Document:

ex10-1.htm

    Exhibit
10.1

     

    STOCK
PURCHASE AGREEMENT

     

    This
STOCK PURCHASE AGREEMENT (this “Agreement”) is made
as of the 28th day of March, 2008, by and between PMA CAPITAL CORPORATION, a
Pennsylvania corporation (the “Seller”), and ARMOUR
REINSURANCE GROUP LIMITED, a Bermuda corporation (the “Buyer”).

     

    PREAMBLE

     

    The
Seller, directly or through one or more of its wholly-owned subsidiaries, is the
beneficial and record owner of 2,000,000 shares of common stock, $10.00 par
value per share, of PMA Capital Insurance Company (“PMACIC”), a
Pennsylvania domestic property and casualty insurance company, 1,000 shares of
common stock, $.01 par value per share of PMA Re Management Company (“PMA RE”), a
Pennsylvania corporation, and 1,000,000 ordinary shares, $1.00 par value per
share of High Mountain Reinsurance, Ltd., a Cayman Islands exempted limited
liability company (“HMR”, and
collectively with PMACIC and PMA RE, the “Companies”), which
represent all of the issued and outstanding shares of the capital stock of the
Companies (the “Shares”).   The
Seller wishes to sell to the Buyer, and the Buyer wishes to purchase from the
Seller, all of the Shares upon the terms and subject to the conditions of this
Agreement.

     

    Accordingly,
in consideration of the premises and of the representations, warranties,
covenants and agreements contained herein, and subject to and on the terms and
conditions set forth in this Agreement, the parties hereto, each intending to be
legally bound hereby, agree as follows:

     

    ARTICLE
1

     

    DEFINITIONS

     

    1.1 Certain Defined
Terms.  Capitalized terms used in this Agreement shall have the
meanings specified in Section 12.1, or elsewhere in this Agreement.

     

    ARTICLE
2

     

    SALE AND PURCHASE OF
SHARES

     

    2.1 Sale and Purchase of
Shares.  At the Closing (as defined in Section 4.1) and upon
the terms and subject to the conditions set forth in this Agreement, the Seller
shall sell, convey, assign, transfer and deliver to the Buyer, or shall cause to
be sold, conveyed, assigned, transferred and delivered to the Buyer, and the
Buyer shall purchase, acquire and accept from the Seller, all of the Shares,
including all of the Seller’s right, title and interest in and to the Shares,
free and clear of any and all Liens (as defined in Section
5.4.2).   In consideration thereof and the covenants of the
Seller hereunder, the Buyer shall pay to the Seller an amount (the “Purchase Price”)
equal to the sum of the Cash Payment (as defined in Section 2.2) and the Note
Payment (as defined in Section 2.2).

     

     

    
      
        
        

      

      
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    2.2 Payment of Purchase
Price.  The Purchase Price shall be determined and paid as
follows:

     

    (1) $10,000,000
(Ten Million US Dollars) in cash, payable by inter-bank wire transfer at the
Closing, subject to any applicable Automatic Purchase Price Adjustment (as
defined in Section 2.3) (the “Cash Payment”), plus

     

    (2) promissory
note having a principal amount of $10,000,000 (Ten Million US Dollars) issued by
the Buyer (the “Promissory Note”) in
the form attached hereto as Exhibit A, subject to any applicable Automatic
Purchase Price Adjustment or Final Purchase Price Adjustment (as defined in
Section 2.4) (the “Note
Payment”).

     

    2.3 Automatic
Purchase Price Adjustment at Closing.

     

    2.3.1 The
Purchase Price shall be automatically adjusted downward at the Closing, on a
dollar for dollar basis, in accordance with any or all of the following
provisions, as applicable:

     

    (i) if any of
PMACIC, HMR or PMA RE, on or before the Closing Date (as defined in Section
4.1), (A) experiences an adverse change or development in its reserves,
including as a result of payment of losses and allocated loss adjustment
expenses (“ALAE”) or increases
in reserves (including case reserves, ALAE reserves and incurred but not
reported reserves (the “IBNR Reserves”)), (B)
experiences a net
increase to expense accruals or non-actuarial reserve figures (including
unallocated loss adjustment expenses (“ULAE” and
collectively with ALAE, “LAE”)), or (C)
experiences a net decrease in the value of any asset item (other than Investment
Assets (as defined in Section 5.8.1) which are addressed in Section 2.3.1(iv)),
in each case, with respect to any of the line items or categories set forth on
Exhibit B hereto (the “Lead Sheet”), if such
line item or category is designated on the Lead Sheet as being subject to a
“Purchase Price Adjustment”, then such occurrence in (A), (B) or (C) above shall
be reflected in the Closing Date Financial Statement.  An adjustment
shall be made to the Purchase Price by comparing the amount for each such line
item or category for each of PMACIC, HMR and PMA RE as set forth in the Closing
Date Financial Statement to those set forth in the applicable Initial Financial
Statement (as defined in Section 5.7.1), such comparison to be made in a manner
consistent with the Lead Sheet, and the aggregate amount of any adverse reserve
change or development, increase to expense accruals or non-actuarial reserve
figures or net decrease in other asset items with respect to any of the
Companies (the “Adverse Development
Component”) shall form a part of the Automatic Purchase Price Adjustment
on a dollar for dollar basis.  In the event of any adverse reserve
change or development, increase to expense accruals or non-actuarial reserve
figures or net decrease in other asset items that is not of the type that would
have been reflected under any of the line items or categories in the Lead Sheet
had it occurred on or prior to December 31, 2007, the full amount of such
adverse reserve change or development, increase to expense accruals or
non-actuarial reserve figures or net decrease in other asset items shall be
included in the Adverse Development Component;

     

    (ii) if any
outside actuarial study of PMACIC or HMR commissioned by the Seller, after
December 31, 2007, by any independent actuarial firm, including Huggins
Actuarial Services, or any successor thereto (other than the actuarial study of
Huggins Actuarial Services regarding PMACIC and HMR as of December 31, 2007, the
“2007 Year-End Huggins
Study”), 

     

     

    
      
        
        

      

      
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    recommends
reserving for PMACIC carried reserves (including case reserves and IBNR
Reserves) at their “Select” value, where the difference between such value and
the carried reserves of PMACIC as of the date of such actuarial study (the
“PMACIC Revised
Difference”) is greater than $10.4 million (the “PMACIC Original
Difference”), then PMACIC shall adjust its carried reserves in an amount
equal to the difference between the PMACIC Revised Difference and the PMACIC
Original Difference (the “PMACIC Reserve
Component”), which amount shall form a part of the Automatic Purchase
Price Adjustment on a dollar for dollar basis; provided that such
adjustment is not already accounted for in the Adverse Development
Component;

     

    (iii)  if
the independent auditors of any of the Companies take, require, or recommend any
action, on or before the Closing Date (including, in the Companies’ financial
statements, dated as of the Closing Date), that would result in an increase to
any expense accruals or any non-actuarial reserve figures (including ULAE) with
respect to any line item or category contained in the Companies’ financial
statements (such increase to be measured by comparing such amounts set forth in
the applicable Initial Financial Statement to the related amounts set forth in
the applicable Closing Date Financial Statement, in a manner consistent with the
Lead Sheet), then the aggregate amount of such increases (the “Expense Accrual
Component”, and collectively with the Adverse Reserve Component and the
PMACIC Reserve Component, the “Components”) shall
form a part of the Automatic Purchase Price Adjustment; provided that such
adjustment is not already accounted for the in the Adverse Development Component
or the PMACIC Reserve Component; and

     

    (iv)  if
the portfolio of the invested assets of any of the Companies requires a downward
adjustment in valuation (by comparing the value of such assets as set forth on
the Initial Invested Asset Statement to those set forth on the Closing Date
Invested Asset Statement), as calculated pursuant to Section 2.3.3, then the
absolute value of the amount of such adjustment (the “Portfolio
Adjustment”) shall form a part of the Automatic Purchase Price Adjustment
on a dollar for dollar basis.

     

    The
“Automatic Purchase
Price Adjustment” shall equal the sum of the Adverse
Development Component, the PMACIC Reserve Component, the Expense Accrual
Component and the Portfolio Adjustment; provided that none of
the Components are duplicative.  For the avoidance of doubt, the
Closing Date Financial Statement shall reflect any action taken under clause
(i), (ii), (iii) or (iv) that was a basis of the Automatic Purchase Price
Adjustment.

     

    2.3.2 The Cash
Payment and the principal amount of the Promissory Note shall be reduced on a
pro rata basis in an amount equal to the Automatic Purchase Price
Adjustment.

     

    2.3.3 All of
the Investment Assets of the Companies shall be “marked to market” or revalued
as of the Closing Date as follows.  Five (5) days prior to the
Closing, the Seller and the Buyer shall each provide their good faith fair
market valuation of the Investment Assets of each of the Companies as of the
Closing.  In the event that the parties cannot agree as to the value
of any Investment Asset, the Seller shall replace such Investment Asset with
cash equal to the valuation of such Investment Asset proposed by the Seller and
the Seller’s valuation (with respect to such Investment Asset) shall be set
forth on the Closing Date Invested Asset Statement.

     

     

    
      
        
        

      

      
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    2.3.4 In the
event of any pro-rata adjustment to the principal amount payable under the
Promissory Note, for the purpose of interest accrual, such pro-rata adjustment
shall be deemed to have occurred on the date of issuance of the Promissory Note
and any interest accrual shall be payable only on the amount of the adjusted
principal, after the pro-rata reduction in the principal amount payable under
the Promissory Note attributable to the Automatic Purchase Price
Adjustment.

     

    2.4 Final
Purchase Price Adjustment and Payment on Promissory Note.

     

    The
Purchase Price (including the principal amount payable under the Promissory
Note), shall be adjusted downward to reflect any adverse developments (including
any increase) in the net loss reserves (including case reserves and IBNR
Reserves) and LAE reserves of the Companies subsequent to the Closing and up to
and including the stated maturity date of the Promissory Note (or earlier
maturity date pursuant to Section 3 of the Promissory Note), in amount equal to
the sum of (i) PMACIC’s net loss and LAE reserves determined on and as of
December 31, 2012 (or earlier maturity date pursuant to Section 3 of the
Promissory Note) (the “Calculation Date”),
plus PMACIC’s actually
paid net loss and expense amounts (including LAE) as reflected on PMACIC’s
audited financial statements for the period from December 31, 2007 to and
including the Calculation Date, minus PMACIC’s net loss and
LAE reserves as set forth on the PMACIC Audited Financial Statement (as defined
in Section 7.22), if such difference is greater than zero, plus (ii) HMR’s net loss and
LAE reserves on and as of the Calculation Date, plus HMR’s actually paid net
loss and expense amounts (including LAE) and accretion of the loss reserve
discount as reflected on HMR’s audited financial statements for the period from
December 31, 2007 to and including the Calculation Date, minus HMR’s net loss and LAE
loss reserves as set forth on the HMR Audited Financial Statement (as defined in
Section 7.22), minus
the Automatic Purchase Price Adjustment, if such difference is greater than zero
(the “Final Purchase
Price Adjustment”).   The Buyer must notify the Seller in
writing by the Calculation Date of the existence of any positive Final Purchase
Price Adjustment, which written notice must contain a written opinion of (i) an
actuary who is a member of the Casualty Actuarial Society (a “Member”), or any
successor thereto, or a fellow of the Institute of Actuaries (a “Fellow”), or any
successor thereto, or (ii) a firm made up of Fellows or Members, in each case,
supporting the Buyer’s calculation of the Final Purchase Price Adjustment (the
“Initial Final
Purchase Price Adjustment”).  If the Buyer determines that
there is no positive Final Purchase Price Adjustment, the Buyer shall pay all
principal and interest due under the Promissory Note within ninety (90) days
after the stated maturity date of the Promissory Note (the “Final Payment Date”)
in accordance with the terms of the Promissory Note; provided, that no
payments of principal or interest shall be due on the Promissory Note until the
Final Payment Date (or such later date, as set forth in the following
paragraphs).

     

    If the
Seller does not provide written notification to the Buyer of its disagreement
with the Initial Final Purchase Price Adjustment within ten (10) days after
Seller’s receipt thereof, then the Buyer shall pay to the Seller, all principal
and interest due under the Promissory Note, less the Initial Final Purchase
Price Adjustment, no later than the Final Payment Date; provided, that
interest on the Promissory Note shall be calculated on the principal amount of
the Promissory Note after the reduction of the Initial Final Purchase Price
Adjustment and; provided, further, that no
payments of principal or interest shall be due on the Promissory Note until such
time.  If the Seller provides the Buyer with written notification of
its disagreement with the 

     

     

     

    
      
        
        

      

      
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    Initial
Final Purchase Price Adjustment within ten (10) days of the Seller’s receipt
thereof, the Buyer shall have no obligation to make any payments of principal or
interest on the Promissory Note until such time as the parties resolve their
dispute with respect to the calculation of the Final Purchase Price
Adjustment.  The Seller may, at it own expense, commission its own
independent actuarial study of the net loss
and LAE reserves of the Companies and the Buyer shall fully cooperate in any
such actuarial study commissioned by the Seller; provided, that such
study shall utilize and apply reserving techniques and methodologies consistent
with prevailing industry standards recommended by the Casualty Actuarial
Society.   In the event that the Buyer and the Seller have not
agreed on the Final Purchase Price Adjustment by the Final Payment Date, the
Buyer and the Seller shall mutually and in good faith work towards a
reconciliation of the net loss and LAE reserves of PMACIC or HMR, as applicable;
provided, that
such reconciliation must be completed within one hundred and twenty (120) days
after the stated maturity date of the Promissory Note and the Buyer shall have
no obligation to make any payments of principal or interest on the Promissory
Note until such time as the parties resolve their dispute with respect to the
calculation of the Final Purchase Price Adjustment.

     

    If the
Buyer and the Seller are unable to agree on the Final Purchase Price Adjustment
after the completion of the aforementioned good faith reconciliation period,
then the Buyer and the Seller shall mutually agree upon and retain a third party
independent actuarial firm (the “Independent Firm”) in
order to reconcile the Buyer’s and the Seller’s differences as to the net loss
and LAE of any of the Companies, and to determine the Final Purchase Price
Adjustment in a manner utilizing and applying reserving techniques and
methodologies consistent with prevailing industry standards recommended by the
Casualty Actuarial Society.  Such Independent Firm’s determination of
the Final Purchase Price Adjustment shall be binding on the parties hereto and
the costs associated therewith shall be shared equally by the Buyer and the
Seller.  Any adjustment to the Final Purchase Price resulting from the
performance of the Independent Firm’s analysis and related determination, shall
occur and the Buyer shall pay all principal and interest due under the
Promissory Note, less the Final Purchase Price Adjustment (as calculated by such
Independent Firm), to the Seller no later than ten (10) days after the Buyer’s
and the Seller’s receipt of such Independent Firm’s analysis and determination;
provided, that
interest on the Promissory Note shall be calculated on the principal amount
payable under the Promissory Note after the reduction of the Final Purchase
Price Adjustment.  If the Final Purchase Price Adjustment results in a
final Purchase Price that is equal to or less than the Cash Payment Amount,
neither the Seller nor the Buyer shall have any obligation to pay any dollar
amount to the other party and the Seller shall not make any demands for payment
under the Promissory Note and shall promptly return the Promissory Note to the
Buyer for cancellation.

     

    2.5 Closing Deliveries by the
Seller.  At the Closing, the Seller shall deliver to the
Buyer:

     

    (a) stock
certificates representing all of the Shares, duly endorsed in blank or
accompanied by stock powers duly executed in blank, in proper form for transfer,
and with all appropriate stock transfer stamps affixed;

     

    (b) certificate(s)
of the Secretary or Assistant Secretary of the Seller, dated as of the Closing
Date, as to the resolutions duly and validly adopted by the Board of Directors,
or 

     

     

    
      
        
        

      

      
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    other
governing body, of the Seller evidencing its authorization of the execution,
delivery and performance of the Transaction Agreements to which the Seller is a
party and such other documents as may be reasonably necessary to consummate the
other transactions contemplated by the Transaction Agreements;

     

    (c) the
Seller’s Closing Certificate (as defined in Section 8.1); and

     

    (d) such
other customary instruments of transfer, assumptions, filings, agreements or
documents, in form and substance reasonably satisfactory to the Buyer, as may be
required to give effect to the transactions contemplated in the Transaction
Agreements.

     

    ARTICLE
3

     

    RELATED
MATTER

     

    3.1 Use of the Companies’ Names.
Buyer is not purchasing, acquiring or otherwise obtaining any right,
title or interest in the name “PMA” or “PMA Capital” or any trade names,
trademarks, identifying logos or service marks related thereto or employing the
words “PMA” or “PMA Capital” or any part or variation of any of the foregoing or
any confusingly similar trade name, trademark or logo (collectively, the “Seller’s Trademarks and
Logos”).  As promptly as practicable after the Closing Date,
but no later than four (4) months after the Closing Date, or such longer time as
may be necessary to comply with and satisfy the requirements of the applicable
insurance laws and regulations or insurance regulatory authority, the Buyer will
cause PMACIC and PMA RE to (i) take any and all action to change their corporate
names, including by amending their certificates of incorporation to remove any
reference to the words “PMA” and “PMA Capital,” subject to obtaining all
required regulatory approvals, and (ii) remove, strike over and otherwise
obliterate all of the Seller’s Trademarks and Logos from all materials
constituting the Companies’ properties and assets, including any business cards,
schedules, stationery, displays, signs, promotional and sales materials,
manuals, forms, software and other materials, except for such use as is required
to comply with applicable insurance laws and regulations or insurance regulatory
authority; provided, however, with respect
to (i) and (ii), neither the Buyer nor its Affiliates shall be required to
relabel or destroy any existing stationery, business cards, purchase orders,
agreements of sale, warranties, indemnifications, invoices or other
correspondence or other documents of a contractual nature, that were distributed
to or are in the possession of third parties prior to the Closing
Date.

     

    ARTICLE
4

     

    CLOSING

     

    4.1 Closing Date and
Location.  The consummation of the sale and purchase of the
Shares contemplated hereby (the “Closing”) shall take
place at the offices of the Seller in Philadelphia, Pennsylvania at 10:00 a.m.
local time, on the last Business Day of the month after satisfaction or waiver
of all of the conditions set forth in Articles 8 and 9, or such other place,
time or date as the Buyer and the Seller may otherwise mutually agree in
writing.  The time and date upon which the Closing occurs is herein
called the “Closing
Date”.

     

     

    
      
        
        

      

      
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    ARTICLE
5

     

    REPRESENTATIONS, WARRANTIES
AND COVENANTS OF THE SELLER

     

    The
Seller represents, warrants and covenants to the Buyer, and acknowledges that
the Buyer intends to rely upon such representations, warranties and covenants,
as of the date of this Agreement and as of the Closing Date as
follows:

     

    5.1 Due Incorporation and Authority of
the Seller.  The Seller is a corporation duly organized,
validly existing and in good standing under the laws of the Commonwealth of
Pennsylvania.

     

    5.2 Due Incorporation and Authority of
the Companies.  PMACIC and PMA RE are corporations duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania and HMR is a corporation duly organized, validly
existing and in good standing under the laws of the Cayman Islands, and each of
them has all requisite corporate power and authority to own, lease and operate
its Assets and to carry on its business as now and heretofore
conducted.  The Companies are duly qualified as foreign corporations
to do business, and are in good standing, in each jurisdiction where the
character of their owned, operated or leased properties or the nature of their
activities makes such qualification necessary.

     

    5.3 Subsidiaries and Other
Affiliates.

     

    5.3.1 The
Companies do not directly or indirectly have any subsidiaries or own or have the
power to vote shares of any capital stock or other ownership interests of any
Person such that it has voting power to elect a majority of the directors of
such Persons or to Control such Persons.  Except for marketable
securities held in their investment portfolios, the Companies do not directly or
indirectly own any interest in any other Person.

     

    5.3.2 There are
no off-balance sheet transactions, arrangements, obligations, or relationships
to which any of the Companies is a party, except as set forth in Schedule
5.3.2.

     

    5.4 Outstanding
Capital Stock and Title to the Shares.

     

    5.4.1 PMACIC is
authorized to issue 2,000,0000 shares of common stock, par value $10.00 per
share, 500,000 shares of which are issued and outstanding, and PMA RE is
authorized to issue 1,000 shares of common stock, par value $.01 per share, all
of which are issued and outstanding, and HMR is authorized to issue 1,000,000
ordinary shares, par value $1.00 per share, all of which are issued and
outstanding, and 40,000 preferred shares, par value $100.00 per share, none of
which are issued and outstanding.  There exist no other authorized,
issued or outstanding shares (including treasury shares) of capital stock or
other equity securities of the Companies, no securities of the Companies
convertible directly or indirectly into or exchangeable directly or indirectly
for any capital stock or other equity security of the Companies, no options,
warrants, puts, calls or rights of conversion or other rights (including any
preemptive rights) to acquire directly or indirectly from the Companies or the
Seller or any Affiliate of the Seller any capital stock or other equity security
of the Companies, and no other contracts, understandings, agreements,
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    commitments
by which the Companies are or may be bound to issue, repurchase, exchange or
convert any capital stock or other equity security of the
Companies.

     

    5.4.2 All of
the Shares are owned beneficially and of record by the Seller (directly or
through one or more of the Seller’s wholly-owned subsidiaries) free and clear of
any lien, pledge, mortgage, deed of trust, hypothecation, security interest,
encumbrance, claim, lease, charge, option, right of first or last refusal or
offer, easement, servitude, transfer restriction under any shareholder or
similar agreement, encumbrance or any other restriction or limitation whatsoever
(each a “Lien”), other than
restrictions on transfer generally under any applicable state and federal
securities and insurance laws.  Upon delivery of the Cash Payment, the
Seller will convey to the Buyer good and valid title to the Shares, free and
clear of all Liens.

     

    5.4.3 All of
the Shares are duly authorized and validly issued, fully paid and nonassessable
and were not issued in violation of any preemptive rights.

     

    5.4.4 Except
for the Required Consents and Insurance Regulatory Approvals (each as defined in
Section 5.19), there are no restrictions on the sale, transfer and assignment by
the Seller of the Shares to the Buyer, and no approval or consent of any Person
is required for the Seller to validly effect the sale of the
Shares.  None of the Companies or the Seller is a party to any
Contract (as defined in Section 5.19) concerning any or all of the Shares other
than, in the case of the Seller, this Agreement, including any voting trust,
stockholder agreement, proxy or other agreement with respect to the voting or
transfer of the capital stock of the Companies.

     

    5.5 Authority to Execute and Perform
Agreement; Enforceability.  The Seller has the full legal right
and power and all corporate power, authority and approvals required to execute
and deliver this Agreement and the other Transaction Agreements to which it is
or will be a party, and to consummate the transactions contemplated by, and to
perform fully its obligations hereunder and thereunder.  The execution
and delivery by the Seller of this Agreement and the other Transaction
Agreements to which it is or will be party, the consummation of the transactions
contemplated hereby and thereby, and the performance by the Seller of its
obligations under this Agreement and such Transaction Agreements, have been duly
authorized by all requisite corporate action on the part of the
Seller.  This Agreement has been, and upon execution and delivery of
the other Transaction Agreements to which the Seller is or will be a party, such
other Transaction Agreements will be, duly executed and delivered by the Seller,
and this Agreement constitutes, and upon execution and delivery of the other
Transaction Agreements to which the Seller is or will be party, such other
Transaction Agreements will constitute, legal, valid and binding obligations of
the Seller, enforceable against the Seller in accordance with their
terms.

     

    5.6 Charter Documents and Corporate
Records.  The Seller has heretofore delivered to the Buyer true
and complete copies of the Certificate of Incorporation, Articles of Association
and Memorandum of Association of HMR and the Certificates of Incorporation,
Articles of Incorporation and Bylaws of PMACIC and PMA RE as in effect on the
date hereof (collectively, the “Organizational
Documents”), and no amendments to any Organizational Document shall be
made from the date hereof through the Closing Date.  The minute books
of the Companies now contain, and on the Closing Date will contain, a true and
complete record of all corporate action taken by the Companies, or hereafter
taken on or prior to the Closing Date, at 

     

     

    
      
        
        

      

      
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    the
meetings or by written consents of shareholders and each of the Companies’ Board
of Directors and any committees thereof.  The stock certificate books
and records of the Companies accurately reflect the ownership of the capital
stock of the Companies.

     

    5.7 Financial
Statements.

     

    5.7.1 Schedule
5.7.1 sets forth a true, complete and correct copy of (i) the Annual Statement
of PMACIC as filed with the Pennsylvania Department of Insurance for the year
ended December 31, 2007 (the “PMACIC Statutory
Statement”), (ii) the unaudited statutory balance sheet and the unaudited
statutory income statement and cash flow statement of PMACIC as of and for the
year ended December 31, 2007 (together with the accompanying audit report
prepared by PMACIC’s independent auditor, the “PMACIC Financial
Statement”, as set forth on Exhibit C-1, and collectively with the PMACIC
Statutory Statement, the “PMACIC Financials”),
(iii) the unaudited balance sheet and the unaudited statement of income of the
operations of PMA RE as of and for the fiscal year ended December 31, 2007 (the
“PMA RE Financial
Statement”, as set forth on Exhibit C-2), (iv) the unaudited balance
sheet and the unaudited statement of income, changes in stockholders’ equity and
cash flows of the operations of HMR as of and for the fiscal year ended December
31, 2007 (the “HMR
Financial Statement”, as set forth on Exhibit C-3, and collectively with
the PMACIC Financial Statement and the PMA RE Financial Statement, the “the
“Initial Financial
Statement”).

     

    5.7.2 The
PMACIC Financials (i) have been prepared, in all material respects, in
accordance with the accounting practices prescribed or permitted by the
Pennsylvania Department of Insurance applied on a consistent basis (“SAP”) during the
period involved; (ii) are true and correct in all material respects and
present fairly, in accordance with SAP, the statutory financial position of
PMACIC as of the date thereof and the statement of income, results of
operations, capital and surplus accounts and cash flows of PMACIC for the period
then ended; and (iii) accurately reflect in all material respects the books
of account and other financial records of PMACIC.

     

    5.7.3 The PMA
RE Financial Statement (i) has been prepared, in all material respects, in
accordance with GAAP during the period involved; (ii) is true and correct
in all material respects and present fairly, in accordance with GAAP, the
financial position of PMA RE as of the date thereof and the statement of income,
results of operations, changes in stockholders’ equity and cash flows of PMA RE
for the period then ended; and (iii) accurately reflects in all material
respects the books of account and other financial records of PMA
RE.

     

    5.7.4 The HMR
Financial Statement (i) has been prepared, in all material respects, in
accordance with GAAP during the period involved; (ii) is true and correct
in all material respects and present fairly, in accordance with GAAP, the
financial position of HMR as of the date thereof and the statement of income,
results of operations, changes in stockholders’ equity and cash flows of HMR for
the period then ended; and (iii) accurately reflects in all material
respects the books of account and other financial records of HMR.

     

    

     

    
      
        
        

      

      
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    5.8 Closing Date
Assets.

     

    5.8.1 Schedule
5.8.1 sets forth a true, correct and complete list of any and all investment
assets, including, bonds, notes, debentures, mortgage loans, real estate,
collateral loans, derivatives and all other instruments of indebtedness, stocks,
partnership or joint venture interests or certificates issued by or interests in
trusts and all other assets acquired for investment purposes that are
beneficially owned by any of the Companies as of February 29, 2008 (such
investment assets, together with all investment assets acquired by any Company
between February 29, 2008 and the Closing Date are referred to herein as the
“Investment
Assets”).  Schedule 5.8.1 also sets forth for each of the
Investment Assets the issuer of such Investment Asset, the amount owned of such
Investment Asset, the maturity date of such Investment Asset (if applicable) and
the fair market value of such Investment Asset as of February 29,
2008.  Each Company has good title to all of the Investment Assets it
purports to own, free and clear of all Liens.

     

    5.8.2 The
Investment Assets of the Companies do and shall consist solely of (i) cash and
cash equivalents and (ii) highly liquid publicly-traded, investment grade
fixed-income securities rated by at least one NRSRO (Nationally Recognized
Securities Ratings Organization) with no single issuer (except the
U.S.  Government and agencies thereof) obligated for more than 5% of
the total statutory book value of the securities portfolio.

     

    5.8.3 Schedule
5.8.3 contains a true, correct and complete list of all information technology,
business equipment, vehicles, furniture and other tangible personal property
owned by any of the Companies.

     

    5.8.4 Schedule
5.8.4 contains a true, correct and complete list and description of each lease
or other agreement or right (showing in each case the annual rental, the
expiration date thereof and a brief description of the property covered), under
which (i) with respect to any such written agreement, any of the Companies is
lessee of, or holds or operates, any machinery, business equipment, vehicle or
other tangible personal property owned by a third Person, except for any such
lease, agreement or right that is terminable by the Companies without penalty or
payment on notice of thirty (30) days or less, or which involves the payment by
the Companies of rentals of less than $1,000 per year or (ii) with respect to
any such oral agreement, any of the Companies, to the Knowledge of the Seller,
is lessee of, or holds or operates, any machinery, business equipment, vehicle
or other tangible personal property owned by a third Person, except for any such
lease, agreement or right that is terminable by the Companies without penalty or
payment on notice of thirty (30) days or less, or which involves the payment by
the Companies of rentals of less than $1,000 per year.

     

    5.8.5 Schedule
5.8.5 contains a list of all reinsurance receivables from an individual
reinsurer as of December 31, 2007 and a list of all other assets with a carrying
value greater than $10,000.  The Closing Date Reinsurance Receivable
Statement shall be true and correct as of the date on which it is delivered to
the Buyer pursuant to Section 7.23.

     

    5.9 Availability of
Assets.  Except as set forth in Schedule 5.9, the assets
and properties owned or leased by the Companies (i) constitute all the assets
used in the business of any of the Companies (including all Books and Records),
(ii) constitute all of the assets 

     

     

    
      
        
        

      

      
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    necessary
and sufficient to operate the business of any of the Companies in the Ordinary
Course of Business and (iii) are in good and serviceable condition (subject to
normal wear and tear).

     

    5.10 Undisclosed
Liabilities.

     

    5.10.1 PMACIC
does not have any material liability or obligation of any nature, whether known
or unknown, absolute, accrued, contingent or otherwise and whether due or to
become due, except (i) as and to the extent properly reflected, reserved against
or disclosed in the most recent of the PMACIC Financials and (ii) for
liabilities incurred after the date of the most recent of the PMACIC Financials,
in the Ordinary Course of Business.

     

    5.10.2 PMA RE
does not have any material liability or obligation of any nature, whether known
or unknown, absolute, accrued, contingent or otherwise and whether due or to
become due except (i) as and to the extent properly reflected, reserved against
or disclosed in the most recent of the PMA RE Financials  and (ii) for
liabilities incurred after the date of the most recent of the PMA RE Financials,
in the Ordinary Course of Business.

     

    5.10.3 HMR does
not have any material liability or obligation of any nature, whether known or
unknown, absolute, accrued, contingent or otherwise and whether due or to become
due except (i) as and to the extent properly reflected, reserved against or
disclosed in the most recent of the HMR Financials and (ii) for liabilities
incurred after the date of the most recent of the HMR Financials, in the
Ordinary Course of Business.

     

    5.10.4 At the
Closing, the Companies will have no liability or obligation of any nature,
whether known or unknown, absolute, accrued, contingent or otherwise and whether
due or to become due, except for (i) accounts payable and accrued expenses
incurred in the Ordinary Course of Business and (ii) insurance or reinsurance
liabilities that are properly reserved for in the PMACIC Financial Statement or
the HMR Financial Statement, as applicable.

     

    5.10.5 For the
purposes of this Section 5.10 only, “material liabilities” shall mean any
liability with a reasonably expected value in excess of $50,000.

     

    5.11 Tax
Matters.

     

    5.11.1 Except as
set forth in Schedule 5.11.1, (i) each of the Companies, each Subsidiary and
each Company Group has filed all Tax Returns required to be filed; (ii) all such
Tax Returns are complete and accurate in all material respects and disclose all
Taxes required to be paid by the Companies, each Subsidiary and each Company
Group for the periods covered thereby; (iii) none of the Companies, any
Subsidiary nor any Company Group is currently the beneficiary of any extension
of time within which to file any Tax Return; (iv) all Taxes (whether or not
shown on any Tax Return) owed by any of the Companies, any Subsidiary or any
Company Group have been timely paid; (v) none of the Companies, any Subsidiary
or any member of any Company Group has waived or been requested to waive any
statute of limitations in respect of Taxes which waiver is currently in effect;
(vi) the Tax Returns referred to in clause (i) have been examined by the
appropriate Taxing authority for the period for assessment of the Taxes in
respect of which each such Tax Return was required to be filed (taking into
account all applicable extensions and waivers) has expired; (vii) to the
Knowledge of the Seller, there is no action, suit, investigation, audit, claim
or assessment pending or proposed or threatened with respect to Taxes owed by
any 

     

     

    
      
        
        

      

      
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    of the
Companies, any Subsidiary or any Company Group and no basis exists therefor;
(viii) all deficiencies asserted or assessments made as a result of any
examination of the Tax Returns referred to in clause (i) have been paid in full;
(ix) there are no Tax rulings, requests for rulings, or closing agreements
relating to any of the Companies, any Subsidiary or any Company Group which
could affect any of the Companies’ or any Subsidiary’s liability for Taxes for
any period after the Closing Date; (x) as a result of a change in accounting
method for a Tax period beginning on or before the Closing Date or for any
Straddle Period, none of the Companies or any Subsidiary will be required to
include any adjustment under Section 481(c) of the Code (or any corresponding
provision of state, local or other Tax law) in taxable income for any Tax period
ending after the Closing Date; (xi) as a result of any “closing agreement” (as
described in Section 7121 of the Code or any corresponding provision of state or
local Tax law), none of the Companies or any Subsidiary will be required to
include any item of income in, or exclude any item of deduction from, any
taxable period ending after the Closing Date; (xii) no claim in writing has ever
been made by a Taxing authority in a jurisdiction where any of the Companies or
any Subsidiary has never paid Taxes or filed Tax Returns asserting that any of
the Companies or any Subsidiary is or may be subject to Taxes assessed by such
jurisdiction; (xiii) all Tax Sharing Arrangements and Tax indemnity arrangements
relating to any of the Companies or any Subsidiary (other than this Agreement)
will terminate prior to the Closing Date and none of the Companies nor any
Subsidiary will have any liability thereunder on or after the Closing Date;
(xiv) there are no liens for Taxes upon the assets of any of the Companies or
any Subsidiary except liens relating to current Taxes not yet due; (xv) all
Taxes which any of the Companies, any Subsidiary or any Company Group are
required by Law to withhold or to collect for payment have been duly withheld
and collected and have been paid to the appropriate Governmental Authority;
(xvi) none of the Companies or any Subsidiary has been a member of any Company
Group other than each Company Group of which it is a member as of the date
hereof and none of the Companies or any Subsidiary has had any direct or
indirect ownership in any corporation, partnership, joint venture or other
entity other than the Subsidiaries and corporations that are currently members
of the Company Group of which the Seller is the common parent corporation;
(xvii) no income or gain of any of the Companies or any Subsidiary has been
deferred pursuant to current or former Treasury Regulation §§ 1.1502-13 or -14,
or current or former Temporary Treasury Regulation §§ 1.1502-13T or -14T, or
Proposed Treasury Regulation § 1.1502-13; and (xviii) no excess loss account (as
described in Treasury Regulation §§ 1.1502-19 and 1.1502-32) exists with respect
to any of the Companies or any Subsidiary.

     

    5.11.2 No
Contemplated Transaction (as defined in Section 5.19) is subject to withholding
under Section 1445 of the Code (relating to “FIRPTA”) and no stock transfer
Taxes, sales Taxes, use Taxes, real estate transfer or gains Taxes, or other
similar Taxes will be imposed on the Contemplated Transactions.

     

    5.11.3 As a
direct or indirect result of the Contemplated Transactions, no payment or other
benefit, and no acceleration of the vesting of any options, payments or other
benefits, will be, an “excess parachute payment” to a “disqualified individual”
as those terms are defined in Section 280G of the Code and the Treasury
Regulations thereunder.  Except as set forth in Schedule 5.11.3, as a
direct or indirect result of the Contemplated Transactions, no payment or other
benefit, and no acceleration of the vesting of any options, payments or other
benefits will be (or under Section 280G of the Code and the Treasury Regulations
thereunder be presumed to be) a “parachute payment” to a “disqualified
individual” as those terms are defined in Section 2

     

     

    
      
        
        

      

      
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    80G of
the Code and the Treasury Regulations thereunder, without regard to whether such
payment or acceleration is reasonable compensation for personal services
performed or to be performed in the future.

     

    5.11.4 Except as
set forth in Schedule 5.11.4, and with respect to each reinsurance agreement
with a foreign party, the Companies have paid any excise Taxes due pursuant to
Section 4371 of the Code or otherwise.

     

    5.11.5 PMACIC
qualifies as an insurance company other than a life insurance company for U.S.
federal income tax purposes and is subject to U.S. federal income taxation under
Part II of Subchapter L of Chapter 1 of subtitle A of the Code.  As of
the Closing Date, PMACIC has reported its reserves for U.S. federal income tax
purposes in accordance with the requirements of Section 846 of the Code and has
calculated its earned and unearned premium in accordance with Section 832(b)(4)
of the Code.

     

    5.11.6 Except as
set forth in Schedule 5.11.6, PMACIC has not issued or reinsured any contracts
subject to Sections 72, 79, 101, 104-106, 125, 130, 264, 401, 403, 408, 408A,
419, 419A, 457, 817, 817A, 818, 7702, 7702A and 7702B of the Code and the
Treasury Regulations thereunder.

     

    5.11.7 HMR has
not made an election under Section 953(d) of the Code and is operated such that
it is not engaged in a U.S. trade or business for U.S. federal income tax
purposes.

     

    5.11.8 To the
Knowledge of the Seller, no basis exists for the IRS to make any allocations,
recharacterizations or adjustments under Section 845 of the Code with respect to
any Reinsurance Agreements (as defined in Section 5.17).

     

    5.11.9 Except as
set forth in Schedule 5.11.9, all Insurance Contracts (as defined in Section
5.16.1) and/or Reinsurance Agreements issued or entered into by any of the
Companies are characterized as insurance for U.S. federal income tax
purposes.

     

    5.11.10 None of
the Subsidiaries (i) is an insurance company for U.S. federal income tax
purposes; or (ii) has written or issued any Insurance Contracts or Reinsurance
Agreements.

     

    5.12 Compliance
with Laws.

     

    5.12.1 Except as
set forth in Schedule 5.12.1, there are no Orders outstanding to which any of
the Companies or any of the Assets are bound.

     

    5.12.2 The
Companies have complied with all Orders and applicable Laws and have not been,
and are not, in violation of any Order or any applicable Law.

     

    5.12.3 The
Seller has heretofore delivered to the Buyer true and complete copies of the
Report on Examination of PMACIC covering the five (5) year period ended December
31, 2002 prepared by the Pennsylvania Insurance Department.  The
foregoing triennial report is the most recent report of examination of PMACIC by
the Pennsylvania Insurance Department.  No understandings, agreements
or stipulations exist between the Pennsylvania Insurance Department

     

     

    
      
        
        

      

      
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    and the
Seller or PMACIC relating to the conduct of the PMACIC except to the extent
expressly contained in the Examination Report as set forth on Schedule
5.12.3.

     

    5.13 Reserves.  The loss
reserves and other actuarial amounts of (i) PMACIC as reflected in the PMACIC
Financials and (ii) HMR as reflected in the HMR Financial Statement: (A) were
determined in all material respects in accordance with prevailing industry
standards recommended by the Casualty Actuarial Society (except as otherwise
noted in such financial statements), (B) were fairly stated in accordance with
sound actuarial principles, (C) satisfied all applicable Laws and have been
computed on the basis of methodologies consistent with those used in computing
the corresponding reserves in the prior fiscal years, except as otherwise noted
in the financial statements and notes thereto included in such PMACIC Financials
or HMR Financial Statement, as the case may be, and (D) include provisions for
all actuarial reserves and related items which ought to be established in
accordance with prudent practices generally followed in the property and
casualty insurance or reinsurance industries, as applicable.  To the
Knowledge of the Seller, no facts or circumstances exist which would necessitate
any material adverse change in the required reserves above those reflected in
the PMACIC Financials or the HMR Financial Statement.  True, complete
and correct copies of all reports and opinions of independent actuaries relating
to the reserves of either PMACIC or HMR as of any date since December 31, 2006
have been made available or furnished to the Buyer prior to the date of this
Agreement.  The information and data furnished by PMACIC or HMR to its
independent actuaries in connection with the preparation of each such report and
opinion were accurate in all material respects.

     

    5.14 Environmental
Matters.  

     

    5.14.1 Each of
the Companies has complied at all times with all applicable Environmental
Laws.

     

    5.14.2 No
property currently or formerly owned, leased or operated by any of the Companies
(including soils, groundwater, surface water, buildings or other structures) is
contaminated by any Hazardous Substance.

     

    5.14.3 None of
the Companies is subject to liability for any Hazardous Substance disposal or
contamination on any third party property.

     

    5.14.4 None of
the Companies has been associated with any release or threat of release of any
Hazardous Substance that could result in claims for personal injury or property
damage.

     

    5.14.5 None of
the Companies has received any notice, demand, letter, claim or request for
information alleging that any of the Companies may be in violation of or subject
to liability under any Environmental Law.

     

    5.15 Licenses.

     

    5.15.1 PMACIC is
duly qualified and licensed as a property and casualty insurance company in the
Commonwealth of Pennsylvania and is in good standing as such in such
Commonwealth.  Schedule 5.15.1 lists and provides a description of the
jurisdictions in which 

     

     

    
      
        
        

      

      
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    PMACIC
currently possesses all governmental qualifications, registrations, privileges,
permits, licenses, franchises, certificates, variances, exemptions, exceptions,
orders and other governmental authorizations, consents, clearances and other
approvals (the “Licenses”) to conduct
insurance and/or reinsurance business (collectively, “Insurance
Licenses”).  PMACIC is not required by applicable Law to have
any other Licenses for the legal and valid (i) conduct of its business as
presently conducted or (ii) the ownership, use and operation of its assets and
properties.  PMACIC has heretofore made available to the Buyer true
and complete copies of all of such Insurance Licenses as are currently in
effect.  All Insurance Licenses are valid and in good standing and are
in full force and effect, except as otherwise noted on Schedule
5.15.1.

     

    5.15.2 HMR is
duly qualified and licensed as an Unrestricted Class B Insurer by the Cayman
Islands Monetary Authority in the Cayman Islands (pursuant to the “Cayman Islands
License”) and is in good standing as such in the Cayman
Islands.  HMR is not required by any applicable Law to have any
License for the legal and valid (i) conduct of its reinsurance business in the
Cayman Islands or (ii) the ownership, use and operation of its assets and
properties other than the Cayman Islands License.  HMR has heretofore
made available to Buyer a true and complete copy of the Cayman Islands License,
which is valid and in good standing and in full force and effect.

     

    5.15.3 PMA RE is
duly organized as a corporation under the laws of the Commonwealth of
Pennsylvania and is in good standing as such in the Commonwealth of
Pennsylvania.  PMA RE is not required by any applicable Law to have
any License for the legal and valid (i) conduct of its business in the
Commonwealth of Pennsylvania or (ii) the ownership, use and operation of its
assets and properties.

     

    5.15.4 Except as
set forth in Schedule 5.15.4, neither the Seller nor any Company has received at
any time since January 1, 2006, any notice or other communication from any
Governmental Authority or any other Person regarding any actual, alleged,
possible, or potential violation of, or failure to comply with, any term or
requirement of any License, or any actual, proposed, possible, or potential
revocation, withdrawal, suspension, cancellation, termination of, or
modification to any License, in each case, that have not been resolved fully and
satisfactorily.  PMACIC, HMR and PMA RE have filed all reports,
notifications and filings with, and have paid all regulatory fees to, the
applicable Governmental Authority necessary to maintain all of their Licenses in
full force and effect.

     

    5.16 Insurance or Reinsurance Issued by
PMACIC or HMR.

     

    5.16.1 Except as
set forth in Schedule 5.16.1, all insurance policies, binders, endorsements, and
certificates, and all amendments, applications, endorsements and riders
pertaining thereto issued by any of the Companies and all reinsurance agreements
where any of the Companies is a reinsurer (collectively, the “Insurance
Contracts”), have been, to the extent required by applicable Law, issued
on forms approved by all applicable Government Authorities or filed with and not
objected to by such Government Authorities within the period provided by
applicable Law for objection.  Except as indicated in Schedule 5.16.1,
all such forms comply in all material respects with, and have been administered
in accordance with, applicable Law.  Any rates for insurance provided
under any of the Insurance Contracts of any of the Companies that 

     

     

     

    
      
        
        

      

      
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    are or
were required to be filed with or approved by any Government Authority have been
so filed or approved, and the rates used by the Companies conform in all
respects thereto.

     

    5.16.2 Except as
set forth in Schedule 5.16.2, all Insurance Contract benefits payable by or on
behalf of any Company have in all respects been paid in accordance with the
terms of the Insurance Contracts under which they arose, except for such
exceptions for which the applicable Company believes there is a reasonable basis
to contest payment.

     

    5.16.3 No claim
or assessment is pending nor, to the Knowledge of the Seller, threatened against
any Company by any state insurance guaranty associations or similar
organizations in connection with such association’s fund except for (i) regular
periodic assessments in the Ordinary Course of Business or (ii) as set forth in
Schedule 5.16.3; provided, that any
claim or assessment set forth in Schedule 5.16.3 must also contain the amount
reserved by the applicable Company with respect to such claim, as reflected in
the most recent of the PMACIC Financials or of the HMR Financials, as
applicable.

     

    5.16.4 None of
the Companies have written, issued, reinsured or assumed any new Insurance
Contracts since December 22, 2003.

     

    5.17 Reinsurance
Agreements.  Schedules 5.17(a), (b) and (c) set forth a true,
complete and correct list of all reinsurance, coinsurance or retrocession
treaties, agreements, slips, binders, cover notes or other arrangements of any
kind (each, a “Reinsurance
Agreement” ) in force as of the date of this Agreement where any of the
Companies is a ceding insurer and any terminated or expired Reinsurance
Agreement under which there remains any outstanding liability.  All of
the Reinsurance Agreements are valid and enforceable against the applicable
Company and, to the Knowledge of the Seller, against the other parties thereto
in accordance with their terms and are in full force and
effect.  Neither the applicable Company nor, to the Knowledge of the
Seller, any of the other parties thereto is in breach or default under any
Reinsurance Agreement.  Neither the Seller nor any Company has
received any written notice from any applicable reinsurer that any outstanding
amount of reinsurance ceded by a Company is or will be uncollectible or
otherwise defaulted upon.  All of the Reinsurance Agreements satisfy
all risk-transfer criteria for reinsurance under GAAP (with respect to
Reinsurance Agreements for which HMR is a party) and SAP (with respect to
Reinsurance Agreements for which PMACIC is a party), except for those set forth
in Schedule 5.17(d).

     

    5.18 Insurance.  Schedule
5.18 sets forth a true, correct and complete list of all current property and
liability insurance policies covering any Company or its assets and properties,
and all current pending claims under such policies.  All such policies
are in full force and effect, and no Company is in default of any provision
thereof, except for such defaults that, individually or in the aggregate, have
not had, and would not be reasonably expected to have a Material Adverse
Effect.

     

    5.19 No Breach.  The
execution, delivery and performance of this Agreement by the Seller and the
consummation of the transactions contemplated hereby (the “Contemplated
Transactions”) will not (i) violate or conflict with any provision of any
Organizational Documents; (ii) require the Companies or the Seller to obtain any
consent, approval, authorization or action of, or make any filing with or give
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    any
consent or waiver pursuant to any Contract or which may be required to prevent
the counterparty thereto from terminating such Contract, except (y) as set forth
on Schedule 5.19 (the “Required Consents”)
and (z) for approvals or filings required under  Laws governing
Pennsylvania insurance companies generally or Cayman Islands insurance companies
generally (the “Insurance Regulatory
Approvals”, each as set forth on Schedule 5.19); (iii) if the Required
Consents and the Insurance Regulatory Approvals are obtained, violate, result
with the passage of time or the giving of notice, or both, in the breach of any
of the terms of, result in a modification of the effect of, otherwise cause the
termination of or constitute a default under, or cause additional fees to be due
or give any Person any rights of termination, amendment, acceleration or
cancellation of, any contract, agreement, understanding, indenture, note, bond,
loan, instrument, lease, conditional sale contract, mortgage, license, permit,
franchise, commitment, agreement or other binding arrangement (collectively, the
“Contracts”)
excluding intercompany agreements between the Seller or its Affiliates and the
Companies to which any of the Companies or the Seller is a party or by or to
which any of them or any of their Assets (including the Shares) may be bound or
subject, or result in the creation of any Lien upon the Assets of the Companies
or the Seller (including the Shares) pursuant to the terms of any such Contract;
(iv) if the Required Consents and Insurance Regulatory Approvals are obtained,
violate any Order of any Governmental Authority against, or binding upon, the
Companies or the Seller or upon any of their Assets (including the Shares) or
upon their respective businesses; or (v) if the Required Consents and Insurance
Regulatory Approvals are obtained, violate any Law; other than, in the case of
clause (iii) above, where such violation, conflict, breach, modification,
termination or Lien does not and would not reasonably be expected to result in a
Material Adverse Effect.

     

    5.20 Claims and
Proceedings.

     

    5.20.1 Other
than as claims under Insurance Contracts issued by the Companies that may arise
in the Ordinary Course of Business and except as set forth in Schedule 5.20.1,
there are no actions, suits, claims or legal, administrative or arbitral
proceedings or investigations (collectively, “Claims”) pending, or
to the Knowledge of the Seller threatened, (i) against or involving the
Companies or any of their Assets or (ii) against the Seller or which questions
the legality or the validity, or the due performance by the Seller, of this
Agreement or any other Transaction Agreement; provided, that any
Claim set forth in Schedule 5.20.1 must also contain the amount reserved by the
applicable Company with respect to such Claim, as reflected in the most recent
of the PMACIC Financials or the HMR Financial Statement, as
applicable.

     

    5.20.2 Schedule
5.20.2 sets forth a true, complete and correct copy of all bad faith Claims and
Claims certified or seeking certification for a class against any Company,
which, as of the date of this Agreement, have not been resolved, closed,
settled, withdrawn, dismissed or terminated in their entirety; provided, that any
Claim set forth in Schedule 5.20.2 must also contain the amount reserved by the
applicable Company with respect to such Claim, as reflected in the most recent
PMACIC Financial, HMR Financial Statement or PMA RE Financial Statement, as
applicable.

     

    5.21 Intercompany
Relationships.  Schedule 5.21 sets forth a list and description
of all (i) Contracts between any of the Companies, on the one hand, and the
Seller or any of its Affiliates, on the other hand, (ii) services provided
by the Seller or any of its Affiliates with 

     

     

    
      
        
        

      

      
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    respect
to the business of the Companies utilizing either (A) assets or properties
not owned by the Companies or (B) employees that are not employees of any
of the Companies and the manner in which the costs of providing such services
have been allocated to the Companies, (iii) all loans, payables,
receivables, and other accounts between any of the Companies, on the one hand,
and the Seller or any of its Affiliates, on the other hand, and (iv) all
assets and properties (whether real, personal, mixed, tangible or intangible)
that are owned, beneficially or of record by the Seller or any of its Affiliates
and all Contracts to which the Seller or any of its Affiliates is a party, in
each case used in the operation of the business of the Companies.

     

    5.22 Material
Contracts.  Other than intercompany Contracts between the
Seller or its Affiliates and the Companies and except as otherwise set forth on
Schedule 5.22, there are no material Contracts to which the Companies are a
party on the date hereof, including but not limited to: (i) partnership, limited
liability company, joint venture or other similar agreements; (ii) Contracts
containing covenants of the Companies not to compete in any line of business or
with any Person in any geographical area or covenants of any other Person not to
compete with the Companies in any line of business or in any geographical area;
(iii) Contracts relating to the borrowing of money; (iv) management, employment,
non-competition, non-solicitation Contracts and other similar agreements; (v)
Contracts with any other insurance company, managing general agent, underwriting
manager or any other Person, pursuant to which any Company has delegated
underwriting and/or claims settlement authority; (vi) Contracts with any
Governmental Authority; (vii) agency, brokerage or other similar insurance sales
or marketing Contracts; (viii) guaranties; (ix) any Contracts that contain
obligations of any Company in excess of $25,000; and (x) any other Contracts
(each of (i) through (x), “Material
Contracts”).  To the Knowledge of the Seller, the Companies are
not a party to any oral Contract, except as otherwise set forth on Schedule
5.28.7(ii).

     

    5.23 Status of
Contracts.  Except as set forth in Schedule 5.23, each
Contract to which any Company is a party constitutes a valid and binding
obligation of the parties thereto and is in full force and effect and (except as
set forth in Schedule 5.19 and except for those Contracts that by their
terms will expire prior to the Closing Date) will continue in full force and
effect after the Closing, in each case without breaching the terms thereof or
resulting in the forfeiture or impairment of any rights thereunder and without
the consent, approval or act of, or the making of any filing with, any other
party.  Each Company has fulfilled and performed its obligations under
each Contract to which it is a party, and the Companies are not in, or alleged
to be in, breach or default under, nor is there or is there alleged to be any
basis for termination of, any such Contracts and, to the best of the Seller’s
knowledge, no other party to any such Contract has breached or defaulted
thereunder, and no event has occurred and no condition or state of facts exists
which, with the passage of time or the giving of notice or both, would
constitute such a default or breach by any Company or by any such other
party.  None of the Seller or any of the Companies are currently
renegotiating any Contract to which any of the Companies is a party or paying
liquidated damages in lieu of performance thereunder.

     

    5.24 Real Estate.  The
Companies do not own or beneficially hold any real property or any interests in
real property.  The Companies are not a party to any leases or
subleases under which any of the Companies is the lessor or lessee of any real
property (or any amendments thereto or guarantees with respect to which), or any
agreements by which the Companies have any right to purchase, acquire, sell or
dispose of any material interest in real property, except as 

     

     

    
      
        
        

      

      
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    set forth
in Schedule 5.24 (the “Leases”).  Complete
and accurate copies of each of the Leases and any documents or instruments
affecting the rights or obligations of any of the parties thereto have been made
available or furnished to the Buyer prior to the date of this
Agreement.

     

    5.25 Intellectual
Property.

     

    5.25.1 Schedule
5.25.1 contains a list of all registered Copyrights, applications to register
Copyrights and material unregistered Copyrights, Patent Rights and Trademarks
(including all assumed or fictitious names under which any of the Companies has
within the previous four (4) years conducted business), in each case owned by,
licensed or used by any of the Companies primarily in connection with its
business.

     

    5.25.2 Schedule
5.25.2 contains a list and description (showing in each case by owner, licensor
or licensee) of all Software owned by, licensed to or used by any of the
Companies primarily in connection with its business, except Software licensed to
any of the Companies that is commercially available and subject to
“shrink-wrap”, “click-through” or similar license agreements.

     

    5.25.3 Schedule
5.25.3 contains a list and description (showing in each case the parties
thereto) of all agreements, contracts, licenses, sublicenses, assignments and
indemnities which relate to (i) any Copyrights, Patent Rights or Trademarks
listed in Schedule 5.25.1; (ii) any Trade Secrets owned by, licensed to or used
by any of the Companies primarily in connection with its business or (iii) any
Software listed in Schedule 5.25.2.

     

    5.25.4 Except as
disclosed in Schedule 5.25.4, the Companies either (i) own the entire right,
title and interest in and to the Intellectual Property and Software included in
the Assets, free and clear of any Liens; or (ii) have the perpetual,
royalty-free right to use the same.  The Intellectual Property and
Software owned by, licensed to or used by the Companies and included in the
Assets are sufficient for the conduct of the business of each Company as it is
currently conducted.

     

    5.25.5 Except as
disclosed on Schedule 5.25.5: (i) all registration for Copyrights, Patent Rights
and Trademarks identified in Schedule 5.25.1 as being owned by the Companies are
valid and in force, and all applications to register any unregistered
Copyrights, Patent Rights and Trademarks so identified are pending and in good
standing, all without challenge of any kind; (ii) the Intellectual Property
owned by the Companies is valid and enforceable; (iii) the Companies have the
sole and exclusive right to bring actions for infringement or unauthorized use
of the Intellectual Property and Software owned by the Companies and included in
the Assets; and (iv) there is no pending or threatened action by the Companies
against any other Person with respect to the infringement or unauthorized use of
the Intellectual Property and Software owned by the Companies and included in
the Assets, and to the Seller’s Knowledge, there is no basis for any such
action.

     

    5.25.6 Except as
set forth in Schedule 5.25.6, no infringement of any Intellectual Property of
any other Person has occurred or results in any way from the operations of the
business of any of the Companies, no claim of infringement of any Intellectual
Property of any other Person has been made or asserted in respect of the
operations of the business of any of the 

     

     

    
      
        
        

      

      
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    Companies
and the Seller has not had notice of, or Knowledge of any basis for, a claim
against the Seller that the operations, activities, products, software,
processes or services of the business of any of the Companies infringe on any
Intellectual Property of any other Person.

     

    5.25.7 Except as
disclosed on Schedule 5.25.7: (i) the Software owned by the Companies and
included in the Assets (the “Owned Software”) is
not subject to any transfer, assignment, site, equipment, or other operational
limitations; (ii) the Companies have maintained and protected the Owned Software
(including all source code and system specifications) with appropriate
proprietary notices, confidentiality and non-disclosure agreements and such
other measures as are necessary to protect the proprietary, trade secret or
confidential information contained therein; (iii) the Owned Software has been
registered or is eligible for protection and registration under applicable
copyright law and has not been forfeited to the public domain; and (iv) there
are no agreements or arrangements in effect with respect to the marketing,
distribution, licensing or promotion of the Owned Software by any other
Person.

     

    5.25.8 Except as
disclosed on Schedule 5.25.8, all employees, agents, consultants or contractors
who have contributed to or participated in the creation or development of any
copyrightable, patentable or trade secret material owned by the Companies and
included in the Assets, including the Owned Software, on behalf of the Companies
or any predecessor in interest thereto, either (i) is a party to a
“work-for-hire” agreement under which the Companies are deemed to be the
original author/owner of all property rights therein; or (ii) has executed an
assignment or an agreement to assign in favor of the Companies (or such
predecessor in interest, as applicable) of all right, title and interest in such
material.

     

    5.26 Third Party
Rights.  Except as set forth in Schedule 5.26 no third Person
has any rights to any Asset of the Companies, tangible or intangible, in whole
or in part (including any patent, copyright, trade secret, business name, trade
name, trademark or proprietary information).

     

    5.27 Title to Assets. At the
Closing, the Companies will own all rights, title and interest in all of the
Assets reflected in the Seller’s Closing Date Statement free and clear of any
Liens, subject only to Liens on statutory deposits with state insurance
departments.

     

    5.28 Employees and Related Agreements;
ERISA.

     

    5.28.1 Schedule
5.28.1 sets forth a list of each Company Plan (as defined in Section
5.28.14).  Schedule 5.28.1 separately lists the Company Plans that are
maintained by the Companies and the Company Plans that are maintained by the
ERISA Affiliates (as defined in Section 5.28.14) of the
Companies.  Except as set forth in Schedule 5.28.1, neither the
Companies nor any ERISA Affiliate currently maintains, contributes to or has any
liability under or, at any time during the past six (6) years has maintained or
contributed to, any pension plan which is subject to Section 412 of the
Code  or Section 302 of ERISA or Title IV of ERISA (the “Pension Plans”). None of the Companies or
any ERISA Affiliate currently maintains, contributes to or has any liability
under or, at any time during the past six (6) years has maintained or
contributed to, any Company Multiemployer Plan (as defined in Section
5.28.14).

     

    5.28.2 The
Seller has delivered or made available to the Buyer, with respect to each
Company Plan, true, correct and complete copies, where applicable,
of:  (i) all plan documents 

     

     

    
      
        
        

      

      
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    and
amendments, trust agreements and insurance and annuity contracts, policies (or a
written summary of any unwritten Company Plan) and expense sharing contracts,
agreements or arrangements between any of the Companies and any ERISA Affiliate;
(ii) the most recent IRS determination letter; (iii) the Annual Reports (Form
5500 Series) and accompanying schedules and financial reports, as filed, for the
most recently completed three plan years; (iv) the summary plan description
currently in use; and (v) copies of correspondence from the IRS or the
Department of Labor regarding any plan audit or investigation or any intent to
conduct a plan audit.

     

    5.28.3 Each
Company Plan which is intended to qualify under Section 401(a) of the Code has
received a favorable determination letter from the IRS that such plan is so
qualified under the Code; and, to the Knowledge of the Seller, no circumstance
exists which might cause such plan to cease being so qualified.

     

    5.28.4 Each
Company Plan complies in all material respects, and has been administered to
comply in all material respects, with all applicable Laws, and there has been no
notice issued nor any ongoing audit or investigation by any Governmental
Authority questioning or challenging such compliance, and there are no actions,
suits or claims (other than routine claims for benefits) pending or, to the
Knowledge of the Seller, threatened involving any such plan or the assets of any
such plan.

     

    5.28.5 Except as
set forth in Schedule 5.28.5, none of the Companies has any obligations under
any of the Company Plans or otherwise to provide health, death or other welfare
benefits to or in respect of their former employees, except as specifically
required by the continuation requirements of Part 6 of Title I of ERISA or any
other applicable Law (the “Retiree
Plans”).

     

    5.28.6 None of
the Companies has any material liability of any kind whatsoever, whether direct,
indirect, contingent or otherwise, on account of (i) any violation of the health
care requirements of Part 6 of Title I of ERISA or Section 4980B of the Code,
(ii) under Section 502(i) or Section 502(l) of ERISA or Section 4975 of the
Code, (iii) under Section 302 of ERISA or Section 412 of the Code or (iv) under
Title IV of ERISA.

     

    5.28.7 The
Companies will not incur any liability or acceleration of benefits under any
Company Plan solely on account of the consummation of the Contemplated
Transactions, alone or together with any other event.  Except as set
forth in Schedule 5.28.7, (i) each Company Plan or the participation of the
employees of the Companies in the Company Plans, is terminable at the discretion
of and without cost to the Companies and (ii) none of the Companies nor any
officer, director, agent or employee of the Companies has made any statement
regarding any Company Plan which could result in liability in excess of that set
forth in such Company Plan.

     

    5.28.8 All
required contributions and premium payments by the Companies to or on behalf of
the Company Plans have been made or properly accrued on the financial statements
of the Companies.

     

    5.28.9 Except as
set forth in Schedule 5.28.9, no amount paid or payable (whether in cash, in
property, or in the form of benefits) by any of  the Companies in
connection with the proposed transactions (either solely as a result thereof or
as a result of such transactions in 

     

     

    
      
        
        

      

      
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    conjunction
with any other event) will be an “excess parachute payment” within the meaning
of Code Section 280G.

     

    5.28.10 Each
Company Plan that is a nonqualified deferred compensation plan within the
meaning of, and subject to, Code Section 409A either (i) has been operated and
maintained by the Seller and the Companies in good faith compliance according to
the requirements of Code Section 409A, or (ii) has not been materially modified
(as defined under Code Section 409A) on or after October 3, 2004, and all
amounts under such plan were deferred and vested as of December 31,
2004.

     

    5.28.11 None of
the Companies maintains or has any obligations or liabilities with respect to
any Company Plan subject to the Laws of any jurisdiction outside of the
U.S.

     

    5.28.12 Schedule
5.28.12 contains:  (i) a list of all employees of the Companies as of
January 1, 2008; (ii) the then current annual compensation of, and a description
of the fringe benefits (other than those generally available to employees)
provided by the Companies to any such employees; (iii) a list of all present or
former employees of the Companies paid in excess of $50,000 in calendar year
2007 who have terminated or given notice of their intention to terminate their
relationship with the related Company or Subsidiary since January 1, 2007; (iv)
a list of any increase, effective after January 1, 2008, in the rate of base
compensation of any employees of the Companies if such increase exceeds 10% of
the previous annual salary of such employee; (v) a list of all substantial
changes in job assignments of, or arrangements with, or promotions or
appointments of, any employees of the Companies whose compensation as of January
1, 2008 was in excess of $50,000 per annum; and (vi) (A) with respect to each
person set forth in clause (i) above, (1) the percentage of salary to which such
person would be entitled, pursuant to the Third Amended and Restated PMA Capital
Insurance Company Employee Retention Plan, effective as of January 1, 2007, if
such person remained an employee of the related Company through December 31,
2008 and (2) the amount to which such person would be entitled under the Fifth
Amended and Restated PMA Capital Insurance Company and PMA Re Management Company
Amended and Restated Severance Pay Plan, effective as of December 18, 2007 (the
“Severance
Plan”), if such person had been terminated by such Company on December
31, 2007 and (B) the amount accrued by the Seller as of December 31, 2007 with
respect to the Severance Plan.

     

    5.28.13 Except as
set forth in Schedule 5.28.13, none of the Companies is involved in any
transaction or other situation with any employee, officer, director or Affiliate
of such Person which may be generally characterized as a “conflict of interest”,
including direct or indirect interests in the business of competitors, suppliers
or customers of such Person.

     

    5.28.14 As used
herein, (i) “Company
Plan” means a “pension plan” (as defined in Section 3(2) of ERISA (other
than a Company Multiemployer Plan)), a “welfare plan” (as defined in Section
3(1) of ERISA), or any other written or oral employment, bonus, profit sharing,
deferred compensation, incentive compensation, stock ownership, stock purchase,
stock option, phantom stock, restricted stock, stock appreciation right, holiday
pay, vacation, retention, severance, medical, dental, vision, disability, death
benefit, sick leave, fringe benefit, personnel policy, insurance or other plan,
arrangement, agreement or understanding, in each case established or maintained
by any of the Companies or any of their ERISA Affiliates for the 

     

     

    
      
        
        

      

      
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    benefit
of any current or former employee of the Companies or as to which any of the
Companies have contributed or otherwise may have any liability; (ii) “Company Multiemployer
Plan” means a “multiemployer plan” (as defined in Section 4001(a)(3) of
ERISA) to which any of the Companies or any of their ERISA Affiliates are or
have been obligated to contribute or otherwise may have any liability; and (iii)
“ERISA
Affiliate” means any trade or business (whether or not incorporated)
which would be considered a single employer with any of the Companies pursuant
to Section 414(b), (c), (m) or (o) of the Code and the regulations promulgated
under those sections or pursuant to Section 4001(b) of ERISA and the regulations
promulgated thereunder.

     

    5.29 Employee
Relations.  Except as set forth in Schedule 5.29, the Companies
have complied with all applicable Laws relating to prices, wages, hours,
discrimination in employment and collective bargaining and are not liable for
any arrears of wages or any employment and withholding taxes or penalties for
failure to comply with any of the foregoing.  None of the Companies is
a party to, affected by or, to the Knowledge of the Seller, threatened with, any
dispute or controversy with a union or with respect to unionization or
collective bargaining involving such Person’s employees.  Schedule
5.29 sets forth a description of any union organizing or election activities
involving any non-union employees of the Companies which have occurred since
January 1, 2005 or, to the Knowledge of the Seller, are threatened as of the
date hereof.  The Companies are in compliance with the Workers
Adjustment and Retraining Notification Act and have no liabilities pursuant to
such Act.

     

    5.30 Operations of the
Companies.  Except as set forth in Schedule 5.30, since June
30, 2007 (unless otherwise indicated), (i) there has not occurred any event or
events that (A) individually or in the aggregate, have had, or could reasonably
be expected to have, a Material Adverse Effect, or (B) were such event or events
to occur after the date of this Agreement, would otherwise require approval of
the Buyer in accordance with Section 7.1 hereof, and (ii) the Companies (A) have
conducted their respective businesses in the Ordinary Course of Business, and
(B) have not:

     

    (i)           incurred
any indebtedness for borrowed money;

     

    
      	
               
      

            	
              (ii)

            	
              amended
      any Organizational Document or merged with or into or consolidated with
      any other Person, subdivided or in any way reclassified any shares of
      their capital stock or changed or agreed to change in any manner the
      rights of its outstanding capital stock or the character of its
      business;

            

    

     

    
      	
               
      

            	
              (iii)

            	
              issued
      or sold any shares of any class of their capital stock, or any securities
      convertible into or exchangeable for any such shares; or issued, sold,
      granted or entered into any subscriptions, options, warrants, conversion
      or other rights agreements to purchase or acquire any such
      securities;

            

    

     

    
      	
               
      

            	
              (iv)

            	
              declared,
      set aside or paid any dividends or distributions on, or made any other
      distributions in respect of, any
securities;

            

    

     

    
      	
               
      

            	
              (v)

            	
              mortgaged
      or pledged any of their Assets, except for Liens on statutory deposits
      with state insurance departments;

            

    

     

     

    
      
        
        

      

      
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              (vi)

            	
              prepared
      or filed any Tax Return inconsistent with past practice or, on any such
      Tax Return, taken any position, made any election, or adopted any method
      that is inconsistent with positions taken, elections made or methods used
      in preparing or filing similar Tax Returns in prior periods (including,
      positions, elections or methods which would have the effect of deferring
      income to periods for which the Buyer is liable pursuant to Section 7.5 or
      accelerating deductions to periods for which the Seller is liable pursuant
      to Section 7.5), nor has the Seller or any Subsidiary done
    so;

            

    

     

    
      	
               
      

            	
              (vii)

            	
              since
      December 31, 2007, made, granted or promised any bonus or any wage or
      salary increase to any employee, officer or director, or made, granted or
      promised any other change in employment terms for any employee, officer or
      director;

            

    

     

    
      	
                     
      (viii)

            	
              since
      December 31, 2007, amended, terminated or authorized the amendment or
      termination of any Company Plan; or

            

    

     

    
      	
               
      

            	
              (ix)

            	
              taken
      any action or, to the Knowledge of Seller, omitted to take any action that
      would result in the occurrence of any of the
  foregoing.

            

    

     

    5.31 Bank
Accounts.  There has been delivered to the Buyer a true,
correct and complete list of all the bank accounts, including escrow, trust and
custodial accounts, of the Companies, including trust accounts for which any of
the Companies are either a grantor or a beneficiary, together with the names of
persons authorized to draw thereon.

     

    5.32 Books and
Records.  The Books and Records of each Company are true,
complete and correct in all material respects and have been maintained in
accordance with sound business practices and in accordance with all applicable
Laws.  At the Closing, all of such Books and Records will be in the
possession of the Companies.

     

    5.33 Use of Corporate
Funds.  There are no situations with respect to
the  business of any Company which involved or involves (i) the use of
any corporate funds for unlawful contributions, gifts, entertainment or other
unlawful expenses related to political activity, (ii) the making of any direct
or indirect unlawful payments to government officials or others from corporate
funds or the establishment or maintenance of any unlawful or unrecorded funds,
(iii) the violation of any of the provisions of The Foreign Corrupt Practices
Act of 1977, or any rules or regulations promulgated thereunder or (iv) the
receipt of any illegal discounts or rebates or any other violation of the
antitrust laws.

     

    ARTICLE
6

     

    REPRESENTATIONS AND
WARRANTIES OF THE BUYER

     

    The Buyer
represents and warrants to the Seller as follows:

     

    6.1 Due Incorporation and
Authority.   The Buyer is a corporation duly organized,
validly existing and in good standing under the laws of Bermuda.

     

     

    
      
        
        

      

      
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    6.2 Authority to Execute and Perform
Agreement; Enforceability.  The Buyer has the full legal right
and power and all corporate authority and approvals required to execute and
deliver this Agreement and to perform fully its obligations
hereunder.  This Agreement has been duly executed and delivered by the
Buyer and (assuming due authorization, execution and delivery by the Seller) is
a valid and binding obligation of the Buyer enforceable in accordance with its
terms.

     

    6.3 No Breach.  The
execution, delivery and performance of this Agreement by the Buyer and the
consummation of the Contemplated Transactions will not (i) violate any provision
of the Certificate of Incorporation or Bye-laws (or comparable instruments) of
the Buyer; (ii) require the Buyer to obtain any consent, approval or action of,
or make any filing with or give any notice to, any Person, except as set forth
in Schedule 6.3 (the “Buyer’s Consents”);
(iii) if the Buyer’s Consents are obtained, violate any Order of any
Governmental Authority against, or binding upon, the Buyer or upon any of its
properties or upon its business; or (iv) if the Buyer’s Consents are obtained,
violate any Law; other than, in the case of clauses (iii) and (iv), where such
violation would not have a Material Adverse Effect on the financial condition,
results of operations or business of the Buyer.

     

    6.4 Claims and
Proceedings.  Except as set forth in Schedule 6.4, there are no
outstanding Orders of any Governmental Authority against or involving, or to the
knowledge of the Buyer threatened against, the Buyer, and no Claims pending
against or involving the Buyer which would have a Material Adverse Effect on the
ability of the Buyer to consummate the Contemplated Transactions.

     

    6.5 Financing.  The
Buyer has on the date of execution of this Agreement and will have at the
Closing sufficient immediately available funds, in cash or pursuant to credit
agreements in effect on the date of this Agreement, to pay the Purchase
Price.

     

    6.6 Purchase for
Investment.  The Buyer is purchasing the Shares for its own
account for investment and not for resale or distribution, and will not sell or
otherwise transfer the Shares except in accordance with all applicable federal
and state securities laws.  For purposes hereof, the foregoing
representation shall not be deemed breached by reason of the Buyer’s subsequent
transfer of any Company to an Affiliate of the Buyer.

     

    6.7 No
Intermediary Transaction Tax Shelter.  The Buyer shall not
cause any of the Companies or the Subsidiaries (or any transferee of the assets
of any Company or Subsidiary) to dispose of all or most of the assets of any of
the Companies or the Subsidiaries in transactions in which gain is recognized
for federal income Tax purposes within the twelve-month period ending on the
first anniversary of the Closing Date.  This Section 6.7 shall not
apply to any Section 338(h)(10) Companies and shall not apply to any transaction
with respect to which substantially all of the gain recognized is not subject to
United States federal income Tax.

     

     

    
      
        
        

      

      
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    ARTICLE
7

     

    COVENANTS AND
AGREEMENTS

     

    7.1 Conduct of
Business.

     

    7.1.1 Except as
contemplated by this Agreement or with the prior written consent of the Buyer
during the period from the date of this Agreement to the Closing, the Seller
shall cause the Companies to conduct their businesses only in the Ordinary
Course of Business and shall use all commercially reasonable efforts to
(i) preserve intact their respective material Assets, current business
organizations and material relationships with third parties, (ii) preserve
the relationships with agents, employees, suppliers, reinsurers and others
having significant business dealings with such businesses, (iii) maintain
in full force and effect until the Closing substantially the same levels of
coverage of insurance with respect to the Assets, operations and activities of
the Companies as are in effect as of the date of this Agreement,
(iv) comply in all material respects with all Laws applicable to any of the
Companies, and (v) maintain in full force and effect, and comply with, all
of the Insurance Licenses.  The Seller shall give the Buyer prompt
notice of any event, condition or circumstance occurring from the date of this
Agreement to the Closing Date that would constitute a material violation or
breach of any representation or warranty of the Seller contained in this
Agreement (including any Seller Representation (as defined in Section 10.1)), or
cause such representation or warranty to be materially untrue as of the Closing
Date (assuming such event, condition or circumstance existed on the Closing
Date), or that would constitute a material violation or breach of any covenant
of the Seller contained in this Agreement.

     

    7.1.2 Without
limiting the generality of the foregoing, from the date hereof through the
Closing, except as expressly provided in this Agreement or consented to in
writing in advance by the Buyer, the Seller will cause the Companies not
to:

     

    (a) amend or
modify their Organizational Documents or corporate structure;

     

    (b) (A) issue,
sell, transfer, grant, pledge, dispose of or otherwise encumber any securities
of any Company, (B) declare, set aside or pay any dividends or
distributions on, or make any other distributions in respect of, any securities,
(C) split, combine or reclassify any of the outstanding securities of any
Company or (D) purchase, redeem or otherwise acquire or dispose of any
securities of any Company;

     

    (c) adopt a
plan of complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization;

     

    (d) fail to
maintain in all material respects their books and records in accordance with
SAP (with respect
to PMACIC) or GAAP (with respect to PMA RE and HMR) (each the “Relevant Accounting
Standard”) or make any change in any method of accounting or Tax,
pension, actuarial or accounting practice, policy, principle or procedure,
except as required by any changes in the Relevant Accounting Standard or
applicable Law;

     

     

     

    
      
        
        

      

      
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    (e) prepare
or file any Tax Return inconsistent with past practice or, on any such Tax
Return, take any position, make any election, or adopt any method that is
inconsistent with positions taken, elections made or methods used in preparing
or filing similar Tax Returns in prior periods (including, positions, elections
or methods which would have the effect of deferring income to periods for which
the Buyer is liable pursuant to Section 7.5 or accelerating deductions to
periods for which the Seller is liable pursuant to Section 7.5);

     

    (f) incur,
authorize or commit to make any capital expenditure that exceeds $10,000 in the
aggregate with the exception of any Budgeted Virtualization Project
Expense;

     

    (g) make,
grant or promise any bonus or any wage or salary increase to any employee,
officer or director, or make, grant or promise any other change in employment
terms for any employee, officer or director, other than routine wage increases
in the Ordinary Course of Business consistent with past practice;

     

    (h) amend,
terminate or authorize the amendment or termination of any Company
Plan;

     

    (i) except to
the extent required by applicable Law, take any action that could reasonably be
expected to result in (A) any representation and warranty of the Seller set
forth in this Agreement (including any Seller Representation) ceasing to be true
and correct in any material respect or (B) any condition to the Closing set
forth in Article 8 not being satisfied;

     

    (j) let
lapse, cancel or abandon an Intellectual Property except if consistent with
reasonable business judgment such Intellectual Property is no longer useful for
the Companies’ respective business;

     

    (k) sell,
assign, transfer or otherwise dispose of any Asset except in the Ordinary Course
of Business;

     

    (l) enter
into any Contract which would have constituted a Material Contract if in force
on the date of this Agreement or amend or terminate any existing Material
Contract;

     

    (m) enter
into any Contract which would have constituted a Reinsurance Agreement if in
force on the date of this Agreement or amend, terminate or commute any existing
Reinsurance Agreement;

     

    (n) settle
any litigation, claims, actions, arbitrations, disputes, audits or other
proceedings, other than ordinary course insurance policy claims, (A) as a
result of which settlement, any of the Companies would be prevented or
materially impaired or delayed in effecting the Closing, or (B) involving
amounts due or alleged to be due to or from any of the Companies, in either case
in an amount, in the aggregate, exceeding $100,000; provided, however, that the
Companies shall promptly provide the Buyer with written notice of all ordinary
course insurance claims.

     

     

    
      
        
        

      

      
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    (o) make any
change in the claim adjustment, claim processing, claim payment, underwriting,
pricing or reserving practices or policies of any of the Companies except as
required by Law or by reason of a concurrent change in the Relevant Accounting
Standard; or

     

    (p) take,
offer, propose or authorize any of, or commit or agree to take any of, the
foregoing.

     

    7.2 Corporate Examinations and
Investigations.  Prior to the Closing Date, the Seller will,
and will cause the Companies to, give to the Buyer and its employees and
representatives, access to all of the Companies’ Assets, Books and Records
(excluding employee medical records), to make such examination of the business,
operations and financial condition of the Companies as the Buyer reasonably
requests.  Any such investigation and examination shall be conducted
at reasonable times and under reasonable circumstances, and the Seller shall,
and shall cause the Companies to, cooperate fully therein.  In order
that the Buyer may have full opportunity to make such physical, business,
accounting and legal review, examination or investigation as it may wish of the
affairs of the Companies, the Seller shall make available and shall cause the
Companies to make available to the representatives of the Buyer during such
period all such information and copies of such documents concerning the affairs
of the Companies (excluding employee medical records) as such representatives
may reasonably request, permit the representatives of the Buyer access to the
physical premises of the Companies and the Seller and all parts thereof, and
cause their officers, employees, consultants, agents, accountants and attorneys
to cooperate fully with such representatives in connection with such review and
examination.  Following the Closing, the Seller shall keep
confidential and shall not use in any manner (i) any information or documents
obtained from the Companies concerning its Assets, businesses and operations,
unless readily ascertainable from public or published information, or trade
sources, and (ii) any documents obtained from the Companies and all copies or
extracts thereof shall be returned to the Companies.

     

    7.3 Publicity.  The
Seller and the Buyer will consult with each other and will mutually agree upon
the content and the timing of any press release or other public statements with
respect to the Contemplated Transactions and shall not issue or make any such
public statement or announcement (including any filings with the U.S. Securities
& Exchange Commission) prior to such consultation and agreement, except as
may be required by applicable Laws or stock exchange rules, provided, however, that the
Seller and the Buyer will give prior written notice to the other party of the
content and the timing of any such press release or other public statement
required by applicable Laws or stock exchange rules.

     

    7.4 Indemnification for Broker’s
Fees.  The Seller agrees to indemnify and hold the Buyer
harmless from any claim or demand for commission or other compensation by any
broker, investment banker, finder or other Person acting in a similar capacity
(a “Broker”)
claiming to have been employed by or on behalf of the Companies or the Seller,
except for any claim or demand made by Friedman, Billings, Ramsey Group Inc.
(“FBR”) with
respect to its representation of the Buyer or any Affiliate of the Buyer in
connection with this Agreement or the Contemplated
Transactions.  Except for FBR and any commission or fee payable to FBR
by the Buyer in connection with this Agreement or the Contemplated Transactions,
the Buyer represents and warrants to the Seller that no Broker has acted on
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    connection
with this Agreement or the Contemplated Transactions, and that there are no
brokerage commissions, finders’ fees or similar fees or commissions payable in
connection therewith based on any agreement, arrangement or understanding with
the Buyer, or any action taken by the Buyer. The Buyer agrees to
indemnify and hold the Seller and its Affiliates harmless from and against any
claim or demand for commission or other compensation in connection with this
Agreement or the Contemplated Transactions by any Broker claiming to have been
employed by or on behalf of the Buyer.

     

    7.5 Tax
Matters.

     

    7.5.1 The
Seller shall prepare and timely file, or cause to be prepared and timely filed,
when due (taking into account all extensions properly obtained) (i) all Tax
Returns that are required to be filed by or with respect to any of the Companies
or any Subsidiary on a combined, consolidated or unitary basis with the Seller
or any Affiliate thereof relating to taxable years or periods beginning on or
before the Closing Date (including any Straddle Period) and (ii) all other Tax
Returns that are required to be filed by or with respect to any of the Companies
or any Subsidiary on or before the Closing Date, and in each case shall pay, or
cause to be paid, all Taxes shown as due on such Tax Returns, any amendments
thereto and any audits thereof.

     

    7.5.2 The
Seller shall be liable for and pay, and will indemnify and hold the Buyer and
the Companies harmless from and against any Loss (as defined in Section 10.4)
resulting from, (i) any Taxes imposed on any of the Companies or any Subsidiary,
or for which any of the Companies or any Subsidiary may otherwise be liable, as
a result of having been a member of a Company Group (including, Taxes for which
any of the Companies or any Subsidiary may be liable pursuant to Treasury
Regulations § 1.1502-6 or similar provisions of state, local or foreign law as a
result of having been a member of a Company Group and any Taxes resulting from
any of the Companies or any Subsidiary ceasing to be a member of any Company
Group), (ii) any and all Taxes imposed on any of the Companies or any
Subsidiary, or for which any of the Companies or any Subsidiary may otherwise be
liable, for any taxable year or tax period ending on or before the Closing Date
and, with respect to any Straddle Period, the portion of such Straddle Period
ending on and including the Closing Date (including any obligations to
contribute to the payment of a Tax determined on a consolidated, combined or
unitary basis with respect to any Company Group), (iii) any real property
transfer or gains Tax, sales Tax, use Tax, stamp Tax, stock transfer Tax or
other similar Taxes imposed on the Contemplated Transactions and (iv) all
Section 338 Taxes.

     

    7.5.3 The Buyer
shall prepare and file, or cause to be prepared and filed, when due (taking into
account all extensions properly obtained) all Tax Returns that are required to
be filed by or with respect to any of the Companies or any Subsidiary other than
those returns referred to in Section 7.5.1 and shall pay, or cause to be paid,
all Taxes shown as due on such Tax Returns, any amendments thereto and any
audits thereof.

     

    7.5.4 The Buyer
shall be liable for and pay, and will indemnify and hold the Seller harmless
from and against any Loss resulting from, (i) any and all Taxes due or payable
by any of the Companies or any Subsidiary for any taxable year or tax period
beginning after the Closing Date and, with respect to any Straddle Period, the
portion of such Straddle Period beginning after the Closing Date and (ii) for
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    Returns
that are required to be filed by or with respect to any of the Companies or any
Subsidiary on a combined, consolidated or unitary basis with the Buyer or any
Affiliate thereof relating to taxable years or periods beginning on or after the
Closing Date; provided, however, that the
Buyer shall not be liable for or pay, and shall not indemnify or hold harmless
the Seller from and against any Loss resulting from any Taxes for which the
Seller is liable under this Agreement (including, under Section
5.11).

     

    7.5.5 The
Seller and the Buyer, when applicable, shall reimburse the other party for the
Taxes which the Seller or the Buyer, as the case may be, is liable pursuant to
this Section 7.5 but which are remitted in respect of any Tax Return to be filed
by the other party pursuant to this Section 7.5 upon the written request of the
party entitled to reimbursement setting forth in detail the computation of the
amount owed by the Seller or the Buyer, as the case may be, but in no event
earlier than ten (10) days prior to the due date for paying such Taxes. In no
event shall the foregoing reimbursement obligations be limited in any way by
limitations set forth in Section 10.4; provided, however, that such
reimbursement shall not be duplication of any indemnification amount under
Section 10.4 or Section 10.5, as applicable.  All Tax Returns which
the Seller is required to file or cause to be filed in accordance with Section
7.5.1 shall be prepared and filed in a manner consistent with past practice and,
on such Tax Returns, no position shall be taken, election made or method adopted
that is inconsistent with positions taken, elections made or methods used in
preparing and filing similar Tax Returns in prior periods (including, but not
limited to, positions, elections or methods which would have the effect of
deferring income to periods for which the Buyer is liable under this Section 7.5
or accelerating deductions to periods for which the Seller is liable under this
Section 7.5).

     

    7.5.6 For
purposes of Sections 7.5.2 and 7.5.4, whenever it is necessary to determine the
liability for Taxes of any of the Companies or any Subsidiary for a Straddle
Period, the determination of the Taxes of such Company or such Subsidiary for
the portion of the Straddle Period ending on and including, and the portion of
the Straddle Period beginning after, the Closing Date shall be determined by
assuming that the Straddle Period consisted of two (2) taxable years or periods,
one which ended at the close of the Closing Date and the other which began at
the beginning of the day following the Closing Date, and items of income, gain,
deduction, loss or credit of such Company or such Subsidiary for the Straddle
Period shall be allocated between such two (2) taxable years or periods on a
“closing of the books basis” by assuming that the books of such Company or such
Subsidiary were closed at the close of the Closing Date; provided, however, that
exemptions, allowances, deductions or Taxes that are calculated on an annual
basis, such as the deduction for depreciation, shall be apportioned between such
two (2) taxable years or periods on a daily basis.

     

    7.5.7 (A)  Except
as provided for in clause (B) below, if the Buyer receives a credit with respect
to, or refund of, any Tax for which the Seller is liable under this Agreement,
the Buyer shall pay over to the Seller the amount of such refund or credit
within fifteen (15) days after receipt or entitlement thereto.  In the
event that any refund or credit of Taxes for which a payment has been made to
the Seller by the Buyer is subsequently reduced or disallowed, the Seller shall
indemnify and hold harmless the Buyer for any Tax assessed against the Seller by
reason of the reduction or disallowance.

     

     

    
      
        
        

      

      
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    (B)           If
the Seller becomes entitled to a credit with respect to, or refund of, Taxes for
which it is liable under this Section 7.5 to indemnify the Buyer, and such
refund or credit is attributable to the carryback of losses, credits or similar
items from a taxable year or period that begins after the Closing Date and is
attributable to any of the Companies or any Subsidiary, the Seller shall pay to
the Buyer the amount of such refund or credit within fifteen (15) days after
receipt or entitlement thereto. If the Buyer, any of the Companies or any
Subsidiary becomes entitled to a refund or credit of Taxes for which the Seller
is liable under this Section 7.5 to indemnify the Buyer, any of the Companies,
or any Subsidiary, and such refund or credit is attributable to the carryback of
losses, credits or similar items from a taxable year or period that begins after
the Closing Date and is attributable to any of the Companies or any Subsidiary,
the Seller shall not be entitled to the amount of such refund or credit, nor
shall the Seller be obligated under the preceding sentence to pay the Buyer the
amount of such refund or credit. In the event that any refund or credit of Taxes
for which a payment has been made to the Buyer by the Seller is subsequently
reduced or disallowed, the Buyer shall indemnify and hold harmless the Seller
for any Tax assessed against the Seller by reason of the reduction or
disallowance.

     

    (C)           For
purposes of this Section 7.5, Tax refunds shall include any interest that is
paid as part of the payment of such refunds, reduced by the increase in the
original payee’s federal, state, local, foreign or other Taxes attributable to
such interest after taking into account any offsetting deductions or credits
from other sources.

     

    7.5.8 The
Seller and the Buyer agree to make a joint election for each of the Companies
(other than HMR) and all Subsidiaries (other than non-U.S. Subsidiaries) (the
“Section 338(h)(10)
Companies”) under Section 338(h)(10) of the Code and under any applicable
similar provisions of state or local law (individually, a “Section 338(h)(10)
Election” and collectively, the “Section 338(h)(10)
Elections”), with respect to the Buyer's purchase of the Shares or any
deemed purchase of shares of such Subsidiaries. The Seller represents that an
election under Section 338(h)(10) of the Code is available for each of the
Section 338(h)(10) Companies in connection with the Contemplated
Transactions.  In addition, the Seller and the Buyer agree that to the
extent the Section 338(h)(10) Companies are insurance companies for U.S. federal
income tax purposes, the Companies will be treated as entering into an
assumption reinsurance transaction pursuant to Treasury Regulation
1.338-11.  The Seller shall prepare Internal Revenue Service Form 8023
(and any required attachments and schedules thereto) and any similar state and
foreign forms (and any required attachments and schedules thereto) that may be
required to make the Section 338(h)(10) Elections (collectively, the
“Forms”) and
shall submit the Forms to the Buyer no later than thirty (30) days prior to the
date the Forms are required to be filed. The Buyer agrees to provide the
necessary information to the Seller in connection with the preparation of the
Forms. The Buyer shall duly sign and date such Forms and
return the Forms to the Seller promptly and no later than ten (10) days prior to
the date the Forms are required to be filed. The Seller shall then timely file
the Forms with the appropriate tax authorities. If any changes are required in
the Forms as a result of information which is first available after the Forms
are prepared, the parties will promptly agree on such changes.

     

    Within sixty (60) days following the
Closing Date, the Buyer shall deliver to the Seller a schedule (the “Preliminary Allocation
Schedule”) allocating the aggregate deemed purchase price and adjusted
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    applicable
Treasury Regulations thereunder) for the assets of each of the Section
338(h)(10) Companies among the assets of each of the Section 338(h)(10)
Companies.  The Seller agrees that promptly upon receiving the
Preliminary Allocation Schedule, it shall negotiate with the Buyer to agree on
revisions to the Preliminary Allocation Schedule (as agreed between the Seller
and the Buyer, the “Allocation
Schedule”).  The Allocation Schedule shall be reasonable and
shall be prepared in accordance with Section 338(h)(10) of the Code and the
Treasury Regulations thereunder.

     

    If, within fifteen (15) days following
delivery of the Preliminary Allocation Schedule by the Buyer to the Seller, the
Buyer and the Seller are unable to agree on an Allocation Schedule, the Buyer
shall promptly cause an independent appraiser selected by the Buyer and
reasonably acceptable to the Seller (the “Appraiser”) to
conduct and to deliver to the Buyer and the Seller, within 60 days following
delivery of the Preliminary Allocation Schedule by Buyer to Seller, an appraisal
(the “Appraisal”) of the
fair market value as of the Closing Date of the assets of each of the Section
338(h)(10) Companies.  The cost of the Appraisal shall be paid
one-half by the Seller and one-half by the Buyer.

     

    Within fifteen (15) days following
receipt of the Appraisal, the Buyer shall deliver to the Seller a schedule (the
“Revised Allocation
Schedule”) allocating the deemed sales price (as determined under Section
338 of the Code and applicable Treasury Regulations thereunder), for the assets
of each of the Section 338(h)(10) Companies among the assets of each of the
Section 338(h)(10) Companies.  The Revised Allocation Schedule shall
be reasonable and shall be prepared in accordance with Section 338(h)(10) of the
Code and the Treasury Regulations thereunder and in accordance with the
Appraisal.

     

    The Buyer and the Seller each agrees to
file all federal, state, local and foreign Tax Returns in accordance with the
Allocation Schedule or the Revised Allocation Schedule, as the case may be, and
not to take, or cause to be taken, any action that would be inconsistent with or
prejudice any Section 338(h)(10) Elections.

     

    7.5.9 If the
Buyer or any of the Companies becomes aware of any pending or threatened
federal, state, local or foreign Tax audits, assessments, official inquiries,
examinations or proceedings that could reasonably result in an official
determination with respect to any material Taxes for which the Seller would be
liable pursuant to this Section 7.5, the Buyer shall promptly so notify the
Seller in writing; provided that failure
to comply with this provision shall not affect the Buyer’s right to
indemnification hereunder except to the extent such failure materially impairs
the Seller’s ability to contest any such Tax liabilities. If the Seller becomes
aware of any pending or threatened federal, state, local or foreign Tax audits,
assessments, official inquiries, examinations or proceedings that could
reasonably result in an official determination with respect to any material
Taxes related to the business, activities or assets of the Companies (including,
any pending or threatened federal, state, local or foreign Tax audits,
assessments, official inquiries, examinations or proceedings with respect to any
Consolidated Return), the Seller shall promptly so notify the Buyer, in writing;
provided that
failure to comply with this Section 7.5.9 shall not affect the Seller’s right to
indemnification hereunder except to the extent such failure materially impairs
the Buyer’s ability to contest any such Tax liabilities.

     

     

    
      
        
        

      

      
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    7.5.10 The
Seller shall have the sole right to exercise control over the contest and/or
settlement of any issue raised in any official inquiry, examination, audit or
proceeding that relates to Taxes for which the Seller is
liable to the Buyer under Section 7.5.2 and which relate to taxable periods
ending on or before the Closing Date, and the Seller shall pay any and all
expenses incurred in connection therewith; provided, however, that the
Seller shall have no right to represent any of the Companies’ or any
Subsidiary’s interests in any Tax audit or administrative or court proceeding
unless the Seller shall have first notified the Buyer in writing of the Seller’s
intention to do so and shall have agreed with the Buyer in writing that, as
between the Buyer and the Seller, the Seller shall be liable for any Taxes that
result from such official inquiry, examination, audit or proceeding; provided, further, that the
Buyer and its representatives shall be permitted, at the Buyer’s expense, to be
present at, and participate in, any such audit or proceeding. Nothing herein
shall be construed to impose on the Buyer or any Affiliate thereof any
obligation to defend any of the Companies or any Subsidiary in any Tax audit or
administrative or court proceeding. The Buyer shall have the sole right to
defend any of the Companies and each Subsidiary with respect to any issue
arising with respect to any such Tax audit or administrative or court proceeding
to the extent the Buyer shall have agreed in writing to forego any
indemnification under this Agreement with respect to such issue. Notwithstanding
the foregoing, neither the Seller nor any Affiliate of the Seller shall be
entitled to settle or compromise, either administratively or after the
commencement of litigation, any claim for Taxes which could adversely affect the
liability for Taxes of the Buyer, any of the Companies, any Subsidiary or any
Affiliate thereof for any period after the Closing Date to any extent unless the
Seller has indemnified the Buyer against the effects of any such settlement
(including, but not limited to, the imposition of income Tax deficiencies, the
reduction of asset basis or cost adjustments, the lengthening of any
amortization or depreciation periods, the denial of amortization or depreciation
deductions, or the reduction of loss or credit carryforwards) without the prior
written consent of the Buyer, which consent may be withheld in the sole
discretion of the Buyer.

     

    7.5.11 The Buyer
shall have the sole right to exercise control over the contest and/or settlement
of any issue raised in any official inquiry, examination or proceeding with
respect to Taxes of any of the Companies and any Subsidiary for which the Buyer
is liable to the Seller under this Section 7.5, and the Buyer shall pay any
expenses incurred in connection therewith; provided that (i) the
Buyer shall keep the Seller informed of all material developments with respect
to such inquiry, examination or proceeding if it relates to any Tax for which
the Seller could be liable under Section 7.5.2 and (ii) the Buyer shall not
settle or compromise any such inquiry, examination or proceeding that relates to
any Tax for which the Seller could be liable under Section 7.5.2 without the
consent of the Seller, which consent shall not be unreasonably
withheld.

     

    7.5.12 The
Seller and the Buyer shall (and shall cause their respective Affiliates to): (i)
timely sign and deliver such certificates or forms as may be necessary or
appropriate to establish an exemption from (or otherwise reduce), or file Tax
Returns or other reports with respect to, Taxes described in clause (iii) of
Section 7.5.2 (relating to sales, transfer and similar Taxes); (ii) assist the
other party in preparing any Tax Returns which such other party is responsible
for preparing and filing in accordance with this Section 7.5, and in connection
therewith provide the other party necessary powers of attorney; (iii) cooperate
fully in preparing for and conducting any audits of, or disputes with Tax
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    each
Subsidiary; (iv) make available to the other and to any Tax authority as
reasonably requested all information, records, and documents relating to Taxes
of the Companies and each Subsidiary; (v) furnish the other with copies of all
correspondence received from any Tax authority in connection with any Tax audit
or information request with respect to any such taxable period; and (vi) provide
reasonable cooperation to each other in connection with the preparation of,
filing and signing of any Tax election, Tax consent or certification, or any
claim for refund.

     

    7.5.13 Notwithstanding
anything to the contrary in this Agreement, the obligations of the parties set
forth in this Section 7.5 shall be unconditional and absolute and shall remain
in effect until the expiration of all applicable statutes of limitation on the
assessment of taxes.

     

    7.6 Intercompany
Obligations.  Except for the intercompany obligations set forth
in Schedule 7.6, the Seller shall, and shall cause its Affiliates to, take such
action and make such payments as may be necessary so that, concurrently with the
Closing, the Companies, on the one hand, and the Seller and its Affiliates
(other than the Companies), on the other, shall settle, discharge, offset, pay
or repay in full all intercompany loans, notes, and advances regardless of their
maturity and all intercompany receivables and payables for the amount due,
including any accrued and unpaid interest to but excluding the date of payment
(the “Intercompany
Obligations”); provided, however, that if each
such item is not paid in full in cash, the method of discharge must be
reasonably satisfactory to the Buyer; and provided, further, that no
payment shall be made (regardless of the method of payment) with respect to any
Intercompany Obligation under this Section 7.6 unless (i) such Intercompany
Obligation is reflected on the Initial Financial Statement and the payment with
respect to such Intercompany Obligation is in an amount no greater than the
amount set forth on the Initial Financial Statement with respect to such
Intercompany Obligation or (ii) such Intercompany Obligation was incurred by one
of the Companies after September 30, 2007 in the Ordinary Course of
Business.

     

    7.7 Intercompany
Arrangements.  Except (i) as otherwise contemplated by this
Agreement or the other Transaction Agreements or (ii) as set forth on Schedule
7.7, the Seller shall, and shall cause its Affiliates to, take such actions as
may be necessary to terminate prior to or concurrently with the Closing Date all
Contracts, commitments and other instruments, arrangements, relationships and
understandings between the Companies, on the one hand, and the Seller and its
Affiliates (other than the Companies), on the other.

     

    7.8 Management Company
Employees.

     

    7.8.1 The Buyer
shall, from the Closing Date until December 31, 2008, maintain the Seller’s
vacation policy in effect on the Closing Date.  The Companies shall be
responsible for all severance and benefit claims related to the Companies’
employees arising out of or resulting from or relating to their employment or
the termination of their employment with the Companies prior to the Closing Date
and the Buyer shall be responsible for all severance and benefit claims related
to the employees arising out of or resulting from or relating to their
employment or the termination of  their employment with the Companies
on or after the Closing Date.

     

    7.8.2 Nothing
herein shall be construed as giving any employee of the Companies any right to
continued employment with the Buyer or the Companies on or after the Closing
Date.

     

     

    
      
        
        

      

      
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    7.8.3 On and
after the Closing Date, at the option of the Buyer, the Companies’ employees, to
the extent they were employed by the Companies prior to the Closing Date, and
their dependents shall be eligible to participate in the Seller’s employee
welfare benefit plans as of the Closing Date, in accordance with terms and
conditions of the ASA (as defined in Section 7.9).

     

    7.8.4 Schedule
7.8.4 sets forth the Company Plans that the Buyer will assume pursuant to the
terms of this Agreement.  For the avoidance of doubt, the Buyer will
not assume any Company Plans that are not listed on Schedule 7.8.4.

     

    7.8.5 The
Seller shall retain and be responsible for all liabilities in connection with
(i) the Pension Plans, including, any contributions to the Pension Plans or
liabilities arising out of, resulting from or relating to any of the Companies
withdrawing from the Pension Plans, (ii) the Retiree Plans, (iii) any Company
Plan that is not maintained by the Companies or not expressly assumed by the
Buyer or the Companies hereunder and (iv) claims incurred prior to the Closing
Date by employees of the Companies and their eligible dependents under any
Company Plan, other than the Pension Plans, that is maintained by the
Companies.  The Buyer shall be responsible for all liabilities in
connection with claims incurred on and after the Closing Date by employees of
the Companies and their eligible dependents under any Company Plan, other than
the Pension Plans, that is maintained by the Companies or expressly assumed by
the Buyer hereunder or any employee benefit plan established by the Buyer or the
Companies on or after the Closing Date.  The Buyer will assume and
pay, or make available, as the case may be, to each employee of the Companies
after the Closing Date all vacation earned and accrued, but not paid on or
before the Closing Date.

     

    7.9 Administrative Services
Agreement.  At or prior to the Closing Date, the Seller and the
Companies will execute the Administrative Services Agreement, in substantially the form of
Schedule 7.9 (the “ASA”), with such
changes therein as may be mutually acceptable to the parties
hereto.

     

    7.10 Ownership of
HMR.   Prior to the Closing Date, the Seller shall cause,
its subsidiary, Mid-Atlantic States Investment Company, to transfer of all its
interest in HMR, to the Seller.

     

    7.11 Transfer of Excluded
Subsidiaries.  Prior to the Closing Date, the Seller shall
cause PMACIC and HMR to transfer all of their interest in (i) PMA Holdings Ltd.,
(ii) Pennsylvania Manufacturer’s International Insurance Ltd., (iii) PMA Re
Corporate Capital Ltd. and (iv) PMA Insurance, SPC Cayman ((i) through (iv)
collectively, the “Excluded
Subsidiaries”) to the Seller in exchange for cash of not less than the
book value of the Excluded Subsidiaries as set forth on the PMACIC Financial
Statement or the HMR Financial Statement, as applicable.

     

    7.12 Outside Actuarial
Study.  In addition to the 2007 Year-End Huggins Study, the
Seller shall promptly, but in no event later than three (3) days after receipt,
provide the Buyer with a copy of any independent or internal actuarial study of
PMACIC or HMR, commissioned by the Seller prior to the Closing.

     

     

    
      
        
        

      

      
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    7.13 Consents
of Third Parties; Governmental Approvals.

     

    7.13.1 The
Seller and the Buyer shall use all reasonable efforts to secure, before the
Closing Date all Required Consents, in form and substance acceptable to the
Seller and the Buyer; provided that the
Companies and the Seller shall not make any agreement or understanding affecting
the Shares, or the Companies as a condition for obtaining any such Required
Consents except with the prior written consent of the Buyer.  During
the period prior to the Closing Date, the Seller shall act diligently and
reasonably to cooperate with the Buyer to obtain the Required
Consents.

     

    7.13.2 During
the period prior to the Closing Date, the Seller, the Companies and the Buyer
shall act diligently and use their reasonable efforts, and shall cooperate with
each other, to secure any consents and approvals of any Governmental Authority
required to be obtained by them in order to permit the consummation of the
Contemplated Transactions, or to otherwise satisfy the conditions set forth in
Article 9, including, but not limited to the filing of a Form A Statement with
the Pennsylvania Department of Insurance; provided that none of
the Companies or the Seller shall make any agreement or understanding affecting
the Shares, the Companies or their Assets as a condition for obtaining any such
consents or approvals, except with the prior written consent of the
Buyer.  Between the date hereof and the Closing, the Seller and the
Buyer shall each use their commercially reasonable efforts to perform, as soon
as reasonably practicable, their respective obligations under this Agreement
that are required to be performed to complete the Closing; provided, that
neither the Seller nor the Buyer shall be required to waive, in whole or in
part, any such conditions to Closing.

     

    7.13.3 Prior to
the Closing, the Seller and the Buyer shall promptly notify one another of any
communication it receives from any Governmental Authority relating to the
matters that are the subject of this Agreement and permit the other party to
review in advance any proposed material written communication by such party to
any Governmental Authority and shall provide each other with copies of all
correspondence, filings or communications between such party or any of its
representatives, on the one hand, and any Governmental Authority or members of
its staff, on the other hand; provided, however, that the
Buyer may redact from such correspondence, filings and communications any
confidential competitive information of the Buyer or its
Affiliates.  Prior to the Closing, none of the Seller, the Companies
or the Buyer shall agree to participate in any meeting with any Governmental
Authority in respect of any such filings, investigation or other inquiry unless
it consults with the other party in advance.  The Seller and the Buyer
will coordinate and cooperate fully with each other in exchanging such
information and providing such assistance as the other party may reasonably
request in connection with the foregoing; provided, however, that neither
party shall be required to disclose to the other any of its or its Affiliates’
confidential competitive information.  Neither party shall be required
to comply with any provision of this Section 7.13.3 to the extent that such
compliance would be prohibited by applicable Laws.

     

    7.13.4 Notwithstanding
anything herein to the contrary, neither the Seller nor the Buyer shall be
obligated to contest any final action taken by any Governmental Authority
challenging the consummation of the Contemplated Transactions, and the Buyer
shall be under no obligation whatsoever, in order to complete the Contemplated
Transactions, to make or accept or engage in negotiations for any settlement
with any Governmental Authority, or to agree to any 

     

     

    
      
        
        

      

      
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    arrangement,
that would (i) require or involve the sale, disposition, or separate holding,
through the establishment of a trust, or otherwise, of any of the Companies or
any of the Assets acquired pursuant to this Agreement, or of any of the assets,
properties or businesses of the Buyer or any of its Affiliates, or the making of
any debt, equity investment or capital contribution in the Buyer or any of its
Affiliates, (ii) require or involve any material modification of the existing
capital structure of the Buyer or any of its Affiliates, (iii) involve any
requirement or restriction on the business of the Companies or any business of
the Buyer or any of its Affiliates, or (iv) otherwise be reasonably likely to
materially and adversely impact the economic or business benefits to the Buyer
or its Affiliates of the Contemplated Transactions.

     

    7.14 Further
Assurances.  Each party will use commercially reasonable
efforts to implement the provisions of this Agreement, and for such purpose, at
the request of the other party will, at or after the Closing, without further
consideration, promptly execute and deliver, or cause to be executed and
delivered, such additional documents, instruments, conveyances and assurances
and take such other actions as the other party may reasonably deem necessary or
desirable to implement any provision of this Agreement and to render effective
the consummation of the Contemplated Transactions, including the transfer to the
Buyer of the ownership of the Shares.  In addition, the Seller and the
Buyer will cooperate to ensure to the extent practicable that all existing
Insurance Licenses are retained by PMACIC and HMR through the Closing
Date.

     

    7.15 Books
and Records of the Companies.

     

    7.15.1 The
Seller agrees to deliver to the Buyer at or as soon as practicable after the
Closing, all Books and Records relating to the corporate governance of the
Companies or  Insurance Licenses of PMACIC or HMR (including but not
limited to, correspondence, memoranda, and the like).

     

    7.15.2 For a
period of seven (7) years following the Closing, or for such longer periods as
may be required by applicable Laws, the parties hereto shall retain all books
and records relating to the business of any Company in their respective
possessions (a) relating to Taxes, including, accounting and tax records and
information pertaining to events occurring prior to the Closing Date, and (b)
required to be retained pursuant to obligations imposed by any Law (such books
and records of the business of the Companies collectively, the “Records”).  During
such period, each party shall provide the other with reasonable access to the
Records for review and copying.

     

    7.15.3 If
original documents are required to respond to legal process in connection with
the conduct by either party of any litigation, arbitration, audit, settlement
proceedings or negotiations with third parties with respect to its conduct of
the business of the Companies (“Legal Proceedings”),
such party, subject to applicable laws, regulations or agreements, shall be
permitted to remove such Records temporarily from the other party’s premises;
provided that
such party shall return such original documents to such other party as promptly
as practicable after such time when such original documents are no longer
required in connection with such Legal Proceedings.

     

     

    
      
        
        

      

      
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    7.15.4 If, in
connection with Legal Proceedings, the Buyer or the Seller shall require the
assistance of the other party’s employees, such party shall provide such
employees to the requesting party as are reasonably required by such requesting
party.  The requesting party shall pay such other party’s reasonable
out-of-pocket costs incurred in connection with such use of such party’s
employees and shall reimburse such party for the number of whole Business Days
spent by each such employee in providing such services at the rate equal to the
average daily gross pay (excluding the value of employee benefits) of such
employee during each calendar month in which such services are
performed.

     

    7.16 Confidentiality
Agreement.  Except to the extent inconsistent with the express
terms hereof, the terms and conditions of that certain Confidentiality
Agreement, dated as of May 3, 2007 (the “Confidentiality
Agreement”), between Aries Partners Limited and PMACIC shall continue to
apply to the Contemplated Transactions and are incorporated herein by reference
and made a part hereof; provided that the
Confidentiality Agreement shall not survive the Closing.

     

    7.17 Negotiations with
Others.  From the date hereof until the Closing, the Seller
will not, and shall cause the Companies not to, directly or indirectly, without
the prior written consent of the Buyer, (i) initiate discussions or engage in
negotiations concerning any sale of the Shares or of any merger, sale of assets
or similar transaction involving the Companies with, or (ii) furnish or cause to
be furnished any non-public information concerning the Companies to, any Person
other than the Buyer and its agents and representatives except in the Ordinary
Course of Business.  The Seller agrees to disclose to the Buyer the
existence and content of any formal inquiries by or discussions with any third
party (including any Governmental Authority) relating to an acquisition of the
stock or assets of the Companies as soon as practicable after they take
place.

     

    7.18 Assets and
Liabilities.  The Seller shall cause the assets and liabilities
of the Companies to be in compliance with Section 5.8 and 5.10, as applicable,
at the Closing.

     

    7.19 Post-Closing
Payments.  The Seller shall cause any payments received by the
Seller after the Closing that relate to the business of any Company to be
promptly paid to the Buyer, without any diminution or set-off for the amount
payable under the Promissory Note.

     

    7.20 Closing Date Financial
Statement.  Within five (5) days, but no later than two (2)
days, prior to the Closing Date, the Seller shall deliver to the Buyer (i) the
Closing Date Financial Statement, in a form reasonably acceptable to the Buyer,
and (ii) a certificate from the Chief Financial Officer of each of the Companies
certifying that the applicable portion of the Closing Date Financial Statement
was prepared in good faith and in accordance with SAP or GAAP, as
applicable.

     

    7.21 Closing Date Invested Asset
Statement.  Within five (5) days, but no later than two (2)
days, prior to the Closing Date, the Seller shall deliver to the Buyer (i) the
Closing Date Invested Asset Statement, in a form reasonably acceptable to the
Buyer, and (ii) a certificate from the Chief Financial Officer of each of the
Companies certifying that the Closing Date Invested Asset Statement was prepared
in good faith and in accordance with the requirements set forth in Section
2.3.3.

     

     

    
      
        
        

      

      
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    7.22 Closing Date Audited Statutory and
Financial Statements.  Promptly, but in no event more than
three (3) days, following filing with the applicable Governmental Authority, the
Seller shall deliver to the Buyer (i) the audited statutory balance sheet and
the audited statutory income statement and cash flow statement of PMACIC as of
and for the year ended December 31, 2007 (the “PMACIC Audited Financial
Statement”); and (ii) the audited balance sheet and the audited statement
of income, changes in stockholders’ equity and cash flows of the operations of
HMR as of and for the fiscal year ended December 31, 2007 (the “HMR Audited Financial
Statement”).  Each of the PMACIC Audited Financial Statement
and the HMR Audited Financial Statement (x) shall be prepared, in all
material respects, in accordance with SAP or GAAP, as applicable, during the
period involved; (y) shall be true and correct in all material respects and
present fairly, in accordance with SAP or GAAP, as applicable, the financial
position of PMACIC or HMR, as applicable, as of the date thereof and the
statement of income, results of operations, changes in stockholders’ equity and
cash flows of PMACIC or HMR, as applicable, for the period then ended; and
(z) shall accurately reflect in all material respects the books of account
and other financial records of PMACIC or HMR, as applicable.

     

    7.23 Closing Date Reinsurance Receivables
and IBNR.  Within five (5) days, but no later than two (2)
days, prior to the Closing Date, the Seller shall deliver to the Buyer a
statement, in a form reasonably acceptable to the Buyer, setting forth (i) a
true and accurate list of all reinsurance receivables, excluding IBNR, from each
individual reinsurer, as of the Closing Date, and (ii) the true and accurate
amount of all IBNR with respect to reinsurance receivables, as of the Closing
Date (the “Closing
Date Reinsurance Receivable Statement”).

     

    7.24 Amendment of HMR Articles of
Association.  Prior to the Closing, the Seller shall amend, or
shall cause Mid-Atlantic States Investment Company to amend, the Articles of
Association of HMR to eliminate the right of Captive Benefits Services, Inc. to
appoint a director of HMR.

     

    7.25 Amendment of the Severance
Plan.  Prior to the Closing, the Seller shall cause PMACIC and
PMA RE to amend the Severance Plan, in the manner described in Schedule
7.25.

     

    7.26 Amendment of the HMR Register of
Members.  Prior to the Closing, the Seller shall cause HMR to
amend the HMR Register of Members to confirm that the 40,000 preferred shares of
HMR, par value $100.00 per share, have been redeemed and shall provide a
certified copy of the revised HMR Register of Members to the Buyer.

     

    7.27 Delivery of Pooled Companies Quota
Share Agreement.  Prior to the Closing, the Seller shall
deliver to the Buyer an executed copy of the currently existing 100% quota share
Reinsurance Agreement by and among Manufacturers Alliance Insurance Company,
Pennsylvania Manufacturers’ Association Insurance Company and Pennsylvania
Manufacturers Indemnity Company (as ceding insurers) and  PMACIC (as
the reinsurer) (the “Pooled Companies Quota Share
Agreement”).

     

     

    
      
        
        

      

      
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    ARTICLE
8

     

    CONDITIONS PRECEDENT TO THE
OBLIGATION OF THE BUYER TO CLOSE

     

    The
obligation of the Buyer to enter into and complete the Closing is subject, at
the option of the Buyer, to the fulfillment on or prior to the Closing Date of
the following conditions, any one or more of which (other than Section 8.2,
insofar as it relates to the Pennsylvania Commissioner of Insurance, and the
Pennsylvania Department of Insurance, and Section 8.3) may be waived by the
Buyer in its sole discretion:

     

    8.1 Representations and
Covenants.  (i) The Seller Representations shall be true and
correct in all respects when made and at and as of the Closing Date with the
same force and effect as though made on and as of the Closing  Date
(other than Seller Representations made as of another date, which Seller
Representations shall have been true and correct as of such date); (ii) all
covenants and agreements required by this Agreement to be performed or complied
with by the Seller on or prior to the Closing Date shall have been performed and
complied with in all material respects; and (iii) the Buyer shall have received
a certificate of the Seller, dated the Closing Date and signed by a duly
authorized executive officer, to such effect (the “Seller’s Closing
Certificate”).

     

    8.2 Consents and Approvals; Insurance
Licenses.  All consents or approvals required for the
consummation of the sale of the Shares and the Contemplated Transactions from
the  Pennsylvania Commissioner of Insurance or the Pennsylvania
Department of Insurance or any other Governmental Authority having jurisdiction
over the Companies or the consummation of the Contemplated Transactions
(including the Required Consents and the Insurance Regulatory Approvals) shall
have been obtained and be in full force and effect.

     

    8.3 Litigation.  No
Claim shall have been instituted or threatened by or before any Governmental
Authority, to restrain, modify or prevent the carrying out of the Contemplated
Transactions.

     

    8.4 Affiliate
Transactions.  The Seller shall have delivered to the Buyer
evidence reasonably satisfactory to the Buyer that, except as set forth in
Schedule 8.4, all agreements between any of the Companies, on the one hand, and
the Seller and/or any Affiliate of the Seller, on the other hand, shall have
terminated without any continuing obligations of any of the Companies remaining
thereunder, including the withdrawal by the Companies from all employee benefit
plans of the Seller.  Additionally, PMACIC shall have transferred the
entities known as PMA Holdings, Ltd. (Bermuda) and PMA International Insurance,
Ltd. (Bermuda) to the Seller in exchange for cash of not less than the book
value of such entities on the Initial Financial Statement.

     

    8.5 Resignations and
Terminations.  The Seller shall have caused the current
Directors of the Companies to resign, and shall have obtained written
resignations of such Directors.  No employees of any Company have been
terminated or resigned from the Companies since January 1, 2008, except for
those disclosed on Schedule 8.5, and Frank Pantazopoulos and Catherine Wilson
shall be employed by the Companies as of the Closing Date, in substantially the
same capacity in which they are employed as of the date hereof.

     

     

    
      
        
        

      

      
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    8.6 Claims Payment and
Commutations.  Except as set forth in Schedule 8.6, no material
commutation, claims payment, settlement or cancellation of any PMACIC or HMR
reinsurance agreement shall have occurred since January 1,
2008.  Except as set forth in Schedule 8.6, no run-off, claims
handling or any other subcontracting services transactions shall be undertaken
by the Companies since January 1, 2008.

     

    8.7 Corporate
Actions.  Except as set forth in Schedule 8.7, no sale,
disposal, merger, dividend or other material transaction shall have been
undertaken by the Seller with respect to any aspect of the Companies since
January 1, 2008.

     

    8.8 FIRPTA
Certification.  The Seller shall have delivered to the Buyer a
certification of non-foreign status, in form and substance reasonably
satisfactory to the Buyer, in accordance with Treasury Regulation § 1.1445-2(b),
and the Buyer shall not have actual Knowledge that such certification is false
and shall not have received a notice that such certification is false pursuant
to Treasury Regulation § 1.1445-4.

     

    8.9 No Material Adverse
Effect.  There shall not have occurred since the date hereof
any event or events that, individually or in the aggregate, have had a Material
Adverse Effect.

     

    8.10 Certain Required
Consents.  The Seller shall have obtained, prior to the Closing
Date, the Required Consents set forth on Schedule 8.10.

     

    8.11 Delivery of the Closing Date
Financial Statement, the Closing Date Invested Asset Statement, the PMACIC
Audited Financial Statement and the HMR Audited Financial
Statement.  The Seller shall have delivered the Closing Date
Financial Statement, the Closing Date Invested Asset Statement, the PMACIC
Audited Financial Statement and the HMR Audited Financial Statement to the Buyer
in accordance with Sections 7.20, 7.21 and 7.22.

     

    8.12 Transfer of Excluded
Subsidiaries.  The transfer of the Excluded Subsidiaries to the
Seller as provided in Section 7.11 shall have occurred.

     

    8.13 Amendment of HMR Articles of
Association.  The Seller shall have amended, or shall have
caused Mid-Atlantic States Investment Company to amend, prior to the Closing
Date, the Articles of Association of HMR to eliminate the right of Captive
Benefits Services, Inc. to appoint a director of HMR in accordance with Section
7.24.

     

    8.14 Amendment of the PMACIC Severance
Plan.  The Seller shall have caused PMACIC to amend, prior to
the Closing Date, the Severance Plan, in accordance with Section
7.25.

     

    8.15 Amendment of the HMR Register of
Members.  The Seller shall have caused HMR to amend, prior to
the Closing Date, the HMR Register of Members and shall provide a certified copy
of the revised HMR Register of Members to the Buyer in accordance with Section
7.26.

     

    8.16 Delivery of the Pooled Companies
Quota Share Agreement.  The Seller shall have delivered to the
Buyer, prior to the Closing Date, a copy of the Pooled Companies Quota Share
Agreement in accordance with Section 7.27.

     

     

    
      
        
        

      

      
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    ARTICLE
9

     

    CONDITIONS PRECEDENT TO THE
OBLIGATION OF THE SELLER TO CLOSE

     

    The
obligation of the Seller to enter into and complete the Closing is subject, at
the option of the Seller, to the fulfillment on or prior to the Closing Date of
the following conditions, any one or more of which (other than Section 9.2,
insofar as it relates to, the Pennsylvania Commissioner of Insurance or the
Pennsylvania Department of Insurance, and Section 9.3) may be waived by the
Seller in its sole discretion:

     

    9.1 Representations and
Covenants.  (i) The Buyer Representations shall be true and
correct in all respects (without giving effect to any limitations of Knowledge,
materiality or “Material Adverse Effect” set forth therein) when made and at and
as of the Closing Date with the same force and effect as though made on and as
of the Closing Date (other than Buyer Representations made as of another date,
which Buyer Representations shall have been true and correct as of such date);
(ii) all covenants and agreements required by this Agreement to be performed or
complied with by the Buyer on or prior to the Closing Date shall have been
performed and complied with in all material respects; and (iii) the Seller shall
have received a certificate of the Buyer, dated the Closing Date and signed by a
duly authorized executive officer, to such effect (the “Buyer’s Closing
Certificate”).

     

    9.2 Consents and
Approvals.  All consents or approvals required for the
consummation of the sale of the Shares and the Contemplated Transactions from
the  Pennsylvania Commissioner of Insurance or the Pennsylvania
Department of Insurance or any other Governmental Authority having jurisdiction
over any Company and the consummation of the Contemplated Transactions shall
have been obtained and be in full force and effect.

     

    9.3 Litigation.  No
Claim shall have been instituted or threatened by or before any Governmental
Authority, to restrain, modify or prevent the carrying out of the Contemplated
Transactions.

     

    ARTICLE
10

     

    INDEMNIFICATION AND
REMEDIES

     

    10.1 Definition of “Seller
Representations”, “Buyer
Representations”. The “Seller Representations” means (i) all of the
representations and warranties of the Seller set forth in Article 5 and (ii) the
Seller’s Closing Certificate.  The “Buyer Representations” means (i)
all of the representations and warranties of the Buyer set forth in Article 6
and (ii) the Buyer’s Closing Certificate.

     

    10.2 Survival of Representations,
Warranties and Covenants.  Subject to the limitations set forth
in Section 10.7, all Buyer Representations and all Seller Representations and
all covenants of each of the parties set forth in this Agreement, will survive
the Closing.

     

    

     

    
      
        
        

      

      
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    10.3 Exclusive
Remedies.

     

    10.3.1 With the
exception of any indemnification obligations set forth in Sections 7.4, 7.5 and
7.9.4 (each of which shall be governed thereby) or as otherwise provided in this
Agreement and any Automatic Purchase Price Adjustment or Final Purchase Price
Adjustment, the rights and obligations with respect to indemnification set forth
in this Article 10 will be the exclusive rights and obligations of the
respective parties hereto with respect to any breach of any Buyer
Representation, any Seller Representation or any covenant of any party hereto,
except for any fraud, fraudulent breach or misrepresentation.  The
rights and obligations of the respective parties hereto set forth in this
Article 10, and any claims or causes of action by a party under this Agreement
or the Confidentiality Agreement to enforce any covenant of a party hereto set
forth in this Agreement or the Confidentiality Agreement will be the exclusive
rights and obligations of the Seller and the Buyer with respect to the business
or ownership of the Companies, the Shares, the events giving rise to this
Agreement and the Contemplated Transactions.  Without limiting the
generality or effect of the foregoing, each of the Seller and the Buyer, hereby
waives any claim or cause of action which it might be entitled to assert against
the other, or any director, officer, employee, controlling person or Affiliate
of such other party (including any claim or cause of action for
misrepresentation or other cause under the common law, any securities, trade
regulation, environmental or other law but not including any claim for fraud) by
reason of this Agreement, the events giving rise to this Agreement and the
Contemplated Transactions, except for claims or causes of action that may be
made or brought under this Agreement to enforce the covenants of any party set
forth herein or therein and claims or causes of action for intentional
fraud.

     

    10.3.2 Any
knowledge, whether actual or constructive or whether acquired before, on or
after the date hereof, of a Buyer Indemnified Party (as defined in Section 10.4)
of any fact or circumstance that could rise to a Loss (as defined in Section
10.4) resulting in an indemnity obligation by the Seller pursuant to Section
10.4 shall not be deemed to absolve the Seller of such indemnity
obligation.  Any knowledge, whether actual or constructive or whether
acquired before, on or after the date hereof, of any Seller Indemnified Party
(as defined in Section 10.5) of any fact or circumstance that could rise to a
Loss resulting in an indemnity obligation by the Buyer pursuant to Section 10.5
shall not be deemed to absolve the Buyer of such indemnity
obligation.

     

    10.4 Indemnification by the
Seller.  The Seller will indemnify and hold the Buyer, its
Affiliates and their respective directors, officers, managers, shareholders,
partners, members, attorneys, accountants, agents, representatives and employees
and their heirs, successors and permitted assigns and the Companies (the “Buyer Indemnified
Parties”) harmless from, against and in respect of any damages, losses,
charges, liabilities, claims, demands, actions, suits, proceedings, payments,
judgments, settlements, assessments, deficiencies, Taxes, interest, penalties,
costs and expenses,  (including all remediation costs, fines,
penalties and expenses of investigation and ongoing monitoring, attorneys’ fees
and out of pocket disbursements) (collectively, the “Losses”) imposed on,
sustained, incurred or suffered by, or asserted or threatened against, any of
the Buyer Indemnified Parties, whether in respect of third party claims, claims
between the parties hereto, or otherwise, directly or indirectly relating to or
arising out of (i) any breach or inaccuracy of any Seller Representation or any
representation or warranty made by the Seller in this Agreement or any other
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    failure
of the Seller to perform any covenant or agreement of the Seller contained
herein or in any other Transaction Agreement; (iii) any Taxes for which the
Seller is liable in accordance with Section 7.5 and for which the Seller is not
otherwise liable to indemnify the Buyer under Section 10.4(i) or (ii); (iv) the
Excluded Subsidiaries (or relating to the Excluded Subsidiaries); (v) the
Pension Plans and (vi) the Lease Agreement, the Sublease Agreement or the
Assignment and Assumption Agreement (to the extent such Loss arose or existed
prior to the Closing Date).  Subject to the following sentence, the
Seller shall have no obligation to indemnify the Buyer under this Section
10.4(i) unless and until the aggregate amount of all Losses for which the Seller
is liable under this Section 10.4 exceeds $100,000 at which time the Seller’s
indemnity obligation shall extend to the entire amount of the Loss including the
first $100,000 thereof.  In no event shall the aggregate liability of
the Seller with respect to all claims of indemnification under clause (i) above
exceed (A) 40% of the Cash Payment with respect to any Loss relating to or
arising out of any Seller Representation or any representation or warranty made
by the Seller in this Agreement or any other Transaction Agreement (other than
the Seller Representation contained in Section 5.11) or (B) the sum of the Cash
Payment and the Note Payment with respect to any Loss relating to or arising out
of Section 5.11; provided, however, that the
limitations set forth in the preceding two (2) sentences of this Section 10.4
shall not apply to any Loss relating to or arising out of Sections 5.1, 5.2,
5.3, 5.4, 5.5 or 5.6.

     

    10.5 Indemnification by
Buyer.  The Buyer will indemnify and hold the Seller and its
directors, officers, managers, shareholders, partners, members, attorneys,
accountants, agents, representatives and employees and its heirs, successors and
permitted assigns, each in their capacity as such (the “Seller Indemnified
Parties” and, together with the Buyer Indemnified Parties, the “Indemnified
Parties”), harmless from, against and in respect of any Loss imposed on,
sustained, incurred or suffered by, or asserted or threatened against, any of
the Seller Indemnified Parties, whether in respect of third party claims, claims
between the parties hereto, or otherwise, directly or indirectly relating to or
arising out of (i) any breach or inaccuracy of any Buyer Representation or any
representation or warranty made by the Buyer in this Agreement or any other
Transaction Agreement for the period such representation or warranty survives,
(ii) any failure of the Buyer to perform any covenant or agreement of the Buyer
contained herein or in any other Transaction Agreement; and (iii) any Taxes for
which the Buyer is liable in accordance with Section 7.5 and for which the Buyer
is not otherwise liable to indemnify the Seller under Section 10.5(i) or
(ii).  The Buyer shall have no obligation to indemnify the Seller
under this Section 10.5(i) unless and until the aggregate amount of all Losses
for which the Buyer is liable under this Section 10.5 exceeds $100,000 at which
time the Buyer’s indemnity obligation shall extend to the entire amount of the
Loss including the first $100,000 thereof.  In no event shall the
aggregate liability of the Buyer with respect to all claims of indemnification
under clause (i) above exceed 40% of the Cash Payment.

     

    10.6 Determination of
Losses.  Losses shall be determined taking into account the
actual amount of damage, deficiency, cost or expense incurred or suffered or the
diminution of value of any property by reason of the event or condition giving
rise to the obligation to indemnify as well as any insurance proceeds actually
received by the indemnified party (otherwise than from an insurer who is an
Affiliate thereof).  Upon payment by the indemnifying party, such
party shall receive from the indemnified party an assignment of the indemnified
party’s rights and claims against insurers and others with respect to the event
or condition giving rise to the obligation to indemnify.

     

     

    
      
        
        

      

      
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    10.7 Certain Limitations on
Claims.  The following limitations shall apply to claims for
indemnification under Section 10.4 or 10.5:

     

    10.7.1 No such
claim based upon the breach of a representation or warranty (including a Seller
Representation or a Buyer Representation) may be asserted unless notice shall
have been given on or before the date specified below to the party from whom
such indemnification may be sought that a breach of such representation or
warranty has or may have occurred (identifying such representation or warranty
with reasonable particularity).  For the avoidance of doubt, the
following limitations shall not apply to the calculation of the Final Purchase
Price Adjustment pursuant to Section 2.4:

     

    (a) If such
claim relates to any Buyer Representation in Section 5.1, 5.2, 5.3, 5.4, 5.5 or
5.6; no time limit shall apply;

     

    (b) If such
claim relates to any Seller Representation in Section 5.7, 5.8, 5.10, 5.11 or
5.14; five (5) years from the Closing Date; and

     

    (c) If such
claim relates to any other representation or warranty (including a Seller
Representation or a Buyer Representation); two (2) years from the Closing
Date.

     

    10.8 Procedure for Indemnification –
Third-Party Claims.

     

    10.8.1 If an
Indemnified Party shall desire to assert any claim for indemnification under
this Article 10 in respect of, arising out or involving a claim or demand made
by any Person (other than a party hereto or Affiliate hereof) against the
Indemnified Party (a “Third-Party Claim”),
such Indemnified Party shall notify the indemnifying party of the Third-Party
Claim after receipt by such Indemnified Party of notice of such Third-Party
Claim; provided, however, that the
failure to notify the indemnifying party of such Third-Party Claim will not
relieve the indemnifying party of any liability that it may have to an
Indemnified Party, except to the extent that the indemnifying party demonstrates
that the defense of such Third-Party Claim is prejudiced by the Indemnified
Party’s failure to give such notice.

     

    10.8.2 If any
Third-Party Claim is brought against an Indemnified Party and such Indemnified
Party gives notice to the indemnifying party of the commencement of such
Third-Party Claim, the indemnifying party will be entitled to participate in
such Third-Party Claim and, to the extent that it wishes (unless (i) such
Third-Party Claim involves potential conflicts of interest or substantially
different defenses for the Indemnified Party and the indemnifying party, or (ii)
the indemnifying party fails to provide reasonable assurance to the Indemnified
Party of its financial capacity to defend such Third-Party Claim and provide
indemnification under this Article 10 with respect to such Third-Party Claim),
to assume the defense of such Third-Party Claim with counsel reasonably
satisfactory to the Indemnified Party.  Should the indemnifying party
elect to assume the defense of such Third-Party Claim in accordance with the
immediately preceding sentence and after notice from the indemnifying party to
the Indemnified Party of its election to assume the defense thereof, the
indemnifying party will not, as long as it diligently conducts such defense, be
liable to the Indemnified Party under this Article 10 for any fees of other
counsel or any other legal expenses with respect to the defense of such

     

     

    
      
        
        

      

      
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    proceeding,
in each case subsequently incurred by the Indemnified Party, in connection with
the defense of such proceeding, other than reasonable costs of
investigation.   If the indemnifying party assumes defense of
such Third-Party Claim, the Indemnified Party shall have the right to
participate in defense thereof and to employ counsel, at its own expense (except
as provided in this Section 10.8.2), separate from the counsel employed by the
indemnifying party.  The indemnifying party shall be liable for the
fees and expenses of counsel employed by the Indemnified Party for any period
during which the indemnifying party has not assumed the defense thereof and as
otherwise contemplated in this Section 10.8.  Whether or not the
indemnifying party shall have assumed the defense of a Third-Party Claim
pursuant to this Section 10.8.2, the indemnifying party shall not admit any
liability with respect to, or settle, compromise or discharge such Third-Party
Claim (the “Proposed
Settlement”), and the Indemnified Party shall have no liability with
respect to any such Proposed Settlement, unless (i) the Indemnified Party
provides its prior written consent to such Proposed Settlement, (ii) such
Proposed Settlement contains an unconditional release of the Indemnified Party
from all liability in respect of the related Third-Party Claim and does not
contain any finding or admission of any violation of any Law or any violation of
the rights of any Person and does not effect on any other claims that may be
made against such Indemnified Party, (iii) the sole relief provided in such
Proposed Settlement is monetary damages which are paid in full by the
indemnifying party and such Proposed Settlement does not subject any Indemnified
Party to any injunctive relief or other equitable remedy and (iv) such Proposed
Settlement does not include a statement or admission of fault, culpability or
failure to act by or on behalf of any Indemnified Party.

     

    10.8.3 If an
Indemnified Party shall desire to assert any claim for indemnification provided
for under this Article 10 other than a claim in respect of, arising out of or
involving a Third-Party Claim, such Indemnified Party shall notify the
indemnifying party in writing, and in reasonable detail (taking into account the
information then available to such Indemnified Party), of such claim promptly
after becoming aware of the existence of such claim; provided that the
failure to give such notification shall not affect the indemnification provided
for hereunder except to the extent the indemnifying party shall have been
actually prejudiced as a result of such failure.

     

    10.9 Coordination with Tax
Contests. If there shall be any conflicts between the provisions of this
Article 10 and Sections 7.5.9 and 7.5.10 (relating to Tax contests), the
provisions of Sections 7.5.9 and 7.5.10 shall control with respect to Tax
contests.

     

    10.10 Indemnification Payments on After Tax
Basis.  Except as may otherwise be required by applicable Laws,
all indemnification payments made hereunder shall be treated by the Seller and
the Buyer for income Tax purposes as adjustments to the Purchase
Price.  Each indemnity payment hereunder with respect to any Loss
shall be calculated on an after-tax basis, which shall mean an amount which is
sufficient to compensate the Indemnified Party for the event giving rise to such
Loss (the “Indemnified
Event”), determined after taking into account (i) all increases in
federal, state, local or other Taxes (including estimated Taxes) payable by the
Indemnified Party as a result of the receipt of the indemnity payment (as a
result of the indemnity payment being included in income, resulting in a
reduction of tax basis, or otherwise), (ii) to the extent not previously taken
into account in computing the amount of such Loss, all increases in federal,
state, local and other Taxes (including estimated Taxes) payable by the
Indemnified Party for all affected taxable years and periods (including any
increased Tax that results from the Indemnified Event causing a reduction in Tax
basis) as a result of the 

     

     

    
      
        
        

      

      
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    Indemnified
Event, and (iii) to the extent not previously taken into account in computing
the amount of such Loss, all reductions in federal, state, local and foreign
Taxes (including estimated Taxes) realized by the Indemnified Party for all
affected taxable years and periods as a result of the Indemnified
Event.  All calculations shall be made at the time of the relevant
indemnification payment using reasonable assumptions (as agreed to by the
indemnifying party and Indemnified Party) and present value concepts (using a
discount rate equal to the applicable federal mid-term rate in effect for the
month in which the Indemnified Event occurs (using semi-annual compounding) as
published by the IRS.

     

    ARTICLE
11

     

    TERMINATION OF
AGREEMENT

     

    11.1 Termination.  This
Agreement may be terminated prior to the Closing as follows:

     

    11.1.1 at the
election of the Seller, by written notice to the Buyer, if at any time the Buyer
Representations shall fail to be true and correct, or the Buyer shall at any
time have failed to perform and comply with all agreements and covenants of the
Buyer contained in this Agreement requiring performance or compliance prior to
such time, and in either case, such failure (i) shall be such that, if not
cured, the conditions set forth in Section 8.1 would not be fulfilled and
(ii) shall not have been cured within ten (10) days of the receipt of
written notice thereof by the Buyer from the Seller;

     

    11.1.2 at the
election of the Buyer, by written notice to the Seller, if at any time the
Seller Representations shall fail to be true and correct, or the Seller shall at
any time have failed to perform and comply with all agreements and covenants of
the Seller contained in this Agreement requiring performance or compliance prior
to such time, and in either case, such failure (i) shall be such that, if not
cured, the conditions set forth in Section 9.1 would not be fulfilled and
(ii) shall not have been cured within ten (10) days of the receipt of
written notice thereof by the Seller from the Buyer;

     

    11.1.3 at any
time on or prior to the Closing Date, by mutual written consent of the Seller
and the Buyer; or

     

    11.1.4 by either
party,  if the Closing has not occurred prior to six (6) months after
the date of this Agreement or such later date as the parties may mutually agree;
provided that
no party may terminate this Agreement if the Closing has not occurred by reason
of, or as a result of, such party’s failure to take any action required to
fulfill any of its obligations hereunder.

     

    11.2 Notice of
Termination.  Any party desiring to terminate this Agreement
pursuant to Section 11.1 shall give written notice of such termination (and the
reason for such termination) to the other party to this Agreement.

     

    11.3 Remedies After
Termination.  If this Agreement terminates pursuant to Section
11.1.1 or 11.1.2, each party shall retain such rights as it may then have for
damages or other relief by reason of any breach by the other party of such other
party’s representations, warranties or covenants (including any breach of any
Seller Representation and Buyer Representation).

     

     

    
      
        
        

      

      
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    ARTICLE
12

     

    DEFINITIONS

     

    12.1 Certain
Definitions.  As used in this Agreement, the following terms
have the following meanings:

     

    12.1.1 “Affiliate” means,
with respect to any Person, any other Person Controlling, Controlled by or under
common Control with, or the parents, spouse, lineal descendants or beneficiaries
of, such Person.

     

    12.1.2 “Assets” means the
assets of every type and description (including real, personal or mixed property
whether tangible or intangible) that are owned, leased or licensed by the
Companies.

     

    12.1.3 “Assignment and Assumption
Agreement” means the Assignment and Assumption of Lease and Consent,
dated as of December 29, 2000, among the Lessor, Lorjo and PMACIC.

     

    12.1.4 “Books and Records”
shall mean originals and copies of all books, records, customer lists, policy
information, contracts, administrative and pricing manuals, claim records, sales
records, underwriting records, financial records, compliance records prepared
for or filed with Governmental Authorities of the Companies, Tax Returns
(including workpapers with respect to the Companies), Tax records and all other
documents and information related to the operation of the Companies, each in the
possession or control of the Seller, the Companies, or their Affiliates, whether
or not stored in hardcopy form or on electronic, magnetic or optical media (to
the extent not subject to licensing restrictions).

     

    12.1.5 “Budget Virtualization
Project Expenses” means the approved and budgeted expenses associated
with PMACIC’s virtualization project, as described and in the amounts set forth
on Exhibit D.

     

    12.1.6  “Business Day” means
any day other than a Saturday or Sunday or upon which banks in Philadelphia,
Pennsylvania, London, England or Bermuda are authorized or required by law to
close.

     

    12.1.7 “Closing Date Financial
Statement” means the estimated financial statements of the Companies,
dated as of the Closing Date, which contain separate balance sheets, income
statements cash flow statements for each of PMACIC, PMA RE and HMR as of the
Closing Date, specifically setting forth (i) the net loss and LAE reserves for
each of PMACIC, PMA RE and HMR as of the Closing Date and (ii) the expense
accruals and non-actuarial reserves for each of PMACIC, PMA RE and HMR as of the
Closing Date; provided that (x) the
statements with respect to PMACIC are prepared in accordance with SAP and (y)
the statements with respect to HMR and PMA RE are prepared in accordance with
GAAP.

     

    12.1.8 “Closing Date Invested Asset
Statement” means a statement setting forth the estimated “marked to
market” valuation of or revaluation of the Invested Assets, as of the Closing
Date, prepared in accordance with Section 2.3.3.

     

     

    
      
        
        

      

      
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    12.1.9 “Code” means the
Internal Revenue Code of 1986, as amended, or corresponding provisions of future
laws.

     

    12.1.10 “Company Group” means
any “affiliated group” (as defined in Section 1504(a) of the Code without regard
to the limitations contained in Section 1504(b) of the Code) that, at any time
on or before the Closing Date, includes or has included any of the Companies or
any Subsidiary or any predecessor of or successor to any of the Companies or
Subsidiary (or another such predecessor or successor), or any other group of
corporations that, at any time on or before the Closing Date, files or has filed
Tax Returns on a combined, consolidated or unitary basis with any of the
Companies or any Subsidiary or any predecessor of or successor to any of the
Companies or any Subsidiary (or another such predecessor or
successor).

     

    12.1.11 “Contract” means as to
any Person, any agreement, indenture, undertaking, debt, instrument, contract,
lease or other commitment to which it is a party, by which it is bound or to
which any of its assets or properties is subject.

     

    12.1.12 “Control”, “Controlling” and
“Controlled”
means, as to any Person, the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or
otherwise.  The terms “Controlled by,” “under common Control with” and
“Controlling” shall have correlative meanings.

     

    12.1.13 “Copyrights” means
U.S. and foreign copyrights, whether registered or unregistered, and pending
applications to register the same.

     

    12.1.14 “Dollars” means
U.S.  Dollars.

     

    12.1.15 “Environmental Law”
means any Law relating to (i) the protection of the environment or human
health and safety (including air, surface water, groundwater, land or
structures), (ii) the exposure to, or the use, storage, recycling,
treatment, generation, transportation, processing, handling, labeling,
management, release or disposal of, any Hazardous Substance or waste material,
or (iii) noise, odor, mold, or any biological or infectious agents.

     

    12.1.16 “ERISA” means the
Employee Retirement Income Security Act of 1974, as amended from time to
time.

     

    12.1.17 “GAAP” means generally
accepted accounting principles in the U.S., consistently applied.

     

    12.1.18 “Governmental
Authority” means any U.S. federal, state or local or any supra-national
or non-U.S. governmental, political subdivision, governmental, regulatory or
administrative authority, department, instrumentality, agency, body, bureau or
commission, self-regulatory organization or any court, tribunal, or judicial or
arbitral body, including the Cayman Islands Monetary Authority and the Cayman
Islands Government.

     

    12.1.19  “Hazardous Substance”
means any substance that is listed, defined, designated or classified as
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    Government
Authority, and includes petroleum products and byproducts, asbestos-containing
material, polychlorinated biphenyls, lead-containing products, biological or
infectious agents and mold.

     

    12.1.20  “Initial Invested Asset
Statement” means the statement of the Invested Assets of the Companies,
as of December 31, 2007, and the valuation of each such Invested Asset, in a
form reasonably satisfactory to the Buyer and attached as Exhibit
E.

     

    12.1.21 “Intellectual
Property” means Copyrights, Patent Rights, Trademarks and Trade
Secrets.

     

    12.1.22 “IRS” means the
Internal Revenue Service.

     

    12.1.23 “Knowledge” or any
similar phrase means (i) with respect to the Seller, the collective knowledge of
Vincent T.  Donnelly or William E. Hitselberger after due inquiry and
(ii) with respect to the Buyer, the collective knowledge of Brad Huntington or
John Williams, after due inquiry.

     

    12.1.24 “Law” means any
federal, state, local or foreign law, statute, code, ordinance, regulation,
rule, interpretation, bulletin, circular letter, published opinion, license or
permit enacted, adopted, issued or promulgated by any Governmental Authority
(including those pertaining to electrical, building, zoning, subdivision, land
use, environmental and occupational safety and health requirements) or common
law.

     

    12.1.25 “Lease Agreement”
means the Office Lease Agreement, between Nine Penn Center Associates, L.P. (the
“Lessor”) and
Lorjo Corp. (“Lorjo”), as
subsequently amended by the First Amendment of Office Lease, dated as of October
30, 1996, between the Lessor and Lorjo, the Second Amendment of Office Lease,
dated as of December 11, 1998, between the Lessor and Lorjo, the Third Amendment
of Office Lease, dated as of May 16, 2001, between the Lessor and PMACIC, the
Fourth Amendment of Office Lease, dated as of July 2, 2003, between the Lessor
and PMACIC, the Fifth Amendment  of Office Lease, dated as of April
30, 2004, between the Lessor and PMACIC, the Sixth Amendment of Office Lease,
dated as of June 14, 2004, between the Lessor and PMACIC and the Seventh
Amendment of Office Lease, dated as of January 25, 2007, between the Lessor and
PMACIC.

     

    12.1.26 “Material Adverse
Effect” means a material adverse effect on the financial condition,
assets, liabilities, properties, business or results of operations of the
Companies, taken as a whole.

     

    12.1.27  “Order” means any
order, civil investigative demand, judgment, injunction, award, decree,
declaration, arbitration award or writ issued by any Governmental
Authority.

     

    12.1.28 “Ordinary Course” or
“Ordinary Course of
Business” means the conduct of the business of the Companies in
accordance with their normal day-to-day customs, practices and procedures as
conducted from time to time during the past four (4) years prior to the date of
this Agreement.

     

     

    
      
        
        

      

      
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    12.1.29 “Patent Rights” means
U.S. and non-U.S. patents, provisional patent applications, patent applications,
continuations, continuations-in-part, divisions, reissues, patent disclosures,
industrial designs, inventions (whether or not patentable or reduced to
practice) and improvements thereto.

     

    12.1.30 “Person” means any
individual, corporation, limited liability corporation, partnership, limited
liability partnership, joint venture, association, joint-stock company; trust,
unincorporated organization, Governmental Authority or other
entity.

     

    12.1.31  “Section 338 Taxes”
shall mean any Taxes that would not have been imposed but for the Section
338(h)(10) Elections or any elections under state, local or other Tax law that
are required to be made or deemed to have been made as a result of any Section
338(h)(10) Election.

     

    12.1.32 “Seller’s Closing Date
Statement” means the statement which contains a description, acquisition
cost and market value (as of the Closing Date) for each Asset owned by PMACIC,
PMA RE or HMR as of the Closing Date, except for (i) Investment Assets and (ii)
insurance and reinsurance liabilities that are properly reserved for in the
PMACIC Financial Statement or HMR Financial Statement, as
applicable.

     

    12.1.33 “Software” means
computer software programs and software systems, including all databases,
compilations, tool sets, compilers, higher level or “proprietary” languages,
related documentation and materials, whether in source code, object code or
human readable form.

     

    12.1.34 “Straddle Period”
means any taxable year or period beginning on or before and ending after the
Closing Date.

     

    12.1.35 “Sublease Agreement”
means the Sublease Agreement, dated  as of May 16, 2007, between PMACIC and
Cambridge Integrated Services Group, Inc. (“Cambridge”), as
subsequently amended by the Sublease Amendment Agreement, dated as of November
27, 2007, between PMACIC and Cambridge.

     

    12.1.36 “Subsidiary” shall
mean any corporation, partnership, joint venture, limited liability company, or
other entity in which any of the Companies (i) owns, directly or indirectly, 50%
or more of the outstanding voting securities or equity interests or (ii) is a
general partner.

     

    12.1.37 “Taxes” (or “Tax” where the
context requires) means (i) all federal, state, county, local, foreign and other
taxes (including, net income, gross income, profits, severance, license,
alternative or add-on minimum, value-added, premium, estimated, excise, sales,
use, occupancy, gross receipts, franchise, ad valorem, severance, capital
levy, production,
transfer, stamp, withholding, employment, unemployment compensation,
payroll-related, property and environmental taxes (including taxes under Code
Section 59A), or any other tax, custom, duty, governmental fee or other like
governmental charges and assessments of any kind whatsoever, together with any
interest or penalty, addition to tax or additional amount imposed by any
Governmental Authority; and (ii) any liability of any of the Companies or any
Subsidiary for the payment of amounts with respect to payments of a type
described in clause (i) as a result of being a member of an affiliated,
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    obligation
of any of the Companies or any Subsidiary under any Tax Sharing Arrangement or
Tax indemnity arrangement.

     

    12.1.38 “Tax Return” means all
returns, declarations, reports, forms, estimates, information returns and
similar statements required to be filed in respect of any Taxes (including any
attached schedules), including, any information return, claim for refund,
amended return or declaration of estimated Tax.

     

    12.1.39 “Tax Sharing
Arrangement” shall mean any written or unwritten agreement or arrangement
for the allocation or payment of Tax liabilities or payment for Tax benefits
with respect to a consolidated, combined or unitary Tax Return which Tax Return
includes or included any of the Companies or any Subsidiary.

     

    12.1.40 “Trade Secrets” means
confidential ideas, know-how, concepts, methods, processes, documentation,
policies, procedures, business methods, algorithms, formulae, reports, data,
customer lists, mailing lists, business plans or other proprietary information,
all of which derive value, monetary or otherwise, from being maintained in
confidence.

     

    12.1.41 “Trademarks” means
U.S., state and foreign trademarks, service marks, internet domain names, logos,
designs, slogans, product descriptions, trade dress, trade names, corporate
names, and other trade designations, whether the foregoing are registered or
unregistered, and all U.S. and foreign registrations and applications (whether
pending or abandoned) to register the foregoing.

     

    12.1.42 “Transaction
Agreements” means this Agreement, any document, instrument or certificate
delivered pursuant to this Agreement, the ASA, any collateral agreements
executed in connection with the consummation of the Contemplated Transactions
and any other agreement entered into pursuant to the terms hereof.

     

    12.1.43 “Treasury Regulations"
means the regulations promulgated under the Internal Revenue Code of 1986, as
amended (or corresponding future law), or corresponding future
regulations.

     

    12.1.44 “U.S.” means the
United States of America.

     

    ARTICLE
13

     

    DISPUTE
RESOLUTION

     

    13.1 Consent to Jurisdiction and Service
of Process.  Each party consents to the exclusive jurisdiction
of the United States District Court of the Eastern District of Pennsylvania, for
any legal action, suit or proceeding arising out of or in connection with this
Agreement or the Contemplated Transactions.  Each party further waives
any objection to the laying of venue for any such legal action, suit or
proceeding in such Court.  Each party agrees that any service of
process upon it that is mailed by registered or certified mail, return receipt
requested, to such party at the address provided in Sections 14.1.1 or 14.1.2,
as applicable, shall be deemed in every respect to be effective service of
process upon such party in any such legal action, suit or
proceeding.

     

     

    
      
        
        

      

      
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    13.2 Waiver of Jury
Trial.  Each party acknowledges and agrees that any controversy
arising out of or in connection with this Agreement or the Contemplated
Transactions is likely to involve complicated and difficult issues and
therefore, each party hereby irrevocably and unconditionally waives any right
such party may have to a trial by jury in respect of any legal action, suit or
proceeding arising out of or in connection with this Agreement or the
Contemplated Transactions.

     

    ARTICLE
14

     

    NOTICES

     

    14.1 Any
notice, request, claim, demand or other communication required or permitted
hereunder or under any other Transaction Agreement shall be in writing and shall
be delivered personally or by U.S. mail, express courier or delivery service,
telegraphed, telexed, sent by facsimile transmission or sent by certified,
registered or express mail, postage prepaid.  Any such notice shall be
deemed given when so delivered personally or by U.S. mail, express courier or
delivery service, telegraphed, telexed or sent by facsimile transmission, as
follows:

     

    14.1.1                      if
to the Seller, to:

     

    William
E. Hitselberger

    Executive
Vice President, Chief Financial Officer

    PMA
Capital Corporation

    380
Sentry Parkway

    Blue
Bell, PA 19422

     

    With a
copy in all cases to:

     

    Senior
Vice President and General Counsel

    PMA
Capital Corporation

    380
Sentry Parkway

    Blue
Bell, PA 19422

     

    14.1.2                      if
to the Buyer to:

    

    Armour
Reinsurance Group Limited

    12,
Bermudiana Road,

    Hamilton
HM 11

    Bermuda

    Attention:  Chief
Executive Officer

    

    With a
copy in all cases to:

     

    Sean
Keyvan

    Sidley
Austin LLP

    One South
Dearborn

    Chicago,
IL  60603

     

    

    
      
        
        

      

      
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    14.2 Any party
may by notice given in accordance with Section 14.1 to the other party designate
another address or Person for receipt of notices hereunder.

     

    ARTICLE
15

     

    MISCELLANEOUS

     

    15.1 Entire
Agreement.  Except as otherwise expressly provided in this
Agreement and the other Transaction Agreements (including the exhibits and
schedules hereto and thereto), this Agreement and the other Transaction
Agreements contain the entire agreement among the parties hereto with respect to
the purchase of the Shares and supersede all prior agreements, both written and
oral, with respect thereto; provided that the
Confidentiality Agreement shall not survive the execution and delivery hereof
and the Closing.

     

    15.2 Waivers and Amendments:
Non-Contractual Remedies; Preservation of Remedies.  This
Agreement and the other Transaction Agreements may be amended, superseded,
canceled, renewed or extended, and the terms hereof or thereof may be waived,
only by a written instrument signed by all parties to such agreement or, in the
case of a waiver, by the party waiving compliance.

     

    15.3 Governing Law.  This
Agreement and the other Transaction Agreements shall be governed and construed
in accordance with the laws of the Commonwealth of Pennsylvania applicable to
agreements made and to be performed entirely within such Commonwealth without
giving effect to the conflicts of law principles of such
Commonwealth.

     

    15.4 Binding Effect, No Third Party
Beneficiary.  This Agreement shall be binding upon and inure to
the benefit of the parties hereto and the Companies and their respective
successors and Permitted Assigns.  For purposes of this section,
“Permitted Assigns” shall mean parties specifically consented to by the party
not seeking assignment, except that the Buyer may assign any or all of its
rights (including the right to purchase any of the Shares) to any of its
Affiliates without the consent of the Seller; provided, however, that no such
assignment shall release the Buyer from any liability or obligation under this
Agreement.  Nothing expressed or implied in this Agreement is intended
or shall be construed to confer upon or give any Person other than the Seller,
the Buyer or the Companies any rights or remedies under or by reason of this
Agreement or any of the Contemplated Transactions.

     

    15.5 Counterparts.   This
Agreement and the other Transaction Agreements may be executed in one or more
counterparts, and by the different parties to each such agreement in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original, but all such counterparts shall together constitute one and the
same instrument.  Each counterpart may consist of a number of copies
thereof each signed by less than all, but together signed by all of the parties
thereto.  Delivery of an executed counterpart of a signature page to
this Agreement or any other Transaction Agreement by facsimile shall be as
effective as delivery of a manually executed counterpart of any such
agreement.

     

     

    
      
        
        

      

      
        54

        
          

        

      

      
        
        

      

    

     

    15.6 Rules of
Construction.  Interpretation of this Agreement shall be
governed by the following rules of construction:  (i) words in
the singular shall be held to include the plural and vice versa, and words of
one gender shall be held to include the other gender as the context requires;
(ii) references to the terms “Article,” “Section,” “Exhibit” and “Schedule” are references to
the Articles, Sections, Exhibits and Schedules to this Agreement unless
otherwise specified; (iii) references to “$” shall mean U.S. dollars;
(iv) the word “including” and words of
similar import when used in this Agreement shall mean “including without
limitation,” unless otherwise specified; (v) the word “or” shall not be exclusive;
(vi) provisions shall apply, when appropriate, to successive events and
transactions and (viii) the headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement; and (ix) this Agreement shall be construed
without regard to any presumption or rule requiring construction or
interpretation against the party drafting or causing any instrument to be
drafted.

     

    15.7 Interpretation.  The
parties hereto acknowledge and agree that each party and its counsel reviewed
and negotiated the terms and provisions of this Agreement and have contributed
to its revision.

     

    

     

    

     

    [REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]

     

    

    
      
        
        

      

      
        55

        
          

        

      

      
        
        

      

    

     

    WITNESS
WHEREOF, the parties hereto have duly executed and delivered this Stock Purchase
Agreement as of the date first above written.

     

    
      	 
      	
              PMA
      CAPITAL CORPORATION

            
	 
      	 
      
	 
      	 
      
	 
      	 
      
	 
      	
              BY: 
      /s/ William E. Hitselberger

            
	 
      	
              TITLE: 
      Executive Vice President and Chief Financial Officer

            
	 
      	 
      
	 
      	
              ARMOUR
      REINSURANCE GROUP LIMITED

            
	 
      	 
      
	 
      	 
      
	 
      	 
      
	 
      	
              BY: 
      /s/ John Williams

            
	 
      	
              TITLE: 
      President and Director

            

    

    

    

    56ex101.htm

    EXHIBIT 10.1

     

    

     

    EMPLOYMENT
AGREEMENT

     

    THIS EMPLOYMENT AGREEMENT
("Agreement") is made and entered into as of the 6th day of March, 2008,
between Brad Holt ("Executive") and NP Capital Corp., a Delaware corporation
(the "Company").

     

    WHEREAS, the Company desires
to employ Executive and Executive desires to be employed by the Company upon the
terms and conditions set forth herein.

     

    NOW, THEREFORE, in
consideration of the promises and mutual agreements hereafter set forth, and
upon the terms and conditions contained in this Agreement, Executive and the
Company hereby agree as follows:

     

    1. Certain
Definitions.

     

    "Business of the Company"
shall at any time mean any line of business then engaged in, or planned to be
engaged in by the Company or any of its affiliates and
subsidiaries.

     

    "Common Stock" shall mean the
common stock of the Company.

     

    "Competing Enterprise" shall
at any time mean any person, firm, corporation or other individual or entity
that is engaged, directly or indirectly, wholly or in part, in any line of
business then engaged in, or then planned to be engaged in, by the Company or
any of its affiliates and subsidiaries.

     

    "Corporate Transaction" shall
mean (A) any merger or consolidation of the Company with another entity, whether
or not the Company is the continuing or surviving entity, in which fifty-one
percent (51%) or more of the Company's voting capital stock is transferred to
holders different from persons or their affiliates who held the stock
immediately prior to such transaction or (B) any sale of all or substantially
all of the Company's assets to another entity or person of which fifty-one
percent (51%) or more of the capital stock is held by holders different from
persons or their affiliates who hold voting capital stock of the
Company.

     

    All other
capitalized terms used herein are defined in other provisions of this
Agreement.

     

    2. Duties.

     

    
      	
              2.1  

            	
              Capacity.

            

    

     

    (a) Executive
shall serve as Chief Executive Officer of the Company reporting to the Board of
Directors and shall perform such customary, appropriate and reasonable executive
duties as are usually performed by a Chief Executive Officer or as may be
delegated to him from time to time by the Board of Directors Executive shall
principally perform his duties hereunder at the executive offices of the Company
in Jacksonville, Florida on a part-time basis.  Executive shall serve
in the same employee position set forth in this Section 2.1 to the extent set
forth in this Section 2.1 of any successor entity or holding company resulting
from a reorganization of the Company other than a Corporate
Transaction.  Such obligation does not apply to Executive’s status as
a Director of the Company.

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

     

    3. Cash Compensation and
Benefits.

     

    
      	
              3.1  

            	
              Salary.

            

    

     

    Executive
shall be paid an annual base salary of One Hundred Twenty Thousand Dollars
($120,000.00) ("Base Compensation"), payable in accordance with the Company's
general payroll practices commencing January 1, 2008 (the "Effective Date. Such
base salary shall be subject to increase from time to time in the sole
discretion of the CEO and Board of Directors, or if established the Compensation
Committee thereof) based on Executive's performance and that of the Company.
However, the Executives annual base salary shall increase to Two Hundred Twenty
Thousand Dollars ($220,000) upon receipt by the Company of One Million Dollars
($1,000,000) from the sale of stock beginning December 1, 2007.

     

    
      	
              3.2  

            	
              Annual
      Bonus.

            

    

     

    Commencing
with the Company's 2008 fiscal year and for each fiscal year of the Company
thereafter during the Term, the Executive shall be eligible to receive, in
addition to his Base Compensation, an annual bonus, to be determined and awarded
in the sole discretion of the Board (or compensation committee thereof), payable
within sixty (60) days of the end of each such fiscal year (the "Annual Bonus").
The schedule as approved by the Board of Directors for 2008 is attached as
Exhibit B

     

    3.3           Benefits.

     

    In
addition to the Base Compensation and any Annual Bonus, Executive shall further
be entitled to participate in any employee benefits programs offered generally
from time to time to senior management employees of the Company to the extent
Executive qualifies for participation under such programs

     

    3.4 Business
Expenses.

     

    The
Company shall pay the reasonable and necessary business expenses incurred by
Executive in performing his duties hereunder in accordance with such policies
regarding employee expenses generally as the Company may have in effect from
time to time.

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    3.5           Vacation and
Holidays.

     

    Executive
shall be entitled to fully paid vacation time of eight (8) weeks per calendar
year.  In addition, Executive shall be entitled to all holidays
provided under the Company's regular holiday schedule.

     

    3.6           Severance
Compensation.

     

    (a) If
Executive's employment with the Company is terminated by the Company without
Cause at any time prior to January 1, 2013, Executive shall receive from the
Company severance pay in an amount equal to the greater of his then-current Base
Compensation in effect at the time of such termination through either December
31, 2012 or eighteen (18) months from the date of notice, whichever is greater,
in a lump sum payable no later than the termination date. and (ii) all unpaid
benefits such as accrued vacation, and (iii) all outstanding expenses, (iv) any
declared but unpaid Annual Bonus, and any and all unvested options or stock
shall become fully vested.  If Executive's employment with the Company
is terminated by the Company by virtue of the expiration of this Agreement on
December 31, 2012, Executive shall be entitled to continue to receive from the
Company severance pay in an amount equal to the greater of his then-current Base
Compensation in effect at the time of such termination through December 31, 2013
in accordance with the Company's general payroll practices; and (ii) any
declared but unpaid Annual Bonus. In the event of a Corporate Transaction, the
amount of severance pay will be equal to his then current Base Compensation for
twenty four (24) months plus any annual bonus due plus all PTO time in a lump
sum payable no later than the closing date of the Corporate Transaction.
Additionally, the Company will continue to pay the premiums for Executive’s
health benefits and life insurance for twenty four months.

     

    (b) During
any period in which Executive is receiving severance compensation pursuant to
subsection (a) of this Section 3.6, the Company shall use reasonable efforts to
obtain reasonably and to pay for comparable medical, life and disability
insurance and other benefits on the same terms and conditions and to the same
extent as theretofore provided by the Company to Executive prior to the
effective date of the termination of his employment.

     

    3.7           Compensation Upon a
Corporate Transaction.

     

    If
Executive is terminated without Cause (whether as an employee or as a
consultant) within a twelve (12) month period following the consummation of a
Corporate Transaction (i) Executive's right to receive any earned but unpaid
Annual Bonus shall immediately vest, but not less than a pro rata amount of the
immediately preceding year's Annual Bonus if no Annual Bonus shall have been
earned for the then current year, (ii) the Company or its successor in interest
shall use reasonable efforts to obtain reasonably comparable medical, life and
disability insurance and other benefits on the same terms and conditions and to
the same extent as immediately theretofore provided by the Company to Executive
prior to the consummation of the Corporate Transaction for a period of two (2)
years following such termination and (iii) all severance compensation provided
for in Section 3.6 will be due and payable at time of termination.

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    
 

    
      	
              3.8  

            	
              Coverage
      by D&O Insurance

            

    

    

    It is the
intent of the Company to purchase Directors and Officers Liability insurance
policy, and the Executive will be covered under this polity when it becomes
available and the Executive will be indemnified by NP Capital Corp for all
activities carried out as an employee and / or agent and/or consultant of NP
Capital Corp and / or its subsidiaries.

     

    
      	
              3.9  

            	
              Stock
      Options

            

    

     

    Executive
will be eligible for the NP Capital Corp Executive Team Stock Option and
Incentive plan as approved by the Board of Directors. The plan for 2008 is
attached hereto as Exhibit A of this Agreement..

     

    
      	
              a.  

            	
              Options
      are redeemable up to 90 days following the later of termination or the end
      of the severance period

            

    

     

    
      	
              b.  

            	
              Any
      unvested options automatically vest and are transferred into shares of NP
      Capital Corp. in the event that there is a change in control (sale or
      otherwise of more than 51% of the shares or assets of the Company) of NP
      Capital Corp and/or inventory assets, the technology assets or
      manufacturing lines or power transaction functions of NP Capital
      Corp

            

    

     

    4. Intentionally left
blank

     

    5. Restrictive Covenants and
Confidentiality.

     

    
      	
              5.1  

            	
              Non-Solicitation.

            

    

     

    The
Executive agrees that during the Term and for a period of one (1) year
thereafter and in any event during any period in which he is receiving severance
compensation pursuant to Section 3.6, he shall not solicit, entice, encourage or
induce any person, other than persons known prior to Executive’s employment, who
at any time within one (1) year prior to the Executive's termination of
employment shall have been an employee of the Company or any of its
subsidiaries, to become employed by or associated with any person, firm or
corporation other than the Company, and the Executive shall not approach any
such employee for such purpose or authorize or knowingly approve the taking of
such actions by any other person, firm or corporation or assist any such person,
firm or corporation in taking such action.

     

    
      	
              5.2  

            	
              Confidentiality.

            

    

     

    Executive
shall not, directly or indirectly, publish, disclose or use, or authorize anyone
else to publish, disclose or use, any secret or confidential matter, or
proprietary or other information not otherwise available in the public domain
relating to any aspect of the operations, activities, or obligations of the
Company, including, without limitation, any confidential material or information
relating to the Company's business, customers, suppliers, arrangements with
Practitioners, trade or industrial practices, trade secrets, technology,
know-how or intellectual property.  All records, files, data,
documents and the like relating to suppliers, customers, costs, prices, systems,
methods, personnel, equipment and other materials relating to the Company shall
be and remain the sole property of the Company.  Upon termination of
Executive's employment with the Company, Executive shall not remove from the
Company's premises or retain any of the materials described in this Section 5.3
without the prior written consent of the Company, and all such materials in
Executive's possession shall be delivered promptly to the Company.

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    
      	
              5.3  

            	
              Survival and Company
      Definition.

            

    

     

    This
Section 5 shall survive the termination of the Executive's employment with the
Company, irrespective of the reason therefore.  For purposes of this
Section 5, the term "Company" shall include all affiliates and
subsidiaries.

     

    
      	
              5.4  

            	
              Remedies.

            

    

     

    The
Executive acknowledges that the services to be rendered by the Executive are of
a special, unique and extraordinary character and, in connection with such
services, the Executive will have access to confidential information vital to
the Company's business.  By reason of this access, the Executive
consents and agrees that if the Executive violates any of the provisions of this
Section 5, the Company shall be entitled, without the need to show actual
damages, to an injunction and a temporary restraining order from any court of
competent jurisdiction restraining the Executive from committing or continuing
any such violation of this Agreement.  The Executive acknowledges that
damages at law would not be an adequate remedy for violation of this Section 5,
and the Executive therefore agrees that the provisions of this Agreement may be
specifically enforced against the Executive in any court of competent
jurisdiction.  The rights, powers and remedies of the Company under
this Agreement are cumulative and not exclusive of any other right, power or
remedy which the Company may have under any other agreement or by
law.

     

    6. Term and
Termination.

     

    
      	
              6.1  

            	
              Term.

            

    

     

    The term
of this Agreement shall be for five  (5) years.   With
respect to the Executive’s employment period (the “Employment Period”), the term
of this Agreement shall terminate—December 31, 2012.  After such
Employment Period, the Board of Directors in its sole discretion may extend the
term with Executive’s consent.  The initial term and any term
established after January 1, 2008, is each referred to as a "Term," and, for
purposes of Section 3.6, severance payments through the end of the Term means
through the end of the applicable Term in which Executive is
terminated.

     

    
      	
              6.2  

            	
              Death.

            

    

     

    This
Agreement shall terminate automatically upon Executive's death and upon complete
payment to Executives estate; all accrued and unpaid Base Compensation including
amounts due as earned but unpaid Annual Bonus and any unpaid travel expenses and
PTO due to the beneficiary. The Company agrees to pay all premiums for a health
insurance policy for executive’s family or designated beneficiary(ies) from Blue
Cross/ Blue Shield through December 31, 2012. The Company will also pay one year
of salary to the designated beneficiary as stated by Executive in Exhibit C
attached hereto. Said payment to be made in twelve equal monthly installments
beginning on the first day of the month following the death All unvested options
or shares of stock will fully vest and transfer to the designated
beneficiary.

     

    
      	
              6.3  

            	
              Disability.

            

    

     

    In the
event that Executive, because of accident, disability or physical or mental
illness, is incapable of performing his usual duties hereunder, the Company
shall have the right to terminate Executive’s employment. For purposes of this
Section 6.3, Executive shall be deemed to have become incapable of performing
his usual duties hereunder if the Board shall determine that Executive is, by
reason of any medically-determinable physical or mental impairment expected to
result in death or to be of continuous duration of not less than six (6)
consecutive months or more, unable to perform his usual duties for the
Company.  If Executive's employment hereunder is terminated pursuant
to this Section 6.3, the Company shall pay to Executive, two years of his then
current Base Compensation as his sole and exclusive right and remedy under this
Agreement (i) all accrued and unpaid Base Compensation through the date of
termination pursuant to this Section 6.3, (ii) any earned but unpaid Annual
Bonus and (iii) continuation of Company benefits for thirty six (36) months to
Executive’s family at no cost to Executive or his family.

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    
      	
              6.4  

            	
              Cause and Voluntary
      Termination.

            

    

     

    The
Company shall have the right to terminate this Agreement and Executive's
employment hereunder for Cause. Cause" shall mean any of the following
occurrences: (1) Executive's conviction of (A) a felony or (B) another serious
crime involving material harm to the standing or reputation of the Company; (2)
Executive's gross negligence or willful misconduct in the performance of his
duties for the Company which causes or may cause material harm to the Company;
(3) conduct by the Executive which brings the Company into public disgrace or
disrepute, including, without limitation, dishonesty and fraud; or (4) a
material breach by Executive of any of the terms or conditions of this Agreement
or any other agreement between the Company and the Executive, which, if curable,
is not cured to the Company's reasonable satisfaction within thirty (30) days of
written notice thereof The Executive shall have the right to voluntarily
terminate this Agreement at any time upon fifteen (15) days prior written
notice.  If Executive voluntarily terminates his employment hereunder
or the Company terminates Executive's employment for Cause, the Executive's sole
and exclusive right and remedy hereunder shall be the right to receive his Base
Compensation through the date of such termination only and the Company shall
have no responsibility for the payment of any other compensation or benefits to
the Employee for any time period subsequent to such termination, including,
without limitation, any Annual Bonus or other employee
benefits.  Nothing herein shall affect the Company's obligation to
provide benefits as required by COBRA or any other applicable federal or state
law.

     

    
      	
              6.5  

            	
              Termination Without
      Cause.

            

    

     

    The
Company may terminate Executive's employment with the Company pursuant to this
Agreement without cause by giving written notice to Executive at least sixty
(60) days prior to the effective date of such termination, subject to the
provisions of Section 3.6.

     

    7.  Non-competition and
Non-solicitation Agreement.

     

    
      	
              7.1  

            	
              The
      Executive acknowledges and agrees that information, including the
      Confidential Information, he acquires at the time of signing this
      Employment Agreement and continues to acquire during the course of his
      employment will enable the Executive to irreparably injure the Company if
      the Executive should engage in unfair competition.  The
      Executive also acknowledges that his position is one which requires public
      involvement with the Company, thus the position requires loyalty to
      preserve a positive public image of the Company and to prevent injury to
      the Company by soliciting employees or customers for the direct benefit of
      a competitor.  Moreover, the Executive acknowledges that the
      services he provides are of a special, peculiar and extraordinary
      character that gives such services a unique value, the loss of which
      cannot be reasonably or adequately compensated for in damages by way of a
      lawsuit.

            

    

     

    Therefore,
in consideration of the compensation, benefits and continued employment provided
to the Executive and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Executive hereby agrees as
follows:

     

    
      	
              a)  

            	
              Non-Competition.  During
      the Term of this Employment Agreement and for a period of one (1) year
      following the termination of this Employment Agreement or of the
      Executive’s employment with the Company for any reason, the Executive
      shall not, directly or indirectly, be employed by any other entity engaged
      in any business relating to the specific businesses the Company is engaged
      in; solar panel sales, franchising solar businesses, in the State or
      State(s) in which the Company has made sales of panels to customers,
      transacted a franchise business in the solar energy industry or solar park
      projects, during the last twelve months of his employment with the
      Company.

            

    

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

     

    
      	
              b)  

            	
              Reasonableness of
      Restrictions.  The
      Executive has carefully read and considered the provisions contained in
      this Section 7, and having done so, agrees that the restrictions set forth
      herein, including, but not limited to, the time period of restriction, the
      geographic areas of restriction, and the scope of the restriction are fair
      and reasonable, are supported by sufficient and valid consideration, and
      these restrictions do not impose any greater restraint than is necessary
      to protect the goodwill and other legitimate business interests of the
      Company and its affiliated entities, officers, directors, shareholders and
      other employees.  The Executive acknowledges that these
      restrictions will not prevent him from obtaining gainful employment in the
      Executive’s occupation or field of expertise or cause him undue hardship;
      that there are numerous other employment and business opportunities
      available to him that are not affected by these restrictions; and that the
      Executive’s ability to earn a livelihood without violating such
      restrictions is a material condition to employment with the
      Company.

            

    

     

    8. Miscellaneous.

     

    
      	
              8.1  

            	
              Successors and
      Assigns.

            

    

     

    This
Agreement shall be binding on and inure to the benefit of the parties hereto and
their heirs, executors, legal representatives, successors and
assigns.  Neither party shall have the right to assign its
obligations, or all or any portion of their rights or interests under this
Agreement without the prior written consent of the other party hereto, and any
attempt to do so will be null and void; provided, that the Company shall have
the right to assign this Agreement in connection with any Corporate
Transaction.

     

    
      	
              8.2  

            	
              Notices.

            

    

     

    Any
notice, request, demand or other communication required or permitted by this
Agreement shall be in writing and shall be deemed to have been properly given
upon the earlier of receipt or five (5) days after being sent by certified or
registered mail with postage prepaid, return receipt requested, addressed to the
parties as follows:

     

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

     

    If to
Executive:                                                      Brad
Holt

    ___________________________

    ____________________________

    If to
Company:                                                      NP
Capital Corp.

    818 A1A, Suite 207

    Ponte
Vedra Beach, FL 32082

    Attention:  Board
of Directors

    

    

    Only
giving written notice of such change in the manner provided herein for giving
notices may change the addresses for purposes of this Section 7.2.

     

    
      	
              8.3  

            	
              Withholding.

            

    

     

    Executive
hereby agrees to make appropriate arrangements with the Company for the
satisfaction of all Federal, State or local income tax withholding requirements
and Federal social security employee tax requirements applicable to this
Agreement.

     

    
      	
              8.4  

            	
              Governing Law, Venue
      and Attorney Fees.

            

    

     

    This
Agreement is made and entered into and is to be governed by the laws of the
State of Florida applicable to agreements made  within such State,
without regard to the conflicts of law principles of such State.  The
Venue for all purposes in connection with this Agreement shall be the County of
St. John, State of Florida.  In the event any party hereto reasonably
retains counsel for the purpose of enforcing or preventing the breach of this
Agreement or any provision hereof, including, but not limited to, instituting
any action or proceeding to enforce any provision hereof, for damages by reason
of any alleged breach of any provision hereof, for a declaration of such party’s
rights or obligations hereunder, for an action seeking injunctive relief to
enforce any provision herein, or for any other judicial remedy, then the
prevailing party shall be entitled, in addition to such other relief as may be
granted, to be reimbursed by the non-prevailing party for all costs and expenses
incurred thereby, including reasonable attorney’s fees.

     

    
      	
              8.5  

            	
              Waiver.

            

    

     

    The
failure of either party at any time to require performance by the other party of
any provision hereof shall not affect in any way the full right to require such
performance at any time thereafter, nor shall a waiver by either party of a
breach of any provision hereof be taken or held to be a continuing waiver of
such provision, or waiver of any other breach under any other provision of this
Agreement.

     

    
      	
              8.6  

            	
              Captions.

            

    

     

    The
captions of the sections referenced herein are inserted as a matter of
convenience only and in no way define, limit, or describe the scope of this
Agreement or any provisions hereof.

     

    
      	
              8.7  

            	
              Entire
      Agreement.

            

    

     

    This
Agreement and any Exhibits hereto set forth the entire agreement and
understanding between the parties hereto with respect to the subject matter
hereof and supersede all prior contracts, agreements, arrangements,
communications, discussions, representations and warranties, whether oral or
written, between the parties with respect to such subject
matter.  This Agreement may be amended only by a written instrument
signed by both parties hereto making specific reference to this Agreement and
expressing the plan or intention to modify it.

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

     

    
      	
              8.8  

            	
              Severability.

            

    

     

    If any
provision of this Agreement shall be adjudicated to be invalid, ineffective or
unenforceable, the remaining provisions of this Agreement shall not be affected
thereby.  The invalid, ineffective and unenforceable provision shall,
without further action by the parties, be automatically amended to effect the
original purpose and intent of the invalid, ineffective or unenforceable
provision; provided, that such amendment shall apply only with respect to the
operation of such provision in the particular jurisdiction with respect to which
such adjudication is made.

     

    
      	
              8.9  

            	
              Counterparts.

            

    

     

    This
Agreement may be executed in any number of counterparts, each of which shall be
deemed to be an original, and all of which together will constitute one and the
same Agreement.

     

    
      	
              8.10  

            	
              No
      Conflict.

            

    

     

    Executive
covenants and represents that he is not a party to any agreement or
understanding which impairs or prohibits his ability to enter into and perform
services under this Agreement.

     

    

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    

     

    IN WITNESS WHEREOF, the
parties hereto have executed this Agreement as of the date first above
written.

     

     

    
      
        	 	NP Capital
    Corp.	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ David
      Fann	 
	 	 	David
      Fann	 
	 	 	Director	 
	 	 	 	 

      

    

    
      	 	 	 
	 	 	 	 
	
               

            	
              By:
      

            	/s/ Michael
      Dodak	 
	 	 	Michael
      Dodak	 
	 	 	Director	 
	 	 	 	 

    

     

     

    

    
      
        	 	 	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Brad
      Holt	 
	 	 	Brad
      Holt	 
	 	 	 	 
	 	 	 	 

      

    

    

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    EXHIBIT
A

    Stock
Options

    

    Stock
options may be granted to the Executive by the Board of Directors or the
Compensation Committee of the Board from time to time. The Board of Directors
has granted the Executive 500,000 options convertible into 500,000 common shares
of NP Capital with an exercise price of $.50. These are stock incentive options
that will vest if the Company books contracts for a total value of $12 million
with at least a gross margin of 10% during fiscal year 2008.

    

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

    

    EXHIBIT
B

    Annual
Bonus

    

    An Annual
Bonus may be granted to the Executive by the Board of Directors or the
Compensation Committee of the Board from time to time. The Board of Directors
has granted the Executive a performance based Annual Bonus for 2008 of
$22,000.00. The Annual Bonus will be deemed earned when the Company books $12
million in revenue with at least a gross margin of 10%.

     

    
 

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

    

    EXHIBIT
C

    Beneficiary
of Death Benefits

    

    

    I elect
as my beneficiary_______________, my wife to receive any and all payments due
from NP Capital as a result of my death. In the event that the above named
Beneficiary does not survive the Executives death, then ______________________
is my beneficiary.

    

     

     

     

     

     

     

     

    13

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00140-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00140-of-00352.parquet"}]]