##### 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, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period From  to
 000-50511
 Commission File Number
 UNITED AMERICA INDEMNITY, LTD.
  Cayman Islands
(State or other jurisdiction 
of incorporation or organization)
    
    98-0417107
(I.R.S. Employer Identification No.)
 WALKER HOUSE, 87 MARY STREET
KYI  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
 Yes o No þ




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##### 



TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Balance Sheets 
As of March 31, 2010 (Unaudited) and December 31, 2009
    
    
    1Consolidated Statements of Operations 
Quarters Ended March 31, 2010 and 2009 (Unaudited)
    
    
    2Consolidated Statements of Comprehensive Income (Loss) 
Quarters Ended March 31, 2010 and 2009 (Unaudited)
    
    
    3Consolidated Statements of Changes in Shareholders Equity 
As of March 31, 2010 (Unaudited) and December 31, 2009
    
    
    4Consolidated Statements of Cash Flows 
Quarters Ended March 31, 2010 and 2009 (Unaudited)
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    29Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    47Item 4. Controls and Procedures
    
    
    47PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    48Item 1A. Risk Factors
    
    
    48Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    48Item 6. Exhibits
    
    
    49Signatures
    
    
    50Exhibit 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, 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., U. A. I. Services,
LLC, J.H. Ferguson & Associates, LLC, and the U.S. Insurance Companies;4)
    
    our U.S. Insurance Companies refers to the insurance and related operations conducted by
United National Insurance Company, Diamond State Insurance Company, United National Casualty
Insurance Company, United National Specialty Insurance Company, Penn-America Insurance
Company, Penn-Star Insurance Company and Penn-Patriot Insurance Company;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 Company, Diamond
State Insurance Company, United National Casualty Insurance Company, United National Specialty
Insurance Company, and J.H. Ferguson & Associates, LLC;6)
    
    our Insurance Operations refers to the U.S. Insurance Operations;7)
    
    Wind River Reinsurance refers to Wind River Reinsurance Company, Ltd.;




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##### Table of Contents



8)
    
    our Non-U.S. Subsidiaries refers to Wind River Reinsurance, the Luxembourg Companies, and
U.A.I. (Ireland) Limited;9)
    
    our Reinsurance Operations refers to the reinsurance and related operations of Wind River
Reinsurance;10)
    
    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.;11)
    
    United America Indemnity Group refers to United America Indemnity Group, Inc.;12)
    
    AIS refers to American Insurance Service, Inc.;13)
    
    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;14)
    
    United National refers to our product classification that includes property, general
liability, and professional lines products distributed through program administrators with
specific binding authority;15)
    
    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;16)
    
    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;17)
    
    Fox Paine & Company refers to Fox Paine & Company, LLC and affiliated investment funds;18)
    
    GAAP refers to accounting principles generally accepted in the United States of America;
and19)
    
    $ 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, 2010
    
    
    December 31, 2009ASSETSFixed maturities:Available for sale, at fair value (amortized cost: $1,495,858 and $1,423,052)
    
    $
    1,542,805
    
    
    $
    1,471,572Equity securities:Preferred stocks:Available for sale, at fair value (cost: $930 and $1,509)
    
    
    2,230
    
    
    
    2,599Common stocks:Available for sale, at fair value (cost: $54,420 and $50,709)
    
    
    68,332
    
    
    
    63,057Other invested assetsAvailable for sale, at fair value (cost: $4,255 and $4,323)
    
    
    5,448
    
    
    
    6,854Securities classified as trading, at fair value (cost: $1,100 and $1,145)
    
    
    1,100
    
    
    
    1,145Total investments
    
    
    1,619,915
    
    
    
    1,545,227Cash and cash equivalents
    
    
    111,146
    
    
    
    186,087Accounts receivable, net
    
    
    68,758
    
    
    
    69,711Reinsurance receivables
    
    
    520,708
    
    
    
    543,351Federal income taxes receivable
    
    
    397
    
    
    
    3,521Deferred federal income taxes
    
    
    14,822
    
    
    
    13,819Deferred acquisition costs
    
    
    33,658
    
    
    
    33,184Intangible assets
    
    
    9,218
    
    
    
    9,236Prepaid reinsurance premiums
    
    
    12,743
    
    
    
    16,546Other assets
    
    
    25,276
    
    
    
    25,098Total assets
    
    $
    2,416,641
    
    
    $
    2,445,780LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses
    
    $
    1,232,641
    
    
    $
    1,257,741Unearned premiums
    
    
    138,472
    
    
    
    131,582Ceded balances payable
    
    
    2,026
    
    
    
    16,009Contingent commissions
    
    
    5,477
    
    
    
    11,169Payable for securities purchased
    
    
    35,975
    
    
    
    37,258Notes and debentures payable
    
    
    121,498
    
    
    
    121,569Other liabilities
    
    
    29,949
    
    
    
    38,476Total liabilities
    
    
    1,566,038
    
    
    
    1,613,804Commitments and contingencies (Note 8)
    
    
    
    
    
    
    Shareholders equity:Common shares, $0.0001 par value, 900,000,000 common shares authorized; Class A common
shares issued: 42,581,491 and 42,486,690, respectively; Class A common shares
outstanding: 36,508,960 and 36,430,477, respectively; Class B common shares issued and
outstanding: 24,122,744 and 24,122,744, respectively
    
    
    7
    
    
    
    7Additional paid-in capital
    
    
    620,444
    
    
    
    619,469Accumulated other comprehensive income
    
    
    47,352
    
    
    
    48,481Retained earnings
    
    
    283,640
    
    
    
    264,739Class A common shares in treasury, at cost: 6,072,531 and 6,056,213 shares, respectively
    
    
    (100,840
    )
    
    
    (100,720
    )Total shareholders equity
    
    
    850,603
    
    
    
    831,976Total liabilities and shareholders equity
    
    $
    2,416,641
    
    
    $
    2,445,780
   1




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Operations
  (Unaudited)Quarters Ended March 31,2010
    
    
    2009Revenues:Gross premiums written
    
    $
    92,853
    
    
    $
    99,188Net premiums written
    
    $
    81,481
    
    
    $
    86,613Net premiums earned
    
    $
    70,788
    
    
    $
    78,540Net investment income
    
    
    14,579
    
    
    
    22,177Net realized investment gains (losses):Other-than-temporary impairment losses on investments
    
    
    (89
    )
    
    
    (3,121
    )Other-than-temporary impairment losses on investments
recognized in other comprehensive income
    
    
    47
    
    
    
    Other net realized investment gains (losses)
    
    
    14,246
    
    
    
    (5,475
    )Total net realized investment gains (losses)
    
    
    14,204
    
    
    
    (8,596
    )Total revenues
    
    
    99,571
    
    
    
    92,121Losses and Expenses:Net losses and loss adjustment expenses
    
    
    41,789
    
    
    
    47,740Acquisition costs and other underwriting expenses
    
    
    30,148
    
    
    
    30,814Corporate and other operating expenses
    
    
    4,896
    
    
    
    3,975Interest expense
    
    
    1,739
    
    
    
    1,854Income before income taxes
    
    
    20,999
    
    
    
    7,738Income tax expense
    
    
    2,069
    
    
    
    723Income before equity in net income (loss) of partnerships
    
    
    18,930
    
    
    
    7,015Equity in net income (loss) of partnerships, net of taxes
    
    
    (29
    )
    
    
    135Net income
    
    $
    18,901
    
    
    $
    7,150Per share data:Net incomeBasic
    
    $
    0.31
    
    
    $
    0.20Diluted
    
    $
    0.31
    
    
    $
    0.20Weighted-average number of shares outstandingBasic
    
    
    60,369,087
    
    
    
    35,036,161Diluted
    
    
    60,409,839
    
    
    
    35,081,845
   2




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Comprehensive Income (Loss)
  (Unaudited)Quarters Ended March 31,2010
    
    
    2009Net income
    
    $
    18,901
    
    
    $
    7,150Other comprehensive income (loss), net of taxes:Unrealized holding gains (losses) arising during period
    
    
    9,978
    
    
    
    (7,455)Portion of other-than-temporary impairment losses recognized in other comprehensive loss, net of taxes
    
    
    (1)
    
    
    
    Recognition of previously unrealized holding (gains) losses
    
    
    (10,993)
    
    
    
    6,321Unrealized foreign currency translation losses
    
    
    (113
    )
    
    
    Other comprehensive loss, net of taxes
    
    
    (1,129
    )
    
    
    (1,134
    )Comprehensive income, net of taxes
    
    $
    17,772
    
    
    $
    6,016
   3




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Changes in Shareholders Equity
  (Unaudited)Quarter Ended
    
    
    Year EndedMarch 31, 2010
    
    
    December 31, 2009Number of Class A common shares issued:Number at beginning of period
    
    
    42,486,690
    
    
    
    25,032,618Common shares issued under share incentive plans
    
    
    58,923
    
    
    
    72,127Common shares issued to directors
    
    
    35,878
    
    
    
    203,524Common shares issued under Rights Offering
    
    
    
    
    
    
    17,178,421Number at end of period
    
    
    42,581,491
    
    
    
    42,486,690Number of Class B common shares issued:Number at beginning of period
    
    
    24,122,744
    
    
    
    12,687,500Common shares issued under Rights Offering
    
    
    
    
    
    
    11,435,244Number at end of period
    
    
    24,122,744
    
    
    
    24,122,744Par value of Class A common shares:Balance at beginning of period
    
    $
    4
    
    
    $
    3Common shares issued under Rights Offering
    
    
    
    
    
    
    1Balance at end of period
    
    $
    4
    
    
    $
    4Par value of Class B common shares:Balance at beginning of period
    
    $
    3
    
    
    $
    1Common shares issued under Rights Offering
    
    
    
    
    
    
    2Balance at end of period
    
    $
    3
    
    
    $
    3Additional paid-in capital:Balance at beginning of period
    
    $
    619,469
    
    
    $
    524,345Share compensation plans
    
    
    975
    
    
    
    3,294Common shares issued under Rights Offering
    
    
    
    
    
    
    91,830Balance at end of period
    
    $
    620,444
    
    
    $
    619,469Accumulated other comprehensive income, net of deferred income tax:Balance at beginning of period
    
    $
    48,481
    
    
    $
    25,108Other comprehensive income (loss):Unrealized holding gains (losses) arising during the period
    
    
    (1,015
    )
    
    
    29,554Unrealized foreign currency translation gains (losses)
    
    
    (113
    )
    
    
    140Other comprehensive income (loss)
    
    
    (1,128
    )
    
    
    29,694Change in other-than-temporary impairment losses recognized in other comprehensive income, net of taxes
    
    
    (1
    )
    
    
    (1
    )Cumulative effect adjustment per new impairment accounting guidance
    
    
    
    
    
    
    (6,320
    )Balance at end of period
    
    $
    47,352
    
    
    $
    48,481Retained earnings:Balance at beginning of period
    
    $
    264,739
    
    
    $
    182,982Net income
    
    
    18,901
    
    
    
    75,437Cumulative effect adjustment per new impairment accounting guidance
    
    
    
    
    
    
    6,320Balance at end of period
    
    $
    283,640
    
    
    $
    264,739Number of Treasury Shares:Number at beginning of period
    
    
    6,056,213
    
    
    
    6,019,156Class A common shares purchased
    
    
    16,318
    
    
    
    37,057Number at end of period
    
    
    6,072,531
    
    
    
    6,056,213Treasury Shares, at cost:Balance at beginning of period
    
    $
    (100,720
    )
    
    $
    (100,446
    )Class A common shares purchased, at cost
    
    
    (120
    )
    
    
    (274
    )Balance at end of period
    
    $
    (100,840
    )
    
    $
    (100,720
    )Total shareholders equity
    
    $
    850,603
    
    
    $
    831,976
   4




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Cash Flows
  (Unaudited)Quarters Ended March 31,2010
    
    
    2009Cash flows from operating activities:Net income
    
    $
    18,901
    
    
    $
    7,150Adjustments to reconcile net income to net cash used for operating activities:Amortization of trust preferred securities issuance costs
    
    
    20
    
    
    
    20Amortization and depreciation
    
    
    528
    
    
    
    434Restricted stock expense
    
    
    1,167
    
    
    
    1,084Deferred federal income taxes
    
    
    (865
    )
    
    
    5,944Amortization of bond premium and discount, net
    
    
    657
    
    
    
    1,048Net realized investment (gains) losses
    
    
    (14,204
    )
    
    
    8,596Equity in net (income) loss of partnerships
    
    
    29
    
    
    
    (135
    )Changes in:Agents balances
    
    
    953
    
    
    
    (10,700
    )Reinsurance receivables
    
    
    22,643
    
    
    
    36,723Unpaid losses and loss adjustment expenses
    
    
    (25,100
    )
    
    
    (59,455
    )Unearned premiums
    
    
    6,890
    
    
    
    4,391Ceded balances payable
    
    
    (13,983
    )
    
    
    (9,642
    )Other assets and liabilities, net
    
    
    (9,236
    )
    
    
    (3,732
    )Contingent commissions
    
    
    (5,692
    )
    
    
    (678
    )Federal income taxes receivable
    
    
    3,124
    
    
    
    2,747Deferred acquisition costs
    
    
    (474
    )
    
    
    (145
    )Prepaid reinsurance premiums
    
    
    3,803
    
    
    
    3,683Net cash used for operating activities
    
    
    (10,839
    )
    
    
    (12,667
    )Cash flows from investing activities:Proceeds from sale of fixed maturities
    
    
    275,773
    
    
    
    68,403Proceeds from sale of stocks
    
    
    10,324
    
    
    
    37,397Proceeds from maturity of fixed maturities
    
    
    17,925
    
    
    
    9,735Proceeds from sale of other invested assets
    
    
    68
    
    
    
    16,699Purchases of fixed maturities
    
    
    (356,759
    )
    
    
    (156,660
    )Purchases of stocks
    
    
    (10,937
    )
    
    
    (36,859
    )Purchases of other invested assets
    
    
    
    
    
    
    (52
    )Net cash used for investing activities
    
    
    (63,606
    )
    
    
    (61,337
    )Cash flows from financing activities:Tax expense associated with share-based compensation plans
    
    
    (192
    )
    
    
    (159
    )Purchases of Class A common shares
    
    
    (120
    )
    
    
    (157
    )Principal payments of term debt
    
    
    (71
    )
    
    
    (62
    )Net cash used for financing activities
    
    
    (383
    )
    
    
    (378
    )Effect of exchange rates on cash and cash equivalents
    
    
    (113
    )
    
    
    Net change in cash and cash equivalents
    
    
    (74,941
    )
    
    
    (74,382
    )Cash and cash equivalents at beginning of period
    
    
    186,087
    
    
    
    292,604Cash and cash equivalents at end of period
    
    $
    111,146
    
    
    $
    218,222
   5




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




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Other-than-temporaryGross
    
    
    Gross
    
    
    
    
    
    
    impairmentsAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Estimated
    
    
    recognized in(Dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value
    
    
    AOCI (1)As of March 31, 2010Fixed
maturities:U.S. treasury and agency obligations
    
    $
    292,522
    
    
    $
    8,782
    
    
    $
    (195
    )
    
    $
    301,109
    
    
    $
    Obligations of states and political subdivisions
    
    
    194,491
    
    
    
    6,047
    
    
    
    (195
    )
    
    
    200,343
    
    
    
    Mortgage-backed securities
    
    
    304,874
    
    
    
    9,876
    
    
    
    (833
    )
    
    
    313,917
    
    
    
    (62
    )Asset-backed securities
    
    
    128,847
    
    
    
    2,517
    
    
    
    (155
    )
    
    
    131,209
    
    
    
    (51
    )Corporate notes and loans
    
    
    512,756
    
    
    
    19,415
    
    
    
    (333
    )
    
    
    531,838
    
    
    
    (134
    )Foreign corporate bonds
    
    
    62,368
    
    
    
    2,118
    
    
    
    (97
    )
    
    
    64,389
    
    
    
    Total fixed
maturities
    
    
    1,495,858
    
    
    
    48,755
    
    
    
    (1,808
    )
    
    
    1,542,805
    
    
    
    (247
    )Common stock
    
    
    54,420
    
    
    
    14,286
    
    
    
    (374
    )
    
    
    68,332
    
    
    
    Preferred stock
    
    
    930
    
    
    
    1,300
    
    
    
    
    
    
    
    2,230
    
    
    
    Other invested assets
    
    
    5,355
    
    
    
    1,193
    
    
    
    
    
    
    
    6,548
    
    
    
    Total
    
    $
    1,556,563
    
    
    $
    65,534
    
    
    $
    (2,182
    )
    
    $
    1,619,915
    
    
    $
    (247
    )
 (1)
    
    Represents the total amount of other-than-temporary impairment losses recognized in
accumulated other comprehensive income (AOCI) since the date of adoption of the recent
guidance on other-than-temporary investments. Per the accounting guidance, these items were
not included in earnings as of March 31, 2010. Other-than-temporaryGross
    
    
    Gross
    
    
    
    
    
    
    impairmentsAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Estimated
    
    
    recognized in(Dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value
    
    
    AOCI (1)As of December 31, 2009Fixed maturities:U.S. treasury and agency obligations
    
    $
    228,386
    
    
    $
    7,936
    
    
    $
    (234
    )
    
    $
    236,088
    
    
    $
    Obligations of states and political subdivisions
    
    
    217,713
    
    
    
    8,255
    
    
    
    (370
    )
    
    
    225,598
    
    
    
    Mortgage-backed securities
    
    
    349,287
    
    
    
    15,219
    
    
    
    (506
    )
    
    
    364,000
    
    
    
    (72
    )Asset-backed securities
    
    
    112,287
    
    
    
    2,322
    
    
    
    (446
    )
    
    
    114,163
    
    
    
    (10
    )Corporate notes and loans
    
    
    446,570
    
    
    
    15,419
    
    
    
    (1,259
    )
    
    
    460,730
    
    
    
    (698
    )Foreign corporate bonds
    
    
    68,809
    
    
    
    2,354
    
    
    
    (170
    )
    
    
    70,993
    
    
    
    Total fixed maturities
    
    
    1,423,052
    
    
    
    51,505
    
    
    
    (2,985
    )
    
    
    1,471,572
    
    
    
    (780
    )Common stock
    
    
    50,709
    
    
    
    12,473
    
    
    
    (125
    )
    
    
    63,057
    
    
    
    Preferred stock
    
    
    1,509
    
    
    
    1,090
    
    
    
    
    
    
    
    2,599
    
    
    
    Other invested assets
    
    
    5,468
    
    
    
    2,531
    
    
    
    
    
    
    
    7,999
    
    
    
    Total
    
    $
    1,480,738
    
    
    $
    67,599
    
    
    $
    (3,110
    )
    
    $
    1,545,227
    
    
    $
    (780
    )
 (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 December 31, 2009.   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
    
    $
    68,928
    
    
    $
    70,452Due after one year through five years
    
    
    732,665
    
    
    
    754,879Due after five years through ten years
    
    
    194,092
    
    
    
    202,978Due after ten years through fifteen years
    
    
    31,913
    
    
    
    33,819Due after fifteen years
    
    
    34,539
    
    
    
    35,551Mortgaged-backed securities
    
    
    304,874
    
    
    
    313,917Asset-backed securities
    
    
    128,847
    
    
    
    131,209$
    1,495,858
    
    
    $
    1,542,805
  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
    
    
    LossesFixed
maturities:U.S. treasury and agency obligations
    
    $
    74,293
    
    
    $
    (195
    )
    
    $
    
    
    
    $
    
    
    
    $
    74,293
    
    
    $
    (195
    )Obligations of states and political subdivisions
    
    
    19,981
    
    
    
    (101
    )
    
    
    6,432
    
    
    
    (94
    )
    
    
    26,413
    
    
    
    (195
    )Mortgage-backed securities
    
    
    119,285
    
    
    
    (708
    )
    
    
    3,328
    
    
    
    (125
    )
    
    
    122,613
    
    
    
    (833
    )Asset-backed securities
    
    
    6,152
    
    
    
    (35
    )
    
    
    1,581
    
    
    
    (120
    )
    
    
    7,733
    
    
    
    (155
    )Corporate notes and loans
    
    
    48,176
    
    
    
    (329
    )
    
    
    1,994
    
    
    
    (4
    )
    
    
    50,170
    
    
    
    (333
    )Foreign corporate bonds
    
    
    6,901
    
    
    
    (97
    )
    
    
    
    
    
    
    
    
    
    
    6,901
    
    
    
    (97
    )Total fixed
maturities
    
    
    274,788
    
    
    
    (1,465
    )
    
    
    13,335
    
    
    
    (343
    )
    
    
    288,123
    
    
    
    (1,808
    )Common stock
    
    
    9,990
    
    
    
    (374
    )
    
    
    
    
    
    
    
    
    
    
    9,990
    
    
    
    (374
    )Total
    
    $
    284,778
    
    
    $
    (1,839
    )
    
    $
    13,335
    
    
    $
    (343
    )
    
    $
    298,113
    
    
    $
    (2,182
    )
 (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
    
    
    LossesFixed maturities:U.S. treasury and agency obligations
    
    $
    56,445
    
    
    $
    (234
    )
    
    $
    
    
    
    $
    
    
    
    $
    56,445
    
    
    $
    (234
    )Obligations of states and political subdivisions
    
    
    26,488
    
    
    
    (239
    )
    
    
    6,403
    
    
    
    (131
    )
    
    
    32,891
    
    
    
    (370
    )Mortgage-backed securities
    
    
    23,612
    
    
    
    (217
    )
    
    
    5,020
    
    
    
    (289
    )
    
    
    28,632
    
    
    
    (506
    )Asset-backed securities
    
    
    31,255
    
    
    
    (246
    )
    
    
    1,625
    
    
    
    (200
    )
    
    
    32,880
    
    
    
    (446
    )Corporate notes and loans
    
    
    87,286
    
    
    
    (1,166
    )
    
    
    3,556
    
    
    
    (93
    )
    
    
    90,842
    
    
    
    (1,259
    )Foreign corporate bonds
    
    
    11,835
    
    
    
    (170
    )
    
    
    
    
    
    
    
    
    
    
    11,835
    
    
    
    (170
    )Total fixed maturities
    
    
    236,921
    
    
    
    (2,272
    )
    
    
    16,604
    
    
    
    (713
    )
    
    
    253,525
    
    
    
    (2,985
    )Common stock
    
    
    3,184
    
    
    
    (73
    )
    
    
    1,107
    
    
    
    (52
    )
    
    
    4,291
    
    
    
    (125
    )Total
    
    $
    240,105
    
    
    $
    (2,345
    )
    
    $
    17,711
    
    
    $
    (765
    )
    
    $
    257,816
    
    
    $
    (3,110
    )
 (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.  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.
   U.S. treasury and agency obligations 
  9




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Obligations of states and political subdivisions s
 Mortgage-backed securities  non-agency 
 Mortgage-backed securities  agency 
 Asset backed securities (ABS) 
 Corporate notes and loans 
 Foreign bonds 
  10




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Quarters Ended March 31,(Dollars in thousands)
    
    2010
    
    
    2009Fixed
maturities:OTTI losses, gross
    
    $
    89
    
    
    $
    1,882Portion of loss recognized in other comprehensive income (pre-tax)
    
    
    (47
    )
    
    
    Net impairment losses on fixed
maturities recognized in earnings
    
    
    42
    
    
    
    1,882Common stock
    
    
    
    
    
    
    592Preferred stock
    
    
    
    
    
    
    647Total
    
    $
    42
    
    
    $
    3,121
  Quarter-to-Date(Dollars in thousands)Balance of credit losses related to securities still being held as of January 1, 2010
    
    $
    50Additions where no OTTI was previously recorded
    
    
    31Additions where an OTTI was previously recorded
    
    
    11Reductions 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 March 31, 2010
    
    $
    92
 NOTE:
    
    The accounting guidance that requires this disclosure was
not adopted until April 1, 2009, so there is no table presented
for the quarter ended March 31, 2009.
 Accumulated Other Comprehensive Income
  (Dollars in thousands)
    
    March 31, 2010
    
    
    December 31, 2009Net unrealized gains (losses) from:Fixed maturities
    
    $
    46,947
    
    
    $
    48,521Preferred stocks
    
    
    1,300
    
    
    
    1,090Common stocks
    
    
    13,912
    
    
    
    12,348Partnerships < 3% owned
    
    
    1,193
    
    
    
    2,531Foreign currency fluctuations
    
    
    (69
    )
    
    
    44Deferred taxes
    
    
    (15,931
    )
    
    
    (16,053
    )Accumulated other comprehensive income
    
    $
    47,352
    
    
    $
    48,481
  11




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Net Realized Investment Gains (Losses)
  Quarters Ended March 31,(Dollars in thousands)
    
    2010
    
    
    2009Fixed maturities
    
    $
    11,691
    
    
    $
    (5,673
    )Convertibles
    
    
    3
    
    
    
    367Common stock
    
    
    2,510
    
    
    
    (2,643
    )Preferred stock
    
    
    
    
    
    
    (647
    )Total
    
    $
    14,204
    
    
    $
    (8,596
    )
  Quarters Ended March 31,(Dollars in thousands)
    
    2010
    
    
    2009Fixed maturities
    
    $
    275,773
    
    
    $
    68,403Equity securities
    
    
    10,324
    
    
    
    37,397
 Net Investment Income
  Quarters Ended March 31,(Dollars in thousands)
    
    2010
    
    
    2009Fixed maturities
    
    $
    15,580
    
    
    $
    14,814Preferred and common stocks
    
    
    361
    
    
    
    476Cash and cash equivalents
    
    
    77
    
    
    
    586Other invested assets
    
    
    
    
    
    
    7,434Total investment income
    
    
    16,018
    
    
    
    23,310Investment expense
    
    
    (1,439
    )
    
    
    (1,133
    )Net investment income
    
    $
    14,579
    
    
    $
    22,177
  Quarters Ended March 31,(Dollars in thousands)
    
    2010
    
    
    2009Net investment income
    
    $
    12,283
    
    
    $
    17,225Net realized investment gains (losses):Invested assets excluding partnerships
    
    
    10,993
    
    
    
    (6,321
    )Partnerships
    
    
    (29
    )
    
    
    135Total net realized investment gains (losses)
    
    
    10,964
    
    
    
    (6,186
    )Net unrealized investment losses
    
    
    (1,017
    )
    
    
    (1,134
    )Net investment gains (losses)
    
    
    9,947
    
    
    
    (7,320
    )Total investment return
    
    $
    22,230
    
    
    $
    9,905Total investment return % (1)
    
    
    1.3
    %
    
    
    0.6
    %Average investment portfolio (2)
    
    $
    1,694,571
    
    
    $
    1,587,100
 (1)
    
    Not annualized.(2)
    
    Average of total cash and
invested assets, net of payable for securities
purchased, as of the beginning and ending of the
period.  12




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Subprime and Alt-A Investments
  Insurance Enhanced Municipal Bonds
  Ratings
    
    
    Ratings(Dollars in thousands)
    
    with
    
    
    withoutRating
    
    Insurance
    
    
    InsuranceAAA
    
    $
    500
    
    
    $
    AA
    
    
    8,840
    
    
    
    148A
    
    
    
    
    
    
    8,191BBB
    
    
    
    
    
    
    1,001Total
    
    $
    9,340
    
    
    $
    9,340
  Exposure Netof Pre-refundedGovernment
    
    
    & Government(Dollars in thousands)
    
    
    
    
    
    Pre-refunded
    
    
    Guaranteed
    
    
    GuaranteedFinancial Guarantor
    
    Total
    
    
    Securities
    
    
    Securities
    
    
    SecuritiesAmbac Financial Group
    
    $
    13,601
    
    
    $
    5,909
    
    
    $
    
    
    
    $
    7,692Assured Guaranty Corporation
    
    
    401
    
    
    
    
    
    
    
    
    
    
    
    401Financial Guaranty Insurance Company
    
    
    2,535
    
    
    
    2,535
    
    
    
    
    
    
    
    Financial Security Assurance, Inc.
    
    
    38,951
    
    
    
    16,745
    
    
    
    
    
    
    
    22,206Municipal Bond Insurance Association
    
    
    51,213
    
    
    
    13,915
    
    
    
    
    
    
    
    37,298Federal Housing Association
    
    
    2,336
    
    
    
    
    
    
    
    2,336
    
    
    
    Federal National Housing Association
    
    
    780
    
    
    
    
    
    
    
    780
    
    
    
    Govt National Housing Association
    
    
    1,188
    
    
    
    1,009
    
    
    
    179
    
    
    
    Permanent School Fund Guaranty
    
    
    3,350
    
    
    
    1,670
    
    
    
    1,680
    
    
    
    Total backed by financial guarantors
    
    
    114,355
    
    
    
    41,783
    
    
    
    4,975
    
    
    
    67,597Other credit enhanced municipal bonds
    
    
    13,688
    
    
    
    13,688
    
    
    
    
    
    
    
    Total
    
    $
    128,043
    
    
    $
    55,471
    
    
    $
    4,975
    
    
    $
    67,597
   13




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Bonds Held on Deposit
  Estimated Fair Value(Dollars in thousands)
    
    March 31, 2010
    
    
    December 31, 2009On deposit with governmental authorities
    
    $
    42,010
    
    
    $
    41,336Intercompany trusts held for the benefit of U.S. policyholders
    
    
    668,166
    
    
    
    653,500Held in trust pursuant to third party requirements
    
    
    34,420
    
    
    
    29,884Held in trust pursuant to U.S. regulatory requirements for the benefit of U.S. policyholders
    
    
    5,834
    
    
    
    6,169Total
    
    $
    750,430
    
    
    $
    730,889
 3. Fair Value Measurements
      14




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  
    
    Level 1  inputs utilize quoted prices (unadjusted) in active markets for identical
assets that the Company has the ability to access at the measurement date.
    
    Level 2  inputs utilize other than quoted prices included in Level 1 that are
observable for the similar assets, either directly or indirectly.
    
    Level 3  inputs are unobservable for the asset, and include situations where there is
little, if any, market activity for the asset.
    As of March 31, 2010
    
    Fair Value Measurements(Dollars in thousands)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalFixed
maturities:U.S. treasury and agency obligations
    
    $
    121,554
    
    
    $
    179,555
    
    
    $
    
    
    
    $
    301,109Obligations of states and political subdivisions
    
    
    
    
    
    
    200,343
    
    
    
    
    
    
    
    200,343Mortgage-backed securities
    
    
    
    
    
    
    313,917
    
    
    
    
    
    
    
    313,917Asset-backed securities
    
    
    
    
    
    
    131,209
    
    
    
    
    
    
    
    131,209Corporate notes and loans
    
    
    
    
    
    
    531,838
    
    
    
    
    
    
    
    531,838Foreign corporate bonds
    
    
    
    
    
    
    64,389
    
    
    
    
    
    
    
    64,389Total fixed
maturities
    
    
    121,554
    
    
    
    1,421,251
    
    
    
    
    
    
    
    1,542,805Preferred shares
    
    
    
    
    
    
    2,230
    
    
    
    
    
    
    
    2,230Common shares
    
    
    68,332
    
    
    
    
    
    
    
    
    
    
    
    68,332Other invested assets
    
    
    
    
    
    
    
    
    
    
    6,548
    
    
    
    6,548Total invested assets
    
    $
    189,886
    
    
    $
    1,423,481
    
    
    $
    6,548
    
    
    $
    1,619,915
 As of December 31, 2009
    
    Fair Value Measurements(Dollars in thousands)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalFixed maturities:U.S. treasury and agency obligations
    
    $
    82,021
    
    
    $
    154,067
    
    
    $
    
    
    
    $
    236,088Obligations of states and political subdivisions
    
    
    
    
    
    
    225,598
    
    
    
    
    
    
    
    225,598Mortgage-backed securities
    
    
    
    
    
    
    364,000
    
    
    
    
    
    
    
    364,000Commercial mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Asset-backed securities
    
    
    
    
    
    
    114,163
    
    
    
    
    
    
    
    114,163Corporate notes and loans
    
    
    
    
    
    
    460,730
    
    
    
    
    
    
    
    460,730Foreign corporate bonds
    
    
    
    
    
    
    70,993
    
    
    
    
    
    
    
    70,993Other bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total fixed maturities
    
    
    82,021
    
    
    
    1,389,551
    
    
    
    
    
    
    
    1,471,572Preferred shares
    
    
    579
    
    
    
    2,020
    
    
    
    
    
    
    
    2,599Common shares
    
    
    63,057
    
    
    
    
    
    
    
    
    
    
    
    63,057Other invested assets
    
    
    
    
    
    
    
    
    
    
    7,999
    
    
    
    7,999Total invested assets
    
    $
    145,657
    
    
    $
    1,391,571
    
    
    $
    7,999
    
    
    $
    1,545,227
   15




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
   OtherInvested(Dollars in thousands)
    
    AssetsBeginning balance at January 1, 2010
    
    $
    7,999Total losses (realized / unrealized):Included in equity in net loss of partnership
    
    
    (44
    )Included in accumulated other comprehensive income
    
    
    (1,339
    )Distribution
    
    
    (68
    )Ending balance at March 31, 2010
    
    $
    6,548Net unrealized losses included in net income for the period related to assets still held at March 31, 2010
    
    $
    (44
    )
   16




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  OtherInvested(Dollars in thousands)
    
    AssetsBeginning balance at January 1, 2009
    
    $
    46,672Total gains (losses) (realized / unrealized):Included in equity in net income of partnership
    
    
    207Included in accumulated other comprehensive income
    
    
    (10,501
    )Purchases
    
    
    52Sales
    
    
    (16,699
    )Ending balance at March 31, 2009
    
    $
    19,731Net unrealized gains included in net income for the period related to assets still held at March 31, 2009
    
    $
    207
  Fair Value of Alternative Investments
  FutureFunding(Dollars in thousands)
    
    Fair Value
    
    
    CommitmentsEquity Fund, LP (1)
    
    $
    4,219
    
    
    $
    2,569Real Estate Fund, LP (2)
    
    
    1,229
    
    
    
    High Yield Convertible Securities Fund, LP (3)
    
    
    1,100
    
    
    
    Total
    
    $
    6,548
    
    
    $
    2,569
 (1)
    
    This limited partnership invests in companies, from various business sectors, whereby
the partnership has acquired control of the operating business as a lead or organizing
investor. The Company does not have the contractual option to redeem its limited
partnership interest but receives distributions based on the liquidation of the
underlying assets. The Company does not have the ability to sell or transfer its
limited partnership interest without consent from the general partner.(2)
    
    This limited partnership invests in real estate assets through a combination of direct
or indirect investments in partnerships, limited liability companies, mortgage loans,
and lines of credit. The Company does not have the contractual option to redeem its
limited partnership interest but receives distributions based on the liquidation of the
underlying assets. The Company does not have the ability to sell or transfer its
limited partnership interest without consent from the general partner.(3)
    
    This limited partnership is a registered mutual fund which invests in a portfolio of
high yield convertible securities issued by companies with small to medium market
capitalizations and lower credit ratings (generally below investment grade). In
accordance with the partnership agreement, the Company has exercised its right to submit
a capital withdrawal request effective December 31, 2009. As of December 31, 2009, the
Company was unable to redeem a portion of its ownership interest in this limited
partnership with a fair market value of $1.1 million. This is related to convertible
preferred securities of one company which are subject to an Appraisal Action in Delaware
Court. The partnership decided to participate in the Appraisal Action to maximize the
value of its preferred share. Until the appraisal action is resolved, the claim
relating to the preferred share is wholly illiquid.  17




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Pricing
    
    
    Equity prices are received from all primary and secondary exchanges.
    
    Corporate notes are individually evaluated on a nominal spread or an option adjusted
spread basis depending on how the market trades a security or sector. Spreads are updated
each day and compared with those from the broker/dealer community and contributing firms.
Issues are generally benchmarked off of the U.S. treasuries or LIBOR.
    
    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 expected 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.
    
    Corporate loans are priced using averages of bids and offers obtained from the
broker/dealer community involved in trading such loans.
  18




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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 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
   (Dollars in thousands)
    
    March 31, 2010
    
    
    December 31, 2009Reinsurance receivables
    
    $
    520,708
    
    
    $
    543,351Collateral securing reinsurance receivables
    
    
    (356,658
    )
    
    
    (378,056
    )Reinsurance receivables, net of collateral
    
    $
    164,050
    
    
    $
    165,295Allowance for uncollectible reinsurance receivables
    
    $
    12,947
    
    
    $
    12,947Prepaid reinsurance premiums
    
    
    12,743
    
    
    
    16,546
  Property Catastrophe Excess of Loss
 Property Per Risk Excess of Loss
  19




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Professional Liability Excess of Loss
 Casualty Excess of Loss
 Casualty Clash Excess of Loss
 Property Quota Share
   20




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 5. Income Taxes
  Quarter Ended March 31, 2010:
    
    Non-U.S.
    
    
    U.S.(Dollars in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    61,646
    
    
    $
    54,071
    
    
    $
    (22,864
    )
    
    $
    92,853Net premiums written
    
    $
    60,867
    
    
    $
    20,614
    
    
    $
    
    
    
    $
    81,481Net premiums earned
    
    $
    47,041
    
    
    $
    23,747
    
    
    $
    
    
    
    $
    70,788Net investment income
    
    
    10,861
    
    
    
    8,265
    
    
    
    (4,547
    )
    
    
    14,579Net realized investment gains
    
    
    5,031
    
    
    
    9,173
    
    
    
    
    
    
    
    14,204Total revenues
    
    
    62,933
    
    
    
    41,185
    
    
    
    (4,547
    )
    
    
    99,571Losses and Expenses:Net losses and loss adjustment expenses
    
    
    25,954
    
    
    
    15,835
    
    
    
    
    
    
    
    41,789Acquisition costs and other underwriting expenses
    
    
    20,375
    
    
    
    9,773
    
    
    
    
    
    
    
    30,148Corporate and other operating expenses
    
    
    2,168
    
    
    
    2,728
    
    
    
    
    
    
    
    4,896Interest expense
    
    
    
    
    
    
    6,286
    
    
    
    (4,547
    )
    
    
    1,739Income before income taxes
    
    $
    14,436
    
    
    $
    6,563
    
    
    $
    
    
    
    $
    20,999
 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
    
    
    (2,098
    )
    
    
    (6,498
    )
    
    
    
    
    
    
    (8,596
    )Total revenues
    
    
    52,899
    
    
    
    43,769
    
    
    
    (4,547
    )
    
    
    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 before income taxes
    
    $
    5,632
    
    
    $
    2,106
    
    
    $
    
    
    
    $
    7,738
  Quarters Ended March 31,2010
    
    
    2009% of Pre-
    
    
    
    
    
    
    % of Pre-(Dollars in thousands)
    
    Amount
    
    
    Tax Income
    
    
    Amount
    
    
    Tax LossExpected tax provision at
weighted average rate
    
    $
    2,374
    
    
    
    11.3
    %
    
    $
    757
    
    
    
    9.8
    %Adjustments:Tax exempt interest
    
    
    (519
    )
    
    
    (2.5
    )
    
    
    (712
    )
    
    
    (9.2
    )Dividend exclusion
    
    
    (79
    )
    
    
    (0.4
    )
    
    
    (111
    )
    
    
    (1.4
    )Effective tax rate adjustment
    
    
    278
    
    
    
    1.3
    
    
    
    755
    
    
    
    9.8Other
    
    
    15
    
    
    
    0.2
    
    
    
    34
    
    
    
    0.3Income tax expense
    
    $
    2,069
    
    
    
    9.9
    %
    
    $
    723
    
    
    
    9.3
    %
  21




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
     6. Liability for Unpaid Losses and Loss Adjustment Expenses
   22




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Quarters Ended March 31,(Dollars in thousands)
    
    2010
    
    
    2009Unpaid losses and loss adjustment expenses at beginning of
period
    
    $
    1,257,741
    
    
    $
    1,506,429Less: Ceded reinsurance receivables on unpaid losses and
loss adjustment expenses
    
    
    527,413
    
    
    
    670,591Net balance at beginning of period
    
    
    730,328
    
    
    
    835,838Incurred losses and loss adjustment expenses related to:Current year
    
    
    44,627
    
    
    
    48,497Prior years (1)
    
    
    (2,838
    )(2)
    
    
    (757
    )(3)Total incurred losses and loss adjustment expenses
    
    
    41,789
    
    
    
    47,740Paid losses and loss adjustment expenses related to:Current year
    
    
    2,660
    
    
    
    3,197Prior years
    
    
    56,364
    
    
    
    71,093Total paid losses and loss adjustment expenses
    
    
    59,024
    
    
    
    74,290Net balance at end of period
    
    
    713,093
    
    
    
    809,288Plus: Ceded reinsurance receivables on unpaid losses and
loss adjustment expenses
    
    
    519,548
    
    
    
    637,686Unpaid losses and loss adjustment expenses at end of period
    
    $
    1,232,641
    
    
    $
    1,446,974
 (1)
    
    When analyzing loss reserves and prior year development, the
Company considers many factors, including the frequency and severity of
claims, loss credit trends, case reserve settlements that may have resulted
in significant development, and any other additional or pertinent factors
that may impact reserve estimates.(2)
    
    In the first quarter of 2010, the Company reduced its prior
accident year loss reserves by $2.8 million, which consisted of a $2.0
million reduction in general liability lines, a $0.6 million reduction in
professional liability lines, and a $0.2 million reduction in property
lines. The reduction in the general liability lines primarily related to
accident years 2006 and prior and was due to continued favorable emergence
on Penn America business.

The reduction to the professional liability lines primarily
consisted of net reductions of $1.0 million related to accident years 2007
and prior for our lawyers and real estate programs due to lower severity than
originally anticipated.  This reduction was partially offset by an increase of $0.4
 million related to accident years 2008 and 2009 for our real estate program, where loss
development was higher than expected during the quarter. The reduction in the property lines
primarily consisted of net reductions of $1.9 million primarily related to
accident years 2002 and 2006 through 2008 due to a recent large subrogation
recovery on a disputed claim, offset by an increase of $1.7 million
primarily related to accident year 2009 due to higher than expected claim
development.(3)
    
    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. Related Party Transactions
 Fox Paine & Company
    23




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Cozen OConnor
  Validus Reinsurance, Ltd.
  
    
    $30.0 million in excess of $30.0 million, which expired on May 31, 2007;
 
    
    $25.0 million in excess of $5.0 million, which expired on May 31, 2007;
 
    
    $100.0 million in excess of $10.0 million, which expired on May 31, 2008; and
 
    
    $70.0 million in excess of $10.0 million, which expired on May 31, 2009.
   Quarters Ended March 31,(Dollars in thousands)
    
    2010
    
    
    2009Ceded written premium
    
    $
    (2,401
    )(1)
    
    $
    408Ceded losses
    
    
    644
    
    
    
    6,400
 (1)
    
    Represents an adjustment to
true up the Companys estimated amount of ceded
premium to actual.  8. Commitments and Contingencies
 Legal Proceedings
   24




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
   9. Share-Based Compensation Plans
  10. Earnings Per Share
     25




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  (Dollars in thousands,
    
    Quarters Ended March 31,except per share data)
    
    2010
    
    
    2009Net income
    
    $
    18,901
    
    
    $
    7,150Basic earnings per share:Weighted average shares outstanding  basic
    
    
    60,369,087
    
    
    
    31,461,439Adjustment for bonus element of Rights Offering
    
    
    
    
    
    
    3,574,722Adjusted weighted average shares outstanding  basic
    
    
    60,369,087
    
    
    
    35,036,161Net income per basic share
    
    $
    0.31
    
    
    $
    0.20Diluted earnings per share:Weighted average shares outstanding  diluted
    
    
    60,408,839
    
    
    
    31,507,123Adjustment for bonus element of Rights Offering
    
    
    
    
    
    
    3,574,722Adjusted weighted average shares outstanding  diluted
    
    
    60,408,839
    
    
    
    35,081,845Net income per diluted share
    
    $
    0.31
    
    
    $
    0.20
  Quarters Ended March 31,2010
    
    
    2009Weighted average shares for basic earnings per share
    
    
    60,369,087
    
    
    
    35,036,161Non-vested restricted stock
    
    
    39,752
    
    
    
    27,886Options
    
    
    
    
    
    
    17,798Weighted average shares for diluted earnings per share
    
    
    60,408,839
    
    
    
    35,081,845
  11. Segment Information
    26




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Quarter Ended March 31, 2010:
    
    Insurance
    
    
    Reinsurance(Dollars in thousands)
    
    Operations (1)
    
    
    Operations (2)
    
    
    TotalRevenues:Gross premiums written
    
    $
    54,071
    
    
    $
    38,782
    
    
    $
    92,853Net premiums written
    
    $
    43,478
    
    
    $
    38,003
    
    
    $
    81,481Net premiums earned
    
    $
    49,744
    
    
    $
    21,044
    
    
    $
    70,788Losses and Expenses:Net losses and loss adjustment expenses
    
    
    29,714
    
    
    
    12,075
    
    
    
    41,789Acquisition costs and other underwriting expenses
    
    
    22,700
    (3)
    
    
    7,448
    (4)
    
    
    30,148Income (loss) from segments
    
    $
    (2,670
    )
    
    $
    1,521
    
    
    
    (1,149
    )Unallocated Items:Net investment income
    
    
    
    
    
    
    
    
    
    
    14,579Net realized investment gains
    
    
    
    
    
    
    
    
    
    
    14,204Corporate and other operating expenses
    
    
    
    
    
    
    
    
    
    
    (4,896
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (1,739
    )Income before income taxes
    
    
    
    
    
    
    
    
    
    
    20,999Income tax expense
    
    
    
    
    
    
    
    
    
    
    2,069Income before equity in net loss of partnership
    
    
    
    
    
    
    
    
    
    
    18,930Equity in net loss of partnership, net of tax
    
    
    
    
    
    
    
    
    
    
    (29
    )Net income
    
    
    
    
    
    
    
    
    
    $
    18,901Total assets
    
    $
    1,775,927
    
    
    $
    640,714
    (5)
    
    $
    2,416,641
 (1)
    
    Includes business ceded to Reinsurance Operations.(2)
    
    External business only, excluding business assumed from Insurance Operations.(3)
    
    Includes federal excise tax of $260 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. Quarter Ended March 31, 2009:
    
    Insurance
    
    
    Reinsurance(Dollars in thousands)
    
    Operations (1)
    
    
    Operations (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.  27




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 12. Supplemental Cash Flow Information
  Quarters Ended March 31,(Dollars in thousands)
    
    2010
    
    
    2009Net U.S. federal income taxes paid
(recovered)
    
    $
    
    
    
    $
    (7,812
    )Interest paid
    
    
    3,124
    
    
    
    3,326
 13. Subsequent Events
    28




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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
      29




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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.
   30




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UNITED AMERICA INDEMNITY, LTD.
        31




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UNITED AMERICA INDEMNITY, LTD.
        32




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UNITED AMERICA INDEMNITY, LTD.
  Gross Reserves(Dollars in thousands)
    
    Case
    
    
    IBNR (1)
    
    
    TotalInsurance Operations
    
    $
    396,162
    
    
    $
    791,504
    
    
    $
    1,187,666Reinsurance Operations
    
    
    11,974
    
    
    
    33,001
    
    
    
    44,975Total
    
    $
    408,136
    
    
    $
    824,505
    
    
    $
    1,232,641
 Net Reserves (2)(Dollars in thousands)
    
    Case
    
    
    IBNR (1)
    
    
    TotalInsurance Operations
    
    $
    230,361
    
    
    $
    438,439
    
    
    $
    668,800Reinsurance Operations
    
    
    11,850
    
    
    
    32,443
    
    
    
    44,293Total
    
    $
    242,211
    
    
    $
    470,882
    
    
    $
    713,093
 (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.      33




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UNITED AMERICA INDEMNITY, LTD.
   Severity Change(Dollars in thousands)
    
    
    
    
    
    -10%
    
    
    -5%
    
    
    0%
    
    
    5%
    
    
    10%Frequency Change
    
    
    -5
    %
    
    $
    (6,471
    )
    
    $
    (4,351
    )
    
    $
    (2,231
    )
    
    $
    (112
    )
    
    $
    2,008-3
    %
    
    
    (5,668
    )
    
    
    (3,503
    )
    
    
    (1,339
    )
    
    
    826
    
    
    
    2,990-2
    %
    
    
    (5,266
    )
    
    
    (3,079
    )
    
    
    (893
    )
    
    
    1,294
    
    
    
    3,481-1
    %
    
    
    (4,864
    )
    
    
    (2,655
    )
    
    
    (446
    )
    
    
    1,763
    
    
    
    3,9720
    %
    
    
    (4,463
    )
    
    
    (2,231
    )
    
    
    
    
    
    
    2,231
    
    
    
    4,4631
    %
    
    
    (4,061
    )
    
    
    (1,807
    )
    
    
    446
    
    
    
    2,700
    
    
    
    4,9542
    %
    
    
    (3,659
    )
    
    
    (1,383
    )
    
    
    893
    
    
    
    3,169
    
    
    
    5,4443
    %
    
    
    (3,258
    )
    
    
    (959
    )
    
    
    1,339
    
    
    
    3,637
    
    
    
    5,9355
    %
    
    
    (2,454
    )
    
    
    (112
    )
    
    
    2,231
    
    
    
    4,574
    
    
    
    6,917
  Recoverability of Reinsurance Receivables
  Investments
   34




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UNITED AMERICA INDEMNITY, LTD.
  Fair Value Measurements
  Intangible Assets
   Taxation
    35




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UNITED AMERICA INDEMNITY, LTD.
   Our Business Segments
     36




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UNITED AMERICA INDEMNITY, LTD.
  Quarters Ended March 31,(Dollars in thousands)
    
    2010
    
    
    2009Insurance Operations premiums written:Gross premiums written
    
    $
    54,071
    
    
    $
    67,620Ceded premiums written
    
    
    10,593
    
    
    
    12,151Net premiums written
    
    $
    43,478
    
    
    $
    55,469Reinsurance Operations premiums written:Gross premiums written
    
    $
    38,782
    
    
    $
    31,568Ceded premiums written
    
    
    779
    
    
    
    424Net premiums written
    
    $
    38,003
    
    
    $
    31,144Revenues: (1)Insurance Operations
    
    $
    49,744
    
    
    $
    70,720Reinsurance Operations
    
    
    21,044
    
    
    
    7,820Total revenues
    
    $
    70,788
    
    
    $
    78,540Expenses: (2)Insurance Operations (3)
    
    $
    52,414
    
    
    $
    71,886Reinsurance Operations (4)
    
    
    19,523
    
    
    
    6,668Total expenses
    
    $
    71,937
    
    
    $
    78,554Income (loss) from segments:Insurance Operations
    
    $
    (2,670
    )
    
    $
    (1,166
    )Reinsurance Operations
    
    
    1,521
    
    
    
    1,152Total income (loss) from segments
    
    $
    (1,149
    )
    
    $
    (14
    )Insurance combined ratio analysis: (5)Insurance OperationsLoss ratio
    
    
    59.7
    
    
    
    60.4Expense ratio
    
    
    45.6
    
    
    
    41.2Combined ratio
    
    
    105.3
    
    
    
    101.6Reinsurance OperationsLoss ratio
    
    
    57.4
    
    
    
    63.9Expense ratio
    
    
    35.4
    
    
    
    21.4Combined ratio
    
    
    92.8
    
    
    
    85.3ConsolidatedLoss ratio
    
    
    59.0
    
    
    
    60.8Expense ratio
    
    
    42.6
    
    
    
    39.2Combined ratio
    
    
    101.6
    
    
    
    100.0
 (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 $260 and $370 related to cessions from our U.S. Insurance Companies to
Wind River Reinsurance for the quarters ended March 31, 2010 and 2009, 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.  37




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UNITED AMERICA INDEMNITY, LTD.
 Results of Operations
  Quarter Ended March 31, 2010 Compared with the Quarter Ended March 31, 2009
 Insurance Operations
  Quarters Ended March 31,
    
    
    Increase / (Decrease)(Dollars in thousands)
    
    2010
    
    
    2009
    
    
    $
    
    
    %Gross premiums written
    
    $
    54,071
    
    
    $
    67,620
    
    
    $
    (13,549
    )
    
    
    -20.0
    %Net premiums written
    
    $
    43,478
    
    
    $
    55,469
    
    
    $
    (11,991
    )
    
    
    -21.6
    %Net premiums earned
    
    $
    49,744
    
    
    $
    70,720
    
    
    $
    (20,976
    )
    
    
    -29.7
    %Losses and expenses:Net losses and loss adjustment expenses
    
    
    29,714
    
    
    
    42,744
    
    
    
    (13,030
    )
    
    
    -30.5
    %Acquisition costs and other
underwriting expenses (1)
    
    
    22,700
    
    
    
    29,142
    
    
    
    (6,442
    )
    
    
    -22.1
    %Loss from underwriting
    
    $
    (2,670
    )
    
    $
    (1,166
    )
    
    $
    (1,504
    )
    
    
    129.0
    %Underwriting Ratios:Loss ratio:Current accident year
    
    
    63.9
    
    
    
    61.6
    
    
    
    2.3Prior accident year
    
    
    (4.2
    )
    
    
    (1.2
    )
    
    
    (3.0
    )Calendar year
    
    
    59.7
    
    
    
    60.4
    
    
    
    (0.7
    )Expense ratio
    
    
    45.6
    
    
    
    41.2
    
    
    
    4.4Combined ratio
    
    
    105.3
    
    
    
    101.6
    
    
    
    3.7
 (1)
    
    Includes excise tax of $260 and $370 related to cessions from our U.S. Insurance
Companies to Wind River Reinsurance for the quarters ended March 31, 2010 and 2009,
respectively. Premiums
      38




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UNITED AMERICA INDEMNITY, LTD.
 Net Losses and Loss Adjustment Expenses
   
    
    In 2010, we reduced our prior accident year loss reserves by $2.1 million, which reduced
our loss ratio by 4.2 points. The reduction of our prior accident year loss reserves
primarily consisted of a $2.0 million reduction in our general liability lines and a $0.6
million reduction in our professional liability lines, offset by a $0.5 million increase in
our property lines:
 1.
    
    The reduction in the general liability lines primarily consisted of net
reductions related to accident years 2006 and prior primarily due to continued
favorable emergence on Penn America business.2.
    
    The reduction to the professional liability lines primarily consisted
of net reductions of $1.0 million related to accident years 2007 and prior for our
lawyers and real estate programs due to lower severity than originally anticipated.
This reduction was partially offset by an increase of $0.4 million related to
accident year 2009 for our real estate program, where loss development was higher
than expected during the quarter.3.
    
    The increase in the property lines primarily consisted of an increase
of $2.4 million related to accident year 2009 that was due to higher than expected
claim development, partially offset by net reductions of
$1.9 million primarily related to
accident years 2002 and 2006 through 2008 that were due to a recent large
subrogation recovery on a disputed claim.
 
    
    In 2009, we reduced our allowance for uncollectible reinsurance by $0.8 million due to
the decrease in the amount of our carried reinsurance receivables.
  
    
    The current accident year property loss ratio increased 7.1 points from 54.1% in the
quarter ended March 31, 2009 to 61.2% in the quarter ended March 31, 2010, which consists
of a 8.0 point increase in the non-catastrophe loss ratio from 51.4% in the quarter ended
March 31, 2009 to 59.4% in the quarter ended March 31, 2010 and a 0.9 point decrease in the
catastrophe loss ratio from 2.7% in the quarter ended March 31, 2009 to 1.8% in the quarter
ended March 31, 2010. The increase in the non-catastrophe loss ratio is primarily due to
higher reinsurance costs. Non-catastrophe losses were $11.4 million and $14.7 million for
the quarters ended March 31, 2010 and 2009, respectively. Property net premiums earned for
the quarters ended March 31, 2010 and 2009 were $19.2 million and $28.7 million,
respectively.
 
    
    The current accident year casualty loss ratio decreased 1.0 points from 66.6% in the
quarter ended March 31, 2009 to 65.6% in the quarter ended March 31, 2010 primarily due to
changes in our mix of business. Casualty net premiums earned for the quarters ended March
31, 2010 and 2009 were $30.5 million and $42.0 million, respectively.
   39




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Acquisition Costs and Other Underwriting Expenses
  
    
    The decrease in acquisition costs is primarily due to a decrease in commissions
resulting from a decrease in net premiums earned.
 
    
    The decrease in other underwriting expenses is primarily due to a decrease in total
compensation expenses and professional services expenses, offset by an increase in
infrastructure costs related to new product development, information technology upgrades,
and additional office locations.
 Expense and Combined Ratios
   Loss from underwriting
   40




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Reinsurance Operations
  Quarters Ended March 31,
    
    
    Increase / (Decrease)(Dollars in thousands)
    
    2010
    
    
    2009
    
    
    $
    
    
    %Gross premiums written
    
    $
    38,782
    
    
    $
    31,568
    
    
    $
    7,214
    
    
    
    22.9
    %Net premiums written
    
    $
    38,003
    
    
    $
    31,144
    
    
    $
    6,859
    
    
    
    22.0
    %Net premiums earned
    
    $
    21,044
    
    
    $
    7,820
    
    
    $
    13,224
    
    
    
    169.1
    %Losses and expenses:Net losses and loss adjustment expenses
    
    
    12,075
    
    
    
    4,996
    
    
    
    7,079
    
    
    
    141.7
    %Acquisition costs and other
underwriting expenses
    
    
    7,448
    
    
    
    1,672
    
    
    
    5,776
    
    
    
    345.5
    %Income (loss) from underwriting
    
    $
    1,521
    
    
    $
    1,152
    
    
    $
    369
    
    
    
    32.0
    %Underwriting Ratios:Loss ratio:Current accident year
    
    
    61.0
    
    
    
    63.5
    
    
    
    (2.5
    )Prior accident year
    
    
    (3.6
    )
    
    
    0.4
    
    
    
    (4.0
    )Calendar year loss ratio
    
    
    57.4
    
    
    
    63.9
    
    
    
    (6.5
    )Expense ratio
    
    
    35.4
    
    
    
    21.4
    
    
    
    14.0Combined ratio
    
    
    92.8
    
    
    
    85.3
    
    
    
    7.5
 Premiums
     Net Losses and Loss Adjustment Expenses
   41




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  
    
    In 2010, we reduced our prior accident year loss reserves by
$0.7 million, which reduced our loss ratio by 3.6 points. This reduction is primarily due to a reduction of $0.7
million in our property lines that is primarily due to a 2009 reinsurance treaty. There were also
offsetting adjustments made to our general liability and professional liability lines for
accident years 2007 through 2009 that resulted in no net change.
 
    
    In 2009, we increased our prior accident year loss reserves by $0.03 million, which
primarily consisted of
increases of $0.02 million in our property lines and $0.01 million in our general liability
lines. The increases to the property and general liability lines were related to accident
year 2008.
   Acquisition Costs and Other Underwriting Expenses
  Expense and Combined Ratios
   Income from underwriting
   42




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UNITED AMERICA INDEMNITY, LTD.
 Unallocated Corporate Items
  Quarters Ended March 31,
    
    
    Increase / (Decrease)(Dollars in thousands)
    
    2010
    
    
    2009
    
    
    $
    
    
    %Net investment income
    
    $
    14,579
    
    
    $
    22,177
    
    
    $
    (7,598
    )
    
    
    -34.3
    %Net realized investment gains (losses)
    
    
    14,204
    
    
    
    (8,596
    )
    
    
    22,800
    
    
    NMCorporate and other operating expenses
    
    
    (4,896
    )
    
    
    (3,975
    )
    
    
    (921
    )
    
    
    23.2
    %Interest expense
    
    
    (1,739
    )
    
    
    (1,854
    )
    
    
    115
    
    
    
    -6.2
    %Income tax expense
    
    
    (2,069
    )
    
    
    (723
    )
    
    
    (1,346
    )
    
    
    186.2
    %Equity in net income (loss) of
partnership, net of tax
    
    
    (29
    )
    
    
    135
    
    
    
    (164
    )
    
    NM
 NM 
    
    Not meaningful. Net Investment Income
  
    
    Gross investment income, excluding realized gains and losses, was $16.0 million for the
quarter ended March 31, 2010, compared with $23.3 million for the quarter ended March 31,
2009, a decrease of $7.3 million or 31.3%. The decrease was primarily due to less income
from our limited partnership investments which had 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, 2010. Excluding limited partnership
distributions, gross investment income for the quarter ended March 31, 2010 increased 0.9%
compared to the quarter ended March 31, 2009. Cash and invested assets, net of payable for
securities purchased of $36.0 million, increased to $1,695.1 million as of March 31, 2010,
from $1,574.7 million as of March 31, 2009, an increase of $120.4 million or 7.6% primarily
due to the Rights Offering, which was completed in the second quarter of 2009. While our
cash and invested assets, net of payable for securities purchased, increased, the yields on
fixed maturities significantly decreased from March 31, 2009.
 
    
    Investment expenses were $1.4 million for the quarter ended March 31, 2010, compared
with $1.1 million for the quarter ended March 31, 2009, an increase of $0.3 million or
27.0%. The increase was primarily due to additional fees related to our investment in
corporate loans.
  Net Realized Investment Gains (Losses)
   43




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  Corporate and Other Operating Expenses
  Interest Expense
  Income Tax Expense
   Equity in Net Income (Loss) of Partnerships
  Net Income
  Liquidity and Capital Resources
 Sources and Uses of Funds
   44




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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.
  45




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  Quarters Ended March 31,2010
    
    
    2009
    
    
    ChangeNet premiums collected
    
    $
    65,078
    
    
    $
    65,553
    (1)
    
    $
    (475
    )Net losses paid
    
    
    (44,246
    )
    
    
    (70,472
    )(2)
    
    
    26,226Acquisition costs and other underwriting
expenses
    
    
    (45,044
    )
    
    
    (36,973
    )
    
    
    (8,071
    )Net investment income
    
    
    16,312
    
    
    
    24,606
    
    
    
    (8,294
    )Net federal income taxes recovered
    
    
    190
    
    
    
    7,968
    
    
    
    (7,778
    )Interest paid
    
    
    (3,123
    )
    
    
    (3,326
    )
    
    
    203Other
    
    
    (6
    )
    
    
    (23
    )
    
    
    17Net cash used for operating activities
    
    $
    (10,839
    )
    
    $
    (12,667
    )
    
    $
    1,828
 (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 did not begin to be collected until the
second quarter of 2009.(2)
    
    Includes losses resulting from Hurricane Ike, which made landfall in
August 2008.  Liquidity
  Capital Resources
  Off Balance Sheet Arrangements
  Cautionary Note Regarding Forward-Looking Statements
   46




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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
   47




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
 PART II-OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
  
 Item 1A.
    
    Risk Factors
  Our Operating Results and Shareholders Equity May Be Adversely Affected by Currency Fluctuations.
  
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    48




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UNITED AMERICA INDEMNITY, LTD.
  ApproximateTotal Number of
    
    
    Dollar ValueShares Purchased
    
    
    of Shares ThatTotal Number
    
    
    Average
    
    
    as Part of Publicly
    
    
    May Yet Beof Shares
    
    
    Price Paid
    
    
    Announced Plan
    
    
    Purchased Under thePeriod (1)
    
    Purchased
    
    
    Per Share
    
    
    or Program
    
    
    Plan or Program (2)January 1-31, 2010
    
    
    10,119
    (3)
    
    $
    7.99
    
    
    
    
    
    
    $
    February 1-28, 2010
    
    
    6,080
    (3)
    
    $
    6.98
    
    
    
    
    
    
    $
    March 1-31, 2010
    
    
    119
    (4)
    
    $
    3.50
    
    
    
    
    
    
    $
    Total
    
    
    16,318
    
    
    $
    7.58
    
    
    
    
    
    
    
    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.(4)
    
    Repurchased as a result of the Rights Offering. 
 Item 6.
    
    Exhibits
 31.1+
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the Securities Exchange of 1934,
as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2+
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the Securities Exchange of 1934,
as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1+
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2+
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 +
    
    Filed herewith.  49




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UNITED AMERICA INDEMNITY, LTD.
 
 SIGNATURE
  UNITED AMERICA INDEMNITY, LTD.
RegistrantMay 10 2010
    
    By:
    
    /s/ Thomas M. McGeehanDate: May 10, 2010
    
    
    
    Thomas M. McGeehanChief Financial Officer(Authorized Signatory andPrincipal Financial and Accounting Officer)
  50