Penn-America Group, Inc.


Penn-America Group, Inc. [LOGO]




                               2000 Annual Report





<PAGE>


Stock Price

Exchange/Symbol            NYSE/PNG
Closing Price              $7.63
52-Week Range              $6.63 - $9.75
Market Capitalization      $57.7 million
Price/Book Ratio           .78
Dividends  Per Share       $.21
Dividend Yield             2.8%

Balance Sheet

Cash And Investments       $178.7 million
Total Assets               $239.5 million
Stockholders' Equity       $74.1 million
Shares Outstanding         7,576,025
Book Value Per Share       $9.77

Operating Data

Total Revenues             $100.6 million
Operating Loss             $3.0 million
Operating Loss Per Basic
     And Diluted Share     $.39
Net Loss Per Basic And
     Diluted Share         $.50
Net Cash Provided
     By Operations         $15.0 million

As of December 31,2000

                               Net Written Premium
                                  (in Millions)

                    [BAR GRAPH OMITTED see Data Points below]

             Year          Commercial       Personal          Total
             1996           $51,767         $21,702         $73,469
             1997            60,768          35,793          95,561
             1998            64,283          23,546          87,829
             1999            75,573          11,463          87,036
             2000            94,481          2,769           97,250


                                   Book Value
                                    Per Share

                   [BAR GRAPH OMITTED see Data Points below]
                                  (in Dollars)
                                1996          $ 6.34
                                1997            9.85
                                1998           10.71
                                1999           10.00
                                2000            9.77

<PAGE>

Penn-America Group At A Glance

Penn-America Group, Inc. (NYSE: PNG) is an insurance holding company that
underwrites commercial property, general liability and commercial multi-peril
insurance, in excess and surplus lines markets, through its subsidiaries,
PennAmerica Insurance Company and PennStar Insurance Company. The company
specializes in small-premium policies for small entrepreneurial businesses in
small cities and towns.

Penn-America distributes insurance products through a small network of about 50
wholesale general agents who live and work in the small cities and towns the
company targets. These general agents, in turn, serve the needs of more than
25,000 retail insurance insurance brokers who represent some 60 percent of the
42,000 in the United States. This distribution is suited ideally to the
insurance require ments of small business owners for whom "getting it right"
depends on the consulting relationship that only a professional insurance broker
can provide.

Because this efficient distribution system is supported from a central location
with only about 100 employees, Penn-America has a national reach without the
costly bricks and mortar overhead typically associated with nationwide insurance
distribution. Further, because the company is focused in "non-standard"
insurance markets, it provides for the routine insurance needs of tens of
thousands of small businesses at rates that are typically higher than those of
standard markets. Yet the average annual $1,500 premium size makes the same
market unattractive to most standard companies, which do not have distribution
systems outside of major metropolitan areas.

Penn-America is-traded on the New York Stock Exchange under the symbol "PNG." In
2000 company paid quarterly dividends of $.0525. Rated A-(Excellent) by A.M.
Best Company, it is located in Hatboro, Pennsylvania, a small town near
Philadelphia.



<PAGE>


[PHOTOS OMITTED]

[PHOTO CAPTION]
The photos featured in this annual report were taken at Penn-America's office in
Hatboro. Here are some of Penn-America's people at a glance.






<PAGE>
[PHOTO OF JON S. SALTZMAN OMITTED]


Dear Stockholders,

Shortly before the end of 2000, a potential investor visited me here in Hatboro.
He said, "You've had a tough year. I believe that you've done all the right
things in response. Now I want to know what kind of people you are, how you
think, if you learn from your mistakes and how you're moving forward."

   The past year was, indeed, a tough year for Penn-America. We had to step up
to the plate and take difficult actions to maintain the solid foundation on
which growth is made possible. As a result of those actions, I would say it is
more accurate to characterize the year as "toughening."

   Here's what happened-and the decisive actions we took to regain the earnings
momentum that we lost in the soft markets of 1998 and 1999.

   We experienced adverse loss development in our prior-year property and
liability lines. Arson and construction defect claims figured prominently. These
developments made it clear that we had to tackle both pricing and reserve issues
more aggressively. In the commercial automobile line, our loss ratios escalated.
We attributed this to the fact that we did not gain the number one position in
most of our agents' offices-a goal we set in all of our business lines-and that
prices in this area were inadequate.

   In the third quarter we concluded that the long-term interests of the company
and its owners would be best served if we were to take a hard look at our
balance sheet. Our shareholders-of whom my family and I represent 40%-have been
surprised too many times, with small earnings leakages. So we completed a series
of actions that included:

*    Taking a prior  accident-year  reserve  increase  of $9.4  million  in four
     business lines;

*    Raising  prices  13%-15%  across the board,  with a minimum 10% increase on
     loss-free accounts;

*    Restructuring  our  investment  portfolio to improve  returns;

*    Exiting the commercial automobile line of business;

*    Shifting a large  portion of our  business  from  admitted to  non-admitted
     markets, to lower expenses and to improve pricing flexibility.

   The payoff began in the fourth quarter, when we returned a modest profit. The
bottom line results are not up to our standards but they did affirm that the
steps we took were the right ones.


"At the end of 2000, hardening insurance market conditions, firming prices, our
operations, our people, our cost structure, our technology, our balance sheet
and our unique distribution system are aligned and the company is poised to
return to bottom line growth."-Jon Saltzman


2

<PAGE>

"We ended 2000 with an asset that continues to increase in value: the powerful,
productive and enduring relationships we have with the wholesale general agents
who are our customers." -Jon Saltzman

   We ended 2000 with an asset that continues to increase in value: the
powerful, productive and enduring relationships we have with the wholesale
general agents who are our customers. Everything that we do is organized around
these 50 men and women, without whom we would not exist as a company. I have
asked four of them to speak in this annual report about the three most important
aspects of our relationship with them: franchise value, franchise value and
franchise value.

   That potential investor who visited me late in the year wanted to take the
measure of the people who are managing Penn-America, the shepherds of the
capital you have entrusted to us.

   The fact is that our number one job is stewardship of capital. And our
steward-ship has a purpose: creating wealth by growth in book value. Here's the
formula in our business: make a profit in the basic business of insurance
underwriting, generate superior investment returns on a high-quality investment
portfolio and increase the value of invested assets. We must allocate capital
that you and we have invested to produce the best rate of return. Every business
decision we make must be driven by whether or not we believe we can achieve a
superior return-period.

   In the past three years we put your capital into the company, primarily
through our stock repurchase program. In the hardening markets of 2001, we will
be putting your capital into writing business. We have set a goal to produce a
combined ratio of 97%-98% with a return on equity in the 12%-15% range by the
end of 2002. From now until then, we expect that you will see a
quarter-over-quarter improvement in our results.

    For most people, our actions this year spoke louder than words.

   Though our actions do speak for us, so do I. Insurance markets don't allow
the luxury of perfect foresight. We have made our mistakes. We have learned
important lessons. We have made difficult but good choices. Most important, we
are resolutely committed to regaining the earnings momentum that you and we
expect from Penn-America. At the end of 2000, hardening insurance market
conditions, firming prices, our operations, our people, our cost structure, our
technology, our balance sheet and our unique distribution system are aligned and
the company is poised to return to bottom line growth. We are pleased that you
will be with us in 2001 to share the returns.


Sincerely,


/s/ Jon S. Saltzman

Jon S. Saltzman
President and Chief Executive Officer


"Our stewardship has a purpose: creating wealth by growth in book value."
-Jon Saltzman



                                                                              3


<PAGE>

Penn-America's wholesale general agents enjoy the benefits of franchise value:

*    Relative market exclusivity

*    Entrepreneurial thinking

*    Flexibility and availability

*    Underwriters who know their territories

*    Profit-sharing with stock incentives

*    Technology innovation


[PHOTO OF ROB TUSCANO OMITTED]


Excerpts from a conversation with Rob Tuscano

"There is no other company out there that would even mention the phrase
`franchise value.' They're afraid to use those words. Penn-America does because
they build relationships with trust. Franchise value is the value of trust that
the relationship is a win/win, that both parties are dedicated to mutual
benefit."

   "The people at Penn-America see value in having fewer agents and having the
best one or two in a given geographical area, as opposed to five others. They
want to deal with people they consider to be the best. I have never met another
Penn-America agent whose business ethics I question. They are a highly select
group of people. It makes you feel better dealing with Penn-America for those
reasons."

   "I like their way of doing business. I have a business philosophy that says
you do business with people for two reasons. Either they have a product that is
essential in the marketplace or you like them. If you have both, it makes for a
wonderful business relationship. Penn-America has good products and I have
tremendous regard for the people."

   "They have done a better job than any other carrier of providing us with
information that is more timely, accurate and thorough. Penn-America has
developed great access through PennLink and they also have great people behind
the scenes. They didn't just create PennLink. They asked the agents what we
wanted and then they created it. Other companies just guess what you want or
need and then develop it for you."

   "Relationship and service are their hallmarks. Never do I make a phone call
and not receive a prompt return call, whether my call is to the management team
or the Underwriting or Claims staff. They always recognize that they are there
to work with you and that you are not an annoyance or an interruption."

   "We have always invested in companies that we do business with. When they are
public companies, we have bought stock to show our support of the company, to
say we believe it is our goal to make money for everybody."

   "Sure, 2000 was a difficult year for Penn-America. But they are honest
people. They recognized unprofitable arenas and removed themselves from those
places. They took early steps to stop bad trends and freed themselves up to
write good, profitable business at adequate rates going forward from here. The
future of the company looks very bright because they invest in the right things.
They are not afraid to make difficult decisions early on. They have positioned
themselves to take advantage of the future."





--------------------------------------------------------------------------------
Agent                                   Rob Tuscano
--------------------------------------------------------------------------------
Agency                                  W. N. Tuscano Agency, Inc.
--------------------------------------------------------------------------------
Number of Employees and Offices         50 employees in three offices in
                                        Greenburg PA, Albany IN and
                                        Pittsburgh PA
--------------------------------------------------------------------------------
Years in Business                       30
--------------------------------------------------------------------------------
Years as a Penn-America Agent           3
--------------------------------------------------------------------------------
Penn-America Shareholder                Yes
--------------------------------------------------------------------------------
Number of Retail Brokers                About 1,000
--------------------------------------------------------------------------------
Revenues                                Gross Written Premium of $35 million
--------------------------------------------------------------------------------



4
<PAGE>

"The people at Penn-America see value in having fewer agents and having the best
one or two in a given geographical area, as opposed to five others. They want to
deal with people they consider to be the best." -Rob Tuscano

"Relationship and service are their hallmarks." -Rob Tuscano



[PHOTO OF JOE MORRIS OMITTED]
[PHOTO CAPTION]
Joe Morris, Senior Vice President and Chief Financial Officer



                                                                               5
<PAGE>



"They have a really good under-standing of how we operate in the wholesale
community because the people there grew up in this end of the business. They are
people doing business with people. It's `P-to-P' not `B-to-B.'"-Frank Mastowski



"I give Penn-America high marks for responsiveness. I can contact anybody in the
organization to resolve any issues. That's a major part of the franchise value."
-Frank Mastowski

[PHOTO OF KAREN BURCH OMITTED]
[PHOTO CAPTION]
Karen Burch, Assistant Manager, Marketing and Communications Technology


6

<PAGE>

[PHOTO OF FRANK MASTOWSKI OMITTED]
Excerpts from a conversation with Frank Mastowski

     "Franchise value is what sold me on Penn-America. In the State of New
Jersey we are synonymous with Penn-America. Go to any retailer in the state,
mention Penn-America and they immediately think of Jimcor. A franchise is a
brand name and a way of doing business. Penn-America is focused on their way of
doing things and, because of the relationship we have and the system they have
set up, we help to develop the household name."

     "I don't see wholesalers like us falling out of favor for a very long time.
There are commodity insurance lines that can be sold over the Internet. The
problem with small business insurance is that you're not dealing with a
commodity. Furthermore, an insurance contract is a legal document. As a small
business owner myself, I'm not sure I am comfortable having somebody I don't
know taking care of a very special need I have and writing a legal document for
me over the Internet. How do I know I am going to get what I need?"

     "The core commercial business they have written since we started with them
13 years ago is solid. They have built a company and a reputation on it. I would
say they made some mistakes getting into some other areas. The important thing
is that it has now been addressed, a good part of it is already washed out of
the system and by the middle of next year it will all be washed out. They are
facing a much better, much more insurance-friendly marketplace, with prices
going up and tighter capacity. It will be a very bright future for
Penn-America."

     "I give Penn-America high marks on responsiveness. I can contact anybody in
the organization to resolve any issues. That's a major part of the franchise
value. They have a really good understanding of how we operate in the wholesale
community because the people there grew up in this end of the business. That
adds value and leads to a better understanding of our needs and problems. It has
been such a smooth operation for us that I really don't have any war stories to
tell. They are people doing business with people. It's `P-to-P' not `B-to-B.'"

     "They are going steps beyond simply making information exchange easier.
They try to match their information systems to what we do as opposed to other
companies that take us dragging and screaming into their systems. They have
developed a number of very useful systems including PennLink and the Internet
policy issuance system they're implementing now."

     "They do a good, responsive job on claims, I have never had an accounting
problem with them, I have no underwriting or marketing issues with them and
everyone from the president on down is reachable. I would use some adjectives to
describe Penn-America: a steady, responsive, non-aggressive approach using the
proper distribution system that works well with their stakeholders, that is
themselves, their stockholders, the wholesalers they deal with and ultimately
the people they insure."



--------------------------------------------------------------------------------
Agent                                   Frank Mastowski
--------------------------------------------------------------------------------
Agency                                  Jimcor Agencies, Inc.
--------------------------------------------------------------------------------
Number of Employees and Offices         68 in five offices in Clifton Park and
                                        New York NY, Plymouth Meeting PA,
                                        Marlton and Closter NJ
--------------------------------------------------------------------------------
Years in Business                       15
--------------------------------------------------------------------------------
Years as a Penn-America Agent           13
--------------------------------------------------------------------------------
Penn-America Shareholder                Yes
--------------------------------------------------------------------------------
Number of Retail Brokers                About 1,500
--------------------------------------------------------------------------------
Revenues                                Gross Written Premium of $45 million
--------------------------------------------------------------------------------


                                                                               7
<PAGE>

[PHOTO OF MIKE SOBIESKI OMITTED]

Excerpts from a conversation with Mike Sobieski

     "I appreciate the fact that Penn-America provides us with a franchise and
unlike other companies there are not half a dozen organizations inside or even
out-side of the state that compete with us. There are several carriers that we
represent who don't have that same philosophy. That means those companies are
less valuable to us and, quite frankly, that posture is a detriment to those
companies. It is not uncommon for us to submit a piece of business to some of
those companies and then have them furnish a duplicate quotation to one of our
competitors. We appreciate the fact that Penn-America doesn't operate in that
fashion."

     "They made some tough calls this year including a commission decrease,
increasing prices and leaving the commercial auto business. I am in complete
agreement with most of the changes they have made this year. They have had the
courtesy to explain their rationale for the choices, in advance. I have to
respect the fact that they are making the hard calls and doing what they need to
do to move the company forward. They have strengthened reserves, exited some
lines of business and they have a very attractive dividend. Speaking not only as
an agent but also as a stockholder, I think the stock is an excellent value. The
fact that Penn-America offers us stock in conjunction with profit-sharing is a
net plus. I think it is important for agents to have ownership in the company
and a long-term perspective concerning that relationship. I don't look at
Penn-America as `just another company' because they don't look at us as `just
another agent.'"

     "I am really supportive of the steps they have taken and the direction in
which they are headed. I wouldn't do anything any differently than what they
have done. It's a family-owned business, as you know. Some of the family members
are also owners of agencies so they are sympathetic to the difficulties that
agents face. That's a refreshing change from other companies we deal with."

     "Another difference is the fact that Penn-America's underwriters are much
more accessible than with our other companies. They don't hide behind voice
mail, which, unfortunately, is becoming commonplace at other companies. Whenever
guidelines and common sense permit it, they go the extra mile to accommodate any
unusual requests we have. They also encourage their employees to travel, to come
to our offices and get to know all of the people who are involved in
representing them. There is definitely more face-to-face contact with
Penn-America than with most of the other companies that we represent. Everybody
from the top to the bottom of the organization seems to have the level of
experience and expertise they need to interact with us effectively."

     "Knowledge is power and nobody empowers us like Penn-America. They are
definitely out there on the cutting edge of working with us through the
Internet. We have the ability to access information from Penn-America that other
companies only dream about. At the Agents' Advisory Council they showed us some
of the technology developments on the drawing board that, to my knowledge, none
of our other companies are even contemplating at this point. Not only are
Penn-America's current systems state-of-theart but the next generation systems
will add significantly to our franchise value."


"The fact that Penn-America offers us stock in conjunction with profit-sharing
is a net plus. I think it is important for agents to have ownership in the
company and a long-term perspective concerning that relationship. I don't look
at Penn-America as `just another company' because they don't look at us as `just
another agent.'" -Mike Sobieski



--------------------------------------------------------------------------------
Agent                                   Mike Sobieski
--------------------------------------------------------------------------------
Agency                                  Sobieski & Bradley, Inc.
--------------------------------------------------------------------------------
Number of Employees and Offices         13 employees in Salt Lake City
                                        Utah, serving UT, NV, ID, MT, WY and CO
--------------------------------------------------------------------------------
Years in Business                       13
--------------------------------------------------------------------------------
Years as a Penn-America Agent           3.5
--------------------------------------------------------------------------------
Penn-America Shareholder                Yes
--------------------------------------------------------------------------------
Number of Retail Brokers                About 400
--------------------------------------------------------------------------------
Revenues                                Gross Written Premium of $9 million
--------------------------------------------------------------------------------

8
<PAGE>

"Knowledge is power and nobody empowers us like Penn-America. They are
definitely out there on the cutting edge of working with us through the
Internet. We have the ability to access information from Penn-America that other
companies only dream about." -Mike Sobieski



[PHOTO FO JEFF KASCAK OMITTED]
[PHOTO CAPTION]
Jeff Kascak, Underwriter

                                                                               9
<PAGE>

[PHOTO OF MIKE SIMMONS OMITTED]
[PHOTO CAPTION]
Mike Simmons, IT Administrator





10
<PAGE>


"The Midwest is different. They do not have your typical East coast mentality.
One of the most important things is that an underwriter understands the
territory."-Mike Knutson


"They have consistently improved their products as a result of our suggestions,
broadening and revisiting coverages as necessary." -Mike Knutson


[PHOTO OF MIKE KNUTSON OMITTED]
Excerpts from a conversation with Mike Knutson


"The best thing is that we aren't running into other Penn-America agents. I am
separated by a 4 1/2 hour drive from the other Penn-America agent in Wisconsin
and 4 1/2 hours from two agents in Illinois."

     "Penn-America is a true general agency company. They know the business. The
people come from general agency backgrounds. They are there to help us when we
need it and that's what a true general agency company does. When we need to do
something off the manual or we have a question, they are there."

     "They have consistently improved their products as a result of our
suggestions, broadening and revisiting coverages as necessary. The important
thing is that it doesn't take nine months to a year to make a decision if it's
the right thing to do. They are prompt. If they do the wrong thing, they tell
you right away."

     "They know the Midwest. The Midwest is different. One of the most important
things is that an underwriter understands the territory. If you mention
Illinois, everyone thinks Chicago. But you need to know there are two states in
Illinois: Chicago and the rest, which is like Wisconsin. Once you get out of
Chicago, the business is great, Main Street business."

     "Penn-America understands the difference between urban and rural. They want
to write the Main Street business or the one-off Main Street business. We try to
make the rural retailer our market. We don't do well with the large urban
brokers in downtown Chicago or downtown Milwaukee. We are an outlet for small
retail brokers. We see the better, smaller business all the time. Penn-America
understands that business."

     "Penn-America is on the cutting edge of technology. They are leading the
way and they are not going to be left behind in the smoke and the dust. They are
a step ahead of us and several steps ahead of the other companies I do business
with. They make our life a lot easier, less cumbersome. Our job is to write
profitable business and spend our time doing that. Now my underwriters can use
the Internet to get information right on line, with no waiting. It's there at
our fingertips."

     "None of Penn-America's competitors have anything even comparable to
PennLink. Several of them are working on something like it but none of them are
there yet. Many insurance companies develop technology to monitor what we do,
not so much to help us do what we have to do. The technology we see coming from
other companies is usually a one-way street-to benefit them-whereas Penn-America
is trying to develop a mutual benefit."

     "Our relationship is a partnership. It's not a company/customer
relationship. The executives actually seem interested in your personal life, as
friends. It's just different as opposed to the guys who are just `business,
business, business.' It' s doing business the small town U.S.A. way. I like to
grow with small companies. There are a lot of benefits to dealing with people
who are like me."

     "The most important thing to me is the longevity of the companies I deal
with, of my carriers being financially strong and being there. I can't say how
important that is. They are a leader."


--------------------------------------------------------------------------------
Agent                                   Mike Knutson
--------------------------------------------------------------------------------
Agency                                  Transcom General Agency, Inc.
--------------------------------------------------------------------------------
Number of Employees and Offices         11 employees in Madison WI
--------------------------------------------------------------------------------
Years in Business                       5 as Transcom
--------------------------------------------------------------------------------
Years as a Penn-America Agent           8
--------------------------------------------------------------------------------
Penn-America Shareholder                Yes
--------------------------------------------------------------------------------
Number of Retail Brokers                About 1,500
--------------------------------------------------------------------------------
Revenues                                Gross Written Premium of $8 million
--------------------------------------------------------------------------------


                                                                              11
<PAGE>


<TABLE>
<CAPTION>
Penn-America Group, Inc. and Subsidiaries
Selected Five Year Financial Data
                                                             As of or for the year ended December 31,
(In thousands, except per share data)           2000           1999            1998          1997            1996
------------------------------------------------------------------------------------------------------------------
<S>                                         <C>            <C>             <C>            <C>            <C>
Operating Data
Gross written premiums                      $ 109,791      $  95,983       $  95,097      $ 104,694      $  80,496
Net written premiums                           97,250         87,036          87,829         96,561         73,469

Premiums earned                                91,449         85,677          89,493         91,649         69,081
Net investment income                          10,454          9,537          10,763          9,218          6,705
Net realized investment gain (loss)            (1,331)           841              18          1,314            906
Other revenue                                                                                   672
                                        --------------------------------------------------------------------------
Total revenues                                100,572         96,055         100,274        102,853         76,692

Operating income (loss)                        (2,978)         1,483           8,869          8,781          6,395

Net income (loss)                              (3,856)         2,038           8,881          9,645          6,993

Comprehensive income (loss)                      (343)        (5,000)          9,946         10,301          6,485

Diluted earnings per share (1) :
Operating income (loss)                         (0.39)          0.17            0.90           1.07           0.95
Net income (loss)                               (0.50)          0.24            0.90           1.17           1.04
Comprehensive income (loss)                     (0.04)         (0.58)           1.01           1.25           0.96

Return on equity                                 -5.0%           2.2%            9.0%          13.8%          17.8%

Comprehensive return on equity                   -0.4%          -5.5%           10.0%          14.8%          16.5%

Cash dividends per share (1)                $    0.21      $    0.21       $    0.20      $    0.16      $    0.11

Cash flow from operations                      14,991          8,602          10,644         24,988         16,821

Insurance Performance Data
GAAP basis:
Loss ratio                                       82.4           73.8            62.3           63.0           62.7
Expense ratio                                    34.0           34.5            33.9           33.2           30.6
                                        --------------------------------------------------------------------------
Combined ratio                                  116.4          108.3            96.2           96.2           93.3

Statutory basis:
Loss ratio                                       82.4           73.8            62.3           63.0           62.7
Expense ratio                                    33.2           34.9            35.0           32.3           31.6
                                        --------------------------------------------------------------------------
Combined ratio                                  115.6          108.7            97.3           95.3           94.3

Policyholders' surplus                      $  55,531      $  69,515       $  85,358      $  83,459      $  41,665

Balance Sheet Data
Cash and investments                        $ 178,675      $ 166,227       $ 182,866      $ 177,819      $ 115,550
Total assets                                  239,486        217,782         230,504        225,157        158,605
Notes payable                                      --             --              --             --          9,000
Total stockholders' equity                     74,051         80,618         100,630         97,307         42,337
Total stockholders' equity per share(1)     $    9.77      $   10.00       $   10.71      $    9.85      $    6.34
<FN>
(1)  Adjusted to reflect a three-for-two split of the Company's common stock on
     March 7, 1997
</FN>
</TABLE>

12


<PAGE>

Penn-America Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations


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

General
Penn-America Group, Inc. (PAGI or the Company) is a specialty property and
casualty insurance holding company which, through its subsidiary, Penn-America
Insurance Company and its subsidiary Penn-Star Insurance Company (collectively
"Penn-America,") markets and underwrites commercial property, general liability
and multi-peril insurance for small businesses located primarily in small towns
and suburban and rural areas. The Company provides commercial property and
casualty insurance both on an excess and surplus lines basis and on an admitted
basis. During 1999, the Company announced that it would exit the non-standard
personal automobile business entirely, a business it entered in 1988. In late
2000, the Company announced that it also was exiting the commercial automobile
business.

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



Commercial Gross Written Premium Per General Agent
(Same Store Sales)
                                                          Compound
                                                            Annual
 (Dollars in millions)          1992        2000          Growth %
------------------------------------------------------------------
Commercial Gross
  Written Premium             $ 22.6     $ 107.0               22%
Number of General
  Agents                          38          52                3%
Commercial Gross
  Written Premium
  Per General Agent             $ .6       $ 2.1               17%
------------------------------------------------------------------

these areas. The Company selects only insurance lines of business and industry
segments for which it reasonably can evaluate the probability of future loss
exposure. Therefore, the Company avoids high-hazard risks and high-hazard lines
of business such as medical malpractice and environmental liability.

Penn-America markets its products through about 50 high-quality general agents,
who in turn produce business through more than 25,000 retail insurance brokers
located throughout the United States. The Company focuses on serving the
insurance needs of small-premium insureds in small or non-standard markets that
are serviced by retail insurance brokers with limited access to larger, standard
lines insurers. The Company believes that these markets generally are
underserved by larger, standard lines insurers, which often limit their
underwriting to larger policies and to certain risk classes. Penn-America
believes that its distribution network enables it to access effectively these
numerous small markets at a relatively low fixed-cost through the marketing,
underwriting and administrative support of its general agents. This access also
is enabled by the local market knowledge and expertise of these general agents
and their retail insurance brokers.

Penn-America's distribution strategy is to maintain strong relationships with a
select group of high-quality general agents. The Company believes that its
network comprises a smaller, higher-quality group of agents than its
competitors. The Company carefully selects a limited number of general agents
based on their experience and reputation and strives to preserve each agent's
franchise value within its marketing territory. The Company seeks to grow with
these general agents and to develop strong, long-standing relationships by
providing a high level of service and support. The success of the Company's
strategy is demonstrated by its strong and consistent growth. From 1992 to 2000,
commercial gross written premiums grew at a 22% compound annual rate from $22.6
million to $107.0 million while the number of general agents rose from 38 to 52.

                                                                              13
<PAGE>

The Company underwrites its business through three underwriting units: The
Binding Authority Unit, the Submit Unit and the Speciality Lines Unit. This
underwriting approach allows the Company to maintain low fixed-costs.
Approximately 85% of the Company's business is underwritten by the Binding
Authority Unit. Of this amount, approximately 85% is bound by general agents in
accordance with the Company's underwriting manual.

The Company provides its general agents with a comprehensive, regularly updated
underwriting manual, which also is available online through a secure intranet
site called PennLink. This manual clearly outlines the Company's risk
eligibility, pricing parameters and underwriting guidelines. Penn-America
closely monitors the quality of business it underwrites. The Company reviews new
and renewal commercial policies on a continuous basis to ensure that its
underwriting guidelines are being followed. The Company also periodically audits
each agent's office to determine if the Company's underwriting guidelines are
being followed in all aspects of risk selection, underwriting compliance, policy
issuance and pricing. In addition to standard commissions, the Company provides
strong incentives to its general agents to produce profitable business through a
contingent commission structure, which is tied substantially to underwriting
profitability. Payments of these contingent commissions have been in cash and
through the issuance of shares of Company common stock and stock options. Since
1996, the Company has awarded agents approximately 161,000 shares of the
Company's common stock through its contingent commission structure.

The Submit Unit was formed in the fourth quarter of 1999 and produced
approximately 3% of the Company's business in 2000. The unit provides a market
to the Company's general agents for approximately fifty classes of insureds that
previously were limited by the Company's underwriting manual. 100% of the
business written by the Submit Unit is bound by Penn-America underwriters;
general agents have no binding authority. Each risk is considered individually
by the Company's underwriters and approximately 15% of policies submitted are
bound.

The Speciality Lines Unit, which accounted for 12% of the Company's business in
2000, creates specialized underwriting and marketing programs for individual
agents based upon specific territorial needs and opportunities. The individual
general agent typically is given exclusive marketing authority for the program,
subject to territorial limitations. The Company believes it can achieve superior
under-writing results and expense savings on these programs. In all of its
commercial product lines, the Company continuously is developing specialized
programs for certain industry segments to meet the needs of these marketplaces.
For example, Penn-America has developed programs for Alaska dwellings, cargo and
retail jewelers. As a group, these programs are a significant benefit to
Penn-America's marketing efforts.

Emphasizing the focus on profitable lines, the Company announced in 1999 that it
would be running-off all of its non-standard personal automobile business.
Non-standard personal automobile business represented approximately 2.5% of the
total gross premium written by the Company in 2000 as compared with 12.0% in
1999. The Company anticipates that run-off from non-standard personal automobile
written premium in 2001 will be approximately $0.5 million, compared with $2.8
million in 2000. The Company also announced in 2000 that it was exiting
commercial automobile coverages and will non-renew all such existing business
starting in the first quarter of 2001. Commercial automobile business
represented approximately 10.4% of the total gross premium written by the
Company in 2000, compared with 7.3% in 1999. The Company anticipates that
run-off from commercial automobile gross written premium in 2001 will be
approximately $4.5 million, compared with $11.5 million in 2000.

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

Competition is based on many factors, including the perceived market strength of
the insurer, pricing and other terms and conditions, services provided, the
speed of claims payment, the reputation and experience of the insurer and
ratings assigned

14

<PAGE>

by independent rating organizations such as A.M. Best Company. Penn-America and
its subsidiary, Penn-Star, currently have a pooled rating from A.M. Best of "A-"
(Excellent), which was lowered from "A" (Excellent) by Best in December 2000.
The Company does not believe that this lower rating will affect its ability to
market its products in its target markets. The Company's rating is based upon
factors of concern to policyholders, including financial condition and solvency
and is not directed to the protection of investors.

Description of the Company's Business Segments and Lines of Insurance
Penn-America manages its business in two segments: commercial and personal
lines. Commercial lines consist of general liability, property, multi-peril,
commercial automobile and commercial umbrella. Personal lines consist solely of
non-standard personal automobile.

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 between $500,000 and $1 million. The Company's general liability
policies provide for defense and related expenses in addition to peroccurrence
and aggregate policy limits.

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.

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

The Company also offers Commercial Umbrella coverage to enhance its commercial
multi-peril writings. The types of risks and insureds targeted are similar to
those already written, such as restaurants, bars and taverns, mercantile,
artisan contractors and similar classes. Commercial umbrella insurance can be
written for limits up to $5 million with significant reinsurance support from
General Reinsurance Corporation. For commercial umbrella coverage, Penn-America
usually writes the primary $1 million general liability limit.

Commercial Automobile coverage was offered by the Company from 1998 through the
first quarter of 2001. The commercial automobile insurance line (cars and light
trucks) is written with liability limits up to $1 million. No new policies
currently are being issued and all existing policies are being non-renewed in
accordance with each state's non-renewal laws.

Penn-America wrote Non-Standard Personal Automobile policies in seven states. In
1999, the Company announced that it was exiting this line entirely and that it
would be in run-off. The business being run-off represented $2.8 million of
gross written premiums in 2000. The non-standard automobile written premium
anticipated to be written by the Company in 2001 is largely the result of the
statutory requirements of states regarding renewals. The Company estimates that
approximately $0.5 million of personal non-standard automobile premiums will be
written in 2001.

Results of Operations

Year ended December 31, 2000 compared with year ended December 31, 1999
Gross written premiums increased 14.4% to $109.8 million for the year ended
December 31, 2000 from $96.0 million for the year ended December 31, 1999. This
increase resulted from a 26.7% increase in commercial lines premium to $107.0
million, partially offset by the 75.8% decline in the non-standard personal
automobile line's gross written premiums to $2.8 million.

Net written premiums increased 11.7% to $97.3 million for the year ended
December 31, 2000 from $87.0 million for the year ended December 31, 1999.
During the same period, net premiums earned increased 6.7% to $91.5 million from
$85.7 million. Net premiums earned increased in total due to the 26.7% increase
in commercial gross written premiums, and the 22.1% increase in commercial net
premiums earned.

Net investment income increased 9.6% to $10.5 million for the year ended
December 31, 2000 from $9.5 million for the year ended December 31, 1999.


                                                                              15

<PAGE>

The increase resulted principally from an increase in tax equivalent yields to
7.14% from 6.27%, and an increase in cash flows from operations due primarily to
the growth in written premiums and reduction in paid losses.

Net realized investment loss after taxes for the year ended December 31, 2000
was $0.9 million as compared with a net realized investment gain of $0.5 million
for the year ended December 31, 1999. Net realized investment losses were
generated in the current period by the Company's decision to sell selected
securities and to reinvest the proceeds into higher-yielding securities.

Losses and loss adjustment expenses increased 19.3% to $75.4 million in 2000 as
compared with $63.2 million in 1999. The 2000 operating results included
strengthening of prior year loss reserves by $9.2 million pre-tax, or $6.1
million after-tax, relating principally to the Company's commercial automobile
liability, CMP liability and other liability (primarily exposure to construction
defect losses) lines of business. In addition, the 2000 results reflected higher
than expected property losses. Operating results in 1999 reflected adverse loss
development in the Company's discontinued non-standard personal automobile line
of business as well as other liability and property lines, including losses
related to Hurricanes Floyd and Irene and other windstorm damage.

Amortization of deferred policy acquisition costs increased 1.7% to $25.2
million for the year ended December 31, 2000 from $24.8 million for the year
ended December 31, 1999. The increase was attributable primarily to the growth
in commercial written premiums.

Other underwriting expenses and corporate expenses increased 10.0% to $6.6
million for the year ended December 31, 2000 from $6.0 million for the year
ended December 31, 1999.

The loss ratio increased to 82.4 for the year ended December 31, 2000 from 73.8
for the year ended December 31, 1999. The GAAP expense ratio decreased to 34.0
from 34.5 for the year ended December 31, 1999. The decrease in the GAAP expense
ratio was attributable mainly to the decrease in the net premiums written in the
non-standard personal automobile line, which has a higher commission rate. The
GAAP combined ratio increased to 116.4 for the year ended December 31, 2000
compared with 108.3 for the year ended December 31, 1999.

As a result of the factors described above, the Company's operating loss before
net realized investment loss for the year ended December 31, 2000 was $3.0
million or $0.39 per share (basic and diluted) compared with operating income
before net realized investment gain of $1.5 million or $0.17 per share (basic
and diluted) for the year ended December 31, 1999.

Net loss for the year ended December 31, 2000 was $3.9 million or $0.50 per
share (basic and diluted) as compared with net income of $2.0 million or $0.24
per share (basic and diluted) in 1999.

Results of Operations

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

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

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

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

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

Losses and loss adjustment expenses increased 13.4% to $63.2 million in 1999 as
compared with $55.7 million in 1998 due primarily to an increase in property
losses in the current year and increased

16

<PAGE>



reserve development on prior accident years of $8.4 million in the commercial
liability and personal automobile lines.

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

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

The loss ratio increased to 73.8 for the year ended December 31, 1999 from 62.3
for the year ended December 31, 1998. The GAAP expense ratio increased to 34.5
from 33.9 for the year ended December 31, 1998. The GAAP combined ratio
increased to 108.3 for the year ended December 31, 1999 compared with 96.2 for
the year ended December 31, 1998.

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

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

Liquidity and Capital Resources
PAGI is a holding company, the principal asset of which is the common stock of
Penn-America. The principal source of cash for the payment of dividends to
PAGI's stockholders, PAGI operating expenses and repurchase of PAGI stock is
dividends from Penn-America and Penn-Star. Penn-America's principal sources of
funds are operations, investment income and proceeds from sales and redemptions
of investments. Funds are used by Penn-America and Penn-Star principally to pay
claims and operating expenses, to purchase investments and to make dividend and
other payments to PAGI.

Penn-America is required by law to maintain a certain minimum surplus on a
statutory basis and is subject to risk-based capital requirements and
regulations under which payment of dividends from statutory surplus may require
prior approval from the Pennsylvania Insurance Department. Penn-America may pay
dividends to PAGI without advance regulatory approval only from unassigned
surplus and only to the extent that all dividends in the past twelve months do
not exceed the greater of 10% of total statutory surplus, or statutory net
income for the prior year. Using this criteria, the available ordinary dividend
for 2001 is $5.5 million. No ordinary dividends were paid to PAGI in 2000.
Rather, Penn-America paid a $6.4 million return of capital to PAGI in 2000,
after receiving approval from the Pennsylvania Insurance Department, which PAGI
used to repurchase stock and to pay dividends and PAGI operating expenses.

Net cash provided by operating activities increased 74.3% to $15.0 million for
the year ended December 31, 2000, from $8.6 million for the year ended December
31, 1999. The increase in net cash provided by operations resulted principally
from the increase in net premiums written during 2000 due to the growth in the
commercial segment and a decrease in paid losses. Net cash used by investing
activities was $9.1 million for the year ended December 31, 2000, compared with
$5.4 million for the year ended December 31, 1999. This increase in cash used by
investing activities in 2000 was due to the Company's decision to invest excess
cash in fixed-maturity investments.

Net cash used by financing activities was $6.5 million for the year ended
December 31, 2000, as compared with $15.3 million for the same period in 1999.
In 2000 and 1999, $4.7 million and $13.8 million, respectively, were used by the
Company to repurchase 572,425 and 1,385,250 shares of Company stock and $1.6
million and $1.8 million were used for PAGI stockholder dividends for 2000 and
1999, respectively.

The Company believes that it has sufficient liquidity to meet its anticipated
insurance obligations and operating and capital expenditure needs. The Company's
investment strategy emphasizes quality, liquidity and diversification, as well
as total return. With respect to liquidity, the Company considers liability
durations, specifically related to loss reserves, when determining desired
investment maturities. In addition, maturities have been stag-gered to produce
cash flows for loss payments and reinvestment opportunities. At December 31,
2000, the Company held a total of $178.7 million in cash and investments. Of
this amount, $17.3 million was classified as held-to-maturity. The average
duration of these fixed-maturity investments as of December

                                                                              17

<PAGE>

                   Net Cash Provided by Operating Activities

                    [BAR GRAPH OMITTED see data points below]


                               Dollars in millions

                               1996    16.8
                               1997    25.0
                               1998    10.6
                               1999     8.6
                               2000    15.0



31, 2000 was approximately 3.6 years. Cash represented $11.4 million, equity
securities represented $24.5 million, and fixed-maturity investments classified
as available-for-sale represented $125.5 million.

The Company's fixed-maturity portfolio represented $142.8 million or 85.4% of
the total carrying value of the investment portfolio as of December 31, 2000.
Approximately 98% of these securities were rated "A" or better by Standard &
Poor's or Moody's. Equity securities, the majority of which consist of preferred
stocks, represented $24.5 million or 14.6% of total investments as of December
31, 2000.

As of December 31, 2000, the investment portfolio contained $45.8 million of
mortgage- and asset-backed obligations. All of these securities were "AA"-rated
or better and 80% were "AAA"-rated by Standard & Poor's or Moody's. These
securities were issued by government or government-related agencies, were
publicly traded and had market values obtained from an independent pricing
service. Changes in estimated cash flows due to changes in prepayment
assumptions from the original purchase assumptions are revised based on current
interest rates and the economic environment. The Company had no other derivative
financial instruments, real estate or mortgages in the investment portfolio as
of December 31, 2000.

In the third quarter of 2000, the Company terminated its $25 million revolving
credit facility with a financial institution. The Company had not borrowed from
this facility since its inception in 1998.

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

The major components of market risk affecting the Company are interest rate and
equity risk. The Company has a fixed-maturities investment portfolio with a fair
value of $142.9 million at December 31, 2000 that is subject to changes in value
principally due to changes in market interest rates. A component of the
fixed-maturities portfolio includes mortgage-backed and asset-backed securities
($45.8 million in fair value at December 31, 2000), which are exposed to
accelerated prepayment risk generally caused by decreases in interest rates.
Acceleration of repayments could adversely affect future investment income, if
reinvestment of the cash received from repayments is in lower-yielding
securities.

The Company's preferred equity portfolio of $18.0 million at December 31, 2000
is subject to interest rate risk similar to the fixed-maturities portfolio
described above.

Cash and Investments Portfolio Mix
[PIE CHART OMITED]
Fixed income            80%
Cash and short-term      6%
Non-redeemable
 preferred stock        10%
Common stock             4%



Quality of Fixed-Income Portfolio
[PIE CHART OMITED]
AAA     48%
AA      17%
A       33%
BBB      2%



18
<PAGE>

In addition to interest rate risk, the Company's common equity portfolio of $6.4
million at December 31, 2000 is subject to changes in value based on changes in
equity prices in United States markets.

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

The chart on this page is a tabular presentation of the Company's investment
portfolio at December 31, 2000.

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

Risk-Based Capital
The National Association of Insurance Commissioners adopted risk-based capital
standards with which property and casualty insurers must comply. In concept,
risk-based capital is designed to measure the acceptable amount of capital an
insurer should have based on the inherent specific risks of each insurer.
Insurers failing to meet this benchmark capital level may be subject to scrutiny
by the insurer's domiciled insurance department. Based on the currently adopted
standards, Penn-America's and Penn-Star's capital and surplus are in excess of
the prescribed risk-based capital requirements for 2000.

Cautionary Statements
Certain information included in Management's Discussion and Analysis and
elsewhere in this Annual Report are not historical facts but are forward-looking
statements including, but not limited to, such matters as anticipated financial
performance, business prospects, technological developments, new and existing
products, expectations for market segment growth and similar matters. In

<TABLE>
<CAPTION>
                                                Expected Maturity Date
                                                                       There-            Fair
(Dollars in millions)           2001    2002    2003    2004    2005    after   Total   Value
-------------------------------------------------------------------------------------------------
Fixed-Maturities Portfolio
<S>                            <C>    <C>     <C>     <C>     <C>      <C>     <C>      <C>
Principal amount               $ 4.5  $ 23.1  $ 20.5  $ 17.1  $ 20.9   $ 56.6  $ 142.7
Average interest rate          6.70%   6.74%   7.18%   7.07%   7.38%    6.67%    6.90%
Fair value                                                                              $ 142.9
Yield on fair value                                                                       6.48%

Preferred Stock
Principal amount                                                               $ 20.0
Average interest rate                                                           6.31%
Fair value                                                                               $ 18.0
Yield on fair value                                                                       7.34%

Common Stock
Fair value                                                                                $ 6.4
-------------------------------------------------------------------------------------------------
</TABLE>

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

                                                                              19

<PAGE>



connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company provides the following cautionary
remarks regarding important factors which, among others, could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development, results of the Company's business and the
other matters referred to above include, but are not limited to: (1) changes in
the business environment in which the Company operates, including inflation and
interest rates; (2) changes in taxes, governmental laws and regulations; (3)
competitive product and pricing activity; and (4) difficulties of managing
growth profitably. For additional disclosure regarding potential risk factors,
please refer to the Company's 2000 10-K and other documents filed with the
Securities and Exchange Commission.


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

Report of Management

Management is responsible for the financial information included in this annual
report and for determining that the information presents fairly the financial
position and operating results of the Company. The accompanying consolidated
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States. Such statements include informed
estimates and judgments of management for those transactions that are not yet
complete or for which the ultimate effects cannot be determined precisely,
including provisions for unpaid losses and loss adjustment expenses and asset
valuation reserves. Financial information presented elsewhere in this annual
report is consistent with that in the consolidated financial statements.

The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that assets are safeguarded against losses from
unauthorized use or disposition and that transactions are executed in accordance
with management's authorization and are recorded properly. Qualified personnel
maintain and monitor these internal accounting controls on an ongoing basis.

The Company engages Ernst & Young LLP, as independent auditors to audit its
financial statements and express their opinion thereon. They have full access to
each member of management in conducting their audits. Such audits are conducted
in accordance with auditing standards generally accepted in the United States
and include a review and evaluation of the system of internal accounting
controls, tests of the accounting records and other auditing procedures they
consider necessary to express their opinion on the consolidated financial
statements.

The Audit Committee of the Board of Directors comprises outside directors and is
responsible for overseeing and monitoring the quality of the Company's
accounting practices and internal controls. Management and the independent
auditors meet periodically with the Committee to review the accounting practices
employed by the Company and to discuss auditing, internal control, financial
reporting matters and any other matters they believe should be brought to the
Committee's attention. The independent auditors have unrestricted access to the
Audit Committee, without members of management present. The Committee also
reviews Ernst & Young's statement regarding their independence.





Jon S. Saltzman             Joseph F. Morris                James J. Mack
President and               Senior Vice President and       Vice President,
Chief Executive Officer     Chief Financial Officer         Treasurer and
                                                            Controller


20
<PAGE>

Report of Independent Auditors

The Board of Directors Penn-America Group, Inc.

We have audited the accompanying consolidated balance sheets of Penn-America
Group, Inc. (the Company) as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial statements of the
Company as of December 31, 1998 and for the year ended December 31, 1998 were
audited by other auditors whose report dated January 22, 1999 expressed an
unqualified opinion on those statements.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Penn-America
Group, Inc. at December 31, 2000 and 1999 and the consolidated results of its
operations and its cash flows for the two years then ended in conformity with
accounting principles generally accepted in the United States.



/s/ Ernst & Young LLP

Philadelphia, Pennsylvania
January 19, 2001




                                                                              21


<PAGE>

Penn-America Group, Inc. and Subsidiaries Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                              December 31,
(In thousands, except per share data)                                                    2000                1999
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>                 <C>
Assets
Investments:
   Fixed maturities:
        Available for sale, at fair value (amortized cost 2000, $123,873;
           1999, $115,975)                                                            $ 125,477           $ 111,419
        Held to maturity, at amortized cost (fair value 2000, $17,441;
           1999, $16,103)                                                                17,282              16,294
   Equity securities, at fair value (cost 2000, $27,324; 1999, $28,014)                  24,491              26,020
   Short-term investments, at cost, which approximates fair value                            --                 449
                                                                                -----------------------------------
        Total investments                                                               167,250             154,182
Cash                                                                                     11,425              12,045
Accrued investment income                                                                 2,181               1,965
Premiums receivable, net                                                                  9,695               8,981
Reinsurance recoverable                                                                  24,447              18,284
Prepaid reinsurance premiums                                                              4,635               3,529
Deferred policy acquisition costs                                                        10,317               9,306
Capital lease                                                                             1,753               1,840
Deferred income taxes                                                                     4,272               5,487
Income tax recoverable                                                                    2,982               1,652
Other assets                                                                                529                 511
                                                                                -----------------------------------
Total assets                                                                          $ 239,486           $ 217,782
                                                                                ===================================

Liabilities and Stockholders' Equity
Liabilities:
   Unpaid losses and loss adjustment expenses                                         $ 115,314           $  93,719
   Unearned premiums                                                                     43,239              36,332
   Accounts payable and accrued expenses                                                  2,353               1,755
   Capitalized lease obligation                                                           1,701               1,821
   Other liabilities                                                                      2,828               3,537
                                                                                -----------------------------------
   Total liabilities                                                                    165,435             137,164
                                                                                -----------------------------------

Stockholders' equity:
   Preferred stock, $.01 par value; authorized 2,000,000 shares;
        None issued                                                                          --                  --
   Common stock, $.01 par value; authorized 20,000,000 shares;
        issued 2000 and 1999, 10,076,025 and 9,990,436 shares, respectively;
        outstanding 2000 and 1999, 7,576,025 and
        8,062,861 shares respectively                                                       101                 100
   Additional paid-in capital                                                            70,164              69,591
   Accumulated other comprehensive loss                                                    (811)             (4,324)
   Retained earnings                                                                     29,583              35,050
   Treasury stock, 2000 and 1999, 2,500,000 and 1,927,575 shares,
        respectively, at cost                                                           (24,161)            (19,474)
   Officers' stock loans                                                                   (546)                  0
   Unearned compensation from restricted stock awards                                      (279)               (325)
                                                                                -----------------------------------
        Total stockholders' equity                                                       74,051              80,618
                                                                                -----------------------------------
        Total liabilities and stockholders' equity                                    $ 239,486           $ 217,782
                                                                                ===================================
</TABLE>


See accompanying notes to Consolidated Financial Statements.

22

<PAGE>



Penn-America Group, Inc. and Subsidiaries Consolidated Statements of Operations




<TABLE>
<CAPTION>
                                                                    For the year ended December 31,
(In thousands, except per share data)                          2000               1999                 1998
--------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                 <C>                 <C>
Revenues
Premiums earned                                            $  91,449           $  85,677           $  89,493
Net investment income                                         10,454               9,537              10,763
Net realized investment gain (loss)                           (1,331)                841                  18
                                                        ------------------------------------------------------
Total revenues                                               100,572              96,055             100,274
                                                        ------------------------------------------------------

Losses and expenses
Losses and loss adjustment expenses                           75,378              63,187              55,733
Amortization of deferred policy acquisition costs             25,219              24,802              25,452
Other underwriting expenses                                    5,850               4,733               4,857
Corporate expenses                                               791               1,306               1,532
Interest expense                                                 161                 145                 177
                                                        ------------------------------------------------------
Total losses and expenses                                    107,399              94,173              87,751
                                                        ------------------------------------------------------

Income (loss) before income tax                               (6,827)              1,882              12,523
Income tax expense (benefit)                                  (2,971)               (156)              3,642
                                                        ------------------------------------------------------
Net income (loss)                                          $  (3,856)          $   2,038           $   8,881
                                                        ======================================================
Net income (loss) per share

Basic                                                      $   (0.50)          $    0.24           $    0.91
Diluted                                                    $   (0.50)          $    0.24           $    0.90

</TABLE>



See accompanying notes to Consolidated Financial Statements.


                                                                              23

<PAGE>

Penn-America Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>
                                                                                                           Unearned
                                                           Accumulated                                   Compensation
                                                Additional   Other                             Officers'     From          Total
(In thousands except share            Common     Paid-In  Comprehensive  Retained    Treasury   Stock      Restricted  Stockholders'
  and per share data)                 Stock      Capital  Income(Loss)   Earnings     Stock     Loans     Stock Awards    Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>           <C>      <C>          <C>       <C>         <C>          <C>         <C>
Balance at December 31, 1997            $ 99    $ 68,221    $ 1,649      $ 27,849        --       --         $ (511)    $ 97,307
Net income                                --          --         --         8,881        --       --             --        8,881
Other comprehensive income:
  Unrealized gains on investments, net of
  tax and reclassification adjustment     --          --      1,065           --         --       --             --        1,065
                                                                                                                       -----------
Comprehensive income                                                                                                       9,946
                                                                                                                       -----------
Issuance of common stock                  --         814         --           --         --       --             --          814
Amortization of compensation expense from
  restricted stock awards issued          --          --         --           --         --       --            157          157
Cash dividends paid ($0.20 per share)     --          --         --       (1,951)        --       --             --       (1,951)
Purchase of treasury stock, at cost       --          --         --           --     (5,643)      --             --       (5,643)
                                       -------------------------------------------------------------------------------------------
Balance at December 31, 1998            $ 99    $ 69,035    $ 2,714     $ 34,779   $ (5,643)     $ 0         $ (354)    $100,630
                                       ===========================================================================================

Net income                                --          --         --        2,038         --       --             --        2,038
Other comprehensive loss:
  Unrealized loss on investments, net of
  tax and reclassification adjustment     --          --     (7,038)          --         --       --             --       (7,038)
                                                                                                                       -----------
Comprehensive loss                                                                                                        (5,000)
                                                                                                                       -----------
Issuance of common stock                   1         556         --           --         --       --             --          557
Unearned compensation from restricted
  stock awards issued                     --          --         --           --         --       --            (91)         (91)
Amortization of compensation expense from
  restricted stock awards issued          --          --         --           --         --       --            120          120
Cash dividends paid ($0.2075 per share)   --          --         --      ( 1,767)        --       --             --       (1,767)
Purchase of treasury stock, at cost       --          --         --           --    (13,831)      --             --      (13,831)
                                       -------------------------------------------------------------------------------------------
Balance at December 31,1999            $ 100    $ 69,591   $ (4,324)    $ 35,050   $(19,474)     $ 0         $ (325)    $ 80,618
                                       ===========================================================================================

Net loss                                  --          --         --       (3,856)        --       --             --       (3,856)
Other comprehensive income:
  Unrealized gains on investments, net of
  tax and reclassification adjustment     --          --      3,513           --         --       --             --        3,513
                                                                                                                       -----------
Comprehensive loss                                                                                                          (343)
                                                                                                                       -----------
Issuance of common stock                   1         573         --           --         --       --             --          574
Officers' stock loans                     --          --         --           --         --     (546)            --         (546)
Unearned compensation from restricted
  stock awards issued                     --          --         --           --         --       --            (74)         (74)
Amortization of compensation expense from
  restricted stock awards issued          --          --         --           --         --       --            120          120
Cash dividends paid ($0.21 per share)     --          --         --       (1,611)        --       --             --       (1,611)
Purchase of treasury stock, at cost       --          --         --           --     (4,687)      --             --       (4,687)
                                       -------------------------------------------------------------------------------------------
Balance at December 31, 2000           $ 101    $ 70,164     $ (811)     $29,583   $(24,161)  $ (546)        $ (279)    $ 74,051
                                       ===========================================================================================
</TABLE>


See accompanying notes to Consolidated Financial Statements.



24

<PAGE>

Penn-America Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows



<TABLE>
<CAPTION>

                                                                        For the year ended December 31,
(In thousands)                                                       2000             1999             1998
----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S>                                                               <C>              <C>              <C>
    Net income (loss)                                             $ (3,856)        $  2,038         $  8,881
    Adjustments to reconcile net income (loss) to
      net cash provided by operating activities:
        Amortization and depreciation expense                          393              493              720
        Net realized investment (gains) losses                       1,331             (841)             (18)
        Deferred income tax (benefit)                                 (594)            (263)             159
        Net increase in premiums receivable, prepaid
          reinsurance premiums and unearned premiums                 5,087            2,727              401
        Net increase in unpaid losses and loss
          adjustment expenses and
          reinsurance recoverable                                   15,432            5,264            2,210
        Accrued investment income                                     (216)             (94)             102
        Deferred policy acquisition costs                           (1,011)            (578)            (165)
        Income tax recoverable                                      (1,330)            (768)            (844)
        Other assets                                                  (134)             (64)            (215)
        Accounts payable and accrued expenses                          598              576           (1,159)
        Other liabilities                                             (709)             112              572
                                                                ------------------------------------------------
        Net cash provided by operating activities                   14,991            8,602           10,644
                                                                ------------------------------------------------

Cash flows from investing activities:
    Purchases of equity securities                                 (10,405)          (8,320)         (17,388)
    Purchases of fixed maturities available for sale               (87,573)         (38,521)         (45,533)
    Purchases of fixed maturities held to maturity                  (9,974)          (2,785)          (1,015)
    Proceeds from sales of equity securities                        11,202            4,462           19,633
    Proceeds from sales of fixed maturities available
      for sale                                                      78,154               --           23,037
    Proceeds from maturities of fixed maturities
      available for sale                                                --           25,995            7,997
    Proceeds from maturities and calls of fixed maturities
      held to maturity                                               9,000           13,256           20,988
    Change in short-term investments                                   449              548           10,458
                                                                ------------------------------------------------
        Net cash (used) provided by investing activities            (9,147)          (5,365)          18,177
                                                                ------------------------------------------------

Cash flows from financing activities:
    Issuance of common stock                                           500              465              814
    Purchase of treasury stock                                      (4,687)         (13,831)          (5,643)
    Officers' stock loans                                             (546)              --               --
    Principal payments on capital lease obligations                   (120)            (136)            (127)
    Dividends paid                                                  (1,611)          (1,767)          (1,951)
                                                                ------------------------------------------------
        Net cash used by financing activities                       (6,464)         (15,269)          (6,907)
                                                                ------------------------------------------------

Increase (decrease) in cash                                           (620)         (12,032)          21,914
Cash, beginning of period                                           12,045           24,077            2,163
                                                                ------------------------------------------------
Cash, end of period                                               $ 11,425         $ 12,045         $ 24,077
                                                                ================================================

Supplemental cash flow information:
        Interest paid                                             $    161         $    145         $    177
        Taxes paid (recovered)                                        (950)             875            4,248
</TABLE>


See accompanying notes to Consolidated Financial Statements.



                                                                              25


<PAGE>

Penn-America Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Note 1 Summary of Significant Accounting Policies

Basis of Presentation and Description of Business
Penn-America Group, Inc. (PAGI or the "Company") is an insurance holding
company. Approximately 41% of the outstanding common stock of the Company was
owned by Penn Independent Corporation ("Penn Independent") at December 31, 2000.
The accompanying financial statements include the accounts of the Company and
its wholly owned subsidiary, Penn-America Insurance Company ("Penn-America") and
its wholly owned subsidiary Penn-Star Insurance Company ("Penn-Star"). All
significant intercompany accounts and transactions have been eliminated in
consolidation. These financial statements are prepared in conformity with
accounting principles generally accepted in the United States, which differ
significantly from accounting principles required by insurance regulatory
authorities.

Penn-America and its subsidiary Penn-Star underwrite commercial property and
general liability insurance and multi-peril insurance, generally referred to as
"property and casualty" insurance. The companies write their business on an
excess and surplus lines, or non-standard, basis as well as on an admitted
basis. Penn-America and Penn-Star combined are licensed admitted insurers in 43
states and are approved excess and surplus lines insurers in 45 states and the
District of Columbia.

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

Fixed-maturity securities classified as "Held to Maturity" are adjusted for
amortization of premium and accretion of discounts to maturity date using the
interest method. Investment income on all fixed-maturity investments is
recognized on the accrual basis. Realized investment gains and losses are
recorded when the securities are sold using the specific identification basis.

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

Equity securities are carried at fair value with unrealized investment gains or
losses net of deferred income taxes included as a separate component of
accumulated other comprehensive income (loss) in stockholders' equity.

Short-term investments are carried at cost, which approximates fair value.

Premiums and Other Receivables
Premiums are recognized as revenue ratably over the terms of the respective
policies. Unearned premiums are calculated on a semi-monthly pro-rata basis.
Management established an allowance for doubtful accounts of $422,000 at
December 31, 2000 and 1999, on premium receivables, which management believes is
adequate to cover uncollectible accounts.

Policy Acquisition Costs
Policy acquisition costs such as commissions, salaries, premium taxes and
certain other underwriting expenses, which vary with and are directly related to
the production of business, are deferred and amortized

26


<PAGE>

over the effective periods of the related insurance policies. Deferred policy
acquisition costs are limited to their estimated realizable values, giving
effect to the premium to be earned, related investment income, losses and loss
adjustment expenses and certain other costs expected to be incurred as the
premium is earned.

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

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

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

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

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

The fair value of options is estimated on the grant date using the Black-Scholes
option pricing model. The model assumes the following for 2000, 1999, and 1998,
respectively: expected annual dividend rates of 2.8%, 1.9%, and 1.1%; risk-free
interest rates of 6.0% for all years; weighted average expected life of the
options of 2.5 years for all years; and expected stock price volatility of 30%
for all years.

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

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

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



                                                                              27
<PAGE>



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

Reclassification
Certain prior-year amounts have been restated to conform to 2000
classifications.

Note 2 Income Per Share
Basic net income (loss) per share is computed by dividing income or loss
available to common stockholders by the weighted-average number of common shares
outstanding for each period. Diluted net income (loss) per share reflects the
potential dilution that could occur if the securities or other contracts to
issue common stock were exercised or converted into common stock.

The following is a reconciliation of the numerators and denominators of the
basic and diluted income (loss) per share computations:

<TABLE>
<CAPTION>
                                                                Year ended December 31,
(In thousands, except per share data)                     2000            1999           1998
===============================================================================================
Basic per share computation:
<S>                                                     <C>             <C>            <C>
Net income (loss)                                       $(3,856)        $ 2,038        $ 8,881
Weighted average common shares outstanding                7,679           8,592          9,766
                                                    -------------------------------------------
Basic net income (loss) per share                       $ (0.50)        $  0.24        $  0.91
                                                    -------------------------------------------

Diluted per share computation: Net income (loss)        $(3,856)        $ 2,038        $ 8,881
Weighted average common shares outstanding                7,679           8,592          9,766

Additional shares outstanding after the assumed
    exercise of options by applying the
    treasury stock method                                     *              66            107
                                                    -------------------------------------------
Total shares                                              7,679           8,658          9,873
                                                    -------------------------------------------
Diluted net income (loss) per share                     $ (0.50)        $  0.24        $  0.90
                                                    ===========================================
</TABLE>

* The Company has issued options to purchase 359,250 shares of common stock to
employees and directors at prices ranging from $5.42 to $19.00. These options
are not considered in the 2000 computation, as the impact is anti-dilutive.


Note 3 Transactions with Affiliates
Penn-America leases its home office facility from a stockholder and the lease is
accounted for as a capital-ized lease. The amount of property capitalized,
$2,227,000 is presented net of accumulated amortization of $474,000 and $387,000
as of December 31, 2000 and 1999, respectively. Capitalized lease obligations of
$1,701,000 and $1,821,000 were recorded at December 31, 2000 and 1999,
respectively, representing the lease obligation arising from this lease, which
carries an 8.5% interest rate. Penn Independent and its subsidiaries also lease
a portion of the building in which Penn-America's home office facility is
located. Management believes that the lease terms are at market rates.


28


<PAGE>



Penn Independent provides the Company with human resources and facilities
management services. The Company paid $200,000, $200,000 and $225,000 in 2000,
1999 and 1998, respectively, for such services. All costs incurred by Penn
Independent on behalf of Penn-America have been allocated to Penn-America and
are reflected in the financial statements. Management believes that the methods
used to allocate such costs are reasonable and reflective of market rates for
such services.

Premiums written resulting from transactions with insurance agency affiliates of
Penn Independent were $3,282,000, $1,732,000 and $1,279,000 in 2000, 1999 and
1998, respectively. Commissions paid to such affiliates were $740,000, $441,000
and $294,000 in 2000, 1999 and 1998, respectively. Premiums receivable includes
receivable from affiliates of $535,000 and $196,000 as of December 31, 2000 and
1999 respectively.

Note 4 Investments
The Company invests primarily in investment-grade fixed maturities,
substantially all of which are rated "A" or higher by Standard & Poor's or
Moody's. The cost, gross unrealized gains and losses and fair values of
investments are as follows:
<TABLE>
<CAPTION>
                                                           December 31, 2000
                                    -----------------------------------------------------------
                                                         Gross          Gross
                                     Amortized       Unrealized     Unrealized           Fair
(In thousands)                           Cost            Gains         Losses           Value
                                    -----------------------------------------------------------
<S>                                    <C>             <C>             <C>             <C>
Fixed maturities
Available for sale
U.S. Treasury securities
 and obligations
 of U.S. government agencies           $  4,015        $    107        $     --        $  4,122
Corporate securities                     52,084             668             387          52,365
Mortgage-backed securities               23,321             629               6          23,944
Other structured securities              21,381             497               6          21,872
Municipal securities                     15,882             537              --          16,419
Public utilities                          7,190              44             479           6,755
                                    -----------------------------------------------------------
Total                                   123,873           2,482             878         125,477
                                    -----------------------------------------------------------

Held to maturity
U.S. Treasury securities
 and obligations
 of U.S. government agencies           $ 13,760             162              14          13,908
Corporate securities                      2,378              --               4           2,374
Municipal securities                        150              --              --             150
Public utilities                            994              15              --           1,009
                                    -----------------------------------------------------------
Total                                    17,282             177              18          17,441
                                    -----------------------------------------------------------

Total fixed-maturity securities        $141,155           2,659             896         142,918

Equity securities                        27,324             300           3,133          24,491
                                    -----------------------------------------------------------
Total investments                      $168,479        $  2,959        $  4,029        $167,409
                                    ===========================================================
</TABLE>




                                                                              29

<PAGE>


<TABLE>
<CAPTION>
                                                           December 31, 1999
                                    -----------------------------------------------------------
                                                         Gross          Gross
                                     Amortized       Unrealized     Unrealized           Fair
(In thousands)                           Cost            Gains         Losses           Value
                                    -----------------------------------------------------------
<S>                                    <C>             <C>             <C>             <C>
Fixed maturities
Available for sale
U.S. Treasury securities
 and obligations
 of U.S. government agencies           $ 10,666        $     30        $  1,315        $  9,381
Corporate securities                     33,005              43           1,204          31,844
Mortgage-backed securities                9,630              --             229           9,401
Other structured securities               8,230              32              55           8,207
Municipal securities                     29,222              --           1,008          28,214
Public utilities                         25,222               2             852          24,372
                                    -----------------------------------------------------------
Total                                   115,975             107           4,663         111,419
                                    -----------------------------------------------------------

Held to maturity
U.S. Treasury securities
 and obligations
 of U.S. government agencies              7,791              --             122           7,669
Corporate securities                      7,360               1              63           7,298
Municipal securities                        150               1               1             150
Public utilities                            993              --               7             986
                                    -----------------------------------------------------------
Total                                    16,294               2             193          16,103
                                    -----------------------------------------------------------

Total fixed-maturity securities         132,269             109           4,856         127,522

Equity securities                        28,014             951           2,945          26,020
Short-term investments                      449              --              --             449
                                    -----------------------------------------------------------
Total investments                      $160,732        $  1,060        $  7,801        $153,991
                                    ===========================================================
</TABLE>


Fixed maturities at December 31, 2000, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.

<TABLE>
<CAPTION>
                                              Available for Sale                       Held to Maturity
                                        Amortized                               Amortized
(In thousands)                            Cost             Fair Value             Cost             Fair Value
---------------------------------------------------------------------------------------------------------------
<S>                                     <C>                 <C>                 <C>                 <C>
Due in one year or less                 $     --            $     --            $  1,251            $  1,249
Due after one year through
 five years                               51,310              51,802              15,031              15,193
Due after five years through
 ten years                                27,549              27,588               1,000                 999
Due after ten years                       21,693              22,142                  --                  --
Asset- and mortgage-backed
 securities                               23,321              23,945                  --                  --
                                      ---------------------------------       --------------------------------
Total                                   $123,873            $125,477            $ 17,282              17,441
                                      =================================       ================================
</TABLE>



30


<PAGE>


<TABLE>
<CAPTION>
A summary of net investment income is as follows:
                                                                Year ended December 31,
(In thousands)                                        2000              1999            1998
--------------------------------------------------------------------------------------------------
<S>                                                <C>              <C>              <C>
Interest on fixed maturities                       $  8,508         $  7,629         $  8,921
Dividends on equity securities                        1,422            1,492            1,528
Interest on short-term investments and cash             815              787              732
Other                                                    26                4                2
                                                --------------------------------------------------
Total investment income                              10,771            9,912           11,183
Less investment expense                                (317)            (375)            (420)
                                                --------------------------------------------------
Net investment income                              $ 10,454         $  9,537         $ 10,763
                                                ==================================================
</TABLE>


All investments in fixed-maturity securities have been income-producing during
2000, 1999 and 1998. A summary of realized gains and losses on the sale of
investments is as follows:

<TABLE>
<CAPTION>
                                                          Year ended December 31,
(In thousands)                                     2000             1999            1998
--------------------------------------------------------------------------------------------
Fixed maturities:
<S>                                              <C>             <C>             <C>
Gross realized gains                             $    24         $    66         $    87
Gross realized losses                             (1,461)            (23)            (11)
                                             ---------------------------------------------
Net realized investment gain (loss)               (1,437)             43              76

Equity securities:
Gross realized gains                               1,128           1,266             724
Gross realized losses                             (1,022)           (468)           (782)
                                             ---------------------------------------------

Net realized investment gain (loss)                  106             798             (58)
                                             ---------------------------------------------
Total net realized investment gain (loss)        $(1,331)        $   841         $    18
                                             =============================================
</TABLE>


Income tax benefit on net realized investment loss was $453,000 in 2000. Income
tax expense on net realized investment gain was $286,000 and $6,000 in 1999 and
1998, respectively.

The amortized cost of fixed maturities on deposit with various regulatory
authorities at December 31, 2000 and 1999 was $10,992,000 and $8,295,000,
respectively.

Note 5 Reinsurance
In the normal course of business, the Company seeks to reduce the losses that
may arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risks in various areas of exposure with
other insurance enterprises or reinsurers. Reinsurance contracts do not relieve
the Company of its obligations to policyholders. Failure of reinsurers to honor
their obligations could result in additional losses to the Company. The Company
evaluates the financial condition of its reinsurers and monitors concentrations
of credit risk arising from similar geographic regions, activities or economic
characteristics of the reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies. At December 31, 2000, reinsurance recoverables and
prepaid reinsurance premiums associated with one major reinsurer, General
Reinsurance Corporation, were $27,982,000.



                                                                              31


<PAGE>



Premiums written and earned consisted of the following:

                                              Year ended December 31,
(In thousands)                         2000             1999            1998
-------------------------------------------------------------------------------
Premiums written:

Gross                                $109,791        $ 95,983        $ 95,097
Ceded                                  12,541           8,947           7,268
                                  --------------------------------------------
Net of reinsurance                   $ 97,250        $ 87,036        $ 87,829
                                  ============================================

Premiums earned:

Gross                                $102,883        $ 93,904        $ 97,017
Ceded                                  11,434           8,227           7,524
                                  --------------------------------------------
Net of reinsurance                   $ 91,449        $ 85,677        $ 89,493
                                  ============================================

Loss and loss adjustment expenses are net of recoveries recognized under
reinsurance contracts as follows: $9,438,000, $7,182,000, $6,081,000 in 2000,
1999, and 1998, respectively.

Note 6 Unpaid Losses and Loss Adjustment Expenses
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:


                                              Year ended December 31,
(In thousands)                         2000             1999            1998
-------------------------------------------------------------------------------

Balance as of January 1              $ 93,719        $ 88,937        $ 84,566
Less reinsurance recoverables          18,086          16,502          15,703
                                  --------------------------------------------
Net balance at January 1               75,633          72,435          68,863

Incurred related to:
Current year                           66,214          54,768          55,647
Prior years                             9,164           8,419              86
                                  --------------------------------------------
Total incurred                         75,378          63,187          55,733

Paid related to:
Current year                           26,273          23,540          21,903
Prior years                            33,517          36,449          30,258
                                  --------------------------------------------
Total paid                             59,790          59,989          52,161

Net balance at December 31             91,221          75,633          72,435
Plus reinsurance recoverables          24,093          18,086          16,502
                                  --------------------------------------------
Balance as of December 31            $115,314        $ 93,719        $ 88,937
                                  ============================================


As a result of changes in estimates of insured events of prior years, the
provision for losses and loss adjustment expenses increased $9,164,000,
$8,419,000, and $86,000 in 2000, 1999, and 1998, respectively. The increase in
prior-year incurred losses in 2000 was due principally to revised loss
projections for the Company's commercial automobile liability, CMP liability and
other liability lines of business as well as higher than expected property
losses. The increase in prior year incurred losses in 1999 was due to loss
reserve development in the non-standard personal automobile and commercial
liability lines of business.


32

<PAGE>



Note 7 Income Tax
The components of income tax expense (benefit) are as follows:

<TABLE>
<CAPTION>
                                                                 Year ended December 31,
-----------------------------------------------------------------------------------------------
(In thousands)                                                2000          1999          1998
<S>                                                          <C>            <C>           <C>
Current                                                    $(2,377)      $   107       $ 3,483
Deferred                                                      (594)         (263)          159
                                                        --------------------------------------
Total tax expense (benefit)                                $(2,971)      $  (156)      $ 3,642
                                                        ======================================
</TABLE>


The actual income tax rate differed from the statutory income tax rate as
follows:

<TABLE>
<CAPTION>
                                                                 Year ended December 31,
-----------------------------------------------------------------------------------------------
                                                              2000          1999          1998
<S>                                                          <C>            <C>           <C>
Statutory income tax rate                                    (34.0)%        34.0%         34.0%
Tax-exempt interest and dividends received deduction         (10.2)        (44.5)         (5.4)
Other                                                          0.7           2.2           0.5
                                                           ------------------------------------
                                                             (43.5)%        (8.3)%        29.1%
                                                           ====================================
</TABLE>


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

<TABLE>
<CAPTION>
                                                                 December 31,
(In thousands)                                               2000          1999
------------------------------------------------------------------------------------
<S>                                                         <C>           <C>
Assets
Effect of discounting unpaid losses
 and loss adjustment expenses                               $4,070        $3,607
Excess of tax over financial
 reporting of earned premium                                 2,625         2,231
Net unrealized investment loss                                 433         2,278
Other                                                          748           788
                                                         ---------------------------
Total deferred assets                                        7,876         8,904
                                                         ---------------------------

Liabilities

Deferred policy acquisition costs                            3,508         3,164
Other                                                           96           253
                                                         ---------------------------
Total deferred liabilities                                   3,604         3,417
                                                         ---------------------------
Net deferred tax asset                                      $4,272        $5,487
                                                         ===========================
</TABLE>


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



                                                                              33
<PAGE>

Note 8 Segment Information
The Company has two reportable segments: non-standard personal automobile and
commercial lines. The Company announced in April 1999 that it would run-off its
remaining portfolio of the personal lines automobile business, which was
underwritten through a single agent in California. This followed a decision
earlier in 1999 to eliminate the remainder of the Company's non-standard
personal automobile business in nine other states. The Company will continue to
report on this segment separately until the amounts relating to the non-standard
personal automobile business become immaterial to the financial statements
presented. These segments are managed separately because they have different
customers, pricing and expense structures. The Company does not allocate assets
between segments because assets are reviewed in total by management for
decision-making purposes.

The accounting policies of the segments are the same as those more fully
described in the summary of significant accounting policies in Note 1. The
Company evaluates segment profit based on profit or loss from operating
activities. Segment profits or losses from operations are pre-tax and do not
include unallocated expenses but do include investment income attributable to
insurance transactions. Segment profit or loss therefore excludes federal income
taxes, unallocated expenses and investment income attributable to equity as
opposed to investment income attributable to insurance transactions.

The following is a summary of the Company's segment revenues, expenses and
profit:

<TABLE>
<CAPTION>
                                                                Year ended December 31, 2000
(In thousands)                                         Commercial         Personal           Total
------------------------------------------------------------------------------------------------------
<S>                                                    <C>               <C>              <C>
Premiums earned                                        $  87,556         $   3,893        $  91,449
Net investment income from insurance operations            5,152               479            5,631
                                                  ----------------------------------------------------
Total segment revenues                                    92,708             4,372           97,080
                                                  ----------------------------------------------------
Segment losses and loss adjustment expenses               72,893             2,485           75,378
Segment expenses                                          25,614             1,362           26,976
                                                  ----------------------------------------------------
Total segment expenses                                    98,507             3,847          102,354
                                                  ----------------------------------------------------
Segment profit (loss)                                  $  (5,799)        $     525        $  (5,274)
                                                  ====================================================
Plus unallocated items:
Net investment income from equity                                                             3,492
Unallocated expenses                                                                         (5,045)
Income tax benefit                                                                            2,971
                                                                                      ----------------
Net loss                                                                                   $ (3,856)
                                                                                      ================

</TABLE>



34


<PAGE>


<TABLE>
<CAPTION>
                                                                Year ended December 31, 1999
(In thousands)                                       Commercial         Personal           Total
---------------------------------------------------------------------------------------------------
<S>                                                    <C>               <C>              <C>
Premiums earned                                        $ 71,731        $ 13,946         $ 85,677
Net investment income from insurance operations           4,730             800            5,530
                                                  -------------------------------------------------
Total segment revenues                                   76,461          14,746           91,207
                                                  -------------------------------------------------
Segment losses and loss adjustment expenses              49,744          13,443           63,187
Segment expenses                                         21,905           4,533           26,438
                                                  -------------------------------------------------
Total segment expenses                                   71,649          17,976           89,625
                                                  -------------------------------------------------
Segment profit (loss)                                  $  4,812        $ (3,230)        $  1,582
                                                  =================================================

Plus unallocated items:
Net investment income from equity                                                          4,848
Unallocated expenses                                                                      (4,548)
Income tax benefit                                                                           156
                                                                                      -------------
Net income                                                                               $ 2,038
                                                                                      =============
</TABLE>


<TABLE>
<CAPTION>
                                                            Year ended December 31, 1998
(In thousands)                                       Commercial         Personal           Total
---------------------------------------------------------------------------------------------------
<S>                                                    <C>               <C>              <C>

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 loss adjustment expenses              37,121          18,612           55,733
Segment expenses                                         18,687           8,547           27,234
                                                  -------------------------------------------------
Total segment expenses                                   55,808          27,159           82,967
                                                  -------------------------------------------------
Segment profit                                          $11,267         $   330          $11,597
                                                  =================================================

Plus unallocated items:
Net investment income from equity                                                          5,710
Unallocated expenses                                                                      (4,784)
Income tax expense                                                                        (3,642)
                                                                                      -------------
Net income                                                                               $ 8,881
                                                                                      =============
</TABLE>

Total segment revenues of $97,080,000, $91,207,000, and $94,564,000, plus
unallocated net investment income from equity of $3,492,000, $4,848,000, and
$5,710,000, equals total Company revenues of $100,572,000, $96,055,000, and
$100,274,000 for the years ended December 31, 2000, 1999, and 1998,
respectively.

In 1998, the Company had one general agency that accounted for approximately
18.4% of revenue. In 2000 and 1999, no general agent accounted for more than 10%
of revenue.



                                                                              35
<PAGE>



Note 9 Stockholders' Equity
The principal source of cash for the payment of dividends to the Company's
stockholders, its operating expenses and repurchase of Company stock is
dividends from Penn-America and Penn-Star. Penn-America is required by law to
maintain a certain minimum surplus on a statutory basis and is subject to
risk-based capital ("RBC") requirements and regulations under which payment of
dividends from statutory surplus may require prior approval from the
Pennsylvania Insurance Department. Penn-America may pay dividends to the Company
without advance regulatory approval only from unassigned surplus and only to the
extent that all dividends in the past twelve months do not exceed the greater of
10% of total statutory surplus or statutory net income for the prior year.
Penn-America's unassigned surplus was $7,456,000 as of December 31, 2000. Using
this criteria, the available ordinary dividend for 2001 is $5.5 million. No
ordinary dividends were paid to PAGI in 2000. Rather, Penn-America paid a $6.4
million return of capital to PAGI in 2000, after receiving approval from the
Pennsylvania Insurance Department.

The National Association of Insurance Commissioners ("NAIC") has adopted RBC
requirements for property and casualty insurance companies. At December 31, 2000
and 1999, the Company's actual RBC exceeded minimum requirements.

The following tables reconcile statutory surplus and net income (loss) of
Penn-America as determined in accordance with accounting procedures prescribed
or permitted by the insurance regulatory authorities to stockholders' equity and
net income (loss) of the Company calculated in accordance with accounting
principles generally accepted in the United States as reported herein:
<TABLE>
<CAPTION>
                                                                        Year ended December 31,
(In thousands)                                                   2000              1999              1998
-----------------------------------------------------------------------------------------------------------
<S>                                                          <C>               <C>               <C>
Statutory surplus as regards policyholders                   $  55,530         $  69,515         $  85,358
Deferred policy acquisition costs                               10,317             9,306             8,728
Deferred income taxes                                            4,272             5,483             1,576
Unrealized investment gains (losses)                             1,974            (5,027)            2,233
Provision for unauthorized reinsurance                              59                --               184
Non-admitted assets                                              1,175               896               889
Other assets (liabilities)                                          90                29                 9
Provision for uncollectible accounts                              (522)             (522)             (622)
Holding company assets                                           1,156               938             2,275
                                                            ----------------------------------------------
GAAP stockholders' equity                                    $  74,051         $  80,618         $ 100,630
                                                            ==============================================





                                                                        Year ended December 31,
(In thousands)                                                   2000              1999              1998
-----------------------------------------------------------------------------------------------------------
Statutory net income (loss)                                  $  (5,020)        $   1,869         $   9,805
Deferred policy acquisition costs                                1,010               578               165
Deferred income tax                                                594               281              (169)
Allowance for uncollectible accounts                                --               100                --
Other, net                                                          60                35                48
Holding company expenses, net of tax benefit                      (500)             (825)             (968)
                                                            ----------------------------------------------
GAAP net income (loss)                                       $  (3,856)        $   2,038         $   8,881
                                                            ==============================================

</TABLE>



36


<PAGE>



The NAIC revised the Statutory Accounting Practices and Procedures Manual in a
process referred to as Codification. The objective of Codification was to
standardize the accounting practices prescribed by each state's Insurance
Department. The revised manual is effective January 1, 2001. Pennsylvania, the
domiciliary state for Penn-America and Penn-Star, has adopted the provisions of
the revised manual. The revised manual has changed, to some extent, prescribed
statutory accounting practices and will result in changes to the accounting
practices that Penn-America and Penn-Star use to prepare their statutory-basis
financial statements. Management believes the impact of these changes on the
statutory-basis capital and surplus of the Company's insurance subsidiaries as
of January 1, 2001 are not material.

Note 10 Profit-Sharing Plans
Penn-America participates in a profit-sharing and 401(k) plan with Penn
Independent that covers qualified employees. Penn-America's contributions under
the 401(k) plan were $72,000, $105,000, and $114,000 for 2000, 1999, and 1998,
respectively. There were no profit-sharing distributions in 2000, 1999, and
1998.

Note 11 Stock Incentive Plans
Stock options: In August 1993, the Company adopted a Stock Incentive Plan (the
"Plan"). The purpose of the Plan is to enable officers, employees, directors,
consultants, advisors and service providers of the Company and its affiliates
(as defined in the Plan) to participate in the Company's future and to enable
the Company to attract and retain these persons by offering them stock
ownership. The Plan authorizes the issuance of up to 825,000 shares of common
stock pursuant to the exercise of stock options or the award of restricted
stock. Options are exercisable according to the various terms under which they
were granted varying from one year to ten years after the date of grant. All
options are subject in general to earlier termination if the option-ee leaves
the Company.

The Company has elected to account for these stock options in accordance with
the provisions of Accounting Principles Board Opinion ("APB") #25, "Accounting
for Stock Issues to Employees" and accordingly, no compensation expense has been
recorded for such grants. SFAS #123, "Accounting for Stock-Based Compensation,"
effective in 1996, would require that compensation expense be recorded for these
option grants. Accounting for such options using the provisions of APB 25 and
SFAS 123 are both acceptable alternatives under GAAP. Had the Company elected to
adopt SFAS 123, the effect on the Company's net income and per share results
would have been:

                                                   Year ended December 31,
(In thousands)                               2000           1999          1998
--------------------------------------------------------------------------------
Net income (loss):

As reported                              $  (3,856)     $   2,038     $   8,881
Pro forma                                   (3,998)         2,013         8,845

Diluted net income (loss) per share:

As reported                              $   (0.50)     $    0.24     $    0.90
Pro forma                                    (0.52)          0.23          0.90




                                                                              37


<PAGE>



A summary of the status of and changes in the Company's stock option plan is
presented below:

<TABLE>
<CAPTION>
                                                                Year ended December 31,
(Options in thousands)                                      2000          1999       1998
-------------------------------------------------------------------------------------------
<S>                                                         <C>          <C>         <C>
Outstanding at beginning of year
 (average price of $7.09, $6.98, and $6.40
 in 2000, 1999, and 1998, respectively)                      307          298         313
Granted
 (average price of $7.44, $10.63, and $19.00
 per share, respectively)                                     74            9          16
Exercised
 (average price of $4.43, and $6.00
 per share, respectively)                                    (16)          --         (29)
Forfeited
 (average price of $16.38, and $15.13
 per share, respectively)                                     (6)          --          (2)
                                                        -----------------------------------
Outstanding at end of year
 (average price of $7.12, $7.09, and $6.98 per share
 in 2000, 1999, and 1998 respectively)                       359          307         298
                                                        -----------------------------------

Options exercisable at end of year                           295          298         286
                                                        -----------------------------------

Weighted average fair value of options
 granted during the year                                    $2.91        $3.29       $4.43
</TABLE>


The following table summarizes information about stock options outstanding at
December 31, 2000:
<TABLE>
<CAPTION>
                             Options Outstanding                    Options Exercisable
                  ----------------------------------------      ---------------------------
                                                 Weighted
                     Number          Average      Weighted        Number          Weighted
                  Outstanding       Remaining      Average      Exercisable       Average
                    12/31/00       Contractual    Exercise        12/31/00        Exercise
Exercise Prices    (in 000's)      Life(Years)     Price         (in 000's)         Price
-------------------------------------------------------------------------------------------
<S>                 <C>            <C>          <C>              <C>               <C>
$ 5.40- 5.99            15             0.4       $  5.42           15             $  5.42
$ 6.00- 7.60           288             4.1       $  6.30          224             $  6.00
$ 7.61- 9.50            24             2.9       $  8.64           24             $  8.64
$ 9.51- 11.40            9             4.4       $ 10.63            9             $ 10.63
$ 11.41- 15.20          14             2.4       $ 13.75           14             $ 13.75
$ 15.21- 19.00           9             3.4       $ 19.00            9             $ 19.00
</TABLE>

Restricted Stock: The Company has awarded shares of restricted stock to certain
employees. Such shares are held by the Company and released to each grantee at
the rate of 20% per year provided that the grantee is still employed by the
Company or its affiliates. The Company charged $120,000, $120,000 and $157,000
to compensation expense relating to these awards for the years ended 2000, 1999
and 1998, respectively. During 2000, 1999 and 1998, 6,500, 6,500, and 14,600
shares, respectively, of the restricted stock were released to the applicable
employees as allowed by the provisions of the grant.

Agents' Contingent Commission Plan: The Agents' Contingent Commission Plan
provides that at least 25% of the contingent commission award to the Company's
agents each year will be given in stock of the Company and that stock options
will be awarded as part of the contingent commission. Agents' stock awards for
the 1999, 1998 and 1997 years, which were issued in May 2000, 1999 and 1998,
amounted to 59,589, 42,035 and 20,437 shares, respectively. No stock options
were awarded under this plan. The awards for 2000 will not be determined until
May 2001.

38


<PAGE>



Note 12 Commitments and Contingencies
The Company's insurance subsidiaries are subject to routine legal proceedings in
connection with their property and casualty insurance business. Neither the
Company nor its subsidiaries is involved in any pending or threatened legal or
administrative proceedings that management believes might have a material
adverse effect on the Company's financial condition or results of operations.

In 2000, the Company terminated its $25 million revolving credit facility. The
Company had not borrowed from this facility since its inception in 1998.

The Company leases various computer equipment for use by its insurance
subsidiaries. These leases have terms primarily expiring in less than a
three-year period. Rental expense for these operating leases were $349,000,
$392,000, and $379,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.

At December 31, 2000, the future minimum rental payments required under
operating leases that have initial or remaining noncancelable lease terms in
excess of one year were $266,000, $210,000 and $83,000 for 2001, 2002 and 2003,
respectively.

Note 13 Comprehensive Income
Under SFAS No. 130, "Comprehensive Income," the Company is required to classify
items of other comprehensive income or loss by their nature in a financial
statements and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
stockholders' equity section of the consolidated balance sheet. Accumulated
other comprehensive (loss) income of the Company consists solely of net
unrealized investment gains or losses.

The following are components of other comprehensive (loss) income:
<TABLE>
<CAPTION>
                                                                   Year ended December 31, 2000
                                                         --------------------------------------------
                                                            Pre-Tax         Tax           Net of Tax
                                                            Amount          Expense         Amount
(In thousands)                                           --------------------------------------------
<S>                                                        <C>               <C>             <C>
Unrealized gains on investments:
Unrealized holding gains arising during period            $  3,990         $ (1,355)        $  2,635
Less: reclassification adjustment for
  losses realized in net income                              1,331             (453)             878
                                                         --------------------------------------------
Other comprehensive income                                $  5,321         $ (1,808)        $  3,513
                                                         ============================================


                                                                   Year ended December 31, 1999
                                                         --------------------------------------------
                                                            Pre-Tax         Tax           Net of Tax
                                                            Amount          Expense         Amount
(In thousands)                                           --------------------------------------------

Unrealized losses on investments:
Unrealized holding losses arising during period           $ (9,823)        $  3,340         $ (6,483)
Less: reclassification adjustment for
  losses realized in net income                               (841)             286             (555)
                                                         --------------------------------------------
Other comprehensive loss                                  $(10,664)        $  3,626         $ (7,038)
                                                         ============================================


                                                                   Year ended December 31, 1998
                                                         --------------------------------------------
                                                            Pre-Tax         Tax           Net of Tax
                                                            Amount          Expense         Amount
(In thousands)                                           --------------------------------------------

Unrealized gains on investments:
Unrealized holding gains arising during the period        $  1,632         $   (555)        $  1,077
Less: reclassification adjustment for
  gains realized in net income                                 (18)               6              (12)
                                                         --------------------------------------------
Other comprehensive income                                $  1,614         $   (549)        $  1,065
                                                         ============================================
</TABLE>

                                                                              39

<PAGE>



Note 14 Unaudited Quarterly Financial Information
<TABLE>
<CAPTION>
(In thousands except per share data)
                                                                       2000

                                    First           Second            Third            Fourth             Total
                                 --------------------------------------------------------------------------------
<S>                              <C>              <C>               <C>               <C>              <C>
Revenues                         $  23,933        $  24,923         $  24,971         $  26,745        $ 100,572
Net income (loss)                    1,583             (662)           (5,078)              301           (3,856)

Basic and diluted net
 income (loss) per share*             0.20            (0.09)            (0.67)             0.04            (0.50)





(In thousands except per share data)
                                                                       1999

                                    First           Second            Third            Fourth             Total
                                 --------------------------------------------------------------------------------

Revenues                         $  24,428        $  24,390         $  23,959         $  23,278        $  96,055
Net income (loss)                    2,209            2,197            (3,244)              876            2,038

Basic and diluted net
 income (loss) per share*             0.24             0.25             (0.38)             0.14             0.24

<FN>
* The total of the quarterly income (loss) per share for each year does not
agree with income (loss) per share as computed for the entire year because the
impact of other potentially dilutive securities is not considered in periods
(quarter or year) reflecting a net loss as the effect of inclusion in loss
periods would be anti-dilutive.
</FN>
</TABLE>




40


<PAGE>

Principal Officers
Penn-America Group, Inc.

Jon S. Saltzman
President and Chief Executive Officer

Joseph F. Morris
Senior Vice President and Chief Financial Officer

Garland P. Pezzuolo
Secretary and General Counsel

Principal Officers
Penn America Insurance Company and
     Penn-Star Insurance  Company

Jon S. Saltzman
President and Chief Executive Officer

John M. DiBiasi, CPCU
Executive Vice President
     Underwriting and Marketing

Thomas P. Bowie
Senior Vice President, Claims

Joseph F. Morris
Senior Vice President and
   Chief Financial Officer

J.Ransley Lennon
Vice President Information Systems

Garland P. Pezzuolo
Secretary and General Counsel

Thomas J. Cannon
Vice President, Underwriting

James J. Mack
Vice President, Treasurer and Controller



Independent Auditors

Ernst & Young
Two Commerce Square
Philadelphia, PA 19103

Consulting Actuary

Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103

Registrar and Transfer Agency

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


<PAGE>
Board of Directors
Penn-America Group, Inc

Irvin Saltzman
Chairman of the Board of Directors,
     Director, Penn Independent Corporation

Jon S. Saltzman
President and Chief Executive Officer, Penn-America Group
     Director, Penn Independent Corporation

Robert A. Lear
President and Director, Penn Independent Corporation
     Director, Dynasil Corporation of America

M.Moshe Porat, Ph.D.,CPCU
Dean, Fox School of Business and Management,
     Temple University

Jami Saltzman-Levy
Vice President and Director, Penn Independent Corporation

Charles Ellman
Retired Insurance Executive

Paul Simon
Director, Public Policy Institute, Southern Illinois University


<PAGE>
Annual Meeting

The Annual Stockholders' Meeting will be held in the Company's home office on
May 9, 2000 at 10:00 A.M.

Stockholder Relations, Form 10-K

The Company's Form 10-K has been filed with the Securities and Exchange
Commission. A copy of the Form 10-K and interim reports are available to
stockholders without charge from the Investor Relations Department. Telephone
(215) 443-3606 or send an E-mail request to info@pennamerica.com

Corporate Headquarters

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

Market and Common Stock Information

The Company's common stock trades on the New York Stock Exchange under the
symbol"PNG." As of February 1, 2001 there were 190 registered holders of record
and approximately 1,300 beneficial holders of record of the company's common
stock. The high and low sale prices of the common stock were as follows:

                                      2000

                    Quarter             High        Low

                    First              $9.00       $6.63
                    Second              9.75        7.13
                    Third               7.88        6.88
                    Fourth              9.44        6.88

                                      1999

                    Quarter             High        Low

                    First            $ 11.44      $ 9.13
                    Second             11.06        9.44
                    Third              10.31        8.44
                    Fourth              8.44        7.13