Document:

<PAGE>
                                                                    Exhibit 10.7

                           DIRECT GENERAL CORPORATION

                                      2003

                              EQUITY INCENTIVE PLAN

<PAGE>

                           DIRECT GENERAL CORPORATION
                           2003 EQUITY INCENTIVE PLAN
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
Section                                                                                                         Page
-------                                                                                                         ----
<S>                                                                                                             <C>
1.       Administration...........................................................................................1
         (a)  The Committee.......................................................................................1
         (b)  Authority of the Committee..........................................................................1
         (c)  Scope of Authority..................................................................................1

2.       Shares Subject to the Plan...............................................................................2
         (a)  Company Stock.......................................................................................2
         (b)  Certain Adjustments.................................................................................2

3.       Eligibility for Participation............................................................................2
         (a)  Employees, Non-Employee Directors, and Key Advisors.................................................2
         (b)  Selection of Grantees...............................................................................2

4.       Options..................................................................................................3
         (a)  Types of Options Authorized.........................................................................3
         (b)  Terms of the Option.................................................................................3
              (i)     ISOs, NQOs or Combination...................................................................3
              (ii)    Exercise Price..............................................................................3
              (iii)   Fair Market Value...........................................................................3
         (c)  Notice and Method of Exercise.......................................................................3
         (d)  $100,000 Limit for ISOs.............................................................................4

5.       Restricted Stock Awards..................................................................................4
         (a)  Authority; Nature of the Awards.....................................................................4
         (b)  Certain Restrictions................................................................................4
         (c)  Issuance of Company Stock...........................................................................4
         (d)  Consideration for the Awards........................................................................4

6.       Stock Appreciation Rights................................................................................5
         (a)  Authority; Nature of the Award......................................................................5
         (b)  Tandem Grants with Options..........................................................................5
         (c)  Payment of the Right................................................................................5

7.       Performance Share Units..................................................................................5
         (a)  Authority...........................................................................................5
         (b)  Nature of the Award.................................................................................5
         (c)  Form of Payment.....................................................................................5

8.       Dividend Equivalent Payments.............................................................................5
</TABLE>

                                        i
<PAGE>

<TABLE>
<CAPTION>
Section                                                                                                         Page
-------                                                                                                         ----
<S>                                                                                                             <C>
9.       Other Stock Based Awards and Other Benefits..............................................................6
         (a)  Authority for Stock Based Awards....................................................................6
         (b)  Authority for Other Types of Awards.................................................................6

10.      Granting of Awards.......................................................................................6
         (a)  Number of Shares....................................................................................6
         (b)  Award Term..........................................................................................6
         (c)  Exercisability of Awards............................................................................6
         (d)  Grant Instrument Required...........................................................................6
         (e)  Termination of Employment, Disability or Death......................................................6
              (i)     Termination of Employment or Services.......................................................6
              (ii)    Termination for Cause.......................................................................7
              (iii)   Termination by Reason of Disability.........................................................7
              (iv)    Termination by Death........................................................................7
              (v)     Definitions.................................................................................7

11.      Withholding of Taxes.....................................................................................8
         (a)  Required Withholding................................................................................8
         (b)  Election to Withhold Shares.........................................................................8

12.      Transferability of Awards................................................................................8
         (a)  General Restrictions; Successor Grantee.............................................................8
         (b)  NQO Transferability.................................................................................9

13.      Change of Control of the Company.........................................................................9
         (a)  Acquisition of 20% Voting Power.....................................................................9
         (b)  Existing Shareholders or Board No Longer Majority; Sale of Assets; Liquidation......................9
         (c)  Tender Offer for 20% Voting.........................................................................9
         (d)  Change in Majority Membership of Board..............................................................9

14.      Consequences of a Change of Control......................................................................9
         (a)  Automatic Acceleration of Full Vesting..............................................................9
         (b)  Substitution of Acquiror's Securities..............................................................10
         (c)  Discretionary Cash Out.............................................................................10

15.      Amendment and Termination of the Plan and Awards........................................................10
         (a)  Amendment of Plan..................................................................................10
         (b)  Termination of Plan................................................................................10
         (c)  Termination and Amendment of Outstanding Awards....................................................10
         (d)  Governing Document.................................................................................10

16.      Funding of the Plan.....................................................................................11

17.      Rights of Participants..................................................................................11
</TABLE>

                                       ii
<PAGE>

<TABLE>
<CAPTION>
Section                                                                                                         Page
-------                                                                                                         ----
<S>                                                                                                             <C>
18.      No Fractional Shares....................................................................................11

19.      Requirements for Issuance of Shares.....................................................................11

20.      Headings................................................................................................11

21.      Effective Date of the Plan..............................................................................11

22.      Miscellaneous...........................................................................................12
         (a)  Awards in Connection with Corporate Transactions and Otherwise.....................................12
         (b)  Compliance with Law................................................................................12
         (c)  Ownership of Stock.................................................................................12
         (d)  Governing Law......................................................................................12
</TABLE>

                                       iii
<PAGE>

                           DIRECT GENERAL CORPORATION
                           2003 EQUITY INCENTIVE PLAN

         The purpose of the Direct General Corporation 2003 Equity Incentive
Plan (the "Plan") is to provide (i) designated employees (including employees
who are also officers or directors) of Direct General Corporation and its
subsidiaries (the "Company"), (ii) certain consultants and advisors to the
Company and (iii) non-employee members of the Board of Directors of the Company
(the "Board") with the opportunity to receive grants of incentive stock options
and nonqualified stock options ("Options"), Restricted Stock Awards, Stock
Appreciation Rights, Performance Shares, Dividend Equivalent Payments and Other
Stock Based Awards ("Options", "Restricted Stock Awards", "Stock Appreciation
Rights", "Performance Share Units", "Dividend Equivalent Payments", and "Other
Stock Based Awards" are collectively referred to herein as "AWARDS").

         The Company believes that the Plan will encourage the participants to
contribute materially to the growth and profitability of the Company, thereby
benefiting the Company's shareholders, and will align the economic interests of
the participants with those of its shareholders.

1.       Administration

         (a)      The Committee. The Plan will be administered by a compensation
committee (the "Committee") of two or more directors appointed by the Board. If
no compensation committee is appointed, all references in the Plan to the
"Committee" shall be deemed to refer to the Board.

         (b)      Authority of the Committee. The Committee shall have the sole
authority consistent with the terms of the Plan to (i) determine the individuals
to whom Awards shall be granted under the Plan, (ii) determine the type, size
and terms of the Awards to be granted to each such individual, (iii) determine
the time when the Awards will be granted and the duration of any applicable
exercise period, including the criteria for exercisability and the acceleration
of exercisability, (iv) deal with any other matters arising under the Plan and
(v) otherwise administer or oversee the administration of the Plan and any
Awards granted hereunder.

         (c)      Scope of Authority. The Committee shall have full power and
authority to administer and interpret the Plan, to make factual determinations
and to adopt or amend such rules, regulations, agreements and instruments for
implementing the Plan and any Awards granted hereunder, and for the conduct of
the Plan's business as the Committee deems necessary or advisable, in its sole
discretion. The Committee's interpretations of the Plan and any Awards granted
hereunder, and all determinations made by the Committee pursuant to the powers
vested in it hereunder shall be conclusive and binding on all persons having any
interest in the Plan or in any Awards granted hereunder. All powers of the
Committee shall be executed in its sole discretion, in the best interest of the
Company, not as a fiduciary, and in keeping with the terms and objectives of the
Plan and need not be uniform as to similarly situated individuals.

                                        1
<PAGE>

2.       Shares Subject to the Plan.

         (a)      Company Stock. Subject to the adjustments specified below, the
aggregate number of shares of common stock of the Company ("Company Stock") that
may be issued under the Plan is 140,000 shares. The shares may be authorized but
unissued shares of Company Stock or reacquired shares of Company Stock,
including shares purchased by the Company on the open market for purposes of the
Plan. If and to the extent Awards granted under the Plan terminate, expire, or
are canceled, forfeited, exchanged or surrendered without having been exercised,
the shares subject to such Awards shall again be available for purposes of the
Plan.

         (b)      Certain Adjustments. If there is any change in the number or
kind of shares of Company Stock outstanding (i) by reason of a stock dividend,
spin off, recapitalization, stock split, or combination or exchange of shares,
(ii) by reason of a merger, reorganization or consolidation in which the Company
is the surviving corporation, (iii) by reason of a reclassification or change in
par value, or (iv) by reason of any other extraordinary or unusual event
affecting the outstanding Company Stock as a class without the Company's receipt
of consideration, or if the value of outstanding shares of Company Stock is
substantially reduced as a result of a spin-off or the Company's payment of an
extraordinary dividend or distribution, the maximum number of shares of Company
Stock available for Awards, the maximum number of shares of Company Stock for
which any individual participating in the Plan may receive Awards in any year,
the number of shares covered by outstanding Awards, the kind of shares issued
under the Plan, and the price per share of such Awards shall be appropriately
adjusted by the Committee to reflect any increase or decrease in the number of,
or change in the kind or value of, issued shares of Company Stock to preclude,
to the extent practicable, the enlargement or dilution of rights and benefits
under such Awards; provided, however, that any fractional shares resulting from
such adjustment shall be eliminated. Any adjustments determined by the Committee
shall be final, binding and conclusive on the Company and all persons having an
interest in the Plan or in any Awards granted hereunder.

3.       Eligibility for Participation

         (a)      Employees, Non-Employee Directors, and Key Advisors. All
employees of the Company ("Employees"), including Employees who are officers or
members of the Board, and members of the Board who are not Employees
("Non-Employee Directors") shall be eligible to participate in the Plan.
Consultants and advisors who perform services to the Company ("Key Advisors")
shall be eligible to participate in the Plan if the Key Advisors render bona
fide services and such services are not in connection with the offer or sale of
securities in a capital-raising transaction.

         (b)      Selection of Grantees. The Committee shall select the
Employees, Non-Employee Directors and Key Advisors to receive Awards and shall
determine the number of shares of Company Stock subject to a particular grant in
such manner as the Committee determines consistent with the terms of the Plan.
The Board must approve or ratify the grant and terms of any Awards granted to
Non-Employee Directors and to any other directors who are members of the
Committee. Employees, Key Advisors and Non-Employee Directors who receive Awards
under this Plan shall hereinafter be referred to as "Grantees".

                                        2
<PAGE>

4.       Options

         (a)      Types of Options Authorized. Options granted under the Plan
                  may be incentive stock options ("Incentive Stock Options" or
                  "ISOs") or nonqualified stock options ("Nonqualified Stock
                  Options" or "NQOs") as described in Section 4(b) hereof.

         (b)      Terms of the Option.

                           (i)      ISOs, NQOs, or Combination. The Committee
                  may grant Incentive Stock Options that are intended to qualify
                  as "incentive stock options" within the meaning of Section 422
                  of the Internal Revenue Code of 1986, as amended (the "Code"),
                  or Nonqualified Stock Options that are not intended so to
                  qualify, or any combination of Incentive Stock Options and
                  Nonqualified Stock Options, all in accordance with the terms
                  and conditions set forth herein. Incentive Stock Options may
                  be granted only to Employees. Nonqualified Stock Options may
                  be granted to Employees, Non-Employee Directors and Key
                  Advisors.

                           (ii)     Exercise Price. The purchase price (the
                  "Exercise Price") of Company Stock subject to an Option shall
                  be determined by the Committee and may be equal to, greater
                  than, or less than the Fair Market Value (as defined below) of
                  a share of such Stock on the date the Option is granted;
                  provided, however, that (x) the Exercise Price of an Incentive
                  Stock Option shall be equal to, or greater than, the Fair
                  Market Value of a share of Company Stock on the date the
                  Incentive Stock Option is granted, and (y) an Incentive Stock
                  Option may not be granted to an Employee who, at the time of
                  grant, owns stock possessing more than 10 percent of the total
                  combined voting power of all classes of stock of the Company
                  or any parent or subsidiary of the Company, unless the
                  Exercise Price per share is not less than 110% of the Fair
                  Market Value of Company Stock on the date of grant.

                           (iii)    Fair Market Value. If Company Stock is
                  publicly traded, then the Fair Market Value per share shall be
                  determined as follows: (x) if the principal trading market for
                  the Company Stock is a national securities exchange or the
                  Nasdaq National Market, the last reported sale price thereof
                  on the relevant date or, if there were no trades on that date,
                  the latest preceding date upon which a sale was reported, or
                  (y) if the Company Stock is not principally traded on such
                  exchange or market, the mean between the last reported "bid"
                  and "asked" prices of Company Stock on the relevant date, as
                  reported on Nasdaq or, if not so reported, as reported by the
                  National Daily Quotation Bureau, Inc. or as reported in a
                  customary financial reporting service, as applicable and as
                  the Committee determines. If the Company Stock is not publicly
                  traded or, if publicly traded, not subject to reported
                  transactions or "bid" or "asked" quotations as set forth
                  above, the Fair Market Value per share shall be as determined
                  by the Committee.

         (c)      Notice and Method of Exercise. A Grantee may exercise an
Option that has become exercisable, in whole or in part, by delivering a notice
of exercise to the Company with payment of the Exercise Price. The Grantee shall
pay the Exercise Price for an Option (i) in cash, (ii) by

                                        3
<PAGE>

delivering shares of Company Stock owned by the Grantee (including Company Stock
acquired in connection with the exercise of an Option) and having a Fair Market
Value on the date of exercise equal to the Exercise Price or (iii) by such other
method as the Committee may approve, including payment through a broker in
accordance with procedures permitted by Regulation T of the Federal Reserve
Board. Shares of Company Stock used to exercise an Option shall have been held
by the Grantee for not less than six months prior to the date of such exercise,
if acquired directly from the Company, or that have been held for any period of
time, if acquired on the open market and not directly or indirectly from the
Company. The Grantee shall pay the Exercise Price and the amount of any
withholding tax due (pursuant to Section 11) at the time of exercise. Shares of
Company Stock shall not be issued upon exercise of an Option until the Exercise
Price is fully paid and any required withholding is made.

         (d)      $100,000 Limit for ISOs. Each Incentive Stock Option shall
provide that, if the aggregate Fair Market Value of the stock on the date of the
grant with respect to which Incentive Stock Options are exercisable for the
first time by a Grantee during any calendar year, under the Plan or any other
stock option plan of the Company or a parent or subsidiary, exceeds $100,000,
then the option, as to the excess, shall be treated as a Nonqualified Stock
Option. An Incentive Stock Option shall not be granted to any person who is not
an Employee of the Company or a parent or subsidiary (within the meaning of
Section 424(f) of the Code). If and to the extent that an Option designated as
an Incentive Stock Option fails so to qualify under the Code, the Option shall
remain outstanding according to its terms as a Nonqualified Stock Option.

5.       Restricted Stock Awards

         (a)      Authority; Nature of the Awards. The Committee may grant
Restricted Stock Awards pursuant to the Plan. Restricted Stock Awards may be
granted to Employees, Non-Employee Directors and Key Advisors. Such Restricted
Stock Awards shall be in any form the Committee deems appropriate, including but
not limited to, stock for converted options, stock bonuses and stock purchase
rights.

         (b)      Certain Restrictions. A Grantee's right to retain a Restricted
Stock Award shall be subject to such restrictions, including, but not limited
to, his continuous employment by the Company for a specified period and other
terms and conditions, as may be determined by the Committee. The Committee may,
in its sole discretion, require different periods of employment and objectives
with respect to different Grantees, different Restricted Stock Awards or
designated portions of a single Restricted Stock Award.

         (c)      Issuance of Company Stock. Company Stock subject to a
Restricted Stock Award shall be issued and delivered at the time of the grant or
as otherwise determined by the Committee, but shall be subject to forfeiture
until provided otherwise in the Grant Instrument or the Plan.

         (d)      Consideration for the Awards. Grants of Restricted Stock
Awards shall be made at such cost to the Grantee as the Committee shall
determine and may be issued in consideration for past services actually rendered
to or for the benefit of the Company.

                                        4
<PAGE>

6.       Stock Appreciation Rights

         (a)      Authority; Nature of the Award. The Committee may grant Stock
Appreciation Rights under the Plan. A Stock Appreciation Right is a right to
receive a payment equal to the excess of the (i) Fair Market Value of the shares
of Common Stock covered by such right as of the date of exercise or termination
over (ii) such amount as is determined by the Committee at the time the Stock
Appreciation Right is granted; such grants may be made individually or in tandem
with Options.

         (b)      Tandem Grants with Options. If Stock Appreciation Rights are
granted in tandem with an Option, the exercise of the Option shall cause a
proportional reduction in Stock Appreciation Rights standing to a Grantee's
credit; the payment of Stock Appreciation Rights shall cause a proportional
reduction of the number of shares of Common Stock exercisable under such Option.
If Stock Appreciation Rights are granted in tandem with an Incentive Stock
Option, the Stock Appreciation Rights shall have such terms and conditions as
shall be required for the Incentive Stock Option to qualify as an Incentive
Stock Option.

         (c)      Payment of the Right. Upon electing to receive payment of a
Stock Appreciation Right, a Grantee shall receive payment in cash, in Common
Stock, in any combination of cash and Common Stock, or in such other form as the
Committee shall determine. Stock Appreciation Rights shall be paid by the
Company to a Grantee, to the extent payment is elected by the Grantee (and is
otherwise due and payable), as soon as practicable after the date on which such
election is made.

7.       Performance Share Units

         (a)      Authority. The Committee may award Performance Share Units
pursuant to the Plan.

         (b)      Nature of the Award. Performance Share Units represent the
right of a Grantee to receive Common Stock or the cash equal to the Fair Market
Value of such Common Stock at a future date in accordance with the terms and
conditions of the Award. The terms and conditions shall be determined by the
Committee, in its sole discretion, but are generally expected to be based
substantially upon the attainment of targeted financial performance objectives.

         (c)      Form of Payment. When the Committee certifies that the
performance goals required by the Award have been attained or otherwise
satisfied, the Committee shall authorize the payment of cash in lieu of Common
Stock or the issuance of Common Stock registered in the name of the Grantee.

8.       Dividend Equivalent Payments

         The Committee may authorize the payment of dividend equivalents on some
or all of the shares of Common Stock covered by an Award pursuant to the Plan,
in an amount equal to, and commensurate with, dividends declared by the Board
and paid on Common Stock. Dividend equivalents payable on Awards under this
Section 8 may be paid in cash or in Common Stock at the discretion of the
Committee.

                                        5
<PAGE>

9.       Other Stock Based Awards and Other Benefits

         (a)      Authority for Stock Based Awards. The Committee shall have the
right to grant Other Stock Based Awards which may include, without limitation,
the grant of Common Stock based on certain conditions, the payment of cash based
on the market performance of the Common Stock, and the grant of securities
convertible into Common Stock.

         (b)      Authority for Other Types of Awards. The Committee shall have
the right to provide other types of Awards under the Plan in addition to those
specifically listed, if the Committee believes that such Awards would further
the purposes for which the Plan has been established.

10.      Granting of Awards

         (a)      Number of Shares. The Committee shall determine the number of
shares of Company Stock that will be subject to each grant of Awards to
Employees, Non-Employee Directors and Key Advisors, subject to approval or
ratification of the Board with respect to Awards granted to Non-Employee
Directors or members of the Committee.

         (b)      Award Term. The Committee shall determine the term of each
Award, subject to approval or ratification of the Board with respect to Awards
granted to Non-Employee Directors or members of the Committee. The term of any
Award shall not exceed ten years from the date of grant. However, an Incentive
Stock Option that is granted to an Employee who, at the time of grant, owns
stock possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company, or any parent or subsidiary of the Company, may
not have a term that exceeds five years from the date of grant.

         (c)      Exercisability of Awards. Awards shall become exercisable in
accordance with such terms and conditions, consistent with the Plan, as may be
determined by the Committee and specified in the Grant Instrument or an
amendment to the Grant Instrument, subject to approval or ratification of the
Board with respect to Awards granted to Non-Employee Directors or members of the
Committee. The Committee may accelerate the exercisability of any or all
outstanding Awards at any time for any reason.

         (d)      Grant Instrument Required. The terms of each individual Award
shall be evidenced in an agreement (the "Grant Instrument") signed by the
Company and the Grantee. The Committee shall approve the form and the terms and
conditions, consistent with the Plan, of each individual Grant Instrument as the
Committee shall deem appropriate. Any amendment to any Grant Instrument shall
also be evidenced in writing and signed by the Company and the Grantee.

         (e)      Termination of Employment, Disability or Death.

                           (i)      Termination of Employment or Services.
                  Except as provided below, an Award may only be exercised while
                  the Grantee is employed by, or providing service to, the
                  Company as an Employee, Key Advisor or member of the Board. In
                  the event that a Grantee ceases to be employed by, or provide
                  service to, the Company for any reason other than
                  "disability", death, or "termination for cause", any Award
                  which is otherwise exercisable by the Grantee shall terminate
                  and be

                                        6
<PAGE>

                  forfeited unless exercised within 90 days of the date on which
                  the Grantee ceases to be employed by, or provide service to,
                  the Company (or within such other period of time as may be
                  specified by the Committee), but in any event no later than
                  the date of expiration of the Award term. Unless otherwise
                  specified by the Committee, any of the Grantee's Awards that
                  are not otherwise exercisable as of the date on which the
                  Grantee ceases to be employed by the Company shall terminate
                  and be forfeited as of such date.

                           (ii)     Termination for Cause. In the event the
                  Grantee ceases to be employed by, or provide service to, the
                  Company on account of a "termination for cause" by the
                  Company, any Award held by the Grantee that has not vested or,
                  if vested, has not been exercised by the Optionee prior to
                  such termination, shall terminate and be forfeited as of the
                  date the Grantee ceases to be employed by, or provide service
                  to, the Company.

                           (iii)    Termination by Reason of Disability. In the
                  event the Grantee ceases to be employed by, or provide service
                  to, the Company because the Grantee is "disabled", any Award
                  which is otherwise exercisable by the Grantee shall terminate
                  unless exercised within one year after the date on which the
                  Grantee ceases to be employed by, or provide service to, the
                  Company (or within such other period of time as may be
                  specified by the Committee), but in any event no later than
                  the date of expiration of the Award term. Any of the Grantee's
                  Awards which are not otherwise exercisable as of the date on
                  which the Grantee ceases to be employed by, or provide service
                  to, the Company shall terminate and be forfeited as of such
                  date.

                           (iv)     Termination by Death. If the Grantee dies
                  while employed by, or providing service to, the Company or
                  within 90 days after the date on which the Grantee ceases to
                  be employed, or provide service, on account of a termination
                  of employment or service specified in Section 10(e)(i) above
                  (or within such other period of time as may be specified by
                  the Committee), any Award that is otherwise exercisable by the
                  Grantee shall terminate unless exercised within one year after
                  the date on which the Grantee ceases to be employed by, or
                  provide service to, the Company (or within such other period
                  of time as may be specified by the Committee), but in any
                  event no later than the date of expiration of the Award term.
                  Any of the Grantee's Awards that are not otherwise exercisable
                  as of the date on which the Grantee ceases to be employed by,
                  or provide service to, the Company shall terminate and be
                  forfeited as of such date.

                           (v)      Definitions. For purposes of this Section
                  10(e):

                                    (1)      "Company" shall mean the Company
                           and its subsidiary corporations.

                                    (2)      "Disability" shall mean a Grantee's
                           becoming disabled within the meaning of Section
                           22(e)(3) of the Code.

                                        7
<PAGE>

                                    (3)      "Employed by, or providing service
                           to, the Company" shall mean employment as an Employee
                           or the provision of services to the Company as a Key
                           Advisor or member of the Board (so that, for purposes
                           of exercising Awards, a Grantee shall not be
                           considered to have terminated employment or ceased to
                           provide services until the Grantee ceases to be an
                           Employee, Key Advisor or member of the Board).

                                    (4)      "Termination for cause" shall mean
                           a finding by the Committee that the Grantee has
                           breached his or her employment or service contract,
                           if any, with the Company, or has been engaged in
                           disloyalty to the Company, including, without
                           limitation, fraud, embezzlement, theft, commission of
                           a felony or proven dishonesty in the course of his or
                           her employment or service, or has disclosed trade
                           secrets or confidential and proprietary information
                           of the Company to persons not entitled to receive
                           such information and, if the Grantee has entered into
                           a confidentiality agreement with the Company, such
                           disclosure has breached such confidentiality
                           agreement.

11.      Withholding of Taxes

         (a)      Required Withholding. All Awards under the Plan shall be
granted subject to any applicable federal (including FICA), state and local tax
withholding requirements. The Company shall have the right to deduct from wages
paid to the Grantee any federal, state or local taxes required by law to be
withheld with respect to Awards, or the Company may require the Grantee or other
person receiving such shares to pay to the Company the amount of any such taxes
that the Company is required to withhold.

         (b)      Election to Withhold Shares. If the Committee so permits, a
Grantee may elect to satisfy the Company's income tax withholding obligation
with respect to an Award by having shares withheld up to an amount that does not
exceed the Grantee's maximum marginal tax rate for federal (including FICA),
state and local tax liabilities. The election must be in a form and manner
prescribed by the Committee and shall be subject to the prior approval of the
Committee.

12.      Transferability of Awards

         (a)      General Restrictions; Successor Grantee. Except as provided
below, only the Grantee or his or her authorized representative may exercise
rights under an Award. A Grantee may not transfer those rights except by will or
by the laws of descent and distribution or, with respect to Nonqualified
Options, if permitted in any specific case by the Committee in its sole
discretion, pursuant to a qualified domestic relations order (as defined under
the Code or Title I of the Employee Retirement Income Security Act of 1974, as
amended, or the rules thereunder). When a Grantee dies, the representative or
other person entitled to succeed to the rights of the Grantee ("Successor
Grantee") may exercise such rights. A Successor Grantee must furnish proof
satisfactory to the Company of his or her right to receive the Grant under the
Grantee's will or under the applicable laws of descent and distribution.

                                        8
<PAGE>

         (b)      NQO Transferability. Notwithstanding the foregoing, the
Committee may provide, in a Grant Instrument, that a Grantee may transfer
Nonqualified Stock Options to family members or other persons or entities
according to such terms as the Committee may determine.

13.      Change of Control of the Company

As used herein, a "Change of Control" shall be deemed to have occurred if:

         (a)      Acquisition of 20% Voting Power. After the effective date of
the Plan, any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934 (the "Exchange Act") becomes a "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 20% or more of the voting
power of the then outstanding securities of the Company, except where the
acquisition is approved by the Board;

         (b)      Existing Shareholders or Board No Longer Majority; Sale of
Assets; Liquidation. The shareholders of the Company approve (or, if shareholder
approval is not required, the Board approves) an agreement providing for (i) the
merger or consolidation of the Company with another corporation where the
shareholders of the Company, immediately prior to the merger or consolidation,
will not beneficially own, immediately after the merger or consolidation, shares
entitling such shareholders to a majority of all votes to which all shareholders
of the surviving corporation would be entitled in the election of directors, or
where the members of the Board, immediately prior to the merger or
consolidation, would not, immediately after the merger or consolidation,
constitute a majority of the board of directors of the surviving corporation,
(ii) a sale or other disposition of all or substantially all of the assets of
the Company, or (iii) a liquidation or dissolution of the Company;

         (c)      Tender Offer for 20% Voting. Any person has commenced a tender
offer or exchange offer for 20% or more of the voting power of the then
outstanding shares of the Company; or

         (d)      Change in Majority Membership of Board. After this Plan is
approved by the shareholders of the Company, directors are elected such that a
majority of the members of the Board shall have been members of the Board for
less than two years, unless the election or nomination for election of each new
director who was not a director at the beginning of such two-year period was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of such period.

14.      Consequences of a Change of Control

         (a)      Automatic Acceleration of Full Vesting. Upon a Change of
Control, (i) the Company shall provide each Grantee with outstanding Awards
written notice of such Change of Control and (ii) unless the Committee
determines otherwise, all outstanding Awards shall automatically accelerate and
become fully exercisable. Notwithstanding the foregoing, the Committee may
provide in a Grant Instrument, or amendment to the Grant Instrument, that the
outstanding Award subject to the Grant Instrument shall automatically accelerate
and become fully exercisable upon a Change of Control, without further action by
the Committee or the Company.

                                        9
<PAGE>

         (b)      Substitution of Acquiror's Securities. In addition, upon a
Change of Control described in Section 13(b)(i) where the Company is not the
surviving corporation (or survives only as a subsidiary of another corporation),
unless the Committee determines otherwise, all outstanding Awards that are not
exercised shall be assumed by, or replaced with comparable options, restricted
stock awards, stock appreciation rights, performance shares, dividend equivalent
payments or other stock based awards by, the surviving corporation. Any
replacement options, restricted stock awards, stock appreciation rights,
performance shares, dividend equivalent payments or other stock based awards
shall entitle the Grantee to receive the same amount and type of securities as
the Grantee would have received as a result of the Change of Control had the
Grantee exercised the Awards immediately prior to the Change of Control.

         (c)      Discretionary Cash Out. Notwithstanding the foregoing, in the
event of a Change of Control, the Committee may require that Grantees surrender
their outstanding Awards in exchange for a payment by the Company, in cash or
Company Stock as determined by the Committee, in an amount equal to the amount
by which the then Fair Market Value of the shares of Company Stock subject to
the Grantee's outstanding Awards exceeds the Exercise Price of the Awards.

15.      Amendment and Termination of the Plan and Awards

         (a)      Amendment of Plan. The Board may amend or terminate the Plan
at any time. However, except as provided in Section 2(b) relating to certain
adjustments upon changes in Common Stock, no amendment to the Plan shall be
effective unless approved by shareholders of the Company to the extent that
shareholder approval is necessary to satisfy the requirements of Section 422 of
the Code. The Board may, in its sole discretion, submit any other amendment to
the Plan for shareholder approval, including, but not limited to, amendments to
the Plan intended to satisfy the requirements of Section 162(m) of the Code and
the regulations thereunder regarding the exclusion of performance-based
compensation from the limit on corporate deductibility of compensation paid to
certain executive officers.

         (b)      Termination of Plan. The Plan shall terminate on the day
immediately preceding the tenth anniversary of its effective date unless
terminated earlier by the Board or unless extended by the Board with the
approval of the shareholders.

         (c)      Termination and Amendment of Outstanding Awards. A termination
or amendment of the Plan that occurs after an Award is granted shall not
materially impair the rights of a Grantee unless the Grantee consents or unless
the Committee acts under Section 22(b) hereof. The termination of the Plan shall
not impair the power and authority of the Committee with respect to an
outstanding Award. Whether or not the Plan has terminated, an outstanding Award
may be terminated or modified under Sections 14 and 22(b) hereof or may be
amended by agreement of the Company and the Grantee consistent with the Plan.

         (d)      Governing Document. The Plan shall be the controlling
document. No other statements, representations, explanatory materials or
examples, oral or written, may amend the Plan in any manner. The Plan and any
Grant Instrument, to the extent consistent with the Plan, shall be binding upon
and enforceable against the Company and its successors and assigns.

                                       10
<PAGE>

16.      Funding of the Plan

         This Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Awards under this Plan. In no event shall
interest be paid or accrued on any Awards.

17.      Rights of Participants

         Nothing in this Plan shall entitle any Employee, Key Advisor or other
person to any claim or right to be granted an Award under this Plan. Neither
this Plan nor any action taken hereunder shall be construed as giving any
individual any rights to be retained by or in the employ of the Company or any
other employment rights.

18.      No Fractional Shares

         No fractional shares of Company Stock shall be issued or delivered
pursuant to the Plan or any Award. The Committee shall determine whether cash,
other awards or other property shall be issued or paid in lieu of such
fractional shares or whether such fractional shares or any rights thereto shall
be forfeited or otherwise eliminated.

19.      Requirements for Issuance of Shares

         No Company Stock shall be issued or transferred in connection with any
Award hereunder unless and until all legal requirements applicable to the
issuance or transfer of such Company Stock have been complied with to the
satisfaction of the Committee. The Committee shall have the right to condition
any Award granted to any Grantee hereunder on such Grantee's undertaking in
writing to comply with such restrictions on his or her subsequent disposition of
such shares of Company Stock as the Committee shall deem necessary or advisable
as a result of any applicable law, regulation or official interpretation thereof
and certificates representing such shares may be legended to reflect any such
restrictions. Certificates representing shares of Company Stock issued under the
Plan will be subject to such stop-transfer orders and other restrictions as may
be applicable under such laws, regulations and interpretations, including any
requirement that a legend or legends be placed thereon.

20.      Headings

         All headings used in this Plan are for reference only. In the event of
a conflict between a heading and the content of a section, the content of the
section shall control.

21.      Effective Date of the Plan.

         This Plan was adopted by the Board of Directors on April 29, 2003;
approved by the Company's shareholders on April 29, 2003; and in accordance with
such adoption and approval, became effective on April 29, 2003.

                                       11
<PAGE>

22.      Miscellaneous

         (a)      Awards in Connection with Corporate Transactions and
Otherwise. Nothing contained in this Plan shall be construed to (i) limit the
right of the Committee to grant Awards under this Plan in connection with the
acquisition, by purchase, lease, merger, consolidation or otherwise, of the
business or assets of any corporation, firm or association, including Awards
granted to employees thereof who become Employees of the Company, or for other
proper corporate purpose, or (ii) limit the right of the Company to grant stock
options, restricted stock awards, stock appreciation rights, performance shares,
dividend equivalent payments, or other stock based awards or make other awards
outside of this Plan. Without limiting the foregoing, the Committee may grant
Awards to an employee of another corporation who becomes an Employee by reason
of a corporate merger, consolidation, acquisition of stock or property,
reorganization or liquidation involving the Company in substitution for a stock
option or restricted stock award made by such other corporation. The Committee
shall prescribe the provisions of the substitute Awards.

         (b)      Compliance with Law. The Plan, the grant and exercise of
Awards, and the obligations of the Company to issue or transfer shares of
Company Stock under Awards shall be subject to all applicable laws and to
approvals by any governmental or regulatory agency as may be required. The
Committee may revoke any grant if it is contrary to law or modify a grant to
bring it into compliance with any valid and mandatory government regulation. The
Committee may also adopt rules regarding the withholding of taxes on payments to
Grantees. The Committee may, in its sole discretion, agree to limit its
authority under this section.

         (c)      Ownership of Stock. A Grantee or Successor Grantee shall have
no rights as a shareholder with respect to any shares of Company Stock covered
by an Award until the shares are issued or transferred to the Grantee or
Successor Grantee on the stock transfer records of the Company. Once an Award is
exercised, the Company shall promptly notify its corporate secretary or, if
applicable, the duly authorized transfer agent of the Company, and the purchaser
shall have the rights equivalent to those of a shareholder, and shall be a
shareholder when his or her purchase is entered upon the records of the Company
or, if applicable, the records of the duly authorized transfer agent of the
Company. No adjustment will be made for a dividend or other right for which the
record date is prior to the date the Award is exercised, except as provided in
Section 2 of the Plan.

         (d)      Governing Law. The validity, construction, interpretation and
effect of the Plan and Grant Instruments issued under the Plan shall exclusively
be governed by and determined in accordance with the laws of the State of
Tennessee.

                                    * * * * *

                                        12<PAGE>
                                                                   Exhibit 10.12

                    EXCESS OF LIABILITY REINSURANCE AGREEMENT

                                     BETWEEN

                   STATE NATIONAL SPECIALTY INSURANCE COMPANY

                                       AND

                        DIRECT GENERAL INSURANCE COMPANY

                           EFFECTIVE: OCTOBER 1, 2002

<PAGE>
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
  ARTICLE                                                                    PAGE
<S>              <C>                                                         <C>
                 Preamble                                                       1

       1         Business Reinsured                                             1

       2         Original Conditions                                            2

       3         Commencement, Termination, Terms & Conditions                  2

       4         Loss and Loss Adjustment Expense                               3

       5         Reports and Remittances                                        4

       6         Errors and Omissions                                           6

       7         Premium and Commission                                         6

       8         Access to Records                                              7

       9         Arbitration                                                    7

      10         Assessments, Assignments, Fines and Penalties                  8

      11         Premium Financing                                              9

      12         Insolvency                                                     9

      13         Alternate Payee                                               10

      14         Hold Harmless Provisions                                      10

      15         Loss in Excess of Policy Limits/ECO                           12

      16         Regulatory Matters                                            12

      17         The General Agent                                             13

      18         Reinsurer or General Agent Sale or Transfer                   14

      19         Miscellaneous                                                 14

      20         Loss and Unearned Premium Reserve Funding                     16

      21         T.B.A. Insurance Group, Ltd. ("T.B.A.")                       16

      22         Savings Clause                                                17

      23         Inuring Reinsurance                                           17
</TABLE>

<PAGE>

                    EXCESS OF LIABILITY REINSURANCE AGREEMENT

THIS EXCESS OF LIABILITY REINSURANCE AGREEMENT (this "Agreement") is made and
entered into as of October 1, 2002, by and among DIRECT GENERAL INSURANCE
COMPANY, an insurance company organized under the laws of South Carolina
("Reinsurer") and STATE NATIONAL SPECIALTY INSURANCE COMPANY, an insurance
company organized under the laws of the State of Texas ("Company");

                              W I T N E S S E T H:

THAT, in consideration of the mutual covenants hereinafter contained and upon
the terms and conditions hereinbelow set forth, the parties hereto agree as
follows:

                                    PREAMBLE

         The Company and Direct General Insurance Agency, Inc., a Texas
corporation, have entered into a General Agency Agreement dated as of October 1,
2002 (the "General Agency Agreement") a true and correct copy of which is
attached hereto as Exhibit A and fully incorporated herein by this reference. It
is understood that, in relation to the business produced under the General
Agency Agreement, the Company and the Reinsurer (hereinafter identified
collectively as the "Parties") wish to enter into a reinsurance arrangement
through which the Company is to bear no business, credit or insurance risk
whatsoever in connection with the private passenger automobile insurance
policies issued through the General Agent (the "Subject Program"). In this
regard, all underwriting risks arising from the Subject Program, with the
exception of private passenger automobile physical damage, will be ceded to and
assumed by The North Carolina Reinsurance Facility (the "Facility"). As a
condition precedent to the Company's agreement to permit policies to be issued
in the name of the Company pursuant to the Subject Program, the Reinsurer shall
hold the Company harmless and indemnify it for these and all risks arising from
the Subject Program other than those assumed and actually paid by the Facility.
The sole consideration provided by the Company, in exchange for the fees set
forth in Article VII herein, is to permit the Policies (as hereinafter defined)
which are reinsured under this Agreement, to be issued in the name of the
Company. All provisions of this Agreement shall be interpreted so as to be in
accord with this Preamble.

                                    ARTICLE I
                               BUSINESS REINSURED

1.01 The Reinsurer hereby reinsures and accepts any and all liability accruing
to the Company in connection with the Subject Program and all policies,
certificates, contracts, binders, agreements or other proposals or evidences of
insurance, new and renewal policies, binders, and contracts of insurance
(hereinafter called "Policies") issued by and on behalf of the Company in its
sole discretion as auto liability, and miscellaneous coverages as endorsed in
North Carolina during the term of this Agreement, produced by or through the
General Agent appointed by the Company at the request of the Reinsurer as
provided in 17.02 of this Agreement (other than those liabilities assumed by the
Facility), including without limitation, every claim, demand, liability, loss,
damage, cost, charge, attorneys' fees, expense, suit, order, judgment, and
adjudication of whatever kind or character arising out of or in connection with
the Subject Program, the business reinsured thereunder (including, but not
limited to, credit loss, and/or run-off expense and/or all legal fees and
expenses incurred by the Company in asserting its rights under this Agreement).
The Reinsurer's obligation hereto relates to, but is not limited

                                       1
<PAGE>

to, the following: all liability for agents' balances; return premiums and
commissions; deceptive trade practice liability; premiums, policy fees or other
charges; costs, liability, damages, fees and/or expenses incurred by the Company
due to a lawsuit between the Reinsurer and the General Agent (any dispute
involving the Company and the Reinsurer is subject to arbitration); all actions
or inactions by the General Agent relating to this Agreement, any agreement with
a premium finance company or claims administrator; and/or all fees and/or
commissions owing to the General Agent under this and the aforementioned related
agreements.

                                   ARTICLE II
                               ORIGINAL CONDITIONS

2.01 Business ceded hereunder shall include every original policy, rewrite,
renewal or extension (whether before or after the termination of this Agreement)
required by applicable statute, or by rule or regulation of any policy of
insurance ceded hereunder by the Company to the Reinsurer.

2.02 The liability of the Reinsurer shall commence obligatorily and
simultaneously with that of the Company as soon as the Company becomes liable,
and the premium on account of such liability shall be credited, as applicable,
to the Reinsurer from the original date of the Company's liability.

2.03 All reinsurance for which the Reinsurer shall be liable, by virtue of this
Agreement, shall be subject, in all respects, to the same rates, terms,
conditions, interpretations, waivers, the exact proportion of premiums paid to
the Company without any deduction for brokerage, and to the same modifications,
alterations and cancellations, as the respective insurance of the Company to
which such reinsurance relates, the true intent of this Agreement being that the
Reinsurer shall, in every case to which this Agreement applies and in the
proportion specified herein, follow the fortunes of the Company.

2.04 Nothing herein shall in any manner create any obligations, establish any
rights or create any direct right of action against the Reinsurer in favor of
any third party, or other person not party to this Agreement; or create any
privity of contract between the policyholders and the Reinsurer.

                                   ARTICLE III
                 COMMENCEMENT, TERMINATION, TERMS AND CONDITIONS

3.01 This Agreement shall become effective on October 1, 2002 at 12:01 A.M. as
respects losses arising out of occurrences commencing under Policies written on
or after such date at the offices of the Company, and shall remain continuously
in force unless terminated as provided herein.

3.02 This Agreement shall continue from the effective date and thereafter until
termination of the General Agency Agreement (as hereinafter defined). The
parties may not cancel this Agreement independent of the General Agency
Agreement, and this Agreement shall terminate automatically and only upon
termination of the General Agency Agreement.

3.03 When this Agreement terminates for any reason, reinsurance hereunder shall
continue to apply to the business in force at the time and date of termination
until expiration or cancellation of such business. It is understood that any
Policies with effective dates prior to the termination date but issued after the
termination date are covered under this Agreement.

                                       2
<PAGE>

Additionally, the reinsurance hereunder shall continue to apply as to Policies
which must be issued or renewed, as a matter of state law or regulation or
because a sub-agent has not been timely canceled, until the expiration dates on
said Policies.

3.04 Upon termination of this Agreement, the Reinsurer, General Agent and the
Company shall not be relieved of or released from any obligation created by or
under this Agreement in relation to payment, expenses, reports, accounting or
handling, which relate to outstanding insurance business under this Agreement
existing on the date of such termination. The parties hereto expressly covenant
and agree that they will cooperate with each other in the handling of all such
run-off insurance business until all policies have expired either by
cancellation or by terms of such policies and all outstanding losses and loss
adjustment expenses have been settled. While by law and regulation, the Company
recognizes its primary obligations to its policyholders, the Reinsurer
recognizes that to the extent possible there shall be no cost or involvement by
the Company in servicing this run-off. All costs and expenses associated with
handling of such run-off business following the cancellation or termination of
this Agreement shall be borne solely by the General Agent and, to the extent not
borne by the General Agent, solely by Reinsurer. If for any reason the General
Agent fails or is unable to service any such run-off business (or any business
while this Agreement is still in effect), including the payment of claims, then
consistent with this Agreement, the Reinsurer's obligation with respect to such
run-off business shall continue and the Reinsurer shall either service such
run-off business directly or appoint, at the Reinsurer's expense, a successor to
the General Agent, subject to the approval of the Company, which approval shall
not be unreasonably withheld. Such successor shall perform all of the duties and
obligations of the General Agent with respect to servicing such run-off business
including the payment of claims.

3.05 This Agreement provides for termination on a run-off basis. The relevant
provisions of this Agreement shall apply to business being run off.

3.06 Upon termination of this Agreement, the Reinsurer shall ensure the General
Agent takes those actions necessary, including, but not limited to, sending
statutorily prescribed non-renewal notices to insureds in a timely manner to
effectuate the intent that there be no renewals or new policies (but for those
required by applicable law or regulation) after the termination of this
Agreement.

                                   ARTICLE IV
                        LOSS AND LOSS ADJUSTMENT EXPENSE

4.01 All loss settlements made by the Company or the General Agent under the
terms of this Agreement, whether under strict policy conditions or by way of
compromise, shall be unconditionally binding upon the Reinsurer in proportion to
its participation, and the Reinsurer shall benefit proportionately in all
salvage and recoveries. The Reinsurer shall assume and be liable for and pay on
behalf of the Company, all losses incurred in connection with the risks covered
by this Agreement, including, but not limited to, judgments (including interest
thereon) and settlements in connection therewith. The Reinsurer shall also be
liable for and pay on behalf of the Company all costs, expenses, and fees
(including, but not limited to, attorney's fees) incurred by the Company in
connection with the investigation or settlement or contesting the validity of
claims or losses covered under this Agreement (this shall include but, of
course, is not limited to, costs, expenses and fees resulting from a declaratory
judgment or injunctive action brought by an insured or other person).

                                       3
<PAGE>

4.02 The Reinsurer's share of losses, expense and loss recovery shall be carried
into the monthly accounting for which provision is hereinafter made.

4.03 All records pertaining to claims arising under insurance policies issued on
behalf of the Company through or by the General Agent subject to this Agreement
shall be deemed to be jointly owned records of the Company and the Reinsurer,
and shall be made available to the Company or the Reinsurer or their respective
representatives or any duly appointed examiner for any state within the United
States; and these records shall be kept in the State of North Carolina or such
other jurisdiction as may be required or permitted by applicable state law or
regulation. Notwithstanding the foregoing, the Reinsurer is authorized to
maintain duplicate working files of all such records outside the State of North
Carolina. The Company, the Reinsurer and the General Agent each agree that it
will not destroy any such records in its possession without the prior written
approval of the other parties except that neither party shall be required to
retain files longer than required by the guidelines set forth by any applicable
state department of insurance.

4.04 The Reinsurer shall, or shall cause the General Agent to, establish a
separate claim register or method of recording claims arising under the Policies
covered by this Agreement so that all claims may be segregated and identified
separate and apart from other records of the Reinsurer or General Agent, with
such claims register to identify each claim on an individual case basis both as
to identify the insured(s) and the claimant, the reserve for loss and adjusting
expense. Such claim register shall be kept in a manner whereby the Company can,
at any time, determine the status of any claim arising under Policies covered by
this Agreement. Such records shall reflect the amount of reserves established
for the individual claim and the date when such reserve was established, and if
closed, whether such claim was closed with or without payment, and if with
payment, the amount paid thereon.

                                    ARTICLE V
                             REPORTS AND REMITTANCES

5.01 In lieu of the Company furnishing the Reinsurer with bordereaux showing the
particulars of all reinsurances ceded hereunder, the Reinsurer shall furnish or
cause to be furnished to the Company, within forty-five (45) days after the
close of each of the respective periods indicated below (on forms agreeable to
the Parties) with monthly, quarterly and annual reports showing the following
statistical data in respect to the business reinsured hereunder:

         (a)  Monthly, with the data segregated by major classes.

                  (i)      Net and ceded premiums written.
                  (ii)     Net and ceded unearned premiums.
                  (iii)    Net and ceded losses paid.
                  (iv)     Net and ceded adjustment expenses paid during this
                           month.
                  (v)      Ceded adjustment expenses paid during this month.
                  (vi)     Losses outstanding.
                  (vii)    Ceding commission due the Company.
                  (viii)   Commission due the General Agent.

         (b)      Annually, with the data segregated by major classes.

                  (i)      Annual summaries of net premiums written, net losses
                           paid, net adjusting expenses paid during the year in
                           such form so as to enable the Company

                                       4
<PAGE>

                           to record such data in its annual convention
                           statement. Such information is to be furnished not
                           later than February 15th of the following year. In
                           force and unearned premium segregated as to advance
                           premiums, premiums running twelve (12) months or less
                           from inception date of policy, and premiums running
                           more than twelve (12) months from inception date of
                           policy in such form as to enable the Company to
                           record such data in its convention annual statement.

                  (ii)     If applicable, annual summaries of net premiums
                           written by geographical location in such form as to
                           enable the Company to record such premiums in its
                           annual report to the Texas Catastrophe Property
                           Insurance Association.

         (c)      Periodic, with data segregated by major lines.

                           Statistical or other data as may be requested from
                           time to time by regulatory authorities.

5.02 In order to facilitate the handling of the business reinsured under this
Agreement, the Reinsurer agrees to furnish the Company with any additional
reports necessary to provide the information needed by the Company to prepare
its monthly, quarterly and annual statements to regulatory authorities.

5.03 Within 60 days after the end of each month, the General Agent shall remit
to the Reinsurer the following:

         (a)      Reinsurance Premium as collected in accordance with Section
                  7.06, less;

         (b)      ceded portion of Net Paid losses and loss adjustment expenses
                  paid, provided such losses and loss adjustment expenses have
                  not been deducted on behalf of the Company in any previous
                  monthly report.

The positive balance of (a) less (b) shall be remitted by the General Agent with
its report. Any balance shown to be due the Company shall be remitted by the
Reinsurer as promptly as possible after receipt and verification of the General
Agent's report, but no later than 60 days after the end of each month.

                                   ARTICLE VI
                              ERRORS AND OMISSIONS

6.01 The Company shall not be prejudiced in any way by any omission through
clerical error, accident or oversight to cede to the Reinsurer any reinsurance
rightly falling under the terms of this Agreement, or by erroneous cancellation,
either partial or total, or any cession, or by omission to report, or by
erroneously reporting any losses, or by any other error or omission, but any
such error or omission shall be corrected immediately upon discovery.

6.02 Should the Company suffer any loss whatsoever, the Reinsurer shall assume
loss for its own account and save and hold the Company harmless therefor.

                                       5
<PAGE>

                                   ARTICLE VII
                             PREMIUM AND COMMISSION

7.01 It is understood that the General Agent shall pay, and the Reinsurer shall
guarantee, the Company directly a fee within forty-five (45) days following the
end of each month (to the Company's designated agent, T.B.A. Insurance Group,
Ltd. ("TBA"), as a ceding fee), 19% of Net Premiums, and in addition guarantees
the amount of assessments and state premium taxes as provided in this Article X.
(The ceding fee amount shall be computed on a calendar year basis based on
premium written in each annual period ended December 31st.) Notwithstanding
anything else contained herein to the contrary, regardless of the amount of Net
Premiums, the minimum ceding fee due the Company shall be $37,500 for each
six-month period, plus the aforementioned assessments and state premium taxes.
(This minimum ceding fee applicable to each successive six-month period shall
not be affected by the amounts of Net Premiums written in other six-month
periods and shall not be reduced by reason of payments in excess of the minimum
in other periods. The minimum ceding fee for each period shall be paid within
sixty (60) days of the end of each period. For these purposes, a policy's entire
premium shall be applied to the period in which the policy is written.) "Net
Premiums" shall mean the gross premiums (including policy fees) charged on all
original and renewal Policies written on behalf of the Company, less return
premiums.

7.02 The General Agent shall allow and pay within forty-five (45) days of the
end of each month to the Company an amount equal to the state premium tax on the
Net Premiums for the past month. Should any additional premium tax be assessed
at any time on written premium reinsured hereunder, the Reinsurer shall pay the
Company such additional premium tax within (fifteen) 15 days of being informed
by the Company of such additional premium tax. The Parties acknowledge that at
the effective date of this Agreement, the North Carolina Department of Insurance
(or other state agency responsible for collecting premium taxes) may require the
payment of estimated premium taxes in advance on a semi-annual basis. The
Reinsurer shall, therefore, pay to the Company within five days prior to the due
date of any such estimated premium tax payment, the amount that would be due
based upon the business produced hereunder.

7.03 The Reinsurer hereby guarantees that (i) the Company will receive the
ceding fee provided hereunder irrespective of any events, losses or developments
for the term of this Agreement (Such payment is not dependent upon the
performance of the General Agent, underwriting experience, loss experience,
whether premium is collected or not, or any other event foreseen or unforeseen
by the parties at the inception of this Agreement.), and in addition (ii) those
amounts described in Section 7.05 of this Agreement and is directly responsible
for payment of the amount described in Article X. The Company shall allow return
ceding fees on return premiums at the same rates.

7.04 RESERVED.

7.05 General Agent shall pay to the Company all premium taxes payable for
policies subject to reinsurance hereunder. In the event that the ceding fee and
premium taxes are not so paid by the General Agent within 60 days following the
end of the month, the unpaid balance shall be paid directly to the Company by
the Reinsurer.

7.06 The Company shall pay the Reinsurer a premium equal to 15.0% of Net Premium
(the "Reinsurance Premium"). The Reinsurance Premium is payable by the Company
to the Reinsurer at the same time, and on the same basis, the ceding fee is
payable to the Company

                                       6
<PAGE>

under section 7.01 hereunder.

                                  ARTICLE VIII
                                ACCESS TO RECORDS

         The Reinsurer or its duly appointed representatives shall have free
access at any and all reasonable times to such books and records of the Company
or General Agent, its departmental or branch offices, as shall reflect premium
and loss transactions of the Company and/or the business produced hereunder, for
the purpose of obtaining any and all information concerning this Agreement or
the subject matter thereof. Likewise, the Company or its duly appointed
representatives shall have free access at any and all reasonable times to such
books and records of the Reinsurer and/or General Agent, its departmental or
branch offices as shall reflect premium and loss transactions of the Company
and/or the business produced hereunder, for the purpose of obtaining any and all
information concerning this Agreement or the subject matter hereof.

                                   ARTICLE IX
                                   ARBITRATION

9.01 As a condition precedent to any right of action hereunder, in the event of
any dispute or difference of opinion hereafter arising between the Company and
the Reinsurer with respect to this Agreement, or with respect to these Parties'
obligations hereunder, it is hereby mutually agreed that such dispute or
difference of opinion shall be submitted to arbitration.

9.02 One arbiter (an "Arbiter") shall be chosen by the Company and one Arbiter
shall be chosen by the Reinsurer and an umpire (an "Umpire") shall be chosen by
the Arbiters, all of whom shall be active or retired disinterested executive
officers of property and casualty insurance or reinsurance companies.

9.03 In the event that a party fails to choose an Arbiter within thirty (30)
days following a written request by either party to the other to name an
Arbiter, the party who has chosen its Arbiter may choose the unchosen Arbiter.
Thereafter, the Arbiters shall choose an Umpire before entering upon
arbitration. If the Arbiters fail to agree upon the selection for the Umpire
within thirty (30) days following their appointment, each Arbiter shall name
three nominees, of whom the other shall decline two, and the decision shall be
made by drawing lots.

9.04 Each party shall present its case to the Arbiters and Umpire within a
reasonable amount of time after selection of the Umpire, unless the period is
extended by the Arbiters and the Umpire in writing and/or at a hearing in
Dallas, Texas. The Arbiters and Umpire shall consider this Agreement as an
honorable engagement, as well as a legal obligation, and they are relieved of
all judicial formalities and may abstain from following the strict rules of law
regarding entering of evidence. The decision in writing by a majority of the
Arbiters and Umpire when filed with the Parties shall be final and binding on
the parties. Judgment upon the final decision of the Arbiters and Umpire may be
entered in any court of competent jurisdiction.

9.05 In the event of a dispute between the Company and the Reinsurer concerning
this Agreement and the General Agency Agreement (regardless of whether either
party has claims against the General Agent), the entire dispute between the
Company and the Reinsurer shall be subject to arbitration as provided in this
Article IX.

                                       7
<PAGE>

9.06 The costs of the arbitration, including the fees of the arbitrators and the
umpire, shall be borne equally unless the Arbiters and Umpire shall decide
otherwise.

9.07 This Agreement shall be interpreted under the laws of Texas and the
arbitration shall be governed and conducted according to the Texas General
Arbitration Act.

                                    ARTICLE X
                  ASSESSMENTS, ASSIGNMENTS, FINES AND PENALTIES

10.01 The Reinsurer hereby assumes liability for any and all assessments and
assignments imposed as a result of Policies reinsured hereunder (whether before
or after the termination of this Agreement). The Reinsurer shall immediately
reimburse the Company for any assessments made against the Company pursuant to
those laws and regulations creating obligatory funds (including, but not limited
to, insurance guaranty and insolvency funds), pools, joint underwriting
associations, FAIR plans and similar plans. Amounts owed by the Reinsurer under
this Section shall be payable directly by the Reinsurer to the Company. The
Reinsurer shall be entitled to receive from the Company on or prior to the 31st
day of March of each year thereafter (or such date on which such premium taxes
are paid) a sum equal to the premium tax credit that is allowed to the Company
with respect to such assessments. The premium tax credit allowed the Reinsurer
hereunder is to be on a pro-rata and first-in, first-out basis. The Company
shall promptly return to the Reinsurer any amount of assessment refunded to or
credited to the Company.

10.02 This Agreement shall apply to risks assigned to the Company under any
assigned risk plan if, in the reasonable judgment of the Company, such risks
were assigned to the Company because of the business written and reinsured
hereunder.

10.03 The Reinsurer shall also pay promptly and directly to the Company the
fines, penalties and/or any other charge incurred by the Company as respects the
business reinsured hereunder arising out of the actions or inactions of the
General Agent unless such fines, penalties and/or any other charge was a direct
result of any willful misconduct on the part of the Company, which has been
finally determined by a court of competent jurisdiction after the exhaustion of
all appeals.

10.04 The Reinsurer shall cause the General Agent to act on behalf of the
Company to produce, prepare, and file statistical information with the
designated statistical reporting bureau. Such costs and expenses shall be
remitted in advance by the General Agent, and the Reinsurer hereby guarantees
the timely payment of such costs and expenses, to the Company with its monthly
account, based on the Company's good faith estimation. Adjustments to the
estimation shall be made annually by the Company to reflect the actual costs
related to the business produced hereunder. The Reinsurer shall also cause the
General Agent to furnish the Company, and other parties as designated by the
Company, with monthly, quarterly and annual reports showing statistical data in
respect of the business written as required.

                                   ARTICLE XI
                                PREMIUM FINANCING

         With respect to Policies covered under the provisions of this
Agreement, if any premiums are financed, the General Agent shall receive and
accept on behalf of the Company all notices required by statute, contract or
otherwise to be given to the Company, including, without limitation, notices of
the existence of premium finance agreements or of cancellation of policies

                                       8
<PAGE>

the premiums of which are financed ("financed policies"). No producing agent or
any other agent shall be entitled to receive or accept any notice on behalf of
the Company, and the General Agent shall be responsible for and will indemnify
and hold the Company harmless from and against any and all liabilities, losses,
claims, damages and expenses incurred by reason of or arising out of any action
taken or inaction suffered as a result of receipt of any notice by any person,
firm or entity other than the General Agent or the Company. Notwithstanding any
other term or provision of this Agreement, the General Agent agrees to return
and pay over to any premium finance company (whether affiliated with the Company
or not) which has sent notice of cancellation of a financed policy to the
General Agent, on behalf of the Company, within 30 days of receipt of such
notice of cancellation, any and all unearned commissions as of the date of
cancellation, together with any and all unearned premiums due any premium
finance company. The General Agent agrees to and does hereby relinquish any and
all rights to any unearned commissions for any such financed policy as of the
date of cancellation. The obligation of the General Agent to refund unearned
commissions and unearned premiums on a canceled financed policy shall survive
the termination or cancellation of this Agreement for so long as any policy
written under the terms of this Agreement remains in force. If the General Agent
does not fulfill its obligations to refund unearned commissions and unearned
premiums as provided in this Article XI and/or to indemnify the Company as
provided in this Article XI, then the Reinsurer shall pay the amount of the
refund owed and/or shall indemnify the Company even if the premium finance
company is an affiliate of the Company.

                                   ARTICLE XII
                                   INSOLVENCY

12.01 In the event of insolvency of the Company, this reinsurance shall be
payable directly to the Company or to its liquidator, receiver, conservator or
statutory successor on the basis of the liability of the Company without
diminution because of the insolvency of the Company or because the liquidator,
receiver, conservator or statutory successor of the Company has failed to pay
all or a portion of any claims.

12.02 It is agreed, however, that the liquidator, receiver, conservator or
statutory successor of the Company shall give written notice to the Reinsurer of
the pendency of a claim against the Company indicating the policy or bond
reinsured which claim would involve a possible liability on the part of the
Reinsurer within thirty (30) days after such claim is filed in the insolvency,
conservation or liquidated proceeding or in the receivership, and that during
the pendency of such claim, the Reinsurer may investigate such claims and
interpose, at its own expense, in the proceeding where such claim is to be
adjudicated, any defense or defenses that it may deem available to the Company
or its liquidator, receiver, conservator or statutory successor. The expense
thus incurred by the Reinsurer shall be chargeable, subject to the approval of
the Court, against the Company as part of the expense of conservation or
liquidation to the extent of a pro rata share of the benefit which may accrue to
the Company solely as a result of the defense undertaken by the Reinsurer.

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

12.04 It is further understood and agreed that, in the event of the insolvency
of the Company, the reinsurance under this Agreement shall be payable directly
by the Reinsurer to the Company or to its liquidator, receiver or statutory
successor, except (i) as provided by applicable law, (ii) where the Agreement
specifically provides another payee of such

                                       9
<PAGE>

reinsurance in the event of the insolvency of the Company and (iii) where the
Reinsurer with the consent of the direct insured or insureds has assumed such
policy obligations of the Company as direct obligations of the Reinsurer to the
payees under such policies and in substitution for the obligation of the Company
to such payees.

                                  ARTICLE XIII
                                 ALTERNATE PAYEE

13.01 As respects subject business assumed as reinsurance under this Agreement,
it is agreed that if the Company has a conservator, liquidator or receiver
appointed for it, or becomes the subject of any conservation, liquidation or
insolvency proceeding, and the General Agent exercises its option to require the
Company to permit all its liabilities under the Policies reinsured hereunder to
be assumed by another licensed insurer as is permitted pursuant to the General
Agency Agreement, such assuming insurer shall be substituted for the Company as
payee of any reinsurance recoverable hereunder in respect of losses under
Policies subject hereto, and the Reinsurer, shall make payment thereof directly
to the substituted insurer. In the event of assumption, the Company shall,
however, be entitled to any ceding fees and other sums owing hereunder with
respect to Policies originally issued on its behalf.

13.02 In the event that an assuming insurer is submitted for the Company under
Section 13.01, all the other provisions of this Agreement shall apply to the
substituted insurer in the same manner as if said insurer were substituted for
the Company as the reinsured party hereunder, and to the extent this Agreement
reinsures such substituted insurer, coverage hereunder shall be excluded as
respects the Company.

                                   ARTICLE XIV
                            HOLD HARMLESS PROVISIONS

14.01 Notwithstanding anything else contained herein to the contrary, as
respects all matters related to this Agreement, in addition to those specific
provisions insulating the Company from specific risks hereunder, the Reinsurer
hereby covenants and agrees to reimburse and hold the Company harmless from and
against every claim, demand, liability, loss, damage, cost, charge, attorneys'
fees, expense, suit, order, judgment and adjudication of whatever kind or
character regarding (i) this Agreement and/or (ii) the business reinsured
hereunder (including, but not limited to, underwriting loss, credit loss, and/or
run-off expense and/or all legal fees and expenses incurred by the Company in
asserting its rights under this Agreement) whether or not such claim, demand,
loss, damage, cost, charge, attorneys' fees, expense, suit, order, judgment or
liability is within the terms of Policies written and reinsured hereunder. The
Reinsurer's obligation hereto relates to, but is not limited to the following:
all liability for agents' balances; return premiums and commissions; deceptive
trade practice liability; premiums, policy fees or other charges (whether
collected or not); costs, liability, damages, fees and/or expenses incurred by
the Company due to a lawsuit between the Reinsurer and the General Agent (any
dispute involving the Company and the Reinsurer is subject to arbitration); all
actions or inactions by General Agent relating to this Agreement, any agreement
with a premium finance company or claims administrator; and/or all fees and/or
commissions owing to the General Agent under this and the aforementioned related
agreements.

14.02 The Company shall not be liable to the Reinsurer for premiums unless the
Company itself has actually received those premiums and wrongfully not remitted
them to the Reinsurer. The Reinsurer may not offset, unless otherwise
contemplated in this Agreement, any balances on account of losses, loss
adjustment expenses or any other amounts due except as to

                                       10
<PAGE>

premiums actually received by the Company itself (as distinct from premiums not
collected, or premiums collected by the General Agent, or premium placed in the
premium trust account pursuant to the General Agency Agreement) which have
wrongfully not been transmitted to the Reinsurer.

14.03 If for any reason the General Agent fails or is unable to administer the
policies reinsured hereunder (whether the Agreement is still in effect or the
business is being run-off), (i) the Reinsurer shall appoint a party (acceptable
and approved by the Company) to administer the business and the Reinsurer shall
be responsible for the cost of said administration and (ii) the General Agent
will fully cooperate with the Company (or its designated representative) in
providing access to such of the General Agent's personnel, computer systems or
other assets or procedures as the Company may deem necessary to provide for an
orderly transition of the administration of the Policies reinsured hereunder. If
return premiums or other funds need to be returned to premium finance companies,
policyholders or sub-agents, the Reinsurer shall pay of these amounts if the
successor or administrator does not.

14.04 The Reinsurer shall not sue, or seek arbitration, against the Company for
any acts of the General Agent for any monies which the General Agent owes unless
the Company has actually received those monies and has wrongfully not remitted
them to the Reinsurer; and the Reinsurer shall indemnify the Company for any
damages, liabilities and expenses incurred by reason of the General Agent's acts
or failure to act. The Company is not responsible for any commissions or other
monies payable to the General Agent in connection with this Agreement and the
General Agent shall not sue, or seek arbitration against, the Company for any
actions by, or debts owing from, the Reinsurer. The Reinsurer shall not seek to
recover from, or offset against, the Company any sums, whether premiums or other
monies, which the General Agent was unable or unwilling to remit to the Company
or the Reinsurer.

14.05 In the event the Reinsurer, or any agent appointed pursuant to this
Agreement, binds the Company for insurance coverage on insurance risks which are
in excess of the policy limits set forth in Article I, and/or are not within the
terms of business specified in Article I, and/or are not within the territory
specified in Article I, whether intentional or not, the Reinsurer and General
Agent will do such things and take such actions as may be necessary to reduce
the Company's exposure to such risks and to hold the Company harmless against
any liability or loss which may be incurred by the Company in excess hereof. At
the Company's request, the General Agent in accordance with applicable law, and
policy terms, shall cancel or not renew any risk bound which is not in
conformance with this Agreement. Any such insurance coverage on insurance risks
bound contrary to the limitations which are in excess of the policy limits set
forth in Article I, and/or are not within the classes of business specified in
Article I, and/or are not within the territory specified in Article I, whether
intentional or not, shall be reinsured and subject to this Agreement.

14.06 In furtherance of the protections afforded to the Company under this
Agreement, the Reinsurer expressly acknowledges that certain circumstances may
come to exist with respect to the Policies reinsured hereunder that require
adjustment to the timing of Reinsurer remittances. If, in the sole discretion of
the Company, an advance payment or payments of the Reinsurer's obligations under
this Agreement is necessary to avoid irreparable harm to the Company (as, for
example, in the circumstance where the funds available in the premium trust
account established pursuant to Section 2.01 of the General Agency Agreement are
insufficient to provide for timely payment of claims), the Reinsurer shall make
such payment or payments promptly upon the Reinsurer's receipt of the Company's
good faith estimate or calculation of the necessity thereof.

                                       11
<PAGE>

14.07 In the event any provision, term and/or condition of this Agreement (other
than the Preamble hereof) is inconsistent with the provision, terms and/or
conditions of Section 14.01 above, the provision, terms, and/or conditions of
said Section 14.01 above shall control over and supercede such inconsistent
provision, terms, and/or conditions.

14.08 The Reinsurer's indemnification obligations to the Company under this
Agreement shall occur when the Company incurs or becomes liable for any
indemnifiable damage, liability or expense hereunder and not upon the actual
payment by the Company of such damage, liability or expense.

14.09 This indemnification provision shall not apply with respect to actions,
causes of actions, suits, arbitrations, or proceedings of any kind, liabilities,
losses, claims, damages, costs, or expenses that result from the gross
negligence or willful misconduct of the Company or attributable to the Company.

                                   ARTICLE XV
                       LOSS IN EXCESS OF POLICY LIMITS/ECO

15.01 In the event the Company pays or is held liable to pay an amount of loss
in excess of its policy limit, but otherwise within the terms of its policy
(hereinafter called "loss in excess of policy limits") or any punitive,
exemplary, compensatory or consequential damages, other than loss in excess of
policy limits (hereinafter called "extra contractual obligations") because of
alleged or actual bad faith or negligence on its part in rejecting a settlement
within policy limits, or in discharging its duty to defend or prepare the
defense in the trial of an action against its policyholder, or in discharging
its duty to prepare or prosecute an appeal consequent upon such an action, or in
otherwise handling a claim under a policy subject to this Agreement, 100% of the
loss in excess of policy limits and/or 100% of the extra contractual obligations
shall be added to the Company's loss, if any, under the Policy involved, and the
sum thereof shall be reinsured under this Agreement; except to the extent that
such loss or obligation is assumed and actually paid by the Facility.

15.02 An extra contractual obligation shall be deemed to have occurred on the
same date as the loss covered or alleged to be covered under the Policy.

15.03 Notwithstanding anything stated herein, this Agreement shall not apply to
any loss incurred by the Company as a result of any fraudulent and/or criminal
act which has been finally determined by a court of competent jurisdiction,
after the exhaustion of all appeals, by any officer or director of the Company
acting individually or collectively or in collusion with any individual,
corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.

                                   ARTICLE XVI
                               REGULATORY MATTERS

16.01 It is the Parties' understanding that any premiums which are overdue from
the General Agent to the Company may be deemed non-admitted assets. In
confirmation of the liabilities assumed by the Reinsurer under this Agreement,
the Reinsurer hereby assumes all liability and responsibility for all premiums
in the course of collection.

16.02 The Reinsurer shall agree, at no cost to the Company, to take those
actions (including,

                                       12
<PAGE>

but not limited to, modifications in how funds are handled and how accounts are
cleared, settled and the manner in which incurred losses are accounted for) and
agree to those arrangements necessary to ensure that the Company suffers no
adverse impact because of this reinsurance program and is in compliance with any
applicable laws of a state insurance department, insofar as this reinsurance
program is concerned.

                                  ARTICLE XVII
                                THE GENERAL AGENT

17.01 The Reinsurer has selected the General Agent to administer the business
reinsured hereunder. While for regulatory purposes, the General Agent will need
to be appointed as the Company's agent, it is recognized that the General Agent
is acting on behalf of the Reinsurer. The Company is making no evaluation of the
General Agent's qualification, has no obligation to furnish reports or
statistics to the Reinsurer, or to monitor the performance of the General Agent.
The Company shall file with the State all reports requested by the State based
upon information received from the General Agent and Reinsurer.

17.02 The Company will, at the request of the General Agent and the Reinsurer,
appoint producing agents to produce business through the General Agent. The
Company, in its sole discretion, may refuse to appoint any such agent; provided,
however, that such appointment shall not be unreasonably withheld. The General
Agent will not establish any sub-general agencies or any agencies with the
authority of a general agency. The Reinsurer shall hold the Company harmless
from and indemnify it for any damage, liability, claim, expense, cost or fees
(including attorneys' fees and expenses) of whatever kind or character caused
directly or indirectly by any action of or failure to act, by any such producing
agent.

17.03 The General Agent shall be responsible for the control of the producing
agents appointed by the Company at the request of and on behalf of the
Reinsurer, including compliance with state licensing laws and the financial
condition of such agents.

17.04 The Reinsurer shall guarantee payment to the Company of any amounts due
the Company (or the Company's designated agent, TBA) from business produced by
and/or policies issued by or through the producing agents appointed by the
Company at the request of and on behalf of the General Agent and the Reinsurer.
The Reinsurer and the General Agent shall be solely responsible for notifying
such agents of this Agreement and of any termination hereof, and the Reinsurer
shall be responsible for the consequences of any failure to provide such
notification.

17.05 The General Agent shall not sue, or seek arbitration, against the Company
for any acts of the Reinsurer and shall indemnify and hold the Company harmless
from and against any damages, liabilities and expenses incurred by reason of the
Reinsurer's acts or failures to act.

17.06 The Company shall conduct or have conducted the examinations of the
General Agent as provided in Section 5.13 of the General Agency Agreement. The
examinations provided for herein shall be at no cost to the Company, and the
Reinsurer shall indemnify and hold the Company completely harmless as respects
any liability, damage, charge, cost, fine, or penalty, the Company may incur as
a result of such examinations.

                                       13
<PAGE>

                                  ARTICLE XVIII
                   REINSURER OR GENERAL AGENT SALE OR TRANSFER

         The Reinsurer and/or the General Agent agree to give the Company or its
designated agent, TBA, 90 days advance written notice of any sale or transfer of
such party's business, or such party's consolidation with a successor firm, in
order that the Company may, in its sole discretion:

         (a) Assign this Agreement to the successor; or

         (b) Terminate this Agreement.

                                   ARTICLE XIX
                                  MISCELLANEOUS

19.01 This Agreement has been made and entered into in the State of Texas and
the Agreement shall be subject to and construed under the laws of the State of
Texas. This Agreement shall be deemed performable at the Company's
administrative office in Fort Worth, Texas, and it is agreed that the venue of
any controversy arising out of this Agreement, or any breach thereof, shall be
in Tarrant County, Texas.

19.02 All notices required to be given hereunder shall be deemed to have been
duly given by personally delivering such notice in writing or by mailing it,
Certified Mail, return receipt requested, with postage prepaid. Any Party may
change the address to which notices and other communications hereunder are to be
sent to such Party by giving the other Party written notice thereof in
accordance with this provision.

19.03 This Agreement shall be binding upon the Parties hereto, together with
their respective successors and permitted assigns. Neither the Reinsurer nor the
General Agent may assign any of its rights or obligations under this Agreement
without the prior written consent of the Company. The foregoing notwithstanding,
the General Agent may delegate any duties or obligations under this Agreement or
the General Agency Agreement to affiliates under common control.

19.04 This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.

19.05 This Agreement is the entire agreement between the parties and supersedes
any and all previous agreements, written or oral, and amendments thereto with
respect to the subject matter hereof.

19.06 This Agreement may be amended, modified or supplemented only by a written
instrument executed by all Parties hereto.

19.07 A waiver by the Company, Reinsurer or General Agent of any breach or
default by the other party under this Agreement shall not constitute a
continuing waiver or a waiver by the Company or the Reinsurer of any subsequent
act in breach or of default hereunder.

19.08 Headings used in this Agreement are for reference purposes only and shall
not be deemed a part of this Agreement.

                                       14
<PAGE>

19.09 The Parties hereto intend all provisions of this Agreement to be enforced
to the fullest extent permitted. Accordingly, should a court of competent
jurisdiction or arbitration panel determine that the scope of any provision is
too broad to be enforced as written, the Parties intend that the court or
arbitration panel should reform the provision to such narrower scope as it
determines to be enforceable under present or future law; such provision shall
be fully severable; this Agreement shall be construed and enforced as if such
illegal, invalid, or unenforceable provision were never a part hereof; and the
remaining provisions of this Agreement shall remain in full force and effect and
shall not be affected by the illegal, invalid, or unenforceable provision or by
its severance.

19.10 This Agreement is not exclusive and the Company reserves the right to
appoint or contract with other reinsurers, agents and/or managing agents in the
territory covered by this Agreement.

19.11 The Reinsurer or General Agent shall not insert any advertisement
respecting the Company or the business to be written under this Agreement in any
publication or issue any circular or paper referring to the Company or such
business without first obtaining the written consent of the Company. The
Reinsurer and/or General Agent shall establish and maintain records of any such
advertising as required by applicable statutes and regulations.

19.12 Policy cancellations at the Company's request will be made strictly
subject to requirements imposed by the Company's underwriting rules and
practices or the Reinsurer's underwriting rules and practices, as approved by
the Company, and in compliance with applicable statutes and regulations and the
applicable provisions contained in this Agreement and the pertinent policy. Such
cancellation authority shall be exercised only for causes inherent in the
particular risk and shall not be construed as authority to make general or
indiscriminate cancellations or replacement of the Policies with those of
another Company, except upon specific written instructions from the Company.
When directed by the Company, the Reinsurer will cancel any and all Policies
produced by it for any reason the Company deems necessary.

19.13 This Agreement shall be interpreted in conformance with applicable Texas
law and regulation. If it is found or ordered by a court or regulatory body that
a term or provision of this Agreement does not conform to such law or regulation
then this Agreement shall be deemed to be amended and modified in accordance
with such law. However, where this Agreement is found not to comply with
applicable law or regulation, and such compliance cannot be obtained by
amendment or modification to the Agreement that is mutually agreeable between
the Parties, then either Party may in its sole discretion terminate this
Agreement immediately and without prior notice.

19.14 The Company agrees that the Reinsurer shall have the right, with the
approval of the Company, to determine the rates and prepare the rate filing for
the Company to file during the term of this Agreement and during the term of the
run-off. The Reinsurer and General Agent understand and agree that no business
shall be produced, until a written approval of the applicable rate rules and
forms is received from the regulatory authority of competent jurisdiction.

                                   ARTICLE XX
                    LOSS AND UNEARNED PREMIUM RESERVE FUNDING

20.01 The Reinsurer will secure its obligations under this Agreement via a
Security Fund Agreement, a copy of which is attached hereto as Exhibit B and
incorporated fully by this

                                       15
<PAGE>

referenced or letter of credit to be obtained by the Reinsurer in the amount of
$6,000,000 in favor of the Company, which letter of credit and/or security fund
shall be in all respects acceptable to the Company.

         (a)      At a minimum, the letter of credit and/or security fund must:

                  (i)      comply with the provisions of Texas Insurance Code,
                           art 5.75-1(d)(3) and 28 Texas Administrative Code
                           7.610;and;

                  (ii)     be issued by a Qualified United States Financial
                           Institution (as defined by the foregoing statute and
                           regulation).

         (b)      The Company may draw the full amount of the letter of credit
                  to satisfy, in whole or in part the obligations of reinsurer
                  hereunder or, if:

                  (i)      the Reinsurer fails to comply with the provisions of
                           this Article; or

                  (ii)     the issuer of the letter of credit gives the Company
                           notice of cancellation or non-renewal under the
                           evergreen provisions of the letter of credit.

20.02 Upon termination of this Agreement, the funding required under the
Security Fund Agreement shall be reduced as follows:

         (a)      $1,200,000 six (6) months after the date of termination of the
                  Reinsurance Agreement;

         (b)      $1,600,000 twelve (12) after the date of termination of the
                  Reinsurance Agreement;

         (c)      $400,000 eighteen (18) months after the date of termination of
                  the Reinsurance Agreement;

         (d)      All other securities deposited by Reinsurer when all of
                  Reinsurer's obligations to the Company under this Agreement
                  have been extinguished.

                                   ARTICLE XXI
                      T.B.A. INSURANCE GROUP, LTD. ("TBA")

         The Company has contracted with TBA as its designated intermediate
agent to perform certain duties on the Company's behalf and to issue certain
checks on behalf of the Company in exchange for certain fees. The Reinsurer
agrees that TBA is to bear no business, credit or insurance risk and can bear no
liability whatsoever to the Reinsurer save liability for any actual fraud or
violation of criminal law it commits, which has been finally determined by a
court of competent jurisdiction after the exhaustion of any appeals. TBA shall
receive all the protections from liability which are contained herein for the
benefit of the Company.

                                       16
<PAGE>

                                  ARTICLE XXII
                                 SAVINGS CLAUSE

22.01 If any law or regulation of any Federal, State or local government of the
United States of America, or the ruling of officials having supervision over
insurance companies, should prohibit or render illegal this Agreement, or any
portion thereof, as to risks or properties located in the jurisdiction of such
authority, either the Company or the Reinsurer may upon written notice to the
other suspend or abrogate this Agreement insofar as it relates to risks or
properties located within such jurisdiction to such extent as may be necessary
to comply with such law, regulations or ruling. Such illegality shall in no way
affect any other portion thereof; provided, however, that the Reinsurer or the
Company may terminate or suspend this Agreement insofar as it relates to the
business to which such law or regulation may apply.

22.02 This Agreement shall be interpreted in accordance with the laws of the
State of Texas. All provisions of this Agreement are intended to be enforced to
the fullest extent permitted. Accordingly, should a court of competent
jurisdiction or arbitration panel determine that the scope of any provision is
too broad to be enforced as written, the Parties intend that the court or
arbitration panel should reform the provision to such narrower scope as it
determines to be enforceable under present or future law; such provision shall
be fully severable; this Agreement shall be construed and enforced as if such
illegal, invalid, or unenforceable provision were never a part hereof; and the
remaining provisions of this Agreement shall remain in full force and effect and
shall not be affected by the illegal, invalid, or unenforceable provision or by
its severance; provided, however, that where this Agreement is so found not to
comply with applicable law or regulation, if the parties are unable to amend
this Agreement upon mutual acceptable terms to bring it into compliance, then
either may in its sole discretion terminate this Agreement immediately without
prior notice.

IN WITNESS WHEREOF, the Parties hereto by their respective duly authorized
representatives have executed this Agreement as of the date first above
mentioned.

STATE NATIONAL SPECIALTY INSURANCE COMPANY

BY:
    --------------------------------

ITS: President
     -------------------------------

DIRECT GENERAL INSURANCE COMPANY

BY:
    --------------------------------

ITS: VP -- Finance & Treasurer
     -------------------------------

                                       17

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00052-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00052-of-00352.parquet"}]]