content: SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C. 20549
                                      Form 10-Q
  
  (Mark One)
  
  (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
  
  For the quarterly period ended March 31, 1998
                                             
  
                                         OR
  
  ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES 
      EXCHANGE ACT OF 1934
  
  For the transition period from_________________to_________________
  
                           Commission file number 0-22316
                                                  -------
  
                              Penn-America Group, Inc.
                           ----------------------------
               (Exact name of registrant as specified in its charter)
  
  
        Pennsylvania                                    23-2731409
   -----------------------------               -------------------------------
  (State or other jurisdiction of             (I.R.S. Employer Identification No.)
   incorporation or organization)
  
  
                  420 South York Road, Hatboro, Pennsylvania 19040
              -------------------------------------------------------
            (Address of principal executive offices including zip code)
  
                                    (215)443-3600
                ---------------------------------------------------            
                (Registrant's telephone number, including area code)
  
  
  Indicate by check mark whether the registrant (1) has filed all reports required
  to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
  the  preceding  12 months  (or for such other  period  that the  registrant  was
  required  to file  such  reports)  and  (2)  has  been  subject  to such  filing
  requirements for the past 90 days. Yes X No .
  
  At May 13, 1998,  9,921,450  shares of the registrant's  common stock,  $.01 par
  value, were outstanding.
  
                                       Page 1
  
  <PAGE>
  
  
  
  
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                                        Index
  
                                                                       Page Number
  
  Part I - Financial Information
  
           Consolidated Unaudited Balance Sheets - March 31, 1998 and
                  December 31, 1997                                           3
  
           Consolidated Unaudited Statements of Earnings - For the three
                  months ended March 31, 1998 and 1997                        4
  
           Consolidated Unaudited Statement of Stockholders' Equity -
                  For the three months ended March 31, 1998                   5
  
           Consolidated Unaudited Statements of Cash Flows -
                  For the three months ended March 31, 1998 and 1997          6
  
           Notes to Unaudited Consolidated Financial Statements               7
  
           Management's Discussion and Analysis of Financial Condition
                  and Results of Operations                                  10
  
  Part II - Other Information                                                13
  
  
                                       Page 2
  
  <PAGE>
  
  
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                             Consolidated Balance Sheets
                                     (Unaudited)
                                   (In thousands)
  <TABLE>
  <CAPTION>
                                                                        March 31,          December 31,
                                                                           1998                1997
                                                                        -----------         ----------
  <S>                                                                      <C>                 <C>
  ASSETS
  Investments:
      Fixed Maturities:
        Available for sale, at fair value 
       (amortized cost 1998 $99,257; 1997 $89,185)                        $ 99,891             $ 89,979
        Held to maturity, at amortized cost
       (fair value 1998 $39,957; 1997 $47,034)                              39,793               46,842
      Equity securities, at fair value 
      (cost 1998 $25,577; 1997 $25,662)                                     28,182               27,380
      Short-term investments, at cost, which approximates fair value         8,001               11,455
                                                                         ----------            ----------
        Total Investments                                                  175,867              175,656
  Cash                                                                       5,772                2,163
  Receivables:
      Accrued investment income                                              2,144                1,973
      Premiums receivable, net                                              13,197               12,414
      Reinsurance recoverable                                               17,018               16,605
                                                                          ---------            ----------
        Total receivables                                                   32,359               30,992
  Prepaid reinsurance premiums                                               2,926                3,065
  Deferred policy acquisition costs                                          8,523                8,563
  Capital leases                                                             1,839                1,865
  Deferred income tax                                                        2,249                2,302
  Income taxes recoverable                                                      --                   40
  Other assets                                                                 560                  511
                                                                       ============            ==========
        Total assets                                                     $ 230,095            $ 225,157
                                                                       ============            ==========
  
  LIABILITIES AND STOCKHOLDERS' EQUITY
  Liabilities:
    Unpaid losses and loss adjustment expenses                            $ 86,195             $ 84,566
    Unearned premiums                                                       35,765               36,173
    Accounts payable and accrued expenses                                    1,554                2,338
    Capitalized lease obligations                                            1,888                1,920
    Income taxes payable                                                     1,285                   --
    Other liabilities                                                        3,331                2,853
                                                                        -----------            ----------
          Total liabilities                                                130,018              127,850
                                                                        -----------            ----------
  
  Stockholders' equity:
    Preferred stock, $.01 par value; authorized 2,000,000 shares;
      none issued                                                               --                   --
    Common stock, $.01 par value, authorized 20,000,000 shares,
        issued and outstanding 1998, 9,901,013 shares and
      1997, 9,883,384 shares                                                    99                   99
    Additional paid-in capital                                              68,409               68,221
    Accumulated other comprehensive income                                   2,106                1,649
    Retained earnings                                                       29,934               27,849
                                                                           --------            ---------
                                                                           100,548               97,818
    Unearned compensation from restricted stock awards                       (471)                (511)
                                                                           --------            ---------
          Total stockholders' equity                                       100,077               97,307
                                                                          ---------            ---------
  
          Total liabilities and stockholders' equity                     $ 230,095            $ 225,157
                                                                         ==========           ==========
  
  </TABLE>
  See accompanying notes to unaudited consolidated financial statements.
                                       Page 3
  
  <PAGE>                                
                         PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                         Consolidated Statements of Earnings
                                     (Unaudited)
  
                          For the three months ended March
                                31, 1998 and 1997
                        (In thousands, except per share data)
  <TABLE>
  <CAPTION>
  
                                                                           Three months ended
                                                                                March 31,
                                                                   ------------------------------
                                                                           1998           1997
                                                                         --------       -------
  <S>                                                                       <C>           <C>
  Revenues:
      Premiums earned                                                     $ 23,035      $ 20,899
      Net investment income                                                  2,775         1,940
      Net realized investment (losses) gains                                  (34)             1
                                                                          --------        -------
        Total revenues                                                      25,776         22,840
                                                                          --------        -------
  
  Losses and expenses:
      Losses and loss adjustment expenses                                   14,291         13,217
      Amortization of deferred policy acquisition costs                      6,370          5,698
      Other underwriting expenses                                            1,394          1,144
      Interest expense                                                          44            192
                                                                          --------         -------
        Total losses and expenses                                           22,099         20,251
                                                                          --------         -------
  
  Earnings before income tax                                                 3,677          2,589
  
  Income tax                                                                 1,097            839
                                                                          --------         --------
  
  Net earnings                                                             $ 2,580         $ 1,750
                                                                          ========         =========
  
  Net earnings per share:
         Basic                                                               $0.26           $0.26     
         Dilute                                                              $0.26           $0.26
  
  Weighted average number of shares used in calculating per share data:
        Basic                                                                9,896           6,689
        Diluted                                                             10,009           6,780
  
  Cash dividends per share
                                                                             $0.05           $0.04
  
  </TABLE>
  See accompanying notes to unaudited consolidated financial statements
                                       Page 4
  <PAGE>
  
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                   Consolidated Statement of Stockholders' Equity
                                     (Unaudited)
  
                      For the three months ended March 31, 1998
                          (In thousands except share data )
  
  <TABLE>
  <CAPTION>    
                                                                                                          Unearned
                                                                                                        Compensation
                                                                                Accumulated                 From
                                                                   Additional     Other                  Restricted
                                                   Common  Stock    Paid-In    Comprehensive  Retained     Stock                     
                                                   Shares  Amount   Capital      Income       Earnings     Awards             Total
                                                 --------- ------  ----------  ------------- ----------  -----------    -------------
  <S>                                               <C>      <C>      <C>          <C>          <C>          <C>              <C>    
                                                 9,883,384 $ 99    $ 68,221      $ 1,649      $ 27,849     $ (511)         $ 97,307
  Balance at December 31, 1997                                                                               2,580            2,580
  Net earnings
  Other comprehensive income, net of tax:
        Unrealized gains on investments, net of
         reclassification adjustment                                                               457                          457
                                                                                                                        -------------
  Comprehensive income                                                                                                        3,037
                                                                                                                       --------------
  Issuance of common stock                          17,629              188                                                     188
  Amortization of compensation expense
        from restricted stock                                                                                   40               40
  Cash dividends paid                                                                            (495)                         (495)
                                                 =========  ======  ========   ============= ==========  ===========    =============
  Balance at March 31, 1998                      9,901,013  $ 99    $ 68,409     $ 2,106      $ 29,934     $ (471)         $ 100,077
                                                 =========  ======  ========   ============= ==========  ===========    =============
  
  </TABLE>
  See accompanying notes to unaudited financial statements.
                                       Page 6
  <PAGE>     
  
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                        Consolidated Statements of Cash Flows
                                     (Unaudited)
  
                 For the three months ended March 31, 1998 and 1997
                                   (In thousands)
  <TABLE>
  <CAPTION>
                                                                                Three months ended March 31,
                                                                               ------------------------------
                                                                                  1998             1997
                                                                               -----------     -----------
  Cash flows from operating activities:
  <S>                                                                             <C>            <C>        
     Net earnings                                                                $ 2,580         $ 1,750
      Adjustments to reconcile net earnings to net cash provided by
        operating activities:
          Amortization and depreciation expense                                      120              85
          Net realized investment losses (gains)                                      34             (1)
          Deferred income tax                                                      (227)            (55)
          Net increase (decrease) in premiums, prepaid reinsurance premiums
             and unearned premiums                                               (1,052)           1,135
          Net increase in unpaid losses and loss adjustment expenses
             and reinsurance recoverable                                           1,216           3,114
          (Increase) decrease in:
             Accrued investment income                                             (171)           (171)
             Deferred policy acquisition costs                                        39           (495)
             Income tax recoverable                                                   40             249
             Other assets                                                           (80)              37
          Increase (decrease) in:
             Accounts payable and accrued expenses                                 (784)           (782)
             Income taxes payable                                                  1,285             645
             Other liabilities                                                       478             249
                                                                                 --------      ----------
                Net cash provided by operating activities                          3,478           5,760
                                                                                 --------      ----------
  
  Cash flows from investing activities:
      Purchases of equity securities                                             (7,540)           (316)
      Purchases of fixed maturities available for sale                          (22,250)         (8,000)
      Purchases of fixed maturities held to maturity                                 --          (3,028)
      Proceeds from sales of equity securities                                     7,576             197
      Proceeds from sales and maturities of fixed maturities available for sale   12,134           1,000
      Proceeds from maturities and calls of fixed maturities held to maturity      7,096           1,085
      Change in short-term investments                                             3,454           2,100
                                                                                 ---------     ----------
          Net cash provided (used) by investing activities                           470         (6,962)
                                                                                 ---------     ----------
  
  Cash flows from financing activities:
      Issuance of common stock                                                       188             243
      Principal payments on capital lease obligations                                (32)           (27)
      Dividends paid                                                                (495)          (268)
                                                                                 ----------    ----------
          Net cash used by financing activities                                     (339)           (52)
                                                                                 ----------    ----------
  
  Increase (decrease) in cash                                                       3,609        (1,254)
  Cash, beginning of period                                                         2,163          2,979
                                                                                 ===========   ==========
  Cash, end of period                                                             $ 5,772         $1,725
                                                                                 ===========   ==========
  
  Supplemental  disclosure of cash flow  information:  
  Cash paid during the period for:
        Interest                                                                       44            197
  
  Supplemental non-cash disclosure:
        Cost transfer from available for sale to held to maturity                      --          8,002
  
  </TABLE>
  See accompanying notes to unaudited financial statements.
                                       Page 6
  
  <PAGE>
  
  
  
                                                        
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
                Notes to Unaudited Consolidated Financial Statements
  
  Note 1 - Organization and Basis of Presentation
  
           Penn-America Group, Inc. ("PAGI") is an insurance holding company whose
  principal  asset  is  the  common  stock  of  Penn-America   Insurance   Company
  ("Penn-America").  The "Company" refers to PAGI and Penn-America,  as well as to
  Penn-America's  wholly-owned  subsidiary,   Penn-Star  Insurance  Company.  Penn
  Independent  Corporation ("Penn Independent") currently owns approximately 31.2%
  of the outstanding common stock of PAGI.
  
           The accompanying  unaudited consolidated financial statements should be
  read in conjunction  with the financial  statements and notes for the year ended
  December 31,  1997.  In the opinion of  management,  the  financial  information
  reflects all adjustments (consisting only of normal recurring adjustments) which
  are  necessary for a fair  presentation  of the  Company's  financial  position,
  results of  operations,  and cash flows for the interim  periods.  The Company's
  results of operations for interim periods are not necessarily  indicative of the
  results to be expected for the entire year.
  
  Note 2 - Reinsurance
  
           Premiums  earned are net of amounts ceded to reinsurers of $1.9 million
  and $1.8  million for the three  months ended March 31, 1998 and March 31, 1997,
  respectively.  Losses and loss  adjustment  expenses are net of amounts ceded to
  reinsurers of $1.7 million and $1.8 million for the three months ended March 31,
  1998 and March 31, 1997, respectively.
  
  Note 3 - Comprehensive Income
  
           In 1997, the Financial  Accounting Standards Board issued SFAS No. 130,
  "Comprehensive  Income".  This statement was  implemented  retroactively  by the
  Company  at March 31,  1998.  The  statement  requires  that an  enterprise  (a)
  classify  items of other  comprehensive  income by their  nature in a  financial
  statement and (b) display the accumulated balance of other comprehensive  income
  separately from retained  earnings and additional  paid-in capital in the equity
  section of a statement of financial  position.  Accumulated other  comprehensive
  income of the Company  consists  solely of net  unrealized  gains on  investment
  securities.
  
  Page 7
  
  <PAGE>
  
  
  
  
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
                Notes to Unaudited Consolidated Financial Statements
                                     (continued)
  
  The following are components of other comprehensive income (in thousands):
  
  <TABLE>
  <CAPTION>
                                                                                  Three months ended
                                                                                     March 31, 1998
                                                         ------------------------------------------------------------
                                                            Before Tax               Tax                Net of Tax
                                                              Amount               Expense                Amount
                                                         -----------------    -------------------     ---------------
  <S>                                                         <C>                 <C>                      <C>
  Unrealized gains on investments:
      Unrealized holdings gains arising
        during period                                         $ 669                $ (234)                 $ 435
      Add: reclassification adjustment for
        losses realized in net income                            34                   (12)                    22
                                                         =================    ===================     ================
  Other comprehensive income                                  $ 703                $ (246)                 $ 457
                                                         =================    ===================     ================
  
                                                                                  Three months ended
                                                                                     March 31, 1997
                                                         ------------------------------------------------------------
                                                            Before Tax               Tax                Net of Tax
                                                              Amount               Benefit                Amount
                                                         -----------------    -------------------     ---------------
  Unrealized gains on securities:
      Holdings losses arising
        during period                                        $ (805)                $ 274                 $ (531)
      Less: reclassification adjustment for
        gains realized in net income                             (1)                   --                     (1)
      Plus:  accretion of net loss on fixed
        maturities transferred to held to maturity               11                    (4)                     7
                                                         =================    ===================    ================
  Other comprehensive (loss) income                          $ (795)                $ 270                 $ (525)
                                                         =================    ===================     ================
  
  
  </TABLE>
  Comprehensive  income for the three months  ended March 31, 1997 was  $1,225,000
  and included net income of $1,750,000 and other  comprehensive loss, net of tax,
  of $525,000.
  
  Page 8
  
  <PAGE>
  
  
  
  
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
                Notes to Unaudited Consolidated Financial Statements
                                     (continued)
  
  
  Note 4 - Basic and Diluted Earnings Per Share
  
           The following is a reconciliation  of the numerator and denominators of
  the basic and diluted earnings per share computations:
  
                                                     Three months ended March 31,
                                                     -----------------------------
                                                         1998               1997
                                                    -------------      -----------
  Basic EPS:
  
  Net earnings                                         $ 2,580            $ 1,750
                                                    ------------        ----------
  
  Weighted average common shares outstanding             9,896              6,689
                                                    -------------      -----------
  
  Basic EPS                                             $ 0.26             $ 0.26
                                                    ============       ===========
  
  
  Diluted EPS:
  
  Net Earnings                                         $ 2,580            $ 1,750
                                                    ------------        ----------
  
  Weighted average common shares outstanding             9,896              6,689
  
  Additional shares outstanding after the assumed
      exercise of options by applying the treasury 
      stock method                                         113                 91
                                                    -------------      -----------
  Total weighted average common shares outstanding      10,009              6,780
                                                    -------------      -----------
  
  Diluted EPS                                          $ 0.26              $ 0.26
                                                    =============      ===========
  
  
  Page 9
  
  
  <PAGE>
  
  
  
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
          Management's Discussion and Analysis of Financial Condition and
                               Results of Operations
  
  
  Results of Operations
  
           Gross written  premiums  increased  2.6% to $24.6 million for the three
  months ended March 31, 1998 from $24.0  million for the three months ended March
  31, 1997.  The increase  resulted  from 19.9% growth in  commercial  lines gross
  written  premiums  to $17.1  million,  which  was  partially  offset  by a 22.9%
  decrease in personal  auto lines gross  written  premiums to $7.5  million.  The
  increase in commercial lines gross written  premiums was primarily  attributable
  to increased  volume.  The decrease in personal auto lines gross written premium
  was due to actions taken by the Company to improve profitability.  Specifically,
  the  Company  terminated  its  relationship  with one agent and reduced a second
  agent's insurance  automobile writing by one-half.  Additionally,  the Company's
  non-standard  automobile  business grew by more than 100% during the  comparable
  quarter  of 1997  because  of new  legislation  in  California  which  increased
  mandatory coverage in that state.
  
           The  Company is  currently  planning to write new  personal  automobile
  programs in the states of Arizona, North Dakota, Montana, Illinois and Hawaii by
  the third  quarter of 1998. If these new programs are not fully  implemented  by
  the beginning of the third quarter of 1998 due to systems or regulatory  delays,
  it may impact the annual  growth in  automobile  premiums  and  earnings for the
  year.
  
           The Company  announced  that effective May 1, 1998, for new and renewal
  business,  it will  increase  the  commission  paid to its agents on  commercial
  business from 20% to 22%. To date, the Company has not felt competitive pressure
  on commercial premium growth,  especially since the first quarter of 1998 showed
  a 19.9% increase in commercial written premium over the same period in 1997. The
  Company  believes that by increasing  its  commercial  commission  rates at this
  time, its commission structure will remain competitive.
  
           Net  written  premiums  increased  2.6% to $22.8  million for the three
  months ended March 31, 1998 from $22.2  million for the three months ended March
  31, 1997. During the same periods,  net premiums earned increased 10.2% to $23.0
  million from $20.9 million. Net premiums earned increased due to the increase in
  gross written premiums over the past 12 months.
  
           Net  investment  income  increased  43.0% to $2.8 million for the three
  months  ended March 31, 1998 from $1.9  million for the three months ended March
  31, 1997.  This increase  resulted  principally  from growth in invested  assets
  funded primarily by the net proceeds from the Company's secondary stock offering
  in July 1997 and from cash flows from operating activities.
  
  Page 10
  
  <PAGE>
  
  
  
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
           Management's Discussion and Analysis of Financial Condition and
                               Results of Operations
                                     (continued)
  
  
  During the first  quarter of 1998,  the Company  purchased  approximately  $12.7
  million in tax free municipal securities as compared to $649,000 held during the
  comparable  period,  March 31, 1997. The tax equivalent  investment yield of the
  fixed  maturity  portfolio  for the three months ended March 31, 1998 was 6.53%,
  compared  to 6.79% for the three  months  ended  March 31,  1997.  Net  realized
  investment losses before taxes were $34,000 for the three months ended March 31,
  1998,  as compared to net realized  investment  gains before taxes of $1,000 for
  the three months ended March 31, 1997.
  
           Losses and loss adjustment expenses increased 8.1% to $14.3 million for
  the three months ended March 31, 1998,  from $13.2  million for the three months
  ended March 31, 1997, primarily due to an increase in net premiums earned.
  
           Amortization  of deferred policy  acquisition  costs increased 11.8% to
  $6.4 million for the three  months  ended March 31, 1998,  from $5.7 million for
  the three  months ended March 31, 1997.  The  increase  was  attributable  to an
  increase in net premiums earned.
  
           Other  underwriting  expenses  increased  21.9% to $1.4 million for the
  three  months  ended March 31, 1998 from $1.1 million for the three months ended
  March 31, 1997.
  
           The loss ratio  decreased to 62.0% for the three months ended March 31,
  1998,  from 63.2% for the three months ended March 31, 1997. The decrease in the
  loss ratio for the three months ended March 31, 1998 resulted  primarily  from a
  decrease in the  personal  lines auto  physical  damage loss ratio to 64.5% from
  96.8% a year earlier.  The statutory  expense ratio increased  slightly to 32.8%
  for the three months ended March 31, 1998, from 32.4% for the three months ended
  March 31, 1997. The statutory  combined  ratio  decreased to 94.8% for the three
  months  ended March 31,  1998,  from 95.6% for the three  months ended March 31,
  1997.
  
           As a result of the factors  described  above,  the Company's net income
  for the three  months  ended March 31, 1998  increased  47.4% to $2.6 million or
  $0.26 per share (basic and diluted), from $1.8 million or $0.26 per share (basic
  and diluted) for the three months ended March 31, 1997.
  
  
  Liquidity and Capital Resources
  
           PAGI is a holding  company,  the principal asset of which is the common
  stock of Penn-America. PAGI's cash flows depend primarily on dividends and other
  payments from Penn-America. PAGI uses these funds to pay (i) operating expenses,
  (ii)  taxes  and  other  payments  and  (iii)  dividends  to PAGI  stockholders.
  Penn-America's sources of funds consist primarily of premiums, investment income
  and  proceeds  from  sales and  redemptions  of  investments.  Funds are used by
  Penn-America  principally  to pay claims and  operating  expenses,  to  purchase
  investments and to make dividend and other payments to PAGI.
  
  
  Page 11
  <PAGE>
  
  
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
  
           Management's Discussion and Analysis of Financial Condition and
                                Results of Operations
                                     (continued)
  
  
  
           Net cash  provided  by  operating  activities  decreased  39.6% to $3.5
  million for the three  months  ended March 31,  1998,  from $5.8 million for the
  three months ended March 31, 1997,  primarily  due to the  reduction in personal
  lines auto gross written premiums in 1998.
  
           Net cash  provided by investing  activities  was $470,000 for the three
  months ended March 31, 1998,  compared to net cash used by investing  activities
  of $7.0 million for the three months ended March 31, 1997.
  
           Net cash used by financing activities was $339,000 for the three months
  ended March 31, 1997, as compared to $52,000 for the same period in 1997.
  
           The  Company  believes  that it has  sufficient  liquidity  to meet its
  anticipated  insurance  obligations and operating and capital expenditure needs.
  The   Company's   investment   strategy   emphasizes   quality,   liquidity  and
  diversification, as well as total return. With respect to liquidity, the Company
  considers  liability  durations,  specifically  related to loss  reserves,  when
  determining  desired investment  maturities.  In addition,  maturities have been
  staggered   to  produce   cash  flows  for  loss   payments   and   reinvestment
  opportunities.  The average duration of the fixed maturity portfolio as of March
  31, 1998 was approximately 3.0 years.
  
           The Company's  fixed maturity  portfolio of $139.7 million was 79.4% of
  the total investment portfolio as of March 31, 1998.  Approximately 99% of these
  securities were rated "A-" or better by Standard & Poor's or Moody's.  Equities,
  the majority of which consist of preferred stocks,  were $ 28.2 million or 16.0%
  of total investments as of March 31, 1998.
  
           As of March 31, 1998, the investment  portfolio contained $38.6 million
  or 22% of mortgage/asset-backed  obligations.  All of these securities are "AAA"
  rated securities issued by government,  government-related  agencies or publicly
  held corporations;  are publicly traded, and have market values obtained from an
  independent  pricing service.  Changes in estimated cash flows due to changes in
  prepayment  assumptions from the original purchase assumptions are revised based
  on current interest rates and the economic environment. The Company had no other
  derivative  financial  instruments,  real estate or mortgages in the  investment
  portfolio as of March 31, 1998.
  
           The  principal  source of cash to use for the payment of  dividends  to
  PAGI's stockholders is dividends from Penn-America.  Penn-America is required by
  law to maintain a certain minimum surplus on a statutory basis and is subject to
  risk-based capital requirements and regulations under which payment of dividends
  from  statutory  surplus  may  require  prior  approval  from  the  Pennsylvania
  regulatory  authorities.  The  maximum  dividend  that  may be  paid  in 1998 by
  Penn-America  to PAGI  without  prior  approval  of  regulatory  authorities  is
  $9,531,000.
  
  Page 12
  
  <PAGE>
  
  
  
  
  
                      PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
                             PART II. OTHER INFORMATION
  
  
  
  Item 1.       Legal Proceedings - None
  
  Item 2.       Changes in Securities - None
  
  Item 3.       Default Upon Senior Securities - None
  
  Item 4.       Submission of Matters to a Vote by Security Holders -None
  
  Item 5.       Other Information - None
  
  Item 6.       Exhibits and Reports on Form 8-K - None
  
  
  Page 13
  
  <PAGE>
  
                                      SIGNATURE
  
  
  
  Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
  Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
  undersigned thereunto duly authorized.
  
  
  
  
                                                Penn-America Group, Inc.
  
  
  
  
  Date: May 13, 1998                         By:/s/ Jon S. Saltzman
       ----------------                           --------------------
         Jon S. Saltzman
          President and
       Chief Executive Officer
  
  
  
                                               By:/s/ Rosemary R. Ferrero
                                                  -----------------------
         Rosemary R. Ferrero
        Principal Finance and
         Accounting Officer
metadata_documents: [{"type": "10-Q", "sequence": "1", "secsgml_size_bytes": 39289}]
metadata_filer: {"company-data": {"conformed-name": "PENN AMERICA GROUP INC", "cik": "0000910110", "assigned-sic": "6351", "irs-number": "232731409", "state-of-incorporation": "PA", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "10-Q", "act": "34", "file-number": "000-22316", "film-number": "98617592"}, "business-address": {"street1": "420 S YORK RD", "city": "HATBORO", "state": "PA", "zip": "19040", "phone": "2154433600"}}
text: SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C. 20549
                                      Form 10-Q
  
  (Mark One)
  
  (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
  
  For the quarterly period ended March 31, 1998
                                             
  
                                         OR
  
  ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES 
      EXCHANGE ACT OF 1934
  
  For the transition period from_________________to_________________
  
                           Commission file number 0-22316
                                                  -------
  
                              Penn-America Group, Inc.
                           ----------------------------
               (Exact name of registrant as specified in its charter)
  
        Pennsylvania                                    23-2731409
   -----------------------------               -------------------------------
  (State or other jurisdiction of             (I.R.S. Employer Identification No.)
   incorporation or organization)
  
                  420 South York Road, Hatboro, Pennsylvania 19040
              -------------------------------------------------------
            (Address of principal executive offices including zip code)
  
                                    (215)443-3600
                ---------------------------------------------------            
                (Registrant's telephone number, including area code)
  
  Indicate by check mark whether the registrant (1) has filed all reports required
  to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
  the  preceding  12 months  (or for such other  period  that the  registrant  was
  required  to file  such  reports)  and  (2)  has  been  subject  to such  filing
  requirements for the past 90 days. Yes X No .
  
  At May 13, 1998,  9,921,450  shares of the registrant's  common stock,  $.01 par
  value, were outstanding.
  
                                       Page 1
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                                        Index
  
                                                                       Page Number
  
  Part I - Financial Information
  
           Consolidated Unaudited Balance Sheets - March 31, 1998 and
                  December 31, 1997                                           3
  
           Consolidated Unaudited Statements of Earnings - For the three
                  months ended March 31, 1998 and 1997                        4
  
           Consolidated Unaudited Statement of Stockholders' Equity -
                  For the three months ended March 31, 1998                   5
  
           Consolidated Unaudited Statements of Cash Flows -
                  For the three months ended March 31, 1998 and 1997          6
  
           Notes to Unaudited Consolidated Financial Statements               7
  
           Management's Discussion and Analysis of Financial Condition
                  and Results of Operations                                  10
  
  Part II - Other Information                                                13
  
                                       Page 2
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                             Consolidated Balance Sheets
                                     (Unaudited)
                                   (In thousands)
  March 31,          December 31,
                                                                           1998                1997
                                                                        -----------         ----------
  ASSETS
  Investments:
      Fixed Maturities:
        Available for sale, at fair value 
       (amortized cost 1998 $99,257; 1997 $89,185)                        $ 99,891             $ 89,979
        Held to maturity, at amortized cost
       (fair value 1998 $39,957; 1997 $47,034)                              39,793               46,842
      Equity securities, at fair value 
      (cost 1998 $25,577; 1997 $25,662)                                     28,182               27,380
      Short-term investments, at cost, which approximates fair value         8,001               11,455
                                                                         ----------            ----------
        Total Investments                                                  175,867              175,656
  Cash                                                                       5,772                2,163
  Receivables:
      Accrued investment income                                              2,144                1,973
      Premiums receivable, net                                              13,197               12,414
      Reinsurance recoverable                                               17,018               16,605
                                                                          ---------            ----------
        Total receivables                                                   32,359               30,992
  Prepaid reinsurance premiums                                               2,926                3,065
  Deferred policy acquisition costs                                          8,523                8,563
  Capital leases                                                             1,839                1,865
  Deferred income tax                                                        2,249                2,302
  Income taxes recoverable                                                      --                   40
  Other assets                                                                 560                  511
                                                                       ============            ==========
        Total assets                                                     $ 230,095            $ 225,157
                                                                       ============            ==========
  
  LIABILITIES AND STOCKHOLDERS' EQUITY
  Liabilities:
    Unpaid losses and loss adjustment expenses                            $ 86,195             $ 84,566
    Unearned premiums                                                       35,765               36,173
    Accounts payable and accrued expenses                                    1,554                2,338
    Capitalized lease obligations                                            1,888                1,920
    Income taxes payable                                                     1,285                   --
    Other liabilities                                                        3,331                2,853
                                                                        -----------            ----------
          Total liabilities                                                130,018              127,850
                                                                        -----------            ----------
  
  Stockholders' equity:
    Preferred stock, $.01 par value; authorized 2,000,000 shares;
      none issued                                                               --                   --
    Common stock, $.01 par value, authorized 20,000,000 shares,
        issued and outstanding 1998, 9,901,013 shares and
      1997, 9,883,384 shares                                                    99                   99
    Additional paid-in capital                                              68,409               68,221
    Accumulated other comprehensive income                                   2,106                1,649
    Retained earnings                                                       29,934               27,849
                                                                           --------            ---------
                                                                           100,548               97,818
    Unearned compensation from restricted stock awards                       (471)                (511)
                                                                           --------            ---------
          Total stockholders' equity                                       100,077               97,307
                                                                          ---------            ---------
  
          Total liabilities and stockholders' equity                     $ 230,095            $ 225,157
                                                                         ==========           ==========
  See accompanying notes to unaudited consolidated financial statements.
                                       Page 3
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                         Consolidated Statements of Earnings
                                     (Unaudited)
  
                          For the three months ended March
                                31, 1998 and 1997
                        (In thousands, except per share data)
  Three months ended
                                                                                March 31,
                                                                   ------------------------------
                                                                           1998           1997
                                                                         --------       -------
  Revenues:
      Premiums earned                                                     $ 23,035      $ 20,899
      Net investment income                                                  2,775         1,940
      Net realized investment (losses) gains                                  (34)             1
                                                                          --------        -------
        Total revenues                                                      25,776         22,840
                                                                          --------        -------
  
  Losses and expenses:
      Losses and loss adjustment expenses                                   14,291         13,217
      Amortization of deferred policy acquisition costs                      6,370          5,698
      Other underwriting expenses                                            1,394          1,144
      Interest expense                                                          44            192
                                                                          --------         -------
        Total losses and expenses                                           22,099         20,251
                                                                          --------         -------
  
  Earnings before income tax                                                 3,677          2,589
  
  Income tax                                                                 1,097            839
                                                                          --------         --------
  
  Net earnings                                                             $ 2,580         $ 1,750
                                                                          ========         =========
  
  Net earnings per share:
         Basic                                                               $0.26           $0.26     
         Dilute                                                              $0.26           $0.26
  
  Weighted average number of shares used in calculating per share data:
        Basic                                                                9,896           6,689
        Diluted                                                             10,009           6,780
  
  Cash dividends per share
                                                                             $0.05           $0.04
  See accompanying notes to unaudited consolidated financial statements
                                       Page 4
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                   Consolidated Statement of Stockholders' Equity
                                     (Unaudited)
  
                      For the three months ended March 31, 1998
                          (In thousands except share data )
  Unearned
                                                                                                        Compensation
                                                                                Accumulated                 From
                                                                   Additional     Other                  Restricted
                                                   Common  Stock    Paid-In    Comprehensive  Retained     Stock                     
                                                   Shares  Amount   Capital      Income       Earnings     Awards             Total
                                                 --------- ------  ----------  ------------- ----------  -----------    -------------
  9,883,384 $ 99    $ 68,221      $ 1,649      $ 27,849     $ (511)         $ 97,307
  Balance at December 31, 1997                                                                               2,580            2,580
  Net earnings
  Other comprehensive income, net of tax:
        Unrealized gains on investments, net of
         reclassification adjustment                                                               457                          457
                                                                                                                        -------------
  Comprehensive income                                                                                                        3,037
                                                                                                                       --------------
  Issuance of common stock                          17,629              188                                                     188
  Amortization of compensation expense
        from restricted stock                                                                                   40               40
  Cash dividends paid                                                                            (495)                         (495)
                                                 =========  ======  ========   ============= ==========  ===========    =============
  Balance at March 31, 1998                      9,901,013  $ 99    $ 68,409     $ 2,106      $ 29,934     $ (471)         $ 100,077
                                                 =========  ======  ========   ============= ==========  ===========    =============
  See accompanying notes to unaudited financial statements.
                                       Page 6
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
                        Consolidated Statements of Cash Flows
                                     (Unaudited)
  
                 For the three months ended March 31, 1998 and 1997
                                   (In thousands)
  Three months ended March 31,
                                                                               ------------------------------
                                                                                  1998             1997
                                                                               -----------     -----------
  Cash flows from operating activities:
  Net earnings                                                                $ 2,580         $ 1,750
      Adjustments to reconcile net earnings to net cash provided by
        operating activities:
          Amortization and depreciation expense                                      120              85
          Net realized investment losses (gains)                                      34             (1)
          Deferred income tax                                                      (227)            (55)
          Net increase (decrease) in premiums, prepaid reinsurance premiums
             and unearned premiums                                               (1,052)           1,135
          Net increase in unpaid losses and loss adjustment expenses
             and reinsurance recoverable                                           1,216           3,114
          (Increase) decrease in:
             Accrued investment income                                             (171)           (171)
             Deferred policy acquisition costs                                        39           (495)
             Income tax recoverable                                                   40             249
             Other assets                                                           (80)              37
          Increase (decrease) in:
             Accounts payable and accrued expenses                                 (784)           (782)
             Income taxes payable                                                  1,285             645
             Other liabilities                                                       478             249
                                                                                 --------      ----------
                Net cash provided by operating activities                          3,478           5,760
                                                                                 --------      ----------
  
  Cash flows from investing activities:
      Purchases of equity securities                                             (7,540)           (316)
      Purchases of fixed maturities available for sale                          (22,250)         (8,000)
      Purchases of fixed maturities held to maturity                                 --          (3,028)
      Proceeds from sales of equity securities                                     7,576             197
      Proceeds from sales and maturities of fixed maturities available for sale   12,134           1,000
      Proceeds from maturities and calls of fixed maturities held to maturity      7,096           1,085
      Change in short-term investments                                             3,454           2,100
                                                                                 ---------     ----------
          Net cash provided (used) by investing activities                           470         (6,962)
                                                                                 ---------     ----------
  
  Cash flows from financing activities:
      Issuance of common stock                                                       188             243
      Principal payments on capital lease obligations                                (32)           (27)
      Dividends paid                                                                (495)          (268)
                                                                                 ----------    ----------
          Net cash used by financing activities                                     (339)           (52)
                                                                                 ----------    ----------
  
  Increase (decrease) in cash                                                       3,609        (1,254)
  Cash, beginning of period                                                         2,163          2,979
                                                                                 ===========   ==========
  Cash, end of period                                                             $ 5,772         $1,725
                                                                                 ===========   ==========
  
  Supplemental  disclosure of cash flow  information:  
  Cash paid during the period for:
        Interest                                                                       44            197
  
  Supplemental non-cash disclosure:
        Cost transfer from available for sale to held to maturity                      --          8,002
  See accompanying notes to unaudited financial statements.
                                       Page 6
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
                Notes to Unaudited Consolidated Financial Statements
  
  Note 1 - Organization and Basis of Presentation
  
           Penn-America Group, Inc. ("PAGI") is an insurance holding company whose
  principal  asset  is  the  common  stock  of  Penn-America   Insurance   Company
  ("Penn-America").  The "Company" refers to PAGI and Penn-America,  as well as to
  Penn-America's  wholly-owned  subsidiary,   Penn-Star  Insurance  Company.  Penn
  Independent  Corporation ("Penn Independent") currently owns approximately 31.2%
  of the outstanding common stock of PAGI.
  
           The accompanying  unaudited consolidated financial statements should be
  read in conjunction  with the financial  statements and notes for the year ended
  December 31,  1997.  In the opinion of  management,  the  financial  information
  reflects all adjustments (consisting only of normal recurring adjustments) which
  are  necessary for a fair  presentation  of the  Company's  financial  position,
  results of  operations,  and cash flows for the interim  periods.  The Company's
  results of operations for interim periods are not necessarily  indicative of the
  results to be expected for the entire year.
  
  Note 2 - Reinsurance
  
           Premiums  earned are net of amounts ceded to reinsurers of $1.9 million
  and $1.8  million for the three  months ended March 31, 1998 and March 31, 1997,
  respectively.  Losses and loss  adjustment  expenses are net of amounts ceded to
  reinsurers of $1.7 million and $1.8 million for the three months ended March 31,
  1998 and March 31, 1997, respectively.
  
  Note 3 - Comprehensive Income
  
           In 1997, the Financial  Accounting Standards Board issued SFAS No. 130,
  "Comprehensive  Income".  This statement was  implemented  retroactively  by the
  Company  at March 31,  1998.  The  statement  requires  that an  enterprise  (a)
  classify  items of other  comprehensive  income by their  nature in a  financial
  statement and (b) display the accumulated balance of other comprehensive  income
  separately from retained  earnings and additional  paid-in capital in the equity
  section of a statement of financial  position.  Accumulated other  comprehensive
  income of the Company  consists  solely of net  unrealized  gains on  investment
  securities.
  
  Page 7
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
                Notes to Unaudited Consolidated Financial Statements
                                     (continued)
  
  The following are components of other comprehensive income (in thousands):
  Three months ended
                                                                                     March 31, 1998
                                                         ------------------------------------------------------------
                                                            Before Tax               Tax                Net of Tax
                                                              Amount               Expense                Amount
                                                         -----------------    -------------------     ---------------
  Unrealized gains on investments:
      Unrealized holdings gains arising
        during period                                         $ 669                $ (234)                 $ 435
      Add: reclassification adjustment for
        losses realized in net income                            34                   (12)                    22
                                                         =================    ===================     ================
  Other comprehensive income                                  $ 703                $ (246)                 $ 457
                                                         =================    ===================     ================
  
                                                                                  Three months ended
                                                                                     March 31, 1997
                                                         ------------------------------------------------------------
                                                            Before Tax               Tax                Net of Tax
                                                              Amount               Benefit                Amount
                                                         -----------------    -------------------     ---------------
  Unrealized gains on securities:
      Holdings losses arising
        during period                                        $ (805)                $ 274                 $ (531)
      Less: reclassification adjustment for
        gains realized in net income                             (1)                   --                     (1)
      Plus:  accretion of net loss on fixed
        maturities transferred to held to maturity               11                    (4)                     7
                                                         =================    ===================    ================
  Other comprehensive (loss) income                          $ (795)                $ 270                 $ (525)
                                                         =================    ===================     ================
  Comprehensive  income for the three months  ended March 31, 1997 was  $1,225,000
  and included net income of $1,750,000 and other  comprehensive loss, net of tax,
  of $525,000.
  
  Page 8
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
                Notes to Unaudited Consolidated Financial Statements
                                     (continued)
  
  Note 4 - Basic and Diluted Earnings Per Share
  
           The following is a reconciliation  of the numerator and denominators of
  the basic and diluted earnings per share computations:
  
                                                     Three months ended March 31,
                                                     -----------------------------
                                                         1998               1997
                                                    -------------      -----------
  Basic EPS:
  
  Net earnings                                         $ 2,580            $ 1,750
                                                    ------------        ----------
  
  Weighted average common shares outstanding             9,896              6,689
                                                    -------------      -----------
  
  Basic EPS                                             $ 0.26             $ 0.26
                                                    ============       ===========
  
  Diluted EPS:
  
  Net Earnings                                         $ 2,580            $ 1,750
                                                    ------------        ----------
  
  Weighted average common shares outstanding             9,896              6,689
  
  Additional shares outstanding after the assumed
      exercise of options by applying the treasury 
      stock method                                         113                 91
                                                    -------------      -----------
  Total weighted average common shares outstanding      10,009              6,780
                                                    -------------      -----------
  
  Diluted EPS                                          $ 0.26              $ 0.26
                                                    =============      ===========
  
  Page 9
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
          Management's Discussion and Analysis of Financial Condition and
                               Results of Operations
  
  Results of Operations
  
           Gross written  premiums  increased  2.6% to $24.6 million for the three
  months ended March 31, 1998 from $24.0  million for the three months ended March
  31, 1997.  The increase  resulted  from 19.9% growth in  commercial  lines gross
  written  premiums  to $17.1  million,  which  was  partially  offset  by a 22.9%
  decrease in personal  auto lines gross  written  premiums to $7.5  million.  The
  increase in commercial lines gross written  premiums was primarily  attributable
  to increased  volume.  The decrease in personal auto lines gross written premium
  was due to actions taken by the Company to improve profitability.  Specifically,
  the  Company  terminated  its  relationship  with one agent and reduced a second
  agent's insurance  automobile writing by one-half.  Additionally,  the Company's
  non-standard  automobile  business grew by more than 100% during the  comparable
  quarter  of 1997  because  of new  legislation  in  California  which  increased
  mandatory coverage in that state.
  
           The  Company is  currently  planning to write new  personal  automobile
  programs in the states of Arizona, North Dakota, Montana, Illinois and Hawaii by
  the third  quarter of 1998. If these new programs are not fully  implemented  by
  the beginning of the third quarter of 1998 due to systems or regulatory  delays,
  it may impact the annual  growth in  automobile  premiums  and  earnings for the
  year.
  
           The Company  announced  that effective May 1, 1998, for new and renewal
  business,  it will  increase  the  commission  paid to its agents on  commercial
  business from 20% to 22%. To date, the Company has not felt competitive pressure
  on commercial premium growth,  especially since the first quarter of 1998 showed
  a 19.9% increase in commercial written premium over the same period in 1997. The
  Company  believes that by increasing  its  commercial  commission  rates at this
  time, its commission structure will remain competitive.
  
           Net  written  premiums  increased  2.6% to $22.8  million for the three
  months ended March 31, 1998 from $22.2  million for the three months ended March
  31, 1997. During the same periods,  net premiums earned increased 10.2% to $23.0
  million from $20.9 million. Net premiums earned increased due to the increase in
  gross written premiums over the past 12 months.
  
           Net  investment  income  increased  43.0% to $2.8 million for the three
  months  ended March 31, 1998 from $1.9  million for the three months ended March
  31, 1997.  This increase  resulted  principally  from growth in invested  assets
  funded primarily by the net proceeds from the Company's secondary stock offering
  in July 1997 and from cash flows from operating activities.
  
  Page 10
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
           Management's Discussion and Analysis of Financial Condition and
                               Results of Operations
                                     (continued)
  
  During the first  quarter of 1998,  the Company  purchased  approximately  $12.7
  million in tax free municipal securities as compared to $649,000 held during the
  comparable  period,  March 31, 1997. The tax equivalent  investment yield of the
  fixed  maturity  portfolio  for the three months ended March 31, 1998 was 6.53%,
  compared  to 6.79% for the three  months  ended  March 31,  1997.  Net  realized
  investment losses before taxes were $34,000 for the three months ended March 31,
  1998,  as compared to net realized  investment  gains before taxes of $1,000 for
  the three months ended March 31, 1997.
  
           Losses and loss adjustment expenses increased 8.1% to $14.3 million for
  the three months ended March 31, 1998,  from $13.2  million for the three months
  ended March 31, 1997, primarily due to an increase in net premiums earned.
  
           Amortization  of deferred policy  acquisition  costs increased 11.8% to
  $6.4 million for the three  months  ended March 31, 1998,  from $5.7 million for
  the three  months ended March 31, 1997.  The  increase  was  attributable  to an
  increase in net premiums earned.
  
           Other  underwriting  expenses  increased  21.9% to $1.4 million for the
  three  months  ended March 31, 1998 from $1.1 million for the three months ended
  March 31, 1997.
  
           The loss ratio  decreased to 62.0% for the three months ended March 31,
  1998,  from 63.2% for the three months ended March 31, 1997. The decrease in the
  loss ratio for the three months ended March 31, 1998 resulted  primarily  from a
  decrease in the  personal  lines auto  physical  damage loss ratio to 64.5% from
  96.8% a year earlier.  The statutory  expense ratio increased  slightly to 32.8%
  for the three months ended March 31, 1998, from 32.4% for the three months ended
  March 31, 1997. The statutory  combined  ratio  decreased to 94.8% for the three
  months  ended March 31,  1998,  from 95.6% for the three  months ended March 31,
  1997.
  
           As a result of the factors  described  above,  the Company's net income
  for the three  months  ended March 31, 1998  increased  47.4% to $2.6 million or
  $0.26 per share (basic and diluted), from $1.8 million or $0.26 per share (basic
  and diluted) for the three months ended March 31, 1997.
  
  Liquidity and Capital Resources
  
           PAGI is a holding  company,  the principal asset of which is the common
  stock of Penn-America. PAGI's cash flows depend primarily on dividends and other
  payments from Penn-America. PAGI uses these funds to pay (i) operating expenses,
  (ii)  taxes  and  other  payments  and  (iii)  dividends  to PAGI  stockholders.
  Penn-America's sources of funds consist primarily of premiums, investment income
  and  proceeds  from  sales and  redemptions  of  investments.  Funds are used by
  Penn-America  principally  to pay claims and  operating  expenses,  to  purchase
  investments and to make dividend and other payments to PAGI.
  
  Page 11
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
           Management's Discussion and Analysis of Financial Condition and
                                Results of Operations
                                     (continued)
  
           Net cash  provided  by  operating  activities  decreased  39.6% to $3.5
  million for the three  months  ended March 31,  1998,  from $5.8 million for the
  three months ended March 31, 1997,  primarily  due to the  reduction in personal
  lines auto gross written premiums in 1998.
  
           Net cash  provided by investing  activities  was $470,000 for the three
  months ended March 31, 1998,  compared to net cash used by investing  activities
  of $7.0 million for the three months ended March 31, 1997.
  
           Net cash used by financing activities was $339,000 for the three months
  ended March 31, 1997, as compared to $52,000 for the same period in 1997.
  
           The  Company  believes  that it has  sufficient  liquidity  to meet its
  anticipated  insurance  obligations and operating and capital expenditure needs.
  The   Company's   investment   strategy   emphasizes   quality,   liquidity  and
  diversification, as well as total return. With respect to liquidity, the Company
  considers  liability  durations,  specifically  related to loss  reserves,  when
  determining  desired investment  maturities.  In addition,  maturities have been
  staggered   to  produce   cash  flows  for  loss   payments   and   reinvestment
  opportunities.  The average duration of the fixed maturity portfolio as of March
  31, 1998 was approximately 3.0 years.
  
           The Company's  fixed maturity  portfolio of $139.7 million was 79.4% of
  the total investment portfolio as of March 31, 1998.  Approximately 99% of these
  securities were rated "A-" or better by Standard & Poor's or Moody's.  Equities,
  the majority of which consist of preferred stocks,  were $ 28.2 million or 16.0%
  of total investments as of March 31, 1998.
  
           As of March 31, 1998, the investment  portfolio contained $38.6 million
  or 22% of mortgage/asset-backed  obligations.  All of these securities are "AAA"
  rated securities issued by government,  government-related  agencies or publicly
  held corporations;  are publicly traded, and have market values obtained from an
  independent  pricing service.  Changes in estimated cash flows due to changes in
  prepayment  assumptions from the original purchase assumptions are revised based
  on current interest rates and the economic environment. The Company had no other
  derivative  financial  instruments,  real estate or mortgages in the  investment
  portfolio as of March 31, 1998.
  
           The  principal  source of cash to use for the payment of  dividends  to
  PAGI's stockholders is dividends from Penn-America.  Penn-America is required by
  law to maintain a certain minimum surplus on a statutory basis and is subject to
  risk-based capital requirements and regulations under which payment of dividends
  from  statutory  surplus  may  require  prior  approval  from  the  Pennsylvania
  regulatory  authorities.  The  maximum  dividend  that  may be  paid  in 1998 by
  Penn-America  to PAGI  without  prior  approval  of  regulatory  authorities  is
  $9,531,000.
  
  Page 12
  PENN-AMERICA GROUP, INC. AND SUBSIDIARIES
  
                             PART II. OTHER INFORMATION
  
  Item 1.       Legal Proceedings - None
  
  Item 2.       Changes in Securities - None
  
  Item 3.       Default Upon Senior Securities - None
  
  Item 4.       Submission of Matters to a Vote by Security Holders -None
  
  Item 5.       Other Information - None
  
  Item 6.       Exhibits and Reports on Form 8-K - None
  
  Page 13
  SIGNATURE
  
  Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
  Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
  undersigned thereunto duly authorized.
  
                                                Penn-America Group, Inc.
  
  Date: May 13, 1998                         By:/s/ Jon S. Saltzman
       ----------------                           --------------------
         Jon S. Saltzman
          President and
       Chief Executive Officer
  
                                               By:/s/ Rosemary R. Ferrero
                                                  -----------------------
         Rosemary R. Ferrero
        Principal Finance and
         Accounting Officer