AMENDMENT NO.2 TO REINSURANCE POOLING AGREEMENT DATED JULY 1, 1998

                 AMENDMENT NO.2 TO REINSURANCE POOLING AGREEMENT
                               DATED JULY 1, 1998


Penn-America   Insurance  Company  ("PAIC")  and  Penn-Star   Insurance  Company
("PSIC"),  parties to the Reinsurance  Pooling  Agreement dated July 1, 1998, as
amended effective July 1, 2002 ("the Agreement"), intending to be legally bound,
due hereby  modify and amend the  Agreement,  effective  December 31,  2002,  as
follows:

         WHEREAS,  since July 1, 1998,  PAIC has under the  Agreement  ceded and
         transferred  to PSIC on a  quota  share  basis,  35% of  PAIC's  losses
         occurring on or after July 1 1998; and,

         WHEREAS,  since July 1, 1998, PAIC has not ceded or transferred to PSIC
         on a quota share basis or  otherwise,  any of PAIC's  losses  occurring
         prior to July 1, 1998; and,

         WHEREAS, the parties desire to achieve consistent  underwriting results
         for reporting periods after December 31, 2002;

         NOW THEREFORE,  in consideration of the foregoing,  PAIC and PSIC agree
         that effective December 31, 2002:

         (1) Article 2, entitled "Reinsurance of Pooled Business Assumed by
         PSIC", is amended by adding the following new paragraph after Article
         2.(b)(2):

               "Effective  December 31, 2002, PSIC hereby  reinsurers,  and PAIC
               hereby cedes and transfers to PSIC on a quota share basis, 35% of
               PAIC's losses,  both reported and unreported,  occurring prior to
               July 1, 1998. As consideration for this  reinsurance,  PAIC shall
               within thirty (30) days of December 31, 2002, assign and transfer
               to PSIC an amount in cash or invested assets  acceptable to PSIC,
               equal in the aggregate to 35% of PAIC's recorded  liabilities for
               unpaid losses and loss  adjustment  expenses on December 31, 2002
               for  both  reported  and  unreported  losses  occurring  on  PAIC
               policies prior to July 1, 1998."

         (2) Article 5, entitled "Settlements of Accounts", is amended by adding
         the following subsection (d) after Article 5.(B)(2)(c):

               "Effective  January  1,  2003,  PSIC  agrees  to pay  PAIC 35% of
               payments on losses occurring prior to July 1, 1998."

All other  terms and  conditions  of the  Agreement  remain  the same;  and this
Amendment  in no way  affects  the  parties'  obligations  otherwise  under  the
Agreement.

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IN WITNESS  WHEREOF,  the parties have  hereunto set their hands in the presence
of:

                      PENN-AMERICA INSURANCE COMPANY


                      BY:


                      PENN-STAR INSURANCE COMPANY


                      BY:


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