EMPLOYEE BONUS PLAN

                         Penn-America Insurance Company
                           Penn-Star Insurance Company
                                   Hatboro, PA

                            Effective January 1, 2000
















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                         Penn-America Insurance Company
                           Penn-Star Insurance Company
                               EMPLOYEE BONUS PLAN

     I. Introduction

Penn-America Insurance Company and Penn-Star Insurance Company (hereinafter
collectively "the Company") want to provide employees with a bonus program
(where appropriate) that grants employees non-qualified stock options.
The Company has, therefore, developed the Employee Bonus Plan ("the Plan").(1)

The Plan is an annual program providing opportunities for eligible employees to
earn non-qualified stock options based on both overall Company and individual
performance during the preceding fiscal year. The Plan demonstrates the
Company's appreciation to its employees. Its purpose is two-fold: to foster
interest in the growth of the Company and afford employees recognition for a job
well done during the past year. This Plan is an integral part of the total
compensation opportunity offered by the Company to its employees.

The Plan is based on the 1993 Stock Incentive Plan ("the 1993 Plan), as amended
and restated April 4, 1994. It becomes effective January 1, 2000; and like the
1993 Plan, the Plan will not continue after April 3, 2004.

The Plan has been submitted to, and approved by, the Board of Directors ("the
Board") of the Company's parent insurance holding company, Penn-America Group,
Inc. ("PAGI"), through its Compensation and Stock Option Committee ("the
Committee").

     II. Participation

Management of the Company, via the President, shall present recommendations to
the Committee and the Board relative to those entitled to participate in the
Plan. The Committee and the Board ultimately determine participation in this
Plan.








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1 Management may also award employees cash as part of any employee bonus in a
given year. The cash component of any such bonus is left to the discretion of
management and does not fall within this Plan or the 1993 Stock Incentive (as
amended and restated April 4, 1994), on which this Plan is based.


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     III. Establishment of Parameters

At the time the parameters for the Key Employee Incentive Plan and the
respective fiscal year budget are presented, the President of the Company will
present to the Committee parameters recommended by management for a bonus under
this Plan, if appropriate, for the next fiscal year. The Committee will then
adopt and recommend to the Board parameters relative to the grant of
non-qualified stock options that include, but are not limited to (i) the amount
of non-qualified stock options available under the Plan for that year, (ii) the
individuals entitled to participate in the Plan for that year, (iii) the vesting
period of the non-qualified stock options, if any, for that year, (iv) the date
of grant for non-qualified stock options, if any, for that year, (v) the time
within which employees have to exercise the non-qualified stock options, if any,
for that year, (vi) the date of valuation of the non-qualified stock options, if
any, for that year, and (vii) such other matters related to the operation of the
Plan. A copy of the parameters applicable to the current year - i.e., 1999 - is
attached as Exhibit 1. On approval by the Board, the parameters will define and
establish the terms of the grant of non-qualified stock options to employees as
a bonus for the year.

     IV. Distribution of Employee Bonuses

Subject to approval and adoption by the Committee and the Board, the President
will instruct the managers relative to the parameters of bonuses to be awarded
to eligible employees for the year. The managers of each department will
thereafter see that each employee is awarded their bonus, with an explanation as
to the contents of the bonus and the reasons for its issuance. The manager will
document the reasons for the bonus given to the eligible employee.

Compensation payable in PAGI stock options will be distributed for no
consideration on or before April 1, but may be subject to conditions or
restrictions imposed by the Committee.

     V. Miscellaneous Provisions

     Decisions on all matters affecting the implementation, operation,
continuation, modification, or termination of the Plan will be made at the sole
discretion of the Committee or its delegate(s). If any provision of this Plan is
determined to be invalid or unenforceable, said invalid or unenforceable
provision shall be deemed null and void, and this Plan shall continue and shall
be construed in all respects to the extent possible to fulfill the purposes of
the Plan as if such invalid or unenforceable provision was omitted.



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                         Penn-America Insurance Company
                           Penn-Star Insurance Company
                               EMPLOYEE BONUS PLAN

                                 1999 Parameters

     1. Compensation:

     Given the Company's performance this year, the employees' bonus for fiscal
year 1999 (payable in 2000) is based solely on non-qualified stock options,
which serves the duel purpose of encouraging interest in the growth of the
Company while recognizing that employees cannot be rewarded with a cash bonus
during poor Company performance years.

     2. Employees Entitled to Participate:

     All employees actively employed with the Company for one or more years
shall be entitled to participate and receive a bonus for fiscal year 1999.
Normally, all employees currently participating in the Key Employee Incentive
Compensation Plan ("the KEIC Plan") would not be entitled to a bonus under this
Plan. However, given the Company's performance in 1999 and the fact that
employees normally entitled to compensation under the KEIC Plan will not (and
have not) received additional compensation under that plan, an exception is
being made for all employees that fall under the provisions of the KEIC Plan,
BUT FOR Jon S. Saltzman, President, John M. DiBiasi, Executive Vice President,
Underwriting and Marketing, Rosemary R. Ferrero, Chief Financial Officer, Thomas
Bowie, Sr. Vice President, Claims, Garland P. Pezzuolo, Secretary and General
Counsel, and Ransley Lennon, Vice President, Information Technology. These
employees will not receive a bonus under the Plan.

     3. Key Terms of 1999 Bonus:

          (a)  The number of non-qualified stock options afforded each eligible
               employee is based on an individual, eligible employee's salary
               level as of January 1, 2000. Those eligible employees making
               $30,999 or under as of January 1st shall receive 250 options;
               those eligible employees making between $31,000 and $85,000 as of
               January 1, 2000 shall receive 500 options; and Duane Wohlgemuth
               shall receive 1000 options.
          (b)  The options shall be valued at the fair market value of
               Penn-America Group, Inc. common stock as of the close of the
               market on the night before the date of grant;
          (c)  The options shall vest one year after the date of grant;
          (d)  The options shall be exercisable for five (5) years after the
               date the options first vest;
          (e)  Eligible employees will have the option of exercising the options
               via a cashless or regular transaction. In a cashless transaction,
               the employee is ideally entitled in one transaction to exercise
               options and realize the cash

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               gain from the sale of the resulting stock, without having to
               expend any money; and,

          (f)  All parttime employees employed with the Company, so long as they
               are actively employed with the Company a minimum of 20 hours per
               week for one or more years, shall be entitled to participate. The
               number of options to which an eligible parttime employee is
               entitled will be based on annualizing the parttime employee's
               salary and dividing the annualized salary by two (2).

     4. Distribution of Bonus:

     At the first quarterly meeting of the Company in 2000, the President will
     announce the bonus for fiscal year 1999. Thereafter, each manager shall
     meet with each eligible employee and distribute his or her respective
     non-qualified stock option bonus agreement. As soon thereafter as
     practical, a representative from a third party administrator retained by
     the Company to monitor the Plan shall be available to meet with all
     eligible employees to discuss the basics of the Plan, the terms and
     conditions of the employees' bonuses, and to answer any questions the
     employees may have.












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