<PAGE>   1

                                                                   Exhibit 10(g)

                      PROPERTY AND CASUALTY EXCESS OF LOSS
                             REINSURANCE AGREEMENT

                                    between

                       MERCHANTS MUTUAL INSURANCE COMPANY
               MERCHANTS INSURANCE COMPANY OF NEW HAMPSHIRE, INC.

                                      and

                         AMERICAN RE-INSURANCE COMPANY


<PAGE>   2


TABLE OF CONTENTS
<TABLE>
<CAPTION>

     ARTICLE                                              PAGE
     -------                                              ----
<S>                                                         <C>
        I       PARTIES TO THIS AGREEMENT                   1

        II      EXHIBITS COVERED                            1

        III     MANAGEMENT OF CLAIMS
                AND LOSSES                                  2

        IV      SALVAGE AND SUBROGATION                     2

        V       SPECIAL ACCEPTANCES                         3

        VI      EXTRA CONTRACTUAL
                OBLIGATIONS AND/OR EXCESS
                JUDGMENTS                                   4

        VII     DECLARATORY JUDGMENT
                EXPENSES                                    5

        VIII    ERRORS AND OMISSIONS                        5

        IX      OFFSET AND SECURITY CLAUSE                  6

        X       ACCESS TO RECORDS                           6

        XI      RESERVES AND TAXES                          7

        XII     INSOLVENCY CLAUSE                           7
</TABLE>




<PAGE>   3


                      PROPERTY AND CASUALTY EXCESS OF LOSS
                      ------------------------------------
                             REINSURANCE AGREEMENT
                             ---------------------

THIS AGREEMENT made and entered into by and between MERCHANTS MUTUAL INSURANCE
COMPANY, Buffalo, New York and MERCHANTS INSURANCE COMPANY OF NEW HAMPSHIRE,
INC., Concord, New Hampshire (hereinafter collectively referred to as "Company")
and AMERICAN RE-INSURANCE COMPANY, a Delaware Corporation with Administrative
Offices in Princeton, New Jersey (hereinafter referred to as "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.

                                   ARTICLE I
                                   ---------

PARTIES TO THIS AGREEMENT
-------------------------

A.       This Agreement is solely between the Company and the Reinsurer. When
         more than one Company is named as a party to this Agreement, the first
         reinsured company named shall be the agent of the other reinsured
         companies as to all matters pertaining to this Agreement. Any payments
         by the Reinsurer to any of the parties comprising the Company shall
         constitute payment due from the Reinsurer to the Company under this
         Agreement.

B.       The retention of the Company and the liability of the Reinsurer and all
         other benefits accruing to the Company as provided in this Agreement or
         any amendments hereto, shall apply to the reinsured companies
         comprising the Company as a group and not separately to each of the
         reinsured companies named in this Agreement.

C.       Performance of the obligations of each party to this Agreement shall be
         rendered solely to the other party; however, if the Company becomes
         insolvent, the liability of the Reinsurer shall be modified to the
         extent set forth in the Article entitled INSOLVENCY CLAUSE.

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

EXHIBITS COVERED
----------------

The Company will reinsure with the Reinsurer and the Reinsurer will accept
reinsurance 


                                      -3-
<PAGE>   4

from the Company as set forth in Exhibits A, B and C, which are
attached hereto and made a part of this Agreement, such Exhibits being entitled
for purposes of identification as follows:

        EXHIBIT A - CASUALTY EXCESS OF LOSS
                    REINSURANCE COVER

        EXHIBIT B - PROPERTY PER RISK EXCESS OF LOSS
                    REINSURANCE COVER

        EXHIBIT C - EACH CLAIMANT WORKERS' COMPENSATION
                    EXCESS OF LOSS REINSURANCE COVER

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

MANAGEMENT OF CLAIMS AND LOSSES
-------------------------------

The Company shall investigate and settle or defend all claims and losses. When
requested by the Reinsurer, the Company shall permit the Reinsurer, at the
expense of the Reinsurer, to be associated with the Company in the defense or
control of any claim, loss, or legal proceeding which involves or is likely to
involve the Reinsurer. All payments of claims or losses by the Company within
the limits of its policies which are within the limits set forth in the
applicable Exhibit shall be binding on the Reinsurer, subject to the terms of
this Agreement.

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

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

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.       If loss expense is pro rated in the attached Exhibits, then in the
         event there are any 


                                      -4-
<PAGE>   5

         recoveries, salvages or reimbursements recovered subsequent to a loss
         settlement, it is agreed that if the expenses incurred in obtaining
         salvage or other recoveries are less than the amount recovered, such
         expenses shall be borne by each party in the proportion that each party
         benefits from the recoveries. Otherwise, the amount recovered shall
         first be applied to the reimbursement of the expense of recovery and
         the remaining expense shall be borne by the Company and the Reinsurer
         in proportion to the liability of each party for the loss before such
         recovery had been obtained.

D.       If loss expense is included in the ultimate net loss in the attached
         Exhibits, 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.

E.       Expenses hereunder shall exclude all office expenses of the Company and
         all salaries and expenses of its officials and employees. However,
         should litigation be necessary in order to effect recovery and the
         Company use its in-house counsel to conduct or monitor the litigation,
         the Company may include the salary of said in-house counsel while so
         engaged and any direct costs incurred by or on behalf of said in-house
         counsel associated with the litigation.

                                   ARTICLE V
                                   ---------

SPECIAL ACCEPTANCES
-------------------

A.       Business not within the terms of this Agreement may be submitted to the
         Reinsurer for special acceptance and, if accepted by the Reinsurer,
         shall be subject to all of the terms of this Agreement except as
         modified by the special acceptance.

B.       Notwithstanding the above, it is agreed that the following business
         shall be covered under this Agreement, subject to all of the terms of
         this Agreement except as otherwise indicated below, until the
         expiration, cancellation or next anniversary date of the Company's
         policies covering said business.

         1.       Business specially accepted under the Company's Agreement of
                  Reinsurance No. 8009 (hereinafter the "prior reinsurance
                  agreement") with General Reinsurance Corporation. Such
                  specially accepted business shall be subject to all of the
                  terms of this Agreement except as modified by the special
                  acceptance made by General Reinsurance Corporation under the
                  prior reinsurance agreement.



                                      -5-
<PAGE>   6

         2.       Business covered under the prior reinsurance agreement.

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

EXTRA CONTRACTUAL OBLIGATIONS AND/OR EXCESS JUDGMENTS
-----------------------------------------------------

A.       This Agreement shall indemnify the Company, within the limits of this
         Agreement, for Extra Contractual Obligations and/or Excess Judgments
         awarded by a court of competent jurisdiction against the Company that
         arise from policies that are reinsured hereunder. Such Extra
         Contractual Obligation and/or Excess Judgment shall be added to the
         amount of the loss 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 and its Exhibits.

B.       "Extra Contractual Obligations" are defined as damages paid by the
         Company that are not covered under any other provision of this
         Agreement, including legal costs and expenses in connection therewith,
         that arise as a result of the Company's handling of any claim on the
         policy reinsured hereunder, such liabilities arising because of, but
         not limited to, the following: failure by the Company to settle within
         the policy limit, or by reason of alleged or actual negligence or bad
         faith or alleged fraud in rejecting an offer of settlement or in the
         preparation of the defense or in the trial of any action against its
         insured or in the preparation or prosecution of an appeal consequent
         upon such action.

C.       "Excess Judgments" are defined as those damages paid by the Company
         which amounts are in excess of its policy limits, but otherwise within
         the coverage terms of the policy reinsured hereunder, including legal
         costs and expenses in connection therewith, as a result of an action
         against it by its insured or its insured's assignee to recover damages
         awarded by a court of competent jurisdiction to a third party claimant,
         arising out of, but not limited to, the Company's alleged or actual
         negligence or bad faith or alleged fraud in rejecting a settlement, in
         discharging its duty to defend, in preparing the defense in an action
         against its insured or discharging its duty to prepare or prosecute an
         appeal consequent upon such action.

D.       The date on which an Extra Contractual Obligation and/or an Excess
         Judgment award is incurred by the Company shall be deemed, in all
         circumstances, to have arisen on the same date as the original loss
         occurrence that gave rise to the Extra Contractual Obligation and/or an
         Excess Judgment.

E.       However, this Article shall not apply where the loss has been incurred
         due to the fraud of a member of the Board of Directors or a corporate
         officer of the Company or any other employee of the Company with claims
         settlement authority acting individually or collectively or in
         collusion with any individual or corporation or any other organization
         or party involved in the presentation, defense or settlement of any
         claim covered hereunder.

F.       Recoveries, collectibles or retentions from any form of insurance
         and/or reinsurance, including but not limited to, deductibles or
         self-insured retentions, that protect the Company against claims the
         subject matter of this clause, will inure to the benefit of the
         Reinsurer and shall be deducted from the total amount 


                                      -6-
<PAGE>   7

         of Extra Contractual Obligation and/or Excess Judgment award for
         purposes of determining the amount recoverable hereunder, whether
         collectible or not.

G.       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 VII
                                  -----------

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

A.       This Agreement shall indemnify the Company, within the limits of this
         Agreement, for Declaratory Judgment Expenses paid by the Company, as
         provided in this Agreement, under policies reinsured hereunder.

B.       "Declaratory Judgment Expenses" as used herein shall mean legal
         expenses paid by the Company for the investigation, analysis,
         evaluation, and/or resolution of litigation of coverage by the Company
         and any other party to determine if there is coverage to indemnify
         and/or pay to its insured(s) under the policies issued by the Company
         and reinsured hereunder for a specific loss which loss is not
         specifically excluded under this Agreement.

C.       Recoveries from any form of insurance and/or reinsurance that protect
         the Company against claims the subject matter of this clause will inure
         to the benefit of the Reinsurer and shall be deducted from the total
         amount of Declaratory Judgment Expenses for purposes of determining the
         amount recoverable hereunder.

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

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

Errors or omissions on the part of the Company shall not invalidate the
reinsurance under this Agreement, provided such errors or omissions are
corrected promptly after discovery thereof, but the liability of the Reinsurer
under this Agreement or any exhibits or endorsements attached thereto shall in
no event exceed the limits specified therein, nor be extended to cover any
risks, perils or classes of insurance generally or specifically excluded
therein.

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

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

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

                                      -7-
<PAGE>   8

         or agreements.

B.       Each party hereby assigns and pledges to the other party (or to each
         other party, if more than one) all of its rights under this Agreement
         to receive premium or loss payments at any time from such other party
         ("Collateral"), to secure its premium or loss obligations to such other
         party at any time under this Agreement and any other reinsurance
         agreement heretofore or hereafter 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.

E.       In the event of the insolvency of a party hereto, offsets shall only be
         allowed in accordance with the laws of the insolvent party's state of
         domicile.

                                   ARTICLE X
                                   ---------

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 XI
                                   ----------

RESERVES AND TAXES
------------------

A.       The Reinsurer shall maintain legal reserves with respect to claims
         hereunder.

B.       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.



                                      -8-
<PAGE>   9

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

INSOLVENCY CLAUSE
-----------------

(If more than one reinsured company is included in the designation of "Company"
this Article shall apply only to the insolvent company or companies)

In the event of the insolvency of the Company and the appointment of a
conservator, liquidator or statutory successor, 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. 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 (i) the Agreement specifies another
payee of such reinsurance in the event of the insolvency of the Company and (ii)
the Reinsurer with the consent of the direct insureds has assumed such policy
obligations of the Company as its direct obligations to the payees under such
policies, in substitution for the obligations of the Company to such payees; or
where the Reinsurer has guaranteed performance of a contract insuring against
physical damage to property for the benefit of mortgagees or other loss payees
named in this Agreement in accordance with Section 1114(c) of the New York
Insurance Law.



                                      -9-
<PAGE>   10



IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed 
in duplicate this          day of                    , 19          .

ACCEPTED:
MERCHANTS MUTUAL INSURANCE COMPANY
MERCHANTS INSURANCE COMPANY OF NEW HAMPSHIRE, INC.


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


----------------------- Attested by:

                                        AMERICAN RE-INSURANCE COMPANY


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


                                        ---------------------------------
                                        Attested by:




                                      -10-
<PAGE>   11


                                   EXHIBIT A
                                   ---------

                            CASUALTY EXCESS OF LOSS
                               REINSURANCE COVER
                               -----------------

                                   Section 1
                                   ---------
COVER
-----

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 12:01 A.M., January 1, 1998, as respects the Company's
policies in force as of said date and new and renewal policies becoming
effective on and after said date, covering the Company's Casualty Business,
subject to the limitations and exclusions hereinafter set forth.

                                   Section 2
                                   ---------

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

A.       With respect to the business covered under this Exhibit, the Reinsurer
         shall pay to the Company the amount of ultimate net loss each
         occurrence in excess of the Company Retention but not exceeding the
         Reinsurer's Limits of Liability as set forth in the Schedule of
         Reinsurance below.
<TABLE>
<CAPTION>
                      SCHEDULE OF REINSURANCE

-----------------------------------------------------------------------
Company Retention                  Reinsurer's Limits of Liability
Each Occurrence                    Each Occurrence
-----------------------------------------------------------------------

                First Excess       Second Excess          Third Excess
                Cover              Cover                  Cover
<S>             <C>                <C>                    <C>       
$500,000        $1,500,000         $3,000,000             $5,000,000
</TABLE>

B.       If an occurrence takes place which involves the classes of business
         reinsured under this Exhibit and one risk reinsured under Exhibit B to
         this Agreement in combination, the Reinsurer shall pay to the Company
         the amount of ultimate net loss in excess of a Company Retention of
         $500,000 with respect to such occurrence, but not exceeding a Limit of
         Liability to the Reinsurer of $500,000. The Reinsurer's Limit of
         Liability specified in this Section shall be in addition to the Limits
         of Liability of the Reinsurer set forth in the sections entitled
         LIABILITY OF THE REINSURER of this Exhibit and said Exhibit B.


                                      -11-
<PAGE>   12

                                   Section 3
                                   ---------

COMPANY POLICY LIMITS
---------------------

For the purpose of determining the Company Retention and the Reinsurer's Limit
of Liability with respect to each layer specified in this Exhibit, the limits of
liability of the Company with respect to any one policy shall be deemed not to
exceed:
<TABLE>
<CAPTION>
<S>                                                        <C>                    
(a) Automobile Bodily Injury Liability                     $1,000,000 each person 
                                                           $1,000,000 each occurrence
(b) Automobile Property Damage Liability                   $1,000,000 each occurrence
(c) Automobile Liability Combined Single Limit             $1,000,000 each occurrence
(d) Uninsured/Underinsured Motorists Coverage              $1,000,000 each person
                                                           $1,000,000 each occurrence
(e) Personal Injury Protection Coverage                    $1,000,000 each occurrence
(f) Other Bodily Injury Liability                          $2,000,000 each occurrence
(g) Other Property Damage Liability                        $2,000,000 each occurrence
(h) Other Liability Combined Single Limit                  $2,000,000 each occurrence
(i) Section II Liability under Commercial Multiple Peril   $2,000,000 each occurrence
(j) Section II Liability under Businessowners              $1,000,000 each occurrence
(k) Section II Liability under Homeowners Multiple Peril   $1,000,000 each occurrence
(l) Section II Liability under Farmowners Multiple Peril   $1,000,000 each occurrence
(m) Employers' Liability
     (1) In all states with Statutory Limits               Statutory Limits
     (2) In All Other States        
         (i)   Bodily Injury by Accident                   $1,000,000 each accident
         (ii)  Bodily Injury by Disease                    $1,000,000 policy limit
         (iii) Bodily Injury by Disease                    $1,000,000 each employee
</TABLE>

                                   Section 4
                                   ---------

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

A.       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 held liable, including 90% of any Extra Contractual Obligations
         and/or Excess Judgments and/or Declaratory Judgment Expenses, in
         accordance with their respective articles, after making proper
         deductions for all recoveries, salvages, and claims upon other
         reinsurance which inures to the benefit of the Reinsurer under this
         Agreement whether collectible or not; provided, however, that in the
         event of the insolvency of the Company, "ultimate net loss" shall mean
         the amount of loss 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 Article entitled INSOLVENCY CLAUSE.


                                      -12-
<PAGE>   13

B.       All expenses incurred by the Company which are included as part of the
         policy limit under the Company's original policies reinsured hereunder
         shall be included in "ultimate net loss" as defined above.

C.       All office expenses of the Company and all salaries and expenses of its
         officials and employees shall be excluded under this Agreement, except
         that the Company may include the costs and expenses of its in-house
         counsel as provided in D. below.

D.       All expenses other than as provided in B. and C. above, including taxed
         court costs, prejudgment and postjudgment interest, and loss expenses
         incurred in investigation, adjustment and litigation, defense and
         settlement of claims made against the Company under its original
         policies reinsured hereunder, including the costs and expenses of the
         Company's in-house counsel while engaged in the litigation of claims
         covered hereunder, shall be apportioned in proportion to the respective
         interests of the parties hereto in the ultimate net loss.

E.       In the event a verdict or judgment is reduced by an appeal or a
         settlement, subsequent to the entry of a judgment, resulting in an
         ultimate saving on such verdict or judgment, or a judgment is reversed
         outright, the expense incurred in securing such final reduction or
         reversal shall (1) be prorated between the Reinsurer and the Company in
         proportion that each benefits from such reduction or reversal and the
         expense incurred up to the time of the original verdict or judgment
         shall be prorated in proportion to each party's interest in such
         verdict or judgment; or (2) when the terms and conditions of the
         Company's original policies reinsured hereunder include expenses as
         part of the policy limit, be added to the Company's ultimate net loss.

                                   Section 5
                                   ---------

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

A.       Casualty Business 
         -----------------

         This term shall mean insurance which is classified in the NAIC form of
         annual statement as Farmowners Multiple Peril (Section II), Homeowners
         Multiple Peril (Section II), Commercial Multiple Peril (Sections II and
         III, including Section II of Business Owners), Workers' Compensation,
         Other Liability, Automobile Liability, and Automobile Personal Injury
         Protection, and described in the manuals of the Insurance Services
         Office, or the standard workers' compensation form of policy, subject
         to the Section of this Exhibit entitled EXCLUSIONS, as respects losses
         occurring in the United States of America, its territories and
         possessions, and Canada.


                                      -13-
<PAGE>   14

B.       Company Retention
         -----------------

         This term shall mean the amount the Company shall retain for its own
         account; however, this requirement shall be satisfied if this amount is
         retained by the Company or its affiliated companies under common
         management or common ownership.

C.       Occurrence
         ----------

         This term shall mean each accident or occurrence or series of accidents
         or occurrences arising out of one event regardless of the number of
         policies involved, and as respects workers' compensation and employers'
         liability policies, regardless of the number of employees or employers
         involved, except as modified below:

         (1)      As respects exposures reinsured hereunder other than
                  occupational and other disease or cumulative injury under
                  workers' compensation policies, all bodily injury or property
                  damage arising out of continuous or repeated exposure to
                  substantially the same general conditions shall be considered
                  as arising out of one occurrence. The date of occurrence shall
                  be deemed to be the following:

                  (i)      As respects a loss involving one or more policies
                           written on an occurrence basis, the date on which
                           bodily injury or property damage occurs.

                  (ii)     As respects a loss involving one or more policies
                           written on a claimsmade basis, the date when notice
                           of claim is received and recorded by the Company or
                           the insured, whichever comes first, and any related
                           claims reported subsequent to such date shall be
                           included in such loss. However, if notice of claim is
                           received and recorded by the Company or the insured
                           during an Extended Reporting Period, the date of
                           occurrence shall be deemed to be the last day of the
                           policy period.

                  (iii)    As respects a loss involving one or more policies
                           written on an occurrence basis and one or more
                           policies written on a claimsmade basis, the date on
                           which bodily injury or property damage occurs, and
                           any related claims reported subsequent to such date
                           shall be included in such loss whether they are
                           covered under occurrence or claims-made policies.


                                      -14-
<PAGE>   15

         (2)      As respects an occupational or other disease or cumulative
                  injury under workers' compensation or employers' liability
                  policies for which the employer is liable:

                  (i)      Which arises from a specific sudden and accidental
                           event limited in time and place, such occupational or
                           other disease suffered by one or more employees of
                           one or more employers shall be deemed to be an
                           occurrence within the meaning of this Exhibit and the
                           date of occurrence shall be deemed to be the date of
                           the sudden and accidental event.

                  (ii)     Which does not arise from a specific sudden and
                           accidental event limited in time and place, such
                           occupational or other disease or cumulative injury
                           shall be deemed to be an occurrence within the
                           meaning of this Exhibit, and the date of occurrence
                           shall be deemed to be the date of the beginning of
                           the disability for which compensation is payable if
                           the case is compensable under the Workers'
                           Compensation law; or the date that disability due to
                           said disease actually began if the case is not
                           compensable under the Workers' Compensation law. Each
                           case of an employee contracting such occupational or
                           other disease or cumulative injury for which the
                           employer insured by the Company is held liable shall
                           be considered a separate occurrence regardless of the
                           date of loss.

                                   Section 6
                                   ---------

EXCLUSIONS
----------

         This Exhibit shall not apply to:

         A.       Business accepted by the Company as reinsurance from other
                  insurers other than its affiliates;

         B.       Nuclear incident per the Nuclear Incident Exclusion Clause
                  Liability Reinsurance attached hereto;

         C.       Policies covering liability of any insurer or reinsurer for
                  its acts or omissions in the negotiation, settlement, or
                  defense of claims or any act or omission in dealings with its
                  policyholders;

         D.       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 and including automobile assigned risk 

                                      -15-
<PAGE>   16

                  pools and voluntary or involuntary market assistance programs;
                  however, this exclusion shall not apply to individual risks
                  under this Agreement which are assigned to the Company as a
                  result of the business reinsured hereunder;

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

         F.       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 workers'
                  compensation and employers liability nor to any policy which
                  contains a standard war exclusion;

         G.       Business written on a coindemnity basis not controlled by the
                  Company;

         H.       Business written to apply in excess of a deductible or self
                  insured amount of more than $25,000 or business written to
                  apply specifically in excess over underlying insurance;

         I.       Automobile liability insurance relating to the ownership,
                  maintenance (but this shall not apply to Garage Liability or
                  Garagekeepers Liability), or use of:

                  (1)      Emergency vehicles including police and fire
                           department vehicles; however, this exclusion shall
                           not apply to renewal business;

                  (2)      Automobiles used in organized speed contests;

                  (3)      Vehicles leased or rented to others, except customer
                           rental exposures for garage risks;

                  (4)      Commercial automobiles, as defined in the manuals of
                           the Insurance Services Office, which customarily
                           operate beyond a 500 mile radius;

                  (5)      Public automobiles, other than school or church buses
                           or funeral home vehicles, as defined in the manuals
                           of the Insurance Services Office;

                  (6)      Motor vehicles used for transporting explosives,
                           munitions, corrosives, flammable and nonflammable
                           gas, flammable liquid, poison, radioactive materials
                           and hazardous waste;


                                      -16-
<PAGE>   17

                  J.       Liability insurance written by the aviation
                           underwriting unit of the Company, howsoever styled;

                  K.       Liability insurance issued to any state or
                           governmental agency or any political subdivision
                           whatsoever; however, this exclusion shall not apply
                           to school districts and school boards nor to renewal
                           business. This exclusion shall also not apply to
                           Owners and Contractors Protective policies issued to
                           any such entities;

                  L.       Liability insurance relating to premises or
                           operations involving:

                           (1)      Aircraft or airports, as respects coverage
                                    for all liability arising out of the
                                    ownership, maintenance, or use of any
                                    aircraft or flight operations;

                           (2)      Amusement parks or devices, carnivals or
                                    circuses, sports or other entertainment
                                    events, arenas, grandstands, or stadiums;
                                    however, this exclusion shall not apply to
                                    coverage for locations or events with daily
                                    admissions of 1,000 or less or seating
                                    capacity of 1,000 or less;

                           (3)      Manufacturing, packing, handling, shipping,
                                    or storage of explosives, ammunitions,
                                    fuses, arms, magnesium, fireworks,
                                    nitroglycerine, celluloid, pyroxylin or
                                    explosive substances intended for use as an
                                    explosive; however, this exclusion shall not
                                    apply to incidental handling and storage in
                                    connection with the sale of such substances;

                           (4)      Gas or public utility companies, gas or
                                    public utility works, or gas lease
                                    operations;

                           (5)      Production, refining, handling, shipping, or
                                    storage of natural or artificial fuel
                                    gasses, synthetic or coal or shale based
                                    fuel, butane, propane, gasoline, or
                                    liquefied petroleum gas; however this
                                    exclusion shall not apply to gasoline
                                    service stations, convenience stores and
                                    fuel oil dealers;

                           (6)      Oil or gas pipelines, wells, or drilling
                                    operations;

                           (7)      Railroad operations; however, this exclusion
                                    shall not apply to Railroad Protective
                                    policies;

                           (8)      Ship building, boat manufacturing, ship
                                    repair yards, dry docks, stevedoring, or
                                    watercraft; however, this exclusion shall
                                    not apply to watercraft commonly insured
                                    under homeowners polices, nor to 


                                      -17-
<PAGE>   18

                                    non-owned watercraft up to 51 feet in length
                                    for commercial policies;

                           (9)      Underground work, including underground
                                    mining and quarrying, tunneling, and subway
                                    construction; however, this exclusion shall
                                    not apply to underground work up to a depth
                                    of 12 feet;

                           (10)     Offshore and subaqueous work;

                           (11)     Wrecking or demolition of structures over 3
                                    stories in height, or marine wrecking;

                           (12)     Chemical manufacturing; however, this
                                    exclusion shall not apply to operations with
                                    annual gross receipts from chemical
                                    manufacturing of $500,000 or less;

                  M.       Liability insurance relating to products or completed
                           operations involving the manufacture or importation
                           of:

                           (1)      Cosmetics, hair, and skin products, but this
                                    exclusion shall not apply if the total
                                    annual receipts from this exposure are
                                    $250,000 or less;

                           (2)      Drugs, pharmaceuticals, and agricultural
                                    chemicals;

                           (3)      Aircraft, aircraft parts, or aircraft
                                    engines, all motorized vehicles, or mobile
                                    equipment (critical parts only).

                                    "Critical parts" shall mean

                                    1.       Safety equipment, including but not
                                             limited to airbags, and seat belts;
                                             but "critical parts" shall not
                                             include mirrors or other such
                                             items;

                                    2.       Operating parts, including but not
                                             limited to brakes, tires,
                                             suspension, engines, head lights,
                                             and steering columns; but "critical
                                             parts" shall not include steering
                                             wheel, gearshift knobs, seat
                                             upholstery or similar items;

                           (4)      Heavy machinery and equipment, home power
                                    tools, or oil drilling equipment:

                  N.       Insurance covering damages claimed for the
                           withdrawal, inspection, repair, replacement, or loss
                           of use of the insured's products or of any property
                           of which such products form a part, or if such
                           products or property are withdrawn from the market or
                           from use because of any 


                                      -18-
<PAGE>   19

                           known or suspected defect or deficiency therein;

                  O.       Malpractice insurance, directors and officers
                           liability insurance, or any other form of errors and
                           omissions or professional liability insurance;
                           however, this exclusion shall not apply to druggists
                           operating outside the State of Florida, funeral
                           directors, veterinarians', beauty and barber shops',
                           hearing aid service specialists', cemetery operators'
                           liability, opticians' or printers' liability
                           business, nor to employee benefits liability
                           business;

                  P.       Insurance written for governmental bodies to afford
                           protection against liability arising out of riot,
                           civil commotion, or mob action or out of any act or
                           omission in connection with the prevention or
                           suppression of any riot, civil commotion, or mob
                           action;

                  Q.       Liability insurance relating to or involving
                           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
                           inorbit);

                  R.       Pollution liability insurance or environmental
                           impairment liability, howsoever styled; however, this
                           exclusion shall not apply to herbicide or pesticide
                           use by landscapers and/or gardeners in commercial
                           landscaping or gardening operations;

                  S.       Pollution under any commercial multiple peril policy,
                           farmowners multiple peril policy, farm liability
                           policy or any other commercial other liability policy
                           written by the Company which does not contain the
                           pollution exclusion set forth in ISO Commercial
                           General Liability Form CG 00 01 (Ed. 11/88) or as
                           subsequently amended or under any garage liability
                           policy written by the Company which does not contain
                           the pollution exclusion set forth in ISO Garage
                           Coverage Form CA 00 05 (Ed. 1/87) or as subsequently
                           amended. However, this exclusion does not apply to:

                           (1)      pollution coverage under the Motor Carriers
                                    Act of 1980 as contained within the MCS-90
                                    endorsement attached to the Company's
                                    commercial automobile liability policies, or

                           (2)      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 Reinsurer and
                                    received the Reinsurer's prior approval.


                                      -19-
<PAGE>   20

                  T.       Workers' compensation and employers' liability
                           insurance with respect to operations principally
                           involving:

                           (1)      Aircraft flight and ground operations or
                                    operations in which the flying hazard is a
                                    major part;

                           (2)      Amusement parks or devices, exhibitions
                                    (including fireworks), carnivals or
                                    circuses, sports events and/or participants;
                                    however, this exclusion shall not apply to
                                    coverage for locations or events with daily
                                    admissions of 1,000 or less or seating
                                    capacity of 1,000 or less;

                           (3)      Manufacturing, packing, handling, shipping,
                                    or storage of explosives, substances
                                    intended for use as an explosive,
                                    ammunitions, fuses, arms, magnesium,
                                    propellant charges, detonating devices,
                                    fireworks, nitroglycerine, celluloid, or
                                    pyroxylin; however, this exclusion shall not
                                    apply to the incidental packing, handling or
                                    storage of same in connection with the sale
                                    of such substances;

                           (4)      Gas companies, dealers, or distributors,
                                    except those in the gasoline service
                                    station, convenience store or fuel oil
                                    dealer business; oil or gas operators, lease
                                    operators or contractors; oil or gas well
                                    works; oil or gas pipeline construction or
                                    operations; oil rig and derrick work;
                                    onshore or offshore gas or oil drilling
                                    operations;

                           (5)      Manufacturing, packing, handling, shipping
                                    or storage of natural gas or artificial fuel
                                    gasses, butane, propane, gasoline, or
                                    liquified petroleum gas; however, this
                                    exclusion shall not apply to the incidental
                                    packing, handling or storage of same in
                                    connection with the sale of such substances:

                           (6)      Railroad operation or construction, except
                                    this exclusion shall not apply if the
                                    excluded exposure is not normally associated
                                    with the insured's operation and does not
                                    present a larger exposure than the overall
                                    unexcluded portion of the risk;

                           (7)      Maritime or federal employments; steamship
                                    lines, agencies, or stevedoring, navigation
                                    or operation of vessels; operation of
                                    drydocks; and including all United States
                                    Longshoremen's and Harbor Workers'
                                    exposures, except this exclusion shall not
                                    apply if the excluded exposure (a) is
                                    endorsed on an "if any" basis or (b) is not
                                    normally associated with the insured's
                                    operation and does not 

                                      -20-
<PAGE>   21

                                    present a larger exposure than the overall
                                    unexcluded portion of the risk;

                           (8)      Subway construction, shaft sinking, or
                                    tunneling;

                           (9)      Wrecking or demolition of vessels or
                                    buildings or structures of more than three
                                    stories in height;

                           (10)     Underground mining, strip mining, or
                                    quarrying;

                           (11)     Subaqueous work;

                           (12)     Caisson or coffer dam work; dam, dike, lock,
                                    or revetment construction:

                           (13)     Chemical manufacturing; however, this
                                    exclusion shall not apply to operations with
                                    annual gross receipts from chemical
                                    manufacturing of $500,000 or less;

                           (14)     Nuclear Regulatory Commission projects or
                                    operations conducted under license from the
                                    Nuclear Regulatory Commission;

                           (15)     Asbestos removal contractors;

                           (16)     Firefighters and police officers.

If the Company provides insurance for an insured with respect to the ownership,
maintenance, or use of items listed in exclusions I.(l) through I.(6) and if
such ownership maintenance, or use constitutes only a minor and incidental part
of the total ownership, maintenance, or use of such items of the insured, such
exclusion(s) shall not apply.

If the Company provides insurance for an insured with respect to any premises,
operations, products, or completed operations listed in exclusions L. and M.,
except exclusions L.(3) and L.(4), and if such premises, operations, products,
or completed operations constitute only a minor incidental part of the total
premises, operations, products, or completed operations of the insured, such
exclusion(s) shall not apply.

If the Company is bound, without the knowledge of and contrary to the
instructions of the Company's supervisory underwriting personnel, on any
business falling within the scope of one or more of the exclusions set forth in
this Section, these exclusions, except A. through G., L.(3), L.(4), N. through
R., T.(3) and T.(4) shall be suspended with respect to such business until the
greater of 30 days or the minimum period of time required by statute after an
underwriting supervisor of the Company acquires knowledge of such business.


                                      -21-
<PAGE>   22

                                   Section 8
                                   ---------

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

         A.       First Excess Cover:

                  (1)      With respect to business in force at the effective
                           time and date of this Exhibit, the Company shall pay
                           the Reinsurer a reinsurance premium equal to the
                           product of the applicable First Excess reinsurance
                           rate set forth in Appendix A attached hereto and the
                           Company's unearned premium for the classes of
                           business reinsured hereunder, calculated on the
                           monthly pro rata basis as of the effective time and
                           date of this Exhibit.

                  (2)      With respect to business becoming effective at and
                           after the effective time and date of this Exhibit,
                           the Company shall pay the Reinsurer a reinsurance
                           premium equal to the product of the applicable First
                           Excess reinsurance rate set forth in Appendix A
                           attached hereto and the Company's written premium for
                           the classes of business reinsured hereunder.

         B.       Second Excess Cover:

                  (1)      With respect to business in force at the effective
                           time and date of this Exhibit, the Company shall pay
                           the Reinsurer a reinsurance premium equal to 0.19% of
                           the Company's unearned premium for the classes of
                           business reinsured hereunder, calculated on the
                           monthly pro rata basis as of the effective time and
                           date of this Exhibit.

                  (2)      With respect to business becoming effective at and
                           after the effective time and date of this Exhibit,
                           the Company shall pay the Reinsurer a reinsurance
                           premium equal to 0.19% of the Company's written
                           premium for the classes of business reinsured
                           hereunder, subject to an annual minimum and deposit
                           reinsurance premium of $200,000.

         C.       Third Excess Cover:

                  Unless otherwise mutually agreed, the Company shall pay the
                  Reinsurer an annual reinsurance premium of $40,000 for each
                  calendar year during which the Third Excess remains in force.

         D.       For the purpose of the calculation of the reinsurance premium
                  for business owners policies reinsured hereunder, the
                  reinsurances rates in A. and B. above shall be applied against
                  40% of the business owners policy premium 


                                      -22-
<PAGE>   23

                  unearned or written, as applicable.

                                   Section 9
                                   ---------

CONTINGENT COMMISSION
---------------------

A.       The Reinsurer shall pay the Company a contingent commission equal to
         50% of the net profit, if any, accruing to the Reinsurer during each
         accounting period defined herein. The first accounting period shall be
         from the effective date of this Agreement through December 31, 2000 and
         each subsequent 36-month period shall be a separate accounting period.
         However, if this Agreement is terminated, the final accounting period
         shall be from the beginning of the then current accounting period
         through the date of termination if this Agreement is terminated on a
         "cutoff" basis, or the end of the runoff period if this Agreement is
         terminated on a "runoff" basis.

B.       The Reinsurer's net profit for each accounting period shall be
         calculated in accordance with the following formula, it being
         understood that a positive balance equals net profit and a negative
         balance equals net loss:

         (1)      Premiums earned for the accounting period; less

         (2)      Ceding commission allowed the Company on premiums earned for
                  the accounting period; less

         (3)      Expenses incurred by the Reinsurer at 12.5% of premiums earned
                  for the accounting period; less

         (4)      Losses incurred for the accounting period; less

         (5)      The Reinsurer's net loss, if any, from the immediately
                  preceding accounting period.

C.       The Company shall calculate and report the Reinsurer's net profit
         within 60 days after the end of each 12-month period within each
         accounting period, within 60 days after the end of each accounting
         period, and within 60 days after the end of each December 31 thereafter
         until all losses subject hereto have been finally settled. Each such
         calculation shall be based on cumulative transactions hereunder from
         the beginning of the accounting period through the date of calculation,
         including the Reinsurer's net loss, if any, from the immediately
         preceding accounting period. As respects the initial calculation
         referred to above, any contingent commission shown to be due the
         Company shall be paid by the Reinsurer as promptly as possible after
         receipt and verification of the Company's report. As respects each
         subsequent calculation, any additional contingent commission shown to
         be due the Company shall be paid by the Reinsurer as promptly as
         possible after receipt and verification


                                      -23-
<PAGE>   24


         of the Company's report. Any return contingent commission shown to be
         due the Reinsurer shall be paid by the Company with its report.

D.       "Premiums earned" as used herein shall mean ceded unearned premiums at
         the beginning of the accounting period, plus ceded net written premiums
         during the period, less ceded unearned premiums at the end of the
         period.

E.       "Losses incurred" as used herein shall mean ceded losses and loss
         adjustment expense paid as of the effective date of calculation, plus
         the ceded reserves for losses and loss adjustment expense outstanding
         as of the same date, all as respects losses occurring during the
         accounting period under consideration.

                                   Section 10
                                   ----------

REPORTS AND REMITTANCES
-----------------------

         A.       Reinsurance Premium
                  -------------------

                  (1)      In Force Premium (Applicable to the First and Second
                           Excess Covers only):

                           Within 45 days after the commencement of this
                           Exhibit, the Company shall render to the Reinsurer a
                           report of the reinsurance premium with respect to the
                           business of the Company in force at the effective
                           time and date of this Exhibit, summarizing the
                           reinsurance premium by line of insurance, by term,
                           and by month and year of expiration; and the amount
                           due the Reinsurer shall be remitted within the
                           earlier of: (a) 180 days after the commencement of
                           this Exhibit, or (b) 5 days after receipt of General
                           Reinsurance Corporation's return premium under the
                           prior casualty reinsurance program.

                  (2)      New and Renewal Premium:

                           a.       First Excess Cover:

                           Within 25 days after the close of each month, the
                           Company shall render to the Reinsurer a report of the
                           reinsurance premium for the month with respect to
                           business of the Company written during the month,
                           summarizing the reinsurance premium by line of
                           insurance; and the amount due either party shall be
                           remitted within 60 days after the close of the month.

                           Within 25 days after the close of each calendar
                           quarter, the Company shall render to the Reinsurer a
                           report of the 


                                      -24-
<PAGE>   25

                           reinsurance premium unearned by line of insurance and
                           the contribution for the quarter to the reinsurance
                           premium in force by line of insurance, by term and by
                           month and year of expiration.

                  b.       Second Excess Cover

                           Within 25 days after the beginning of each calendar
                           quarter, the Company shall pay to the Reinsurer one
                           quarter of the annual minimum and deposit reinsurance
                           premium stipulated in subparagraph B.2 of the section
                           entitled REINSURANCE PREMIUM.

                           Within 60 days after the close of each calendar year,
                           the Company shall render to the Reinsurer a report of
                           the premium written by the Company on the classes of
                           business reinsured hereunder during such calendar
                           year. The Company shall calculate the reinsurance
                           premium thereon and remit to the Reinsurer the amount
                           of reinsurance premium, if any, in excess of the
                           annual minimum and deposit reinsurance premium
                           previously paid.

                  c.       Third Excess Cover

                           Within 25 days after the beginning of each calendar
                           quarter, the Company shall pay to the Reinsurer one
                           quarter of the annual reinsurance premium stipulated
                           in subparagraph C. of the section entitled
                           REINSURANCE PREMIUM.

B.       Claims and Losses
         ----------------- 

         The Company shall report promptly to the Reinsurer each claim or loss
         for which the Company's estimated amount of net loss is 50% or more of
         the amount of the Company Retention and shall also report all cases of
         serious injury which, regardless of considerations of liability or
         coverage, might involve this reinsurance, including but not limited to
         the following:

         (1)      Cord injury paraplegia, quadriplegia;

         (2)      Amputations requiring a prosthesis;

         (3)      Brain damage affecting mentality or central nervous system
                  such as permanent disorientation, behavior disorder,
                  personality change, seizures, motor deficit, inability to
                  speak (aphasia), hemiplegia or


                                      -25-
<PAGE>   26


         unconsciousness (comatose);

         (4)      Blindness;

         (5)      Burns involving over 10% of body with third degree or 30% of
                  body with second degree;

         (6)      Multiple fractures involving more than one member or
                  non-union;

         (7)      Fracture of both heel bones (fractured bilateral or calcis);

         (8)      Nerve damage causing paralysis and loss of sensation in arm
                  and hand (brachial plexus nerve damage);

         (9)      Massive internal injuries affecting body organs;

         (10)     Injury to nerves at base of spinal canal (Cauda Equina) or any
                  other back injury resulting in incontinence of bowel and/or
                  bladder;

         (11)     Fatalities;

         (12)     Any other serious injury which, in the judgment of the
                  Company, might involve the Reinsurer.

                  The Company shall advise the Reinsurer of the estimated amount
                  of ultimate net loss and loss expense in connection with each
                  such claim or loss and of any subsequent changes in such
                  estimates.

                  Upon receipt of a definitive statement of ultimate net loss
                  and loss expense from the Company, the Reinsurer shall pay
                  promptly to the Company the Reinsurer's portion of ultimate
                  net loss and Reinsurer's portion of loss expense, if any. Any
                  subsequent changes shall be reported by the Company to the
                  Reinsurer and the amount due either party shall be remitted
                  promptly.

C.       General
         -------

         In addition to the reports required in A. and B. above, the Company
         shall furnish such other information as may be required by the
         Reinsurer for the completion of the Reinsurer's quarterly and annual
         statements and internal records.

         All reports shall be rendered in forms acceptable to the Company and
         the Reinsurer.



                                      -26-
<PAGE>   27

                                   Section 11
                                   ----------

REINSTATEMENT
-------------

         A.       First Excess Cover

                  In the event of any portion of the liability under the First
                  Excess Cover being exhausted by loss, the amount so exhausted
                  is automatically reinstated from the time of the occurrence of
                  the loss without payment of additional premium. Nevertheless,
                  the Reinsurer's liability shall not exceed $1,500,000 in
                  respect of all losses from any one occurrence.

         B.       Second Excess Cover

                  In the event of any portion of the liability under the Second
                  Excess Cover being exhausted by loss, the amount so exhausted
                  is automatically reinstated from the time of the occurrence of
                  the loss without payment of additional premium. Nevertheless,
                  the Reinsurer's liability shall not exceed $3,000,000 in
                  respect of all losses from any one occurrence.

         C.       Third Excess Cover

                  The limit of liability of the Reinsurer under the Third Excess
                  Cover with respect to each occurrence shall be reduced by an
                  amount equal to the amount of liability paid by the Reinsurer,
                  but that part of the liability of the Reinsurer that is so
                  reduced shall be automatically reinstated, subject to the
                  maximum payment of $20,000,000 with respect to all occurrences
                  taking place during each calendar year that the Third Excess
                  Cover is in effect. In consideration of this automatic
                  reinstatement, the Company shall pay to the Reinsurer:

                  (a)      For the first $5,000,000 so reinstated an additional
                           reinsurance premium which shall be the product of the
                           annual reinsurance premium set forth in the section
                           entitled REINSURANCE PREMIUM and the amount so
                           reinstated divided by $5,000,000,

                  (b)      For the next two full reinstatements of $5,000,000
                           each, an additional reinsurance premium which shall
                           be the product of 50% of the annual reinsurance
                           premium set forth in the section entitled REINSURANCE
                           PREMIUM and the amount so reinstated divided by
                           $5,000,000.

                  The reinsurance premium so developed for each amount
                  reinstated shall be in addition to the reinsurance premium set
                  forth in the section entitled REINSURANCE PREMIUM, and shall
                  be paid by the Company 


                                      -27-
<PAGE>   28

                  immediately following loss payment by the Reinsurer.

                  If at the time of loss payment, the adjusted annual
                  reinsurance premium is unknown, calculation of such additional
                  reinsurance premium shall be based upon the annual minimum and
                  deposit reinsurance premium subject to adjustment when the
                  adjusted annual reinsurance premium is established.

                                   Section 12
                                   ----------

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

         A.       As respects policies written on a claimsmade basis, this
                  Exhibit shall apply to claims received and recorded by the
                  Company or the insured at and after 12:01 A.M., January 1,
                  1998, provided that each such policy includes a specific
                  retroactive date and the occurrence which results in each such
                  claim takes place on or after such retroactive date, and
                  provided further that such retroactive date is on or after the
                  inception date of the first of one or more consecutive
                  claimsmade policies issued by the Company or another
                  insurer(s) to the named insured. However, this Exhibit shall
                  not apply to claims received and recorded by the Company or
                  the insured during any Extended Reporting Period in force at
                  such time and date. As respects policies written on an
                  occurrence basis, this Exhibit shall apply to claims and
                  losses resulting from occurrences taking place at and after
                  12:01 A.M., January 1, 1998.

         B.       This Exhibit may be terminated by either party sending to the
                  other, by registered mail to its principal office, notice
                  stating the time and date when, not less than 90 days after
                  the date of mailing of such notice, termination shall be
                  effective.

         C.       Upon termination of this Exhibit, the Reinsurer's liability
                  hereunder will terminate on a cut-off basis. However, the
                  Company may elect to have the Reinsurer's liability terminate
                  on a run-off basis. The phrases "cut-off basis" and "run-off
                  basis" shall have the meanings set forth below:

                  (1)      Cut-Off Basis:

                           As respects policies written on a claims-made basis,
                           the Reinsurer shall not be liable for claims received
                           and recorded by the Company or the insured at and
                           after the effective time and date of termination,
                           unless such claim is received and recorded by the
                           Company or the insured during an Extended Reporting
                           Period in force or provided under policy conditions
                           in effect at the time and date of termination. As
                           respects policies written on an occurrence basis, the
                           Reinsurer shall not be liable for claims and losses
                           resulting from occurrences taking place at and after
                           the effective time and date of termination.



                                      -28-
<PAGE>   29

                  (2)      Run-Off Basis:

                           The Reinsurer shall continue to be liable, with
                           respect to policies in force at the time and date of
                           termination, for occurrences taking place until the
                           expiration, cancellation, or next anniversary date,
                           not to exceed one year, of each such policy of the
                           Company, whichever occurs first, provided that with
                           respect to policies written on a claims-made basis,
                           the claim is received and recorded by the Company or
                           the insured before such expiration, cancellation, or
                           next anniversary date. However, if the Company
                           provides an Extended Reporting Period within one year
                           after the termination date of this Exhibit on any
                           claims-made policy which is in force at such
                           termination date or if an Extended Reporting Period
                           is in force at the time and date of termination, the
                           Reinsurer shall continue to be liable for claims
                           received and recorded by the Company or the insured
                           during such Extended Reporting Period, provided
                           always that the occurrence which results in any such
                           claim takes place prior to the expiration or
                           cancellation date of the policy.

                           For the First and Second Excess Covers, the
                           reinsurance premium for policies in force at the time
                           and date of termination shall be calculated by
                           applying the provisions of the Section entitled
                           REINSURANCE PREMIUM to the quarterly earned premiums
                           that derive from the unearned premium applicable to
                           policies in force at the time and date of
                           termination, provided such reinsurance premium is at
                           least 50% of the reinsurance premium for the prior
                           calendar year. Further, the reinsurance premium for
                           any unlimited Extended Reporting Period provided
                           within one year after the termination date of this
                           Exhibit on any claims-made policy which is in force
                           at such termination date shall be calculated in
                           accordance with the provisions of the Section
                           entitled REINSURANCE PREMIUM. For the Third Excess
                           Cover, the run-off reinsurance premium shall be
                           mutually agreed by the parties.

         D.       When all reinsurance is expired or terminated, the Reinsurer
                  shall return to the Company the reinsurance premium unearned,
                  if any, calculated on the monthly pro rata basis, less the
                  commission previously allowed thereon.



                                      -29-
<PAGE>   30



                                   APPENDIX A
                                   ----------

                       MERCHANTS MUTUAL INSURANCE COMPANY
               MERCHANTS INSURANCE COMPANY OF NEW HAMPSHIRE, INC.

                  CASUALTY EXCESS OF LOSS REINSURANCE EXHIBIT
                  -------------------------------------------

FIRST EXCESS COVER REINSURANCE RATES

<TABLE>
<CAPTION>
Class of Business                                Rate
-----------------------------------------------------
<S>                                             <C>  
Private Passenger Automobile                    0.05%
Liability (including PIP)

Commercial Automobile Liability                 1.76%
(including PIP)

Workers' Compensation and                       2.80%
Employers' Liability

Commercial Multiple Peril                       3.07%
(Section II) and
Business Owners (Section II)

Homeowners Multiple Peril                       No Charge
(Section II) and Farmowners
Multiple Peril (Section II)
</TABLE>





                                      -30-
<PAGE>   31


                                   EXHIBIT B
                                   ---------

                        PROPERTY PER RISK EXCESS OF LOSS
                               REINSURANCE COVER
                               -----------------

                                   Section 1
                                   ---------

COVER
-----

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 12:01 A.M., January 1, 1998, as respects:

         (1)      First Excess Cover:

                  the Company's policies in force as of said date, and new and
                  renewal policies becoming effective on and after said date;

         (2)      Second Excess Cover:

                  new and renewal policies of the Company becoming effective on
                  and after said date,

covering the Company's Property Business, subject to the limitations and
exclusions set forth.

                                   Section 2
                                   ---------

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

A.       With respect to the business covered under this Exhibit, the Reinsurer
         shall pay to the Company the amount of ultimate net loss each risk,
         each occurrence sustained by the Company in excess of the Company
         Retention but not exceeding the Reinsurer's Limit of Liability as set
         forth in the Schedule of Reinsurance below.

         The Reinsurer's Limit of Liability for the First Excess Cover of this
         Exhibit shall not exceed a total payment of $3,000,000 on all risks
         involved in one occurrence.



                                      -31-
<PAGE>   32


<TABLE>
<CAPTION>

                    SCHEDULE OF REINSURANCE
--------------------------------------------------------------------
COMPANY RETENTION                   REINSURER'S LIMIT OF LIABILITY
EACH RISK, EACH                     EACH RISK, EACH OCCURRENCE
OCCURRENCE
--------------------------------------------------------------------
                                    FIRST              SECOND 
                                    EXCESS COVER       EXCESS COVER
<S>                                 <C>                <C>       
$   500,000                         $1,500,000         $8,000,000
--------------------------------------------------------------------
</TABLE>

B.       All insurance written under one or more policies of the Company against
         the same peril on the same risk shall be combined, and Company
         Retention and Reinsurer's Limit of Liability shall be determined on the
         basis of the sum of all insurance against the same peril and on the
         same risk which is in force at the time of a claim or loss.

C.       If an occurrence takes place which involves one risk reinsured under
         this Exhibit and the classes of business reinsured under Exhibit A to
         this Agreement in combination, the provisions of paragraph C. of the
         section entitled LIMITS OF COVER of said Exhibit A shall apply.

                                   Section 3
                                   ---------

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

A.       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 held liable, including 90% of any Extra Contractual Obligations
         and/or Excess Judgments and/or Declaratory Judgment Expenses, in
         accordance with their respective articles, after making proper
         deductions for all recoveries, salvages, and claims upon other
         reinsurance which inures to the benefit of the Reinsurer under this
         Agreement whether collectible or not; provided, however, that in the
         event of the insolvency of the Company, "ultimate net loss" shall mean
         the amount of loss 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 Article entitled INSOLVENCY CLAUSE.

B.       All expenses incurred by the Company which are included as part of the
         policy limit under the Company's original policies reinsured hereunder
         shall be included in "ultimate net loss" as defined above.


                                      -32-
<PAGE>   33

C.       All office expenses of the Company and all salaries and expenses of its
         officials and employees shall be excluded under this Agreement, except
         that the Company may include the costs and expenses of its in-house
         counsel as provided in D. below.

D.       All expenses other than as provided in B. and C. above, including taxed
         court costs, prejudgment and postjudgment interest, and loss expenses
         incurred in investigation, adjustment and litigation, defense and
         settlement of claims made against the Company under its original
         policies reinsured hereunder, including the costs and expenses of the
         Company's in-house counsel while engaged in the litigation of claims
         covered hereunder, shall be apportioned in proportion to the respective
         interests of the parties hereto in the ultimate net loss.

E.       In the event a verdict or judgment is reduced by an appeal or a
         settlement, subsequent to the entry of a judgment, resulting in an
         ultimate saving on such verdict or judgment, or a judgment is reversed
         outright, the expense incurred in securing such final reduction or
         reversal shall (1) be prorated between the Reinsurer and the Company in
         proportion that each benefits from such reduction or reversal and the
         expense incurred up to the time of the original verdict or judgment
         shall be prorated in proportion to each party's interest in such
         verdict or judgment; or (2) when the terms and conditions of the
         Company's original policies reinsured hereunder include expenses as
         part of the policy limit, be added to the Company's ultimate net loss.

F.       Recoveries from catastrophe reinsurance shall be deemed not to reduce
         the amount required with respect to the Company Retention.

                                   Section 4
                                   ---------
DEFINITIONS
-----------

         A.       Property Business
                  -----------------

                  This term shall mean insurance which is classified in the NAIC
                  form of annual statement as Fire, Allied Lines, Farmowners
                  Multiple Peril (Section I), Homeowners Multiple Peril (Section
                  I), Commercial Multiple Peril (Section I including Section I
                  of Business Owners), Inland Marine, and Automobile Physical
                  Damage (including collision, water damage, fleet dealers' and
                  garagekeepers' legal liability) except those lines
                  specifically excluded in the section entitled EXCLUSIONS, on
                  risks wherever located in the United States of America, its
                  territories and possessions, and Canada.

         B.       Company Retention
                  -----------------

                  This term shall mean the amount the Company shall retain for
                  its own 



                                      -33-
<PAGE>   34

                  account; however, this requirement shall be satisfied if this
                  amount is retained by the Company or its affiliated companies
                  under common management or common ownership.

         C.       Property Risk
                  -------------

                  The Company shall establish what constitutes one risk,
                  provided:

                  (1)      a building and its contents, including time element
                           coverages, shall never be considered more than one
                           risk:

                  (2)      when two or more buildings and their contents are
                           situated at the same general location, the Company
                           shall identify on its records at the time of
                           acceptance by the Company those individual buildings
                           and their contents that are considered to constitute
                           each risk; if such identification is not made, each
                           building and its contents shall be considered to be a
                           separate risk.

         D.       Building
                  --------

                  This term shall mean each structure that is considered by the
                  local fire insurance rating organization to be a separate
                  building for rate making purposes. With reference to
                  structures not rated specifically by the local fire insurance
                  rating organization, the term building shall mean each
                  separately roofed structure enclosed within exterior walls.

         E.       Automobile Physical Damage Risk
                  -------------------------------

                  The Company shall establish what constitutes one automobile
                  physical damage risk, provided:

                  (1)      a tractor and trailer(s) or a tractor and
                           semi-trailer(s) shall never be considered more than
                           one risk;

                  (2)      with respect to fleet dealers' business and garage
                           keepers legal liability business, all vehicles housed
                           in one building shall never be considered more than
                           one risk;

                  (3)      with respect to fleet dealers' business and garage
                           keepers legal liability business, any location where
                           all vehicles are situated out-of-doors shall never be
                           considered more than one risk.

         F.       Occurrence
                  ----------

                  This term shall mean each occurrence or series of occurrences
                  arising out 


                                      -34-
<PAGE>   35

                  of one event.

                                   Section 5
                                   ---------
EXCLUSIONS
----------

         This Exhibit shall not apply to:

         A.       Reinsurance accepted by the Company other than:

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

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

                  (3)      From its affiliates;

         B.       Nuclear incident per the Nuclear Incident Exclusion - Physical
                  Damage Reinsurance attached hereto;

         C.       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
                  individual risks under this Agreement which are assigned to
                  the Company as a result of the business reinsured hereunder;

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

         E.       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 workers'
                  compensation and employers liability nor to any policy which
                  contains a standard war exclusion;

         F.       Policies written to apply in excess of underlying insurance or
                  policies written with a deductible or franchise of more than
                  $25,000; however, this exclusion shall not apply to policies
                  which provide a percentage of deductibles or franchise in
                  connection with windstorm;

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



                                      -35-
<PAGE>   36

         H.       Insurance on growing crops;

         I.       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;

         J.       Business classified as fidelity;

         K.       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;

         L.       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;

         M.       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;

         N.       Difference in conditions insurance and similar kinds of
                  insurance, howsoever styled, except when written in
                  conjunction with fire and otherwise eligible perils;

         O.       Risks which have a total insurable value of more than
                  $250,000,000;

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

         Q.       Mobile homes; however, this exclusion shall not apply to
                  dealers' physical damage renewal business;

         R.       Inland marine business with respect to the following:

                  (1)      All bridges and tunnels;

                  (2)      Cargo insurance when written as such with respect to
                           ocean, lake, or inland waterways vessels, except
                           transit insurance with a limit of $100,000 each or
                           less;

                  (3)      Commercial negative film insurance and cast
                           insurance;

                                      -36-
<PAGE>   37

                  (4)      Oil drilling rigs;

                  (5)      Furriers' customers policies;

                  (6)      Garment contractors policies;

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

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

                  (9)      Mining equipment while underground;

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

                  (11)     Radio and television broadcasting towers in excess of
                           100 feet in height;

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

                  (13)     Watercraft, other than watercraft insured under a
                           standard homeowners policy and non-owned watercraft
                           up to 51 feet in length for commercial policies;

         S.       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);

         T.       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;

         U.       Pollutant clean up or removal under any commercial property
                  policy or any inland marine policy written by the Company
                  which does not contain ISO ChangesPollutants 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


                                      -37-
<PAGE>   38

                  an endorsement independent of ISO, such endorsement will be
                  deemed a suitable substitute provided the Company has
                  submitted the wording to the Reinsurer and received the
                  Reinsurer's prior approval.

If the Company is bound, without the knowledge of and contrary to the
instructions of the Company's supervisory underwriting personnel, on any
business falling within the scope of one or more of the exclusions set forth in
this Section, these exclusions, except A. through F., J., K., P., S., T and U.
shall be suspended with respect to such business until 30 days after an
underwriting supervisor of the Company acquires knowledge of such business.

                                   Section 7
                                   ---------

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

The Company shall Pay to the Reinsurer:

A.       First Excess Cover:

         (1)      With respect to business becoming in force at the effective
                  time and date of this Exhibit:

                  a.       0.36% of the Company's unearned premium on homeowners
                           multiple peril (Section I) after deducting that
                           portion, if any, paid for share reinsurance,
                           calculated on the monthly pro rata basis as of the
                           effective time and date of this Exhibit; and

                  b.       4.86% of the Company's unearned premium on all other
                           classes of business reinsured hereunder (except
                           automobile physical damage), after deducting that
                           portion, if any, paid for share reinsurance,
                           calculated on the monthly pro rata basis as of the
                           effective time and date of this Exhibit.

         (2)      With respect to business becoming effective at and after the
                  effective time and date of this Exhibit:

                  a.       0.36% of the Company's written premium on homeowners
                           multiple peril (Section I) after deducting that
                           portion, if any, paid for share reinsurance; and

                  b.       4.86% of the Company's written premium on all other
                           classes of business reinsured hereunder (except
                           automobile physical damage), after deducting that
                           portion, if any, paid for share reinsurance.

         B.       Second Excess Cover:


                                      -38-
<PAGE>   39

                  For each risk ceded hereunder, the Company shall pay to the
                  Reinsurer a reinsurance premium equal to the product of the
                  applicable reinsurance rate set forth in Appendix B attached
                  hereto and the Company's written premium for the risk being
                  reinsured. The applicable reinsurance rate shall be determined
                  based on the total insured value and construction of the
                  reinsured risk.

         C.       For the purpose of the calculation of the reinsurance premium
                  for business owners policies reinsured hereunder, the
                  reinsurance rate above shall be applied against business
                  owners policy written premium.

                                   Section 8
                                   ---------

CONTINGENT COMMISSION
---------------------

The Reinsurer's underwriting experience under the First Excess Cover of this
Exhibit and under the First Excess Cover and the Combination Cover of Exhibit A
to this Agreement shall be combined for the purposes of calculating the
contingent commission on accordance with the provisions of the section entitled
CONTINGENT COMMISSION of said Exhibit A.

                                   Section 9
                                   ---------

REPORTS AND REMITTANCES
-----------------------

A.      Reinsurance Premium
        -------------------

         (1)      In Force Premium (Applicable to the First Excess Cover only):

                  Within 45 days after the commencement of this Exhibit, the
                  Company shall render to the Reinsurer a report of the
                  reinsurance premium with respect to the business of the
                  Company in force at the effective time and date of this
                  Exhibit, summarizing the reinsurance premium by line of
                  insurance, by term, and by month and year of expiration; and
                  the amount due the Reinsurer shall be remitted within the
                  earlier of (a) 180 days after the commencement of this
                  Exhibit, or (b) 5 days after receipt of General Reinsurance
                  Corporation's return premium under the prior property
                  reinsurance program.

         (2)      New and Renewal Premium:

                  Within 25 days after the close of each month, the Company
                  shall render to the Reinsurer a report of the reinsurance
                  premium for the month with respect to business of the Company
                  written during the month, summarizing the reinsurance premium
                  by line of insurance; and the amount due either party shall be
                  remitted within 60 days after the close of 

                                      -39-
<PAGE>   40

                  the month.

                  Within 25 days after the close of each calendar quarter, the
                  Company shall render to the Reinsurer a report of the
                  reinsurance premium unearned by line of insurance and the
                  contribution for the quarter to the reinsurance premium in
                  force by line of insurance, by term, and by month and year of
                  expiration.

B.       Claims and Losses
         -----------------

         The Company shall report promptly to the Reinsurer each claim or loss
         which, in the Company's opinion, may involve the reinsurance afforded
         by this Exhibit. The Company shall advise the Reinsurer of the
         estimated amount of ultimate net loss in connection with each such
         claim or loss and of any subsequent changes in such estimates.

         Upon receipt of a definitive statement of ultimate net loss from the
         Company, the Reinsurer shall promptly pay to the Company the
         Reinsurer's portion of ultimate net loss and the Reinsurer's portion of
         loss expense, if any. Any subsequent changes in the amount of ultimate
         net loss shall be reported by the Company to the Reinsurer and the
         amount due either party shall be remitted promptly.

C.       General
         -------

         In addition to the reports required in A., B. and C. above, the Company
         shall furnish such other information as may be required by the
         Reinsurer for the completion of the Reinsurer's quarterly and annual
         statements and internal records.

         All reports shall be rendered in forms acceptable to the Company and
         the Reinsurer.

                                   Section 10
                                   ----------

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

A.       This Exhibit shall apply to new and renewal policies of the Company
         becoming effective at and after 12:01 A.M., January 1, 1998, and to
         policies of the Company in force at 12:01 A.M., January 1, 1998, with
         respect to claims or losses resulting from occurrences taking place at
         and after the aforesaid time and date.

B.       This Exhibit may be terminated by either party sending to the other, by
         registered mail to its principal office, notice stating the time and
         date when, not less than 90 days after the date of mailing of such
         notice, termination shall be effective.


                                      -40-
<PAGE>   41

C.       Upon termination of this Exhibit, the Reinsurer's liability hereunder
         will terminate on a cut-off basis. However, the Company may elect to
         have the Reinsurer's liability terminate on a run-off basis. The
         phrases "cut-off basis" and "run-off basis" shall have the meanings set
         forth below:

         (1)      Cut-Off Basis:

                  The Reinsurer shall not be liable for claims and losses
                  resulting from occurrences taking place at and after the
                  effective time and date of termination.

         (2)      Run-Off Basis:

                  The Reinsurer shall continue to be liable, with respect to
                  policies in force at the time and date of termination, for
                  occurrences taking place until the expiration, cancellation,
                  or next anniversary date, not to exceed one year, of each such
                  policy of the Company, whichever occurs first.

                  The reinsurance premium for policies in force at the time and
                  date of termination shall be calculated by applying the
                  provisions of the Section entitled REINSURANCE PREMIUM to the
                  quarterly earned premiums that derive from the unearned
                  premium applicable to policies in force at the time and date
                  of termination, provided such reinsurance premium is at least
                  50% of the reinsurance premium for the prior calendar year.

D.       When all reinsurance is expired or terminated, the Reinsurer shall
         return to the Company the reinsurance premium unearned, if any,
         calculated on the monthly pro rata basis.



                                      -41-
<PAGE>   42


                                   APPENDIX B
                                   ----------

                       MERCHANTS MUTUAL INSURANCE COMPANY
               MERCHANTS INSURANCE COMPANY OF NEW HAMPSHIRE, INC.

                  PROPERTY EXCESS OF LOSS REINSURANCE EXHIBIT

                        Second Excess Reinsurance Rates
                        -------------------------------

<TABLE>
<CAPTION>
Total Insured Value                  Protection Class 1-8           Protection Class 9-10
-------------------                  --------------------           ---------------------
<S>                                     <C>                             <C>
Greater than $2.0 - $2.5 million             1%                              3%
Greater than $2.5 - $3.0 million             2%                              7%
Greater than $3.0 - $3.5 million             4%                              10%
Greater than $3.5 - $4.0 million             5%                              12%
Greater than $4.0 - $4.5 million             6%                              14%
Greater than $4.5 - $5.0 million             7%                              16%
Greater than $5.0 - $5.5 million             9%                              18%
Greater than $5.5 - $6.0 million            10%                              19%
Greater than $6.0 - $6.5 million            11%                              21%
Greater than $6.5 - $7.0 million            12%                              22%
Greater than $7.0 - $7.5 million            13%                              23%
Greater than $7.5 - $8.0 million            14%                              24%
Greater than $8.0 - $8.5 million            15%                              25%
Greater than $8.5 - $9.0 million            16%                              26%
Greater than $9.0 - $9.5 million            17%                              27%
Greater than $9.5 - $10.0 million           18%                              28%
</TABLE>




                                      -42-
<PAGE>   43


                                   EXHIBIT C
                                   ---------

               EACH CLAIMANT WORKERS' COMPENSATION EXCESS OF LOSS
                               REINSURANCE COVER
                               -----------------

                                   Section 1
                                   ---------
COVER
-----

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 12:01 A.M., January 1, 1998, as respects the Company's
policies in force as of said date and new and renewal policies becoming
effective on and after said date, covering the Company's Workers' Compensation
Business, subject to the limitations and exclusions hereinafter set forth.

                                   Section 2
                                   ---------

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

A.       With respect to the business covered under this Exhibit, the Reinsurer
         shall pay to the Company the amount of ultimate net loss for each
         claimant, each occurrence in excess of the Company Retention but not
         exceeding the Reinsurer's Limits of Liability as set forth in the
         Schedule of Reinsurance below.
<TABLE>
<CAPTION>
                            SCHEDULE OF REINSURANCE
-------------------------------------------------------------------------------------
COMPANY RETENTION           REINSURER'S LIMITS OF LIABILITY           ALL OCCURRENCES
EACH CLAIMANT,                       EACH CLAIMANT,                     DURING EACH
EACH OCCURRENCE                     EACH OCCURRENCE                    CALENDAR YEAR
-------------------------------------------------------------------------------------
<C>                                     <C>                             <C>        
$10,000,000                             $5,000,000                      $20,000,000

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

                                   Section 3
                                   ---------

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

A.       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 held liable, including:

         (1)      90% of any Extra Contractual Obligations and/or Excess
                  Judgments and/or Declaratory Judgment Expenses, in accordance
                  with their respective articles; and

         (2)      All expenses, other than as provided in B. below, including
                  taxed court 


                                      -43-
<PAGE>   44

                  costs, prejudgment and postjudgment interest, and loss
                  expenses incurred in investigation, adjustment and litigation,
                  defense and settlement of claims made against the Company
                  under its original policies reinsured hereunder, including the
                  costs and expenses of the Company's in-house counsel while
                  engaged in the litigation of claims covered hereunder;

         after making proper deductions for all recoveries, salvages, and claims
         upon other reinsurance which inures to the benefit of the Reinsurer
         under this Agreement whether collectible or not; provided, however,
         that in the event of the insolvency of the Company, "ultimate net loss"
         shall mean the amount of loss 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 Article entitled INSOLVENCY
         CLAUSE.

B.       All office expenses of the Company and all salaries and expenses of its
         officials and employees shall be excluded under this Agreement, except
         that the Company may include costs and expenses of the Company's
         in-house counsel while engaged in the litigation of claims covered
         hereunder.

                                   Section 5
                                   ---------

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

         A.       Workers' Compensation Business
                  ------------------------------

                  This term shall mean insurance afforded by Parts One and Three
                  of the Company's Workers' Compensation and Employers'
                  Liability Policy and any endorsements included therein or
                  attached thereto.

         B.       Company Retention
                  -----------------

                  This term shall mean the amount the Company shall retain for
                  its own account; however, this requirement shall be satisfied
                  if this amount is retained by the Company or its affiliated
                  companies under common management or common ownership.

         C.       Occurrence
                  ----------

                  This term shall mean each accident or occurrence or series of
                  accidents or occurrences arising out of one event regardless
                  of the number of policies involved, and as respects workers'
                  compensation and employers' liability policies, regardless of
                  the number of employees or employers involved, except as
                  modified below:

                  (1)      As respects exposures reinsured hereunder other than
                           occupational 

                                      -44-
<PAGE>   45

                           and other disease or cumulative injury under workers'
                           compensation policies, all bodily injury or property
                           damage arising out of continuous or repeated exposure
                           to substantially the same general conditions shall be
                           considered as arising out of one occurrence. The date
                           of occurrence shall be deemed to be the following:

                           (i)      As respects a loss involving one or more
                                    policies written on an occurrence basis, the
                                    date on which bodily injury or property
                                    damage occurs.

                           (ii)     As respects a loss involving one or more
                                    policies written on a claimsmade basis, the
                                    date when notice of claim is received and
                                    recorded by the Company or the insured,
                                    whichever comes first, and any related
                                    claims reported subsequent to such date
                                    shall be included in such loss. However, if
                                    notice of claim is received and recorded by
                                    the Company or the insured during an
                                    Extended Reporting Period, the date of
                                    occurrence shall be deemed to be the last
                                    day of the policy period.

                           (iii)    As respects a loss involving one or more
                                    policies written on an occurrence basis and
                                    one or more policies written on a claimsmade
                                    basis, the date on which bodily injury or
                                    property damage occurs, and any related
                                    claims reported subsequent to such date
                                    shall be included in such loss whether they
                                    are covered under occurrence or claims-made
                                    policies.

                  (2)      As respects an occupational or other disease or
                           cumulative injury under workers' compensation or
                           employers' liability policies for which the employer
                           is liable:

                           (i)      Which arises from a specific sudden and
                                    accidental event limited in time and place,
                                    such occupational or other disease suffered
                                    by one or more employees of one or more
                                    employers shall be deemed to be an
                                    occurrence within the meaning of this
                                    Exhibit and the date of occurrence shall be
                                    deemed to be the date of the sudden and
                                    accidental event.

                           (ii)     Which does not arise from a specific sudden
                                    and accidental event limited in time and
                                    place, such occupational or other disease or
                                    cumulative injury shall be deemed to be an
                                    occurrence within the meaning of this
                                    Exhibit, and the date of occurrence shall be
                                    deemed to be the date of the 


                                      -45-
<PAGE>   46

                                    beginning of the disability for which
                                    compensation is payable if the case is
                                    compensable under the Workers' Compensation
                                    law; or the date that disability due to said
                                    disease actually began if the case is not
                                    compensable under the Workers' Compensation
                                    law. Each case of an employee contracting
                                    such occupational or other disease or
                                    cumulative injury for which the employer
                                    insured by the Company is held liable shall
                                    be considered a separate occurrence
                                    regardless of the date of loss.

                                   Section 6
                                   ---------

EXCLUSIONS
----------

        This Exhibit shall not apply to:

         A.       Business accepted by the Company as reinsurance from other
                  insurers other than its affiliates;

         B.       Nuclear incident per the Nuclear Incident Exclusion Clause -
                  Liability - Reinsurance attached hereto;

         C.       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 and including automobile assigned risk pools and
                  voluntary or involuntary market assistance programs; however,
                  this exclusion shall not apply to individual risks under this
                  Agreement which are assigned to the Company as a result of the
                  business reinsured hereunder;

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

         E.       War, Civil War;

         F.       Business written with a deductible of more than $25,000
                  (unless the deductible is $100,000 or more and ceded to
                  Exhibit A of this Agreement in accordance with its terms) or
                  written to apply in excess of a self-insured amount of more
                  than $25,000 (unless the self-insured amount is $100,000 or
                  more and ceded to Exhibit A of this Agreement in accordance
                  with its terms) or business written to apply specifically in
                  excess over underlying insurance;

         G.       Workers' compensation and employers' liability insurance with
                  respect to operations principally involving:


                                      -46-
<PAGE>   47

                  (1)      Aircraft flight and ground operations or operations
                           in which the flying hazard is a major part;

                  (2)      Amusement parks or devices, exhibitions (including
                           fireworks), carnivals or circuses, sports events
                           and/or participants; however, this exclusion shall
                           not apply to coverage for locations or events with
                           daily admissions of 1,000 or less or seating capacity
                           of 1,000 or less;

                  (3)      Manufacturing, packing, handling, shipping, or
                           storage of explosives, substances intended for use as
                           an explosive, ammunitions, fuses, arms, magnesium,
                           propellant charges, detonating devices, fireworks,
                           nitroglycerine, celluloid, or pyroxylin; however,
                           this exclusion shall not apply to the incidental
                           packing, handling or storage of same in connection
                           with the sale of such substances;

                  (4)      Gas companies, dealers, or distributors, except those
                           in the gasoline service station, convenience store or
                           fuel oil dealer business; oil or gas operators, lease
                           operators or contractors; oil or gas well works; oil
                           or gas pipeline construction or operations; oil rig
                           and derrick work; onshore or offshore gas or oil
                           drilling operations;

                  (5)      Manufacturing, packing, handling, shipping or storage
                           of natural gas or artificial fuel gasses, butane,
                           propane, gasoline, or liquified petroleum gas;
                           however, this exclusion shall not apply to the
                           incidental packing, handling or storage of same in
                           connection with the sale of such substances;

                  (6)      Railroad operation or construction, except this
                           exclusion shall not apply if the excluded exposure is
                           not normally associated with the insured's operation
                           and odes not present a larger exposure than the
                           overall unexcluded portion of the risk;

                  (7)      Maritime or federal employments; steamship lines,
                           agencies, or stevedoring, navigation or operation of
                           vessels; operation of drydocks; and including all
                           United States Longshoremen's and Harbor Workers'
                           exposures, except this exclusion shall not apply if
                           the excluded exposure (a) is endorsed on an "if any"
                           basis or (b) is not normally associated with the
                           insured's operation and does not present a larger
                           exposure than the overall unexcluded portion of the
                           risk;


                                      -47-
<PAGE>   48

                  (8)      Subway construction, shaft sinking, or tunneling;

                  (9)      Wrecking or demolition of vessels or buildings or
                           structures of more than three stories in height;

                  (10)     Underground mining, strip mining, or quarrying;

                  (11)     Subaqueous work;

                  (12)     Caisson or coffer dam work; dam, dike, lock, or
                           revetment construction;

                  (13)     Chemical manufacturing; however, this exclusion shall
                           not apply to operations with annual gross receipts
                           from chemical manufacturing of $500,000 or less;

                  (14)     Nuclear Regulatory Commission projects or operations
                           conducted under license from the Nuclear Regulatory
                           Commission;

                  (15)     Asbestos removal contractors;

                  (16)     Firefighters and police officers.

If the Company is bound, without the knowledge of and contrary to the
instructions of the Company's supervisory underwriting personnel, on any
business falling within the scope of one or more of the exclusions set forth in
this Section, these exclusions, except A. through E., G.(3) and G.(4) shall be
suspended with respect to such business until the greater of 30 days or the
minimum period of time required by statute after an underwriting supervisor of
the Company acquires knowledge of such business.

                                   Section 7
                                   ---------

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

Unless otherwise mutually agreed, the Company shall pay the Reinsurer an annual
reinsurance premium of $30,000 for each calendar year during which this Exhibit
remains in force.

                                   Section 8
                                   ---------

REPORTS AND REMITTANCES
-----------------------

         A.       Reinsurance Premium
                  -------------------

                  Within 25 days after the beginning of each calendar quarter,
                  the Company shall pay to the Reinsurer one quarter of the
                  annual reinsurance premium stipulated in the section entitled
                  REINSURANCE PREMIUM.


                                      -48-
<PAGE>   49

         B.       Claims and Losses
                  -----------------

                  The Company shall report promptly to the Reinsurer each claim
                  or loss for which the Company's estimated amount of net loss
                  is 50% or more of the amount of the Company Retention and
                  shall also report all cases of serious injury which,
                  regardless of considerations of liability or coverage, might
                  involve this reinsurance, including but not limited to the
                  following:

                  (1)      Cord injury paraplegia, quadriplegia;

                  (2)      Amputations requiring a prosthesis;

                  (3)      Brain damage affecting mentality or central nervous
                           system such as permanent disorientation, behavior
                           disorder, personality change, seizures, motor
                           deficit, inability to speak (aphasia), hemiplegia or
                           unconsciousness (comatose);

                  (4)      Blindness;

                  (5)      Burns involving over 10% of body with third degree or
                           30% of body with second degree;

                  (6)      Multiple fractures involving more than one member or
                           non-union;

                  (7)      Fracture of both heel bones (fractured bilateral or
                           calcis);

                  (8)      Nerve damage causing paralysis and loss of sensation
                           in arm and hand (brachial plexus nerve damage);

                  (9)      Massive internal injuries affecting body organs;

                  (10)     Injury to nerves at base of spinal canal (Cauda
                           Equina) or any other back injury resulting in
                           incontinence of bowel and/or bladder;

                  (11)     Fatalities;

                  (12)     Any other serious injury which, in the judgment of
                           the Company, might involve the Reinsurer.

                           The Company shall advise the Reinsurer of the
                           estimated amount of ultimate net loss and loss
                           expense in connection with each such claim or loss
                           and of any subsequent changes in such estimates.

                           Upon receipt of a definitive statement of ultimate
                           net loss and loss 


                                      -49-
<PAGE>   50

                           expense from the Company, the Reinsurer shall pay
                           promptly to the Company the Reinsurer's portion of
                           ultimate net loss and Reinsurer's portion of loss
                           expense, if any. Any subsequent changes shall be
                           reported by the Company to the Reinsurer and the
                           amount due either party shall be remitted promptly.

         C.       General
                  -------

                  In addition to the reports required in A. and B. above, the
                  Company shall furnish such other information as may be
                  required by the Reinsurer for the completion of the
                  Reinsurer's quarterly and annual statements and internal
                  records.

                  All reports shall be rendered in forms acceptable to the
                  Company and the Reinsurer.

                                   Section 9
                                   ---------

REINSTATEMENT
-------------

A.   The limit of liability of the Reinsurer under this Exhibit with respect to
     each occurrence shall be reduced by an amount equal to the amount of
     liability paid by the Reinsurer, but that part of the liability of the
     Reinsurer that is so reduced shall be automatically reinstated, subject to
     the maximum payment of $20,000,000 with respect to all occurrences taking
     place during each calendar year this Exhibit is in effect. In consideration
     of this automatic reinstatement, the Company shall pay to the Reinsurer:

          (a)  For the first $5,000,000 so reinstated an additional reinsurance
               premium which shall be the product of the annual reinsurance
               premium set forth in the section entitled REINSURANCE PREMIUM and
               the amount so reinstated divided by $5,000,000,

          (b)  For the next two full reinstatements of $5,000,000 each, an
               additional reinsurance premium which shall be the product of 50%
               of the annual reinsurance premium set forth in the section
               entitled REINSURANCE PREMIUM and the amount so reinstated divided
               by $5,000,000.

     The reinsurance premium so developed for each amount reinstated shall be in
     addition to the reinsurance premium set forth in the section entitled
     REINSURANCE PREMIUM, and shall be paid by the Company immediately following
     loss payment by the Reinsurer.

                                      -50-
<PAGE>   51

                                   Section 10
                                   ----------

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

A.   This Exhibit shall apply to claims and losses resulting from occurrences
     taking place at and after 12:01 A.M., January 1, 1998.

B.   This Exhibit may be terminated by either party sending to the other, by
     registered mail to its principal office, notice stating the time and date
     when, not less than 90 days after the date of mailing of such notice,
     termination shall be effective.

C.   Upon termination of this Exhibit, the Reinsurer's liability hereunder will
     terminate on a cut-off basis. However, the Company may elect to have the
     Reinsurer's liability terminate on a run-off basis. The phrases "cut-off
     basis" and "run-off basis" shall have the meanings set forth below:

     (1)  Cut-Off Basis:

          The Reinsurer shall not be liable for claims and losses resulting from
          occurrences taking place at and after the effective time and date of
          termination.

     (2)  Run-Off Basis:

          The Reinsurer shall continue to be liable, with respect to policies in
          force at the time and date of termination, for occurrences taking
          place until the expiration, cancellation, or next anniversary date,
          not to exceed one year, of each such policy of the Company, whichever
          occurs first.

          The reinsurance premium for policies in force at the time and date of
          termination shall be mutually agreed by the parties.

                                      -51-
<PAGE>   52
ENDORSEMENT
                                                                     Page 1 of 6

ENDORSEMENT

Attached to and forming part of the PROPERTY AND CASUALTY EXCESS OF LOSS
REINSURANCE AGREEMENT NO. 2530-0004 (hereinafter referred to as the "Agreement")
between MERCHANTS MUTUAL INSURANCE COMPANY, Buffalo, New York and MERCHANTS
INSURANCE COMPANY OF NEW HAMPSHIRE, INC., Concord, New Hampshire (hereinafter
collectively referred to as the "Company") and AMERICAN REINSURANCE COMPANY, a
Delaware Corporation with Administrative Offices in Princeton, New Jersey
(hereinafter referred to as the "Reinsurer").

It is hereby mutually understood and agreed that the following changes are made
in the Agreement effective 12:01 A.M., January 1, 1998.

I. EXHIBIT A IS AMENDED AS FOLLOWS:

(A) SECTION 8, REINSURANCE PREMIUM, IS DELETED IN ITS ENTIRETY AND REPLACED
BY THE FOLLOWING:

Section 8

REINSURANCE PREMIUM AND COMMISSION

A. First Excess Cover:

(1) With respect to business in force at the effective time and date of this
Exhibit, the Company shall pay the Reinsurer a reinsurance premium equal to the
product of the applicable First Excess reinsurance rate set forth in Appendix A
attached hereto and the Company's unearned premium for the classes of business
reinsured hereunder, calculated on the monthly pro rata basis as of the
effective time and date of this Exhibit.

(2) With respect to business becoming effective at and after the effective time
and date of this Exhibit, the Company shall pay the Reinsurer a reinsurance
premium equal to the product of the applicable First Excess reinsurance rate set
forth in Appendix A attached hereto and the Company's written premium for the
classes of business reinsured hereunder.

B. Second Excess Cover:

(1) With respect to business in force at the effective time and date of this
Exhibit, the Company shall pay the Reinsurer a reinsurance premium equal to
0.38% of the Company's unearned premium for the classes of business reinsured
hereunder, calculated on the

monthly pro rata basis as of the effective time and date of this Exhibit.

(2) With respect to business becoming effective at and after the effective time
and date of this Exhibit, the Company shall pay the Reinsurer a reinsurance
premium equal to 0.38% of the Company's written premium for the classes of
business reinsured hereunder, subject to an annual minimum and deposit
reinsurance premium of $400,000.

<PAGE>   53
ENDORSEMENT
                                                                     Page 2 of 6

C. Third Excess Cover:

Unless otherwise mutually agreed, the Company shall pay the Reinsurer an annual
reinsurance premium of $40,000 for each calendar year during which the Third
Excess remains in force.

D. The Reinsurer shall allow the Company (and the Company shall allow the
Reinsurer, in the event of return premiums) a flat ceding commission of 50% on
all premiums ceded under the First and Second Excess Covers. There shall be no
commission on the premiums ceded under the Third Excess Cover. The commission
will include premium taxes of all kinds, local board assessments, and all other
expenses and charges whatsoever based on the premium for business ceded under
this Agreement.

E. For the purpose of the calculation of the reinsurance premium for business
owners policies reinsured hereunder, the reinsurances rates in A. and B. above
shall be applied against 60% of the business owners policy premium unearned or
written, as applicable.

(B) PARAGRAPH A OF SECTION 10, REPORTS AND REMITTANCES, IS DELETED AND REPLACED
BY THE FOLLOWING:

Section 10

REPORTS AND REMITTANCES

A. Reinsurance Premium

(1) In Force Premium (Applicable to the First and Second Excess Covers only):

Within 45 days after the commencement of this Exhibit, the Company shall render
to the Reinsurer a report of the reinsurance premium with respect to the
business of the Company in force at the effective time and date of this Exhibit,
summarizing the reinsurance premium by line of insurance, by term, and by month
and year of expiration; and the amount due the Reinsurer, less ceding
commission, shall be remitted within the earlier of: (a) 180 days after the
commencement of this Exhibit, or (b) 5 days after receipt of General Reinsurance
Corporation's return premium under the prior casualty reinsurance program.

(2) New and Renewal Premium:

a. First Excess Cover:

Within 25 days after the close of each month, the Company shall render to the
Reinsurer a report of the reinsurance premium for the month with respect to
business of the Company written during the month, summarizing the reinsurance
premium by line of insurance; and the amount due either party, less ceding
commission, shall be remitted within 60 days after the close of the month.

Within 25 days after the close of each calendar quarter, the Company shall
render to the Reinsurer a report of the reinsurance premium unearned by line of
insurance and the contribution for the quarter to the reinsurance premium in
force by line of insurance, by term and by month and year of expiration.

<PAGE>   54
ENDORSEMENT
                                                                     Page 3 of 6

b. Second Excess Cover

Within 25 days after the beginning of each calendar quarter, the Company shall
pay to the Reinsurer one quarter of the annual minimum and deposit reinsurance
premium stipulated in subparagraph B.2 of the section entitled REINSURANCE
PREMIUM, less ceding commission thereon.

Within 60 days after the close of each calendar year, the Company shall render
to the Reinsurer a report of the premium written by the Company on the classes
of business reinsured hereunder during such calendar year. The Company shall
calculate the reinsurance premium thereon and remit to the Reinsurer the amount
of reinsurance premium, if any, in excess of the annual minimum and deposit
reinsurance premium previously paid, less ceding commission thereon.

c. Third Excess Cover

Within 25 days after the beginning of each calendar quarter, the Company shall
pay to the Reinsurer one quarter of the annual reinsurance premium stipulated in
subparagraph C. of the section entitled REINSURANCE PREMIUM.

(C) PARAGRAPH D OF SECTION 12, COMMENCEMENT AND TERMINATION, IS DELETED AND
REPLACED BY THE FOLLOWING:

D. When all reinsurance is expired or terminated, the Reinsurer shall return to
the Company the reinsurance premium unearned, if any, calculated on the monthly
pro rata basis, less any commission previously allowed thereon.

(D) APPENDIX A IS DELETED IN ITS ENTIRETY AND REPLACED BY THE FOLLOWING:

APPENDIX A

MERCHANTS MUTUAL INSURANCE COMPANY

MERCHANTS INSURANCE COMPANY OF NEW HAMPSHIRE, INC.

CASUALTY EXCESS OF LOSS REINSURANCE EXHIBIT

FIRST EXCESS COVER REINSURANCE RATES

Class of Business Rate

Private Passenger Automobile 0.10%

Liability (including PIP)

Commercial Automobile Liability 3.52%

<PAGE>   55
ENDORSEMENT
                                                                     Page 4 of 6

(including PIP)

Workers' Compensation and 5.60%

Employers' Liability

Commercial Multiple Peril 6.14%

(Section II) and

Business Owners (Section II)

Homeowners Multiple Peril No Charge

(Section II) and Farmowners

Multiple Peril (Section II)

II. EXHIBIT B IS AMENDED AS FOLLOWS:

(A) SECTION 7, REINSURANCE PREMIUM, IS DELETED IN ITS ENTIRETY AND REPLACED BY
THE FOLLOWING:

Section 7

REINSURANCE PREMIUM AND COMMISSION

The Company shall pay to the Reinsurer:

A. First Excess Cover:

(1) With respect to business becoming in force at the effective time and date of
this Exhibit:

a. 0.72% of the Company's unearned premium on homeowners multiple peril (Section
I) after deducting that portion, if any, paid for share reinsurance, calculated
on the monthly pro rata basis as of the effective time and date of this Exhibit;
and

b. 9.72% of the Company's unearned premium on all other classes of business
reinsured hereunder (except automobile physical damage), after deducting that
portion, if any, paid for share reinsurance, calculated on the monthly pro rata
basis as of the effective time and date of this Exhibit.

(2) With respect to business becoming effective at and after the effective time
and date of this Exhibit:

a. 0.72% of the Company's written premium on homeowners multiple peril (Section
I) after deducting that portion, if any, paid for share reinsurance; and

b. 9.72% of the Company's written premium on all other classes of business
reinsured hereunder

<PAGE>   56
ENDORSEMENT
                                                                     Page 5 of 6

(except automobile physical damage), after deducting that portion, if any, paid
for share reinsurance.

B. Second Excess Cover:

For each risk ceded hereunder, the Company shall pay to the Reinsurer a
reinsurance premium equal to the product of the applicable reinsurance rate set
forth in Appendix B attached hereto and the Company's written premium for the
risk being reinsured. The applicable reinsurance rate shall be determined based
on the total insured value and construction of the reinsured risk.

C. The Reinsurer shall allow the Company (and the Company shall allow the
Reinsurer, in the event of return premiums) a flat ceding commission of 50% on
all premiums ceded under the First Excess Cover. There shall be no commission on
premiums ceded under the Second Excess Cover. The commission will include
premium taxes of all kinds, local board assessments, and all other expenses and
charges whatsoever based on the premium for business ceded under this Agreement.

D. For the purpose of the calculation of the reinsurance premium for business
owners policies reinsured hereunder, the reinsurance rate above shall be applied
against 40% of business owners policy written premium.

(B) PARAGRAPH A OF SECTION 9, REPORTS AND REMITTANCES, IS DELETED AND REPLACED
BY THE FOLLOWING:

Section 9

REPORTS AND REMITTANCES

A. Reinsurance Premium

(1) In Force Premium (Applicable to the First Excess Cover only):

Within 45 days after the commencement of this Exhibit, the Company shall render
to the Reinsurer a report of the reinsurance premium with respect to the
business of the Company in force at the effective time and date of this Exhibit,
summarizing the reinsurance premium by line of insurance, by term, and by month
and year of expiration; and the amount due the Reinsurer, less ceding
commission, shall be remitted within the earlier of (a) 180 days after the
commencement of this Exhibit, or (b) 5 days after receipt of General Reinsurance
Corporation's return premium under the prior property reinsurance program.

(2) New and Renewal Premium:

Within 25 days after the close of each month, the Company shall render to the
Reinsurer a report of the reinsurance premium for the month with respect to
business of the Company written during the month, summarizing the reinsurance
premium by line of insurance; and the amount due either party, less ceding
commission, shall be remitted within 60 days after the close of the month.

Within 25 days after the close of each calendar quarter, the Company shall
render to the Reinsurer a report of the reinsurance premium unearned by line of
insurance and the contribution for the quarter to the reinsurance premium in
force by line of insurance, by term, and by month and year of expiration.

<PAGE>   57
ENDORSEMENT
                                                                     Page 6 of 6

(C) PARAGRAPH D OF SECTION 10, COMMENCEMENT AND TERMINATION, IS DELETED AND
REPLACED BY THE FOLLOWING:

D. When all reinsurance is expired or terminated, the Reinsurer shall return to
the Company the reinsurance premium unearned, if any, calculated on the monthly
pro rata basis, less any ceding commission previously allowed thereon.

Nothing herein contained shall alter, vary or extend any provision or condition
of the Agreement other than as above stated.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their duly authorized officers.

In Buffalo, New York, this 6th day of October, 1998.

ACCEPTED:

MERCHANTS MUTUAL INSURANCE COMPANY

MERCHANTS INSURANCE COMPANY OF NEW HAMPSHIRE, INC.

By: /s/ Kenneth J. Wilson

By: /s/ Thomas B. Harris

Attested by:

And in Princeton, New Jersey this 6th day of October, 1998.

AMERICAN RE-INSURANCE COMPANY

By: /s/ David M. Domino

By: /s/ Thomas D. Bell

Attested by: