##### 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 September 30, 2008
 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
  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 September 30, 2008 (Unaudited) and December 31, 2007
    
    
    1Consolidated Statements of Operations
Quarters and Nine Months Ended September 30, 2008 and 2007 (Unaudited)
    
    
    2Consolidated Statements of Comprehensive Income (Loss)
Quarters and Nine Months Ended September 30, 2008 and 2007 (Unaudited)
    
    
    3Consolidated Statements of Changes in Shareholders Equity
As of September 30, 2008 (Unaudited) and December 31, 2007
    
    
    4Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2008 and 2007 (Unaudited)
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    45Item 4. Controls and Procedures
    
    
    45PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    46Item 1A. Risk Factors
    
    
    46Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    46Item 6. Exhibits
    
    
    47Signatures
    
    
    48Exhibit 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., U.N. Holdings Inc.,
which was dissolved on May 31, 2006, Wind River Investment Corporation, which was dissolved on
May 31, 2006, AIS, Emerald Insurance Company, which was dissolved on March 24, 2008,
Penn-America Group, Inc., our U.S. Insurance Operations and our Agency Operations;
 3)
    
    our U.S. Insurance Operations refers to the insurance and related operations conducted by
AIS subsidiaries, including American Insurance Adjustment Agency, Inc., International
Underwriters, LLC, J.H. Ferguson & Associates, LLC, the United National Insurance Companies
and the Penn-America Insurance Companies;
 4)
    
    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,
International Underwriters, LLC, and J.H. Ferguson & Associates, LLC;
 5)
    
    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;
 6)
    
    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;
 7)
    
    our Insurance Operations refers to the U.S. Insurance Operations;
 8)
    
    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 September 30, 2006;
 9)
    
    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.;
 10)
    
    our Agency Operations refers to the operations of Penn Independent Corporation and its
subsidiaries, which were classified as discontinued operations as of September 30, 2006;
 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)
    
    AIS refers to American Insurance Service, Inc.;
 15)
    
    United National Group refers to the United National Insurance Companies and Emerald
Insurance Company, which was dissolved on March 24, 2008;
 16)
    
    Penn-America Group refers to Penn-America Group, Inc. and the Penn-America Insurance
Companies;
 17)
    
    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;
 18)
    
    United National refers to our product classification that includes property, general
liability, and professional lines products distributed through program administrators with
specific binding authority;
 19)
    
    Diamond State refers to our product classification that includes property, general
liability, and professional lines products distributed through wholesale brokers and program
administrators with specific binding authority;
 20)
    
    the Statutory Trusts refers to United National Group Capital Trust I, United National Group
Capital Statutory Trust II, and Penn-America Statutory Trust II;
 21)
    
    Fox Paine & Company refers to Fox Paine & Company, LLC and affiliated investment funds;
 22)
    
    GAAP refers to accounting principles generally accepted in the United States of America;
and
 23)
    
    $ or dollars refers to U.S. dollars.




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Balance Sheets
 (Unaudited)September 30, 2008
    
    
    December 31, 2007ASSETSBonds:Available for sale securities, at fair value 
(amortized cost: $1,234,212 and $1,356,439)
    
    $
    1,218,831
    
    
    $
    1,370,566Preferred shares:Available for sale securities, at fair value 
(cost: $5,468 and $11,802)
    
    
    5,468
    
    
    
    11,883Common shares:Available for sale securities, at fair value
 (cost: $57,795 and $61,032)
    
    
    62,617
    
    
    
    73,794Other invested assetsAvailable for sale securities, at fair value
 (cost: $19,689 and $19,412)
    
    
    44,065
    
    
    
    51,102Securities classified as trading, at fair value
 (cost: $5,151 and $5,151)
    
    
    11,041
    
    
    
    13,437Total investments
    
    
    1,342,022
    
    
    
    1,520,782Cash and cash equivalents
    
    
    295,344
    
    
    
    244,321Agents balances, net
    
    
    60,816
    
    
    
    64,719Reinsurance receivables
    
    
    679,901
    
    
    
    719,706Accrued investment income
    
    
    12,351
    
    
    
    12,820Federal income taxes receivable
    
    
    10,784
    
    
    
    Deferred federal income taxes
    
    
    25,471
    
    
    
    8,219Deferred acquisition costs
    
    
    38,622
    
    
    
    52,505Goodwill
    
    
    84,246
    
    
    
    84,246Intangible assets
    
    
    21,764
    
    
    
    22,520Prepaid reinsurance premiums
    
    
    27,795
    
    
    
    29,218Other assets
    
    
    11,879
    
    
    
    16,116Total assets
    
    $
    2,610,995
    
    
    $
    2,775,172LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses
    
    $
    1,525,864
    
    
    $
    1,503,237Unearned premiums
    
    
    170,577
    
    
    
    228,363Federal income taxes payable
    
    
    
    
    
    
    3,455Ceded balances payable
    
    
    24,965
    
    
    
    15,758Contingent commissions
    
    
    5,542
    
    
    
    9,600Notes and debentures payable
    
    
    121,925
    
    
    
    137,602Other liabilities
    
    
    27,507
    
    
    
    40,881Total liabilities
    
    
    1,876,380
    
    
    
    1,938,896Commitments and contingencies (Note 9)
    
    
    
    
    
    
    Shareholders equity:Common shares, $0.0001 par value, 900,000,000 common shares authorized; Class A common
shares issued: 25,032,618 and 24,770,507, respectively; Class A
common shares outstanding: 19,018,793 and 22,316,420, respectively;
Class B common shares issued and outstanding: 12,687,500
    
    
    4
    
    
    
    4Additional paid-in capital
    
    
    523,678
    
    
    
    519,980Accumulated other comprehensive income
    
    
    7,902
    
    
    
    40,172Retained earnings
    
    
    303,413
    
    
    
    324,542Class A common shares in treasury, at cost: 6,013,825 and 2,454,087 shares, respectively
    
    
    (100,382
    )
    
    
    (48,422
    )Total shareholders equity
    
    
    734,615
    
    
    
    836,276Total
    
    $
    2,610,995
    
    
    $
    2,775,172
   1




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Operations
 (Unaudited)
    
    
    (Unaudited)Quarter Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Gross premiums written
    
    $
    99,030
    
    
    $
    140,915
    
    
    $
    302,410
    
    
    $
    442,134Net premiums written
    
    $
    79,706
    
    
    $
    122,568
    
    
    $
    246,879
    
    
    $
    387,137Net premiums earned
    
    $
    89,511
    
    
    $
    133,449
    
    
    $
    303,241
    
    
    $
    408,471Net investment income
    
    
    16,627
    
    
    
    19,870
    
    
    
    51,485
    
    
    
    58,055Net realized investment gains (losses)
    
    
    (20,510
    )
    
    
    (614
    )
    
    
    (24,060
    )
    
    
    1,153Total revenues
    
    
    85,628
    
    
    
    152,705
    
    
    
    330,666
    
    
    
    467,679Losses and Expenses:Net losses and loss adjustment expenses
    
    
    76,134
    
    
    
    74,511
    
    
    
    236,428
    
    
    
    231,596Acquisition costs and other underwriting expenses
    
    
    33,164
    
    
    
    43,376
    
    
    
    109,471
    
    
    
    130,920Corporate and other operating expenses
    
    
    3,039
    
    
    
    3,080
    
    
    
    9,494
    
    
    
    9,537Interest expense
    
    
    1,963
    
    
    
    2,770
    
    
    
    6,690
    
    
    
    8,574Income (loss) before income taxes
    
    
    (28,672
    )
    
    
    28,968
    
    
    
    (31,417
    )
    
    
    87,052Income tax expense (benefit)
    
    
    (10,260
    )
    
    
    4,664
    
    
    
    (11,786
    )
    
    
    14,688Income (loss) before equity in net income (loss)
of partnership
    
    
    (18,412
    )
    
    
    24,304
    
    
    
    (19,631
    )
    
    
    72,364Equity in net income (loss) of partnership, net of tax
    
    
    (1,088
    )
    
    
    (206
    )
    
    
    (1,557
    )
    
    
    155Income (loss) before discontinued operations
    
    
    (19,500
    )
    
    
    24,098
    
    
    
    (21,188
    )
    
    
    72,519Discontinued operations, net of tax
    
    
    (98
    )
    
    
    (118
    )
    
    
    59
    
    
    
    2Net income (loss)
    
    $
    (19,598
    )
    
    $
    23,980
    
    
    $
    (21,129
    )
    
    $
    72,521Per share
data(1):Income (loss) from continuing operations:Basic
    
    $
    (0.62
    )
    
    $
    0.64
    
    
    $
    (0.63
    )
    
    $
    1.95Diluted
    
    $
    (0.62
    )
    
    $
    0.64
    
    
    $
    (0.63
    )
    
    $
    1.93Discontinued operations:Basic
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00Diluted
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00Net income (loss):Basic
    
    $
    (0.62
    )
    
    $
    0.64
    
    
    $
    (0.63
    )
    
    $
    1.95Diluted
    
    $
    (0.62
    )
    
    $
    0.64
    
    
    $
    (0.63
    )
    
    $
    1.93Weighted-average number of shares outstanding:Basic
    
    
    31,449,094
    
    
    
    37,229,274
    
    
    
    33,302,048
    
    
    
    37,184,783Diluted
    
    
    31,449,094
    
    
    
    37,521,473
    
    
    
    33,302,048
    
    
    
    37,513,041
 (1)
    
    In 2008, Diluted data is the same as
Basic data since there was a net loss for the quarter and
nine months ended September 30, 2008.   2




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Comprehensive Income (Loss)
 (Unaudited)
    
    
    (Unaudited)Quarter Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    (19,598
    )
    
    $
    23,980
    
    
    $
    (21,129
    )
    
    $
    72,521Other comprehensive loss, net of tax:Unrealized gains on securities:Unrealized holding gains (losses) arising during period
    
    
    (29,266
    )
    
    
    14,531
    
    
    
    (48,290
    )
    
    
    6,670Less: Reclassification adjustment for gains (losses)
included in net income (loss)
    
    
    (13,764
    )
    
    
    (400
    )
    
    
    (16,020
    )
    
    
    740Other comprehensive income (loss), net of tax
    
    
    (15,502
    )
    
    
    14,931
    
    
    
    (32,270
    )
    
    
    5,930Comprehensive income (loss), net of tax
    
    $
    (35,100
    )
    
    $
    38,911
    
    
    $
    (53,399
    )
    
    $
    78,451
   3




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Changes in Shareholders Equity
 (Unaudited)Nine Months Ended
    
    
    Year EndedSeptember 30, 2008
    
    
    December 31, 2007Number of Class A common shares:Number at beginning of period
    
    
    24,770,507
    
    
    
    24,507,919Common shares issued under share incentive plans
    
    
    252,248
    
    
    
    243,253Common shares issued to directors
    
    
    9,863
    
    
    
    19,335Number at end of period
    
    
    25,032,618
    
    
    
    24,770,507Number of Class B common shares:Number at beginning of period
    
    
    12,687,500
    
    
    
    12,687,500Number at end of period
    
    
    12,687,500
    
    
    
    12,687,500Par value of Class A common shares:Balance at beginning of period
    
    $
    3
    
    
    $
    3Balance at end of period
    
    $
    3
    
    
    $
    3Par value of Class B common shares:Balance at beginning of period
    
    $
    1
    
    
    $
    1Balance at end of period
    
    $
    1
    
    
    $
    1Additional paid-in capital:Balance at beginning of period
    
    $
    519,980
    
    
    $
    515,357Contributed capital from Class A common shares
    
    
    
    
    
    
    1,002Share compensation plans
    
    
    3,698
    
    
    
    3,621Balance at end of period
    
    $
    523,678
    
    
    $
    519,980Accumulated other comprehensive income, net of deferred income tax:Balance at beginning of period
    
    $
    40,172
    
    
    $
    22,580Other comprehensive income (loss)
    
    
    (32,270
    )
    
    
    17,888Adoption of SFAS 155
    
    
    
    
    
    
    (296
    )Balance at end of period
    
    $
    7,902
    
    
    $
    40,172Retained earnings:Balance at beginning of period
    
    $
    324,542
    
    
    $
    225,329Adoption of SFAS 155
    
    
    
    
    
    
    296Net income (loss)
    
    
    (21,129
    )
    
    
    98,917Balance at end of period
    
    $
    303,413
    
    
    $
    324,542Number of Treasury Shares:Number at beginning of period
    
    
    2,454,087
    
    
    
    Class A common shares purchased
    
    
    3,559,738
    
    
    
    2,454,087Number at end of period
    
    
    6,013,825
    
    
    
    2,454,087Treasury Shares, at cost:Balance at beginning of period
    
    $
    (48,422
    )
    
    $
    Class A common shares purchased, at cost
    
    
    (51,960
    )
    
    
    (48,422
    )Balance at end of period
    
    $
    (100,382
    )
    
    $
    (48,422
    )Total shareholders equity
    
    $
    734,615
    
    
    $
    836,276
   4




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Cash Flows
 (Unaudited)Nine Months Ended September 30,2008
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    (21,129
    )
    
    $
    72,521Adjustments to reconcile net income to net cash provided by operating activities:Amortization of trust preferred securities issuance costs
    
    
    152
    
    
    
    212Amortization and depreciation
    
    
    756
    
    
    
    758Restricted stock expense
    
    
    2,730
    
    
    
    2,088Gain on extinguishment of note payable
    
    
    
    
    
    
    (277
    )Deferred federal income taxes
    
    
    (3,845
    )
    
    
    2,280Amortization of bond premium and discount, net
    
    
    2,221
    
    
    
    905Net realized investment (gains) losses
    
    
    24,060
    
    
    
    (1,153
    )Equity in net (income) loss of partnerships
    
    
    1,557
    
    
    
    (155
    )Changes in:Agents balances
    
    
    3,903
    
    
    
    13,013Reinsurance receivables
    
    
    39,805
    
    
    
    218,047Unpaid losses and loss adjustment expenses
    
    
    22,627
    
    
    
    (147,326
    )Unearned premiums
    
    
    (57,786
    )
    
    
    (27,832
    )Ceded balances payable
    
    
    9,207
    
    
    
    1,804Other assets and liabilities, net
    
    
    (8,305
    )
    
    
    (7,410
    )Contingent commissions
    
    
    (4,058
    )
    
    
    (1,988
    )Prepaid reinsurance premiums
    
    
    1,423
    
    
    
    6,501Federal income taxes receivable
    
    
    (14,239
    )
    
    
    (233
    )Deferred acquisition costs
    
    
    13,883
    
    
    
    2,155Net cash provided by operating activities
    
    
    12,962
    
    
    
    133,910Cash flows from investing activities:Proceeds from sale of bonds
    
    
    201,491
    
    
    
    158,429Proceeds from sale of stocks
    
    
    24,348
    
    
    
    25,342Proceeds from maturity of bonds
    
    
    76,210
    
    
    
    55,829Purchases of bonds
    
    
    (167,892
    )
    
    
    (298,303
    )Purchases of stocks
    
    
    (29,150
    )
    
    
    (30,896
    )Purchases of other invested assets
    
    
    (277
    )
    
    
    Net cash provided by (used for) investing activities
    
    
    104,730
    
    
    
    (89,599
    )Cash flows from financing activities:Net proceeds from issuance of common shares
    
    
    
    
    
    
    296Borrowing under credit facilities
    
    
    
    
    
    
    9,406Repayments of credit facilities
    
    
    
    
    
    
    (10,941
    )Proceeds from exercises of stock options
    
    
    1,041
    
    
    
    1,762Tax benefits (expense) associated with SFAS 123R
    
    
    (73
    )
    
    
    344Purchases of Class A common shares
    
    
    (51,960
    )
    
    
    Retirement of junior subordinated debentures
    
    
    (15,464
    )
    
    
    Principal payments of term debt
    
    
    (213
    )
    
    
    (407
    )Net cash provided by (used for) financing activities
    
    
    (66,669
    )
    
    
    460Net change in cash and cash equivalents
    
    
    51,023
    
    
    
    44,771Cash and cash equivalents at beginning of period
    
    
    244,321
    
    
    
    273,745Cash and cash equivalents at end of period
    
    $
    295,344
    
    
    $
    318,516
   5




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UNITED AMERICA INDEMNITY, LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Principles of Consolidation and Basis of Presentation
       2. Summary of Significant Accounting Policies
  Goodwill and Intangible Assets
    6




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UNITED AMERICA INDEMNITY, LTD.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 3. Investments
   Gross Unrealized LossesCost or
    
    
    
    
    
    
    Six
    
    
    Between
    
    
    GreaterNumber of
    
    
    Estimated
    
    
    Amortized
    
    
    
    
    
    
    Months or
    
    
    Seven Months
    
    
    than One(Dollars in thousands)
    
    Securities
    
    
    Fair Value
    
    
    Cost
    
    
    Total
    
    
    Less
    
    
    and One Year
    
    
    Year (1)Bonds
    
    
    345
    
    
    $
    631,429
    
    
    $
    659,421
    
    
    $
    27,992
    
    
    $
    10,158
    
    
    $
    10,806
    
    
    $
    7,028Common stock
    
    
    41
    
    
    
    15,274
    
    
    
    17,627
    
    
    
    2,353
    
    
    
    1,900
    
    
    
    453
    
    
    
    $
    30,345
    
    
    $
    12,058
    
    
    $
    11,259
    
    
    $
    7,028
 (1)
    
    At September 30, 2008, the Company had 84 bonds that were in an unrealized loss position for
greater than one year. The estimated fair value and amortized cost of these securities were
$92.7 million and $99.7 million, respectively. The Company has analyzed these securities and
has determined that they are not other than temporarily impaired. The Company has the ability
to hold these investments until maturity or until recovery. 100% of these securities are
investment grade.  Gross Unrealized LossesCost or
    
    
    
    
    
    
    Six
    
    
    Between
    
    
    GreaterNumber of
    
    
    Estimated
    
    
    Amortized
    
    
    
    
    
    
    Months or
    
    
    Seven Months
    
    
    than One(Dollars in thousands)
    
    Securities
    
    
    Fair Value
    
    
    Cost
    
    
    Total
    
    
    Less
    
    
    and One Year
    
    
    Year (1)Bonds
    
    
    266
    
    
    $
    374,064
    
    
    $
    379,222
    
    
    $
    5,158
    
    
    $
    877
    
    
    $
    337
    
    
    $
    3,944Preferred stock
    
    
    1
    
    
    
    2,363
    
    
    
    2,500
    
    
    
    137
    
    
    
    137
    
    
    
    
    
    
    
    Common stock
    
    
    31
    
    
    
    15,714
    
    
    
    17,715
    
    
    
    2,001
    
    
    
    1,502
    
    
    
    499
    
    
    
    $
    7,296
    
    
    $
    2,516
    
    
    $
    836
    
    
    $
    3,944
 (1)
    
    At December 31, 2007, the Company had 215 bonds that were in an unrealized loss position for
greater than one year. The estimated fair value and amortized cost of these securities were
$293.8 million and $297.7 million, respectively. The Company has analyzed these securities
and has determined that they are not other than temporarily impaired. The Company has the
ability to hold these investments until maturity or until recovery. 100% of these securities
are investment grade.  7




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
       Quarter Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Bonds
    
    $
    1,067
    
    
    $
    432
    
    
    $
    1,067
    
    
    $
    453Common stock
    
    
    3,227
    
    
    
    
    
    
    
    5,046
    
    
    
    Preferred stock
    
    
    1,807
    
    
    
    
    
    
    
    1,807
    
    
    
    Other invested assets
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    150Total
    
    $
    6,101
    
    
    $
    582
    
    
    $
    7,920
    
    
    $
    603
   Quarter Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Bonds
    
    $
    (6,887
    )
    
    $
    (108
    )
    
    $
    (6,697
    )
    
    $
    804Convertibles
    
    
    (1,591
    )
    
    
    (412
    )
    
    
    (3,507
    )
    
    
    (1,473
    )Common stock
    
    
    (3,405
    )
    
    
    56
    
    
    
    (5,229
    )
    
    
    1,541Preferred stock
    
    
    (8,627
    )
    
    
    
    
    
    
    (8,627
    )
    
    
    431Other invested assets
    
    
    
    
    
    
    (150
    )
    
    
    
    
    
    
    (150
    )Total
    
    $
    (20,510
    )
    
    $
    (614
    )
    
    $
    (24,060
    )
    
    $
    1,153
  8




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
    Fannie Mae
    
    
    Freddie MacS&P
    
    
    
    
    
    
    
    
    
    
    S&P(Dollars in thousands)
    
    Book Value
    
    
    Fair Value
    
    
    Rating
    
    
    Book Value
    
    
    Fair Value
    
    
    RatingMortgage-backed securities
    
    $
    161,036
    
    
    $
    162,320
    
    
    AAA
    
    
    $
    93,315
    
    
    $
    93,609
    
    
    AAASenior debt securities
    
    
    37,854
    
    
    
    39,241
    
    
    AAA
    
    
    
    39,282
    
    
    
    40,337
    
    
    AAA
  Quarter Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net investment income
    
    $
    13,652
    
    
    $
    16,062
    
    
    $
    42,189
    
    
    $
    46,565Net realized investment gains (losses)
    
    
    (13,765
    )
    
    
    (400
    )
    
    
    (16,021
    )
    
    
    740Net unrealized investment gains (losses)
    
    
    (15,502
    )
    
    
    14,931
    
    
    
    (32,270
    )
    
    
    5,634Net investment gains (losses)
    
    
    (29,267
    )
    
    
    14,531
    
    
    
    (48,291
    )
    
    
    6,374Total investment return (loss)
    
    $
    (15,615
    )
    
    $
    30,593
    
    
    $
    (6,102
    )
    
    $
    52,939Total investment return (loss) %
    
    
    (1.0
    )%
    
    
    1.7
    %
    
    
    (0.4
    )%
    
    
    3.0
    %Average investment portfolio (1)
    
    $
    1,656,009
    
    
    $
    1,782,284
    
    
    $
    1,701,235
    
    
    $
    1,738,944
 (1)
    
    Average of total cash and invested assets as of the beginning and ending of the period. 4. Fair Value Measurements
   9




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
   
    
    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.
    Fair Value Measurements(Dollars in thousands)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalBonds:Obligations of state and political subdivision
    
    $
    
    
    
    $
    240,969
    
    
    $
    
    
    
    $
    240,969Mortgage-backed and asset-backed securities
    
    
    
    
    
    
    560,592
    
    
    
    
    
    
    
    560,592U.S. Treasury and agency obligations
    
    
    70,125
    
    
    
    73,884
    
    
    
    
    
    
    
    144,009Corporate notes
    
    
    
    
    
    
    273,261
    
    
    
    
    
    
    
    273,261Total bonds
    
    
    70,125
    
    
    
    1,148,706
    
    
    
    
    
    
    
    1,218,831Preferred shares
    
    
    2,063
    
    
    
    3,405
    
    
    
    
    
    
    
    5,468Common shares
    
    
    62,617
    
    
    
    
    
    
    
    
    
    
    
    62,617Other invested assets
    
    
    
    
    
    
    
    
    
    
    55,106
    
    
    
    55,106Total invested assets
    
    $
    134,805
    
    
    $
    1,152,111
    
    
    $
    55,106
    
    
    $
    1,342,022
     10




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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 September 30, 2008

    
    
    
    
    
    Invested(Dollars in thousands)
    
    Bonds
    
    
    Assets
    
    
    TotalBeginning balance at July 1, 2008
    
    $
    
    
    
    $
    61,474
    
    
    $
    61,474Total gains (losses) (realized / unrealized):Included in equity in net income (loss) of partnership
    
    
    
    
    
    
    (1,674
    )
    
    
    (1,674
    )Included in accumulated other comprehensive income
    
    
    
    
    
    
    (4,716
    )
    
    
    (4,716
    )Purchases
    
    
    
    
    
    
    22
    
    
    
    22Ending balance at September 30, 2008
    
    $
    
    
    
    $
    55,106
    
    
    $
    55,106Losses for the quarter ended September 30, 2008 included
in earnings attributable to the change in unrealized
losses relating to assets still held at September 30,
2008
    
    $
    
    
    
    $
    (1,674
    )
    
    $
    (1,674
    )
 Fair Value Measurements Using Level 3 InputsOtherNine Months Ended September 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
    
    
    
    
    
    
    (2,396
    )
    
    
    (2,396
    )Included in accumulated other comprehensive income
    
    
    (55
    )
    
    
    (7,314
    )
    
    
    (7,369
    )Purchases
    
    
    
    
    
    
    277
    
    
    
    277Sales
    
    
    (554
    )
    
    
    
    
    
    
    (554
    )Transfers out of Level 3
    
    
    (1,767
    )
    
    
    
    
    
    
    (1,767
    )Ending balance at September 30, 2008
    
    $
    
    
    
    $
    55,106
    
    
    $
    55,106Losses for the nine months ended September 30, 2008
included in earnings attributable to the change in
unrealized losses relating to assets still held at
September 30, 2008
    
    $
    
    
    
    $
    (2,396
    )
    
    $
    (2,396
    )
 5. Reinsurance
    11




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
   Quarter Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Earned premium
    
    $
    18,936
    
    
    $
    19,405
    
    
    $
    56,955
    
    
    $
    61,497Commissions
    
    
    4,270
    
    
    
    2,543
    
    
    
    11,205
    
    
    
    13,774Incurred losses
    
    
    23,773
    (1)
    
    
    (24,657
    )(2)
    
    
    52,706
    (3)
    
    
    (106,011
    )(4)
 (1)
    
    The Company reduced gross and ceded loss and loss adjustment expenses related to prior
accident years by $2.8 million and $7.0 million, respectively, during the third quarter of
2008.(2)
    
    The Company reduced gross and ceded loss and loss adjustment expenses related to prior
accident years by $41.4 million and $34.6 million, respectively, during the third quarter of
2007.(3)
    
    The Company increased gross and ceded loss and loss adjustment expenses related to prior
accident years by $28.4 million and $7.7 million, respectively, during the nine months ended
September 30, 2008.(4)
    
    The Company reduced gross and ceded loss and loss adjustment expenses related to prior
accident years by $157.0 million and $136.3 million, respectively, during the nine months
ended September 30, 2007.  Property Catastrophe
  Property Excess of Loss
 Professional Liability Excess of Loss
 General Liability Excess of Loss
   12




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 6. Income Taxes
  Quarter Ended September 30, 2008:
    
    Non-U.S.
    
    
    U.S.(Dollars in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    46,143
    
    
    $
    92,456
    
    
    $
    (39,569
    )
    
    $
    99,030Net premiums written
    
    $
    40,135
    
    
    $
    39,571
    
    
    $
    
    
    
    $
    79,706Net premiums earned
    
    $
    45,608
    
    
    $
    43,903
    
    
    $
    
    
    
    $
    89,511Net investment income
    
    
    10,289
    
    
    
    10,986
    
    
    
    (4,648
    )
    
    
    16,627Net realized investment losses
    
    
    (1,238
    )
    
    
    (16,415
    )
    
    
    (2,857
    )
    
    
    (20,510
    )Total revenues
    
    
    54,659
    
    
    
    38,474
    
    
    
    (7,505
    )
    
    
    85,628Losses and Expenses:Net losses and loss adjustment expenses
    
    
    39,537
    
    
    
    36,597
    
    
    
    
    
    
    
    76,134Acquisition costs and other underwriting expenses
    
    
    17,987
    
    
    
    15,177
    
    
    
    
    
    
    
    33,164Corporate and other operating expenses
    
    
    1,973
    
    
    
    1,066
    
    
    
    
    
    
    
    3,039Interest expense
    
    
    
    
    
    
    6,611
    
    
    
    (4,648
    )
    
    
    1,963Loss before income taxes
    
    $
    (4,838
    )
    
    $
    (20,977
    )
    
    $
    (2,857
    )
    
    $
    (28,672
    )
 Quarter Ended September 30, 2007:
    
    Non-U.S.
    
    
    U.S.(Dollars in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    65,995
    
    
    $
    134,043
    
    
    $
    (59,123
    )
    
    $
    140,915Net premiums written
    
    $
    63,445
    
    
    $
    59,123
    
    
    $
    
    
    
    $
    122,568Net premiums earned
    
    $
    67,699
    
    
    $
    65,750
    
    
    $
    
    
    
    $
    133,449Net investment income
    
    
    11,555
    
    
    
    12,963
    
    
    
    (4,648
    )
    
    
    19,870Net realized investment gains (losses)
    
    
    (2
    )
    
    
    (622
    )
    
    
    10
    
    
    
    (614
    )Total revenues
    
    
    79,252
    
    
    
    78,091
    
    
    
    (4,638
    )
    
    
    152,705Losses and Expenses:Net losses and loss adjustment expenses
    
    
    34,893
    
    
    
    39,618
    
    
    
    
    
    
    
    74,511Acquisition costs and other underwriting expenses
    
    
    24,750
    
    
    
    18,687
    
    
    
    (61
    )
    
    
    43,376Corporate and other operating expenses
    
    
    1,518
    
    
    
    1,562
    
    
    
    
    
    
    
    3,080Interest expense
    
    
    
    
    
    
    7,418
    
    
    
    (4,648
    )
    
    
    2,770Income before income taxes
    
    $
    18,091
    
    
    $
    10,806
    
    
    $
    71
    
    
    $
    28,968
  13




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Nine Months Ended September 30, 2008:
    
    Non-U.S.
    
    
    U.S.(Dollars in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    143,796
    
    
    $
    280,603
    
    
    $
    (121,989
    )
    
    $
    302,410Net premiums written
    
    $
    124,889
    
    
    $
    121,990
    
    
    $
    
    
    
    $
    246,879Net premiums earned
    
    $
    155,279
    
    
    $
    147,962
    
    
    $
    
    
    
    $
    303,241Net investment income
    
    
    31,138
    
    
    
    34,139
    
    
    
    (13,792
    )
    
    
    51,485Net realized investment losses
    
    
    (1,090
    )
    
    
    (19,574
    )
    
    
    (3,396
    )
    
    
    (24,060
    )Total revenues
    
    
    185,327
    
    
    
    162,527
    
    
    
    (17,188
    )
    
    
    330,666Losses and Expenses:Net losses and loss adjustment expenses
    
    
    115,368
    
    
    
    121,060
    
    
    
    
    
    
    
    236,428Acquisition costs and other underwriting expenses
    
    
    64,594
    
    
    
    44,877
    
    
    
    
    
    
    
    109,471Corporate and other operating expenses
    
    
    5,786
    
    
    
    3,708
    
    
    
    
    
    
    
    9,494Interest expense
    
    
    
    
    
    
    20,482
    
    
    
    (13,792
    )
    
    
    6,690Income (loss) before income taxes
    
    $
    (421
    )
    
    $
    (27,600
    )
    
    $
    (3,396
    )
    
    $
    (31,417
    )
 Nine Months Ended September 30, 2007:
    
    Non-U.S.
    
    
    U.S.(Dollars in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    213,766
    
    
    $
    423,097
    
    
    $
    (194,729
    )
    
    $
    442,134Net premiums written
    
    $
    203,820
    
    
    $
    183,317
    
    
    $
    
    
    
    $
    387,137Net premiums earned
    
    $
    205,766
    
    
    $
    202,705
    
    
    $
    
    
    
    $
    408,471Net investment income
    
    
    32,870
    
    
    
    38,977
    
    
    
    (13,792
    )
    
    
    58,055Net realized investment gains (losses)
    
    
    (27
    )
    
    
    1,147
    
    
    
    33
    
    
    
    1,153Total revenues
    
    
    238,609
    
    
    
    242,829
    
    
    
    (13,759
    )
    
    
    467,679Losses and Expenses:Net losses and loss adjustment expenses
    
    
    115,259
    
    
    
    116,337
    
    
    
    
    
    
    
    231,596Acquisition costs and other underwriting expenses
    
    
    76,279
    
    
    
    55,184
    
    
    
    (543
    )
    
    
    130,920Corporate and other operating expenses
    
    
    6,860
    
    
    
    2,501
    
    
    
    176
    
    
    
    9,537Interest expense
    
    
    
    
    
    
    22,366
    
    
    
    (13,792
    )
    
    
    8,574Income before income taxes
    
    $
    40,211
    
    
    $
    46,441
    
    
    $
    400
    
    
    $
    87,052
  Quarter Ended September 30,2008
    
    
    2007% of Pre-
    
    
    
    
    
    
    % of Pre-(Dollars in thousands)
    
    Amount
    
    
    Tax Loss
    
    
    Amount
    
    
    Tax IncomeExpected tax provision (benefit) at weighted average rate
    
    $
    (8,324
    )
    
    
    (29.0
    )%
    
    $
    3,828
    
    
    
    13.2
    %Adjustments:Tax exempt interest
    
    
    (715
    )
    
    
    (2.5
    )
    
    
    (608
    )
    
    
    (2.1
    )Dividend exclusion
    
    
    (155
    )
    
    
    (0.5
    )
    
    
    (120
    )
    
    
    (0.4
    )Effective tax rate adjustment
    
    
    (450
    )
    
    
    (1.6
    )
    
    
    1,501
    
    
    
    5.2Other
    
    
    (616
    )
    
    
    (2.2
    )
    
    
    63
    
    
    
    0.2Income tax expense (benefit)
    
    $
    (10,260
    )
    
    
    (35.8
    )%
    
    $
    4,664
    
    
    
    16.1
    %
  14




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Nine Months Ended September 30,2008
    
    
    2007% of Pre-
    
    
    
    
    
    
    % of Pre-(Dollars in thousands)
    
    Amount
    
    
    Tax Loss
    
    
    Amount
    
    
    Tax IncomeExpected tax provision (benefit) at weighted average rate
    
    $
    (10,792
    )
    
    
    (34.3
    )%
    
    $
    16,454
    
    
    
    18.9
    %Adjustments:Tax exempt interest
    
    
    (2,172
    )
    
    
    (6.9
    )
    
    
    (1,805
    )
    
    
    (2.1
    )Dividend exclusion
    
    
    (481
    )
    
    
    (1.5
    )
    
    
    (346
    )
    
    
    (0.4
    )Effective tax rate adjustment
    
    
    2,447
    
    
    
    7.8
    
    
    
    990
    
    
    
    1.1Other
    
    
    (788
    )
    
    
    (2.6
    )
    
    
    (605
    )
    
    
    (0.6
    )Income tax expense (benefit)
    
    $
    (11,786
    )
    
    
    (37.5
    )%
    
    $
    14,688
    
    
    
    16.9
    %
        15




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 7. Liability for Unpaid Losses and Loss Adjustment Expenses
   Quarter Ended September 30,(Dollars in thousands)
    
    2008
    
    
    2007Unpaid losses and loss adjustment expenses at beginning of period
    
    $
    1,501,229
    
    
    $
    1,598,805Less: Gross reinsurance receivables on unpaid losses and loss adjustment expenses
    
    
    666,913
    
    
    
    810,949Net balance at beginning of period
    
    
    834,316
    
    
    
    787,856Incurred losses and loss adjustment expenses related to:Current year
    
    
    71,917
    
    
    
    81,405Prior years
    
    
    4,217
    (1)
    
    
    (6,894
    )(2)Total incurred losses and loss adjustment expenses
    
    
    76,134
    
    
    
    74,511Paid losses and loss adjustment expenses related to:Current year
    
    
    21,328
    
    
    
    23,544Prior years
    
    
    41,144
    
    
    
    37,946Total paid losses and loss adjustment expenses
    
    
    62,472
    
    
    
    61,490Net balance at end of period
    
    
    847,978
    
    
    
    800,877Plus: Gross reinsurance receivables on unpaid losses and loss adjustment expenses
    
    
    677,886
    
    
    
    753,807Unpaid losses and loss adjustment expenses at end of period
    
    $
    1,525,864
    
    
    $
    1,554,684
 (1)
    
    In the third quarter of 2008, the Company reduced its prior
accident year loss reserves by $1.5 million and increased its allowance for
uncollectible reinsurance by $5.7 million. The loss reserves decrease of
$1.5 million consisted of reductions of $3.5 million in general liability
lines and $0.2 million in property lines, offset by an increase of $2.2
million in professional lines. The reduction to the general liability lines
consisted of reductions of $8.6 million primarily related to accident years
2005 and prior, offset by increases of $5.1 million related to accident
years 2006 and 2007. The reduction to the property lines and increase to
the professional liability lines are primarily related to accident years
2006 and 2007.(2)
    
    In the third quarter of 2007, the Company reduced its prior
accident year loss reserves by $5.3 million and reduced its allowance for
uncollectible reinsurance by $1.6 million. The loss reserves reduction of
$5.3 million consisted of reductions of $4.6 million in general liability
lines, $1.7 million in umbrella lines, and $0.1 million in property lines,
offset by an increase of $1.1 million in professional liability lines. The
reduction in the general liability lines consisted of reductions of $20.0
million primarily related to accident years 2002 through 2006, offset by
increases of $15.4 million primarily related to accident years 2001 and
prior. The reduction in the umbrella lines are primarily related to
accident years 2001 through 2004. The increase to the professional
liability lines consisted of increases of $1.7 million primarily related to
accident years 1998, 2003, and 2006, offset by reductions of $0.6 million
primarily related to accident years 2002 and 2005.  16




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Nine Months Ended September 30,(Dollars in thousands)
    
    2008
    
    
    2007Unpaid losses and loss adjustment expenses at beginning of period
    
    $
    1,503,237
    
    
    $
    1,702,010Less: Gross reinsurance receivables on unpaid losses and loss adjustment expenses
    
    
    702,353
    
    
    
    966,668Net balance at beginning of period
    
    
    800,884
    
    
    
    735,342Incurred losses and loss adjustment expenses related to:Current year
    
    
    215,670
    
    
    
    252,350Prior years
    
    
    20,758
    (1)
    
    
    (20,754
    )(2)Total incurred losses and loss adjustment expenses
    
    
    236,428
    
    
    
    231,596Paid losses and loss adjustment expenses related to:Current year
    
    
    42,895
    
    
    
    46,582Prior years
    
    
    146,439
    
    
    
    119,479Total paid losses and loss adjustment expenses
    
    
    189,334
    
    
    
    166,061Net balance at end of period
    
    
    847,978
    
    
    
    800,877Plus: Gross reinsurance receivables on unpaid losses and loss adjustment expenses
    
    
    677,886
    
    
    
    753,807Unpaid losses and loss adjustment expenses at end of period
    
    $
    1,525,864
    
    
    $
    1,554,684
 (1)
    
    In 2008, the Company increased its prior accident year loss
reserves by $15.5 million and increased its allowance for uncollectible
reinsurance by $5.3 million. The loss reserves increase of $15.5 million
consisted of increases of $13.4 million in our general liability lines and
$7.5 million in our professional liability lines, offset by reductions of
$4.6 million in our property lines and $0.8 million in our umbrella lines.
The increase to the general liability lines was primarily related to
accident years 2006, 2007, and 1995 and prior. The increase to the
professional liability lines consisted of increases of $9.8 million
primarily related to accident years 2006 and 2007, offset by reductions of
$2.3 million primarily related to accident years 2003 and 2005. The
reduction in property lines was primarily related to accident years 2006 and
2007. The reduction in umbrella lines was primarily related to accident
years 2004 and prior.(2)
    
    In 2007, the Company reduced its prior accident year loss reserves
by $16.2 million and reduced its allowance for uncollectible reinsurance by
$4.5 million. The loss reserves reduction of $16.2 million consisted of
reductions of $6.3 million in our property lines, $9.0 million in our
general liability lines, and $8.2 million in our umbrella lines, offset by
an increase of $7.3 million in our professional liability lines. The
reduction to the property lines was primarily related to accident years 2003
through 2007. The reduction in general liability lines consisted of
reductions of $20.6 million related to accident years 2002 through 2006,
offset by increases of $11.6 million related to accident years 2001 and
prior. The reduction in umbrella lines was primarily related to accident
years 2002 and 2003. The increase in professional liability lines was
primarily related to accident years 1998, 2003, and 2006.    17




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 8. Debt
  Junior Subordinated Debentures
  Loans Payable
   9. Related Party Transactions
     18




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UNITED AMERICA INDEMNITY, LTD.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
   Quarter Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Ceded written premium
    
    $
    1,149
    
    
    $
    1,921
    
    
    $
    9,721
    
    
    $
    7,630Ceded losses
    
    
    5,225
    
    
    
    498
    
    
    
    5,890
    
    
    
    1,049
  10. Commitments and Contingencies
 Legal Proceedings
   11. Share-Based Compensation Plans
   19




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 12. Earnings Per Share
   Quarter Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Income (loss) from continuing operations
    
    $
    (19,500
    )
    
    $
    24,098
    
    
    $
    (21,188
    )
    
    $
    72,519Discontinued operations
    
    
    (98
    )
    
    
    (118
    )
    
    
    59
    
    
    
    2Net income (loss)
    
    $
    (19,598
    )
    
    $
    23,980
    
    
    $
    (21,129
    )
    
    $
    72,521Basic earnings per share:Weighted average shares for basic
earnings per share
    
    
    31,449,094
    
    
    
    37,229,274
    
    
    
    33,302,048
    
    
    
    37,184,783Income (loss) from continuing operations
    
    $
    (0.62
    )
    
    $
    0.64
    
    
    $
    (0.63
    )
    
    $
    1.95Discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Net income (loss)
    
    $
    (0.62
    )
    
    $
    0.64
    
    
    $
    (0.63
    )
    
    $
    1.95Diluted earnings per share:Weighted average shares for diluted
earnings per share
    
    
    31,449,094
    
    
    
    37,521,473
    
    
    
    33,302,048
    
    
    
    37,513,041Income (loss) from continuing operations
    
    $
    (0.62
    )
    
    $
    0.64
    
    
    $
    (0.63
    )
    
    $
    1.93Discontinued operations
    
    $
    0.00
    
    
    
    0.00
    
    
    $
    0.00
    
    
    
    0.00Net income (loss)
    
    $
    (0.62
    )
    
    $
    0.64
    
    
    $
    (0.63
    )
    
    $
    1.93
 13. Segment Information
     20




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UNITED AMERICA INDEMNITY, LTD.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Quarter Ended September 30, 2008:
    
    Insurance(Dollars in thousands)
    
    Operations (1)
    
    

Reinsurance (2)
    
    
    TotalRevenues:Gross premiums written
    
    $
    92,458
    
    
    $
    6,572
    
    
    $
    99,030Net premiums written
    
    $
    79,139
    
    
    $
    567
    
    
    $
    79,706Net premiums earned
    
    $
    87,800
    
    
    $
    1,711
    
    
    $
    89,511Losses and Expenses:Net losses and loss adjustment expenses
    
    
    74,383
    
    
    
    1,751
    
    
    
    76,134Acquisition costs and other underwriting expenses
    
    
    32,401
    (3)
    
    
    763
    (4)
    
    
    33,164Loss from segments
    
    $
    (18,984
    )
    
    $
    (803
    )
    
    
    (19,787
    )Unallocated Items:Net investment income
    
    
    
    
    
    
    
    
    
    
    16,627Net realized investment losses
    
    
    
    
    
    
    
    
    
    
    (20,510
    )Corporate and other operating expenses
    
    
    
    
    
    
    
    
    
    
    (3,039
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (1,963
    )Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    (28,672
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    (10,260
    )Loss before equity in net loss of partnership
    
    
    
    
    
    
    
    
    
    
    (18,412
    )Equity in net loss of partnership, net of tax
    
    
    
    
    
    
    
    
    
    
    (1,088
    )Loss before discontinued operations
    
    
    
    
    
    
    
    
    
    
    (19,500
    )Discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    (98
    )Net loss
    
    
    
    
    
    
    
    
    
    $
    (19,598
    )Total assets
    
    $
    2,006,132
    
    
    $
    604,863
    (5)
    
    $
    2,610,995
 (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 $443 relating to the quota share agreement.(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. Quarter Ended September 30, 2007:
    
    Insurance(Dollars in thousands)
    

Operations (1)
    
    

Reinsurance (2)
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    134,043
    
    
    $
    6,872
    
    
    $
    
    
    
    $
    140,915Net premiums written
    
    $
    118,245
    
    
    $
    4,323
    
    
    $
    
    
    
    $
    122,568Net premiums earned
    
    $
    131,499
    
    
    $
    1,950
    
    
    $
    
    
    
    $
    133,449Losses and Expenses:Net losses and loss adjustment expenses
    
    
    73,247
    
    
    
    1,264
    
    
    
    
    
    
    
    74,511Acquisition costs and other underwriting expenses
    
    
    42,225
    (3)
    
    
    1,212
    (4)
    
    
    (61
    )(5)
    
    
    43,376Income (loss) from segments
    
    $
    16,027
    
    
    $
    (526
    )
    
    $
    61
    
    
    
    15,562Unallocated Items:Net investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,870Net realized investment losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (614
    )Corporate and other operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,080
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,770
    )Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,968Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,664Income before equity in net income of partnership
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,304Equity in net income of partnership, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (206
    )Income before discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,098Discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (118
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    23,980Total Assets
    
    $
    2,252,206
    
    
    $
    643,536
    (6)
    
    $
    
    
    
    $
    2,895,742
 (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 $657 relating to the quota share agreement.(4)
    
    Includes all Wind River Reinsurance expenses other than federal excise tax.(5)
    
    Elimination of intercompany activity between our Insurance Operations and our discontinued
Agency Operations.(6)
    
    Comprised of Wind River Reinsurances total assets less its investment in subsidiaries.  21




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UNITED AMERICA INDEMNITY, LTD.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Nine Months Ended September 30, 2008:
    
    Insurance(Dollars in thousands)
    

Operations (1)
    
    

Reinsurance (2)
    
    
    TotalRevenues:Gross premiums written
    
    $
    280,605
    
    
    $
    21,805
    
    
    $
    302,410Net premiums written
    
    $
    243,978
    
    
    $
    2,901
    
    
    $
    246,879Net premiums earned
    
    $
    295,923
    
    
    $
    7,318
    
    
    $
    303,241Losses and Expenses:Net losses and loss adjustment expenses
    
    
    226,175
    
    
    
    10,253
    
    
    
    236,428Acquisition costs and other underwriting expenses
    
    
    104,859
    (3)
    
    
    4,612
    (4)
    
    
    109,471Loss from segments
    
    $
    (35,111
    )
    
    $
    (7,547
    )
    
    
    (42,658
    )Unallocated Items:Net investment income
    
    
    
    
    
    
    
    
    
    
    51,485Net realized investment losses
    
    
    
    
    
    
    
    
    
    
    (24,060
    )Corporate and other operating expenses
    
    
    
    
    
    
    
    
    
    
    (9,494
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (6,690
    )Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    (31,417
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    (11,786
    )Loss before equity in net loss of partnership
    
    
    
    
    
    
    
    
    
    
    (19,631
    )Equity in net loss of partnership, net of tax
    
    
    
    
    
    
    
    
    
    
    (1,557
    )Loss before discontinued operations
    
    
    
    
    
    
    
    
    
    
    (21,188
    )Discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    59Net loss
    
    
    
    
    
    
    
    
    
    $
    (21,129
    )Total assets
    
    $
    2,006,132
    
    
    $
    604,863
    (5)
    
    $
    2,610,995
 (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 $1,484 relating to the quota share agreement.(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. Nine Months Ended September 30, 2007:
    
    Insurance(Dollars in thousands)
    

Operations (1)
    
    

Reinsurance (2)
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    423,097
    
    
    $
    19,037
    
    
    $
    
    
    
    $
    442,134Net premiums written
    
    $
    378,045
    
    
    $
    9,092
    
    
    $
    
    
    
    $
    387,137Net premiums earned
    
    $
    405,409
    
    
    $
    3,062
    
    
    $
    
    
    
    $
    408,471Losses and Expenses:Net losses and loss adjustment expenses
    
    
    229,757
    
    
    
    1,839
    
    
    
    
    
    
    
    231,596Acquisition costs and other underwriting expenses
    
    
    128,861
    (3)
    
    
    2,602
    (4)
    
    
    (543
    )(5)
    
    
    130,920Income (loss) from segments
    
    $
    46,791
    
    
    $
    (1,379
    )
    
    $
    543
    
    
    
    45,955Unallocated Items:Net investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,055Net realized investment gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,153Corporate and other operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,537
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,574
    )Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,052Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,688Income before equity in net income of partnership
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,364Equity in net income of partnership, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    155Income before discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,519Discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    72,521Total Assets
    
    $
    2,252,206
    
    
    $
    643,536
    (6)
    
    $
    
    
    
    $
    2,895,742
 (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 $1,764 relating to the quota share agreement.(4)
    
    Includes all Wind River Reinsurance expenses other than federal excise tax.(5)
    
    Elimination of intercompany activity between our Insurance Operations and our discontinued
Agency Operations.(6)
    
    Comprised of Wind River Reinsurances total assets less its investment in subsidiaries.  22




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UNITED AMERICA INDEMNITY, LTD.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 14. Supplemental Cash Flow Information
  Quarter Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net U.S. federal income taxes paid
    
    $
    
    
    
    $
    4,300
    
    
    $
    6,401
    
    
    $
    12,300Interest paid
    
    
    3,327
    
    
    
    4,125
    
    
    
    8,465
    
    
    
    9,779
  23




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UNITED AMERICA INDEMNITY, LTD.
 
 Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
     Critical Accounting Estimates and Policies
   24




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UNITED AMERICA INDEMNITY, LTD.
 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.
     25




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UNITED AMERICA INDEMNITY, LTD.
        26




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UNITED AMERICA INDEMNITY, LTD.
      27




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UNITED AMERICA INDEMNITY, LTD.
  Gross Reserve(Dollars in thousands)
    
    Case
    
    
    IBNR (1)
    
    
    TotalInsurance Operations:Penn-America
    
    $
    180,786
    
    
    $
    383,718
    
    
    $
    564,504United National
    
    
    251,267
    
    
    
    529,744
    
    
    
    781,011Diamond State
    
    
    66,222
    
    
    
    90,192
    
    
    
    156,414Total Insurance Operations
    
    
    498,275
    
    
    
    1,003,654
    
    
    
    1,501,929Reinsurance Operations:Wind River Reinsurance
    
    
    2,239
    
    
    
    21,696
    
    
    
    23,935Total
    
    $
    500,514
    
    
    $
    1,025,350
    
    
    $
    1,525,864
 Net Reserves (2)(Dollars in thousands)
    
    Case
    
    
    IBNR (1)
    
    
    TotalInsurance Operations:Penn-America
    
    $
    163,413
    
    
    $
    321,562
    
    
    $
    484,975United National
    
    
    68,814
    
    
    
    166,581
    
    
    
    235,395Diamond State
    
    
    48,380
    
    
    
    64,501
    
    
    
    112,881Total Insurance Operations
    
    
    280,607
    
    
    
    552,644
    
    
    
    833,251Reinsurance Operations:Wind River Reinsurance
    
    
    2,135
    
    
    
    12,592
    
    
    
    14,727Total
    
    $
    282,742
    
    
    $
    565,236
    
    
    $
    847,978
 (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.     28




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
    Severity Change(Dollars in thousands)
    
    
    
    
    
    -10%
    
    
    -5%
    
    
    0%
    
    
    5%
    
    
    10%Frequency Change
    
    
    -5
    %
    
    $
    (31,272
    )
    
    $
    (21,028
    )
    
    $
    (10,784
    )
    
    $
    (539
    )
    
    $
    9,705-3
    %
    
    
    (27,390
    )
    
    
    (16,930
    )
    
    
    (6,470
    )
    
    
    3,990
    
    
    
    14,450-2
    %
    
    
    (25,449
    )
    
    
    (14,881
    )
    
    
    (4,313
    )
    
    
    6,254
    
    
    
    16,822-1
    %
    
    
    (23,508
    )
    
    
    (12,832
    )
    
    
    (2,157
    )
    
    
    8,519
    
    
    
    19,1950
    %
    
    
    (21,567
    )
    
    
    (10,784
    )
    
    
    
    
    
    
    10,784
    
    
    
    21,5671
    %
    
    
    (19,626
    )
    
    
    (8,735
    )
    
    
    2,157
    
    
    
    13,048
    
    
    
    23,9392
    %
    
    
    (17,685
    )
    
    
    (6,686
    )
    
    
    4,313
    
    
    
    15,313
    
    
    
    26,3123
    %
    
    
    (15,744
    )
    
    
    (4,637
    )
    
    
    6,470
    
    
    
    17,577
    
    
    
    28,6845
    %
    
    
    (11,862
    )
    
    
    (539
    )
    
    
    10,784
    
    
    
    22,106
    
    
    
    33,429
  Recoverability of Reinsurance Receivables
   29




---



##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Investments
     Fair Value Measurements
  Goodwill and Intangible Assets
     30




---



##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Taxation
     Our Business Segments
     31




---



##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  Quarter Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(Dollars in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Insurance Operations premiums written:Gross premiums written
    
    $
    92,458
    
    
    $
    134,043
    
    
    $
    280,605
    
    
    $
    423,097Ceded premiums written
    
    
    13,319
    
    
    
    15,798
    
    
    
    36,627
    
    
    
    45,052Net premiums written
    
    $
    79,139
    
    
    $
    118,245
    
    
    $
    243,978
    
    
    $
    378,045Reinsurance Operations premiums written:Gross premiums written
    
    $
    6,572
    
    
    $
    6,872
    
    
    $
    21,805
    
    
    $
    19,037Ceded premiums written
    
    
    6,005
    
    
    
    2,549
    
    
    
    18,904
    
    
    
    9,945Net premiums written
    
    $
    567
    
    
    $
    4,323
    
    
    $
    2,901
    
    
    $
    9,092Revenues: (1)Insurance Operations
    
    $
    87,800
    
    
    $
    131,499
    
    
    $
    295,923
    
    
    $
    405,409Reinsurance Operations
    
    
    1,711
    
    
    
    1,950
    
    
    
    7,318
    
    
    
    3,062Total revenues
    
    $
    89,511
    
    
    $
    133,449
    
    
    $
    303,241
    
    
    $
    408,471Expenses: (2)Insurance Operations
    
    $
    106,784
    
    
    $
    115,472
    
    
    $
    331,034
    
    
    $
    358,618Reinsurance Operations
    
    
    2,514
    
    
    
    2,476
    
    
    
    14,865
    
    
    
    4,441Subtotal
    
    
    109,298
    
    
    
    117,948
    
    
    
    345,899
    
    
    
    363,059Intercompany eliminations
    
    
    
    
    
    
    (61
    )
    
    
    
    
    
    
    (543
    )Net expenses
    
    $
    109,298
    
    
    $
    117,887
    
    
    $
    345,899
    
    
    $
    362,516Income (loss) from segments:Insurance Operations
    
    $
    (18,984
    )
    
    $
    16,027
    
    
    $
    (35,111
    )
    
    $
    46,791Reinsurance Operations
    
    
    (803
    )
    
    
    (526
    )
    
    
    (7,547
    )
    
    
    (1,379
    )Subtotal
    
    
    (19,787
    )
    
    
    15,501
    
    
    
    (42,658
    )
    
    
    45,512Intercompany eliminations
    
    
    
    
    
    
    61
    
    
    
    
    
    
    
    543Total income (loss) from segments
    
    $
    (19,787
    )
    
    $
    15,562
    
    
    $
    (42,658
    )
    
    $
    45,955Insurance combined ratio analysis: (3)Loss ratio
    
    
    85.1
    
    
    
    55.8
    
    
    
    78.0
    
    
    
    56.7Expense ratio
    
    
    37.1
    
    
    
    32.5
    
    
    
    36.1
    
    
    
    32.1Combined ratio
    
    
    122.2
    
    
    
    88.3
    
    
    
    114.1
    
    
    
    88.8
 (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)
    
    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. Results of Operations
 Quarter Ended September 30, 2008 Compared with the Quarter Ended September 30, 2007
 Premiums
   32




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  Quarter Ended September 30,
    
    
    Increase / (Decrease)2008
    
    
    2007
    
    
    $
    
    
    %Insurance Operations:Penn-America
    
    $
    44,321
    
    
    $
    67,494
    
    
    $
    (23,173
    )
    
    
    (34.3
    )%United National
    
    
    19,878
    
    
    
    32,412
    
    
    
    (12,534
    )
    
    
    (38.7
    )%Diamond State
    
    
    28,259
    
    
    
    34,137
    
    
    
    (5,878
    )
    
    
    (17.2
    )%Total Insurance Operations
    
    
    92,458
    
    
    
    134,043
    
    
    
    (41,585
    )
    
    
    (31.0
    )%Reinsurance Operations:Wind River Reinsurance
    
    
    6,572
    
    
    
    6,872
    
    
    
    (300
    )
    
    
    (4.4
    )%Total
    
    $
    99,030
    
    
    $
    140,915
    
    
    $
    (41,885
    )
    
    
    (29.7
    )%
 
    
    Insurance Operations:
 
    
    Penn-America gross premiums written decreased $23.2 million or 34.3% primarily due
to a reduction of $5.3 million due to terminations of business that did not meet our
profitability requirements, a reduction of $11.1 million from agents that write
business in coastal catastrophe prone areas, and a reduction of $6.8 million from price
decreases in the aggregate of approximately 4.5% and other market factors.
 
    
    United National gross premiums written decreased $12.5 million or 38.7% primarily
due to a reduction of $7.2 million due to terminations of business that did not meet
our profitability requirements and a reduction of $5.3 million from price decreases in
the aggregate of approximately 4.0% and other market factors.
 
    
    Diamond State gross premiums written decreased $5.9 million or 17.2% primarily due
to a reduction of $1.6 million due to terminations of business that did not meet our
profitability requirements and a reduction of $4.3 million from price decreases in the
aggregate of approximately 5.0% and other market factors.
 
    
    Reinsurance Operations:
 
    
    Wind River Reinsurance gross premiums written decreased $0.3 million or 4.4%
primarily due to the non-renewal of a treaty that did not meet our profitability
requirements.
   Quarter Ended September 30,
    
    
    Increase / (Decrease)2008
    
    
    2007
    
    
    $
    
    
    %Insurance Operations:Penn-America
    
    $
    40,988
    
    
    $
    62,931
    
    
    $
    (21,943
    )
    
    
    (34.9
    )%United National
    
    
    16,192
    
    
    
    26,481
    
    
    
    (10,289
    )
    
    
    (38.9
    )%Diamond State
    
    
    21,959
    
    
    
    28,832
    
    
    
    (6,873
    )
    
    
    (23.8
    )%Total Insurance Operations
    
    
    79,139
    
    
    
    118,244
    
    
    
    (39,105
    )
    
    
    (33.1
    )%Reinsurance Operations:Wind River Reinsurance
    
    
    567
    
    
    
    4,324
    
    
    
    (3,757
    )
    
    
    (86.9
    )%Total
    
    $
    79,706
    
    
    $
    122,568
    
    
    $
    (42,862
    )
    
    
    (35.0
    )%
  33




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
    
    Insurance Operations:
 
    
    Penn-America net premiums written decreased $21.9 million or 34.9% primarily due to
the reduction of gross premiums written noted above.
 
    
    United National net premiums written decreased $10.3 million or 38.9% primarily due
to the reduction of gross premiums written noted above.
 
    
    Diamond State net premiums written decreased $6.9 million or 23.8% primarily due to
the reduction of gross premiums written noted above.
 
    
    Reinsurance Operations:
 
    
    Wind River Reinsurance net premiums written decreased $3.8 million or 86.9%
primarily due to the reduction of gross premiums written noted above.
  
    
    The decrease in net premiums earned from our Insurance Operations segment was
attributable to the decreases in net premiums written noted above, as well as to a decrease
in net written premium from $560.5 million in 2006 to $478.3 million in 2007. The net
unearned premium reserve at December 31, 2007 was $192.7 million compared to $244.9 million
at December 31, 2006, a decrease of $45.8 million or 18.7%.
 
    
    The decrease in net premiums earned from our Reinsurance Operations segment is primarily
due to the decreases in net premiums written noted above.
 Net Investment Income
  
    
    Gross investment income, excluding realized gains and losses, was $17.9 million for the
quarter ended September 30, 2008, compared with $21.4 million for the quarter ended
September 30, 2007, a decrease of $3.5 million or 16.6%. The decrease was primarily due to
reductions in short-term interest rates and a reduction of our cash and invested assets,
which have decreased primarily as a result of purchasing $100.0 million of our Class A
common shares and redeeming $30.9 million of our junior subordinated debentures since
September 2007. We had no gross investment income from our limited partnership investments
during the quarters ended September 30, 2008 and 2007.
 
    
    Investment expenses were $1.3 million for the quarter ended September 30, 2008, compared
with $1.6 million for the quarter ended September 30, 2007, a decrease of $0.3 million or
20.1%. The decrease was primarily due to the decrease in the average fair value of our
invested assets.
   34




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Net Realized Investment Gains (Losses)
   Net Losses and Loss Adjustment Expenses
       35




---



##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Acquisition Costs and Other Underwriting Expenses
  
    
    The decrease in our Insurance Operations segment is due to a $10.6 million decrease in
acquisition costs, which is primarily due to a decrease in commission expenses as a result
of the decrease in net premiums earned, offset by a $0.8 million increase in other
underwriting expenses, which is primarily due to increases in total compensation expenses
and property and office costs.
 
    
    The decrease in our Reinsurance Operations segment is primarily due to a $0.3 million
decrease in acquisition costs, which is primarily due to a decrease in commission expenses
related to the decrease in net premium earned during the quarter ended September 30, 2008
compared to the quarter ended September 30, 2007. There was not a significant change in
other underwriting expenses.
 Corporate and Other Operating Expenses
  Expense and Combined Ratios
   Interest Expense
   36




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Income Tax Expense (Benefit)
  Equity in Net Income (Loss) of Partnership
  Discontinued Operations
  Net Income (Loss)
  Nine Months Ended September 30, 2008 Compared with the Nine Months Ended September 30, 2007
 Premiums
   Nine Months Ended September 30,
    
    
    Increase / (Decrease)2008
    
    
    2007
    
    
    $
    
    
    %Insurance Operations:Penn-America
    
    $
    137,669
    
    
    $
    227,342
    
    
    $
    (89,673
    )
    
    
    (39.4
    )%United National
    
    
    68,169
    
    
    
    103,788
    
    
    
    (35,619
    )
    
    
    (34.3
    )%Diamond State
    
    
    74,767
    
    
    
    91,967
    
    
    
    (17,200
    )
    
    
    (18.7
    )%Total Insurance Operations
    
    
    280,605
    
    
    
    423,097
    
    
    
    (142,492
    )
    
    
    (33.7
    )%Reinsurance Operations:Wind River Reinsurance
    
    
    21,805
    
    
    
    19,037
    
    
    
    2,768
    
    
    
    14.5
    %Total
    
    $
    302,410
    
    
    $
    442,134
    
    
    $
    (139,724
    )
    
    
    (31.6
    )%
  37




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
    
    Insurance Operations:
 
    
    Penn-America gross premiums written decreased $89.7 million or 39.4% primarily due
to a reduction of $37.9 million due to terminations of business that did not meet our
profitability requirements, a
reduction of $30.8 million from agents that write business in coastal catastrophe prone
areas, and a reduction of $21.0 million from price decreases in the aggregate of
approximately 4.5% and other market factors.
 
    
    United National gross premiums written decreased $35.6 million or 34.3% primarily
due to a reduction of $1.5 million from a terminated 100% reinsured property program,
$18.1 million due to terminations of business that did not meet our profitability
requirements, and a reduction of $16.0 million from price decreases in the aggregate of
approximately 4.0% and other market factors.
 
    
    Diamond State gross premiums written decreased $17.2 million or 18.7% primarily due
to a reduction of $4.2 million due to terminations of business that did not meet our
profitability requirements and a reduction of $13.0 million from price decreases in the
aggregate of approximately 4.0% and other market factors.
 
    
    Reinsurance Operations:
 
    
    Wind River Reinsurance gross premiums written increased $2.8 million or 14.5%
primarily due to increased participation on one of our reinsurance treaties offset
partially by the termination of a treaty that did not meet our profitability
requirements.
   Nine Months Ended September 30,
    
    
    Increase / (Decrease)2008
    
    
    2007
    
    
    $
    
    
    %Insurance Operations:Penn-America
    
    $
    125,902
    
    
    $
    213,507
    
    
    $
    (87,605
    )
    
    
    (41.0
    )%United National
    
    
    57,621
    
    
    
    85,798
    
    
    
    (28,177
    )
    
    
    (32.8
    )%Diamond State
    
    
    60,455
    
    
    
    78,740
    
    
    
    (18,285
    )
    
    
    (23.2
    )%Total Insurance Operations
    
    
    243,978
    
    
    
    378,045
    
    
    
    (134,067
    )
    
    
    (35.5
    )%Reinsurance Operations:Wind River Reinsurance
    
    
    2,901
    
    
    
    9,092
    
    
    
    (6,191
    )
    
    
    (68.1
    )%Total
    
    $
    246,879
    
    
    $
    387,137
    
    
    $
    (140,258
    )
    
    
    (36.2
    )%
 
    
    Insurance Operations:
 
    
    Penn-America net premiums written decreased $87.6 million or 41.0% primarily due to
the reduction of gross premiums written noted above.
 
    
    United National net premiums written decreased $28.2 million or 32.8% primarily due
to the reduction of gross premiums written noted above.
 
    
    Diamond State net premiums written decreased $18.3 million or 23.2% primarily due to
the reduction of gross premiums written noted above.
 
    
    Reinsurance Operations:
 
    
    Wind River Reinsurance net premiums written decreased $6.2 million or 68.1%
primarily due to the termination of a treaty that did not meet our profitability
requirements.
  38




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  
    
    The decrease in net premiums earned from our Insurance Operations segment was
attributable to the decreases in net premiums written noted above, as well as to a decrease
in net written premium from $560.5 million in 2006 to $478.3 million in 2007. The net
unearned premium reserve at December 31, 2007 was $192.7 million compared to $244.9 million
at December 31, 2006, a decrease of $45.8 million or 18.7%.
 
    
    The increase in net premiums earned from our Reinsurance Operations segment is primarily
due to business written in the latter part of 2007.
 Net Investment Income
  
    
    Gross investment income, excluding realized gains and losses, was $55.5 million for the
nine months ended September 30, 2008, compared with $62.5 million for the nine months ended
September 30, 2007, a decrease of $7.0 million or 11.1%. The decrease was primarily due to
reductions in short-term interest rates and a reduction of our cash and invested assets,
which have decreased primarily as a result of purchasing $100.0 million of our Class A
common shares and redeeming $30.9 million of our junior subordinated debentures since
September 2007. We had no gross investment income from our limited partnership investments
during the nine months ended September 30, 2008 compared to $0.4 million for the nine
months ended September 30, 2007. Excluding limited partnership distributions, gross
investment income for the nine months ended September 30, 2008 decreased 10.5% compared to
the nine months ended September 30, 2007.
 
    
    Investment expenses were $4.1 million and $4.4 million for the nine months ended
September 30, 2008 and 2007, respectively, a decrease of $0.3 million or 7.9%. The
decrease was primarily due to the decrease in the average fair value of our invested
assets.
  Net Realized Investment Gains (Losses)
    39




---



##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Net Losses and Loss Adjustment Expenses
      Acquisition Costs and Other Underwriting Expenses
  
    
    The decrease in our Insurance Operations segment is due to a $24.3 million decrease in
acquisition costs, which is primarily due to a decrease in commission expenses as a result
of the decrease in net premiums earned, and a $0.8 million increase in other underwriting
expenses, which is primarily due to an increase in
total compensation expenses and property and office costs, offset by a decrease in
professional services costs.
 
    
    The increase in our Reinsurance Operations segment is primarily due to a $2.3 million
increase in acquisition costs, which is primarily due to an increase in commission expenses
related to the increase in net premium earned during the nine months ended September 30,
2008 compared to the nine months ended September 30, 2007, and a $0.3 million decrease in
other underwriting expenses, which is primarily due to an decrease in total compensation
expenses and professional services costs.
  40




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Corporate and Other Operating Expenses
  Expense and Combined Ratios
   Interest Expense
  Income Tax Expense (Benefit)
  Equity in Net Income (Loss) of Partnership
   41




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Discontinued Operations
  Net Income (Loss)
  Liquidity and Capital Resources
 Sources and Uses of Funds
      42




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##### Table of Contents



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.
  
    
    a decrease in net premiums collected of $141.9 million, an increase in net losses paid
of $13.1 million, offset by a decrease in acquisition costs and other underwriting expenses
of $30.9 million;
 
    
    a decrease in net investment income collected of $5.4 million;
 
    
    a decrease in net federal income taxes paid of $6.3 million.
  Liquidity
    Capital Resources
   43




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
    Off Balance Sheet Arrangements
  Cautionary Note Regarding Forward-Looking Statements
     44




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
   45




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
 PART
II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   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)July 1-31, 2008
    
    
    636,545
    (3)
    
    $
    13.97
    
    
    
    633,376
    (4)
    
    $
    August 1-31, 2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    September 1-30, 2008
    
    
    2,173
    (5)
    
    $
    14.69
    
    
    
    
    
    
    $
    Total
    
    
    638,718
    
    
    $
    13.97
    
    
    
    633,376
    
    
    
    N/A
 (1)
    
    Based on settlement date.(2)
    
    Approximate dollar value of shares is as of the last date of the applicable month.(3)
    
    Includes 3,169 shares surrendered by employees as payment of taxes withheld on the
vesting of restricted stock.(4)
    
    Purchased as part of the repurchase authorization announced in February 2008.(5)
    
    Surrendered by employees as payment of taxes withheld on the vesting of restricted
stock.  46




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
 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.*
    
    Management contract or compensatory plan or arrangement.  47




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
 SIGNATURE
  UNITED AMERICA INDEMNITY, LTD.
RegistrantDate: November 10, 2008
    By:
    /s/ Thomas M. McGeehanThomas M. McGeehanInterim Chief Financial Officer
(Authorized Signatory and Principal
Financial and Accounting Officer)  48




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
 EXHIBIT INDEX
 Exhibit No.
    
    Description31.1+
    
    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.*
    
    Management contract or compensatory plan or arrangement.  49