2

                                    SCHEDULE
                                     to the
                                     ISDA(R)
              International Swaps and Derivatives Association, Inc.
                                MASTER AGREEMENT
           dated as of {earlier of trade date or date of first trade}


between BEAR STEARNS BANK PLC, a bank  organized  under the laws of the Republic
of Ireland  ("Party A"), and  PENN-AMERICA  GROUP INC., a corporation  organized
under the laws of Pennsylvania ("Party B").

                                     Part 1
                             Termination Provisions
                             ----------------------

(a)      "Specified  Entity"  means in  relation  to Party A for the purpose of:
         Section 5(a)(v), Affiliates of Party A Section 5(a)(vi), Not Applicable
         Section 5(a)(vii), Not Applicable Section 5(b)(iv), Not Applicable

         And in relation to Party B for the purpose of:
         Section 5(a)(v),  Affiliates of Party B
         Section 5(a)(vi), Not Applicable
         Section 5(a)(vii),         Not Applicable
         Section 5(b)(iv), Not Applicable

(b)      The  "Default  under  Specified   Transactions"  provision  of  Section
         5(a)(v),  as  modified  in Part 5 below,  will  apply to Party A and to
         Party B.

         To the extent such provisions apply:

         "Specified  Transaction"  will  have the  meaning  set  forth in Part 5
below.

(c)       The "Cross Default" provisions of Section 5(a)(vi) will apply to Party
          A and to Party B.

         To the extent such provisions apply:

         "Specified  Indebtedness" will have the meaning specified in Section 14
         of this Agreement unless otherwise defined herein.

         "Threshold Amount" means  USD10,000,000,  or the equivalent thereof, as
         reasonably  determined by the other party, if the applicable  Specified
         Indebtedness is stated in any currency other than USD.

(d)       The "Credit Event Upon Merger" provision of Section 5(b)(iv) will
          apply to Party A and to Party B; provided that, if upon the occurrence
          of any event contemplated by Section 5(b)(iv) the resulting, surviving
          or transferee entity has both (i) a ratings classification set by A.M.
          Best equal to or above B++ , and (ii) if such entity has been given a
          ratings classification for its long-term, senior, unsecured and
          otherwise unsupported obligations set by either or both of Standard


                                       19
<PAGE>



          and Poor's Ratings Group, a division of the McGraw-Hill Companies,
          Inc., ("S&P") or Moody's Investors Service Inc. ("Moody's"), a rating
          classification (the lower of, if applicable,) which is equal to or
          above BBB- by S&P and Baa3 by Moody's, then for the purposes of
          Section 5(b)(iv) such entity shall not be deemed to be "materially
          weaker".

(e)      The "Automatic  Early  Termination"  provision of Section 6(a) will not
         apply to Party A or to Party B.
(f)      Payments on Early Termination.  For the purpose of Section 6(e) of this
         Agreement the Second Method and Market Quotation will apply.

(g)      "Termination Currency" means United States Dollars,  unless the parties
         otherwise agree.

(h)      Section 5(b)(v)  Additional  Termination  Event will apply. Each of the
         following shall constitute an Additional Termination Event:

         (i) Ratings Downgrade.  If, at any time, a Relevant Rating with respect
         to a party declines below the Termination Level or is withdrawn or if a
         party has no Relevant  Rating,  such party shall be the Affected Party,
         and the  non-Affected  Party shall,  at its option,  designate an Early
         Termination  Date,  and all  Transactions  hereunder  will be  Affected
         Transactions.

         (A) With respect to Party A, the ratings  classification set by S&P and
         Moody's for any long-term,  senior, unsecured and otherwise unsupported
         obligations of The Bear Stearns  Companies Inc. ("BSC") shall each be a
         "Relevant Rating"; and

         (B) With  respect to Party B, the rating set by A.M.  Best with respect
         to Penn-America  Insurance Company or Penn-Star Insurance Company shall
         be a Relevant Rating.

         (C) The  Termination  Level for  Party A is,  with  respect  to S&P and
         Moody's,  respectively,  BB+ and Ba1. The Termination Level for Party B
         is, with respect to A.M. Best, B++.

         (ii) Change in Ownership;  Maintenance of Control. If, at any time, (I)
         Penn-Independent  Corporation  fails  to own or  control,  directly  or
         indirectly,  20 percent of the common stock or other equity interest of
         Party B and  (II)  another  person  or  entity  (the  "New  Controlling
         Entity") owns or controls,  directly or indirectly, a percentage of the
         common stock or other  equity  interest of Party B that is greater than
         Penn-Independent  Corporation,  and (III) such New  Controlling  Entity
         does not have both (A) a ratings classification set by A.M. Best of B++
         or  higher  and (B) if the New  Controlling  Entity  has  been  given a
         ratings  classification  for  its  long-term,   senior,  unsecured  and
         otherwise  unsupported  obligations  set by  either  or both  ofS&P and
         Moody's, a ratings  classification (the lower of, if applicable,) which
         is equal to or above BBB- S&P and Baa3, respectively, then Party B will
         be the sole  Affected  Party  and all  Transactions  hereunder  will be
         Affected Transactions.

         (iii) Disposal of Material  Subsidiary.  If, at any time, Party B fails
         to own or control,  directly or  indirectly,  100 percent of the common
         stock or other equity  interest of  Penn-America  Insurance  Company or
         Penn-Star  Insurance  Company,  Party B will be the sole Affected Party
         and all Transactions hereunder will be Affected Transactions.


                                     Part 2
                               Tax Representations
                               -------------------

(a)      Payer Tax  Representation.  For the  purpose  of  Section  3(e) of this
         Agreement, Party A and Party B each make the following representation:

                                       20

<PAGE>


         It is not required by any  applicable  law, as modified by the practice
         of  any  relevant  governmental  revenue  authority,  of  any  Relevant
         Jurisdiction  to make any deduction or withholding for or on account of
         any Tax from any  payment  (other than  interest  under  Section  2(e),
         6(d)(ii) or 6(e) of this Agreement) to be made by it to the other party
         under this Agreement. In making this representation, it may rely on:

(i)               the  accuracy of any  representations  made by the other party
                  pursuant to Section 3(f) of this Agreement;

(ii)              the satisfaction of the agreement of the other party contained
                  in Section  4(a)(i) or  4(a)(iii)  of this  Agreement  and the
                  accuracy and  effectiveness  of any  document  provided by the
                  other party  pursuant to Section  4(a)(i) or 4(a)(iii) of this
                  Agreement; and

(iii)             the satisfaction of the agreement of the other party contained
                  in Section 4(d) of this Agreement,  provided that it shall not
                  be a breach of this representation where reliance is placed on
                  clause  (ii) and the other  party  does not  deliver a form or
                  document  under Section  4(a)(iii) of this Agreement by reason
                  of material prejudice to its legal or commercial position.

(b)               Payee Tax Representation.  The following  representations will
                  apply to Party A and Party B:

         For the purpose of Section  3(f),  Party A represents  that (i) it is a
         "foreign  financial  institution" and a "non-US branch (or office) of a
         foreign  person" in each case  within  the  meaning,  respectively,  of
         Sections 1.165-12(c)(1)(iv) and 1.1441-4(a)(3)(ii) of the United States
         Treasury  Regulations  and (ii) it is a  "foreign  person"  within  the
         meaning  of  Section  1.6041-4(a)(4)  of  the  United  States  Treasury
         Regulations.

         For the purpose of Section 3(f), Party B makes no representations.

                                     Part 3
                         Agreement to Deliver Documents
                         ------------------------------

For the purpose of Section 4(a)(i) and (ii) of this Agreement, each party agrees
to deliver the following documents, as applicable:

(a) Tax forms,  documents or  certificates  to be delivered by Party A are: Form
W-8BEN, if applicable.

(b) Other documents to be delivered are:

<TABLE>
<CAPTION>




 PARTY REQUIRED TO                                                           DATE BY WHICH TO BE       COVERED BY
      DELIVER                 FORM/DOCUMENT/CERTIFICATE                           DELIVERED           SECTION 3(d)
================== ======================================================     ======================== =================

<S>                <C>                                                          <C>                          <C>
     Party A       Certified   copies   of   all   documents   evidencing     Upon execution of this         Yes
       and         necessary   authorizations  and  approvals,   obtained     Agreement, any Credit
     Party B       pursuant to the relevant constitutive documents,  with     Support Document and
                   respect to the execution,  delivery and performance by     promptly at the
                   the  party and any  Credit  Support  Provider  of this     request of the other
                   Agreement,   any  Credit  Support   Document  and  any     party upon execution
                   Confirmation,  including, where applicable,  certified     of a Confirmation.
                   copies of the  resolutions  of its Board of  Directors
                   or its governing  body  authorizing  the execution and
                   delivery  of  this  Agreement,   the  relevant  Credit
                   Support Document or any Confirmation.

                                       21

<PAGE>

 PARTY REQUIRED TO                                                           DATE BY WHICH TO BE       COVERED BY
      DELIVER                 FORM/DOCUMENT/CERTIFICATE                           DELIVERED           SECTION 3(d)
================== ======================================================     ======================== =================


     Party A       A certificate of an authorized  officer of the party
                   Upon execution of this Yes and and any  Credit  Support
                   Provider  as to the  incumbency Agreement, any Credit


     Party B       and  authority  of the  officers  of the party and any       Support Document and
                   Credit Support  Provider  signing this Agreement,  any       promptly at the
                   Credit Support Document or any Confirmation.                 request of the other
                                                                                party upon execution
                                                                                of a Confirmation.

     Party A       Guaranty of The Bear Stearns  Companies  Inc.  ("BSC")       As soon as                      No
                   in the form of Exhibit I attached hereto.                    practicable, but no
                                                                                later than upon
                                                                                execution of this
                                                                                Agreement.

     Party A       With  respect  to Party  A, a copy of the  audited  Promptly
                   after request Yes and consolidated  financial statements of
                   BSC with respect by the other party.


     Party B       to its most recent  fiscal year,  and with respect to Party
                   B, the audited  consolidated  financial statements of Party B
                   and of Party B's Credit  Support  Provider,  if any,  for the
                   most recent fiscal year, in all cases  prepared in accordance
                   with generally accepted accounting  principles in the country
                   in which such party is organized.

     Party A       With  respect to Party A, a copy of the  unaudited  Promptly
                   after request Yes and consolidated financial statements of
                   BSC, and with by the other party.

     Party B       respect   to  Party   B,  a  copy  of  the   unaudited
                   consolidated  financial  statements of Party B and its
                   Credit Support  Provider (if any), in each case either
                   for each fiscal  quarter or for each six month period,
                   if not prepared on a quarterly  basis,  as applicable,
                   prepared  in  accordance   with   generally   accepted
                   accounting  principles  in the  country  in which such
                   party is organized.

     Party A       A copy of each regular financial or business Promptly after
                   request Yes and reporting  document that is (i)
                   distributed or made by the other party.

     Party B       generally  available by, with respect to Party A, BSC,
                   and with  respect  to Party B,  Party B and its Credit
                   Support   Provider   (if  any),   to  its   respective
                   shareholders  or  investors  or (ii)  filed  by,  with
                   respect to Party A, BSC,  and with respect to Party B,
                   Party B and its Credit  Support  Provider  (if any) in
                   accordance  with the  disclosure  requirements  of any
                   applicable  statute,   rule,  regulation  or  judicial
                   decree and made available for public inspection.

     Party B       An opinion of  counsel of Party B in  connection  with   Promptly upon                   No
                   this  Agreement  in  form  and  substance   reasonably   execution of this
                   satisfactory to Party A.                                 Agreement.

                                       22
</TABLE>
<PAGE>



                                     Part 4
                                  Miscellaneous
                                  --------------

(a) Addresses for Notices. For the purpose of Section 12(a) of this Agreement:

     Address for notices or communications to Party A:

              Address:          One Metrotech Center North, Brooklyn, New York
                                11201
              Attention:        Derivatives Operation - 7th Floor
              Facsimile:        (212) 272-1634

     With a copy to:

              Address:          Block 8, Harcourt Centre, Charlotte Way,
                                Dublin 2, Ireland
              Attention:        President
              Facsimile:        (3531) 402-6223

              Address:          383 Madison Avenue, New York, NY 10179
              Attention:        Derivatives Middle Office - 4th Floor
              Facsimile:        (212) 499-6886 and (212) 272-9857


     For purposes of Sections 5 and 6, a copy to:

              Address:          383 Madison Avenue, New York, NY 10179
              Attention:        Derivatives Documentation - 35th Floor
              Facsimile:        (212) 499-6886 and (212) 272-9857

     Addresses for notices or communications to Party B:

              Address:          420 South York Road, Hatboro, PA, 19040
              Attention:        Garland P. Pezzuolo, Secretary and
                                General Counsel
              Facsimile:        (215) 443-3603

(b) Process Agent. For the purpose of Section 13(c) of this Agreement:

         Party A appoints as its Process Agent - Not Applicable.

         Party B appoints as its Process Agent - Not Applicable

(c) Offices. The provisions of Section 10(a) will apply to this Agreement.

(d) Multibranch Party. For the purpose of Section 10(c) of this Agreement:

         Neither Party A or Party B is a Multibranch Party.

(e) Calculation Agent. The Calculation Agent is Party A.

(f) Credit Support Document. Details of any Credit Support Document:

         The Guaranty of BSC shall be a Credit Support  Document with respect to
Party A.

         The Credit  Support  Annex  dated as of even date  herewith  shall be a
         Credit  Support  Document  in  relation  to Party A and  Party B and is
         incorporated herein by reference.

                                       23

<PAGE>


(g)      Credit Support  Provider.  "Credit Support Provider" means, in relation
         to Party A, BSC and, in relation to Party B, Not Applicable.

(h)      Governing  Law.  This  Agreement  will be governed by and  construed in
         accordance with the laws of the State of New York (without reference to
         choice of law doctrine).

(i)      Netting  of  Payments.  Subparagraph  (ii)  of  Section  2(c)  of  this
         Agreement  will not  apply to all  Transactions  from the date  hereof,
         other than as specified in a Confirmation.

(j)      "Affiliate"  will have the  meaning  specified  in  Section  14 of this
         Agreement.


                                     Part 5
                                Other Provisions
                                ----------------

(a)       Inconsistency. In the event of any inconsistency between the
          provisions contained in this Agreement and those contained in any of
          the definitions published by ISDA (the "ISDA Definitions"), the
          provisions contained in this Agreement will prevail. In the event of
          any inconsistency between the provisions contained in a Confirmation
          and those contained in ISDA Definitions or the Agreement, the
          provisions contained in such Confirmation shall prevail unless
          otherwise specified in a Confirmation or other writing signed by the
          parties.

(b)       Modifications to Termination Provisions.

          (i)       Default under Specified Transactions

                    (A)       Section 5(a)(v) is hereby amended by (1) deleting
                              the phrase "for at least three Local Business
                              Days" in the seventh line thereof and replacing it
                              with the phrase "for at least one Local Business
                              Day".

                    (B)       "Specified Transaction," as defined in Section 14
                              of this Agreement, is hereby amended (a) by
                              inserting between "(b)" and the word "any" in the
                              ninth line thereof the following clause: "all
                              financial transactions and agreements entered into
                              between Party A (or any Credit Support Provider of
                              such party or any applicable Specified Entity of
                              such Party) and Party B (or any Credit Support
                              Provider of such party or any applicable Specified
                              Entity of such party), including, without
                              limitation, futures, stock lending agreements,
                              repurchase agreements and reverse repurchase
                              agreements, loans of any kind, purchases and sales
                              of equity and debt securities of any kind,
                              including mortgages, whether or not on margin,
                              (c)" and (b) by replacing the words "and (c)" in
                              the ninth line thereof with "and (d)".

(c)               Procedures for Entering into Transaction; Recording.

         (i)  For  each  Transaction  which  Party  A and  Party  B  enter  into
         hereunder, Party A shall transmit to Party B a Confirmation.

         (ii) Each party hereto consents to the monitoring or recording,  at any
         time  and  from  time  to  time,  by the  other  party  of any  and all
         communications between officers or employees of the parties, waives any
         further  notice of such  monitoring or recording,  and agrees to notify
         its officers and employees of such monitoring or recording.

(d)      Transfer.  Section 7 of this  Agreement  is hereby  amended by
         inserting  the  following at the end
         thereof:

                  "Notwithstanding  the  foregoing,  Party A may  transfer  this
                  Agreement and all of its interests or  obligations in or under
                  this  Agreement  to BSC or any of BSC's

                                       24

<PAGE>


                  Affiliates, provided that if such transfer is to an entity
                  other than BSC, Party B is furnished with a Guaranty of BSC of
                  such transferee's obligation in substantially the form of the
                  Guaranty of BSC delivered in connection with this Agreement.
                  Upon such assignment Party A shall be fully released from any
                  and all obligations and liabilities related to the interests
                  assigned."

(e)      Additional  Representations.  Section 3 is hereby amended by adding the
         following subsections (g), (h), (i) and (j) at the end of such Section:

                  "(g) Non-Reliance.  In connection with the negotiation of, the
                  entering  into,  and the  confirming of the execution of, this
                  Agreement,  any Credit Support Document,  each Transaction and
                  any other documentation relating to this Agreement to which it
                  is a party  or  that  it is  required  by  this  Agreement  to
                  deliver:  (1) the other party  hereto or thereto is not acting
                  as a fiduciary or financial or investment  advisor for it; (2)
                  it is not  relying  (for  purposes  of making  any  investment
                  decision   or   otherwise)   upon  any   advice,   counsel  or
                  representations  (whether  written or oral) of the other party
                  hereto or thereto other than the representations expressly set
                  forth in this Agreement,  in such Credit Support  Document and
                  in any Confirmation; (3) the other party hereto or thereto has
                  not given to it  (directly  or  indirectly  through  any other
                  person) any assurance,  guaranty or representation  whatsoever
                  as  to  the  expected  or  projected  success,  profitability,
                  return,  performance,  result, effect, consequence, or benefit
                  (legal, regulatory,  tax, financial,  accounting or otherwise)
                  of  this  Agreement,   such  Credit  Support  Document,   such
                  Transaction or such other documentation;  (4) it has consulted
                  with its own legal,  regulatory,  tax,  business,  investment,
                  financial and accounting  advisors to the extent it has deemed
                  necessary,  and it has made its own  investment,  hedging  and
                  trading   decisions   (including   decisions   regarding   the
                  suitability  of any  Transaction)  based upon its own judgment
                  and  upon any  advice  from  such  advisors  as it has  deemed
                  necessary and not upon any view  expressed by the other party;
                  (5) it has  determined  that the rates,  prices or amounts and
                  other terms of each Transaction and the indicative  quotations
                  (if any) provided by the other party hereto or thereto reflect
                  those in the relevant market for similar transactions, and all
                  trading  decisions  have  been  the  result  of  arm's  length
                  negotiations between the parties; (6) it is entering into this
                  Agreement and each  Transaction  with a full  understanding of
                  all  the  terms,  conditions  and  risks  hereof  and  thereof
                  (economic  and  otherwise)  and it is capable of assuming  and
                  willing to assume (financially and otherwise) those risks; and
                  (7) it is a sophisticated institutional investor.

                  (h) Line of  Business.  It has  entered  into  this  Agreement
                  (including each  Transaction  governed  hereby) in conjunction
                  with its line of business (including financial  intermediation
                  services) or the financing of its business.

                  (i) No Agency. It is entering into this Agreement,  any Credit
                  Support Document to which it is a party,  each Transaction and
                  any other  documentation  relating  to this  Agreement  or any
                  Transaction  as  principal  (and not as agent or in any  other
                  capacity,  fiduciary  or  otherwise)  and it has  individually
                  negotiated each Transaction.

                  (j) Eligible Contract Participant. It constitutes an "eligible
                  contract  participant"  as such  term is  defined  in  Section
                  1a(12) of the Commodity Exchange Act, as amended."

                                       25

(f) Payments.


<PAGE>



                  (i) If the parties are each required to make payments pursuant
                  to Section  2(a) on the same day in  respect of a  Transaction
                  but the payments are to be made in different  currencies,  the
                  party that  receives the payment due to it first shall hold an
                  amount  equal to the  payment it  received  in trust (with the
                  right to commingle that amount with its general funds) for the
                  benefit of the other party until that other party receives the
                  corresponding payment due to it.

                  (ii) If by reason of the time difference between the cities in
                  which  payments  are  to be  made,  it  is  not  possible  for
                  simultaneous  payments  to be made on any date on  which  both
                  parties are required to make payments hereunder,  either party
                  may at its option and in its sole discretion  notify the other
                  party that payments on that date are to be made in escrow.  In
                  this case deposit of the payment due earlier on that day shall
                  be made by 2:00 P.M.  (local time at the place for the earlier
                  payment)  on that date with an escrow  agent  selected  by the
                  party giving the notice,  accompanied by  irrevocable  payment
                  instructions  (A) to  release  the  deposited  payment  to the
                  intended  recipient  upon  receipt by the escrow  agent of the
                  required deposit of the  corresponding  payment from the other
                  party on the same  date  accompanied  by  irrevocable  payment
                  instructions to the same effect or (B) if the required deposit
                  of the corresponding payment is not made on that same date, to
                  return the  payment  deposited  to the party that paid it into
                  escrow.  The party that elects to have payments made in escrow
                  shall pay the costs of the escrow arrangements and shall cause
                  those  arrangements to provide that the intended  recipient of
                  the  payment  due to be  deposited  first shall be entitled to
                  interest on that deposited  payment for each day in the period
                  of its  deposit at the rate  offered  by the escrow  agent for
                  that day for  overnight  deposits in the relevant  currency in
                  the office where it holds the deposited payment (at 11:00 A.M.
                  local  time on that day) if that  payment is not  released  by
                  5:00  P.M.  local  time on the  date it is  deposited  for any
                  reason other than the intended recipient's failure to make the
                  escrow  deposit it is required to make  hereunder  in a timely
                  fashion.

(g)  Set-off.  Section 6 of this  Agreement  is  hereby  amended  by adding  the
following Subsection (f) at the end thereof:

                  "(f)  Set-Off.  (i) In  addition  to any  rights  of  set-off,
                  combination of accounts, lien or other similar rights to which
                  a party hereto is at any time otherwise  entitled  (whether by
                  operation of law, contract or otherwise),  upon the occurrence
                  of (a) an Event of Default (in which case the Defaulting Party
                  will be  referred to herein as "X"),  (b) a Credit  Event Upon
                  Merger or an Illegality (in which case the Affected Party will
                  be referred to herein as "X") or (c) an Additional Termination
                  Event  (in  which  case the party  with  respect  to which the
                  Additional  Termination Event has occurred,  or been deemed to
                  have  occurred,  will be referred to herein as "X"), the party
                  hereto that is not X (such  party being  referred to herein as
                  "Y") shall have the right  (but not the  obligation),  without
                  prior  notice  to  X or  any  other  person,  to  set-off  any
                  obligation of X owing to Y (and, if Y elects,  any  Affiliates
                  of Y) (whether or not arising under the Agreement,  whether or
                  not matured,  whether or not  contingent and regardless of the
                  currency,   place  of  payment   or  booking   office  of  the
                  obligation).  The  parties  agree  and  acknowledge  that  the
                  obligations  referred  to by this  provision  shall be  deemed
                  satisfied and discharged to the extent they are so set-off.  Y
                  will give notice to X of any set-off effected pursuant to this
                  Section 6(f) promptly after such set-off has been effected.

                  (ii) In order to set-off  obligations  that are denominated in
                  different currencies, Y may convert any obligation denominated
                  in one currency (the "Original  Currency") to another currency
                  (the "Set-off  Currency") at the market rate,  determined by Y
                  in  good  faith,  at  which  Y  would  be  able,  acting  in a
                  commercially   reasonable  manner,  to  purchase  the  Set-off
                  Currency for the relevant amount of the Original Currency.

                                       26

<PAGE>


                  (iii) If an obligation is  unascertained,  Y may in good faith
                  estimate  that  obligation  and  set-off  in  respect  of such
                  estimate,  subject to the  relevant  party  accounting  to the
                  other when such obligation is ascertained.

                  (iv)  Nothing in this  Section 6(f) will be deemed to create a
                  charge or other security interest."

(h)      Waiver of Jury Trial. Each party  irrevocably  waives any and all right
         to  trial by jury in any  legal  proceeding  in  connection  with  this
         Agreement.


(i)      Multibranch Party.  Without limiting the generality of Section 10, each
         Multibranch  Party  represents  to the other  party and agrees that the
         obligations of such Multibranch Party are  unconditional,  irrespective
         of the validity or  enforceability of this Agreement against any of its
         Offices,  whether  or not such  Office  has  undergone  a change in its
         status, function, control or ownership.

(j)      Incorporation  of EMU  Protocol.  Party A and  Party B agree  that  the
         definitions and provisions contained in Annexes 1 to 5, inclusive,  and
         Section 6 of the EMU Protocol, as published by the ISDA on May 6, 1998,
         are incorporated into and apply to this Agreement.  References in those
         definitions and provisions to an "ISDA Master Agreement" will be deemed
         to be references to this Agreement.


                                       27

<PAGE>



IN WITNESS WHEREOF,  the parties have executed and delivered this document as of
the date specified on the first page of this document.

BEAR STEARNS BANK PLC                             PENN-AMERICA GROUP INC.




By:   ___________________________________       By:  ___________________________
           Name:                                             Name:
           Title:                                            Title:


                                       28

<PAGE>





                                                                       EXHIBIT 1
                                                                       ---------

                                    GUARANTY
                                    --------

GUARANTY. dated as of December 16, 2OO2 by THE BEAR STEARNS COMPANIES INC., A
Delaware corporation (the "Guarantor"), in favor of PENN-ANIERICA GROUP INC., a
corporation organized under the laws of Pennsylvania (the "Beneficiary").

(a)  Guaranty.

     (i)  To induce the Beneficiary to enter into an ISDA Master Agreement as of
          even date  herewith and one or more  Transactions  as of various dates
          (together,  the  "Agreement";  terms  capitalized  but  not  otherwise
          defined herein being used herein as therein defined) with BEAR STEARNS
          BANK PLC ("Bear  Stearns"),  subject to the terms and  conditions  set
          forth herein, the Guarantor irrevocably and unconditionally guarantees
          to the Beneficiary,  its successors and permitted assigns,  the prompt
          payment by Bear  Stearns on demand,  of any amount due and  payable to
          the Beneficiary  under the Agreement,  subject to any applicable grace
          period thereunder (the "Obligations').

     (ii) The Guarantor  hereby waives  acceptance of this Guaranty,  diligence,
          promptness,  presentment,  demand on Bear Stearns for payment, protest
          of  nonpayment  and  all  notices  of  any  kind.  In  addition,   the
          Guarantor's  obligations  hereunder  shall  not  be  affected  by  the
          existence,  validity,  enforceability,  perfection,  or  extent of any
          collateral therefor. The Beneficiary shall not be obligated to proceed
          against Bear Stearns  before  claiming  under the Guaranty nor to file
          any claim  relating to the  Obligations in the event that Bear Stearns
          becomes subject to a bankruptcy, reorganization or similar proceeding,
          and the  failure  of the  Beneficiary  so to file shall not affect the
          Guarantor's  obligations  hereunder.  The  Guarantor  agrees  that its
          obligations  under this Guaranty  constitute a guaranty of payment and
          not of collection.

(b)  Consents,  Waivers and Renewals. The Guarantor agrees that the Beneficiary,
     may at any time and from time to time,  either before or after the maturity
     thereof, without notice to or further consent of the Guarantor,  extend the
     time of payment of,  exchange or surrender any collateral for, or renew any
     of the  Obligations,  and may also make any agreement  with Bear Stearns or
     with any other  party to or person  liable  on any of the  Obligations,  or
     interested  therein,  for  the  extension,  renewal,  payment,  compromise,
     discharge or release thereof, in whole or in party, or for any modification
     of the terms thereof or of any agreement  between the  Beneficiary and Bear
     Stearns or any such other party or person,  without in any way impairing or
     affecting  this Guaranty.  The Guarantor  agrees that the  Beneficiary  may
     resort to the Guarantor for payment of any of the  Obligations,  whether or
     not the  Beneficiary  shall have resorted to any  collateral  security,  or
     shall have proceeded  against any other obligor  principally or secondarily
     obligated with respect to any of the Obligations.

(c)  Expenses.  The Guarantor agrees to pay on demand all out-of-pocket expenses
     (including  without  limitation the reasonable  fees and  disbursements  of
     Beneficiary's  counsel)  incurred in the  enforcement  or protection of the
     rights of the Beneficiary hereunder;  provided that the Guarantor shall not
     be liable for any  expenses of the  Beneficiary  if not payment  under this
     Guaranty is due.

(d)  Subrogation.  The  Guarantor  will not  exercise  any  rights  which it may
     acquire by way of  subrogation  until all  Obligations  to the  Beneficiary
     shall have been paid in full.  If any amount shall he paid to the Guarantor
     in violation of the preceding  sentence,  such amount shall be held for the
     benefit of the  Beneficiary  and shall forthwith be paid to the Beneficiary
     to  be  credited  and  applied  to  the  Obligations,  whether  matured  or
     unmatured.  Subject to the foregoing,  upon payment of all the Obligations,
     the Guarantor shall be subrogated to the rights of the Beneficiary against


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                                                        PENN-AMERICA GROUP, INC.

                                                                     Page 2 of 2

     Bear Stearns and the Beneficiary agrees to take at the Guarantor's  expense
     such  steps as the  Guarantor  may  reasonably  request to  implement  such
     subrogation.

(e)  Cumulative  Rights. No failure on the party of the Beneficiary to exercise,
     and no delay in  exercising,  any right,  remedy or power  hereunder  shall
     operate as a waiver  thereof,  nor shall any single or partial  exercise by
     the Beneficiary of any right,  remedy or power hereunder preclude any other
     or future  exercise of any right,  remedy or power.  Each and every  right,
     remedy and power hereby granted to the  Beneficiary or allowed it by law or
     other agreement shall be cumulative and not exclusive of any other, and may
     be exercised by the Beneficiary from time to time.

(f)  Representations and Warranties.

     (i)  The  Guarantor is a corporation  duly  existing  under the laws of the
          State of Delaware.

     (ii) The  execution,  delivery and  performance  oft his Guaranty have been
          duly authorized by all necessary  corporate action and do not conflict
          with any  provision  of law or any  regulation  or of the  Guarantor's
          charter or by-laws or of any agreement binding upon it.

     (iii)No consent,  approvals and authorizations of and registrations with or
          declarations to any governmental  authority are required in connection
          with the execution, delivery and performance of this Guaranty.

     (iv) This Guaranty  constitutes the legal,  valid and binding obligation of
          the Guarantor,  enforceable  against the Guarantor in accordance  with
          its  terms,  subject  as to  enforcement  to  bankruptcy,  insolvency,
          reorganization and other laws of general applicability  relating to or
          affecting creditors' rights and to general equity principles.

(g)  Continuing Guaranty. The Guaranty shall remain in full force and effect and
     he binding upon the Guarantor and its successors and permitted assigns, and
     inure to the benefit of the  Beneficiary  and its  successors and permitted
     assigns,  until all of the Obligations  have been satisfied in full. In the
     event that any  payment by Bear  Stearns in respect of any  Obligations  is
     rescinded  or must  otherwise be returned  for any reason  whatsoever,  the
     Guarantor shall remain liable  hereunder in respect of such  Obligations as
     if such payment had not been made.

(h)  Notices.  All  notices in  connection  with this  Guaranty  shall he deemed
     effective, if in writing and delivered in person or by courier, on the date
     delivered  to the  following  address  (or such  other  address  which  the
     Guarantor shall notify the Beneficiary of in writing):

                  THE BEAR STEARNS COMPANIES INC.
                  383 Madison Park Avenue
                  New York, NY 10179

                  Attention: Derivatives Department, 35th  Floor
                  With a copy to: Legal Department, 10d  Floor

(i)  Governing  Law.  The  Guaranty  shall be  governed  by,  and  construed  in
     accordance  with, the laws of the State of New York,  without  reference to
     choice of law doctrine.

IN WITNESS WHEREOF, this Guaranty has been duly executed and delivered by the
Guarantor to the Beneficiary as of the date first above written.

THE BEAR STEARNS COMPANIES INC.

By:
Name:
Title: