Document:

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                                  Exhibit 10.1

                        GRANITE CONSTRUCTION INCORPORATED

                    KEY MANAGEMENT DEFERRED COMPENSATION PLAN

                                 Amendment No. 2

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      WHEREAS, Granite Construction Incorporated (the "Company") maintains the
Granite Construction Incorporated Key Management Deferred Compensation Plan (the
"Plan") for the benefit of its eligible employees;

      WHEREAS, the Company desires to modify the definition of "Compensation" to
conform to changes made by the Economic Growth and Tax Relief Reconciliation Act
of 2001; and

      WHEREAS, the Company desires to clarify the provisions related to
Discretionary Contributions, and to modify certain other provisions.

      NOW, THEREFORE, the Plan is hereby amended as follows:

      1. Section 2(e) is restated, effective as of January 1, 2002, to read as
follows:

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            (e) "Compensation" means "compensation" (as defined in the Company's
      tax-qualified retirement plans) in excess of $200,000 (as indexed under
      section 401(a)(17) of the Code) but not in excess of $300,000 (as indexed
      from time to time by the Committee).

      2. Section 5 is restated, effective as of January 1, 2003, to read as
follows:

            5. Additions To Accounts.

            (a) Participant Compensation Deferrals. Each Participant may
      annually elect to defer the receipt of a whole percentage (up to 15% or
      such other percentage as may be determined by the Company's board of
      directors) of his or her Compensation.

            (b) Additional Deferrals. Under rules established by the Committee,
      each Participant may elect to defer an additional portion of the
      Participant's compensation equal to the full amount of the quarterly cash
      dividends that are paid to the Participant under Section 13(a) of the
      Granite Construction Employee Stock Ownership Plan. Each Participant may
      also elect to defer an additional portion of the Participant's
      compensation equal to the amount payable to the Participant under the
      Company's "cafeteria plan" under Section 125 of the Code. In addition,
      each Participant may elect to defer an additional portion of the
      Participant's compensation equal to the amount of up to 85% of the
      Participant's cash bonus (in 5% increments) payable under the Granite
      Construction Profit Sharing Cash Bonus Plan.

            (c) Company Matching Contributions. The Company will annually credit
      each Participant's Account with an amount equal to a percentage of the
      Compensation deferred by the Participant under Sections 5(a) or (b), which
      percentage will equal the matching contribution percentage determined
      under the Granite Construction Profit Sharing and 401(k) Plan for such
      Plan Year.

            (d) Discretionary Contributions. For each Plan Year in which a
      Participant elects to defer a portion of his or her compensation in
      accordance with Sections 5(a), the Company will credit each Participant's
      Account with an amount equal to a percentage of the Participant's
      Compensation that is equal to the total discretionary contribution
      percentage determined by the Company's board of directors for the Granite
      Construction Profit Sharing and 401(k) Plan and the Granite Construction
      Employee Stock Ownership Plan with respect to the Plan Year for which such
      Compensation was deferred.

            (e) Hypothetical Investment Experience. For each Plan Year, the
      balance of each Participant's Account will be credited quarterly with
      hypothetical earnings equal to one-quarter of the sum of the 30-day
      average of the Lehman Brothers long term bond

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      index (as published in the Wall Street Journal) determined as of the
      December 1 of the prior Plan Year, plus 100 basis points, or as determined
      by the Committee.

      3. Section 7(d) is restated, effective as of January 1, 2003, to read as
follows:

            (d) Special Rule for "For Cause" Terminations. If a Participant is
      terminated "for cause" (as such term is defined in section 6.5(iii) of the
      Granite Construction Incorporated 1999 Equity Incentive Plan), and the
      Participant forfeits all amounts other than his or her own Compensation
      deferrals, then notwithstanding Sections 6, 7(a) or 7(c), distribution of
      the vested portion of such Participant's Account will be made in a lump
      sum cash payment as soon as practicable following his or her termination
      of Company employment.

      To record the adoption of this Amendment No. 2 to the Plan, the Company
has caused it to be executed this Monday, March 24, 2003.

                                             GRANITE CONSTRUCTION

                                             INCORPORATED

                                             By  /s/ William G. Dorey
                                                --------------------------------
                                                 William G. Dorey, President

                                             By  /s/ Michael Futch
                                                --------------------------------
                                                Michael Futch, Secretary

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                                                                   Exhibit 10(b)

                               SERVICES AGREEMENT

                  This Agreement, dated as of January 1, 2003, is by and among
MERCHANTS MUTUAL INSURANCE COMPANY ("Merchants Mutual"), a New York domiciled
mutual property and casualty insurance company, MERCHANTS INSURANCE COMPANY OF
NEW HAMPSHIRE, INC. ("Merchants New Hampshire"), a New Hampshire domiciled stock
property and casualty insurance company, and MERCHANTS GROUP, INC. ("MGI"), a
publicly-traded Delaware business corporation. Merchants Mutual is sometimes
herein referred to as "Administrator"; Merchants New Hampshire and MGI are
sometimes herein referred to individually or jointly as "Client"; and Merchants
Mutual, Merchants New Hampshire and MGI are sometimes herein referred to
collectively as the "Companies" and individually as a "Company".

                                    Recitals

                  WHEREAS, Merchants New Hampshire is a wholly-owned subsidiary
of MGI; and

                  WHEREAS, prior to the date of this Agreement the insurance
coverages offered by Merchants Mutual and Merchants New Hampshire have been
marketed together through common, independent agents; and

                  WHEREAS, the Companies are parties to a Management Agreement
dated as of September 29, 1986 (the "Previous Management Agreement"), pursuant
to which Merchants Mutual has been providing certain management services to
Merchants New Hampshire and MGI; and

                  WHEREAS, the Previous Management Agreement is scheduled to
terminate on July 23, 2003; and

                  WHEREAS, the Companies desire to provide for the
administration and management of certain aspects of Merchants New Hampshire's
and MGI's business effective upon the termination of the Previous Management
Agreement; and

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                  WHEREAS, the Companies believe that because Merchants Mutual
(a) has managed the Traditional Insurance Business, as defined below, under the
Previous Management Agreement, (b) is a significant stockholder of MGI, and (c)
will share in the underwriting results of Merchants New Hampshire with respect
to the Traditional Insurance Business pursuant to the Reinsurance Pooling
Agreement, as defined below, that Merchants Mutual is well qualified to manage
the Traditional Insurance Business of Merchants New Hampshire in an efficient
and effective manner and has indicated a willingness and desire to do so; and

                  WHEREAS, it is the overall intent of the Companies in entering
into this Agreement and Annexes hereto and the Reinsurance Pooling Agreement, as
such terms are defined below, to perpetuate a mutually beneficial relationship
among the Companies upon the termination of the Previous Management Agreement;
to align the insurance interests of Merchants New Hampshire and Merchants Mutual
by pooling risks and assuring common underwriting results on their Traditional
Insurance Business prior to any annual or cumulative profit or loss sharing
calculation; to allow the Companies to pursue independent endeavors, or joint
endeavors if they are mutually so inclined; and to more clearly delineate the
on-going rights and duties of the respective Companies with respect to the
administration, management and oversight of the respective insurance operations
of the Client.

                  NOW, THEREFORE, in consideration of the mutual promises and
covenants and subject to the conditions herein set forth, each party hereto
agrees as follows:

                  1. GENERAL DEFINITIONS. The following words and phrases shall
have the meanings set forth below, unless such word or phase is otherwise
specifically defined elsewhere in this Agreement or in one of the Annexes
attached hereto:

                  (a) "Agreement" shall mean this Services Agreement by and
among Merchants Mutual, Merchants New Hampshire and MGI, dated as of January 1,
2003, and shall include each Annex attached hereto and the Schedules, if any,
attached to each Annex.

                  (b) "Annex" or "Annexes" shall mean individually or
collectively, as the context may require, the Administrative Services Annex, the
Underwriting Services Annex, the Claims Services Annex and the Investment and
Cash Management Services Annex referred to in Paragraph 8 below.

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                  (c) "Reinsurance Pooling Agreement" shall mean the Reinsurance
Pooling Agreement between Merchants New Hampshire and Merchants Mutual dated
January 1, 2003.

                  (d) "Traditional Insurance Business" shall mean those
commercial and personal lines of property, liability and workers' compensation
insurance in any jurisdiction in which either of Merchants New Hampshire or
Merchants Mutual is or was licensed to do an insurance business, which insurance
was produced through the Companies' independent insurance agents pursuant to the
Previous Management Agreement, including residual market assumptions and
assessments, industry underwriting facilities charges, and all similar
assessments and charges attributable to such business, and such other business
as the Companies may mutually agree.

                  2. EFFECTIVE DATE. Unless otherwise specifically provided
herein or in any Annex hereto, all of the terms and conditions in this Agreement
shall be effective as of 12:00 a.m. on January 1, 2003 ("Effective Date").

                  3. TERM. This Agreement shall remain in effect until the
expiration or earlier termination of each and every of the Annexes hereto;
provided, however, that the provisions set forth in Paragraphs 4, 5, 6, 9, 10,
11, 12, 13, 14 and 19 herein shall survive the expiration or earlier termination
of this Agreement and each of the Annexes hereto.

                  4. TERMINATION OF PREVIOUS MANAGEMENT AGREEMENT. The Previous
Management Agreement shall terminate immediately upon the Effective Date;
provided, however, that the Companies shall continue to apply the terms of the
Previous Management Agreement to any transactions outstanding as of that time in
order to provide for a smooth, fair and equitable transition from the Previous
Management Agreement to this Agreement. In the event there is any dispute as to
whether the terms of this Agreement or of the Previous Management Agreement
apply to any such transaction, the terms of the Previous Management Agreement
shall apply.

                  5. RELEASE AND DISCHARGE. Each of the Companies hereby
releases and discharges each of the other Companies and their officers,
directors, employees and representatives from any and all claims, causes of
action or damages which it has or may have against the other Companies and their
officers, directors, employees and representatives arising out of or under the

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Previous Management Agreement or such other Company's performance or
nonperformance under the Previous Management Agreement; provided, however, the
Companies do not release or discharge each other from claims, causes of action
or damages resulting from or arising out of the direct financial obligations of
each Company to any other Company under the Previous Management Agreement,
accounting adjustments made in the ordinary course of business consistent with
past practices, inadvertent accounting or clerical errors, and any fines,
penalties or assessments asserted by any state insurance department.

                  6. CONTINUATION OF TERMINATION OF INTER-COMPANY POOLING
AGREEMENT. Merchants Mutual and Merchants New Hampshire are parties to a
Termination of Inter-Company Pooling Agreement dated as of January 1, 1985, as
modified on May 5, 1986, (the "Termination of Pooling Agreement"). This
Agreement shall not amend, change or modify in any respect the Termination of
Pooling Agreement which shall remain in full force and effect in accordance with
its terms. Any ambiguity or conflict between the terms of the Termination of
Pooling Agreement and this Agreement shall be resolved in accordance with the
terms of this Agreement.

                  7. BOARD OF DIRECTORS CONTROL. Nothing contained in this
Agreement, in any Annex, or in the Reinsurance Pooling Agreement shall be deemed
to be a delegation of the authority or responsibility of either Client's Board
of Directors. The business of each Company will be managed by its officers
subject to the authority of its Board of Directors. Each Company may appoint or
elect as officers of such Company persons who hold offices in the other
Companies, subject at all times to the power of its Board of Directors to
appoint or elect and remove its officers in accordance with the charter,
certificate of incorporation, by-laws, or other governing instrument, statute or
rule of law applicable to such Company.

                  8. AGREEMENT TO PROVIDE SERVICES; BANK ACCOUNTS; ADDITIONAL
PARTICIPANTS.

                        (a) Subject to the approval, if required, of the New
York and New Hampshire Insurance Departments and any other regulatory authority
having jurisdiction over any Company, Merchants New Hampshire and MGI, as
Client, hereby engage, retain and appoint Merchants Mutual, as Administrator, to
provide the following services, and Merchants Mutual hereby accepts such
engagement, retention and appointment:

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                              (i)   administrative services for Merchants New
                                    Hampshire and MGI, in accordance with the
                                    terms and conditions set forth in the
                                    Administrative Services Annex attached
                                    hereto and hereby incorporated herein;

                              (ii)  underwriting services for Merchants New
                                    Hampshire, in accordance with the terms and
                                    conditions set forth in the Underwriting
                                    Services Annex attached hereto and hereby
                                    incorporated herein;

                              (iii) claims services for Merchants New Hampshire,
                                    in accordance with the terms and conditions
                                    set forth in the Claims Services Annex
                                    attached hereto and hereby incorporated
                                    herein; and

                              (iv)  investment and cash management services for
                                    Merchants New Hampshire and MGI, in
                                    accordance with the terms and conditions set
                                    forth in the Investment and Cash Management
                                    Services Annex attached hereto and hereby
                                    incorporated herein.

                        (b) All underwriting, claims and investment services
provided to the Merchants New Hampshire by Merchants Mutual pursuant to this
Agreement are to be based upon the written standards and guidelines of Merchants
New Hampshire. Merchants New Hampshire shall have the ultimate and final
authority over decisions and policies, including but not limited to the
acceptance, rejection and canceling of risks, the payment or non payment of
claims, and the purchase and sale of securities.

                        (c) Each Client hereby authorizes Administrator to open,
maintain and use bank accounts in each Client's name for the purpose of
effecting the transactions contemplated in this Agreement, the Annexes referred
to herein, and the Reinsurance Pooling Agreement. Merchants New Hampshire
further authorizes Merchants Mutual to open, maintain and use bank accounts in
the name of Merchants New Hampshire or Merchants Mutual or both companies for
the purpose of effecting the premium collections, loss payments and other policy
related transactions under the Reinsurance Pooling Agreement.

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                        (d) Each Client acknowledges that Merchants Mutual
intends to form a new, wholly owned subsidiary and to license that subsidiary to
write property and casualty insurance. The Companies may mutually agree to add
that new subsidiary as a party to this Agreement and certain or all of the
Annexes, and the Reinsurance Pooling Agreement.

                  9. BASIS FOR COMPUTATION OF AMOUNTS DUE. Except as otherwise
required by the context of this Agreement or in any Annex hereto, the amounts
due hereunder shall be determined on a year-to-date basis with such
determination to be made as of the end of each month using the same accounting
principles and practices used by Merchants Mutual and Merchants New Hampshire in
filing quarterly and annual statements with the Insurance Departments of the
States of New York and New Hampshire, respectively, and by MGI in preparing
separate quarterly and annual financial statements for filing with the
Securities and Exchange Commission. The accounting principles and practices used
by Merchants Mutual and Merchants New Hampshire shall be consistent with the
provisions of Regulation 30 of the State of New York, Title 11. Chapter IV
Subchapter C. Part 105. -- Operating Expense Classifications for Annual
Statement Purposes.

                  10. TERMINATION.

                        (a) Any Company may, at any time, terminate this
Agreement or any Annex for "cause" by written notice specifying (i) the
effective date of termination, which date shall be not less than sixty (60) days
after the date of such notice, and (ii) the reasons for termination. "Cause",
for purposes of terminating this Agreement or any Annex, shall mean either (i)
any material breach of this Agreement or such Annex or (ii) continuous or
repeated failure of a party to comply with a material term of this Agreement or
such Annex. Any termination for cause shall not affect the rights and
obligations of the parties as to transactions or acts by either party prior to
the effective date of termination or relieve either party's obligation during
the pendency of any dispute over the cause of termination. Before a party may
terminate this Agreement or any Annex for cause, the terminating party must
permit the other to rectify such breach, non-performance, or violation within
thirty (30) business days after receipt of written notice of termination. If the
party in breach of this Agreement or any Annex fails to cure within thirty (30)
days of receiving notice of termination of this Agreement or any Annex for
cause, this

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Agreement or any Annex shall terminate on the effective day of the termination
as provided in the notice, unless agreed otherwise in writing by the terminating
party.

                        (b) Any Company may terminate this Agreement or any
Annex immediately by giving written notice of termination to the other Companies
if either of the other Companies:

                              (i)   is placed under supervision or in
                                    rehabilitation or liquidation by a state
                                    regulatory authority;

                              (ii)  is adjudged bankrupt;

                              (iii) has a receiver of its assets or property
                                    appointed by a court of competent
                                    jurisdiction;

                              (iv)  makes a general assignment for the benefit
                                    of creditors; or

                              (v)   institutes (or suffers to be instituted and
                                    not dismissed within sixty (60) days) any
                                    proceeding for the reorganization or
                                    arrangement of its affairs.

                        (c) In addition to the grounds for termination set forth
in Subparagraphs 10(a) and (b) above, Merchants Mutual may terminate this
Agreement, which shall include all (but only all) of the Annexes, upon thirty
(30) days notice given within forty-five (45) days after a "change in control"
shall have occurred with respect to either MGI or Merchants New Hampshire, and
either MGI or Merchants New Hampshire may terminate this Agreement, which shall
include all (but only all) of the Annexes, upon thirty (30) days notice given
within forty-five (45) days after a "change in control" shall have occurred with
respect to Merchants Mutual. For purposes of this Agreement, a "change in
control" shall have occurred with respect to a Company if, after the date of
this Agreement:

                              (i)   Any person (as such term is used in Section
                                    13(d) or Section 14(d)(2) of the Securities
                                    Exchange Act of 1934, as amended, and the
                                    rules and regulations thereunder and
                                    including any affiliate or associate of such
                                    person, as defined in Rule 12b-2 under said
                                    Act, and any person acting in concert with
                                    such person), directly or indirectly
                                    acquires or becomes the beneficial owner of
                                    (within the

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                                    meaning of Rule 13d-3 under said Act), or
                                    otherwise becomes entitled to vote, stock of
                                    MGI or Merchants New Hampshire with 25% or
                                    more of the voting power entitled to be cast
                                    at elections for directors (excluding any
                                    acquisition of stock in one Client by the
                                    other Client or by Merchants Mutual); or

                              (ii)  There occurs any merger or consolidation of
                                    any Company (excluding any merger or
                                    consolidation of one Company with another
                                    Company) or any sale, lease or exchange of
                                    all or any substantial part of the assets of
                                    any of the Companies and their subsidiaries
                                    to any other person, excluding any of the
                                    other Companies, and (i) in the case of a
                                    merger or consolidation, the holders of the
                                    outstanding stock of any of the Companies
                                    entitled to vote in elections of directors
                                    ("voting stock") immediately before such
                                    merger or consolidation hold less than 50%
                                    of the voting stock of the survivor of such
                                    merger or consolidation or its parent; or
                                    (ii) in the case of any such sale, lease or
                                    exchange, neither of the Clients or the
                                    Companies as a group owns at least 50% of
                                    the voting stock of the other person; or

                              (iii) During any period of two (2) consecutive
                                    years, individuals who at the beginning of
                                    such period constitute the entire Board of
                                    Directors of any of the Companies shall
                                    cease for any reason to constitute a
                                    majority thereof, unless the election or the
                                    nomination for the election by that
                                    Company's Directors, shareholders or
                                    policyholders of each new Director was
                                    approved by a vote of at least two-thirds of
                                    the Directors then still in office who were
                                    Directors at the beginning of the period.

                        (d) This Agreement, and any Annex, may be terminated at
any time upon the agreement of all parties hereto, subject to all necessary
regulatory approvals.

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                        (e) The right of termination belonging to any party may
be exercised without prejudice to any other remedy to which the terminating or
canceling party may be entitled to at law or under this Agreement.

                        (f) Upon the effective date of termination for any
reason, Client shall either: (i) assume the responsibility for all functions for
which Administrator may be responsible in accordance with the terms of this
Agreement or any Annex being terminated, or (ii) identify and engage one or more
replacement administrators for one or more of said functions. Upon the effective
date of termination for any reason, Administrator shall be relieved of all of
its obligations and duties hereunder without further liability to Client, except
as provided in Subparagraph 10(g) below and except for those provisions which
shall survive termination as provided in Paragraph 3 above; provided, however,
in such event, Administrator shall cooperate with Client and, if applicable, the
replacement administrator in the transfer without undue delay of files and
information to assist Client or replacement administrator in assuming
uninterrupted service upon the date of termination.

                        (g) Within thirty (30) days after the effective date of
termination, Client shall pay to Administrator all outstanding sums due to
Administrator pursuant to this Agreement or the Annex being terminated, and
Administrator shall pay to Client all outstanding sums due to Client pursuant to
this Agreement or the Annex being terminated.

                  11. RECORDS AND INSPECTION.

                        (a) Administrator shall keep accurate records and
accounts of all transactions undertaken on behalf of Client pursuant to this
Agreement. Said records and accounts shall be maintained in accordance with the
same prudent standards of record keeping as Administrator follows with respect
to its own business and in accordance with all applicable state laws and
regulations concerning records retention. All files shall, upon reasonable prior
written notice to Administrator, be open and available for on-site audit and/or
inspection and reproduction, at Client's expense, by duly authorized
representatives of Client.

                        (b) Regulatory authorities, having appropriate
jurisdiction, shall have access to files maintained by Administrator for the
purpose of examination, audit, and inspection.

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                  12. OWNERSHIP OF FILES, RETENTION OF RECORDS. Upon termination
of this Agreement or any Annex or on order of a court having competent
jurisdiction, Client's files and records maintained by Administrator pursuant to
this Agreement shall become the sole property of Client once Administrator has
been paid for the services rendered. Administrator shall have reasonable access
to and the right to copy all files, books and records on a timely basis.

                  13. REVIEWS. Client may conduct on-site reviews of the
operations of Administrator on behalf of Client. Client may conduct such reviews
during normal business hours upon reasonable notice to Administrator.
Administrator shall cooperate fully with Client, its representatives, and its
designees in such reviews. Client shall prepare written findings in connection
with any review and shall provide Administrator with a copy of such findings
within thirty (30) days after completion of the review.

                  14. INDEMNIFICATION.

                        (a) Administrator agrees to indemnify and hold Client
harmless against all claims, liabilities, demands, proceedings, actions,
damages, costs, and expenses (including, without limitation, reasonable
attorneys' fees, fines, penalties or other assessments imposed against Client by
an insurance department or other governmental entities) to which Client may be
subjected arising out of or caused by material breach of this Agreement or any
Annex by Administrator, or the gross negligence or misconduct of Administrator
in processing any transaction and/or the fraudulent conduct or embezzlement or
any other defalcation or gross negligence attributable to Administrator. Nothing
in this Paragraph or in any other provision of this Agreement shall relieve MNH
of its obligations or liabilities to persons or entities not a party to this
Agreement.

                        (b) Client agrees to indemnify and hold Administrator
harmless against all claims, liabilities, demands, proceedings, actions,
damages, costs, and expenses (including, without limitation, reasonable
attorneys' fees, fines, penalties or other assessments imposed against
Administrator by an insurance department or other governmental entities) to
which Administrator may be subjected arising out of or caused by material breach
of this Agreement or any Annex by Client, or the gross negligence or misconduct
of Client and/or the fraudulent conduct or embezzlement or any other defalcation
or gross negligence attributable to Client.

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                  15. ERRORS AND OMISSIONS. At any time that Administrator's
capital and surplus, as reported to insurance regulatory authorities as of the
end of each calendar quarter on a Statutory Accounting basis, is below forty
million dollars ($40,000,000), Administrator agrees that it will provide and
maintain insurance coverage for Errors and Omissions Liability in an amount of
not less than one million dollars ($1,000,000) for any one event or occurrence
and in an amount of not less that five million dollars ($5,000,000) in the
aggregate. Client shall receive thirty (30) days written notice of any pending
change, cancellation or other termination of any such Errors and Omissions
Liability policy.

                  16. ASSIGNMENT. This Agreement shall be binding upon and inure
to the benefit of the parties hereto, their successors and assigns. Except as
otherwise provided below, neither Administrator nor Client may assign this
Agreement or any Annex or the services required herein without the prior written
consent of the other party. This provision shall not prohibit Administrator from
assigning or subcontracting any one or more of the activities to be performed by
Administrator, provided that Administrator obtains any required regulatory
approvals, and provided further that such assignment or subcontracting shall not
relieve Administrator of its obligations to Client under this Agreement.

                  17. INDEPENDENT CONTRACTOR. Administrator shall act as an
independent contractor in providing services to Client hereunder. Neither this
Agreement nor the performance hereof by Administrator shall create nor be deemed
to create any employer-employee, joint venture or partnership relationship
between Administrator or any of its affiliates, officers, directors, employees,
or other agents or representatives, on the one hand, and Client or any of its
affiliates, officers, directors, employees, or other agents or representatives,
on the other hand.

                  18. NOTICES.

                        (a) All notices or other communications required
pursuant to any provision of this Agreement or any Annex shall be in writing and
shall be delivered personally, or sent by a nationally recognized overnight
carrier, or sent by certified mail return receipt requested, postage prepaid,
addressed as follows:

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           Administrator:    Merchants Mutual Insurance Company
           Address:          250 Main Street
                             Buffalo, New York 14202
           Attn.:            Robert M. Zak, President & CEO

           Client:           Merchants Group, Inc.
                             Merchants Insurance Company of New Hampshire, Inc.
           Address:          250 Main Street
                             Buffalo, New York 14202
           Attn.:            Stephen C. June

                        (b) When required or issued pursuant to this Agreement,
notices shall be deemed to have been given at the time when personally
delivered, or the day following the day sent by overnight carrier, or if by
certified mail, upon the third (3rd) day after the date such notice is
postmarked.

                  19. ARBITRATION. If any dispute arises under this Agreement
that cannot be resolved by the parties hereto it shall be settled by arbitration
in the following manner: The dispute shall be submitted for determination to a
panel of three (3) arbitrators, not related to or affiliated with any of the
parties to this Agreement, one to be chosen by Merchants Mutual, one to be
chosen by MGI and the third to be selected by the mutual agreement of the other
two (2) arbitrators. The arbitration shall take place in Buffalo, New York, and
shall be conducted in accordance with the then current Commercial Arbitration
Rules of the American Arbitration Association. The arbitrators shall not be
authorized to award punitive damages.

                  20. GENERAL.

                        (a) This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof, and as of the Effective
Date supersedes all previous agreements and/or contracts whether oral or written
between them with respect to the subject matter hereof, including the Previous
Management Agreement unless specifically provided otherwise herein.

                        (b) If any provision of this Agreement shall contravene
or be invalid under the laws of the United States, the state in which
enforcement is sought, or the regulatory requirements of such state, it is
agreed that such provision shall not invalidate the whole

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Agreement but the Agreement shall be construed as if not containing the
particular provision or provisions held to be invalid.

                        (c) This Agreement shall not be amended, changed or
modified in any manner, except by an instrument in writing signed by all the
parties hereto or their respective successors or assigns.

                        (d) No party hereto shall be deemed to have waived any
rights or remedies accruing to it hereunder unless such waiver is in writing and
signed by such party.

                        (e) No delay or omission by any party hereto in
exercising any right shall operate as a waiver of said right on any further
occasion.

                        (f) The captions are for convenience of reference only
and shall not control or affect the meaning or construction of any provision of
this Agreement.

                        (g) This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same instrument.

                        (h) This Agreement shall be interpreted and construed in
accordance with the internal laws of the State of New York without regard to
conflicts of law.

                        (i) Each party represents to the other that it is
authorized to enter into this Agreement and that its entry into this Agreement
does not and will not violate the terms of any judgment, decree or ruling or any
contract with any third party.

                        (j) If an unforeseen event or circumstance arises and
the terms of this Agreement or the Annexes are ambiguous as to how the event or
circumstance shall be resolved or managed, or a literal reading of this
Agreement or the Annexes creates a result inconsistent with the purposes for
which the Companies have entered into this Agreement or the Annexes, this
Agreement and the Annexes shall be interpreted in a manner that will effectuate
the purposes of the parties as set forth in the Recitals which appear at the
head of this Agreement.

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CLIENT AND ADMINISTRATOR CERTIFY BY THEIR UNDERSIGNED AUTHORIZED OFFICERS THAT
THEY HAVE READ THIS AGREEMENT, INCLUDING ALL ANNEXES HERETO AND THE SCHEDULES TO
SUCH ANNEXES, AND AGREE TO BE BOUND BY ITS TERMS AND CONDITIONS.

                  IN WITNESS WHEREOF, this Agreement has been duly executed by
each party hereto in Buffalo, New York on the date first above written.

                                  MERCHANTS MUTUAL INSURANCE COMPANY

                                  By
                                     -------------------------------------------
                                                Robert M. Zak, President

                                  MERCHANTS INSURANCE COMPANY OF
                                  NEW HAMPSHIRE, INC.

                                  By
                                     -------------------------------------------
                                      Stephen C. June, Executive Vice President

                                  MERCHANTS GROUP, INC.

                                  By
                                     -------------------------------------------
                                           Edward M. Murphy, Vice President

                                       14
<PAGE>

                          ADMINISTRATIVE SERVICES ANNEX

This Annex is part of the Services Agreement dated January 1, 2003 (the
"Agreement" or "Services Agreement"), by and between Merchants Group, Inc.
("MGI") and Merchants Insurance Company of New Hampshire, Inc. ("Merchants New
Hampshire") on the one hand (jointly, "Client") and Merchants Mutual Insurance
Company on the other hand ("Administrator").

I.       Appointment of Administrator

         Client hereby appoints Administrator and Administrator hereby accepts
         appointment by Client to provide the administrative, bookkeeping,
         accounting and other similar functional services enumerated in Section
         II below and related to the administration of Merchants New Hampshire's
         Traditional Insurance Business and to the day-to-day administration of
         MGI's bookkeeping, accounting and related needs.

         Administrator agrees to perform, for the fees set forth below, the
         services enumerated in Section II below. Administrator's services shall
         be performed in a timely manner in accordance with the legal
         requirements and other obligations of Client. Administrator's
         performance is subject, however, to the timely performance by Client of
         its duties and responsibilities where applicable.

II.      Duties of Administrator

         With respect to the administration of Merchants New Hampshire's
         Traditional Insurance Business and to the day-to-day administration of
         MGI's and MNH's bookkeeping, accounting and related needs,
         Administrator agrees to perform the duties and obligations listed below
         in accordance with the standards established below and the legal
         requirements applicable to such Traditional Insurance Business. In the
         event that any such duties or obligations are more specifically
         provided for in another Annex, that other Annex shall supercede this
         Section.

         In respect to the authorization and appointment established in Section
         I, Client hereby conveys to and confers upon Administrator the required
         powers authorizing it to take all necessary action to enable it to
         perform its duties hereunder, on behalf of Client, including without
         limitation:

         A.   Accounting services, including the preparation of all income tax
              returns, balance sheets, profit and loss statements and convention
              statements; making disbursements, other than related to premiums
              and claims, following established internal control procedures; the
              keeping of all original books and records regarding all receipts
              and disbursements and posting all entries in the same; the
              compilation of all financial information in such detail and at
              such times as shall be required by the Board of Directors of
              Client or any committee thereof; compiling information

                                       15
<PAGE>

              for and completing drafts for the review and approval of Merchants
              New Hampshire or MGI management of all financial forms and
              statements required by any governmental agency, whether state or
              federal or for distribution to Client's stockholders and
              directors; and, in general, to do and perform all services
              customarily done and performed by accounting departments of
              property and casualty insurance companies.

         B.   Actuarial services, including the development and calculation of
              loss reserves for property and casualty insurance business
              produced pursuant to the Underwriting Services Annex as amended
              from time to time. Administrator shall make available its staff
              and actuarial advisors for the purpose of carrying out such
              functions, evaluating loss reserves and statutory reserves, and
              all other management services traditionally performed by actuarial
              departments in property and casualty insurance companies.

         C.   Management of the procurement of legal services, including advice
              with respect to all state and federal laws applicable to Client's
              insurance operations; the performance of other management services
              customarily performed by counsel for property and casualty
              insurance companies in the ordinary course-of-business. The
              management services provided for in this paragraph shall not
              include litigation (whether initiated by Client or others); the
              transfer of stock whether by purchase, exchange, or otherwise;
              fees incurred in connection with the investment of assets of
              Client or any legal management services required other than in the
              ordinary course of the business of Client, including without
              limitation any corporate advice, advice to the Board of Directors
              or securities laws advice. Nothing contained in this paragraph
              shall be construed to require Administrator to undertake any
              action that would constitute the practice of law in any applicable
              jurisdiction.

         D.   Internal audit services necessary to maintain an adequate system
              of internal controls and management reporting.

         E.   All other administrative services:

              i.   in conjunction with Client, and, with respect to MGI,
                   incidental to the operation of a publicly traded corporation
                   including without limitation, the maintenance of all
                   corporate records, including drafting minutes of Directors
                   meetings; the drafting of all filings with the Securities and
                   Exchange Commission subject to the review and approval by
                   MGI; handling of investor relations, including relations with
                   investment analysts and news media;

              ii.  with respect to Merchants New Hampshire, incidental to the
                   operation of a property and casualty insurance company
                   including without limitation, the handling of matters before
                   all insurance departments having jurisdiction over Merchants
                   New Hampshire and all legislative matters which might affect
                   the operation of Merchants New Hampshire in the various
                   states in which

                                       16
<PAGE>

                   Merchants New Hampshire is admitted to do business; the
                   handling of matters with AM Best and other financial rating
                   agencies; and

              iii. in general, to perform such administrative, management and
                   development tasks as are or might be, considered prudent,
                   reasonable and necessary for the operation of Client.

III.     Duties of Client

         Client agrees to perform the duties and obligations listed below in
         accordance with the standards established below and the legal
         requirements of all applicable jurisdictions.

         A.   Advise Administrator of all corporate plans and strategies that
              affect the performance of Administrator's duties under this Annex.

         B.   Disclose to Administrator information relevant to the preparation
              and filing of all financial and other reports.

         C.   Review and approve the following:

              i.   Securities and Exchange Commission and stock exchange and
                   other securities filings and reports; and

              ii.  Press releases.

IV.      Fees and Expenses

         A.   In consideration for the services performed by Administrator
              enumerated under Section II of this Annex, Client shall pay to
              Administrator fees as follows:

              i.   For all services as set forth in Section II of this Annex
                   monthly fees determined as set forth in Schedule 1 attached
                   hereto, payable monthly within thirty (30) days after the end
                   of each month

              ii.  Other services - in accordance with fees to be agreed

         B.   Client shall be responsible to pay directly to the applicable
              taxing authority or to Administrator, if imposed on or paid on
              behalf of Client by Administrator, all federal, state and local
              taxes and assessments which Administrator may be required to pay
              or collect or which may be incurred or assessed against
              Administrator, under any existing or future law.

                                       17
<PAGE>

V.      Term of Annex

                 This Annex shall commence as of the Effective Date of the
                 Agreement and continue in force and in effect for an indefinite
                 period, unless and until terminated (i) at 11:59 p.m. December
                 31, 2003 or at the end of any calendar quarter thereafter by
                 either party providing the other with written notice not less
                 than 180 days prior to the date of termination, or (ii) upon
                 termination of the Services Agreement.

                                      * * *

                                       18
<PAGE>

                                   SCHEDULE 1

                     Annual Fees for Administrative Services
                      Set Forth in Section II of this Annex

For each calendar year, Client shall pay to Administrator on a monthly basis 50%
of the expenses incurred by Administrator listed in paragraphs A. and B. below.
This percentage and the category of expenses may be changed by mutual agreement
of Client and Administrator, at any time and from time to time after December
31, 2003.

A.       The Client's agreed share of the following DEPARTMENTAL EXPENSES:

         1.       General accounting services, after deducting:
                  a.       Depreciation - furniture and fixtures
                  b.       Depreciation - electronic data processing
                  c.       Facility administration expenses
                  d.       Legal and audit fees
                  e.       Building rent

         2.       Actuarial services, but only as respects the agreed percentage
                  of the actuarial staff as relates to determining the Client's
                  reserves for losses, loss adjustment expenses and unearned
                  premiums.

         3.       Statistical reporting, but including only the agreed
                  percentage of the Chief Actuary's salary and fringe benefits
                  relating to this service.

         4.       Internal audit

         The above Departmental Expenses shall also include the allocated
         percentages of the following related additional expenses:

         1.       Fringe benefits applicable to the managers and staff providing
                  the applicable services, and

         2.       Occupancy and equipment costs required for the managers and
                  staff providing the applicable services.

B.       Salaries and fringe benefits for the following Executive Managers and
         staff, but only as relates to the services provided by the departments
         listed in A. above:

         1.       Chief Executive Officer
         2.       Chief Financial Officer
         3.       Assistant Vice President - Finance
         4.       Controller
         5.       Executive Assistant.

                                       19
<PAGE>

C.       In addition to its share of the expenses listed in paragraphs A. and B.
         above, Client shall also pay 100% of its direct expenses including, but
         not limited to, the following:

         1.       Legal
         2.       Audit
         3.       Insurance
         4.       Salaries, fringe benefits and other expenses for Client's
                  employees
         5.       Fees and expenses for Client's advisors.
         6.       Rating agency fees.

                                       20
<PAGE>
                           UNDERWRITING SERVICES ANNEX

This Annex is part of the Services Agreement dated January 1, 2003 (the
"Agreement" or "Services Agreement"), by and between Merchants Group, Inc.
("MGI") and Merchants Insurance Company of New Hampshire, Inc. ("Merchants New
Hampshire") on the one hand (jointly, "Client") and Merchants Mutual Insurance
Company on the other hand ("Administrator").

I.       Appointment of Administrator

         Merchants New Hampshire hereby appoints Administrator and Administrator
         hereby accepts appointment by Merchants New Hampshire to act on behalf
         of Merchants New Hampshire in underwriting and servicing Merchants New
         Hampshire's Traditional Insurance Business incepting and in force
         during the Term of this Annex.

         This Annex shall not be considered an exclusive relationship between
         Merchants New Hampshire and Administrator, and Merchants New Hampshire
         may act on its own behalf or engage such other underwriting
         administrators to act for it with respect to other policies or
         insurance business not included in Traditional Insurance Business as
         Merchants New Hampshire may designate from time to time. Conversely,
         Administrator may provide similar services to others.

         Administrator agrees to perform, for the fees set forth below, the
         services enumerated in Section II. below. Administrator's services
         shall be performed in a timely manner in accordance with the legal
         requirements of the state in which the policy was written.
         Administrator's performance is subject, however, to the timely
         performance by Merchants New Hampshire of its duties and
         responsibilities where applicable.

II.      Duties of Administrator

         With respect to Traditional Insurance Business, Administrator agrees to
         perform the duties and obligations listed below and Client authorizes
         Administrator to perform all such duties and obligations, all in
         accordance with the standards established below and the legal
         requirements of the state in which the applicable policy was written.
         In the event that any such duties or obligations are more specifically
         provided for in another Annex, that other Annex shall supercede this
         Section.

         A.   Market Traditional Insurance Business through Merchants New
              Hampshire's appointed independent agents.

         B.   Appoint agents on behalf of Merchants New Hampshire in accordance
              with marketing plans as are approved by Merchants New Hampshire.

         C.   Ensure that each insurance applicant qualifies for new or renewal
              insurance in accordance with Merchants New Hampshire's
              underwriting guidelines and

                                       21
<PAGE>

              eligibility rules as are in effect from time to time; provided,
              however, that Administrator has the authority to interpret
              underwriting guidelines as the same apply to individual insurance
              applicants.

         D.   Solicit and receive insurance policy applications and renewal
              information, and bind and issue policies in accordance with
              Merchants New Hampshire's underwriting manuals and guidelines, as
              the same may be amended from time to time at the suggestion of or
              in consultation with Administrator.

         E.   Price all new and renewal premiums in accordance with premium
              rates, rating plans and rules as are in effect from time to time.

         F.   Prepare and maintain all policy files.

         G.   Submit premium billings to insureds or agents as applicable,
              collect premiums or pay or credit return premiums, and deposit
              cash in depository accounts approved by Merchants New Hampshire
              ("Deposit Account(s)"); the funds held in such Deposit Accounts
              may be commingled with funds of the Administrator but shall only
              be used by the Administrator to satisfy obligations related to the
              Traditional Insurance Business.

         H.   Provide all policyholder services not otherwise provided by
              Merchants New Hampshire's independent insurance agents, including
              fielding and responding to inquiries, processing policy changes
              and issuing endorsements, billing additional premiums and
              disbursing return premiums.

         I.   Establish and maintain files for each appointed agent including,
              among other things, agent's appointment agreement, commission
              structure, and binding authority, if any.

         J.   Calculate, process, and pay out of the Deposit Account(s) on
              behalf of Merchants New Hampshire all commissions and collect all
              return commissions in accordance with commission rates and plans
              as are in effect from time to time. Administrator shall have the
              authority to negotiate commissions on individual policies.

         K.   Calculate, process, and pay out of the Deposit Account(s) on
              behalf of Merchants New Hampshire all premium taxes out of
              Merchants New Hampshire's Deposit Account(s).

         L.   Calculate, process, and pay out of Deposit Account(s) on behalf of
              Merchants New Hampshire all policyholder dividends in accordance
              with the dividend plans in effect from time to time.

         M.   Maintain, and make available to Merchants New Hampshire as
              required all accounting records in the format and media maintained
              by Administrator

                                       22
<PAGE>

              including, but not limited to: premium registers; cash receipt
              journals; cash disbursements journals; open premium receivables
              and commission payables; and other related billings, receipts,
              payables and disbursements. Such records shall be available to
              Merchants New Hampshire during normal business hours upon
              reasonable notice.

         N.   Prepare and submit to Merchants New Hampshire periodic management
              reports as set forth in Schedule 1.

         O.   Make all systems, records and files available to Merchants New
              Hampshire and its actuaries and analysts. Such information shall
              be available to Merchants New Hampshire during normal business
              hours upon reasonable notice.

         P.   Prepare and file premium rating plans and amendments, as
              appropriate, whenever required, and submit to Merchants New
              Hampshire for specific approval any filing that deviates from
              credibility weighted actuarial indications by more than the
              greater of two (2) percentage points from the indication and 20%
              of the indication. In addition, Administrator shall also submit to
              Merchants New Hampshire for specific approval any filing that,
              after amendment following consultation or negotiation with the
              applicable state insurance department, deviates from credibility
              weighted actuarial indications by more than the greater of three
              (3) percentage points from the indication and 30% of the
              indication. Absent a response, Merchants New Hampshire is deemed
              to have approved any filing after ten (10) days from receipt of
              the submission from Administrator.

         Q.   Prepare and maintain, subject to the approval of Merchants New
              Hampshire, the following:

              i.      Underwriting guidelines and eligibility rules.

              ii.     Premium rating plans based on current underwriting
                      statistics, revised on a regular basis.

              iii.    Independent agency commission structures - base and
                      incentive.

              iv.     Policy dividend programs.

              Absent a response, Merchants New Hampshire is deemed to have
              approved any such guidelines, rules, plans, structures and/or
              programs (as applicable) after ten (10) days from receipt of the
              submission from Administrator.

         R.   Respond to and resolve insurance department inquiries and
              complaints, and notify Merchants New Hampshire promptly of any
              such inquiries or complaints and Administrator's responses thereto
              and the resolutions thereof.

                                       23
<PAGE>

         S.   Assist Merchants New Hampshire with determining reinsurance needs
              and placement of reinsurance with reinsurers approved in
              accordance with criteria established by Merchants New Hampshire.
              Merchants New Hampshire retains final authority for approval of
              placement of all reinsurance; provided, however, that
              Administrator shall have the authority to place facultative
              reinsurance on individual risks with reinsurers approved by
              Merchants New Hampshire.

         T.   Manage Merchants New Hampshire's residual market obligations.

         U.   Perform such other tasks as are traditionally the responsibility
              of an insurance underwriting administrator, including those
              previously performed by Administrator under the Previous
              Management Agreement.

III.     Duties of Client

         With respect to Merchants New Hampshire's Traditional Insurance
         Business, Merchants New Hampshire agrees to perform the duties and
         obligations listed below in accordance with the standards established
         below and the legal requirements of the applicable state(s) in which
         the policy was written:

         A.   Approve or reject, within ten (10) days of receipt of any
              submission from Administrator, any proposed new or changes to
              existing:

              i.   Policy forms (except for changes required by law which can be
                   made without Merchants New Hampshire's approval).

              ii.  Underwriting guidelines and eligibility rules.

              iii. Premium rating plans and rules based on current underwriting
                   statistics and revised on a regular basis.

              iv.  Independent agency commission structures - base and
                   incentive.

              v.   Policy dividend programs.

              Absent a response, Merchants New Hampshire is deemed to have
              approved any such forms, guidelines, rules, plans, structures
              and/or programs (as applicable) after ten (10) days.

         B.   Approve or reject all premium rate filings as submitted by
              Administrator in accordance with Subsection II. P. above.

         C.   Approve or reject the placement of all reinsurance and establish
              the criteria for any company with whom reinsurance is placed;
              provided, however, that Administrator shall have the authority to
              place facultative reinsurance on individual risks with reinsurers
              approved by Merchants New Hampshire.

                                       24
<PAGE>

         D.   Authorize Administrator to appoint agents on behalf of Merchants
              New Hampshire in accordance with guidelines agreed between the
              Administrator and Merchants New Hampshire.

         E.   Authorize Administrator to obtain underwriting application
              information, and to bind and issue policies in accordance with
              Merchants New Hampshire's underwriting manuals and guidelines, as
              amended from time to time at the suggestion of Administrator or in
              consultation with Administrator.

         F.   Authorize Administrator to bill and collect premiums and to pay
              return premiums.

IV.      Cash Receipts and Disbursements

         A.   Merchants New Hampshire hereby authorizes and empowers
              Administrator to collect and receive all premiums related to
              Merchants New Hampshire's Traditional Insurance Business. Such
              funds shall be deposited in an account (the "Deposit Account")
              established and maintained by Administrator for premiums collected
              on Traditional Insurance Business written by Merchants New
              Hampshire, Merchants Mutual and other affiliated insurers (the
              "depositing companies") which might also underwrite the same lines
              of insurance as are included with Merchants New Hampshire's
              Traditional Insurance Business. Premium refunds, commissions,
              premium taxes and other expenses related to premiums written by
              the depositing companies will be paid by Administrator from funds
              deposited in the Deposit Account.

         B.   Administrator is also authorized to fund Merchants New Hampshire's
              claims settlement accounts, and make payments for Merchants New
              Hampshire's reinsurance premiums (less reinsurance loss
              recoveries), general operating expenses and Merchants New
              Hampshire's allocated share of unallocated loss adjustment
              expenses from the Deposit Account.

         C.   Balances at the end of each month will be settled with the
              depositing companies. Positive balances will be paid to and
              negative balances will be collected from the depositing companies
              within thirty (30) days after the end of the month.

         D.   Amounts maintained in the Deposit Account by Administrator on
              behalf of or for Merchants New Hampshire, shall be held by
              Administrator in a fiduciary capacity.

         E.   Administrator shall maintain and make available to Merchants New
              Hampshire as required records of all deposit and disbursement
              transactions with respect to the Deposit Account. Such records
              shall be available to Merchants New Hampshire during normal
              business hours upon reasonable notice.

                                       25
<PAGE>

V.       Service Fees, Payments and Direct Expenses

         A.   In consideration for the services performed by Administrator
              enumerated under Section II of this Annex, Merchants New Hampshire
              shall pay to Administrator monthly fees based upon an allocated
              share of Administrator's other underwriting expenses as agreed
              between Merchants New Hampshire and Administrator determined
              pursuant to statutory accounting rules and set forth in Schedule 2
              attached hereto. The expenses shall be allocated based on
              Merchants New Hampshire's premiums written that are subject to
              this Annex relative to the total of all premiums written by
              Administrator plus Merchants New Hampshire's premiums written
              subject to this Annex during each month. The calculation shall be
              made based on cumulative premiums and expenses and the monthly
              changes thereof for each year this Annex is in effect. Merchants
              New Hampshire shall pay the fee within thirty (30) days after the
              end of each month.

         B.   In addition to the above fees paid to Administrator, Merchants New
              Hampshire shall be responsible for the payment of all agent
              commissions and other direct policy acquisition costs.

         C.   Merchants New Hampshire shall be responsible to pay directly to
              the applicable taxing authority or to Administrator, if imposed on
              or paid on behalf of Merchants New Hampshire by Administrator, all
              federal, state and local taxes and assessments which Administrator
              or Merchants New Hampshire may be required to pay or collect or
              which may be incurred or assessed against Administrator or
              Merchants New Hampshire, under any existing or future law,
              including, without limitation, premium taxes, residual market
              assessments, and industry underwriting facilities charges, and all
              similar taxes, assessments and charges attributable to Merchants
              New Hampshire's business underwritten and serviced pursuant to
              this Annex.

VI.      Term of Annex

         This Annex shall commence as of the Effective Date of the Agreement and
         continue in force and in effect for an indefinite period, unless and
         until terminated (i) at 11:59 pm on December 31, 2007 or any December
         31 thereafter by either party providing the other with written notice
         not less than one year prior to the date of termination, or (ii)
         coincident with the termination of the Reinsurance Pooling Agreement
         ceding Merchants New Hampshire's Traditional Insurance Business to
         Merchants Mutual, but not earlier than at 11:59 p.m. on December 31,
         2007, or (iii) upon termination of the Services Agreement.

                                      * * *

                                       26
<PAGE>

                                   SCHEDULE 1

                               Management Reports

o       Monthly Production Reports (DWP)

o       Monthly Management Reports (Regional Reports)

o       Quarterly Agent Production and Profitability Reports ("55's")

o       Quarterly Loss and LAE Results, by line

o       Quarterly Profitability Analysis

o       Internal Underwriting and Claims File Reviews, as completed

o       Rate Indications and Rate and Rule Filings as prepared in the ordinary
        course of business

o       Monthly Cash Flows

                                       27
<PAGE>

                                   SCHEDULE 2

                           Other Underwriting Expenses

For each year, the combined amount of underwriting expenses of Administrator and
Merchants New Hampshire as are to be reported in such year's Underwriting and
Investment Exhibit, Part 4 - Expenses of the Administrator and Merchants New
Hampshire Annual Statements included in Column 2 on lines 3 through 18 plus line
24, excluding the following specific items:

          1.   Expenses unrelated to the Traditional Insurance Business;

          2.   Expenses deemed to be direct expenses of either Merchants New
               Hampshire or Administrator;

          3.   Administrative expenses of Administrator that will be included in
               the determination of the fees payable under the Administrative
               Services Annex of the Services Agreement;

          4.   Provisions for payment of Senior Management bonuses by
               Administrator; and

          5.   Other expenses as may, from time to time, be agreed by the
               parties.

                                       28
<PAGE>

                              CLAIMS SERVICES ANNEX

This Annex is part of the Services Agreement dated January 1, 2003 (the
"Agreement" or "Services Agreement"), by and between Merchants Group, Inc.
("MGI") and Merchants Insurance Company of New Hampshire, Inc. ("Merchants New
Hampshire") on the one hand (jointly, "Client") and Merchants Mutual Insurance
Company on the other hand ("Administrator").

I.       Appointment of Administrator

         Client hereby appoints Administrator and Administrator hereby accepts
         appointment by Client as claims manager to represent and act for
         Merchants New Hampshire with respect to those claims incurred on
         Merchants New Hampshire's Traditional Insurance Business and
         investigated and settled during the Term of this Annex.

         Merchants New Hampshire may act on its own behalf or engage such other
         claims administrators to act with respect to other such of its policies
         or insurance business not included in its Traditional Insurance
         Business as Merchants New Hampshire may designate from time to time.
         Administrator may provide similar services to others.

         Administrator agrees to perform, for the fees set forth below, the
         services enumerated in Section II below. Administrator's services shall
         be performed in a timely manner in accordance with claims guidelines
         and practices as adopted by Merchants New Hampshire from time to time,
         and with the legal requirements of the state in which the policy was
         written or the claim was incurred. Administrator's performance is
         subject, however, to the timely performance by Merchants New Hampshire
         of its duties and responsibilities where applicable.

II.      Duties of Administrator

         With respect to claims arising under Merchants New Hampshire's
         Traditional Insurance Business, Administrator agrees to perform the
         duties and obligations listed below in accordance with the standards
         established below and the legal requirements of the state(s) in which
         the applicable policy was written and the claim was incurred. In the
         event that any such duties or obligations are more specifically
         provided for in another Annex, that other Annex shall supercede this
         Section.

         A.   Receive, accept and establish a file for each claim. Enter claim
              data into Administrator's claims management system.

         B.   Conduct necessary investigations of all claims submitted to it by
              insureds or claimants to determine their validity and
              compensability.

                                       29
<PAGE>

         C.   Furnish to insureds and claimants all claim forms necessary for
              the proper administration of claims.

         D.   Verify insured's coverage provided by Merchants New Hampshire.

         E.   Establish case specific reserves, adjust, resist and/or settle
              claims in accordance with authority levels granted to
              Administrator by Merchants New Hampshire and set forth on Schedule
              1 hereto.

         F.   Utilize investigators, legal counsel and other service providers
              required for the administration of claims and assist selected
              legal counsel in the preparation of cases for hearings, appeals,
              and/or trials. Administrator shall propose and Merchants New
              Hampshire shall approve a list of service providers (the "approved
              list"). As respects specific claims, Administrator may retain a
              service provider not on the approved list, but must provide
              Merchants New Hampshire with notice of such retention as soon as
              reasonably practical, along with the reasons for the selection. If
              Merchants New Hampshire so directs, Administrator will terminate
              the non-approved service provider and retain one acceptable to
              Merchants New Hampshire.

         G.   Supervise all litigation and other proceedings involving a claim
              and, where required, attend judicial or administrative hearings
              involving a claim.

         H.   Issue drafts for settlement of claims and payment of all allocated
              loss adjustment expenses out of the Deposit Account(s) established
              pursuant to the Underwriting Services Annex.

         I.   Evaluate all claims for reinsurance coverage; submit claims
              reports and related information to reinsurers; negotiate
              settlement and collection of all reinsurance claims.

         J.   Pursue all reasonable possibilities of subrogation, contribution
              or indemnity, where in the reasonable judgment of Administrator
              there is a substantial likelihood of a net recovery, and pay all
              such recovered amounts to Merchants New Hampshire.

         K.   Maintain and make available to Merchants New Hampshire as required
              all accounting records in the format and media maintained by
              Administrator including, but not limited to: loss payment
              journals; individual claim reserves and periodic adjustments;
              salvage and subrogation receipts journals; open salvage and
              subrogation receivables; reinsurance claims reports and receipts.
              Such records shall be available to Merchants New Hampshire during
              normal business hours upon reasonable notice.

                                       30
<PAGE>

         L.   Prepare and submit to the Merchants New Hampshire periodic
              management reports as set forth in Schedule 2.

         M.   Maintain all loss and allocated loss adjustment expense systems
              and data files and provide access to the systems and files to
              Merchants New Hampshire and its actuaries and analysts. Such
              information shall be available to Merchants New Hampshire during
              normal business hours upon reasonable notice.

         N.   Respond to all insurance department and regulatory complaints and
              inquiries, and cooperate with Merchants New Hampshire to dispose
              of such complaints and inquiries.

         O.   Hold all funds and assets of Merchants New Hampshire, which come
              into the possession or control of Administrator pursuant to this
              Annex, in a fiduciary capacity on behalf of Merchants New
              Hampshire.

         P.   Maintain all applicable regulatory licenses and use its best
              efforts to ensure that all individuals employed, retained or
              acting under the direction of Administrator hold all required
              individual regulatory licenses.

III.     Duties of Merchants New Hampshire

         With respect to Merchants New Hampshire's Traditional Insurance
         Business, Merchants New Hampshire agrees to perform the duties and
         obligations listed below in accordance with the standards established
         below and the legal requirements of the applicable state(s) in which
         the policy was written and the claim was incurred.

         A.   Authorize Administrator to receive and provide to Administrator
              Notices of Claim including ACORD forms, letters, or phone reports,
              if and when received by Merchants New Hampshire within twenty-four
              (24) hours of receipt by Merchants New Hampshire. Merchants New
              Hampshire shall promptly forward, or cause to be forwarded to
              Administrator, all claims, claim forms, demands, notices,
              inquiries or correspondence concerning or related to claims
              received by Merchants New Hampshire.

         B.   Provide, and authorize Administrator to utilize, all policy and
              other data in order to allow Administrator to promptly verify
              coverage after receipt of Notice of Claim by Administrator.

         C.   Advise Administrator within two (2) business days of receipt of
              all inquiries affecting Merchants New Hampshire's licenses,
              requests for audits, or regulatory inquiries.

         D.   With respect to any claim requiring Merchants New Hampshire
              approval, pursuant to the claims handling procedures as set forth
              on Schedule 1,

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<PAGE>

              Merchants New Hampshire shall provide such approval or disapproval
              within ten (10) days from receipt of the submission from
              Administrator.

IV.      Cash Disbursements and Account Funding

         A.   Merchants New Hampshire authorizes Administrator to disburse cash
              to settle claims (within agreed limits of authority as set forth
              in Schedule 1 or otherwise in this Agreement) with funds provided
              by Merchants New Hampshire to Administrator and maintained by
              Administrator for such purpose.

         B.   Funds held by Administrator on behalf of Merchants New Hampshire
              shall be held in a fiduciary capacity. Such funds shall be
              deposited in an account established and maintained by
              Administrator in a federal or state insured financial institution.
              Claims and allocated loss adjustment expenses will be paid from
              this account.

         C.   Administrator is authorized to obtain reimbursement for claims
              payments and Administrator's Service Fees (as such term is defined
              in Section V (A) below) from:

              i.   The fiduciary account to which premiums and related
                   transactions are deposited and disbursed as authorized by the
                   terms of the Underwriting Services Annex (the "Deposit
                   Account"), and to the extent this account is insufficient;

              ii.  The general operating funds of Merchants New Hampshire.

         D.   Merchants New Hampshire shall deposit and maintain in the Deposit
              Account with Administrator a minimum required balance of one
              hundred thousand dollars ($100,000) by periodically transferring
              additional funds to such account in order to replenish the account
              so that it equals or exceeds the minimum required balance.

         E.   Administrator shall render a monthly accounting within thirty (30)
              days after the end of each month to Merchants New Hampshire
              reporting the balance of the funds and the details of all
              transactions with respect to such funds.

V.       Service Fees and Payment

         A.   In consideration for the services performed by Administrator
              enumerated under Section II of this Annex, Merchants New Hampshire
              shall pay to Administrator monthly service fees ("Service Fees")
              based upon an allocated share of Administrator's unallocated loss
              adjustment expenses as agreed between Merchants New Hampshire and
              Administrator determined pursuant to statutory accounting rules
              and set forth in Schedule 3. The expenses shall be allocated based
              on the claims attributable to Merchants New Hampshire that are
              subject

                                       32
<PAGE>

              to this Annex relative to the total of all claims being handled by
              Administrator outstanding each month by averaging the number of
              claims outstanding at the beginning and end of each month. The
              calculated share for Merchants New Hampshire shall be applied to
              Administrator's total unallocated loss adjustment expenses to
              determine Administrator's monthly Service Fee. It is the intent of
              the parties that claims expenses will continue to be allocated in
              the manner utilized under the Previous Management Agreement.
              Merchants New Hampshire shall pay each monthly Service Fee within
              (30) days after the end of each month.

         B.   In addition to the Service Fees paid to Administrator, Merchants
              New Hampshire shall be responsible for the payment of all
              Allocated Loss Adjustment Expense(s) as defined in Section VI of
              this Annex to the persons to whom such Allocated Loss Adjustment
              Expenses are owed.

         C.   Merchants New Hampshire shall be responsible to pay directly to
              the applicable taxing authority or to Administrator, if imposed on
              or paid on behalf of Merchants New Hampshire by Administrator, all
              federal, state and local taxes and assessments which Administrator
              may be required to pay or collect or which may be incurred or
              assessed against Administrator, under any existing or future law,
              relating to the handling and settlement of any claims under this
              Annex.

VI.      Definition of "Allocated Loss Adjustment Expense"

         A.   For the purposes of this Annex, Allocated Loss Adjustment Expenses
              ("Allocated Loss Adjustment Expenses") shall mean any expense not
              incurred by Administrator as a part of its day to day intrinsic
              operation (such as its own internal payroll, office expenses,
              overhead, etc,) which is chargeable or attributable to the
              investigation, coverage analysis, adjustment, negotiation,
              settlement, defense or general handling of any claim(s) or
              action(s) related thereto, or to the protection and/or perfection
              of Merchants New Hampshire's and/or its insureds' rights of
              subrogation, contribution or indemnification.

         B.   Allocated Loss Adjustment Expenses include, but are not limited to
              the following:

              i.      Attorney's fees and disbursements incurred in connection
                      with the determination of coverage and/or the adjustment,
                      defense, negotiation or settlement of any claim;
                      attorney's fees incurred for representation at
                      depositions, hearings, pretrial conferences and/or trials.

              ii.     Costs incurred in handling any Alternative Dispute
                      Resolution proceeding ("ADR"), legal actions, including
                      trials or appeals, or in pursuing any declaratory judgment
                      action, including deposition

                                       33
<PAGE>

                      fees, costs of appeal bonds, court reporter or
                      stenographic service fees, filing fees, and other court
                      costs, fees and expenses, transcript or printing costs and
                      all discovery expenses; fees for service of process; fees
                      for witnesses' testimony, opinions, or attendance at
                      hearings or trial.

              iii.    Statutory fines or penalties to the extent incurred in
                      connection with the adjustment, negotiation, settlement or
                      defense of any claim; pre- and post-judgment interest paid
                      as a result of litigation, unless legal requirements
                      define such interest as indemnity payments.

              iv.     Subcontractors' fees and travel expenses, including
                      independent adjusters, automobile and property appraisers,
                      to the extent that same are incurred in the adjustment,
                      negotiation, settlement or defense of any claim (excluding
                      Administrator's employees).

              v.      Experts' fees including reconstruction experts, engineers,
                      cause & origin reports, photographers, accountants,
                      economists, metallurgists, cartographers, architects,
                      handwriting experts, physicians, appraisers and other
                      natural and physical science experts, plus the costs
                      associated with preparation of expert reports,
                      depositions, and testimony.

              vi.     Fees for surveillance, undercover operative and detective
                      services or any other investigations.

              vii.    Costs for medical examinations, or autopsies, including
                      diagnostic services, and related transportation costs,
                      fees for medical reports and rehabilitation evaluations.

              viii.   Costs for any public records, medical records, credit
                      bureau reports, and other like reports.

              ix.     Costs and expenses incurred where Administrator determines
                      it is reasonable to pursue the rights of contribution,
                      indemnification, salvage or subrogation of Merchants New
                      Hampshire and/or its insured, including attorney and
                      collection agency fees and/or expenses.

              x.      Medical or vocational rehabilitation expenses, and all
                      other medical cost containment services, including, but
                      not limited to utilization review, pre-audit admission
                      authorization, hospital bill audit or adjudication;
                      provider bill audit or adjudication, and review of medical
                      case management.

                                       34
<PAGE>

              xi.     Extraordinary travel and related expenses incurred by
                      Administrator at the express request of Merchants New
                      Hampshire, which are not otherwise payable under this
                      Annex.

VII.     Term of Annex

            This Annex shall commence as of the Effective Date of the Agreement.
            With respect to claims incurred during the period when the parties
            are operating pursuant to the Reinsurance Pooling Agreement or
            another reinsurance or pooling agreement, this Annex may only be
            terminated by mutual agreement of the parties, or for cause pursuant
            to Subparagraph 10(a) of the Services Agreement, or pursuant to
            Subparagraphs 10(b) or (c) of the Services Agreement. For claims
            incurred prior to the Effective Date, this Annex shall continue in
            force and in effect for an indefinite period, unless and until
            terminated (i) at 11:59 p.m. December 31, 2004 or any month end
            thereafter by either party providing the other with written notice
            not less than six (6) months prior to the date of termination, or
            (ii) upon termination of the Services Agreement.

                                      * * *

                                       35
<PAGE>

                                            SCHEDULE 1

                                    Claims Handling Procedures

1.            Administrator will report any and all claims, regardless of
              liability or policy limits, to Merchants New Hampshire with a
              total reserve of $50,000 or more, as soon as such exposure is
              known. On these claims, Administrator will provide Merchants New
              Hampshire with sufficient information to enable it to
              independently evaluate the individual claim and determine whether
              Merchants New Hampshire may require additional information. After
              such notice, Merchants New Hampshire may request additional
              information and documentation, which Administrator shall provide.

2.            Administrator will report to Merchants New Hampshire all claims,
              regardless of liability or policy limits, which and when to its
              knowledge involve one or more of the following:

                a.       Fatalities
                b.       Brain stem injuries, quadriplegia, paraplegia,
                         hemiplegia or paralysis.
                c.       All second or third degree burn injuries involving 25%
                         or more of the body.
                d.       All amputation, whether partial or whole, or loss of
                         use of limbs.
                e.       Loss of use of any of the five senses.

3.            With respect to any claims referenced in Sections 1 or 2 above, in
              addition to the other notice requirements contained in the
              Agreement, Administrator will report, in a timely fashion, to
              Merchants New Hampshire concerning any substantive settlement
              demands, dispositive motions or scheduled trials or hearings.

4.            Administrator may settle, adjust, compromise, pay, defend,
              litigate, or submit to arbitration all actions, suits,
              proceedings, accounts, claims and demands in which Merchants New
              Hampshire may become a party, and in connection therewith to make
              and execute, in Administrator's discretion or as otherwise
              directed by Merchants New Hampshire, general and specific
              releases, covenants not to sue, and any and all documents
              necessary or proper and to make or to accept and receive payment
              or other consideration in satisfaction of any disputes on behalf
              of or for the use of Merchants New Hampshire and retain counsel to
              represent Merchants New Hampshire for the purposes expressed
              herein. Settlement of any claim in excess of $100,000 or any other
              amount as may, from time to time, be agreed to by Merchants New
              Hampshire and Administrator, shall require the prior approval of
              Merchants New Hampshire. Merchants New Hampshire acknowledges that
              time is often of the essence in settlement negotiations and that
              if Merchants New Hampshire, through its designated

                                       36
<PAGE>

              officer or employee, is not available, Administrator shall have
              the authority to settle such claim based upon the exercise of its
              good faith judgment consistent with applicable statutes and how
              Administrator handles its owns claims.

5.            Administrator will provide a written report to Merchants New
              Hampshire concerning any claim where the estimated fair value for
              the injuries, without regard to liability, exceeds $100,000 in the
              judgment of Administrator wherein allegations of bad faith or
              unfair claim practices are made against Merchants New Hampshire
              and/or Administrator.

6.            Merchants New Hampshire shall also have the right to withdraw from
              Administrator and assume control of any claim, at Merchants New
              Hampshire's expense. Any withdrawn claim(s) will not be included
              in the calculation of Administrator's Service Fee from the time
              such claim is withdrawn, and the amount of any Claims Related
              Extra Contractual Obligation, as defined in the Reinsurance
              Pooling Agreement, arising from or relating to a withdrawn claim
              shall not be included in the calculation of profit sharing or
              retrospective amounts under the Reinsurance Pooling Agreement.

                                       37
<PAGE>

                                   SCHEDULE 2

                               Management Reports

Large Claims Advisory        --   as prepared in the ordinary course of business

Monthly Claims
Management Reports --

Internal Claim File Reviews  --   as completed

                                       38
<PAGE>

                                   SCHEDULE 3

                      Unallocated Loss Adjustment Expenses

For each year, the combined amount of unallocated loss adjustment expenses of
Administrator and Merchants New Hampshire as are to be reported in such year's
Underwriting and Investment Exhibit, Part 4 - Expenses of the Administrator and
Merchants New Hampshire Annual Statements included in Column 1 on lines 3
through 18 plus line 24, excluding the following specific items:

     1.  Expenses unrelated to the Traditional Insurance Business;
     2.  Expenses deemed to be direct expenses of either Merchants New Hampshire
         or Administrator;
     3.  Administrative expenses of Administrator that will be included in the
         determination of the fees payable under the Administrative Services
         Annex of the Services Agreement;
     4.  Provisions for payment of senior management (positions with a title of
         assistant vice president or higher or a pay grade of 27 or higher)
         bonuses by Administrator; and
     5.  Other expenses as may, from time to time, be agreed by the parties.

                                       39
<PAGE>

                  INVESTMENT AND CASH MANAGEMENT SERVICES ANNEX

This Annex is part of the Services Agreement dated January 1, 2003 by and
between Merchants Group, Inc. and Merchants Insurance Company of New Hampshire,
Inc. on the one hand ("Client") and Merchants Mutual Insurance Company ("MMIC")
on the other hand ("Manager").

I.       The Account

         The cash, securities and other assets placed by Client in the account
         to be managed under this Annex (the "Account") are listed on Section I.
         A. of Schedule A. At the sole discretion of Client, assets may be added
         to or withdrawn from the Account at any time. Client will provide
         notification to the Manager of any such additions or withdrawals. The
         Account will include these assets and any changes in them resulting
         from transactions directed by Manager, withdrawals and additions made
         by Client, or dividends, interest, stock splits and other earnings,
         gains or losses on the assets.

         Assets of the Client that are not to be managed by Manager are
         separately identified on Section I. B. of Schedule A ("Unmanaged
         Assets"). Manager may include these assets in its periodic reports to
         Client, but will exclude their value when calculating Manager's asset
         management fees.

II.      Management of the Account

         Manager will make all investment decisions for the Account, in
         Manager's sole discretion and without first consulting or notifying
         Client, in accordance with the investment restrictions and guidelines
         which are attached as Schedule B (the "Investment Guidelines"). If
         Manager manages only a portion of Client's portfolio, unless otherwise
         specified by Client in writing, Investment Guidelines' restrictions
         relate specifically to the assets managed by Manager. Client may change
         these Investment Guidelines at any time, but Manager will be bound by
         the changes only after it has received and agreed to them in writing,
         which agreement may not be unreasonably withheld. Other than by the
         Investment Guidelines and the terms of this Annex, the investments made
         by Manager on behalf of the Client will not be restricted in any
         manner, except by operation of law.

         Manager will have full power and authority, on behalf of Client, to
         instruct any brokers, dealers or banks to buy, sell, exchange, convert
         or otherwise trade in all securities, futures or other investments for
         the Account.

         Manager will not be responsible for giving Client investment advice or
         taking any other action with respect to Unmanaged Assets.

         Client appoints Manager as the true and lawful attorney of the Client
         for and in the name, place and stead of Client, in Manager's
         unrestricted discretion, to operate and conduct the Cash Accounts and
         the Account of the Client and any brokerage accounts necessary to

                                       40
<PAGE>

         manage the Account, and to do and perform all and every act and thing
         whatsoever requisite in furtherance of this Annex, including the
         execution of all writings related to the purchase or sale, assignments,
         transfers and ownership of any stocks, bonds, commodities, or other
         derivatives or securities. Manager is hereby fully authorized to act
         and rely on the authority vested pursuant to said power of attorney.

III.     Transactions for the Account

         Manager will arrange for securities transactions for the Account to be
         executed through those brokers, dealers or banks that Manager believes
         will provide best execution, unless specifically directed otherwise by
         Client as provided below in this Section III. In choosing a broker,
         dealer or bank, Manager will consider the broker, dealer or bank's
         execution capability, reputation and access to the markets for the
         securities being traded for the Account. Manager will seek competitive
         commission rates, but not necessarily the lowest rates available.

         Manager may send transactions for the Account to brokers who charge
         higher commissions than other brokers, provided that Manager determines
         in good faith that the amount of commissions Manager pays is reasonable
         in relation to the value of the brokerage and research services
         provided, viewed in terms either of that particular transaction or
         Manager's overall responsibilities with respect to all clients whose
         accounts Manager manages on a discretionary basis.

         Portfolio transactions for each client account generally are completed
         independently. However, if Manager decides to purchase or sell the same
         securities for Client and other clients at about the same time, Manager
         may combine Client's order with those of other clients if Manager
         reasonably believes that it will be able to negotiate better prices or
         lower commission rates or transaction costs for the combined order than
         for Client's order alone. Client will pay the average price and
         transaction costs obtained for such combined orders. Manager generally
         will allocate securities purchased or sold as part of a combined order
         to Client's Account and to accounts of other clients according to the
         size of the order placed for each client.

         If Manager cannot obtain execution for the total amount of the
         securities in the combined orders, adjustments to the allocation will
         be made on pro-rated methodology. However, Manager may increase or
         decrease the amounts of securities allocated to each client if
         necessary to avoid having odd or small numbers of shares held for the
         account of any client. Each client that participates in a combined
         order will receive or pay the average share price and/or transactions
         costs for all transactions executed as part of the combined order.

         If Client directs Manager to use particular brokers, dealers or banks
         to execute transactions for the Account, Manager will do so, but in
         that situation Manager will not seek better execution services or
         prices for Client from other brokers, dealers or banks, and Client may
         pay higher prices or transaction costs as a result. Also, in that
         situation

                                       41
<PAGE>

         Manager may not be able to seek better execution services for Client
         by combining Client's orders with those of other clients.

         Client may direct all transactions for the Account to a particular
         broker, dealer or bank, by writing the name and address of that broker,
         dealer or bank in the space provided on Schedule A.IV.

IV.      Transaction Confirmations

         Manager will instruct the brokers, dealers or banks who execute
         transactions for the Account to send to Client copies of all
         transaction confirmations, unless Client chooses not to receive
         confirmations.

         Client may elect to receive individual confirmations at any time by
         giving Manager written notice.

V.       Custody of Account Assets

         The assets in the Account will be held for Client by the custodian
         named on Schedule A.II (the "Custodian"). Manager will not have custody
         of any Account assets. Client will pay all fees of the Custodian.

         Client will authorize the Custodian to follow Manager's instructions to
         make and accept payments for, and to deliver or to receive, securities,
         cash or other investments purchased, sold, redeemed, exchanged, pledged
         or loaned for the Account. Client also will instruct the Custodian to
         send Client and Manager periodic statements showing the assets in and
         all transactions for the Account during the month, including any
         payments of Manager's fees.

         Client will provide Manager with a copy of its agreement with the
         Custodian, and will give Manager reasonable advance notice of any
         change of Custodian. Any additional direct costs and any identifiable
         indirect costs, such as increased salaries, which are incurred by
         Manager as a result of a change in Custodian by Client, not initiated
         or suggested by Manager, shall be paid to Manager by Client.

VI.      Reports to Client

         Manager will send Client monthly written reports showing the identity,
         cost and current market value of the assets in the Account and each
         transaction made for the Account during the period covered by the
         report. The Account's performance will be sent quarterly, semi-annually
         or annually upon Client's request.

VII.     Account Valuation

         Manager will value the securities in the Account using independent
         pricing sources. All securities in the Account that are listed and
         traded on a national securities exchange or on

                                       42
<PAGE>

         NASDAQ shall be valued on the valuation date at the closing price on
         the principal market where the securities are traded. All other
         securities shall be valued in accordance with any reasonable valuation
         method selected by Manager, consistent with accepted industry
         practices. While Manager does its best to obtain representative market
         prices for all securities in the Account, such prices do not always
         reflect the price actually received or paid on the open market.

VIII.    The Cash Accounts

         For the purposes of this Annex, the Cash Accounts shall be considered
         as any other asset class and be subject to the same reporting
         requirements, custodial agreements, valuation guidelines and fees;
         provided, however, that Cash Accounts of Client will continue to be
         subject to the control of Manager as long as any of (i) the Reinsurance
         Pooling Agreement; (ii) the Underwriting Annex; or (iii) the Claims
         Services Annex remain in effect.

IX.      Manager's Fees

         In consideration for the investment management services provided for
         under this Annex, the Client shall pay to the Manager a quarterly
         management fee (the "Management Fee") for its services in accordance
         with the following fee schedule: 5 basis points on the first $100
         million, and 2 basis points thereafter. The Management Fee shall be
         payable promptly after the end of each fiscal quarter and shall be
         based on the average amount of Account assets and accrued interest for
         each fiscal quarter, computed in accordance with the provisions of
         Section VII above and before deducting the Management Fee for such
         quarter. In any partial quarter, the fees will be reduced pro rata
         based on the number of days the Account was managed.

         Client will be billed directly by Manager and will pay each quarterly
         Management Fee within 30 days of receiving the bill.

         If Manager invests in securities issued by money market funds or other
         investment companies for the Account, these securities will be included
         in the value of the Account when Manager's fees are calculated. These
         same assets will be subject to additional investment management and
         other fees that are paid by the investment company but ultimately borne
         by its shareholders. These additional fees are described in each
         investment company's prospectus.

X.       Legal Proceedings

         Manager will not advise or act for Client in any legal proceedings,
         including bankruptcies or class actions, involving securities held in
         the Account or issuers of those securities. The costs of such legal
         proceedings are to be borne by the Client. However, Manager agrees to
         cooperate as a witness for or lend such other reasonable assistance to
         the Client in any legal proceedings, other than any legal proceeding
         between the Manager or any

                                       43
<PAGE>

         affiliate or subsidiary of the Manager and the Client or any affiliate
         or subsidiary of the Client arising out of any security purchased by
         the Manager on behalf of the Client.

XI.      Risk

         Manager cannot guarantee the future performance of the Account, promise
         any specific level of performance or promise that its investment
         decisions, strategies or overall management of the Account will be
         successful. The investment decisions Manager will make for Client are
         subject to various market, currency, economic, political and business
         risks, and will not necessarily be profitable. Client hereby
         acknowledges these limitations and risks.

XII.     Standard of Care; Limitation of Liability

         Manager shall manage the Account in accordance with all state insurance
         laws that are applicable to Client's investments.

         Manager will not be liable to Client for any loss (i) that Client may
         suffer as a result of Manager's good faith decisions or actions where
         Manager exercises the degree of care, skill, prudence and diligence
         that a prudent person acting in a like fiduciary capacity would use;
         (ii) caused by following Client's instructions; or (iii) caused by the
         Custodian, any broker, dealer or bank to which Manager directs
         transactions for the Account or any other person.

         Federal and state securities laws impose liabilities under certain
         circumstances on persons who act in good faith, and this Annex does not
         waive or limit Client's rights under those laws.

         Manager will not be responsible for Client's own compliance with the
         insurance investment laws of Client's state of domicile or for Client's
         compliance with applicable tax laws.

         In managing the Account, Manager will not consider for diversification
         or other purposes any other securities, cash, or other investments or
         assets Client owns but which are not in the Account. Manager shall have
         no responsibility whatsoever for the management of the Unmanaged Assets
         or any assets of Client other than the Account and shall incur no
         liability for any loss or damage which may result from the management
         of such other assets.

XIII.    Client Directions

         The names and specimen signatures of each individual who is authorized
         to give directions to Manager on Client's behalf under this Agreement
         are set forth on Schedule C. Directions received by Manager from Client
         must be signed by at least one such person. If Manager receives
         directions from Client which are not signed by a person that Manager
         reasonably believes is authorized to do so, Manager shall not be
         required to

                                       44
<PAGE>

         comply with such directions until it verifies that the directions are
         properly authorized by Client.

         Manager shall be fully protected in relying upon any direction signed
         or given by a person that Manager reasonably believes is authorized to
         give such directions on Client's behalf. Manager also shall be fully
         protected when acting upon an instrument, certificate, or paper that
         Manager reasonably believes to be genuine and to be signed or presented
         by any such person or persons. Manager shall be under no duty to make
         any investigation or inquiry as to any statement contained in any
         writing and may accept the same as conclusive evidence of truth and
         accuracy of statements contained therein.

XIV.     Confidentiality

         Except as Client and Manager otherwise agree or as may be required by
         law, all information concerning the Account and services provided under
         this Annex shall be kept confidential. Notwithstanding the foregoing,
         Client may generally discuss the Account with other members of its
         industry. Client shall not discuss the specific composition of the
         Account, meaning the assets purchased for the Account by the Manager,
         without the Manager's prior agreement. Client acknowledges that the
         composition of the Account is considered proprietary work product of
         the Manager constituting a trade secret.

XV.      Non-Exclusive Agreement

         Manager manages investments for its own account and may provide
         investment advice to other clients and may give them advice or take
         actions for them, for Manager's own accounts or for accounts of persons
         related to or employed by Manager that is different from advice
         provided to or actions taken for Client.

         Manager is not obligated to buy, sell or recommend for Client's Account
         any security or other investment that Manager may buy, sell or
         recommend for other clients or for the account of Manager or its
         related persons or employees.

         If Manager obtains material, non-public information about a security or
         its issuer that Manager may not lawfully use or disclose, Manager will
         have no obligation to disclose the information to Client or to use it
         for Client's benefit.

XVI.     Term and Termination of Annex

         This Annex shall commence as of the Effective Date of the Agreement.
         Either Client or Manager may cancel this Annex with one year's written
         notice. If said notice is given within a calendar quarter, the one
         year's notice will begin at the end of the calendar quarter. This Annex
         will remain in effect until terminated. Termination of this Annex will
         not affect (i) the validity of any action that Manager or Client has
         previously taken; (ii) the liabilities or obligations of Manager or
         Client for transactions started before termination; or (iii) Client's
         obligation to pay Manager's fees through the date of

                                       45
<PAGE>

         termination. Upon termination, Manager will have no obligation to
         recommend or take any action with regard to the securities, cash or
         other assets in the Account.

XVII.    Annex Not Assignable

         This Annex may not be assigned within the meaning of the Investment
         Advisers Act of 1940 (the "Advisers Act") by Manager without Client's
         consent.

XVIII.   Governing Law

         The internal laws of the State of New York without regard to principles
         of conflicts of law will govern this Annex. However, nothing in this
         Annex will be construed contrary to any provision of the Advisers Act
         or the rules thereunder to the extent that the Advisers Act is
         applicable to Manager.

XIX.     Miscellaneous

         If any provision of this Annex is or becomes inconsistent with any
         applicable law or rule, the provision will be deemed rescinded or
         modified to the extent necessary to comply with such law or rule. In
         all other respects, this Annex will continue in full force and effect.
         This Annex contains the entire understanding between Manager and Client
         and may not be changed except in writing signed by both parties.
         Failure to insist on strict compliance with this Annex or with any of
         its terms or any continued conduct will not be considered a waiver by
         either party under this Annex.

XX.      Representations of Client

         Client represents and warrants to Manager that (a) Client is the
         beneficial owner of all assets in the Account and, except as
         specifically identified by Client, there are no restrictions on
         transfer or sale of any of those assets; (b) the Agreement has been
         duly authorized, executed, and delivered by Client and is Client's
         valid and binding obligation; (c) the names of the individuals who are
         authorized to act under this Annex on behalf of Client have been given
         to Manager in writing; (d) no government authorizations, approvals,
         consents, or filings not already obtained are required in connection
         with the execution, delivery, or performance of this Annex by Client;
         and (e) Client certifies that it is not an employee benefit plan
         subject to the Employee Retirement Income Security Act of 1974, as
         amended or a plan subject to Section 4975 of the Internal Revenue Code
         of 1986, as amended, nor a Person acting on behalf of any such plan.
         Client agrees to notify Manager in writing within five (5) calendar
         days after the occurrence of an event making the above statement no
         longer accurate.

XXI.     Representations of Manager

         Manager represents and warrants that the Agreement has been duly
         authorized, executed and delivered by Manager and is its valid and
         binding obligation.

                                       46
<PAGE>

                                   SCHEDULE A

I.  ACCOUNT ASSETS.

           A.     Managed Assets - Client has deposited the following
securities, cash and other assets with the Custodian identified below to be
managed under this Annex:

                  See Exhibit I

         B.       Unmanaged Assets - Client also deposited with the Custodian
the following assets which are not to be managed under this Annex: None.

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

II.  CUSTODY OF ACCOUNT ASSETS.  The assets to be managed under this Annex and
any Unmanaged Assets will be held by:

JP Morgan Investor Services
Custodial Account Number: G55021
David Ricketts, AVP
3 Metro Tech Center - 6th Floor
Brooklyn, New York 11245
Contact Phone Number: 718-254-3395

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

III.  QUARTERLY FEES.   Manager's fees for services provided under this Annex
shall be as follows, computed in accordance with Section IX of this Annex:
Asset Management Fees:

Quarterly fee of .05% (five hundredths of one percent) of the first $100 million
of the market value of the assets under management; plus

Quarterly fee of .02% (two hundredths of one percent) of the market value of the
assets under management in excess of $100 million.

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

IV.  BROKERAGE DIRECTION.  Client directs Manager to cause all transactions for
the Account to be executed through the following broker, dealer or bank:

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

Client has read, understands and accepts the limitations that this direction
will place on Manager's ability to seek best execution for the Account. This
direction may be changed by Client at any time by notifying Manager in writing.

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

                                       47
<PAGE>

V.  NAME OF CLIENT:                                         VI.  DATE:
Merchants Group, Inc.
Merchants Insurance Company of New Hampshire, Inc.
                                                            January 1, 2003
By: ____________________________________________

                                       48
<PAGE>

                                   SCHEDULE B

INVESTMENT GUIDELINES: The investment guidelines to be followed by Manager in
managing Client's Account are set forth below:

I.       INVESTMENT STRATEGY

         Client's investment strategy is to pursue growth in shareholders'
         equity by maximizing after-tax returns WITHIN STATED PARAMETERS, while
         controlling risk in the portfolio. The strategy aims to provide for
         sufficient liquidity and maintain a management-informed relationship
         between assets and liabilities.

II.      INVESTMENT POLICY GUIDELINES

         A. OBJECTIVES

         1. RETURN REQUIREMENTS

         Return objectives emphasize after-tax total return that seeks a balance
         between capital growth and current income.

         2. CREDIT PROFILE

         As of January 1, 2003, except as otherwise provided in this Schedule B,
         purchases of fixed income and preferred stock securities shall be
         limited to those rated AA/Aa or better by at least one of the
         nationally known rating agencies including, but not limited to,
         Standard and Poor's, Moody's or Fitch.

         B. CONSTRAINTS

         1. LIQUIDITY REQUIREMENTS

         The variable cash flow from Client's insurance operations necessitates
         vigilant monitoring of liquidity needs. Sufficient cash reserves, or
         cash equivalents, will be maintained to minimize the potential for
         having to liquidate assets at undue cost. In addition, cash reserves
         will be maintained at the direction of the Client's Board of Directors
         to serve any structural or corporate needs that develop.

         2. TIME/MATURITY HORIZON

         As of January 1, 2003 purchases shall target a maturity of up to five
         (5) years at the time of purchase.

                                       49
<PAGE>

         3. TAX CONSIDERATIONS

         At January 1, 2003, Client is in a taxable position. Manager will
         maintain flexibility in shifting between income from taxable or
         tax-advantaged sources in an effort to maximize after-tax income
         annually, subject to other guidelines.

         4. LEGAL AND REGULATORY REQUIREMENTS

         Manager shall comply with Article 14 of the New York Insurance Law
         regarding permissible Client investments.

         5. ADDITIONAL CONSIDERATIONS

         Client has adopted additional guidelines for the investment of assets,
         beyond those required by Article 14 of the New York Insurance Law (see
         II.B.5.c.), as follows:

         a.   GENERAL GUIDELINES

              These guidelines apply to all fixed income and preferred stock
              investments except investments made under Section 1404(b) ("Leeway
              Provision") of the New York Insurance Law.

              i. QUALITY

              All investments will be limited to securities rated among the top
              two (2) quality grades (AA or better) by at least one of the
              nationally recognized rating agencies.

              ii. MATURITY

              All fixed income purchases will be limited to a maximum maturity
              of five (5) years, except mortgage-backed and asset-backed
              securities that may have stated maturities longer than five (5)
              years. All cash equivalents will be invested in money market
              instruments with a maximum maturity of six (6) months. Perpetual
              preferred stocks (i.e. stocks with no stated maturity) and
              preferred stocks having longer-term call or sinking fund
              provisions are permitted up to, but not to exceed, a purchase
              amount of $10.0 million in the aggregate.

              iii. MARKETABILITY

              Issue size will be sufficiently large enough to ensure an ongoing
              secondary trading market.

                                       50
<PAGE>

              iv. POSITION SIZE

              Unsecured investment securities of any single issue will be
              limited to no more than 10% of the Client's statutory surplus at
              any time. Additionally, investment in any one industry will be
              limited to no more than 25% of the statutory surplus of Client.
              The above restrictions do not apply to securities issued or
              guaranteed by the United States Government or United States
              Government Agencies, or to investments in subsidiaries.

              v. REPORTING REQUIREMENTS

              Manager will report all investment transactions to the Client's
              Board of Directors at their regularly scheduled meetings.

         b.   EQUITY SECURITIES

              As of January 1, 2003 equity securities are not a permitted class
              for new purchases. However, should these instructions change to
              permit equity investments, the following guidelines will followed:

              i. EXCHANGE TRADED

              The shares must be traded on at least one nationally recognized
              exchange (New York Stock Exchange, American Stock Exchange,
              NASDAQ, Boston, or Philadelphia Stock Exchanges).

              ii. POSITION SIZES

              The aggregate cost of all equity interests is limited to the
              lesser of Client's policyholders' surplus or 10% of admitted
              assets. This excludes any insurance company shares.

              Investments in any single domestic institution's equity securities
              (common shares) are limited to 1% of admitted assets as of the
              last statement date. (Initial investment shall be limited to the
              lesser of $5,000,000 beginning cost or 15% of statutory surplus as
              of the last statement date.)

              Individual equity purchase recommendations may be made by the
              Client's Board of Directors or their designated representative and
              initiated through Manager.

                                       51
<PAGE>

              iii. REPORTING REQUIREMENTS - MANAGEMENT

              Manager will report all investment transactions under this section
              to the Client Board of Directors at their regularly scheduled
              meetings.

         c.   SPECIAL GUIDELINES

              These special guidelines apply specifically to investment made
              under Section 1404(b) ("Leeway Provision") of the New York
              Insurance Law.

              i. TOTAL CAPACITY

              Aggregate investments made under Section 1404(b) will be limited
              to 5% of admitted assets of the Company as of December 31st of the
              most recently completed year.

              ii. NATURE OF INVESTMENTS

              Investments made under Section 1404(b) will primarily consist of
              below investment grade bonds and unsecured subordinated debt, as
              well as equity interests in non-publicly traded companies.

              Maturity on debt instruments will be generally limited to ten (10)
              years. However, at the direction of the Client's Board of
              Directors or their designee, investments with maturities greater
              than ten (10) years are permitted.

              Investments that expose Client to financial risk in excess of its
              original principal investment are prohibited.

              iii. POSITION SIZE

              Investments in securities issued by any single entity will be
              limited to $1.0 million. Securities purchased with the intention
              of holding until maturity may be purchased in reasonable sizes
              under $1.0 million.

              iv. REPORTING REQUIREMENTS

              Manager will report all investment transactions at the regularly
              scheduled meetings of the Client's Board of Directors.

              Management will report and review the performance of investments
              made under these special guidelines separately at least twice a
              year at regularly scheduled meetings of the Client's Board of
              Directors.

                                       52
<PAGE>

NAME OF CLIENT:                                             DATE:
Merchants Group, Inc.
Merchants Insurance Company of New Hampshire, Inc.          January 1, 2003

                                                           _________________
By: ____________________________________________

                                       53
<PAGE>

                                   SCHEDULE C
                              MERCHANTS GROUP, INC.

                             SECRETARY'S CERTIFICATE

         I, Edward M. Murphy, the Secretary of Merchants Group, Inc. (the
"Corporation"), a Corporation organized and existing under the laws of the State
of Delaware hereby certify that each of the following officers of the
Corporation, acting singly, is authorized in the name and on behalf of the
Corporation, to give instructions to Merchants Mutual Insurance Company
("Manager") with respect to any and all matters, including investment and
reinvestment of securities, pertaining to the Investment and Cash Management
Services Annex between the Corporation and Manager, and to execute and deliver
any and all documents and to take any and all other action to carry out the
purposes of said Investment and Cash Management Services Annex. I further
certify that the specimen signature set forth next to the names of such
officers, is the true and genuine signature of such persons.

Name of Officer            Title                      Signature

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

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

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

         This Certificate shall be in effect from the date hereof until written
notice is given on behalf of the Corporation to terminate or revise it.

         IN WITNESS WHEREOF, I set my hand and seal of the Corporation.

                    -----------------------------------      -------------------
(Corporate Seal)    Secretary                                Date

                                       54
<PAGE>

                                   SCHEDULE C
               MERCHANTS INSURANCE COMPANY OF NEW HAMPSHIRE, INC.

                            SECRETARY'S CERTIFICATE

      I, Edward M. Murphy, the Secretary of Merchants Insurance Company of
New Hampshire, Inc. (the "Corporation"), a Corporation organized and existing
under the laws of the State of New Hampshire hereby certify that each of the
following officers of the Corporation, acting singly, is authorized in the name
and on behalf of the Corporation, to give instructions to Merchants Mutual
Insurance Company ("Manager") with respect to any and all matters, including
investment and reinvestment of securities, pertaining to the Investment and Cash
Management Services Annex between the Corporation and Manager, and to execute
and deliver any and all documents and to take any and all other action to carry
out the purposes of said Investment and Cash Management Services Annex. I
further certify that the specimen signature set forth next to the names of such
officers, is the true and genuine signature of such persons.

Name of Officer            Title                      Signature

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

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

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

         This Certificate shall be in effect from the date hereof until written
notice is given on behalf of the Corporation to terminate or revise it.

         IN WITNESS WHEREOF, I set my hand and seal of the Corporation.

                    -----------------------------------      -------------------
(Corporate Seal)    Secretary                                Date

                                       55

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