SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934


For the fiscal year ended December 31, 1997

                                       or

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES 
    EXCHANGE ACT OF 1934


For the transition period from__________________to_______________


                         Commission file number 022316
                                                -------

                            PENN-AMERICA GROUP, INC.
                            ------------------------
             (Exact name of registrant as specified in its charter)


      Pennsylvania                                    23-2731409
----------------------------                 ------------------------------
(State or other jurisdiction o           (I.R.S. Employer Identification Number
incorporation or organization)

420 S. York Road               
Hatboro, Pennsylvania                                            19040 
------------------------------------                          ----------
(Address of principal executive offices)                      (Zip Code)

Registrant's telephone number, including area code:     (215) 443-3600

            Securities registered pursuant to Section 12(b) of the Act:

                                      NONE

            Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $0.01 per share
                     ---------------------------------------
                                (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                  Yes      X                         No

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]

As of March 24,1998,  the aggregate  market value of the Common Stock held by
non-affiliates  of the Registrant  was  approximately  $66,695,525.  As of March
24,1998 there were 9,901,013 shares of the Common Stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Portions  of the  Registrant's  annual  report to  stockholders  for the  fiscal
year-ended December 31, 1997 are incorporated by reference in Parts I, II and IV
of this report.

Part III - Portions of the Registrant's  definitive Proxy Statement with respect
to the Registrant's  1998 Annual Meeting of Shareholders,  to be filed not later
than 120 days after the close of the Registrant's fiscal year.
<PAGE>                                              

                            PENN-AMERICA GROUP, INC.
                           ANNUAL REPORT ON FORM 10-K
                                DECEMBER 31, 1997

                                                                            Page
                                     PART I

ITEM 1. BUSINESS.............................................................. 3

ITEM 2. PROPERTIES............................................................17

ITEM 3. LEGAL PROCEEDINGS.....................................................18

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
        SECURITY-HOLDERS......................................................18


                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
        AND RELATED STOCKHOLDER MATTERS.......................................19

ITEM 6. SELECTED FINANCIAL DATA...............................................19

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
        FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................19

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................19

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
        ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE............................................................19

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
         REGISTRANT...........................................................20

ITEM 11. EXECUTIVE COMPENSATION...............................................21

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                    OWNERS AND MANAGEMENT.....................................21

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................21

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
         REPORTS ON FORM 8-K..................................................22

                                     page 2

<PAGE>


                                     PART I

ITEM 1.           BUSINESS

(a) General

    Penn-America  Group,  Inc. is a specialty  property and  casualty  insurance
holding  company  which,  through  its  subsidiaries,  markets  and  underwrites
commercial  property,  general  liability  and  multi-peril  insurance for small
businesses  located  primarily in small towns and suburban and rural areas,  and
nonstandard  personal  automobile  insurance.  The Company  provides  commercial
property and casualty insurance on both an excess and surplus lines basis and an
admitted basis,  and personal  automobile  insurance on an admitted  basis.  The
Company markets its products through 55 high quality general agents, who in turn
produce business through over 25,000 retail insurance brokers located throughout
the United States.  The Company  focuses on serving the insurance needs of small
or nonstandard markets which are generally characterized by small average policy
premiums and serviced by retail insurance brokers with limited access to larger,
standard lines insurers.  The Company  believes that these markets are generally
underserved   by  larger,   standard   lines  insurers  who  often  limit  their
underwriting to policies above a certain minimum premium size or to certain risk
classes  and who  operate  in  large-scale  markets  in which  they can  achieve
economies of scale. The Company  believes that its distribution  network enables
it to effectively  access these numerous small markets at a relatively low fixed
cost  through the  marketing,  underwriting  and  administrative  support of its
general agents,  as well as the localized  market knowledge and expertise of its
general agents and their retail insurance brokers.

    The  success of the  Company's  strategy is  demonstrated  by its strong and
consistent growth and  profitability.  From 1993 to 1997, gross written premiums
grew at a 31.0% compound annual rate, from $35.5 million to $104.7 million,  and
net operating  earnings  (excluding  realized  investment gains) grew at a 44.6%
compound  annual  rate,  from $2.0  million to $8.8  million.  The  Company  has
operated at a statutory  combined  ratio under  100.0% in every year since 1992.
The Company's  average SAP combined  ratio from 1992 to 1997 was 95.0%,  and the
Company's average return on average  stockholders' equity during the same period
was 14.8%.

    The Company's distribution strategy is to maintain strong relationships with
fewer and higher  quality  general  agents  than its  competitors.  The  Company
carefully  selects a limited  number  of  agents  in each  state  based on their
experience and reputation and strives to preserve each agent's  franchise  value
within its  marketing  territory.  The Company  seeks to grow with these general
agents and develop strong,  longstanding relationships by providing a high level
of  service  and  support.  From  1993 to  1997,  the  Company  achieved  194.7%
cumulative  growth in gross written premiums with a 44.7% increase in the number
of  general  agents  from 38 to 55. The  Company  maintains  low fixed  costs by
underwriting  the  substantial  majority of its policies on a binding  authority
basis.  The Company  closely  monitors the quality of business it underwrites by
maintaining  close  relationships  with a small  number of general  agents.  The
Company  provides its general  agents with a  comprehensive,  regularly  updated
underwriting   manual  which  clearly   outlines  the   Company's   pricing  and
underwriting  guidelines.  The Company does not write high risk policies  (e.g.,
medical  malpractice,   environmental  and  aviation  liability).   The  Company
generally reviews new and renewal commercial  policies on a continuous basis and
nonstandard personal automobile policies on a quarterly basis to ensure that its
underwriting guidelines are being followed. In addition to standard commissions,
the  Company  provides  strong  incentives  to its  general  agents  to  produce
profitable  business  through  a  contingent   commission   structure  which  is
substantially  tied to  underwriting  profitability  and through the issuance of
shares  of  common  stock  in lieu  of  cash  for a  portion  of the  contingent
commissions.

                                     Page 3

<PAGE>

    Historically,  the Company has  underwritten  the majority of its commercial
lines  business on an excess and  surplus  lines  basis.  In recent  years,  the
Company has  underwritten a greater  proportion of its commercial lines business
on an admitted basis,  as it has identified  profitable  admitted  markets which
remain  under-served by  larger  standard  insurers.   Currently,   the  Company
underwrites all of its nonstandard  personal  automobile business on an admitted
basis.  The Company expects to continue to expand its commercial  lines business
by offering  additional products and packages which enhance its current property
and  liability  coverages,  by  identifying  profitable  programs  and  books of
business and by selectively adding high quality general agents. Examples of such
additional  products and programs  include a commercial  automobile  product and
specialty  programs,  which may  include  miscellaneous  professional  liability
coverage.  The Company currently writes nonstandard personal automobile policies
in five states. The Company has filed applications to write personal  automobile
policies in three  additional  states and is considering  expanding into several
other states.

    The Company's  commercial insureds consist primarily of small, "Main Street"
businesses,  including restaurants,  taverns, retailers and artisan contractors,
located  principally  in small towns and suburban and rural areas.  In addition,
the Company has  developed  customized  products and  coverages  for other small
commercial  insureds such as day care  facilities,  fitness  centers and special
events.  The Company believes it has benefited from a general migration of small
businesses  out of urban  centers and into  suburban and rural  areas.  Industry
consolidation,  corporate  downsizing  and the increased  use of  communications
technology and personal computers,  among other factors, have contributed to the
high growth in the number of small  businesses  in these  areas.  The  Company's
nonstandard  automobile  insurance products are designed for insureds who do not
qualify for preferred or standard automobile  insurance because of their payment
history,  driving record,  age, vehicle type or other  underwriting  criteria or
market conditions.  Underwriting standards in the preferred and standard markets
have  become  more   restrictive,   thereby  requiring  more  insureds  to  seek
nonstandard  coverage  and  contributing  to an  increase  in  the  size  of the
nonstandard automobile market.

    Penn-America was formed in 1975 by Irvin Saltzman,  who began working in the
insurance  industry in 1947 when he founded a general  agency.  Jon S. Saltzman,
Irvin  Saltzman's son, is President and Chief  Executive  Officer of the Company
and has been  employed by the  Company  since 1986.  The  Company  completed  an
initial public offering ("IPO") on October 28, 1993, at a price to the public of
$6.00 per share.  Currently,  the Saltzman family,  substantially  through their
ownership of  Penn  Independent  Corporation,  owns  approximately  31.2% of the
Company's Common Stock.

(b) Financial Information About Industry Segments

    The  Company is of the  opinion  that all of its  operations  are within one
industry  segment and that no  information  as to industry  segments is required
pursuant to Statement of Financial  Accounting  Standards  No. 14 or  Regulation
S-X.

                                     Page 4

<PAGE>


(c) Lines of Business

    The  following  table  sets forth an  analysis  of gross  earned  premium by
specific product lines during the periods indicated:

<TABLE>
<CAPTION>

                                                             Year ended
                                           ---------------------------------------------------
                                     1997                     1996                 1995
                             ---------------------------------------------------------------------
                             Amount      Percent      Amount      Percent      Amount      Percent
                           ----------   ---------   ----------  -----------  ----------  ---------
                                                              (dollars in thousands)
<S>                         <C>           <C>       <C>            <C>         <C>        <C>     
Commercial multi-peril      $ 35,687       35.9%    $ 29,345        38.7%      $ 23,781     37.7%
Liability                     23,486       23.6       21,418        28.2         20,431     32.4
Auto liability                29,310       29.5       15,772        20.8         11,524     18.3
Property                       5,502        5.6        5,556         7.3          4,957      7.9
Auto physical damage           5,400        5.4        3,785         5.0          2,312      3.7
                            ---------    -------    -------     --------      ---------  ------

Total gross earned premium  $ 99,385        100%     $ 75,876        100%      $ 63,005     100.0%
                           ===========   =========   ==========  ===========  ==========  ========

</TABLE>

    


o    Commercial  General Liability.  The Company's  commercial general liability
     insurance  is  written  on  an  occurrence  policy  form  (as opposed to a 
     claims--made policy form)  and  provides limits   generally  ranging  from 
     $25,000 to $3 million,  with the majority of such  policies  having  limits
     of  between  $500,000  and  $1 million.  The  Company's  general  liability
     policies pay defense and related expenses in addition to per occurrence and
     aggregate policy limits.  General liability  insureds include  restaurants,
     bars and taverns, retail operations,  garage  liability,  contractors  and 
     similar classes.

o    Commercial Property. The Company's commercial property lines provide limits
     usually no higher than $4 million,  with almost all of the  policies  being
     written  at  limits  less  than  $1  million.  Properties  insured  include
     restaurants,  bars and taverns,  retail  operations,  vacant  buildings and
     other similar classes.

o    Commercial  Multi-Peril.  The  Company  also  writes  the  same  commercial
     property  and general  liability  risks  together  as a  "package"  for its
     insureds,  generally referred to as "commercial multi-peril." The limits on
     these policies are the same as if written on a monoline  basis.  Consistent
     with  the  current  industry  trend,  the  Company  has been  writing  more
     commercial multi-peril policies over the last several years than individual
     property and liability policies. The Company expects this trend to continue
     in light of the fact that a substantial number of the Company's  commercial
     insureds   customarily   require  both  liability  and  property  insurance
     coverage,  together with the revisions to Insurance Services Office ("ISO")
     forms  which make it easier and more  efficient  to write such  multi-peril
     policies.

o    Business Automobile and Commercial Umbrella. In late 1997, the Company
     added both business automobile and commercial umbrella coverages to enhance
     its commercial multi-peril ("package") writings. The types of risks and
     insureds targeted are similar to those already written, such as,
     restaurants, bars and taverns, retail operations, artisan contractors and
     similar classes. The business automobile insurance (cars and light trucks)
     can be written up to $1 million liability limits. Commercial umbrella
     insurance can be written for limits up to $5 million with significant
     reinsurance support from General Reinsurance. For commercial umbrella,
     Penn-America must write the primary $1 million liability limit. The Company
     expects that the addition of these coverages in 1998 will further expand
     package writings and help increase renewal retention of existing policies.
     In all of its commercial product lines, the Company is continuously
     developing specialized programs for certain industry segments
  
                                     Page 5
<PAGE>

     to meet the needs of these  market-places.  For  example,  the  Company has
     developed  programs for independent  fitness centers,  day care operations,
     artisan  contractors,   low-hazard  miscellaneous   professional  liability
     coverages and special events. As a group,  these programs are a significant
     benefit to the Company's marketing efforts,  although  individually they do
     not generate a material amount of the Company's gross written premiums.

     Non-Standard Personal Automobile. The Company currently writes non-standard
     personal  automobile  policies  in the  states of  Washington,  California,
     Alabama,  South Dakota and Nevada. These risks typically do not qualify for
     preferred or standard  insurance because of a driver's age, driving record,
     vehicle type or other factors.  The personal automobile business is written
     at very low coverage limits. The Company writes a majority of this coverage
     on a six-month basis in Washington, Alabama and South Dakota. In California
     and Nevada,  the  coverage  is written  predominantly  on a monthly  policy
     basis.

(d) Marketing and Distribution

     The Company  currently  markets  its  insurance  products  through a select
number of high quality  general  agents.  The Company  believes that it benefits
significantly  from a general agency system  because it obtains the  significant
underwriting  and  marketing  expertise  of the  general  agents who have strong
business experience and relationships in their local territory. In addition, the
general  agency  system  allows the Company to avoid the expense of  maintaining
national or regional sales forces. This enables the Company to focus its efforts
on reviewing the underwriting  decisions of its agents and evaluating submission
business,  rather than devoting greater resources to making routine underwriting
decisions.   The  Company  actively  competes  for  quality  general  agents  to
distribute its products.  The Company  selectively  appoints  general agents and
grants authority on a  state-by-state  basis so that each general agent only has
authority in a state(s) where they have marketing expertise. Prior to appointing
a general  agent,  the Company  extensively  reviews the  candidate's  financial
condition,  geographic  diversification of risk,  historical loss experience and
reputation, as well as the agent's results and practices with other insurers. An
on-site review is made of the prospective agent's office,  including an audit of
selected policy files and confirmation that the agent has sufficient  experience
to merit authority to bind the Company only to appropriate  risks.  The agent is
also interviewed at the Company's  office in order to confirm the  compatibility
between the agent and the Company's  underwriting  staff.  Such a  comprehensive
review is  necessitated  by the Company's  philosophy of  establishing  an agent
relationship only if it has long-term potential.

     Once   appointed,   the  Company   provides   each  general  agent  with  a
comprehensive  agency manual which  enables the agent to begin writing  business
immediately.  The manual  allows the agent to write  coverages  effectively  and
consistently within the Company's  comprehensive  underwriting  guidelines.  The
agents are provided  limited  binding  authority,  based  primarily on Insurance
Services Office ("ISO") rates and forms, to write a variety of property, general
liability,  commercial  multi-peril and personal automobile  business,  provided
that the risks and terms  involved  in a  particular  coverage  are  within  the
guidelines  set forth in the agency  manual.  The Company has devoted  extensive
research to the  development of its detailed  agency manual to enable its agents
to select and price risks consistently. The Company's agency manual is regularly
updated to be  responsive  to changes in the  marketplace.  The Company  devotes
substantial  resources to the  continuous  monitoring and support of its general
agents.

     The general  agents are  compensated  on a  commission  basis,  which is on
average 21.4% of the gross written premium for commercial business and 27.4% for
                                     Page 6
<PAGE>
personal lines automobile business. A portion of this commission is passed on to
the retail insurance broker.  In addition,  the general agency contracts between
the Company and its general agents contain profit contingency  inducements under
the Agents' Profit Sharing and Performance  Award Program,  which is designed to
reward  general  agents who meet the  Company's  loss ratio and  premium  volume
criteria. The Company also provides performance awards under this program to its
commercial  agents for timely  policy  issuance,  timely  premium  payments  and
successful  underwriting  audits.  Such  contingent  commissions and performance
awards  accounted for 5.5% of the total commissions paid by the Company in 1997.
During 1995, the  Agents'  Profit  Sharing  and  Performance  Award  Program was
modified to provide that at least one-third of the contingent  commission awards
would be given in the form of common stock. The Company authorized 75,000 shares
of common stock for issuance  under this program.  Stock awards for 1996,  which
were issued in May 1997, amounted to 27,746 shares,  accounting for 51.4% of the
total contingent commissions paid for 1996. In May 1997, the Company began a new
program under which the Company will award $1,000 in the form of Common Stock to
each new general agent it appoints.  The contingent stock award for 1997 will be
issued in May 1998.

    The following table sets forth the geographic  distribution of the Company's
gross written premiums for the periods indicated:

<TABLE>
<CAPTION>

                    Year ended             Year ended             Year ended
              ------------------------------------------------------------------
                December 31, 1997      December 31, 1996     December 31, 1995
             ---------------------    ------------------    -------------------
                Amount      Percent     Amount   Percent   Amount      Percent
            (in thousand)           (in thousands)      (in thousand)
                                                                                      
<S>            <C>         <C>         <C>          <C>      <C>          <C>
Pacific        26,126      25.0%      $ 29,435       36.6%   $ 24,823      37.2%
South          16,236      15.5         15,677       19.5      12,519      18.7
Mid-Atlantic    9,876       9.4         10,665       13.2      10,607      15.8
New England     7,514       7.2          7,832        9.7       7,849      11.7
Southwest      18,625      17.8         11,693       14.5       7,949      11.9
Midwest        12,198      11.7          4,685        5.8       2,977       4.4
Mountain       14,119      13.4            509        0.7         229       0.3
             =========   ========     ==========   =======    =======    =======
              104,694     100.0%      $ 80,496      100.0%   $ 66,953     100.0%
            ==========  =========    ==========  =========    =======    =======
</TABLE>
                       

(e) Underwriting and Pricing

    In the  commercial  property  and  casualty  market,  the rates and terms of
coverage  provided by property and casualty  insurance  carriers are  frequently
based on ISO rates and  forms.  ISO makes  available  to its  members  advisory,
rating,   statistical  and  actuarial  services,  policy  language  and  related
services.  ISO and its related  organizations  currently  provide such services,
including  rates and forms,  to more than 1,500 property and casualty  insurance
companies  in the U.S.  One of the  important  services  that ISO provides is an
actuarial-based  estimate  of the  "ideal"  premium  rate  for  risks in each of
approximately 1,250 risk classifications. These rates reflect an analysis of the
loss and loss  adjustment  expenses on claims  reported to ISO. ISO  statistics,
however,  include  only  claims  and policy  information  reported  to ISO,  and
therefore do not reflect all of the loss  experience  for each class.  Also, the
historical  results  for a  particular  class may not be  sufficient  to provide
actuarially meaningful results.

    The Company  primarily uses ISO statistics as a benchmark for risk selection
and pricing. Other carriers may or may not rely heavily on this information, and
several of the larger  standard  carriers  have  developed  their own  actuarial
databases.  As a general rule,  most standard  carriers set rates lower than ISO
                                     Page 7

<PAGE>
rates.  However, the Company,  because of its strategy of providing insurance to
underserved markets, typically charges 100% of prescribed ISO rates or more.

    All  policies  written by the  Company are either  generated  by the general
agents pursuant to their binding authority or on a submit basis from the general
agents if the risk falls outside of that authority.  In 1997,  approximately 93%
of the commercial  policies  written by the Company were on a binding  authority
basis,  generating  approximately  82% of the Company's  commercial  lines gross
written premiums. The personal automobile program is written solely on a binding
authority  basis.  The Company has established  strict  commercial  underwriting
guidelines  within the terms of its agency manual which identify the risks that:
(i) are  within  the  binding  authority  of the  general  agents;  (ii) must be
submitted  to the Company and (iii) the Company  would not insure on  any  basis
The agency manual was prepared after extensive  research,  including  input from
its  commercial   reinsurers,   and   is   regularly  updated by  the  Company's
underwriting  staff.  Generally,  the Company  provides its general  agents with
pricing  flexibility  on a  per-policy  basis,  with the  objective  that in the
aggregate,  the  weighted  average  premium  of all new and  renewal  commercial
policies written by a general agent are at approximately 110% of ISO rates. Most
standard carriers typically price at 60-80% of ISO rates, based on ISO data. The
Company's  underwriting staff carefully monitors its general agents and performs
on-site  reviews and  underwriting  audits of its agents on a periodic basis for
quality and compliance with Company guidelines.

    With respect to  commercial  risks  written by general  agents under binding
authority, the Company generally has 60 days from the effective date to cancel a
policy if the risk  insured  does not  comply  with the  Company's  underwriting
guidelines.  In the event an agent  exceeds its authority by binding the Company
on a risk when it had no authority to do so, the Company is  at  risk  for  that
policy until it receives the policy and effects a cancellation.  General  agents
must deliver all  policies  to the  Company  within 35 days of the date written.
The Company monitors this activity  closely  through  its  computer  system  and
underwriting department.

    The  commercial  risks the Company  writes on a submit  basis are  generally
similar to the binding authority classes, but may have larger coverage limits or
greater  complexity.  In determining whether to accept such risks, the Company's
underwriting  staff will  review such  factors as the type of risk,  the agent's
knowledge  and control of the risk,  potential  underwriting  profitability  and
historical  data  regarding  any similar  risk  previously  underwritten  by the
Company.  During  this  process,  the  Company  will  quote a  proposed  premium
reflecting  relevant  ISO  rates,  if  available,  and  adjustments  that may be
warranted based on the individual  characteristics  of the particular  risk. The
underwriting  staff then assembles a complete  underwriting file with respect to
the  particular  submission  and  specific  approval  procedures  are  employed,
depending on the characteristics and magnitude of the particular risk.

    The Company generally  reviews all commercial  policies as they are received
from  general  agents  for  completeness,  accuracy,  and  compliance  with  the
Company's  underwriting  guidelines.  Further,  the Company  conducts a detailed
audit of each of its  general  agents at least once a year.  The audit  involves
thoroughly  reviewing  between 50 and 100  policies  to check for  completeness,
accuracy,  pricing, use of proper exclusions,  verification of information,  and
compliance with the Company's regulatory filings, as well as the general agent's
use of the Company's overall product lines.

    The  Company  routinely  reviews  selected  data  for  nonstandard  personal
automobile   policies  as  such  data  is  received  from  general   agents  for
completeness,   accuracy,   and  compliance  with  the  Company's   underwriting
guidelines.  Generally,  the Company  conducts  detailed  on-site  audits of its
general agents on a quarterly basis. These audits involve  thoroughly  reviewing
between 50 and 100 policies to verify proper classifications,  ratings, accident
                                     Page 8

<PAGE>
and  violation  surcharges,  adherence  to  manual  guidelines,  use  of  proper
exclusions,  verification of information  relative to inspections and compliance
with the Company's regulatory filings.  The Company  provides its general agents
with written feedback based on the results of its audits and monitors  their 
timely responses to any issues highlighted in such audits.  
      
(f) Claims Management and Administration

    The  Company's  approach to claims  management  is  designed to  investigate
reported incidents at the earliest juncture, to select, manage and supervise all
legal and adjustment  aspects thereof and to provide a high level of service and
support to general agents,  retail insurance brokers and insureds throughout the
claims process.  The Company's general agents have no authority to settle claims
or  otherwise  exercise  control over the claims  process.  All  commercial  and
personal lines claims are  supervised  and processed  centrally by the Company's
claims management staff. Senior management reviews all claims over $25,000.

(g) Reserves

    The Company is directly liable for loss and loss adjustment expense payments
under the terms of the insurance policies that it writes. In many cases, several
years may elapse between the occurrence of an insured loss, the reporting of the
loss to the Company and the Company's payment of that loss. The Company reflects
its  liability  for  the  ultimate  payment  of all  incurred  losses  and  loss
adjustment  expenses by establishing  loss and loss adjustment  expense reserves
for both reported and  unreported  claims,  which are balance sheet  liabilities
representing  estimates  of future  amounts  needed to pay  claims  and  related
expenses.

    When a claim involving a probable loss is reported,  the Company establishes
a case reserve for the estimated amount of the Company's  ultimate loss and loss
adjustment expense payments.  The estimate of the amount of the ultimate loss is
based upon such  factors as the type of loss,  jurisdiction  of the  occurrence,
knowledge  of the  circumstances  surrounding  the claim,  severity of injury or
damage,  potential for ultimate exposure and policy  provisions  relating to the
claim. The loss adjustment  expenses include the estimated  expenses of settling
the claim, including legal and other fees, and general expenses of administering
the claims adjustment process.

    All newly  reported  claims  received  with  respect to personal  automobile
policies are set up with an initial average  reserve.  The average  reserves for
these claims are  determined  every quarter by dividing all of the closed claims
into the total  amount paid during the three  month  period.  If a claim is open
more than 90 days,  that open case  reserve  is  evaluated  and the  reserve  is
adjusted  upward  or  downward  according  to the  facts  and  damages  of  that
particular claim.

    In  addition,  management  establishes  reserves  on an  aggregate  basis to
provide for Incurred But Not Reported Losses ("IBNR"). The Company's independent
actuarial  consultant  annually  reviews the provision for IBNR and the reserves
taken as a whole. The Company does not discount its loss reserves. The estimates
of reserves are subject to the effect of trends in claims severity and frequency
and are  continually  reviewed.  As part of this  process,  the Company  reviews
historical data and considers  various factors,  including known and anticipated
legal  developments,   changes  in  social  attitudes,  inflation  and  economic
conditions.  As  experience  develops  and other data  become  available,  these
estimates  are  revised,  as  required,  resulting  in increases or decreases to
existing  reserves.  Adjustments  are  reflected in results of operations in the
period  in  which  they  are  made  and may  deviate  substantially  from  prior
estimates.

                                     Page 9

<PAGE>


    The  following  table sets forth a  reconciliation  of beginning  and ending
reserves as shown on the Company's  financial  statements (on a GAAP basis gross
of reinsurance)  for unpaid losses and loss adjustment  expenses for the periods
indicated:

<TABLE>
<CAPTION>
                                                                   Year ended December 31,
                                                              ----------------------------------
                                                               1997          1996        1995
                                                            -----------   ----------  ----------
                                                                         (in thousands)
<S>                                                          <C>           <C>         <C>
Reserves for unpaid losses and loss adjustment expenses,
   at beginning of year                                      70,728        $ 60,139    $ 44,796
                                                            -----------   ----------  ----------
Incurred losses and loss adjustment expenses:
   Provision for insured events of the current year          61,916          48,076      40,606
   Increase (decrease) in provision for insured
      events of prior years                                     916           3,744       3,377
                                                            ----------   -----------  ----------
Total incurred losses and loss adjustment expenses           62,832          51,820      43,983
                                                            ---------    -----------  ----------
Payments:
   Losses and loss adjustment expenses attributable
      to insured events of the current year                  21,408          17,931      13,054
   Losses and loss adjustment expenses attributable
      to insured events of prior years                       27,586          23,300      15,586
                                                           ---------      ----------   ---------
Total payments                                               48,994          41,231      28,640
                                                           ---------      ----------   ---------
Reserves for unpaid losses and loss adjustment expenses,
   at end of year                                          $ 84,566        $ 70,728     $ 60,139
                                                          ==========      ==========  ===========
</TABLE>


    The  Company  has  experienced  adverse  development  of gross  reserves  of
$916,000,  $3.7 million and $3.4 million in 1997,  1996 and 1995,  respectively,
for prior years' insured events. The net reserves had unfavorable development of
$341,000 for 1997 and favorable development of $804,000 and $1.7 million in 1996
and 1995,  respectively.  The  unfavorable  development  on the  gross  reserves
occurred  primarily on the gross  reserves  held as of December 31, 1993,  which
deficiency is ceded to the Company's  reinsurers. The unfavorable development on
the  net  reserves  in  1997  was  primarily due to the personal auto line.  The
establishment of reserves is  an inherently  subjective  process and, therefore,
the historical gross or net redundancies or  deficiencies  are not indicative of
the likelihood or amount of future redundancies or deficiencies. 


    The  following  table  represents  the  development  of unpaid loss and loss
adjustment  expense  reserves  during the ten years ended December 31, 1996. The
top of the table reflects the ten year development of the Company's reserves net
of reinsurance. The bottom of the table reconciles 1997, 1996, 1995, 1994, 1993,
and 1992 ending  reserves to the gross  reserves in the  Company's  consolidated
financial statements. Prior to 1992, the Company developed its reserves on a net
of reinsurance basis and restatement for those prior years is not presented. The
top line of the table  shows the  estimated  reserve  for  unpaid  loss and loss
adjustment  expenses at the balance sheet date for each of the indicated  years.
These figures  represent the estimated amount of unpaid loss and loss adjustment
expenses  for claims  arising in all prior years that were unpaid at the balance
sheet date,  including  losses that had been incurred but not yet reported.  The
table also shows the  re-estimated  amount of the  previously  recorded  reserve
based on experience as of the end of each succeeding  year. The estimate changes
as more  information  becomes  available  about the  frequency  and  severity of
claims.

                                    Page 10


<PAGE>
<TABLE>
<CAPTION>

                                 1987     1988     1989     1990     1991     1992      1993    1994     1995      1996       1997
                                     
<S>                              <C>     <C>      <C>       <C>      <C>      <C>    <C>       <C>      <C>        <C>       <C>
Reserves for unpaid losses and  $18,618  $21,741  $25,391  $25,352  $25,681  $26,110  $26,830  $35,307  $46,512    $55,656   $68,863
     loss adjustment expenses,
     as stated

a.  Net cumulative paid as of
     1 year later                $4,641   $4,911   $8,655   $6,929   $6,605   $7,381   $6,852  $12,383  $17,208    $23,660
     2 years later                6,995   10,743   13,361   11,610   10,988   11,127   13,127   20,617   29,612
     3 years later               11,728   14,132   16,952   14,667   13,325   15,546   18,656   27,266
     4 years later               14,127   15,823   19,050   16,341   16,417   19,253   22,254
     5 years later               15,209   17,074   20,359   18,363   19,283   21,503
     6 years later               16,023   17,405   21,866   20,214   20,872
     7 years later               16,219   18,303   23,383   21,470
     8 years later               16,636   19,248   24,476
     9 years later               17,157   20,133
     10 years later              17,788

b.  Reserves re-estimated as 
      of end of year
     1 year later               $18,483  $21,036  $25,128  $23,468  $23,228  $24,478  $23,897  $33,601   $45,708   $55,997
     2 years later               18,054   21,396   24,329   22,658   22,383   21,945   23,489   34,281    47,225    
     3 years later               18,370   20,570   23,923   22,252   20,471   22,032   24,558   36,453           
     4 years later               17,739   20,206   23,615   21,465   20,819   22,767   26,335                 
     5 years later               17,552   19,822   23,639   21,469   21,726   23,935
     6 years later               17,342   19,499   24,021   21,990   22,550
     7 years later               17,488   19,621   24,683   22,609                                      
     8 years later               17,432   20,222   25,379
     9 years later               17,932   20,829
     10 years later              18,374

Net cumulative redundancy          $244     $912      $12   $2,743   $3,131   $2,175     $495 ($1,146)    ($713)    ($341)
     (deficiency)
Gross liability for unpaid 
     losses and loss adjustment
     expenses, as stated                                                     $31,703  $33,314  $44,796    $60,139  $70,728   $84,566
Reinsurance recoverable                                                        5,593    6,484    9,489     13,627   15,072    15,703
Net liability for unpaid losses
     and loss adjustment 
     expenses, as stated                                                     $26,110  $26,830  $35,307    $46,512  $55,656   $68,863

Gross liability re-estimated - 
     1 year later                                                            $30,609  $32,796  $48,173    $63,884  $71,644   
Reinsurance recoverable
     Net Liability re-estimated                                                6,131    8,899   14,572     18,176   15,647   
     1 year later                                                            $24,478  $23,897  $33,601    $45,708  $55,997
                                -------   -------  -------  ------  ------- --------  -------  -------    -------  --------  -------
                                                                                                                            
                                                                                                                            
                                                                                                                             
Gross liability re-estimated 
     - 2 years later                                                         $30,390  $36,243  $53,009    $66,405
Reinsurance recoverable 
     re-estimated                                                              8,445   12,754   18,728     19,180
Net liability re-estimated
      - 2 years later                                                        $21,945  $23,489  $34,281     47,225
                                -------   -------  -------  ------  ------- --------  -------  -------    --------   -------  ------

Gross liability re-estimated 
     - 3 years later                                                         $33,992  $41,600  $56,042
Reinsurance recoverable 
     re-estimated                                                             11,960   17,042   19,589
Net liability re-estimated 
     - 3 years later                                                         $22,032  $24,558   36,453                             
                               --------   -------  -------  ------  ------- --------  -------  -------    --------   -------  ------

Gross liability re-estimated 
     - 4 years later                                                         $38,165  $43,824 
Reinsurance recoverable 
     re-estimated                                                             15,398   17,489
Net liability re-estimated
      - 4 years later                                                        $22,767  $26,335
                                --------   -------  -------  ------  ------- --------  -------  -------    --------   -------  -----

Gross liability re-estimate 
     - 5 years later                                                         $39,956
Reinsurance recoverable 
     re-estimated                                                             16,021
Net liability re-estimated
      -5 years later                                                         $23,935
                                --------   -------  -------  ------  ------- --------  -------  -------    --------   -------  -----
Gross cumulative deficiency                                                  ($8,253) ($10,510) ($11,246)  ($6,266)   ($916)
</TABLE>
a.  Net cumulative paid "as of" equals the amounts of paid losses and loss 
    adjustment expenses subsequent to the year in which the original reserves 
    were established.
b.  Reserves re-estimated "as of" equals the amounts of unpaid losses and loss
    adjustment expenses which the company would have originally established
    based on experience as of the end of each succeeding year. These amounts
    were  calculated  as  the  sum  of the  cumulative  paid  amounts described
    described  in (a.) above plus the amounts of unpaid  losses and loss  
    adjustment expenses reevaluated at the end of each succeeding year end.

                                     Page 11

<PAGE>


    The cumulative  redundancy or deficiency  represents the aggregate change in
the reserve  estimates  over all prior years.  It should be emphasized  that the
table  presents a run-off of balance  sheet  reserves  rather  than  accident or
policy year loss development.  Therefore,  each amount in the table includes the
effects of changes in reserves for all prior years.

    The  following  table sets forth  ratios for the  Company  and the  industry
prepared in accordance with statutory accounting practices ("SAP") prescribed or
permitted by state insurance  authorities.  The statutory  combined ratio, which
reflects  underwriting  results  but not  investment  income,  is a  traditional
measure of the underwriting performance of a property and casualty insurer. This
ratio  is the sum of (i) the  ratio  of  incurred  losses  and  loss  adjustment
expenses to net earned  premium ("loss  ratio");  and (ii) the ratio of expenses
incurred for commissions,  premium taxes,  administrative and other underwriting
expenses to net written premium ("expense ratio").

             
                                               Year ended December 31,
                                         ---------------------------------------
                                             1997         1996          1995
                                         -----------   ----------   ------------
The Company:
SAP Basis
Loss and loss adjustment expense ratio       63.0%         62.7%        62.6%
Expense ratio                                32.3          31.6         30.4
                                         ===========   ==========   ============
Combined ratio                               95.3%         94.3%        93.0%
                                         ===========   ==========   ============


                                               Year ended December 31,
                                         ---------------------------------------
                                              1997         1996          1995
                                         -----------   ----------   ------------
Property and casualty insurance industry (1):
SAP Basis
Loss and loss adjustment expense ratio        73.4%         78.6%        78.9%
Expense ratio                                 26.6          26.2         26.1
Dividend ratio                                 1.1           1.1          1.4
                                         ===========   ==========   ============
Combined ratio                               101.1%        105.9%       106.4%
                                         ===========   ==========   ============

(1)   Source:  Industry  Estimate for the first nine months of 1997,  Best Week,
      P/C Supplement, December 29, 1997 edition, including dividend ratios. 1996
      and 1995, Best Aggregates & Averages - P/C.


(h) Reinsurance

    The Company  purchases  reinsurance  through  contracts called "treaties" to
reduce its exposure to liability on  individual  risks,  and to protect  against
catastrophic  losses.  Reinsurance involves an insurance company transferring or
"ceding"  a  portion  of  its  exposure  on  a  risk  to  another  insurer  (the
"reinsurer").  The reinsurer assumes the exposure in return for a portion of the
premium.  The ceding of liability to a reinsurer does not legally  discharge the
primary  insurer from its liability for the full amount of the policies on which
it obtains  reinsurance.  The primary insurer will be required to pay the entire
loss if the  reinsurer  fails  to meet its  obligations  under  the  reinsurance
agreement.

    In formulating  its  reinsurance  programs,  the Company is selective in its
choice of reinsurers and considers numerous factors, the most important of which
are the  financial  stability of the  reinsurer,  its history of  responding  to
claims and its overall reputation.  In an effort to minimize its exposure to the

                             Page 12
<PAGE>
insolvency  of its  reinsurers,  the Company  evaluates  the  acceptability  and
reviews the financial condition of each reinsurer annually. The Company's policy
is to use only  reinsurers  that have an A.M. Best rating of "A  (Excellent)" or
better and that have at least $250 million in policyholder surplus.

    The Company's current treaty  reinsurance is with General Re, which is rated
"A++  (Superior)" by A.M.  Best.  Since January 1995, the Company has maintained
net retention  limits of $500,000  (including  indemnity  and/or loss adjustment
expense) for casualty  insurance  and  $200,000 for property  insurance,  with a
combined Company  retention for any one loss resulting from a common  occurrence
involving both the property and casualty  coverage on a single risk of $500,000.
Effective January 1, 1998, the Company  increased  its  retention  for  property
insurance to $300,000 from  $200,000 per risk.  The retention for  casualty risk
for 1998 remained  the same.  The Company  also  maintains  casualty  contingent
excess coverage with General Re, which covers exposures such as punitive damages
and other extra-contractual obligations, losses in excess of policy limits (such
as bad faith and errors and omissions)  and  liability  actions  brought  by two
or more of the Company's insureds  against  each  other resulting  from the same
occurrence.  

    The Company is covered for catastrophe  losses by a consortium of reinsurers
for 1998 such as General  Re and  Lloyds  of  London  and  other  "A"  rated  or
better reinsurers. Under  the terms  of the agreement,  the Company  retains the
first $2 million of losses and the  consortium  reinsures  95.0% of the next $23
million, with the Company retaining  5.0% of each  of  the layers within the $21
million.

    The Company may write  individual  risks with limits greater than the treaty
limits on a per policy basis by using facultative  reinsurance.  The facultative
reinsurers must also meet Penn-America's reinsurer guidelines.


The  following  table  reflects  the amount of premiums  written and ceded under
reinsurance treaties:

                                           Year ended December 31,
                                    -----------------------------------------
                                       1997           1996          1995
                                       ----           ----          ----
                                                 (in thousands)

Gross written premiums              $ 104,694      $ 80,496       $ 66,953
Ceded written premiums                  8,133         7,027          5,667


(i) Investments

The Company's  investment policy seeks to maximize  investment income consistent
with the  overriding  objective of maintaining  liquidity and  minimizing  risk.
Approximately  84.4% of the  Company's  investment  portfolio as of December 31,
1997  consisted of  investment-grade  fixed  income  securities  and  short-term
investments.  Approximately 98.5% of the Company's fixed income securities as of
December  31,  1997  were  rated  "A-" or  better  by  Standard  & Poor's  or an
equivalent  rating by Moody's.  As of December 31,  1997,  the  Company's  fixed
maturity  investments  had an average  duration of 3.01 years.  Publicly  traded
equity  securities,  the  majority  of  which  consisted  of  preferred  stocks,
represented 15.6% of the Company's investment portfolio as of December 31, 1997.

    As of December 31, 1997, the Company's  investment portfolio contained $38.4
million (21.8%) of  mortgage-backed  and asset-backed  securities.  All of these
securities    are    "AAA"-rated    securities    issued   by   government   and
government-related  agencies,  are  publicly  traded,  and  have  market  values
obtained from an external pricing  service.  Changes in estimated cash flows due
                              Page 13
<PAGE>

to changes in prepayment  assumptions from the original purchase assumptions are
revised based on current interest rates and the economic  environment.  Although
the Company is permitted to invest in other  derivative  financial  instruments,
real estate mortgages and real estate, the Company does not participate in these
markets and does not have any such investments in its investment portfolio.

    The  Company's  investment  portfolio is under the direction of the Board of
Directors of Penn-America acting through its Investment Committee (consisting of
Irvin  Saltzman,  Chairman,  Jon  Saltzman  and  Robert  Lear).  The  Investment
Committee establishes and monitors the Company's investment policies,  which are
intended to maximize  after-tax income while maintaining a high level of quality
and  liquidity  in  its  portfolio  for  insurance  operations.  All  investment
transactions must receive approval from the Chairman of the Investment Committee
prior to their initiation by the Company's outside investment advisors.

    In April 1997, the Company retained General Re, New England Asset Management
("NEAM"), to manage the fixed income portfolio. The Investment Committee retains
Carl Domino  Associates,  L.P.  ("CDA"),  a registered  investment  advisor,  to
recommend purchases and sales for the equity portfolio.

The following table shows the  classifications  of the Company's  investments at
December 31, 1997:
<TABLE>
<CAPTION>
                                                                           Amount
                                                                         reflected
                                                          Fair           on balance        Percent of
                                                          value             sheet            total
                                                     --------------   ----------------    -------------
                                                                         (In thousands)
<S>                                                    <C>                 <C>                 <C>
Fixed maturities:
    Available for sale
      U.S. Treasury securities and obligations of
         U.S. government agencies                      $ 22,831           $ 22,831              13.0%
      Corporate securities                               30,537             30,537              17.4
      Mortgage-backed securities                         11,792             11,792               6.7
      Other structured securities                        18,694             18,694              10.6
      Public utilities                                    6,125              6,125               3.5
                                                      ----------           --------          --------
      Total available for sale                           89,979             89,979              51.2
                                                      ----------           --------          --------

    Held to maturity
      U.S. Treasury securities and obligations of
         U.S. government agencies                        21,535             21,466              12.2
      Corporate securities                               11,326             11,284               6.4
      Mortgage-backed securities                          7,965              7,901               4.5
      Public utilities                                    6,058              6,041               3.5
      Other securities                                      150                150               0.1
                                                        ---------          --------           -------
      Total held to maturity                             47,034             46,842              26.7
                                                        ---------         ---------           -------
Total fixed maturities                                  137,013            136,821              77.9
                                                        ---------         ---------           -------

Equity investments:
      Common stock                                        6,435              6,435               3.7
      Preferred stock                                    20,945             20,945              11.9
                                                        -------           ---------            ------   
      Total equity investments                           27,380             27,380              15.6
                                                        --------          ---------           -------

Short-term investments                                   11,455             11,455               6.5
                                                       =========          =========            =======
      Total investments                                $ 175,848          $ 175,656             100.0%
                                                       =========          =========            =======
</TABLE>
                                             Page 14

<PAGE>


The following  table sets forth the  composition  of the Company's  portfolio of
fixed maturity investments by rating at December 31, 1997:
<TABLE>
<CAPTION>
                                                           Amortized      Percentage      Cumulative
                                                              Cost       of portfolio     percentage
                                                         -----------------------------------------------
                                                                        (in thousands)
                      Ratings (1)
------------------------------------------
<S>                                                         <C>             <C>               <C>
AAA (including U.S. government obligations)                $ 83,449          61.3%            61.3%
AA                                                           14,765          10.9             72.2
A                                                            35,810          26.3             98.5
BBB                                                           2,003           1.5            100.0
                                                         -----------------------------------------------
                                             Total        $ 136,027         100.0%           100.0%
                                                         ===============================================
</TABLE>


(1)   Ratings are  assigned  primarily  by Standard & Poor's with the  remaining
      ratings  assigned by Moody's and  converted to the  equivalent  Standard &
      Poor's ratings.



    The following table sets forth investment results of the Company for each of
the years in the three years ended December 31, 1997:

                                         1997            1996          1995
                                                    (in thousands)

Interest on fixed maturities           $ 7,506        $ 6,108        $ 4,615
Dividends on equity securities           1,123            691            533
Interest on short-term
    investments and cash                   852            380            291
Other                                       42             61             42
                                   -------------------------------------------
Total investment income                  9,523          7,240          5,481
Investment expense                        (305)          (535)          (414)
                                   -------------------------------------------
Net investment income                    9,218        $ 6,705        $ 5,067
                                   ===========================================

(j) Competition

    The property  and  casualty  insurance  industry is highly  competitive  and
includes several thousand insurers, ranging from large companies offering a wide
variety of products  worldwide  to smaller,  specialized  companies  in a single
state or region and  offering in some cases only a single  product.  The Company
competes  with a  significant  number of these  insurers in  attracting  quality
general agents and in selling insurance products. Many of the Company's existing
or potential  competitors are larger,  have  considerably  greater financial and
other resources,  have greater  experience in the insurance industry and offer a
broader line of insurance  products than the Company.  In commercial  lines, the
Company competes with excess and surplus lines and specialty  admitted  insurers
including  Scottsdale  Insurance  Company (part of Nationwide  Mutual  Insurance
Company),  Essex Insurance  Company  (Markel  Corporation),  Nautilus  Insurance
Company (W.R.  Berkley  Corporation),  Acceptance  Insurance Company and Western
World Insurance Company. The Company competes in nonstandard personal automobile
lines with, among others,  Viking Insurance  Company (Orion Capital),  Financial
Indemnity  Company  (Unitrin,  Inc.),  Essex  Insurance  Company  and Five  Star
Insurance  Company. 
                                    Page 15
<PAGE>
The  Company  also  competes  with new  forms of  insurance organizations  (such
as risk retention groups) and alternative self-insurance mechanisms. The Company
believes  that in order  to be  successful in  its market,  it  must be aware of
pricing cycles, must be able to minimize the impact of such cycles through tight
expense  control  and superior  customer  service  and must continually identify
profitable  opportunities. Other competitive  factors  include ratings  by  A.M.
Best, pricing and  admitted  versus  excess  and surplus lines status in a given
state.

(k) Regulation

    General.  The Company is subject to regulation under the insurance  statutes
and regulations,  including  insurance holding company statutes,  of the various
states in which it does  business.  These  statutes  are  generally  designed to
protect the interests of insurance policyholders, as opposed to the interests of
stockholders, and they relate to such matters as the standards of solvency which
must be met and  maintained;  the  licensing of insurers and their  agents;  the
nature and limitations of investments; deposits of securities for the benefit of
policyholders;  approval of policy forms and premium rates; periodic examination
of the affairs of insurance  companies;  annual and other reports required to be
filed  on  the   financial   condition  of  insurers  or  for  other   purposes;
establishment and maintenance of reserves for unearned premiums and losses;  and
requirements regarding numerous other matters. All insurance companies must file
annual  statements  with certain  state  regulatory  agencies and are subject to
regular  and  special  financial   examinations  by  those  agencies.  The  last
regulatory   financial   examination  of  Penn-America   was  completed  by  the
Pennsylvania  Insurance  Department in 1995, covering the five-year period ended
December 31, 1994.

     Since 1993, Penn-America has maintained an "A (Excellent)" rating from A.M.
Best company, Inc.("A.M. Best"), which rating was reaffirmed by A.M. Best on May
27, 1997. A.M.Best's ratings are based upon factors of concern to policyholders,
including  financial  condition  and  solvency,  and  are  not  directed  to the
protection of investors.

    Penn-America  is  licensed  as an  admitted  insurer  in 27 states and is an
approved  non-admitted (excess and surplus lines) insurer in the other 23 states
and the District of Columbia as of December 31, 1997.  All  insurance is written
through licensed agents and brokers.  In states in which the Company operates on
a  non-admitted  basis,  general  agents  and  their  retail  insurance  brokers
generally  are  required to certify that a certain  number of licensed  admitted
insurers  will not write a  particular  risk prior to placing that risk with the
Company.

    Insurance  Holding  Company  Laws.  Pennsylvania,  Penn-America's  state  of
domicile,  has laws  governing  insurers and insurance  holding  companies.  The
Pennsylvania statutes generally require insurers and insurance holding companies
to register and file reports  concerning  their  capital  structure,  ownership,
financial  condition and general  business  operations.  Under the  statutes,  a
person must generally obtain the Pennsylvania Insurance Department's approval to
acquire,  directly  or  indirectly,  10%  or  more  of  the  outstanding  voting
securities  of   PAGI,   Penn-America or Penn-Star.  The insurance  department's
determination  of whether to approve any such  acquisition is based on a variety
of factors,  including an evaluation of the acquirer's financial condition,  the
competence  of its  management  and whether  competition  would be reduced.  All
transactions  within a holding company's group affecting an insurer must be fair
and  reasonable,  and the insurer's  policyholders'  surplus  following any such
transaction  must be both reasonable in relation to its outstanding  liabilities
and adequate for its needs. Notice to applicable regulators is required prior to
the consummation of certain transactions affecting insurance subsidiaries of the
holding company group.

                                     Page 16
<PAGE>

    Dividend  Restrictions.  As an insurance holding company,  PAGI is primarily
dependent on dividends and other permitted payments from Penn-America to provide
cash for the payment of any cash dividends to its  stockholders.  The payment of
dividends to PAGI by Penn-America and to Penn-America by Penn-Star are subject
to state regulations, primarily  the insurance laws of Pennsylvania.  Generally,
these  laws  provide that,  unless prior  approval  is obtained,  dividends of a
property and casualty insurance  company  in any  consecutive  12-month  period
shall not exceed the greater of 100% of its  statutory  net income for  the most
recent calendar year or 10% of its statutory  policyholders'  surplus as of the 
preceding  year  end. The  maximum  annual  dividends  payable  by Penn-America 
without prior approval in 1998 is approximately  $9.5 million. Penn-America paid
a dividend of approximately $1.6 million to PAGI in 1997.  Insurance  regulators
have  broad  powers to  prevent  reduction  of  statutory  surplus to inadequate
levels,  and  there  is  no  assurance  that  dividends  of  the maximum amounts
calculated under any applicable formula would be permitted.

    Insurance  Guaranty Funds.  Under  insolvency or guarantee laws in states in
which  Penn-America  is  licensed  as an  admitted  insurer  and in New  Jersey,
organizations  have been established  (often referred to as guaranty funds) with
the authority to assess admitted insurers up to prescribed limits for the claims
of policyholders  insured by insolvent,  admitted insurance  companies.  Surplus
lines  insurance  companies are generally not subject to such  assessments,  but
neither are their  policyholders  eligible to file claims  against the  guaranty
funds, except in New Jersey.

    Additional  Legislation or Regulations.  New regulations and legislation are
proposed from time to time to limit damage  awards,  to bring the industry under
regulation by the federal government,  to control premiums,  policy terminations
and other policy terms,  and to impose new taxes and  assessments.  Difficulties
with  insurance   availability  and  affordability  have  increased  legislative
activity at both the  federal  and state  levels.  Some state  legislatures  and
regulatory  agencies have enacted  measures,  particularly in personal lines, to
limit midterm  cancellations  by insurers and require  advance notice of renewal
intentions. In addition,  Congress is investigating possible avenues for federal
regulation of the insurance industry.


 (l) Employees

The  Company  has  approximately  105  employees.  The  Chairman of the Board of
Directors of the Company and certain Directors devote a portion of their time to
the  management of Penn  Independent,  the Company's  largest  stockholder.  The
Company is not a party to any collective bargaining agreements and believes that
its employee relations are good.


ITEM 2.              PROPERTIES

The  Company  leases  approximately  22,000  square  feet in an office  building
located  in  Hatboro,   Pennsylvania.  The  office  building  also  houses  Penn
Independent  and its  subsidiaries.  The Company leases the space from Mr. Irvin
Saltzman, Chairman of the Board of Directors of the Company, pursuant to a lease
agreement  which  expires on June 30, 2000,  and  provides for an annual  rental
payment of approximately $260,000,  which amount is considered by the Company to
be at fair market value.
                                    Page 17
<PAGE>


ITEM 3.             LEGAL PROCEEDINGS

    The Company is subject to routine legal  proceedings in the normal course of
operating  its  insurance  business.  The  Company is not  involved in any legal
proceedings which reasonably could be expected to have a material adverse effect
on the Company's business, results of operations or financial condition.

ITEM 4.             SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    No matter  was  submitted  during  the  fourth  quarter of 1997 to a vote of
holders of the Company's Common Stock.
                                     Page 18

<PAGE>



                                     PART II

ITEM 5.           MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
                  STOCKHOLDER MATTERS

    The "Market for Common Stock and Related Security Holder Matters" section on
page 28 of the  Company's  annual  report  to  stockholders  for the year  ended
December 31,  1997,  which is included as Exhibit (13) to this Form 10-K Report,
is incorporated herein by reference.


ITEM 6.           SELECTED FINANCIAL DATA

    The  "Selected  Consolidated  Financial  Data"  section  on  page  8 of  the
Company's  Annual Report to  stockholders  for the year ended December 31, 1997,
which is  included as Exhibit  (13) to this Form 10-K  Report,  is  incorporated
herein by reference.


ITEM 7.          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                 RESULTS OF OPERATIONS

    The  "Management's  Discussion  and  Analysis of Results of  Operations  and
Financial  Condition" section on pages 9 to 15 of the Company's Annual Report to
stockholders  for the year ended December 31, 1997, which is included as Exhibit
(13) to this Form 10-K Report, is incorporated herein by reference.


ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The  consolidated  financial  statements  on pages 16 to 27 of the Company's
Annual Report to  stockholders  for the year ended  December 31, 1997,  which is
included as Exhibit (13) to this Form 10-K Report,  are  incorporated  herein by
reference.

ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE

    None.
                                     Page 19


<PAGE>


                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The  Director's  information  will be contained in the Company's  definitive
Proxy   Statement   with  respect  to  the  Company's  1998  Annual  Meeting  of
Shareholders, to be filed with the Securities and Exchange Commission within 120
days following the end of the Company's fiscal year, and is hereby  incorporated
by reference thereto.

    Executive Officers of the Registrant as of March 10, 1998 are as follows:

Irvin Saltzman               75    Chairman of the Board of Directors of PAGI
                                   and Penn-America

Jon S. Saltzman              40    President and Chief Executive Officer of PAGI
                                   and Penn-America, and Director

Rosemary R. Ferrero, CPA     42    Vice President - Finance,  Secretary and 
                                   Treasurer of PAGI, Vice President,  Secretary
                                   and Chief Financial Officer of Penn-America

John M. DiBiasi, CPCU        43    Executive Vice President, Underwriting and
                                   Marketing of Penn-America



Mr. Irvin Saltzman is the founder of Penn-America and of Penn  Independent,  and
for more  than  six years was  the Chief Executive  Officer and Chairman  of the
boards of directors  of both  corporations.  Mr.  Saltzman has been  Chairman of
the  Board  of  Directors  of the  Company  since its  formation in  July  1993.
Mr.Saltzman has been active in the insurance industry since 1947. See "Principal
and  Selling   Stockholders"  and  "Certain  Relationships  and  Related   Party
Transactions."

    Mr. Jon S. Saltzman has been President and Chief Executive  Officer of PAGI
since its formation in July 1993. He has  been  President  and  Chief  Executive
Officer of Penn-America  since June 1993. Mr. Saltzman was  President  and Chief
Operating  Officer of  Penn-America from June 1989 until June 1993, and was Vice
President,  Marketing  of  Penn-America  from  January  1986  until  June  1988.
Mr. Saltzman is Mr. Irvin Saltzman's son.

    Ms. Rosemary R. Ferrero  has  been Vice  President-Finance,  Chief Financial
Officer, Treasurer of PAGI since May 1995 and Secretary since February 1997. She
has been Vice President and Chief Financial Officer of Penn-America  since May 
1994. From 1977 until joining  Penn-America in  1994, Ms. Ferrero  was a  Senior
Financial Services Manager at Coopers & Lybrand, LLP.

    Mr. John M. DiBiasi has  been  Executive  Vice  President--Underwriting  and
Marketing  since  May  1994  and  Vice  President--Underwriting and Marketing of
Penn-America since  January  1989.  From January 1988 until  January 1989 he was
Manager-Marketing  Research and  Product  Development of Penn-America. From 1983
                                    Page 20
<PAGE>
until joining Penn-America in 1988,  Mr. DiBiasi was Senior Manager,  Commercial
Lines of American  Reliance  Insurance Companies, of Lawrenceville,  New Jersey.
Mr. DiBiasi was employed by ISO from 1977 to 1983.


ITEM 11.          EXECUTIVE COMPENSATION

    This  information  will  be  contained  in the  Company's  definitive  Proxy
Statement with respect to the Company's 1998 Annual Meeting of Shareholders,  to
be filed with the Securities and Exchange  Commission  within 120 days following
the end of the Company's  fiscal year, and is hereby  incorporated  by reference
thereto.


ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                  AND MANAGEMENT

    This  information  will  be  contained  in the  Company's  definitive  Proxy
Statement with respect to the Company's 1998 Annual Meeting of Shareholders,  to
be filed with the Securities and Exchange  Commission  within 120 days following
the end of the Company's  fiscal year, and is hereby  incorporated  by reference
thereto.


ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    This  information  will  be  contained  in the  Company's  definitive  Proxy
Statement with respect to the Company's 1998 Annual Meeting of Shareholders,  to
be filed with the Securities and Exchange  Commission  within 120 days following
the end of the Company's  fiscal year, and is hereby  incorporated  by reference
thereto.
                                     Page 21

<PAGE>


                                     PART IV

ITEM 14.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
                  REPORTS ON FORM 8-K


(a)  The  following  consolidated  financial  statements,   financial  statement
schedules and exhibits are filed as part of this report:

    1.  Consolidated Financial Statements
                                                                           Page*
                                                                          ------

Consolidated Balance Sheets at December 31, 1997 and 1996                   16
Consolidated Statements of Earnings for the years ended 
December 31, 1997, 1996, and 1995                                           17
Consolidated Statements of Stockholders' Equity for 
the years ended December 31, 1997,                                          18
1996 and 1995
Consolidated Statements of Cash Flows for the years ended 
December 31, 1997, 1996, and 1995                                           19
Notes to Consolidated Financial Statements                                20-26
Independent Auditors' Report                                                27

    The following consolidated financial statement schedules for the years 1997,
1996 and 1995 are submitted herewith:

    2.  Financial Statement Schedules

Schedule I. Summary of Investments - Other Than Investments in Related Parties
Schedule II. Condensed Financial Information of Parent Company
Schedule III. Supplementary Insurance Information
Schedule IV Reinsurance
Schedule VI. Supplemental Insurance Information Concerning Property and Casualty
Subsidiaries  Independent  Auditors'  Consent and  Report on Schedules (filed as
Exhibit 23).

                  All  other   schedules  are  omitted   because  they  are  not
applicable or the required  information is included in the financial  statements
or notes thereto.


* Refers to the respective page of Penn-America Group's  1997  Annual  Report to
Stockholders attached as Exhibit(13).  The Consolidated Financial Statements and
Independent Auditors' Report on  pages  16  to  27 are  incorporated  herein  by
reference. With the exception of the portions of such Annual Report specifically
incorporated by reference in this Item and Items 5,6,7 and 8, such Annual Report
shall  not be deemed filed as part of this Form 10-K or otherwise subject to the
liabilities of Section 18 of the the Securities and Exchange Act of 1934.
                                    Page 22
<PAGE>



3.  Exhibits

Exhibit No.    Description

3.1            Articles of  Incorporation  of  the  Registrant.  Incorporated by
               reference  to   Exhibit  3.1  to  the  Registrant's  Registration
               Statement on Form S-1 (No.33-66892) filed with the Securities and
               Exchange Commission on August 2, 1993.

3.2            Bylaws of the Registrant. Incorporated by  reference  to  Exhibit
               3.2 to the Registrant's Registration Statement  on  Form  S-1 
               (No. 33-66892) filed with the Securities and Exchange Commission 
               on August 2, 1993.

10.2           Agency    Agreement  between  Penn-America   Insurance    Company
               ("Penn-America")and Carnegie General Agency. Incorporated  by
               reference  to Exhibit  10.2 to   the  Registrant's   Registration
               Statement on  Form S-1  (No. 33-66892) filed with the Securities
               and Exchange Commission on August 2, 1993.

10.2(a)        Amended Carnegie Agreement, effective March 1, 1998.

10.3           1993  Casualty  Excess  of   Loss   Reinsurance  Agreement  with
               National Reinsurance  Corporation.   Incorporated   by  reference
               to  Exhibit  10.3 to the Registrant's Registration Statement on 
               Form S-1 (No. 33-66892)  filed  with  the Securities and Exchange
               Commission on August 2, 1993.

10.3(i)        Endorsement Nos.4 through 6 (Termination Endorsement) to Casualty
               Excess of Loss Reinsurance Agreement  with  National  Reinsurance
               Corporation. Filed with Registrant's Report on Form 10-K for the
               period ended December 31, 1995 which  has  been  filed  with  the
               the Securities and Exchange Commission. 

10.4           1993 Underlying Homeowners and  Dwelling  Fire Property  Per Risk
               Excess  of  Loss  Reinsurance  (Run-off  Business) Agreement with
               National Reinsurance Corporation. Incorporated  by  referenc e to
               Exhibit 10.4 to the Registrant's  Registration Statement on Form 
               S-1  (No.  33-66892)  filed  with  the  Securities  and  Exchange
               Commission on August 2, 1993.

10.5           1993 Property Per Risk Excess  of Loss  (Commercial)  Reinsurance
               Agreement with Employers Reinsurance Corporation. Incorporated by
               reference  to  Exhibit  10.5  to  the  Registrant's  Registration
               Statement on Form S-1 (No.33-66892) filed with the Securities and
               Exchange Commission on August 2, 1993.

10.5(i)        Endorsement No.3 to Property Per Risk of Excess Loss (Commercial)
               Reinsurance  Agreement with  Employers  Reinsurance  Corporation.
               Filed with  the  Registrant's  Report on Form 10-K for the period
               ending December 31, 1994 which has been filed with the Securities
               and Exchange Commission.

                                    Page 23
<PAGE>


Exhibit No.    Description

10.6           1993 Property Catastrophe Excess Reinsurance Agreement with 
               Employers Reinsurance Corporation.  Incorporated  by reference to
               Exhibit 10.6 to the  Registrant's   Registration   Statement  on 
               Form S-1 (No.  33-66892) filed with the Securities  and  Exchange
               Commission on August 2, 1993.

10.6(i)        Endorsement  No. 6  to  Property  Catastrophe  Excess Reinsurance
               Agreement  with  Employers  Reinsurance  Corporation.  Filed with
               the  Registrant's  Report  on  Form 10-K  for  the period  ending
               December  31,  1994 which has been filed with  the Securities and
               Exchange Commission.

10.6(ii)       Stipulation  of  Termination  of  Property   Catastrophe   Excess
               Reinsurance  Agreement  with  Employers  Reinsurance  Corporation
               effective January 1, 1995. Filed with the  Registrant's Report on
               Form 10-K for the period ending December 31, 1994 which has been 
               filed with the Securities and Exchange Commission.

10.7           Agreement  dated   August  20,  1993  between   Penn  Independent
               Corporation ("Penn Independent") and the Registrant regarding the
               reimbursement  of  certain  employment  costs.  Incorporated   by
               reference to  Exhibit 10.7 to Amendment No. 1 to the Registrant's
               Registration  Statement on Form S-1 (No. 33-66892) filed with the
               Securities and Exchange Commission on August 26, 1993.

10.7(i)        Amendment, effective January 1, 1995, to August 20,1993 Agreement
               between Penn Independent and Registrant  regarding the sharing of
               certain operating costs.  Filed with Registrant's Report  on Form
               10-K for the period ended  December 31, 1995 which has been filed
               with the Securities and Exchange Commission.

10.7(ii)       Amendments dated January 1, 1996 and March 1, 1996, to August 20,
               1993 Agreement between Penn Independent  and Registrant regarding
               the sharing of certain operating costs.  Filed with  Registrant's
               Report on Form 10-K for the period ended December 31, 1996, which
               has been filed with the SEC.

10.7(iii)      Amendment  dated  March 1, 1997  to  August 20,  1993  Agreement
               between Penn Independent and  Registrant regarding the sharing of
               certain operating costs.


                                    Page 24
<PAGE>


Exhibit No.    Description

10.9           Restated Investment  Advisory  Agreement  effective  July 1, 1990
               between    Penn-America   and   Carl   Domino   Associates,  L.P.
               Incorporated by  reference  to  Exhibit  10.9 to the Registrant's
               Registration Statement on Form S-1  (No. 33-66892) filed with the
               Securities and Exchange Commission on August 2, 1993.

10.9(i)        Amended Investment Advisory Agreement effective September 1, 1997
               between and among Penn-America,  its  subsidiary,  Penn-Star  and
               Carl Domino Associates, L.P.

10.9(ii)       Agreement dated April 15, 1997, between and among General Re, 
               New  England   Asset  Management,  Inc.,  Penn-America,  and  its
               subsidiary, Penn-Star.

* 10.10        1993 Stock Incentive Plan. Incorporated by reference  to  Exhibit
               10.10  to  Amendment  No.  4  to  the  Registrant's  Registration
               Statement  Form S-1  (No. 33-66892) filed with the Securities and
               Exchange Commission on September 29, 1993.

10.10(i)       Penn-America Group, Inc. 1993 Stock Incentive  Plan,  as  amended
               and restated April 4, 1994. Incorporated by reference to  Exhibit
               4.1 to the Registrant's  Registration  Statement on Form S-8 (No.
               33-82728) filed with the  Securities  and    Exchange Commission 
               on August 11, 1994.

10.11(ii)      Lease  effective  June  30, 1995  between  Registrant  and  Irvin
               Saltzman.  Filed with  Registrant's  Report on Form 10-K  for the
               period  ended   December  31,  1995 which has been filed with the
               Securities and Exchange Commission.

10.12          Demand  Promissory   Note  dated  January  12,  1993  from   Penn
               Independent   Financial   Services,    Inc.   to    Penn-America.
               Incorporated  by  reference  to Exhibit 10.12 to the Registrant's
               Registration Statement on Form S-1 (No. 33-66892)  filed with the
               Securities and Exchange Commission on August 26, 1993.

10.13          Promissory  Note dated  December 29, 1993  from the Registrant to
               Penn Independent. Filed with Registrant's Report on Form 10-K for
               the period  ended December 31, 1995 which has been filed with the
               Securities and Exchange Commission.

10.13(i)       Amendment No.1 dated November 30, 1995, to Demand Promissory Note
               dated January 12, 1993 from Penn Independent Financial Services, 
               Inc. to Penn-America. Filed with the Registrant's Report on  Form
               10-K for the period ended December 31, 1996 which has been  filed
               with the Securities and Exchange Commission.

10.14          1995 Multiple  Line  Excess   of  Loss  (Casualty  and  Property)
               Reinsurance   Agreement   with  National Reinsurance Corporation.
               Filed with  Registrant's  Report  on Form  10-K  for  the  period
               ended December  31, 1995 which has been filed with the Securities
               and Exchange Commission.


* Constitutes a compensatory plan arrangementrequired to be filed as an exhibit
  to form.
                                    Page 25

<PAGE>


Exhibit No.    Description

10.14(i)       Endorsement  No. 1 to  Multiple Line  Excess of  Loss Reinsurance
               Agreement with National Reinsurance  Corporation, effective as of
               January 1, 1995.  Filed  with  Registrant's  Report on  Form 10-K
               for the period  ended  December 31, 1995 which has been filed 
               with the Securities and Exchange Commission.

10.14(ii)      Endorsement  No. 2 to  Multiple  Line Excess of Loss  Reinsurance
               Agreement  with  National Reinsurance Corporation,   effective as
               of January 1, 1995.  Filed with Registrant's  Report on Form 10-K
               for the period ended December 31, 1995 which has been filed  with
               the Securities and Exchange Commission.

 10.14(iii)    1996 Property & Liability  Reinsurance  Agreement with General Re
               Corporation effective May 1, 1996.  Filed  with the  Registrant's
               Report on Form 10-K for the period ended December 31, 1996  which
               has been filed with the Securities and Exchange Commission.

 10.15         1995 Property  Catastrophe  Excess of Loss  Reinsurance Agreement
               with the  subscribing  Reinsurers.  Filed  with  the Registrant's
               Report on Form 10-K for the period ending December 31, 1994 which
               has been filed with the Securities and Exchange Commission.

 10.15(i)      1996 Property Catastrophe  Excess  of Loss  Reinsurance Agreement
               with the  subscribing  Reinsurers.  Filed  with the  Registrant's
               Report on Form 10-K for the period ended December 31, 1996 which
               has been filed with the Securities and Exchange Commission.

 10.16         Penn-America Group, Inc. 1995 Key Employee Incentive Compensation
               Plan,  incorporated  as  Part  I  to   Registrant's  Registration
               Statement on Form S-8 (No. 333-00050)  filed  with the Securities
               and Exchange Commission on January 4, 1996.

 10.17         Penn-America Insurance Company's Agency  Award and Profit Sharing
               Plan, incorporated  as  Exhibit  4  to Registrant's  Registration
               Statement  on  Form S-3 (No. 333-00046) filed with the Securities
               and Exchange Commission on January 4, 1996.

10.18          Stipulation of  Termination of Property and Liability Reinsurance
               Agreement  with National Reinsurance Corporation effective May 1,
               1996. Filed  with the Registrant's  Report  on  Form 10-K for the
               period  ended  December 31, 1996  which  has  been  file with the
               Securities and Exchange Commission.

13.            1997 Annual Report to Shareholders.

21.            As  of  December  31,  1997,  the Registrant's only subsidiary is
               Penn-America Insurance Company, a Pennsylvania Corporation.

23.            Independent Auditor's Consent and Report on Schedules.

                                    Page 26
<PAGE>


Exhibit No.    Description

28.1           Loan and Security Agreement, Term Note and Stock Pledge Agreement
               dated  December  20,  1995  between  Registrant  and   PNC   Bank
               (successor to Midlantic Bank, N.A).   Filed with the Registrant's
               Report on Form 10-K for the period ending December 31, 1995 which
               has been filed with the Securities and Exchange Commission.

(b)      Reports on Form 8-K

         No reports were filed on Form 8-K during the last quarter of the fiscal
year covered by this report.
                                    Page 27

<PAGE>


                            PENN-AMERICA GROUP, INC.
 Schedule I - Summary of Investments - Other than Investments in Related Parties
                                 (in thousands)
<TABLE>
<CAPTION>


                                                               December 31, 1997
                                                             
                                                       Amortized               Amount shown on
                                                         Cost       Fair Value   Balance Sheet
<S>                                                       <C>         <C>            <C>         
Fixed maturities:

Available for sale
      U.S. treasury securities and obligations of
        U.S. government agencies                       $ 22,730      $ 22,831       $ 22,831
      Corporate securities                               30,053        30,537         30,537
      Mortgage-backed securities                         11,751        11,792         11,792
      Other structured securities                        18,602        18,694         18,694
      Public utilities                                    6,049         6,125          6,125
                                                       ----------     ---------     ----------
      Total available for sale                           89,185        89,979         89,979
                                                       ----------     ---------     ----------

Held to maturity
      U.S. treasury securities and obligations of
        U.S. government agencies                       $ 21,466      $ 21,535       $ 21,466
      Corporate securities                               11,284        11,326         11,284
      Mortgage-backed securities                          7,901         7,965          7,901
      Public utilities                                    6,041         6,058          6,041
      Other securities                                      150           150            150
                                                        ---------     ---------     ---------
      Total held to maturity                             46,842        47,034         46,842
                                                        ---------     ---------     ---------
     Total fixed maturities                             136,027       137,013        136,821
                                                        ---------     ---------     ---------

Equity investments:
      Common stocks                                       4,902         6,434          6,434
      Preferred stocks                                   20,760        20,946         20,946
                                                       ---------      --------       --------
      Total equity investments                           25,662        27,380         27,380
                                                       ---------      ---------      --------

Short term investments:                                  11,455        11,455         11,455
                                                        --------      ---------      -------  
      Total investments                               $ 173,144     $ 175,848      $ 175,656
                                                      ==========    ==========     ==========
</TABLE>

                                    Page 28





<PAGE>



                            PENN-AMERICA GROUP, INC.
         Schedule II--Condensed Financial Information of Parent Company
                            Condensed Balance Sheets
                        (in thousands except share data)

<TABLE>
<CAPTION>

                                                                             December 31,           
                                                                      1997                 1996
<S>                                                               <C>                  <C>          
ASSETS
     Cash                                                              $ 1,516              $ 369
     Investment in subsidiary, equity method                            95,390             50,669
     Other assets                                                          594                514
                                                                      =========           =========
           Total assets                                               $ 97,500            $ 51,552
                                                                      =========           =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
     Accounts payable and accrued expenses                              $ 193               $ 215
     Note payable, bank                                                  ---                9,000
                                                                     ----------           ---------
            Total liabilities                                             193               9,215
                                                                     ----------           ---------

Stockholders' equity:
     Preferred stock, $ .01 par value; authorized 2,000,000 shares;
         none issued
     Common stock, $.01 par value;  authorized 20,000,000 shares
         in 1997 and 10,000,000 shares in 1996; issued and 
         outstanding 1997; 9,883,384 and 1996; 6,676,131 shares, 
         respectively                                                      99                   67
     Additional paid-in capital                                        68,221               21,844
     Unrealized investment gains, net                                   1,649                  993
     Retained earnings                                                 27,849               19,533
                                                                   ------------          ----------
                                                                       97,818               42,437
     Unearned compensation from restricted stock awards                  (511)                (100)
                                                                   ------------         -----------
         Total stockholders' equity                                    97,307               42,337
                                                                   ------------         -----------
         Total liabilities and stockholders' equity                  $ 97,500             $ 51,522
                                                                   ===========          ===========
</TABLE>
                                    Page 29


<PAGE>




                            PENN-AMERICA GROUP, INC.
         Schedule II--Condensed Financial Information of Parent Company
                        Condensed Statements of Earnings
                      (in thousands except per share data)
              (per share data adjusted for the adoption of FASB 128
              and restated for 3-for-2 stock split in January,1997)
<TABLE>
<CAPTION>

                                                  Year ended December 31,     
                                             1997          1996         1995
                                         -----------   ---------- --------------
<S>                                         <C>         <C>           <C>
Dividend income                            $ 1,555      $ 3,258       $ 1,300
Other                                          122           10          ---
Operating expenses                          (1,636)      (1,653)       (1,121)
Income tax benefit                             539          552           380
                                         -----------   -----------  ------------
Income before equity in undistributed
     net income of subsidiary                  580        2,167           559
Equity in undistributed net earnings
     of subsidiary                           9,065        4,826         5,467
                                         -----------   -----------  ------------

Net earnings                               $ 9,645      $ 6,993       $ 6,026
                                         ===========   ===========  ============

Net earnings per share
    Basic                                  $ 1.19       $ 1.05         $ 0.91
    Diluted                                $ 1.17       $ 1.04         $ 0.91
Weighted average number of shares used
    in calculating per share data
    Basic                                   8,126        6,663          6,645
    Diluted                                 8,228        6,743          6,655

Cash dividends per share                   $ 0.16       $ 0.11         $ 0.06
                                         ===========   ===========  ============
</TABLE>
                                    Page 30



<PAGE>


                            PENN-AMERICA GROUP, INC.
         Schedule II - Condensed Financial Information of Parent Company
                       Condensed Statements of Cash Flows
                                 (in thousands)
<TABLE>
<CAPTION>

                                                                        Year ended
                                                                         December 31,
                                                                    1997      1996       1995
<S>                                                                <C>        <C>     <C>                          
Cash flows from operating activities:
     Net earnings                                                $ 9,645    $6,993    $ 6,026
     Adjustments to reconcile net earnings to net
         cash provided by operating activities:
     Equity in undistributed net earnings of subsidiary           (9,065)   (4,826)    (5,467)
     Increase (decrease) in :
         Accounts payable and accrued expenses                       (22)      (54)        30
         Other, net                                                 (200)     (352)      (129)
         Amortization                                                221       133         83
                                                                 --------    -------    -------
          Net cash provided by operating activities                  579     1,894        543
                                                                 --------    -------    -------

Cash flows from financing activities:
     Repayment of note payable, bank                              (9,000)    (1,000)     (1,000)
     Proceeds of note payable, bank                                 ---        ---       10,000
     Issuance of common stock (net of expense)                    45,897        259         ---
     Repayment of note payable, affiliate                           ---        (150)       (200)
     Equity contributions to subsidiary                          (35,000)       ---      (9,000)
     Dividends paid                                               (1,329)      (711)       (398)
                                                                 --------    --------   ---------
            Net cash provided (used) by financing activities         568      (1,602)      (598)
                                                                 --------    --------   ---------

Increase (decrease) in cash                                        1,147         292        (55)

Cash, beginning of period                                            369          77         132

                                                                 =========   =========   =========
Cash, end of period                                              $ 1,516       $ 369        $ 77
                                                                 =========   =========   =========
</TABLE>
                                    Page 31



<PAGE>



                            PENN-AMERICA GROUP, INC.
               Schedule III - Supplementary Insurance Information
                    Years Ended December 31, 1997, 1996, 1995
                                 (in thousands)

<TABLE>
<CAPTION>
                                      Liability                                               Amortization
                                     for Unpaid                                                    of
                         Deferred    Losses and                                      Losses     Deferred
                          Policy        Loss                               Net      and Loss     Policy         Other
                        Acquisition  Adjustment  Unearned   Earned     Investment  Adjustment  Acquisition  Underwriting    Premiums
                           Costs     Expenses    Premiums  Premiums      Income    Expenses       Costs      Expenses        Written
<S>                      <C>         <C>        <C>        <C>          <C>       <C>           <C>           <C>            <C> 
Year Ended:
    December 31, 1997     $8,563     $84,566    $36,173     $91,649      $9,218    $57,728      $24,984       $5,840        $96,561
    December 31, 1996      7,231      70,728     30,865      69,081       6,705     43,292       17,785        4,349         73,469
    December 31, 1995      5,716      60,139     26,245      57,228       5,067     35,835       14,237        4,356         61,286

</TABLE>
                                    Page 32


<PAGE>



                            PENN-AMERICA GROUP, INC.
                            Schedule IV - Reinsurance
                  Years Ended December 31, 1997, 1996 and 1995
                                 (in thousands)
<TABLE>
<CAPTION>





                                                                                               Percentage
                                               Ceded to         Assumed                        of Amount
                                                 Other         from Other                    Assumed to Net
                            Gross Amount       Companies       Companies      Net Amount
<S>                           <C>              <C>               <C>            <C>            <C> 
          1997
Premiums
    Property and
    liability insurance        $ 104,694         $ 8,133             ---       $ 96,561                0
                            ==============   ==============   =============  =============   ===============
             Total
    Premiums                   $ 104,694         $ 8,133             ---       $ 96,561                0
                            ==============   ==============   =============  =============   ===============

          1996
Premiums
    Property and
    liability insurance         $ 80,496         $ 7,027             ---        $73,469                0
                            ==============   ==============   =============  =============   ===============
             Total
    Premiums                    $ 80,496         $ 7,027             ---       $ 73,469                0
                            ==============   ==============   =============  =============   ===============

          1995
Premiums
    Property and
    liability insurance          $66,953         $ 5,667             ---        $61,286                0
                            ==============   ==============   =============  =============   ===============
             Total
    Premiums                    $ 66,953         $ 5,667             ---       $ 61,286                0
                            ==============   ==============   =============  =============   ===============
</TABLE>
                                    Page 33



<PAGE>



                            PENN-AMERICA GROUP, INC.
           Schedule VI - Supplemental Insurance Information Concerning
                       Property and Casualty Subsidiaries
                  Years Ended December 31, 1997, 1996 and 1995
                                 (in thousands)
<TABLE>
<CAPTION>


                                      Liability                                 Loss and Loss
                                      for Unpaid         Discount            Adjustment Expenses
                                      Losses and          if Any,            (Benefits) Incurred              Paid Losses
                                         Loss            Deducted                 Related to                    and Loss     
                                      Adjustment           from           Current          Prior               Adjustment
                                       Expenses          Reserves           Year            Year                Expenses    
<S>                                     <C>                               <C>             <C>                 <C>
Year Ended
       December 31, 1997               $ 84,566                          $ 57,387            $ 341              $  44,521
       December 31, 1996                 70,728                            44,096             (804)                34,148
       December 31, 1995                 60,139                            37,541           (1,706)                24,630

</TABLE>
                                    Page 34

<PAGE>




                            PENN-AMERICA GROUP, INC.
                           Exhibit II-- Statement re:
                        Computation of Per Share Earnings
                    Years ended December 31, 1997, 1996, 1995
                      (in thousands except per share data)
             (per share data adjusted for the adoption of FASB 128
             and restated for 3 for 2 stock split in January, 1997)
<TABLE>
<CAPTION>
                                                      Year ended December 31,                                      
                                               1997               1996              1995
<S>                                          <C>                 <C>                <C>                                             
Basic EPS:

Net earnings                                  $ 9,645            $ 6,993           $ 6,026
                                             -----------        -----------      ------------

Weighted average common shares outstanding      8,126              6,663             6,645
                                             =============      =============     =============
Basic EPS                                       $1.19              $1.05             $0.91
                                             =============      =============     =============

Diluted EPS:

Net Earnings                                    $ 9,645            $ 6,993           $ 6,026
                                                 ----------      ----------         -----------

Weighted average common shares outstanding        8,126              6,663             6,645
Additional shares outstanding after the 
    assumed exercise of options by applying
    the treasury stock method                       102                 80                10
                                              -------------     -------------     -------------
Total                                             8,228              6,743             6,655
                                             =============      =============     =============
Diluted EPS                                     $ 1.17              $ 1.04           $ 0.91
                                             =============      =============     =============
</TABLE>
                                    Page 35




<PAGE>



                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned thereunto duly authorized.

                                     Penn-America Group, Inc.

Date:  March   , 1998                By: /s/ Jon S. Saltzman                  
                                         Jon S. Saltzman,
                                         President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been  signed by the  following  persons on behalf of the  Registrant  in the
capacities and on the dates indicated.

/s/ Irvin Saltzman       Chairman of the Board of Directors       March   , 1998
Irvin Saltzman           and Director

/s/ Jon S. Saltzman      President, Chief Executive Officer and   March   , 1998
Jon S. Saltzman          Director (Principal Executive Officer)

/s/ James E. Heerin, Jr. Director                                 March   , 1998
James E. Heerin, Jr.

/s/ Robert A. Lear       Director                                 March   , 1998
Robert A. Lear

/s/ Rosemary R. Ferrero  Vice President-Finance, Secretary and    March   , 1998
Rosemary R. Ferrero      Treasurer (Principal Financial and 
                         Accounting Officer)

/s/ Paul Simon           Director                                 March   , 1998
Paul Simon

/s/ Charles Ellman       Director                                 March   , 1998
Charles Ellman

/s/ M. Moshe Porat       Director                                 March   , 1998
M. Moshe Porat

/s/ Jami Saltzman-Levy   Director                                 March   , 1998
Jami Saltzman-Levy

/s/ Thomas Spiro         Director                                 March   , 1998
Thomas Spiro

                                    Page 36
<PAGE>

3.  Exhibits

Exhibit No.    Description

3.1            Articles of  Incorporation  of  the  Registrant.  Incorporated by
               reference  to   Exhibit  3.1  to  the  Registrant's  Registration
               Statement on Form S-1 (No.33-66892) filed with the Securities and
               Exchange Commission on August 2, 1993.

3.2            Bylaws of the Registrant. Incorporated by  reference  to  Exhibit
               3.2 to the Registrant's Registration Statement  on  Form  S-1 
               (No. 33-66892) filed with the Securities and Exchange Commission 
               on August 2, 1993.

10.2           Agency    Agreement  between  Penn-America   Insurance    Company
               ("Penn-America")and Carnegie General Agency. Incorporated  by
               reference  to Exhibit  10.2 to   the  Registrant's   Registration
               Statement on  Form S-1  (No. 33-66892) filed with the Securities
               and Exchange Commission on August 2, 1993.

10.2(a)        Amended Carnegie Agreement, effective March 1, 1998.

10.3           1993  Casualty  Excess  of   Loss   Reinsurance  Agreement  with
               National Reinsurance  Corporation.   Incorporated   by  reference
               to  Exhibit  10.3 to the Registrant's Registration Statement on 
               Form S-1 (No. 33-66892)  filed  with  the Securities and Exchange
               Commission on August 2, 1993.

10.3(i)        Endorsement Nos.4 through 6 (Termination Endorsement) to Casualty
               Excess of Loss Reinsurance Agreement  with  National  Reinsurance
               Corporation. Filed with the Registrant's Report on Form 10-K for
               the period ended December 31, 1995  which has been filed with the
               Securities and Exchange Commission.

10.4           1993 Underlying Homeowners and  Dwelling  Fire Property  Per Risk
               Excess  of  Loss  Reinsurance  (Run-off  Business) Agreement with
               National Reinsurance Corporation. Incorporated  by  referenc e to
               Exhibit 10.4 to the Registrant's  Registration Statement on Form 
               S-1  (No.  33-66892)  filed  with  the  Securities  and  Exchange
               Commission on August 2, 1993.

10.5           1993 Property Per Risk Excess  of Loss  (Commercial)  Reinsurance
               Agreement with Employers Reinsurance Corporation. Incorporated by
               reference  to  Exhibit  10.5  to  the  Registrant's  Registration
               Statement on Form S-1 (No.33-66892) filed with the Securities and
               Exchange Commission on August 2, 1993.

10.5(i)        Endorsement No.3 to Property Per Risk of Excess Loss (Commercial)
               Reinsurance  Agreement with  Employers  Reinsurance  Corporation.
               Filed with  the  Registrant's  Report on Form 10-K for the period
               ending December 31, 1994 which has been filed with the Securities
               and Exchange Commission.

                                    Page 37
<PAGE>


Exhibit No.    Description

10.6           1993 Property Catastrophe Excess Reinsurance Agreement with 
               Employers Reinsurance Corporation.  Incorporated  by reference to
               Exhibit 10.6 to the  Registrant's   Registration   Statement  on 
               Form S-1 (No.  33-66892) filed with the Securities  and  Exchange
               Commission on August 2, 1993.

10.6(i)        Endorsement  No. 6  to  Property  Catastrophe  Excess Reinsurance
               Agreement  with  Employers  Reinsurance  Corporation.  Filed with
               the  Registrant's  Report  on  Form 10-K  for  the period  ending
               December  31,  1994 which has been filed with  the Securities and
               Exchange Commission.

10.6(ii)       Stipulation  of  Termination  of  Property   Catastrophe   Excess
               Reinsurance  Agreement  with  Employers  Reinsurance  Corporation
               effective January 1, 1995. Filed with the  Registrant's Report on
               Form 10-K for the period ending December 31, 1994 which has been 
               filed with the Securities and Exchange Commission.

10.7           Agreement  dated   August  20,  1993  between   Penn  Independent
               Corporation ("Penn Independent") and the Registrant regarding the
               reimbursement  of  certain  employment  costs.  Incorporated   by
               reference to  Exhibit 10.7 to Amendment No. 1 to the Registrant's
               Registration  Statement on Form S-1 (No. 33-66892) filed with the
               Securities and Exchange Commission on August 26, 1993.

10.7(i)        Amendment, effective January 1, 1995, to August 20,1993 Agreement
               between Penn Independent and Registrant  regarding the sharing of
               certain operating costs.  Filed with Registrant's Report  on Form
               10-K for the period ended  December 31, 1995 which has been filed
               with the Securities and Exchange Commission.

10.7(ii)       Amendments dated January 1, 1996 and March 1, 1996, to August 20,
               1993 Agreement between Penn Independent  and Registrant regarding
               the sharing of certain operating costs.  Filed with  Registrant's
               Report on Form 10-K for the period ended December 31, 1996, which
               has been filed with the SEC.

10.7(iii)      Amendment  dated  March 1, 1997  to  August 20,  1993  Agreement
               between Penn Independent and  Registrant regarding the sharing of
               certain operating costs.



                                    Page 38
<PAGE>


Exhibit No.    Description

10.9           Restated Investment  Advisory  Agreement  effective  July 1, 1990
               between    Penn-America   and   Carl   Domino   Associates,  L.P.
               Incorporated by  reference  to  Exhibit  10.9 to the Registrant's
               Registration Statement on Form S-1  (No. 33-66892) filed with the
               Securities and Exchange Commission on August 2, 1993.

10.9(i)        Amended Investment Advisory Agreement effective September 1, 1997
               between and among Penn-America,  its  subsidiary,  Penn-Star  and
               Carl Domino Associates, L.P.

10.9(ii)       Agreement dated April 15, 1997, between and among General Re, 
               New  England   Asset  Management,  Inc.,  Penn-America,  and  its
               subsidiary, Penn-Star.

* 10.10        1993 Stock Incentive Plan. Incorporated by reference  to  Exhibit
               10.10  to  Amendment  No.  4  to  the  Registrant's  Registration
               Statement  Form S-1  (No. 33-66892) filed with the Securities and
               Exchange Commission on September 29, 1993.

10.10(i)       Penn-America Group, Inc. 1993 Stock Incentive  Plan,  as  amended
               and restated April 4, 1994. Incorporated by reference to  Exhibit
               4.1 to the Registrant's  Registration  Statement on Form S-8 (No.
               33-82728) filed with the  Securities  and    Exchange Commission 
               on August 11, 1994.

10.11(ii)      Lease  effective  June  30, 1995  between  Registrant  and  Irvin
               Saltzman.  Filed with  Registrant's  Report on Form 10-K  for the
               period  ended   December  31,  1995 which has been filed with the
               Securities and Exchange Commission.

10.12          Demand  Promissory   Note  dated  January  12,  1993  from   Penn
               Independent   Financial   Services,    Inc.   to    Penn-America.
               Incorporated  by  reference  to Exhibit 10.12 to the Registrant's
               Registration Statement on Form S-1 (No. 33-66892)  filed with the
               Securities and Exchange Commission on August 26, 1993.

10.13          Promissory  Note dated  December 29, 1993  from the Registrant to
               Penn Independent. Filed with Registrant's Report on Form 10-K for
               the period  ended December 31, 1995 which has been filed with the
               Securities and Exchange Commission.

10.13(i)       Amendment No.1 dated November 30, 1995, to Demand Promissory Note
               dated January 12, 1993 from Penn Independent Financial Services, 
               Inc. to Penn-America. Filed with the Registrant's Report on form
               10-K for the period ended December 31, 1996 which has been  filed
               with the Securities and Exchange Commission.

10.14          1995 Multiple  Line  Excess   of  Loss  (Casualty  and  Property)
               Reinsurance   Agreement   with  National Reinsurance Corporation.
               Filed with  Registrant's  Report  on Form  10-K  for  the  period
               ended December  31, 1995 which has been filed with the Securities
               and Exchange Commission.


* Constitutes a compensatory plan arrangementrequired to be filed as an exhibit
  to form.
                                    Page 39

<PAGE>


Exhibit No.    Description

10.14(i)       Endorsement  No. 1 to  Multiple Line  Excess of  Loss Reinsurance
               Agreement with National Reinsurance  Corporation, effective as of
               January 1, 1995.  Filed  with  Registrant's  Report on  Form 10-K
               for the period  ended  December 31, 1995 which has been filed 
               with the Securities and Exchange Commission.

10.14(ii)      Endorsement  No. 2 to  Multiple  Line Excess of Loss  Reinsurance
               Agreement  with  National Reinsurance Corporation,   effective as
               of January 1, 1995.  Filed with Registrant's  Report on Form 10-K
               for the period ended December 31, 1995 which has been filed  with
               the Securities and Exchange Commission.

 10.14(iii)    1996 Property & Liability  Reinsurance  Agreement with General Re
               Corporation effective May 1, 1996. Filed  with  the  Registrant's
               Report on Form 10-K for the period ended  December 31, 1996 which
               has been filed with the Securities and Exchange Commission.

 10.15         1995 Property  Catastrophe  Excess of Loss  Reinsurance Agreement
               with the  subscribing  Reinsurers.  Filed  with  the Registrant's
               Report on Form 10-K for the period ending December 31, 1994 which
               has been filed with the Securities and Exchange Commission.

 10.15(i)      1996 Property Catastrophe  Excess  of Loss  Reinsurance Agreement
               with the subscribing  Reinsurers.  Filed  with  the  Registrant's
               Report on Form 10-K for the period ended December 31,  1996 which
               has been filed with the Securities and Exchange Commission.

 10.16         Penn-America Group, Inc. 1995 Key Employee Incentive Compensation
               Plan,  incorporated  as  Part  I  to   Registrant's  Registration
               Statement on Form S-8 (No. 333-00050)  filed  with the Securities
               and Exchange Commission on January 4, 1996.

 10.17         Penn-America Insurance Company's Agency  Award and Profit Sharing
               Plan, incorporated  as  Exhibit  4  to Registrant's  Registration
               Statement  on  Form S-3 (No. 333-00046) filed with the Securities
               and Exchange Commission on January 4, 1996.

10.18          Stipulation of  Termination of Property and Liability Reinsurance
               Agreement  with National Reinsurance Corporation effective May 1,
               1996. Filed with the  Registrant's  Report  on Form 10-K  for the
               period  ended  December  31, 1996  which has been filed with the 
               Securities and Exchange Commission. 

13.            1997 Annual Report to Shareholders.

21.            As  of  December  31,  1997,  the Registrant's only subsidiary is
               Penn-America Insurance Company, a Pennsylvania Corporation.

23.            Independent Auditor's Consent and Report on Schedules.

                                    Page 40
<PAGE>


Exhibit No.    Description

28.1           Loan and Security Agreement, Term Note and Stock Pledge Agreement
               dated  December  20,  1995  between  Registrant  and   PNC   Bank
               (successor to Midlantic Bank, N.A).   Filed with the Registrant's
               Report on Form 10-K for the period ending December 31, 1995 which
               has been filed with the Securities and Exchange Commission.

(b)      Reports on Form 8-K

         No reports were filed on Form 8-K during the last quarter of the fiscal
year covered by this report.
                                    Page 41