United America Indemnity (INDM) 10-Q 2009 Q3 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 September 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	98-0417107
(State or other jurisdiction	(I.R.S. Employer Identification No.)
of incorporation or organization)

WALKER HOUSE, 87 MARY STREET
KYI — 9005
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.:

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 November 2, 2009, the registrant had outstanding 36,434,262 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 September 30, 2009 (Unaudited) and December 31, 2008		1
Consolidated Statements of Operations Quarters and Nine Months Ended September 30, 2009 and 2008 (Unaudited)		2
Consolidated Statements of Comprehensive Income (Loss) Quarters and Nine Months Ended September 30, 2009 and 2008 (Unaudited)		3
Consolidated Statements of Changes in Shareholders’ Equity As of September 30, 2009 (Unaudited) and December 31, 2008		4
Consolidated Statements of Cash Flows Nine Months Ended September 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		34
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		62
Item 6. Exhibits		62
Signatures		63
Exhibit 3.1
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)
	September 30, 2009			December 31, 2008
ASSETS
Bonds:
Available for sale securities, at fair value (amortized cost: $1,351,959 and $1,192,385)	$	1,413,135		$	1,204,974
Preferred shares:
Available for sale securities, at fair value (cost: $3,405 and $4,665)		4,358			4,665
Common shares:
Available for sale securities, at fair value (cost: $47,294 and $46,316)		59,311			50,613
Other invested assets
Available for sale securities, at fair value (cost: $3,676 and $19,689)		8,664			39,219
Securities classified as trading, at fair value (cost: $35,151 and $5,151)		43,828			7,453
Total investments		1,529,296			1,306,924
Cash and cash equivalents		212,739			292,604
Agents’ balances, net		74,072			57,117
Reinsurance receivables		577,823			679,277
Federal income taxes receivable		5,365			16,487
Deferred federal income taxes		12,507			32,532
Deferred acquisition costs		35,571			34,734
Intangible assets		9,254			9,309
Prepaid reinsurance premiums		18,175			23,960
Other assets		25,525			24,115
Total assets	$	2,500,327		$	2,477,059
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses	$	1,340,594		$	1,506,429
Unearned premiums		144,756			149,677
Ceded balances payable		18,139			25,165
Contingent commissions		9,622			6,695
Notes and debentures payable		121,640			121,845
Other liabilities		47,745			35,255
Total liabilities		1,682,496			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: 42,450,892 and 25,032,618, respectively; Class A common shares outstanding: 36,398,464 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		619,123			524,345
Accumulated other comprehensive income		59,329			25,108
Retained earnings		240,065			182,982
Class A common shares in treasury, at cost: 6,052,428 and 6,019,156 shares, respectively		(100,693	)		(100,446	)
Total shareholders’ equity		817,831			631,993
Total	$	2,500,327		$	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 September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
Revenues:
Gross premiums written	$	75,806		$	99,030		$	266,474		$	302,410
Net premiums written	$	62,932		$	79,706		$	227,023		$	246,879
Net premiums earned	$	72,893		$	89,511		$	226,165		$	303,241
Net investment income		15,267			16,627			54,049			51,485
Net realized investment gains (losses):
Other than temporary impairment losses on investments		(2,108	)		(6,101	)		(5,689	)		(7,920	)
Other than temporary impairment losses on investments recognized in other comprehensive income		8			—			133			—
Other net realized investment gains (losses)		8,713			(14,409	)		8,971			(16,140	)
Total net realized investment gains (losses)		6,613			(20,510	)		3,415			(24,060	)
Total revenues		94,773			85,628			283,629			330,666
Losses and Expenses:
Net losses and loss adjustment expenses		38,887			76,134			130,674			236,428
Acquisition costs and other underwriting expenses		27,564			33,164			88,350			109,471
Corporate and other operating expenses		4,676			3,189			12,314			9,403
Interest expense		1,776			1,963			5,462			6,690
Income (loss) before income taxes		21,870			(28,822	)		46,829			(31,326	)
Income tax expense (benefit)		(2,673	)		(10,312	)		808			(11,754	)
Income (loss) before equity in net income (loss) of partnership		24,543			(18,510	)		46,021			(19,572	)
Equity in net income (loss) of partnership, net of tax		2,809			(1,088	)		4,742			(1,557	)
Net income (loss)	$	27,352		$	(19,598	)	$	50,763		$	(21,129	)
Per share data (1):
Net income (loss):
Basic	$	0.45		$	(0.56	)	$	1.04		$	(0.57	)
Diluted	$	0.45		$	(0.56	)	$	1.04		$	(0.57	)
Weighted-average number of shares outstanding(2):
Basic		60,289,792			35,022,413			48,806,007			37,085,904
Diluted		60,311,106			35,022,413			48,846,055			37,085,904

(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 nine months ended September 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 1.114 to reflect the impact of a bonus element associated with the Rights Offering in accordance with appropriate accounting guidance As a result, share counts for the prior periods 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 September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
Net income (loss)	$	27,352		$	(19,598	)	$	50,763		$	(21,129	)
Other comprehensive income (loss), net of taxes:
Unrealized holding gains (losses) arising during period		30,337			(29,266	)		39,532			(48,290	)
Portion of other than temporary impairment losses recognized in other comprehensive income (loss), net of taxes		394			—			3,069			—
Recognition of previously unrealized holding (gains) losses		(5,046	)		13,764			(2,274	)		16,020
Unrealized foreign currency translation gains		137			—			214			—
Other comprehensive income (loss), net of taxes		25,822			(15,502	)		40,541			(32,270	)
Comprehensive income (loss), net of taxes	$	53,174		$	(35,100	)	$	91,304		$	(53,399	)

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)
	Nine Months Ended			Year Ended
	September 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		167,726			9,863
Common shares issued under Rights Offering		17,178,421			—
Number at end of period		42,450,892			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		2,948			4,365
Common shares issued under Rights Offering		91,830			—
Balance at end of period	$	619,123		$	524,345
Accumulated other comprehensive income, net of deferred income tax:
Balance at beginning of period	$	25,108		$	40,172
Other comprehensive income (loss)		40,511			(15,064	)
Change in other than temporary impairment losses recognized in other comprehensive income, net of taxes		30			—
Reclass of impairment losses per new accounting guidance		(6,320	)		—
Balance at end of period	$	59,329		$	25,108
Retained earnings:
Balance at beginning of period	$	182,982		$	324,542
Net income (loss)		50,763			(141,560	)
Reclass of impairment losses per new accounting guidance		6,320			—
Balance at end of period	$	240,065		$	182,982
Number of Treasury Shares:
Number at beginning of period		6,019,156			2,454,087
Class A common shares purchased		33,272			3,565,069
Number at end of period		6,052,428			6,019,156
Treasury Shares, at cost:
Balance at beginning of period	$	(100,446	)	$	(48,422	)
Class A common shares purchased, at cost		(247	)		(52,024	)
Balance at end of period	$	(100,693	)	$	(100,446	)
Total shareholders’ equity	$	817,831		$	631,993

See accompanying notes to consolidated financial statements.

4

UNITED AMERICA INDEMNITY, LTD.

Consolidated Statements of Cash Flows
(Dollars in thousands)

	(Unaudited)
	Nine Months Ended September 30,
	2009			2008
Cash flows from operating activities:
Net income (loss)	$	50,763		$	(21,129	)
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Amortization of trust preferred securities issuance costs		62			152
Amortization and depreciation		55			756
Restricted stock expense		3,119			2,730
Deferred federal income taxes		7,874			(3,845	)
Amortization of bond premium and discount, net		1,545			2,221
Net realized investment losses		(3,415	)		24,060
Equity in net (income) loss of partnerships		(4,742	)		1,557
Changes in:
Agents’ balances		(16,955	)		3,903
Reinsurance receivables		101,454			39,805
Unpaid losses and loss adjustment expenses		(165,835	)		22,627
Unearned premiums		(4,921	)		(57,786	)
Ceded balances payable		(7,026	)		9,207
Other assets and liabilities, net		(506	)		(8,305	)
Contingent commissions		2,927			(4,058	)
Prepaid reinsurance premiums		5,785			1,423
Federal income taxes receivable		11,122			(14,239	)
Deferred acquisition costs		(837	)		13,883
Net cash provided by (used for) operating activities		(19,531	)		12,962
Cash flows from investing activities:
Proceeds from sale of bonds		231,258			201,491
Proceeds from sale of stocks		68,834			24,348
Proceeds from maturity of bonds		41,085			76,210
Proceeds from sale of other invested assets		16,699			—
Purchases of bonds		(421,040	)		(167,892	)
Purchases of stocks		(65,242	)		(29,150	)
Purchases of other invested assets		(30,687	)		(277	)
Net cash provided by (used for) investing activities		(159,093	)		104,730
Cash flows from financing activities:
Proceeds from exercises of stock options		—			1,041
Tax expense associated with share-based compensation plans		(171	)		(73	)
Issuance of common shares		99,168			—
Purchases of Class A common shares		(247	)		(51,960	)
Retirement of junior subordinated debentures		—			(15,464	)
Principal payments of term debt		(205	)		(213	)
Net cash provided by (used for) financing activities		98,545			(66,669	)
Effect of exchange rates on cash and cash equivalents		214			—
Net change in cash and cash equivalents		(79,865	)		51,023
Cash and cash equivalents at beginning of period		292,604			244,321
Cash and cash equivalents at end of period	$	212,739		$	295,344

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 interim consolidated financial statements 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 nine months ended September 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 the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification”). 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 $627.0 million and $681.4 million were deposited in trust or with various governmental authorities in accordance with statutory requirements at September 30, 2009 and December 31, 2008, respectively. These amounts include bonds with an estimated fair market value of $6.2 million and $5.9 million at September 30, 2009 and December 31, 2008, respectively, 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 were as follows as of September 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 September 30, 2009
Bonds:
U.S. treasury and agency obligations	$	252,843	$	13,004	$	—		$	265,847	$	—
Obligations of states and political subdivisions		202,811		9,222		(77	)		211,956		—
Mortgage-backed securities		350,423		16,888		(294	)		367,017		(101	)
Commercial mortgage-backed securities		111,161		3,500		—			114,661		(1,945	)
Asset-backed securities		82,634		2,720		(283	)		85,071		(9	)
Corporate notes		273,791		14,082		(167	)		287,706		—
Foreign corporate bonds		56,131		2,581		—			58,712		(698	)
Other bonds		22,165		—		—			22,165		—
Total bonds		1,351,959		61,997		(821	)		1,413,135		(2,753	)
Common stock		47,294		12,495		(478	)		59,311		—
Preferred stock		3,405		953		—			4,358		—
Other invested assets		38,827		13,665		—			52,492		—
Total	$	1,441,485	$	89,110	$	(1,299	)	$	1,529,296	$	(2,753	)

(1) Represents the amount of other than temporary impairment losses recognized in accumulated other comprehensive income (“AOCI”). Per the accounting guidance, these items were not included in earnings as of September 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 the applicable new accounting guidance on other than temporary impairments is not applied retrospectively.

Excluding U.S. treasury and agency bonds, the Company did not hold any debt or equity investments in a single issuer that was in excess of 10% of shareholders’ equity at September 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 September 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	$	52,069	$	53,012
Due after one year through five years		486,308		507,709
Due after five years through ten years		170,955		182,143
Due after ten years through fifteen years		57,610		61,402
Due after fifteen years		40,799		42,120
Mortgaged-backed securities		350,423		367,017
Commercial mortgage-backed securities		111,161		114,661
Asset-backed securities		82,634		85,071
	$	1,351,959	$	1,413,135

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 September 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:
Obligations of states and political subdivisions	$	2,596	$	(26	)	$	3,919	$	(51	)	$	6,515	$	(77	)
Mortgage-backed securities		3,803		(147	)		2,973		(147	)		6,776		(294	)
Asset-backed securities		543		(111	)		1,121		(172	)		1,664		(283	)
Corporate notes		1,486		(2	)		5,986		(165	)		7,472		(167	)
Total bonds		8,428		(286	)		13,999		(535	)		22,427		(821	)
Common stock		6,677		(405	)		1,046		(73	)		7,723		(478	)
Total	$	15,105	$	(691	)	$	15,045	$	(608	)	$	30,150	$	(1,299	)

(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 the Company’s Investment Manager as an investment to be sold before recovery or maturity; and
(7)	the investment failed cash flow projection testing 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.

According to the most recent accounting guidance, 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.

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:

Obligations of states and political subdivisions— As of September 30, 2009, gross unrealized losses related to obligations of states and political subdivisionswere $0.08 million. Of this amount, $0.05 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 officials in addition to the standard rigorous analysis that determines the financial condition of the issuer.

Mortgage-backed securities — non-agency —As of September 30, 2009, gross unrealized losses related to mortgage-backed securities — non-agency were $0.3 million. Of this amount, $0.1 million has been in an unrealized loss position for twelve months or greater. Of these securities, 56% 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.

9

UNITED AMERICA INDEMNITY, LTD.

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

Asset backed securities —As of September 30, 2009, gross unrealized losses related to asset backed securities were $0.3 million. Of this amount, $0.2 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 17.3. 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 September 30, 2009, gross unrealized losses related to corporate bonds were $0.2 million. Of this amount, $0.2 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.

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

	Quarter Ended September 30,					Nine Months Ended September 30,
(Dollars in thousands)	2009			2008		2009			2008
Bonds:
OTTI losses, gross	$	2,108		$	1,067	$	4,449		$	1,067
Portion of loss recognized in other comprehensive income (pre-tax)		(8	)		—		(133	)		—
Net bonds impairment losses recognized in earnings		2,100	(1)		1,067		4,316			1,067
Common stock		—			3,227		593			5,046
Preferred stock		—			1,807		647			1,807
Total	$	2,100		$	6,101	$	5,556		$	7,920

(1) Includes $2.0 million of OTTI losses related to the Company’s commercial mortgage-backed securities which had been identified as securities in a loss position at September 30, 2009 that will be sold.

In the second quarter of 2009, the Company reclassed $6.3 million of OTTI losses, net of tax, that were previously recorded through earnings to other comprehensive income with an offset to retained earnings as a cumulative-effect adjustment. This adjustment represented the non-credit portion of previously recognized OTTI on debt securities which were still held as investments as of April 1, 2009.

10

UNITED AMERICA INDEMNITY, LTD.

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

The following tables are quarter-to-date and adoption-to-date analyses of the credit losses recognized in earnings on debt securities held by the Company as of September 30, 2009 for which a portion of the OTTI loss was recognized in other comprehensive income (loss).

Quarter-to-Date
(Dollars in thousands)
Balance of credit losses related to securities still being held as of July 1, 2009	$	21
Additions where no OTTI was previously recorded		3
Additions where an OTTI was previously recorded		9
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 September 30, 2009	$	33

Adoption-to-Date
(Dollars in thousands)
Balance of credit losses related to securities still being held as of April 1, 2009, date of adoption	$	—
Additions where no OTTI was previously recorded		33
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 September 30, 2009	$	33

Accumulated Other Comprehensive Income

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

	September 30,			December 31,
(Dollars in thousands)	2009			2008
Net unrealized gains from:
Bonds	$	61,176		$	12,589
Preferred stocks		953			—
Common stocks		12,017			4,297
Partnerships < 3% owned		4,988			19,530
Foreign currency fluctuations		117			(97	)
Deferred taxes		(19,922	)		(11,211	)
Accumulated other comprehensive income	$	59,329		$	25,108

Net Realized Investment Gains (Losses)

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

	Quarter Ended September 30,					Nine Months Ended September 30,
(Dollars in thousands)	2009		2008			2009			2008
Bonds	$	487	$	(6,887	)	$	(4,659	)	$	(6,697	)
Convertibles		4,021		(1,591	)		7,121			(3,507	)
Common stock		2,105		(3,405	)		2,030			(5,229	)
Preferred stock		—		(8,627	)		(1,077	)		(8,627	)
Total	$	6,613	$	(20,510	)	$	3,415		$	(24,060	)

11

UNITED AMERICA INDEMNITY, LTD.

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

Proceeds from the sales of bonds classified as available-for-sale resulting in net realized investment gains (losses) for the nine months ended September 30, 2009 and 2008 were $231.3 million and $201.5 million, respectively.

Proceeds from the sales of equity securities classified as available-for-sale resulting in net realized investment gains (losses) for the nine months ended September 30, 2009 and 2008 were $68.8 million and $24.3 million, respectively.

Net Investment Income

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

	Quarter Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2009			2008			2009			2008
Bonds	$	15,808		$	15,379		$	46,485		$	48,086
Preferred and common stocks		351			760			1,281			2,399
Cash and cash equivalents		225			1,740			1,077			5,050
Other		—			—			8,647			—
Total investment income		16,384			17,879			57,490			55,535
Investment expense		(1,117	)		(1,252	)		(3,441	)		(4,050	)
Net investment income	$	15,267		$	16,627		$	54,049		$	51,485

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

	Quarter Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2009			2008			2009			2008
Net investment income	$	12,586		$	13,652		$	43,494		$	42,189
Net realized investment gains (losses):
Invested assets excluding partnerships		4,763			(12,677	)		1,991			(14,444	)
Partnerships		2,809			(1,088	)		4,742			(1,577	)
Total net realized investment gains (losses)		7,572			(13,765	)		6,733			(16,021	)
Net unrealized investment gains (losses)		25,685			(15,502	)		40,328			(32,270	)
Net investment gains (losses)		33,257			(29,267	)		47,061			(48,291	)
Total investment return	$	45,843		$	(15,615	)	$	90,555		$	(6,102	)
Total investment return %(1)		2.7	%		(1.0	)%		5.4	%		(0.4	)%
Average investment portfolio(2)	$	1,710,395		$	1,656,009		$	1,670,782		$	1,701,235

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

Subprime and Alt-A Investments

The Company had approximately $2.7 million and $3.5 million worth of investment exposure through subprime and Alt-A investments as of September 30, 2009 and December 31, 2008, respectively. An Alt-A investment is one which is backed by a loan that contains limited documentation. As of September 30, 2009, approximately $0.9 million of those investments were rated AAA, $1.0 million were rated BBB+ to AA, $0.5 million were rated B, and $0.3 million were rated CC to 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 $0.9 million during the quarter and nine months ended September 30, 2009 and $0.5 million during the year ended December 31, 2008.

12

UNITED AMERICA INDEMNITY, LTD.

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

Insurance Enhanced Municipal Bonds

As of September 30, 2009, the Company held insurance enhanced municipal bonds of approximately $182.8 million, which represented approximately 10.5% of the Company’s total invested assets. These securities had an average rating of “AA.” Approximately $73.4 million of these bonds are pre-refunded with U.S. treasury securities, of which $53.7 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 $109.4 million of insurance enhanced municipal bonds, $46.5 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	$	2,679	$	—
AA		23,995		5,255
A		14,312		16,975
BBB		5,521		1,028
Rating Not Available		—		23,249
Total	$	46,507	$	46,507

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, is as follows:

							Exposure Net
							of Pre-refunded
					Govt		& Govt
(Dollars in thousands)			Pre-refunded		Guaranteed		Guaranteed
Financial Guarantor	Total		Securities		Securities		Securities
Ambac Financial Group	$	26,415	$	9,210	$	—	$	17,205
Assured Guaranty Corporation		408		—		—		408
Financial Guaranty Insurance Company		7,677		5,358		—		2,319
Financial Security Assurance, Inc.		49,317		17,066		—		32,251
Municipal Bond Insurance Association		71,006		18,796		—		52,210
Federal Housing Association		2,392		—		2,392		—
Federal National Housing Association		780		—		780		—
Govt National Housing Association		1,335		1,106		229		—
Permanent School Fund Guaranty		3,875		2,205		1,670		—
Total backed by financial guarantors		163,205		53,741		5,071		104,393
Other credit enhanced municipal bonds		19,610		19,610		—		—
Total	$	182,815	$	73,351	$	5,071	$	104,393

In addition to the $182.8 million of insurance enhanced municipal bonds, the Company also held unrated insurance enhanced asset-backed and credit securities with a market value of approximately $21.7 million, which represented approximately 1.2% of the Company’s total invested assets. The financial guarantors of the Company’s $21.7 million of insurance enhanced asset-backed and credit securities include Financial Guaranty Insurance Company ($1.1 million), Municipal Bond Insurance Association ($8.8 million), Ambac ($4.4 million), Financial Security Assurance, Inc ($6.4 million), and National Public Finance Guarantee ($1.0 million).

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 September 30, 2009.

13

UNITED AMERICA INDEMNITY, LTD.

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

3. Fair Value Measurements

In accordance with the most recent accounting guidance, 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 $43.8 million and $7.5 million as of September 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 investments held by the partnership. Accordingly, these investments are classified as Level 3 within the fair value hierarchy. 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 the fair value option has not had any impact on the Company’s consolidated financial condition or results of operations since the securities for which the fair value option 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 nine months ended September 30, 2009, the Company recognized a gain, net of taxes, of $2.8 million, and a gain, net of taxes, of $4.7 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 recently issued accounting standards related to fair value measurements. These standards define fair value, establish a framework for measuring fair value, outline a fair value hierarchy based on inputs used to measure fair value, and enhance disclosure requirements for fair value measurements. These standards do 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 these new accounting standards. The implementation of the new accounting standards has not had any impact on the Company’s consolidated financial condition or results of operations. The implementation of the new accounting standards resulted in expanded disclosures about securities measured at fair value, as discussed below.

The Company’s invested assets are carried at their fair value and 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.

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.

14

UNITED AMERICA INDEMNITY, LTD.

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

The following tables present information about the Company’s invested assets measured at fair value on a recurring basis as of September 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 September 30, 2009	Fair Value Measurements
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Bonds:
U.S. treasury and agency obligations	$	112,256	$	153,591	$	—	$	265,847
Obligations of states and political subdivisions		—		211,956		—		211,956
Mortgage-backed securities		—		367,017		—		367,017
Commercial mortgage-backed securities		—		114,661		—		114,661
Asset-backed securities		—		85,071		—		85,071
Corporate notes		—		287,706		—		287,706
Foreign corporate bonds		—		58,712		—		58,712
Other bonds		—		22,165		—		22,165
Total bonds		112,256		1,300,879		—		1,413,135
Preferred shares		1,917		2,441		—		4,358
Common shares		59,311		—		—		59,311
Other invested assets		—		—		52,492		52,492
Total invested assets	$	173,484	$	1,303,320	$	52,492	$	1,529,296

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.

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.

15

UNITED AMERICA INDEMNITY, LTD.

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

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

	Fair Value Measurements Using Level 3 Inputs
			Other
Quarter Ended September 30, 2009			Invested
(Dollars in thousands)	Bonds		Assets			Total
Beginning balance at July 1, 2009	$	—	$	50,817		$	50,817
Total gains (losses) (realized / unrealized):
Included in equity in net income (loss) of partnership		—		3,638			3,638
Included in accumulated other comprehensive income		—		(1,995	)		(1,995	)
Purchases		—		32			32
Sales		—		—			—
Ending balance at September 30, 2009	$	—	$	52,492		$	52,492
Gains for 2009 included in earnings attributable to the change in unrealized gains relating to assets still held at September 30, 2009	$	—	$	3,638		$	3,638

	Fair Value Measurements Using Level 3 Inputs
			Other
Nine Months Ended September 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		—		6,375			6,375
Included in accumulated other comprehensive income		—		(5,879	)		(5,879	)
Purchases		—		30,687			30,687
Sales		—		(25,363	)		(25,363	)
Ending balance at September 30, 2009	$	—	$	52,492		$	52,492
Gains for 2009 included in earnings attributable to the change in unrealized gains relating to assets still held at September 30, 2009	$	—	$	6,375		$	6,375

The securities classified as Level 3 in the above table consist of $52.5 million related to the Company’s limited partnership investments. Of this amount, $8.7 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. $12.1 million was related to a 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 $31.7 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 nine months ended September 30, 2008:

	Fair Value Measurements Using Level 3 Inputs
			Other
Quarter Ended September 30, 2008			Invested
(Dollars in thousands)	Bonds		Assets			Total
Beginning balance at July 1, 2008	$	—	$	61,474		$	61,474
Total gains (losses) (realized / unrealized):
Included in equity in net income (loss) of partnership		—		(1,674	)		(1,674	)
Included in accumulated other comprehensive income		—		(4,716	)		(4,716	)
Purchases		—		22			22
Ending balance at September 30, 2008	$	—	$	55,106		$	55,106
Losses for the quarter ended September 30, 2008 included in earnings attributable to the change in unrealized losses relating to assets still held at September 30, 2008	$	—	$	(1,674	)	$	(1,674	)

	Fair Value Measurements Using Level 3 Inputs
				Other
Nine Months Ended September 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		—			(2,396	)		(2,396	)
Included in accumulated other comprehensive income		(55	)		(7,314	)		(7,369	)
Purchases		—			277			277
Sales		(554	)		—			(554	)
Transfers out of Level 3		(1,767	)		—			(1,767	)
Ending balance at September 30, 2008	$	—		$	55,106		$	55,106
Losses for the nine months ended September 30, 2008 included in earnings attributable to the change in unrealized losses relating to assets still held at September 30, 2008	$	—		$	(2,396	)	$	(2,396	)

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 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 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 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 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 the most recent accounting guidance, 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 nine months ended September 30, 2009, the Company has not needed to adjust quotes or prices obtained from the pricing vendors.

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.

18

UNITED AMERICA INDEMNITY, LTD.

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

At September 30, 2009 and December 31, 2008, the Company carried reinsurance receivables of $577.8 million and $679.3 million, respectively. These amounts are net of an allowance for uncollectible reinsurance receivables. The allowance for uncollectible reinsurance receivables was $13.2 million and $13.7 million at September 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 September 30, 2009 and December 31, 2008, the Company held collateral securing its reinsurance receivables of $403.4 million and $477.1 million, respectively. Prepaid reinsurance premiums were $18.2 million and $24.0 million at September 30, 2009 and December 31, 2008, respectively. Reinsurance receivables, net of collateral held, were $174.4 million and $202.2 million at September 30, 2009 and December 31, 2008, 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.

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 nine months ended September 30, 2009, the Company ceded $3.2 million and $8.9 million of written premium, respectively.

19

UNITED AMERICA INDEMNITY, LTD.

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

There were no other significant changes to any of the Company’s other reinsurance treaties during the quarter or nine months ended September 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 limited partnership distributions, and then adding that amount to income taxes on net realized gains and losses and limited partnership distributions. The Company’s income 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 nine months ended September 30, 2009 and 2008 were as follows:

Quarter Ended September 30, 2009:	Non-U.S.		U.S.
(Dollars in thousands)	Subsidiaries		Subsidiaries		Eliminations			Total
Revenues:
Gross premiums written	$	37,943	$	67,368	$	(29,505	)	$	75,806
Net premiums written	$	37,928	$	25,004	$	—		$	62,932
Net premiums earned	$	45,656	$	27,237	$	—		$	72,893
Net investment income		10,229		9,686		(4,648	)		15,267
Net realized investment gains		1,327		5,286		—			6,613
Total revenues		57,212		42,209		(4,648	)		94,773
Losses and Expenses:
Net losses and loss adjustment expenses		23,823		15,064		—			38,887
Acquisition costs and other underwriting expenses		17,472		10,092		—			27,564
Corporate and other operating expenses		4,116		560		—			4,676
Interest expense		—		6,424		(4,648	)		1,776
Income before income taxes	$	11,801	$	10,069	$	—		$	21,870

Quarter Ended September 30, 2008:	Non-U.S.			U.S.
(Dollars in thousands)	Subsidiaries			Subsidiaries			Eliminations			Total
Revenues:
Gross premiums written	$	46,143		$	92,456		$	(39,569	)	$	99,030
Net premiums written	$	40,135		$	39,571		$	—		$	79,706
Net premiums earned	$	45,608		$	43,903		$	—		$	89,511
Net investment income		10,289			10,986			(4,648	)		16,627
Net realized investment gains (losses)		(1,238	)		(19,272	)		—			(20,510	)
Total revenues		54,659			35,617			(4,648	)		85,628
Losses and Expenses:
Net losses and loss adjustment expenses		39,537			36,597			—			76,134
Acquisition costs and other underwriting expenses		17,987			15,177			—			33,164
Corporate and other operating expenses		1,973			1,216			—			3,189
Interest expense		—			6,611			(4,648	)		1,963
Loss before income taxes	$	(4,838	)	$	(23,984	)	$	—		$	(28,822	)

20

UNITED AMERICA INDEMNITY, LTD.

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

Nine Months Ended September 30, 2009:	Non-U.S.			U.S.
(Dollars in thousands)	Subsidiaries			Subsidiaries		Eliminations			Total
Revenues:
Gross premiums written	$	149,934		$	207,675	$	(91,135	)	$	266,474
Net premiums written	$	149,389		$	77,634	$	—		$	227,023
Net premiums earned	$	135,845		$	90,320	$	—		$	226,165
Net investment income		31,156			36,685		(13,792	)		54,049
Net realized investment losses		(655	)		4,070		—			3,415
Total revenues		166,346			131,075		(13,792	)		283,629
Losses and Expenses:
Net losses and loss adjustment expenses		73,615			57,059		—			130,674
Acquisition costs and other underwriting expenses		54,001			34,349		—			88,350
Corporate and other operating expenses		7,635			4,679		—			12,314
Interest expense		—			19,254		(13,792	)		5,462
Income before income taxes	$	31,095		$	15,734	$	—		$	46,829

Nine Months Ended September 30, 2008:	Non-U.S.			U.S.
(Dollars in thousands)	Subsidiaries			Subsidiaries			Eliminations		Total
Revenues:
Gross premiums written	$	143,796		$	280,603		$	(121,989)	$	302,410
Net premiums written	$	124,889		$	121,990		$	—	$	246,879
Net premiums earned	$	155,279		$	147,962		$	—	$	303,241
Net investment income		31,138			34,139			(13,792)		51,485
Net realized investment gains (losses)		(1,090	)		(22,970	)		—		(24,060	)
Total revenues		185,327			159,131			(13,792)		330,666
Losses and Expenses:
Net losses and loss adjustment expenses		115,368			121,060			—		236,428
Acquisition costs and other underwriting expenses		64,594			44,877			—		109,471
Corporate and other operating expenses		5,786			3,617			—		9,403
Interest expense		—			20,482			(13,792)		6,690
Income (loss) before income taxes	$	(421	)	$	(30,905	)	$	—	$	(31,326	)

The following tables summarize the differences between the tax provisions under accounting guidance applicable to interim financial statement periods and the expected tax provision at the weighted average tax rate:

	Quarter Ended September 30,
	2009						2008
				% of Pre-						% of Pre-
(Dollars in thousands)	Amount			Tax Income			Amount			Tax Loss
Expected tax provision at weighted average rate	$	3,544			16.2	%	$	(8,377	)		(29.1	)%
Adjustments:
Tax exempt interest		(616	)		(2.8	)		(715	)		(2.5	)
Dividend exclusion		(79	)		(0.4	)		(155	)		(0.5	)
Effective tax rate adjustment		(3,447	)		(15.8	)		(449	)		(1.6	)
Other		(2,075	)		(9.4	)		(616	)		(2.1	)
Income tax expense	$	(2,673	)		(12.2	)%	$	(10,312	)		(35.8	)%

21

UNITED AMERICA INDEMNITY, LTD.

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

	Nine Months Ended September 30,
	2009						2008
				% of Pre-						% of Pre-
(Dollars in thousands)	Amount			Tax Income			Amount			Tax Loss
Expected tax provision at weighted average rate	$	5,567			11.9	%	$	(10,760	)		(34.3	)%
Adjustments:
Tax exempt interest		(1,996	)		(4.3	)		(2,172	)		(6.9	)
Dividend exclusion		(289	)		(0.6	)		(481	)		(1.5	)
Effective tax rate adjustment		(496	)		(1.1	)		2,448			7.8
Other		(1,978	)		(4.2	)		(789	)		(2.6	)
Income tax expense	$	808			1.7	%	$	(11,754	)		(37.5	)%

The effective income tax expense rate for the nine months ended September 30, 2009 was 1.7%, compared to an effective income tax benefit rate of 37.5% for the nine months ended September 30, 2008. The increase in the effective tax rate is primarily due to capital gains in 2009 compared to capital losses in 2008. The effective rates differed from the weighted average expected income tax expense (benefit) rates of 11.9% and (34.3)% for the nine months ended September 30, 2009 and 2008, respectively, primarily due to the fact that the Company records tax based on the annualized effective tax rate, net of tax-exempt interest and dividends, and a $2.0 million release of tax reserves due to the expiration of IRS statute of limitations on the Company’s 2005 federal income tax return.

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 2006.

The Company applies a more-likely-than-not recognition threshold for all tax uncertainties whereby it only recognizes 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 $1.1 million and $3.1 million as of September 30, 2009 and December 31, 2008, respectively.

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 decreased $2.0 million during the third quarter of 2009 due to the expiration of the IRS statute of limitations on the Company’s 2005 federal income tax return. As a result, the effective income tax rate was reduced by 4.2% during 2009.

The Company classifies all interest and penalties related to uncertain tax positions as income tax expense. As of September 30, 2009, the Company has recorded $0.1 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 September 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 September 30,
(Dollars in thousands)	2009			2008
Unpaid losses and loss adjustment expenses at beginning of period	$	1,394,818		$	1,501,229
Less: Ceded reinsurance receivables on unpaid losses and loss adjustment expenses		613,664			666,913
Net balance at beginning of period		781,154			834,316
Incurred losses and loss adjustment expenses related to:
Current year		40,527			71,917
Prior years		(1,640	)(1)		4,217	(2)
Total incurred losses and loss adjustment expenses		38,887			76,134
Paid losses and loss adjustment expenses related to:
Current year		12,892			21,328
Prior years		42,941			41,144
Total paid losses and loss adjustment expenses		55,833			62,472
Net balance at end of period		764,208			847,978
Plus: Ceded reinsurance receivables on unpaid losses and loss adjustment expenses		576,386			677,886
Unpaid losses and loss adjustment expenses at end of period	$	1,340,594		$	1,525,864

(1)

In the third quarter of 2009, the Company reduced its prior accident year loss reserves by $2.0 million and increased its allowance for uncollectible reinsurance by $0.4 million. The loss reserves reduction of $2.0 million consisted of a $2.7 million reduction in general liability lines, a $0.2 million reduction in property lines, and a $0.4 million reduction in umbrella lines, offset by a $1.3 million increase in professional lines. The reduction in the general liability lines consisted of net reductions of $5.1 million related to accident years 2005 and prior, offset by increases of $2.4 million related to accident years 2006 through 2008. The reduction in the property lines consisted of net reductions of $0.5 million related to accident years 2007 and prior, offset by an increase of $0.3 million related to accident year 2008. The reduction in the umbrella lines related to accident years 2003 and 2001. The increase in the professional lines primarily consisted of increases of $1.6 million related to accident years 2004 through 2008, offset by net reductions of $0.3 million related to accident years 2003 and prior.

(2)

In the third quarter of 2008, the Company reduced its prior accident year loss reserves by $1.5 million and increased its allowance for uncollectible reinsurance by $5.7 million. The loss reserves reduction of $1.5 million consisted of reductions of $3.5 million in general liability lines and $0.2 million in property lines, offset by an increase of $2.2 million in professional lines. The reduction in the general liability lines consisted of reductions of $8.6 million primarily related to accident years 2005 and prior, offset by increases of $5.1 million related to accident years 2006 and 2007. The reduction in the property lines and increase to the professional liability lines are primarily related to accident years 2006 and 2007.

23

UNITED AMERICA INDEMNITY, LTD.

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

	Nine Months Ended September 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		135,224			215,670
Prior years		(4,550	)(1)		20,758	(2)
Total incurred losses and loss adjustment expenses		130,674			236,428
Paid losses and loss adjustment expenses related to:
Current year		28,962			42,895
Prior years		173,342			146,439
Total paid losses and loss adjustment expenses		202,304			189,334
Net balance at end of period		764,208			847,978
Plus: Ceded reinsurance receivables on unpaid losses and loss adjustment expenses		576,386			677,886
Unpaid losses and loss adjustment expenses at end of period	$	1,340,594		$	1,525,864

(1)

In 2009, the Company reduced its prior accident year loss reserves by $4.2 million and reduced its allowance for uncollectible reinsurance by $0.4 million. The loss reserves reduction of $4.2 million primarily consisted of a $5.2 million reduction in general liability lines, a $2.4 million reduction in property lines, and a $0.4 million reduction in umbrella lines, offset by a $3.8 million increase in professional lines. The reduction in the general liability lines primarily consisted of net reductions of $9.7 million related to accident years 2006 and prior, offset by increase of $4.5 million to accident years 2007 and 2008. The reduction in the property lines primarily consisted of reductions related to accident year 2007 and 2008. The reduction in the umbrella lines primarily related to accident years 2003 and 2001. The increase to the professional lines primarily related to increases of $6.1 million related to accident years 2007 and 2008, offset by net reductions of $2.3 million primarily to accident years 2005 and prior.

(2)

In 2008, the Company increased its prior accident year loss reserves by $15.5 million and increased its allowance for uncollectible reinsurance by $5.3 million. The loss reserves increase of $15.5 million consisted of increases of $13.4 million in general liability lines and $7.5 million in professional liability lines, offset by reductions of $4.6 million in property lines and $0.8 million in umbrella lines. The increase to the general liability lines was primarily related to accident years 2006, 2007, and 1995 and prior. The increase to the professional liability lines consisted of increases of $9.8 million primarily related to accident years 2006 and 2007, offset by reductions of $2.3 million primarily related to accident years 2003 and 2005. The reduction in property lines was primarily related to accident years 2006 and 2007. The reduction in umbrella lines was primarily related to accident years 2004 and prior.

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 nine months ended September 30, 2009:

Loans Payable

At September 30, 2009 and December 31, 2008, the Company had loans payable of $0.7 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 September 30, 2009 and 2008, and $0.02 million and $0.03 million for the nine months ended September 30, 2009 and 2008, respectively.

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

24

UNITED AMERICA INDEMNITY, LTD.

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

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 was subject to the prior approval by the Company’s shareholders, which was obtained at the Annual General Shareholders’ meeting that was held on October 27, 2009. The fees were paid on October 27, 2009.

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 $91.8 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 52.3% 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.

25

UNITED AMERICA INDEMNITY, LTD.

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

9. Related Party Transactions

As of September 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 $0.3 million in each of the quarters ended September 30, 2009 and 2008 and $1.1 million in each of the nine months ended September 30, 2009 and 2008 as part of the annual management fee that is paid to Fox Paine & Company. The Company reimbursed Fox Paine & Company $0.1 million and $0.08 million during the quarters ended September 30, 2009 and 2008, respectively, and $0.2 million and $0.1 million during the nine months ended September 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 was subject to the prior approval of the Company’s shareholders, which was obtained at the Annual General Shareholders’ meeting that was held on October 27, 2009. The fees were paid on October 27, 2009. See Note 8 above for more details concerning the Rights Offering.

At September 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 $4.4 million and $6.8 million at September 30, 2009 and December 31, 2008, respectively. On April 24, 2009, the Company made a required capital call contribution of $0.6 million to the partnership. On July 1, 2009, the Company made a required capital call contribution of $0.03 million to the partnership. At September 30, 2009, the Company had an unfunded capital commitment of $3.1 million to the partnership.

During the quarters ended September 30, 2009 and 2008, the Company incurred $0.07 million and $0.03 million respectively, for legal services rendered by Cozen O’Connor. During the nine months ended September 30, 2009 and 2008, the Company incurred $0.2 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.

During the nine months ended September 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 September 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 September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2009		2008		2009		2008
Ceded written premium	$	—	$	1,149	$	2,748	$	9,721
Ceded losses		—		5,225		972		3,997

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 paid 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.

26

UNITED AMERICA INDEMNITY, LTD.

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

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.

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. (“AON”), 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 filed its Notice of Appeal and a Bond in the amount of $33.0 million. AON will file its appellate brief, to which the Company will respond. There will likely be a mediation ordered by the Appellate Court. If that fails to produce a settlement, oral arguments will likely be ordered. It is estimated that it will take another eight to ten months for a decision following oral arguments. United National does not intend to recognize the gain contingency until the matter has been resolved through the appellate process.

11. Share-Based Compensation Plans

During the nine months ended September 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 167,726 fully vested Class A common shares, subject to certain restrictions, at a weighted average grant date value of $5.77 per share, to non-employee directors of the Company under the Plan.

As a result of the amendment and restatement of Larry A. Frakes’s employment agreement, the Company cancelled 249,419 and granted 249,419 Time-Based Options, and cancelled 249,419 and granted 249,419 Performance-Based Options under the Plan. 25% of the Time-Based Options had vested on December 31, 2008. The remaining Time-Based Options will vest equally over a three year period beginning December 31, 2010 and expire ten years after the new agreement date, August 14, 2009. The Performance-Based Options vest in 25% increments over a four-year period and are conditional upon the Company achieving various operating targets and expire ten years after the new agreement date, August 14, 2009. There was no material effect on the Company’s results of operations for the quarter or nine months ended September 30, 2009 as a result of this amendment and restatement.

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.

The Company issued non-transferable rights to stockholders of record on March 16, 2009. The rights entitled the holders to purchase 0.9013 shares 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.

27

UNITED AMERICA INDEMNITY, LTD.

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

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. 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 1.114 to reflect the impact of a bonus element associated with the Rights Offering. The factor was changed from the factor of 1.116 that had been disclosed in the second quarter due to an adjustment in the third quarter to the total net proceeds received related to the Rights Offering. This change did not result in a change to earnings per share. 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 September 30,					Nine Months Ended September 30,
except per share data)	2009		2008			2009		2008
Net income (loss)	$	27,352	$	(19,598	)	$	50,763	$	(21,129	)
Basic earnings (loss) per share:
Weighted average shares outstanding — basic		60,289,792		31,449,094			47,177,225		33,302,048
Adjustment for bonus element of Rights Offering		—		3,573,319			1,628,782		3,783,856
Adjusted weighted average shares outstanding — basic		60,289,792		35,022,413			48,806,007		37,085,904
Net income (loss)	$	0.45	$	(0.56	)	$	1.04	$	(0.57	)
Diluted earnings (loss) per share:
Weighted average shares outstanding — diluted		60,311,106		31,449,094			47,217,273		33,302,048
Adjustment for bonus element of Rights Offering		—		3,573,319			1,628,782		3,783,856
Adjusted weighted average shares outstanding — diluted		60,311,106		35,022,413			48,846,055		37,085,904
Net income (loss)	$	0.45	$	(0.56	)	$	1.04	$	(0.57	)

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 September 30,				Nine Months Ended September 30,
	2009		2008		2009		2008
Weighted average shares for basic earnings per share		60,289,792		35,022,413		48,806,007		37,085,904
Non-vested restricted stock		21,314		—		40,048		—
Weighted average shares for diluted earnings per share		60,311,106		35,022,413		48,846,055		37,085,904

If the Company had not incurred a loss in 2008, then 35,198,341 and 37,276,633 weighted average shares would have been used to compute the diluted loss per share calculation for the quarter and nine months ended September 30, 2008, respectively. In addition to the basic shares, weighted average shares for the diluted calculation would have included 67,906 shares of non-vested restricted stock and 108,022 share equivalents for options and warrants for the quarter ended September 30, 2008, and 58,448 shares of non-vested restricted stock and 132,282 share equivalents for options and warrants for the nine months ended September 30, 2008.

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.

28

UNITED AMERICA INDEMNITY, LTD.

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

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.

Quarter Ended September 30, 2009:	Insurance
(Dollars in thousands)	Operations (1)			Reinsurance (2)			Total
Revenues:
Gross premiums written	$	67,368		$	8,438		$	75,806
Net premiums written	$	54,510		$	8,422		$	62,932
Net premiums earned	$	58,971		$	13,922		$	72,893
Losses and Expenses:
Net losses and loss adjustment expenses		33,292			5,595			38,887
Acquisition costs and other underwriting expenses		24,028	(3)		3,536	(4)		27,564
Income (loss) from segments	$	1,651		$	4,791			6,442
Unallocated Items:
Net investment income								15,267
Net realized investment gains								6,613
Corporate and other operating expenses								(4,676	)
Interest expense								(1,776	)
Income before income taxes								21,870
Income tax expense								(2,673	)
Income before equity in net income of partnership								24,543
Equity in net income of partnership, net of tax								2,809
Net income							$	27,352
Total assets	$	1,868,061		$	632,266	(5)	$	2,500,327

(1)	Includes business ceded to Reinsurance Operations.
(2)	External business only, excluding business assumed from Insurance Operations.
(3)	Includes federal excise tax of $317 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)

Quarter Ended September 30, 2008:	Insurance
(Dollars in thousands)	Operations (1)			Reinsurance (2)			Total
Revenues:
Gross premiums written	$	92,458		$	6,572		$	99,030
Net premiums written	$	79,139		$	567		$	79,706
Net premiums earned	$	87,800		$	1,711		$	89,511
Losses and Expenses:
Net losses and loss adjustment expenses		74,383			1,751			76,134
Acquisition costs and other underwriting expenses		32,401	(3)		763	(4)		33,164
Loss from segments	$	(18,984	)	$	(803	)		(19,787	)
Unallocated Items:
Net investment income								16,627
Net realized investment losses								(20,510	)
Corporate and other operating expenses								(3,189	)
Interest expense								(1,963	)
Loss before income taxes								(28,822	)
Income tax benefit								(10,312	)
Loss before equity in net loss of partnership								(18,510	)
Equity in net loss of partnership, net of tax								(1,088	)
Net loss							$	(19,598	)
Total assets	$	2,006,132		$	604,863	(5)	$	2,610,995

(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 $443 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.

Nine Months Ended September 30, 2009:	Insurance
(Dollars in thousands)	Operations (1)			Reinsurance (2)			Total
Revenues:
Gross premiums written	$	207,675		$	58,799		$	266,474
Net premiums written	$	168,770		$	58,253		$	227,023
Net premiums earned	$	194,137		$	32,028		$	226,165
Losses and Expenses:
Net losses and loss adjustment expenses		115,583			15,091			130,674
Acquisition costs and other underwriting expenses		80,408	(3)		7,942	(4)		88,350
Income (loss) from segments	$	(1,854	)	$	8,995			7,141
Unallocated Items:
Net investment income								54,049
Net realized investment gains								3,415
Corporate and other operating expenses								(12,314	)
Interest expense								(5,462	)
Income before income taxes								46,829
Income tax expense								808
Income before equity in net income of partnership								46,021
Equity in net income of partnership, net of tax								4,742
Net income							$	50,763
Total assets	$	1,868,061		$	632,266	(5)	$	2,500,327

(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 $1,038 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.

30

UNITED AMERICA INDEMNITY, LTD.

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

Nine Months Ended September 30, 2008:	Insurance
(Dollars in thousands)	Operations (1)			Reinsurance (2)			Total
Revenues:
Gross premiums written	$	280,605		$	21,805		$	302,410
Net premiums written	$	243,978		$	2,901		$	246,879
Net premiums earned	$	295,923		$	7,318		$	303,241
Losses and Expenses:
Net losses and loss adjustment expenses		226,175			10,253			236,428
Acquisition costs and other underwriting expenses		104,859	(3)		4,612	(4)		109,471
Loss from segments	$	(35,111	)	$	(7,547	)		(42,658	)
Unallocated Items:
Net investment income								51,485
Net realized investment losses								(24,060	)
Corporate and other operating expenses								(9,403	)
Interest expense								(6,690	)
Loss before income taxes								(31,326	)
Income tax benefit								(11,754	)
Loss before equity in net loss of partnership								(19,572	)
Equity in net loss of partnership, net of tax								(1,557	)
Net loss								(21,129	)
Total assets	$	2,006,132		$	604,863	(5)	$	2,610,995

(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 $1,484 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 nine months ended September 30, 2009 and 2008:

	Quarter Ended September 30,					Nine Months Ended September 30,
(Dollars in thousands)	2009			2008		2009			2008
Net U.S. federal income taxes paid (recovered)	$	(10,957	)	$	—	$	(18,019	)	$	6,401
Interest paid		3,058			3,327		6,830			8,465

15. New Accounting Pronouncements

In June 2009, the FASB issued new accounting guidance entitled “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162”, which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities that are presented in conformity with GAAP. This new guidance is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this guidance has changed how the Company references various elements of GAAP when preparing its financial statement disclosures, but did not have an impact on the Company’s financial position, results of operations, or cash flows.

In January 2009, the FASB issued new accounting guidance on other than temporary impairments with the intent of achieving more consistent determination of whether an other than temporary impairment has occurred. This guidance retains and emphasizes the other than temporary impairment assessment guidance and required disclosures from previous related disclosures. Under this new guidance, 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 from previous related disclosures. This new guidance became effective for interim and annual reporting periods ending after December 15, 2008. The Company adopted this new guidance 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.

31

UNITED AMERICA INDEMNITY, LTD.

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

In April 2009, the FASB issued new accounting guidance on fair value measurements. The new guidance 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 new guidance 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 new guidance further requires an entity to disclose any change in valuation techniques, the related inputs, and the effects resulting from the application of the new guidance. In addition, the adoption of the new guidance 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. This new guidance was 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 this new guidance in the second quarter of 2009.

In April 2009, the FASB issued new accounting guidance on other than temporary impairments. The new guidance 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 new guidance 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 the new guidance 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. This new guidance was 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 this new guidance in the second quarter of 2009.

In April 2009, the FASB issued new accounting guidance on interim disclosures of fair value measurements. This new guidance 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 new guidance, fair values for these assets and liabilities were only disclosed once a year. The new guidance 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. This new guidance was 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 this new guidance in the second quarter of 2009.

In May 2009, the FASB issued new accounting guidance on subsequent events. This new guidance 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 new guidance 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 new guidance is effective for interim or annual financial periods ending after June 15, 2009. The Company adopted this new guidance 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.

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

In June 2009, the FASB issued new accounting guidance on accounting for transfers of financial assets. This new guidance eliminates the concept of a qualifying special-purpose entity from previous guidance. This new guidance 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 new guidance 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 new accounting guidance on whether an enterprise is the primary beneficiary of a variable interest entity. In addition, this new accounting guidance eliminated the quantitative approach previously required for determining the primary beneficiary of a variable interest entity. This new guidance amends certain previously issued guidance 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, this new guidance requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. This new guidance is effective as of the beginning of the first annual reporting period and interim reporting periods that begin after November 15, 2009, and management is currently assessing its impact in regard to the Company’s wholly-owned business trust subsidiaries.

16. Subsequent Events

At the Annual General Shareholders’ meeting held on October 27, 2009, the Company’s shareholders voted to approve the payment to Fox Paine & Company of the arrangement fee of $2.0 million and backstop fee of $5.0 million related to the Rights Offering. The fees were paid on October 27, 2009. See Note 8 above for more details concerning the Rights Offering.

There were no subsequent events requiring adjustment to the financial statements or disclosure through November 6, 2009, the date that the Company’s financial statements were issued.

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

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

Recent Developments

On May 5, 2009, we completed the Rights Offering in which a total of 17,178,421 Class A common shares and 11,435,244 Class B common shares were issued. The issuance of the Class A common shares included 41,588 Class A common shares issued to an affiliate of Fox Paine & Company in a private placement pursuant to Section 4(2) of the Securities Act, as amended. The affiliate of Fox Paine & Company purchased the 41,588 Class A common shares for $3.50 per share, which was the subscription price at which all Class A common shareholders and Class B common shareholders were entitled to purchase additional shares.

At the Annual General Shareholders’ meeting held on October 27, 2009, our shareholders voted to approve the payment to Fox Paine & Company of the arrangement fee of $2.0 million and backstop fee of $5.0 million related to the Rights Offering, in which a total of 17,178,421 Class A common shares and 11,435,244 Class B common shares were issued. The fees were paid on October 27, 2009. See Note 8 in Item 1 of Part I of this report for more details concerning the Rights Offering.

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.

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.

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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 review of the loss reserves of our Reinsurance Operations was performed by an independent actuary in the third quarter of 2009. For our Insurance Operations, an independent actuary performed a peer review of our internal actuary recommended reserves.

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.

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.

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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.

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.

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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.

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Management’s best estimate at September 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 $1,340.6 million and $764.2 million, respectively, as of September 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 September 30, 2009 is as follows:

	Gross Reserves
(Dollars in thousands)	Case		IBNR (1)		Total
Insurance Operations:
Penn-America	$	179,127	$	323,760	$	502,887
United National		204,505		448,855		653,360
Diamond State		52,314		92,576		144,890
Total Insurance Operations		435,946		865,191		1,301,137
Reinsurance Operations:
Wind River Reinsurance		12,987		26,470		39,457
Total	$	448,933	$	891,661	$	1,340,594

	Net Reserves (2)
(Dollars in thousands)	Case		IBNR (1)		Total
Insurance Operations:
Penn-America	$	153,770	$	266,444	$	420,214
United National		69,854		143,271		213,125
Diamond State		37,656		64,427		102,083
Total Insurance Operations		261,280		474,142		735,422
Reinsurance Operations:
Wind River Reinsurance		5,426		23,360		28,786
Total	$	266,706	$	497,502	$	764,208

(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 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).

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.

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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 $135.2 million for claims occurring during the nine months ended September 30, 2009:

			Severity Change
(Dollars in thousands)			-10%			-5%			0%			5%			10%
Frequency Change	-5	%	$	(19,607	)	$	(13,184	)	$	(6,761	)	$	(338	)	$	6,085
	-3	%		(17,173	)		(10,615	)		(4,057	)		2,502			9,060
	-2	%		(15,956	)		(9,330	)		(2,704	)		3,921			10,547
	-1	%		(14,739	)		(8,046	)		(1,352	)		5,341			12,035
	0	%		(13,522	)		(6,761	)		—			6,761			13,522
	1	%		(12,305	)		(5,477	)		1,352			8,181			15,010
	2	%		(11,088	)		(4,192	)		2,704			9,601			16,497
	3	%		(9,871	)		(2,907	)		4,057			11,021			17,985
	5	%		(7,437	)		(338	)		6,761			13,860			20,960

Our net reserves for losses and loss expenses of $764.2 million as of September 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 September 30, 2009, our reinsurance receivables were $577.8 million, net of an allowance for uncollectible reinsurance receivables of $13.2 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.

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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 cash flow projection testing 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.

Under prior guidance, 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 new guidance that amends the existing impairment model for debt securities only. This new guidance 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 September 30, 2009 and December 31, 2008, and for other than temporary losses that we recorded for the quarters and nine months ended September 30, 2009 and 2008, please see Note 2 to the consolidated financial statements in Item 1 of Part I of this report.

Fair Value Measurements

We categorize our assets that are accounted for at fair value in the consolidated statements into a fair value hierarchy. 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.

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UNITED AMERICA INDEMNITY, LTD.

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

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 September 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. 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 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.

During the nine 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 apply a more likely than not recognition threshold for all tax uncertainties, only allowing 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 our tax uncertainties.

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UNITED AMERICA INDEMNITY, LTD.

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.

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

	Quarter Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2009			2008			2009			2008
Insurance Operations premiums written:
Gross premiums written	$	67,368		$	92,458		$	207,675		$	280,605
Ceded premiums written		12,858			13,319			38,905			36,627
Net premiums written	$	54,510		$	79,139		$	168,770		$	243,978
Reinsurance Operations premiums written:
Gross premiums written	$	8,438		$	6,572		$	58,799		$	21,805
Ceded premiums written		16			6,005			546			18,904
Net premiums written	$	8,422		$	567		$	58,253		$	2,901
Revenues:(1)
Insurance Operations	$	58,971		$	87,800		$	194,137		$	295,923
Reinsurance Operations		13,922			1,711			32,028			7,318
Total revenues	$	72,893		$	89,511		$	226,165		$	303,241
Expenses:(2)
Insurance Operations	$	57,320	(3)	$	106,784	(3)	$	195,991	(4)	$	331,034	(4)
Reinsurance Operations(5)		9,131			2,514			23,033			14,865
Total expenses	$	66,451		$	109,298		$	219,024		$	345,899
Income (loss) from segments:
Insurance Operations	$	1,651		$	(18,984	)	$	(1,854	)	$	(35,111	)
Reinsurance Operations		4,791			(803	)		8,995			(7,547	)
Total income (loss) from segments	$	6,442		$	(19,787	)	$	7,141		$	(42,658	)
Insurance combined ratio analysis:(6)
Insurance Operations
Loss ratio		56.4			84.8			59.5			76.4
Expense ratio		40.7			36.9			41.4			35.4
Combined ratio		97.1			121.7			100.9			111.8
Reinsurance Operations
Loss ratio		40.2			102.4			47.1			140.1
Expense ratio		25.4			44.6			24.8			63.0
Combined ratio		65.6			147.0			71.9			203.1
Consolidated
Loss ratio		53.4			85.1			57.8			78.0
Expense ratio		37.8			37.1			39.1			36.1
Combined ratio		91.2			122.2			96.9			114.1

(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 $317 and $443 related to cessions from our U.S. Insurance Companies to Wind River Reinsurance for the quarters ended September 30, 2009 and 2008, respectively.
(4)	Includes excise tax of $1,038 and $1,484 related to cessions from our U.S. Insurance Companies to Wind River Reinsurance for the nine months ended September 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.

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UNITED AMERICA INDEMNITY, LTD.

Results of Operations

All percentage changes included in the text below have been calculated using the corresponding amounts from the applicable tables.

Quarter Ended September 30, 2009 Compared with the Quarter Ended September 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 September 30,						Increase / (Decrease)
(Dollars in thousands)	2009			2008			$			%
Gross premiums written:
Penn-America	$	31,687		$	44,321		$	(12,634	)		-28.5	%
United National		14,446			20,927			(6,481	)		-31.0	%
Diamond State		21,235			27,210			(5,975	)		-22.0	%
Total	$	67,368		$	92,458		$	(25,090	)		-27.1	%
Net premiums written:
Penn-America	$	25,016		$	40,988		$	(15,972	)		-39.0	%
United National		11,433			17,076			(5,643	)		-33.0	%
Diamond State		18,061			21,075			(3,014	)		-14.3	%
Total	$	54,510		$	79,139		$	(24,629	)		-31.1	%
Net premiums earned:
Penn-America	$	29,235		$	46,340		$	(17,105	)		-36.9	%
United National		12,756			22,668			(9,912	)		-43.7	%
Diamond State		16,980			18,792			(1,812	)		-9.6	%
Total		58,971			87,800		$	(28,829	)		-32.8	%
Losses and expenses:
Net losses and loss adjustment expenses		33,292			74,383			(41,091	)		-55.2	%
Acquisition costs and other underwriting expenses(1)		24,028			32,401			(8,373	)		-25.8	%
Income (loss) from underwriting	$	1,651		$	(18,984	)	$	20,635		NA
Underwriting Ratios:
Loss ratio:
Current accident year		59.2			80.0			(20.8	)
Prior accident year		(2.8	)		4.8			(7.6	)
Calendar year		56.4			84.8			(28.4	)
Expense ratio		40.7			36.9			3.8
Combined ratio		97.1			121.7			(24.6	)

(1) Includes excise tax of $317 and $443 related to cessions from our U.S. Insurance Companies to Wind River Reinsurance for the quarters ended September 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 $67.4 million for the quarter ended September 30, 2009, compared with $92.5 million for the quarter ended September 30, 2008, a decrease of $25.1 million or 27.1%.

• Penn-America gross premiums written were $31.7 million for the quarter ended September 30, 2009, compared with $44.3 million for the quarter ended September 30, 2008, a decrease of $12.6 million, or 28.5%. 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 $9.4 million from other market factors.

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UNITED AMERICA INDEMNITY, LTD.

• United National gross premiums written were $14.4 million for the quarter ended September 30, 2009, compared with $20.9 million for the quarter ended September 30, 2008, a decrease of $6.5 million, or 31.0%. The decrease was primarily due to a reduction of $4.0 million due to terminations of business that did not meet our profitability requirements and a reduction of $2.5 million from other market factors.

• Diamond State gross premiums written were $21.2 million for the quarter ended September 30, 2009, compared with $27.2 million for the quarter ended September 30, 2008, a decrease of $6.0 million, or 22.0%. The decrease was primarily due to a reduction of $0.7 million due to terminations of business that did not meet our profitability requirements and a reduction of $5.3 million from other market factors.

Net premiums written, which equal gross premiums written less ceded premiums written, were $54.5 million for the quarter ended September 30, 2009, compared with $79.1 million for the quarter ended September 30, 2008, a decrease of $24.6 million or 31.1%. 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 September 30, 2009 and 85.6% for the quarter ended September 30, 2008, a decline of 4.7 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 $59.0 million for the quarter ended September 30, 2009, compared with $87.8 million for the quarter ended September 30, 2008, a decrease of $28.8 million or 32.8%. The decrease was primarily due to the reduction of gross premiums written noted above. Property net premiums earned for the quarters ended September 30, 2009 and 2008 were $24.5 million and $32.4 million, respectively. Casualty net premiums earned for the quarters ended September 30, 2009 and 2008 were $34.5 million and $55.4 million, respectively.

Net Losses and Loss Adjustment Expenses

The loss ratio for our Insurance Operations was 56.4% for the quarter ended September 30, 2009 compared with 84.8% for the quarter ended September 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 7.6 points resulting from a reduction of net losses and loss adjustment expenses for prior accident years of $1.6 million in the quarter ended September 30, 2009 and an increase of net losses and loss adjustment expenses for prior accident years of $4.2 million in the quarter ended September 30, 2008:

• In 2009, we reduced our prior accident year loss reserves by $2.0 million and increased our allowance for uncollectible reinsurance by $0.4 million, which reduced our loss ratio by 2.8 points. The loss reserves reduction of $2.0 million primarily consisted of a $2.7 million reduction in our general liability lines, a $0.2 million reduction in our property lines, and a $0.4 million reduction in our umbrella lines, offset by a $1.3 million increase in our professional lines. The reduction in the general liability lines consisted of net reductions of $5.1 million related to accident years 2005 and prior, offset by increases of $2.4 million related to accident years 2006 through 2008. The reduction in the property lines consisted of net reductions primarily related to accident years 2007 and prior. The reduction in the umbrella lines related to accident years 2003 and 2001. The increase in the professional lines primarily consisted of increases of $1.6 million related to accident years 2004 through 2008, offset by net reductions of $0.3 million related to accident years 2003 and prior.

• In 2008, we reduced our prior accident year loss reserves by $1.5 million and increased our allowance for uncollectible reinsurance by $5.7 million, which increased our loss ratio by 4.8 points. The loss reserves reduction of $1.5 million consisted of reductions of $3.5 million in our general liability lines and $0.2 million in our property lines, offset by an increase of $2.2 million in our professional lines. The reduction in the general liability lines consisted of reductions of $8.6 million primarily related to accident years 2005 and prior, offset by increases of $5.1 million related to accident years 2006 and 2007. The reduction in the property lines and increase to the professional liability lines are primarily related to accident years 2006 and 2007.

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UNITED AMERICA INDEMNITY, LTD.

The current accident year loss ratio decreased 20.8 points in the quarter ended September 30, 2009. The property and casualty loss ratios both decreased:

• The current accident year property loss ratio decreased 48.2 points from 97.5% in the quarter ended September 30, 2008 to 49.3% in the quarter ended September 30, 2009, which consists of a 4.5 point decrease in the non-catastrophe loss ratio from 49.5% in the quarter ended September 30, 2008 to 45.0% in the quarter ended September 30, 2009 and a 43.7 point decrease in the catastrophe loss ratio from 48.0% in the quarter ended September 30, 2008 to 4.3% in the quarter ended September 30, 2009. The decrease in the non-catastrophe loss ratio is primarily due to lower severity from non-catastrophe weather related losses and fire losses. Catastrophe losses were $1.0 million and $15.5 million for the quarters ended September 30, 2009 and 2008, respectively. Property net premiums earned for the quarters ended September 30, 2009 and 2008 were $24.5 million and $32.4 million, respectively.

• The current accident year casualty loss ratio decreased 3.4 points from 69.7% in the quarter ended September 30, 2008 to 66.3% in the quarter ended September 30, 2009 primarily due to changes in our mix of business. Casualty net premiums earned for the quarters ended September 30, 2009 and 2008 were $34.5 million and $55.4 million, respectively.

Net losses and loss adjustment expenses were $33.3 million for the quarter ended September 30, 2009, compared with $74.4 million for the quarter ended September 30, 2008, a decrease of $41.1 million or 55.2%. Excluding the $1.6 million reduction of net losses and loss adjustment expenses for prior accident years in the quarter ended September 30, 2009 and the $4.2 million increase of net losses and loss adjustment expenses for prior accident years in the quarter ended September 30, 2008, the current accident year net losses and loss adjustment expenses were $34.9 million and $70.2 million for the quarters ended September 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 $24.0 million for the quarter ended September 30, 2009, compared with $32.4 million for the quarter ended September 30, 2008, a decrease of $8.4 million or 25.8%. The decrease is due to a $7.5 million decrease in acquisition costs and a $0.8 million decrease 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 decrease in other underwriting expenses is primarily due to a decrease in total compensation expenses and other expenses, offset by an increase in infrastructure costs related to new product development, information technology upgrades, and additional office locations.

Expense and Combined Ratios

The expense ratio for our Insurance Operations was 40.7% for the quarter ended September 30, 2009, compared with 36.9% for the quarter ended September 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 and the incurrence of infrastructure costs noted above.

The combined ratio for our Insurance Operations was 97.1% for the quarter ended September 30, 2009, compared with 121.7% for the quarter ended September 30, 2008. The combined ratio is a non-GAAP financial measure and is the sum of our loss and expense ratios. Excluding the $1.6 million reduction of net losses and loss adjustment expenses for prior accident years in the quarter ended September 30, 2009 and the $4.2 million increase of net losses and loss adjustment expenses for prior accident years in the quarter ended September 30, 2008, the combined ratio decreased from 116.9% for the quarter ended September 30, 2008 to 99.9% for the quarter ended September 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.

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UNITED AMERICA INDEMNITY, LTD.

Income (Loss) from underwriting

The factors described above resulted in income from underwriting for our Insurance Operations of $1.7 million for the quarter ended September 30, 2009 compared to a loss from underwriting of $19.0 million for the quarter ended September 30, 2008.

Reinsurance Operations

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

	Quarter Ended September 30,					Increase / (Decrease)
(Dollars in thousands)	2009		2008			$			%
Gross premiums written	$	8,438	$	6,572		$	1,866			28.4	%
Net premiums written	$	8,422	$	567		$	7,855			1,385.4	%
Net premiums earned	$	13,922	$	1,711		$	12,211			713.7	%
Losses and expenses:
Net losses and loss adjustment expenses		5,595		1,751			3,844			219.5	%
Acquisition costs and other underwriting expenses		3,536		763			2,773			363.4	%
Income (loss) from underwriting	$	4,791	$	(803	)	$	5,594		NA
Underwriting Ratios:
Loss ratio:
Current accident year		40.2		100.4			(60.2	)
Prior accident year		—		2.0			(2.0	)
Calendar year loss ratio		40.2		102.4			(62.2	)
Expense ratio		25.4		44.6			(19.2	)
Combined ratio		65.6		147.0			(81.4	)

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 $8.4 million for the quarter ended September 30, 2009, compared with $6.6 million for the quarter ended September 30, 2008, an increase of $1.8 million or 28.4%. 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 $8.4 million for the quarter ended September 30, 2009, compared with $0.6 million for the quarter ended September 30, 2008, an increase of $7.8 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 99.8% for the quarter ended September 30, 2009 and 8.6% for the quarter ended September 30, 2008, an increase of 91.2 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 $13.9 million for the quarter ended September 30, 2009, compared with $1.7 million for the quarter ended September 30, 2008, an increase of $12.2 million or 713.7%. The increase was primarily due to the increase of gross premiums written noted above. Property net premiums earned for the quarters ended September 30, 2009 and 2008 were $7.9 million and $0.07 million, respectively. Casualty net premiums earned for the quarters ended September 30, 2009 and 2008 were $6.0 million and $1.6 million, respectively.

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UNITED AMERICA INDEMNITY, LTD.

Net Losses and Loss Adjustment Expenses

The loss ratio for our Reinsurance Operations was 40.2% for the quarter ended September 30, 2009 compared with 102.4% for the quarter ended September 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 a reduction of 2.0 points resulting from an increase of net losses and loss adjustment expenses for prior accident years of $0.03 million in the quarter ended September 30, 2008:

• In 2008, we increased our prior accident year loss reserves by $0.03 million, which increased our loss ratio by 2.0 points. This increase primarily consisted of increases of $0.08 million in our property lines related to accident year 2007, offset by reductions of $0.05 million in our professional lines related to accident year 2007.

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

The current accident year loss ratio decreased 60.2 points from 100.4% in 2008 to 40.2% 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 includes a catastrophe book of business that has performed very well during 2009.

Net losses and loss adjustment expenses were $5.6 million for the quarter ended September 30, 2009, compared with $1.75 million for the quarter ended September 30, 2008, an increase of $3.85 million or 219.5%. Excluding the $0.03 million increase of net losses and loss adjustment expenses for prior accident years in the quarter ended September 30, 2008, the current accident year net losses and loss adjustment expenses increased from $1.72 million for the quarter ended September 30, 2008 to $5.6 million for the quarter ended September 30, 2009. This increase is primarily attributable to an increase in net premiums earned, which increased from $1.7 million in 2008 to $13.9 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 $3.5 million for the quarter ended September 30, 2009, compared with $0.8 million for the quarter ended September 30, 2008, an increase of $2.7 million or 363.4%. The increase is due to a $2.8 million increase in acquisition costs offset by a $0.1 million decrease 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 decrease in other underwriting expenses is primarily due to a decrease in total compensation expenses, offset by an increase in property and office costs and professional services expenses.

Expense and Combined Ratios

The expense ratio for our Reinsurance Operations was 25.4% for the quarter ended September 30, 2009, compared with 44.6% for the quarter ended September 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 65.6% for the quarter ended September 30, 2009, compared with 147.0% for the quarter ended September 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 $0.03 million increase of prior accident year loss reserves in the quarter ended September 30, 2008, the combined ratio decreased from 145.0% for the quarter ended September 30, 2008 to 65.6% for the quarter ended September 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.

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Income (Loss) from underwriting

The factors described above resulted in income from underwriting for our Reinsurance Operations of $4.8 million for the quarter ended September 30, 2009, compared with loss from underwriting of $0.8 million for the quarter ended September 30, 2008.

Unallocated Corporate Items

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

	Quarter Ended September 30,						Increase / (Decrease)
(Dollars in thousands)	2009			2008			$			%
Net investment income	$	15,267		$	16,627		$	(1,360	)		-8.2	%
Net realized investment gains (losses)		6,613			(20,510	)		27,123		NA
Corporate and other operating expenses		(4,676	)		(3,189	)		(1,487	)		46.6	%
Interest expense		(1,776	)		(1,963	)		187			-9.5	%
Income tax benefit		2,673			10,312			(7,639	)		-74.1	%
Equity in net income (loss) of partnership, net of tax		2,809			(1,088	)		3,897		NA

Net Investment Income

Net investment income, which is gross investment income less investment expenses, was $15.3 million for the quarter ended September 30, 2009, compared with $16.6 million for the quarter ended September 30, 2008, a decrease of $1.3 million or 8.2%.

• Gross investment income, excluding realized gains and losses, was $16.4 million for the quarter ended September 30, 2009, compared with $17.9 million for the quarter ended September 30, 2008, a decrease of $1.5 million or 8.4%. The decrease was primarily due to reductions in yields on both short-term investments and the common stock portfolio. This decrease was partially offset by investing approximately $100.0 million of cash in higher yielding bonds during the quarter.

• Investment expenses were $1.1 million for the quarter ended September 30, 2009, compared with $1.2 million for the quarter ended September 30, 2008, a decrease of $0.1 million or 10.8%.

The average duration of our bonds was 2.8 years as of September 30, 2009, compared with 3.9 years as of September 30, 2008. Including cash and short-term investments, the average duration of our investments as of September 30, 2009 and 2008 was 2.4 years and 3.1 years, respectively. At September 30, 2009, our embedded book yield on our bonds, not including cash, was 4.72% compared with 4.98% at September 30, 2008. The embedded book yield on the $212.0 million of municipal bonds in our portfolio was 3.97% at September 30, 2009.

Net Realized Investment Gains (Losses)

Net realized investment gains were $6.6 million for the quarter ended September 30, 2009, compared with net realized investment losses of $20.5 million for the quarter ended September 30, 2008. The net realized investment gains for the quarter ended September 30, 2009 consist primarily of net gains of $4.7 million relative to our bond and equity portfolios and net gains of $4.0 million relative to market value changes in our convertible portfolio, offset by other than temporary impairments of $2.1 million relative to our bond portfolio. The net realized investment losses for the quarter ended September 30, 2008 consist primarily of net losses of $1.6 million relative to market value declines in our convertible portfolios, other than temporary impairment losses of $6.1 million relative to our equity and bond portfolios, net losses of $5.9 million from the sale of Fannie Mae and Freddie Mac preferred stock, and net losses of $6.8 million from the sale of Lehman Brothers corporate bonds.

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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 September 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 $4.7 million for the quarter ended September 30, 2009, compared with $3.2 million for the quarter ended September 30, 2008, an increase of $1.5 million or 46.6%. The increase was primarily due to the incurrence of infrastructure costs related to information technology upgrades, additional office locations, and redomestication, offset by reductions in compensation and related benefits costs, property and office costs, and other expenses.

Interest Expense

Interest expense was $1.8 million and $2.0 million for the quarter ended September 30, 2009 and 2008, respectively, a decrease of $0.2 million or 9.5% 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 Benefit

Income tax benefit was $2.7 million and $10.3 million for the quarters ended September 30, 2009 and 2008, respectively, a decrease of $7.6 million or 74.1%. 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 September 30, 2009 and December 31, 2008 was $4.1 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, $17.3 million were realized in 2009, net of capital gains of $0.6 million. There was also a net operating loss as of September 30, 2009 of $11.7 million. As a result, the AMT credit carryforward increased by $3.3 million.

Equity in Net Income (Loss) of Partnerships

Equity in net income of partnerships, net of tax was $2.8 million for the quarter ended September 30, 2009, compared with equity in net loss of partnerships of $1.1 million for the quarter ended September 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 $27.3 million for the quarter ended September 30, 2009, compared to net loss of $19.6 million for the quarter ended September 30, 2008, an increase of $46.9 million.

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Nine Months Ended September 30, 2009 Compared with the Nine Months Ended September 30, 2008

Insurance Operations

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

	Nine Months Ended September 30,						Increase / (Decrease)
(Dollars in thousands)	2009			2008			$			%
Gross premiums written:
Penn-America	$	98,282		$	137,669		$	(39,387	)		-28.6	%
United National		46,373			71,166			(24,793	)		-34.8	%
Diamond State		63,020			71,770			(8,750	)		-12.2	%
Total	$	207,675		$	280,605		$	(72,930	)		-26.0	%
Net premiums written:
Penn-America	$	79,673		$	125,902		$	(46,229	)		-36.7	%
United National		37,072			60,147			(23,075	)		-38.4	%
Diamond State		52,025			57,929			(5,904	)		-10.2	%
Total	$	168,770		$	243,978		$	(75,208	)		-30.8	%
Net premiums earned:
Penn-America	$	98,936		$	159,357		$	(60,421	)		-37.9	%
United National		44,300			72,826			(28,526	)		-39.2	%
Diamond State		50,901			63,740			(12,839	)		-20.1	%
Total		194,137			295,923			(101,786	)		-34.4	%
Losses and expenses:
Net losses and loss adjustment expenses		115,583			226,175			(110,592	)		-48.9	%
Acquisition costs and other underwriting expenses(1)		80,408			104,859			(24,451	)		-23.3	%
Income (loss) from underwriting	$	(1,854	)	$	(35,111	)	$	33,257			-94.7	%
Underwriting Ratios:
Loss ratio:
Current accident year		61.9			70.1			(8.2	)
Prior accident year		(2.4	)		6.3			(8.7	)
Calendar year		59.5			76.4			(16.9	)
Expense ratio		41.4			35.4			6.0
Combined ratio		100.9			111.8			(10.9	)

(1) Includes excise tax of $1,038 and $1,484 related to cessions from our U.S. Insurance Companies to Wind River Reinsurance for the nine months ended September 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 $207.7 million for the nine months ended September 30, 2009, compared with $280.6 million for the nine months ended September 30, 2008, a decrease of $72.9 million or 26.0%.

• Penn-America gross premiums written were $98.3 million for the nine months ended September 30, 2009, compared with $137.7 million for the nine months ended September 30, 2008, a decrease of $39.4 million, or 28.6%. The decrease was primarily due to a reduction of $8.7 million due to terminations of business that did not meet our profitability requirements and a reduction of $30.7 million from other market factors.

• United National gross premiums written were $46.4 million for the nine months ended September 30, 2009, compared with $71.2 million for the nine months ended September 30, 2008, a decrease of $24.8 million, or 34.8%. The decrease was primarily due to a reduction of $18.5 million due to terminations of business that did not meet our profitability requirements and a reduction of $6.3 million from other market factors.

• Diamond State gross premiums written were $63.0 million for the nine months ended September 30, 2009, compared with $71.8 million for the nine months ended September 30, 2008, a decrease of $8.8 million, or 12.2%. The decrease was primarily due to a reduction of $4.5 million due to terminations of business that did not meet our profitability requirements and a reduction of $4.3 million from other market factors.

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Net premiums written, which equal gross premiums written less ceded premiums written, were $168.8 million for the nine months ended September 30, 2009, compared with $244.0 million for the nine months ended September 30, 2008, a decrease of $75.2 million or 30.8%. 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 81.3% for the nine months ended September 30, 2009 and 86.9% for the nine months ended September 30, 2008, a decline of 5.6 points, which was primarily due to $8.9 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 $194.1 million for the nine months ended September 30, 2009, compared with $295.9 million for the nine months ended September 30, 2008, a decrease of $101.8 million or 34.4%. The decrease was primarily due to the reduction of gross premiums written noted above. Property net premiums earned for the nine months ended September 30, 2009 and 2008 were $79.8 million and $107.8 million, respectively. Casualty net premiums earned for the nine months ended September 30, 2009 and 2008 were $114.3 million and $188.1 million, respectively.

Net Losses and Loss Adjustment Expenses

The loss ratio for our Insurance Operations was 59.5% for the nine months ended September 30, 2009 compared with 76.4% for the nine months ended September 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 8.7 points resulting from a reduction of net losses and loss adjustment expenses for prior accident years of $4.6 million in the nine months ended September 30, 2009 and an increase of net losses and loss adjustment expenses for prior accident years of $18.8 million in the nine months ended September 30, 2008:

• In 2009, we reduced our prior accident year loss reserves by $4.2 million and reduced our allowance for uncollectible reinsurance by $0.4 million, which reduced our loss ratio by 2.4 points. The reduction of our prior accident year loss reserves primarily consisted of a $5.2 million reduction in our general liability lines, a $2.4 million reduction in our property lines, and a $0.4 million reduction in our umbrella lines, offset by a $3.8 million increase in our professional lines. The reduction in the general liability lines primarily consisted of net reductions of $9.7 million related to accident years 2006 and prior, offset by increase of $4.5 million to accident years 2007 and 2008. The reduction in the property lines primarily consisted of reductions related to accident year 2007 and 2008. The reduction in the umbrella lines primarily related to accident years 2003 and 2001. The increase to the professional lines primarily related to increases of $6.1 million related to accident years 2007 and 2008, offset by net reductions of $2.3 million primarily to accident years 2005 and prior.

• In 2008, we increased our prior accident year loss reserves by $13.4 million and increased our allowance for uncollectible reinsurance by $5.3 million, which increased our loss ratio by 6.3 points. The increase of our prior accident year loss reserves of $13.4 million primarily consisted of increases of approximately $14.0 million and $4.8 million in our general liability lines and professional lines, respectively, offset by reductions of $4.5 million and $0.9 million in our property lines and umbrella lines, respectively. The increase to the general liability lines primarily related to accident years 2006, 2007, and 2001 and prior. The increase to the professional liability lines primarily related to increases of $7.2 million related to accident years 2006 and 2007, offset by reductions of $2.3 million related to accident years 2005 and prior. The reduction in the property lines primarily related to accident years 2006 and 2007. The reduction in the umbrella lines primarily related to accident years 2004 and prior.

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The current accident year loss ratio decreased 8.2 points in the nine months ended September 30, 2009 primarily due to a decrease in both the property and casualty loss ratios:

• The current accident year property loss ratio decreased 18.9 points from 73.7% in the nine months ended September 30, 2008 to 54.8% in the nine months ended September 30, 2009, which consists of a 14.2 point decrease in the catastrophe loss ratio from 18.7% in the nine months ended September 30, 2008 to 4.5% in the nine months ended September 30, 2009 and a 4.7 point decrease in the non-catastrophe loss ratio from 55.0% in the nine months ended September 30, 2008 to 50.3% in the nine months ended September 30, 2009. Catastrophe losses were $3.6 million and $20.1 million in the nine months ended September 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 nine months ended September 30, 2009 and 2008 were $79.8 million and $107.8 million, respectively.

• The current accident year casualty loss ratio decreased 1.1 points from 68.0% in the nine months ended September 30, 2008 to 66.9% in the nine months ended September 30, 2009 primarily due to changes in our mix of business. Casualty net premiums earned for the nine months ended September 30, 2009 and 2008 were $114.3 million and $188.1 million, respectively.

Net losses and loss adjustment expenses were $115.6 million for the nine months ended September 30, 2009, compared with $226.2 million for the nine months ended September 30, 2008, a decrease of $110.6 million or 48.9%. Excluding the $4.6 million reduction of net losses and loss adjustment expenses for prior accident years in the nine months ended September 30, 2009 and the $18.8 million increase of net losses and loss adjustment expenses for prior accident years in the nine months ended September 30, 2008, the current accident year net losses and loss adjustment expenses were $120.2 million and $207.4 million for the nine months ended September 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 $80.4 million for the nine months ended September 30, 2009, compared with $104.9 million for the nine months ended September 30, 2008, a decrease of $24.5 million or 23.3%. The decrease is due to a $26.1 million decrease in acquisition costs offset by a $1.7 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 and the incurrence of infrastructure costs related to new product development, information technology upgrades, and additional office locations, offset by reductions in professional services and other expenses.

Expense and Combined Ratios

The expense ratio for our Insurance Operations was 41.4% for the nine months ended September 30, 2009, compared with 35.4% for the nine months ended September 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 and the incurrence of infrastructure costs noted above.

The combined ratio for our Insurance Operations was 100.9% for the nine months ended September 30, 2009, compared with 111.8% for the nine months ended September 30, 2008. The combined ratio is a non-GAAP financial measure and is the sum of our loss and expense ratios. Excluding the $4.6 million reduction of net losses and loss adjustment expenses for prior accident years in the nine months ended September 30, 2009 and the $18.8 million increase of net losses and loss adjustment expenses for prior accident years in the nine months ended September 30, 2008, the combined ratio decreased from 105.5% for the nine months ended September 30, 2008 to 103.3% for the nine months ended September 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.

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Loss from underwriting

The factors described above resulted in loss from underwriting for our Insurance Operations of $1.8 million and $35.1 million for the nine months ended September 30, 2009 and 2008, respectively, a decrease in the loss of $33.3 million or 94.7%.

Reinsurance Operations

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

	Nine Months Ended September 30,					Increase / (Decrease)
(Dollars in thousands)	2009		2008			$			%
Gross premiums written	$	58,799	$	21,805		$	36,994			169.7	%
Net premiums written	$	58,253	$	2,901		$	55,352			1,908.0	%
Net premiums earned	$	32,028	$	7,318		$	24,710			337.7	%
Losses and expenses:
Net losses and loss adjustment expenses		15,091		10,253			4,838			47.2	%
Acquisition costs and other underwriting expenses		7,942		4,612			3,330			72.2	%
Income (loss) from underwriting	$	8,995	$	(7,547	)	$	16,542		NA
Underwriting Ratios:
Loss ratio:
Current accident year		47.0		112.7			(65.7	)
Prior accident year		0.1		27.4			(27.3	)
Calendar year loss ratio		47.1		140.1			(93.0	)
Expense ratio		24.8		63.0			(38.2	)
Combined ratio		71.9		203.1			(131.2	)

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 $58.8 million for the nine months ended September 30, 2009, compared with $21.8 million for the nine months ended September 30, 2008, an increase of $37.0 million or 169.7%. 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 $58.3 million for the nine months ended September 30, 2009, compared with $2.9 million for the nine months ended September 30, 2008, an increase of $55.4 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 99.1% for the nine months ended September 30, 2009 and 13.3% for the nine months ended September 30, 2008, an increase of 85.8 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 $32.0 million for the nine months ended September 30, 2009, compared with $7.3 million for the nine months ended September 30, 2008, an increase of $24.7 million or 337.7%. The increase was primarily due to the increase of gross premiums written noted above. Property net premiums earned for the nine months ended September 30, 2009 and 2008 were $16.6 million and $0.4 million, respectively. Casualty net premiums earned for the nine months ended September 30, 2009 and 2008 were $15.4 million and $6.9 million, respectively.

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Net Losses and Loss Adjustment Expenses

The loss ratio for our Reinsurance Operations was 47.1% for the nine months ended September 30, 2009 compared with 140.1% for the nine months ended September 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 a reduction of 27.3 points resulting from an increase of net losses and loss adjustment expenses for prior accident years of $0.03 million in the nine months ended September 30, 2009 and an increase of net losses and loss adjustment expenses for prior accident years of $2.0 million in the nine months ended September 30, 2008:

• In 2009, we increased our prior accident year loss reserves by $0.03 million, which primarily consisted of increases in our general liability lines. The increase to the general liability lines were related to accident years 2007 and 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 65.7 points from 112.7% in 2008 to 47.0% 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 includes a catastrophe book of business that has performed very well during 2009.

Net losses and loss adjustment expenses were $15.1 million for the nine months ended September 30, 2009, compared with $10.3 million for the nine months ended September 30, 2008, an increase of $4.8 million or 47.2%. Excluding the $0.03 million and $2.0 million increases of net losses and loss adjustment expenses for prior accident years in the nine months ended September 30, 2009 and 2008, respectively, the current accident year net losses and loss adjustment expenses increased from $8.2 million for the nine months ended September 30, 2008 to $15.0 million for the nine months ended September 30, 2009. This increase is primarily attributable to an increase in net premiums earned, which increased from $7.3 million in 2008 to $32.0 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 $7.9 million for the nine months ended September 30, 2009, compared with $4.6 million for the nine months ended September 30, 2008, an increase of $3.3 million or 72.2%. The increase is primarily due to a $3.5 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 nine months ended September 30, 2009 compared to the prior year.

Expense and Combined Ratios

The expense ratio for our Reinsurance Operations was 24.8% for the nine months ended September 30, 2009, compared with 63.0% for the nine months ended September 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.

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UNITED AMERICA INDEMNITY, LTD.

The combined ratio for our Reinsurance Operations was 71.9% for the nine months ended September 30, 2009, compared with 203.1% for the nine months ended September 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 nine months ended September 30, 2009 and 2008, respectively, the combined ratio decreased from 175.7% for the nine months ended September 30, 2008 to 71.8% for the nine months ended September 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 $9.0 million for the nine months ended September 30, 2009, compared with a loss from underwriting of $7.5 million for the nine months ended September 30, 2008.

Unallocated Corporate Items

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

	Nine Months Ended September 30,						Increase / (Decrease)
(Dollars in thousands)	2009			2008			$			%
Net investment income	$	54,049		$	51,485		$	2,564			5.0	%
Net realized investment gains (losses)		3,415			(24,060	)		27,475		NA
Corporate and other operating expenses		(12,314	)		(9,403	)		(2,911	)		31.0	%
Interest expense		(5,462	)		(6,690	)		1,228			18.4	%
Income tax (expense) benefit		(808	)		11,754			(12,562	)	NA
Equity in net income (loss) of partnership, net of tax		4,742			(1,557	)		6,299		NA

Net Investment Income

Net investment income, which is gross investment income less investment expenses, was $54.0 million for the nine months ended September 30, 2009, compared with $51.5 million for the nine months ended September 30, 2008, an increase of $2.5 million or 5.0%.

• Gross investment income, excluding realized gains and losses, was $57.5 million for the nine months ended September 30, 2009, compared with $55.5 million for the nine months ended September 30, 2008, an increase of $2.0 million or 3.5%. 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 interest rates. Our limited partnership investments generated gross investment income of $8.6 million for the nine months ended September 30, 2009 due to liquidations of some of those investments. There was no investment income generated by our limited partnership investments for the nine months ended September 30, 2008. Excluding distributions from our limited partnership investments, gross investment income for the nine months ended September 30, 2009 decreased 12.1% compared to the nine months ended September 30, 2008. This decrease is due to reductions in interest rates.

• Investment expenses were $3.4 million for the nine months ended September 30, 2009, compared with $4.0 million for the nine months ended September 30, 2008, a decrease of $0.6 million or 15.0%. 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.

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UNITED AMERICA INDEMNITY, LTD.

Net Realized Investment Gains (Losses)

Net realized investment gains were $3.4 million for the nine months ended September 30, 2009 compared to net realized investment losses of $24.1 million for the nine months ended September 30, 2008. The net realized investment gains for the nine months ended September 30, 2009 consist primarily of net gains of $7.1 million relative to market value changes in our convertible portfolio and net gains of $1.9 million relative to our bond and equity portfolio, offset by other than temporary impairment losses of $5.6 million. The net realized investment losses for the nine months ended September 30, 2008 consist primarily of net losses of $3.5 million relative to market value declines in our convertible portfolios, other than temporary impairment losses of $7.9 million, net losses of $5.9 million from the sale of Fannie Mae and Freddie Mac preferred stock, and net losses of $6.8 million from the sale of Lehman Brothers corporate bonds.

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 nine months ended September 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 $12.3 million and $9.4 million for the nine months ended September 30, 2009 and 2008, respectively, an increase of $2.9 million or 31.0%. The increase was primarily due to and the incurrence of infrastructure costs related to information technology upgrades, additional office locations, and redomestication, offset by reductions in total compensation expenses and property and office costs.

Interest Expense

Interest expense was $5.5 million and $6.7 million for the nine months ended September 30, 2009 and 2008, respectively, a decrease of $1.2 million or 18.4%. 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 $0.8 million for the nine months ended September 30, 2009, compared to a benefit of $11.8 million for the nine months ended September 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 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 $4.7 million for the nine months ended September 30, 2009, compared with equity in net loss of partnerships of $1.6 million for the nine months ended September 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 $50.8 million for the nine months ended September 30, 2009, compared to net loss of $21.1 million for the nine months ended September 30, 2008, respectively.

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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.

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 $91.8 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 September 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 $3.5 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 nine months ended September 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.

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Cash Flows

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

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

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

• the timing of our settlements with our reinsurers; and

• the timing of our loss payments.

Net cash used for operating activities was $19.5 million for the nine months ended September 30, 2009 compared to net cash provided by operating activities of $13.0 million for the nine months ended September 30, 2008. The decrease in operating cash flows of approximately $32.5 million from the prior year was primarily a net result of the following items:

	Nine Months Ended September 30,
	2009			2008			Change
Net premiums collected	$	203,767		$	255,011		$	(51,244	)
Net losses paid		(195,055	)(1)		(173,996	)		(21,059	)
Acquisition costs and other underwriting expenses		(98,904	)		(113,859	)		14,955
Net investment income		59,337			58,349			988
Net federal income taxes recovered (paid)		18,188			(6,330	)		24,518
Interest paid		(6,828	)		(8,467	)		1,639
Other		(36	)		2,254			(2,290	)
Net cash provided by (used for) operating activities	$	(19,531	)	$	12,962		$	(32,493	)

(1) 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 nine months ended September 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.

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Capital Resources

Other than the previously discussed Rights Offering, there have been no significant changes to our capital resources during the quarter or nine months ended September 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.

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.

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An overall investment portfolio strategy of maintaining high liquidity, high quality, and a defensive interest rate posture remained consistent through the third quarter. After rising in the second quarter, U.S. Treasury yields were relatively stable during the third quarter. The majority of fixed income market activity during the quarter was in the risk sectors as spreads continued to compress in response to strong buying interest. New investments were focused on short maturity government guaranteed and high quality corporate credits. In response to strong performance, portfolio allocations to municipal and CMBS securities were reduced during the quarter. These sectors are expected to face challenges going forward due to tight state budgets and declining commercial lease rates. With duration at approximately 2.5 years, the portfolio remains defensively positioned in expectation of rising interest rates as the economy recovers. Overall portfolio quality at the end of the third quarter remained high at AA.

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.

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 September 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 nine months ended September 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.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

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

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.

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

On May 5, 2009, we completed the Rights Offering in which a total of 17,178,421 Class A common shares and 11,435,244 Class B common shares were issued. The issuance of the Class A common shares included 41,588 Class A common shares issued to an affiliate of Fox Paine & Company in a private placement pursuant to Section 4(2) of the Securities Act, as amended. The affiliate of Fox Paine & Company purchased the 41,588 Class A common shares for $3.50 per share, which was the subscription price at which all Class A common shareholders and Class B common shareholders were entitled to purchase additional shares. All other shares issued in the Rights Offering were issued pursuant to a registration statement. We intend to use the net proceeds of $91.8 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.

We allow employees to surrender our Class A common shares as payment for the tax liability incurred upon the vesting of restricted stock that was issued under our Share Incentive Plan. During the quarter ended September 30, 2009, we purchased 17,302 surrendered Class A common shares from our employees for $0.08 million. All Class A common shares purchased from employees by us are held as treasury stock and recorded at cost.

The following table provides information with respect to the Class A common shares that were surrendered or repurchased during the quarter ended September 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)
July 1–31, 2009		17,302	(3)	$	4.51		—	$	—
August 1–31, 2009		—		$	—		—	$	—
September 1–30, 2009		—		$	—		—	$	—
Total		17,302		$	—		—		N/A

(1)	Based on settlement date.
(2)	Approximate dollar value of shares is as of the last date of the applicable month.
(3)	Includes 7,302 shares that were surrendered by employees as payment of taxes withheld on the vesting of restricted stock.

Item 6. Exhibits

3.1+	Amended and Restated Memorandum and Articles of Association of United America Indemnity, Ltd. (effective as of September 30, 2007).
31.1+	Certification of Chief Executive Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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.

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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
November 6, 2009	By:	/s/ Thomas M. McGeehan
Date: November 6, 2009		Thomas M. McGeehan
		Interim Chief Financial Officer (Authorized Signatory and Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description
3.1+	Amended and Restated Memorandum and Articles of Association of United America Indemnity, Ltd. (effective as of September 30, 2007).
31.1+	Certification of Chief Executive Officer pursuant to Rule 13a-14 (a) / 15d-14 (a) of the Securities Exchange of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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.

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