SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-Q

(Mark One)

(x)  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the quarterly period ended     June 30, 1999
                                 ----------------

                                       OR

( )  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number    0-22316
                         ---------

                            Penn-America Group, Inc.
        -----------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


            Pennsylvania                                23-2731409
---------------------------------------    -------------------------------------
  (State or other jurisdiction of           (I.R.S. Employer Identification No.)
   incorporation or organization)


                420 South York Road, Hatboro, Pennsylvania 19040
     -----------------------------------------------------------------------
          (Address of principal executive offices, including zip code)


                                 (215) 443-3600
     -----------------------------------------------------------------------
              (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding  12 months  (or for such other  period  that the  registrant  was
required  to file  such  reports)  and  (2)  has  been  subject  to such  filing
requirements for the past 90 days. Yes _X_   No ___.

At August 10, 1999,  8,489,411 shares of the registrant's common stock, $.01 par
value, were outstanding.

                                     Page 1
<PAGE>
                    Penn-America Group, Inc. and SubsidiarIES
                                      Index

                                                                     Page Number

Part I - Financial Information

         Consolidated Unaudited Balance Sheets - June 30, 1999 and
                December 31, 1998                                          3

         Consolidated Unaudited Statements of Earnings - For the three
                 and six months ended June 30, 1999 and 1998               4

         Consolidated Unaudited Statement of Stockholders' Equity -
                For the six months ended June 30, 1999                     5

         Consolidated Unaudited Statements of Cash Flows -
                For the six months ended June 30, 1999 and 1998            6

         Notes to Unaudited Consolidated Financial Statements              7

         Management's Discussion and Analysis of Financial Condition
                and Results of Operations                                 13

Part II - Other Information                                               25

                                     Page 2
<PAGE>
                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                                   (Unaudited)
                 (In thousands, except share and per share data)
<TABLE>
<CAPTION>
                                                                               June 30,     December 31,
                                                                                 1999           1998
                                                                              ---------      ---------
<S>                                                                           <C>            <C>
ASSETS
Investments:
    Fixed maturities:
       Available for sale, at fair value (amortized cost 1999,                $ 109,041      $ 105,598
         $110,806; 1998, $103,365)
       Held to maturity, at amortized cost (fair value 1999,
         $21,623; 1998, $27,270)                                                 21,632         26,956
    Equity securities, at fair value (cost 1999, $26,667; 1998, $23,358)         26,913         25,238
    Short-term investments, at cost, which approximates fair value                   --            997
                                                                              ---------      ---------
       Total investments                                                        157,586        158,789
Cash                                                                             13,186         24,077
Receivables:
    Accrued investment income                                                     1,740          1,871
    Premiums receivable, net                                                      9,321         10,349
    Reinsurance recoverable                                                      17,811         18,766
                                                                              ---------      ---------
       Total receivables                                                         28,872         30,986
Prepaid reinsurance premiums                                                      2,666          2,809
Deferred policy acquisition costs                                                 9,084          8,728
Capital lease                                                                     1,884          2,051
Deferred income taxes                                                             3,428          1,598
Income tax recoverable                                                              174            884
Other assets                                                                        455            582
                                                                              ---------      ---------
       Total assets                                                           $ 217,335      $ 230,504
                                                                              =========      =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Unpaid losses and loss adjustment expenses                                  $  86,902      $  88,937
  Unearned premiums                                                              34,432         34,253
  Accounts payable and accrued expenses                                             881          1,179
  Capitalized lease obligation                                                    1,889          2,080
  Other liabilities                                                               2,680          3,425
                                                                              ---------      ---------
         Total liabilities                                                      126,784        129,874
                                                                              ---------      ---------

Stockholders' equity:
  Preferred stock, $.01 par value; authorized 2,000,000 shares;
    none issued                                                                      --             --
  Common stock, $.01 par value; authorized 20,000,000 shares;
     issued 1999, 9,990,436 and 1998, 9,938,179 shares, outstanding 1999,
     8,489,411 and 1998, 9,395,854 shares                                           100             99
  Additional paid-in capital                                                     69,590         69,035
  Accumulated other comprehensive (loss) income                                  (1,002)         2,714
  Retained earnings                                                              38,284         34,779
  Treasury stock, 1999, 1,501,025 shares, 1998, 542,325 shares, at cost         (16,061)        (5,643)
                                                                              ---------      ---------
                                                                                 90,911        100,984
  Unearned compensation from restricted stock awards                               (360)          (354)
                                                                              ---------      ---------
         Total stockholders' equity                                              90,551        100,630
                                                                              ---------      ---------

         Total liabilities and stockholders' equity                           $ 217,335      $ 230,504
                                                                              =========      =========
</TABLE>

     See accompanying notes to unaudited consolidated financial statements.
                                     Page 3
<PAGE>
                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                       Consolidated Statements of Earnings
                                   (Unaudited)

        For the three and six month periods ended June 30, 1999 and 1998
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                               Three months ended June 30,       Six months ended June 30,
                                                               ------------------------          ------------------------
                                                                1999             1998             1999             1998
                                                               -------          -------          -------          -------
<S>                                                            <C>              <C>              <C>              <C>
Revenues:
    Premiums earned                                            $21,359          $22,074          $42,820          $45,109
    Net investment income                                        2,349            2,749            4,760            5,524
    Net realized investment gains                                  682              477            1,238              443
                                                               -------          -------          -------          -------
       Total revenues                                           24,390           25,300           48,818           51,076
                                                               -------          -------          -------          -------

Losses and expenses:
    Losses and loss adjustment expenses                         13,822           13,855           27,546           28,146
    Amortization of deferred policy acquisition costs            6,087            6,054           12,240           12,424
    Other underwriting expenses                                  1,431            1,779            2,884            3,173
    Interest expense                                                36               45               73               89
                                                               -------          -------          -------          -------
       Total losses and expenses                                21,376           21,733           42,743           43,832
                                                               -------          -------          -------          -------

Earnings before income tax                                       3,014            3,567            6,075            7,244

Income tax                                                         817            1,042            1,670            2,139

                                                               -------          -------          -------          -------
Net earnings                                                   $ 2,197          $ 2,525          $ 4,405          $ 5,105
                                                               =======          =======          =======          =======

Net earnings per share
         Basic                                                 $  0.25          $  0.25          $  0.50          $  0.52

         Diluted                                               $  0.25          $  0.25          $  0.49          $  0.51


Weighted average number of shares outstanding
         Basic                                                   8,647            9,910            8,887            9,900

         Diluted
                                                                 8,724           10,018            8,965           10,012

Cash dividends per share                                       $0.0525          $  0.05          $0.1025          $  0.10

</TABLE>

     See accompanying notes to unaudited consolidated financial statements.
                                     Page 4
<PAGE>
                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

                 Consolidated Statement of Stockholders' Equity
                                   (Unaudited)

                     For the six months ended June 30, 1999
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                                               Unearned
                                                                                                             Compensation
                                                                             Accumulated                         From
                                                Common Stock     Additional     Other                         Restricted
                                           -------------------    Paid-In   Comprehensive  Retained  Treasury   Stock
                                             Shares    Amount     Capital   Income (Loss)  Earnings    Stock    Awards     Total
                                           ---------   -------   ---------  -------------  --------  -------- -----------  -----
<S>                                        <C>            <C>      <C>          <C>         <C>       <C>        <C>       <C>
Balance at December 31, 1998               9,938,179      $99      $69,035      $2,714      $34,779   $(5,643)   $(354)    $100,630
Net earnings                                                                                  4,405                           4,405
Other comprehensive (loss)
  income, net of tax:
      Unrealized losses on investments,
       net of reclassification adjustment                                        (3,716)                                     (3,716)
                                                                                                                           --------
Comprehensive income                                                                                                            689
                                                                                                                           --------
Issuance of common stock                      52,257        1          464                                                      465
Unearned compensation  from  restricted
      stock awards                                                      91                                         (91)          --
 Amortization of compensation expense from
      restricted  stock awards issued                                                                               85           85
Cash dividends paid ($0.1025 per share)                                                        (900)                           (900)
Purchase of treasury stock, 958,700 shares                                                            (10,418)              (10,418)
                                           ----------------------------------------------------------------------------------------
Balance at June 30, 1999                   9,990,436     $100      $69,590     $(1,002)     $38,284  $(16,061)   $(360)     $90,551
                                           ========================================================================================
</TABLE>

     See accompanying notes to unaudited consolidated financial statements.
                                     Page 5
<PAGE>
                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                                   (Unaudited)

                 For the six months ended June 30, 1999 and 1998
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                  Six months ended June 30,
                                                                                   ----------------------
                                                                                     1999          1998
                                                                                   --------      --------
<S>                                                                                <C>           <C>
Cash flows from operating activities:
    Net earnings                                                                   $  4,405      $  5,105
    Adjustments to reconcile net earnings to net cash provided by
      operating activities:
         Amortization and depreciation expense                                          311           296
         Net realized investment gains                                               (1,238)         (443)
         Deferred income tax                                                             85          (342)
         Net decrease in premiums receivable, prepaid reinsurance premiums
           and unearned premiums                                                      1,350           392
         Net (decrease) increase in unpaid losses and loss adjustment expenses
           and reinsurance recoverable                                               (1,079)        2,833
         (Increase) decrease in:
           Accrued investment income                                                    131          (209)
           Deferred policy acquisition costs                                           (356)          (81)
           Income tax recoverable                                                       710          (266)
           Other assets                                                                  64           (99)
         Increase (decrease) in:
           Accounts payable and accrued expenses                                       (298)       (1,599)
           Other liabilities                                                           (745)        1,937
                                                                                   --------      --------
               Net cash provided by operating activities                              3,340         7,524
                                                                                   --------      --------

Cash flows from investing activities:
    Purchases of equity securities                                                   (5,634)      (11,739)
    Purchases of fixed maturities available for sale                                (24,270)      (38,890)
    Purchases of fixed maturities held to maturity                                   (2,100)           --
    Proceeds from sales of equity securities                                          3,520        11,790
    Proceeds from sales and maturities of fixed maturities available for sale        16,921        15,080
    Proceeds from maturities and calls of fixed maturities held to maturity           7,258        11,067
    Change in short-term investments                                                    997         9,382
                                                                                   --------      --------
         Net cash used by investing activities                                       (3,308)       (3,310)
                                                                                   --------      --------

Cash flows from financing activities:
    Issuance of common stock                                                            465           633
    Purchase of treasury stock                                                      (10,418)           --
    Principal payments on capital lease obligations                                     (70)          (65)
    Dividends paid                                                                     (900)         (991)
                                                                                   --------      --------
         Net cash used by financing activities                                      (10,923)         (423)
                                                                                   --------      --------

(Decrease) increase in cash                                                         (10,891)        3,791
Cash, beginning of period                                                            24,077         2,163
                                                                                   --------      --------
Cash, end of period                                                                $ 13,186      $  5,954
                                                                                   ========      ========

Supplemental disclosure of cash flow information:
    Cash paid during the period for:
      Interest                                                                     $     73      $     89
      Taxes                                                                             875         2,748
</TABLE>

     See accompanying notes to unaudited consolidated financial statements.
                                     Page 6
<PAGE>
                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

              Notes to Unaudited Consolidated Financial Statements

Note 1 - Organization and Basis of Presentation

     Penn-America  Group,  Inc.  ("PAGI") is an insurance  holding company whose
principal  asset  is  the  common  stock  of  Penn-America   Insurance   Company
("Penn-America").  The "Company" refers to PAGI and Penn-America,  as well as to
Penn-America's  wholly-owned  subsidiary,   Penn-Star  Insurance  Company.  Penn
Independent  Corporation ("Penn Independent") currently owns approximately 36.3%
of the outstanding common stock of PAGI as of June 30, 1999.

     The accompanying unaudited consolidated financial statements should be read
in  conjunction  with the  financial  statements  and notes  for the year  ended
December 31,  1998.  In the opinion of  management,  the  financial  information
reflects all  adjustments  (consisting  only of normal  recurring  adjustments),
which are necessary for a fair presentation of the Company's financial position,
results of  operations,  and cash flows for the interim  periods.  The Company's
results of operations for interim periods are not necessarily  indicative of the
results to be expected for the entire year.

Note 2 - Reinsurance

     Premiums  earned are net of amounts ceded to reinsurers of $1.8 million and
$1.9  million  for the  three  months  ended  June 30,  1999 and June 30,  1998,
respectively.  Losses and loss  adjustment  expenses are net of amounts ceded to
reinsurers  of $3.5 million and $1.5 million for the three months ended June 30,
1999 and June 30, 1998, respectively.

     Premiums  earned are net of amounts ceded to reinsurers of $3.5 million and
$3.8  million  for the six  months  ended  June 30,  1999  and  June  30,  1998,
respectively.  Losses and loss  adjustment  expenses are net of amounts ceded to
reinsurers  of $4.1  million and $3.2  million for the six months ended June 30,
1999 and June 30, 1998, respectively

Note 3 - Comprehensive Income

     Accumulated  other  comprehensive  (loss)  income of the  Company  consists
solely of net unrealized (loss) gains on investment securities.

                                     Page 7

<PAGE>
                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

              Notes to Unaudited Consolidated Financial Statements
                                   (continued)

The  following  are  components  of  other   comprehensive   (loss)  income  (in
thousands):

<TABLE>
<CAPTION>
                                                     Six months ended June 30, 1999
                                                -----------------------------------------
                                                Before Tax         Tax         Net of Tax
                                                  Amount         Expense         Amount
                                                 --------        -------        -------
<S>                                              <C>             <C>            <C>
Unrealized losses on investments:
    Unrealized holding losses arising
       during period                             $(4,392)        $ 1,493        $(2,899)
    Less: reclassification adjustment for
      gains realized in net earnings              (1,238)            421           (817)
                                                 --------------------------------------
Other comprehensive loss                         $(5,630)        $ 1,914        $(3,716)
                                                 ======================================
</TABLE>

<TABLE>
<CAPTION>
                                                      Six months ended June 30, 1998
                                                ------------------------------------------
                                                Before Tax         Tax          Net of Tax
                                                 Amount          Expense          Amount
                                                 -------         --------        -------
<S>                                              <C>             <C>            <C>
Unrealized gains on investments:
    Unrealized holding gains arising
      during period                              $   684         $  (236)        $  448
    Less: reclassification adjustment for
       gains realized in net earnings               (443)            153           (290)
                                                 --------------------------------------
Other comprehensive income                       $   241         $   (83)        $  158
                                                 ======================================
</TABLE>


For the  three  months  ended  June 30,  1999,  comprehensive  loss of  $184,000
consisted  of  net  income  of  $2,197,000  and  other   comprehensive  loss  of
$2,381,000.

Comprehensive  income  for the  three and six  months  ended  June 30,  1998 was
$2,226,000  and  $5,263,000  which  consisted  of net income of  $2,525,000  and
$5,105,000 and other  comprehensive  income (loss), net of tax of ($299,000) and
$158,000, respectively.

                                     Page 8
                                     <PAGE>
                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

              Notes to Unaudited Consolidated Financial Statements
                                   (continued)


Note 4 - Basic and Diluted Earnings Per Share

     The following is a reconciliation of the numerators and denominators of the
basic and diluted  earnings per share  computations  (in  thousands,  except per
share data):
<TABLE>
<CAPTION>
                                      Three months ended June 30,    Six months ended June 30,
                                          1999           1998          1999           1998
                                        -------        -------        -------        -------
<S>                                     <C>            <C>            <C>            <C>

Basic EPS:
Net earnings                            $ 2,197        $ 2,525        $ 4,405        $ 5,105
                                        -------        -------        -------        -------

Weighted average common
      shares outstanding                  8,647          9,910          8,887          9,900
                                        -------        -------        -------        -------

Basic EPS                               $  0.25        $  0.25        $  0.50        $  0.52
                                        =======        =======        =======        =======

Diluted EPS:
Net earnings                            $ 2,197        $ 2,525        $ 4,405        $ 5,105
                                        -------        -------        -------        -------
Weighted  average common
      shares outstanding                  8,647          9,910          8,887          9,900

Additional shares outstanding
      after the assumed exercise
      of options by applying the
      treasury stock method                  77            108             78            112
                                        -------        -------        -------        -------

Total weighted average common
      shares outstanding                  8,724         10,018          8,965         10,012
                                        =======        =======        =======        =======

Diluted EPS                             $  0.25        $  0.25        $  0.49        $  0.51
                                        =======        =======        =======        =======
</TABLE>

                                     Page 9
<PAGE>
                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

              Notes to Unaudited Consolidated Financial Statements
                                   (continued)


Note 5- Segment Information

     In 1998, the Company implemented Statement of Financial Accounting Standard
No. 131,  "Disclosures about Segments of an Enterprise and Related  Information"
which establishes standards about a company's operating segments.

     The Company has two reportable segments: personal automobile and commercial
lines.  These  segments  are  managed  separately  because  they have  different
customers,  pricing and expense structures. The Company does not allocate assets
between  segments  because  assets  are  reviewed  in  total by  management  for
decision-making purposes.

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

     As of June  30,  1999,  the  Company's  insurance  business  comprised  two
distinct segments:  commercial lines,  which represent  approximately 84% of the
Company's  gross  written  premiums for the six months ended June 30, 1999,  and
minimum limits non-standard personal automobile insurance. The Company announced
in April 1999,  that it would  run-off its  remaining  portfolio of the personal
lines non-standard automobile business,  which was underwritten through a single
agent in  California.  This  followed a move earlier this year to eliminate  the
rest  of the  Company's  non-standard  personal  automobile  portfolio  of  this
business in six other states.

     The Company  currently has one major customer  accounting for more than 10%
of the Company's revenue.  The Company derived  approximately 10.7% and 18.8% of
its revenues  from this agent for the three months ended June 30, 1999 and 1998,
respectively,  and 11.8% and 20.1% of its  revenues  from this agent for the six
months ended June 30, 1999 and 1998,  respectively.  This major  customer is the
agent who writes  personal  non-standard  automobile  coverage  in the states of
California and Nevada that the Company is currently running off.

                                    Page 10
<PAGE>
                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES


              Notes to Unaudited Consolidated Financial Statements
                                   (continued)

     The following is a summary of the Company's segment revenues,  expenses and
profit for the three months ended June 30, 1999 and 1998:

<TABLE>
<CAPTION>

(in thousands)                      Three months ended June 30, 1999
                                    --------------------------------
                                                 Personal
                                Commercial      Automobile         Total
                                ----------------------------------------
<S>                               <C>            <C>             <C>
Premiums earned                   $17,422        $ 3,937         $21,359
Net investment income from
  insurance operations              1,326            233           1,559
                                ----------------------------------------
Total segment revenues             18,748          4,170          22,918
                                ----------------------------------------

Segment losses and LAE             10,575          3,247          13,822
Segment expenses                    5,225          1,273           6,498
                                ----------------------------------------
Total segment expenses             15,800          4,520          20,320
                                ----------------------------------------

Segment profit (loss)             $ 2,948        $  (350)        $ 2,598
                                ----------------------------------------
Plus unallocated items:
Net investment income from equity                                  1,472
Unallocated expenses                                              (1,056)
Income tax                                                          (817)
                                                               ---------
Net earnings                                                     $ 2,197
                                                               =========


(in thousands)                      Three months ended June 30, 1998
                                    --------------------------------
                                                 Personal
                                Commercial      Automobile         Total
                                ----------------------------------------
Premiums earned                  $ 15,513       $  6,561        $ 22,074
Net investment income from
  insurance operations              1,303            236           1,539
                                ----------------------------------------
Total segment revenues             16,816          6,797          23,613
                                ----------------------------------------

Segment losses and LAE              9,460          4,395          13,855
Segment expenses                    4,839          2,200           7,039
                                ----------------------------------------
Total segment expenses             14,299          6,595          20,894
                                ----------------------------------------

Segment profit                   $  2,517        $   202        $  2,719
                                ----------------------------------------
Plus unallocated items:
Net investment income from equity                                  1,687
Unallocated expenses                                                (839)
Income tax                                                        (1,042)
                                                                --------
Net earnings                                                    $  2,525
                                                                ========
</TABLE>

                                    Page 11
<PAGE>
                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

              Notes to Unaudited Consolidated Financial Statements
                                   (continued)


The  following  is a summary of the  Company's  segment  revenues,  expenses and
profit for the six months ended June 30, 1999 and 1998:

<TABLE>
<CAPTION>
(in thousands)                                              Six months ended June 30, 1999
                                                     ------------------------------------------
                                                                       Personal
                                                    Commercial        Automobile         Total
                                                     ------------------------------------------
<S>                                                  <C>              <C>              <C>
Premiums earned                                      $ 34,035         $  8,785         $ 42,820
Net investment income from
  insurance operations                                  2,623              460            3,083
                                                     ------------------------------------------
Total segment revenues                                 36,658            9,245           45,903
                                                     ------------------------------------------

Segment losses and LAE                                 20,692            6,854           27,546
Segment expenses                                       10,226            2,849           13,075
                                                     ------------------------------------------
Total segment expenses                                 30,918            9,703           40,621
                                                     ------------------------------------------

Segment profit (loss)                                $  5,740         $   (458)        $  5,282
                                                     ------------------------------------------
Plus unallocated items:
Net investment income from equity                                                         2,915
Unallocated expenses                                                                     (2,122)
Income tax                                                                               (1,670)
                                                                                       --------
Net earnings                                                                           $  4,405
                                                                                       ========


(in thousands)                                              Six months ended June 30, 1998
                                                     ------------------------------------------
                                                                      Personal
                                                    Commercial       Automobile          Total
                                                     ------------------------------------------
Premiums earned                                      $ 30,467         $ 14,642         $ 45,109
Net investment income from
  insurance operations                                  2,284              523            2,807
                                                     ------------------------------------------
Total segment revenues                                 32,751           15,165           47,916
                                                     ------------------------------------------

Segment losses and LAE                                 18,573            9,573           28,146
Segment expenses                                        9,044            4,715           13,759
                                                     ------------------------------------------
Total segment expenses                                 27,617           14,288           41,905
                                                     ------------------------------------------

Segment profit                                       $  5,134         $    877         $  6,011
                                                     ------------------------------------------
Plus unallocated items:
Net investment income from equity                                                         3,160
Unallocated expenses                                                                     (1,927)
Income tax                                                                               (2,139)
                                                                                       --------
Net earnings                                                                           $  5,105
                                                                                       ========
</TABLE>

                                    Page 12
<PAGE>
                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

           Management's Discussion and Analysis of Financial Condition
                           and Results of Operations


Results of Operations

Three Months Ended June 30, 1999 and 1998

     Premiums earned  decreased 3.2% to $21.4 million for the three months ended
June 30, 1999 from $22.1  million for the three months ended June 30, 1998,  due
to a 40.0% decline in  non-standard  personal lines  automobile  premiums earned
caused by the run off of personal lines as discussed below,  partially offset by
an 12.3% increase in commercial premiums earned.

     Gross written  premiums  increased 1.6% for the three months ended June 30,
1999 to $24.4 million  compared to $24.0 million in 1998;  net written  premiums
increased  0.7%  for the  three  months  ended  June 30,  1999 to $22.4  million
compared to $22.2 million in 1998.

     Net investment  income decreased 14.5% to $2.3 million for the three months
ended June 30, 1999, from $2.7 million for the three months ended June 30, 1998.
This decrease  resulted  principally from an overall decline in invested assets,
an increased investment in tax-exempt municipal securities, the participation of
the Company in its stock  repurchase  program,  and a decrease in tax equivalent
investment  yields from 6.58% as of June 30, 1998 to 6.19% as of June 30,  1999.
The decline in invested assets is due to capital used to purchase treasury stock
and the  overall  decline in net  written  premiums.  Investment  in  tax-exempt
municipal  securities  increased 45.7% to $38.3 million in the second quarter of
1999 compared to $26.3 million in the same quarter of 1998.

     Losses and loss  adjustment  expenses  decreased  to $13.8  million for the
three months ended June 30, 1999,  from $13.9 million for the three months ended
June 30,  1998.  The  decrease  was due to a  decline  in net  premiums  earned,
partially  offset by an increase in the non-standard  personal  automobile lines
loss ratio, which increased to 82.5% for the second quarter of 1999, compared to
67.0% for 1998. The commercial lines loss ratio decreased to 60.7% in the second
quarter of 1999, compared to 61.0% in 1998.

     Amortization of deferred policy acquisition costs was $6.1 million for both
the three months ended June 30, 1999 and 1998. Despite the decline in net earned
premiums,  amortization of deferred acquisition costs, as a percentage of earned
premium,  increased  slightly,  primarily due to an increase in commission rates
for commercial business from 20% to 22%.

     Other  underwriting  expenses decreased 19.6% to $1.4 million for the three
months  ended June 30, 1999  compared to $1.8  million in for the same period in
1998,  primarily due to certain  non-recurring  expenses  incurred in the second
quarter of 1998.

                                    Page 13
<PAGE>
                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

           Management's Discussion and Analysis of Financial Condition
                           and Results of Operations
                                   (continued)

     The overall statutory combined ratio for the Company increased to 98.5% for
the three months ended June 30, 1999, from 96.9% for the three months ended June
30,  1998,  primarily  due to the  increase  in the loss ratio to 64.7% in 1999,
compared to 62.8% in 1998.  The increase in the loss ratio is  primarily  due to
the  non-standard  personal  automobile  loss  ratio,  which  was 82.5% in 1999,
compared  to 67.0% in 1998.  The expense  ratio  declined to 33.8% for the three
months  ended June 30,  1999,  compared to 34.1% for the three months ended June
30, 1998.

     As a result of the factors  described  above,  the Company's net income for
the three  months ended June 30, 1999  decreased  13.0% to $2.2 million or $0.25
per share (basic and  diluted),  from $2.5 million or $0.25 per share (basic and
diluted) for the three months  ended June 30,  1998.  Per share  amounts for the
three  months  ended  June  30,  1999  are  based on  weighted  averages  shares
outstanding of 8,647,000 (basic) and 8,724,000 (diluted).  Per share amounts for
the three  months  ended  June 30,  1998 are based on  weighted  average  shares
outstanding of 9,910,000 (basic) and 10,018,000 (diluted).

Commercial Lines

     Premiums  earned for commercial  lines increased 12.3% to $17.4 million for
the second  quarter of 1999,  compared  to $15.5  million for the same period in
1998.  The increase is  primarily  attributable  to the growth in gross  written
premiums, which increased 15.5% to $21.5 million compared with $18.6 million for
the second  quarter  of 1998.  Net  written  premiums  increased  15.5% to $19.5
million compared with $16.9 million in 1998.

     Investment  income from insurance  operations was $1.3 million for both the
second quarters of 1999 and 1998.

     Incurred  losses  and loss  adjustment  expenses  increased  11.8% to $10.6
million for the second  quarter of 1999  compared to $9.5  million in the second
quarter of 1998.  The  increase is primarily  attributable  to the growth of net
earned premiums as the loss and loss adjustment  expense ratio improved to 60.7%
in 1999, compared to 61.0% in 1998.

     Underwriting  expenses allocated to commercial lines increased 8.0% to $5.2
million  for the  second  quarter  of 1999  compared  to $4.8  million  in 1998,
primarily  due to the  increase  in net earned  premiums  in  commercial  lines,
partially  offset by a decline in the commercial  segment expense ratio to 30.0%
in 1999 from 31.2% in 1998.

     As a result of the factors  described  above,  the commercial lines segment
profit increased 17.1% to $2.9 million for the second quarter of 1999,  compared
to $2.5 million for the second quarter of 1998.

                                       14

<PAGE>

                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

           Management's Discussion and Analysis of Financial Condition
                           and Results of Operations
                                   (continued)

Non-Standard Personal Automobile Lines

     Premiums earned for non-standard  personal automobile lines decreased 40.0%
to $3.9 million for the second  quarter of 1999 compared to $6.6 million for the
same period in 1998. The decrease is primarily attributable to the 46.4% decline
in gross written premiums in the second quarter of 1999 to $2.9 million compared
with $5.4 million for the same quarter in 1998. Net written  premiums  decreased
46.1% to $2.9 million  compared with $5.4 million in 1998.  The decrease was due
to actions  taken by the  Company to run-off  its entire  non-standard  personal
automobile portfolio.

     Investment  income from  insurance  operations  was $233,000 for the second
quarter of 1999, compared to $236,000 for the second quarter of 1998.

     Incurred losses and loss adjustment expenses declined 26.1% to $3.2 million
for the second quarter of 1999 compared to $4.4 million in the second quarter of
1998.  The decrease was less than the decrease in net earned  premiums due to an
increase in the loss ratio to 82.5% for the second  quarter of 1999  compared to
67.0%  for the  second  quarter  of 1998.  The  increase  in the  loss  ratio is
attributed to unfavorable development in the current and prior accident years.

     Underwriting  expenses allocated to non-standard  personal automobile lines
decreased  42.1% to $1.3 million for the second quarter of 1999 compared to $2.2
million  in  1998,  primarily  due to the  decline  in net  earned  premiums  in
non-standard personal automobile lines.

     As a result of the  factors  described  above,  the  non-standard  personal
automobile  segment  recorded a loss of $350,000 in the second  quarter of 1999,
compared to a $202,000 profit in the second quarter of 1998.

Six Months Ended June 30, 1999 and 1998

     Premiums  earned  decreased  5.1% to $42.8 million for the six months ended
June 30, 1999 from $45.1 million for the six months ended June 30, 1998,  due to
a 40.0% decline in  non-standard  personal  lines  automobile  premiums  earned,
partially offset by an 11.7% increase in commercial premiums earned.

     Gross  written  premiums  decreased  4.3% for the six months ended June 30,
1999 to $46.5 million  compared to $48.6 million in 1998;  net written  premiums
decreased 4.1% for the six months ended June 30, 1999 to $43.1 million  compared
to $45.0 million in 1998.

     Net investment  income  decreased  13.8% to $4.8 million for the six months
ended June 30,  1999,  from $5.5 million for the six months ended June 30, 1998.
This decrease  resulted  principally from an overall decline in invested assets,
an increased investment in tax-exempt municipal securities and a decrease in tax

                                    Page 15

<PAGE>


                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

           Management's Discussion and Analysis of Financial Condition
                           and Results of Operations
                                   (continued)

equivalent  investment yields from 6.58% as of June 30, 1998 to 6.19% as of June
30,  1999.  The  decline in invested  assets is due to capital  used to purchase
treasury stock and the overall decline in written premiums.

     Losses and loss adjustment expenses decreased 2.1% to $27.5 million for the
six months ended June 30, 1999, from $28.1 million for the six months ended June
30, 1998.  The decrease was due to a decline in net premiums  earned,  partially
offset by an increase in the personal lines loss ratio, which increased to 78.0%
for the six months ended June 30,  1999,  compared to 65.4 % for the same period
in 1998.  The  commercial  lines loss ratio  decreased to 60.7% in the six month
period in 1999, compared to 61.0% in the same period in 1998.

     Amortization of deferred policy  acquisition  costs decreased 1.5% to $12.2
million for the six months  ended June 30, 1999,  compared to $12.4  million for
the six  months  ended  June 30,  1998,  primarily  due a decline  in net earned
premiums and partially  offset by an increase in commission rates for commercial
business from 20% to 22%.

     The overall statutory combined ratio for the Company increased to 98.7% for
the six months ended June 30, 1999, from 95.8% for the six months ended June 30,
1998, primarily due to the increase in the loss ratio to 64.3% in 1999, compared
to  62.4% in 1998.  The  increase  in the  loss  ratio is  primarily  due to the
non-standard  personal  automobile loss ratio, which was 78.0% in 1999, compared
to 65.4% in 1998. The expense ratio  increased to 34.4% for the six months ended
June 30, 1999, compared to 33.4% for the six months ended June 30, 1998.

     As a result of the factors  described  above,  the Company's net income for
the six months ended June 30, 1999 decreased  13.7% to $4.4 million or $0.50 per
share  (basic)  and $0.49 per share  (diluted),  from $5.1  million or $0.52 per
share  (basic) and $0.51 per share  (diluted)  for the six months ended June 30,
1998.  Per share  amounts  for the six months  ended June 30,  1999 are based on
weighted  averages  shares   outstanding  of  8,887,000  (basic)  and  8,965,000
(diluted). Per share amounts for the six months ended June 30, 1998 are based on
weighted  average  shares   outstanding  of  9,900,000  (basic)  and  10,012,000
(diluted).

Commercial Lines

     Premiums  earned for commercial  lines increased 11.7% to $34.0 million for
the six months  ended June 30,  1999,  compared  to $30.5  million  for the same
period in 1998.  The increase is primarily  attributable  to the growth in gross
written  premiums,  which  increased  9.6% to $39.2 million  compared with $35.7
million for the six months ended June 30, 1998. Net written  premiums  increased
11.3% to $35.8 million compared with $32.2 million in 1998. Net premiums written
for the six months ended June 30, 1999 increased more  significantly  than gross
premiums. This is primarily due to an increase in the Company's retention on its
casualty excess of loss reinsurance treaty from limits of $500,000 to $1 million

                                    Page 16
<PAGE>

                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

           Management's Discussion and Analysis of Financial Condition
                           and Results of Operations
                                   (continued)


effective January 1, 1999. This was partially offset by growth in the commercial
automobile  liability lines where retention is primarily at $100,000.  Effective
July 1, 1999, the Company amended the casualty excess of loss reinsurance treaty
to return to a retention of  $500,000.  The Company  accounted  for the casualty
unearned premium retention change on July 1, 1999 as an unearned transfer to its
reinsurer.

     Investment income from insurance operations increased 14.8% to $2.6 million
for the six months  ended June 30,  1999,  compared to $2.3  million for the six
months ended June 30, 1998.

     Incurred  losses  and loss  adjustment  expenses  increased  11.4% to $20.7
million for the six months ended June 30, 1999 compared to $18.6 million for the
six months ended June 30, 1998.  The increase is primarily  attributable  to the
growth of net earned  premiums  as the loss and loss  adjustment  expense  ratio
improved to 60.8% in 1999, compared to 61.0% in 1998.

     Underwiting expenses allocated to commercial lines increased 13.1% to $10.2
million for the six months  ended June 30, 1999  compared to $9.0 million in the
same period of 1998,  primarily due to the increase in net earned premiums.  The
commercial  segment  expense  ratio was 30.0% for the six months  ended June 30,
1999 compared to 29.7% in the same period in 1998.

     As a result of the factors  described  above,  the commercial lines segment
profit  increased  11.8% to $5.7 million for the six months ended June 30, 1999,
compared to $5.1 million in the same period of 1998.


Non-Standard Personal Automobile Lines

     Premiums earned for non-standard  personal automobile lines decreased 40.0%
to $8.8 million for the six months ended June 30, 1999 compared to $14.6 million
for the same period in 1998. The decrease is primarily attributable to the 42.9%
decline in gross written premiums for the six months ended June 30, 1999 to $7.3
million  compared  with $12.9  million for the same period in 1998.  Net written
premiums  decreased  42.9% to $7.3 million  compared with $12.8 million in 1998.
The  decrease  was due to actions  taken by the  Company  to run-off  its entire
non-standard personal automobile portfolio.

     Investment income from insurance operations was $460,000 for the six months
ended June 30,  1999,  compared  to $523,000  for the six months  ended June 30,
1998.

     Incurred losses and loss adjustment expenses declined 28.4% to $6.9 million
for the six  months  ended June 30,  1999  compared  to $9.6  million in the six
months  ended June 30,  1998.

                                    Page 17

<PAGE>

                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

           Management's Discussion and Analysis of Financial Condition
                           and Results of Operations
                                   (continued)

The  increase  is  primarily  attributable  to the  decline of the  non-standard
personal  automobile lines net earned premiums offset by an increase in the loss
and loss  adjustment  expense  ratio to 78.0% for the six months  ended June 30,
1999  compared to 65.4% for the six months ended June 30, 1998.  The increase in
the loss ratio is attributed to unfavorable development in the current and prior
accident years.

     Underwriting  expenses allocated to non-standard  personal automobile lines
decreased  39.6% to $2.8 million for the six months ended June 30, 1999 compared
to $4.7  million for the six months ended June 30,  1998,  primarily  due to the
decline in net earned premiums in non-standard personal automobile lines.

     As a result of the  factors  described  above,  the  non-standard  personal
automobile segment recorded a loss of $458,000 for the six months ended June 30,
1999, compared to a segment profit of $877,000 for the six months ended June 30,
1998.



Liquidity and Capital Resources

     PAGI is a holding company, the principal asset of which is the common stock
of  Penn-America.  PAGI's cash flows depend  primarily  on  dividends  and other
payments from Penn-America and its subsidiary,  Penn-Star. PAGI uses these funds
to pay (i)  operating  expenses,  (ii)  taxes  and  other  payments,  and  (iii)
dividends  to  PAGI  stockholders.   Penn-America's  source  of  funds  consists
primarily of premiums, investment income and proceeds from sales and redemptions
of investments.  Funds are used by Penn-America and Penn-Star principally to pay
claims and operating expenses,  to purchase investments and to make dividend and
other payments to PAGI.

     Net cash provided by operating activities decreased to $3.3 million for the
six months ended June 30, 1999,  from $7.5 million for the six months ended June
30, 1998, due primarily to the decline in non-standard personal lines automobile
gross written premiums in 1999.

     Net cash used by  investing  activities  was $3.3  million for both the six
months periods ended June 30, 1999 and 1998.

     Net cash used by financing  activities was $10.9 million for the six months
ended June 30,  1999,  compared  to $423,000  for the same  period in 1998.  The
principal reason for the use of cash by financing activities was the purchase of
958,700 shares of treasury stock totaling $10.4 million for the six months ended
June 30, 1999. The Company  announced a corporate stock buy-back program in July
1998. On April 28, 1999, the Board of Directors had authorized the repurchase of

                                    Page 18

<PAGE>

                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

           Management's Discussion and Analysis of Financial Condition
                           and Results of Operations
                                   (continued)

up to two million  shares.  As of June 30,  1999,  the Company has  acquired 1.5
million  shares at an  average  cost of $10.70 per share.  The  funding  for the
treasury  stock  program  has been  primarily  provided  by  dividends  from the
Company's  insurance  subsidiary,  Penn-America  Insurance Company.  For the six
months ended June 30, 1999,  Penn-America  Insurance  Company paid  dividends of
$10.5 million to the Company.  As a result of the dividends paid by Penn-America
to the Company,  its  statutory  surplus as of June 30, 1999  decreased to $77.8
million from $87.2 million as of June 30, 1998.

     The  Company  believes  that  it  has  sufficient  liquidity  to  meet  its
anticipated  insurance  obligations and operating and capital expenditure needs.
The   Company's   investment   strategy   emphasizes   quality,   liquidity  and
diversification, as well as total return. With respect to liquidity, the Company
considers  liability  durations,  specifically  related to loss  reserves,  when
determining  desired investment  maturities.  In addition,  maturities have been
staggered   to  produce   cash  flows  for  loss   payments   and   reinvestment
opportunities.  The average duration of the fixed maturity  portfolio as of June
30, 1999 was approximately 3.8 years.

     The Company's  fixed  maturity  portfolio of $130.7  million was 83% of the
total  investment  portfolio  as of June 30,  1999.  Approximately  99% of these
securities were rated "A-" or better by Standard & Poor's or Moody's.  Equities,
the majority of which consist of preferred stocks,  were $26.9 million or 17% of
total investments as of June 30, 1999.

     As of June 30, 1999, the investment  portfolio  contained  $20.1 million of
mortgage/  asset-backed  obligations,   which  represents  12.8%  of  the  total
investments  as of June  30,  1999.  All of these  securities  are  "AAA"  rated
securities  issued by government,  government-related  agencies or publicly held
corporations,  are publicly  traded,  and have market  values  obtained  from an
independent  pricing service.  Changes in estimated cash flows due to changes in
prepayment  assumptions from the original purchase assumptions are revised based
on current interest rates and the economic environment. The Company had no other
derivative  financial  instruments,  real estate or mortgages in the  investment
portfolio as of June 30, 1999.

     In 1999, the Company engaged a third asset manager,  Madison Monroe,  Inc.,
to  invest  $10,000,000  of its  investment  portfolio.  As of  June  30,  1999,
approximately $8.8 million was invested in U.S. Treasury strip bonds. One of the
principals of Madison Monroe is a party related to the  controlling  shareholder
of the Company.

     The  principal  source  of cash for the  payment  of  dividends  to  PAGI's
stockholders  is  dividends  from   Penn-America   Insurance   Company  and  its
subsidiary,  Penn-Star  Insurance  Company.  Penn-America  is required by law to
maintain  a certain  minimum  surplus  on a  statutory  basis and is  subject to
risk-based capital requirements and regulations under which payment of dividends
from  statutory  surplus  may  require  prior  approval  from  the  Pennsylvania

                                    Page 19

<PAGE>

                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

           Management's Discussion and Analysis of Financial Condition
                           and Results of Operations
                                   (continued)

regulatory  authorities.  The  maximum  dividend  that  may be  paid  in 1999 by
Penn-America  to PAGI  without  prior  approval  of  regulatory  authorities  is
$9,455,000.  For the twelve-month  period ended June 30, 1999,  Penn-America had
paid  regular  dividends  of  $9,455,000  and had  obtained  approval  from  the
Pennsylvania Insurance Department to pay extraordinary  dividends of $6,745,000.
These  dividends were used to fund the Company's  stock  repurchase  program and
operating expenses of the Company.


The Year 2000

Introduction

     The "Year 2000",  or Y2K,  refers to the problems  that  automated  systems
could  encounter  as the  year  2000  approaches  due  to  computers'  or  other
electronic  devices' inability to register the year 2000 correctly,  rather than
as the year 1900. In this regard, the Company relies on its existing information
technology systems ("IT systems") to operate and to monitor all major aspects of
the Company's  business,  including  underwriting,  claims and various financial
systems.  The Company also relies,  to a lesser extent, on the IT systems of its
general  agents and,  indirectly,  on those of the  producing  retail  insurance
brokers.  Finally,  the  Company  relies  on  certain  critical  non-information
technology  systems  ("non-IT  systems"),   such  as  electricity,   telephones,
facsimile machines,  heating and  air-conditioning  and fire protection systems.
Any  disruption  in the  operation  of the IT and  non-IT  systems of either the
Company or any of its  critical  customers,  vendors or  suppliers  could have a
material  adverse  effect on the  Company's  business,  results of operations or
financial condition.

State of Readiness

     IT systems: In an effort to remediate the problems associated with the Year
2000, the Company,  in 1996,  evaluated all its computer codes to determine what
software  programs  would be  affected  by  date-sensitive  fields.  After  this
identification  process was  completed,  the Company hired an outside  vendor to
implement the recoding that was required. In July 1997, the Company successfully
ran its second  trial of all the revised  programs.  Based upon testing to date,
the Company  believes  that its programs are Year 2000  compliant.  The Company,
however, continues to run periodic tests to make sure the programs will function
properly.  The next  series of tests are  scheduled  to be run at the end of the
third quarter of 1999. As of June 30, 1999,  approximately  30,000 policies have
been successfully processed as new policies and renewals with an expiration date
of January 1, 2000 or after.

     The  Company's  IT  systems  have also  been  tested  against  hypothetical
information supplied by its general agents. The IT systems currently are able to
read properly the information provided.  Assuming the general agents don't alter

                                    Page 20

<PAGE>


their records, the Company reasonably believes that its IT systems will function
properly. To the extent the general agents' records change, the Company requires
that the agents provide notice.

     The  Company's   management   information  systems  rely  primarily  on  an
integrated property-casualty software package that is processed on an IBM AS/400
computer system.  The system is leased from IBM and kept current or near current
in both  hardware  and  operating  systems.  The IBM AS/400  model  hardware was
upgraded in the fourth  quarter of 1998 to the latest  processor  platform.  The
AS/400 software was most recently  upgraded in the second quarter of 1999, which
is software reported by IBM to be fully compliant with Year 2000.

     The Company uses a Microsoft NT 4.0 Server to connect all  employees to the
computer system. The LAN is reported to be Year 2000 compliant.  The LAN is used
primarily for "service" applications including word processing, spreadsheets and
E-mail.  The majority of the LAN-based  applications are Microsoft  products and
are current or near current in their software releases.

     The LAN also consists of personal  computers ("PCs") that are attached to a
series of servers.  All PCs have been tested and  correctly  recognize  the Year
2000. The IT Department of the Company supports an Internet web site and various
stand-alone third party PC software  applications.  These packages were assessed
for any Year 2000 problems and testing of these  packages were completed in June
1999.  The IT Department  also  supports  IPPS, a document  management  software
package  developed by DocuCorp,  which is used by the majority of general agents
to produce Penn-America policies.  FormMaker has been tested and, in its current
release, is reported by DocuCorp to be Year 2000 compliant.

     Non-IT systems:  The Company has  identified,  and relies on, the following
non-IT  systems  in  its  daily  operations:  telephones,  voicemail,  facsimile
machines  and heating and air  conditioning  and fire  protection  systems.  The
telephone system was tested as compliant. The voicemail system was identified as
non-compliant  and was replaced with a compliant  system in September  1998. The
heating and air  conditioning  systems have been tested and are  compliant.  The
Company has been informed that all of the remaining systems will not be affected
by the Year 2000 and the  Company  has  received  written  confirmation  to this
effect.

     The  Company   continues  to  respond  to  requests  for  information  from
customers,  suppliers and vendors with whom the Company does business, including
various  departments of insurance.  The Company was recently  informed of a Year
2000 compliance  examination by the Insurance  Department of  Pennsylvania,  the
Company's state of domicile,  which should be completed by the Department during
the third quarter of 1999.

                                    Page 21
<PAGE>

                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

           Management's Discussion and Analysis of Financial Condition
                           and Results of Operations
                                   (continued)

     Key Customers,  Suppliers and Vendors: As part of its remediation plan, the
Company is analyzing the Year 2000 readiness of the Company's  critical  outside
customers (including general agents), vendors and suppliers.  Each department of
the Company was asked to identify key customers, suppliers and vendors with whom
the Company has an interdependent,  material business relationship. In September
1998,  the  Company  sent   approximately   188  surveys  to  those   identified
customers/suppliers/vendors  to ask them: to provide the current status of their
Y2K plan;  whether they will be compliant;  and what plans they have in place in
the event they will not be  compliant.  Of the 188  surveys  sent out,  100 were
returned  with  responses  indicating  that  the  recipients  were or  would  be
compliant,  88 did not respond.  In December 1998, the Company sent out a second
request  for  information  to  those  who had not yet  responded  and for  newly
identified critical customers,  suppliers and vendors. As of April 30, 1999, the
responses were as follows: 55 indicated that they were compliant;  112 indicated
that they would be compliant before January 1, 2000; and 24 have yet to respond.
In June 1999,  the Company sent out a third request for those 18  questionnaires
that the Company had not received any response.  Of the 18 sent, 7 responded,  3
compliant and 4 to be compliant by December 31, 1999. Additionally, 75 follow-up
letters were sent to respondents who had previously indicated that they would be
compliant.  Of the 23 responses as of June 30, 1999, 10 are now compliant and 13
will be compliant by December 31, 1999.

     Despite  all the  procedures  the  Company  has in  place,  there can be no
guarantee  that the systems of other  companies on which the Company's  business
relies will be  converted  in a timely  fashion,  or that  failure to convert by
another company or a conversion that is incompatible  with the Company's systems
will not have a materially adverse effect on the Company and its operations.

Cost

     The Company incurred costs of approximately  $60,000 to recode its internal
programs.  The costs were incurred by the Company to test significant  insurance
hardware and software that the Company  believes are compliant.  These costs are
and will be  minimal  as these  costs  are  built  into the  Company's  standard
disaster   recovery  testing   program.   The  current  standard  testing  costs
approximately  $28,000  per year.  The  Company  does not  separately  track the
internal costs incurred for the Y2K project. Such costs are related primarily to
payroll costs for the Company's information  technology  personnel.  The Company
also incurred an additional $13,000 to upgrade its voicemail system.  Additional
expenses  may arise  during 1999.  Management  believes  that at this time these
costs,  including the estimated cost associated with the Pennsylvania  Insurance
Department Y2K audit, will approximate $50,000 to $60,000.

                                    Page 22

<PAGE>

                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

           Management's Discussion and Analysis of Financial Condition
                           and Results of Operations
                                   (continued)

Risks

     The risks associated with the Company's  inability to resolve all Year 2000
issues include the  possibility of system  failures or  miscalculations  causing
disruption in operations including,  among other things, an inability to process
transactions,  to send invoices, to send or to receive E-mail and voicemail,  or
conduct  similar  normal  business  activities.  Additionally,  failure of third
parties upon whom the  Company's  business  relies to remediate  their Year 2000
problems  in a timely  fashion  could  result in  disruption  in the receipt and
processing of insurance  policies,  claims,  payment of receivables  and general
problems   related  to  the  Company's  daily   operations.   If  any  of  these
contingencies  were to occur,  the  disruption in business could be temporary or
permanent,  depending  on the  degree of  failure.  Until the  Company  receives
responses  from all of the  Company's  agents and  suppliers,  the overall risks
associated  with the Year 2000 remain  difficult to describe  accurately  and to
quantify; and there can be no guarantee that the Year 2000 issue will not have a
material adverse effect on the Company and its operations.

     If the  Company  and its  business  partners  do not  solve  the Year  2000
problem,  the Company  could face  business  disruption,  operational  problems,
financial losses, legal liability and similar risks to the business. These risks
could have a material adverse impact on the Company.

     Additionally,  the Company may be exposed to insurance  risk related to Y2K
exposures of its insureds. In order to mitigate this risk, the Company generally
began endorsing  applicable new and renewal  policies with effective dates after
November 1, 1998 with an exclusion  endorsement.  This endorsement  excludes Y2K
computer  and  related  electronic  exposures  by using  the  standard  industry
exclusion. Certain states, however, may not accept this exclusion in all cases.

Contingency Plan

     The Company has  completed a second draft of a Year 2000  Contingency  Plan
and anticipates  having a final draft of the plan in place by the fourth quarter
of 1999.  In the  meantime,  the Company  maintains a Disaster  Recovery Plan to
address various potential business interruptions.

     The  current   Disaster   Recovery  Plan  addresses  the  availability  and
compatibility  of  hardware  offsite  that  could be placed  into  action by the
Company.  In September  1998,  the Company  tested the offsite  facility and the
operation  of  significant  insurance  software  that had been  made  Year  2000
compliant,  as well as the operation of the offsite  hardware.  Under these test

                                    Page 23

<PAGE>

                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

           Management's Discussion and Analysis of Financial Condition
                           and Results of Operations
                                   (continued)

conditions,  all dates were rolled  forward to January 1, 2000. The test results
indicated  that  the  Company's   significant   insurance-related   software  is
compliant.

     The testing  facility has  indicated  that the majority of its hardware and
equipment  is  fully  compliant  as  of  December  1998.  The  testing  facility
previously  noted that it would not  upgrade  certain of its  systems  until the
second quarter of 1999 so as to afford all subscribers an opportunity to upgrade
their systems. The Company recently followed up with the testing facility on its
system upgrades to see where they stand.  The testing facility is also available
if electric, heat, water, telephones and office space should be required.

     The foregoing is a "Year 2000  Readiness  Disclosure"  pursuant to the Year
2000  Readiness  Disclosure  Act.  Readers are  cautioned  that  forward-looking
statements contained in the Year 2000 disclosure contained herein should be read
in conjunction with the Company's  disclosure  titled "Safe Harbor Provisions of
the  Private  Securities   Litigation  Reform  Act  of  1995".   Forward-looking
statements  include,  but are not limited to,  whether the Company will complete
its remediation and testing in a timely fashion,  whether  remediation will cost
more than  anticipated,  the impact of redeploying staff and the effect of third
parties on the Company's ability to function after the century date change.


New Accounting Standards

     In June 1998,  Statement of Financial  Accounting Standards (SFAS) No. 133,
"Accounting for Derivative  Instruments and Hedging Activities",  was issued and
established standards for accounting and reporting of derivative instruments and
hedging  activities.  The  statement as amended by SFAS No. 137 is effective for
all fiscal  quarters of fiscal years  beginning after June 15, 2000. The Company
is in the process of  determining  the effect,  if any, of this statement on its
financial statements.


                                    Page 24
<PAGE>
                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES


                           PART II. OTHER INFORMATION



Item 1.     Legal Proceedings - None

Item 2.     Changes in Securities - None

Item 3.     Default Upon Senior Securities - None

Item 4.     Submission of Matters to a Vote by Security Holders - (See Attached)

Item 5.     Other Information - None

Item 6.     Exhibits and Reports on Form 8-K


                                    Page 25
<PAGE>

PART II, ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     The annual meeting of the Shareholders of Penn-America Group, Inc. was held
on May 19, 1999 (the "Annual Meeting" or "Meeting"), with the following results:

     The total number of shares  represented  at the Annual Meeting in person or
by proxy was 7,747,090 of the 8,736,201  share of common stock  outstanding  and
entitled to vote at the meeting.

     On the proposal to elect Irvin Saltzman, Jon S. Saltzman,  James E. Heerin,
Jr., Robert A. Lear, Jami  Saltzman-Levy,  M. Moshe Porat,  Charles Ellman, Paul
Simon and Thomas Spiro as  Directors to serve until the 2000 Annual  Meeting and
until their successors are duly elected and qualified, the nominees for Director
received the number of votes set forth opposite their respective names.

                                  Number of Votes

                               For             Withheld

Irvin Saltzman              7,585,112          161,978
Jon S. Saltzman             7,586,112          160,978
James E. Heerin, Jr         7,586,112          160,978
Robert A. Lear              7,586,112          160,978
Jami Saltzman-Levy          7,586,112          160,978
M. Moshe Porat              7,626,112          120,978
Charles Ellman              7,586,112          160,978
Paul Simon                  7,626,112          120,978
Thomas M. Spiro             7,626,112          120,978

     There were no broker  non-votes  recorded.  On the basis of the above vote,
Irvin  Saltzman,  Jon S. Saltzman,  James E. Heerin,  Jr.,  Robert A. Lear, Jami
Saltzman-Levy,  M. Moshe Porat, Charles Ellman, Paul Simon and Thomas Spiro were
elected as  Directors  to serve  until the 2000  Annual  Meeting and until their
respective successors are duly elected and qualified.  Subsequent to the May 19,
1999 Annual  Shareholders  Meeting,  Mr. James E. Heerin and Mr. Thomas M. Spiro
resigned  from the  Board  due to other  business  commitments.  The  nominating
committee of the Board of Directors will seek replacements for both directors in
the future.

                                    Page 26
<PAGE>
                                    SIGNATURE



Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.




                                                  Penn-America Group, Inc.




Date:  August 10, 1999                            By: /s/ Jon S. Saltzman
                                                      --------------------------
                                                      Jon S. Saltzman
                                                      President and
                                                      Chief Executive Officer



                                                  By: /s/ Rosemary R. Ferrero
                                                      --------------------------
                                                      Rosemary R. Ferrero
                                                      Principal Finance and
                                                      Accounting Officer

                                    Page 27