##### 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 June 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period From  to
 000-50511
Commission File Number
 UNITED AMERICA INDEMNITY, LTD.
  Cayman Islands
(State or other jurisdiction 
of incorporation or organization)
    
    98-0417107
(I.R.S. Employer Identification No.)
 WALKER HOUSE, 87 MARY STREET
KYI  9002
GEORGE TOWN, GRAND CAYMAN
CAYMAN ISLANDS
 (345) 949-0100
 þ o
  Large accelerated filer o;
    
    Accelerated filer þ;
    
    Non-accelerated filer o;
    
    Smaller reporting company o
 o þ




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##### 



TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Balance Sheets
As of June 30, 2008 (Unaudited) and December 31, 2007
    
    
    1Consolidated Statements of Operations
Quarters and Six Months Ended June 30, 2008 and 2007 (Unaudited)
    
    
    2Consolidated Statements of Comprehensive Income (Loss)
Quarters and Six Months Ended June 30, 2008 and 2007 (Unaudited)
    
    
    3Consolidated Statements of Changes in Shareholders Equity
As of June 30, 2008 (Unaudited) and December 31, 2007
    
    
    4Consolidated Statements of Cash Flows
Six Months Ended June 30, 2008 and 2007 (Unaudited)
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    45Item 4. Controls and Procedures
    
    
    46PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    47Item 1A. Risk Factors
    
    
    47Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    47Item 4. Submission of Matters to a Vote of Security Holders
    
    
    48Item 6. Exhibits
    
    
    48Signatures
    
    
    49Exhibit 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., U.N. Holdings Inc.,
which was dissolved on May 31, 2006, Wind River Investment Corporation, which was dissolved on
May 31, 2006, AIS, Emerald Insurance Company, which was dissolved on March 24, 2008,
Penn-America Group, Inc., our U.S. Insurance Operations and our Agency Operations;3)
    
    our U.S. Insurance Operations refers to the insurance and related operations conducted by
AIS subsidiaries, including American Insurance Adjustment Agency, Inc., International
Underwriters, LLC, J.H. Ferguson & Associates, LLC, the United National Insurance Companies
and the Penn-America Insurance Companies;4)
    
    our Predecessor Insurance Operations refers to Wind River Investment Corporation, which was
dissolved on May 31, 2006, AIS, American Insurance Adjustment Agency, Inc., Emerald Insurance
Company, which was dissolved on March 24, 2008, the United National Insurance Companies,
International Underwriters, LLC, and J.H. Ferguson & Associates, LLC;5)
    
    the United National Insurance Companies refers to the insurance and related operations
conducted by United National Insurance Company and its subsidiaries, including Diamond State
Insurance Company, United National Casualty Insurance Company, and United National Specialty
Insurance Company;6)
    
    the Penn-America Insurance Companies refers to the insurance and related operations of
Penn-America Insurance Company,
Penn-Star Insurance Company, and Penn-Patriot Insurance Company;




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##### Table of Contents



7)
    
    our Insurance Operations refers to the U.S. Insurance Operations;8)
    
    our Non-U.S. Insurance Operations refers to the insurance related operations of Wind River
Insurance Company (Barbados), Ltd. and Wind River Insurance Company, Ltd. prior to the
amalgamation, which occurred on September 30, 2006;9)
    
    Wind River Reinsurance refers to Wind River Reinsurance Company, Ltd. In September 2006,
Wind River Insurance Company (Barbados), Ltd. was redomesticated to Bermuda and renamed Wind
River Reinsurance Company, Ltd., at which time it was amalgamated with Wind River Insurance
Company, Ltd.;10)
    
    our Agency Operations refers to the operations of Penn Independent Corporation and its
subsidiaries, which were classified as discontinued operations as of September 30, 2006;11)
    
    our Non-U.S. Subsidiaries refers to Wind River Reinsurance, U.A.I. (Gibraltar) Limited,
which was liquidated on May 30, 2006, U.A.I. (Gibraltar) II Limited, which was liquidated on
May 30, 2006, the Luxembourg Companies, U.A.I. (Ireland) Limited, and Wind River Services,
Ltd.;12)
    
    our Reinsurance Operations refers to the reinsurance and related operations of Wind River
Reinsurance;13)
    
    the Luxembourg Companies refers to U.A.I. (Luxembourg) I S.à r.l., U.A.I. (Luxembourg) II
S.à r.l., U.A.I. (Luxembourg) III S.à r.l., U.A.I. (Luxembourg) IV S.à r.l., U.A.I.
(Luxembourg) Investment S.à r.l., and Wind River (Luxembourg) S.à r.l.;14)
    
    AIS refers to American Insurance Service, Inc.;15)
    
    United National Group refers to the United National Insurance Companies and Emerald
Insurance Company, which was dissolved on March 24, 2008;16)
    
    Penn-America Group refers to Penn-America Group, Inc. and the Penn-America Insurance
Companies;17)
    
    Penn-America refers to our product classification that includes property and general
liability products for small commercial businesses distributed through a select network of
wholesale general agents with specific binding authority;18)
    
    United National refers to our product classification that includes property, general
liability, and professional lines products distributed through program administrators with
specific binding authority;19)
    
    Diamond State refers to our product classification that includes property, general
liability, and professional lines products distributed through wholesale brokers and program
administrators with specific binding authority;20)
    
    the Statutory Trusts refers to United National Group Capital Trust I, United National Group
Capital Statutory Trust II, and Penn-America Statutory Trust II;21)
    
    Fox Paine & Company refers to Fox Paine & Company, LLC and affiliated investment funds;22)
    
    GAAP refers to accounting principles generally accepted in the United States of America;
and23)
    
    $ 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)June 30, 2008
    
    
    December 31, 2007ASSETSBonds:Available for sale securities, at fair value

(amortized cost: $1,285,040 and $1,356,439)
    
    $
    1,286,339
    
    
    $
    1,370,566Preferred shares:Available for sale securities, at fair value
(cost: $14,006 and $11,802)
    
    
    12,881
    
    
    
    11,883Common shares:Available for sale securities, at fair value
(cost: $60,376 and $61,032)
    
    
    64,960
    
    
    
    73,794Other invested assetsAvailable for sale securities, at fair value
(cost: $19,667 and $19,412)
    
    
    48,759
    
    
    
    51,102Trading securities, at fair value
(cost: $5,151 and $5,151)
    
    
    12,715
    
    
    
    13,437Total investments
    
    
    1,425,654
    
    
    
    1,520,782Cash and cash equivalents
    
    
    248,998
    
    
    
    244,321Agents balances, net
    
    
    58,494
    
    
    
    64,719Reinsurance receivables
    
    
    682,495
    
    
    
    719,706Accrued investment income
    
    
    12,772
    
    
    
    12,820Federal income taxes receivable
    
    
    3,167
    
    
    
    Deferred federal income taxes
    
    
    17,723
    
    
    
    8,219Deferred acquisition costs
    
    
    40,375
    
    
    
    52,505Goodwill
    
    
    84,246
    
    
    
    84,246Intangible assets
    
    
    22,016
    
    
    
    22,520Prepaid reinsurance premiums
    
    
    27,407
    
    
    
    29,218Other assets
    
    
    13,453
    
    
    
    16,116Total assets
    
    $
    2,636,800
    
    
    $
    2,775,172LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses
    
    $
    1,501,229
    
    
    $
    1,503,237Unearned premiums
    
    
    179,994
    
    
    
    228,363Federal income taxes payable
    
    
    
    
    
    
    3,455Ceded balances payable
    
    
    21,497
    
    
    
    15,758Contingent commissions
    
    
    4,431
    
    
    
    9,600Notes and debentures payable
    
    
    121,996
    
    
    
    137,602Other liabilities
    
    
    30,473
    
    
    
    40,881Total liabilities
    
    
    1,859,620
    
    
    
    1,938,896Commitments and contingencies (Note 9)
    
    
    
    
    
    
    Shareholders equity:Common shares, $0.0001 par value, 900,000,000
common shares authorized; Class A common shares
issued: 24,852,480 and 24,770,507, respectively;
Class A common shares outstanding: 19,477,373
and 22,316,420, respectively; Class B common
shares issued and outstanding: 12,687,500
    
    
    4
    
    
    
    4Additional paid-in capital
    
    
    522,219
    
    
    
    519,980Accumulated other comprehensive income
    
    
    23,404
    
    
    
    40,172Retained earnings
    
    
    323,011
    
    
    
    324,542Class A common shares in treasury, at cost: 5,375,107 and 2,454,087 shares, respectively
    
    
    (91,458
    )
    
    
    (48,422
    )Total shareholders equity
    
    
    777,180
    
    
    
    836,276Total
    
    $
    2,636,800
    
    
    $
    2,775,172
   1




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Operations
 (Unaudited)
    
    
    (Unaudited)Quarter Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Gross premiums written
    
    $
    104,318
    
    
    $
    148,683
    
    
    $
    203,380
    
    
    $
    301,219Net premiums written
    
    $
    85,209
    
    
    $
    130,514
    
    
    $
    167,173
    
    
    $
    264,569Net premiums earned
    
    $
    100,673
    
    
    $
    136,585
    
    
    $
    213,730
    
    
    $
    275,022Net investment income
    
    
    17,072
    
    
    
    19,317
    
    
    
    34,858
    
    
    
    38,185Net realized investment gains (losses)
    
    
    (2,480
    )
    
    
    1,542
    
    
    
    (3,550
    )
    
    
    1,767Total revenues
    
    
    115,265
    
    
    
    157,444
    
    
    
    245,038
    
    
    
    314,974Losses and Expenses:Net losses and loss adjustment expenses
    
    
    83,644
    
    
    
    75,244
    
    
    
    160,294
    
    
    
    157,085Acquisition costs and other underwriting expenses
    
    
    38,112
    
    
    
    44,662
    
    
    
    76,307
    
    
    
    87,544Corporate and other operating expenses
    
    
    2,521
    
    
    
    2,893
    
    
    
    6,455
    
    
    
    6,457Interest expense
    
    
    2,188
    
    
    
    2,899
    
    
    
    4,727
    
    
    
    5,804Income (loss) before income taxes
    
    
    (11,200
    )
    
    
    31,746
    
    
    
    (2,745
    )
    
    
    58,084Income tax expense (benefit)
    
    
    (2,091
    )
    
    
    5,950
    
    
    
    (1,526
    )
    
    
    10,024Income (loss) before equity in net income (loss)
of partnership
    
    
    (9,109
    )
    
    
    25,796
    
    
    
    (1,219
    )
    
    
    48,060Equity in net income (loss) of partnership, net of tax
    
    
    (26
    )
    
    
    191
    
    
    
    (469
    )
    
    
    361Income (loss) before discontinued operations
    
    
    (9,135
    )
    
    
    25,987
    
    
    
    (1,688
    )
    
    
    48,421Discontinued operations, net of tax
    
    
    164
    
    
    
    (39
    )
    
    
    157
    
    
    
    120Net income (loss)
    
    $
    (8,971
    )
    
    $
    25,948
    
    
    $
    (1,531
    )
    
    $
    48,541Per share data:Income (loss) from continuing operations:Basic
    
    $
    (0.27
    )
    
    $
    0.70
    
    
    $
    (0.05
    )
    
    $
    1.31Diluted
    
    $
    (0.27
    )
    
    $
    0.69
    
    
    $
    (0.05
    )
    
    $
    1.30Discontinued operations:Basic
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    0.00Diluted
    
    $
    0.01
    
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    0.00Net income (loss):Basic
    
    $
    (0.27
    )
    
    $
    0.70
    
    
    $
    (0.04
    )
    
    $
    1.31Diluted
    
    $
    (0.26
    )
    
    $
    0.69
    
    
    $
    (0.04
    )
    
    $
    1.30Weighted-average number of shares outstanding:Basic
    
    
    33,776,708
    
    
    
    37,199,146
    
    
    
    34,238,706
    
    
    
    37,156,203Diluted
    
    
    33,980,719
    
    
    
    37,495,087
    
    
    
    34,452,742
    
    
    
    37,483,083
   2




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Comprehensive Income (Loss)
 (Unaudited)
    
    
    (Unaudited)Quarter Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    (8,971
    )
    
    $
    25,948
    
    
    $
    (1,531
    )
    
    $
    48,541Other comprehensive loss, net of tax:Unrealized gains on securities:Unrealized holding losses arising during period
    
    
    (21,708
    )
    
    
    (10,671
    )
    
    
    (19,024
    )
    
    
    (7,861
    )Less: Reclassification adjustment for gains
(losses) included in net income (loss)
    
    
    (1,556
    )
    
    
    994
    
    
    
    (2,256
    )
    
    
    1,140Other comprehensive loss, net of tax
    
    
    (20,152
    )
    
    
    (11,665
    )
    
    
    (16,768
    )
    
    
    (9,001
    )Comprehensive income (loss), net of tax
    
    $
    (29,123
    )
    
    $
    14,283
    
    
    $
    (18,299
    )
    
    $
    39,540
   3




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Changes in Shareholders Equity
 (Unaudited)Six Months Ended
    
    
    Year EndedJune 30, 2008
    
    
    December 31, 2007Number of Class A common shares:Number at beginning of period
    
    
    24,770,507
    
    
    
    24,507,919Common shares issued under share incentive plans
    
    
    59,534
    
    
    
    243,253Common shares issued to directors
    
    
    22,439
    
    
    
    19,335Number at end of period
    
    
    24,852,480
    
    
    
    24,770,507Number of Class B common shares:Number at beginning of period
    
    
    12,687,500
    
    
    
    12,687,500Number at end of period
    
    
    12,687,500
    
    
    
    12,687,500Par value of Class A common shares:Balance at beginning of period
    
    $
    3
    
    
    $
    3Balance at end of period
    
    $
    3
    
    
    $
    3Par value of Class B common shares:Balance at beginning of period
    
    $
    1
    
    
    $
    1Balance at end of period
    
    $
    1
    
    
    $
    1Additional paid-in capital:Balance at beginning of period
    
    $
    519,980
    
    
    $
    515,357Contributed capital from Class A common shares
    
    
    
    
    
    
    1,002Share compensation plans
    
    
    2,239
    
    
    
    3,621Balance at end of period
    
    $
    522,219
    
    
    $
    519,980Accumulated other comprehensive income, net of
deferred income tax:Balance at beginning of period
    
    $
    40,172
    
    
    $
    22,580Other comprehensive income (loss)
    
    
    (16,768
    )
    
    
    17,888Adoption of SFAS 155
    
    
    
    
    
    
    (296
    )Balance at end of period
    
    $
    23,404
    
    
    $
    40,172Retained earnings:Balance at beginning of period
    
    $
    324,542
    
    
    $
    225,329Adoption of SFAS 155
    
    
    
    
    
    
    296Net income (loss)
    
    
    (1,531
    )
    
    
    98,917Balance at end of period
    
    $
    323,011
    
    
    $
    324,542Number of Treasury Shares:Number at beginning of period
    
    
    2,454,087
    
    
    
    Class A common shares purchased
    
    
    2,921,020
    
    
    
    2,454,087Number at end of period
    
    
    5,375,107
    
    
    
    2,454,087Treasury Shares, at cost:Balance at beginning of period
    
    $
    (48,422
    )
    
    $
    Class A common shares purchased, at cost
    
    
    (43,036
    )
    
    
    (48,422
    )Balance at end of period
    
    $
    (91,458
    )
    
    $
    (48,422
    )Total shareholders equity
    
    $
    777,180
    
    
    $
    836,276
   4




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UNITED AMERICA INDEMNITY, LTD.
 
 Consolidated Statements of Cash Flows
 (Unaudited)Six Months Ended June 30,2008
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    (1,531
    )
    
    $
    48,541Adjustments to reconcile net income to net cash provided by
(used for) operating activities:Amortization of trust preferred securities issuance costs
    
    
    131
    
    
    
    131Amortization and depreciation
    
    
    504
    
    
    
    506Restricted stock expense
    
    
    1,920
    
    
    
    1,237Deferred federal income taxes
    
    
    (1,213
    )
    
    
    2,152Amortization of bond premium and discount, net
    
    
    1,391
    
    
    
    534Net realized investment (gains) losses
    
    
    3,550
    
    
    
    (1,767
    )Equity in net (income) loss of partnerships
    
    
    469
    
    
    
    (361
    )Changes in:Agents balances
    
    
    6,225
    
    
    
    6,897Reinsurance receivables
    
    
    37,211
    
    
    
    163,548Unpaid losses and loss adjustment expenses
    
    
    (2,008
    )
    
    
    (103,205
    )Unearned premiums
    
    
    (48,369
    )
    
    
    (15,892
    )Ceded balances payable
    
    
    5,739
    
    
    
    (2,069
    )Other assets and liabilities, net
    
    
    (8,952
    )
    
    
    (1,604
    )Amounts held for the account of others
    
    
    1,126
    
    
    
    (7,177
    )Contingent commissions
    
    
    (5,169
    )
    
    
    (3,394
    )Prepaid reinsurance premiums
    
    
    1,811
    
    
    
    5,442Federal income taxes receivable
    
    
    (6,622
    )
    
    
    (399
    )Deferred acquisition costs
    
    
    12,130
    
    
    
    137Net cash provided by (used for) operating activities
    
    
    (1,657
    )
    
    
    93,257Cash flows from investing activities:Proceeds from sale of bonds
    
    
    118,229
    
    
    
    99,349Proceeds from sale of stocks
    
    
    19,034
    
    
    
    17,157Proceeds from maturity of bonds
    
    
    47,455
    
    
    
    37,511Purchases of bonds
    
    
    (96,431
    )
    
    
    (227,391
    )Purchases of stocks
    
    
    (23,375
    )
    
    
    (17,171
    )Purchases of other invested assets
    
    
    (255
    )
    
    
    Net cash provided by (used for) investing activities
    
    
    64,657
    
    
    
    (90,545
    )Cash flows from financing activities:Borrowing under credit facilities
    
    
    
    
    
    
    6Repayments of credit facilities
    
    
    
    
    
    
    (1,541
    )Proceeds from exercises of stock options
    
    
    329
    
    
    
    1,518Tax benefits (expense) associated with SFAS 123R
    
    
    (10
    )
    
    
    336Purchases of Class A common shares
    
    
    (43,036
    )
    
    
    Retirement of junior subordinated debentures
    
    
    (15,464
    )
    
    
    Principal payments of term debt
    
    
    (142
    )
    
    
    (336
    )Net cash provided by (used for) financing activities
    
    
    (58,323
    )
    
    
    (17
    )Net change in cash and cash equivalents
    
    
    4,677
    
    
    
    2,695Cash and cash equivalents at beginning of period
    
    
    244,321
    
    
    
    273,745Cash and cash equivalents at end of period
    
    $
    248,998
    
    
    $
    276,440
   5




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




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Gross Unrealized LossesCost or
    
    
    
    
    
    
    Six
    
    
    Between
    
    
    GreaterNumber of
    
    
    Estimated
    
    
    Amortized
    
    
    
    
    
    
    Months or
    
    
    Seven Months
    
    
    than One(Dollars in thousands)
    
    Securities
    
    
    Fair Value
    
    
    Cost
    
    
    Total
    
    
    Less
    
    
    and One Year
    
    
    Year (1)Bonds
    
    
    321
    
    
    $
    518,346
    
    
    $
    530,005
    
    
    $
    11,659
    
    
    $
    2,346
    
    
    $
    4,986
    
    
    $
    4,327Preferred stock
    
    
    4
    
    
    
    7,625
    
    
    
    8,750
    
    
    
    1,125
    
    
    
    734
    
    
    
    391
    
    
    
    Common stock
    
    
    59
    
    
    
    23,907
    
    
    
    29,088
    
    
    
    5,181
    
    
    
    2,110
    
    
    
    2,793
    
    
    
    278$
    17,965
    
    
    $
    5,190
    
    
    $
    8,170
    
    
    $
    4,605
 (1)
    
    At June 30, 2008, the Company had 87 bonds that were in an unrealized loss position for
greater than one year. The estimated fair value and amortized cost of these securities were
$102.8 million and $107.1 million, respectively. The Company has analyzed these securities
and has determined that they are not other than temporarily impaired. The Company has the
ability to hold these investments until maturity or until recovery. 100% of these securities
are investment grade. The Company also had three common stock securities that were in an
unrealized loss position for greater than one year. The estimated fair value and amortized
cost of these securities were $0.9 million and $0.6 million, respectively. The Company is
carefully monitoring these equity securities and has not made a determination that the
impairment is other than temporary.  Gross Unrealized LossesCost or
    
    
    
    
    
    
    Six
    
    
    Between
    
    
    GreaterNumber of
    
    
    Estimated
    
    
    Amortized
    
    
    
    
    
    
    Months or
    
    
    Seven Months
    
    
    than One(Dollars in thousands)
    
    Securities
    
    
    Fair Value
    
    
    Cost
    
    
    Total
    
    
    Less
    
    
    and One Year
    
    
    Year (1)Bonds
    
    
    266
    
    
    $
    374,064
    
    
    $
    379,222
    
    
    $
    5,158
    
    
    $
    877
    
    
    $
    337
    
    
    $
    3,944Preferred stock
    
    
    1
    
    
    
    2,363
    
    
    
    2,500
    
    
    
    137
    
    
    
    137
    
    
    
    
    
    
    
    Common stock
    
    
    31
    
    
    
    15,714
    
    
    
    17,715
    
    
    
    2,001
    
    
    
    1,502
    
    
    
    499
    
    
    
    $
    7,296
    
    
    $
    2,516
    
    
    $
    836
    
    
    $
    3,944
 (1)
    
    At December 31, 2007, the Company had 215 bonds that were in an unrealized loss position for
greater than one year. The estimated fair value and amortized cost of these securities were
$293.8 million and $297.7 million, respectively. The Company has analyzed these securities
and has determined that they are not other than temporarily impaired. The Company has the
ability to hold these investments until maturity or until recovery. 100% of these securities
are investment grade.     7




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
    Quarter Ended June 30,
    
    
    Six Months Ended June 30,(Dollars in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Bonds
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    21Common stock
    
    
    1,740
    
    
    
    
    
    
    
    1,819
    
    
    
    Total
    
    $
    1,740
    
    
    $
    
    
    
    $
    1,819
    
    
    $
    21
   Fannie Mae


    
    
    Freddie MacS&P(Dollars in thousands)
    
    Book Value
    
    
    Fair Value
    
    
    S&P Rating
    
    
    Book Value
    
    
    Fair Value
    
    
    RatingPreferred stock
    
    $
    1,625
    
    
    $
    1,492
    
    
    AA-
    
    $
    4,625
    
    
    $
    4,025
    
    
    
    A+Senior debt securities
    
    
    37,628
    
    
    
    38,893
    
    
    AAA
    
    
    49,968
    
    
    
    51,764
    
    
    AAA
  3. Fair Value Measurements
   8




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
   
    
    Level 1  inputs utilize quoted prices (unadjusted) in active markets for identical
assets that the Company has the ability to access at the measurement date.
    
    Level 2  inputs utilize other than quoted prices included in Level 1 that are
observable for the similar assets, either directly or indirectly.
    
    Level 3  inputs are unobservable for the asset, and include situations where there is
little, if any, market activity for the asset.
    Fair Value Measurements(Dollars in thousands)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalBonds:Obligations of state and political
subdivision
    
    $
    
    
    
    $
    245,867
    
    
    $
    
    
    
    $
    245,867Mortgage-backed and asset-backed
securities
    
    
    
    
    
    
    582,176
    
    
    
    
    
    
    
    582,176U.S. treasury and agency obligations
    
    
    69,532
    
    
    
    90,117
    
    
    
    
    
    
    
    159,649Corporate notes
    
    
    
    
    
    
    298,647
    
    
    
    
    
    
    
    298,647Total bonds
    
    
    69,532
    
    
    
    1,216,807
    
    
    
    
    
    
    
    1,286,339Preferred shares
    
    
    3,610
    
    
    
    9,271
    
    
    
    
    
    
    
    12,881Common shares
    
    
    64,960
    
    
    
    
    
    
    
    
    
    
    
    64,960Other invested assets
    
    
    
    
    
    
    
    
    
    
    61,474
    
    
    
    61,474Total invested assets
    
    $
    138,102
    
    
    $
    1,226,078
    
    
    $
    61,474
    
    
    $
    1,425,654
   9




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
   Fair Value Measurements Using Level 3 InputsOtherQuarter Ended June 30, 2008
    
    
    
    
    
    Invested(Dollars in thousands)
    
    Bonds
    
    
    Assets
    
    
    TotalBeginning balance at April 1, 2008
    
    $
    1,995
    
    
    $
    62,330
    
    
    $
    64,325Total gains (losses) (realized / unrealized):Included in equity in net income (loss) of partnership
    
    
    
    
    
    
    (41
    )
    
    
    (41
    )Included in accumulated other comprehensive income
    
    
    33
    
    
    
    (1,070
    )
    
    
    (1,037
    )Purchases
    
    
    
    
    
    
    255
    
    
    
    255Sales
    
    
    (261
    )
    
    
    
    
    
    
    (261
    )Transfers out of Level 3
    
    
    (1,767
    )
    
    
    
    
    
    
    (1,767
    )Ending balance at June 30, 2008
    
    $
    
    
    
    $
    61,474
    
    
    $
    61,474Losses for the quarter ended June 30, 2008 included in
earnings attributable to the change in unrealized losses
relating to assets still held at June 30, 2008
    
    $
    
    
    
    $
    (41
    )
    
    $
    (41
    )
 Fair Value Measurements Using Level 3 InputsOtherSix Months Ended June 30, 2008
    
    
    
    
    
    Invested(Dollars in thousands)
    
    Bonds
    
    
    Assets
    
    
    TotalBeginning balance at January 1, 2008
    
    $
    2,376
    
    
    $
    64,539
    
    
    $
    66,915Total gains (losses) (realized / unrealized):Included in equity in net income (loss) of partnership
    
    
    
    
    
    
    (722
    )
    
    
    (722
    )Included in accumulated other comprehensive income
    
    
    (55
    )
    
    
    (2,598
    )
    
    
    (2,653
    )Purchases
    
    
    
    
    
    
    255
    
    
    
    255Sales
    
    
    (554
    )
    
    
    
    
    
    
    (554
    )Transfers out of Level 3
    
    
    (1,767
    )
    
    
    
    
    
    
    (1,767
    )Ending balance at June 30, 2008
    
    $
    
    
    
    $
    61,474
    
    
    $
    61,474Losses for the six months ended June 30, 2008 included
in earnings attributable to the change in unrealized
losses relating to assets still held at June 30, 2008
    
    $
    
    
    
    $
    (722
    )
    
    $
    (722
    )
  10




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 4. Reinsurance
     Quarter Ended June 30,
    
    
    Six Months Ended June 30(Dollars in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Earned premium
    
    $
    18,553
    
    
    $
    21,515
    
    
    $
    38,019
    
    
    $
    42,092Commissions
    
    
    2,827
    
    
    
    5,741
    
    
    
    6,934
    
    
    
    11,231Incurred losses
    
    
    21,055
    (1)
    
    
    (92,703
    )(2)
    
    
    28,933
    (1)
    
    
    (81,354
    )(3)
 (1)
    
    The Company increased gross and ceded loss and loss
adjustment expenses related to prior accident years by $31.2 million
and $14.7 million, respectively, during the quarter and six
months ended June 30, 2008.(2)
    
    The Company reduced gross and ceded loss and loss adjustment
expenses related to prior accident years by $115.6 million and $103.3
million, respectively, during the second quarter of 2007.(3)
    
    The Company reduced gross and ceded loss and loss adjustment expenses related to prior
accident years by $115.6 million and $101.7 million,
respectively, during the six months ended June 30, 2007.  Property Catastrophe
 Property Excess of Loss
 Professional Liability Excess of Loss
 General Liability Excess of Loss
   11




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 5. Income Taxes
  Quarter Ended June 30, 2008:
    
    Non-U.S.
    
    
    U.S.(Dollars in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    51,548
    
    
    $
    94,855
    
    
    $
    (42,085
    )
    
    $
    104,318Net premiums written
    
    $
    43,121
    
    
    $
    42,088
    
    
    $
    
    
    
    $
    85,209Net premiums earned
    
    $
    51,572
    
    
    $
    49,101
    
    
    $
    
    
    
    $
    100,673Net investment income
    
    
    10,295
    
    
    
    11,374
    
    
    
    (4,597
    )
    
    
    17,072Net realized investment gains (losses)
    
    
    160
    
    
    
    (2,239
    )
    
    
    (401
    )
    
    
    (2,480
    )Total revenues
    
    
    62,027
    
    
    
    58,236
    
    
    
    (4,998
    )
    
    
    115,265Losses and Expenses:Net losses and loss adjustment expenses
    
    
    37,752
    
    
    
    45,892
    
    
    
    
    
    
    
    83,644Acquisition costs and other
underwriting expenses
    
    
    23,506
    
    
    
    14,606
    
    
    
    
    
    
    
    38,112Corporate and other operating expenses
    
    
    1,209
    
    
    
    1,312
    
    
    
    
    
    
    
    2,521Interest expense
    
    
    
    
    
    
    6,785
    
    
    
    (4,597
    )
    
    
    2,188Loss before income taxes
    
    $
    (440
    )
    
    $
    (10,359
    )
    
    $
    (401
    )
    
    $
    (11,200
    )
 Quarter Ended June 30, 2007:
    
    Non-U.S.
    
    
    U.S.(Dollars in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    69,852
    
    
    $
    143,452
    
    
    $
    (64,621
    )
    
    $
    148,683Net premiums written
    
    $
    65,893
    
    
    $
    64,621
    
    
    $
    
    
    
    $
    130,514Net premiums earned
    
    $
    68,487
    
    
    $
    68,098
    
    
    $
    
    
    
    $
    136,585Net investment income
    
    
    10,912
    
    
    
    13,003
    
    
    
    (4,598
    )
    
    
    19,317Net realized
investment gains (losses)
    
    
    (25
    )
    
    
    1,523
    
    
    
    44
    
    
    
    1,542Total revenues
    
    
    79,374
    
    
    
    82,624
    
    
    
    (4,554
    )
    
    
    157,444Losses and Expenses:Net losses and loss adjustment expenses
    
    
    37,640
    
    
    
    37,604
    
    
    
    
    
    
    
    75,244Acquisition costs and other
underwriting expenses
    
    
    26,730
    
    
    
    18,083
    
    
    
    (151
    )
    
    
    44,662Corporate and other operating expenses
    
    
    3,795
    
    
    
    (902
    )
    
    
    
    
    
    
    2,893Interest expense
    
    
    
    
    
    
    7,497
    
    
    
    (4,598
    )
    
    
    2,899Income before income taxes
    
    $
    11,209
    
    
    $
    20,342
    
    
    $
    195
    
    
    $
    31,746
  12




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Six Months Ended June 30, 2008:
    
    Non-U.S.
    
    
    U.S.(Dollars in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    97,653
    
    
    $
    188,147
    
    
    $
    (82,420
    )
    
    $
    203,380Net premiums written
    
    $
    84,754
    
    
    $
    82,419
    
    
    $
    
    
    
    $
    167,173Net premiums earned
    
    $
    109,671
    
    
    $
    104,059
    
    
    $
    
    
    
    $
    213,730Net investment income
    
    
    20,849
    
    
    
    23,153
    
    
    
    (9,144
    )
    
    
    34,858Net realized investment gains (losses)
    
    
    148
    
    
    
    (3,159
    )
    
    
    (539
    )
    
    
    (3,550
    )Total revenues
    
    
    130,668
    
    
    
    124,053
    
    
    
    (9,683
    )
    
    
    245,038Losses and Expenses:Net losses and loss adjustment expenses
    
    
    75,831
    
    
    
    84,463
    
    
    
    
    
    
    
    160,294Acquisition costs and other
underwriting expenses
    
    
    46,607
    
    
    
    29,700
    
    
    
    
    
    
    
    76,307Corporate and other operating expenses
    
    
    3,813
    
    
    
    2,642
    
    
    
    
    
    
    
    6,455Interest expense
    
    
    
    
    
    
    13,871
    
    
    
    (9,144
    )
    
    
    4,727Income (loss) before income taxes
    
    $
    4,417
    
    
    $
    (6,623
    )
    
    $
    (539
    )
    
    $
    (2,745
    )
 Six Months Ended June 30, 2007:
    
    Non-U.S.
    
    
    U.S.(Dollars in thousands)
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    147,771
    
    
    $
    289,054
    
    
    $
    (135,606
    )
    
    $
    301,219Net premiums written
    
    $
    140,375
    
    
    $
    124,194
    
    
    $
    
    
    
    $
    264,569Net premiums earned
    
    $
    138,067
    
    
    $
    136,955
    
    
    $
    
    
    
    $
    275,022Net investment income
    
    
    21,315
    
    
    
    26,014
    
    
    
    (9,144
    )
    
    
    38,185Net realized
investment gains (losses)
    
    
    (25
    )
    
    
    1,769
    
    
    
    23
    
    
    
    1,767Total revenues
    
    
    159,357
    
    
    
    164,738
    
    
    
    (9,121
    )
    
    
    314,974Losses and Expenses:Net losses and loss adjustment expenses
    
    
    80,366
    
    
    
    76,719
    
    
    
    
    
    
    
    157,085Acquisition costs and other
underwriting expenses
    
    
    51,529
    
    
    
    36,497
    
    
    
    (482
    )
    
    
    87,544Corporate and other operating expenses
    
    
    5,342
    
    
    
    939
    
    
    
    176
    
    
    
    6,457Interest expense
    
    
    
    
    
    
    14,948
    
    
    
    (9,144
    )
    
    
    5,804Income before income taxes
    
    $
    22,120
    
    
    $
    35,635
    
    
    $
    329
    
    
    $
    58,084
  Quarter Ended June 30,2008
    
    
    2007% of Pre-
    
    
    
    
    
    
    % of Pre-(Dollars in thousands)
    
    Amount
    
    

Tax
Loss
    
    
    Amount
    
    
    Tax IncomeExpected tax provision
(benefit) at weighted average
rate
    
    $
    (3,747
    )
    
    
    (33.5
    )%
    
    $
    7,206
    
    
    
    22.7
    %Adjustments:Tax exempt interest
    
    
    (744
    )
    
    
    (6.6
    )
    
    
    (597
    )
    
    
    (1.9
    )Dividend exclusion
    
    
    (165
    )
    
    
    (1.5
    )
    
    
    (110
    )
    
    
    (0.3
    )Effective tax rate adjustment
    
    
    2,486
    
    
    
    22.2
    
    
    
    151
    
    
    
    0.5Other
    
    
    78
    
    
    
    0.7
    
    
    
    (700
    )
    
    
    (2.2
    )Income
tax expense (benefit)
    
    $
    (2,092
    )
    
    
    (18.7
    )%
    
    $
    5,950
    
    
    
    18.7
    %
  13




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Six Months Ended June 30,2008
    
    
    2007% of Pre-
    
    
    
    
    
    
    % of Pre-(Dollars in thousands)
    
    Amount
    
    

Tax
Loss
    
    
    Amount
    
    
    Tax IncomeExpected tax provision
(benefit) at weighted average
rate
    
    $
    (2,468
    )
    
    
    (89.9
    )%
    
    $
    12,626
    
    
    
    21.7
    %Adjustments:Tax exempt interest
    
    
    (1,457
    )
    
    
    (53.1
    )
    
    
    (1,197
    )
    
    
    (2.1
    )Dividend exclusion
    
    
    (326
    )
    
    
    (11.9
    )
    
    
    (226
    )
    
    
    (0.4
    )Effective tax rate adjustment
    
    
    2,897
    
    
    
    105.5
    
    
    
    (511
    )
    
    
    (0.8
    )Other
    
    
    (172
    )
    
    
    (6.2
    )
    
    
    (668
    )
    
    
    (1.1
    )Income
tax expense (benefit)
    
    $
    (1,526
    )
    
    
    (55.6
    )%
    
    $
    10,024
    
    
    
    17.3
    %
    
    14




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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
   Quarter Ended June 30,(Dollars in thousands)
    
    2008
    
    
    2007Unpaid losses and loss adjustment expenses at beginning of
period
    
    $
    1,494,816
    
    
    $
    1,699,707Less: Gross reinsurance receivables on unpaid losses and
loss adjustment expenses
    
    
    679,775
    
    
    
    928,772Net balance at beginning of period
    
    
    815,041
    
    
    
    770,935Incurred losses and loss adjustment expenses related to:Current year
    
    
    67,103
    
    
    
    87,547Prior years
    
    
    16,541
    (1)
    
    
    (12,303
    )(2)Total incurred losses and loss adjustment expenses
    
    
    83,644
    
    
    
    75,244Paid losses and loss adjustment expenses related to:Current year
    
    
    15,634
    
    
    
    18,764Prior years
    
    
    48,735
    
    
    
    39,559Total paid losses and loss adjustment expenses
    
    
    64,369
    
    
    
    58,323Net balance at end of period
    
    
    834,316
    
    
    
    787,856Plus: Gross reinsurance receivables on unpaid losses and
loss adjustment expenses
    
    
    666,913
    
    
    
    810,949Unpaid losses and loss adjustment expenses at end of period
    
    $
    1,501,229
    
    
    $
    1,598,805
 (1)
    
    In 2008, the Company increased its prior accident year loss
reserves by $16.9 million and reduced its allowance for uncollectible
reinsurance by $0.4 million. The loss reserves increase of $16.9 million
consisted of an increase of approximately $21.1 million in liability lines
partially offset by a reduction of $4.2 million in property lines. The
increase related to the liability lines consisted of $16.6 million from
general liability lines primarily related to accident years 2001 and prior,
$2.6 million from professional liability lines primarily related to accident
years 2006 and 2007 and $1.9 million from reinsurance operations primarily
related to accident year 2007. The reduction to the property lines
primarily related to accident year 2007.(2)
    
    In 2007, the Company reduced its prior accident year loss reserves
by $11.0 million and reduced its allowance for uncollectible reinsurance by
$1.3 million. The loss reserves reduction of $11.0 million consisted of
approximately $4.8 million in liability lines and $6.2 million in property
lines. The reduction to the liability lines consisted of $6.5 million from
umbrella and excess lines primarily related to accident years 2002 and 2003,
$4.5 million related to general liability lines primarily related to
accident years 2004 and prior offset partially by an increase of $6.2
million to professional lines primarily related to accident years 1998 and
2006. The reduction to the property lines primarily related to accident
years 2005 and 2006.  15




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Six Months Ended June 30,(Dollars in thousands)
    
    2008
    
    
    2007Unpaid losses and loss adjustment expenses at beginning of
period
    
    $
    1,503,237
    
    
    $
    1,702,010Less: Gross reinsurance receivables on unpaid losses and
loss adjustment expenses
    
    
    702,353
    
    
    
    966,668Net balance at beginning of period
    
    
    800,884
    
    
    
    735,342Incurred losses and loss adjustment expenses related to:Current year
    
    
    143,753
    
    
    
    170,945Prior years
    
    
    16,541
    (1)
    
    
    (13,860
    )(2)Total incurred losses and loss adjustment expenses
    
    
    160,294
    
    
    
    157,085Paid losses and loss adjustment expenses related to:Current year
    
    
    21,567
    
    
    
    23,038Prior years
    
    
    105,295
    
    
    
    81,533Total paid losses and loss adjustment expenses
    
    
    126,862
    
    
    
    104,571Net balance at end of period
    
    
    834,316
    
    
    
    787,856Plus: Gross reinsurance receivables on unpaid losses and
loss adjustment expenses
    
    
    666,913
    
    
    
    810,949Unpaid losses and loss adjustment expenses at end of period
    
    $
    1,501,229
    
    
    $
    1,598,805
 (1)
    
    In 2008, the Company increased its prior accident year loss
reserves by $16.9 million and reduced its allowance for uncollectible
reinsurance by $0.4 million. The loss reserves increase of $16.9 million
consisted of an increase of approximately $21.1 million in liability lines
partially offset by a reduction of $4.2 million in property lines. The
increase related to the liability lines consisted of $16.6 million from
general liability lines primarily related to accident years 2001 and prior,
$2.6 million from professional liability lines primarily related to
accident years 2006 and 2007 and $1.9 million from reinsurance operations
primarily related to accident year 2007. The reduction to the property
lines primarily related to accident year 2007.(2)
    
    In 2007, the Company reduced its prior accident year loss reserves
by $11.0 million and reduced its allowance for uncollectible reinsurance by
$2.9 million. The loss reserves reduction of $11.0 million consisted of
approximately $4.8 million in liability lines and $6.2 million in property
lines. The reduction to the liability lines consists of $6.5 million from
umbrella and excess lines primarily related to accident years 2002 and 2003,
$4.5 million related to general liability lines primarily related to
accident years 2004 and prior offset partially by an increase of $6.2
million to professional lines primarily related to accident years 1998 and
2006. The reduction to the property lines primarily related to accident
years 2005 and 2006. 7. Debt
  Junior Subordinated Debentures
  Loans Payable
    16




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 8. Related Party Transactions
     Quarter Ended June 30,
    
    
    Quarter Ended June 30,(Dollars in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Ceded written premium
    
    $
    5,076
    
    
    $
    2,376
    
    
    $
    8,573
    
    
    $
    5,709Ceded losses
    
    
    (2,206
    )(1)
    
    
    396
    
    
    
    665
    
    
    
    552
 (1)
    
    Negative ceded losses and loss adjustment expenses due to better than anticipated
performance on a property reinsurance agreement.   17




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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 Plans
  11. Earnings Per Share
   Quarter Ended June 30,
    
    
    Six Months Ended June 30,(Dollars in thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Income (loss) from continuing operations
    
    $
    (9,135
    )
    
    $
    25,987
    
    
    $
    (1,688
    )
    
    $
    48,421Discontinued operations
    
    
    164
    
    
    
    (39
    )
    
    
    157
    
    
    
    120Net income (loss)
    
    $
    (8,971
    )
    
    $
    25,948
    
    
    $
    (1,531
    )
    
    $
    48,541Basic earnings per share:Weighted average shares for basic
earnings per share
    
    
    33,776,708
    
    
    
    37,199,146
    
    
    
    34,238,706
    
    
    
    37,156,203Income (loss) from continuing operations
    
    $
    (0.27
    )
    
    $
    0.70
    
    
    $
    (0.05
    )
    
    $
    1.31Discontinued operations
    
    
    0.00
    
    
    
    (0.00
    )
    
    
    0.01
    
    
    
    0.00Net income (loss)
    
    $
    (0.27
    )
    
    $
    0.70
    
    
    $
    (0.04
    )
    
    $
    1.31Diluted earnings per share:Weighted average shares for diluted
earnings per share
    
    
    33,980,719
    
    
    
    37,495,087
    
    
    
    34,452,742
    
    
    
    37,483,083Income (loss) from continuing operations
    
    $
    (0.27
    )
    
    $
    0.69
    
    
    $
    (0.05
    )
    
    $
    1.30Discontinued operations
    
    
    0.01
    
    
    
    (0.00
    )
    
    
    0.01
    
    
    
    0.00Net income (loss)
    
    $
    (0.26
    )
    
    $
    0.69
    
    
    $
    (0.04
    )
    
    $
    1.30
  18




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Quarter Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Weighted average shares
for basic earnings per
share
    
    
    33,776,708
    
    
    
    37,199,146
    
    
    
    34,238,706
    
    
    
    37,156,203Non-vested restricted stock
    
    
    72,106
    
    
    
    38,657
    
    
    
    56,573
    
    
    
    33,808Options and warrants
    
    
    131,905
    
    
    
    257,284
    
    
    
    157,463
    
    
    
    293,072Weighted average shares
for diluted earnings per
share
    
    
    33,980,719
    
    
    
    37,495,087
    
    
    
    34,452,742
    
    
    
    37,483,083
  12. Segment Information
     19




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
  Quarter Ended June 30, 2008:
    
    Insurance(Dollars in thousands)
    
    Operations
    
    
    Reinsurance
    
    
    Corporate
    
    
    TotalRevenues:Gross premiums written
    
    $
    94,855
    
    
    $
    9,463
    (1)
    
    $
    
    
    
    $
    104,318Net premiums written
    
    $
    84,171
    
    
    $
    1,038
    (1)
    
    $
    
    
    
    $
    85,209Net premiums earned
    
    $
    98,204
    
    
    $
    2,469
    (1)
    
    $
    
    
    
    $
    100,673Net investment income
    
    
    
    
    
    
    
    
    
    
    17,072
    
    
    
    17,072Net realized investment losses
    
    
    
    
    
    
    
    
    
    
    (2,480
    )
    
    
    (2,480
    )Total revenues
    
    
    98,204
    
    
    
    2,469
    
    
    
    14,592
    
    
    
    115,265Losses and Expenses:Net losses and loss adjustment expenses
    
    
    77,576
    
    
    
    6,068
    (1)
    
    
    
    
    
    
    83,644Acquisition costs and other underwriting
expenses
    
    
    35,817
    (2)
    
    
    2,295
    (3)
    
    
    
    
    
    
    38,112Corporate and other operating expenses
    
    
    
    
    
    
    
    
    
    
    2,521
    
    
    
    2,521Interest expense
    
    
    
    
    
    
    
    
    
    
    2,188
    
    
    
    2,188Income (loss) before income taxes
    
    $
    (15,189
    )
    
    $
    (5,894
    )
    
    $
    9,883
    
    
    
    (11,200
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,091
    )Loss before equity in net loss of partnership
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,109
    )Equity in net loss of partnership, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26
    )Loss before discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,135
    )Discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    164Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (8,971
    )
 (1)
    
    External business only, excluding business assumed from affiliates.(2)
    
    Includes excise tax of $491 relating to the quota share agreement.(3)
    
    Includes all Wind River Reinsurance expenses other than excise tax.  20




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Quarter Ended June 30, 2007:
    
    Insurance(Dollars in thousands)
    
    Operations
    
    
    Reinsurance (1)
    
    
    Corporate
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    143,452
    
    
    $
    5,231
    (1)
    
    $
    
    
    
    $
    
    
    
    $
    148,683Net premiums written
    
    $
    129,242
    
    
    $
    1,272
    (1)
    
    $
    
    
    
    $
    
    
    
    $
    130,514Net premiums earned
    
    $
    136,196
    
    
    $
    389
    (1)
    
    $
    
    
    
    $
    
    
    
    $
    136,585Net investment income
    
    
    
    
    
    
    
    
    
    
    19,317
    
    
    
    
    
    
    
    19,317Net realized investment gains
    
    
    
    
    
    
    
    
    
    
    1,542
    
    
    
    
    
    
    
    1,542Total revenues
    
    
    136,196
    
    
    
    389
    
    
    
    20,859
    
    
    
    
    
    
    
    157,444Losses and Expenses:Net losses and loss adjustment expenses
    
    
    75,133
    
    
    
    111
    (1)
    
    
    
    
    
    
    
    
    
    
    75,244Acquisition costs and other underwriting
expenses
    
    
    44,103
    (2)
    
    
    710
    (3)
    
    
    
    
    
    
    (151
    )
    
    
    44,662Corporate and other operating expenses
    
    
    
    
    
    
    
    
    
    
    2,893
    
    
    
    
    
    
    
    2,893Interest expense
    
    
    
    
    
    
    
    
    
    
    2,899
    
    
    
    
    
    
    
    2,899Income (loss) before income taxes
    
    $
    16,960
    
    
    $
    (432
    )
    
    $
    15,067
    
    
    $
    151
    
    
    
    31,746Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,950Income before equity in net income of
partnership
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,796Equity in net income of partnership, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191Income before discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,987Discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    25,948
 (1)
    
    External business only, excluding business assumed from affiliates.(2)
    
    Includes excise tax of $656 relating to the quota share agreement.(3)
    
    Includes all Wind River Reinsurance expenses other than excise tax.  21




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Six Months Ended June 30, 2008:
    
    Insurance(Dollars in thousands)
    
    Operations
    
    
    Reinsurance
    
    
    Corporate
    
    
    TotalRevenues:Gross premiums written
    
    $
    188,147
    
    
    $
    15,233
    (1)
    
    $
    
    
    
    $
    203,380Net premiums written
    
    $
    164,839
    
    
    $
    2,334
    (1)
    
    $
    
    
    
    $
    167,173Net premiums earned
    
    $
    208,123
    
    
    $
    5,607
    (1)
    
    $
    
    
    
    $
    213,730Net investment income
    
    
    
    
    
    
    
    
    
    
    34,858
    
    
    
    34,858Net realized investment losses
    
    
    
    
    
    
    
    
    
    
    (3,550
    )
    
    
    (3,550
    )Total revenues
    
    
    208,123
    
    
    
    5,607
    
    
    
    31,308
    
    
    
    245,038Losses and Expenses:Net losses and loss adjustment expenses
    
    
    151,792
    
    
    
    8,502
    (1)
    
    
    
    
    
    
    160,294Acquisition costs and other underwriting
expenses
    
    
    72,458
    (2)
    
    
    3,849
    (3)
    
    
    
    
    
    
    76,307Corporate and other operating expenses
    
    
    
    
    
    
    
    
    
    
    6,455
    
    
    
    6,455Interest expense
    
    
    
    
    
    
    
    
    
    
    4,727
    
    
    
    4,727Income (loss) before income taxes
    
    $
    (16,127
    )
    
    $
    (6,744
    )
    
    $
    20,126
    
    
    
    (2,745
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,526
    )Loss before equity in net loss of partnership
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,219
    )Equity in net loss of partnership, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (469
    )Loss before discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,688
    )Discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    157Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (1,531
    )Total assets
    
    $
    2,037,657
    
    
    $
    599,143
    (4)
    
    $
    
    
    
    $
    2,636,800
 (1)
    
    External business only, excluding business assumed from affiliates.(2)
    
    Includes excise tax of $1,041 relating to the quota share agreement.(3)
    
    Includes all Wind River Reinsurance expenses other than excise tax.(4)
    
    Comprised of Wind River Reinsurances total assets less its investment in subsidiaries.  22




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 Six Months Ended June 30, 2007:
    
    Insurance(Dollars in thousands)
    
    Operations
    
    
    Reinsurance
    
    
    Corporate
    
    
    Eliminations
    
    
    TotalRevenues:Gross premiums written
    
    $
    289,054
    
    
    $
    12,165
    (1)
    
    $
    
    
    
    $
    
    
    
    $
    301,219Net premiums written
    
    $
    259,800
    
    
    $
    4,769
    (1)
    
    $
    
    
    
    $
    
    
    
    $
    264,569Net premiums earned
    
    $
    273,910
    
    
    $
    1,112
    (1)
    
    $
    
    
    
    $
    
    
    
    $
    275,022Net investment income
    
    
    
    
    
    
    
    
    
    
    38,185
    
    
    
    
    
    
    
    38,185Net realized investment gains
    
    
    
    
    
    
    
    
    
    
    1,767
    
    
    
    
    
    
    
    1,767Total revenues
    
    
    273,910
    
    
    
    1,112
    
    
    
    39,952
    
    
    
    
    
    
    
    314,974Losses and Expenses:Net losses and loss adjustment expenses
    
    
    156,510
    
    
    
    575
    (1)
    
    
    
    
    
    
    
    
    
    
    157,085Acquisition costs and other
underwriting expenses
    
    
    86,607
    (2)
    
    
    1,419
    (3)
    
    
    
    
    
    
    (482
    )
    
    
    87,544Corporate and other operating expenses
    
    
    
    
    
    
    
    
    
    
    6,281
    
    
    
    176
    
    
    
    6,457Interest expense
    
    
    
    
    
    
    
    
    
    
    5,804
    
    
    
    
    
    
    
    5,804Income (loss) before income taxes
    
    $
    30,793
    
    
    $
    (882
    )
    
    $
    27,867
    
    
    $
    306
    
    
    
    58,084Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,024Income before equity in net income
of partnership
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,060Equity in net income of partnership,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    361Income before discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,421Discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    48,541Total Assets
    
    $
    2,290,056
    
    
    $
    598,931
    (4)
    
    $
    
    
    
    $
    
    
    
    $
    2,888,987
 (1)
    
    External business only, excluding business assumed from affiliates.(2)
    
    Includes excise tax of $1,078 relating to the quota share agreement.(3)
    
    Includes all Wind River Reinsurance expenses other than excise tax.(4)
    
    Comprised of Wind River Reinsurances total assets less its investment in subsidiaries.  23




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UNITED AMERICA INDEMNITY, LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  (Unaudited)
 13. Supplemental Cash Flow Information
  Quarter Ended June 30,
    
    
    Six Months Ended June 30,(Dollars in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net U.S. federal income taxes paid
    
    $
    5,000
    
    
    $
    8,000
    
    
    $
    6,401
    
    
    $
    8,000Interest paid
    
    
    943
    
    
    
    1,418
    
    
    
    5,138
    
    
    
    5,654
 14. Subsequent Events
    24




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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
      25




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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.
   26




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UNITED AMERICA INDEMNITY, LTD.
         27




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UNITED AMERICA INDEMNITY, LTD.
       28




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UNITED AMERICA INDEMNITY, LTD.
  Gross Reserve(Dollars in thousands)
    
    Case
    
    
    IBNR (1)
    
    
    TotalInsurance Operations:Penn-America
    
    $
    186,803
    
    
    $
    382,301
    
    
    $
    569,104United National
    
    
    250,463
    
    
    
    527,695
    
    
    
    778,158Diamond State
    
    
    55,070
    
    
    
    85,060
    
    
    
    140,130Total Insurance Operations
    
    
    492,336
    
    
    
    995,056
    
    
    
    1,487,392Reinsurance Operations:Wind River Reinsurance
    
    
    1,492
    
    
    
    12,345
    
    
    
    13,837Total
    
    $
    493,828
    
    
    $
    1,007,401
    
    
    $
    1,501,229
 Net Reserves (2)(Dollars in thousands)
    
    Case
    
    
    IBNR (1)
    
    
    TotalInsurance Operations:Penn-America
    
    $
    169,403
    
    
    $
    323,086
    
    
    $
    492,489United National
    
    
    66,261
    
    
    
    160,845
    
    
    
    227,106Diamond State
    
    
    39,577
    
    
    
    62,140
    
    
    
    101,717Total Insurance Operations
    
    
    275,241
    
    
    
    546,071
    
    
    
    821,312Reinsurance Operations:Wind River Reinsurance
    
    
    1,387
    
    
    
    11,617
    
    
    
    13,004Total
    
    $
    276,628
    
    
    $
    557,688
    
    
    $
    834,316
 (1)
    
    Losses incurred but not reported, including the
expected future emergence of case reserves.(2)
    
    Does not include reinsurance receivable on paid
losses or reserve for uncollectible reinsurance.    29




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
     Severity Change(Dollars in thousands)
    
    
    -10%
    
    
    -5%
    
    
    0%
    
    
    5%
    
    
    10%Frequency Change
    
    
    -5
    %
    
    $
    (20,844
    )
    
    $
    (14,016
    )
    
    $
    (7,188
    )
    
    $
    (359
    )
    
    $
    6,469-3
    %
    
    
    (18,257
    )
    
    
    (11,285
    )
    
    
    (4,313
    )
    
    
    2,659
    
    
    
    9,632-2
    %
    
    
    (16,963
    )
    
    
    (9,919
    )
    
    
    (2,875
    )
    
    
    4,169
    
    
    
    11,213-1
    %
    
    
    (15,669
    )
    
    
    (8,553
    )
    
    
    (1,438
    )
    
    
    5,678
    
    
    
    12,7940
    %
    
    
    (14,375
    )
    
    
    (7,188
    )
    
    
    
    
    
    
    7,188
    
    
    
    14,3751
    %
    
    
    (13,082
    )
    
    
    (5,822
    )
    
    
    1,438
    
    
    
    8,697
    
    
    
    15,9572
    %
    
    
    (11,788
    )
    
    
    (4,456
    )
    
    
    2,875
    
    
    
    10,207
    
    
    
    17,5383
    %
    
    
    (10,494
    )
    
    
    (3,091
    )
    
    
    4,313
    
    
    
    11,716
    
    
    
    19,1195
    %
    
    
    (7,906
    )
    
    
    (359
    )
    
    
    7,188
    
    
    
    14,735
    
    
    
    22,282
  Recoverability of Reinsurance Receivables
   30




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Investments
     Fair Value Measurements
  Goodwill and Intangible Assets
     31




---



##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Taxation
     Our Business Segments
     32




---



##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  Quarter Ended June 30,
    
    
    Six Months Ended June 30,(Dollars in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Insurance Operations premiums written:Gross premiums written
    
    $
    94,855
    
    
    $
    143,452
    
    
    $
    188,147
    
    
    $
    289,054Ceded premiums written
    
    
    10,684
    
    
    
    14,210
    
    
    
    23,308
    
    
    
    29,254Net premiums written
    
    $
    84,171
    
    
    $
    129,242
    
    
    $
    164,839
    
    
    $
    259,800Reinsurance Operations premiums written:Gross premiums written
    
    $
    9,463
    
    
    $
    5,231
    
    
    $
    15,233
    
    
    $
    12,165Ceded premiums written
    
    
    8,425
    
    
    
    3,959
    
    
    
    12,899
    
    
    
    7,396Net premiums written
    
    $
    1,038
    
    
    $
    1,272
    
    
    $
    2,334
    
    
    $
    4,769Revenues:Insurance Operations
    
    $
    98,204
    
    
    $
    136,196
    
    
    $
    208,123
    
    
    $
    273,910Reinsurance Operations
    
    
    2,469
    
    
    
    389
    
    
    
    5,607
    
    
    
    1,112Corporate (1)
    
    
    14,592
    
    
    
    20,859
    
    
    
    31,308
    
    
    
    39,952Total revenues
    
    $
    115,265
    
    
    $
    157,444
    
    
    $
    245,038
    
    
    $
    314,974Expenses:Insurance Operations
    
    $
    113,393
    
    
    $
    119,236
    
    
    $
    224,250
    
    
    $
    243,117Reinsurance Operations
    
    
    8,363
    
    
    
    821
    
    
    
    12,351
    
    
    
    1,994Corporate (2)
    
    
    4,709
    
    
    
    5,792
    
    
    
    11,182
    
    
    
    12,085Subtotal
    
    
    126,465
    
    
    
    125,849
    
    
    
    247,783
    
    
    
    257,196Intercompany eliminations
    
    
    
    
    
    
    (151
    )
    
    
    
    
    
    
    (306
    )Net expenses
    
    $
    126,465
    
    
    $
    125,698
    
    
    $
    247,783
    
    
    $
    256,890Income (loss) before income taxes:Insurance Operations
    
    $
    (15,189
    )
    
    $
    16,960
    
    
    $
    (16,127
    )
    
    $
    30,793Reinsurance Operations
    
    
    (5,894
    )
    
    
    (432
    )
    
    
    (6,744
    )
    
    
    (882
    )Corporate
    
    
    9,883
    
    
    
    15,067
    
    
    
    20,126
    
    
    
    27,867Subtotal
    
    
    (11,200
    )
    
    
    31,595
    
    
    
    (2,745
    )
    
    
    57,778Intercompany eliminations
    
    
    
    
    
    
    151
    
    
    
    
    
    
    
    306Total income (loss) before income taxes
    
    $
    (11,200
    )
    
    $
    31,746
    
    
    $
    (2,745
    )
    
    $
    58,084Insurance combined ratio analysis: (3)Net losses and loss adjustment expense ratio
    
    
    83.1
    
    
    
    55.1
    
    
    
    75.0
    
    
    
    57.1Other underwriting expense ratio
    
    
    37.9
    
    
    
    32.7
    
    
    
    35.7
    
    
    
    31.8Combined ratio
    
    
    121.0
    
    
    
    87.8
    
    
    
    110.7
    
    
    
    88.9
 (1)
    
    Comprised of net investment income and net realized investment gains (losses).(2)
    
    Comprised of interest expense, outside legal fees, other professional fees, directors
fees, management fees, salaries and benefits for holding company personnel, and taxes
incurred that are not directly related to insurance or reinsurance operations.(3)
    
    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.  33




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Results of Operations
 Quarter Ended June 30, 2008 Compared with the Quarter Ended June 30, 2007
 Premiums
   Quarter Ended June 30,
    
    
    Increase / (Decrease)2008
    
    
    2007
    
    
    $
    
    
    %Insurance Operations:Penn-America
    
    $
    49,167
    
    
    $
    79,327
    
    
    $
    (30,160
    )
    
    
    -38.0
    %United National
    
    
    23,360
    
    
    
    34,801
    
    
    
    (11,441
    )
    
    
    -32.9
    %Diamond State
    
    
    22,329
    
    
    
    29,324
    
    
    
    (6,995
    )
    
    
    -23.9
    %Total Insurance Operations
    
    
    94,856
    
    
    
    143,452
    
    
    
    (48,596
    )
    
    
    -33.9
    %Reinsurance Operations:Wind River Reinsurance
    
    
    9,462
    
    
    
    5,231
    
    
    
    4,231
    
    
    
    80.9
    %Total
    
    $
    104,318
    
    
    $
    148,683
    
    
    $
    (44,365
    )
    
    
    -29.8
    %
 
    
    Insurance Operations:
 
    
    Penn-America gross premiums written decreased $30.2 million or 38.0% primarily due
to a reduction of $12.3 million due to terminations of business that did not meet our
profitability requirements, a reduction of $9.9 million from coastal catastrophe prone
areas, and a reduction of $8.0 million from price decreases in the aggregate of
approximately 4.0% and other market factors.
 
    
    United National gross premiums written decreased $11.4 million or 32.9% primarily
due to a reduction of $0.4 million from a terminated 100% reinsured property program, a
reduction of $5.3 million due to terminations of business that did not meet our
profitability requirements, and a reduction of $5.7 million from price decreases in the
aggregate of approximately 4.0% and other market factors.
 
    
    Diamond State gross premiums written decreased $7.0 million or 23.9% primarily due
to a reduction of $1.7 million due to terminations of business that did not meet our
profitability requirements and a reduction of $5.3 million from price decreases in the
aggregate of approximately 5.0% and other market factors.
 
    
    Reinsurance Operations:
 
    
    Wind River Reinsurance gross premiums written increased $4.2 million or 80.9%
primarily due to increased participation on one of our reinsurance treaties offset
partially by the termination of a treaty that did not meet our profitability
requirements.
   34




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  Quarter Ended June 30,
    
    
    Increase / (Decrease)2008
    
    
    2007
    
    
    $
    
    
    %Insurance Operations:Penn-America
    
    $
    45,515
    
    
    $
    74,895
    
    
    $
    (29,380
    )
    
    
    -39.2
    %United National
    
    
    20,082
    
    
    
    29,773
    
    
    
    (9,691
    )
    
    
    -32.5
    %Diamond State
    
    
    18,578
    
    
    
    24,574
    
    
    
    (5,996
    )
    
    
    -24.4
    %Total Insurance Operations
    
    
    84,175
    
    
    
    129,242
    
    
    
    (45,067
    )
    
    
    -34.9
    %Reinsurance Operations:Wind River Reinsurance
    
    
    1,034
    
    
    
    1,272
    
    
    
    (238
    )
    
    
    -18.7
    %Total
    
    $
    85,209
    
    
    $
    130,514
    
    
    $
    (45,305
    )
    
    
    -34.7
    %
 
    
    Insurance Operations:
 
    
    Penn-America net premiums written decreased $29.4 million or 39.2% primarily due to
the reduction of gross premiums written noted above.
 
    
    United National net premiums written decreased $9.7 million or 32.5% primarily due
to the reduction of gross premiums written noted above.
 
    
    Diamond State net premiums written decreased $6.0 million or 24.4% primarily due to
the reduction of gross premiums written noted above.
 
    
    Reinsurance Operations:
 
    
    Wind River Reinsurance net premiums written decreased $0.2 million or 18.7%
primarily due to a terminated treaty that did not meet our profitability requirements.
  
    
    The decrease in net premiums earned from our Insurance Operations segment was
attributable to the decreases in net premiums written noted above, as well as to a decrease
in net written premium from $560.5 million in 2006 to $490.5 million in 2007. The net
unearned premium reserve at December 31, 2007 was $192.7 million compared to $244.9 million
at December 31, 2006, a decrease of $45.8 million or 18.7%.
 
    
    The increase in net premiums earned from our Reinsurance Operations segment is primarily
due to business written in the latter part of 2007.
 Net Investment Income
  
    
    Gross investment income, excluding realized gains and losses, was $18.3 million for the
quarter ended June 30, 2008, compared with $20.6 million for the quarter ended June 30,
2007, a decrease of $2.3 million or 11.1%. The decrease was primarily due to reductions in
short-term interest rates and a reduction of our cash and invested assets. We had no gross
investment income from our limited partnership investments during the quarter ended June
30, 2008 compared to $0.1 million for the quarter ended June 30, 2007. Excluding limited
partnership distributions, gross investment income for the quarter ended June 30, 2008
decreased 10.6% compared to the quarter ended June 30, 2007.
 
    
    Investment expenses were $1.3 million for each of the quarters ended June 30, 2008 and
2007.
  35




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  Net Realized Investment Gains (Losses)
  Net Losses and Loss Adjustment Expenses
      36




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  Acquisition Costs and Other Underwriting Expenses
  
    
    The decrease in our Insurance Operations segment is due to a $8.6 million decrease in
acquisition costs, which is primarily due to a decrease in commission expenses as a result
of the decrease in net premiums earned, offset by a $0.8 million increase in other
underwriting expenses, which is primarily due to increases in total compensation expenses,
property and office costs, and accounting and audit fees.
 
    
    The increase in our Reinsurance Operations segment is primarily due to a $1.3 million
increase in acquisition costs, which is primarily due to an increase in commission expenses
related to the increase in net premium earned during the quarter ended June 30, 2008
compared to the quarter ended June 30, 2007. There was not a significant change in other
underwriting expenses.
 Corporate and Other Operating Expenses
  Expense and Combined Ratios
   Interest Expense
   37




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Income Tax Expense (Benefit)
  Equity in Net Income (Loss) of Partnership
  Discontinued Operations
  Net Income (Loss)
  Six Months Ended June 30, 2008 Compared with the Six Months Ended June 30, 2007
 Premiums
   Six Months Ended June 30,
    
    
    Increase / (Decrease)2008
    
    
    2007
    
    
    $
    
    
    %Insurance Operations:Penn-America
    
    $
    93,348
    
    
    $
    159,848
    
    
    $
    (66,500
    )
    
    
    -41.6
    %United National
    
    
    48,291
    
    
    
    71,376
    
    
    
    (23,085
    )
    
    
    -32.3
    %Diamond State
    
    
    46,508
    
    
    
    57,830
    
    
    
    (11,322
    )
    
    
    -19.6
    %Total Insurance Operations
    
    
    188,147
    
    
    
    289,054
    
    
    
    (100,907
    )
    
    
    -34.9
    %Reinsurance Operations:Wind River Reinsurance
    
    
    15,233
    
    
    
    12,165
    
    
    
    3,068
    
    
    
    25.2
    %Total
    
    $
    203,380
    
    
    $
    301,219
    
    
    $
    (97,839
    )
    
    
    -32.5
    %
  38




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
    
    Insurance Operations:
 
    
    Penn-America gross premiums written decreased $66.5 million or 41.6% primarily due
to a reduction
of $26.8 million due to terminations of business that did not meet our profitability
requirements, a reduction of $22.0 million from coastal catastrophe prone areas, and a
reduction of $17.7 million from price decreases in the aggregate of approximately 4.0%
and other market factors.
 
    
    United National gross premiums written decreased $23.1 million or 32.3% primarily
due to a reduction of $1.7 million from a terminated 100% reinsured property program,
$10.9 million due to terminations of business that did not meet our profitability
requirements, and a reduction of $10.5 million from price decreases in the aggregate of
approximately 4.0% and other market factors.
 
    
    Diamond State gross premiums written decreased $11.3 million or 19.6% primarily due
to a reduction of $2.6 million due to terminations of business that did not meet our
profitability requirements and a reduction of $8.7 million from price decreases in the
aggregate of approximately 5.0% and other market factors.
 
    
    Reinsurance Operations:
 
    
    Wind River Reinsurance gross premiums written increased $3.1 million or 25.2%
primarily due to increased participation on one of our reinsurance treaties offset
partially by the termination of a treaty that did not meet our profitability
requirements.
   Six Months Ended June 30,
    
    
    Increase / (Decrease)2008
    
    
    2007
    
    
    $
    
    
    %Insurance Operations:Penn-America
    
    $
    84,914
    
    
    $
    150,575
    
    
    $
    (65,661
    )
    
    
    -43.6
    %United National
    
    
    41,429
    
    
    
    59,317
    
    
    
    (17,888
    )
    
    
    -30.2
    %Diamond State
    
    
    38,496
    
    
    
    49,908
    
    
    
    (11,412
    )
    
    
    -22.9
    %Total Insurance Operations
    
    
    164,839
    
    
    
    259,800
    
    
    
    (94,961
    )
    
    
    -36.6
    %Reinsurance Operations:Wind River Reinsurance
    
    
    2,334
    
    
    
    4,769
    
    
    
    (2,435
    )
    
    
    -51.1
    %Total
    
    $
    167,173
    
    
    $
    264,569
    
    
    $
    (97,396
    )
    
    
    -36.8
    %
 
    
    Insurance Operations:
 
    
    Penn-America net premiums written decreased $65.7 million or 43.6% primarily due to
the reduction of gross premiums written noted above.
 
    
    United National net premiums written decreased $17.9 million or 30.2% primarily due
to the reduction of gross premiums written noted above.
 
    
    Diamond State net premiums written decreased $11.4 million or 22.9% primarily due to
the reduction of gross premiums written noted above.
 
    
    Reinsurance Operations:
 
    
    Wind River Reinsurance net premiums written decreased $2.4 million or 36.8%
primarily due to the termination of a treaty that did not meet our profitability
requirements.
  39




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  
    
    The decrease in net premiums earned from our Insurance Operations segment was
attributable to the decreases in net premiums written noted above, as well as to a decrease
in net written premium from $560.5 million in 2006 to $490.5 million in 2007. The net
unearned premium reserve at December 31, 2007 was $192.7 million compared to $244.9 million
at December 31, 2006, a decrease of $45.8 million or 18.7%.
 
    
    The increase in net premiums earned from our Reinsurance Operations segment is primarily
due to business written in the latter part of 2007.
 Net Investment Income
  
    
    Gross investment income, excluding realized gains and losses, was $37.7 million for the
six months ended June 30, 2008, compared with $41.0 million for the six months ended June
30, 2007, a decrease of $3.3 million or 8.2%. The decrease was primarily due to reductions
in short-term interest rates and a reduction of our cash and invested assets. We had no
gross investment income from our limited partnership investments during the six months
ended June 30, 2008 compared to $0.4 million for the six months ended June 30, 2007.
Excluding limited partnership distributions, gross investment income for the six months
ended June 30, 2008 decreased 7.3% compared to the six months ended June 30, 2007.
 
    
    Investment expenses were $2.8 million for each of the six months ended June 30, 2008 and
2007.
  Net Realized Investment Gains (Losses)
  Net Losses and Loss Adjustment Expenses
    40




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
    Acquisition Costs and Other Underwriting Expenses
  
    
    The decrease in our Insurance Operations segment is due to a $13.7 million decrease in
acquisition costs, which is primarily due to a decrease in commission expenses as a result
of the decrease in net premiums earned. There was not a significant change in other
underwriting expenses.
 
    
    The increase in our Reinsurance Operations segment is primarily due to a $2.6 million
increase in acquisition costs, which is primarily due to an increase in commission expenses
related to the increase in net premium earned during the six months ended June 30, 2008
compared to the six months ended June 30, 2007. There was not a significant change in
other underwriting expenses.
 Corporate and Other Operating Expenses
  Expense and Combined Ratios
   41




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
  Interest Expense
  Income Tax Expense (Benefit)
  Equity in Net Income (Loss) of Partnership
  Discontinued Operations
  Net Income (Loss)
   42




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Liquidity and Capital Resources
 Sources and Uses of Funds
      43




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Cash Flows
   
    
    the fact that we collect premiums in advance of losses paid;
 
    
    the timing of our settlements with our reinsurers; and
 
    
    the timing of our loss payments.
  
    
    a decrease in net premiums collected of $88.2 million, an increase in net losses paid of
$28.3 million, offset by a decrease in acquisition costs and other underwriting expenses of
$22.9 million;
 
    
    a decrease in net investment income collected of $2.0 million;
 
    
    a decrease in net federal income taxes paid of $1.9 million.
  Liquidity
    Capital Resources
      44




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 Off Balance Sheet Arrangements
  Cautionary Note Regarding Forward-Looking Statements
    
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    45




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
   46




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
 PART II-OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   ApproximateTotal Number of
    
    
    Dollar ValueShares Purchased
    
    
    of Shares ThatTotal Number
    
    
    Average
    
    
    as Part of Publicly
    
    
    May Yet Beof Shares
    
    
    Price Paid
    
    
    Announced Plan
    
    
    Purchased Under thePeriod (1)
    
    Purchased
    
    
    Per Share
    
    
    or Program
    
    
    Plan or Program (2)April 1-30, 2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    45,746,974May 1-31, 2008
    
    
    995,674
    
    
    $
    14.06
    
    
    
    995,674
    (3)
    
    $
    31,749,232June 1-30, 2008
    
    
    1,606,850
    
    
    $
    14.25
    
    
    
    1,606,850
    (3)
    
    $
    8,847,487Total
    
    
    2,602,524
    
    
    $
    14.18
    
    
    
    2,602,524
    
    
    
    N/A
 (1)
    
    Based on settlement date.(2)
    
    Approximate dollar value of shares is as of the last date of the applicable month.(3)
    
    Purchased as part of the repurchase authorization announced in February 2008.   47




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
 Item 4. Submission of Matters to a Vote of Security Holders
   Nominee
    
    Votes For
    
    
    Votes Against
    
    
    Votes AbstainedSaul A. Fox
    
    
    135,684,945
    
    
    
    9,106,051
    
    
    
    529,858Larry A. Frakes
    
    
    137,165,496
    
    
    
    8,150,054
    
    
    
    5,304Stephen A. Cozen
    
    
    136,324,210
    
    
    
    8,990,488
    
    
    
    6,156Richard L. Duszak
    
    
    144,448,670
    
    
    
    866,028
    
    
    
    6,156James R. Kroner
    
    
    136,646,064
    
    
    
    8,668,634
    
    
    
    6,156Michael J. Marchio
    
    
    136,645,890
    
    
    
    8,668,808
    
    
    
    6,156Seth Gersch
    
    
    136,593,245
    
    
    
    8,721,453
    
    
    
    6,156
 2.
    
    Ratification of the appointment of PricewaterhouseCoopers LLP as our independent auditor for
2008 and the authorization of our Board of Directors acting by its Audit Committee to set the
fees for the independent auditor.
 Votes For
    
    Votes Against
    
    Votes Abstained
    
    Broker Non Votes145,216,216
    
    81,663
    
    22,975
    
    0
 3.
    
    Election of the following nominees to the Wind River Reinsurance Company, Ltd. Board of
Directors.
 Nominee
    
    Votes For
    
    
    Votes WithheldAlan Bossin
    
    
    144,752,346
    
    
    
    568,508Larry A. Frakes
    
    
    144,752,346
    
    
    
    568,508David R. Whiting
    
    
    144,751,846
    
    
    
    569,008Janita Burke Waldron (Alternate Director)
    
    
    144,754,346
    
    
    
    566,508Richard H. Black (Alternate Director)
    
    
    144,754,346
    
    
    
    566,508
 4.
    
    Approval of the appointment of PricewaterhouseCoopers, Hamilton, Bermuda, as the independent
auditor of Wind River Reinsurance Company, Ltd. for 2008.
 Votes For
    
    Votes Against
    
    Votes Abstained
    
    Broker Non Votes145,241,129
    
    50,703
    
    29,022
    
    0
 5.
    
    Approval of the GAAP audited financial statements and ratification of the STAT audited
financial statement of Wind River Reinsurance Company, Ltd. and the report of the independent
auditors on these financial statements.
 Votes For
    
    Votes Against
    
    Votes Abstained110,015,996
    
    0
    
    0
 6.
    
    Approval of amendments to the bye-laws of Wind River Reinsurance Company, Ltd.
 Votes For
    
    Votes Against
    
    Votes Abstained110,015,996
    
    0
    
    0
 
 Item 6. Exhibits
 31.1+
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14 (a) 15d-14 (a) of the
Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2+
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14 (a) 15d-14 (a) of the
Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1+
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2+
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 +
    
    Filed herewith.*
    
    Management contract or compensatory plan or arrangement.  48




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##### Table of Contents



UNITED AMERICA INDEMNITY, LTD.
 
 SIGNATURE
  UNITED AMERICA INDEMNITY, LTD.
RegistrantAugust 11, 2008

    By:
    /s/ Thomas M. McGeehanDate: August 11, 2008

    
    Thomas M. McGeehanInterim Chief Financial Officer

(Authorized Signatory and Principal
Financial
 and Accounting Officer)  49




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description31.1
    
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14 (a) 15d-14 (a) of the
Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14 (a) 15d-14 (a) of the
Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  50