(Bilateral Form) (ISDA Agreements Subject to New York Law Only)
                                    International Swap Dealers Association, Inc.


                                      ISDA
              International Swaps and Derivatives Association, Inc.
                              CREDIT SUPPORT ANNEX
                             to the Schedule to the
                              ISDA Master Agreement
                          dated as of December 16, 2002
                                     between
               BEAR STEARNS BANK PLC and PENN-AMERICA GROUP, INC.
                   ("Party A")                  ("Party B")

This Annex supplements,  forms part of, and is subject to, the  above-referenced
Agreement,  is part of its Schedule and is a Credit Support  Document under this
Agreement with respect to each party.

Accordingly, the parties agree as follows: --

Paragraph 1. Interpretation

(a)  Definitions  and  Inconsistency.  Capitalized  terms not otherwise  defined
herein or elsewhere in this  Agreement have the meanings  specified  pursuant to
Paragraph 12, and all  references in this Annex to Paragraphs  are to Paragraphs
of this  Annex.  In the event of any  inconsistency  between  this Annex and the
other provisions of this Schedule,  this Annex will prevail, and in the event of
any  inconsistency  between Paragraph 13 and the other provisions of this Annex,
Paragraph 13 will prevail.

(b) Secured  Party and  Pledgor.  All  references  in this Annex to the "Secured
Party"  will  be  to  either  party  when  acting  in  that   capacity  and  all
corresponding references to the "Pledgor" will be to the other party when acting
in that capacity;  provided,  however, that if Other Posted Support is held by a
party to this Annex,  all  references  herein to that party as the Secured Party
with  respect  to  that  Other  Posted  Support  will be to  that  party  as the
beneficiary  thereof  and will not  subject  that  support  or that party as the
beneficiary  thereof  to  provisions  of  law  generally  relating  to  security
interests and secured parties.

Paragraph 2. Security Interest
Each party,  as the Pledgor,  hereby pledges to the other party,  as the Secured
Party, as security for its Obligations,  and grants to the Secured Party a first
priority  continuing  security interest in, lien on and right of Set-off against
all Posted Collateral Transferred to or received by the Secured Party hereunder.
Upon the Transfer by the Secured Party to the Pledgor of Posted Collateral,  the
security  interest and lien granted  hereunder on that Posted Collateral will be
released immediately and, to the extent possible,  without any further action by
either party.


Copyright (C) 1994 by International Swaps and Derivatives Association, Inc

                                       11

<PAGE>


Paragraph 3. Credit Support Obligations

(a) Delivery  Amount.  Subject to  Paragraphs 4 and 5, upon a demand made by the
Secured Party on or promptly  following a Valuation Date, if the Delivery Amount
for that Valuation Date equals or exceeds the Pledgor's Minimum Transfer Amount,
then the Pledgor will  Transfer to the Secured  Party  Eligible  Credit  Support
having a Value  as of the date of  Transfer  at  least  equal to the  applicable
Delivery Amount (rounded  pursuant to Paragraph 13). Unless otherwise  specified
in  Paragraph  13, the  "Delivery  Amount"  applicable  to the  Pledgor  for any
Valuation Date will equal the amount by which:

(i) the Credit Support Amount

exceeds

(ii) the Value as of that  Valuation  Date of all Posted Credit  Support held by
the Secured Party.

(b) Return  Amount.  Subject to  Paragraphs  4 and 5, upon a demand  made by the
Pledgor on or promptly following a Valuation Date, if the Return Amount for that
Valuation Date equals or exceeds the Secured  Party's Minimum  Transfer  Amount,
then the  Secured  Party will  Transfer  to the Pledgor  Posted  Credit  Support
specified  by the  Pledgor  in that  demand  having  a Value  as of the  date of
Transfer  as close as  practicable  to the  applicable  Return  Amount  (rounded
pursuant to Paragraph  13).  Unless  otherwise  specified  in Paragraph  13, the
"Return  Amount"  applicable to the Secured  Party for any  Valuation  Date will
equal the amount by which:

(i) the Value as of that Valuation Date of all Posted Credit Support held by the
Secured Party

exceeds

(ii) the Credit Support Amount.

"Credit Support Amount" means,  unless otherwise  specified in Paragraph 13, for
any Valuation Date (i) the Secured Party's Exposure for that Valuation Date plus
(ii) the aggregate of all Independent Amounts applicable to the Pledgor, if any,
minus (iii) all  Independent  Amounts  applicable to the secured Party,  if any,
minus (iv) the Pledgor's  Threshold provided,  however,  that the Credit Support
Amount will be deemed to be zero  whenever  the  calculation  of Credit  Support
Amount yields a number less than zero.

Paragraph 4. Conditions Precedent, Transfer Timing, Calculations and
Substitutions

(a)  Conditions  Precedent.  Each  Transfer  obligation  of  the  Pledgor  under
Paragraphs 3 and 5 and of the Secured Party under Paragraphs 3, 4(d)(ii),  5 and
6(d) is subject to the conditions precedent that:

(i) no Event of Default,  Potential Event of Default or Specified  Condition has
occurred and is continuing with respect to the other party; and

(ii) no Early  Termination  Date for which any unsatisfied  payment  obligations
exist has  occurred or been  designated  as the result of an Event of Default or
Specified Condition with respect to the other party.

(b)  Transfer  Timing.  Subject to  Paragraphs  4(a) and 5 and unless  otherwise
specified,  if a demand for the  Transfer of Eligible  Credit  Support or Posted
Credit Support is made by the Notification Time, then the relevant Transfer will
be made not later than the close of business on the next Local  Business Day; if
a demand is made after the Notification Time, then the relevant Transfer will be
made not later than the close of  business  on the  second  Local  Business  Day
thereafter.

(c)  Calculations.  All  calculations  of Value and  Exposure  for  purposes  of
Paragraphs 3 and 6(d) will be made by the  Valuation  Agent as of the  Valuation
Time.  The  Valuation  Agent will notify each party (or the other party,  if the
Valuation Agent is a party) of its  calculations not later than the Notification
Time on the Local  Business Day following the  applicable  Valuation Date (or in
the case of Paragraph 6(d), following the date of calculation).

                                                                 ISDA(R)1994
                                        2



(d) Substitutions.

(i) Unless otherwise specified in Paragraph 13, upon notice to the Secured Party
specifying the items of Posted Credit Support to be exchanged,  the Pledgor may,
on any Local  Business Day,  Transfer to the Secured Party  substitute  Eligible
Credit Support (the "Substitute Credit Support"); and

(ii) subject to Paragraph  4(a),  the Secured Party will Transfer to the Pledgor
the items of Posted  Credit  Support  specified by the Pledgor in its notice not
later than the Local  Business Day following the date on which the Secured Party
receives the Substitute Credit Support,  unless otherwise specified in Paragraph
13 (the  "Substitution  Date");  provided  that the  Secured  Party will only be
obligated  to  Transfer  Posted  Credit  Support  with a Value as of the date of
Transfer of that Posted Credit Support equal to the Value as of that date of the
Substitute Credit Support.

Paragraph 5. Dispute Resolution

If a party (a "Disputing Party") disputes (I) the Valuation Agent's  calculation
of a Delivery  Amount or a Return  Amount or (II) the Value of any  Transfer  of
Eligible Credit Support or Posted Credit  Support,  then (1) the Disputing Party
will notify the other party and the Valuation  Agent (if the Valuation  Agent is
not the other party) not later than the close of business on the Local  Business
Day following (X) the date that the demand is made under Paragraph 3 in the case
of (I) above or (Y) the date of Transfer in the case of (II) above,  (2) subject
to Paragraph 4(a), the appropriate  party will Transfer the undisputed amount to
the other party not later than the close of business on the Local  Business  Day
following (X) the date that the demand is made under  Paragraph 3 in the case of
(I) above or (Y) the date of Transfer in the case of (II) above, (3) the parties
will  consult  with each other in an attempt to resolve  the  dispute and (4) if
they fail to resolve the dispute by the Resolution Time, then:

(i) In the case of a dispute  involving  a  Delivery  Amount  or Return  Amount,
unless otherwise specified in Paragraph 13, the Valuation Agent will recalculate
the Exposure and the Value as of the Recalculation Date by:

(A)  utilizing  any  calculations  of  Exposure  for the  Transactions  (as Swap
Transactions) that the parties have agreed are not in dispute;

(B)  calculating the Exposure for the  Transactions  (or Swap  Transactions)  in
dispute  by  seeking  four  actual   quotations  at  mid-market  from  Reference
Market-makers  for  purposes of  calculating  Market  Quotation,  and taking the
arithmetic  average of those obtained;  provided that if four quotations are not
available for a particular  Transaction (or Swap  Transaction),  then fewer than
four quotations may be used for that Transaction (or Swap  Transaction);  and if
no quotations are available for a particular  Transaction (or Swap Transaction),
then  the  Valuation  Agent's  original  calculations  will  be  used  for  that
Transaction (or Swap Transaction); and

(C)  utilizing  the  procedures  specified in Paragraph 13 for  calculating  the
Value, if disputed, of Posted Credit Support.

(ii) In the case of a dispute  involving  the Value of any  Transfer of Eligible
Credit Support or Posted Credit Support,  the Valuation  Agent will  recalculate
the Value as of the date of Transfer pursuant to Paragraph 13.

Following a recalculation  pursuant to this Paragraph,  the Valuation Agent will
notify each party (or the other party,  if the  Valuation  Agent is a party) not
later  than the  Notification  Time on the  Local  Business  Day  following  the
Resolution  Time. The appropriate  party will, upon demand following that notice
by the  Valuation  Agent or a  resolution  pursuant  to (3) above and subject to
Paragraphs 4(a) and 4(b), make the appropriate Transfer.

                                                                 ISDA(R)1994
                                        3




Paragraph 6. Holding and Using Posted Collateral

(a) Care of Posted Collateral. Without limiting the Secured Party's rights under
Paragraph  6(c), the Secured Party will exercise  reasonable  care to assure the
safe custody of all Posted  Collateral to the extent required by applicable law,
and in any event the Secured Party will be deemed to have  exercised  reasonable
care if it exercises at least the same degree of care as it would  exercise with
respect to its own property.  Except as specified in the preceding sentence, the
Secured  Party will have no duty with respect to Posted  Collateral,  including,
without  limitation,  any duty to  collect  any  Distributions,  or  enforce  or
preserve any rights pertaining thereto.

(b) Eligibility to Hold Posted Collateral; Custodians.

(i)  General.  Subject  to the  satisfaction  of  any  conditions  specified  in
Paragraph 13 for holding Posted  Collateral,  the Secured Party will be entitled
to hold Posted  Collateral or to appoint an agent (a "Custodian") to hold Posted
Collateral  for the  Secured  Party.  Upon  notice by the  Secured  Party to the
Pledgor of the appointment of a Custodian, the Pledgor's obligations to make any
Transfer  will be  discharged  by making the  Transfer  to that  Custodian.  The
holding of Posted  Collateral by a Custodian will be deemed to be the holding of
that Posted Collateral by the Secured Party for which the Custodian is acting.

(ii) Failure to Satisfy Conditions.  If the Secured Party or its Custodian fails
to satisfy any conditions for holding Posted Collateral, then upon a demand made
by the Pledgor,  the Secured Party will, not later than five Local Business Days
after the  demand,  Transfer  or cause its  Custodian  to  Transfer  all  Posted
Collateral held by it to a Custodian that satisfies  those  conditions or to the
Secured Party if it satisfies those conditions.

(iii)  Liability.  The Secured Party will be liable for the acts or omissions of
its  Custodian  to the  same  extent  that the  Secured  Party  would be  liable
hereunder for its own acts or omissions.

(c) Use of Posted  Collateral.  Unless  otherwise  specified in Paragraph 13 and
without  limiting the rights and obligations of the parties under  Paragraphs 3,
4(d)(ii),  5, 6(d) and 8, if the Secured  Party is not a Defaulting  Party or an
Affected  Party with respect to a Specified  Condition and no Early  Termination
Date has  occurred  or been  designated  as the result of an Event of Default or
Specified  Condition with respect to the Secured  Party,  then the Secured Party
will,  notwithstanding  Section 9-207 of the New York Uniform  Commercial  Code,
have the right to:

(i) sell, pledge,  rehypothecate,  assign,  invest,  use, commingle or otherwise
dispose of, or otherwise  use in its business  any Posted  Collateral  it holds,
free from any claim or right of any nature whatsoever of the Pledgor,  including
any equity or right of redemption by the Pledgor; and

(ii)  register  any Posted  Collateral  in the name of the  Secured  Party,  its
Custodian or a nominee for either.

For purposes of the  obligation to Transfer  Eligible  Credit  Support or Posted
Credit  Support  pursuant  to  Paragraphs  3 and 5 and any  rights  or  remedies
authorized under this Agreement, the Secured Party will be deemed to continue to
hold all Posted Collateral and to receive Distributions made thereon, regardless
of whether the Secured  Party has  exercised  rights with  respect to any Posted
Collateral pursuant to (i) or (ii) above.

(d) Distributions and Interest Amount.

(i)  Distributions.  Subject to Paragraph 4(a), if the Secured Party receives or
is deemed to receive  Distributions on a Local Business Day, it will Transfer to
the Pledgor not later than the following Local Business Day any Distributions it
receives or is deemed to receive to the extent that a Delivery  Amount would not
be created or increased by that Transfer,  as calculated by the Valuation  Agent
(and the date of  calculation  will be  deemed to be a  Valuation  Date for this
purpose).


                                    4                         ISDA(R)1994



<PAGE>


(ii) Interest Amount.  Unless otherwise specified in Paragraph 13 and subject to
Paragraph  4(a),  in lieu of any  interest,  dividends or other  amounts paid or
deemed to have been paid with respect to Posted  Collateral  in the form of Cash
(all of which may be  retained  by the Secured  Party),  the Secured  Party will
Transfer to the Pledgor at the times  specified  in  Paragraph  13 the  Interest
Amount to the extent that a Delivery Amount would not be created or increased by
that transfer, as calculated by the Valuation Agent (and the date of calculation
will be deemed to be a Valuation Date for this purpose).  The Interest Amount or
portion  thereof not  Transferred  pursuant to this  paragraph  will  constitute
Posted  Collateral  in the  form of Cash  and will be  subject  to the  security
interest granted under Paragraph 2.

Paragraph 7. Events of Default

For purposes of Section 5(a)(iii)(1) of this agreement, an Event of Default will
exist with respect to a party if:

(i) that party fail (or fails to cause its  Custodian)  to make,  when due,  any
Transfer of Eligible  Collateral,  Posted  Collateral or the Interest Amount, as
applicable,  required to be made by it and that failure  continues for two local
Business Days after notice of that failure is given to that party;

(ii) that party fails to comply with any restriction or prohibition specified in
this annex with respect to any of the rights  specified  in Paragraph  6(c ) and
that failure continues for five local Business Days after notice of that failure
is given to that party; or

(iii) that party  fails to comply with or perform any  agreement  or  obligation
other  than  those  specified  in  Paragraphs  7(i) and 7(ii)  and that  failure
continues for 30 days after notice of that failure is given to that party.

Paragraph 8. Certain Rights and Remedies

(a) Secured Party's Rights and Remedies.  If at any time (1) an Event of Default
or  Specified  Condition  with  respect  to  the  Pledgor  has  occurred  and is
continuing or (2) and Early  Termination Date has occurred or been designated as
the result of an Event of Default or  Specified  Condition  with  respect to the
Pledgor,  then,  unless the Pledgor has paid in full all of its Obligations that
are then due, the Secured Party may exercise one or more of the following rights
and remedies:

(i) all rights and remedies  available to a secured party under  applicable  law
with respect to Posted Collateral held by the Secured Party;

(ii) any other  rights and  remedies  available  to the Secured  Party under the
terms of Other Posted Support, if any;

(iii) the right to Set-off any amounts  payable by the Pledgor  with  respect to
any  Obligations  against any Posted  Collateral  or the Cash  equivalent of any
Posted  Collateral  held by the Secured Party (or any  obligation of the Secured
Party to Transfer that Posted Collateral); and

(iv) the right to  liquidate  any Posted  Collateral  held by the Secured  Party
through  one or more  public or private  sales or other  dispositions  with such
notice,  if any, as may be required under applicable law, free from any claim or
right of any nature whatsoever of the Pledgor,  including any equity or right of
redemption  by the Pledgor  (with the Secured Party having the right to purchase
any or all of the Posted  Collateral  to be sold) and to apply the  proceeds (or
the Cash equivalent  thereof) from the  liquidation of the Posted  Collateral to
any amounts payable by the Pledgor with respect to any Obligations in that order
as the Secured Party may elect.

Each  party  acknowledges  and  agrees  that  Posted  Collateral  in the form of
securities may decline  speedily in value and is of a type customarily sold on a
recognized market, and, accordingly, the Pledgor is not entitled to prior notice
of any sale of that Posted  Collateral by the Secured  Party,  except any notice
that is required under applicable law and cannot be waived.

                                        5
                                                                    ISDA(R)1994


<PAGE>



(b) Pledgor's Rights and Remedies.  If at any time an Early Termination Date has
occurred or been  designated  as the result of an Event of Default or  Specified
Condition  with  respect to the Secured  Party,  then  (except in the case of an
Early  Termination  Date  relating  to  less  than  all  Transactions  (or  Swap
Transactions)  where the Secured  Party has paid in full all of its  obligations
that are then due under Section 6(e) of this Agreement):

(i) the Pledgor may  exercise  all rights and  remedies  available  to a pledgor
under  applicable  law with  respect to Posted  Collateral  held by the  Secured
Party;

(ii)the  Pledgor may exercise  any other  rights and  remedies  available to the
Pledgor under the terms of Other Posted Support, in any;

(iii) the Secured  Party will be  obligated  immediately  to Transfer all Posted
Collateral and the Interest Amount to the Pledgor; and

(iv)to  the extent  that  Posted  Collateral  or the  Interest  Amount is not so
Transferred pursuant to (iii) above, the Pledgor may:

(A) Set-off any amounts  payable by the Pledgor with respect to any  Obligations
against any Posted  Collateral or the Cash  equivalent of any Posted  Collateral
held by the Secured  Party (or any  obligation  of the Secured Party to Transfer
that Posted Collateral); and

(B) to the  extent  that the  Pledgor  does not  Set-off  under  (iv)(A)  above,
withhold payment of any remaining amounts payable by the Pledgor with respect to
any Obligations,  up to the Value of any remaining Posted Collateral held by the
Secured Party, until that Posted Collateral is Transferred to the Pledgor.

(c)  Deficiencies  and Excess  Proceeds.  The Secured Party will Transfer to the
Pledgor any proceeds and Posted  Credit  Support  remaining  after  liquidation,
Set-off and/or  application under Paragraphs 8(a) and 8(b) after satisfaction in
full of all amounts payable by the Pledgor with respect to any Obligations;  the
Pledgor in all events will remain liable for any amounts  remaining unpaid after
any liquidation, Set-off and/or application under Paragraphs 8(a) and 8(b).

(d) Final  Returns.  When no amounts are or thereafter may become payable by the
Pledgor  with respect to any  Obligations  (except for any  potential  liability
under  Section 2(d) of this  Agreement),  the Secured Party will Transfer to the
Pledgor all Posted Credit Support and the Interest Amount, if any.

Paragraph 9. Representations

Each Party represents to the other party (which  representations  will be deemed
to be repeated as of each date on which it, as the Pledgor,  Transfers  Eligible
Collateral) that:

(i) it has the power to grant a security  interest  in and lien on any  Eligible
Collateral it Transfers as the Pl;edgor and has taken all  necessary  actions to
authorize the granting of that security interest and lien;

(ii) it is the sole owner of or otherwise has the right to Transfer all Eligible
Collateral  it Transfers to the Secured Party  hereunder,  free and clear of any
security  interest,  lien,  emcumbrance  or other  restrictions  other  than the
security interest and lien granted under Paragraph 2;

(iii) upon the Transfer of any Eligible  Collateral  to the Secured  Party under
the terms of this  Annex,  the  Secured  Party will have a \valid and  perfected
first priority  security  interest  therein  (assuming that any central clearing
corporation or any third-party financial intermediary or other entity not within
the control of the Pledgor involved in the Transfer of that Eligible  Collateral
gives the notices and takes the action  required of it under  applicable law for
perfection of that interest); and

(iv) the performance by it of its  obligations  under this Annex will not result
in the  creation of any  security  interest,  lien or other  encumbrance  on any
Posted  Collateral  other than the  security  interest  and lien  granted  under
Paragraph 2.

                                        6
                                                                  ISDA(R)1994

<PAGE>


Paragraph 10. Expenses

(a) General.  Except as otherwise  provided in Paragraphs 10(b) and 10(c),  each
party will pay its own costs and  expenses in  connection  with  performing  its
obligations  under this Annex and neither Party will be liable for any costs and
expenses incurred by the other party in connection herewith.

(b) Posted  Credit  Support.  The Pledgor will  promptly pay when due all taxes,
assessments  or charges of any nature  that are imposed  with  respect to Posted
Credit  Support  held by the  Secured  Party  upon  becoming  aware of the same,
regardless of whether any portion of that Posted Credit Support is  subsequently
disposed  of under  Paragraph  6(c),  except for those  taxes,  assessments  and
charges  that result  from the  exercise of the  Secured  Party's  rights  under
Paragraph 6(c).

(c)  Liquidation/Application  of Posted Credit Support. All reasonable costs and
expenses  incurred  by or on  behalf  of the  Secured  Party or the  Pledgor  in
connection with the liquidation  and/or application of any Posted Credit Support
under  Paragraph  8 will be  payable,  on demand and  pursuant  tot he  Expenses
Section of this Agreement, by the Defaulting Party or, of there is no Defaulting
Party, equally by the parties.

Paragraph 11. Miscellaneous

(a) Default Interest. A Secured Party that fails to make, when due, any Transfer
of Posted Collateral or the Interest Amount will be obligated to pay the Pledgor
(to the extent  permitted  under  applicable law) an amount equal to interest at
the Default  Rate  multiplied  by the Value of the items of  property  that were
required to be Transferred, from (and including) the date that Posted Collateral
or Interest Amount was required to be Transferred to (but excluding) the date of
Transfer of that Posted  Collateral  or Interest  Amount.  This interest will be
calculated  on the  basis of daily  compounding  and the  actual  number of days
elapsed.

(b) Further  Assurances.  Promptly following a demand made by a party, the other
party will execute,  deliver, file and record any financing statement,  specific
assignment or other  document and take any other action that may be necessary or
desirable and reasonably requested by that party to create,  preserve,  perfect,
or validate any security  interest or lien granted under  Paragraph 2, to enable
that party to exercise or enforce  its rights  under this Annex with  respect to
Posted Credit  Support or an Interest  Amount or to effect or document a release
of a security interest on Posted Collateral or an Interest Amount.

(c) Further  Protection.  The Pledgor will  promptly  give notice to the Secured
Party of, and defend against, any suit, action, proceeding or lien that involves
Posted Credit Support  Transferred by the Pledgor or that could adversely affect
the  security  interest  and lien  granted by it under  Paragraph 2, unless that
suit,  action,  proceeding  or lien  results  from the  exercise  of the Secured
Party's rights under Paragraph 6(c ).

(d)  Good  Faith  and  Commercially   Reasonable  Manner.   Performance  of  all
obligations under this Annex,  including,  but not limited to, all calculations,
valuations and  determinations  made by either party, will be made in good faith
and in a commercially reasonable manner.

(e) Demands  and  Notices.  All  demands and notices  made by a party under this
Annex will be made as specified in the Notices Section of this Agreement, except
as otherwise provided in Paragraph 13.

(f)  Specifications  of Certain Matters.  Anything  referred to in this Annex as
being  specified  in  Paragraph  13  also  may  be  specified  in  one  or  more
Confirmations or other documents and this Annex will be construed accordingly.

                                        7
                                                                    ISDA(R)1994



<PAGE>



Paragraph 12. Definitions

As used in this Annex: --

"Cash" means the lawful currency of the United States of America.

"Credit Support Amount" has the meaning specified in Paragraph 3.

"Custodian" has the meaning specified in Paragraphs 6(b)(i) and 13.

"Delivery Amount" has the meaning specified in Paragraph 3(a).

"Disputing Party" has the meaning specified in Paragraph 5.

"Distributions"  means with respect to Posted  Collateral  other than Cash,  all
principal,  interest  and  other  payments  and  distributions  of cash or other
property  with  respect  thereto,  regardless  of whether the Secured  Party has
disposed of that Posted Collateral under Paragraph 6(c ). Distributions will not
include any item of property  acquired by the Secured Party upon any disposition
or liquidation of Posted Collateral or, with respect to any Posted Collateral in
the  form of  Cash,  any  distributions  on that  collateral,  unless  otherwise
specified herein.

"Eligible  Collateral"  means,  with  respect  to a party,  the  items,  if any,
specified as such for that party in Paragraph 13.

"Eligible Credit Support" means Eligible Collateral and Other Eligible Support.

"Exposure"  means for any  Valuation  Date or other date for which  Exposure  is
calculated and subject to Paragraph 5 in the case of a dispute,  the amount,  if
any,  that would be payable  to a party that is the  Secured  Party by the other
party  (expressed as a positive  number) or by a party that is the Secured Party
to the  other  party  (expressed  as a  negative  number)  pursuant  to  Section
6(e)(ii)(2)(A)  of this Agreement as if all Transactions (or Swap  Transactions)
were being  terminated as of the relevant  Valuation Time;  provided that Market
Quotation  will be  determined  by the  Valuation  Agent using its  estimates at
mid-market of the amounts that would be paid for  Replacement  Transactions  (as
that term is defined in the definition of "Market Quotation").

"Independent  Amount" means,  with respect to a party,  the amount  specified as
such for that party in Paragraph 13; if no amount is specified, zero.

"Interest Amount" means,  with respect to an Interest Period,  the aggregate sum
of the amounts of interest  calculated  for each day in that Interest  Period on
the  principal  amount  of  Posted  Collateral  in the form of Cash  held by the
Secured Party on that day,  determined by the Secured Party for each such day as
follows:

(x) the amount of that Cash on that day; multiplied by

(y) the Interest Rate in effect for that day; divided by

(z) 360.

"Interest  Period" means the period from (and including) the last Local Business
Day on which an Interest Amount was  Transferred  (or, if no Interest Amount has
yet been  Transferred,  the Local Business Day on which Posted Collateral in the
form of Cash was  Transferred  to or  received  by the  Secured  Party)  to (but
excluding) the Local Business Day on which the current  Interest Amount is to be
Transferred.

"Interest Rate" means the rate specified in Paragraph 13.

"Local  Business  Day",  unless  otherwise  specified in  Paragraph  13, has the
meaning  specified in the  Definitions  Section of this  Agreement,  except that
references  to a  payment  in clause  (b)  thereof  will be deemed to  include a
Transfer under this Annex.

                                        8
                                                                  ISDA(R)1994

<PAGE>






"Minimum  Transfer Amount" means,  with respect to a party, the amount specified
as such for that party in Paragraph 13; if no amount is specified, zero.

"Notification Time" has the meaning specified in Paragraph 13.

"Obligation"  means, with respect to a party, all present and future obligations
of that party under this Agreement and any additional  obligations specified for
that party in Paragraph 13.

"Other  Eligible  Support"  means,  with respect to a party,  the items, if any,
specified as such for that party in Paragraph 13.

"Other Posted  Support"  means all Other  Eligible  Support  Transferred  to the
Secured Party that remains in effect for the benefit of thaat Secured Party.

"Pledgor"  means either  party,  when that party (i) receives a demand for or is
required to transfer  Eligible  Credit Support under  Paragraph 3(a) or (ii) has
Transferred Eligible Credit Support under Paragraph 3(a).

"Posted   Collateral"   means   all   Eligible   Collateral,   other   property,
Distributions,  and all  proceeds  thereof  that  have  been  Transferred  to or
received  by the  Secured  Party  under  this Annex and not  Transferred  to the
Pledgor  pursuant  to  Paragraph  3(b),  4(d)(ii)  or 6(d)(i) or released by the
Secured  Party under  Paragraph  8. Any interest  Amount or portion  thereof not
Transferred  pursuant to Paragraph 6(d)(ii) will constitute Posted Collateral in
the form of Cash.

"Posted Credit Support" means Posted Collateral and Other Posted Support.

"Recalculation  Date"  means the  Valuation  Date that gives rise to the dispute
under Paragraph 5, provided, however, that if a subsequent Valuation Date occurs
under   Paragraph  3  prior  to  the   resolution  of  the  dispute,   then  the
"Recalculation Date" menas the most recent Valuation Date under Paragraph 3.

"Resolution Time" has the meaning specified in Paragraph 13.

"Return Amount" has the meaning specified in Paragraph 3(b).

"Secured Party" means either party, when that party (i) makes a demand for or is
entitled to receive Eligible Credit Support under Paragraph 3(a) or (ii) makes a
demand for or is entitled to receive  Eligible  Credit  Support under  Paragraph
3(a) or (ii) holds or is deemed to hold Posted Credit Support.

"Specified  Condition"  means,  with respect to a party,  any event specified as
such for that party in Paragraph 13.

"Substitute Credit Support" has the meaning specified in Paragraph 4(d)(i).

"Substitution Date" has the meaning specified in Paragraph 4(d)(ii).

"Threshold"  means,  with respect to a party,  the amount  specified as such for
that party in Paragraph 13; if no amount is specified, zero.

"Transfer"  means,  with respect to any Eligible Credit  Support,  Posted Credit
Support or Interest  Amount,  and in  accordance  with the  instructions  of the
Secured Party,  Pledgor or Custodian,  as  applicable:  (i) in the case of Cash,
payment or delivery by wire transfer into one or more bank accounts specified by
the recipient;

(ii) in the case of certificated securities that cannot be paid or delivered by
book entry, payment or delivery in appropriate physical form to the recipient or
its account accompanied by any duly executed instruments of transfer,
assignments in blank, transfer tax stamps and any other documents necessary to
constitute a legally valid transfer to the recipient;

(iii) in the case of securities that can be paid or delivered by book-entry, the
giving of written instructions to the relevant depository institution or other
entity specified by the recipient, together with a written copy thereof to the
recipient, sufficient if complied with to result in a legally effective transfer
of the relevant interest to the recipient; and

(iv) in the case of Other Eligible Support or Other Posted Support, as specified
in Paragraph 13.

                                       9

<PAGE>



"Valuation Agent" has the meaning specified in Paragraph 13.

"Valuation Date" means each date specified in or otherwise  determined  pursuant
to Paragraph 13.

"Valuation  Percentage"  means,  for  any  item  of  Eligible  Collateral,   the
percentage specified in Paragraph 13.

"Valuation Time" has the meaning specified in Paragraph 13.

"Value" means for any Valuation Date or other date for which Value is calculated
and subject to Paragraph 5 in the case of a dispute, with respect to:

(i) Eligible Collateral or Posted Collateral that is:

(A) Cash, the amount thereof; and

(B) a security,  the bid price obtained by the valuation Agent multiplied by the
applicable Valuation Percentage, if any;

(ii) Posted Collateral that consists of items that are not specified as Eligible
Collateral, zero; and

(iii) Other Eligible Support and Other Posted Support, as specified in Paragraph
13.


                                       10
<PAGE>




BEAR STEARNS BANK PLC ("Party A") and PENN-AMERICA GROUP INC. ("Party B")

Paragraph 13.  Elections and Variables

(a) Security Interest for "Obligations".  The term "Obligations" as used in this
Annex includes no "additional obligations" within the meaning of Paragraph 12.

(b)      Credit Support Obligations.

         (i) Delivery Amount, Return Amount and Credit Support Amount.

(A) "Delivery Amount" has the meaning specified in Paragraph 3(a).

(B) "Return Amount" has the meaning specified in Paragraph 3(b).

(C) "Credit Support Amount" has the meaning specified in Paragraph 3.

         (ii)  Eligible  Collateral.  The  items  set  forth  on the  Collateral
         Schedule  attached  hereto  will  qualify  as  "Eligible   Collateral";
         provided,  however,  that,  during the  pendency  of any suit,  action,
         proceeding or lien  referenced  in Paragraph  11(c) (other than a suit,
         action,  proceeding or lien  resulting from the exercise of the Secured
         Party's  rights  under  Paragraph  6(c)),  the  Posted  Credit  Support
         affected  thereby shall not  constitute  Eligible  Collateral.  Pledgor
         shall be  obligated,  in such event,  to Transfer to the Secured  Party
         substitute  Eligible  Credit  Support for such posted Credit Support in
         order to satisfy its obligations  under Paragraph 3, provided that such
         substitute Eligible Credit Support shall have a Value as of the date of
         Transfer  equal to or greater than the Value such Posted Credit Support
         would have had (as  determined  by the Secured  Party) if no such suit,
         action, proceeding or lien was pending.

          (iii)  Other  Eligible  Support.  Such other  property  as the Secured
         Party,  in its  sole  discretion,  shall  deem  acceptable,  with  such
         Valuation  Percentage applied thereto as the Secured Party, in its sole
         discretion, shall deem appropriate.

         (iv) Thresholds.

                        (A)         "Independent Amount" means not applicable
                                    with respect to Party A and Party B.

                        (B)         "Threshold" means with respect to a Party A,
                                    the amount set forth on Table 1 on the
                                    Threshold Schedule attached hereto under
                                    "Pledgor's Threshold" corresponding to the
                                    lower Rating of such party (as defined
                                    below) at the relevant time.

                  "Threshold" means with respect to Party B, zero.

                        (C)         "Minimum Transfer Amount", means with
                                    respect to a Party A, USD 250,000.

                  "Minimum  Transfer  Amount" means with respect to Party B, USD
                  100,000.

                        (D)         Rounding. The Delivery Amount and the Return
                                    Amount will be rounded to the nearest
                                    integral multiple of USD10,000.

                        (E)         "Rating" means, in the case of Party A, the
                                    rating issued by Standard and Poor's Ratings
                                    Group, a division of the McGraw-Hill
                                    Companies Inc. ("S&P"), and Moody's
                                    Investors Service Inc. ("Moody's") in
                                    respect of the long-term, unsecured and
                                    unsubordinated obligations of The Bear
                                    Stearns Companies Inc.




                                       11

<PAGE>


(c)      Valuation and Timing.

         (i)  "Valuation  Agent" means,  for purposes of Paragraphs 3 and 5, the
         party  making the demand  under  Paragraph 3; for purposes of Paragraph
         4(d)(ii),  the Secured Party  receiving the Substitute  Credit Support;
         for purposes of Paragraph  6(d), the Secured Party  receiving or deemed
         to receive the  Distributions  or the Interest  Amount,  as applicable,
         and, for purposes of assigning a Value to Posted Credit Support for the
         purpose of setting off against such Posted Credit Support the Pledgor's
         Obligations to the Secured Party or for the purpose of determining  the
         amount of any Cash  payment to which the Pledgor is entitled in lieu of
         the return of Posted  Credit  Support,  the Secured  Party (or, in each
         such instance, an Affiliate of the applicable party).

         (ii)  "Valuation  Date" means any Local  Business Day  designated  by a
         party which, in the reasonable  judgment of such party, would result in
         a Delivery Amount or Return Amount.

         (iii)  "Valuation  Time"  means  the  close of  business  on the  Local
         Business  Day  in  the  city  where  the  Valuation  Agent  is  located
         immediately  preceding the Valuation  Date or date of  calculation,  as
         applicable;  provided that the  calculations of Value and Exposure will
         be made as of approximately the same time on the same date.

         (iv) "Notification Time" means 11:00 A.M. (New York time).

         (v)  Transfer  Timing and  Calculations.  Paragraphs  4(b) and 4(c) are
         hereby amended and restated in their entirety as set forth below.

              "(b) Transfer Timing.  Subject to Paragraphs 4(a) and 5 and unless
              otherwise  specified,  if a demand for the  Transfer  of  Eligible
              Credit   Support  or  Posted   Credit   Support  is  made  by  the
              Notification  Time,  then the relevant  Transfer  will be made not
              later  than the close of  business  on the  Valuation  Date;  if a
              demand is made  after the  Notification  Time,  then the  relevant
              Transfer  will be made not later than the close of business on the
              next Local Business Day thereafter.

              (c)  Calculations.  All  calculations  of Value and  Exposure  for
              purposes of  Paragraphs  3 and 6(d) will be made by the  Valuation
              Agent as of the Valuation  Time.  The Valuation  Agent will notify
              each party (or the other party, if the Valuation Agent is a party)
              of its calculations  not later than the  Notification  Time on the
              applicable  Valuation Date (or in the case of Paragraph  6(d), the
              Local Business Day)."

               (d) Conditions Precedent. There shall be no "Specified Condition"
               with respect to either party for purposes of this Annex.

               (e) Substitution.

               (i)  "Substitution Date" means (A) the Local Business Day on
                    which the Secured Party receives the Substitute Credit
                    Support, if notice of substitution is received by the
                    Notification Time on such date, and (B) the Local Business
                    Day following the date on which the Secured Party receives
                    the Substitute Credit Support, if notice of substitution is
                    received after the Notification Time.

               (ii) Consent of Secured Party for Substitution. Inapplicable.

               (iii) Amendment of Paragraph 4(d)(ii). Paragraph 4(d)(ii) is
                    amended and restated in its entirety as set forth below.

                    "(ii) subject to Paragraph 4(a) of the Annex, the Secured
                         Party will Transfer the items of Posted Credit Support
                         specified by the Pledgor in its notice not later than
                         the close of business on the Substitution Date;
                         provided, however, that if the Secured Party shall not
                         have received the Substitute Credit Support prior to
                         1:00 P.M. (New


                                       12

<PAGE>


              York time) on the Substitution Date, then the Secured Party (which
              agrees to use  commercially  reasonable  efforts to  Transfer  the
              specified  items  of  Posted  Credit  Support  on the  same day it
              receives  the  Substitute   Credit  Support)  shall  Transfer  the
              applicable items of Posted Credit Support not later than the close
              of business on the Local  Business Day  immediately  following the
              day on which the Secured  Party  receives  the  Substitute  Credit
              Support.  Notwithstanding  the  foregoing,  the Secured Party will
              only be obligated to Transfer  Posted Credit  Support with a Value
              as of the  Substitution  Date equal to the Value of the Substitute
              Credit Support delivered by the Pledgor in exchange therefor."

(f)      Dispute Resolution.

         (i)  "Resolution  Time"  means  12:00 Noon (New York time) on the Local
         Business Day for both parties  following the date the  Disputing  Party
         gives notice of a dispute pursuant to Paragraph 5.

         (ii) Value. For the purpose of Paragraphs  5(i)(C) and 5(ii),  disputes
         over  the  Value of  Posted  Credit  Support  will be  resolved  by the
         Valuation  Agent  seeking  bid-side   quotations  as  of  the  relevant
         Recalculation  Date or date of  Transfer,  as  applicable,  from  three
         parties that  regularly  act as dealers in the  securities in question.
         The Value will be the arithmetic mean of the quotations obtained by the
         Valuation Agent;  provided,  however,  that if three quotations are not
         available  for a  particular  security,  then the number of  quotations
         obtained  with respect to such  security will be used. If no quotations
         are available  for a particular  security,  then the Valuation  Agent's
         original  calculation  of the  Value  thereof  will  be used  for  that
         security.

         (iii)  Alternative.  Subject  to item (iv)  below,  the  provisions  of
         Paragraph 5 will apply.

         (iv)  Modification  of  Paragraph  5.  The  introductory  paragraph  of
         Paragraph  5 shall be amended and  restated to read in its  entirety as
         follows:

              "If a party  (a  `Disputing  Party')  disputes  (I) the  Valuation
              Agent's  calculation  of a Delivery  Amount or a Return  Amount or
              (II) the Value of any  Transfer  of  Eligible  Credit  Support  or
              Posted Credit Support, then:

              (A) the  Disputing  Party will (x) notify the other  party and, if
              applicable, the Valuation Agent of the amount it is disputing, (y)
              indicate what it believes the correct amount to be and (z) provide
              a statement showing,  in reasonable detail, how it arrived at such
              amount,  and the  appropriate  party will  deliver the  undisputed
              amount  to the other  party  not  later  than (i) (a) the close of
              business on the Valuation Date, if the demand made under Paragraph
              3 in the case of (I) above is made by the  Notification  Time,  or
              (b) the close of business of the Local  Business Day following the
              date on which the demand is made under  Paragraph 3 in the case of
              (I) above, if such demand is made after the Notification  Time, or
              (ii) the close of business of the date of Transfer, in the case of
              (II) above;

              (B) the parties  will  consult  with each other and  provide  such
              information  as the other  party  shall  reasonably  request in an
              attempt to resolve the dispute; and

              (C) if they fail to resolve  the dispute by the  Resolution  Time,
              then:"

(g)      Holding and Using Posted Collateral.

         (i) Eligibility to Hold Posted Collateral;  Custodians. A party and its
         Custodian (if any) will be entitled to hold Posted Collateral  pursuant
         to  Paragraph  6(b);  provided  that  the  following   conditions,   as
         applicable, are satisfied:

(A) Such party is not a Defaulting Party; and



                                       13

<PAGE>



(B)          Posted  Collateral  consisting of Cash or  certificated  securities
             that cannot be paid or delivered by book-entry  may be held only in
             any state of the  United  States  which  has  adopted  the  Uniform
             Commercial Code.

             There shall be no Custodian for Party A.

             There shall be no Custodian for Party B.

         (ii) Use of Posted  Collateral.  The  provisions of Paragraph 6(c) will
         apply to both parties.  For the avoidance of doubt,  the parties hereby
         agree and  acknowledge  that whether or not the Secured  Party has used
         any Posted  Collateral  as permitted by  Paragraph  6(c),  whenever the
         Secured Party is obligated to return  Posted  Collateral to the Pledgor
         under this  Annex,  the  Secured  Party,  at its  option,  may  deliver
         Equivalent Collateral. For the purposes hereof, "Equivalent Collateral"
         means,  with respect to any security  constituting  Posted  Collateral,
         securities of the same issuer, series, class (if applicable), maturity,
         mortgage pool (if applicable), coupon and principal amount.

(h)      Distributions and Interest Amount.

         (i) Interest  Rate.  The  "Interest  Rate" will be the  "Federal  Funds
         (Effective)"  rate as such rate is displayed  on Telerate  page 118 for
         such day under the caption "Effective."

         (ii) Amendment of Paragraph 6(d)(i) - Distributions.  Clause 6(d)(i) of
         Paragraph  6 shall be amended and  restated to read in its  entirety as
         follows:

             "(i)  Distributions.  If the Secured Party receives or is deemed to
             have received Distributions on a Local Business Day, it will credit
             to the Pledgor not later than the following  Local Business Day any
             Distributions  it receives or is deemed to have received,  and such
             Distributions will constitute Posted Collateral and will be subject
             to the security interest granted under Paragraph 2."

         (iii) Amendment of Paragraph 6(d)(ii) - Interest Amount. Clause (d)(ii)
         of Paragraph 6 shall be amended and restated to read in its entirety as
         follows:

             "(ii) Interest Amount. In lieu of any interest,  dividends or other
             amounts  paid or deemed to have  been paid with  respect  to Posted
             Collateral in the form of Cash (all of which may be retained by the
             Secured  Party),  the  Secured  Party will credit to Pledgor on the
             20th  day of each  calendar  month  (or if such  day is not a Local
             Business Day, the next Local Business Day) the Interest Amount. The
             Interest  Amount  will  constitute  Posted  Collateral  and will be
             subject to the security  interest  granted  under  Paragraph 2. For
             purposes of calculating the Interest Amount, the amount of interest
             calculated for each day of the interest  period shall be compounded
             monthly.

(i)      Demands and Notices. All demands, specifications and notices under this
         Annex will be made pursuant to the Notices Section of this Agreement.

(j)      Addresses for Transfers.

         Party A: To be provided in writing by Party A to Party B.

         Party B: To be provided in writing by Party B to Party A.

(k)      Other Provision(s).

         (i)  Amendment  of  Paragraph  7 - Events  of  Default.  Clause  (i) of
         Paragraph  7 shall be amended and  restated to read in its  entirety as
         follows:



                                       14

<PAGE>


             "(i) that party  fails (or fails to cause its  Custodian)  to make,
             when due, any Transfer of Eligible Collateral, Posted Collateral or
             the Interest Amount,  as applicable,  required to be made by it and
             that failure  continues for one Local  Business Day after notice of
             that failure is given to that party;"

         (ii) Non-Reliance. Notwithstanding the obligations of the Secured Party
         under Paragraph 6(a), and without  limiting the generality of the final
         sentence of Paragraph 6(a), each party, as Pledgor,  acknowledges  that
         it has the means to monitor  all matters  relating  to all  valuations,
         payments, defaults and rights with respect to Posted Collateral without
         need to rely on the other party, in its capacity as Secured Party,  and
         that,   given   the   provisions   of  this   Annex  on   substitution,
         responsibility  for the  preservation of the rights of the Pledgor with
         respect  to all such  matters  is  reasonably  allocated  hereby to the
         Pledgor.




                                       15



<PAGE>






IN WITNESS  WHEREOF,  the parties have  executed this Annex with effect from the
date specified on the first page of this Annex.


BEAR STEARNS BANK, PLC                    PENN-AMERICA GROUP, INC.


By: /s/ Timothy Murray                    By: /s/ Joseph F. Morris
Name: Timothy Murray                      Title: SVP, CFO and Treasurer
Title: Authorized Signatory






                                       16


Execution Version


                                                              THRESHOLD SCHEDULE




                                     Table 1


Rating Classification       Rating Classification       Pledgor's Threshold
Issued by Moody's           Issued by S&P

Aaa                         AAA                         USD25,000,000
Aa1, Aa2, Aa3               AA+, AA,  AA-               USD15,000,000
Al, A2, A3                  A+, A, A-                   USD5,000,000
Baa1, Baa2, Baa3            BBB+, BBB, BBB-             USD1,000,000

Below Baa3 or               Below BBB- or
Suspended, withdrawn        suspended, withdrawn
or unrated                  or unrated                  Zero



If Moody's and S&P issue different rating classifications for Party A (or it's
Credit Support Provider, as applicable), the Pledgor's Threshold and the Minimum
Transfer Amount that apply to such party shall be the applicable amounts
opposite the lower of the two rating classifications. In addition, a party that
is a Defaulting Party shall be deemed to have a Pledgor's Threshold and
MinimumTransfer Amount equal to zero regardless of the rating classification
that Moody's or S&P may have issued at such time.

                                       17

<PAGE>


Execution Version
                                                             COLLATERAL SCHEDULE

      Eligible Collateral                                          Valuation
                                                                   Percent-
                                                                     age

      Cash                                                           100%

      U.S. Treasuries (as defined below) having a 100% remaining term
      to maturity of not more than one year

      Direct Obligations of US-Government Sponsored                   99%
      Entities (as defined below) having a remaining term
      to maturity of not more than one year

      U.S. Treasuries having a remaining term to maturity 99% of more
      than one year but not more than five years

      Direct Obligations of US-Government Sponsored                   98%
      Entities having a remaining term to maturity of more
      than one year but not more than five years

      U.S. Treasuries having a remaining term to maturity 99% of more
      than five years but not more than ten years

      Direct Obligations of US-Government Sponsored                   98%
      Entities having a remaining term to maturity of more
      than five years but not more than ten years

      U.S. Treasuries having a remaining term to maturity 98% of more
      than ten years but not more than twenty years

      Direct Obligations of US-Government Sponsored                   97%
      Entities having a remaining term to maturity of more
      than ten years but not more than twenty years

      U.S. Treasuries having a remaining term to maturity             98%
      of more than twenty years but not more than thirty
      years

      Mortgage participation certificates in book-entry               97%
      form, the timely payment of interest at the applicable
      certificate rate and the ultimate collection of principal
      of which are guaranteed by the Federal Home Loan
      Mortgage Corporation (excluding multi-class REMIC
      pass-through certificates and pass-through certificates
      backed by adjustable rate mortgages and excluding
      securities paying interest or principal only)


                                       18

<PAGE>


Execution Version



      Mortgage pass-through certificates in book-entry                97%
      form, the full and timely payment of interest at the
      applicable certificate rate and the ultimate collection of
      principal of which are guaranteed by the Federal National
      Mortgage Association (excluding multi-class REMIC pass-through
      certificates and pass-through certificates backed by adjustable
      rate mortgages and excluding securities paying interest or
      principal only)

      Fully modified pass-through certificates in book-entry form,    97%
      the full and timely payment of principal and interest of
      which are guaranteed by the Government National Mortgage
      Association (excluding multi-class REMIC pass-through
      certificates and pass-through certificates backed by
       adjustable rate mortgages and excluding securities
      paying interest or principal only)


For the purposes of the Eligible Collateral Chart set forth above, the words
indicated below shall have the following definitions:

(US Treasuries) shall mean negotiable debt obligations issued by the United
States Treasury Department.

"Direct Obligations of US-Government Sponsored Entities" shall mean non-callable
negotiable debt obligations of the Federal Home Loan Mortgage Corporation,
Federal National Mortgage Association and Government National Mortgage
Association.



                                       19