Document:

EMPLOYEE BONUS PLAN

                         Penn-America Insurance Company
                           Penn-Star Insurance Company
                                   Hatboro, PA

                            Effective January 1, 2000

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                         Penn-America Insurance Company
                           Penn-Star Insurance Company
                               EMPLOYEE BONUS PLAN

     I. Introduction

Penn-America Insurance Company and Penn-Star Insurance Company (hereinafter
collectively "the Company") want to provide employees with a bonus program
(where appropriate) that grants employees non-qualified stock options.
The Company has, therefore, developed the Employee Bonus Plan ("the Plan").(1)

The Plan is an annual program providing opportunities for eligible employees to
earn non-qualified stock options based on both overall Company and individual
performance during the preceding fiscal year. The Plan demonstrates the
Company's appreciation to its employees. Its purpose is two-fold: to foster
interest in the growth of the Company and afford employees recognition for a job
well done during the past year. This Plan is an integral part of the total
compensation opportunity offered by the Company to its employees.

The Plan is based on the 1993 Stock Incentive Plan ("the 1993 Plan), as amended
and restated April 4, 1994. It becomes effective January 1, 2000; and like the
1993 Plan, the Plan will not continue after April 3, 2004.

The Plan has been submitted to, and approved by, the Board of Directors ("the
Board") of the Company's parent insurance holding company, Penn-America Group,
Inc. ("PAGI"), through its Compensation and Stock Option Committee ("the
Committee").

     II. Participation

Management of the Company, via the President, shall present recommendations to
the Committee and the Board relative to those entitled to participate in the
Plan. The Committee and the Board ultimately determine participation in this
Plan.

_____________________
1 Management may also award employees cash as part of any employee bonus in a
given year. The cash component of any such bonus is left to the discretion of
management and does not fall within this Plan or the 1993 Stock Incentive (as
amended and restated April 4, 1994), on which this Plan is based.

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     III. Establishment of Parameters

At the time the parameters for the Key Employee Incentive Plan and the
respective fiscal year budget are presented, the President of the Company will
present to the Committee parameters recommended by management for a bonus under
this Plan, if appropriate, for the next fiscal year. The Committee will then
adopt and recommend to the Board parameters relative to the grant of
non-qualified stock options that include, but are not limited to (i) the amount
of non-qualified stock options available under the Plan for that year, (ii) the
individuals entitled to participate in the Plan for that year, (iii) the vesting
period of the non-qualified stock options, if any, for that year, (iv) the date
of grant for non-qualified stock options, if any, for that year, (v) the time
within which employees have to exercise the non-qualified stock options, if any,
for that year, (vi) the date of valuation of the non-qualified stock options, if
any, for that year, and (vii) such other matters related to the operation of the
Plan. A copy of the parameters applicable to the current year - i.e., 1999 - is
attached as Exhibit 1. On approval by the Board, the parameters will define and
establish the terms of the grant of non-qualified stock options to employees as
a bonus for the year.

     IV. Distribution of Employee Bonuses

Subject to approval and adoption by the Committee and the Board, the President
will instruct the managers relative to the parameters of bonuses to be awarded
to eligible employees for the year. The managers of each department will
thereafter see that each employee is awarded their bonus, with an explanation as
to the contents of the bonus and the reasons for its issuance. The manager will
document the reasons for the bonus given to the eligible employee.

Compensation payable in PAGI stock options will be distributed for no
consideration on or before April 1, but may be subject to conditions or
restrictions imposed by the Committee.

     V. Miscellaneous Provisions

     Decisions on all matters affecting the implementation, operation,
continuation, modification, or termination of the Plan will be made at the sole
discretion of the Committee or its delegate(s). If any provision of this Plan is
determined to be invalid or unenforceable, said invalid or unenforceable
provision shall be deemed null and void, and this Plan shall continue and shall
be construed in all respects to the extent possible to fulfill the purposes of
the Plan as if such invalid or unenforceable provision was omitted.

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                         Penn-America Insurance Company
                           Penn-Star Insurance Company
                               EMPLOYEE BONUS PLAN

                                 1999 Parameters

     1. Compensation:

     Given the Company's performance this year, the employees' bonus for fiscal
year 1999 (payable in 2000) is based solely on non-qualified stock options,
which serves the duel purpose of encouraging interest in the growth of the
Company while recognizing that employees cannot be rewarded with a cash bonus
during poor Company performance years.

     2. Employees Entitled to Participate:

     All employees actively employed with the Company for one or more years
shall be entitled to participate and receive a bonus for fiscal year 1999.
Normally, all employees currently participating in the Key Employee Incentive
Compensation Plan ("the KEIC Plan") would not be entitled to a bonus under this
Plan. However, given the Company's performance in 1999 and the fact that
employees normally entitled to compensation under the KEIC Plan will not (and
have not) received additional compensation under that plan, an exception is
being made for all employees that fall under the provisions of the KEIC Plan,
BUT FOR Jon S. Saltzman, President, John M. DiBiasi, Executive Vice President,
Underwriting and Marketing, Rosemary R. Ferrero, Chief Financial Officer, Thomas
Bowie, Sr. Vice President, Claims, Garland P. Pezzuolo, Secretary and General
Counsel, and Ransley Lennon, Vice President, Information Technology. These
employees will not receive a bonus under the Plan.

     3. Key Terms of 1999 Bonus:

          (a)  The number of non-qualified stock options afforded each eligible
               employee is based on an individual, eligible employee's salary
               level as of January 1, 2000. Those eligible employees making
               $30,999 or under as of January 1st shall receive 250 options;
               those eligible employees making between $31,000 and $85,000 as of
               January 1, 2000 shall receive 500 options; and Duane Wohlgemuth
               shall receive 1000 options.
          (b)  The options shall be valued at the fair market value of
               Penn-America Group, Inc. common stock as of the close of the
               market on the night before the date of grant;
          (c)  The options shall vest one year after the date of grant;
          (d)  The options shall be exercisable for five (5) years after the
               date the options first vest;
          (e)  Eligible employees will have the option of exercising the options
               via a cashless or regular transaction. In a cashless transaction,
               the employee is ideally entitled in one transaction to exercise
               options and realize the cash

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               gain from the sale of the resulting stock, without having to
               expend any money; and,

          (f)  All parttime employees employed with the Company, so long as they
               are actively employed with the Company a minimum of 20 hours per
               week for one or more years, shall be entitled to participate. The
               number of options to which an eligible parttime employee is
               entitled will be based on annualizing the parttime employee's
               salary and dividing the annualized salary by two (2).

     4. Distribution of Bonus:

     At the first quarterly meeting of the Company in 2000, the President will
     announce the bonus for fiscal year 1999. Thereafter, each manager shall
     meet with each eligible employee and distribute his or her respective
     non-qualified stock option bonus agreement. As soon thereafter as
     practical, a representative from a third party administrator retained by
     the Company to monitor the Plan shall be available to meet with all
     eligible employees to discuss the basics of the Plan, the terms and
     conditions of the employees' bonuses, and to answer any questions the
     employees may have.

                                       5GENERAL AGENCY PROFIT SHARING ADDENDUM

THIS ADDENDUM, effective * forms part of the agreement between PENN-AMERICA
INSURANCE COMPANY and PENN-STAR INSURANCE COMPANY (hereinafter referred to as
"Companies") and [[agency]] (hereinafter referred to as "Agent"), dated
[[date]].

I. INTRODUCTION

     A.   This plan is designed to reward you for your favorable underwriting
          results on a policy year loss ratio basis.

     B.   Payments of your Agency Profit Sharing under this Addendum will be
          made 25% in stock of the Companies' parent, Penn-America Group, Inc.
          ("PAGI") ("PAGI Stock" or "Stock") and 75% in cash though you can
          choose to be paid 50%, 75%, or 100% in shares of stock. Payments will
          be in accordance with the provisions of Section IV below. This change
          applies to Profit Sharing payments made beginning in May of 2000.

     C.   In addition to the amount which you receive for your profit sharing in
          a given year, you are entitled to receive stock options for policy
          years 1999 and later in accordance with the provisions of Section III
          below.

II. HOW YOUR AGENCY QUALIFIES FOR THE PLAN

     A.   There is a two-year waiting period for eligibility owing to loss
          development.

     B.   If you satisfy all requirements, you are eligible for your first
          payment by June 1 of the second year following the year of initial
          eligibility.

     C.   To initially qualify you must have written at least $500,000 total
          calendar year premium according to the Companies' books as of December
          31st.

     D.   To remain eligible in succeeding calendar years, you must write at
          least 90 percent of the previous year's total written premium, subject
          to the $500,000 total premium minimum. This 90 percent requirement is
          waived in any year you write in excess of $1 million in premium.

     E.   You must maintain E&O coverage in conformity with the Companies'
          standards for such coverage.

     F.   You agree that the Companies' records are final.

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III THE PLAN

     A.   Eligible Lines of Business include only the following and will be
          evaluated at the end of the second, third, and fourth years. At the
          end of each year, you will receive one-third (1/3) of the profit
          sharing payment for that year:

          1.   CMP and Garage Liability includes Section II of commercial multi
               peril, liquor liability, garage liability, and when written as
               part of commercial multi peril professional liability classes and
               increased limits general liability.

          2.   Monoline General Liability includes general liability, liquor
               liability, professional liability and increased general liability
               limits when written on a monoline basis.

          3.   Commercial Automobile Liability includes bodily injury, property
               damage, uninsured and underinsured motorists, personal injury
               protection, medical payments, and hired and non-owned coverages.

          4.   Property Business includes Section I of commercial multi peril,
               monoline fire and allied lines, crime, glass, inland marine,
               automobile physical damage, dealers open lot, and garage keepers
               liability.

          NOTE: Any classes not specifically mentioned above are not included in
                the Plan.

     B.   Your loss ratio is calculated on a policy-year basis, earned to
          incurred. Incurred losses include indemnity paid, reserves, and loss
          adjustment expenses and credit for salvage and subrogation.

     C.   Your profit sharing will be calculated for each policy year you
          continue to remain eligible as of March 31; if you qualify, you will
          be paid by June 1.

     D.   The profit calculation includes the following "loss ratios":

               "Desired loss ratio" is the target. A loss ratio below the
               Desired loss ratio will generate profit subject to the Floor. A
               loss ratio above the Desired loss ratio will reduce profit in
               other lines of business subject to the Ceiling.

               "Ceiling loss ratio" - If you are above this figure, the
               calculation will be completed using this figure (a sort of "stop
               loss").

               "Floor loss ratio" - If you are below this figure, the
               calculation will be completed using this figure (a sort of "stop
               gain").

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     E.   Because the policy-year formula is used, there is no need for loss
          carry forwards or stop losses - each year stands alone.

     F.   The "Desired" loss ratio is the ratio which your agency loss ratio
          must be below to be eligible for profit sharing. The "Floor" loss
          ratio is the lowest loss ratio eligible for profit sharing as any loss
          ratio below the floor is calculated using the floor. Similarly, the
          "Ceiling" loss ratio limits the amount by which a loss ratio above the
          ceiling will reduce profits in other classes of business.

     G.   The current annual "Companies' Desired, Floor, and Ceiling Loss
          Ratios" are:

                             Pay Out      Floor       Desired     Ceiling
Class of Business            Year         Ratio       Loss Ratio  Ratio
-----------------            --------     -----       ----------  -------

CMP and Garage Liability     1st Year     12.50%      27.50%      42.50%
                             2nd Year     17.50%      37.50%      57.50%
                             3rd Year     30.00%      47.50%      65.00%

Commercial Auto Liability    1st Year     27.50%      40.00%      52.50%
                             2nd Year     35.00%      47.50%      60.00%
                             3rd Year     37.50%      50.00%      62.50%

Monoline General Liability   1st Year     12.50%      20.00%      27.50%
                             2nd Year     17.50%      25.00%      32.50%
                             3rd Year     25.00%      35.00%      45.00%

Property Business            1st Year     40.00%      50.00%      60.00%
                             2nd Year     40.00%      55.00%      70.00%
                             3rd Year     40.00%      55.00%      70.00%

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<TABLE>
<CAPTION>

EXAMPLE:

Policy Year 1999 - Total Written Premium Volume $1,400,000:
-----------------------------------------------------------
(CMP Liability Written Premium = $300,000)
(Monoline Liability Written Premium = $500,000)
(Commercial Auto Written Premium = $100,000)
(Property Written Premium = $500,000)

                                                                    Profit Calculation:
                                                                    (Subtract commission paid from
1999                                                                earned premium; multiply by              Per Year
Policy                                                              difference between Companies             Pay Out Value
Year                                   Company         Agency       Desired Loss Ratio and Agency            (1/3 of 1/2 agency
Valued       Class of                  Desired         Actual       Actual Loss Ratio; divide by half to     portion) of
As Of        Business                Loss Ratio       Loss Ratio    establish value of Agency portion)       expected profit
-----        --------                ----------       ----------    ---------------------------------        ---------------

<S>         <C>                      <C>              <C>          <C>                                       <C>
3/31/01*     CMP and Garage           27.50%           15.00%       Earned Premium = $300,000                 $4,875
             Liability                                              - $66,000 commission paid
                                                                    $234,000 x 12.5% = $29,250
                                                                    $29,250/2 = $14,625

             Monoline General         20.0%            12.5%        Earned Premium = $500,000                 $4,875
             Liability                                              - $110,000 commission paid
                                                                    $390,000 x 7.5% = $29,250
                                                                    $29,295 / 2 = $14,625

             Commercial Auto          40.0%            30.0%        Earned Premium = $100,000                 $1,300
                                                                    - $22,000 commission paid
                                                                    $78,000 x 10.0% = $7,800
                                                                    $7,800 / 2 = $3,900

             Property                 50.0%            55.0%        Earned Premium = $500,000                 $(3,250)
                                                                    - $110,000 commission paid
                                                                    $390,000 x -5.0% = $(19,500)
                                                                    $(19,500) / 2 = $(9,750)
                                                                    1999 First Payout                          $7,800
                                                                                                               ------

*Note: First Year loss ratios below the Floor will be evaluated at the Floor
       percentage above. First Year loss ratios above the Ceiling will be
       evaluated at the Ceiling percentage above.

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EXAMPLE (Cont.):
                                                                    Profit Calculation:
                                                                    (Subtract commission paid from
1999                                                                earned premium; multiply by               Per Year
Policy                                                              difference between Companies              Pay Out Value
Year                                   Company          Agency      Desired Loss Ratio and Agency             (1/3 of 1/2 agency
Valued       Class of                  Desired          Actual      Actual Loss Ratio; divide by half to      portion) of
As Of        Business                Loss Ratio       Loss Ratio    establish value of Agency portion)        expected profit

3/31/02*     CMP and Garage           37.5%            20.0%        Earned Premium = $300,000                 $6,825
             Liability                                              - $66,000 commission paid
                                                                    $234,000 x 17.5% = $40,950
                                                                    $40,950 / 2 = $20,475

             Monoline General         25.0%            17.5%        Earned Premium = $500,000                 $4,875
             Liability                                              - $110,000 commission paid
                                                                    $390,000 x 7.5% = $29,250
                                                                    $29,250 / 2 = $14,625

             Commercial Auto          47.5%            35.0%        Earned Premium = $100,000                 $1,625
             Liability                                              - $22,000 commission paid
                                                                    $78,000 x 12.5% = $9,750
                                                                    $9,750 / 2 = $4,875

             Property                 55.0%            40.0%        Earned Premium = $500,000                 $9,750
                                                                    - $110,000 commission paid
                                                                    $390,000 x 15% = $58,500
                                                                    $58,500 / 2 = $29,250

                                                                    1999 Second Payout                        $23,075
                                                                                                              -------

*Note:   Second Year loss ratios  below the Floor will be evaluated at the Floor
         percentage  above.  Second Year loss ratios  above the Ceiling  will be
         evaluated at the Ceiling percentage above.

3/31/03*     CMP and Garage           47.5%            30.0%        Earned Premium = $300,000                 $6,825
             Liability                                              - $66,000 commission paid
                                                                    $234,000 x 17.5% = $40,950
                                                                    $40,950 / 2 = $20,475

             Monoline General         35.0%            25.0%        Earned Premium = $500,000                 $6,500
             Liability                                              - $110,000 commission paid
                                                                    $390,000 x 10.0% = $39,000
                                                                    $39,000 / 2 = $19,500

             Commercial Auto          50.0%            40.0%        Earned Premium = $100,000                 $1,300
             Liability                                              - $220,000 commission paid
                                                                    $78,000 x 10.0% = $7,800
                                                                    $7,800 / 2 = $3,900

             Property                 55.0%            40.0%        Earned Premium = $500,000                 $9,750
                                                                    - $110,000 commission paid
                                                                    $390,000 x 15.0% = $58,500
                                                                    $58,500 / 2 = $29,250

                                                                    1999 Third Payout                         $24,375
                                                                                                              -------

*Note:   Third Year loss ratios  below the Floor will be  evaluated at the Floor
         percentage  above.  Third Year loss ratios  above the  Ceiling  will be
         evaluated at the Ceiling percentage above.

                                 Total three-year Value of Pay Out for Policy Year 1999:                      $55,250
                                                                                                              =======

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</TABLE>
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          The above examples only reflect calculations and payments for the 1999
          policy year. It is possible that you may be paid on more than one
          policy-year statement in a given year as calculations for subsequent
          policy-year statements are made assuming you maintain eligibility each
          year.

          Example: In 2003 you could be paid profit sharing payments based upon
          property experience from policy years 1999, 2000, and 2001.

     H.   In addition to the amount to which you are entitled for your profit
          sharing in a given year, you are entitled to receive stock options
          based on the following formula: Your profit sharing for the policy
          years 1999 and later times 10% divided by the stock price on the date
          of grant. The options will vest as of the date of grant and will be
          exercisable for a period of five (5) years from the date of grant.

          For example, if your payments for the 1999 policy year in 2001, 2002,
          and 2003 are $7,800, $23,075, and $24,375 and the stock price on March
          31, 2001, 2002, and 2003 is $12, $14, and $16, your options would be
          calculated as follows:

<TABLE>
<CAPTION>

                                                          Stock
                   Profit                                 Price     # of
Policy    Pmt      Sharing        Formula    Divided     3/31 of   Options     Vesting    Exercisable
Year      Year     Amount            %         by       Pmt Year   Granted      Date        Through
-----------------------------------------------------------------------------------------------------

<S>     <C>     <C>        <C>    <C>                   <C>         <C>      <C>         <C>
1999     2001    $7,800     X      10%         /         $12         65       3/31/01     3/31/06
1999     2002    $23,075    X      10%         /         $14         165      3/31/02     3/31/07
1999     2003    $24,375    X      10%         /         $16         152      3/31/03     3/31/08
                                                                     ---

          Total three-year options granted for policy year 1999      382
                                                                     ===

</TABLE>

IV. PAYMENTS TO YOU UNDER THE PLAN

     A.   Allocation of Profit Sharing between stock and cash:

          1)   You may, at your option, exercisable by written notice to the
               Companies received by us on or before March 15, take either 25%,
               50%, 75%, or 100% of your Profit Sharing in shares of PAGI stock.

          2)   For purposes of the calculation, any portion of your payment in
               PAGI Stock will be valued as of the median between the bid and
               asked price for the Stock as of the March 31 profit sharing
               calculation date. If the stock markets are closed on that date,
               the valuation will be made on the same basis as of the nearest
               previous business day.

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          3)   Notwithstanding the above, if the value of your Profit Sharing is
               less than $2,500, payment of the Profit Sharing will be made
               entirely in cash.

     B.   Payment Due Date:

          1)   Your Profit Sharing will be distributed to you by June 1.

          2)   Shares of stock distributed to you will be delivered free of all
               commissions and transaction costs.

     C.   Your Profit Sharing will be subject to income tax in accordance with
          applicable IRS laws and regulations. Stock distributed to you under
          the Plan may not be sold until after August 1 of the same year and
          will be legended accordingly.

V. TERMINATION

     A.   If your General Agency Agreement is terminated by either party, the
          program also terminates, with the final calculation and pro-rata
          payment made at June 1 of the following year.

     B.   The plan may be terminated or amended by us at any time without cause,
          but existing obligations will be honored.

     C.   Profit Sharing Upon Termination. Upon termination of this Addendum for
          any reason:

          1)   Before the end of a full calendar year, its terms and conditions
               shall apply to all prior calendar years in which this Addendum
               was in effect, without proration and without allowance for the
               portion of the year in which this Addendum was terminated; and

          2)   The Agency's right to Profit Sharing shall cease on December 31
               of the year preceding the year in which termination is effective,
               notwithstanding the continuance in force and effect of any
               unexpired policies or binders after such calendar year.

          3)   In the event of termination of the General Agency Agreement by
               either party, this Addendum shall terminate simultaneously and
               the Agency shall not be eligible for Profit Sharing in the
               termination or succeeding years.

     D.   If the General Agency Agreement is terminated by us because of a
          breach of its terms by you and/or in accordance with any of the terms
          of paragraphs 9 (iii) or (iv) of the General Agency Agreement, there
          shall be no further calculations made, nor profit sharing payments
          made.

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<PAGE>
VI. GENERAL

     This Profit Sharing Program constitutes the entire and exclusive agreement
     between Companies and Agency on the subjects of profit sharing (contingent
     commissions), and supersedes any and all prior or contemporaneous
     agreements, representations, and understandings, written and oral, on these
     subjects. The undersigned signatories hereby warrant that they have full
     power and authority to execute this Addendum on behalf of the respective
     parties thereto.

IN WITNESS WHEREOF, this Addendum has been executed in duplicate by the parties
hereto.

DATE:

PENN-AMERICA INSURANCE COMPANY
PENN-STAR INSURANCE COMPANY               [[agency]]

By:                                           By:
John M. DiBiasi, CPCU                               [[attention]]
Executive Vice President                            [[title2]]

                                                                               8

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