SECOND AMENDMENT TO CREDIT AGREEMENT

     THIS  SECOND  AMENDMENT  TO CREDIT  AGREEMENT,  dated as of the 26th day of
August,  1999 (this  "Amendment"),  is made  among  PENN-AMERICA  GROUP,  INC, a
Pennsylvania corporation (the "Borrower"),  the banks and financial institutions
from  time  to  time  party  to  the  Credit   Agreement  (as  defined   herein)
(collectively, the "Lenders"), and FIRST UNION NATIONAL BANK ("First Union"), as
agent for the Lenders (in such capacity, the "Agent").

                                    RECITALS

     A.  The  Borrower,  the  Lenders  and the  Agent  are  parties  to a Credit
Agreement,  dated as of September 28, 1998,  as amended by a First  Amendment to
Credit  Agreement,  dated as of May 12,  1999 (as further  amended,  the "Credit
Agreement"),  providing for the availability of certain credit facilities to the
Borrower upon the terms and conditions set forth therein. Capitalized terms used
herein  without  definition  shall have the meanings given to them in the Credit
Agreement.

     B. The Borrower has requested  certain  amendments to the Credit Agreement,
and the Lenders have agreed to effect such amendments,  effective as of June 30,
1999, upon the terms and conditions set forth herein.

                             STATEMENT OF AGREEMENT

     NOW,  THEREFORE,  in  consideration  of the  foregoing  and other  good and
valuable  consideration,  the  receipt  and  sufficiency  of  which  are  hereby
acknowledged, the parties hereto agree as follows:

                                   ARTICLE I

                                   AMENDMENTS

     1.1 Definitions. Section 1.1 of the Credit Agreement is amended by deleting
the proviso at the end of the  definition  of Fixed  Charge  Coverage  Ratio and
substituting  the  following  therefor  "provided  that,  the stock  repurchases
referred to in subclause (z) of clause (ii) above shall not include (a) any such
repurchases occurring prior to July 1, 1999 and (b) the first $5,000,000 of such
repurchases occurring on or between July 1, 1999 and September 30, 2000."

     1.2  Statutory  Surplus.  Section  7.6 of the  Credit  Agreement  is hereby
amended and restated in its entirety as follows.

                    7.6 Statutory Surplus. The Borrower will not permit Combined
               Statutory Capital and Surplus of the Insurance  Subsidiaries,  as
               of the last day of any fiscal quarter,  beginning with the fiscal
               quarter ending December 31, 1999, to be less than 90%

<PAGE>
               of Combined  Statutory  and Capital  Surplus as of September  30,
               1999, as determined in accordance with SAP.

     1.3  Compliance  Certificate.  Part C of Attachment A to Exhibit C-1 to the
Credit  Agreement  (Form of GAAP  Compliance  Certificate) is hereby amended and
restated as set forth on Exhibit A hereto. Part C of Attachment A to Exhibit C-2
to the Credit  Agreement (Form of SAP Compliance  Certificate) is hereby amended
and restated as set forth on Exhibit B hereto.

                                   ARTICLE II

                         REPRESENTATIONS AND WARRANTIES

     The Borrower hereby represents and warrants to the Agent and each Lender as
follows:

     2.1 Representations and Warranties.  After giving effect to this Amendment,
each of the  representations  and  warranties  of the Borrower  contained in the
Credit Agreement and in the other Credit Documents is true and correct on and as
of the date  hereof with the same effect as if made on and as of the date hereof
(except to the extent any such representation or warranty is expressly stated to
have been made as of a  specific  date,  in which  case such  representation  or
warranty is true and correct as of such date).

     2.2 No Default. After giving effect to this Amendment,  no Default or Event
of Default has occurred and is continuing.

                                  ARTICLE III

                                 EFFECTIVE DATE

     This Amendment shall be effective as of June 30, 1999.

                                   ARTICLE IV

                                 MISCELLANEOUS

     4.1  Effect  of  Amendment.  From  and  after  the  effective  date  of the
amendments  to the Credit  Agreement  set forth  herein,  all  references to the
Credit  Agreement set forth in any other Credit  Document or other  agreement or
instrument shall, unless otherwise  specifically  provided, be references to the
Credit  Agreement as amended by this  Amendment  and as may be further  amended,
modified,  restated or supplemented from time to time. This Amendment is limited
as specified  and shall not  constitute or be deemed to constitute an amendment,
modification  or waiver  of any  provision  of the  Credit  Agreement  except as
expressly  set forth  herein.  Except as expressly  amended  hereby,  the Credit
Agreement shall remain in full force and effect in accordance with its terms.

                                       2
<PAGE>
     4.2 Governing  Law. This  Amendment  shall be governed by and construed and
enforced in  accordance  with the laws of the State of North  Carolina  (without
regard to the conflicts of law provisions thereof).

     4.3  Expenses. The  Borrower  agrees  to pay upon  demand  all  reasonable
out-of-pocket  costs  and  expenses  of the Agent  and each  Lender  (including,
without limitation, the reasonable fees and expenses of counsel to the Agent and
each Lender) in  connection  with the  preparation,  negotiation,  execution and
delivery  of  this  Amendment  and  the  other  Credit  Documents  delivered  in
connection herewith.

     4.4  Severability.  To the  extent  any  provision  of  this  Amendment  is
prohibited  by or invalid under the  applicable  law of any  jurisdiction,  such
provision  shall  be  ineffective  only to the  extent  of such  prohibition  or
invalidity  and  only  in  any  such   jurisdiction,   without   prohibiting  or
invalidating  such  provision  in  any  other   jurisdiction  or  the  remaining
provisions of this Amendment in any jurisdiction.

     4.5 Successors and Assigns.  This Amendment shall be binding upon, inure to
the benefit of and be enforceable  by the  respective  successors and assigns of
the parties hereto.

     4.6  Construction.  The headings of the various sections and subsections of
this Amendment have been inserted for convenience  only and shall not in any way
affect the meaning or construction of any of the provisions hereof.

     4.7  Counterparts;  Effectiveness.  This  Amendment  may be executed in any
number  of  a  counterparts   and  by  different   parties  hereto  on  separate
counterparts, each of which when so executed and delivered shall be an original,
but all of which shall  together  constitute one and the same  instrument.  This
Amendment  shall  become   effective  upon  the  execution  and  delivery  of  a
counterpart hereof by each of the parties hereto.


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<PAGE>
     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Amendment to be
executed by their duly authorized officers as of the date first above written.


                                        PENN-AMERICA GROUP, INC.

                                        By: /s/ Rosemary Ferrero

                                        Title: Vice President, Finance


                                        FIRST UNION NATIONAL BANK,
                                        as Agent and as Lender

                                        By: /s/ Thomas L. Stitchberry

                                        Title: Senior Vice President

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<PAGE>
                                    EXHIBIT A
                                       TO
                      SECOND AMENDMENT TO CREDIT AGREEMENT

      C. Fixed Charge Coverage Ratio (Section 7.3 of the Credit Agreement)
                       (shall not be less than 1.25 : 1.0)

     (1)  Available  coverage  as  of  the  last  day  of  any
          period  of  four  consecutive fiscal quarters
         (the "Measurement Period"):

          (a)  Available  Dividend  Amount for the
               Measurement  Period (list by
               Insurance   Subsidiary  other  than
               Subsidiaries  of  Insurance
               Subsidiaries)

               (i)  PAIC                             $__________

               (ii) Other (list separately)          $__________

               (iii) Total                                         $__________

          (b)  Net Tax Sharing Payments with
               respect to the Measurement Period

               (i)   Tax Payments received by        $__________
                     Borrower

               (ii)  Tax Payments to be received by  $__________
                     Borrower

               (iii) Tax Payments made by            $__________
                     Borrower

               (iv)  Tax Payments to be made by      $__________
                     Borrower

               (v)   Net Payments  (the sum of                     $__________
                     Lines  l(b)(i) and l(b)(ii)
                     minus Lines l(b)(iii) and
                     I (b)(iv))

          (c)  Combined  Net Cash  Flow of non-                    $__________
               Insurance  Subsidiaries  for the
               Measurement Period (attach detail)
<PAGE>
          (d)  Holding Company Expenses accrued            $__________
               during the Measurement Period

          (e)  Available  coverage:  add Lines                     $==========
               1(a)(iii),  l(b)(v) and 1(c), and subtract
               Line 1 (d)

     (2)  Fixed Charges:

          (a)  Debt Service for the period of four
               consecutive fiscal quarters
               immediately following the
               Measurement Period (the "Pro Forma
               Period")

               (i)   Debt Service on the Loans       $__________

               (ii)  Debt Service on other           $__________
                     consolidated Indebtedness

               (iii) Total Debt Service (add Lines         $__________
                     2(a)(i) and 2(a)(ii))

          (b)  Dividends to shareholders of the            $__________
               Borrower for the Pro Forma Period
               (based upon the most recent quarterly
               rate)

          (c)  Stock purchases for the Measurement         $__________
               Period (net of stock repurchases
               occurring (i) prior to 7/01/99 in the
               amount of $___________ and
               (ii) on or between 7/01/99 and
               9/30/00 in the amount of _________ (1))

          (d)  Fixed Charges:                                      $==========
                  Add Lines 2(a)(iii), 2(b) and 2(c)

     (3)  Fixed Charge Coverage Ratio:                             $==========
             Divide Line 1(e) by Line 2(d)

__________
1 Not to exceed $5,000,000.


                                       2
<PAGE>

                                    EXHIBIT B
                                       TO
                      SECOND AMENDMENT TO CREDIT AGREEMENT

                        C. Statutory Capital and Surplus
                      (Section 7.6 of the Credit Agreement)

(1)      Combined Statutory Capital and
         Surplus as of the date of
         determination                           $
                                                  ===========

(2)      Minimum Combined Statutory
         Capital and Surplus--90% of the
         Combined Statutory Capital and
         Surplus as of 9/30/99                   $
                                                  ===========