SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K


                   For the fiscal year ended December 31, 1998

                                       of

                            PENN-AMERICA GROUP, INC.


                           A Pennsylvania Corporation

                   IRS Employer Identification No. 23-2731409
                             SEC File Number 022316

                                420 S. York Road
                               Hatboro, Pa. 19040
                                 (215) 443-3600

Penn America Group, Inc. does not have any securities registered pursuant to 
Section 12 (b) and 12 (g) of the Act.

Penn  America  Group,  Inc.  (1) has filed all  reports  required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter  period that the  registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.

Penn America Group, Inc. is unaware of any delinquent filers pursuant to Item
405 or Regulation 3-K.

As of March 22, 1999, the aggregate market value of the outstanding Common Stock
held by non-affiliates of the Registrant was  approximately  $62,400,000.  As of
March 22, 1999, there were 8,739,901 shares of the Common Stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Portions  of the  Registrant's  annual  report to  stockholders  for the  fiscal
year-ended December 31, 1998 are incorporated by reference in Parts I, II and IV
of this report.

Part III - Portions of the Registrant's  definitive Proxy Statement with respect
to the Registrant's  1999 Annual Meeting of Shareholders,  to be filed not later
than 120 days after the close of the Registrant's fiscal year.


<PAGE>



                            PENN-AMERICA GROUP, INC.
                           ANNUAL REPORT ON FORM 10-K
                                DECEMBER 31, 1998

                                                                            Page
                                                PART I
ITEM        1.      BUSINESS............................................... 3

ITEM        2.      PROPERTIES..............................................20

ITEM        3.      LEGAL PROCEEDINGS.......................................20

ITEM        4.      SUBMISSION OF MATTERS TO A VOTE OF
                    SECURITY-HOLDERS........................................20


                                               PART II

ITEM        5.      MARKET FOR REGISTRANT'S COMMON STOCK
                    AND RELATED STOCKHOLDER MATTERS.........................21

ITEM        6.      SELECTED FINANCIAL DATA.................................21

ITEM        7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........21

ITEM        8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............21

ITEM        9.      CHANGES IN AND DISAGREEMENTS WITH
                    ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                    DISCLOSURE..............................................21

                                               PART III

ITEM       10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE
                    REGISTRANT..............................................22

ITEM       11.      EXECUTIVE COMPENSATION..................................22

ITEM       12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                    OWNERS AND MANAGEMENT...................................22

ITEM       13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........22

                                               PART IV

ITEM       14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
                    REPORTS ON FORM 8-K.....................................23

                                     Page 2
<PAGE>


                                     PART I

ITEM 1.           BUSINESS

General

    Penn-America  Group,  Inc. is a specialty  property and  casualty  insurance
holding company which, through its subsidiaries,  Penn-America Insurance Company
and Penn-Star  Insurance  Company markets and underwrites  commercial  property,
general  liability,  business  automobile,  and multi-peril  insurance for small
businesses  located  primarily in small towns and suburban and rural areas,  and
non-standard  personal  automobile  insurance.  The Company provides  commercial
property and casualty insurance on both an excess and surplus lines basis and an
admitted basis,  and personal  automobile  insurance on an admitted  basis.  The
Company markets its products through 57 high-quality general agents, who in turn
produce business through over 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 are generally  characterized  by small to average
policy premiums and serviced by retail insurance  brokers with limited access to
larger,  standard lines  insurers.  The Company  believes that these markets are
generally under-served by larger,  standard lines insurers who often limit their
underwriting to policies above a certain minimum premium size or to certain risk
classes  and who  operate  in  large-scale  markets  in which  they can  achieve
economies of scale. The Company  believes that its distribution  network enables
it to effectively  access 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.

    The  success of the  Company's  strategy is  demonstrated  by its strong and
consistent growth and  profitability.  From 1993 to 1998, gross written premiums
grew at a 168.8%  cumulative  annual rate,  from $35.5 million to $95.1 million,
and net operating earnings (excluding realized investment gains) grew at a 34.6%
compound  annual  rate,  from $2.0  million to $8.9  million.  The  Company  has
operated at a statutory  combined  ratio under  100.0% in every year since 1993.
The  Company's  average  combined  ratio  from  1993  to  1998  under  Statutory
Accounting Practices(SAP)  was  95.4%, and  the  Company's   average  return  on
average stockholders' equity during the same period was 13.8%

    The Company'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 agents in each state based on the agent's
experience and reputation and strives to preserve each agent's  franchise  value
within  their market  territory.  The Company  seeks to grow with these  general
agents and develop strong,  longstanding relationships by providing a high level
of  service  and  support.  From  1993 to  1998,  the  Company  achieved  168.8%
cumulative growth in gross written premiums with a 50% increase in the number of
general  agents  from  38 to 57.  The  Company  maintains  low  fixed  costs  by
underwriting  the  substantial  majority of its policies on a binding  authority
basis.  The Company  closely  monitors the quality of business it underwrites by
maintaining  close  relationships  with a small  number of general  agents.  The
Company  provides its general  agents with a  comprehensive,  regularly  updated
underwriting   manual  which  clearly   outlines  the   Company's   pricing  and
underwriting  guidelines.  The Company 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 and
non-standard  personal  automobile  policies on a quarterly 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
substantially  tied to  underwriting  profitability  and through the issuance of
shares  of  common  stock  in lieu  of  cash  for a  portion  of the  contingent
commissions.

                                     Page 3
<PAGE>

    Historically,  the Company has  underwritten  the majority of its commercial
lines  business on an excess and  surplus  lines  basis.  In recent  years,  the
Company has  underwritten a greater  proportion of its commercial lines business
on an admitted  basis as it has  identified  profitable  admitted  markets which
remain  under-served  by  larger  standard  insurers.   Currently,  the  Company
underwrites all of its non-standard  personal automobile business on an admitted
basis.  The Company expects to continue to expand its commercial  lines business
by offering  additional products and packages which enhance its current property
and  liability  coverages,  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,  which may  include  miscellaneous  professional  liability
coverage.  The Company recently announced in January,  1999, that it would focus
its premium  writings of non-standard  automobile in the state of California and
would run-off the non-standard  automobile  premium in the six remaining states.
In 1998, the automobile premium written in California represented  approximately
60% of total  automobile  premium.  The six states where the Company  expects to
run-off the automobile premium represented the remaining 40%.

    The Company's  commercial insureds consist primarily of small, "Main Street"
businesses,  including restaurants,  taverns, retailers and artisan contractors,
located  principally  in small towns and suburban and rural areas.  In addition,
the Company has  developed  customized  products and  coverages  for other small
commercial  insureds such as day care  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.

    The Company's non-standard personal automobile insurance product is designed
for insureds who do not qualify for preferred or standard  automobile  insurance
because of their payment  history,  driving record,  age,  vehicle type or other
underwriting  criteria or market conditions.  Non-standard  personal  automobile
business  represented  approximately 25% of the Company's gross written premiums
in  1998  as  compared  to 35% of  gross  written  premium  in  1997.  In  1999,
non-standard  personal automobile premium is not expected to represent more than
10% of the Company's gross written premiums.

    Penn-America  Insurance  Company was formed in 1975 by Irvin  Saltzman,  who
began  working  in the  insurance  industry  in 1947  when he  founded a general
agency. Jon S. Saltzman,  Irvin Saltzman's son, is President and Chief Executive
Officer of the Company and has been  employed  by the  Company  since 1986.  The
Company  completed an initial public offering  ("IPO") on October 28, 1993, at a
price  to the  public  of $6.00  per  share.  Currently,  the  Saltzman  family,
substantially  through their  ownership of Penn  Independent  Corporation,  owns
approximately 32.9% of the Company's Common Stock.

Financial Information About Business Segments

    The Company has two reported segments:  commercial and personal lines. These
segments are managed  separately  because  they have  different  customers,  and
require different 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 in the  Company's  1998 annual
report.  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.
                                     Page 4
<PAGE>

    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 currently
has one major customer accounting for over 10% of the Company's revenue. In 1998
and 1997,  the Company  derived  approximately  18.4% and 21.3% of its  revenues
from this one agent.  In 1996,  the Company had two major  customers and derived
24.7% of its revenues from these two agents.

    The following is a summary of our segment revenue and segment profit for the
years ended December 31, 1998, 1997 and 1996:

                                                                 1998
                                                                 ----
                                              Commercial      Personal     Total
                                              ----------      --------    ------
                                                        (in thousands)

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 losses and expenses               55,808       27,159    82,967
                                              -----------     ---------  -------
   Segment profit                                 $11,267         $330   $11,597
                                              ============    =========  =======
Unallocated items:
Net investment income from equity                                         5,710
Unallocated expenses                                                     (4,784)
Income taxes                                                             (3,642)
                                                                         -------
   Net earnings                                                          $ 8,881
                                                                         =======


                                                                 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 losses and expenses              48,545       36,009     84,554
                                              ==========      =======     ======
   Segment profit (loss)                        $ 13,850      $ (385)   $ 13,465
                                              ==========      =======     ======
Unallocated items:
Net investment income from equity                                         4,834
Unallocated expenses                                                     (4,518)
Income taxes                                                             (4,136)
                                                                        --------
   Net earnings                                                         $ 9,645
                                                                        ========

                                                                 1996
                                                                -----
                                              Commercial      Personal     Total
                                              ----------      --------    ------
Premiums earned                                 $ 49,667     $ 19,414    $69,081
Net investment  income from insurance
   operations                                      3,832          433      4,265
                                              ----------      --------    ------
Total segment revenues                            53,499       19,847     73,346
                                              -----------     --------    ------
Segment losses and LAE                            30,887       12,405     43,292
Segment expenses                                  13,026        6,147     19,173
                                              -----------     --------    ------
   Total segment losses and  expenses             43,913       18,552     62,465
                                              ===========     ========    ======
   Segment profit                                $ 9,586      $ 1,295   $ 10,881
                                              ===========     ========    ======
Unallocated items:
Net investment income from equity                                         3,346
Unallocated expenses                                                     (3,845)
Income taxes                                                             (3,389)
                                                                        ------- 
Net earnings                                                            $ 6,993 
                                                                        ========
                                     Page 5
<PAGE>

    Total  segment  revenues of $94.6  million,  $98.0 million and $73.3 million
plus unallocated net investment income from equity of $5.7 million, $4.8 million
and $3.3  million  equals  total  Company  revenues  of $100.3  million,  $102.9
million, and $76.7 million for the years ended December 31, 1998, 1997 and 1996,
respectively.

Lines of Business

    The following table  sets  forth an  analysis of  gross  earned  premium  by
 specific product lines during  the periods indicated:
<TABLE>
<CAPTION>
                                                                     Years ended

                                      -------------------------------------------------------------------------
                                                1998                     1997                          1996
                                      ---------------------------------------------------------------------------
                                        Amount       Percent      Amount      Percent      Amount      Percent
                                      -----------   ----------   ----------  -----------  ----------  -----------
                                         <C>           <C>         <C>          <C>          <C>        <C>       
                                                                       (dollars in thousands)
                                      -------------------------------------------------------------------------
   <S>
     Commercial lines:

     Commercial multi-peril              $39,113       40.3%       $35,687      35.9%       $29,345       38.7%
     Liability                            24,863        25.6        23,486      23.6         21,418       28.2
     Property                              5,398        5.6          5,502       5.6          5,556        7.3
                                      -----------   ----------   ----------  -----------  ----------  -----------
                                          69,374       71.5         64,675      65.1         56,319       74.2
                                      -----------   ----------   ----------  -----------  ----------  -----------
     Personal Lines:

     Auto liability                       22,844       23.5         29,310      29.5         15,772       20.8
     Auto physical damage                  4,799        5.0          5,400       5.4          3,785        5.0
                                      -----------   ----------   ----------  -----------  ----------  -----------
                                          27,643       28.5         34,710      34.9         19,557      25.8
                                      -----------   ----------   ----------  -----------  ----------  -----------
     Total gross earned premium          $97,017      100.0%      $ 99,385     100.0%      $ 75,876     100.0%
                                      ===========   ==========   ==========  ===========  ==========  ===========
</TABLE>


o    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 pay
     defense and related  expenses in addition to per  occurrence  and aggregate
     policy limits.  General liability  insureds include  restaurants,  bars and
     taverns,  retail  operations,  garage  liability,  contractors  and similar
     classes.

o    Commercial Property. The Company'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.

o    Commercial  Multi-Peril.  The  Company  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 over the last several years than individual
     property and liability policies. 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 standard  Insurance  Services Office ("ISO") forms
     which make it easier and more efficient to write such multi-peril policies.

o    Business  Automobile  and  Commercial  Umbrella.  The  Company  wrote  both
     business  automobile  and  commercial umbrella  coverages  to  enhance its 
     commercial multi-peril ("package") writings.The types of risks and insureds
     targeted  are  similar  to  those   covered  by  other policies,  such  as,
     restaurants, bars and taverns, retail  operations, artisan contractors and 
     similar classes.  The business automobile insurance (cars and light trucks)
     can be  written up  to $1 million  liability  limits.  Commercial  umbrella
     insurance can be
                                     Page 6
<PAGE>

     written  for limits  up to $5 million with significant reinsurance support
     from General Reinsurance Corporation. For commercial umbrella, Penn-America
     must write the primary $1 million liability limit. The Company expects that
     these  coverages will  further  expand package writings  and  help increase
     renewal retention of existing policies.  In all of its  commercial  product
     lines, the Company is  continuously  developing  specialized  programs  for
     certain industry segments to meet the needs of these markets.  For example,
     the  Company  has   developed programs  for independent  fitness  centers, 
     day-care  operations,  low-hazard  miscellaneous  professional  liability 
     coverages and special events.  As a group, these programs are a significant
     benefit to the Company's marketing efforts, although individually  they do 
     not generate a material amount of the Company's gross written premiums.

     Non-Standard  Personal  Automobile.  The Company announced in January 1999,
     that it would run-off its non-standard  personal automobile business in the
     states of  Washington,  Montana,  Alabama,  North Dakota,  South Dakota and
     Nevada and focus its efforts on  non-standard  personal  automobile  in the
     state  of  California.  The  California  non-standard  personal  automobile
     business is written at very low statutory coverage limits,  and, is written
     predominantly on a monthly policy basis.

Marketing and Distribution

     The Company  currently  markets  its  insurance  products  through a select
number of high quality  general  agents.  The Company  believes that it benefits
significantly  from a general agency system  because it obtains the  significant
underwriting  and  marketing  expertise  of the  general  agents who have strong
business experience and relationships in their local territory. In addition, the
general  agency  system  allows the Company to avoid the expense of  maintaining
national or regional sales forces. This enables the Company to focus its efforts
on reviewing the underwriting  decisions of its agents and evaluating submission
business,  rather than devoting greater resources to making routine underwriting
decisions.

     The Company actively  competes for quality general agents to distribute its
products.  The Company selectively  appoints general agents and grants authority
on a  state-by-state  basis so that each general agent only has authority in the
area where they have marketing  expertise.  Prior to appointing a general agent,
the Company extensively reviews the candidate's financial condition,  geographic
diversification of risk,  historical loss experience and reputation,  as well as
the agent's results and practices with other insurers. An on-site review is made
of the prospective  agent's office,  including an audit of selected policy files
and confirmation that the agent has sufficient  experience to merit authority to
bind the Company only to appropriate risks. The agent is also interviewed at the
Company's office in order to confirm the compatibility between the agent and the
Company's underwriting staff. Such a comprehensive review is necessitated by the
Company's  philosophy  of  establishing  an  agent  relationship  only if it has
long-term potential.

     Once   appointed,   the  Company   provides   each  general  agent  with  a
comprehensive  agency manual which  enables the agent to begin writing  business
immediately.  The manual  allows the agent to write  coverages  effectively  and
consistently within the Company's  comprehensive  underwriting  guidelines.  The
agents are provided  limited  binding  authority,  based  primarily on Insurance
Services Office ("ISO") rates and forms, to write a variety of property, general
liability,  commercial multi-peril and commercial automobile business,  provided
that the risks and terms  involved  in a  particular  coverage  are  within  the
guidelines  set forth in the agency  manual.  The Company has devoted  extensive
research to the  development of its detailed  agency manual to enable its agents
to select and price risks consistently. The Company's agency manual is regularly
updated to be  responsive  to changes in the  marketplace.  The Company  devotes
substantial  resources to the  continuous  monitoring and support of its general
agents.
                                     Page 7
<PAGE>

     The general agents are compensated on a commission basis.  During 1998, the
Company,  increased by 10%, the  commission on  commercial  business from 20% to
22%. For personal lines automobile business,  the average commission is 26.5%. A
portion of this  commission  is passed on to the  retail  insurance  broker.  In
addition,  the  general  agency  contracts  between  the Company and its general
agents contain profit  sharing  incentives  under the Agents' Profit Sharing and
Performance  Award Program,  which is designed to reward general agents who meet
the Company's loss ratio and premium volume criteria.  The Company also provides
performance awards under this program to its commercial agents for timely policy
issuance,  timely premium  payments and  successful  underwriting  audits.  Such
contingent  commissions and performance  awards  accounted for 3.8% of the total
commissions  paid by the  Company  in  1998.  The  Agents'  Profit  Sharing  and
Performance  Award  Program  provides for at least  one-third of the  contingent
commission  awards be given in the form of common stock. The Company  authorized
75,000 shares of common stock for issuance under this program.  Stock awards for
1997, which were issued in May 1998,  amounted to 20,437 shares,  accounting for
50.0% of the  total  contingent  commissions  paid for 1997.  In May  1998,  the
Company  began a new program  under which the Company  will award  $1,000 in the
form of Common Stock to each new general agent it appoints. The contingent stock
award for 1998 will be issued in May 1999.

The following  table sets forth the geographic  distribution  of  the Company's 
gross written premiums for the periods indicated:
<TABLE>
<CAPTION>

                                                                                               Years ended
                          -----------------------------------------------------------------------------------------------------
                                December 31, 1998                 December 31, 1997                   December 31, 1996
                          -----------------------------------------------------------------------------------------------------
                             Amount           Percent            Amount          Percent           Amount           Percent
                           (in thousands)                    (in thousands)                    (in thousands)
                                                                                               
<S>                           <C>                 <C>              <C>               <C>              <C>              <C>
Pacific                        $23,969           25.3%           $ 26,126           25.0%           $ 29,435           36.6%
South                           16,346           17.2              16,236           15.5              15,677           19.5
Southwest                       16,027           16.6              18,625           17.8              11,693           14.5
Midwest                         14,392           15.2              12,198           11.7               4,685            5.8
Mountain                         9,321            9.8              14,119           13.4                 509            0.7
Mid-Atlantic                     8,998            9.5               9,876            9.4              10,665           13.2
New England                      6,044            6.4               7,514            7.2               7,832            9.7
                          ==============    ============     ===============   =============    ==============    =============
                               $95,097          100.0%           $104,694          100.0%           $ 80,496          100.0%
                          ==============    ============     ===============   =============    ==============    =============
</TABLE>

Underwriting and Pricing

    In the  commercial  property  and  casualty  market,  the rates and terms of
coverage  provided by property and casualty  insurance  carriers are  frequently
based on ISO rates and  forms.  ISO makes  available  to its  members  advisory,
rating,   statistical  and  actuarial  services,  policy  language  and  related
services.  ISO and its related  organizations  currently  provide such services,
including  rates and forms,  to more than 1,500 property and casualty  insurance
companies  in the U.S.  One of the  important  services  that ISO provides is an
actuarial-based  estimate of the "ideal" rate for risks in each of approximately
1,250 risk classifications. These rates reflect an analysis of the loss and loss
adjustment expenses on claims reported to ISO. ISO statistics,  however, include
only claims and policy information reported to ISO, and therefore do not reflect
all of the loss  experience for each class.  Also, the historical  results for a
particular  class  may  not be  sufficient  to  provide  actuarially  meaningful
results.

    The Company  primarily uses ISO statistics as a benchmark for risk selection
and pricing.  Other carriers may or may not rely as heavily on this information,
and several of the larger  standard  carriers have developed their own actuarial
databases.  As a general rule,  most standard  carriers set rates lower than ISO
rates.  However, 
                                     Page 8
<PAGE>

the Company,  because of its  strategy of  providing  insurance to under-served
markets, typically charges 100% or more of prescribed ISO rates.

    All  policies  written by the  Company are either  generated  by the general
agents  pursuant to their  binding  authority or on approval by the Company upon
submission by the general agents if the risk falls outside of that authority. In
1998,  approximately 92% of the commercial  policies written by the Company were
on a binding  authority  basis,  generating  approximately  91% of the Company's
commercial  lines gross written  premiums.  The personal  automobile  program is
written solely on a binding authority basis. The Company has established  strict
commercial  underwriting  guidelines within the terms of its agency manual which
identify  the risks that:  (i) are within the binding  authority  of the general
agents;  (ii) must be submitted  to the Company and (iii) the Company  would not
insure on any basis.

    The agency manual was prepared after  extensive  research,  including  input
from the  Company's  commercial  reinsurers,  and is  regularly  updated  by the
Company's underwriting staff. Generally, the Company provides its general agents
with pricing  flexibility on a per-policy  basis, with the objective that in the
aggregate,  the  weighted  average  premium  of all new and  renewal  commercial
policies  written  by a general  agent are at  approximately  110% of ISO rates.
According to ISO data, most standard  carriers  typically price at 60-80% of ISO
rates. The Company's  underwriting  staff carefully  monitors its general agents
and performs on-site reviews and underwriting audits of its agents on a periodic
basis for quality and compliance with Company guidelines.

    With respect to  commercial  risks  written by general  agents under binding
authority, the Company generally has 60 days from the effective date to cancel a
policy if the risk  insured  does not  comply  with the  Company's  underwriting
guidelines.  In the event an agent  exceeds its authority by binding the Company
on a risk when it had no  authority  to do so,  the  Company is at risk for that
policy until it receives the policy and effects a  cancellation.  General agents
must deliver all policies to the Company within 35 days of the date written. The
Company   monitors  this  activity  closely  through  its  computer  system  and
underwriting department.

    The  commercial  risks the Company  writes on a submit  basis are  generally
similar to the binding authority classes, but may have larger coverage limits or
greater  complexity.  In determining whether to accept such risks, the Company's
underwriting  staff will  review such  factors as the type of risk,  the agent's
knowledge  and control of the risk,  potential  underwriting  profitability  and
historical  data  regarding  any similar  risk  previously  underwritten  by the
Company.  During  this  process,  the  Company  will  quote a  proposed  premium
reflecting  relevant  ISO  rates,  if  available,  and  adjustments  that may be
warranted based on the individual  characteristics  of the particular  risk. The
underwriting  staff then assembles a complete  underwriting file with respect to
the  particular  submission  and  specific  approval  procedures  are  employed,
depending on the characteristics and magnitude of the particular risk.

    The Company generally  reviews all commercial  policies as they are received
from  general  agents  for  completeness,  accuracy,  and  compliance  with  the
Company's underwriting guidelines.  In addition, the Company conducts a detailed
audit of each of its  general  agents at least once a year.  The audit  involves
thoroughly  reviewing  between 50 and 100  policies  to check for  completeness,
accuracy,  pricing, use of proper exclusions,  verification of information,  and
compliance with the Company's regulatory filings, as well as the general agent's
use of the Company's overall product lines.

    The Company  routinely  reviews selected data for its non-standard  personal
automobile  policies  as such  data is  received  from  its  general  agent  for
completeness,   accuracy,   and  compliance  with  the  Company's   underwriting
guidelines.  Generally,  the Company  conducts  detailed  on-site  audits of its
personal  lines  general  agent  on a quarterly  basis.  These  audits  involve
                                     Page 9
<PAGE>

thoroughly   reviewing   between   50  and  100   policies   to  verify   proper
classifications, ratings, accident and violation surcharges, adherence to manual
guidelines,  use of proper  exclusions,  verification  of information  regarding
inspections and compliance with the Company's  regulatory  filings.  The Company
provides  its general  agent with written  feedback  based on the results of its
audits and  monitors  its timely  responses  to any issues  highlighted  in such
audits.

Claims Management and Administration

    Commercial Claims
    The  Company's  approach  to  commercial  claims  management  is designed to
investigate reported incidents at the earliest juncture,  to select,  manage and
supervise all legal and adjustment  aspects  thereof and to provide a high level
of service and support to general agents,  retail insurance brokers and insureds
throughout the claims process.  The Company's  commercial general agents have no
authority  to settle  claims  or  otherwise  exercise  control  over the  claims
process.  All commercial lines claims are supervised and processed  centrally by
the Company's claims management staff. Senior management reviews all claims over
$25,000.

    Personal Automobile Claims
    Prior to November 1998, all personal  automobile  claims were handled by the
Company. All claims for the personal automobile run-off business in the state of
Alabama, Nevada, Montana and North and South Dakota are continuing to be handled
by the  Company's  internal  claims  unit.  When the claims are  received by the
Company,  an initial  reserve is  established  using an  average  reserve  which
reflects   that  state's   automobile   loss   experience.   Subsequent  to  the
establishment  of the initial  reserve,  adjustments  are made to the reserve to
reflect the latest information on the claims'estimated settlement costs.

    For personal  automobile  business  written in the state of California,  The
Company's agent has a claims  management  company,  which  as of  November 1998,
handles all claims on all newly  written  business  as well as any  claims  that
are  made on  previously  written  business.  Existing  open  claim  files  in 
California  will continue to be managed  by the  Company's internal claims unit.
The agent has pre-established   settlement  authority   depending  on  coverage.
The agent  establishes  an  initial  average  reserve  based  on   California's 
experience.  Any changes to the initial average reserve must be approved by the
Company.

    For claims in the state of Washington,  the Company has established  similar
settlement  authority for the management of claims.  An outside claims adjusting
company has been retained by the Company to manage the run-off claim activity in
that state.

    For both outside claims management companies, the Company conducts quarterly
audits and reviews the claim file management.

Reserves

    The Company is directly liable for loss and loss adjustment expense payments
under the terms of the insurance policies that it writes. In many cases, several
years may elapse between the occurrence of an insured loss, the reporting of the
loss to the Company and the Company's payment of that loss. The Company reflects
its  liability  for  the  ultimate  payment  of all  incurred  losses  and  loss
adjustment  expenses by establishing  loss and loss adjustment  expense reserves
for both reported and  unreported  claims,  which are balance sheet  liabilities
representing  estimates  of future  amounts  needed to pay  claims  and  related
expenses.
                                    Page 10
<PAGE>

    When a claim involving a probable loss is reported,  the Company establishes
a case reserve for the estimated amount of the Company's  ultimate loss and loss
adjustment expense payments.  The estimate of the amount of the ultimate loss is
based upon such  factors as the type of loss,  jurisdiction  of the  occurrence,
knowledge  of the  circumstances  surrounding  the claim,  severity of injury or
damage,  potential for ultimate exposure and policy  provisions  relating to the
claim. The loss adjustment  expenses include the estimated  expenses of settling
the claim, including legal and other fees, and general expenses of administering
the claims adjustment process.

    All newly  reported  claims  received  with  respect to personal  automobile
policies are established with an initial average  reserve.  The average reserves
for these  claims are  determined  every  quarter by dividing  all of the closed
claims into the total amount paid during the three month  period.  If a claim is
open more than 90 days,  that open case reserve is evaluated  and the reserve is
adjusted upward or downward according to the facts of that particular claim.

    In  addition,  management  establishes  reserves  on an  aggregate  basis to
provide for Incurred But Not Reported Losses ("IBNR"). The Company's independent
actuarial  consultant  annually  reviews the provision for IBNR and the reserves
taken as a whole. The Company does not discount its loss reserves. The estimates
of reserves are subject to the effect of trends in claims severity and frequency
and are  continually  reviewed.  As part of this  process,  the Company  reviews
historical data and considers  various factors,  including known and anticipated
legal  developments,   changes  in  social  attitudes,  inflation  and  economic
conditions.  As  experience  develops  and other data  become  available,  these
estimates  are  revised,  as  required,  resulting  in increases or decreases to
existing  reserves.  Adjustments  are  reflected in results of operations in the
period  in  which  they  are  made  and may  deviate  substantially  from  prior
estimates.


    The  following  table sets forth a  reconciliation  of beginning  and ending
reserves  as shown  on the  Company's  financial  statements  (on a GAAP  basis,
without regard to reinsurance)  for unpaid losses and loss  adjustment  expenses
for the periods indicated:
<TABLE>
<CAPTION>

                                                                                 Years ended December 31,
                                                                   ------------------------------------------------------
                                                                        1998               1997               1996
                                                                  ----------------  -----------------  -----------------
                                                                                    (in thousands)
                                                                          <C>             <C>               <C> 
<S>                       
Reserves for unpaid losses and loss adjustment expenses,
   at beginning of year                                                  $84,566           $70,728           $ 60,139
                                                                   ----------------  -----------------  -----------------
Incurred losses and loss adjustment expenses:
   Provision for insured events of the current year                       60,740            61,916             48,076
   Increase in provision for insured
      events of prior years                                                1,074               916              3,744
                                                                   ----------------  -----------------  -----------------
Total incurred losses and loss adjustment expenses                        61,814            62,832             51,820
                                                                   ----------------  -----------------  -----------------
Payments:
   Losses and loss adjustment expenses attributable
      to insured events of the current year                               22,716            21,408             17,931
   Losses and loss adjustment expenses attributable
      to insured events of prior years                                    34,727            27,586             23,300
                                                                   ----------------  -----------------  -----------------
Total payments                                                            57,443            48,994             41,231
                                                                   ----------------  -----------------  -----------------
Reserves for unpaid losses and loss adjustment expenses,
   at end of year                                                        $88,937           $84,566           $ 70,728
                                                                   ================  =================  =================
</TABLE>
                                    Page 11
<PAGE>

    The  Company  has  experienced  adverse  development  of gross  reserves  of
$1.1 million, $916,000 and $3.7 million in 1998, 1997 and 1996, respectively,for
prior years' insured  events.  The net reserves had  unfavorable  development of
$86,000 and $341,000 for 1998 and 1997 respectively and favorable development of
$804,000 in 1996. The  unfavorable  development  on the gross reserves  occurred
primarily on reserves held as of December 31, 1993, which deficiency is ceded to
the Company's  reinsurers.  The  unfavorable  development on the net reserves in
1998  and  1997  was  primarily  due  to  the  personal   automobile  line.  The
establishment of reserves is an inherently  subjective  process and,  therefore,
the historical  gross or net  redundancies or deficiencies may not be indicative
of the likelihood or amount of future redundancies or deficiencies.

    The  following  table  represents  the  development  of unpaid loss and loss
adjustment  expense  reserves  during the ten years ended December 31, 1997. The
top of the table reflects the ten year development of the Company's reserves net
of  reinsurance.  The bottom of the table  reconciles  1992  through 1998 ending
reserves  to  the  gross  reserves  in  the  Company's   consolidated  financial
statements.  Prior to 1992,  the  Company  developed  its  reserves  on a net of
reinsurance  basis and restatement  for those prior years is not presented.  The
top line of the table  shows the  estimated  reserve  for  unpaid  loss and loss
adjustment  expenses at the balance sheet date for each of the indicated  years.
These figures  represent the estimated amount of unpaid loss and loss adjustment
expenses  for claims  arising in all prior years that were unpaid at the balance
sheet date,  including  losses that had been incurred but not yet reported.  The
table also shows the  re-estimated  amount of the  previously  recorded  reserve
based on experience as of the end of each succeeding  year. The estimate changes
as more  information  becomes  available  about the  frequency  and  severity of
claims.



                                    Page 12
<PAGE>
<TABLE>
<CAPTION>

                                         1988     1989    1990     1991    1992     1993     1994     1995    1996    1997    1998 
                                       --------  ------   ------  ------  ------   ------   ------   ------  ------  ------  ------
<S>                                     <C>       <C>       <C>     <C>    <C>       <C>      <C>     <C>     <C>      <C>    <C> 
Reserves for unpaid losses and         
  Loss Adjustment expense, as stated   $21,741  $25,391  $25,352  $25,681  $26,110  $26,830 $35,307 $46,512 $55,656 $68,863 $72,435
  
a.  Net cumulative paid as of
     1 year later                       $4,911   $8,655   $6,929   $6,605   $7,381   $6,852 $12,383 $17,208  23,660 $30,236
     2 years later                      10,743   13,361   11,610   10,988   11,127   13,127  20,617  29,612  38,819
     3 years later                      14,132   16,952   14,667   13,325   15,546   18,656  27,266  38,091    
     4 years later                      15,823   19,050   16,341   16,417   19,253   22,254  32,119
     5 years later                      17,074   20,359   18,363   19,283   21,503   24,303
     6 years later                      17,405   21,866   20,214   20,872   22,796
     7 years later                      18,303   23,383   21,470   21,881
     8 years later                      19,248   24,476   22,084
     9 years later                      20,133   24,978
     10 years later                     20,658

b.  Reserves re-estimated as of end of year
     1 year later                      $21,036  $25,128  $23,468  $23,228  $24,478  $23,897 $33,601 $45,708 $55,997  $68,946
     2 years later                      21,396   24,329   22,658   22,383   21,945   23,489  34,281  47,225  57,913
     3 years later                      20,570   23,923   22,252   20,471   22,032   24,558  36,453  47,378
     4 years later                      20,206   23,615   21,465   20,819   22,767   26,335  36,359
     5 years later                      19,822   23,639   21,469   21,726   23,935   26,380
     6 years later                      19,499   24,021   21,990   22,550   24,143
     7 years later                      19,621   24,683   22,609   22,761
     8 years later                      20,222   25,379   22,609
     9 years later                      20,829   25,460
     10 years later                     21,079

Net cumulative redundancy (deficiency)    $662    ($69)   $2,743   $2,920   $1,967     $450 ($1,052) ($866) ($2,257)   ($86)

Gross liability for unpaid losses and
 loss adjustment expenses, as stated                                      $31,703  $33,314  $44,796 $60,139 $70,728 $84,566 $88,937 
Reinsurance recoverable                                                     5,593    6,484    9,489  13,627  15,072  15,703  16,502
Net liability for unpaid losses and
 loss adjustment expenses, as stated                                      $26,110  $26,830  $35,307 $46,512 $55,656 $68,863 $72,435

Gross liability re-estimated - 1 year later                                $30,609  $32,796  $48,173 $63,884 $71,644 $85,640
Reinsurance recoverable re-estimated                                         6,131    8,899   14,572  18,176  15,647  16,694
Net liability re-estimated - 1 year later                                  $24,478  $23,897  $33,601 $45,708 $55,997 $68,946
                                        ---------------------------------------------------------------------------- ------- -------

Gross liability re-estimated - 2 years later                               $30,390  $36,243  $53,009 $66,405 $74,312 
Reinsurance recoverable re-estimated                                         8,445   12,754   18,728  19,180  16,399
Net liability re-estimated - 2 years later                                 $21,945  $23,489  $34,281 $47,225  57,913
                                        ---------------------------------------------------------------------------- ------- -------

Gross liability re-estimated - 3 years later                                $33,992  $41,600  $56,042 $66,891
Reinsurance recoverable re-estimated                                         11,960   17,042   19,589  19,513
Net liability re-estimated - 3 years later                                  $22,032  $24,558  $36,453 $47,378
                                       ------------------------------------------------------------------------------ ------- ------

Gross liability re-estimated - 4 years later                                $38,165  $43,824  $56,167 
Reinsurance recoverable re-estimated                                         15,398   17,489   19,808
Net liability re-estimated - 4 years later                                  $22,767  $26,335  $36,359
                                       ------------------------------------------------------------------------------ ------- ------

Gross liability re-estimate - 5 years later                                 $39,956  $44,466
Reinsurance recoverable re-estimated                                         16,021   18,086
Net liability re-estimated - 5 years later                                  $23,935  $26,380
                                             ------------------------------------------------------------------------ ------- ------
Gross liability re-estimate - 6 years later                                 $40,670
Reinsurance recoverable re-estimated                                         16,527
Net liability re-estimated - 6 years later                                  $24,143


Gross cumulative deficiency                                                 ($8,967)($11,152)($11,371)($6,752)($3,584)($1,074)
</TABLE>
a.  Net cumulative paid "as of"  equals  the amounts  of paid losses  and  loss 
adjustment expenses subsequent to the year in which the original reserves were
established.
b.  Reserves re-estimated "as of" equals the  amounts of  unpaid losses and loss
adjustment expenses which the company would have originally established based on
experience as of the end of each year.  Amounts  were   calculated  as  the sum 
of the  cumulative  paid  amounts described  in (a.) above  plus the amounts of 
unpaid  losses  and loss  adjustment expenses  reevaluated  at the  end o f each
succeeding year end.
                                    Page 13

<PAGE>


    The cumulative  redundancy or deficiency  represents the aggregate change in
the reserve  estimates  over all prior years.  It should be emphasized  that the
table  presents a run-off of balance  sheet  reserves  rather  than  accident or
policy year loss development.  Therefore,  each amount in the table includes the
effects of changes in reserves for all prior years.

    The  following  table sets forth  ratios for the  Company  and the  industry
prepared in accordance with Statutory Accounting Practices ("SAP") prescribed or
permitted by state insurance  authorities.  The statutory  combined ratio, which
reflects  underwriting  results  but not  investment  income,  is a  traditional
measure of the underwriting performance of a property and casualty insurer. This
ratio  is the sum of (i) the  ratio  of  incurred  losses  and  loss  adjustment
expenses to net earned  premium ("loss  ratio");  and (ii) the ratio of expenses
incurred for commissions,  premium taxes,  administrative and other underwriting
expenses to net written premium ("expense ratio").

                                                   Years ended December 31,
                                        ----------------------------------------
                                              1998           1997         1996
                                        ------------   -----------  ------------
The Company:
SAP Basis
Loss and loss adjustment expense ratio         62.3%          63.0%        62.7%
Expense ratio                                  35.0           32.3         31.6
                                        ============   ===========  ============
Combined ratio                                 97.3%          95.3%        94.3%
                                        ============   ===========  ============


                                                   Years ended December 31,
                                        ----------------------------------------
                                          1998 (1)       1997 (2)       1996 (2)
                                        ------------   -----------  ------------
Property and casualty insurance industry :
SAP Basis
Loss and loss adjustment expense ratio         75.7%          73.4%        78.6%
Expense ratio                                  27.2%          26.6%        26.2%
Dividend ratio                                  1.4%           1.1%         1.1%
                                        ============   ===========  ============
Combined ratio                                104.3%         101.1%       105.9%
                                        ============   ===========  ============

(1)   Source:  Industry  Estimate for the first nine months of 1998,  Best Week,
      P/C Supplement, December 14, 1998 edition, including dividend ratios.
(2)   1997 and 1996, Best Aggregates & Averages - P/C.



Reinsurance

    The Company  purchases  reinsurance  through  contracts called "treaties" to
reduce its exposure to liability on  individual  risks,  and to protect  against
catastrophic  losses.  Reinsurance involves an insurance company transferring or
"ceding"  a  portion  of  its  exposure  on  a  risk  to  another  insurer  (the
"reinsurer").  The reinsurer assumes the exposure in return for a portion of the
premium.  The ceding of liability to a reinsurer does not legally  discharge the
primary  insurer from its liability for the full amount of the policies on which
it obtains  reinsurance.  The primary insurer will be required to pay the entire
loss if the  reinsurer  fails  to meet its  obligations  under  the  reinsurance
agreement.

    In formulating  its  reinsurance  programs,  the Company is selective in its
choice of reinsurers and considers numerous factors, the most important of which
are the  financial  stability of the  reinsurer,  its history of  responding  to
claims and its overall reputation.  In an effort to minimize its exposure to the
insolvency  of its  reinsurers,  the Company  evaluates  the  acceptability  and
                                    Page 14
<PAGE>

reviews the financial condition of each reinsurer annually. The Company's policy
is to use only  reinsurers  that have an A.M. Best rating of "A  (Excellent)" or
better and that have at least $250 million in policyholder surplus.

    The Company's current treaty  reinsurance is with General Re, which is rated
"A++  (Superior)" by A.M.  Best.  Since January 1995, the Company has maintained
net retention  limits of $500,000  (including  indemnity  and/or loss adjustment
expense) for casualty  insurance.  Net retention  limits for property  insurance
were  $300,000 for 1998 and  $200,000  per risk for 1997 and 1996.  The combined
Company retention for any one loss resulting from a common occurrence  involving
both the  property  and  casualty  coverage  on a single risk of  $500,000.  The
Company also  maintains  casualty  contingent  excess  coverage with General Re,
which  covers  exposures  such as punitive  damages and other  extra-contractual
obligations, losses in excess of policy limits (such as bad faith and errors and
omissions)  and  liability  actions  brought  by two or  more  of the  Company's
insureds against each other resulting from the same occurrence.

    For 1998 and 1999,  the  Company  is  covered  for  catastrophe  losses by a
consortium  of  reinsurers  including  General Re, Lloyds and other "A" rated or
better  reinsurers.  Under the terms of the agreement,  the Company  retains the
first $2 million of losses and the  consortium  reinsures  95.0% of the next $23
million,  with the Company  retaining 5.0% of each layer (1st layer, $3 million,
2nd layer, $5 million, 3rd layer, $15 million) within the $23 million.

    The Company may write  individual  risks with limits greater than the treaty
limits on a per policy basis by using facultative  reinsurance.  The facultative
reinsurers must also meet Penn-America's reinsurer guidelines.

The  following  table  reflects  the amount of premiums  written and ceded under
reinsurance treaties:

                                                   Years ended December 31,
                                       -----------------------------------------
                                              1998           1997          1996
                                              ----           ----          ----
                                                         (in  thousands)
Gross written premiums                      $ 95,097     $ 104,694      $ 80,496
Ceded written premiums                         7,268         8,133         7,027

Investments

The Company's  investment policy seeks to maximize  investment income consistent
with the  overriding  objective of maintaining  liquidity and  minimizing  risk.
Approximately  98% of the Company's  fixed income  securities as of December 31,
1998 were rated "A" or better by  Standard & Poor's or an  equivalent  rating by
Moody's.  As of December 31, 1998, the Company's fixed maturity  investments had
an average  duration  of 3.0  years.  Publicly  traded  equity  securities,  the
majority  of which  consisted  of  preferred  stocks,  represented  15.9% of the
Company's investment portfolio as of December 31, 1998.

    As of December 31, 1998, the Company's  investment portfolio contained $31.0
million of mortgage- and  asset-backed  securities.  All of these securities are
"AAA" rated securities issued by government and government-related agencies, are
publicly  traded,  and have market  values  obtained  from an  external  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.  Although the Company is permitted
to invest in other derivative financial  instruments,  real estate mortgages and
real estate, the Company does not participate in these markets and does not have
any such investments in its investment portfolio.
                                    Page 15
<PAGE>

    The  Company's  investment  portfolio is under the direction of the Board of
Directors of Penn-America acting through its Investment Committee (consisting of
Irvin  Saltzman,  Chairman,  Jon  Saltzman  and  Robert  Lear).  The  Investment
Committee establishes and monitors the Company's investment policies,  which are
intended to maximize  after-tax income while maintaining a high level of quality
and  liquidity  in  its  portfolio  for  insurance  operations.  All  investment
transactions must receive approval from the Chairman of the Investment Committee
prior to their initiation by the Company's outside investment advisors.

    The Investment  Committee retained New England Asset Management  ("NEAM"), a
subsidiary  of Gen Re to  manage  its fixed  income  portfolio  and Carl  Domino
Associates,   L.P.  ("CDA"),  a  registered  investment  advisor,  to  recommend
purchases and sales for the equity portfolio.

The following table shows the  classifications  of the Company's  investments at
December 31, 1998:
<TABLE>
<CAPTION>

                                                                                        Amount
                                                                                       reflected
                                                                       Fair           on balance        Percent of
                                                                       value             sheet            total
                                                                   --------------   ----------------    -------------
                                                                      <C>              <C>               <C>
                                                                                    (in thousands)
<S>
Fixed maturities:
    Available for sale:
      U.S. Treasury securities and obligations of
         U.S. government agencies                                    $ 5,661            $ 5,661               3.6%
      Corporate securities                                            29,748             29,748              18.7%
      Mortgage-backed securities                                      10,167             10,167               6.4%
      Other structured securities                                     15,737             15,737               9.9%
      Municipal                                                       35,919             35,919              22.6%
      Public Utilities                                                 8,366              8,366               5.3%
                                                                   --------------   ---------------     -------------
      Total                                                          105,598            105,598              66.5%
                                                                   --------------   ---------------     -------------

    Held to maturity:
      U.S. Treasury securities and obligations of
         U.S. government agencies                                     11,194             11,046               7.0%
      Corporate securities                                             9,496              9,396               5.9%
      Mortgage-backed securities                                       5,158              5,123               3.2%
      Municipal                                                          403                399               0.3%
      Public utilities                                                 1,019                992               0.6%
                                                                   --------------   ---------------     --------------
      Total                                                           27,270             26,956              17.0%

                                                                   --------------   ----------------    -------------
Total fixed maturity securities                                      132,868            132,554              83.5%
                                                                   --------------   ----------------    -------------

Equity securities:
      Common stock                                                     8,112              8,112               5.1%
      Preferred stock                                                 17,126             17,126              10.8%
                                                                   --------------   ---------------     -------------
      Total equity investments                                        25,238             25,238              15.9%
                                                                   --------------   ---------------     -------------

Short-term investments                                                   997                997               0.6%
                                                                   ==============   ===============     =============
      Total investments                                             $159,103           $158,789             100.0%
                                                                   ==============   ===============     =============

</TABLE>
                                    Page 16
<PAGE>


    The following table sets forth the composition of the Company's portfolio of
fixed maturity investments by rating at December 31, 1998:

                                            Amortized   Percentage    Cumulative
                                               Cost    of portfolio   percentage
                                         ---------------------------------------
                                                        (in thousands)
            Ratings (1)
-------------------------------------------

AAA (including U.S. government obligations)   $73,219       56.2 %        56.2 %
AA                                             20,674       15.9          72.1
A                                              33,420       25.6          97.7
BBB                                             3,008        2.3         100.0
                                         ---------------------------------------
                               Total         $130,321      100.0 %       100.0 %
                                         =======================================



(1)   Ratings are  assigned  primarily  by Standard & Poor's with the  remaining
      ratings  assigned by Moody's and  converted to the  equivalent  Standard &
      Poor's ratings.


    The  following  table sets forth the net  investment  income  results of the
Company for each of the years in the periods indicated:
                                           1998             1997           1996
                                          ------           ------        ------
                                                (in thousands)

Interest on fixed maturities                $8,921        $ 7,506        $ 6,108
Dividends on equity securities               1,528          1,123            691
Interest on short-term
    investments and cash                       732            852            380
Other                                            2             42             61
                                     -------------------------------------------
Total investment income                     11,183          9,523          7,240
Investment expense                           (420)          (305)          (535)
                                     -------------------------------------------
Net investment income                      $10,763        $ 9,218        $ 6,705
                                     ===========================================

Competition

    The property  and  casualty  insurance  industry is highly  competitive  and
includes several thousand insurers, ranging from large companies offering a wide
variety of products  worldwide  to smaller,  specialized  companies  in a single
state or region and  offering in some cases only a single  product.  The Company
competes  with a  significant  number of these  insurers in  attracting  quality
general agents and in selling insurance products. Many of the Company's existing
or potential  competitors are larger,  have  considerably  greater financial and
other resources,  have greater  experience in the insurance industry and offer a
broader line of insurance  products than the Company.  In commercial  lines, the
Company competes with excess and surplus lines and specialty  admitted  insurers
including  Scottsdale  Insurance  Company (part of Nationwide  Mutual  Insurance
Company),  Essex Insurance  Company  (Markel  Corporation),  Nautilus  Insurance
Company (W.R.  Berkley  Corporation),  Acceptance  Insurance Company and Western
World Insurance  Company.  The Company also competes with new forms of insurance
organizations  (such as risk retention  groups) and  alternative  self-insurance
mechanisms.  The Company  believes that in order to be successful in its market,
it must be aware of pricing cycles,  must be able to minimize the impact of such
cycles  through tight  expense  control and superior  customer  service and must
continually identify profitable opportunities. Other competitive factors include
ratings by A.M.  Best,  pricing and  admitted  versus  excess and surplus  lines
status in a given state.
                                    Page 17
<PAGE>

Regulation

    General.  The Company is subject to regulation under the insurance  statutes
and regulations,  including  insurance holding company statutes,  of the various
states in which it does  business.  These  statutes  are  generally  designed to
protect the interests of insurance policyholders, as opposed to the interests of
stockholders, and they relate to such matters as the standards of solvency which
must be met and  maintained;  the  licensing of insurers and their  agents;  the
nature and limitations of investments; deposits of securities for the benefit of
policyholders;  approval of policy forms and premium rates; periodic examination
of the affairs of insurance  companies;  annual and other reports required to be
filed  on  the   financial   condition  of  insurers  or  for  other   purposes;
establishment and maintenance of reserves for unearned premiums and losses;  and
requirements regarding numerous other matters. All insurance companies must file
annual  statements  with certain  state  regulatory  agencies and are subject to
regular  and  special  financial   examinations  by  those  agencies.  The  last
regulatory financial examination of Penn-America Insurance Company was completed
by the Pennsylvania  Insurance Department in 1995, covering the five-year period
ended December 31, 1994, and for Penn-Star  Insurance Company in 1997,  covering
its initial licensing by the Department.

    Since 1993, Penn-America Insurance Company has maintained an "A (Excellent)"
rating from A.M. Best Company, Inc. ("A.M. Best"), which rating was reaffirmed 
by A.M. Best on August 31, 1998, and  included Penn-Star as  a  pooled  rating. 
A.M.  Best's  ratings are  based  upon  factors  of  concern  to policyholders, 
including  financial  condition  and  solvency,  and  are  not  directed  to the
protection of investors.

    Penn-America  Insurance Company and Penn-Star Insurance Company combined are
licensed  as an  admitted  insurer  in 34 states and are  approved  non-admitted
(excess and surplus  lines)  insurer in the other 16 states and the  District of
Columbia as of December 31, 1998.  All  insurance  is written  through  licensed
agents and brokers.  In states in which the Company  operates on a  non-admitted
basis,  general agents and their retail insurance brokers generally are required
to certify that a certain number of licensed  admitted insurers will not write a
particular risk prior to placing that risk with the Company.

    Insurance  Holding  Company  Laws.  Pennsylvania,  the  Companies'  state of
domicile,  has laws  governing  insurers and insurance  holding  companies.  The
Pennsylvania statutes generally require insurers and insurance holding companies
to register and file reports  concerning  their  capital  structure,  ownership,
financial  condition and general  business  operations.  Under the  statutes,  a
person must generally obtain the Pennsylvania Insurance Department's approval to
acquire,  directly  or  indirectly,  10%  or  more  of  the  outstanding  voting
securities  of the Company or any of its  insurance  company  subsidiaries.  The
insurance department's  determination of whether to approve any such acquisition
is based on a variety of factors,  including  an  evaluation  of the  acquirer's
financial  condition,  the competence of its management and whether  competition
would be reduced. All transactions within a holding company's group affecting an
insurer must be fair and reasonable,  and the insurer's  policyholders'  surplus
following  any such  transaction  must be both  reasonable  in  relation  to its
outstanding  liabilities  and  adequate  for its  needs.  Notice  to  applicable
regulators  is  required  prior  to the  consummation  of  certain  transactions
affecting insurance subsidiaries of the holding company group.
                                    Page 18

<PAGE>


    Dividend  Restrictions.  As an insurance holding company,  PAGI is primarily
dependent on dividends and other permitted payments from Penn-America to provide
cash for the payment of any cash dividends to its  stockholders.  The payment of
dividends to PAGI by  Penn-America  and to Penn-America by Penn-Star are subject
to state regulations,  primarily the insurance laws of Pennsylvania.  Generally,
these laws  provide  that,  unless prior  approval is  obtained,  dividends of a
property and casualty insurance company in any consecutive 12-month period shall
not exceed the greater of 100% of its  statutory  net income for the most recent
calendar year or 10% of its statutory policyholders' surplus as of the preceding
year end. The maximum annual  dividends  payable by  Penn-America  without prior
approval in 1999 is approximately $9.5 million.  Penn-America paid a dividend of
approximately  $8.0  million to PAGI in 1998.  Insurance  regulators  have broad
powers to prevent reduction of statutory surplus to inadequate levels, and there
is no assurance  that  dividends  of the maximum  amounts  calculated  under any
applicable formula would be permitted.

    During  1998,  the Board of  Directors  of PAGI  approved a corporate  stock
repurchase plan. Initially, up to 1 million shares were authorized by the Board.
Subsequently, in February 1999, an additional 500,000 shares were authorized for
a total of 1.5 million shares  authorized by the Board. As of December 31, 1998,
542,325  shares were  acquired by the  Company at a cost of  approximately  $5.6
million.  As of March 15, 1999, an additional  666,000 shares have been acquired
by the Company.

    Insurance  Guaranty Funds.  Under  insolvency or guarantee laws in states in
which  Penn-America  is  licensed  as an  admitted  insurer  and in New  Jersey,
organizations  have been established  (often referred to as guaranty funds) with
the authority to assess admitted insurers up to prescribed limits for the claims
of policyholders  insured by insolvent,  admitted insurance  companies.  Surplus
lines  insurance  companies are generally not subject to such  assessments,  but
neither are their  policyholders  eligible to file claims  against the  guaranty
funds, except in New Jersey.

    Additional  Legislation or Regulations.  New regulations and legislation are
proposed from time to time to limit damage  awards,  to bring the industry under
regulation by the federal government,  to control premiums,  policy terminations
and other policy terms,  and to impose new taxes and  assessments.  Difficulties
with  insurance   availability  and  affordability  have  increased  legislative
activity at both the  federal  and state  levels.  Some state  legislatures  and
regulatory  agencies have enacted  measures,  particularly in personal lines, to
limit midterm  cancellations  by insurers and require  advance notice of renewal
intentions. In addition,  Congress is investigating possible avenues for federal
regulation of the insurance industry.


Employees

    The Company has approximately 105 employees.  The Company is not a party to
any  collective bargaining agreements  and believes that its employee relations 
are good.

                                    Page 19


<PAGE>


ITEM 2.              PROPERTIES

    The Company leases  approximately  23,000 square feet in an office  building
located  in  Hatboro,   Pennsylvania.  The  office  building  also  houses  Penn
Independent  and its  subsidiaries.  The Company leases the space from Mr. Irvin
Saltzman, Chairman of the Board of Directors of the Company, pursuant to a lease
agreement  which  expires on June 30, 2000,  and  provides for an annual  rental
payment of approximately $281,112,  which amount is considered by the Company to
be at fair  market  value.  The lessee has the option to renew the lease for one
additional five year period at the expiration of the original term of the lease.


ITEM 3.             LEGAL PROCEEDINGS

    The Company is subject to routine legal  proceedings in the normal course of
operating  its  insurance  business.  The  Company is not  involved in any legal
proceedings which reasonably could be expected to have a material adverse effect
on the Company's business, results of operations or financial condition.


ITEM 4.             SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    No matter  was  submitted  during  the  fourth  quarter of 1998 to a vote of
holders of the Company's Common Stock.
                                    Page 20

<PAGE>


                                  PART II

ITEM 5.           MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED 
                  STOCKHOLDER MATTERS

    The "Market for Common Stock and Related Security Holder Matters" section on
page 31 of the  Company's  annual  report  to  stockholders  for the year  ended
December 31,  1998,  which is included as Exhibit (13) to this Form 10-K Report,
is incorporated herein by reference.


ITEM 6.           SELECTED FINANCIAL DATA

    The  "Selected  Consolidated  Financial  Data"  section  on  page  8 of  the
Company's  Annual Report to  stockholders  for the year ended December 31, 1998,
which is  included as Exhibit  (13) to this Form 10-K  Report,  is  incorporated
herein by reference.


ITEM 7.         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
                RESULTS OF OPERATIONS

    The  "Management's  Discussion  and  Analysis of Results of  Operations  and
Financial  Condition" section on pages 9 to 17 of the Company's Annual Report to
stockholders  for the year ended December 31, 1998, which is included as Exhibit
(13) to this Form 10-K Report, is incorporated herein by reference.


ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The  consolidated  financial  statements  on pages 18 to 30 of the Company's
Annual Report to  stockholders  for the year ended  December 31, 1998,  which is
included as Exhibit (13) to this Form 10-K Report,  are  incorporated  herein by
reference.

ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE

    None.

                                    Page 21

<PAGE>


                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The  Director's  information  will be contained in the Company's  definitive
Proxy   Statement   with  respect  to  the  Company's  1999  Annual  Meeting  of
Shareholders, to be filed with the Securities and Exchange Commission within 120
days following the end of the Company's fiscal year, and is hereby  incorporated
by reference thereto.

    Executive Officers of the Registrant as of March 12, 1999 are as follows:

Irvin Saltzman                 76         Chairman of the Board of Directors of 
                                          PAGI and Penn-America

Jon S. Saltzman                41         President and Chief Executive Officer
                                          of PAGI and Penn-America, and Director

Rosemary R. Ferrero, CPA       43         Vice  President-Finance, and Treasurer
                                          of PAGI,  Vice  President,  and Chief 
                                          Financial  Officer of Penn-America

John M. DiBiasi, CPCU          44         Executive Vice President,Underwriting 
                                          and Marketing of Penn-America

Garland P. Pezzuolo            34         Secretary and General Counsel

ITEM 11.          EXECUTIVE COMPENSATION

    This  information  will  be  contained  in the  Company's  definitive  Proxy
Statement with respect to the Company's 1999 Annual Meeting of Shareholders,  to
be filed with the Securities and Exchange  Commission  within 120 days following
the end of the Company's  fiscal year, and is hereby  incorporated  by reference
thereto.


ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                  AND MANAGEMENT

    This  information  will  be  contained  in the  Company's  definitive  Proxy
Statement with respect to the Company's 1999 Annual Meeting of Shareholders,  to
be filed with the Securities and Exchange  Commission  within 120 days following
the end of the Company's  fiscal year, and is hereby  incorporated  by reference
thereto.


ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    This  information  will  be  contained  in the  Company's  definitive  Proxy
Statement with respect to the Company's 1999 Annual Meeting of Shareholders,  to
be filed with the Securities and Exchange  Commission  within 120 days following
the end of the Company's  fiscal year, and is hereby  incorporated  by reference
thereto.
                                    Page 22

<PAGE>



                                     PART IV

ITEM 14.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
                  REPORTS ON FORM 8-K

a.)  The following consolidated  financial  statements,  financial  statement 
     schedules and exhibits are filed as part of this report:

  1.  Consolidated Financial Statements
                                                                        Page*
                                                                  --------------

        Consolidated Balance Sheets at December 31, 1998 and 1997            18
        Consolidated Statements of Earnings for the years ended
          December 31, 1998, 1997, and 1996                                  19
        Consolidated  Statements  of  Stockholders'  Equity for
          the years ended  December 31, 1998, 1997, and 1996                 20
        Consolidated Statements of Cash Flows for the years ended
          December 31, 1998, 1997, and 1996                                  21
        Notes to Consolidated Financial Statements                         22-29
        Independent Auditors' Report                                         30

    The following consolidated financial statement schedules for the years 1998,
1997 and 1996 are submitted herewith:

   2.  Financial Statement Schedules

        Schedule I.       Summary of Investments - Other Than Investments in 
                          Related Parties
        Schedule II.      Condensed Financial Information of Parent Company
        Schedule III.     Supplementary Insurance Information
        Schedule IV       Reinsurance
        Schedule VI.      Supplemental Insurance Information Concerning Property
                          and Casualty Subsidiaries
       Independent Auditors' Consent and Report on Schedules 
       (filed as Exhibit 23).

                  All  other   schedules  are  omitted   because  they  are  not
applicable or the required  information is included in the financial  statements
or notes thereto.

        EPS - Statement if not included in notes to financial statements.

---------------
*Refers to the  respective pages of Penn-America Group's 1998  Annual  Report to
Stockholders attached as Exhibit (13). The Consolidated Financial Statements and
Independent  Auditors'  Report on  pages 18 to  30 are  incorporated  herein by 
reference.   With  the  exception  of  the  portions  of  such  Annual  Reports 
specifically incorporated by reference  in this Item and Items 5,6,7 and 8, such
Annual Report  shall not be deemed  filed as part of this Form 10-K or otherwise
subject  to the liabilities of section 18 of the Securities and Exchange Act of
1934.
                                    Page 23
<PAGE>


                                  Exhibit Index
Exhibit No.       Description

    3.1           Articles of Incorporation of the Registrant.  Incorporated by
                  reference to  Exhibit 3.1 to  the Registrant's Registration
                  Statement on Form S-1 (No. 33-66892) filed with the Securities
                  and Exchange Commission on August 2, 1993.

    3.2           Bylaws of the Registrant. Incorporated by reference to Exhibit
                  3.2 to the Registrant's  Registration  Statement  on  Form S-1
                 (No.33-66892) filed with the Securities and Exchange Commission
                  on August 2, 1993.

   10.2           Agency Agreement  between  Penn-America    Insurance   Company
                  ("Penn-America") and Carnegie General Agency.  Incorporated by
                  reference  to Exhibit 10.2 to the  Registrant's  Registration 
                  Statement on Form S-1 (No. 33-66892) filed with the Securities
                  and Exchange Commission on August 2, 1993.

   10.2(a)        Amended Carnegie Agreement, effective March 1, 1998, filed 
                  with the Registrant's report on Form 10-K for the period ended
                  December 13, 1997, which has been filed with the Securities 
                  and Exchange Commission.

   10.3           1993  Casualty  Excess  of  Loss  Reinsurance  Agreement with
                  National Reinsurance Corporation. Incorporated by reference to
                  Exhibit 10.3 to the Registrant's Registration Statement on 
                  Form S-1 (No. 33-66892) filed with the Securities and Exchange
                  Commission on August 2, 1993.

   10.3(i)        Endorsement  Nos. 4 through  6 (Termination   Endorsement) to 
                  Casualty Excess of Loss  Reinsurance Agreement  with  National
                  Reinsurance Corporation.  Filed with Registrant's Report on 
                  Form 10-K for the period  ended   December 31, 1995  which has
                  been filed with the Securities and Exchange Commission.

   10.4           1993 Underlying Homeowners and Dwelling Fire Property Per Risk
                  Excess of Loss  Reinsurance   (Run-off   Business)  Agreement 
                  with  National  Reinsurance  Corporation.  Incorporated  by
                  reference  to  Exhibit   10.4  to  the   Registrant's
                  Registration  Statement  on Form S-1  (No.  33-66892) filed
                  with the Securities and Exchange Commission on August 2, 1993.

   10.5           1993 Property Per Risk Excess of Loss (Commercial) Reinsurance
                  Agreement with Employers Reinsurance Corporation. Incorporated
                  by reference to Exhibit 10.5 to the Registrant's  Registration
                  Statement on Form S-1 (No 33-66892) filed with the Securities 
                  and Exchange Commission on August 2, 1993.

   10.5(i)        Endorsement No. 3 to  Property  Per  Risk of  Excess  Loss 
                  (Commercial) Reinsurance Agreement with Employers Reinsurance 
                  Corporation. Filed with the Registrant's Report On Form 10-K  
                  for the period ending  December 31, 1994 which has been filed
                  with the Securities and Exchange Commission.

                                    Page 24
<PAGE>



Exhibit No.       Description

   10.6           1993 Property Catastrophe Excess Reinsurance  Agreement  with 
                  Employers Reinsurance Corporation. Incorporated  by  reference
                  to Exhibit  10.6 to the  Registrant's  Registration  Statement
                  on Form S-1 (No.  33-66892)  filed  with  the  Securities and 
                  Exchange Commission on August 2, 1993.

   10.6(i)        Endorsement No. 6 to Property Catastrophe  Excess Reinsurance 
                  Agreement with Employers Reinsurance Corporation.  Filed with
                  the Registrant's Report  on Form 10-K for  the period  ending 
                  December 31, 1994 which has been filed with the Securities and
                  Exchange Commission.

   10.6(ii)       Stipulation of  Termination of  Property  Catastrophe  Excess 
                  Reinsurance Agreement with Employers Reinsurance Corporation 
                  effective January 1, 1995. Filed with the Registrant's Report 
                  on Form 10-K for the period ending December 31, 1994 which has
                  been filed with the Securities and Exchange Commission.

   10.7           Agreement  dated  August  20, 1993,  between  Penn Independent
                  Corporation ("Penn Independent") and the Registrant regarding 
                  the reimbursement of certain  employment costs.  Incorporated 
                  by  reference  to Exhibit 10.7 to Amendment  No. 1 to  the  
                  Registrant's Registration Statement on Form S-1 (No. 33-66892)
                  filed with the  Securities  and  Exchange Commission on August
                  26, 1993.

   10.7(i)        Amendment, effective January 1,  1995, to  August  20,  1993,
                  Agreement between Penn Independent and Registrant regarding 
                  the sharing of certain  operating  costs. Filed  with
                  Registrant's Report on Form 10-K for the period ended December
                  31, 1995 which has been filed with the Securities and Exchange
                  Commission.

   10.7(ii)       Amendments  dated  January  1, 1996  and  March  1,  1996, to
                  August 20,  1993  Agreement  between Penn  Independent  and
                  Registrant  regarding   the  sharing  of   certain  operating 
                  costs.  Filed with  Registrant's  Report on Form 10-K for the
                  period ended December 31, 1996, which has been filed with the 
                  SEC.

   10.7(iii)      Amendment  dated  March 1, 1997 to August  20,  1993 Agreement
                  between Penn  Independent and Registrant regarding the sharing
                  of certain  operating  costs, filed with  Registrant's  Report
                  on Form 10-K for the period ended December 31, 1997, which has
                  been filed with the Securities and Exchange Commission.

   10.7(iv)       Amendment dated January 1, 1999 to August 20, 1993 Agreement 
                  between Penn Independent and Registrant regarding the sharing
                  of certain operating costs.
                                    Page 25


<PAGE>


Exhibit No.       Description

   10.9           Restated Investment Advisory Agreement effective July 1, 1990
                  between Penn America and Carl Domino Associates, L.P. 
                  Incorporated by reference to Exhibit 10.9 to the Registrant's
                  Registration Statement on Form S-1 (No. 33-66892) filed with 
                  the Securities and Exchange Commission on August 2, 1993.

   10.9(i)        Amended  Investment  Advisory  Agreement  effective September
                  1, 1997,  between  and among  Penn-America,  its subsidiary, 
                  Penn-Star and  Carl Domino  Associates, L.P.  filed  with  the
                  Registrant's   Report  on  Form  10-K for the period  ending 
                  December 31, 1997,  which was filed with the SEC.

   10.9(ii)       Agreement dated April 15, 1997, between and among General Re,
                  New England  Asset  Management, Inc.,  Penn-America,  and  its
                  subsidiary, Penn-Star  filed  with the Registrant's Report on 
                  Form  10-K for the  period ending December 31, 1997, which was
                  filed with the SEC.

   10.10          1993 Stock Incentive Plan.  Incorporated by reference to 
                  Exhibit 10.10 to Amendment No. 4 to the Registrant's 
                  Registration Statement on Form S-1 (No.33-66892)filed with the
                  Securities and Exchange Commission on September 29, 1993.

   10.10(i)       Penn-America Group, Inc. 1993 Stock Incentive Plan, as amended
                  and restated April 4, 1994.  Incorporated by reference to 
                  Exhibit 4.1 to the Registrant's Registration Statement on Form
                  S-8 (No. 33-82728) filed with the Securities and Exchange
                  Commission on August 11, 1994.

   10.11(ii)      Lease effective June 30, 1995 between Registrant and Irvin
                  Saltzman. Filed with Registrant's Report on Form 10-K for the
                  period ended December 31, 1995 which has been filed with  the
                  Securities and Exchange Commission.

   10.12          Demand  Promissory  Note dated  January 12, 1993  from   Penn
                  Independent   Financial    Services,  Inc. to   Penn-America. 
                  Incorporated by reference to Exhibit 10.12 to the Registrant's
                  Registration  Statement on  Form S-1 (No. 33-66892) filed with
                  the Securities and Exchange Commission on August 26, 1993.

   10.13          Promissory Note dated December 29, 1993 from the Registrant to
                  Penn Independent. Filed with Registrant's Report on Form 10-K 
                  for the period ended December 31, 1995  which has  been  filed
                  with the Securities and Exchange Commission.

   10.13(i)       Amendment No.1 dated November  30, 1995, to Demand Promissory 
                  Note dated January 12, 1993 from  Penn  Independent  Financial
                  Services, Inc. to Penn-America.  Filed  with the  Registrant's
                  Report on Form 10-K for the period ended December 31, 1996 
                  which  has  been  filed  with  the  Securities  and  Exchange 
                  Commission.

   10.14          1995  Multiple Line  Excess  of  Loss (Casualty and Property) 
                  Reinsurance Agreement with  National  Reinsurance Corporation.
                  Filed with Registrant's Report on Form 10-K for the period 
                  ended  December  31, 1995  which  has  been  filed  with the
                  Securities and Exchange Commission.
                                    Page 26
<PAGE>

Exhibit No.       Description

   10.14(i)       Endorsement   No. 1 to  Multiple   Line   Excess  of  Loss
                  Reinsurance  Agreement with  National Reinsurance Corporation,
                  effective as of January 1,1995. Filed with Registrant's Report
                  on Form 10-K for the period ended December 31, 1995 which has
                  been filed with the Securities and Exchange Commission.

   10.14(ii)      Endorsement   No. 2  to   Multiple   Line   Excess  of  Loss
                  Reinsurance  Agreement with  National Reinsurance Corporation,
                  effective as of January 1,1995. Filed with Registrant's Report
                  on Form 10-K for the period ended December 31, 1995 which  has
                  been filed with the Securities and Exchange Commission.

   10.14(iii)     1996 Property & Liability Reinsurance Agreement with GeneralRe
                  Corporation effective May 1, 1996. Filed with the Registrant's
                  Report on Form 10-K for the period  ended  December  31, 1996 
                  which has been filed with the Securities and Exchange
                  Commission.

   10.15          1995 Property Catastrophe Excess of Loss Reinsurance Agreement
                  with the subscribing Reinsurers. Filed with the Registrant's 
                  Report on Form 10-K for the period ending December 31, 1994 
                  which has been filed with the Securities and Exchange 
                  Commission.

   10.15(i)       1996 Property Catastrophe Excess of Loss Reinsurance Agreement
                  with the subscribing  Reinsurers. Filed with the Registrant's 
                  Report on Form 10-K for  the period ended December  31, 1996
                  which  has been  filed  with the  Securities  and Exchange  
                  Commission.

   10.16          Penn-America  Group,  Inc. 1995  Key  Employee  Incentive 
                  Compensation Plan, incorporated as Part  I  to  Registrant's 
                  Registration Statement on Form S-8 (No. 333-00050) filed with
                  the Securities and Exchange Commission on January 4, 1996.

   10.17          Penn-America Insurance Company's Agency Award and Profit 
                  Sharing Plan, incorporated as  Exhibit  4  to  Registrant's 
                  Registration Statement on Form S-3 (No. 333-00046) filed with 
                  the Securities and Exchange Commission on January 4, 1996.

   10.17(i)       Penn-America Insurance Company's Agency Award  and  Profit
                  Sharing  Plan,  attached  as Exhibit  4  to Registrant's 
                  Registration Statement on Form S-3 (No. 333-49055) filed with
                  the SEC on March 31, 1998.

   10.18          Stipulation  of Termination of Property and Liability
                  Reinsurance  Agreement with  National Reinsurance Coproration
                  effective  May 1, 1996.  Filed with the Registrant's Report on
                  Form 10-K for the period ended December  31,  1996  which  has
                  been  filed  with the Securities and Exchange Commission.

   13             1998 Annual Report to Shareholders.

   21             As of December 31, 1997, the Registrant's only subsidiary is
                  Penn-America Insurance Company, a Pennsylvania Corporation.
                                    Page 27
<PAGE>

Exhibit No.       Description

   23             Independent Auditor's Consent and Report on Schedules


   28.1           Loan and Security  Agreement,  Term  Note and  Stock  Pledge
                  Agreement  dated  December  20, 1995  between Registrant and 
                  PNC Bank (successor to Midlantic Bank, N.A). Filed with the 
                  Registrant's  Report on Form  10-K  for  the  period  ending 
                  December 31,1995 which has been filed  with the Securities and
                  Exchange Commission.

   28.2           Credit Agreement among Registrant, Certain Lenders and  First 
                  Union National Bank dated September 28, 1998


   30.0           Reinsurance Pooling Agreement  between  Penn-America Insurance
                  Company and  Penn-Star  Insurance  Company dated July 1, 1998.


                                    Page 28

<PAGE>
<TABLE>
<CAPTION>

                                                                            PENN-AMERICA GROUP, INC.
                                                Schedule I - Summary of Investments - Other than Investments in Related Parties
                                                                                 (in thousands)

                                                                                    December 31, 1998
                                                             --------------------------------------------------------------------
                                                                    Amortized                                   Amount shown on
                                                                      Cost                Fair Value             Balance Sheet
                                                                ------------------     -----------------      ---------------------
<S>                                                                   <C>                 <C>                      <C>
Fixed maturities:

Available for sale
      U.S. treasury securities and obligations of
        U.S. government agencies                                          $ 5,512                $ 5,661                $ 5,661
      Corporate securities                                                 28,725                 29,748                 29,748
      Mortgage-backed securities                                           10,074                 10,167                 10,167
      Other structured securities                                          15,668                 15,737                 15,737
      Municipal                                                            35,295                 35,919                 35,919
      Public Utilities                                                      8,091                  8,366                  8,366
                                                                ------------------     -----------------       -----------------
      Total available for sale                                            103,365               105,598                 105,598
                                                                ------------------     -----------------       -----------------

Held to maturity
      U.S. treasury securities and obligations of
        U.S. government agencies                                           11,046                 11,194                 11,046
      Corporate securities                                                  9,396                  9,496                  9,396
      Mortgage-backed securities                                            5,123                  5,158                  5,123
      Municipal                                                               399                    403                    399
      Public Utilities                                                        992                  1,019                    992
                                                                ------------------     -----------------       -----------------
      Total held to maturity                                               26,956                27,270                  26,956
                                                                ------------------     -----------------       -----------------
     Total fixed maturities                                               130,321               132,868                 132,554
                                                                ------------------     -----------------       -----------------

Equity securities:
      Common stock                                                          6,556                 8,112                   8,112
      Preferred stock                                                      16,802                17,126                  17,126
                                                                                       -----------------       -----------------
                                                                ------------------
      Total equity investments                                             23,358                25,238                  25,238
                                                                ------------------     -----------------       -----------------

Short term investments:                                                       997                   997                     997
                                                                ------------------                             -----------------
                                                                ==================     =================       =================
      Total investments                                                 $ 154,676             $ 159,103               $ 158,789
                                                                ==================     =================       =================

</TABLE>
                                    Page 29


<PAGE>



                            PENN-AMERICA GROUP, INC.
         Schedule II--Condensed Financial Information of Parent Company
                            Condensed Balance Sheets
                        (in thousands except share data)



                                                    December 31,
                                          -------------------------------------
                                                  1998                 1997
                                           ----------------     ----------------
ASSETS                            
     Cash                                         $    316            $   1,516
     Short-term investments                            997                  ---
     Investment in subsidiary, equity method        98,355               95,390
     Other assets                                      962                  594
                                           ================     ================
           Total assets                           $100,630             $ 97,500
                                           ================     ================

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
     Accounts payable and accrued expenses           $ ---                $ 193
                                            ---------------     ----------------

                                           ----------------     ----------------
                                           ----------------     ----------------
            Total liabilities                       $  ---                $ 193
                                           ----------------     ----------------

Stockholders' equity:
     Preferred stock, $ .01 par value;
      authorized 2,000,000 shares; none issued
     Common  stock,  $.01 par  value;  
      authorized  20,000,000  in 1998 and 1997;
      issued and outstanding  1998;  9,938,179;  
      and 9,395,854  respectively; issued and
      outstanding 1997; 9,883,384 shares                99                   99
     
     Additional paid-in capital                     69,035               68,221
     Accumulated Other comprehensive income          2,714                1,649
     Treasury stock, 542,325 shares, at cost        (5,643)                 ---
     Retained earnings                              34,779               27,849
                                           ----------------     ----------------
                                                   100,984               97,818
     Unearned compensation from restricted
       stock awards                                   (354)                (511)
                                           ----------------     ----------------
         Total stockholders' equity                100,630               97,307
                                           ----------------     ----------------
         Total liabilities and stockholders' 
            equity                                $100,630             $ 97,500
                                           ================     ================


                                    Page 30
<PAGE>
<TABLE>
<CAPTION>



                                              PENN-AMERICA GROUP, INC.
                           Schedule II--Condensed Financial Information of Parent Company
                                          Condensed Statements of Earnings
                                        (in thousands except per share data)


                                                                               Years ended December 31,
                                                                   --------------------------------------------------
                                                                       1998               1997              1996
                                                                   -------------      -------------     -------------
<S>                                                                   <C>                <C>             <C>                 
Dividend income                                                       $7,950            $ 1,555           $ 3,258
Other                                                                     65                122                10
Operating expenses                                                    (1,532)            (1,636)           (1,653)
Income tax benefit                                                       499                539               552
                                                                   -------------      -------------     -------------
Income before equity in undistributed
     net income of subsidiary                                          6,982                580             2,167
Equity in undistributed net earnings
     of subsidiary                                                     1,899              9,065             4,826
                                                                   -------------      -------------     -------------

Net earnings                                                          $8,881            $ 9,645           $ 6,993
                                                                   =============      =============     =============

Net earnings per share
    Basic                                                              $0.91             $ 1.19            $ 1.05
    Diluted                                                            $0.90             $ 1.17            $ 1.04
Weighted average number of shares used in calculating
    per share data
    Basic                                                              9,766              8,126            6,663
    Diluted                                                            9,873              8,228            6,743

Cash dividends per share                                               $0.20             $ 0.16            $ 0.11
                                                                   =============      =============     =============
</TABLE>
                                    Page 31



<PAGE>
<TABLE>
<CAPTION>

                                                                            PENN-AMERICA GROUP, INC.
                                                        Schedule II - Condensed Financial Information of Parent Company
                                                                       Condensed Statements of Cash Flows
                                                                                 (in thousands)


                                                                                                       Years ended
                                                                                                       December 31,
                                                                                       ---------------------------------------------
                                                                                          1998            1997            1996
                                                                                          ----            ----            ----
<S>                                                                                        <C>             <C>             <C.
Cash flows from operating activities:
     Net earnings                                                                          $8,881        $ 9,645          $6,993
     Adjustments to reconcile net earnings to net
         cash provided by operating activities:
     Equity in undistributed net earnings of subsidiary                                    (1,899)        (9,065)         (4,826)
     Increase (decrease) in :
         Accounts payable and accrued expenses                                              (193)            (22)            (54)
         Other, net                                                                         (522)           (200)           (352)
         Amortization                                                                        309             221             133

                                                                                     
                                                                                      -------------   -------------   --------------
            Net cash provided by operating activities                                      6,576             579           1,894
                                                                                      -------------   -------------   --------------

Cash flows from financing activities:
     Repayment of notes payable                                                               ---         (9,000)         (1,150)
     Issuance of common stock (net of expenses)                                               815         45,897             259
     Purchase of treasury stock                                                            (5,643)           ---             ---
     Dividends paid                                                                        (1,951)        (1,329)           (711)
                                                                                       ------------   -------------   --------------
            Net cash (used)provided by financing activities                               (6,779)        35,568          (1,602)
                                                                                       ------------   -------------   --------------
Cash flows from investing activities:
     Purchase of short- term investments                                                     (997)           ---             ---
     Equity contributions to subsidiary                                                       ---        (35,000)            ---
                                                                                       -----------   --------------   --------------
            Net cash (used) by investing activities                                          (997)        (35,000)            ---
                                                                                       -----------   --------------   --------------

(decrease) increase in cash                                                                (1,200)         1,147             292

Cash, beginning of period                                                                   1,516            369              77

                                                                                       ============   =============   ==============
Cash, end of period                                                                        $  316        $ 1,516          $  369
                                                                                       ============   =============   ==============
</TABLE>
Page 32



<PAGE>

<TABLE>
<CAPTION>

                                                                       PENN-AMERICA GROUP, INC.
                                                          Schedule III - Supplementary Insurance Information
                                                             Years Ended December 31, 1998, 1997 and 1996
                                                                            (in thousands)

                                  Liability                                                   Amorrtization
                                 for Unpaid                                                        of
                     Deferred    Losses and                                         Losses      Deferred
                      Policy        Loss                                 Net        and Loss     Policy         Other          Net
                    Acquisition  Adjustment  Unearned     Earned     Investment   Adjustment   Acquisition   Underwriting   Premiums
                       Costs      Expenses   Premiums    Premiums      Income      Expenses       Costs        Expenses      Written
                       -----      -------    --------    --------      ------      --------       -----        --------      -------
<S>                     <C>        <C>       <C>            <C>         <C>          <C>            <C>          <C>          <C>
1998  
Commercial          $ 7,553     $ 69,845     $ 30,625     $ 62,949     $ 4,119     $ 37,121      $ 17,112      $ 1,575     $ 64,283 
Personal              1,175       19,092        3,628       26,544         943       18,612         8,340          207       23,546
Unallocated               -            -            -            -       5,701            -             -        4,607           -
                   ---------    --------     --------      -------      -------    --------      --------       -------     -------
     Total          $ 8,728     $ 88,937     $ 34,253     $ 89,493    $ 10,763     $ 55,733      $ 25,452      $ 6,389     $ 87,829
                   ---------    --------     --------      -------      -------    --------      --------       -------     -------

1997
Commercial          $ 6,449     $ 69,022     $ 29,546     $ 57,189     $ 4,214     $ 32,723      $ 14,327      $ 1,495     $ 60,768
Personal              2,114       15,544        6,627       34,460         774       25,005        10,657          347       35,793
Unallocated               -            -            -            -       4,230            -             -        3,998            -
                   ---------    --------     --------      -------      -------    --------      --------       -------     -------
     Total          $ 8,563     $ 84,566     $ 36,173     $ 91,649     $ 9,218     $ 57,728      $ 24,984      $ 5,840     $ 95,561
                   ---------    --------     --------      -------      -------    --------      --------       -------     -------
1996
Commercial          $ 5,612     $ 63,000     $ 25,570     $ 49,667     $ 3,375     $ 30,887      $ 11,785      $ 1,241     $ 51,768
Personal              1,619        7,728        5,295       19,414         382       12,405         6,000          147       21,701
Unallocated               -            -            -            -       2,948            -             -        2,961            -
                    ---------    --------     --------      -------      -------    --------      --------       -------     ------ 
    Total           $ 7,231     $ 70,728     $ 30,865     $ 69,081     $ 6,705     $ 43,292      $ 17,785      $ 4,349     $ 73,469
                    ---------    --------     --------      -------      -------    --------      --------       -------     ------ 
</TABLE>
                                    Page 33
<PAGE>
<TABLE>
<CAPTION>


                                                                       PENN-AMERICA GROUP, INC.
                                                                       Schedule IV - Reinsurance
                                                             Years Ended December 31, 1998, 1997 and 1996
                                                                            (in thousands)







                                               Ceded to         Assumed                        Percentage
                                                 Other         from Other                    of Assumed to
                               Direct          Companies       Companies      Net Amount          Net
                            --------------   --------------   -------------  -------------   ---------------
<S>                           <C>              <C>               <C>            <C>            <C>                 
          1998
Premiums
    Property and               $  94,831          $7,268            $266        $87,829                0.3%
    liability insurance
                            ==============   ==============   =============  =============   ===============
             Total
    premiums                   $  94,831          $7,268            $266        $87,829                0.3%
                            ==============   ==============   =============  =============   ===============

          1997
Premiums
    Property and
    liability insurance        $ 104,694          $8,133             ---        $96,561              ---
                            ==============   ==============   =============  =============   ===============
             Total
    premiums                   $ 104,694          $8,133             ---        $96,561              ---
                            ==============   ==============   =============  =============   ===============

          1996
Premiums
    Property and
    liability insurance        $  80,496          $7,027             ---        $73,469              ---
                            ==============   ==============   =============  =============   ===============
             Total
    premiums                   $  80,496          $7,027             ---        $73,469              ---
                            ==============   ==============   =============  =============   ===============

</TABLE>

                                    Page 34

<PAGE>

<TABLE>
<CAPTION>

                                                                       PENN-AMERICA GROUP, INC.
                                                      Schedule VI - Supplemental Insurance Information Concerning
                                                                  Property and Casualty Subsidiaries
                                                             Years Ended December 31, 1998, 1997 and 1996
                                                                            (in thousands)



                                      Liability                                 Loss and Loss
                                      for Unpaid         Discount            Adjustment Expenses
                                      Losses and          if Any,            (Benefits) Incurred              Paid Losses
                                         Loss            Deducted                 Related to                    and Loss
                                                                        -------------------------------
                                      Adjustment           from           Current          Prior               Adjustment
                                       Expenses          Reserves           Year            Year                Expenses
                                    ---------------    --------------   -------------   ---------------    -------------------
<S>                                     <C>              <C>               <C>            <C>                 <C>                 
Years Ended
       December 31, 1998                $88,937                           $55,647              $86                $52,161
       December 31, 1997                 84,566                            57,387              341                 44,521
       December 31, 1996                 70,728                            44,096             (804)                34,148


</TABLE>
                                    Page 35
<PAGE>
<TABLE>
<CAPTION>




                                              PENN-AMERICA GROUP, INC.
                                             Exhibit II-- Statement re:
                                Computation of Per Share Basic and Diluted Earnings
                                    Years ended December 31, 1998, 1997 and 1996
                                        (in thousands except per share data)



                                                                               Years ended December 31,
                                                                   --------------------------------------------------
                                                                       1998               1997              1996
                                                                   -------------      -------------     -------------
<S>                                                                   <C>               <C>              <C>
Basic EPS:
Net earnings                                                          $8,881             $9,645            $6,993
                                                                   -------------      -------------     -------------

Weighted average common shares outstanding                             9,766              8,126             6,663
                                                                   -------------      -------------     -------------
Basic EPS                                                              $0.91              $1.19             $1.05
                                                                   -------------      -------------     -------------

Diluted EPS:
Net Earnings                                                          $8,881             $9,645            $6,993
                                                                   -------------      -------------     -------------

Weighted average common shares outstanding                             9,766              8,126             6,663
Additional shares outstanding after the assumed exercise of
    options by applying the treasury stock method                        107                102                80
                                                                   -------------      -------------     -------------
Total                                                                  9,873              8,228             6,743
                                                                   -------------      -------------     -------------
Diluted EPS                                                             $0.90             $1.17              $1.04
                                                                   -------------      -------------     -------------
</TABLE>


                                   

<PAGE>


                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned thereunto duly authorized.


                                               Penn-America Group, Inc.

Date:  March  25, 1999                        By: /s/ Jon S. Saltzman
                                               -------------------
                                               Jon S. Saltzman,
                                               President and Chief Executive
                                               Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been  signed by the  following  persons on behalf of the  Registrant  in the
capacities and on the dates indicated.

/s/ Irvin Saltzman          Chairman of the Board of Directors    March 25, 1999
--------------------        and Director
Irvin Saltzman                    

/s/ Jon S. Saltzman         President, Chief Executive Officer    March 25, 1999
--------------------        and Director (Principle Executive
Jon S. Saltzman              Officer)

/s/ James E. Heerin, Jr.    Director                              March 25, 1999
------------------------
James E. Heerin, Jr.

/s/ Robert A. Lear          Director                              March 25, 1999
------------------------
Robert A. Lear

/s/ Rosemary R. Ferrero     Vice President-Finance and Treasurer  March 25, 1999
------------------------   (Principle Financial Accounting Officer)
Rosemary R. Ferrero              

/s/ Garland P. Pezzuolo     Secretary and General Counsel         March 25, 1999
------------------------
Garland P. Pezzuolo

/s/ Paul Simon              Director                              March 25, 1999
-----------------------
Paul Simon

/s/ Charles Ellman          Director                              March 25, 1999
-----------------------
Charles Ellman

/s/ M. Moshe Porat          Director                              March 25, 1999
-----------------------
M. Moshe Porat

/s/ Jami Saltzman-Levy      Director                              March 25, 1999
------------------------
Jami Saltzman-Levy

/s/ Thomas Spiro            Director                              March 25, 1999
-----------------------
Thomas Spiro


<PAGE>