United America Indemnity (INDM) 10-Q 2007 Q2 Quarterly report

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, 2007

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.

(Exact name of registrant as specified in its charter)

Cayman Islands
(State or other jurisdiction	98-0417107
of incorporation or organization)	(I.R.S. Employer Identification No.)

WALKER HOUSE, 87 MARY STREET
GEORGE TOWN, GRAND CAYMAN KY1-9002
CAYMAN ISLANDS
(Address of principal executive office including zip code)

(345) 949-0100
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero;      Accelerated filerþ;      non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

As of August 3, 2007, the registrant had outstanding 24,697,430 Class A Common Shares and 12,687,500 Class B Common Shares.

TABLE OF CONTENTS

Page

	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Balance Sheets As of June 30, 2007 (Unaudited) and December 31, 2006	1
	Consolidated Statements of Operations Quarters and Six Months Ended June 30, 2007 and 2006 (Unaudited)	2
	Consolidated Statements of Comprehensive Income Quarters and Six Months Ended June 30, 2007 and 2006 (Unaudited)	3
	Consolidated Statements of Changes in Shareholders’ Equity As of June 30, 2007 (Unaudited) and December 31, 2006	4
	Consolidated Statements of Cash Flows Six Months Ended June 30, 2007 and 2006 (Unaudited)	5
	Notes to Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	40
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 4.	Submission of Matters to a Vote of Security Holders	42
Item 6.	Exhibits	43
Signatures		45
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certification of Chief Executive Officer, pursuant to Section 906
Certification of Chief Financial Officer, pursuant to Section 906

As used in this quarterly report, unless the context requires otherwise:

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, Penn-America Group, Inc., our U.S. Insurance Operations and our Agency Operations;
3)	“United America Insurance Group” refers to our U.S. Insurance Operations;
4)	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;
5)	our “Predecessor Insurance Operations” refers to Wind River Investment Corporation, which was dissolved on May 31, 2006, AIS, American Insurance Adjustment Agency, Inc., Emerald Insurance Company, the United National Insurance Companies, International Underwriters, LLC, and J.H. Ferguson & Associates, LLC;
6)	the “United National Insurance Companies” refers to the insurance and related operations conducted by United National Insurance Company and its subsidiaries, including Diamond State Insurance Company, United National Casualty Insurance Company, and United National Specialty Insurance Company;
7)	the ���Penn-America Insurance Companies” refers to the insurance and related operations of Penn-America Insurance Company, Penn-Star Insurance Company, and Penn-Patriot Insurance Company;

8)	our “Insurance Operations” refers to the U.S. Insurance Operations;
9)	our “Non-U.S. Insurance Operations” refers to the insurance related operations of Wind River Barbados and Wind River Bermuda prior to the amalgamation, which occurred on September 30, 2006;
10)	“Wind River Barbados” refers to Wind River Insurance Company (Barbados), Ltd.;
11)	“Wind River Bermuda” refers to Wind River Insurance Company, Ltd.;
12)	“Wind River Reinsurance” refers to Wind River Reinsurance Company, Ltd. In September 2006, Wind River Barbados was redomesticated to Bermuda and renamed Wind River Reinsurance Company, Ltd., at which time it was amalgamated with Wind River Bermuda;
13)	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;
14)	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.;
15)	our “Reinsurance Operations” refers to the reinsurance and related operations of Wind River Reinsurance;
16)	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.;
17)	“AIS” refers to American Insurance Service, Inc.;
18)	“United National Group” refers to the United National Insurance Companies and Emerald Insurance Company;
19)	“Penn-America Group” refers to Penn-America Group, Inc. and the Penn-America Insurance Companies;
20)	the “Statutory Trusts” refers to United National Group Capital Trust I, United National Group Capital Statutory Trust II, Penn-America Statutory Trust I 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; and
23)	“$” or “dollars” refers to U.S. dollars.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

UNITED AMERICA INDEMNITY, LTD.

Consolidated Balance Sheets

(Dollars in thousands, except share amounts)

	(Unaudited)
	June 30, 2007		December 31, 2006
ASSETS
Bonds:
Available for sale securities, at fair value (amortized cost: $1,345,501 and $1,253,016)	$	1,323,619	$	1,246,684
Preferred shares:
Available for sale securities, at fair value (cost: $3,565 and $3,991)		3,565		4,369
Common shares:
Available for sale securities, at fair value (cost: $59,825 and $57,351)		74,815		71,003
Other invested assets
Available for sale securities, at fair value (cost: $24,712 and $24,712)		64,906		60,863
Total investments		1,466,905		1,382,919
Cash and cash equivalents		276,440		273,745
Accounts receivable		5,794		8,579
Agents’ balances		79,512		86,409
Reinsurance receivables		818,954		982,502
Accrued investment income		13,769		13,150
Federal income taxes receivable		20		—
Deferred federal income taxes		12,158		12,661
Deferred acquisition costs		59,949		60,086
Goodwill		84,246		84,246
Intangible assets		23,024		23,528
Prepaid reinsurance premiums		32,893		38,335
Other assets		15,323		18,456
Total assets	$	2,888,987	$	2,984,616
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses	$	1,598,805	$	1,702,010
Unearned premiums		267,373		283,265
Federal income taxes payable		—		379
Amounts held for the account of others		8,314		15,491
Ceded balances payable		14,166		16,235
Insurance premiums payable		1,333		1,797
Contingent commissions		5,235		8,629
Payable for securities		2,297		—
Senior notes payable		90,000		90,000
Junior subordinated debentures		61,857		61,857
Notes and loans payable		1,352		4,382
Other liabilities		33,739		37,301
Total liabilities		2,084,471		2,221,346
Commitments and contingencies (Note 8)		—		—
Shareholders’ equity:
Common shares, $0.0001 par value, 900,000,000 common shares authorized, 24,689,949 and 24,507,919 Class A common shares issued and outstanding, respectively, and 12,687,500 Class B common shares issued and outstanding		4		4
Preferred shares, $0.0001 par value, 100,000,000 shares authorized, none issued and outstanding		—		—
Additional paid-in capital		517,063		515,357
Accumulated other comprehensive income		13,283		22,580
Retained earnings		274,166		225,329
Total shareholders’ equity		804,516		763,270
Total	$	2,888,987	$	2,984,616

See accompanying notes to consolidated financial statements.

1

UNITED AMERICA INDEMNITY, LTD.

Consolidated Statements of Operations

(Dollars in thousands, except per share data)

	(Unaudited)						(Unaudited)
	Quarter Ended June 30,						Six Months Ended June 30,
	2007			2006			2007		2006
Revenues:
Gross premiums written	$	148,683		$	167,295		$	301,219	$	326,853
Net premiums written	$	130,514		$	142,688		$	264,569	$	278,025
Net premiums earned	$	136,585		$	133,751		$	275,022	$	269,181
Net investment income		19,317			17,936			38,185		31,615
Net realized investment gains (losses)		1,542			(4	)		1,767		39
Total revenues		157,444			151,683			314,974		300,835
Losses and Expenses:
Net losses and loss adjustment expenses		75,244			80,464			157,085		159,428
Acquisition costs and other underwriting expenses		44,662			41,175			87,544		86,163
Corporate and other operating expenses		2,893			3,868			6,457		8,126
Interest expense		2,899			2,958			5,804		5,678
Income before income taxes		31,746			23,218			58,084		41,440
Income tax expense		5,950			2,558			10,024		3,733
Income before minority interest and equity in net income of partnership		25,796			20,660			48,060		37,707
Minority interest, net of tax		—			4			—		—
Equity in net income of partnership, net of tax		191			40			361		572
Income before discontinued operations		25,987			20,704			48,421		38,279
Discontinued operations, net of tax		(39	)		(450	)		120		(247	)
Net income	$	25,948		$	20,254		$	48,541	$	38,032
Per share data:
Income from continuing operations:
Basic	$	0.70		$	0.56		$	1.31	$	1.05
Diluted	$	0.69		$	0.56		$	1.30	$	1.04
Discontinued operations:
Basic	$	0.00		$	(0.01	)	$	0.00	$	(0.01	)
Diluted	$	0.00		$	(0.01	)	$	0.00	$	(0.01	)
Net income:
Basic	$	0.70		$	0.55		$	1.31	$	1.04
Diluted	$	0.69		$	0.55		$	1.30	$	1.03
Weighted-average number of shares outstanding:
Basic		37,199,146			36,664,626			37,156,203		36,615,325
Diluted		37,495,087			37,115,922			37,483,083		37,047,091

See accompanying notes to consolidated financial statements.

2

UNITED AMERICA INDEMNITY, LTD.

Consolidated Statements of Comprehensive Income

(Dollars in thousands)

	(Unaudited)						(Unaudited)
	Quarter Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Net income	$	25,948		$	20,254		$	48,541		$	38,032
Other comprehensive loss, net of tax:
Unrealized losses on securities:
Unrealized holding losses arising during period		(10,671	)		(11,400	)		(7,861	)		(17,527	)
Less: Reclassification adjustment for gains (losses) included in net income		994			(73	)		1,140			(14	)
Other comprehensive loss, net of tax		(11,665	)		(11,327	)		(9,001	)		(17,513	)
Comprehensive income, net of tax	$	14,283		$	8,927		$	39,540		$	20,519

See accompanying notes to consolidated financial statements.

3

UNITED AMERICA INDEMNITY, LTD.

Consolidated Statements of Changes in Shareholders’ Equity

(Dollars in thousands, except share amounts)

	(Unaudited)
	Six Months Ended			Year Ended
	June 30, 2007			December 31, 2006
Number of Class A common shares:
Number at beginning of period		24,507,919			23,868,402
Class A common shares issued under share incentive plans		175,132			618,797
Class A common shares issued to directors		6,898			20,720
Number at end of period		24,689,949			24,507,919
Number of Class B common shares:
Number at beginning of period		12,687,500			12,687,500
Number at end of period		12,687,500			12,687,500
Par value of Class A common shares:
Balance at beginning of period	$	3		$	3
Class A common shares issued		—			—
Balance at end of period	$	3		$	3
Par value of Class B common shares:
Balance at beginning of period	$	1		$	1
Balance at end of period	$	1		$	1
Additional paid-in capital:
Balance at beginning of period	$	515,357		$	504,541
Contributed capital from Class A common shares		—			1,000
Share compensation plans		1,706			9,816
Balance at end of period	$	517,063		$	515,357
Accumulated other comprehensive income, net of deferred income tax:
Balance at beginning of period	$	22,580		$	9,471
Other comprehensive (loss) income		(9,001	)		13,109
Adoption of SFAS 155		(296	)		—
Balance at end of period	$	13,283		$	22,580
Retained earnings:
Balance at beginning of period	$	225,329		$	125,911
Net income		48,541			99,418
Adoption of SFAS 155		296			—
Balance at end of period	$	274,166		$	225,329
Total shareholders’ equity	$	804,516		$	763,270

See accompanying notes to consolidated financial statements.

4

UNITED AMERICA INDEMNITY, LTD.

Consolidated Statements of Cash Flows

(Dollars in thousands)

	(Unaudited)
	Six Months Ended June 30,
	2007			2006
Cash flows from operating activities:
Net income	$	48,541		$	38,032
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of trust preferred securities issuance costs		131			131
Amortization and depreciation		506			1,009
Restricted stock expense		1,237			3,864
Gain on extinguishment of note payable		(277	)		—
Deferred federal income taxes		2,152			(783	)
Amortization of bond premium and discount, net		534			2,714
Net realized investment gains		(1,767	)		(39	)
Equity in net income of partnerships		(361	)		(572	)
Changes in:
Agents’ balances		6,897			(8,577	)
Accounts receivable		1,959			423
Reinsurance receivables		163,548			110,581
Unpaid losses and loss adjustment expenses		(103,205	)		(58,334	)
Unearned premiums		(15,892	)		7,284
Ceded balances payable		(2,069	)		(6,892	)
Insurance premiums payable		(464	)		2,969
Other assets and liabilities, net		(2,001	)		7,207
Amounts held for the account of others		(7,177	)		(912	)
Contingent commissions		(3,394	)		(3,817	)
Prepaid reinsurance premiums		5,442			1,559
Federal income taxes receivable		(399	)		46
Deferred acquisition costs		137			(1,486	)
Other – net		(821	)		(2,393	)
Net cash provided by operating activities		93,257			92,014
Cash flows from investing activities:
Proceeds from sale of bonds		99,349			41,256
Proceeds from sale of stocks		17,157			22,153
Proceeds from maturity of bonds		37,511			85,773
Proceeds from sale of other invested assets		—			1,293
Purchase of bonds		(227,391	)		(302,876	)
Purchase of stocks		(17,171	)		(21,085	)
Purchase of other invested assets		—			(12	)
Net cash used for investing activities		(90,545	)		(173,498	)
Cash flows from financing activities:
Borrowing under credit facility		6			1,865
Repayments of credit facility		(1,541	)		(2,322	)
Proceeds from exercises of stock options		1,518			—
Tax benefits associated with SFAS 123R		336			199
Principal payments of term debt		(336	)		(486	)
Net cash provided by (used for) financing activities		(17	)		(744	)
Net change in cash and cash equivalents		2,695			(82,228	)
Cash and cash equivalents at beginning of period		273,745			220,122
Cash and cash equivalents at end of period	$	276,440		$	137,894

See accompanying notes to consolidated financial statements.

5

UNITED AMERICA INDEMNITY, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Principles of Consolidation and Basis of Presentation

United America Indemnity, Ltd. (“United America Indemnity” or the “Company”), was incorporated on August 26, 2003, and is domiciled in the Cayman Islands. The Company’s Class A common stock is publicly traded on the NASDAQ Global Market under the trading symbol “INDM”.

The consolidated financial statements as of June 30, 2007 and 2006 are unaudited, but have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which differ in certain respects from those followed in reports to insurance regulatory authorities. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The unaudited consolidated financial statements include all adjustments that are, in the opinion of management, of a normal recurring nature and are necessary for a fair statement of results for the interim periods. Results of operations for the quarters and six months ended June 30, 2007 and 2006 are not necessarily indicative of the results of a full year. The accompanying notes to the unaudited consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements contained in the Company’s 2006 Annual Report on Form 10-K.

The unaudited consolidated financial statements include the accounts of United America Indemnity and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company’s wholly owned business trust subsidiaries, United National Group Capital Trust I (“UNG Trust I”), United National Group Capital Statutory Trust II (“UNG Trust II”), Penn-America Statutory Trust I (“Penn Trust I”) and Penn-America Statutory Trust II (“Penn Trust II”), are not consolidated pursuant to Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (“FIN 46R”). The Company’s business trust subsidiaries have issued $60.0 million in floating rate capital securities (“Trust Preferred Securities”) and $1.9 million of floating rate common securities. The sole assets of the Company’s business trust subsidiaries are $61.9 million of junior subordinated debentures issued by the Company, which have the same terms with respect to maturity, payments, and distributions as the Trust Preferred Securities and the floating rate common securities.

Certain prior period amounts have been reclassified to conform to the current period presentation.

2. Investments

The Company’s investments in bonds, preferred stock, and common stock are classified as available for sale and are carried at their fair value. The Company purchases bonds with the expectation of holding them to their maturity; however, changes to the portfolio are sometimes required to assure it is appropriately matched to liabilities. In addition, changes in financial market conditions and tax considerations may cause the Company to sell an investment before it matures. In 2007, the difference between amortized cost and fair value of these investments, net of the effect of deferred income taxes, is reflected in accumulated other comprehensive income in shareholders’ equity and, accordingly, has no effect on net income other than for impairments deemed to be other than temporary. In 2006, the difference between amortized cost and fair value of these investments, excluding the derivative components embedded in bonds and preferred stock, net of the effect of deferred income taxes, is reflected in accumulated other comprehensive income in shareholders’ equity and, accordingly, has no effect on net income other than for impairments deemed to be other than temporary. In 2006, the difference between amortized cost and fair value of the derivative components is included in income.

As stated in Note 3 of the consolidated financial statements in Item 8 of Part II in the Company’s 2006 Annual Report on Form 10-K, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140”

6

UNITED AMERICA INDEMNITY, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
(Unaudited)

(“SFAS 155”) on January 1, 2007 and irrevocably elected to measure the Company’s convertible bond and convertible preferred stock portfolios at estimated fair value. The changes in the market value of the Company’s convertible bond and convertible preferred stock portfolios are recognized as realized gains and losses in the current period. Since the Company realizes the change in market value, cost and market value are the same for these securities.

Bonds available for sale with an estimated fair market value of approximately $788.2 million and $718.1 million were deposited with various governmental authorities in accordance with statutory requirements at June 30, 2007 and December 31, 2006, respectively. In addition, bonds with an estimated fair market value of $5.9 million and $5.8 million at June 30, 2007 and December 31, 2006, respectively, were held in a trust fund to meet the regulatory requirements applicable to Wind River Reinsurance, one of the Company’s subsidiaries.

The following table contains an analysis of the Company’s securities with gross unrealized losses, categorized by the period that the securities were in a continuous loss position as of June 30, 2007:

							Gross Unrealized Losses
					Cost or				Six		Between		Greater
(Dollars in	Number of		Estimated		Amortized				Months or		Seven Months		than One
thousands)	Securities		Fair Value		Cost		Total		Less		and One Year		Year (1)
Bonds		494	$	1,107,409	$	1,131,512	$	24,103	$	5,961	$	3,382	$	14,760
Common stock		14		5,603		5,786		183		181		2		—
							$	24,286	$	6,142	$	3,384	$	14,760

(1) At June 30, 2007, the Company had 293 bonds that were in an unrealized loss position for greater than one year. The estimated fair value and amortized cost of these securities was $442.8 million and $457.6 million, respectively. The Company has analyzed these securities and has determined that they are not impaired. The Company has the ability to hold these investments until maturity or until recovery. All of these securities are investment grade.

The following table contains an analysis of the Company’s securities with gross unrealized losses, categorized by the period that the securities were in a continuous loss position as of December 31, 2006:

									Gross Unrealized Losses
					Cost or				Six		Between		Greater
(Dollars in	Number of		Estimated		Amortized				Months or		Seven Months		than One
thousands)	Securities		Fair Value		Cost		Total		Less		and One Year		Year (1)
Bonds		414	$	725,155	$	738,781	$	13,626	$	1,945	$	585	$	11,096
Common stock		7		2,362		2,410		48		48		—		—
							$	13,674	$	1,993	$	585	$	11,096

(1) At December 31, 2006, the Company had 299 bonds that were in an unrealized loss position for greater than one year. The estimated fair value and amortized cost of these securities was $436.7 million and $447.8 million, respectively. The Company has analyzed these securities and has determined that they are not impaired. The Company has the ability to hold these investments until maturity or until recovery. 99.8% of the value of these securities is investment grade.

Subject to the risks and uncertainties in evaluating the potential impairment of a security’s value, the impairment evaluation conducted by the Company as of June 30, 2007 concluded the gross unrealized losses discussed above are not other than temporary impairments. Accordingly, these gross unrealized losses are recognized as a component of shareholders’ equity, net of taxes.

The carrying amount of investments approximates their estimated fair value. The Company regularly performs various analytical valuation procedures with respect to its investments, including identifying any security where the fair value is below its cost. Upon identification of such securities, a detailed review is performed to determine whether the decline is considered other than temporary. This review includes an analysis of several factors, including but not limited to, the credit ratings and cash flows of the securities, and the magnitude and length of time that the fair value of such securities is below cost.

For bonds, the factors considered in reaching the conclusion that a decline below cost is other than temporary

7

UNITED AMERICA INDEMNITY, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
(Unaudited)

include, among others, whether (1) the issuer is in financial distress, (2) the investment is secured, (3) a significant credit rating action occurred, (4) scheduled interest payments were delayed or missed, and (5) changes in laws or regulations have affected an issuer or industry.

The amount of any write-down, including those that are deemed to be other than temporary, is included in earnings as a realized loss in the period in which the impairment arose.

For equity securities, a decline in value is considered to be other than temporary if an unrealized loss has either (1) persisted for more than 12 consecutive months, or (2) the value of the investment has been 20% or more below cost for six continuous months or more. For securities with significant declines in value for periods shorter than six continuous months, the security is evaluated to determine whether the cost basis of the security should be written down to its fair value.

The Company recorded the following other than temporary losses on its investment portfolio for the quarters and six months ended June 30, 2007 and 2006:

	Quarter Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2007		2006		2007		2006
Bonds	$	—	$	—	$	21	$	—
Preferred stock		—		—		—		167
Common stock		—		37		—		37
Total	$	—	$	37	$	21	$	204

As of June 30, 2007, the Company had approximately $7.3 million worth of investment exposure through subprime and Alt-A investments. An Alt-A investment is one in which the risk falls between prime and subprime. Of that amount, approximately $4.7 million of those investments have been rated AAA by S&P. The remaining subprime exposure is rated AA or A.

3. Reinsurance

The Company cedes insurance to unrelated reinsurers on a pro rata (“quota share”) and excess of loss basis in the ordinary course of business to limit its net loss exposure on insurance contracts. Reinsurance ceded arrangements do not discharge the Company of primary liability as the originating insurer. Moreover, reinsurers may fail to pay the Company due to a lack of reinsurer liquidity, perceived improper underwriting, losses for risks that are excluded from reinsurance coverage, and other similar factors, all of which could adversely affect the Company’s financial results.

At June 30, 2007 and December 31, 2006, the Company carried reinsurance receivables of $819.0 million and $982.5 million, respectively. These amounts are net of two purchase accounting adjustments. The first purchase accounting adjustment is related to discounting the loss reserves to their present value and applying a risk margin to the discounted reserves. This adjustment was $18.5 million at June 30, 2007 and December 31, 2006. The second purchase accounting adjustment netted uncollectible reinsurance reserves against the reinsurance receivables to properly reflect the reinsurance receivables at their fair value on the date the Company acquired all of the outstanding common stock of Wind River Investment Corporation and its subsidiaries (“Wind River Acquisition date”). This purchase accounting adjustment was $12.1 million and $20.5 million at June 30, 2007 and December 31, 2006, respectively. The change is primarily due to a commutation of the Company’s reinsurance agreement with an unrelated third party reinsurer that reduced the uncollectible reinsurance reserve by $6.5 million. The Company received $3.5 million in cash as a result of this commutation. In addition, $1.3 million and $2.9 million of the reserve was released during the quarter and six months ended June 30, 2007, respectively, primarily due to a reduction in ceded loss reserves, including losses incurred but not reported (“IBNR”).

At June 30, 2007 and December 31, 2006, the Company held collateral securing its reinsurance receivables of $625.3 million and $642.9 million, respectively, a decrease of $17.6 million or 2.7%. Prepaid reinsurance premiums were $32.9 million and $38.3 million at June 30, 2007 and December 31, 2006, respectively, a decrease of $5.4

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UNITED AMERICA INDEMNITY, LTD.

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(Unaudited)

million or 14.1%. Reinsurance receivables, net of collateral held, were $193.7 million and $339.6 million at June 30, 2007 and December 31, 2006, respectively, a decrease of $145.9 million or 43.0%.

During the quarters and six months ended June 30, 2007 and 2006, the Company recorded the following ceded amounts:

	Quarter Ended June 30,					Six Months Ended June 30,
(Dollars in thousands)	2007			2006		2007			2006
Earned premium	$	21,515		$	24,831	$	42,092		$	50,389
Commissions		3,363			6,099		7,892			11,870
Incurred losses (1)		(91,284	)		13,094		(79,929	)		27,802

(1) The Company reduced gross and ceded loss and loss adjustment expenses related to prior periods by $113.5 million and $102.5 million, respectively, during the second quarter of 2007.

The Company’s current property writings create exposure to catastrophic events. To protect against these exposures, the Company purchases property catastrophe coverage. In June 2007, the Company entered into a new property catastrophe reinsurance agreement that provides single event coverage for losses of $100.0 million in excess of $10.0 million. This coverage provides for one full reinstatement of coverage at 100% additional premium as to time and pro-rata as to amount of limit reinstated and replaces the contracts that expired on May 31, 2007. The Company did not cede any incurred losses under the property catastrophe contracts during the quarter ended June 30, 2007.

The Company evaluated retention levels during 2006 to ensure that the ultimate reinsurance cessions are aligned with corporate risk tolerance levels and capital levels. As a result of this analysis, during the first quarter of 2007, the Company increased its property retention from $0.5 million to $1.0 million for property losses occurring on or after January 1, 2007.

As a result of the allied health business units expansion of policy limits up to $10.0 million, the Company has increased its professional liability protection by purchasing an additional $5.0 million layer of reinsurance protection. As a result, the Company’s professional liability treaty is now $9.5 million in excess of $0.5 million.

Effective April 29, 2007, the Company has increased the retention on its general casualty excess of loss treaty by changing the terms regarding loss adjustment expenses from inclusive to pro rata. The Company’s ultimate net loss on this treaty, not including loss adjustment expenses which are allocated in proportion to losses retained and ceded, remains at $0.75 million.

4. Income Taxes

The statutory income tax rates of the countries where the Company does business are 35.0% in the United States, 0.0% in Bermuda, 0.0% in the Cayman Islands, 29.63% in the Duchy of Luxembourg, and 25.0% in the Republic of Ireland. The statutory income tax rate of each country is applied against the expected annual taxable income of each country to estimate the annual income tax expense. Total estimated annual income tax expense is divided by total estimated annual pre-tax income to determine the expected annual income tax rate used to compute the income tax provision. On an interim basis, the expected annual income tax rate is applied against interim pre-tax income, excluding net realized gains and losses, and then adding that amount to income taxes on net realized gains and losses. The Company’s income from continuing operations before income taxes from the Non-U.S. Subsidiaries and U.S. Subsidiaries, including the results of the quota share agreement between Wind River Reinsurance and the U.S. Insurance Operations, for the quarters and six months ended June 30, 2007 and 2006 were as follows:

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UNITED AMERICA INDEMNITY, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
(Unaudited)

Quarter Ended June 30, 2007:	Non-U.S.			U.S.
(Dollars in thousands)	Subsidiaries			Subsidiaries			Eliminations			Total
Revenues:
Gross premiums written	$	69,852		$	143,452		$	(64,621	)	$	148,683
Net premiums written	$	65,893		$	64,621		$	—		$	130,514
Net premiums earned	$	68,487		$	68,098		$	—		$	136,585
Net investment income		10,912			13,003			(4,598	)		19,317
Net realized investment (losses) gains		(25	)		1,523			44			1,542
Total revenues		79,374			82,624			(4,554	)		157,444
Losses and Expenses:
Net losses and loss adjustment expenses		37,640			37,604			—			75,244
Acquisition costs and other underwriting expenses		26,730			18,083			(151	)		44,662
Corporate and other operating expenses (income)		3,795			(902	)		—			2,893
Interest expense		—			7,497			(4,598	)		2,899
Income before income taxes	$	11,209		$	20,342		$	195		$	31,746

Quarter Ended June 30, 2006:	Non-U.S.			U.S.
(Dollars in thousands)	Subsidiaries			Subsidiaries			Eliminations			Total
Revenues:
Gross premiums written	$	68,794		$	167,303		$	(68,802	)	$	167,295
Net premiums written	$	68,793		$	73,895		$	—		$	142,688
Net premiums earned	$	63,317		$	70,434		$	—		$	133,751
Net investment income		9,131			13,403			(4,598	)		17,936
Net realized investment losses		(200	)		(30	)		226			(4	)
Total revenues		72,248			83,807			(4,372	)		151,683
Losses and Expenses:
Net losses and loss adjustment expenses		35,598			44,866			—			80,464
Acquisition costs and other underwriting expenses		23,452			19,188			(1,465	)		41,175
Corporate and other operating expenses		963			2,711			194			3,868
Interest expense		—			7,556			(4,598	)		2,958
Income before income taxes	$	12,235		$	9,486		$	1,497		$	23,218

Six Months Ended June 30, 2007:	Non-U.S.			U.S.
(Dollars in thousands)	Subsidiaries			Subsidiaries		Eliminations			Total
Revenues:
Gross premiums written	$	147,771		$	289,054	$	(135,606	)	$	301,219
Net premiums written	$	140,375		$	124,194	$	—		$	264,569
Net premiums earned	$	138,067		$	136,955	$	—		$	275,022
Net investment income		21,315			26,014		(9,144	)		38,185
Net realized investment (losses) gains		(25	)		1,769		23			1,767
Total revenues		159,357			164,738		(9,121	)		314,974
Losses and Expenses:
Net losses and loss adjustment expenses		80,366			76,719		—			157,085
Acquisition costs and other underwriting expenses		51,529			36,497		(482	)		87,544
Corporate and other operating expenses		5,342			939		176			6,457
Interest expense		—			14,948		(9,144	)		5,804
Income before income taxes	$	22,120		$	35,635	$	329		$	58,084

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UNITED AMERICA INDEMNITY, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
(Unaudited)

Six Months Ended June 30, 2006:	Non-U.S.			U.S.
(Dollars in thousands)	Subsidiaries			Subsidiaries			Eliminations			Total
Revenues:
Gross premiums written	$	132,993		$	326,806		$	(132,946	)	$	326,853
Net premiums written	$	132,986		$	145,039		$	—		$	278,025
Net premiums earned	$	127,198		$	141,983		$	—		$	269,181
Net investment income		18,029			22,730			(9,144	)		31,615
Net realized investment (losses) gains		(112	)		(112	)		263			39
Total revenues		145,115			164,601			(8,881	)		300,835
Losses and Expenses:
Net losses and loss adjustment expenses		72,439			86,989			—			159,428
Acquisition costs and other underwriting expenses		46,483			40,829			(1,149	)		86,163
Corporate and other operating expenses		2,963			4,776			387			8,126
Interest expense		—			14,822			(9,144	)		5,678
Income before income taxes	$	23,230		$	17,185		$	1,025		$	41,440

The following table summarizes the differences between the tax provisions under Accounting Principles Board Opinion (“APB”) No. 28, “Interim Financial Reporting” (“APB 28”), for interim financial statement periods and the expected tax provision at the weighted average tax rate:

	Quarter Ended June 30,
	2007						2006
				% of Pre-						% of Pre-
	Amount			Tax Income			Amount			Tax Income
Expected tax provision at weighted average rate	$	7,206			22.7	%	$	3,841			16.5	%
Adjustments:
Tax exempt interest		(597	)		(1.9	)		(1,349	)		(5.8	)
Dividend exclusion		(110	)		(0.3	)		(111	)		(0.5	)
Other		(549	)		(1.8	)		177			0.8
Income tax expense	$	5,950			18.7	%	$	2,558			11.0	%

	Six Months Ended June 30,
	2007						2006
				% of Pre-						% of Pre-
	Amount			Tax Income			Amount			Tax Income
Expected tax provision at weighted average rate	$	12,626			21.7	%	$	6,390			15.4	%
Adjustments:
Tax exempt interest		(1,197	)		(2.1	)		(2,601	)		(6.3	)
Dividend exclusion		(226	)		(0.4	)		(236	)		(0.6	)
Other		(1,179	)		(1.9	)		180			0.5
Income tax expense	$	10,024			17.3	%	$	3,733			9.0	%

The Company recognized tax (benefit) expense on discontinued operations of $(0.02) million and $(0.2) million for the quarters ended June 30, 2007 and 2006, respectively, and $0.06 million and $(0.1) million for the six months ended June 30, 2007 and 2006, respectively.

The effective tax rate for the six months ended June 30, 2007 was 17.3%, compared with an effective rate of 9.0% for the six months ended June 30, 2006. The increase in the effective tax rate is due to a decrease in tax-exempt investment income and increases in underwriting income and net investment income of the Company’s U.S. Subsidiaries. The effective rates differed from the weighted average expected rate of 21.7% and 15.4% for the six months ended June 30, 2007 and 2006, respectively, primarily due to investments in tax-exempt securities.

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UNITED AMERICA INDEMNITY, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
(Unaudited)

The alternative minimum tax (“AMT”) carryforward was $0.0 million and $2.8 million as of June 30, 2007 and December 31, 2006, respectively.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations by tax authorities for tax years before March 1, 2003. The Internal Revenue Service (“IRS”) commenced examinations of the Company’s U.S. income tax returns for the period from September 6, 2003 through December 31, 2003 and the year ended December 31, 2004 in the third quarter of 2006. The examinations are expected to be completed by the end of 2007.

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007. As a result, the Company now applies a more-likely-than-not recognition threshold for all tax uncertainties. FIN 48 only allows the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the taxing authorities. As a result of the implementation, the Company recognized no material adjustment to reserves for uncertain tax positions. At January 1, 2007, the date of the implementation, the Company has $3.6 million of total gross unrecognized tax benefits, not including interest and penalties. If recognized, the gross unrecognized tax benefits could lower the effective income tax rate in any future period. There has been no change to the provision for gross unrecognized tax benefits during the quarter and six months ended June 30, 2007.

The Company is not aware of anything at this time that would require it to make any changes to its tax reserve.

The Company classifies all interest and penalties related to uncertain tax positions as income tax expense. As of June 30, 2007, the Company has recorded $0.5 million in liabilities for tax-related interest and penalties on its consolidated balance sheet.

5. Liability for Unpaid Losses and Loss Adjustment Expenses

The liability for unpaid losses and loss adjustment expenses reflects the Company’s best estimate for future amounts needed to pay claims and related settlement expenses and the impact of the Company’s reinsurance coverages with respect to insured events. Estimating the ultimate claims liability of the Company is a complex and judgmental process, inasmuch as the amounts are based on management’s informed estimates and judgments using data currently available. In some cases, significant periods of time, up to several years or more, may elapse between the occurrence of an insured loss and the reporting of such to the Company. The method for determining the Company’s liability for unpaid losses and loss adjustment expenses includes, but is not limited to, reviewing past loss experience and considering other factors such as industry data and legal, social, and economic developments. As additional experience and data become available, the Company’s estimate for the liability for unpaid losses and loss adjustment expenses is revised accordingly. If the Company’s ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded with respect to unpaid losses and loss adjustment expenses at June 30, 2007, the related adjustments could have a material impact on the Company’s results of operations.

During the quarter and six months ended June 30, 2007, the Company reduced its prior year loss reserves by $11.0 million due to favorable development in umbrella and excess, construction defect, and property losses. Including the purchase accounting reinsurance reserve of $1.3 million and $2.9 million that was released during the quarter and six months ended June 30, 2007, respectively, referenced in Note 3 above, incurred losses include $12.3 million and $13.9 million of prior year loss reserves released during the quarter and six months ended June 30, 2007, respectively.

6. Notes and Loans Payable

Notes Payable

Notes payable and term loans assumed through the acquisition of Penn Independent Corporation consists of a $2.5 million revolving line of credit which expires on November 30, 2007, bearing interest at the bank’s prime rate less 1.25% payable monthly. The outstanding amounts due on the line of credit as of June 30, 2007 and December 31, 2006 were $0.0 million and $1.5 million, respectively. Interest expense resulting from the line of credit was less

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(Unaudited)

than $0.01 million and approximately $0.04 million for the quarters ended June 30, 2007 and 2006, respectively, and $0.02 million and $0.09 million for the six months ended June 30, 2007 and 2006, respectively.

Loans Payable

Loans payable of $1.4 million and $2.8 million as of June 30, 2007 and December 31, 2006 were comprised of one and three loans payable, respectively, to vendors and former minority shareholders in certain of the Company’s Agency Operations subsidiaries. Interest expense related to loans payable was $0.01 million and $0.04 million for the quarters ended June 30, 2007 and 2006, respectively, and $0.02 million and $0.07 million for the six months ended June 30, 2007 and 2006, respectively.

7. Related Party Transactions

As of June 30, 2007, Fox Paine & Company beneficially owns shares having approximately 84.8% of the Company’s total share voting authority. The Company’s Chairman is a member of Fox Paine & Company. In addition, another Director is an employee of Fox Paine & Company. The Company relies on Fox Paine & Company to provide management services and other services related to the operations of the Company.

At June 30, 2007 and December 31, 2006, Wind River Reinsurance was a limited partner in investment funds managed by Fox Paine & Company. This investment was made in June 2000 and pre-dates the September 5, 2003 acquisition by Fox Paine & Company of Wind River Investment Corporation, the holding company for the Company’s Predecessor Insurance Operations. The Company’s investment in this limited partnership was valued at $5.9 million at June 30, 2007 and December 31, 2006. At June 30, 2007, the Company had a remaining capital commitment of $4.1 million to the partnership.

During the quarter and six months ended June 30, 2007, the Company paid $0.5 million for legal services rendered by Cozen O’Connor. There is an additional accrual of $0.4 million as of June 30, 2007 for legal services rendered. During the six months ended June 30, 2006, the Company paid $0.04 million to Cozen O’Connor. There were no significant payments to Cozen O’Connor during the quarter ended June 30, 2006. Stephen A. Cozen, the chairman of Cozen O’Connor, is a member of the Company’s Board of Directors.

The Company directly reimbursed Fox Paine & Company $0.1 million and $0.05 million during the quarters ended June 30, 2007 and 2006, respectively, and $0.2 million and $0.1 million during the six months ended June 30, 2007 and 2006, respectively, for expenses incurred in providing management services.

The Company paid $0.02 million during each of the quarters ended June 30, 2007 and 2006, and $0.2 million and $0.04 million during the six months ended June 30, 2007 and 2006, respectively, in premium to Validus Reinsurance, Ltd. (“Validus”), a current participant on the Company’s $100.0 million in excess of $10.0 million catastrophe reinsurance treaty and the Company’s $30.0 million in excess of $30.0 million and $25.0 million in excess of $5.0 million catastrophe reinsurance treaties, which expired on May 31, 2007. No losses have yet been ceded by the Company under these treaties. Validus is also a participant in a quota share retrocession agreement with Wind River Reinsurance. During the quarter ended June 30, 2007, the Company estimated that $2.4 million of written premium and $0.4 million of losses has been assumed by Validus from Wind River Reinsurance. During the six months ended June 30, 2007, the Company estimated that $5.7 million of written premium and $0.6 million of losses has been assumed by Validus from Wind River Reinsurance. Edward J. Noonan, the chairman and chief executive officer of Validus, was a member of the Company’s Board of Directors. Effective June 1, 2007, Mr. Noonan resigned as a member of the Company’s Board of Directors.

8. Commitments and Contingencies

Legal Proceedings

The Company is, from time to time, involved in various legal proceedings in the ordinary course of business. The Company purchases insurance and reinsurance policies covering such risks in amounts that it considers adequate.

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(Unaudited)

However, there can be no assurance that the insurance and reinsurance coverage that the Company maintains is sufficient or will be available in adequate amounts or at a reasonable cost. The Company does not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material adverse effect on the Company’s business, results of operations, cash flows, or financial condition.

There is a greater potential for disputes with reinsurers who are in a runoff of their reinsurance operations. Some of the Company’s reinsurers’ reinsurance operations are in runoff, and therefore, the Company closely monitors those relationships. The Company anticipates that, similar to the rest of the insurance and reinsurance industry, it will continue to be subject to litigation and arbitration proceedings in the ordinary course of business.

9. Shareholders’ Equity

Shareholders’ equity as of June 30, 2007 and December 31, 2006 was $804.5 million and $763.3 million, respectively. The increase of $41.2 million during 2007 was primarily due to net income for the six months of $48.5 million, a decrease in accumulated other comprehensive income of $9.3 million due to net unrealized losses on investments of $9.0 million and a decrease of $0.3 million due to the adoption of SFAS 155, an increase in additional paid-in-capital of $1.7 million due to restricted stock and stock option compensation accruals of $3.1 million related to awards under the Share Incentive Plan (please see Note 14 to the consolidated financial statements in Item 8 of Part II in the Company’s 2006 Annual Report on Form 10-K for further information regarding the Share Incentive Plan), a reduction of $1.4 million for vested options that were purchased from former executives, and an increase to retained earnings of $0.3 million due to the adoption of SFAS 155. There was no net effect to shareholders’ equity as a result of the adoption of SFAS 155.

10. Share-Based Compensation Plans

On March 29, 2007, the Company agreed to resolve the lawsuit against certain former executives. (Please see Item 3 of Part I of the Company’s 2006 Annual Report on 10-K for details concerning this lawsuit.) As part of the settlement reached with Messrs. Schmidt and Ritz, the Company purchased their vested options for $1.4 million and retired their unvested options. For further details concerning the terms of this settlement, please see the Company’s Current Report on Form 8-K filed on March 29, 2007.

11. Earnings Per Share

Earnings per share have been computed using the weighted average number of common shares and common share equivalents outstanding during the period.

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UNITED AMERICA INDEMNITY, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
(Unaudited)

The following table sets forth the computation of basic and diluted earnings per share.

	Quarter Ended June 30,						Six Months Ended June 30,
(Dollars in thousands, except per share data)	2007			2006			2007		2006
Income from continuing operations	$	25,987		$	20,704		$	48,421	$	38,279
Discontinued operations		(39	)		(450	)		120		(247	)
Net income	$	25,948		$	20,254		$	48,541	$	38,032
Basic earnings per share:
Weighted average shares for basic earnings per share		37,199,146			36,664,626			37,156,203		36,615,325
Income from continuing operations	$	0.70		$	0.56		$	1.31	$	1.05
Discontinued operations		0.00			(0.01	)		0.00		(0.01	)
Net income	$	0.70		$	0.55		$	1.31	$	1.04
Diluted earnings per share:
Weighted average shares for diluted earnings per share		37,495,087			37,115,922			37,483,083		37,047,091
Income from continuing operations	$	0.69		$	0.56		$	1.30	$	1.04
Discontinued operations		0.00			(0.01	)		0.00		(0.01	)
Net income	$	0.69		$	0.55		$	1.30	$	1.03

A reconciliation of weighted average shares for basic earnings per share to weighted average shares for diluted earnings per share is as follows:

	Quarter Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Weighted average shares for basic earnings per share		37,199,146		36,664,626		37,156,203		36,615,325
Non-vested restricted stock		38,657		23,219		33,808		19,311
Options and warrants		257,284		428,077		293,072		412,455
Weighted average shares for diluted earnings per share		37,495,087		37,115,922		37,483,083		37,047,091

12. Segment Information

The Company manages its business through two business segments: Insurance Operations, which includes the operations of the United America Insurance Group, and Reinsurance Operations, which includes the operations of Wind River Reinsurance.

The Company’s Reinsurance Operations segment resulted from the amalgamation of the Non-U.S. Insurance Operations into a single Bermuda based entity, Wind River Reinsurance, in September 2006. The Reinsurance Operations segment began offering third party reinsurance in the third quarter of 2006 and entered into its initial third party reinsurance treaty effective January 1, 2007. As such, there are no results for the Reinsurance Operations segment for the prior year.

As a result of the sale of substantially all of the assets of the Company’s Agency Operations in September 2006, the Company no longer has an Agency Operations segment, and the results of its Agency Operations are now classified as discontinued operations.

The Insurance Operations segment, the Reinsurance Operations segment, and the discontinued Agency Operations segment follow the same accounting policies used for the Company’s consolidated financial statements. For further disclosure regarding the Company’s accounting policies, please see Note 3 to the consolidated financial statements in Item 8 of Part II in the Company’s 2006 Annual Report on Form 10-K.

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UNITED AMERICA INDEMNITY, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
(Unaudited)

Following is a tabulation of business segment information. Corporate information is included to reconcile segment data to the consolidated financial statements.

Quarter Ended June 30, 2007:	Insurance
(Dollars in thousands)	Operations		Reinsurance (1)			Corporate		Eliminations			Total
Revenues:
Gross premiums written	$	143,452	$	5,231		$	—	$	—		$	148,683
Net premiums written	$	129,242	$	1,272		$	—	$	—		$	130,514
Net premiums earned	$	136,196	$	389		$	—	$	—		$	136,585
Net investment income		—		—			19,317		—			19,317
Net realized investment gains		—		—			1,542		—			1,542
Total revenues		136,196		389			20,859		—			157,444
Losses and Expenses:
Net losses and loss adjustment expenses		75,133		111			—		—			75,244
Acquisition costs and other underwriting expenses		43,447		1,366	(2)		—		(151	)		44,662
Corporate and other operating expenses		—		—			2,893		—			2,893
Interest expense		—		—			2,899		—			2,899
Income (loss) before income taxes	$	17,616	$	(1,088	)	$	15,067	$	151			31,746
Income tax expense												5,950
Income before equity in net income of partnership												25,796
Equity in net income of partnership, net of tax												191
Income before discontinued operations												25,987
Discontinued operations, net of tax												(39	)
Net income											$	25,948

(1)	Direct business only, excluding business assumed from affiliates.
(2)	Includes excise tax of $656.

Quarter Ended June 30, 2006:	Insurance
(Dollars in thousands)	Operations			Corporate			Eliminations			Total
Revenues:
Gross premiums written	$	167,295		$	—		$	—		$	167,295
Net premiums written	$	142,688		$	—		$	—		$	142,688
Net premiums earned	$	133,751		$	—		$	—		$	133,751
Net investment income		—			17,936			—			17,936
Net realized investment losses		—			(4	)		—			(4	)
Total revenues		133,751			17,932			—			151,683
Losses and Expenses:
Net losses and loss adjustment expenses		80,464			—			—			80,464
Acquisition costs and other underwriting expenses		42,640	(1)		—			(1,465	)		41,175
Corporate and other operating expenses		—			3,481			387			3,868
Interest expense		—			2,958			—			2,958
Income before income taxes	$	10,647		$	11,493		$	1,078			23,218
Income tax expense											2,558
Income before minority interest and equity in net income of partnership											20,660
Minority interest, net of tax											4
Equity in net income of partnership, net of tax											40
Income before discontinued operations											20,704
Discontinued operations, net of tax											(450	)
Net income										$	20,254

(1) Includes $1,262 from the predecessor of Wind River Reinsurance. $686 of this amount is excise tax.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
(Unaudited)

Six Months Ended June 30, 2007:	Insurance
(Dollars in thousands)	Operations		Reinsurance (1)			Corporate		Eliminations			Total
Revenues:
Gross premiums written	$	289,054	$	12,165		$	—	$	—		$	301,219
Net premiums written	$	259,800	$	4,769		$	—	$	—		$	264,569
Net premiums earned	$	273,910	$	1,112		$	—	$	—		$	275,022
Net investment income		—		—			38,185		—			38,185
Net realized investment gains		—		—			1,767		—			1,767
Total revenues		273,910		1,112			39,952		—			314,974
Losses and Expenses:
Net losses and loss adjustment expenses		156,510		575			—		—			157,085
Acquisition costs and other underwriting expenses		85,529		2,497	(2)		—		(482	)		87,544
Corporate and other operating expenses		—		—			6,281		176			6,457
Interest expense		—		—			5,804		—			5,804
Income (loss) before income taxes	$	31,871	$	(1,960	)	$	27,867	$	306			58,084
Income tax expense												10,024
Income before equity in net income of partnership												48,060
Equity in net income of partnership, net of tax												361
Income before discontinued operations												48,421
Discontinued operations, net of tax												120
Net income											$	48,541
Total Assets	$	—	$	—		$	2,888,987	$	—		$	2,888,987

(1)	Direct business only, excluding business assumed from affiliates.
(2)	Includes excise tax of $1,399.

Six Months Ended June 30, 2006:	Insurance
(Dollars in thousands)	Operations			Corporate		Eliminations			Total
Revenues:
Gross premiums written	$	326,853		$	—	$	—		$	326,853
Net premiums written	$	278,025		$	—	$	—		$	278,025
Net premiums earned	$	269,181		$	—	$	—		$	269,181
Net investment income		—			31,615		—			31,615
Net realized investment gains		—			39		—			39
Total revenues		269,181			31,654		—			300,835
Losses and Expenses:
Net losses and loss adjustment expenses		159,428			—		—			159,428
Acquisition costs and other underwriting expenses		87,312	(1)		—		(1,149	)		86,163
Corporate and other operating expenses		—			7,739		387			8,126
Interest expense		—			5,678		—			5,678
Income before income taxes	$	22,441		$	18,237	$	762			41,440
Income tax expense										3,733
Income before equity in net income of partnership										37,707
Equity in net income of partnership, net of tax										572
Income before discontinued operations										38,279
Discontinued operations, net of tax										(247	)
Net income									$	38,032
Total Assets	$	—		$	3,075,593	$	—		$	3,075,593

(1) Includes $2,655 from the predecessor of Wind River Reinsurance. $1,330 of this amount is excise tax.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
(Unaudited)

13. Supplemental Cash Flow Information

Taxes and Interest Paid

	Quarter Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2007		2006		2007		2006
Net federal income taxes paid	$	8,000	$	4,000	$	8,000	$	4,000
Interest paid		1,418		1,470		5,654		5,456

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes of United America Indemnity included elsewhere in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy, constitutes forward-looking statements that involve risks and uncertainties. Please see “Cautionary Note Regarding Forward-Looking Statements” at the end of this Item 2 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein. For more information regarding our business and operations, please see our Annual Report on Form 10-K for the year ended December 31, 2006.

Recent Developments

On May 9, 2007, we announced that the Board of Directors had appointed Larry A. Frakes as our President and Chief Operating Officer. Mr. Frakes was subsequently appointed to the position of President and Chief Executive Officer on June 28, 2007, replacing Saul A. Fox as Chief Executive Officer. Mr. Fox remains as Chairman of our Board of Directors. The employment of Robert M. Fishman, former President and Chief Executive Officer of United America Insurance Group, terminated on May 8, 2007.

Overview

Our Insurance Operations distribute our insurance products through a group of approximately 138 professional general agencies that have limited quoting and binding authority, as well as a number of wholesale insurance brokers who in turn sell our insurance products to insureds through retail insurance brokers. Our Insurance Operations are comprised of the operations of the Penn-America Group, which distributes its products to small commercial businesses through a select network of general agents with specific binding authority, and the United National Group, a provider of property and casualty products through the following two business units, both of which operate predominately in the excess and surplus lines marketplace: 1) Programs, which markets insurance products for targeted insured segments as well as specialty products, such as professional lines, through program administrators with specific binding authority; and 2) Specialty Brokerage, which markets property, casualty, and professional lines products through wholesale brokers.

Our Reinsurance Operations are comprised of the operations of Wind River Reinsurance, a Bermuda based treaty and facultative reinsurer of excess and surplus lines and specialty property and casualty insurance.

We derive our revenues primarily from premiums paid on insurance policies that we write and from income generated by our investment portfolio, net of fees paid for investment management services. The amount of insurance premiums that we receive is a function of the amount and type of policies we write, as well as of prevailing market prices.

Our expenses include losses and loss adjustment expenses, acquisition costs and other underwriting expenses, corporate and other operating expenses, interest, and other investment expenses. Losses and loss adjustment expenses are estimated by management and reflect our best estimate of ultimate losses and costs arising during the reporting period and revisions of prior period estimates. We record losses and loss adjustment expenses based on an actuarial analysis of the estimated losses we expect to incur on the insurance policies we write. The ultimate losses and loss adjustment expenses will depend on the actual costs to resolve claims. Acquisition costs consist principally of commissions that are typically a percentage of the premiums on the insurance policies we write, net of ceding commissions earned from reinsurers and allocated internal costs. Other underwriting expenses consist primarily of personnel expenses and general operating expenses. Corporate and other operating expenses are comprised primarily of outside legal fees, other professional fees, including accounting fees, directors’ fees, management fees, and salaries and benefits for holding company personnel. Interest expense consists primarily of senior notes payable, junior subordinated debentures, and interest paid on funds held on behalf of others.

In managing the business and evaluating performance, our management focuses on measures such as premium

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growth, rate level changes, loss ratio, expense ratio, combined ratio, return on equity, growth in book value per share, and operating income, which we define as net income excluding after-tax net realized investment gains (losses), after-tax gain and one-time charges from discontinued operations, and after-tax extraordinary items that do not reflect overall operating trends. (Loss ratio, expense ratio, combined ratio, and operating income are non-GAAP measures.)

Our management focuses on operating income as a useful measure of the net income attributable to the ongoing operations of the business. We believe that the presentation of net operating income provides useful information regarding our results of operations because it is a measure that is closely followed by financial statement users, including investors, analysts, and rating agencies. We believe it is a widely accepted practice among analysts who follow the insurance industry to state their earnings forecasts in terms of operating income per share. Operating income excludes items that are expected to be non-recurring or very infrequent. Operating income also excludes net realized investment gains (losses). There is discretion to control when net realized investment gains (losses) can be realized; therefore, they are not considered when management measures our performance. Although we believe that operating income is a better indicator of our performance than net income, operating income is not a substitute for net income determined in accordance with GAAP, and investors should not place undue reliance on this measure.

Critical Accounting Estimates and Policies

Our consolidated financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions. We believe that of our significant accounting policies, the following may involve a higher degree of judgment and estimation.

Liability For Unpaid Losses And Loss Adjustment Expenses

Although variability is inherent in estimates, we believe that the liability for unpaid losses and loss adjustment expenses reflects our best estimate for future amounts needed to pay losses and related loss adjustment expenses and the impact of our reinsurance coverages with respect to insured events.

In developing loss and loss adjustment expense (“loss” or “losses”) reserve estimates, our actuaries perform detailed reserve analyses each quarter. To perform the analysis the data is organized at a “reserve category” level. A reserve category can be a line of business such as commercial automobile liability, or it can be a particular type of claim such as construction defect. The reserves within a reserve category level are characterized as either short tail or long tail. Most of our business can be characterized as long tail. For long tail business, it will generally be several years between the time the business is written and the time when all claims are settled. Our long-tail exposures include commercial automobile liability, general liability, professional liability, products liability and excess and umbrella. Short-tail exposures include property, commercial automobile physical damage, and equine mortality. Both of our business classifications, Penn-America and United National, as well as Wind River Reinsurance, contain both long-tail and short-tail exposures. Every reserve category is analyzed by the actuaries each quarter. The analyses generally include reviews of losses gross of reinsurance and net of reinsurance.

The methods that we use to project ultimate losses for both long-tail and short-tail exposures include, but are not limited to, the following:

• 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.

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The Paid Development method estimates ultimate losses by reviewing paid loss patterns and applying them to accident years with further expected changes in paid loss. Selection of the paid loss pattern requires analysis of several factors including the impact of inflation on claims costs, the rate at which claims professionals make claim payments and close claims, the impact of judicial decisions, the impact of underwriting changes, the impact of large claim payments and other factors. Claim cost inflation itself requires evaluation of changes in the cost of repairing or replacing property, changes in the cost of medical care, changes in the cost of wage replacement, judicial decisions, legislative changes and other factors. Because this method assumes that losses are paid at a consistent rate, changes in any of these factors can impact the results. Since the method does not rely on case reserves, it is not directly influenced by changes in the adequacy of case reserves.

For many reserve categories, paid loss data for recent periods may be too immature or erratic for accurate predictions. This situation often exists for long-tail exposures. In addition, changes in the factors described above may result in inconsistent payment patterns. Finally, estimating the paid loss pattern subsequent to the most mature point available in the data analyzed often involves considerable uncertainty for long-tail reserve categories.

The Incurred Development method is similar to the Paid Development method, but it uses case incurred losses instead of paid losses. Since this method uses more data (case reserves in addition to paid losses) than the Paid Development method, the incurred development patterns may be less variable than paid patterns. However, selection of the incurred loss pattern requires analysis of all of the factors listed in the description of the Paid Development method. In addition, the inclusion of case reserves can lead to distortions if changes in case reserving practices have taken place and the use of case incurred losses may not eliminate the issues associated with estimating the incurred loss pattern subsequent to the most mature point available.

The Expected Loss Ratio method multiplies premiums by an expected loss ratio to produce ultimate loss estimates for each accident year. This method may be useful if loss development patterns are inconsistent, losses emerge very slowly, or there is relatively little loss history from which to estimate future losses. The selection of the expected loss ratio requires analysis of loss ratios from earlier accident years or pricing studies and analysis of inflationary trends, frequency trends, rate changes, underwriting changes, and other applicable factors.

The Bornhuetter-Ferguson method using premiums and paid losses is a combination of the paid development approach and the expected loss ratio approach. This method normally determines expected loss ratios similar to the approach used to estimate the expected loss ratio for the Expected Loss Ratio method and requires analysis of the same factors described above. The method assumes that only future losses will develop at the expected loss ratio level. The percent of paid loss to ultimate loss implied from the Paid Development method is used to determine what percentage of ultimate loss is yet to be paid. The use of the pattern from the Paid Development method requires consideration of all factors listed in the description of the Paid Development method. The estimate of losses yet to be paid is added to current paid losses to estimate the ultimate loss for each year. This method will react very slowly if actual ultimate loss ratios are different from expectations due to changes not accounted for by the expected loss ratio calculation.

The Bornhuetter-Ferguson method using premiums and incurred losses is similar to the Bornhuetter-Ferguson method using premiums and paid losses except that it uses case incurred losses. The use of case incurred losses instead of paid losses can result in development patterns that are less variable than paid patterns. However, the inclusion of case reserves can lead to distortions if changes in case reserving have taken place, and the method requires analysis of all the factors that need to be reviewed for the Expected Loss Ratio and Incurred Development methods.

The Average Loss method multiplies a projected number of ultimate claims by an estimated ultimate average loss for each accident year to produce ultimate loss estimates. Since projections of the ultimate number of claims are often less variable than projections of ultimate loss, this method can provide more reliable results for reserve categories where loss development patterns are inconsistent or too variable to be relied on exclusively. In addition, this method can more directly account for changes in coverage that impact the number and size of claims. However, this method can be difficult to apply to situations where very large claims or a substantial number of unusual claims result in volatile average claim sizes. Projecting the ultimate number of claims requires analysis of several factors including the rate at which policyholders report claims to us, the impact of judicial decisions, the impact of underwriting changes and other factors. Estimating the ultimate average loss requires analysis of the impact of large

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losses and claim cost trends based on changes in the cost of repairing or replacing property, changes in the cost of medical care, changes in the cost of wage replacement, judicial decisions, legislative changes and other factors.

For many exposures, especially those that can be considered long-tail, a particular accident year may not have a sufficient volume of paid losses to produce a statistically reliable estimate of ultimate losses. In such a case, our actuaries typically assign more weight to the Incurred Development method than to the Paid Development method. As claims continue to settle and the volume of paid loss increases, the actuaries may assign additional weight to the Paid Development method. For most of our reserve categories, even the incurred losses for accident years that are early in the claim settlement process will not be of sufficient volume to produce a reliable estimate of ultimate losses. In these cases, we will not assign any weight to the Paid and Incurred Development methods and will use the Bornhuetter-Ferguson and Expected Loss Ratio methods. For short-tail exposures, the Paid and Incurred Development methods can often be relied on sooner primarily because our history includes a sufficient number of years to cover the entire period over which paid and incurred losses are expected to change. However, we may also use the Expected Loss Ratio, Bornhuetter-Ferguson and Average Loss methods for short-tail exposures.
Generally, reserves for long tail lines use the Expected Loss Ratio method for the most recent accident year, shift to the Bornhuetter-Ferguson methods for the next two years, and then shift to the Incurred and/or Paid Development method. Claims related to umbrella business are usually reported later than claims for other long tail lines. For umbrella business, the Expected Loss Ratio method is used for as many as five years, shifts to the Bornhuetter-Ferguson method for one year, and then shifts to the Incurred Development method. Reserves for short tail lines use the Bornhuetter-Ferguson methods for the most recent accident year and shift to the Incurred and/or Paid Development method in subsequent years.

For other more complex reserve categories where the above methods may not produce reliable indications, we use additional methods tailored to the characteristics of the specific situation. Such reserve categories include construction defect and asbestos and environmental (“A&E”).

For construction defect losses, our actuaries organize losses by report year. Report year groups claims by the year in which they were reported. To estimate losses from claims that have not been reported, various extrapolation techniques are applied to the pattern of claims that have been reported to estimate the number of claims yet to be reported. This process requires analysis of several factors including the rate at which policyholders report claims to us, the impact of judicial decisions, the impact of underwriting changes and other factors. An average claim size is determined from past experience and applied to the number of unreported claims to estimate reserves for these claims.

The reserve analyses performed by our actuaries result in preliminary point estimates. Each quarter, the results of the detailed reserve reviews are summarized and discussed with our senior management to determine the best estimate of reserves. This group considers many factors in making this decision. The factors include, but are not limited to, the historical pattern and volatility of the actuarial indications, the sensitivity of the actuarial indications to changes in paid and incurred loss patterns, the consistency of claims handling processes, the consistency of case reserving practices, changes in our pricing and underwriting, and overall pricing and underwriting trends in the insurance market.

Our recorded reserves reflect our best estimate as of a particular point in time based upon known facts, current law and our judgment. The carried reserve may differ from the actuarial point estimate as the result of our consideration of the factors noted above as well as the potential volatility of the projections associated with the specific reserve category being analyzed and other factors impacting claims costs that may not be quantifiable through actuarial analysis. This process results in management’s best estimate which is then recorded as the loss reserve.

Currently, our reserves are slightly higher than the actuarial point estimate. We do not establish a specific provision for uncertainty. Adjustments to actuarial indications are based upon the age of the accident year and the volatility of the reserve category. The difference between our reserves and the actuarial point estimate is primarily due to the recent accident years, because claim data from these accident years is very immature. We believe it is prudent to wait until actual experience confirms that the loss reserves should be adjusted. In addition, the carried reserve is slightly higher than the actuarial point estimate for A&E, construction defect and umbrella reserve categories because of the volatility of these reserve categories.

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Establishing reserves for A&E and other mass tort claims involves considerably more judgment than other types of claims due to, among other things, inconsistent court decisions, an increase in bankruptcy filings as a result of asbestos-related liabilities, novel theories of coverage, and judicial interpretations that often expand theories of recovery and broaden the scope of coverage. The insurance industry continues to receive a substantial number of asbestos-related bodily injury claims, with an increasing focus being directed toward installers of products containing asbestos rather than against asbestos manufacturers. This shift has resulted in significant insurance coverage litigation implicating applicable coverage defenses or determinations, if any, including but not limited to, determinations as to whether or not an asbestos related bodily injury claim is subject to aggregate limits of liability found in most comprehensive general liability policies. One of our insurance companies has been named in a lawsuit seeking coverage from it and other unrelated insurance companies that involves such issues with regard to approximately 4,000 asbestos-related bodily injury claims and others that continue to be filed. There are numerous factual and legal issues to be resolved in connection with this lawsuit, and it is difficult to predict at this time the extent of financial exposure that this matter could present.

The tables below identify the components of our gross and net unpaid losses and loss adjustment expenses as of June 30, 2007:

	Gross Reserves
(Dollars in thousands)	Case		IBNR (1)		Total
Insurance Operations:
Penn-America	$	167,917	$	399,106	$	567,023
United National:
Program		316,711		684,423		1,001,134
Specialty Brokerage		15,269		14,124		29,393
Total United National		331,980		698,547		1,030,527
Total Insurance Operations		499,897		1,097,653		1,597,550
Reinsurance Operations:
Wind River Reinsurance		—		1,255		1,255
Total	$	499,897	$	1,098,908	$	1,598,805

	Net Reserves (2)
(Dollars in thousands)	Case		IBNR (1)		Total
Insurance Operations:
Penn-America	$	152,246	$	342,453	$	494,699
United National:
Program		80,126		193,586		273,712
Specialty Brokerage		7,168		11,573		18,741
Total United National		87,294		205,159		292,453
Total Insurance Operations		239,540		547,612		787,152
Reinsurance Operations:
Wind River Reinsurance		—		703		703
Total	$	239,540	$	548,315	$	787,855

(1)	Losses incurred but not reported.
(2)	Does not include reinsurance receivable on paid losses or reserve for uncollectible reinsurance.

We continually review these estimates and, based on new developments and information, we include adjustments of the probable ultimate liability in the operating results for the periods in which the adjustments are made. The establishment of loss and loss adjustment expense reserves makes no provision for the possible broadening of coverage by legislative action or judicial interpretation, or the emergence of new types of losses not sufficiently represented in our historical experience or that cannot yet be quantified. We regularly analyze our reserves and review pricing and reserving methodologies so that future adjustments to prior year reserves can be minimized. However, given the complexity of this process, reserves will require continual updates and the ultimate liability may be higher or lower than previously indicated. Change in estimates for loss and loss adjustment expense reserves, as required by SFAS No. 60, “Accounting and Reporting by Insurance Enterprises,” is recorded in the period that the change in these estimates is made. Other than the purchase accounting adjustments made at the time of the purchase of Wind River Investment Corp. and the merger with Penn-America Group, Inc. of $49.4 million and $19.5 million, respectively, we do not discount our GAAP loss reserves.

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Management continues to review the actuarial analyses and assumptions and makes adjustments to actuarial indications based upon the age of the accident year and the volatility of the reserve category when determining management’s best estimate. Management’s evaluation resulted in a decrease to carried reserves of $0.8 million for the six months ended June 30, 2007. This decrease is part of the $11.0 million release of prior year loss reserves described in Note 5 to the consolidated financial statements in Item 1 of Part I of this report. Management’s best estimate exceeds the actuarial indication.

The detailed reserve analyses use a variety of generally accepted actuarial methods and techniques to produce a number of estimates of ultimate loss. We determine a point estimate of ultimate loss by reviewing the various estimates and assigning weight to each estimate given the characteristics of the reserve category being reviewed. The reserve estimate is the difference between the estimated ultimate loss and the losses paid to date. The difference between the estimated ultimate loss and the case incurred loss (paid loss plus case reserve) is considered to be IBNR. IBNR calculated as such includes a provision for development on known cases (supplemental development) as well as a provision for claims that have occurred but have not yet been reported (pure IBNR).

The level of reserves we maintain represents our best estimate, as of a particular point in time, of what the ultimate settlement and administration of claims will cost based on our assessment of facts and circumstances known at that time. Reserves are not an exact calculation of liability but instead are complex estimates that we derive, generally utilizing a variety of actuarial reserve estimation techniques, from numerous assumptions and expectations about future events, both internal and external, many of which are highly uncertain. In light of the many uncertainties associated with establishing the estimates and making the assumptions necessary to establish reserve levels, we review our reserve estimates on a regular basis and make adjustments in the period that the need for such adjustments is determined. The anticipated future emergence continues to be reflective of historical patterns, and the selected development patterns have not changed significantly from those underlying our most recent analyses.

The key assumptions fundamental to the reserving process are often different for various reserve categories and accident years. Some of these assumptions are explicit assumptions that are required of a particular method, but most of the assumptions are implicit and cannot be precisely quantified. An example of an explicit assumption is the pattern employed in the Paid Development method. However, the assumed pattern is itself based on several implicit assumptions such as the impact of inflation on medical costs and the rate at which claim professionals close claims. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Each reserve segment has an implicit frequency and severity for each accident year as a result of the various assumptions made. As a result, the effect on reserve estimates of a particular change in assumptions usually cannot be specifically quantified, and changes in these assumptions cannot be tracked over time.

Previous reserve analyses have resulted in our identification of information and trends that have caused us to increase or decrease our reserves in prior periods and could lead to the identification of a need for additional material changes in loss and loss adjustment expense reserves, which could materially affect our results of operations, equity, business and insurer financial strength and debt ratings. Factors affecting loss frequency include, among other things, the effectiveness of loss controls and safety programs and changes in economic activity or weather patterns. Factors affecting loss severity include, among other things, changes in policy limits and deductibles, rate of inflation and judicial interpretations. Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to us. The length of the loss reporting lag affects our ability to accurately predict loss frequency (loss frequencies are more predictable for short tail lines) as well as the amount of reserves needed for incurred but not reported losses.

If the actual level of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management’s estimate. Based on our judgment and analysis, we believe that frequency can be predicted with greater accuracy than severity for losses incurred during 2007. Inflation, judicial interpretation, and other factors can affect severity. We believe management’s estimate is more sensitive to changes in severity than frequency. The following table, which we believe reflects a reasonable range of variability around our point estimate, reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity on our current accident year gross loss estimate of $170.9 million for claims occurring during the six months ended June 30, 2007:

24

			Severity Change
(Dollars in thousands)			-10%			-5%			0%			5%			10%
Frequency Change	-5	%	$	(24,787	)	$	(16,667	)	$	(8,547	)	$	(427	)	$	7,693
	-3	%		(21,710	)		(13,419	)		(5,128	)		3,162			11,453
	-2	%		(20,172	)		(11,795	)		(3,419	)		4,957			13,334
	-1	%		(18,633	)		(10,171	)		(1,709	)		6,752			15,214
	0	%		(17,095	)		(8,547	)		—			8,547			17,095
	1	%		(15,556	)		(6,923	)		1,709			10,342			18,975
	2	%		(14,017	)		(5,299	)		3,419			12,137			20,855
	3	%		(12,479	)		(3,675	)		5,128			13,932			22,736
	5	%		(9,402	)		(427	)		8,547			17,522			26,496

Our net reserves for losses and loss expenses of $787.9 million as of June 30, 2007 relate to multiple accident years. Therefore, the impact of changes in frequency and severity for more than once accident year could be higher or lower than the amounts reflected above.

Recoverability of Reinsurance Receivables

We regularly review the collectibility of our reinsurance receivables, and we include adjustments resulting from this review in earnings in the period in which the adjustment arises. A.M. Best ratings, financial history, available collateral, and payment history with the reinsurers are several of the factors that we consider when judging collectibility. Changes in loss reserves can also affect the valuation of reinsurance receivables if the change is related to loss reserves that are ceded to reinsurers. Certain amounts may be uncollectible if our reinsurers dispute a loss or if the reinsurer is unable to pay. If our reinsurers do not pay, we are still legally obligated to pay the loss.

During the quarter and six months ended June 30, 2007, we lowered our purchase accounting reserve related to uncollectible reinsurance by $1.3 million and $2.9 million, respectively, primarily due to a reduction in ceded loss reserves, including IBNR.

Investments

The carrying amount of our investments approximates their estimated fair value. We regularly perform various analytical procedures with respect to our investments, including identifying any security where the fair value is below its cost. Upon identification of such securities, we perform a detailed review to determine whether the decline is considered other than temporary. This review includes an analysis of several factors, including but not limited to, the credit ratings and cash flows of the securities, and the magnitude and length of time that the fair value is below cost.

For bonds, the factors considered in reaching the conclusion that a decline below cost is other than temporary include, among others, whether (1) the issuer is in financial distress, (2) the investment is secured, (3) a significant credit rating action occurred, (4) scheduled interest payments were delayed or missed, and (5) changes in laws or regulations have affected an issuer or industry. If the fair value of an investment falls below its cost and the decline is determined to be other than temporary, the amount of the decline is included in earnings as a realized loss in the period in which the impairment arose.

For equity securities, a decline in value is considered to be other than temporary if an unrealized loss has either (1) persisted for more than twelve consecutive months or (2) the value of the investment has been 20% or more below cost for six continuous months or more. For securities with significant declines in value for periods shorter than six months, the security is evaluated to determine whether the cost basis of the security should be written down to its fair value.

For an analysis of our securities with gross unrealized losses as of June 30, 2007 and December 31, 2006, and for other than temporary losses that we recorded for the quarters and six months ended June 30, 2007 and 2006, please see Note 2 to the consolidated financials statements in Item 1 of Part I of this report.

Goodwill and Intangible Assets

We use several techniques to value the recoverability of our intangible assets. Discounted cash flow and cost to

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replace methods were used to value agency relationships, customer contracts, and insurer relationships. State licenses were valued by comparing our licenses to comparable companies. Software was evaluated based on the cost to build and the cost to replace existing software.

Other intangible assets that are not deemed to have an indefinite useful life are amortized over their useful lives. We anticipate that amortization expense will be approximately $1.0 million per year for the next five succeeding years. The amount is subject to change, however, based upon the reviews of recoverability and useful lives that are performed at least annually.

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), we are required to perform a test for impairment of goodwill and other indefinite lived assets at least annually. We concluded our annual impairment review of goodwill and other indefinite lived assets during the first quarter of 2007 and have concluded that goodwill and other indefinite lived assets were not impaired as of December 31, 2006. No events have occurred since then that would indicate that goodwill and other indefinite lived assets were impaired as of June 30, 2007. Impairment is recognized if the fair value of the company is less than its carrying amount.

Taxation

We provide for income taxes in accordance with the provisions of SFAS 109, “Accounting for Income Taxes” (“SFAS 109”). Deferred tax assets and liabilities are recognized consistent with the asset and liability method required by SFAS 109. Our deferred tax assets and liabilities primarily result from temporary differences between the amounts recorded in our consolidated financial statements and the tax basis of our assets and liabilities.

At each balance sheet date, management assesses the need to establish a valuation allowance that reduces deferred tax assets when it is more likely than not that all, or some portion, of the deferred tax assets will not be realized. A valuation allowance would be based on all available information including our assessment of uncertain tax positions and projections of future taxable income from each tax-paying component in each jurisdiction, principally derived from business plans and available tax planning strategies. There is no valuation allowance as of June 30, 2007. The deferred tax asset balance is analyzed regularly by management. Based on these analyses, we have determined that our deferred tax asset is recoverable. Projections of future taxable income incorporate several assumptions of future business and operations that are apt to differ from actual experience. If, in the future, our assumptions and estimates that resulted in our forecast of future taxable income for each tax-paying component prove to be incorrect, a valuation allowance may be required. This could have a material adverse effect on our financial condition, results of operations, and liquidity.

On an interim basis, we book our tax provision using the expected full year effective tax rate in accordance with the provisions of APB 28. Forecasts which compute taxable income and taxes expected to be incurred in the jurisdictions where we do business are prepared several times per year. The effective tax rate is computed by dividing forecasted income tax expense by forecasted pre-tax income. Changes in pre-tax and taxable income in the jurisdictions where we do business can change the APB 28 effective tax rate.

We adopted the provisions of FIN 48 on January 1, 2007. As a result, we apply a more likely than not recognition threshold for all tax uncertainties. FIN 48 only allows the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the taxing authorities. Please see Note 4 to the consolidated financial statements in Item 1 of Part I of this report for a discussion of FIN 48.

Our Business Segments

We have two business segments: Insurance Operations and a new financial reporting segment, Reinsurance Operations, which was created as a result of the amalgamation of our Non-U.S. Insurance Operations into a single Bermuda based entity in September 2006. Our Insurance Operations, which distribute property, general liability, and professional liability products, are comprised of the operations of the Penn-America Group and the United National Group. Our Reinsurance Operations, which offer third party reinsurance products, are comprised of the operations of Wind River Reinsurance. Our Reinsurance Operations began offering third party reinsurance in the third quarter of 2006 and entered into its initial third party reinsurance treaty effective January 1, 2007. As such, there are no results for our Reinsurance Operations segment for the prior year.

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As a result of the sale of substantially all of the assets of our Agency Operations in September 2006, we no longer have an Agency Operations segment, and the results of our Agency Operations are now classified as discontinued operations.

We evaluate the performance of our Insurance Operations and Reinsurance Operations segments based on gross and net premiums written, revenues in the form of net premiums earned, and expenses in the form of (1) net losses and loss adjustment expenses, (2) acquisition costs, and (3) other underwriting expenses.

The following table sets forth an analysis of financial data from continuing operations for our segments during the periods indicated:

	Quarter Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2007			2006			2007			2006
Insurance Operations premiums written:
Gross premiums written	$	143,452		$	167,295		$	289,054		$	326,853
Ceded premiums written		14,210			24,607			29,254			48,828
Net premiums written	$	129,242		$	142,688		$	259,800		$	278,025
Reinsurance Operations premiums written:
Gross premiums written	$	5,231		$	—		$	12,165		$	—
Ceded premiums written		3,959			—			7,396			—
Net premiums written	$	1,272		$	—		$	4,769		$	—
Revenues: (1)
Insurance Operations	$	136,196		$	133,751		$	273,910		$	269,181
Reinsurance Operations		389			—			1,112			—
Corporate		20,859			17,932			39,952			31,654
Total revenues	$	157,444		$	151,683		$	314,974		$	300,835
Expenses: (1)
Insurance Operations	$	118,580		$	123,104	(2)	$	242,039		$	246,740	(3)
Reinsurance Operations		1,477	(4)		—			3,072	(5)		—
Corporate		5,792			6,439			12,085			13,417
Subtotal		125,849			129,543			257,196			260,157
Intercompany eliminations		(151	)		(1,078	)		(306	)		(762	)
Net expenses	$	125,698		$	128,465		$	256,890		$	259,395
Income (loss) before income taxes: (1)
Insurance Operations	$	17,616		$	10,647		$	31,871		$	22,441
Reinsurance Operations		(1,088	)		—			(1,960	)		—
Corporate		15,067			11,493			27,867			18,237
Subtotal		31,595			22,140			57,778			40,678
Intercompany eliminations		151			1,078			306			762
Total income before income taxes	$	31,746		$	23,218		$	58,084		$	41,440
Insurance combined ratio analysis: (6)
Net losses and loss adjustment expense ratio		55.1			60.2			57.1			59.2
Other underwriting expense ratio		32.7			30.8			31.8			32.0
Combined ratio		87.8			91.0			88.9			91.2

(1)	Excludes the results of our Agency Operations, which have been classified as discontinued operations for 2007 and 2006.
(2)	Includes $1,262 from the predecessor of Wind River Reinsurance. $686 of this amount is excise tax.
(3)	Includes $2,655 from the predecessor of Wind River Reinsurance. $1,330 of this amount is excise tax.
(4)	Includes excise tax of $656.
(5)	Includes excise tax of $1,399.
(6)	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.

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Results of Operations

Quarter Ended June 30, 2007 Compared with the Quarter Ended June 30, 2006

Premiums

Gross premiums written, which represent the amount received or to be received for insurance policies written without reduction for reinsurance costs or other deductions, were $148.7 million for the quarter ended June 30, 2007, compared with $167.3 million for the quarter ended June 30, 2006, a decrease of $18.6 million or 11.1%.

A breakdown of gross premiums written by product class is as follows:

	Quarter Ended		Quarter Ended			Increase /
(Dollars in thousands)	June 30, 2007		June 30, 2006			(Decrease)
Insurance Operations:
Penn-America	$	79,369	$	99,639		$	(20,270	)
United National:
Program		52,252		59,622			(7,370	)
Specialty Brokerage		11,831		8,042			3,789
Total United National		64,083		67,664			(3,581	)
Total Insurance Operations		143,452		167,303			(23,851	)
Reinsurance Operations:
Wind River Reinsurance		5,231		(8	)		5,239
Total	$	148,683	$	167,295		$	(18,612	)

• Insurance Operations:

• Penn-America gross premiums written decreased $20.3 million due to: (a) increased competition from both surplus lines and standard carriers; and (b) cancellation of business that did not meet our profitability standards. Premium rates on renewal business on average were flat during the quarter ended June 30, 2007.

• United National Program gross premiums written decreased $7.4 million primarily due to a: (a) decrease in premiums in a program of 1^st Party business in our property product line; and (b) decrease in premiums in our umbrella product line as a result of competition in the marketplace. Premium rates on renewal business on average were down approximately 5% during the quarter ended June 30, 2007.

• United National Specialty Brokerage gross premiums written increased $3.8 million primarily due to continued growth in our property and allied health product lines. Premium rates on renewal business on average were down approximately 10% during the quarter ended June 30, 2007.

• Reinsurance Operations:

• Wind River Reinsurance gross premiums written increased $5.2 million. Wind River Reinsurance began offering third party reinsurance in the third quarter of 2006 and entered into its initial third party reinsurance contracts during the first quarter of 2007. Wind River Reinsurance did not offer any third party reinsurance products during the quarter ended June 30, 2006.

Net premiums written, which equal gross premiums written less ceded premiums written, were $130.5 million for the quarter ended June 30, 2007, compared with $142.7 million for the quarter ended June 30, 2006, a decrease of $12.2 million or 8.5%. The ratio of net premiums written to gross premiums written was 87.8% for the quarter ended June 30, 2007 and 85.3% for the quarter ended June 30, 2006.

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A breakdown of net premiums written by product class is as follows:

	Quarter Ended		Quarter Ended			Increase /
(Dollars in thousands)	June 30, 2007		June 30, 2006			(Decrease)
Insurance Operations:
Penn-America	$	74,895	$	90,507		$	(15,612	)
United National:
Program		45,036		46,275			(1,239	)
Specialty Brokerage		9,311		5,913			3,398
Total United National		54,347		52,188			2,159
Total Insurance Operations		129,242		142,695			(13,453	)
Reinsurance Operations:
Wind River Reinsurance		1,272		(7	)		1,279
Total	$	130,514	$	142,688		$	(12,174	)

• Insurance Operations:

• Penn-America net premiums written decreased $15.6 million primarily due to a decrease in casualty and general liability premiums caused by increased competition from both surplus lines and standard carriers and the recent cancellation of business that did not meet our profitability standards.

• United National Program net premiums written decreased $1.2 million primarily as a result of decreases in product writings in our umbrella line.

• United National Specialty Brokerage net premiums written increased $3.4 million due to continued growth in our property and allied health product writings.

• Reinsurance Operations:

• Wind River Reinsurance net premiums written increased $1.3 million. Wind River Reinsurance began offering third party reinsurance in the third quarter of 2006 and entered into its initial third party reinsurance contracts during the first quarter of 2007. Wind River Reinsurance did not offer any third party reinsurance products during the six months ended June 30, 2006.

Net premiums earned were $136.6 million for the quarter ended June 30, 2007, compared with $133.8 million for the quarter June 30, 2006, an increase of $2.8 million or 2.1%. The increase in net premiums earned is primarily due to a $2.4 million increase in net premiums earned from our Insurance Operations segment and $0.4 million of net premiums earned from our Reinsurance Operations segment.

• The increase in net premiums earned from our Insurance Operations segment is due to higher net premiums written in the second half of 2006, which are now being earned in 2007, compared to net premiums written in the second half of 2005, which were earned in 2006.

• Net premiums earned from our Reinsurance Operations segment were $0.4 million for the quarter ended June 30, 2007. Our Reinsurance Operations segment began offering third party reinsurance in the third quarter of 2006 and entered into its initial third party reinsurance contracts during the first quarter of 2007; therefore there were no net premiums earned for our Reinsurance Operations segment in 2006.

Net Investment Income

Net investment income, which is gross investment income less investment expenses, was $19.3 million for the quarter ended June 30, 2007, compared with $17.9 million for the quarter ended June 30, 2006, an increase of $1.4 million or 7.7%.

• Gross investment income, excluding realized gains and losses, was $20.6 million for the quarter ended June 30, 2007, compared with $19.3 million for the quarter ended June 30, 2006, an increase of $1.3 million or 7.0%. The increase was primarily due to growth in the average market value of our cash and invested

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assets and an increase in the investment yields on both our bond and short term investment portfolios, offset by a decrease in limited partnership distributions. Cash and invested assets grew to $1,743.3 million as of June 30, 2007, from $1,656.7 million as of December 31, 2006, an increase of $86.6 million or 5.2%. Our limited partnership investments generated gross investment income of $0.1 million and $2.0 million for the quarters ended June 30, 2007 and 2006, respectively. Excluding limited partnership distributions, gross investment income for the quarter ended June 30, 2007 increased 18.8% compared to the quarter ended June 30, 2006.

•

Investment expenses were $1.3 million and $1.4 million for the quarters ended June 30, 2007 and 2006, respectively.

The average duration of our bonds decreased to 3.6 years as of June 30, 2007 from 4.1 years as of June 30, 2006. Including cash and short term investments, the average duration of our investments as of June 30, 2007 was 3.0 years, compared to 3.9 years as of June 30, 2006. At June 30, 2007, our embedded book yield on our bonds, not including cash and short term investments, was 5.01% compared with 4.64% at June 30, 2006.

Net Realized Investment Gains (Losses)

Net realized investment gains were $1.5 million for the quarter ended June 30, 2007 compared to net realized investment losses of $0.004 million for the quarter ended June 30, 2006. The net realized investment gains for the quarter ended June 30, 2007 consist primarily of net gains of $0.3 million relative to bond portfolios, net gains of $1.1 million relative to our equity portfolios, and net gains of $0.1 million relative to our convertible portfolio. As stated in Note 2 of the notes to the consolidated financial statements in Item 1 of Part I of this report, we adopted SFAS 155 on January 1, 2007, and as a result, changes in the market value of our convertible bond and convertible preferred stock portfolios are recognized as realized gains and losses in the current period. The net realized investment losses for the quarter ended June 30, 2006 consist primarily of net gains of $0.07 million relative to our options portfolio, net gains of $0.07 million relative to our equity portfolios, and net losses of $0.1 million relative to our bond portfolios.

Net Losses and Loss Adjustment Expenses

Net losses and loss adjustment expenses were $75.2 million for the quarter ended June 30, 2007, compared with $80.5 million for the quarter ended June 30, 2006, a decrease of $5.3 million or 6.5%. Excluding the impact of a $1.3 million reduction in our reinsurance reserve allowance and an $11.0 million release of prior year loss reserves, which are discussed in Note 5 of the notes to the consolidated financial statements in Item 1 of Part I of the report, net losses and loss adjustment expenses would have been $87.5 million for the quarter ended June 30, 2007. The increase in incurred losses and loss adjustment expenses from $80.5 million for the quarter ended June 30, 2006 to $87.5 million for the quarter ended June 30, 2007 is primarily attributable to growth in exposure as net earned premiums were higher in 2007, an increase in the severity of non-catastrophe property losses, and casualty loss cost inflation, offset somewhat by lower catastrophe losses.

The loss ratio for the quarter ended June 30, 2007 was 55.1% compared with 60.2% for the quarter ended June 30, 2006. The loss ratio is calculated by dividing net losses and loss adjustment expenses by net premiums earned. The reduction in our reinsurance reserve allowance and the release of prior year loss reserves in 2007 decreased the loss ratio for 2007 9.0 points. Excluding the impact of the reduction in our reinsurance reserve allowance and release of prior year loss reserves, the loss ratio increased from 60.2% for 2006 to 64.1% for 2007 primarily due to the reasons for the increase in incurred losses and loss adjustment expenses stated above and casualty loss cost inflation in excess of rate increases.

Acquisition Costs and Other Underwriting Expenses

Acquisition costs and other underwriting expenses, net of intercompany eliminations, were $44.7 million for the quarter ended June 30, 2007, compared with $41.2 million for the quarter ended June 30, 2006, an increase of $3.5 million or 8.5%. This increase is primarily due to a $2.8 million increase in acquisition costs and other underwriting expenses, net of intercompany eliminations, of our Insurance Operations segment and a $0.7 million increase in acquisition costs and other underwriting expenses of our Reinsurance Operations segment.

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• The increase in our Insurance Operations segment is due to a $2.0 million increase in acquisition costs, which is primarily due to an increase in commissions, and a $0.8 million increase in other underwriting expenses, which is primarily due to stock options and an increase in consulting expenses.

• The increase in our Reinsurance Operations segment is primarily due to a $0.7 million increase in other underwriting expenses. Our Reinsurance Operations segment began offering third party reinsurance in the third quarter of 2006 and entered into its initial third party reinsurance contracts during the first quarter of 2007.

Corporate and Other Operating Expenses

Corporate and other operating expenses consist of outside legal fees, other professional fees, directors’ fees, management fees, salaries and benefits for holding company personnel, and taxes incurred which are not directly related to operations. Corporate and other operating expenses were $2.9 million for the quarter ended June 30, 2007, compared with $3.9 million for the quarter ended June 30, 2006, a decrease of $1.0 million. This decrease is primarily due to reductions in stock options expenses, and other corporate expenses.

Expense and Combined Ratios

Our expense ratio, which is calculated by dividing the sum of acquisition costs and other underwriting expenses by premiums earned, was 32.7% for the quarter ended June 30, 2007, compared with 30.8% for the quarter ended June 30, 2006. The increase in the expense ratio is primarily due to an increase in commissions, legal expenses, stock options, and consulting expenses as a percentage of earned premium.

Our combined ratio was 87.8% for the quarter ended June 30, 2007, compared with 91.0% for the quarter ended June 30, 2006. The combined ratio is the sum of our loss and expense ratios. The reduction in our reinsurance reserve allowance and release of prior year loss reserves in 2007 decreased the combined ratio for 2007 9.0 points. Excluding the impact of the reduction in our reinsurance reserve allowance and release of prior year loss reserves, the combined ratio increased from 91.0% for 2006 to 96.8% for 2007. See discussions of loss ratio and expense ratio above for an explanation of this increase.

Interest Expense

Interest expense was $2.9 million for the quarter ended June 30, 2007, compared with $3.0 million for the quarter ended June 30, 2006, a decrease of $0.1 million or 2.0%. This decrease is primarily due to decreases in interest rates on the junior subordinated debt, which are tied to the three month LIBOR rate. The three month LIBOR rate was 5.36% at June 30, 2007 compared to 5.51% at June 30, 2006.

Income Tax Expense (Benefit)

Income tax expense relating to continuing operations was $6.0 million for the quarter ended June 30, 2007, compared with $2.6 million for the quarter ended June 30, 2006. See Note 4 of the notes to the consolidated financial statements in Item 1 of Part I of this report for a comparison of income tax expense between periods. To compute our income tax expense, we apply our anticipated effective year end tax rate against our pre-tax income excluding realized gains and add actual tax on realized gains to that result. Our pre-tax income was $31.7 million and $23.2 million for the quarters ended June 30, 2007 and 2006, respectively.

Our AMT credit carryforward as of June 30, 2007 and December 31, 2006 was $0.0 million and $2.8 million, respectively.

Equity in Net Income of Partnership

Equity in net income of partnerships was $0.2 million for the quarter ended June 30, 2007, compared with $0.04 million for the quarter ended June 30, 2006, an increase of $0.2 million. The increase is due to the increased performance of a limited partnership investment which invests mainly in high yield bonds.

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Discontinued Operations

Discontinued operations consists of the net results of operations of our Agency Operations segment. Loss from discontinued operations was $0.04 million for the quarter ended June 30, 2007, compared with a loss of $0.5 million for the quarter ended June 30, 2006.

Net Income and Operating Income

The factors described above resulted in net income of $25.9 million for the quarter ended June 30, 2007, compared with net income of $20.2 million for the quarter ended June 30, 2006, an increase of $5.7 million or 28.1%. Operating income was $25.0 million for the quarter ended June 30, 2007, compared with operating income of $20.3 million for the quarter ended June 30, 2006, an increase of $4.7 million or 22.8%. Operating income is a non-GAAP financial measure used by management as a measure of our performance. It is calculated as net income less after-tax net realized investment gains (losses), less the after-tax gain and one-time charges from discontinued operations, less any after-tax extraordinary gains (losses). We believe that the presentation of net operating income provides useful information regarding our results of operations because it is a measure that is closely followed by financial statement users, including investors, analysts, and rating agencies. We believe it is a widely accepted practice among analysts who follow the insurance industry to state their earnings forecasts in terms of operating income per share. Operating income excludes items that are expected to be non-recurring or very infrequent. Operating income also excludes net realized investment gains (losses). There is discretion to control when net realized investment gains (losses) can be realized; therefore, they are not considered when management measures our performance. We believe operating income is a better indicator of our performance than net income.

A reconciliation of operating income to net income for the quarters ended June 30, 2007 and 2006 is as follows:

	Quarter Ended June 30,
(Dollars in thousands)	2007		2006
Operating income	$	24,954	$	20,327
Adjustments:
Net realized investment gains (losses), net of tax		994		(73	)
Net income	$	25,948	$	20,254

Six Months Ended June 30, 2007 Compared with the Six Months Ended June 30, 2006

Premiums

Gross premiums written, which represent the amount received or to be received for insurance policies written without reduction for reinsurance costs or other deductions, were $301.2 million for the six months ended June 30, 2007, compared with $326.9 million for the six months ended June 30, 2006, a decrease of $25.7 million or 7.8%.

A breakdown of gross premiums written by product class is as follows:

	Six Months Ended		Six Months Ended		Increase /
(Dollars in thousands)	June 30, 2007		June 30, 2006		(Decrease)
Insurance Operations:
Penn-America	$	159,857	$	194,694	$	(34,837	)
United National:
Program		105,939		118,013		(12,074	)
Specialty Brokerage		23,258		14,099		9,159
Total United National		129,197		132,112		(2,915	)
Total Insurance Operations		289,054		326,806		(37,752	)
Reinsurance Operations:
Wind River Reinsurance		12,165		47		12,118
Total	$	301,219	$	326,853	$	(25,634	)

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• Insurance Operations:

• Penn-America gross premiums written decreased $34.8 million due to a: (a) increased competition from both surplus lines and standard carriers; and (b) cancellation of business that did not meet our profitability standards. Premium rates on renewal business on average were flat during the six months ended June 30, 2007.

• United National Program gross premiums written decreased $12.1 million primarily due to: (a) decrease in premiums in a program of 1^st Party business in our property product line; and (b) decrease in premiums in our umbrella product line as a result of competition in the marketplace. Premium rates on renewal business on average were down approximately 4% during the six months ended June 30, 2007.

• United National Specialty Brokerage gross premiums written increased $9.2 million primarily due to continued growth in our property and allied health product lines. Premium rates on renewal business on average were down approximately 5% during the six months ended June 30, 2007.

• Reinsurance Operations:

• Wind River Reinsurance gross premiums written increased $12.1 million. Wind River Reinsurance began offering third party reinsurance in the third quarter of 2006 and entered into its initial third party reinsurance contracts during the first quarter of 2007. Wind River Reinsurance did not offer any third party reinsurance products during the six months ended June 30, 2006.

Net premiums written, which equal gross premiums written less ceded premiums written, were $264.6 million for the six months ended June 30, 2007, compared with $278.0 million for the six months ended June 30, 2006, a decrease of $13.4 million or 4.8%. The ratio of net premiums written to gross premiums written was 87.8% for the six months ended June 30, 2007 and 85.1% for the six months ended June 30, 2006.

A breakdown of net premiums written by product class is as follows:

	Six Months Ended		Six Months Ended		Increase /
(Dollars in thousands)	June 30, 2007		June 30, 2006		(Decrease)
Insurance Operations:
Penn-America	$	150,575	$	176,891	$	(26,316	)
United National:
Program		89,717		90,657		(940	)
Specialty Brokerage		19,508		10,437		9,071
Total United National		109,225		101,094		8,131
Total Insurance Operations		259,800		277,985		(18,185	)
Reinsurance Operations:
Wind River Reinsurance		4,769		40		4,729
Total	$	264,569	$	278,025	$	(13,456	)

• Insurance Operations:

• Penn-America net premiums written decreased $26.3 million primarily due to a decrease in property, casualty, and general liability premiums caused by increased competition from both surplus lines and standard carriers and the recent cancellation of business that did not meet our profitability standards.

• United National Program net premiums written decreased $0.9 million primarily as a result of decreases in product writings in our umbrella line partially offset by an increase in habitational general liability premium.

• United National Specialty Brokerage net premiums written increased $9.1 million due to continued growth in our property and allied health product writings.

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• Reinsurance Operations:

• Wind River Reinsurance net premiums written increased $4.7 million. Wind River Reinsurance began offering third party reinsurance in the third quarter of 2006 and entered into its initial third party reinsurance contracts during the first quarter of 2007. Wind River Reinsurance did not offer any third party reinsurance products during the six months ended June 30, 2006.

Net premiums earned were $275.0 million for the six months ended June 30, 2007, compared with $269.2 million for the six months ended June 30, 2006, an increase of $5.8 million or 2.2%. The increase in net premiums earned is due to a $4.7 million increase in net premiums earned from our Insurance Operations segment and $1.1 million of net premiums earned from our Reinsurance Operations segment.

• The increase in net premiums earned from our Insurance Operations segment is due to higher net premiums written in the second half of 2006, which are now being earned in 2007, compared to net premiums written in the second half of 2005, which were earned in 2006.

• Net premiums earned from our Reinsurance Operations segment were $1.1 million for the six months ended June 30, 2007. Our Reinsurance Operations segment began offering third party reinsurance in the third quarter of 2006 and entered into its initial third party reinsurance contracts during the first quarter of 2007; therefore there were no net premiums earned for our Reinsurance Operations segment for the prior year.

Net Investment Income

Net investment income, which is gross investment income less investment expenses, was $38.2 million for the six months ended June 30, 2007, compared with $31.6 million for the six months ended June 30, 2006, an increase of $6.6 million or 20.8%.

• Gross investment income, excluding realized gains and losses, was $41.0 million for the six months ended June 30, 2007, compared with $34.5 million for the six months ended June 30, 2006, an increase of $6.5 million or 18.9%. The increase was primarily due to growth in the average market value of our cash and invested assets and an increase in the investment yields on both our bond and short term investment portfolios, offset by a decrease in limited partnership distributions. Cash and invested assets grew to $1,743.3 million as of June 30, 2007, from $1,656.7 million as of December 31, 2006, an increase of $86.6 million or 5.2%. Our limited partnership investments generated gross investment income of $0.4 million and $2.4 million for the six months ended June 30, 2007 and 2006, respectively. Excluding limited partnership distributions, gross investment income for the six months ended June 30, 2007 increased 26.4% compared to the six months ended June 30, 2006.

• Investment expenses were $2.8 million and $2.9 million for the six months ended June 30, 2007 and 2006, respectively.

Please see the discussion of Net Investment Income in the quarter to quarter comparison above for a discussion of our average duration and embedded book yield.

Net Realized Investment Gains (Losses)

Net realized investment gains were $1.8 million and $0.04 million for the six months ended June 30, 2007 and 2006, respectively. The net realized investment gains for the six months ended June 30, 2007 consist primarily of net gains of $0.9 million relative to bond portfolios, net of other than temporary impairment losses of $0.02 million, net gains of $1.9 million relative to our equity portfolios, and net losses of $1.0 million relative to our convertible portfolio. As stated in Note 2 of the notes to the consolidated financial statements in Item 1 of Part I of this report, we adopted SFAS 155 on January 1, 2007, and as a result, changes in the market value of our convertible bond and convertible preferred stock portfolios are recognized as realized gains and losses in the current period. The net realized investment gains for the six months ended June 30, 2006 consist primarily of net gains of $0.6 million relative to our options portfolio, net losses of $0.2 million relative to our bond portfolios, and net losses of $0.3 million relative to our equity portfolios.

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Net Losses and Loss Adjustment Expenses

Net losses and loss adjustment expenses were $157.1 million for the six months ended June 30, 2007, compared with $159.4 million for the six months ended June 30, 2006, a decrease of $2.3 million or 1.5%. Excluding the impact of a $2.9 million reduction in our reinsurance reserve allowance and an $11.0 million release of prior year loss reserves, which are discussed in Note 5 of the notes to the consolidated financial statements in Item 1 of Part I of the report, net losses and loss adjustment expenses would have been $170.9 million for the six months ended June 30, 2007. The increase in incurred losses and loss adjustment expenses from $159.4 million for the six months ended June 30, 2006 to $170.9 million for the six months ended June 30, 2007 is primarily attributable to growth in exposure as net premiums earned were higher in 2007, an increase in the severity of non-catastrophe property losses, and casualty loss cost inflation, offset somewhat by lower catastrophe losses.

The loss ratio for the six months ended June 30, 2007 was 57.1% compared with 59.2% for the six months ended June 30, 2006. The loss ratio is calculated by dividing net losses and loss adjustment expenses by net premiums earned. The reduction in our reinsurance reserve allowance and release of prior year loss reserves in 2007 decreased the loss ratio for 2007 5.1 points. Excluding the impact of the reduction in our reinsurance reserve allowance and the release of prior year loss reserves, the loss ratio increased from 59.2% for 2006 to 62.2% for 2007 primarily due to the reasons for the increase in incurred losses and loss adjustment expenses stated above and casualty loss cost inflation in excess of rate increases.

Acquisition Costs and Other Underwriting Expenses

Acquisition costs and other underwriting expenses, net of intercompany eliminations, were $87.5 million for the six months ended June 30, 2007, compared with $86.2 million for the six months ended June 30, 2006, an increase of $1.3 million or 1.6%. This increase is primarily due to a $0.2 million increase in acquisition costs and other underwriting expenses, net of intercompany eliminations, of our Insurance Operations segment and a $1.2 million increase in acquisition costs and other underwriting expenses of our Reinsurance Operations segment.

• The increase in our Insurance Operations segment is due to a $0.1 million increase in acquisition costs, which is primarily due to an increase in commissions, and a $0.1 million increase in other underwriting expenses, which is primarily due to an increase in consulting expenses. Other underwriting expenses for the six months ended June 30, 2006 included $0.3 million of severance costs resulting from our restructuring in 2006.

• The increase in our Reinsurance Operations segment is primarily due to a $1.1 million increase in other underwriting expenses. Our Reinsurance Operations segment began offering third party reinsurance in the third quarter of 2006 and entered into its initial third party reinsurance contracts during the first quarter of 2007; therefore there were no other underwriting expenses for our Reinsurance Operations segment for the prior year.

Corporate and Other Operating Expenses

Corporate and other operating expenses consist of outside legal fees, other professional fees, directors’ fees, management fees, salaries and benefits for holding company personnel, and taxes incurred which are not directly related to operations. Corporate and other operating expenses were $6.5 million for the six months ended June 30, 2007, compared with $8.1 million for the six months ended June 30, 2006, a decrease of $1.6 million. This decrease is primarily due to reductions in legal expenses, stock options expenses, and other corporate expenses.

Expense and Combined Ratios

Our expense ratio, which is calculated by dividing the sum of acquisition costs and other underwriting expenses by premiums earned, was 31.8% for the six months ended June 30, 2007, compared with 32.0% for the six months ended June 30, 2006. The decrease in the expense ratio is primarily due to a decrease in non-commission related acquisition expenses as a percentage of earned premium partially offset by an increase in legal expenses, stock options, and consulting expenses as a percentage of earned premium.

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Our combined ratio was 88.9% for the six months ended June 30, 2007, compared with 91.2% for the six months ended June 30, 2006. The combined ratio is the sum of our loss and expense ratios. The reduction in our reinsurance reserve allowance and release of prior year loss reserves in 2007 decreased the combined ratio for 2007 5.1 points. Excluding the impact of the reduction in our reinsurance reserve allowance and the release of prior year loss reserves, the combined ratio increased from 91.2% for 2006 to 94.0% for 2007. See discussions of loss ratio and expense ratio above for an explanation of this increase.

Interest Expense

Interest expense was $5.8 million for the six months ended June 30, 2007, compared with $5.7 million for the six months ended June 30, 2006, an increase of $0.1 million or 2.2%. This increase is primarily due to increases in interest rates on the junior subordinated debt, which are tied to the three month LIBOR rate.

Income Tax Expense (Benefit)

Income tax expense relating to continuing operations was $10.0 million for the six months ended June 30, 2007, compared with $3.7 million for the six months ended June 30, 2006. See Note 4 of the notes to the consolidated financial statements in Item 1 of Part I of this report for a comparison of income tax expense between periods. To compute our income tax expense, we apply our anticipated effective year end tax rate against our pre-tax income excluding realized gains and add actual tax on realized gains to that result. Our pre-tax income was $58.1 million and $41.4 million for the six months ended June 30, 2007 and 2006, respectively.

Our AMT credit carryforward as of June 30, 2007 and December 31, 2006 was $0.0 million and $2.8 million, respectively.

Equity in Net Income of Partnership

Equity in net income of partnerships was $0.4 million for the six months ended June 30, 2007, compared with $0.6 million for the six months ended June 30, 2006, a decrease of $0.2 million or 36.9%. The decrease is due to the performance of a limited partnership investment which invests mainly in high yield bonds.

Discontinued Operations

Discontinued operations consists of the net results of operations of our Agency Operations segment. Income from discontinued operations was $0.1 million for the six months ended June 30, 2007, compared with a loss of $0.2 million for the six months ended June 30, 2006, an increase of $0.3 million.

Net Income and Operating Income

The factors described above resulted in net income of $48.5 million for the six months ended June 30, 2007, compared with net income of $38.0 million for the six months ended June 30, 2006, an increase of $10.5 million or 27.6%. Operating income was $47.4 million for the six months ended June 30, 2007, compared with operating income of $38.0 million for the six months ended June 30, 2006, an increase of $9.4 million or 24.6%. Operating income is a non-GAAP financial measure used by management as a measure of our performance. It is calculated as net income less after-tax net realized investment gains (losses), less the after-tax gain and one-time charges from discontinued operations, less any after-tax extraordinary gains (losses). We believe that the presentation of net operating income provides useful information regarding our results of operations because it is a measure that is closely followed by financial statement users, including investors, analysts, and rating agencies. We believe it is a widely accepted practice among analysts who follow the insurance industry to state their earnings forecasts in terms of operating income per share. Operating income excludes items that are expected to be non-recurring or very infrequent. Operating income also excludes net realized investment gains (losses). There is discretion to control when net realized investment gains (losses) can be realized; therefore, they are not considered when management measures our performance. We believe operating income is a better indicator of our performance than net income.

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A reconciliation of operating income to net income for the six months ended June 30, 2007 and 2006 is as follows:

	Six Months Ended June 30,
(Dollars in thousands)	2007		2006
Operating income	$	47,401	$	38,046
Adjustments:
Net realized investment gains (losses), net of tax		1,140		(14	)
Net income	$	48,541	$	38,032

Liquidity and Capital Resources

Sources and Uses of Funds

United America Indemnity is a holding company. Its principal asset is its ownership of the shares of its direct and indirect subsidiaries, including United National Insurance Company, Diamond State Insurance Company, United National Specialty Insurance Company, United National Casualty Insurance Company, Wind River Reinsurance, Penn-America Insurance Company, Penn-Star Insurance Company, Penn-Patriot Insurance Company, and Penn Independent Corporation. Substantially all of the assets of Penn Independent Corporation were sold on September 30, 2006.

United America Indemnity’s principal source of cash to meet short-term and long-term liquidity needs, including the payment of corporate expenses, includes dividends and other permitted disbursements from Wind River Reinsurance, the Luxembourg Companies, the United National Insurance Companies, and the Penn-America Insurance Companies. The principal sources of funds at these direct and indirect subsidiaries include underwriting operations, investment income, and proceeds from sales and redemptions of investments. Funds are used principally by these operating subsidiaries to pay claims and operating expenses, to make debt payments, to purchase investments and to make dividend payments. United America Indemnity’s future liquidity is dependent on the ability of its subsidiaries to pay dividends. United America Indemnity has no planned capital expenditures that could have a material impact on its long-term liquidity needs.

The United National Insurance Companies and the Penn-America Insurance Companies are restricted by statute as to the amount of dividends that they may pay without the prior approval of regulatory authorities. The United National Insurance Companies and the Penn-America Insurance Companies may pay dividends without advance regulatory approval only out of unassigned surplus. For 2007, the maximum amount of distributions that could be paid by the United National Insurance Companies as dividends under applicable laws and regulations without regulatory approval is approximately $65.3 million. For 2007, the maximum amount of distributions that could be paid by the Penn-America Insurance Companies as dividends under applicable laws and regulations without regulatory approval is approximately $19.6 million, including $6.4 million that would be distributed to United National Insurance Company or its subsidiary, Penn Independent Corporation, based on the December 31, 2006 ownership percentages. The United National Insurance Companies and the Penn-America Insurance Companies did not declare or pay any dividends during the six months ended June 30, 2007.

For 2007, we believe that Wind River Reinsurance should have sufficient liquidity and solvency to pay dividends. In the future, we anticipate paying dividends from Wind River Reinsurance to fund obligations of United America Indemnity, Ltd. Wind River Reinsurance is prohibited, without the approval of the Bermuda Monetary Authority (“BMA”), from reducing by 15% or more its total statutory capital as set out in its previous year’s financial statements, and any application for such approval must include such information as the BMA may require. Based upon the total statutory capital plus the statutory surplus as set out in its 2006 statutory financial statements as filed with the BMA on June 29, 2007, Wind River Reinsurance could pay a dividend in 2007 of up to $200.4 million without requesting BMA approval.

Surplus Levels

Each company in our U.S. Insurance Operations is required by law to maintain a certain minimum level of policyholders’ surplus on a statutory basis. Policyholders’ surplus is calculated by subtracting total liabilities from

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total assets. The NAIC adopted risk-based capital standards that are designed to identify property and casualty insurers that may be inadequately capitalized based on inherent risks of each insurer’s assets and liabilities and mix of net premiums written. Insurers falling below a calculated threshold may be subject to varying degrees of regulatory action. Based on the standards currently adopted, the capital and surplus for each company in our U.S. Insurance Operations are in excess of the prescribed minimum company action level risk-based capital requirements.

Cash Flows

Sources of funds consist primarily of net premiums written, investment income, and maturing investments. Funds are used primarily to pay claims and operating expenses and to purchase investments.

Our reconciliation of net income to cash provided from operations is generally influenced by the following:

• 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.

Net cash provided by operating activities for the six months ended June 30, 2007 and 2006 was $93.2 million and $92.0 million, respectively. The increase in operating cash flows of approximately $1.2 million from the prior year was primarily a net result of the following items:

• an increase in net premiums collected of $1.4 million and a decrease in net losses paid of $10.4 million, offset by an increase in acquisition costs and other underwriting expenses of $10.3 million;

• an increase in net investment income collected of $5.6 million;

• an increase in net federal income taxes paid of $4.0 million; and

• a decrease in agency commissions and fee revenues of $20.2 million offset by a decrease in agency commissions and operating expenses of $18.6 million.

See the consolidated statement of cash flows in the financial statements in Item 1 of Part I of this report for details concerning our investing and financing activities.

Liquidity

There have been no significant changes to our liquidity during the quarter and six months ended June 30, 2007. Please see Item 7 of Part II in our 2006 Annual Report on Form 10-K for information regarding our liquidity.

Capital Resources

United America Indemnity Group, Inc. (“United America Indemnity Group”) has $90.0 million of debt in the form of guaranteed senior notes, due July 20, 2015. These senior notes have an interest rate of 6.22%, payable semi-annually. On July 20, 2011 and on each anniversary thereafter to and including July 20, 2014, United America Indemnity Group is required to repay $18.0 million of the principal amount. On July 20, 2015, United America Indemnity Group is required to pay any remaining outstanding principal amount on the notes. The notes are guaranteed by United America Indemnity, Ltd.

U.A.I. (Luxembourg) Investment S.à r.l. (“UAI Luxembourg Investment”) holds promissory notes of $175.0 million and $110.0 million from United America Indemnity Group, which have interest rates of 6.64% and 6.20%, respectively, and mature in 2018 and 2020, respectively. Interest on these notes is paid annually.

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UAI Luxembourg Investment holds a loan receivable of $6.0 million from United America Indemnity, Ltd. The loan has been and will be used to pay operating expenses that arise in the normal course of business. The loan is a demand loan and bears interest at 4.38%. United America Indemnity, Ltd. is dependent on its subsidiaries to pay it dividends to pay its operating expenses. We anticipate that Wind River Reinsurance will begin to pay dividends to United America Indemnity, Ltd. during 2007.

Our business trust subsidiaries have issued floating rate capital and floating rate common securities. A summary of the terms related to these securities is as follows:

Issuer	Amount	Maturity	Interest Rate	Call Provisions
AIS through its wholly owned subsidiary UNG Trust I	$10.0 million issued September 30, 2003	September 30, 2033	Payable quarterly at the three month London Interbank Offered Rate (“LIBOR) plus 4.05%	At par after September 30, 2008
AIS through its wholly owned subsidiary UNG Trust II	$20.0 million issued October 29, 2003	October 29, 2033	Payable quarterly at the three month LIBOR plus 3.85%	At par after October 29, 2008
PAGI through its wholly owned subsidiary Penn Trust I	$15.0 million issued December 4, 2002	December 4, 2032	Payable quarterly at the three month LIBOR plus 4.0% (1)	At par after December 4, 2007
PAGI through its wholly owned subsidiary Penn Trust II	$15.0 million issued May 15, 2003	May 15, 2033	Payable quarterly at the three month LIBOR plus 4.1%	At par after May 15, 2008

(1) To protect against increases in interest rates, we have a fixed rate interest rate swap on these securities that locks the interest at an annual rate of 7.4%. The swap agreement expires on December 4, 2007.

The proceeds from the above offerings were used to purchase junior subordinated interest notes and to support the business growth in the insurance subsidiaries and general business needs.

Distributions on the above securities can be deferred up to five years, but in the event of such deferral, we may not declare or pay cash dividends on the common stock of the applicable subsidiary.

Our wholly owned business trust subsidiaries, UNG Trust I, UNG Trust II, Penn Trust I, and Penn Trust II, are not consolidated pursuant to FIN 46R. Our business trust subsidiaries have issued $60.0 million in floating rate capital securities and $1.9 million of floating rate common securities. The sole assets of the business trust subsidiaries are $61.9 million of our junior subordinated debentures, which have the same terms with respect to maturity, payments and distributions as the floating rate capital securities and the floating rate common securities.

United National Insurance Company has a $25.0 million discretionary demand line of credit. There were no outstanding borrowings against this line of credit as of June 30, 2007.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements.

Cautionary Note Regarding Forward-Looking Statements

Some of the statements under “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this report may include forward-looking statements that reflect our current views with respect to future events and financial performance that are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts. These statements can be identified by the use of forward-looking terminology such as “believe,” “expect,” “may,” “will,” “should,” “project,” “plan,” “seek,” “intend,” or “anticipate” or the negative thereof or comparable terminology, and include discussions of strategy, financial projections and estimates and their underlying assumptions, statements regarding plans, objectives, expectations or consequences of identified transactions, and statements about the future performance, operations, products and services of the companies.

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Our business and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experience may materially differ from those contained in any forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the following: (1) the ineffectiveness of our business strategy due to changes in current or future market conditions; (2) the effects of competitors’ pricing policies, and of changes in laws and regulations on competition, including industry consolidation and development of competing financial products; (3) greater frequency or severity of claims and loss activity than our underwriting, reserving or investment practices have anticipated; (4) decreased level of demand for our insurance products or increased competition due to an increase in capacity of property and casualty insurers; (5) risks inherent in establishing loss and loss adjustment expense reserves; (6) uncertainties relating to the financial ratings of our insurance subsidiaries; (7) uncertainties arising from the cyclical nature of our business; (8) changes in our relationships with, and the capacity of, our general agents; (9) the risk that our reinsurers may not be able to fulfill obligations; (10) investment performance and credit risk; and (11) uncertainties relating to governmental and regulatory policies.

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, as well as in the materials filed and to be filed with the U.S. Securities and Exchange Commission (SEC). We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes to our market risk since December 31, 2006. Please see Item 7A of Part II in our 2006 Annual Report on Form 10-K for information regarding our market risk.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based on their evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), our principal executive officer and principal financial officer have concluded that as of June 30, 2007, our disclosure controls and procedures are effective in that they are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and information that we are required to disclose in our Exchange Act reports is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

As a result of combining the operations of United National and Penn-America under a single United America Insurance Group management structure, we have added, deleted, or modified certain of our internal controls over financial reporting. However, there have been no changes in our internal controls over financial reporting that occurred during the quarter ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II-OTHER INFORMATION

Item 1. Legal Proceedings

We are, from time to time, involved in various legal proceedings in the ordinary course of business, including litigation regarding claims. There is a greater potential for disputes with reinsurers who are in a runoff of their reinsurance operations. Some of our reinsurers are in a runoff of their reinsurance operations, and therefore, we closely monitor those relationships. We do not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material adverse effect on our business, consolidated financial position or results of operations. We anticipate that, similar to the rest of the insurance and reinsurance industry, we will continue to be subject to litigation and arbitration proceedings in the ordinary course of business.

On March 29, 2007, we agreed to resolve the lawsuit against the former executives. Pursuant to the Settlement Agreement and Stipulated Injunction filed with and approved by the court on April 9, 2007, Messrs. Schmidt, Ritz, and Goetz are prohibited from competing directly or indirectly with our business until August 5, 2008; and are further specifically prohibited from engaging in business with a significant number of named insurance companies and agencies. Mr. Ritz is permitted to work for a named reinsurance intermediary, provided that he otherwise abides by the terms and conditions of the Injunction. The former executives are further prohibited from disclosing any of our confidential and proprietary information, certified that they had not disclosed any such information, and otherwise turned over and/or destroyed the information that they took. In exchange for the above, we agreed to issue payments to the former executives over a period of eighteen months in total amounts substantially less than that to which they claimed they were entitled from us. For further details concerning the terms of this settlement, please see our Current Report on Form 8-K filed on March 29, 2007.

Item 1A. Risk Factors

Our results of operations and financial condition are subject to numerous risks and uncertainties described in Part I, “Item 1A. Risk Factors” in our 2006 Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (SEC) on March 16, 2007. The risk factors identified therein have not materially changed other than as set forth below.

We Are Dependent on Our Senior Executives and the Loss of Any of These Executives or Our Inability to Attract and Retain Other Key Personnel Could Adversely Affect Our Business.

Our success substantially depends upon our ability to attract and retain qualified employees and upon the ability of our senior management and other key employees to implement our business strategy. We believe there are only a limited number of available, qualified executives in the business lines in which we compete. The success of our initiatives and our future performance depend, in significant part, upon the continued service of our senior management team, including Larry A. Frakes, our President and Chief Executive Officer, Kevin L. Tate, our Chief Financial Officer, and David R. Whiting, President and Chief Executive Officer of Wind River Reinsurance. Messrs. Frakes, Tate, and Whiting have employment agreements with us, although these agreements cannot assure us of the continued service of these individuals. We do not currently maintain key man life insurance policies with respect to any of our employees.

Over the past year, we have restructured some of the responsibilities of our senior management as part of the consolidation of our U.S. Insurance Operations and the refocus of our strategy for our Reinsurance Operations, and in response to the departure of some senior management personnel. Effective February 5, 2007, William F. Schmidt, President and Chief Executive Officer of United America Insurance Group, Jonathan P. Ritz, Senior Vice President and Chief Operating Officer of United America Insurance Group, and Gerould J. Goetz, Senior Vice President — Claims of United America Insurance Group, resigned. Additionally, the employment of Robert M. Fishman, former President and Chief Executive Officer of United America Insurance Group, terminated on May 8, 2007. The loss of these executives may hinder our ability to manage our operations efficiently and to implement our business strategy. In addition, we may suffer the loss of agents or business as a result of their departures. In response to these departures, we appointed Larry A. Frakes as our President and Chief Operating Officer on May 9,

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2007. Mr. Frakes was subsequently appointed as our President and Chief Executive Officer on June 28, 2007, replacing Saul A. Fox as Chief Executive Officer. Mr. Fox remains as Chairman of our Board of Directors.

The future loss of any of the services of other members of our senior management team or the inability to attract and retain other talented personnel could impede the further implementation of our business strategy, which could have a material adverse effect on our business.

Since We Depend On Professional General Agencies For a Significant Portion of Our Revenue, the Loss of Any One of Them Could Adversely Affect Us.

We market and distribute our insurance products through a group of approximately 138 professional general agencies that have specific quoting and binding authority and that in turn sell our insurance products to insureds through retail insurance brokers. For the year ended December 31, 2006, our top five non-affiliated agencies, all of which market more than one specific product, represented 23.0% of our gross premiums written. No one agency accounted for more that 7.5% of our gross premiums written. During the third quarter of 2007, we expect production declines from two of the top five agencies. We are cancelling a portion of the business written by one of the agents due to profitability concerns. The other agent is moving a portion of their business to other carriers.

The loss of the business produced by these two agencies and a loss of all or substantially all the business produced by one or more of the other top agencies could have an adverse effect on our business and results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

The following matters were submitted to a vote of shareholders at our Annual General Meeting of Shareholders on May 25, 2007:

1. Election of the following nominees to our Board of Directors.⁽¹⁾

Nominee	Votes For		Votes Against		Votes Abstained
Saul A. Fox		139,602,312		8,485,252		209,647
Troy W. Thacker		139,583,252		8,504,312		209,647
John J. Hendrickson		140,487,353		7,240,211		209,647
Edward J. Noonan		139,962,938		7,859,029		475,244
Stephen A. Cozen		139,521,011		8,566,553		209,647
Richard L. Duszak		147,428,036		657,950		209,647
Larry A. Frakes		147,234,607		851,379		209,647
Justin R. Reyna		128,497,726		0		0

2. Approval of an amendment to our Share Incentive Plan.

Votes For	Votes Against	Votes Abstained	Broker Non Votes
144,405,919	943,369	1,300	2,946,627

3. Approval of an amendment to our Amended and Restated Annual Incentive Awards Program.

Votes For	Votes Against	Votes Abstained	Broker Non Votes
144,373,355	953,894	23,339	2,946,627

4. Ratification of the appointment of PricewaterhouseCoopers LLP as our independent auditor for 2007 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 Votes
148,287,579	5,337	4,298	1

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5. Election of the following nominees to the Wind River Reinsurance Company, Ltd. Board of Directors.

Nominee	Votes For		Votes Withheld
Alan Bossin		147,432,547		864,667
Larry A. Frakes		147,432,547		864,667
David R. Whiting		147,432,547		864,667
Janita Burke Waldron (Alternate Director)		147,432,447		864,767
Richard H. Black (Alternate Director)		147,432,547		864,667

6. Approval of the appointment of PricewaterhouseCoopers, Hamilton, Bermuda, as the independent auditor of Wind River Reinsurance Company, Ltd. for 2007.

Votes For	Votes Against	Votes Abstained	Broker Non Votes
147,861,309	26,741	409,164	1

7. Approval of the financial statements of Wind River Reinsurance Company, Ltd. and the report of the independent auditors on these financial statements.

Votes For	Votes Against	Votes Abstained
110,015,996	0	0

8. Election of the following nominees to the Wind River Services, Ltd. Board of Directors.

Nominee	Votes For		Votes Withheld
Alan Bossin		147,432,547		864,667
David R. Whiting		147,432,547		864,667
Janita Burke Waldron (Alternate Director)		147,432,447		864,767
Richard H. Black (Alternate Director)		147,489,080		808,134

9. Approval of the appointment of PricewaterhouseCoopers, Hamilton, Bermuda, as the independent auditor of Wind River Services, Ltd. for 2007.

Votes For	Votes Against	Votes Abstained	Broker Non Votes
147,861,309	26,741	409,164	1

10. Approval of the proposal to waive the presentation of the financial statements of Wind River Services, Ltd. and the report of the independent auditors on these financial statements for approval by shareholders.

Votes For	Votes Against	Votes Abstained	Broker Non Votes
148,036,009	238,812	22,390	4

(1) As previously announced on June 7, 2007, Messrs. Thacker and Noonan resigned from our Board of Directors effective June 1, 2007. Additionally, Mr. Hendrickson announced his resignation to be effective on or before September 30, 2007.

Item 6. Exhibits

10.1*	Amendment No. 4 to the United America Indemnity, Ltd. Share Incentive Plan (incorporated herein by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on May 31, 2007).
10.2*	Amendment No. 2 to the Amended and Restated United America Indemnity, Ltd. Annual Incentive Awards Program (incorporated herein by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on May 31, 2007).
31.1+	Certification of Chief Executive Officer pursuant to Rule 13a-14 (a) 15d-14 (a) of the Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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UNITED AMERICA INDEMNITY, LTD.

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.

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UNITED AMERICA INDEMNITY, LTD.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	UNITED AMERICA INDEMNITY, LTD. Registrant
August 9, 2007	By:	/s/ Kevin L. Tate
Date: August 9, 2007	Kevin L. Tate
	Chief Financial Officer (Authorized Signatory and Principal Financial and Accounting Officer)

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