Document:

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                                                                    EXHIBIT 10.1

                              COINSURANCE AGREEMENT

                                      among

                 PENN TREATY NETWORK AMERICA INSURANCE COMPANY,

                       AMERICAN NETWORK INSURANCE COMPANY,

                                       and

                    IMAGINE INTERNATIONAL REINSURANCE LIMITED

                          Effective as of June 30, 2005

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<TABLE>
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                                                  TABLE OF CONTENTS
                                                  -----------------

                                                                                                               Page
                                                                                                               ----

<S>                        <C>                                                                                 <C>
ARTICLE I                DEFINITIONS..............................................................................1
ARTICLE II               COVERAGE................................................................................13
ARTICLE III              REINSURANCE PREMIUM; POLICY PREMIUM; CEDING COMMISSIONS.................................16
ARTICLE IV               EXPENSE ALLOWANCES......................................................................17
ARTICLE V                ACCOUNTING AND SETTLEMENT...............................................................18
ARTICLE VI               DURATION, TERMINATION AND RECAPTURE.....................................................21
ARTICLE VII              INSOLVENCY..............................................................................24
ARTICLE VIII             FUNDS WITHHELD..........................................................................25
ARTICLE IX               REINSURANCE SECURITY....................................................................30
ARTICLE X                EXPERIENCE ACCOUNT......................................................................34
ARTICLE XI               ADMINISTRATION; CLAIMS HANDLING.........................................................37
ARTICLE XII              REINSURER'S RIGHT OF ASSOCIATION........................................................42
ARTICLE XIII             LOSS SETTLEMENTS........................................................................43
ARTICLE XIV              CEDED REINSURANCE.......................................................................44
ARTICLE XV               CANCELLATION;  COMMUTATION..............................................................45
ARTICLE XVI              GENERAL PROVISIONS......................................................................48
ARTICLE XVII             ADDITIONAL COVENANTS,  REPRESENTATIONS AND WARRANTIES OF THE CEDENTS AND THE REINSURER..50
ARTICLE XVIII            INDEMNIFICATION.........................................................................57
ARTICLE XIX              SALVAGE AND SUBROGATION.................................................................57
ARTICLE XX               ARBITRATION.............................................................................57
ARTICLE XXI              AUDIT AND ACCESS TO RECORDS.............................................................60
ARTICLE XXII             REGULATORY RISK.........................................................................61
ARTICLE XXIII            PREMIUM RATE INCREASES..................................................................62
ARTICLE XXIV             TAXES...................................................................................65
ARTICLE XXV              RULES OF CONSTRUCTION...................................................................65
ARTICLE XXVI             SURVIVAL................................................................................66
ARTICLE XXVII            SEVERABILITY............................................................................66
ARTICLE XXVIII           MISCELLANEOUS PROVISIONS................................................................66

                                                      SCHEDULES
                                                      ---------

SCHEDULE A        -      REINSURED POLICIES
SCHEDULE B        -      INITIAL REINSURANCE REPORT (Part I)
SCHEDULE B        -      QUARTERLY REPORTS (Part II)
SCHEDULE C        -      TERRORISM EXCLUSION
SCHEDULE D        -      CEDED REINSURANCE AGREEMENTS
SCHEDULE E        -      CEDENTS DATA
SCHEDULE F        -      APPROVALS AND AUTHORIZATIONS
</TABLE>

                                                          i
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                                    EXHIBITS
                                    --------

EXHIBIT A         -        FUNDS WITHHELD TRUST AGREEMENT - PENN TREATY
EXHIBIT B         -        FUNDS WITHHELD TRUST AGREEMENT - AMERICAN NETWORK
EXHIBIT C         -        REINSURER TRUST AGREEMENT - PENN TREATY
EXHIBIT D         -        REINSURER TRUST AGREEMENT - AMERICAN NETWORK

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                              COINSURANCE AGREEMENT
                              ---------------------

        This Agreement, dated as of July 28, 2005 (this "Agreement") is made and
entered into by and among Penn Treaty Network America Insurance Company, an
insurance company organized under the laws of the Commonwealth of Pennsylvania
(hereinafter referred to as "Penn Treaty"), American Network Insurance Company,
an insurance company organized under the laws of the Commonwealth of
Pennsylvania (hereinafter referred to as "American Network" and, along with Penn
Treaty, as a "Cedent" and collectively the "Cedents"), and Imagine International
Reinsurance Limited, a reinsurance company organized under the laws of Ireland
(hereinafter referred to as the "Reinsurer").

        Each Cedent agrees to cede and the Reinsurer agrees to accept liability
under the terms and conditions stated herein. This Agreement is an indemnity
reinsurance agreement solely between the Cedents and the Reinsurer, and the
performance of the obligations of the parties under this Agreement shall be
rendered solely to the other parties hereto. In no instance, except as set forth
in Article VII of this Agreement, shall anyone other than the Cedents or the
Reinsurer have any rights under this Agreement. The Cedents are and shall remain
the only parties hereunder that are liable to any insured, policyholder or
beneficiary under any insurance policy or contract reinsured hereunder.

                                    ARTICLE I

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

        1.1.    DEFINITIONS. As used in this Agreement, the following terms
shall have the following meanings (definitions are applicable to both the
singular and the plural forms of each term defined in this Article):

                                       1
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        "ACCOUNTING PERIOD" means the calendar quarter beginning July 1, 2005
and each successive calendar quarter thereafter, except that the last Accounting
Period shall be the period commencing with the first day of the calendar quarter
in which the Termination Date or the Recapture Date, as applicable, falls and
ending with the Termination Date or the Recapture Date, as applicable.

        "ACT OF TERRORISM" means any terrorist act, occurrence or threat,
wherever and whenever occurring, whether or not any law, or governmental
authority or other person or entity determines such act, occurrence or threat to
be an act of terrorism. Acts of Terrorism shall include, without limitation,
actions, occurrences or threats:

        (i)     That are or involve one or both of the following:

                (A)     any act, use, attempted use or threat of use of force or
                        violence, or any act causing or threatening damage or
                        harm of any nature, whether or not the person or persons
                        involved are acting along or in conjunction with or on
                        behalf of a sovereign power or terrorist organization;
                        or

                (B)     the commission, attempted commission or threat of an act
                        that interferes with or disrupts (or could reasonably be
                        expected to interfere with or disrupt) any electronic,
                        communication, information or mechanical system;

including without limitation, in the case of each of clauses (A) or (B) of this
paragraph (i), any use, attempted use, or threatened use of, or act involving,
biological, chemical, radioactive or other toxic or contaminating materials, or
weapons devices;

AND

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        (ii)    one or both of the following applies:

                (A)     the effect or intent is to intimidate, place in fear,
                        coerce, or influence the policies of, or disrupt,
                        damage, punish or interfere with or hinder the business
                        or commerce of, any government or political subdivision
                        thereof, or any civilian population or sector thereof,
                        any organization, company or other entity, or any
                        industries, services or systems (including any gas,
                        power, communications, water, sewer, construction,
                        energy, technology, financial industries or
                        transportation systems and services); or

                (B)     one of the motives, or one of the apparent or claimed
                        motives, of the person(s) or entities committing such
                        act, use, attempted use, commission, attempted
                        commission or threat is to further or express (or
                        express opposition to or support of) any political,
                        philosophical, ideological, religious, social, terrorist
                        or economic objectives or any similar objectives.

        "AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control", when used with respect to any specified Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.

        "AGGREGATE TRUST ACCOUNT VALUE" shall have the meaning specified in
Section 9.2(b).

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        "AGREEMENT" shall have the meaning specified in the first introductory
paragraph.

        "AGGREGATE LIMIT" shall have the meaning specified in Section 2.4.

        "AMENDMENTS" shall have the meaning specified in Section 2.2.

        "AMERICAN NETWORK" shall have the meaning specified in the first
introductory paragraph.

        "ANNUAL REVIEW" shall have the meaning specified in Section 23.1(b).

        "ASSET VALUE" shall have the meaning specified in Section 9.2.

        "BUSINESS DAY" means any day on which (i) a United States national
banking association is open for regular business and (ii) banks are open for
business in Ireland.

        "CANCELLATION DATE" shall have the meaning specified in Section 15.1(a).

        "CEDED REINSURANCE AGREEMENTS" means all of the contracts, binders,
certificates, treaties or other evidence of reinsurance ceded by the Cedents
relating to the Reinsured Risks in effect prior to the Effective Date, including
without limitation, those contracts, binders, certificates, treaties or other
evidences of reinsurance set forth on Schedule D hereto but excluding the
reinsurance provided pursuant to this Agreement.

        "CEDENT" or "CEDENTS" shall have the meaning specified in the
introductory paragraph.

        "CEDENTS DATA" shall have the meaning specified Section 17.1(c).

        "CLAIMS CONTROL EVENT" shall have the meaning specified in Section
11.2(h).

        "CLAIMS GUIDELINES" shall have the meaning specified in Section 11.2(b).

        "DAMAGE" means any loss, damage, claim, liability, cost or expense of
any nature (including, without limitation, any bodily injury, property damage,
business interruption, lost

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profit, consequential or indirect losses, damages, claims, liabilities, costs or
expenses) and wherever occurring.

        "EFFECTIVE DATE" shall have the meaning specified in Section 2.1.

        "EXCESS LIMITS LIABILITY" means any amounts payable in excess of a
Reinsured Policy limit as a result of alleged or actual negligence or reckless
conduct in failing to settle or rejecting a settlement within the policy limit,
in the preparation of the defense, in the trial of any action against the
insured or reinsured, or in the preparation of or prosecution of an appeal
consequent upon such action. The date on which any Excess Limits Liability is
incurred by a Cedent will be deemed, in all circumstances, to be the same date
established in respect of the claim from which the Excess Limits Liability
arose.

        "EXPENSE ALLOWANCE" shall have the meaning specified in Section 4.1(a).

        "EXPERIENCE ACCOUNT" shall have the meaning specified in Section
10.1(a).

        "EXPERIENCE TRIGGER EVENT" shall have the meaning specified in Section
10.3.

        "EXTRA CONTRACTUAL OBLIGATIONS" means all liabilities not covered under
the provisions of any policy included within the Reinsured Policies or under any
other provision of this Agreement, whether for compensatory, consequential,
punitive, exemplary, bad faith or other damages, which relate to or arise in
connection with any alleged or actual act, error or omission, whether
intentional or otherwise, or from any alleged or actual negligence, reckless
conduct or bad faith, in connection with the handling of any claim arising out
of or under any of the Reinsured Policies or in connection with the marketing,
sale, underwriting, issuance, delivery, cancellation or administration of any of
the Reinsured Policies, or in the preparation of the defense or in the trial of
any action against the insured or reinsured or in the preparation or prosecution
of an appeal consequent upon such action. For the avoidance of doubt, Extra

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Contractual Obligations include (y) amounts paid in settlement of claims that
seek or purport to assert liability of the Cedents for amounts that, if such
claim were proved, would be Extra Contractual Obligations and (z) all costs,
charges, and expenses, including without limitation attorneys' fees, of the
Cedents in defending any such claim (including expenses that might otherwise be
categorized as Loss Adjustment Expenses but for the fact that they were incurred
in connection with an Extra Contractual Obligation). The date on which any Extra
Contractual Obligation is incurred by a Cedent will be deemed, in all
circumstances, to be the same date established in respect of the claim from
which the Extra Contractual Obligation arose.

        "FEDERAL ARBITRATION ACT" means Title 9 of the United States Code, as
amended.

        "FUNDS WITHHELD ACCOUNT" shall have the meaning specified in Section
8.1.

        "FUNDS WITHHELD ACCOUNT INVESTMENT INCOME" shall have the meaning
specified in Section 8.3(a).

        "FUNDS WITHHELD INTEREST RATE--RETAINED" means an amount equal to the
average yield of the assets representing the Funds Withheld Account that is
withheld from deposit to the Funds Withheld Trust Accounts pursuant to Section
8.4, determined in accordance with the formula I / [A x .65] where:

        I = the recorded income during the Accounting Period attributable to the
Cedents' Corporate Owned Life Insurance Policies ("COLI"), to be determined as
B-A+C,

        A equals the carrying value of the COLI at the beginning of the
Accounting Period,

        B equals the carrying value of the COLI at the end of the Accounting
Period,

and.

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        C equals any cash distribution (death benefits, policy loans, cash
surrenders, or partial withdrawals) made from the COLI during the Accounting
Period.

        "FUNDS WITHHELD INTEREST RATE--TRUST" means an amount equal to the
average yield, at amortized cost, of the assets in the Funds Withheld Trust
Accounts, determined in accordance with the formula 2I/[A+B-I] where:

        I equals the accrued investment income and realized capital gains and
losses and changes (decreases less increases) in the Interest Maintenance
Reserve, net of investment expenses, calculated by the Cedents on a statutory
historical book value basis during the current Accounting Period with respect to
the assets in the Funds Withheld Trust Accounts, and

        A equals the book value of the assets in the Funds Withheld Trust
Accounts at the beginning of the Accounting Period (after reflecting the
settlement for the end of the prior Accounting Period), and

        B equals the book value of the assets in the Funds Withheld Trust
Accounts at the end of the Accounting Period (before reflecting the settlement
for the end of the current Accounting Period).

        The Interest Maintenance Reserve is the amount reflected in the Cedents'
statutory financial statements relating to the assets in the Funds Withheld
Trust Accounts. Any Interest Maintenance Reserve relating to such assets will be
excluded for purposes of this calculation and only changes in the Interest
Maintenance Reserve related to Funds Withheld Trust Account asset transactions
after the Effective Date will be included.

        "FUNDS WITHHELD TRUST ACCOUNT" shall have the meaning specified in
Section 8.4.

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        "FUNDS WITHHELD TRUST AGREEMENT" shall have the meaning specified in
Section 8.4.

        "INCREMENTAL LIMIT AMOUNT" shall have the meaning specified in Section
2.4.

        "INITIAL CEDING COMMISSION" shall have the meaning specified in Section
3.3.

        "INITIAL REINSURANCE PREMIUM" shall have the meaning specified in
Section 3.1.

        "INITIAL REPORT" shall have the meaning specified in Section 5.2.

        "INSOLVENCY FUND" means any guarantee fund, insolvency fund, plan, pool,
association, fund or other arrangement, however denominated, established or
governed, which provides for any assessment of or payment or assumption by the
Cedents of part or all of any claim, debt, charge, fee or other obligation of an
insurer or reinsurer, or its successors or assigns, which has been declared by
any competent authority to be insolvent, or which is otherwise deemed unable to
meet any claim, debt, charge, fee or other obligation in whole or in part.

        "LIMIT ACCOUNT" shall have the meaning specified in Section 2.4(a).

        "LIMIT AMOUNT REDUCTION" means, for any Accounting Period (or any part
thereof), an amount equal to 50% of the difference between the Rate Adjusted Net
Premiums for that Accounting Period (or part thereof) and the Net Premiums for
that Accounting Period (or part thereof). A Limit Amount Reduction shall only
occur as a result of a Regulatory Risk Event or Material Breach Event.

        "LOC" shall have the meaning specified in Section 9.2(a).

        "LOC VALUE" shall have the meaning specified in Section 9.2(b).

        "LOSS" or "LOSSES" means the amount of benefits or losses paid by each
Cedent with respect to claims arising under the Reinsured Policies, including
without limitation, any

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settlements or compromises of disputed claims and any waived premium incurred on
or after the Effective Date.

        "LOSS ADJUSTMENT EXPENSES" means, with respect to each Cedent, all
costs, fees and expenses incurred by the Cedent or its Affiliates in the
investigation, appraisal, adjustment, settlement, litigation, defense or appeal
of all claims or the monitoring, preservation or enforcement of rights,
interests or benefits under or with respect to the Reinsured Policies, including
office expenses and salaries of employees of the Cedent or of its affiliates or
any other administrative or overhead expenses of the Cedent or of its
Affiliates, and court costs, and interest on any judgment or award; Loss
Adjustment Expenses shall also include (i) expenses associated with an action by
the Cedent for declaratory judgment filed in connection with the Reinsured
Policies and (ii) any payments made under the Reinsured Policies which exceed
the benefit provisions of the Reinsured Policies as a result of deviation from
the Claims Guidelines.

        "MANDATORY FILING DATE" shall have the meaning specified in Section
23.2(b).

        "MATERIAL ADVERSE EFFECT" shall have the meaning specified in Section
15.3.

        "MATERIAL BREACH EVENT" shall have the meaning specified in Section
23.2(f).

        "MATERIAL CHANGE" shall have the meaning specified in Section 15.3.

        "NET PREMIUM" means an amount equal to at anytime (i) gross premiums
written (including waived premiums) collected under the Reinsured Policies on
and after the Effective Date, less (ii) premiums for reinsurance under the Ceded
Reinsurance Agreements and the Other Ceded Reinsurance, whether or not such
reinsurance is collectible, plus (iii) expense allowances received under the
Ceded Reinsurance Agreements and the Other Ceded Reinsurance, plus (iv) all
amounts collected by the Cedents with respect to reinstatement of any of the
Reinsured Policies.

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        "NON-APPROVED AMENDMENTS" shall have the meaning specified in Section
2.2.

        "NOTICE OF CANCELLATION" shall have the meaning specified in Section
15.1.

        "NOTICE OF INTENTION TO ARBITRATE" shall have the meaning specified in
Section 20.1.

        "NOTICE OF PROPOSED COMMUTATION" shall have the meaning specified in
Section 15.2(a).

        "NUCLEAR HAZARD" means (i) an actual or threatened nuclear or
radioactive accident or incident (regardless of when such Damage becomes
manifest or known), and/or (ii) the controlling, suppressing, hindering,
responding to, remediating or defending against an actual, threatened or
expected nuclear or radioactive accident or incident or pursuant to any
instructions, recommendations, warnings or advice given or preventative action
taken with respect to any actual or expected nuclear or radioactive accident or
incident, regardless in the case of both clauses (i) and (ii), (A) of any other
cause or event that contributes concurrently or in any sequence or in any chain
of events to the loss, damage, claim, liability, cost or expense and (B) whether
the Damage is accidental, foreseeable or intentional, and including any such
liability as a result of an Act of Terrorism.

        "OBLIGATORY PREMIUM RATE INCREASE" shall have the meaning specified in
Section 23.2.

        "OTHER CEDED REINSURANCE" shall have the meaning specified in Section
14.1(c).

        "PENN TREATY" shall have the meaning specified in the Recitals.

        "PERSON" means any individual, corporation, limited liability company,
partnership, association, joint-stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.

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        "PROGRAM OF INTERNAL REPLACEMENT" shall have the meaning specified in
Section 17.1(b).

        "PTAC" means Penn Treaty American Corporation, a corporation organized
under the laws of the Commonwealth of Pennsylvania.

        "QUARTERLY REPORT" shall have the meaning specified in Section 5.3.

        "QUARTERLY SETTLEMENT" shall have the meaning specified in Section 5.1.

        "RATE ADJUSTED NET PREMIUMS" shall mean an amount equal to the Net
Premiums that would have been charged to the Cedents' policyholders had the
Cedents filed for and been granted Obligatory Premium Rate Increases in
accordance with Article XXIII herein (whether or not such filing is made or such
increase is granted); provided that the parties agree that for the purposes of
determining the Rate Adjusted Net Premiums, the Cedents shall be deemed to have
been granted rate increases in respect of any Obligatory Premium Rate Increase
filing on the earlier of (i) the date such filing was actually granted and (ii)
the 180th day subsequent to the applicable Mandatory Filing Date, although it is
understood and agreed that once granted, Rate Adjusted Net Premiums will be
collected following a 60 day implementation period and following the modal
payment structure of the affected Reinsured Policy.

        "RECAPTURE DATE" means the effective date of any recapture of the
Reinsured Risks as provided in Section 6.3.

        "REGULATORY RISK EVENT" shall mean the failure to obtain an Obligatory
Premium Rate Increase as a result of any matter beyond the reasonable control of
the Cedents, including any changes in applicable statute, law, rule, regulation,
governmental practice, policy and procedure, NAIC-adopted model law, or
regulatory action or inaction, affecting the Cedents' Reinsured Policies,
products or rates.

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        "REINSURED POLICIES" means the long term care policies and riders
attached thereto (i) issued by or on behalf of the Cedents prior to January 1,
2002, (ii) in force on the Effective Date or in force prior to the Effective
Date and reinstated after the Effective Date and (iii) described in Schedule A.

        "REINSURED RISKS" shall have the meaning specified in Section 2.1.

        "REINSURER ALLOWANCE" shall have the meaning specified in Section 10.2.

        "REINSURER TRUST ACCOUNT" shall have the meaning specified in Section
9.1.

        "REINSURER TRUST AGREEMENT" shall have the meaning specified in Section
9.1.

        "RESERVE CREDIT TRUST ASSETS" shall have the meaning specified in
Section 9.2.

        "REVIEWS" shall have the meaning specified in Section 23.1(c).

        "SAP" means statutory accounting practices prescribed or permitted by
the Insurance Department of the Commonwealth of Pennsylvania.

        "SEMI-ANNUAL REVIEW" shall have the meaning specified in Section
23.1(a).

        "TERMINAL ACCOUNTING AND SETTLEMENT" shall have the meaning specified in
Section 6.4(a).

        "TERMINATION DATE" means the effective date of any termination of this
Agreement as provided in Section 6.2.

        "TOTAL CEDED RESERVES" means, as of any given date, an amount, with
respect to each Cedent, equal to (i) its gross reserves calculated in accordance
with Pennsylvania Department of Insurance Standards with respect to the
Reinsured Risks, less (ii) an amount equal to its reinsurance ceded with respect
to the Reinsured Risks pursuant to the Ceded Reinsurance Agreements and the
Other Ceded Reinsurance. Gross reserves consist of unearned premium

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reserves, claim liabilities and claim reserves (including reserves for Loss
Adjustment Expenses), and additional active life reserves.

        "TRUSTEE" shall have the meaning specified in Section 9.1.

        "ULTIMATE NET LOSS" shall have the meaning specified in Section 2.3.

        "WAR AND MILITARY ACTION" means (i) war, including undeclared or civil
war, (ii) warlike action by a military force, including action in hindering or
defending against an actual or expected attack, by any government, sovereign or
other authority using military personnel or other agents; or (iii) insurrection,
rebellion, revolution, usurped power, or action taken by governmental authority
in hindering or defending against any of these.

                                   ARTICLE II

                                    COVERAGE
                                    --------

        2.1.    COVERAGE. As of June 30, 2005 (the "Effective Date"), each
Cedent agrees to reinsure with the Reinsurer, and the Reinsurer agrees to
indemnify each Cedent for, one hundred percent (100%) of Ultimate Net Loss paid
by such Cedent under the Reinsured Policies on or after the Effective Date,
subject to the limits set forth herein (the "Reinsured Risks").

        2.2.    CONDITIONS. No changes, amendments, revisions, supplements or
modifications (each, an "Amendment") made on or after the Effective Date in the
terms and conditions of the Reinsured Policies shall be covered hereunder
without the prior written approval of such Amendment by the Reinsurer, other
than such Amendment as may be required under applicable law (which shall be
promptly communicated in writing to the Reinsurer). In the event that any
Amendments are made in any Reinsured Policy without the prior written approval
of the Reinsurer (each, a "Non-Approved Amendment"), this Agreement will cover
Ultimate Net Loss paid by the Cedents under the Reinsured Policies as if the
Non-Approved Amendments had

                                       13
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not been made and Cedents jointly and severally agree to be liable for all
expenses, fees or other liabilities associated with such Non-Approved Amendments
and shall, pursuant to Article XVIII hereof, jointly and severally indemnify and
hold harmless the Reinsurer in connection with any such costs and expenses.

        2.3.    ULTIMATE NET LOSS. Subject to Section 2.5, "Ultimate Net Loss"
shall mean, with respect to each Cedent, the actual Losses paid by such Cedent
after making deductions for all recoveries, subrogations and inuring reinsurance
under the Ceded Reinsurance Agreements and the Other Ceded Reinsurance, whether
or not collectible. 2.4. AGGREGATE LIMIT.

        (a)     LIMIT ACCOUNT. A notional "Limit Account," shall be calculated
by the Reinsurer as of the Effective Date of this Agreement and maintained until
all obligations of the Reinsurer hereunder have been satisfied or discharged in
full as follows:

                The Limit Account balance shall be calculated by the Reinsurer
        and as of any date shall be equal to the following:

        Part I: 1)      Incremental Limit Amount, plus

                2)      The Initial Premium, less

                3)      The Initial Ceding Allowance, plus

                4)      The cumulative Net Premiums collected after the
                        Effective Date, less

                5)      The cumulative Expense Allowances reimbursed after the
                        Effective Date, plus

                6)      The cumulative Funds Withheld Account Investment Income
                        (Trust and Retained) after the Effective Date;

                            less

        Part II:        100% of Ultimate Net Loss

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<PAGE>

All Net Premiums are deemed to be credited to and all Ultimate Net Losses are
deemed to be debited from the Limit Account at the exact time when such Net
Premiums and Ultimate Net Losses are credited to and debited from, respectively,
the Funds Withheld Account.

        (b)     "Incremental Limit Amount" shall equal $100 million, subject
however, to any reductions pursuant to Articles XXII and XXIII herein.

        (c)     REINSURER'S AGGREGATE LIMIT OF LIABILITY. Notwithstanding any
other provision of this Agreement, in no event shall the Reinsurer's Aggregate
Limit of Liability at any time under or related to this Agreement be greater
than the amount in Part I of the Limit Account, as set forth in Section 2.4(a).

        2.5.    EXCLUSIONS. The following shall in all events be excluded from
Ultimate Net Loss and the Reinsurer shall have no liability whatsoever with
respect thereto: (i) Loss Adjustment Expenses; (ii) Extra Contractual
Obligations; (iii) Excess Limits Liability; (iv) any and all liability arising,
by contract, operation of law, or otherwise from a Cedent's participation or
membership whether voluntary or involuntary in any Insolvency Fund; (v) any
Damage directly or indirectly caused or occasioned by or resulting from any
Nuclear Hazard; (vi) any Damage directly or indirectly caused or occasioned by
or resulting from any Act of Terrorism to the extent set forth in Schedule C;
and (vii) any Damage directly or indirectly caused or occasioned by or resulting
from any War and Military Action. For the avoidance of doubt, if it is alleged
by the Reinsurer that any claim is not covered by reason of this Section 2.5,
the burden of proving the contrary shall be on the Cedents.

        2.6.    TERRITORY. The territorial limits of this Agreement shall be
identical with those of the Reinsured Policies.

                                       15
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                                  ARTICLE III

             REINSURANCE PREMIUM; POLICY PREMIUM; CEDING COMMISSIONS
             -------------------------------------------------------

        3.1.    REINSURANCE PREMIUM. The initial reinsurance premium due from
each Cedent to the Reinsurer shall be an amount equal to the Total Ceded
Reserves of such Cedent as of the Effective Date (each, an "Initial Reinsurance
Premium"), which the parties hereby agree are $963,456,708 with respect to Penn
Treaty and $76,019,654 with respect to American Network. The Initial Reinsurance
Premium for a Cedent, less an amount equal to the applicable Initial Ceding
Commission for such Cedent, shall be credited to each applicable Funds Withheld
Account in accordance with Article VIII. In addition, within three (3) Business
Days of the date hereof, the Cedents shall pay to the Reinsurer an initial
reinsurer allowance equal to $2,270,000.

        3.2.    POLICY PREMIUMS. In addition to the Initial Reinsurance Premium,
the Reinsurer shall be entitled to all Net Premiums paid after the Effective
Date. Each Cedent hereby agrees to promptly credit to each Funds Withheld
Account all such Net Premiums in accordance with Article VIII. In order to
secure its liabilities to the Reinsurer, each Cedent shall deposit to its
respective Funds Withheld Trust Account, promptly following receipt, an amount
equal to premiums (and amounts collected on reinstatement) collected on
Reinsured Policies and amounts received under the Ceded Reinsurance Agreements
and the Other Ceded Reinsurance less any estimated Expense Allowances related to
such premiums.

        3.3.    INITIAL CEDING COMMISSIONS. The Reinsurer shall allow the
Cedents an initial ceding commission equal to $60,000,000 with respect to Penn
Treaty and $0 with respect to American Network (each, an "Initial Ceding
Commission")

                                       16
<PAGE>

                                   ARTICLE IV

                               EXPENSE ALLOWANCES
                               ------------------

        4.1.    EXPENSE ALLOWANCE.

        (a)     With respect to each Accounting Period ending after the
Effective Date, the Reinsurer shall allow each Cedent an expense allowance
(each, an "Expense Allowance") in an amount equal to the sum of:

                (i)     Renewal commissions paid by such Cedent to its agents
                        with respect to the Reinsured Policies during the
                        Accounting Period, not to exceed 10.5% of Net Premiums
                        collected by such Cedent during the Accounting Period;
                        plus

                (ii)    6.7 % of Net Premiums for such Cedent collected during
                        the Accounting Period; plus

                (iii)   2.5 % of Net Premiums for such Cedent collected during
                        the Accounting Period; plus

                (iv)    4.0 % of Ultimate Net Loss for such Cedent paid during
                        the Accounting Period.

        However, in no event will the Expense Allowance of a Cedent with respect
to any Accounting Period exceed 25% of Net Premiums collected by that Cedent
during the Accounting Period.

        (b)     To the extent that the Reinsurer exercises any of its rights
under Article XI and incurs any fees, costs and expenses in connection
therewith, such fees, costs or expenses shall be deducted from the Expense
Allowance.

                                       17
<PAGE>

        4.2.    NO LIABILITY FOR EXPENSES OTHER THAN EXPENSE ALLOWANCES. Taxes
paid and expenses (including Loss Adjustment Expenses) incurred by the Cedents
in connection with the Reinsured Policies are included as part of the Expense
Allowances paid by the Reinsurer. Except as included therein, the Reinsurer will
not reimburse the Cedents for any premium taxes, Federal, state or local income
or other taxes, including any applicable excise taxes, or any licensing or other
fees allocated directly or indirectly to the Reinsured Risks, it being expressly
understood that the Cedents shall be solely liable for all such amounts that may
be owed by them. The Reinsurer shall not bear any part of any expenses incurred
in connection with the administration of the Reinsured Policies, including Loss
Adjustment Expenses, other than the Expense Allowances.

                                   ARTICLE V

                            ACCOUNTING AND SETTLEMENT
                            -------------------------

        5.1.    PAYMENT OF AMOUNTS DUE. Except as otherwise specifically
provided herein, all amounts due to be paid to each Cedent and the Reinsurer
under this Agreement shall be determined on a net basis as of the Effective Date
and subsequently as of the last day of each Accounting Period ending after the
Effective Date. The net amount due the Reinsurer as of the Effective Date shall
be set forth in the Initial Reports and paid by the Cedents within three (3)
Business Days of the date hereof. Each net amount subsequently due with respect
to each Accounting Period ending after the Effective Date (the "Quarterly
Settlement") shall be paid by the Reinsurer to each Cedent, or by each Cedent to
the Reinsurer, as applicable, in accordance with Section 8.1, no later than
fifteen (15) calendar days after receipt by the Reinsurer of the applicable
Quarterly Reports.

                                       18
<PAGE>

        5.2.    INITIAL REPORTS. A report shall be provided by each Cedent to
the Reinsurer within three (3) Business Days of the date hereof providing the
data required in Schedule B - Part I (each an "Initial Report").

        5.3.    QUARTERLY REPORTS. Within forty-five (45) calendar days of the
end of each Accounting Period, each Cedent shall deliver to the Reinsurer a
report that shall provide the financial data for such Accounting Period required
in Schedule B - Part II, together with any additional information reasonably
required by the Reinsurer to complete its statutory financial statements filed
with the applicable state insurance regulators (each, a "Quarterly Report").

        5.4.    ANNUAL REVIEW. Within sixty (60) calendar days of the
commencement of the Annual Review conducted pursuant to Article XXIII, each
Cedent shall deliver a report to the Reinsurer containing the results of such
review, including the projected morbidity and other experience and any warranted
premium rate increases.

        5.5.    BEST EFFORTS TO SUPPLY ACTUAL DATA. In preparing all reports
required in this Agreement, each Cedent shall use its best efforts to supply the
actual data. If the actual data cannot be supplied with the appropriate report,
such Cedent shall produce best estimates and shall provide amended reports based
on actual data no more than ten (10) Business Days after the actual data becomes
available and the parties will settle any additional amounts due within five (5)
Business Days thereafter, together with interest as provided in Section 5.6
hereof.

        5.6.    ADDITIONAL REPORTS AND UPDATES.

        (a)     For so long as this Agreement remains in effect, the Cedents
shall each periodically furnish to the Reinsurer such other reports and
information as may be reasonably required by the Reinsurer and reasonably
available to the Cedents.

                                       19
<PAGE>

        (b)     The Cedents shall each furnish to the Reinsurer all information
that the Reinsurer reasonably requires in order for the Reinsurer to prepare its
financial reports in accordance with the accounting reporting requirements of
the Reinsurer, including, but not limited to, that information necessary to
complete an actuarial opinion in the form and substance similar to what would be
required if the Reinsurer were domiciled in the United States. The Cedents shall
also promptly furnish to the Reinsurer a copy of any disclosure relating to this
Agreement that is filed with the U.S. Securities and Exchange Commission by or
on behalf of either of the Cedents, PTAC, or any Affiliate thereof that is
required to file reports under the U.S. federal securities laws.

        (c)     The Cedents covenant and agree that each shall notify the
Reinsurer within twenty-four (24) hours after such Cedent receives notice of any
regulatory action, order, proceeding, or planned or threatened regulatory
intervention or oversight by any regulatory agency having jurisdiction over such
Cedent in connection with its financial condition or market conduct, including,
but not limited to, any notice of impairment, corrective order, risk based
capital deficiency or event, or other similar threatened regulatory action.

        (d)     The Cedents acknowledge and agree that failure to comply with
the covenants set forth in this Article V, if remaining uncorrected thirty (30)
days following written notification by the Reinsurer, shall constitute a
material breach of this Agreement by the Cedents. The Cedents shall not
willingly or willfully delay or hinder immediate correction of any known breach.
In addition, the Cedents acknowledge and agree that the failure to correct the
acts or omissions giving rise to any regulatory action described in Section
5.6(c) within thirty (30) days of receipt of notice of such act or omission or
receipt of the notice of regulatory action by a Cedent shall in each such case
constitute a material breach of this Agreement with or

                                       20
<PAGE>

without notification by the Reinsurer. Remedies available to the Reinsurer for
such breach include, but are not limited to, those contained in Section 8.5 and
Article XV.

        (e)     DELAYED PAYMENTS. In the event that all or any portion of a
Quarterly Settlement amount becomes overdue (whether because of a failure to pay
in accordance with Section 5.1 or Section 5.5 hereof or the production of a
report based on best estimates as contemplated in Section 5.5 hereof, or
otherwise), the portion of the amount overdue shall bear interest at an annual
rate equal to the then current three (3) month U.S. Treasury Rate on the date
that the payment becomes overdue plus 200 basis points, for the period that the
amount is overdue.

                                   ARTICLE VI

                       DURATION, TERMINATION AND RECAPTURE
                       -----------------------------------

        6.1.    DURATION. Except as otherwise provided herein, this Agreement
shall be unlimited in duration.

        6.2.    REINSURER'S LIABILITY. The Reinsurer's liability with respect to
the Reinsured Risks will terminate on the earliest of: (i) the Recapture Date;
(ii) the date the Cedents' liability with respect to the Reinsured Risks is
terminated; and (iii) the date this Agreement is terminated.

        6.3.    RECAPTURE.

        (a)     Provided that both Cedents give notice of recapture, the Cedents
shall have the right, as of any January 1, beginning with January 1, 2008 on
ninety (90) days' prior written notice to the Reinsurer delivered by certified
or registered mail, to recapture the Reinsured Risks in full, but not in part.

                                       21
<PAGE>

        (b)     Upon the Reinsurer's receipt of the Cedents' notice to recapture
the Reinsured Risks as set forth in this Section 6.3, the recapture shall be
binding on all parties. In the event of recapture, the Reinsurer's sole
liability shall be to pay to the Cedents the net payments required under Section
6.4. Recapture by the Cedents, and payment to the Cedents of the net payments
required under this Article VI, if any, shall constitute a complete and final
release of the Reinsurer in respect of any and all known and unknown obligations
or liability of any nature to the Cedents or any other Person under or related
to this Agreement and there shall be no Quarterly Report or Quarterly Settlement
with respect to the quarter in which the Recapture Date falls, other than the
Terminal Accounting and Settlement. Simultaneous with the payment by the
Reinsurer to the Cedents of the net amount due the Cedents under the Terminal
Accounting and Settlement, the Cedents shall instruct the Trustee to distribute
to the Reinsurer the remaining balances of the Reinsurance Trust Accounts and
shall instruct the trustee of the Funds Withheld Trust Accounts to distribute,
or consent to such trustee's distributing, to the Reinsurer the remaining
balances of the Funds Withheld Trust Accounts.

        6.4.    PAYMENTS ON RECAPTURE. (a) In the event that the Reinsured Risks
are to be recaptured pursuant to this Article VI, the Cedents shall supply the
Reinsurer with a net accounting and settlement as to any balance due under this
Agreement with respect to the Reinsured Risks (the "Terminal Accounting and
Settlement") within forty-five (45) days following the Recapture Date;

        (b)     Any net payment required under the Terminal Accounting and
Settlement shall be paid within thirty (30) days after receipt of the Terminal
Accounting and Settlement. Net payments with respect to the Reinsured Risks
required under the Terminal Accounting and Settlement shall consist of the
following:

                                       22
<PAGE>

                (i)     the payment by the Cedents to the Reinsurer of an amount
                        equal to the balance of the Funds Withheld Accounts
                        calculated to the Recapture Date with interest from the
                        Recapture Date to the date of payment equal to the Funds
                        Withheld Interest Rate--Trust applied to the balance of
                        the Funds Withheld Accounts as of the Recapture Date;

                (ii)    the payment by the Cedents to the Reinsurer of an amount
                        equal to the portion of the Reinsurer Allowances as set
                        forth in Section 10.2. for the final Accounting Period;
                        and

                (iii)   the payment by the Reinsurer to the Cedents of an amount
                        equal to (A) less (B), where:

                        A equals the sum of the balance of the Experience
                Accounts in respect of each Cedent (except in the case where
                recapture occurs after January 1, 2011 and the sum of the
                balance of the Experience Accounts in respect of each Cedent is
                greater than the sum of the Total Ceded Reserves at the
                Recapture Date, in which case A equals the sum of the Total
                Ceded Reserves);

                        B equals .50% of the sum of the Total Ceded Reserves as
                of the Recapture Date if the Recapture Date is on or before
                January 1, 2008; otherwise B equals zero.

                        A shall also include interest on the amount in A from
                the Recapture Date to the date of payment at the Funds Withheld
                Interest Rate -- Trust.

                                       23
<PAGE>

                                   ARTICLE VII

                                   INSOLVENCY
                                   ----------

        7.1.    PAYMENTS. In the event of the insolvency of a Cedent, net
payments due the Cedent on all reinsurance made, ceded, renewed or otherwise
becoming effective under this Agreement shall be payable by the Reinsurer
directly to the Cedent or to its liquidator, receiver, or statutory successor on
the basis of the liability of the Cedent under the policy or policies reinsured,
without diminution because of the insolvency of the Cedent. It is agreed and
understood; provided, however, that (i) in the event of the insolvency of a
Cedent, the Cedent or its liquidator, receiver, or statutory successor shall
give the Reinsurer written notice of the pendency of a claim against the
insolvent Cedent on a Reinsured Policy within a reasonable time after such claim
is filed in the insolvency proceeding and (ii) during the pendency of such claim
the Reinsurer may investigate such claim and interpose, at its own expense, in
the proceeding where such claim is to be adjudicated any defenses which it may
deem available to the Cedent or its liquidator, receiver or statutory successor.

        7.2.    EXPENSES. It is further understood that any expense incurred by
the Reinsurer pursuant to Section 7.1 shall be chargeable, subject to court
approval, against the insolvent Cedent as part of the expense of liquidation to
the extent of a proportionate share of the benefit which may accrue to the
Cedent solely as a result of the defense undertaken by the Reinsurer. Where two
or more assuming reinsurers are involved in the same claim and a majority in
interest elect to interpose defenses 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 Cedent.

                                       24
<PAGE>

                                  ARTICLE VIII

                                 FUNDS WITHHELD
                                 --------------

        8.1.    FUNDS WITHHELD ACCOUNT. Subject to the terms of this Agreement,
each Cedent shall retain one hundred percent (100%) of the Initial Reinsurance
Premium on a funds withheld basis. Each Cedent shall establish on its books as a
liability to the Reinsurer a funds withheld account with respect to this
Agreement (each, a "Funds Withheld Account"). Each Cedent shall maintain a Funds
Withheld Account in an amount, determined in accordance with SAP, equal to (i)
the Initial Reinsurance Premium for the Cedent, plus (ii) the cumulative Funds
Withheld Account Investment Income, plus (iii) Net Premiums applicable to such
Cedent, less (iv) amounts applied by the Cedent in payment of amounts due from
the Reinsurer for the Reinsurer's liability under Section 2.3 with respect to
Ultimate Net Loss (adjusted to reflect recoveries, salvages, subrogations or
payments received by the Cedent), less (v) the Initial Ceding Commission due to
the Cedents under the terms of this Agreement, less (vi) the cumulative Expense
Allowances, less (vii) the cumulative Reinsurer Allowances. The balance of the
Funds Withheld Account shall in no event be less than zero.

        8.2.    APPLICATION OF FUNDS WITHHELD.

        In consideration of the Reinsurer agreeing to the funds withheld
arrangement set forth in this Article VIII, each Cedent agrees that, except as
otherwise specifically set forth in this Agreement, such Cedent, its liquidator,
receiver or statutory successor, shall apply the assets in the Cedent's Funds
Withheld Trust Account against the Reinsurer's liability under this Agreement to
the Cedent until the assets in the Funds Withheld Trust Account are exhausted
and (ii) no payments by the Reinsurer to the Cedent hereunder or draws from the
Reinsurer Trust Account shall be made until all amounts in the Funds Withheld
Trust Account have been exhausted.

                                       25
<PAGE>

        8.3.    FUNDS WITHHELD INVESTMENT INCOME.

        (a)     Commencing as of the Effective Date, each Cedent shall credit to
the Reinsurer interest on its Funds Withheld Account in an amount equal to the
sum of (i), (ii) and (iii) (the "Funds Withheld Account Investment Income"),
where:

                (i)     equals 50% of the Funds Withheld Interest Rate--Trust
                        applied to (A) less (B) less (C) ; where (A) equals the
                        Net Premiums collected during the Accounting Period, (B)
                        equals the Ultimate Net Loss paid during the Accounting
                        Period, , and (C) equals the Expense Allowance for the
                        Accounting Period; and

                (ii)    equals the Funds Withheld Interest Rate--Trust applied
                        to the balance of its Funds Withheld Account at the
                        beginning of the Accounting Period less that portion of
                        the Funds Withheld Account withheld from deposit to the
                        Funds Withheld Trust Account, as described in Section
                        8.4; and

                (iii)   equals the Funds Withheld Interest Rate--Retained
                        applied to (A), where (A) equals the balance of its
                        Funds Withheld Account withheld from deposit to the
                        Funds Withheld Trust Account, as described in Section
                        8.4, at the beginning of the Accounting Period.

        (b)     The Funds Withheld Account Investment Income shall be determined
and credited on a quarterly basis.

                                       26
<PAGE>

        (c)     The Reinsurer and each Cedent agree that they may use an
alternative Funds Withheld Account Investment Income calculation as mutually
agreed to, subject to the approval of the Pennsylvania Department of Insurance.

        (d)     The Funds Withheld Account Investment Income for the first
Accounting Period for (i) Penn Treaty will equal the amount determined by the
calculation in Section 8.3(a) above plus an amount equal to $3,400,000
representing approximate interest on the Initial Reinsurance Premium less the
Initial Ceding Commission from the Effective Date to the date hereof and (ii)
for American Network will equal the amount determined by the calculation in
Section 8.3(a) above plus an amount equal to $300,000 representing approximate
interest on the Initial Reinsurance Premium less the Initial Ceding Commission
from the Effective Date to the date hereof, such amounts to be reconciled and
adjusted for actual experience following the initial deposit made to the Funds
Withheld Trust Accounts.

        8.4.    FUNDS WITHHELD TRUST ACCOUNTS. The Cedents shall enter into
trust agreements in the form attached hereto as EXHIBIT A and EXHIBIT B,
respectively (each, a "Funds Withheld Trust Agreement"), for the benefit of the
Reinsurer with a bank acceptable to the Reinsurer and shall deposit, within
three (3) Business Days of the date hereof, assets in trust for the benefit of
the Reinsurer equal to the balance of their respective Funds Withheld Accounts
as of the date hereof (each, a "Funds Withheld Trust Account"). Each Cedent
shall at all times maintain sufficient assets in its Funds Withheld Trust
Account to ensure that the book value of the assets in the Funds Withheld Trust
Account, determined in accordance with SAP, equals or exceeds the balance of its
respective Funds Withheld Account less the carrying value of its Corporate Owned
Life Insurance Policies ("COLI") as of the end of each Accounting Period. The
assets shall consist only of (i) cash (United States legal tender), (ii)
certificates of deposit

                                       27
<PAGE>

(issued by a United States bank and payable in United States legal tender), and
(iii) other admitted assets of a character, maturity, and value to fulfill the
intent of this Agreement, provided that such investment is issued by an
institution that is not the parent, subsidiary or affiliate of either Cedent or
the Reinsurer and provided further that such assets are of the type specified
under 40 P.S. ss. 442.1(b)(1) and (2). The Reinsurer and the Cedents agree that
Penn Treaty may withhold from deposit to its Funds Withheld Trust Account an
amount not to exceed its carrying value under SAP of its COLI. Each Cedent shall
deposit to its respective Funds Withheld Trust Account, immediately upon
receipt, any cash distributions received under the COLI so long as the Funds
Withheld Account balance exceeds the Funds Withheld Trust Account balance.
Furthermore, the Reinsurer shall retain the right, at any time and in its sole
discretion, to require the deposit of an amount equal to all or a portion of the
carrying value of the COLI into the Funds Withheld Trust Account upon thirty
days notice to Penn Treaty and make an equivalent reduction to the carrying
value of the COLI wherever referenced under this Agreement.

        8.5.    TERMINATION OF THE FUNDS WITHHELD TRUST ACCOUNTS.
Notwithstanding any other provision of this Agreement, in the event that either
Cedent materially breaches this Agreement and such material breach remains
uncured thirty (30) calendar days after written notice of such breach is first
provided by the Reinsurer, or if there is a Material Change, the Reinsurer shall
have the right at any time thereafter to require that the Cedents deposit to the
Reinsurer Trust Account an amount equal to the balance of the Funds Withheld
Trust Accounts, which may be accomplished by instructing the trustee of the
Funds Withheld Trust Accounts to distribute, or by consenting to such trustee's
distributing, to the Reinsurer Trust Account, the balances of the Funds Withheld
Trust Accounts. Thereafter, the parties shall

                                       28
<PAGE>

close the Funds Withheld Trust Accounts and terminate the Funds Withheld Trust
Agreements. In the event of subsequent recapture of the Reinsured Risks by the
Cedents following such withdrawal of Funds Withheld Trust Account assets by the
Reinsurer, all transferred funds will included investment income thereon for the
purposes of Terminal Accounting and Settlement in accordance with Article VI and
Article XV.

        8.6.    INVESTMENT MANAGEMENT

        (a)     The Reinsurer and the Cedents agree that the investment
performance and credit monitoring of the assets deposited to the Funds Withheld
Trust Account is an important component of the profitability of the reinsured
business. Accordingly, the Cedents shall enter into an Investment Management
Agreement dated as of July 28, 2005 (the "Investment Management Agreement") with
Perspective (Barbados) Limited, formerly Brascan Strategic Asset Managment
Limited (Barbados) ("BSAML"), pursuant to which BSAML will provide certain
investment management advisory services in connection with the Funds Withheld
Trust Account. The Cedents will use their best efforts to (i) agree with BSAML,
by no later than October 31, 2005, on a performance fee formula for BSAML under
the Investment Management Agreement, and (ii) agree to terms to extend the term
of the Investment Management Agreement beyond its current December 31, 2005
scheduled term.

        (b)     The Cedents shall evaluate and select an investment manager to
manage the assets in the Funds Withheld Trust Accounts that will prudently
manage the investment objectives as mutually determined by the Cedents and the
Reinsurer. In the event that mutually agreed upon investment objectives are not
met, based upon periodic assessment of the total return of the portfolio, the
effective yield of the portfolio, the duration of the portfolio, management
reporting effectiveness, fee structure and peer comparison with other

                                       29
<PAGE>

similar investment management styles, the Reinsurer may require a reevaluation
of, and change in, if deemed appropriate, investment managers, including
consideration of BSAML if not currently engaged at that time.

        (c)     The Cedents shall not engage an investment manager to manage the
assets in the Funds Withheld Trust Accounts without the written consent of the
Reinsurer, which shall not be unreasonably withheld.

                                   ARTICLE IX

                              REINSURANCE SECURITY
                              --------------------

        9.1.    RESERVE CREDIT SECURITY. Within three (3) Business Days of the
date hereof, the Reinsurer shall enter into trust agreements with respect to the
Cedents in the forms attached hereto as EXHIBIT C and EXHIBIT D, respectively
(each, a "Reinsurer Trust Agreement") and establish trust accounts (each, a
"Reinsurer Trust Account") for the sole benefit of each Cedent with respect to
the Reinsured Risks with a qualified United States financial institution as
defined in 40 P.S. ss. 442.1(g)(2) (the "Trustee").

        9.2.    REINSURER TRUST ACCOUNTS. (a) The Reinsurer agrees to maintain
in each Reinsurer Trust Account, assets (the "Reserve Credit Trust Assets") to
be held in trust by the Trustee for the sole benefit of each Cedent as security
for the payment of the Reinsurer's obligations to each Cedent under this
Agreement. The assets shall consist only of (i) cash (United States legal
tender), (ii) certificates of deposit (issued by a United States bank and
payable in United States legal tender), (iii) other admitted assets, provided
that such assets are issued by an institution that is not the parent, subsidiary
or affiliate of either Cedent or the Reinsurer and provided further that such
assets are of the type specified under 40 P.S. ss.442.1 and

                                       30
<PAGE>

(iv) letters of credit meeting the requirements of Section 9.3 (each, an "LOC").
Any LOC will comply with Title 31 PA Code Ch. 163 ss.ss. 163.14-163.17.

        (b)     The value of the assets in each Reinsurer Trust Account (other
than the LOCs) at any time (the "Asset Value") shall be the current fair market
value of such assets as of such valuation date. LOCs in each Reinsurer Trust
Account shall be valued at their face amount as of the valuation date (such
aggregate amount of all LOCs, the "LOC Value"). The "Aggregate Trust Account
Value" as of any date shall be equal to the Asset Value on such date plus the
LOC Value on such date.

        (c)     Prior to depositing assets with the Trustee (other than LOCs),
the Reinsurer shall execute all assignments and endorsements in blank, or
transfer legal title to the Trustee of all shares, obligations or any other
assets requiring assignments, in order that the Cedents, or the Trustee upon
direction of the Cedents, may whenever necessary negotiate any such assets
without consent or signature from the Reinsurer or any other entity.

        (d)     All settlements of account under this Agreement between the
Cedents and the Reinsurer shall be made in cash or its equivalent.

        (e)     The Reinsurer and the Cedents agree that the assets in the
Reinsurer Trust Accounts (including the proceeds of any draw on an LOC) may be
withdrawn by the Cedents at any time, notwithstanding any other provisions in
this Agreement, provided such assets are applied and utilized by the Cedents (or
any successor of the Cedents by operation of law, including, without limitation,
any liquidator, rehabilitator, receiver or conservator of the Cedents), without
diminution because of the insolvency of the Cedents or the Reinsurer, only for
the purposes set forth in the Reinsurer Trust Agreements.

                                       31
<PAGE>

        9.3.    LETTERS OF CREDIT. (a) In connection with the establishment of
the Reinsurer Trust Accounts pursuant to Section 9.2, the Reinsurer may provide
to the Trustee one or more LOCs that comply with the provisions of 40 P.S. ss.
442.1 and Title 31 PA Code Ch. 163 ss.163.15 of the Pennsylvania Insurance
Regulations.

        (b)     The Reinsurer shall be an LOC applicant. Any LOC shall be issued
or confirmed by a qualified United States financial institution authorized to
issue letters of credit pursuant to 40 P.S. ss.442.1(g)(2) provided, that such
qualified United States financial institution shall not be a parent, subsidiary
or affiliate of the Cedents or the Reinsurer.

        (c)     The LOCs provided by the Reinsurer pursuant to the provisions of
this Agreement may be drawn at any time, notwithstanding any other provisions
herein, and shall be utilized by each Cedent or its permitted successors in
interest only for one or more of the following reasons:

                (i)     For the purposes set forth in the Reinsurer Trust
                        Agreements; or

                (ii)    Upon receipt of a notice of non-renewal of the LOC.

        (d)     Each Cedent shall return any amounts drawn on the LOC in excess
of the actual amounts required for the purposes set forth in the Reinsurer Trust
Agreements with interest calculated at a rate equal to the current three (3)
month U.S. Treasury Rate plus 200 basis points applied on a per annum basis
since the date the excess amounts were withdrawn. All of the foregoing shall be
applied without diminution or increase because of insolvency on the part of
either Cedents or the Reinsurer. Failure by either Cedent to return any such
excess amounts within thirty calendar days (30) following such withdrawal shall
constitute a material breach of this Agreement by the Cedents, and remedies
available to the Reinsurer with respect to such breach include, but are not
limited to, those contained in Section 8.5 and Article XV.

                                       32
<PAGE>

        9.4.    ADJUSTMENTS. The Reinsurer shall deposit, within three (3)
Business Days of the date hereof, into the respective Reinsurer Trust Account
assets valued at a fair market value and LOCs valued at their face amount equal
to the excess of Total Ceded Reserves of each Cedent as of the Effective Date
over the balance of the Funds Withheld Account for such Cedent as of the
Effective Date. The Cedents and the Reinsurer agree that thereafter, until the
termination of this Agreement, following the receipt by the Reinsurer of (i) the
statement of all assets in each Reinsurer Trust Account from the Trustee (as
required under each Reinsurer Trust Agreement) and (ii) the Quarterly Report
from the Cedents in the form of Schedule B - Part II (in accordance with Article
V), the assets and/or LOCs in each Reinsurer Trust Account will be adjusted in
the following manner:

        (a)     If the amount of Total Ceded Reserves of each Cedent as set
forth on any Quarterly Report over the balance of the Funds Withheld Account of
each Cedent at the end of each Accounting Period exceeds the Aggregate Trust
Account Value of the applicable Reinsurer Trust Account, then the Reinsurer
shall, within ten (10) calendar days of receiving such report, either (A) secure
delivery of one or more additional LOCs to the Trustee, (B) secure an amendment
increasing the face amount of one or more existing LOCs or (C) contribute
additional (qualifying) assets (other than LOCs) to each Reinsurer Trust Account
such that the Aggregate Trust Account Value of each Reinsurer Trust Account
following such deliveries, increases and/or contributions is at least equal to
the Total Ceded Reserves of each Cedent as set forth on each Quarterly Report
over the balance of the Funds Withheld Account of each Cedent at the end of each
Accounting Period.

        (b)     If the amount of the Total Ceded Reserves of each Cedent as set
forth on each Quarterly Report over the balance of the Funds Withheld Account of
each Cedent at the end

                                       33
<PAGE>

of each Accounting Period is less than the Aggregate Trust Account Value of each
Reinsurer Trust Account (taking into account any distributions out of the Funds
Withheld Trust Account pursuant to Section 8.2), then the Cedents shall, within
thirty (30) days of receiving such report, permit the Reinsurer to withdraw, and
take all actions necessary to effectuate such withdrawal of, an appropriate
amount of trust assets or amend the amount of outstanding LOCs such that the
Aggregate Trust Account Value of each Reinsurer Trust Account following such
deliveries and/or amendments is equal to the Total Ceded Reserves of each Cedent
as set forth on each Quarterly Report over the balance of the Funds Withheld
Account of each Cedent at the end of each Accounting Period. Failure to comply
with the covenants set forth in this Section 9.4(d) shall constitute a material
breach of this Agreement. Remedies available to the Reinsurer for such breach
include, but are not limited to, those contained in Article XV and Section 8.5.

        9.5.    MAXIMUM RESERVE CREDIT TRUST ASSETS. The Cedents acknowledge
that, in the event that the Aggregate Limit of Liability has been exceeded, or
is expected to be exceeded in the future, they will be required to, and agree
to, maintain a deficiency reserve for policyholders under SAP, regardless of the
amount of Reserve Credit Trust Assets provided by the Reinsurer. Therefore, the
Cedents and the Reinsurer agree that the Reserve Credit Trust Assets provided by
the Reinsurer shall not exceed, as calculated at any time during this Agreement,
an amount equal to the Incremental Limit Amount plus the absolute value of
cumulative Reinsurer Allowances.

                                   ARTICLE X

                               EXPERIENCE ACCOUNT
                               ------------------

        10.1.   EXPERIENCE ACCOUNT. (a) The Reinsurer shall establish as of the
Effective Date and maintain on its books a notional experience account with
respect to each

                                       34
<PAGE>

Cedent (each an "Experience Account") until all obligations of the Reinsurer
under this Agreement have been satisfied or discharged in full.

        (b)     The balance of each Experience Account as of the end of each
Accounting Period shall be an amount equal to: (i) the Initial Reinsurance
Premium for the Cedent, plus (ii) the cumulative Funds Withheld Account
Investment Income, plus (iii) Net Premiums applicable to such Cedent, plus (iv)
cumulative additional Reinsurer Allowances applicable to Experience Trigger
Events times 1.045 times the number of calendar days elapsed since individual
payment dates divided by 365, less (v) amounts applied by the Cedent in payment
of amounts due from the Reinsurer for the Reinsurer's liability under Section
2.3 with respect to Ultimate Net Loss (adjusted to reflect recoveries, salvages,
subrogations or payments received by the Cedent), less (vi) the Initial Ceding
Commission due the Cedent under the terms of this Agreement, less (vii) the
cumulative Expense Allowances, less (viii) the cumulative Reinsurer Allowances,
less (ix) with respect to Penn Treaty, the negative balance, if any, in the
Experience Account maintained by the Reinsurer with respect to American Network,
and less (x), with respect to American Network, the negative balance, if any, in
the Experience Account maintained by the Reinsurer with respect to Penn Treaty.
After January 1, 2010, item (iv) in the above calculation shall be zero. The
Experience Accounts may be a negative number. In such event, the balance of the
applicable Experience Account will be carried forward with interest at 1.125%
per Accounting Period applied to the negative balance of such Experience Account
at the beginning of such Accounting Period. The parties hereto agree and
acknowledge that the Experience Account is a notional account and has no bearing
on the statutory financial statements of either Cedent.

                                       35
<PAGE>

        10.2.   REINSURER ALLOWANCES. In the event that an Experience Trigger
Event has not occurred, the Reinsurer Allowance with respect to each Accounting
Period after the Effective Date, shall be an amount equal to the sum of (i) and
(ii), where:

                (i)     equals 0.25% (0.375% effective January 1, 2009 and
                        later) of the sum of the Total Ceded Reserves as of the
                        end of the Accounting Period; and

                (ii)    equals 0.50% of the market value of the Reserve Credit
                        Trust Assets as of the beginning of the Accounting
                        Period (not including any assets in the Reserve Credit
                        Trust resulting from cumulative Reinsurer Allowances, if
                        any, or amounts withdrawn by the Reinsurer from the
                        Funds Withheld Trust Accounts and deposited in the
                        Reserve Credit Trust).

In the event that an Experience Trigger Event has occurred with respect to an
Accounting Period, the Reinsurer Allowance in part (i) above shall be .3125%
(.4375% effective January 1, 2009 and later) of the sum of the Total Ceded
Reserves of the Cedents as of the end of each Accounting Period during which and
after the Experience Trigger Event occurred.

        10.3.   EXPERIENCE TRIGGER EVENT. "Experience Trigger Event" shall mean,
any of the following:

                (i)     The total incurred claims measured at the end of a
                        calendar year with respect to the Cedents, exceed, by
                        more than 5%, the expected incurred claims for that
                        calendar year. The incurred claims are paid claims
                        (including waived premiums) plus increases in claim

                                       36
<PAGE>

reserves. Expected incurred claims are consistent with the calculation of the
expected loss ratio in Section 23.2(d).

                (ii)    The Risk Based Capital Ratio at the end of a calendar
                        year for either Cedent is less than 250%. The Risk Based
                        Capital Ratio is defined as the ratio of Total Adjusted
                        Capital to Authorized Control Level Capital, with both
                        items as stated in the Cedents' NAIC annual statement.

                (iii)   The Standard & Poor's Financial Strength Rating for Penn
                        Treaty falls below B- at any time.

The failure of either Cedent to maintain a Risk Based Capital Ratio of at least
250% at the end of any calendar year or the failure of Penn Treaty to maintain a
Standard & Poor's Financial Strength Rating of B- or higher shall constitute a
material breach of this Agreement by the Cedents. Remedies available to the
Reinsurer for such breach include, but are not limited to, those contained in
Section 8.5.

                                   ARTICLE XI

                         ADMINISTRATION; CLAIMS HANDLING
                         -------------------------------

        11.1.   ADMINISTRATION. Subject to Section 11.2, each Cedent shall
administer the Reinsured Policies and perform all accounting for the Reinsured
Policies.

        11.2.   CLAIMS HANDLING.

        (a)     Except as otherwise provided in this Agreement, the Cedents will
continue to be responsible for the investigation, adjustment, defense and
settlement obligations under the Reinsured Policies, and shall provide all
servicing of the Reinsured Policies in the ordinary course of their business and
in a manner consistent with this Section 11.2.

                                       37
<PAGE>

        (b)     Each Cedent covenants and agrees that its claims administration
practices and procedures shall not materially deviate from and shall
substantially conform to those claims administration practices and procedures
adopted by the Cedents (as may be modified to reflect changes required by the
Reinsurer pursuant to Section 11.2(c)), and approved by the Reinsurer ("Claims
Guidelines").

        (c)     Each Cedent agrees that the claims guidelines adopted by the
Cedents prior to the Effective Date may be audited by the Reinsurer at the
Reinsurer's cost and expense within twelve (12) months of the Effective Date.
The Reinsurer may require lawful and reasonable changes to such claims
guidelines within such twelve (12) month period, which, if practicable and
financially prudent, shall be promptly implemented and adopted by the Cedents.

        (d)     Each Cedent shall maintain, at a minimum, no lesser level of
performance in claims handling than was in place during the three (3) months
prior to the Effective Date.

        (e)     Each Cedent further covenants and agrees to use best efforts to
provide prompt, accurate and quality claims administration services in
accordance with its obligations under this Agreement generally, and more
specifically, the Claims Guidelines. Each Cedent shall commit and devote
sufficient time and effort, and shall utilize and allocate sufficient, competent
management, personnel and other resources as may be necessary or advisable to
perform its obligations under this Agreement.

        (f)     Failure to comply with the covenants set forth in this Section
11.2 shall constitute a material breach of this Agreement. Remedies available to
the Reinsurer for such breach include, but are not limited to, those contained
in Article XV, Section 8.5, and Sections 11.2 (h), (i) and (k).

                                       38
<PAGE>

        (g)     The Reinsurer or its designee shall have the right at its cost
and expense to audit and inspect the Cedents' claims administration practices
and procedures from time to time as the Reinsurer may in its sole discretion
deem desirable in accordance with Article XXI.

        (h)     The Reinsurer shall have the right to: (i) take control of
claims administration and/or (ii) replace either or both of the Cedents as
claims administrator with a substitute claims administrator designated by the
Reinsurer, which substitute claims administrator shall be duly licensed to
administrate claims in each of the Cedents' licensed jurisdictions, and may be
the Reinsurer or any of its Affiliates as may be allowed by individual state
regulation, and/or (iii) institute an oversight process of the Cedents as claims
administrator, upon the occurrence of any of the following:

                (A)     either Cedent's NAIC Risk-Based Capital Level falls to
                        or below the Company Action Level and is not corrected
                        within 30 days, or immediately if the NAIC Risk-Based
                        Capital Level falls to or below the Regulatory Action
                        Level;

                (B)     either Cedent materially breaches any covenant set forth
                        in this Section 11.2;

                (C)     if for whatever reason, either Cedent does not commence
                        fulfillment of its duties and obligations provided in
                        this Section 11.1 or once having commenced such duties
                        and obligations, engages in neglect of its duties and
                        obligations hereunder, or fails or refuses to carry out
                        such duties and obligations hereunder, and such neglect,
                        failure or refusal is reasonably likely to have a
                        material adverse effect on the Reinsurer;

                                       39
<PAGE>

                (D)     either Cedent or PTAC experiences any material change,
                        direct or indirect, in its capital stock participation
                        or control, or any material change in its management,
                        directors, officers or key personnel, or if either
                        Cedent or PTAC or any part of its business is sold,
                        transferred or merged, and the Reinsurer reasonably
                        determines that such material change has or is likely to
                        have a materially adverse impact on the Reinsurer's
                        interests;

                (E)     either Cedent has taken any action or failed to comply
                        with any applicable law or regulation, the ultimate
                        result of which the Cedent knew or should have known
                        would cause any governmental or regulatory agency or
                        authority to revoke or suspend the authority of such
                        Cedent or place such Cedent under any supervision or
                        cease and desist order, and the Reinsurer reasonably
                        determines in its sole discretion that such action,
                        noncompliance, supervision or cease and desist order has
                        had, or is reasonably likely to have, a materially
                        adverse impact on the Reinsurer's interests; or

                (F)     any Cedent's directors, officers, principals or key
                        personnel are indicted for a crime involving financial
                        dishonesty or fraud related to the Cedent's business.

Each of the events described in Sections 11.2(h)(iii)(A) through (F) shall be
referred to as a "Claims Control Event." The ability for the Reinsurer to take
control of claims handling and/or replace the Cedents in this capacity is a
fundamental, bargained-for right under this Agreement.

                                       40
<PAGE>

Nothing elsewhere in this Agreement shall conflict with or otherwise limit the
Reinsurer's right to control claims administration pursuant to this Section
11.2(h).

        (i)     In the event of a Claims Control Event, and if the Reinsurer
elects its remedy to take control of claims administration, an automatic
adjustment shall be made to the Expense Allowance provided under Article IV of
this Agreement such that the Reinsurer shall no longer be obligated to pay that
part of the Expense Allowance set forth in Section 4.1(a)(iv). Each Cedent shall
jointly and severally be obligated to reimburse the Reinsurer for that amount of
expense reasonably incurred in taking control of and handling claims that exceed
the sum that would otherwise be payable to the Cedents pursuant to Section
4.1(a)(iv). Furthermore, in order to indemnify and hold the Reinsurer harmless
from such deviation, the Reinsurer's liability under this Agreement shall be
adjusted such that this Agreement will cover Ultimate Net Loss arising from such
Reinsured Policies, determined as if such deviation did not occur and such level
of performance had been maintained.

        (j)     The remedies available to the Reinsurer in the event of a Claims
Control Event include all such remedies as are available under this Agreement
and any remedies available under law or equity.

        (k)     The Cedents shall cooperate fully with the Reinsurer in all
reasonable respects in furtherance of the covenants and commitments outlined in
this Section 11.2. To the extent permitted by law, each Cedent agrees that it
will, from time to time, execute, acknowledge and deliver, or cause to be
executed, acknowledged and delivered, such supplements hereto and such further
agreements, certificates, requests, orders, UCC financing statements, powers of
attorney, instruments or other documents as the Reinsurer may reasonably request
and as may be required in the Reinsurer's reasonable judgment to effectuate the
intention of or facilitate the

                                       41
<PAGE>

performance of this Agreement. The Parties acknowledge that a breach or
threatened breach of the covenants, terms and conditions contained in this
Agreement would cause irreparable harm to the Reinsurer and that money damages
would not provide an adequate remedy therefor. As such, the Reinsurer shall be
entitled to seek and obtain injunctive relief, without the posting of any bond
or security, and any other equitable remedies, in addition to any other remedies
available by law to enforce any of the foregoing obligations of the Cedents and
all Reinsurer's remedies with respect thereto.

                                   ARTICLE XII

                        REINSURER'S RIGHT OF ASSOCIATION
                        --------------------------------

        As a condition precedent to the payment by the Reinsurer of any Ultimate
Net Loss arising under this Agreement:

        (a)     at any time, and from time to time, at the Reinsurer's own
expense, the Reinsurer may investigate any claim or claims arising under any
Reinsured Policy and may interpose the Reinsurer in any claim adjudication, suit
or proceeding, including but not limited to any proceeding where the claim is to
be adjudicated, and may pursue any defenses that the Reinsurer may deem
available to the Cedents or their respective statutory receiver, conservator,
liquidator, rehabilitator (or the like) or to the Reinsurer; and

        (b)     the Cedents or their respective statutory receiver, conservator,
liquidator, rehabilitator (or the like), will afford the Reinsurer the
opportunity to be associated with the Cedents in the manner set forth in the
immediately preceding paragraph (a), at the Reinsurer's own expense, and shall
cooperate with the Reinsurer in all respects in the investigation and defense of
such claim or claims.

                                       42
<PAGE>

                                  ARTICLE XIII

                                LOSS SETTLEMENTS
                                ----------------

        13.1.   LOSS SETTLEMENTS.

        (a)     Subject to the limitations and conditions in this Agreement,
including but not limited to Articles II, XIV and XXIII:

                (i)     the liability of the Reinsurer shall follow that of the
                        Cedents;

                (ii)    any settlement made by or on behalf of the Cedents of
                        any claim or loss which is alleged to arise under the
                        Reinsured Policies shall be binding upon the Reinsurer,
                        whether under the strict policy conditions (including,
                        but not limited to, the general and specific
                        stipulations, clauses, waivers, extensions,
                        modifications and endorsements of any of the Reinsured
                        Policies), or by way of compromise in the ordinary
                        course (excluding, EX GRATIA payments).

        (b)     For the avoidance of any doubt, nothing in this Article XIII
shall obligate the Reinsurer to indemnify the Cedents for any Extra Contractual
Obligation or Excess Limits Liability.

        (c)     The Cedents shall notify and advise the Reinsurer promptly of
all Losses which, in either Cedent's opinion, may result in a claim hereunder
and of all subsequent developments thereto which, in either Cedent's opinion,
may materially affect the position of either Cedent or the Reinsurer. The
Reinsurer shall have the right of association as set forth in Article XII.

                                       43
<PAGE>

                                  ARTICLE XIV

                                CEDED REINSURANCE
                                -----------------

        14.1.   CEDED REINSURANCE AGREEMENTS.

        (a)     As of the Effective Date, the Cedents have in force, with
respect to the Reinsured Policies, reinsurance coverage under the Ceded
Reinsurance Agreements.

        (b)     The Cedents shall not procure, place or cede any additional
reinsurance with respect to the Reinsured Policies without specific prior
written consent of the Reinsurer.

        (c)     With respect to any additional reinsurance that is procured,
placed or ceded after the Effective Date with respect to the Reinsured Policies
with the consent of the Reinsurer (collectively the "Other Ceded Reinsurance"),
the Cedents agree as follows:

                (i)     The Cedents shall maintain such Other Ceded Reinsurance,
                        and shall not recapture policies, commute, terminate or
                        otherwise, to the extent within the Cedents' control,
                        permit same to expire or lapse without the express prior
                        written consent of the Reinsurer (which consent shall be
                        granted or denied in the Reinsurer's reasonable
                        discretion), and shall comply in all respects with such
                        agreements to ensure that they remain in full force and
                        effect;

                (ii)    Such Other Ceded Reinsurance shall inure to the
                        Reinsurer's benefit and shall reduce the Reinsurer's
                        obligations under this Agreement, whether or not such
                        Other Ceded Reinsurance is collectible; and

                (iii)   Any such Other Ceded Reinsurance shall comply with
                        applicable laws and regulations, including all
                        regulatory approval requirements.

                                       44
<PAGE>

                                   ARTICLE XV

                            CANCELLATION; COMMUTATION
                            -------------------------

        15.1.   CANCELLATION.

        If any Net Premium or any other amounts due to the Reinsurer (including,
but not limited to, Funds Withheld Account Investment Income, and amounts
corresponding to the decreases in the Funds Withheld Account) remain unpaid, or
have not been deposited to the Funds Withheld Trust Accounts as may otherwise be
required, fifteen (15) calendar days after notice of non-payment or non-deposit
is first provided by the Reinsurer, then the Reinsurer, at its sole option, may
cancel this Agreement by providing the Cedents written notice of such
cancellation ("Notice of Cancellation"). For the purposes of this Agreement, the
cancellation date (the "Cancellation Date") shall be the date that the overdue
amounts were originally due. Upon the delivery of such Notice of Cancellation by
the Reinsurer, the Reinsured Risks shall automatically be recaptured on the
Cancellation Date. A Terminal Accounting and Settlement will be made in
accordance with Article VI, including the settlement for any Reinsurer's
Allowance for the Accounting Period in which the Cancellation Date occurs.
Recapture of this Agreement in accordance with Section 15.1, and completion of
the Terminal Accounting and Settlement, shall constitute a complete and final
settlement and release of the Reinsurer in respect of any and all known and
unknown obligations or liability of any nature to the Cedents under or related
to this Agreement. Simultaneous with the payment by the Reinsurer to the Cedents
of the net amount due the Cedents under the Terminal Accounting and Settlement,
the Cedents shall instruct the Trustee to distribute to the Reinsurer the
remaining balances of the Reinsurance Trust Accounts and shall instruct the
trustee of the Funds Withheld Trust Accounts to distribute, or consent to such
trustee's distributing, to the Reinsurer the remaining balances of the Funds
Withheld Trust Accounts.

                                       45
<PAGE>

        15.2.   COMMUTATION.

        (a)     If (i) either Cedent materially breaches this Agreement, its
respective Reinsurer Trust Agreement, or its respective Funds Withheld Trust
Agreement, and such material breach remains uncured thirty (30) calendar days
after written notice of such breach is first provided by the Reinsurer, or (ii)
any of the Cedents' representations and warranties contained herein are not
true, correct and complete as of the date of this Agreement in all material
respects and such failure to be true, correct and complete may cause or present
current or future material harm to the Reinsurer, or (iii) if there has been a
Material Change, then the Reinsurer, at its sole option, may deliver a written
notice of a proposed commutation of this Agreement to the Cedents ("Notice of
Proposed Commutation"). Upon the delivery of such Notice of Proposed
Commutation, the Cedents, at their sole discretion, may elect within 60 calendar
days from the date of such Notice of Proposed Commutation, to commute this
Agreement as of the date of delivery of such Notice of Proposed Commutation, and
such date shall be the related Recapture Date. If the Notice of Proposed
Commutation is dated prior to January 1, 2008, the Cedents agree upon their
election to commute to pay to the Reinsurer any Reinsurer Allowances between the
date of the Notice of Proposed Commutation and January 1, 2008 based on the sum
of the Total Ceded Reserves at the date of such Notice of Proposed Commutation.
If the Cedents do not elect to commute within 60 calendar days from the Notice
of Proposed Commutation, the Cedents agree to forgo any future right to commute
this Agreement.

        (b)     Commutation of this Agreement in accordance with Section 15.2,
and completion of the Terminal Accounting and Settlement, shall constitute a
complete and final

                                       46
<PAGE>

settlement and release of the Reinsurer in respect of any and all known and
unknown obligations or liability of any nature to the Cedents under or related
to this Agreement.

        (c)     Simultaneous with the payment by the Reinsurer to the Cedents of
the net amount due the Cedents under the Terminal Accounting and Settlement, the
Cedents shall instruct the Trustee to distribute to the Reinsurer the remaining
balances of the Reinsurance Trust Accounts and shall instruct the trustee of the
Funds Withheld Trust Accounts to distribute, or consent to such trustee's
distributing, to the Reinsurer the remaining balances of the Funds Withheld
Trust Accounts.

        15.3.   MATERIAL CHANGE. For purposes of this Agreement, a "Material
Change" shall be defined as follows:

                (i)     any change in the law, whether arising from legislation,
                        decisions of the courts or otherwise, after the
                        Effective Date, which would constitute or result, in the
                        opinion of the Reinsurer, in a material change in the
                        risk exposure of the Reinsurer ("Material Adverse
                        Effect"); or

                (ii)    a material change in the business operations of the
                        Cedents or in the interests of the Cedents with respect
                        to the Reinsured Policies that has or could reasonably
                        be expected to have a Material Adverse Effect; or

                (iii)   any change in the financial position of the Cedents
                        (including without limitation as a result of or in
                        contemplation of any financial restructuring undertaken
                        or proposed to be undertaken by

                                       47
<PAGE>

                        the Cedents) that has or could reasonably be expected to
                        have a Material Adverse Effect.

The Cedents agree to notify the Reinsurer immediately and in writing in the
event of the Cedents becoming aware of the occurrence of a Material Change. In
the event of a Material Change, the parties agree to review the terms of this
Agreement. If the parties cannot reach agreement on amended terms within 90 days
of the Material Change, remedies available to the Reinsurer include, but are not
limited to, those contained in Section 8.5 and Section 15.2. Additionally, the
Cedents must not exercise any of their rights under this Agreement where the
exercise of such rights would constitute or result in a Material Change without
the prior written consent of the Reinsurer, such consent not to be unreasonably
withheld or delayed. Should the Cedents fail to timely report such a Material
Change, remedies available to the Reinsurer include, but are not limited to,
those contained in Section 8.5 and Section 15.2.

        15.4.   MISREPRESENTATION. In the case any of the Cedents'
representations and warranties contained herein are not true, correct and
complete as of the date of this Agreement in all material respects and such
failure to be true, correct and complete may cause or present current or future
material harm to the Reinsurer, the remedies available to the Reinsurer include
all such remedies as are available under this Agreement, including those in
Section 8.5 and 15.2.

                                  ARTICLE XVI

                               GENERAL PROVISIONS
                               ------------------

        16.1.   MISUNDERSTANDINGS AND OVERSIGHTS. If any delay, omission, error
or failure to pay amounts due or to perform any other act required by this
Agreement is unintentional and caused by misunderstanding or oversight, the
Cedent(s) and the Reinsurer will adjust the situation to what it would have been
had the misunderstanding or oversight not occurred. The

                                       48
<PAGE>

party first discovering such misunderstanding or oversight or an act resulting
from such misunderstanding or oversight, will notify the other party in writing
promptly upon discovery thereof, and the parties shall act to correct such
misunderstanding or oversight within twenty (20) Business Days of such other
party's receipt of such notice. However, this Section shall not be construed as
a waiver by either party of its right to enforce strictly the terms of this
Agreement and shall in no way or under any circumstances limit any right or
remedy the Reinsurer may have under this Agreement or in law or equity. All
payments due with respect to such corrective action shall bear interest at the
three (3) month U.S. Treasury Rate then in effect plus 200 basis points from the
date when such amounts would have been paid absent such misunderstanding or
oversight to the date of actual payment.

        16.2.   AGE, SEX AND OTHER ADJUSTMENTS. If the Cedents' liability under
any of the Reinsured Policies is changed because of a misstatement of age or sex
or any other material fact, the Reinsurer will share in the change
proportionately to the amount reinsured hereunder and the Cedent(s) and the
Reinsurer will make all appropriate adjustments to amounts due each other under
this Agreement.

        16.3.   SETOFF. Any debts or credits, matured or unmatured, liquidated
or unliquidated, regardless of when they arose or were incurred, in favor of or
against either the Cedent or the Reinsurer with respect to this Agreement are
deemed mutual debts or credits, as the case may be, and shall be set off, and
only the net balance shall be allowed or paid. This provision shall not be
affected by the insolvency of any party to this Agreement.

        16.4.   COMMON UNDERSTANDING. The Cedents and the Reinsurer hereby
acknowledge and agree that this Agreement has been negotiated and entered into
in good faith and at arms length. The Cedents and the Reinsurer hereby
acknowledge and agree that the terms

                                       49
<PAGE>

and conditions of this Agreement are fair and reasonable. Further, the Cedents
and the Reinsurer acknowledge that this Agreement reflects the complete
agreement between the parties with regard to the reinsurance of the Reinsured
Policies.

        16.5.   UTMOST GOOD FAITH. The performance of obligations by each of the
Cedents on the one hand, and the Reinsurer on the other hand, arising under or
related to this Agreement shall be in accordance with utmost good faith and fair
dealing.

                                  ARTICLE XVII

                              ADDITIONAL COVENANTS,
                              ---------------------
         REPRESENTATIONS AND WARRANTIES OF THE CEDENTS AND THE REINSURER
         ---------------------------------------------------------------

        17.1.   ADDITIONAL COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE
CEDENTS.

        (a)     Without in any way limiting the application of Section 16.5, the
Cedents further jointly and severally represent and warrant as follows:

                (i)     All of the policy forms and riders issued as the
                        Reinsured Policies are in material compliance with all
                        applicable regulations and laws;

                (ii)    Each of the Reinsured Policies were written on a policy
                        form that currently complies with regulatory
                        requirements in the state of issue;

                (iii)   The Cedents have provided or made available to the
                        Reinsurer a true and complete listing prior to the
                        Effective Date of all market conduct and financial
                        examinations conducted within the last five (5) years by
                        any regulatory authority having jurisdiction over each
                        Cedent, and copies of all reports thereon. No material
                        limitation or restriction has been imposed upon either
                        Cedent's operations

                                       50
<PAGE>

                        arising out of or related to any policy administration
                        or claims handling practices;

                (iv)    Other than as disclosed in PTAC's filings with the
                        Securities and Exchange Commission, neither Cedent is
                        currently subject to any regulatory action, order or
                        proceeding, other than as disclosed to the Reinsurer
                        prior to the date of this Agreement in Schedule E, and
                        its senior management, officers and directors are not
                        aware of any threatened regulatory action, order or
                        other action that prohibits the Cedents from performing
                        their respective duties and obligations under this
                        Agreement;

                (v)     This Agreement has been duly authorized, executed and
                        delivered by the Cedents and constitutes the legal,
                        valid and binding obligation of the Cedents, enforceable
                        in all respects in accordance with its terms;

                (vi)    There are no actions, suits or proceedings by or before
                        any arbitrator or governmental authority pending against
                        or, to the knowledge of the Cedents, threatened against
                        or affecting the Cedents, other than as disclosed to the
                        Reinsurer prior to the date of this Agreement in
                        Schedule E, that involve this Agreement or the Reinsured
                        Policies;

                (vii)   The Cedents have provided the Reinsurer with written
                        evidence of the approval of the Pennsylvania Insurance
                        Department of (A) the commutation of the prior
                        reinsurance agreement with Centre

                                       51
<PAGE>

                        Solutions (Bermuda) Limited and (B) the terms and
                        conditions of this Agreement and the transactions hereby
                        contemplated. The Cedents acknowledge that this is a
                        condition precedent for the execution and effectiveness
                        of this Agreement by the Reinsurer;

                (viii)  Where required, the Cedents have initiated or will
                        initiate the filing and have sought or will seek
                        approval of this Agreement by the regulators in each of
                        the states that have jurisdiction over the Cedents, the
                        Agreement and the matters contemplated hereby, and are
                        in the process of seeking all required approvals and
                        authorizations in connection therewith from such
                        regulators. The Cedents represent and warrant that
                        Schedule F sets forth a true, correct and complete list
                        of all such required approvals and authorizations. The
                        Cedents covenant that they will continue to diligently
                        pursue these approvals and authorizations until the
                        approval or authorization process is completed in the
                        states that require it.

        (b)     Each Cedent covenants and agrees that neither Cedent, nor its
Affiliates, successors agents or assigns, will initiate or engage in a Program
of Internal Replacement, other than as disclosed to the Reinsurer prior to the
date of this Agreement in Schedule E, that includes any of the Reinsured
Policies reinsured hereunder, unless and until such Cedent obtains the
Reinsurer's prior written consent to initiate or engage in a Program of Internal
Replacement. The Reinsurer, in its sole discretion, may determine whether the
Cedents may initiate or engage in a Program of Internal Replacement. For
purposes of this Agreement, the term "Program of

                                       52
<PAGE>

Internal Replacement" means any effort by or on behalf of a Cedent, its
Affiliates, successors or assigns generally to solicit replacements of the
Reinsured Policies by which a Reinsured Policy or any portion of the cash value
of a Reinsured Policy is exchanged for another policy or contract that is not
reinsured under this Agreement; provided, HOWEVER, that providing unsolicited
replacements at the request of a Reinsured Policy owner shall not be considered
a Program of Internal Replacement.

        (c)     The Cedents acknowledge that, at the Reinsurer's request, each
has provided the Reinsurer, either directly to the Reinsurer or through the
Cedents' intermediaries, with company data described in Schedule E (the "Cedents
Data") prior to the execution of this Agreement by the Reinsurer. The Cedents
represent that all factual information contained in the Cedents Data, whether
written or oral, is complete and accurate in all material respects as of the
date the document containing the information was prepared and does not contain
any untrue statement of material fact or omit to state a material fact necessary
to make statements contained therein not misleading. The Cedents further
represent that any assumptions made in preparing the Cedents Data were based
upon informed judgment and are consistent with sound actuarial principles. The
Cedents further represent that they are not aware of any omissions, errors,
changes or discrepancies which would materially affect the Cedents Data.
Regardless of the Cedents' actual or implied knowledge or lack thereof, the
Cedents further represent and warrant that there has been no fraud, material
misrepresentation or material omission or inaccurate information supplied by the
Cedents, its principals, intermediaries, employees, agents or policyholders in
connection with this Agreement. The Cedents acknowledge that the Reinsurer has
relied on such Cedents Data and the foregoing representations in entering into
this Agreement.

                                       53
<PAGE>

        (d)     The Cedents hereby jointly and severally represent and warrant
to the Reinsurer that all rate increases required under the previous reinsurance
treaty referenced on Schedule A hereto covering the Reinsured Policies have been
applied for and obtained or are in the ongoing process of resolution as
indicated in Schedule E.

        (e)     The Cedents hereby jointly and severally represent and warrant
to the Reinsurer that:

                (i)     The Cedents have performed their own financial analysis
                        of this Agreement, including with respect to the
                        transferred risk and the underlying economic impact, and
                        that they have sought or are seeking their own
                        independent accounting, legal and tax advice for this
                        Agreement. Irrespective of any conversations between the
                        parties, the Cedents are not relying on the Reinsurer in
                        any respect for financial analysis or accounting, legal
                        or tax advice in connection with the transaction.

                (ii)    The Cedents (i) have fully disclosed, or hereby agree to
                        fully disclose this Agreement to their internal
                        accountants and independent auditors prior to the
                        earlier of September 30, 2005 and the completion of the
                        current audit cycle, and (ii) where appropriate in the
                        reasonable opinion of the Cedents, have made or shall
                        make appropriate disclosure to, or consult with, their
                        legal counsel and any relevant regulatory and tax
                        authorities.

                (iii)   The Cedents will account for this Agreement in
                        accordance with applicable accounting principles and
                        standards, consistently

                                       54
<PAGE>

                                    applied. The Cedents are not entering this
                                    Agreement for the purpose of altering their
                                    financial accounting statements in a manner
                                    that would be misleading to users of their
                                    financial accounting statements.

        17.2.   ADDITIONAL COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE
REINSURER.

        (a)     The Reinsurer represents and warrants as follows:

                (i)     The Reinsurer is not currently subject to any regulatory
                        action, order or proceeding, and its senior management,
                        officers and directors are not aware of any threatened
                        regulatory action or order or other action that
                        prohibits the Reinsurer from performing its duties and
                        obligations under this Agreement;

                (ii)    The Reinsurer is financially capable, as of the date
                        hereof, of performing its duties as described in this
                        Agreement;

                (iii)   This Agreement has been duly authorized, executed and
                        delivered by the Reinsurer and constitutes the legal,
                        valid and binding obligation of the Reinsurer,
                        enforceable in all respects in accordance with its
                        terms;

                (iv)    There are no actions, suits or proceedings by or before
                        any arbitrator or governmental authority pending against
                        or, to the knowledge of the Reinsurer, threatened
                        against or affecting the Reinsurer, that involve this
                        Agreement;

                                       55
<PAGE>

                (v)     As of the date of this Agreement, Fitch Ratings Inc. has
                        assigned an Insurer Financial Strength Rating of A to
                        the Reinsurer, which is the only published rating for
                        the Reinsurer; and

                (vi)    The Reinsurer has performed its own financial analysis
                        of this Agreement, including with respect to the
                        transferred risk and the underlying economic impact, and
                        it has sought or is seeking its own independent
                        accounting, legal and tax advice for this Agreement.
                        Irrespective of any conversations between the parties,
                        the Reinsurer is not relying on the Cedents in any
                        respect for financial analysis or accounting, legal or
                        tax advice in connection with the transaction.

        (b)     The Reinsurer covenants and agrees as follows:

        (i)     Upon the written request of the Cedents from time to time during
                the term of this Agreement, the Reinsurer will provide written
                advice of any notice of any regulatory action, order,
                proceeding, or planned or threatened regulatory intervention or
                oversight by any regulatory agency having jurisdiction over the
                Reinsurer in connection with its financial condition or market
                conduct, including, but not limited to, any notice of
                impairment, corrective order, risk based capital deficiency or
                event, or other similar threatened regulatory action.

                                       56
<PAGE>

                                  ARTICLE XVIII

                                 INDEMNIFICATION
                                 ---------------

        18.1    INDEMNIFICATION. The Cedents, jointly and severally, and the
Reinsurer agree to indemnify and hold harmless the other party, its Affiliates,
and its and their subsidiaries, agents, sub-agents, brokers and representatives,
as well as their respective employees, officers, and directors from and against
any and all loss, cost and expense (including reasonable attorneys' fees), as
such loss, cost or expense is incurred resulting from each and every material
breach of the covenants, representations, warranties and obligations made by the
Cedents or the Reinsurer in this Agreement.

                                   ARTICLE XIX

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

        19.1.   SALVAGE AND SUBROGATION. The Cedents jointly and severally agree
to pay to or credit the Reinsurer with any recovery connected with an Ultimate
Net Loss which is obtained from salvage, subrogation, or other insurance or any
other recovery, after charging the Reinsurer with the expenses directly incurred
by the Cedents in obtaining any such recovery. Any such recoveries received
subsequent to any loss or claim settlement hereunder shall be applied as if
received prior to the aforesaid loss or claim settlement and all necessary
adjustments in such regard shall be made accordingly.

                                   ARTICLE XX

                                   ARBITRATION
                                   -----------

        20.1.   RESOLUTION OF DAMAGES. Any dispute between any Cedent and the
Reinsurer arising out of the provisions of this Agreement, or concerning its
interpretation or validity, whether arising before or after termination of this
Agreement, shall be submitted to

                                       57
<PAGE>

arbitration in the manner set forth in this Article XX. Each party may initiate
arbitration of any such dispute by giving written notice to other parties by
registered mail or a recognized overnight courier of its intention to arbitrate
and of its appointment of an arbitrator in accordance with Section 20.3 (each, a
"Notice of Intention to Arbitrate").

        20.2.   COMPOSITION OF PANEL. Unless the parties agree upon a single
arbitrator within fifteen (15) days after the receipt of a Notice of Intention
to Arbitrate, all disputes shall be submitted to an arbitration panel composed
of two arbitrators and an umpire, chosen in accordance with Sections 20.3 and
20.4.

        20.3.   APPOINTMENT OF ARBITRATORS. The party requesting arbitration
(hereinafter referred to as the "Claimant") shall appoint an arbitrator and give
written notice thereof, by registered mail or a recognized overnight courier to
the other party (hereinafter referred to as the "Respondent") together with its
Notice of Intention to Arbitrate. Unless a single arbitrator is agreed upon
within fifteen (15) days after the receipt of the Notice of Intention to
Arbitrate, the respondent shall, within thirty (30) days after receiving such
notice, also appoint an arbitrator and notify the Claimant thereof in a like
manner. Before instituting a hearing, the two arbitrators so appointed shall
choose an impartial umpire. If, within thirty (30) days after they are both
appointed, the arbitrators fail to agree upon the appointment of an umpire, the
umpire shall be appointed by the Chairman of the International Association for
Insurance Law ("AIOA") and the Reinsurance and Insurance Arbitration Society
("ARIAS-US"). The umpire shall be an arbitrator certified by ARIAS-U.S. The
arbitrators shall be present or former executives or officers of insurance or
reinsurance companies with experience in the reinsurance of life and accident &
health insurance policies or arbitrators certified by ARIAS-US. The arbitrators
and umpire shall be disinterested individuals and not be under the control of
either party, and shall

                                       58
<PAGE>

have no financial interest in the outcome of the arbitration other than fees
that they be entitled to in their arbitration capacity.

        20.4.   FAILURE OF A PARTY TO APPOINT ARBITRATOR. If a Respondent fails
to appoint an arbitrator within thirty (30) days after receiving a Notice of
Intention to Arbitrate, such arbitrator shall be appointed by the Chairman of
ARIAS-US, and shall then, together with the arbitrator appointed by the
claimant, choose an umpire as provided in Section 20.3.

        20.5.   CHOICE OF FORUM. Any arbitration instituted pursuant to this
Article XX shall be held in Allentown, Pennsylvania or such other place as the
parties may mutually agree.

        20.6.   SUBMISSION OF DISPUTE TO PANEL. Unless otherwise extended by the
arbitration panel, or agreed to by the parties, the claimant shall submit its
brief to the panel within forty-five (45) days after the selection of an umpire.
The respondent shall submit its brief within forty-five (45) days thereafter.
The claimant may submit a reply brief within thirty (30) days after the filing
of the respondent's brief. Notwithstanding anything herein to the contrary, the
time period for submission of the case to the panel may be extended or modified
by mutual consent of the parties or by order of the panel.

        20.7.   PROCEDURE GOVERNING ARBITRATION. All proceedings before the
panel shall be informal and the panel shall not be bound by the formal rules of
evidence. The panel shall have the power to fix all procedural rules relating to
the arbitration proceeding. In reaching any decision, the panel shall give due
consideration to the custom and usage of the insurance and reinsurance business,
with a view to effecting the general purpose of this Agreement.

        20.8.   ARBITRATION AWARD. The arbitration panel shall render its
decision within sixty (60) days after termination of the proceeding unless the
parties consent to an extension, which decision shall be in writing, stating the
reasons therefor. The decision of the majority of

                                       59
<PAGE>

the panel shall be final and binding on the parties to the proceeding except to
the extent otherwise provided in the Federal Arbitration Act. Judgment upon the
award may be entered in any court having jurisdiction pursuant to the Federal
Arbitration Act.

        20.9.   COST OF ARBITRATION. Unless otherwise allocated by the panel,
each party shall bear the expense of its own arbitrator and its own witnesses
and shall equally bear with the other parties the expense of the umpire and the
arbitration.

        20.10.  LIMIT OF AUTHORITY. It is agreed that the arbitrators shall have
no authority to authorize any punitive, exemplary or consequential damage awards
between the parties hereto.

        20.11.  SURVIVAL. This Article XX shall survive the termination of this
Agreement.

                                   ARTICLE XXI

                           AUDIT AND ACCESS TO RECORDS
                           ---------------------------

        21.1.   AUDIT AND ACCESS TO RECORDS.

        (a)     Upon five (5) Business Days advance written notice, the
Reinsurer and its duly appointed representatives, may, at the offices of the
Cedents or such other reasonable and appropriate location or locations to be
designated by agreement of the Cedents and Reinsurer, audit any and all books,
records, systems, statements, correspondence, reports and other documentation
that relate to the Reinsured Policies, this Agreement or the subject matter
hereof. The Cedents shall provide reasonable access to all appropriate senior
personnel and workspace during normal business hours for such audit and shall
cooperate with and disclose and produce any and all documentation reasonably
requested by the auditors. The Reinsurer shall keep all information disclosed or
produced for audit, including all audit reports and analyses, confidential.

                                       60
<PAGE>

        (b)     The Reinsurer's right to audit, as specified in Section 21.1(a)
above, shall continue during the term of this Agreement..

                                  ARTICLE XXII

                                 REGULATORY RISK
                                 ---------------

        22.1.   REGULATORY RISK. The Cedents jointly and severally represent and
warrant that:

        (a)     At the Effective Date, each of their long-term care policy forms
is a guaranteed renewable accident and health policy form, and as such are
eligible for actuarially supported premium rate increases (which may arise,
among other reasons, from adverse deviation in actual claims experience or from
changes in future expected claims experience) under statutory practices and
procedures in all jurisdictions in which the Cedents are licensed to conduct
business; and

        (b)     The Cedents have been successful in obtaining premium rate
increases historically, and have not been subjected to significant risk arising
from (i) regulatory action that is inconsistent with established statutory
practices and procedures or (ii) insurance legislation that has prevented their
ability to obtain all or the majority of their requested premium rate increases.
As of the Effective Date, the Cedents are not aware of any specific reason that
would indicate that they would not be able to obtain such increases in the
future.

        (c)     Whenever a Regulatory Risk Event occurs and remains unresolved,
a Limit Amount Reduction shall occur and apply to reduce the Reinsurer's
Incremental Limit Account under Article II of this Agreement.

        The Cedents and the Reinsurer consider the provisions of this Agreement
relating to Regulatory Risk Event to be in full compliance with the guidelines
of Statement of Statutory

                                       61
<PAGE>

Accounting Principles No. 61 and Statutory Accounting Practices and Procedures
Manual - Appendix A-791.

                                 ARTICLE XXIII

                             PREMIUM RATE INCREASES
                             ----------------------

        23.1.   RATE INCREASE REVIEW.

        (a)     In order to ensure the Cedents' regular review of the
performance of the Reinsured Policies, each Cedent covenants and agrees that it
shall conduct an analysis of the Reinsured Policies to ascertain their actual to
expected loss experience no less often than once every six (6) months (the
"Semi-Annual Review"), which analysis shall be conducted over the course of no
more than thirty (30) days and subject to audit by the Reinsurer in accordance
with Article XXI.

        (b)     Each Cedent further covenants and agrees that it shall conduct
an analysis of the underlying actuarial assumptions and experience of the
Policies to ascertain the future morbidity experience no less than once annually
(the "Annual Review"). The Annual Review shall be conducted prior to March 31 of
each year for the calendar year ending on the immediately preceding December 31,
which analysis shall be conducted over the course of no more than thirty (30)
days and subject to audit by the Reinsurer in accordance with Article XXI.

        (c)     Failure to conduct either the Semi-Annual Review or the Annual
Review (collectively, the "Reviews") shall be considered a material breach of
this Agreement by the Cedents. Remedies available to the Reinsurer for such
breach by the Cedents include, but are not limited to, those contained in
Section 8.5 and Article XV.

        23.2.   OBLIGATORY PREMIUM RATE INCREASES.

                                       62
<PAGE>

        (a)     The Cedents shall use their best efforts in good faith to file
and obtain approval for increases in premium rates on the Reinsured Policies to
maintain, from the Effective Date, the lifetime and prospective loss ratios
(based upon revised actual and expected experience) for the Reinsured Policies
at the level approved by the relevant regulatory authorities in the most recent
filing of the relevant policy form prior to the Effective Date.

        (b)     In the event that, and as a result of the Reviews, either Cedent
would reasonably be required to file and obtain approval for premium rate
increases for the Reinsured Policies, such Cedent shall submit any such premium
rate increase filing no later than thirty (30) days following such determination
(to wit, no more than sixty (60) days following the commencement of any such
Review) (the "Mandatory Filing Date"). If no such Review is conducted or
commenced, the Mandatory Filing Date shall be deemed to be the sixtieth (60th)
day following the date when such Review was required to be commenced pursuant to
this Agreement.

        (c)     In furtherance and not in limitation of the foregoing paragraphs
(a) and (b), the Cedents shall be obligated to file for increases in premium
rates on the Reinsured Policies in each jurisdiction, if at any time, either
Cedent or the Reinsurer has reason to believe (i) that future experience is
likely to be worse than projected at the Effective Date, or upon the date of the
most recent rate increase approval if later, and (ii) that such deterioration in
expected experience would justify an increase in premium rates of 5% or more in
aggregate on the Reinsured Policies if filed by such Cedent (an "Obligatory
Premium Rate Increase").

        (d)     The Parties agree that they shall be deemed to have a "reason to
believe" that future morbidity experience is likely to be worse than projected
if, at the end of any calendar year, the ratio of (a) the present value of
claims incurred since the Effective Date or then

                                       63
<PAGE>

anticipated to be incurred henceforth as discounted at 4.5% to the Effective
Date, divided by (b) the present value of premiums collected since the Effective
Date or then anticipated to be collected henceforth as discounted at 4.5% to the
Effective Date, exceeds by more than 5% the same ratio as computed at the
Effective Date (e.g., 116.19% projected versus 110.65% expected).

        (e)     All determinations affecting whether to seek increases in
premium rates, or the amount of such increases, shall be based on actuarial
assumptions ultimately agreed upon by the Reinsurer and the Cedents, including
consideration of input from state regulatory agencies and actuaries as may
occur. Any dispute regarding actuarial assumptions or determinations shall be
resolved in accordance with Article XX. For the avoidance of any doubt, any
resolution of such arbitration in favor of the Reinsurer with regard to
actuarial assumptions underlying any filing pursuant to this Article XXIII,
shall obligate the Cedents to file for premium rate increases, no later than
thirty (30) days following such resolution, in accordance with this Article
XXIII.

        (f)     A "Material Breach Event" shall mean the failure by either
Cedent to comply with its obligations under this Section 23.2, including but not
limited to the failure to file and obtain an Obligatory Premium Rate Increase
for any reason; PROVIDED HOWEVER, that a Material Breach Event shall not include
the failure to obtain an Obligatory Premium Rate Increase as a result of a
Regulatory Risk Event, or as a result of and during the pendency of (and for a
reasonable period after termination of) any BONA FIDE dispute being arbitrated
pursuant to the terms of this Article XXIII or Article XX.

        (g)     Whenever a Material Breach Event occurs and remains unresolved,
in addition to any other remedy available to the Reinsurer pursuant to this
Agreement in law or in equity, a Limit Amount Reduction shall occur and apply to
reduce the Reinsurer's Incremental

                                       64
<PAGE>

Limit Amount under Article II of this Agreement. The Cedents and the Reinsurer
consider the provisions in this Agreement regarding protection from a Material
Breach Event to be in full compliance with the guidelines of Statement of
Statutory Accounting Principles No. 61 and Statutory Accounting Practices and
Procedures Manual - Appendix A-791.

                                  ARTICLE XXIV

                                      TAXES
                                      -----

        24.1.   TAXES. The Cedents shall be jointly and severally liable to the
appropriate governmental authorities for the payment of all taxes, including
premium tax and the Federal excise tax, on the premium paid to the Reinsurer
under this Agreement, except income or profit taxes of the Reinsurer. The
Reinsurer has provided to the Cedents a closing letter from the Internal Revenue
Service specifying that it is exempt from Federal excise tax. In the event that
excise taxes are levied against the Reinsurer as a result of the reinsurance
because of a change in the United States Federal tax laws, then the Cedents may
recapture the policies reinsured hereunder subject to the completion of a
Terminal Accounting and Settlement as described in Article VI. The Reinsurer
will not reimburse the Cedents for any other taxes or assessments paid by the
Cedents in connection with the Reinsured Policies. The Reinsurer covenants that
it will use reasonable best efforts not to cause the Cedents to unnecessarily
become subject to the payment of excise taxes solely as a result of the
Reinsurer's retro-cession of the Reinsured Policies to another reinsurer,
whether affiliated or otherwise.

                                  ARTICLE XXV

                              RULES OF CONSTRUCTION
                              ---------------------

        25.1.   RULES OF CONSTRUCTION. Each party acknowledges that, in the
negotiation and drafting of this Agreement, it has been represented by and has
relied upon the advice of

                                       65
<PAGE>

counsel of its choice; that its counsel has had a substantial role in the
drafting and negotiation of this Agreement; and, therefore, that the rules of
construction that any ambiguities are to be resolved against the drafting Party
shall not be applied in the interpretation of this Agreement.

                                  ARTICLE XXVI

                                    SURVIVAL
                                    --------

        26.1    SURVIVAL. All of the provisions of this Agreement, to the extent
necessary to carry out the purposes of this Agreement or to ascertain and
enforce the parties' rights hereunder, shall survive the termination or
cancellation of this Agreement.

                                  ARTICLE XXVII

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

        27.1    SEVERABILITY. To the extent that any term or provisions of this
Agreement is held to be unenforceable, then such term and all of the other terms
and provisions of the Agreement shall be construed so as to create or provide
for, to the fullest extent permitted by law, the same rights and obligations as
this Agreement would have created or provided for had such term or provision
been enforceable.

                                 ARTICLE XXVIII

                            MISCELLANEOUS PROVISIONS
                            ------------------------

        28.1.   HEADINGS AND SCHEDULES. Headings used herein are not a part of
this Agreement and shall not affect the terms hereof. The attached Schedules and
Exhibits are a part of this Agreement.

        28.2.   NOTICES. All notices and communications hereunder shall be in
writing and shall become effective when received. Any written notice shall be by
either certified or

                                       66
<PAGE>

registered mail, return receipt requested, or overnight delivery service
(providing for delivery receipt) or delivered by hand. All notices or
communications under this Agreement shall be addressed as follows:

        If to the Cedents:
        American Network Insurance Company
        Penn Treaty Network America Insurance Company
        3440 Lehigh Street
        Allentown, PA 18103-7001
        Attention:  Cameron B. Waite, Executive Vice President

        If to the Reinsurer:
        Imagine International Reinsurance Limited
        43 St. Stephen's Green
        Dublin 2, Ireland
        Attention: Director

        28.3.   SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors,
permitted assigns and legal representatives. Neither this Agreement, nor any
right hereunder, may be assigned by any party without the prior written consent
of the other party hereto; PROVIDED HOWEVER, that the Reinsurer shall be
permitted to assign this Agreement to any affiliate of the Reinsurer with the
same A.M. Best rating as the Reinsurer, without the consent of the Cedents as
long as such assignment does not cause the Cedents to become subject to the
payment of excise taxes. This Agreement is not intended to, and shall not be
construed to, confer rights on any persons other than the signatories to this
Agreement and their respective successors and permitted assigns.

        28.4.   EXECUTION IN COUNTERPART. This Agreement may be executed by the
parties hereto in any number of counterparts, and by each of the parties hereto
in separate counterparts, each of which counterparts, when so executed and
delivered, shall be deemed to be an original, but all such counterparts shall
together constitute but one and the same instrument.

                                       67
<PAGE>

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

        28.6.   AMENDMENTS. This Agreement may not be changed, altered or
modified unless the same shall be in writing executed by the Cedents and the
Reinsurer.

        28.7.   GOVERNING LAW. This Agreement shall be interpreted and governed
by the laws of the Commonwealth of Pennsylvania without regard to its rules with
respect to conflicts of law.

        28.8.   INTEGRATION. This Agreement constitutes the entire agreement
between the parties hereto relating to the subject matter hereof and supersedes
all prior and contemporaneous agreements, understandings, negotiations and
discussions, whether oral or written, of the parties and there are no general or
specific warranties, representations or other agreements by or among the parties
in connection with the entering into of this Agreement or the subject matter
hereof except as specifically set forth or contemplated herein.

        28.9.   NO WAIVER. No consent or waiver, express or implied, by any
party to or of any breach or default by any other party in the performance by
such other party of its obligations hereunder shall be deemed or construed to be
a consent or waiver to or of any other breach or default in the performance of
obligations hereunder by such other party hereunder. Failure on the part of any
party to complain of any act or failure to act of any other party or to declare
any other party in default, irrespective of how long such failure continues,
shall not constitute a waiver by such first party of any of its rights
hereunder.

                                       68
<PAGE>

        28.10.  SERVICE OF PROCESS.

        (a)     CT Corporation System of 111 Eighth Avenue, New York, NY 10011
is hereby appointed as Agent for Service of Process by the Reinsurer, for the
purposes of this Agreement.

        (b)     Subject to the arbitration provisions in Article XX, in the
event of the Reinsurer's failure to pay any amount claimed to be due under this
Agreement, the Reinsurer, at the Cedents' request, will submit to the
jurisdiction of any court of competent jurisdiction within the United States of
America and will comply with all requirements necessary to give such court
jurisdiction. Nothing in this Agreement (including the arbitration provisions in
Article XX) constitutes or should be construed to constitute a waiver of the
Reinsurer's rights (exercisable at any time) to commence an action in any court
of competent jurisdiction in the United States, to remove an action to a United
States District Court, or to seek a transfer of a case to another court as
permitted by the laws of the United States or of any state in the United States.

        (c)     Service of Process in such suit against the Reinsurer shall be
made by a nationally recognized courier service or certified mail upon the Agent
for Service of Process in accordance with Section 28.2 herein, and in any suit
instituted against the Reinsurer upon this Agreement, the Reinsurer will abide
by the final non-appealable decision of such court or of any appellate court of
competent jurisdiction in the event of appeal. To the extent permitted by law,
each Cedent hereby waives any requirements under the unauthorized insurance or
similar laws of any jurisdiction or otherwise that the Reinsurer post funds,
bonds, securities or other security as a condition to its appearance or filing
of pleadings in any proceeding involving or arising in connection with this
Agreement.

                                       69
<PAGE>

        (d)     Further, pursuant to any statute of any state, territory, or
district of the United States of America which makes provision therefor, the
Reinsurer hereby designates the Superintendent, Commissioner, or Director of
Insurance or other officer specified for that purpose in the statute, or his
successor or successors in office, as its true and lawful attorney upon whom may
be served any lawful process in any action, suit, or proceeding instituted by or
on behalf of the Cedents arising out of this Agreement (and for no other
purpose) and hereby designates the Agent for Service of Process as the agent to
whom said officer is authorized to mail such process or a true copy thereof.

                                       70
<PAGE>

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

                                PENN TREATY NETWORK AMERICA
                                INSURANCE COMPANY

                                By /s/ Cameron B. Waite
                                   --------------------
                                Title Executive Vice President
                                      ------------------------
                                Date July 28, 2005
                                     -------------

                                AMERICAN NETWORK INSURANCE COMPANY

                                By /s/ Cameron B. Waite
                                   --------------------
                                Title Executive Vice President
                                      ------------------------
                                Date July 28, 2005
                                     -------------

                                IMAGINE INTERNATIONAL
                                REINSURANCE LIMITED

                                By /s/ J. Doyle
                                   ------------
                                Title Chief Risk Officer
                                      ------------------
                                Date
                                    -------------------------------------

                                By /s/ Antoinette Glennon
                                   ----------------------
                                Title Finance
                                      -------
                                Date
                                    -------------------------------------

                                       71
<PAGE>

                                   SCHEDULE A

                               REINSURED POLICIES
                               ------------------

        The Reinsured Policies shall be those long term care policies issued by
or on behalf the Cedents prior to January 1, 2002 and in force on the Effective
Date and previously reinsured by Centre Solutions (Bermuda) Limited pursuant to
a reinsurance agreement effective December 31, 2001, as listed in the worksheet
"Imagine Re Policy Listing.zip".

        The Reinsurer shall consider through September 30, 2005, at its sole
discretion, to offer to add this Agreement by amendment, a quota share of the
long term care policies issued by the Cedents effective July 1, 2005 and later.
Such reinsurance will be subject to a due diligence period through November 30,
2005 and the approval of the Reinsurer's underwriting committee.

                                       72
<PAGE>

                               SCHEDULE B - PART I

                           INITIAL REINSURANCE REPORT
                           --------------------------

1.       Initial Reinsurance Premium                           $___________

2.       Initial Reinsurer Allowance                           $___________

3.       Initial Ceding Commission                             $___________

4.       Funds Withheld Account balance                        $___________

5.       Net Due Reinsurer                                     $___________
         (1 plus 2 minus 3 minus 4)

                                       73
<PAGE>

                              SCHEDULE B - PART II

                                QUARTERLY REPORTS
                                -----------------

1.  Net Premiums                                               $____________
2.  Funds Withheld Account Investment Income                   $____________
3.  Decrease in Funds Withheld Account (if any)                $____________
4.  Ultimate Net Loss                                          $____________
5.  Expense Allowance                                          $____________
6.  Increase in Funds Withheld Account (if any)                $____________
7.  Total Ceded Reserves                                       $____________
8.  Net Amount Due Cedent, if any                              $____________
     (1 plus 2 plus 3 minus 4 minus 5 minus 6, if
      negative)
9.  Net Amount Due Reinsurer, if any                           $____________
    (1 plus 2 plus 3 minus 4 minus 5 minus 6, if
     positive)

   Number of Reinsured Policies                                 ____________

                                       74
<PAGE>

                             SCHEDULE C - TERRORISM

        Notwithstanding any provision in this Agreement to the contrary, the
Reinsurer will not pay for or have any liability with respect to any Damage
directly or indirectly caused or occasioned by or resulting from an actual or
threatened Act of Terrorism (regardless of when such Damage becomes manifest or
known) and/or the controlling, suppressing, hindering, responding to,
remediating or defending against an actual, threatened or expected Act of
Terrorism or from any instructions, recommendations, warnings or advice given or
preventative action taken with respect to any actual or expected Act of
Terrorism. Such Damage is excluded regardless of any other cause or event that
contributes concurrently or in any sequence or in any chain of events to the
Damage and regardless of whether the Damage is accidental, foreseeable or
intentional.

                                       75
<PAGE>

                    SCHEDULE D - CEDED REINSURANCE AGREEMENTS

        The Cedents have entered into certain excess of loss reinsurance
treaties with Cologne Life Reinsurance Company with respect to the Reinsured
Risks. Under those reinsurance treaties, the Cedents are indemnified for certain
loss payments. The Ultimate Net Loss on any one life paid under this Agreement
for a specific policy will be the claims paid for any one life, net of the loss
payments recoverable (whether or not collectible) under those reinsurance
treaties.

                                       76
<PAGE>

                            SCHEDULE E - CEDENTS DATA

NAIC Annual Statements for Penn Treaty and American Network - 2002, 2003, 2004

NAIC Annual Statements Amended Pages Penn Treaty and American Network - 2002,
2003

Penn Treaty American Corporation 10K - 2003, 2004

Penn Treaty American Corporation 10Q - 8/16/2004

Worksheet labeled "Schedule E" provided from Brian Heffernan of Reinsurer to Cam
Waite of Cedents on 7/27/05 with list of files and information furnished to the
Reinsurer

Reinsured Policies on the Effective Date total 145,610 as indicated in file
provided to the Reinsurer on July 29, 2005, named "Imagine Re Policy
Listing.zip"

                                       77
<PAGE>

                    SCHEDULE F - APPROVALS AND AUTHORIZATIONS

                                      None.

                                       78<PAGE>

                                                                    EXHIBIT 10.2

                         FUNDS WITHHELD TRUST AGREEMENT

                            DATED AS OF JULY 28, 2005

                                      AMONG

                  PENN TREATY NETWORK AMERICA INSURANCE COMPANY

                                   AS GRANTOR,

                    IMAGINE INTERNATIONAL REINSURANCE LIMITED

                                 AS BENEFICIARY

                                       AND

                              THE BANK OF NEW YORK

                                   AS TRUSTEE

<PAGE>

                         FUNDS WITHHELD TRUST AGREEMENT

FUNDS WITHHELD TRUST AGREEMENT, dated as of July 28, 2005 (this "Agreement"),
among Penn Treaty Network America Insurance Company, an insurance company
organized under the laws of Pennsylvania (the "Grantor"), Imagine International
Reinsurance Limited , an insurance company organized under the laws of Ireland
(the "Beneficiary"), and The Bank of New York, a New York banking corporation
(the "Trustee") (the Grantor, the Beneficiary and the Trustee are hereinafter
each sometimes referred to individually as a "Party" and collectively as the
"Parties").

                                   WITNESSETH:

        WHEREAS, the Beneficiary has entered into the reinsurance agreement
listed in Exhibit A hereto (the "Reinsurance Agreement");

        WHEREAS, the parties desire that the Grantor transfer assets as
described below to the Trustee for deposit to the Trust Account (as defined
below) in order to secure all amounts withheld by the Grantor and owed to the
Beneficiary in connection with the Reinsurance Agreement (collectively, the
"Secured Obligations"); and

        WHEREAS, the Trustee has agreed to act as Trustee hereunder, and to hold
such assets in trust in the Trust Account for the sole use and benefit of the
Beneficiary; and

        WHEREAS, this Agreement is made for the sole use and benefit of the
Beneficiary, to grant the Beneficiary the security interest granted herein and
for the purpose of setting forth the duties and powers of the Trustee with
respect to the Trust Account;

        NOW, THEREFORE, for and in consideration of the premises and for other
good and valuable consideration, the receipt of which is hereby acknowledged,
the Parties hereby agree as follows:

lA.     DEPOSIT OF ASSETS TO THE TRUST ACCOUNT.

(a)     The Trustee has established and will maintain (subject to the terms
        hereof) segregated trust account number 100234 (the "Trust Account") in
        its name as Trustee in accordance with the provisions of this Agreement.

(b)     Within three (3) business days of the date hereof, the Grantor shall
        transfer to the Trustee, for deposit to the Trust Account, the assets
        listed in Exhibit B hereto. The Grantor may transfer to the Trustee, for
        deposit to the Trust Account, such other assets as it may from time to
        time desire (all such assets are herein referred to individually as an
        "Asset" and collectively as the "Assets"). The Assets shall consist only
        of cash (United States legal tender) and Eligible Securities (as
        hereinafter defined).

<PAGE>

(c)     The Grantor hereby covenants, represents and warrants that (i) any
        Assets transferred by the Grantor to the Trustee for deposit to the
        Trust Account will be in such form that the Beneficiary whenever
        necessary may, and the Trustee upon direction by the Beneficiary will,
        negotiate any such Assets without consent or signature from the Grantor
        or any person in accordance with the terms of this Agreement, (ii) it is
        and will be the sole legal and beneficial owner of each Asset at the
        time such Asset is transferred to the Trust Account and each Asset shall
        be free and clear of any lien, encumbrance, mortgage, pledge or other
        interest except for the lien created hereunder, (iii) no effective
        financing statement or other instrument of similar effect covering any
        one or more Assets is on file in any recording office, (iv) upon
        execution of this Agreement by the Parties, the Beneficiary shall have a
        duly perfected first priority security interest in the Account and the
        Assets credited thereto or held therein, (v) this Agreement has been
        duly executed and delivered by the Grantor and constitutes Grantor's
        legal, valid and binding obligation, enforceable against Grantor in
        accordance with its terms (except to the extent such enforcement may be
        limited by applicable bankruptcy or similar laws of general application
        relating to or affecting the rights of creditors and by general
        equitable principles), and (vi) all Assets transferred by the Grantor to
        the Trustee for deposit to the Trust Account consist only of cash and
        Eligible Securities.

(d)     The Trustee shall have no responsibility to determine whether the Assets
        in the Trust Account are sufficient to secure the Grantor's liability to
        the Beneficiary for the Secured Obligations.

(e)     Each of the Parties agrees that (a) with respect to the Trust Account,
        the Trustee is a "securities intermediary" (as such term is defined in
        the Uniform Commercial Code as in effect in the State of New York, the
        "UCC"), (b) each Asset held in or credited to the Trust Account shall be
        treated as a "financial asset" as defined in the UCC, (c) the Trust
        Account is, and will be maintained during the term hereof as, a
        "securities account" as defined in the UCC, and (d) the jurisdiction of
        The Bank of New York as securities intermediary hereunder (and within
        the meaning of Section 8-110 of the UCC) is the State of New York.

1B.     GRANT OF SECURITY INTEREST.

To secure the prompt and complete payment, observance and performance of the
Secured Obligations, the Grantor hereby grants, assigns, transfers and pledges
to the Beneficiary a security interest in all of Grantor's right, title and
interest in and to the Trust Account, each Asset or other property held therein
or credited thereto, all securities entitlements related thereto and all
proceeds thereof (in each instance, whether now or hereafter existing).

2.      WITHDRAWAL OF ASSETS FROM THE TRUST ACCOUNT.

(a)     The Trustee as securities intermediary shall comply with any directions
        or other entitlement orders (as defined in the UCC) by the Secured Party
        in respect of the Trust Account without the further consent of the
        Grantor or any other person or entity.

(b)     Without notice to or the consent of the Grantor, the Beneficiary shall
        have the right, at any time and from time to time, to direct the Trustee
        by written notice thereto (the "Withdrawal

<PAGE>

        Notice") to transfer from the Trust Account to The Bank of New York
        trust account number 179999 of which the Grantor is the beneficiary (the
        "Reinsurer Trust Account"), such Assets as are specified in such
        Withdrawal Notice. The Beneficiary need present no statement or document
        in addition to a Withdrawal Notice in order to withdraw any Assets. The
        Withdrawal Notice shall be in the form of Exhibit C hereto.

(c)     Upon receipt of a Withdrawal Notice, the Trustee shall immediately take
        any and all steps necessary to transfer the Assets specified in such
        Withdrawal Notice, including absolutely and unequivocally all rights,
        title and interest therein, and shall deliver such Assets to the
        Reinsurer Trust Account. Promptly, but in no event more than three (3)
        business days, following receipt of a Withdrawal Notice, the Trustee
        shall provide a copy thereof to the Grantor.

(d)     The Trustee shall allow no substitution or withdrawal of any Asset from
        the Trust Account except as provided in this Section 2 and Section 4.

(e)     The Grantor may request in writing to the Beneficiary (the "Investment
        Manager Payment Request"), with a copy to the Trustee, that the
        Beneficiary allow the Grantor to direct the Trustee to pay from the
        Trust Account fees due to the investment manager that manages the
        investments of the Assets. By countersigning a copy of such Investment
        Manager Payment Request and providing a copy thereof to the Trustee, the
        Beneficiary, promptly (but in any event within three (3) business days)
        following receipt of such Investment Manager Payment Request, shall
        instruct the Trustee to, and the Trustee shall, immediately comply with
        the instructions in such Investment Manager Payment Request. The
        Beneficiary need present no statement or document in addition to an
        Investment Manager Payment Request in order to effect the Investment
        Manager Payment Request. The Investment Manager Payment Request shall be
        in the form of Exhibit E hereto.

3.      APPLICATION OF ASSETS.

(a)     The Beneficiary hereby covenants to the Grantor that it shall use and
        apply any withdrawn Assets, without diminution because of the insolvency
        of the Beneficiary or the Grantor, for the following purposes only:

        (i)     to pay or reimburse the Beneficiary for the Secured Obligations;

        (ii)    where the Beneficiary has received a Termination Notice (as
                hereinafter defined) pursuant to Section 10 of this Agreement
                and where any of the Secured Obligations remain unliquidated and
                undischarged ten days prior to the Termination Date (as
                hereinafter defined), to withdraw amounts equal to the Secured
                Obligations and deposit such amounts in a separate account
                subject to a new trust agreement compliant with 31 PA Code ss.
                163, apart from its other assets, in the name of the
                Beneficiary, in any bank or trust company organized in the
                United States, in trust for the uses and purposes specified in
                subparagraph (i) of this Section 3(a).

<PAGE>

(b)     The Trustee shall have no responsibility whatsoever to determine that
        any Assets withdrawn from the Trust Account pursuant to Section 2 of
        this Agreement will be used and applied in the manner contemplated by
        Section 3(a).

4.      REDEMPTION, INVESTMENT AND SUBSTITUTION OF ASSETS.

(a)     Upon call or maturity of an Asset, the Trustee may withdraw such Asset
        without the consent of the Beneficiary, if the Trustee provides notice
        to the Beneficiary, liquidates or redeems the Asset, and the proceeds
        are paid into the Trust Account no later than five (5) days after the
        liquidation or redemption of such Asset.

(b)     From time to time, at the written order and direction of the Grantor or
        its designated investment advisor, the Trustee shall invest Assets in
        the Trust Account in Eligible Securities. The Trustee shall not be
        required to take any action with respect to the investment or
        reinvestment of Assets other than those actions set forth in this
        Section 4(b) or as otherwise directed by the Grantor or its designated
        investment advisor.

(c)     From time to time, subject to the prior written approval of the
        Beneficiary, the Grantor may direct the Trustee to substitute Assets of
        comparable value for other Assets then held in the Trust Account. The
        Trustee shall have no responsibility whatsoever to determine the value
        of such substituted securities or that such substituted securities
        constitute Eligible Securities.

(d)     All investments and substitutions of securities referred to in Sections
        4(b) and 4(c) above shall be in compliance with the relevant provisions
        of 31 PA Code ss. 163.6(a), (b), and (c). Any instruction or order
        concerning such investments or substitutions of securities shall be
        referred to herein as an "Investment Order". The Trustee shall execute
        Investment Orders and settle securities transactions by itself or by
        means of an agent or broker. The Trustee shall not be responsible for
        (i) ensuring compliance with 31 PA Code ss. 163.6(a), (b), and (c) or
        (ii) any act or omission, or for the solvency, of any such agent or
        broker.

(e)     When the Trustee is directed to deliver Assets against payment, delivery
        will be made in accordance with generally accepted market practice.

(f)     Any loss incurred from any investment pursuant to the terms of this
        Section 4 shall be borne exclusively by the Trust Account. The Trustee
        shall not be liable for any loss due to changes in market rates or
        penalties for early redemption.

5.      THE INCOME ACCOUNT.

All payments of interest, dividends and other income in respect of Assets in the
Trust Account shall be posted and credited by the Trustee, subject to the
deduction of the Trustee's compensation and expenses as provided in Section 8,
in the separate income column of the custody ledger (the "Income Account")
within the Trust Account established and maintained by the Grantor at an office
of the Trustee in New York City. Any interest, dividend or other income
automatically posted and credited on the payment date to the Income Account,
which is

<PAGE>

not subsequently received by the Trustee, shall be reimbursed by the Grantor to
the Trustee and the Trustee may debit the Income Account for this purpose.

6.      RIGHT TO VOTE ASSETS.

The Trustee shall forward all annual and interim stockholder reports and all
proxies and proxy materials relating to the Assets in the Trust Account to the
Grantor. Subject only to the Beneficiary's security interest therein, the
Grantor shall have the full and unqualified right to vote any Assets in the
Trust Account.

7.      ADDITIONAL RIGHTS, DUTIES AND REPRESENTATIONS OF THE TRUSTEE.

(a)     Subject to Section 2(c) hereof, the Trustee shall notify the Grantor and
        the Beneficiary in writing within five days following each deposit to,
        or withdrawal from, the Trust Account.

(b)     Before accepting any Asset for deposit to the Trust Account, the Trustee
        shall determine that such Asset is in such form that the Beneficiary
        whenever necessary, or the Trustee upon direction by the Beneficiary,
        may negotiate such Asset without consent or signature from the Grantor
        or any person or entity in accordance with the terms of this Agreement.

(c)     The Trustee shall have no responsibility whatsoever to determine that
        any Assets in the Trust Account are or continue to be Eligible
        Securities. (d) The Trustee shall receive and hold all Assets in a safe
        place at an office of the Trustee in the State of New York. The Trustee
        may from time to time deposit any Assets in the Trust Account, for the
        sole purpose of the Trust Account and in the name of the Trustee, in a
        book-entry account maintained at the Federal Reserve Bank or in the
        Depository Trust Company, which is organized as a limited purpose trust
        company under the banking law of New York State and a member of the
        Federal Reserve System.

        Assets may be held in the name of Hare & Co., for which the Trustee
        agrees to remain responsible for such Assets as though the Assets were
        actually held at the Trustee's office in the State of New York. All
        Assets held in book-entry accounts, depositories, or in the name of Hare
        & Co. must be in a form so that the Beneficiary, or the Trustee upon
        direction of the Beneficiary, may negotiate the assets without consent
        or signature from the Grantor or any other person.

(e)     The Trustee shall accept and open all mail directed to the Grantor or
        the Beneficiary in care of the Trustee, and shall forward such mail on
        to the appropriate Party.

(f)     The Trustee shall provide to the Grantor and the Beneficiary statements
        of Assets in the Trust Account and statements of account (such
        statements to be in such form and content as Trustee customarily
        maintains for trust accounts similar to the Trust Account) showing all
        transactions in the Trust Account, the face amount of all Assets and the
        market value of all Assets (i) upon its inception, (ii) thereafter
        within fifteen (15) days of the end of each calendar month and (iii)

<PAGE>

        thereafter within five (5) days of a request by the Grantor or the
        Beneficiary. Upon request, the Trustee shall also furnish to authorized
        representatives of the Grantor and the Beneficiary, access to the
        Trustee's then-existing on-line electronic account reporting system,
        which system allows users to view and print the status of and activities
        in the Trust Account.

(g)     The Trustee shall keep records of the administration of the Trust
        Account. Upon the request of the Grantor or the Beneficiary, the Trustee
        shall promptly permit the Grantor or the Beneficiary, their respective
        agents, employees or independent auditors to examine, audit, excerpt,
        transcribe and copy, during the Trustee's normal business hours, any
        books, documents, papers and records relating to the Trust Account or
        the Assets.

(h)     To the extent provided herein, the Trustee is authorized to follow and
        rely upon all instructions given by officers named in incumbency
        certificates furnished to the Trustee from time to time by the Grantor
        and the Beneficiary, respectively, and by attorneys-in-fact acting under
        written authority furnished to the Trustee by the Grantor or the
        Beneficiary, including, without limitation, instructions given by
        letter, facsimile transmission, telegram, teletype, cablegram or
        electronic media, if the Trustee believes such instructions to be
        genuine and to have been signed, sent or presented by the proper party
        or parties. The Trustee shall not incur any liability to anyone
        resulting from actions taken by the Trustee in reliance on such
        instructions, absent Trustee's negligence, willful misconduct or lack of
        good faith.

(i)     The duties and obligations of the Trustee shall only be such as are
        specifically set forth in this Agreement, as it may from time to time be
        amended, and no implied duties or obligations shall be read into this
        Agreement against the Trustee. The Trustee shall not be liable except
        for its own negligence, willful misconduct or lack of good faith.

(j)     No provision of this Agreement shall require the Trustee to take any
        action which, in the Trustee's reasonable judgment, would result in any
        violation of this Agreement or any provision of law.

(k)     Anything in this Agreement to the contrary notwithstanding, in no event
        shall the Trustee be liable under or in connection with this Agreement
        for indirect, special, incidental, punitive or consequential losses or
        damages of any kind whatsoever, including but not limited to lost
        profits, whether or not foreseeable, even if the Trustee has been
        advised of the possibility thereof and regardless of the form of action
        in which such damages are sought.

(l)     The Trustee represents that it has not allowed, and hereby agrees that
        it will not allow, any person other than the Beneficiary to have
        "control" (as defined in Section 9-106 of the UCC) of the Trust Account
        and further represents that it has not entered into, and hereby agrees
        that it will not enter into, any control agreement or any other
        agreement relating to the Trust Account with any other third party.

(m)     The Trustee shall not change the name or the account number of the Trust
        Account without the prior written consent of the Beneficiary.

<PAGE>

(n)     In the event that the Trustee has or subsequently obtains by agreement,
        operation of law or otherwise a security interest in the Trust Account
        or any security entitlement in respect of financial assets carried
        therein, the Trustee hereby agrees that such security interest shall be
        subordinate to the security interest of the Beneficiary under this
        Agreement, and agrees that the financial assets standing to the credit
        of the Trust Account will not be subject to deduction, set off, banker's
        lien or any other right in favor of any person other than the
        Beneficiary (except for the face amount of any items which have been
        credited to the Trust Account but are subsequently returned unpaid
        because of uncollected or insufficient funds).

(o)     The Trustee hereby represents and warrants that this Agreement has been
        duly executed and delivered by it and constitutes the Trustee's legal,
        valid and binding obligation, enforceable against the Trustee in
        accordance with its terms (except to the extent such enforcement may be
        limited by applicable bankruptcy or similar laws of general application
        relating to or affecting the rights of creditors and by general
        equitable principles).

(p)     The Trustee shall not be responsible or liable for any failure or delay
        in the performance of its obligations under this Agreement arising out
        of or caused, directly or indirectly, by circumstances beyond its
        reasonable control, including without limitation, acts of God;
        earthquakes; fires; floods; wars; civil or military disturbances;
        sabotage; epidemics; riots; interruptions, loss or malfunctions of
        utilities, computer (hardware or software) or communications service;
        accidents; labor disputes; acts of civil or military authority or
        governmental actions; it being understood that any such party shall use
        its best efforts to resume performance as soon as practicable under the
        circumstances. The Trustee may consult with counsel of its own choice
        and at its own expense and shall have full and complete authorization
        and protection for any action taken, omitted or suffered by it hereunder
        in good faith in accordance with the written advice of such counsel and
        in the absence of negligence, willful misconduct or lack of good faith.

(q)     All payments to be made by the Trustee under this Agreement shall be
        made only from the Trust Account and only to the extent that the Trustee
        shall have received sufficient funds from the Trust Account to make such
        payments in accordance with the terms hereof. The Trustee will not be
        required to advance, expend risk or disburse its own funds in the
        administration of the Trust Account.

(r)     Upon execution of this Agreement, the Grantor and the Beneficiary shall
        each provide Trustee with a fully executed W-8 or W-9 Internal Revenue
        Service form, which shall include its Tax Identification Number as
        assigned by the United States Internal Revenue Service if applicable.

8.      THE TRUSTEE'S COMPENSATION, EXPENSES, ETC.

(a)     The Grantor shall pay the Trustee, as compensation for its services
        under this Agreement, a fee computed at rates determined by the Trustee
        from time to time and communicated in writing to the Grantor. The
        Grantor shall pay or reimburse the Trustee for all of the Trustee's
        expenses and disbursements in connection with its duties under this
        Agreement (including attorney's fees and expenses), except any such
        expense or disbursement as may arise from the Trustee's

<PAGE>

        negligence, willful misconduct, or lack of good faith. The Trustee shall
        be entitled to deduct its compensation and expenses from payments of
        dividends, interest and other income in respect of the Assets held in
        the Trust Account prior to the deposit thereof to the Income Account as
        provided in Section 5 of this Agreement. The Grantor and the Beneficiary
        jointly and severally hereby indemnify the Trustee for, and hold it
        harmless against, any loss, liability, costs or expenses (including
        attorney's fees and expenses) incurred or made without negligence,
        willful misconduct or lack of good faith on the part of the Trustee,
        arising out of or in connection with the performance of its obligations
        in accordance with the provisions of this Agreement, including any loss,
        liability, costs or expenses arising out of or in connection with the
        status of the Trustee and its nominee as the holder of record of the
        Assets. The Grantor and Beneficiary hereby acknowledge that the
        foregoing indemnities shall survive the resignation or discharge of the
        Trustee or the termination of this Agreement and hereby grant the
        Trustee a lien, right of set-off and security interest in the funds in
        the Income Account for the payment of any claim for compensation,
        reimbursement or indemnity hereunder.

(b)     No Assets shall be withdrawn from the Trust Account or used in any
        manner for paying compensation to, or reimbursement or indemnification
        of, the Trustee.

9.      RESIGNATION OR REMOVAL OF THE TRUSTEE.

(a)     The Trustee may resign at any time by giving 90 days' written notice
        thereof to the Beneficiary and to the Grantor. The Trustee may be
        removed by the Grantor's delivery of 90 days' written notice of removal
        to the Trustee and the Beneficiary. Such resignation or removal shall
        become effective no later than 90 days after notice is given and the
        acceptance of appointment by a successor trustee and the transfer to
        such successor trustee of all Assets in the Trust Account in accordance
        with Section 9(b).

(b)     Upon receipt by the proper Parties of the Trustee's notice of
        resignation or the Grantor's notice of removal, the Grantor and the
        Beneficiary shall appoint and approve a successor trustee. Any successor
        trustee shall be a "qualified United States financial institution" as
        defined in 40 P.S. ss. 442.1(g) and shall not be a Parent, a Subsidiary
        or an Affiliate of the Grantor or the Beneficiary. The successor trustee
        must be organized, or in the case of a foreign banking organization
        licensed, under the laws of the United States or any state thereof and
        must have been granted authority to operate with fiduciary powers.

(c)     Upon the acceptance of the appointment as Trustee hereunder by a
        successor trustee, the execution of a security trust, and the transfer
        to such successor trustee of the possession and title to all Assets in
        the Trust Account, the resignation or removal of the Trustee shall
        become effective. Thereupon, such successor trustee shall succeed to and
        become vested with all the rights, powers, privileges and duties of the
        resigning or removed Trustee, and the resigning or removed Trustee shall
        be discharged from any future duties and obligations under this
        Agreement, but the resigning or removed Trustee shall continue after
        such resignation or removal to be entitled to the benefits of the
        indemnities provided herein for the Trustee.

10.     TERMINATION OF THE TRUST ACCOUNT.

<PAGE>

(a)     The Trust Account and this Agreement, except for the indemnities
        provided herein, may be terminated only after (i) the Grantor or the
        Beneficiary has given the Trustee written notice of its intention to
        terminate the Trust Account (the "Notice of Intention"), and (ii) the
        Trustee has given the Grantor and the Beneficiary the written notice
        specified in Section 10(b). The Notice of Intention shall specify the
        date on which the notifying Party intends the Trust Account to terminate
        (the "Proposed Date").

(b)     Within five business days following receipt by the Trustee of the Notice
        of Intention, the Trustee shall give written notification (the
        "Termination Notice") to the Beneficiary and the Grantor of the date
        (the "Termination Date") on which the Trust Account and this Agreement
        shall terminate. The Termination Date shall be (a) the Proposed Date if
        the Proposed Date is at least 30 days but no more than 45 days
        subsequent to the date the Termination Notice is given; (b) 30 days
        subsequent to the date the Termination Notice is given, if the Proposed
        Date is fewer than 30 days subsequent to the date the Termination Notice
        is given; or (c) 45 days subsequent to the date the Termination Notice
        is given, if the Proposed Date is more than 45 days subsequent to the
        date the Termination Notice is given. The Termination Notice shall be in
        the form of Exhibit D hereto.

(c)     On the Termination Date, upon receipt of written approval of the
        Beneficiary, the Trustee shall transfer to the Grantor any Assets
        remaining in the Trust Account, at which time all liability of the
        Trustee with respect to such Assets shall cease.

11.     DEFINITIONS.

Except as the context shall otherwise require, the following terms shall have
the following meanings for all purposes of this Agreement (the definitions to be
applicable to both the singular and the plural forms of each term defined if
both forms of such term are used in this Agreement):

The term "Affiliate" with respect to any corporation shall mean a corporation
which directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, such corporation.

The term "Beneficiary" shall have the meaning set forth in the preamble of this
Agreement and shall include any successor of the Beneficiary by operation of law
including, without limitation, any liquidator, rehabilitator, receiver or
conservator.

The term "control" (including the related terms "controlled by" and "under
common control with"), except as used in Section 7 hereof, shall mean the
ownership, directly or indirectly, of more than 10% of the voting stock of a
corporation.

The term "Eligible Securities" means and shall include certificates of deposit
issued by a United States bank and payable in United States legal tender,
including those issued by the Trustee, and securities, including securities
issued by the Trustee, representing investments with a rating of 1 or 2 under
the National Association of Insurance Commissioners SVO rating system, that
qualify as

<PAGE>

admitted assets in Pennsylvania; provided that no such securities shall have
been issued by a Parent, a Subsidiary or an Affiliate of either the Grantor or
the Beneficiary.

The term "person" shall mean and include an individual, a corporation, a
partnership, an association, a trust, an unincorporated organization or a
government or political subdivision thereof.

The term "Parent" shall mean an institution that, directly or indirectly,
controls another institution.

The term "Subsidiary" shall mean an institution controlled, directly or
indirectly, by another institution.

12.     GOVERNING LAW AND WAIVER OF JURY TRIAL.

(a) This Agreement and any amendments hereto shall be administered, governed by
and construed in accordance with the internal substantive laws of the State of
New York.

(b) Each of the Beneficiary, the Grantor and the Trustee hereby irrevocably
waives all right to a trial by jury in any action, proceeding or counterclaim
(whether based on contract, tort or otherwise) arising out of or relating to
this Agreement.

13.     SUCCESSORS AND ASSIGNS.

No Party may assign this Agreement or any of its rights or obligations
hereunder, whether by merger, consolidation, sale of all or substantially all of
its assets, liquidation, rehabilitation, dissolution or otherwise, except as
expressly permitted by Section 9.

14.     SEVERABILITY.

In the event that any provision of this Agreement shall be declared invalid or
unenforceable by any regulatory body or court having jurisdiction, such
invalidity or unenforceability shall not affect the validity or enforceability
of the remaining portions of this Agreement.

15.     ENTIRE AGREEMENT.

This Agreement, along with the Reinsurance Agreement, constitutes the entire
agreement among the Parties, and there are no understandings or agreements,
conditions or qualifications relative to this Agreement that are not fully
expressed in this Agreement.

16.     AMENDMENTS.

This Agreement and any exhibits hereto may be modified or otherwise amended, and
the observance of any term of this Agreement may be waived, if such
modification, amendment or waiver is in writing and signed by the Parties.

<PAGE>

17.     NOTICES, ETC.

Unless otherwise provided in this Agreement, all notices, directions, requests,
demands, acknowledgments and other communications required or permitted to be
given or made under the terms hereof shall be in writing and shall be deemed to
have been duly given or made (a)(i) when delivered personally, (ii) when made or
given by prepaid telex, telegraph, telecopier, facsimile or electronic media, or
(iii) in the case of mail delivery, upon the expiration of three days after any
such notice, direction, request, demand, acknowledgment or other communication
shall have been deposited in the United States mail for transmission by first
class mail, postage prepaid, or upon receipt thereof, whichever shall first
occur and (b) when addressed as follows:

        If to the Grantor:

            Penn Treaty Network America Insurance Company
            3440 Lehigh Street
            Allentown, PA  18103
            Attention: Mark Cloutier, Senior VP and CFO
            Facsimile: (610) 965-0668
            Telephone: (610) 965-2222

        If to the Beneficiary:

            Imagine International Reinsurance Limited
            43 St. Stephen's Green
            Dublin 2, Ireland
            Attention: Director
            Facsimile: 011-353-1-669-1848
            Telephone: 011-353-1-669-1850

        If to the Trustee:

            The Bank of New York
            101 Barclay Street, 8w
            New York, NY 10286
            Attention: Insurance Trust
            Facsimile: (212) 815 - 5877
            Phone: (212) 815 - 3233

Each Party may from time to time designate a different address for notices,
directions, requests, demands, acknowledgments and other communications by
giving written notice of such change to the other Parties. All notices,
directions, requests, demands, acknowledgments and other communications relating
to the Beneficiary's approval of the Grantor's authorization to substitute
Assets and to the termination of the Trust Account shall be in writing and may
be made or given by prepaid telex, telegraph, telecopier, facsimile or
electronic media.

<PAGE>

18.     HEADINGS. The headings of the Sections and the Table of Contents have
        been inserted for convenience of reference only and shall not be deemed
        to constitute a part of this Agreement.

19.     COUNTERPARTS. This Agreement may be executed in any number of
        counterparts, each of which when so executed and delivered shall
        constitute an original, but such counterparts together shall constitute
        but one and the same Agreement.

            [The remainder of this page is intentionally left blank.
                          The signature page follows.]

<PAGE>

        IN WITNESS WHEREOF, the Parties have caused this Funds Withheld Trust
Agreement to be executed and delivered by their respective officers thereunto
duly authorized as of the date first above written.

                        PENN TREATY NETWORK AMERICA INSURANCE COMPANY,
                        as Grantor

                        By: /s/ Cameron B. Waite
                            --------------------
                                Name: Cameron B. Waite
                                Title: Executive Vice President

                        IMAGINE INTERNATIONAL REINSURANCE LIMITED, as
                        Beneficiary

                        By: /s/ J. Doyle
                            ------------
                                Name: J. Doyle
                                Title: Chief Risk Officer

                        By: /s/ Antoinette Glennon
                            ----------------------
                                Name: Antoinette Glennon
                                Title: Finance

                        THE BANK OF NEW YORK, as Trustee

                        By: /s/ Robert W. Rich
                            ------------------
                                Name: Robert W. Rich
                                Title: Vice President

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