##### 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, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period From
 _____ 

to
 _____
 000-50511
Commission File Number
 UNITED AMERICA INDEMNITY, LTD.
  Cayman Islands
    
    98-0417107(State or other jurisdiction
    
    (I.R.S. Employer Identification No.)of incorporation or organization)
 WALKER HOUSE, 87 MARY STREET
KYI  9005
GEORGE TOWN, GRAND CAYMAN
CAYMAN ISLANDS
 (345) 949-0100
 þ o
 Yes o No o
  Large accelerated filer o;   
    Accelerated filer þ;
    Non-accelerated filer o;
    Smaller reporting company o
 o þ




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##### 



TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Balance Sheets 

As of September 30, 2009 (Unaudited) and December 31, 2008
    
    
    1Consolidated Statements of Operations 

Quarters and Nine Months Ended September 30, 2009 and 2008 (Unaudited)
    
    
    2Consolidated Statements of Comprehensive Income (Loss) 

Quarters and Nine Months Ended September 30, 2009 and 2008 (Unaudited)
    
    
    3Consolidated Statements of Changes in Shareholders Equity 

As of September 30, 2009 (Unaudited) and December 31, 2008
    
    
    4Consolidated Statements of Cash Flows 

Nine Months Ended September 30, 2009 and 2008 (Unaudited)
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    34Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    59Item 4. Controls and Procedures
    
    
    60PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    61Item 1A. Risk Factors
    
    
    61Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    62Item 6. Exhibits
    
    
    62Signatures
    
    
    63Exhibit 3.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   1)
    
    United America Indemnity, we, us, and our refer to United America Indemnity, Ltd., an
exempted company incorporated with limited liability under the laws of the Cayman Islands, and
its U.S. and Non-U.S. Subsidiaries;
 2)
    
    our U.S. Subsidiaries refers to United America Indemnity Group, Inc., AIS, Emerald
Insurance Company, which was dissolved on March 24, 2008, Penn-America Group, Inc., and our
Insurance Operations;
 3)
    
    our U.S. Insurance Operations refers to the insurance and related operations conducted by
AIS subsidiaries, including American Insurance Adjustment Agency, Inc., United America
Insurance Services, LLC, J.H. Ferguson & Associates, LLC, the United National Insurance
Companies and the Penn-America Insurance Companies;
 4)
    
    our U.S. Insurance Companies refers to the United National Insurance Companies and the
Penn-America Insurance Companies;
 5)
    
    our Predecessor Insurance Operations refers to Wind River Investment Corporation, which was
dissolved on May 31, 2006, AIS, American Insurance Adjustment Agency, Inc., Emerald Insurance
Company, which was dissolved on March 24, 2008, the United National Insurance Companies,
United America Insurance Services, LLC, and J.H. Ferguson & Associates, LLC;
 6)
    
    the United National Insurance Companies refers to the insurance and related operations
conducted by United National Insurance Company and its subsidiaries, including Diamond State
Insurance Company, United National Casualty Insurance Company, and United National Specialty
Insurance Company;
 7)
    
    the Penn-America Insurance Companies refers to the insurance and related operations of
Penn-America Insurance Company, Penn-Star Insurance Company, and Penn-Patriot Insurance
Company;




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##### Table of Contents



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




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PART I  FINANCIAL INFORMATION
 
 Item 1.    Financial Statements
 UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Balance Sheets
 (Unaudited)September 30, 2009
    
    
    December 31, 2008ASSETSBonds:Available for sale securities, at fair value
(amortized cost: $1,351,959 and $1,192,385)
    
    $
    1,413,135
    
    
    $
    1,204,974Preferred shares:Available for sale securities, at fair value
(cost: $3,405 and $4,665)
    
    
    4,358
    
    
    
    4,665Common shares:Available for sale securities, at fair value
(cost: $47,294 and $46,316)
    
    
    59,311
    
    
    
    50,613Other invested assetsAvailable for sale securities, at fair value
(cost: $3,676 and $19,689)
    
    
    8,664
    
    
    
    39,219Securities classified as trading, at fair value
(cost: $35,151 and $5,151)
    
    
    43,828
    
    
    
    7,453Total investments
    
    
    1,529,296
    
    
    
    1,306,924Cash and cash equivalents
    
    
    212,739
    
    
    
    292,604Agents balances, net
    
    
    74,072
    
    
    
    57,117Reinsurance receivables
    
    
    577,823
    
    
    
    679,277Federal income taxes receivable
    
    
    5,365
    
    
    
    16,487Deferred federal income taxes
    
    
    12,507
    
    
    
    32,532Deferred acquisition costs
    
    
    35,571
    
    
    
    34,734Intangible assets
    
    
    9,254
    
    
    
    9,309Prepaid reinsurance premiums
    
    
    18,175
    
    
    
    23,960Other assets
    
    
    25,525
    
    
    
    24,115Total assets
    
    $
    2,500,327
    
    
    $
    2,477,059LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses
    
    $
    1,340,594
    
    
    $
    1,506,429Unearned premiums
    
    
    144,756
    
    
    
    149,677Ceded balances payable
    
    
    18,139
    
    
    
    25,165Contingent commissions
    
    
    9,622
    
    
    
    6,695Notes and debentures payable
    
    
    121,640
    
    
    
    121,845Other liabilities
    
    
    47,745
    
    
    
    35,255Total liabilities
    
    
    1,682,496
    
    
    
    1,845,066Commitments and contingencies (Note 10)
    
    
    
    
    
    
    Shareholders equity:Common shares, $0.0001 par value, 900,000,000
common shares authorized; Class A common shares
issued: 42,450,892 and 25,032,618, respectively;
Class A common shares outstanding: 36,398,464 and
19,013,462, respectively; Class B common shares
issued and outstanding: 24,122,744 and 12,687,500,
respectively
    
    
    7
    
    
    
    4Additional paid-in capital
    
    
    619,123
    
    
    
    524,345Accumulated other comprehensive income
    
    
    59,329
    
    
    
    25,108Retained earnings
    
    
    240,065
    
    
    
    182,982Class A common shares in treasury, at cost: 6,052,428 and 6,019,156 shares, respectively
    
    
    (100,693
    )
    
    
    (100,446
    )Total
shareholders equity
    
    
    817,831
    
    
    
    631,993Total
    
    $
    2,500,327
    
    
    $
    2,477,059
   1




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Operations
 (Unaudited)
    
    
    (Unaudited)Quarter Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues:Gross premiums written
    
    $
    75,806
    
    
    $
    99,030
    
    
    $
    266,474
    
    
    $
    302,410Net premiums written
    
    $
    62,932
    
    
    $
    79,706
    
    
    $
    227,023
    
    
    $
    246,879Net premiums earned
    
    $
    72,893
    
    
    $
    89,511
    
    
    $
    226,165
    
    
    $
    303,241Net investment income
    
    
    15,267
    
    
    
    16,627
    
    
    
    54,049
    
    
    
    51,485Net realized investment gains (losses):Other than temporary impairment losses on
investments
    
    
    (2,108
    )
    
    
    (6,101
    )
    
    
    (5,689
    )
    
    
    (7,920
    )Other than temporary impairment losses on
investments recognized in other comprehensive
income
    
    
    8
    
    
    
    
    
    
    
    133
    
    
    
    Other net realized investment gains (losses)
    
    
    8,713
    
    
    
    (14,409
    )
    
    
    8,971
    
    
    
    (16,140
    )Total net realized investment gains (losses)
    
    
    6,613
    
    
    
    (20,510
    )
    
    
    3,415
    
    
    
    (24,060
    )Total revenues
    
    
    94,773
    
    
    
    85,628
    
    
    
    283,629
    
    
    
    330,666Losses and Expenses:Net losses and loss adjustment expenses
    
    
    38,887
    
    
    
    76,134
    
    
    
    130,674
    
    
    
    236,428Acquisition costs and other underwriting expenses
    
    
    27,564
    
    
    
    33,164
    
    
    
    88,350
    
    
    
    109,471Corporate and other operating expenses
    
    
    4,676
    
    
    
    3,189
    
    
    
    12,314
    
    
    
    9,403Interest expense
    
    
    1,776
    
    
    
    1,963
    
    
    
    5,462
    
    
    
    6,690Income (loss) before income taxes
    
    
    21,870
    
    
    
    (28,822
    )
    
    
    46,829
    
    
    
    (31,326
    )Income tax expense (benefit)
    
    
    (2,673
    )
    
    
    (10,312
    )
    
    
    808
    
    
    
    (11,754
    )Income (loss) before equity in net income (loss)
of partnership
    
    
    24,543
    
    
    
    (18,510
    )
    
    
    46,021
    
    
    
    (19,572
    )Equity in net income (loss) of partnership, net of tax
    
    
    2,809
    
    
    
    (1,088
    )
    
    
    4,742
    
    
    
    (1,557
    )Net income (loss)
    
    $
    27,352
    
    
    $
    (19,598
    )
    
    $
    50,763
    
    
    $
    (21,129
    )Per share data (1):Net income (loss):Basic
    
    $
    0.45
    
    
    $
    (0.56
    )
    
    $
    1.04
    
    
    $
    (0.57
    )Diluted
    
    $
    0.45
    
    
    $
    (0.56
    )
    
    $
    1.04
    
    
    $
    (0.57
    )Weighted-average number of shares outstanding (2):Basic
    
    
    60,289,792
    
    
    
    35,022,413
    
    
    
    48,806,007
    
    
    
    37,085,904Diluted
    
    
    60,311,106
    
    
    
    35,022,413
    
    
    
    48,846,055
    
    
    
    37,085,904
 (1)
    
    In 2008, Diluted loss per share is the same as Basic loss per share since there was a net loss for the quarter and nine months
ended September 30, 2008.(2)
    
    In May 2009, the Company issued 17.2 million Class A common shares and 11.4 million Class B common shares in conjunction with the
Rights Offering. In computing the basic and diluted weighted share counts, the number of shares outstanding prior to May 5, 2009 (the date
that the common shares were issued in conjunction with the Rights Offering) was adjusted by a factor of 1.114 to reflect the impact of a
bonus element associated with the Rights Offering in accordance with appropriate accounting guidance As a result, share counts for the
prior periods have been restated.   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 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss)
    
    $
    27,352
    
    
    $
    (19,598
    )
    
    $
    50,763
    
    
    $
    (21,129
    )Other comprehensive income (loss), net of taxes:Unrealized holding gains (losses) arising during period
    
    
    30,337
    
    
    
    (29,266
    )
    
    
    39,532
    
    
    
    (48,290
    )Portion of other than temporary impairment losses
recognized in other comprehensive income (loss), net of
taxes
    
    
    394
    
    
    
    
    
    
    
    3,069
    
    
    
    Recognition of previously unrealized holding (gains) losses
    
    
    (5,046
    )
    
    
    13,764
    
    
    
    (2,274
    )
    
    
    16,020Unrealized foreign currency translation gains
    
    
    137
    
    
    
    
    
    
    
    214
    
    
    
    Other comprehensive income (loss), net of taxes
    
    
    25,822
    
    
    
    (15,502
    )
    
    
    40,541
    
    
    
    (32,270
    )Comprehensive income (loss), net of taxes
    
    $
    53,174
    
    
    $
    (35,100
    )
    
    $
    91,304
    
    
    $
    (53,399
    )
   3




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Changes in Shareholders Equity
 (Unaudited)Nine Months Ended
    
    
    Year EndedSeptember 30, 2009
    
    
    December 31, 2008Number of Class A common shares issued:Number at beginning of period
    
    
    25,032,618
    
    
    
    24,770,507Common shares issued under share incentive plans
    
    
    72,127
    
    
    
    252,248Common shares issued to directors
    
    
    167,726
    
    
    
    9,863Common shares issued under Rights Offering
    
    
    17,178,421
    
    
    
    Number at end of period
    
    
    42,450,892
    
    
    
    25,032,618Number of Class B common shares issued:Number at beginning of period
    
    
    12,687,500
    
    
    
    12,687,500Common shares issued under Rights Offering
    
    
    11,435,244
    
    
    
    Number at end of period
    
    
    24,122,744
    
    
    
    12,687,500Par value of Class A common shares:Balance at beginning of period
    
    $
    3
    
    
    $
    3Common shares issued under Rights Offering
    
    
    1
    
    
    
    Balance at end of period
    
    $
    4
    
    
    $
    3Par value of Class B common shares:Balance at beginning of period
    
    $
    1
    
    
    $
    1Common shares issued under Rights Offering
    
    
    2
    
    
    
    Balance at end of period
    
    $
    3
    
    
    $
    1Additional paid-in capital:Balance at beginning of period
    
    $
    524,345
    
    
    $
    519,980Share compensation plans
    
    
    2,948
    
    
    
    4,365Common shares issued under Rights Offering
    
    
    91,830
    
    
    
    Balance at end of period
    
    $
    619,123
    
    
    $
    524,345Accumulated other comprehensive income, net of
deferred income tax:Balance at beginning of period
    
    $
    25,108
    
    
    $
    40,172Other comprehensive income (loss)
    
    
    40,511
    
    
    
    (15,064
    )Change in other than temporary impairment
losses recognized in other comprehensive
income, net of taxes
    
    
    30
    
    
    
    Reclass of impairment losses per new accounting
guidance
    
    
    (6,320
    )
    
    
    Balance at end of period
    
    $
    59,329
    
    
    $
    25,108Retained earnings:Balance at beginning of period
    
    $
    182,982
    
    
    $
    324,542Net income (loss)
    
    
    50,763
    
    
    
    (141,560
    )Reclass of impairment losses per new accounting
guidance
    
    
    6,320
    
    
    
    Balance at end of period
    
    $
    240,065
    
    
    $
    182,982Number of Treasury Shares:Number at beginning of period
    
    
    6,019,156
    
    
    
    2,454,087Class A common shares purchased
    
    
    33,272
    
    
    
    3,565,069Number at end of period
    
    
    6,052,428
    
    
    
    6,019,156Treasury Shares, at cost:Balance at beginning of period
    
    $
    (100,446
    )
    
    $
    (48,422
    )Class A common shares purchased, at cost
    
    
    (247
    )
    
    
    (52,024
    )Balance at end of period
    
    $
    (100,693
    )
    
    $
    (100,446
    )Total shareholders equity
    
    $
    817,831
    
    
    $
    631,993
   4




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Cash Flows
 (Unaudited)Nine Months Ended September 30,2009
    
    
    2008Cash flows from operating activities:Net income (loss)
    
    $
    50,763
    
    
    $
    (21,129
    )Adjustments to reconcile net income to net cash provided by
(used for) operating activities:Amortization of trust preferred securities issuance costs
    
    
    62
    
    
    
    152Amortization and depreciation
    
    
    55
    
    
    
    756Restricted stock expense
    
    
    3,119
    
    
    
    2,730Deferred federal income taxes
    
    
    7,874
    
    
    
    (3,845
    )Amortization of bond premium and discount, net
    
    
    1,545
    
    
    
    2,221Net realized investment losses
    
    
    (3,415
    )
    
    
    24,060Equity in net (income) loss of partnerships
    
    
    (4,742
    )
    
    
    1,557Changes in:Agents balances
    
    
    (16,955
    )
    
    
    3,903Reinsurance receivables
    
    
    101,454
    
    
    
    39,805Unpaid losses and loss adjustment expenses
    
    
    (165,835
    )
    
    
    22,627Unearned premiums
    
    
    (4,921
    )
    
    
    (57,786
    )Ceded balances payable
    
    
    (7,026
    )
    
    
    9,207Other assets and liabilities, net
    
    
    (506
    )
    
    
    (8,305
    )Contingent commissions
    
    
    2,927
    
    
    
    (4,058
    )Prepaid reinsurance premiums
    
    
    5,785
    
    
    
    1,423Federal income taxes receivable
    
    
    11,122
    
    
    
    (14,239
    )Deferred acquisition costs
    
    
    (837
    )
    
    
    13,883Net cash provided by (used for) operating activities
    
    
    (19,531
    )
    
    
    12,962Cash flows from investing activities:Proceeds from sale of bonds
    
    
    231,258
    
    
    
    201,491Proceeds from sale of stocks
    
    
    68,834
    
    
    
    24,348Proceeds from maturity of bonds
    
    
    41,085
    
    
    
    76,210Proceeds from sale of other invested assets
    
    
    16,699
    
    
    
    Purchases of bonds
    
    
    (421,040
    )
    
    
    (167,892
    )Purchases of stocks
    
    
    (65,242
    )
    
    
    (29,150
    )Purchases of other invested assets
    
    
    (30,687
    )
    
    
    (277
    )Net cash provided by (used for) investing activities
    
    
    (159,093
    )
    
    
    104,730Cash flows from financing activities:Proceeds from exercises of stock options
    
    
    
    
    
    
    1,041Tax expense associated with share-based compensation plans
    
    
    (171
    )
    
    
    (73
    )Issuance of common shares
    
    
    99,168
    
    
    
    Purchases of Class A common shares
    
    
    (247
    )
    
    
    (51,960
    )Retirement of junior subordinated debentures
    
    
    
    
    
    
    (15,464
    )Principal payments of term debt
    
    
    (205
    )
    
    
    (213
    )Net cash provided by (used for) financing activities
    
    
    98,545
    
    
    
    (66,669
    )Effect of exchange rates on cash and cash equivalents
    
    
    214
    
    
    
    Net change in cash and cash equivalents
    
    
    (79,865
    )
    
    
    51,023Cash and cash equivalents at beginning of period
    
    
    292,604
    
    
    
    244,321Cash and cash equivalents at end of period
    
    $
    212,739
    
    
    $
    295,344
   5




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




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Other thantemporaryGross
    
    
    Gross
    
    
    
    
    
    
    impairmentsAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Estimated
    
    
    recognized in(Dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value
    
    
    AOCI (1)As of September 30, 2009Bonds:U.S. treasury and agency obligations
    
    $
    252,843
    
    
    $
    13,004
    
    
    $
    
    
    
    $
    265,847
    
    
    $
    Obligations of states and political subdivisions
    
    
    202,811
    
    
    
    9,222
    
    
    
    (77
    )
    
    
    211,956
    
    
    
    Mortgage-backed securities
    
    
    350,423
    
    
    
    16,888
    
    
    
    (294
    )
    
    
    367,017
    
    
    
    (101
    )Commercial mortgage-backed securities
    
    
    111,161
    
    
    
    3,500
    
    
    
    
    
    
    
    114,661
    
    
    
    (1,945
    )Asset-backed securities
    
    
    82,634
    
    
    
    2,720
    
    
    
    (283
    )
    
    
    85,071
    
    
    
    (9
    )Corporate notes
    
    
    273,791
    
    
    
    14,082
    
    
    
    (167
    )
    
    
    287,706
    
    
    
    Foreign corporate bonds
    
    
    56,131
    
    
    
    2,581
    
    
    
    
    
    
    
    58,712
    
    
    
    (698
    )Other bonds
    
    
    22,165
    
    
    
    
    
    
    
    
    
    
    
    22,165
    
    
    
    Total bonds
    
    
    1,351,959
    
    
    
    61,997
    
    
    
    (821
    )
    
    
    1,413,135
    
    
    
    (2,753
    )Common stock
    
    
    47,294
    
    
    
    12,495
    
    
    
    (478
    )
    
    
    59,311
    
    
    
    Preferred stock
    
    
    3,405
    
    
    
    953
    
    
    
    
    
    
    
    4,358
    
    
    
    Other invested assets
    
    
    38,827
    
    
    
    13,665
    
    
    
    
    
    
    
    52,492
    
    
    
    Total
    
    $
    1,441,485
    
    
    $
    89,110
    
    
    $
    (1,299
    )
    
    $
    1,529,296
    
    
    $
    (2,753
    )
 (1)
    
    Represents the amount of other than temporary impairment losses recognized in accumulated
other comprehensive income (AOCI). Per the accounting guidance, these items were not
included in earnings as of September 30, 2009. Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Estimated(Dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAs of December 31, 2008Bonds:U.S. treasury and agency obligations
    
    $
    135,457
    
    
    $
    17,320
    
    
    $
    
    
    
    $
    152,777Obligations of states and political subdivisions
    
    
    241,457
    
    
    
    5,712
    
    
    
    (4,139
    )
    
    
    243,030Mortgage-backed securities
    
    
    372,569
    
    
    
    12,180
    
    
    
    (680
    )
    
    
    384,069Commercial mortgage-backed securities
    
    
    156,402
    
    
    
    
    
    
    
    (11,945
    )
    
    
    144,457Asset-backed securities
    
    
    19,801
    
    
    
    
    
    
    
    (3,248
    )
    
    
    16,553Corporate notes
    
    
    215,931
    
    
    
    2,175
    
    
    
    (4,451
    )
    
    
    213,655Foreign corporate bonds
    
    
    29,485
    
    
    
    136
    
    
    
    (471
    )
    
    
    29,150Other bonds
    
    
    21,283
    
    
    
    
    
    
    
    
    
    
    
    21,283Total bonds
    
    
    1,192,385
    
    
    
    37,523
    
    
    
    (24,934
    )
    
    
    1,204,974Common stock
    
    
    46,316
    
    
    
    4,482
    
    
    
    (185
    )
    
    
    50,613Preferred stock
    
    
    4,665
    
    
    
    
    
    
    
    
    
    
    
    4,665Other invested assets
    
    
    24,840
    
    
    
    21,832
    
    
    
    
    
    
    
    46,672Total
    
    $
    1,268,206
    
    
    $
    63,837
    
    
    $
    (25,119
    )
    
    $
    1,306,924
 NOTE:
    
    Other than temporary impairments recognized in AOCI is not shown as of December
31, 2008 since the applicable new accounting guidance on other than temporary
impairments is not applied retrospectively.   7




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Amortized
    
    
    Estimated(Dollars in thousands)
    
    Cost
    
    
    Fair ValueDue in one year or less
    
    $
    52,069
    
    
    $
    53,012Due after one year through five years
    
    
    486,308
    
    
    
    507,709Due after five years through ten years
    
    
    170,955
    
    
    
    182,143Due after ten years through fifteen years
    
    
    57,610
    
    
    
    61,402Due after fifteen years
    
    
    40,799
    
    
    
    42,120Mortgaged-backed securities
    
    
    350,423
    
    
    
    367,017Commercial mortgage-backed securities
    
    
    111,161
    
    
    
    114,661Asset-backed securities
    
    
    82,634
    
    
    
    85,071$
    1,351,959
    
    
    $
    1,413,135
  Less than 12 months
    
    
    12 months or longer (1)
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized(Dollars in thousands)
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesBonds:Obligations of states and political subdivisions
    
    $
    2,596
    
    
    $
    (26
    )
    
    $
    3,919
    
    
    $
    (51
    )
    
    $
    6,515
    
    
    $
    (77
    )Mortgage-backed securities
    
    
    3,803
    
    
    
    (147
    )
    
    
    2,973
    
    
    
    (147
    )
    
    
    6,776
    
    
    
    (294
    )Asset-backed securities
    
    
    543
    
    
    
    (111
    )
    
    
    1,121
    
    
    
    (172
    )
    
    
    1,664
    
    
    
    (283
    )Corporate notes
    
    
    1,486
    
    
    
    (2
    )
    
    
    5,986
    
    
    
    (165
    )
    
    
    7,472
    
    
    
    (167
    )Total bonds
    
    
    8,428
    
    
    
    (286
    )
    
    
    13,999
    
    
    
    (535
    )
    
    
    22,427
    
    
    
    (821
    )Common stock
    
    
    6,677
    
    
    
    (405
    )
    
    
    1,046
    
    
    
    (73
    )
    
    
    7,723
    
    
    
    (478
    )Total
    
    $
    15,105
    
    
    $
    (691
    )
    
    $
    15,045
    
    
    $
    (608
    )
    
    $
    30,150
    
    
    $
    (1,299
    )
 (1)
    
    Fixed maturities in a gross unrealized loss position for twelve months or longer is primarily
comprised of non-credit losses on investment grade securities where management does not intend
to sell, and it is more likely than not that the Company will not be forced to sell the
security before recovery. The Company has analyzed these securities and has determined that
they are not impaired.  Less than 12 months
    
    
    12 months or longer (1)
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized(Dollars in thousands)
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesBonds:Obligations of states and political subdivisions
    
    $
    59,175
    
    
    $
    (3,253
    )
    
    $
    7,181
    
    
    $
    (886
    )
    
    $
    66,356
    
    
    $
    (4,139
    )Mortgage-backed securities
    
    
    7,561
    
    
    
    (282
    )
    
    
    4,533
    
    
    
    (398
    )
    
    
    12,094
    
    
    
    (680
    )Commercial mortgage-backed securities
    
    
    55,904
    
    
    
    (4,514
    )
    
    
    45,380
    
    
    
    (7,431
    )
    
    
    101,284
    
    
    
    (11,945
    )Asset-backed securities
    
    
    12,624
    
    
    
    (2,976
    )
    
    
    1,476
    
    
    
    (272
    )
    
    
    14,100
    
    
    
    (3,248
    )Corporate notes
    
    
    112,886
    
    
    
    (2,555
    )
    
    
    20,614
    
    
    
    (1,896
    )
    
    
    133,500
    
    
    
    (4,451
    )Foreign corporate bonds
    
    
    21,171
    
    
    
    (471
    )
    
    
    
    
    
    
    
    
    
    
    21,171
    
    
    
    (471
    )Total bonds
    
    
    269,321
    
    
    
    (14,051
    )
    
    
    79,184
    
    
    
    (10,883
    )
    
    
    348,505
    
    
    
    (24,934
    )Common stock
    
    
    1,143
    
    
    
    (185
    )
    
    
    
    
    
    
    
    
    
    
    1,143
    
    
    
    (185
    )Total
    
    $
    270,464
    
    
    $
    (14,236
    )
    
    $
    79,184
    
    
    $
    (10,883
    )
    
    $
    349,648
    
    
    $
    (25,119
    )
 (1)
    
    At December 31, 2008, the Company had 52 bonds that were in an unrealized loss position for
twelve months or longer. The estimated fair value and amortized cost of these securities was
$79.2 million and $90.1 million, respectively. The Company has analyzed these securities and
has determined that they are not impaired. The Company has the ability to hold these
investments until maturity or until recovery. 99.9% of these securities are investment grade.  8




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##### Table of Contents



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




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Asset backed securities 
 Corporate bonds 
  Quarter Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Bonds:OTTI losses, gross
    
    $
    2,108
    
    
    $
    1,067
    
    
    $
    4,449
    
    
    $
    1,067Portion of loss
recognized in other
comprehensive
income (pre-tax)
    
    
    (8
    )
    
    
    
    
    
    
    (133
    )
    
    
    Net bonds impairment
losses recognized in
earnings
    
    
    2,100
    (1)
    
    
    1,067
    
    
    
    4,316
    
    
    
    1,067Common stock
    
    
    
    
    
    
    3,227
    
    
    
    593
    
    
    
    5,046Preferred stock
    
    
    
    
    
    
    1,807
    
    
    
    647
    
    
    
    1,807Total
    
    $
    2,100
    
    
    $
    6,101
    
    
    $
    5,556
    
    
    $
    7,920
 (1)
    
    Includes $2.0 million of OTTI losses related to the Companys commercial mortgage-backed
securities which had been identified as securities in a loss position at September 30, 2009
that will be sold.   10




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Quarter-to-Date(Dollars in thousands)Balance of credit losses related to securities still being held as of July 1, 2009
    
    $
    21Additions where no OTTI was previously recorded
    
    
    3Additions where an OTTI was previously recorded
    
    
    9Reductions for securities for which the company intends to sell or more likely
than not will be required to sell before recovery
    
    
    Reductions reflecting increases in expected cash flows to be collected
    
    
    Reductions for securities sold during the period
    
    
    Balance of credit losses related to securities still being held as of September
30, 2009
    
    $
    33
 Adoption-to-Date(Dollars in thousands)Balance of credit losses related to securities still being held as of
April 1, 2009, date of adoption
    
    $
    Additions where no OTTI was previously recorded
    
    
    33Additions where an OTTI was previously recorded
    
    
    Reductions for securities for which the company intends to sell or
more likely than not will be required to sell before recovery
    
    
    Reductions reflecting increases in expected cash flows to be collected
    
    
    Reductions for securities sold during the period
    
    
    Balance of credit losses related to securities still being held as of
September 30, 2009
    
    $
    33
 Accumulated Other Comprehensive Income
  September 30,
    
    
    December 31,(Dollars in thousands)
    
    2009
    
    
    2008Net unrealized gains from:Bonds
    
    $
    61,176
    
    
    $
    12,589Preferred stocks
    
    
    953
    
    
    
    Common stocks
    
    
    12,017
    
    
    
    4,297Partnerships < 3% owned
    
    
    4,988
    
    
    
    19,530Foreign currency fluctuations
    
    
    117
    
    
    
    (97
    )Deferred taxes
    
    
    (19,922
    )
    
    
    (11,211
    )Accumulated other comprehensive income
    
    $
    59,329
    
    
    $
    25,108
 Net Realized Investment Gains (Losses)
  Quarter Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Bonds
    
    $
    487
    
    
    $
    (6,887
    )
    
    $
    (4,659
    )
    
    $
    (6,697
    )Convertibles
    
    
    4,021
    
    
    
    (1,591
    )
    
    
    7,121
    
    
    
    (3,507
    )Common stock
    
    
    2,105
    
    
    
    (3,405
    )
    
    
    2,030
    
    
    
    (5,229
    )Preferred stock
    
    
    
    
    
    
    (8,627
    )
    
    
    (1,077
    )
    
    
    (8,627
    )Total
    
    $
    6,613
    
    
    $
    (20,510
    )
    
    $
    3,415
    
    
    $
    (24,060
    )
  11




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
   Net Investment Income
  Quarter Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Bonds
    
    $
    15,808
    
    
    $
    15,379
    
    
    $
    46,485
    
    
    $
    48,086Preferred and common stocks
    
    
    351
    
    
    
    760
    
    
    
    1,281
    
    
    
    2,399Cash and cash equivalents
    
    
    225
    
    
    
    1,740
    
    
    
    1,077
    
    
    
    5,050Other
    
    
    
    
    
    
    
    
    
    
    8,647
    
    
    
    Total investment income
    
    
    16,384
    
    
    
    17,879
    
    
    
    57,490
    
    
    
    55,535Investment expense
    
    
    (1,117
    )
    
    
    (1,252
    )
    
    
    (3,441
    )
    
    
    (4,050
    )Net investment income
    
    $
    15,267
    
    
    $
    16,627
    
    
    $
    54,049
    
    
    $
    51,485
  Quarter Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Net investment income
    
    $
    12,586
    
    
    $
    13,652
    
    
    $
    43,494
    
    
    $
    42,189Net realized investment gains (losses):Invested assets excluding partnerships
    
    
    4,763
    
    
    
    (12,677
    )
    
    
    1,991
    
    
    
    (14,444
    )Partnerships
    
    
    2,809
    
    
    
    (1,088
    )
    
    
    4,742
    
    
    
    (1,577
    )Total net realized investment gains
(losses)
    
    
    7,572
    
    
    
    (13,765
    )
    
    
    6,733
    
    
    
    (16,021
    )Net unrealized investment gains (losses)
    
    
    25,685
    
    
    
    (15,502
    )
    
    
    40,328
    
    
    
    (32,270
    )Net investment gains (losses)
    
    
    33,257
    
    
    
    (29,267
    )
    
    
    47,061
    
    
    
    (48,291
    )Total investment return
    
    $
    45,843
    
    
    $
    (15,615
    )
    
    $
    90,555
    
    
    $
    (6,102
    )Total investment return % (1)
    
    
    2.7
    %
    
    
    (1.0
    )%
    
    
    5.4
    %
    
    
    (0.4
    )%Average investment portfolio (2)
    
    $
    1,710,395
    
    
    $
    1,656,009
    
    
    $
    1,670,782
    
    
    $
    1,701,235
 (1)
    
    Not annualized.(2)
    
    Average of total cash and invested assets as of the beginning and ending of the
period. Subprime and Alt-A Investments
   12




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Insurance Enhanced Municipal Bonds
  Ratings
    
    
    Ratings(Dollars in thousands)
    
    with
    
    
    withoutRating
    
    Insurance
    
    
    InsuranceAAA
    
    $
    2,679
    
    
    $
    AA
    
    
    23,995
    
    
    
    5,255A
    
    
    14,312
    
    
    
    16,975BBB
    
    
    5,521
    
    
    
    1,028Rating Not Available
    
    
    
    
    
    
    23,249Total
    
    $
    46,507
    
    
    $
    46,507
 pre-refunded
 Exposure Netof Pre-refundedGovt
    
    
    & Govt(Dollars in thousands)
    
    
    
    
    
    Pre-refunded
    
    
    Guaranteed
    
    
    GuaranteedFinancial Guarantor
    
    Total
    
    
    Securities
    
    
    Securities
    
    
    SecuritiesAmbac Financial Group
    
    $
    26,415
    
    
    $
    9,210
    
    
    $
    
    
    
    $
    17,205Assured Guaranty Corporation
    
    
    408
    
    
    
    
    
    
    
    
    
    
    
    408Financial Guaranty Insurance Company
    
    
    7,677
    
    
    
    5,358
    
    
    
    
    
    
    
    2,319Financial Security Assurance, Inc.
    
    
    49,317
    
    
    
    17,066
    
    
    
    
    
    
    
    32,251Municipal Bond Insurance Association
    
    
    71,006
    
    
    
    18,796
    
    
    
    
    
    
    
    52,210Federal Housing Association
    
    
    2,392
    
    
    
    
    
    
    
    2,392
    
    
    
    Federal National Housing Association
    
    
    780
    
    
    
    
    
    
    
    780
    
    
    
    Govt National Housing Association
    
    
    1,335
    
    
    
    1,106
    
    
    
    229
    
    
    
    Permanent School Fund Guaranty
    
    
    3,875
    
    
    
    2,205
    
    
    
    1,670
    
    
    
    Total backed by financial guarantors
    
    
    163,205
    
    
    
    53,741
    
    
    
    5,071
    
    
    
    104,393Other credit enhanced municipal bonds
    
    
    19,610
    
    
    
    19,610
    
    
    
    
    
    
    
    Total
    
    $
    182,815
    
    
    $
    73,351
    
    
    $
    5,071
    
    
    $
    104,393
    13




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##### Table of Contents



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




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  As of September 30, 2009
    
    Fair Value Measurements(Dollars in thousands)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalBonds:U.S. treasury and agency obligations
    
    $
    112,256
    
    
    $
    153,591
    
    
    $
    
    
    
    $
    265,847Obligations of states and political
subdivisions
    
    
    
    
    
    
    211,956
    
    
    
    
    
    
    
    211,956Mortgage-backed securities
    
    
    
    
    
    
    367,017
    
    
    
    
    
    
    
    367,017Commercial mortgage-backed securities
    
    
    
    
    
    
    114,661
    
    
    
    
    
    
    
    114,661Asset-backed securities
    
    
    
    
    
    
    85,071
    
    
    
    
    
    
    
    85,071Corporate notes
    
    
    
    
    
    
    287,706
    
    
    
    
    
    
    
    287,706Foreign corporate bonds
    
    
    
    
    
    
    58,712
    
    
    
    
    
    
    
    58,712Other bonds
    
    
    
    
    
    
    22,165
    
    
    
    
    
    
    
    22,165Total bonds
    
    
    112,256
    
    
    
    1,300,879
    
    
    
    
    
    
    
    1,413,135Preferred shares
    
    
    1,917
    
    
    
    2,441
    
    
    
    
    
    
    
    4,358Common shares
    
    
    59,311
    
    
    
    
    
    
    
    
    
    
    
    59,311Other invested assets
    
    
    
    
    
    
    
    
    
    
    52,492
    
    
    
    52,492Total invested assets
    
    $
    173,484
    
    
    $
    1,303,320
    
    
    $
    52,492
    
    
    $
    1,529,296
 As of December 31, 2008
    
    Fair Value Measurements(Dollars in thousands)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalBonds:U.S. treasury and agency obligations
    
    $
    75,460
    
    
    $
    77,317
    
    
    $
    
    
    
    $
    152,777Obligations of states and political
subdivisions
    
    
    
    
    
    
    243,030
    
    
    
    
    
    
    
    243,030Mortgage-backed securities
    
    
    
    
    
    
    384,069
    
    
    
    
    
    
    
    384,069Commercial mortgage-backed securities
    
    
    
    
    
    
    144,457
    
    
    
    
    
    
    
    144,457Asset-backed securities
    
    
    
    
    
    
    16,553
    
    
    
    
    
    
    
    16,553Corporate notes
    
    
    
    
    
    
    213,655
    
    
    
    
    
    
    
    213,655Foreign corporate bonds
    
    
    
    
    
    
    29,150
    
    
    
    
    
    
    
    29,150Other bonds
    
    
    
    
    
    
    21,283
    
    
    
    
    
    
    
    21,283Total bonds
    
    
    75,460
    
    
    
    1,129,514
    
    
    
    
    
    
    
    1,204,974Preferred shares
    
    
    1,813
    
    
    
    2,852
    
    
    
    
    
    
    
    4,665Common shares
    
    
    50,613
    
    
    
    
    
    
    
    
    
    
    
    50,613Other invested assets
    
    
    
    
    
    
    
    
    
    
    46,672
    
    
    
    46,672Total invested assets
    
    $
    127,886
    
    
    $
    1,132,366
    
    
    $
    46,672
    
    
    $
    1,306,924
    15




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Fair Value Measurements Using Level 3 InputsOtherQuarter Ended September 30, 2009
    
    
    
    
    
    Invested(Dollars in thousands)
    
    Bonds
    
    
    Assets
    
    
    TotalBeginning balance at July 1, 2009
    
    $
    
    
    
    $
    50,817
    
    
    $
    50,817Total gains (losses) (realized / unrealized):Included in equity in net income (loss) of partnership
    
    
    
    
    
    
    3,638
    
    
    
    3,638Included in accumulated other comprehensive income
    
    
    
    
    
    
    (1,995
    )
    
    
    (1,995
    )Purchases
    
    
    
    
    
    
    32
    
    
    
    32Sales
    
    
    
    
    
    
    
    
    
    
    Ending balance at September 30, 2009
    
    $
    
    
    
    $
    52,492
    
    
    $
    52,492Gains for 2009 included in earnings attributable to the
change in unrealized gains relating to assets still held
at September 30, 2009
    
    $
    
    
    
    $
    3,638
    
    
    $
    3,638
 Fair Value Measurements Using Level 3 InputsOtherNine Months Ended September 30, 2009
    
    
    
    
    
    Invested(Dollars in thousands)
    
    Bonds
    
    
    Assets
    
    
    TotalBeginning balance at January 1, 2009
    
    $
    
    
    
    $
    46,672
    
    
    $
    46,672Total gains (losses) (realized / unrealized):Included in equity in net income (loss) of partnership
    
    
    
    
    
    
    6,375
    
    
    
    6,375Included in accumulated other comprehensive income
    
    
    
    
    
    
    (5,879
    )
    
    
    (5,879
    )Purchases
    
    
    
    
    
    
    30,687
    
    
    
    30,687Sales
    
    
    
    
    
    
    (25,363
    )
    
    
    (25,363
    )Ending balance at September 30, 2009
    
    $
    
    
    
    $
    52,492
    
    
    $
    52,492Gains for 2009 included in earnings attributable to the
change in unrealized gains relating to assets still held
at September 30, 2009
    
    $
    
    
    
    $
    6,375
    
    
    $
    6,375
   16




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Fair Value Measurements Using Level 3 InputsOtherQuarter Ended 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
    )
    17




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  5. Income Taxes
  Quarter Ended September 30, 2009:
    
    Non-U.S.
    
    
    U.S.(Dollars in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    37,943
    
    
    $
    67,368
    
    
    $
    (29,505
    )
    
    $
    75,806Net premiums written
    
    $
    37,928
    
    
    $
    25,004
    
    
    $
    
    
    
    $
    62,932Net premiums earned
    
    $
    45,656
    
    
    $
    27,237
    
    
    $
    
    
    
    $
    72,893Net investment income
    
    
    10,229
    
    
    
    9,686
    
    
    
    (4,648
    )
    
    
    15,267Net realized investment gains
    
    
    1,327
    
    
    
    5,286
    
    
    
    
    
    
    
    6,613Total revenues
    
    
    57,212
    
    
    
    42,209
    
    
    
    (4,648
    )
    
    
    94,773Losses and Expenses:Net losses and loss adjustment expenses
    
    
    23,823
    
    
    
    15,064
    
    
    
    
    
    
    
    38,887Acquisition costs and other
underwriting expenses
    
    
    17,472
    
    
    
    10,092
    
    
    
    
    
    
    
    27,564Corporate and other operating expenses
    
    
    4,116
    
    
    
    560
    
    
    
    
    
    
    
    4,676Interest expense
    
    
    
    
    
    
    6,424
    
    
    
    (4,648
    )
    
    
    1,776Income before income taxes
    
    $
    11,801
    
    
    $
    10,069
    
    
    $
    
    
    
    $
    21,870
 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 gains (losses)
    
    
    (1,238
    )
    
    
    (19,272
    )
    
    
    
    
    
    
    (20,510
    )Total revenues
    
    
    54,659
    
    
    
    35,617
    
    
    
    (4,648
    )
    
    
    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
    
    
    
    1,216
    
    
    
    
    
    
    
    3,189Interest expense
    
    
    
    
    
    
    6,611
    
    
    
    (4,648
    )
    
    
    1,963Loss before income taxes
    
    $
    (4,838
    )
    
    $
    (23,984
    )
    
    $
    
    
    
    $
    (28,822
    )
  20




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Nine Months Ended September 30, 2009:
    
    Non-U.S.
    
    
    U.S.(Dollars in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    149,934
    
    
    $
    207,675
    
    
    $
    (91,135
    )
    
    $
    266,474Net premiums written
    
    $
    149,389
    
    
    $
    77,634
    
    
    $
    
    
    
    $
    227,023Net premiums earned
    
    $
    135,845
    
    
    $
    90,320
    
    
    $
    
    
    
    $
    226,165Net investment income
    
    
    31,156
    
    
    
    36,685
    
    
    
    (13,792
    )
    
    
    54,049Net realized investment losses
    
    
    (655
    )
    
    
    4,070
    
    
    
    
    
    
    
    3,415Total revenues
    
    
    166,346
    
    
    
    131,075
    
    
    
    (13,792
    )
    
    
    283,629Losses and Expenses:Net losses and loss adjustment expenses
    
    
    73,615
    
    
    
    57,059
    
    
    
    
    
    
    
    130,674Acquisition costs and other
underwriting expenses
    
    
    54,001
    
    
    
    34,349
    
    
    
    
    
    
    
    88,350Corporate and other operating expenses
    
    
    7,635
    
    
    
    4,679
    
    
    
    
    
    
    
    12,314Interest expense
    
    
    
    
    
    
    19,254
    
    
    
    (13,792
    )
    
    
    5,462Income before income taxes
    
    $
    31,095
    
    
    $
    15,734
    
    
    $
    
    
    
    $
    46,829
 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 gains (losses)
    
    
    (1,090
    )
    
    
    (22,970
    )
    
    
    
    
    
    
    (24,060
    )Total revenues
    
    
    185,327
    
    
    
    159,131
    
    
    
    (13,792)
    
    
    
    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
    
    
    
    3,617
    
    
    
    
    
    
    
    9,403Interest expense
    
    
    
    
    
    
    20,482
    
    
    
    (13,792)
    
    
    
    6,690Income (loss) before income taxes
    
    $
    (421
    )
    
    $
    (30,905
    )
    
    $
    
    
    
    $
    (31,326
    )
  Quarter Ended September 30,2009

    
    
    2008% of Pre-
    
    
    
    

    
    
    % of Pre-(Dollars in thousands)
    
    Amount
    
    
    Tax Income
    
    
    Amount
    
    
    Tax LossExpected tax provision at
weighted average rate
    
    $
    3,544
    
    
    
    16.2
    %
    
    $
    (8,377
    )
    
    
    (29.1
    )%Adjustments:Tax exempt interest
    
    
    (616
    )
    
    
    (2.8
    )
    
    
    (715
    )
    
    
    (2.5
    )Dividend exclusion
    
    
    (79
    )
    
    
    (0.4
    )
    
    
    (155
    )
    
    
    (0.5
    )Effective tax rate adjustment
    
    
    (3,447
    )
    
    
    (15.8
    )
    
    
    (449
    )
    
    
    (1.6
    )Other
    
    
    (2,075
    )
    
    
    (9.4
    )
    
    
    (616
    )
    
    
    (2.1
    )Income tax expense
    
    $
    (2,673
    )
    
    
    (12.2
    )%
    
    $
    (10,312
    )
    
    
    (35.8
    )%
  21




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Nine Months Ended September 30,2009
    
    
    2008% of Pre-
    
    
    
    
    
    
    % of Pre-(Dollars in thousands)
    
    Amount
    
    
    Tax Income
    
    
    Amount
    
    
    Tax LossExpected tax provision at
weighted average rate
    
    $
    5,567
    
    
    
    11.9
    %
    
    $
    (10,760
    )
    
    
    (34.3
    )%Adjustments:Tax exempt interest
    
    
    (1,996
    )
    
    
    (4.3
    )
    
    
    (2,172
    )
    
    
    (6.9
    )Dividend exclusion
    
    
    (289
    )
    
    
    (0.6
    )
    
    
    (481
    )
    
    
    (1.5
    )Effective tax rate adjustment
    
    
    (496
    )
    
    
    (1.1
    )
    
    
    2,448
    
    
    
    7.8Other
    
    
    (1,978
    )
    
    
    (4.2
    )
    
    
    (789
    )
    
    
    (2.6
    )Income tax expense
    
    $
    808
    
    
    
    1.7
    %
    
    $
    (11,754
    )
    
    
    (37.5
    )%
      6. Liability for Unpaid Losses and Loss Adjustment Expenses
   22




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Quarter Ended September 30,(Dollars in thousands)
    
    2009
    
    
    2008Unpaid losses and loss adjustment expenses at beginning of
period
    
    $
    1,394,818
    
    
    $
    1,501,229Less: Ceded reinsurance receivables on unpaid losses and
loss adjustment expenses
    
    
    613,664
    
    
    
    666,913Net balance at beginning of period
    
    
    781,154
    
    
    
    834,316Incurred losses and loss adjustment expenses related to:Current year
    
    
    40,527
    
    
    
    71,917Prior years
    
    
    (1,640
    )(1)
    
    
    4,217
    (2)Total incurred losses and loss adjustment expenses
    
    
    38,887
    
    
    
    76,134Paid losses and loss adjustment expenses related to:Current year
    
    
    12,892
    
    
    
    21,328Prior years
    
    
    42,941
    
    
    
    41,144Total paid losses and loss adjustment expenses
    
    
    55,833
    
    
    
    62,472Net balance at end of period
    
    
    764,208
    
    
    
    847,978Plus: Ceded reinsurance receivables on unpaid losses and
loss adjustment expenses
    
    
    576,386
    
    
    
    677,886Unpaid losses and loss adjustment expenses at end of period
    
    $
    1,340,594
    
    
    $
    1,525,864
 (1)
    
    In the third quarter of 2009, the Company reduced its prior
accident year loss reserves by $2.0 million and increased its allowance for
uncollectible reinsurance by $0.4 million. The loss reserves reduction of
$2.0 million consisted of a $2.7 million reduction in general liability
lines, a $0.2 million reduction in property lines, and a $0.4 million
reduction in umbrella lines, offset by a $1.3 million increase in
professional lines. The reduction in the general liability lines consisted
of net reductions of $5.1 million related to accident years 2005 and prior,
offset by increases of $2.4 million related to accident years 2006 through
2008. The reduction in the property lines consisted of net reductions of
$0.5 million related to accident years 2007 and prior, offset by an
increase of $0.3 million related to accident year 2008. The reduction in
the umbrella lines related to accident years 2003 and 2001. The increase
in the professional lines primarily consisted of increases of $1.6 million
related to accident years 2004 through 2008, offset by net reductions of
$0.3 million related to accident years 2003 and prior.(2)
    
    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 reduction 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 in 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 in the property lines and
increase to the professional liability lines are primarily related to
accident years 2006 and 2007.  23




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Nine Months Ended September 30,(Dollars in thousands)
    
    2009
    
    
    2008Unpaid losses and loss adjustment expenses at beginning of
period
    
    $
    1,506,429
    
    
    $
    1,503,237Less: Ceded reinsurance receivables on unpaid losses and
loss adjustment expenses
    
    
    670,591
    
    
    
    702,353Net balance at beginning of period
    
    
    835,838
    
    
    
    800,884Incurred losses and loss adjustment expenses related to:Current year
    
    
    135,224
    
    
    
    215,670Prior years
    
    
    (4,550
    )(1)
    
    
    20,758
    (2)Total incurred losses and loss adjustment expenses
    
    
    130,674
    
    
    
    236,428Paid losses and loss adjustment expenses related to:Current year
    
    
    28,962
    
    
    
    42,895Prior years
    
    
    173,342
    
    
    
    146,439Total paid losses and loss adjustment expenses
    
    
    202,304
    
    
    
    189,334Net balance at end of period
    
    
    764,208
    
    
    
    847,978Plus: Ceded reinsurance receivables on unpaid losses and
loss adjustment expenses
    
    
    576,386
    
    
    
    677,886Unpaid losses and loss adjustment expenses at end of period
    
    $
    1,340,594
    
    
    $
    1,525,864
 (1)
    
    In 2009, the Company reduced its prior accident year loss reserves
by $4.2 million and reduced its allowance for uncollectible reinsurance by
$0.4 million. The loss reserves reduction of $4.2 million primarily
consisted of a $5.2 million reduction in general liability lines, a $2.4
million reduction in property lines, and a $0.4 million reduction in
umbrella lines, offset by a $3.8 million increase in professional lines.
The reduction in the general liability lines primarily consisted of net
reductions of $9.7 million related to accident years 2006 and prior, offset
by increase of $4.5 million to accident years 2007 and 2008. The reduction
in the property lines primarily consisted of reductions related to accident
year 2007 and 2008. The reduction in the umbrella lines primarily related
to accident years 2003 and 2001. The increase to the professional lines
primarily related to increases of $6.1 million related to accident years
2007 and 2008, offset by net reductions of $2.3 million primarily to
accident years 2005 and prior.(2)
    
    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 general liability lines and $7.5
million in professional liability lines, offset by reductions of $4.6
million in property lines and $0.8 million in 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. 7. Debt
  Loans Payable
    24




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 8. Shareholders Equity
        25




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 9. Related Party Transactions
       Quarter Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Ceded written premium
    
    $
    
    
    
    $
    1,149
    
    
    $
    2,748
    
    
    $
    9,721Ceded losses
    
    
    
    
    
    
    5,225
    
    
    
    972
    
    
    
    3,997
    26




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 10. Commitments and Contingencies
 Legal Proceedings
    11. Share-Based Compensation Plans
   12. Earnings (Loss) Per Share
    27




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
   (Dollars in thousands,
    
    Quarter Ended September 30,
    
    
    Nine Months Ended September 30,except per share data)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss)
    
    $
    27,352
    
    
    $
    (19,598
    )
    
    $
    50,763
    
    
    $
    (21,129
    )Basic earnings (loss) per share:Weighted average shares outstanding  basic
    
    
    60,289,792
    
    
    
    31,449,094
    
    
    
    47,177,225
    
    
    
    33,302,048Adjustment for bonus element of Rights Offering
    
    
    
    
    
    
    3,573,319
    
    
    
    1,628,782
    
    
    
    3,783,856Adjusted weighted average shares outstanding  basic
    
    
    60,289,792
    
    
    
    35,022,413
    
    
    
    48,806,007
    
    
    
    37,085,904Net income (loss)
    
    $
    0.45
    
    
    $
    (0.56
    )
    
    $
    1.04
    
    
    $
    (0.57
    )Diluted earnings (loss) per share:Weighted average shares outstanding  diluted
    
    
    60,311,106
    
    
    
    31,449,094
    
    
    
    47,217,273
    
    
    
    33,302,048Adjustment for bonus element of Rights Offering
    
    
    
    
    
    
    3,573,319
    
    
    
    1,628,782
    
    
    
    3,783,856Adjusted weighted average shares outstanding  diluted
    
    
    60,311,106
    
    
    
    35,022,413
    
    
    
    48,846,055
    
    
    
    37,085,904Net income (loss)
    
    $
    0.45
    
    
    $
    (0.56
    )
    
    $
    1.04
    
    
    $
    (0.57
    )
  Quarter Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Weighted average shares for basic earnings per share
    
    
    60,289,792
    
    
    
    35,022,413
    
    
    
    48,806,007
    
    
    
    37,085,904Non-vested restricted stock
    
    
    21,314
    
    
    
    
    
    
    
    40,048
    
    
    
    Weighted average shares for diluted earnings per share
    
    
    60,311,106
    
    
    
    35,022,413
    
    
    
    48,846,055
    
    
    
    37,085,904
  13. Segment Information
   28




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
   Quarter Ended September 30, 2009:
    
    Insurance(Dollars in thousands)
    
    Operations (1)
    
    
    Reinsurance (2)
    
    
    TotalRevenues:Gross premiums written
    
    $
    67,368
    
    
    $
    8,438
    
    
    $
    75,806Net premiums written
    
    $
    54,510
    
    
    $
    8,422
    
    
    $
    62,932Net premiums earned
    
    $
    58,971
    
    
    $
    13,922
    
    
    $
    72,893Losses and Expenses:Net losses and loss adjustment expenses
    
    
    33,292
    
    
    
    5,595
    
    
    
    38,887Acquisition costs and other underwriting expenses
    
    
    24,028
    (3)
    
    
    3,536
    (4)
    
    
    27,564Income (loss) from segments
    
    $
    1,651
    
    
    $
    4,791
    
    
    
    6,442Unallocated Items:Net investment income
    
    
    
    
    
    
    
    
    
    
    15,267Net realized investment gains
    
    
    
    
    
    
    
    
    
    
    6,613Corporate and other operating expenses
    
    
    
    
    
    
    
    
    
    
    (4,676
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (1,776
    )Income before income taxes
    
    
    
    
    
    
    
    
    
    
    21,870Income tax expense
    
    
    
    
    
    
    
    
    
    
    (2,673
    )Income before equity in net income of partnership
    
    
    
    
    
    
    
    
    
    
    24,543Equity in net income of partnership, net of tax
    
    
    
    
    
    
    
    
    
    
    2,809Net income
    
    
    
    
    
    
    
    
    
    $
    27,352Total assets
    
    $
    1,868,061
    
    
    $
    632,266
    (5)
    
    $
    2,500,327
 (1)
    
    Includes business ceded to Reinsurance Operations.(2)
    
    External business only, excluding business assumed from Insurance Operations.(3)
    
    Includes federal excise tax of $317 relating to premiums ceded from Insurance Operations to Reinsurance Operations.(4)
    
    Includes all Wind River Reinsurance expenses other than federal excise tax.(5)
    
    Comprised of Wind River Reinsurances total assets less its investment in subsidiaries.  29




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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
    
    
    
    
    
    
    
    
    
    
    (3,189
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (1,963
    )Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    (28,822
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    (10,312
    )Loss before equity in net loss of partnership
    
    
    
    
    
    
    
    
    
    
    (18,510
    )Equity in net loss of partnership, net of tax
    
    
    
    
    
    
    
    
    
    
    (1,088
    )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 premiums ceded from Insurance Operations to Reinsurance Operations.(4)
    
    Includes all Wind River Reinsurance expenses other than federal excise tax.(5)
    
    Comprised of Wind River Reinsurances total assets less its investment in subsidiaries. Nine Months Ended September 30, 2009:
    
    Insurance(Dollars in thousands)
    
    Operations (1)
    
    
    Reinsurance (2)
    
    
    TotalRevenues:Gross premiums written
    
    $
    207,675
    
    
    $
    58,799
    
    
    $
    266,474Net premiums written
    
    $
    168,770
    
    
    $
    58,253
    
    
    $
    227,023Net premiums earned
    
    $
    194,137
    
    
    $
    32,028
    
    
    $
    226,165Losses and Expenses:Net losses and loss adjustment expenses
    
    
    115,583
    
    
    
    15,091
    
    
    
    130,674Acquisition costs and other underwriting expenses
    
    
    80,408
    (3)
    
    
    7,942
    (4)
    
    
    88,350Income (loss) from segments
    
    $
    (1,854
    )
    
    $
    8,995
    
    
    
    7,141Unallocated Items:Net investment income
    
    
    
    
    
    
    
    
    
    
    54,049Net realized investment gains
    
    
    
    
    
    
    
    
    
    
    3,415Corporate and other operating expenses
    
    
    
    
    
    
    
    
    
    
    (12,314
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (5,462
    )Income before income taxes
    
    
    
    
    
    
    
    
    
    
    46,829Income tax expense
    
    
    
    
    
    
    
    
    
    
    808Income before equity in net income of partnership
    
    
    
    
    
    
    
    
    
    
    46,021Equity in net income of partnership, net of tax
    
    
    
    
    
    
    
    
    
    
    4,742Net income
    
    
    
    
    
    
    
    
    
    $
    50,763Total assets
    
    $
    1,868,061
    
    
    $
    632,266
    (5)
    
    $
    2,500,327
 (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 $1,038 relating to premiums ceded from Insurance Operations to Reinsurance Operations.(4)
    
    Includes all Wind River Reinsurance expenses other than federal excise tax.(5)
    
    Comprised of Wind River Reinsurances total assets less its investment in subsidiaries.  30




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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
    
    
    
    
    
    
    
    
    
    
    (9,403
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (6,690
    )Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    (31,326
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    (11,754
    )Loss before equity in net loss of partnership
    
    
    
    
    
    
    
    
    
    
    (19,572
    )Equity in net loss of partnership, net of tax
    
    
    
    
    
    
    
    
    
    
    (1,557
    )Net 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 premiums ceded from Insurance Operations to Reinsurance Operations.(4)
    
    Includes all Wind River Reinsurance expenses other than federal excise tax.(5)
    
    Comprised of Wind River Reinsurances total assets less its investment in subsidiaries. 14. Supplemental Cash Flow Information
  Quarter Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Net U.S. federal
income taxes paid
(recovered)
    
    $
    (10,957
    )
    
    $
    
    
    
    $
    (18,019
    )
    
    $
    6,401Interest paid
    
    
    3,058
    
    
    
    3,327
    
    
    
    6,830
    
    
    
    8,465
 15. New Accounting Pronouncements
    31




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




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
   16. Subsequent Events
    33




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UNITED AMERICA INDEMNITY, LTD.
 
 Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  Recent Developments
   Overview
      34




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UNITED AMERICA INDEMNITY, LTD.
 Critical Accounting Estimates and Policies
  Liability For Unpaid Losses And Loss Adjustment Expenses
     
    
    Paid Development method;
    
    Incurred Development method;
    
    Expected Loss Ratio method;
    
    Bornhuetter-Ferguson method using premiums and paid loss;
    
    Bornhuetter-Ferguson method using premiums and incurred loss; and
    
    Average Loss method.
   35




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UNITED AMERICA INDEMNITY, LTD.
         36




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UNITED AMERICA INDEMNITY, LTD.
        37




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UNITED AMERICA INDEMNITY, LTD.
  Gross Reserves(Dollars in thousands)
    
    Case
    
    
    IBNR (1)
    
    
    TotalInsurance Operations:Penn-America
    
    $
    179,127
    
    
    $
    323,760
    
    
    $
    502,887United National
    
    
    204,505
    
    
    
    448,855
    
    
    
    653,360Diamond State
    
    
    52,314
    
    
    
    92,576
    
    
    
    144,890Total Insurance Operations
    
    
    435,946
    
    
    
    865,191
    
    
    
    1,301,137Reinsurance Operations:Wind River Reinsurance
    
    
    12,987
    
    
    
    26,470
    
    
    
    39,457Total
    
    $
    448,933
    
    
    $
    891,661
    
    
    $
    1,340,594
 Net Reserves (2)(Dollars in thousands)
    
    Case
    
    
    IBNR (1)
    
    
    TotalInsurance Operations:Penn-America
    
    $
    153,770
    
    
    $
    266,444
    
    
    $
    420,214United National
    
    
    69,854
    
    
    
    143,271
    
    
    
    213,125Diamond State
    
    
    37,656
    
    
    
    64,427
    
    
    
    102,083Total Insurance Operations
    
    
    261,280
    
    
    
    474,142
    
    
    
    735,422Reinsurance Operations:Wind River Reinsurance
    
    
    5,426
    
    
    
    23,360
    
    
    
    28,786Total
    
    $
    266,706
    
    
    $
    497,502
    
    
    $
    764,208
 (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.     38




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UNITED AMERICA INDEMNITY, LTD.
    Severity Change(Dollars in thousands)

        
    -10%
    
    
    -5%
    
    
    0%
    
    
    5%
    
    
    10%Frequency Change
    
    
    -5
    %
    
    $
    (19,607
    )
    
    $
    (13,184
    )
    
    $
    (6,761
    )
    
    $
    (338
    )
    
    $
    6,085-3
    %
    
    
    (17,173
    )
    
    
    (10,615
    )
    
    
    (4,057
    )
    
    
    2,502
    
    
    
    9,060-2
    %
    
    
    (15,956
    )
    
    
    (9,330
    )
    
    
    (2,704
    )
    
    
    3,921
    
    
    
    10,547-1
    %
    
    
    (14,739
    )
    
    
    (8,046
    )
    
    
    (1,352
    )
    
    
    5,341
    
    
    
    12,0350
    %
    
    
    (13,522
    )
    
    
    (6,761
    )
    
    
    
    
    
    
    6,761
    
    
    
    13,5221
    %
    
    
    (12,305
    )
    
    
    (5,477
    )
    
    
    1,352
    
    
    
    8,181
    
    
    
    15,0102
    %
    
    
    (11,088
    )
    
    
    (4,192
    )
    
    
    2,704
    
    
    
    9,601
    
    
    
    16,4973
    %
    
    
    (9,871
    )
    
    
    (2,907
    )
    
    
    4,057
    
    
    
    11,021
    
    
    
    17,9855
    %
    
    
    (7,437
    )
    
    
    (338
    )
    
    
    6,761
    
    
    
    13,860
    
    
    
    20,960
  Recoverability of Reinsurance Receivables
   39




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Investments
   (1)
    
    the issuer is in financial distress;(2)
    
    the investment is secured;(3)
    
    a significant credit rating action occurred;(4)
    
    scheduled interest payments were delayed or missed;(5)
    
    changes in laws or regulations have affected an issuer or industry;(6)
    
    the investment has an unrealized loss and was identified by our Investment
Manager as an investment to be sold before recovery or maturity; and(7)
    
    the investment failed cash flow projection testing to determine if anticipated
principal and interest payments will be realized.
  (1)
    
    persisted for more than twelve consecutive months or(2)
    
    the value of the investment has been 20% or more below cost for six continuous
months or more to determine if the security should be impaired.
   Fair Value Measurements
   40




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Goodwill and Intangible Assets
    Taxation
       41




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Our Business Segments
     Quarter Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Insurance Operations premiums written:Gross premiums written
    
    $
    67,368
    
    
    $
    92,458
    
    
    $
    207,675
    
    
    $
    280,605Ceded premiums written
    
    
    12,858
    
    
    
    13,319
    
    
    
    38,905
    
    
    
    36,627Net premiums written
    
    $
    54,510
    
    
    $
    79,139
    
    
    $
    168,770
    
    
    $
    243,978Reinsurance Operations premiums written:Gross premiums written
    
    $
    8,438
    
    
    $
    6,572
    
    
    $
    58,799
    
    
    $
    21,805Ceded premiums written
    
    
    16
    
    
    
    6,005
    
    
    
    546
    
    
    
    18,904Net premiums written
    
    $
    8,422
    
    
    $
    567
    
    
    $
    58,253
    
    
    $
    2,901Revenues: (1)Insurance Operations
    
    $
    58,971
    
    
    $
    87,800
    
    
    $
    194,137
    
    
    $
    295,923Reinsurance Operations
    
    
    13,922
    
    
    
    1,711
    
    
    
    32,028
    
    
    
    7,318Total revenues
    
    $
    72,893
    
    
    $
    89,511
    
    
    $
    226,165
    
    
    $
    303,241Expenses: (2)Insurance Operations
    
    $
    57,320
    (3)
    
    $
    106,784
    (3)
    
    $
    195,991
    (4)
    
    $
    331,034
    (4)Reinsurance Operations (5)
    
    
    9,131
    
    
    
    2,514
    
    
    
    23,033
    
    
    
    14,865Total expenses
    
    $
    66,451
    
    
    $
    109,298
    
    
    $
    219,024
    
    
    $
    345,899Income (loss) from segments:Insurance Operations
    
    $
    1,651
    
    
    $
    (18,984
    )
    
    $
    (1,854
    )
    
    $
    (35,111
    )Reinsurance Operations
    
    
    4,791
    
    
    
    (803
    )
    
    
    8,995
    
    
    
    (7,547
    )Total income (loss) from segments
    
    $
    6,442
    
    
    $
    (19,787
    )
    
    $
    7,141
    
    
    $
    (42,658
    )Insurance combined ratio analysis: (6)Insurance OperationsLoss ratio
    
    
    56.4
    
    
    
    84.8
    
    
    
    59.5
    
    
    
    76.4Expense ratio
    
    
    40.7
    
    
    
    36.9
    
    
    
    41.4
    
    
    
    35.4Combined ratio
    
    
    97.1
    
    
    
    121.7
    
    
    
    100.9
    
    
    
    111.8Reinsurance OperationsLoss ratio
    
    
    40.2
    
    
    
    102.4
    
    
    
    47.1
    
    
    
    140.1Expense ratio
    
    
    25.4
    
    
    
    44.6
    
    
    
    24.8
    
    
    
    63.0Combined ratio
    
    
    65.6
    
    
    
    147.0
    
    
    
    71.9
    
    
    
    203.1ConsolidatedLoss ratio
    
    
    53.4
    
    
    
    85.1
    
    
    
    57.8
    
    
    
    78.0Expense ratio
    
    
    37.8
    
    
    
    37.1
    
    
    
    39.1
    
    
    
    36.1Combined ratio
    
    
    91.2
    
    
    
    122.2
    
    
    
    96.9
    
    
    
    114.1
 (1)
    
    Excludes net investment income and net realized investment gains (losses), which are not
allocated to our segments(2)
    
    Excludes corporate and other operating expenses and interest expense, which are not allocated
to our segments.(3)
    
    Includes excise tax of $317 and $443 related to cessions from our U.S. Insurance Companies to
Wind River Reinsurance for the quarters ended September 30, 2009 and 2008, respectively.(4)
    
    Includes excise tax of $1,038 and $1,484 related to cessions from our U.S. Insurance
Companies to Wind River Reinsurance for the nine months ended September 30, 2009 and 2008,
respectively.(5)
    
    Includes all Wind River Reinsurance expenses other than excise tax related to cessions from
our U.S. Insurance Companies to Wind River Reinsurance.(6)
    
    Our insurance combined ratios are non-GAAP financial measures that are generally viewed in
the insurance industry as indicators of underwriting profitability. The loss ratio is the
ratio of net losses and loss adjustment expenses to net premiums earned. The expense ratio is
the ratio of acquisition costs and other underwriting expenses to net premiums earned. The
combined ratio is the sum of the loss and expense ratios.  42




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Results of Operations
  Quarter Ended September 30, 2009 Compared with the Quarter Ended September 30, 2008
 Insurance Operations
  Quarter Ended September 30,
    
    
    Increase / (Decrease)(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    $
    
    
    %Gross premiums written:Penn-America
    
    $
    31,687
    
    
    $
    44,321
    
    
    $
    (12,634
    )
    
    
    -28.5
    %United National
    
    
    14,446
    
    
    
    20,927
    
    
    
    (6,481
    )
    
    
    -31.0
    %Diamond State
    
    
    21,235
    
    
    
    27,210
    
    
    
    (5,975
    )
    
    
    -22.0
    %Total
    
    $
    67,368
    
    
    $
    92,458
    
    
    $
    (25,090
    )
    
    
    -27.1
    %Net premiums written:Penn-America
    
    $
    25,016
    
    
    $
    40,988
    
    
    $
    (15,972
    )
    
    
    -39.0
    %United National
    
    
    11,433
    
    
    
    17,076
    
    
    
    (5,643
    )
    
    
    -33.0
    %Diamond State
    
    
    18,061
    
    
    
    21,075
    
    
    
    (3,014
    )
    
    
    -14.3
    %Total
    
    $
    54,510
    
    
    $
    79,139
    
    
    $
    (24,629
    )
    
    
    -31.1
    %Net premiums earned:Penn-America
    
    $
    29,235
    
    
    $
    46,340
    
    
    $
    (17,105
    )
    
    
    -36.9
    %United National
    
    
    12,756
    
    
    
    22,668
    
    
    
    (9,912
    )
    
    
    -43.7
    %Diamond State
    
    
    16,980
    
    
    
    18,792
    
    
    
    (1,812
    )
    
    
    -9.6
    %Total
    
    
    58,971
    
    
    
    87,800
    
    
    $
    (28,829
    )
    
    
    -32.8
    %Losses and expenses:Net losses and loss adjustment expenses
    
    
    33,292
    
    
    
    74,383
    
    
    
    (41,091
    )
    
    
    -55.2
    %Acquisition costs and other
underwriting expenses (1)
    
    
    24,028
    
    
    
    32,401
    
    
    
    (8,373
    )
    
    
    -25.8
    %Income (loss) from underwriting
    
    $
    1,651
    
    
    $
    (18,984
    )
    
    $
    20,635
    
    
    NAUnderwriting Ratios:Loss ratio:Current accident year
    
    
    59.2
    
    
    
    80.0
    
    
    
    (20.8
    )Prior accident year
    
    
    (2.8
    )
    
    
    4.8
    
    
    
    (7.6
    )Calendar year
    
    
    56.4
    
    
    
    84.8
    
    
    
    (28.4
    )Expense ratio
    
    
    40.7
    
    
    
    36.9
    
    
    
    3.8Combined ratio
    
    
    97.1
    
    
    
    121.7
    
    
    
    (24.6
    )
 (1)
    
    Includes excise tax of $317 and $443 related to cessions from our U.S. Insurance
Companies to Wind River Reinsurance for the quarters ended September 30, 2009 and 2008,
respectively. Premiums
  
    
    Penn-America gross premiums written were $31.7 million for the quarter ended September 30,
2009, compared with $44.3 million for the quarter ended September 30, 2008, a decrease of
$12.6 million, or 28.5%. The decrease was primarily due to a reduction of $3.2 million due to
terminations of business that did not meet our profitability requirements and a reduction of
$9.4 million from other market factors.
  43




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
    
    United National gross premiums written were $14.4 million for the quarter ended September
30, 2009, compared with $20.9 million for the quarter ended September 30, 2008, a decrease of
$6.5 million, or 31.0%. The decrease was primarily due to a reduction of $4.0 million due to
terminations of business that did not meet our profitability requirements and a reduction of
$2.5 million from other market factors.
 
    
    Diamond State gross premiums written were $21.2 million for the quarter ended September 30,
2009, compared with $27.2 million for the quarter ended September 30, 2008, a decrease of $6.0
million, or 22.0%. The decrease was primarily due to a reduction of $0.7 million due to
terminations of business that did not meet our profitability requirements and a reduction of
$5.3 million from other market factors.
    Net Losses and Loss Adjustment Expenses
   
    
    In 2009, we reduced our prior accident year loss reserves by $2.0 million and increased
our allowance for uncollectible reinsurance by $0.4 million, which reduced our loss ratio
by 2.8 points. The loss reserves reduction of $2.0 million primarily consisted of a $2.7
million reduction in our general liability lines, a $0.2 million reduction in our property
lines, and a $0.4 million reduction in our umbrella lines, offset by a $1.3 million
increase in our professional lines. The reduction in the general liability lines consisted
of net reductions of $5.1 million related to accident years 2005 and prior, offset by
increases of $2.4 million related to accident years 2006 through 2008. The reduction in
the property lines consisted of net reductions primarily related to accident years 2007 and
prior. The reduction in the umbrella lines related to accident years 2003 and 2001. The
increase in the professional lines primarily consisted of increases of $1.6 million related
to accident years 2004 through 2008, offset by net reductions of $0.3 million related to
accident years 2003 and prior.
 
    
    In 2008, we reduced our prior accident year loss reserves by $1.5 million and increased
our allowance for uncollectible reinsurance by $5.7 million, which increased our loss ratio
by 4.8 points. The loss reserves reduction of $1.5 million consisted of reductions of $3.5
million in our general liability lines and $0.2 million in our property lines, offset by an
increase of $2.2 million in our professional lines. The reduction in 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 in the property lines and increase to the professional liability lines are
primarily related to accident years 2006 and 2007.
  44




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  
    
    The current accident year property loss ratio decreased 48.2 points from 97.5% in the
quarter ended September 30, 2008 to 49.3% in the quarter ended September 30, 2009, which
consists of a 4.5 point decrease in the non-catastrophe loss ratio from 49.5% in the
quarter ended September 30, 2008 to 45.0% in the quarter ended September 30, 2009 and a
43.7 point decrease in the catastrophe loss ratio from 48.0% in the quarter ended September
30, 2008 to 4.3% in the quarter ended September 30, 2009. The decrease in the
non-catastrophe loss ratio is primarily due to lower severity from non-catastrophe weather
related losses and fire losses. Catastrophe losses were $1.0 million and $15.5 million for
the quarters ended September 30, 2009 and 2008, respectively. Property net premiums earned
for the quarters ended September 30, 2009 and 2008 were $24.5 million and $32.4 million,
respectively.
    
    The current accident year casualty loss ratio decreased 3.4 points from 69.7% in the
quarter ended September 30, 2008 to 66.3% in the quarter ended September 30, 2009 primarily
due to changes in our mix of business. Casualty net premiums earned for the quarters ended
September 30, 2009 and 2008 were $34.5 million and $55.4 million, respectively.
  Acquisition Costs and Other Underwriting Expenses
  
    
    The decrease in acquisition costs is primarily due to a decrease in commissions
resulting from a decrease in net premiums earned.
 
    
    The decrease in other underwriting expenses is primarily due to a decrease in total
compensation expenses and other expenses, offset by an increase in infrastructure costs
related to new product development, information technology upgrades, and additional office
locations.
 Expense and Combined Ratios
    45




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Income (Loss) from underwriting
  Reinsurance Operations
  Quarter Ended September 30,
    
    
    Increase / (Decrease)(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    $
    
    
    %Gross premiums written
    
    $
    8,438
    
    
    $
    6,572
    
    
    $
    1,866
    
    
    
    28.4
    %Net premiums written
    
    $
    8,422
    
    
    $
    567
    
    
    $
    7,855
    
    
    
    1,385.4
    %Net premiums earned
    
    $
    13,922
    
    
    $
    1,711
    
    
    $
    12,211
    
    
    
    713.7
    %Losses and expenses:Net losses and loss adjustment expenses
    
    
    5,595
    
    
    
    1,751
    
    
    
    3,844
    
    
    
    219.5
    %Acquisition costs and other underwriting expenses
    
    
    3,536
    
    
    
    763
    
    
    
    2,773
    
    
    
    363.4
    %Income (loss) from underwriting
    
    $
    4,791
    
    
    $
    (803
    )
    
    $
    5,594
    
    
    NAUnderwriting Ratios:Loss ratio:Current accident year
    
    
    40.2
    
    
    
    100.4
    
    
    
    (60.2
    )Prior accident year
    
    
    
    
    
    
    2.0
    
    
    
    (2.0
    )Calendar year loss ratio
    
    
    40.2
    
    
    
    102.4
    
    
    
    (62.2
    )Expense ratio
    
    
    25.4
    
    
    
    44.6
    
    
    
    (19.2
    )Combined ratio
    
    
    65.6
    
    
    
    147.0
    
    
    
    (81.4
    )
 Premiums
      46




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Net Losses and Loss Adjustment Expenses
   
    
    In 2008, we increased our prior accident year loss reserves by $0.03 million, which
increased our loss ratio by 2.0 points. This increase primarily consisted of increases of
$0.08 million in our property lines related to accident year 2007, offset by reductions of
$0.05 million in our professional lines related to accident year 2007.
 
    
    There were no significant changes to prior accident year loss reserves in 2009.
   Acquisition Costs and Other Underwriting Expenses
  
    
    The increase in acquisition costs is primarily due to an increase in commissions
resulting from an increase in net premiums earned.
 
    
    The decrease in other underwriting expenses is primarily due to a decrease in total
compensation expenses, offset by an increase in property and office costs and professional
services expenses.
 Expense and Combined Ratios
    47




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Income (Loss) from underwriting
  Unallocated Corporate Items
  Quarter Ended September 30,
    
    
    Increase / (Decrease)(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    $
    
    
    %Net investment income
    
    $
    15,267
    
    
    $
    16,627
    
    
    $
    (1,360
    )
    
    
    -8.2
    %Net realized investment gains (losses)
    
    
    6,613
    
    
    
    (20,510
    )
    
    
    27,123
    
    
    NACorporate and other operating expenses
    
    
    (4,676
    )
    
    
    (3,189
    )
    
    
    (1,487
    )
    
    
    46.6
    %Interest expense
    
    
    (1,776
    )
    
    
    (1,963
    )
    
    
    187
    
    
    
    -9.5
    %Income tax benefit
    
    
    2,673
    
    
    
    10,312
    
    
    
    (7,639
    )
    
    
    -74.1
    %Equity in net income (loss) of
partnership, net of tax
    
    
    2,809
    
    
    
    (1,088
    )
    
    
    3,897
    
    
    NA
 Net Investment Income
  
    
    Gross investment income, excluding realized gains and losses, was $16.4 million for the
quarter ended September 30, 2009, compared with $17.9 million for the quarter ended
September 30, 2008, a decrease of $1.5 million or 8.4%. The decrease was primarily due to
reductions in yields on both short-term investments and the common stock portfolio. This
decrease was partially offset by investing approximately $100.0 million of cash in higher
yielding bonds during the quarter.
 
    
    Investment expenses were $1.1 million for the quarter ended September 30, 2009, compared
with $1.2 million for the quarter ended September 30, 2008, a decrease of $0.1 million or
10.8%.
  Net Realized Investment Gains (Losses)
   48




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##### Table of Contents



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




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Nine Months Ended September 30, 2009 Compared with the Nine Months Ended September 30, 2008
 Insurance Operations
  Nine Months Ended September 30,
    
    
    Increase / (Decrease)(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    $
    
    
    %Gross premiums written:Penn-America
    
    $
    98,282
    
    
    $
    137,669
    
    
    $
    (39,387
    )
    
    
    -28.6
    %United National
    
    
    46,373
    
    
    
    71,166
    
    
    
    (24,793
    )
    
    
    -34.8
    %Diamond State
    
    
    63,020
    
    
    
    71,770
    
    
    
    (8,750
    )
    
    
    -12.2
    %Total
    
    $
    207,675
    
    
    $
    280,605
    
    
    $
    (72,930
    )
    
    
    -26.0
    %Net premiums written:Penn-America
    
    $
    79,673
    
    
    $
    125,902
    
    
    $
    (46,229
    )
    
    
    -36.7
    %United National
    
    
    37,072
    
    
    
    60,147
    
    
    
    (23,075
    )
    
    
    -38.4
    %Diamond State
    
    
    52,025
    
    
    
    57,929
    
    
    
    (5,904
    )
    
    
    -10.2
    %Total
    
    $
    168,770
    
    
    $
    243,978
    
    
    $
    (75,208
    )
    
    
    -30.8
    %Net premiums earned:Penn-America
    
    $
    98,936
    
    
    $
    159,357
    
    
    $
    (60,421
    )
    
    
    -37.9
    %United National
    
    
    44,300
    
    
    
    72,826
    
    
    
    (28,526
    )
    
    
    -39.2
    %Diamond State
    
    
    50,901
    
    
    
    63,740
    
    
    
    (12,839
    )
    
    
    -20.1
    %Total
    
    
    194,137
    
    
    
    295,923
    
    
    
    (101,786
    )
    
    
    -34.4
    %Losses and expenses:Net losses and loss adjustment expenses
    
    
    115,583
    
    
    
    226,175
    
    
    
    (110,592
    )
    
    
    -48.9
    %Acquisition costs and other
underwriting expenses (1)
    
    
    80,408
    
    
    
    104,859
    
    
    
    (24,451
    )
    
    
    -23.3
    %Income (loss) from underwriting
    
    $
    (1,854
    )
    
    $
    (35,111
    )
    
    $
    33,257
    
    
    
    -94.7
    %Underwriting Ratios:Loss ratio:Current accident year
    
    
    61.9
    
    
    
    70.1
    
    
    
    (8.2
    )Prior accident year
    
    
    (2.4
    )
    
    
    6.3
    
    
    
    (8.7
    )Calendar year
    
    
    59.5
    
    
    
    76.4
    
    
    
    (16.9
    )Expense ratio
    
    
    41.4
    
    
    
    35.4
    
    
    
    6.0Combined ratio
    
    
    100.9
    
    
    
    111.8
    
    
    
    (10.9
    )
 (1)
    
    Includes excise tax of $1,038 and $1,484 related to cessions from our U.S. Insurance
Companies to Wind River Reinsurance for the nine months ended September 30, 2009 and 2008,
respectively. Premiums
  
    
    Penn-America gross premiums written were $98.3 million for the nine months ended September
30, 2009, compared with $137.7 million for the nine months ended September 30, 2008, a
decrease of $39.4 million, or 28.6%. The decrease was primarily due to a reduction of $8.7
million due to terminations of business that did not meet our profitability requirements and a
reduction of $30.7 million from other market factors.
 
    
    United National gross premiums written were $46.4 million for the nine months ended
September 30, 2009, compared with $71.2 million for the nine months ended September 30, 2008,
a decrease of $24.8 million, or 34.8%. The decrease was primarily due to a reduction of $18.5
million due to terminations of business that did not meet our profitability requirements and a
reduction of $6.3 million from other market factors.
 
    
    Diamond State gross premiums written were $63.0 million for the nine months ended September
30, 2009,
compared with $71.8 million for the nine months ended September 30, 2008, a decrease of $8.8
million, or 12.2%. The decrease was primarily due to a reduction of $4.5 million due to
terminations of business that did not meet our profitability requirements and a reduction of
$4.3 million from other market factors.
  50




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UNITED AMERICA INDEMNITY, LTD.
    Net Losses and Loss Adjustment Expenses
   
    
    In 2009, we reduced our prior accident year loss reserves by $4.2 million and reduced
our allowance for uncollectible reinsurance by $0.4 million, which reduced our loss ratio
by 2.4 points. The reduction of our prior accident year loss reserves primarily consisted
of a $5.2 million reduction in our general liability lines, a $2.4 million reduction in our
property lines, and a $0.4 million reduction in our umbrella lines, offset by a $3.8
million increase in our professional lines. The reduction in the general liability lines
primarily consisted of net reductions of $9.7 million related to accident years 2006 and
prior, offset by increase of $4.5 million to accident years 2007 and 2008. The reduction
in the property lines primarily consisted of reductions related to accident year 2007 and
2008. The reduction in the umbrella lines primarily related to accident years 2003 and
2001. The increase to the professional lines primarily related to increases of $6.1
million related to accident years 2007 and 2008, offset by net reductions of $2.3 million
primarily to accident years 2005 and prior.
 
    
    In 2008, we increased our prior accident year loss reserves by $13.4 million and
increased our allowance for uncollectible reinsurance by $5.3 million, which increased our
loss ratio by 6.3 points. The increase of our prior accident year loss reserves of $13.4
million primarily consisted of increases of approximately $14.0 million and $4.8 million in
our general liability lines and professional lines, respectively, offset by reductions of
$4.5 million and $0.9 million in our property lines and umbrella lines, respectively. The
increase to the general liability lines primarily related to accident years 2006, 2007, and
2001 and prior. The increase to the professional liability lines primarily related to
increases of $7.2 million related to accident years 2006 and 2007, offset by reductions of
$2.3 million related to accident years 2005 and prior. The reduction in the property lines
primarily related to accident years 2006 and 2007. The reduction in the umbrella lines
primarily related to accident years 2004 and prior.
  51




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UNITED AMERICA INDEMNITY, LTD.
  
    
    The current accident year property loss ratio decreased 18.9 points from 73.7% in the
nine months ended September 30, 2008 to 54.8% in the nine months ended September 30, 2009,
which consists of a 14.2 point decrease in the catastrophe loss ratio from 18.7% in the
nine months ended September 30, 2008 to 4.5% in the nine months ended September 30, 2009
and a 4.7 point decrease in the non-catastrophe loss ratio from 55.0% in the nine months
ended September 30, 2008 to 50.3% in the nine months ended September 30, 2009. Catastrophe
losses were $3.6 million and $20.1 million in the nine months ended September 30, 2009 and
2008, respectively. The decrease in the non-catastrophe loss ratio is primarily due to
lower severity from non-catastrophe weather related losses and large fire losses. Property
net premiums earned for the nine months ended September 30, 2009 and 2008 were $79.8
million and $107.8 million, respectively.
 
    
    The current accident year casualty loss ratio decreased 1.1 points from 68.0% in the
nine months ended September 30, 2008 to 66.9% in the nine months ended September 30, 2009
primarily due to changes in our mix of business. Casualty net premiums earned for the nine
months ended September 30, 2009 and 2008 were $114.3 million and $188.1 million,
respectively.
  Acquisition Costs and Other Underwriting Expenses
  
    
    The decrease in acquisition costs is primarily due to a decrease in commissions
resulting from a decrease in net premiums earned.
 
    
    The increase in other underwriting expenses is primarily due to and the incurrence of
infrastructure costs related to new product development, information technology upgrades,
and additional office locations, offset by reductions in professional services and other
expenses.
 Expense and Combined Ratios
    52




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UNITED AMERICA INDEMNITY, LTD.
 Loss from underwriting
  Reinsurance Operations
  Nine Months Ended September 30,
    
    
    Increase / (Decrease)(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    $
    
    
    %Gross premiums written
    
    $
    58,799
    
    
    $
    21,805
    
    
    $
    36,994
    
    
    
    169.7
    %Net premiums written
    
    $
    58,253
    
    
    $
    2,901
    
    
    $
    55,352
    
    
    
    1,908.0
    %Net premiums earned
    
    $
    32,028
    
    
    $
    7,318
    
    
    $
    24,710
    
    
    
    337.7
    %Losses and expenses:Net losses and loss adjustment expenses
    
    
    15,091
    
    
    
    10,253
    
    
    
    4,838
    
    
    
    47.2
    %Acquisition costs and other underwriting expenses
    
    
    7,942
    
    
    
    4,612
    
    
    
    3,330
    
    
    
    72.2
    %Income (loss) from underwriting
    
    $
    8,995
    
    
    $
    (7,547
    )
    
    $
    16,542
    
    
    NAUnderwriting Ratios:Loss ratio:Current accident year
    
    
    47.0
    
    
    
    112.7
    
    
    
    (65.7
    )Prior accident year
    
    
    0.1
    
    
    
    27.4
    
    
    
    (27.3
    )Calendar year loss ratio
    
    
    47.1
    
    
    
    140.1
    
    
    
    (93.0
    )Expense ratio
    
    
    24.8
    
    
    
    63.0
    
    
    
    (38.2
    )Combined ratio
    
    
    71.9
    
    
    
    203.1
    
    
    
    (131.2
    )
 Premiums
      53




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




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UNITED AMERICA INDEMNITY, LTD.
  Income (Loss) from underwriting
  Unallocated Corporate Items
  Nine Months Ended September 30,
    
    
    Increase / (Decrease)(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    $
    
    
    %Net investment income
    
    $
    54,049
    
    
    $
    51,485
    
    
    $
    2,564
    
    
    
    5.0
    %Net realized investment gains (losses)
    
    
    3,415
    
    
    
    (24,060
    )
    
    
    27,475
    
    
    NACorporate and other operating expenses
    
    
    (12,314
    )
    
    
    (9,403
    )
    
    
    (2,911
    )
    
    
    31.0
    %Interest expense
    
    
    (5,462
    )
    
    
    (6,690
    )
    
    
    1,228
    
    
    
    18.4
    %Income tax (expense) benefit
    
    
    (808
    )
    
    
    11,754
    
    
    
    (12,562
    )
    
    NAEquity in net income (loss) of
partnership, net of tax
    
    
    4,742
    
    
    
    (1,557
    )
    
    
    6,299
    
    
    NA
 Net Investment Income
  
    
    Gross investment income, excluding realized gains and losses, was $57.5 million for the
nine months ended September 30, 2009, compared with $55.5 million for the nine months ended
September 30, 2008, an increase of $2.0 million or 3.5%. The increase was primarily due to
gross investment income from our investments in limited partnerships of $8.6 million offset
by reductions due to decreases in interest rates. Our limited partnership investments
generated gross investment income of $8.6 million for the nine months ended September 30,
2009 due to liquidations of some of those investments. There was no investment income
generated by our limited partnership investments for the nine months ended September 30,
2008. Excluding distributions from our limited partnership investments, gross investment
income for the nine months ended September 30, 2009 decreased 12.1% compared to the nine
months ended September 30, 2008. This decrease is due to reductions in interest rates.
 
    
    Investment expenses were $3.4 million for the nine months ended September 30, 2009,
compared with $4.0 million for the nine months ended September 30, 2008, a decrease of $0.6
million or 15.0%. The decrease was primarily due to the decrease in trust fees and a
change in fee structure resulting from change in investment managers.
   55




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UNITED AMERICA INDEMNITY, LTD.
 Net Realized Investment Gains (Losses)
   Corporate and Other Operating Expenses
  Interest Expense
  Income Tax Expense (Benefit)
   Equity in Net Income (Loss) of Partnerships
  Net Income (Loss)
   56




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UNITED AMERICA INDEMNITY, LTD.
 Liquidity and Capital Resources
 Sources and Uses of Funds
         57




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UNITED AMERICA INDEMNITY, LTD.
 Cash Flows
   
    
    the fact that we collect premiums in advance of losses paid;
 
    
    the timing of our settlements with our reinsurers; and
 
    
    the timing of our loss payments.
  Nine Months Ended September 30,2009
    
    
    2008
    
    
    ChangeNet premiums collected
    
    $
    203,767
    
    
    $
    255,011
    
    
    $
    (51,244
    )Net losses paid
    
    
    (195,055
    )(1)
    
    
    (173,996
    )
    
    
    (21,059
    )Acquisition costs and other underwriting expenses
    
    
    (98,904
    )
    
    
    (113,859
    )
    
    
    14,955Net investment income
    
    
    59,337
    
    
    
    58,349
    
    
    
    988Net federal income taxes recovered (paid)
    
    
    18,188
    
    
    
    (6,330
    )
    
    
    24,518Interest paid
    
    
    (6,828
    )
    
    
    (8,467
    )
    
    
    1,639Other
    
    
    (36
    )
    
    
    2,254
    
    
    
    (2,290
    )Net cash provided by (used for) operating activities
    
    $
    (19,531
    )
    
    $
    12,962
    
    
    $
    (32,493
    )
 (1)
    
    Includes losses resulting from Hurricane Ike, which made landfall in
August 2008.  Liquidity
     58




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Capital Resources
  Off Balance Sheet Arrangements
  Cautionary Note Regarding Forward-Looking Statements
    
 Item 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   59




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




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##### Table of Contents



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




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
 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, 2009
    
    
    17,302
    (3)
    
    $

    4.51
    
    
    
    
    
    
    $
    August 131, 2009
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    September 130, 2009
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Total
    
    
    17,302
    
    
    $
    
    
    
    
    
    
    
    
    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 7,302 shares that were surrendered by employees as payment of taxes
withheld on the vesting of restricted stock. 
 Item 6.
    
    Exhibits
 3.1+
    
    Amended and Restated Memorandum and Articles of Association of United America Indemnity, Ltd.
(effective as of September 30, 2007).31.1+
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the
Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2+
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the
Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1+
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2+
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 +
    
    Filed herewith.  62




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UNITED AMERICA INDEMNITY, LTD.
 
 SIGNATURE
  UNITED AMERICA INDEMNITY, LTD.
RegistrantNovember 6, 2009
    By:
    /s/ Thomas M. McGeehanDate: November 6, 2009
    
    Thomas M. McGeehanInterim Chief Financial Officer
(Authorized Signatory and Principal
Financial and Accounting Officer)  63




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UNITED AMERICA INDEMNITY, LTD.
 
 EXHIBIT INDEX
 Exhibit No.
    
    Description3.1+
    
    Amended and Restated Memorandum and Articles of Association of United America Indemnity, Ltd.
(effective as of September 30, 2007).31.1+
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the
Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2+
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the
Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1+
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2+
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 +
    
    Filed herewith.  64