Exhibit 4 (iv)
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                               GUARANTEE AGREEMENT

                                 by and between

                            PENN-AMERICA GROUP, INC.

                                       and

                         U.S. Bank NATIONAL ASSOCIATION

                            Dated as of May 15, 2003


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<PAGE>
<TABLE>
<CAPTION>



                                                     TABLE OF CONTENTS

                                                                                                                Page
<S>         <C>                                                                                                  <C>

ARTICLE I          DEFINITIONS AND INTERPRETATION.................................................................1

    Section 1.1       Definitions and Interpretation..............................................................1

ARTICLE II         POWERS, DUTIES AND RIGHTS OF GUARANTEE TRUSTEE.................................................4

    Section 2.1       Powers and Duties of the Guarantee Trustee..................................................4
    Section 2.2       Certain Rights of Guarantee Trustee.........................................................6
    Section 2.3       Not Responsible for Recitals or Issuance of Guarantee.......................................8
    Section 2.4       Events of Default; Waiver...................................................................8
    Section 2.5       Events of Default; Notice...................................................................8

ARTICLE III        GUARANTEE TRUSTEE..............................................................................8

    Section 3.1       Guarantee Trustee; Eligibility..............................................................8
    Section 3.2       Appointment, Removal and Resignation of Guarantee Trustee...................................9

ARTICLE IV         GUARANTEE.....................................................................................10

    Section 4.1       Guarantee..................................................................................10
    Section 4.2       Waiver of Notice and Demand................................................................10
    Section 4.3       Obligations Not Affected...................................................................10
    Section 4.4       Rights of Holders..........................................................................11
    Section 4.5       Guarantee of Payment.......................................................................11
    Section 4.6       Subrogation................................................................................12
    Section 4.7       Independent Obligations....................................................................12
    Section 4.8       Enforcement by a Beneficiary...............................................................12

ARTICLE V          LIMITATION OF TRANSACTIONS; SUBORDINATION.....................................................12

    Section 5.1       Limitation of Transactions.................................................................12
    Section 5.2       Ranking....................................................................................13

ARTICLE VI         TERMINATION...................................................................................14

    Section 6.1       Termination................................................................................14

ARTICLE VII        INDEMNIFICATION...............................................................................14

    Section 7.1       Exculpation................................................................................14
    Section 7.2       Indemnification............................................................................14
    Section 7.3       Compensation; Reimbursement of Expenses....................................................15

ARTICLE VIII       MISCELLANEOUS.................................................................................16


                                       i


<PAGE>


    Section 8.1       Successors and Assigns.....................................................................16
    Section 8.2       Amendments.................................................................................16
    Section 8.3       Notices....................................................................................16
    Section 8.4       Benefit....................................................................................17
    Section 8.5       Governing Law..............................................................................17
    Section 8.6       Counterparts...............................................................................17
    Section 8.7       Separability...............................................................................18



</TABLE>





                                       ii
<PAGE>



                               GUARANTEE AGREEMENT
                               -------------------


                 This GUARANTEE  AGREEMENT (this  "Guarantee"),  dated as of May
15, 2003, is executed and delivered by Penn-America  Group, Inc., a Pennsylvania
corporation (the "Guarantor"),  and U.S. Bank National  Association,  a national
banking  association,  organized under the laws of the United States of America,
as trustee (the "Guarantee Trustee"), for the benefit of the Holders (as defined
herein)  from time to time of the  Capital  Securities  (as  defined  herein) of
Penn-America Statutory Trust II, a Connecticut statutory trust (the "Issuer").

         WHEREAS,  pursuant to an Amended and Restated Declaration of Trust (the
"Declaration"),   dated  as  of  the  date  hereof  among  U.S.   Bank  National
Association, not in its individual capacity but solely as institutional trustee,
the administrators of the Issuer named therein,  the Guarantor,  as sponsor, and
the holders from time to time of undivided beneficial interests in the assets of
the Issuer, the Issuer is issuing on the date hereof those undivided  beneficial
interests,  having  an  aggregate  liquidation  amount  of  $15,000,000.00  (the
"Capital Securities"); and

         WHEREAS,   as  incentive  for  the  Holders  to  purchase  the  Capital
Securities,  the Guarantor desires  irrevocably and unconditionally to agree, to
the  extent  set  forth in this  Guarantee,  to pay to the  Holders  of  Capital
Securities the Guarantee  Payments (as defined herein) and to make certain other
payments on the terms and conditions set forth herein;

         NOW, THEREFORE,  in consideration of the purchase by each Holder of the
Capital Securities, which purchase the Guarantor hereby agrees shall benefit the
Guarantor, the Guarantor executes and delivers this Guarantee for the benefit of
the Holders.

                                    ARTICLE I

                         DEFINITIONS AND INTERPRETATION

         Section 1.1 Definitions and Interpretation.
                     -------------------------------

         In this Guarantee, unless the context otherwise requires:

         (a)  capitalized  terms used in this  Guarantee  but not defined in the
preamble  above have the  respective  meanings  assigned to them in this Section
1.1;

         (b) a term  defined  anywhere in this  Guarantee  has the same  meaning
throughout;

         (c) all references to "the  Guarantee" or "this  Guarantee" are to this
Guarantee as modified, supplemented or amended from time to time;

         (d) all references in this Guarantee to "Articles" or "Sections" are to
Articles or Sections of this Guarantee, unless otherwise specified;

         (e) terms  defined in the  Declaration  as at the date of  execution of
this  Guarantee  have the same  meanings  when  used in this  Guarantee,  unless
otherwise  defined in this Guarantee or unless the context  otherwise  requires;
and





<PAGE>

         (f) a reference to the singular includes the plural and vice versa.

         "Affiliate"  has the same  meaning as given to that term in Rule 405 of
the Securities Act of 1933, as amended, or any successor rule thereunder.

         "Beneficiaries"  means any  Person to whom the  Issuer is or  hereafter
becomes indebted or liable.

         "Capital  Securities" has the meaning set forth in the recitals to this
Guarantee.

         "Common Securities" means the common securities issued by the Issuer to
the Guarantor pursuant to the Declaration.

         "Corporate  Trust Office" means the office of the Guarantee  Trustee at
which the  corporate  trust  business of the  Guarantee  Trustee  shall,  at any
particular  time,  be  principally  administered,  which  office  at the date of
execution of this  Guarantee is located at 225 Asylum  Street,  Goodwin  Square,
Hartford, Connecticut 06103.

         "Covered Person" means any Holder of Capital Securities.

         "Debentures" means the debt securities of the Guarantor  designated the
Floating Rate Junior  Subordinated  Deferrable Interest Debentures due 2033 held
by the Institutional Trustee (as defined in the Declaration) of the Issuer.

         "Declaration Event of Default" means an "Event of Default" as defined
in the Declaration.

         "Event of Default" has the meaning set forth in Section 2.4(a).

         "Guarantee  Payments"  means the following  payments or  distributions,
without duplication,  with respect to the Capital Securities,  to the extent not
paid or made by the Issuer: (i) any accrued and unpaid Distributions (as defined
in the Declaration)  which are required to be paid on such Capital Securities to
the extent the Issuer  shall have funds  available  therefor,  (ii) the Optional
Redemption  Price to the extent the Issuer has funds  available  therefor,  with
respect to any Capital Securities called for redemption by the Issuer, (iii) the
Special Redemption Price to the extent the Issuer has funds available  therefor,
with respect to Capital  Securities  redeemed  upon the  occurrence of a Special
Event,  and (iv)  upon a  voluntary  or  involuntary  liquidation,  dissolution,
winding-up  or  termination  of the Issuer  (other than in  connection  with the
distribution of Debentures to the Holders of the Capital  Securities in exchange
therefor as provided in the Declaration), the lesser of (a) the aggregate of the
liquidation  amount and all  accrued  and unpaid  Distributions  on the  Capital
Securities  to the date of  payment,  to the extent the Issuer  shall have funds
available  therefor,  and (b) the  amount  of  assets  of the  Issuer  remaining
available for  distribution  to Holders in  liquidation of the Issuer (in either
case, the "Liquidation Distribution").

         "Guarantee  Trustee"  means U.S.  Bank  National  Association,  until a
Successor Guarantee Trustee has been appointed and has accepted such appointment
pursuant to the terms of this Guarantee and thereafter means each such Successor
Guarantee Trustee.



                                       2
<PAGE>

         "Guarantor" means  Penn-America  Group, Inc. and each of its successors
and assigns.

         "Holder"  means any holder,  as  registered on the books and records of
the Issuer, of any Capital Securities;  provided,  however, that, in determining
whether the Holders of the requisite percentage of Capital Securities have given
any request, notice, consent or waiver hereunder, "Holder" shall not include the
Guarantor or any Affiliate of the Guarantor.

         "Indemnified  Person" means the Guarantee Trustee, any Affiliate of the
Guarantee Trustee, or any officers, directors, shareholders,  members, partners,
employees,  representatives,  nominees,  custodians  or agents of the  Guarantee
Trustee.

         "Indenture" means the Indenture dated as of the date hereof between the
Guarantor and U.S. Bank National Association, not in its individual capacity but
solely as trustee, and any indenture  supplemental thereto pursuant to which the
Debentures are to be issued to the institutional trustee of the Issuer.

         "Issuer"  has the meaning set forth in the  opening  paragraph  to this
Guarantee.

         "Liquidation  Distribution" has the meaning set forth in the definition
of "Guarantee Payments" herein.

         "Majority  in  liquidation  amount  of the  Capital  Securities"  means
Holder(s) of outstanding  Capital  Securities,  voting together as a class,  but
separately  from the  holders  of  Common  Securities,  of more  than 50% of the
aggregate  liquidation amount (including the stated amount that would be paid on
redemption,  liquidation or otherwise,  plus accrued and unpaid Distributions to
the date upon  which the  voting  percentages  are  determined)  of all  Capital
Securities then outstanding.

         "Obligations"  means  any  costs,  expenses  or  liabilities  (but  not
including  liabilities related to taxes) of the Issuer other than obligations of
the  Issuer to pay to  holders  of any Trust  Securities  the  amounts  due such
holders pursuant to the terms of the Trust Securities.

         "Officer's   Certificate"   means,   with  respect  to  any  Person,  a
certificate  signed by one  authorized  officer of such  Person.  Any  Officer's
Certificate  delivered  with respect to compliance  with a condition or covenant
provided for in this Guarantee shall include:

               (a)  a  statement   that  the  officer   signing  the   Officer's
          Certificate  has read the  covenant or condition  and the  definitions
          relating thereto;

               (b) a brief  statement of the nature and scope of the examination
          or investigation  undertaken by the officer in rendering the Officer's
          Certificate;

               (c) a statement  that the officer  has made such  examination  or
          investigation  as, in such officer's  opinion,  is necessary to enable
          such officer to express an informed  opinion as to whether or not such
          covenant or condition has been complied with; and

               (d) a  statement  as to whether,  in the opinion of the  officer,
          such condition or covenant has been complied with.


                                       3
<PAGE>

         "Optional Redemption Price" has the meaning set forth in the Indenture.

         "Person" means a legal person,  including any individual,  corporation,
estate, partnership,  joint venture,  association,  joint stock company, limited
liability  company,  trust,  unincorporated  association,  or  government or any
agency or political subdivision thereof, or any other entity of whatever nature.

         "Responsible Officer" means, with respect to the Guarantee Trustee, any
officer within the Corporate Trust Office of the Guarantee Trustee including any
Vice President, Assistant Vice President,  Secretary, Assistant Secretary or any
other officer of the Guarantee Trustee customarily  performing functions similar
to those  performed  by any of the above  designated  officers  and  also,  with
respect to a particular  corporate trust matter,  any other officer to whom such
matter is referred  because of that officer's  knowledge of and familiarity with
the particular subject.

         "Special Event" has the meaning set forth in the Indenture.

         "Special Redemption Price" has the meaning set forth in the Indenture.

         "Subsidiary"  means with respect to any Person,  (i) any corporation at
least a majority of the outstanding voting stock of which is owned,  directly or
indirectly,  by such  Person or by one or more of its  Subsidiaries,  or by such
Person and one or more of its Subsidiaries,  (ii) any general partnership, joint
venture or similar entity, at least a majority of the outstanding partnership or
similar  interests of which shall at the time be owned by such Person, or by one
or  more  of  its  Subsidiaries,  or by  such  Person  and  one or  more  of its
Subsidiaries  and (iii) any limited  partnership  of which such Person or any of
its  Subsidiaries  is a general  partner.  For the purposes of this  definition,
"voting stock" means shares,  interests,  participations or other equivalents in
the equity interest  (however  designated) in such Person having ordinary voting
power for the election of a majority of the  directors  (or the  equivalent)  of
such Person, other than shares,  interests,  participations or other equivalents
having such power only by reason of the occurrence of a contingency.

         "Successor  Guarantee  Trustee"  means a  successor  Guarantee  Trustee
possessing the qualifications to act as Guarantee Trustee under Section 3.1.

         "Trust   Securities"  means  the  Common  Securities  and  the  Capital
Securities.

                                   ARTICLE II

                          POWERS, DUTIES AND RIGHTS OF
                                GUARANTEE TRUSTEE

        Section 2.1  Powers and Duties of the Guarantee Trustee.
                     -------------------------------------------

         (a) This  Guarantee  shall  be held by the  Guarantee  Trustee  for the
benefit of the  Holders of the Capital  Securities,  and the  Guarantee  Trustee
shall not  transfer  this  Guarantee  to any  Person  except a Holder of Capital
Securities  exercising  his or her rights  pursuant  to  Section  4.4(b) or to a
Successor Guarantee Trustee on acceptance by such Successor Guarantee Trustee


                                       4
<PAGE>

of its appointment to act as Successor  Guarantee Trustee.  The right, title and
interest of the  Guarantee  Trustee  shall  automatically  vest in any Successor
Guarantee  Trustee,  and such vesting and  cessation of title shall be effective
whether or not conveyancing  documents have been executed and delivered pursuant
to the appointment of such Successor Guarantee Trustee.

     (b) If an Event of Default  actually known to a Responsible  Officer of the
Guarantee  Trustee has occurred and is continuing,  the Guarantee  Trustee shall
enforce this Guarantee for the benefit of the Holders of the Capital Securities.

     (c) The Guarantee  Trustee,  before the  occurrence of any Event of Default
and after curing all Events of Default that may have occurred,  shall  undertake
to perform only such duties as are specifically set forth in this Guarantee, and
no implied  covenants  shall be read into this  Guarantee  against the Guarantee
Trustee.  In case an Event of Default  has  occurred  (that has not been  waived
pursuant to Section 2.4) and is actually  known to a Responsible  Officer of the
Guarantee  Trustee,  the Guarantee Trustee shall exercise such of the rights and
powers vested in it by this Guarantee, and use the same degree of care and skill
in its exercise  thereof,  as a prudent  person would  exercise or use under the
circumstances in the conduct of his or her own affairs.

     (d) No  provision  of this  Guarantee  shall be  construed  to relieve  the
Guarantee Trustee from liability for its own negligent action, its own negligent
failure to act, or its own willful misconduct, except that:

               (i) prior to the occurrence of any Event of Default and after the
          curing  or  waiving  of all  such  Events  of  Default  that  may have
          occurred:

                    (A) the  duties and  obligations  of the  Guarantee  Trustee
               shall be  determined  solely by the  express  provisions  of this
               Guarantee,  and the Guarantee  Trustee shall not be liable except
               for  the  performance  of  such  duties  and  obligations  as are
               specifically  set  forth  in  this  Guarantee,   and  no  implied
               covenants  or  obligations  shall  be read  into  this  Guarantee
               against the Guarantee Trustee; and

                    (B) in the absence of bad faith on the part of the Guarantee
               Trustee,  the Guarantee Trustee may conclusively  rely, as to the
               truth  of the  statements  and the  correctness  of the  opinions
               expressed therein, upon any certificates or opinions furnished to
               the Guarantee  Trustee and conforming to the requirements of this
               Guarantee;  but in the case of any such  certificates or opinions
               that by any  provision  hereof are  specifically  required  to be
               furnished to the Guarantee  Trustee,  the Guarantee Trustee shall
               be under a duty to examine the same to  determine  whether or not
               they conform to the requirements of this Guarantee;

               (ii) the  Guarantee  Trustee shall not be liable for any error of
          judgment made in good faith by a Responsible  Officer of the Guarantee
          Trustee,  unless it shall be proved that such  Responsible  Officer of
          the  Guarantee  Trustee or the  Guarantee  Trustee  was  negligent  in
          ascertaining the pertinent facts upon which such judgment was made;

               (iii)the  Guarantee  Trustee  shall not be liable with respect to
          any  action  taken  or  omitted  to be  taken  by it in good  faith in
          accordance with the written  direction of


                                       5
<PAGE>

          the Holders of not less than a Majority in  liquidation  amount of the
          Capital  Securities   relating  to  the  time,  method  and  place  of
          conducting any  proceeding  for any remedy  available to the Guarantee
          Trustee,  or relating to the exercise of any trust or power  conferred
          upon the Guarantee Trustee under this Guarantee; and

               (iv) no provision of this  Guarantee  shall require the Guarantee
          Trustee to expend or risk its own funds or  otherwise  incur  personal
          financial  liability in the performance of any of its duties or in the
          exercise  of any of its rights or  powers,  if the  Guarantee  Trustee
          shall have reasonable grounds for believing that the repayment of such
          funds  is not  reasonably  assured  to it  under  the  terms  of  this
          Guarantee or security and indemnity,  reasonably  satisfactory  to the
          Guarantee  Trustee,  against such risk or liability is not  reasonably
          assured to it.

         Section 2.2 Certain Rights of Guarantee Trustee.
                     ------------------------------------

         (a) Subject to the provisions of Section 2.1:

               (i) The Guarantee  Trustee may  conclusively  rely,  and shall be
          fully  protected  in  acting  or  refraining  from  acting  upon,  any
          resolution,   certificate,  statement,  instrument,  opinion,  report,
          notice, request,  direction,  consent,  order, bond, debenture,  note,
          other evidence of indebtedness or other paper or document  believed by
          it to be genuine and to have been  signed,  sent or  presented  by the
          proper party or parties.

               (ii) Any direction or act of the Guarantor  contemplated  by this
          Guarantee shall be sufficiently evidenced by an Officer's Certificate.

               (iii) Whenever,  in the  administration  of this  Guarantee,  the
          Guarantee  Trustee shall deem it desirable  that a matter be proved or
          established before taking, suffering or omitting any action hereunder,
          the Guarantee  Trustee  (unless other evidence is herein  specifically
          prescribed) may, in the absence of bad faith on its part,  request and
          conclusively  rely  upon an  Officer's  Certificate  of the  Guarantor
          which,  upon receipt of such request,  shall be promptly  delivered by
          the Guarantor.

               (iv)  The  Guarantee  Trustee  shall  have  no duty to see to any
          recording,   filing  or   registration   of  any  instrument  (or  any
          re-recording, refiling or re-registration thereof).

               (v)  The  Guarantee  Trustee  may  consult  with  counsel  of its
          selection,  and the advice or opinion of such  counsel with respect to
          legal matters shall be full and complete  authorization and protection
          in respect of any action taken, suffered or omitted by it hereunder in
          good faith and in accordance with such advice or opinion. Such counsel
          may be  counsel  to the  Guarantor  or any of its  Affiliates  and may
          include any of its  employees.  The  Guarantee  Trustee shall have the
          right at any time to seek instructions  concerning the  administration
          of this Guarantee from any court of competent jurisdiction.

               (vi) The  Guarantee  Trustee  shall be  under  no  obligation  to
          exercise any of the rights or powers vested in it by this Guarantee at
          the request or direction of any Holder,  unless such Holder shall have
          provided  to  the  Guarantee  Trustee  such  security  and  indemnity,
          reasonably  satisfactory to the Guarantee Trustee,  against the costs,
          expenses


                                       6
<PAGE>

          (including  attorneys'  fees  and  expenses  and the  expenses  of the
          Guarantee  Trustee's  agents,  nominees or custodians) and liabilities
          that  might be  incurred  by it in  complying  with  such  request  or
          direction,  including such reasonable  advances as may be requested by
          the Guarantee Trustee;  provided,  however,  that nothing contained in
          this Section 2.2(a)(vi) shall relieve the Guarantee Trustee,  upon the
          occurrence of an Event of Default,  of its  obligation to exercise the
          rights and powers vested in it by this Guarantee.

               (vii)  The  Guarantee  Trustee  shall  not be  bound  to make any
          investigation  into the facts or  matters  stated  in any  resolution,
          certificate,  statement, instrument, opinion, report, notice, request,
          direction,  consent,  order, bond, debenture,  note, other evidence of
          indebtedness or other paper or document, but the Guarantee Trustee, in
          its discretion,  may make such further inquiry or  investigation  into
          such facts or matters as it may see fit.

               (viii) The  Guarantee  Trustee  may  execute any of the trusts or
          powers hereunder or perform any duties hereunder either directly or by
          or  through  agents,  nominees,   custodians  or  attorneys,  and  the
          Guarantee  Trustee  shall not be  responsible  for any  misconduct  or
          negligence  on the part of any agent or  attorney  appointed  with due
          care by it hereunder.

               (ix) Any  action  taken by the  Guarantee  Trustee  or its agents
          hereunder  shall bind the Holders of the Capital  Securities,  and the
          signature  of the  Guarantee  Trustee  or its  agents  alone  shall be
          sufficient  and  effective to perform any such action.  No third party
          shall be  required  to inquire as to the  authority  of the  Guarantee
          Trustee  to so act or as to its  compliance  with any of the terms and
          provisions  of this  Guarantee,  both of which  shall be  conclusively
          evidenced  by the  Guarantee  Trustee's  or its  agent's  taking  such
          action.

               (x)  Whenever  in  the   administration  of  this  Guarantee  the
          Guarantee Trustee shall deem it desirable to receive instructions with
          respect to  enforcing  any remedy or right or taking any other  action
          hereunder, the Guarantee Trustee (i) may request instructions from the
          Holders of a Majority in liquidation amount of the Capital Securities,
          (ii) may refrain  from  enforcing  such remedy or right or taking such
          other action until such instructions are received,  and (iii) shall be
          protected in conclusively relying on or acting in accordance with such
          instructions.

               (xi) The  Guarantee  Trustee  shall not be liable  for any action
          taken,  suffered,  or omitted to be taken by it in good faith, without
          negligence,  and reasonably  believed by it to be authorized or within
          the  discretion  or  rights  or  powers  conferred  upon  it  by  this
          Guarantee.

     (b) No  provision of this  Guarantee  shall be deemed to impose any duty or
obligation on the  Guarantee  Trustee to perform any act or acts or exercise any
right, power, duty or obligation conferred or imposed on it, in any jurisdiction
in which it  shall  be  illegal  or in  which  the  Guarantee  Trustee  shall be
unqualified or incompetent in accordance with applicable law to perform any such
act or acts or to  exercise  any  such  right,  power,  duty or  obligation.  No
permissive  power or  authority  available  to the  Guarantee  Trustee  shall be
construed to be a duty.



                                       7
<PAGE>

         Section 2.3 Not Responsible for Recitals or Issuance of Guarantee.
                     ------------------------------------------------------

         The recitals contained in this Guarantee shall be taken as the
statements of the Guarantor, and the Guarantee Trustee does not assume any
responsibility for their correctness. The Guarantee Trustee makes no
representation as to the validity or sufficiency of this Guarantee.

         Section 2.4 Events of Default; Waiver.
                     --------------------------

     (a) An Event of Default under this Guarantee will occur upon the failure of
the Guarantor to perform any of its payment or other obligations hereunder.

     (b)  The  Holders  of a  Majority  in  liquidation  amount  of the  Capital
Securities may, voting or consenting as a class, on behalf of the Holders of all
of the Capital Securities, waive any past Event of Default and its consequences.
Upon such waiver,  any such Event of Default shall cease to exist,  and shall be
deemed to have been  cured,  for every  purpose of this  Guarantee,  but no such
waiver shall extend to any  subsequent  or other  default or Event of Default or
impair any right consequent thereon.

         Section 2.5 Events of Default; Notice.
                     --------------------------

     (a) The Guarantee Trustee shall,  within 90 days after the occurrence of an
Event of Default,  transmit by mail, first class postage prepaid, to the Holders
of the Capital  Securities and the  Guarantor,  notices of all Events of Default
actually known to a Responsible  Officer of the Guarantee  Trustee,  unless such
defaults  have been cured before the giving of such notice,  provided,  however,
that the Guarantee  Trustee shall be protected in withholding such notice if and
so long  as a  Responsible  Officer  of the  Guarantee  Trustee  in  good  faith
determines  that the  withholding  of such  notice  is in the  interests  of the
Holders of the Capital Securities.

     (b) The  Guarantee  Trustee  shall not be deemed to have  knowledge  of any
Event of Default unless the Guarantee Trustee shall have received written notice
from the Guarantor or a Holder of the Capital  Securities (except in the case of
a payment  default),  or a Responsible  Officer of the Guarantee Trustee charged
with the  administration  of this Guarantee shall have obtained actual knowledge
thereof.

                                  ARTICLE III

                                GUARANTEE TRUSTEE

         Section 3.1 Guarantee Trustee; Eligibility.
                     -------------------------------

     (a) There shall at all times be a Guarantee Trustee which shall:

               (i) not be an Affiliate of the Guarantor, and

               (ii) be a corporation organized and doing business under the laws
          of the United  States of America or any State or Territory  thereof or
          of the District of Columbia,  or Person  authorized under such laws to
          exercise corporate trust powers, having a combined capital and surplus
          of at least 50 million  U.S.  dollars  ($50,000,000),  and


                                       8
<PAGE>

          subject to supervision or examination by Federal,  State,  Territorial
          or District  of  Columbia  authority.  If such  corporation  publishes
          reports of  condition  at least  annually,  pursuant  to law or to the
          requirements  of the  supervising or examining  authority  referred to
          above, then, for the purposes of this Section 3.1(a)(ii), the combined
          capital  and  surplus  of such  corporation  shall be deemed to be its
          combined capital and surplus as set forth in its most recent report of
          condition so published.

          (b) If at any time the Guarantee Trustee shall cease to be eligible to
     so act under Section 3.1(a), the Guarantee Trustee shall immediately resign
     in the manner and with the effect set out in Section 3.2(c).

          (c) If the  Guarantee  Trustee has or shall  acquire any  "conflicting
     interest"  within the meaning of Section 310(b) of the Trust Indenture Act,
     the Guarantee Trustee shall either eliminate such interest or resign to the
     extent and in the manner provided by, and subject to this Guarantee.

         Section 3.2 Appointment, Removal and Resignation of Guarantee Trustee.
                     ----------------------------------------------------------

         (a) Subject to Section 3.2(b),  the Guarantee  Trustee may be appointed
or removed without cause at any time by the Guarantor  except during an Event of
Default.

         (b) The  Guarantee  Trustee  shall not be  removed in  accordance  with
Section  3.2(a) until a Successor  Guarantee  Trustee has been appointed and has
accepted  such  appointment  by written  instrument  executed by such  Successor
Guarantee Trustee and delivered to the Guarantor.

         (c) The Guarantee Trustee appointed to office shall hold office until a
Successor  Guarantee  Trustee shall have been  appointed or until its removal or
resignation.  The  Guarantee  Trustee may resign from office  (without  need for
prior or subsequent  accounting)  by an  instrument  in writing  executed by the
Guarantee  Trustee and delivered to the Guarantor,  which  resignation shall not
take effect  until a Successor  Guarantee  Trustee  has been  appointed  and has
accepted such appointment by an instrument in writing executed by such Successor
Guarantee  Trustee and delivered to the  Guarantor  and the resigning  Guarantee
Trustee.

         (d) If no Successor  Guarantee  Trustee  shall have been  appointed and
accepted  appointment  as  provided  in this  Section  3.2  within 60 days after
delivery of an  instrument  of removal or  resignation,  the  Guarantee  Trustee
resigning or being removed may petition any court of competent  jurisdiction for
appointment of a Successor  Guarantee Trustee.  Such court may thereupon,  after
prescribing  such  notice,  if any, as it may deem  proper,  appoint a Successor
Guarantee Trustee.

         (e) No Guarantee  Trustee  shall be liable for the acts or omissions to
act of any Successor Guarantee Trustee.

         (f) Upon termination of this Guarantee or removal or resignation of the
Guarantee  Trustee  pursuant to this Section 3.2, the Guarantor shall pay to the
Guarantee  Trustee all amounts owing to the Guarantee Trustee under Sections 7.2
and 7.3 accrued to the date of such termination, removal or resignation.



                                       9
<PAGE>

                                   ARTICLE IV

                                    GUARANTEE

         Section 4.1 Guarantee.
                     ----------

         (a) The Guarantor irrevocably and unconditionally agrees to pay in full
to  the  Holders  the  Guarantee   Payments  (without   duplication  of  amounts
theretofore  paid by the  Issuer),  as and when due,  regardless  of any defense
(except the defense of payment by the Issuer),  right of set-off or counterclaim
that the  Issuer  may  have or  assert.  The  Guarantor's  obligation  to make a
Guarantee  Payment may be satisfied by direct payment of the required amounts by
the Guarantor to the Holders or by causing the Issuer to pay such amounts to the
Holders.

         (b) The Guarantor  hereby also agrees to assume any and all Obligations
of the Issuer and in the event any such Obligation is not so assumed, subject to
the  terms  and  conditions   hereof,   the  Guarantor  hereby  irrevocably  and
unconditionally  guarantees to each  Beneficiary  the full payment,  when and as
due,  of any and  all  Obligations  to such  Beneficiaries.  This  Guarantee  is
intended  to be  for  the  benefit  of,  and  to be  enforceable  by,  all  such
Beneficiaries, whether or not such Beneficiaries have received notice hereof.

         Section 4.2 Waiver of Notice and Demand.
                     ----------------------------

         The Guarantor  hereby waives notice of acceptance of this Guarantee and
of any  liability  to which it  applies or may  apply,  presentment,  demand for
payment, any right to require a proceeding first against the Issuer or any other
Person before proceeding against the Guarantor,  protest,  notice of nonpayment,
notice of dishonor, notice of redemption and all other notices and demands.

         Section 4.3 Obligations Not Affected.
                     -------------------------

         The  obligations,  covenants,  agreements  and duties of the  Guarantor
under this  Guarantee  shall in no way be  affected or impaired by reason of the
happening from time to time of any of the following:

         (a) the release or waiver,  by  operation of law or  otherwise,  of the
performance  or  observance  by the Issuer of any express or implied  agreement,
covenant,  term or condition  relating to the Capital Securities to be performed
or observed by the Issuer;

         (b) the  extension  of time for the payment by the Issuer of all or any
portion of the  Distributions,  Optional  Redemption Price,  Special  Redemption
Price, Liquidation Distribution or any other sums payable under the terms of the
Capital  Securities  or the extension of time for the  performance  of any other
obligation under,  arising out of or in connection with, the Capital  Securities
(other  than an  extension  of  time  for  payment  of  Distributions,  Optional
Redemption Price,  Special Redemption Price,  Liquidation  Distribution or other
sum payable that results from the  extension of any interest  payment  period on
the Debentures or any extension of the maturity date of the Debentures permitted
by the Indenture);

                                       10
<PAGE>


         (c) any  failure,  omission,  delay or lack of diligence on the part of
the Holders to enforce, assert or exercise any right, privilege, power or remedy
conferred on the Holders pursuant to the terms of the Capital Securities, or any
action on the part of the Issuer granting indulgence or extension of any kind;

         (d) the voluntary or involuntary liquidation,  dissolution, sale of any
collateral, receivership,  insolvency, bankruptcy, assignment for the benefit of
creditors, reorganization,  arrangement, composition or readjustment of debt of,
or other similar proceedings  affecting,  the Issuer or any of the assets of the
Issuer;

         (e) any  invalidity  of,  or  defect  or  deficiency  in,  the  Capital
Securities;

         (f) the settlement or compromise of any obligation guaranteed hereby or
hereby incurred; or

         (g) any other circumstance whatsoever that might otherwise constitute a
legal or equitable  discharge or defense of a guarantor,  it being the intent of
this  Section  4.3 that the  obligations  of the  Guarantor  hereunder  shall be
absolute and unconditional under any and all circumstances.

         There  shall be no  obligation  of the  Holders  to give  notice to, or
obtain  consent of, the  Guarantor  with respect to the  happening of any of the
foregoing.

         Section 4.4 Rights of Holders.
                     ------------------

         (a) The  Holders of a Majority  in  liquidation  amount of the  Capital
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Guarantee  Trustee in respect of this
Guarantee  or to direct the  exercise of any trust or power  conferred  upon the
Guarantee  Trustee under this  Guarantee;  provided,  however,  that (subject to
Section 2.1) the Guarantee Trustee shall have the right to decline to follow any
such direction if the Guarantee Trustee being advised by counsel determines that
the  action  or  proceeding  so  directed  may not  lawfully  be taken or if the
Guarantee Trustee in good faith by its board of directors or trustees, executive
committees  or a trust  committee of directors  or trustees  and/or  Responsible
Officers  shall  determine  that the action or  proceedings  so  directed  would
involve the Guarantee Trustee in personal liability.

(b) Any Holder of Capital Securities may institute a legal proceeding directly
         against the Guarantor to enforce the Guarantee  Trustee's  rights under
this Guarantee, without first instituting a legal proceeding against the Issuer,
the
Guarantee Trustee or any other Person. The Guarantor waives any right or remedy
to require that any such action be brought first against the Issuer, the
Guarantee Trustee or any other Person before so proceeding directly against the
Guarantor.

         Section 4.5 Guarantee of Payment.
                     ----------------------

         This Guarantee creates a guarantee of payment and not of collection.



                                       11
<PAGE>

         Section 4.6 Subrogation.
                     ------------

         The Guarantor shall be subrogated to all (if any) rights of the Holders
of Capital  Securities against the Issuer in respect of any amounts paid to such
Holders by the  Guarantor  under this  Guarantee;  provided,  however,  that the
Guarantor  shall not (except to the extent  required by mandatory  provisions of
law) be entitled to enforce or exercise  any right that it may acquire by way of
subrogation or any indemnity,  reimbursement or other agreement, in all cases as
a result of payment  under this  Guarantee,  if, after giving effect to any such
payment,  any amounts  are due and unpaid  under this  Guarantee.  If any amount
shall be paid to the  Guarantor  in  violation of the  preceding  sentence,  the
Guarantor  agrees to hold such  amount in trust for the  Holders and to pay over
such amount to the Holders.

         Section 4.7 Independent Obligations.
                     ------------------------

         The  Guarantor   acknowledges   that  its  obligations   hereunder  are
independent  of the  obligations  of the  Issuer  with  respect  to the  Capital
Securities  and that the  Guarantor  shall be liable as principal  and as debtor
hereunder to make  Guarantee  Payments  pursuant to the terms of this  Guarantee
notwithstanding  the  occurrence  of any event  referred to in  subsections  (a)
through (g), inclusive, of Section 4.3 hereof.

         Section 4.8 Enforcement by a Beneficiary.
                     ------------------------------

         A Beneficiary may enforce the obligations of the Guarantor contained in
Section 4.1(b) directly against the Guarantor and the Guarantor waives any right
or remedy to require that any action be brought  against the Issuer or any other
person or entity before proceeding against the Guarantor. The Guarantor shall be
subrogated  to all  rights  (if any) of any  Beneficiary  against  the Issuer in
respect of any amounts paid to the  Beneficiaries  by the  Guarantor  under this
Guarantee; provided, however, that the Guarantor shall not (except to the extent
required by mandatory  provisions of law) be entitled to enforce or exercise any
rights that it may acquire by way of subrogation or any indemnity, reimbursement
or other agreement, in all cases as a result of payment under this Guarantee, if
at the time of any such payment,  and after giving  effect to such payment,  any
amounts are due and unpaid under this Guarantee.

                                   ARTICLE V

                    LIMITATION OF TRANSACTIONS; SUBORDINATION

         Section 5.1 Limitation of Transactions.
                     ----------------------------

         So long as any  Capital  Securities  remain  outstanding,  if (a) there
shall have occurred and be continuing an Event of Default or a Declaration Event
of Default or (b) the  Guarantor  shall have  selected  an  Extension  Period as
provided in the Declaration  and such period,  or any extension  thereof,  shall
have  commenced and be  continuing,  then the Guarantor  shall not and shall not
permit any Affiliate of the Guarantor controlled by the Guarantor to (x) declare
or pay any dividends or distributions on, or redeem, purchase,  acquire, or make
a  liquidation  payment  with  respect  to,  any  of  the  Guarantor's  or  such
Affiliate's  capital stock (other than payments of dividends or distributions to
the Guarantor or a Subsidiary of the  Guarantor) or make any guarantee  payments
with  respect  to the  foregoing;  or (y) make any  payment of  principal  of or



                                       12
<PAGE>

interest  or  premium,  if any,  on or  repay,  repurchase  or  redeem  any debt
securities of the Guarantor or any Affiliate of the Guarantor  controlled by the
Guarantor that rank pari passu in all respects with or junior in interest to the
Debentures  (other  than,  with  respect  to  clauses  (x)  and (y)  above,  (i)
repurchases, redemptions or other acquisitions of shares of capital stock of the
Guarantor or any  Subsidiary of the Guarantor in connection  with any employment
contract,  benefit plan or other similar  arrangement with or for the benefit of
one or more employees,  officers, directors or consultants, in connection with a
dividend  reinvestment or stockholder  stock purchase plan or in connection with
the  issuance  of  capital  stock of the  Guarantor  or of such  Subsidiary  (or
securities   convertible   into  or  exercisable  for  such  capital  stock)  as
consideration in an acquisition transaction entered into prior to the occurrence
of the Event of Default,  Declaration  Event of Default or Extension  Period, as
applicable,  (ii) as a result  of any  exchange  or  conversion  of any class or
series of the Guarantor's capital stock (or any capital stock of a Subsidiary of
the Guarantor) for any class or series of the  Guarantor's  capital stock (or in
the  case  of a  Subsidiary  of the  Guarantor,  any  class  or  series  of such
Subsidiary's  capital  stock)  or of any  class  or  series  of the  Guarantor's
indebtedness for any class or series of the Guarantor's capital stock (or in the
case of indebtedness of a Subsidiary of the Guarantor, of any class or series of
such  Subsidiary's  indebtedness  for any class or  series of such  Subsidiary's
capital  stock),  (iii) the  purchase of  fractional  interests in shares of the
Guarantor's  capital  stock  (or  the  capital  stock  of a  Subsidiary  of  the
Guarantor)  pursuant to the  conversion  or exchange  provisions of such capital
stock or the security being  converted or exchanged,  (iv) any  declaration of a
dividend in connection  with any  stockholders'  rights plan, or the issuance of
rights,  stock or other  property  under any  stockholders'  rights plan, or the
redemption  or repurchase of rights  pursuant  thereto,  (v) any dividend in the
form of stock, warrants, options or other rights where the dividend stock or the
stock  issuable upon exercise of such  warrants,  options or other rights is the
same stock as that on which the  dividend is being paid or ranks pari passu with
or  junior to such  stock and any cash  payments  in lieu of  fractional  shares
issued in connection therewith, or (vi) payments under this Guarantee).

         Section 5.2 Ranking.
                    ---------

         This Guarantee will constitute an unsecured obligation of the Guarantor
and will rank  subordinate  and junior in right of payment  to all  present  and
future Senior  Indebtedness  (as defined in the Indenture) of the Guarantor.  By
their  acceptance  thereof,  each  Holder of  Capital  Securities  agrees to the
foregoing provisions of this Guarantee and the other terms set forth herein.

         The right of the Guarantor to participate in any distribution of assets
of  any  of  its  Subsidiaries  upon  any  such   Subsidiary's   liquidation  or
reorganization  or otherwise is subject to the prior claims of creditors of that
Subsidiary,  except to the extent the  Guarantor  may itself be  recognized as a
creditor of that Subsidiary. Accordingly, the Guarantor's obligations under this
Guarantee  will  be  effectively   subordinated   to  all  existing  and  future
liabilities of the Guarantor's  Subsidiaries,  and claimants should look only to
the assets of the  Guarantor for payments  hereunder.  This  Guarantee  does not
limit the  incurrence  or issuance  of other  secured or  unsecured  debt of the
Guarantor,  including Senior Indebtedness of the Guarantor,  under any indenture
that the Guarantor may enter into in the future or otherwise.



                                       13
<PAGE>

                                   ARTICLE VI

                                   TERMINATION

         Section 6.1 Termination.
                     ------------

         This Guarantee  shall  terminate as to the Capital  Securities (i) upon
full payment of the Optional Redemption Price or Special Redemption Price of all
Capital  Securities then  outstanding,  (ii) upon the distribution of all of the
Debentures  to the Holders of all of the Capital  Securities  or (iii) upon full
payment  of  the  amounts  payable  in  accordance  with  the  Declaration  upon
dissolution of the Issuer.  This Guarantee will continue to be effective or will
be  reinstated,  as the  case  may be,  if at any time  any  Holder  of  Capital
Securities must restore payment of any sums paid under the Capital Securities or
under this Guarantee.

                                  ARTICLE VII

                                 INDEMNIFICATION

         Section 7.1 Exculpation.
                     ------------

         (a) No Indemnified  Person shall be liable,  responsible or accountable
in damages or  otherwise to the  Guarantor  or any Covered  Person for any loss,
damage or claim  incurred by reason of any act or omission  performed or omitted
by such  Indemnified  Person in good faith in accordance with this Guarantee and
in a manner that such Indemnified  Person  reasonably  believed to be within the
scope of the authority conferred on such Indemnified Person by this Guarantee or
by law,  except that an  Indemnified  Person  shall be liable for any such loss,
damage or claim incurred by reason of such  Indemnified  Person's  negligence or
willful misconduct with respect to such acts or omissions.

         (b) An Indemnified  Person shall be fully  protected in relying in good
faith upon the records of the Issuer or the Guarantor and upon such information,
opinions,  reports or statements presented to the Issuer or the Guarantor by any
Person as to matters the Indemnified Person reasonably  believes are within such
other Person's  professional  or expert  competence and who, if selected by such
Indemnified  Person,  has been selected with reasonable care by such Indemnified
Person, including information,  opinions,  reports or statements as to the value
and amount of the  assets,  liabilities,  profits,  losses,  or any other  facts
pertinent  to the  existence  and amount of assets from which  Distributions  to
Holders of Capital Securities might properly be paid.

         Section 7.2 Indemnification.
                     ----------------

         (a) The Guarantor agrees to indemnify each Indemnified  Person for, and
to hold each Indemnified Person harmless against,  any and all loss,  liability,
damage,  claim or expense incurred without  negligence or willful  misconduct on
the part of the  Indemnified  Person,  arising out of or in connection  with the
acceptance or administration of the trust or trusts  hereunder,  including,  but
not  limited to, the costs and  expenses  (including  reasonable  legal fees and
expenses) of the Indemnified Person defending itself against,  or investigating,
any claim or liability in connection  with the exercise or performance of any of
the Indemnified Person's

                                       14
<PAGE>

powers or duties  hereunder.  The  obligation  to indemnify as set forth in this
Section 7.2 shall survive the  resignation  or removal of the Guarantee  Trustee
and the termination of this Guarantee.

         (b) Promptly after receipt by an Indemnified  Person under this Section
7.2 of notice of the commencement of any action,  such Indemnified  Person will,
if a claim in respect  thereof is to be made  against the  Guarantor  under this
Section 7.2, notify the Guarantor in writing of the  commencement  thereof;  but
the failure so to notify the Guarantor  (i) will not relieve the Guarantor  from
liability  under paragraph (a) above unless and to the extent that the Guarantor
did  not  otherwise  learn  of such  action  and  such  failure  results  in the
forfeiture  by the  Guarantor of  substantial  rights and defenses and (ii) will
not, in any event, relieve the Guarantor from any obligations to any Indemnified
Person  other than the  indemnification  obligation  provided in  paragraph  (a)
above.  The Guarantor  shall be entitled to appoint  counsel of the  Guarantor's
choice at the  Guarantor's  expense to represent the  Indemnified  Person in any
action for which  indemnification  is sought (in which case the Guarantor  shall
not thereafter be responsible for the fees and expenses of any separate  counsel
retained  by the  Indemnified  Person or  Persons  except  as set forth  below);
provided,  however,  that such counsel shall be reasonably  satisfactory  to the
Indemnified Person.  Notwithstanding the Guarantor's election to appoint counsel
to represent the Guarantor in an action,  the Indemnified  Person shall have the
right to employ separate counsel  (including  local counsel),  and the Guarantor
shall bear the reasonable  fees,  costs and expenses of such separate counsel if
(i) the use of counsel  chosen by the  Guarantor  to represent  the  Indemnified
Person would  present such counsel with a conflict of interest,  (ii) the actual
or  potential  defendants  in, or targets of, any such action  include  both the
Indemnified  Person and the  Guarantor  and the  Indemnified  Person  shall have
reasonably  concluded  that there may be legal  defenses  available to it and/or
other  Indemnified  Person(s)  which are  different  from or additional to those
available to the Guarantor,  (iii) the Guarantor shall not have employed counsel
satisfactory  to the  Indemnified  Person to represent  the  Indemnified  Person
within a reasonable  time after notice of the institution of such action or (iv)
the Guarantor shall authorize the Indemnified  Person to employ separate counsel
at the  expense of the  Guarantor.  The  Guarantor  will not,  without the prior
written consent of the Indemnified  Persons,  settle or compromise or consent to
the entry of any  judgment  with  respect to any  pending or  threatened  claim,
action,  suit or proceeding in respect of which  indemnification or contribution
may be sought  hereunder  (whether or not the Indemnified  Persons are actual or
potential parties to such claim or action) unless such settlement, compromise or
consent  includes an unconditional  release of each Indemnified  Person from all
liability arising out of such claim, action, suit or proceeding.

         Section 7.3 Compensation; Reimbursement of Expenses.
                     ----------------------------------------

         The Guarantor agrees:

         (a) to pay to the Guarantee Trustee from time to time such compensation
for all services  rendered by it  hereunder  as the parties  shall agree to from
time to time (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust); and

         (b) except as otherwise  expressly  provided  herein,  to reimburse the
Guarantee  Trustee upon request for all reasonable  expenses,  disbursements and
advances  incurred  or made


                                       15
<PAGE>

by it in  accordance  with  any  provision  of  this  Guarantee  (including  the
reasonable  compensation  and the expenses and  disbursements  of its agents and
counsel),   except  any  such  expense,   disbursement  or  advance  as  may  be
attributable to its negligence or willful misconduct.

         The  provisions  of this Section 7.3 shall survive the  resignation  or
removal of the Guarantee Trustee and the termination of this Guarantee.

                                  ARTICLE VIII

                                  MISCELLANEOUS

         Section 8.1 Successors and Assigns.
                     -----------------------

         All guarantees and  agreements  contained in this Guarantee  shall bind
the  successors,   assigns,  receivers,  trustees  and  representatives  of  the
Guarantor  and  shall  inure  to the  benefit  of  the  Holders  of the  Capital
Securities   then   outstanding.   Except  in  connection  with  any  merger  or
consolidation of the Guarantor with or into another entity or any sale, transfer
or lease of the  Guarantor's  assets to another  entity,  in each  case,  to the
extent permitted under the Indenture, the Guarantor may not assign its rights or
delegate its obligations  under this Guarantee without the prior approval of the
Holders of at least a Majority in liquidation amount of the Capital Securities.

         Section 8.2 Amendments.
                    -----------

         Except with  respect to any changes  that do not  adversely  affect the
rights of Holders of the Capital  Securities  in any material  respect (in which
case no consent of Holders will be required), this Guarantee may be amended only
with  the  prior  approval  of the  Holders  of not  less  than  a  Majority  in
liquidation amount of the Capital  Securities and the Guarantor.  The provisions
of the  Declaration  with respect to  amendments  thereof apply to the giving of
such approval.

         Section 8.3 Notices.
                     --------

         All notices  provided for in this Guarantee  shall be in writing,  duly
signed by the party giving such notice,  and shall be  delivered,  telecopied or
mailed by first class mail, as follows:

         (a) If given  to the  Guarantee  Trustee,  at the  Guarantee  Trustee's
mailing address set forth below (or such other address as the Guarantee  Trustee
may give notice of to the Holders of the Capital Securities and the Guarantor):

                U.S. Bank National Association
                225 Asylum Street, Goodwin Square
                Hartford, Connecticut 06103
                Attention: Corporate Trust Services
                Telecopy: 860-244-1889



                                       16
<PAGE>

                With a copy to:


                U.S. Bank National Association
                1 Federal Street
                Boston, Massachusetts  02110
                Attention:  Paul D. Allen, Corporate Trust Services
                Telecopy:  617-603-6665


         (b) If given to the Guarantor,  at the Guarantor's  mailing address set
forth below (or such other  address as the  Guarantor  may give notice of to the
Holders of the Capital Securities and to the Guarantee Trustee):

                Penn-America Group, Inc.
                420 South York Road
                Hatboro, Pennsylvania  19040
                Attention:  Garland P. Pezzuolo
                Telecopy:  215-443-3603


         (c) If given to any Holder of the  Capital  Securities,  at the address
set forth on the books and records of the Issuer.

         All such  notices  shall be deemed to have been given when  received in
person,  telecopied  with  receipt  confirmed,  or mailed by first  class  mail,
postage  prepaid,  except that if a notice or other document is refused delivery
or cannot be  delivered  because  of a changed  address  of which no notice  was
given,  such notice or other  document shall be deemed to have been delivered on
the date of such refusal or inability to deliver.

         Section 8.4 Benefit.
                     --------

         This  Guarantee  is solely for the  benefit of the  Beneficiaries  and,
subject to Section  2.1(a),  is not  separately  transferable  from the  Capital
Securities.

         Section 8.5 Governing Law.
                     --------------

         THIS GUARANTEE  SHALL BE GOVERNED BY, AND CONSTRUED AND  INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF
LAWS  PRINCIPLES  THEREOF  (OTHER THAN  SECTION  5-1401 OF THE NEW YORK  GENERAL
OBLIGATIONS LAW).

         Section 8.6 Counterparts.
                     -------------

         This  Guarantee  may be executed in one or more  counterparts,  each of
which shall be an original, but all of which taken together shall constitute one
and the same instrument.



                                       17
<PAGE>

         Section 8.7 Separability.
                     -------------

         In case one or more of the provisions contained in this Guarantee shall
for any reason be held to be invalid,  illegal or  unenforceable in any respect,
such  invalidity,  illegality  or  unenforceability  shall not  affect any other
provisions of this  Guarantee,  but this Guarantee shall be construed as if such
invalid or illegal or unenforceable provision had never been contained herein.

                     Signatures appear on the following page







                                       18
<PAGE>



         THIS GUARANTEE is executed as of the day and year first above written.



                                          PENN-AMERICA GROUP, INC., as Guarantor

                                          By:
                                                   -----------------------------
                                                   Name:
                                                   Title:



                                          U.S. BANK NATIONAL ASSOCIATION,
                                          as Guarantee Trustee

                                          By:
                                                   -----------------------------
                                                   Name:
                                                   Title:







                                       19
<PAGE>