##### 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 March 31, 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  9002
GEORGE TOWN, GRAND CAYMAN
CAYMAN ISLANDS
 (345) 949-0100
 þ o
 Yes o 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 March 31, 2009 (Unaudited) and December 31, 2008
    
    
    1Consolidated Statements of Operations 

Quarter Ended March 31, 2009 and 2008 (Unaudited)
    
    
    2Consolidated Statements of Comprehensive Income (Loss) 

Quarter Ended March 31, 2009 and 2008 (Unaudited)
    
    
    3Consolidated Statements of Changes in Shareholders Equity 

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

Quarter Ended March 31, 2009 and 2008 (Unaudited)
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    44Item 4. Controls and Procedures
    
    
    44PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    45Item 1A. Risk Factors
    
    
    45Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    45Item 6. Exhibits
    
    
    46Signatures
    
    
    47Exhibit 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;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;
and24)
    
    $ 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)March 31, 2009
    
    
    December 31, 2008ASSETSBonds:Available for sale securities, at fair value
(amortized cost: $1,264,368 and $1,192,385)
    
    $
    1,289,934
    
    
    $
    1,204,974Preferred shares:Available for sale securities, at fair value
(cost: $3,511 and $4,665)
    
    
    3,351
    
    
    
    4,665Common shares:Available for sale securities, at fair value
(cost: $43,232 and $46,316)
    
    
    43,433
    
    
    
    50,613Other invested assetsAvailable for sale securities, at fair value
(cost: $3,042 and $19,689)
    
    
    12,071
    
    
    
    39,219Securities classified as trading, at fair value
(cost: $5,151 and $5,151)
    
    
    7,660
    
    
    
    7,453Total investments
    
    
    1,356,449
    
    
    
    1,306,924Cash and cash equivalents
    
    
    218,222
    
    
    
    292,604Agents balances, net
    
    
    67,817
    
    
    
    57,117Reinsurance receivables
    
    
    642,554
    
    
    
    679,277Federal income taxes receivable
    
    
    13,740
    
    
    
    16,487Deferred federal income taxes
    
    
    27,160
    
    
    
    32,532Deferred acquisition costs
    
    
    34,879
    
    
    
    34,734Intangible assets
    
    
    9,291
    
    
    
    9,309Prepaid reinsurance premiums
    
    
    20,277
    
    
    
    23,960Other assets
    
    
    25,047
    
    
    
    24,115Total assets
    
    $
    2,415,436
    
    
    $
    2,477,059LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses
    
    $
    1,446,974
    
    
    $
    1,506,429Unearned premiums
    
    
    154,068
    
    
    
    149,677Ceded balances payable
    
    
    15,523
    
    
    
    25,165Contingent commissions
    
    
    6,017
    
    
    
    6,695Notes and debentures payable
    
    
    121,783
    
    
    
    121,845Other liabilities
    
    
    32,294
    
    
    
    35,255Total liabilities
    
    
    1,776,659
    
    
    
    1,845,066Commitments and contingencies (Note 9)
    
    
    
    
    
    
    Shareholders equity:Common shares, $0.0001 par value, 900,000,000
common shares authorized; Class A common shares
issued: 25,113,108 and 25,032,618, respectively;
Class A common shares outstanding: 19,080,380 and
19,013,462, respectively; Class B common shares
issued and outstanding: 12,687,500
    
    
    4
    
    
    
    4Additional paid-in capital
    
    
    525,270
    
    
    
    524,345Accumulated other comprehensive income
    
    
    23,974
    
    
    
    25,108Retained earnings
    
    
    190,132
    
    
    
    182,982Class A common shares in treasury, at cost: 6,032,728 and 6,019,156 shares, respectively
    
    
    (100,603
    )
    
    
    (100,446
    )Total shareholders equity
    
    
    638,777
    
    
    
    631,993Total
    
    $
    2,415,436
    
    
    $
    2,477,059
   1




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Operations
  (Unaudited)Quarter Ended March 31,2009
    
    
    2008Revenues:Gross premiums written
    
    $
    99,188
    
    
    $
    99,062Net premiums written
    
    $
    86,613
    
    
    $
    81,964Net premiums earned
    
    $
    78,540
    
    
    $
    113,057Net investment income
    
    
    22,177
    
    
    
    17,786Net realized investment gains (losses)
    
    
    (8,596
    )
    
    
    (1,070
    )Total revenues
    
    
    92,121
    
    
    
    129,773Losses and Expenses:Net losses and loss adjustment expenses
    
    
    47,740
    
    
    
    76,650Acquisition costs and other underwriting expenses
    
    
    30,814
    
    
    
    38,195Corporate and other operating expenses
    
    
    3,975
    
    
    
    3,945Interest expense
    
    
    1,854
    
    
    
    2,539Income before income taxes
    
    
    7,738
    
    
    
    8,444Income tax expense
    
    
    723
    
    
    
    561Income before equity in net income (loss) of
partnership
    
    
    7,015
    
    
    
    7,883Equity in net income (loss) of partnership, net of tax
    
    
    135
    
    
    
    (443
    )Net income
    
    $
    7,150
    
    
    $
    7,440Per share data:Net income:Basic
    
    $
    0.23
    
    
    $
    0.21Diluted
    
    $
    0.23
    
    
    $
    0.21Weighted-average number of shares outstanding:Basic
    
    
    31,461,439
    
    
    
    34,700,928Diluted
    
    
    31,507,123
    
    
    
    34,953,554
   2




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Comprehensive Income (Loss)
  (Unaudited)Quarter Ended March 31,2009
    
    
    2008Net income
    
    $
    7,150
    
    
    $
    7,440Other comprehensive income (loss), net of taxes:Unrealized holding gains (losses) arising during period
    
    
    (7,455)
    
    
    
    2,684Recognition of previously unrealized holding losses
    
    
    6,321
    
    
    
    700Other comprehensive income (loss), net of taxes
    
    
    (1,134
    )
    
    
    3,384Comprehensive income, net of taxes
    
    $
    6,016
    
    
    $
    10,824
   3




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Changes in Shareholders Equity
  (Unaudited)Quarter Ended
    
    
    Year EndedMarch 31, 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
    
    
    56,167
    
    
    
    252,248Common shares issued to directors
    
    
    24,323
    
    
    
    9,863Number at end of period
    
    
    25,113,108
    
    
    
    25,032,618Number of Class B common shares issued:Number at beginning of period
    
    
    12,687,500
    
    
    
    12,687,500Number at end of period
    
    
    12,687,500
    
    
    
    12,687,500Par value of Class A common shares:Balance at beginning of period
    
    $
    3
    
    
    $
    3Balance at end of period
    
    $
    3
    
    
    $
    3Par value of Class B common shares:Balance at beginning of period
    
    $
    1
    
    
    $
    1Balance at end of period
    
    $
    1
    
    
    $
    1Additional paid-in capital:Balance at beginning of period
    
    $
    524,345
    
    
    $
    519,980Share compensation plans
    
    
    925
    
    
    
    4,365Balance at end of period
    
    $
    525,270
    
    
    $
    524,345Accumulated other comprehensive income, net of
deferred income tax:Balance at beginning of period
    
    $
    25,108
    
    
    $
    40,172Other comprehensive income (loss)
    
    
    (1,134
    )
    
    
    (15,064
    )Balance at end of period
    
    $
    23,974
    
    
    $
    25,108Retained earnings:Balance at beginning of period
    
    $
    182,982
    
    
    $
    324,542Net income (loss)
    
    
    7,150
    
    
    
    (141,560
    )Balance at end of period
    
    $
    190,132
    
    
    $
    182,982Number of Treasury Shares:Number at beginning of period
    
    
    6,019,156
    
    
    
    2,454,087Class A common shares purchased
    
    
    13,572
    
    
    
    3,565,069Number at end of period
    
    
    6,032,728
    
    
    
    6,019,156Treasury Shares, at cost:Balance at beginning of period
    
    $
    (100,446
    )
    
    $
    (48,422
    )Class A common shares purchased, at cost
    
    
    (157
    )
    
    
    (52,024
    )Balance at end of period
    
    $
    (100,603
    )
    
    $
    (100,446
    )Total shareholders equity
    
    $
    638,777
    
    
    $
    631,993
   4




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Cash Flows
  (Unaudited)Quarter Ended March 31,2009
    
    
    2008Cash flows from operating activities:Net income (loss)
    
    $
    7,150
    
    
    $
    7,440Adjustments to reconcile net income to net cash provided by
(used for) operating activities:Amortization of trust preferred securities issuance costs
    
    
    20
    
    
    
    66Amortization and depreciation
    
    
    18
    
    
    
    252Restricted stock expense
    
    
    1,084
    
    
    
    1,046Deferred federal income taxes
    
    
    5,944
    
    
    
    596Amortization of bond premium and discount, net
    
    
    1,048
    
    
    
    655Net realized investment losses
    
    
    8,596
    
    
    
    1,070Equity in net (income) loss of partnerships
    
    
    (135
    )
    
    
    443Changes in:Agents balances
    
    
    (10,700
    )
    
    
    7,479Reinsurance receivables
    
    
    36,723
    
    
    
    29,701Unpaid losses and loss adjustment expenses
    
    
    (59,455
    )
    
    
    (8,421
    )Unearned premiums
    
    
    4,391
    
    
    
    (33,462
    )Ceded balances payable
    
    
    (9,642
    )
    
    
    13Other assets and liabilities, net
    
    
    (3,316
    )
    
    
    (6,553
    )Contingent commissions
    
    
    (678
    )
    
    
    (3,882
    )Federal income taxes receivable
    
    
    2,747
    
    
    
    (1,394
    )Deferred acquisition costs
    
    
    (145
    )
    
    
    6,998Prepaid reinsurance premiums
    
    
    3,683
    
    
    
    2,370Net cash provided by (used for) operating activities
    
    
    (12,667
    )
    
    
    4,417Cash flows from investing activities:Proceeds from sale of bonds
    
    
    68,403
    
    
    
    70,694Proceeds from sale of stocks
    
    
    37,397
    
    
    
    7,312Proceeds from maturity of bonds
    
    
    9,735
    
    
    
    8,137Proceeds from sale of other invested assets
    
    
    16,699
    
    
    
    Purchases of bonds
    
    
    (156,660
    )
    
    
    (33,058
    )Purchases of stocks
    
    
    (36,859
    )
    
    
    (11,886
    )Purchases of other invested assets
    
    
    (52
    )
    
    
    Net cash provided by (used for) investing activities
    
    
    (61,337
    )
    
    
    41,199Cash flows from financing activities:Proceeds from exercises of stock options
    
    
    
    
    
    
    324Tax expense associated with SFAS 123R
    
    
    (159
    )
    
    
    (43
    )Purchases of Class A common shares
    
    
    (157
    )
    
    
    (6,137
    )Principal payments of term debt
    
    
    (62
    )
    
    
    (71
    )Net cash used for financing activities
    
    
    (378
    )
    
    
    (5,927
    )Net change in cash and cash equivalents
    
    
    (74,382
    )
    
    
    39,689Cash and cash equivalents at beginning of period
    
    
    292,604
    
    
    
    244,321Cash and cash equivalents at end of period
    
    $
    218,222
    
    
    $
    284,010
   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)
  Gross Unrealized LossesCost or
    
    
    
    
    
    
    Six
    
    
    Between
    
    
    GreaterNumber of
    
    
    Estimated
    
    
    Amortized
    
    
    
    
    
    
    Months or
    
    
    Seven Months
    
    
    than One(Dollars in thousands)
    
    Securities
    
    
    Fair Value
    
    
    Cost
    
    
    Total
    
    
    Less
    
    
    and One Year
    
    
    Year (1)Bonds
    
    
    147
    
    
    $
    293,293
    
    
    $
    314,693
    
    
    $
    21,400
    
    
    $
    1,210
    
    
    $
    6,746
    
    
    $
    13,444Preferred stock
    
    
    1
    
    
    
    170
    
    
    
    338
    
    
    
    168
    
    
    
    168
    
    
    
    
    
    
    
    Common stock
    
    
    41
    
    
    
    16,541
    
    
    
    19,052
    
    
    
    2,511
    
    
    
    2,435
    
    
    
    76
    
    
    
    $
    24,079
    
    
    $
    3,813
    
    
    $
    6,822
    
    
    $
    13,444
 (1)
    
    At March 31, 2009, the Company had 50 bonds that were in an unrealized loss position for
greater than one year. The estimated fair value and amortized cost of these securities were
$87.0 million and $100.4 million, respectively. The Company has analyzed these securities and
has determined that they are not other than temporarily impaired. The Company has the ability
to hold these investments until maturity or until recovery. 99.96% of these securities are
investment grade.
  Gross Unrealized LossesCost or
    
    
    
    
    
    
    Six
    
    
    Between
    
    
    GreaterNumber of
    
    
    Estimated
    
    
    Amortized
    
    
    
    
    
    
    Months or
    
    
    Seven Months
    
    
    than One(Dollars in thousands)
    
    Securities
    
    
    Fair Value
    
    
    Cost
    
    
    Total
    
    
    Less
    
    
    and One Year
    
    
    Year (1)Bonds
    
    
    182
    
    
    $
    348,505
    
    
    $
    373,438
    
    
    $
    24,933
    
    
    $
    7,032
    
    
    $
    10,337
    
    
    $
    7,564Common Stock
    
    
    6
    
    
    
    1,143
    
    
    
    1,328
    
    
    
    185
    
    
    
    135
    
    
    
    50
    
    
    
    $
    25,118
    
    
    $
    7,167
    
    
    $
    10,387
    
    
    $
    7,564
 (1)
    
    At December 31, 2008, the Company had 35 bonds that were in an unrealized loss position for
greater than one year. The estimated fair value and amortized cost of these securities was
$55.0 million and $62.6 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.      7




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Quarter Ended March 31,(Dollars in thousands)
    
    2009
    
    
    2008Bonds
    
    $
    1,882
    
    
    $
    Common stock
    
    
    592
    
    
    
    79Preferred stock
    
    
    647
    
    
    
    Total
    
    $
    3,121
    
    
    $
    79
   Ratings
    
    
    Ratings(Dollars in millions)
    
    with
    
    
    withoutRating
    
    Insurance
    
    
    InsuranceAAA
    
    $
    4.0
    
    
    $
    AA
    
    
    19.1
    
    
    
    0.2A
    
    
    1.0
    
    
    
    15.7BBB
    
    
    2.0
    
    
    
    1.0Rating Not Available
    
    
    
    
    
    
    9.2Total
    
    $
    26.1
    
    
    $
    26.1
  8




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Exposure NetGovt
    
    
    of Pre-refunded(Dollars in millions)
    
    
    
    
    
    Pre-refunded
    
    
    Guaranteed
    
    
    & Govt GuarFinancial Guarantor
    
    Total
    
    
    Securities
    
    
    Securities
    
    
    SecuritiesAmbac Financial Group
    
    $
    24.2
    
    
    $
    9.3
    
    
    $
    
    
    
    $
    14.9Assured Guaranty Corp
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    0.4Financial Guaranty Insurance Company
    
    
    7.6
    
    
    
    6.0
    
    
    
    
    
    
    
    1.6Financial Security Assurance, Inc.
    
    
    46.0
    
    
    
    17.3
    
    
    
    
    
    
    
    28.7Municipal Bond Insurance Association
    
    
    63.1
    
    
    
    19.3
    
    
    
    
    
    
    
    43.8Federal Housing Association
    
    
    2.4
    
    
    
    
    
    
    
    2.4
    
    
    
    Federal National Housing Association
    
    
    0.8
    
    
    
    
    
    
    
    0.8
    
    
    
    Govt National Housing Association
    
    
    1.5
    
    
    
    1.2
    
    
    
    0.3
    
    
    
    Permanent School Fund Guaranty
    
    
    3.9
    
    
    
    2.3
    
    
    
    1.6
    
    
    
    Total backed by financial guarantors
    
    
    149.9
    
    
    
    55.4
    
    
    
    5.1
    
    
    
    89.4Other credit enhanced municipal bonds
    
    
    18.5
    
    
    
    18.5
    
    
    
    
    
    
    
    Total
    
    $
    168.4
    
    
    $
    73.9
    
    
    $
    5.1
    
    
    $
    89.4
    Quarter Ended March 31,(Dollars in thousands)
    
    2009
    
    
    2008Bonds
    
    $
    (5,673
    )
    
    $
    43Convertibles
    
    
    367
    
    
    
    (955
    )Common stock
    
    
    (2,643
    )
    
    
    (158
    )Preferred stock
    
    
    (647
    )
    
    
    Total
    
    $
    (8,596
    )
    
    $
    (1,070
    )
  Quarter Ended March 31,(Dollars in thousands)
    
    2009
    
    
    2008Net investment income
    
    $
    17,225
    
    
    $
    14,537Net realized investment losses
    
    
    (6,186
    )
    
    
    (1,143
    )Net unrealized investment gains (losses)
    
    
    (1,134
    )
    
    
    3,384Net investment gains (losses)
    
    
    (7,320
    )
    
    
    2,241Total investment return
    
    $
    9,905
    
    
    $
    16,778Total investment return %
    
    
    0.6
    %
    
    
    1.0
    %Average investment portfolio (1)
    
    $
    1,587,100
    
    
    $
    1,764,932
 (1)
    
    Average of total cash and invested assets as of the
beginning and ending of the period.  9




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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.
   10




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
   Fair Value Measurements(Dollars in thousands)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalBonds:Obligations of state and political
subdivision
    
    $
    
    
    
    $
    238,960
    
    
    $
    
    
    
    $
    238,960Mortgage-backed and asset-backed
securities
    
    
    
    
    
    
    567,231
    
    
    
    
    
    
    
    567,231U.S. Treasury and agency obligations
    
    
    73,800
    
    
    
    75,544
    
    
    
    
    
    
    
    149,344Corporate notes
    
    
    
    
    
    
    317,235
    
    
    
    
    
    
    
    317,235Other bonds
    
    
    
    
    
    
    17,164
    
    
    
    
    
    
    
    17,164Total bonds
    
    
    73,800
    
    
    
    1,216,134
    
    
    
    
    
    
    
    1,289,934Preferred shares
    
    
    1,960
    
    
    
    1,391
    
    
    
    
    
    
    
    3,351Common shares
    
    
    43,433
    
    
    
    
    
    
    
    
    
    
    
    43,433Other invested assets
    
    
    
    
    
    
    
    
    
    
    19,731
    
    
    
    19,731Total invested assets
    
    $
    119,193
    
    
    $
    1,217,525
    
    
    $
    19,731
    
    
    $
    1,356,449
    Fair Value Measurements(Dollars in thousands)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalBonds:Obligations of state and political
subdivision
    
    $
    
    
    
    $
    243,030
    
    
    $
    
    
    
    $
    243,030Mortgage-backed and asset-backed
securities
    
    
    
    
    
    
    545,079
    
    
    
    
    
    
    
    545,079U.S. Treasury and agency obligations
    
    
    75,460
    
    
    
    77,317
    
    
    
    
    
    
    
    152,777Corporate notes
    
    
    
    
    
    
    242,805
    
    
    
    
    
    
    
    242,805Other 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
    Fair Value Measurements Using Level 3 InputsOtherInvested(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
    
    
    
    
    
    
    207
    
    
    
    207Included in accumulated other comprehensive income
    
    
    
    
    
    
    (10,501
    )
    
    
    (10,501
    )Purchases
    
    
    
    
    
    
    52
    
    
    
    52Sales
    
    
    
    
    
    
    (16,699
    )
    
    
    (16,699
    )Transfers out of Level 3
    
    
    
    
    
    
    
    
    
    
    Ending balance at March 31, 2009
    
    $
    
    
    
    $
    19,731
    
    
    $
    19,731Gains for 2009 included in earnings attributable to the
change in unrealized gains relating to assets still held
at March 31, 2009
    
    $
    
    
    
    $
    207
    
    
    $
    207
  11




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
   Fair Value Measurements Using Level 3 InputsOtherInvested(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
    
    
    
    
    
    
    (681
    )
    
    
    (681
    )Included in accumulated other comprehensive income
    
    
    (88
    )
    
    
    (1,528
    )
    
    
    (1,616
    )Sales
    
    
    (293
    )
    
    
    
    
    
    
    (293
    )Ending balance at March 31, 2008
    
    $
    1,995
    
    
    $
    62,330
    
    
    $
    64,325Gains (losses) for the quarter ended March 31, 2008
included in earnings attributable to the change in
unrealized losses relating to assets still held at March
31, 2008
    
    $
    
    
    
    $
    (681
    )
    
    $
    (681
    )
    
    
    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, the Evaluations Desk
receives nominal spread levels on specific and generic tranches contributing firms and
other broker/dealers involved in the CMBS market.
    
    For CMOs, 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 or benchmarking
to value a security.
  12




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  
    
    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 Company does not validate pricing at
the individual security level.
    
    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
     Property Catastrophe
  13




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Property Excess of Loss
  Professional Liability Excess of Loss
  General Liability Excess of Loss
 Penn-America Property Quota Share
  5. Income Taxes
   14




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Quarter Ended March 31, 2009:
    
    Non-U.S.
    
    
    U.S.(Dollars in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    60,894
    
    
    $
    67,620
    
    
    $
    (29,326
    )
    
    $
    99,188Net premiums written
    
    $
    60,470
    
    
    $
    26,143
    
    
    $
    
    
    
    $
    86,613Net premiums earned
    
    $
    44,771
    
    
    $
    33,769
    
    
    $
    
    
    
    $
    78,540Net investment income
    
    
    10,226
    
    
    
    16,498
    
    
    
    (4,547
    )
    
    
    22,177Net realized investment losses
    
    
    (2,097
    )
    
    
    (3,975
    )
    
    
    (2,524
    )
    
    
    (8,596
    )Total revenues
    
    
    52,900
    
    
    
    46,292
    
    
    
    (7,071
    )
    
    
    92,121Losses and Expenses:Net losses and loss adjustment expenses
    
    
    26,196
    
    
    
    21,544
    
    
    
    
    
    
    
    47,740Acquisition costs and other
underwriting expenses
    
    
    18,200
    
    
    
    12,614
    
    
    
    
    
    
    
    30,814Corporate and other operating expenses
    
    
    2,871
    
    
    
    1,104
    
    
    
    
    
    
    
    3,975Interest expense
    
    
    
    
    
    
    6,401
    
    
    
    (4,547
    )
    
    
    1,854Income (loss) before income taxes
    
    $
    5,633
    
    
    $
    4,629
    
    
    $
    (2,524
    )
    
    $
    7,738
 Quarter Ended March 31, 2008:
    
    Non-U.S.
    
    
    U.S.(Dollars in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    46,105
    
    
    $
    93,292
    
    
    $
    (40,335
    )
    
    $
    99,062Net premiums written
    
    $
    41,633
    
    
    $
    40,331
    
    
    $
    
    
    
    $
    81,964Net premiums earned
    
    $
    58,099
    
    
    $
    54,958
    
    
    $
    
    
    
    $
    113,057Net investment income
    
    
    10,554
    
    
    
    11,779
    
    
    
    (4,547
    )
    
    
    17,786Net realized investment losses
    
    
    (12
    )
    
    
    (920
    )
    
    
    (138
    )
    
    
    (1,070
    )Total revenues
    
    
    68,641
    
    
    
    65,817
    
    
    
    (4,685
    )
    
    
    129,773Losses and Expenses:Net losses and loss adjustment expenses
    
    
    38,079
    
    
    
    38,571
    
    
    
    
    
    
    
    76,650Acquisition costs and other
underwriting expenses
    
    
    23,101
    
    
    
    15,094
    
    
    
    
    
    
    
    38,195Corporate and other operating expenses
    
    
    2,604
    
    
    
    1,341
    
    
    
    
    
    
    
    3,945Interest expense
    
    
    
    
    
    
    7,086
    
    
    
    (4,547
    )
    
    
    2,539Income (loss) before income taxes
    
    $
    4,857
    
    
    $
    3,725
    
    
    $
    (138
    )
    
    $
    8,444
  Quarter Ended March 31,2009
    
    
    2008% of Pre-
    
    
    
    
    
    
    % of Pre-(Dollars in thousands)
    
    Amount
    
    
    Tax Loss
    
    
    Amount
    
    
    Tax IncomeExpected tax provision at
weighted average rate
    
    $
    757
    
    
    
    9.8
    %
    
    $
    1,275
    
    
    
    15.1
    %Adjustments:Tax exempt interest
    
    
    (712
    )
    
    
    (9.2
    )
    
    
    (713
    )
    
    
    (8.4
    )Dividend exclusion
    
    
    (111
    )
    
    
    (1.4
    )
    
    
    (161
    )
    
    
    (1.9
    )Effective tax rate adjustment
    
    
    755
    
    
    
    9.8
    
    
    
    411
    
    
    
    4.9Other
    
    
    34
    
    
    
    0.3
    
    
    
    (251
    )
    
    
    (3.1
    )Income tax expense
    
    $
    723
    
    
    
    9.3
    %
    
    $
    561
    
    
    
    6.6
    %
  15




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
      6. Liability for Unpaid Losses and Loss Adjustment Expenses
   16




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Quarter Ended March 31,(Dollars in thousands)
    
    2009
    
    
    2008Unpaid losses and loss adjustment expenses at beginning of
period
    
    $
    1,506,429
    
    
    $
    1,503,237Less: Gross 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
    
    
    48,497
    
    
    
    76,650Prior years
    
    
    (757)
    (1)
    
    
    Total incurred losses and loss adjustment expenses
    
    
    47,740
    
    
    
    76,650Paid losses and loss adjustment expenses related to:Current year
    
    
    3,197
    
    
    
    5,933Prior years
    
    
    71,093
    
    
    
    56,560Total paid losses and loss adjustment expenses
    
    
    74,290
    
    
    
    62,493Net balance at end of period
    
    
    809,288
    
    
    
    815,041Plus: Gross reinsurance receivables on unpaid losses and
loss adjustment expenses
    
    
    637,686
    
    
    
    679,775Unpaid losses and loss adjustment expenses at end of period
    
    $
    1,446,974
    
    
    $
    1,494,816
 (1)
    
    In the first quarter of 2009, the Company reduced its net losses
and loss adjustment expenses related to prior accident years by $0.8
million, which was due to a reduction in its allowance for uncollectible
reinsurance. 7. Debt
  Loans Payable
   8. Shareholders Equity
     17




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
    9. Related Party Transactions
       18




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Quarter Ended March 31,(Dollars in thousands)
    
    2009
    
    
    2008Ceded written premium
    
    $
    408
    
    
    $
    3,496Ceded loss reserves
    
    
    6,400
    
    
    
    797
   10. Commitments and Contingencies
 Legal Proceedings
   11. Share-Based Compensation Plans
   19




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 12. Earnings Per Share
  Quarter Ended March 31,(Dollars in thousands, except per share data)
    
    2009
    
    
    2008Net income
    
    $
    7,150
    
    
    $
    7,440Basic earnings per share:Weighted average shares for basic
earnings per share
    
    
    31,461,439
    
    
    
    34,700,928Net income
    
    $
    0.23
    
    
    $
    0.21Diluted earnings per share:Weighted average shares for diluted
earnings per share
    
    
    31,507,123
    
    
    
    34,953,554Net income
    
    $
    0.23
    
    
    $
    0.21
  Quarter Ended March 31,2009
    
    
    2008Weighted average shares for basic earnings per share
    
    
    31,461,439
    
    
    
    34,700,928Non-vested restricted stock
    
    
    27,886
    
    
    
    62,247Options and warrants
    
    
    17,798
    
    
    
    190,379Weighted average shares for diluted earnings per
share
    
    
    31,507,123
    
    
    
    34,953,554
 13. Segment Information
    20




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Quarter Ended March 31, 2009:
    
    Insurance(Dollars in thousands)
    
    Operations (1)
    
    
    Reinsurance (2)
    
    
    TotalRevenues:Gross premiums written
    
    $
    67,620
    
    
    $
    31,568
    
    
    $
    99,188Net premiums written
    
    $
    55,469
    
    
    $
    31,144
    
    
    $
    86,613Net premiums earned
    
    $
    70,720
    
    
    $
    7,820
    
    
    $
    78,540Losses and Expenses:Net losses and loss adjustment expenses
    
    
    42,744
    
    
    
    4,996
    
    
    
    47,740Acquisition costs and other underwriting expenses
    
    
    29,142
    (3)
    
    
    1,672
    (4)
    
    
    30,814Income (loss) from segments
    
    $
    (1,166
    )
    
    $
    1,152
    
    
    
    (14
    )Unallocated Items:Net investment income
    
    
    
    
    
    
    
    
    
    
    22,177Net realized investment losses
    
    
    
    
    
    
    
    
    
    
    (8,596
    )Corporate and other operating expenses
    
    
    
    
    
    
    
    
    
    
    (3,975
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (1,854
    )Income before income taxes
    
    
    
    
    
    
    
    
    
    
    7,738Income tax expense
    
    
    
    
    
    
    
    
    
    
    723Income before equity in net income of partnership
    
    
    
    
    
    
    
    
    
    
    7,015Equity in net income of partnership, net of tax
    
    
    
    
    
    
    
    
    
    
    135Net income
    
    
    
    
    
    
    
    
    
    $
    7,150Total assets
    
    $
    1,809,108
    
    
    $
    606,328
    (5)
    
    $
    2,415,436
 (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 $370 relating to the quota share agreement.(4)
    
    Includes all Wind River Reinsurance expenses other than federal excise tax.(5)
    
    Comprised of Wind River Reinsurances total assets less its investment in subsidiaries. Quarter Ended March 31, 2008:
    
    Insurance(Dollars in thousands)
    
    Operations (1)
    
    
    Reinsurance (2)
    
    
    TotalRevenues:Gross premiums written
    
    $
    93,292
    
    
    $
    5,770
    
    
    $
    99,062Net premiums written
    
    $
    80,668
    
    
    $
    1,296
    
    
    $
    81,964Net premiums earned
    
    $
    109,919
    
    
    $
    3,138
    
    
    $
    113,057Losses and Expenses:Net losses and loss adjustment expenses
    
    
    74,216
    
    
    
    2,434
    
    
    
    76,650Acquisition costs and other underwriting expenses
    
    
    36,641
    (3)
    
    
    1,554
    (4)
    
    
    38,195Loss from segments
    
    $
    (938
    )
    
    $
    (850
    )
    
    
    (1,788
    )Unallocated Items:Net investment income
    
    
    
    
    
    
    
    
    
    
    17,786Net realized investment losses
    
    
    
    
    
    
    
    
    
    
    (1,070
    )Corporate and other operating expenses
    
    
    
    
    
    
    
    
    
    
    (3,945
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (2,539
    )Income before income taxes
    
    
    
    
    
    
    
    
    
    
    8,444Income tax expense
    
    
    
    
    
    
    
    
    
    
    561Income before equity in net loss of partnership
    
    
    
    
    
    
    
    
    
    
    7,883Equity in net loss of partnership, net of tax
    
    
    
    
    
    
    
    
    
    
    (443
    )Net income
    
    
    
    
    
    
    
    
    
    $
    7,440Total assets
    
    $
    2,069,307
    
    
    $
    658,990
    (5)
    
    $
    2,728,297
 (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 $550 relating to the quota share agreement.(4)
    
    Includes all Wind River Reinsurance expenses other than federal excise tax.(5)
    
    Comprised of Wind River Reinsurances total assets less its investment in subsidiaries.  21




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 14. Supplemental Cash Flow Information
  Quarter Ended March 31,(Dollars in thousands)
    
    2009
    
    
    2008Net U.S. federal income taxes paid
(recovered)
    
    $
    (7,812
    )
    
    $
    1,401Interest paid
    
    
    3,326
    
    
    
    4,195
 15. New Accounting Pronouncements
      22




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  16. Subsequent Events
   23




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
 Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  Recent Developments
         24




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
      Overview
   25




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
    Critical Accounting Estimates and Policies
  Liability For Unpaid Losses And Loss Adjustment Expenses
    26




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
   
    
    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.
       27




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UNITED AMERICA INDEMNITY, LTD.
        28




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UNITED AMERICA INDEMNITY, LTD.
    Gross Reserves(Dollars in thousands)
    
    Case
    
    
    IBNR (1)
    
    
    TotalInsurance Operations:Penn-America
    
    $
    171,478
    
    
    $
    350,761
    
    
    $
    522,239United National
    
    
    243,533
    
    
    
    488,410
    
    
    
    731,943Diamond State
    
    
    69,674
    
    
    
    93,477
    
    
    
    163,151Total Insurance Operations
    
    
    484,685
    
    
    
    932,648
    
    
    
    1,417,333Reinsurance Operations:Wind River Reinsurance
    
    
    12,197
    
    
    
    17,444
    
    
    
    29,641Total
    
    $
    496,882
    
    
    $
    950,092
    
    
    $
    1,446,974
 Net Reserves (2)(Dollars in thousands)
    
    Case
    
    
    IBNR (1)
    
    
    TotalInsurance Operations:Penn-America
    
    $
    151,825
    
    
    $
    293,898
    
    
    $
    445,723United National
    
    
    76,471
    
    
    
    154,924
    
    
    
    231,395Diamond State
    
    
    45,778
    
    
    
    66,630
    
    
    
    112,408Total Insurance Operations
    
    
    274,074
    
    
    
    515,452
    
    
    
    789,526Reinsurance Operations:Wind River Reinsurance
    
    
    4,341
    
    
    
    15,421
    
    
    
    19,762Total
    
    $
    278,415
    
    
    $
    530,873
    
    
    $
    809,288
 (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.  29




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UNITED AMERICA INDEMNITY, LTD.
       30




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UNITED AMERICA INDEMNITY, LTD.
  Severity Change(Dollars in thousands)
    
    
    -10%
    
    
    -5%
    
    
    0%
    
    
    5%
    
    
    10%Frequency Change
    
    
    -5
    %
    
    $
    (7,032
    )
    
    $
    (4,728
    )
    
    $
    (2,425
    )
    
    $
    (121
    )
    
    $
    2,182-3
    %
    
    
    (6,159
    )
    
    
    (3,807
    )
    
    
    (1,455
    )
    
    
    897
    
    
    
    3,249-2
    %
    
    
    (5,723
    )
    
    
    (3,346
    )
    
    
    (970
    )
    
    
    1,406
    
    
    
    3,783-1
    %
    
    
    (5,286
    )
    
    
    (2,886
    )
    
    
    (485
    )
    
    
    1,916
    
    
    
    4,3160
    %
    
    
    (4,850
    )
    
    
    (2,425
    )
    
    
    
    
    
    
    2,425
    
    
    
    4,8501
    %
    
    
    (4,413
    )
    
    
    (1,964
    )
    
    
    485
    
    
    
    2,934
    
    
    
    5,3832
    %
    
    
    (3,977
    )
    
    
    (1,503
    )
    
    
    970
    
    
    
    3,443
    
    
    
    5,9173
    %
    
    
    (3,540
    )
    
    
    (1,043
    )
    
    
    1,455
    
    
    
    3,953
    
    
    
    6,4505
    %
    
    
    (2,667
    )
    
    
    (121
    )
    
    
    2,425
    
    
    
    4,971
    
    
    
    7,517
  Recoverability of Reinsurance Receivables
  Investments
      31




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Fair Value Measurements
  Goodwill and Intangible Assets
    Taxation
     32




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
   Our Business Segments
     33




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  Quarter Ended March 31,(Dollars in thousands)
    
    2009
    
    
    2008Insurance Operations premiums written:Gross premiums written
    
    $
    67,620
    
    
    $
    93,292Ceded premiums written
    
    
    12,151
    
    
    
    12,624Net premiums written
    
    $
    55,469
    
    
    $
    80,668Reinsurance Operations premiums written:Gross premiums written
    
    $
    31,568
    
    
    $
    5,770Ceded premiums written
    
    
    424
    
    
    
    4,474Net premiums written
    
    $
    31,144
    
    
    $
    1,296Revenues: (1)Insurance Operations
    
    $
    70,720
    
    
    $
    109,919Reinsurance Operations
    
    
    7,820
    
    
    
    3,138Total revenues
    
    $
    78,540
    
    
    $
    113,057Expenses: (2)Insurance Operations
    
    $
    71,886
    (3)
    
    $
    110,857
    (3)Reinsurance Operations
    
    
    6,668
    (4)
    
    
    3,988
    (4)Total expenses
    
    $
    78,554
    
    
    $
    114,845Income (loss) from segments:Insurance Operations
    
    $
    (1,166
    )
    
    $
    (938
    )Reinsurance Operations
    
    
    1,152
    
    
    
    (850
    )Total income (loss) from segments
    
    $
    (14
    )
    
    $
    (1,788
    )Insurance combined ratio analysis: (5)Insurance OperationsLoss ratio
    
    
    60.4
    
    
    
    67.5Expense ratio
    
    
    41.2
    
    
    
    33.3Combined ratio
    
    
    101.6
    
    
    
    100.8Reinsurance OperationsLoss ratio
    
    
    63.9
    
    
    
    77.6Expense ratio
    
    
    21.4
    
    
    
    49.5Combined ratio
    
    
    85.3
    
    
    
    127.1ConsolidatedLoss ratio
    
    
    60.8
    
    
    
    67.8Expense ratio
    
    
    39.2
    
    
    
    33.8Combined ratio
    
    
    100.0
    
    
    
    101.6
 (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 $370 and $550 related to cessions from our U.S.
Insurance Companies to Wind River Reinsurance for quarters ended March 31, 2009
and 2008, respectively.(4)
    
    Includes all Wind River Reinsurance expenses other than excise tax
related to cessions from our U.S. Insurance Companies to Wind River
Reinsurance.(5)
    
    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.  34




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Results of Operations
 Quarter Ended March 31, 2009 Compared with the Quarter Ended March 31, 2008
 Insurance Operations
  Quarter Ended March 31,
    
    
    Increase / (Decrease)(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    $
    
    
    %Gross premiums written:Penn-America
    
    $
    32,339
    
    
    $
    44,182
    
    
    $
    (11,843
    )
    
    
    (26.8
    )%United National
    
    
    15,320
    
    
    
    25,869
    
    
    
    (10,549
    )
    
    
    (40.8
    )%Diamond State
    
    
    19,961
    
    
    
    23,241
    
    
    
    (3,280
    )
    
    
    (14.1
    )%Total
    
    $
    67,620
    
    
    $
    93,292
    
    
    $
    (25,672
    )
    
    
    (27.5
    )%Net premiums written:Penn-America
    
    $
    27,157
    
    
    $
    39,403
    
    
    $
    (12,246
    )
    
    
    (31.1
    )%United National
    
    
    12,417
    
    
    
    22,108
    
    
    
    (9,691
    )
    
    
    (43.8
    )%Diamond State
    
    
    15,895
    
    
    
    19,157
    
    
    
    (3,262
    )
    
    
    (17.0
    )%Total
    
    $
    55,469
    
    
    $
    80,668
    
    
    $
    (25,199
    )
    
    
    (31.2
    )%Net premiums earned:Penn-America
    
    $
    37,080
    
    
    $
    60,691
    
    
    $
    (23,611
    )
    
    
    (38.9
    )%United National
    
    
    16,694
    
    
    
    26,111
    
    
    
    (9,417
    )
    
    
    (36.1
    )%Diamond State
    
    
    16,946
    
    
    
    23,117
    
    
    
    (6,171
    )
    
    
    (26.7
    )%Total
    
    
    70,720
    
    
    
    109,919
    
    
    
    (39,199
    )
    
    
    (35.7
    )%Losses and expenses:Net losses and loss adjustment expenses
    
    
    42,744
    
    
    
    74,216
    
    
    
    (31,472
    )
    
    
    (42.4
    )%Acquisition costs and other
underwriting expenses (1)
    
    
    29,142
    
    
    
    36,641
    
    
    
    (7,499
    )
    
    
    (20.5
    )%Income (loss) from underwriting
    
    $
    (1,166
    )
    
    $
    (938
    )
    
    $
    (228
    )
    
    
    (24.3
    )%Underwriting Ratios:Loss ratio:Current accident year
    
    
    61.6
    
    
    
    67.5
    
    
    
    (5.9
    )Prior accident year
    
    
    (1.2
    )
    
    
    
    
    
    
    (1.2
    )Calendar year
    
    
    60.4
    
    
    
    67.5
    
    
    
    (7.1
    )Expense ratio
    
    
    41.2
    
    
    
    33.3
    
    
    
    7.9Combined ratio
    
    
    101.6
    
    
    
    100.8
    
    
    
    0.8
 (1)
    
    Includes excise tax of $370 and $550 related to cessions from our U.S. Insurance
Companies to Wind River Reinsurance for the quarters ended March 31, 2009 and 2008,
respectively. Premiums
  
    
    Penn-America gross premiums written were $32.3 million for the quarter ended March 31,
2009, compared with $44.2 million for the quarter ended March 31, 2008, a decrease of $11.9
million, or 26.8%. The decrease was primarily due to a reduction of $1.2 million due to
terminations of business that did not meet our profitability requirements and a reduction of
$10.5 million from other market factors.
    
    United National gross premiums written were $15.3 million for the quarter ended March 31,
2009, compared with $25.9 million for the quarter ended March 31, 2008, a decrease of $10.6
million, or 40.8%. The decrease was primarily due to a reduction of $8.8 million due to
terminations of business that did not meet our profitability requirements and a reduction of
$1.7 million from other market factors.
    
    Diamond State gross premiums written were $20.0 million for the quarter ended March 31,
2009, compared with $23.2 million for the quarter ended March 31, 2008, a decrease of $3.2
million, or 14.1%. The decrease was primarily due to a reduction of $2.5 million due to
terminations of business that did not meet our profitability requirements and a reduction of
$0.7 million from other market factors.
  35




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UNITED AMERICA INDEMNITY, LTD.
    Net Losses and Loss Adjustment Expenses
    Acquisition Costs and Other Underwriting Expenses
   36




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
    
    The decrease in acquisition costs is primarily due to a decrease in commissions
resulting from a decrease in net premiums earned.
    
    The increase in other underwriting expenses is primarily due to an increase in total
compensation expenses and property and office costs.
 Expense and Combined Ratios
   Loss from underwriting
  Reinsurance Operations
  Quarter Ended March 31,
    
    
    Increase / (Decrease)(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    $
    
    
    %Gross premiums written
    
    $
    31,568
    
    
    $
    5,770
    
    
    $
    25,798
    
    
    
    447.1
    %Net premiums written
    
    $
    31,144
    
    
    $
    1,296
    
    
    $
    29,848
    
    
    
    2,303.1
    %Net premiums earned
    
    $
    7,820
    
    
    $
    3,138
    
    
    $
    4,682
    
    
    
    149.2
    %Losses and expenses:Net losses and loss adjustment expenses
    
    
    4,996
    
    
    
    2,434
    
    
    
    2,562
    
    
    
    105.3
    %Acquisition costs and other underwriting expenses
    
    
    1,672
    
    
    
    1,554
    
    
    
    118
    
    
    
    7.6
    %Income (loss) from underwriting
    
    $
    1,152
    
    
    $
    (850
    )
    
    $
    2,002
    
    
    
    (235.5
    )%Underwriting Ratios:Loss ratio:Current accident year
    
    
    63.5
    
    
    
    77.6
    
    
    
    (14.1
    )Prior accident year
    
    
    0.4
    
    
    
    
    
    
    
    0.4Calendar year loss ratio
    
    
    63.9
    
    
    
    77.6
    
    
    
    (13.7
    )Expense ratio
    
    
    21.4
    
    
    
    49.5
    
    
    
    (28.1
    )Combined ratio
    
    
    85.3
    
    
    
    127.1
    
    
    
    (41.8
    )
 Premiums
   37




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UNITED AMERICA INDEMNITY, LTD.
    Net Losses and Loss Adjustment Expenses
     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.
  38




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Expense and Combined Ratios
   Income (loss) from underwriting
  Unallocated Corporate Items
  Quarter Ended March 31,
    
    
    Increase / (Decrease)(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    $
    
    
    %Net investment income
    
    $
    22,177
    
    
    $
    17,786
    
    
    $
    4,391
    
    
    
    24.7
    %Net realized investment gains (losses)
    
    
    (8,596
    )
    
    
    (1,070
    )
    
    
    (7,526
    )
    
    
    703.4
    %Corporate and other operating expenses
    
    
    (3,975
    )
    
    
    (3,945
    )
    
    
    (30
    )
    
    
    0.8
    %Interest expense
    
    
    (1,854
    )
    
    
    (2,539
    )
    
    
    685
    
    
    
    (27.0
    )%Income tax expense
    
    
    (723
    )
    
    
    (561
    )
    
    
    (162
    )
    
    
    28.9
    %Equity in net income (loss) of
partnership, net of tax
    
    
    135
    
    
    
    (443
    )
    
    
    578
    
    
    NA
 Net Investment Income
  
    
    Gross investment income, excluding realized gains and losses, was $23.3 million for the
quarter ended March 31, 2009, compared with $19.3 million for the quarter ended March 31,
2008, an increase of $4.0 million or 20.7%. The increase was primarily due to gross
investment income from our limited partnerships of $7.4 million offset by reductions due to
decreases in short-term interest rates and a reduction of our cash and invested assets.
Our limited partnership investments generated gross investment income of $7.4 million for
the quarter ended March 31, 2009 due to liquidations of some of those investments. There
was no investment income generated by our limited partnership investments for the quarter
ended March 31, 2008. Excluding limited partnership distributions, gross investment income
for the quarter ended March 31, 2009 decreased 17.8% compared to the quarter ended March
31, 2008. This decrease is due to reductions in short-term interest rates and reductions
in our cash and invested assets. Cash and invested assets decreased to $1,574.7 million as
of March 31, 2009, from $1,764.8 million as of March 31, 2008, a decrease of $190.1 million
or 10.8%. This decrease was primarily due to negative operating cash flow of $35.3 million
during that same period, realized and unrealized losses in our
investment portfolio of $89.5 million, and $61.8 million in share repurchases and debt
repayments.
    
    Investment expenses were $1.1 million for the quarter ended March 31, 2009, compared
with $1.5 million for the quarter ended March 31, 2008, a decrease of $0.4 million or
25.5%. The decrease was primarily due to the decrease in trust fees and the decrease in
the average fair value of our invested assets as well as a change in fee structure
resulting from change in investment managers.
  39




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  Net Realized Investment Gains (Losses)
    Corporate and Other Operating Expenses
  Interest Expense
  Income Tax Expense
   40




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  Equity in Net Income (Loss) of Partnerships
  Net Income
  Liquidity and Capital Resources
 Sources and Uses of Funds
      41




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
   Cash Flows
   
    
    the fact that we collect premiums in advance of losses paid;
    
    the timing of our settlements with our reinsurers; and
    
    the timing of our loss payments.
  Quarters Ended March 31,(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    ChangeNet premiums collected
    
    $
    65,553
    (1)
    
    $
    87,547
    
    
    $
    (21,994
    )Net losses paid
    
    
    (70,472)
    (2)
    
    
    (55,371
    )
    
    
    (15,101
    )Acquisition costs and other underwriting expenses
    
    
    (36,973
    )
    
    
    (42,515
    )
    
    
    5,542Net investment income
    
    
    24,606
    
    
    
    20,334
    
    
    
    4,272Net federal income taxes recovered (paid)
    
    
    7,968
    
    
    
    (1,358
    )
    
    
    9,326Interest paid
    
    
    (3,326
    )
    
    
    (4,195
    )
    
    
    869Other
    
    
    (23
    )
    
    
    (25
    )
    
    
    2Net cash provided by (used for) operating activities
    
    $
    (12,667
    )
    
    $
    4,417
    
    
    $
    (17,084
    )
 (1)
    
    During the first quarter of 2009, Wind River Reinsurance entered into
multiple new reinsurance treaties with third parties; however, the premium
associated with these new treaties will not begin to be collected until the
second quarter of 2009.(2)
    
    Includes losses resulting from Hurricane Ike, which made landfall in
August 2008.  Liquidity
   42




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
   Capital Resources
  Off Balance Sheet Arrangements
  Cautionary Note Regarding Forward-Looking Statements
     43




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
   44




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
 PART II-OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   ApproximateTotal Number of
    
    
    Dollar ValueShares Purchased
    
    
    of Shares ThatTotal Number
    
    
    Average
    
    
    as Part of Publicly
    
    
    May Yet Beof Shares
    
    
    Price Paid
    
    
    Announced Plan
    
    
    Purchased Under thePeriod (1)
    
    Purchased
    
    
    Per Share
    
    
    or Program
    
    
    Plan or Program (2)January 1-31, 2009
    
    
    9,246
    (3)
    
    $
    12.13
    
    
    
    
    
    
    $
    February 1-28, 2009
    
    
    4,326
    (3)
    
    $
    10.50
    
    
    
    
    
    
    $
    Total
    
    
    13,572
    
    
    $
    11.61
    
    
    
    
    
    
    
    N/A
 (1)
    
    Based on settlement date.(2)
    
    Approximate dollar value of shares is as of the last date of the applicable month.(3)
    
    Surrendered by employees as payment of taxes withheld on the vesting of restricted
stock.  45




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
 Item 6. Exhibits
 10.1
    
    Subscription and Backstop Agreement dated March 16, 2009, among United America
Indemnity, Ltd., U.N. Holdings (Cayman) II, Ltd., and Fox Paine & Company, LLC. (incorporated
herein by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on March 17,
2009).31.1+
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the
Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2+
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the
Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1+
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2+
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 +
    
    Filed herewith.*
    
    Management contract or compensatory plan or arrangement.  46




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
 SIGNATURE
  UNITED AMERICA INDEMNITY, LTD.
RegistrantMay 11, 2008
    
    By:
    /s/ Thomas M. McGeehanDate:  May 11, 2009
    
    
    Thomas M. McGeehanInterim Chief Financial Officer
(Authorized Signatory and Principal
Financial and Accounting Officer)  47




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
 EXHIBIT INDEX
 ExhibitNumber
    
    Description10.1
    
    Subscription and Backstop Agreement dated March 16, 2009, among United America
Indemnity, Ltd., U.N. Holdings (Cayman) II, Ltd., and Fox Paine & Company, LLC. (incorporated
herein by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on March 17,
2009).31.1+
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the
Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2+
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the
Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1+
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2+
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 +
    
    Filed herewith.*
    
    Management contract or compensatory plan or arrangement.  48