PENN AMERICA GROUP INC
EXHIBIT 10.1
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>8
<FILENAME>exhibit10-1.txt
<DESCRIPTION>EXHIBIT 10.1
<TEXT>
                                                                   No. 3154-0018

Exhibit 10.1











                            CERTIFIED TERRORISM LOSS
                              AGGREGATE QUOTA SHARE
                              REINSURANCE AGREEMENT

                                     between

                         PENN AMERICA INSURANCE COMPANY
                           PENN-STAR INSURANCE COMPANY

                                       and

                          American Re-Insurance COMPANY



<PAGE>


<TABLE>
<CAPTION>

                                      TABLE OF CONTENTS
                                      -----------------

               ARTICLE                                                                 PAGE
               -------                                                                 ----

<S>                                                                                     <C>
                  I                 AFFILIATED COMPANIES                                1

                  II                BUSINESS REINSURED                                  1

                  III               TERRITORY                                           2

                  IV                COMPLIANCE WARRANTY                                 2

                  V                 EXCLUSIONS                                          3

                  VI                REINSURANCE LIMITS                                 15

                  VII               AGGREGATE ULTIMATE NET LOSS                        15

                  VIII              EXTRA CONTRACTUAL
                                    OBLIGATIONS                                        16

                  IX                EXCESS JUDGMENTS                                   17

                  X                 DEFINITIONS                                        18

                  XI                FEDERAL TERRORISM EXCESS
                                    RECOVERY                                           19

                  XII               PREMIUM                                            19

                  XIII              REPORTS AND REMITTANCES                            20

                  XIV               ERRORS AND OMISSIONS                               21

                  XV                ACCESS TO RECORDS                                  21

                  XVI               RESERVES AND TAXES                                 21

                  XVII              OFFSET                                             21

                  XVIII             INSOLVENCY                                         22

                  XIX               COMMENCEMENT AND
                                    TERMINATION                                        22


<PAGE>

</TABLE>
                                                                   No. 3154-0018


                              FEDERAL TERRORISM ACT
                              AGGREGATE QUOTA SHARE
                              REINSURANCE AGREEMENT
                              ---------------------
                       (herein referred to as "Agreement")

This  Agreement  made and entered  into by and between  PENN  AMERICA  INSURANCE
COMPANY  and  PENN-STAR  INSURANCE  COMPANY,   both  of  Hatboro,   Pennsylvania
(hereinafter  collectively  referred to as "Company") and AMERICAN  RE-INSURANCE
COMPANY, a Delaware  corporation with administrative  offices in Princeton,  New
Jersey (hereinafter referred to as "Reinsurer").

WITNESSETH:

The  Reinsurer  hereby  reinsures the Company to the extent and on the terms and
conditions and subject to the exceptions, exclusions and limitations hereinafter
set forth and nothing  hereinafter shall in any manner create any obligations or
establish any rights against the Reinsurer in favor of any third party or entity
not a party to this Agreement.

                                    ARTICLE I
                                   -----------

AFFILIATED COMPANIES
--------------------

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

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

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

BUSINESS REINSURED
------------------

The  Company  shall  cede and the  Reinsurer  shall  accept an 80%  Quota  Share
participation in the Company's  Aggregate Ultimate Net Loss arising from Insured
Losses under the Terrorism Risk Insurance Act of 2002 (the Act) occurring during
the term of this  Agreement,  up to but not  exceeding the  Reinsurer's  maximum
limit of liability as provided herein. The reinsurance  provided hereunder shall
apply only to Insured Losses arising under all written policies,  contracts, and
binders of insurance  (hereinafter  collectively  referred to as "Policies"  and
individually  referred to as "Policy")  under all lines of business


                                       -1-
<PAGE>

to which the Act is applicable,  which are  underwritten by the Company that are
new or renewed during the term of this Agreement.

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

TERRITORY
---------

This  Agreement  shall  be  limited  to  Insured  Loss  within  the  territorial
boundaries covered under the Policies reinsured  hereunder as further delineated
or limited by the Act.

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

COMPLIANCE WARRANTY
-------------------

A.   The  Company  warrants  that it will  seek to  obtain  coverage  under  the
     Terrorism  Risk  Insurance  Act and will comply with all  provisions of the
     Terrorism Risk Insurance Act necessary to obtain coverage thereunder,  with
     respect  to all  property  and  casualty  insurance  as defined in the Act,
     written by the Company,  including but not limited to the prescribed notice
     and offer of coverage and the disclosures of premium to the policyholder as
     required under the Act.

B.   The Company further warrants that:

     1.   for any policy where the insurer receives a written statement from the
          insured that affirmatively authorizes an exclusion; or
     2.   where the  insured  fails to pay the  premium  charged  for  providing
          terrorism  coverage,  an exclusion for such terrorism coverage will be
          attached to the Company's policy as permitted under law.

C.   The Company  shall charge no less than 5% of all other Total Gross  Premium
     for Certified Terrorism coverage on each policy covered hereunder unless:

     1.   The original  insured  declines such terrorism  coverage in accordance
          with  the  Act and  such  declination  is not  prohibited  by law.
     2.   Otherwise prohibited from doing so by law.

D.   The Company warrants that all reinsurance in place at the inception of each
     Agreement Year hereunder shall remain  unchanged during such Agreement Year
     or so deemed.

E.   The  Company  and the  Reinsurer  have  mutually  agreed  to the  Company's
     underwriting  guidelines  for  Terrorism  as  respects  certified  acts  of
     terrorism.  The Company  warrants that these guidelines shall be applied to
     all business  reinsured  hereunder and shall remain unchanged unless agreed
     to in writing by American  Re-Insurance  prior to the implementation of any
     such  changes.  The terms  and  conditions  of this  Agreement  shall  take
     precedence over any other  agreement  between the Company and the Reinsurer
     regarding such guidelines.

Revised:  June 26, 2003


                                      -2-
<PAGE>

                                    ARTICLE V
                                   -----------

EXCLUSIONS
----------

A. This Agreement does not apply to and specifically excludes:

     1.   Any loss,  cost or  expense  arising  under a  subscription  placement
          coverage.

          "Subscription  placement" as used herein shall mean insurance coverage
          provided by the Company  where two or more insurers  provide  coverage
          under  layered  policies for any one insured where the total amount of
          insurance for such insured from all sources is $25,000,000 or more.

     2.   Property   risks  having  a  total   insurable   value   greater  than
          $50,000,000.

     3.   The Company's liability and any related expenses, beyond circumscribed
          policy provisions,  including but not limited to, punitive, exemplary,
          consequential  or  compensatory  damages  resulting from a claim of an
          insured or an  insured's  assignee  against  the company its agents or
          employees, except as provided by the Extra Contractual Obligations and
          Excess Judgments Articles.

     4.   Business   derived  from  any  Pool,   Association   (including  Joint
          Underwriting Associations),  Syndicate,  Exchange, Plan, Fund or other
          facility  directly  as  a  member,   subscriber  or  participant,   or
          indirectly by way of reinsurance or assessments.  This exclusion shall
          not  apply  to  automobile  assigned  risks or  workers'  compensation
          assigned  risks  which  may  be  currently  or  subsequently   covered
          hereunder,  except  such  assigned  risks  arising  from  property  or
          umbrella coverages.

     5.   Liability of the Company arising from its participation or membership,
          whether  voluntary or involuntary,  in any insolvency fund,  including
          any guarantee  fund,  association,  pool, plan or other facility which
          provides  for the  assessment  of,  payment by, or  assumption  by the
          Company  of a part or the whole of any  claim,  debt,  charge,  fee or
          other obligations of an insurer,  or its successors or assigns,  which
          has been declared insolvent by any authority having jurisdiction.

     6.   Except as respects Workers' Compensation business hereunder, liability
          excluded by the provisions of the following  Nuclear clauses  attached
          hereto. The word "Reassured" used therein means "Company."

                  USA:
                    - Liability - Reinsurance No. 1B
                    - Physical Damage - Reinsurance No. 2



                                      -3-
<PAGE>

                    - Physical Damage and Liability
                      (Boiler and Machinery) - Reinsurance    No. 3.

                  Canada:
                    - Liability - Reinsurance Canada Pre 1985
                    - Physical Damage
                    - Reinsurance Canada Pre 1985
                    - Liability - Reinsurance
                      Canada Post 1985
                    - Physical Damage - Reinsurance Canada Post 1985
                    - Physical Damage and Liability Canada -Reinsurance (Boiler
                      and Machinery)

          As  respects  Workers  Compensation  business  hereunder,   operations
          employing  the  process of nuclear  fission or fusion or  handling  of
          radioactive material, which operations include but are not limited to:

          1.   the use of  nuclear  reactors  such  as  atomic  piles,  particle
               accelerators or generators, or
          2.   the use, handling or transportation of radioactive materials, or
          3.   the use,  handling  or  transportation  of any  weapon  of war or
               explosive device employing nuclear fission or fusion

     The preceding exclusions a., b., and c. do not apply to:

          a.   the exclusive use of particle accelerators incidental to ordinary
               industrial or educational research pursuits, or
          b.   the exclusive use,  handling or  transportation of radio isotopes
               for medical or industrial use;
          c.   radium or radium compounds.

     7.   Coverage  provided  by  the  Company  to  insurance,   or  reinsurance
          companies,   captives,   brokers  or  risk   retention   groups  (each
          hereinafter  referred to as "insured" for purposes of this  exclusion)
          which  provide  insurance  against  liability  of the  insured for any
          damages  resulting  from  alleged  or actual  tortious  conduct by the
          insured in the handling of claims brought against any policyholders of
          the insured or in the handling of any other  business  matters with or
          on behalf of any policyholders.

     8.   The following coverages:

               a. Financial Guarantees;
               b. Credit and Fidelity Coverage;
               c. Surety Bonds;
               d. Warranty Coverage;
               e. Political Risk Coverage;
               f. Currency Exchange Coverage;
               g. Forgery Coverage; or
               h. Kidnap, Extortion or Ransom Coverage.



                                      -4-
<PAGE>

     9.   Aggregate Excess of Loss or Stop Loss Coverages.

     10.  Retroactive  Coverage,  except in connection  with unknown  incidents,
          covered under a claims made coverage.

     11.  Coverage  provided  on a  co-indemnity  basis  with  another  insurer,
          reinsurer or other entity  including  an insured  under the  Company's
          policy;  however,  this  exclusion  does  not  apply  to the  standard
          co-insurance  provisions  of  a  policy  and  facultative  reinsurance
          inuring to the benefit of this Agreement.

     12.  Coverage  underwritten  or  accepted  by any third  party  except  the
          binding  authority  granted  by the  Company  to its  duly  authorized
          agents.

     13.  Coverage written specifically to insure or reinsure punitive damages.

     14.  Entertainment  business,  including  but not  limited  to,  Commercial
          Negative Film Coverage, Cast Coverage and Completion Bond Coverage.

     15.  The Company's liability and any related expenses, beyond circumscribed
          policy provisions,  including but not limited to, punitive, exemplary,
          consequential  or compensatory  damages,  resulting from a claim of an
          insured or an  insured's  assignee  against  the Company its agents or
          employees, except as provided for in the Extra Contractual Obligations
          and Excess Judgments Articles.

     16.  All reinsurance assumed by the Company,  except intra-Company  pooling
          arrangements.

     17.  All loss, cost or expense  arising out of,  resulting as a consequence
          of or  related  to War.  "War",  as  utilized  herein,  shall mean war
          whether  or  not  declared,  civil  war,  martial  law,  insurrection,
          revolution,  invasion,  bombardment  or  any  use of  military  force,
          usurped power or confiscation,  nationalization  or damage of property
          by any government, military or other authority.

          To the extent  there is no  Insurance  Service  Office,  Inc.  current
          standard  coverage  form for a type of coverage  reinsured  under this
          agreement,  "War" as  utilized  herein  shall mean war  whether or not
          declared, civil war, martial law, insurrection,  revolution, invasion,
          bombardment   or  any  use  of  military   force,   usurped  power  or
          confiscation, nationalization or damage of property by any government,
          military or other authority.

     18.  All loss,  cost or expense  directly  or  indirectly  arising  out of,
          resulting as a consequence  of or related to Pollution  whether or not
          there is another cause of loss which may have contributed concurrently
          or in any sequence to a loss.



                                      -5-
<PAGE>

          "Pollution"  means any solid,  liquid,  gaseous or thermal irritant or
          contaminant,  including smoke,  vapor,  soot, fumes,  acids,  alkalis,
          chemicals  and  waste.   Waste  includes  materials  to  be  recycled,
          reconditioned or reclaimed.

          This  exclusion  shall not apply to the extent  that such  liabilities
          would be covered under the current standard  unendorsed coverage forms
          issued by Insurance  Services  Office,  Inc. for each type of coverage
          reinsured under this Agreement.

     19.  Space or space-related  risks such as, but not limited to, satellites,
          spacecraft,  launch  sites and  launch  vehicles  including  cargo and
          freight carried therein, in all phases of operation.

     20.  a. Any coverage written  specifically to apply to Internet  exposures;
             or

          b.   Any  loss,  cost or  expense  arising  out of or  related  to the
               Internet,  except if covered  under any  coverage  not written or
               endorsed   specifically   to   apply   to   Internet   exposures.
               Notwithstanding the above referenced  exception,  the reinsurance
               provided  under this  agreement  shall not apply to the following
               persons, entities or exposures, except for in force policies with
               effective dates prior to 9/1/01 and covered under this Agreement:

          (1)  Internet  Service   Providers,   meaning  any  person  or  entity
               providing  access to the  Internet,  content over the Internet or
               connection to the Internet; or

          (2)  Application Service Providers,  meaning any person or entity that
               provides  software and associated  services to a subscriber  base
               across an area network; or

          (3)  Internet  Backbone  Providers,  meaning any person or entity that
               routes or provides  channels for packets that transport data from
               point to point on the Internet; or

          (4)  Any person or entity that derives ninety percent or more of gross
               revenue  or  conducts  or  executes  ninety  percent  or  more of
               business transactions on or through the Internet; or
               (5) Any person or entity that provides  electronic mail services;
               or

          (6)  Any person or entity that  develops,  supplies,  and/or  installs
               encryption software for use on the Internet.

               "Internet"  as  utilized  in  this  exclusion   shall  mean,  the
               international  computer network of interoperable  packet switched
               data  networks,  also  known as the  worldwide  web or  worldwide
               network of computers.



                                      -6-
<PAGE>

     21.  All Workers'  Compensation  business,  except for Employers' Liability
          Stop Gap coverage.

     22.  All automobile Liability business when written as such.

B.   The reinsurance provided under this Agreement for Liability business, other
     than Workers  Compensation,  and Automobile  Liability business,  shall not
     apply to the following:

     1.   Professional Liability or Errors and Omissions Coverage other than for
          the following:

          a. "Beau-T-Pak";
          b. Barbers;
          c. Opticians;
          d. Veterinarians that treat household pets;
          e. Morticians;
          f. Clergy;
          g. Employee Benefits Liability (E&O Coverage);
          h. Druggists;
          i. "Day Care Pak";
          j. "Adult Day Care;
          k. "Health Club Pak";
          l. "Instructor Pak";
          m. In-Home Day Care;
          n. "Pet Pak"; or
          o. "Wellness Pak".

     2.   Directors' and Officers' Liability  Coverage,  except for Condominiums
          and Homeowners Associations.

     3.   The following coverages:

          a. Product recall;
          b. Product tampering;
          c. Product integrity impairment; or
          d. Product guarantee.

     4.   Coverage provided under or for liability arising from any federal law,
          including  but not limited to;  USL&H,  Jones Act,  Defense  Base Act,
          Federal  Employers'  Liability Act, Outer Continental Shelf Lands Act,
          the   Federal   Coal  Mine   Health  and  Safety  Act  of  1969,   the
          Non-appropriated  Fund  Instrumentality's  Act, any other  federal law
          awarding  damages for  violation of those laws or  regulations  issued
          there under and any  amendments to any of the  aforementioned  laws or
          regulations.

     5.   Securities Act Liability Coverage (S.E.C. Liability).

     6.   International Massage Program.



                                      -7-
<PAGE>

     7.   Personal Umbrella Liability Coverage.

     8.   Environmental Impairment Liability Coverage.

     9.   Products Liability Coverage written without an annual aggregate limit.

     10.  Employer's  liability  and/or  common law  liability of  employer's to
          their employees when coverage is provided under Worker's  Compensation
          Coverage.

     11.  Protection and Indemnity Liability Coverage.

     12.  Primary  coverage  written  on  a  deductible  basis  or  excess  of a
          self-insured  retention when such  deductible or retained  amounts are
          greater than $50,000.

     13.  Uninsured or Underinsured Motorists Coverage.

     14.  Advertising or Personal  Injury  Liability  Coverage for any person or
          entity whose  business is  advertising,  broadcasting,  publishing  or
          telecasting.

     15.  Aircraft and airports as respects  coverage for all liability  arising
          out of the ownership,  maintenance or use of aircraft and/or flight or
          ground operations.

     16.  Blanket or all-risk type coverage,  commonly  known as  Organizational
          Liability,  Organization Liability,  Operational Liability, Integrated
          Risk,  Enterprise Risk or under similar names, written in, or endorsed
          to, a policy  covering  all  types of  losses  incurred  by, or claims
          against, an entity;  provided,  however, that this exclusion shall not
          include  any   named-peril   grant  of  coverage  which   contemplates
          specifically enumerated types of claims or losses.

     17.  Liability,  including  any related  expenses  directly  or  indirectly
          arising  out  of,  resulting  as  a  consequence  of,  or  related  to
          employment-related practices,  including, but not limited to liability
          related to harassment, wrongful termination or discrimination, whether
          under coverage written as such or otherwise.

     18.  Liability including any related expenses,  arising out of the Employee
          Retirement Income Security Act of 1974 and amendments thereto.

     19.  Liability  including  any related  expenses,  directly  or  indirectly
          arising out of,  resulting  as a  consequence  of or related to Sexual
          Misconduct,  whether or not there is  another  cause of loss which may
          have  contributed  concurrently  or in any  sequence to a loss for the
          Company's  Day Care  Pak,  In Home  Day  Care


                                      -8-
<PAGE>

          Pak or Adult Day Care  policies,  except  for in force  policies  with
          effective  dates  prior to 9/1/01,  and for Day Care Pak,  In Home Day
          Care Pak or Adult Day Care  policies of the Company  where the insured
          purchases the Company's buy-back coverage.

          "Sexual   Misconduct"  as  utilized   herein  shall  include,   sexual
          molestation,  sexual harassment, sexual abuse, any verbal or nonverbal
          communication,  behavior,  or conduct with sexual  connotations or the
          infliction of physical,  emotional or psychological injury whether for
          purpose  of  sexual   gratification,   discrimination,   intimidation,
          coercion or other sexual purpose, regardless of whether such action or
          resulting injury is alleged to be intentionally or negligently caused.

     20.  All loss,  cost or expense  directly  or  indirectly,  arising out of,
          resulting  as  a  consequence  of,  or  related  to  the  manufacture,
          distribution,  testing, remediation, removal, storage, disposal, sale,
          use of or exposure to the  following,  whether or not there is another
          cause  of loss  which  may  have  contributed  concurrently  or in any
          sequence to a loss:

          a.   Asbestos or materials or products containing asbestos;
          b.   2.4,5 Trichloroacetic acid ("2,4,5-1") or 2.3,7,8 - TCDD;
          c.   Diethylstilbestrol ("DES") in any dosage or form Any intrauterine
               device ("IUD");
          d.   Any product containing silicone, which is in any form injected or
               implanted into the body;
          e.   Phen-fen;
          f.   Dioxin;
          g.   Polychlorinated biphenyls;
          h.   Lead or materials or products containing lead;
          i.   Latex gloves;
          j.   Polybutylene piping (acrylonitrile-butadine-styrene); or
          k.   Bio-engineered  products,  including  any  food  products  or
               therapeutic  or  diagnostic  pharmaceutical products which are
               developed using some form of bioengineering.

     21.  All loss,  cost or expense  directly  arising out of,  resulting  as a
          consequence of, or related to Electromagnetic Radiation related to the
          manufacture or generation of:

          a. Electric power and/or power lines;
          b. Cellular phones;
          c. Radio and TV broadcasting and/or towers except for insured's
             with total sales less than $500,000;
          d. Computers;
          e. Electric blankets;
          f. Military radar or weapons;
          g. Police or weather radar;
          h. Satellite stations;
          i. Magnetic resonance imaging equipment;


                                      -9-
<PAGE>


          j.   X-ray  equipment,  except sales that are 10% or less of insured's
               total sales; or

          k.   Microwave ovens;

          "Electromagnetic  Radiation" as used herein,  shall  include  magnetic
          energy  waves,  fields or  forces  generated,  produced,  distributed,
          transmitted or maintained by charges, currents, frequencies, forces of
          energy or electricity."

         22. Products Liability or Completed Operations Liability related to:

          a.   Drugs,  except for  liability  arising  from the  retail  sale or
               wholesale  distribution of drugs by insureds not engaged in their
               manufacture ;
          b.   Chemicals,  except for liability  arising from the retail sale or
               wholesale  distribution  of  household  chemicals by insureds not
               engaged in their manufacture;
          c.   Insecticides and pesticides, except sales that are 20% or less of
               insured's total sales;
          d.   Aircraft or aircraft parts;
          e.   Animal feed, other than custom-blended grains without chemical or
               pharmacological  additives,  except sales that are 20% or less of
               insured's total sales;
          f.   Cosmetics  manufacturing,  except for the manufacture of soaps or
               shampoos where the insured's  receipts are less than 10% of total
               sales or skin and hair care products prepared at beauty salons or
               similar establishments,
          g.   Tobacco and tobacco products,  but this exclusion shall not apply
               to   liability   arising   from  the  retail  sale  or  wholesale
               distribution of tobacco products by insureds not engaged in their
               manufacture;
          h.   Automobiles,  trucks,  motorcycles  and  all-terrain  vehicles or
               component  parts critical to the operation of the foregoing,  but
               this exclusion shall not apply to the liability  arising from the
               retail sale or wholesale distribution of component parts critical
               or  non-critical to the operation of the foregoing not engaged in
               their manufacture;
          i.   Fiberglass,  but this  exclusion  shall  not  apply to  liability
               arising  from  the  retail  sale  or  wholesale  distribution  of
               fiberglass products by insureds not engaged in their manufacture;
          j.   Firearms,  except sales that are 20% or less of  insured's  total
               sales;
          k.   Medical equipment;
          l.   Elevator  or  hoist  manufacturing,   installation,   inspection,
               service or repair;
          m.   Security   and   alarm   system   manufacturing,    installation,
               inspection,  service or repair,  except for  coverage as provided
               for in the Company's guidelines as of 9/01/01; or
          n.   Fire suppression system manufacturing,  installation, inspection,
               service or repair,  except for  coverage as  provided  for in the
               Company's guidelines as of 9/01/01.



                                      -10-
<PAGE>

     23.  Wrecking  or  demolition  of  buildings,  structures,   watercraft  or
          aircraft, except for buildings three stories or less.

     24.  Railroad,  subway  and  street  railway  construction,   operation  or
          maintenance, excepting sidetrack agreements.

     25.  Bridge,  tunnel, dam or reservoir design,  construction,  operation or
          maintenance.

     26.  Mining,  except insureds with receipts from quarry  operations of less
          than 5% of total sales.

     27.  Onshore or offshore  gas or oil  drilling  operations,  pipelines,  or
          wells.

     28.  Mill or grain elevator operation.

     29.  Manufacture, assembly, packing, handling, processing,  transportation,
          sale,  storage or  detonation  of  fireworks,  fuses,  nitroglycerine,
          ammonium  nitrate,  magnesium,   celluloid,   pyroxylin,   ammunition,
          explosives  or any  product  in which  an  explosive  substance  is an
          ingredient, or component part.

          The term  "explosive  substance,"  as used  herein,  is any  substance
          manufactured  for the express  purpose of exploding as  differentiated
          from those commodities, other than those commodities specified in this
          exclusion,  which are only fortuitously  explosive,  such as gasoline,
          fuel oil, or dyestuffs.

     30.  Manufacture,  production,  refining,  storage,  sale,  distribution or
          transportation  of natural or artificial fuel, gas,  butane,  methane,
          propane,  other liquefied  petroleum  gases,  gasoline or gases or air
          under  pressure,  except this  exclusion does not apply to gasoline at
          hardware stores,  convenience  stores and automobile  service stations
          storing  gasoline on premises for retail sale,  fuel oil dealers,  and
          LPG sales that are 20% or less of the insured's total sales.

     31.  Stevedoring.

     32.  Ski lodges, lifts, cable cars and tows.

     33.  Shipbuilding, ship repair, ship breaking, dry dock, and quays or wharf
          operations.

     34.  Watercraft over 50 feet in length.

     35.  Amusement parks, amusement devices (other than coin operated devices),
          fairs, exhibitions,  carnivals,  circuses and zoos (other than petting
          zoos),


                                      -11-
<PAGE>

          except when  written  within the  guidelines  of the of the  Company's
          Special Events Program.

     36.  Sports or other entertainment events with an expected capacity, at any
          one time, of 25,000 or more people.

     37.  Arenas,  grandstands,  stadiums,  theatres, halls and any other indoor
          venue with an expected capacity, at any one time, of 25,000 or more.

     38.  Electric and gas utilities and the municipalities, authorities and all
          boards,  commissions,  or entities  responsible for  administering  or
          controlling these utilities.

     39.  Governmental agencies,  entities, or political subdivisions of a state
          or  municipalities  with a  population  of 50,000 or more,  except for
          insureds  required to name the local  municipality  as a named insured
          for special events.

     40.  Insurance  companies,  agents,  brokers,  or  risk  retention  groups,
          inspection  services,  claims  services  and  rating  bureaus,  unless
          coverage  for  errors  and  omissions  is  excluded  under the  policy
          reinsured.

     41.  School boards or school districts.

     42.  Nursing homes and nursing home care, except for adult day care centers
          or the Family  Home Care  Program  when  written  within  the  Company
          guidelines as of 9/01/01.

     43.  Banks and other financial  institutions  unless the Company's coverage
          contains  a  financial  institution   endorsement  agreed  to  by  the
          Reinsurer.

     44.  Contractors   engaged  in  the  construction,   erection  or  exterior
          maintenance  of  structures  in excess of three  stories,  except  for
          window washers or power washing operations.

     45.  Crop-dusting.

     46.  Insureds  in  the  business  of  Scaffold  manufacture,  installation,
          repair, removal or rental.

     47.  Inverse condemnation liability.

     48.  All loss, cost or expense  arising out of,  resulting as a consequence
          of or related to poultry products, operations or exposures,  including
          but not limited to; poultry  houses,  poultry  processing  operations,
          live birds,  processed  birds, egg laying  operations,  egg processing
          operations or eggs.



                                      -12-
<PAGE>

     49.  Contractors,  except as provided for by the Company's  Penn  Amerigram
          dated November 7, 2001, and attached to this Agreement as APPENDIX B.

C.   In the event the Company is inadvertently bound on any exclusion enumerated
     under  paragraph B, the  reinsurance  provided under this  Agreement  shall
     apply until  discovery by the Company of the  existence of the  inadvertent
     binding and for 30 days thereafter, and shall then cease unless, within the
     30-day period,  the Company has received from the Reinsurer  written notice
     of its approval of such binding.

D.   The reinsurance  provided under this Agreement for Property  business shall
     not apply to the following:

     1.   Difference in Conditions Coverage.

     2.   Ocean Marine Coverage.

     3.   Mortgage impairment insurance and similar kinds of insurance,  however
          styled.

     4.   Mining including mining equipment.

     5.   Aviation business.

     6.   The following coverages:
            a. Product recall;
            b. Product tampering;
            c. Product integrity impairment; or
            d. Product guarantee.

     7.   Excess Coverage,  meaning  coverage  written to apply  specifically in
          excess over underlying insurance.

     8.   Boiler and Machinery Coverage.

     9.   Livestock Mortality or Fertility Coverage.

     10.  Furriers' and Jewelers Block Coverage.

     11.  Contingency business interruption risks of any kind.

     12.  Transmission and  distribution  lines other than those within 500 feet
          of an  insured's  premises.  It is  understood  and agreed that public
          utilities  extension  and/or  suppliers  extension  and/or  contingent
          business  interruption  coverage  are not  subject  to this  exclusion
          provided that these are not part of a transmitter's  or  distributor's
          policies.



                                      -13-
<PAGE>

     13.  All  onshore  or  offshore:
            a. gas  and  oil  drilling   risks;
            b. petrochemical risks;
            c. pipeline risks; or
            d. well risks.

     14.  Flood,  surface water, waves, tidal water or tidal waves,  overflow of
          streams or other  bodies of water or spray from any of the  foregoing,
          all whether driven by wind or not; provided,  however,  this exclusion
          shall not apply to losses  covered under  automobile  physical  damage
          policies or Inland Marine Policies.

     15.  Earthquake, landslide and other earth movement provided, however, this
          exclusion  shall not apply to automobile  physical  damage coverage or
          Inland Marine Policies.

     16.  Railroad property, rolling stock, tracks or roadbeds.

     17.  Fine arts collections exceeding $5,000,000 in total value.
         18.      Mobile homes, except mobile home parks written on a commercial
                  lines basis with less than 25% of the mobile homes being owned
                  by the insured.

     19.  Risks having total insurable value of more than $50,000,000.

     20.  Growing, standing or drying crops and timber.

     21.  Watercraft except watercraft insured under personal property floaters.

     22.  Bridges, dams and tunnels.

     23.  All loss, cost or expense  arising out of,  resulting as a consequence
          of or related to poultry products, operations or exposures,  including
          but not limited to; poultry  houses,  poultry  processing  operations,
          live birds,  processed  birds, egg laying  operations,  egg processing
          operations or eggs.

          24.  As respects Property risks:

               a.   Any one  risk at any  one  location  where  the  risk  Total
                    Insured Value (hereinafter TIV),  inclusive of all coverages
                    is greater than $50,000,000; or
               b.   The  aggregate  TIV for all risks  insured by the company at
                    any one location, inclusive of all coverages is greater than
                    $50,000,000; or
               c.   Any of the  following  risks  (i.e.,  owners of, not tenants
                    in):
                    1.   Airlines or Airports
                    2.   Apartments,  Condos, or Co-Operatives (i.e., Urban Only
                         and greater than 25 stories)

                                      -14-
<PAGE>

                    3.   Bridges (i.e., greater than 300 feet in length)
                    4.   Casinos of Las Vegas and Atlantic City only
                    5.   Chemical Manufacturing or Distributing Companies except
                         for liability arising from the retail sale or wholesale
                         distribution  of  household  chemicals  by insureds not
                         engaged in their manufacture
                    6.   Convention or  Exhibition  Centers  (i.e.,  Urban only)
                         with an expected  capacity,  at any one time, of 25,000
                         or more
                    7.   Dams (i.e., greater than 300 feet in length)
                    8.   Defense or Aerospace Industries
                    9.   Department Stores that are part of malls over 1,000,000
                         sq. feet
                    10.  Financial   Institutions  (i.e.,   Building.  and  Time
                         Element coverages or multiple  locations (i.e.,  Office
                         Schedules   of  greater   than   10,000  sq.  feet  per
                         location))
                    11.  Government  buildings  (i.e.,  Federal  or  State)  and
                         National Landmarks
                    12.  High Tech Manufacturing Companies and Telecommunication
                         Companies   with  Total  Insured  Values  greater  than
                         $5,000,000.
                    13.  Hospitals (i.e., Urban only)
                    14.  Hotels (i.e., Urban only and greater than 25 stories)
                    15.  Internet Companies and Major Media Companies with Total
                         Insured Values greater than $5,000,000.
                    16.  Office Buildings (i.e.,  Urban only and greater than 25
                         stories)
                    17.  Oil and Gas Manufacturing or Distributing Companies
                    18.  Public School Districts (i.e., Urban only)
                    19.  Port or Transit Authorities
                    20.  Railroads
                    21.  Shopping Malls over 1,000,000 sq. feet
                    22.  Stadiums (i.e., all pro sports)
                    23.  Tunnels (i.e., greater than 300 feet in length)
                    24.  Universities (i.e., Urban only)
                    25.  Utilities electric, gas, water & sewer

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

REINSURANCE LIMITS
------------------

The Reinsurer's maximum liability hereunder shall not exceed $4,000,000, being
80% of $5,000,000, during the Agreement Year.

                                   ARTICLE VII
                                   -----------

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

     A.   The term "Aggregate Ultimate Net Loss" shall mean the sum or sums paid
          by the  Company  for losses as  covered  herein for which it is liable
          under policies  reinsured  hereunder  including any extra  contractual
          obligations  as  provided  within  the


                                      -15-
<PAGE>

          Extra  Contractual   Obligations  Article,  any  excess  judgments  as
          provided within the Excess  Judgments  Article and any Loss Adjustment
          Expenses as defined within  Paragraph B below, to the extent qualified
          and  reimbursable   under  the  Act,  which  are  within  the  Insurer
          Deductible or Company Retained Amount as determined under the Act. All
          sums  hereunder  shall  first be subject to  deductions  for all other
          reinsurances  whether collectible or not that are applicable to losses
          hereunder,  and any subrogation or salvage  received.  The Reinsurer's
          liability shall not increase by reason of the inability of the Company
          to collect from any other reinsurer,  for any reason,  any amount that
          may be due from such reinsurer.

     B.   The term "Loss Adjustment Expenses" shall mean all expenses which have
          been paid by the Company in the investigation,  adjustment, settlement
          or defense of specific  losses  covered  herein for which it is liable
          under policies of the Company  reinsured  hereunder,  (also  including
          salaries and expenses of salaried adjusters associated therewith), but
          not  including  office,  administrative  or  overhead  expenses of the
          Company or salaries and expenses of its officials and employees.

     C.   In the event of the insolvency of the Company, "Aggregate Ultimate Net
          Loss" shall be as otherwise defined herein except it shall include the
          sum or sums  which the  Company  has  incurred  for  losses as covered
          herein  for which it is liable  instead of the sum or sums paid by the
          Company  for  losses as covered  herein  for which it is  liable,  and
          payment by the reinsurer shall be made to the liquidator,  receiver or
          statutory  successor of the Company in accordance  with the INSOLVENCY
          Article.

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

     E.   Except as otherwise  provided herein,  the Company shall pay or credit
          the Reinsurer with its proportionate share of any subrogation, salvage
          or other  amounts  recovered  by the  Company  applying  to the losses
          hereunder.

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

EXTRA CONTRACTUAL OBLIGATIONS
-----------------------------

     A.   As reinsured under this Agreement,  the Company shall be protected for
          any Extra Contractual  Obligation.  (Such Extra Contractual Obligation
          shall be added to the  amount of the award or  settlement  within  the
          Company's  policy limit and the sum thereof  shall be  considered  one
          loss  subject  to the  exclusions  and  limitations  set forth in this
          Agreement.)


                                      -16-
<PAGE>


     B.   "Extra  Contractual  Obligation" shall be defined as those liabilities
          not covered under any other provision of this Agreement, and any legal
          costs and expenses incurred in connection therewith,  which arise from
          the  Company's  handling of any claim on business  covered  hereunder,
          including  but not  limited  to, the  failure by the Company to settle
          within the policy limit, or by reason of alleged or actual negligence,
          fraud,  or bad faith,  in  rejecting  an offer of  settlement,  in the
          preparation  of the  defense,  in the trial of any action  against its
          insured or in the  preparation or prosecution of an appeal  consequent
          upon such action.

     C.   For the  purpose  of the  application  of  this  Agreement,  an  Extra
          Contractual Obligation shall be deemed to have arisen on the same date
          as  the  original  loss  that  gave  rise  to  the  Extra  Contractual
          Obligation.

     D.   This Article  shall not apply where the Extra  Contractual  Obligation
          has been  incurred due to the fraud or criminal act of a member of the
          Board of  Directors,  an  officer,  an agent,  or an  employee  of the
          Company  or  any  other  person  or   organization   involved  in  the
          presentation,  defense or settlement  of any claim covered  hereunder,
          whether acting  individually  or collectively or in collusion with any
          person or organization.

     E.   Recoveries  from  any  form  of  insurance  or  reinsurance,   whether
          separately  purchased from another insurance carrier or self insurance
          issued by the Company to itself,  which  protects the Company  against
          claims which are the subject matter of this Article, will inure to the
          benefit of the Reinsurer and shall be first  deducted to arrive at the
          amount of any Extra Contractual Obligation covered hereunder,  whether
          collectible or not.

     F.   The coverage  provided  under this  Article  shall not apply where the
          laws, regulations or public policy of an applicable jurisdiction would
          prohibit  such  coverage.  If any  provision of this Article  shall be
          rendered illegal or  unenforceable by the laws,  regulations or public
          policy of any jurisdiction, such provision shall be considered void in
          such  jurisdiction,   but  this  shall  not  affect  the  validity  or
          enforceability  of  any  other  provision  of  this  Agreement  or the
          enforceability of such provision in any other jurisdiction.

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

EXCESS JUDGMENTS
----------------

     A.   As reinsured under this Agreement,  the Company shall be protected for
          any  Excess  Judgment  awarded  by a court of  competent  jurisdiction
          against  the  Company.  (Such  Excess  Judgment  shall be added to the
          amount of the award or settlement  within the  Company's  policy limit
          and the sum  thereof  shall  be  considered  one loss  subject  to the
          exclusions and limitations set forth in this Agreement.)



                                      -17-
<PAGE>

     B.   "Excess  Judgment"  shall mean any  amount in excess of the  Company's
          policy limits,  but otherwise within the coverage terms of the policy,
          that is  paid by the  Company,  together  with  any  legal  costs  and
          expenses incurred in connection therewith,  resulting from the failure
          by the  Company to settle  within the  policy  limit,  or by reason of
          alleged or actual negligence,  fraud, or bad faith, in discharging its
          duty to defend,  in  preparing  the  defense in an action  against its
          insured or in  discharging  its duty to prepare or prosecute an appeal
          consequent upon such action.

     C.   This  Article  shall not  apply  where the  Excess  Judgment  has been
          incurred  due to the fraud or criminal act of a member of the Board of
          Directors,  an officer, an agent or an employee of the Company, or any
          other person or organization involved in the presentation,  defense or
          settlement of any claim covered hereunder, whether acting individually
          or collectively or in collusion with any person or organization.

     D.   Recoveries  from  any  form  of  insurance  or  reinsurance,   whether
          separately  purchased from another insurance carrier or self insurance
          issued by the Company to itself,  which  protects the Company  against
          claims which are the subject matter of this Article, will inure to the
          benefit of the Reinsurer and shall be first  deducted to arrive at the
          amount of any Excess Judgment hereunder, whether collectible or not.

     E.   The coverage  provided  under this  Article  shall not apply where the
          laws, regulations or public policy of an applicable jurisdiction would
          prohibit  such  coverage.  If any  provision of this Article  shall be
          rendered illegal or  unenforceable by the laws,  regulations or public
          policy of any jurisdiction, such provision shall be considered void in
          such  jurisdiction,   but  this  shall  not  affect  the  validity  or
          enforceability  of  any  other  provision  of  this  Agreement  or the
          enforceability of such provision in any other jurisdiction.

                                    ARTICLE X
                                    ---------

DEFINITIONS

     A.   "Terrorism  Risk Insurance Act" or "Act" as utilized herein shall mean
          the provisions of the Terrorism Risk Insurance Act of 2002 in place at
          the  inception  date  of  this  Agreement,   including  any  rules  or
          regulations applicable thereto. Subsequent amendments to the Act shall
          not be included  within the  definition  hereunder  except as mutually
          agreed in writing by the parties hereto.

     B.   "Insured  Loss(es),"  "Program  Year,"  "Act of  Terrorism,"  "Insurer
          Deductible"   and  "Insurer"  as  utilized  herein  shall  follow  the
          definitions as provided in the Act.

     C.   "Company  Retained Amount" shall mean amounts covered  hereunder which
          the Company  retains net of any amounts paid or payable by the Federal
          Government


                                      -18-
<PAGE>

          for Insured Loss in excess of the Insurer Deductible,  all as provided
          under the Terrorism Risk Insurance Act of 2002.

     D.   "Agreement  Year" as utilized  herein,  shall mean that period of time
          from  the  date  of  inception  to the  date  of  termination  of this
          Agreement as more fully delineated in the Commencement and Termination
          Article.

                                   ARTICLE XI
                                   ----------

FEDERAL TERRORISM EXCESS RECOVERY
---------------------------------

As respects  the Insured  Losses of the Insurer  for each  Program  Year,  it is
hereby agreed that to the extent the Insurer's  total  reinsurance  recoverables
for Insured  Losses,  whether  collected  or not,  combined  with the  financial
assistance  available to the Insurer under the Act exceeds the aggregate  amount
of  Insured  Losses  paid  by  the  Insurer,   less  any  other   recoveries  or
reimbursements,  such excess amounts (the "Excess  Recovery") shall be allocated
to the Company.  The  allocation  to the Company shall be deemed to be an amount
equal to the proportion that the Company's  Insured Losses bear to the Insurer's
total Insured Losses for each Program Year. The Company shall then reimburse the
Reinsurer  for its share of the Excess  Recovery  allocated to the Company.  The
Reinsurer's  share of the Excess  Recovery shall be deemed to be an amount equal
to the  proportion  that the  Reinsurer's  payment of Insured  Losses under this
Agreement bears to the Company's total collected  reinsurance  recoverables  for
Insured  Losses.  The  Company  also agrees to provide  the  Reinsurer  with all
necessary data respecting the transactions covered under this Clause.

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

PREMIUM
-------

A.   The premium for the  reinsurance  provided  under this  Agreement  shall be
     computed at the rate of 55% of the Company's  Gross Net Earned  Premium for
     terrorism on the business reinsured hereunder.

B.   The minimum  premium for the  reinsurance  provided under this Agreement is
     $400,000.

C.   "Gross Net Earned  Premium" as used herein means the Company's net premiums
     written for  terrorism  (i.e.,  gross  premiums for  terrorism  less return
     premiums for  terrorism)  during the period for which  computation is being
     made, plus the net unearned  premiums for terrorism at the beginning of the
     period,  less the net  unearned  premiums  for  terrorism at the end of the
     period;  said net  unearned  premium  for  terrorism  to be computed on the
     monthly pro rata basis.

D.   The  minimum  premium  stipulated  herein  shall be fully  earned as of the
     inception  date of this  Agreement  and  shall  be paid in  advance  by the
     Company to the Reinsurer in equal  installments on 1/1, and 7/1, during the
     term of this Agreement.



                                      -19-
<PAGE>

                                  ARTICLE XIII
                                  ------------

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

A.   The Company will provide the Reinsurer with all necessary  data  respecting
     premiums and losses,  including reserves thereon,  at dates and on forms as
     indicated below.

B.   The Company  shall  render an account  within 45 days after the end of each
     quarter summarizing the following information,  by Agreement Year, relating
     to reinsurance covered under this Agreement during the 2003 Program Year:

          1.   A Statement of premiums  including:  policy  number and effective
               date;  insured name;  line of business;  total  written  premium;
               total  unearned  premium;  written  terrorism  premium;  unearned
               terrorism premium; ceded terrorism premium.

          2.   A Statement of Insured  Losses  including:  company claim number;
               insured name;  claimant  name;  date of loss or accident;  policy
               number and effective date; line of business;  ceded paid loss and
               Loss   Adjustment    Expense;    ceded   subrogation,    salvage,
               reimbursements or other available recoveries; ceded loss and Loss
               Adjustment   Expense   reserves;   and  Property  Claim  Services
               catastrophe number (if applicable).

          3.   An Account  Current  summarizing  minimum  premium  paid to date,
               Insured   Losses  and  Loss   Adjustment   Expenses   paid,   any
               subrogation,  salvage,  reimbursements or recoveries, and any net
               balance due either party hereunder.

         The Reinsurer shall remit any balance due the Company as indicated by
         the aforementioned Account Current, promptly upon the Reinsurer's
         receipt of the Account Current.

C.   Within 45 days after the  expiration  of this  Agreement  and at the end of
     each Agreement Year  thereafter,  until all premiums are accounted for, the
     Company shall render to the  Reinsurer a statement of the  Company's  Gross
     Net Earned Premium for terrorism on business  hereunder  during the term of
     this Agreement and a calculation  of the premium due hereunder  computed by
     the  application  of the  rate  set  forth in the  Premium  Article  to the
     Company's  Gross Net Earned  Premium for  terrorism.  If the actual premium
     owed to the Reinsurer under this Agreement is more than the minimum premium
     stipulated  in  the  Premium  Article,  the  additional  premium  shall  be
     forwarded to the Reinsurer with the statement.

D.   The Company shall notify the Reinsurer immediately, in writing, of any loss
     which may result in a claim under this  Agreement  equal to or greater than
     $100,000 to the  Reinsurer.  In  addition,  the Company  shall  immediately
     provide all claim related


                                      -20-
<PAGE>

     information  specifically  requested by the Reinsurer on any claim reported
     to the Reinsurer in the monthly report herein.

E.   The Company has the  obligation to  investigate  and defend claims or suits
     affecting  this  reinsurance  and to pursue  such  claims or suits to final
     determination. The Company, when so requested, will afford the Reinsurer an
     opportunity  to be  associated  with the  Company,  at the  expense  of the
     Reinsurer,  in the  defense or control  of any  claim,  suit or  proceeding
     involving  this  reinsurance,  and  the  Company  and the  Reinsurer  shall
     cooperate  in  every  respect  in  the  defense  of  such  claim,  suit  or
     proceeding.

                                   ARTICLE XIV
                                   -----------

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

Inadvertent  errors or omissions  shall not relieve  either party from liability
which  would  have  attached  under the terms of the  Company's  policy and this
Agreement had such error or omission not occurred,  provided  that,  immediately
upon  discovery  the  responsible  party  notifies the other party  hereunder in
writing and takes prompt corrective action.

                                   ARTICLE XV
                                   ----------

ACCESS TO RECORDS
-----------------

The Company shall place at the disposal of the Reinsurer and the Reinsurer shall
have the  right to  inspect,  through  its  authorized  representatives,  at all
reasonable  times  during the currency of this  Agreement  and  thereafter,  the
books,  records and papers of the Company pertaining to the reinsurance provided
hereunder and all claims made in connection therewith.

                                   ARTICLE XVI
                                   -----------

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

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

B.   The  Company  will be liable  for all  taxes on  premiums  reported  to the
     Reinsurer  hereunder and will  reimburse the Reinsurer for such taxes where
     the Reinsurer is required to pay the same.

                                  ARTICLE XVII
                                  ------------

OFFSET
------

Each party  hereto  shall  have,  and may  exercise at any time and from time to
time,  the right to offset  any  balance  or  balances,  whether  on  account of
premiums or on account of losses or otherwise,  due from such party to the other
(or, if more than one, any other) party hereto


                                      -21-
<PAGE>

under this  Agreement or under any other  reinsurance  agreement  heretofore  or
hereafter  entered into by and between them, and may offset the same against any
balance or balances due or to become due to the former from the latter under the
same or any other  reinsurance  agreement  between them; and the party asserting
the right of offset shall have and may exercise  such right  whether the balance
or balances  due or to become due to such party from the other are on account of
premiums or on account of losses or otherwise  and  regardless  of the capacity,
whether as  assuming  insurer or as ceding  insurer,  in which each party  acted
under the  agreement or, if more than one, the  different  agreements  involved,
provided,  in the event of the insolvency of a party hereto,  offsets shall only
be  allowed  in  accordance  with the  laws of the  insolvent  party's  state of
domicile.

                                  ARTICLE XVIII
                                  -------------

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

In the  event  of the  insolvency  of  the  Company  and  the  appointment  of a
conservator, liquidator or statutory successor, the reinsurance provided by this
Agreement  shall be payable by the  Reinsurer  directly to the Company or to its
liquidator, receiver or statutory successor on the basis of the liability of the
Company  under the  contract  or  contracts  reinsured.  Subject to the right of
offset and the  verification  of coverage,  the Reinsurer shall pay its share of
the loss  without  diminution  because of the  insolvency  of the  Company.  The
liquidator,  receiver or statutory  successor of the Company  shall give written
notice of the  pendency  of each claim  against  the Company on a policy or bond
reinsured  within a reasonable  time after such claim is filed in the insolvency
proceeding.  During the pendency of such claim,  the  Reinsurer  may, at its own
expense, investigate such claim and interpose in the proceeding where such claim
is to be adjudicated  any defense or defenses which it may deem available to the
Company,  its  liquidator or receiver or statutory  successor.  Subject to court
approval, any expense thus incurred by the Reinsurer shall be chargeable against
the  Company  as  part of the  expense  of  liquidation  to the  extent  of such
proportionate  share of the benefit as shall  accrue to the Company  solely as a
result of the defense  undertaken by the  Reinsurer.  The  reinsurance  shall be
payable as set forth above except where this Agreement specifically provides for
the  payment  of  reinsurance  proceeds  to  another  party in the  event of the
insolvency of the Company.

                                   ARTICLE XIX
                                   -----------

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

A.   This Agreement shall be effective for the Program Year beginning 12:01 A.M.
     January 1, 2003 and  terminating  12:00 Midnight  December 31, 2003, at the
     location as determined under the Act.

B.   The Reinsurer  shall be discharged  and released of all liability as of the
     date of  termination  of this  Agreement  for any  Insured  Loss  under the
     Company's  policies


                                      -22-
<PAGE>

     occurring on or after the date and time of  termination  of this  Agreement
     unless otherwise directed under applicable provisions of the Act.

C.   Notwithstanding the termination of this Agreement as hereinabove  provided,
     the provisions of this Agreement  shall continue to apply to all unfinished
     business  hereunder  to the end that all the  obligations  and  liabilities
     incurred by each party hereunder prior to such  termination  shall be fully
     performed and discharged.

IN WITNESS  WHEREOF the parties hereto have caused this Agreement to be executed
in duplicate this           day of              , 2003;

ACCEPTED:
PENN AMERICA INSURANCE COMPANY
PENN-STAR INSURANCE COMPANY



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


and in Princeton, New Jersey, this                day of                  2003.


                                                  AMERICAN RE-INSURANCE COMPANY



                                                  ----------------------------
                                                  Vice President


DATED:  June 3, 2003
RG/rg




                                      -23-
<PAGE>




      NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - No. 1B

     (1) This reinsurance does not cover any loss or liability accruing to the
Reassured as a member of, or subscriber to, any association of insurers or
reinsurer formed for the purpose of covering nuclear energy risks or as a direct
or indirect reinsurer of any such member, subscriber or association.

     (2) Without in any way restricting the operation of paragraph (1) of this
Clause it is understood and agreed that for all purposes of this reinsurance all
the original policies of the Reassured (new, renewal and replacement) of the
classes specified in Clause II of this paragraph (2) from the time specified in
Clause III in this paragraph (2) shall be deemed to include the following
provision (specified as the Limited Exclusion Provision):

     Limited Exclusion Provision.*
       I. It is agreed that the policy does not apply under any liability
coverage,

           to     {    injury, sickness, disease, death or destruction
                       bodily injury or property damage
           with respect to which an insured under the policy is also an insured
           under a nuclear energy liability policy issued by Nuclear Energy
           Liability Insurance Association, Mutual Atomic Energy Liability
           Underwriters or Nuclear Insurance Association of Canada, or would be
           an insured under any such policy for its termination upon exhaustion
           of its limit of liability.

       II. Family Automobile Policies (liability only), Special Automobile
           Policies (private passenger automobiles, liability only), Farmers
           Comprehensive Personal Liability Policies (liability only),
           Comprehensive Personal Liability Policies (liability only) or
           policies of similar nature; and the liability portion of combination
           forms related to the four classes of policies stated above, such as
           the Comprehensive Dwelling Policy and the applicable types of
           Homeowners Policies.

       III.The inception dates and thereafter of all original policies as
           described in II above, whether new, renewal or replacement, being
           policies which either

                (a) become effective on or after 1st May, 1960, or

                (b) become effective before that date and contain the Limited
                    Exclusion Provision set out above;

           provided this paragraph (2) shall not be applicable to Family
           Automobile Policies, Special Automobile Policies, or policies or
           combination policies of a similar nature, issued by the Reassured on
           New York risks, until 90 days following approval of the Limited
           Exclusion Provision by the Governmental Authority having jurisdiction
           thereof.

     (3) Except for those classes of policies specified in Clause II of
paragraph (2) and without in any way restricting the operation of paragraph (1)
of this Clause, it is understood and agreed that for all purposes of this
reinsurance the original liability policies of the Reassured (new, renewal and
replacement) affording the following coverages:
           Owners, Landlords and Tenants Liability, Contractual Liability,
           Elevator Liability, Owners or Contractors (including railroad)
           Protective Liability, Manufacturers and Contractors Liability,
           Product Liability, Professional and Malpractice Liability,
           Storekeepers Liability, Garage Liability, Automobile Liability
           (including Massachusetts Motor Vehicle or Garage Liability)
shall be deemed to include, with respect to such coverages, from the time
specified in Clause V of this paragraph (3), the following provision (specified
as the Broad Exclusion Provision):

     Broad Exclusion Provision.*
     It is agreed that the policy does not apply:

       I. Under any Liability Coverage, to     { Injury, sickness, disease,
                                                 death or destruction Bodily
                                                 injury or property damage

                (a) with respect to which an insured under the policy is also an
                    insured under a nuclear energy liability policy issued by
                    Nuclear Energy Liability Insurance Association, Mutual
                    Atomic Energy Liability Underwriters or Nuclear Insurance
                    Association of Canada, or would be an insured under any such
                    policy but for its termination upon exhaustion of its limit
                    of liability; or


                                       -1-
<PAGE>

                (b) resulting from the hazardous properties of nuclear material
                    and with respect to which (1) any person or organization is
                    required to maintain financial protection pursuant to the
                    Atomic Energy Act of 1954, or any law amendatory thereof, or
                    (2) the insured is, or had this policy not been issued would
                    be, entitled to indemnity from the United States of America,
                    or any agency thereof, under any agreement entered into by
                    the United States of America, or any agency thereof, with
                    any person or organization.

     II. Under any Medical Payments Coverage, or under any Supplementary
        Payments Provision relating

   to     { immediate medical ,
            or surgical relief        to expenses incurred with respect
              first aid,

   to     { bodily injury, sickness,
            disease or death
            bodily injury             resulting from the hazardous properties of

         nuclear material and arising out of the operation of nuclear facility
         by any person or organization.

    III.  Under any Liability Coverage, to       { injury, sickness,
                                                   disease, death or destruction
                                                   bodily injury or property
                                                   damage

         resulting from the hazardous properties of nuclear material, if

                (a) the nuclear material (1) is at any nuclear facility owned
                    by, or operated by or on behalf of, an insured or (2) has
                    been discharged or dispersed therefrom;

                (b) the nuclear material is contained in spent fuel or waste at
                    any time possessed, handled, used, processed, stored,
                    transported or disposed of by or on behalf of an insured; or

                (c) the         { injury, sickness, disease, death or
                                 destruction bodily injury or property damage

                    arises out of the furnishing by an insured of services,
                    materials, parts or equipment in connection with the
                    planning, construction, maintenance, operation or use of any
                    nuclear facility, but if such facility is located within the
                    United States of America, its territories, or possessions or
                    Canada, this exclusion (c) applies only to

           {  injury to or destruction of property at such nuclear facility.
              property damage to such nuclear facility and any property thereat.

     IV. As used in this endorsement:

         "hazardous properties" include radioactive, toxic or explosive
         properties; "nuclear materials" means source material, special nuclear
         material or byproduct material; "source material," "special nuclear
         material," "byproduct material" have the meanings given them in the
         Atomic Energy Act of 1954 or in any law amendatory thereof; "spent
         fuel" means any fuel element or fuel component, solid or liquid, which
         has been used or exposed to radiation in a nuclear reactor; "waste"
         means any waste material (1) containing byproduct material other than
         the tailings or wastes produced by the extraction or concentration of
         uranium or thorium from any ore processed primarily for its source
         material content and (2) resulting from the operation by any person or
         organization of any nuclear facility included within the definition of
         nuclear facility under paragraph (a) or (b) thereof; "nuclear facility"
         means

                (a) any nuclear reactor,

                (b) any equipment or device designed or used for (1) separating
                    the isotopes of uranium or plutonium, (2) processing or
                    utilizing spent fuel, or (3) handling, processing or
                    packaging waste,

                (c) any equipment or device used for the processing, fabricating
                    or alloying of special nuclear material if at any time the
                    total amount of such material in the custody of the insured
                    at the premises where such equipment or device is located
                    consists of or contains more than 25 grams of plutonium or
                    uranium 233 or any combination thereof, or more than 250
                    grams of uranium 235,

                (d) any structure, basin, excavation, premises or place prepared
                    or used for the storage or disposal of waste,



                                      -2-
<PAGE>

         and includes the site on which any of the foregoing is located, all
         operations conducted on such site and all premises used for such
         operations; "nuclear reactor" means any apparatus designed or used to
         sustain nuclear fission in a self-supporting chain reaction or to
         contain a critical mass of fissionable material; With respect to injury
         to or destruction of property, the word "injury" or "destruction"
         includes all forms of radioactive contamination of property. "Property
         damage" includes all forms of radioactive contamination of property.

     V.  The inception dates and thereafter of all original policies affording
         coverages specified in this paragraph (3), whether new, renewal or
         replacement, being policies which become effective on or after 1st May,
         1960, provided this paragraph (3) shall not be applicable to

                (i) Garage and Automobile Policies issued by the Reassured on
New York risks, or

                (ii)statutory liability insurance required under Chapter 90,
         General Laws of Massachusetts, until 90 days following approval of the
         Broad Exclusion Provision by the Governmental Authority having
         jurisdiction thereof.

     (4) Without in any way restricting the operation of paragraph (1) of this
Clause, it is understood and agreed that paragraphs (2) and (3) above are not
applicable to original liability policies of the Reassured in Canada and that
with respect to such policies this Clause shall be deemed to include the Nuclear
Energy Liability Exclusion Provisions adopted by the Canadian Underwriters'
Association or the Independent Insurance Conference of Canada.


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

     * NOTE: The words printed in italics in the Limited Exclusion Provision and
in the Broad Exclusion Provision shall apply only in relation to original
liability policies which include a Limited Exclusion Provision or a Broad
Exclusion Provision containing those words.






                                      -3-
<PAGE>



                       NUCLEAR INCIDENT EXCLUSION CLAUSE--
                       PHYSICAL DAMAGE--REINSURANCE--NO. 2

          (1) This Reinsurance does not cover any loss or liability  accruing to
     the Reassured,  directly or indirectly and whether as Insurer or Reinsurer,
     from any Pool of Insurers or Reinsurers  formed for the purpose of covering
     Atomic or Nuclear Energy risks.

          (2) Without in any way  restricting  the operation of paragraph (1) of
     this Clause, this Reinsurance does not cover any loss or liability accruing
     to the  Reassured,  directly  or  indirectly  and  whether  as  Insurer  or
     Reinsurer,  from any insurance against Physical Damage (including  business
     interruption or consequential loss arising out of such Physical Damage) to:

     I.  Nuclear reactor power plants including all auxiliary property on the
         site, or

     II. Any other nuclear reactor installation, including laboratories handling
         radioactive materials in connection with reactor installations, and
         "critical facilities" as such, or

     III.Installations for fabricating complete fuel elements or for processing
         substantial quantities of "special nuclear material," and for
         reprocessing, salvaging, chemically separating, storing or disposing of
         "spent" nuclear fuel or waste materials, or

     IV. Installations other than those listed in paragraph (2) III above using
         substantial quantities of radioactive isotopes or other products of
         nuclear fission.

          (3) Without in any way  restricting  the  operations of paragraphs (1)
     and (2) hereof,  this  Reinsurance  does not cover any loss or liability by
     radioactive   contamination   accruing  to  the   Reassured,   directly  or
     indirectly,  and whether as Insurer or  Reinsurer,  from any  insurance  on
     property  which is on the same site as a  nuclear  reactor  power  plant or
     other nuclear  installation  and which normally would be insured  therewith
     except that this paragraph (3) shall not operate:

         (a) where Reassured does not have knowledge of such nuclear reactor
         power plant or nuclear installation, or

         (b) where said insurance contains a provision excluding coverage for
         damage to property caused by or resulting from radioactive
         contamination, however caused. However on and after 1st January 1960
         this sub-paragraph (b) shall only apply provided the said radioactive
         contamination exclusion provision has been approved by the Governmental
         Authority having jurisdiction thereof.

          (4) Without in any way  restricting  the operations of paragraphs (1),
     (2) and (3) hereof,  this  Reinsurance does not cover any loss or liability
     by  radioactive  contamination  accruing  to  the  Reassured,  directly  or
     indirectly,  and  whether as Insurer or  Reinsurer,  when such  radioactive
     contamination is a named hazard specifically insured against.

          (5) It is  understood  and agreed that this Clause shall not extend to
     risks using radioactive  isotopes in any form where the nuclear exposure is
     not considered by the Reassured to be the primary hazard.

          (6) The term "special  nuclear  material" shall have the meaning given
     it in the Atomic Energy Act of 1954 or by any law amendatory thereof.

          (7) Reassured to be sole judge of what constitutes:

               (a) substantial quantities, and

               (b) the extent of installation, plant or site.

     Note.--Without in any way restricting the operation of paragraph (1)
hereof, it is understood and agreed that:

          (a) all policies  issued by the  Reassured on or before 31st  December
          1957 shall be free from the  application  of the other  provisions  of
          this Clause until expiry date or 31st  December 1960  whichever  first
          occurs whereupon all the provisions of this Clause shall apply,





                                      -1-
<PAGE>



         (b) With respect to any risk located in Canada policies issued by the
         Reassured on or before 31st December 1958 shall be free from the
         application of the other provisions of this Clause until expiry date or
         31st December 1960 whichever first occurs whereupon all the provisions
         of this Clause shall apply.



                                      -2-
<PAGE>



        NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE AND LIABILITY
              (BOILER AND MACHINERY POLICIES) - REINSURANCE - No. 3

         (1) This reinsurance does not cover any loss or liability accruing to
the Reassured as a member of, or subscriber to, any association of insurers or
reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.

         (2) Without in any way restricting the operation of paragraph (1) of
this Clause it is understood and agreed that for all purposes of this
reinsurance all original Boiler and Machinery Insurance contracts of the
Reassured (new, renewal and replacement) shall be deemed to include the
following provisions of this paragraph.

                This Policy does not apply to "loss," whether it be direct or
indirect, proximate or remote

                (a)   from an Accident caused directly or indirectly by nuclear
                      reaction, nuclear radiation or radioactive contamination,
                      all whether controlled or uncontrolled; or

                (b)   from nuclear reaction, nuclear radiation or radioactive
                      contamination, all whether controlled or uncontrolled,
                      caused directly or indirectly by, contributed to or
                      aggravated by an Accident.

         (3) However, it is agreed that loss arising out of the use of
Radioactive Isotopes in any form is not hereby excluded from reinsurance
protection.

         (4) Without in any way  restricting  the  operation  of  paragraph  (1)
hereof, it is understood and agreed that

                (a)   all policies issued by the Reassured to become effective
                      on or before 30th April, 1958, shall be free from the
                      application of the other provisions of this Clause until
                      expiry date or 30th April, 1961, whichever first occurs,
                      whereupon all the provisions of this Clause shall apply,

                (b)   with respect to any risk located in Canada policies issued
                      by the Reassured to become effective on or before 31st
                      December, 1958, shall be free from the application of the
                      other provisions of this Clause until expiry date or 31st
                      December, 1960, whichever first occurs, whereupon all the
                      provisions of this Clause shall apply.





                                      -1-
<PAGE>



              NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE -
                                  REINSURANCE -
                                     CANADA

           Applicable to policies in effect prior to January 1, 1985.

         1. This Contract does not cover any loss or liability accruing to the
Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any
Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or
Nuclear Energy risks.

         2. Without in any way restricting the operation of paragraph 1 of this
clause, this Contract does not cover any loss or liability accruing to the
Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any
insurance against Physical Damage (including business interruption or
consequential loss arising out of such Physical Damage) to:

               (1)  Nuclear   reactor  power  plants   including  all  auxiliary
                    property on the site, or

               (2)  Any   other   nuclear   reactor   installation,    including
                    laboratories  handling  radioactive  materials in connection
                    with reactor installations, and critical facilities as such,
                    or

               (3)  Installations for fabricating  complete fuel elements or for
                    processing  substantial quantities of prescribed substances,
                    and  for  reprocessing,  salvaging,  chemically  separating,
                    storing  or  disposing  of  spent   nuclear  fuel  or  waste
                    materials, or

               (4)  Installations  other  than those  listed in (3) above  using
                    substantial  quantities  of  radioactive  isotopes  or other
                    products of nuclear fission.

         3. Without in any way restricting the operation of paragraphs 1 and 2
of this clause, this Contract does not cover any loss or liability by
radioactive contamination accruing to the Reassured, directly or indirectly, and
whether as Insurer or Reinsurer from any insurance on property which is on the
same site as a nuclear reactor power plant or other nuclear installation and
which normally would be insured therewith, except that this paragraph 3 shall
not operate.

         (a)      where the Reassured does not have knowledge of such nuclear
                  reactor power plant or nuclear installation, or

         (b)      where the said insurance contains a provision excluding
                  coverage for damage to property caused by or resulting from
                  radioactive contamination, however caused.

         4. Without in any way  restricting the operation of paragraphs 1, 2 and
3 of this  clause,  this  Contract  does  not  cover  any loss or  liability  by
radioactive contamination accruing to the Reassured, directly or indirectly, and
whether as Insurer or Reinsurer,  when such radioactive contamination is a named
hazard specifically insured against.

         5. This clause shall not extend to risks using radioactive  isotopes in
any form where the nuclear exposure is not considered by the Reassured to be the
primary hazard.

         6. The term "prescribed  substances" shall have the meaning given it by
the Atomic Energy Control Act R.S.C. 1946 c.37 or by any law amendatory thereof.

         7. The Reassured to be sole judge of what constitutes:

                  (a) substantial quantities, and

                  (b) the extent of installation, plant or site.




                                      -1-
<PAGE>


         NOTE:- Without in any way restricting the operation of paragraph 1 of
this clause, it is agreed that policies issued by the Reassured effective on or
before 31st December 1958 shall be free from the application of the other
provisions of this clause until expiry date or 31st December 1961, whichever
first occurs, whereupon all the provisions of this clause shall apply.





                                      -2-
<PAGE>



      NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA

           Applicable to policies in effect prior to January 1, 1985.

         1. This Contract does not cover any loss or liability accruing to the
Reassured as a member of, or subscriber to, any association of insurers or
reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.

         2. Without in any way restricting the operation of paragraph 1 of this
clause it is agreed that for all purposes of this Contract all the original
liability contracts of the Reassured, whether new, renewal or replacement, of
the following classes, namely,

                  Personal Liability,

                  Farmers Liability,

                  Storekeepers Liability,

which become effective on or after 31st December, 1962, shall be deemed to
include, from their inception dates and thereafter, the following provision:-

         Limited Exclusion Provision

                  This Policy does not apply to injury, sickness, disease,
         death, damage or destruction with respect to which an Insured under
         this Policy is also insured under a contract of nuclear energy
         liability insurance (whether the Insured is named in such contract or
         not and whether or not it is legally enforceable by the Insured) issued
         by the Nuclear Insurance Association of Canada or any other group or
         pool of insurers or would be an Insured under any such policy but for
         its termination upon exhaustion of its limit of liability.

                  With respect to property, loss of use of such property shall
         be deemed to be damage to or destruction of property.

         3. Without in any way restricting the operation of paragraph 1 of this
clause it is agreed that for all purposes of this Contract all the original
liability contracts of the Reassured, whether new, renewal or replacement, of
any class whatsoever (other than Personal Liability, Farmers Liability,
Storekeepers Liability or Automobile Liability contracts), which become
effective on or after 31st December, 1962, shall be deemed to include, from
their inception dates and thereafter, the following provision:-

         Broad Exclusion Provision

                  This Policy does not apply to injury, sickness, disease,
         death, damage or destruction

                    (a)  with  respect to which an Insured  under this Policy is
                         also  insured  under  a  contract  of  nuclear   energy
                         liability  insurance  (whether  the Insured is named in
                         such  contract  or not and whether or not it is legally
                         enforceable by the Insured) issued by the Nuclear

                         Insurance  Association  of Canada or any other group or
                         pool of insurers or would be an Insured  under any such
                         policy but for its  termination  upon exhaustion of its
                         limit of liability; or

                    (b)  resulting  directly  or  indirectly  from  the  nuclear
                         energy hazard arising from:

                                    (1)     the ownership, maintenance,
                                            operation or use of a nuclear
                                            facility by or on behalf of an
                                            Insured;

<PAGE>

                                    (2)     the furnishing by an Insured of
                                            services, materials, parts or
                                            equipment in connection with the
                                            planning, construction, maintenance,
                                            operation or use of any nuclear
                                            facility; and

                                    (3)     the transportation, consumption,
                                            possession, handling, disposal or
                                            use of radioactive material (other
                                            than radioisotopes away from a
                                            nuclear facility) sold, handled,
                                            used or distributed by an Insured.

                           As used in this Endorsement:

                                    (i)     The term "nuclear energy hazard"
                                            means the radioactive, toxic,
                                            explosive or other hazardous
                                            properties of radioactive material;

                                    (ii)    The term "radioactive material"
                                            means uranium, thorium, plutonium,
                                            neptunium, their respective
                                            derivatives and compounds,
                                            radioactive isotopes of other
                                            elements and any other substances
                                            that the Atomic Energy Control Board
                                            may, by regulation, designate as
                                            being prescribed substances capable
                                            of releasing atomic energy, or as
                                            being requisite for the production,
                                            use or application of atomic energy;

                                    (iii)   The term "nuclear facility" means:

                                            (a)      any apparatus designed or
                                                     used to sustain nuclear
                                                     fission in a
                                                     self-supporting chain
                                                     reaction or to contain a
                                                     critical mass of plutonium,
                                                     thorium and uranium or any
                                                     one or more of them;

                                            (b)      any equipment or device
                                                     designed or used for (i)
                                                     separating the isotopes of
                                                     plutonium, thorium and
                                                     uranium or any one or more
                                                     of them, (ii) processing or
                                                     utilizing spent fuel, or
                                                     (iii) handling, processing
                                                     or packaging waste;

                                            (c)      any equipment or device
                                                     used for the processing,
                                                     fabricating or alloying of
                                                     plutonium, thorium and
                                                     uranium or any one or more
                                                     of them if at any time the
                                                     total amount of such
                                                     material in the custody of
                                                     the insured at the premises
                                                     where such equipment or
                                                     device is located consists
                                                     of or contains more than 25
                                                     grams of plutonium or
                                                     uranium 233 or any
                                                     combination thereof, or
                                                     more than 250 grams of
                                                     uranium 235;

                                            (d)      any structure, basin,
                                                     excavation, premises or
                                                     place prepared or used for
                                                     the storage or disposal of
                                                     waste radioactive material;



                                            and includes the site on which any
                                            of the foregoing is located,
                                            together with all operations
                                            conducted thereon and all premises
                                            used for such operations.

                                      -2-
<PAGE>

                                    (iv)    With respect to property, loss of
                                            use of such property shall be deemed
                                            to be damage to or destruction of
                                            property.


                                      -3-
<PAGE>




              NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE -
                              REINSURANCE - CANADA

                                     Rev. 83

             Applicable to policies becoming effective on and after
                                January 1, 1985.

                                   (See Note)

1. This Agreement does not cover any loss or liability accruing to the Company,
directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of
Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear
Energy risks.

2. Without in any way restricting the operation of paragraph 1 of this clause,
this Agreement does not cover any loss or liability accruing to the Company,
directly or indirectly, and whether as Insurer or Reinsurer, from any insurance
against Physical Damage (including business interruption or consequential loss
arising out of such Physical Damage) to:

          (1)  Nuclear reactor power plants including all auxiliary property on
               the site, or

          (2)  Any other nuclear reactor installation, including laboratories
               handling radioactive materials in connection with reactor
               installations, and critical facilities as such, or

          (3)  Installations for fabricating complete fuel elements or for
               processing substantial quantities of prescribed substances, and
               for reprocessing, salvaging, chemically separating, storing or
               disposing of spent nuclear fuel or waste materials, or

          (4)  Installations other than those listed in (3) above using
               substantial quantities of radioactive isotopes or other products
               of nuclear fission.

3. Without in any way restricting the operation of paragraphs 1 and 2 of this
clause, this Agreement does not cover any loss or liability by radioactive
contamination accruing to the Company, directly or indirectly, and whether as
Insurer or Reinsurer from any insurance on property which is on the same site as
a nuclear reactor power plant or other nuclear installation and which normally
would be insured therewith, except that this paragraph 3 shall not operate.

                  (a)      where the Company does not have knowledge of such
                           nuclear reactor power plant or nuclear installation,
                           or

                  (b)      where the said insurance contains a provision
                           excluding coverage for damage to property caused by
                           or resulting from radioactive contamination, however
                           caused.

4. Without in any way restricting the operation of paragraphs 1, 2 and 3 of this
clause, this Agreement does not cover any loss or liability by radioactive
contamination accruing to the Company, directly or indirectly, and whether as
Insurer or Reinsurer, when such radioactive contamination is a named hazard
specifically insured against.

5. This clause shall not extend to risks using radioactive isotopes in any form
where the nuclear exposure is not considered by the Company to be the primary
hazard.

6. The term "prescribed substances" shall have the meaning given it by the
Atomic Energy Control Act R.S.C. 1974 or by any law amendatory thereof.

7. The Company to be sole judge of what constitutes:

                  (a) substantial quantities, and

                  (b) the extent of installation, plant or site.

8. Without in any way restricting the operation of paragraphs 1, 2, 3 and 4 of
this clause, this Agreement does not cover any loss or liability accruing to the
Company, directly or indirectly, and whether as Insurer or Reinsurer caused by
any nuclear incident as defined in The Nuclear Liability Act, nuclear explosion
or contamination by radioactive material.


<PAGE>

NOTE:          In addition, this clause is applicable to all original contracts
               of the Company in effect on and after January 1, 1985 whether
               new, renewal or replacement which incorporate a nuclear
               incident/radioactive contamination exclusion as contained in Form
               IBC 1105 1-82.








<PAGE>



        NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY -REINSURANCE CANADA
                                     REV. 83
             Applicable to policies becoming effective on and after
                                January 1, 1985.
                                   (See Note)

         1. This Agreement does not cover any loss or liability accruing to the
Company as a member of, or subscriber to, any association of insurers or
reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.

         2. Without in any way restricting the operation of paragraph 1 of this
clause it is agreed that for all purposes of this Agreement all the original
liability contracts of the Company, whether new, renewal or replacement, of the
following classes, namely,

                           Personal Liability,
                           Farmers Liability,
                           Storekeepers Liability,

which become effective on or after 31st December, 1984, shall be deemed to
include, from their inception dates and thereafter, the following provision:-

         Limited Exclusion Provision

                  This Policy does not apply to injury, sickness, disease,
         death, damage or destruction with respect to which an Insured under
         this Policy is also insured under a contract of nuclear energy
         liability insurance (whether the Insured is named in such contract or
         not and whether or not it is legally enforceable by the Insured) issued
         by the Nuclear Insurance Association of Canada or any other group or
         pool of insurers or would be an Insured under any such policy but for
         its termination upon exhaustion of its limit of liability.

                  With respect to property, loss of use of such property shall
         be deemed to be damage to or destruction of property.

         3. Without in any way restricting the operation of paragraph 1 of this
clause it is agreed that for all purposes of this Agreement all the original
liability contracts of the Company, whether new, renewal or replacement, of any
class whatsoever (other than Personal Liability, Farmers Liability, Storekeepers
Liability or Automobile Liability contracts), which become effective on or after
31st December, 1984, shall be deemed to include, from their inception dates and
thereafter, the following provision:-

         Broad Exclusion Provision

                  It is agreed that this policy does not apply:

                           (a)      to liability imposed by or arising under the
                                    Nuclear Liability Act; nor

                           (b)      to bodily injury or property damage with
                                    respect to which an Insured under this
                                    policy is also insured under a contract of
                                    nuclear energy liability insurance (whether
                                    the Insured is unnamed in such contract and
                                    whether or not it is legally enforceable by
                                    the Insured) issued by the Nuclear Insurance
                                    Association of Canada or any other insurer
                                    or group or pool of insurers or would be an
                                    Insured under any such policy but for its
                                    termination upon exhaustion of its limit of
                                    liability; nor

                           (c)      to bodily injury or property damage
                                    resulting directly or indirectly from the
                                    nuclear energy hazard arising from:

                                      -1-
<PAGE>

                                   (i)      the ownership, maintenance,
                                            operation or use of a nuclear
                                            facility by or on behalf of an
                                            Insured;
                                   (ii)     the furnishing by an Insured of
                                            services, materials, parts or
                                            equipment in connection with the
                                            planning, construction, maintenance,
                                            operation or use of any nuclear
                                            facility; and
                                   (iii)    the possession, consumption, use,
                                            handling, disposal or transportation
                                            of fissionable substances, or of
                                            other radioactive material (except
                                            radioactive isotopes, away from a
                                            nuclear facility, which have reached
                                            the final stage of fabrication so as
                                            to be usable for any scientific,
                                            medical, agricultural, commercial or
                                            industrial purpose) used,
                                            distributed, handled or sold by an
                                            insured.

                                    As used in this policy:

                                    1.      The term "nuclear energy hazard"
                                            means the radioactive, toxic,
                                            explosive or other hazardous
                                            properties of radioactive material;
                                    2.      The term "radioactive material"
                                            means uranium, thorium, plutonium,
                                            neptunium, their respective
                                            derivatives and compounds,
                                            radioactive isotopes of other
                                            elements and any other substances
                                            that the Atomic Energy Control Board
                                            may, by regulation, designate as
                                            being prescribed substances capable
                                            of releasing atomic energy, or as
                                            being requisite for the production,
                                            use or application of atomic energy;
                                    3.      The term "nuclear facility" means:

                                            (a)      any apparatus designed or
                                                     used to sustain nuclear
                                                     fission in a
                                                     self-supporting chain
                                                     reaction or to contain a
                                                     critical mass of plutonium,
                                                     thorium and uranium or any
                                                     one or more of them;

                                            (b)      any equipment or device
                                                     designed or used for (i)
                                                     separating the isotopes of
                                                     plutonium, thorium and
                                                     uranium or any one or more
                                                     of them, (ii) processing or
                                                     utilizing spent fuel, or
                                                     (iii) handling, processing
                                                     or packaging waste;

                                            (c)      any equipment or device
                                                     used for the processing,
                                                     fabricating or alloying of
                                                     plutonium, thorium or
                                                     uranium enriched in the
                                                     isotope uranium 233 or in
                                                     the isotope uranium 235, or
                                                     any one or more of them if
                                                     at any time the total
                                                     amount of such material in
                                                     the custody of the insured
                                                     at the premises where such
                                                     equipment or device is
                                                     located consists of or
                                                     contains more than 25 grams
                                                     of plutonium or uranium 233
                                                     or any combination thereof,
                                                     or more than 250 grams of
                                                     uranium 235;

                                            (d)      any structure, basin,
                                                     excavation, premises or
                                                     place prepared or used for
                                                     the storage or disposal of
                                                     waste radioactive material;

                                      -2-
<PAGE>

                                            and includes the site on which any
                                            of the foregoing is located,
                                            together with all operations
                                            conducted thereon and all premises
                                            used for such operations.

                                    4.      The term "fissionable substance"
                                            means any prescribed substance that
                                            is, or from which can be obtained, a
                                            substance capable of releasing
                                            atomic energy by nuclear fission.

                                    5.      With respect to property, loss of
                                            use of such property shall be deemed
                                            to be damage to or destruction of
                                            property.

NOTE:          In addition, the clause is applicable to all the original
               liability contracts of the Company in effect after January 1,
               1985 whether, new, renewal or replacement of any class
               whatsoever, (other than Personal Liability, Farmers Liability,
               Storekeepers Liability or Automobile Liability contracts) which
               incorporate a Nuclear Energy Liability Exclusion as contained in
               Form IBC 2000 1-83.


                                      -3-
<PAGE>



CANADA
------

            NUCLEAR EXCLUSION CLAUSE - PHYSICAL DAMAGE AND LIABILITY

                  (BOILER AND MACHINERY POLICIES) - REINSURANCE

         (1) This reinsurance does not cover any loss or liability accruing to
the Reassured as a member of, or subscriber to, any association of insurers or
reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.

         (2) Without in any way restricting the operation of paragraph (1) of
this Clause it is understood and agreed that for all purposes of this
reinsurance all original Boiler and Machinery Insurance or Reinsurance contracts
of the Reassured shall be deemed to include the following provisions of this
paragraph;

     This Policy does not apply to loss, whether it be direct or indirect,
proximate or remote

                  (a)      from an Accident caused directly or indirectly by
                           nuclear reaction, nuclear radiation or radioactive
                           contamination, all whether controlled or
                           uncontrolled; or

                  (b)      from nuclear reaction, nuclear radiation or
                           radioactive contamination, all whether controlled or
                           uncontrolled, caused directly or indirectly by,
                           contributed to or aggravated by an Accident.

         (3) However, it is agreed that loss arising out of the use of
Radioactive Isotopes in any form hereby excluded from reinsurance protection.

         (4) Without in any way restricting the operation of paragraph (1)
hereof, it is understood and agreed that policies issued by the Reassured
effective on or before 31st December, 1958, shall be free from the application
of the other provisions of this Clause until expiry date or 31st December, 1961,
whichever first occurs, whereupon all the provisions of this clause shall apply.




<PAGE>


</TEXT>
</DOCUMENT>
