UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D. C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2004

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 022316

PENN-AMERICA GROUP, INC.
 (Exact name of registrant as specified in its charter)

|Pennsylvania                    |  | 23-2731409         
|------------------------------- |  | -------------------
|(State or other jurisdiction of |  | (IRS Employer      
|incorporation or organization)  |  | Identification No.)

420 S. York Road, Hatboro, PA 19040 (Address of principal executive
offices) (Zip code)

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

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 shorter 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

Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act).    Yes x    No

As of October 31, 2004, the registrant had 14,797,629 shares of common
stock, $0.01 par value, outstanding.

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Penn-America Group, Inc. and Subsidiaries

Table of Contents

|         |                                                                                                                   | Page
|-------- | ----------------------------------------------------------------------------------------------------------------- | ----
|         |                                                                                                                   |     
|Part I.  | Financial Information                                                                                             |     
|         |                                                                                                                   |     
|Item 1.  | Financial Statements                                                                                              |     
|         |                                                                                                                   |     
|         | Consolidated Balance Sheets as of September 30, 2004 (unaudited) andDecember 31, 2003                             | 3   
|         |                                                                                                                   |     
|         | Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2004 and 2003 (unaudited) | 4   
|         |                                                                                                                   |     
|         | Consolidated Statements of Stockholders Equity for the Nine
      Months Ended September 30, 2004 (unaudited)    | 5   
|         |                                                                                                                   |     
|         | Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2004 and 2003 (unaudited)           | 6   
|         |                                                                                                                   |     
|         | Notes to the Consolidated Financial Statements (unaudited)                                                        | 7   
|         |                                                                                                                   |     
|Item 2.  | Management's Discussion and Analysis of Financial Condition
      and Results of Operations                       | 11  
|         |                                                                                                                   |     
|Item 3.  | Quantitative and Qualitative Disclosure About Market Risk                                                         | 25  
|         |                                                                                                                   |     
|Item 4.  | Controls and Procedures                                                                                           | 26  
|         |                                                                                                                   |     
|Part II. | Other Information                                                                                                 |     
|         |                                                                                                                   |     
|Item 1.  | Legal Proceedings                                                                                                 | 27  
|         |                                                                                                                   |     
|Item 2.  | Unregistered Sales of Equity Securities and Use of Proceeds                                                       | 27  
|         |                                                                                                                   |     
|Item 3.  | Defaults Upon Senior Securities                                                                                   | 27  
|         |                                                                                                                   |     
|Item 4.  | Submission of Matters to a Vote by Security Holders                                                               | 27  
|         |                                                                                                                   |     
|Item 5.  | Other Information                                                                                                 | 27  
|         |                                                                                                                   |     
|Item 6.  | Exhibits                                                                                                          | 27  

2

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|Penn-America Group, Inc. and Subsidiaries Consolidated Balance Sheets     
|--------------------------------------------------------------------------
|(In thousands, except share data)                                         
|                                                                          
|                                                                          
|Assets                                                                    
|Investments:                                                              
|Fixed maturities:                                                         
|Available for sale, at fair value (amortized cost 2004, $353,061;         
|2003, $315,509)                                                           
|Held to maturity, at amortized cost (fair value 2004, $282;               
|2003, $293)                                                               
|Equity securities, at fair value (cost 2004, $23,839; 2003, $10,048)      
|                                                                          
|Total investments                                                         
|Cash and cash equivalents                                                 
|Accrued investment income                                                 
|Premiums receivable (net of allowances of $825 for 2004 and $750 for 2003)
|Reinsurance recoverable                                                   
|Prepaid reinsurance premiums                                              
|Deferred policy acquisition costs                                         
|Capital lease, affiliate                                                  
|Deferred income taxes                                                     
|Income tax recoverable                                                    
|Other assets                                                              
|                                                                          
|Total assets                                                              
|                                                                          
|Liabilities & Stockholders' Equity                                        
|Liabilities:                                                              
|Unpaid losses and loss adjustment expenses                                
|Unearned premiums                                                         
|Accounts payable and accrued expenses                                     
|Capitalized lease obligation, affiliate                                   
|Junior subordinated debentures                                            
|Income tax payable                                                        
|Other liabilities                                                         
|                                                                          
|Total liabilities                                                         
|                                                                          
|Commitments and Contingencies (Note 8)                                    
|Stockholders' equity:                                                     
|Preferred stock, $.01 par value; authorized 2,000,000 shares;             
|None issued                                                               
|Common stock, $.01 par value; authorized 2004 and 2003, 30,000,000        
|and 20,000,000 shares, respectively; issued and outstanding 2004          
|and 2003, 14,778,504 and 14,743,698 shares, respectively                  
|Additional paid-in capital                                                
|Accumulated other comprehensive income                                    
|Retained earnings                                                         
|Officers' stock loans                                                     
|Unearned compensation from restricted stock awards                        
|                                                                          
|Total stockholders' equity                                                
|                                                                          
|Total liabilities and stockholders' equity                                
|                                                                          

See accompanying Notes to Consolidated Financial Statements.

3

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|Penn-America Group, Inc. and Subsidiaries
                         Consolidated Statements of Operations
                            (Unaudited)
|------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|(In thousands, except share data)                                                                                                               
|                                                                                                                                                
|Revenues                                                                                                                                        
|Premiums earned                                                                                                                                 
|Net investment income                                                                                                                           
|Net realized investment gain (loss)                                                                                                             
|                                                                                                                                                
|Total revenues                                                                                                                                  
|                                                                                                                                                
|                                                                                                                                                
|Losses and expenses                                                                                                                             
|Losses and loss adjustment expenses                                                                                                             
|Amortization of deferred policy acquisition costs                                                                                               
|Other underwriting expenses                                                                                                                     
|Corporate expenses                                                                                                                              
|Interest expense                                                                                                                                
|                                                                                                                                                
|Total losses and expenses                                                                                                                       
|                                                                                                                                                
|                                                                                                                                                
|Income before income tax                                                                                                                        
|Income tax expense                                                                                                                              
|                                                                                                                                                
|Net income                                                                                                                                      
|                                                                                                                                                
|                                                                                                                                                
|Net income per share                                                                                                                            
|Basic                                                                                                                                           
|Diluted                                                                                                                                         
|                                                                                                                                                
|Weighted average shares outstanding                                                                                                             
|Basic                                                                                                                                           
|Diluted                                                                                                                                         
|                                                                                                                                                
|Cash dividend per share                                                                                                                         

See accompanying Notes to Consolidated Financial Statements.

4

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|Penn-America Group, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 2004
(Unaudited)
|-----------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                         
|(In thousands, except share data)                                                                                                        
|                                                                                                                                         
|                                                                                                                                         
|Balance at December 31, 2003                                                                                                             
|Net income                                                                                                                               
|Other comprehensive loss:                                                                                                                
|Unrealized loss on investments,                                                                                                          
|net of tax and reclassification                                                                                                          
|adjustment                                                                                                                               
|Unrealized gain on cash flow                                                                                                             
|hedging instrument, net of tax                                                                                                           
|                                                                                                                                         
|Comprehensive income                                                                                                                     
|                                                                                                                                         
|Issuance of common stock                                                                                                                 
|Compensation expense on stock                                                                                                            
|options                                                                                                                                  
|Amortization of unearned                                                                                                                 
|compensation from restricted                                                                                                             
|stock awards issued                                                                                                                      
|Forgiveness of officers' stock loans                                                                                                     
|Cash dividend paid                                                                                                                       
|($0.18 per share)                                                                                                                        
|                                                                                                                                         
|Balance at September 30, 2004                                                                                                            
|                                                                                                                                         

See accompanying Notes to Consolidated Financial Statements.

5

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Penn-America Group, Inc. and Subsidiaries Consolidated Statements of
Cash Flows (Unaudited)

|                                                             |                                 | 
|------------------------------------------------------------ | ------------------------------- | 
|                                                             | Nine months ended September 30, | 
|                                                             |                                
|                                                             |                                 | 
|(In thousands)                                               |                                 | 
|                                                            
|Cash flows from operating activities:                        |                                 | 
|Net income                                                   |                                 | 
|Adjustments to reconcile net income to                       |                                 | 
|net cash provided by operating activities:                   |                                 | 
|Amortization/accretion and depreciation                      |                                 | 
|expense, net                                                 |                                 | 
|Net realized investment (gain) loss                          |                                 | 
|Deferred income tax benefit                                  |                                 | 
|Net decrease in premiums receivable,                         |                                 | 
|prepaid reinsurance premiums and                             |                                 | 
|unearned premiums                                            |                                 | 
|Net increase in unpaid losses and loss adjustment            |                                 | 
|expenses and reinsurance recoverable                         |                                 | 
|Change in:                                                   |                                 | 
|Accrued investment income                                    |                                 | 
|Deferred policy acquisition costs                            |                                 | 
|Income tax recoverable/payable                               |                                 | 
|Other assets                                                 |                                 | 
|Accounts payable and accrued expenses                        |                                 | 
|Other liabilities                                            |                                 | 
|                                                             |                                
|Net cash provided by operating activities                    |                                 | 
|                                                             |                                
|Cash flows from investing activities:                        |                                 | 
|Purchases of equity securities                               |                                 | 
|Purchases of fixed maturities available for sale             |                                 | 
|Proceeds from sales of equity securities                     |                                 | 
|Proceeds from sales of fixed maturities available for sale   |                                 | 
|Proceeds from maturities or calls of fixed maturities        |                                 | 
|available for sale                                           |                                 | 
|Proceeds from maturities and calls of fixed maturities       |                                 | 
|held to maturity                                             |                                 | 
|Increase in payable for investment purchases                 |                                 | 
|                                                             |                                
|Net cash used by investing activities                        |                                 | 
|                                                             |                                
|Cash flows from financing activities:                        |                                 | 
|Issuance of common stock                                     |                                 | 
|Net proceeds from issuance of junior subordinated debentures |                                 | 
|Principal payments on capital lease obligations, affiliate   |                                 | 
|Repayment of officers' loans                                 |                                 | 
|Dividends paid                                               |                                 | 
|                                                             |                                
|Net cash provided (used) by financing activities             |                                 | 
|                                                             |                                
|Increase in cash and cash equivalents                        |                                 | 
|Cash and cash equivalents, beginning of period               |                                 | 
|                                                             |                                
|Cash and cash equivalents, end of period                     |                                 | 
|                                                             |                                

See accompanying Notes to Consolidated Financial Statements.

6

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Penn-America Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Note 1 Organization and Basis of Presentation

Penn-America Group, Inc. (PAGI) is an insurance
holding company. Penn Independent Corporations wholly-owned subsidiary,
PIC Holdings, Inc. (PIC Holdings) owned approximately 31% of the
outstanding common stock of PAGI at September 30, 2004. On May 19, 2004,
Penn-Independent Corporation transferred all of its shares of PAGIs common
stock to PIC Holdings. The accompanying condensed unaudited consolidated
financial statements are prepared in conformity with accounting principles
generally accepted in the United States (GAAP) and include the
accounts of PAGI and its wholly owned subsidiary, Penn-America Insurance Company
(Penn-America), and its wholly owned subsidiary, Penn-Star Insurance
Company (Penn-Star) (collectively the Company). In the
opinion of management, all adjustments (consisting of normal and recurring
adjustments) considered necessary for a fair presentation of results for the
interim periods have been included. The Companys results of operations for
interim periods are not necessarily indicative of the results to be expected for
the entire year. It is suggested that these condensed unaudited consolidated
financial statements and notes be read in conjunction with the financial
statements and notes in the Companys Annual Report on Form 10-K for the
year ended December 31, 2003.

PAGIs wholly-owned business trust subsidiaries,
Penn-America Statutory Trust I and Penn-America Statutory Trust II, are not
consolidated pursuant to Financial Accounting Standards Board Interpretation No.
46, Consolidation of Variable Interest Entities. The Companys business
trust subsidiaries have issued $30.0 million in floating rate capital securities
(Trust Preferred Securities). PAGI guarantees all obligations of
these business trust subsidiaries with respect to distributions and payments of
the Trust Preferred Securities. The sole assets of the Companys business
trust subsidiaries are junior subordinated debentures issued by the Company,
which have the same terms with respect to maturity, payments and distributions
as the Trust Preferred Securities.

Note 2 Proposed Business Combination with United National Group, Ltd.

On October 15, 2004, the Company announced a proposed business
combination with United National Group, Ltd. (UNGL), which will be renamed
United America Indemnity, Ltd. (UAI) after closing. In accordance with the
merger agreement, each publicly-held share of the Company will be exchanged for
$15.375 of value, consisting of $13.875 in UAI class A common shares and $1.50
in cash. Separately, UNGL proposed to acquire Penn Independent Corporation,
which is 100% owned by the Saltzman family. The transactions are expected to
close during the first quarter of 2005 and are subject to several conditions and
contingencies including regulatory approvals and the affirmative vote of the
shareholders of UNGL and PAGI.

During the third quarter of 2004, the Company incurred $882,000
in expenses related to the proposed business combination with UNGL. The Company
expects to incur additional expenses related to financial advisory, legal,
accounting, actuarial services of approximately $2,200,000 and costs for board
and employee compensation of approximately $2,600,000 for bonuses and the
accelerated vesting of unvested stock options and unvested restricted stock
through closing of the transaction.

7

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Note 3 Reinsurance

Premiums earned are presented net of amounts ceded to reinsurers
of $9,667,000 and $7,503,000 for the three months ended September 30, 2004 and
2003, respectively. Losses and loss adjustment expenses are presented net of
amounts ceded to reinsurers of $12,411,000 and $2,576,000 for the three months
ended September 30, 2004 and 2003, respectively.

Premiums earned are presented net of amounts ceded to reinsurers
of $26,787,000 and $20,409,000 for the nine months ended September 30, 2004 and
2003, respectively. Losses and loss adjustment expenses are presented net of
amounts ceded to reinsurers of $25,638,000 and $10,890,000 for the nine months
ended September 30, 2004 and 2003, respectively.

For the three and nine months ended September 30, 2004, premiums
earned included amounts ceded to catastrophic loss reinsurers of $1,100,000 for
reinstatement premiums due to Hurricanes Charley, Frances, Ivan and Jeanne.

For the three and nine months ended September 30, 2004, gross
losses and loss adjustment expenses related to Hurricanes Charley, Frances, Ivan
and Jeanne were estimated to aggregate $12,000,000. As of September 30, 2004,
the Company had $8,000,000 in aggregate reinsurance recoverable due from its
catastrophic loss reinsurers related to these hurricanes as follows: American
Agricultural Insurance Company, Converium Reinsurance (NA), Inc., Everest
Reinsurance Company, Shelter Mutual Insurance Company, Hannover Re (Bermuda)
Ltd, XL Re Ltd., Converium Ltd. (Zurich) and Sirius International Insurance
Corporation. All of these reinsurers have statutory surplus of $500 million or
greater and an A.M. Best rating of A (Excellent) or higher, with the
exception of Converium Reinsurance (NA) Inc. and Converium Ltd. (Zurich) which
were downgraded to B- (Fair) and B++ (Very Good) by A.M.
Best in 2004. The participating share of the aggregate $8,000,000 in reinsurance
recoverable from Converium Reinsurance (NA) Inc. and Converium Ltd. (Zurich) is
$1,680,000 and $1,160,000, respectively, which the Company believes is fully
recoverable.

As of September 30, 2004, the Company had a remaining
reinsurance recoverable of $1,100,000 relating to a claim for an insured
involving multiple policies written over multiple years beginning in 1998. The
Company settled this claim in February 2004, but has not yet finalized the
reinsurance recoverable with its reinsurer. The Company believes that resolution
of this reinsurance recoverable will not have a material adverse impact on its
results of operations.

Note 4 Comprehensive Income (Loss)

For the three months ended September 30, 2004, comprehensive
income was $6,744,000, which consisted of net income of $2,088,000 and other
comprehensive gain of $4,656,000 related to net unrealized gain on investments
and an unrealized gain on a cash flow hedging instrument. For the three months
ended September 30, 2003, comprehensive income was $2,153,000, which consisted
of net income of $4,635,000 and other comprehensive loss of $2,482,000 related
to net unrealized loss on investments and an unrealized gain on a cash flow
hedging instrument.

For the nine months ended September 30, 2004, comprehensive
income was $11,154,000, which consisted of net income of $11,646,000 and other
comprehensive loss of $492,000 related to net unrealized loss on investments and
a cash flow hedging instrument. For the nine months ended September 30, 2003,
comprehensive income was $11,576,000, which consisted of net income of
$12,208,000 and other comprehensive loss of $632,000 related to net unrealized
loss on investments and gain an unrealized loss on a cash flow hedging instrument.

8

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Note 5 Net Income Per Share

Basic net income per share is computed by dividing net income
available to common stockholders by the weighted average number of common shares
outstanding for each period. Diluted net income per share includes the potential
dilution that could occur if outstanding contracts to issue common stock were
exercised and converted to common stock. The following is a reconciliation of
the basic and diluted net income per share computations:

|                                  | Three months ended September 30, |  | Nine months ended September 30, |           
|--------------------------------- | -------------------------------- |  | ------------------------------- | ----------
|                                  |                                  |  |                                 |           
|(In thousands, except share data) |                                  |  |                                 | 2004      
|                                  |                                 
|Basic per share computation:      |                                  |  |                                 |           
|Net income                        |                                  |  | $                               | 2,088     
|Weighted average common shares    |                                  | 
|outstanding                       |                                  |  |                                 | 14,776,739
|                                 
|Basic net income per share        |                                  |  | $                               | 0.14      
|                                  |                                  | 
|Diluted per share computation:    |                                  | 
|Net income                        |                                  |  | $                               | 2,088     
|Weighted average common shares    |                                  | 
|outstanding                       |                                  |  |                                 | 14,776,739
|Additional shares outstanding     |                                  | 
|after the assumed exercise of     |                                  | 
|options by applying the treasury  |                                  | 
|stock method                      |                                  |  |                                 | 222,383   
|                                  |                                  | 
|Total shares                      |                                  |  |                                 | 14,999,122
|                                  |                                  | 
|Diluted net income per share      |                                  |  | $                               | 0.14      
|                                  |                                  | 

Note 6 Segment Information

The Company has one reportable segment that consists of its
commercial property and casualty lines of business. In 1999, the Company exited
the non-standard personal automobile line of business and announced that it
would run-off its remaining portfolio of such business. For the three and nine
months ended September 30, 2004 and 2003, amounts relating to the non-standard
personal automobile business were not material to the financial statements
presented, and therefore, are not presented separately.

Note 7 Unpaid Losses and Loss Adjustment Expenses

The liability for losses and loss adjustment expenses represents
the Companys best estimate of the ultimate amounts needed to pay both
reported and unreported claims. These estimates are based on certain actuarial
and other assumptions. The Company continually reviews these estimates and,
based on new developments and information, the Company includes adjustments of
the probable ultimate liability in the operating results for the periods in
which the adjustments are made.

During the first nine months of 2004, the Company increased
incurred losses and loss adjustment expense attributable to insured events of
prior years by $1,500,000. This increase consisted of an increase in the
Companys estimate for the commercial casualty lines of business by
$5,500,000 relating primarily to accident years 1994 through 2000, partially
offset by a decrease in the Companys estimate for the commercial property
lines of business by $4,000,000 relating primarily to the 2003 accident year.

At September 30, 2004, the Companys unpaid losses and loss
adjustment expenses included its best estimate of $12,000,000 for gross losses
and loss adjustment expenses related to Hurricanes Charley, Frances, Ivan and
Jeanne based on current claims reported to the Company. At September 30, 2004,
the Company recorded reinsurance recoverables of $8,000,000 related to these
hurricane losses (See Note 3).

In 2003, the Company received an unexpected increase in the  number of
new claims reported relating to four policies issued to a single  insured between January
1, 1980 and April 1, 1983. The insured was a

9

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manufacturer of safety equipment including industrial masks and the new
claims  reported allege existing and potential bodily injury due to a medical condition
called silicosis. The original policies covered products and completed  operations only
and were issued with a $500,000 indemnity policy aggregate limit  of liability. At
September 30, 2004, the Companys loss and loss adjustment  expense reserves
included its best estimate for its ultimate obligations for  these claims based on
current information.

Note 8 Commitments and Contingencies

The Companys insurance subsidiaries are subject to routine
legal proceedings in connection with their property and casualty business. The
Company is involved in no other pending or threatened legal or administrative
proceedings which management believes might have a material adverse effect on
the Companys financial condition or results of operations.

Note 9 Officers Stock Loans

In May 2004, the Companys board of directors forgave
officers stock loans in consideration of the Companys strong
financial results and in recognition that no long-term equity compensation plan
was in place over the last two fiscal years. The Company recorded compensation
expense of $1,200,000, which is included in other underwriting expenses in the
consolidated statements of operation for the nine months ended September 30,
2004. This compensation expense consisted of $569,000 for the principal amounts
of the loans, $140,000 for the accrued interest on the loans and $491,000 for
cash bonuses granted to these officers to compensate them for their
federal, state and local tax obligations.

Note 10 Other-Than-Temporary Impairments on Investments

The Company regularly evaluates its investment portfolio to
identify other-than-temporary impairments of individual securities. The Company
considers many factors in determining if an other-than-temporary impairment
exists, including the length of time and extent to which the market value of the
security has been less than cost, the financial condition and near-term
prospects of the issuer of the security and the Companys ability and
willingness to hold the security until the market value is expected to recover.

For the three and nine months ended September 30, 2004, the
Company recorded other-than-temporary impairments of $1,146,000 on certain of
its investments in common stocks that were in a continuous unrealized loss
position for more than six months as of September 30, 2004.

Note 11 Subsequent Event

In October 2004, the market value of the Companys common
stock investment in Marsh & McLennan Companies, Inc. declined significantly
below its $710,000 cost basis as of September 30, 2004. The Company attributes
the market value decline to developments announced to the public in October
2004. The Company may record other-than temporary impairments on this security
in the fourth quarter of 2004 if the market value of this security does not
fully recover to its cost basis by December 31, 2004.

10

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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

The following discussion and analysis of Penn-America Group,
Inc. (PAGI) and subsidiaries (collectively Penn-America
or the Company) should be read in conjunction with the
Companys Consolidated Financial Statements and related Notes included in
Item 1, Financial Statements, of this report on Form 10-Q, as well
as the Companys Annual Report on Form 10-K for the year ended December 31,
2003. This discussion and analysis may contain forward-looking statements that
are not historical facts and that are intended to be covered by the safe harbor
for forward-looking statements provided by the Private Securities Litigation
Reform Act of 1995. Forward looking statements can be identified by the use of
words such as believe, expect, may,
will, should, intend or the negative thereof
or comparable terminology, and include discussions of matters such as
anticipated financial performance, business prospects, technological
developments, new and existing products, expectations for market segments and
statements regarding our recently announced transaction with United National
Group, Ltd. These forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
expected. Please see the Companys Annual Report on Form 10-K for the year
ended December 31, 2003 and other documents filed with the Securities and
Exchange Commission for additional disclosures regarding potential risk factors
that may cause the Companys actual results and experience to differ
materially from those contained in such forward-looking statements.

Overview

On October 15, 2004, the Company announced a proposed business
combination with United National Group, Ltd. (UNGL), which will be renamed
United America Indemnity, Ltd. (UAI) after closing. In accordance with the
merger agreement, each publicly-held share of the Company will be exchanged for
$15.375 of value, consisting of $13.875 in UAI class A common shares and $1.50
in cash. Separately, UNGL proposed to acquire Penn Independent Corporation,
which is 100% owned by the Saltzman family. The transactions are expected to
close during the first quarter of 2005 and are subject to several conditions and
contingencies including regulatory approvals and the affirmative vote of the
shareholders of UNGL and PAGI. Additional details on the proposed business
combination will be provided to shareholders in a joint proxy
statement/prospectus to be filed with the Securities and Exchange Commission by
Penn-America and UNGL and sent to shareholders of each company.

Business. PAGI is a specialty property and casualty insurance
holding company that markets and underwrites general liability, commercial
property and multi-peril insurance for small businesses with average annual
premiums of about $2,000. These small businesses are located primarily in small
towns and rural areas in all fifty states and the District of Columbia. The
small businesses Penn-America insures, such as restaurants, service contractors,
retail stores and apartments, often cannot obtain insurance because of their
rural locations, small premium size or non-standard risk characteristics. As a
result, these small businesses must turn to companies like Penn-America, which
operate in a small business niche of the secondary or residual market called the
excess and surplus lines or E&S market. By operating
in the E&S market, Penn-America is rewarded with higher prices than the
standard lines market, more flexibility in excluding coverage for specific loss
exposures and lower premium taxes and state guarantee fund assessments.

Penn-America distributes its insurance products through a small
network of sixty-three (63) high-quality wholesale general agents who serve the
needs of the more than 30,000 retail insurance brokers who work directly with
Penn-America insureds. Penn-America has about one-half the number of general
agents as its nearest competitor. By maintaining strong relationships with a
small, select group of agents, a relationship with Penn-America offers true
franchise value to each general agent by providing relative market
exclusivity and a high level of service and support. The Companys
distribution strategy has resulted in strong and consistent growth. From 1992 to
2003, the Companys commercial gross written premiums grew from $22.6
million to $209.4 million (a 22% annual compounded growth rate). Most of

11

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the growth was due to an increase in gross written premiums per
agent from $590,000 in 1992 to $3.9 million in 2003.

Key Financial Measures. The Company utilizes a number of
financial measures to evaluate its operating performance and financial
condition. The Companys overall financial goal is to produce a 12 to 15
percent return on equity (ROE) over the long-term. For the twelve
months ended September 30, 2004, ROE was 12.1 percent. The Company calculates
ROE by dividing net income by average stockholders equity. The following
table summarizes ROE for each year in the ten-year period ended December 31,
2003:

|                 | Year ended December 31,
|---------------- | -----------------------
|                 |                        
|                 |                        
|                 | 2003                   
|                
|Return on Equity | 13.5%                  

The Companys philosophy has been to distribute a portion
of the ROE it generates through cash dividends to stockholders. Cash dividend
per share increased to $0.18 for the nine months ended September 30, 2004,
compared with $0.13125 for the nine months ended September 30, 2003. Through
September 30, 2004, the Company has paid cash dividends to stockholders in 38
consecutive quarters totaling over $16.5 million.

In Section 6.1 of the Agreement and Plan of Merger dated as of October
14, 2004 by and among Penn-America Group,  Inc., United National Group, Ltd., U.N.
Holdings II, Inc. and Cheltenham Acquisition Corp. in connection with the  proposed
business combination, the Company may not declare, set aside or pay any dividend or other
distribution  payable in cash, stock or property with respect to its common stock without
the prior written consent of United  National Group, Ltd. until the effective date of the
proposed business combination or any termination of the  merger agreement.

The remainder of the ROE generated by the Company is invested in
growing the book value per share of the Company. Book value per share increased
7.1% in the first nine months of 2004 to $9.50 from $8.87 at December 31, 2003.
Book value per share is calculated by dividing stockholders equity by
outstanding common shares.

The Company utilizes other financial measures to evaluate its
operating performance, such as gross written premiums, operating income, GAAP
underwriting income, GAAP combined ratio, net income and cash flows provided by
operations. These additional financial measures are more fully described in
Results of Operations and Liquidity and Capital
Resources in this discussion and analysis.

This discussion and analysis consists of the following
components:

| |  | Results
of Operations
| | - | ---------------------

| |  | Critical
Accounting Estimates and Policies
| | - | ------------------------------------------

| |  | Reinsurance
| | - | -----------

| |  | Investments
| | - | -----------

| |  | Liquidity
and Capital Resources
| | - | -------------------------------

Results of Operations

Three Months Ended September 30, 2004 Compared With Three Months Ended
September 30, 2003

Premiums earned increased 29.9% to $52.4 million for the three
months ended September 30, 2004 compared with $40.3 million for the three months
ended September 30, 2003 due to the growth in net written premiums over the last
12 months.

12

---



Gross written premiums, which represent the amount received or
to be received for insurance policies written without reduction for acquisition
costs, reinsurance costs or other deductions, increased 12.4% to $65.8 million
for the three months ended September 30, 2004 compared with $58.5 million for
the three months ended September 30, 2003. The increase was attributable to
growth in renewal business and premium rate increases.

Ceded written premiums, the portion of gross written premiums
reinsured by unaffiliated insurers, increased 6.3% to $9.6 million for the three
months ended September 30, 2004 compared with $9.0 million for the three months
ended September 30, 2003. The increase in ceded written premiums was due
primarily to growth in gross written premiums and the recognition of $1.1
million in catastrophe loss treaty reinstatement premiums due to Hurricanes
Charley, Frances, Ivan and Jeanne, partially offset by lower reinsurance rates
on the Companys multiple-line excess of loss reinsurance treaty. These
lower reinsurance rates were due primarily to an increase in the Companys
reinsurance retention on its property lines of business from $300,000 per risk
in 2003 to $500,000 per risk in 2004.

Net written premiums, which are gross written premiums less
ceded written premiums, increased 13.6% to $56.2 million for the three months
ended September 30, 2004 compared with $49.5 million for the three months ended
September 30, 2003. The increase in net written premiums was higher than the
increase in gross written premiums due to lower reinsurance costs.

Net investment income increased to $3.8 million for the three
months ended September 30, 2004 compared with $3.3 million for the three months
ended September 30, 2003, due primarily to the growth in average invested
assets, partially offset by a decrease in average yield on fixed-maturity
investments.

Net realized investment loss was $1.4 million for the three
months ended September 30, 2004 compared to a net unrealized investment gain of
$0.7 million for the three months ended September 30, 2003. The net realized
investment loss for the 2004 period was primarily attributable to $1.1 million
of other-than-temporary impairments on certain of the Companys investments
in common stock that were in a continuous unrealized loss position for over six
months and $0.3 million on sales of certain of the Companys investments in
fixed-maturity securities. The net realized investment gain for the 2003 period
was primarily attributable to the sale of certain of the Companys
investments in preferred stocks.

Losses and loss adjustment expenses increased 44.6% to $35.6
million for the three months ended September 30, 2004 compared with $24.6
million for the three months ended September 30, 2003. The increase was due to
growth in premiums earned and an increase in the loss ratio from 61.0 for the
2003 period to 67.9 for the 2004 period. The increase in the loss ratio was due
primarily to an increase in catastrophe-related losses from $1.3 million for the
2003 period to $4.3 million for the 2004 period due primarily to Hurricanes
Charley, Frances, Ivan and Jeanne, partially offset by rate increases
implemented in 2003 and 2004 and a decline in losses and loss adjustment
expenses attributable to insured events of prior years of $1.1 million.
Although, in the aggregate, the Company did not record an adjustment to losses
and loss adjustment expenses attributable to insured events of prior years, the
Company increased casualty losses and loss adjustment expenses attributable to
insured events of prior years by $1.5 million primarily for accident years 1994
through 2000, which were entirely offset by a reduction of $1.5 million for its
property lines of business primarily related to accident year 2003. For more
information regarding losses and loss adjustment expenses attributable to
insured events of prior years, see the section entitled Critical
Accounting Estimates and Policies of this discussion and analysis.

Amortization of deferred policy acquisition costs
(ADAC) increased 24.5% to $12.3 million for the three months ended
September 30, 2004 from $9.9 million for the three months ended September 30,
2003, due primarily to the growth in premiums earned.

Other underwriting expenses decreased 7.5% to $2.2 million for
the three months ended September 30, 2004 from $2.4 million for the three months
ended September 30, 2003.

13

---



The overall GAAP combined ratio, which is the sum of  the loss and
expense ratios, increased to 95.7 for the three months ended  September 30, 2004 from
91.5 for the three months ended September 30, 2003. The  loss ratio increased to 67.9 for
the 2004 period from 61.0 for the 2003 period.  The expense ratio, which is calculated by
dividing the sum of ADAC and other  underwriting expenses by premiums earned, improved to
27.8 for the 2004 period  from 30.5 for the 2003 period due primarily to growth in
premiums earned of 29.9  percent over growth in ADAC and other underwriting expenses of
18.3 percent. The  GAAP combined ratio is a standard measure of underwriting
profitability used  throughout the property and casualty insurance industry. A ratio
below 100.0  generally indicates underwriting profitability.

Underwriting income decreased to $2.3 million for the three
months ended September 30, 2004 from $3.4 million for the three months ended
September 30, 2003. Underwriting income is a non-GAAP financial measure used by
the Company, among other measures, to evaluate the performance of its
underwriting operations. Underwriting income is equal to premiums earned less
losses and loss adjustment expenses, ADAC and other underwriting expenses. The
decline in underwriting income for the 2004 period was due to an increase in the
GAAP combined ratio, partially offset by growth in earned premiums.

Interest expense was $0.5 million for both the three months
ended September 30, 2004 and 2003.

Corporate expenses increased to $1.2 million for the three
months ended September 30, 2004 from $0.2 million for the three months ended
September 30, 2003. This increase was due primarily to approximately $0.9
million in expenses incurred in connection with the proposed business
combination with UNGL.

Income tax expense declined to $0.8 million for the three months
ended September 30, 2004 from $2.1 million for the three months ended September
30, 2003. This decline was due primarily to lower underwriting profitability, an
increase in corporate expenses and the net realized investment loss for the
three months ended September 30, 2004.

Operating income decreased to $3.0 million or $0.20 per share
(basic and diluted) for the three months ended September 30, 2004 from $4.2
million or $0.28 per share (basic and diluted) for the three months ended
September 30, 2003. Operating income is calculated by subtracting net realized
investment gain, after taxes, from net income. Operating income is a non-GAAP
financial measure used by the Company, among other measures, to evaluate its
performance because the realization of net realized investment gains or losses
in a given period is largely discretionary as to timing and could distort the
comparability of results. The decline in operating income for the 2004 period
was due to the decline in underwriting income, after taxes, and corporate
expenses, after taxes, partially offset by growth of investment income, after
taxes.

The factors described above resulted in net income of $2.1
million or $0.14 per share (basic and diluted) for the three months ended
September 30, 2004 compared with $4.6 million or $0.31 per share (basic and
diluted) for the three months ended September 30, 2003.

Nine Months Ended September 30, 2004 Compared With Nine Months Ended
September 20, 2003

Premiums earned increased 35.6% to $150.5 million for the nine
months ended September 30, 2004 compared with $111.0 million for the nine months
ended September 30, 2003 due to the growth in net written premiums over the last
12 months.

Gross written premiums increased 27.0% to $194.8 million for the
nine months ended September 30, 2004 compared with $153.3 million for the nine
months ended September 30, 2003. The increase was attributable to growth in new and renewal
business and premium rate increases.

Ceded written premiums increased 8.9% to $26.1 million for the
nine months ended September 30, 2004 compared with $23.9 million for the nine
months ended September 30, 2003. The increase in ceded

14

---



written premiums was due  primarily to growth in gross written premiums
and the recognition of $1.1  million in catastrophe loss treaty reinstatement premiums
due to Hurricanes  Charley, Frances, Ivan and Jeanne, partially offset by lower
reinsurance rates  on the Companys multiple-line excess of loss reinsurance treaty.
These  lower reinsurance rates were primarily due to an increase in Companys
reinsurance retention on its property lines of business from $300,000 per risk  in 2003
to $500,000 per risk in 2004.

Net written premiums increased 30.4% to $168.7 million for the
nine months ended September 30, 2004 compared with $129.4 million for the nine
months ended September 30, 2003. The increase in net written premiums was higher
than the increase in gross written premiums due to lower reinsurance costs.

Net investment income increased to $10.8 million for the nine
months ended September 30, 2004 compared with $9.7 million for the nine months
ended September 30, 2003, due primarily to the growth in average invested
assets, partially offset by a decrease in average yield on fixed-maturity
investments.

Net realized investment loss was $0.7 million for the nine
months ended September 30, 2004 compared to a net realized investment gain of
$1.9 million for the nine months ended September 30, 2003. The net realized
investment loss for the 2004 period was primarily attributable to $1.1 million
of other-than-temporary impairments on certain of the Companys investments
in common stock that were in a continuous unrealized loss position for over six
months, partially offset by realized gains on the sale of certain of the
Companys investments in fixed-income securities and common stocks. The net
realized investment gain for the 2003 period was primarily attributable to the
sale of certain of the Companys fixed-maturity securities and preferred
stocks and all of the Companys then existing common stock investments.

Losses and loss adjustment expenses increased 38.2% to $95.1
million for the nine months ended September 30, 2004 compared with $68.8 million
for the nine months ended September 30, 2003. The increase was due to growth in
premiums earned and an increase in the loss ratio from 62.0 for the 2003 period
to 63.2 for the 2004 period. The increase in the loss ratio was due primarily to
an increase in catastrophe-related losses from $3.0 million in 2003 to $5.4
million in 2004 due primarily to Hurricanes Charley, Frances, Ivan and Jeanne,
partially offset by rate increases implemented in 2003 and 2004 and a decrease
in losses and loss adjustment expenses attributable to insured events of prior
years to $1.5 million in 2004 from $2.0 million in 2003. For more information
regarding the $1.5 million in losses and loss adjustment expenses attributable
to insured events of prior years, see the section entitled Critical
Accounting Estimates and Policies of this discussion and analysis.

Amortization of deferred policy acquisition costs increased
33.8% to $36.9 million for the nine months ended September 30, 2004 from $27.6
million for the nine months ended September 30, 2003, due primarily to the
growth in premiums earned.

Other underwriting expenses increased 26.6% to $8.6 million for
the nine months ended September 30, 2004 from $6.8 million for the nine months
ended September 30, 2003, due primarily to expenses related to the forgiveness
of officers stock loans in the second quarter of 2004 totaling $1.2
million.

The overall GAAP combined ratio increased to 93.4 for the nine
months ended September 30, 2004 from 93.0 for the nine months ended September
30, 2003. The loss ratio increased to 63.2 for the 2004 period from 62.0 for the
2003 period. The GAAP expense ratio improved to 30.2 for the 2004 period from
31.0 for the 2003 period.

Underwriting income increased to $9.9 million for the nine
months ended September 30, 2004 from $7.8 million for the nine months ended
September 30, 2003. The improvement in underwriting income for the 2004 period
was primarily due to growth in earned premiums, which was partially offset by an
increase in the GAAP combined ratio from 93.0 for 2003 to 93.4 for 2004.

15

---



Corporate expenses increased to $1.8 million for the three
months ended September 30, 2004 from $0.6 million for the three months ended
September 30, 2003. This increase was due primarily to approximately $0.9
million in expenses incurred in connection with the proposed business
combination with UNGL.

Interest expense increased to $1.5 million for the nine months
ended September 30, 2004 from $1.2 million for the nine months ended September
30, 2003, due primarily to interest expense on the Companys junior
subordinated debentures issued in May, 2003.

Income tax expense decreased to $5.0 million for the nine months
ended September 30, 2004 from $5.4 million for the nine months ended September
30, 2003. This decline was due primarily to an increase in corporate expenses
and the net realized investment loss for the nine months ended September 30,
2004, partially offset by improved underwriting profitability.

Operating income increased to $12.1 million or $0.82 per basic
share and $0.81 per diluted share for the nine months ended September 30, 2004
from $11.0 million or $0.75 per basic share and $0.74 per diluted share for the
nine months ended September 30, 2003. The increase in operating income for the
2004 period was due to the improvement in underwriting income, after taxes, and
growth of investment income, after taxes, partially offset by the increase in
corporate expenses, after taxes.

The factors described above resulted in net income of $11.6
million or $0.79 per basic share and $0.78 per diluted share for the nine months
ended September 30, 2004 compared with $12.2 million or $0.83 per basic share
and $0.82 per diluted share for the nine months ended September 30, 2003.

Critical Accounting Estimates and Policies

The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires the
Company to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.

The Company has identified that the establishment of reserves
for unpaid losses and loss adjustment expenses and the valuation of certain
investments are critical accounting estimates because they involve a high degree
of judgment. Although variability is inherent in these estimates, the Company
believes the amounts provided in its financial statements are appropriate based
upon the facts available at the time. For information related to the valuation
of investments, see the section entitled Investments in this
discussion and analysis beginning on page 20.

The Company is directly liable for losses and loss adjustment
expenses under the terms of the insurance policies that it writes. In many
cases, several years may lapse between the occurrence of an insured loss, the
reporting of the loss to the Company and the Companys payment of that
loss. The Company reflects its liability for the ultimate payment of all
incurred losses and loss adjustment expenses by establishing loss and loss
adjustment expense reserves as balance sheet liabilities for both reported and
unreported claims.

16

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When a claim involving a probable loss is reported, the Company
establishes a case reserve for the estimated amount of the Companys
ultimate loss. The estimate of the amount of the ultimate loss is based upon
such factors as:

| |  | the
type of loss;
| | - | -----------------

| |  | jurisdiction
of the occurrence;
| | - | -------------------------------

| |  | knowledge
of the circumstances surrounding the claim;
| | - | -----------------------------------------------------

| |  | severity
of injury or damage;
| | - | -----------------------------

| |  | potential
for ultimate exposure; and
| | - | ------------------------------------

| |  | policy
provisions relating to the claim.
| | - | ----------------------------------------

The Company determines loss adjustment expenses as a percentage
of expected indemnity losses based on historical patterns adjusted to reflect
current experience.

In addition to case reserves, management establishes reserves on
an aggregate basis to provide for incurred but not reported losses and loss
adjustment expenses, commonly referred to as IBNR. To establish
reserves for IBNR the Company must estimate the ultimate liability based
primarily on past experience. The Company applies a variety of traditional
actuarial techniques to determine its estimate of ultimate liability. The
techniques recognize, among other factors:

| |  | the
Companys and the industrys experience;
| | - | --------------------------------------------

| |  | historical
trends in  reserving patterns and loss payments;
| | - | -----------------------------------------------------------

| |  | the
impact of claim inflation;
| | - | ------------------------------

| |  | the
pending level of unpaid claims;
| | - | -----------------------------------

| |  | the
cost of claim settlements;
| | - | ------------------------------

| |  | the
line of  business mix; and
| | - | ------------------------------

| |  | the
economic environment in which property and casualty  insurance companies operate.
| | - | -------------------------------------------------------------------------------------

The Company continually reviews these estimates and, based on
new developments and information, the Company includes adjustments of the
probable ultimate liability in the operating results for the periods in which
the adjustments are made. In general, initial reserves are based upon the
actuarial and underwriting data utilized to set pricing levels and are reviewed
as additional information, including claims experience, becomes available.

The establishment of loss and loss adjustment expense reserves
makes no provision for the broadening of coverage by legislative action or
judicial interpretation, or the emergence of new types of losses not
sufficiently represented in the Companys historical experience or that
cannot yet be quantified. The Company regularly analyzes its reserves and
reviews pricing and reserving methodologies so that future adjustments to prior
year reserves can be minimized. However, given the complexity of this process,
reserves will require continual updates and the ultimate liability may be higher
or lower than previously indicated. Changes in estimates for loss and loss
adjustment expense reserves, as required by Statement of Financial Accounting
Standards (SFAS) No. 60, Accounting and Reporting by Insurance
Enterprises, are recorded in the period that the change in these estimates is
made. The Company does not discount its loss reserves.

Unpaid losses and loss adjustment expenses increased 29.5% to
$226.5 million at September 30, 2004 from $174.9 million at December 31, 2003.
During the first nine months of 2004, the Company increased incurred losses and
loss adjustment expenses attributable to insured events of prior years by $1.5
million. This increase consisted of an increase in the Companys estimate
for the commercial casualty lines of business by $5.5 million relating primarily
to accident years 1994 through 2000, partially offset by a decrease in the
Companys estimate for the commercial property lines of business of $4.0
million relating primarily to the 2003 accident year.

17

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At September 30, 2004, the Companys unpaid losses and loss
adjustment expenses included its best estimate of $12,000,000 for gross losses
and loss adjustment expenses related to Hurricanes Charley, Frances, Ivan and
Jeanne based on current claims reported to the Company. As of September 30,
2004, the Company recorded reinsurance recoverables of $8,000,000 related to
these hurricane losses (See Reinsurance Recoverable on page 19).

In 2003, the Company received an unexpected increase in the
number of new claims reported relating to four policies issued to a single
insured between January 1, 1980 and April 1, 1983. The insured was a
manufacturer of safety equipment including industrial masks and the new claims
reported allege existing and potential bodily injury due to a medical condition
called silicosis. The original policies covered products and completed
operations only and were issued with a $500,000 indemnity policy aggregate limit
of liability. At September 30, 2004, the Companys loss and loss adjustment
expense reserves included its best estimate for its ultimate obligations for
these claims based on current information.

Reinsurance

Overview. To reduce its exposure to liability on individual
risks and to protect against catastrophic losses, the Company purchases
reinsurance through contracts called treaties or on a facultative
basis. Reinsurance involves an insurance company transferring or
ceding a portion of its exposure on a risk to another insurer (the
reinsurer). The reinsurer assumes the exposure in return for a
portion of the premium. The ceding of liability to a reinsurer does not legally
discharge the primary insurer from its liability for the full amount of the
policies on which it obtains reinsurance. The primary insurer will be required
to pay the entire loss if the reinsurer fails to meet its obligations under the
reinsurance agreement.

In formulating its reinsurance programs, the Company is
selective in its choice of reinsurers and considers numerous factors, the most
important of which are the financial stability of the reinsurer, its history of
responding to claims and its overall reputation. In an effort to minimize its
exposure to the insolvency of its reinsurers, the Company evaluates the
acceptability and reviews the financial condition of each reinsurer annually.
The Companys policy is to use only reinsurers that have an A.M. Best
rating of A (Excellent) or better and that have at least $500
million in statutory surplus.

The Companys principal reinsurance treaties include
multiple-line excess of loss, umbrella quota share and property catastrophic
loss.

Multiple-Line Excess of Loss. The Companys multiple-line
excess of loss reinsurance treaty is placed with American Reinsurance Company
(American Re), part of the Munich Re Group. American Re has an A.M.
Best rating of A+ (Superior). The following is a summary of the
Companys multiple-line excess of loss reinsurance treaty for 2004:

|Line of Business             | Company Policy Limit      | Reinsurance Coverage / Company Retention                                      
|---------------------------- | ------------------------- | ------------------------------------------------------------------------------
|                            
|Commercial property          | $2,000,000 per risk       | $1,500,000 per risk / $4,500,000 per occurrence in excess of $500,000 per risk
|                            
|Commercial general liability | $3,000,000 per occurrence | $2,500,000 per occurrence in excess of $500,000 per occurrence                
|                            

The Companys combined retention for any one loss resulting
from a common occurrence involving both the commercial property and commercial
general liability coverage on a single risk is $500,000. The Companys
multiple-line excess of loss treaty reinsurer also provides reinsurance coverage
of $10,000,000 per occurrence/aggregate for extra-contractual obligations,
losses in excess of policy limits, loss adjustment expenses and liability
resulting from two or more of the Companys insureds from the same
occurrence.

18

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Umbrella Quota Share. The Company offers umbrella liability
policies up to $5.0 million per occurrence. For policies where the Company
writes the primary general liability, 90% of policy limits up to $1.0 million
per occurrence and 100% of policy limits up to $4.0 million in excess of $1.0
million per occurrence are reinsured with American Re. For policies where
another insurer writes the primary general liability, 85% of policy limits up to
$1.0 million per occurrence, 90% of policy limits up to $1.0 million in excess
of $1.0 million per occurrence and 100% of policy limits up to $3.0 million in
excess of $2.0 million per occurrence are reinsured with American Re.

Property Catastrophic Loss. The Company maintains a catastrophic
loss reinsurance program. As of January 1, 2004, the terms of this program
provide for 100% retention of the first $1.0 million per occurrence and
reinsurance of 100% of $29.0 million per occurrence in excess of $1.0 million
per occurrence.

For 2004, the Company's catastrophic loss reinsurance program includes:
American Agricultural Insurance Company,  Converium Reinsurance (North America) Inc.,
Converium Ltd. (Zurich), Everest Reinsurance Company, Hannover Re  (Bermuda) Ltd., PXRE
Reinsurance Company, Shelter Reinsurance Company, Sirius International Insurance
Corporation  and XL Re Ltd. All of these reinsurers have statutory surplus greater than
$500 million and an A.M. Best rating  of "A" (Excellent) or higher, with the
exception of Converium Reinsurance (NA) Inc. and Converium Ltd. (Zurich)  which were
downgraded to "B-" (Fair) and "B++" (Very Good), respectively, by
A.M. Best in 2004.

Reinsurance Recoverable. The Companys reinsurance
recoverable increased to $49.5 million as of September 30, 2004 compared with
$38.0 million as of December 31, 2003. This increase was due primarily to the
growth in unpaid losses and loss adjustment expenses, which increased 29.5% to
$226.5 million as of September 30, 2004 from $174.9 million at December 31,
2003. The following table summarizes the Companys outstanding reinsurance
recoverable, net of a $700,000 allowance for doubtful accounts, as of September
30, 2004, by reinsurer:

|                                        |                  |                                 |                                    
|--------------------------------------- | ---------------- | ------------------------------- | -----------------------------------
|(Dollars in thousands)                  | A.M. Best Rating | AmountReflected onBalance Sheet | Percentage ofReinsuranceRecoverable
|                                       
|American Re                             | "A+" (Superior)  | $29,654                         | 59.9%                              
|General Re                              | "A++" (Superior) | 11,534                          | 23.3                               
|Everest Reinsurance Company             | "A+" (Superior)  | 2,000                           | 4.0                                
|Converium Reinsurance (N.A.) Inc.       | "B-" (Fair)      | 1,680                           | 3.4                                
|Hannover Re (Bermuda) Ltd.              | "A" (Excellent)  | 1,200                           | 2.4                                
|Converium Ltd. (Zurich)                 | "B++"(Very Good) | 1,160                           | 2.3                                
|XL Re Ltd.                              | "A+" (Superior)  | 1,120                           | 2.3                                
|American Agricultural Insurance Company | "A" (Excellent)  | 400                             | 0.8                                
|Shelter Mutual Insurance Company        | "A" (Excellent)  | 280                             | 0.6                                
|Sirius International                    | "A" (Excellent)  | 160                             | 0.3                                
|Other reinsurers                        | ---              | 341                             | 0.7                                
|                                        |                 
|                                        |                  | $49,529                         | 100.0%                             
|                                        |                 

As of September 30, 2004, the Company had a remaining
reinsurance recoverable of $1.1 million relating to a claim for an insured
involving multiple policies written over multiple years beginning in 1998. The
Company settled this claim in February 2004, but has not yet finalized the
reinsurance recoverable with its reinsurer. The Company believes that resolution
of this reinsurance recoverable will not have a material adverse impact on its
results of operations.

As of September 30, 2004, the Company had $8,000,000 in aggregate
reinsurance recoverable due from its  catastrophic loss reinsurers related to these
hurricanes as follows: American Agricultural Insurance Company,  Converium Reinsurance
(NA), Inc., Everest Reinsurance Company, Shelter Mutual Insurance Company, Hannover Re
(Bermuda) Ltd, XL Re Ltd., Converium Ltd. (Zurich) and Sirius International Insurance
Corporation.  All of these  reinsurers have statutory surplus of $500 million or greater
and an

19

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A.M. Best rating of "A" (Excellent) or  higher, with the
exception of  Converium Reinsurance (NA) Inc.  and Converium Ltd. (Zurich) which were
downgraded  to  "B-" (Fair) and "B++" (Very Good) by A.M. Best in
2004.  The  participating share of the aggregate $8,000,000  in reinsurance recoverable
from  Converium Reinsurance (NA) Inc. and Converium Ltd. (Zurich) is $1,680,000 and
$1,160,000, respectively, which the Company believes is fully recoverable.

Investments

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 Company outsources the management of its
investment portfolio to Gen Re New England Asset Management Inc.
(NEAMS). In accordance with the asset management agreement between
the Company and NEAMS, all investment transactions are approved by the
Investment Committee of the Company within 60 days of their initiation by NEAMS.

Total cash and investments increased 16.7% to $403.4 million at
September 30, 2004 from $345.7 million at December 31, 2003. This increase
resulted primarily from net cash provided by operating activities of $60.0
million for the first nine months of 2004. Total cash and investments of $403.4
million at September 30, 2004 consisted of $360.0 million in fixed-maturity
securities, $24.1 million in equity securities, consisting of preferred stocks,
common stocks and a mutual fund invested in adjustable rate mortgages, and $19.3
million in cash.

The following summarizes the classifications of the
Companys cash and investments at September 30, 2004:

|(Dollars in thousands)                   | Fair Value |  | AmountReflected onBalance Sheet |         | Percentage ofCash andInvestments |  
|---------------------------------------- | ---------- |  | ------------------------------- | ------- | -------------------------------- | -
|                                         |            |  |                                 |         |                                  |  
|                                        
|Fixed maturities:                        |            | 
|Available for sale:                      |            | 
|U.S. Treasury securities and obligations |            | 
|of U.S. government agencies              |            |  | $                               | 17,372  |                                  | $
|Corporate securities                     |            |  |                                 | 96,568  |                                  |  
|Mortgage-backed securities               |            |  |                                 | 121,729 |                                  |  
|Other-structured securities              |            |  |                                 | 17,184  |                                  |  
|Municipal securities                     |            |  |                                 | 106,893 |                                  |  
|                                         |           
|Total available for sale                 |            |  |                                 | 359,746 |                                  |  
|                                         |           
|Held to maturity:                        |            | 
|U.S. Treasury securities and obligations |            | 
|of U.S. government agencies              |            |  |                                 | 25      |                                  |  
|Corporate securities                     |            |  |                                 | 257     |                                  |  
|                                         |           
|Total held to maturity                   |            |  |                                 | 282     |                                  |  
|                                         |           
|Total fixed-maturity securities          |            |  |                                 | 360,028 |                                  |  
|Equity securities                        |            |  |                                 | 24,150  |                                  |  
|Cash                                     |            |  |                                 | 19,276  |                                  |  
|                                         |           
|Total cash and investments               |            |  | $                               | 403,454 |                                  | $
|                                         |           

The Companys fixed-maturity portfolio of $360.0 million  was 89.2%
of the total cash and investments as of September 30, 2004. Of the  fixed-maturity
portfolio, 97.0% of the securities were rated A or  better by Standard & Poors.
Standard & Poors rates publicly  traded securities in 20 categories ranging from

20

---



AAA to CC. Securities with  ratings from AAA to BBB- (the top ten
categories) are commonly referred to as  having an investment grade rating.

The quality of the fixed-maturity portfolio at September 30,
2004 was as follows:

|                           |                                      |  
|-------------------------- | ------------------------------------ | -
|Standard and Poor's Rating | Percentage ofFixed-MaturityPortfolio |  
|                          
|"AAA"                      | 62.0                                 | %
|"AA"                       | 15.2                                 |  
|"A"                        | 19.8                                 |  
|"BBB"                      | 2.8                                  |  
|Below "BBB"                | 0.2                                  |  
|                           |                                     
|                           | 100.0                                | %
|                           |                                     

As of September 30, 2004, the investment portfolio contained $138.9
million of mortgage-backed, asset-backed and collateralized mortgage
obligations. These securities 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 investments in real estate or mortgage loans in its investment
portfolio as of September 30, 2004.

As of September 30, 2004, the Companys investment
portfolio contained corporate fixed-maturities, common stocks and preferred
stocks with a market value of $118.4 million. A summary of these securities by
industry segment was as follows:

|                       |                                                                                |  
|---------------------- | ------------------------------------------------------------------------------ | -
|Industry Segment       | Percentage of
CorporateFixed-Maturity,Common Stockand PreferredStock Portfolio
|                      
|Consumer, non-cyclical | 25.2                                                                           | %
|Financial institutions | 24.7                                                                          
|Utilities              | 24.1                                                                          
|Communications         | 9.3                                                                           
|Consumer, cyclical     | 7.1                                                                           
|Industrial             | 4.1                                                                           
|Energy                 | 3.1                                                                           
|Basic materials        | 1.7                                                                           
|Technology             | 0.7                                                                           
|                       |                                                                               
|                       | 100.0                                                                          | %
|                       |                                                                               

21

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The Company regularly evaluates its investment portfolio to
identify other-than-temporary impairments of individual securities. The Company
considers many factors in determining if an other-than-temporary impairment
exists, including the length of time and extent to which the market value of the
security has been less than cost, the financial condition and near-term
prospects of the issuer of the security and the Companys ability and
willingness to hold the security until the market value is expected to recover.
The following table contains an analysis of the Companys securities with
gross unrealized losses, categorized by the period that the securities were in a
continuous unrealized loss position as of September 30, 2004:

|                         | Gross Unrealized Losses
|------------------------ | -----------------------
|                         |                        
|(Dollars in thousands)   | NumberofSecurities     
|                         |                        
|                        
|Fixed-maturitysecurities |                        
|Equity securities        |                        
|                         |                        
|                         | $                      
|                         |                        

As of September 30, 2004, the Companys fixed-maturity
investment portfolio had eleven (11) securities with $0.2 million of gross
unrealized losses that were in a continuous unrealized loss position for over
one year. The Company believes that the unrealized loss positions of these
securities are due to changes in market interest rates. All of these securities
were rated A or better by Standard & Poors and were in an
unrealized loss position of less than 3 percent of its cost. Currently, the
Company has the intent and ability to hold these securities until maturity and
expects that the contractual obligations of these securities will be satisfied.

As of September 30, 2004, the Company held fourteen (14) equity
securities with $0.4 million of gross unrealized losses, consisting primarily of
common stocks purchased by the Company in the first nine months of 2004.

In the third quarter of 2004, the Company recorded
other-than-temporary impairments of $1.1 million on certain of its investments
in common stocks that were in a continuous unrealized loss position for more
than six months as of September 30, 2004.

In October 2004, the market value of the Companys common
stock investment in Marsh & McLennan Companies, Inc. declined significantly
below its $0.7 million cost basis as of September 30, 2004. The Company
attributes the market value decline to developments announced to the public in
October 2004. The Company may record other-than temporary impairments on this
security in the fourth quarter of 2004 if the market value of this security does
not fully recover to its cost basis by December 31, 2004.

22

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Liquidity and Capital Resources

Capital Resources. PAGI is a holding company, the principal
asset of which is the common stock of Penn-America Insurance Company. At
September 30, 2004, PAGIs capital structure consisted of common
stockholders equity of $140.5 million and junior subordinated debentures
of $30.0 million. The following table summarizes the capital resources:

|(In thousands)                 | September 30,2004 |  | December 31,2003 |        
|------------------------------ | ----------------- |  | ---------------- | -------
|                              
|                               |                   |  |                  |        
|Stockholders' equity           |                   |  | $                | 140,458
|Junior subordinated debentures |                   |  |                  | 30,000 
|                               |                   | 
|Total capital                  |                   |  | $                | 170,458
|                               |                   | 

Stockholders equity increased 7.4% to $140.5 million at
September 30, 2004 compared with $130.8 million at December 31, 2003 due
primarily to net income of $11.6 million for the first nine months of 2004,
partially offset by dividends paid of $2.7 million in the first nine months of
2004.

The Company continually evaluates the adequacy and mix of its
capital resources. The Companys strategy is to maintain capital at an
adequate level to support its insurance operations, while achieving its 12% to
15% ROE financial goal over the long-term.

Liquidity. PAGIs principal source of cash to meet
short-term and long-term liquidity needs, including the payment of dividends to
stockholders, corporate expenses and interest on its junior subordinated
debentures, is dividends from Penn-America Insurance Company. PAGI has no
planned capital expenditures that could have an impact on its long-term
liquidity needs.

Penn-America Insurance Companys principal sources of funds
are underwriting operations, investment income and proceeds from sales and
redemptions of investments. Funds are used by Penn-America Insurance Company and
Penn-Star Insurance Company principally to pay claims and operating expenses, to
purchase investments and to make dividend payments to PAGI. PAGIs future
liquidity is dependent on the ability of Penn-America Insurance Company to pay
dividends to PAGI.

The Companys insurance subsidiaries are restricted by
statute as to the amount of dividends that they may pay without the prior
approval of regulatory authorities. Penn-America Insurance Company may pay
dividends to PAGI without advance regulatory approval only from unassigned
surplus and only to the extent that all dividends in the past twelve months do
not exceed the greater of 10% of total statutory surplus, or statutory net
income for the prior year. Using these criteria, the available ordinary dividend
for 2004 is $12,196,000. For the nine months ended September 30, 2004, there
were no dividends paid by Penn-America Insurance Company to PAGI. Penn-America
Insurance Companys ability to pay future dividends to PAGI without advance
regulatory approval is dependent upon maintaining a positive level of unassigned
and statutory surplus, which in turn, is dependent upon Penn-America Insurance
Company and Penn-Star Insurance Company generating net income in excess of
dividends to PAGI. As of September 30, 2004, Penn-America Insurance
Companys statutory surplus was $131,663,000 and included unassigned
surplus of $46,123,000.

Penn-America Insurance Company and Penn-Star Insurance Company
are required by law to maintain a certain minimum level of statutory surplus.
Statutory surplus is calculated by subtracting total liabilities from total
assets. The National Association of Insurance Commissioners adopted risk-based
capital standards designed to identify property and casualty insurers that may
be inadequately capitalized based on inherent risks of each insurers
assets and liabilities and its mix of net written premiums. Insurers falling
below a calculated threshold may be subject to varying degrees of regulatory
action. As of December 31, 2003, the statutory surplus of Penn-America Insurance
Company and Penn-Star Insurance

23

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Company was in excess of the prescribed  risk-based capital requirements.
Penn-America Insurance Companys statutory  surplus at December 31, 2003 was
$121,960,000 and its regulatory action level  was $30,034,000. Penn-Star Insurance Companys
statutory surplus at  December 31, 2003 was $42,232,000 and its regulatory action level
was  $11,256,000.

Net cash provided by operating activities increased to $60.0
million for the nine months ended September 30, 2004 compared with $37.3 million
for the nine months ended September 30, 2003. This growth was due primarily to
the increase of cash received from collections of premiums for the first nine
months of 2004 compared with the same period in 2003.

Net cash used by financing activities was $2.3 million for the
nine months ended September 30, 2004 as compared to $13.8 million provided by
financing activities for the nine months ended September 30, 2003. The cash used
by financing activities for the nine months ending September 30, 2004 was
primarily due to dividends paid of $2.7 million, partially offset by cash
received from the issuance of stock of $0.5 million. The cash provided by
financing activities for the nine months ended September 30, 2003 was due
primarily to the junior subordinated debentures issued by the Company, which
resulted in net proceeds of $14.5 million, which was partially offset by
dividends paid of $1.9 million.

As a result of cash provided by operating activities, cash used
by investing activities was $50.4 million for the nine months ended September
30, 2004 compared with $29.4 million for the nine months ended September 30,
2003.

The Company continually evaluates its short and long-term
liquidity. The Company has generated positive cash flows from operations and
acquired capital resources to support its liquidity. The Company believes that
cash flows from operations and strategy of matching its investment maturities
with liability durations will continue to support its short-term and long-term
liquidity.

Contractual Obligations. The Company's contractual obligations have not
materially changed from that identified at December 31, 2003.

24

---



Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

Market risk is the potential economic loss principally arising
from adverse changes in the market value of financial instruments. The major
component of market risk affecting the Company is interest rate risk related to
its investment portfolio.

Interest Rate Risk. Interest rate risk is the Companys
underlying exposure to an economic loss from changes in market interest rates.
The Companys investment portfolio included fixed-maturity securities,
preferred stocks and a mutual fund invested in adjustable rate mortgages with a
market value of $366.0 million at September 30, 2004 that is subject to interest
rate risk. The Company manages its exposure to interest rate risk on investments
through a disciplined asset/liability matching and capital management process.
In the management of this risk, the characteristics of duration, credit and
variability of cash flows are critical elements. These risks constantly are
assessed and balanced within the context of the Companys liability and
capital position.

The Companys market risk associated with exposure to
interest rate risk has not materially changed from that identified at December
31, 2003.

Equity Price Risk. As of September 30, 2004, the Companys
investments in equity securities consist of common stocks of $18.2 million,
preferred stocks of $3.4 million and a mutual fund invested in adjustable rate
mortgages of $2.5 million. The market value of the Companys investments in
preferred stocks and a mutual fund invested in adjustable rate mortgages
totaling $6.0 million are primarily affected by changes in interest rates. The
Companys exposure to equity price risk is primarily attributable to its
investments in common stocks of $18.2 million, which were acquired in the first
nine months of 2004.

The table below illustrates the sensitivity of the market value
of the Companys investments in common stocks to selected hypothetical
changes in market prices as of September 30, 2004. The selected scenarios are
not predictions of future events, but rather illustrative of the effect that
such events may have on the market value of the Companys investments in
common stocks and stockholders equity.

|(Dollars in thousands)              | EstimatedMarket Value of |  | EstimatedChange in |        | HypotheticalPercentageIncrease(Decrease) inStockholders |  
|----------------------------------- | ------------------------ |  | ------------------ | ------ | -------------------------------------------------------- | -
|Hypothetical Change in Market Price | Common Stocks            |  | Market Value       |        | Equity                                                   |  
|                                    |                          |  |                    |        |                                                          |  
|                                   
|20% price increase                  |                          |  | $                  | 21,803 |                                                          | $
|10% price increase                  |                          |  |                    | 19,986 |                                                          |  
|No change                           |                          |  |                    | 18,169 |                                                          |  
|10% price decrease                  |                          |  |                    | 16,352 |                                                          |  
|20% price decrease                  |                          |  |                    | 14,535 |                                                          |  
|                                   

25

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Item 4. Controls and Procedures

As of the end of the period covered by this report, an
evaluation was performed under the supervision and with the participation of the
Companys management, including the President and CEO and Senior Vice
President, CFO and Treasurer, of the effectiveness of the design and operation
of the Companys disclosure controls and procedures. Based on that
evaluation, the Companys management, including the President and CEO and
Senior Vice President, CFO and Treasurer, concluded that the Companys
disclosure controls and procedures were effective as of the end of the period
covered by this report.

During the last fiscal quarter, there have been no changes in
the Companys internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.

26

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PART II

Item 1. Legal Proceedings  None

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 
None

Item 3. Defaults Upon Senior Securities None

Item 4.  Submission of Matters to a Vote by Security Holders  None

Item 5. Other Information

| | On
October 15, 2004, the Company announced a proposed business  combination with United
National Group, Ltd. (UNGL), which will be renamed  United America Indemnity, Ltd. (UAI)
after closing. In accordance with the  merger agreement, each publicly-held share of the
Company will be exchanged for  $15.375 of value, consisting of $13.875 in UAI class A
common shares and $1.50  in cash. Separately, UNGL proposed to acquire Penn Independent
Corporation,  which is 100% owned by the Saltzman family. The transactions are expected
to  close during the first quarter of 2005 and are subject to several conditions and
contingencies including regulatory approvals and the affirmative vote of the
shareholders of UNGL and PAGI. Additional details on the proposed business  combination
will be provided to shareholders in a joint proxy  statement/prospectus to be filed with
the Securities and Exchange Commission by  Penn-America and UNGL and sent to shareholders
of each company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 6. Exhibits

| | An
Exhibit Index  has been filed as part of this report beginning on page E-1.
| | ------------------------------------------------------------------------------

27

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SIGNATURES

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: November 5, 2004 |  | By: /s/ Jon S. Saltzman 
|                       |  | Jon S. Saltzman         
|                       |  | President and           
|                       |  | Chief Executive Officer 
|                       |  |                         
|                       |  |                         
|                       |  |                         
|                       |  | By: /s/ Joseph F. Morris
|                       |  | Joseph F. Morris        
|                       |  | Senior Vice President,  
|                       |  | Chief Financial Officer 
|                       |  | and Treasurer           

28

---



Exhibit Index

|ExhibitNumber |  | Description of Exhibit
|------------- |  | ----------------------

|2.1 |  | Agreement
and Plan of Merger, dated as of October 14, 2004, by and among United National Group,
Ltd., U.N. Holdings II,  Inc., Cheltenham Acquisition Corp. and Penn-America Group, Inc.,
filed as Exhibit 2.1 to the Companys Current Report on  Form 8-K dated October 15,
2004 and hereby incorporated by reference.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.1 |  | Voting
Agreement, dated as of October 14, 2004, by and among the Penn-America Group, Inc., U.N.
Holdings (Cayman), Ltd.,  U.N. Co-Investment Fund I (Cayman), L.P., U.N. Co-Investment
Fund II (Cayman), L.P., U.N. Co-Investment Fund III (Cayman),  L.P., U.N. Co-Investment
Fund IV (Cayman), L.P., U.N. Co-Investment Fund V (Cayman), L.P., U.N. Co-Investment Fund
VI  (Cayman), L.P., U.N. Co-Investment Fund (Cayman) VII, L.P., U.N. Co-Investment Fund
VIII (Cayman), L.P., and U.N.  Co-Investment Fund IX (Cayman), L.P., filed as Exhibit
10.1 to the Companys Current Report on Form 8-K dated October 15,  2004 and hereby
incorporated by reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2* |  | Endorsement
No. 1 to Property and Casualty Excess of Loss Reinsurance Agreement between Penn-America
Insurance Company,  Penn-Star Insurance Company, Penn-Patriot Insurance Company and
American Re-Insurance Company effective January 1, 2004.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3* |  | Endorsement
No. 2 to Property and Casualty Excess of Loss Reinsurance Agreement between Penn-America
Insurance Company,  Penn-Star Insurance Company, Penn-Patriot Insurance Company and
American Re-Insurance Company effective July 22, 2004.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4* |  | Endorsement
No. 1 effective to Property and Casualty Clash Excess of Loss Reinsurance Agreement
between Penn-America  Insurance Company, Penn-Star Insurance Company, Penn-Patriot
Insurance Company and American Re-Insurance Company effective  January 1, 2004.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5* |  | Endorsement
No. 2 to Property and Casualty Clash Excess of Loss Reinsurance Agreement between
Penn-America Insurance  Company, Penn-Star Insurance Company, Penn-Patriot Insurance
Company and American Re-Insurance Company effective July 22,  2004.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.6* |  | Endorsement
No. 1 to Certified Terrorism Loss Aggregate Quota Share Reinsurance Agreement between
Penn-America Insurance  Company, Penn-Star Insurance Company, Penn-Patriot Insurance
Company and American Re-Insurance Company effective January  1, 2004.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.7* |  | Endorsement
No. 2 to Certified Terrorism Loss Aggregate Quota Share Reinsurance Agreement between
Penn-America Insurance  Company, Penn-Star Insurance Company, Penn-Patriot Insurance
Company and American Re-Insurance Company effective July 22,  2004.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.8* |  | Termination
Endorsement to the Property Catastrophe Excess of Loss Reinsurance Contract between
Penn-America Insurance  Company, Penn-Star Insurance Company, and Penn-Patriot Insurance
Company and Converium Ltd. (Subscribing Reinsurer)  effective October 1, 2004.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.9* |  | Endorsement
No. 1 to the Property Catastrophe Excess of Loss Reinsurance Contract between
Penn-America Insurance Company,  Penn-Star Insurance Company, and Penn-Patriot Insurance
Company and Converium Ltd. (Subscribing Reinsurer) effective  October 1, 2004.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

E-1

---



|ExhibitNumber |  | Description of Exhibit
|------------- |  | ----------------------

|10.10* |  | Property
Catastrophe Second Reinstatement Excess of Loss Reinsurance Contract between subscribing
Reinsurers and  Penn-America Insurance Company, Penn-Star Insurance Company, and
Penn-Patriot Insurance Company effective October 1, 2004  to December 31, 2004.
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|31.1* |  | Certification
of Chief Executive Officer as adopted pursuant to Section 302(a) of Sarbanes-Oxley Act of
2002.
|----- |  | -------------------------------------------------------------------------------------------------------------

|31.2* |  | Certification
of Chief Financial Officer as adopted pursuant to Section 302(a) of Sarbanes-Oxley Act of
2002.
|----- |  | -------------------------------------------------------------------------------------------------------------

|32.1* |  | Certification
of Chief Executive Officer of Penn-America Group, Inc. dated November 5, 2004 in
accordance with 18 U.S.C.  Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|32.2* |  | Certification
of Chief Financial Officer of Penn-America Group, Inc. dated November 5, 2004 in
accordance with 18 U.S.C.  Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

_________

* Filed herewith

E-2

---