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         March 31, 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 May 13, 1999,  8,767,444  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 - March 31, 1999 and
                December 31, 1998                                          3

         Consolidated Unaudited Statements of Earnings - For the three
                months ended March 31, 1999 and 1998                       4

         Consolidated Unaudited Statement of Stockholders' Equity -
                For the three months ended March 31, 1999                  5

         Consolidated Unaudited Statements of Cash Flows -
                For the three months ended March 31, 1999 and 1998         6

         Notes to Unaudited Consolidated Financial Statements              7

         Management's Discussion and Analysis of Financial Condition
                and Results of Operations                                 12

Part II - Other Information                                               21

                                     Page 2
<PAGE>
                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                                   (Unaudited)
                 (In thousands, except share and per share data)
<TABLE>
<CAPTION>
                                                                                            March 31,        December 31,
                                                                                               1999              1998
                                                                                            ---------         ---------
<S>                                                                                         <C>               <C>      
ASSETS
Investments:
    Fixed maturities:
       Available for sale, at fair value (amortized cost 1999, $112,333; 
       1998, $103,365)                                                                      $ 113,546         $ 105,598
       Held to maturity, at amortized cost (fair value 1999, $22,397; 1998, $27,270)           22,247            26,956
    Equity securities, at fair value (cost 1999, $26,962; 1998, $23,358)                       27,838            25,238
    Short-term investments, at cost, which approximates fair value                                 --               997
                                                                                            ---------         ---------
       Total investments                                                                      163,631           158,789
Cash                                                                                           11,372            24,077
Receivables:
    Accrued investment income                                                                   2,188             1,871
    Premiums receivable, net                                                                   10,827            10,349
    Reinsurance recoverable                                                                    17,861            18,766
                                                                                            ---------         ---------
       Total receivables                                                                       30,876            30,986
Prepaid reinsurance premiums                                                                    2,569             2,809
Deferred policy acquisition costs                                                               8,692             8,728
Capital lease                                                                                   1,905             2,051
Deferred income taxes                                                                           2,401             1,598
Income tax recoverable                                                                             --               884
Other assets                                                                                      504               582
                                                                                            ---------         ---------
       Total assets                                                                         $ 221,950         $ 230,504
                                                                                            =========         =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Unpaid losses and loss adjustment expenses                                                $  88,343         $  88,937
  Unearned premiums                                                                            33,294            34,253
  Accounts payable and accrued expenses                                                           838             1,179
  Capitalized lease obligation                                                                  1,923             2,080
  Other liabilities                                                                             3,677             3,425
  Income tax payable                                                                               83                --
                                                                                            ---------         ---------
         Total liabilities                                                                    128,158           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, 9,948,326 and 1998 9,938,179 shares, outstanding 1999,
     8,736,201 and 1998, 9,395,854 shares                                                          99                99
  Additional paid-in capital                                                                   69,127            69,035
  Accumulated other comprehensive income                                                        1,378             2,714
  Retained earnings                                                                            36,540            34,779
  Treasury stock, 1999, 1,212,125 shares; 1998, 542,325 shares, at cost                       (12,952)           (5,643)
                                                                                            ---------         ---------
                                                                                               94,192           100,984
  Unearned compensation from restricted stock awards                                             (400)             (354)
                                                                                            ---------         ---------
         Total stockholders' equity                                                            93,792           100,630
                                                                                            ---------         ---------

         Total liabilities and stockholders' equity                                         $ 221,950         $ 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 months ended March 31, 1999 and 1998
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                            Three months ended March 31,
                                                               1999            1998
                                                             --------        --------
<S>                                                          <C>             <C>     
Revenues:
    Premiums earned                                          $ 21,462        $ 23,035
    Net investment income                                       2,410           2,775
    Net realized investment gains (losses)                        556             (34)
                                                             --------        --------
       Total revenues                                          24,428          25,776
                                                             --------        --------

Losses and expenses:
    Losses and loss adjustment expenses                        13,724          14,291
    Amortization of deferred policy acquisition costs           6,153           6,370
    Other underwriting expenses                                 1,453           1,394
    Interest expense                                               36              44
                                                             --------        --------
       Total losses and expenses                               21,366          22,099
                                                             --------        --------

Earnings before income tax                                      3,062           3,677

Income tax                                                        853           1,097
                                                             --------        --------

Net earnings                                                 $  2,209        $  2,580
                                                             ========        ========

Net earnings per share:
         Basic                                               $   0.24        $   0.26
         Diluted                                             $   0.24        $   0.26

Weighted average number of shares outstanding:
         Basic                                                  9,129           9,896
         Diluted                                                9,204          10,009


Cash dividends per share                                     $   0.05        $   0.05
                                                             
</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 three months ended March 31, 1999
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                                                 Unearned
                                                                               Accumulated                     Compensation
                                                                                  Other                            From
                                                      Common Stock   Additional  Compre-                        Restricted
                                                  ------------------  Paid-In    hensive  Retained    Treasury     Stock
                                                    Shares    Amount  Capital    Income   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                                                                                 2,209                            2,209
Other comprehensive (losses) income, 
  net of tax:
      Unrealized losses on investments, net of
       reclassification adjustment                                               (1,336)                                     (1,336)
                                                                                                                           --------
Comprehensive income                                                                                                            873
                                                                                                                           --------
Issuance of common stock                             10,147                 92                                                   92
Unearned compensation  from  restricted
  stock awards                                                                                                       (91)       (91)
Amortization of compensation expense from
  restricted  stock awards issued                                                                                     45         45
Cash dividends paid ($0.05 per share)                                                         (448)                            (448)
Purchase of treasury stock, 669,800 shares                                                             (7,309)               (7,309)
                                                  ---------------------------------------------------------------------------------
Balance at March  31, 1999                        9,948,326    $99     $69,127   $1,378    $36,540   $(12,952)     $(400)   $93,792
                                                  =================================================================================
</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 three months ended March 31, 1999 and 1998
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                               Three months ended March 31,
                                                                                  ----------------------
                                                                                     1999         1998
                                                                                  --------      --------
<S>                                                                               <C>           <C>     
Cash flows from operating activities:
    Net earnings                                                                  $  2,209      $  2,580
    Adjustments to reconcile net earnings to net cash provided by
      Operating activities:
         Amortization and depreciation expense                                         190           120
         Net realized investment (gains)/losses                                       (556)           34
         Deferred income tax                                                          (114)         (227)
         Net decrease in premiums receivable, prepaid reinsurance premiums
           and unearned premiums                                                    (1,197)       (1,052)
         Net increase in unpaid losses and loss adjustment expenses
           and reinsurance recoverable                                                 312         1,216
         (Increase) decrease in:
           Accrued investment income                                                  (317)         (171)
           Deferred policy acquisition costs                                            36            39
           Income tax recoverable                                                      884            40
           Other assets                                                                 46           (80)
         Increase (decrease) in:
           Accounts payable and accrued expenses                                      (341)         (784)
           Income taxes payable                                                         83         1,285
           Other liabilities                                                           252           478
                                                                                  --------      --------
               Net cash provided by operating activities                             1,487         3,478
                                                                                  --------      --------

Cash flows from investing activities:
    Purchases of equity securities                                                  (5,179)       (7,540)
    Purchases of fixed maturities available for sale                               (13,013)      (22,250)
    Purchases of fixed maturities held to maturity                                  (1,058)           --
    Proceeds from sales of equity securities                                         2,131         7,576
    Proceeds from sales and maturities of fixed maturities available for sale        3,948        12,134
    Proceeds from maturities and calls of fixed maturities held to maturity          5,773         7,096
    Change in short-term investments                                                   997         3,454
                                                                                  --------      --------
         Net cash (used) provided by investing activities                           (6,401)          470
                                                                                  --------      --------

Cash flows from financing activities:
    Issuance of common stock                                                            --           188
    Purchase of treasury stock                                                      (7,309)           --
    Principal payments on capital lease obligations                                    (34)          (32)
    Dividends paid                                                                    (448)         (495)
                                                                                  --------      --------
         Net cash (used) by financing activities                                    (7,791)         (339)
                                                                                  --------      --------

(Decrease) increase in cash                                                        (12,705)        3,609
Cash, beginning of period                                                           24,077         2,163
                                                                                  --------      --------
Cash, end of period                                                               $ 11,372      $  5,772
                                                                                  ========      ========

Supplemental  disclosure of cash flow  information:
    Cash paid during the period for:
      Interest                                                                    $     36      $     44
</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 35.3%
of the outstanding common stock of PAGI as of March 31, 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 $1.7 and $1.9
million  for the  three  months  ended  March  31,  1999  and  March  31,  1998,
respectively.  Losses and loss  adjustment  expenses are net of amounts ceded to
reinsurers  of $600  thousand  and $1.7 million for the three months ended March
31, 1999 and March 31, 1998, respectively.


Note 3 - Comprehensive Income

           Accumulated other comprehensive income of the Company consists solely
of net unrealized (losses) 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  (losses)  income  (in
thousands):

<TABLE>
<CAPTION>
                                                                     Three months ended March 31, 1999
                                                        -------------------------------------------------------
                                                           Before Tax              Tax              Net of Tax
                                                             Amount              Expense              Amount
                                                        --------------        ------------        -------------
<S>                                                        <C>                   <C>                 <C>     
Unrealized losses on investments:
    Unrealized holding losses arising
       during period                                       $(1,468)              $ 499              $   (969)
    Less: reclassification adjustment for
      gains realized in net earnings                          (556)                189                  (367)
                                                        =======================================================
Other comprehensive loss                                   $(2,024)              $ 688               $(1,336)
                                                        =======================================================
</TABLE>


<TABLE>
<CAPTION>
                                                                     Three months ended March 31, 1998
                                                        -------------------------------------------------------
                                                           Before Tax              Tax              Net of Tax
                                                             Amount              Expense              Amount
                                                        --------------        ------------          -----------
<S>                                                          <C>                <C>                    <C>  
Unrealized gains on investments:
    Unrealized holding gains arising
      during period                                          $ 669              $ (234)                $ 435
    Add: reclassification adjustment for
       losses realized in net earnings                          34                 (12)                   22
                                                        =======================================================
Other comprehensive income                                   $ 703              $ (246)                $ 457
                                                        =======================================================
</TABLE>


For the three months ended March 31, 1998,  comprehensive  income of  $3,037,000
consisted  of net  income  of  $2,580,000  and  other  comprehensive  income  of
$457,000.


                                     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):

                                          Three months ended
                                               March 31,
                                        ----------------------
                                          1999           1998
                                        -------        -------

Basic EPS:

Net Earnings                            $ 2,209        $ 2,580
                                        -------        -------

Weighted  average common
      shares outstanding                  9,129          9,896
                                        -------        -------

Basic EPS                               $  0.24        $  0.26
                                        =======        =======

Diluted EPS:

Net Earnings                            $ 2,209        $ 2,580
                                        -------        -------

Weighted  average common
      shares outstanding                  9,129          9,896

Additional shares outstanding
      after the assumed exercise
      of options by applying the
      treasury stock method                  75            113
                                        -------        -------

Total weighted average common
     shares outstanding                   9,204         10,009
                                        =======        =======

Diluted EPS                             $  0.24        $  0.26
                                        =======        =======


                                     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 lines 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.

         The Company  currently has one major customer  accounting for more than
10% of the Company's revenue. The Company derived  approximately 12.8% and 21.5%
of its  revenues  from this agent for the three  months ended March 31, 1999 and
1998,  respectively.  This  major  customer  is the  agent who  writes  personal
non-standard  automobile  coverage in the states of California  and Nevada.  The
Company  announced on April 28, 1999 that it would be running off the California
automobile  book with this customer.  The Company had  previously  announced the
runoff of the Nevada automobile book with this agent in January 1999.


                                    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 March 31, 1999 and 1998:

<TABLE>
<CAPTION>
(in thousands)                                          March 31, 1999
                                         Commercial       Personal           Total
                                        -------------------------------------------
<S>                                      <C>              <C>              <C>     
Premiums earned                          $ 16,614         $  4,848         $ 21,462
Net investment income from
  insurance operations                      1,297              228            1,525
                                        -------------------------------------------
Total segment revenues                     17,911            5,076           22,987
                                        -------------------------------------------

Segment losses and LAE                     10,117            3,607           13,724
Segment expenses                            5,000            1,577            6,577
                                        -------------------------------------------
Total segment expenses                     15,117            5,184           20,301
                                        -------------------------------------------

Segment profit (loss)                    $  2,794         $   (108)        $  2,686


Plus unallocated items:
Net investment income from equity                                             1,441
Unallocated expenses                                                         (1,065)
Income taxes                                                                   (853)
                                                                           --------
Net earnings                                                               $  2,209
                                                                           ========


(in thousands)                                         March 31, 1998
                                        Commercial        Personal           Total
                                        -------------------------------------------
Premiums earned                          $ 14,955         $  8,080         $ 23,035
Net investment income from
  insurance operations                        979              288            1,267
                                        -------------------------------------------
Total segment revenues                     15,934            8,368           24,302
                                        -------------------------------------------
Segment losses and LAE                      9,113            5,178           14,291
Segment expenses                            4,205            2,515            6,720
                                        -------------------------------------------
Total segment expenses                     13,318            7,693           21,011
                                        -------------------------------------------


Segment profit                           $  2,616         $    675         $  3,291
Plus unallocated items:
Net investment income from equity                                             1,474
Unallocated expenses                                                         (1,088)
Income taxes                                                                 (1,097)
                                                                           --------
Net earnings                                                               $  2,580
                                                                           ========
</TABLE>

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

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


         As of March 31, 1999, the Company's  insurance  business  comprised two
distinct segments:  commercial lines,  which represent  approximately 80% of the
Company's  gross written  premiums,  and minimum  limits  non-standard  personal
automobile  insurance.  The Company  announced on April 28, 1999,  that it would
run-off its remaining portfolio of the personal lines automobile business, which
was  underwritten  through a single agent in  California.  This  followed a move
earlier this year to eliminate  the rest of the  Company's  personal  automobile
portfolio of this business in six other states.

Results of Operations

Segment Premiums for the Three Months Ended March 31, 1999 and 1998

Commercial Premiums:

         Gross  written  premiums for  commercial  lines in the first quarter of
1999 increased  3.2% to $17.6 million  compared with $17.1 million for the first
quarter of 1998; net written  premiums  increased 6.6% to $16.3 million compared
with $15.3 million in 1998. Effective January 1, 1999, the Company increased its
retention on its casualty  reinsurance  treaty from $500,000 to $1,000,000.  The
increase in net written premiums for commercial lines is partially  attributable
to this increase in retention.  The Company's  retention on its property  treaty
for 1999 remained unchanged at $300,000.

         The statutory  combined ratio for commercial  lines  increased to 95.3%
compared  with 92.6% for the three month  periods ended March 31, 1999 and 1998,
respectively  due  primarily  to the expense  ratio,  which  increased  to 34.4%
compared with 31.6% during the same  periods.  The increase in the expense ratio
is  attributable  primarily to an increase in the commission the Company pays to
its  commercial  agents,  from 20% to 22%.  The loss ratio in  commercial  lines
improved to 60.9% in the first  quarter of 1999 compared with 61.0% in the first
quarter of 1998.

Personal Automobile Premiums:

         Gross written premiums for personal automobile lines decreased 40.5% in
the first  quarter of 1999 to $4.5  million  compared  with $7.5 million for the
same  quarter in 1998;  net written  premiums  decreased  40.7% to $4.4  million
compared with $7.5 million in 1998.  The decrease was due largely to actions the
Company took to limit losses in this business by cutting-back production. Of the
$4.5 million of premiums  written in the first quarter of 1999, $2.4 million was
written in California as compared with $4.3 million written in California in the
first quarter of 1998.

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

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


         The statutory combined ratio for personal automobile lines increased to
112.3% for the three months ended March 31, 1999 compared with 99.3% in the same
period of 1998,  due  primarily  to the loss  ratio,  which  increased  to 74.4%
compared with 64.1% in 1998. The expense ratio in personal  automobile lines was
37.9% and  35.2% for the three  month  periods  ended  March 31,  1999 and 1998,
respectively. The increase in the expense ratio is attributable primarily to the
40.5% decline in written premium for non-standard personal automobile insurance.

Three Months Ended March 31, 1999 and 1998

         Premiums  earned  decreased  6.8% to $21.5 million for the three months
ended March 31, 1999 from $23.0  million  for the three  months  ended March 31,
1998,  due to a 40.0%  decrease in personal lines  automobile  premiums  earned,
partially offset by an 11.1% increase in commercial premiums earned.

         Net  investment  income  decreased 13.1 % to $2.4 million for the three
months ended March 31, 1999,  from $2.8 million for the three months ended March
31, 1998. This decrease resulted principally from an overall decline in invested
assets,  an  increased  investment  in  tax-exempt  municipal  securities  and a
decrease  in  investment  yields  from 6.67% as of March 31, 1998 to 6.22% as of
March 31,  1999.  The  decline  in  invested  assets is due to  capital  used to
purchase treasury stock and decreased cashflow from operations attributed to the
overall  decline  in  written  premiums.   Investment  in  tax-exempt  municipal
securities increased 236% to $38.3 million in the first quarter of 1999 compared
to $11.4 million in the same quarter of 1998.

         Losses and loss adjustment expenses decreased 3.9% to $13.7 million for
the three months ended March 31, 1999,  from $14.3  million for the three months
ended March 31, 1998, due to a decline in net premiums earned,  partially offset
by an increase in the personal lines loss ratio.

         Amortization  of deferred  policy  acquisition  costs decreased 3.1% to
$6.2 million for the three  months  ended March 31, 1999,  from $6.4 million for
the three months ended March 31, 1998.  The decrease was primarily  attributable
to a decline in net  premiums  earned,  and  partially  offset by an increase in
commission rates for commercial business from 20% to 22%.

         The overall loss ratio for the Company increased to 63.9% for the three
months  ended March 31,  1999,  from 62.0% for the three  months ended March 31,
1998,  due to the increase in the loss ratio in personal  automobile to 74.4% at
March 31,  1999,  from 64.1% at March 31,  1998.  The  statutory  expense  ratio
increased to 35.2% for the three months ended March 31,


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

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



1999, from 32.8% for the three months ended March 31, 1998. The principal causes
for the  increase in the  expense  ratio were the 8.9%  decline in net  premiums
written for the quarter  ended March 31,  1999,  compared to the same quarter in
1998 and the increase in the commercial  lines  commission rate to 22% from 20%.
The overall  statutory  combined  ratio  increased to 99.1% for the three months
ended March 31, 1999, from 94.8% for the three months ended March 31, 1998.

         As a result of the factors  described  above,  the Company's net income
for the three  months  ended March 31, 1999  decreased  14.4% to $2.2 million or
$0.24 per share (basic and diluted), from $2.6 million or $0.26 per share (basic
and diluted) for the three months ended March 31, 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. 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  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  57.2% to $1.5
million for the three  months  ended March 31,  1999,  from $3.5 million for the
three months ended March 31, 1998,  due  primarily to the  reduction in personal
lines automobile gross written premiums in 1999.

         Net cash used by  investing  activities  was $6.4 million for the three
months ended March 31,  1999,  compared to $470  thousand  provided by investing
activities  for the three months ended March 31, 1998. The increase in cash used
by investing  activities is due primarily to cash that was not fully invested as
of year-end 1998, which was invested during the first quarter of 1999.

         Net cash used by  financing  activities  was $7.8 million for the three
months  ended March 31, 1999,  compared to $339  thousand for the same period in
1998. The principal  reason for the use of cash by financing  activities was the
purchase of 669,800  shares of treasury  stock  totaling $7.3 million during the
quarter ended March 31, 1999. The Company  announced a corporate  stock buy-back
program  in July  1998.  As of  April  28,  1999,  the  Board of  Directors  had
authorized the repurchase of up to two million shares. As of March 31, 1999, the
Company has acquired 1.2 million  shares at an average cost of $10.71 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. During the quarter ended March 31, 1999, Penn-America Insurance Company
paid a dividend of $9.0 million to the Company.

                                    Page 14

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

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



         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 March
31, 1999 was approximately 4.0 years.

         The Company's fixed maturity portfolio of $135.8 million was 83% of the
total  investment  portfolio  as of March 31, 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 $27.8 million or 17% of
total investments as of March 31, 1999.

         As of March 31, 1999, the investment  portfolio contained $22.6 million
of  mortgage/  asset-backed  obligations,  which  represents  13.8% of the total
investments  as of March 31,  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 March 31, 1999.

         During the first quarter,  the Company  engaged  another asset manager,
Madison Monroe, Inc. to invest $10,000,000 of it's investment  portfolio.  As of
March 31, 1999, the entire amount 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.  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
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.

                                    Page 15
<PAGE>
                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES

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

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 first 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 prior to July 4, 1999
in connection with  implementation of a new processing program. As of this date,
approximately  13,230  policies  have been  successfully  processed  as renewals
bearing an effective date on or after January 1, 2000.

         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
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 was upgraded in the
fourth  quarter  of 1998 to  Version  4,  which is  reported  by IBM to be fully
compliant with Year 2000.

                                    Page 16

<PAGE>

                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES


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


         The  Company  uses a Novell  Local Area  Network  (LAN) 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.  The  Company  continues  to test  these
packages to ensure their  compliance.  Testing should be complete by June, 1999.
The IT  Department  also  supports  FormMaker,  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  effected  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
soon-to-be   scheduled  Year  2000  compliance   examination  by  the  Insurance
Department of Pennsylvania, the Company's state of domicile.

         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

                                    Page 17

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



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



follows: 55 indicated that they were compliant; 112 indicated that they would be
compliant before January 1, 2000; and 24 have yet to respond.  The Company is in
the process of sending out a final  request.  Those that do not respond  will be
deemed  non-compliant  and the Company will find an alternative  source for that
information  or  service.  For  those  that  have  responded  that  they will be
compliant,  the Company plans to issue a follow-up  letter on or about the dates
on which they indicated they will be compliant in order to confirm that status.

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 services personnel. The Company also
incurred an  additional  $13,000 to upgrade  its  voicemail  system.  Additional
expenses may arise in the upcoming year.  Management  believes that at this time
these costs will approximate $10,000.

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.

                                    Page 18

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


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


         If the Year 2000  problem is not solved by the Company and its business
partners,  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 first 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
conditions,  all dates were rolled  forward to January 1, 2000. The test results
indicated  that  the  Company's  significant   insurance-related   software  are
compliant.

         The testing  facility has  indicated  that the majority of its hardware
and  equipment is fully  compliant as of December,  1998.  The testing  facility
further  noted that it will not upgrade  certain of its systems  until the first
quarter of 1999 so as to afford all  subscribers an opportunity to upgrade their
systems.  The Company is  following  up with the testing  facility on its system
upgrades at this time. 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.

                                    Page 19
<PAGE>
                    PENN-AMERICA GROUP, INC. AND SUBSIDIARIES


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


         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 is effective for all fiscal  quarters of
fiscal years  beginning  after June 15,  1999.  The Company is in the process of
determining the effect, if any, of this statement on its financial statements.



                                    Page 20
<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 -None

Item 5.       Other Information - None

Item 6.       Exhibits and Reports on Form 8-K

              On April  28,  1999,  the  Company  filed  with the  Securities  &
              Exchange  Commission a report on Form 8-K which  reported  that on
              April 28,  1999,  the Company  issued a press  release  announcing
              first  quarter  earnings,  the  run-off  of  writing  non-standard
              personal  automobile  insurance  in the State of  California,  the
              complete run-off of all non-standard automobile and an increase by
              500,000  in  the  authorized  shares  under  the  Company's  stock
              buy-back  program for a total  authorization of two million shares
              by the Board.


                                    Page 21
<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:     May 17, 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 22