##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2006
 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
P.O. BOX 908GT
GEORGE TOWN, GRAND CAYMAN
CAYMAN ISLANDS
 (345) 949-0100
 þ o
  o þ o
 o þ




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##### 



TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Consolidated Balance Sheets
As of September 30, 2006 (Unaudited) and December 31, 2005
    
    
    1Consolidated Statements of Operations
Quarters and Nine Months Ended September 30, 2006 and 2005 (Unaudited)
    
    
    2Consolidated Statements of Comprehensive Income
Quarters and Nine Months Ended September 30, 2006 and 2005 (Unaudited)
    
    
    3Consolidated Statements of Changes in Shareholders Equity
As of September 30, 2006 (Unaudited) and December 31, 2005
    
    
    4Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2006 and 2005 (Unaudited)
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    43Item 4.
    
    Controls and Procedures
    
    
    45PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    46Item 1A.
    
    Risk Factors
    
    
    46Item 6.
    
    Exhibits
    
    
    47Signatures
    
    
    
    
    48Certification pursuant to Rule 13a-14(a)/15d-14(a)Certification pursuant to Rule 13a-14(a)/15d-14(a)Certification pursuant to Rule 13a-14(a)/15d-14(a)Certification pursuant to 18 U.S.C. Section 1350Certification pursuant to 18 U.S.C. Section 1350Certification pursuant to 18 U.S.C. Section 1350
   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. (corporate name
changed from U.N. Holdings II, Inc. on September 15, 2005), U.N. Holdings Inc. (liquidated as
of May 31, 2006), Wind River Investment Corporation (liquidated as of May 31, 2006), American
Insurance Service, Inc., Emerald Insurance Company, Penn-America Group, Inc., our U.S.
Insurance Operations and our Agency Operations;3)
    
    UAI Group refers to our U.S. Insurance Operations;4)
    
    our U.S. Insurance Operations refers to the insurance and related operations conducted by
American Insurance Service, Inc.s subsidiaries, including American Insurance Adjustment
Agency, Inc., International Underwriters, LLC, J.H. Ferguson & Associates, LLC, the United
National Insurance Companies and the Penn-America Insurance Companies;5)
    
    the United National Insurance Companies refers to the insurance and related operations
conducted by United National Insurance Company and its subsidiaries, including Diamond State
Insurance Company, United National Casualty Insurance Company, and United National Specialty
Insurance Company;6)
    
    the Penn-America Insurance Companies refers to the insurance and related operations of
Penn-America Insurance Company, Penn-Star Insurance Company, and Penn-Patriot Insurance
Company;7)
    
    Penn-America refers to Penn-America Group, Inc. and its subsidiaries;8)
    
    the Insurance Operations refers to the U.S. Insurance Operations and the Non-U.S. Insurance
Operations;9)
    
    the Agency Operations refers to the now discontinued operations of Penn Independent
Corporation, PIC Holdings, Inc., Penn Independent Financial Services, Inc., Penn Oceanic
Insurance Co., Ltd. (Barbados), Residential Underwriting Agency, Inc.,




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##### Table of Contents



Stratus Insurance Services, Inc. (sold effective December 31, 2005), Stratus Web Builder, Inc.
(sold effective December 31, 2005), Apex Insurance Agency, Inc., Apex Insurance Services of
Illinois, Inc., Summit Risk Services, Inc., Delaware Valley Underwriting Agency, Inc. (DVUA),
DVUA Pittsburgh, Inc., DVUA Massachusetts, Inc., DVUA of New York, Inc., DVUA of New Jersey,
Inc., DVUA West Virginia, Inc., DVUA North Carolina, Inc., DVUA of Ohio, Inc., DVUA South
Carolina, Inc., and DVUA Virginia, Inc.;10)
    
    Penn Independent refers to Penn Independent Corporation and its subsidiaries;11)
    
    our Non-U.S. Insurance Operations refers to the insurance and reinsurance and related
operations of Wind River Barbados and Wind River Bermuda;12)
    
    our Non-U.S. Subsidiaries refers to our Non-U.S. Insurance Operations, U.A.I. (Gibraltar)
Limited (liquidated as of May 31, 2006), U.A.I. (Gibraltar) II Limited (liquidated as of May
31, 2006), the Luxembourg Companies, U.A.I. (Ireland) Limited, and Wind River Services, Ltd.;13)
    
    Wind River Barbados refers to Wind River Insurance Company (Barbados) Ltd.;14)
    
    Wind River Bermuda refers to Wind River
Reinsurance Company, Ltd.;15)
    
    the Luxembourg Companies refers to U.A.I. (Luxembourg) I S.ar.l., U.A.I. (Luxembourg) II
S.ar.l., U.A.I. (Luxembourg) III S.ar.l., U.A.I. (Luxembourg) IV S.ar.l., U.A.I. (Luxembourg)
Investment S.ar.l., and Wind River (Luxembourg) S.ar.l.;16)
    
    AIS refers to America Insurance Service, Inc.;17)
    
    United National refers to the United National Insurance Companies, and Emerald Insurance
Company;18)
    
    Fox Paine & Company refers to Fox Paine & Company, LLC and affiliated investment funds;19)
    
    GAAP refers to accounting principles generally accepted in the United States of America;
and20)
    
    $ or dollars refers to U.S. dollars.




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##### Table of Contents



PART
I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Balance Sheets
 (Unaudited)September 30, 2006
    
    
    December 31, 2005Bonds:Available for sale securities, at fair value
(amortized cost: $1,255,834 and $1,092,137)
    
    $
    1,250,643
    
    
    $
    1,085,624Preferred shares:Available for sale securities, at fair value
(cost: $3,938 and $6,563)
    
    
    4,209
    
    
    
    6,400Common shares:Available for sale securities, at fair value
(cost: $57,887 and $56,654)
    
    
    66,739
    
    
    
    59,602Other invested assets
(cost: $24,674 and $25,942)
    
    
    57,486
    
    
    
    52,427Total investments
    
    
    1,379,077
    
    
    
    1,204,053Cash and cash equivalents
    
    
    253,137
    
    
    
    220,122Accounts receivable
    
    
    25,077
    
    
    
    24,235Agents balances
    
    
    88,485
    
    
    
    78,669Reinsurance receivables
    
    
    1,045,020
    
    
    
    1,278,156Accrued investment income
    
    
    13,317
    
    
    
    12,260Federal income taxes receivable
    
    
    
    
    
    
    415Deferred federal income taxes
    
    
    18,492
    
    
    
    21,646Deferred acquisition costs
    
    
    61,259
    
    
    
    59,339Receivable for securities
    
    
    1,936
    
    
    
    Goodwill
    
    
    84,246
    
    
    
    101,854Intangible assets
    
    
    23,780
    
    
    
    30,852Prepaid reinsurance premiums
    
    
    40,404
    
    
    
    41,688Other assets
    
    
    20,797
    
    
    
    33,324Total assets
    
    $
    3,055,027
    
    
    $
    3,106,613Liabilities:Unpaid losses and loss adjustment expenses
    
    $
    1,760,434
    
    
    $
    1,914,224Unearned premiums
    
    
    288,438
    
    
    
    272,552Federal income taxes payable
    
    
    7,115
    
    
    
    Amounts held for the account of others
    
    
    17,859
    
    
    
    22,781Ceded balances payable
    
    
    13,439
    
    
    
    22,895Insurance premium payable
    
    
    26,598
    
    
    
    25,252Contingent commissions
    
    
    7,699
    
    
    
    11,061Senior notes payable
    
    
    90,000
    
    
    
    90,000Junior subordinated debentures
    
    
    61,857
    
    
    
    61,857Notes and loans payable
    
    
    5,721
    
    
    
    6,455Other liabilities
    
    
    51,827
    
    
    
    39,547Total liabilities
    
    
    2,330,987
    
    
    
    2,466,624Commitments and contingencies (Note 9)
    
    
    
    
    
    
    Minority interest
    
    
    
    
    
    
    62Shareholders equity:Common shares, $0.0001 par value, 900,000,000
common shares authorized, 24,198,765 and
23,868,402 Class A common shares issued and
outstanding, respectively, and 12,687,500 Class
B common shares issued and outstanding
    
    
    4
    
    
    
    4Preferred shares, $0.0001 par value, 100,000,000
shares authorized, none issued and outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    510,146
    
    
    
    504,541Accumulated other comprehensive income
    
    
    17,858
    
    
    
    9,471Retained earnings
    
    
    196,032
    
    
    
    125,911Total shareholders equity
    
    
    724,040
    
    
    
    639,927Total
    
    $
    3,055,027
    
    
    $
    3,106,613
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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Operations
 (Unaudited)
    
    
    (Unaudited)Quarter Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Gross premiums written
    
    $
    167,862
    
    
    $
    163,593
    
    
    $
    494,715
    
    
    $
    462,955Net premiums written
    
    $
    145,654
    
    
    $
    134,863
    
    
    $
    423,679
    
    
    $
    380,678Net premiums earned
    
    $
    137,327
    
    
    $
    121,987
    
    
    $
    406,508
    
    
    $
    343,901Net investment income
    
    
    15,569
    
    
    
    11,041
    
    
    
    47,184
    
    
    
    34,023Net realized investment (losses) gains
    
    
    (1,423
    )
    
    
    572
    
    
    
    (1,384
    )
    
    
    350Total revenues
    
    
    151,473
    
    
    
    133,600
    
    
    
    452,308
    
    
    
    378,274Losses and Expenses:Net losses and loss adjustment expenses
    
    
    75,643
    
    
    
    80,693
    
    
    
    235,071
    
    
    
    215,511Acquisition costs and other underwriting expenses
    
    
    43,559
    
    
    
    37,619
    
    
    
    129,647
    
    
    
    102,065Corporate and other operating expenses
    
    
    2,876
    
    
    
    2,483
    
    
    
    11,077
    
    
    
    10,658Interest expense
    
    
    3,063
    
    
    
    2,664
    
    
    
    8,741
    
    
    
    6,760Income before income taxes
    
    
    26,332
    
    
    
    10,141
    
    
    
    67,772
    
    
    
    43,280Income tax expense
    
    
    5,118
    
    
    
    1,363
    
    
    
    8,841
    
    
    
    1,886Income before minority interest and equity
in net income of partnership
    
    
    21,214
    
    
    
    8,778
    
    
    
    58,931
    
    
    
    41,394Minority interest
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    2Equity in net (loss) income of partnership
    
    
    (39
    )
    
    
    631
    
    
    
    533
    
    
    
    1,056Income before discontinued operations
    
    
    21,175
    
    
    
    9,402
    
    
    
    59,464
    
    
    
    42,452Discontinued operations, net of taxes
    
    
    10,914
    
    
    
    845
    
    
    
    10,657
    
    
    
    416Income before extraordinary gain
    
    
    32,089
    
    
    
    10,247
    
    
    
    70,121
    
    
    
    42,868Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,426Net income
    
    $
    32,089
    
    
    $
    10,247
    
    
    $
    70,121
    
    
    $
    44,294Per share data:Income from continuing operations:Basic
    
    $
    0.57
    
    
    $
    0.26
    
    
    $
    1.62
    
    
    $
    1.19Diluted
    
    $
    0.57
    
    
    $
    0.26
    
    
    $
    1.60
    
    
    $
    1.17Discontinued operations:Basic
    
    $
    0.30
    
    
    $
    0.02
    
    
    $
    0.29
    
    
    $
    0.01Diluted
    
    $
    0.29
    
    
    $
    0.02
    
    
    $
    0.29
    
    
    $
    0.01Extraordinary gain:Basic
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.04Diluted
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.04Net income:Basic
    
    $
    0.87
    
    
    $
    0.28
    
    
    $
    1.91
    
    
    $
    1.24Diluted
    
    $
    0.86
    
    
    $
    0.28
    
    
    $
    1.89
    
    
    $
    1.22Weighted-average number of shares outstanding:Basic
    
    
    36,679,847
    
    
    
    36,437,908
    
    
    
    36,637,068
    
    
    
    35,704,208Diluted
    
    
    37,097,902
    
    
    
    37,118,156
    
    
    
    37,089,548
    
    
    
    36,388,955
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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Comprehensive Income
 (Unaudited)
    
    
    (Unaudited)Quarter Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    32,089
    
    
    $
    10,247
    
    
    $
    70,121
    
    
    $
    44,294Other
comprehensive income (loss), net of tax:Unrealized gains (losses) on securities:Unrealized holding gains (losses) arising during period
    
    
    24,975
    
    
    
    (7,603
    )
    
    
    7,448
    
    
    
    (4,441
    )Less:
Reclassification adjustment for (losses) gains included in net income
    
    
    (925
    )
    
    
    359
    
    
    
    (939
    )
    
    
    252Other comprehensive income (loss), net of tax
    
    
    25,900
    
    
    
    (7,962
    )
    
    
    8,387
    
    
    
    (4,693
    )Comprehensive income, net of tax
    
    $
    57,989
    
    
    $
    2,285
    
    
    $
    78,508
    
    
    $
    39,601
  3




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Changes in Shareholders Equity
 (Unaudited)Nine Months Ended
    
    
    Year EndedSeptember 30, 2006
    
    
    December 31, 2005Number of Class A common shares:Number at beginning of period
    
    
    23,868,402
    
    
    
    15,585,653Class A common shares issued in merger
    
    
    
    
    
    
    7,930,536Class A common shares issued under share
incentive plans
    
    
    313,896
    
    
    
    322,479Class A common shares issued to directors
    
    
    16,467
    
    
    
    29,734Number at end of period
    
    
    24,198,765
    
    
    
    23,868,402Number of Class B common shares:Number at beginning of period
    
    
    12,687,500
    
    
    
    12,687,500Number at end of period
    
    
    12,687,500
    
    
    
    12,687,500Par value of Class A common shares:Balance at beginning of period
    
    $
    3
    
    
    $
    2Class A common shares issued
    
    
    
    
    
    
    1Balance 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
    
    $
    504,541
    
    
    $
    356,725Contributed capital from common shares
    
    
    
    
    
    
    142,925Share compensation plans
    
    
    5,605
    
    
    
    5,865Other
    
    
    
    
    
    
    (974
    )Balance at end of period
    
    $
    510,146
    
    
    $
    504,541Accumulated other comprehensive income,
net of deferred income tax:Balance at beginning of period
    
    $
    9,471
    
    
    $
    15,507Other comprehensive income (loss)
    
    
    8,387
    
    
    
    (6,036
    )Balance at end of period
    
    $
    17,858
    
    
    $
    9,471Retained earnings:Balance at beginning of period
    
    $
    125,911
    
    
    $
    60,318Net income
    
    
    70,121
    
    
    
    65,593Balance at end of period
    
    $
    196,032
    
    
    $
    125,911Total shareholders equity
    
    $
    724,040
    
    
    $
    639,927
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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Cash Flows
 (Unaudited)Nine Months Ended September 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    70,121
    
    
    $
    44,294Adjustments to reconcile net income to net cash provided by
operating activities:Amortization of trust preferred securities issuance costs
    
    
    176
    
    
    
    135Amortization and depreciation
    
    
    1,483
    
    
    
    1,419Restricted stock expense
    
    
    5,406
    
    
    
    2,840Extraordinary gain
    
    
    
    
    
    
    (1,426
    )Gain on disposal of assets
    
    
    (10,103
    )
    
    
    Impairment losses recognized
    
    
    36
    
    
    
    Deferred federal income taxes
    
    
    7,184
    
    
    
    (1,899
    )Amortization of bond premium and discount, net
    
    
    3,697
    
    
    
    5,046Net realized investment losses (gains)
    
    
    1,384
    
    
    
    (350
    )Equity in net income of partnerships
    
    
    (533
    )
    
    
    (1,058
    )Changes in:Agents balances
    
    
    (8,127
    )
    
    
    (7,461
    )Account receivables
    
    
    3,946
    
    
    
    15,024Reinsurance receivables
    
    
    233,136
    
    
    
    210,527Unpaid losses and loss adjustment expenses
    
    
    (153,790
    )
    
    
    (134,574
    )Unearned premiums
    
    
    15,886
    
    
    
    33,699Ceded balances payable
    
    
    (9,456
    )
    
    
    1,483Insurance premiums payable
    
    
    (278
    )
    
    
    (14,927
    )Other assets and liabilities, net
    
    
    14,523
    
    
    
    1,212Amounts held for the account of others
    
    
    (4,922
    )
    
    
    1,904Contingent commissions
    
    
    (3,377
    )
    
    
    (1,131
    )Prepaid reinsurance premiums
    
    
    1,284
    
    
    
    3,080Federal income taxes receivable
    
    
    (5,551
    )
    
    
    (451
    )Deferred acquisition costs
    
    
    (2,521
    )
    
    
    (26,159
    )Other  net
    
    
    (95
    )
    
    
    (2,118
    )Net cash provided by operating activities
    
    
    159,509
    
    
    
    129,109Cash flows from investing activities:Proceeds from sale of bonds
    
    
    281,337
    
    
    
    193,696Proceeds from sale of stocks
    
    
    30,977
    
    
    
    29,693Proceeds from maturity of bonds
    
    
    120,031
    
    
    
    38,046Proceeds from sale of other invested assets
    
    
    1,305
    
    
    
    10,201Purchase of bonds
    
    
    (573,752
    )
    
    
    (397,317
    )Purchase of stocks
    
    
    (29,036
    )
    
    
    (17,253
    )Purchase of other invested assets
    
    
    (21
    )
    
    
    (913
    )Acquisition of business, net of cash acquired
    
    
    
    
    
    
    (58,529
    )Proceeds from disposition of assets
    
    
    43,200
    
    
    
    Net cash used for investing activities
    
    
    (125,959
    )
    
    
    (202,376
    )Cash flows from financing activities:Borrowing under credit facility
    
    
    3,259
    
    
    
    3,490Repayments of credit facility
    
    
    (3,387
    )
    
    
    (3,869
    )Excess tax benefit from share-based compensation plans
    
    
    199
    
    
    
    Dividends paid to minority shareholders
    
    
    
    
    
    
    (22
    )Capital lease obligations
    
    
    
    
    
    
    (238
    )Decrease in term debt
    
    
    
    
    
    
    (592
    )Issuance of senior notes payable
    
    
    
    
    
    
    90,000Retirement of senior notes payable to related party
    
    
    
    
    
    
    (72,848
    )Principal payments of term debt
    
    
    (606
    )
    
    
    Net cash (used for) provided by financing activities
    
    
    (535
    )
    
    
    15,921Net change in cash and cash equivalents
    
    
    33,015
    
    
    
    (57,346
    )Cash and cash equivalents at beginning of period
    
    
    220,122
    
    
    
    242,123Cash and cash equivalents at end of period
    
    $
    253,137
    
    
    $
    184,777
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UNITED AMERICA INDEMNITY, LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Principles of Consolidation and Basis of Presentation
         2. Sale of Assets of Agency Operations
  6




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UNITED AMERICA INDEMNITY, LTD.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  Quarter Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    11,439
    
    
    $
    13,086
    
    
    $
    31,583
    
    
    $
    30,809Intercompany eliminations
    
    
    (666
    )
    
    
    (654
    )
    
    
    (2,459
    )
    
    
    (2,010
    )Net revenues
    
    $
    10,773
    
    
    $
    12,432
    
    
    $
    29,124
    
    
    $
    28,799Pretax income
    
    $
    1,611
    
    
    $
    1,687
    
    
    $
    2,127
    
    
    $
    1,660Intercompany eliminations
    
    
    (195
    )
    
    
    (337
    )
    
    
    (1,091
    )
    
    
    (1,036
    )Net pretax income
    
    $
    1,416
    
    
    $
    1,350
    
    
    $
    1,036
    
    
    $
    624
  Quarter Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Income from Agency
Operations, net of
tax
    
    $
    811
    
    
    $
    845
    
    
    $
    554
    
    
    $
    416Gain on sale of
assets including
one-time charges, net
of tax
    
    
    10,103
    
    
    
    
    
    
    
    10,103
    
    
    
    Income from
discontinued
operations, net of
tax
    
    $
    10,914
    
    
    $
    845
    
    
    $
    10,657
    
    
    $
    416
 3. Investments
    Gross Unrealized LossesCost or
    
    
    
    
    
    
    
    
    
    
    Between(Dollars in
    
    Number of
    
    
    
    
    
    
    Amortized
    
    
    
    
    
    
    Six Months
    
    
    Seven Months
    
    
    Greater thanthousands)
    

Securities
(1)
    
    
    Fair Value
    
    
    Cost
    
    
    Total
    
    
    or Less
    
    
    and One Year
    
    

One
Year (2)Bonds
    
    
    404
    
    
    $
    734,682
    
    
    $
    748,507
    
    
    $
    13,825
    
    
    $
    80
    
    
    $
    4,528
    
    
    $
    9,217Preferred Stock
    
    
    2
    
    
    
    1,048
    
    
    
    1,107
    
    
    
    59
    
    
    
    59
    
    
    
    
    
    
    
    Common Stock
    
    
    9
    
    
    
    6,301
    
    
    
    6,819
    
    
    
    518
    
    
    
    40
    
    
    
    478
    
    
    
    $
    14,402
    
    
    $
    179
    
    
    $
    5,006
    
    
    $
    9,217
 
 (1)
    
    Gross unrealized losses as of September 30, 2006 were
determined by analyzing each security on an individual basis rather
than on a per lot basis.(2)
    
    At September 30, 2006, the Company had 217 bonds that were in an unrealized loss position for
greater than one year. The Company has analyzed these securities and
has determined that they should not be impaired. The Company has the
ability to hold these investments until maturity or until market
value exceeds amortized cost. 99.7% of these securities are investment grade. 7




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Gross Unrealized LossesCost or
    
    
    
    
    
    
    
    
    
    
    Between(Dollars
in
    
    Number of
    
    
    
    
    
    
    Amortized
    
    
    
    
    
    
    Six Months
    
    
    Seven Months
    
    
    Greater thanthousands)
    

Securities
(1)
    
    
    Fair Value
    
    
    Cost
    
    
    Total
    
    
    or Less
    
    
    and One Year
    
    
    One YearBonds
    
    
    815
    
    
    $
    725,048
    
    
    $
    737,510
    
    
    $
    12,462
    
    
    $
    5,554
    
    
    $
    6,877
    
    
    $
    31Preferred Stock
    
    
    5
    
    
    
    3,039
    
    
    
    3,423
    
    
    
    384
    
    
    
    36
    
    
    
    348
    
    
    
    Common Stock
    
    
    138
    
    
    
    29,673
    
    
    
    30,483
    
    
    
    810
    
    
    
    746
    
    
    
    64
    
    
    
    $
    13,656
    
    
    $
    6,336
    
    
    $
    7,289
    
    
    $
    31
 
 (1)
    
    Gross unrealized losses as of December 31, 2005 were
determined by analyzing securities in lots.       Quarter Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Bonds
    
    $
    44
    
    
    $
    
    
    
    $
    44
    
    
    $
    Preferred stock
    
    
    
    
    
    
    
    
    
    
    167
    
    
    
    Common stock
    
    
    
    
    
    
    719
    
    
    
    37
    
    
    
    819Total
    
    $
    44
    
    
    $
    719
    
    
    $
    248
    
    
    $
    819
  8




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  4. Reinsurance
     Quarter Ended September 30,
    
    Nine Months Ended September 30,(Dollars in thousands)
    
    2006
    
    2005
    
    2006
    
    2005Earned premium
    
    $
    21,933
    
    
    $
    28,730
    
    
    $
    72,322
    
    
    $
    85,356Commissions
    
    
    5,058
    
    
    
    5,044
    
    
    
    16,928
    
    
    
    16,073Incurred losses (1) (2)
    
    
    (56,609
    )
    
    
    11,572
    
    
    
    (28,807
    )
    
    
    (25,731
    )
 
 (1)
    
    As a result of the Companys quarterly review of unpaid losses and loss adjustment
expenses in the third quarter of 2006, the Company reduced gross and ceded unpaid loss
and loss adjustment expenses related to prior periods by $70.0 million and $65.0 million,
respectively.(2)
    
    As a result of the Companys quarterly review of unpaid losses and loss adjustment
expenses in the second quarter of 2005, the Company reduced gross and ceded unpaid loss
and loss adjustment expenses related to prior periods by $79.2 million.   9




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
       5. Income Taxes
  10




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Quarter Ended
    
    
    Quarter EndedSeptember 30, 2006
    
    
    September 30, 2005% of Pre-
    
    
    
    
    
    
    % of Pre-Amount
    
    
    Tax Income
    
    
    Amount
    
    
    Tax IncomeExpected tax
provision at
weighted average
rate
    
    $
    6,187
    
    
    
    23.5
    %
    
    $
    3,024
    
    
    
    29.8
    %Adjustments:Tax exempt interest
    
    
    (808
    )
    
    
    (3.1
    )
    
    
    (1,285
    )
    
    
    (12.7
    )Dividend exclusion
    
    
    (108
    )
    
    
    (0.4
    )
    
    
    (84
    )
    
    
    (0.8
    )Other
    
    
    (153
    )
    
    
    (0.6
    )
    
    
    (292
    )
    
    
    (2.9
    )Income tax expense
    
    $
    5,118
    
    
    
    19.4
    %
    
    $
    1,363
    
    
    
    13.4
    %
 Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    September 30, 2005% of Pre-
    
    
    
    
    
    
    % of Pre-Amount
    
    
    Tax Income
    
    
    Amount
    
    
    Tax IncomeExpected tax
provision at
weighted average
rate
    
    $
    12,577
    
    
    
    18.6
    %
    
    $
    5,356
    
    
    
    12.4
    %Adjustments:Tax exempt interest
    
    
    (3,409
    )
    
    
    (5.1
    )
    
    
    (3,846
    )
    
    
    (8.9
    )Dividend exclusion
    
    
    (336
    )
    
    
    (0.5
    )
    
    
    (238
    )
    
    
    (0.5
    )Other
    
    
    9
    
    
    
    
    
    
    
    614
    
    
    
    1.4Income tax expense
    
    $
    8,841
    
    
    
    13.0
    %
    
    $
    1,886
    
    
    
    4.4
    %
    11




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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
    (Dollars in thousands)
    
    September 30, 2006
    
    
    December 31, 2005
    
    
    Increase/ (Decrease)Katrina first landfall
    
    $
    653
    
    
    $
    1,250
    
    
    $
    (597
    )Katrina second landfall
    
    
    37,441
    
    
    
    30,600
    
    
    
    6,841Rita
    
    
    3,800
    
    
    
    3,400
    
    
    
    400Wilma
    
    
    8,700
    
    
    
    7,700
    
    
    
    1,000Total
    
    $
    50,594
    
    
    $
    42,950
    
    
    $
    7,644
  (Dollars in thousands)
    
    September 30, 2006
    
    
    December 31, 2005
    
    
    Increase/ (Decrease)Katrina first landfall
    
    $
    210
    
    
    $
    560
    
    
    $
    (350
    )Katrina second landfall
    
    
    6,329
    
    
    
    2,400
    
    
    
    3,929Rita
    
    
    3,600
    
    
    
    3,000
    
    
    
    600Wilma
    
    
    2,000
    
    
    
    2,000
    
    
    
    Total
    
    $
    12,139
    
    
    $
    7,960
    
    
    $
    4,179
  12




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 7. Notes and Loans Payable
 Notes Payable
   Loans Payable
  8. Related Party Transactions
    13




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
      9. Commitments and Contingencies
 Legal Proceedings
   10. Share-Based Compensation
   14




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
      WeightedAverageNumber of
    
    Exercise PriceShares
    
    Per ShareOptions outstanding at December 31, 2005
    
    
    1,545,055
    
    
    $
    11.35Options forfeited
    
    
    (185,162
    )
    
    $
    16.05Options exercised
    
    
    (141,336
    )
    
    $
    10.96Options outstanding at
September 30, 2006
    
    
    1,218,557
    
    
    $
    12.65Options exercisable at
September 30, 2006
    
    
    674,686
    
    
    $
    12.40
 15




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Number of options
    
    Weighted AverageOption Price
    
    exercisable
    
    Remaining Life$  6.50
    
    
    56,074$  8.49
    
    
    11,084$10.00
    
    
    361,937$14.62
    
    
    4,000$17.00
    
    
    102,166$17.81
    
    
    124,425$18.27
    
    
    10,000$18.40
    
    
    1,000$19.40
    
    
    4,000Options exercisable at September
30, 2006
    
    
    674,686
    
    
    2.3 years
  Nine Months Ended September 30,2006
    
    2005Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    23.0
    %
    
    
    23.0
    %Risk-free interest rate
    
    
    3.8
    %
    
    
    3.8
    %Expected option life
    

5 years

    
    5 yearsForfeiture rate
    
    
    10.2
    %
    
    
    N/A
  Number of options
    
    Weighted AverageExercise Price
    
    outstanding
    
    Remaining Life (in Years)$  6.50
    
    
    56,074
    
    
    
    6.9$  8.49
    
    
    11,084
    
    
    
    8.3$10.00
    
    
    694,874
    
    
    
    6.9$14.62
    
    
    10,000
    
    
    
    7.8$17.00
    
    
    222,100
    
    
    
    7.2$17.81
    
    
    124,425
    
    
    
    8.6$18.27
    
    
    50,000
    
    
    
    8.3$18.40
    
    
    5,000
    
    
    
    8.4$18.85
    
    
    25,000
    
    
    
    9.1$19.40
    
    
    20,000
    
    
    
    8.8Options outstanding at
September 30, 2006
    
    
    1,218,557
    
    
    
    7.3
  16




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
   WeightedAverageNumber of
    
    Exercise PriceShares
    
    Per ShareNon-vested restricted stock at December 31, 2005
    
    
    83,571
    
    
    $
    17.96Stock issued
    
    
    190,168
    
    
    
    21.66Stock vested
    
    
    (84,699
    )
    
    
    21.21Non-vested restricted stock at
September 30, 2006
    
    
    189,040
    
    
    
    20.71
 Recent Equity Awards
  17




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 11. Earnings Per Share
   Quarter Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands, except per share data)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Income from continuing operations
    
    $
    21,175
    
    
    $
    9,402
    
    
    $
    59,464
    
    
    $
    42,452Discontinued operations
    
    
    10,914
    
    
    
    845
    
    
    
    10,657
    
    
    
    416Income before extraordinary gain
    
    
    32,089
    
    
    
    10,247
    
    
    
    70,121
    
    
    
    42,868Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,426Net income
    
    $
    32,089
    
    
    $
    10,247
    
    
    $
    70,121
    
    
    $
    44,294Basic earnings per share:Weighted average shares for basic earnings per share
    
    
    36,679,847
    
    
    
    36,437,908
    
    
    
    36,637,068
    
    
    
    35,704,208Income from continuing operations
    
    $
    0.57
    
    
    $
    0.26
    
    
    $
    1.62
    
    
    $
    1.19Discontinued operations
    
    
    0.30
    
    
    
    0.02
    
    
    
    0.29
    
    
    
    0.01Income before extraordinary gain
    
    
    0.87
    
    
    
    0.28
    
    
    
    1.91
    
    
    
    1.20Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.04Net income
    
    $
    0.87
    
    
    $
    0.28
    
    
    $
    1.91
    
    
    $
    1.24Diluted earnings per share:Weighted average shares for diluted earnings per
share
    
    
    37,097,902
    
    
    
    37,118,156
    
    
    
    37,089,548
    
    
    
    36,388,955Income from continuing operations
    
    $
    0.57
    
    
    $
    0.26
    
    
    $
    1.60
    
    
    $
    1.17Discontinued operations
    
    
    0.29
    
    
    
    0.02
    
    
    
    0.29
    
    
    
    0.01Income before extraordinary gain
    
    
    0.86
    
    
    
    0.28
    
    
    
    1.89
    
    
    
    1.18Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.04Net income
    
    $
    0.86
    
    
    $
    0.28
    
    
    $
    1.89
    
    
    $
    1.22
  Quarter Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Weighted average shares for basic earnings per share
    
    
    36,679,847
    
    
    
    36,437,908
    
    
    
    36,637,068
    
    
    
    35,704,208Non-vested restricted stock
    
    
    47,120
    
    
    
    
    
    
    
    31,991
    
    
    
    Options and warrants
    
    
    370,936
    
    
    
    680,248
    
    
    
    420,489
    
    
    
    684,747Weighted average shares for diluted earnings per
share
    
    
    37,097,902
    
    
    
    37,118,156
    
    
    
    37,089,548
    
    
    
    36,388,955
 12. Segment Information
   18




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Quarter Ended September 30, 2006:
    
    Insurance(Dollars in thousands)
    
    Operations
    
    
    Corporate
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    167,862
    
    
    $
    
    
    
    $
    
    
    
    $
    167,862Net premiums written
    
    $
    145,654
    
    
    $
    
    
    
    $
    
    
    
    $
    145,654Net premiums earned
    
    $
    137,327
    
    
    $
    
    
    
    $
    
    
    
    $
    137,327Net investment income
    
    
    
    
    
    
    15,569
    
    
    
    
    
    
    
    15,569Net realized investment losses
    
    
    
    
    
    
    (1,423
    )
    
    
    
    
    
    
    (1,423
    )Total revenues
    
    
    137,327
    
    
    
    14,146
    
    
    
    
    
    
    
    151,473Losses and Expenses:Net losses and loss adjustment expenses
    
    
    75,643
    
    
    
    
    
    
    
    
    
    
    
    75,643Acquisition costs and other underwriting
expenses
    
    
    44,037
    
    
    
    
    
    
    
    (478
    )
    
    
    43,559Corporate and other operating expenses
    
    
    
    
    
    
    2,601
    
    
    
    275
    
    
    
    2,876Interest expense
    
    
    
    
    
    
    3,063
    
    
    
    
    
    
    
    3,063Income before income taxes
    
    $
    17,647
    
    
    $
    8,482
    
    
    $
    203
    
    
    
    26,332Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,118Income before equity in net income of
partnerships
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,214Equity in net income of partnerships
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39
    )Income before discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,175Discontinued operations, net of eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,914Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    32,089
 Quarter Ended September 30, 2005:
    
    Insurance(Dollars in thousands)
    
    Operations
    
    
    Corporate
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    163,593
    
    
    $
    
    
    
    $
    
    
    
    $
    163,593Net premiums written
    
    $
    134,863
    
    
    $
    
    
    
    $
    
    
    
    $
    134,863Net premiums earned
    
    $
    121,987
    
    
    $
    
    
    
    $
    
    
    
    $
    121,987Net investment income
    
    
    
    
    
    
    11,041
    
    
    
    
    
    
    
    11,041Net realized investment gains
    
    
    
    
    
    
    572
    
    
    
    
    
    
    
    572Total revenues
    
    
    121,987
    
    
    
    11,613
    
    
    
    
    
    
    
    133,600Losses and Expenses:Net losses and loss adjustment expenses
    
    
    80,693
    
    
    
    
    
    
    
    
    
    
    
    80,693Acquisition costs and other underwriting
expenses
    
    
    37,934
    
    
    
    
    
    
    
    (315
    )
    
    
    37,619Corporate and other operating expenses
    
    
    
    
    
    
    2,483
    
    
    
    
    
    
    
    2,483Interest expense
    
    
    
    
    
    
    2,664
    
    
    
    
    
    
    
    2,664Income before income taxes
    
    $
    3,360
    
    
    $
    6,466
    
    
    $
    315
    
    
    
    10,141Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,363Income before equity in net income of
partnerships
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,778Equity in net income of partnerships
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    624Income before discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,402Discontinued operations, net of eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    845Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    10,247
 19




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Nine Months Ended September 30, 2006:
    
    Insurance(Dollars in thousands)
    
    Operations
    
    
    Corporate
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    494,715
    
    
    $
    
    
    
    $
    
    
    
    $
    494,715Net premiums written
    
    $
    423,679
    
    
    $
    
    
    
    $
    
    
    
    $
    423,679Net premiums earned
    
    $
    406,508
    
    
    $
    
    
    
    $
    
    
    
    $
    406,508Net investment income
    
    
    
    
    
    
    47,184
    
    
    
    
    
    
    
    47,184Net realized investment losses
    
    
    
    
    
    
    (1,384
    )
    
    
    
    
    
    
    (1,384
    )Total revenues
    
    
    406,508
    
    
    
    45,800
    
    
    
    
    
    
    
    452,308Losses and Expenses:Net losses and loss adjustment expenses
    
    
    235,071
    
    
    
    
    
    
    
    
    
    
    
    235,071Acquisition costs and other underwriting
expenses
    
    
    131,274
    
    
    
    
    
    
    
    (1,627
    )
    
    
    129,647Corporate and other operating expenses
    
    
    
    
    
    
    10,415
    
    
    
    662
    
    
    
    11,077Interest expense
    
    
    
    
    
    
    8,741
    
    
    
    
    
    
    
    8,741Income before income taxes
    
    $
    40,163
    
    
    $
    26,644
    
    
    $
    965
    
    
    
    67,772Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,841Income before equity in net income of
partnerships
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,931Equity in net income of partnerships
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    533Income before discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59,464Discontinued operations, net of eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,657Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    70,121Total Assets
    
    $
    3,055,027
    
    
    $
    
    
    
    $
    
    
    
    $
    3,055,027
 Nine Months Ended September 30, 2005:
    
    Insurance(Dollars in thousands)
    
    Operations
    
    
    Corporate
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    462,955
    
    
    $
    
    
    
    $
    
    
    
    $
    462,955Net premiums written
    
    $
    380,678
    
    
    $
    
    
    
    $
    
    
    
    $
    380,678Net premiums earned
    
    $
    343,901
    
    
    $
    
    
    
    $
    
    
    
    $
    343,901Net investment income
    
    
    
    
    
    
    34,023
    
    
    
    
    
    
    
    34,023Net realized investment gains
    
    
    
    
    
    
    350
    
    
    
    
    
    
    
    350Total revenues
    
    
    343,901
    
    
    
    34,373
    
    
    
    
    
    
    
    378,274Losses and Expenses:Net losses and loss adjustment expenses
    
    
    215,511
    
    
    
    
    
    
    
    
    
    
    
    215.511Acquisition costs and other underwriting
expenses
    
    
    102,689
    
    
    
    
    
    
    
    (624
    )
    
    
    102,065Corporate and other operating expenses
    
    
    
    
    
    
    10,658
    
    
    
    
    
    
    
    10,658Interest expense
    
    
    
    
    
    
    6,760
    
    
    
    
    
    
    
    6,760Income before income taxes
    
    $
    25,701
    
    
    $
    16,955
    
    
    $
    (624
    )
    
    
    43,280Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,886Income before equity in net income of
partnerships
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,394Equity in net income of partnerships
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,058Income before discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,452Discontinued operations, net of eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    416Income before extraordinary gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,868Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,426Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    44,294Total Assets
    
    $
    3,141,575
    
    
    $
    
    
    
    $
    
    
    
    $
    3,141,575
 20




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 13. Supplemental Cash Flow Information
 Taxes and Interest Paid
 Quarter Ended September 30,
    
    Nine Months Ended September 30,(Dollars in thousands)
    
    2006
    
    2005
    
    2006
    
    2005Net federal income taxes paid
    
    $
    2,500
    
    
    $
    1,750
    
    
    $
    6,500
    
    
    $
    4,733Interest paid
    
    
    4,398
    
    
    
    4,234
    
    
    
    9,981
    
    
    
    6,482
 14. Restructuring
   15. New Accounting Pronouncements
    21




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  22




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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
     23




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UNITED AMERICA INDEMNITY, LTD.
   Critical Accounting Estimates and Policies
  Liability For Unpaid Losses And Loss Adjustment Expenses
     24




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UNITED AMERICA INDEMNITY, LTD.
    PercentageBalance of Net
    
    Change In Net
    
    Increase(Dollars in thousands)
    
    Loss and Net
    
    Loss and Net
    
    (Decrease) inHypothetical Change in Net Loss and
    
    Loss Adjustment
    
    Loss Adjustment
    
    ShareholdersLoss Adjustment Expense Reserves
    

Expense
Reserves (1)
    
    Expense Reserves
    

Equity (2)7.5% increase
    
    $
    776,000
    
    
    $
    54,140
    
    
    
    (6.2
    )%5.0% increase
    
    
    757,953
    
    
    
    36,093
    
    
    
    (4.1
    )%2.5% increase
    
    
    739,907
    
    
    
    18,047
    
    
    
    (2.1
    )%As recorded on September 30, 2006
    
    
    721,860
    
    
    
    
    
    
    
    2.5% decrease
    
    
    703,814
    
    
    
    (18,047
    )
    
    
    2.1
    %5.0% decrease
    
    
    685,767
    
    
    
    (36,093
    )
    
    
    4.1
    %7.5% decrease
    
    
    667,721
    
    
    
    (54,140
    )
    
    
    6.2
    %
 
 (1)
    
    Does not include reinsurance receivable on paid losses or
reserve for uncollectible reinsurance.(2)
    
    This presumes that the change in reserves is pro-rata across the entire
portfolio of loss reserves for the purpose of determining the net effect on
shareholders equity. Recoverability of Reinsurance Receivables
  Investments
   25




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UNITED AMERICA INDEMNITY, LTD.
    Gross Unrealized LossesCost or
    
    
    
    
    
    
    Six
    
    
    Between(Dollars in
    
    Number of
    
    
    
    
    
    
    Amortized
    
    
    
    
    
    
    Months or
    
    
    Seven Months
    
    
    Greater thanthousands)
    

Securities
(1)
    
    
    Fair Value
    
    
    Cost
    
    
    Total
    
    
    Less
    
    
    and One Year
    
    

One Year (2)Bonds
    
    
    404
    
    
    $
    734,682
    
    
    $
    748,507
    
    
    $
    13,825
    
    
    $
    80
    
    
    $
    4,528
    
    
    $
    9,217Preferred Stock
    
    
    2
    
    
    
    1,048
    
    
    
    1,107
    
    
    
    59
    
    
    
    59
    
    
    
    
    
    
    
    Common Stock
    
    
    9
    
    
    
    6,301
    
    
    
    6,819
    
    
    
    518
    
    
    
    40
    
    
    
    478
    
    
    
    $
    14,402
    
    
    $
    179
    
    
    $
    5,006
    
    
    $
    9,217
 
 (1)
    
    Gross unrealized losses as of September 30, 2006 were
determined by analyzing each security on an individual basis rather
than on a per lot basis.(2)
    
    At September 30, 2006, we had 217 bonds that were in an unrealized loss position for
greater than one year. We have analyzed these securities and have
determined that they should not be impaired. We have the ability to
hold these investments until maturity or until market value exceeds
amortized cost. 99.7% of these securities are investment grade.   Quarter Ended September 30,
    
    
    Nine Months Ended September 30,(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Bonds
    
    $
    44
    
    
    $
    
    
    
    $
    44
    
    
    $
    Preferred stock
    
    
    
    
    
    
    
    
    
    
    167
    
    
    
    Common stock
    
    
    
    
    
    
    719
    
    
    
    37
    
    
    
    819Total
    
    $
    44
    
    
    $
    719
    
    
    $
    248
    
    
    $
    819
 Goodwill and Intangible Assets
   26




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Taxation
    Our Business Segments
    27




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  Quarter Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Insurance Operations premiums written:Gross premiums written
    
    $
    167,862
    
    
    $
    163,593
    
    
    $
    494,715
    
    
    $
    462,955Ceded premiums written
    
    
    22,208
    
    
    
    28,730
    
    
    
    71,036
    
    
    
    82,277Net premiums written
    
    $
    145,654
    
    
    $
    134,863
    
    
    $
    423,679
    
    
    $
    380,678Revenues: (1)Insurance Operations
    
    $
    137,327
    
    
    $
    121,987
    
    
    $
    406,508
    
    
    $
    343,901Corporate
    
    
    14,146
    
    
    
    11,613
    
    
    
    45,800
    
    
    
    34,373Total revenues
    
    $
    151,473
    
    
    $
    133,600
    
    
    $
    452,308
    
    
    $
    378,274Expenses: (1)Insurance Operations
    
    $
    119,680
    
    
    $
    118,627
    
    
    $
    366,345
    
    
    $
    318,200Corporate
    
    
    5,664
    
    
    
    5,147
    
    
    
    19,156
    
    
    
    17,418Subtotal
    
    
    125,344
    
    
    
    123,774
    
    
    
    385,501
    
    
    
    335,618Intercompany eliminations
    
    
    (203
    )
    
    
    (315
    )
    
    
    (965
    )
    
    
    (624
    )Net expenses
    
    $
    125,141
    
    
    $
    123,459
    
    
    $
    384,536
    
    
    $
    334,994Income
before income taxes: (1)Insurance Operations
    
    $
    17,647
    
    
    $
    3,360
    
    
    $
    40,163
    
    
    $
    25,701Corporate
    
    
    8,482
    
    
    
    6,466
    
    
    
    26,644
    
    
    
    16,955Subtotal
    
    
    26,129
    
    
    
    9,826
    
    
    
    66,807
    
    
    
    42,656Intercompany eliminations
    
    
    203
    
    
    
    315
    
    
    
    965
    
    
    
    624Total income before income taxes
    
    $
    26,332
    
    
    $
    10,141
    
    
    $
    67,772
    
    
    $
    43,280Insurance
combined ratio analysis: (2)Before purchase accounting adjustments:Net losses and loss adjustment expense ratio
    
    
    55.1
    
    
    
    63.6
    
    
    
    57.8
    
    
    
    59.4Other underwriting expense ratio
    
    
    31.7
    
    
    
    33.5
    
    
    
    31.9
    
    
    
    33.3Combined ratio
    
    
    86.8
    
    
    
    97.1
    
    
    
    89.7
    
    
    
    92.7Impact of purchase accounting adjustmentsNet losses and loss adjustment expense ratio
    
    
    
    
    
    
    2.5
    
    
    
    
    
    
    
    3.3Other underwriting expense ratio
    
    
    
    
    
    
    (2.7
    )
    
    
    
    
    
    
    (3.6
    )Combined ratio
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    (0.3
    )As reported, after purchase accounting adjustments:Net losses and loss adjustment expense ratio
    
    
    55.1
    
    
    
    66.1
    
    
    
    57.8
    
    
    
    62.7Other underwriting expense ratio
    
    
    31.7
    
    
    
    30.8
    
    
    
    31.9
    
    
    
    29.7Combined ratio
    
    
    86.8
    
    
    
    96.9
    
    
    
    89.7
    
    
    
    92.4
 
 (1)
    
    Excludes the results of our Agency Operations which have been classified as discontinued
operations for 2006 and 2005.(2)
    
    Our insurance combined ratios are non-GAAP financial measures that are generally viewed
as indicators of underwriting profitability. The net losses and loss adjustment expense
ratio is the ratio of net losses and loss adjustment expenses to net premiums earned. The
underwriting expense ratio is the ratio of acquisition costs and other underwriting
expenses to net premiums earned. The combined ratio is the ratio of the sum of net losses,
loss adjustment expenses, acquisition costs, and other underwriting expenses to net
premiums earned. Results of Operations
 Quarter Ended September 30, 2006 Compared with the Quarter Ended September 30, 2005
 Premiums
  28




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UNITED AMERICA INDEMNITY, LTD.
  Quarter Ended
    
    
    Quarter Ended
    
    
    Increase /(Dollars in thousands)
    
    September 30, 2006
    
    
    September 30, 2005
    
    
    (Decrease)Penn-America product
    
    $
    102,638
    
    
    $
    94,232
    
    
    $
    8,406United National Class Specific (1)
    
    
    30,912
    
    
    
    30,858
    
    
    
    54United National Professional
    
    
    15,217
    
    
    
    24,429
    
    
    
    (9,212
    )United National Brokerage
    
    
    14,114
    
    
    
    6,248
    
    
    
    7,866United National Umbrella / Excess
    
    
    4,981
    
    
    
    7,826
    
    
    
    (2,845
    )Total United National products
    
    
    65,224
    
    
    
    69,361
    
    
    
    (4,137
    )Total
    
    $
    167,862
    
    
    $
    163,593
    
    
    $
    4,269
 
 (1)
    
    This product class includes gross written premiums of the Non-U.S.
Insurance Operations of $0.003 million and $0.1 million for the quarters ended
September 30, 2006 and 2005, respectively. 
    
    Penn-America gross premiums written increased $8.4 million largely due to an
increase in property premium offset by a slight reduction in casualty premium.
    
    United National gross premiums written decreased $4.1 million. United National realized
growth in its property brokerage premium line; however, this increase was offset by a
decline in the professional product class, mainly resulting from a reduction in public
officials premium and a decrease in umbrella premium.
   Quarter Ended
    
    
    Quarter Ended
    
    
    Increase /(Dollars in thousands)
    
    September 30, 2006
    
    
    September 30, 2005
    
    
    (Decrease)Penn-America product
    
    $
    94,625
    
    
    $
    82,341
    
    
    $
    12,284United National Class Specific (1)
    
    
    26,868
    
    
    
    24,852
    
    
    
    2,016United National Professional
    
    
    13,344
    
    
    
    20,974
    
    
    
    (7,630
    )United National Brokerage
    
    
    10,371
    
    
    
    5,103
    
    
    
    5,268United National Umbrella / Excess
    
    
    446
    
    
    
    1,593
    
    
    
    (1,147
    )Total United National products
    
    
    51,029
    
    
    
    52,522
    
    
    
    (1,493
    )Total
    
    $
    145,654
    
    
    $
    134,863
    
    
    $
    10,791
 
 (1)
    
    This product class includes net premiums written of the Non-U.S. Insurance
Operations of $0.003 million and $0.1 million for the quarters ended September
30, 2006 and 2005, respectively. 
    
    Penn-America net premiums written increased $12.3 million due to an increase in
property premium and increased retentions relating to Penn-Americas casualty reinsurance
treaties.
    
    United National net premiums written decreased $1.5 million. United National realized
growth in its property brokerage and class specific lines; however, this increase was
offset by a decline in the professional product class that mainly resulted from a reduction
in public officials premium and a decrease in umbrella premium.
  29




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UNITED AMERICA INDEMNITY, LTD.
 Net Investment Income
  
    
    Gross investment income, excluding realized gains and losses, was $17.4 million for the
quarter ended September 30, 2006, compared with $12.6 million for the quarter ended
September 30, 2005, an increase of $4.8 million or 38.5%. The increase was primarily due
to increasing investment yields and an increase in cash and invested assets. Cash and
invested assets grew to $1,632.2 million as of September 30, 2006, from $1,424.2 million as
of December 31, 2005, an increase of $208.0 million or 14.6%. Gross investment income in
the quarter ended September 30, 2006 also included $0.4 million in distributions from our
limited partnership investments compared to distributions of $0.1 million in the quarter
ended September 30, 2005.
    
    Investment expenses were $1.9 million for the quarter ended September 30, 2006, compared
with $1.5 million for the quarter ended September 30, 2005, an increase of $0.3 million or
20.8%. The increase was primarily due to higher investment manager fees based on a higher
average portfolio market value in 2006 compared to 2005.
  Net Realized Investment Gains (Losses)
  Net Losses and Loss Adjustment Expenses
   30




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UNITED AMERICA INDEMNITY, LTD.
   (Dollars in thousands)
    
    September 30, 2006
    
    
    June 30, 2006
    
    
    Increase/ (DecreaseKatrina first landfall
    
    $
    653
    
    
    $
    650
    
    
    $
    3Katrina second landfall
    
    
    37,441
    
    
    
    36,929
    
    
    
    512Rita
    
    
    3,800
    
    
    
    4,500
    
    
    
    (700
    )Wilma
    
    
    8,700
    
    
    
    8,900
    
    
    
    (200
    )Total
    
    $
    50,594
    
    
    $
    50,979
    
    
    $
    (385
    )
  (Dollars in thousands)
    
    September 30, 2006
    
    
    June 30, 2006
    
    
    Increase/ (DecreaseKatrina first landfall
    
    $
    210
    
    
    $
    207
    
    
    $
    3Katrina second landfall
    
    
    6,329
    
    
    
    5,833
    
    
    
    496Rita
    
    
    3,600
    
    
    
    4,100
    
    
    
    (500
    )Wilma
    
    
    2,000
    
    
    
    2,000
    
    
    
    Total
    
    $
    12,139
    
    
    $
    12,140
    
    
    $
    (1
    )
   Acquisition Costs and Other Underwriting Expenses
  
    
    The increase in acquisition costs is primarily due to the fact that Penn-America
Insurance Companies deferred acquisition costs were written off at January 24, 2005 as a
result of their merger with us, thereby reducing acquisition costs by $4.9 million in 2005.
    
    Other underwriting expenses increased $0.3 million.
 Corporate and Other Operating Expenses
  31




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UNITED AMERICA INDEMNITY, LTD.
 Expense and Combined Ratios
   Interest Expense
  Income Tax Expense (Benefit)
   Equity in Net Income of Partnerships
  Discontinued Operations
  32




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UNITED AMERICA INDEMNITY, LTD.
  Net Income and Operating Income
   Quarter Ended
    
    
    Quarter Ended(Dollars
in thousands)
    
    September 30, 2006
    
    
    September 30, 2005Operating income
    
    $
    22,911
    
    
    $
    9,888Adjustments:Net realized investment gains (losses), net of tax
    
    
    (925
    )
    
    
    359Gain on the sale of Agency Operations assets, net of tax
    
    
    10,103
    
    
    
    Net income
    
    $
    32,089
    
    
    $
    10,247
 Nine Months Ended September 30, 2006 Compared with the Nine Months Ended September 30, 2005
 Premiums
   Nine Months Ended
    
    
    Nine Months Ended
    
    
    Increase /(Dollars in thousands)
    
    September 30, 2006
    
    
    September 30, 2005
    
    
    (Decrease)Penn-America product
    
    $
    300,712
    
    
    $
    278,185
    
    
    $
    22,527United National Class Specific (1)
    
    
    100,484
    
    
    
    89,646
    
    
    
    10,838United National Professional
    
    
    43,775
    
    
    
    59,896
    
    
    
    (16,121
    )United National Brokerage
    
    
    31,831
    
    
    
    13,188
    
    
    
    18,643United National Umbrella / Excess
    
    
    17,913
    
    
    
    22,040
    
    
    
    (4,127
    )Total United National products
    
    
    194,003
    
    
    
    184,770
    
    
    
    9,233Total
    
    $
    494,715
    
    
    $
    462,955
    
    
    $
    31,760
 
 (1)
    
    This product class includes gross written premiums of the Non-U.S.
Insurance Operations of $0.05 million and $2.4 million for the nine months ended
September 30, 2006 and 2005, respectively. 
    
    Penn-America gross premiums written increased $22.5 million primarily as a result
of the inclusion of premium written by the Penn-America Insurance Companies for a full nine
months in 2006 whereas our
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UNITED AMERICA INDEMNITY, LTD.
 2005 results only included premium written by the Penn-America Insurance Companies from
January 25, 2005, the date of their merger with us.
    
    United National gross premiums written increased $9.2 million primarily due to an
increase in class specific and property brokerage premium somewhat offset by decreases in
our professional lines mainly due to decreases in the public officials line and decreased
umbrella premium.
   Nine Months Ended
    
    
    Nine Months Ended
    
    
    Increase /(Dollars in thousands)
    
    September 30, 2006
    
    
    September 30, 2005
    
    
    (Decrease)Penn-America product
    
    $
    274,869
    
    
    $
    245,521
    
    
    $
    29,348United National Class Specific (1)
    
    
    83,376
    
    
    
    68,474
    
    
    
    14,902United National Professional
    
    
    38,055
    
    
    
    51,268
    
    
    
    (13,213
    )United National Brokerage
    
    
    23,858
    
    
    
    11,163
    
    
    
    12,695United National Umbrella / Excess
    
    
    3,521
    
    
    
    4,252
    
    
    
    (731
    )Total United National products
    
    
    148,810
    
    
    
    135,157
    
    
    
    13,653Total
    
    $
    423,679
    
    
    $
    380,678
    
    
    $
    43,001
 
 (1)
    
    This product class includes net premiums written of the Non-U.S. Insurance
Operations of $0.04 million and $2.0 million for the nine months ended September
30, 2006 and 2005, respectively. 
    
    Penn-America net premiums written increased $29.4 million primarily due to the
inclusion of premium written by the Penn-America Insurance Companies for a full nine months
in 2006 whereas our 2005 results only included premium written by the Penn-America
Insurance Companies from January 25, 2005, the date of their merger with us, combined with
an increase in property premium and increased retentions relating to Penn-Americas
casualty reinsurance treaties.
    
    United National net premiums written increased $13.7 million primarily due an increase
in property brokerage premium, increased retentions relating to United Nationals casualty
reinsurance treaties, and new product offerings within our class specific product class
partially offset by a decline in our professional product class resulting from a reduction
in public officials and umbrella premium.
  Net Investment Income
  
    
    Gross investment income, excluding realized gains and losses, was $51.9 million for the
nine months ended September 30, 2006, compared with $38.5 million for the nine months ended
September 30, 2005, an increase of $13.5 million or 35.0%. The increase was primarily due
to increasing investment yields, an increase in cash and invested assets, and the inclusion
of Penn-America Insurance Companies and Penn Independent for a full nine months in 2006.
Cash and invested assets grew to $1,632.2 million as of September 30, 2006, from $1,424.2
million as of December 31, 2005, an increase of $208.0 million or
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UNITED AMERICA INDEMNITY, LTD.
 14.6%. Gross investment income for the first nine months of 2006 also included $2.8 million
in distributions from our limited partnership investments compared to distributions of $4.7
million in the first nine months of 2005.
    
    Investment expenses were $4.7 million and $4.4 million for the nine months ended
September 30, 2006 and 2005, respectively, an increase of $0.3 million or 6.9%. The
increase was primarily due to higher investment manager fees based on a higher average
portfolio market value in 2006 compared to 2005.
  Net Realized Investment Gains (Losses)
  Net Losses and Loss Adjustment Expenses
    (Dollars in thousands)
    
    September 30, 2006
    
    
    December 31, 2005
    
    
    Increase/ (Decrease)Katrina first landfall
    
    $
    653
    
    
    $
    1,250
    
    
    $
    (597
    )Katrina second landfall
    
    
    37,441
    
    
    
    30,600
    
    
    
    6,841Rita
    
    
    3,800
    
    
    
    3,400
    
    
    
    400Wilma
    
    
    8,700
    
    
    
    7,700
    
    
    
    1,000Total
    
    $
    50,594
    
    
    $
    42,950
    
    
    $
    7,644
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##### Table of Contents



UNITED
AMERICA INDEMNITY, LTD.
  (Dollars in thousands)
    
    September 30, 2006
    
    
    December 31, 2005
    
    
    Increase/ (Decrease)Katrina first landfall
    
    $
    210
    
    
    $
    560
    
    
    $
    (350
    )Katrina second landfall
    
    
    6,329
    
    
    
    2,400
    
    
    
    3,929Rita
    
    
    3,600
    
    
    
    3,000
    
    
    
    600Wilma
    
    
    2,000
    
    
    
    2,000
    
    
    
    Total
    
    $
    12,139
    
    
    $
    7,960
    
    
    $
    4,179
   Acquisition Costs and Other Underwriting Expenses
  
    
    Purchase accounting caused the acquisition costs for the nine months ended September 30,
2005 to be $19.0 million lower than what they would have been. Excluding the purchase
accounting adjustment, acquisition costs increased $8.6 million. The increase in
acquisition costs is primarily the result of increased earned premium. 2006 includes
Penn-Americas results for a full nine months. For the nine months ended September 30,
2005, the results of Penn-America are only included from the date of its acquisition,
January 25, 2005.
    
    Other underwriting expenses increased $0.7 million.
 Corporate and Other Operating Expenses
  Expense and Combined Ratios
  36




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UNITED AMERICA INDEMNITY, LTD.
   Interest Expense
  Income Tax Expense (Benefit)
   Equity in Net Income of Partnerships
  Discontinued Operations
  37




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UNITED AMERICA INDEMNITY, LTD.
  Extraordinary Gain
  Net Income and Operating Income
   Nine Months Ended
    
    
    Nine Months Ended(Dollars in thousands)
    
    September 30, 2006
    
    
    September 30, 2005Operating income
    
    $
    60,957
    
    
    $
    42,616Adjustments:Net realized investment gains (losses), net of tax
    
    
    (939
    )
    
    
    252Extraordinary gain
    
    
    
    
    
    
    1,426Gain on sale of Agency Operations assets, net of tax
    
    
    10,103
    
    
    
    Total after-tax adjustments
    
    
    9,164
    
    
    
    1,678Net income
    
    $
    70,121
    
    
    $
    44,294
 Liquidity and Capital Resources
 Sources and Uses of Funds
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UNITED AMERICA INDEMNITY, LTD.
     Surplus Levels
  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.
  39




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##### Table of Contents



UNITED
AMERICA INDEMNITY, LTD.
  
    
    an increase in net premiums collected of $44.4 million, offset by an increase in net
losses paid of $16.2 million and an increase in acquisition costs and other underwriting
expenses of $12.1 million;
    
    an increase in net investment income collected of $16.7 million; and
    
    an increase in interest paid of $3.6 million.
  Liquidity
       40




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UNITED AMERICA INDEMNITY, LTD.
          Capital Resources
   41




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
   Issuer
    
    Amount
    
    Maturity
    
    Interest Rate
    
    Call ProvisionsAIS through its
wholly owned
subsidiary UNG
Trust 1
    
    $10.0 million
issued September
30, 2003
    
    September 30, 2033
    
    Payable quarterly
at the Three month
London Interbank
Offered Rate
(LIBOR) plus 4.05%
    
    At par after September 30,
2008AIS through its
wholly owned
subsidiary UNG
Trust 2
    
    $20.0 million
issued October 29,
2003
    
    October 29, 2033
    
    Payable quarterly
at the three month
LIBOR plus 3.85%
    
    At par after October 29, 2008PAGI through its
wholly owned
subsidiary Penn
Trust II
    
    $15.0 million
issued May 15, 2003
    
    May 15, 2033
    
    Payable quarterly
at the three month
LIBOR plus 4.1%
    
    At par after May 15, 2008PAGI through its
wholly owned
subsidiary Penn
Trust I
    
    $15.0 million
issued December 4,
2002
    
    December 4, 2032
    
    Payable quarterly
at the three month
LIBOR plus 4.0%
(1)
    
    At par after December 4, 2009
 
 (1)
    
    To protect against increases in interest rates, we have a fixed rate interest rate swap on
these securities that locks the interest at an annual rate of 7.4%. The swap agreement
expires on December 4, 2007.     Off Balance Sheet Arrangements
  Inflation
   Cautionary Note Regarding Forward-Looking Statements
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UNITED AMERICA INDEMNITY, LTD.
    
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Risk
  43




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  Change in(Dollars in thousands)
    
    
    
    
    
    Market ValueBasis Point Change
    
    Market Value
    
    $
    
    %200
    
    $
    1,162,422
    
    
    $
    (88,221
    )
    
    
    (7.1
    )%100
    
    
    1,206,302
    
    
    
    (44,341
    )
    
    
    (3.6
    )No change
    
    
    1,250,643
    
    
    
    
    
    
    
    (100)
    
    
    1,293,097
    
    
    
    42,454
    
    
    
    3.4(200)
    
    
    1,332,986
    
    
    
    82,343
    
    
    
    6.6
 Credit Risk
    Equity Price Risk
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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  (Dollars in thousands)HypotheticalEstimated Fair Value
    
    Percentage IncreaseHypothetical Price
    
    after Hypothetical
    
    (Decrease) inChange
    
    Change in Prices
    
    Shareholders Equity(20%)
    
    $
    56,758
    
    
    
    (1.3
    %)(10%)
    
    
    63,853
    
    
    
    (0.6
    %)No change
    
    
    70,948
    
    
    
    10%
    
    
    78,043
    
    
    
    0.6
    %20%
    
    
    85,138
    
    
    
    1.3
    %
 
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
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UNITED AMERICA INDEMNITY, LTD.
 
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  We Are Dependent on Our Senior Executives and the Loss of Any of These Executives or Our Inability
to Hire and Retain a Chief Executive Officer or Other Key Personnel Could Adversely Affect Our
Business.
    46




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
 Item 6. Exhibits
 10.1*
    
    Letter Agreement, dated as of August 21, 2006, by and between Joseph F. Morris, United
America Indemnity Group, Inc., and United America Indemnity, Ltd. (incorporated by
reference to Exhibit 10.1 of our Current Report on Form 8-K filed on August 29, 2006).31.1+
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2+
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.3+
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1+
    
    Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.32.2+
    
    Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.32.3+
    
    Certification 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 47




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UNITED AMERICA INDEMNITY, LTD.
 
 SIGNATURE
  UNITED AMERICA INDEMNITY, LTD.
RegistrantNovember 9, 2006
    
    By:
    
    /s/ Kevin L. TateDate: November 9, 2006
    
    Kevin L. Tate
Chief Financial Officer
(Authorized Signatory and
Principal Financial and Accounting
Officer)
 48