##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 30, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period From  to
 000-50511  Commission File Number
 UNITED AMERICA INDEMNITY, LTD.
  Cayman Islands
(State or other jurisdiction 
of incorporation or organization)
    
    98-0417107
(I.R.S. Employer Identification No.)
 WALKER HOUSE, 87 MARY STREET
KYI  9002
GEORGE TOWN, GRAND CAYMAN
CAYMAN ISLANDS
 (345) 949-0100
 þ o
 Yes o
No o
  Large accelerated filer o;
    
    Accelerated filer þ;
    
    Non-accelerated filer o;
    
    Smaller reporting company o
 o þ




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##### 



TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated
Balance Sheets 
As of June 30, 2009 (Unaudited) and December 31, 2008
    
    
    1Consolidated Statements of Operations 
Quarters and Six Months Ended June 30, 2009 and 2008 (Unaudited)
    
    
    2Consolidated Statements of Comprehensive Income (Loss) 
Quarters and Six Months Ended June 30, 2009 and 2008 (Unaudited)
    
    
    3Consolidated Statements of Changes in Shareholders Equity 
As of June 30, 2009 (Unaudited) and December 31, 2008
    
    
    4Consolidated Statements of Cash Flows 
Six Months Ended June 30, 2009 and 2008 (Unaudited)
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    33Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    59Item 4. Controls and Procedures
    
    
    60PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    61Item 1A. Risk Factors
    
    
    61Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    61Item 6. Exhibits
    
    
    62Signatures
    
    
    63Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



1)
    
    United America Indemnity, we, us, and our refer to United America Indemnity, Ltd., an
exempted company incorporated with limited liability under the laws of the Cayman Islands, and
its U.S. and Non-U.S. Subsidiaries;
 2)
    
    our U.S. Subsidiaries refers to United America Indemnity Group, Inc., AIS, Emerald
Insurance Company, which was dissolved on March 24, 2008, Penn-America Group, Inc., and our
Insurance Operations;
 3)
    
    our U.S. Insurance Operations refers to the insurance and related operations conducted by
AIS subsidiaries, including American Insurance Adjustment Agency, Inc., United America
Insurance Services, LLC, J.H. Ferguson & Associates, LLC, the United National Insurance
Companies and the Penn-America Insurance Companies;
 4)
    
    our U.S. Insurance Companies refers to the United National Insurance Companies and the
Penn-America Insurance Companies;
 5)
    
    our Predecessor Insurance Operations refers to Wind River Investment Corporation, which was
dissolved on May 31, 2006, AIS, American Insurance Adjustment Agency, Inc., Emerald Insurance
Company, which was dissolved on March 24, 2008, the United National Insurance Companies,
United America Insurance Services, LLC, and J.H. Ferguson & Associates, LLC;
 6)
    
    the United National Insurance Companies refers to the insurance and related operations
conducted by United National Insurance Company and its subsidiaries, including Diamond State
Insurance Company, United National Casualty Insurance Company, and United National Specialty
Insurance Company;
 7)
    
    the Penn-America Insurance Companies refers to the insurance and related operations of
Penn-America Insurance Company, Penn-Star Insurance Company, and Penn-Patriot Insurance
Company;
 8)
    
    our Insurance Operations refers to the U.S. Insurance Operations;
 9)
    
    our Non-U.S. Insurance Operations refers to the insurance related operations of Wind River
Insurance Company (Barbados), Ltd. and Wind River Insurance Company, Ltd. prior to the
amalgamation, which occurred on March 31, 2006;
 10)
    
    Wind River Reinsurance refers to Wind River Reinsurance Company, Ltd. In September 2006,
Wind River Insurance Company (Barbados), Ltd. was redomesticated to Bermuda and renamed Wind
River Reinsurance Company, Ltd., at which time it was amalgamated with Wind River Insurance
Company, Ltd.;
 11)
    
    our Non-U.S. Subsidiaries refers to Wind River Reinsurance, U.A.I. (Gibraltar) Limited,
which was liquidated on May 30, 2006, U.A.I. (Gibraltar) II Limited, which was liquidated on
May 30, 2006, the Luxembourg Companies, U.A.I. (Ireland) Limited, and Wind River Services,
Ltd., which was dissolved on August 17, 2007.;
 12)
    
    our Reinsurance Operations refers to the reinsurance and related operations of Wind River
Reinsurance;
 13)
    
    the Luxembourg Companies refers to U.A.I. (Luxembourg) I S.à r.l., U.A.I. (Luxembourg) II
S.à r.l., U.A.I. (Luxembourg) III S.à r.l., U.A.I. (Luxembourg) IV S.à r.l., U.A.I.
(Luxembourg) Investment S.à r.l., and Wind River (Luxembourg) S.à r.l.;
 14)
    
    United America Indemnity Group refers to United America Indemnity Group, Inc.;
 15)
    
    AIS refers to American Insurance Service, Inc.;
 16)
    
    United National Group refers to the United National Insurance Companies and Emerald
Insurance Company;
 17)
    
    Penn-America Group refers to Penn-America Group, Inc. and the Penn-America Insurance
Companies;
 18)
    
    Penn-America refers to our product classification that includes property and general
liability products for small commercial businesses distributed through a select network of
wholesale general agents with specific binding authority;
 19)
    
    United National refers to our product classification that includes property, general
liability, and professional lines products distributed through program administrators with
specific binding authority;
 20)
    
    Diamond State refers to our product classification that includes property, casualty, and
professional lines products distributed through wholesale brokers and program administrators
with specific binding authority;
 21)
    
    the Statutory Trusts refers to United National Group Capital Trust I, United National Group
Capital Statutory Trust II, Penn-America Statutory Trust I, whose registration was cancelled
effective January 15, 2008, and Penn-America Statutory Trust II, whose registration was
cancelled effective February 2, 2009;
 22)
    
    Fox Paine & Company refers to Fox Paine & Company, LLC and affiliated investment funds;
 23)
    
    GAAP refers to accounting principles generally accepted in the United States of America;
and
 24)
    
    $ or dollars refers to U.S. dollars.




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PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Balance Sheets
  (Unaudited)June 30, 2009
    
    
    December 31, 2008ASSETSBonds:Available for sale securities, at fair value (amortized cost: $1,254,330 and $1,192,385)
    
    $
    1,286,530
    
    
    $
    1,204,974Preferred shares:Available for sale securities, at fair value (cost: $3,561 and $4,665)
    
    
    4,308
    
    
    
    4,665Common shares:Available for sale securities, at fair value (cost: $44,418 and $46,316)
    
    
    50,724
    
    
    
    50,613Other invested assetsAvailable for sale securities, at fair value (cost: $3,644 and $19,689)
    
    
    10,627
    
    
    
    39,219Securities classified as trading, at fair value (cost: $35,151 and $5,151)
    
    
    40,190
    
    
    
    7,453Total investments
    
    
    1,392,379
    
    
    
    1,306,924Cash and cash equivalents
    
    
    286,375
    
    
    
    292,604Agents balances, net
    
    
    78,873
    
    
    
    57,117Reinsurance receivables
    
    
    620,101
    
    
    
    679,277Federal income taxes receivable
    
    
    14,954
    
    
    
    16,487Deferred federal income taxes
    
    
    19,247
    
    
    
    32,532Deferred acquisition costs
    
    
    37,481
    
    
    
    34,734Intangible assets
    
    
    9,272
    
    
    
    9,309Prepaid reinsurance premiums
    
    
    18,848
    
    
    
    23,960Other assets
    
    
    27,871
    
    
    
    24,115Total assets
    
    $
    2,505,401
    
    
    $
    2,477,059LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses
    
    $
    1,394,818
    
    
    $
    1,506,429Unearned premiums
    
    
    155,383
    
    
    
    149,677Ceded balances payable
    
    
    19,664
    
    
    
    25,165Contingent commissions
    
    
    7,274
    
    
    
    6,695Notes and debentures payable
    
    
    121,712
    
    
    
    121,845Other liabilities
    
    
    43,188
    
    
    
    35,255Total liabilities
    
    
    1,742,039
    
    
    
    1,845,066Commitments and contingencies (Note 10)
    
    
    
    
    
    
    Shareholders equity:Common shares, $0.0001 par value, 900,000,000 common shares authorized; Class A common
shares issued: 42,385,514 and 25,032,618, respectively; Class A common shares
outstanding:36,350,388 and 19,013,462, respectively; Class B common shares issued and
outstanding: 24,122,744 and 12,687,500, respectively
    
    
    7
    
    
    
    4Additional paid-in capital
    
    
    617,750
    
    
    
    524,345Accumulated other comprehensive income
    
    
    33,507
    
    
    
    25,108Retained earnings
    
    
    212,713
    
    
    
    182,982Class A common shares in treasury, at cost: 6,035,126 and 6,019,156 shares, respectively
    
    
    (100,615
    )
    
    
    (100,446
    )Total shareholders equity
    
    
    763,362
    
    
    
    631,993Total
    
    $
    2,505,401
    
    
    $
    2,477,059
   1




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Operations
  (Unaudited)
    
    
    (Unaudited)Quarter Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues:Gross premiums written
    
    $
    91,480
    
    
    $
    104,318
    
    
    $
    190,668
    
    
    $
    203,380Net premiums written
    
    $
    77,478
    
    
    $
    85,209
    
    
    $
    164,091
    
    
    $
    167,173Net premiums earned
    
    $
    74,732
    
    
    $
    100,673
    
    
    $
    153,272
    
    
    $
    213,730Net investment income
    
    
    16,605
    
    
    
    17,072
    
    
    
    38,782
    
    
    
    34,858Net realized investment gains (losses):Other than temporary impairment losses on investments
    
    
    (459
    )
    
    
    
    
    
    
    (459
    )
    
    
    Other than temporary impairment losses on investments
recognized in other comprehensive income
    
    
    125
    
    
    
    
    
    
    
    125
    
    
    
    Other net realized investment gains (losses)
    
    
    5,732
    
    
    
    (2,480
    )
    
    
    (2,864
    )
    
    
    (3,550
    )Total net realized investment gains (losses)
    
    
    5,398
    
    
    
    (2,480
    )
    
    
    (3,198
    )
    
    
    (3,550
    )Total revenues
    
    
    96,735
    
    
    
    115,265
    
    
    
    188,856
    
    
    
    245,038Losses and Expenses:Net losses and loss adjustment expenses
    
    
    44,047
    
    
    
    83,644
    
    
    
    91,787
    
    
    
    160,294Acquisition costs and other underwriting expenses
    
    
    29,972
    
    
    
    38,112
    
    
    
    60,786
    
    
    
    76,307Corporate and other operating expenses
    
    
    3,663
    
    
    
    2,269
    
    
    
    7,638
    
    
    
    6,214Interest expense
    
    
    1,832
    
    
    
    2,188
    
    
    
    3,686
    
    
    
    4,727Income (loss) before income taxes
    
    
    17,221
    
    
    
    (10,948
    )
    
    
    24,959
    
    
    
    (2,504
    )Income tax expense (benefit)
    
    
    2,758
    
    
    
    (2,003
    )
    
    
    3,481
    
    
    
    (1,442
    )Income (loss) before equity in net income (loss) of
partnership
    
    
    14,463
    
    
    
    (8,945
    )
    
    
    21,478
    
    
    
    (1,062
    )Equity in net income (loss) of partnership, net of tax
    
    
    1,798
    
    
    
    (26
    )
    
    
    1,933
    
    
    
    (469
    )Net income (loss)
    
    $
    16,261
    
    
    $
    (8,971
    )
    
    $
    23,411
    
    
    $
    (1,531
    )Per share data (1):Net income:Basic
    
    $
    0.32
    
    
    $
    (0.24
    )
    
    $
    0.54
    
    
    $
    (0.04
    )Diluted
    
    $
    0.32
    
    
    $
    (0.24
    )
    
    $
    0.54
    
    
    $
    (0.04
    )Weighted-average number of shares outstanding (2):Basic
    
    
    50,824,306
    
    
    
    37,678,647
    
    
    
    43,005,349
    
    
    
    38,194,016Diluted
    
    
    50,863,201
    
    
    
    37,678,647
    
    
    
    43,038,123
    
    
    
    38,194,016
 (1)
    
    In 2008, Diluted loss per share is the same as Basic loss per share since there was a net loss for the quarter and six months ended June 30, 2008.(2)
    
    In May 2009, the Company issued 17.2 million Class A common shares and 11.4 million Class B common shares in conjunction with the Rights Offering.
In computing the basic and diluted weighted share counts, the number of shares outstanding prior to May 5, 2009 (the date that the common shares were
issued in conjunction with the Rights Offering) was adjusted by a factor of 1.116 to reflect the impact of a bonus element associated with the Rights
Offering in accordance with SFAS No. 128, Earnings Per Share. As a result, share counts for the prior year have been restated.   2




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Comprehensive Income (Loss)
  (Unaudited)
    
    
    (Unaudited)Quarter Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss)
    
    $
    16,261
    
    
    $
    (8,971
    )
    
    $
    23,411
    
    
    $
    (1,531
    )Other comprehensive income (loss), net of taxes:Unrealized holding gains (losses) arising during period
    
    
    19,325
    
    
    
    (21,708
    )
    
    
    11,870
    
    
    
    (19,024
    )Recognition of previously unrealized holding (gains) losses
    
    
    (3,549
    )
    
    
    1,556
    
    
    
    2,772
    
    
    
    2,256Unrealized foreign currency translation gains
    
    
    77
    
    
    
    
    
    
    
    77
    
    
    
    Other comprehensive income (loss), net of taxes
    
    
    15,853
    
    
    
    (20,152
    )
    
    
    14,719
    
    
    
    (16,768
    )Comprehensive income (loss), net of taxes
    
    $
    32,114
    
    
    $
    (29,123
    )
    
    $
    38,130
    
    
    $
    (18,299
    )
   3




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated
Statements of Changes in Shareholders Equity
  (Unaudited)Six Months Ended
    
    
    Year EndedJune 30, 2009
    
    
    December 31, 2008Number of Class A common shares issued:Number at beginning of period
    
    
    25,032,618
    
    
    
    24,770,507Common shares issued under share incentive plans
    
    
    72,127
    
    
    
    252,248Common shares issued to directors
    
    
    102,348
    
    
    
    9,863Common shares issued under Rights Offering
    
    
    17,178,421
    
    
    
    Number at end of period
    
    
    42,385,514
    
    
    
    25,032,618Number of Class B common shares issued:Number at beginning of period
    
    
    12,687,500
    
    
    
    12,687,500Common shares issued under Rights Offering
    
    
    11,435,244
    
    
    
    Number at end of period
    
    
    24,122,744
    
    
    
    12,687,500Par value of Class A common shares:Balance at beginning of period
    
    $
    3
    
    
    $
    3Common shares issued under Rights Offering
    
    
    1
    
    
    
    Balance at end of period
    
    $
    4
    
    
    $
    3Par value of Class B common shares:Balance at beginning of period
    
    $
    1
    
    
    $
    1Common shares issued under Rights Offering
    
    
    2
    
    
    
    Balance at end of period
    
    $
    3
    
    
    $
    1Additional paid-in capital:Balance at beginning of period
    
    $
    524,345
    
    
    $
    519,980Share compensation plans
    
    
    1,950
    
    
    
    4,365Common shares issued under Rights Offering
    
    
    91,455
    
    
    
    Balance at end of period
    
    $
    617,750
    
    
    $
    524,345Accumulated other comprehensive income, net of deferred income tax:Balance at beginning of period
    
    $
    25,108
    
    
    $
    40,172Other comprehensive income (loss)
    
    
    14,800
    
    
    
    (15,064
    )Change in other than temporary impairment losses recognized in
other comprehensive income, net of taxes
    
    
    (81
    )
    
    
    Adoption of FSP115-2
    
    
    (6,320
    )
    
    
    Balance at end of period
    
    $
    33,507
    
    
    $
    25,108Retained earnings:Balance at beginning of period
    
    $
    182,982
    
    
    $
    324,542Net income (loss)
    
    
    23,411
    
    
    
    (141,560
    )Adoption of FSP115-2
    
    
    6,320
    
    
    
    Balance at end of period
    
    $
    212,713
    
    
    $
    182,982Number of Treasury Shares:Number at beginning of period
    
    
    6,019,156
    
    
    
    2,454,087Class A common shares purchased
    
    
    15,970
    
    
    
    3,565,069Number at end of period
    
    
    6,035,126
    
    
    
    6,019,156Treasury Shares, at cost:Balance at beginning of period
    
    $
    (100,446
    )
    
    $
    (48,422
    )Class A common shares purchased, at cost
    
    
    (169
    )
    
    
    (52,024
    )Balance at end of period
    
    $
    (100,615
    )
    
    $
    (100,446
    )Total shareholders equity
    
    $
    763,362
    
    
    $
    631,993
   4




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Cash Flows
  (Unaudited)Six Months Ended June 30,2009
    
    
    2008Cash flows from operating activities:Net income (loss)
    
    $
    23,411
    
    
    $
    (1,531
    )Adjustments to reconcile net income to net cash used for
operating activities:Amortization of trust preferred securities issuance costs
    
    
    41
    
    
    
    131Amortization and depreciation
    
    
    37
    
    
    
    504Restricted stock expense
    
    
    2,118
    
    
    
    1,920Deferred federal income taxes
    
    
    9,178
    
    
    
    (1,213
    )Amortization of bond premium and discount, net
    
    
    1,291
    
    
    
    1,391Net realized investment losses
    
    
    3,198
    
    
    
    3,550Equity in net (income) loss of partnerships
    
    
    (1,933
    )
    
    
    469Changes in:Agents balances
    
    
    (21,756
    )
    
    
    6,225Reinsurance receivables
    
    
    59,176
    
    
    
    37,211Unpaid losses and loss adjustment expenses
    
    
    (111,611
    )
    
    
    (2,008
    )Unearned premiums
    
    
    5,706
    
    
    
    (48,369
    )Ceded balances payable
    
    
    (5,501
    )
    
    
    5,739Other assets and liabilities, net
    
    
    (1,200
    )
    
    
    (7,826
    )Contingent commissions
    
    
    579
    
    
    
    (5,169
    )Prepaid reinsurance premiums
    
    
    5,112
    
    
    
    1,811Federal income taxes receivable
    
    
    1,533
    
    
    
    (6,622
    )Deferred acquisition costs
    
    
    (2,747
    )
    
    
    12,130Net cash used for operating activities
    
    
    (33,368
    )
    
    
    (1,657
    )Cash flows from investing activities:Proceeds from sale of bonds
    
    
    122,727
    
    
    
    118,229Proceeds from sale of stocks
    
    
    53,077
    
    
    
    19,034Proceeds from maturity of bonds
    
    
    17,235
    
    
    
    47,455Proceeds from sale of other invested assets
    
    
    16,699
    
    
    
    Purchases of bonds
    
    
    (201,700
    )
    
    
    (96,431
    )Purchases of stocks
    
    
    (49,895
    )
    
    
    (23,375
    )Purchases of other invested assets
    
    
    (30,654
    )
    
    
    (255
    )Net cash provided by (used for) investing activities
    
    
    (72,511
    )
    
    
    64,657Cash flows from financing activities:Proceeds from exercises of stock options
    
    
    
    
    
    
    329Tax expense associated with SFAS 123R
    
    
    (168
    )
    
    
    (10
    )Issuance of common shares
    
    
    100,043
    
    
    
    Purchases of Class A common shares
    
    
    (169
    )
    
    
    (43,036
    )Retirement of junior subordinated debentures
    
    
    
    
    
    
    (15,464
    )Principal payments of term debt
    
    
    (133
    )
    
    
    (142
    )Net cash provided by (used for) financing activities
    
    
    99,573
    
    
    
    (58,323
    )Effect of exchange rates on cash and cash equivalents
    
    
    77
    
    
    
    Net change in cash and cash equivalents
    
    
    (6,229
    )
    
    
    4,677Cash and cash equivalents at beginning of period
    
    
    292,604
    
    
    
    244,321Cash and cash equivalents at end of period
    
    $
    286,375
    
    
    $
    248,998
   5




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UNITED AMERICA INDEMNITY, LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. Principles of Consolidation and Basis of Presentation
       2. Investments
    6




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Other-than-temporaryGross
    
    
    Gross
    
    
    
    
    
    
    impairmentsAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Estimated
    
    
    recognized in(Dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value
    
    
    AOCI (1)As of June 30, 2009Bonds:U.S. treasury and agency obligations
    
    $
    147,536
    
    
    $
    10,095
    
    
    $
    (7
    )
    
    $
    157,624
    
    
    $
    Obligations of states and political subdivisions
    
    
    217,024
    
    
    
    7,354
    
    
    
    (754
    )
    
    
    223,624
    
    
    
    Mortgage-backed securities
    
    
    322,419
    
    
    
    13,148
    
    
    
    (380
    )
    
    
    335,187
    
    
    
    113Commercial mortgage-backed securities
    
    
    152,824
    
    
    
    2,906
    
    
    
    (9,485
    )
    
    
    146,245
    
    
    
    7,428Asset-backed securities
    
    
    70,356
    
    
    
    2,031
    
    
    
    (603
    )
    
    
    71,784
    
    
    
    12Corporate notes
    
    
    279,453
    
    
    
    8,129
    
    
    
    (1,223
    )
    
    
    286,359
    
    
    
    Foreign corporate bonds
    
    
    44,717
    
    
    
    1,007
    
    
    
    (18
    )
    
    
    45,706
    
    
    
    698Other bonds
    
    
    20,001
    
    
    
    
    
    
    
    
    
    
    
    20,001
    
    
    
    Total bonds
    
    
    1,254,330
    
    
    
    44,670
    
    
    
    (12,470
    )
    
    
    1,286,530
    
    
    
    8,251Common stock
    
    
    44,418
    
    
    
    7,154
    
    
    
    (848
    )
    
    
    50,724
    
    
    
    Preferred stock
    
    
    3,561
    
    
    
    747
    
    
    
    
    
    
    
    4,308
    
    
    
    Other invested assets
    
    
    3,644
    
    
    
    6,983
    
    
    
    
    
    
    
    10,627
    
    
    
    Total
    
    $
    1,305,953
    
    
    $
    59,554
    
    
    $
    (13,318
    )
    
    $
    1,352,189
    
    
    $
    8,251
 (1)
    
    Represents the amount of other-than-temporary impairment losses recognized in accumulated
other comprehensive income (AOCI). Per FSP FAS 115-2 and FAS 124-2, these items were not
included in earnings as of June 30, 2009. Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Estimated(Dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAs of December 31, 2008Bonds:U.S. treasury and agency obligations
    
    $
    135,457
    
    
    $
    17,320
    
    
    $
    
    
    
    $
    152,777Obligations of states and political subdivisions
    
    
    241,457
    
    
    
    5,712
    
    
    
    (4,139
    )
    
    
    243,030Mortgage-backed securities
    
    
    372,569
    
    
    
    12,180
    
    
    
    (680
    )
    
    
    384,069Commercial mortgage-backed securities
    
    
    156,402
    
    
    
    
    
    
    
    (11,945
    )
    
    
    144,457Asset-backed securities
    
    
    19,801
    
    
    
    
    
    
    
    (3,248
    )
    
    
    16,553Corporate notes
    
    
    215,931
    
    
    
    2,175
    
    
    
    (4,451
    )
    
    
    213,655Foreign corporate bonds
    
    
    29,485
    
    
    
    136
    
    
    
    (471
    )
    
    
    29,150Other bonds
    
    
    21,283
    
    
    
    
    
    
    
    
    
    
    
    21,283Total bonds
    
    
    1,192,385
    
    
    
    37,523
    
    
    
    (24,934
    )
    
    
    1,204,974Common stock
    
    
    46,316
    
    
    
    4,482
    
    
    
    (185
    )
    
    
    50,613Preferred stock
    
    
    4,665
    
    
    
    
    
    
    
    
    
    
    
    4,665Other invested assets
    
    
    24,840
    
    
    
    21,832
    
    
    
    
    
    
    
    46,672Total
    
    $
    1,268,206
    
    
    $
    63,837
    
    
    $
    (25,119
    )
    
    $
    1,306,924
 NOTE:
    
    Other than temporary impairments recognized in AOCI is not shown as of December
31, 2008 since FSP FAS 115-2 and FAS 124-2 is not applied retrospectively.   7




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Amortized
    
    
    Estimated(Dollars in thousands)
    
    Cost
    
    
    Fair ValueDue in one year or less
    
    $
    65,386
    
    
    $
    66,028Due after one year through five years
    
    
    361,536
    
    
    
    374,355Due after five years through ten years
    
    
    174,150
    
    
    
    182,012Due after ten years through fifteen years
    
    
    64,939
    
    
    
    67,739Due after fifteen years
    
    
    42,720
    
    
    
    43,180Mortgaged-backed securities
    
    
    322,419
    
    
    
    335,187Commercial mortgage-backed securities
    
    
    152,824
    
    
    
    146,245Asset-backed securities
    
    
    70,356
    
    
    
    71,784$
    1,254,330
    
    
    $
    1,286,530
  Less than 12 months
    
    
    12 months or longer (1)
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized(Dollars in thousands)
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesBonds:U.S. treasury and agency obligations
    
    $
    13,980
    
    
    $
    7
    
    
    $
    
    
    
    $
    
    
    
    $
    13,980
    
    
    $
    7Obligations of states and political subdivisions
    
    
    8,824
    
    
    
    89
    
    
    
    16,229
    
    
    
    665
    
    
    
    25,053
    
    
    
    754Mortgage-backed securities
    
    
    1,032
    
    
    
    63
    
    
    
    6,615
    
    
    
    317
    
    
    
    7,647
    
    
    
    380Commercial mortgage-backed securities
    
    
    42,263
    
    
    
    3,409
    
    
    
    58,732
    
    
    
    6,076
    
    
    
    100,995
    
    
    
    9,485Asset-backed securities
    
    
    667
    
    
    
    29
    
    
    
    1,505
    
    
    
    574
    
    
    
    2,172
    
    
    
    603Corporate notes
    
    
    20,294
    
    
    
    323
    
    
    
    23,248
    
    
    
    900
    
    
    
    43,542
    
    
    
    1,223Foreign corporate bonds
    
    
    5,371
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    5,371
    
    
    
    18Total bonds
    
    
    92,431
    
    
    
    3,938
    
    
    
    106,329
    
    
    
    8,532
    
    
    
    198,760
    
    
    
    12,470Common stock
    
    
    9,567
    
    
    
    840
    
    
    
    27
    
    
    
    8
    
    
    
    9,594
    
    
    
    848Total
    
    $
    101,998
    
    
    $
    4,778
    
    
    $
    106,356
    
    
    $
    8,540
    
    
    $
    208,354
    
    
    $
    13,318
 (1)
    
    Fixed maturities in a gross unrealized loss position for twelve months or longer is primarily
comprised of non-credit losses on investment grade securities where management does not intend
to sell, and it is more likely than not that the Company will not be forced to sell the
security before recovery. The Company has analyzed these securities and has determined that
they are not impaired.  Less than 12 months
    
    
    12 months or longer (1)
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized(Dollars in thousands)
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesBonds:Obligations of states and political subdivisions
    
    $
    59,175
    
    
    $
    3,253
    
    
    $
    7,181
    
    
    $
    886
    
    
    $
    66,356
    
    
    $
    4,139Mortgage-backed securities
    
    
    7,561
    
    
    
    282
    
    
    
    4,533
    
    
    
    398
    
    
    
    12,094
    
    
    
    680Commercial mortgage-backed securities
    
    
    55,904
    
    
    
    4,514
    
    
    
    45,380
    
    
    
    7,431
    
    
    
    101,284
    
    
    
    11,945Asset-backed securities
    
    
    12,624
    
    
    
    2,976
    
    
    
    1,476
    
    
    
    272
    
    
    
    14,100
    
    
    
    3,248Corporate notes
    
    
    112,886
    
    
    
    2,555
    
    
    
    20,614
    
    
    
    1,896
    
    
    
    133,500
    
    
    
    4,451Foreign corporate bonds
    
    
    21,171
    
    
    
    471
    
    
    
    
    
    
    
    
    
    
    
    21,171
    
    
    
    471Total bonds
    
    
    269,321
    
    
    
    14,051
    
    
    
    79,184
    
    
    
    10,883
    
    
    
    348,505
    
    
    
    24,934Common stock
    
    
    1,143
    
    
    
    185
    
    
    
    
    
    
    
    
    
    
    
    1,143
    
    
    
    185Total
    
    $
    270,464
    
    
    $
    14,236
    
    
    $
    79,184
    
    
    $
    10,883
    
    
    $
    349,648
    
    
    $
    25,119
 (1)
    
    At December 31, 2008, the Company had 52 bonds that were in an unrealized loss position for
twelve months or longer. The estimated fair value and amortized cost of these securities was
$79.2 million and $90.1 million, respectively. The Company has analyzed these securities and
has determined that they are not impaired. The Company has the ability to hold these
investments until maturity or until recovery. 99.9% of these securities are investment grade.  8




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
   (1)
    
    the issuer is in financial distress;
 (2)
    
    the investment is secured;
 (3)
    
    a significant credit rating action occurred;
 (4)
    
    scheduled interest payments were delayed or missed;
 (5)
    
    changes in laws or regulations have affected an issuer or industry;
 (6)
    
    the investment has an unrealized loss and was identified by our Investment
Manager as an investment to be sold before recovery or maturity; and
 (7)
    
    the investment failed EITF 99-20-1 testing, which is a cash flow projection
test to determine if anticipated principal and interest payments will be realized.
  (1)
    
    persisted for more than twelve consecutive months or
 (2)
    
    the value of the investment has been 20% or more below cost for six continuous
months or more to determine if the security should be impaired.
   9




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  U.S.
government and federal agency and U.S. government-sponsored enterprise obligations 
 Obligations of states and political subdivisions
 Mortgage-backed securities  non-agency 
 Commercial mortgage-backed securities (CMBS) 
 Asset backed securities 
 Corporate bonds 
  10




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Quarter Ended June 30,
    
    
    Six Months Ended June 30,(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Bonds:OTTI losses, gross
    
    $
    459
    
    
    $
    
    
    
    $
    2,341
    
    
    $
    Portion of loss
recognized in other
comprehensive income
(pre-tax)
    
    
    (125
    )
    
    
    
    
    
    
    (125
    )
    
    
    Net bonds impairment
losses recognized in
earnings
    
    
    334
    
    
    
    
    
    
    
    2,216
    
    
    
    Common stock
    
    
    
    
    
    
    1,740
    
    
    
    593
    
    
    
    1,819Preferred stock
    
    
    
    
    
    
    
    
    
    
    647
    
    
    
    Total
    
    $
    334
    
    
    $
    1,740
    
    
    $
    3,456
    
    
    $
    1,819
   (Dollars in thousands)Balance of credit losses related to securities still being held as of
April 1, 2009
    
    $
    Additions where no OTTI was previously recorded
    
    
    21Additions where an OTTI was previously recorded
    
    
    Reductions for securities for which the company intends to sell or
more likely than not will be required to sell before recovery
    
    
    Reductions reflecting increases in expected cash flows to be collected
    
    
    Reductions for securities sold during the period
    
    
    Balance of credit losses related to securities still being held as of
June 30, 2009
    
    $
    21
 Accumulated Other Comprehensive Income
  June 30,
    
    
    December 31,(Dollars in thousands)
    
    2009
    
    
    2008Net unrealized gains from:Partnerships < 3% owned
    
    $
    6,983
    
    
    $
    19,530Available-for-sale portfolio  other
    
    
    39,253
    
    
    
    16,886Foreign currency fluctuations
    
    
    (20
    )
    
    
    (97
    )Deferred taxes
    
    
    (12,709
    )
    
    
    (11,211
    )Accumulated other comprehensive income
    
    $
    33,507
    
    
    $
    25,108
  11




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Net
Realized Investment Gains (Losses)
  Quarter Ended June 30,
    
    
    Six Months Ended June 30,(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Bonds
    
    $
    380
    
    
    $
    455
    
    
    $
    (5,293
    )
    
    $
    498Convertibles
    
    
    2,450
    
    
    
    (1,269
    )
    
    
    2,817
    
    
    
    (2,224
    )Common stock
    
    
    2,568
    
    
    
    (1,666
    )
    
    
    (75
    )
    
    
    (1,824
    )Preferred stock
    
    
    
    
    
    
    
    
    
    
    (647
    )
    
    
    Total
    
    $
    5,398
    
    
    $
    (2,480
    )
    
    $
    (3,198
    )
    
    $
    (3,550
    )
   Net Investment Income
  Quarter Ended June 30,
    
    
    Six Months Ended June 30,(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Bonds
    
    $
    15,845
    
    
    $
    16,068
    
    
    $
    30,659
    
    
    $
    32,707Preferred and common stocks
    
    
    468
    
    
    
    833
    
    
    
    944
    
    
    
    1,639Cash and cash equivalents
    
    
    270
    
    
    
    1,448
    
    
    
    856
    
    
    
    3,310Other
    
    
    1,213
    
    
    
    
    
    
    
    8,647
    
    
    
    Total investment income
    
    
    17,796
    
    
    
    18,349
    
    
    
    41,106
    
    
    
    37,656Investment expense
    
    
    (1,191
    )
    
    
    (1,277
    )
    
    
    (2,324
    )
    
    
    (2,798
    )Net investment income
    
    $
    16,605
    
    
    $
    17,072
    
    
    $
    38,782
    
    
    $
    34,858
  Quarter Ended June 30,
    
    
    Six Months Ended June 30,(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Net investment income
    
    $
    13,697
    
    
    $
    13,999
    
    
    $
    30,922
    
    
    $
    28,536Net realized investment gains (losses):Invested assets excluding partnerships
    
    
    3,549
    
    
    
    (1,556
    )
    
    
    (2,772
    )
    
    
    (2,256
    )Partnerships
    
    
    1,798
    
    
    
    (26
    )
    
    
    1,933
    
    
    
    (469
    )Total net realized investment gains
(losses)
    
    
    5,347
    
    
    
    (1,582
    )
    
    
    (839
    )
    
    
    (2,725
    )Net unrealized investment gains (losses)
    
    
    15,776
    
    
    
    (20,152
    )
    
    
    14,642
    
    
    
    (16,768
    )Net investment gains (losses)
    
    
    21,123
    
    
    
    (21,734
    )
    
    
    13,803
    
    
    
    (19,493
    )Total investment return
    
    $
    34,820
    
    
    $
    (7,735
    )
    
    $
    44,725
    
    
    $
    9,043Total investment return % (1)
    
    
    2.1
    %
    
    
    (0.5
    )%
    
    
    2.7
    %
    
    
    0.5
    %Average investment portfolio (2)
    
    $
    1,626,713
    
    
    $
    1,719,707
    
    
    $
    1,639,141
    
    
    $
    1,719,878
 (1)
    
    Not annualized.(2)
    
    Average of total cash and invested assets as of the beginning and ending of the
period.  12




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Subprime and Alt-A Investments
  Insurance Enhanced Municipal Bonds
  Ratings
    
    
    Ratings(Dollars in Thousands)
    
    with
    
    
    withoutRating
    
    Insurance
    
    
    InsuranceAAA
    
    $
    1,554
    
    
    $
    AA
    
    
    22,534
    
    
    
    148A
    
    
    9,598
    
    
    
    15,578BBB
    
    
    1,660
    
    
    
    982Rating Not Available
    
    
    1,943
    
    
    
    20,581Total
    
    $
    37,289
    
    
    $
    37,289
  Exposure NetGovt
    
    
    of Pre-refunded &(Dollars in thousands)
    
    
    
    
    
    Pre-refunded
    
    
    Guaranteed
    
    
    Govt GuaranteedFinancial Guarantor
    
    Total
    
    
    Securities
    
    
    Securities
    
    
    SecuritiesAmbac Financial Group
    
    $
    23,609
    
    
    $
    9,185
    
    
    $
    
    
    
    $
    14,424Assured Guaranty Corp
    
    
    411
    
    
    
    
    
    
    
    
    
    
    
    411Financial Guaranty Insurance Company
    
    
    7,502
    
    
    
    4,927
    
    
    
    
    
    
    
    2,575Financial Security Assurance, Inc.
    
    
    51,998
    
    
    
    17,106
    
    
    
    
    
    
    
    34,892Municipal Bond Insurance Association
    
    
    71,405
    
    
    
    18,873
    
    
    
    
    
    
    
    52,532Federal Housing Association
    
    
    2,433
    
    
    
    
    
    
    
    2,433
    
    
    
    Federal National Housing Association
    
    
    777
    
    
    
    
    
    
    
    777
    
    
    
    Govt National Housing Association
    
    
    1,479
    
    
    
    1,206
    
    
    
    273
    
    
    
    Permanent School Fund Guaranty
    
    
    3,848
    
    
    
    2,221
    
    
    
    1,627
    
    
    
    Total backed by financial guarantors
    
    
    163,462
    
    
    
    53,518
    
    
    
    5,110
    
    
    
    104,834Other credit enhanced municipal bonds
    
    
    1,474
    
    
    
    1,474
    
    
    
    
    
    
    
    Total
    
    $
    164,936
    
    
    $
    54,992
    
    
    $
    5,110
    
    
    $
    104,834
   13




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  3. Fair Value Measurements
       
    
    Level 1  inputs utilize quoted prices (unadjusted) in active markets for identical
assets that the Company has the ability to access at the measurement date.
 
    
    Level 2  inputs utilize other than quoted prices included in Level 1 that are
observable for the similar assets, either directly or indirectly.
 
    
    Level 3  inputs are unobservable for the asset, and include situations where there is
little, if any, market activity for the asset.
  14




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
    As of June 30, 2009
    
    Fair Value Measurements(Dollars in thousands)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalBonds:U.S. treasury and agency obligations
    
    $
    69,133
    
    
    $
    88,491
    
    
    $
    
    
    
    $
    157,624Obligations of states and political
subdivisions
    
    
    
    
    
    
    223,624
    
    
    
    
    
    
    
    223,624Mortgage-backed securities
    
    
    
    
    
    
    335,187
    
    
    
    
    
    
    
    335,187Commercial mortgage-backed securities
    
    
    
    
    
    
    146,245
    
    
    
    
    
    
    
    146,245Asset-backed securities
    
    
    
    
    
    
    71,784
    
    
    
    
    
    
    
    71,784Corporate notes
    
    
    
    
    
    
    286,359
    
    
    
    
    
    
    
    286,359Foreign corporate bonds
    
    
    
    
    
    
    45,706
    
    
    
    
    
    
    
    45,706Other bonds
    
    
    
    
    
    
    20,001
    
    
    
    
    
    
    
    20,001Total bonds
    
    
    69,133
    
    
    
    1,217,397
    
    
    
    
    
    
    
    1,286,530Preferred shares
    
    
    2,201
    
    
    
    2,107
    
    
    
    
    
    
    
    4,308Common shares
    
    
    50,724
    
    
    
    
    
    
    
    
    
    
    
    50,724Other invested assets
    
    
    
    
    
    
    
    
    
    
    50,817
    
    
    
    50,817Total invested assets
    
    $
    122,058
    
    
    $
    1,219,504
    
    
    $
    50,817
    
    
    $
    1,392,379
 As of December 31, 2008
    
    Fair Value Measurements(Dollars in thousands)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalBonds:U.S. treasury and agency obligations
    
    $
    75,460
    
    
    $
    77,317
    
    
    $
    
    
    
    $
    152,777Obligations of states and political
subdivisions
    
    
    
    
    
    
    243,030
    
    
    
    
    
    
    
    243,030Mortgage-backed securities
    
    
    
    
    
    
    384,069
    
    
    
    
    
    
    
    384,069Commercial mortgage-backed securities
    
    
    
    
    
    
    144,457
    
    
    
    
    
    
    
    144,457Asset-backed securities
    
    
    
    
    
    
    16,553
    
    
    
    
    
    
    
    16,553Corporate notes
    
    
    
    
    
    
    213,655
    
    
    
    
    
    
    
    213,655Foreign corporate bonds
    
    
    
    
    
    
    29,150
    
    
    
    
    
    
    
    29,150Other bonds
    
    
    
    
    
    
    21,283
    
    
    
    
    
    
    
    21,283Total bonds
    
    
    75,460
    
    
    
    1,129,514
    
    
    
    
    
    
    
    1,204,974Preferred shares
    
    
    1,813
    
    
    
    2,852
    
    
    
    
    
    
    
    4,665Common shares
    
    
    50,613
    
    
    
    
    
    
    
    
    
    
    
    50,613Other invested assets
    
    
    
    
    
    
    
    
    
    
    46,672
    
    
    
    46,672Total invested assets
    
    $
    127,886
    
    
    $
    1,132,366
    
    
    $
    46,672
    
    
    $
    1,306,924
   15




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
   Fair Value Measurements Using Level 3 InputsOtherQuarter Ended June 30, 2009
    
    
    
    
    
    Invested(Dollars in thousands)
    
    Bonds
    
    
    Assets
    
    
    TotalBeginning balance at April 1, 2009
    
    $
    
    
    
    $
    19,731
    
    
    $
    19,731Total gains (losses) (realized / unrealized):Included in equity in net income (loss) of partnership
    
    
    
    
    
    
    2,530
    
    
    
    2,530Included in accumulated other comprehensive income
    
    
    
    
    
    
    (816
    )
    
    
    (816
    )Purchases
    
    
    
    
    
    
    30,602
    
    
    
    30,602Sales
    
    
    
    
    
    
    (1,230
    )
    
    
    (1,230
    )Ending balance at June 30, 2009
    
    $
    
    
    
    $
    50,817
    
    
    $
    50,817Gains for 2009 included in earnings attributable to the
change in unrealized gains relating to assets still held
at June 30, 2009
    
    $
    
    
    
    $
    2,530
    
    
    $
    2,530
 Fair Value Measurements Using Level 3 InputsOtherSix Months Ended June 30, 2009
    
    
    
    
    
    Invested(Dollars in thousands)
    
    Bonds
    
    
    Assets
    
    
    TotalBeginning balance at January 1, 2009
    
    $
    
    
    
    $
    46,672
    
    
    $
    46,672Total gains (losses) (realized / unrealized):Included in equity in net income (loss) of partnership
    
    
    
    
    
    
    2,737
    
    
    
    2,737Included in accumulated other comprehensive income
    
    
    
    
    
    
    (3,884
    )
    
    
    (3,884
    )Purchases
    
    
    
    
    
    
    30,654
    
    
    
    30,654Sales
    
    
    
    
    
    
    (25,362
    )
    
    
    (25,362
    )Ending balance at June 30, 2009
    
    $
    
    
    
    $
    50,817
    
    
    $
    50,817Gains for 2009 included in earnings attributable to the
change in unrealized gains relating to assets still held
at June 30, 2009
    
    $
    
    
    
    $
    2,737
    
    
    $
    2,737
   16




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Fair Value Measurements Using Level 3 InputsOtherQuarter Ended June 30, 2008
    
    
    
    
    
    Invested(Dollars in thousands)
    
    Bonds
    
    
    Assets
    
    
    TotalBeginning balance at April 1, 2008
    
    $
    1,995
    
    
    $
    62,330
    
    
    $
    64,325Total gains (losses) (realized / unrealized):Included in equity in net income (loss) of partnership
    
    
    
    
    
    
    (41
    )
    
    
    (41
    )Included in accumulated other comprehensive income
    
    
    33
    
    
    
    (1,070
    )
    
    
    (1,037
    )Purchases
    
    
    
    
    
    
    255
    
    
    
    255Sales
    
    
    (261
    )
    
    
    
    
    
    
    (261
    )Transfers out of Level 3
    
    
    (1,767
    )
    
    
    
    
    
    
    (1,767
    )Ending balance at June 30, 2008
    
    $
    
    
    
    $
    61,474
    
    
    $
    61,474Losses for the quarter ended June 30, 2008 included in
earnings attributable to the change in unrealized losses
relating to assets still held at June 30, 2008
    
    $
    
    
    
    $
    (41
    )
    
    $
    (41
    )
 Fair Value Measurements Using Level 3 InputsOtherSix Months Ended June 30, 2008
    
    
    
    
    
    Invested(Dollars in thousands)
    
    Bonds
    
    
    Assets
    
    
    TotalBeginning balance at January 1, 2008
    
    $
    2,376
    
    
    $
    64,539
    
    
    $
    66,915Total gains (losses) (realized / unrealized):Included in equity in net income (loss) of partnership
    
    
    
    
    
    
    (722
    )
    
    
    (722
    )Included in accumulated other comprehensive income
    
    
    (55
    )
    
    
    (2,598
    )
    
    
    (2,653
    )Purchases
    
    
    
    
    
    
    255
    
    
    
    255Sales
    
    
    (554
    )
    
    
    
    
    
    
    (554
    )Transfers out of Level 3
    
    
    (1,767
    )
    
    
    
    
    
    
    (1,767
    )Ending balance at June 30, 2008
    
    $
    
    
    
    $
    61,474
    
    
    $
    61,474Losses for the six months ended June 30, 2008 included
in earnings attributable to the change in unrealized
losses relating to assets still held at June 30, 2008
    
    $
    
    
    
    $
    (722
    )
    
    $
    (722
    )
    17




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  
    
    Equity prices are received from all primary and secondary exchanges.
 
    
    Corporate bonds are individually evaluated, mostly on a dollar basis, sometimes on a
yield or nominal spread basis (depending on how the market trades a security or sector).
Valuations are then verified with other broker/dealers and contributing firms.
 
    
    Commercial mortgage backed securities (CMBS) are evaluated on a nominal spread basis
using a contributed model to value individual tranches. Each tranche is hand evaluated
using nominal spreads from broker/dealers deemed to accurately represent the market.
Investment grade tranches are evaluated with spreads to the swap curve and non-investment
grade tranches are evaluated with spreads to the treasury curve. Coverage includes AAA
tranches as well as mezzanine and subordinated pieces. In addition, nominal spread levels
on specific and generic tranches are received from other broker/dealers involved in the
CMBS market.
 
    
    For CMOs, which are categorized with mortgage-backed securities in the tables listed
above, a volatility-driven, multi dimensional single cash flow stream model or
option-adjusted spread model is used. For ABSs, a single cash flow stream model is
utilized. For both asset classes, evaluations utilize standard inputs plus new issue data,
monthly payment information, and collateral performance. The evaluated pricing models
incorporate security set-up, prepayment speeds, cash flows, treasury, swap curves and
spread adjustments.
 
    
    For municipals, a series of matrices are used to evaluate securities within this asset
class. The evaluated pricing models for this asset class incorporate security set-up,
sector curves, yield to worst, ratings updates, and adjustments for material events
notices.
 
    
    U.S. Treasuries are priced on the bid side by a market maker.
 
    
    For MBSs, the pricing vendor utilizes a matrix model correlation to TBA (a forward MBS
trade) or benchmarking to value a security.
  
    
    Examining market value changes on an overall portfolio basis to determine if the market
value reported by the pricing vendors appears reasonable. Duration of the portfolio and
changes to benchmark yields are compared to the market value change reported by the
Investment Manager to make this determination. The fair values reported are reviewed by
management.
 
    
    Reviewing periodic reports provided by the Investment Manager that provides information
regarding rating changes and securities placed on watch. This procedure allows the Company
to understand why a particular securitys market value may have changed.
 
    
    Understanding and periodically evaluating the various pricing methods and procedures
used by the Companys pricing vendors to ensure that investments are properly classified
within the fair value hierarchy.
   18




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 4. Reinsurance
     Property Catastrophe Excess of Loss
 Property Per Risk Excess of Loss
 Professional Liability Excess of Loss
 Casualty Excess of Loss
 Casualty Clash Excess of Loss
  19




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Property
Quota Share
  5. Income Taxes
  Quarter Ended June 30, 2009:
    
    Non-U.S.
    
    
    U.S.(Dollars in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    51,097
    
    
    $
    72,687
    
    
    $
    (32,304
    )
    
    $
    91,480Net premiums written
    
    $
    50,991
    
    
    $
    26,487
    
    
    $
    
    
    
    $
    77,478Net premiums earned
    
    $
    45,418
    
    
    $
    29,314
    
    
    $
    
    
    
    $
    74,732Net investment income
    
    
    10,701
    
    
    
    10,501
    
    
    
    (4,597
    )
    
    
    16,605Net realized investment gains
    
    
    115
    
    
    
    5,283
    
    
    
    
    
    
    
    5,398Total revenues
    
    
    56,234
    
    
    
    45,098
    
    
    
    (4,597
    )
    
    
    96,735Losses and Expenses:Net losses and loss adjustment expenses
    
    
    23,596
    
    
    
    20,451
    
    
    
    
    
    
    
    44,047Acquisition costs and other
underwriting expenses
    
    
    18,329
    
    
    
    11,643
    
    
    
    
    
    
    
    29,972Corporate and other operating expenses
    
    
    648
    
    
    
    3,015
    
    
    
    
    
    
    
    3,663Interest expense
    
    
    
    
    
    
    6,429
    
    
    
    (4,597
    )
    
    
    1,832Income before income taxes
    
    $
    13,661
    
    
    $
    3,560
    
    
    $
    
    
    
    $
    17,221
 Quarter Ended June 30, 2008:
    
    Non-U.S.
    
    
    U.S.(Dollars in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    51,548
    
    
    $
    94,855
    
    
    $
    (42,085
    )
    
    $
    104,318Net premiums written
    
    $
    43,121
    
    
    $
    42,088
    
    
    $
    
    
    
    $
    85,209Net premiums earned
    
    $
    51,572
    
    
    $
    49,101
    
    
    $
    
    
    
    $
    100,673Net investment income
    
    
    10,295
    
    
    
    11,374
    
    
    
    (4,597
    )
    
    
    17,072Net realized investment gains (losses)
    
    
    160
    
    
    
    (2,640
    )
    
    
    
    
    
    
    (2,480
    )Total revenues
    
    
    62,027
    
    
    
    57,835
    
    
    
    (4,597
    )
    
    
    115,265Losses and Expenses:Net losses and loss adjustment expenses
    
    
    37,752
    
    
    
    45,892
    
    
    
    
    
    
    
    83,644Acquisition costs and other
underwriting expenses
    
    
    23,506
    
    
    
    14,606
    
    
    
    
    
    
    
    38,112Corporate and other operating expenses
    
    
    1,209
    
    
    
    1,060
    
    
    
    
    
    
    
    2,269Interest expense
    
    
    
    
    
    
    6,785
    
    
    
    (4,597
    )
    
    
    2,188Loss before income taxes
    
    $
    (440
    )
    
    $
    (10,508
    )
    
    $
    
    
    
    $
    (10,948
    )
  20




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Six Months Ended June 30, 2009:
    
    Non-U.S.
    
    
    U.S.(Dollars in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    111,991
    
    
    $
    140,307
    
    
    $
    (61,630
    )
    
    $
    190,668Net premiums written
    
    $
    111,461
    
    
    $
    52,630
    
    
    $
    
    
    
    $
    164,091Net premiums earned
    
    $
    90,189
    
    
    $
    63,083
    
    
    $
    
    
    
    $
    153,272Net investment income
    
    
    20,927
    
    
    
    26,999
    
    
    
    (9,144
    )
    
    
    38,782Net realized investment losses
    
    
    (1,982
    )
    
    
    (1,216
    )
    
    
    
    
    
    
    (3,198
    )Total revenues
    
    
    109,134
    
    
    
    88,866
    
    
    
    (9,144
    )
    
    
    188,856Losses and Expenses:Net losses and loss adjustment expenses
    
    
    49,792
    
    
    
    41,995
    
    
    
    
    
    
    
    91,787Acquisition costs and other
underwriting expenses
    
    
    36,529
    
    
    
    24,257
    
    
    
    
    
    
    
    60,786Corporate and other operating expenses
    
    
    3,519
    
    
    
    4,119
    
    
    
    
    
    
    
    7,638Interest expense
    
    
    
    
    
    
    12,830
    
    
    
    (9,144
    )
    
    
    3,686Income before income taxes
    
    $
    19,294
    
    
    $
    5,665
    
    
    $
    
    
    
    $
    24,959
 Six Months Ended June 30, 2008:
    
    Non-U.S.
    
    
    U.S.(Dollars in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    97,653
    
    
    $
    188,147
    
    
    $
    (82,420
    )
    
    $
    203,380Net premiums written
    
    $
    84,754
    
    
    $
    82,419
    
    
    $
    
    
    
    $
    167,173Net premiums earned
    
    $
    109,671
    
    
    $
    104,059
    
    
    $
    
    
    
    $
    213,730Net investment income
    
    
    20,849
    
    
    
    23,153
    
    
    
    (9,144
    )
    
    
    34,858Net realized investment gains (losses)
    
    
    148
    
    
    
    (3,698
    )
    
    
    
    
    
    
    (3,550
    )Total revenues
    
    
    130,668
    
    
    
    123,514
    
    
    
    (9,144
    )
    
    
    245,038Losses and Expenses:Net losses and loss adjustment expenses
    
    
    75,831
    
    
    
    84,463
    
    
    
    
    
    
    
    160,294Acquisition costs and other
underwriting expenses
    
    
    46,607
    
    
    
    29,700
    
    
    
    
    
    
    
    76,307Corporate and other operating expenses
    
    
    3,813
    
    
    
    2,401
    
    
    
    
    
    
    
    6,214Interest expense
    
    
    
    
    
    
    13,871
    
    
    
    (9,144
    )
    
    
    4,727Income (loss) before income taxes
    
    $
    4,417
    
    
    $
    (6,921
    )
    
    $
    
    
    
    $
    (2,504
    )
  Quarter Ended June 30,2009
    
    
    2008% of Pre-
    
    
    
    
    
    
    % of Pre-(Dollars in thousands)
    
    Amount
    
    

Tax
Income
    
    
    Amount
    
    

Tax
LossExpected tax provision at
weighted average rate
    
    $
    1,266
    
    
    
    7.3
    %
    
    $
    (3,658
    )
    
    
    (33.4
    )%Adjustments:Tax exempt interest
    
    
    (668
    )
    
    
    (3.9
    )
    
    
    (744
    )
    
    
    (6.8
    )Dividend exclusion
    
    
    (99
    )
    
    
    (0.6
    )
    
    
    (165
    )
    
    
    (1.5
    )Effective tax rate adjustment
    
    
    2,196
    
    
    
    12.7
    
    
    
    2,486
    
    
    
    22.7Other
    
    
    63
    
    
    
    0.5
    
    
    
    78
    
    
    
    0.7Income tax expense
    
    $
    2,758
    
    
    
    16.0
    %
    
    $
    (2,003
    )
    
    
    (18.3
    )%
  21




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Six Months Ended June 30,2009
    
    
    2008% of Pre-
    
    
    
    
    
    
    % of Pre-(Dollars in thousands)
    
    Amount
    
    

Tax
Income
    
    
    Amount
    
    

Tax
LossExpected tax provision at
weighted average rate
    
    $
    2,023
    
    
    
    8.1
    %
    
    $
    (2,383
    )
    
    
    (95.2
    )%Adjustments:Tax exempt interest
    
    
    (1,380
    )
    
    
    (5.5
    )
    
    
    (1,457
    )
    
    
    (58.2
    )Dividend exclusion
    
    
    (210
    )
    
    
    (0.8
    )
    
    
    (326
    )
    
    
    (13.0
    )Effective tax rate adjustment
    
    
    2,951
    
    
    
    11.8
    
    
    
    2,897
    
    
    
    115.7Other
    
    
    97
    
    
    
    0.3
    
    
    
    (173
    )
    
    
    (6.9
    )Income tax expense
    
    $
    3,481
    
    
    
    13.9
    %
    
    $
    (1,442
    )
    
    
    (57.6
    )%
      6. Liability for Unpaid Losses and Loss Adjustment Expenses
   22




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Quarter Ended June 30,(Dollars in thousands)
    
    2009
    
    
    2008Unpaid losses and loss adjustment expenses at beginning of
period
    
    $
    1,446,974
    
    
    $
    1,494,816Less: Ceded reinsurance receivables on unpaid losses and
loss adjustment expenses
    
    
    637,686
    
    
    
    679,775Net balance at beginning of period
    
    
    809,288
    
    
    
    815,041Incurred losses and loss adjustment expenses related to:Current year
    
    
    46,200
    
    
    
    67,103Prior years
    
    
    (2,153)
    (1)
    
    
    16,541
    (2)Total incurred losses and loss adjustment expenses
    
    
    44,047
    
    
    
    83,644Paid losses and loss adjustment expenses related to:Current year
    
    
    12,873
    
    
    
    15,634Prior years
    
    
    59,308
    
    
    
    48,735Total paid losses and loss adjustment expenses
    
    
    72,181
    
    
    
    64,369Net balance at end of period
    
    
    781,154
    
    
    
    834,316Plus: Ceded reinsurance receivables on unpaid losses and
loss adjustment expenses
    
    
    613,664
    
    
    
    666,913Unpaid losses and loss adjustment expenses at end of period
    
    $
    1,394,818
    
    
    $
    1,501,229
 (1)
    
    In the second quarter of 2009, the Company reduced its prior
accident year loss reserves by $2.1 million, which consisted of a $2.1
million reduction in property lines related primarily to accident year 2008
and a reduction of $2.0 million in general liability lines related
primarily to accident years 2006 to 2008, offset by a $2.0 million increase
in professional lines related to terminated programs.(2)
    
    In the second quarter of 2008, the Company increased its prior
accident year loss reserves by $16.9 million and reduced its allowance for
uncollectible reinsurance by $0.4 million. The loss reserves increase of
$16.9 million consisted of an increase of approximately $21.1 million in
liability lines partially offset by a reduction of $4.2 million in property
lines. The increase related to the liability lines consisted of $16.6
million from general liability lines primarily related to accident years
2001 and prior, $2.6 million from professional liability lines primarily
related to accident years 2006 and 2007 and $1.9 million from reinsurance
operations primarily related to accident year 2007. The reduction to the
property lines primarily related to accident year 2007. Six Months Ended June 30,(Dollars in thousands)
    
    2009
    
    
    2008Unpaid losses and loss adjustment expenses at beginning of
period
    
    $
    1,506,429
    
    
    $
    1,503,237Less: Ceded reinsurance receivables on unpaid losses and
loss adjustment expenses
    
    
    670,591
    
    
    
    702,353Net balance at beginning of period
    
    
    835,838
    
    
    
    800,884Incurred losses and loss adjustment expenses related to:Current year
    
    
    94,697
    
    
    
    143,753Prior years
    
    
    (2,910)
    (1)
    
    
    16,541
    (2)Total incurred losses and loss adjustment expenses
    
    
    91,787
    
    
    
    160,294Paid losses and loss adjustment expenses related to:Current year
    
    
    16,070
    
    
    
    21,567Prior years
    
    
    130,401
    
    
    
    105,295Total paid losses and loss adjustment expenses
    
    
    146,471
    
    
    
    126,862Net balance at end of period
    
    
    781,154
    
    
    
    834,316Plus: Ceded reinsurance receivables on unpaid losses and
loss adjustment expenses
    
    
    613,664
    
    
    
    666,913Unpaid losses and loss adjustment expenses at end of period
    
    $
    1,394,818
    
    
    $
    1,501,229
 (1)
    
    In 2009, the Company reduced its prior accident year loss reserves
by $2.1 million and reduced its allowance for uncollectible reinsurance by
$0.8 million. The loss reserves reduction of $2.1 million primarily
consisted of a $2.1 million reduction in property lines related primarily to
accident year 2008 and a reduction of $2.0 million in general liability
lines related primarily to accident years 2006 to 2008, offset by a $2.0
million increase in
professional lines related to terminated programs.(2)
    
    In 2008, the Company increased its prior accident year loss
reserves by $16.9 million and reduced its allowance for uncollectible
reinsurance by $0.4 million. The loss reserves increase of $16.9 million
consisted of an increase of approximately $21.1 million in liability lines
partially offset by a reduction of $4.2 million in property lines. The
increase related to the liability lines consisted of $16.6 million from
general liability lines primarily related to accident years 2001 and prior,
$2.6 million from professional liability lines primarily related to accident
years 2006 and 2007 and $1.9 million from reinsurance operations primarily
related to accident year 2007. The reduction to the property lines
primarily related to accident year 2007.  23




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 7. Debt
  Loans Payable
   8. Shareholders Equity
      24




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
   9. Related Party Transactions
      25




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
   Quarter Ended June 30,
    
    
    Six Months Ended June 30,(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Ceded written premium
    
    $
    2,340
    
    
    $
    5,076
    
    
    $
    2,748
    
    
    $
    8,573Ceded losses
    
    
    497
    
    
    
    (2,275
    )
    
    
    972
    
    
    
    (1,228
    )
   10. Commitments and Contingencies
 Legal Proceedings
   11. Share-Based Compensation Plans
  12. Earnings (Loss) Per Share
   26




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
    (Dollars in thousands,
    
    Quarter Ended June 30,
    
    
    Six Months Ended June 30,except per share data)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss)
    
    $
    16,261
    
    
    $
    (8,971
    )
    
    $
    23,411
    
    
    $
    (1,531
    )Basic earnings (loss) per share:Weighted average shares outstanding  basic
    
    
    49,462,974
    
    
    
    33,776,708
    
    
    
    40,512,274
    
    
    
    34,238,706Adjustment for bonus element of Rights Offering
    
    
    1,361,332
    
    
    
    3,901,939
    
    
    
    2,493,075
    
    
    
    3,955,310Adjusted weighted average shares outstanding  basic
    
    
    50,824,306
    
    
    
    37,678,647
    
    
    
    43,005,349
    
    
    
    38,194,016Net income (loss)
    
    $
    0.32
    
    
    $
    (0.24
    )
    
    $
    0.54
    
    
    $
    (0.04
    )Diluted earnings (loss) per share:Weighted average shares outstanding  diluted
    
    
    49,501,869
    
    
    
    33,776,708
    
    
    
    40,545,048
    
    
    
    34,238,706Adjustment for bonus element of Rights Offering
    
    
    1,361,332
    
    
    
    3,901,939
    
    
    
    2,493,075
    
    
    
    3,955,310Adjusted weighted average shares outstanding  diluted
    
    
    50,863,201
    
    
    
    37,678,647
    
    
    
    43,038,123
    
    
    
    38,194,016Net income (loss)
    
    $
    0.32
    
    
    $
    (0.24
    )
    
    $
    0.54
    
    
    $
    (0.04
    )
  Quarter Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Weighted average shares for basic earnings per share
    
    
    50,824,306
    
    
    
    37,678,647
    
    
    
    43,005,349
    
    
    
    38,194,016Non-vested restricted stock
    
    
    38,895
    
    
    
    
    
    
    
    32,774
    
    
    
    Weighted average shares for diluted earnings per share
    
    
    50,863,201
    
    
    
    37,678,647
    
    
    
    43,038,123
    
    
    
    38,194,016
   27




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 13. Segment Information
    Quarter Ended June 30, 2009:
    
    Insurance(Dollars in thousands)
    

Operations (1)
    
    
    Reinsurance (2)

    
    
    TotalRevenues:Gross premiums written
    
    $
    72,687
    
    
    $
    18,793
    
    
    $
    91,480Net premiums written
    
    $
    58,791
    
    
    $
    18,687
    
    
    $
    77,478Net premiums earned
    
    $
    64,446
    
    
    $
    10,286
    
    
    $
    74,732Losses and Expenses:Net losses and loss adjustment expenses
    
    
    39,547
    
    
    
    4,500
    
    
    
    44,047Acquisition costs and other underwriting expenses
    
    
    27,238
    (3)
    
    
    2,734
    (4)
    
    
    29,972Income (loss) from segments
    
    $
    (2,339
    )
    
    $
    3,052
    
    
    
    713Unallocated Items:Net investment income
    
    
    
    
    
    
    
    
    
    
    16,605Net realized investment gains
    
    
    
    
    
    
    
    
    
    
    5,398Corporate and other operating expenses
    
    
    
    
    
    
    
    
    
    
    (3,663
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (1,832
    )Income before income taxes
    
    
    
    
    
    
    
    
    
    
    17,221Income tax expense
    
    
    
    
    
    
    
    
    
    
    2,758Income before equity in net income of partnership
    
    
    
    
    
    
    
    
    
    
    14,463Equity in net income of partnership, net of tax
    
    
    
    
    
    
    
    
    
    
    1,798Net income
    
    
    
    
    
    
    
    
    
    $
    16,261Total assets
    
    $
    1,894,370
    
    
    $
    611,031
    (5)
    
    $
    2,505,401
 (1)
    
    Includes business ceded to Reinsurance Operations.(2)
    
    External business only, excluding business assumed from Insurance Operations.(3)
    
    Includes federal excise tax of $351 relating to premiums ceded from Insurance Operations to Reinsurance Operations.(4)
    
    Includes all Wind River Reinsurance expenses other than federal excise tax.(5)
    
    Comprised of Wind River Reinsurances total assets less its investment in subsidiaries.  28




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Quarter Ended June 30, 2008:
    
    Insurance(Dollars in thousands)
    
    Operations (1)
    
    
    Reinsurance (2)
    
    
    TotalRevenues:Gross premiums written
    
    $
    94,855
    
    
    $
    9,463
    
    
    $
    104,318Net premiums written
    
    $
    84,171
    
    
    $
    1,038
    
    
    $
    85,209Net premiums earned
    
    $
    98,204
    
    
    $
    2,469
    
    
    $
    100,673Losses and Expenses:Net losses and loss adjustment expenses
    
    
    77,576
    
    
    
    6,068
    
    
    
    83,644Acquisition costs and other underwriting expenses
    
    
    35,817
    (3)
    
    
    2,295
    (4)
    
    
    38,112Loss from segments
    
    $
    (15,189
    )
    
    $
    (5,894
    )
    
    
    (21,083
    )Unallocated Items:Net investment income
    
    
    
    
    
    
    
    
    
    
    17,072Net realized investment losses
    
    
    
    
    
    
    
    
    
    
    (2,480
    )Corporate and other operating expenses
    
    
    
    
    
    
    
    
    
    
    (2,269
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (2,188
    )Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    (10,948
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    (2,003
    )Loss before equity in net loss of partnership
    
    
    
    
    
    
    
    
    
    
    (8,945
    )Equity in net loss of partnership, net of tax
    
    
    
    
    
    
    
    
    
    
    (26
    )Net loss
    
    
    
    
    
    
    
    
    
    $
    (8,971
    )Total assets
    
    $
    2,037,657
    
    
    $
    599,143
    (5)
    
    $
    2,636,800
 (1)
    
    Includes business ceded to the Companys Reinsurance Operations.(2)
    
    External business only, excluding business assumed from the Companys Insurance Operations.(3)
    
    Includes federal excise tax of $491 relating to premiums ceded from Insurance Operations to Reinsurance Operations.(4)
    
    Includes all Wind River Reinsurance expenses other than federal excise tax.(5)
    
    Comprised of Wind River Reinsurances total assets less its investment in subsidiaries. Six Months Ended June 30, 2009:
    
    Insurance(Dollars in thousands)
    
    Operations (1)
    
    
    Reinsurance (2)
    
    
    TotalRevenues:Gross premiums written
    
    $
    140,307
    
    
    $
    50,361
    
    
    $
    190,668Net premiums written
    
    $
    114,260
    
    
    $
    49,831
    
    
    $
    164,091Net premiums earned
    
    $
    135,166
    
    
    $
    18,106
    
    
    $
    153,272Losses and Expenses:Net losses and loss adjustment expenses
    
    
    82,291
    
    
    
    9,496
    
    
    
    91,787Acquisition costs and other underwriting expenses
    
    
    56,380
    (3)
    
    
    4,406
    (4)
    
    
    60,786Income (loss) from segments
    
    $
    (3,505
    )
    
    $
    4,204
    
    
    
    699Unallocated Items:Net investment income
    
    
    
    
    
    
    
    
    
    
    38,782Net realized investment losses
    
    
    
    
    
    
    
    
    
    
    (3,198
    )Corporate and other operating expenses
    
    
    
    
    
    
    
    
    
    
    (7,638
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (3,686
    )Income before income taxes
    
    
    
    
    
    
    
    
    
    
    24,959Income tax expense
    
    
    
    
    
    
    
    
    
    
    3,481Income before equity in net income of partnership
    
    
    
    
    
    
    
    
    
    
    21,478Equity in net income of partnership, net of tax
    
    
    
    
    
    
    
    
    
    
    1,933Net income
    
    
    
    
    
    
    
    
    
    $
    23,411Total assets
    
    $
    1,894,370
    
    
    $
    611,031
    (5)
    
    $
    2,505,401
 (1)
    
    Includes business ceded to the Companys Reinsurance Operations.(2)
    
    External business only, excluding business assumed from the Companys Insurance Operations.(3)
    
    Includes federal excise tax of $721 relating to premiums ceded from Insurance Operations to Reinsurance Operations.(4)
    
    Includes all Wind River Reinsurance expenses other than federal excise tax.(5)
    
    Comprised of Wind River Reinsurances total assets less its investment in subsidiaries.  29




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Six Months Ended June 30, 2008:
    
    Insurance(Dollars in thousands)
    
    Operations (1)
    
    
    Reinsurance (2)
    
    
    TotalRevenues:Gross premiums written
    
    $
    188,147
    
    
    $
    15,233
    
    
    $
    203,380Net premiums written
    
    $
    164,839
    
    
    $
    2,334
    
    
    $
    167,173Net premiums earned
    
    $
    208,123
    
    
    $
    5,607
    
    
    $
    213,730Losses and Expenses:Net losses and loss adjustment expenses
    
    
    151,792
    
    
    
    8,502
    
    
    
    160,294Acquisition costs and other underwriting expenses
    
    
    72,458
    (3)
    
    
    3,849
    (4)
    
    
    76,307Loss from segments
    
    $
    (16,127
    )
    
    $
    (6,744
    )
    
    
    (22,871
    )Unallocated Items:Net investment income
    
    
    
    
    
    
    
    
    
    
    34,858Net realized investment losses
    
    
    
    
    
    
    
    
    
    
    (3,550
    )Corporate and other operating expenses
    
    
    
    
    
    
    
    
    
    
    (6,214
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (4,727
    )Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    (2,504
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    (1,442
    )Loss before equity in net loss of partnership
    
    
    
    
    
    
    
    
    
    
    (1,062
    )Equity in net loss of partnership, net of tax
    
    
    
    
    
    
    
    
    
    
    (469
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (1,531
    )Total assets
    
    $
    2,037,657
    
    
    $
    599,143
    (5)
    
    $
    2,636,800
 (1)
    
    Includes business ceded to the Companys Reinsurance Operations.(2)
    
    External business only, excluding business assumed from the Companys Insurance Operations.(3)
    
    Includes federal excise tax of $1,041 relating to premiums ceded from Insurance Operations to Reinsurance Operations.(4)
    
    Includes all Wind River Reinsurance expenses other than federal excise tax.(5)
    
    Comprised of Wind River Reinsurances total assets less its investment in subsidiaries. 14. Supplemental Cash Flow Information
  Quarter Ended June 30,
    
    
    Six Months Ended June 30,(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Net U.S. federal
income taxes paid
(recovered)
    
    $
    750
    
    
    $
    5,000
    
    
    $
    (7,062
    )
    
    $
    6,401Interest paid
    
    
    446
    
    
    
    943
    
    
    
    3,772
    
    
    
    5,138
 15. New Accounting Pronouncements
   30




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
       31




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
    16. Subsequent Events
    32




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
 Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  Recent Developments
       Overview
     33




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  Critical Accounting Estimates and Policies
  Liability For Unpaid Losses And Loss Adjustment Expenses
     
    
    Paid Development method;
 
    
    Incurred Development method;
 
    
    Expected Loss Ratio method;
 
    
    Bornhuetter-Ferguson method using premiums and paid loss;
 
    
    Bornhuetter-Ferguson method using premiums and incurred loss; and
 
    
    Average Loss method.
  34




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UNITED AMERICA INDEMNITY, LTD.
         35




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UNITED AMERICA INDEMNITY, LTD.
        36




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  Gross Reserves(Dollars in thousands)
    
    Case
    
    
    IBNR (1)
    
    
    TotalInsurance Operations:Penn-America
    
    $
    170,311
    
    
    $
    332,268
    
    
    $
    502,579United National
    
    
    232,791
    
    
    
    474,511
    
    
    
    707,302Diamond State
    
    
    61,836
    
    
    
    88,727
    
    
    
    150,563Total Insurance Operations
    
    
    464,938
    
    
    
    895,506
    
    
    
    1,360,444Reinsurance Operations:Wind River Reinsurance
    
    
    13,014
    
    
    
    21,360
    
    
    
    34,374Total
    
    $
    477,952
    
    
    $
    916,866
    
    
    $
    1,394,818
 Net Reserves (2)(Dollars in thousands)
    
    Case
    
    
    IBNR (1)
    
    
    TotalInsurance Operations:Penn-America
    
    $
    151,028
    
    
    $
    276,882
    
    
    $
    427,910United National
    
    
    70,991
    
    
    
    149,642
    
    
    
    220,633Diamond State
    
    
    42,439
    
    
    
    66,466
    
    
    
    108,905Total Insurance Operations
    
    
    264,458
    
    
    
    492,990
    
    
    
    757,448Reinsurance Operations:Wind River Reinsurance
    
    
    5,453
    
    
    
    18,253
    
    
    
    23,706Total
    
    $
    269,911
    
    
    $
    511,243
    
    
    $
    781,154
 (1)
    
    Losses incurred but not reported, including the expected future emergence of case reserves.(2)
    
    Does not include reinsurance receivable on paid losses or reserve for uncollectible reinsurance.    37




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UNITED AMERICA INDEMNITY, LTD.
     Severity Change(Dollars in thousands)
    
    -10%
    
    
    -5%
    
    
    0%
    
    
    5%
    
    
    10%Frequency Change-5%
    
    $
    (13,731
    )
    
    $
    (9,233
    )
    
    $
    (4,735
    )
    
    $
    (237
    )
    
    $
    4,261-3%
    
    
    (12,027
    )
    
    
    (7,434
    )
    
    
    (2,841
    )
    
    
    1,752
    
    
    
    6,345-2%
    
    
    (11,174
    )
    
    
    (6,534
    )
    
    
    (1,894
    )
    
    
    2,746
    
    
    
    7,386-1%
    
    
    (10,322
    )
    
    
    (5,634
    )
    
    
    (947
    )
    
    
    3,741
    
    
    
    8,4280%
    
    
    (9,470
    )
    
    
    (4,735
    )
    
    
    
    
    
    
    4,735
    
    
    
    9,4701%
    
    
    (8,617
    )
    
    
    (3,835
    )
    
    
    947
    
    
    
    5,729
    
    
    
    10,5112%
    
    
    (7,765
    )
    
    
    (2,936
    )
    
    
    1,894
    
    
    
    6,723
    
    
    
    11,5533%
    
    
    (6,913
    )
    
    
    (2,036
    )
    
    
    2,841
    
    
    
    7,718
    
    
    
    12,5955%
    
    
    (5,208
    )
    
    
    (237
    )
    
    
    4,735
    
    
    
    9,706
    
    
    
    14,678
  Recoverability of Reinsurance Receivables
   38




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UNITED AMERICA INDEMNITY, LTD.
 Investments
   (1)
    
    the issuer is in financial distress;
 (2)
    
    the investment is secured;
 (3)
    
    a significant credit rating action occurred;
 (4)
    
    scheduled interest payments were delayed or missed;
 (5)
    
    changes in laws or regulations have affected an issuer or industry;
 (6)
    
    the investment has an unrealized loss and was identified by our Investment
Manager as an investment to be sold before recovery or maturity; and
 (7)
    
    the investment failed EITF 99-20-1 testing, which is a cash flow projection
test to determine if anticipated principal and interest payments will be realized.
  (1)
    
    persisted for more than twelve consecutive months or
 (2)
    
    the value of the investment has been 20% or more below cost for six continuous
months or more to determine if the security should be impaired.
    39




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UNITED AMERICA INDEMNITY, LTD.
 Fair Value Measurements
  Goodwill and Intangible Assets
    Taxation
     40




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UNITED AMERICA INDEMNITY, LTD.
   Our Business Segments
     41




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UNITED AMERICA INDEMNITY, LTD.
  Quarter Ended June 30,
    
    
    Six Months Ended June 30,(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Insurance Operations premiums written:Gross premiums written
    
    $
    72,687
    
    
    $
    94,855
    
    
    $
    140,307
    
    
    $
    188,147Ceded premiums written
    
    
    13,896
    
    
    
    10,684
    
    
    
    26,047
    
    
    
    23,308Net premiums written
    
    $
    58,791
    
    
    $
    84,171
    
    
    $
    114,260
    
    
    $
    164,839Reinsurance Operations premiums written:Gross premiums written
    
    $
    18,793
    
    
    $
    9,463
    
    
    $
    50,361
    
    
    $
    15,233Ceded premiums written
    
    
    106
    
    
    
    8,425
    
    
    
    530
    
    
    
    12,899Net premiums written
    
    $
    18,687
    
    
    $
    1,038
    
    
    $
    49,831
    
    
    $
    2,334Revenues: (1)Insurance Operations
    
    $
    64,446
    
    
    $
    98,204
    
    
    $
    135,166
    
    
    $
    208,123Reinsurance Operations
    
    
    10,286
    
    
    
    2,469
    
    
    
    18,106
    
    
    
    5,607Total revenues
    
    $
    74,732
    
    
    $
    100,673
    
    
    $
    153,272
    
    
    $
    213,730Expenses: (2)Insurance Operations
    
    $
    66,785
    (3)
    
    $
    113,393
    (3)
    
    $
    138,671
    (4)
    
    $
    224,250
    (4)Reinsurance Operations (5)
    
    
    7,234
    
    
    
    8,363
    
    
    
    13,902
    
    
    
    12,351Total expenses
    
    $
    74,019
    
    
    $
    121,756
    
    
    $
    152,573
    
    
    $
    236,601Income (loss) from segments:Insurance Operations
    
    $
    (2,339
    )
    
    $
    (15,189
    )
    
    $
    (3,505
    )
    
    $
    (16,127
    )Reinsurance Operations
    
    
    3,052
    
    
    
    (5,894
    )
    
    
    4,204
    
    
    
    (6,744
    )Total income (loss) from segments
    
    $
    713
    
    
    $
    (21,083
    )
    
    $
    699
    
    
    $
    (22,871
    )Insurance combined ratio analysis: (6)Insurance OperationsLoss ratio
    
    
    61.4
    
    
    
    79.0
    
    
    
    60.9
    
    
    
    72.9Expense ratio
    
    
    42.3
    
    
    
    36.5
    
    
    
    41.7
    
    
    
    34.8Combined ratio
    
    
    103.7
    
    
    
    115.5
    
    
    
    102.6
    
    
    
    107.7Reinsurance OperationsLoss ratio
    
    
    43.7
    
    
    
    245.8
    
    
    
    52.4
    
    
    
    151.7Expense ratio
    
    
    26.6
    
    
    
    93.0
    
    
    
    24.3
    
    
    
    68.6Combined ratio
    
    
    70.3
    
    
    
    338.8
    
    
    
    76.7
    
    
    
    220.3ConsolidatedLoss ratio
    
    
    58.9
    
    
    
    83.1
    
    
    
    59.9
    
    
    
    75.0Expense ratio
    
    
    40.1
    
    
    
    37.9
    
    
    
    39.7
    
    
    
    35.7Combined ratio
    
    
    99.0
    
    
    
    121.0
    
    
    
    99.6
    
    
    
    110.7
 (1)
    
    Excludes net investment income and net realized investment gains (losses), which are not
allocated to our segments(2)
    
    Excludes corporate and other operating expenses and interest expense, which are not allocated
to our segments.(3)
    
    Includes excise tax of $351 and $491 related to cessions from our U.S. Insurance Companies to
Wind River Reinsurance for the quarters ended June 30, 2009 and 2008, respectively.(4)
    
    Includes excise tax of $721 and $1,041 related to cessions from our U.S. Insurance Companies
to Wind River Reinsurance for the six months ended June 30, 2009 and 2008, respectively.(5)
    
    Includes all Wind River Reinsurance expenses other than excise tax related to cessions from
our U.S. Insurance Companies to Wind River Reinsurance.(6)
    
    Our insurance combined ratios are non-GAAP financial measures that are generally viewed in
the insurance industry as indicators of underwriting profitability. The loss ratio is the
ratio of net losses and loss adjustment expenses to net premiums earned. The expense ratio is
the ratio of acquisition costs and other underwriting expenses to net premiums earned. The
combined ratio is the sum of the loss and expense ratios.  42




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UNITED AMERICA INDEMNITY, LTD.
 Results of Operations
 Quarter Ended June 30, 2009 Compared with the Quarter Ended June 30, 2008
 Insurance Operations
  Quarter Ended June 30,
    
    
    Increase / (Decrease)(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    $
    
    
    %Gross premiums written:Penn-America
    
    $
    34,256
    
    
    $
    49,166
    
    
    $
    (14,910
    )
    
    
    -30.3
    %United National
    
    
    16,607
    
    
    
    24,370
    
    
    
    (7,763
    )
    
    
    -31.9
    %Diamond State
    
    
    21,824
    
    
    
    21,319
    
    
    
    505
    
    
    
    2.4
    %Total
    
    $
    72,687
    
    
    $
    94,855
    
    
    $
    (22,168
    )
    
    
    -23.4
    %Net premiums written:Penn-America
    
    $
    27,500
    
    
    $
    45,511
    
    
    $
    (18,011
    )
    
    
    -39.6
    %United National
    
    
    13,222
    
    
    
    20,963
    
    
    
    (7,741
    )
    
    
    -36.9
    %Diamond State
    
    
    18,069
    
    
    
    17,697
    
    
    
    372
    
    
    
    2.1Total
    
    $
    58,791
    
    
    $
    84,171
    
    
    $
    (25,380
    )
    
    
    -30.2
    %Net premiums earned:Penn-America
    
    $
    32,621
    
    
    $
    52,326
    
    
    $
    (19,705
    )
    
    
    -37.7
    %United National
    
    
    14,850
    
    
    
    24,047
    
    
    
    (9,197
    )
    
    
    -38.2
    %Diamond State
    
    
    16,975
    
    
    
    21,831
    
    
    
    (4,856
    )
    
    
    -22.2
    %Total
    
    
    64,446
    
    
    
    98,204
    
    
    $
    (33,758
    )
    
    
    -34.4
    %Losses and expenses:Net losses and loss adjustment expenses
    
    
    39,547
    
    
    
    77,576
    
    
    
    (38,029
    )
    
    
    -49.0
    %Acquisition costs and other
underwriting expenses (1)
    
    
    27,238
    
    
    
    35,817
    
    
    
    (8,579
    )
    
    
    -24.0
    %Income (loss) from underwriting
    
    $
    (2,339
    )
    
    $
    (15,189
    )
    
    $
    12,850
    
    
    
    -84.6
    %Underwriting Ratios:Loss ratio:Current accident year
    
    
    64.7
    
    
    
    64.2
    
    
    
    0.5Prior accident year
    
    
    (3.3
    )
    
    
    14.8
    
    
    
    (18.1
    )Calendar year
    
    
    61.4
    
    
    
    79.0
    
    
    
    (17.6
    )Expense ratio
    
    
    42.3
    
    
    
    36.5
    
    
    
    5.8Combined ratio
    
    
    103.7
    
    
    
    115.5
    
    
    
    (11.8
    )
 (1)
    
    Includes excise tax of $351 and $491 related to cessions from our U.S. Insurance
Companies to Wind River Reinsurance for the quarters ended June 30, 2009 and 2008,
respectively. Premiums
  
    
    Penn-America gross premiums written were $34.3 million for the quarter ended June 30, 2009,
compared with $49.2 million for the quarter ended June 30, 2008, a decrease of $14.9 million,
or 30.3%. The decrease was primarily due to a reduction of $2.1 million due to terminations
of business that did not meet our profitability requirements and a reduction of $12.8 million
from other market factors.
 
    
    United National gross premiums written were $16.6 million for the quarter ended June 30,
2009, compared with $24.4 million for the quarter ended June 30, 2008, a decrease of $7.8
million, or 31.9%. The decrease was primarily due to a reduction of $6.0 million due to
terminations of business that did not meet our profitability requirements and a reduction of
$1.8 million from other market factors.
 
    
    Diamond State gross premiums written were $21.8 million for the quarter ended June 30,
2009, compared with $21.3 million for the quarter ended June 30, 2008, an increase of $0.5 million, or 2.4%. The
increase was primarily due to increases in our property line of $1.7 million and in our general
liability line of $1.7 million, offset by a decrease in our professional line of $2.9 million.
  43




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UNITED AMERICA INDEMNITY, LTD.
    Net Losses and Loss Adjustment Expenses
   
    
    In 2009, we reduced our prior accident year loss reserves by $2.1 million, which reduced
our loss ratio by 3.3 points. This reduction primarily consisted of a $2.1 million
reduction in our property lines primarily related to accident year 2008 and a $2.0 million
reduction in our general liability lines primarily related to accident years 2006 to 2009,
offset by a $2.0 million increase in our professional lines related to terminated programs.
 
    
    In 2008, we increased our prior accident year loss reserves by $15.0 million and reduced
our allowance for uncollectible reinsurance by $0.4 million, which increased our loss ratio
by 14.8 points. The loss reserves increase of $15.0 million primarily consisted of
increases of approximately $17.5 million and $2.6 million in our general liability lines
and professional lines, respectively, offset by reductions of $4.3 million and $0.8 million
in our property lines and umbrella lines, respectively. The increase related to our
general liability lines primarily related to accident years 2001 and prior. The increase
to our professional liability lines primarily related to accident years 2006 and 2007. The
reduction to the property lines primarily related to accident year 2007. The reduction to
the umbrella lines primarily related to accident years 2004 and prior.
  
    
    The current accident year property loss ratio increased 1.2 points from 59.4% in the
quarter ended June 30, 2008 to 60.6% in the quarter ended June 30, 2009, which consists of
a 1.4 point increase in the non-catastrophe loss ratio from 51.6% in the quarter ended June
30, 2008 to 53.0% in the quarter ended June 30, 2009 and a 0.2 point decrease in the
catastrophe loss ratio from 7.8% in the quarter ended June 30, 2008 to 7.6% in the quarter
ended June 30, 2009. The increase in the non-catastrophe loss ratio is primarily due to
higher severity from non-catastrophe weather related losses and fire losses. Catastrophe
losses were $2.0 million and $2.8 million for the quarters ended June 30, 2009 and 2008, respectively.
Property net premiums earned for the quarters ended June 30, 2009 and 2008 were $26.7
million and $36.1 million, respectively.
 
    
    The current accident year casualty loss ratio increased 0.7 points from 66.9% in the
quarter ended June 30, 2008 to 67.6% in the quarter ended June 30, 2009 primarily due to
changes in our mix of business. Casualty net premiums earned for the quarters ended June
30, 2009 and 2008 were $37.8 million and $62.1 million, respectively.
  44




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  Acquisition Costs and Other Underwriting Expenses
  
    
    The decrease in acquisition costs is primarily due to a decrease in commissions
resulting from a decrease in net premiums earned.
 
    
    The increase in other underwriting expenses is primarily due to an increase in total
compensation expenses and property and office costs, offset by a decrease in professional
services costs and other expenses.
 Expense and Combined Ratios
   Loss from underwriting
   45




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Reinsurance Operations
  Quarter Ended June 30,
    
    
    Increase / (Decrease)(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    $
    
    
    %Gross premiums written
    
    $
    18,793
    
    
    $
    9,463
    
    
    $
    9,330
    
    
    
    98.6
    %Net premiums written
    
    $
    18,687
    
    
    $
    1,038
    
    
    $
    17,649
    
    
    
    1,700.3
    %Net premiums earned
    
    $
    10,286
    
    
    $
    2,469
    
    
    $
    7,817
    
    
    
    316.6
    %Losses and expenses:Net losses and loss adjustment expenses
    
    
    4,500
    
    
    
    6,068
    
    
    
    (1,568
    )
    
    
    -25.8
    %Acquisition costs and other underwriting expenses
    
    
    2,734
    
    
    
    2,295
    
    
    
    439
    
    
    
    19.1
    %Income (loss) from underwriting
    
    $
    3,052
    
    
    $
    (5,894
    )
    
    $
    8,946
    
    
    
    -151.8
    %Underwriting Ratios:Loss ratio:Current accident year
    
    
    43.7
    
    
    
    165.9
    
    
    
    (122.2
    )Prior accident year
    
    
    
    
    
    
    79.9
    
    
    
    (79.9
    )Calendar year loss ratio
    
    
    43.7
    
    
    
    245.8
    
    
    
    (202.1
    )Expense ratio
    
    
    26.6
    
    
    
    93.0
    
    
    
    (66.4
    )Combined ratio
    
    
    70.3
    
    
    
    338.8
    
    
    
    (268.5
    )
 Premiums
     Net Losses and Loss Adjustment Expenses
   46




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  
    
    In 2008, we increased our prior accident year loss reserves by $2.0 million, which
increased our loss ratio by 79.9 points. This increase primarily consisted of increases of
$2.7 million in our professional lines related to accident year 2007, offset by reductions
of $0.1 million in our property lines related to accident year 2007, and $0.6 million in
our general liability lines primarily related to accident year 2005.
 
    
    There were no significant changes to prior accident year loss reserves in 2009.
   Acquisition Costs and Other Underwriting Expenses
  
    
    The increase in acquisition costs is primarily due to an increase in commissions
resulting from an increase in net premiums earned.
 
    
    The increase in other underwriting expenses is primarily due to an increase in property
and office costs, and professional services expenses, offset by a decrease in total
compensation expenses.
 Expense and Combined Ratios
   Income (Loss) from underwriting
   47




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UNITED AMERICA INDEMNITY, LTD.
 Unallocated Corporate Items
  Quarter Ended June 30,
    
    
    Increase / (Decrease)(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    $
    
    
    %Net investment income
    
    $
    16,605
    
    
    $
    17,072
    
    
    $
    (467
    )
    
    
    -2.7
    %Net realized investment gains (losses)
    
    
    5,398
    
    
    
    (2,480
    )
    
    
    7,878
    
    
    NACorporate and other operating expenses
    
    
    (3,663
    )
    
    
    (2,269
    )
    
    
    (1,394
    )
    
    
    61.4
    %Interest expense
    
    
    (1,832
    )
    
    
    (2,188
    )
    
    
    356
    
    
    
    (16.3
    )%Income tax (expense) benefit
    
    
    (2,758
    )
    
    
    2,003
    
    
    
    (4,761
    )
    
        NAEquity in net income (loss) of
partnership, net of tax
    
    
    1,798
    
    
    
    (26
    )
    
    
    1,824
    
    
        NA
 Net Investment Income
  
    
    Gross investment income, excluding realized gains and losses, was $17.8 million for the
quarter ended June 30, 2009, compared with $18.3 million for the quarter ended June 30,
2008, a decrease of $0.5 million or 3.0%. The decrease was primarily due to decreases in
short-term interest rates and a decrease in the amount of our invested assets, partially
offset by distributions from our investments in limited partnerships of $1.2 million. Our
limited partnership investments generated gross investment income of $1.2 million for the
quarter ended June 30, 2009 due to liquidations of some of those investments. There was no
investment income generated by our limited partnership investments for the quarter ended
June 30, 2008. Excluding distributions from our limited partnership investments, gross
investment income for the quarter ended June 30, 2009 decreased 9.6% compared to the
quarter ended June 30, 2008. This decrease is due to reductions in short-term interest
rates.
 
    
    Investment expenses were $1.2 million for the quarter ended June 30, 2009, compared with
$1.3 million for the quarter ended June 30, 2008, a decrease of $0.1 million or 6.7%.
  Net Realized Investment Gains (Losses)
    48




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  Corporate and Other Operating Expenses
  Interest Expense
  Income Tax Expense (Benefit)
   Equity in Net Income (Loss) of Partnerships
  Net Income (Loss)
   49




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UNITED AMERICA INDEMNITY, LTD.
 Six Months Ended June 30, 2009 Compared with the Six Months Ended June 30, 2008
 Insurance Operations
  Six Months Ended June 30,
    
    
    Increase / (Decrease)(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    $
    
    
    %Gross premiums written:Penn-America
    
    $
    66,595
    
    
    $
    93,348
    
    
    $
    (26,753
    )
    
    
    -28.7
    %United National
    
    
    31,927
    
    
    
    50,239
    
    
    
    (18,312
    )
    
    
    -36.4
    %Diamond State
    
    
    41,785
    
    
    
    44,560
    
    
    
    (2,775
    )
    
    
    -6.2
    %Total
    
    $
    140,307
    
    
    $
    188,147
    
    
    $
    (47,840
    )
    
    
    -25.4
    %Net premiums written:Penn-America
    
    $
    54,657
    
    
    $
    84,914
    
    
    $
    (30,257
    )
    
    
    -35.6
    %United National
    
    
    25,639
    
    
    
    43,071
    
    
    
    (17,432
    )
    
    
    -40.5
    %Diamond State
    
    
    33,964
    
    
    
    36,854
    
    
    
    (2,890
    )
    
    
    -7.8
    %Total
    
    $
    114,260
    
    
    $
    164,839
    
    
    $
    (50,579
    )
    
    
    -30.7
    %Net premiums earned:Penn-America
    
    $
    69,701
    
    
    $
    113,017
    
    
    $
    (43,316
    )
    
    
    -38.3
    %United National
    
    
    31,544
    
    
    
    50,158
    
    
    
    (18,614
    )
    
    
    -37.1
    %Diamond State
    
    
    33,921
    
    
    
    44,948
    
    
    
    (11,027
    )
    
    
    -24.5
    %Total
    
    
    135,166
    
    
    
    208,123
    
    
    
    (72,957
    )
    
    
    -35.1
    %Losses and expenses:Net losses and loss adjustment expenses
    
    
    82,291
    
    
    
    151,792
    
    
    
    (69,501
    )
    
    
    -45.8
    %Acquisition costs and other
underwriting expenses (1)
    
    
    56,380
    
    
    
    72,458
    
    
    
    (16,078
    )
    
    
    -22.2
    %Income (loss) from underwriting
    
    $
    (3,505
    )
    
    $
    (16,127
    )
    
    $
    12,622
    
    
    
    -78.3
    %Underwriting Ratios:Loss ratio:Current accident year
    
    
    63.1
    
    
    
    65.9
    
    
    
    (2.8
    )Prior accident year
    
    
    (2.2
    )
    
    
    7.0
    
    
    
    (9.2
    )Calendar year
    
    
    60.9
    
    
    
    72.9
    
    
    
    (12.0
    )Expense ratio
    
    
    41.7
    
    
    
    34.8
    
    
    
    6.9Combined ratio
    
    
    102.6
    
    
    
    107.7
    
    
    
    (5.1
    )
 (1)
    
    Includes excise tax of $721 and $1,041 related to cessions from our U.S. Insurance
Companies to Wind River Reinsurance for the six months ended June 30, 2009 and 2008,
respectively. Premiums
  
    
    Penn-America gross premiums written were $66.6 million for the six months ended June 30,
2009, compared with $93.3 million for the six months ended June 30, 2008, a decrease of $26.7
million, or 28.7%. The decrease was primarily due to a reduction of $3.2 million due to
terminations of business that did not meet our profitability requirements and a reduction of
$23.5 million from other market factors.
 
    
    United National gross premiums written were $31.9 million for the six months ended June 30,
2009, compared with $50.2 million for the six months ended June 30, 2008, a decrease of $18.3
million, or 36.4%. The decrease was primarily due to a reduction of $14.9 million due to
terminations of business that did not meet our profitability requirements and a reduction of
$3.4 million from other market factors.
 
    
    Diamond State gross premiums written were $41.8 million for the six months ended June 30,
2009, compared with $44.6 million for the six months ended June 30, 2008, a decrease of $2.8
million, or 6.2%. The decrease was primarily due to a reduction of $3.8 million due to
terminations of business that did not meet our
profitability requirements offset by an increase in our continuing business of $1.0 million.
  50




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
    Net Losses and Loss Adjustment Expenses
   
    
    In 2009, we reduced our prior accident year loss reserves by $2.1 million and reduced
our allowance for uncollectible reinsurance by $0.8 million, which reduced our loss ratio
by 2.2 points. The reduction of our prior accident year loss reserves primarily consisted
of a $2.1 million reduction in our property lines primarily related to accident year 2008
and a $2.5 million reduction in our general liability lines primarily related to accident
years 2006 to 2009, offset by a $2.5 million increase in our professional lines related to
terminated programs.
 
    
    In 2008, we increased our prior accident year loss reserves by $15.0 million and reduced
our allowance for uncollectible reinsurance by $0.4 million, which increased our loss ratio
by 7.0 points. The reduction of our prior accident year loss reserves of $15.0 million
primarily consisted of increases of approximately $17.5 million and $2.6 million in our
general liability lines and professional lines, respectively, offset by reductions of $4.3
million and $0.8 million in our property lines and umbrella lines, respectively. The
increase related to our general liability lines primarily related to accident years 2001
and prior. The increase to our professional liability lines primarily related to accident
years 2006 and 2007. The reduction to the property lines primarily related to accident
year 2007. The reduction to the umbrella lines primarily related to accident years 2004
and prior.
  
    
    The current accident year property loss ratio decreased 6.3 points from 63.5% in the six
months ended June 30, 2008 to 57.2% in the six months ended June 30, 2009, which consists
of a 1.3 point decrease in the catastrophe loss ratio from 6.1% in the six months ended
June 30, 2008 to 4.8% in the six months ended June 30, 2009 and a 5.0 point decrease in the
non-catastrophe loss ratio from 57.4% in the six months ended June 30, 2008 to 52.4% in the
six months ended June 30, 2009. Catastrophe losses were $2.7 million and $4.6 million in
the six months ended June 30, 2009 and 2008, respectively. The decrease in the non-
catastrophe loss ratio is primarily due to lower severity from non-catastrophe weather
related losses and large fire losses. Property net premiums earned for the six months ended
June 30, 2009 and 2008 were $55.4 million and $75.4 million, respectively.
 
    
    The current accident year casualty loss ratio decreased 0.2 points from 67.3% in the six
months ended June 30, 2008 to 67.1% in the six months ended June 30, 2009 primarily due to
changes in our mix of business. Casualty net premiums earned for the six months ended June
30, 2009 and 2008 were $79.8 million and $132.7 million, respectively.
  51




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UNITED AMERICA INDEMNITY, LTD.
  Acquisition Costs and Other Underwriting Expenses
  
    
    The decrease in acquisition costs is primarily due to a decrease in commissions
resulting from a decrease in net premiums earned.
 
    
    The increase in other underwriting expenses is primarily due to an increase in total
compensation expenses and property and office costs, offset by reductions in professional
services and other expenses.
 Expense and Combined Ratios
   Loss from underwriting
   52




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UNITED AMERICA INDEMNITY, LTD.
 Reinsurance Operations
  Six Months Ended June 30,
    
    
    Increase / (Decrease)(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    $
    
    
    %Gross premiums written
    
    $
    50,361
    
    
    $
    15,233
    
    
    $
    35,128
    
    
    
    230.6
    %Net premiums written
    
    $
    49,831
    
    
    $
    2,334
    
    
    $
    47,497
    
    
    
    2,035.0
    %Net premiums earned
    
    $
    18,106
    
    
    $
    5,607
    
    
    $
    12,499
    
    
    
    222.9
    %Losses and expenses:Net losses and loss adjustment expenses
    
    
    9,496
    
    
    
    8,502
    
    
    
    994
    
    
    
    11.7
    %Acquisition costs and other underwriting expenses
    
    
    4,406
    
    
    
    3,849
    
    
    
    557
    
    
    
    14.5
    %Income (loss) from underwriting
    
    $
    4,204
    
    
    $
    (6,744
    )
    
    $
    10,948
    
    
    
    -162.3
    %Underwriting Ratios:Loss ratio:Current accident year
    
    
    52.3
    
    
    
    116.5
    
    
    
    (64.2
    )Prior accident year
    
    
    0.1
    
    
    
    35.2
    
    
    
    (35.1
    )Calendar year loss ratio
    
    
    52.4
    
    
    
    151.7
    
    
    
    (99.3
    )Expense ratio
    
    
    24.3
    
    
    
    68.6
    
    
    
    (44.3
    )Combined ratio
    
    
    76.7
    
    
    
    220.3
    
    
    
    (143.6
    )
 Premiums
     Net Losses and Loss Adjustment Expenses
   53




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UNITED AMERICA INDEMNITY, LTD.
  
    
    In 2009, we increased our prior accident year loss reserves by $0.03 million, which
primarily consisted of increases of $0.02 million in our property lines and $0.01 million
in our general liability lines. The increases to the property and general liability lines
were related to accident year 2008.
 
    
    In 2008, we increased our prior accident year loss reserves by $2.0 million, which
primarily consisted of increases of $2.7 million in our professional lines related to
accident year 2007, offset by reductions of $0.1 million in our property lines related to
accident year 2007, and $0.6 million in our general liability lines primarily related to
accident year 2005.
   Acquisition Costs and Other Underwriting Expenses
  Expense and Combined Ratios
   Income (Loss) from underwriting
   54




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UNITED AMERICA INDEMNITY, LTD.
 Unallocated Corporate Items
  Six Months Ended June 30,
    
    
    Increase / (Decrease)(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    $
    
    
    %Net investment income
    
    $
    38,782
    
    
    $
    34,858
    
    
    $
    3,924
    
    
    
    11.3
    %Net realized investment gains (losses)
    
    
    (3,198
    )
    
    
    (3,550
    )
    
    
    352
    
    
    
    -9.9
    %Corporate and other operating expenses
    
    
    (7,638
    )
    
    
    (6,214
    )
    
    
    (1,424
    )
    
    
    22.9
    %Interest expense
    
    
    (3,686
    )
    
    
    (4,727
    )
    
    
    1,041
    
    
    
    -22.0
    %Income tax (expense) benefit
    
    
    (3,481
    )
    
    
    1,442
    
    
    
    (4,923
    )
    
    NAEquity in net income (loss) of
partnership, net of tax
    
    
    1,933
    
    
    
    (469
    )
    
    
    2,402
    
    
    NA
 Net Investment Income
  
    
    Gross investment income, excluding realized gains and losses, was $41.1 million for the
six months ended June 30, 2009, compared with $37.7 million for the six months ended June
30, 2008, an increase of $3.4 million or 9.2%. The increase was primarily due to gross
investment income from our investments in limited partnerships of $8.6 million offset by
reductions due to decreases in short-term interest rates and a decrease in the amount of
our invested assets. Our limited partnership investments generated gross investment income
of $8.6 million for the six months ended June 30, 2009 due to liquidations of some of those
investments. There was no investment income generated by our limited partnership
investments for the six months ended June 30, 2008. Excluding distributions from our
limited partnership investments, gross investment income for the six months ended June 30,
2009 decreased 13.9% compared to the six months ended June 30, 2008. This decrease is due
to reductions in short-term interest rates.
 
    
    Investment expenses were $2.3 million for the six months ended June 30, 2009, compared
with $2.8 million for the six months ended June 30, 2008, a decrease of $0.5 million or
16.9%. The decrease was primarily due to the decrease in trust fees and a change in fee
structure resulting from change in investment managers.
  Net Realized Investment Losses
    55




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UNITED AMERICA INDEMNITY, LTD.
  Corporate and Other Operating Expenses
  Interest Expense
  Income Tax Expense (Benefit)
   Equity in Net Income (Loss) of Partnerships
  Net Income (Loss)
  Liquidity and Capital Resources
 Sources and Uses of Funds
    56




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UNITED AMERICA INDEMNITY, LTD.
      Cash Flows
   
    
    the fact that we collect premiums in advance of losses paid;
 
    
    the timing of our settlements with our reinsurers; and
 
    
    the timing of our loss payments.
  57




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UNITED AMERICA INDEMNITY, LTD.
  Six Months Ended June 30,2009
    
    
    2008
    
    
    ChangeNet premiums collected
    
    $
    135,443
    (1)
    
    $
    176,337
    
    
    $
    (40,894
    )Net losses paid
    
    
    (144,222
    )(2)
    
    
    (125,091
    )
    
    
    (19,131
    )Acquisition costs and other underwriting expenses
    
    
    (70,404
    )
    
    
    (79,986
    )
    
    
    9,582Net investment income
    
    
    42,386
    
    
    
    39,212
    
    
    
    3,174Net federal income taxes recovered (paid)
    
    
    7,230
    
    
    
    (6,393
    )
    
    
    13,623Interest paid
    
    
    (3,771
    )
    
    
    (5,140
    )
    
    
    1,369Other
    
    
    (30
    )
    
    
    (596
    )
    
    
    566Net cash provided by (used for) operating activities
    
    $
    (33,368
    )
    
    $
    (1,657
    )
    
    $
    (31,711
    )
 (1)
    
    During the first quarter of 2009, Wind River Reinsurance entered into
multiple new reinsurance treaties with third parties; however, the premium
associated with these new treaties will not begin to be collected until the
second quarter of 2009.(2)
    
    Includes losses resulting from Hurricane Ike, which made landfall in
August 2008.  Liquidity
    Capital Resources
  Off Balance Sheet Arrangements
   58




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UNITED AMERICA INDEMNITY, LTD.
 Cautionary Note Regarding Forward-Looking Statements
    
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     59




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UNITED AMERICA INDEMNITY, LTD.
 
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
   60




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UNITED AMERICA INDEMNITY, LTD.
 
 PART II-OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Catastrophic Events Can Have a Significant Impact on Our Financial and Operational Condition.
  Legislative
and Regulatory Action by the U.S. Congress Could Materially and
Adversely Affect Us.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   61




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UNITED AMERICA INDEMNITY, LTD.
  ApproximateTotal Number of
    
    
    Dollar ValueShares Purchased
    
    
    of Shares ThatTotal Number
    
    
    Average
    
    
    as Part of Publicly
    
    
    May Yet Beof Shares
    
    
    Price Paid
    
    
    Announced Plan
    
    
    Purchased Under thePeriod (1)
    
    Purchased
    
    
    Per Share
    
    
    or Program
    
    
    Plan or Program (2)April 1-30, 2009
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    May 1-31, 2009
    
    
    2,398
    (3)
    
    $
    4.89
    
    
    
    
    
    
    $
    June 1-30, 2009
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Total
    
    
    2,398
    
    
    $
    
    
    
    
    
    
    
    
    N/A
 (1)
    
    Based on settlement date.(2)
    
    Approximate dollar value of shares is as of the last date of the applicable month.(3)
    
    Surrendered by employees as payment of taxes withheld on the vesting of restricted
stock. 
 Item 6. Exhibits
 31.1+
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the
Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2+
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the
Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1+
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2+
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 +
    
    Filed herewith.  62




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UNITED AMERICA INDEMNITY, LTD.
 
 SIGNATURE
  UNITED AMERICA INDEMNITY, LTD.
RegistrantDate: August 10, 2009
    By:
    /s/ Thomas M. McGeehanThomas M. McGeehanInterim Chief Financial Officer
(Authorized Signatory and Principal
Financial and Accounting Officer)  63




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UNITED AMERICA INDEMNITY, LTD.
 
 EXHIBIT INDEX
 31.1+
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the
Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2+
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the
Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1+
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2+
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 +
    
    Filed herewith.  64