TERMINATION OF
                     PROMISSORY NOTE AND SECURITY AGREEMENT


         THIS TERMINATION OF PROMISSORY NOTE AND SECURITY AGREEMENT dated as of
May 21, 2004 (the "Termination") with respect to the PROMISSORY NOTE AND
SECURITY AGREEMENT, dated as of March 9, 2001 (the "Agreement"), by and between
Garland P. Pezzuolo, an individual (the "Borrower"), and PENN-AMERICA INSURANCE
COMPANY (the "Lender") in the principal amount of $18,681.25, together with
accrued interest of $3,033.44.

                  WHEREAS, in view of the Lender's outstanding results over the
past two years and the fact that Lender's management received no long-term
equity compensation in either 2002 or 2003, the Lender desires to forgive the
loan evidenced by the Agreement and the parties desire to terminate the
Agreement.

                  NOW, THEREFORE, in consideration of the premises and of the
mutual covenants herein contained and intending to be legally bound hereby, the
parties hereto agree as follows:

                  1. The loan evidenced by the Agreement, including both
principal and interest, is hereby forgiven and the Agreement is hereby
terminated, both effective as of May 21, 2004. Lender agrees to promptly return
the original Agreement to Borrower, to release any collateral held in escrow in
connection with the loan, and will indemnify and hold Borrower harmless from any
failure to so return the Agreement and the collateral.

                  2. The Lender further agrees to pay to the Borrower an amount
equal to the "Tax Gross-Up Amount" (as defined in the next sentence). The Tax
Gross-Up Amount means an amount equal to the sum of any federal, state and/or
local tax arising as a result of the loan forgiveness pursuant to Section 1 and
any payment pursuant to this Section 2, which sum may be due and payable by the
Employee or withheld by the Lender (collectively, the "Total Taxes") so that the
Employee receives actual loan forgiveness or payments, after payment or
withholding, in an amount no less than that which would have been received by
him or her if no obligation for Total Taxes had arisen.

                  3. This Termination may be executed in any number of
counterparts and by the different parties hereto on separate counterparts each
of which, when so executed, shall be deemed an original, but all such
counterparts shall constitute but one and the same instrument.

                  4. This Termination shall be binding upon and inure to the
benefit of the Borrower and the Lender and their respective successors and
assigns.

                  5. This Termination shall be governed by, construed and
enforced in accordance with the laws of the Commonwealth of Pennsylvania,
without regard to choice of law principles.


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                  IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Termination as of the date first above written.


                             LENDER:

                             PENN-AMERICA INSURANCE COMPANY



                             By
                               ---------------------------------------------
                               Title:  President and Chief Executive Officer


                             BORROWER:


                             -----------------------------------------------
                             Garland P. Pezzuolo




                                       -2-




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COMMONWEALTH OF PENNSYLVANIA)
                            ) ss:
COUNTY OF MONTGOMERY        )

                  On this, the _____ day of ______________________, 20__, before
me, a Notary Public, the undersigned officer, personally appeared
___________________, who acknowledged himself to be _____________________ of
Penn-America Insurance Company, a Pennsylvania corporation, and that he as such
officer, being authorized to do so, executed the foregoing instrument for the
purposes therein contained by signing the name of the corporation by himself as
such officer.

                  IN WITNESS WHEREOF, I hereunto set my hand and official seal.





                                  -----------------------------
                                         Notary Public

[Notarial Seal]                   My commission expires:


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