The 1999 Annual Report: Penn-America Group, Inc.

Behind the scenes:
The Penn-Americans
                                  Main Street
                                     Today

                          In depth: Penn-America 1999

                                             SMALL BUSINESS
                                             ON MAIN STREET
                                             America's Economic
                                             Engine


                                             Are Small
                                             Firms Important?

                                             Living on Main Street
                                             Five Penn-America Agents
                                             And Their Markets


                                                        Penn-America Shareholder
                                                        Number One Main Street
                                                        Smalltown US 10000-0000
<PAGE>
                         Penn-America Group at a Glance

     Penn-America  Group, Inc. (NYSE:PNG) is a specialty niche insurance company
which,  through its subsidiaries  Penn-America  Insurance  Company and Penn-Star
Insurance  Company  underwrites   commercial  property  and  casualty,   general
liability,  commercial  multi-peril  and commercial  automobile  insurance.  The
company's  speciality  program  lines of  insurance  (such as for  couriers  and
cargo),  introduced in 1998, have  contributed  meaningfully to strong growth in
the company's core Main Street markets.

     Penn-America has developed a unique niche providing small premium insurance
products to small growing businesses in small vibrant cities and towns in all 50
United States and the District of Columbia,  through a small network of about 50
wholesale general agents. These entrepreneurial agents live and work in the same
markets they serve,  comprising a finely tuned,  responsive and powerful system,
empowered by technology, for spotting and responding to market opportunities.

     Penn-America  is traded on the New York  Stock  Exchange  under the  symbol
"PNG." In 1999, the company paid quarterly  dividends of $.0525 per share. Rated
"A" (Excellent) by A.M. Best Company, it is located in Hatboro,  Pennsylvania, a
small vibrant town near Philadelphia.


Penn-America's Commitments


o    Make a profit in our basic business: insurance.

o    Be the best, as defined by our agents, at what we do in our markets.

o    Maintain our reputation as the company that provides the best, most
     responsive service to its agents, bar none.

o    Be number one in premium dollar volume in each of our agents' offices, for
     the products we sell.

o    Return exceptional value for our stockholders' investments.

o    Practice the corporate values in which we believe.

                         Important Facts
                                                    1999
Shares Outstanding                                 8,062,861
Closing Price                                      $7.75
52-Week Range                                      $7.125-
                                                   $11.3125
Market Capitalization                              $62.5 Million
Price/Book Ratio                                    0.78x
Stockholders' Equity                               $80.6 Million
Book Value Per Share                               $10.00
Net Operating Earnings
Per Share:
         Basic                                      $0.17
         Diluted                                    $0.17
Net Earnings Per Share
         Basic                                      $0.24
         Diluted                                    $0.24
Price/Earnings Ratio
         Basic and Diluted                          32.3x
Dividends Per Share                                 $0.2075
Dividend Yield                                       2.8%

                                                  As of 12/31/99



<PAGE>

                                  MAIN STREET
                                     TODAY
                       Penn-America's 1999 Annual Report

                                 IN THIS ISSUE


Featured Company
--------------------------------------------------------------------------------
Penn-America Group At A Glance                                      Inside Front
                                                                           Cover

Letter From The Publisher
--------------------------------------------------------------------------------
Welcome!....................................................................1

Cover Story
--------------------------------------------------------------------------------
Small Business On Main Street:America's Economic Engine ....................2

--------------------------------------------------------------------------------
Vital Statistics: Small Business In America ................................2

--------------------------------------------------------------------------------
A Month In The Life of Main Street .........................................3

Technology
--------------------------------------------------------------------------------
How Modern Technology Makes Old-Fashioned Relationships Better .............4

People
--------------------------------------------------------------------------------
Behind the Scenes On Main Street: The Penn-Americans .......................5

--------------------------------------------------------------------------------
Living on Main Street: Five Penn-America Agents And Their Markets ..........6

Guest Opinion
--------------------------------------------------------------------------------
Are Small Firms Important? .................................................6

Money and Finance
--------------------------------------------------------------------------------
Financial Review ...........................................................8

--------------------------------------------------------------------------------
Management Discussion and Analysis of
Financial Condition and Results of Operations ..............................9

--------------------------------------------------------------------------------
Financial Statements ......................................................16

--------------------------------------------------------------------------------
Notes to Consolidated Financial Statements ................................20

--------------------------------------------------------------------------------
Independent Auditors' Report ..............................................28


<PAGE>
Principal Officers Penn-America Group, Inc.
Jon S. Saltzman
President and Chief Executive Officer
Rosemary R. Ferrero, CPA
Vice President - Finance and Treasurer
Garland P. Pezzuolo
Secretary and General Counsel

Principal Officers Penn-America Insurance Company and Penn-Star Insurance
Company
Jon S. Saltzman
President and Chief Executive Officer
John M. DiBiasi, CPCU
Executive Vice President Underwriting and Marketing
Rosemary R. Ferrero, CPA
Vice President - Finance and Treasurer
Thomas P. Bowie
Senior Vice President, Claims
J.Ransley Lennon
Vice President Information Systems
Garland P. Pezzuolo
Secretary and General Counsel

Board of Directors Penn-America Group, Inc.
Irvin Saltzman
Chairman of the Board of Directors, Director, Penn Independent
Corporation
Jon S. Saltzman
President and Chief Executive Officer,
Penn-America Group, Inc.
Director, Penn Independent Corporation
Robert A. Lear
President and Director, Penn Independent Corporation,
Director, Dynasil Corporation of America
M. Moshe Porat, Ph.D., CPCU
Dean, Fox School of Business and Management, Temple University
Jami Saltzman-Levy
Vice President, Human Resources, Director, Penn Independent
Corporation
Charles Ellman
Retired Insurance Executive
Paul Simon
Director, Public Policy Institute,
Southern Illinois University

Independent Auditors
Ernst & Young LLP
Two Commerce Square, 2001 Market Street
Philadelphia PA 19103

Consulting Actuary
Ernst & Young LLP
Two Commerce Square, 2001 Market Street
Philadelphia PA 19103

Registrar and Transfer Agency
First Union National Bank, Corporate Trust Operations
1525 W. WT Harris Boulevard, Charlotte NC 28288-1153
Stockholder Inquiries: (800) 829-8432

Corporate Communication Consultant
David Kirk, APR
127 Gateshead Way,
Phoenixville PA 19460-1048
(610) 792-3329 or davidkirk@theprguy.com

Graphic Design Firm
Malish & Pagonis, 623 South 3rd Street, Philadelphia PA 19147,
(215) 629-3699 or info@malishandpagonis.com

Corporate Headquarters
420 South York Road
Hatboro PA 19040-3949
(215) 443-3600 voice
(215) 443-3603 facsimile
http://www.penn-america.com

<PAGE>
                            Letter from the Publisher

[GRAPHIC OMITTED - PHOTO]

     Welcome to Main Street Today,  Penn-America's 1999 Annual Report. Just what
are we up to with this magazine idea? We couldn't think of a better way in which
to report the many facets of the Penn-America  story. Here's the banner headline
on Page One: Penn-America's Main Street Core Is Vibrant and Growing. That's Main
Street Today.

     The events of 1999 were, in a word,  ironic.  On the one hand,  the core of
our business  regained the momentum it had lost in the soft markets of 1998. Yet
our  decision to run-off  our  non-standard  personal  automobile  business  and
developments in our other liability lines ultimately required that we strengthen
our reserves by $5.5 million.  Combined with a third-quarter after tax charge of
$1.3 million in our property  lines,  the bottom line of 1999 masks what's going
on "under the hood" of the company. That's the real "story."

     More than a year ago, we saw  disturbing  trends in our small  town,  small
premium,  small business insurance  marketplace.  Large,  "brand name" insurance
companies  responded to  softening  insurance  markets by literally  giving away
their excess capital. They did this by underwriting insurance in our traditional
markets  below  their cost.  We said then that we'd pull back,  watch the battle
from the sidelines and let the big guys slug it out. Yes, we took a punch or two
even from that vantage point.  But while those  competitors were frittering away
their  capital,  we were  investing  ours in the  future  of  Penn-America.  For
example,  in 1999 we repurchased  nearly two million  shares of our  outstanding
stock at near book value,  completed  upgrades to our technology  infrastructure
and deployed  new  technologies  to help our  customers--our  wholesale  general
agents-- to do their jobs more efficiently and profitably.

     At the same time we reinvested our capital in these ways, we also refocused
on our core  commercial  business  and  closed  the  books  on the  non-standard
personal  automobile  insurance  portfolio  that was a  significant  part of our
business  for more  than 10  years.  The  marketplace  for  personal  automobile
insurance  changed  dramatically  during  1998  and  1999  to  a  direct-selling
environment  and we made the decision not to invest further in this niche.  This
allowed us to  concentrate  fully on our core  commercial  business that, by the
fourth  quarter of 1999,  was growing at the rate of about 25%; for the year our
core grew about 19%.  Commercial  programs,  part of our  strategy to expand the
core business,  took firm hold this year and, by year end, had contributed  $7.5
million in gross written premium--from a start at nearly zero last year.

     In many ways, our future is our past.  Although we have invested heavily in
technology to stay on the leading edge of  innovation in our industry,  it's not
the bells  and  whistles  that make  Penn-America  a great  company  and a great
long-term  investment.  We are great  because the  markets we serve  through our
general agents are great. They are the heart, the soul, the backbone, the brain,
the sweat, the blood and the brawn of the American economy.  They are the small,
entrepreneurial  businesses  that line every Main  Street in  America.  They are
where  innovation is born and jobs are created.  Together they form the economic
engine driving our company's success,  indeed, our nation's success. That is why
this  1999  Annual  Report  puts  the  emphasis  where it  belongs:  at the busy
intersections of Main Street America.

     Welcome to Main Street Today. Welcome to Penn-America.

     Sincerely,


     /s/ Jon S. Saltzman
Jon S. Saltzman, President and Chief Executive Officer

                                                                               1
<PAGE>
                                                                     COVER STORY
            SMALL BUSINESS ON MAIN STREET: AMERICA'S ECONOMIC ENGINE
[GRAPHIC OMITTED - PHOTO]
The story of Penn-America is, from every angle,  the story of small things.  The
company  underwrites  small  premium  commercial  insurance  policies for small,
entrepreneurial  businesses  located in small  cities and towns  through a small
network of  entrepreneurial  wholesale  general agents people at a small company
located on the main street of a quintessentially  small American town:  Hatboro,
Pennsylvania.

     In America, small business is big business.  According to the United States
Small Business  Administration,  small businesses (companies with fewer than 500
employees) represent 99.7% of all employers, provide 67% of all American workers
with their first jobs and  training  in basic  skills and  represent  47% of all
sales in the nation.

     At  Penn-America,  small is everything.  The average  Penn-America  insured
(there are about 42,000 of them) is a very small (3.3 employees) entrepreneurial
(79% of policies  purchased  by an owner),  established  business  (5.9 years in
business)  paying a small annual premium (the average is about $1,500.)  Because
Penn-America  itself is a small  entrepreneurial  company  (109  employees)  its
management  team is flat (only two layers  deep) and fast to respond to changing
marketplace  demands.  Everything about  Penn-America  mirrors its markets.  The
company is located in the former local middle school building on the main street
of  Hatboro  between  the YMCA and the local  municipal  offices  are  housed in
another old school building built in 1848.  Hatboro is a thriving little town on
the outskirts of Philadelphia,  founded in 1705, 1.2 square miles in area with a
population of 7,382 served by 59 retail shops, 17  restaurants,  35 professional
offices, 13 churches, 45 service businesses and 4 banks.

     Welcome to Main Street Today.

------------------------------------------------------
Vital Statistics: Penn-America's Insureds
------------------------------------------------------
Number of insureds                      About 42,000
------------------------------------------------------
Average size of business                3.3 employees
------------------------------------------------------
Average length of time in business      5.9 years
------------------------------------------------------
Average premium                         About $1,500
------------------------------------------------------

Vital Statistics: Small Business In America (1)

     o    There are 24 million small businesses in the United States

     o    In 1997 the U.S. economy created nearly 3 million new jobs. Six out of
          10 of the  industries  adding  those  jobs  were  dominated  by  small
          business.

     Small businesses...

     o    Represent 99.7% of all employers

     o    Provide 55% of innovations

     o    Employ 53% of the private work force

     o    Provide 47% of all sales in the country

     o    Employ 38% of the private workers in high-tech occupations

     o    Account for 35% of all Federal contract dollars

(1) Source: United States Small Business Administration publication 5/4/99


2
<PAGE>
Distribution of Employer Firms in the United States [PIE CHART OMITTED}

Number of Jobs Created By Industry and Employment Size of Firm
[BAR CHART OMITTED]

[GRAPHIC OMITTED - PHOTO]

                       A Month In The Life Of Main Street

     In  one  month  during  1999,  Penn-America  helped  to  provide  insurance
protection to small businesses like these all across America.

                               Apartment building
                                Food distributor
                                 Public parking
                                Apartment complex
                                 Fraternal lodge
                          Residential moving & delivery
                              Athletic association
                                     Garage
                                   Restaurant
                                Auto repair shop
                                    Gift shop
                             Restaurant & cigar shop
                                   Auto sales
                                 Grading of land
                           Restaurant with dance floor
                                    Bar/club
                                  Grocery store
                                Roofing & gutters
                              Beauty salon/tanning
                                 Ice cream shop
                              Roofing and carpentry
                                   Beauty shop
                              Interior construction
                            Sale of Indian artifacts
                                 Building owner
                              Landscape maintenance
                                 Screen printing
                                    T-shirts
                             Cable TV line installer
                                 Language school
                              Sheet metal-flashings
                                 Cafe' & lounge
                                  Maid service
                                 Shopping center
                               Candy manufacturer
                              Martial arts academy
              Stereo/video sales installation Carpentry contractor
                                Massage therapist
                                     Tavern
                               Carpentry/painting
                                 Mortgage broker
                              Telemarketing office
                                Catering service
                                      Motel
                                   Town Homes
                               Commercial roofing
                                   Nail salon
                                   Dance hall
                                    Painting
                               Two-family dwelling
                                 Daycare center
                                 Used car dealer
                                   Pet sitting
                           Wholesale circuit breakers
                        Electrical equipment distributor
                                   Excavation
                            Prefab building erection
                              Exercise and fitness

                                                                               3
<PAGE>
                                   TECHNOLOGY
         How Modern Technology Makes Old-Fashioned Relationships Better

     Penn-America's  success  depends on some very  old-fashioned  technologies:
listening, honest relationships,  handshakes, open communication,  shoe leather.
The  company's  agents are in the  trenches,  every day,  engaged in the kind of
ground-level  reconnaissance,  responsiveness and person-to-person  contact that
separates nimble  entrepreneurs from lumbering  bureaucrats.  Yet, old fashioned
ideas and practices must be supported by sophisticated  technologies--  the same
technologies  that are transforming  the livelihoods of the small  entrepreneurs
the company  serves.  Penn-America  works hard,  and invests  substantially,  to
harness  modern  technologies  to improve  the  quality  and  efficiency  of its
relationship with its agents.

     In 1999, Penn-America took great strides down this critical path to success
including:

     o    Converting the company's agency  underwriting  manual to CD-ROM format
          and  distributing it to the 625 manual holders in its agents' offices.
          Many have adopted this better,  faster, less expensive format and more
          than 10% have cancelled their orders for the paper-based version;

     o    Completing an electronic data transfer system,  through which now more
          than 70% of all account current  information from the company's agents
          is exchanged;

     o    Introducing  Pennlink, a first-of-its kind private intranet system for
          agents  that  provides  immediate  and  real  time  access  to  forms,
          production statistics and other business data and resources;

     o    Upgrading the 135 personal  computers used throughout the company,  to
          improve speed and efficiency;

     o    Developing  and hosting sites on the World Wide Web for company agents
          who did not have them at the beginning of 1999;

     o    Partnering with DocuCorp International (NASDAQ:DOCC) in a beta test of
          the new Internet Policy  Production  System (iPPS) that will allow the
          company's  agents to issue policies and supporting  documentation  via
          the Internet.

[GRAPHIC OMITTED - PHOTOS]

4
<PAGE>
                                     PEOPLE
   Behind The Scenes On Main Street:
                               The Penn-Americans


When you're "Just Doin'  Business" with  Penn-America,  it's with people who are
remarkably  like the general  agents and small town business  people they serve.
Here is a profile of the people of Penn-America:
-----------------------------------------------------------
Average age                                       40.3 yrs
-----------------------------------------------------------
Married                                           70.1%
-----------------------------------------------------------
Have children                                     72.4%
-----------------------------------------------------------
Have grandchildren                                17.2%
-----------------------------------------------------------
Live in a small town                              83.7%
-----------------------------------------------------------
Average distance to work                          13.8 miles
-----------------------------------------------------------
Have a small business in the family               40.7%
-----------------------------------------------------------
Grew up in a family with a small business         18.6%
-----------------------------------------------------------

Penn-America has a motto:  "Just Doin' Business." It's a shorthand way to recall
the five principles by which the company operates:

   Solid relationships
   Sound underwriting
   Adequate reserves
   Strong reinsurance partnerships
   Prudent investing

[GRAPHIC OMITTED - PHOTOS]

                                                                               5
<PAGE>
                                  GUEST OPINION

                           Are Small Firms Important?

By Jere W. Glover
Chief Counsel for Advocacy, Office of Economic Research of the U.S. Small
Business Administration's Office of Advocacy


     Are small firms  important?  Yes. The  impressive  performance  of the U.S.
economy  over the past six years can be  contrasted  with the rather  lackluster
performance in both Europe and Japan. This divergent  macroeconomic  performance
can be explained in part by differences in competition, entrepreneurship and new
firm start-ups. Small firms make two indispensable contributions to the American
economy.

     First,  they are an integral part of the renewal  process that pervades and
defines  market  economies.   New  and  small  firms  play  a  crucial  role  in
experimentation  and  innovation,   which  leads  to  technological  change  and
productivity  growth.  In short,  small firms are about  change and  competition
because  they  change  market  structure!   The  U.  S.  economy  is  a  dynamic
organization  always in the process of becoming,  rather than an established one
that has arrived.

     Second, small firms are the essential mechanism by which millions enter the
economic  and social  mainstream  of  American  society.  Small  business is the
vehicle by which millions  access the American  Dream by creating  opportunities
for women,  minorities and immigrants.  In this evolutionary process,  community
plays the  crucial  and  indispensable  role of  providing  the social  glue and
networking  that binds small firms  together in both high tech and "Main Street"
activities.  The American economy is a democratic system, as well as an economic
system, that invites change and participation.

    A  successful  entrepreneurial   environment  features  continual  "creative
destruction,"  to use Joseph  Schumpeter's  apt term. New companies  prosper and
help the  economy,  in part by  destroying  the  markets  for  semi-monopolistic
industries.  Nations  that  protect the  markets and incomes of existing  larger
companies prevent the creative destruction so essential to progress.  Therefore,
the crucial  barometer for economic and social  well-being is the continued high
level of  creation  of new and small  firms in all sectors of the economy by all
segments of society.  It should be the role of  government  policy to facilitate
that process by eliminating  barriers to entry,  lowering transaction costs, and
minimizing monopoly profits by large firm. (4)

(4) Reprinted with permission from the "Summary and Policy" implications portion
of "The New American  Evolution:  The Role and Impact of Small  Firms," a report
prepared by the Office of Economic  Research of the United States Small Business
Administration's Office of Advocacy.

Penn-America's Core Commerical Business Shows Strong Growth
[BAR CHART OMITTED]

6
<PAGE>
                                                                          PEOPLE
                   Five Penn-America Agents and Their Markets
                             Living On Main Street:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
<S>                                         <C>                                   <C>
                                             Frank R. Berry                         R. Edward Kraft
                                             Chairman [GRAPHIC OMITTED - PHOTO]     President [GRAPHIC OMITTED]
Agency                                       Specialty Insurance                    American Insurance
                                               Managers, Inc.                         Managers, Inc.
Location                                     Austin TX                              Seattle WA
Years in Business                                     36                                    44
Number of Employees                                   50                                     7
Annual Sales                                       $ 27M                                $ 2.5M
Number Of Businesses
  In State With Employees in 1997                375,357                               174,516
Percentage Of Businesses In State
  That Are Small                                    98.7%                                 98.3%
Net New Jobs Created by Small Businesses
  in Agent's State (1992-1996)                   909,965                               262,258

------------------------------------------------------------------------------

                                         Kenneth E. Kukral, CIC         George Rothert                 Michael Goodell, CIC
                                         President [GRAPHIC OMITTED]    President [GRAPHIC OMITTED]    President [GRAPHIC OMITTED]
Agency                                   International Excess           George Rothert                 R&R/Select
                                           Agency, Inc.                   & Associates
Location                                 Cleveland OH                   Santa Rosa CA                  Tulsa OK
Years in Business                                       43                             4                        10
Number of Employees                                     14                             8                        37
Annual Sales                                       $ 13.5M                        $ 3.2M                     $ 24M
Number Of Businesses
  In State With Employees in 1997                  228,772                       837,802                    72,648
Percentage Of Businesses In State
  That Are Small                                      98.4%                        99.2%                     97.6%
Net New Jobs Created by Small Businesses
  in Agent's State (1992-1996)                     348,113                     1,066,182                    85,023

------------------------------------------------------------------------------------
</TABLE>

Annual Meeting
The Annual Stockholders' Meeting will be held in our home office on May 17, 2000
at 10:00 A.M.

Stockholder Relations, Form 10-K
The  company's  Form  10-K  has been  filed  with the  Securities  and  Exchange
Commission.  A copy of the Form  10-K  and  interim  reports  are  available  to
stockholders  without charge from the Investor Relations  Department.  Telephone
(215) 443-3656 or send your E-mail request to info@penn-america.com

Market and Common Stock Information
Since  August 4, 1998,  the  company's  common  stock has traded on the New York
Stock  Exchange  under the symbol "PNG."  Previously,  the  company's  stock was
listed  on  NASDAQ.  As of  February  1,  2000  there  were  approximately  1400
beneficial  holders of record of the company's  common  stock.  The high and low
sale prices of the common stock were as follows:

          1998                                        1999
Quarter           High     Low              Quarter           High      Low
First           $ 23.00  $ 19.50            First           $ 11.44   $ 9.13
Second            21.25    13.00            Second            11.06     9.44
Third             13.25     8.25            Third             10.31     8.44
Fourth            11.13     8.63            Fourth             8.44     7.13

                                                                               7
<PAGE>
                                     MONEY

                                MONEY & FINANCE

<TABLE>
<CAPTION>
Selected Five Year Financial Data
(in thousands except per share data)                                     At or for the years ended December 31,
                                                             1999           1998          1997         1996           1995
                                                          ------------------------------------------------------------------
<S>                                                       <C>            <C>           <C>           <C>           <C>
Income statement data
Revenues
         Premiums earned                                   $85,677        $89,493       $91,649       $69,081       $57,228
         Net investment income                               9,537         10,763         9,218         6,705         5,067
         Net realized investment gains                         841             18         1,314           906         1,279
         Other income                                           --             --           672            --            --
                                                          ------------------------------------------------------------------
                  Total revenues                            96,055        100,274       102,853        76,692        63,574
                                                          ------------------------------------------------------------------
Losses and expenses
         Losses and loss adjustment expenses                63,187         55,733        57,728        43,292        35,835
         Amortization of deferred policy
               acquisition costs                            24,802         25,452        24,984        17,785        14,237
         Other underwriting expenses                         6,039          6,389         5,840         4,349         4,356
         Interest expense                                      145            177           520           884           239
                                                          ------------------------------------------------------------------
                  Total losses & expenses                   94,173         87,751        89,072        66,310        54,667
                                                          ------------------------------------------------------------------
Earnings before income taxes                                 1,882         12,523        13,781        10,382         8,907
Income tax (benefit) expense                                  (156)         3,642         4,136         3,389         2,881
                                                          ------------------------------------------------------------------
Net earnings                                                $2,038         $8,881        $9,645        $6,993        $6,026
                                                          ==================================================================

Per share data (1)
Basic
         Net operating earnings(2)                           $0.17          $0.91         $1.08         $0.96         $0.78
         Net earnings                                        $0.24          $0.91         $1.19         $1.05         $0.91
         Weighted average shares outstanding                 8,592          9,766         8,126         6,663         6,645
Diluted
         Net operating earnings(2)                           $0.17          $0.90         $1.07         $0.95         $0.78
         Net earnings                                        $0.24          $0.90         $1.17         $1.04         $0.91
         Weighted average shares outstanding                 8,658          9,873         8,228         6,743         6,655
Cash dividends per share                                   $0.2075          $0.20         $0.16         $0.11         $0.06

Other data
         Gross written premiums                            $95,983        $95,097      $104,694       $80,496       $66,953
         Net written premiums                               87,036         87,829        96,561        73,469        61,286
         Net operating earnings(2)                           1,483          8,869         8,781         6,395         5,182
         Return on average stockholders' equity                2.2%           9.0%         13.8%         17.8%         18.7%

GAAP data
         Loss ratio                                           73.8%          62.3%         63.0%         62.7%         62.6%
         Expense ratio                                        36.0           35.6          33.6          32.0          32.5
                                                          ------------------------------------------------------------------
         Combined ratio                                      109.8%          97.9%         96.6%         94.7%         95.1%

Statutory data
         Policyholders' surplus                            $69,515        $85,358       $83,459       $41,665       $39,118
         Loss ratio                                           73.8%          62.3%         63.0%         62.7%         62.6%
         Expense ratio                                        34.9           35.0          32.3          31.6          30.4
                                                          ------------------------------------------------------------------
         Combined ratio                                      108.7%          97.3%         95.3%         94.3%         93.0%
                                                          ==================================================================
         Property-casualty industry combined ratio(3)        107.5%         104.3%        101.1%        105.9%        106.4%

Balance sheet data (at end of period)
         Cash and investments                             $166,227       $182,866      $177,819      $115,550      $100,428
         Total assets                                      217,782        230,504       225,157       158,605       137,763
         Notes payable                                          --             --            --         9,000        10,150
         Total stockholders' equity                         80,618        100,630        97,307        42,337        36,250
         Total stockholders' equity per share(1)            $10.00         $10.71         $9.85         $6.34         $5.46

<FN>
(1)  Adjusted to reflect a  three-for-two  split of the  company's  common stock
effected on March 7, 1997.  (2) Excludes  realized  investment  gains  (losses),
assuming  34.2%  for 1997 and 34%  marginal  tax rate for all other  years.  (3)
Source:  For 1999,  January 10, 2000 Best  Viewpoint;  1995 through  1998,  Best
Aggregates & Averages-Property Casualty.
</FN>
</TABLE>

8
<PAGE>
                      Management's Discussion and Analysis
                of Financial Condition and Results of Operations


The following  discussion  should be read in conjunction  with the  Consolidated
Financial Statements of the Company and related notes included therein.

General
Penn-America  Group, Inc. (PNG) is a specialty  property and casualty  insurance
holding company which, through its subsidiaries,  Penn-America Insurance Company
and  its  subsidiary  Penn-Star  Insurance  Company,   markets  and  underwrites
commercial  property,  general  liability  and  multi-peril  insurance for small
businesses  located  primarily in small towns and suburban and rural areas.  The
Company provides  commercial  property and casualty  insurance both on an excess
and surplus  lines  basis and on an admitted  basis.  During  1999,  the company
announced  that it would  exit the  non-standard  personal  automobile  business
entirely. That business is now in run-off.

Penn-America  markets its products through about 50 high-quality general agents,
who in turn produce business  through more than 25,000 retail insurance  brokers
located  throughout  the United  States.  The  Company  focuses  on serving  the
insurance   needs  of  small  or   non-standard   markets  which  generally  are
characterized  by small  average  policy  premiums  and are  serviced  by retail
insurance  brokers with limited access to larger,  standard lines insurers.  The
Company  believes  that  these  markets  generally  are  underserved  by larger,
standard  lines  insurers,  which  often limit  their  underwriting  to policies
greater than a certain minimum premium size or to certain risk classes and which
operate in  large-scale  markets in which they can achieve  economies  of scale.
Penn-America  believes  that  its  distribution  network  enables  it to  access
effectively these numerous small markets at a relatively low fixed-cost  through
the marketing, underwriting and administrative support of its general agents, as
well as the localized  market  knowledge and expertise of its general agents and
their  retail  insurance  brokers.

Same Store Sales Growth

Dollars in millions           1992           1999           Increase
Commercial GWP                $22.6          $84.5          273.9%
Number of General Agents         38             50           31.6%
Commercial
GWP Per Agent                 $0.59          $ 1.7          188.1%

The  success  of the  Company's  strategy  is  demonstrated  by its  strong  and
consistent growth and profitability. From 1992 to 1999, commercial gross written
premiums  grew at a 20.7%  compound  annual  rate from  $22.6  million  to $84.5
million.

Penn-America's  distribution  strategy is to maintain strong  relationships with
fewer and  higher-quality  general  agents  than its  competitors.  The  Company
carefully  selects a limited  number of general  agents in each  state  based on
their  experience and reputation and strives to preserve each agent's  franchise
value  within its  marketing  territory.  The  Company  seeks to grow with these
general agents and develop strong,  long-standing  relationships  by providing a
high level of service  and  support.  From 1992 to 1999,  Penn-America  achieved
273.9%  cumulative  growth in  commercial  gross  written  premiums with a 31.6%
increase in the number of general agents,  from 38 to 50. The Company  maintains
low  fixed-costs by underwriting  the substantial  majority of its policies on a
binding authority basis.

Penn-America  closely  monitors  the  quality of business  it  underwrites.  The
Company  provides its general  agents with a  comprehensive,  regularly  updated
underwriting  manual,  which also is available online through a private Intranet
site called  Pennlink.  The manual  clearly  outlines the Company's  pricing and
underwriting  guidelines  Penn-America  does not write high-risk  policies (e.g.
medical  malpractice,   environmental  and  aviation  liability).   The  Company
generally reviews new and renewal  commercial  policies on a continuous basis to
ensure  that its  underwriting  guidelines  are being  followed.  In addition to
standard  commissions,  the Company  provides  strong  incentives to its general
agents to produce profitable business through a contingent commission structure,
which is tied  substantially  to  underwriting  profitability,  and  through the
issuance  of shares of its  common  stock,  options  and cash as  payment of the
contingent commissions. Since 1996, the Company has awarded agents approximately
107,000  shares  of  the  Company's  stock  through  its  contingent  commission
structure.  Historically,  the  Company  has  underwritten  the  majority of its
commercial  lines  business on an excess and  surplus  basis.  In recent  years,
Penn-America  has  underwritten  a greater  proportion of its  commercial  lines
business on an admitted basis, as it has identified profitable admitted markets,
which remain  underserved by larger  standard  insurers.  The Company expects to
continue to expand its commercial

                                                                               9
<PAGE>

lines  business by offering  additional  products and packages which enhance its
current property and liability coverage, by identifying  profitable programs and
books  of  business  and by  selectively  adding  high-quality  general  agents.
Examples  of  such  additional   products  and  programs  include  a  commercial
automobile  product  and  specialty  programs,   commercial  umbrella  and  some
miscellaneous  professional  liability  coverage.  The Company announced in 1999
that  it  would  be  running-off  all of the  non-standard  personal  automobile
business.  Non-standard  personal automobile business represented  approximately
12.0% of the total gross premium written by the Company in 1999 as compared with
24.9% in 1998. The Company  anticipates that run-off from non-standard  personal
automobile written premium in 2000 will be approximately $2.0 million.

Penn-America's  commercial  insureds consist  primarily of small,  "Main Street"
businesses including restaurants,  taverns, mercantiles and artisan contractors,
located  principally  in small towns and suburban and rural areas.  In addition,
the Company has  developed  customized  products  and  coverage  for other small
commercial  insureds  such as daycare  facilities,  fitness  centers and special
events.  The Company believes it has benefited from a general migration of small
businesses  out of urban  centers and into  suburban and rural  areas.  Industry
consolidation,  corporate  downsizing  and the increased  use of  communications
technology and personal computers,  among other factors, have contributed to the
high growth in the number of small  businesses  in these  areas.

Penn-America's  financial  position  and  results of  operations  are subject to
fluctuations due to a variety of factors.  Abnormally high severity or frequency
of claims in any period could have a material  adverse  effect on the  Company's
business,  results of operations or financial condition. Also, re-evaluations of
the Company's  loss reserves could result in an increase or decrease in reserves
and a corresponding adjustment to earnings. Additionally, the insurance industry
is highly  competitive.  Penn-America  competes with domestic and  international
insurers, some of which have greater financial,  marketing, management resources
and experience than the Company,  and it may compete with new market entrants in
the future.

The Internet is an obvious force that is affecting every segment of the economy.
A host of new  competitors  is  aimed  at the  immense  E-commerce  market.  The
magnitude of the roles that the Internet and its  participants  will take is yet
to be determined.

Competition is based on many factors, including the perceived market strength of
the insurer,  pricing and other terms and  conditions,  services  provided,  the
speed of claims  payment,  the  reputation  and  experience  of the  insurer and
ratings assigned by independent rating  organizations such as A.M. Best Company.
Penn-America and its subsidiary,  Penn-Star  currently have a pooled rating from
A.M. Best of "A" (Excellent)  which was reaffirmed by Best in January 2000. This
rating is based upon factors of concern to  policyholders,  including  financial
condition and solvency and is not directed to the protection of investors.

Gross Premium Mix by Business Segment [PIE CHART OMITTED]

The  following is a brief  description  of the Company's  business  segments and
lines of insurance

Penn-America  manages its  business in two  segments:  commercial  and  personal
lines.  Commercial lines consist of general  liability,  property,  multi-peril,
business  automobile and commercial  umbrella.  Personal lines consist solely of
non-standard  personal  automobile.  During  1999,  the  Company  began  exiting
non-standard  personal  automobile and running-off its remaining  policies.  The
Company will continue to report  non-standard  personal automobile as a separate
business segment until it no longer is significant as a segment to the financial
statements of the Company.

Commercial General Liability

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

Commercial Property

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

10
<PAGE>

Commercial Multi-Peril

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

Business Automobile and Commercial Umbrella

The Company  recently added both business  automobile  and  commercial  umbrella
coverage to enhance its commercial  multi-peril  ("package") writings. The types
of risks and insureds  targeted are similar to those  already  written,  such as
restaurants,  bars and  taverns,  mercantile,  artisan  contractors  and similar
classes.  The business automobile  insurance line (cars and light trucks) can be
written with liability limits up to $1 million.  Commercial  umbrella  insurance
can be written for limits up to $5 million with significant  reinsurance support
from  General  Reinsurance   Corporation.   For  commercial  umbrella  coverage,
Penn-America  usually writes the primary $1 million liability limit. The Company
expects  that the  addition  of these  coverages  will expand  package  writings
further and help to increase renewal retention of existing policies.

Program Business.

Penn-America  creates  specialized   underwriting  and  marketing  programs  for
individual agents based upon specific  territorial needs and opportunities.  The
individual agent is given exclusive  marketing authority for the program subject
to  territorial  limitations.  The  Company  believes  it can  achieve  superior
underwriting  results  and  expense  savings  on these  programs.  In all of its
commercial  product lines,  the Company  continuously is developing  specialized
programs for certain industry segments to meet the needs of these  marketplaces.
For  example,  Penn-America  has  developed  programs  for  independent  fitness
centers,  daycare operations,  low-hazard  miscellaneous  professional liability
coverage  and special  events.  As a group,  these  programs  are a  significant
benefit to the Penn-America's marketing efforts, although they do not generate a
material  amount of the  Company's  gross  written  premiums.  During 1999,  the
Company began cargo,  courier and dwelling  programs for specific agents.  These
programs contributed approximately $7.5 in gross written premiums during 1999.

Non-Standard Personal Automobile

Penn-America wrote non-standard personal automobile policies in seven states. In
1999, the Company  announced  that it was  pulling-out of this line entirely and
that it would be in  run-off.  The  business  being  run-off  represented  $11.5
million of gross premiums written in 1999. The non-standard  automobile  written
premium  anticipated  to be written by the Company in 2000 is largely the result
of  the  statutory  requirements  of  states  regarding  renewals.  The  Company
estimates  that only about  $2.0  million of  personal  non-standard  automobile
premiums will be written in 2000.

Results of Operations

Year ended December 31, 1999 compared with year ended December 31, 1998

Gross  written  premiums  increased  0.9% to $95.9  million  for the year  ended
December 31, 1999 from $95.1 million for the year ended  December 31, 1998.  The
slight increase  resulted from an 18.3% increase in commercial  lines premium to
$84.5  million  offset  by  the  51.3%  decline  in  the  non-standard  personal
automobile line's gross written premiums to $11.5 million.

Net written premiums decreased 0.9% to $87.0 million for the year ended December
31,  1999 from  $87.8 for the year  ended  December  31,  1998.  During the same
period,  net premiums  earned  decreased 4.3% to $85.7 from $89.5  million.  Net
premiums earned decreased due to the decrease in gross written premium which, in
turn, was due primarily to the run-off of non-standard personal automobile.

1999 Commercial Premium Growth As Compared with The P&C Industry
[BAR CHART OMITTED]

                                                                              11
<PAGE>

Net  investment  income  decreased  11.4% to $9.5  million  for the  year  ended
December 31, 1999 from $10.8 million for the year ended  December 31, 1998.  The
decrease  resulted  principally from the use of excess capital to purchase $13.8
million of treasury  stock; a decrease in investment  tax  equivalent  yields to
6.27% from 6.52%; and a decline in cash flows from operations due principally to
the run-off of the non-standard personal automobile line.

Net realized  investment  gains after taxes for the year ended December 31, 1999
were $555,000 as compared with $12,000 for the year ended December 31, 1998.

Losses and loss adjustment  expenses increased 13.4% to $63.2 million in 1999 as
compared  with $55.7  million in 1998 due  primarily  to an increase in property
losses in the current year and increased developments on prior accident years of
$8.4 million in the commercial casualty and personal automobile lines.

Amortization of deferred  acquisition  costs decreased 2.6% to $24.8 million for
the year ended  December 31, 1999 from $25.5 million for the year ended December
31, 1998. The decrease was attributable  primarily to a decrease in non-standard
automobile  premium  written  and the change in the mix of  business.  Typically
non-standard automobile commission rates are higher than the commercial rates.

Other  underwriting  expenses  decreased 5.5% to $6.0 million for the year ended
December 31, 1999 from $6.4 million for the year ended December 31, 1998.

The loss ratio  increased  to 73.8% for the year ended  December  31,  1999 from
62.3%  for the year  ended  December  31,  1998.  The  statutory  expense  ratio
decreased slightly to 34.9% from 35.0% for the year ended December 31, 1998. The
decrease in the statutory  expense ratio is attributable  mainly to the decrease
in the net premiums written in the non-standard  personal automobile line, which
has a higher  commission rate. The statutory  combined ratio increased to 108.7%
for the year ended  December  31,  1999  compared  with 97.3% for the year ended
December 31, 1998.

As a result of the factors described above, the Company's net operating earnings
before realized  investment gains for the year ended December 31, 1999 decreased
83.3% to $1.5 million or $0.17 per share  (basic and diluted)  from $8.9 million
or $0.91 per share  (basic)  and $0.90 per share  (diluted)  for the year  ended
December 31, 1998.

Net earnings for the year ended December 31, 1999 were $2.0 million or $0.24 per
share  (basic and  diluted)  as  compared  with $8.9  million or $0.91 per share
(basic) and $0.90 per share (diluted) in 1998.

Year ended December 31, 1998 compared with year ended December 31, 1997

Gross  written  premiums  decreased  9.2% to $95.1  million  for the year  ended
December 31, 1998 from $104.7  million for the year ended December 31, 1997. The
decrease resulted from a 34.0% decline in the non-standard  personal  automobile
line's gross written  premiums to $23.7 million.  Commercial lines gross written
premiums  grew 3.8% to $71.4  million.  The overall  decrease  in gross  written
premiums was attributable  primarily to actions taken by the Company  throughout
1998 to limit losses in certain states'  automobile  programs by cutting-back on
production.  Further, in January 1999, the Company announced that it would focus
its non-standard  automobile  premium writings solely in the state of California
and would run-off the  non-standard  personal  automobile  business in six other
states.

Net written premiums decreased 9.0% to $87.8 million for the year ended December
31,  1998 from  $96.6 for the year  ended  December  31,  1997.  During the same
periods,  net premiums  earned  decreased 2.4% to $89.5 from $91.6 million.  Net
premiums earned decreased due to the decrease in gross written premiums.

Net  investment  income  increased  16.8% to $10.8  million  for the year  ended
December  31, 1998 from $9.2 million for the year ended  December 31, 1997.  The
increase resulted principally from growth in invested assets funded primarily by
net  proceeds  from the  secondary  offering  in July 1997 and cash  flows  from
operations,  which was partially offset by an increase in tax-exempt  securities
in the portfolio, which grew to $35.3 million from $550,000 at year-end December
31,  1997.  The  average tax  equivalent  investment  yield on the  fixed-income
portfolio as of December  31, 1998 was 6.52%  compared to 6.70% for December 31,
1997.

Net realized  investment  gains after taxes for the year ended December 31, 1998
were $12,000 as compared with $864,000 for the year ended December 31, 1997.

Losses and loss adjustment  expenses  decreased 3.5% to $55.7 million in 1998 as
compared  with  $57.7  million  in 1997 due  primarily  to the  decrease  in net
premiums earned.

Amortization of deferred  acquisition  costs increased 1.9% to $25.5 million for
the year ended  December 31, 1998 from $25.0 million for the year ended December
31, 1997. The increase was  attributable  primarily to an increase in commercial
lines  commission  rates from 20% to 22%,  a 10%  increase  during  1998 and was
offset partially by the decline in earned premiums.

Other  underwriting  expenses  increased 9.4% to $6.4 million for the year ended
December  31, 1998 from $5.8 million for the year ended  December 31, 1997.  The
increase in 1998 expenses was due primarily to expenses  related to new programs
and other non-recurring expenses of the holding company.

12
<PAGE>

The loss ratio  decreased  to 62.3% for the year ended  December  31,  1998 from
63.0%  for the year  ended  December  31,  1997.  The  statutory  expense  ratio
increased to 35.0% from 32.3% for the year ended December 31, 1997. The increase
in the statutory  expense ratio was  attributable  mainly to the decrease in the
net premiums written primarily in the non-standard  personal automobile lines as
well as the increase in the  commercial  lines  commission  rate.  The statutory
combined ratio  increased to 97.3% for the year ended December 31, 1998 compared
with 95.3% for the year ended December 31, 1997.

As a result of the factors described above, the Company's net operating earnings
before realized  investment gains for the year ended December 31, 1998 increased
1.0% to $8.9  million or $0.91 per share  (basic) and $0.90 per share  (diluted)
from $8.8 million or $1.08 per share  (basic) and $1.07 per share  (diluted) for
the year ended  December 31, 1997.

Net earnings for the year ended December 31, 1998 were $8.9 million or $0.91 per
share  (basic) and $0.90 per share  (diluted)  as compared  with $9.6 million or
$1.19 per share (basic) and $1.17 per share (diluted) in 1997.

Liquidity and Capital Resources

Penn-America  Group (PNG) is a holding company,  the principal asset of which is
the common  stock of  Penn-America  Insurance  Company.  PNG's cash flows depend
primarily on dividends and other payments from  Penn-America  and its subsidiary
Penn-Star.  PNG uses these funds to pay (i) operating  expenses,  (ii) taxes and
other payments,  (iii) dividends to PNG  stockholders  and (iv) more recently to
fund the company's  stock  repurchase  program.  Penn-America's  source of funds
consists  primarily of premiums,  investment  income and proceeds from sales and
redemptions  of  investments.  Funds  are  used by  Penn-America  and  Penn-Star
principally to pay claims and operating expenses, to purchase investments and to
make dividend and other payments to PNG.

The  principal  source  of cash to use for the  payment  of  dividends  to PNG's
stockholders  is  dividends  from  Penn-America  and its  subsidiary  Penn-Star.
Penn-America  is  required  by law to  maintain a certain  minimum  surplus on a
statutory  basis  and  is  subject  to  risk-based   capital   requirements  and
regulations  under which payment of dividends from statutory surplus may require
prior approval of the Pennsylvania regulatory authorities.  The maximum dividend
that  may be paid in 2000 by  Penn-America  to PNG  without  prior  approval  of
regulatory  authorities  is  $6.9  million.   Penn-America's  statutory  surplus
decreased  18.6% to $69.5 million as of December 31, 1999, from $85.4 million as
of December 31,  1998.  This  decrease  was due  primarily to dividends of $14.5
million to PNG and offset by  consolidated  statutory net income of $1.9 million
from  Penn-America.  These dividends were used primarily to purchase stock under
the corporate stock buy-back program ($13.8 million) and to pay dividends to PNG
stockholders ($1.8 million).

Net cash provided by operating  activities  decreased  19.2% to $8.6 million for
the year ended  December 31, 1999 from $10.6 million for the year ended December
31, 1998. The decrease in net cash provided by operations  resulted  principally
from the decrease in net premiums  written during the year due to the run-off of
non-standard personal automobile business. Net cash used by investing activities
was $5.4  million for the year ended  December  31,  1999,  compared  with $18.2
million  provided by investing  activities for the year ended December 31, 1998.
This decrease in cash from investing activities in 1999 was due to the Company's
decision to invest  excess cash in the  purchase of its own stock.  During 1998,
cash flow was provided by investing  activities due to the Company's decision to
remain liquid through year-end as the Company  evaluated  interest rates and the
financial markets.

Net cash used by  financing  activities  was $15.3  million  for the year  ended
December 31, 1999 as compared  with $6.9 million for the same period in 1998. In
1999 and 1998,  $13.8 and $5.6  million  were used by the Company to  repurchase
1,385,250 and 542,325 shares of Company stock through the stock buy-back program
and $1.8 and $1.9 million were used for PNG  stockholder  dividends for 1999 and
1998,  respectively.  The cash provided by financing activities in

STOCK REPURCHASE PROGRAM [BAR CHART OMITTED]
                                                                              13
<PAGE>

1997 resulted  primarily from $45.6 million in proceeds from the secondary stock
offering and the exercise of stock  options,  partially  offset by the principal
repayment of $9 million on the term loan and $1.3 million of the cash  dividends
paid to stockholders.

The Company  believes that it has sufficient  liquidity to meet its  anticipated
insurance obligations and operating and capital expenditure needs. The Company's
investment strategy emphasizes quality,  liquidity and diversification,  as well
as total return.  With respect to  liquidity,  the Company  considers  liability
durations,  specifically  related to loss  reserves,  when  determining  desired
investment  maturities.  In addition,  maturities have been staggered to produce
cash  flows  for loss  payments  and  reinvestment  opportunities.  The  average
duration  of  the   fixed-maturity   portfolio  as  of  December  31,  1999  was
approximately 4.5 years.

The Company's  fixed-maturity  portfolio  represented $127.7 million or 82.8% of
the total carrying  value of the  investment  portfolio as of December 31, 1999.
Approximately  97.8% of these  securities were rated "A" or better by Standard &
Poor's or Moody's. Equity securities, the majority of which consist of preferred
stocks,  represented  $26.0 million or 16.8% of total investments as of December
31, 1999.

As of December 31, 1999, the  investment  portfolio  contained  $17.6 million of
mortgage- and asset-backed obligations. All of these securities were "AAA"-rated
securities issued by government or  government-related  agencies,  were publicly
traded and had market  values  obtained  from an  independent  pricing  service.
Changes in estimated  cash flows due to changes in prepayment  assumptions  from
the original  purchase  assumptions are revised based on current  interest rates
and the  economic  environment.  The Company had no other  derivative  financial
instruments, real estate or mortgages in the investment portfolio as of December
31, 1999.

In September  1998, the Company  completed a revolving  credit  facility for $25
million with First Union National Bank.  This facility  provides for an interest
rate tied to LIBOR plus a variable  factor to be charged on borrowed funds based
on the Company's  debt-to-equity  ratio at the time of borrowing.  This variable
interest  factor ranges from 75 to 150 basis  points.  The facility is available
until the year 2004 with a  structured  step-down in the  available  credit line
over that period.  As of December 31, 1999,  the Company had not drawn upon this
credit facility.

Market Risk

The Company is subject to market risk  principally  arising  from the  potential
change in the value of its investment portfolio.

The major  components of market risk affecting the Company are interest rate and
equity risk. The Company has a fixed-maturities investment portfolio with a fair
value of $127.7 million at December 31, 1999 that is subject to changes in value
principally  due to  changes  in  market  interest  rates.  A  component  of the
fixed-maturities  portfolio includes mortgage-backed and asset-backed securities
($17.6  million  in fair  value at  December  31,  1999),  which are  exposed to
accelerated  prepayment  risk generally  caused by decreases in interest  rates.
Acceleration of repayments could affect adversely future  investment  income, if
reinvestment  of  the  cash  received  from  repayments  is  in   lower-yielding
securities.

The Company's  preferred  equity portfolio of $18.4 million at December 31, 1999
is subject to  interest  rate risk  similar  to the  fixed-maturities  portfolio
described above.

In addition to interest rate risk, the Company's common equity portfolio of $7.6
million at December  31, 1999 is subject to changes in value based on changes in
equity prices in United States markets.

The  Company   manages  its  exposure  to  market  risk  through  a  disciplined
asset/liability  matching and capital management  process.  In the management of
market risk, the  characteristics  of duration,  credit and  variability of cash
flows are critical  elements.  These risks  constantly are assessed and balanced
within the context of the  liability  and capital  position of the Company.

The following is a tabular  presentation of the Company's  investment  portfolio
(dollars are presented in millions) at December 31, 1999.
<TABLE>
<CAPTION>
                                                            Expected Maturity Date
                                                                                                        Fair
                                                                                      There-            Value
                                           2000     2001    2002     2003     2004     after   Total    Total
---------------------------------------------------------------------------------------------------------------
Fixed-Maturities Portfolio
<S>                                       <C>      <C>     <C>      <C>      <C>       <C>     <C>       <C>
Principal  amount                         $15.4    $13.1   $12.1    $ 6.0    $17.2     $84.1  $147.9
  Average  interest rate                   6.19%    6.41%   6.32%    5.77%    5.95%     5.42%   5.78%
  Fair value                                                                                            $127.5
  Yield  on fair  value                                                                                   6.55%

Preferred Stock
  Principal amount                                                                     $20.4   $20.4
  Average interest rate                                                                 6.32%   6.32%
  Fair value                                                                                             $18.4
  Yield on fair value                                                                                     7.04%

Common Stock
  Fair value                                                                                              $7.6
---------------------------------------------------------------------------------------------------------------
</TABLE>

The average  interest  rate  presented  above is the yield on amortized  cost of
fixed maturities and the yield on actual cost of preferred stocks. The principal
amounts are the par values or the cash flow at maturity.  The expected  maturity
date anticipates calls and prepayments.

14
<PAGE>
Impact of Inflation
Inflation  can have a  significant  impact on  property  and  casualty  insurers
because  premium  rates are  established  before  the  amounts  of loss and loss
adjustment expenses are known. The Company attempts to anticipate increases from
inflation in establishing rates,  subject to limitations imposed for competitive
pricing.  The Company does not believe that inflation has had a material  impact
on the Company's business, results of operations or financial condition to date.
The Company also considers inflation when estimating  liabilities for losses and
loss adjustment  expenses,  particularly for claims having a long period between
occurrence  and  settlement.  The  liabilities  for losses  and loss  adjustment
expenses are  management's  estimates  of the  ultimate  net cost of  underlying
claims and expenses and are not discounted for the time value of money. In times
of high  inflation,  the normally  higher  yields on  investments  may be offset
partially  by higher  claims and  expenses.

Other
The National Association of Insurance  Commissioners  adopted risk-based capital
standards  with which  property and casualty  insurers must comply.  In concept,
risk-based  capital is designed to measure the  acceptable  amount of capital an
insurer  should  have  based on the  inherent  specific  risks of each  insurer.
Insurers failing to meet this benchmark capital level may be subject to scrutiny
by the insurer's domiciled insurance department.  Based on the currently adopted
standards,  Penn-America's  and Penn-Star's  capital and surplus is in excess of
the prescribed risk-based capital requirements for 1999.

The Year 2000

Introduction
The Company  has  referred  to the "Year  2000,  or "Y2K," as any  problem  that
automated  systems  could  encounter  on or after  January  1,  2000,  including
February 29, 2000, due to computers' or other electronic  devices'  inability to
register the year 2000 correctly,  rather than as the year 1900. In this regard,
the Company has relied on its (and its key customers',  suppliers' and vendors')
information  technology  systems ("IT systems") to operate and monitor all major
aspects of the Company's business,  including  underwriting,  claims and various
financial systems,  and non-information  technology systems  ("non-IT-systems"),
such   as   electricity,    telephones,    facsimile   machines,   heating   and
air-conditioning and fire protection systems.

State of Readiness
As of December 31, 1999, all remediations to and of the IT and non-IT systems of
the Company and its key  customers,  suppliers and vendors were  completed.  The
Company also had completed  and tested a Contingency  Plan that could be used in
the event of a Year 2000, or Y2K, problem.

As of the date of this report, neither the Company nor any of its key customers,
suppliers and vendors has experienced any significant Year 2000 or Y2K problems.
The Company  continues to monitor the Year 2000 situation,  but has seen no Year
2000  disruption to date and has no basis on which to expect a disruption.

Cost
The Company incurred  approximately $120,000 to re-code and test its IT systems,
upgrade  certain non-IT  systems and  participate in a Y2K audit mandated by the
Pennsylvania Department of Insurance.

Risks
While  the  Company  believes  as of this  date  that it has  not and  will  not
experience any Year 2000 or Y2K related  problems,  the Company cannot guarantee
that a  significant  problem  will not arise,  either with IT systems and non-IT
systems of the  Company or any key  customer,  supplier or vendor with which the
Company does  business.  It is still  possible  that a disruption in the receipt
and/or processing of insurance policies, claims, payment of receivables or other
problems  could  occur.  This could result in business  disruption,  operational
problems,  financial losses,  legal liability and similar risks to the business.

While the Company has not yet  received any demand for coverage for a Y2K event,
it is possible that the Company  could be exposed to insurance  risks related to
Y2K  exposures  of its  insureds.  This  is  despite  the  endorsement  of a Y2K
exclusion in new and renewal policies as of November 1, 1998.

Contingency Plans
The  Company   continues  to  maintain  its  written   Contingency  Plan,  which
incorporates  its Disaster  Recovery  Plan,  and is available in the event of an
unforeseen Year 2000 or Y2K related problem.

The foregoing  constitutes a "Year 2000 Readiness Disclosure" within the meaning
of the Year 2000 Readiness Disclosure Act.

                                                                              15
<PAGE>
      Penn-America Group, Inc. and Subsidiaries Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                                       December 31,
(In thousands except share and per share data)
                                                                                                  1999              1998
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>               <C>
Assets
Investments:
   Fixed maturities:
      Available for sale, at fair value (amortized cost 1999, $115,975; 1998, $103,365)         $111,419          $105,598
      Held to maturity, at amortized cost (fair value 1999, $16,103; 1998, $27,270                16,294            26,956
   Equity securities, at fair value (cost 1999, $28,014; 1998, $23,358)                           26,020            25,238
   Short-term investments, at cost, which approximates fair value                                    449               997
                                                                                              -----------------------------
         Total investments                                                                       154,182           158,789
Cash                                                                                              12,045            24,077
Receivables:
   Accrued investment income                                                                       1,965             1,871
   Premiums receivable, net                                                                        8,981            10,349
   Reinsurance recoverable                                                                        18,284            18,766
                                                                                              -----------------------------
         Total receivables                                                                        29,230            30,986
Prepaid reinsurance premiums                                                                       3,529             2,809
Deferred policy acquisition costs                                                                  9,306             8,728
Capital lease                                                                                      1,840             2,051
Deferred income taxes                                                                              5,487             1,598
Income tax recoverable                                                                             1,652               884
Other assets                                                                                         511               582
                                                                                              -----------------------------
         Total assets                                                                           $217,782          $230,504
                                                                                              =============================

Liabilities and Stockholders' Equity
Liabilities:
   Unpaid losses and loss adjustment expenses                                                    $93,719           $88,937
   Unearned premiums                                                                              36,332            34,253
   Accounts payable and accrued expenses                                                           1,755             1,179
   Capitalized lease obligation                                                                    1,821             2,080
   Other liabilities                                                                               3,537             3,425
                                                                                              -----------------------------
         Total liabilities                                                                       137,164           129,874
                                                                                              -----------------------------

Stockholders' equity:
   Preferred stock, $ .01 par value; authorized 2,000,000 shares;
      none issued                                                                                     --                --
   Common stock, $ .01 par value; authorized 20,000,000 shares
      issued; 1999, 9,990,436 and 1998, 9,938,179 shares; outstanding 1999,
      8,062,861 and 1998, 9,395,854                                                                  100                99
   Additional paid-in capital                                                                     69,591            69,035
   Accumulated other comprehensive (loss) income                                                  (4,324)            2,714
   Retained earnings                                                                              35,050            34,779
   Treasury stock, 1999, 1,927,575 shares and 1998, 542,325 shares, at cost                      (19,474)           (5,643)
                                                                                              -----------------------------
                                                                                                  80,943           100,984
   Unearned compensation from restricted stock awards                                               (325)             (354)
                                                                                              -----------------------------
         Total stockholders' equity                                                               80,618           100,630
                                                                                              -----------------------------
         Total liabilities and stockholders' equity                                             $217,782          $230,504
                                                                                              =============================
</TABLE>
          See accompanying notes to consolidated financial statements.
16
<PAGE>
  Penn-America Group, Inc. and Subsidiaries Consolidated Statements of Earnings

<TABLE>
<CAPTION>
                                                                   For the years ended December 31,
(In thousands except per share data)                           1999            1998             1997
-------------------------------------------------------------------------------------------------------
<S>                                                       <C>             <C>               <C>
Revenues
   Premiums earned                                          $ 85,677         $ 89,493        $ 91,649
   Net investment income                                       9,537           10,763           9,218
   Net realized investment gains                                 841               18           1,314
   Other income                                                   --               --             672
                                                            -----------------------------------------
           Total revenues                                     96,055          100,274         102,853
                                                            -----------------------------------------

Losses and expenses
   Losses and loss adjustment expenses                        63,187           55,733          57,728
   Amortization of deferred policy acquisition costs          24,802           25,452          24,984
   Other underwriting expenses                                 6,039            6,389           5,840
   Interest expense                                              145              177             520
                                                            -----------------------------------------
           Total losses and expenses                          94,173           87,751          89,072
                                                            -----------------------------------------

   Earnings before income tax                                  1,882           12,523          13,781
   Income tax (benefit) expense                                 (156)           3,642           4,136
                                                            -----------------------------------------
Net earnings                                                $  2,038         $  8,881        $  9,645
                                                            =========================================

Net earnings per share (note 2)
   Basic                                                    $   0.24         $   0.91        $   1.19
   Diluted                                                  $   0.24         $   0.90        $   1.17
                                                            =========================================
Weighted average number of shares used in
calculating per share data (note 2)
   Basic                                                       8,592            9,766           8,126
   Diluted                                                     8,658            9,873           8,228
                                                            =========================================

Cash dividends per share                                    $ 0.2075         $   0.20        $   0.16
                                                            =========================================
</TABLE>
         See accompanying notes to consolidated financial statements.
                                                                              17
<PAGE>
             Penn-America Group, Inc. and Subsidiaries Consolidated
                       Statements of Stockholders' Equity
<TABLE>
<CAPTION>
                                                                                                                Unearned
                                                                         Accumulated                        Compensation
                                                           Additional          Other                                From
(In thousands except share                  Common Stock      Paid-In  Comprehensive  Retained    Treasury    Restricted
  and per share data)                    Shares    Amount     Capital  Income(Loss)   Earnings       Stock   Stock Awards     Total

<S>                                  <C>           <C>      <C>            <C>       <C>         <C>               <C>     <C>
Balance, at December 31, 1996          6,676,131      $67      $21,844       $993     $19,533          --          $(100)   $42,337
Net earnings                                                                            9,645                                 9,645
Other comprehensive income,
   net of tax:
   Unrealized gains on investments,
   net of reclassification adjustment                                         656                                               656
                                                                                                                          ---------
Comprehensive income                                                                                                         10,301
                                                                                                                          ---------
Issuance of common stock               3,207,253       32       46,377                                                       46,409
Unearned compensation from
   restricted stock awards                                                                                          (512)      (512)
Cash dividends paid
   ($0.16 per share)                                                                   (1,329)                               (1,329)
Amortization of compensation
   expense from restricted stock                                                                                     101        101
                                     -----------------------------------------------------------------------------------------------

Balance, at December 31, 1997          9,883,384      $99      $68,221     $1,649     $27,849          --          $(511)   $97,307
Net earnings                                                                            8,881                                 8,881
Other comprehensive income,
   net of tax:
   Unrealized gains on investments,
   net of reclassification adjustment                                       1,065                                             1,065
                                                                                                                          ---------
Comprehensive income                                                                                                          9,946
                                                                                                                          ---------
Issuance of common stock                  54,795                   814                                                          814
Amortization of compensation
   expense from restricted
   stock awards                                                                                                      157        157
Cash dividends paid ($0.20 per share)                                                  (1,951)                               (1,951)
Purchase of treasury stock, at cost                                                                (5,643)                   (5,643)
                                     -----------------------------------------------------------------------------------------------

Balance, at December 31, 1998          9,938,179     $ 99     $ 69,035     $2,714    $ 34,779    $ (5,643)         $(354)  $100,630
Net earnings                                                                            2,038                                 2,038
Other comprehensive (loss),
   net of tax:
   Unrealized losses on
   investments, net of
   reclassification adjustment                                             (7,038)                                           (7,038)
                                                                                                                          ---------
Comprehensive (loss)                                                                                                         (5,000)
                                                                                                                          ---------
Issuance of common stock                  52,257        1          556                                                          557
Unearned compensation from
   restricted stock awards                                                                                           (91)       (91)
Amortization of compensation
   expense from restricted
   stock awards                                                                                                      120        120
Cash dividends paid ($0.2075
   per share)                                                                          (1,767)                               (1,767)
Purchase of treasury stock, at cost                                                                              (13,831)   (13,831)
                                     ----------------------------------------------------------------------------------------------
Balance, at December 31, 1999          9,990,436     $100     $ 69,591    $(4,324)    $35,050    $(19,474)       $  (325)   $80,618
                                     ==============================================================================================
</TABLE>
         See accompanying notes to consolidated financial statements.
18
<PAGE>
             Penn-America Group, Inc. and Subsidiaries Consolidated
                            Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                                 For the years ended December 31,
(In thousands)                                                               1999            1998              1997
---------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>              <C>              <C>
Cash flows from operating activities:
   Net earnings                                                           $  2,038         $  8,881         $  9,645
   Adjustments to reconcile net earnings to net cash provided by
   operating activities:
      Amortization and depreciation expense                                    493              720              449
      Net realized investment gains                                           (841)             (18)          (1,314)
      Deferred tax (benefit) expense                                          (263)             159             (434)
      Net increase in premiums and note receivable, prepaid
              reinsurance premiums and unearned premiums                     2,727              401            3,266
      Net increase in unpaid losses and loss adjustment expenses
              and reinsurance recoverable                                    5,264            2,210           12,951
   (Increase) decrease in:
      Accrued investment income                                                (94)             102             (302)
      Deferred policy acquisition costs                                       (578)            (165)          (1,332)
      Income tax recoverable                                                  (768)            (844)             562
      Other assets                                                             (64)            (215)             (50)
   Increase (decrease) in:
      Accounts payable and accrued expenses                                    576           (1,159)             565
      Other liabilities                                                        112              572              982
                                                                         -------------------------------------------
   Net cash provided by operating activities                                 8,602           10,644           24,988
                                                                         -------------------------------------------


Cash flows from investing activities:
   Purchases of equity securities                                           (8,320)         (17,388)         (19,258)
   Purchases of fixed maturities available for sale                        (38,521)         (45,533)         (61,966)
   Purchases of fixed maturities held to maturity                           (2,785)          (1,015)         (13,082)
   Proceeds from sales of equity securities                                  4,462           19,633            5,459
   Proceeds from sales of fixed maturities available for sale                   --           23,037               --
   Proceeds from maturities of fixed maturities available for sale          25,995            7,997           13,604
   Proceeds from maturities of fixed maturities held to maturity            13,256           20,988           18,789
   Change in short-term investments                                            548           10,458           (4,455)
                                                                         -------------------------------------------
   Net cash (used) provided by investing activities                         (5,365)          18,177          (60,909)
                                                                         -------------------------------------------

Cash flows from financing activities:
   Issuance of common stock                                                    465              814           45,544
   Purchase of treasury stock                                              (13,831)          (5,643)              --
   Principal payments on notes payable                                          --               --           (9,000)
   Principal payments on capital lease obligations                            (136)            (127)            (110)
   Dividends paid                                                           (1,767)          (1,951)          (1,329)
                                                                         -------------------------------------------
   Net cash (used) provided by financing activities                        (15,269)          (6,907)          35,105
                                                                         -------------------------------------------

(Decrease) increase in cash                                                (12,032)          21,914             (816)
Cash, beginning of period                                                   24,077            2,163            2,979
                                                                         -------------------------------------------
Cash, end of period                                                       $ 12,045         $ 24,077         $  2,163
                                                                         ===========================================
Supplemental disclosure of cash flow information
   Cash paid during the period for:
      Income tax                                                          $    875         $  4,248         $  4,009
      Interest                                                                 145              177              576
   Non-cash transaction:
      Cost of securities transferred from available for
      sale to held to maturity                                            $     --               --         $  8,002
</TABLE>
         See accompanying notes to consolidated financial statements.
                                                                              19
<PAGE>
                Penn-America Group, Inc. and Subsidiaries Notes
                      to Consolidated Financial Statements

Note 1 Summary of Significant Accounting Policies

Basis of Presentation and Description of Business
Penn-America  Group, Inc. (the "Company") is an insurance holding company.  Penn
Independent   Corporation  ("Penn  Independent")  at  December  31,  1999,  owns
approximately  38.3%  of  the  outstanding  common  stock  of the  Company.  The
accompanying  financial  statements  include the accounts of the Company and its
wholly owned subsidiary, Penn-America Insurance Company ("Penn-America") and its
wholly  owned  subsidiary   Penn-Star  Insurance  Company   ("Penn-Star").   All
significant  intercompany  accounts and  transactions  have been  eliminated  in
consolidation.  These  financial  statements  are  prepared in  conformity  with
accounting  principles  generally accepted in the United States, which differ in
some   respects  from  those   followed  in  reports  to  insurance   regulatory
authorities.

The preparation of financial  statements  requires  management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

Penn-America and its subsidary  Penn-Star  underwrites  commercial  property and
general liability insurance and multi-peril insurance,  generally referred to as
"property and casualty"  insurance.  The  companies  write their  business on an
excess and surplus lines or non-standard  basis as well as on an admitted basis.
Penn-America and Penn-Star  combined are licensed admitted insurers in 35 states
and are approved  non-admitted  (excess and surplus lines) insurers in 15 states
and the District of Columbia.

Investments
At the  time of  purchase  of  fixed-maturity  investments,  management  makes a
determination as to the investment classification ("Available for Sale" or "Held
to Maturity"). Factors taken into consideration by management in determining the
appropriate investment category are: maturity, yield, cash flow requirements and
anticipated changes in interest rates. Fixed maturities classified as "Available
for Sale" are carried at fair value with unrealized  investment gains or losses,
net of  deferred  income  taxes,  and are  included as a separate  component  of
accumulated  other  comprehensive  income  in  stockholders'  equity.  "Held  to
Maturity" investments are carried at amortized cost.

Investments  in  fixed-maturity  securities  are  adjusted for  amortization  of
premium and accretion of discounts to maturity  date using the interest  method.
Income is recognized on the accrual basis.  Realized investment gains and losses
are  recorded  as  income  when the  securities  are  sold  using  the  specific
identification basis.

The amortized cost of mortgage- and asset-backed  securities  iscalculated using
the interest method including  consideration  of anticipated  prepayments at the
date of purchase.  Significant changes in estimated cash flows from the original
assumptions are accounted for using the composite method.

Equity  securities  are  carried at fair  value  with the  change in  unrealized
investment gains or losses credited or charged directly to stockholders' equity,
net of deferred  income  taxes,  and are included as a component of  accumulated
other comprehensive  income.  Short-term  investments are carried at cost, which
approximates fair value.

Premiums and Other Receivables

Premiums are  recognized  as revenue  ratably  over the terms of the  respective
policies.  Unearned  premiums are  calculated  using the  semi-monthly  pro-rata
basis. Management has established an allowance for doubtful accounts of $422,000
at December 31, 1999 and $522,000 1998, on premium receivables, which management
believes is adequate to cover uncollectible accounts.

Policy Acquisition Costs

Policy  acquisition  costs  such as  commissions,  salaries,  premium  taxes and
certain other underwriting expenses, which vary with and are directly related to
the  production  of  business,  are deferred and  amortized  over the  effective
periods of the related  insurance  policies.  The method  followed in  computing
deferred  policy  acquisition  costs limits the amount of such deferred costs to
their  estimated  realizable  values,  which  gives  effect to the premium to be
earned,  related  investment  income,  losses and loss  adjustment  expenses and
certain other costs expected to be incurred as the premium is earned.

Losses and Loss Adjustment Expenses
The  liability  for losses and loss  adjustment  expenses  (LAE)  represents  an
estimate of the ultimate  unpaid net cost of all losses  incurred.  Estimates of
unpaid  reported  losses and related  allocated  loss  adjustment  expenses  are
determined on the basis of claims adjusters'  evaluations of individual  claims.
Estimates of losses and loss  adjustment  expenses  arising from losses incurred
but not yet reported are based on selected  historical and industry  data.  Such
estimates are not discounted and may be more or less than the amounts ultimately
paid when the claims are settled.  These estimates are reviewed periodically and
adjusted as necessary; such adjustments are reflected in current operations.

Fair Values of Financial  Instruments
The Company uses the following  methods or assumptions in estimating  fair value
disclosures:

Investment  Securities:  Fair  values  are based on quoted  market  prices or on
quoted  market  prices  of  comparable   instruments  or  values  obtained  from
independent pricing services.

20
<PAGE>
Premium and Reinsurance  Receivables and Payables: The carrying amounts reported
in the balance sheet for these instruments approximate their fair values.

Capitalized Lease Obligation:  Fair value is based upon the present value of the
underlying cash flows discounted at the Company's  incremental borrowing rate at
year end. The carrying  amounts  reported in the balance sheet  approximate fair
value.

The fair value of options is estimated on the grant date using the Black-Scholes
option pricing model.  The model assumes the following for 1999,  1998 and 1997,
respectively:  expected annual dividend rates of 1.9%, 1.1%, and 1.2%; risk-free
interest rates of 6.0%,  6.0% and 6.8%;  weighted  average  expected life of the
options of 2.5 years for all years;  and expected stock price  volatility of 30%
for all years.

Reinsurance
In the  ordinary  course of  business,  the  Company  reinsures  certain  risks,
generally  on an excess of loss  basis  with  other  insurance  companies  which
principally are rated A+ or higher by A.M. Best. Such  reinsurance  arrangements
serve to limit the Company's maximum loss.  Amounts  recoverable from reinsurers
are estimated in a manner consistent with the claim liabilities arising from the
reinsured policies and incurred but not reported losses.

Capitalized Lease
The  capitalized  lease  is  carried  at  cost  less  accumulated  amortization.
Amortization  is  calculated  using the  interest  method  over 20 years,  which
represents  the term of the mortgage on the office space which the Company rents
from a related party (see note 3).

Income Tax
Deferred  income taxes are accounted  for under the asset and liability  method.
Deferred  tax  assets  and   liabilities  are  recognized  for  the  future  tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases.  Deferred tax assets and liabilities are measured using enacted tax rates
expected  to apply to  taxable  income  in the  years in which  those  temporary
differences are expected to be recovered or settled.  The effect on deferred tax
assets and  liabilities  of a change in tax rates is recognized in income in the
period that includes the enactment date.

Note 2 Basic and Diluted Earnings Per Share and Retroactive Adjustment for Stock
Split

Basic  earnings  per share is computed by dividing  income  available  to common
stockholders  by the  weighted-average  number of common shares  outstanding for
each period.

Diluted EPS reflects the potential  dilution that could occur if the  securities
or other contracts to issue common stock were exercised or converted into common
stock. All per-share  calculations and stock option  disclosures  presented have
been adjusted  retroactively to reflect a three-for-two  stock split declared in
January 1997.  Shares  outstanding  also have been restated to reflect the stock
split.

The following is a  reconciliation  of the  numerators and  denominators  of the
basic and diluted EPS computations:

                                         Years ended December 31,
                                      ----------------------------
(In thousands except per share data)    1999      1998       1997
                                      ----------------------------

Basic EPS:

Net earnings                           $2,038    $8,881    $9,645
Weighted average common
   shares outstanding                   8,592     9,766     8,126
                                      ----------------------------
Basic EPS                               $0.24     $0.91     $1.19
                                      ----------------------------

Diluted EPS:

Net Earnings                           $2,038    $8,881    $9,645
                                      ----------------------------
Weighted average common
   shares outstanding                   8,592     9,766     8,126
Additional shares outstanding
   after the assumed exercise of
   options by applying the treasury
   stock method                            66       107       102
                                      ----------------------------

Total Shares                            8,658     9,873     8,228
                                      ----------------------------

Diluted EPS                             $0.24     $0.90     $1.17
                                      ============================

Note 3 Transactions with Affiliates

Penn-America  leases its home office  facility from a stockholder.  The lease is
accounted  for as a  capitalized  lease.  The amounts of  property  capitalized,
$2,603,000  and  $2,727,000  are presented net of  accumulated  amortization  of
$763,000  and  $676,000 as of December  31,  1999 and 1998,  respectively.  Penn
Independent and its  subsidiaries  also lease a portion of the building in which
Penn-America's  home office  facility is located.  Management  believes that the
lease terms are at market rates.

Penn  Independent  provides the Company with management and other services.  The
Company  paid  $200,000,   $225,000  and  $296,000  in  1999,   1998  and  1997,
respectively,  for such  services.  Such  amounts  are based on  allocations  of
estimated costs.

All costs  incurred  by Penn  Independent  on behalf of  Penn-America  have been
allocated  to  Penn-America  and  are  reflected  in the  financial  statements.
Management  believes that the methods used to allocate such costs are reasonable
and that Penn-America's  expenses on a stand-alone basis would not be materially
different.

Premiums written resulting from transactions with insurance agency affiliates of
Penn Independent  were $1,732,000 in 1999,  $1,279,000 in 1998 and $1,597,000 in
1997. Commissions

                                                                              21
<PAGE>
paid to such affiliates were $441,000 in 1999,  $294,000 in 1998 and $359,000 in
1997. Agents' balances  receivable from affiliates were $196,000 and $153,000 as
of December 31, 1999 and 1998 respectively.

Note 4 Investments

The  Company   invests   primarily   in   investment-grade   fixed   maturities,
substantially  all of  which  are  rated  "A" or  higher  by  Standard  & Poor's
Corporation.  The cost,  gross  unrealized  gains and losses and fair  values of
investments are as follows:
<TABLE>
<CAPTION>
                                                 December 31, 1999
                                  ----------------------------------------------
                                                   Gross       Gross
                                              Unrealized  Unrealized       Fair
(In thousands)                        Cost         Gains      Losses      Value
                                  ----------------------------------------------
<S>                                 <C>           <C>       <C>           <C>
Fixed maturities
Available for sale
U.S. Treasury securities
  and obligations of U.S.
  government agencies               $10,666         $30     $(1,315)      $9,381
Corporate securities                 33,005          43      (1,204)      31,844
Mortgage-backed securities            9,630           0        (229)       9,401
Other structured securities           8,230          32         (55)       8,207
Municipal                            29,222           0      (1,008)      28,214
Public utilities                     25,222           2        (852)      24,372
                                  ----------------------------------------------
Total                              $115,975        $107     $(4,663)    $111,419
                                  ----------------------------------------------

Held to maturity
U.S. Treasury securities and
  obligations of U.S.
  government agencies                 7,791           0        (122)       7,669
Corporate securities                  7,360           1         (63)       7,298
Municipal                               150           1          (1)         150
Public utilities                        993           0          (7)         986
                                  ----------------------------------------------
Total                                16,294           2        (193)      16,103
                                  ----------------------------------------------
Total fixed-maturity securities     132,269         109      (4,856)     127,522
                                  ----------------------------------------------
Equity securities                    28,014         951      (2,945)      26,020
Short-term investments                  449          --          --          449
                                  ----------------------------------------------
Total investments                  $160,732      $1,060     $(7,801)    $153,991
                                  ==============================================
</TABLE>

<TABLE>
<CAPTION>
                                                       December 31, 1998
                                      ---------------------------------------------------
                                                       Gross         Gross
                                                  Unrealized    Unrealized         Fair
(In thousands)                           Cost          Gains        Losses        Value
                                      ---------------------------------------------------
<S>                                      <C>            <C>           <C>        <C>
Fixed maturities
Available for sale
U.S. Treasury securities
     and obligations of U.S.
     government agencies                 $5,512         $149          $--        $5,661
Corporate securities                     28,725        1,024           (1)       29,748
Mortgage-backed securities               10,074           96           (3)       10,167
Other structured securities.15,668           69           --       15,737
Municipal                                35,295          624           --        35,919
Public utilities                          8,091          275           --         8,366
                                      ---------------------------------------------------
Total                                  $103,365       $2,237          $(4)     $105,598
                                      ===================================================
</TABLE>

<TABLE>
                                                    December 31, 1998 (cont'd)
                                      -------------------------------------------------
                                                        Gross        Gross
                                                   Unrealized    Unrealized     Fair
(In thousands)                           Cost           Gains        Losses    Value
                                      -------------------------------------------------
<S>                                     <C>             <C>        <C>         <C>
Held to maturity
U.S. Treasury securities and
     obligations of U.S.
     government agencies                11,046          148           --        11,194
Corporate securities                     9,396          101           (1)        9,496
Mortgage-backed securities               5,123           37           (2)        5,158
Municipal                                  399            4           --           403
Public utilities                           992           27           --         1,019
                                      -------------------------------------------------
Total                                   26,956          317           (3)       27,270
                                      -------------------------------------------------
Total fixed-maturity securities        130,321        2,554           (7)      132,868
                                      -------------------------------------------------
Equity securities                       23,358        2,348         (468)       25,238
Short-term investments                     997           --           --           997
                                      -------------------------------------------------
Total investments                     $154,676       $4,902        $(475)     $159,103
                                      =================================================
</TABLE>

Fixed maturities at December 31, 1999, by contractual maturity, are shown below.
Expected  maturities will differ from contractual  maturities  because borrowers
may have  the  right  to call or  prepay  obligations  with or  without  call or
prepayment penalties.
<TABLE>
<CAPTION>
          Available for Sale                      Held to Maturity
                                -------------------------------------------------
                                 Amortized                 Amortized
(In thousands)                        Cost    Fair Value        Cost   Fair Value
                                -------------------------------------------------
<S>                                <C>          <C>          <C>          <C>
Due in one year or less            $2,000       $1,992       $9,013       $8,999
Due after one year through
     five years                    28,586       28,100        6,281        6,146
Due after five years through
     ten years                     36,959       35,331        1,000          958
Due after ten years                30,570       28,388            0            0
Asset- and mortgage-backed
     securities                    17,860       17,608            0            0
                                -------------------------------------------------
Total                            $115,975     $111,419      $16,294      $16,103
                                =================================================
</TABLE>

A summary of net investment income is as follows:

                                           Years ended December 31,
                                    ------------------------------------
(In thousands)                        1999          1998           1997
                                    ------------------------------------
Interest on fixed maturities         $7,629        $8,921        $7,506
Dividends on equity securities        1,492         1,528         1,123
Interest on short-term
     investments and cash               787           732           852
Other                                     4             2            42
                                    ------------------------------------
Total investment income               9,912        11,183         9,523

Less investment expense                (375)         (420)         (305)
                                    ------------------------------------
Net investment income                $9,537       $10,763        $9,218
                                    ====================================

22
<PAGE>
All investments in fixed-maturity  securities have been income-producing  during
1999, 1998 and 1997.  Realized pre-tax gains (losses) on the sale of investments
are as follows:

                                               Years ended December 31,
                                        ---------------------------------
(In thousands)                             1999          1998        1997
                                        ---------------------------------

Fixed maturities:
Gross realized gains                        $66          $87          $77
Gross realized losses                       (23)         (11)         (30)
                                        ---------------------------------
Net gains                                    43           76           47
                                        ---------------------------------
Equity securities:
Gross realized gains                      1,266          724        1,321
Gross realized losses                      (468)        (782)         (54)
                                        ---------------------------------
Net gains (losses)                          798          (58)       1,267
                                        ---------------------------------
Total net realized investment gains        $841          $18       $1,314
                                        =================================

Income  taxes on net  realized  investment  gains  were  $286,000,  $6,000,  and
$450,000 in 1999, 1998 and 1997, respectively.

The  amortized  cost of fixed  maturities  on deposit  with  various  regulatory
authorities  at  December  31,  1999  and  1998,   amounted  to  $8,295,000  and
$7,341,000, respectively.

Note 5 Reinsurance

In the normal  course of business,  the Company  seeks to reduce the losses that
may arise from catastrophes or other events that cause unfavorable  underwriting
results by reinsuring  certain levels of risks in various areas of exposure with
other insurance enterprises or reinsurers.

Reinsurance  contracts  do  not  relieve  the  Company  of  its  obligations  to
policyholders.  Failure of reinsurers to honor their obligations could result in
losses to the  Company.  Allowances  have been  established  for amounts  deemed
uncollectible.  The Company evaluates the financial  condition of its reinsurers
and monitors  concentrations  of credit risk  arising  from  similar  geographic
regions,  activities or economic  characteristics  of the reinsurers to minimize
its exposure to significant losses from reinsurer insolvencies.  At December 31,
1999, reinsurance  recoverables and prepaid reinsurance premiums associated with
one major reinsurer, General Reinsurance Corporation, were $19,875,000.

Premiums written and earned consisted of the following:

                             Years ended December 31,
                       ----------------------------------
(In thousands)            1999         1998        1997
                       ==================================

Premiums written:

Gross                   $95,983      $95,097     $104,694
Ceded                     8,947        7,268        8,133
                       ----------------------------------
Net of reinsurance      $87,036      $87,829      $96,561
                       ==================================

Premiums earned:

Gross                   $93,904      $97,017      $99,385
Ceded                     8,227        7,524        7,736
                       ----------------------------------
Net of reinsurance      $85,677      $89,493      $91,649
                       ==================================


Recoveries recognized under reinsurance contracts were as follows:

                       1999              $ 7,182,000
                       1998              $ 6,081,000
                       1997              $ 5,132,000

Note 6 Capitalized Lease Obligation

Capitalized  lease  obligation of $1,821,000 and $2,080,000 at December 31, 1999
and 1998, respectively,  represented the lease obligation arising under the home
office  facility  lease  (see  note  3).  Interest  is  payable  at  8.5% on the
outstanding principal balance.

Note 7 Unpaid Losses and Loss Adjustment Expenses

Activity in the  liability  for unpaid  losses and loss  adjustment  expenses is
summarized as follows:

(In thousands)                      1999        1998        1997
                                 --------------------------------

Balance as of January 1           $88,937     $84,566     $70,728
Less reinsurance recoverables      16,502      15,703      15,072
                                 --------------------------------

Net balance at January 1           72,435      68,863      55,656
                                 --------------------------------

Incurred related to:
Current year                       54,768      55,647      57,387
Prior years                         8,419          86         341
                                 --------------------------------
Total incurred                     63,187      55,733      57,728
                                 --------------------------------

Paid related to:
Current year                       23,540      21,903      20,861
Prior years                        36,449      30,258      23,660
                                 --------------------------------
Total paid                         59,989      52,161      44,521
                                 --------------------------------

Net balance at December 31         75,633      72,435      68,863
Plus reinsurance recoverables      18,086      16,502      15,703
                                 --------------------------------
Balance as of December 31         $93,719     $88,937     $84,566
                                 ================================

As a result of  changes  in  estimates  of insured  events of prior  years,  the
provision for losses and loss adjustment expenses increased $8,419,000,  $86,000
and $341,000 in 1999,  1998 and 1997,  respectively.  The increase in prior year
incurred  losses in 1999 is due to loss  development  in  non-standard  personal
automobile line which the company is exiting,  and commercial lines primarily as
a result of the Company strengthening its reserves. The increase in prior years'
incurred  losses  in 1998  and  1997 is due  primarily  to loss  development  in
non-standard   personal  automobile  liability  partially  offset  by  favorable
development in the commercial lines.

Note 8 Income Tax

The components of income tax expense are as follows:

                         Years ended December 31,
                  -------------------------------------
(In thousands)     1999            1998           1997
                  -------------------------------------

Current            $107          $3,483         $4,570
Deferred           (263)            159           (434)
                  -------------------------------------
Total             $(156)         $3,642         $4,136
                  =====================================


                                                                              23
<PAGE>
The  actual  income  tax  rate  differed  from  the  statutory  income  tax rate
applicable to income before income taxes as follows:

                                           1999          1998          1997
                                         -----------------------------------
Statutory income tax rate                  34.0%         34.0%         34.2%
Tax-exempt interest and dividends
  received deduction                      (44.5)         (5.4)         (1.6)
Life insurance proceeds                      --            --          (2.5)
Other                                       2.2           0.5          (0.1)
                                         -----------------------------------
                                           (8.3)%        29.1%         30.0%
                                         -----------------------------------

The tax effects of temporary differences that result in a net deferred tax asset
as of December 31, are summarized as follows:

(In thousands)                              1999           1998
                                         -----------------------
Assets

Effect of discounting unpaid losses
     and loss adjustment expenses          $3,607        $3,530
Excess of tax over financial
     reporting of earned premium            2,231         2,138
Unrealized investment losses                2,278            --
Other, net                                    788           476
                                         -----------------------
Total deferred assets                       8,904         6,144
                                         -----------------------

Liabilities

Deferred policy acquisition costs           3,164        $3,024
Unrealized investment gains                    --         1,398
Other, net                                    253           124
                                         -----------------------
Total deferred liabilities                  3,417         4,546
                                         -----------------------
Net deferred tax asset                     $5,487        $1,598
                                         =======================

The Company is required to  establish a valuation  allowance  for any portion of
the deferred tax asset that  management  believes  will not be realized.  In the
opinion of management,  it is more likely than not that the Company will realize
the  benefit  of the  deferred  tax  asset  and,  therefore,  no such  valuation
allowance has been established.

Note 9

Segment  Information  In 1998,  the Company  implemented  Statement of Financial
Accounting  Standards No. 131,  "Disclosures about Segments of an Enterprise and
Related  Information"  which establishes  standards about a company's  operating
segments.

The Company has two reportable  segments:  personal lines and commercial  lines.
These segments are managed  separately  because they have  different  customers,
pricing and expense  structures.  The Company does not allocate  assets  between
segments because assets are reviewed in total by management for  decision-making
purposes.

The accounting  policies of the segments are the same as those  described in the
summary of significant accounting policies. The Company evaluates segment profit
based on profit or loss from operating  activities.  Segment profit or loss from
operations is pre-tax and does not include unallocated expenses but does include
investment income attributable to insurance transactions. Segment profit or loss
therefore  excludes  Federal income taxes,  unallocated  expenses and investment
income  attributable to equity, as opposed to investment income  attributable to
insurance transactions.

The company had one major customer accounting for more than 10% of the Company's
revenue prior to 1999. In 1998 and 1997, the Company derived approximately 18.4%
and 21.3% of its revenues from this agent.  In 1999,  no one customer  accounted
for more than 10% of revenue.

The  following  is a summary of the  Company's  segment  revenues,  expenses and
profit for the years ended December 31, 1999, 1998 and 1997:

(In thousands)                                      1999
                                   ----------------------------------------
                                   Commercial      Personal           Total
                                   ----------------------------------------

Premiums earned                    $71,731         $13,946          $85,677
Net investment income from
     insurance operations            4,730             800            5,530
                                   ----------------------------------------
Total segment revenues              76,461          14,746           91,207
                                   ----------------------------------------
Segment losses and LAE              49,744          13,443           63,187
Segment expenses                    21,905           4,533           26,438
                                   ----------------------------------------
Total segment expenses              71,649          17,976           89,625
                                   ----------------------------------------
Segment profit (loss)               $4,812         $(3,230)          $1,582
                                   ========================================

Plus unallocated items:
Net investment income from equity                                     4,848
Unallocated expenses                                                 (4,548)
Income taxes                                                            156
                                                                     ------
Net earnings                                                         $2,038
                                                                     ======
(In thousands)                                        1998
                                   ----------------------------------------
                                   Commercial      Personal           Total
                                   ----------------------------------------
Premiums earned                       $62,949        $26,544        $89,493
Net investment income from
     insurance operations               4,126            945          5,071
                                   ----------------------------------------
Total segment revenues                 67,075         27,489         94,564
                                   ----------------------------------------
Segment losses and LAE                 37,121         18,612         55,733
Segment expenses                       18,687          8,547         27,234
Total segment expenses                 55,808         27,159         82,967
                                   ----------------------------------------
Segment profit                        $11,267           $330        $11,597
                                   ========================================

Plus unallocated items:
Net investment income from equity                                     5,710
Unallocated expenses                                                 (4,784)
Income taxes                                                         (3,642)
                                                                     ------
Net earnings                                                         $8,881
                                                                     ======

24
<PAGE>

(In thousands)                                        1997
                                   ----------------------------------------
                                   Commercial      Personal           Total
                                   ----------------------------------------
Premiums earned                       $57,189        $34,460        $91,649
Net investment income from
     insurance operations               4,764            934          5,698
Other income                              442            230            672
                                   ----------------------------------------
Total segment revenues                 62,395         35,624         98,019
                                   ----------------------------------------
Segment losses and LAE                 32,723         25,005         57,728
Segment expenses                       15,822         11,004         26,826
                                   ----------------------------------------
Total segment expenses                 48,545         36,009         84,554
                                   ----------------------------------------
Segment profit (loss)                 $13,850          $(385)       $13,465
                                   ========================================
Plus unallocated items:
Net investment income from equity                                     4,834
Unallocated expenses                                                 (4,518)
Income taxes                                                         (4,136)
                                                                     ------
Net earnings                                                         $9,645
                                                                     ======

Total segment revenues of $91.2 million,  $94.6 million and $98.0 million,  plus
unallocated net investment income from equity of $4.9 million,  $5.7 million and
$4.8 million, equals total Company revenues of $96.1 million, $100.3 million and
$102.9  million  for  the  years  ended  December  31,  1999,   1998  and  1997,
respectively.

Note 10 Stockholders' Equity

A  source  of  cash  to use  for  the  payment  of  dividends  to the  Company's
stockholders is dividends from Penn-America.  Penn-America is required by law to
maintain  a certain  minimum  surplus  on a  statutory  basis and is  subject to
risk-based  capital  requirements  and  regulations  under  which  payment  of a
dividend from statutory  surplus may require prior approval of the  Pennsylvania
regulatory authorities. The maximum dividend that may be paid by Penn-America to
the  Company  without  prior  approval  of  regulatory  authorities  in  2000 is
$6,950,000.

The National  Association  of  Insurance  Commissioners  has adopted  risk-based
capital (RBC) requirements for property and casualty insurance  companies.  This
requirement  may have a  further  impact  on the  payment  of  dividends  to the
stockholders.  At December 31, 1999 and 1998, the Company's  actual RBC exceeded
minimum  requirements.  Therefore,  there  are no  further  restrictions  on the
payment of dividends.

The  following  tables  reconcile  surplus and net earnings of  Penn-America  as
determined in accordance with accounting  procedures  prescribed or permitted by
the insurance regulatory authorities to stockholders' equity and net earnings of
the Company  calculated  in  accordance  with  accounting  principles  generally
accepted in the United States as reported herein:
<TABLE>
<CAPTION>
                                                                       At December 31,
                                                       ---------------------------------------------
(In thousands)                                             1999              1998              1997
                                                       ---------------------------------------------
<S>                                                      <C>               <C>               <C>
Statutory surplus as regards policyholders               $69,515           $85,358           $83,459
Deferred policy acquisition costs                          9,306             8,728             8,563
Deferred income taxes                                      5,483             1,576             2,302
Unrealized investment gains
(losses) on fixed maturities available for sale           (5,027)            2,233               794
Capital lease, net                                            19               (29)              (55)
Provision for unauthorized reinsurance                        --               184                65
Non-admitted assets                                          896               889               889
Other assets (liabilities)                                    10                38                15
Provision for uncollectible accounts                        (522)             (622)             (622)
Holding company                                              938             2,275             1,897
                                                       ---------------------------------------------
GAAP stockholders' equity                                $80,618          $100,630           $97,307
                                                       =============================================
</TABLE>

<TABLE>
<CAPTION>
                                                      Years ended December 31,
                                           ----------------------------------------
(In thousands)                                1999            1998             1997
                                           ----------------------------------------
<S>                                          <C>             <C>             <C>
Statutory net income                         $1,869          $9,805          $8,075
Deferred acquisition costs                      578             165           1,332
Deferred income tax                             281            (169)            418
Allowance for uncollectible accounts            100              --              --
Capital lease                                    25              25              25
Life insurance proceeds                          --              --             672
Other, net                                       10              23              99
Holding company                                (825)           (968)           (976)
                                           ----------------------------------------
GAAP net earnings                            $2,038          $8,881          $9,645
                                           ========================================
</TABLE>

Note 11 Profit-Sharing Plans

Penn-America  participates  in a  profit-sharing  and a 401(k)  plan  with  Penn
Independent that covers qualified employees.  Penn-America's contributions under
the 401(k) plan were $105,000,  $114,000,  and $74,000 for 1999,  1998 and 1997,
respectively. There were no profit-sharing distributions in 1999, 1998 and 1997.

Note 12 Stock Incentive Plans

Stock options:  In August 1993, the Company  adopted a Stock Incentive Plan (the
"Plan").  The purpose of the Plan is to enable officers,  employees,  directors,
consultants,  advisors and service  providers of the Company and its  affiliates
(as defined in the Plan) to  participate  in the Company's  future and to enable
the Company to attract and retain  these  persons by offering  them  proprietary
interests  in the  Company.  The Plan  authorizes  the issuance of up to 825,000
shares of common stock pursuant to the exercise of stock options or the award of
restricted stock.

Options are  exercisable  according  to the various  terms under which they were
granted varying from one year to ten years after the date of grant.  All options
are subject in general to earlier  termination if the optionee leaves the employ
of the Company.

                                                                              25
<PAGE>
The Company applies APB opinion No. 25 and related interpretations in accounting
for its Plan.  Accordingly,  no  compensation  cost has been  recognized for the
Plan. Had compensation  cost for the Plan been determined based on fair value at
the grant  date  consistent  with FASB  Statement  No.  123,  the  effect on the
Company's net earnings and earnings per share would have been:

                                                Years ended December 31,
                                           1999         1998          1997
                                        ------------------------------------
Net earnings (in thousands):

As reported                              $2,038        $8,881        $9,645
Pro forma                                 2,013         8,845         9,610

Basic net earnings per share:

As reported                               $0.24         $0.91         $1.19
Pro forma                                  0.23          0.91          1.18

Diluted net earnings per share:

As reported                               $0.24         $0.90         $1.17
Pro forma                                  0.23          0.90          1.17

A summary of the status of the  Company's  stock  option plan as of December 31,
1999,  1998,  1997 and the  changes  during  the years  ended on those  dates is
presented below:

(Options in thousands)                        1999       1998         1997
                                            -------------------------------

Outstanding at beginning of year
  (average price of $6.98, $6.40
  and $6.07, in 1999, 1998 and 1997
  respectively)                               298         313          405
Granted
  (average price of $10.63, $19.00
   and $13.99 per share)                        9          16           22
Exercised
  (average price of $0.00, $6.00
  and $6.19 per share)                         --         (29)        (114)
Forfeited (average price of $0.00,
  $15.13, and $0.00 per share)                 --          (2)          --
                                            -------------------------------
Outstanding at end of year
  (average price of $7.09, $6.98,
   and, $6.40 per share in 1999, 1998
   and 1997 respectively)                     307         298          313
                                            ===============================

Options exercisable at end of year            298         286          250
                                            ===============================

Weighted average fair value
  of options granted
  during the year                            $3.29       $4.43        $2.45
                                            ===============================

The following table summarizes  information  about stock options  outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
                             Options Outstanding                    Options Exercisable
                  ----------------------------------------      ---------------------------
                                                 Weighted
                     Number          Average      Weighted        Number            Weighted
                  Outstanding       Remaining      Average      Exercisable         Average
                    12/31/99       Contractual    Exercise        12/31/99          Exercise
Exercise Prices    (in 000's)      Life(Years)     Price         (in 000's)           Price
-------------------------------------------------------------------------------------------
<S>                 <C>            <C>          <C>              <C>               <C>
$ 4.33 - $ 5.42         30            0.9          $ 4.88            30              $ 4.88
$ 6.00                 225            3.8          $ 6.00           225              $ 6.00
$ 8.83 - $ 19.00        52            3.3          $13.01            43              $13.50
-------------------------------------------------------------------------------------------
$ 4.33 - $ 19.00       307            3.5          $ 7.09           298              $ 6.98
===========================================================================================
</TABLE>

Restricted  Stock:  The Company awarded to certain  employees  45,000 and 32,500
shares of restricted  stock having values on the dates of the awards of $270,000
and $512,000  respectively.  Such shares are held by the Company and released to
each  grantee  at the rate of 20% per year  provided  that the  grantee is still
employed  by the  Company  or its  affiliates.  The  Company  charged  $120,000,
$157,000 and $101,000 to compensation  expense  relating to these awards for the
years ended  1999,  1998 and 1997,  respectively.  During  1999,  1998 and 1997,
6,500,  14,600,  and 9,900 shares,  respectively,  of the restricted  stock were
released to the applicable employees as allowed by the provisions of the grant.

Executive  Incentive  Compensation  Plan: During 1995, the Board of Directors of
the Company adopted an executive  incentive  compensation plan which provides up
to 75,000  shares,  over the life of the plan,  to be granted  to key  officers,
executives  and  employees of the Company and its  subsidiaries.  No shares were
issued in 1999 in  accordance  with this plan for fiscal year December 31, 1998.
In January 1998 and 1997,  5,629 and 7,535 shares were distributed in accordance
with the plan's  provisions for the years 1997 and 1996. The shares issued under
this plan are valued at the fair value of the stock at the close of  business at
the end of each  year and are  issued in the  subsequent  year,  subject  to the
Board's approval and attainment of corporate objectives.

Agents'  Contingent   Commission  Plan:  During  1999,  the  Agents'  Contingent
Commission  Plan was  modified  to provide  that at least 25% of the  contingent
commission  award to the  Company's  agents each year would be given in stock of
the  Company.  Additionally,  stock  options  will  be  awarded  as  part of the
contingent  commission.  Agents' stock awards for the 1998, 1997 and 1996 years,
which were issued in May of 1999, 1998 and 1997, amounted to 42,035,  20,437 and
27,746 shares, respectively. The awards for the 1999 year will not be determined
until March 2000.

Note 13 Commitments and Contingencies

The Company's insurance subsidiaries are subject to routine legal proceedings in
connection  with their  property and casualty  insurance  business.  Neither the
Company nor its  subsidiaries is involved in any pending or threatened  legal or
administrative  proceedings  which  management  believes  might  have a material
adverse effect on the Company's financial condition or results of operations.

During 1998 the Company  secured a revolving  credit  facility  with First Union
National Bank for $25 million.  This facility  provides an interest rate tied to
libor  plus a  variable  factor to be charged  on  borrowed  funds  based on the
Company's debt-to-equity ratio at the time of borrowing.  This variable interest
factor ranges from 75 to 150 basis points.  This facility is available until the
year 2004 with a  structured  step-down  in the  available  credit line over the
period. The line also includes cer-

26
<PAGE>
tain financial  covenants which must be met by the Company.  The Company has not
drawn upon this credit facility as of December 31, 1999.

The  Company  leases  various  computer  equipment  for  use  by  its  insurance
subsidiaries.  These  leases  have  terms  primarily  expiring  in  less  than a
three-year  period.  Rental expenses for these  operating  leases were $392,000,
$379,000  and $417,000  for the years ended  December  31, 1999,  1998 and 1997,
respectively.

At  December  31,  1999,  the future  minimum  rental  payments  required  under
operating  leases that have  initial or remaining  noncancelable  lease terms in
excess of one year were $183,000,  $153,000 and $91,000 for 2000, 2001 and 2002,
respectively.

Note 14 Comprehensive Income

In  1997,  the  Financial  Accounting  Standards  Board  issued  SFAS  No.  130,
"Comprehensive  Income." This  statement was  implemented  retroactively  by the
Company in 1998. The statement requires that an enterprise (a) classify items of
other  comprehensive  income by their  nature in a financial  statement  and (b)
display the accumulated  balance of other  comprehensive  income separately from
retained  earnings and additional  paid-in  capital in the equity section of the
statement of financial position.  Accumulated other comprehensive  (loss) income
of the Company  consists solely of net unrealized  gains or losses on investment
securities.

The following are components of other comprehensive  (loss) income for the years
ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>

(In thousands)                                                      1999
                                                 --------------------------------------------
                                                  Before Tax         Tax           Net of Tax
                                                    Amount          Benefit           Amount
                                                 --------------------------------------------
<S>                                                <C>               <C>             <C>
Unrealized losses on investments:
  Unrealized holding losses arising
    during period                                  $(9,823)          $3,340          $(6,483)
  Less: reclassification adjustment for
    gains realized in net income                      (841)             286             (555)
                                                 --------------------------------------------
Other comprehensive loss                          $(10,664)          $3,626          $(7,038)
                                                 ============================================
</TABLE>

<TABLE>
<CAPTION>
                                                                     1998
                                                 --------------------------------------------
                                                  Before Tax         Tax           Net of Tax
                                                    Amount          Benefit           Amount
                                                 --------------------------------------------
<S>                                                 <C>               <C>             <C>
Unrealized gains on investments:
  Unrealized holding gains arising
    during the period                               $1,632            $(555)          $1,077
  Less: reclassification adjustment for
    gains realized in net income                       (18)               6              (12)
                                                 --------------------------------------------
Other comprehensive income                          $1,614            $(549)          $1,065
                                                 ============================================


                                                                    1997
                                                 --------------------------------------------
                                                  Before Tax         Tax           Net of Tax
                                                    Amount          Benefit           Amount
                                                 --------------------------------------------
Unrealized gains on investments:
  Unrealized holding gains arising
    during period                                   $2,311            $(790)          $1,521
  Less: reclassification adjustment for
    gains realized in net income                    (1,314)             449             (865)
                                                 --------------------------------------------
Other comprehensive income                            $997            $(341)            $656
                                                 ============================================
</TABLE>



Note 15 Unaudited Quarterly Results of Operations for 1999 and 1998
<TABLE>
<CAPTION>
(In thousands except per share data)
                                                                 1999
                              ---------------------------------------------------------------------------
                                 First           Second          Third            Fourth          Total
                              ---------------------------------------------------------------------------
<S>                             <C>             <C>             <C>              <C>             <C>
Revenues                        $24,428         $24,390         $23,959          $23,278         $96,055
Losses and expenses              21,366          21,376          29,136           22,295          94,173
Net earnings                      2,209           2,197          (3,244)             876           2,038

Net earnings per share:
Basic                              0.24            0.25           (0.38)            0.14            0.24
Diluted                           $0.24           $0.25          $(0.38)           $0.14           $0.24

                                                                 1998
                              ---------------------------------------------------------------------------
                                 First           Second          Third            Fourth          Total
                              ---------------------------------------------------------------------------
Revenues                        $25,776         $25,300         $24,877          $24,321        $100,274
Losses and expenses              22,099          21,733          22,426           21,493          87,751
Net earnings                      2,580           2,525           1,784            1,992           8,881

Net earnings per share:
Basic                              0.26            0.25            0.18             0.21            0.91
Diluted                           $0.26           $0.25           $0.18            $0.21           $0.90
</TABLE>

                                                                              27
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Penn-America Group, Inc.


       We  have  audited  the   accompanying   consolidated   balance  sheet  of
    Penn-America  Group,  Inc.  (the  Company) as of December 31, 1999,  and the
    related  consolidated  statements of income,  changes in capital and surplus
    and cash flows for the year then ended.  These financial  statements are the
    responsibility of the Company's management. Our responsibility is to express
    an opinion on these financial  statements  based on our audit. The financial
    statements  of the Company as of  December  31, 1998 and for each of the two
    years in the period ended  December 31, 1998 were audited by other  auditors
    whose report dated  January 22, 1999  expressed  an  unqualified  opinion on
    those statements.

       We conducted our audit in accordance  with auditing  standards  generally
    accepted in the United  States.  Those  standards  require  that we plan and
    perform the audit to obtain reasonable assurance about whether the financial
    statements are free of material  misstatement.  An audit includes examining,
    on a test basis,  evidence  supporting  the amounts and  disclosures  in the
    financial  statements.  An audit  also  includes  assessing  the  accounting
    principles  used and  significant  estimates made by management,  as well as
    evaluating the overall financial statement presentation. We believe that our
    audit provides a reasonable basis for our opinion.

       In our opinion,  the 1999 financial  statements referred to above present
    fairly, in all material  respects,  the consolidated  financial  position of
    Penn-America Group, Inc. at December 31, 1999, and the consolidated  results
    of its  operations  and its cash flows for the year then ended in conformity
    with accounting principles generally accepted in the United States.


                                             /s/ Ernest & Young LLP


Philadelphia, Pennsylvania
January 21, 2000                             Ernest & Young LLP


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