PROMISSORY NOTE AND SECURITY AGREEMENT

                                January 17, 2000

     This Promissory Note and Security Agreement ("Note") is made and given
effect as of January 17, 2000, BY Jon S. Saltzman, an individual having an
address at 435 Dreshertown Road, Forth Washington, Pennsylvania, hereinafter
referred to as "Borrower", IN FAVOR OF, Penn-America Insurance Company, a
Pennsylvania corporation, with offices located at 420 S. York Road, Hatboro,
Pennsylvania, hereinafter referred to as "Lender". The word "Lender" means the
original Lender and anyone else who takes this Note by transfer.

1. Sole Purpose of the Loan. This credit evidenced hereby is given by the Lender
pursuant to Section 1502 of the  Pennsylvania  Corporation Law and the Unanimous
Consent of the  Directors  of the  Lender,  dated  January  1,  2000.  Any funds
provided  under this Note may solely be used by Borrower  to purchase  $.001 par
value  common  stock of the Lender (the  "Common  Stock"),  including  brokerage
commissions  and  transaction  costs.  Such funds will be  provided by Lender to
Borrower by way of Borrower's  authorized  broker,  Gruntal & Company,  who will
relay  Borrower's  request for funds from Lender and who will then  receive said
funds from  Lender and apply them  towards  the  purchase of $.001 par value PNG
common stock as directed by Borrower.

2.  Borrower's  Promise to Pay Principal  and Interest.  In return for the funds
loaned by Lender to Borrower for the  acquisition of PNG common stock,  Borrower
promises to pay $146,370.00 (the "Principal"), plus interest to the order of the
Lender.  Interest,  at an annual rate of (6.21%) percent will be charged on that
part of the  Principal  which has not been paid from the date of this Note until
all Principal has been paid in full, with interest to be accrued  semi-annually.
See attached Addendum,  incorporated  herein by reference,  for specifics of the
transaction(s), which generated the principal due and owing herein.

3. Payments.  Unless otherwise specifically set forth herein,  Borrower will pay
all  principal,  interest,  costs and  charges  due and owing under this Note no
later than January 17, 2005.  All payments will be made to Lender at the address
shown  above or to such  other  address as Lender  may  notify  Borrower  of, in
writing.  Notwithstanding  the foregoing,  Borrower may instruct  Lender to sell
some or all of the Common Stock,  which is the subject of this  Promissory  Note
and  Security  Agreement.  The  proceeds  from  such sale will be used by Lender
towards  repayment of Borrower's loan and shall be applied by Lender to repay an
amount  equal to the cost basis for the shares of Common  Stock sold,  including
commissions,  costs and interest incurred.  Such repayment shall be entered onto
Lender's  books  within  five (5)  business  days of the  receipt of  settlement
proceeds by Lender.  Further,  notwithstanding  the  foregoing,  all  principal,
interest,  costs and charges due and owing under this Note shall be  immediately
due and payable upon the termination of the Borrower's  employment  relationship
with the Lender for any reason whatsoever.

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4. Principal  Non-Recourse to Borrower.  Notwithstanding  anything  contained in
this Promissory Note and Security  Agreement to the contrary,  the Lender's sole
recourse with respect to the principal  amounts due under this note in the event
of default or other  failure of the  Borrower  hereunder  shall be to the Common
Stock subject to the security agreement embodied herein, and the loans evidenced
hereby shall in all events be  non-recourse to the Borrower or any assets of the
Borrower other than the Common Stock purchased  hereby.  Interest due under this
Note, however, shall be fully recourse to the Borrower.

5. Early  Payments.  Borrower has the right to make  payments at any time before
they are due. These early payments will mean that this Note will be paid in less
time.

6. Late Charge for Overdue Payments.  If the Lender has not received any payment
within fifteen (15) days after its due date, Borrower will pay the Lender a late
charge of (4%)  percent of the  payment.  This charge will be paid with the late
payment.

7. Default.  If Borrower fails to make any payment  required by this Note within
fifteen  (15) days after its due date,  or if  Borrower  fails to keep any other
promises  that  Borrower  makes in this Note,  or if those  promises made in the
Security  Agreement  bearing even date herewith are not kept, Lender may declare
that  Borrower  is in  default  on this Note and the  Security  Agreement.  Upon
default,  Borrower must immediately pay the full amount of all unpaid principal,
interest,  other  amounts due on this Note and the  Security  Agreement  and the
Lender's costs of collection and reasonable attorney fees.

8.  Waivers.  Borrower  gives up its  right to  require  that the  Lender do the
following: (a) to demand payment (called "presentment");  (b) to notify Borrower
of  nonpayment  (called  "notice of  dishonor");  and (c) to obtain an  official
certified  statement  showing  nonpayment  (called a "protest").  The Lender may
exercise any right under this Note or the  Security  Agreement or under any law,
even if Lender has delayed in exercising  that right or has agreed in an earlier
instance not to exercise that right.  Lender does not waive its right to declare
that  Borrower  is in  default  by making  payments  or  incurring  expenses  on
Borrower's behalf.

9. Pledge of Collateral.  In order to protect the Lender if the promises made in
this Note are not kept,  and as security  for the  Borrower's  repayment  of its
obligations as set forth in this Note (the  "Obligations"),  the Borrower hereby
grants to the Lender a security  interest in and a lien on the Common Stock (the
"Collateral")  purchased in accordance  with this Note and held by Lender in its
safe at Penn-America Insurance Company, under the control of the Controller. The
parties intend that this Note shall constitute a "security agreement" within the
meaning  and  for  purposes  of,  and as  defined  in the  Pennsylvania  Uniform
Commercial Code, 13 PACSA Section 4101 et seq. (the "Code").

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<PAGE>
10. Escrow of Collateral.

          A.  Simultaneously  with the  Borrower's  execution of this Note,  the
Borrower  shall  execute and  deliver to Lender any and all forms,  instruments,
certificates  and other  documents  required by Lender that are  sufficient  for
Lender to establish possession or control of the Common Stock to be purchased in
order to perfect the  Lender's  lien on such Common  Stock,  together  with such
other  reasonable terms and conditions to preserve the Collateral and to protect
the rights of Lender in the Collateral.

          B. Lender  shall hold the  Collateral  and the  Assignment  thereof in
escrow in accordance with the following provisions:

          (1) If Borrower is in Default, Lender shall liquidate the Collateral.

          (2) When the  Obligations  have  been paid in full or  satisfied,  the
          Lender shall release the Collateral to the order of the Borrower.

11. Rights Retained by the Borrower.

          A. Until the Lender  exercises its rights under this  Agreement to the
Collateral,  the Borrower shall retain any voting rights, rights to receive cash
dividends,  liquidating  stock  dividends  and  dividends  paid  in  stock,  new
securities or other property which the Borrower is entitled to receive by virtue
of such dividend,  and all other rights  associated with the Collateral,  except
those expressly limited in this Agreement.

          B. In addition,  the Borrower shall, at all times until the Collateral
is sold and title thereto is actually  transferred,  have the absolute  right to
redeem the Collateral upon payment to the Lender of the then outstanding balance
of the Obligations.

12.  Borrower's  Default.  If  the  Borrower  defaults  in  the  payment  of its
Obligations  pursuant to this Note, upon the Lender's demand,  the Borrower will
execute any other assignment or document  necessary or advisable to liquidate or
assign the Collateral to the Lender,  make payment pursuant to this Note, and to
carry out the purposes of this Agreement.

13. Lender's Rights. The rights, powers and remedies given to the Lender by this
Agreement are in addition to all rights, powers and remedies given to the Lender
by  statute  or rule of law,  unless  otherwise  limited  in this  Agreement.  A
forbearance or failure or a delay by the Lender in exercising any one or more of
its  rights,  powers or  remedies  is not a waiver of any such  right,  power or
remedy,  and any  exercise  of a right,  power or remedy does not  preclude  its
further exercise. Until the Obligations of the Borrower are fully satisfied, the
rights, powers and remedies of the Lender continue to exist and may be exercised
by the Lender at any time not limited in this Agreement.

14. Further Assurances.  The Borrower and the Lender hereby agree to execute and
deliver in the future any and all assignments,  agreements,  instruments  and/or
documents as

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may  reasonably  be required  and as may be  necessary or expedient to effect or
facilitate  the  transfer of the  Collateral  in order to effect the intents and
purposes of this Agreement.

15. Miscellaneous.

          A. This  Agreement  applies to and shall  inure to the  benefit of the
Lender's successors and assigns and binds the Borrower's heirs and assigns.

          B. This  Agreement may not be modified  except by a written  agreement
executed by both the Borrower and the Lender.

          C. This Agreement contains the entire agreement between the parties as
to the subject matter set forth therein and supersedes any and all prior written
or oral understandings or agreements with respect to the subject matter hereof.

          D. This  Agreement  may not be  assigned by the  Borrower.  Lender may
assign this  Promissory  Note and Security  Agreement and shall provide  written
notification thereof to Borrower.

          E. Any and all notices and other correspondence  required or permitted
to be given  hereunder  shall be in writing and shall  either be (i)  personally
delivered;  (ii)  transmitted by telefax and followed by sending same via United
States first class mail; or (iii) sent by United States  certified or registered
mail, return receipt requested,  with full postage prepaid, and addressed to the
parties at their respective addresses herein set forth (or to such other address
as the parties may from time to time  designate by notice to the others given in
the foregoing manner. All notices shall be deemed effective when given.

          F. This  Agreement  shall be governed by and  construed in  accordance
with the laws of the  Commonwealth of Pennsylvania  unless  preempted by Federal
law, without regard to its principles of conflict of laws.

          G. In the event that any provision or part thereof set forth herein is
held to be invalid by a court of competent jurisdiction,  or otherwise conflicts
with applicable law, such provision or part hereof shall be deemed to be deleted
from this Agreement, and this Agreement shall be construed to give effect to the
remaining provisions hereof.

          H. Captions in this Agreement are included  herein for  convenience of
reference only and shall not constitute a part hereof for any other purpose.

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     IN WITNESS  WHEREOF,  the parties  hereto have hereunto set their hands and
seals the day and year first above written.




PENN-AMERICA INS. CO.                       Borrower:



By: /s/ Rosemary R. Ferrero                 /s/ Jon S. Saltzman
   ----------------------------------       ------------------------------------


WITNESS:








STATE OF PENNSYLVANIA         )
                              )ss.
COUNTY OF                     )

     BE IT REMEMBERED, that I hereby certify that on this 4th day of February,
2000, before me, the undersigned authority, personally appeared Jon S. Saltzman,
who I am satisfied is the person mentioned in the within instrument, and he
acknowledged that he signed, sealed and delivered the same as his voluntary act
and deed.



/s/ Rosemary R. Ferrero
--------------------------------

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<PAGE>
STATE OF PENNSYLVANIA         )
                              )ss.
COUNTY OF Montgomery          )


     BE IT REMEMBERED,  that on this 4th day of February,  2000,  before me, the
subscriber,  a Notary Public of the State of Pennsylvania,  personally  appeared
Rosemary  R.  Ferrero,  to me known,  who,  being by me duly sworn upon her oath
according to law, did depose and say that she is the Chief Financial  Officer of
Penn-America  Insurance Company, the Lender in the within Pledge Agreement,  and
that in her  capacity  aforesaid  she executed  the within  Pledge  Agreement on
behalf of the said corporation;  she did duly acknowledge to me that she signed,
sealed and  delivered the same as her voluntary act and deed and as such officer
of the said  corporation;  that the within  instrument  is the voluntary act and
deed of the said  corporation,  by virtue of  authority  granted by its Board of
Directors;  that this person knows the proper seal of the corporation  which was
affixed to his Pledge Agreement.


Notary Public of Pennsylvania
                                                                   NOTARIAL SEAL
/s/ Stacey M. Manzo


My Commission Expires 12/9/02

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<PAGE>
                                    Addendum

This  Addendum  forms a part  of the  Promissory  Note  and  Security  Agreement
("Note") by and between Jon S. Saltzman ("Borrower") and Penn-America  Insurance
Company ("Lender"), dated January 17, 2000.

         The common stock acquired by Borrower,  which gives rise to the Note in
         the amount of $146,370 (which is the principal  amount of the loan plus
         brokerage  commissions  and  transaction  costs)  is the  result of the
         acquisition  by Borrower:  (a) on January 19, 2000 of 500 shares of PNG
         common stock at a price of $6.75 per share;  (b) on January 19, 2000 of
         3,900 shares of PNG common stock at a price of $7.125 per share; (c) on
         January 19, 2000 of 600 shares of PNG common  stock at a price of $7.00
         per share;  and, (d) on January 20, 2000 of 15,000 shares of PNG common
         stock at a price of $7.3675  per share.  See  Confirmation  Notice from
         Gruntal & Co., attached hereto and forming a part hereof.

By  signing  this  Addendum,  the  parties  to the Note  acknowledge  that  this
Addendum,  and all  attachments  hereto,  forms a part of and is incorporated by
reference in the Note by and between Jon S. Saltzman and Penn-America  Insurance
Company dated January 17, 2000.


PENN-AMERICA INSURANCE COMPANY              JON S. SALTZMAN


By: /s/ Garland P. Pezzuolo                 /s/      Jon S. Saltzman
   -----------------------------            -------------------------------












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