United America Indemnity (INDM) 10-Q 2009 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2009

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)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files.). Yeso Noo

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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero; Accelerated filerþ; Non-accelerated filero; Smaller reporting companyo

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

As of August 3, 2009, the registrant had outstanding 36,415,766 Class A Common Shares and 24,122,744 Class B Common Shares.

TABLE OF CONTENTS

	Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets As of June 30, 2009 (Unaudited) and December 31, 2008		1
Consolidated Statements of Operations Quarters and Six Months Ended June 30, 2009 and 2008 (Unaudited)		2
Consolidated Statements of Comprehensive Income (Loss) Quarters and Six Months Ended June 30, 2009 and 2008 (Unaudited)		3
Consolidated Statements of Changes in Shareholders’ Equity As of June 30, 2009 (Unaudited) and December 31, 2008		4
Consolidated Statements of Cash Flows Six Months Ended June 30, 2009 and 2008 (Unaudited)		5
Notes to Consolidated Financial Statements (Unaudited)		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		33
Item 3. Quantitative and Qualitative Disclosures About Market Risk		59
Item 4. Controls and Procedures		60
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		61
Item 1A. Risk Factors		61
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		61
Item 6. Exhibits		62
Signatures		63
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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

1) “United America Indemnity,” “we,” “us,” and “our” refer to United America Indemnity, Ltd., an exempted company incorporated with limited liability under the laws of the Cayman Islands, and its U.S. and Non-U.S. Subsidiaries;

2) our “U.S. Subsidiaries” refers to United America Indemnity Group, Inc., AIS, Emerald Insurance Company, which was dissolved on March 24, 2008, Penn-America Group, Inc., and our Insurance Operations;

3) our “U.S. Insurance Operations” refers to the insurance and related operations conducted by AIS’ subsidiaries, including American Insurance Adjustment Agency, Inc., United America Insurance Services, LLC, J.H. Ferguson & Associates, LLC, the United National Insurance Companies and the Penn-America Insurance Companies;

4) our “U.S. Insurance Companies” refers to the United National Insurance Companies and the Penn-America Insurance Companies;

5) our “Predecessor Insurance Operations” refers to Wind River Investment Corporation, which was dissolved on May 31, 2006, AIS, American Insurance Adjustment Agency, Inc., Emerald Insurance Company, which was dissolved on March 24, 2008, the United National Insurance Companies, United America Insurance Services, LLC, and J.H. Ferguson & Associates, LLC;

6) the “United National Insurance Companies” refers to the insurance and related operations conducted by United National Insurance Company and its subsidiaries, including Diamond State Insurance Company, United National Casualty Insurance Company, and United National Specialty Insurance Company;

7) the “Penn-America Insurance Companies” refers to the insurance and related operations of Penn-America Insurance Company, Penn-Star Insurance Company, and Penn-Patriot Insurance Company;

8) our “Insurance Operations” refers to the U.S. Insurance Operations;

9) our “Non-U.S. Insurance Operations” refers to the insurance related operations of Wind River Insurance Company (Barbados), Ltd. and Wind River Insurance Company, Ltd. prior to the amalgamation, which occurred on March 31, 2006;

10) “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.;

11) our “Non-U.S. Subsidiaries” refers to Wind River Reinsurance, U.A.I. (Gibraltar) Limited, which was liquidated on May 30, 2006, U.A.I. (Gibraltar) II Limited, which was liquidated on May 30, 2006, the Luxembourg Companies, U.A.I. (Ireland) Limited, and Wind River Services, Ltd., which was dissolved on August 17, 2007.;

12) our “Reinsurance Operations” refers to the reinsurance and related operations of Wind River Reinsurance;

13) the “Luxembourg Companies” refers to U.A.I. (Luxembourg) I S.à r.l., U.A.I. (Luxembourg) II S.à r.l., U.A.I. (Luxembourg) III S.à r.l., U.A.I. (Luxembourg) IV S.à r.l., U.A.I. (Luxembourg) Investment S.à r.l., and Wind River (Luxembourg) S.à r.l.;

14) “United America Indemnity Group” refers to United America Indemnity Group, Inc.;

15) “AIS” refers to American Insurance Service, Inc.;

16) “United National Group” refers to the United National Insurance Companies and Emerald Insurance Company;

17) “Penn-America Group” refers to Penn-America Group, Inc. and the Penn-America Insurance Companies;

18) “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;

19) “United National” refers to our product classification that includes property, general liability, and professional lines products distributed through program administrators with specific binding authority;

20) “Diamond State” refers to our product classification that includes property, casualty, and professional lines products distributed through wholesale brokers and program administrators with specific binding authority;

21) the “Statutory Trusts” refers to United National Group Capital Trust I, United National Group Capital Statutory Trust II, Penn-America Statutory Trust I, whose registration was cancelled effective January 15, 2008, and Penn-America Statutory Trust II, whose registration was cancelled effective February 2, 2009;

22) “Fox Paine & Company” refers to Fox Paine & Company, LLC and affiliated investment funds;

23) “GAAP” refers to accounting principles generally accepted in the United States of America; and

24) “$” or “dollars” refers to U.S. dollars.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

UNITED AMERICA INDEMNITY, LTD.

Consolidated Balance Sheets

(Dollars in thousands, except share amounts)

	(Unaudited)
	June 30, 2009			December 31, 2008
ASSETS
Bonds:
Available for sale securities, at fair value (amortized cost: $1,254,330 and $1,192,385)	$	1,286,530		$	1,204,974
Preferred shares:
Available for sale securities, at fair value (cost: $3,561 and $4,665)		4,308			4,665
Common shares:
Available for sale securities, at fair value (cost: $44,418 and $46,316)		50,724			50,613
Other invested assets
Available for sale securities, at fair value (cost: $3,644 and $19,689)		10,627			39,219
Securities classified as trading, at fair value (cost: $35,151 and $5,151)		40,190			7,453
Total investments		1,392,379			1,306,924
Cash and cash equivalents		286,375			292,604
Agents’ balances, net		78,873			57,117
Reinsurance receivables		620,101			679,277
Federal income taxes receivable		14,954			16,487
Deferred federal income taxes		19,247			32,532
Deferred acquisition costs		37,481			34,734
Intangible assets		9,272			9,309
Prepaid reinsurance premiums		18,848			23,960
Other assets		27,871			24,115
Total assets	$	2,505,401		$	2,477,059
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses	$	1,394,818		$	1,506,429
Unearned premiums		155,383			149,677
Ceded balances payable		19,664			25,165
Contingent commissions		7,274			6,695
Notes and debentures payable		121,712			121,845
Other liabilities		43,188			35,255
Total liabilities		1,742,039			1,845,066
Commitments and contingencies (Note 10)		—			—
Shareholders’ equity:
Common shares, $0.0001 par value, 900,000,000 common shares authorized; Class A common shares issued: 42,385,514 and 25,032,618, respectively; Class A common shares outstanding:36,350,388 and 19,013,462, respectively; Class B common shares issued and outstanding: 24,122,744 and 12,687,500, respectively		7			4
Additional paid-in capital		617,750			524,345
Accumulated other comprehensive income		33,507			25,108
Retained earnings		212,713			182,982
Class A common shares in treasury, at cost: 6,035,126 and 6,019,156 shares, respectively		(100,615	)		(100,446	)
Total shareholders’ equity		763,362			631,993
Total	$	2,505,401		$	2,477,059

See accompanying notes to consolidated financial statements.

1

UNITED AMERICA INDEMNITY, LTD.

Consolidated Statements of Operations

(Dollars in thousands, except per share data)

	(Unaudited)						(Unaudited)
	Quarter Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Revenues:
Gross premiums written	$	91,480		$	104,318		$	190,668		$	203,380
Net premiums written	$	77,478		$	85,209		$	164,091		$	167,173
Net premiums earned	$	74,732		$	100,673		$	153,272		$	213,730
Net investment income		16,605			17,072			38,782			34,858
Net realized investment gains (losses):
Other than temporary impairment losses on investments		(459	)		—			(459	)		—
Other than temporary impairment losses on investments recognized in other comprehensive income		125			—			125			—
Other net realized investment gains (losses)		5,732			(2,480	)		(2,864	)		(3,550	)
Total net realized investment gains (losses)		5,398			(2,480	)		(3,198	)		(3,550	)
Total revenues		96,735			115,265			188,856			245,038
Losses and Expenses:
Net losses and loss adjustment expenses		44,047			83,644			91,787			160,294
Acquisition costs and other underwriting expenses		29,972			38,112			60,786			76,307
Corporate and other operating expenses		3,663			2,269			7,638			6,214
Interest expense		1,832			2,188			3,686			4,727
Income (loss) before income taxes		17,221			(10,948	)		24,959			(2,504	)
Income tax expense (benefit)		2,758			(2,003	)		3,481			(1,442	)
Income (loss) before equity in net income (loss) of partnership		14,463			(8,945	)		21,478			(1,062	)
Equity in net income (loss) of partnership, net of tax		1,798			(26	)		1,933			(469	)
Net income (loss)	$	16,261		$	(8,971	)	$	23,411		$	(1,531	)
Per share data (1):
Net income:
Basic	$	0.32		$	(0.24	)	$	0.54		$	(0.04	)
Diluted	$	0.32		$	(0.24	)	$	0.54		$	(0.04	)
Weighted-average number of shares outstanding(2):
Basic		50,824,306			37,678,647			43,005,349			38,194,016
Diluted		50,863,201			37,678,647			43,038,123			38,194,016

(1)

In 2008, “Diluted” loss per share is the same as “Basic” loss per share since there was a net loss for the quarter and six months ended June 30, 2008.

(2)

In May 2009, the Company issued 17.2 million Class A common shares and 11.4 million Class B common shares in conjunction with the Rights Offering. In computing the basic and diluted weighted share counts, the number of shares outstanding prior to May 5, 2009 (the date that the common shares were issued in conjunction with the Rights Offering) was adjusted by a factor of 1.116 to reflect the impact of a bonus element associated with the Rights Offering in accordance with SFAS No. 128, “Earnings Per Share.” As a result, share counts for the prior year have been restated.

See accompanying notes to consolidated financial statements.

2

UNITED AMERICA INDEMNITY, LTD.

Consolidated Statements of Comprehensive Income (Loss)

(Dollars in thousands)

	(Unaudited)						(Unaudited)
	Quarter Ended June 30,						Six Months Ended June 30,
	2009			2008			2009		2008
Net income (loss)	$	16,261		$	(8,971	)	$	23,411	$	(1,531	)
Other comprehensive income (loss), net of taxes:
Unrealized holding gains (losses) arising during period		19,325			(21,708	)		11,870		(19,024	)
Recognition of previously unrealized holding (gains) losses		(3,549	)		1,556			2,772		2,256
Unrealized foreign currency translation gains		77			—			77		—
Other comprehensive income (loss), net of taxes		15,853			(20,152	)		14,719		(16,768	)
Comprehensive income (loss), net of taxes	$	32,114		$	(29,123	)	$	38,130	$	(18,299	)

See accompanying notes to consolidated financial statements.

3

UNITED AMERICA INDEMNITY, LTD.

Consolidated Statements of Changes in Shareholders’ Equity

(Dollars in thousands, except share amounts)

	(Unaudited)
	Six Months Ended			Year Ended
	June 30, 2009			December 31, 2008
Number of Class A common shares issued:
Number at beginning of period		25,032,618			24,770,507
Common shares issued under share incentive plans		72,127			252,248
Common shares issued to directors		102,348			9,863
Common shares issued under Rights Offering		17,178,421			—
Number at end of period		42,385,514			25,032,618
Number of Class B common shares issued:
Number at beginning of period		12,687,500			12,687,500
Common shares issued under Rights Offering		11,435,244			—
Number at end of period		24,122,744			12,687,500
Par value of Class A common shares:
Balance at beginning of period	$	3		$	3
Common shares issued under Rights Offering		1			—
Balance at end of period	$	4		$	3
Par value of Class B common shares:
Balance at beginning of period	$	1		$	1
Common shares issued under Rights Offering		2			—
Balance at end of period	$	3		$	1
Additional paid-in capital:
Balance at beginning of period	$	524,345		$	519,980
Share compensation plans		1,950			4,365
Common shares issued under Rights Offering		91,455			—
Balance at end of period	$	617,750		$	524,345
Accumulated other comprehensive income, net of deferred income tax:
Balance at beginning of period	$	25,108		$	40,172
Other comprehensive income (loss)		14,800			(15,064	)
Change in other than temporary impairment losses recognized in other comprehensive income, net of taxes		(81	)		—
Adoption of FSP115-2		(6,320	)		—
Balance at end of period	$	33,507		$	25,108
Retained earnings:
Balance at beginning of period	$	182,982		$	324,542
Net income (loss)		23,411			(141,560	)
Adoption of FSP115-2		6,320			—
Balance at end of period	$	212,713		$	182,982
Number of Treasury Shares:
Number at beginning of period		6,019,156			2,454,087
Class A common shares purchased		15,970			3,565,069
Number at end of period		6,035,126			6,019,156
Treasury Shares, at cost:
Balance at beginning of period	$	(100,446	)	$	(48,422	)
Class A common shares purchased, at cost		(169	)		(52,024	)
Balance at end of period	$	(100,615	)	$	(100,446	)
Total shareholders’ equity	$	763,362		$	631,993

See accompanying notes to consolidated financial statements.

4

UNITED AMERICA INDEMNITY, LTD.

Consolidated Statements of Cash Flows

(Dollars in thousands)

	(Unaudited)
	Six Months Ended June 30,
	2009			2008
Cash flows from operating activities:
Net income (loss)	$	23,411		$	(1,531	)
Adjustments to reconcile net income to net cash used for operating activities:
Amortization of trust preferred securities issuance costs		41			131
Amortization and depreciation		37			504
Restricted stock expense		2,118			1,920
Deferred federal income taxes		9,178			(1,213	)
Amortization of bond premium and discount, net		1,291			1,391
Net realized investment losses		3,198			3,550
Equity in net (income) loss of partnerships		(1,933	)		469
Changes in:
Agents’ balances		(21,756	)		6,225
Reinsurance receivables		59,176			37,211
Unpaid losses and loss adjustment expenses		(111,611	)		(2,008	)
Unearned premiums		5,706			(48,369	)
Ceded balances payable		(5,501	)		5,739
Other assets and liabilities, net		(1,200	)		(7,826	)
Contingent commissions		579			(5,169	)
Prepaid reinsurance premiums		5,112			1,811
Federal income taxes receivable		1,533			(6,622	)
Deferred acquisition costs		(2,747	)		12,130
Net cash used for operating activities		(33,368	)		(1,657	)
Cash flows from investing activities:
Proceeds from sale of bonds		122,727			118,229
Proceeds from sale of stocks		53,077			19,034
Proceeds from maturity of bonds		17,235			47,455
Proceeds from sale of other invested assets		16,699			—
Purchases of bonds		(201,700	)		(96,431	)
Purchases of stocks		(49,895	)		(23,375	)
Purchases of other invested assets		(30,654	)		(255	)
Net cash provided by (used for) investing activities		(72,511	)		64,657
Cash flows from financing activities:
Proceeds from exercises of stock options		—			329
Tax expense associated with SFAS 123R		(168	)		(10	)
Issuance of common shares		100,043			—
Purchases of Class A common shares		(169	)		(43,036	)
Retirement of junior subordinated debentures		—			(15,464	)
Principal payments of term debt		(133	)		(142	)
Net cash provided by (used for) financing activities		99,573			(58,323	)
Effect of exchange rates on cash and cash equivalents		77			—
Net change in cash and cash equivalents		(6,229	)		4,677
Cash and cash equivalents at beginning of period		292,604			244,321
Cash and cash equivalents at end of period	$	286,375		$	248,998

See accompanying notes to consolidated financial statements.

5

UNITED AMERICA INDEMNITY, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Principles of Consolidation and Basis of Presentation

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

The consolidated financial statements as of June 30, 2009 and 2008 are unaudited, but have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which differ in certain respects from those followed in reports to insurance regulatory authorities. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The unaudited consolidated financial statements include all adjustments that are, in the opinion of management, of a normal recurring nature and are necessary for a fair statement of results for the interim periods. Results of operations for the quarters and six months ended June 30, 2009 and 2008 are not necessarily indicative of the results of a full year. The accompanying notes to the unaudited consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements contained in the Company’s 2008 Annual Report on Form 10-K.

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

The Company’s wholly-owned business trust subsidiaries, United National Group Capital Trust I (“UNG Trust I”) and United National Group Capital Statutory Trust II (“UNG 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 $30.0 million in floating rate capital securities (“Trust Preferred Securities”) and $0.9 million of floating rate common securities. The sole assets of the Company’s business trust subsidiaries are $30.9 million of junior subordinated debentures issued by the Company, which have the same terms with respect to maturity, payments, and distributions as the Trust Preferred Securities and the floating rate common securities. The $15.0 million issued and outstanding notes of the Company’s wholly owned business trust subsidiary, Penn-America Statutory Trust II (“Penn Trust II”), were redeemed on May 15, 2008. The registration of Penn Trust II was cancelled effective February 2, 2009 as a result of this redemption.

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

2. Investments

The Company’s investments in bonds, preferred stock, and common stock are classified as available for sale and are carried at their fair value. The Company purchases bonds with the expectation of holding them to their maturity; however, changes to the portfolio are sometimes required to assure it is appropriately matched to liabilities. In addition, changes in financial market conditions and tax considerations may cause the Company to sell an investment before it matures. In 2009 and 2008, the difference between amortized cost and fair value of these investments, excluding the Company’s convertible bond and convertible 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 convertible preferred stocks is included in income.

Bonds available for sale with an estimated fair market value of approximately $626.8 million and $681.4 million were deposited in trust or with various governmental authorities in accordance with statutory requirements at June 30, 2009 and December 31, 2008, respectively. These amounts include bonds with an estimated fair market value of $5.9 million at both June 30, 2009 and December 31, 2008 that are held in a trust fund to meet the regulatory requirements applicable to Wind River Reinsurance, one of the Company’s subsidiaries.

6

UNITED AMERICA INDEMNITY, LTD.

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

The amortized cost and estimated fair value of investments classified as available for sale were as follows as of June 30, 2009 and December 31, 2008:

										Other-than-
										temporary
			Gross		Gross					impairments
	Amortized		Unrealized		Unrealized			Estimated		recognized in
(Dollars in thousands)	Cost		Gains		Losses			Fair Value		AOCI (1)
As of June 30, 2009
Bonds:
U.S. treasury and agency obligations	$	147,536	$	10,095	$	(7	)	$	157,624	$	—
Obligations of states and political subdivisions		217,024		7,354		(754	)		223,624		—
Mortgage-backed securities		322,419		13,148		(380	)		335,187		113
Commercial mortgage-backed securities		152,824		2,906		(9,485	)		146,245		7,428
Asset-backed securities		70,356		2,031		(603	)		71,784		12
Corporate notes		279,453		8,129		(1,223	)		286,359		—
Foreign corporate bonds		44,717		1,007		(18	)		45,706		698
Other bonds		20,001		—		—			20,001		—
Total bonds		1,254,330		44,670		(12,470	)		1,286,530		8,251
Common stock		44,418		7,154		(848	)		50,724		—
Preferred stock		3,561		747		—			4,308		—
Other invested assets		3,644		6,983		—			10,627		—
Total	$	1,305,953	$	59,554	$	(13,318	)	$	1,352,189	$	8,251

(1) Represents the amount of other-than-temporary impairment losses recognized in accumulated other comprehensive income (“AOCI”). Per FSP FAS 115-2 and FAS 124-2, these items were not included in earnings as of June 30, 2009.

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
(Dollars in thousands)	Cost		Gains		Losses			Fair Value
As of December 31, 2008
Bonds:
U.S. treasury and agency obligations	$	135,457	$	17,320	$	—		$	152,777
Obligations of states and political subdivisions		241,457		5,712		(4,139	)		243,030
Mortgage-backed securities		372,569		12,180		(680	)		384,069
Commercial mortgage-backed securities		156,402		—		(11,945	)		144,457
Asset-backed securities		19,801		—		(3,248	)		16,553
Corporate notes		215,931		2,175		(4,451	)		213,655
Foreign corporate bonds		29,485		136		(471	)		29,150
Other bonds		21,283		—		—			21,283
Total bonds		1,192,385		37,523		(24,934	)		1,204,974
Common stock		46,316		4,482		(185	)		50,613
Preferred stock		4,665		—		—			4,665
Other invested assets		24,840		21,832		—			46,672
Total	$	1,268,206	$	63,837	$	(25,119	)	$	1,306,924

NOTE: Other than temporary impairments recognized in AOCI is not shown as of December 31, 2008 since FSP FAS 115-2 and FAS 124-2 is not applied retrospectively.

The Company did not hold any debt or equity investments in a single issuer that was in excess of 10% of shareholders’ equity at June 30, 2009 or December 31, 2008.

7

UNITED AMERICA INDEMNITY, LTD.

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

The amortized cost and estimated fair value of bonds classified as available for sale at June 30, 2009, 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
(Dollars in thousands)	Cost		Fair Value
Due in one year or less	$	65,386	$	66,028
Due after one year through five years		361,536		374,355
Due after five years through ten years		174,150		182,012
Due after ten years through fifteen years		64,939		67,739
Due after fifteen years		42,720		43,180
Mortgaged-backed securities		322,419		335,187
Commercial mortgage-backed securities		152,824		146,245
Asset-backed securities		70,356		71,784
	$	1,254,330	$	1,286,530

The following table contains an analysis of the Company’s securities with gross unrealized losses, categorized by the period that the securities were in a continuous loss position as of June 30, 2009:

	Less than 12 months				12 months or longer (1)				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
(Dollars in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Bonds:
U.S. treasury and agency obligations	$	13,980	$	7	$	—	$	—	$	13,980	$	7
Obligations of states and political subdivisions		8,824		89		16,229		665		25,053		754
Mortgage-backed securities		1,032		63		6,615		317		7,647		380
Commercial mortgage-backed securities		42,263		3,409		58,732		6,076		100,995		9,485
Asset-backed securities		667		29		1,505		574		2,172		603
Corporate notes		20,294		323		23,248		900		43,542		1,223
Foreign corporate bonds		5,371		18		—		—		5,371		18
Total bonds		92,431		3,938		106,329		8,532		198,760		12,470
Common stock		9,567		840		27		8		9,594		848
Total	$	101,998	$	4,778	$	106,356	$	8,540	$	208,354	$	13,318

(1) Fixed maturities in a gross unrealized loss position for twelve months or longer is primarily comprised of non-credit losses on investment grade securities where management does not intend to sell, and it is more likely than not that the Company will not be forced to sell the security before recovery. The Company has analyzed these securities and has determined that they are not impaired.

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, 2008:

	Less than 12 months				12 months or longer (1)				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
(Dollars in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Bonds:
Obligations of states and political subdivisions	$	59,175	$	3,253	$	7,181	$	886	$	66,356	$	4,139
Mortgage-backed securities		7,561		282		4,533		398		12,094		680
Commercial mortgage-backed securities		55,904		4,514		45,380		7,431		101,284		11,945
Asset-backed securities		12,624		2,976		1,476		272		14,100		3,248
Corporate notes		112,886		2,555		20,614		1,896		133,500		4,451
Foreign corporate bonds		21,171		471		—		—		21,171		471
Total bonds		269,321		14,051		79,184		10,883		348,505		24,934
Common stock		1,143		185		—		—		1,143		185
Total	$	270,464	$	14,236	$	79,184	$	10,883	$	349,648	$	25,119

(1) At December 31, 2008, the Company had 52 bonds that were in an unrealized loss position for twelve months or longer. The estimated fair value and amortized cost of these securities was $79.2 million and $90.1 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. 99.9% of these securities are investment grade.

8

UNITED AMERICA INDEMNITY, LTD.

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

The Company regularly performs various analytical valuation procedures with respect to its investments, including reviewing each fixed maturity security in an unrealized loss position to assess whether the security is a candidate for credit loss. Specifically, the Company considers credit rating, market price, and issuer specific financial information, among other factors, to assess the likelihood of collection of all principal and interest as contractually due. Securities for which the Company determines that credit loss is likely are subjected to further analysis to estimate the credit loss to be recognized in earnings, if any. The specific methodologies and significant assumptions used by asset class are discussed below. Upon identification of such securities and periodically thereafter, 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;

(5) changes in laws or regulations have affected an issuer or industry;

(6) the investment has an unrealized loss and was identified by our Investment Manager as an investment to be sold before recovery or maturity; and

(7) the investment failed EITF 99-20-1 testing, which is a cash flow projection test to determine if anticipated principal and interest payments will be realized.

For equity securities, management carefully reviews securities with unrealized losses that have either:

(1) persisted for more than twelve consecutive months or

(2) the value of the investment has been 20% or more below cost for six continuous months or more to determine if the security should be impaired.

Prior to the implementation of FSP FAS 115-2 and FAS 124-2 “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”), if the fair value of an investment fell below its cost and the decline was determined to be other than temporary, the amount of the decline was included in earnings as a realized loss in the period in which the impairment arose. Effective April 1, 2009, the Company adopted FSP FAS 115-2 and FAS 124-2. This new accounting pronouncement amends the existing impairment model for debt securities only. This FSP does not amend existing recognition and measurement guidance related to the other-than-temporary impairment of equity securities. Under this new pronouncement, for securities in an unrealized loss position, the Company is required to assess whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before the anticipated recovery. If either of these conditions is met, the Company must recognize an other-than-temporary impairment with the entire unrealized loss being recorded through earnings. For securities in an unrealized loss position not meeting these conditions, the Company assesses whether the impairment of a security is other-than-temporary. If the impairment is deemed to be other-than-temporary, the Company must separate the other-than-temporary impairment into two components: the amount representing the credit loss and the amount related to all other factors. The credit loss represents the portion of the amortized book value in excess of the net present value of the projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. The credit loss component of the other-than-temporary impairment is recorded through earnings, whereas the amount relating to factors other than credit losses are recorded in other comprehensive income, net of taxes.

9

UNITED AMERICA INDEMNITY, LTD.

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

The following is a description, by asset type, of the methodology and significant inputs that the Company used to measure the amount of credit loss recognized in earnings:

U.S. government and federal agency and U.S. government-sponsored enterprise obligations —As of June 30, 2009, gross unrealized losses on U.S. government and federal agency securities and mortgage-backed securities related to U.S. government-sponsored enterprise obligations were $0.01 million. All of these securities have been in an unrealized loss position for less than 12 months and are rated AAA. No credit losses were identified on these securities.

Obligations of states and political subdivisions— As of June 30, 2009, gross unrealized losses related to these bonds were $0.8 million. Of this amount, $0.7 million has been in an unrealized loss position for twelve months or greater. These securities are rated investment grade or better. The Company’s investment manager’s analysis for this sector includes on-site visits and meetings with management in addition to the standard rigorous analysis that determines the financial condition of the issuer.

Mortgage-backed securities — non-agency —As of June 30, 2009, gross unrealized losses related to mortgage-backed securities — non-agency were $0.4 million. Of this amount, $0.3 million has been in an unrealized loss position for twelve months or greater. Of these securities, 61% are rated AAA with the remaining securities being rated between AA and investment grade. The Company’s investment manager analyzes these bonds at the cusip level to project expected principal losses under a range of scenarios. As part of the analysis, a constant default rate (“CDR”) vector for each bond is utilized to project deal cash flows. A CDR vector is constructed for each deal using the most recently released delinquency data, underlying collateral characteristics and input from the investment manager’s internal analysts. Projected losses are a function of both loss severity and probability of default at the security level. The loss severity assumptions differ based on product type, vintage and specific collateral characteristics to create a multi-dimensional matrix of loss severity assumptions.

Commercial mortgage-backed securities (“CMBS”) —As of June 30, 2009, gross unrealized losses related to CMBSs were $9.5 million. Of this amount, $6.1 million has been in an unrealized loss position for twelve months or greater. The securities in an unrealized loss position for twelve months or longer are rated AAA. The weighted average credit enhancement for the Company’s CMBS portfolio is 27.3. This represents the percentage of pool losses that can occur before an asset-backed security will incur its first dollar of principal losses. For the Company’s CMBS portfolio, a loan level analysis is utilized where every underlying CMBS loan is re-underwritten based on the Company’s investment manager’s internally generated set of assumptions that reflect their expectation of an economic down turn. In the analysis, the focus is centered on stressing the significant variables that influence loan defaults and losses in CMBS deals. Occupancies are projected to drop. Capitalization rates vary by property type and are forecasted to rise to reflect both higher risk premiums and a higher cost of funds for acquirers of commercial real estate property. The capitalization rates used in the analysis are significantly higher than the 4% to 7% capitalization rates that were reached during 2007. Property value was stressed by using projected property performance and projected capitalization rates. Term risk is triggered if projected debt service coverage rate falls below 1x. Balloon risk is triggered if a property’s projected performance does not satisfy new, tighter mortgage standards. All specialty serviced loans and delinquent loans are assumed to default immediately.

Asset backed securities —As of June 30, 2009, gross unrealized losses related to asset backed securities were $0.6 million. Of this amount, $0.57 million has been in an unrealized loss position for twelve months or greater. These securities are rated investment grade. The weighted average credit enhancement for the Company’s asset backed portfolio is 17.2. The Company’s investment manager projects an expected loss for a deal given a set of assumptions specific to the asset type. These assumptions are used to calculate at what level of losses that the deal will incur a dollar of loss. The major assumptions used to calculate this ratio are loss severities, recovery lags, and no advances on principal and interest.

Corporate bonds —As of June 30, 2009, gross unrealized losses related to corporate bonds were $1.2 million. Of this amount, $0.9 million has been in an unrealized loss position for twelve months or greater. These securities are rated investment grade or better. The Company’s investment manager maintains financial models for the Company’s corporate bond issuers. These models include a projection of each issuer’s future financial performance including prospective debt servicing capabilities and capital structure composition. The analysis incorporates macroeconomics environment, industry conditions in which the issuer operates, issuer’s current competitive position, vulnerability to changes in the competitive environment, regulatory environment, issuer liquidity, issuer commitment to bondholders, issuer creditworthiness, and asset protection.

10

UNITED AMERICA INDEMNITY, LTD.

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

The Company recorded the following other than temporary impairments (“OTTI”) on its investment portfolio for the quarter and six months ended June 30, 2009 and 2008:

	Quarter Ended June 30,					Six Months Ended June 30,
(Dollars in thousands)	2009			2008		2009			2008
Bonds:
OTTI losses, gross	$	459		$	—	$	2,341		$	—
Portion of loss recognized in other comprehensive income (pre-tax)		(125	)		—		(125	)		—
Net bonds impairment losses recognized in earnings		334			—		2,216			—
Common stock		—			1,740		593			1,819
Preferred stock		—			—		647			—
Total	$	334		$	1,740	$	3,456		$	1,819

In accordance with FSP FAS 115-2 and FAS 124-2, the Company recorded a $6.3 million, net of tax, cumulative effect adjustment to reclassify from the opening balance of retained earnings to accumulated other comprehensive income the non-credit portion of previously recognized OTTI on debt securities which were still held as investments as of April 1, 2009.

The following table is an analysis of the credit losses recognized in earnings on debt securities held by the Company as of June 30, 2009 for which a portion of the OTTI loss was recognized in other comprehensive income (loss).

(Dollars in thousands)
Balance of credit losses related to securities still being held as of April 1, 2009	$	—
Additions where no OTTI was previously recorded		21
Additions where an OTTI was previously recorded		—
Reductions for securities for which the company intends to sell or more likely than not will be required to sell before recovery		—
Reductions reflecting increases in expected cash flows to be collected		—
Reductions for securities sold during the period		—
Balance of credit losses related to securities still being held as of June 30, 2009	$	21

Accumulated Other Comprehensive Income

Accumulated other comprehensive income as of June 30, 2009 and December 31, 2008 was as follows:

	June 30,			December 31,
(Dollars in thousands)	2009			2008
Net unrealized gains from:
Partnerships < 3% owned	$	6,983		$	19,530
Available-for-sale portfolio — other		39,253			16,886
Foreign currency fluctuations		(20	)		(97	)
Deferred taxes		(12,709	)		(11,211	)
Accumulated other comprehensive income	$	33,507		$	25,108

11

UNITED AMERICA INDEMNITY, LTD.

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

Net Realized Investment Gains (Losses)

The components of net realized investment gains (losses) for the quarters and six months ended June 30, 2009 and 2008 were as follows:

	Quarter Ended June 30,					Six Months Ended June 30,
(Dollars in thousands)	2009		2008			2009			2008
Bonds	$	380	$	455		$	(5,293	)	$	498
Convertibles		2,450		(1,269	)		2,817			(2,224	)
Common stock		2,568		(1,666	)		(75	)		(1,824	)
Preferred stock		—		—			(647	)		—
Total	$	5,398	$	(2,480	)	$	(3,198	)	$	(3,550	)

Proceeds from the sales of bonds classified as available-for-sale resulting in net realized investment gains (losses) for the six months ended June 30, 2009 and 2008 were $122.7 million and $118.2 million, respectively.

Proceeds from the sales of equity securities classified as available-for-sale resulting in net realized investment gains (losses) for the six months ended June 30, 2009 and 2008 were $53.1 million and $19.0 million, respectively.

Net Investment Income

The sources of net investment income for the quarters and six months ended June 30, 2009 and 2008 were as follows:

	Quarter Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2009			2008			2009			2008
Bonds	$	15,845		$	16,068		$	30,659		$	32,707
Preferred and common stocks		468			833			944			1,639
Cash and cash equivalents		270			1,448			856			3,310
Other		1,213			—			8,647			—
Total investment income		17,796			18,349			41,106			37,656
Investment expense		(1,191	)		(1,277	)		(2,324	)		(2,798	)
Net investment income	$	16,605		$	17,072		$	38,782		$	34,858

The Company’s total investment return on an after-tax basis for the quarters and six months ended June 30, 2009 and 2008 were as follows:

	Quarter Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2009			2008			2009			2008
Net investment income	$	13,697		$	13,999		$	30,922		$	28,536
Net realized investment gains (losses):
Invested assets excluding partnerships		3,549			(1,556	)		(2,772	)		(2,256	)
Partnerships		1,798			(26	)		1,933			(469	)
Total net realized investment gains (losses)		5,347			(1,582	)		(839	)		(2,725	)
Net unrealized investment gains (losses)		15,776			(20,152	)		14,642			(16,768	)
Net investment gains (losses)		21,123			(21,734	)		13,803			(19,493	)
Total investment return	$	34,820		$	(7,735	)	$	44,725		$	9,043
Total investment return %(1)		2.1	%		(0.5	)%		2.7	%		0.5	%
Average investment portfolio(2)	$	1,626,713		$	1,719,707		$	1,639,141		$	1,719,878

(1)	Not annualized.
(2)	Average of total cash and invested assets as of the beginning and ending of the period.

12

UNITED AMERICA INDEMNITY, LTD.

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

Subprime and Alt-A Investments

The Company had approximately $2.6 million and $3.5 million worth of investment exposure through subprime and Alt-A investments as of June 30, 2009 and December 31, 2008, respectively. An Alt-A investment is one which is backed by a loan that contains insufficient documentation or background. As of June 30, 2009, approximately $0.8 million of those investments were rated AAA, $1.1 million were rated BBB- to AA+, $0.5 million were rated B, and $0.2 million were rated CCC. As of December 31, 2008, approximately $1.2 million of those investments were rated AAA, $1.8 million were rated BBB- to AA, and $0.5 million were rated BB+. Impairments on these investments were $0.1 million and $0.8 million during the quarter and six months ended June 30, 2009 and $0.5 million during the year ended December 31, 2008.

Insurance Enhanced Municipal Bonds

As of June 30, 2009, the Company held insurance enhanced municipal bonds of approximately $164.9 million, which represented approximately 9.8% of the Company’s total invested assets. These securities had an average rating of “AA.” Approximately $55.0 million of these bonds are pre-refunded with U.S. treasury securities, of which $53.4 million are backed by financial guarantors, meaning that funds have been set aside in escrow to satisfy the future interest and principal obligations of the bond. (See table below.) Of the remaining $109.9 million of insurance enhanced municipal bonds, $37.3 million would have carried a lower credit rating had they not been insured. The following table provides a breakdown of the ratings for these municipal bonds with and without insurance.

	Ratings		Ratings
(Dollars in Thousands)	with		without
Rating	Insurance		Insurance
AAA	$	1,554	$	—
AA		22,534		148
A		9,598		15,578
BBB		1,660		982
Rating Not Available		1,943		20,581
Total	$	37,289	$	37,289

A summary of the Company’s insurance enhanced municipal bonds that are backed by financial guarantors, including the pre-refunded bonds that are escrowed in U.S. government obligations, as of June 30, 2009 is as follows:

							Exposure Net
					Govt		of Pre-refunded &
(Dollars in thousands)			Pre-refunded		Guaranteed		Govt Guaranteed
Financial Guarantor	Total		Securities		Securities		Securities
Ambac Financial Group	$	23,609	$	9,185	$	—	$	14,424
Assured Guaranty Corp		411		—		—		411
Financial Guaranty Insurance Company		7,502		4,927		—		2,575
Financial Security Assurance, Inc.		51,998		17,106		—		34,892
Municipal Bond Insurance Association		71,405		18,873		—		52,532
Federal Housing Association		2,433		—		2,433		—
Federal National Housing Association		777		—		777		—
Govt National Housing Association		1,479		1,206		273		—
Permanent School Fund Guaranty		3,848		2,221		1,627		—
Total backed by financial guarantors		163,462		53,518		5,110		104,834
Other credit enhanced municipal bonds		1,474		1,474		—		—
Total	$	164,936	$	54,992	$	5,110	$	104,834

In addition to the $164.9 million of insurance enhanced municipal bonds, the Company also held unrated insurance enhanced asset-backed and credit securities with a market value of approximately $18.2 million, which represented approximately 1.1% of the Company’s total invested assets. The financial guarantors of the Company’s $18.2 million of insurance enhanced asset-backed and credit securities include Financial Guaranty Insurance Company ($0.9 million), Municipal Bond Insurance Association ($11.0 million) and Financial Security Assurance, Inc ($6.3 million).

13

UNITED AMERICA INDEMNITY, LTD.

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

The Company had no direct investments in the entities that have provided financial guarantees or other credit support to any security held by the Company at June 30, 2009.

3. Fair Value Measurements

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards (“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 an instrument-by-instrument basis, with the change in fair value recorded in earnings. The Company elected to apply the fair value option within its limited partnership investment portfolio to those investments where the Company owns more than a 3% interest. The fair value of these investments was $40.2 million and $7.5 million as of June 30, 2009 and December 31, 2008, respectively. One of the limited partnerships invests mainly in securities that are publicly traded. Securities that are held by this partnership 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 this partnership at the end of each reporting period; however, the Company is only periodically provided with a detailed listing of the investment held by the partnership. Accordingly, these investments are classified as Level 3 within the SFAS 157 fair value hierarchy. (See below for details concerning the Company’s implementation of SFAS 157.) The other limited partnership invests in bank loans. This investment is classified within the Level 3 hierarchy because bank loans trade infrequently (or not all), and therefore have little or no readily available pricing. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available.

The adoption of SFAS 159 has not had any impact on the Company’s consolidated financial condition or results of operations since the securities for which SFAS 159 was elected are already reported at fair value and the change in the value of the investment is included in income.

During the quarter and six months ended June 30, 2009, the Company recognized a gain, net of taxes, of $1.8 million and a gain, net of taxes, of $1.9 million, respectively, due to changes in the values of these investments. This gain is reflected on the Consolidated Statement of Operations as equity in net income (loss) of partnerships, net of taxes.

The fair value option was not elected for the Company’s investments in limited partnerships with less than a 3% ownership interest.

The Company also adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), effective January 1, 2008. SFAS 157 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 has determined that its fair value measurements are in accordance with the requirements of SFAS 157. Therefore, the implementation of SFAS 157 has not had any impact on the Company’s consolidated financial condition or results of operations. The implementation of SFAS 157 resulted in expanded disclosures about securities measured at fair value, as discussed below.

The Company’s invested assets 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 — inputs utilize quoted prices (unadjusted) in active markets for identical assets that the Company has the ability to access at the measurement date.

• Level 2 — inputs utilize other than quoted prices included in Level 1 that are observable for the similar assets, either directly or indirectly.

• Level 3 — inputs are unobservable for the asset, and include situations where there is little, if any, market activity for the asset.

14

UNITED AMERICA INDEMNITY, LTD.

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

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset.

Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, the unrealized gains and losses for invested assets within the Level 3 category presented in the tables below may include changes in fair value that are attributed to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

The following tables present information about the Company’s invested assets measured at fair value on a recurring basis as of June 30, 2009 and December 31, 2008, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

As of June 30, 2009	Fair Value Measurements
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Bonds:
U.S. treasury and agency obligations	$	69,133	$	88,491	$	—	$	157,624
Obligations of states and political subdivisions		—		223,624		—		223,624
Mortgage-backed securities		—		335,187		—		335,187
Commercial mortgage-backed securities		—		146,245		—		146,245
Asset-backed securities		—		71,784		—		71,784
Corporate notes		—		286,359		—		286,359
Foreign corporate bonds		—		45,706		—		45,706
Other bonds		—		20,001		—		20,001
Total bonds		69,133		1,217,397		—		1,286,530
Preferred shares		2,201		2,107		—		4,308
Common shares		50,724		—		—		50,724
Other invested assets		—		—		50,817		50,817
Total invested assets	$	122,058	$	1,219,504	$	50,817	$	1,392,379

As of December 31, 2008	Fair Value Measurements
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Bonds:
U.S. treasury and agency obligations	$	75,460	$	77,317	$	—	$	152,777
Obligations of states and political subdivisions		—		243,030		—		243,030
Mortgage-backed securities		—		384,069		—		384,069
Commercial mortgage-backed securities		—		144,457		—		144,457
Asset-backed securities		—		16,553		—		16,553
Corporate notes		—		213,655		—		213,655
Foreign corporate bonds		—		29,150		—		29,150
Other bonds		—		21,283		—		21,283
Total bonds		75,460		1,129,514		—		1,204,974
Preferred shares		1,813		2,852		—		4,665
Common shares		50,613		—		—		50,613
Other invested assets		—		—		46,672		46,672
Total invested assets	$	127,886	$	1,132,366	$	46,672	$	1,306,924

The securities classified as Level 1 in the above table consist of U.S. Treasuries and equity securities actively traded on an exchange.

15

UNITED AMERICA INDEMNITY, LTD.

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

The securities classified as Level 2 in the above table consist primarily of fixed maturity securities. Based on the typical trading volumes and the lack of quoted market prices for fixed maturities, security prices are derived through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information. If there are no recent reported trades, matrix or model processes are used to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Included in the pricing of asset-backed securities, collateralized mortgage obligations, and mortgage-backed securities are estimates of the rate of future prepayments of principal over the remaining life of the securities. Such estimates are derived based on the characteristics of the underlying structure and prepayment speeds previously experienced at the interest rate levels projected for the underlying collateral.

The following table presents changes in Level 3 investments measured at fair value on a recurring basis for the quarter and six months ended June 30, 2009:

	Fair Value Measurements Using Level 3 Inputs
			Other
Quarter Ended June 30, 2009			Invested
(Dollars in thousands)	Bonds		Assets			Total
Beginning balance at April 1, 2009	$	—	$	19,731		$	19,731
Total gains (losses) (realized / unrealized):
Included in equity in net income (loss) of partnership		—		2,530			2,530
Included in accumulated other comprehensive income		—		(816	)		(816	)
Purchases		—		30,602			30,602
Sales		—		(1,230	)		(1,230	)
Ending balance at June 30, 2009	$	—	$	50,817		$	50,817
Gains for 2009 included in earnings attributable to the change in unrealized gains relating to assets still held at June 30, 2009	$	—	$	2,530		$	2,530

	Fair Value Measurements Using Level 3 Inputs
			Other
Six Months Ended June 30, 2009			Invested
(Dollars in thousands)	Bonds		Assets			Total
Beginning balance at January 1, 2009	$	—	$	46,672		$	46,672
Total gains (losses) (realized / unrealized):
Included in equity in net income (loss) of partnership		—		2,737			2,737
Included in accumulated other comprehensive income		—		(3,884	)		(3,884	)
Purchases		—		30,654			30,654
Sales		—		(25,362	)		(25,362	)
Ending balance at June 30, 2009	$	—	$	50,817		$	50,817
Gains for 2009 included in earnings attributable to the change in unrealized gains relating to assets still held at June 30, 2009	$	—	$	2,737		$	2,737

The securities classified as Level 3 in the above table consist of $50.8 million related to the Company’s limited partnership investments. Of this amount, $10.6 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. $9.8 million was related to a limited partnership that invests mainly in securities that are publicly traded. However, since the Company does not have the ability to see the invested asset composition of these limited partnerships on a daily basis, these investments have been classified within the Level 3 category. The remaining $30.4 million was related to a limited partnership that invests in bank loans. This investment is classified within the Level 3 category since the bank loans trade infrequently (or not all), and therefore have little or no readily available pricing. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available.

16

UNITED AMERICA INDEMNITY, LTD.

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

The following tables present changes in Level 3 investments measured at fair value on a recurring basis for the quarter and six months ended June 30, 2008:

	Fair Value Measurements Using Level 3 Inputs
				Other
Quarter Ended June 30, 2008				Invested
(Dollars in thousands)	Bonds			Assets			Total
Beginning balance at April 1, 2008	$	1,995		$	62,330		$	64,325
Total gains (losses) (realized / unrealized):
Included in equity in net income (loss) of partnership		—			(41	)		(41	)
Included in accumulated other comprehensive income		33			(1,070	)		(1,037	)
Purchases		—			255			255
Sales		(261	)		—			(261	)
Transfers out of Level 3		(1,767	)		—			(1,767	)
Ending balance at June 30, 2008	$	—		$	61,474		$	61,474
Losses for the quarter ended June 30, 2008 included in earnings attributable to the change in unrealized losses relating to assets still held at June 30, 2008	$	—		$	(41	)	$	(41	)

	Fair Value Measurements Using Level 3 Inputs
				Other
Six Months Ended June 30, 2008				Invested
(Dollars in thousands)	Bonds			Assets			Total
Beginning balance at January 1, 2008	$	2,376		$	64,539		$	66,915
Total gains (losses) (realized / unrealized):
Included in equity in net income (loss) of partnership		—			(722	)		(722	)
Included in accumulated other comprehensive income		(55	)		(2,598	)		(2,653	)
Purchases		—			255			255
Sales		(554	)		—			(554	)
Transfers out of Level 3		(1,767	)		—			(1,767	)
Ending balance at June 30, 2008	$	—		$	61,474		$	61,474
Losses for the six months ended June 30, 2008 included in earnings attributable to the change in unrealized losses relating to assets still held at June 30, 2008	$	—		$	(722	)	$	(722	)

Effective January 1, 2009, the Company changed its primary investment manager (the “Investment Manager”) and investment accountants. The former Investment Manager provided the Company with one non-binding price for each of its fixed maturity and equity securities valued as Level 1 or Level 2 in the SFAS 157 fair value hierarchy. The new Investment Manager does not provide pricing to the Company’s investment accountant for fixed maturity and equity securities valued as Level 1 or Level 2 in the SFAS 157 fair value hierarchy. As a result, the Company entered into third party agreements with pricing vendors to obtain a single non-binding price for each of its fixed maturity and equity securities valued as Level 1 or Level 2 in the SFAS 157 fair value hierarchy. The third party pricing vendors, and the respective securities they price, were selected based on the advice of the Company’s new Investment Manager. The Investment Manager provided advice as to which pricing source would provide the best estimate of fair value for each asset class.

The Company’s pricing vendors provide prices for select investment categories valued as Level 1 or Level 2 in the SFAS 157 fair value hierarchy. One vendor provides prices for equity securities and select fixed maturity categories including; commercial mortgage backed securities, high yield, investment grade, short term securities, and international fixed income securities, if any. A second vendor provides prices for other fixed maturity categories including: asset backed securities (“ABS”), collateralized mortgage obligations (“CMO”), and municipals. A third vendor provides prices for the remaining fixed maturity categories including mortgage backed securities (“MBS”) and treasuries.

17

UNITED AMERICA INDEMNITY, LTD.

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

The following is a description of the valuation methodologies used by the Company’s pricing vendors for investment securities carried at fair value:

• Equity prices are received from all primary and secondary exchanges.

• Corporate bonds are individually evaluated, mostly on a dollar basis, sometimes on a yield or nominal spread basis (depending on how the market trades a security or sector). Valuations are then verified with other broker/dealers and contributing firms.

• Commercial mortgage backed securities (“CMBS”) are evaluated on a nominal spread basis using a contributed model to value individual tranches. Each tranche is hand evaluated using nominal spreads from broker/dealers deemed to accurately represent the market. Investment grade tranches are evaluated with spreads to the swap curve and non-investment grade tranches are evaluated with spreads to the treasury curve. Coverage includes “AAA” tranches as well as mezzanine and subordinated pieces. In addition, nominal spread levels on specific and generic tranches are received from other broker/dealers involved in the CMBS market.

• For CMOs, which are categorized with mortgage-backed securities in the tables listed above, a volatility-driven, multi dimensional single cash flow stream model or option-adjusted spread model is used. For ABSs, a single cash flow stream model is utilized. For both asset classes, evaluations utilize standard inputs plus new issue data, monthly payment information, and collateral performance. The evaluated pricing models incorporate security set-up, prepayment speeds, cash flows, treasury, swap curves and spread adjustments.

• For municipals, a series of matrices are used to evaluate securities within this asset class. The evaluated pricing models for this asset class incorporate security set-up, sector curves, yield to worst, ratings updates, and adjustments for material events notices.

• U.S. Treasuries are priced on the bid side by a market maker.

• For MBSs, the pricing vendor utilizes a matrix model correlation to TBA (a forward MBS trade) or benchmarking to value a security.

The Company performs certain procedures to validate whether the pricing information received from the pricing vendors is reasonable, to ensure that the fair value determination is consistent with SFAS 157, Fair Value Measurements, and to ensure that its assets are properly classified in the fair value hierarchy. The Company’s procedures include, but are not limited to:

• Examining market value changes on an overall portfolio basis to determine if the market value reported by the pricing vendors appears reasonable. Duration of the portfolio and changes to benchmark yields are compared to the market value change reported by the Investment Manager to make this determination. The fair values reported are reviewed by management.

• Reviewing periodic reports provided by the Investment Manager that provides information regarding rating changes and securities placed on watch. This procedure allows the Company to understand why a particular security’s market value may have changed.

• Understanding and periodically evaluating the various pricing methods and procedures used by the Company’s pricing vendors to ensure that investments are properly classified within the fair value hierarchy.

During the quarter and six months ended June 30, 2009, the Company has not needed to adjust quotes or prices obtained from the pricing vendors.

18

UNITED AMERICA INDEMNITY, LTD.

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

4. Reinsurance

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

At June 30, 2009 and December 31, 2008, the Company carried reinsurance receivables of $620.1 million and $679.3 million, respectively. These amounts are net of an allowance for uncollectible reinsurance receivables. The allowance for uncollectible reinsurance receivables was $12.9 million and $13.7 million at June 30, 2009 and December 31, 2008, respectively. The change is primarily due to a decrease in the Company’s assessment of its risk of collecting from several individual reinsurers.

At June 30, 2009 and December 31, 2008, the Company held collateral securing its reinsurance receivables of $446.2 million and $477.1 million, respectively. Prepaid reinsurance premiums were $18.8 million and $24.0 million at June 30, 2009 and December 31, 2008, respectively. Reinsurance receivables, net of collateral held, were $173.9 million and $202.2 million at June 30, 2009 and December 31, 2007, respectively.

The Company regularly evaluates retention levels to ensure that the ultimate reinsurance cessions are aligned with corporate risk tolerance and capital levels, as follows:

Property Catastrophe Excess of Loss— The Company’s current property writings create exposure to catastrophic events. To protect against these exposures, the Company purchases a property catastrophe treaty. Effective June 1, 2009, the Company renewed its property catastrophe excess of loss treaty which provides occurrence coverage for losses of $75.0 million in excess of $15.0 million. This treaty provides for one full reinstatement of coverage at 100% additional premium as to time and pro rata as to amount of limit reinstated. This replaces the treaty that expired on May 31, 2009, which provided occurrence coverage for losses of $70.0 million in excess of $10.0 million, also with one full reinstatement. The additional limit purchased is a result of an increase in aggregate loss exposure to catastrophic events.

Property Per Risk Excess of Loss— Effective January 1, 2009, the Company renewed its property per risk excess of loss treaty which provides coverage of $14.0 million per risk in excess of $1.0 million per risk. This replaces the treaty that expired December 31, 2008, which also covered $14.0 million per risk in excess of $1.0 million per risk. This treaty provides coverage in two layers: $4.0 million per risk in excess of $1.0 million per risk, and $10.0 million per risk in excess of $5.0 million per risk. Similar to expiring terms, the first layer is subject to a $4.0 million limit of liability for all risks involved in one loss occurrence, and the second layer is subject to a $10.0 million limit for all risks involved in one loss occurrence.

Professional Liability Excess of Loss— Effective January 1, 2009, the Company renewed its professional liability excess of loss treaty which provides coverage of $4.0 million per occurrence in excess of $1.0 million per occurrence. This replaces the treaty that expired December 31, 2008, which provided coverage for $9.5 million in excess of $0.5 million. The Company reduced its reinsurance limit due to a decrease in exposure to policies with limits in excess of $5.0 million per occurrence.

Casualty Excess of Loss— Effective May 1, 2009, the Company renewed its casualty excess of loss treaty which provides coverage for $2.25 million in excess of $0.75 million per occurrence for general liability and auto liability. Allocated loss adjustment expenses are shared in proportion to losses retained and ceded. This replaces the treaty that expired April 30, 2009, which provided identical limits of coverage for general liability only.

Casualty Clash Excess of Loss— Effective January 1, 2009, the Company renewed its casualty clash excess of loss treaty which provides coverage of $10.0 million per occurrence in excess of $3.0 million per occurrence, subject to a $20.0 million limit for all loss occurrences. This replaces the treaty that expired December 31, 2008, which provided identical coverage.

19

UNITED AMERICA INDEMNITY, LTD.

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

Property Quota Share— Effective January 1, 2009, the Company entered into a 30% quota share treaty related to the Penn-America property line of business. During the quarter and six months ended June 30, 2009, the Company ceded $3.2 million and $5.7 million of written premium, respectively.

There were no other significant changes to any of the Company’s other reinsurance treaties during the quarter or six months ended June 30, 2009.

5. Income Taxes

The statutory income tax rates of the countries where the Company does business are 35.0% in the United States, 0.0% in Bermuda, 0.0% in the Cayman Islands, 29.63% in the Duchy of Luxembourg, and 25.0% in the Republic of Ireland. The statutory income tax rate of each country is applied against the expected annual taxable income of the Company in each country to estimate the annual income tax expense. Total estimated annual income tax expense is divided by total estimated annual pre-tax income to determine the expected annual income tax rate used to compute the income tax provision. On an interim basis, the expected annual income tax rate is applied against interim pre-tax income, excluding net realized gains and losses, and then adding that amount to income taxes on net realized gains and losses. The Company’s income from continuing operations before income taxes from the Non-U.S. Subsidiaries and U.S. Subsidiaries, including the results of the quota share agreement between Wind River Reinsurance and the U.S. Insurance Operations, for the quarters and six months ended June 30, 2009 and 2008 were as follows:

Quarter Ended June 30, 2009:	Non-U.S.		U.S.
(Dollars in thousands)	Subsidiaries		Subsidiaries		Eliminations			Total
Revenues:
Gross premiums written	$	51,097	$	72,687	$	(32,304	)	$	91,480
Net premiums written	$	50,991	$	26,487	$	—		$	77,478
Net premiums earned	$	45,418	$	29,314	$	—		$	74,732
Net investment income		10,701		10,501		(4,597	)		16,605
Net realized investment gains		115		5,283		—			5,398
Total revenues		56,234		45,098		(4,597	)		96,735
Losses and Expenses:
Net losses and loss adjustment expenses		23,596		20,451		—			44,047
Acquisition costs and other underwriting expenses		18,329		11,643		—			29,972
Corporate and other operating expenses		648		3,015		—			3,663
Interest expense		—		6,429		(4,597	)		1,832
Income before income taxes	$	13,661	$	3,560	$	—		$	17,221

Quarter Ended June 30, 2008:	Non-U.S.			U.S.
(Dollars in thousands)	Subsidiaries			Subsidiaries			Eliminations			Total
Revenues:
Gross premiums written	$	51,548		$	94,855		$	(42,085	)	$	104,318
Net premiums written	$	43,121		$	42,088		$	—		$	85,209
Net premiums earned	$	51,572		$	49,101		$	—		$	100,673
Net investment income		10,295			11,374			(4,597	)		17,072
Net realized investment gains (losses)		160			(2,640	)		—			(2,480	)
Total revenues		62,027			57,835			(4,597	)		115,265
Losses and Expenses:
Net losses and loss adjustment expenses		37,752			45,892			—			83,644
Acquisition costs and other underwriting expenses		23,506			14,606			—			38,112
Corporate and other operating expenses		1,209			1,060			—			2,269
Interest expense		—			6,785			(4,597	)		2,188
Loss before income taxes	$	(440	)	$	(10,508	)	$	—		$	(10,948	)

20

UNITED AMERICA INDEMNITY, LTD.

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

Six Months Ended June 30, 2009:	Non-U.S.			U.S.
(Dollars in thousands)	Subsidiaries			Subsidiaries			Eliminations			Total
Revenues:
Gross premiums written	$	111,991		$	140,307		$	(61,630	)	$	190,668
Net premiums written	$	111,461		$	52,630		$	—		$	164,091
Net premiums earned	$	90,189		$	63,083		$	—		$	153,272
Net investment income		20,927			26,999			(9,144	)		38,782
Net realized investment losses		(1,982	)		(1,216	)		—			(3,198	)
Total revenues		109,134			88,866			(9,144	)		188,856
Losses and Expenses:
Net losses and loss adjustment expenses		49,792			41,995			—			91,787
Acquisition costs and other underwriting expenses		36,529			24,257			—			60,786
Corporate and other operating expenses		3,519			4,119			—			7,638
Interest expense		—			12,830			(9,144	)		3,686
Income before income taxes	$	19,294		$	5,665		$	—		$	24,959

Six Months Ended June 30, 2008:	Non-U.S.		U.S.
(Dollars in thousands)	Subsidiaries		Subsidiaries			Eliminations				Total
Revenues:
Gross premiums written	$	97,653	$	188,147		$	(82,420	)		$	203,380
Net premiums written	$	84,754	$	82,419		$	—			$	167,173
Net premiums earned	$	109,671	$	104,059		$	—			$	213,730
Net investment income		20,849		23,153			(9,144	)			34,858
Net realized investment gains (losses)		148		(3,698	)		—				(3,550	)
Total revenues		130,668		123,514			(9,144	)			245,038
Losses and Expenses:									��
Net losses and loss adjustment expenses		75,831		84,463			—				160,294
Acquisition costs and other underwriting expenses		46,607		29,700			—				76,307
Corporate and other operating expenses		3,813		2,401			—				6,214
Interest expense		—		13,871			(9,144	)			4,727
Income (loss) before income taxes	$	4,417	$	(6,921	)	$	—			$	(2,504	)

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

	Quarter Ended June 30,
	2009						2008
				% of Pre-						% of Pre-
(Dollars in thousands)	Amount			Tax Income			Amount			Tax Loss
Expected tax provision at weighted average rate	$	1,266			7.3	%	$	(3,658	)		(33.4	)%
Adjustments:
Tax exempt interest		(668	)		(3.9	)		(744	)		(6.8	)
Dividend exclusion		(99	)		(0.6	)		(165	)		(1.5	)
Effective tax rate adjustment		2,196			12.7			2,486			22.7
Other		63			0.5			78			0.7
Income tax expense	$	2,758			16.0	%	$	(2,003	)		(18.3	)%

21

UNITED AMERICA INDEMNITY, LTD.

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

	Six Months Ended June 30,
	2009						2008
				% of Pre-						% of Pre-
(Dollars in thousands)	Amount			Tax Income			Amount			Tax Loss
Expected tax provision at weighted average rate	$	2,023			8.1	%	$	(2,383	)		(95.2	)%
Adjustments:
Tax exempt interest		(1,380	)		(5.5	)		(1,457	)		(58.2	)
Dividend exclusion		(210	)		(0.8	)		(326	)		(13.0	)
Effective tax rate adjustment		2,951			11.8			2,897			115.7
Other		97			0.3			(173	)		(6.9	)
Income tax expense	$	3,481			13.9	%	$	(1,442	)		(57.6	)%

The effective income tax expense rate for the six months ended June 30, 2009 was 13.9%, compared to an effective income tax benefit rate of 57.6% for the six months ended June 30, 2008. The increase in the effective tax rate is primarily due to the gain on the liquidation of limited partnerships of $8.6 million. The effective rates differed from the weighted average expected income tax expense (benefit) rates of 8.1% and (95.2)% for the six months ended June 30, 2009 and 2008, respectively, primarily due to the fact that we are recording tax based on the annualized effective tax rate, net of tax-exempt interest and dividends.

The Company and some of its subsidiaries file 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 2005.

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007. As a result, the Company now applies a more-likely-than-not recognition threshold for all tax uncertainties. FIN 48 only allows the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the taxing authorities. The Company’s unrecognized tax benefit was $3.1 million as of June 30, 2009 and December 31, 2008.

If recognized, the gross unrecognized tax benefits could lower the effective income tax rate in any future period. The provision for gross unrecognized tax benefits did not change during the quarter or six months ended June 30, 2009.

The Company classifies all interest and penalties related to uncertain tax positions as income tax expense. As of June 30, 2009, the Company has recorded $0.3 million in liabilities for tax-related interest and penalties on its consolidated balance sheet.

6. Liability for Unpaid Losses and Loss Adjustment Expenses

The liability for unpaid losses and loss adjustment expenses reflects the Company’s best estimate for future amounts needed to pay claims and related settlement expenses and the impact of the Company’s reinsurance coverages with respect to insured events. Estimating the ultimate claims liability of the Company is a complex and judgmental process, because the amounts are based on management’s informed estimates and judgments using data currently available. In some cases, significant periods of time, up to several years or more, may elapse between the occurrence of an insured loss and the reporting of such to the Company. The method for determining the Company’s liability for unpaid losses and loss adjustment expenses includes, but is not limited to, reviewing past loss experience and considering other factors such as industry data and legal, social, and economic developments. As additional experience and data become available, the Company’s estimate for the liability for unpaid losses and loss adjustment expenses is revised accordingly. If the Company’s ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded with respect to unpaid losses and loss adjustment expenses at June 30, 2009, the related adjustments could have a material impact on the Company’s future results of operations.

22

UNITED AMERICA INDEMNITY, LTD.

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

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

	Quarter Ended June 30,
(Dollars in thousands)	2009			2008
Unpaid losses and loss adjustment expenses at beginning of period	$	1,446,974		$	1,494,816
Less: Ceded reinsurance receivables on unpaid losses and loss adjustment expenses		637,686			679,775
Net balance at beginning of period		809,288			815,041
Incurred losses and loss adjustment expenses related to:
Current year		46,200			67,103
Prior years		(2,153)	(1)		16,541	(2)
Total incurred losses and loss adjustment expenses		44,047			83,644
Paid losses and loss adjustment expenses related to:
Current year		12,873			15,634
Prior years		59,308			48,735
Total paid losses and loss adjustment expenses		72,181			64,369
Net balance at end of period		781,154			834,316
Plus: Ceded reinsurance receivables on unpaid losses and loss adjustment expenses		613,664			666,913
Unpaid losses and loss adjustment expenses at end of period	$	1,394,818		$	1,501,229

(1)

In the second quarter of 2009, the Company reduced its prior accident year loss reserves by $2.1 million, which consisted of a $2.1 million reduction in property lines related primarily to accident year 2008 and a reduction of $2.0 million in general liability lines related primarily to accident years 2006 to 2008, offset by a $2.0 million increase in professional lines related to terminated programs.

(2)

In the second quarter of 2008, the Company increased its prior accident year loss reserves by $16.9 million and reduced its allowance for uncollectible reinsurance by $0.4 million. The loss reserves increase of $16.9 million consisted of an increase of approximately $21.1 million in liability lines partially offset by a reduction of $4.2 million in property lines. The increase related to the liability lines consisted of $16.6 million from general liability lines primarily related to accident years 2001 and prior, $2.6 million from professional liability lines primarily related to accident years 2006 and 2007 and $1.9 million from reinsurance operations primarily related to accident year 2007. The reduction to the property lines primarily related to accident year 2007.

	Six Months Ended June 30,
(Dollars in thousands)	2009			2008
Unpaid losses and loss adjustment expenses at beginning of period	$	1,506,429		$	1,503,237
Less: Ceded reinsurance receivables on unpaid losses and loss adjustment expenses		670,591			702,353
Net balance at beginning of period		835,838			800,884
Incurred losses and loss adjustment expenses related to:
Current year		94,697			143,753
Prior years		(2,910)	(1)		16,541	(2)
Total incurred losses and loss adjustment expenses		91,787			160,294
Paid losses and loss adjustment expenses related to:
Current year		16,070			21,567
Prior years		130,401			105,295
Total paid losses and loss adjustment expenses		146,471			126,862
Net balance at end of period		781,154			834,316
Plus: Ceded reinsurance receivables on unpaid losses and loss adjustment expenses		613,664			666,913
Unpaid losses and loss adjustment expenses at end of period	$	1,394,818		$	1,501,229

(1)

In 2009, the Company reduced its prior accident year loss reserves by $2.1 million and reduced its allowance for uncollectible reinsurance by $0.8 million. The loss reserves reduction of $2.1 million primarily consisted of a $2.1 million reduction in property lines related primarily to accident year 2008 and a reduction of $2.0 million in general liability lines related primarily to accident years 2006 to 2008, offset by a $2.0 million increase in professional lines related to terminated programs.

(2)

In 2008, the Company increased its prior accident year loss reserves by $16.9 million and reduced its allowance for uncollectible reinsurance by $0.4 million. The loss reserves increase of $16.9 million consisted of an increase of approximately $21.1 million in liability lines partially offset by a reduction of $4.2 million in property lines. The increase related to the liability lines consisted of $16.6 million from general liability lines primarily related to accident years 2001 and prior, $2.6 million from professional liability lines primarily related to accident years 2006 and 2007 and $1.9 million from reinsurance operations primarily related to accident year 2007. The reduction to the property lines primarily related to accident year 2007.

23

UNITED AMERICA INDEMNITY, LTD.

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

7. Debt

The Company’s debt is comprised of guaranteed senior notes, junior subordinated debentures, a discretionary demand line of credit, notes payable, and loans payable. The following items had changes during the quarter or six months ended June 30, 2009:

Loans Payable

At June 30, 2009 and December 31, 2008, the Company had loans payable of $0.8 million and $0.9 million, respectively. These balances were comprised of a loan payable to a former minority shareholder. Interest expense related to loans payable was $0.01 million for each of the quarters ended June 30, 2009 and 2008, and $0.02 million for each of the six months ended June 30, 2009 and 2008.

There were no other significant changes to the Company’s debt during the quarter or six months ended June 30, 2009.

8. Shareholders’ Equity

On February 17, 2009, the Company filed a universal shelf registration statement on Form S-3 with the U.S. Securities and Exchange Commission (“SEC”) covering up to $300.0 million of Class A common shares, preferred shares, depositary shares, debt securities, warrants to purchase Class A common shares, preferred shares or debt securities, stock purchase contracts, and stock purchase units. The filing was made in order to provide the Company with future financial flexibility.

On March 10, 2009, the Company filed Amendment No. 1 to the Form S-3 filing with the SEC, which included a preliminary prospectus defining the terms of United America Indemnity’s intended non-transferable rights offering (the “Rights Offering”). On March 17, 2009, the Company filed a final Prospectus under SEC Rule 424(b)(2), denoting the amended terms of the prospectus.

The Rights Offering allowed holders of the Company’s Class A common shares to subscribe to a new offering of Class A common shares and the holders of the Company’s Class B common shares to subscribe to a new offering of Class B common shares. One non-transferable Class A Right for each Class A common share held, and one non-transferable Class B Right for each Class B common share held, was distributed to the respective Class A and B share holders for each share owned at 5:00 PM EST on March 16, 2009, the record date for the Rights Offering. Each Right entitled the holder to purchase either 0.9013 Class A shares or 0.9013 Class B shares, depending on the class of shares owned on the record date of the offering, at the subscription price of $3.50 per share. The Rights Offering expired April 6, 2009.

The Rights Offering included an agreement with Fox Paine & Company and an investment entity referred to as the “Backstop Purchaser,” which is controlled by Fox Paine & Company. The Backstop Purchaser agreed, subject to certain conditions, to purchase all of the Class A and Class B common shares offered in the Rights Offering and not subscribed for pursuant to the Rights Offering. The Company entered into the agreement to ensure that, subject to the conditions of the agreement, all Class A common shares and Class B common shares offered in the Rights Offering were either distributed in the Rights Offering or purchased subsequent to the Rights Offering at the same purchase price at which the rights were exercisable. Through this arrangement, the Company had a high degree of certainty that it would raise gross proceeds of $100.0 million through the Rights Offering. In the agreement and subject to the successful completion of the Rights Offering, the Company agreed to pay Fox Paine & Company an arrangement fee of $2.0 million and a backstop fee equal to 5% of the aggregate gross proceeds raised in the Rights Offering, or $5.0 million, for total payments of $7.0 million. Payment of these fees is subject to the prior approval by the Company’s shareholders. As of the filing date of this report, the fees have been accrued, but have not yet been paid.

24

UNITED AMERICA INDEMNITY, LTD.

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

As a result of the Rights Offering, 17.2 million Class A common shares and 11.4 million Class B common shares were purchased, resulting in gross proceeds of $100.1 million. After deducting expenses associated with the Rights Offering, the Company’s equity increased $91.5 million. Approximately 66% of the Class A common shareholders had exercised their subscription right. Excluding those Class A common shares that are owned by Fox Paine & Company and affiliated entities, approximately 72% of the Class A common shareholders had exercised their subscription right. Fox Paine & Company and affiliated entities purchased 5.9 million Class A common shares and all Class B common shares for $60.7 million. Post the Rights Offering, Fox Paine & Company and affiliated entities own 7.5 million of the total 36.4 million outstanding Class A common shares and all 24.1 million of the outstanding Class B common shares. In total, Fox Paine & Company and affiliated entities now own 52.4% of all outstanding shares and beneficially own shares having approximately 89.6% of the Company’s total outstanding voting power.

See the specific filings with the SEC for the details regarding the shelf registration and the Rights Offering.

9. Related Party Transactions

As of June 30, 2009, Fox Paine & Company beneficially owned shares having approximately 89.6% 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 relies on Fox Paine & Company to provide management services and other services related to the operations of the Company. The Company incurred management fees of $0.4 million in each of the quarters ended June 30, 2009 and 2008 and $0.8 million in each of the six months ended June 30, 2009 and 2008 as part of the annual management fee that is paid to Fox Paine & Company. The Company reimbursed Fox Paine & Company $0.08 million and $0.0 million during the quarters ended June 30, 2009 and 2008, respectively, and $0.1 million and $0.02 million during the six months ended June 30, 2009 and 2008, respectively, for expenses incurred in providing management services.

As mentioned in Note 8 above, as a result of the Rights Offering, the Company agreed to pay Fox Paine & Company an arrangement fee of $2.0 million and a backstop fee equal to 5% of the aggregate gross proceeds raised in the Rights Offering, or $5.0 million, for total payments of $7.0 million. Since Fox Paine & Company is a related party, and all other shareholders were not offered these fees in the Rights Offering, the payment of the fees is subject to the prior approval of our shareholders. Such approval will be sought at the Company’s next shareholder meeting. As a result, the Company has accrued the fees, but has not yet issued payment. See Note 8 above for more details concerning the Rights Offering.

At June 30, 2009 and December 31, 2008, Wind River Reinsurance was a limited partner in investment funds 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 $4.1 million and $6.8 million at June 30, 2009 and December 31, 2008, respectively. On April 24, 2009, the Company paid a capital call contribution of $0.6 million to the partnership. At June 30, 2009, the Company had an unfunded capital commitment of $3.2 million to the partnership. On July 1, 2009, the Company paid a capital call contribution of $0.03 million to the partnership.

During the quarters ended June 30, 2009 and 2008, the Company incurred $0.02 million and $0.6 million respectively, for legal services rendered by Cozen O’Connor. During the six months ended June 30, 2009 and 2008, the Company incurred $0.09 million and $0.8 million respectively, for legal services rendered by Cozen O’Connor. Stephen A. Cozen, the chairman of Cozen O’Connor, is a member of the Company’s Board of Directors.

25

UNITED AMERICA INDEMNITY, LTD.

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

During the six months ended June 30, 2009 and 2008, the Company paid $0.0 million and $0.2 million, respectively, in premium to Validus Reinsurance, Ltd. (“Validus”). There were no payments during the quarters ended June 30, 2009 and 2008. Validus was a participant on the Company’s $100.0 million in excess of $10.0 million property catastrophe reinsurance treaty, which expired on May 31, 2007. No losses were ceded by the Company under this treaty.

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 related to the quota share retrocession agreement have been assumed by Validus from Wind River Reinsurance:

	Quarter Ended June 30,					Six Months Ended June 30,
(Dollars in thousands)	2009		2008			2009		2008
Ceded written premium	$	2,340	$	5,076		$	2,748	$	8,573
Ceded losses		497		(2,275	)		972		(1,228	)

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.

In connection with the Rights Offering, the Company entered into an agreement with Citigroup Global Markets, Inc. (“Citi”), wherein Citi agreed to be the Company’s exclusive capital markets structuring adviser to provide advisory and investment banking services. The Company agreed to pay Citi $1.0 million in connection with these services. Chad A. Leat, the managing director and chairman of Citigroup’s Global Alternative Asset Group, is a member of the Company’s Board of Directors.

10. Commitments and Contingencies

Legal Proceedings

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

11. Share-Based Compensation Plans

During the six months ended June 30, 2009, the Company granted 103,138 Class A common shares, subject to certain restrictions, at a weighted average grant date value of $9.44 per share, to key employees of the Company under the United America Indemnity, Ltd. Share Incentive Plan (the “Plan”). In addition, during the same period, the Company granted an aggregate of 102,648 fully vested Class A common shares, subject to certain restrictions, at a weighted average grant date value of $6.32 per share, to non-employee directors of the Company under the Plan.

12. Earnings (Loss) Per Share

Earnings (loss) per share have been computed using the weighted average number of common shares and common share equivalents outstanding during the period. As detailed below, share counts for the prior year have been restated as a result of the Rights Offering.

26

UNITED AMERICA INDEMNITY, LTD.

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

The Company issued non-transferable rights to stockholders of record on March 16, 2009. The rights entitled the holders to purchase one new share of common stock for every right held. The Rights Offering expired on April 6, 2009. On May 5, 2009, the Company issued 17.2 million Class A common shares and 11.4 million Class B common shares at a subscription price of $3.50 per share in conjunction with the Rights Offering.

The market price of the Company’s Class A common shares was $4.89 per share on March 12, 2009, which was the ex-rights date related to the Rights Offering. Since the $3.50 per share subscription price of the shares issued under the Rights Offering was lower than the $4.89 per share market price on March 12, 2009, the Rights Offering contained a bonus element. As required by SFAS No. 128, “Earnings Per Share” (“SFAS 128”), in computing the basic and diluted weighted share counts, the number of shares outstanding prior to May 5, 2009 (the date that the common shares were issued in conjunction with the Rights Offering) was adjusted by a factor of 1.116 to reflect the impact of a bonus element associated with the Rights Offering. See Note 8 above for more details concerning the Rights Offering.

The following table sets forth the computation of basic and diluted earnings (loss) per share. In 2008, “Diluted” loss per share is the same as “Basic” loss per share since there was a net loss for that year.

(Dollars in thousands,	Quarter Ended June 30,					Six Months Ended June 30,
except per share data)	2009		2008			2009		2008
Net income (loss)	$	16,261	$	(8,971	)	$	23,411	$	(1,531	)
Basic earnings (loss) per share:
Weighted average shares outstanding — basic		49,462,974		33,776,708			40,512,274		34,238,706
Adjustment for bonus element of Rights Offering		1,361,332		3,901,939			2,493,075		3,955,310
Adjusted weighted average shares outstanding — basic		50,824,306		37,678,647			43,005,349		38,194,016
Net income (loss)	$	0.32	$	(0.24	)	$	0.54	$	(0.04	)
Diluted earnings (loss) per share:
Weighted average shares outstanding — diluted		49,501,869		33,776,708			40,545,048		34,238,706
Adjustment for bonus element of Rights Offering		1,361,332		3,901,939			2,493,075		3,955,310
Adjusted weighted average shares outstanding — diluted		50,863,201		37,678,647			43,038,123		38,194,016
Net income (loss)	$	0.32	$	(0.24	)	$	0.54	$	(0.04	)

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

	Quarter Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
Weighted average shares for basic earnings per share		50,824,306		37,678,647		43,005,349		38,194,016
Non-vested restricted stock		38,895		—		32,774		—
Weighted average shares for diluted earnings per share		50,863,201		37,678,647		43,038,123		38,194,016

If the Company had not incurred a loss in 2008, then 37,882,658 and 38,408,052 weighted average shares would have been used to compute the diluted loss per share calculation for the quarter and six months ended June 30, 2008, respectively. In addition to the basic shares, weighted average shares for the diluted calculation would have included 72,106 shares of non-vested restricted stock and 131,905 share equivalents for options and warrants for the quarter ended June 30, 2008, and 56,573 shares of non-vested restricted stock and 157,463 share equivalents for options and warrants for the six months ended June 30, 2008.

27

UNITED AMERICA INDEMNITY, LTD.

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

13. Segment Information

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

The Insurance Operations segment and the Reinsurance 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 to the consolidated financial statements in Item 8 of Part II in the Company’s 2008 Annual Report on Form 10-K.

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

Quarter Ended June 30, 2009:	Insurance
(Dollars in thousands)	Operations(1)			Reinsurance (2)			Total
Revenues:
Gross premiums written	$	72,687		$	18,793		$	91,480
Net premiums written	$	58,791		$	18,687		$	77,478
Net premiums earned	$	64,446		$	10,286		$	74,732
Losses and Expenses:
Net losses and loss adjustment expenses		39,547			4,500			44,047
Acquisition costs and other underwriting expenses		27,238	(3)		2,734	(4)		29,972
Income (loss) from segments	$	(2,339	)	$	3,052			713
Unallocated Items:
Net investment income								16,605
Net realized investment gains								5,398
Corporate and other operating expenses								(3,663	)
Interest expense								(1,832	)
Income before income taxes								17,221
Income tax expense								2,758
Income before equity in net income of partnership								14,463
Equity in net income of partnership, net of tax								1,798
Net income							$	16,261
Total assets	$	1,894,370		$	611,031	(5)	$	2,505,401

(1)	Includes business ceded to Reinsurance Operations.
(2)	External business only, excluding business assumed from Insurance Operations.
(3)	Includes federal excise tax of $351 relating to premiums ceded from Insurance Operations to Reinsurance Operations.
(4)	Includes all Wind River Reinsurance expenses other than federal excise tax.
(5)	Comprised of Wind River Reinsurance’s total assets less its investment in subsidiaries.

28

UNITED AMERICA INDEMNITY, LTD.

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

Quarter Ended June 30, 2008:	Insurance
(Dollars in thousands)	Operations (1)			Reinsurance (2)			Total
Revenues:
Gross premiums written	$	94,855		$	9,463		$	104,318
Net premiums written	$	84,171		$	1,038		$	85,209
Net premiums earned	$	98,204		$	2,469		$	100,673
Losses and Expenses:
Net losses and loss adjustment expenses		77,576			6,068			83,644
Acquisition costs and other underwriting expenses		35,817	(3)		2,295	(4)		38,112
Loss from segments	$	(15,189	)	$	(5,894	)		(21,083	)
Unallocated Items:
Net investment income								17,072
Net realized investment losses								(2,480	)
Corporate and other operating expenses								(2,269	)
Interest expense								(2,188	)
Loss before income taxes								(10,948	)
Income tax benefit								(2,003	)
Loss before equity in net loss of partnership								(8,945	)
Equity in net loss of partnership, net of tax								(26	)
Net loss							$	(8,971	)
Total assets	$	2,037,657		$	599,143	(5)	$	2,636,800

(1)	Includes business ceded to the Company’s Reinsurance Operations.
(2)	External business only, excluding business assumed from the Company’s Insurance Operations.
(3)	Includes federal excise tax of $491 relating to premiums ceded from Insurance Operations to Reinsurance Operations.
(4)	Includes all Wind River Reinsurance expenses other than federal excise tax.
(5)	Comprised of Wind River Reinsurance’s total assets less its investment in subsidiaries.

Six Months Ended June 30, 2009:	Insurance
(Dollars in thousands)	Operations (1)			Reinsurance (2)			Total
Revenues:
Gross premiums written	$	140,307		$	50,361		$	190,668
Net premiums written	$	114,260		$	49,831		$	164,091
Net premiums earned	$	135,166		$	18,106		$	153,272
Losses and Expenses:
Net losses and loss adjustment expenses		82,291			9,496			91,787
Acquisition costs and other underwriting expenses		56,380	(3)		4,406	(4)		60,786
Income (loss) from segments	$	(3,505	)	$	4,204			699
Unallocated Items:
Net investment income								38,782
Net realized investment losses								(3,198	)
Corporate and other operating expenses								(7,638	)
Interest expense								(3,686	)
Income before income taxes								24,959
Income tax expense								3,481
Income before equity in net income of partnership								21,478
Equity in net income of partnership, net of tax								1,933
Net income							$	23,411
Total assets	$	1,894,370		$	611,031	(5)	$	2,505,401

(1)	Includes business ceded to the Company’s Reinsurance Operations.
(2)	External business only, excluding business assumed from the Company’s Insurance Operations.
(3)	Includes federal excise tax of $721 relating to premiums ceded from Insurance Operations to Reinsurance Operations.
(4)	Includes all Wind River Reinsurance expenses other than federal excise tax.
(5)	Comprised of Wind River Reinsurance’s total assets less its investment in subsidiaries.

29

UNITED AMERICA INDEMNITY, LTD.

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

Six Months Ended June 30, 2008:	Insurance
(Dollars in thousands)	Operations (1)			Reinsurance (2)			Total
Revenues:
Gross premiums written	$	188,147		$	15,233		$	203,380
Net premiums written	$	164,839		$	2,334		$	167,173
Net premiums earned	$	208,123		$	5,607		$	213,730
Losses and Expenses:
Net losses and loss adjustment expenses		151,792			8,502			160,294
Acquisition costs and other underwriting expenses		72,458	(3)		3,849	(4)		76,307
Loss from segments	$	(16,127	)	$	(6,744	)		(22,871	)
Unallocated Items:
Net investment income								34,858
Net realized investment losses								(3,550	)
Corporate and other operating expenses								(6,214	)
Interest expense								(4,727	)
Loss before income taxes								(2,504	)
Income tax benefit								(1,442	)
Loss before equity in net loss of partnership								(1,062	)
Equity in net loss of partnership, net of tax								(469	)
Net loss								(1,531	)
Total assets	$	2,037,657		$	599,143	(5)	$	2,636,800

(1)	Includes business ceded to the Company’s Reinsurance Operations.
(2)	External business only, excluding business assumed from the Company’s Insurance Operations.
(3)	Includes federal excise tax of $1,041 relating to premiums ceded from Insurance Operations to Reinsurance Operations.
(4)	Includes all Wind River Reinsurance expenses other than federal excise tax.
(5)	Comprised of Wind River Reinsurance’s total assets less its investment in subsidiaries.

14. Supplemental Cash Flow Information

The Company paid the following amounts in cash for interest and net U.S. federal income taxes paid during the quarters and six months ended June 30, 2009 and 2008:

	Quarter Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2009		2008		2009			2008
Net U.S. federal income taxes paid (recovered)	$	750	$	5,000	$	(7,062	)	$	6,401
Interest paid		446		943		3,772			5,138

15. New Accounting Pronouncements

On January 12, 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20” (“FSP EITF 99-20-1”) with the intent of achieving more consistent determination of whether an other-than-temporary impairment has occurred. This FSP retains and emphasizes the other-than-temporary impairment assessment guidance and required disclosures in Statement 115, FSP FAS 115-1 and FAS 124-1 and other related disclosures. Under FSP EITF 99-20-1, the holder of a beneficial interest should continue to update the estimate of cash flows over the life of the beneficial interest. If upon evaluation, it is probable that there is a favorable or an adverse change in estimated cash flows from previously projected cash flows, then the investor should recalculate the amount of accretable yield for the beneficial interest and apply this new yield prospectively as a change in estimate. An entity should then apply the impairment guidance in FAS 115. This FSP became effective for interim and annual reporting periods ending after December 15, 2008. The Company adopted the guidance provided in FSP EITF 99-20-1 in its valuation review of applicable securities during the fourth quarter of 2008, and it did not result in a material impact on the Company’s consolidated financial position or results of operations.

30

UNITED AMERICA INDEMNITY, LTD.

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

In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”). The guidance provided clarifies that the measurement objective in determining fair value when the volume and level of activity for the asset or liability have significantly decreased, is the price that would be received to sell the asset in an orderly transaction between willing market participants under current market conditions at the date of the financial statements. The FSP includes additional factors for determining whether there has been a significant decrease in the volume and level of activity for an asset or liability compared to normal activity for that asset or liability (or similar assets or liabilities) and provides additional guidance in estimating fair value in those instances. The FSP further requires an entity to disclose any change in valuation techniques, the related inputs, and the effects resulting from the application of the FSP. In addition, the adoption of FSP FAS 157-4 did not have any impact on the Company’s consolidated financial condition or results of operations because it did not result in a change in valuation techniques or related inputs.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”). The FSP is intended to bring greater consistency to the timing of impairment recognition and to provide greater clarity to investors about the credit and other factors (interest rates, market conditions, etc.) components of impaired debt securities that are not expected to be sold. It modifies the impairment model utilized for debt securities, the presentation of other-than-temporary impairment losses, and expands the required disclosures of other-than-temporary impairment for debt and equity securities. The guidance in the FSP provides that in order for an entity to conclude impairment is not other-than-temporary, it is required to assess whether it has the intent to sell the debt security or more likely than not will be required to sell the debt security before the anticipated recovery. When the entity asserts it does not have the intent to sell the security and it is more likely than not it will not have to sell the security before recovery of its cost basis, only the credit related impairment losses are to be recorded in earnings; losses from other factors are to be recorded in accumulated other comprehensive income (loss). The Company adopted FSP FAS 115-2 and FAS 124-2 on April 1, 2009. As a result, $6.3 million of other-than-temporary impairment losses, net of tax, that were previously recorded through earnings were reclassified to other comprehensive income (loss) with an offset to retained earnings as a cumulative-effect adjustment.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”). This FSP relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value. Prior to issuing this FSP, fair values for these assets and liabilities were only disclosed once a year. The FSP now requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value.

FSP FAS 157-4, FSP FAS 115-2 and FAS 124-2, and FSP FAS 107-1 and APB 28-1are effective for interim and annual reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March, 15, 2009. The Company adopted these FSPs during the second quarter of 2009.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued. This statement sets forth the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This statement is effective for interim or annual financial periods ending after June 15, 2009. The Company adopted SFAS 165 during the second quarter of 2009, and it did not result in a material impact on the Company’s consolidated financial position or results of operations.

31

UNITED AMERICA INDEMNITY, LTD.

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

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140” (“SFAS 166”),which eliminates the concept of a qualifying special-purpose entity from SFAS 140, which will generally subject those entities to the consolidation guidance applied to other variable interest entities (“VIEs”) set out in FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities — and interpretation of ARB No. 51” (“FIN 46(R)”), as amended by SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 166 also introduces the concept of a “participating interest,” which will limit the circumstances where the transfer of a portion of a financial asset will qualify as a sale, assuming all other de-recognition criteria are met. Furthermore, it clarifies and amends the de-recognition criteria for determining whether a transfer qualifies for sale accounting. This Statement is effective as of the beginning of the first annual reporting period and interim reporting periods that begin after November 15, 2009 and is not expected to have a material impact on the Company’s financial statements.

In June 2009, the FASB issued SFAS 167, which amends Interpretation 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. In addition, SFAS 167 amends Interpretation 46(R) to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity. SFAS 167 amends certain guidance in Interpretation 46(R) for determining whether an entity is a variable interest entity and adds an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance. Further, SFAS 167 requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. SFAS 167 is effective as of the beginning of the first annual reporting period and interim reporting periods that begin after November 15, 2009. The adoption of SFAS 167 is not expected to have a material impact on the Company’s financial position, results of operations or liquidity.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162” (“SFAS 168”). In accordance with SFAS 168, the FASB Accounting Standards CodificationTM (Codification) is the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases by the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of SFAS 168 is not expected to have an impact on the Company’s financial position, results of operations or liquidity.

16. Subsequent Events

On July 24, 2009, a federal judge from the U.S. District Court for the Eastern District of Pennsylvania (Philadelphia) upheld a jury verdict in favor of United National Insurance Company (“United National”), an indirect wholly owned subsidiary of the Company, against AON Corp., an insurance and reinsurance broker. In doing so, the U.S. District Judge increased the verdict to $32.2 million by adding more than $8.2 million in prejudgment interest. AON has the right to appeal the result. United National does not intend to recognize the gain contingency until the matter has been resolved through the appellate process.

There were no subsequent events requiring adjustment to the financial statements or disclosure through August 10, 2009, the date that the Company’s financial statements were issued.

32

UNITED AMERICA INDEMNITY, LTD.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes of United America Indemnity included elsewhere in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy, constitutes forward-looking statements that involve risks and uncertainties. Please see “Cautionary Note Regarding Forward-Looking Statements” at the end of this Item 2 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein. For more information regarding our business and operations, please see our Annual Report on Form 10-K for the year ended December 31, 2008.

Recent Developments

On May 5, 2009, we received $100.1 million related to the Rights Offering. See Note 8 to the consolidated financial statements in Item 1 of Part I of this report for details concerning the Rights Offering. We issued 17.2 million and 11.4 million of Class A and Class B common shares, respectively, in conjunction with this offering.

Please see the specific filings with the SEC for the details regarding the Rights Offering.

On June 8, 2009, we announced the appointment of Matthew B. Scott as President of Penn-America Group, effective as of that date. The appointment follows the resignation of Raymond H. (Scott) McDowell as President of Penn-America Group on June 8, 2009.

On June 8, 2009, Robert S. Fleischer resigned from our Board of Directors as a result of his having joined Willis Capital Markets and Advisory Services as a Managing Director.

On June 16, 2009, Charles F. Barr’s tenure as Senior Vice President and General Counsel ended.

We previously announced a plan, which had been approved by our Board of Directors, to re-domicile from the Cayman Islands to Switzerland. We are reevaluating this plan and are also considering other jurisdictions. No other plan has yet been approved by our Board.

Overview

Our Insurance Operations distribute property and casualty insurance products through a group of approximately 110 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, casualty, 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.

33

UNITED AMERICA INDEMNITY, LTD.

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 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. 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 medium to 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 are Penn-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 our Annual Report on Form 10-K for the year ended December 31, 2008. 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.

A full loss review of the loss reserves of our Insurance and Reinsurance Operations was performed by an independent actuary in the second quarter of 2009.

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

• Paid Development method;

• Incurred Development method;

• Expected Loss Ratio method;

• Bornhuetter-Ferguson method using premiums and paid loss;

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

• Average Loss method.

34

UNITED AMERICA INDEMNITY, LTD.

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 development 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 method and the Expected Loss Ratio method. This method normally determines expected loss ratios similar to the method 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 development patterns. However, the inclusion of case reserves can lead to distortions if changes in case reserving practices have taken place, and the method requires analysis of all the factors that need to be reviewed for the Expected Loss Ratio and Incurred Development methods.

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

35

UNITED AMERICA INDEMNITY, LTD.

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 Incurred and/or Paid Development method. Claims related to umbrella business are usually reported later than claims for other long-tail lines. For umbrella business, the Expected Loss Ratio and Bornhuetter-Ferguson methods are used for as many as six years before shifting to the Incurred Development method. Reserves for short-tail lines use the Bornhuetter-Ferguson methods for the most recent accident year and shift to the Incurred and/or Paid Development method in subsequent years.

For other more complex reserve categories where the above methods may not produce reliable indications, we use additional methods tailored to the characteristics of the specific situation. Such reserve categories include losses from construction defects and 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, 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 other parties, including 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 continuing developments, management increased gross and net A&E reserves during the second quarter of 2008 to reflect its best estimate of A&E exposures. In 2008, one of our insurance companies was dismissed from a lawsuit seeking coverage from it and other unrelated insurance companies. The suit involved issues related to approximately 3,900 existing asbestos related bodily injury claims and future claims. The dismissal was the result of a settlement of a disputed claim related to accident year 1984. The settlement is conditioned upon certain legal events occurring which will trigger financial obligations by the insurance company. Management will continue to monitor the developments of the litigation to determine if any additional financial exposure is present.

Reserve analyses performed by our actuaries result 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 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.

36

UNITED AMERICA INDEMNITY, LTD.

Management’s best estimate at June 30, 2009 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 $1,394.8 million and $781.2 million, respectively, as of June 30, 2009. A breakout of our gross and net reserves, excluding the effects of our intercompany pooling arrangements and intercompany quota share reinsurance agreement, as of June 30, 2009 is as follows:

	Gross Reserves
(Dollars in thousands)	Case		IBNR (1)		Total
Insurance Operations:
Penn-America	$	170,311	$	332,268	$	502,579
United National		232,791		474,511		707,302
Diamond State		61,836		88,727		150,563
Total Insurance Operations		464,938		895,506		1,360,444
Reinsurance Operations:
Wind River Reinsurance		13,014		21,360		34,374
Total	$	477,952	$	916,866	$	1,394,818

	Net Reserves (2)
(Dollars in thousands)	Case		IBNR (1)		Total
Insurance Operations:
Penn-America	$	151,028	$	276,882	$	427,910
United National		70,991		149,642		220,633
Diamond State		42,439		66,466		108,905
Total Insurance Operations		264,458		492,990		757,448
Reinsurance Operations:
Wind River Reinsurance		5,453		18,253		23,706
Total	$	269,911	$	511,243	$	781,154

(1)	Losses incurred but not reported, including the expected future emergence of case reserves.
(2)	Does not include reinsurance receivable on paid losses or reserve for uncollectible reinsurance.

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 require continual updates and the ultimate liability may be higher or lower than previously indicated. Changes in estimates for loss and loss adjustment expense reserves, as required by SFAS No. 60, “Accounting and Reporting by Insurance Enterprises,” are recorded in the period that the change in these estimates is made. See Note 6 to the consolidated financial statements in Item 1 of Part I of this report for details concerning the changes in the estimate for incurred loss and loss adjustment expenses related to prior accident years.

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 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).

37

UNITED AMERICA INDEMNITY, LTD.

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.

Previous reserve analyses have resulted in our identification of information and trends that have caused us to increase or decrease our frequency and severity assumptions 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 IBNR.

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. For most of our reserving classes, 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 $94.7 million for claims occurring during the six months ended June 30, 2009:

	Severity Change
(Dollars in thousands)	-10%			-5%			0%			5%			10%
Frequency Change
-5%	$	(13,731	)	$	(9,233	)	$	(4,735	)	$	(237	)	$	4,261
-3%		(12,027	)		(7,434	)		(2,841	)		1,752			6,345
-2%		(11,174	)		(6,534	)		(1,894	)		2,746			7,386
-1%		(10,322	)		(5,634	)		(947	)		3,741			8,428
0%		(9,470	)		(4,735	)		—			4,735			9,470
1%		(8,617	)		(3,835	)		947			5,729			10,511
2%		(7,765	)		(2,936	)		1,894			6,723			11,553
3%		(6,913	)		(2,036	)		2,841			7,718			12,595
5%		(5,208	)		(237	)		4,735			9,706			14,678

Our net reserves for losses and loss expenses of $781.2 million as of June 30, 2009 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. At June 30, 2009, our reinsurance receivables were $620.1 million, net of an allowance for uncollectible reinsurance receivables of $12.9 million. See Note 4 to the consolidated financial statements in Item 1 of Part I of this report for more details concerning the collectibility of our reinsurance receivables.

38

UNITED AMERICA INDEMNITY, LTD.

Investments

The carrying amount of our investments approximates their estimated fair value. We regularly perform various analytical procedures with respect to our investments, including identifying any security where the fair value is below its cost. Upon identification of such securities and periodically thereafter, 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;

(5) changes in laws or regulations have affected an issuer or industry;

(6) the investment has an unrealized loss and was identified by our Investment Manager as an investment to be sold before recovery or maturity; and

(7) the investment failed EITF 99-20-1 testing, which is a cash flow projection test to determine if anticipated principal and interest payments will be realized.

For equity securities, management carefully reviews securities with unrealized losses that have either:

(1) persisted for more than twelve consecutive months or

(2) the value of the investment has been 20% or more below cost for six continuous months or more to determine if the security should be impaired.

Prior to the implementation of FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”), if the fair value of an investment fell below its cost and the decline was determined to be other than temporary, the amount of the decline was included in earnings as a realized loss in the period in which the impairment arose. Effective April 1, 2009, we adopted FSP FAS 115-2 and FAS 124-2. This new accounting pronouncement amends the existing impairment model for debt securities only. This FSP does not amend existing recognition and measurement guidance related to the other-than-temporary impairment of equity securities. Under this new pronouncement, for securities in an unrealized loss position, we are required to assess whether we have the intent to sell the debt security or more likely than not will be required to sell the debt security before the anticipated recovery. If either of these conditions is met, we must recognize an other-than-temporary impairment with the entire unrealized loss being recorded through earnings. For securities in an unrealized loss position not meeting these conditions, we assess whether the impairment of a security is other-than-temporary. If the impairment is deemed to be other-than-temporary, we must separate the other-than-temporary impairment into two components: the amount representing the credit loss and the amount related to all other factors. The credit loss represents the portion of the amortized book value in excess of the net present value of the projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. The credit loss component of the other-than-temporary impairment is recorded through earnings, whereas the amount relating to factors other than credit losses are recorded in other comprehensive income, net of taxes.

For an analysis of our securities with gross unrealized losses as of June 30, 2009 and December 31, 2008, and for other than temporary losses that we recorded for the quarters and six months ended June 30, 2009 and 2008, please see Note 2 to the consolidated financial statements in Item 1 of Part I of this report.

39

UNITED AMERICA INDEMNITY, LTD.

Fair Value Measurements

As stated in Note 3 to the consolidated financial statements in Item 1 of Part I of this report, we adopted SFAS 157 effective January 1, 2008. In connection with this adoption, we categorize our assets that are accounted for at fair value in the consolidated statements into a fair value hierarchy as defined by SFAS 157. The fair value hierarchy is directly related to the amount of subjectivity associated with the inputs utilized to determine the fair value of these assets. See Note 3 for further information about the fair value hierarchy and our assets that are accounted for at fair value.

Goodwill and Intangible Assets

In 2008, we impaired all of the goodwill and $12.2 million of intangible assets associated with our merger with Penn-America Group, Inc. due to the results of our 2008 impairment testing. This resulted in an after-tax loss in 2008 of $92.2 million. We also determined that our remaining software intangible asset will be fully amortized in two years. See Note 6 of the notes to the consolidated financial statements in Item 8 of Part II in our 2008 Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 11, 2009 for a discussion of our testing of impairment of goodwill and other definite and indefinite lived assets.

We use several techniques to value the recoverability of intangible assets. 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 indefinite useful lives are amortized over their useful lives. State licenses and trade names are not amortized. Reviews of recoverability and useful lives are performed at least annually.

For our expected amortization expense for the next two fiscal years, see “Critical Accounting Estimates and Policies” in Item 7 of Part II in our 2008 Annual Report on Form 10-K.

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 June 30, 2009. The deferred tax asset balance is analyzed regularly by management. Based on these analyses, we have determined that our deferred tax asset is recoverable. Projections of future taxable income incorporate several assumptions of future business and operations that are apt to differ from actual experience. If, in the future, our assumptions and estimates that resulted in our forecast of future taxable income for each tax-paying component prove to be incorrect, a valuation allowance may be required. This could have a material adverse effect on our financial condition, results of operations, and liquidity.

On an interim basis, we book our tax provision using the expected full year effective tax rate in accordance with the provisions of APB 28. Forecasts which compute taxable income and taxes expected to be incurred in the jurisdictions where we do business are prepared several times per year. The effective tax rate is computed by dividing forecasted income tax expense not including net realized investment gains (losses) by forecasted pre-tax income not including net realized investment gains (losses). Changes in pre-tax and taxable income in the jurisdictions where we do business can change the APB 28 effective tax rate. To compute our income tax expense on an interim basis, we apply our expected full year effective tax rate against our pre-tax income excluding net realized investment gains (losses) and then add actual tax on net realized investment gains (losses) to that result.

40

UNITED AMERICA INDEMNITY, LTD.

During the six months ended 2009, we recognized $8.6 million of investment income related to the liquidation of investments in two limited partnerships. The first quarter tax provision includes federal income tax expense of $3.0 million related to this investment income.

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 5 to the consolidated financial statements in Item 1 of Part I of this report for a discussion of FIN 48.

Our Business Segments

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

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.

For a description of our segments, see “Business Segments” in Item 1 of Part I in our 2008 Annual Report on Form 10-K.

41

UNITED AMERICA INDEMNITY, LTD.

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

	Quarter Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2009			2008			2009			2008
Insurance Operations premiums written:
Gross premiums written	$	72,687		$	94,855		$	140,307		$	188,147
Ceded premiums written		13,896			10,684			26,047			23,308
Net premiums written	$	58,791		$	84,171		$	114,260		$	164,839
Reinsurance Operations premiums written:
Gross premiums written	$	18,793		$	9,463		$	50,361		$	15,233
Ceded premiums written		106			8,425			530			12,899
Net premiums written	$	18,687		$	1,038		$	49,831		$	2,334
Revenues:(1)
Insurance Operations	$	64,446		$	98,204		$	135,166		$	208,123
Reinsurance Operations		10,286			2,469			18,106			5,607
Total revenues	$	74,732		$	100,673		$	153,272		$	213,730
Expenses:(2)
Insurance Operations	$	66,785	(3)	$	113,393	(3)	$	138,671	(4)	$	224,250	(4)
Reinsurance Operations(5)		7,234			8,363			13,902			12,351
Total expenses	$	74,019		$	121,756		$	152,573		$	236,601
Income (loss) from segments:
Insurance Operations	$	(2,339	)	$	(15,189	)	$	(3,505	)	$	(16,127	)
Reinsurance Operations		3,052			(5,894	)		4,204			(6,744	)
Total income (loss) from segments	$	713		$	(21,083	)	$	699		$	(22,871	)
Insurance combined ratio analysis:(6)
Insurance Operations
Loss ratio		61.4			79.0			60.9			72.9
Expense ratio		42.3			36.5			41.7			34.8
Combined ratio		103.7			115.5			102.6			107.7
Reinsurance Operations
Loss ratio		43.7			245.8			52.4			151.7
Expense ratio		26.6			93.0			24.3			68.6
Combined ratio		70.3			338.8			76.7			220.3
Consolidated
Loss ratio		58.9			83.1			59.9			75.0
Expense ratio		40.1			37.9			39.7			35.7
Combined ratio		99.0			121.0			99.6			110.7

(1)	Excludes net investment income and net realized investment gains (losses), which are not allocated to our segments
(2)	Excludes corporate and other operating expenses and interest expense, which are not allocated to our segments.
(3)	Includes excise tax of $351 and $491 related to cessions from our U.S. Insurance Companies to Wind River Reinsurance for the quarters ended June 30, 2009 and 2008, respectively.
(4)	Includes excise tax of $721 and $1,041 related to cessions from our U.S. Insurance Companies to Wind River Reinsurance for the six months ended June 30, 2009 and 2008, respectively.
(5)	Includes all Wind River Reinsurance expenses other than excise tax related to cessions from our U.S. Insurance Companies to Wind River Reinsurance.
(6)	Our insurance combined ratios are non-GAAP financial measures that are generally viewed in the insurance industry as indicators of underwriting profitability. The loss ratio is the ratio of net losses and loss adjustment expenses to net premiums earned. The expense ratio is the ratio of acquisition costs and other underwriting expenses to net premiums earned. The combined ratio is the sum of the loss and expense ratios.

42

UNITED AMERICA INDEMNITY, LTD.

Results of Operations

Quarter Ended June 30, 2009 Compared with the Quarter Ended June 30, 2008

Insurance Operations

The components of income (loss) from underwriting and underwriting ratios of our Insurance Operations segment, with premium by product classification, are as follows:

	Quarter Ended June 30,						Increase / (Decrease)
(Dollars in thousands)	2009			2008			$			%
Gross premiums written:
Penn-America	$	34,256		$	49,166		$	(14,910	)		-30.3	%
United National		16,607			24,370			(7,763	)		-31.9	%
Diamond State		21,824			21,319			505			2.4	%
Total	$	72,687		$	94,855		$	(22,168	)		-23.4	%
Net premiums written:
Penn-America	$	27,500		$	45,511		$	(18,011	)		-39.6	%
United National		13,222			20,963			(7,741	)		-36.9	%
Diamond State		18,069			17,697			372			2.1
Total	$	58,791		$	84,171		$	(25,380	)		-30.2	%
Net premiums earned:
Penn-America	$	32,621		$	52,326		$	(19,705	)		-37.7	%
United National		14,850			24,047			(9,197	)		-38.2	%
Diamond State		16,975			21,831			(4,856	)		-22.2	%
Total		64,446			98,204		$	(33,758	)		-34.4	%
Losses and expenses:
Net losses and loss adjustment expenses		39,547			77,576			(38,029	)		-49.0	%
Acquisition costs and other underwriting expenses(1)		27,238			35,817			(8,579	)		-24.0	%
Income (loss) from underwriting	$	(2,339	)	$	(15,189	)	$	12,850			-84.6	%
Underwriting Ratios:
Loss ratio:
Current accident year		64.7			64.2			0.5
Prior accident year		(3.3	)		14.8			(18.1	)
Calendar year		61.4			79.0			(17.6	)
Expense ratio		42.3			36.5			5.8
Combined ratio		103.7			115.5			(11.8	)

(1) Includes excise tax of $351 and $491 related to cessions from our U.S. Insurance Companies to Wind River Reinsurance for the quarters ended June 30, 2009 and 2008, respectively.

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 $72.7 million for the quarter ended June 30, 2009, compared with $94.9 million for the quarter ended June 30, 2008, a decrease of $22.2 million or 23.4%.

• Penn-America gross premiums written were $34.3 million for the quarter ended June 30, 2009, compared with $49.2 million for the quarter ended June 30, 2008, a decrease of $14.9 million, or 30.3%. The decrease was primarily due to a reduction of $2.1 million due to terminations of business that did not meet our profitability requirements and a reduction of $12.8 million from other market factors.

• United National gross premiums written were $16.6 million for the quarter ended June 30, 2009, compared with $24.4 million for the quarter ended June 30, 2008, a decrease of $7.8 million, or 31.9%. The decrease was primarily due to a reduction of $6.0 million due to terminations of business that did not meet our profitability requirements and a reduction of $1.8 million from other market factors.

• Diamond State gross premiums written were $21.8 million for the quarter ended June 30, 2009, compared with $21.3 million for the quarter ended June 30, 2008, an increase of $0.5 million, or 2.4%. The increase was primarily due to increases in our property line of $1.7 million and in our general liability line of $1.7 million, offset by a decrease in our professional line of $2.9 million.

43

UNITED AMERICA INDEMNITY, LTD.

Net premiums written, which equal gross premiums written less ceded premiums written, were $58.8 million for the quarter ended June 30, 2009, compared with $84.2 million for the quarter ended June 30, 2008, a decrease of $25.4 million or 30.2%. The decrease was primarily due to the reduction of gross premiums written noted above as well as to changes to our reinsurance structure.

The ratio of net premiums written to gross premiums written was 80.9% for the quarter ended June 30, 2009 and 88.7% for the quarter ended June 30, 2008, a decline of 7.8 points, which was primarily due to $3.2 million of ceded premiums written to a new quota share treaty that we executed on Penn-America’s property lines of business effective January 1, 2009 and changes in our mix of business.

Net premiums earned were $64.4 million for the quarter ended June 30, 2009, compared with $98.2 million for the quarter ended June 30, 2008, a decrease of $33.8 million or 34.4%. The decrease was primarily due to the reduction of gross premiums written noted above. Property net premiums earned for the quarters ended June 30, 2009 and 2008 were $26.7 million and $36.1 million, respectively. Casualty net premiums earned for the quarters ended June 30, 2009 and 2008 were $37.7 million and $62.1 million, respectively.

Net Losses and Loss Adjustment Expenses

The loss ratio for our Insurance Operations was 61.4% for the quarter ended June 30, 2009 compared with 79.0% for the quarter ended June 30, 2008. The loss ratio is a non-GAAP financial measure that is generally viewed in the insurance industry as an indicator of underwriting profitability and is calculated by dividing net losses and loss adjustment expenses by net premiums earned.

The impact of changes to prior accident years is 18.1 points resulting from a reduction of net losses and loss adjustment expenses for prior accident years of $2.1 million in the quarter ended June 30, 2009 and an increase of net losses and loss adjustment expenses for prior accident years of $14.6 million in the quarter ended June 30, 2008:

• In 2009, we reduced our prior accident year loss reserves by $2.1 million, which reduced our loss ratio by 3.3 points. This reduction primarily consisted of a $2.1 million reduction in our property lines primarily related to accident year 2008 and a $2.0 million reduction in our general liability lines primarily related to accident years 2006 to 2009, offset by a $2.0 million increase in our professional lines related to terminated programs.

• In 2008, we increased our prior accident year loss reserves by $15.0 million and reduced our allowance for uncollectible reinsurance by $0.4 million, which increased our loss ratio by 14.8 points. The loss reserves increase of $15.0 million primarily consisted of increases of approximately $17.5 million and $2.6 million in our general liability lines and professional lines, respectively, offset by reductions of $4.3 million and $0.8 million in our property lines and umbrella lines, respectively. The increase related to our general liability lines primarily related to accident years 2001 and prior. The increase to our professional liability lines primarily related to accident years 2006 and 2007. The reduction to the property lines primarily related to accident year 2007. The reduction to the umbrella lines primarily related to accident years 2004 and prior.

The current accident year loss ratio increased 0.5 points in the quarter ended June 30, 2009. The property and casualty loss ratios both increased:

• The current accident year property loss ratio increased 1.2 points from 59.4% in the quarter ended June 30, 2008 to 60.6% in the quarter ended June 30, 2009, which consists of a 1.4 point increase in the non-catastrophe loss ratio from 51.6% in the quarter ended June 30, 2008 to 53.0% in the quarter ended June 30, 2009 and a 0.2 point decrease in the catastrophe loss ratio from 7.8% in the quarter ended June 30, 2008 to 7.6% in the quarter ended June 30, 2009. The increase in the non-catastrophe loss ratio is primarily due to higher severity from non-catastrophe weather related losses and fire losses. Catastrophe losses were $2.0 million and $2.8 million for the quarters ended June 30, 2009 and 2008, respectively. Property net premiums earned for the quarters ended June 30, 2009 and 2008 were $26.7 million and $36.1 million, respectively.

• The current accident year casualty loss ratio increased 0.7 points from 66.9% in the quarter ended June 30, 2008 to 67.6% in the quarter ended June 30, 2009 primarily due to changes in our mix of business. Casualty net premiums earned for the quarters ended June 30, 2009 and 2008 were $37.8 million and $62.1 million, respectively.

44

UNITED AMERICA INDEMNITY, LTD.

Net losses and loss adjustment expenses were $39.5 million for the quarter ended June 30, 2009, compared with $77.6 million for the quarter ended June 30, 2008, a decrease of $38.1 million or 49.0%. Excluding the $2.1 million reduction of net losses and loss adjustment expenses for prior accident years in the quarter ended June 30, 2009 and the $14.6 million increase of net losses and loss adjustment expenses for prior accident years in the quarter ended June 30, 2008, the current accident year net losses and loss adjustment expenses were $41.7 million and $63.0 million for the quarters ended June 30, 2009 and 2008, respectively. This decrease is primarily attributable to a decrease in net premiums earned.

Acquisition Costs and Other Underwriting Expenses

Acquisition costs and other underwriting expenses were $27.2 million for the quarter ended June 30, 2009, compared with $35.8 million for the quarter ended June 30, 2008, a decrease of $8.6 million or 24.0%. The decrease is due to a $9.1 million decrease in acquisition costs and a $0.5 million increase in other underwriting expenses.

• The decrease in acquisition costs is primarily due to a decrease in commissions resulting from a decrease in net premiums earned.

• The increase in other underwriting expenses is primarily due to an increase in total compensation expenses and property and office costs, offset by a decrease in professional services costs and other expenses.

Expense and Combined Ratios

The expense ratio for our Insurance Operations was 42.3% for the quarter ended June 30, 2009, compared with 36.5% for the quarter ended June 30, 2008. The expense ratio is a non-GAAP financial measure that is calculated by dividing the sum of acquisition costs and other underwriting expenses by net premiums earned. The increase in the expense ratio is primarily due to the decrease in net premiums earned noted above.

The combined ratio for our Insurance Operations was 103.7% for the quarter ended June 30, 2009, compared with 115.5% for the quarter ended June 30, 2008. The combined ratio is a non-GAAP financial measure and is the sum of our loss and expense ratios. Excluding the $2.1 million reduction of net losses and loss adjustment expenses for prior accident years in the quarter ended June 30, 2009 and the $14.6 million increase of net losses and loss adjustment expenses for prior accident years in the quarter ended June 30, 2008, the combined ratio increased from 100.7% for the quarter ended June 30, 2008 to 107.0% for the quarter ended June 30, 2009. See discussion of loss ratio included in “Net Losses and Loss Adjustment Expenses” above and discussion of expense ratio in preceding paragraph above for an explanation of this increase.

Loss from underwriting

The factors described above resulted in loss from underwriting for our Insurance Operations of $2.3 million and $15.2 million for the quarters ended June 30, 2009 and 2008, respectively, a decrease in the loss of $12.9 million.

45

UNITED AMERICA INDEMNITY, LTD.

Reinsurance Operations

The components of income (loss) from underwriting and underwriting ratios of our Reinsurance Operations segment are as follows:

	Quarter Ended June 30,					Increase / (Decrease)
(Dollars in thousands)	2009		2008			$			%
Gross premiums written	$	18,793	$	9,463		$	9,330			98.6	%
Net premiums written	$	18,687	$	1,038		$	17,649			1,700.3	%
Net premiums earned	$	10,286	$	2,469		$	7,817			316.6	%
Losses and expenses:
Net losses and loss adjustment expenses		4,500		6,068			(1,568	)		-25.8	%
Acquisition costs and other underwriting expenses		2,734		2,295			439			19.1	%
Income (loss) from underwriting	$	3,052	$	(5,894	)	$	8,946			-151.8	%
Underwriting Ratios:
Loss ratio:
Current accident year		43.7		165.9			(122.2	)
Prior accident year		—		79.9			(79.9	)
Calendar year loss ratio		43.7		245.8			(202.1	)
Expense ratio		26.6		93.0			(66.4	)
Combined ratio		70.3		338.8			(268.5	)

Premiums

Gross premiums written, which represent the amount received or to be received for reinsurance agreements written without reduction for reinsurance costs or other deductions, were $18.8 million for the quarter ended June 30, 2009, compared with $9.5 million for the quarter ended June 30, 2008, an increase of $9.3 million or 98.6%. The increase was primarily due to several new reinsurance treaties that commenced during the first quarter of 2009. One of the treaties we entered into during the first quarter was a catastrophe book of business.

Net premiums written, which equal gross premiums written less ceded premiums written, were $18.7 million for the quarter ended June 30, 2009, compared with $1.0 million for the quarter ended June 30, 2008, an increase of $17.7 million. The increase was primarily due to the increase of gross premiums written noted above.

The ratio of net premiums written to gross premiums written was 99.4% for the quarter ended June 30, 2009 and 11.0% for the quarter ended June 30, 2008, an increase of 88.4 points, which was primarily due to changes in our mix of business. In 2008, one of our largest treaties was 95% retroceded.

Net premiums earned were $10.3 million for the quarter ended June 30, 2009, compared with $2.5 million for the quarter ended June 30, 2008, an increase of $7.8 million or 316.6%. The increase was primarily due to the increase of gross premiums written noted above. Property net premiums earned for the quarters ended June 30, 2009 and 2008 were $5.5 million and $0.2 million, respectively. Casualty net premiums earned for the quarters ended June 30, 2009 and 2008 were $4.8 million and $2.3 million, respectively.

Net Losses and Loss Adjustment Expenses

The loss ratio for our Reinsurance Operations was 43.7% for the quarter ended June 30, 2009 compared with 245.8% for the quarter ended June 30, 2008. The loss ratio is a non-GAAP financial measure that is generally viewed in the insurance industry as an indicator of underwriting profitability and is calculated by dividing net losses and loss adjustment expenses by net premiums earned.

46

UNITED AMERICA INDEMNITY, LTD.

The impact of changes to prior accident years is 79.9 points resulting from an increase of net losses and loss adjustment expenses for prior accident years of $2.0 million in the quarter ended June 30, 2008:

• In 2008, we increased our prior accident year loss reserves by $2.0 million, which increased our loss ratio by 79.9 points. This increase primarily consisted of increases of $2.7 million in our professional lines related to accident year 2007, offset by reductions of $0.1 million in our property lines related to accident year 2007, and $0.6 million in our general liability lines primarily related to accident year 2005.

• There were no significant changes to prior accident year loss reserves in 2009.

The current accident year loss ratio decreased 122.2 points from 165.9% in 2008 to 43.7% in 2009 primarily due to a change in the mix of business due to signing several new treaties that became effective in 2009. In 2008, our book was primarily comprised of casualty business that included a treaty that was not performing profitably and that has since been terminated. In 2009, our book is comprised of approximately 50% casualty and 50% property business, based on net premiums earned. The property book of business consists of a catastrophe book of business that has performed very well during 2009.

Net losses and loss adjustment expenses were $4.5 million for the quarter ended June 30, 2009, compared with $6.1 million for the quarter ended June 30, 2008, a decrease of $1.6 million or 25.8%. Excluding the $2.0 million increase of net losses and loss adjustment expenses for prior accident years in the quarter ended June 30, 2008, the current accident year net losses and loss adjustment expenses increased from $4.1 million for the quarter ended June 30, 2008 to $4.5 million for the quarter ended June 30, 2009. This increase is primarily attributable to an increase in net premiums earned, which increased from $2.5 million in 2008 to $10.3 million in 2009, offset partially by improved performance on our book of business in 2009 compared with 2008.

Acquisition Costs and Other Underwriting Expenses

Acquisition costs and other underwriting expenses were $2.7 million for the quarter ended June 30, 2009, compared with $2.3 million for the quarter ended June 30, 2008, an increase of $0.4 million or 19.1%. The increase is due to a $0.3 million increase in acquisition costs and a $0.1 million increase in other underwriting expenses.

• The increase in acquisition costs is primarily due to an increase in commissions resulting from an increase in net premiums earned.

• The increase in other underwriting expenses is primarily due to an increase in property and office costs, and professional services expenses, offset by a decrease in total compensation expenses.

Expense and Combined Ratios

The expense ratio for our Reinsurance Operations was 26.6% for the quarter ended June 30, 2009, compared with 93.0% for the quarter ended June 30, 2008. The expense ratio is a non-GAAP financial measure that is calculated by dividing the sum of acquisition costs and other underwriting expenses by net premiums earned. The decrease in the expense ratio is primarily due to the increase in net premiums earned noted above.

The combined ratio for our Reinsurance Operations was 70.3% for the quarter ended June 30, 2009, compared with 338.8% for the quarter ended June 30, 2008. The combined ratio is a non-GAAP financial measure and is the sum of our loss and expense ratios. Excluding the impact of a $2.0 million increase of prior accident year loss reserves in the quarter ended June 30, 2008, the combined ratio decreased from 258.9% for the quarter ended June 30, 2008 to 70.3% for the quarter ended June 30, 2009. See discussion of loss ratio included in “Net Losses and Loss Adjustment Expenses” above and discussion of expense ratio in preceding paragraph above for an explanation of this increase.

Income (Loss) from underwriting

The factors described above resulted in income from underwriting for our Reinsurance Operations of $3.1 million for the quarter ended June 30, 2009, compared with loss from underwriting of $5.9 million for the quarter ended June 30, 2008.

47

UNITED AMERICA INDEMNITY, LTD.

Unallocated Corporate Items

The following items are not allocated to our Insurance Operations or Reinsurance Operations segments:

	Quarter Ended June 30,						Increase / (Decrease)
(Dollars in thousands)	2009			2008			$			%
Net investment income	$	16,605		$	17,072		$	(467	)		-2.7	%
Net realized investment gains (losses)		5,398			(2,480	)		7,878		NA
Corporate and other operating expenses		(3,663	)		(2,269	)		(1,394	)		61.4	%
Interest expense		(1,832	)		(2,188	)		356			(16.3	)%
Income tax (expense) benefit		(2,758	)		2,003			(4,761	)	NA
Equity in net income (loss) of partnership, net of tax		1,798			(26	)		1,824		NA

Net Investment Income

Net investment income, which is gross investment income less investment expenses, was $16.6 million for the quarter ended June 30, 2009, compared with $17.1 million for the quarter ended June 30, 2008, a decrease of $0.5 million or 2.7%.

• Gross investment income, excluding realized gains and losses, was $17.8 million for the quarter ended June 30, 2009, compared with $18.3 million for the quarter ended June 30, 2008, a decrease of $0.5 million or 3.0%. The decrease was primarily due to decreases in short-term interest rates and a decrease in the amount of our invested assets, partially offset by distributions from our investments in limited partnerships of $1.2 million. Our limited partnership investments generated gross investment income of $1.2 million for the quarter ended June 30, 2009 due to liquidations of some of those investments. There was no investment income generated by our limited partnership investments for the quarter ended June 30, 2008. Excluding distributions from our limited partnership investments, gross investment income for the quarter ended June 30, 2009 decreased 9.6% compared to the quarter ended June 30, 2008. This decrease is due to reductions in short-term interest rates.

• Investment expenses were $1.2 million for the quarter ended June 30, 2009, compared with $1.3 million for the quarter ended June 30, 2008, a decrease of $0.1 million or 6.7%.

The average duration of our bonds was 3.0 years as of June 30, 2009, compared with 3.7 years as of June 30, 2008. Including cash and short-term investments, the average duration of our investments as of June 30, 2009 and 2008 was 2.4 years and 3.1 years, respectively. At June 30, 2009, our embedded book yield on our bonds, not including cash, was 5.08% compared with 4.92% at June 30, 2008. The embedded book yield on the $223.6 million of municipal bonds in our portfolio was 4.01% at June 30, 2009.

Net Realized Investment Gains (Losses)

Net realized investment gains were $5.4 million for the quarter ended June 30, 2009, compared with net realized investment losses of $2.5 million for the quarter ended June 30, 2008, an increase of $7.9 million. The net realized investment gains for the quarter ended June 30, 2009 consist primarily of net gains of $3.3 million relative to our bond and equity portfolios and net gains of $2.4 million relative to market value changes in our convertible portfolio, offset by other than temporary impairment losses of $0.3 million. The net realized investment losses for the quarter ended June 30, 2008 consist primarily of net losses of $1.1 million relative to market value declines in our convertible portfolios, other than temporary impairment losses of $1.7 million relative to our equity portfolios, offset by net gains of $0.3 million relative to bond portfolios.

During the quarter, there was modest restructuring of the equity portfolios. Within the equity portfolio, the overall strategy was transitioned from a relatively diversified large cap approach to a fundamental value strategy with a new manager. This change in strategy resulted in the sale of certain existing securities in favor of new holdings more consistent with the fundamental value approach. This equity market transition to a new investment style generated capital gains of approximately $2.6 million for the quarter.

48

UNITED AMERICA INDEMNITY, LTD.

See Note 2 of the notes to the consolidated financial statements in Item 1 of Part I of this report for an analysis of total investment return on an after-tax basis for the quarters ended June 30, 2009 and 2008.

Corporate and Other Operating Expenses

Corporate and other operating expenses consist of outside legal fees, other professional fees, directors’ fees, management fees, salaries and benefits for holding company personnel, and taxes incurred which are not directly related to operations. Corporate and other operating expenses were $3.7 million for the quarter ended June 30, 2009, compared with $2.3 million for the quarter ended June 30, 2008, an increase of $1.4 million or 61.4%. The increase was primarily due to an increase in compensation and related benefits costs, professional services costs due to exploring country of domicile alternatives, and other expenses.

Interest Expense

Interest expense was $1.8 million and $2.2 million for the quarter ended June 30, 2009 and 2008, respectively, a decrease of $0.4 million or 16.3% The reduction is primarily due to retiring $15.5 million of trust preferred debt in May 2008. See Note 10 of the notes to the consolidated financial statements in Item 8 of Part II of our 2008 Annual Report on Form 10-K for details on our debt.

Income Tax Expense (Benefit)

Income tax expense was $2.8 million for the quarter ended June 30, 2009, compared to a benefit of $2.0 million for the quarter ended June 30, 2008. See Note 5 of the notes to the consolidated financial statements in Item 1 of Part I of this report for a comparison of income tax expense between periods.

Our alternative minimum tax (“AMT”) credit carryforward as of June 30, 2009 and December 31, 2008 was $4.4 million and $0.8 million, respectively. In 2008, there were $29.0 million of other than temporary impairment losses on invested assets held by our U.S. Subsidiaries. Of that amount, $17.1 million were realized in 2009, along with additional capital losses of $7.0 million. As a result, the AMT credit carryforward increased by $3.6 million.

Equity in Net Income (Loss) of Partnerships

Equity in net income of partnerships, net of tax was $1.8 million for the quarter ended June 30, 2009, compared with equity in net loss of partnerships of $0.03 million for the quarter ended June 30, 2008. The change from a loss in 2008 to income in 2009 was due to the performances of limited partnership investments which invest mainly in high yield bonds and bank loans.

Net Income (Loss)

The factors described above resulted in net income of $16.3 million for the quarter ended June 30, 2009, compared to net loss of $9.0 million for the quarter ended June 30, 2008, an increase of $25.3 million.

49

UNITED AMERICA INDEMNITY, LTD.

Six Months Ended June 30, 2009 Compared with the Six Months Ended June 30, 2008

Insurance Operations

The components of income (loss) from underwriting and underwriting ratios of our Insurance Operations segment, with premium by product classification, are as follows:

	Six Months Ended June 30,						Increase / (Decrease)
(Dollars in thousands)	2009			2008			$			%
Gross premiums written:
Penn-America	$	66,595		$	93,348		$	(26,753	)		-28.7	%
United National		31,927			50,239			(18,312	)		-36.4	%
Diamond State		41,785			44,560			(2,775	)		-6.2	%
Total	$	140,307		$	188,147		$	(47,840	)		-25.4	%
Net premiums written:
Penn-America	$	54,657		$	84,914		$	(30,257	)		-35.6	%
United National		25,639			43,071			(17,432	)		-40.5	%
Diamond State		33,964			36,854			(2,890	)		-7.8	%
Total	$	114,260		$	164,839		$	(50,579	)		-30.7	%
Net premiums earned:
Penn-America	$	69,701		$	113,017		$	(43,316	)		-38.3	%
United National		31,544			50,158			(18,614	)		-37.1	%
Diamond State		33,921			44,948			(11,027	)		-24.5	%
Total		135,166			208,123			(72,957	)		-35.1	%
Losses and expenses:
Net losses and loss adjustment expenses		82,291			151,792			(69,501	)		-45.8	%
Acquisition costs and other underwriting expenses(1)		56,380			72,458			(16,078	)		-22.2	%
Income (loss) from underwriting	$	(3,505	)	$	(16,127	)	$	12,622			-78.3	%
Underwriting Ratios:
Loss ratio:
Current accident year		63.1			65.9			(2.8	)
Prior accident year		(2.2	)		7.0			(9.2	)
Calendar year		60.9			72.9			(12.0	)
Expense ratio		41.7			34.8			6.9
Combined ratio		102.6			107.7			(5.1	)

(1) Includes excise tax of $721 and $1,041 related to cessions from our U.S. Insurance Companies to Wind River Reinsurance for the six months ended June 30, 2009 and 2008, respectively.

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 $140.3 million for the six months ended June 30, 2009, compared with $188.1 million for the six months ended June 30, 2008, a decrease of $47.8 million or 25.4%.

• Penn-America gross premiums written were $66.6 million for the six months ended June 30, 2009, compared with $93.3 million for the six months ended June 30, 2008, a decrease of $26.7 million, or 28.7%. The decrease was primarily due to a reduction of $3.2 million due to terminations of business that did not meet our profitability requirements and a reduction of $23.5 million from other market factors.

• United National gross premiums written were $31.9 million for the six months ended June 30, 2009, compared with $50.2 million for the six months ended June 30, 2008, a decrease of $18.3 million, or 36.4%. The decrease was primarily due to a reduction of $14.9 million due to terminations of business that did not meet our profitability requirements and a reduction of $3.4 million from other market factors.

• Diamond State gross premiums written were $41.8 million for the six months ended June 30, 2009, compared with $44.6 million for the six months ended June 30, 2008, a decrease of $2.8 million, or 6.2%. The decrease was primarily due to a reduction of $3.8 million due to terminations of business that did not meet our profitability requirements offset by an increase in our continuing business of $1.0 million.

50

UNITED AMERICA INDEMNITY, LTD.

Net premiums written, which equal gross premiums written less ceded premiums written, were $114.3 million for the six months ended June 30, 2009, compared with $164.8 million for the six months ended June 30, 2008, a decrease of $50.5 million or 30.7%. The decrease was primarily due to the reduction of gross premiums written noted above as well as to changes to our reinsurance structure.

The ratio of net premiums written to gross premiums written was 81.4% for the six months ended June 30, 2009 and 87.6% for the six months ended June 30, 2008, a decline of 6.2 points, which was primarily due to $5.7 million of ceded premiums written to a new quota share treaty that we executed on Penn-America’s property lines of business effective January 1, 2009 and changes in our mix of business.

Net premiums earned were $135.2 million for the six months ended June 30, 2009, compared with $208.1 million for the six months ended June 30, 2008, a decrease of $72.9 million or 35.1%. The decrease was primarily due to the reduction of gross premiums written noted above. Property net premiums earned for the six months ended June 30, 2009 and 2008 were $55.4 million and $75.4 million, respectively. Casualty net premiums earned for the six months ended June 30, 2009 and 2008 were $79.8 million and $132.7 million, respectively.

Net Losses and Loss Adjustment Expenses

The loss ratio for our Insurance Operations was 60.9% for the six months ended June 30, 2009 compared with 72.9% for the six months ended June 30, 2008. The loss ratio is a non-GAAP financial measure that is generally viewed in the insurance industry as an indicator of underwriting profitability and is calculated by dividing net losses and loss adjustment expenses by net premiums earned.

The impact of changes to prior accident years is 9.2 points resulting from a reduction of net losses and loss adjustment expenses for prior accident years of $2.9 million in the six months ended June 30, 2009 and an increase of net losses and loss adjustment expenses for prior accident years of $14.6 million in the six months ended June 30, 2008:

• In 2009, we reduced our prior accident year loss reserves by $2.1 million and reduced our allowance for uncollectible reinsurance by $0.8 million, which reduced our loss ratio by 2.2 points. The reduction of our prior accident year loss reserves primarily consisted of a $2.1 million reduction in our property lines primarily related to accident year 2008 and a $2.5 million reduction in our general liability lines primarily related to accident years 2006 to 2009, offset by a $2.5 million increase in our professional lines related to terminated programs.

• In 2008, we increased our prior accident year loss reserves by $15.0 million and reduced our allowance for uncollectible reinsurance by $0.4 million, which increased our loss ratio by 7.0 points. The reduction of our prior accident year loss reserves of $15.0 million primarily consisted of increases of approximately $17.5 million and $2.6 million in our general liability lines and professional lines, respectively, offset by reductions of $4.3 million and $0.8 million in our property lines and umbrella lines, respectively. The increase related to our general liability lines primarily related to accident years 2001 and prior. The increase to our professional liability lines primarily related to accident years 2006 and 2007. The reduction to the property lines primarily related to accident year 2007. The reduction to the umbrella lines primarily related to accident years 2004 and prior.

The current accident year loss ratio decreased 2.8 points in the six months ended June 30, 2009 primarily due to a decrease in both the property and casualty loss ratios:

• The current accident year property loss ratio decreased 6.3 points from 63.5% in the six months ended June 30, 2008 to 57.2% in the six months ended June 30, 2009, which consists of a 1.3 point decrease in the catastrophe loss ratio from 6.1% in the six months ended June 30, 2008 to 4.8% in the six months ended June 30, 2009 and a 5.0 point decrease in the non-catastrophe loss ratio from 57.4% in the six months ended June 30, 2008 to 52.4% in the six months ended June 30, 2009. Catastrophe losses were $2.7 million and $4.6 million in the six months ended June 30, 2009 and 2008, respectively. The decrease in the non- catastrophe loss ratio is primarily due to lower severity from non-catastrophe weather related losses and large fire losses. Property net premiums earned for the six months ended June 30, 2009 and 2008 were $55.4 million and $75.4 million, respectively.

• The current accident year casualty loss ratio decreased 0.2 points from 67.3% in the six months ended June 30, 2008 to 67.1% in the six months ended June 30, 2009 primarily due to changes in our mix of business. Casualty net premiums earned for the six months ended June 30, 2009 and 2008 were $79.8 million and $132.7 million, respectively.

51

UNITED AMERICA INDEMNITY, LTD.

Net losses and loss adjustment expenses were $82.3 million for the six months ended June 30, 2009, compared with $151.8 million for the six months ended June 30, 2008, a decrease of $69.5 million or 45.8%. Excluding the $2.9 million reduction of net losses and loss adjustment expenses for prior accident years in the six months ended June 30, 2009 and the $14.6 million increase of net losses and loss adjustment expenses for prior accident years in the six months ended June 30, 2008, the current accident year net losses and loss adjustment expenses were $85.2 million and $137.2 million for the six months ended June 30, 2009 and 2008, respectively. This decrease is primarily attributable to a decrease in net premiums earned.

Acquisition Costs and Other Underwriting Expenses

Acquisition costs and other underwriting expenses were $56.4 million for the six months ended June 30, 2009, compared with $72.5 million for the six months ended June 30, 2008, a decrease of $16.1 million or 22.2%. The decrease is due to an $18.6 million decrease in acquisition costs and a $2.5 million increase in other underwriting expenses.

• The decrease in acquisition costs is primarily due to a decrease in commissions resulting from a decrease in net premiums earned.

• The increase in other underwriting expenses is primarily due to an increase in total compensation expenses and property and office costs, offset by reductions in professional services and other expenses.

Expense and Combined Ratios

The expense ratio for our Insurance Operations was 41.7% for the six months ended June 30, 2009, compared with 34.8% for the six months ended June 30, 2008. The expense ratio is a non-GAAP financial measure that is calculated by dividing the sum of acquisition costs and other underwriting expenses by net premiums earned. The increase in the expense ratio is primarily due to the decrease in net premiums earned noted above.

The combined ratio for our Insurance Operations was 102.6% for the six months ended June 30, 2009, compared with 107.7% for the six months ended June 30, 2008. The combined ratio is a non-GAAP financial measure and is the sum of our loss and expense ratios. Excluding the $2.9 million reduction of net losses and loss adjustment expenses for prior accident years in the six months ended June 30, 2009 and the $14.6 million increase of net losses and loss adjustment expenses for prior accident years in the six months ended June 30, 2008, the combined ratio increased from 100.7% for the six months ended June 30, 2008 to 104.8% for the six months ended June 30, 2009. See discussion of loss ratio included in “Net Losses and Loss Adjustment Expenses” above and discussion of expense ratio in preceding paragraph above for an explanation of this increase.

Loss from underwriting

The factors described above resulted in loss from underwriting for our Insurance Operations of $3.5 million and $16.1 million for the six months ended June 30, 2009 and 2008, respectively, a decrease in the loss of $12.6 million.

52

UNITED AMERICA INDEMNITY, LTD.

Reinsurance Operations

The components of income (loss) from underwriting and underwriting ratios of our Reinsurance Operations segment are as follows:

	Six Months Ended June 30,					Increase / (Decrease)
(Dollars in thousands)	2009		2008			$			%
Gross premiums written	$	50,361	$	15,233		$	35,128			230.6	%
Net premiums written	$	49,831	$	2,334		$	47,497			2,035.0	%
Net premiums earned	$	18,106	$	5,607		$	12,499			222.9	%
Losses and expenses:
Net losses and loss adjustment expenses		9,496		8,502			994			11.7	%
Acquisition costs and other underwriting expenses		4,406		3,849			557			14.5	%
Income (loss) from underwriting	$	4,204	$	(6,744	)	$	10,948			-162.3	%
Underwriting Ratios:
Loss ratio:
Current accident year		52.3		116.5			(64.2	)
Prior accident year		0.1		35.2			(35.1	)
Calendar year loss ratio		52.4		151.7			(99.3	)
Expense ratio		24.3		68.6			(44.3	)
Combined ratio		76.7		220.3			(143.6	)

Premiums

Gross premiums written, which represent the amount received or to be received for reinsurance agreements written without reduction for reinsurance costs or other deductions, were $50.4 million for the six months ended June 30, 2009, compared with $15.2 million for the six months ended June 30, 2008, an increase of $35.2 million or 230.6%. The increase was primarily due to several new reinsurance treaties that commenced during the first quarter of 2009. One of the treaties we entered into during the first quarter was a catastrophe book of business.

Net premiums written, which equal gross premiums written less ceded premiums written, were $49.8 million for the six months ended June 30, 2009, compared with $2.3 million for the six months ended June 30, 2008, an increase of $47.5 million. The increase was primarily due to the increase of gross premiums written noted above.

The ratio of net premiums written to gross premiums written was 98.9% for the six months ended June 30, 2009 and 15.3% for the six months ended June 30, 2008, an increase of 83.6 points, which was primarily due to changes in our mix of business. In 2008, one of the largest treaties was 95% retroceded.

Net premiums earned were $18.1 million for the six months ended June 30, 2009, compared with $5.6 million for the six months ended June 30, 2008, an increase of $12.5 million or 222.9%. The increase was primarily due to the increase of gross premiums written noted above. Property net premiums earned for the six months ended June 30, 2009 and 2008 were $8.7 million and $0.3 million, respectively. Casualty net premiums earned for the six months ended June 30, 2009 and 2008 were $9.4 million and $5.3 million, respectively.

Net Losses and Loss Adjustment Expenses

The loss ratio for our Reinsurance Operations was 52.4% for the six months ended June 30, 2009 compared with 151.7% for the six months ended June 30, 2008. The loss ratio is a non-GAAP financial measure that is generally viewed in the insurance industry as an indicator of underwriting profitability and is calculated by dividing net losses and loss adjustment expenses by net premiums earned.

53

UNITED AMERICA INDEMNITY, LTD.

The impact of changes to prior accident years is 35.1 points resulting from an increase of net losses and loss adjustment expenses for prior accident years of $0.03 million in the six months ended June 30, 2009 and an increase of net losses and loss adjustment expenses for prior accident years of $2.0 million in the six months ended June 30, 2008:

• In 2009, we increased our prior accident year loss reserves by $0.03 million, which primarily consisted of increases of $0.02 million in our property lines and $0.01 million in our general liability lines. The increases to the property and general liability lines were related to accident year 2008.

• In 2008, we increased our prior accident year loss reserves by $2.0 million, which primarily consisted of increases of $2.7 million in our professional lines related to accident year 2007, offset by reductions of $0.1 million in our property lines related to accident year 2007, and $0.6 million in our general liability lines primarily related to accident year 2005.

In 2009, the current accident year loss ratio decreased 64.2 points from 116.5% in 2008 to 52.3% in 2009 primarily due to a change in the mix of business due to signing several new treaties that became effective in 2009. In 2008, our book was primarily comprised of casualty business that included a treaty that was not performing profitably and that has since been terminated. In 2009, our book is primarily comprised of approximately 50% casualty and 50% property business, based on net earned premiums. The property book of business consists of a catastrophe book of business that has performed very well during 2009.

Net losses and loss adjustment expenses were $9.5 million for the six months ended June 30, 2009, compared with $8.5 million for the six months ended June 30, 2008, an increase of $1.0 million or 11.7%. Excluding the $0.03 million and $2.0 million increases of net losses and loss adjustment expenses for prior accident years in the six months ended June 30, 2009 and 2008, respectively, the current accident year net losses and loss adjustment expenses increased from $6.5 million for the six months ended June 30, 2008 to $9.5 million for the six months ended June 30, 2009. This increase is primarily attributable to an increase in net premiums earned, which increased from $5.6 million in 2008 to $18.1 million in 2009, offset partially by improved performance on our book in 2009 compared with 2008.

Acquisition Costs and Other Underwriting Expenses

Acquisition costs and other underwriting expenses were $4.4 million for the six months ended June 30, 2009, compared with $3.8 million for the six months ended June 30, 2008, an increase of $0.6 million or 14.5%. The increase is due to a $0.6 million increase in acquisition costs, which was due to an increase in commissions resulting from an increase in net premiums earned. There was not a significant change in other underwriting expenses for the six months ended June 30, 2009 compared to the prior year.

Expense and Combined Ratios

The expense ratio for our Reinsurance Operations was 24.3% for the six months ended June 30, 2009, compared with 68.6% for the six months ended June 30, 2008. The expense ratio is a non-GAAP financial measure that is calculated by dividing the sum of acquisition costs and other underwriting expenses by net premiums earned. The decrease in the expense ratio is primarily due to the increase in net premiums earned and acquisition costs and other underwriting expenses noted above.

The combined ratio for our Reinsurance Operations was 76.7% for the six months ended June 30, 2009, compared with 220.3% for the six months ended June 30, 2008. The combined ratio is a non-GAAP financial measure and is the sum of our loss and expense ratios. Excluding the impacts of a $0.03 million and a $2.0 million increase of prior accident year loss reserves in the six months ended June 30, 2009 and 2008, respectively, the combined ratio decreased from 185.1% for the six months ended June 30, 2008 to 76.6% for the six months ended June 30, 2009. See discussion of loss ratio included in “Net Losses and Loss Adjustment Expenses” above and discussion of expense ratio in preceding paragraph above for an explanation of this increase.

Income (Loss) from underwriting

The factors described above resulted in income from underwriting for our Reinsurance Operations of $4.2 million for the six months ended June 30, 2009, compared with loss from underwriting of $6.7 million for the six months ended June 30, 2008.

54

UNITED AMERICA INDEMNITY, LTD.

Unallocated Corporate Items

The following items are not allocated to our Insurance Operations or Reinsurance Operations segments:

	Six Months Ended June 30,						Increase / (Decrease)
(Dollars in thousands)	2009			2008			$			%
Net investment income	$	38,782		$	34,858		$	3,924			11.3	%
Net realized investment gains (losses)		(3,198	)		(3,550	)		352			-9.9	%
Corporate and other operating expenses		(7,638	)		(6,214	)		(1,424	)		22.9	%
Interest expense		(3,686	)		(4,727	)		1,041			-22.0	%
Income tax (expense) benefit		(3,481	)		1,442			(4,923	)	NA
Equity in net income (loss) of partnership, net of tax		1,933			(469	)		2,402		NA

Net Investment Income

Net investment income, which is gross investment income less investment expenses, was $38.8 million for the six months ended June 30, 2009, compared with $34.9 million for the six months ended June 30, 2008, an increase of $3.9 million or 11.3%.

• Gross investment income, excluding realized gains and losses, was $41.1 million for the six months ended June 30, 2009, compared with $37.7 million for the six months ended June 30, 2008, an increase of $3.4 million or 9.2%. The increase was primarily due to gross investment income from our investments in limited partnerships of $8.6 million offset by reductions due to decreases in short-term interest rates and a decrease in the amount of our invested assets. Our limited partnership investments generated gross investment income of $8.6 million for the six months ended June 30, 2009 due to liquidations of some of those investments. There was no investment income generated by our limited partnership investments for the six months ended June 30, 2008. Excluding distributions from our limited partnership investments, gross investment income for the six months ended June 30, 2009 decreased 13.9% compared to the six months ended June 30, 2008. This decrease is due to reductions in short-term interest rates.

• Investment expenses were $2.3 million for the six months ended June 30, 2009, compared with $2.8 million for the six months ended June 30, 2008, a decrease of $0.5 million or 16.9%. The decrease was primarily due to the decrease in trust fees and a change in fee structure resulting from change in investment managers.

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

Net Realized Investment Losses

Net realized investment losses were $3.2 million and $3.6 million for the six months ended June 30, 2009 and 2008, respectively, a decrease of $0.4 million or 9.9%. The net realized investment losses for the six months ended June 30, 2009 consist primarily of net loss of $2.8 million relative primarily to our bond portfolio, net gains of $3.1 million relative to market value changes in our convertible portfolio, and other than temporary impairment losses of $3.5 million. The net realized investment losses for the six months ended June 30, 2008 consist primarily of net losses of $1.9 million relative to market value declines in our convertible portfolios, other than temporary impairment losses of $1.8 million, offset by net gains of $0.1 million mainly in our bond portfolios.

During the year, there was modest restructuring of the fixed income portfolio with the objective of reducing overall portfolio risk in this challenging economic environment. Given market conditions, this restructuring program resulted in realized capital losses. The losses that were realized were carried back to 2006 for tax purposes. Within the fixed income portfolio, the restructuring was concentrated in reducing holdings of commercial mortgage backed securities that were identified by stress testing methodologies as having weaker credit support in recessionary economic scenarios. Proceeds from the sales were reinvested in securities with better risk characteristics and higher book yields.

55

UNITED AMERICA INDEMNITY, LTD.

See Note 2 of the notes to the consolidated financial statements in Item 1 of Part I of this report for an analysis of total investment return on an after-tax basis for the six months ended June 30, 2009 and 2008.

Corporate and Other Operating Expenses

Corporate and other operating expenses consist of outside legal fees, other professional fees, directors’ fees, management fees, salaries and benefits for holding company personnel, and taxes incurred which are not directly related to operations. Corporate and other operating expenses were $7.6 million and $6.2 million for the six months ended June 30, 2009 and 2008, respectively, an increase of $1.4 million or 22.9%. The increase was due to professional services costs due to exploring country of domicile alternatives and other expenses.

Interest Expense

Interest expense was $3.7 million and $4.7 million for the six months ended June 30, 2009 and 2008, respectively, a decrease of $1.0 million or 22.0%. The reduction is primarily due to retiring $15.5 million of trust preferred debt in May 2008. See Note 10 of the notes to the consolidated financial statements in Item 8 of Part II of our 2008 Annual Report on Form 10-K for details on our debt.

Income Tax Expense (Benefit)

Income tax expense was $3.5 million for the six months ended June 30, 2009, compared to a benefit of $1.4 million for the six months ended June 30, 2008. See Note 5 of the notes to the consolidated financial statements in Item 1 of Part I of this report for a comparison of income tax expense between periods.

Please see the discussion of Income Tax Expenses (Benefit) in the quarter to quarter comparison above for a discussion of our alternative minimum tax.

Equity in Net Income (Loss) of Partnerships

Equity in net income of partnerships, net of tax was $1.9 million for the six months ended June 30, 2009, compared with equity in net loss of partnerships of $0.5 million for the six months ended June 30, 2008. The change from a loss in 2008 to income in 2009 was primarily due to the performances of limited partnership investments which invest mainly in high yield bonds and bank loans.

Net Income (Loss)

The factors described above resulted in net income of $23.4 million for the six months ended June 30, 2009, compared to net loss of $1.5 million for the six months ended June 30, 2009 and 2008, respectively.

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

56

UNITED AMERICA INDEMNITY, LTD.

In July 2008, United America Indemnity completed its purchase of $100.0 million of its Class A common shares as part of two $50.0 million share buyback programs that were initiated in November 2007 and February 2008, respectively. Wind River Reinsurance loaned United America Indemnity funds to enable it to execute the buybacks. The loan currently bears interest at 3.75% per year. In June 2008, Wind River Reinsurance declared and paid a dividend of $50.0 million to United America Indemnity. United America Indemnity used proceeds from the dividend to repay a portion of the loan. We anticipate that Wind River Reinsurance will pay additional dividends in the future and that United America Indemnity will use the proceeds to repay the remainder of the loan.

In May 2009, we received gross proceeds of $100.1 million from the issuance of 17.2 million and 11.4 million of our Class A and Class B common shares, respectively, in conjunction with the Rights Offering that was announced on March 4, 2009. We intend to use the net proceeds of $91.5 million to support our strategic initiatives, enhance liquidity and financial flexibility, and for other general corporate purposes. See Note 8 to the consolidated financial statements in Item 1 of Part I of this report for details concerning the Rights Offering.

At June 30, 2009, United America Indemnity owed $48.7 million in principal to Wind River Reinsurance, $6.0 million in principal to U.A.I. (Luxembourg) Investment S.à r.l. (“UAI Luxembourg Investment”), and $3.1 million in related accrued interest.

The United National Insurance Companies and the Penn-America Insurance Companies are restricted by statute as to the amount of dividends that they may pay without the prior approval of regulatory authorities. The United National Insurance Companies and the Penn-America Insurance Companies may pay dividends without advance regulatory approval only out of unassigned surplus. For 2009, the maximum amount of distributions that could be paid by the United National Insurance Companies and the Penn-America Insurance Companies as dividends under applicable laws and regulations without regulatory approval is approximately $31.3 million and $18.9 million, respectively. The Penn-America Insurance Companies limitation includes $6.2 million that would be distributed to United National Insurance Company or its subsidiary Penn Independent Corporation based on the December 31, 2008 ownership percentages. The United National Insurance Companies and the Penn-America Insurance Companies did not declare or pay any dividends during the quarter or six months ended June 30, 2009.

For 2009, 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 Bermuda Monetary Authority (“BMA”), from reducing by 15% or more its total statutory capital as set out in its previous year’s financial statements, and any application for such approval must include such information as the BMA may require. Based upon the total statutory capital plus the statutory surplus as set out in its 2008 statutory financial statements that were filed with the BMA in 2009, Wind River Reinsurance could pay a dividend in 2009 of up to $170.9 million without requesting BMA approval.

Cash Flows

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

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

• the fact that we collect premiums in advance of losses paid;

• the timing of our settlements with our reinsurers; and

• the timing of our loss payments.

57

UNITED AMERICA INDEMNITY, LTD.

Net cash used for operating activities for the six months ended June 30, 2009 and 2008 was $33.4 million and $1.7 million, respectively. The decrease in operating cash flows of approximately $31.7 million from the prior year was primarily a net result of the following items:

	Six Months Ended June 30,
	2009			2008			Change
Net premiums collected	$	135,443	(1)	$	176,337		$	(40,894	)
Net losses paid		(144,222	)(2)		(125,091	)		(19,131	)
Acquisition costs and other underwriting expenses		(70,404	)		(79,986	)		9,582
Net investment income		42,386			39,212			3,174
Net federal income taxes recovered (paid)		7,230			(6,393	)		13,623
Interest paid		(3,771	)		(5,140	)		1,369
Other		(30	)		(596	)		566
Net cash provided by (used for) operating activities	$	(33,368	)	$	(1,657	)	$	(31,711	)

(1)	During the first quarter of 2009, Wind River Reinsurance entered into multiple new reinsurance treaties with third parties; however, the premium associated with these new treaties will not begin to be collected until the second quarter of 2009.
(2)	Includes losses resulting from Hurricane Ike, which made landfall in August 2008.

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

Liquidity

Other than the items noted below, there have been no significant changes to our liquidity during the quarter or six months ended June 30, 2009. Please see Item 7 of Part II in our 2008 Annual Report on Form 10-K for information regarding our liquidity.

In May 2009, we received gross proceeds of $100.1 million from the issuance of 17.2 million and 11.4 million of our Class A and Class B common shares, respectively, in conjunction with the Rights Offering that was announced on March 4, 2009. See Note 8 to the consolidated financial statements in Item 1 of Part I of this report for details concerning the Rights Offering.

Effective January 1, 2009, all of the U.S. Insurance Companies participate in a single pool. The U.S. Insurance Companies and Wind River Reinsurance also negotiated a new stop loss agreement that provides protection to the U.S. Insurance Companies in a loss corridor from 70% to 90%. Regulatory approval for these agreements was obtained.

Capital Resources

Other than the previously discussed Rights Offering, there have been no significant changes to our capital resources during the quarter or six months ended June 30, 2009. Please see Item 7 of Part II in our 2008 Annual Report on Form 10-K for information regarding our capital resources.

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” and “Liquidity” sections in Item 2 of Part I of this report and in Item 7 of Part II of our 2008 Annual Report on Form 10-K.

58

UNITED AMERICA INDEMNITY, LTD.

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; (11) risks associated with our proposed re-domestication; (12) new tax legislation or interpretations that could lead to an increase in our tax burden; and (13) 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 on Form 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

During the first quarter of 2009, there was modest restructuring of both the fixed income and equity portfolios with the objective of reducing overall portfolio risk in this challenging economic environment. Within the fixed income portfolio, the restructuring was concentrated in reducing holdings of commercial mortgage backed securities that were identified by stress testing methodologies as having weaker credit support in recessionary economic scenarios. Within the equity portfolio, the overall strategy was transitioned from a relatively diversified large cap approach to a fundamental value strategy with a new manager. This change in strategy resulted in the sale of approximately 80% of the portfolio in favor of new holdings more consistent with the fundamental value approach.

During the second quarter of 2009, the investment strategy remained conservative in anticipation of continued economic uncertainty and market volatility. In anticipation of rising Treasury interest rates, the overall effective duration of invested assets was maintained in a low 2.0-2.5 year range. Sector allocations within the fixed income portfolio were stable with a modest reduction in municipal bond holdings, offset by selective additions to high quality, short maturity corporate bonds. Over the quarter, rising Treasury interest rates were more than offset by reduced yield spreads on the corporate, mortgage, asset backed, and municipal bonds held in the portfolio. In total, the increased risk appetite in the fixed income market improved the overall unrealized gain position of the portfolio. At the end of the second quarter, all of the fixed income investments remained investment grade quality with a high average portfolio quality of AA. The equity allocation was held at a relatively low 3.0% of invested assets. This allocation continued to be actively managed in a fundamental value style. This portfolio participated in the recovery of the overall equity market generating a return of 19% during the quarter.

There have been no other significant changes to our market risk since December 31, 2008. Please see Item 7A of Part II in our 2008 Annual Report on Form 10-K for information regarding our market risk.

59

UNITED AMERICA INDEMNITY, LTD.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based on their evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), our principal executive officer and principal financial officer have concluded that as of June 30, 2009, our disclosure controls and procedures are effective in that they are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and information that we are required to disclose in our Exchange Act reports is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

We have added, deleted, or modified certain of our internal controls over financial reporting during the quarter or six months ended June 30, 2009; however, there have been no changes in our internal controls over financial reporting that occurred that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

60

UNITED AMERICA INDEMNITY, LTD.

PART II-OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Our results of operations and financial condition are subject to numerous risks and uncertainties described in Item 1A of Part I in our 2008 Annual Report on Form 10-K, filed with the SEC on March 10, 2008. The risk factors identified therein have not materially changed, except for the following:

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 the catastrophe reinsurance coverage of our Insurance Operations. In 2009, our Reinsurance Operations began to participate as a retrocessionaire on a global property catastrophe treaty. Our operating results could be negatively impacted if losses and expenses related to the property catastrophe treaty exceed premiums assumed from that treaty. 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 $9.8 million, respectively, related to Hurricanes Katrina, Rita, and Wilma. There were no individual catastrophic events that generated significant losses for us in 2006 or 2007. In 2008, Hurricanes Gustav and Ike made landfall on August 31 and September 13, respectively. Hurricane Ike was far wider and penetrated deeply into the U.S. causing industry wide losses that are currently estimated to be upwards of $15.0 billion. We suffered gross and net catastrophic losses of $50.6 million and $10.5 million, respectively, related to Hurricane Ike. Catastrophe reinsurance became more expensive to buy as of January 1, 2009.

Legislative and Regulatory Action by the U.S. Congress Could Materially and Adversely Affect Us.

Our tax position could be adversely impacted by changes in tax laws, tax treaties or tax regulations or the interpretation or enforcement thereof. Legislative action may be taken by the U.S. Congress which, if ultimately enacted, could override tax treaties upon which we rely or could broaden the circumstances under which we would be considered a U.S. resident, each of which could materially and adversely affect our effective tax rate and cash tax position.

In addition, there continues to be negative publicity regarding, and criticism of, companies that conduct substantial business in the U.S. but are domiciled in countries like the Cayman Islands.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

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 the quarter ended June 30, 2009, the Company purchased 2,398 surrendered Class A common shares from its employees for $0.01 million. All Class A common shares purchased from employees by the Company are held as treasury stock and recorded at cost.

61

UNITED AMERICA INDEMNITY, LTD.

The following table provides information with respect to the Class A common shares that were surrendered or repurchased during the quarter ended June 30, 2009:

								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)
April 1-30, 2009		—		$	—		—	$	—
May 1-31, 2009		2,398	(3)	$	4.89		—	$	—
June 1-30, 2009		—		$	—		—	$	—
Total		2,398		$	—		—		N/A

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

Item 6. Exhibits

31.1+	Certification of Chief Executive Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2+	Certification of Chief Financial Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1+	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2+	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

+ Filed herewith.

62

UNITED AMERICA INDEMNITY, LTD.

SIGNATURE

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

	UNITED AMERICA INDEMNITY, LTD. Registrant
Date: August 10, 2009	By:	/s/ Thomas M. McGeehan
		Thomas M. McGeehan
		Interim Chief Financial Officer (Authorized Signatory and Principal Financial and Accounting Officer)

63

UNITED AMERICA INDEMNITY, LTD.

EXHIBIT INDEX

31.1+	Certification of Chief Executive Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2+	Certification of Chief Financial Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1+	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2+	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

+ Filed herewith.

64