United America Indemnity (INDM) 10-K 2007 FY Annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Fiscal Year Ended December 31, 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
of incorporation or organization) 98-0417107
(I.R.S. Employer
Identification No.)

WALKER HOUSE, 87 MARY STREET

KYI — 9002

GEORGE TOWN, GRAND CAYMAN

CAYMAN ISLANDS

(Address of principal executive office including zip code)

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

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Exchange on Which Registered
Common A Common Shares, $0.0001 Par Value	The Nasdaq Stock Market LLC

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o     NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o     NO þ

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.  YES þ     NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K.  o

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

Large accelerated filer o Accelerated filer þ Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act). YESo     NO þ

The aggregate market value of the common equity held by non-affiliates of the registrant, computed by reference to the price of the registrant’s Class A Common shares as of the last business day of the registrant’s most recently completed second fiscal quarter (based on the last reported sale price on the Nasdaq Global Market as of such date), was $571,096,600. Class A common shares held by each executive officer and director and by each person who is known by the registrant to beneficially own 5% or more of the registrant’s outstanding Class A common shares have been excluded in that such persons may be deemed affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of February 22, 2008, the registrant had outstanding 24,814,059 Class A Common Shares and 12,687,500 Class B Common Shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for its 2008 Annual General Meeting of Shareholders to be held May 23, 2008 are incorporated by reference in Part III of this Annual Report onForm 10-K.

TABLE OF CONTENTS

			Page
PART I
	Item 1.	BUSINESS		3
	Item 1A.	RISK FACTORS		35
	Item 1B.	UNRESOLVED STAFF COMMENTS		46
	Item 2.	PROPERTIES		46
	Item 3.	LEGAL PROCEEDINGS		46
	Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		46
PART II
	Item 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		47
	Item 6.	SELECTED FINANCIAL DATA		51
	Item 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		54
	Item 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		78
	Item 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		81
	Item 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		134
	Item 9A.	CONTROLS AND PROCEDURES		134
	Item 9B.	OTHER INFORMATION		134
PART III
	Item 10.	DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE		134
	Item 11.	EXECUTIVE COMPENSATION		134
	Item 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER ITEMS		135
	Item 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE		135
	Item 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES		135
PART IV
	Item 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES		135

As used in this annual 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. andNon-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 Insurance Operations and our Agency Operations; 3) our “Insurance Operations” refers to the insurance and related operations conducted by United America Indemnity Group’s direct and indirect subsidiaries, including American Insurance Adjustment Agency, Inc., International Underwriters, LLC, J.H. Ferguson & Associates, LLC, the United National Insurance Companies and thePenn-America Insurance Companies; 4) our “Predecessor Insurance Operations” refers to Wind River Investment Corporation, which was dissolved on May 31, 2006, AIS, American Insurance Adjustment Agency, Inc., Emerald Insurance Company, the United National Insurance Companies, International Underwriters, LLC, and J.H. Ferguson & Associates, LLC; 5) the “United National Insurance Companies” refers to the insurance and related operations conducted by United National Insurance Company and its subsidiaries, including Diamond State Insurance Company, United National Casualty Insurance Company, and United National Specialty Insurance Company; 6) the“Penn-America

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Insurance Companies” refers to the insurance and related operations ofPenn-America Insurance Company, Penn-Star Insurance Company, and Penn-Patriot Insurance Company; 7) our“Non-U.S. Insurance Operations” refers to the insurance related operations of Wind River Insurance Company (Barbados), Ltd. and Wind River Insurance Company, Ltd. prior to the amalgamation, which occurred on September 30, 2006; 8) “Wind River Reinsurance” refers to Wind River Reinsurance Company, Ltd. In September 2006, Wind River Insurance Company (Barbados), Ltd. was redomesticated to Bermuda and renamed Wind River Reinsurance Company, Ltd., at which time it was amalgamated with Wind River Insurance Company, Ltd.; 9) 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; 10) our“Non-U.S. Subsidiaries” refers to Wind River Reinsurance, U.A.I. (Gibraltar) Limited, which was liquidated on May 30, 2006, U.A.I. (Gibraltar) II Limited, which was liquidated on May 30, 2006, the Luxembourg Companies, U.A.I. (Ireland) Limited, and Wind River Services, Ltd., which was dissolved on August 17, 2007.; 11) our “Reinsurance Operations” refers to the reinsurance and related operations of Wind River Reinsurance; 12) 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.; 13) “United America Indemnity Group” refers to United America Indemnity Group, Inc.; 14) “AIS” refers to American Insurance Service, Inc.; 15) “United National Group” refers to the United National Insurance Companies and Emerald Insurance Company;16) “Penn-America Group” refers toPenn-America Group, Inc. and thePenn-America Insurance Companies;17) “Penn-America” refers to our product classification that includes property and general liability products for small commercial businesses distributed through a select network of wholesale general agents with specific binding authority; 18) “United National” refers to our product classification that includes program, general liability, and professional lines products distributed through program administrators with specific binding authority; 19) “Diamond State” refers to our product classification that includes property, general liability, and professional lines products distributed through wholesale brokers and program administrators with specific binding authority; 20) the “Statutory Trusts” refers to United National Group Capital Trust I, United National Group Capital Statutory Trust II,Penn-America Statutory Trust I andPenn-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.

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PART I

Item 1.   Business

Some of the information contained in this Item 1 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 Item 7 of Part II and “Risk Factors” in Item 1A of Part I for more information. You should review “Risk Factors” in Item 1A of Part I 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.

Recent Developments

On January 28, 2008, our shareholders approved an amendment to the United America Indemnity, Ltd. Share Incentive Plan (the “Share Incentive Plan”) that allows for the repricing, without shareholder approval, of stock options and other stock-based awards granted under the Share Incentive Plan.

On February 5, 2008, we entered into an amended and restated employment agreement with Larry A. Frakes, our President and Chief Executive Officer, which amended and restated Mr. Frakes’ original employment agreement that was entered into on May 10, 2007. The amended and restated employment agreement changes and clarifies the terms of options granted under the original employment agreement.

On February 11, 2008, we announced that our Board of Directors authorized us to repurchase up to an additional $50.0 million of our Class A common shares. The timing and amount of the repurchase transactions under this program will depend on market conditions and other factors. Approximately 2.4 million shares of our Class A common shares were repurchased in 2007 under the initial share repurchase program that was authorized in October 2007. As a result, we had approximately 22.3 million Class A common shares outstanding at December 31, 2007 compared to approximately 24.5 million shares outstanding at December 31, 2006. Including Class B common shares, there were approximately 35.0 million common shares outstanding at December 31, 2007 compared to approximately 37.2 million outstanding shares at December 31, 2006.

Our History

We are a holding company formed on August 26, 2003 under the laws of the Cayman Islands to acquire our Predecessor Insurance Operations.

Acquisition of Our Predecessor Insurance Operations

On September 5, 2003, Fox Paine & Company made a capital contribution of $240.0 million to us, in exchange for 10.0 million Class B common shares and 14.0 million Series A preferred shares, and we acquired Wind River Investment Corporation, the holding company for our Predecessor Insurance Operations, from a group of family trusts affiliated with the Ball family of Philadelphia, Pennsylvania (the “Wind River Acquisition”).

To effect this acquisition, we used $100.0 million of the $240.0 million capital contribution to purchase a portion of the common stock of Wind River Investment Corporation held by the Ball family trusts. We then purchased the remainder of the common stock of Wind River Investment Corporation that was also held by the Ball family trusts, paying consideration consisting of 2.5 million Class A common shares, 3.5 million Series A preferred shares and senior notes issued by Wind River Investment Corporation having an aggregate principal amount of approximately $72.8 million, which have since been retired.

Of the remaining $140.0 million contributed to us, we then contributed $80.0 million to United National Group, used $42.4 million to capitalize ourNon-U.S. Insurance Operations and used $17.6 million to pay fees and expenses incurred in connection with the acquisition.

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Initial Public Offering of Class A Common Shares (“IPO”)

In December 2003, we consummated our IPO of 10,750,000 Class A common shares, including 1,000,000 Class A common shares issued in connection with the exercise of a portion of the underwriters’ overallotment option, at a price of $17.00 per share. Proceeds of the offering less underwriting discounts of $12.8 million were $170.0 million. Expenses for the IPO totaled $4.4 million, resulting in net proceeds to us of $165.6 million (the “IPO Proceeds”). We used $150.0 million of the IPO Proceeds to fund the redemption of all our Series A preferred shares. We contributed the remaining proceeds of $15.6 million to ourNon-U.S. Insurance Operations. In January 2004, we issued an additional 462,500 Class A common shares in connection with the exercise of the underwriters’ remaining overallotment option at a price of $17.00 per share. Proceeds to us, net of underwriting discounts of $0.5 million, were $7.3 million, which we contributed to ourNon-U.S. Insurance Operations.

Acquisition ofPenn-America Group, Inc. and Penn Independent Corporation

On January 24, 2005, we completed our merger withPenn-America Group, Inc. (NYSE: PNG) and our acquisition of Penn Independent Corporation. In connection with these transactions, our shareholders’ approved our change in name from United National Group, Ltd. to United America Indemnity, Ltd.

Our results of operations include the results ofPenn-America Group, Inc. and Penn Independent Corporation from the date of their merger and acquisition, respectively.

Sale of Agency Operations

On September 30, 2006, we sold substantially all of the assets of our Agency Operations to Brown & Brown, Inc., an unrelated third party. The gain on the sale was $9.4 million, net of applicable taxes of $4.5 million. We had acquired our Agency Operations through the acquisition of Penn Independent Corporation on January 24, 2005. With the divestiture of our Agency Operations complete, we are focused on our core competency, providing excess and surplus lines and specialty property and casualty insurance and reinsurance products. As a result of this sale, we terminated our Agency Operations segment and have classified the results of this segment as discontinued operations for all periods presented.

General

United America Indemnity, through its Insurance and Reinsurance Operations, is one of the leading specialty property and casualty insurers in the industry, as well as a provider of treaty and facultative reinsurance for writers of excess, surplus, and specialty lines of property and casualty insurance, respectively.

Our Insurance Operations

The United National Insurance Companies and thePenn-America Insurance Companies distribute property and casualty insurance products and operate predominantly in the excess and surplus lines marketplace. To manage our operations, we differentiate them by product classification. These product classifications are:1) Penn-America, which includes property and general liability products for small commercial businesses distributed through a select network of wholesale general agents with specific binding authority; 2) United National, which includes property, general liability, and professional lines products distributed through program administrators with specific binding authority; and 3) Diamond State, which includes property, general liability, and professional lines products distributed through wholesale brokers and program administrators with specific binding authority. These product classifications comprise our Insurance Operations business segment and are not considered individual business segments because each product has similar economic characteristics, distribution, and coverages. Our Insurance Operations provide property, general liability, and professional liability products utilizing customized guidelines, rates, and forms tailored to our risk and underwriting philosophy. Our Insurance Operations are licensed to write on a surplus lines (non-admitted) basis and an admitted basis in all 50 U.S. States, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands, which provides us with flexibility in designing products, programs, and in determining rates to meet emerging risks and discontinuities in the marketplace.

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For 2007, the combined ratio of our Insurance Operations was 87.9%, excluding intercompany eliminations for the amortization of deferred acquisition costs that were related to policies bound by our Agency Operations on behalf of our Insurance Operations. The combined ratio of an insurance company is a non-GAAP financial measure that is generally viewed as an indication of underwriting profitability. It is the ratio of the sum of net losses and loss adjustment expenses, acquisition costs, and other underwriting expenses to net premiums earned.

We distribute our insurance products through a group of approximately 140 professional general agencies that have specific 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 United National Insurance Companies andPenn-America Insurance Companies are rated “A” (Excellent) by A.M. Best, which assigns credit ratings to insurance companies transacting business in the United States. “A” (Excellent) is the third highest rating of sixteen rating categories. These ratings are based upon factors of concern to policyholders, such as capital adequacy, loss reserve adequacy, and overall operating performance, and are not directed to the protection of investors.

Our Reinsurance Operations

We provide third party treaty and facultative reinsurance for writers of excess and surplus and specialty lines of property and casualty insurance through Wind River Reinsurance. Wind River Reinsurance began offering third party reinsurance in the third quarter of 2006 and entered into its initial third party reinsurance treaty effective January 1, 2007. Wind River Reinsurance also provides reinsurance to our Insurance Operations. Wind River Reinsurance was formed in 2006 through the amalgamation of ourNon-U.S. Insurance Operations into a single Bermuda based company. Prior to the amalgamation, ourNon-U.S. Insurance Operations consisted of Wind River Barbados and Wind River Bermuda. OurNon-U.S. Insurance Operations discontinued offering direct third party excess and surplus lines primary insurance policies in the fourth quarter of 2005. All excess and surplus lines insurance policies written through ourNon-U.S. Insurance Operations have been allowed to expire and have not been renewed. For a discussion of the risks associated with this strategy, see the risk factor regarding the business plan of our Reinsurance Operations in Item 1A of Part I of this Report.

Wind River Reinsurance is rated “A” (Excellent) by A.M. Best.

Available Information

We maintain a website at www.uai.ky. We will make available, free of charge on our website, our most recent annual report onForm 10-K and subsequently filed quarterly reports onForm 10-Q, current reports onForm 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we file such material with, or furnish it to, the U.S. Securities and Exchange Commission.

Recent Trends In Our Industry

The property and casualty insurance industry has historically been a cyclical industry. During periods of reduced underwriting capacity, which is characterized by a shortage of capital and reduced competition, underwriting results are generally more favorable for insurers due to more favorable policy terms and conditions and higher rate levels. During periods of excess underwriting capacity, which is characterized by an abundance of capital and increased competition, underwriting results are generally less favorable for insurers due to an expansion of policy terms and conditions and lower rate levels. Historically, several factors have affected the level of underwriting capacity, including industry losses, catastrophes, changes in legal and regulatory guidelines, investment results, and the ratings and financial strength of competitors. As underwriting capacity increases, the standard insurance markets begin to expand their risk selection criteria to include risks that have typically been placed in the non-admitted market. This tends to shrink the demand for insurance coverage from insurers that are focused on writing in the excess and surplus line marketplace, such as United America Indemnity.

After three years of reduced underwriting capacity brought on by a number of factors in the late 1990s and the terrorist attacks of September 11, 2001, the insurance industry began to move into a period of excess underwriting

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capacity in late 2004, which was characterized by excess capital and increased competition. As a result, rate increases moderated in most lines of business and even declined slightly in some lines of business. That trend has continued through 2007.

In 2005, Hurricanes Katrina, Rita, and Wilma made landfall in the United States causing estimated combined insurance losses in the industry of approximately $56.6 billion. As a result, underwriting capacity for writing property insurance in several coastal areas of the United States was reduced dramatically which led to significant increases in rate levels in coastal areas of the United States. Rate increases on risks in coastal areas continued to be realized in 2006. However, the absence of significant catastrophe activity in the United States over the past two calendar years has encouraged more competition and downward pressure in rate levels in the same catastrophe exposed regions of the country that previously saw rate increases as a result of the 2004 and 2005 hurricanes. The pressure for property rate level decreases should continue into 2008 in the absence of significant catastrophic events in the United States.

In order for property and casualty insurance companies to generate an acceptable return on capital in the current interest rate environment, companies are focusing on generating acceptable underwriting returns. The industry is making increased use of risk management tools to adequately compensate them for the risks they write. The industry is also focusing on investment yields and the credit-worthiness of investment portfolios.

Our exposure to subprime investments was $5.8 million at December 31, 2007, of which $3.7 million was rated AAA, with the remaining $2.1 million rated AA or A. See “Investments” below for additional details about the credit quality of our bond portfolios. Market yields have generally decreased since December 31, 2007. Although decreases in interest rates cause the market value of existing fixed income investments to rise, new money is being invested at lower rates. Yields on one year U.S. Treasuries were 4.99% at December 29, 2006 compared to 1.54% at March 7, 2008. Yields on five year Treasuries also dropped from 4.69% at December 31, 2007 to 2.43% at March 7, 2008. Although spreads have widened on corporate bonds relative to Treasuries, yields have decreased. At February 8, 2008, the spread on a five year corporate AA bond was 223 basis points compared to a spread of 40 basis points at December 29, 2006; however, the yields on these bonds have dropped from 5.09% to 4.66%. The Federal Reserve lowered the federal funds interest rate on four occasions from September 18, 2007 to January 30, 2008 by a total of 225 basis points to the rate as of February 25, 2008 of 3.00%.

Lastly, the regulatory environment could have some impact on our industry:

•  The Terrorism Risk Insurance Act of 2002, which was due to expire on December 31, 2007, has been extended for seven years, until December 31, 2014, with the enactment, on December 26, 2007, of the Terrorism Risk Insurance Program Reauthorization Act (“TRIPRA”). It should be noted that under TRIPRA, the distinction between foreign and domestic acts of terrorism is eliminated, thus making losses for domestic acts of terrorism eligible for reimbursement.

•  The House Financial Services Committee passed the Non-admitted and Reinsurance Reform Act in mid-2006. If this bill passes Congress, it would apply single-state regulation and uniform standards to the surplus lines/non-admitted insurance and reinsurance markets.

•  The National Insurance Act of 2007, the successor to The National Insurance Act of 2006, is virtually identical to its predecessor, and would allow property, casualty, and life insurers to be chartered by the federal government.

•  In early 2007, The Insurance Industry Antitrust Enforcement Act of 2007 (the “Act”) was introduced in Congress. If this bill passes Congress, the McCarran-Ferguson Act’s antitrust exemption for insurance companies would be repealed. The Act clearly provides that the antitrust laws will apply to the insurance industry in the same manner as they apply to other industries. Two exemptions to this rule, articulated in the Act, would be the sharing of historical claim data and the development of policy forms via joint insurer participation.

We are continuing to monitor these developments.

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Excess and Surplus Lines Market

Our Insurance Operations operate in the excess and surplus lines market. The excess and surplus lines market differs significantly from the standard property and casualty insurance market. In the standard property and casualty insurance market, insurance rates and forms are highly regulated, products and coverages are largely uniform and have relatively predictable exposures. In the standard market, policies must be written by insurance companies that are admitted to transact business in the state in which the policy is issued. As a result, in the standard property and casualty insurance market, insurance companies tend to compete for customers primarily on the basis of price, coverage, value-added service, and financial strength. In contrast, the excess and surplus lines market provides coverage for businesses that often do not fit the underwriting criteria of an insurance company operating in the standard market due to their relatively greater unpredictable loss patterns and unique niches of exposure requiring rate and policy form freedom. Without the excess and surplus lines market, certain businesses would have to self insure their exposures, or seek coverage outside the U.S. market.

Competition in the excess and surplus lines market tends to focus less on price and more on availability, service and other considerations. While excess and surplus lines market exposures may have higher perceived insurance risk than their standard market counterparts, excess and surplus lines market underwriters historically have been able to generate underwriting profitability superior to standard market underwriters.

According to A.M. Best, from 1988 through 2006, the excess and surplus lines market grew from an estimated $6.3 billion in direct premiums written to $38.7 billion. In contrast, the U.S. property and casualty industry grew more moderately during this period from $211.3 billion in direct premiums written to $499.1 billion. During this period, the surplus lines market as a percentage of the total property and casualty industry grew from approximately 3.0% to 7.8%.

Within the excess and surplus lines market, we write business on both an admitted and surplus lines basis. Surplus lines business accounts for approximately 69.6% of the business that our Insurance Operations writes, while specialty admitted business accounts for the remaining 30.4%.

When writing on a specialty admitted basis, our focus is on writing insurance for insureds that engage in similar but often highly specialized types of activities. The specialty admitted market is subject to greater state regulation than the surplus lines market, particularly with regard to rate and form filing requirements and the ability to enter and exit lines of business. Insureds purchasing coverage from specialty admitted insurance companies do so because the insurance product is not otherwise available from standard market insurers. Yet, for regulatory or marketing reasons, these insureds require products that are written by an admitted insurance company.

Business Segments

We operate and manage our business through two business segments: Insurance Operations and Reinsurance Operations.

Insurance Operations

Our Insurance Operations segment includes the operations of the United National Insurance Companies and thePenn-America Insurance Companies which distribute property and casualty products through three product classifications:1) Penn-America; 2) United National; and 3) Diamond State. See “Our Insurance Operations” above for a description of these product classifications. Our insurance products target specific, defined groups of insureds with customized coverages to meet their needs. Our products include customized guidelines, rates, and forms tailored to our risk and underwriting philosophy. In 2007, gross premiums written were $536.8 million compared to $653.0 million for 2006.

Reinsurance Operations

Our Reinsurance Operations segment consists solely of the operations of Wind River Reinsurance. Wind River Reinsurance was formed in 2006 through the amalgamation of ourNon-U.S. Insurance Operations into a single Bermuda based company. Our Reinsurance Operations include third party treaty and facultative reinsurance on excess and surplus lines and specialty property and casualty insurance distributed through Wind River Reinsurance.

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Wind River Reinsurance also provides quota share reinsurance to our Insurance Operations. In 2007, gross premiums written, excluding assumed premiums from affiliates, were $26.3 million.

Products and Product Development

Our Insurance Operations distribute property and casualty insurance products and operate predominantly in the excess and surplus lines marketplace. To manage our operations, we differentiate our products by product classification. See “Our Insurance Operations” above for a description of these product classifications. We have significant flexibility in designing products, programs, and in determining rates to meet the needs of the marketplace.

Our Reinsurance Operations offer third party treaty and facultative reinsurance for writers of excess, surplus, and specialty lines of property and casualty insurance. Our Reinsurance Operations also provide reinsurance to our Insurance Operations.

The following table sets forth an analysis of United America Indemnity’s gross premiums written, which is the sum of direct and assumed premiums written, by product classification within our Insurance Operations and Reinsurance Operations segments during the periods indicated:

	For the Years Ended December 31,(1)
	2007					2006					2005
	Amount		Percent			Amount		Percent			Amount		Percent
(Dollars in thousands)
Insurance Operations:
Penn-America	$	286,439		50.8	%	$	390,260		59.8	%	$	374,402		60.1	%
United National		132,311		23.5			154,114		23.6			146,868		23.6
Diamond State		118,085		21.0			108,591		16.6			101,608		16.3
Total Insurance Operations		536,835		95.3			652,965		100.0			622,878		100.0
Reinsurance Operations:(2)
Wind River Reinsurance		26,277		4.7			—		—			—		—
Total	$	563,112		100.0	%	$	652,965		100.0	%	$	622,878		100.0	%

(1)	Does not include results of thePenn-America Group prior to January 24, 2005.
(2)	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; therefore, our Reinsurance Operations had no gross premiums written for the years ended December 31, 2006 and 2005.

For a discussion of the variances between years, see “Results of Operations” in Item 7 of Part II of this report.

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The following table sets forth an analysis of United America Indemnity’s net premiums written, which is gross premiums written less ceded premiums written, by product classification within our Insurance Operations and Reinsurance Operations segments during the periods indicated:

	For the Years Ended December 31,(1)
	2007					2006					2005
	Amount		Percent			Amount		Percent			Amount		Percent
(Dollars in thousands)
Insurance Operations:
Penn-America	$	266,874		54.4	%	$	355,428		63.4	%	$	336,201		64.7	%
United National		110,649		22.6			114,718		20.5			97,331		18.7
Diamond State		100,751		20.5			90,389		16.1			86,201		16.6
Total Insurance Operations		478,274		97.5			560,535		100.0			519,733		100.0
Reinsurance Operations:(2)
Wind River Reinsurance		12,261		2.5			—		—			—		—
Total	$	490,535		100.0	%	$	560,535		100.0	%	$	519,733		100.0	%

(1)	Does not include results of thePenn-America Group prior to January 24, 2005.
(2)	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; therefore, our Reinsurance Operations had no net premiums written for the years ended December 31, 2006 and 2005.

For a discussion of the variances between years, see “Results of Operations” in Item 7 of Part II of this report.

Geographic Concentration

The following table sets forth the geographic distribution of United America Indemnity’s gross premiums written by its Insurance Operations for the periods indicated:

	For the Years Ended December 31,(1)
	2007						2006					2005
	Amount			Percent			Amount		Percent			Amount		Percent
(Dollars in thousands)
California	$	67,578			12.0	%	$	81,121		12.4	%	$	71,538		11.5	%
Florida		65,610			11.7			67,852		10.4			40,581		6.5
New York		55,627			9.9			87,551		13.5			85,093		13.7
Texas		37,252			6.6			41,690		6.4			36,166		5.8
New Jersey		26,767			4.8			34,084		5.2			36,824		5.9
Massachusetts		24,054			4.3			35,412		5.4			39,964		6.4
Pennsylvania		17,527			3.1			20,067		3.1			23,214		3.7
Illinois		16,633			3.0			20,374		3.1			22,231		3.6
Louisiana		14,447			2.6			15,241		2.3			13,229		2.1
Georgia		12,548			2.2			13,447		2.1			14,804		2.4
Subtotal		338,043			60.0			416,839		63.8			383,644		61.6
All others		225,069	(2)		40.0			216,126		36.2			239,234		38.4
Total	$	563,112			100.0	%	$	652,965		100.0	%	$	622,878		100.0	%

(1)	Does not include results of thePenn-America Group prior to January 24, 2005.
(2)	Includes gross written premiums of our Reinsurance Operations of $26.3 million.

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Marketing and Distribution

We distribute our insurance products through a group of approximately 140 professional general agencies that have specific quoting and binding authority, as well as wholesale insurance brokers who in turn sell our insurance products to insureds through retail insurance brokers.

Of our non-affiliated professional general agencies, the top five accounted for 23.4% of our gross premiums written for the year ended December 31, 2007. During 2007, we terminated our relationship with one of the agencies in the top five because it did not meet our profitability standards. That agency accounted for 4.3% of our gross premiums written for the year ended December 31, 2007. No one agency accounted for more than 5.9% of our gross premiums written.

Our distribution strategy is to maintain strong relationships with a limited number of high-quality professional general agencies and wholesale insurance brokers. We carefully select our distribution sources based on their experience and reputation. We believe that our distribution strategy enables us to effectively access numerous markets at a relatively low cost structure through the marketing, underwriting, and administrative support of our professional general agencies and wholesale insurance brokers. These professional general agencies and wholesale insurance brokers have local market knowledge and expertise that enables us to access business in these markets more effectively.

Underwriting

Our professional general agencies have specific quoting and binding authority with respect to a single insurance product and some have limited quoting and binding authority with respect to multiple products. We utilize a three-step underwriting process that is intended to ensure appropriate selection of risk.

First, we carefully and thoroughly review the expected exposure, policy terms, premium rates, conditions and exclusions to determine whether a risk appropriately fits our overall strategic objectives. Risks that meet these criteria are outlined within pre-approved comprehensive underwriting manuals. We also develop specific administrative and policy issuance processes and procedures that are provided to our underwriting personnel and our professional general agencies.

Second, our professional general agencies and our underwriting personnel further underwrite and assist in the selection of our target customers. Our professional general agencies utilize the underwriting manuals and processes and procedures that we provide to generate an insurance quote for the particular insured. In certain cases, a professional general agency may have a potential insured that requires insurance for a risk that lies outside of the scope of our pre-approved underwriting guidelines. For these risks, we directly review the particular accounts and provide the approval or denial of the application of the insured. We regularly update our underwriting manuals to ensure that they clearly outline risk eligibility, pricing, underwriting criteria and processes, approved policy forms and policy issuance and administrative procedures.

Third, we monitor the quality of our underwriting on an ongoing basis. Our underwriting staff monitors the underwriting quality of our business through a disciplined system of controls developed for products and general agency appointments. Our control system typically consists of a multi-layer approach to ensure compliance with our underwriting and processing guidelines by our general agents and internal underwriters. We also utilize the following four independent steps that we believe aid the integrity of our underwriting guidelines and processes:

•  individual binder and policy reviews;

•  automated system criteria checks and exception reports;

•  on-site general agency audits for profitability, processes and controls that provide for removal of general agencies not producing satisfactory underwriting results or complying with established guidelines; and

•  internal quarterly actuarial and profitability reviews.

We provide incentives to certain of our professional general agencies to produce profitable business through contingent profit commission structures that are tied directly to the achievement of profitability targets.

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Pricing

We use our pricing actuaries to establish pricing tailored to each specific product we underwrite, taking into account historical loss experience and individual risk and coverage characteristics. We generally use the actuarial loss costs promulgated by the Insurance Services Office as a benchmark in the development of pricing for most of our products. We will only write business if we believe we can achieve an adequate rate of return.

Rates have generally declined over the last several years. During 2004 and the first eight months of 2005 the ability to achieve significant rate increases lessened with increased competition and additional industry capacity. This trend subsided, however, during the last four months of 2005 primarily as a result of the impact of Hurricanes Katrina, Rita, and Wilma on the United States. The underwriting capacity for writing property insurance in several wind-prone areas of the United States was reduced immediately, which led to dramatic increases in rate levels in many of the territories affected by these storms. Since 2005, the trend has reversed and prices have been steadily declining. We believe that casualty rates have declined faster than property rates. Our market is facing new competition from standard line companies who are writing risks that they had not insured previously, Bermuda companies who are establishing relationships with wholesale brokers, and new excess and surplus competitors. New competition is driving much of the price decline. Although market prices have dropped, we have continued to maintain our underwriting discipline. Renewal pricing on our book decreased approximately 1% in each of 2005 and 2006 and approximately 2.2% in 2007, on average.

Reinsurance of Underwriting Risk

Our philosophy is to purchase reinsurance to limit our liability on individual risks and to protect against property catastrophe and casualty clash losses. Reinsurance assists us in controlling exposure to severe losses, and protecting capital resources. We purchase reinsurance on both an excess of loss and proportional basis. The type, cost and limits of reinsurance we purchase can vary from year to year based upon our desired retention levels and the availability of quality reinsurance at an acceptable price. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policies it has written, it does make the assuming reinsurer liable to the insurer to the extent of the insurance ceded. Our reinsurance contracts renew throughout the year, and all of our reinsurance is purchased following guidelines established by our management. We primarily utilize treaty reinsurance products, including proportional reinsurance, excess of loss reinsurance, casualty clash, and property catastrophic loss reinsurance. Additionally, we may purchase facultative reinsurance protection on single risks when deemed necessary.

We purchase specific types and structures of reinsurance depending upon the specific characteristics of the lines of business and specialty products we underwrite. We will typically seek to place proportional reinsurance for our umbrella and excess products, some of our specific specialty products, or in the development stages of a new product. We believe that this approach allows us to control our net exposure in these product areas more cost effectively. In our proportional reinsurance contracts, we generally receive a ceding commission on the premium ceded to reinsurers. This commission is intended to compensate us for the direct costs associated with the production and underwriting of the business.

We purchase reinsurance on an excess of loss basis to cover individual risk severity. These structures are utilized to protect our primary positions on property, general liability, and professional liability products. The excess of loss structures allow us to maximize our underwriting profits over time by retaining a greater portion of the risk in these products, while helping to protect against the possibility of unforeseen volatility. We also receive a ceding commission on premiums ceded to reinsurers on selected excess of loss agreements.

We analyze our reinsurance contracts to ensure that they meet the risk transfer requirements of Statement of Financial Accounting Standards (“SFAS”) No. 113, “Accounting for Reinsurance of Short Duration and Long Duration Contracts,” which requires that the reinsurer must assume significant insurance risk under the reinsured portions of the underlying insurance contracts and that there must be a reasonably possible chance that the reinsurer may realize a significant loss from the transaction.

Our current property writings create exposure to catastrophic events, and our casualty writings create exposure to casualty clash events. Casualty clash exposure arises when two or more insureds are involved in the same loss

11

occurrence. To protect against these exposures, effective June 1, 2006, we purchased a $70.0 million in excess of $5.0 million property catastrophe treaty for those events occurring in June 2006 through May 2007. Effective June 1, 2007, we purchased a $100.0 million in excess of $10.0 million property catastrophe treaty for events occurring in June through December 2007, and through May 2008, and renewed our $10.0 million in excess of $3.0 million casualty clash treaty as of January 1, 2008 for events occurring in 2008, both of which are on a per occurrence basis and contain mandatory reinstatement clauses. To the extent that there may be an increase or decrease in catastrophe or casualty clash exposure in the future, we may increase or decrease our reinsurance protection for these exposures commensurately. We did not cede any losses under our property catastrophe or casualty clash treaties during 2007. We have also purchased an additional $10.0 million in excess of $5.0 million layer on our current property treaty to accommodate the per risk exposures for all business units greater than $5.0 million. As a result, our property treaty now covers losses of $14.0 million in excess of $1.0 million per risk as of January 1, 2008.

We continually evaluate our retention levels across the entire line of business and specialty product portfolio to ensure that the ultimate reinsurance structures are aligned with the corporate risk tolerance levels associated with such lines of business products. Any decision to decrease our reliance upon proportional reinsurance or to increase our excess of loss retentions could increase our earnings volatility. In cases where we decide to increase our excess of loss retentions, such decisions will be a result of a change or progression in our risk tolerance level and will be supported by an actuarial analysis. We endeavor to purchase reinsurance from financially strong reinsurers with which we have long-standing relationships. In addition, in certain circumstances, we hold collateral, including letters of credit, under reinsurance agreements.

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The following table sets forth the ten reinsurers for which we have the largest reinsurance asset amounts, as of December 31, 2007. Also shown are the amounts of premiums ceded by us to these reinsurers during the year ended December 31, 2007.

	A.M.	Gross			Prepaid			Total			Percent			Ceded			Percent
	Best	Reinsurance			Reinsurance			Reinsurance			of			Premiums			of
	Rating	Receivables			Premium			Assets			Total			Written			Total
(Dollars in millions)
Munich Re America, Inc.	A	$	321.7		$	13.0		$	334.7			43.1	%	$	28.0			38.5	%
Swiss Reinsurance America Corp	A+		220.3			(0.1	)		220.2			28.3			(3.8	)		(5.2	)
General Reinsurance Corp.	A++		35.6			0.8			36.4			4.7			2.0			2.8
Hartford Fire Insurance Co.	A+		31.9			—			31.9			4.1			—			—
Converium AG, Zurich	A-		16.8			—			16.8			2.2			—			—
Finial Reinsurance Company	B+		16.4			—			16.4			2.1			—			—
XL Reinsurance America, Inc.	A+		12.8			—			12.8			1.6			—			—
Scor Reinsurance Co.	A-		11.4			—			11.4			1.5			—			—
Clearwater Insurance Company	A		8.5			—			8.5			1.1			—			—
Generali — Assicurazioni	A+		8.3			—			8.3			1.1			—			—
Subtotal			683.7			13.7			697.4			89.8			26.2			36.1
All other reinsurers			64.0			15.5			79.5			10.2			46.3			63.9
Total reinsurance receivables before purchase accounting adjustments			747.7			29.2			776.9			100.0	%	$	72.5			100.0	%
Purchase accounting adjustments, including uncollectible reinsurance reserve			(28.0	)		—			(28.0	)
Total receivables, net of purchase accounting adjustments and uncollectible reinsurance reserve			719.7			29.2			748.9
Collateral held in trust from reinsurers			(520.8	)		(6.2	)		(527.0	)
Net receivables		$	198.9		$	23.0		$	221.9

At December 31, 2007 and 2006, we carried reinsurance receivables of $719.7 million and $982.5 million, respectively. These amounts are net of a purchase accounting adjustment and an allowance for uncollectible reinsurance receivables. The 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 $17.5 million and $18.5 million at December 31, 2007 and 2006, respectively. The allowance for uncollectible reinsurance receivables was $10.5 million and $20.7 million at December 31, 2007 and 2006, respectively. The decrease in the allowance was primarily due to a commutation of our reinsurance agreement with an unrelated third party reinsurer during the first quarter of 2007 that reduced the uncollectible reinsurance reserve by $6.5 million. A benefit of $0.7 million was realized as a result of the commutation. In addition, we released $3.7 million of the reserve for uncollectible reinsurance during 2007, primarily due to a reduction in ceded loss reserves, including losses incurred but not reported (“IBNR”), as a result of better than expected loss emergence.

Historically, there have been insolvencies following a period of competitive pricing in the industry. While we have recorded allowances for reinsurance receivables based on currently available information, conditions may change or additional information might be obtained that may require us to record additional allowances. On a quarterly basis, we review our financial exposure to the reinsurance market and assess the adequacy of our collateral and allowance for uncollectible reinsurance and continue to take actions to mitigate our exposure to possible loss.

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Claims Management and Administration

Our approach to claims management is designed to investigate reported incidents at the earliest juncture, to select, manage and supervise all legal and adjustment aspects of claims, including settlement, for the mutual benefit of us, our professional general agents, wholesale brokers, reinsurers and insureds. Our professional general agents and wholesale brokers have no authority to settle claims or otherwise exercise control over the claims process. Our claims management staff supervises or processes all claims. We have a formal claims review process, and all claims greater than $100,000, gross of reinsurance, are reviewed by our senior claims management and certain of our senior executives.

To handle claims, we utilize our own in-house claims department as well as third-party claims administrators (“TPAs”) and assuming reinsurers, to whom we delegate limited claims handling authority. Our experienced in-house staff of claims management professionals are assigned to one of five dedicated claim units: casualty claims, latent exposure claims, property claims, TPA oversight and a wholly owned subsidiary that administers construction defect claims. The dedicated claims units meet regularly to communicate current developments within their assigned areas of specialty.

As of December 31, 2007, we had $474.8 million of gross outstanding loss and loss adjustment expense case reserves on known claims. Claims relating to approximately 72% of those reserves are handled by our in-house claims management professionals, while claims relating to approximately 11% of those reserves are handled by our TPAs, which send us detailed financial and claims information on a monthly basis. We also individually supervise in-house any significant or complicated TPA handled claims, and conduct two to five dayon-site audits of our material TPAs at least twice a year. Approximately 17% of our reserves are handled by our assuming reinsurers. We diligently review and supervise the claims handled by our reinsurers to protect our reputation and minimize exposure.

Our Reinsurance Operations

Our Reinsurance Operations consist of operations related to writing third party reinsurance by Wind River Reinsurance. Prior to the fourth quarter of 2005, ourNon-U.S. Insurance Operations offered direct third party excess and surplus lines primary insurance policies. In the fourth quarter of 2005, ourNon-U.S. Insurance Operations discontinued offering such products in order to focus on third party reinsurance products. Following this decision, all excess and surplus lines insurance policies written through ourNon-U.S. Insurance Operations have been allowed to expire and have not been renewed. As a result of the amalgamation of Wind River Barbados and Wind River Bermuda to form Wind River Reinsurance, Wind River Reinsurance is listed with the International Insurers Department (“IID”) of the National Association of Insurance Commissioners (“NAIC”). Although Wind River Reinsurance does not currently offer direct third party excess and surplus lines insurance products, it remains eligible to write on a surplus lines basis in 30 U.S. states and the District of Columbia.

Intercompany Reinsurance

OurNon-U.S. Insurance Operations commenced offering reinsurance to the United National Insurance Companies in January 2004 through quota share arrangements. These reinsurance arrangements resulted in 60% of the United National Insurance Companies’ net retained insurance liability on new or renewal business being ceded to Wind River Reinsurance or its predecessors through December 31, 2006.

On February 1, 2005, theNon-U.S. Insurance Operations commenced providing reinsurance to the Penn-America Insurance Companies through a quota share arrangement. This reinsurance arrangement resulted in 30% of thePenn-America Insurance Companies’ net retained insurance liability on new and renewal business bound after February 1, 2005 being ceded to Wind River Bermuda. The agreement also stipulated that 30% ofPenn-America Insurance Companies’ February 1, 2005 net unearned premium be ceded to Wind River Bermuda.

As part of the amalgamation of ourNon-U.S. Insurance Operations, each of the aforementioned quota share agreements was assumed by Wind River Reinsurance.

Effective January 1, 2007, each of the quota share agreements was terminated and consolidated into a single quota share reinsurance agreement. Under this new agreement, our Insurance Operations have agreed to cede 50%

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of their net unearned premiums as of December 31, 2006, plus 50% of the net retained insurance liability of all new and renewal business bound on or after January 1, 2007 to Wind River Reinsurance.

Reserves For Unpaid Losses and Loss Adjustment Expenses

Applicable insurance laws require us to maintain reserves to cover our estimated ultimate losses under insurance policies that we write and for loss adjustment expenses relating to the investigation and settlement of policy claims.

We establish loss and loss adjustment expense reserves for individual claims by evaluating reported claims on the basis of:

•  our knowledge of the circumstances surrounding the claim;

•  the severity of injury or damage;

•  jurisdiction of the occurrence;

•  the potential for ultimate exposure;

•  litigation related developments;

•  the type of loss; and

•  our experience with the insured and the line of business and policy provisions relating to the particular type of claim.

We generally estimate such losses and claims costs through an evaluation of individual reported claims. We also establish loss reserves for IBNR. IBNR reserves are based in part on statistical information and in part on industry experience with respect to the expected number and nature of claims arising from occurrences that have not been reported. We also establish our reserves based on our estimates of future trends in claims severity and other subjective factors. Insurance companies are not permitted to reserve for a catastrophe until it has occurred. Reserves are recorded on an undiscounted basis other than fair value adjustments recorded under purchase accounting. The reserves are reviewed quarterly by the in-house actuarial staff. In 2007, our reserves were also reviewed by independent actuaries in the first, second, and fourth quarters. In 2008, it is anticipated that our reserves will be reviewed by independent actuaries on a quarterly basis. We do not rely upon the review by the independent actuaries to develop our reserves; however, the data is used to corroborate the analysis performed by the in-house actuarial staff.

With respect to some classes of risks, the period of time between the occurrence of an insured event and the final resolution of a claim may be many years, and during this period it often becomes necessary to adjust the claim estimates either upward or downward. Certain classes of umbrella and excess liability that we underwrite have historically had longer intervals between the occurrence of an insured event, reporting of the claim and final resolution. In such cases, we must estimate reserves over long periods of time with the possibility of several adjustments to reserves. Other classes of insurance that we underwrite, such as most property insurance, historically have shorter intervals between the occurrence of an insured event, reporting of the claim and final resolution. Reserves with respect to these classes are therefore inherently less likely to be adjusted.

The loss and loss expense reserving process is intended to reflect the impact of inflation and other factors affecting loss payments by taking into account changes in historical payment patterns and perceived trends. However, there is no precise method for the subsequent evaluation of the adequacy of the consideration given to inflation, or to any other specific factor, or to the way one factor may affect another.

The loss and loss expense development table below shows changes in our reserves in subsequent years from the prior loss and loss expense estimates based on experience as of the end of each succeeding year and in conformity with GAAP. The estimate is increased or decreased as more information becomes known about the frequency and severity of losses for individual years. A redundancy means the original estimate was higher than the current estimate; a deficiency means that the current estimate is higher than the original estimate.

15

The first line of the loss and loss expense development table shows, for the years indicated, our net reserve liability including the reserve for incurred but not reported losses. The first section of the table shows, by year, the cumulative amounts of losses and loss adjustment expenses paid as of the end of each succeeding year. The second section sets forth the re-estimates in later years of incurred losses and loss expenses, including payments, for the years indicated. The “cumulative redundancy (deficiency)” represents, as of the date indicated, the difference between the latest re-estimated liability and the reserves as originally estimated.

In 2005, $235.2 million of loss reserves were acquired as a result of the merger withPenn-America Group, Inc. that took place on January 24, 2005. As such, there are no loss reserves in our loss development table related to thePenn-America Insurance Companies for any years prior to 2005.

This loss development table shows development in United America Indemnity’s loss and loss expense reserves on a net basis:

	1997			1998			1999			2000			2001			2002			2003		2004		2005		2006		2007
(Dollars in thousands)
Balance sheet reserves:	$	180,651		$	210,483		$	167,868		$	131,128		$	156,784		$	260,820		$	314,023	$	344,614	$	639,291	$	735,342	$	800,884
Cumulative paid as of:
One year later	$	8,360		$	85,004		$	64,139		$	26,163		$	63,667		$	42,779		$	76,048	$	85,960	$	154,069		169,899
Two years later		64,079			110,073			82,119			72,579			82,970			96,623			136,133		139,822		268,827
Three years later		77,775			123,129			118,318			75,661			118,401			141,545			171,659		180,801
Four years later		85,923			152,915			110,640			98,654			150,062			164,181			197,596
Five years later		111,044			161,028			126,119			121,407			164,023			182,043
Six years later		116,167			168,091			143,782			129,371			177,682
Seven years later		121,303			172,926			149,413			139,090
Eight years later		125,215			176,634			157,431
Nine years later		128,180			183,349
Ten years later		129,431
Re-estimated liability as of:
End of year	$	180,651		$	210,483		$	167,868		$	131,128		$	156,784		$	260,820		$	314,023	$	344,614	$	639,291	$	735,342	$	800,884
One year later		164,080			195,525			157,602			124,896			228,207			261,465			313,213		343,332		632,327		716,361
Two years later		146,959			185,421			155,324			180,044			228,391			263,995			315,230		326,031		629,859
Three years later		137,711			182,584			192,675			180,202			231,133			268,149			298,989		323,696
Four years later		136,307			211,544			192,714			175,198			236,271			252,078			301,660
Five years later		157,605			211,352			175,478			179,727			226,116			264,058
Six years later		157,431			203,451			180,735			173,424			242,666
Seven years later		149,562			201,991			177,025			187,441
Eight years later		149,301			201,396			193,337
Nine years later		149,342			216,673
Ten years later		159,913
Cumulative redundancy/(deficiency)	$	20,738		$	(6,190	)	$	(25,469	)	$	(56,313	)	$	(85,882	)	$	(3,238	)	$	12,363	$	20,918	$	9,432	$	18,981	$	—
Gross Liability — end of year		791,190			802,692			805,717			800,630			907,357			2,004,422			2,059,760		1,876,510		1,914,224		1,702,010		1,503,237
Less: Reinsurance recoverables		610,539			592,209			637,849			669,502			750,573			1,743,602			1,745,737		1,531,896		1,274,933		966,668		702,353
Net liability-end of year		180,651			210,483			167,868			131,128			156,784			260,820			314,023		344,614		639,291		735,342		800,884
																						��
Gross re-estimated liability		829,177			1,029,992			1,190,941			1,316,674			1,630,680			1,795,429			1,725,533		1,529,345		1,674,254		1,525,814		1,503,237
Less: Re-estimated recoverables at December 31, 2007		669,264			813,319			997,604			1,129,233			1,388,014			1,531,371			1,423,873		1,205,649		1,044,395		809,453		702,353
Net re-estimated liability at December 31, 2007	$	159,913		$	216,673		$	193,337		$	187,441		$	242,666		$	264,058		$	301,660	$	323,696	$	629,859	$	716,361		800,884
Gross cumulative redundancy/(deficiency)	$	(37,987	)	$	(227,300	)	$	(385,224	)	$	(516,044	)	$	(723,323	)	$	208,993		$	334,227	$	347,165	$	239,970	$	176,196	$	—

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In the first quarter of 2007, we commuted a reinsurance agreement with an unrelated third party reinsurer that increased our net loss and loss adjustment expense reserves by $5.7 million. This increase was offset by a reduction in the uncollectible reinsurance reserve. The commutation and offsetting reduction had no impact on our financial results for 2007. This increase is net loss and loss adjustment expense reserves was anticipated and accounted for prior to 2007. A reconciliation of the 2007 favorable development to the loss development table, which includes the impact of the commutation with the third party reinsurer, is as follows:

(Dollars in thousands)
Favorable development relating to prior accident years	$	24,752
Increase to reserves from commutation		(5,771	)
Cumulative redundancy	$	18,981

We experienced $24.7 million of favorable development related to our 2006 net reserves. The reduction was comprised of a net reduction of $42.5 million for primary liability, umbrella and excess, construction defect, and lines in run-off due to both lower than expected frequency and severity emergence, offset by a $17.8 million increase in net reserves for unallocated loss adjustment expenses (“ULAE”) and asbestos and environmental (“A&E”). The 2003 through 2005 years benefited for the same reasons as 2006; however, to a lesser degree. $22.8 million of the $24.7 million of favorable development was related to better than expected loss emergence related to 2006. The adverse development noted from 1997 through 2002 is primarily related to increasing asbestos and environmental reserves. 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. In response to these developments, management increased gross and net A&E reserves during 2007 to reflect its best estimate of A&E exposures.

The net deficiency for 1999 through 2001 primarily resulted in a strengthening of our reserves by $47.8 million in 2002. This was due to faster than expected development in accident years 1997 through 2001. We also increased loss reserves in 2002 by an additional $23.6 million as a result of a rescission related to products written in 1993 and 1994.

During 2007, thePenn-America Insurance Companies increased incurred losses related to insured events of years 2004 and prior by $9.1 million. This increase in incurred losses related primarily to our casualty lines of business relating to accident years 2003 through 2004. During 2006, thePenn-America Insurance Companies increased incurred losses related to insured events of years 2004 and prior by $4.3 million. This increase in incurred losses related primarily to our casualty lines of business relating to accident years 1997 through 2003. This development is reflected in the 2005 and 2006 columns of the loss development table above.

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The following table provides a reconciliation of United America Indemnity’s liability for losses and loss adjustment expenses, net of reinsurance ceded:

	Years Ended December 31,
	2007			2006			2005
(Dollars in thousands)
Unpaid losses and loss adjustment expenses at beginning of year	$	1,702,010		$	1,914,224		$	1,876,510
Less: Gross reinsurance receivables on unpaid losses and loss adjustment expenses		966,668			1,274,933			1,531,896
Net balance at beginning of year		735,342			639,291			344,614
Plus unpaid losses and loss adjustment expenses acquired as a result of the merger(1)		—			—			235,192
Less gross reinsurance receivables on unpaid losses and loss adjustment expenses acquired as a result of the merger(1)		—			—			43,908
Unpaid losses and loss adjustment expenses subtotal		735,342			639,291			535,898
Incurred losses and loss adjustment expenses related to:
Current year(2)		328,346			319,927			289,406
Prior years(3)		(29,105	)		(15,572	)		(1,282	)
Total incurred losses and loss adjustment expenses		299,241			304,355			288,124
Paid losses and loss adjustment expenses related to:
Current year		73,923			62,928			59,930
Prior years		159,776			145,376			124,801
Total paid losses and loss adjustment expenses		233,699			208,304			184,731
Net balance at end of year		800,884			735,342			639,291
Plus: Gross reinsurance receivables on unpaid losses and loss adjustment expenses		702,353			966,668			1,274,933
Unpaid losses and loss adjustment expenses at end of year	$	1,503,237		$	1,702,010		$	1,914,224

(1)	Unpaid loss and loss adjustment expenses and gross reinsurance receivable on unpaid losses acquired on January 24, 2005, as a result of the merger withPenn-America Group, Inc.
(2)	Included in 2005 is $5.8 million of negative development for thePenn-America Group that is related to prior years. This amount is not included in the “Prior years” line due to the fact that we did not own thePenn-America Group during the prior year periods to which the losses and loss adjustment expenses are related.
(3)	In 2007, we experienced $24.7 million of favorable development related to prior year reserves. The reduction was comprised of a net reduction of $42.5 million for primary liability, umbrella and excess, construction defect, and lines in run-off due to both lower than expected frequency and severity emergence, offset by a $17.8 million increase in net reserves for unallocated loss adjustment expenses (“ULAE”) and asbestos and environmental (“A&E”). We also reduced its reinsurance reserve allowance by $4.4 million due to better than anticipated collections from troubled reinsurers and loss emergence that has been lower than anticipated. In 2006, we decreased our net loss reserve relative to accident years 2005 and prior by $7.0 million due to favorable development relative to construction defect losses as well as primary general liability, umbrella and excess, and asbestos and environmental, and by $8.6 million as a reduction of our reinsurance reserve allowance. In 2005, we decreased our net loss reserve relative to accident years 2004 and prior by $1.3 million due to lower than anticipated frequency in our animal mortality program.

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Asbestos and Environmental Exposure

Although we believe it to be limited, we have exposure to A&E claims. Our environmental exposure arises from the sale of general liability and commercial multi-peril insurance. Currently, our policies continue to exclude classic environmental contamination claims. In some states we are required, however, depending on the circumstances, to provide coverage for certain bodily injury claims, such as an individual’s exposure to a release of chemicals. We have also issued policies that were intended to provide limited pollution and environmental coverage. These policies were specific to certain types of products underwritten by us. We have also received a number of asbestos-related claims, the majority of which declined based on well-established exclusions. In establishing the liability for unpaid losses and loss adjustment expenses related to A&E exposures, management considers facts currently known and the current state of the law and coverage litigations. Estimates of these liabilities are reviewed and updated continually.

Significant uncertainty remains as to our ultimate liability for asbestos-related claims due to such factors as the long latency period between asbestos exposure and disease manifestation and the resulting potential for involvement of multiple policy periods for individual claims, the increase in the volume of claims made by plaintiffs who claim exposure but who have no symptoms of asbestos-related disease, and an increase in claims subject to coverages under general liability policies that do not contain aggregate limits of liability. There is also the possibility of federal legislation that would address asbestos litigation.

The liability for unpaid losses and loss adjustment expenses, inclusive of A&E reserves, reflects our best estimates for future amounts needed to pay losses and related adjustment expenses as of each of the balance sheet dates reflected in the financial statements herein in accordance with GAAP. As of December 31, 2007, we had $16.1 million of net loss reserves for asbestos-related claims and $10.6 million for environmental claims. We attempt to estimate the full impact of the A&E exposures by establishing specific case reserves on all known losses.

The following table shows our gross reserves for A&E losses:

	Years Ended December 31,
	2007		2006			2005
(Dollars in thousands)
Gross reserves for A&E losses and loss adjustment expenses — beginning of period	$	36,010	$	40,124		$	34,622
Plus: Incurred losses and loss adjustment expenses related to the merger withPenn-America Group, Inc.		—		—			78
Plus: Incurred losses and loss adjustment expenses — case reserves		11,648		1,946			6,911
Plus: Incurred losses and loss adjustment expenses — IBNR		15,015		(3,589	)		5,120
Less: Payments		4,096		2,471			6,607
Gross reserves for A&E losses and loss adjustment expenses — end of period	$	58,577	$	36,010		$	40,124

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The following table shows our net reserves for A&E losses:

	Years Ended December 31,
	2007		2006			2005
(Dollars in thousands)
Net reserves for A&E losses and loss adjustment expenses — beginning of period	$	11,157	$	11,519		$	11,800
Plus: Incurred losses and loss adjustment expenses related to the merger withPenn-America Group, Inc.		—		—			58
Plus: Incurred losses and loss adjustment expenses — case reserves		4,703		1,118			1,981
Plus: Incurred losses and loss adjustment expenses — IBNR		12,248		(856	)		(662	)
Less: Payments		1,415		624			1,658
Net reserves for A&E losses and loss adjustment expenses — end of period	$	26,694	$	11,157		$	11,519

In addition to the factors referenced above, establishing reserves for A&E and other mass tort claims involves 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. In response to these developments, management increased gross and net A&E reserves during the third quarter of 2007 to reflect its best estimate of A&E exposures. 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 5,000 asbestos-related bodily injury claims and others that continue to be filed. Management is continuing to gather information to enable it to both evaluate the numerous factual and legal issues that are presented by this lawsuit and to estimate the timing of any payments that may be required. Until that information is obtained and analyzed, it is difficult to predict the ultimate financial exposure that this matter presents.

As of December 31, 2007, 2006, and 2005, the survival ratio on a gross basis for our open A&E claims was 13.3 years, 7.4 years, and 7.1 years, respectively. As of December 31, 2007, 2006, and 2005, the survival ratio on a net basis for our open A&E claims was 23.6 years, 10.6 years, and 9.6 years, respectively. The survival ratio, which is the ratio of gross or net reserves to the3-year average of annual paid claims, is a non-GAAP financial measure that indicates how long the current amount of gross or net reserves will last based on the current rate of paid claims.

Investments

Our investment policy is determined by the Investment Committee of our Board of Directors. We have engaged third-party investment advisors to oversee our investments and to make recommendations to the Investment Committee of our Board of Directors. Our investment policy allows us to invest in taxable and tax-exempt fixed income investments as well as publicly traded and private equity investments. With respect to bonds, the maximum exposure per issuer varies as a function of the credit quality of the security. The allocation between taxable and tax-exempt bonds is determined based on market conditions and tax considerations, including the applicability of the alternative minimum tax. The maximum allowable investment in equity securities under our investment policy is 30% of our GAAP equity, or $250.9 million at December 31, 2007. As of December 31, 2007, we had $1,765.1 million of investments and cash and cash equivalent assets, including $150.2 million of equity and limited partnership investments.

Insurance company investments must comply with applicable statutory regulations that prescribe the type, quality and concentration of investments. These regulations permit investments, within specified limits and subject

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to certain qualifications, in federal, state and municipal obligations, corporate bonds, and preferred and common equity securities.

Although we generally intend to hold bonds to recovery, we regularly reevaluate our position based upon market conditions. As of December 31, 2007, our bonds had a weighted average maturity of 4.91 years and a weighted average duration, including cash and short-term investments, of 3.3 years. Our financial statements reflect a net unrealized gain on bonds available for sale as of December 31, 2007 of $14.1 million on a pre-tax basis.

The following table shows the average amount of bonds, bond income earned, and the book yield thereon for the periods indicated:

	Years Ended December 31,(1)
	2007			2006			2005
(Dollars in thousands)
Average bonds at estimated fair value	$	1,311,033		$	1,204,662		$	1,005,938
Gross bond income(2)		65,908			57,310			41,196
Book yield		5.03	%		4.76	%		4.10	%

(1)	Does not include any amounts for the Penn Independent Group or thePenn-America Group for any periods prior to January 24, 2005.
(2)	Represents income earned by bonds, gross of investment expenses and excluding realized gains and losses.

Realized gains and (losses), including other than temporary impairments, for the years ended December 31, 2007, 2006, and 2005 were $1.0 million, $(0.6) million, and $0.6 million, respectively.

The following table summarizes by type the estimated fair value of United America Indemnity’s investments and cash and cash equivalents as of December 31, 2007, 2006, and 2005:

	December 31, 2007					December 31, 2006					December 31, 2005
	Estimated		Percent			Estimated		Percent			Estimated		Percent
	Fair Value		of Total			Fair Value		of Total			Fair Value		of Total
(Dollars in thousands)
Cash and cash equivalents	$	244,321		13.8	%	$	273,745		16.5	%	$	215,511		15.5	%
U.S. Treasury securities		67,124		3.8			67,037		4.0			74,013		5.2
Obligations of states, municipalities and political subdivisions		69,120		3.9			52,322		3.2			185,676		13.0
Special revenue bonds		143,955		8.2			118,803		7.2			204,064		14.3
Corporate bonds		278,937		15.8			322,623		19.5			263,028		18.5
Mortgage-backed and asset-backed securities		660,918		37.4			485,970		29.3			340,523		23.9
Other bonds		150,512		8.5			199,929		12.1			18,320		1.3
Total bonds		1,370,566		77.6			1,246,684		75.3			1,085,624		76.2
Equity securities		85,677		4.9			75,372		4.6			66,002		4.6
Other investments		64,539		3.7			60,863		3.6			52,427		3.7
Total investments and cash and cash equivalents	$	1,765,103		100.0	%	$	1,656,664		100.0	%	$	1,419,564		100.0	%

We expect that default rates on collateralized obligations may continue to rise. To protect ourselves against these risks, we have structured our portfolio to lessen the risk. Of the $660.9 million of mortgage and asset-backed securities, $406.7 million is invested in U.S. agency paper, $50.2 million is invested in collateralized mortgage obligations, of which $50.0 million, or 99.6%, are rated AAA, and $204.0 million is invested in asset-backed securities, of which $202.0 million is rated AAA. $175.2 million of our asset backed securities are invested in commercial mortgage obligations, all of which are rated AAA. In addition, we temporarily discontinued purchasing commercial paper to minimize potential exposure to subprime risk. We held no commercial paper at December 31,

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2007. Our overnight cash sweep accounts are generally invested in funds that invest in U.S. treasuries, U.S. agency notes and repurchase agreements that are fully collateralized by U.S. treasuries and U.S. agency securities. We also face liquidity risk. Liquidity risk is when the fair value of an investment is not able to be realized due to lack of interest by outside parties in the marketplace. We attempt to diversify our investment holdings to minimize this risk. We also face credit risk. 99.5% of our bonds are investment grade securities. 76.2% of our bonds are rated AAA. See “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of this report for a more detailed discussion of the credit market and our investment strategy.

The following table summarizes, by Standard & Poor’s rating classifications, the estimated fair value of United America Indemnity’s investments in bonds, as of December 31, 2007 and 2006:

	December 31, 2007					December 31, 2006
	Estimated		Percent of			Estimated		Percent of
	Fair Value		Total			Fair Value		Total
(Dollars in thousands)
AAA	$	1,045,151		76.2	%	$	901,859		72.3	%
AA		122,427		8.9			116,768		9.4
A		160,636		11.7			189,217		15.2
BBB		36,575		2.7			32,215		2.6
BB		4,044		0.3			5,206		0.4
B		814		0.1			848		0.1
CCC		919		0.1			480		0.0
Not rated		0		0.0			91		0.0
Total bonds	$	1,370,566		100.0	%	$	1,246,684		100.0	%

The following table sets forth the expected maturity distribution of United America Indemnity’s bonds at their estimated market value as of December 31, 2007 and 2006:

	December 31, 2007					December 31, 2006
	Estimated		Percent of			Estimated		Percent of
	Market Value		Total			Market Value		Total
(Dollars in thousands)
One year or less	$	85,513		6.3	%	$	24,392		2.0	%
More than one year to five years		272,859		19.9			354,888		28.5
More than five years to ten years		211,577		15.4			231,260		18.6
More than ten years to fifteen years		71,228		5.2			82,251		6.6
More than fifteen years		68,471		5.0			67,923		5.4
Securities with fixed maturities		709,648		51.8			760,714		61.1
Asset-backed and mortgage-backed securities		660,918		48.2			485,970		38.9
Total bonds	$	1,370,566		100.0	%	$	1,246,684		100.0	%

The expected weighted average duration of our asset-backed and mortgage-backed securities is 4.3 years.

The value of our portfolio of bonds is inversely correlated to changes in market interest rates. In addition, some of our bonds have call or prepayment options. This could subject us to reinvestment risk should interest rates fall and issuers call their securities and we are forced to invest the proceeds at lower interest rates. We seek to mitigate our reinvestment risk by investing in securities with varied maturity dates, so that only a portion of the portfolio will mature, be called, or be prepaid at any point in time.

As of December 31, 2007, we had aggregate equity securities of $85.7 million that consisted of $73.8 million in common stocks and $11.9 million in preferred stocks. We also hold other invested assets valued at $64.5 million as of December 31, 2007. These investments are primarily comprised of investments in limited partnerships. Several of these limited partnerships mainly invest in securities that are publicly traded. Securities that are held by

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these partnerships are valued by obtaining values from Bloomberg, other external pricing sources, and managers that make markets for these securities. We obtain the value of the partnerships at the end of each reporting period; however, we are not provided with a detailed listing of the investments held by these partnerships. We receive annual audited financial statements from each of the partnerships we own.

As of December 31, 2007, our other invested assets portfolio of $64.5 million was comprised of securities for which there was no readily available independent market price. The estimated fair value of such securities is determined by the general partner of each limited partnership based on comparisons to transactions involving similar investments. Material assumptions and factors utilized in pricing these securities include future cash flows, constant default rates, recovery rates and any market clearing activity that may have occurred since the prior month-end pricing period.

Competition

We compete with numerous domestic and international insurance companies and reinsurers, mutual companies, specialty insurance companies, underwriting agencies, diversified financial services companies, Lloyd’s syndicates, risk retention groups, insurance buying groups, risk securitization products and alternative self-insurance mechanisms. In particular, in the specialty insurance market we compete against, among others:

•  American International Group;

•  Argo Group International Holdings, Ltd.;

•  Berkshire Hathaway;

•  Century Surety;

•  Great American Insurance Group;

•  HCC Insurance Holdings, Inc.;

•  IFG Companies;

•  James River Insurance Group;

•  Markel Corporation;

•  Nationwide Insurance;

•  Navigators Insurance Group;

•  Philadelphia Consolidated Group;

•  RLI Corporation;

•  W.R. Berkley Corporation;

•  Western World Insurance Group.

In addition to the companies mentioned above, we are facing new competition from standard line companies who are writing risks that they had not insured previously, Bermuda companies who are establishing relationships with wholesale brokers, and new excess and surplus competitors.

Competition may take the form of lower prices, broader coverages, greater product flexibility, higher quality services, reputation and financial strength or higher ratings by independent rating agencies. In all of our markets, we compete by developing insurance products to satisfy well-defined market needs and by maintaining relationships with brokers and insureds that rely on our expertise. For our program and specialty wholesale products, offering and underwriting products that are not readily available is our principal means of differentiating ourselves from our competition. Each of our products has its own distinct competitive environment. We seek to compete through innovative products, appropriate pricing, niche underwriting expertise, and quality service to policyholders, general agencies and brokers.

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A number of recent, proposed or potential legislative or marketplace developments could further increase competition in our industry. These developments include an influx of new capital that resulted from the formation of new insurers in the marketplace and existing companies that have attempted to expand their business as a result of better pricing or terms, legislative mandates for insurers to provide certain types of coverage in areas where existing insurers do business which could eliminate the opportunities to write those coverages, and proposed federal legislation which would establish national standards for state insurance regulation.

These developments are making the property and casualty insurance marketplace more competitive by increasing the supply of insurance capacity.

Employees

We have approximately 390 employees. This includes four individuals who operate out of our Bermuda office. In addition, we have contracts with international insurance service providers based in Bermuda to provide services to our Reinsurance Operations. Our Bermuda employees are either permanent residents of Bermuda or British citizens who possess Bermuda status. All employees that do not possess Bermuda status who operate out of our Bermuda office are subject to approval of any required work permits that may be applicable. None of our employees are covered by collective bargaining agreements, and our management believes that our relationship with our employees is excellent.

Ratings

A.M. Best ratings for the industry range from “A++” (Superior) to “F” (In Liquidation) with some companies not being rated. The United National Insurance Companies,Penn-America Insurance Companies, and Wind River Reinsurance are currently rated “A” (Excellent) by A.M. Best, the third highest of sixteen rating categories.

Publications of A.M. Best indicate that “A” (Excellent) ratings are assigned to those companies that, in A.M. Best’s opinion, have an excellent ability to meet their ongoing obligations to policyholders. In evaluating a company’s financial and operating performance, A.M. Best reviews its profitability, leverage and liquidity, as well as its spread of risk, the quality and appropriateness of its reinsurance, the quality and diversification of its assets, the adequacy of its policy and loss reserves, the adequacy of its surplus, its capital structure and the experience and objectives of its management. These ratings are based on factors relevant to policyholders, general agencies, insurance brokers and intermediaries and are not directed to the protection of investors.

Regulation

General

The business of insurance is regulated in most countries, although the degree and type of regulation varies significantly from one jurisdiction to another. In Bermuda, we operate under a relatively less intensive regulatory framework than exists in the United States, where we are subject to extensive regulation, primarily by the various State departments of insurance.

As a holding company, United America Indemnity is not subject to any insurance regulation by any authority in the Cayman Islands.

U.S. Regulation

We have seven operating insurance subsidiaries domiciled in the United States; United National Insurance Company,Penn-America Insurance Company, and Penn-Star Insurance Company, which are domiciled in Pennsylvania; Diamond State Insurance Company and United National Casualty Insurance Company, which are domiciled in Indiana; United National Specialty Insurance Company, which is domiciled in Wisconsin; and Penn-Patriot Insurance Company, which is domiciled in Virginia. We refer to these companies collectively as our U.S. Insurance Subsidiaries.

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As the indirect parent of the U.S. Insurance Subsidiaries, we are subject to the insurance holding company laws of Indiana, Pennsylvania, Virginia, and Wisconsin. These laws generally require each company of our U.S. Insurance Subsidiaries to register with its respective domestic state insurance department and to furnish annually financial and other information about the operations of the companies within our insurance holding company system. Generally, all material transactions among affiliated companies in the holding company system to which any of the U.S. Insurance Subsidiaries is a party must be fair, and, if material or of a specified category, require prior notice and approval or absence of disapproval by the insurance department where the subsidiary is domiciled. Material transactions include sales, loans, reinsurance agreements, and service agreements with the non-insurance companies within our family of companies, our Insurance Operations, or our Reinsurance Operations.

Changes of Control

Before a person can acquire control of a U.S. insurance company, prior written approval must be obtained from the insurance commissioner of the state where the domestic insurer is domiciled. Prior to granting approval of an application to acquire control of a domestic insurer, the state insurance commissioner will consider factors such as the financial strength of the applicant, the integrity and management of the applicant’s Board of Directors and executive officers, the acquirer’s plans for the management, Board of Directors and executive officers of the company being acquired, the acquirer’s plans for the future operations of the domestic insurer and any anti-competitive results that may arise from the consummation of the acquisition of control. Generally, state statutes provide that control over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, 10% or more of the voting securities of the domestic insurer. Because a person acquiring 10% or more of our common shares would indirectly control the same percentage of the stock of the U.S. Insurance Subsidiaries, the insurance change of control laws of Indiana, Pennsylvania, Virginia, and Wisconsin would likely apply to such a transaction. While our articles of association limit the voting power of any U.S. shareholder to less than 9.5%, there can be no assurance that the applicable state insurance regulator would agree that such shareholder did not control the applicable Insurance Operations company.

These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of United America Indemnity, including through transactions, and in particular unsolicited transactions, that some or all of the shareholders of United America Indemnity might consider desirable.

Notice must also be provided to the IID after a person acquires 10% or more of the voting securities of Wind River Reinsurance. Failure to do so may cause Wind River Reinsurance to be removed from the IID listing. In the event of a change in controland/or merger of Wind River Reinsurance, a complete application must be filed with the IID, including all documents that are necessary for the IID to determine if Wind River Reinsurance continues to be in compliance for listing with the IID. The IID may determine after a change in controland/or merger that Wind River Reinsurance is not in compliance and may remove it from continued listing.

Legislative Changes

On November 26, 2002, the Federal Terrorism Risk Insurance Act (“TRIA”) was enacted to ensure the availability of insurance coverage for defined acts of terrorism in the United States. On December 22, 2005, the Terrorism Risk Insurance Extension Act of 2005 was enacted, which extended TRIA until December 31, 2007. TRIA was further extended, until December 31, 2014, with the enactment, on December 26, 2007, of the Terrorism Risk Insurance Program Reauthorization Act (“TRIPRA”). It should be noted that under TRIPRA, the distinction between foreign and domestic acts of terrorism is eliminated, thus making losses for domestic acts of terrorism eligible for reimbursement. This law requires insurers writing certain lines of property and casualty insurance, including us, to offer coverage against certified acts of terrorism causing damage within the United States or to U.S. flagged vessels or aircraft. In return, the law requires the federal government, should an insurer comply with the procedures of the law, to indemnify the insurer for 90% of covered losses, exceeding a deductible, based on a percentage of direct earned premiums for the previous calendar year, up to an industry limit of $100.0 billion resulting from covered acts of terrorism. TRIPRA also requires that post-event policyholder surcharges be imposed at 133% of the actual payout by the Treasury Department. Additionally, the availability and affordability of terrorism insurance coverage must be studied and reported on by the Government Accountability Office (“GAO”)

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within 180 days of enactment and a study on possible expansion of TRIPRA to include coverage for nuclear, biological, chemical, and radiological exposures must be completed by the GAO within one year of enactment.

For 2007, our deductible for certified acts of terrorism was 20.0% of our direct earned premium for the year ended December 31, 2006, or $128.0 million. For 2008, our deductible for certified acts of terrorism will be 20% of the full year of our direct earned premium for the year ended December 31, 2007, or $121.1 million. We believe that our net exposure to insured losses from certified acts of terrorism will be considerably less than the deductible amount for 2008 due to: 1) the low percentage of insureds who have elected to purchase the offered terrorism coverage (approximately 0.2% of 2007 direct earned premium was for the coverage subject to TRIA); 2) the fact that the majority of our customers are small commercial businesses; 3) an exclusion that is attached to all of our policies for insureds who do not elect this coverage; and 4) the amount of reinsurance coverage that is available to us, to various extents, under the majority of our per risk reinsurance contracts.

We believe that we are in compliance with the requirements of TRIA and will be in compliance with the requirements of TRIPRA.

State Insurance Regulation

State insurance authorities have broad regulatory powers with respect to various aspects of the business of U.S. insurance companies, including but not limited to licensing companies to transact admitted business or determining eligibility to write surplus lines business, accreditation of reinsurers, admittance of assets to statutory surplus, regulating unfair trade and claims practices, establishing reserve requirements and solvency standards, regulating investments and dividends, approving policy forms and related materials in certain instances and approving premium rates in certain instances. State insurance laws and regulations may require the U.S. Insurance Subsidiaries to file financial statements with insurance departments everywhere they will be licensed or eligible or accredited to conduct insurance business, and their operations are subject to review by those departments at any time. The U.S. Insurance Subsidiaries prepare statutory financial statements in accordance with statutory accounting principles, or “SAP,” and procedures prescribed or permitted by these departments. State insurance departments also conduct periodic examinations of the books and records, financial reporting, policy filings and market conduct of insurance companies domiciled in their states, generally once every three to five years, although market conduct examinations may take place at any time. These examinations are generally carried out in cooperation with the insurance departments of other states under guidelines promulgated by the NAIC. In addition, admitted insurers are subject to targeted market conduct examinations involving specific insurers by state insurance regulators in any state in which the insurer is admitted.

Insurance Regulatory Information System Ratios

The NAIC Insurance Regulatory Information System, or “IRIS,” was developed by a committee of the state insurance regulators and is intended primarily to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies twelve industry ratios and specifies “usual values” for each ratio. Departure from the usual values of the ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer’s business. Insurers that report four or more ratios that fall outside the range of usual values are generally targeted for increased regulatory review.

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The table below summarizes the 2007 IRIS ratio results for the seven insurance companies in our Insurance Operations. Of those seven, only the following three companies had IRIS ratios with unusual values:

	Number of IRIS
	Ratios with Unusual	Ratio(s) with
Company	Values	Unusual Value	Reason(s)
Penn-America Insurance Co.	1	Change in Net Premiums Written	Increase in quota share cession percentage to Wind River Reinsurance in 2007
Penn-Star Insurance Co.	1	Change in Net Premiums Written	Increase in quota share cession percentage to Wind River Reinsurance in 2007
Penn-Patriot Insurance Co.	1	Change in Net Premiums Written	Increase in quota share cession percentage to Wind River Reinsurance in 2007

We do not believe that the above departures from the usual values will subject us to further regulatory review.

Risk-Based Capital Regulations

The state insurance departments of Indiana, Pennsylvania, Virginia, and Wisconsin require that each domestic insurer report its risk-based capital based on a formula calculated by applying factors to various asset, premium and reserve items. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk and business risk. The respective state insurance regulators use the formula as an early warning regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action, and generally not as a means to rank insurers. State insurance laws impose broad confidentiality requirements on those engaged in the insurance business (including insurers, general agencies, brokers and others) and on state insurance departments as to the use and publication of risk-based capital data. The respective state insurance regulators have explicit regulatory authority to require various actions by, or to take various actions against, insurers whose total adjusted capital does not exceed certain company action level risk-based capital levels. The United National Insurance Companies andPenn-America Insurance Companies had risk-based capital requirements of $178.2 million and $89.7 million, respectively. Both groups have capital in excess of the required minimum company action levels as of December 31, 2007.

Statutory Accounting Principles (“SAP”)

SAP is a basis of accounting developed to assist insurance regulators in monitoring and regulating the solvency of insurance companies. SAP is primarily concerned with measuring an insurer’s surplus. Accordingly, statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance laws, regulatory provisions, and practices prescribed or permitted by each insurer’s domiciliary state.

GAAP is concerned with a company’s solvency, but it is also concerned with other financial measurements, such as income and cash flows. Accordingly, GAAP gives more consideration to appropriate matching of revenue and expenses. As a direct result, different line item groupings of assets and liabilities and different amounts of assets and liabilities are reflected in financial statements prepared in accordance with GAAP than financial statements prepared in accordance with SAP.

Statutory accounting practices established by the NAIC and adopted in part by the Indiana, Pennsylvania, Virginia, and Wisconsin regulators determine, among other things, the amount of statutory surplus and statutory net income of the United National Insurance Companies andPenn-America Insurance Companies and thus determine, in part, the amount of funds these subsidiaries have available to pay dividends.

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State Dividend Limitations

Under Indiana law, Diamond State Insurance Company and United National Casualty Insurance Company may not pay any dividend or make any distribution of cash or other property, the fair market value of which, together with that of any other dividends or distributions made within the 12 consecutive months ending on the date on which the proposed dividend or distribution is scheduled to be made, exceeds the greater of (1) 10% of its surplus as of the 31^st day of December of the last preceding year, or (2) its net income for the 12 month period ending on the 31^st day of December of the last preceding year, unless the commissioner approves the proposed payment or fails to disapprove such payment within 30 days after receiving notice of such payment. An additional limitation is that Indiana does not permit a domestic insurer to declare or pay a dividend except out of earned surplus unless otherwise approved by the commissioner before the dividend is paid.

Under Pennsylvania law, United National Insurance Company,Penn-America Insurance Company, and Penn-Star Insurance Company may not pay any dividend or make any distribution that, together with other dividends or distributions made within the preceding 12 consecutive months, exceeds the greater of (1) 10% of its surplus as shown on its last annual statement on file with the commissioner or (2) its net income for the period covered by such statement, not including pro rata distributions of any class of its own securities, unless the commissioner has received notice from the insurer of the declaration of the dividend and the commissioner approves the proposed payment or fails to disapprove such payment within 30 days after receiving notice of such payment. An additional limitation is that Pennsylvania does not permit a domestic insurer to declare or pay a dividend except out of unassigned funds (surplus) unless otherwise approved by the commissioner before the dividend is paid. Furthermore, no dividend or other distribution may be declared or paid by a Pennsylvania insurance company that would reduce its total capital and surplus to an amount that is less than the amount required by the Insurance Department for the kind or kinds of business that it is authorized to transact.

Under Virginia law, Penn-Patriot Insurance Company may not pay any dividend or make any distribution of cash or other property, the fair market value of which, together with that of any other dividends or distributions made within the preceding 12 consecutive months exceeds the lesser of either (1) 10% of its surplus as of the 31st day of December of the last preceding year, or (2) its net income for the 12 month period ending on the 31st day of December of the last preceding year, not including pro rata distributions of any class of its securities, unless the commissioner approves the proposed payment or fails to disapprove such payment within 30 days after receiving notice of such payment.

Under Wisconsin law, United National Specialty Insurance Company may not pay any dividend or make any distribution of cash or other property, other than a proportional distribution of its stock, the fair market value of which, together with that of other dividends paid or credited and distributions made within the preceding 12 months, exceeds the lesser of (1) 10% of its surplus as of the preceding 31st day of December, or (2) the greater of (a) its net income for the calendar year preceding the date of the dividend or distribution, minus realized capital gains for that calendar year or (b) the aggregate of its net income for the three calendar years preceding the date of the dividend or distribution, minus realized capital gains for those calendar years and minus dividends paid or credited and distributions made within the first two of the preceding three calendar years, unless it reports the extraordinary dividend to the commissioner at least 30 days before payment and the commissioner does not disapprove the extraordinary dividend within that period. Additionally, under Wisconsin law, all authorizations of distributions to shareholders, other than stock dividends, shall be reported to the commissioner in writing and no payment may be made until at least 30 days after such report.

The dividend limitations imposed by the state laws are based on the statutory financial results of each company within our Insurance Operations that are determined by using statutory accounting practices that differ in various respects from accounting principles used in financial statements prepared in conformity with GAAP. See “Regulation — Statutory Accounting Principles.” Key differences relate to among other items, deferred acquisition costs, limitations on deferred income taxes, and reserve calculation assumptions and surplus notes.

For 2008, 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 $46.9 million. For 2008, the maximum amount of distributions that could be paid by thePenn-America Insurance Companies as dividends under applicable laws and regulations without regulatory approval is approximately

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$23.5 million, including $7.7 million that would be distributed to United National Insurance Company or its subsidiary Penn Independent Corporation based on the December 31, 2006 ownership percentages. In 2007, the United National Insurance Companies andPenn-America Insurance Companies declared and paid dividends of $23.3 million and $14.8 million, respectively.

Guaranty Associations and Similar Arrangements

Most of the jurisdictions in which our U.S. Insurance Subsidiaries are admitted to transact business require property and casualty insurers doing business within that jurisdiction to participate in guaranty associations. These organizations are organized to pay contractual benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets or in limited circumstances by surcharging policyholders.

Operations of Wind River Reinsurance

The insurance laws of each of the United States and of many other countries regulate or prohibit the sale of insurance and reinsurance within their jurisdictions bynon-U.S. insurers and reinsurers that are not admitted to do business within such jurisdictions. Wind River Reinsurance is not admitted to do business in the United States. We do not intend that Wind River Reinsurance will maintain offices or solicit, advertise, settle claims or conduct other insurance and reinsurance underwriting activities in any jurisdiction in the United States where the conduct of such activities would require that Wind River Reinsurance be admitted or authorized.

As a reinsurer that is not licensed, accredited or approved in any state in the United States, Wind River Reinsurance is required to post collateral security with respect to the reinsurance liabilities it assumes from our Insurance Operations as well as other U.S. ceding companies. The posting of collateral security is generally required in order for U.S. ceding companies to obtain credit on their U.S. statutory financial statements with respect to reinsurance liabilities ceded to unlicensed or unaccredited reinsurers. Under applicable United States “credit for reinsurance” statutory provisions, the security arrangements generally may be in the form of letters of credit, reinsurance trusts maintained by third-party trustees or funds-withheld arrangements whereby the ceded premium is held by the ceding company. If “credit for reinsurance” laws or regulations are made more stringent in Indiana, Pennsylvania, Virginia, Wisconsin or other applicable states or any of the Insurance Operations redomesticates to one of the few states that do not allow credit for reinsurance ceded to non-licensed reinsurers, we may be unable to realize some of the benefits we expect from our business plan. Accordingly, our Reinsurance Operations could be adversely affected. See the “Notes to Consolidated Financial Statements” in Item 8 of Part II of this report for our risk-based capital results.

Although Wind River Reinsurance is eligible to write surplus lines insurance in 31 U.S. states and the District of Columbia, ourNon-U.S. Insurance Operations discontinued offering direct third party excess and surplus lines insurance products during the fourth quarter of 2005.

Even though Wind River Reinsurance does not currently offer third party excess and surplus lines insurance products, it maintains a U.S. surplus lines trust fund with a U.S. bank to secure its U.S. surplus lines policyholders. The amount held in trust at December 31, 2007 was $6.2 million. Outstanding reserves at December 31, 2007 were $0.9 million. In subsequent years, if Wind River Reinsurance wrote third party excess and surplus line insurance, it would need to maintain an amount equal to 30% of its U.S. surplus lines liabilities, as at each year end, as certified by an actuary, in the trust fund subject to the current maximum of $60.0 million. The trust fund is irrevocable and must remain in force for a period of five years from the date of written notice to the trustee of the termination of the trust unless the liabilities with respect to all risks covered by the trust fund have been transferred to an insurer licensed to do business in all states where insurance is in force.

Apart from the financial and related filings required to maintain Wind River Reinsurance’s place on the IID’s Non-Admitted Insurers Quarterly Listing and its jurisdiction-specific approvals and eligibilities, Wind River Reinsurance generally is not subject to regulation by U.S. jurisdictions. Specifically, rate and form regulations

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otherwise applicable to authorized insurers will generally not apply to Wind River Reinsurance’s surplus lines transactions.

Bermuda Insurance Regulation

The Bermuda Insurance Act 1978 and related regulations, as amended (the “Insurance Act”), regulates the insurance business of Wind River Reinsurance and provides that no person may carry on any insurance business in or from within Bermuda unless registered as an insurer by the Bermuda Monetary Authority (the “BMA”) under the Insurance Act. Wind River Reinsurance has been registered as a Class 3 insurer by the BMA. The continued registration of an applicant as an insurer is subject to it complying with the terms of its registration and such other conditions as the BMA may impose from time to time.

The Insurance Act also imposes on Bermuda insurance companies solvency and liquidity standards and auditing and reporting requirements. Certain significant aspects of the Bermuda insurance regulatory framework are set forth below.

Classification of Insurers

Wind River Reinsurance, which is incorporated to carry on general insurance and reinsurance business, is registered as a Class 3 insurer in Bermuda.

Cancellation of Insurer’s Registration

An insurer’s registration may be canceled by the Supervisor of Insurance of the BMA on certain grounds specified in the Insurance Act, including failure of the insurer to comply with its obligations under the Insurance Act.

Principal Representative

An insurer is required to maintain a principal office in Bermuda and to appoint and maintain a principal representative in Bermuda. Wind River Reinsurance’s principal office is its executive offices in Hamilton, Bermuda, and Wind River Reinsurance’s principal representative is its Chief Executive Officer.

Independent Approved Auditor

Every registered insurer, such as Wind River Reinsurance, must appoint an independent auditor who will audit and report annually on the statutory financial statements and the statutory financial return of the insurer, both of which are required to be filed annually with the BMA.

Loss Reserve Specialist

As a registered Class 3 insurer, Wind River Reinsurance is required to submit an opinion of its approved loss reserve specialist in respect of its losses and loss expense provisions with its statutory financial return.

Statutory Financial Statements

Wind River Reinsurance must prepare annual statutory financial statements. The Insurance Act prescribes rules for the preparation and substance of these statutory financial statements (which include, in statutory form, a balance sheet, an income statement, a statement of capital and surplus and notes thereto). Wind River Reinsurance is required to give detailed information and analyses regarding premiums, claims, reinsurance and investments. The statutory financial statements are not prepared in accordance with GAAP or SAP and are distinct from the financial statements prepared for presentation to Wind River Reinsurance’s shareholders and under the Bermuda Companies Act 1981 (the “Companies Act”), which financial statements will be prepared in accordance with GAAP.

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Annual Statutory Financial Return

Wind River Reinsurance is required to file with the BMA a statutory financial return no later than four months after its financial year end (unless specifically extended upon application to the BMA). The statutory financial return for a Class 3 insurer includes, among other matters, a report of the approved independent auditor on the statutory financial statements of the insurer, solvency certificates, the statutory financial statements, a declaration of statutory ratios and the opinion of the loss reserve specialist.

Minimum Margin of Solvency and Restrictions on Dividends and Distributions

The Insurance Act provides a minimum margin of solvency for Class 3 general business insurers, such as Wind River Reinsurance. A Class 3 insurer engaged in general business is required to maintain the amount by which the value of its assets exceed its liabilities at the greater of: (1) $1.0 million; (2) where net premiums written exceed $6.0 million: $1.2 million plus 15% of the excess over $6.0 million; or (3) 15% of loss and loss expenses provisions plus other insurance reserves, as such terms are defined in the Insurance Act.

Additionally, under the Companies Act, Wind River Reinsurance may only declare or pay a dividend if Wind River Reinsurance has no reasonable grounds for believing that it is, or would after the payment be, unable to pay its liabilities as they become due, or if the realizable value of its assets would not be less than the aggregate of its liabilities and its issued share capital and share premium accounts.

Minimum Liquidity Ratio

The Insurance Act provides a minimum liquidity ratio for general business insurers, such as Wind River Reinsurance. An insurer engaged in general business is required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities, as such terms are defined in the Insurance Act.

Restrictions on Dividends and Distributions

Wind River Reinsurance is prohibited from declaring or paying any dividends during any financial year if it is in breach of its minimum solvency margin or minimum liquidity ratio or if the declaration or payment of such dividends would cause it to fail to meet such margin or ratio. In addition, if it has failed to meet its minimum solvency margin or minimum liquidity ratio on the last day of any financial year, Wind River Reinsurance will be prohibited, without the approval of the BMA, from declaring or paying any dividends during the next financial year.

Wind River Reinsurance is prohibited, without the approval of the 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. In addition, at any time it fails to meet its minimum margin of solvency, Wind River Reinsurance is required within 30 days after becoming aware of such failure or having reason to believe that such failure has occurred, to file with the BMA a written report containing certain information.

Additionally, under the Companies Act, Wind River Reinsurance may not declare or pay a dividend, or make a distribution from contributed surplus, if there are reasonable grounds for believing that it is, or would after the payment, be unable to pay its liabilities as they become due, or if the realizable value of its assets would be less than the aggregate of its liabilities and its issued share capital and share premium accounts. Wind River Reinsurance did not declare or pay any dividends in 2007.

Supervision, Investigation and Intervention

The BMA has wide powers of investigation and document production in relation to Bermuda insurers under the Insurance Act. For example, the BMA may appoint an inspector with extensive powers to investigate the affairs of Wind River Reinsurance if the BMA believes that such an investigation is in the best interests of its policyholders or persons who may become policyholders.

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Disclosure of Information

The BMA may assist other regulatory authorities, including foreign insurance regulatory authorities, with their investigations involving insurance and reinsurance companies in Bermuda, but subject to restrictions. For example, the BMA must be satisfied that the assistance being requested is in connection with the discharge of regulatory responsibilities of the foreign regulatory authority. Further, the BMA must consider whether cooperation is in the public interest. The grounds for disclosure are limited and the Insurance Act provides sanctions for breach of the statutory duty of confidentiality.

Under the Companies Act, the Minister of Finance may assist a foreign regulatory authority that has requested assistance in connection with inquiries being carried out by it in the performance of its regulatory functions. The Minster of Finance’s powers include requiring a person to furnish information to the Minister of Finance, to produce documents to the Minister of Finance, to attend and answer questions and to give assistance to the Minister of Finance in relation to inquiries. The Minister of Finance must be satisfied that the assistance requested by the foreign regulatory authority is for the purpose of its regulatory functions and that the request is in relation to information in Bermuda that a person has in his possession or under his control. The Minister of Finance must consider, among other things, whether it is in the public interest to give the information sought.

Certain Other Bermuda Law Considerations

Although Wind River Reinsurance is incorporated in Bermuda, it is classified as a non-resident of Bermuda for exchange control purposes by the BMA. Pursuant to the non-resident status, Wind River Reinsurance may engage in transactions in currencies other than Bermuda dollars, and there are no restrictions on its ability to transfer funds (other than funds denominated in Bermuda dollars) in and out of Bermuda or to pay dividends to United States residents that are holders of its common shares.

Under Bermuda law, exempted companies are companies formed for the purpose of conducting business outside Bermuda from a principal place of business in Bermuda. As an “exempted” company, Wind River Reinsurance may not, without the express authorization of the Bermuda legislature or under a license or consent granted by the Minister of Finance, participate in certain business transactions, including transactions involving Bermuda landholding rights and the carrying on of business of any kind for which it is not licensed in Bermuda.

Taxation of United America Indemnity and Subsidiaries

Under current Cayman Islands law, we are not required to pay any taxes in the Cayman Islands on our income or capital gains. We have received an undertaking that, in the event of any taxes being imposed, we will be exempted from taxation in the Cayman Islands until the year 2023. Under current Bermuda law, we and our Bermuda subsidiaries are not required to pay any taxes in Bermuda on our income or capital gains. We have received an undertaking from Bermuda that, in the event of any taxes being imposed, we will be exempt from taxation until March 2016.

Cayman Islands

We are incorporated under the laws of the Cayman Islands as an exempted company and, as such, we obtained an undertaking on September 2, 2003 from the Governor in Council of the Cayman Islands substantially that, for a period of 20 years from the date of such undertaking, no law that is enacted in the Cayman Islands imposing any tax to be levied on profit or income or gains or appreciation shall apply to us and no such tax and no tax in the nature of estate duty or inheritance tax will be payable, either directly or by way of withholding, on our common shares. Given the limited duration of the undertaking, we cannot be certain that we will not be subject to Cayman Islands tax after the expiration of the20-year period.

Bermuda

Currently, there is no Bermuda income, corporation or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by Wind River Reinsurance or its shareholders, other than shareholders ordinarily resident in Bermuda, if any. Currently, there is no Bermuda withholding or other tax on

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principal, interest or dividends paid to holders of the common shares of Wind River Reinsurance, other than holders ordinarily resident in Bermuda, if any. There can be no assurance that Wind River Reinsurance or its shareholders will not be subject to any such tax in the future.

We have received a written assurance from the Bermuda Minister of Finance under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of that tax would not be applicable to Wind River Reinsurance or to any of its operations, shares, debentures or obligations through March 28, 2016; provided that such assurance is subject to the condition that it will not be construed to prevent the application of such tax to people ordinarily resident in Bermuda, or to prevent the application of any taxes payable by Wind River Reinsurance in respect of real property or leasehold interests in Bermuda held by them. Given the limited duration of the assurance, we cannot be certain that we will not be subject to any Bermuda tax after March 28, 2016.

Luxembourg

The Luxembourg Companies are all private limited liability companies, incorporated under the laws of Luxembourg. The Luxembourg Companies are all taxable companies, which may carry out any activities that fall within the scope of their corporate object clause. The Luxembourg Companies are resident taxpayers fully subject to Luxembourg corporate income tax at a rate of 29.63%, capital duty at a rate of 0.5%, and net worth tax at a rate of 0.5%. The Luxembourg Companies are entitled to benefits of the tax treaties concluded between Luxembourg and other countries and European Union Directives.

Profit distributions (not in respect to liquidations) by the Luxembourg Companies are generally subject to Luxembourg dividend withholding tax at a rate of 15% in 2007, unless a domestic law exemption or a lower tax treaty rate applies. There is no Luxembourg dividend withholding tax in 2008. Dividends paid by any of the Luxembourg Companies to their Luxembourg resident parent company are exempt from Luxembourg dividend withholding tax, provided that at the time of the dividend distribution, the resident parent company has held (or commits itself to continue to hold) 10% or more of the nominal paid up capital of the distributing entity or, in the event of a lower percentage participation, a participation having an acquisition price of Euro 1.2 million or more for a period of at least 12 months.

The Luxembourg Companies have obtained a confirmation from the Luxembourg Administration des Contributions Directes (“Luxembourg Tax Administration”) that the current financing activities of the Luxembourg Companies under the application of at arm’s length principles will not lead to any material taxation in Luxembourg. The confirmation from the Luxembourg Tax Administration covers the current financing operations of the Luxembourg Companies through September 15, 2018. Given the limited duration of the confirmation and the possibility of a change in the relevant tax laws or the administrative policy of the Luxembourg Tax Administration, we cannot be certain that we will not be subject to greater Luxembourg taxes in the future.

Ireland

U.A.I. (Ireland) Limited is a private limited liability company incorporated under the laws of Ireland. The company is a resident taxpayer fully subject to Ireland corporate income tax of 12.5% on trading income and 25% on non-trading income, including interest and dividends from foreign companies.

United States

The following discussion is a summary of all material U.S. federal income tax considerations relating to our operations. We manage our business in a manner designed to mitigate the risk that either United America Indemnity or Wind River Reinsurance will be treated as engaged in a U.S. trade or business for U.S. federal income tax purposes. However, whether business is being conducted in the United States is an inherently factual determination. Because the United States Internal Revenue Code (the “Code”), regulations and court decisions fail to identify definitively activities that constitute being engaged in a trade or business in the United States, we cannot be certain that the IRS will not contend successfully that United America Indemnity or Wind River Reinsurance is or will be engaged in a trade or business in the United States. Anon-U.S. corporation deemed to be so engaged would be

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subject to U.S. income tax at regular corporate rates, as well as the branch profits tax, on its income that is treated as effectively connected with the conduct of that trade or business unless the corporation is entitled to relief under the permanent establishment provision of an applicable tax treaty, as discussed below. Such income tax, if imposed, would be based on effectively connected income computed in a manner generally analogous to that applied to the income of a U.S. corporation, except that anon-U.S. corporation is generally entitled to deductions and credits only if it timely files a U.S. federal income tax return. Wind River Reinsurance is filing protective U.S. federal income tax returns on a timely basis in order to preserve the right to claim income tax deductions and credits if it is ever determined that it is subject to U.S. federal income tax. The highest marginal federal income tax rates currently are 35% for a corporation’s effectively connected income and 30% for the “branch profits” tax.

United America Indemnity Group, Inc. is a Delaware corporation wholly owned by U.A.I. (Luxembourg) Investment S.à r.l. Under U.S. federal income tax law, dividends and interest paid by a U.S. corporation to anon-U.S. shareholder are generally subject to a 30% withholding tax, unless reduced by treaty. The income tax treaty between Luxembourg and the United States (the “Luxembourg Treaty”) reduces the rate of withholding tax on interest payments to 0% and on dividends to 15%, or 5% (if the shareholder owns 10% or more of the company’s voting stock).

If Wind River Reinsurance is entitled to the benefits under the income tax treaty between Bermuda and the United States (the “Bermuda Treaty”), Wind River Reinsurance would not be subject to U.S. income tax on any business profits of its insurance enterprise found to be effectively connected with a U.S. trade or business, unless that trade or business is conducted through a permanent establishment in the United States. No regulations interpreting the Bermuda Treaty have been issued. Wind River Reinsurance currently intends to conduct its activities to reduce the risk that it will have a permanent establishment in the United States, although we cannot be certain that we will achieve this result.

An insurance enterprise resident in Bermuda generally will be entitled to the benefits of the Bermuda Treaty if (1) more than 50% of its shares are owned beneficially, directly or indirectly, by individual residents of the United States or Bermuda or U.S. citizens and (2) its income is not used in substantial part, directly or indirectly, to make disproportionate distributions to, or to meet certain liabilities to, persons who are neither residents of either the United States or Bermuda nor U.S. citizens. We cannot be certain that Wind River Reinsurance will be eligible for Bermuda Treaty benefits in the future because of factual and legal uncertainties regarding the residency and citizenship of our shareholders.

Foreign insurance companies carrying on an insurance business within the United States have a certain minimum amount of effectively connected net investment income, determined in accordance with a formula that depends, in part, on the amount of U.S. risk insured or reinsured by such companies. If Wind River Reinsurance is considered to be engaged in the conduct of an insurance business in the United States and it is not entitled to the benefits of the Bermuda Treaty in general (because it fails to satisfy one of the limitations on treaty benefits discussed above), the Code could subject a significant portion of Wind River Reinsurance’s investment income to U.S. income tax. In addition, while the Bermuda Treaty clearly applies to premium income, it is uncertain whether the Bermuda Treaty applies to other income such as investment income. If Wind River Reinsurance is considered engaged in the conduct of an insurance business in the United States and is entitled to the benefits of the Bermuda Treaty in general, but the Bermuda Treaty is interpreted to not apply to investment income, a significant portion of Wind River Reinsurance’s investment income could be subject to U.S. federal income tax.

Foreign corporations not engaged in a trade or business in the United States are subject to 30% U.S. income tax imposed by withholding on the gross amount of certain “fixed or determinable annual or periodic gains, profits and income” derived from sources within the United States (such as dividends and certain interest on investments), subject to exemption under the Code or reduction by applicable treaties. The Bermuda Treaty does not reduce the rate of tax in such circumstances. The United States also imposes an excise tax on insurance and reinsurance premiums paid to foreign insurers or reinsurers with respect to risks located in the United States. The rates of tax applicable to premiums paid to Wind River Reinsurance on such business are 4% for direct insurance premiums and 1% for reinsurance premiums.

Our U.S. Subsidiaries are each subject to taxation in the United States at regular corporate rates.

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Item 1A.   Risk Factors

For purposes of this Risk Factors section, the use of “we,” “us,” and “our” refer to United America Indemnity.

The risks and uncertainties described below are those we believe to be material, but they are not the only ones we face. If any of the following risks, or other risks and uncertainties that we have not yet identified or that we currently consider not to be material, actually occur, our business, prospects, financial condition, results of operations and cash flows could be materially and adversely affected.

Some of the statements regarding risk factors below and elsewhere in this report may include forward-looking statements that reflect our current views with respect to future events and financial performance. Such statements include forward-looking statements both with respect to us specifically and the insurance and reinsurance sectors in general, both as to underwriting and investment matters. Statements that include words such as “expect,” “intend,” “plan,” “believe,” “project,” “anticipate,” “seek,” “will” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements. We assume no obligation to update our forward-looking statements to reflect actual results or changes in or additions to such forward-looking statements.

Risks Related to our Business

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 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, Raymond H. McDowell, President ofPenn-America Group, David J. Myers, President of United National Group and Diamond State Group, David R. Whiting, President and Chief Executive Officer of Wind River Reinsurance, and Edward M. Rafter, Senior Vice President and Chief Information / Administrative Officer of the United National Insurance Companies and thePenn-America Insurance Companies. Messrs. Frakes, Tate, McDowell, Myers, Whiting, and Rafter 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 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, former President and Chief Executive Officer of United America Insurance Group, Jonathan P. Ritz, former Senior Vice President and Chief Operating Officer of United America Insurance Group, and Gerould J. Goetz, former 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 cause us to 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, 2007. Mr. Frakes was subsequently appointed as our 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.

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If Actual Claims Payments Exceed Our Reserves for Losses and Loss Adjustment Expenses, Our Financial Condition and Results of Operations Could Be Adversely Affected.

Our success depends upon our ability to accurately assess the risks associated with the insurance and reinsurance policies that we write. We establish reserves to cover our estimated liability for the payment of all losses and loss adjustment expenses incurred with respect to premiums earned on the insurance policies that we write. Reserves do not represent an exact calculation of liability. Rather, reserves are estimates of what we expect to be the ultimate cost of resolution and administration of claims under the insurance policies that we write. These estimates are based upon actuarial and statistical projections, our assessment of currently available data, as well as estimates and assumptions as to future trends in claims severity and frequency, judicial theories of liability and other factors. We continually refine our reserve estimates in an ongoing process as experience develops and claims are reported and settled. Our insurance subsidiaries obtain an annual statement of opinion from an independent actuarial firm on the reasonableness of these reserves.

Establishing an appropriate level of reserves is an inherently uncertain process. The following factors may have a substantial impact on our future actual losses and loss adjustment experience:

•  claim and expense payments;

•  severity of claims;

•  legislative and judicial developments; and

•  changes in economic conditions, including the effect of inflation.

For example, as industry practices and legal, judicial, social and other conditions change, unexpected and unintended exposures related to claims and coverage may emerge. Recent examples include claims relating to mold, asbestos and construction defects, as well as larger settlements and jury awards against professionals and corporate directors and officers. In addition, there is a growing trend of plaintiffs targeting property and casualty insurers in purported class action litigations relating to claims-handling, insurance sales practices and other practices. These exposures may either extend coverage beyond our underwriting intent or increase the frequency or severity of claims. As a result, such developments could cause our level of reserves to be inadequate.

Actual losses and loss adjustment expenses we incur under insurance policies that we write may be different from the amount of reserves we establish, and to the extent that actual losses and loss adjustment expenses exceed our expectations and the reserves reflected on our financial statements, we will be required to immediately reflect those changes by increasing our reserves. In addition, regulators could require that we increase our reserves if they determine that our reserves were understated in the past. When we increase reserves, our pre-tax income for the period in which we do so will decrease by a corresponding amount. In addition to having an effect on reserves and pre-tax income, increasing or “strengthening” reserves causes a reduction in our insurance companies’ surplus and could cause the rating of our insurance company subsidiaries to be downgraded or placed on credit watch. Such a downgrade could, in turn, adversely affect our ability to sell insurance policies.

Catastrophic Events Can Have a Significant Impact on Our Financial and Operational Condition.

Results of property and casualty insurers are subject to man-made and natural catastrophes. We have experienced, and expect to experience in the future, catastrophe losses. It is possible that a catastrophic event or a series of multiple catastrophic events could have a material adverse effect on our operating results and financial condition. Our operating results could be negatively impacted if we experience losses from catastrophes that are in excess of our catastrophe reinsurance coverage. Catastrophes include windstorms, hurricanes, earthquakes, tornadoes, hail, severe winter weather, fires and may include terrorist events such as the attacks on the World Trade Center and Pentagon on September 11, 2001. We cannot predict how severe a particular catastrophe may be until after it occurs. The extent of losses from catastrophes is a function of the total amount and type of losses incurred, the number of insureds affected, the frequency of the events and the severity of the particular catastrophe. Most catastrophes occur in small geographic areas. However, some catastrophes may produce significant damage in large, heavily populated areas. In 2005, we suffered gross and net catastrophic losses of $43.0 million and

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$9.8 million, respectively, related to Hurricanes Katrina, Rita, and Wilma. There were no catastrophic losses from named storms in 2006 or 2007.

A Decline in Rating for Any of Our Insurance or Reinsurance Subsidiaries Could Adversely Affect Our Position in the Insurance Market, Make It More Difficult To Market Our Insurance Products and Cause Our Premiums and Earnings To Decrease.

Ratings have become an increasingly important factor in establishing the competitive position for insurance companies. A.M. Best ratings currently range from “A++” (Superior) to “F” (In Liquidation), with a total of 16 separate ratings categories. A.M. Best currently assigns the companies in our Insurance Operations and Reinsurance Operations a financial strength rating of “A” (Excellent), the third highest of their 16 rating categories. The objective of A.M. Best’s rating system is to provide potential policyholders an opinion of an insurer’s financial strength and its ability to meet ongoing obligations, including paying claims. In evaluating a company’s financial and operating performance, A.M. Best reviews its profitability, leverage and liquidity, its spread of risk, the quality and appropriateness of its reinsurance, the quality and diversification of its assets, the adequacy of its policy and loss reserves, the adequacy of its surplus, its capital structure, and the experience and objectives of its management. These ratings are based on factors relevant to policyholders, general agencies, insurance brokers, reinsurers and intermediaries and are not directed to the protection of investors. These ratings are not an evaluation of, nor are they directed to, investors in our Class A common shares and are not a recommendation to buy, sell or hold our Class A common shares. Publications of A.M. Best indicate that companies are assigned “A” (Excellent) ratings if, in A.M. Best’s opinion, they have an excellent ability to meet their ongoing obligations to policyholders. These ratings are subject to periodic review by, and may be revised downward or revoked at the sole discretion of, A.M. Best.

If the rating of any of the companies in our Insurance Operations or Reinsurance Operations is reduced from its current level by A.M. Best, our competitive position in the insurance industry could suffer, and it could be more difficult for us to market our insurance products. A downgrade could result in a significant reduction in the number of insurance contracts we write and in a substantial loss of business, as such business could move to other competitors with higher ratings, thus causing premiums and earnings to decrease.

We Cannot Guarantee that Our Reinsurers Will Pay in a Timely Fashion, if At All, and as a Result, We Could Experience Losses.

We cede a portion of gross premiums written by our Insurance Operations to third party reinsurers under reinsurance contracts. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred, it does not relieve us of our liability to our policyholders. Upon payment of claims, we will bill our reinsurers for their share of such claims. Our reinsurers may not pay the reinsurance receivables that they owe to us or they may not pay such receivables on a timely basis. If our reinsurers fail to pay us or fail to pay us on a timely basis, our financial results would be adversely affected. Lack of reinsurer liquidity, perceived improper underwriting or claim handling by us, and other factors could cause a reinsurer not to pay.

As of December 31, 2007, we had $719.7 million of reinsurance receivables, and $520.8 million of collateral was held in trust to support our reinsurance receivables. Our reinsurance receivables, net of collateral held, were $198.9 million. We also had $23.0 million of prepaid reinsurance premiums, net of collateral held. As of December 31, 2007, our largest reinsurer represented approximately 43.0% of our reinsurance receivables, or $321.7 million, and our second largest reinsurer represented approximately 29.5% of our reinsurance receivables, or $220.3 million. As of December 31, 2007, we had committed collateral of $278.0 million and $194.2 million from our largest reinsurer and second largest reinsurer, respectively. See “Business — Reinsurance of Underwriting Risk” in Item 1 of Part I of this report.

Our Investment Performance May Suffer as a Result of Adverse Capital Market Developments or Other Factors, Which Would In Turn Adversely Affect Our Financial Condition and Results of Operations.

We derive a significant portion of our income from our invested assets. As a result, our operating results depend in part on the performance of our investment portfolio. For 2007, our income derived from invested assets, was $78.3 million, net of investment expenses, including net realized gains of $1.0 million, or 66.3% of our pre-tax

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income. For 2006, our income derived from invested assets was $66.0 million, net of investment expenses, including net realized losses of $0.6 million, or 61.9% of our pre-tax income. Our operating results are subject to a variety of investment risks, including risks relating to general economic conditions, market volatility, interest rate fluctuations, liquidity risk and credit and default risk. The fair value of fixed income investments can fluctuate depending on changes in interest rates and the credit quality of underlying issuers. Generally, the fair market value of these investments has an inverse relationship with changes in interest rates, while net investment income earned by us from future investments in bonds will generally increase or decrease with changes in interest rates. Additionally, with respect to certain of our investments, we are subject to pre-payment or reinvestment risk.

Credit tightening could negatively impact our future investment returns and limit the ability to invest in certain classes of investments. Credit tightening may cause opportunities that are marginally attractive to not be financed, which could cause a decrease in the number of bond issuances. If marginally attractive opportunities are financed, they may be at higher interest rates, which would cause credit risk of such opportunities to increase. If new debt supply is curtailed, it could cause interest rates on securities that are deemed to be credit-worthy to decline. Funds generated by operations, sales, and maturities will need to be invested. If we invest during a tight credit market, our investment returns could be lower than the returns we are currently realizingand/or we may have to invest in higher risk securities.

With respect to our longer-term liabilities, we strive to structure our investments in a manner that recognizes our liquidity needs for our future liabilities. In that regard, we attempt to correlate the maturity and duration of our investment portfolio to our liability for insurance reserves. However, if our liquidity needs or general and specific liability profile unexpectedly changes, we may not be successful in continuing to structure our investment portfolio in that manner. To the extent that we are unsuccessful in correlating our investment portfolio with our expected liabilities, we may be forced to liquidate our investments at times and prices that are not optimal, which could have a material adverse affect on the performance of our investment portfolio. We refer to this risk as liquidity risk, which is when the fair value of an investment is not able to be realized due to low demand by outside parties in the marketplace.

We are also subject to credit risk due to non-payment of principal or interest. Current market conditions increase the risk that companies may default on their credit obligations. Several classes of securities that we hold, including our corporate securities, have default risk. As interest rates rise for companies that are deemed to be less creditworthy, there is a greater risk that they will be unable to pay contractual interest or principal on their debt obligations.

Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Although we attempt to take measures to manage the risks of investing in a changing interest rate environment, we may not be able to mitigate interest rate sensitivity effectively. Our mitigation efforts include maintaining a high-quality portfolio with a relatively short duration to reduce the effect of interest rate changes on book value. A significant portion of the investment portfolio matures each year, allowing for reinvestment at current market rates. The portfolio is actively managed, and trades are made to balance our exposure to interest rates. However, a significant increase in interest rates could have a material adverse effect on the market value of our fixed income investments.

We also have an equity portfolio that represented approximately 4.9% of our total investments and cash and cash equivalents portfolio, as of December 31, 2007. The performance of our equity portfolio is dependent upon a number of factors, including many of the same factors that affect the performance of our fixed income investments, although those factors sometimes have the opposite effect on performance as to the equity portfolio. Individual equity securities have unsystematic risk. We could experience market declines on these investments. We also have systematic risk, which is the risk inherent in the general market due to broad macroeconomic factors that affect all companies in the market. If the market indexes were to decline, we anticipate that the value of our portfolio would be negatively affected.

We have $64.5 million of investments in limited partnerships for which there is no readily available market valuation. Material assumptions and factors utilized in pricing these securities include future cash flows, constant default rates, recovery rates, and any market clearing activity that may have occurred since the prior month-end pricing period.

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Our limited partnership investments are not liquid. Several of the investment contracts state that we need to provide advance notice to the partnerships of up to three months if we wished to liquidate part or all of the investment. Several of the contracts have provisions that allow the general partner to delay distribution of funds if it would negatively impact the partnership. Our returns could be negatively affected if the market value of the partnership declines. We may miss the opportunity to reinvest proceeds from a partnership at attractive rates. If the general partner exercised a provision to not distribute funds, and we needed liquidity, we might be forced to liquidate other investments at a time when prices are not optimal.

As of December 31, 2007, we had approximately $5.8 million worth of investment exposure to subprime investments. Of that amount, approximately $3.7 million of those investments have been rated AAA by S&P. The remaining subprime exposure is rated AA or A. There were no write-downs on these investments during 2007.

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

We market and distribute our insurance products through a group of approximately 140 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, 2007, our top five non-affiliated agencies, all of which market more than one specific product, represented 23.4% of our gross premiums written. During 2007, we terminated our relationship with one of the agencies in the top five because it did not meet our profitability standards. That agency accounted for 4.3% of our gross premiums written for the year ended December 31, 2007. No one agency accounted for more that 5.9% of our gross premiums written. A loss of all or substantially all of the business produced by any more of these general agencies could have an adverse effect on our results of operations.

If Market Conditions Cause Reinsurance To Be More Costly or Unavailable, We May Be Required To Bear Increased Risks or Reduce the Level of Our Underwriting Commitments.

As part of our overall strategy of risk and capacity management, we purchase reinsurance for a portion of the risk underwritten by our insurance subsidiaries. Market conditions beyond our control determine the availability and cost of the reinsurance we purchase, which may affect the level of our business and profitability. Our third party reinsurance facilities are generally subject to annual renewal. We may be unable to maintain our current reinsurance facilities or obtain other reinsurance facilities in adequate amounts and at favorable rates. If we are unable to renew our expiring facilities or obtain new reinsurance facilities, either our net exposure to risk would increase or, if we are unwilling to bear an increase in net risk exposures, we would have to reduce the amount of risk we underwrite.

We May Not Be Successful in Executing Our Business Plan For Our Reinsurance Operations.

Our Reinsurance Operations consist solely of the operations of Wind River Reinsurance. Wind River Reinsurance was formed through the amalgamation of Wind River Bermuda and Wind River Barbados, with the amalgamated entity renamed Wind River Reinsurance Company, Ltd. Prior to the amalgamation, Wind River Bermuda and Wind River Barbados formed ourNon-U.S. Insurance Operations. Until the fourth quarter of 2005, ourNon-U.S. Insurance Operations offered direct third party excess and surplus lines primary insurance policies. In the fourth quarter of 2005, ourNon-U.S. Insurance Operations discontinued offering such products in order to focus on third party reinsurance products. In order to execute our business plan for our Reinsurance Operations, we will need to continue to hire qualified reinsurance professionals. We will also need to continue to establish the market relationships, procedures and controls necessary for our Reinsurance Operations to operate effectively and profitably. We may be unable to do so, and if we fail to successfully execute the business plan for our Reinsurance Operations or if the business written by our Reinsurance Operations generates losses, it would have an adverse impact on our results of operations and may prevent us from realizing the financial efficiencies that our Reinsurance Operations might otherwise provide.

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Our Results May Fluctuate as a Result of Many Factors, Including Cyclical Changes in the Insurance Industry.

Historically, the results of companies in the property and casualty insurance industry have been subject to significant fluctuations and uncertainties. The industry’s profitability can be affected significantly by:

•  competition;

•  capital capacity;

•  rising levels of actual costs that are not foreseen by companies at the time they price their products;

•  volatile and unpredictable developments, including man-made, weather-related and other natural catastrophes or terrorist attacks;

•  changes in loss reserves resulting from the general claims and legal environments as different types of claims arise and judicial interpretations relating to the scope of insurers’ liability develop; and

•  fluctuations in interest rates, inflationary pressures and other changes in the investment environment, which affect returns on invested assets and may affect the ultimate payout of losses.

The demand for property and casualty insurance and reinsurance can also vary significantly, rising as the overall level of economic activity increases and falling as that activity decreases. The property and casualty insurance industry historically is cyclical in nature. These fluctuations in demand and competition could produce underwriting results that would have a negative impact on our consolidated results of operations and financial condition.

We Face Significant Competitive Pressures in Our Business that Could Cause Demand for Our Products to Fall and Adversely Affect Our Profitability.

We compete with a large number of other companies in our selected lines of business. We compete, and will continue to compete, with major U.S. andNon-U.S. insurers and other regional companies, as well as mutual companies, specialty insurance companies, reinsurance companies, underwriting agencies and diversified financial services companies. Our competitors include, among others: American International Group, Argo Group International Holdings, Ltd., Berkshire Hathaway, Century Surety, Great American Insurance Group, HCC Insurance Holdings, Inc., IFG Companies, James River Insurance Group, Markel Corporation, Nationwide Insurance, Navigators Insurance Group, Philadelphia Consolidated Group, RLI Corporation, W.R. Berkley Corporation, and Western World Insurance Group. Some of our competitors have greater financial and marketing resources than we do. Our profitability could be adversely affected if we lose business to competitors offering similar or better products at or below our prices.

A number of recent, proposed or potential legislative or industry developments could further increase competition in our industry. These developments include an influx of new capital that resulted from the formation of new insurers in the marketplace and existing companies that attempted to expand their business as a result of better pricing or terms,and/or their willingness to assume additional risk, legislative mandates for insurers to provide certain types of coverage in areas where existing insurers do business which could eliminate the opportunities to write those coverages, and proposed federal legislation which would establish national standards for state insurance regulation. These developments could make the property and casualty insurance marketplace more competitive by increasing the supply of insurance capacity. Accordingly, these developments could have an adverse effect on our earnings. New competition from these developments could cause the demand for insurance to fall or the expense of customer acquisition and retention to increase, either of which could have a material adverse effect on our growth and profitability.

Our General Agencies Typically Pay the Insurance Premiums On Business They Have Bound To Us On a Monthly Basis. This Accumulation of Balances Due To Us Exposes Us To a Credit Risk.

Insurance premiums generally flow from the insured to their retail broker, then into a trust account controlled by our professional general agencies. Our general agencies are typically required to forward funds, net of

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commissions, to us following the end of each month. Consequently, we assume a degree of credit risk on the aggregate amount of these balances that have been paid by the insured but have yet to reach us.

As a Property and Casualty Insurer and Reinsurer, We Could Face Losses From Terrorism and Political Unrest.

We may have exposure to losses resulting from acts of terrorism and political instability. Even if reinsurers are able to exclude coverage for terrorist acts or price that coverage at rates that we consider unattractive, direct insurers, like our insurance company subsidiaries, might not be able to likewise exclude terrorist acts because of regulatory constraints. If this does occur, we, in our capacity as a primary insurer, would have a significant gap in our reinsurance protection and would be exposed to potential losses as a result of any terrorist acts. These risks are inherently unpredictable, although recent events may lead to increased frequency and severity. It is difficult to predict occurrence of such events with statistical certainty or to estimate the amount of loss per occurrence they will generate.

TRIA, which was extended with the enactment of TRIPRA in 2007, was enacted to ensure availability of insurance coverage for defined terrorist acts in the United States. This law requires insurers writing certain lines of property and casualty insurance, including us, to offer coverage against certified acts of terrorism causing damage within the United States or to U.S. flagged vessels or aircraft. In return, the law requires the federal government, should an insurer comply with the procedures of the law, to indemnify the insurer for 90% of covered losses, exceeding a deductible, based on a percentage of direct earned premiums for the previous calendar year, up to an industry limit of $100 billion resulting from covered acts of terrorism. For 2008, our deductible for certified acts of terrorism was 20% of the full year of our direct earned premium for the year ended December 31, 2007 or $121.1 million. In 2007, $1.0 million of our direct earned premium was for the coverage subject to TRIA. Under TRIPRA, the existing program triggers, deductibles, aggregate industry retention, and co-payments remain the same, and the distinction between foreign and domestic acts of terrorism is eliminated, thus making losses for domestic acts of terrorism eligible for reimbursement.

Because We Provide Our General Agencies with Specific Quoting and Binding Authority, If Any of Them Fail To Comply With Our Pre-Established Guidelines, Our Results of Operations Could Be Adversely Affected.

We market and distribute our insurance products through a group of approximately 140 professional general agencies that have limited quoting and binding authority and that in turn sell our insurance products to insureds through retail insurance brokers. These agencies can bind certain risks without our initial approval. If any of these professional general agencies fail to comply with our underwriting guidelines and the terms of their appointment, we could be bound on a particular risk or number of risks that were not anticipated when we developed the insurance products or estimated loss and loss adjustment expenses. Such actions could adversely affect our results of operations.

Our Holding Company Structure and Regulatory Constraints Limit Our Ability to Receive Dividends from Our Subsidiaries in Order to Meet Our Cash Requirements.

United America Indemnity is a holding company and, as such, has no substantial operations of its own or assets other than its ownership of the shares of its direct and indirect subsidiaries. Dividends and other permitted distributions from insurance subsidiaries, which include payment for equity awards granted by United America Indemnity to employees of such subsidiaries, are expected to be United America Indemnity’s sole source of funds to meet ongoing cash requirements, including debt service payments and other expenses.

Due to our corporate structure, any dividends that United America Indemnity receives from its subsidiaries must pass through Wind River Reinsurance. The inability of Wind River Reinsurance to pay dividends to United America Indemnity in an amount sufficient to enable United America Indemnity to meet its cash requirements at the holding company level could have a material adverse effect on its operations.

Bermuda law does not permit payment of dividends or distributions of contributed surplus by a company if there are reasonable grounds for believing that the company, after the payment is made, would be unable to pay its

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liabilities as they become due, or the realizable value of the company’s assets would be less, as a result of the payment, than the aggregate of its liabilities and its issued share capital and share premium accounts. Furthermore, pursuant to the Bermuda Insurance Act 1978, an insurance company is prohibited from declaring or paying a dividend during the financial year if it is in breach of its minimum solvency margin or minimum liquidity ratio or if the declaration or payment of such dividends would cause it to fail to meet such margin or ratio. See “Regulation — Bermuda Insurance Regulation” in Item 1 of Part I of this report.

In addition, the United National Insurance Companies and thePenn-America Insurance Companies, which are indirect subsidiaries of Wind River Reinsurance, are subject to significant regulatory restrictions limiting their ability to declare and pay dividends, which must first pass through Wind River Reinsurance before being paid to United America Indemnity. See “Regulation — U.S. Regulation of United America Indemnity” in Item 1 of Part I of this report. For 2008, 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 $46.9 million. For 2008, the maximum amount of distributions that could be paid by thePenn-America Insurance Companies as dividends under applicable laws and regulations without regulatory approval is approximately $23.5 million, including $7.7 million that would be distributed to United National Insurance Company or its subsidiary Penn Independent Corporation based on the December 31, 2007 ownership percentages.

Because We Are Heavily Regulated by the U.S. States in Which We Operate, We May Be Limited in the Way We Operate.

We are subject to extensive supervision and regulation in the U.S. states in which our Insurance Operations operate. This is particularly true in those states in which our insurance subsidiaries are licensed, as opposed to those states where our insurance subsidiaries write business on a surplus lines basis. The supervision and regulation relate to numerous aspects of our business and financial condition. The primary purpose of the supervision and regulation is the protection of our insurance policyholders and not our investors. The extent of regulation varies, but generally is governed by state statutes. These statutes delegate regulatory, supervisory and administrative authority to state insurance departments. This system of regulation covers, among other things:

•  standards of solvency, including risk-based capital measurements;

•  restrictions on the nature, quality and concentration of investments;

•  restrictions on the types of terms that we can include or exclude in the insurance policies we offer;

•  restrictions on the way rates are developed and the premiums we may charge;

•  standards for the manner in which general agencies may be appointed or terminated;

•  certain required methods of accounting;

•  reserves for unearned premiums, losses and other purposes; and

•  potential assessments for the provision of funds necessary for the settlement of covered claims under certain insurance policies provided by impaired, insolvent or failed insurance companies.

The statutes or the state insurance department regulations may affect the cost or demand for our products and may impede us from obtaining rate increases or taking other actions we might wish to take to increase our profitability. Further, we may be unable to maintain all required licenses and approvals and our business may not fully comply with the wide variety of applicable laws and regulations or the relevant authority’s interpretation of the laws and regulations. Also, regulatory authorities have discretion to grant, renew or revoke licenses and approvals subject to the applicable state statutes and appeal process. If we do not have the requisite licenses and approvals (including in some states the requisite secretary of state registration) or do not comply with applicable regulatory requirements, the insurance regulatory authorities could stop or temporarily suspend us from carrying on some or all of our activities or monetarily penalize us.

In recent years, the U.S. insurance regulatory framework has come under increased federal scrutiny, and some state legislators have considered or enacted laws that may alter or increase state regulation of insurance and reinsurance companies and holding companies. Moreover, NAIC, which is an association of the insurance

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commissioners of all 50 states and the District of Columbia, and state insurance regulators regularly reexamine existing laws and regulations. Changes in these laws and regulations or the interpretation of these laws and regulations could have a material adverse effect on our business.

As an example of increased federal involvement in insurance issues, in response to the tightening of supply in certain insurance and reinsurance markets resulting from, among other things, the September 11, 2001 terrorist attacks, TRIA was enacted to ensure the availability of insurance coverage for defined terrorist acts in the United States. This law, along with its extension through the enactment of TRIPRA, establishes a federal assistance program through December 31, 2014 to aid the commercial property and casualty insurance industry in covering claims related to future terrorism related losses and regulates the terms of insurance relating to terrorism coverage. This law could adversely affect our business by increasing underwriting capacity for our competitors as well as by requiring that we offer coverage for terrorist acts.

Certain Business Practices of the Insurance Industry Have Become the Subject of Investigations by the New York State Attorney General’s Office and Other Regulatory Agencies.

In 2004, the New York State’s Attorney General’s office filed a civil lawsuit accusing one of the nation’s largest insurance brokers of fraudulent behavior, including alleged participation in bid-rigging schemes and acceptance of improper payments from insurance carriers in exchange for agreeing not to shop quotes for their customers. At the same time, a number of property and casualty insurance companies have also been investigated by the New York State Attorney General’s office for their alleged participation in these schemes or agreements. Since that time similar allegations have been made against other brokers and insurance companies by other states’ attorney general offices and state insurance departments. Although some individual cases may remain open, most of these matters have been resolved through settlement, in some instances with large amounts being paid by those involved.

Subsequent to these initial activities, other states’ attorney general offices and state insurance departments have announced similar investigations. In November 2004, the Pennsylvania Department of Insurance has made inquiries of each of its licensed companies, including our Insurance Operations, concerning producer compensation arrangements. The Securities and Exchange Commission and the U.S. Department of Justice have also taken measures to investigate the use of insurance products designed to “smooth earnings.” Activities being investigated include participation in contingent commission structures and other agreements under which brokers receive additional commissions based upon the volumeand/or profitability of business placed with an insurer. We have not been the subject of any specific investigation or inquiry. We believe our commission programs and payments comply with applicable laws and regulations.

We May Require Additional Capital in the Future That May Not Be Available or Only Available On Unfavorable Terms.

Our future capital requirements depend on many factors, including the incurring of significant net catastrophe losses, our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. To the extent that we need to raise additional funds, any equity or debt financing for this purpose, if available at all, may be on terms that are not favorable to us. If we cannot obtain adequate capital, our business, results of operations and financial condition could be adversely affected.

Interests of Holders of Class A Common Shares May Conflict with the Interests of Our Controlling Shareholder.

Fox Paine & Company beneficially owns shares having approximately 86.1% of our total voting power. The percentage of our total voting power that Fox Paine & Company may exercise is greater than the percentage of our total shares that Fox Paine & Company beneficially owns because Fox Paine & Company beneficially owns a large number of Class B common shares, which have ten votes per share as opposed to Class A common shares, which have one vote per share. The Class A common shares and the Class B common shares generally vote together as a single class on matters presented to our shareholders. Based on the ownership structure of the affiliates of Fox Paine & Company that own these shares, these affiliates are subject to the voting restriction contained in our articles

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of association. As a result, Fox Paine & Company has and will continue to have control over the outcome of certain matters requiring shareholder approval, including the power to, among other things:

•  amend our memorandum or articles of association;

•  prevent schemes of arrangement of our subsidiaries’ assets; and

•  approve redemption of the common shares.

Fox Paine & Company will also be able to prevent or cause a change of control. Fox Paine & Company’s control over us, and Fox Paine & Company’s ability to prevent or cause a change of control, may delay or prevent a change of control, or cause a change of control to occur at a time when it is not favored by other shareholders. As a result, the trading price of our Class A common shares could be adversely affected.

In addition, we have agreed to pay Fox Paine & Company annual management fees of $1.5 million. Fox Paine & Company may in the future make significant investments in other insurance or reinsurance companies. Some of these companies may compete with us or with our subsidiaries. Fox Paine & Company is not obligated to advise us of any investment or business opportunities of which they are aware, and they are not prohibited or restricted from competing with us or with our subsidiaries.

Our Controlling Shareholder Has the Contractual Right to Nominate a Majority of the Members of Our Board of Directors.

Under the terms of a shareholders agreement between us and Fox Paine & Company, Fox Paine & Company has the contractual right to nominate a majority of the members of our Board of Directors. Our Board of Directors currently consists of seven directors, five of whom were nominated by Fox Paine & Company: Messrs. Saul A. Fox, Seth J. Gersch, Michael J. Marchio, Stephen A. Cozen, and James R. Kroner.

Our Board of Directors, in turn, and subject to its fiduciary duties under Cayman Islands law, appoints the members of our senior management, who also have fiduciary duties to the Company. As a result, Fox Paine & Company effectively has the ability to control the appointment of the members of our senior management and to prevent any changes in senior management that other shareholders, or that other members of our Board of Directors, may deem advisable.

Because We Rely on Certain Services Provided by Fox Paine & Company, the Loss of Such Services Could Adversely Affect Our Business.

During 2005, 2006, and 2007, Fox Paine & Company provided certain management services to us, particularly with respect to our merger withPenn-America Group, Inc., our acquisition of Penn Independent Corporation, and the sale of substantially all of the assets of our Agency Operations. To the extent that Fox Paine & Company is unable or unwilling to provide similar services in the future, and we are unable to perform those services ourselves or we are unable to secure replacement services, our business could be adversely affected.

Risks Related to Taxation

We May Become Subject To Taxes in the Cayman Islands or Bermuda in the Future, Which May Have a Material Adverse Effect on our Results of Operations.

United America Indemnity has been incorporated under the laws of the Cayman Islands as an exempted company and, as such, obtained an undertaking on September 2, 2003 from the Governor in Council of the Cayman Islands substantially that, for a period of 20 years from the date of such undertaking, no law that is enacted in the Cayman Islands imposing any tax to be levied on profit or income or gains or appreciation shall apply to us and no such tax and no tax in the nature of estate duty or inheritance tax will be payable, either directly or by way of withholding, on our common shares. This undertaking would not, however, prevent the imposition of taxes on any person ordinarily resident in the Cayman Islands or any company in respect of its ownership of real property or leasehold interests in the Cayman Islands. Given the limited duration of the undertaking, we cannot be certain that we will not be subject to Cayman Islands tax after the expiration of the20-year period.

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Wind River Reinsurance was formed in 2006 through the amalgamation of ourNon-U.S. Operations. We received an assurance from the Bermuda Minister of Finance, under the Bermuda Exempted Undertakings Tax Protection Act 1966, as amended, that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to Wind River Reinsurance or any of its operations, shares, debentures or other obligations through March 28, 2016. Given the limited duration of the assurance, we cannot be certain that we will not be subject to any Bermuda tax after March 28, 2016.

Following the expiration of the periods described above, we may become subject to taxes in the Cayman Islands or Bermuda, which may have a material adverse effect on our results of operations.

United America Indemnity or Wind River Reinsurance May Be Subject to U.S. Tax That May Have a Material Adverse Effect on United America Indemnity’s, or Wind River Reinsurance’s Results of Operations.

United America Indemnity is a Cayman Islands company and Wind River Reinsurance is a Bermuda company. We have managed our business in a manner designed to reduce the risk that United America Indemnity and Wind River Reinsurance will be treated as being engaged in a U.S. trade or business for U.S. federal income tax purposes. However, because there is considerable uncertainty as to the activities that constitute being engaged in a trade or business within the United States, we cannot be certain that the U.S. Internal Revenue Service will not contend successfully that United America Indemnity or Wind River Reinsurance will be engaged in a trade or business in the United States. If United America Indemnity or Wind River Reinsurance were considered to be engaged in a business in the United States, we could be subject to U.S. corporate income and branch profits taxes on the portion of our earnings effectively connected to such U.S. business, in which case our results of operations could be materially adversely affected.

The Impact of the Cayman Islands’ Letter of Commitment or Other Concessions to the Organization for Economic Cooperation and Development to Eliminate Harmful Tax Practices Is Uncertain and Could Adversely Affect Our Tax Status in the Cayman Islands or Bermuda.

The Organization for Economic Cooperation and Development, which is commonly referred to as the OECD, has published reports and launched a global dialogue among member and non-member countries on measures to limit harmful tax competition. These measures are largely directed at counteracting the effects of tax havens and preferential tax regimes in countries around the world. In the OECD’s report dated April 18, 2002, the Cayman Islands and Bermuda were not listed as uncooperative tax haven jurisdictions because each had previously committed itself to eliminate harmful tax practices and to embrace international tax standards for transparency, exchange of information and the elimination of any aspects of the regimes for financial and other services that attract business with no substantial domestic activity. We are not able to predict what changes will arise from the commitment or whether such changes will subject us to additional taxes.

There Is A Risk That Interest Paid By Our U.S. Subsidiaries To a Luxembourg Affiliate May Be Subject to 30% U.S. Withholding Tax.

U.A.I. (Luxembourg) Investment, S.à r.l., an indirectly owned Luxembourg subsidiary of Wind River Reinsurance, owns two notes issued by United America Indemnity Group, Inc., a Delaware corporation. Under U.S. federal income tax law, interest paid by a U.S. corporation to anon-U.S. shareholder is generally subject to a 30% withholding tax, unless reduced by treaty. The income tax treaty between the United States and Luxembourg (the “Luxembourg Treaty”) generally eliminates the withholding tax on interest paid to qualified residents of Luxembourg. Were the IRS to contend successfully that U.A.I. (Luxembourg) Investment, S.à r.l. is not eligible for benefits under the Luxembourg Treaty, interest paid to U.A.I. (Luxembourg) Investment, S.à r.l. by United America Indemnity Group, Inc. would be subject to the 30% withholding tax. Such tax may be applied retroactively to all previous years for which the statute of limitations has not expired, with interest and penalties. Such a result may have a material adverse effect on our financial condition and results of operation.

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There is a Risk That Interest Income Imputed to Our Irish Affiliate May be Subject to 25% Irish Income Tax

U.A.I. (Ireland) Limited is a private limited liability company incorporated under the laws of Ireland. The company is a resident taxpayer fully subject to Ireland corporate income tax of 12.5% on trading income and 25.0% on non-trading income, including interest and dividends from foreign companies. The company intends to manage its operations in such a way that there will not be any material taxable income generated in Ireland under Irish law. However, there can be no assurance from the Irish authorities that a law may not be enacted that would impute income to U.A.I. (Ireland) Limited in the future or retroactively arising out of our current operations.

Item 1B.   Unresolved Staff Comments

None.

Item 2.   Properties

We lease approximately 71,000 square feet of office space in Bala Cynwyd, Pennsylvania, which serves as the headquarters location for our Insurance Operations, pursuant to a lease that expires on December 31, 2013. Through March 2007, certain of our subsidiaries leased approximately 50,000 square feet of office space in a Hatboro, Pennsylvania property that was purchased by AIS in October 2005. This property was sold on March 30, 2007. As part of the integration of our Insurance Operations, we moved all of our employees from the Hatboro location to Bala Cynwyd during 2007. In addition, we lease a small amount of additional office space in other locations in the United States, and Hamilton, Bermuda. The Hamilton, Bermuda office space is used by our Reinsurance Operations.

Item 3.   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. See Note 10 in the notes to the consolidated financial statements in Item 8 of Part II of this report for more details concerning our legal proceedings.

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

On January 28, 2008, at an extraordinary general meeting of shareholders, our shareholders approved an amendment to our Share Incentive Plan that allows for the repricing, without shareholder approval, of stock options and other stock-based awards granted under the Share Incentive Plan. There were 124,394,867 votes in favor of the proposal, 13,122,774 votes against the proposal, and 345,309 abstentions and broker non-votes.

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PART II

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for Our Class A Common Shares

Our Class A common shares, par value $0.0001 per share, began trading on the Nasdaq Global Market, formerly the Nasdaq National Market, under the symbol “UNGL” on December 16, 2003. On March 14, 2005 we changed our symbol to “INDM.” The following table sets forth, for the periods indicated, the high and low sales prices of our Class A common shares, as reported by the Nasdaq Global Select Market:

	High		Low
Fiscal Year Ended December 31, 2007:
First Quarter	$	25.48	$	22.41
Second Quarter		26.49		23.05
Third Quarter		25.41		18.31
Fourth Quarter		22.99		18.95
Fiscal Year Ended December 31, 2006:
First Quarter	$	23.51	$	17.84
Second Quarter		25.82		19.50
Third Quarter		23.25		19.04
Fourth Quarter		25.99		20.00

There is no established public trading market for our Class B common shares, par value $0.0001 per share.

As of February 25, 2008, there were approximately 5,142 beneficial holders of record of our Class A common shares. As of February 25, 2008, there were 10 holders of record of our Class B common shares, all of whom are affiliates of Fox Paine & Company.

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Performance of Our Class A Common Shares

	12/16/03		12/31/03		12/31/04		12/31/05		12/31/06		12/31/07
United America Indemnity, Ltd.	$	100.0	$	103.9	$	109.5	$	108.0	$	149.0	$	117.2
NASDAQ Insurance Index		100.0		103.1		123.4		134.9		151.2		150.0
NASDAQ Composite Index		100.0		104.1		113.1		114.6		125.5		137.8

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Purchases of Our Class A Common Shares

Our Share Incentive Plan allows employees to surrender shares of our Class A common shares as payment for the tax liability incurred upon the vesting of restricted stock that was issued under our Share Incentive Plan. During 2007, we purchased an aggregate of 7,386 of surrendered Class A common shares from our employees for $0.2 million. All shares purchased from employees are held as treasury stock and recorded at cost.

On October 24, 2007, we announced that our Board of Directors authorized us to repurchase up to $50.0 million of our Class A common shares through a share repurchase program over the subsequent twelve months. This repurchase was completed in January 2008. All shares repurchased under this program are held as treasury stock and recorded at cost.

The following table provides information with respect to the Class A common shares that were surrendered or repurchased in 2007:

								Approximate
						Total Number of		Dollar Value
						Shares Purchased		of Shares That
	Total Number			Average		as Part of Publicly		May Yet Be
	of Shares			Price Paid		Announced Plan		Purchased Under the
Period(1)	Purchased			Per Share		or Program		Plan or Program(2)
January 1-31, 2007		1,191		$	23.65		—	$	—
February 1-28, 2007		379		$	23.63		—	$	—
October 1-31, 2007		3,297		$	22.06		—	$	50,000,000
November 1-30, 2007		287,603	(3)	$	20.11		285,400	$	44,264,212
December 1-31, 2007		2,161,617	(4)	$	19.68		2,161,301	$	1,740,614
Total		2,454,087		$	19.73		2,446,701		N/A

(1)	Based on settlement date.
(2)	Approximate dollar value of shares is as of the last date of the applicable month.
(3)	Includes 2,203 shares surrendered by employees as payment of taxes withheld on the vesting of restricted stock.
(4)	Includes 316 shares surrendered by employees as payment of taxes withheld on the vesting of restricted stock.

On December 31, 2007, in connection with the share repurchase program, we contracted to purchase 5,000 shares for $0.1 million which did not settle until January 4, 2008. As a result, these shares are not included in the above table.

During January 2008, an additional 88,362 shares were repurchased, including the 5,000 shares mentioned above, as part of the share repurchase program. Including the January 2008 repurchases, a total of 2,535,063 shares were repurchased at an average purchase price of $19.72 per share as part of the share repurchase program.

On February 11, 2008, we announced that our Board of Directors authorized us to repurchase up to an additional $50.0 million of our Class A common shares. The timing and amount of the repurchase transactions under this program will depend on market conditions and other factors.

Dividend Policy

We did not declare or pay cash dividends on any class of our common shares in 2007 or 2006, and we do not anticipate paying any cash dividends on any class of our common shares in the foreseeable future. However, this is subject to future determinations by the Board of Directors based on our results, financial conditions, amounts required to grow our business, and other factors deemed relevant by the Board.

We are a holding company and have no direct operations. Our ability to pay dividends depends, in part, on the ability of Wind River Reinsurance, the Luxembourg Companies, the United National Insurance Companies, and thePenn-America Insurance Companies to pay dividends. Wind River Reinsurance, the United National Insurance Companies, and thePenn-America Insurance Companies are subject to significant regulatory restrictions limiting their ability to declare and pay dividends.

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In 2007, the United National Insurance Companies andPenn-America Insurance Companies declared and paid dividends of $23.3 million and $14.8 million, respectively. For 2008, 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 $46.9 million. For 2008, the maximum amount of distributions that could be paid by thePenn-America Insurance Companies as dividends under applicable laws and regulations without regulatory approval is approximately $23.5 million, including $7.7 million that would be distributed to United National Insurance Company or its subsidiary Penn Independent Corporation based on the December 31, 2007 ownership percentages.

For 2008, 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 statutory 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 2007 statutory financial statements that will be filed in 2008, Wind River Reinsurance could pay a dividend of up to $220.4 million without requesting BMA approval.

Under the Companies Act, Wind River Reinsurance may only declare or pay a dividend if Wind River Reinsurance has no reasonable grounds for believing that it is, or would after the payment be, unable to pay its liabilities as they become due, or if the realizable value of its assets would not be less than the aggregate of its liabilities and its issued share capital and share premium accounts.

In 2007, profit distributions (not in respect to liquidations) by the Luxembourg Companies were generally subject to Luxembourg dividend withholding tax at a rate of 15%, unless a domestic law exemption or a lower tax treaty rate applies. There is no Luxembourg dividend withholding tax in 2008. Dividends paid by any of the Luxembourg Companies to their Luxembourg resident parent company are exempt from Luxembourg dividend withholding tax, provided that at the time of the dividend distribution, the resident parent company has held (or commits itself to continue to hold) 10% or more of the nominal paid up capital of the distributing entity or, in the event of a lower percentage participation, a participation having an acquisition price of Euro 1.2 million or more for a period of at least twelve months.

For a discussion of factors affecting our ability to pay dividends, see “Business — Regulation” in Item 1 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Sources and Uses of Funds and — Capital Resources” in Item 7 of Part II, and the notes to the consolidated financial statements in Item 8 of Part II of this report.

Our common shareholders are not subject to taxes, including withholding provisions, under existing laws and regulations of the Cayman Islands.

Recent Sales of Unregistered Securities

None.

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Item 6.   Selected Financial Data

The following information presented in this Item 6 Selected Financial Data includes historical financial data for United America Indemnity only, and excludes information relating to the business and operations ofPenn-America Group and Penn Independent Group prior to our acquisition of them on January 24, 2005. Prior data relating toPenn-America Group, Inc. and Penn Independent Corporation can be found in our Current Report onForm 8-K/A, filed on April 7, 2005.

The following table sets forth selected consolidated historical financial data for United America Indemnity (“Successor”) and, for periods prior to September 5, 2003, Wind River Investment Corporation, which is considered United America Indemnity’s predecessor for accounting purposes (“Predecessor”). This selected financial data is derived from the consolidated financial statements and accompanying notes of United America Indemnity and Wind River Investment Corporation included elsewhere in this report. This selected historical financial data should be read together with the consolidated financial statements and accompanying notes of United America Indemnity and Wind River Investment Corporation and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report.

									Successor			Predecessor
									For the			For the
									Period from			Period from
									September 6, 2003 to			January 1, 2003 to
	Successor For the Years Ended December 31,								December 31,			September 5,
	2007		2006		2005		2004		2003			2003
(Dollars in thousands)
Consolidated Statements of Operations Data:
Gross premiums written	$	563,112	$	652,965	$	622,878	$	409,073	$	157,757		$	510,623
Net premiums written		490,535		560,535		519,733		280,208		61,265			139,116
Net premiums earned		536,323		546,469		475,430		230,140		51,912			128,254
Total revenues		614,632		612,437		523,102		252,982		58,187			147,132
Income from continuing operations		98,886		89,338		64,751		35,852		6,097			24,604
Net income		98,917		99,418		65,593		37,047		52,521			24,604
Per share data:
Income from continuing operations	$	98,886	$	89,338	$	64,751	$	35,852	$	(23,153	)	$	24,604
Basic		2.67		2.43		1.81		1.27		(1.14	)		246,040
Diluted		2.65		2.41		1.77		1.24		(1.41	)		246,040
Net income available to common shareholders	$	98,917	$	99,418	$	65,593	$	37,047	$	23,271		$	24,604
Basic		2.67		2.70		1.83		1.31		1.42			246,040
Diluted		2.65		2.68		1.79		1.28		1.42			246,040
Weighted-average number of shares outstanding
Basic		37,048,491		36,778,276		35,904,127		28,259,173		16,372,283			100
Diluted		37,360,703		37,157,783		36,589,902		28,836,195		16,372,283			100

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										Successor			Predecessor
										For the			For the
										Period from			Period from
										September 6, 2003 to			January 1, 2003 to
	Successor For the Years Ended December 31,									December 31,			September 5,
	2007		2006		2005			2004		2003			2003
(Dollars in thousands)
Insurance Operating Ratios based on our GAAP Results:(1)
Before purchase accounting adjustments:
Net losses and loss adjustment expense ratio(2)(4)		55.8		55.7		58.0			57.1		65.2			66.4
Underwriting expense ratio(3)		32.5		31.8		33.2			30.1		33.8			24.8
Combined ratio(2)(3)(4)		88.3		87.5		91.2			87.2		99.0			91.2
Impact of purchase accounting adjustments:
Net losses and loss adjustment expense ratio		—		—		2.6			1.1		9.0			—
Underwriting expense ratio		—		—		(2.9	)		0.2		(8.1	)		—
Combined ratio		—		—		(0.3	)		1.3		0.9			—
As reported, after purchase accounting adjustments:
Net losses and loss adjustment expense ratio(2)(4)		55.8		55.7		60.6			58.2		74.2			66.4
Underwriting expense ratio(3)		32.5		31.8		30.3			30.3		25.7			24.8
Combined ratio(2)(3)(4)		88.3		87.5		90.9			88.5		99.9			91.2
Net/gross premiums written		87.1		85.8		83.4			68.5		38.8			27.2
Financial Position as of Last Day of Period:
Total investments and cash and cash equivalents	$	1,765,103	$	1,656,664	$	1,419,564		$	924,070	$	848,309		$	667,836
Reinsurance receivables, net of allowance		719,706		982,502		1,278,156			1,531,863		1,762,988			1,842,667
Total assets		2,775,172		2,984,616		3,102,002			2,625,937		2,848,761			2,837,545
Senior notes payable		90,000		90,000		90,000			—		—			—
Senior notes payable to related party		—		—		—			72,848		72,848			—
Junior subordinated debentures		46,393		61,857		61,857			30,929		30,929			—
Unpaid losses and loss adjustment expenses		1,503,237		1,702,010		1,914,224			1,876,510		2,059,760			2,120,594
Total shareholders’ equity		836,276		763,270		639,927			432,553		380,792			296,917

(1)

Our insurance operating 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.

(2)

Our 2007 net losses and loss adjustment expense ratio and combined ratio were impacted by $24.7 million of favorable development related to prior year reserves. The reduction was comprised of a net reduction of $42.5 million for primary liability, umbrella and excess, construction defect, and lines in run-off due to both lower than expected frequency and severity emergence, offset by a $17.8 million increase in net reserves for unallocated loss adjustment expenses (“ULAE”) and asbestos and environmental (“A&E”). We also reduced our reinsurance reserve allowance by $4.4 million due to better than anticipated collections from troubled reinsurers and loss emergence that has been lower than anticipated. Our 2006 net losses and loss adjustment expense ratio and combined ratio were impacted by $7.0 million of favorable development related to construction defect losses as well as primary general liability, umbrella and excess, and asbestos and environmental, and by $8.6 million as a reduction of our reinsurance reserve allowance. Our 2005 net losses and loss adjustment expense ratio and combined ratio were impacted by $1.3 million due to lower than anticipated frequency in our animal mortality program. See “Results of Operations” in Item 7 of Part II of this

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	report for a discussion of the impact of these items on the net losses and loss adjustment expenses and combined ratios.
(3)	Our underwriting expense ratio for the period January 1, 2003 to September 5, 2003 includes a 4.7 percentage point increase attributable to a $4.2 million expense for stock appreciation rights and retention payments made to certain key executives upon completion of the acquisition and a $1.8 million allowance for doubtful reinsurance receivables.
(4)	Our net losses and loss adjustment expense ratios and combined ratios for 2005 and 2004 include $8.0 million and $1.7 million, respectively, of catastrophic losses related to named storms. See “Results of Operations” in Item 7 of Part II of this report for a discussion of the impact of these losses on the combined ratios. Our combined ratio for the period September 6, 2003 to December 31, 2003 includes $0.9 million of deferred compensation option expense.

No cash dividends were declared on common stock in any year presented in the table.

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Item 7.   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 7 and “Risk Factors” in Item 1A above for more information. You should review “Risk Factors” in Item 1A above 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.

Recent Developments

On January 28, 2008, our shareholders approved an amendment to the Share Incentive Plan that allows for the repricing, without shareholder approval, of stock options and other stock-based awards granted under the Share Incentive Plan.

On February 5, 2008, we entered into an amended and restated employment agreement with Larry A. Frakes, our President and Chief Executive Officer, which amended and restated Mr. Frakes’ original employment agreement that was entered into on May 10, 2007. The amended and restated employment agreement changes and clarifies the terms of options granted under the original employment agreement.

On February 11, 2008, we announced that our Board of Directors authorized us to repurchase up to an additional $50.0 million of our Class A common shares. The timing and amount of the repurchase transactions under this program will depend on market conditions and other factors. Approximately 2.4 million shares were repurchased in 2007 under the initial share repurchase program that was authorized in October 2007. As a result, we had approximately 22.3 million Class A common shares outstanding at December 31, 2007 compared to approximately 24.5 million shares outstanding at December 31, 2006. Including Class B common shares, there were approximately 35.0 million common shares outstanding at December 31, 2007 compared to approximately 37.2 million outstanding shares at December 31, 2006.

Overview

Our Insurance Operations distribute property and casualty insurance products through a group of approximately 140 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. We operate predominantly in the excess and surplus lines marketplace. To manage our operations, we differentiate them by product classification. These product classifications are:1) Penn-America, which includes property and general liability products for small commercial businesses distributed through a select network of wholesale general agents with specific binding authority; 2) United National, which includes property, general liability, and professional lines products distributed through program administrators with specific binding authority; and 3) Diamond State, which includes property, general liability, and professional lines products distributed through wholesale brokers and program administrators with specific binding authority.

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, other investment expenses, and income taxes. 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

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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, salaries and benefits for company personnel whose services relate to the support of corporate activities, and taxes incurred. Interest expense consists primarily of interest on senior notes payable, junior subordinated debentures, and funds held on behalf of others.

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 (see Note 2 of the “Notes to Consolidated Financial Statements”) contained in Item 8 of Part II of this report. 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 general liability, professional liability, products liability, commercial automobile liability, and excess and umbrella. Short-tail exposures include property, commercial automobile physical damage, and equine mortality. To manage our insurance operations, we differentiate them by product classifications, which arePenn-America, United National , and Diamond State. For further discussion about our product classifications, see “General — Our Insurance Operations” in Item 1 of Part I of this report. Each of our product classifications contain both long-tail and short-tail exposures. Every reserve category is analyzed by our actuaries each quarter. The analyses generally include reviews of losses gross of reinsurance and net of reinsurance.

In the first, second, and fourth quarters of 2007, the reserve analyses performed by our actuaries were reviewed by an independent actuary. Management did not rely on this analysis, but the information was used to corroborate the work performed by our internal actuarial staff. During the third quarter of 2007, we elected not to have our losses reviewed by an independent actuary. We now anticipate that in 2008 and thereafter an independent actuary will review our reserves quarterly.

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;

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•  Bornhuetter-Ferguson method using premiums and incurred loss; and

•  Average Loss method.

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 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

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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 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 losses 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 Incurredand/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 Incurredand/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 losses from construction defect and asbestos and environmental (“A&E”).

For construction defect losses, our actuaries organize losses 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.

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. In response to these developments, management increased gross and net A&E reserves during the third quarter of 2007 to reflect its best estimate of A&E exposures. 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 5,000 asbestos-related bodily injury claims and others that continue to be filed. Management is continuing to gather information to enable it to both evaluate the numerous factual and legal issues that are presented by this lawsuit and to estimate the timing of any payments that may be required. Until that information is obtained and analyzed, it is difficult to predict the ultimate financial exposure that this matter presents.

In previous quarters, the reserve analyses performed by our actuaries resulted in actuarial point estimates. The results of the detailed reserve reviews were summarized and discussed with our senior management to determine the best estimate of reserves. This group considered many factors in making this decision. The factors included, but

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were 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. The carried reserve may have differed 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 have been quantifiable through actuarial analysis.

In establishing our reserves as of December 31, 2007, our actuaries considered the factors noted in the preceding paragraph in arriving at an actuarial point estimate. As of December 31, 2007, the actuarial point estimate is equal to management’s best estimate, which was recorded as the loss reserve. Management’s best estimate is as of a particular point in time and is based upon known facts, our actuarial analyses, current law, and our judgment. This resulted in carried gross and net reserves of $1,503.2 million and $800.9 million, respectively, as of December 31, 2007. A breakout of our gross and net reserves as of December 31, 2007 is as follows:

	Gross Reserves(1)
	Case		IBNR(2)		Total
(Dollars in thousands)
Insurance Operations:
Penn-America	$	176,788	$	403,376	$	580,164
United National		243,226		533,832		777,057
Diamond State		54,677		84,446		139,123
Total Insurance Operations		474,691		1,021,654		1,496,345
Reinsurance Operations:
Wind River Reinsurance		73		6,819		6,892
Total	$	474,764	$	1,028,473	$	1,503,237

	Net Reserves(1)(3)
	Case		IBNR(2)		Total
(Dollars in thousands)
Insurance Operations:
Penn-America	$	158,624	$	327,302	$	485,925
United National		55,059		159,140		214,199
Diamond State		36,658		59,543		96,201
Total Insurance Operations		250,341		545,984		796,325
Reinsurance Operations:
Wind River Reinsurance		73		4,486		4,559
Total	$	250,414	$	550,470	$	800,884

(1)	Excludes the effects of our intercompany pooling arrangements and intercompany quota share reinsurance agreement.
(2)	Losses incurred but not reported.
(3)	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 estimated 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 or estimated. 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

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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.

The detailed reserve analyses that our actuaries complete use a variety of generally accepted actuarial methods and techniques to produce a number of estimates of ultimate loss. We determine our best 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 incurred but not reported (“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).

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 loss 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.

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If the actual levels of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management’s best estimate. We believe that frequency can be predicted with greater accuracy than severity. Therefore, we believe management’s best estimate is more sensitive to changes in severity than frequency. The following table, which we believe reflects a reasonable range of variability around our best estimate based on our historical loss experience and management’s judgment, reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity on our current accident year gross loss estimate of $328.3 million for claims occurring during the year ended December 31, 2007:

			Severity Change
			−10%			−5%			0%			5%			10%
(Dollars in thousands)
Frequency Change	(5	)%	$	(47,610	)	$	(32,014	)	$	(16,417	)	$	(821	)	$	14,776
	(3	)%		(41,700	)		(25,775	)		(9,850	)		6,074			21,999
	(2	)%		(38,745	)		(22,656	)		(6,567	)		9,522			25,611
	(1	)%		(35,790	)		(19,537	)		(3,283	)		12,970			29,223
	0	%		(32,835	)		(16,417	)		—			16,417			32,835
	1	%		(29,879	)		(13,298	)		3,283			19,865			36,446
	2	%		(26,924	)		(10,179	)		6,567			23,313			40,058
	3	%		(23,969	)		(7,059	)		9,850			26,760			43,670
	5	%		(18,059	)		(821	)		16,417			33,655			50,894

Our net reserves for losses and loss expenses of $800.9 million as of December 31, 2007 relate to multiple accident years. Therefore, the impact of changes in frequency and severity for more than one 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. For a listing of the ten reinsurers for which we have the largest reinsurance asset amounts as of December 31, 2007, see “Reinsurance of Underwriting Risk” in Item 1 of Part I of this report.

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 estimated 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, management carefully reviews securities with unrealized losses that have 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 to determine if the security should be impaired. For securities with

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significant declines in value for periods shorter than six months, the security is evaluated to determine if impairment is required.

For an analysis of our securities with gross unrealized losses as of December 31, 2007 and 2006, and for other than temporary losses that we recorded for the years ended December 31, 2007, 2006, and 2005, please see Note 4 to the consolidated financials statements in Item 8 of Part II 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 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 for the next five years will be as follows:

(Dollars in thousands)
2008	$	1,005
2009		1,005
2010		985
2011		938
2012		938

These amounts are 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 2008 and have concluded that goodwill and other indefinite lived assets were not impaired as of December 31, 2007. No events have occurred since then that would indicate that goodwill and other indefinite lived assets were impaired as of December 31, 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 are no valuation allowances as of December 31, 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.

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 6 to the consolidated financial statements in Item 8 of Part II of this report for a discussion of FIN 48.

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Our Business Segments

We manage our business through two business segments: Insurance Operations, which includes the operations of the United National Insurance Companies and thePenn-America Insurance Companies, and Reinsurance Operations, which are the operations of Wind River Reinsurance.

Our Reinsurance Operations segment resulted from the amalgamation of theNon-U.S. Insurance Operations into a single Bermuda based entity, Wind River Reinsurance, in September 2006. Our 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 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.

See “Business Segments” in Item 1 of Part I of this report for a description of our segments.

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

	Years Ended December 31,
	2007			2006			2005
(Dollars in thousands)
Insurance Operations premiums written:
Gross premiums written	$	536,835		$	652,965		$	622,878
Ceded premiums written		58,561			92,430			103,145
Net premiums written	$	478,274		$	560,535		$	519,733
Reinsurance Operations premiums written:
Gross premiums written	$	26,277		$	—		$	—
Ceded premiums written		14,016			—			—
Net premiums written	$	12,261		$	—		$	—
Revenues:(1)
Insurance Operations	$	530,516		$	546,469		$	475,430
Reinsurance Operations		5,807			—			—
Corporate(2)		78,309			65,968			47,672
Total revenues	$	614,632		$	612,437		$	523,102
Expenses:(1)
Insurance Operations	$	466,235		$	479,701	(3)	$	433,332	(4)
Reinsurance Operations		7,730			—			—
Corporate(5)		22,887			27,086			24,245
Subtotal		496,852			506,787			457,577
Intercompany eliminations		(367	)		(838	)		(1,088	)
Net expenses	$	496,485		$	505,949		$	456,489
Income (loss) before income taxes:(1)
Insurance Operations	$	64,281		$	66,768		$	42,098
Reinsurance Operations		(1,923	)		—			—
Corporate		55,422			38,882			23,427
Subtotal		117,780			105,650			65,525
Intercompany eliminations		367			838			1,088
Total income before income taxes	$	118,147		$	106,488		$	66,613
Insurance combined ratio analysis:(6)
Before purchase accounting adjustments:
Net losses and loss adjustment expense ratio		55.8			55.7			60.6
Other underwriting expense ratio		32.5			31.8			30.3
Combined ratio		88.3			87.5			90.9
Impact of purchase accounting adjustments:
Net losses and loss adjustment expense ratio		—			—			2.6
Other underwriting expense ratio		—			—			(2.9	)
Combined ratio		—			—			(0.3	)
As reported, after purchase accounting adjustments:
Net losses and loss adjustment expense ratio		55.8			55.7			63.2
Other underwriting expense ratio		32.5			31.8			27.4
Combined ratio		88.3			87.5			90.6

(1)	Excludes the results of our Agency Operations, which have been classified as discontinued operations for 2007, 2006, and 2005.
(2)	Comprised of net investment income and net realized investment gains (losses).

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(3)	Includes $2,223 from the predecessor of Wind River Reinsurance and excise tax of $2,932 related to offshore cessions.
(4)	Includes $3,741 from the predecessor of Wind River Reinsurance and excise tax of $2,741 related to offshore cessions.
(5)	Comprised of interest expense, excise tax, 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 insurance or reinsurance operations.
(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.

Results of Operations

Year Ended December 31, 2007 Compared with the Year Ended December 31, 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 $563.1 million for 2007, compared with $653.0 million for 2006, a decrease of $89.9 million or 13.8%.

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

					Increase /
	2007		2006		(Decrease)
(Dollars in thousands)
Insurance Operations:
Penn-America	$	286,439	$	390,260	$	(103,821	)
United National		132,311		154,114		(21,803	)
Diamond State		118,085		108,591		9,494
Total Insurance Operations		536,835		652,965		(116,130	)
Reinsurance Operations:
Wind River Reinsurance		26,277		—		26,277
Total	$	563,112	$	652,965	$	(89,853	)

•  Insurance Operations:

•  Penn-America gross premiums written decreased $103.8 million, or 26.6%, due to increased competition from both surplus lines and standard carriers and the cancellation of business that did not meet our profitability standards. Premium rates on renewal business on average were down 0.1% during 2007.

•  United National gross premiums written decreased $21.8 million, or 14.1%, primarily due to a decrease in a 100% reinsured property program, combined with a reduction in umbrella and non-owned auto business. Premium rates on renewal business on average were down 5.0% during 2007.

•  Diamond State gross premiums written increased $9.5 million, or 8.7%, primarily due to growth in our property and allied health brokerage products. Premium rates on renewal business on average were down 4.3% during 2007.

•  Reinsurance Operations:

•  Wind River Reinsurance gross premiums written increased $26.3 million. Wind River commenced writing third party reinsurance business during 2007 concentrating on excess and surplus lines as well as specialty business which it believes provide attractive risk/reward opportunities.

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Net premiums written, which equal gross premiums written less ceded premiums written, were $490.5 million for 2007, compared with $560.5 million for 2006, a decrease of $70.0 million or 12.5%. The ratio of net premiums written to gross premiums written was 87.1% for 2007 and 85.8% for 2006.

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

					Increase /
	2007		2006		(Decrease)
(Dollars in thousands)
Insurance Operations:
Penn-America	$	266,874	$	355,428	$	(88,554	)
United National		110,649		114,718		(4,069	)
Diamond State		100,751		90,389		10,362
Total Insurance Operations		478,274		560,535		(82,261	)
Reinsurance Operations:
Wind River Reinsurance		12,261		—		12,261
Total	$	490,535	$	560,535	$	(70,000	)

•  Insurance Operations:

•  Penn-America net premiums written decreased $88.6 million, or 24.9%, primarily due to increased competition from both surplus lines and standard carriers and the cancellation of business that did not meet our profitability standards.

•  United National net premiums written decreased $4.1 million, or 3.5%, primarily due to reductions in non-owned auto business.

•  Diamond State net premiums written increased $10.4 million, 11.5%, primarily due to growth in our property and allied health brokerage products.

•  Reinsurance Operations:

•  Wind River Reinsurance net premiums written increased $12.3 million. Wind River commenced writing third party reinsurance business during 2007 concentrating on excess and surplus lines as well as specialty business which it believes provide attractive risk/reward opportunities.

Net premiums earned were $536.3 million for 2007, compared with $546.5 million for 2006, a decrease of $10.2 million or 1.9%. Net premiums earned decreased for the reasons noted above in net premiums written.

Net Investment Income

Net investment income, which is gross investment income less investment expenses, was $77.3 million for 2007, compared with $66.5 million for 2006, an increase of $10.8 million or 16.2%.

•  Gross investment income, excluding realized gains and losses, was $83.4 million for 2007, compared with $72.4 million for 2006, an increase of $11.0 million or 15.1%. The increase was primarily due to growth in the average market value of our invested assets, interest earned on our cash, 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 $1,765.1 million as of December 31, 2007, from $1,656.7 million as of December 31, 2006, an increase of $108.4 million or 6.5%. Our limited partnership investments generated gross investment income of $0.4 million and $3.9 million for 2007 and 2006, respectively. Excluding limited partnership distributions, gross investment income for 2007 increased 21.0% compared to 2006.

During the fourth quarter of 2007, cash was used to retire $15.5 million of junior subordinated debentures and to repurchase $48.4 million of our Class A common shares.

•  Investment expenses were $6.1 million for 2007, compared with $5.9 million for 2006, an increase of $0.2 million or 2.5%.

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The average duration of our bonds was 3.9 years as of December 31, 2007 and 2006. Including cash and short-term investments, the average duration of our investments as of December 31, 2007 and 2006 was 3.3 and 3.4 years, respectively. At December 31, 2007, our embedded book yield on our bonds, not including cash, was 5.02% compared with 4.97% at December 31, 2006.

Net Realized Investment Gains (Losses)

Net realized investment gains (losses) were $1.0 million for 2007, compared with $(0.6) million for 2006. The net realized investment gains for 2007 consist primarily of net gains of $1.7 million relative to our bond portfolios, net of other than temporary impairments of $0.7 million, net gains of $2.1 million relative to our equity portfolio, net losses of $2.6 million relative to our convertible portfolios, and net losses of $0.2 million relative to our limited partnership portfolios. As a result of adopting SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments an amendment of FASB Statements No. 133 and 140” on January 1, 2007, 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 2006 consist primarily of net losses of $2.5 million relative to bond portfolios, including other than temporary impairments of $0.7 million, primarily caused as a result of our investment income optimization strategy, net gains of $0.6 million relative to our options portfolio, net gains of $1.6 million relative to our convertible portfolios, and net losses of $0.3 million relative to our equity portfolios.

Net Losses and Loss Adjustment Expenses

Net losses and loss adjustment expenses were $299.2 million for 2007, compared with $304.3 million for 2006, a decrease of $5.1 million or 1.7%. Excluding the impact of a $4.4 million reduction in our reinsurance reserve allowance and a $24.7 million release of prior year loss reserves in 2007, which are discussed in Note 5 of the notes to the consolidated financial statements in Item 8 of Part II of the report, and a $8.6 million reduction in our reinsurance reserve allowance and a $7.0 million release of prior year loss reserves in 2006, net losses and loss adjustment expenses would have been $328.3 million and $319.9 million for 2007 and 2006, respectively. The increase in incurred losses and loss adjustment expenses from $319.9 million for 2006 to $328.3 million for 2007 is primarily attributable to an increase in the severity of non-catastrophe property losses, and casualty loss cost inflation.

The loss ratio for 2007 was 55.8% compared with 55.7% for 2006. The loss ratio is calculated by dividing net losses and loss adjustment expenses by net premiums earned. The reductions in our reinsurance reserve allowance and releases of prior year loss reserves in 2007 and 2006 decreased the loss ratios for 2007 and 2006 5.4 points and 2.8 points, respectively. Excluding the impact of the reductions in our reinsurance reserve allowance and the releases of prior year loss reserves, the loss ratio increased from 58.5% for 2006 to 61.2% 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 $174.2 million for 2007, compared with $173.7 million for 2006, an increase of $0.5 million or 0.3%. This change is primarily due to a $3.6 million increase in acquisition costs and other underwriting costs of our Reinsurance Operations and a $3.1 million decrease in acquisition costs and other underwriting costs of our Insurance Operations.

•  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. We incurred $1.6 million of acquisition costs and $2.0 million of other underwriting expenses to support the $26.3 million of gross premiums written.

•  The decrease in our Insurance Operations segment is due to a $1.4 million decrease in acquisition costs, which is primarily due to a decrease in commissions, and a $1.7 million decrease in other underwriting expenses, which is primarily due to other underwriting expenses in the prior year of our Bermuda subsidiary relating to direct business, offset by an increase in other underwriting expenses from the prior year of our

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Insurance Operations due to legal expenses, stock options, and consulting expenses. Other underwriting expenses for 2006 included $0.3 million of severance costs resulting from our restructuring in 2006.

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 company personnel whose services relate to the support of corporate activities, and taxes incurred which are not directly related to operations. Corporate and other operating expenses were $11.7 million for 2007, compared with $16.5 million for 2006, a decrease of $4.8 million or 29.2%. This decrease is primarily due to reductions in stock option expenses, recruiting and relocation expenses, compensation expenses, and other miscellaneous corporate expenses.

Expense and Combined Ratios

Our expense ratio, which is calculated by dividing the sum of acquisition costs and other underwriting expenses by net premiums earned, was 32.5% for 2007, compared with 31.8% for 2006. The increase in the expense ratio is primarily a result of the decrease in net premiums earned. Acquisition costs and other underwriting expenses increased $0.5 million from the prior year, but net premiums earned decreased $10.2 million, causing acquisition costs and other underwriting expenses to increase as a percentage of net premiums earned.

Our combined ratio was 88.3% for 2007, compared with 87.5% for 2006. The combined ratio is the sum of our loss and expense ratios. The reductions in our reinsurance reserve allowance and releases of prior year loss reserves in 2007 and 2006 decreased the combined ratio for 2007 and 2006 5.4 points and 2.8 points, respectively. Excluding the impact of the reductions in our reinsurance reserve allowance and the releases of prior year loss reserves, the combined ratio increased from 90.3% for 2006 to 93.7% for 2007. See discussion of loss ratio in “Net Losses and Loss Adjustment Expenses” above and discussion of expense ratio in preceding paragraph above for an explanation of this increase.

Interest Expense

Interest expense was $11.4 million for each of 2007 and 2006. See Note 8 of the notes to the consolidated financial statements in Item 8 of Part II of this report for details on our debt.

Income Tax Expense

Income tax expense relating to continuing operations was $18.7 million for 2007, compared with $18.2 million for 2006, an increase of $0.5 million or 2.8%. See Note 6 of the notes to the consolidated financial statements in Item 8 of Part II of this report for a comparison of income tax expense between periods.

Our alternative minimum tax (“AMT”) credit carryforward as of December 31, 2007 and 2006 was $0.0 million and $2.8 million, respectively. During 2007, our U.S. taxable income exceeded our AMT taxable income, and, as a result, we were able to utilize the remainder of our AMT carryforward.

Equity in Net Income (Loss) of Partnerships

Equity in net income (loss) of partnerships was $(0.6) million for 2007, compared with $1.0 million for 2006, a decrease of $1.6 million. 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, including the gain on the sale of substantially all of the assets of our Agency Operations. The assets of our Agency Operations were sold on September 30, 2006, and as a result, Agency Operations only had run-off activity in 2007. Income from discontinued operations, net of tax was $0.03 million for 2007, compared with $10.1 million for 2006, a decrease of $10.1 million.

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Net Income

The factors described above resulted in net income of $98.9 million for 2007, compared with net income of $99.4 million for 2006, a decrease of $0.5 million or 0.5%.

Year Ended December 31, 2006 Compared with the Year Ended December 31, 2005

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 $653.0 million for 2006, compared with $622.9 million for 2005, an increase of $30.1 million or 4.8%.

A breakdown of gross premiums written by product classification for our Insurance Operations is shown below. There are no gross premiums written for our Reinsurance Operations for the years ended December 31, 2006 and 2005 since Wind River Reinsurance began offering third party reinsurance in the third quarter of 2006 and entered into its initial third party reinsurance treaty effective January 1, 2007.

					Increase /
(Dollars in thousands)	2006		2005(1)		(Decrease)
Insurance Operations:
Penn-America	$	390,260	$	374,402	$	15,858
United National(2)		154,114		146,868		7,246
Diamond State		108,591		101,608		6,983
Total Insurance Operations	$	652,965	$	622,878	$	30,087

(1)	Does not include results of thePenn-America Group prior to January 24, 2005.
(2)	This product classification includes gross written premiums of theNon-U.S. Insurance Operations of $0.05 million and $2.5 million for 2006 and 2005, respectively.

•  Penn-America gross premiums written increased $15.9 million primarily as a result of the inclusion of premium written by thePenn-America Insurance Companies for a full year in 2006 whereas our 2005 results only included premium written by thePenn-America Insurance Companies from January 24, 2005, the date of their merger with us.

•  United National gross premiums written increased $7.2 million primarily due to increases in habitational, liquor liability, and primary general liability business offset by a reduction in umbrella premium.

•  Diamond State gross premiums written increased $7.0 million primarily due to growth in our property and allied health brokerage lines offset by decreases in our public officials writings.

Net premiums written, which equal gross premiums written less ceded premiums written, were $560.5 million for 2006, compared with $519.7 million for 2005, an increase of $40.8 million or 7.9%. The ratio of net premiums written to gross premiums written was 85.8% for 2006 and 83.4% for 2005.

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A breakdown of net premiums written by product classification for our Insurance Operations is shown below. There are no net premiums written for our Reinsurance Operations for the years ended December 31, 2006 and 2005 since Wind River Reinsurance began offering third party reinsurance in the third quarter of 2006 and entered into its initial third party reinsurance treaty effective January 1, 2007.

					Increase /
(Dollars in thousands)	2006		2005(1)		(Decrease)
Insurance Operations:
Penn-America	$	355,428	$	336,201	$	19,227
United National(2)		114,718		97,331		17,387
Diamond State		90,389		86,201		4,188
Total Insurance Operations	$	560,535	$	519,733	$	40,802

(1)	Does not include results of thePenn-America Group prior to January 24, 2005.
(2)	This product classification includes net premiums written of theNon-U.S. Insurance Operations of $0.04 million and $2.2 million for 2006 and 2005, respectively.

•  Penn-America net premiums written increased $19.2 million primarily due to the inclusion of premium written by thePenn-America Insurance Companies for a full year in 2006 whereas our 2005 results only included premium written by thePenn-America Insurance Companies from January 24, 2005, the date of their merger with us, combined with an increase in property premium and increased retentions relating toPenn-America’s casualty reinsurance treaties.

•  United National net premiums written increased $17.4 million primarily due to increases in our habitational, liquor liability, and primary general liability program business, offset by a reduction in umbrella premium.

•  Diamond State net premiums written increased $4.2 million primarily due to growth in our property and allied health brokerage lines offset by decreases in our public officials writings.

Net premiums earned were $546.5 million for 2006, compared with $475.4 million for 2005, an increase of $71.1 million or 14.9%. Net premiums earned increased for the reasons noted above in net premiums written.

Net Investment Income

Net investment income, which is gross investment income less investment expenses, was $66.5 million for 2006, compared with $47.1 million for 2005, an increase of $19.4 million or 41.2%.

•  Gross investment income, excluding realized gains and losses, was $72.4 million for 2006, compared with $53.0 million for 2005, an increase of $19.4 million or 36.7%. The increase was primarily due to increasing investment yields, an increase in cash and invested assets, the shift of $194.0 million of tax-free investments to taxable investments, and the inclusion of thePenn-America Insurance Companies and Penn Independent for a full year in 2006. Cash and invested assets grew to $1,656.7 million as of December 31, 2006, from $1,419.6 million as of December 31, 2005, an increase of $237.1 million or 16.7%. Our limited partnership investments generated gross investment income of $3.9 million and $5.1 million for 2006 and 2005. Excluding limited partnership distributions, gross investment income for 2006 increased 43.2% compared to 2005.

•  Investment expenses were $5.9 million for each of 2006 and 2005.

The average duration of our bonds decreased to 3.9 years as of December 31, 2006 from 4.1 years as of December 31, 2005. Including cash and short-term investments, the average duration of our investments as of December 31, 2006 and 2005 was 3.4 years. At December 31, 2006, our embedded book yield on our bonds, not including cash, was 4.97% compared with 4.36% at December 31, 2005.

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Net Realized Investment Gains (Losses)

Net realized investment losses were $0.6 million for 2006, compared with net realized investment gains of $0.6 million for 2005. The net realized investment losses for 2006 consist primarily of net losses of $2.5 million relative to bond portfolios, including other than temporary impairments of $0.7 million, primarily caused as a result of our investment income optimization strategy, net gains of $0.6 million relative to our options portfolio, net gains of $1.6 million relative to our convertible portfolios, and net losses of $0.3 million relative to our equity portfolios. The net realized investment gains for 2005 consist primarily of net gains of $3.1 million from our equity portfolio offset by net losses of $0.4 million relative to the market value of our options and net losses of $2.1 million from our fixed income investments, including other than temporary impairment losses of $0.8 million.

Net Losses and Loss Adjustment Expenses

Net losses and loss adjustment expenses were $304.3 million for 2006, compared with $288.1 million for 2005, an increase of $16.2 million or 5.6%. The increase in incurred losses and loss adjustment expenses is attributable to growth in earned premium and the inclusion ofPenn-America for a full year in 2006. In 2006, we released $7.0 million of prior year loss reserves due to favorable development relative to construction defect losses as well as primary general liability, umbrella and excess, and asbestos and environmental losses, and $8.6 million as a reduction of our reinsurance reserve allowance. (See Note 8 of the notes to the consolidated financial statements in Item 8 of Part II of this report for more information regarding the reserve release.)

The loss ratio for 2006 was 55.7% compared with 60.6% for 2005. The loss ratio is calculated by dividing net losses and loss adjustment expenses by net premiums earned. Purchase accounting adjustments in 2005 increased the loss ratio for 2005 2.6 points. There were no purchase accounting adjustments that impacted the loss ratio for 2006. The release of prior year loss reserves in 2006 and 2005 decreased the loss ratios for 2006 and 2005 2.8 points and 0.3 points, respectively. The release of prior year reserves in 2005 does not include $5.8 million of negative development for thePenn-America Group that was related to prior years. We did not own thePenn-America Group prior to 2005. All prior year development related to thePenn-America Group’s 2005 results is included in current year loss and loss adjustment expenses. Catastrophe losses for Hurricanes Katrina, Rita, and Wilma in 2005 increased the loss ratio for 2005 1.9 points. Excluding the impact of purchase accounting adjustments, the release of prior year loss reserves, and catastrophe losses for Hurricanes Katrina, Rita, and Wilma in 2005, the loss ratio increased from 56.4% for 2005 to 58.5% for 2006 primarily due to an increase in our Diamond State loss ratios andPenn-America casualty loss ratio.

For a description of our catastrophe reinsurance agreements and our coverage under those agreements, see the “Reinsurance of Underwriting Risk” section in Item 1 of Part I of this report.

Acquisition Costs and Other Underwriting Expenses

Acquisition costs and other underwriting expenses, net of intercompany eliminations, were $173.7 million for 2006, compared with $144.1 million for 2005, an increase of $29.6 million or 20.5%. Purchase accounting resulting from the merger withPenn-America Group, Inc. which required deferred acquisition costs to be written off at the merger date, caused the acquisition costs for 2005 to be $21.5 million lower than what they would have been. Excluding the purchase accounting adjustment, acquisition costs increased $8.7 million. The increase in acquisition costs is primarily the result of increased earned premium. 2006 results includePenn-America for a full year. For 2005, the results ofPenn-America are only included from the date of its acquisition, January 24, 2005. Other underwriting expenses decreased $0.7 million.

Corporate and Other Operating Expenses

Corporate and other operating expenses consist of outside legal fees, other professional fees, including accounting fees, directors’ fees, management fees, salaries and benefits for company personnel whose services relate to the support of corporate activities, and taxes incurred which are not directly related to operations. Corporate and other operating expenses were $16.5 million for 2006, compared with $14.8 million for 2005, an increase of $1.7 million or 11.5%. 2005 corporate expenses include a gain on the extinguishment of debt of $1.3 million. The gain was recorded as a result of the prepayment of $72.8 million in principal and related interest

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under senior notes issued by Wind River Investment Corporation (“Wind River”) to the Ball family trusts in September 2003. Excluding the effect of this 2005 gain, corporate and other operating expenses for 2006 increased $0.4 million compared to 2005.

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 2006, compared with 30.3% for 2005. Purchase accounting adjustments in 2005 decreased the expense ratio for 2005 2.9 points. There were no purchase accounting adjustments that impacted the expense ratio for 2006. Excluding the impact of purchase accounting adjustments, the expense ratio decreased from 33.2% for 2005 to 31.8% for 2006 primarily due to reductions in commissions and other underwriting expenses as a percentage of earned premium.

Our combined ratio was 87.5% for 2006, compared with 90.9% for 2005. Purchase accounting adjustments in 2005 decreased the combined ratio for 2005 0.3 points. There were no purchase accounting adjustments that impacted the combined ratio for 2006. The release of prior year loss reserves in 2006 and 2005 decreased the combined ratio for 2006 and 2005 2.8 points and 0.3 points respectively. Catastrophe losses for Hurricanes Katrina, Rita, and Wilma in 2005 increased the combined ratio for 2005 2.0 points. Excluding the impact of purchase accounting adjustments, the release of prior year loss reserves, and catastrophes losses for Hurricanes Katrina, Rita, and Wilma in 2005, the combined ratio increased from 89.6% for 2005 to 90.3% for 2006 primarily due to an increase in ourPenn-America casualty loss ratio offset by reductions in commission and other underwriting expenses as a percentage of earned premium.

Interest Expense

Interest expense was $11.4 million for 2006, compared with $9.4 million for 2005, an increase of $2.0 million or 20.8%. This increase is primarily due to increases in interest rates on the junior subordinated debt and interest expense on the $90.0 million private placement debt, which was borrowed on July 20, 2005, offset by a decrease in interest expense related to the retirement of $72.8 million of the Ball family trust senior notes, which were retired on that same date. The interest rate charged on our junior subordinated debt is tied to the three month LIBOR rate at the beginning of each fiscal quarter. The three month LIBOR rate increased from 2.57% at January 1, 2005 to 4.54% at December 31, 2005 and from 4.54% at January 1, 2006 to 5.36% at December 31, 2006. See Note 9 of the notes to the consolidated financial statements in Item 8 of Part II of this report for additional information regarding these notes.

Income Tax Expense

Income tax expense relating to continuing operations was $18.2 million for 2006, compared with $3.0 million for 2005. See Note 6 of the notes to the consolidated financial statements in Item 8 of Part II of this report for a comparison of income tax expense between periods. The increase in tax expense is due to the release of prior year loss reserves, a reduction in our reinsurance reserve allowance, ceding commission changes on treaties between our Insurance Operations and Wind River Reinsurance, and the shift of $194.0 million of tax free investments to taxable investments. Our pretax income was $106.5 million and $66.6 million for 2006 and 2005, respectively.

Our AMT credit carryforward as of December 31, 2006 and 2005 was $2.8 million and $13.0 million, respectively. The carryforward can be carried forward indefinitely. The carryforward decreased as a result of the release of prior year loss reserves, the gain on the sale of substantially all of the assets of our Agency Operations, and the shift of $194.0 million of tax-free investments to taxable investments.

Equity in Net Income of Partnerships

Equity in net income of partnerships was $1.0 million for 2006, compared with $1.1 million for 2005, a decrease of $0.1 million. The decrease is due to the 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, including the gain on the sale of substantially all of the assets of our Agency Operations. Income from discontinued operations, net of tax was $10.1 million for 2006, compared with a loss of $0.6 million for 2005, an increase of $10.7 million. The increase is primarily due to the gain on the sale of assets of $9.4 million.

Extraordinary Gain

The extraordinary gain of $1.4 million for 2005 represents the recognition of tax benefits derived from acquisition costs incurred in connection with the Wind River Acquisition in 2003, a portion of which are currently considered to be deductible for federal tax purposes.

Net Income

The factors described above resulted in net income of $99.4 million for 2006, compared with net income of $65.6 million for 2005, an increase of $33.8 million or 51.6%.

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, and Penn-Patriot Insurance Company.

United America Indemnity Group, Inc. (“United America Indemnity Group”) owes $90.0 million to unrelated third parties in guaranteed senior notes. See Note 8 of the “Notes to Consolidated Financial Statements” in Item 8 of Part II of this report for the terms of these notes. In the event that debt service obligations were not satisfied, United America Indemnity Group would be precluded from paying dividends to U.A.I. (Luxembourg) Investment S.à r.l., its parent company.

AIS owes $30.9 million to affiliated parties in junior subordinated debentures. Interest is payable quarterly. See Note 8 of the “Notes to Consolidated Financial Statements” in Item 8 of Part II of this report for the terms of these notes. In the event that debt service obligations were not satisfied, AIS would be precluded from paying dividends to United America Indemnity Group, its parent company.

Penn-America Group, Inc. (“PAGI”) owes $15.5 million to an affiliated party in junior subordinated debentures. Interest is payable quarterly. See Note 8 of the “Notes to Consolidated Financial Statements” in Item 8 of Part II of this report for the terms of these notes. In the event that debt service obligations were not satisfied, PAGI would be precluded from paying dividends to United America Indemnity Group, United National Insurance Company, and PIC Holdings, Inc., its parent companies.

The principal source of cash of United America Indemnity, United America Indemnity Group, AIS, and PAGI to meet short term and long term liquidity needs, including corporate expenses, dividends, other permitted disbursements from their direct and indirect subsidiaries, and reimbursement to United America Indemnity from its subsidiaries for equity awards granted to employees. The principal sources of funds at these direct and indirect subsidiaries include underwriting operations, commissions, investment income, and proceeds from sales and redemptions of investments. Funds are used principally to pay claims and operating expenses, to make debt payments, to purchase investments, and to make dividend payments. The future liquidity of United America Indemnity, United America Indemnity Group, AIS, and PAGI is dependent on the ability of their subsidiaries to pay dividends. United America Indemnity, United America Indemnity Group, AIS, and PAGI currently have no planned capital expenditures that could have a material impact on its long-term liquidity needs.

The United National Insurance Companies and thePenn-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

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United National Insurance Companies and thePenn-America Insurance Companies may pay dividends without advance regulatory approval only out of unassigned surplus. In 2007, United National Insurance Companies andPenn-America Insurance Companies declared and paid dividends of $23.3 million and $14.8 million, respectively. For 2008, 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 $46.9 million. For 2008, the maximum amount of distributions that could be paid by thePenn-America Insurance Companies as dividends under applicable laws and regulations without regulatory approval is approximately $23.5 million, including $7.7 million that would be distributed to United National Insurance Company or its subsidiary, Penn Independent Corporation, based on the December 31, 2007 ownership percentages.

For 2008, we believe that Wind River Reinsurance should have sufficient liquidity and solvency to pay dividends. Wind River Reinsurance is prohibited, without the approval of the BMA, from reducing by 15% or more its total statutory capital as set out in its previous year’s statutory 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 2007 statutory financial statements that will be filed in 2008, Wind River Reinsurance could pay a dividend of up to $220.4 million without requesting BMA approval.

Surplus Levels

Each company in our 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 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 the 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 policyholders’ surplus of each company in our Insurance Operations is in excess of the prescribed minimum company action level risk-based capital requirements.

Cash Flows

Sources of operating funds consist primarily of net premiums written and investment income. 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, net of commission, in advance of losses paid;

•  the timing of our settlements with our reinsurers; and

•  the timing of our loss payments.

Net cash was provided by operating activities in 2007, 2006, and 2005 of $148.0 million, $180.8 million and $164.5 million, respectively. In 2007, we realized a net decrease in operating cash flows of approximately $33.8 million primarily as a result of the following:

•  a decrease in net premiums collected of $38.3 million, an increase in net losses paid of $14.3 million, offset by a decrease in acquisition costs and other underwriting expenses paid of $8.0 million;

•  an increase in net investment income collected of $11.3 million;

•  an increase in net federal income taxes paid of $5.9 million; and

•  a decrease in agency commissions and fee revenues of $22.0 million offset by a decrease in agency commissions and operating expenses paid of $27.9 million.

In 2006, we were able to realize a net increase in operating cash flows of approximately $16.8 million primarily as a result of the following:

•  an increase in net premiums collected of $29.6 million, offset by an increase in net losses paid of $32.9 million and a decrease in acquisition costs and other underwriting expenses paid of $4.7 million;

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•  an increase in net investment income collected of $19.4 million; and

•  an increase in interest paid of $3.7 million.

In 2005, we merged withPenn-America Group, Inc. and purchased Penn Independent Corporation.

See the consolidated statement of cash flows in the financial statements in Item 8 of Part II of this report for details concerning our investing and financing activities.

Liquidity

Each company in our Insurance Operations and our Reinsurance Operations maintains sufficient liquidity to pay claims through cash generated by operations and investments in liquid investments. At December 31, 2007, United America Indemnity had cash and cash equivalents of $244.3 million.

The United National Insurance Companies participate in an intercompany pooling arrangement whereby premiums, losses, and expenses are shared pro rata among the members of the group. United National Insurance Company is not an authorized reinsurer in all states. As a result, any losses and unearned premium that are ceded to United National Insurance Company by the other companies in the group must be collateralized. To satisfy this requirement, United National Insurance Company has set up custodial trust accounts on behalf of the other group members. The state insurance departments that regulate the parties to the intercompany pooling agreements also require United National Insurance Company to place assets on deposit subject to trust agreements for the protection of other group members.

There are two intercompany pooling agreements in place for the United National Insurance Companies. The first pooling agreement governs policies that were written prior to July 1, 2002. The second pooling agreement governs policies that are written on or after July 1, 2002. The method by which intercompany reinsurance is ceded is different for each pool. In the first pool, the United National Insurance Companies cede all business to United National Insurance Company. United National Insurance Company cedes in turn to external reinsurers. The remaining net premiums retained are allocated to the companies in the group according to their respective pool participation percentages. In the second pool, each company in the group first cedes to external reinsurers. The remaining net is ceded to United National Insurance Company where the net premiums written of the group are pooled and reallocated to the group based on their respective participation percentages. The second pool requires less collateral by United National Insurance Company as a result of it assuming less business from the other group members. United National Insurance Company only has to fund the portion that is ceded to it after cessions have occurred with external reinsurers. United National Insurance Company retains 80.0% of the risk associated with each pool.

ThePenn-America Insurance Companies participate in an intercompany pooling arrangement whereby premiums, losses, and expenses are shared pro rata among the members of the group. These parties are not authorized reinsurers in all states. As a result, any losses and unearned premium that are ceded to Penn-Star Insurance Company by the other group members must be collateralized. The state insurance departments that regulate the parties to the intercompany pooling agreements require Penn-Star Insurance Company to place assets on deposit subject to trust agreements for the protection of other group members.

OurNon-U.S. Insurance Operations commenced offering reinsurance to the United National Insurance Companies in January 2004 through quota share arrangements. These reinsurance arrangements resulted in 60% of the United National Insurance Companies’ net retained insurance liability on new or renewal business being ceded to Wind River Reinsurance or its predecessors through December 31, 2006.

On February 1, 2005, theNon-U.S. Insurance Operations commenced providing reinsurance to thePenn-America Insurance Companies through a quota share arrangement. This reinsurance arrangement resulted in 30% ofPenn-America Insurance Companies’ net retained insurance liability on new and renewal business bound after February 1, 2005 being ceded to Wind River Bermuda. The agreement also stipulated that 30% ofPenn-America Insurance Companies’ February 1, 2005 net unearned premium be ceded to Wind River Bermuda.

As part of the amalgamation of ourNon-U.S. Insurance Operations, each of the aforementioned quota share agreements was assumed by Wind River Reinsurance.

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Effective January 1, 2007, each of the quota share agreements was terminated and consolidated into a single quota share reinsurance agreement. Under this new agreement, our Insurance Operations have agreed to cede 50% of their net unearned premiums as of December 31, 2006, plus 50% of the net retained insurance liability of all new and renewal business bound on or after January 1, 2007 to Wind River Reinsurance. Wind River Reinsurance is an unauthorized reinsurer. As a result, any losses and unearned premium that are ceded to Wind River Reinsurance by the Insurance Operations must be collateralized. To satisfy this requirement, Wind River Reinsurance has set up custodial trust accounts on behalf of the Insurance Operations.

Wind River Reinsurance has established independent reinsurance trust accounts for the benefit of each of the U.S. Insurance Subsidiaries. We invest the funds in securities that have durations that closely match the expected duration of the liabilities assumed. We believe that Wind River Reinsurance will have sufficient liquidity to pay claims prospectively.

All trusts that we are required to maintain as a result of the above mentioned pooling agreements and quota share arrangements are adequately funded.

In 2007, we expect that, in the aggregate, our Insurance Operations and our Reinsurance Operations will have positive cash flow and will have sufficient liquidity to pay claims. We monitor our portfolios to assure liability and investment durations are closely matched.

Prospectively, as fixed income investments mature and new cash is obtained, the cash available to invest will be invested in accordance with our investment policy. Our investment policy allows us to invest in taxable and tax-exempt fixed income investments as well as publicly traded and private equity investments. With respect to bonds, our credit exposure limit for each issuer varies with the issuer’s credit quality. The allocation between taxable and tax-exempt bonds is determined based on market conditions and tax considerations.

We have access to various capital sources including dividends from insurance subsidiaries, invested assets in ourNon-U.S. Subsidiaries, undrawn capacity under United National Insurance Company’s discretionary demand line of credit, and access to the debt and equity capital markets. We believe we have sufficient liquidity to meet our capital needs.

Capital Resources

In July 2005, United America Indemnity Group sold $90.0 million 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.

In conjunction with the issuance of these senior notes, Wind River Investment Corporation (“Wind River”) reached agreement with the trustee of the Ball family trusts for the prepayment of the $72.8 million principal and related interest due as of July 20, 2005 on senior notes issued by Wind River. The terms of the prepayment agreement required the Ball family trusts to pay Wind River for $0.3 million of the issuance costs of the new senior notes plus $1.0 million of the incremental interest costs that United America Indemnity Group is estimated to incur under the new senior notes. The total amount of these payments of $1.3 million was recorded as a gain on the early extinguishment of debt in 2005.

U.A.I. (Luxembourg) Investment S.à r.l. 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.

On January 18, 2006, U.A.I. (Luxembourg) Investment S.à r.l. (“UAI Luxembourg Investment”) loaned $6.0 million to United America Indemnity, Ltd. The loan has been 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 and its operating expenses.

On November 12, 2007, Wind River Reinsurance issued a $50.0 million demand line of credit to United America Indemnity, Ltd. that bears interest at 5.25%. The proceeds of the line were used to fund the

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purchases of our Class A common shares. See Item 5 in Part II of this report for details concerning these purchases. As of December 31, 2007, there was $50.0 million outstanding on the line of credit.

On February 13, 2008, the demand line of credit was amended. The interest rate was decreased to 3.75% per annum, and the loan amount was increased to $100.0 million. The increase will be used to fund the repurchase of up to an additional $50.0 million of our Class A common shares. See Item 5 in Part II of this report for details concerning these purchases.

United America Indemnity Group has no income producing operations. The ability of United America Indemnity Group to generate cash to repay the notes is dependent on dividends that it receives from its subsidiaries.

On December 4, 2007, we redeemed all of the $15.0 million issued and outstanding notes ofPenn-America Statutory Trust I (“Penn Trust I”), and the fixed rate interest rate swap on these notes that locked the interest at an annual rate of 7.4% expired. In conjunction with this redemption, the $15.5 million of junior subordinated debentures of PAGI, which were the sole assets of Penn Trust I, were also redeemed.

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 United National Group Capital Trust I (“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 United National Group Capital Statutory Trust II (“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 subsidiaryPenn-America Statutory Trust II (“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

The proceeds from the above offerings were used to purchase junior subordinated interest notes and were used 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, and Penn Trust II, are not consolidated pursuant to FIN 46R. Our business trust subsidiaries have issued $45.0 million in floating rate capital securities and $1.4 million of floating rate common securities. The sole assets of the business trust subsidiaries are $46.4 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.

We are party to a management agreement with Fox Paine & Company, whereby in connection with certain management services provided to us by Fox Paine & Company, we agreed to pay an annual management fee of $1.5 million to Fox Paine & Company. The last annual management fee of $1.5 million was paid to Fox Paine & Company on November 1, 2007. The next annual management fee payment of $1.5 million is payable on November 1, 2008.

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 December 31, 2007.

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Contractual Obligations

We have commitments in the form of operating leases, a revolving line of credit, senior notes payable, junior subordinated debentures and unpaid losses and loss expense obligations. As of December 31, 2007, contractual obligations related to United America Indemnity’s commitments, including any principal payments, were as follows:

			Payment Due by Period
			1 Year		2 to 3 Years		4 to 5 Years		6 Years
	Total		1/1/08-12/31/08		1/1/09-12/31/10		1/1/11-12/31/12		and Later
(Dollars in thousands)
Operating leases(1)	$	16,527	$	3,154	$	5,460	$	5,236	$	2,677
Commitments to fund limited partnerships		4,111		4,111		—		—		—
Senior notes(2)		123,588		5,598		11,196		46,076		60,718
Junior subordinated debentures(3)		199,279		5,372		10,744		10,744		172,419
Term Loans		1,210		285		569		356		—
Unpaid losses and loss adjustment expenses obligations(4)		1,503,237		359,533		474,822		263,352		405,530
Total	$	1,847,952	$	378,053	$	502,791	$	325,764	$	641,344

(1)	We lease office space and equipment as part of our normal operations. The amounts shown above represent future commitments under such operating leases.
(2)	On July 20, 2005, United America Indemnity Group sold $90.0 million of guaranteed senior notes, due July 20, 2015. These 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 prepay $18.0 million of the principal amount. On July 20, 2015, United America Indemnity Group, Inc is required to pay any remaining outstanding principal amount on the notes. The notes are guaranteed by United America Indemnity, Ltd. Proceeds from the notes were used to prepay $72.8 million in principal together with related interest due as of July 20, 2005 under senior notes issued by Wind River to the Ball family trusts in September 2003. The terms of the prepayment agreement required the Ball family trusts to reimburse Wind River for $0.3 million of the issuance costs of the new senior notes plus $1.0 million of the incremental interest costs that United America Indemnity Group is estimated to incur under the new senior notes. The total amount of these reimbursements of $1.3 million was recorded as a gain on the early extinguishment of debt.
(3)	See discussion in “Capital Resources.”
(4)	These amounts represent the gross future amounts needed to pay losses and related loss adjustment expenses and do not reflect amounts that are expected to be recovered from our reinsurers. See discussion in “Liability for Unpaid Losses and Loss Adjustment Expenses” for more details.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements other than the Trust Preferred Securities and floating rate common securities discussed in the “Capital Resources” section of “Liquidity and Capital Resources.”

Inflation

Property and casualty insurance premiums are established before we know the amount of losses and loss adjustment expenses or the extent to which inflation may affect such amounts. We attempt to anticipate the potential impact of inflation in establishing our reserves.

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Substantial future increases in inflation could result in future increases in interest rates, which in turn are likely to result in a decline in the market value of the investment portfolio and resulting unrealized losses or reductions in shareholders’ equity.

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.

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 set forth in “Risk Factors” in Item 1A and elsewhere in this Annual Report onForm 10-K. 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 7A.   Quantitative and Qualitative Disclosures About Market Risk

Market Risk

Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in interest rates, equity prices, credit risk, foreign exchange rates and commodity prices. Our consolidated balance sheet includes the estimated fair values of assets that are subject to market risk. Our primary market risks are interest rate risk and credit risks associated with investments in fixed maturities and equity price risk associated with investments in equity securities. Each of these risks is discussed in more detail below. We have no foreign exchange or commodity risk.

Interest Rate Risk

Our primary market risk exposure is to changes in interest rates. Our fixed income investments are exposed to interest rate risk. Fluctuations in interest rates have a direct impact on the market valuation of these securities. As interest rates rise, the market value of our fixed income investments fall, and the converse is also true. We expect to manage interest rate risk through an active portfolio management strategy that involves the selection, by our managers, of investments with appropriate characteristics, such as duration, yield, currency and liquidity, that are

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tailored to the anticipated cash outflow characteristics of our liabilities. Our strategy for managing interest rate risk also includes maintaining a high quality portfolio with a relatively short duration to reduce the effect of interest rate changes on book value. A significant portion of our investment portfolio matures each year, allowing for reinvestment at current market rates.

As of December 31, 2007, assuming identical shifts in interest rates for securities of all maturities, the table below illustrates the sensitivity of market value in United America Indemnity’s bonds to selected hypothetical changes in basis point increases and decreases:

			Change in
(Dollars in thousands)			Market Value
Basis Point Change	Market Value		$			%
(200)	$	1,457,016	$	86,450			6.3	%
(100)		1,415,667		45,101			3.3	%
No change		1,370,566		—			0.0	%
100		1,320,380		(50,186	)		(3.7	)%
200		1,267,345		(103,221	)		(7.5	)%

Credit Risk

We have exposure to credit risk primarily as a holder of fixed income investments. Our investment policy requires that we invest in debt instruments of high credit quality issuers and limits the amount of credit exposure to any one issuer based upon the rating of the security. As of December 31, 2007, we had approximately $5.8 million worth of investment exposure to subprime investments. Of that amount, approximately $3.7 million of those investments have been rated AAA by S&P. The remaining subprime exposure is rated AA or A. There were no write-downs on these investments during 2007.

In addition, we have credit risk exposure to our general agencies and reinsurers. We seek to mitigate and control our risks to producers by typically requiring our general agencies to render payments within no more than 45 days after the month in which a policy is effective and including provisions within our general agency contracts that allow us to terminate a general agency’s authority in the event of non-payment.

With respect to our credit exposure to reinsurers, we seek to mitigate and control our risk by ceding business to only those reinsurers having adequate financial strength and sufficient capital to fund their obligation. In addition, we seek to mitigate credit risk to reinsurers through the use of trusts and letters of credit for collateral. As of December 31, 2007, $527.0 million of collateral was held in trust to support the reinsurance receivables.

Equity Price Risk

The objective for our equity portfolio is to provide a total rate of return that exceeds the Russell 1000 Value index over the long run, with an overweighting towards dividend paying equities. Further, the equity portfolio will hold a high percentage of securities issued by companies with a significant historical record of having paid and increased their annual dividends. The equity portfolio will also be managed with a focus on tax-efficiency. Our equity strategy is based on the view that our core holdings should be a conservative, broadly diversified portfolio comprised of domestic large capitalization common stocks.

Seeking active returns, exclusively from stock selection means that we minimize all other portfolio risk for which we believe an investor is not adequately compensated, which includes market timing and sector, capitalization, and style biases. As part of our strategy, stocks are sold when their risk/return profile is no longer attractive.

We compare the results of our equity portfolio to the Russell 1000 Value Index, which is our benchmark index. To protect against equity price risk, the sector exposures within our equity portfolio closely correlate to the sector exposures within the Russell 1000 Value Index. In 2007, our common stock portfolio had a return of 4.31%, not including investment advisor fees, compared to the Russell 1000 Value Index which had a return of (0.17)%.

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The carrying values of investments subject to equity price risk are based on quoted market prices as of the balance sheet dates. Market prices are subject to fluctuation and thus the amount realized in the subsequent sale of an investment may differ from the reported market value. Fluctuation in the market price of a security results from perceived changes in the underlying economic makeup of a stock, the price of alternative investments and overall market conditions.

We attempt to mitigate our unsystematic risk, which is the risk that is associated with holding a particular security, by holding a large number of securities in that market. We continue to have systematic risk, which is the risk inherent in the general market due to broad macroeconomic factors that affect all companies in the market.

As of December 31, 2007, the table below summarizes our equity price risk and reflects the effect of a hypothetical 10%, and 20% increase or decrease in market prices. The selected hypothetical changes do not indicate what could be the potential best or worst scenarios.

			Hypothetical
	Estimated Fair Value		Percentage Increase
(Dollars in thousands)	after Hypothetical		(Decrease) in
Hypothetical Price Change	Change in Prices		Shareholders’ Equity
(20)%	$	68,542		(1.3	)%
(10)%		77,109		(0.7	)%
No change		85,677		—
10%		94,245		0.7	%
20%		102,812		1.3	%

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Item 8.   Financial Statements and Supplementary Data

UNITED AMERICA INDEMNITY, LTD.

Index to Financial Statements

Report of Independent Registered Public Accounting Firm	82
Consolidated Balance Sheets	83
Consolidated Statements of Operations	84
Consolidated Statements of Comprehensive Income	85
Consolidated Statements of Changes in Shareholders’ Equity	86
Consolidated Statements of Cash Flows	87
Notes to Consolidated Financial Statements	88

Index to Financial Statement Schedules

Schedule I	Summary of Investments — Other Than Investments in Related Parties	S-1
Schedule II	Condensed Financial Information of Registrant	S-2
Schedule III	Supplementary Insurance Information	S-5
Schedule IV	Reinsurance Earned Premiums	S-6
Schedule V	Valuation and Qualifying Accounts and Reserves	S-7
Schedule VI	Supplementary Information for Property Casualty Underwriters	S-8

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and
Shareholders of United America Indemnity, Ltd.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of United America Indemnity, Ltd. and its subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established inInternal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in “Management’s Report on Internal Controls over Financial Reporting” appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 11, 2008

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UNITED AMERICA INDEMNITY, LTD.

Consolidated Balance Sheets

	December 31,			December 31,
	2007			2006
(In thousands, except share amounts)
ASSETS
Bonds:
Available for sale, at fair value (amortized cost: $1,356,439 and $1,253,016)	$	1,370,566		$	1,246,684
Equity securities:
Preferred stocks:
Available for sale, at fair value (cost: $11,802 and $3,991)		11,883			4,369
Common stocks:
Available for sale, at fair value (cost: $61,032 and $57,351)		73,794			71,003
Other invested assets
Available for sale, at fair value (cost: $24,563 and $24,712)		64,539			60,863
Total investments		1,520,782			1,382,919
Cash and cash equivalents		244,321			273,745
Agents’ balances, net		64,719			86,409
Reinsurance receivables		719,706			982,502
Accrued investment income		12,820			13,150
Deferred federal income taxes		8,219			12,661
Deferred acquisition costs		52,505			60,086
Goodwill		84,246			84,246
Intangible assets		22,520			23,528
Prepaid reinsurance premiums		29,218			38,335
Other assets		16,116			27,035
Total assets	$	2,775,172		$	2,984,616
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses	$	1,503,237		$	1,702,010
Unearned premiums		228,363			283,265
Federal income taxes payable		3,455			379
Ceded balances payable		15,758			16,235
Contingent commissions		9,600			8,629
Notes and debentures payable		137,602			156,239
Other liabilities		40,881			54,589
Total liabilities		1,938,896			2,221,346
Commitments and contingencies (Note 10)		—			—
Shareholders’ equity:
Common shares, $0.0001 par value, 900,000,000 common shares authorized; Class A common shares issued: 24,770,507 and 24,507,919, respectively; Class A common shares outstanding: 22,316,420 and 24,507,919, respectively; Class B common shares issued and outstanding: 12,687,500		4			4
Additional paid-in capital		519,980			515,357
Accumulated other comprehensive income, net of taxes		40,172			22,580
Retained earnings		324,542			225,329
Class A common shares in treasury, at cost: 2,454,087 and 0 shares, respectively		(48,422	)		—
Total shareholders’ equity		836,276			763,270
Total liabilities and shareholders’ equity	$	2,775,172		$	2,984,616

See accompanying notes to consolidated financial statements.

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UNITED AMERICA INDEMNITY, LTD.

Consolidated Statements of Operations

	Years Ended December 31,
	2007			2006			2005
(In thousands, except shares and per share data)
Revenues:
Gross premiums written	$	563,112		$	652,965		$	622,878
Net premiums written	$	490,535		$	560,535		$	519,733
Net premiums earned	$	536,323		$	546,469		$	475,430
Net investment income		77,341			66,538			47,118
Net realized investment gains (losses)		968			(570	)		554
Total revenues		614,632			612,437			523,102
Losses and Expenses:
Net losses and loss adjustment expenses		299,241			304,355			288,124
Acquisition costs and other underwriting expenses		174,181			173,686			144,070
Provision for doubtful reinsurance receivables		—			—			50
Corporate and other operating expenses		11,691			16,515			14,810
Interest expense		11,372			11,393			9,435
Income before income taxes		118,147			106,488			66,613
Income tax expense		18,680			18,176			2,973
Income before minority interest and equity in net income (loss) of partnerships		99,467			88,312			63,640
Minority interest, net of taxes		—			—			19
Equity in net income (loss) of partnerships		(581	)		1,026			1,092
Income before discontinued operations		98,886			89,338			64,751
Discontinued operations, net of taxes		31			10,080			(584	)
Income before extraordinary gain		98,917			99,418			64,167
Extraordinary gain		—			—			1,426
Net income	$	98,917		$	99,418		$	65,593
Per share data:
Income from continuing operations:
Basic	$	2.67		$	2.43		$	1.81
Diluted	$	2.65		$	2.41		$	1.77
Discontinued operations:
Basic	$	—		$	0.27		$	(0.02	)
Diluted	$	—		$	0.27		$	(0.02	)
Extraordinary gain
Basic	$	—		$	—		$	0.04
Diluted	$	—		$	—		$	0.04
Net income available to common shareholders
Basic	$	2.67		$	2.70		$	1.83
Diluted	$	2.65		$	2.68		$	1.79
Weighted-average number of shares outstanding
Basic		37,048,491			36,778,276			35,904,127
Diluted		37,360,703			37,157,783			36,589,902

See accompanying notes to consolidated financial statements.

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UNITED AMERICA INDEMNITY, LTD.

Consolidated Statements of Comprehensive Income

	Years Ended December 31,
	2007		2006			2005
(In thousands)
Net income	$	98,917	$	99,418		$	65,593
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period		18,509		12,684			(5,909	)
Less: Reclassification adjustment for gains (losses) included in net income		621		(425	)		127
Other comprehensive income (loss), net of tax		17,888		13,109			(6,036	)
Comprehensive income, net of tax	$	116,805	$	112,527		$	59,557

See accompanying notes to consolidated financial statements.

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UNITED AMERICA INDEMNITY, LTD.

Consolidated Statements of Changes in Shareholders’ Equity

	Years Ended December 31,
	2007			2006		2005
(In thousands, except share amounts)
Number of Class A common shares:
Number at beginning of period		24,507,919			23,868,402		15,585,653
Common shares issued in merger		—			—		7,930,536
Common shares issued under share incentive plan		243,253			618,797		322,479
Common shares issued to directors		19,335			20,720		29,734
Number at end of period		24,770,507			24,507,919		23,868,402
Number of Class B common shares:
Number at beginning of period		12,687,500			12,687,500		12,687,500
Number at end of period		12,687,500			12,687,500		12,687,500
Par value of Class A common shares:
Balance at beginning of period	$	3		$	3	$	2
Common shares issued		—			—		1
Balance at end of period	$	3		$	3	$	3
Par value Class B common shares:
Balance at beginning of period	$	1		$	1	$	1
Balance at end of period	$	1		$	1	$	1
Additional paid-in capital:
Balance at beginning of period	$	515,357		$	504,541	$	356,725
Contributed capital from Class A common shares		1,002			1,000		142,925
Share compensation plans		3,621			9,816		5,865
Other		—			—		(974	)
Balance at end of period	$	519,980		$	515,357	$	504,541
Accumulated other comprehensive income net of deferred income tax:
Balance at beginning of period	$	22,580		$	9,471	$	15,507
Other comprehensive income (loss)		17,888			13,109		(6,036	)
Adoption of SFAS 155		(296	)		—		—
Balance at end of period	$	40,172		$	22,580	$	9,471
Retained earnings:
Balance at beginning of period	$	225,329		$	125,911	$	60,318
Adoption of SFAS 155		296			—		—
Net income		98,917			99,418		65,593
Balance at end of period	$	324,542		$	225,329	$	125,911
Number of Treasury Shares:
Number at beginning of period		—			—		—
Class A common shares purchased		2,454,087			—		—
Number at end of period		2,454,087			—		—
Treasury Shares, at cost:
Balance at beginning of period	$	—		$	—	$	—
Class A common shares purchased, at cost		(48,422	)		—		—
Balance at end of period	$	(48,422	)	$	—	$	—
Total shareholders’ equity	$	836,276		$	763,270	$	639,927

See accompanying notes to consolidated financial statements.

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UNITED AMERICA INDEMNITY, LTD.

Consolidated Statements of Cash Flows

	Years Ended December 31,
	2007			2006			2005
(In thousands)
Cash flows from operating activities:
Net income	$	98,917		$	99,418		$	65,593
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of debt issuance costs		278			248			217
Amortization and depreciation		1,010			1,738			1,921
Restricted stock and stock option expense		2,698			4,810			4,305
Extraordinary gain		—			—			(1,426	)
Gain on disposal of assets		—			(9,413	)		—
Deferred federal income taxes		(1,561	)		8,606			(2,222	)
Amortization of bond premium and discount, net		1,513			2,421			6,593
Net realized investment (gains) losses		(968	)		570			(554	)
Equity in income (loss) of partnerships		581			(1,026	)		(1,111	)
Changes in:
Agents’ balances		21,690			(7,740	)		(8,843	)
Reinsurance receivable		262,796			295,654			297,615
Unpaid losses and loss adjustment expenses		(198,773	)		(212,214	)		(197,478	)
Unearned premiums		(54,902	)		10,713			36,108
Ceded balances payable		(477	)		(6,660	)		(7,132	)
Other assets and liabilities, net		(5,004	)		(4,815	)		(9,161	)
Contingent commissions		971			(2,432	)		60
Federal income tax (receivable) payable		3,076			(1,558	)		(610	)
Prepaid reinsurance premiums		9,117			3,353			8,194
Deferred acquisition costs, net		7,581			(1,201	)		(30,178	)
Other — net		(524	)		308			2,113
Net cash provided by operating activities		148,019			180,780			164,004
Cash flows from investing activities:
Proceeds from sale of bonds		217,367			340,139			371,712
Proceeds from sale of equity securities		34,854			36,882			76,071
Proceeds from maturity of bonds		68,144			134,337			57,809
Proceeds from sale of other invested assets		—			1,832			12,662
Purchase of bonds		(390,365	)		(638,475	)		(588,037	)
Purchase of equity securities		(44,853	)		(35,453	)		(74,858	)
Purchase of other invested assets		—			(41	)		(936	)
Disposition of subsidiary		—			34,300			(1,249	)
Acquisition of business, net of cash acquired		—			—			(58,762	)
Net cash used for investing activities		(114,853	)		(126,479	)		(205,588	)
Cash flows from financing activities:
Net proceeds from issuance of common shares		1,002			1,000			—
Borrowings under credit facility		22,906			3,827			4,466
Repayments of credit facility		(24,441	)		(5,175	)		(5,238	)
Proceeds from exercise of stock options		1,902			4,575			2,082
Excess tax benefit from share-based compensation plan		406			431			520
Dividends paid to minority shareholders		—			—			(22	)
Issuance of senior notes payable		—			—			90,000
Retirement of senior notes payable to related party		—			—			(72,848	)
Purchase of Class A common shares		(48,422	)		—			—
Retirement of junior subordinated debentures		(15,464	)		—			—
Retirement of debt		(479	)		(725	)		(732	)
Net cash provided by (used for) financing activities		(62,590	)		3,933			18,228
Cash and cash equivalents		(29,424	)		58,234			(23,356	)
Cash and cash equivalents at beginning of period		273,745			215,511			238,867
Cash and cash equivalents at end of period	$	244,321		$	273,745		$	215,511

See accompanying notes to consolidated financial statements.

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UNITED AMERICA INDEMNITY, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. On January 24, 2005, the Company changed its name from United National Group, Ltd. to United America Indemnity, Ltd. The Company’s Class A common stock is publicly traded on the NASDAQ Global Market. On March 14, 2005, the Company changed its trading symbol on the NASDAQ Global Market from “UNGL” to “INDM.”

The Company offers property and casualty insurance products in the excess and surplus lines marketplace. The Company manages its operations by differentiating them into three product classifications:Penn-America, which markets to small commercial businesses through a select network of wholesale general agents with specific binding authority; United National, which markets insurance products for targeted insured segments, including specialty products, such as property, general liability, and professional lines through program administrators with specific binding authority; and Diamond State, which markets property, general liability, and professional lines products, which are developed by the Company’s underwriting department by individuals with expertise in those lines of business, through wholesale brokers and also markets through program administrators having specific binding authority. Collectively, the Company’s U.S. insurance subsidiaries are licensed in all 50 states and the District of Columbia.

The consolidated financial statements 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 consolidated financial statements include the accounts of United America Indemnity and its wholly owned subsidiaries. All 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”), andPenn-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 $45.0 million in floating rate capital securities (“Trust Preferred Securities”) and $1.4 million of floating rate common securities. The sole assets of the Company’s business trust subsidiaries are $46.4 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.   Summary of Significant Accounting Policies

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. In 2007, the difference between amortized cost and fair value of these investments, excluding the Company’s convertible bond and preferred stock portfolios, 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. The difference between amortized cost and fair value of the convertible bonds and preferred stocks is included in income. Prior to 2007, the difference between amortized cost and fair value of these investments, excluding the derivative components of the Company’s convertible bond and convertible preferred stock portfolios, net of the effect of deferred income taxes, was reflected in accumulated other comprehensive income in shareholders’ equity and, accordingly, has no effect on net income

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

other than for impairments deemed to be other than temporary. The change in the difference between amortized cost and fair value of the options imbedded within the convertible bond and convertible preferred stock portfolios is included in income as a component of net realized investment gains and losses.

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” (“SFAS 155”) on January 1, 2007. As a result, the changes in the Company’s convertible bond and convertible preferred stock portfolios are included as components of net realized gains and losses. Prior to 2007, SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended, required that convertible instruments be bifurcated if they were classified as available for sale under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The change in the market value of the underlying security was included as a component of accumulated other comprehensive income and change in the value of the derivative component.

At December 31, 2007, the Company held $25.1 million of convertible bonds and $3.1 million of convertible preferred stock. The change in the difference between the amortized cost and the market value of the convertible portfolio is included in income as a component of net realized investments gains (losses). The Company realized a $2.6 million loss, a $1.6 million gain, and a $1.2 million loss for the years ended December 31, 2007, 2006, and 2005, respectively, due to market value changes related to convertibles.

The Company’s investments in other invested assets are comprised primarily of limited liability partnership interests. Partnership interests of 3% ownership or greater are accounted for using the equity method. The change in the difference between amortized cost and fair value of partnership interests of 3% ownership or greater, net of the effect of deferred income taxes, is reflected in income. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair values of the Company’s investments in bonds and stocks are determined on the basis of quoted market prices. Partnership interests of less than 3% ownership are carried at their fair value. The change in the difference between amortized cost and the fair value of partnership interests of less than 3% ownership, 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. On January 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” (“SFAS 159”) which gives entities the option to measure eligible assets, financial liabilities and firm commitments at fair value (i.e., the fair value option), on aninstrument-by-instrument basis. See “New Accounting Pronouncements” below for a discussion of the adoption of SFAS 159. Several of the limited partnerships invest mainly in securities that are publicly traded. Securities that are held by these partnerships are valued by obtaining values from Bloomberg, other external pricing sources, and managers that make markets for these securities. The Company obtains the value of the partnerships at the end of each reporting period; however, the Company is not provided with a detailed listing of the investments held by these partnerships. The Company receives annual audited financial statements from each of the partnerships it owns. For the partnerships that do not invest mainly in publicly traded securities, the fair value of such securities is determined by the general partner of each limited partnership based on comparisons to transactions involving similar investments. The Company’s investments in other invested assets, including investments in several limited partnerships, were valued at $64.5 million and $60.9 million as of December 31, 2007 and 2006, respectively.

As of December 31, 2007 and 2006, respectively, the Company’s other invested assets portfolio of $64.5 million and $60.9 million was comprised of securities for which there is no readily available independent market price. Material assumptions and factors utilized in pricing these securities include future cash flows, constant default rates, recovery rates, and any market clearing activity that may have occurred since the prior month-end pricing period.

Net realized gains and losses on investments are reported as a component of income from investments. Such gains or losses are determined based on the specific identification method.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 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, management carefully reviews securities with unrealized losses that have 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 along with other factors to determine if it should be impaired. For securities with significant declines in value for periods shorter than six months, the security is evaluated to determine if impairment is required.

For an analysis of other than temporary losses that were recorded for the years ended December 31, 2007, 2006, and 2005, please see Note 4 below.

Derivative Instruments

The Company accounts for derivative instruments under SFAS 133 which established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value.

In accordance with SFAS 133, the Company formally documents the cash flow hedging relationship between the hedging instrument and the hedged item, the risk management objective and strategy for undertaking the hedge, and how the effectiveness of hedging the exposure to variability in interest rates will be assessed. At inception, the Company determined its cash flow hedge to be highly effective in achieving offsetting cash flows attributable to the hedge risk during the term of the hedge, as it meets the criteria for assuming “no ineffectiveness”, pursuant to SFAS 133.

By using derivative instruments, the Company is exposed to credit risk based on current market conditions and potential payment obligations between the Company and its counterparty. The Company had previously entered into the interest rate swap with a high credit quality counterparty, which is rated “A1” by Moody’s Investors Service Inc. (“Moody’s”). As of December 31, 2007, the swap was no longer in place due to the retirement ofPenn-America Statutory Trust I (“Penn Trust I”) on December 4, 2007. See Note 8 for further details regarding the retirement of Penn Trust I.

Cash and Cash Equivalents

For the purpose of the statements of cash flows, the Company considers all liquid instruments with an original maturity of three months or less to be cash equivalents. The Company has a cash management program that provides for the investment of excess cash balances primarily in short-term money market instruments. Generally, bank balances exceed federally insured limits. The carrying amount of cash and cash equivalents approximates fair value.

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UNITED AMERICA INDEMNITY, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Valuation of Agents’ Balances

The Company evaluates the collectibility of agents’ balances based on a combination of factors. In circumstances in which the Company is aware of a specific agent’s inability to meet its financial obligations to the Company, a specific allowance for bad debts against amounts due is recorded to reduce the net receivable to the amount reasonably believed by the Company’s management to be collectible. For all remaining balances, allowances are recognized for bad debts based on the length of time the receivables are past due. The allowance for bad debts was $3.9 million and $4.0 million as of December 31, 2007 and 2006, respectively. For 2007 and 2006, there were net bad debts written off of $0.6 million and $0.07 million, respectively.

Goodwill and Intangible Assets

On January 24, 2005, the Company recorded $102.0 million and $32.5 million of goodwill and intangible assets, respectively, as a result of the acquisition of Penn Independent Corporation and the merger withPenn-America Group, Inc. Goodwill of $17.0 million and intangible assets of $5.8 million from the Company’s Agency Operations were netted against the gain on the sale of substantially all of the assets of the Company’s Agency Operations on September 30, 2006. These amounts represented the net book values of goodwill and intangible assets of Agency Operations as of the date of the sale. See Note 3 for details about this sale.

In accordance with SFAS 142, the Company tests for impairment of goodwill and other indefinite lived assets at least annually and more frequently as circumstances warrant and concluded that there was no impairment as of December 31, 2007.

A rollforward of goodwill is as follows:

(Dollars in thousands)
Balance at December 31, 2005(1)	$	101,854
Sale of Agency Operations’ assets		(17,006	)
Adjustment to transaction costs related to merger withPenn-America Group, Inc.		(602	)
Balance at December 31, 2006 and 2007	$	84,246

(1) — Goodwill of $84,848 related to merger withPenn-America Group, Inc. and $17,006 related to the purchase of Penn Independent Corporation.

There were no changes to goodwill during 2007.

Other intangible assets that are not deemed to have an indefinite useful life are amortized over their estimated useful lives. The carrying amount of intangible assets that are not deemed to have an indefinite useful life is regularly reviewed for indicators of impairments in value in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Impairment is recognized only if the carrying amount of the intangible asset is considered not to be recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the estimated fair value of the asset. No impairments of intangible assets that are not deemed to have indefinite life were recognized in the year ended December 31, 2007.

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UNITED AMERICA INDEMNITY, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of December 31, 2007, intangible assets are as follows:

(Dollars in thousands)				Accumulated
Description	Life	Cost		Amortization		Net
Agency relationships	16 years	$	15,012	$	2,673	$	12,339
Tradenames	Indefinite		5,000		—		5,000
State insurance licenses	Indefinite		5,000		—		5,000
Software technology	5 years		400		219		181
		$	25,412	$	2,892	$	22,520

Amortization expense related to thePenn-America Group, Inc. merger for the years ended December 31, 2007, 2006, and 2005 was $1.0 million, $1.0 million, and $1.1 million, respectively. Amortization expense related to the Penn Independent Corporation acquisition for the years ended December 31, 2007, 2006, and 2005 was $0.0 million, $0.5 million, and $0.8 million, respectively.

The Company expects that amortization expense for the next five succeeding years will be as follows:

(Dollars in thousands)
2008	$	1,005
2009		1,005
2010		985
2011		938
2012		938

These amounts are subject to change based upon the reviews of recoverability and useful lives that are performed at least annually.

Reinsurance

In the normal course of business, the Company seeks to reduce the loss that may arise from events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with reinsurers. Amounts receivable from reinsurers are estimated in a manner consistent with the reinsured policy. The Company analyzes its reinsurance contracts to ensure they meet the risk transfer requirements of SFAS No. 113, “Accounting for Reinsurance of Short Duration and Long Duration Contracts” (“SFAS 113”) and regularly reviews the collectibility of reinsurance receivables. Any changes in the allowances resulting from this review are included in income during the period in which the determination is made.

During 2007, the Company decreased its uncollectible reinsurance reserve by $4.4 million due to a reduction in ceded loss reserves, including losses incurred but not reported, as a result of better than expected loss emergence. During 2006, the Company decreased its uncollectible reinsurance reserve by $8.6 million due to (i) an A.M. Best rating upgrade of one of the reinsurers included in the Company’s reserve, (ii) continued collections and reductions of receivables from other reinsurers included in the reserve, and (iii) better than expected loss emergence.

SFAS 113 requires that the reinsurer must assume significant insurance risk under the reinsured portions of the underlying insurance contracts and that there must be a reasonably possible chance that the reinsurer may realize a significant loss from the transaction. The Company has evaluated its reinsurance contracts and concluded that each contract qualifies for reinsurance accounting treatment pursuant to SFAS 113.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the remaining deferred income tax assets, and accordingly, the Company has not established any valuation allowances.

Deferred Acquisition Costs

The costs of acquiring new and renewal insurance and reinsurance contracts include commissions, premium taxes and certain other costs that vary with and are primarily related to the acquisition of new and renewal insurance and reinsurance contracts. The excess of the Company’s costs of acquiring new and renewal insurance and reinsurance contracts over the related ceding commissions earned from reinsurers is capitalized as deferred acquisition costs and amortized over the period in which the related premiums are earned. In accordance with SFAS No. 60, “Accounting and Reporting by Insurance Enterprises,” the method followed in computing such amounts limits them to their estimated realizable value that gives effect to the premium to be earned, related investment income, losses and loss adjustment expenses, and certain other costs expected to be incurred as the premium is earned. The amortization of deferred acquisition costs for the years ended December 31, 2007, 2006, and 2005 was $142.2 million, $145.7 million, and $107.4 million, respectively.

Notes and Debentures Payable

The carrying amounts reported in the balance sheet represent the outstanding balances.

In accordance with SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity, the Company’s junior subordinated debentures are classified as a liability on the balance sheets and the related distributions are recorded as interest expense in the Statements of Operations.

Pursuant to FIN 46R, the Company does not consolidate its business trust subsidiaries, which in the aggregate issued $45.0 million of Trust Preferred Securities and $1.4 million of floating rate common securities. The sole assets of the Company’s business trust subsidiaries are $46.4 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. Therefore, the Company’s junior subordinated debentures are presented as a liability in the balance sheet at December 31, 2007 and 2006.

Guaranty Fund Assessments

The U.S. Insurance Subsidiaries are subject to various state guaranty fund assessments, which enable states to provide for the payment of covered claims or meet other insurance obligations from insurance company insolvencies. Each state has enacted legislation establishing guaranty funds and other insurance activity related assessments resulting in a variety of assessment methodologies. Expenses for guaranty fund and insurance-related assessments are recognized when it is probable that an assessment will be imposed, the obligatory event has occurred and the amount of the assessment is reasonably estimable. As of December 31, 2007 and 2006, included in other liabilities in the consolidated balance sheets were $1.0 million and $1.3 million, respectively, of liabilities for state guaranty funds and other assessments. As of December 31, 2007 and 2006, included in other assets in the consolidated balance sheets were $0.6 million and $0.5 million, respectively, of related assets for premium tax offsets or policy surcharges. The related asset is limited to the amount that is determined based upon future premium collections or policy surcharges from policies in force at the balance sheet date.

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UNITED AMERICA INDEMNITY, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Unpaid Losses and Loss Adjustment Expenses

The liability for unpaid losses and loss adjustment expenses represents the Company’s best estimate of future amounts needed to pay losses and related settlement expenses with respect to events insured by the Company. This liability is based upon the accumulation of individual case estimates for losses reported prior to the close of the accounting period with respect to direct business, estimates received from ceding companies with respect to assumed reinsurance and estimates of unreported losses.

The process of establishing the liability for unpaid losses and loss adjustment expenses of a property and casualty insurance company is complex, requiring the use of informed actuarially based estimates and judgments. 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 that loss to the Company. To establish this liability, the Company regularly reviews and updates the methods of making such estimates and establishing the resulting liabilities. Any resulting adjustments are recorded in income during the period in which the determination is made.

Premiums

Premiums are recognized as revenue ratably over the term of the respective policies. Unearned premiums are computed on a pro rata basis to the day of expiration.

Contingent Commissions

Certain professional general agencies of the Insurance Operations are paid special incentives when loss results of business produced by these agencies are more favorable than predetermined thresholds. These costs are charged to other underwriting expenses when incurred.

Share Based Compensation

The Company accounts for stock options and other equity based compensation using the modified prospective application of the fair value-based method permitted by SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), which revised SFAS 123 “Accounting for Share-Based Compensation.” The Company adopted SFAS 123R effective January 1, 2006. See Note 12 for details.

Earnings Per Share

Basic earnings per share has been calculated by dividing net income available to common shareholders by the weighted-average common shares outstanding. Diluted earnings per share has been calculated by dividing net income available to common shareholders by the sum of the weighted-average common shares outstanding and the weighted-average common share equivalents outstanding, which include options and warrants and other equity awards.

New Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value, outlines a fair value hierarchy based on inputs used to measure fair value, and enhances disclosure requirements for fair value measurements. SFAS 157 does not change existing guidance as to whether or not an instrument is carried at fair value.

The Company’s investments are carried at their fair value. In accordance with SFAS 157, assets recorded at fair value are categorized based upon a fair value hierarchy (level 1, 2, and 3). Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets that the Company has the ability to access. Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset, either directly or indirectly.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Level 3 inputs are unobservable inputs for the asset, and include situations where there is little, if any, market activity for the asset. The Company is currently evaluating its disclosures relating to the fair value hierarchy.

The provisions of SFAS 157 are to be applied prospectively, except changes in fair value measurements that result from the initial application of SFAS 157 which are to be recorded as an adjustment to beginning retained earnings in the year of adoption.

The provisions of SFAS 157 are effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS 157 on January 1, 2008. The adoption of this statement is not expected to have a material impact on beginning retained earnings or on the Company’s consolidated financial position or results of operations.

On February 15, 2007, the FASB issued SFAS 159, which gives entities the option to measure eligible assets, financial liabilities and firm commitments at fair value (i.e., the fair value option), on aninstrument-by-instrument basis. The election to use the fair value option is available at specified elections dates, such as when an entity first recognizes a financial asset or financial liability or upon entering into a firm commitment. Subsequent changes in fair value must be recorded in earnings. Additionally, SFAS 159 allows for a one-time election for existing positions upon adoption, with the transition adjustment recorded in beginning retained earnings.

The Company adopted SFAS 159 on January 1, 2008 and elected to apply the fair value option within its limited partnership investment portfolio. Since these securities are already reported at fair value, the Company does not expect the adoption of SFAS 159 to have a material impact on its financial condition although it could have a material effect on the results of operations in periods subsequent to adoption.

3.   Sale of Agency Assets

On September 30, 2006, the Company sold to Brown & Brown, Inc., an unrelated third party, substantially all of the assets of its Agency Operations. The gain on the sale was $9.4 million, net of applicable taxes of $4.5 million. As part of the sale agreement, 10% of the cash payment was originally held in escrow for a period of up to two years to cover indemnification obligations under the asset purchase agreement. Half of that amount was released in October 2007. As of December 31, 2007, 5% of the cash payment is still being held in escrow. As a result of this sale, the Company has terminated its Agency Operations segment and has classified the results of this segment, including the gain on the sale, as discontinued operations for 2007, 2006, and 2005. There were no Agency Operations prior to the Company’s acquisition of Penn Independent Corporation in 2005.

Aggregate revenues and pretax income (loss), before and after intercompany eliminations, of discontinued operations were as follows:

	Years Ended December 31,
	2007			2006			2005
(Dollars in thousands)
Revenues	$	332		$	31,663		$	40,984
Intercompany eliminations		—			(2,459	)		(2,547	)
Net revenues	$	332		$	29,204		$	38,437
Pretax income (loss)	$	(40	)	$	2,031		$	414
Intercompany eliminations		88			(1,004	)		(1,312	)
Net pretax income (loss)	$	48		$	1,027		$	(898	)

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The following table sets forth the composition of income (loss) from discontinued operations:

	Years Ended December 31,
	2007		2006		2005
(Dollars in thousands)
Income (loss) from Agency Operations, net of tax	$	31	$	667	$	(584	)
Gain on sale of assets including one-time charges, net of tax		—		9,413		—
Income (loss) from discontinued operations, net of tax	$	31	$	10,080	$	(584	)

4.  Investments

The amortized cost and estimated fair value of investments classified as available for sale were as follows as of December 31, 2007 and 2006:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
(Dollars in thousands)
2007
Bonds:
Obligations of states and political subdivisions	$	210,172	$	3,498	$	(595	)	$	213,075
Mortgage-backed and asset-backed securities		656,799		7,082		(2,963	)		660,918
U.S. treasury and agency obligations		180,658		6,164		(14	)		186,808
Corporate notes		308,810		2,541		(1,586	)		309,765
Total bonds		1,356,439		19,285		(5,158	)		1,370,566
Common stock		61,032		14,763		(2,001	)		73,794
Preferred stock		11,802		218		(137	)		11,883
Total	$	1,429,273	$	34,266	$	(7,296	)	$	1,456,243

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
(Dollars in thousands)
2006
Bonds:
Obligations of states and political subdivisions	$	169,062	$	2,986	$	(924	)	$	171,124
Mortgage-backed and asset-backed securities		490,457		1,613		(6,100	)		485,970
U.S. treasury and agency obligations		236,820		1,500		(1,445	)		236,875
Corporate notes		356,677		1,194		(5,156	)		352,715
Total bonds		1,253,016		7,293		(13,625	)		1,246,684
Common stock		57,351		13,700		(48	)		71,003
Preferred stock		3,991		378		—			4,369
Total	$	1,314,358	$	21,371	$	(13,673	)	$	1,322,056

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company did not hold any debt or equity investments in a single issuer that was in excess of 10% of shareholders’ equity at December 31, 2007 or 2006.

The Company holds several investments in limited partnerships where it owns less than 3% of the limited partnerships. Changes in the value of these partnerships are included in accumulated other comprehensive income as a component of shareholders’ equity. The estimated fair value and cost of these investments are as follows:

	Years Ended December 31,
	2007		2006		2005
(Dollars in thousands)
Estimated fair value	$	51,102	$	46,629	$	39,675
Cost		19,412		19,562		20,788
Gross unrealized gain	$	31,690	$	27,067	$	18,887

The Company is a limited partner in a high yield fund where it owns more than a 3% interest. Changes in the value of this investment are included in equity in earnings of partnerships on the income statement. The market value and amortized cost of that partnership are as follows:

	Years Ended December 31,
	2007		2006		2005
(Dollars in thousands)
Estimated fair value	$	13,437	$	14,234	$	12,752
Cost		5,151		5,151		5,151
Gross unrealized gain	$	8,286	$	9,083	$	7,601

Accumulated comprehensive income as of December 31, 2007 and 2006 was as follows:

	December 31,
	2007			2006
(Dollars in thousands)
Net unrealized gains from:
Partnerships < 3% owned	$	31,690		$	27,067
Available-for-sale portfolio		26,970			7,696
Interest rate swap(1)		—			178
Deferred taxes		(18,488	)		(12,361	)
Accumulated other comprehensive income	$	40,172		$	22,580

(1) — Please see Note 8 for additional details.

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, 2007:

							Gross Unrealized Losses
					Cost or						Between		Greater
	Number of		Estimated		Amortized				Six Month		Seven Months		than One
	Securities		Fair Value		Cost		Total		or Less		and One Year		Year(1)
(Dollars in thousands)
Bonds		266	$	374,064	$	379,222	$	5,158	$	877	$	337	$	3,944
Common Stock		31		15,714		17,715		2,001		1,502		499		—
Preferred Stock		1		2,363		2,500		137		137		—		—
							$	7,296	$	2,516	$	836	$	3,944

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(1) At December 31, 2007, the Company had 215 bonds that were in an unrealized loss position for greater than one year. The estimated fair value and amortized cost of these securities was $293.8 million and $297.7 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. 100% 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						Between
	Number of		Estimated		Amortized				Six Months		Seven Months		Greater than
	Securities		Fair Value		Cost		Total		or Less		and One Year		One Year(1)
(Dollars in thousands)
Bonds		414	$	725,155	$	738,781	$	13,626	$	981	$	1,548	$	11,097
Common Stock		7		2,363		2,410		47		29		18		—
							$	13,673	$	1,010	$	1,566	$	11,097

(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 these securities are 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 December 31, 2007, concluded the unrealized losses discussed above are not other than temporary impairments. The impairment evaluation process is discussed in the “Investment” section of Note 2 (“Summary of Significant Accounting Policies”).

Many of the common stocks that comprise the $2.0 million unrealized loss as of December 31, 2007 are in the financial services sector. Several of these stocks incurred losses during 2007 due to write-downs of subprime investments by the stocks’ issuers. Management does not believe these stocks should be impaired at this time and is continuing to closely monitor these investments.

The Company recorded the following other than temporary losses on its investment portfolio for the years ended December 31, 2007, 2006, and 2005:

	Years Ended December 31,
	2007		2006		2005
(Dollars in thousands)
Bonds	$	432	$	393	$	—
Preferred stock		—		167		—
Common stock		69		143		838
Other invested assets		150		—		—
Total	$	651	$	703	$	838

As of December 31, 2007, the Company had approximately $5.8 million worth of investment exposure to subprime investments. Of that amount, approximately $3.7 million of those investments have been rated AAA by S&P. The remaining subprime exposure is rated AA or A. There were no write-downs on these investments during 2007.

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The amortized cost and estimated fair value of bonds classified as available for sale at December 31, 2007, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Estimated
	Cost		Fair Value
(Dollars in thousands)
Due in one year or less	$	85,435	$	85,513
Due after one year through five years		269,839		272,859
Due after five years through ten years		207,589		211,577
Due after ten years through fifteen years		69,925		71,228
Due after fifteen years		66,852		68,471
Mortgage-backed securities		656,799		660,918
	$	1,356,439	$	1,370,566

The components of net realized investment gains (losses) on the sale of investments for the years ended December 31, 2007, 2006, and 2005 were as follows:

	Years Ended December 31,
	2007			2006			2005
(Dollars in thousands)
Bonds:
Gross realized gains	$	2,573		$	894		$	2,785
Gross realized losses		(2,573	)		(3,368	)		(4,807	)
Net realized losses		—			(2,474	)		(2,022	)
Common stock:
Gross realized gains		3,417			1,526			5,198
Gross realized losses		(1,645	)		(1,535	)		(1,926	)
Net realized gains (losses)		1,772			(9	)		3,272
Preferred stock:
Gross realized gains		431			4			—
Gross realized losses		(1,085	)		(337	)		(696	)
Net realized losses		(654	)		(333	)		(696	)
Other invested assets:
Gross realized gains		—			2,419			—
Gross realized losses		(150	)		(173	)		—
Net realized gains (losses)		(150	)		2,246			—
Total net realized investment gains (losses)	$	968		$	(570	)	$	554

Proceeds from the sales of bonds classified as available-for-sale resulting in net realized investment gains (losses) for the years ended December 31, 2007, 2006, and 2005 were $217.4 million, $340.1 million, and $371.7 million, respectively.

Proceeds from the sales of equity securities classified as available-for-sale resulting in net realized investment gains (losses) for the years ended December 31, 2007, 2006 and 2005 were $34.9 million, $36.9 million, and $76.1 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The sources of net investment income for the years ended December 31, 2007, 2006, and 2005 were as follows:

	Years Ended December 31,
	2007			2006			2005
(Dollars in thousands)
Bonds	$	65,778		$	57,310		$	41,196
Preferred and common stocks		2,365			2,170			1,568
Cash and cash equivalents		14,855			9,096			5,118
Other		395			3,864			5,102
Total investment income		83,393			72,440			52,984
Investment expense		(6,052	)		(5,902	)		(5,866	)
Net investment income	$	77,341		$	66,538		$	47,118

There was one non-income producing bond with an estimated fair value of $0.5 million as of December 31, 2006 and 2005. In 2007, the estimated fair value of this bond was written down to $0.0 million.

Certain cash balances, cash equivalents, and bonds available for sale were deposited with various governmental authorities in accordance with statutory requirements or were held in trust pursuant to intercompany reinsurance agreements. The estimated fair values of bonds available for sale and on deposit or held in trust were as follows as of December 31, 2007 and December 31, 2006:

	Estimated Fair Value
	December 31,		December 31,
	2007		2006
(Dollars in thousands)
On deposit with governmental authorities	$	41.5	$	40.5
Intercompany trusts held for the benefit of U.S. policyholders		761.5		671.8
Held in trust pursuant to U.S. regulatory requirements for the benefit of U.S. policyholders		6.2		5.8
Total	$	809.2	$	718.1

5.   Reinsurance

The Company cedes insurance to unrelated insurers 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 us 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 December 31, 2007 and 2006, the Company carried reinsurance receivables of $719.7 million and $982.5 million, respectively. These amounts are net of a purchase accounting adjustment and an allowance for uncollectible reinsurance receivables. The 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 $17.5 million and $18.5 million at December 31, 2007 and 2006, respectively. The allowance for uncollectible reinsurance receivables was $10.5 million and $20.7 million at December 31, 2007 and 2006, respectively. The decrease in the allowance was primarily due to a commutation of the Company’s reinsurance agreement with an unrelated third party reinsurer during the first quarter of 2007 that reduced the uncollectible reinsurance reserve by $6.5 million. A benefit of $0.7 million was realized as a result of the commutation. In addition, the Company released $3.7 million of the reserve for uncollectible reinsurance during 2007, primarily due to a reduction in ceded

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loss reserves, including losses incurred but not reported (“IBNR”), as a result of better than expected loss emergence.

During 2007 and 2006, the Company’s reinsurance receivables and related unpaid losses and loss adjustment expenses were decreased by $262.8 million and $295.7 million, respectively. Of these amounts, $152.6 million and $107.1 million, respectively, were due to the Company’s review of unpaid loss and loss adjustment expenses, and the remainder was due to the payment of losses in the ordinary course of business. At the Wind River Acquisition date, discounts and risk margins were applied to reinsurance receivables related to ceded loss reserves. During 2007 and 2006, the Company decreased its discount and risk margin purchase adjustment by $1.0 million and $2.7 million, respectively, due to (1) reductions in ceded loss reserves that existed as of the Wind River Acquisition date and (2) decreases to the amount of discount due to the passage of time. This adjustment equally affected reinsurance receivables and loss reserves and had no impact on the net income of the Company during 2007 and 2006.

At December 31, 2007 and 2006, the Company held collateral securing its reinsurance receivables of $520.8 million and $642.9 million, respectively. Prepaid reinsurance premiums were $29.2 million and $38.3 million at December 31, 2007 and 2006, respectively. Reinsurance receivables, net of collateral held, were $198.9 million and $339.6 million at December 31, 2007 and 2006, respectively.

During the years ended December 31, 2007, 2006, and 2005, the Company recorded the following ceded amounts:

	Years Ended December 31,
	2007			2006			2005
(Dollars in thousands)
Earned premium	$	81,691		$	95,784		$	111,339
Commissions		15,482			22,240			16,073
Incurred losses		(107,746	)(1)		(55,901	)(2)		(25,731	)(3)

(1)	The Company reduced gross and ceded unpaid loss and loss adjustment expenses related to prior periods by $177.1 million and $152.6 million, respectively, in 2007 due to better than expected loss emergence.
(2)	The Company reduced gross and ceded unpaid loss and loss adjustment expenses related to prior periods by $114.1 million and $107.1 million, respectively, in 2006 due to better than expected loss emergence.
(3)	The Company reduced both gross and ceded unpaid loss and loss adjustment expenses related to prior periods by $142.3 million in 2005 due to better than expected loss emergence.

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 2007. Effective January 1, 2008, the Company renewed its casualty clash treaty which affords protection for exposures arising from two or more casualty insureds being involved in the same loss occurrence. The structure for losses occurring in 2008 remains $10.0 million in excess of $3.0 million.

The Company evaluated retention levels during 2006 to ensure that the ultimate reinsurance structures 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 for individual property losses from $0.5 million to $1.0 million for property losses occurring on or after January 1, 2007. As a result of the Company’s increased appetite for larger property risks, the Company has increased its protection for individual property losses by purchasing an additional

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$10.0 million in excess of $5.0 million layer. As a result, the Company’s property treaty now covers losses of $14.0 million in excess of $1.0 million per risk.

As a result of the allied health business unit’s expansion of policy limits up to $10.0 million per risk, the Company has increased its professional liability protection by purchasing an additional $5.0 million layer of reinsurance protection effective March 1, 2007. As a result, the Company’s professional liability treaty covers losses of $9.5 million in excess of $0.5 million per occurrence, or claim or wrongful or negligent act. Effective January 1, 2008, the Company renewed the aforementioned expiring reinsurance structure.

Effective April 29, 2007, the Company 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 per risk.

As of December 31, 2007, the Company had aggregate unsecured reinsurance receivables that exceeded 3% of shareholders’ equity from the following groups of reinsurers. Unsecured reinsurance receivables include amounts receivable for paid and unpaid losses and loss adjustment expenses and prepaid reinsurance premiums, less amounts secured by collateral.

	Reinsurance		A.M. Best Ratings
	Receivables		(As of December 31, 2007)
(Dollars in thousands)
Munich Group	$	56.7		A
Berkshire Hathaway		36.4		A++
Hartford Fire Insurance Company		28.5		A+
Swiss Re Group		26.1		A+
	$	147.7

The effect of reinsurance on premiums written and earned is as follows:

	Written			Earned
(Dollars in thousands)
For the year ended December 31, 2007:
Direct business	$	536,868		$	605,316
Reinsurance assumed		26,244			12,698
Reinsurance ceded		(72,577	)		(81,691	)
Net premiums	$	490,535		$	536,323
For the year ended December 31, 2006:
Direct business	$	652,448		$	639,878
Reinsurance assumed		517			2,375
Reinsurance ceded		(92,430	)		(95,784	)
Net premiums	$	560,535		$	546,469
For the year ended December 31, 2005:
Direct business	$	614,291		$	580,068
Reinsurance assumed		8,587			6,701
Reinsurance ceded		(103,145	)		(111,339	)
Net premiums	$	519,733		$	475,430

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

6.   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 annual taxable income of each country to calculate the annual income tax expense.

The Company’s income from continuing operations before income taxes from theNon-U.S. Subsidiaries and U.S. Subsidiaries, including the results of the quota share agreement between Wind River Reinsurance and the Insurance Operations, for the years ended December 31, 2007, 2006, and 2005 were as follows:

Year Ended December 31, 2007:

	Non-U.S.			U.S.
	Subsidiaries			Subsidiaries		Eliminations			Total
(Dollars in thousands)
Revenues:
Gross premiums written	$	271,120		$	536,835	$	(244,843	)	$	563,112
Net premiums written	$	257,105		$	233,430	$	—		$	490,535
Net premiums earned	$	271,065		$	265,258	$	—		$	536,323
Net investment income		44,305			51,513		(18,477	)		77,341
Net realized investment gains (losses)		(23	)		1,024		(33	)		968
Total revenues		315,347			317,795		(18,510	)		614,632
Losses and Expenses:
Net losses and loss adjustment expenses		149,803			149,438		—			299,241
Acquisition costs and other underwriting expenses		102,223			72,501		(543	)		174,181
Corporate and other operating expenses		9,044			2,471		176			11,691
Interest expense		—			29,849		(18,477	)		11,372
Income before income taxes	$	54,277		$	63,536	$	334		$	118,147

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Year Ended December 31, 2006:

	Non-U.S.			U.S.
	Subsidiaries			Subsidiaries			Eliminations			Total
(Dollars in thousands)
Revenues:
Gross premiums written	$	266,849		$	652,914		$	(266,798	)	$	652,965
Net premiums written	$	266,841		$	293,694		$	—		$	560,535
Net premiums earned	$	258,233		$	288,236		$	—		$	546,469
Net investment income		37,754			47,224			(18,440	)		66,538
Net realized investment gains (losses)		(157	)		(511	)		98			(570	)
Total revenues		295,830			334,949			(18,342	)		612,437
Losses and Expenses:
Net losses and loss adjustment expenses		149,764			154,591			—			304,355
Acquisition costs and other underwriting expenses		94,289			81,057			(1,660	)		173,686
Corporate and other operating expenses		8,536			6,736			1,243			16,515
Interest expense		—			29,833			(18,440	)		11,393
Income before income taxes	$	43,241		$	62,732		$	515		$	106,488

Year Ended December 31, 2005:

	Non-U.S.			U.S.
	Subsidiaries			Subsidiaries		Eliminations			Total
(Dollars in thousands)
Revenues:
Gross premiums written	$	275,604		$	621,315	$	(274,041	)	$	622,878
Net premiums written	$	275,379		$	244,354	$	—		$	519,733
Net premiums earned	$	232,974		$	242,456	$	—		$	475,430
Net investment income		32,656			32,438		(17,976	)		47,118
Net realized investment gains (losses)		(627	)		1,555		(374	)		554
Total revenues		265,003			276,449		(18,350	)		523,102
Losses and Expenses:
Net losses and loss adjustment expenses		127,637			160,487		—			288,124
Acquisition costs and other underwriting expenses		87,451			57,707		(1,088	)		144,070
Provision for doubtful reinsurance receivables		—			50		—			50
Corporate and other operating expenses		5,769			9,041		—			14,810
Interest expense		—			27,389		(17,954	)		9,435
Income before income taxes	$	44,146		$	21,775	$	692		$	66,613

The weighted average expected tax provision has been calculated using income (loss) before income taxes in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate. The Company’s income before income taxes in 2007 of $118.1 million represents $54.3 million from its foreign operations and $63.8 million from its United States operations. The Company’s income before income taxes in 2006 of $106.5 million represents $43.2 million from its foreign operations and $63.2 million from its United States operations. The Company’s

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

income before income taxes in 2005 of $66.6 million represents $44.1 million from its foreign operations and $22.5 million from its United States operations.

The following table summarizes the differences between the tax provision for financial statement purposes and the expected tax provision at the weighted average tax rate:

	Years Ended December 31,
	2007						2006						2005
				% of Pre-						% of Pre-						% of Pre-
	Amount			Tax Income			Amount			Tax Income			Amount			Tax Income
(Dollars in thousands)
Expected tax provision at weighted average	$	22,434			19.0	%	$	22,359			21.0	%	$	7,945			11.9	%
Adjustments:
Tax exempt interest		(2,462	)		(2.1	)		(4,011	)		(3.8	)		(5,142	)		(7.7	)
Dividend exclusion		(476	)		(0.4	)		(455	)		(0.4	)		(317	)		(0.5	)
Other		(816	)		(0.7	)		283			0.3			487			0.8
Actual taxes on continuing operations	$	18,680			15.8	%	$	18,176			17.1	%	$	2,973			4.5	%

The Company recognized tax expense (benefit) on discontinued operations of $0.02 million, $4.8 million and $(0.3) million for the years ended December 31, 2007, 2006, and 2005, respectively.

In 2005, the Company recognized an extraordinary gain of $1.4 million for tax benefits derived from acquisition costs included as a reduction in equity as a result of the Wind River Acquisition, that have been or will be deducted in the future from income for federal tax purposes.

The following table summarizes the components of income tax expense:

	Years Ended December 31,
	2007			2006		2005
(Dollars in thousands)
Current income tax expense:
Foreign and U.S. Federal	$	20,240		$	9,570	$	6,202
Deferred income tax expense (benefit):
U.S. Federal		(1,560	)		8,606		(3,229	)
Total income tax expense	$	18,680		$	18,176	$	2,973

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UNITED AMERICA INDEMNITY, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets at December 31, 2007 and 2006 are presented below:

	2007			2006
(Dollars in thousands)
Deferred tax assets:
Discounted unpaid losses and loss adjustment expenses	$	24,766		$	24,866
Unearned premiums		6,744			8,972
Alternative minimum tax credit carryover		—			2,780
Depreciation and amortization		308			1,295
Partnership K1 basis differences		6,497			3,715
Investment impairments		2,082			1,767
Stock options		1,910			1,694
Other		3,126			3,943
Total deferred tax assets		45,433			49,032
Deferred tax liabilities:
Intangible assets		7,882			8,235
Investments in subsidiaries		—			225
Gains (losses) on securities		(99	)		668
Unrealized gain on securities available-for-sale and less than 3% owned investments in partnerships included in accumulated other comprehensive income		18,488			12,361
Gain on partnerships greater than 20% owned		2,900			3,179
Investment basis differences		2,485			2,821
Deferred acquisition costs		4,602			6,511
Other		956			2,371
Total deferred tax liabilities		37,214			36,371
Total net deferred tax assets	$	8,219		$	12,661

Management believes it is more likely than not that the deferred tax assets will be completely utilized in future years. As a result, there is no valuation allowance at December 31, 2007 and 2006.

The alternative minimum tax carryforward was $0.0 million and $2.8 million as of December 31, 2007 and 2006, respectively.

The Company or one of its subsidiaries has filed 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 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 IRS completed its examination during the fourth quarter of 2007. No audit adjustments were made.

The IRS initiated examination of the U.S. income tax return ofPenn-America Group, Inc. and its subsidiaries for the period January 1, 2005 through January 24, 2005 in the third quarter of 2007. No audit adjustments have yet been reported to the Company.

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

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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.

The Company’s unrecognized tax benefits were $3.6 million as of December 31, 2007 and 2006.

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 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 December 31, 2007, the Company has recorded $0.5 million in liabilities for tax-related interest and penalties on its consolidated balance sheet.

7.   Liability for Unpaid Losses and Loss Adjustment Expenses

Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows:

	Years Ended December 31,
	2007			2006			2005
(Dollars in thousands)
Unpaid losses and loss adjustment expenses at beginning of period	$	1,702,010		$	1,914,224		$	1,876,510
Less: Gross reinsurance receivables on unpaid losses and loss adjustment expenses		966,668			1,274,933			1,531,896
Net balance at beginning of period		735,342			639,291			344,614
Plus: Unpaid losses and loss adjustment expenses acquired as a result of the merger(1)		—			—			235,192
Less: Gross reinsurance receivables on unpaid losses and loss adjustment expenses acquired as a result of the merger(1)		—			—			43,908
Unpaid losses and loss adjustment expenses subtotal		735,342			639,291			535,898
Incurred losses and loss adjustment expenses related to:
Current year(2)		328,346			319,927			289,406
Prior years(3)		(29,105	)		(15,572	)		(1,282	)
Total incurred losses and loss adjustment expenses		299,241			304,355			288,124
Paid losses and loss adjustment expenses related to:
Current year		73,923			62,928			59,930
Prior years		159,776			145,376			124,801
Total paid losses and loss adjustment expenses		233,699			208,304			184,731
Net balance at end of period		800,884			735,342			639,291
Plus: Gross reinsurance receivables on unpaid losses and loss adjustment expenses		702,353			966,668			1,274,933
Unpaid losses and loss adjustment expenses at end of period	$	1,503,237		$	1,702,010		$	1,914,224

(1) Unpaid loss and loss adjustment expenses and gross reinsurance receivable on unpaid losses acquired on January 24, 2005, as a result of the merger withPenn-America Group, Inc.

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(2)

Included in 2005 is $5.8 million of negative development for thePenn-America Group that is related to prior years. This amount is not included in the “Prior years” line due to the fact that the Company did not own thePenn-America Group during the prior year periods to which the losses and loss adjustment expenses are related.

(3)

In 2007, the Company experienced $24.7 million of favorable development related to prior year reserves. The reduction was comprised of a net reduction of $42.5 million for primary liability, umbrella and excess, construction defect, and lines in run-off due to both lower than expected frequency and severity emergence, offset by a $17.8 million increase in net reserves for unallocated loss adjustment expenses (“ULAE”) and asbestos and environmental (“A&E”). The Company also reduced its reinsurance reserve allowance by $4.4 million due to better than anticipated collections from troubled reinsurers and loss emergence that has been lower than anticipated. In 2006, the Company decreased its net loss reserve relative to accident years 2005 and prior by $7.0 million due to favorable development relative to construction defect losses as well as primary general liability, umbrella and excess, and asbestos and environmental, and by $8.6 million as a reduction of its reinsurance reserve allowance. In 2005, the Company decreased its net loss reserve relative to accident years 2004 and prior by $1.3 million due to lower than anticipated frequency in its animal mortality program.

During 2006, thePenn-America Insurance Companies increased incurred losses related to insured events of years 2004 and prior by $4.3 million. This increase in incurred losses related primarily to the Company’s casualty lines of business relating to accident years 1997 through 2003.

Prior to 2001, the Company underwrote multi-peril business insuring general contractors, developers, and sub-contractors primarily involved in residential construction that has resulted in significant exposure to construction defect (“CD”) claims. Management believes its reserves for CD claims ($49.3 million and $47.3 million as of December 31, 2007 and 2006, net of reinsurance, respectively) are appropriately established based upon known facts, existing case law and generally accepted actuarial methodologies. However, due to the inherent uncertainty concerning this type of business, the ultimate exposure for these claims may vary significantly from the amounts currently recorded.

The Company has exposure to A&E claims. The asbestos exposure primarily arises from the sale of product liability insurance, and the environmental exposure arises from the sale of general liability and commercial multi-peril insurance. In establishing the liability for unpaid losses and loss adjustment expenses related to A&E exposures, management considers facts currently known and the current state of the law and coverage litigation. Liabilities are recognized for known claims (including the cost of related litigation) when sufficient information has been developed to indicate the involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, liabilities have been established to cover additional exposures on both known and unasserted claims. Estimates of the liabilities are reviewed and updated continually. Developed case law and claim history do not exist for such claims, especially because significant uncertainty exists about the outcome of coverage litigation and whether past claim experience will be representative of future claim experience. Included in net unpaid losses and loss adjustment expenses as of December 31, 2007, 2006, and 2005 were IBNR reserves of $18.8 million, $6.7 million, and $7.5 million, respectively, and case reserves of approximately $7.9 million, $4.5 million, and $4.0 million, respectively, for known A&E-related claims.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table shows the Company’s gross reserves for A&E losses:

	Years Ended December 31,
	2007		2006			2005
(Dollars in thousands)
Gross reserve for A&E losses and loss adjustment expenses — beginning of period	$	36,010	$	40,124		$	34,622
Plus: Incurred losses and loss adjustment expenses related to the merger withPenn-America Group, Inc.		—		—			78
Plus: Incurred losses and loss adjustment expenses — case reserves		11,648		1,946			6,911
Plus: Incurred losses and loss adjustment expenses — IBNR		15,015		(3,589	)		5,120
Less: Payments		4,096		2,471			6,607
Gross reserves for A&E losses and loss adjustment expenses — end of period	$	58,577	$	36,010		$	40,124

The following table shows the Company’s net reserves for A&E losses:

	Years Ended December 31,
	2007		2006			2005
(Dollars in thousands)
Net reserve for A&E losses and loss adjustment expenses — beginning of period	$	11,157	$	11,519		$	11,800
Plus: Incurred losses and loss adjustment expenses related to the merger withPenn-America Group, Inc.		—		—			58
Plus: Incurred losses and loss adjustment expenses — case reserves		4,703		1,118			1,981
Plus: Incurred losses and loss adjustment expenses — IBNR		12,248		(856	)		(662	)
Less: Payments		1,415		624			1,658
Net reserves for A&E losses and loss adjustment expenses — end of period	$	26,694	$	11,157		$	11,519

Establishing reserves for A&E and other mass tort claims involves 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. In response to these developments, management increased gross and net A&E reserves during the third quarter of 2007 to reflect its best estimate of A&E exposures. One of the Company’s 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 5,000 asbestos-related bodily injury claims and others that continue to be filed. Management is continuing to gather information to enable it to both evaluate the numerous factual and legal issues that are presented by this lawsuit and to estimate the timing of any payments that may be required. Until that information is obtained and analyzed, it is difficult to predict the ultimate financial exposure that this matter presents.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of December 31, 2007, 2006, and 2005, the survival ratio on a gross basis for the Company’s open A&E claims was 13.3 years, 7.4 years, and 7.1 years, respectively. As of December 31, 2007, 2006, and 2005, the survival ratio on a net basis for the Company’s open A&E claims was 23.6 years, 10.6 years, and 9.6 years, respectively. The survival ratio, which is the ratio of gross or net reserves to the3-year average of annual paid claims, is a non-GAAP financial measure that indicates how long the current amount of gross or net reserves are expected to last based on the current rate of paid claims.

8.   Debt

Debt consisted of the following as of December 31, 2007 and 2006:

	December 31,		December 31,
	2007		2006
6.22% guaranteed senior notes of United America Indemnity Group due July 2015	$	90,000	$	90,000
Three-month LIBOR plus 4.00% junior subordinated debentures of PAGI due December 2032		—		15,464
Three-month LIBOR plus 4.10% junior subordinated debentures of PAGI due May 2033		15,464		15,464
Three-month LIBOR plus 4.05% junior subordinated debentures of AIS due September 2033		10,310		10,310
Three-month LIBOR plus 3.85% junior subordinated debentures of AIS due October 2033		20,619		20,619
Revolving line of credit of Penn Independent Corporation, interest is variable at bank’s prime rate plus 1.25%		—		1,534
Loans payable, due 2012 to 2013, stated interest up to 4.5%		1,209		2,848
Demand discretionary facility of UNIC, interest is variable at LIBOR plus 65 basis points or the prime rate		—		—
Total debt	$	137,602	$	156,239

Guaranteed Senior Notes

On July 20, 2005, United America Indemnity Group sold $90.0 million 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 prepay $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.

In conjunction with the issuance of these senior notes, Wind River Investment Corporation (“Wind River”) reached agreement with the trustee of the Ball family trusts for the prepayment of the $72.8 million principal and related interest due as of July 20, 2005 on senior notes issued by Wind River. The terms of the prepayment agreement required the Ball family trusts to pay Wind River for $0.3 million of the issuance costs of the new senior notes plus $1.0 million of the incremental interest costs that United America Indemnity Group is estimated to incur under the new senior notes. The total amount of these payments of $1.3 million by the Ball family trusts was recorded as a gain on the early extinguishment of debt in 2005.

Junior Subordinated Debentures

On December 4, 2007, the Company redeemed all of the $15.0 million issued and outstanding notes ofPenn-America Statutory Trust I (“Penn Trust I”), and the fixed rate interest rate swap on these notes that locked the interest at an annual rate of 7.4% expired. In conjunction with this redemption, the $15.5 million of junior

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subordinated debentures ofPenn-America Group, Inc. (“PAGI”), which were the sole assets of Penn Trust I, were also redeemed.

In 2003, trusts formed and owned by the Company issued a total of $30.0 million of trust preferred securities. In 2002 and 2003, trusts formed and owned by PAGI issued a total of $30.0 million of trust preferred securities. The funds were used to purchase junior subordinated interest notes and to support the business growth in the insurance subsidiaries and general business needs. A summary of the terms related to the trust preferred securities that are still currently outstanding 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 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

The proceeds from the above offerings were used to purchase junior subordinated interest notes and were used 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, the Company may not declare or pay cash dividends on the common stock of the applicable subsidiary.

The Company’s wholly owned business trust subsidiaries, UNG Trust I, UNG Trust II, and Penn Trust II, are not consolidated pursuant to FIN 46R. These business trust subsidiaries have issued $45.0 million in floating rate capital securities and $1.4 million of floating rate common securities. The sole assets of the business trust subsidiaries are $46.4 million of the Company’s 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.

Revolving Credit Facility

During 2002, the Company established a $25.0 million Revolving Credit Facility with Citizens Bank of Pennsylvania. Interest is payable monthly at LIBOR plus 65 basis points or the Prime Rate. The Revolving Credit Facility was converted to a Demand Discretionary Facility in February 2003. During 2007, the Company borrowed and repaid $22.9 million under this credit facility. As of December 31, 2007, there was no balance due in connection with this credit facility.

Notes Payable

Notes payable and term loans assumed through the acquisition of Penn Independent Corporation consisted of a $2.5 million revolving line of credit, bearing interest at the bank’s prime rate less 1.25% payable monthly. During September 2007, all amounts due on the line were paid, and the line was terminated. Interest expense resulting from the line of credit was $0.02 million, $0.2 million, and $0.1 million for 2007, 2006, and 2005, respectively.

Loans Payable

Loans payable of $1.2 million and $2.8 million as of December 31, 2007 and 2006 were comprised of one and three loans payable, respectively, to former minority shareholders. There were no minority shareholders at December 31, 2007 and 2006. The current portion of these loans that will be payable in 2008 is $0.3 million. Interest expense related to loans payable was $0.05 million, $0.1 million, and $0.1 million for 2007, 2006, and 2005, respectively.

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UNITED AMERICA INDEMNITY, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9.   Related Party Transactions

As of December 31, 2007, Fox Paine & Company beneficially owns shares having approximately 86.1% of the Company’s total outstanding voting power. Fox Paine & Company can nominate five of the directors of the Company’s Board of Directors. The Company’s Chairman is a member of Fox Paine & Company. In addition, another director is an employee of Fox Paine & Company. The Company directly reimbursed Fox Paine & Company $0.3 million, $0.1 million, and $0.2 million during 2007, 2006, and 2005, respectively, for expenses incurred in providing management services.

At December 31, 2007 and 2006, Wind River Reinsurance was a limited partner in the Fox Paine Capital Fund, II, which is managed by Fox Paine & Company. This investment was originally made by United National Insurance Company 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 $5.6 million and $5.9 million at December 31, 2007 and 2006, respectively. At December 31, 2007, the Company had an unfunded capital commitment of $4.1 million to the partnership.

On May 25, 2006, the Company, Fox Paine & Company, and Wind River Holdings, L.P, formerly The AMC Group, L.P. (“Wind River Holdings”), entered into Amendment No. 1 (the “Amendment”) to the Management Agreement (as amended, the “Management Agreement”). The Amendment terminated Wind River Holdings’ services as of May 25, 2006, and provided that Wind River Holdings refund $0.04 million to the Company as a net repayment of the Annual Service Fee paid by the Company to Wind River Holdings on November 2, 2005. Furthermore, the Amendment modified the Agreement to reflect the Company’s new 6.22% guaranteed senior notes, which were issued in 2005, as opposed to the 5% senior notes, which were repaid by the Company in 2005 upon the issuance of the guaranteed senior notes. Per terms of the Amendment, the next management fee payment of $1.5 million was payable to Fox Paine & Company and was paid on November 8, 2006.

In November 2007, management fees of $1.5 million in the aggregate were paid to Fox Paine & Company pursuant to the Management Agreement. The management fees cover the period from September 5, 2007 through September 4, 2008 and will be recognized ratably over that period. In November 2006, management fees of $1.5 million in the aggregate were paid to Fox Paine & Company. The management fees covered the period from September 5, 2006 through September 4, 2007 and were recognized ratably over that period. In November 2005, management fees of $1.5 million in the aggregate were paid to Fox Paine & Company and The AMC Group, L.P. (“The AMC Group”), both of which were affiliates. The management fees covered the period from September 5, 2005 through September 4, 2006 and were recognized ratably over that period. The Company relies on Fox Paine & Company to provide management services and other services related to the operations of the Company.

In October 2006, the Company paid Fox Paine & Company a fee of $0.5 million for investment banking services provided in connection with the sale of substantially all of the assets of the Company’s Agency Operations.

In connection with the merger withPenn-America Group, Inc. and the acquisition of Penn Independent Corporation on January 24, 2005, the Company paid a $6.0 million transaction fee to Fox Paine & Company.

On June 30, 2006, DVUA Massachusetts, Inc. repurchased twenty shares of common stock that it issued to a minority shareholder. As a result, DVUA Massachusetts, Inc. became a wholly owned subsidiary of the Company. On October 24, 2007, DVUA Massachusetts, Inc. was dissolved.

On April 20, 2006, the Company announced that it had entered into Amendment No. 1 (the “Amendment”) of the Amended and Restated Shareholders Agreement. The Amendment reduced the requirement that the Board of Directors be comprised of no fewer than eleven directors to no fewer than seven directors. Furthermore, the Amendment (i) reduced the number of directors that Fox Paine & Company can nominate for election from six directors to five directors; and (ii) terminated the right of the Ball family trusts to nominate one director for election.

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UNITED AMERICA INDEMNITY, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In 2007, 2006, and 2005, the Company paid $1.3 million, $0.2 million, and $0.08 million, respectively, to Cozen O’Connor for legal services rendered. There is an additional accrual of $0.4 million as of December 31, 2007 for legal services rendered. Stephen A. Cozen, the chairman of Cozen O’Connor, is a member of the Company’s Board of Directors.

The Company paid $0.9 million and $0.5 million in 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 been ceded by the Company under these treaties. Validus is also a participant in a quota share retrocession agreement with Wind River Reinsurance. The Company estimated that the following written premium and losses have been assumed by Validus from Wind River Reinsurance in 2007:

(Dollars in thousands)
Ceded written premium	$	10,762
Ceded losses		1,893

Edward J. Noonan, the chairman and chief executive officer of Validus, was a member of the Company’s Board of Directors until June 1, 2007, when he resigned from the Company’s Board. Although Validus is no longer a related party as a result of Mr. Noonan’s resignation, the current quota share retrocession agreement with Wind River Reinsurance was put in place during the period when Validus was a related party.

10.   Commitments and Contingencies

Lease Commitments

Total rental expense under operating leases for the years ended December 31, 2007, 2006, and 2005 were $3.6 million, $3.5 million, and $4.0 million, respectively. At December 31, 2007, future minimum payments under non-cancelable operating leases were as follows:

(Dollars in thousands)
2008	$	3,154
2009		2,804
2010		2,656
2011		2,590
2012 and thereafter		5,323
Total	$	16,527

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. 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Other Commitments

As mentioned in Note 9 above, the Company has a remaining commitment of $4.1 million to the Fox Paine Capital Fund, II. The timing and funding of this remaining commitment has not been determined. As investment opportunities are identified by the partnerships, capital calls will be made.

The Company is party to a Management Agreement, as amended, with Fox Paine & Company, whereby in connection with certain management services provided to it by Fox Paine & Company, the Company agreed to pay an annual management fee of $1.5 million to Fox Paine & Company. The most recent annual management fee of $1.5 million was paid to Fox Paine & Company on November 1, 2007. The next annual management fee payment of $1.5 million is payable on November 1, 2008.

11.   Shareholders’ Equity

The Company allows employees to surrender the Company’s Class A common shares as payment for the tax liability incurred upon the vesting of restricted stock that was issued under the Company’s Share Incentive Plan. During 2007, the Company purchased an aggregate of 7,386 of surrendered Class A common shares from its employees for $0.2 million. All Class A common shares purchased from employees by the Company are held as treasury stock and recorded at cost.

On October 24, 2007, the Company announced that its Board of Directors authorized it to repurchase up to $50.0 million of the Company’s Class A common shares through a share repurchase program over the subsequent twelve months. This repurchase was completed in January 2008. All shares repurchased under this program are held as treasury stock and recorded at cost.

The following table provides information with respect to the Class A common shares that were surrendered or repurchased in 2007:

								Approximate
						Total Number of		Dollar Value
						Shares Purchased		of Shares That
	Total Number			Average		as Part of Publicly		May Yet Be
	of Shares			Price Paid		Announced Plan		Purchased Under the
Period	Purchased			Per Share		or Program		Plan or Program(1)
January 1-31, 2007		1,191		$	23.65		—	$	—
February 1-28, 2007		379		$	23.63		—	$	—
October 1-31, 2007		3,297		$	22.06		—	$	50,000,000
November 1-30, 2007		287,603	(2)	$	20.11		285,400	$	44,264,212
December 1-30, 2007		2,161,617	(3)	$	19.68		2,161,301	$	1,740,614
Total		2,454,087		$	19.73		2,446,701		N/A

(1)	Approximate dollar value of shares is as of the last date of the applicable month.
(2)	Includes 2,203 shares surrendered by employees as payment of taxes withheld on the vesting of restricted stock.
(3)	Includes 316 shares surrendered by employees as payment of taxes withheld on the vesting of restricted stock.

On December 31, 2007, in connection with the share repurchase program, the Company contracted to purchase 5,000 shares for $0.1 million which did not settle until January 4, 2008. As a result, these shares are not included in the above table.

During January 2008, an additional 88,362 shares were repurchased, including the 5,000 shares mentioned above, as part of the share repurchase program. Including the January 2008 repurchase, a total of 2,535,063 shares were repurchased at an average purchase price of $19.72 per share as part of the share repurchase program.

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On February 11, 2008, the Company announced that its Board of Directors authorized the Company to repurchase up to an additional $50.0 million of its Class A common shares. The timing and amount of the repurchase transactions under this program will depend on market conditions and other factors.

12.   Share-Based Compensation Plans

The fair value method of accounting recognizes share-based compensation in the statements of operation using the grant-date fair value of the stock options and other equity-based compensation expensed over the requisite service and vesting period.

On January 1, 2006, the Company adopted the provisions of SFAS 123R, which revised SFAS 123, using the modified prospective application method. SFAS 123R sets accounting requirements for share-based compensation to employees and non-employee directors, and requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity based compensation. For the purpose of determining the fair value of stock option awards, the Company uses the Black-Scholes option-pricing model. SFAS 123R requires the estimation of forfeitures when recognizing compensation expense and that this estimate be adjusted over the requisite service period should actual forfeitures differ from such estimates. Changes in estimated forfeitures are recognized through a cumulative adjustment to compensation in the period of change.

Prior to the adoption of SFAS 123R, cash retained as a result of tax deductions relating to share-based compensation was presented in operating cash flows, along with other tax cash flows. SFAS 123R requires tax benefits relating to excess stock-based compensation deductions to be prospectively presented in the statement of cash flows as financing cash inflows. Tax benefits resulting from stock-based compensation deductions in excess of amounts reported for financial reporting purposes were $0.4 million, $0.4 million and $0.5 million for the years ended December 31, 2007, 2006 and 2005, respectively.

The adoption of SFAS 123R resulted in a cumulative benefit to equity of $0.4 million in 2006 due to recognition of expected forfeitures.

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OPTIONS

Share Incentive Plan

The Company maintains the United America Indemnity, Ltd. Share Incentive Plan (as so amended, the “Plan”). The purpose of the Plan is to give the Company a competitive advantage in attracting and retaining officers, employees, consultants and non-employee directors by offering stock options, restricted shares and other stock-based awards. As amended in May 2005, the Company may issue up to 5.0 million Class A common shares for issuance pursuant to awards granted under the Plan. Award activity for stock options granted under the Plan is summarized as follows:

	Time-Based			Performance-			Tranche A
	Options			Based Options			Options			Total Options
Outstanding at January 1, 2005		568,101			895,989			256,074			1,720,164
Granted		261,484			133,415			—			394,899
Purchased due to merger		175,008			—			—			175,008
Forfeited		(39,773	)		(369,540	)		(93,825	)		(503,138	)
Exercised		(148,326	)		(15,552	)		(78,000	)		(241,878	)
Converted		644,312			(644,312	)		—			—
Outstanding at December 31, 2005		1,460,806			—			84,249			1,545,055
Granted		202,429			202,429			—			404,858
Forfeited		(195,120	)		—			—			(195,120	)
Exercised		(335,976	)		—			(28,175	)		(364,151	)
Outstanding at December 31, 2006		1,132,139			202,429			56,074			1,390,642
Granted		217,473			197,473			—			414,946
Forfeited		(254,979	)		(202,429	)		—			(457,408	)
Exercised		(144,232	)		—			—			(144,232	)
Retired		(90,300	)		—			—			(90,300	)
Purchased by Company		(119,700	)		—			—			(119,700	)
Outstanding at December 31, 2007		740,401			197,473			56,074			993,948

NOTE:   The above table excludes 55,000 warrants that were issued, at an exercise price of $10.00 per share, on September 5, 2003 and which expire on September 11, 2008. In addition, the Tranche A options were granted outside of the Plan.

On September 5, 2003, the Company granted options to purchase 256,074 Class A common shares to two officers of the Company (“Option-A Tranche”). The Option-A Tranche options have an exercise price of $6.50 per share, expire on September 5, 2013 and were fully vested at the time of the grant. The Company recorded $0.9 million of compensation expense during the period from September 5, 2003 to December 31, 2003, which represents the fair value of the Option-A Tranche on the date of the grant since they were fully vested on that date. During 2005, 93,825 of the Option-A Tranche options were forfeited and 78,000 options were exercised. During 2006, 28,175 Tranche-A options were exercised.

During the period from September 5, 2003 to December 31, 2003, the Company granted 566,661 Time-Based Options and 895,989 Performance-Based Options under the Plan. The Time-Based Options were originally scheduled to vest in 20% increments over a five-year period, with any unvested options forfeitable upon termination of employment for any reason, and expire 10 years after the grant date. The first vesting period ended on December 31, 2004. The Performance-Based Options were originally scheduled to vest in 25% increments and

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were conditioned upon the Company achieving various operating targets or Fox Paine & Company’s holdings in United America Indemnity achieving an agreed upon rate of return, and expire 10 years after the grant date. On December 31, 2005, the Company modified the 2003 grant of 566,661 Time-Based Options and the 2003 grant of 895,989 Performance-Based Options. Of the 2003 stock option grants, a total of 369,540 and 15,552 were forfeited and exercised, respectively, before the change. The Time Based Options were amended so as to modify the vesting schedule for the remaining unvested options to reflect vesting at the rate of 12% on December 31, 2006, 12% on December 31, 2007, and 36% on December 31, 2008. Also, the performance hurdle with respect to accelerated option vesting upon a change of control was eliminated. The Performance-Based Options were amended to eliminate the performance vesting criteria relating to the annual option vesting andcatch-up vesting. Also, the performance hurdle with respect to accelerated option vesting upon a change of control was eliminated. The table reflects a reclassification of 644,312 Performance-Based Options to Time-Based Options as a result of the removal of the performance based criteria. The remaining unvested options become exercisable at the rate of 10% on December 31, 2006, 10% on December 31, 2007, and 30% on December 31, 2008. As a result of these changes, the Company incurred an additional $2.5 million in stock option expense in 2005.

During 2004, the Company granted 10,000 Time-Based Options under the Plan. The Time Based Options vest in 20% increments over a five-year period, with any unvested options forfeited upon termination of employment for any reasons, and expire 10 years after grant date. The first vesting period ended on August 3, 2005.

In accordance with thePenn-America Group, Inc. Stock Incentive Plan, the merger with United America Indemnity on January 24, 2005 caused immediate vesting of allPenn-America Group, Inc.’s unvested stock options. As of January 24, 2005,Penn-America Group, Inc. had 203,635 stock options outstanding, all of which were exercisable. Each holder of thePenn-America Group, Inc. stock options received converted stock options of United America Indemnity. In exchange for outstanding options to purchasePenn-America Group, Inc.’s Class A common shares, the Company granted 175,008 stock options at the acquisition date. The modification of converting the options to purchasePenn-America Group, Inc.’s Class A common shares to options to purchase United America Indemnity’s Class A common shares had no impact on earnings.

During 2005, the Company granted 261,484 Time-Based Options and 133,415 Performance-Based Options under the Plan. The Time-Based Options vest in 20% increments over a five-year period, with any unvested options forfeited upon termination of employment for any reason, and expire 10 years after grant date. The Performance-Based Options vest in 25% increments and are conditional upon the Company achieving various operating targets and expire 10 years after the grant date.

During 2006, the Company granted 202,429 Time-Based Options and 202,429 Performance-Based Options under the Plan. The Timed-Based Options vest in 25% increments over a five-year period, with any unvested options forfeited upon termination of employment for any reason and expire 10 years after grant date. The Performance-Based Options vest in 25% increments and are conditional upon the Company achieving various operating targets and expire 10 years after the grant date. During 2007, these Time-Based and Performance-Based Options were forfeited.

During 2007, the Company granted 217,473 Time-Based Options and 197,473 Performance-Based Options under the Plan. The Timed-Based Options vest in 25% increments over a four-year period, with any unvested options forfeited upon termination of employment for any reason and expire 10 years after grant date. The Performance-Based Options vest in 25% increments and are conditional upon the Company achieving various operating targets and expire 10 years after the grant date.

In 2007, the Company recorded $0.8 million of compensation expense for the 993,948 outstanding options granted under the Plan. In 2006, the Company recorded $2.0 million of compensation expense for the 1,390,642 outstanding options granted under the Plan. In 2005, the Company recorded $3.3 million of compensation expense for the 1,545,055 options granted under the Plan. The Company received $1.9 million, $4.6 million and $2.1 million of proceeds from the exercise of options during 2007, 2006 and 2005, respectively.

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Option intrinsic values, which are the differences between the fair market value of $19.92 at December 31, 2007 and the strike price of the option, are as follows:

	Number of		Average
	Shares		Strike Price		Intrinsic Value
Outstanding		993,948	$	17.75	$	2.2 million
Exercisable		365,262		12.17		2.8 million
Exercised		144,232		13.19		1.4 million

NOTE:   The intrinsic value of the Exercised Options is the difference between the fair market value at time of exercise and the strike price of the option.

Option activity for the years ended December 31, 2005, 2006 and 2007 is as follows:

				Weighted Average
	Number of			Exercise Price
	Shares			Per Share
Options outstanding at December 31, 2004		1,720,164		$	11.35
Options issued		569,907		$	15.42
Options forfeited		(503,138	)	$	12.53
Options exercised		(241,878	)	$	8.59
Options outstanding at December 31, 2005		1,545,055		$	11.35
Options issued		404,858		$	24.70
Options forfeited		(195,120	)	$	16.10
Options exercised		(364,151	)	$	12.92
Options outstanding at December 31, 2006		1,390,642		$	15.92
Options issued		414,946		$	25.15
Options forfeited		(457,408	)	$	23.90
Options exercised		(144,232	)	$	13.19
Options retired		(90,300	)	$	10.00
Options purchased by Company		(119,700	)	$	10.00
Options outstanding at December 31, 2007		993,948		$	17.75
Options exercisable at December 31, 2007		365,262		$	12.17

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The options exercisable at December 31, 2007 include the following:

	Number of Options
Option Price	Exercisable
$6.50		56,074
$8.49		2,738
$10.00		168,389
$14.62		6,000
$17.00		111,061
$18.40		3,000
$18.85		10,000
$19.40		8,000
Options exercisable at December 31, 2007		365,262

The weighted average fair value of options granted under the Plan was $9.19, $8.31 and $4.69 in 2007, 2006 and 2005, respectively, using a Black-Scholes option-pricing model and the following weighted average assumptions:

	2007		2006		2005
Dividend yield		0.0%		0.0%		0.0%
Expected volatility		26.6%		31.4%		23.0%
Risk-free interest rate		4.6%		4.6%		3.8%
Expected option life		6.2 years		4.5 years		4.4 years

The following tables summarize the range of exercise prices of options outstanding at December 31, 2007, 2006 and 2005:

			Weighted Average
	Outstanding at		Per Share		Weighted Average
Ranges of Exercise Prices	December 31, 2007		Exercise Price		Remaining Life
$6.50-$9.99		58,812	$	6.59		5.9 years
$10.00-$16.99		310,425	$	10.15		6.0 years
$17.00-$19.99		209,765	$	17.48		6.6 years
$20.00-$25.32		414,946	$	25.15		9.4 years
Total		993,948

			Weighted Average
	Outstanding at		Per Share		Weighted Average
Ranges of Exercise Prices	December 31, 2006		Exercise Price		Remaining Life
$6.50-$9.99		62,910	$	6.72		6.8 years
$10.00-$16.99		599,875	$	10.08		6.7 years
$17.00-$19.99		322,999	$	17.56		7.5 years
$24.70		404,858	$	24.70		9.9 years
Total		1,390,642

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			Weighted Average
	Outstanding at		Per Share		Weighted Average
Ranges of Exercise Prices	December 31, 2005		Exercise Price		Remaining Life
$6.50-$9.99		110,930	$	6.94		8.3 years
$10.00-$16.99		810,625	$	10.06		7.7 years
$17.00-$19.99		623,500	$	17.66		8.8 years
Total		1,545,055

Restricted Shares

The Company recognized compensation expense for restricted stock of $1.4 million, $2.5 million and $0.6 million for 2007, 2006 and 2005, respectively. The total unrecognized compensation expense for the non-vested restricted stock was $3.8 million at December 31, 2007, which will be recognized over a weighted average life of 2.5 years. The fair value of the 54,886 Class A common shares, subject to certain restrictions granted to key employees of the Company under the Plan (“Restricted Shares”) that vested during the year ended December 31, 2007 was $22.80 per share. In addition to stock option awards, the Plan also provides for the issuance of Restricted Shares to employees and non-employee Directors. The following table summarizes the restricted stock awards since inception.

	Restricted Stock Awards
Year	Employees		Directors		Total
2003		254,708		—		254,708
2004		—		8,350		8,350
2005		79,756		29,734		109,490
2006		216,200		20,720		236,920
2007		83,984		19,335		103,319
		634,648		78,139		712,787

NOTE:   The above table includes 245,208 shares that were purchased by key employees in 2003.

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The following table summarizes the non-vested Restricted Shares activity for the year ended December 31, 2007:

				Weighted
				Average
	Number of			Price
	Shares			Per Share
Non-vested Restricted Shares at December 31, 2004		14,957		$	16.54
Shares issued		109,490		$	17.85
Shares vested		(40,876	)	$	17.22
Shares forfeited		(34,472	)	$	17.89
Shares returned		34,472		$	17.89
Non-vested Restricted Shares at December 31, 2005		83,571		$	17.93
Shares issued		236,920		$	21.71
Shares vested		(92,852	)	$	21.15
Shares forfeited		(57,682	)	$	20.83
Shares returned		57,682		$	20.83
Non-vested Restricted Shares at December 31, 2006		227,639		$	20.56
Shares issued		103,319		$	23.60
Shares vested		(54,886	)	$	21.70
Shares forfeited		(31,531	)	$	22.58
Shares returned		31,531		$	22.58
Shares purchased		(35,000	)	$	20.18
Non-vested Restricted Shares at December 31, 2007		241,072		$	24.59

Based on the terms of the Restricted Shares awards, all forfeited shares revert back to the Company.

During 2005, the Company granted an aggregate of 79,756 Restricted Shares which vest in 20% increments over a five-year period . In addition, an aggregate of 29,734 Class A common shares with a weighted average grant date value of $17.40 per share were granted, subject to certain restrictions, to the non-employee directors of the Company under the Plan (“Director Restricted Shares”). Due to an amendment to the Directors’ Compensation Plan, effective June 30, 2005, all of these Director Restricted Shares have vested. As a result of this amendment, 17,331 units were converted into 14,977 Director Restricted Shares, which vested immediately, subject to certain holding requirements, and 10,590 Director Restricted Shares granted in 2004 and prior to June 2005 vested immediately, subject to certain holding requirements. Prior to the amendment, 957 Director Restricted Shares were forfeited.

During 2006, the Company granted an aggregate of 216,200 Restricted Shares to key employees of the Company and an aggregate of 20,720 fully vested Director Restricted Shares, at a weighted average fair value of $20.81 per share, to non-employee directors of the Company under the Plan. Included in the 216,200 shares, as a result of the Compensation Committee approval of an award of an Annual Integration Bonus as described below under the heading “Annual Incentive Plans,” the Company granted 173,700 Restricted Shares to Plan Participants employed as of February 15, 2006. Of the 173,700 Restricted Shares, 61,436 shares vested immediately, 67,545 shares (including 20,000 shares, subject to certain restrictions, which were awarded to several key employees) vest over five years, and 44,719 shares vest over a three-year period. Also included in the 216,200 Restricted Shares, the Company granted Restricted Shares to key executives of the Company in exchange for signed employmentand/or non-compete agreements. The related 42,500 Restricted Shares vest 331/3% on each subsequent anniversary date of the award for a period of three years.

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During the third quarter of 2006, the Board of Directors authorized a grant of Restricted Shares to officers of the Company if the Company achieves a minimum 10% return on equity based on 2006’s operating results. 54,484 Restricted Shares were awarded during the first quarter of 2007, based on the December 31, 2006 market value of the Company’s common shares, and will vest 34% on January 1, 2008 and 33% on each January 1 of years 2009 and 2010. The Board of Directors also authorized a grant of Restricted Shares to these individuals if the Company earns no less than 85% of planned 2006 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. The results of calendar year 2006 will be examined three years hence by an independent actuary. If 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, adjusted to reflect the results of the actuarial study, is greater than or equal to 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 as originally reported, Restricted Shares may be awarded based on the December 31, 2006 market value of the Company’s common shares. The awards are being expensed over the intrinsic service period, which includes the performance period and the employee service period. The employee must be continually employed through the vesting date to be eligible to receive the award. The Company recognized $0.5 million and $0.3 million of expense in 2007 and 2006, respectively, related to these awards.

During 2007, the Company granted an aggregate of 83,984 Restricted Shares to key employees of the Company and an aggregate of 19,332 fully vested Director Restricted Shares, at a weighted average fair value of $23.13 per share, to non-employee directors of the Company under the Plan. Included in the 83,984, the Company granted 2,500 Restricted Shares in exchange for a signed non-compete agreement. Of this award, 850 Restricted Shares vested immediately and the remainder vest 33% on October 24, 2008 and 2009. Also included, the Company granted 27,000 Restricted Shares to key executives of the Company in exchange for signed employment agreements. The shares vest 331/3% on each subsequent anniversary date of the award for a period of three years. Included in the 83,984 shares, the Company granted 54,484 Restricted Shares, as a result of the 2006 Board of Directors’ approval of the grant of Restricted Shares as described below.

During 2007, the Board of Directors authorized a grant of Restricted Shares to officers of the Company if the Company achieves a minimum 10% return on equity based on 2007’s operating results. 45,514 Restricted Shares were awarded during the first quarter of 2008, based on the December 31, 2007 market value of the Company’s common shares, and will vest 34% on January 1, 2009 and 33% on each January 1 of years 2010 and 2011. The Board of Directors also authorized an incentive award of Restricted Shares to these individuals if the Company earns no less than 85% of planned 2007 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. The results of calendar year 2007 will be examined in 2010 by an independent actuary. If 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, adjusted to reflect the results of the actuarial study, is greater than or equal to 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 as originally reported, Restricted Shares may be awarded in 2011 based on the December 31, 2007 market value of the Company’s common shares. The awards are being expensed over the intrinsic service period, which includes the performance period and the employee service period. The employee must be continually employed through the vesting date to be eligible to receive the award. The Company recognized $0.4 million of expense in 2007 related to these awards.

Annual Incentive Plans

The Restricted Shares awards under the Plan are included in the Restricted Shares section above. In May 2005, shareholders approved the Amended and Restated United America Indemnity, Ltd. Annual Incentive Awards

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Program (the “Awards Program”). The purpose of the Awards Program is to encourage increased efficiency and profitability and reward employees’ contributions to corporate success. All employees of the Company and its subsidiaries are eligible to participate in the Awards Program, and Awards Program participants are selected by the Compensation Committee of the Board of Directors (the “Committee”). Incentive awards under the Awards Program are determined and paid in cashand/or restricted stock based upon objective performance-based criteria as determined by the Committee. The criteria relate to certain performance goals, such as net income, combined ratio, return on equity, and individual performance expectations as established by the Committee, except that certain specific performance targets will be approved by the Section 162(m) Committee of the Board of Directors with respect to the executives covered by Section 162(m) of the Internal Revenue Code (“Section 162(m)”). It is the Company’s intent that any compensation paid pursuant to the Awards Program comply with Section 162(m).

In connection with the business combinations of the Company withPenn-America Group and Penn Independent Group, along with their respective subsidiaries, certain executives ofPenn-America Group and Penn Independent Group entered into employment agreements which provided for the establishment of an integration bonus payable in Class A common shares of the Company in 2006 and 2007, if specified integrated company performance goals for 2005 and 2006, respectively, were achieved (the “Integration Plan”).

On February 15, 2006, the Compensation Committee of the Company modified certain aspects of the Integration Plan.

First, the Compensation Committee revised the definition of the “Merger Price” from $15.375 per share to $17.89 per share. This change corrected a typographical error contained within the Integration Plan.

Second, the Compensation Committee approved an award of an Annual Integration Bonus relating to the 2006 fiscal year to the Integration Plan participants who were employed byPenn-America Group, Inc. as of February 15, 2006 (the “Current Plan Participants”). Such awards would have otherwise been determined and paid in full following the 2006 fiscal year. The decision by the Compensation Committee to modify the determination and award of the 2006 Annual Integration Bonus was based on: (i) the Compensation Committee’s recognition of the earlier-than-anticipated consolidation of the Company’s Insurance Operations, (ii) the Compensation Committee’s determination that thePenn-America Group, Inc. performance targets contained in the Integration Plan for the 2006 Bonus Determination Year were no longer appropriate performance targets on which to base plan awards given the earlier — than-anticipated consolidation, and the fact that the 2006 targets were exceeded in 2005, and (iii) the Compensation Committee’s desire to achieve parity among the Current Plan Participants and other executives of the Company entitled to receive awards of stock based on time versus performance-based vesting. Therefore, the Compensation Committee eliminated the performance criteria relating to the 2006 Bonus Determination Year, and instead granted restricted stock to the Current Plan Participants, which will vest at the rate 20% on each of February 15, 2007 and February 15, 2008 and 60% on February 15, 2009, subject to certain employment-related requirements. Although the Current Plan Participants were granted restricted stock earlier than they otherwise would have, the restricted stock vests over time as set forth above. Under the original terms of the Integration Plan, the granted stock would have vested immediately.

Chief Executive Officer

Effective May 9, 2007, Larry A. Frakes was hired as the Company’s President and Chief Operating Officer, as well as Chief Executive Officer of all of the Company Affiliates. Mr. Frakes’ four-year employment agreement includes several equity components including (a) the granting of $10.0 million of stock options, or 394,946 shares split evenly between time-based and performance-based options at the grant date market value of $25.32 per share; (b) an annual bonus program under which the first $0.5 million is paid in restricted stock based on the market value at December 31 of the subject Bonus Year; (c) the purchase of $1.0 million of the Company’s Class A common shares by Mr. Frakes; and (d) the requirement that, effective January 1, 2009, Mr. Frakes hold Class A common shares of the Company with a value of the lesser of two times his Annual Compensation or the sum of owned, granted, and vested Class A common shares. The time-based options vest at 25% on each December 31 of years

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2008 through 2011. The performance-based options generally vest at the same rate based on the achievement of various Company financial performance goals. The restricted stock portion of the 2008, 2009, and 2010 bonuses vest at 25% per year each year after the bonus year, and awards for the 2010 bonus year and thereafter will vest at 33.3% per year each year after the bonus year.

In February 2008, Mr. Frakes’ employment agreement was amended and restated. See Note 17 for details concerning this amendment and restatement.

13.   401(k) Plans

The Company maintains a 401(k) defined contribution plan that covers all eligible U.S employees. Under this plan, the Company matches 100% of the first 6% contributed by an employee. Vesting on contributions made by the Company for new employees occurs pro-rata over a three year period. Total expenses for the plan for the year ended December 31, 2007 were $1.3 million.

Through December 31, 2006, the Company maintained two 401(k) defined contribution plans covering all U.S employees.

Through December 31, 2006, for employees, exclusive of employees of Penn Independent Corporation,Penn-America Group, Inc. and their respective subsidiaries, the Company matched 75% of the first 6% contributed by an eligible employee. Additionally, the Company contributed 1% of the employee’s salary regardless of whether an employee contributed to the plan. Eligible employees vested in the Company’s contribution and relative investment income after three years of service. Total expenses related to this plan for the years ended December 31, 2006 and 2005 were $0.8 million and $0.7 million, respectively.

Through December 31, 2006, for employees of Penn Independent Corporation,Penn-America Group Inc. and their respective subsidiaries, the Company matched 50% of the first 6% contributed by an eligible employee. Vesting in the Company’s contribution was immediate for eligible employees. Total expenses for this plan for the years ended December 31, 2006 and 2005 were $0.4 million and $0.5 million, respectively.

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14.   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.

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

	Years Ended December 31,
	2007		2006		2005
(Dollars in thousands, except per share data)
Income from continuing operations	$	98,886	$	89,338	$	64,751
Discontinued operations		31		10,080		(584	)
Income before extraordinary gain		98,917		99,418		64,167
Extraordinary gain		—		—		1,426
Net income	$	98,917	$	99,418	$	65,593
Basic earnings per share:
Weighted average shares for basic earnings per share		37,048,491		36,778,276		35,904,127
Income from continuing operations	$	2.67	$	2.43	$	1.81
Discontinued operations		—		0.27		(0.02	)
Income before extraordinary gain		2.67		2.70		1.79
Extraordinary gain		—		—		0.04
Net income	$	2.67	$	2.70	$	1.83
Diluted earnings per share:
Weighted average shares for diluted earnings per share		37,360,703		37,157,783		36,589,902
Income from continuing operations	$	2.65	$	2.41	$	1.77
Discontinued operations		—		0.27		(0.02	)
Income before extraordinary gain		2.65		2.68		1.75
Extraordinary gain		—		—		0.04
Net income	$	2.65	$	2.68	$	1.79

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

	Years Ended December 31,
	2007		2006		2005
Weighted average shares for basic earnings per share		37,048,491		36,778,276		35,904,127
Non-vested restricted stock		60,549		13,134		—
Options and warrants		251,663		366,373		685,775
Weighted average shares for diluted earnings per share		37,360,703		37,157,783		36,589,902

As mentioned in Note 11, the Company has repurchased approximately 2.4 million shares of its Class A common shares in 2007 under the share repurchase program that was authorized in October 2007. As a result, there were approximately 22.3 million outstanding Class A common shares at December 31, 2007 compared to approximately 24.5 million shares outstanding at December 31, 2006. Including Class B common shares, there

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UNITED AMERICA INDEMNITY, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

were approximately 35.0 million common shares outstanding at December 31, 2007 compared to approximately 37.2 million outstanding shares at December 31, 2006.

15.   Statutory Financial Information

GAAP differs in certain respects from Statutory Accounting Principles (“SAP”) as prescribed or permitted by the various U.S. State Insurance Departments. The principal differences between SAP and GAAP are as follows:

•  Under SAP, investments in debt securities are primarily carried at amortized cost, while under GAAP the Company records its debt securities at estimated fair value.

•  Under SAP, policy acquisition costs, such as commissions, premium taxes, fees and other costs of underwriting policies are charged to current operations as incurred, while under GAAP such costs are deferred and amortized on a pro rata basis over the period covered by the policy.

•  Under SAP, certain assets designated as “Non-admitted Assets” (such as prepaid expenses) are charged against surplus.

•  Under SAP, net deferred income tax assets are admitted following the application of specified criteria, with the resulting admitted deferred tax amount being credited directly to surplus.

•  Under SAP, certain premium receivables are non-admitted and are charged against surplus based upon aging criteria.

•  Under SAP, the costs and related receivables for guaranty funds and other assessments are recorded based on management’s estimate of the ultimate liability and related receivable settlement, while under GAAP such costs are accrued when the liability is probable and reasonably estimable and the related receivable amount is based on future premium collections or policy surcharges from in-force policies.

•  Under SAP, unpaid losses and loss adjustment expenses and unearned premiums are reported net of the effects of reinsurance transactions, whereas under GAAP, unpaid losses and loss adjustment expenses and unearned premiums are reported gross of reinsurance.

•  Under SAP, a provision for reinsurance is charged to surplus based on the authorized status of reinsurers, available collateral, and certain aging criteria, whereas under GAAP, an allowance for uncollectible reinsurance is established based on management’s best estimate of the collectibility of reinsurance receivables.

The National Association of Insurance Commissioners (“NAIC”) issues model laws and regulations, many of which have been adopted by state insurance regulators, relating to: (a) risk-based capital (“RBC”) standards; (b) codification of insurance accounting principles; (c) investment restrictions; and (d) restrictions on the ability of insurance companies to pay dividends.

The Company’s U.S. insurance subsidiaries are required by law to maintain certain minimum surplus on a statutory basis, and are subject to regulations under which payment of a dividend from statutory surplus is restricted and may require prior approval of regulatory authorities. Applying the current regulatory restrictions as of December 31, 2007, the maximum amount of distributions that could be paid by the United National Insurance Companies and thePenn-America Insurance Companies as dividends under applicable laws and regulations without regulatory approval is approximately $46.9 million and $23.5 million, respectively. ThePenn-America Insurance Companies limitation includes $7.7 million that would be distributed to United National Insurance Company or its subsidiary Penn Independent Corporation based on the December 31, 2007 ownership percentages. For 2007, United National Insurance Companies andPenn-America Insurance Companies declared and paid dividends of $23.3 million and $14.8 million, respectively.

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The NAIC’s RBC model provides a tool for insurance regulators to determine the levels of statutory capital and surplus an insurer must maintain in relation to its insurance and investment risks, as well as its reinsurance exposures, to assess the potential need for regulatory attention. The model provides four levels of regulatory attention, varying with the ratio of an insurance company’s total adjusted capital to its authorized control level RBC (“ACLRBC”). If a company’s total adjusted capital is:

(a) less than or equal to 200%, but greater than 150% of its ACLRBC (the “Company Action Level”), the company must submit a comprehensive plan to the regulatory authority proposing corrective actions aimed at improving its capital position;

(b) less than or equal to 150%, but greater than 100% of its ACLRBC (the “Regulatory Action Level”), the regulatory authority will perform a special examination of the company and issue an order specifying the corrective actions that must be followed;

(c) less than or equal to 100%, but greater than 70% of its ACLRBC (the “Authorized Control Level”), the regulatory authority may take any action it deems necessary, including placing the company under regulatory control; and

(d) less than or equal to 70% of its ACLRBC (the “Mandatory Control Level”), the regulatory authority must place the company under its control.

Based on the standards currently adopted, the capital and surplus of the United National Insurance Companies and thePenn-America Insurance Companies are above the prescribed Company Action Level RBC requirements of $178.2 million and $89.7 million, respectively, as of December 31, 2007.

The following is selected information for the Company’s U.S. Insurance Subsidiaries, net of intercompany eliminations, where applicable, as determined in accordance with SAP:

	Years Ended December 31,
	2007		2006		2005
(Dollars in thousands)
Statutory capital and surplus, as of end of period	$	650,698	$	592,977	$	523,049
Statutory net income		85,077		100,235		37,418

16.   Segment Information

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

The Company’s Reinsurance Operations segment resulted from the amalgamation of theNon-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 years.

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 2.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Gross premiums written by product classification are as follows:

	Years Ended December 31,
	2007		2006		2005
(Dollars in thousands)
Insurance Operations:
Penn-America	$	286,439	$	390,260	$	374,402
United National		132,311		154,114		146,868
Diamond State		118,085		108,591		101,608
Total Insurance Operations		536,835		652,965		622,878
Reinsurance Operations:
Wind River Reinsurance		26,277		—		—
Total	$	563,112	$	652,965	$	622,878

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

	Insurance
2007:	Operations			Reinsurance			Corporate		Eliminations			Total
(Dollars in thousands)
Revenues:
Gross premiums written	$	536,835		$	26,277	(1)	$	—	$	—		$	563,112
Net premiums written	$	478,274		$	12,261	(1)	$	—	$	—		$	490,535
Net premiums earned	$	530,516		$	5,807	(1)	$	—	$	—		$	536,323
Net investment income		—			—			77,341		—			77,341
Net realized investment gains		—			—			968		—			968
Total revenues	$	530,516		$	5,807			78,309		—			614,632
Losses and Expenses:
Net losses and loss adjustment expenses		295,624			3,617			—		—			299,241
Acquisition costs and other underwriting expenses		170,611	(2)		4,113	(3)		—		(543	)		174,181
Corporate and other operating expenses		—			—			11,515		176			11,691
Interest expense		—			—			11,372		—			11,372
Income (loss) before income taxes	$	64,281		$	(1,923	)	$	55,422	$	367			118,147
Income tax expense													18,680
Income before equity in net loss of partnership													99,467
Equity in net loss of partnership, net of tax													(581	)
Income before discontinued operations													98,886
Discontinued operations, net of tax													31
Net income												$	98,917
Total assets	$	2,131,185		$	643,987		$	—	$	—		$	2,775,172

(1)	External business only, excluding business assumed from affiliates.
(2)	Includes excise tax of $2,390 relating to offshore cession.
(3)	Includes all Wind River Reinsurance expenses other than excise tax.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Insurance
2006:	Operations			Corporate			Eliminations			Total
(Dollars in thousands)
Revenues:
Gross premiums written	$	652,965		$	—		$	—		$	652,965
Net premiums written	$	560,535		$	—		$	—		$	560,535
Net premiums earned	$	546,469		$	—		$	—		$	546,469
Net investment income		—			66,538			—			66,538
Net realized investment losses		—			(570	)		—			(570	)
Total revenues		546,469			65,968			—			612,437
Losses and Expenses:
Net losses and loss adjustment expenses		304,355			—			—			304,355
Acquisition costs and other underwriting expenses		175,346	(1)		—			(1,660	)		173,686
Corporate and other operating expenses		—			15,693			822			16,515
Interest expense		—			11,393			—			11,393
Income before income taxes	$	66,768		$	38,882		$	838			106,488
Income tax expense											18,176
Income before equity in net income of partnerships											88,312
Equity in net income of partnerships											1,026
Income before discontinued operations											89,338
Discontinued operations, net of tax											10,080
Net income										$	99,418
Total assets	$	2,984,616		$	—		$	—		$	2,984,616

(1) Includes $2,223 from the predecessor of Wind River Reinsurance and excise tax of $2,932 relating to offshore cession.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Insurance
2005:	Operations			Corporate		Eliminations			Total
(Dollars in thousands)
Revenues:
Gross premiums written	$	622,878		$	—	$	—		$	622,878
Net premiums written	$	519,733		$	—	$	—		$	519,733
Net premiums earned	$	475,430		$	—	$	—		$	475,430
Net investment income		—			47,118		—			47,118
Net realized investment gains		—			554		—			554
Total revenues		475,430			47,672		—			523,102
Losses and Expenses:
Net losses and loss adjustment expenses		288,124			—		—			288,124
Acquisition costs and other underwriting expenses		145,158	(1)		—		(1,088	)		144,070
Provision for doubtful reinsurance		50			—		—			50
Corporate and other operating expenses		—			14,810		—			14,810
Interest expense		—			9,435		—			9,435
Income before income taxes	$	42,098		$	23,427	$	1,088			66,613
Income tax expense										2,973
Income before minority interest and equity in net income of partnerships										63,640
Minority interest										19
Equity in net income of partnerships										1,092
Income before discontinued operations										64,751
Discontinued operations, net of tax										(584	)
Income before extraordinary gain										64,167
Extraordinary gain										1,426
Net income									$	65,593
Total assets	$	3,102,002		$	—	$	—		$	3,102,002

(1) Includes $3,741 from the predecessor of Wind River Reinsurance and excise tax of $2,741 relating to offshore cession.

17.   Supplemental Cash Flow Information

Taxes and Interest Paid

	Years Ended December 31,
(Dollars in thousands)	2007		2006		2005
Net federal income taxes paid	$	16,779	$	18,915	$	5,980
Interest paid		11,181		11,238		7,642

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

18.   Subsequent Events

On January 28, 2008, the Company’s shareholders approved an amendment to the Share Incentive Plan that allows for the repricing, without shareholder approval, of stock options and other stock-based awards granted under the Share Incentive Plan.

On February 5, 2008, the Company entered into an amended and restated employment agreement with Larry A. Frakes, the Company’s President and Chief Executive Officer, which amended and restated Mr. Frakes’ original employment agreement that was entered into on May 10, 2007. The amended and restated employment agreement changes and clarifies the terms of options granted under the original employment agreement. The original agreement granted Mr. Frakes $10.0 million of options, or 394,946 shares, as described in Note 12. The amended and restated agreement grants Mr. Frakes $10.0 million of options with a strike price equal to the average price per share that was paid by Mr. Frakes upon his purchase of $1.0 million of the Company’s Class A common shares.

On February 11, 2008, the Company announced that its Board of Directors authorized the Company to repurchase up to an additional $50.0 million of its Class A common shares. The timing and amount of the repurchase transactions under this program will depend on market conditions and other factors.

19.   Summary of Quarterly Financial Information (Unaudited)

An unaudited summary of the Company’s 2007 and 2006 quarterly performance is as follows:

	Year Ended December 31, 2007
	First		Second			Third			Fourth
(Dollars in thousands, except per share data)	Quarter		Quarter			Quarter			Quarter
Net premiums earned	$	138,437	$	136,585		$	133,449		$	127,852
Net investment income		18,868		19,317			19,870			19,286
Net realized investment gains (losses)		225		1,542			(614	)		(185	)
Net losses and loss adjustment expenses		81,841		75,244			74,511			67,645
Acquisition costs and other underwriting expenses		42,882		44,662			43,376			43,261
Income before income taxes		26,338		31,746			28,968			31,095
Discontinued operations, net of tax		159		(39	)		(118	)		29
Net income		22,593		25,948			23,980			26,396
Per share data — Diluted:
Income from continuing operations	$	0.61	$	0.69		$	0.64		$	0.71
Discontinued operations		—		—			—			—
Net income	$	0.61	$	0.69		$	0.64		$	0.71

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Year Ended December 31, 2006
	First		Second			Third			Fourth
(Dollars in thousands, except per share data)	Quarter		Quarter			Quarter			Quarter
Net premiums earned	$	135,430	$	133,751		$	137,327		$	139,961
Net investment income		13,679		17,936			15,569			19,354
Net realized investment gains (losses)		43		(4	)		(1,423	)		814
Net losses and loss adjustment expenses		78,964		80,464			75,643			69,284
Acquisition costs and other underwriting expenses		44,988		41,175			43,591			43,932
Income before income taxes		18,222		23,218			26,332			38,716
Discontinued operations, net of tax		203		(450	)		11,024			(697	)
Net income		17,778		20,254			32,089			29,297
Per share data — Diluted:
Income from continuing operations	$	0.48	$	0.56		$	0.57		$	0.80
Discontinued operations		—		(0.01	)		0.30			(0.02	)
Net income		0.48		0.55			0.87			0.78

133

Item 9.   Changes In And Disagreements With Accountants On Accounting And Financial Disclosure

None

Item 9A.   Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Based on their evaluation of the effectiveness of our disclosure controls and procedures (as defined inRule 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 December 31, 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.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined inRule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Our management has concluded that, as of December 31, 2007, our internal control over financial reporting was effective based on these criteria. Our independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of our internal control over financial reporting, as stated in their report, which is included in Item 8 of this report onForm 10-K.

Changes in Internal Control over Financial Reporting

As a result of combining the operations of United National andPenn-America under a single 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 year ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.   Other Information

None.

PART III

Item 10.   Directors, Executive Officers of the Registrant, and Corporate Governance

The information concerning our directors and executive officers required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement.

Item 11.   Executive Compensation

The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement.

134

Item 12.   Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters

The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement.

Item 13.   Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement.

Item 14.   Principal Accounting Fees and Services

The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement.

PART IV

Item 15.   Exhibits and Financial Statement Schedules

(a) The following documents are filed as part of this report:

(1) The Financial Statements listed in the accompanying index on page 75 are filed as part of this report.

(2) The Financial Statement Schedules listed in the accompanying index on page 75 are filed as part of this report.

(3) The Exhibits listed below are filed as part of, or incorporated by reference into, this report.

Exhibit No.			Description
	2	.1	Amended and Restated Investment Agreement, dated as of September 5, 2003, by and among U.N. Holdings (Cayman), Ltd., United National Group, Ltd., United America Indemnity Group, Inc., U.N. Holdings LLC, U.N. Holdings Inc., Wind River Investment Corporation and certain Trusts Listed on Schedule A thereof (incorporated herein by reference to Exhibit 2.1 of Amendment No. 1 to our Registration Statement onForm S-1 (RegistrationNo. 333-108857) filed on October 28, 2003).
	2	.2	Agreement and Plan of Merger, dated as of October 14, 2004, by and amongPenn-America Group, Inc., United National Group, Ltd., United America Indemnity Group, Inc. and Cheltenham Acquisition Corp. (incorporated herein by reference to Exhibit 2.1 of our Current Report onForm 8-K dated October 15, 2004).
	2	.3	Stock Purchase Agreement, dated as of October 14, 2004, by and among United National Group, Ltd., United National Insurance Company, Penn Independent Corporation, the Shareholders named therein and the Shareholders’ representative (incorporated herein by reference to Exhibit 2.2 of our Current Report onForm 8-K dated October 15, 2004).
	2	.4	Stock Purchase Agreement, dated as of October 14, 2004, by and among United National Group, Ltd., United National Insurance Company and Irvin Saltzman (incorporated herein by reference to Exhibit 2.3 of our Current Report onForm 8-K dated October 15, 2004).
	2	.5	Stock Purchase Agreement, dated as of October 14, 2004, by and among United National Group, Ltd., United National Insurance Company, Jon S. Saltzman and Joanne Lynch Saltzman (incorporated herein by reference to Exhibit 2.4 of our Current Report onForm 8-K dated October 15, 2004).
	3	.1	Amended and Restated Memorandum and Articles of Association of United America Indemnity, Ltd., dated September 20, 2007 (incorporated herein by reference to Appendix A of our Definitive Proxy Statement dated August 21, 2007).
	4	.1	Note and Guarantee Agreement dated July 20, 2005, among United America Indemnity Group, Inc., United America Indemnity, Ltd. and the Investors named therein (incorporated herein by reference to Exhibit 4.1 of our Current Report onForm 8-K filed on July 21, 2005).
	4	.2	Form of 6.22% Guaranteed Senior Note due 2015 (incorporated herein by reference to Exhibit 4.1 of our Current Report onForm 8-K filed on July 21, 2005).

135

Exhibit No.			Description
	4	.3	Form of Specimen Certificate for Registrant’s Class A Common Shares (incorporated herein by reference to Exhibit 4.3 of Amendment No. 4 to our Registration Statement onForm S-1 (RegistrationNo. 333-108857) filed on December 15, 2003).
	10	.1	Amended and Restated Shareholders Agreement dated December 15, 2003, by and among United National Group, Ltd., U.N. Holdings (Cayman) Ltd. and those trusts signatory thereto (incorporated herein by reference to Exhibit 10.1 of our Annual Report onForm 10-K for the fiscal year ended December 31, 2003)
	10	.2	Amendment No. 1 to Amended and Restated Shareholders Agreement, dated as of April 10, 2006, by and among United America Indemnity, Ltd., U.N. Holdings (Cayman) Ltd., those co-investment funds signatory thereto and those trust signatory thereto (incorporated herein by reference to Exhibit 10.1 of our Current Report onForm 8-K filed on April 20, 2006).
	10	.3*	Management Shareholders Agreement, dated as of September 5, 2003, by and among United National Group, Ltd. and those management shareholders signatory thereto (incorporated herein by reference to Exhibit 10.2 of Amendment No. 1 to our Registration Statement onForm S-1 (RegistrationNo. 333-108857) filed on October 28, 2003).
	10	.4*	Amendment to Management Shareholders’ Agreement, dated as of January 1, 2006, by and among United America Indemnity, Ltd. and those management shareholders signatory thereto (incorporated herein by reference to Exhibit 10.1 of our Current Report onForm 8-K filed January 12, 2006).
	10	.5*	Management Agreement, dated as of September 5, 2003, by and among United National Group, Ltd., Fox Paine & Company, LLC and The AMC Group, L.P., with related Indemnity Letter (incorporated herein by reference to Exhibit 10.3 of Amendment No. 1 to our Registration Statement onForm S-1 (RegistrationNo. 333-108857) filed on October 28, 2003).
	10	.6*	Amendment No. 1 to the Management Agreement, dated as of May 25, 2006, by and among United America Indemnity, Ltd., Fox Paine & Company, LLC and Wind River Holdings, L.P., formerly The AMC Group, L.P. (incorporated herein by reference to Exhibit 10.3 of our Current Report onForm 8-K filed on June 1, 2006).
	10	.7*	United National Group, Ltd. Stock Incentive Plan and Amendment No. 1 thereto (incorporated herein by reference to Exhibit 10.4 of Amendment No 2. to our Registration Statement onForm S-1 (RegistrationNo. 333-108857) filed on November 26, 2003).
	10	.8*	Amendment No. 2 to the United America Indemnity, Ltd. Share Incentive Plan (incorporated herein by reference to Exhibit 10.2 of our Current Report onForm 8-K filed on May 9, 2005).
	10	.9*	Amendment No. 3 to the United America Indemnity, Ltd. Share Incentive Plan (incorporated herein by reference to Exhibit 10.1 of our Current Report onForm 8-K filed on June 1, 2006).
	10	.10*	Amendment No. 4 to the United America Indemnity, Ltd. Share Incentive Plan (incorporated herein by reference to Exhibit 10 of our Current Report onForm 8-K filed on January 31, 2008).
	10	.11*	Amended and Restated United America Indemnity, Ltd. Annual Incentive Awards Program (incorporated herein by reference to Exhibit 10.1 of our Current Report onForm 8-K filed on May 9, 2005).
	10	.12*	Amendment No. 1 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 onForm 8-K filed on June 1, 2006).
	10	.13*	Employment Agreement for Larry A. Frakes, dated May 10, 2007 (incorporated herein by reference to Exhibit 10.1 of our Quarterly Report onForm 10-Q filed on May 10, 2007)
	10	.14*	Amended and Restated Employment Agreement for Larry A. Frakes, dated February 5, 2008 (incorporated herein by reference to Exhibit 10.1 of our Current Report onForm 8-K filed on February 8, 2008).
	10	.15*	Employment Agreement between United America Indemnity, Ltd. and Robert M. Fishman, dated November 9, 2006 (incorporated herein by reference to Exhibit 10.1 of our Current Report onForm 8-K filed on November 13, 2006).
	10	.16*	Executive Employment Agreement, dated as of April 1, 2006, between Wind River Insurance Company (Bermuda), Ltd. and David R. Whiting (incorporated herein by reference to Exhibit 10.1 of our Current Report onForm 8-K filed on May 17, 2006).

136

Exhibit No.			Description
	10	.17*	Amended and Restated Executive Employment Agreement, dated January 1, 2005, between United National Insurance Company and Richard S. March (incorporated herein by reference to Exhibit 10.1 of our Current Report onForm 8-K filed on April 12, 2005).
	10	.18*	Amendment to Executive Employment Agreement, dated as of January 1, 2006, between United National Insurance Company and Richard S. March (incorporated herein by reference to Exhibit 10.4 of our Current Report onForm 8-K filed on January 12, 2006).
	10	.19*	Amended and Restated Executive Agreement, dated January 1, 2005, between United National Insurance Company and Kevin L. Tate (incorporated herein by reference to Exhibit 10.2 of our Current Report onForm 8-K filed on April 12, 2005).
	10	.20*	Amendment to Executive Employment Agreement, dated as of January 1, 2006, between United National Insurance Company and Kevin L. Tate (incorporated herein by reference to Exhibit 10.3 of our Current Report onForm 8-K filed on January 12, 2006).
	21	.1+	List of Subsidiaries.
	23	.1+	Consent of PricewaterhouseCoopers LLP.
	31	.1+	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31	.2+	Certification of Chief Financial Officer 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 required to be filed as an exhibit to thisForm 10-K.

137

SIGNATURES

Pursuant to the requirements of the Section 13 or 15 (d) 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.

By:  /s/  Larry A. Frakes

Name: Larry A. Frakes

Title:  Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated below on March 11, 2008.

Signature	Title
/s/  Saul A. Fox Saul A. Fox	Chairman and Director
/s/  Larry A. Frakes Larry A. Frakes	President, Chief Executive Officer, and Director
/s/  Kevin L. Tate Kevin L. Tate	Principal Financial and Accounting Officer
/s/  Seth J. Gersch Seth J. Gersch	Director
/s/  Stephen A. Cozen Stephen A. Cozen	Director
/s/  Richard L. Duszak Richard L. Duszak	Director
/s/  James R. Kroner James R. Kroner	Director
/s/  Michael J. Marchio Michael J. Marchio	Director

138

UNITED AMERICA INDEMNITY, LTD.

SCHEDULE I — SUMMARY OF INVESTMENTS — OTHER THAN INVESTMENTS
IN RELATED PARTIES
(In thousands)

	As of December 31, 2007
					Amount
					Included in the
	Cost *		Value		Balance Sheet
Type of Investment:
Bonds:
United States Government and government agencies and authorities	$	180,658	$	186,808	$	186,808
States, municipalities, and political subdivisions		866,971		873,993		873,993
Public utilities		32,423		32,278		32,278
All other corporate bonds		276,387		277,487		277,487
Total bonds		1,356,439		1,370,566		1,370,566
Equity securities:
Common stocks:
Public utilities		4,816		5,549		5,549
Banks, trusts and insurance companies		12,513		12,673		12,673
Industrial and miscellaneous		43,703		55,572		55,572
Non-redeemable preferred stock		11,802		11,883		11,883
Total equity securities		72,834		85,677		85,677
Other long-term investments		24,563		64,539		64,539
Total investments	$	1,453,836	$	1,520,782	$	1,520,782

* Original cost of equity securities; original cost of fixed maturities adjusted for amortization of premiums and accretion of discounts. All amounts are shown net of impairment losses.

S-1

UNITED AMERICA INDEMNITY, LTD.

SCHEDULE II — Condensed Financial Information of Registrant
(Parent Only)
Balance Sheets
(Dollars in thousands, except per share data)

	As of			As of
	December 31, 2007			December 31, 2006
ASSETS
Cash and cash equivalents	$	4,901		$	1,716
Equity in unconsolidated subsidiaries (1)		886,697			760,296
Due from affiliates		138			8,511
Other assets		1,556			1,030
Total assets	$	893,292		$	771,553
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Note payable to affiliate (1)	$	56,000		$	6,000
Other liabilities		1,016			2,283
Total liabilities		57,016			8,283
Commitments and contingencies
Shareholders’ equity:
Common shares, $0.0001 par value, 900,000,000 common shares authorized, 24,770,507 and 24,507,919 Class A common shares issued and outstanding 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		519,980			515,357
Accumulated other comprehensive income, net of tax		40,172			22,580
Retained earnings		324,542			225,329
Class A common shares in treasury, at cost: 2,454,087 and 0 shares, respectively		(48,422	)		—
Total shareholders’ equity		836,276			763,270
Total liabilities and shareholders’ equity	$	893,292		$	771,553

(1) This item has been eliminated in the Company’s Consolidated Financial Statements.

See Notes to Consolidated Financial Statements included in Item 8.

S-2

UNITED AMERICA INDEMNITY, LTD.

SCHEDULE II — Condensed Financial Information of Registrant (continued)
(Parent Only)
Statement of Operations and Comprehensive Income
(Dollars in thousands)

	Year Ended			Year Ended
	December 31, 2007			December 31, 2006
Revenues:
Total revenues	$	115		$	98
Expenses:
Other expenses		9,701			8,585
Loss before equity in earnings of unconsolidated subsidiaries		(9,586	)		(8,487	)
Equity in earnings of unconsolidated subsidiaries (1)		108,503			107,905
Net income		98,917			99,418
Other comprehensive income, net of tax:
Equity in other comprehensive income of unconsolidated subsidiaries		17,888			13,109
Other comprehensive income, net of tax		17,888			13,109
Comprehensive income, net of tax	$	116,805		$	112,527

(1) This item has been eliminated in the Company’s Consolidated Financial Statements.

See Notes to Consolidated Financial Statements included in Item 8.

S-3

UNITED AMERICA INDEMNITY, LTD.

SCHEDULE II — Condensed Financial Information of Registrant – (continued)
(Parent Only)
Statement of Cash Flows
(Dollars in thousands)

	Year Ended			Year Ended
	December 31, 2007			December 31, 2006
Cash flows from operating activities:
Net income	$	98,917		$	99,418
Adjustments to reconcile net income to net cash used for operating activities:
Equity in earnings of unconsolidated subsidiaries		(108,503	)		(107,905	)
Restricted stock and stock options		2,698			4,810
Change in:
Due to affiliates		8,373			(10,436	)
Other assets and liabilities		(3,182	)		2,800
Other – net		(6	)		5
Net cash used for operating activities		(1,703	)		(11,308	)
Cash flows from investing activities:
Capital contributions from subsidiaries (1)		—			506
Net cash provided by investing activities		—			506
Cash flows from financing activities:
Issuance of common shares		1,002			1,000
Proceeds from exercise of stock options		1,902			4,575
Excess tax benefit from share-based compensation plans		406			431
Purchase of Class A common shares		(48,422	)		—
Note issued by related party		50,000			6,000
Net cash provided by financing activities		4,888			12,006
Net increase in cash and equivalents		3,185			1,204
Cash and cash equivalents at beginning of period		1,716			512
Cash and cash equivalents at end of period	$	4,901		$	1,716

(1) This item has been eliminated in the Company’s Consolidated Financial Statements.

See Notes to Consolidated Financial Statements included in Item 8.

S-4

UNITED AMERICA INDEMNITY, LTD.
SCHEDULE III — SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in thousands)

			Future
			Policy Benefits,
	Deferred Policy		Losses, Claims And		Unearned		Other Policy and
Segment	Acquisition Costs		Loss Expenses		Premiums		Benefits Payable
At December 31, 2007:
Insurance Operations	$	49,186	$	1,496,344	$	214,800	$	—
Reinsurance Operations		3,319		6,893		13,563		—
At December 31, 2006:
Insurance Operations		60,086		1,702,010		283,265		—
At December 31, 2005:
Insurance Operations		59,339		1,914,224		272,552		—

					Benefits, Claims,					Corporate and
			Net		Losses And		Amortization of			Other		Net
	Premium		Investment		Settlement		Deferred Policy			Operating		Written
Segment	Revenue		Income		Expenses		Acquisition Costs			Expenses		Premium
For the year ended December 31, 2007:
Insurance Operations	$	530,516	$	—	$	295,624	$	(139,503	)	$	—	$	478,274
Reinsurance Operations		5,807		—		3,617		(2,653	)		—		12,261
Corporate		—		77,341		—		—			11,691		—
Total	$	536,323	$	77,341	$	299,241	$	(142,156	)	$	11,691	$	490,535
For the year ended December 31, 2006:
Insurance Operations	$	546,469	$	—	$	304,355	$	(145,738	)	$	—	$	560,535
Corporate		—		66,538		—		—			16,515		—
Total	$	546,469	$	66,538	$	304,355	$	(145,738	)	$	16,515	$	560,535
For the year ended December 31, 2005:
Insurance Operations	$	475,430	$	—	$	288,124	$	(107,423	)	$	—	$	519,733
Corporate		—		47,118		—		—			14,810		—
Total	$	475,430	$	47,118	$	288,124	$	(107,423	)	$	14,810	$	519,733

S-5

UNITED AMERICA INDEMNITY, LTD.

SCHEDULE IV — REINSURANCE
EARNED PREMIUMS
(Dollars in thousands)

									Percentage of
	Gross		Ceded to Other		Assumed from				Amount
	Amount(1)		Companies		Other Companies		Net Amount		Assumed to Net
For the year ended December 31, 2007:
Property & Liability Insurance	$	605,316	$	81,691	$	12,698	$	536,323		2.4	%
For the year ended December 31, 2006:
Property & Liability Insurance		639,878		95,784		2,375		546,469		0.4	%
For the year ended December 31, 2005:
Property & Liability Insurance		580,068		111,339		6,701		475,430		1.4	%

(1) Includes direct premiums written.

S-6

UNITED AMERICAN INDEMNITY, LTD.

SCHEDULE V — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in thousands)

	Balance at		Charged
	Beginning of		(Credited) to Costs			Charged (Credited)			Other		Balance at End
Description	Period		and Expenses			to Other Accounts			Deductions		of Period
For the year ended December 31, 2007:
Investment asset valuation reserves:
Mortgage loans	$	—	$	—		$	—		$	—	$	—
Real estate		—		—			—			—		—
Allowance for doubtful accounts:
Premiums, accounts and notes receivable	$	3,987	$	(690	)	$	613		$	—	$	3,910
Deferred tax asset valuation allowance		—		—			—			—		—
Reinsurance receivables		20,667		(5,092	)		(5,033	)		—		10,542
For the year ended December 31, 2006:
Investment asset valuation reserves:
Mortgage loans	$	—	$	—		$	—		$	—	$	—
Real estate		—		—			—			—		—
Allowance for doubtful accounts:
Premiums, accounts and notes receivable	$	3,574	$	348		$	65		$	—	$	3,987
Deferred tax asset valuation allowance		—		—			—			—		—
Reinsurance receivables		28,954		(7,786	)		(501	)		—		20,667
For the year ended December 31, 2005:
Investment asset valuation reserves:
Mortgage loans	$	—	$	—		$	—		$	—	$	—
Real estate		—		—			—			—		—
Allowance for doubtful accounts:
Premiums, accounts and notes receivable	$	2,500	$	375		$	699		$	—	$	3,574
Deferred tax asset valuation allowance		—		—			—			—		—
Reinsurance receivables		28,720		19			215			—		28,954

S-7

UNITED AMERICA INDEMNITY, LTD.

SCHEDULE VI — SUPPLEMENTARY INFORMATION FOR PROPERTY CASUALTY
UNDERWRITERS
(Dollars in thousands)

			Reserves for
	Deferred		Unpaid Claims
	Policy		and Claim
	Acquisition		Adjustment		Discount If		Unearned
	Costs		Expenses		Any Deducted		Premiums
Consolidated Property & Casualty Entities:
As of December 31, 2007	$	52,505	$	1,503,237	$	—	$	228,363
As of December 31, 2006		60,086		1,702,010		—		283,265
As of December 31, 2005		59,339		1,914,224		—		272,552

													Paid Claims
			Net		Claims and Claim Adjustment					Amortization Of			and Claim
	Earned		Investment		Expense Incurred Related To					Deferred Policy			Adjustment		Premiums
	Premiums		Income		Current Year		Prior Year			Acquisition Costs			Expenses		Written
Consolidated Property & Casualty Entities:
For the year ended December 31, 2007	$	536,323	$	77,341	$	328,346	$	(29,105	)	$	(142,156	)	$	233,699	$	490,535
For the year ended December 31, 2006		546,469		66,538		319,927		(15,572	)		(145,738	)		208,304		560,535
For the year ended December 31, 2005		475,430		47,118		289,406		(1,282	)		(107,423	)		184,731		519,733

Note: All of the Company’s insurance subsidiaries are 100% owned and consolidated.

S-8