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

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the Fiscal Year Ended December 31, 2008
		For the Fiscal Year Ended December 31, 2009
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the Transition Period From to

000-50511

Commission File Number

United America Indemnity, Ltd.

(Exact name of registrant as specified in its charter)


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

WALKER HOUSE, 87 MARY STREET

KYI — 9002

GEORGE TOWN, GRAND CAYMAN

CAYMAN ISLANDS

(Address of principal executive office including zip code)

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

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


Title of Each Class		Name of Exchange on Which Registered

Common A Common Shares, $0.0001 Par Value		The Nasdaq Stock Market LLC

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o

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

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

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

(Do not check if a smaller reporting company)

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

The aggregate market value of the common equity held by non-affiliates of the registrant, computed by reference to the price of the registrant’s Class A Common shares as of the last business day of the registrant’s most recently completed second fiscal quarter (based on the last reported sale price on the Nasdaq Global Market as of such date), was $~~308~~161,~~206~~824,~~002~~608. Class A common shares held by each executive officer and director and by each person who is known by the registrant to beneficially own 5% or more of the registrant’s outstanding Class A common shares have been excluded in that such persons may be deemed affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of February 25, ~~2009~~2010, the registrant had outstanding 2536,~~053~~525,~~506~~278 Class A Common Shares and 1224,~~687~~122,~~500~~744 Class B Common Shares.

TABLE OF CONTENTS

			~~Page~~		Page
PART I
~~Item 1.~~	Item 1.	~~BUSINESS~~	BUSINESS	3		3
~~Item 1A.~~	Item 1A.	~~RISK FACTORS~~	RISK FACTORS	33		32
~~Item 1B.~~	Item 1B.	~~UNRESOLVED STAFF COMMENTS~~	UNRESOLVED STAFF COMMENTS	44		46
~~Item 2.~~	Item 2.	~~PROPERTIES~~	PROPERTIES	44		46
~~Item 3.~~	Item 3.	~~LEGAL PROCEEDINGS~~	LEGAL PROCEEDINGS	44		46
~~Item 4.~~	Item 4.	~~SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS~~	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	45		47
PART II
~~Item 5.~~	Item 5.	~~MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES~~	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	46		48
~~Item 6.~~	Item 6.	~~SELECTED FINANCIAL DATA~~	SELECTED FINANCIAL DATA	50		51
~~Item 7.~~	Item 7.	~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	52		53
~~Item 7A.~~	Item 7A.	~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	81		83
~~Item 8.~~	Item 8.	~~FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA~~	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	83		86
~~Item 9.~~	Item 9.	~~CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE~~	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	~~142~~		149
~~Item 9A.~~	Item 9A.	~~CONTROLS AND PROCEDURES~~	CONTROLS AND PROCEDURES	~~142~~		149
~~Item 9B.~~	Item 9B.	~~OTHER INFORMATION~~	OTHER INFORMATION	~~142~~		149
PART III
~~Item 10.~~	Item 10.	~~DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE~~	DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE	~~142~~		149
~~Item 11.~~	Item 11.	~~EXECUTIVE COMPENSATION~~	EXECUTIVE COMPENSATION	~~149~~		149
~~Item 12.~~	Item 12.	~~SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER ITEMS~~	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER ITEMS	~~170~~		149
~~Item 13.~~	Item 13.	~~CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE~~	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	~~174~~		150
~~Item 14.~~	Item 14.	~~PRINCIPAL ACCOUNTING FEES AND SERVICES~~	PRINCIPAL ACCOUNTING FEES AND SERVICES	~~176~~		150
PART IV
~~Item 15.~~	Item 15.	~~EXHIBITS AND FINANCIAL STATEMENT SCHEDULES~~	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	~~177~~		151
EX-10.22
EXHIBIT 10.25
EX-10.23
EXHIBIT 10.26
EX-21.1
EXHIBIT 10.27
EX-23.1
EXHIBIT 21.1
EX-31.1
EXHIBIT 23.1
EX-31.2
EXHIBIT 31.1
EX-32.1
EXHIBIT 31.2
EX-32.2
EXHIBIT 32.1
EXHIBIT 32.2

As used in this annual report, unless the context requires otherwise: 1) “United America Indemnity,” “we,” “us,” and “our” refer to United America Indemnity, Ltd., an exempted company incorporated with limited liability under the laws of the Cayman Islands, and its U.S. and Non-U.S. Subsidiaries; 2) our “U.S. Subsidiaries” refers to United America Indemnity Group, Inc., ~~U.N. Holdings Inc., which was dissolved on May 31, 2006, Wind River Investment Corporation, which was dissolved on May 31, 2006,~~ AIS, Emerald Insurance Company, which was dissolved on March 24, 2008, Penn-America Group, Inc., our Insurance Operations and our Agency Operations; 3) our “U.S. Insurance Operations” refers to the insurance and related operations conducted by AIS’ subsidiaries, including American Insurance Adjustment Agency, Inc., 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 ~~Insurance~~ Operations” refers to Wind River Investment Corporation, which was dissolved on May 31, 2006, AIS, American ~~American~~ Insurance Adjustment Agency, Inc., Emerald Insurance Company, which was dissolved on March 24, 2008, the United National ~~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

~~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 September 30, 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 “Agency Operations” refers to the operations of Penn Independent Corporation and its subsidiaries, which were classified as discontinued operations as of September 30, 2006; 12) 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.; 13) our “Reinsurance Operations” refers to the reinsurance and related operations of Wind River Reinsurance; 14) 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.; 15) “United America Indemnity Group” refers to United America Indemnity Group, Inc.; 16) “AIS” refers to American Insurance Service, Inc.; 17) “United National Group” refers to the United National Insurance Companies and Emerald Insurance Company, which was dissolved on March 24, 2008; 18) “Penn-America Group” refers to Penn-America Group, Inc. and the Penn-America Insurance Companies; 19) “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; 20) “United National” refers to our product classification that includes property, general liability, and professional lines products distributed through program administrators with specific binding authority; 21) “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; 22) 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; 23) “Fox Paine & Company” refers to Fox Paine & Company, LLC and affiliated investment funds; 24) “GAAP” refers to accounting principles generally accepted in the United States of America; and 25) “$” or “dollars” refers to U.S. dollars.

PART I


Item 1.	*Business*

Some of the information contained in this Item 1 or set forth elsewhere in this report, including information with respect to our plans and strategy, constitutes forward-looking statements that involve risks and uncertainties. Please see “Cautionary Note Regarding Forward-Looking Statements” at the end of Item 7 of Part II and “Risk Factors” in Item 1A of Part I for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.

Recent Developments

~~On March 4, 2009, we announced a $100.0 million rights~~ ~~offering, fully back-stopped by Fox Paine & Company,~~Redomestication ~~under which we will distribute~~ to ~~holders of record of our~~Ireland Class A and Class B common shares on March 16, 2009 non-transferable rights to subscribe for Class A and Class B common shares. We also announced that our Board of Directors has approved a plan for us to re-domicile from the Cayman Islands to Switzerland. If approved by our shareholders, we expect our re-domestication to be effective during the second or third quarters of 2009.

On February 1716, ~~2009~~2010, we ~~filed~~announced athat ~~universal~~our ~~shelf~~Board of ~~registration~~Directors ~~statement~~has ~~on Form S-3 with~~unanimously ~~the~~approved ~~U.S. Securities~~a ~~and~~plan ~~Exchange~~for ~~Commission~~us ~~covering~~to re-domicile upfrom tothe ~~$300.0 million~~Cayman ofIslands ~~Class A~~to ~~common~~Ireland. ~~shares, preferred~~Our ~~shares,~~shareholders ~~depositary~~will ~~shares, debt securities, warrants~~be asked to ~~purchase~~vote ~~Class A~~in ~~common~~favor ~~shares,~~of ~~preferred~~completing ~~shares~~the orreorganization ~~debt~~proposal ~~securities,~~at ~~stock~~a ~~purchase~~special ~~contracts~~shareholders ~~and~~meeting. ~~stock~~If ~~purchase~~the ~~units.~~proposal is accepted, ~~The~~we ~~filing~~will ~~was~~become ~~made~~a inwholly-owned ~~order~~subsidiary toof ~~provide~~Global usIndemnity plc, ~~with~~an ~~future~~Irish ~~financial flexibility~~company.

InIf the ~~fourth~~move ~~quarter~~to ofIreland ~~2008~~is approved, weour ~~provided~~Class A ~~advance~~common shares ~~notice~~will ofbe ~~our~~exchanged for Global Indemnity plc’s ~~wish~~Class A toordinary ~~liquidate~~shares ~~all~~on ofa two-for-one basis, ~~our~~which ~~investment~~will intrade ~~two~~on ~~limited~~The NASDAQ Global Select Market under ~~partnerships.~~the Inticker ~~January~~symbol ~~2009,~~“GBLI.” weGlobal ~~received~~Indemnity aplc ~~distribution~~will ~~from~~be ~~these~~subject ~~partnerships~~to inU.S. Securities and Exchange Commission reporting requirements, the ~~amount~~mandates of ~~$24~~the U.~~1 million~~S. Sarbanes-Oxley ~~This amount~~Act, ~~represents~~and ~~95%~~the corporate governance rules of ~~the~~Nasdaq. ~~estimated~~Global ~~capital~~Indemnity ~~account~~plc ~~balances~~will report consolidated ~~for~~financial ~~both~~results ~~partnerships~~in asU.S. dollars ofand ~~December~~under U.S. ~~31,~~generally ~~2008~~accepted accounting principles. ~~The~~If ~~final~~required ~~distribution~~by Irish law, audited consolidated annual financial statements prepared in accordance with Irish generally accepted accounting principles will also be ~~received~~made ~~when~~available to shareholders. In addition to shareholder approval, the ~~partnerships’~~move to Ireland is subject ~~audited~~to ~~financial~~an ~~statements~~order ~~for~~from ~~2008~~the ~~are~~Grand ~~finalized~~Court of the Cayman Islands sanctioning the transaction.

~~On December 19, 2008, we and David R. Whiting, the~~ ~~President and Chief Executive Officer of Wind River Reinsurance,~~Haiti ~~mutually agreed that Mr. Whiting’s employment~~Earthquake ~~agreement would not be renewed following its March 31, 2009 expiration. Mr. Whiting has advised us that he will retire at that time.~~

OnIn ~~November 29,~~January ~~2008~~2010, ~~we received notice that Mr. Richard L. Duszak,~~ a ~~member~~massive ofearthquake ~~our~~struck ~~Board of Directors, Chair of our Audit Committee, and a member of~~ the ~~Section 162(m)~~ ~~Committee,~~Republic ~~was retiring for personal reasons effective November 28, 2008. On December 1, 2008, we notified the Listing Qualification Department~~ of ~~the NASDAQ~~ ~~Stock~~Haiti ~~Market~~that ofdevastated ~~Mr. Duszak’s resignation from our Audit Committee and~~ the ~~Board~~capital ofcity ~~Directors~~Port-au-Prince and ~~the resulting~~ ~~non-compliance~~resulted ~~with~~in ~~NASDAQ~~widespread ~~Marketplace Rule 4350~~damage. ~~On December 10,~~We ~~2008,~~do wenot ~~officially~~expect ~~received~~much, aif ~~notice of our~~any, ~~non-compliance~~catastrophe ~~from~~loss ~~the~~exposure ~~Listing~~as ~~Qualification~~insurance ~~Department.~~penetration ~~On February 10,~~in ~~2009,~~Haiti ~~we announced that Messrs. Chad A.~~has ~~Leat~~historically ~~and~~been ~~Robert S~~low. ~~Fleischer~~Any ~~were~~exposure ~~appointed~~that tomay ~~the~~develop ~~Board~~would ~~of Directors,~~be ~~effective~~ as ~~of that date. Mr. Leat was also~~ ~~appointed~~a toresult ~~serve as the Chair~~ of ~~the~~tsunami ~~Audit~~activity ~~Committee~~that ofaffected ~~the Board~~neighboring ~~of Directors. We notified the Listing Qualification~~islands ~~Department~~where ofwe ~~the~~have ~~NASDAQ Stock Market of Mr~~exposure. ~~Leat’s appointment,~~ ~~and~~At onthis ~~February 11~~time, ~~2009~~however, we ~~received~~do anot ~~notice~~expect ofany ~~from~~significant ~~the Listing Qualification Department notifying that we are now in compliance with NASDAQ’s audit committee requirements~~exposure. ~~A failure to regain compliance would have resulted~~ ~~in our being delisted from the NASDAQ Stock Market.~~

~~On January 26, 2009, we announced the appointment of~~California ~~Charles~~Mudslides ~~F. Barr as Senior Vice President~~ and ~~General Counsel,~~Flooding ~~effective February 2, 2009.~~

In January 2010, the southern California coast was battered by ~~Our~~multiple heavy rainstorms that caused mudslides and flooding ~~History~~which resulted in significant property losses. We do not expect much, if any, catastrophe loss exposure since we expect losses to be within the retention limits of our property catastrophe reinsurance coverage.

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

In February 2010, a massive earthquake struck the Republic of Chile that resulted in widespread damage. We do not anticipate any catastrophe loss exposure as our current exposures do not include Chilean risks. Any exposure that may develop would be as a result of tsunami activity that affected the Australian, Asian, or Pacific island regions where we have exposure. At this time, however, we do not expect any significant exposure.

Europe Winter Storm

In February 2010, a late winter storm with fierce rain and hurricane strength winds hit western Europe. At this time, we do not know the extent of our catastrophe loss exposure, if any.

Appointment of Thomas M. McGeehan

On December 8, 2009, we announced the appointment of Thomas M. McGeehan as Senior Vice President and Chief Financial Officer, effective as of that day. Mr. McGeehan had been serving as Interim Chief Financial Officer since May 2008.

Our History

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

Acquisition of Our Predecessor Insurance Operations

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

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

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

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

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

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

On January 24, 2005, we completed our merger with Penn-America Group, Inc. (NYSE: PNG) for $249.4 million, which was comprised of $15.3 million in cash and approximately 7.9 million of our Class A common shares, and our acquisition of Penn Independent Corporation for $98.5 million in cash. These transactions resulted in goodwill of $102.0 million and intangible assets of $32.5 million. In connection with these transactions, our shareholders’ approved our change in name from United National Group, Ltd. to United America Indemnity, Ltd.

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

Sale of Agency Operations

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

Sale of Agency Operations

Rights Offering

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 in March 2009. The net proceeds of $91.8 million were used to support strategic initiatives, enhance liquidity and financial flexibility, and for other general corporate purposes. See Note 10 to the consolidated financial statements in Item 8 of Part II of this report for details concerning the Rights Offering.

General

United America Indemnity, one of the leading specialty property and casualty insurers in the industry, provides its insurance products across a full distribution network — binding authority, program, brokerage, and reinsurance. We manage the distribution of these products in two segments;: (a) Insurance Operations and (b) Reinsurance Operations.

Our Insurance Operations

The United National Insurance Companies and the Penn-America Insurance Companies distribute property and casualty insurance products and operate predominantly in the excess and surplus lines marketplace. To manage our operations, we differentiate them by product classification. These product classifications are:

• Penn-America distributes property and general liability products for small commercial businesses distributed through a select network of wholesale general agents with specific binding authority; • United National distributes property, general liability, and professional lines products distributed through program administrators with specific binding authority; and • Diamond State distributes property, casualty, and professional lines products distributed through wholesale brokers that are underwritten by our personnel and ~~program~~selected ~~administrators~~brokers with specific binding authority.

See “Marketing and Distribution” below for a discussion on how our insurance products are underwritten.

These product classifications comprise our Insurance Operations business segment and are not considered individual business segments because each product has similar economic characteristics, distribution, and coverages. Our Insurance Operations provide property, casualty, and professional liability products utilizing customized guidelines, rates, and forms tailored to our risk and underwriting philosophy. Our Insurance Operations are licensed to write on a surplus lines (non-admitted) basis and an admitted basis in all 50 U.S. States, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands, which provides us with flexibility in designing products, programs, and in determining rates to meet emerging risks and discontinuities in the marketplace.

We distribute our insurance products through a group of approximately 110 professional wholesale general agencies that have specific quoting and binding authority, as well as a number of wholesale insurance brokers who in turn sell our insurance products to insureds through retail insurance brokers.

Our United National Insurance Companies and Penn-America Insurance Companies are rated “A” (Excellent) by A.M. Best, which assigns credit ratings to insurance companies transacting business in the United States. “A” (Excellent) is the third highest rating of sixteen rating categories. These ratings are based upon factors of concern to ~~policyholders, such as capital adequacy, loss reserve~~ ~~adequacy, and overall operating performance, and are not directed to the protection of investors.~~

Our Reinsurance Operations

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

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

policyholders, such as capital adequacy, loss reserve adequacy, and overall operating performance, and are not directed to the protection of investors.

Our Reinsurance Operations

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

Available Information

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

Recent Trends Inin Our Industry

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

~~After~~Currently ~~three~~we ~~years~~are in a period of ~~reduced~~excess underwriting capacity, and ~~brought~~we oncontinued byto see rate decreases throughout 2009. aReinsurers’ ~~number~~2009 ofgrowth, ~~factors~~if inany, ~~the~~became ~~late~~very ~~1990s~~selective as new business prices remained competitive and ~~the~~renewals ~~terrorist~~saw ~~attacks~~little ofoverall ~~September 11~~price increases. The 2009 market proved to be a positive risk selection, ~~2001~~capacity management, and pricing environment for the ~~insurance~~catastrophe ~~industry~~underwriters. ~~began~~Non-catastrophe segments of the reinsurance market continued to ~~move~~be strained further as the many ~~into~~opposing amarket ~~period~~forces offailed ~~excess~~to ~~underwriting~~allow ~~capacity~~the upward rate pressures to take root. Reinsurers and carriers alike clearly observed that competition has caused the adequacy in ~~late~~underlying ~~2004~~prices, ~~which~~terms, ~~was~~and ~~characterized~~conditions byto ~~excess~~be ~~capital~~eroded over the past several years calling for a flight to improved pricing, terms, and ~~increased~~conditions ~~competition~~adequacy.

In ~~2005,~~order ~~Hurricanes~~for ~~Katrina,~~property ~~Rita,~~ and ~~Wilma~~casualty ~~made~~reinsurance ~~landfall~~and ~~in the United States causing estimated combined~~ insurance ~~losses in~~ ~~the~~companies ~~industry~~to ofgenerate ~~approximately~~an ~~$56.6 billion.~~acceptable Asreturn aon ~~result, underwriting~~capital ~~capacity for writing property insurance~~ in ~~several coastal areas of~~ the ~~United States was reduced dramatically~~ ~~which~~current ~~led~~interest ~~to significant increases in~~ rate ~~levels~~environment, incompanies ~~coastal areas~~are offocusing ~~the United States. Rate increases~~ on ~~risks in coastal~~ ~~areas~~generating ~~continued~~acceptable tounderwriting ~~be realized in 2006~~returns. ~~However,~~The ~~the~~industry ~~absence of~~is ~~significant~~making ~~catastrophe~~increased ~~activity~~use inof ~~the~~risk ~~United~~management ~~States post-Hurricane~~tools ~~Katrina~~to ~~has encouraged more competition and~~adequately ~~downward~~compensate ~~pressure~~for ~~in rate levels in~~ the ~~same~~risks ~~catastrophe~~being ~~exposed regions~~written. ofThe ~~the~~industry ~~country that previously saw rate increases as a~~continues ~~result~~to offocus ~~the~~on ~~2004~~investment yields and ~~2005 hurricanes. Over~~ the ~~last~~credit-worthiness ~~three~~of ~~years,~~investment ~~the industry has experienced rate decreases in most lines~~portfolios.

InAlthough ~~2008,~~the ~~Hurricanes~~discount ~~Gustav~~rate ~~and~~was ~~Ike~~recently ~~made~~raised ~~landfall~~0.25 onpoints ~~August 31~~in ~~and~~February ~~September 13~~2010, ~~respectively~~the Federal Funds rate remained at extremely low levels of 0.0% ~~Hurricane~~to ~~Ike~~0.25% ~~was~~during ~~far~~2009 ~~wider~~causing investment yields on short-term and ~~penetrated~~overnight ~~deeply~~investments ~~into~~to ~~the~~be Ulow.~~S. causing~~ ~~industry~~Given ~~wide~~low ~~losses~~interest ~~that~~rates ~~are~~for ~~currently~~Fed ~~estimated~~funds and current yields on investment grade fixed income securities, our investment portfolio has been positioned to beprotect ~~approximately~~against a rising interest rate environment ~~$15.0 billion.~~by ~~Catastrophe~~including ~~reinsurance~~fixed ~~became~~maturity ~~more~~investments with low durations. The ~~expensive~~fixed income portfolio continues to ~~buy~~be asbiased oftoward ~~January 1,~~high quality ~~2009~~assets with an average quality of AA.

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

As regards investments, credit quality continues to be a considerable risk factor. Several asset classes such as high yield investments, commercial mortgage backed securities, private issued mortgage backed securities, and common stocks were particularly hard hit during 2008. During 2008, we experienced an increase in investment impairments due to credit concerns. Interest rates on other asset classes such as treasuries, U.S. agencies, and mortgages issued declined from 2007 to 2008 as investors sought safer investment havens. Interest rates on asset classes such as corporate bonds and asset-backed securities increased during 2008 which lowered the overall investment return for those asset classes. The Federal Reserve cut rates six times in 2008 in an attempt to stimulate the economy. The Fed Funds rate was 4.25% at December 31, 2007 and was eventually reduced to its current rate of 0.0% to 0.25% on December 16, 2008. The rates actions caused investment yields on short-term and overnight investments to decline.

~~Lastly~~In addition, developments in the regulatory environment could have some impact on our industry. In December 2009, the U.S. House of Representatives passed the Wall Street Reform and Consumer Protection Act of 2009. This bill includes a number of provisions having a direct impact on the insurance industry:, most notably, the creation of a Federal Insurance Office to monitor the insurance industry, streamlining of surplus lines insurance, credit for reinsurance, reinsurance insolvency regulation, and systemic risk regulation. This bill will be assigned to the Senate Banking Committee. We are continuing to monitor this development and the impact that it may have on our operations.

	•	The Terrorism Risk Insurance Act of 2002, which was due to expire on December 31, 2007, has been extended for seven years, until December 31, 2014, with the enactment, on December 26, 2007, of the Terrorism Risk Insurance Program Reauthorization Act (“TRIPRA”). It should be noted that under TRIPRA, the distinction between foreign and domestic acts of terrorism is eliminated, thus making losses for domestic acts of terrorism eligible for reimbursement.
	•	The Non-admitted and Reinsurance Reform Act, The National Insurance Act of 2007, and the Insurance Industry Antitrust Enforcement Act of 2007 are no longer viable bills. The U.S. House Financial Services Committee’s Oversight Plan for the 111th Congress includes a number of proposals which are either directly related to or have an impact on the insurance industry. Most notable are the creation of an Office of Insurance Information within the Treasury Department, the streamlining of surplus lines regulation and speed to market initiatives and financial services regulatory reform. It should be noted that the Optional Federal Charter proposal is not mentioned in the Oversight Plan.

We are continuing to monitor these developments.

Excess and Surplus Lines Market

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

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

According to A.M. Best, ~~from~~direct ~~1988~~premiums ~~through~~written ~~2007,~~of the ~~excess~~ excess and surplus lines market shrank 11.2% the past two years, but from 1988 through 2008, it grew from an estimated $6.3 billion ~~in direct premiums written~~ to $3634.64 billion. In contrast, the U.S. property and casualty industry grew more moderately during this period from $211.3 billion in direct premiums written to $~~501~~492.69 billion. During this period, the excess and surplus lines market as a percentage of the total property and casualty industry grew from approximately 3.0% to 7.30%.

Within the excess and surplus lines market, we write business on both a specialty admitted and surplus lines basis. Surplus lines business accounts for approximately 7581.23% of the business that our Insurance Operations writes, while specialty admitted business accounts for the remaining 2418.87%.

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

Business Segments

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

Insurance Operations

Our Insurance Operations segment includes the operations of the United National Insurance Companies and the Penn-America Insurance Companies which distribute property and casualty products through three product classifications: 1) Penn-America; 2) United National; and 3) Diamond State. See “Our Insurance Operations” above for a description of these product classifications. Our insurance products target specific, defined groups of insureds with customized coverages to meet their needs. Our products include customized guidelines, rates, and forms ~~tailored to our risk and underwriting~~ ~~philosophy. In 2008, gross premiums written were $353.1 million compared to $536.8 million for 2007.~~

tailored to our risk and underwriting philosophy. In 2009, gross premiums written were $268.0 million compared to $353.1 million for 2008.

Reinsurance Operations

Our Reinsurance Operations segment ~~consists~~provides solely of the operations of Wind River Reinsurance. Wind River Reinsurance was formed in 2006 through the amalgamation of our Non-U.S. Insurance Operations into a single Bermuda based company. Our Reinsurance Operations include third party treaty and facultative reinsurance for writers of excess, surplus, and ~~specialty~~ specialty property and casualty insurance ~~distributed~~and ~~through~~consists ~~Wind~~solely ~~River~~of the operations of Wind River Reinsurance. Wind River Reinsurance also provides quota share reinsurance to our Insurance Operations. In ~~2008~~2009, gross premiums written were $2573.60 million compared to $2625.36 million for ~~2007~~2008. ~~Our Reinsurance Operations consist of operations related to writing third party reinsurance by~~ Wind ~~River~~ Reinsurance. Prior to the fourth quarter of 2005, our Non-U.S. Insurance Operations offered direct third party excess and surplus lines primary insurance policies. In the fourth quarter of 2005, our Non-U.S. Insurance Operations discontinued offering such products in order to focus on third party reinsurance products. Following this decision, all excess and surplus lines insurance policies written through our Non-U.S. Insurance Operations have been allowed to expire and have not been renewed. As a result of the amalgamation of Wind River ~~Barbados and Wind River Bermuda to form Wind River~~ Reinsurance, ~~Wind River Reinsurance~~ is listed with the International Insurers Department (“IID”) of the National Association of Insurance Commissioners (“NAIC”). Although Wind River Reinsurance does not currently offer direct third party excess and surplus lines insurance products, it ~~remains~~is eligible to write on a surplus lines basis in 31 U.S. states and the District of Columbia.

~~Our Non-U~~Wind River Reinsurance conducts business in Bermuda.~~S. Insurance~~ While many ~~Operations~~reinsurers ~~commenced~~in ~~offering~~Bermuda ~~reinsurance~~continue to ~~the~~focus ~~United~~on ~~National~~catastrophe oriented ~~Insurance~~reinsurance ~~Companies~~solutions, inWind ~~January~~River ~~2004~~Reinsurance ~~through~~is ~~quota~~part ~~share~~of a ~~arrangements.~~smaller ~~These~~group ~~reinsurance~~of ~~arrangements~~companies ~~resulted~~looking into ~~60%~~write ofniche and casualty ~~the~~oriented ~~United~~treaty ~~National~~and ~~Insurance~~facultative ~~Companies’~~opportunities. ~~net~~While ~~retained~~Wind River ~~insurance~~Reinsurance ~~liability~~will onconsider ~~new~~unique orcatastrophe ~~renewal~~oriented placements, ~~business~~this ~~being~~is ~~ceded~~a tovery selective process and is not its primary focus. Given the pricing environment of the larger casualty oriented organizations, Wind River Reinsurance continues orto cautiously deploy and manage its ~~predecessors~~capital ~~through~~while ~~December 31,~~seeking ~~2006~~to position itself as niche reinsurance solution provider. The current market dictates that growth will be very measured.

OnAs ~~February 1,~~part ~~2005,~~of the ~~Non-U.S. Insurance Operations~~ ~~commenced~~aforementioned ~~providing~~quota share reinsurance tothat ~~the~~Wind ~~Penn-America Insurance~~River ~~Companies~~Reinsurance ~~through~~provides ato ~~quota~~our ~~share~~Insurance ~~arrangement.~~Operations, ~~This~~our ~~reinsurance~~Insurance ~~arrangement~~Operations ~~resulted~~cede ~~in 30~~50% of ~~the Penn-America Insurance~~their ~~Companies’~~ net ~~retained~~unearned ~~insurance liability on new and renewal business bound after February 1~~premiums, ~~2005 being~~ ~~ceded~~plus to50% ~~Wind~~of ~~River~~the ~~Bermuda.~~net ~~The~~retained ~~agreement~~insurance ~~also~~liability ~~stipulated that 30%~~ of ~~Penn-America Insurance~~ ~~Companies’~~all ~~February 1,~~new ~~2005 net~~and ~~unearned~~renewal ~~premium~~business ~~be ceded~~ to Wind River ~~Bermuda~~Reinsurance.

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

Effective January 1, 2007, each of the quota share agreements was terminated and consolidated into a common quota share reinsurance agreement. Under this new agreement, our Insurance Operations have agreed to cede 50% of their net unearned premiums as of December 31, 2006, plus 50% of the net retained insurance liability of all new and renewal business bound on or after January 1, 2007 to Wind River Reinsurance.

Products and Product Development

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

classification. See “Our Insurance Operations” above for a description of these product classifications. We have significant flexibility in designing products, programs, and in determining rates to meet the needs of the marketplace.

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

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

	For the Years Ended December 31,
	2008					2007					2006
	2009					2008					2007
	Amount		Percent			Amount		Percent			Amount		Percent
(Dollars in thousands)
Insurance Operations:
Penn-America	$	~~172~~124,~~869~~914		4536.6	%	$	~~286~~172,~~439~~869		5045.86	%	$	~~390~~286,~~260~~439		5950.8	%
United National		8462,~~761~~059		2218.42			~~132~~88,~~311~~884		23.5			~~154~~132,~~114~~311		23.65
Diamond State		9581,~~500~~019		2523.28			~~118~~91,~~085~~377		2124.01			~~108~~118,~~591~~085		1621.60
Total Insurance Operations		~~353~~267,~~130~~992		9378.26			~~536~~353,~~835~~130		9593.32			~~652~~536,~~965~~835		~~100~~95.03
Reinsurance Operations:(1)
Reinsurance Operations:
Wind River Reinsurance		2573,~~570~~007		621.84			2625,~~277~~570		46.78			—26,277		—4.7
Total	$	~~378~~340,~~700~~999		100.0	%	$	~~563~~378,~~112~~700		100.0	%	$	~~652~~563,~~965~~112		100.0	%

(1) Our Reinsurance Operations began offering third party reinsurance in the third quarter of 2006 and entered into its initial third party reinsurance treaty effective January 1, 2007; therefore, our Reinsurance Operations had no gross premiums written for the year ended December 31, 2006.

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

~~The following table sets forth an analysis of United America~~ ~~Indemnity’s net premiums written, which is gross premiums~~8 ~~written less ceded premiums written, by product classification within our Insurance Operations and Reinsurance Operations segments during the periods indicated:~~

	For the Years Ended December 31,
	2008					2007					2006
	Amount		Percent			Amount		Percent			Amount		Percent
(Dollars in thousands)
Insurance Operations:
Penn-America	$	158,136		51.2	%	$	266,874		54.4	%	$	355,428		63.4	%
United National		71,491		23.1			110,649		22.6			114,718		20.5
Diamond State		75,852		24.5			100,751		20.5			90,389		16.1
Total Insurance Operations		305,479		98.8			478,274		97.5			560,535		100.0
Reinsurance Operations:(1)
Wind River Reinsurance		3,601		1.2			12,261		2.5			—		—
Total	$	309,080		100.0	%	$	490,535		100.0	%	$	560,535		100.0	%

(1) Our Reinsurance Operations began offering third party reinsurance in the third quarter of 2006 and entered into its initial third party reinsurance treaty effective January 1, 2007; therefore, our Reinsurance Operations had no net premiums written for the year ended December 31, 2006.

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


	For the Years Ended December 31,
	2009					2008					2007
	Amount		Percent			Amount		Percent			Amount		Percent
(Dollars in thousands)

Insurance Operations:
Penn-America	$	101,320		34.8	%	$	158,136		51.1	%	$	266,874		54.4	%
United National		50,036		17.2			74,964		24.3			110,649		22.6
Diamond State		66,908		23.0			72,379		23.4			100,751		20.5

Total Insurance Operations		218,264		75.0			305,479		98.8			478,274		97.5

Reinsurance Operations:
Wind River Reinsurance		72,731		25.0			3,601		1.2			12,261		2.5

Total	$	290,995		100.0	%	$	309,080		100.0	%	$	490,535		100.0	%

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

Geographic Concentration

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

	For the Years Ended December 31,
	2008									2007								2006
	2009						2008						2007
	Amount			Percent			~~Percent~~Amount			~~Amount~~Percent			Amount		Percent			~~Amount~~		~~Percent~~
(Dollars in thousands)
Florida	$	4134,~~893~~061			10.0	%	$	~~11.1~~41,893	%	$	~~65,610~~11.0	%	$	65,610		11.6	%	$	~~67,852~~		~~10.4~~	%
California		3928,~~793~~264			8.3			~~10.5~~39,793			~~67,578~~10.5			67,578		12.0			~~81,121~~		~~12.4~~
New York		26,045						6.9			55,627					9.9			87,551		13.5
Texas		24,292			7.1			26,029			6.9			37,252		6.6
Texas		26,029						6.9			37,252					6.6			41,690		6.4
New York		17,224			5.1			26,045			6.9			55,627		9.9
Massachusetts		16,956						4.5			24,054					4.3			35,412		5.4
Louisiana		12,339			3.6			13,214			3.5			14,447		2.6
New Jersey		13,617						3.6			26,767					4.7			34,084		5.2
Massachusetts		11,948			3.5			16,956			4.5			24,054		4.3
Louisiana		13,214						3.5			14,447					2.6			15,241		2.3
Pennsylvania		9,506			2.8			12,446			3.3			17,527		3.1
Pennsylvania		12,446						3.3			17,527					3.1			20,067		3.1
New Jersey		8,918			2.6			13,617			3.6			26,767		4.7
Illinois		118,~~766~~630			2.5			~~3.1~~11,766			~~16,633~~3.1			16,633		3.0			~~20,374~~		~~3.1~~
Ohio		8,668						2.2			11,710					2.1			15,192		2.3
Michigan		6,927			2.0			8,467			2.2			9,257		1.6
Subtotal		~~210~~162,~~427~~109			47.5			~~55.6~~210,226			~~337,205~~55.5			334,752		59.94			~~418,584~~		~~64.1~~
All others		168,273	(1)					44.4			225,907	(2)				40.1			234,381		35.9
Reinsurance Operations		73,007			21.4			25,570			6.8			26,277		4.7
Total	$	378,700						100.0	%	$	563,112					100.0	%	$	652,965		100.0	%
All others		105,883			31.1			142,904			37.7			202,083		35.9
Total	$	340,999			100.0	%	$	378,700			100.0	%	$	563,112		100.0	%

(1)		Includes gross written premiums of our Reinsurance Operations of $25.6 million.
(2)		Includes gross written premiums of our Reinsurance Operations of $26.3 million.

Marketing and Distribution

We provide our insurance products across a full distribution network — binding authority, program, brokerage, and reinsurance. For our binding authority and program product classifications, we distribute our insurance products through a group of approximately 110 wholesale general agents and program administrators that have specific quoting and binding authority. For our brokerage business, we distribute our insurance products through wholesale insurance brokers who in turn sell our insurance products to insureds through retail insurance brokers. ~~For our reinsurance business, we distribute our products through reinsurance brokers and directly through reinsurers.~~

~~Of our non-affiliated professional wholesale general agents and~~ ~~program administrators, the top five accounted for 29.8% of our gross premiums written for the year ended December 31, 2008. No one agency accounted for more than~~ 9~~.5% of our gross~~ ~~premiums written.~~

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

For our reinsurance business, we distribute our products through reinsurance brokers and directly through reinsurers.

Of our non-affiliated professional wholesale general agents and program administrators, the top five accounted for 34.1% of our gross premiums written for the year ended December 31, 2009. No one agency accounted for more than 12.9% of our gross premiums written.

Underwriting

Our insurance products are underwritten in two ways: (1) specific binding authority in which we grant underwriting authority to our wholesale general agents and program administrators, and (2) brokerage in which our internal ~~personnnel~~personnel underwrites business submitted by our wholesale insurance brokers.

Specific Binding Authority — Our wholesale general agents and program administrators have specific quoting and binding authority with respect to a single insurance product and some have limited quoting and binding authority with respect to multiple products.

We provide our wholesale general agents and program administrators with a comprehensive, regularly updated underwriting manual that specifically outlines risk eligibility, which is developed based on the type of insured, nature of exposure and overall expected profitability. This manual also outlines (a) premium pricing, (b) underwriting guidelines, including but not limited to policy forms, terms and conditions, and (c) policy issuance instructions.

Our wholesale general agents and program administrators are appointed to underwrite submissions received from their retail agents in accordance with our underwriting manual. Risks that are not within the specific binding authority must be submitted to our underwriting personnel directly for underwriting review and approval or denial of the application of the insured. Our wholesale general agents provide all policy issuance services in accordance with our underwriting manuals.

We regularly monitor the underwriting quality of our wholesale general agents and program administrators through disciplined system of controls, which includes the following:


	•	automated system criteria edits and exception reports;

	•	individual policy reviews to measure general agents adherence to underwriting manual including, risk selection, underwriting compliance, policy issuance and pricing.

	•	periodic on-site comprehensive general agency audits to evaluate processes, controls, profitability and adherence to all aspects of our underwriting manual including, risk selection, underwriting compliance, policy issuance and pricing; and

	•	internal quarterly actuarial analysis of loss ratios produced by business underwritten by our wholesale general agents and program administrators

	•	internal quarterly analysis of financial results, including premium growth and overall profitability of business produced by our wholesale general agents and program administrators

We provide incentives to certain of our wholesale general agents and program administrators to produce profitable business through contingent profit commission structures that are tied directly to the achievement of profitability targets.

Brokerage — Our wholesale insurance brokers do not have specific binding authority, therefore, these risks are submitted to our underwriting personnel for review and processing.

We provide our underwriters with a comprehensive, regularly updated underwriting manual that specifically outlines risk eligibility, which is developed based on the type of insured, nature of exposure and overall expected profitability. This manual also outlines (a) premium pricing, (b) underwriting guidelines, including but not limited to policy forms, terms and conditions, and (c) policy issuance instructions.

Our underwriting personnel review submissions, issue all quotes and perform all policy issuance functions. We regularly monitor the underwriting quality of our underwriters through disciplined system of controls, which includes the following:

• individual policy reviews to measure our underwriters’ adherence to underwriting manual including, risk selection, underwriting compliance, policy issuance and pricing. • periodic underwriting review to evaluate adherence to all aspects of our underwriting manual including, risk selection, underwriting compliance, policy issuance and pricing; and • internal quarterly actuarial analysis of loss ratios produced by business underwritten by our underwriters • internal quarterly analysis of financial results, including premium growth and overall profitability of business produced by our underwriters

Contingent 11Commissions

~~Table~~ Certain professional general agencies of ~~Contents~~the Insurance Operations are paid special incentives, referred to as commissions, when loss results of business produced by these agencies are more favorable than predetermined thresholds. Similarly, in some circumstances, insurance companies that cede business to our Reinsurance Operations are paid ceding or profit commissions based on the profitability of the ceded portfolio. These commissions are charged to other underwriting expenses when incurred. The liability for the unpaid portion of these commissions is stated separately on the face of the consolidated balance sheet as contingent commissions.

• The ~~internal~~amount ~~quarterly~~of ~~actuarial~~contingent ~~analysis~~commissions offor ~~loss~~2009 ~~ratios~~has ~~produced~~increased byfrom the ~~business~~prior ~~underwritten~~year byprimarily ~~our~~due ~~underwriters~~to •several ~~internal~~reinsurance ~~quarterly~~treaties that ~~analysis~~were ofentered ~~financial~~into ~~results,~~by ~~including~~our ~~premium~~Reinsurance ~~growth~~Operations ~~and~~during ~~overall~~the first ~~profitability~~quarter of 2009 that have generated profitable business and ~~produced~~therefore byresulted ~~our~~in ~~underwriters~~increased commissions.

Pricing

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

Rates have generally declined over the last several years. During 2004 and the first eight months of 2005 the ability to achieve significant rate increases lessened with increased competition and additional industry capacity. This trend subsided, however, during the last four months of 2005 primarily as a result of the impact of Hurricanes Katrina, Rita, and Wilma on the United States. The underwriting capacity for writing property insurance in several wind-prone areas of the United States was reduced immediately, which led to dramatic increases in rate levels in many of the territories affected by these storms. Since 2005, the trend has reversed and prices have been steadily declining. Casualty rates have declined faster than property rates. Our market is facing competition from standard line companies who are writing risks that they had not insured previously, Bermuda companies who are establishing relationships with wholesale brokers, and ~~new~~ excess and surplus competitors. New ~~New~~ competition is driving much of the price decline. Although market prices have dropped, we have continued to maintain our underwriting discipline, and have therefore exited many programs. Renewal pricing on our book decreased approximately ~~approximately 1~~2.2% in ~~2006~~2007, approximately 23.28% in ~~2007~~2008, and approximately 32.83% in ~~2008~~2009, on average.

Reinsurance of Underwriting Risk

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

We purchase specific types and structures of reinsurance depending upon the specific characteristics of the lines of business and specialty products we underwrite. We will typically seek to place proportional reinsurance for our umbrella and excess products, some of our specific specialty products, or in the development stages of a new product. We believe that this approach allows us to control our net exposure in these product areas more cost effectively.

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

We analyze our reinsurance contracts to ensure that they meet the risk transfer requirements of ~~Statement~~applicable ~~of Financial~~accounting ~~Accounting Standards (“SFAS”) No. 113~~guidance, ~~“Accounting~~ ~~for Reinsurance of Short Duration and Long Duration Contracts,”~~ which requires that the reinsurer must assume ~~assume~~ significant insurance risk under the reinsured portions of the underlying insurance contracts and that there must be a reasonably possible chance that the reinsurer may realize a significant loss from the transaction. See Note 6 of the notes to consolidated financial statements in Item 8 of Part II of this report for details concerning our current reinsurance contracts.

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

~~Our~~The ~~current~~following ~~property~~table ~~writings~~sets ~~create~~forth ~~exposure~~the toten ~~catastrophic events.~~reinsurers Tofor ~~protect~~which ~~against this exposure,~~ we ~~purchase~~ ~~catastrophic~~have ~~reinsurance~~the ~~treaties.~~largest ~~Effective~~reinsurance ~~June 1~~receivables, ~~2007, we~~as ~~purchased a $100 million in excess~~ of ~~$10.0 million~~ ~~property catastrophe treaty for those events occurring in June 2007 through May 2008. Effective June~~December 131, ~~2008, we purchased a $70.0 million in excess of $10.0 million property catastrophe treaty for events occurring in June 2008 through May~~ 2009. ~~The~~Also ~~decrease~~shown inare the ~~amount~~amounts ~~in coverage for our treaty effective June 1, 2008 was a result~~ of ~~lower catastrophe~~premiums ~~exposure. During 2008, we~~ ceded ~~losses~~by ofus ~~$36.1 million~~ to ~~our~~ ~~property~~these ~~catastrophe~~reinsurers ~~treaty~~during asthe ayear ~~result of Hurricane Ike.~~ended ~~This sizable industry event will be contained within our property catastrophe reinsurance treaty. As a result of mandatory reinstatement~~December 31, ~~we have full limits available on our current property catastrophe treaty~~2009. ~~We did not cede any losses~~ ~~on our property catastrophe treaty during 2007.~~

Our casualty writings create exposure to casualty clash events. Casualty clash exposure arises when two or more insureds, or more than one liability policy for the same insured, are involved in the same loss occurrence. To protect against this exposure for events occurring in 2008, we purchased a $10.0 million in excess of $3.0 million per occurrence casualty clash treaty. Effective, January 1, 2009, we renewed this treaty for the same limits and coverage, $10 million in excess of $3.0 million per occurrence, to protect us against this exposure for events occurring in 2009. Both treaties effective for 2008 and 2009 have mandatory reinstatements. We did not cede any losses to our casualty clash treaty in 2008.


	A.M.	Gross			Prepaid			Total			Percent			Ceded			Percent
	Best	Reinsurance			Reinsurance			Reinsurance			of			Premiums			of
	Rating	Receivables			Premium			Assets			Total			Written			Total
(Dollars in millions)

Munich Re America, Inc.	A+	$	256.5		$	6.5		$	263.0			44.5	%	$	20.2			40.4	%
Westport Insurance Corp.	A		130.1			—			130.1			22.0			(0.1	)		(0.2	)
General Reinsurance Corp.	A++		27.3			0.6			27.9			4.7			1.8			3.6
Hartford Fire Insurance Co.	A		21.7			—			21.7			3.7			—			—
Transatlantic Reinsurance	A		16.9			3.6			20.5			3.5			8.2			16.4
GE Reinsurance Corporation (Swiss Re)	A		14.8			—			14.8			2.5			—			—
Finial Reinsurance Company	A−		11.1			—			11.1			1.9			—			—
Converium AG, Zurich	A−		10.1			—			10.1			1.7			—			—
Swiss Reinsurance America Corp	A		9.2			—			9.2			1.6			0.1			0.2
Clearwater Insurance Company	A−		7.8			—			7.8			1.3			—			—

Subtotal			505.5			10.7			516.2			87.4			30.2			60.4
All other reinsurers			68.3			5.8			74.1			12.6			19.8			39.6

Total reinsurance receivables before purchase accounting adjustments			573.8			16.5			590.3			100.0	%	$	50.0			100.0	%

Purchase accounting adjustments, including uncollectible reinsurance reserve			(30.4	)		—			(30.4	)

Total receivables, net of purchase accounting adjustments and uncollectible reinsurance reserve			543.4			16.5			559.9
Collateral held in trust from reinsurers			(378.1	)		(5.4	)		(383.5	)

Net receivables		$	165.3		$	11.1		$	176.4

ToAt ~~the~~December 31, ~~extent~~2009 ~~that~~and ~~there~~2008, ~~may~~we becarried reinsurance receivables of $543.4 million and $679.3 million, respectively. These amounts are net of a purchase accounting adjustment and an ~~increase~~allowance orfor ~~decrease~~uncollectible inreinsurance ~~catastrophe~~receivables. orThe ~~casualty~~purchase ~~clash~~accounting ~~exposure~~adjustment inresulted ~~the~~from our ~~future~~acquisition of Wind River Investment Corporation on September 5, we2003 ~~may~~and is related to discounting the ~~increase~~acquired orloss ~~decrease~~reserves ~~our~~to ~~reinsurance~~their ~~protection~~present value and applying a risk margin to the discounted reserves. This adjustment was $17.5 million at December 31, 2009 and 2008. The allowance for ~~these~~uncollectible reinsurance receivables was ~~exposures~~$12.9 million ~~commensurately~~and $13.7 million at December 31, 2009 and 2008, respectively. The change is primarily due to a decrease in the amount of our carried reinsurance receivables.

WeHistorically, ~~continually~~there ~~evaluate~~have ~~our~~been ~~retention~~insolvencies ~~levels~~following ~~across~~a ~~the~~period ~~entire~~of ~~line~~competitive ofpricing ~~business~~in ~~and~~the ~~specialty~~industry. ~~product~~While ~~portfolio~~we tohave ~~ensure that~~recorded ~~the~~allowances ~~ultimate~~for reinsurance ~~structures~~receivables ~~are~~based ~~aligned~~on ~~with the~~currently ~~corporate~~available ~~risk~~information, ~~tolerance~~conditions ~~levels~~may ~~associated~~change ~~with~~or ~~such lines of~~additional ~~business~~information ~~products.~~might ~~Any~~be ~~decision~~obtained tothat ~~decrease~~may ~~our~~require ~~reliance~~us ~~upon proportional reinsurance or~~ to ~~increase our excess of loss~~record ~~retentions~~additional ~~could~~allowances. ~~increase~~On ~~our~~a ~~earnings~~quarterly ~~volatility.~~basis, Inwe ~~cases~~review our ~~where~~financial weexposure ~~decide~~ to ~~increase~~the ~~our~~reinsurance ~~excess~~market ofand ~~loss~~assess ~~retentions, such~~the ~~decisions~~adequacy ~~will be a result~~ of ~~a change or progression in~~ our ~~risk~~ ~~tolerance~~collateral ~~level~~ and ~~will~~allowance befor ~~supported by an actuarial~~uncollectible ~~analysis.~~reinsurance Weand ~~endeavor~~continue to ~~purchase~~take ~~reinsurance~~actions ~~from~~to ~~financially strong~~mitigate ~~reinsurers with which we have long-standing~~our ~~relationships.~~exposure Into ~~addition,~~possible ~~in certain circumstances, we hold collateral, including letters of credit, under reinsurance agreements~~loss.

The following table sets forth the ten reinsurers for which we have the largest reinsurance receivables, as of December 31, 2008. Also shown are the amounts of premiums ceded by us to these reinsurers during the year ended December 31, 2008.

	A.M.	Gross			Prepaid			Total			Percent			Ceded		Percent
	Best	Reinsurance			Reinsurance			Reinsurance			of			Premiums		of
	Rating	Receivables			Premium			Assets			Total			Written		Total
(Dollars in millions)
Munich Re America, Inc.	A+	$	316.4		$	9.5		$	325.9			44.3	%	$	24.6		35.3	%
Swiss Reinsurance America Corp	A+		194.0			0.1			194.1			26.4			0.2		0.2
General Reinsurance Corp.	A++		34.8			0.4			35.2			4.8			1.4		2.1
Hartford Fire Insurance Co.	A+		25.3			—			25.3			3.5			—		—
Transatlantic Reinsurance	A		14.2			3.7			17.9			2.4			10.3		14.8
Finial Reinsurance Company	A−		12.2			—			12.2			1.7			—		—
Converium AG, Zurich	A−		12.1			—			12.1			1.7			—		—
XL Reinsurance America, Inc.	A+		8.9			—			8.9			1.2			—		—
Validus Reinsurance Ltd.	A−		8.1			—			8.1			1.1			11.7		16.8
Clearwater Insurance Company	A		8.0			—			8.0			1.1			—		—
Subtotal			634.0			13.7			647.7			88.2			48.2		69.2
All other reinsurers			76.5			10.3			86.8			11.8			21.4		30.8
Total reinsurance receivables before purchase accounting adjustments			710.5			24.0			734.5			100.0	%	$	69.6		100.0	%
Purchase accounting adjustments, including uncollectible reinsurance reserve			(31.2	)		—			(31.2	)
Total receivables, net of purchase accounting adjustments and uncollectible reinsurance reserve			679.3			24.0			703.3
Collateral held in trust from reinsurers			(477.1	)		(7.6	)		(484.7	)
Net receivables		$	202.2		$	16.4		$	218.6

At December 31, 2008 and 2007, we carried reinsurance receivables of $679.3 million and $719.7 million, respectively. These amounts are net of a purchase accounting adjustment and an allowance for uncollectible reinsurance receivables. The purchase accounting adjustment resulted from our acquisition of Wind River Investment Corporation on September 5, 2003 and is related to discounting the acquired loss reserves to their present value and applying a risk margin to the discounted reserves. This adjustment was $17.5 million at December 31, 2008 and December 31, 2007. The allowance for uncollectible reinsurance receivables was $13.7 million and $10.5 million at December 31, 2008 and 2007, respectively. The change is primarily due to an increase in the Company’s assessment of its risk of collecting from several individual reinsurers.

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

Claims Management and Administration

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

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

As of December 31, ~~2008~~2009, we had $~~508~~431.0 million of gross outstanding loss and loss adjustment expense case reserves. Claims relating to approximately 7680.0% of those ~~reserves~~ reserves are handled by our in-house claims management ~~professionals,~~ professionals, while claims relating to approximately 65.0% of those reserves are handled by our TPAs, which send us detailed financial and claims information on a monthly basis. We also individually supervise in-house any significant or complicated TPA handled claims, and conduct two to five day on-site audits of our material TPAs at least twice a year. Approximately 1815.0% of our reserves are handled by our assuming reinsurers. We diligently review and supervise the claims handled by our reinsurers to protect our reputation and minimize exposure.

Reserves ~~For~~for Unpaid Losses and Loss Adjustment Expenses

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

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


	•	our knowledge of the circumstances surrounding the claim;

	•	the severity of injury or damage;

	•	jurisdiction of the occurrence;

	•	the potential for ultimate exposure;

	•	litigation related developments;

	•	the type of loss; and

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

We generally estimate such losses and claims costs through an evaluation of individual reported claims. We also establish reserves for incurred but not reported losses (“IBNR”). IBNR reserves are based in part on statistical information and in part on industry experience with respect to the expected number and nature of claims arising from occurrences that have not been reported. We also establish our reserves based on our estimates of future trends in claims severity and other subjective factors. Insurance companies are not permitted to reserve for a catastrophe until it has occurred. Reserves are recorded on an undiscounted basis other than fair value adjustments recorded under purchase accounting. The reserves are reviewed quarterly by the in-house actuarial staff. In ~~2008~~2009, the internal workpapers supporting our reserves were reviewed by independent actuaries for the ~~first~~third ~~and~~quarter ~~third~~of ~~quarters of 2008~~2009, and our reserves were reviewed in detail by independent ~~independent~~ actuaries for the second and fourth quarters of ~~2008~~ 2009. We do not rely

1514

~~not rely~~ upon the review by the independent actuaries to develop our ~~our~~ reserves; however, the data is used to corroborate the analysis ~~analysis~~ performed by the in-house actuarial staff.

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

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

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

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

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

1615

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

	1998			1999			2000			2001			2002			2003		2004		2005		2006			2007			2008
	1999			2000			2001			2002			2003			2004		2005		2006		2007			2008			2009
(Dollars in thousands)
Balance sheet reserves:	$	~~210~~167,~~483~~868		$	~~167~~131,~~868~~128		$	~~131~~156,~~128~~784		$	~~156~~260,~~784~~820		$	~~260~~314,~~820~~023		$	~~314~~344,~~023~~614	$	~~344~~639,~~614~~291	$	~~639~~735,~~291~~342	$	~~735~~800,~~342~~884		$	~~800~~835,~~884~~838		$	~~835~~730,~~838~~328
Cumulative paid as of:
One year later	$	8564,~~004~~139		$	6426,~~139~~163		$	2663,~~163~~667		$	6342,~~667~~779		$	4276,~~779~~048		$	7685,~~048~~960	$	85154,~~960~~069	$	~~154~~169,~~069~~899		~~169~~190,~~899~~723			~~190~~215,~~723~~903
Two years later		~~110~~82,~~073~~119			8272,~~119~~579			7282,~~579~~970			8296,~~970~~623			96136,~~623~~133			~~136~~139,~~133~~822		~~139~~268,~~822~~827		~~268~~300,~~827~~041		~~300~~360,~~041~~336
Three years later		~~123~~118,~~129~~318			~~118~~75,~~318~~661			75118,~~661~~401			~~118~~141,~~401~~545			~~141~~171,~~545~~659			~~171~~180,~~659~~801		~~180~~355,~~801~~987		~~355~~413,~~987~~055
Four years later		~~152~~110,~~915~~640			~~110~~98,~~640~~654			98150,~~654~~062			~~150~~164,~~062~~181			~~164~~197,~~181~~596			~~197~~209,~~596~~938		~~209~~414,~~938~~068
Five years later		~~161~~126,~~028~~119			~~126~~121,~~119~~407			~~121~~164,~~407~~023			~~164~~182,~~023~~043			~~182~~214,~~043~~376			~~214~~237,~~376~~636
Six years later		~~168~~143,~~091~~782			~~143~~129,~~782~~371			~~129~~177,~~371~~682			~~177~~193,~~682~~536			~~193~~235,~~536~~022
Seven years later		~~172~~149,~~926~~413			~~149~~139,~~413~~090			~~139~~186,~~090~~173			~~186~~211,~~173~~036
Eight years later		~~176~~157,~~634~~431			~~157~~143,~~431~~435			~~143~~201,~~435~~899
Nine years later		~~183~~162,~~349~~218			~~162~~156,~~218~~432
Ten years later		~~186~~174,~~987~~512
Re-estimated liability as of:
End of year	$	~~210~~167,~~483~~868		$	~~167~~131,~~868~~128		$	~~131~~156,~~128~~784		$	~~156~~260,~~784~~820		$	~~260~~314,~~820~~023		$	~~314~~344,~~023~~614	$	~~344~~639,~~614~~291	$	~~639~~735,~~291~~342	$	~~735~~800,~~342~~884		$	~~800~~835,~~884~~838		$	~~835~~730,~~838~~328
One year later		~~195~~157,~~525~~602			~~157~~124,~~602~~896			~~124~~228,~~896~~207			~~228~~261,~~207~~465			~~261~~313,~~465~~213			~~313~~343,~~213~~332		~~343~~632,~~332~~327		~~632~~716,~~327~~361		~~716~~832,~~361~~733			~~832~~827,~~733~~442
Two years later		~~185~~155,~~421~~324			~~155~~180,~~324~~044			~~180~~228,~~044~~391			~~228~~263,~~391~~995			~~263~~315,~~995~~230			~~315~~326,~~230~~031		~~326~~629,~~031~~859		~~629~~732,~~859~~056		~~732~~812,~~056~~732
Three years later		~~182~~192,~~584~~675			~~192~~180,~~675~~202			~~180~~231,~~202~~133			~~231~~268,~~133~~149			~~268~~298,~~149~~989			~~298~~323,~~989~~696		~~323~~635,~~696~~504		~~635~~707,~~504~~525
Four years later		~~211~~192,~~544~~714			~~192~~175,~~714~~198			~~175~~236,~~198~~271			~~236~~252,~~271~~078			~~252~~301,~~078~~660			~~301~~332,~~660~~302		~~332~~622,~~302~~122
Five years later		~~211~~175,~~352~~478			~~175~~179,~~478~~727			~~179~~226,~~727~~116			~~226~~264,~~116~~058			~~264~~308,~~058~~775			~~308~~323,~~775~~547
Six years later		~~203~~180,~~451~~735			~~180~~173,~~735~~424			~~173~~242,~~424~~666			~~242~~272,~~666~~806			~~272~~303,~~806~~146
Seven years later		~~201~~177,~~991~~025			~~177~~187,~~025~~441			~~187~~254,~~441~~110			~~254~~266,~~110~~880
Eight years later		~~201~~193,~~396~~337			~~193~~198,~~337~~999			~~198~~249,~~999~~861
Nine years later		~~216~~201,~~673~~812			~~201~~196,~~812~~423
Ten years later		~~223~~201,~~440~~424
Cumulative redundancy/(deficiency)	$	(1233,~~958~~556	)	$	(3365,~~944~~295	)	$	(6793,~~871~~077	)	$	(976,~~326~~060	)	$	~~(11~~10,~~986~~877	)	$	521,~~247~~067	$	1217,~~312~~169	$	327,~~787~~817	$	3(11,~~286~~848	)	$	~~(31~~8,~~848~~396	)	$	—
Gross Liability — end of year		~~802~~805,~~692~~717			~~805~~800,~~717~~630			~~800~~907,~~630~~357			~~907~~2,~~357~~004,422			2,~~004~~059,~~422~~760			21,~~059~~876,~~760~~510		1,~~876~~914,~~510~~224		1,~~914~~702,~~224~~010		1,~~702~~503,~~010~~237			1,~~503~~506,~~237~~429			1,~~506~~257,~~429~~741
Less: Reinsurance recoverables		~~592~~637,~~209~~849			~~637~~669,~~849~~502			~~669~~750,~~502~~573			~~750~~1,~~573~~743,602			1,~~743~~745,~~602~~737			1,~~745~~531,~~737~~896		1,~~531~~274,~~896~~933		1966,~~274,933~~668		~~966~~702,~~668~~353			~~702~~670,~~353~~591			~~670~~527,~~591~~413
Net liability-end of year		~~210~~167,~~483~~868			~~167~~131,~~868~~128			~~131~~156,~~128~~784			~~156~~260,~~784~~820			~~260~~314,~~820~~023			~~314~~344,~~023~~614		~~344~~639,~~614~~291		~~639~~735,~~291~~342		~~735~~800,~~342~~884			~~800~~835,~~884~~838			~~835~~730,~~838~~328
Gross re-estimated liability		1,~~026~~167,~~183~~929			1,~~179~~284,~~841~~806			1,~~299~~604,~~526~~977			1,~~635~~707,~~351~~488			1,~~740~~594,~~334~~873			1,~~636~~369,~~182~~457		1,~~417~~500,~~937~~971		1,~~552~~324,~~360~~044		1,~~382~~490,~~427~~514			1,~~550~~461,~~581~~854			1,~~506~~257,~~429~~741
Less: Re-estimated recoverables at December 31, 2008		802,743			978,029			1,100,527			1,381,241			1,467,528			1,327,407		1,085,635		916,856		650,371			717,848			670,591
Less: Re-estimated recoverables at December 31, 2009		966,505			1,088,383			1,355,116			1,440,608			1,291,727			1,045,910		878,849		616,519		677,782			634,412			527,413
Net re-estimated liability at December 31, 2008	$	223,440		$	201,812		$	198,999		$	254,110		$	272,806		$	308,775	$	332,302	$	635,504	$	732,056		$	832,733		$	835,838
Net re-estimated liability at December 31, 2009	$	201,424		$	196,423		$	249,861		$	266,880		$	303,146		$	323,547	$	622,122	$	707,525	$	812,732		$	827,442		$	730,328
Gross cumulative redundancy/(deficiency)	$	(~~223~~362,~~491~~212	)	$	(~~374~~484,~~124~~176	)	$	(~~498~~697,~~896~~620	)	$	~~(727~~296,~~994~~934	)	$	~~264~~464,~~088~~887		$	~~423~~507,~~578~~053	$	~~458~~413,~~573~~253	$	~~361~~377,~~864~~966	$	~~319~~12,~~583~~723		$	~~(47~~44,~~344~~575	)	$	—

During ~~2008~~2009, we experienced ana ~~increase~~decrease in prior accident year net loss and loss adjustment expenses of ~~34.~~$9.1 million, which includes ana ~~increase~~decrease in our allowance for reinsurance recoverables of $30.17 million due to a decrease in the amount of our carried insurance receivables. The remaining $~~31.~~8.4 million represents ~~increases~~decreases to loss and loss adjustment expense reserves related to accident years ~~2007~~2008 and prior.

The loss reserves ~~increase~~decrease of $~~31.~~8.4 million consisted ofa ~~increases of~~ $155.35 million inreduction ~~our general liability lines and $18.3 million~~ in ~~our~~property ~~professional liability~~ lines, ~~offset~~ ~~by reductions of $1.2 million in our property lines~~a ~~and~~ $02.69 million reduction in ~~our umbrella lines. The increase to the~~ general liability lines ~~consisted of increases of $20.4 million related to accident years 2006~~, ~~2007,~~ and ~~2001~~ ~~and prior, offset by reductions of $5.1 million~~a ~~related to accident years 2002 through 2005. The increase to the professional liability lines consisted of increases of~~ $204.37 million ~~related to accident years 2006 and 2007, offset by reductions of $2.0 million related to accident years 2005 and prior. The~~ reduction in ~~property~~umbrella lines, ~~consisted of~~partially ~~reductions of $2.6 million related to accident years~~offset ~~2007 and 2003 and prior, offset~~ by ~~increases~~a of $1.4.7 million ~~related~~increase ~~to accident years 2004 through 2006. The reduction~~ in ~~umbrella~~professional ~~lines~~liability ~~was primarily related to~~lines: ~~accident years 2004 and prior.~~

~~See~~• ~~Note 9~~The ofreduction in the ~~notes~~property lines primarily consisted of reductions related to ~~consolidated~~accident ~~financial statements~~year 2006 through 2008 due to better than expected loss emergence in ~~Item 8~~brokerage. • The reduction in the general liability lines primarily consisted of ~~Part II~~reductions of ~~this~~$13.5 ~~report~~million ~~for~~related ~~a reconciliation~~to accident years 2006 and prior due to loss emergence that had been consistently lower than expected during the year, partially offset by increases of ~~United~~$10.6 ~~America~~million ~~Indemnity’s~~to ~~liability~~accident years 2007 and 2008 that were driven by a large claim and an increase in our construction defect provisions for ~~losses~~ Penn America. • The reduction in the umbrella lines primarily consisted of net reductions of $5.1 million related to accident years 2007 and prior that were driven by loss ~~adjustment~~emergence ~~expenses~~throughout the year that was consistently better than expected, ~~net~~partially offset by increases of ~~reinsurance~~$0.4 ~~ceded~~million related to accident year 2008.

~~The adverse development noted from 1998 through 2005 is~~ ~~primarily related to increasing asbestos and environmental~~16 (“A&E”) reserves. The insurance industry continues to receive a substantial number of asbestos-related bodily injury claims, with an increasing focus being directed toward installers of products containing

~~asbestos~~• ~~rather~~The ~~than~~increase ~~against~~to ~~asbestos~~the ~~manufacturers.~~professional ~~This~~liability ~~shift has~~lines ~~resulted~~primarily inconsisted ~~significant~~of ~~insurance~~increases ~~coverage~~of ~~litigation implicating~~$10.1 ~~applicable~~million ~~coverage~~related ~~defenses~~to oraccident ~~determinations,~~years ~~if any,~~2007 ~~including~~and ~~but~~2008 ~~not~~due ~~limited~~ to, ~~determinations as to whether or not~~ an ~~asbestos~~increase ~~related~~in ~~bodily~~severity, ~~injury~~partially ~~claim~~offset isby ~~subject~~net ~~to aggregate~~reductions ~~limits~~ of ~~liability found in most comprehensive general liability policies~~$5.4 Inmillion ~~response~~primarily related to ~~these~~accident ~~developments, management~~years ~~increased~~2006 ~~gross~~ and ~~net A&E reserves during 2008 to reflect its best estimate of A&E exposures~~prior.

~~The~~See ~~net~~Note 8 ~~deficiency for 1999 through 2001 primarily resulted in a strengthening~~ of ~~our~~the ~~reserves~~notes ~~by $47.8 million in 2002. This was due~~ to ~~faster~~consolidated ~~than expected development in accident~~financial ~~years~~statements ~~1997 through 2001. We also increased loss reserves~~ in ~~2002 by~~Item 8 anof ~~additional $23.6~~Part ~~million~~II asof athis ~~result~~report offor a ~~rescission~~ ~~related~~reconciliation toof ~~products~~United ~~written~~America inIndemnity’s ~~1993~~liability ~~and 1994. Additional reserve~~for ~~strengthening~~losses ofand ~~$8.6 million~~loss ~~was~~adjustment ~~booked~~expenses, innet ~~2008 to account for expected for lines~~ of ~~business~~reinsurance ~~that we previously exited~~ceded.

The adverse development noted from 1999 through 2002 is primarily related to increasing asbestos and environmental (“A&E”) reserves. The insurance industry continues to receive a substantial number of asbestos-related bodily injury claims, with an increasing focus being directed toward installers of products containing asbestos rather than against asbestos manufacturers. This shift has resulted in significant insurance coverage litigation implicating applicable coverage defenses or determinations, if any, including but not limited to, determinations as to whether or not an asbestos related bodily injury claim is subject to aggregate limits of liability found in most comprehensive general liability policies. In response to these developments, management increased gross and net A&E reserves during 2008 to reflect its best estimate of A&E exposures.

Asbestos and Environmental Exposure

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

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

The liability for unpaid losses and loss adjustment expenses, inclusive of A&E reserves, reflects our best estimates for future amounts needed to pay losses and related adjustment expenses as of each of the balance sheet dates reflected in the financial statements herein in accordance with GAAP. As of December 31, ~~2008~~2009, we had $2521.41 million of net loss reserves for asbestos-related claims and $1110.65 million for environmental claims. We attempt to estimate the full impact of the A&E exposures by establishing specific case reserves on all known losses. See Note 98 of the notes to the consolidated financial statements in Item 8 of Part II of this report for tables showing our gross and net reserves for A&E losses.

In addition to the factors referenced above, establishing reserves for A&E and other mass tort claims involves more judgment than other types of claims due to, among other things, inconsistent court decisions, an increase in bankruptcy filings as a result of asbestos-related liabilities, 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 developments, management increased gross and net A&E reserves during the third quarter of 2007 to reflect its best estimate of A&E exposures. ~~One~~In 2009, one of our insurance companies was ~~recently~~ 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.

1817

~~See~~disputed ~~Note 9~~claim ofrelated ~~the~~to ~~notes~~accident toyear ~~the~~1984. ~~consolidated~~The ~~financial~~settlement is ~~statements~~conditioned inupon ~~Item 8~~certain oflegal ~~Part II~~events ofoccurring ~~this~~which ~~report~~will trigger ~~for~~financial obligations by the insurance company. ~~survival~~Management ~~ratios~~will oncontinue ato ~~gross~~monitor ~~basis~~the ~~for~~developments ~~our~~of ~~open~~the litigation ~~A&E~~to ~~claims~~determine if any additional financial exposure is present.

See Note 8 of the notes to the consolidated financial statements in Item 8 of Part II of this report for the survival ratios on a gross basis for our open A&E claims.

Investments

Our investment policy is determined by the Investment Committee of our Board of Directors. We have engaged third-party investment advisors to oversee our investments and to make recommendations to the Investment Committee of our Board of Directors. Our investment policy allows us to invest in taxable and tax-exempt fixed income investments including corporate loans and as well as publicly traded and private equity investments. With respect to fixed income investments, the maximum exposure per issuer varies as a function of the credit quality of the security. ~~The~~For ~~allocation~~our corporate loan portfolio, the maximum exposure per issuer is limited to 5% of the market value of the corporate loan portfolio. The allocation between taxable and tax-exempt bonds is determined based on market conditions and tax considerations, including the applicability of the alternative minimum tax. The maximum allowable investment in equity securities under our investment policy is 30% of our GAAP equity, or $~~189~~250.60 million at December 31, ~~2008~~2009. As of December 31, ~~2008~~2009, we had $1,~~599~~694.51 million of investments and cash and cash equivalent assets, including $~~102~~73.07 million of equity and limited partnership investments and $138.9 million in corporate loans, less a $37.3 million payable for securities purchased.

Insurance company investments must comply with applicable statutory regulations that prescribe the type, quality and concentration of investments. These regulations permit investments, within specified limits and subject to certain qualifications, in federal, state, and municipal obligations, corporate bonds, and preferred and common equity securities.

~~Although~~The wefollowing ~~generally~~table ~~intend~~summarizes toby ~~hold~~type ~~bonds~~the toestimated ~~recovery and/or maturity,~~fair ~~we regularly reevaluate our position based upon market~~value ~~conditions. As~~ of ~~December 31,~~United ~~2008,~~America ~~our~~Indemnity’s ~~bonds~~investments ~~had a weighted average maturity of 3.79 years~~ and ~~a weighted average duration, including~~ cash and ~~short-term investments, of~~cash ~~3.1 years.~~equivalents ~~Our financial statements reflect a net unrealized gain on bonds available for sale~~ as of December 31, 2009, 2008, ofand ~~$12.6 million on a pre-tax basis.~~2007:

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


	December 31, 2009					December 31, 2008					December 31, 2007
	Estimated		Percent			Estimated		Percent			Estimated		Percent
	Fair Value		of Total			Fair Value		of Total			Fair Value		of Total
(Dollars in thousands)

Cash and cash equivalents	$	186,087		10.8	%	$	292,604		18.3	%	$	244,321		13.8	%

U.S. treasury and agency obligations		236,088		13.6			152,777		9.6			186,808		10.6
Obligations of states and political subdivisions		225,598		13.0			243,030		15.2			213,074		12.1
Mortgage-backed securities(1)		364,000		21.0			384,069		24.0			456,932		25.9
Commercial mortgage-backed securities		—		—			144,457		9.0			175,160		9.9
Asset-backed securities		114,163		6.6			16,553		1.0			28,827		1.6
Corporate notes and loans		460,730		26.6			213,655		13.4			248,410		14.0
Foreign corporate bonds		70,993		4.1			29,150		1.8			32,107		1.8
Other bonds		—		—			21,283		1.3			29,248		1.7

Total fixed maturities		1,471,572		84.9			1,204,974		75.3			1,370,566		77.6
Equity securities		65,656		3.8			55,278		3.5			85,677		4.9
Other investments		7,999		0.5			46,672		2.9			64,539		3.7

Total investments and cash and cash equivalents(2)	$	1,731,314		100.0	%	$	1,599,528		100.0	%	$	1,765,103		100.0	%

	Years Ended December 31,
	2008			2007			2006
(Dollars in thousands)
Average bonds at book value	$	1,275,700		$	1,311,033		$	1,219,122
Gross bond income(1)		63,268			65,908			57,310
Book yield		4.96	%		5.03	%		4.70	%

(1)Table Represents income earned by bonds, gross of investment expenses and excluding realized gains and losses.Contents

Realized gains and (losses), including other than temporary impairments, for the years ended December 31, 2008, 2007, and 2006 were $(50.3) million, $1.0 million, and $(0.6) million, respectively.


(1)		Includes collateralized mortgage obligations of $21,959, $34,395, and $50,210 for 2009, 2008, and 2007, respectively.

(2)		Does not include payable for securities purchased of $37,258 and $710 for 2009 and 2008, respectively.

Although we generally intend to hold fixed maturities to recovery and/or maturity, we regularly reevaluate our position based upon market conditions. As of December 31, 2009, our fixed maturities had a weighted average maturity of 8.69 years and a weighted average duration, including cash and short-term investments, of 2.5 years. Our financial statements reflect a net unrealized gain on fixed maturities available for sale as of December 31, 2009 of $48.5 million on a pre-tax basis.

The following table shows the average amount of fixed maturities, income earned on fixed maturities, and the book yield thereon for the periods indicated:


	Years Ended December 31,
	2009			2008			2007
(Dollars in thousands)

Average fixed maturities at book value	$	1,307,718		$	1,275,700		$	1,311,033
Gross income on fixed maturities(1)		62,099			63,268			65,908
Book yield		4.75	%		4.96	%		5.03	%


(1)		Represents income earned by fixed maturities, gross of investment expenses and excluding realized gains and losses.

We expect that default rates on collateralized commercial real estate obligations and asset-backed securities may continue to rise. To protect ourselves against this, we have structured our portfolio to reduce the risk of default. Of the $364.0 million of residential mortgage-backed securities, $342.0 million is invested in U.S. agency paper and $22.0 million is invested in collateralized mortgage obligations, of which $20.0 million, or 91.1%, are rated AAA. Of the $114.2 million in asset-backed securities, 87.1% are rated AAA. The weighted average credit enhancement for our asset-backed securities is 20.8. In addition, in order to minimize the risk of commercial mortgage backed securities (“CMBS”) defaults due to falling commercial property values, we sold all of our CMBS in the fourth quarter of 2009 and currently do not have any direct exposure to this sector. We also face liquidity risk. Liquidity risk is when the fair value of an investment is not able to be realized due to lack of interest by outside parties in the marketplace. We attempt to diversify our investment holdings to minimize this risk. Our investment managers run periodic analysis of liquidity costs to the fixed income portfolio. We also face credit risk. 90.6% of our bonds are investment grade securities. 50.4% of our bonds are rated AAA. See “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of this report for a more detailed discussion of the credit market and our investment strategy.

The following table summarizes, by ~~type~~Standard & Poor’s rating classifications, the estimated fair value of of United America Indemnity’s investments ~~and~~in ~~cash and cash~~fixed ~~equivalents~~maturities, as of December 31, ~~2008,~~2009 ~~2007,~~ and ~~2006~~2008:

	December 31, 2008					December 31, 2007					December 31, 2006
	December 31, 2009					December 31, 2008
	Estimated		Percent			Estimated		Percent			~~Estimated~~		~~Percent~~
	Fair Value		of Total			Fair Value		of Total			~~Fair Value~~		~~of Total~~
(Dollars in thousands)
Cash and cash equivalents	$	292,604		18.3	%	$	244,321		13.8	%	$	273,745		16.5	%
AAA	$	740,658		50.4	%	$	812,659		67.4	%
U.S. Treasury and agency obligations		152,777		9.6			186,808		10.6			236,876		14.3
AA		231,403		15.7			139,906		11.6
Obligations of states, municipalities and political subdivisions		81,618		5.1			69,120		3.9			52,322		3.2
A		299,703		20.4			197,345		16.4
Special revenue bonds		161,412		10.1			143,955		8.2			118,803		7.2
BBB		60,439		4.1			48,388		4.0
Corporate bonds		242,805		15.2			278,937		15.8			322,623		19.5
BB		47,816		3.2			3,696		0.3
Mortgage-backed securities(1)		384,068		24.0			456,932		25.9			355,595		21.5
B		78,212		5.3			—		—
Commercial mortgage-backed securities		144,457		9.0			175,159		9.9			93,530		5.6
CCC		5,856		0.4			—		—
Other asset-backed securities		16,554		1.0			28,827		1.6			36,845		2.2
C		—		—			299		0.1
Other bonds		21,283		1.3			30,828		1.7			30,090		1.8
Not rated		7,485		0.5			2,681		0.2
Total bonds		1,204,974		75.3			1,370,566		77.6			1,246,684		75.3
Total fixed maturities	$	1,471,572		100.0	%	$	1,204,974		100.0	%
Equity securities		55,278		3.5			85,677		4.9			75,372		4.5
Other investments		46,672		2.9			64,539		3.7			60,863		3.7
Total investments and cash and cash equivalents	$	1,599,528		100.0	%	$	1,765,103		100.0	%	$	1,656,664		100.0	%

~~(1)~~ The ~~Includes~~following ~~collateralized~~table ~~mortgage~~sets ~~obligations~~forth the expected maturity distribution of ~~$34,395,~~United ~~$50,210,~~America ~~and~~Indemnity’s ~~$60,975~~fixed ~~for~~maturities portfolio ~~2008,~~at ~~2007,~~their ~~and~~estimated ~~2006~~market value as of December 31, ~~respectively.~~2009 and 2008:

We expect that default rates on collateralized obligations may continue to rise. To protect ourselves against these risks, we have structured our portfolio to lessen the risk. Of the $384.1 million of mortgage-backed securities, $349.7 million is invested in U.S. agency paper and $34.4 million is invested in collateralized mortgage obligations, of which $34.3 million, or 99.7%, are rated AAA. All of our commercial mortgage-backed securities are invested in senior traunches and are rated AAA. In addition, we temporarily discontinued purchasing commercial paper to minimize potential exposure to subprime risk. We held no commercial paper at December 31, 2008. We also face liquidity risk. Liquidity risk is when the fair value of an investment is not able to be realized due to lack of interest by outside parties in the marketplace. We attempt to diversify our investment holdings to minimize this risk. We also face credit risk. 99.4% of our bonds are investment grade securities. 67.4% of our bonds are rated AAA. See “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of this report for a more detailed discussion of the credit market and our investment strategy.


	December 31, 2009					December 31, 2008
	Estimated		Percent of			Estimated		Percent of
	Market Value		Total			Market Value		Total
(Dollars in thousands)

One year or less	$	59,587		4.0	%	$	49,303		4.1	%
More than one year to five years		718,081		48.8			287,273		23.8
More than five years to ten years		149,785		10.2			202,482		16.8
More than ten years to fifteen years		26,679		1.8			73,108		6.1
More than fifteen years		39,277		2.7			47,729		4.0

Securities with fixed maturities		993,409		67.5			659,895		54.8
Mortgaged-backed securities		364,000		24.7			384,069		31.9
Commercial mortgage-backed securities		—		—			144,457		12.0
Asset-backed securities		114,163		7.8			16,553		1.4

Total fixed maturities	$	1,471,572		100.0	%	$	1,204,974		100.0	%

The expected weighted average duration of our asset-backed and mortgage-backed securities is 2.5 years.

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

Our investments in corporate loans were valued at $138.9 million at December 31, 2009. Corporate loans, a new investment vehicle in 2009, sometimes also referred to as leveraged loans, are primarily investments in senior secured floating rate loans that banks have made to corporations. The loans are generally priced at an interest rate spread over LIBOR that resets every 60 to 90 days. As a result, this asset class provides protection against rising interest rates. However, this asset class is subject to default risk since these investments are typically below investment grade. To mitigate this risk, our investment managers perform an in-depth structural analysis. As part of this analysis, they focus on the strength of any security granted to the lenders, the position of the loan in the company’s capital structure and the appropriate covenant protection. In addition, as part of our risk control, our investment managers maintain appropriate portfolio diversification by limiting issuer and industry exposure.

~~The~~As ~~following~~of ~~table summarizes~~December 31, ~~by Standard & Poor’s rating classifications~~2009, ~~the~~we ~~estimated~~had ~~fair~~aggregate ~~value~~equity ofsecurities ~~United~~of $65.6 ~~America~~million ~~Indemnity’s~~that ~~investments~~consisted inof ~~bonds,~~$63.0 million ~~as of~~in ~~December 31,~~common ~~2008~~stocks and ~~2007:~~$2.6 million in preferred stocks.

	December 31, 2008					December 31, 2007
	Estimated		Percent			Estimated		Percent
	Fair Value		of Total			Fair Value		of Total
(Dollars in thousands)
AAA	$	812,659		67.4	%	$	1,045,151		76.2	%
AA		139,906		11.6			122,427		8.9
A		197,345		16.4			160,636		11.7
BBB		48,388		4.0			36,575		2.7
BB		3,696		0.3			4,044		0.3
B		—		—			814		0.1
C		299		0.1			919		0.1
Not rated		2,681		0.2			—		—
Total bonds	$	1,204,974		100.0	%	$	1,370,566		100.0	%

Our investments in other invested assets are comprised primarily of limited liability partnerships, and were valued at $8.0 million at December 31, 2009. Of this amount, $6.9 million was comprised of securities for which there is no readily available independent market price, and the remaining $1.1 million was related to a limited partnership which holds convertible preferred securities of a privately held company. These securities are subject to an appraisal action in Delaware State Court. Until the appraisal action is resolved, our ownership interest in this limited partnership is wholly illiquid. The estimated fair value of these limited partnerships is determined by the general partner of each limited partnership based on comparisons to transactions involving similar investments. Material assumptions and factors utilized in pricing these securities include future cash flows, constant default rates, recovery rates, and any market clearing activity that may have occurred since the prior month-end pricing period. We obtain the value of the partnerships at the end of each reporting period; however, we are not provided with a detailed listing of the investments held by these partnerships. We receive annual audited financial statements from each of the partnerships we own.

~~The~~Realized ~~following~~gains ~~table~~and ~~sets~~(losses), ~~forth~~including ~~the~~other ~~expected~~than ~~maturity~~temporary ~~distribution~~impairments, offor ~~United~~the ~~America~~years ~~Indemnity’s~~ended ~~bonds~~December 31, at2009, ~~their~~2008, ~~estimated~~and ~~market~~2007 ~~value~~were as$15.9 million, ~~of December~~$(50.3) 31million, ~~2008~~ and $1.0 million, ~~2007:~~respectively.

	December 31, 2008					December 31, 2007
	Estimated		Percent of			Estimated		Percent of
	Market Value		Total			Market Value		Total
(Dollars in thousands)
One year or less	$	49,303		4.1	%	$	85,513		6.3	%
More than one year to five years		287,273		23.8			272,859		19.9
More than five years to ten years		202,482		16.8			211,577		15.4
More than ten years to fifteen years		73,108		6.1			71,228		5.2
More than fifteen years		47,729		4.0			68,471		5.0
Securities with fixed maturities		659,895		54.8			709,648		51.8
Asset-backed and mortgage-backed securities		545,079		45.2			660,918		48.2
Total bonds	$	1,204,974		100.0	%	$	1,370,566		100.0	%

The expected weighted average duration of our asset-backed and mortgage-backed securities is 2.3 years.

As of December 31, 2008, we had aggregate equity securities of $55.3 million that consisted of $50.6 million in common stocks and $4.7 million in preferred stocks. We also hold other invested assets valued at $46.7 million as of December 31, 2008. These investments are primarily comprised of investments in limited partnerships. Several of these limited partnerships mainly invest in securities that are publicly traded. Securities that are held by these partnerships are valued by obtaining values from Bloomberg, other external pricing sources, and managers that make markets for these securities. We obtain the value of the partnerships at the end of each reporting period; however, we are not provided with a detailed listing of the investments held by these partnerships. We receive annual audited financial statements from each of the partnerships we own.

Our investments in other invested assets, including investments in several limited partnerships, were valued at $46.7 million at December 31, 2008. Of this amount, $13.9 million was comprised of securities for which there is no readily available independent market price. The estimated fair value of such securities is determined by the general partner of each limited partnership based on comparisons to transactions involving similar investments. Material

assumptions and factors utilized in pricing these securities include future cash flows, constant default rates, recovery rates and any market clearing activity that may have occurred since the prior month-end pricing period.

In the fourth quarter of 2008, we provided advance notice of our wish to liquidate all of our investment in two limited partnerships that were valued at $25.4 million in total in our other invested assets portfolio at December 31, 2008. In January 2009, we received a distribution from these partnerships in the amount of $24.1 million, resulting in a realized gain of $7.4 million. This amount represents 95% of the estimated capital account balances for both partnerships as of December 31, 2008. The final distribution will be received when the partnerships’ audited financial statements for 2008 are finalized.

Competition

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

• American International Group; • Argo Group International Holdings, Ltd.; • Berkshire Hathaway; • ~~Century~~Everest ~~Surety~~Re Group, Ltd.; • Great American Insurance Group; • HCC Insurance Holdings, Inc.; • IFG Companies; • ~~James~~JRG ~~River~~Reinsurance ~~Insurance~~Company, ~~Group~~Ltd.; • Maiden Holdings, Ltd.; • Markel Corporation; • Max Capital Group, Ltd.; • Nationwide Insurance; • Navigators Insurance Group; • ~~Philadelphia~~RLI ~~Consolidated Group~~Corporation; • ~~RLI~~Torus ~~Corporation~~Insurance Holdings, Ltd.; • W.R. Berkley Corporation; • Western World Insurance Group.

~~In addition to the companies mentioned above, we are facing~~ ~~competition from standard line companies who are continuing to~~21 write risks that traditionally had been written by excess and surplus lines carriers, Bermuda companies who are establishing relationships with wholesale brokers, and new excess and surplus competitors.

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

A number of recent, proposed or potential legislative or marketplace developments could further increase competition in our industry. These developments include an influx of new capital that resulted from the formation of

~~new~~In ~~insurers~~addition into the ~~marketplace~~companies ~~and~~mentioned ~~existing~~above, ~~companies~~we ~~that~~are ~~have~~facing ~~attempted~~competition tofrom ~~expand~~standard ~~their~~line ~~business~~companies aswho aare ~~result~~continuing ~~of better pricing~~to orwrite ~~terms,~~risks ~~legislative~~that ~~mandates~~traditionally ~~for~~had ~~insurers~~been towritten ~~provide~~by ~~certain~~excess and ~~types~~surplus oflines ~~coverage~~carriers, inBermuda ~~areas~~companies ~~where~~who ~~existing~~are ~~insurers do business~~establishing ~~which~~relationships ~~could~~with ~~eliminate~~wholesale ~~the opportunities to write those coverages~~brokers, and ~~proposed~~other ~~federal~~excess ~~legislation which would~~and ~~establish~~surplus ~~national standards for state insurance regulation~~competitors.

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

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

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

Employees

We have approximately ~~360~~390 employees, most of whom are located at our Bala Cynwyd, Pennsylvania office. This includes two individuals who operate out of our Bermuda office and 4167 individuals who operate out of our field offices that are located in Arizona, California, ~~Illinois~~Georgia, ~~Michigan~~Illinois, ~~and~~New ~~North~~York, North Carolina, and Texas. In addition, we have contracts with ~~international~~ international insurance service providers based in Bermuda to provide services to our Reinsurance Operations. ~~Our Bermuda employees are either~~ permanent residents of Bermuda or British citizens who possess Bermuda status. All employees that do not possess Bermuda status who operate out of our Bermuda office are subject to approval of any required work permits that may be applicable. None of our employees are covered by collective bargaining agreements, and our management believes that our relationship with our employees is excellent.

Our Bermuda employees are either permanent residents of Bermuda who possess Bermuda status or are considered residents by the applicable employment visas issued by the Bermuda immigration authorities.

None of our employees are covered by collective bargaining agreements, and our management believes that our relationship with our employees is excellent.

Ratings

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

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

Regulation

General

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

framework than exists in the United States, where we are subject to extensive regulation, primarily by the various State departments of insurance.

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

U.S. Regulation

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

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

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

Changes of Control

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

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

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

~~Legislative~~ ~~Changes~~23

On November 26, 2002, the Federal Terrorism Risk Insurance Act (“TRIA”) was enacted to ensure the availability of insurance coverage for defined acts of terrorism in the United States. On December 22, 2005, the Terrorism Risk Insurance Extension Act of 2005 was enacted, which extended TRIA until December 31, 2007. TRIA was further extended, until December 31, 2014, with the enactment, on December 26, 2007, of the Terrorism Risk Insurance Program Reauthorization Act (“TRIPRA”). It should be noted that under TRIPRA, the distinction between foreign and domestic acts of terrorism is eliminated, thus making losses for domestic acts of terrorism eligible for reimbursement. This law requires insurers writing certain lines of property and casualty insurance, including us, to offer coverage against certified acts of terrorism causing damage within the United States or to U.S. flagged vessels or aircraft. In return, the law requires the federal government, should an insurer comply with the procedures of the law, to indemnify the insurer for 90% of covered losses, exceeding a deductible, based on a percentage of direct earned premiums for the previous calendar year, up to an industry limit of $100.0 billion resulting from covered acts of terrorism. TRIPRA also requires that post-event policyholder surcharges be imposed at 133% of the actual payout by the Treasury Department. Additionally, the availability and affordability of terrorism insurance coverage must be studied and reported on by the Government Accountability Office (“GAO”) within 180 days of enactment and a study on possible expansion of TRIPRA to include coverage for nuclear, biological, chemical, and radiological exposures must be completed by the GAO within one year of enactment.

For 2008, our deductible for certified acts of terrorism was 20.0% of our direct earned premium for the year ended December 31, 2007, or $121.1 million. For 2009, our deductible for certified acts of terrorism will be 20% of the full year of our direct earned premium for the year ended December 31, 2008, or $85.8 million. We believe that our net exposure to insured losses from certified acts of terrorism will be considerably less than the deductible amount for 2008 due to: 1) the low percentage of insureds who have elected to purchase the offered terrorism coverage (approximately 0.2% of 2008 direct earned premium was for the coverage subject to TRIA); 2) the fact that the majority of our customers are small commercial businesses; 3) an exclusion that is attached to all of our policies for insureds who do not elect this coverage; and 4) the amount of reinsurance coverage that is available to us, to various extents, under the majority of our per risk reinsurance contracts.

We believe that we are in compliance with the requirements of TRIPRA.

State Insurance Regulation

State insurance authorities have broad regulatory powers with respect to various aspects of the business of U.S. insurance companies, including but not limited to licensing companies to transact admitted business or determining eligibility to write surplus lines business, accreditation of reinsurers, admittance of assets to statutory surplus, regulating unfair trade and claims practices, establishing reserve requirements and solvency standards, regulating investments and dividends, approving policy forms and related materials in certain instances and approving premium rates in certain instances. State insurance laws and regulations may require the U.S. Insurance Subsidiaries to file financial statements with insurance departments everywhere they will be licensed or eligible or accredited to conduct insurance business, and their operations are subject to review by those departments at any time. The U.S. Insurance Subsidiaries prepare statutory financial statements in accordance with statutory accounting principles, or “SAP,” and procedures prescribed or permitted by these departments. State insurance departments also conduct periodic examinations of the books and records, financial reporting, policy filings and market conduct of insurance companies domiciled in their states, generally once every three to five years, although market conduct examinations may take place at any time. These examinations are generally carried out in cooperation with the insurance departments of other states under guidelines promulgated by the NAIC. In addition, admitted insurers are subject to targeted market conduct examinations involving specific insurers by state insurance regulators in any state in which the insurer is admitted. The insurance departments for the states of Pennsylvania, Indiana, Wisconsin, and Virginia ~~are~~ ~~currently~~completed intheir ~~the~~financial ~~process~~examinations of ~~their~~our U.S. Insurance ~~financial~~Subsidiaries ~~examinations~~ for the periods ended December 31, 2007. WeTheir ~~expect their~~ final reports towere be issued ~~after~~in ~~the date of the filing of this~~2009, ~~report.~~and Wethere dowere ~~not~~no ~~anticipate any material findings that would~~ materially ~~impact~~adverse usfindings.

Insurance Regulatory Information System Ratios

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

The following summarizes the ~~2008~~2009 IRIS ratio results for our insurance companies in our Insurance Operations:

	•	The Penn-America Insurance Companies did not have any unusual values.
	•	The United National Insurance Companies all had an unusual value for the change in net written premiums resulting from the decline in gross written premiums during 2008.


	•	Except for United National Insurance Company, our insurance companies had an unusual value for the change in net written premiums resulting from the decline in gross written premiums during 2009 and the result of an unearned premium transfer within the group.

	•	Penn-America Insurance Company and United National Insurance Company had an unusual value for investment yield. The investment yield for each company exceeded the high end of the range due to dividend income received from its wholly-owned insurance subsidiaries.

	•	Diamond State Insurance Company had an unusual value for a liquidity ratio, equal to the ratio of liabilities, adjusted for deferred agents’ balances, to liquid assets. The unusual value results from a high concentration of investments in wholly-owned insurance subsidiaries which are excluded from the value of liquid assets. Diamond State Insurance Company is a participant in a pooling arrangement with our other U.S. insurance subsidiaries and has proportional surplus to meet its share of current and long-term obligations.

• United National Insurance Company had three additional unusual values:

	(1)	investment yield as a result of the write-down of goodwill related to its investment in Penn-America; and
	(2)	gross change in policyholders’ surplus as a result of decline in market value on its equity portfolio, increases in losses related to prior accident years and decline in investment yield.

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

Risk-Based Capital Regulations

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

~~Based on the standards currently adopted, we reported in our~~ ~~2008 statutory filings that the capital and surplus of our U.S.~~24 ~~Insurance Companies are above the prescribed Company Action Level Risk-Based Capital requirements.~~

action, and generally not as a means to rank insurers. State insurance laws impose broad confidentiality requirements on those engaged in the insurance business (including insurers, general agencies, brokers and others) and on state insurance departments as to the use and publication of risk-based capital data. The respective state insurance regulators have explicit regulatory authority to require various actions by, or to take various actions against, insurers whose total adjusted capital does not exceed certain company action level risk-based capital levels.

Based on the standards currently adopted, we reported in our 2009 statutory filings that the capital and surplus of our U.S. Insurance Companies are above the prescribed Company Action Level Risk-based Capital requirements.

Statutory Accounting Principles (“SAP”)

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

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

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

State Dividend Limitations

Under Indiana law, Diamond State Insurance Company and United National Casualty Insurance Company may not pay any dividend or make any distribution of cash or other property, the fair market value of which, together with that of any other dividends or distributions made within the 12 consecutive months ending on the date on which the proposed dividend or distribution is scheduled to be made, exceeds the greater of (1) 10% of its surplus as of the ~~31st~~ 31st day of December of the last preceding year, or (2) its net income for the 12 month period ending on the ~~31st~~ 31st day of December of the last preceding year, unless the commissioner approves the proposed payment or fails to disapprove such payment within 30 days after receiving notice of such payment. An additional limitation is that Indiana does not permit a domestic insurer to declare or pay a dividend except out of earned surplus unless otherwise approved by the commissioner before the dividend is paid. See Note 1716 of the notes to consolidated financial statements in Item 8 of Part II of this report for the dividends declared and paid by the United National Insurance Companies and the Penn-America Insurance Companies in 2009.

financial statements in Item 8 of Part II of this report for the dividends declared and paid by the United National Insurance Companies and the Penn-America Insurance Companies in 2008.

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

~~Under Virginia law, Penn-Patriot Insurance Company may not pay~~ ~~any dividend or make any distribution of cash or other property,~~25 the fair market value of which, together with that of any other dividends or distributions made within the preceding 12 consecutive months exceeds the lesser of either (1) 10% of its surplus as of the 31st day of December of the last preceding year, or (2) its net income for the 12 month period ending on the 31st day of December of the last preceding year, not including pro rata distributions of any class of its securities, unless the commissioner approves the proposed payment or fails to disapprove such payment within 30 days after receiving notice of such payment.

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

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

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

See Note 1716 of the notes to consolidated financial statements in Item 8 of Part II of this report for the dividends declared and paid by the United National Insurance Companies and the Penn-America Insurance Companies in ~~2008~~2009 and the maximum amount of distributions that they could pay as dividends in ~~2009~~2010.

Guaranty Associations and Similar Arrangements

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

recover assessments paid through full or partial premium tax offsets or in limited circumstances by surcharging policyholders.

Operations of Wind River Reinsurance

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

As a reinsurer that is not licensed, accredited, or approved in any state in the United States, Wind River Reinsurance is required to post collateral security with respect to the reinsurance liabilities it assumes from our Insurance Operations as well as other U.S. ceding companies. The posting of collateral security is generally ~~required in order for~~ U.S. ceding companies to obtain credit on their U.S. statutory financial statements with respect to reinsurance liabilities ceded to unlicensed or unaccredited reinsurers. Under applicable United States “credit for reinsurance” statutory provisions, the security arrangements generally may be in the form of letters of credit, reinsurance trusts maintained by third-party trustees or funds-withheld arrangements whereby the ceded premium is held by the ceding company. If “credit for reinsurance” laws or regulations are made more stringent in Indiana, Pennsylvania, Virginia, Wisconsin or other applicable states or any of the Insurance Operations redomesticates to one of the few states that do not allow credit for reinsurance ceded to non-licensed reinsurers, we may be unable to realize some of the benefits we expect from our business plan. Accordingly, our Reinsurance Operations could be adversely affected. See Note 15 of the notes to consolidated financial statements in Item 8 of Part II of this report for our risk-based capital results.

~~Even though Wind River Reinsurance does not currently offer~~ ~~third party excess and surplus lines insurance products, it~~26 maintains a U.S. surplus lines trust fund with a U.S. bank to secure its U.S. surplus lines policyholders. The amount held in trust at December 31, 2008 was $5.9 million. Outstanding reserves at December 31, 2008 were $0.1 million. The current minimum amount that Wind River Reinsurance needs to maintain in the trust fund is $5.4 million. In subsequent years, if Wind River Reinsurance were to write third party excess and surplus lines insurance, it would need to maintain in the trust fund an amount equal to 30% of any amount up to the first $200.0 million plus further graduated amounts of its U.S. surplus lines liabilities, as at each year end, as certified by an actuary, but subject to a current maximum of $100.0 million. The trust fund is irrevocable and must remain in force for a period of five years from the date of written notice to the trustee of the termination of the trust unless the liabilities with respect to all risks covered by the trust fund have been transferred to an insurer licensed to do business in all states where insurance is in force.

required in order for U.S. ceding companies to obtain credit on their U.S. statutory financial statements with respect to reinsurance liabilities ceded to unlicensed or unaccredited reinsurers. Under applicable United States “credit for reinsurance” statutory provisions, the security arrangements generally may be in the form of letters of credit, reinsurance trusts maintained by third-party trustees or funds-withheld arrangements whereby the ceded premium is held by the ceding company. If “credit for reinsurance” laws or regulations are made more stringent in Indiana, Pennsylvania, Virginia, Wisconsin or other applicable states or any of the Insurance Operations redomesticates to one of the few states that do not allow credit for reinsurance ceded to non-licensed reinsurers, we may be unable to realize some of the benefits we expect from our business plan. Accordingly, our Reinsurance Operations could be adversely affected. Even though Wind River Reinsurance does not currently offer third party excess and surplus lines insurance products, it maintains a U.S. surplus lines trust fund with a U.S. bank to secure its U.S. surplus lines policyholders. The amount held in trust at December 31, 2009 was $6.2 million. Outstanding reserves at December 31, 2009 were $0.1 million. The current minimum amount that Wind River Reinsurance needs to maintain in the trust fund is $5.4 million. In subsequent years, if Wind River Reinsurance were to write third party excess and surplus lines insurance, it would need to maintain in the trust fund an amount equal to 30% of any amount up to the first $200.0 million plus further graduated amounts of its U.S. surplus lines liabilities, as at each year end, as certified by an actuary, but subject to a current maximum of $100.0 million. The trust fund is irrevocable and must remain in force for a period of five years from the date of written notice to the trustee of the termination of the trust unless the liabilities with respect to all risks covered by the trust fund have been transferred to an insurer licensed to do business in all states where insurance is in force.

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

Bermuda Insurance Regulation

The Bermuda Insurance Act 1978 and related regulations, as amended (the “Insurance Act”), regulates the insurance business of Wind River Reinsurance and provides that no person may carry on any insurance business in or from within Bermuda unless registered as an insurer by the Bermuda Monetary Authority (the “BMA”) under the Insurance Act. Wind River Reinsurance has been registered as a Class 3B insurer by the BMA. A body corporate is registrable as a Class 3B insurer if it intends to carry on insurance business in circumstances where 50% or more of the net premiums written or 50% or more of the loss and loss expense provisions represent unrelated business, or its total net premiums written from unrelated business are $50.0 million or more. The continued registration of an applicant as an insurer is subject to it complying with the terms of its registration and such other conditions as the BMA may impose from time to time.

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

Classification of Insurers

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

Cancellation of Insurer’s Registration

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

Principal Representative

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

Independent Approved Auditor

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

Loss Reserve Specialist

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

Statutory Financial Statements

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

Annual Statutory Financial Return

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

Minimum Margin of Solvency and Restrictions on Dividends and Distributions

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

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

Minimum Liquidity Ratio

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

Restrictions on Dividends and Distributions

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

Wind River Reinsurance is prohibited, without the approval of the BMA, from reducing by 15% or more its total statutory capital as set out in its previous year’s financial statements, and any application for such approval must include such information as the BMA may require. In addition, at any time it fails to meet its minimum margin of solvency, Wind River Reinsurance is required within 30 days after becoming aware of such failure or having reason to believe that such failure has occurred, to file with the BMA a written report containing certain information.

Additionally, under the Companies Act, Wind River Reinsurance may not declare or pay a dividend, or make a distribution from contributed surplus, if there are reasonable grounds for believing that it is, or would after the payment, be unable to pay its liabilities as they become due, or if the realizable value of its assets would be less than the aggregate of its liabilities and its issued share capital and share premium accounts. ~~In June 2008, Wind River Reinsurance declared and paid~~ ~~a dividend of $50.0 million to United America Indemnity.~~

Supervision, Investigation and Intervention

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

Disclosure of Information

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

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

Certain Other Bermuda Law Considerations

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

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

Taxation of United America Indemnity and Subsidiaries

Cayman Islands

Under current Cayman Islands law, we are not required to pay any taxes in the Cayman Islands on our income or capital gains. We have received an undertaking that, in the event of any taxes being imposed, we will be exempted from taxation in the Cayman Islands until the year 2023. We are incorporated under the laws of the Cayman Islands as an exempted company and, as such, we obtained an undertaking on September 2, 2003 from the Governor in Council of the Cayman Islands substantially that, for a period of 20 years from the date of such undertaking, no law that is enacted in the Cayman Islands imposing any tax to be levied on profit or income or gains or appreciation shall apply to us and no such tax and no tax in the nature of estate duty or inheritance tax will be payable, either directly or by way of withholding, on our common shares. Given the limited duration of the undertaking, we cannot be certain that we will not be subject to Cayman Islands tax after the expiration of the 20-year period.

Bermuda

Under current Bermuda law, we and our Bermuda subsidiaries are not required to pay any taxes in Bermuda on our income or capital gains. We have received an undertaking from Bermuda that, in the event of any taxes being imposed, we will be exempt from taxation until March 2016. Currently, there is no Bermuda income, corporation or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by Wind River Reinsurance or its shareholders, other than shareholders ordinarily resident in Bermuda, if any. Currently, there is no Bermuda withholding or other tax on principal, interest, or dividends paid to holders of the common shares of Wind River Reinsurance, other than holders ordinarily resident in Bermuda, if any. There can be no assurance that Wind River Reinsurance or its shareholders will not be subject to any such tax in the future.

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

Luxembourg

The Luxembourg Companies are all private limited liability companies, incorporated under the laws of Luxembourg. The Luxembourg Companies are all taxable companies, which may carry out any activities that fall within the scope of their corporate object clause. The Luxembourg Companies are resident taxpayers fully subject to Luxembourg corporate income tax at a rate of 2928.6359%, ~~capital~~and ~~duty~~net worth tax at a rate of 0.5%,. ~~and~~The ~~net~~Luxembourg Companies ~~worth~~are entitled to benefits of the tax attreaties aconcluded ~~rate~~between ofLuxembourg and other countries and European Union Directives.

0.5%. The Luxembourg Companies are entitled to benefits of the tax treaties concluded between Luxembourg and other countries and European Union Directives.

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

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

The confirmation from the Luxembourg Tax Administration covers the current financing operations of the Luxembourg Companies through September 15, 2018. Given the limited duration of the confirmation and the possibility of a change in the relevant tax laws or the administrative policy of the Luxembourg Tax Administration, we cannot be certain that we will not be subject to greater Luxembourg taxes in the future.

Ireland

U.A.I. (Ireland) Limited, an indirect wholly-owned subsidiary, is a private limited liability company incorporated under the laws of Ireland. The company is a resident taxpayer fully subject to Ireland corporate income tax of 12.5% on trading income and 25.0% on non-trading income, including interest and dividends from foreign companies. Currently, U.A.I. (Ireland) Limited only has non-trading income, so it is subject to corporate income tax of 25.0%.

In February 2010, we announced that our Board of Directors has unanimously approved a plan for us to re-domicile from the Cayman Islands to Ireland. (See “Recent Developments” above for details.) If the proposal is accepted, we will become a wholly-owned subsidiary of Global Indemnity plc, a newly formed Irish company, which will be a resident taxpayer similar to U.A.I. (Ireland) Limited. It is anticipated that Global Indemnity plc will only have non-trading income, so it will be subject to corporate income tax of 25.0%.

United States

The following discussion is a summary of all material U.S. federal income tax considerations relating to our operations. We manage our business in a manner designed to mitigate the risk that either United America Indemnity or Wind River Reinsurance will be treated as engaged in a U.S. trade or business for U.S. federal income tax purposes. However, whether business is being conducted in the United States is an inherently factual determination. Because the United States Internal Revenue Code (the “Code”), regulations and court decisions fail to identify definitively activities that constitute being engaged in a trade or business in the United States, we cannot be certain that the IRS will not contend successfully that United America Indemnity or Wind River Reinsurance is or will be engaged in a trade or business in the United States. A non-U.S. corporation deemed to be so engaged would be subject to U.S. income tax at regular corporate rates, as well as the branch profits tax, on its income that is treated as effectively connected with the conduct of that trade or business unless the corporation is entitled to relief under the permanent establishment provision of an applicable tax treaty, as discussed below. Such income tax, if imposed, would be based on effectively connected income computed in a manner generally analogous to that applied to the income of a U.S. corporation, except that a non-U.S. corporation is generally entitled to deductions and credits only if it timely files a U.S. federal income tax return. Wind River Reinsurance is filing protective U.S. federal income tax returns on a timely basis in order to preserve the right to claim income tax deductions and credits if it is ever determined that it is subject to U.S. federal income tax. The highest marginal federal income tax rates currently are 35% for a corporation’s effectively connected income and 30% for the “branch profits” tax.

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

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

An insurance enterprise resident in Bermuda generally will be 32entitled to the benefits of the Bermuda Treaty if (1) more than 50% of its shares are owned beneficially, directly or indirectly, by individual residents of the

~~business~~United States ~~profits~~or ofBermuda or U.S. citizens and (2) its ~~insurance~~income ~~enterprise~~is ~~found~~not toused bein substantial part, directly or ~~effectively~~indirectly, ~~connected~~to ~~with~~make adisproportionate ~~U.S. trade~~distributions ~~or business~~to, ~~unless~~or to ~~that~~meet ~~trade~~certain orliabilities ~~business~~to, ispersons ~~conducted~~who ~~through~~are aneither ~~permanent~~residents ~~establishment~~of ineither the United States. Noor ~~regulations~~Bermuda ~~interpreting~~nor U.S. citizens. ~~the~~We ~~Bermuda~~cannot ~~Treaty~~be ~~have~~certain ~~been~~that ~~issued.~~ Wind River Reinsurance will be ~~currently~~eligible ~~intends~~for toBermuda ~~conduct~~Treaty ~~its~~benefits ~~activities~~in tothe ~~reduce~~future ~~the~~because ~~risk~~of ~~that~~factual itand ~~will~~legal ~~have~~uncertainties aregarding ~~permanent establishment in~~ the ~~United~~residency and ~~States,~~citizenship ~~although~~of weour ~~cannot be certain that we will achieve this result~~shareholders.

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

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

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

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


Item 1A.	*Risk Factors*

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

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

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

Risks Related to our Business

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

Our success substantially depends upon our ability to attract and retain qualified employees and upon the ability of our senior management and other key employees to implement our business strategy. We believe there are a limited number of available, qualified executives in the business lines in which we compete. The success of our ~~initiatives and our future~~ performance depend, in significant part, upon the continued service of our senior management team, including Larry A. Frakes, our President and Chief Executive Officer, Thomas M. McGeehan, our Interim Chief Financial Officer, Raymond H. McDowell, President of Penn-America Group, Scott Reynolds, President of United National Group, David J. Myers, President of Diamond State Group, and Edward M. Rafter, Senior Vice President and Chief Information / Administrative Officer of the United National Insurance Companies and the Penn-America Insurance Companies. Messrs. Frakes, McDowell, Reynolds, Myers, and Rafter have employment agreements with us, although these agreements cannot assure us of the continued service of these individuals. We do not currently maintain key man life insurance policies with respect to any of our employees.

initiatives and our future performance depend, in significant part, upon the continued service of our senior management team, including Larry A. Frakes, our President and Chief Executive Officer, Thomas M. McGeehan, our Chief Financial Officer, Matthew B. Scott, President of Penn-America Group, J. Scott Reynolds, President of United National Group, David J. Myers, President of Diamond State Group, Troy W. Santora, President of Wind River Reinsurance Company, Limited, and Edward M. Rafter, Senior Vice President and Chief Information / Administrative Officer of the United National Insurance Companies and the Penn-America Insurance Companies. Messrs. Frakes, McGeehan, Scott, Reynolds, Myers, and Rafter have employment agreements with us, although these agreements cannot assure us of the continued service of these individuals. We do not currently maintain key man life insurance policies with respect to any of our employees.

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

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

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

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


	•	claim and expense payments;

	•	severity of claims;

	•	legislative and judicial developments; and

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

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

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

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determine that our reserves were understated in the past. When we increase reserves, our pre-tax income for the period in which we do so will decrease by a corresponding amount. In addition to having an effect on reserves and pre-tax income, increasing or “strengthening” reserves causes a reduction in our insurance companies’ surplus and could cause the rating of our insurance company subsidiaries to be downgraded or placed on credit watch. Such a downgrade could, in turn, adversely affect our ability to sell insurance policies.

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

Results of operations of property and casualty insurers are subject to man-made and natural catastrophes. WeWhile there were no individual catastrophic events that generated significant losses for us in 2009, we have experienced, and expect to experience in the future, catastrophe losses. It is possible ~~possible~~ that a catastrophic event or a series of multiple catastrophic ~~catastrophic~~ events could have a material adverse effect on our operating ~~operating~~ results and financial condition. Our operating results could be negatively impacted if we experience losses from catastrophes ~~catastrophes~~ that are in excess of ~~our~~the catastrophe reinsurance coverage of ~~coverage~~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 ~~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.

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

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

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

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

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

~~As of December 31, 2008, we had $679.3 million of~~ ~~reinsurance receivables, and $477.1 million of collateral~~34 was held in trust to support our reinsurance receivables. Our reinsurance receivables, net of collateral held, were $202.2 million. We also had $16.4 million of prepaid reinsurance premiums, net of collateral held. As of December 31, 2008, our largest reinsurer represented approximately 44.5% of our reinsurance receivables, or $316.4 million, and our second largest reinsurer represented approximately 27.3% of our reinsurance receivables, or $194.0 million. As of December 31, 2008, we had committed collateral of $261.9 million and $170.2 million from our largest reinsurer and second largest reinsurer, respectively. See “Business — Reinsurance of Underwriting Risk” in Item 1 of Part I of this report.

As of December 31, 2009, we had $543.4 million of reinsurance receivables, and $378.1 million of collateral was held in trust to support our reinsurance receivables. Our reinsurance receivables, net of collateral held, were $165.3 million. We also had $11.1 million of prepaid reinsurance premiums, net of collateral held. As of December 31, 2009, our largest reinsurer represented approximately 44.7% of our reinsurance receivables, or $256.5 million, and our second largest reinsurer represented approximately 22.7% of our reinsurance receivables, or $130.1 million. As of December 31, 2009, we had collateral of $207.6 million and $123.3 million from our largest reinsurer and second largest reinsurer, respectively. See “Business — Reinsurance of Underwriting Risk” in Item 1 of Part I of this report.

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

We derive a significant portion of our income from our invested assets. As a result, our operating results depend in part on the performance of our investment portfolio. For ~~2008~~2009, our income derived from invested assets, was $1786.61 million, net of investment expenses, including net realized ~~losses~~gains of $5015.39 million. Of this amount, $325.16 million were other ~~other~~ than temporary impairments. For ~~2007~~2008, our income derived from ~~from~~ invested assets, was $7817.36 million, net of investment expenses, including net realized ~~gains~~losses of $150.03 million~~, or~~. 66Of this amount, $32.3%1 million ofwere ~~our~~other ~~pre-tax~~than ~~income~~temporary impairments. Our operating results are subject to a variety of investment risks, including risks relating to general economic conditions, market volatility, interest rate fluctuations, liquidity risk and credit and default risk. The fair value of fixed income investments can fluctuate depending on changes in interest rates and the credit quality of underlying issuers. Generally, the fair market value of these investments has an inverse relationship with changes in interest rates, while net investment income earned by us from future investments in ~~bonds~~fixed maturities will generally increase or decrease with changes in interest rates. Additionally, with respect to certain of our investments, we are subject to pre-payment or reinvestment risk.

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

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

We are also subject to credit risk due to non-payment of 36principal or interest. Current market conditions increase the risk that companies may default on their credit obligations. Several classes of securities that we hold, including our corporate notes and loan securities, have default risk. As interest rates rise for companies that are deemed to be less creditworthy, there is a greater risk that they will be unable to pay contractual interest or principal on their debt obligations.

Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Although we attempt to take measures to manage the risks of investing in a changing interest rate environment, we may not be able to mitigate interest rate sensitivity effectively. A significant increase in interest rates could have a material adverse effect on the

~~We are also subject to credit risk due to non-payment of principal or interest. Current~~ market ~~conditions~~value ~~increase the risk that companies may default on their credit obligations. Several classes~~ of ~~securities that we hold, including~~ our ~~corporate~~ ~~securities,~~fixed ~~have~~maturities ~~default risk~~securities. AsOur ~~interest rates rise~~mitigation ~~for~~efforts ~~companies~~include ~~that~~maintaining ~~are~~a ~~deemed~~high-quality toportfolio bewith ~~less creditworthy, there is~~a arelatively ~~greater~~short ~~risk~~duration ~~that~~to ~~they~~reduce ~~will~~the beeffect ~~unable~~of tointerest ~~pay contractual~~rate ~~interest~~changes ~~or principal~~ on ~~their~~market ~~debt obligations~~value.

~~Interest~~We ~~rates~~also ~~are~~have ~~highly~~an ~~sensitive~~equity toportfolio ~~many~~that ~~factors,~~represented ~~including~~approximately ~~governmental~~3.9% ~~monetary~~of ~~policies,~~our ~~domestic~~total investments and ~~international economic~~cash and ~~political~~cash ~~conditions~~equivalents portfolio, ~~and~~net ~~other~~of ~~factors~~payable ~~beyond~~for ~~our~~securities purchased of ~~control~~$37.3 million, ~~Although~~as weof ~~attempt~~December 31, to2009. ~~take measures to manage the~~The ~~risks~~performance of ~~investing~~our inequity aportfolio ~~changing~~is ~~interest~~dependent ~~rate~~upon ~~environment,~~a wenumber ~~may~~of ~~not~~factors, beincluding ~~able~~many toof ~~mitigate~~the ~~interest~~same ~~rate~~factors ~~sensitivity effectively.~~that ~~Our~~affect ~~mitigation efforts include maintaining a~~the ~~high-quality~~performance ~~portfolio~~of ~~with~~our afixed ~~relatively~~income ~~short~~investments, ~~duration~~although tothose ~~reduce~~factors ~~the~~sometimes ~~effect~~have ofthe ~~interest~~opposite ~~rate~~effect ~~changes~~ on ~~book~~the ~~value.~~performance Aof ~~significant portion of~~ the ~~investment~~equity portfolio. ~~matures~~Individual ~~each~~equity securities have ~~year,~~unsystematic ~~allowing~~risk. ~~for~~We ~~reinvestment~~could atexperience ~~current~~ market ~~rates.~~declines ~~The~~on these ~~portfolio~~investments. isWe ~~actively~~also ~~managed,~~have ~~and~~systematic ~~trades~~risk, ~~are~~which ~~made~~is tothe ~~balance~~risk ~~our~~inherent ~~exposure~~in tothe ~~interest~~general ~~rates.~~market ~~However,~~due ato ~~significant~~broad ~~increase~~macroeconomic infactors ~~interest~~that ~~rates~~affect ~~could~~all ~~have~~companies ain ~~material~~the ~~adverse~~market. ~~effect~~If on the market ~~market~~indexes were to decline, we anticipate that the value of our portfolio ~~fixed~~would ~~income~~be ~~investments~~negatively affected.

We ~~also~~ have ~~an equity portfolio that represented approximately 3~~$138.5%9 million of ~~our total~~ investments ~~and~~in ~~cash~~corporate ~~and cash equivalents~~loans. ~~portfolio,~~Corporate asloans ofare ~~December 31,~~primarily ~~2008.~~investments ~~The~~in ~~performance~~senior ~~of our~~secured ~~equity~~floating ~~portfolio~~rate isloans ~~dependent~~that ~~upon~~banks ahave ~~number~~made ofto ~~factors,~~corporations. The ~~including~~loans ~~many~~are ofgenerally ~~the~~priced ~~same~~at ~~factors~~an ~~that~~interest ~~affect~~rate ~~the~~spread ~~performance of~~over ~~our fixed income investments, although those factors~~LIBOR ~~sometimes~~that ~~have~~resets ~~the~~every ~~opposite~~60 ~~effect on performance as~~ to ~~the equity portfolio~~90 days. ~~Individual~~As ~~equity~~a ~~securities~~result, ~~have~~this ~~unsystematic~~asset ~~risk.~~class Weprovides ~~could~~protection ~~experience~~against ~~market~~rising ~~declines~~interest ~~on these investments~~rates. WeHowever, ~~also~~this ~~have~~asset ~~systematic~~class ~~risk, which~~ is ~~the~~subject ~~risk inherent in the general market due~~ to ~~broad~~default ~~macroeconomic~~risk ~~factors~~since ~~that affect~~these ~~all~~investments ~~companies~~are intypically ~~the~~below ~~market.~~investment ~~If the market indexes were to decline, we anticipate that the value of our portfolio would be negatively affected~~grade.

We have $468.70 million of investments in limited partnerships. ~~Of this amount, $13.9 million was comprised of securities for which there is no readily available independent market price.~~ Material assumptions and factors utilized in pricing these securities include future cash flows, constant ~~constant~~ default rates, recovery rates, and any market clearing activity ~~activity~~ that may have occurred since the prior month-end pricing period.

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

As of December 31, ~~2008~~2009, we had approximately $32.5 million worth of investment exposure to subprime investments and Alt-A investments. Of that amount, approximately $10.28 million of those investments have been rated AAA by Standard & Poor’s, $1.86 million were rated BBB- to AA, and $0.51 million were rated ~~BB+~~CCC. Impairments on these investments were $0.59 million during ~~2008~~2009.

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

We market and distribute our insurance products through a group of approximately 110 professional general agencies that have specific quoting and binding authority and that in turn sell our insurance products to insureds through retail insurance brokers. For the year ended December 31, ~~2008~~2009, our top five non-affiliated agencies, all of which market more than one specific product, represented 2934.81% of our gross premiums written. No one agency accounted for more that 912.59% of our ~~gross~~ gross premiums written. A loss of all or substantially all of ~~the~~ the business produced by any more of these general agencies ~~could~~ could have an adverse effect on our results of operations.

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

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

~~We May~~ ~~Not Be Successful in Executing Our Business Plan For Our~~36 ~~Reinsurance Operations.~~

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

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

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


	•	competition;

	•	capital capacity;

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

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

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

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

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

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

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

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

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

Insurance premiums generally flow from the insured to their retail broker, then into a trust account controlled by our professional general agencies. Our general agencies are typically required to forward funds, net of commissions, to us following the end of each month. Consequently, we assume a degree of credit risk on the aggregate amount of these balances that have been paid by the insured but have yet to reach us.

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

We market and distribute our insurance products through ~~a group~~ ~~of approximately 110~~ professional general agencies that have limited quoting and binding authority and that in turn sell our insurance products to insureds through retail insurance brokers. These agencies can bind certain risks without our initial approval. If any of these wholesale professional general agencies fail to comply with our underwriting guidelines and the terms of their appointment, we ~~could be bound on a particular~~ ~~risk or number of risks that were not anticipated when we developed the insurance products or estimated loss and loss adjustment expenses. Such actions~~ could ~~adversely affect our~~be ~~results of operations.~~

~~As a~~ ~~Property and Casualty Insurer and Reinsurer, We Could Face~~37 ~~Losses From Terrorism and Political Unrest.~~

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

~~predict~~bound ~~occurrence~~on ofa ~~such~~particular ~~events~~risk ~~with~~or ~~statistical~~number ~~certainty~~of orrisks that were not toanticipated ~~estimate~~when we developed the ~~amount~~insurance ofproducts or estimated loss ~~per~~and ~~occurrence~~loss ~~they~~adjustment ~~will~~expenses. ~~generate~~Such actions could adversely affect our results of operations.

~~TRIA, which was extended with the enactment of TRIPRA in 2007,~~ ~~was~~As ~~enacted to ensure availability of insurance coverage for~~a ~~defined~~Property ~~terrorist~~and ~~acts~~Casualty inInsurer ~~the United States. This law requires insurers writing certain lines of property~~ and ~~casualty insurance~~Reinsurer, ~~including~~We ~~us,~~Could ~~to offer coverage against certified~~Face ~~acts~~Losses of terrorism causing damage within the United States or to U.S. flagged vessels or aircraft. In return, the law requires the federal government, should an insurer comply with the procedures of the law, to indemnify the insurer for 90% of covered losses, exceeding a deductible, based on a percentage of direct earned premiums for the previous calendar year, up to an industry limit of $100 billion resulting from ~~covered~~Terrorism acts of terrorism. For 2009, our deductible for certified acts of terrorism was 20% of the full year of our direct earned premium for the year ended December 31, 2008 or $85.8 million. In 2008, $0.9 million of our direct earned premium was for the coverage subject to TRIA. Under TRIPRA, the existing program triggers, deductibles, aggregate industry retention, and ~~co-payments~~ ~~remain~~Political ~~the same, and the distinction between foreign and domestic acts of terrorism is eliminated, thus making losses for domestic acts of terrorism eligible for reimbursement~~Unrest.

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

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

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

Bermuda law does not permit payment of dividends or distributions of contributed surplus by a company if there are reasonable grounds for believing that the company, after the payment is made, would be unable to pay its liabilities as they become due, or the realizable value of the company’s assets would be less, as a result of the payment, than the aggregate of its liabilities and its issued share capital and share premium accounts. Furthermore, pursuant to the Bermuda Insurance Act 1978, an insurance company is prohibited from declaring or paying a dividend during the financial year if it is in breach of its minimum solvency margin or minimum liquidity ratio or if the declaration or payment of such dividends would cause it to fail to meet such margin or ratio. See “Regulation — Bermuda Insurance Regulation” in Item 1 of Part I of this report.

In addition, the United National Insurance Companies and the Penn-America Insurance Companies, which are indirect subsidiaries of Wind River Reinsurance, are subject to significant regulatory restrictions limiting their ability to declare and pay dividends, which must first pass through Wind River Reinsurance before being paid to United America Indemnity. See “Regulation — U.S. Regulation of United America Indemnity” in Item 1 of Part I of this report. Also, see Note 1716 of the notes to consolidated financial statements in Item 8 of Part II of this report for the maximum amount of distributions that could be paid by the United National Insurance Companies and the Penn-America Insurance Companies in 2009.

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

We are subject to extensive supervision and regulation in the U.S. states in which our Insurance Operations operate. This is particularly true in those states in which our insurance subsidiaries are licensed, as opposed to those states where our insurance subsidiaries write business on a surplus lines basis. The supervision and regulation relate to numerous aspects of our business and financial condition. The primary purpose of the supervision and regulation is the protection of our insurance policyholders and not our investors. The extent of regulation varies, but generally

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is governed by state statutes. These statutes delegate regulatory, supervisory, and administrative authority to state insurance departments. This system of regulation covers, among other things:


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

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

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

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

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

	•	certain required methods of accounting;

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

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

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

In recent years, the U.S. insurance regulatory framework has come under increased federal scrutiny, and some state legislators have considered or enacted laws that may alter or increase state regulation of insurance and reinsurance companies and holding companies. Moreover, the NAIC, which is an ~~association~~ association of the insurance commissioners of all 50 states and the District of Columbia, and state insurance regulators ~~regularly~~ regularly reexamine existing laws and regulations. Changes in these laws and regulations or the interpretation of these laws ~~and~~ and regulations could have a material adverse effect on our business.

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

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

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

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

Fox Paine & Company beneficially owns shares having approximately 8889.16% of our total voting power. The percentage of our total voting power that Fox Paine & Company may exercise is greater than the percentage of our total shares that Fox Paine & Company beneficially owns because Fox Paine & Company beneficially owns a large number of Class B common shares, which have ten votes per share as opposed to Class A common shares, which have one vote per share. The Class A common shares and the Class B common shares generally vote together as a single class on matters presented to our shareholders. Based on the ownership structure of the affiliates of Fox Paine & Company that own these shares, these affiliates are subject to the voting restriction contained in our articles ~~of association. As~~ ~~a result, Fox Paine & Company has and will continue to have control over the outcome of certain matters requiring shareholder approval, including the power to, among other things:~~

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


	•	amend our memorandum or articles of association;

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

	•	approve redemption of the common shares.

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

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

Our Controlling Shareholder Has the Contractual Right to Nominate a Majority of the Members of Our Board of Directors and Also Otherwise Controls the Election of Directors Due to Its Majority Ownership.

~~Under~~While Fox Paine & Company has the contractual right, under the terms of a shareholders agreement between us, ~~and~~ Fox Paine & Company, ~~Fox~~and ~~Paine &~~certain ~~Company~~affiliates ~~has~~of ~~the~~Fox ~~contractual~~Paine & ~~right~~Company, to nominate a majority of the members of our Board of Directors, it also controls the election of all directors to the Board of Directors due to its controlling share ownership. Our Board of Directors currently consists of seven ~~eight~~ directors, ~~five~~all of ~~whom~~which ~~were~~other ~~nominated~~than byMr. Frakes ~~Fox~~were ~~Paine &~~identified ~~Company:~~and ~~Messrs. Saul~~proposed A.for ~~Fox,~~consideration ~~Seth~~for J.the Board of ~~Gersch,~~Directors ~~Michael~~by J.Fox ~~Marchio,~~Paine & ~~Stephen A~~Company. ~~Cozen, and James R.~~ ~~Kroner.~~

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

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

During ~~2006~~2007, ~~2007~~2008, and ~~2008~~2009, Fox Paine & Company provided certain management services to us~~, particularly with respect to the sale of substantially all of the assets of our Agency Operations~~. To the extent that Fox Paine & Company is unable or unwilling to provide similar services in the future, and we are unable to perform those services ourselves or we are unable to secure replacement services, our business could be adversely affected.

The Current Recession and Other Adverse Consequences of the Recent U.S. and Global Economic and Financial Industry Downturns Could Harm Our Business, Our Liquidity and Financial Condition, and Our Stock Price.

Global market and economic conditions have been severely disrupted. These conditions may potentially affect (among other aspects of our business) the demand for and claims made under our products, the ability of customers, counterparties and others to establish or maintain their relationships with us, our ability to access and efficiently use internal and external capital resources, the availability of reinsurance protection, the risks we assume under reinsurance programs covering variable annuity guarantees, and our investment performance. Continued volatility in the U.S. and other securities markets may adversely affect our stock price.

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counterparties and others to establish or maintain their relationships with us, our ability to access and efficiently use internal and external capital resources, the availability of reinsurance protection, the risks we assume under reinsurance programs covering variable annuity guarantees, and our investment performance. Continued volatility in the U.S. and other securities markets may adversely affect our stock price.

Risks Related to Taxation

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.

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

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

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

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

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

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

~~The~~ ~~Impact of the Cayman Islands’ Letter of Commitment or Other~~41 Concessions to the Organization for Economic Cooperation and Development to Eliminate Harmful Tax Practices Is Uncertain and Could Adversely Affect Our Tax Status in the Cayman Islands or Bermuda.

~~exchange~~The Impact of ~~information~~the ~~and~~Cayman ~~the~~Islands’ ~~elimination~~Letter of ~~any~~Commitment ~~aspects~~or ofOther Concessions to the ~~regimes~~Organization for ~~financial~~Economic ~~and~~Cooperation ~~other services that attract~~and ~~business~~Development ~~with~~to noEliminate ~~substantial~~Harmful ~~domestic~~Tax ~~activity.~~Practices WeIs ~~are~~Uncertain ~~not able~~and toCould ~~predict~~Adversely ~~what~~Affect ~~changes~~Our ~~will~~Tax ~~arise~~Status ~~from~~in the ~~commitment~~Cayman Islands or ~~whether such changes will subject us to additional taxes~~Bermuda.

The Organization for Economic Cooperation and Development, which is commonly referred to as the OECD, has published reports and launched a global dialogue among member and non-member countries on measures to limit harmful tax competition. These measures are largely directed at counteracting the effects of tax havens and preferential tax regimes in countries around the world. In the OECD’s report dated February 22, 2010, the Cayman Islands and Bermuda were not listed as uncooperative tax haven jurisdictions because each had previously committed itself to eliminate harmful tax practices and to embrace international tax standards for transparency, exchange of information and the elimination of any aspects of the regimes for financial and other services that attract business with no substantial domestic activity. We are not able to predict what changes will arise from the commitment or whether such changes will subject us to additional taxes.

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

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

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

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

Risks Related to Our Proposed Redomestication to Ireland

The Rights of Our Shareholders Will Change as a Result of Our Proposed Redomestication.

Because of differences between Irish law and Cayman Islands law and differences between the governing documents of Global Indemnity plc and United America Indemnity, the rights of shareholder will change if the proposed redomestication transaction (the “Transaction”) is completed.

Fox Paine & Company and Affiliated Investment Funds of Fox Paine & Company (collectively, the “Fox Paine Entities”) Will Continue to Control a Substantial Interest in Us and Thus May Exert Significant Influence on Corporate Affairs and Actions, Including Those Submitted to a Shareholder Vote.

Following the Transaction, the Fox Paine Entities will continue to beneficially own approximately 17.8% of Global Indemnity plc Class A ordinary shares and 100.0% of our issued and outstanding Class B ordinary shares, together representing approximately 89.6% of our total voting power. As a result of their majority ownership, the

Fox Paine Entities have and will continue to have control over the outcome of most matters requiring shareholder approval, including the power to, among other things:


	•	elect all of our directors;

	•	amend our articles of association (as long as their voting power is greater than 75%);

	•	elect our auditors;

	•	increase our share capital;

	•	resolve to pay dividends or distributions; and

	•	approve the annual report and the annual financial statements.

Subject to certain exceptions, the Fox Paine Entities may also be able to prevent or cause a change of control. The Fox Paine Entities’ control over us, and Fox Paine & Company’s ability in certain circumstances to prevent or cause a change of control, may delay or prevent a change of control, or cause a change of control to occur at a time when it is not favored by other shareholders. As a result, the trading price of our Global Indemnity plc Class A ordinary shares could be adversely affected.

Under the terms of an existing shareholders agreement between us and certain Fox Paine Entities, the applicable Fox Paine Entities have the contractual right to nominate a majority of the members of our board of directors. Our board of directors currently consists of seven directors, all of which, other than Mr. Frakes, were identified and proposed for consideration for the Board of Directors by such Fox Paine Entities. Global Indemnity plc will assume the obligations of United America Indemnity under the shareholders agreement. Following the Transaction, the right of Fox Paine Entities to appoint directors to the board will be included in Global Indemnity plc’s memorandum and articles of association, which will permit certain Fox Paine affiliates to appoint by written notice to the board a certain number of directors, dependent on their percentage ownership of voting shares in Global Indemnity plc for so long as Fox Paine & Company and its affiliates hold an aggregate of 25% or more of the voting power in the company.

Our board of directors, in turn, and subject to its fiduciary duties under Cayman Islands law and Irish law, appoints or will appoint, as applicable, the members of our senior management, who also have fiduciary duties to the Company. As a result, the Fox Paine Entities have the ability to control the appointment of the members of our senior management and to prevent any changes in senior management that other shareholders, or that other members of our board of directors, may deem advisable.

Legislative and Regulatory Action Could Materially and Adversely Affect Us Regardless of Whether or Not We Complete the Transaction.

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 regardless of whether we complete the Transaction, each of which could materially and adversely affect our effective tax rate and cash tax position. We cannot predict the outcome of any specific legislative proposals. However, if proposals were enacted that had the effect of disregarding the Transaction or limiting our ability to take advantage of the tax treaties between Ireland and the U.S., we could be subjected to increased taxation. In addition, any future amendments to the current income tax treaty between Ireland and the U.S. could subject us to increased taxation.

As a company incorporated in the European Union, Global Indemnity plc is subject to European Union law and this could impose regulatory burdens on Global Indemnity plc in the future.

Our Effective Tax Rate May Increase After the Transaction.

While the Transaction is not anticipated to have any material impact on our effective tax rate, there is uncertainty regarding the tax policies of the jurisdictions where we operate (which include the potential legislative actions described above), and our effective tax rate may increase and any such increase may be material.

Additionally, the tax laws of Ireland and other jurisdictions could change in the future, and such changes could cause a material change in our effective tax rate.

The Transaction Will Result In Additional Direct and Indirect Costs, Even If It Is Not Completed.

Although we do not expect these costs to be material, we will incur additional direct costs as a result of the Transaction. In addition to Global Indemnity plc being incorporated in Ireland and being governed by Irish law, we will expand our presence in Ireland. In general, we will hold at least half of our board of directors meetings in Ireland. We also expect to incur costs and expenses, including professional fees, to comply with Irish corporate and tax laws and financial reporting requirements. In addition, we expect to incur attorneys’ fees, accountants’ fees, filing fees, mailing expenses and financial printing expenses in connection with the Transaction, even if the scheme of arrangement, pursuant to which we will effect the redomestication (the “Scheme of Arrangement”) is not approved or completed. The Transaction also may negatively affect us by diverting attention of our management and employees from our operating business during the period of implementation and by increasing other administrative costs and expenses.

We May Choose to Abandon or Delay the Transaction.

We may abandon or delay the Transaction at any time prior to the Scheme of Arrangement becoming effective by action of our board of directors, even after obtaining the necessary approval of United America Indemnity common shareholders at the special meeting of shareholders relating to this transaction and sanction of the Grand Court of the Cayman Islands (the “Grand Court”). While we currently expect to complete the Transaction as soon as practicable after obtaining shareholder approval of the Scheme of Arrangement at the Special Meeting and sanction of the Grand Court, our board of directors may delay the Transaction for a significant time or may abandon the Transaction after the Special Meeting because, among other reasons, of an increase in our estimated cost of the Transaction or a determination by the board of directors that completing the Transaction is no longer in our best interest or the best interests of our shareholders or may not result in the benefits we expect. Additionally, we may not be able to obtain the requisite shareholder approval or court sanction.

If the Shareholders of United America Indemnity Do Not Approve the Proposal Relating to Global Indemnity plc’s Distributable Reserves Proposal, Global Indemnity Plc May Not Have Sufficient Distributable Reserves to Pay Dividends (or to Repurchase or Redeem Shares) Following the Transaction. In Addition, There Is No Guarantee That Irish High Court Approval of the Creation of Distributable Reserves Will Be Forthcoming.

Under Irish law, dividends must be paid (and share repurchases and redemptions must generally be funded) out of “distributable reserves,” which Global Indemnity plc will not have immediately following the Transaction. If the Scheme of Arrangement is approved, shareholders of United America Indemnity also will be asked at the special meeting of shareholders to approve the reduction of share premium of Global Indemnity plc to allow the creation of distributable reserves of Global Indemnity plc (through the reduction of the share premium account of Global Indemnity plc), so that we may pay dividends and repurchase or redeem shares. The approval of the distributable reserves proposal is not a condition to the consummation of the Transaction. Accordingly, if the common shareholders of United America Indemnity approve the Scheme of Arrangement but do not approve the distributable reserves proposal, and the Transaction is consummated, Global Indemnity plc may not have sufficient distributable reserves to make distributions or pay dividends (or to repurchase or redeem shares) following the Transaction.

In addition, the creation of distributable reserves requires the approval of the Irish High Court. Although we are not aware of any reason why the Irish High Court would not approve the creation of distributable reserves, the issuance of the required order is a matter for the discretion of the Irish High Court and there is no guarantee that such approval will be forthcoming. Even if the Irish High Court does approve the creation of distributable reserves, it may take substantially longer than we anticipate.

As a Result Of Different Shareholder Voting Requirements in Ireland Relative to the Cayman Islands, We Will Have Less Flexibility with Respect to Certain Aspects of Capital Management Than We Now Have.

Under Cayman Islands law, our directors may issue, without shareholder approval, any common shares authorized in our memorandum of association that are not already issued. Irish law allows shareholders to authorize share capital which then can be issued by a board of directors without shareholder approval. Additionally, subject to specified exceptions, Irish law grants statutory pre-emptive rights to existing shareholders to subscribe for new issuances of shares for cash, but allows shareholders to authorize the waiver of the statutory pre-emptive rights with respect to any particular allotment of shares. These authorizations must be renewed by the shareholders at least every five years and we cannot guarantee that these authorizations will always be approved, which could limit our ability to issue equity. While we do not believe that the differences between Cayman Islands law and Irish law relating to our capital management will have an adverse effect on us, situations may arise where the flexibility we now have in the Cayman Islands would have provided benefits to our shareholders.

After The Transaction, A Future Transfer of Global Indemnity Plc Ordinary Shares May Be Subject to Irish Stamp Duty.

Transfers by shareholders who hold their Global Indemnity plc ordinary shares beneficially through banks, brokers, trustees, custodians or other nominees, which in turn hold those shares through DTC, will not be subject to Irish stamp duty where such transfers are to holders who also hold through DTC. If shareholders hold their Global Indemnity plc ordinary shares directly rather than beneficially, any purchase of their shares will be subject to Irish stamp duty. Irish stamp duty is currently at the rate of 1% of the price paid or, if higher, the market value of the ordinary shares acquired. Any transfer of Global Indemnity plc ordinary shares which is subject to Irish stamp duty will not be registered in the name of the buyer unless an instrument of transfer is executed by or on behalf of the seller, is duly stamped and is provided to our transfer agent. Only registered shareholders of Global Indemnity plc will be entitled to receive dividends. Subject to certain exceptions, only registered shareholders of Global Indemnity plc will be entitled to vote in general meetings of Global Indemnity plc. The potential for stamp duty could adversely affect the price of Global Indemnity plc ordinary shares.

Dividends Received by Shareholders May Be Subject to Irish Dividend Withholding Tax.

In certain circumstances, as an Irish tax resident company, we are required to deduct Irish dividend withholding tax (currently at the rate of 20%) from dividends paid to our shareholders. In the majority of cases, shareholders resident in the U.S. will not be subject to Irish dividend withholding tax, and shareholders resident in a number of other countries will not be subject to Irish dividend withholding tax provided that they complete certain Irish dividend withholding tax forms. However, some shareholders may be subject to withholding tax, which could adversely affect the price of our shares.

Dividends Received by Shareholders Could Be Subject to Irish Income Tax.

Dividends paid in respect of our shares will generally not be subject to Irish income tax where the beneficial owner of these dividends is exempt from dividend withholding tax, unless the beneficial owner of the dividend has some connection with Ireland other than his or her shareholding in Global Indemnity plc.

Global Indemnity plc shareholders who receive their dividends subject to Irish dividend withholding tax will generally have no further liability to Irish income tax on the dividend unless the beneficial owner of the dividend has some connection with Ireland other than his or her shareholding in Global Indemnity plc.

A Change of Control Could Accelerate Certain of Our Indebtedness.

We have $90.0 million principal amount of Notes outstanding under the Note and Guarantee Agreement dated as of July 20, 2005. Pursuant to the terms of these Notes, if Global Indemnity plc ceases to be an affiliate of the Fox Paine Entities, then unless certain ratings of United America Indemnity or Global Indemnity plc and its subsidiaries remain constant, we will be required to offer to repurchase such indebtedness pursuant to a change of control provision set forth therein.

The Total Market Capitalization of Global Indemnity Plc Ordinary Shares After the Transaction May Be Lower Than the Total Market Capitalization of United America Indemnity Common Shares Before the Transaction

Reducing the number of outstanding shares through the one-for-two exchange pursuant to the Transaction is intended, absent other factors, to increase the per share market price of Global Indemnity plc ordinary shares. However, other factors, such as financial results, market conditions and the market perception of our business and the one-for-two exchange may adversely affect the market price of Global Indemnity plc ordinary shares. As a result, there can be no assurance that the one-for-two exchange pursuant to the Transaction, if completed, will result in the intended benefits, that the market price of Global Indemnity plc will increase following the Transaction or that the market price of Global Indemnity plc will not decrease in the future. Additionally, we cannot assure our shareholders that the market price per share of Global Indemnity plc after the Transaction will increase in proportion to the reduction in the number of United America Indemnity common shares outstanding before the Transaction. Accordingly, the total market capitalization of Global Indemnity plc ordinary shares after the Transaction may be lower than the market capitalization of United America Indemnity common shares before the Transaction.

The Transaction May Result in Some Shareholders Owning “Odd Lots” of Less Than 100 Shares of Global Indemnity Plc Ordinary Shares

The Transaction may result in some shareholders owning “odd lots” of less than 100 shares of Global Indemnity plc ordinary shares because of the one-for-two exchange of Global Indemnity plc ordinary shares for United America Indemnity common shares. Odd lot shares may be more difficult to sell, and brokerage commissions and other costs of transactions in odd lots are generally somewhat higher than the costs of transactions in “round lots” of even multiples of 100 shares.


Item 1B.	*Unresolved Staff Comments*

None.


Item 2.	*Properties*

We lease approximately 7071,~~700~~150 square feet of office space in Bala Cynwyd, Pennsylvania, which serves as the headquarters location for our Insurance Operations, pursuant to a lease that expires on December 31, 2013. In addition, we lease approximately 3129,~~700~~800 square feet of additional office space in Arizona, California, ~~Illinois~~Georgia, ~~Michigan~~Illinois, ~~and~~New ~~North Carolina~~York, North Carolina, and Texas, which serve as office space for our field offices, pursuant to various leases that expire at various times from ~~July~~June 3130, ~~2009~~ 2010 to March 31, 2016. Some of the office space in California also serves as office space for our claims operations. We also lease approximately 1,600 square feet of office space in Hamilton, Bermuda, which is used by our Reinsurance Operations, pursuant to a lease that expires on December 31, 2013.


Item 3.	*Legal Proceedings*

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

On ~~December~~July 424, ~~2008~~2009, a federal ~~jury~~judge infrom the U.S. District Court for the Eastern District of Pennsylvania (Philadelphia) ~~returned~~upheld a ~~$24.0 million~~ jury verdict in favor of United National Insurance Company ~~(“United National”)~~, ~~one~~an ~~of our~~ indirect wholly owned ~~subsidiaries~~subsidiary of the Company, against AON Corp., an insurance and ~~reinsurance~~ reinsurance broker. ~~United~~See Note 12 of the notes to consolidated financial statements in Item 8 of Part II of this report for details concerning this legal proceeding.

4446

National believes that it also is entitled to prejudgment interest, which, if the court agrees, could increase the judgment to in excess of $33.0 million. If United National is successful in being awarded the prejudgment interest, United National would expect to net, after payment of attorneys fees and other expenses, between $20.0 million and $22.0 million. AON has announced its intention to appeal the verdict. United National does not intend to recognize the gain contingency until the matter has been resolved through the appellate process.

See Note 12 of the notes to the consolidated financial statements in Item 8 of Part II of this report for more details concerning our legal proceedings.


Item 4.	*Submission Of Matters To A Vote Of Security Holders*

NoThe following matters were submitted to a vote of ~~security holders during~~shareholders ~~the~~at ~~fourth~~our ~~quarter~~Annual General Meeting of ~~2008.~~Shareholders on October 27, 2009:

1. Election of the following nominees to our Board of 45Directors.


Nominee	Votes For		Votes Against		Votes Abstained

Saul A. Fox		261,715,487		14,129,278		656,439
Larry A. Frakes		267,661,688		8,186,080		653,436
Stephen A. Cozen		266,596,209		9,251,859		653,136
Seth J. Gersch		267,261,051		8,584,014		656,139
James R. Kroner		268,051,467		7,799,098		650,639
Chad A. Leat		268,294,198		7,779,636		427,370
Michael J. Marchio		268,059,572		7,791,293		650,339

2. Ratification of the appointment of PricewaterhouseCoopers LLP as our independent auditor for 2009 and the authorization of our Board of Directors acting by its Audit Committee to set the fees for the independent auditor.


Votes For	Votes Against	Votes Abstained

275,793,080	695,395	12,729

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


Nominee	Votes For		Votes Against		Votes Withheld

Alan Bossin		275,839,880		—		661,324
Larry A. Frakes		275,803,913		—		697,291
Troy W. Santora		275,841,819		—		659,385
Janita Burke Waldron (Alternate Director)		275,840,054		—		661,150

4. Approval of the appointment of PricewaterhouseCoopers, Hamilton, Bermuda, as the independent auditor of Wind River Reinsurance Company, Ltd. for 2009.


Votes For	Votes Against	Votes Abstained

275,870,510	608,155	22,539

5. Approval of the payment of an arrangement fee and a backstop fee to Fox Paine & Company in connection with the Rights Offering.


Votes For	Votes Against	Votes Abstained

150,399,810	6,276,258	119,825,136

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


Votes For	Votes Against	Votes Abstained

222,835,120	—	—

PART II


Item 5.	*MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES*

Market for Our Class A Common Shares

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

	High		Low
Fiscal Year Ended December 31, 2009:
First Quarter	$	13.48	$	3.70
Second Quarter		6.47		3.73
Third Quarter		7.69		4.37
Fourth Quarter		8.91		6.62
Fiscal Year Ended December 31, 2008:
First Quarter	$	21.44	$	17.52
Second Quarter		20.22		13.22
Third Quarter		17.64		11.75
Fourth Quarter		15.74		8.46
Fiscal Year Ended December 31, 2007:
First Quarter	$	25.48	$	22.41
Second Quarter		26.49		23.05
Third Quarter		25.41		18.31
Fourth Quarter		22.99		18.95

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

As of ~~March~~February 225, ~~2009~~2010, there were approximately 12,~~906~~100 beneficial holders of record of our Class A common shares. As of ~~March~~February 225, ~~2009~~2010, there were 10 holders of record of ~~our~~ our Class B common shares, all of whom are affiliates of ~~Fox~~ Fox Paine & Company.

4648

Performance of Our Class A Common Shares

	12/16/03		12/31/03		12/31/04		12/31/05		12/31/06		12/31/07		12/31/08		12/31/09
United America Indemnity, Ltd.	$	100.0	$	103.9	$	109.5	$	108.0	$	149.0	$	117.2	$	75.4	$	46.6
NASDAQ Insurance Index		100.0		103.1		123.4		134.9		151.2		150.0		132.5		133.2
NASDAQ Composite Index		100.0		104.1		113.1		114.6		125.5		137.8		82.0		117.9

47 Note: We completed our Rights Offering on May 5, 2009, which increased our total outstanding Class A common shares by 17.2 million shares. See Note 10 to the consolidated financial statements in Item 8 of Part II of this report for details concerning the Rights Offering.

Recent Sales of Unregistered Securities

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. The net proceeds of $91.8 million were used to support our strategic initiatives, enhance liquidity and financial flexibility, and for other general corporate purposes. See Note 10 to the consolidated financial statements in Item 8 of Part II of this report for details concerning the Rights Offering.

Purchases of Our Class A Common Shares

Our Share Incentive Plan allows employees to surrender shares of our Class A common shares as payment for the tax liability incurred upon the vesting of restricted stock that was issued under our Share Incentive Plan. During ~~2008~~2009, we purchased an aggregate of 1727,~~948~~057 of surrendered Class A common shares from our employees for $0.3 2 million. All shares purchased from ~~from~~ employees are held as treasury stock and recorded at cost.

OnAs ~~October 24,~~part ~~2007,~~of wethe ~~announced~~Rights Offering that ~~our~~was ~~Board~~completed ofin May 2009, ~~Directors~~we ~~authorized~~purchased us10,000 toClass A ~~repurchase~~common upshares to for $~~50.~~0.04 million of ~~our~~that ~~Class A~~had ~~common~~been ~~shares~~purchased ~~through~~by a ~~share~~former ~~repurchase~~employee ~~program~~with ~~over~~ the ~~subsequent~~non-transferable ~~twelve~~Class A ~~months.~~Rights ~~This~~that ~~repurchase was~~were ~~completed~~distributed into ~~January~~that ~~2008.~~former Onemployee ~~February~~for Class ~~11,~~A ~~2008, we~~common ~~announced~~shares ~~that~~held ~~our~~of ~~Board~~non-vested ofrestricted ~~Directors~~stock. ~~authorized~~Since usthe torestricted ~~repurchase~~stock upwas tonot anvested, ~~additional~~the ~~$50.0 million~~former ofemployee, ~~our~~upon leaving the Company, had to forfeit those Class A common shares. ~~This repurchase was completed in~~that ~~July~~had ~~2008.~~been Aspurchased awith ~~result~~the ofnon-transferable ~~these~~Class A ~~programs, we repurchased~~Rights ~~approximately~~that ~~6.0 million~~were ofdistributed ~~our~~on ~~Class A~~that ~~common~~restricted ~~shares~~stock. See Note 10 atto anthe ~~average~~consolidated ~~price~~financial ofstatements ~~$16.68.~~in ~~All~~Item 8 ~~shares repurchased under~~of ~~these~~Part II ~~programs~~of ~~are~~this ~~held~~report asfor ~~treasury~~details ~~stock~~concerning ~~and~~the ~~recorded at cost~~Rights Offering.

The following table provides information with respect to the Class A common shares that were surrendered or repurchased in 2008:

									Approximate
						Total Number of			Dollar Value
						Shares Purchased			of Shares That
	Total Number			Average		as Part of Publicly			May Yet Be
	of Shares			Price Paid		Announced Plan			Purchased Under the
Period(1)	Purchased			Per Share		or Program			Plan or Program(2)
January 1-31, 2008		93,054	(3)	$	19.70		88,362	(4)	$	434
February 1-29, 2008		71,242	(5)	$	19.23		68,659	(6)	$	48,680,261
March 1-31, 2008		154,200		$	19.02		154,200	(6)	$	45,746,974
April 1-30, 2008		—		$	—		—		$	45,746,974
May 1-31, 2008		995,674		$	14.06		995,674	(6)	$	31,749,232
June 1-30, 2008		1,606,850		$	14.25		1,606,850	(6)	$	8,847,487
July 1-31, 2008		636,545	(7)	$	13.97		633,376	(6)	$	—
August 1-31, 2008		—		$	—		—		$	—
September 1-30, 2008		2,173	(8)	$	14.69		—		$	—
October 1-31, 2008		1,931	(8)	$	11.21		—		$	—
November 1-30, 2008		3,226	(8)	$	12.35		—		$	—
December 1-31, 2008		174	(8)	$	11.45		—		$	—
Total		3,565,069		$	14.59		3,547,121			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 4,692 shares surrendered by employees as payment of taxes withheld on the vesting of restricted stock.
(4)		Purchased as part of the repurchase authorization announced in December 2007.
(5)		Includes 2,583 shares surrendered by employees as payment of taxes withheld on the vesting of restricted stock.
(6)		Purchased as part of the repurchase authorization announced in February 2008.
(7)		Includes 3,169 shares surrendered by employees as payment of taxes withheld on the vesting of restricted stock.
(8)		Surrendered by employees as payment of taxes withheld on the vesting of restricted stock.

Dividend Policy

We did not declare or pay cash dividends on any class of our common shares in ~~2008~~2009 or ~~2007~~2008, and we do not anticipate paying any cash dividends on any class of our common shares in the foreseeable future. However, this is subject to future determinations by the Board of Directors based on our results, financial conditions, amounts required to grow our business, and other factors deemed relevant by the Board.

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

InFor ~~2008~~2010, we believe that Wind River Reinsurance ~~declared~~should have sufficient liquidity and ~~paid~~solvency ato ~~dividend~~pay ofdividends. In the ~~$50.0 million~~future, we anticipate paying dividends from Wind River Reinsurance to fund obligations of United America Indemnity. 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~~ previous year’s statutory financial statements, and any ~~application~~ application for such approval must include such information as the BMA may require. Based upon the total statutory capital plus ~~the~~ the statutory surplus as set out in its ~~2008~~2009 statutory financial statements that will be filed in ~~2009~~2010, Wind River Reinsurance could pay a dividend of up to $~~170~~175.98 million without requesting BMA approval.

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

~~In 2008, profit distributions (not in respect to liquidations)~~ ~~by the Luxembourg Companies were generally subject to Luxembourg~~50 dividend withholding tax at a rate of 15%, unless a domestic law exemption or a lower tax treaty rate applies. There is no Luxembourg dividend withholding tax in 2008. Dividends paid by any of the Luxembourg Companies to their Luxembourg resident parent company are exempt from Luxembourg dividend withholding tax, provided that at the time of the dividend distribution, the resident parent company has held (or commits itself to continue to hold) 10% or more of the nominal paid up capital of the distributing entity or, in the event of a lower percentage participation, a participation having an acquisition price of Euro 1.2 million or more for a period of at least twelve months.

In 2009, profit distributions (not in respect to liquidations) by the Luxembourg Companies were generally subject to Luxembourg dividend withholding tax at a rate of 15%, unless a domestic law exemption or a lower tax treaty rate applies. There is no Luxembourg dividend withholding tax in 2009. Dividends paid by any of the Luxembourg Companies to their Luxembourg resident parent company are exempt from Luxembourg dividend withholding tax, provided that at the time of the dividend distribution, the resident parent company has held (or commits itself to continue to hold) 10% or more of the nominal paid up capital of the distributing entity or, in the event of a lower percentage participation, a participation having an acquisition price of Euro 1.2 million or more for a period of at least twelve months.

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

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

Recent Sales of Unregistered Securities

None.


Item 6.	*Selected Financial Data*

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

The following table sets forth selected consolidated historical financial data for United America Indemnity and should be read together with the consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report.

	For the Years Ended December 31,
	2008			2007			2006			2005			2004
	2009			2008			2007			2006			2005
(Dollars in thousands)
Consolidated Statements of Operations Data:
Gross premiums written	$	~~378~~340,~~700~~999		$	~~563~~378,~~112~~700		$	~~652~~563,~~965~~112		$	~~622~~652,~~878~~965		$	~~409~~622,~~073~~878
Net premiums written		~~309~~290,~~080~~995			~~490~~309,~~535~~080			~~560~~490,535			~~519~~560,~~733~~535			~~280~~519,~~208~~733
Net premiums earned		~~382~~301,~~508~~674			~~536~~382,~~323~~508			~~546~~536,~~469~~323			~~475~~546,~~430~~469			~~230~~475,~~140~~430
Net realized investment gains (losses)		~~(50~~15,~~259~~862	)		~~968~~(50,259	)		~~(570~~968	)		~~554~~(570	)		554
Total revenues		~~400~~387,~~079~~750			~~614~~400,~~632~~079			~~612~~614,~~437~~632			~~523~~612,~~102~~437			~~252~~523,~~982~~102
Impairments of goodwill and intangible assets		~~(96,449~~—	)		—(96,449	)		—			—			—
Income (loss) from continuing operations		(141,647	)		98,886			89,338			64,751			35,852
Income (loss) from continuing operations(1)		75,437			(141,560	)		98,917			89,338			64,751
Net income (loss)		~~(141~~75,~~560~~437	)		98(141,~~917~~560	)		9998,~~418~~917			6599,~~593~~418			3765,~~047~~593
Per share data:(1)
Per share data:(2)
Income (loss) from continuing operations	$	(141,647	)	$	98,886		$	89,338		$	64,751		$	35,852
Income (loss) from continuing operations(1)	$	75,437		$	(141,560	)	$	98,917		$	89,338		$	64,751
Basic		(41.3246	)		2(3.6787	)		2.4340			12.8118			1.2762
Diluted		(41.3246	)		2(3.6587	)		2.4138			12.7716			1.2459
Net income (loss) available to common shareholders	$	~~(141~~75,~~560~~437	)	$	98(141,~~917~~560	)	$	9998,~~418~~917		$	6599,~~593~~418		$	3765,~~047~~593
Basic		(41.3246	)		2(3.6787	)		2.7040			12.8343			1.3164
Diluted		(41.3246	)		2(3.6587	)		2.6838			12.7941			1.2861
Weighted-average number of shares outstanding
Basic		3251,~~826~~712,~~379~~098			3736,~~048~~556,~~491~~189			3641,~~778~~258,~~276~~027			3540,~~904~~957,~~127~~109			2839,~~259~~983,~~173~~638
Diluted		3251,~~826~~763,~~379~~220			3736,~~360~~556,~~703~~189			3741,~~157~~570,~~783~~239			3641,~~589~~336,~~902~~616			2840,~~836~~669,~~195~~413

(1) In 2008, “Diluted” loss per share is the same as “Basic” loss per share since there was a net loss for that year.


(1)		The results of our discontinued operations for 2009, 2008, and 2007 relating to our Agency Operations that were sold in 2006 are included in income from continuing operations due to immateriality. The results of discontinued operations continue to be stated separately for 2006 and 2005.

(2)		In 2008, “Diluted” loss per share is the same as “Basic” loss per share since there was a net loss for that year.

(3)		In May 2009, we 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

5051

Consolidated Insurance Operating Ratios based on our GAAP Results:(1)
Before purchase accounting adjustments:
Loss ratio(2)(3)		79.8		55.8		55.7		58.0			57.1
Expense ratio		37.3		32.5		31.8		33.2			30.1
Combined ratio(2)(3)		117.1		88.3		87.5		91.2			87.2
Impact of purchase accounting adjustments:
Loss ratio		—		—		—		2.6			1.1
Expense ratio		—		—		—		(2.9	)		0.2
Combined ratio		—		—		—		(0.3	)		1.3
As reported, after purchase accounting adjustments:
Loss ratio(2)(3)		79.8		55.8		55.7		60.6			58.2
Expense ratio		37.3		32.5		31.8		30.3			30.3
Combined ratio(2)(3)		117.1		88.3		87.5		90.9			88.5
Net/gross premiums written		81.6		87.1		85.8		83.4			68.5
Financial Position as of Last Day of Period:
Total investments and cash and cash equivalents	$	1,599,528	$	1,765,103	$	1,656,664	$	1,419,564		$	924,070
Reinsurance receivables, net of allowance		679,277		719,706		982,502		1,278,156			1,531,863
Total assets		2,473,201		2,775,172		2,984,616		3,102,002			2,625,937
Senior notes payable		90,000		90,000		90,000		90,000			—
Senior notes payable to related party		—		—		—		—			72,848
Junior subordinated debentures		30,929		46,393		61,857		61,857			30,929
Unpaid losses and loss adjustment expenses		1,506,429		1,503,237		1,702,010		1,914,224			1,876,510
Total shareholders’ equity		631,993		836,276		763,270		639,927			432,553


		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.

(1)	Our insurance operating 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. The ratios presented here represent the consolidated results of both our Insurance Operations and Reinsurance Operations.
Consolidated Insurance Operating Ratios based on our GAAP Results:(1)
(2)	Our 2008 loss and combined ratios were impacted by a $34.9 million increase of net losses and loss adjustment expenses for prior accident years. Our 2007 loss and combined ratios were impacted by a $29.1 million reduction of net losses and loss adjustment expenses for prior accident years. Our 2006 loss and combined ratios were impacted by a $15.6 million reduction of net losses and loss adjustment expenses for prior accident years. See “Results of Operations” in Item 7 of Part II of this report for details of these items and their impact on the loss and combined ratios.
Before purchase accounting adjustments:
(3)	Our loss and combined ratios for 2008, 2007, 2006, 2005, and 2004 include $21.5 million, $1.7 million, $4.6 million, $8.0 million, and $1.7 million, respectively, of catastrophic losses related to named storms. See “Results of Operations” in Item 7 of Part II of this report for a discussion of the impact of these losses on the loss and combined ratios.
Loss ratio(2)(3)		56.2		79.8		55.8		55.7		58.0
Expense ratio		39.8		37.3		32.5		31.8		33.2
Combined ratio(2)(3)		96.0		117.1		88.3		87.5		91.2
Impact of purchase accounting adjustments:
Loss ratio		—		—		—		—		2.6
Expense ratio		—		—		—		—		(2.9	)
Combined ratio		—		—		—		—		(0.3	)
As reported, after purchase accounting adjustments:
Loss ratio(2)(3)		56.2		79.8		55.8		55.7		60.6
Expense ratio		39.8		37.3		32.5		31.8		30.3
Combined ratio(2)(3)		96.0		117.1		88.3		87.5		90.9
Net/gross premiums written		85.3		81.6		87.1		85.8		83.4
Financial Position as of Last Day of Period:
Total investments and cash and cash equivalents	$	1,731,314	$	1,599,528	$	1,765,103	$	1,656,664	$	1,419,564
Reinsurance receivables, net of allowance		543,351		679,277		719,706		982,502		1,278,156
Total assets		2,445,780		2,477,059		2,775,172		2,984,616		3,102,002
Senior notes payable		90,000		90,000		90,000		90,000		90,000
Junior subordinated debentures		30,929		30,929		46,393		61,857		61,857
Unpaid losses and loss adjustment expenses		1,257,741		1,506,429		1,503,237		1,702,010		1,914,224
Total shareholders’ equity		831,976		631,993		836,276		763,270		639,927


(1)		Our insurance operating 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. The ratios presented here represent the consolidated results of both our Insurance Operations and Reinsurance Operations.

(2)		Our 2009 loss and combined ratios were impacted by a $9.1 million reduction of net losses and loss adjustment expenses for prior accident years. Our 2008 loss and combined ratios were impacted by a $34.9 million increase of net losses and loss adjustment expenses for prior accident years. Our 2007 loss and combined ratios were impacted by a $29.1 million reduction of net losses and loss adjustment expenses for prior accident years. Our 2006 loss and combined ratios were impacted by a $15.6 million reduction of net losses and loss adjustment expenses for prior accident years. See “Results of Operations” in Item 7 of Part II of this report for details of these items and their impact on the loss and combined ratios.

(3)		Our loss and combined ratios for 2009, 2008, 2007, 2006, and 2005 include $5.8 million, $21.5 million, $1.7 million, $4.6 million, and $8.0 million, respectively, of catastrophic losses. See “Results of Operations” in Item 7 of Part II of this report for a discussion of the impact of these losses on the loss and combined ratios.

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

51 52


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes of United America Indemnity included elsewhere in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy, constitutes forward-looking statements that involve risks and uncertainties. Please see “Cautionary Note Regarding Forward-Looking Statements” at the end of this Item 7 and “Risk Factors” in Item 1A above for more information. You should review “Risk Factors” in Item 1A above for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.

Recent Developments

InIf the ~~fourth~~move ~~quarter~~to ofIreland ~~2008~~is approved, weour ~~provided~~Class A ~~advance~~common shares ~~notice~~will ofbe ~~our~~exchanged for Global Indemnity plc’s ~~wish~~Class A toordinary ~~liquidate~~shares ~~all~~on ofa two-for-one basis, ~~our~~which ~~investment~~will intrade ~~two~~on ~~limited~~The NASDAQ Global Select Market under ~~partnerships.~~the Inticker ~~January~~symbol ~~2009,~~“GBLI.” weGlobal ~~received~~Indemnity aplc ~~distribution~~will ~~from~~be ~~these~~subject ~~partnerships~~to inU.S. Securities and Exchange Commission reporting requirements, the ~~amount~~mandates of ~~$24~~the U.~~1 million~~S. Sarbanes-Oxley ~~This~~Act, and the corporate governance rules ~~amount~~of ~~represents~~Nasdaq. ~~95%~~Global ofIndemnity ~~the~~plc ~~estimated~~will ~~capital~~continue ~~account~~to ~~balances~~report our ~~for~~consolidated ~~both~~financial ~~partnerships~~results asin ofU.S. dollars ~~December~~and under U.S. ~~31,~~generally ~~2008~~accepted accounting principles. ~~The~~If ~~final~~required ~~distribution~~by Irish law, audited consolidated annual financial statements prepared in accordance with Irish generally accepted accounting principles will also be ~~received~~made ~~when~~available to shareholders. In addition to shareholder approval, the ~~partnerships’~~move to Ireland is subject ~~audited~~to ~~financial~~an ~~statements~~order ~~for~~from ~~2008~~the ~~are~~Grand ~~finalized~~Court of the Cayman Islands sanctioning the transaction.

On ~~November~~January 2912, ~~2008~~2010, ~~we received notice that Mr. Richard L. Duszak,~~ a ~~member~~massive ofearthquake ~~our~~struck ~~Board of Directors,~~the ~~Chair~~Republic of ~~our~~Haiti ~~Audit~~that ~~Committee,~~devastated ~~and a member of~~ the ~~Section 162(m)~~ ~~Committee,~~capital ~~was retiring for personal reasons~~city ~~effective~~Port-au-Prince ~~November 28,~~and ~~2008.~~resulted Onin ~~December 1,~~widespread ~~2008, we notified the Listing Qualification Department of the NASDAQ Stock Market of Mr~~damage. ~~Duszak’s~~ ~~resignation~~We ~~from~~do ~~our~~not ~~Audit~~expect ~~Committee~~much, ~~and~~if ~~the Board of Directors and the resulting non-compliance with NASDAQ Marketplace Rule 4350. On December 10~~any, ~~2008,~~catastrophe weloss ~~officially~~exposure ~~received~~as ~~a notice of our~~insurance ~~non-compliance~~penetration ~~from~~in ~~the~~Haiti ~~Listing~~has ~~Qualification~~historically ~~Department.~~been ~~On February 10, 2009, we announced that Messrs~~low. ~~Chad~~ ~~A. Leat~~Any ~~and Robert S. Fleischer were appointed to the Board of~~exposure ~~Directors, effective as of~~ that ~~date.~~may ~~Mr. Leat~~develop ~~was~~would ~~also appointed~~be ~~to serve~~ as ~~the~~a ~~Chair~~result of ~~the~~tsunami ~~Audit~~activity ~~Committee of the~~that ~~Board~~affected ofneighboring ~~Directors.~~islands Wewhere ~~notified~~we ~~the~~have ~~Listing~~exposure. ~~Qualification Department~~At ~~of the NASDAQ Stock Market of Mr. Leat’s~~this ~~appointment~~time, ~~and on February 11~~however, ~~2009,~~ we ~~received~~do anot ~~notice of~~expect ~~from~~any ~~the~~significant ~~Listing Qualification Department notifying that we are now in compliance with NASDAQ’s audit committee requirements~~exposure. ~~A failure to regain compliance would have resulted~~ ~~in our being delisted from the NASDAQ Stock Market.~~

~~On January 26, 2009, we announced the appointment of~~California ~~Charles~~Mudslides ~~F. Barr as Senior Vice President~~ and ~~General Counsel,~~Flooding ~~effective February 2, 2009.~~

In January 2010, the southern California coast was battered by 52multiple heavy rainstorms that caused mudslides and flooding which resulted in significant property losses. We do not expect much, if any, catastrophe loss exposure since we expect losses to be within the retention limits of our property catastrophe reinsurance coverage.

Chile Earthquake

Europe Winter Storm

In February 2010, a late winter storm with fierce rain and hurricane strength winds hit western Europe. At this time, we do not know the extent of our catastrophe loss exposure, if any.

Appointment of Thomas M. McGeehan

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.

Critical Accounting Estimates and Policies

Our consolidated financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. (See Note 2 of the notes to consolidated financial statements contained in Item 8 of Part II of this report.) Actual results could differ from those estimates and assumptions. We believe that of our significant accounting policies, the following may involve a higher degree of judgment and estimation.

Liability For Unpaid Losses And Loss Adjustment Expenses

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

~~In developing loss and loss adjustment expense (“loss”~~ ~~or “losses”) reserve estimates, our actuaries perform~~54 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

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. ~~exposures~~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 ~~commercial~~ automobile physical damage, and equine mortality. To manage our insurance operations, we differentiate them by product ~~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 this report. Each of our product classifications contain both long-tail and short-tail exposures. Every reserve category is analyzed by our actuaries each quarter. The analyses generally include reviews of losses gross of reinsurance and net of reinsurance.

~~The~~In ~~reserve~~2009, ~~analyses~~the ~~performed~~internal byworkpapers supporting our reserves were reviewed by independent actuaries ~~during~~for ~~2008~~the ~~were~~third quarter of 2009, and our reserves were reviewed byin andetail by independent actuaries ~~actuary~~for the second and fourth quarters of 2009. ~~Management~~We ~~did~~do not rely onupon the review by the independent actuaries to develop our ~~this~~reserves; ~~review~~however, ~~but~~ the ~~information~~data ~~was~~is used to corroborate the analysis ~~work~~ performed by ~~our~~the ~~internal~~in-house actuarial staff.

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.

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~~55 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~~emerge ~~assumes~~very ~~that~~slowly, ~~only~~or ~~future~~there ~~losses~~is ~~will~~relatively ~~develop~~little ~~at the expected~~ loss ~~ratio level. The percent of paid loss to ultimate~~history ~~loss implied~~ from ~~the~~which ~~Paid Development method is used~~ to ~~determine~~ ~~what~~estimate ~~percentage~~future ~~of ultimate loss is yet to be paid~~losses. The ~~use~~selection of the ~~pattern from the Paid Development method requires~~ ~~consideration~~expected ofloss ~~all~~ratio ~~factors~~requires ~~listed~~analysis ~~in the description~~ of ~~the Paid~~loss ~~Development~~ratios ~~method. The estimate of losses yet to be paid~~from isearlier ~~added~~accident toyears ~~current~~or ~~paid~~pricing ~~losses~~studies toand ~~estimate~~analysis ~~the ultimate loss~~of ~~for~~inflationary ~~each~~trends, ~~year.~~frequency ~~This~~trends, ~~method~~rate ~~will react very slowly if actual~~changes, ~~ultimate~~underwriting ~~loss ratios are different from expectations due to~~ changes, ~~not~~and ~~accounted~~other ~~for~~applicable ~~by the expected loss ratio calculation~~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. 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. One of our insurance companies was recently 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.

Management’s best estimate at December 31, 2008 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 $1,506.4 million and $835.8 million, respectively, as of December 31, 2008. A breakout of our gross and net reserves, excluding the effects of our intercompany pooling arrangements and intercompany quota share reinsurance agreement, as of December 31, 2008 is as follows:

	Gross Reserves
	Case		IBNR(1)		Total
(Dollars in thousands)
Insurance Operations:
Penn-America	$	185,041	$	359,368	$	544,409
United National		251,164		499,252		750,416
Diamond State		94,056		92,912		186,968
Total Insurance Operations		530,261		951,532		1,481,793
Reinsurance Operations:
Wind River Reinsurance		10,621		14,015		24,636
Total	$	540,882	$	965,547	$	1,506,429

	Net Reserves(2)
	Case		IBNR(1)		Total
(Dollars in thousands)
Insurance Operations:
Penn-America	$	159,137	$	303,885	$	463,022
United National		77,910		159,207		237,117
Diamond State		51,483		68,553		120,036
Total Insurance Operations		288,530		531,645		820,175
Reinsurance Operations:
Wind River Reinsurance		3,143		12,520		15,663
Total	$	291,673	$	544,165	$	835,838

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 2009, 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.

Management’s best estimate at December 31, 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 $1,257.7 million and $730.3 million, respectively, as of December 31, 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 December 31, 2009 is as follows:


	Gross Reserves
	Case		IBNR(1)		Total
(Dollars in thousands)

Insurance Operations	$	412,395	$	809,121	$	1,221,516
Reinsurance Operations		8,633		27,592		36,225

Total	$	421,028	$	836,713	$	1,257,741


	Net Reserves(2)
	Case		IBNR(1)		Total
(Dollars in thousands)

Insurance Operations	$	240,242	$	454,718	$	694,960
Reinsurance Operations		8,228		27,140		35,368

Total	$	248,470	$	481,858	$	730,328


(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~~57 estimated ultimate liability in the operating results for the periods in which the adjustments are made. The establishment of loss and loss adjustment expense reserves makes no provision for the possible broadening of coverage by legislative action or judicial interpretation, or the emergence of new types of losses not sufficiently represented in our historical experience or that cannot yet be quantified or estimated. We regularly analyze our reserves and review pricing and reserving methodologies so that future adjustments to prior year reserves can be minimized. However, given the complexity of this process, reserves require continual updates and the ultimate liability may be higher or lower than previously indicated. Changes in estimates for loss and loss adjustment expense reserves, as required by SFAS No. 60, “Accounting and Reporting by Insurance Enterprises,” are recorded in the period that the change in these estimates is made. See Note 9 of the notes to the consolidated financial statements in Item 8 of Part II of this report for the changes in estimates for loss and loss adjustment expense reserves that occurred during 2008.

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 8 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.

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 $270.2 million for claims occurring during the year ended December 31, 2008:~~

			Severity Change
			−10%			−5%			0%			5%			10%
(Dollars in thousands)
Frequency Change	−5	%	$	(39,185	)	$	(26,349	)	$	(13,512	)	$	(676	)	$	12,161
	−3	%		(34,321	)		(21,214	)		(8,107	)		4,999			18,106
	−2	%		(31,889	)		(18,647	)		(5,405	)		7,837			21,079
	−1	%		(29,456	)		(16,079	)		(2,702	)		10,675			24,052
	0	%		(27,024	)		(13,512	)		—			13,512			27,024
	1	%		(24,592	)		(10,945	)		2,702			16,350			29,997
	2	%		(22,160	)		(8,378	)		5,405			19,187			32,970
	3	%		(19,728	)		(5,810	)		8,107			22,025			35,942
	5	%		(14,863	)		(676	)		13,512			27,700			41,888

Our net reserves for losses and loss expenses of $835.8 million as of December 31, 2008 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 December 31, 2008, our reinsurance receivables were $679.3 million, net of an allowance for uncollectible reinsurance receivables of $13.7 million. For a listing of the ten reinsurers for which we have the largest reinsurance asset amounts as of December 31, 2008, see “Reinsurance of Underwriting Risk” in Item 1 of Part I of this report. See Note 7 of the notes to the consolidated financial statements in Item 1 of Part I of this report for more details concerning the collectibility of our reinsurance receivables.

the impact of changes (which could be favorable or unfavorable) in frequency and severity on our current accident year gross loss estimate of $178.5 million for claims occurring during the nine months ended December 31, 2009:


			Severity Change
			−10%			−5%			0%			5%			10%
(Dollars in thousands)

Frequency Change	−5	%	$	(25,881	)	$	(17,403	)	$	(8,925	)	$	(446	)	$	8,032
	−3	%		(22,668	)		(14,012	)		(5,355	)		3,302			11,959
	−2	%		(21,062	)		(12,316	)		(3,570	)		5,176			13,922
	−1	%		(19,456	)		(10,620	)		(1,785	)		7,050			15,886
	0	%		(17,849	)		(8,925	)		—			8,925			17,849
	1	%		(16,243	)		(7,229	)		1,785			10,799			19,813
	2	%		(14,636	)		(5,533	)		3,570			12,673			21,776
	3	%		(13,030	)		(3,838	)		5,355			14,547			23,739
	5	%		(9,817	)		(446	)		8,925			18,295			27,666

Our net reserves for losses and loss expenses of $725.3 million as of December 31, 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 December 31, 2009, our reinsurance receivables were $543.4 million, net of an allowance for uncollectible reinsurance receivables of $12.9 million. For a listing of the ten reinsurers for which we have the largest reinsurance asset amounts as of December 31, 2009, see “Reinsurance of Underwriting Risk” in Item 1 of Part I of this report. See Note 6 of the notes to the consolidated financial statements in Item 8 of Part II of this report for more details concerning the collectibility of our reinsurance receivables.

Investments

The carrying amount of our investments approximates their estimated fair value. We regularly perform various analytical valuation procedures with respect to ~~our~~ investments, including ~~identifying~~reviewing ~~any~~each fixed maturity security ~~where~~in an unrealized loss position to determine the ~~fair~~amount of unrealized loss related to credit loss and the amount related to all other factors, such as changes in interest rates. 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 ~~below~~recorded ~~its~~through ~~cost~~earnings, whereas the amount relating to factors other than credit losses are recorded in other comprehensive income, net of taxes. During our review, we consider 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 we determine that a credit loss is likely are subjected to further analysis to estimate the credit loss to be recognized in earnings, if any. See Note 2 of the notes to consolidated financial statements in Item 8 of Part II of this report for the specific methodologies and significant assumptions used by asset class. Upon identification of such securities and periodically thereafter, ~~we perform~~ 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 isof such securities is below cost.

For ~~bonds,~~an ~~the~~analysis ~~factors~~of ~~considered~~our insecurities ~~reaching~~with ~~the~~gross ~~conclusion that~~unrealized ~~a decline below cost is other than temporary include, among~~losses ~~others,~~as ~~whether~~of ~~(1)~~December ~~the issuer is in financial distress~~31, ~~(2) the~~ ~~investment~~2009 isand ~~secured~~2008, (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~~for ~~identified~~other ~~by our~~than ~~Investment~~temporary ~~Manager~~losses asthat anwe ~~investment~~recorded tofor ~~be sold before recovery or maturity, and (7)~~ the ~~investment~~years ~~failed~~ended ~~EITF~~December ~~99-20 testing~~31, ~~which~~2009, is2008, ~~a cash flow projection test to determine if anticipated principal~~ and ~~interest~~2007, ~~payments~~please ~~will~~see ~~be realized. If~~Note 3 ~~the fair value~~ of ~~an investment falls below its cost and~~ the ~~decline~~ isnotes ~~determined~~ to ~~be other than temporary,~~ the ~~amount~~consolidated ~~of the~~financial ~~decline~~statements ~~is included~~ in ~~earnings as a realized loss in the~~ ~~period~~Item 8 inof ~~which~~Part II ~~the~~of ~~impairment~~this ~~arose~~report.

~~In the fourth quarter of 2008, we performed~~ ~~EITF 99-20~~59 ~~testing on our mortgage and asset-backed investments, which resulted in one security failing the test. An impairment of approximately $0.5 million was recognized.~~

ForTable equity securities, management carefully reviews securities with unrealized losses that have either (1) persisted for more than 12 consecutive months or (2) the value of the investment has been 20% or more below cost for six continuous months or more to determine if the security should be impaired. For securities with significant declines in value for periods shorter than six months, the security is evaluated to determine if impairment is required. Contents

For an analysis of our securities with gross unrealized losses as of December 31, 2008 and 2007, and for other than temporary losses that we recorded for the years ended December 31, 2008, 2007, and 2006, please see Note 4 of the notes to the consolidated financial statements in Item 8 of Part II of this report.

Fair Value Measurements

AsWe stated in Note 5 to the consolidated financial statements in Item 8 of Part II of this report, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), effective January 1, 2008. In connection with this adoption, we categorize our assets that are accounted for at fair value in the consolidated statements into a fair value hierarchy ~~as defined by SFAS 157~~. The fair value hierarchy is directly related to the amount of subjectivity associated with the inputs utilized to determine the fair value of these assets. See Note 4 of the notes to ~~Note~~the consolidated financial statements in Item 58 of Part II of this report for further information about the fair value hierarchy and our assets that are accounted for at fair value.

Goodwill and Intangible Assets

In 2008, we impaired all of the goodwill and $12.2 million of intangible assets associated with our merger with Penn-America Group, Inc. This resulted in an after-tax loss of $92.2 million. See Note 5 of the notes to the consolidated financial statements in Item 8 of Part II of this report for details concerning this impairment and a discussion of the results of our 2008 impairment testing of goodwill and other definite and indefinite lived assets. As of December 31, 2009, we had $9.2 million of remaining intangible assets, net of accumulated amortization.

We use several techniques to value the recoverability of our goodwill and intangible assets. Market capitalization and discounted cash flow were used to value goodwill. Undiscounted cash flow was used to value agency relationships. State licenses were valued by comparing our licenses to comparable companies. Software was evaluated based on the cost to build and the cost to replace existing software.

~~Other~~Our intangible assets that are ~~not~~ deemed to have an indefinite useful life, which includes trade names and state insurance licenses, are not amortized. Our intangible assets that are not deemed to have an indefinite useful life, which includes software technology, are amortized over their useful lives. Due ~~Due~~ to the results of our 2008 impairment testing, we ~~have~~determined ~~determined~~ that our remaining intangible assets ~~will~~that beare ~~fully~~not deemed to have ~~amortized~~an inindefinite ~~two~~useful ~~years~~life would be fully amortized by 2010. As a result, we anticipate that amortization expense ~~for the next two years~~ will be $0.~~07 million in 2009 and $0.~~04 million in 2010. ~~These amounts~~This ~~are~~amount is subject to change, however, based upon subsequent reviews of recoverability and useful lives that are performed at least annually.

consolidated financial statements for details concerning this impairment and a discussion of the results of our 2008 impairment testing of goodwill and other definite and indefinite lived assets.

Taxation

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

At each balance sheet date, management assesses the need to establish a valuation allowance that reduces deferred tax assets when it is more likely than not that all, or some portion, of the deferred tax assets will not be realized. A valuation allowance would be based on all available information including our assessment of uncertain tax positions and projections of future taxable income from each tax-paying component in each jurisdiction, principally derived from business plans and available tax planning strategies. There are no valuation allowances as of December 31, ~~2008~~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.

WeIn ~~adopted the provisions of FIN 48 on January 1~~2009, ~~2007.~~ ~~As a result,~~ we ~~apply~~recognized a$8.6 million ~~more~~of ~~likely~~investment ~~than not recognition~~income ~~threshold~~related ~~for~~to ~~all~~the ~~tax~~liquidation ~~uncertainties.~~of ~~FIN 48~~investments ~~only~~in ~~allows~~two ~~the~~limited ~~recognition~~partnerships. ofOur ~~those~~2009 tax ~~benefits~~provision ~~that~~includes ~~have~~federal aincome ~~greater than 50%~~tax ~~likelihood~~expense of ~~being sustained upon examination by the taxing authorities~~$3. ~~Please see Note~~0 8million ofrelated ~~the notes~~ to ~~the consolidated financial statements in Item 8 of Part II of~~ this ~~report~~investment ~~for a discussion of FIN 48~~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 7 of the notes to the consolidated financial statements in Item 8 of Part II of this report for a discussion of our tax uncertainties.

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.

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

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

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

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

	Years Ended December 31,
	2008			2007			2006(1)
	2009			2008			2007
(Dollars in thousands)
Insurance Operations premiums written:
Gross premiums written	$	~~353~~267,~~130~~992		$	~~536~~353,~~835~~130		$	~~652~~536,~~965~~835
Ceded premiums written		4749,~~651~~728			5847,~~561~~651			9258,~~430~~561
Net premiums written	$	~~305~~218,~~479~~264		$	~~478~~305,~~274~~479		$	~~560~~478,~~535~~274
Reinsurance Operations premiums written:
Gross premiums written	$	2573,~~570~~007		$	2625,~~277~~570		$	—26,277
Ceded premiums written		~~21,969~~276			1421,~~016~~969			—14,016
Net premiums written	$	372,~~601~~731		$	123,~~261~~601		$	—12,261
Revenues:(2)
Revenues:(1)
Insurance Operations	$	~~374~~250,~~174~~409		$	~~530~~374,~~516~~174		$	~~546~~530,~~469~~516
Reinsurance Operations		851,~~334~~265			58,~~807~~334			—5,807
Total revenues	$	~~382~~301,~~508~~674		$	~~536~~382,~~323~~508		$	~~546~~536,~~469~~323
Expenses:(3)
Expenses:(2)
Insurance Operations	$	~~431~~252,~~114~~494	(43)	$	~~466~~431,~~235~~114	(43)	$	~~479~~466,~~701~~235	(3)
Reinsurance Operations		1636,~~827~~817	~~(5)~~		716,~~730~~827	~~(5)~~		—7,730
Subtotal		~~447~~289,~~941~~311			~~473~~447,~~965~~941			~~479~~473,~~701~~965
Intercompany eliminations		—			~~(543~~—	)		(~~1,660~~543	)
Net expenses	$	~~447~~289,~~941~~311		$	~~473~~447,~~422~~941		$	~~478~~473,~~041~~422
Income (loss) from segments:
Insurance Operations	$	(562,~~940~~085	)	$	64(56,~~281~~940	)	$	6664,~~768~~281
Reinsurance Operations		(814,~~493~~448	)		(18,~~923~~493	)		—(1,923	)
Subtotal		~~(65~~12,~~433~~363	)		62(65,~~358~~433	)		6662,~~768~~358
Intercompany eliminations		—			~~543~~—			~~1,660~~543
Total income (loss) from segments	$	~~(65~~12,~~433~~363	)	$	62(65,~~901~~433	)	$	6862,~~428~~901
Insurance combined ratio analysis:(6)
Insurance combined ratio analysis:(4)
Insurance Operations
Loss ratio		7858.54			5578.75			55.7
Expense ratio		3642.74			3236.27			32.12
Combined ratio		~~115~~100.28			87115.92			87.89
Reinsurance Operations
Loss ratio		~~136~~45.2			62136.32			—62.3
Expense ratio		6526.76			7065.87			—70.8
Combined ratio		~~201~~71.98			~~133~~201.19			—133.1
Consolidated
Loss ratio		7956.82			5579.8			55.78
Expense ratio(7)		37.3			32.5			31.8
Expense ratio		39.8			37.3			32.5	(5)
Combined ratio(7)		117.1			88.3			87.5
Combined ratio		96.0			117.1			88.3	(5)

(1)		Insurance Operations includes the results from the predecessor of Wind River Reinsurance.
(2)		Excludes net investment income and net realized investment gains (losses), which are not allocated to our segments
(3)		Excludes corporate and other operating expenses and interest expense, which are not allocated to our segments.
(4)		Includes excise tax of $1,871 and $2,390 related to cessions from our U.S. Insurance Companies to Wind River Reinsurance for 2008 and 2007, 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.
(1)		Excludes net investment income and net realized investment gains (losses), which are not allocated to our segments
(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.
(2)		Excludes corporate and other operating expenses and interest expense, which are not allocated to our segments.
(7)		Includes intercompany eliminations of $(543), and $(1,660) for 2007 and 2006, respectively.
(3)		Includes excise tax of $1,342, $1,871, and $2,390 related to cessions from our U.S. Insurance Companies to Wind River Reinsurance for 2009, 2008, and 2007, respectively.
(4)		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.
(5)		Includes intercompany eliminations of $(543).

Results of Operations

~~Year Ended~~All ~~December 31,~~percentage ~~2008~~changes ~~Compared~~included ~~with~~in the ~~Year~~text ~~Ended~~below have been ~~December 31,~~calculated ~~2007~~using the corresponding amounts from the applicable tables.

Year Ended December 31, 2009 Compared with the Year Ended December 31, 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:

							Increase/(Decrease)
	2008			2007			$			%
	2009			2008			$			%
(Dollars in thousands)
Gross premiums written:
Penn-America	$	~~172~~124,~~869~~914		$	~~286~~172,~~439~~869		$	(~~113~~47,~~570~~955	)		(3927.67	)%
United National		8462,~~761~~059			~~132~~88,~~311~~884			(4726,~~500~~825	)		(3530.92	)%
Diamond State		9581,~~500~~019			~~118~~91,~~085~~377			(2210,~~585~~358	)		(1911.13	)%
Total	$	~~353~~267,~~130~~992		$	~~536~~353,~~835~~130		$	(~~183~~85,~~705~~138	)		(3424.21	)%
Net premiums written:
Penn-America	$	~~158~~101,~~136~~320		$	~~266~~158,~~874~~136		$	(~~108~~56,~~738~~816	)		(4035.79	)%
United National		7150,~~491~~036			~~110~~74,~~649~~964			(3924,~~158~~928	)		(3533.43	)%
Diamond State		7566,~~852~~908			~~100~~72,~~751~~379			(245,~~899~~471	)		(~~24.~~7.6	)%
Total	$	~~305~~218,~~479~~264		$	~~478~~305,~~274~~479		$	(~~172~~87,~~795~~215	)		(3628.16	)%
Net premiums earned:
Penn-America	$	~~200~~125,~~991~~342		$	~~317~~200,~~826~~991		$	(~~116~~75,~~835~~649	)		(3637.86	)%
United National		8957,~~042~~344			~~115~~92,~~118~~449			(2635,~~076~~105	)		(2238.70	)%
Diamond State		8467,~~141~~723			9780,~~572~~734			(13,~~431~~011	)		(1316.81	)%
Total		~~374~~250,~~174~~409			~~530~~374,~~516~~174			(~~156~~123,~~342~~765	)		(2933.51	)%
Losses and expenses:
Net losses and loss adjustment expenses		~~293~~146,~~820~~197			~~295~~293,~~624~~820			(1147,~~804~~623	)		(050.62	)%
Acquisition costs and other underwriting expenses(1)		~~137~~106,~~294~~297			~~170~~137,~~611~~294			(3330,~~317~~997	)		(1922.56	)%
Income (loss) from underwriting	$	(562,~~940~~085	)	$	64(56,~~281~~940	)	$	~~(121~~54,~~221~~855	)		(~~188~~96.63	)%
Underwriting Ratios:
Loss ratio:
Current accident year		6962.70			6169.27			8(7.57	)
Prior accident year		8(3.86	)		(58.58	)		14(12.34	)
Calendar year		7858.54			5578.75			22(20.81	)
Expense ratio		3642.74			3236.27			4.5.7
Combined ratio		~~115~~100.28			87115.92			27(14.34	)

(1) Includes excise tax of $1,871 and $2,390 related to cessions from our U.S. Insurance Companies to Wind River Reinsurance for 2008 and 2007, respectively.


(1)		Includes excise tax of $1,342 and $1,871 related to cessions from our U.S. Insurance Companies to Wind River Reinsurance for 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 $268.0 million for 2009, compared with $353.1 million for 2008, a decrease of $85.1 million or 24.1%.


	•	Penn-America gross premiums written were $124.9 million for 2009, compared with $172.9 million for 2008, a decrease of $48.0 million, or 27.7%. The decrease was primarily due to a reduction of $11.0 million due to terminated programs and agents and a reduction of $37.0 million from price decreases in the aggregate of approximately 2.9% and other market factors.

	•	United National gross premiums written were $62.1 million for 2009, compared with $88.9 million for 2008, a decrease of $26.8 million, or 30.2%. The decrease was primarily due to a reduction of $19.7 million due to terminated programs and agents and a reduction of $7.1 million from price decreases in the aggregate of approximately 3.8% and from other market factors.

	•	Diamond State gross premiums written were $81.0 million for 2009, compared with $91.4 million for 2008, a decrease of $10.4 million, or 11.3%. The decrease was primarily due to a reduction of $4.5 million due to terminated programs and agents and a reduction of $5.9 million from price decreases in the aggregate of approximately 0.7% and other market factors.

Net premiums written, which equal gross premiums written less ceded premiums written, was $218.3 million for 2009, compared with $305.5 million for 2008, a decrease of $87.2 million or 28.6%. The decrease was primarily due to the reduction of gross premiums written noted above.

The ratio of net premiums written to gross premiums written was 81.4% for 2009 and 86.5% for 2008, a decline of 5.1 points, which was primarily due to $11.5 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 $250.4 million for 2009, compared with $374.2 million for 2008, a decrease of $123.8 million or 33.1%. The decrease was primarily due to the reduction of net premiums written noted above. Property net premiums earned for 2009 and 2008 were $103.5 million and $137.9 million, respectively. Casualty net premiums earned for 2009 and 2008 were $146.9 million and $236.3 million, respectively.

Net Losses and Loss Adjustment Expenses

The loss ratio for our Insurance Operations was 58.4% for 2009 compared with 78.5% for 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 12.4 points resulting from a decrease of net losses and loss adjustment expenses for prior accident years of $9.1 million in 2009 compared to an increase of net losses and loss adjustment expenses for prior accident years of $33.0 million in 2008. When analyzing loss reserves and prior year development, we consider many factors, including the frequency and severity of claims, loss credit trends, case reserve settlements that may have resulted in significant development, and any other additional or pertinent factors that may impact reserve estimates.


	•	In 2009, we reduced our prior accident year loss reserves by $8.4 million and reduced our allowance for uncollectible reinsurance by $0.7 million. The reduction of our prior accident year loss reserves primarily consisted of a $5.5 million reduction in our property lines, a $2.9 million reduction in our general liability


		lines, and a $4.7 million reduction in our umbrella lines, offset by a $4.7 million increase in our professional liability lines:


	1.	The reduction in the property lines primarily consisted of reductions related to accident year 2006 through 2008 due to better than expected loss emergence in brokerage.

	2.	The reduction in the general liability lines primarily consisted of net reductions of $13.5 million related to accident years 2006 and prior due to loss emergence that had been consistently lower than expected during the year, partially offset by increases of $10.6 million to accident years 2007 and 2008 that were driven by a large claim and an increase in our construction defect provisions for Penn America.

	3.	The reduction in the umbrella lines primarily consisted of net reductions of $5.1 million related to accident years 2007 and prior that were driven by loss emergence throughout the year that was consistently better than expected, partially offset by increases of $0.4 million related to accident year 2008.

	4.	The increase to the professional liability lines primarily consisted of increases of $10.1 million related to accident years 2007 and 2008 due to an increase in severity, partially offset by net reductions of $5.4 million primarily related to accident years 2006 and prior.

The reduction in our allowance for uncollectible reinsurance is primarily due to the decrease in the amount of our carried reinsurance receivables.


	•	In 2008, we increased our prior accident year loss reserves by $29.9 million and increased our allowance for uncollectible reinsurance by $3.1 million. The loss reserves increase of $29.9 million consisted of increases of $15.9 million in our general liability lines and $15.7 million in our professional liability lines, offset by reductions of $1.2 million in our property lines and $0.5 million in our umbrella lines.


	1.	The increase to the general liability lines consisted of increases of $20.5 million related to accident years 2006, 2007, and 2001 and prior, offset by reductions of $4.6 million related to accident years 2002 through 2005. The increases in 2006 and 2007 are primarily related to greater severity.

	2.	The increase to the professional liability lines consisted of increases of $17.7 million related to accident years 2006 and 2007, offset by reductions of $2.0 million related to accident years 2005 and prior. The increases in 2006 and 2007 are primarily related to greater severity.

	3.	The reduction in property lines consisted of reductions of $2.6 million related to accident years 2008 and 2003 and prior, offset by increases of $1.4 million primarily related to accident years 2004 through 2006.

	4.	The reduction in umbrella lines was primarily related to accident years 2004 and prior. The increases in 2006 and 2007 in our professional and general liability lines are primarily related to greater severity.

The current accident year loss ratio decreased 7.7 points in 2009 primarily due to a decrease in both the property and casualty loss ratios:


	•	The current accident year property loss ratio decreased 13.9 points from 69.2% in 2008 to 55.3% in 2009, which consists of an 11.4 point decrease in the catastrophe loss ratio from 15.3% in 2008 to 3.9% in 2009 and a 2.5 point decrease in the non-catastrophe loss ratio from 53.9% in 2008 to 51.4% in 2009. Catastrophe losses were $4.0 million and $21.1 million in 2009 and 2008, respectively. Catastrophe losses in 2008 included net loss and loss adjustment expenses related to Hurricanes Ike and Gustav, which occurred in September 2008, and storms in the Midwest that occurred in the first half of 2008. Property net premiums earned for 2009 and 2008 were $103.5 million and $137.9 million, respectively.

	•	The current accident year casualty loss ratio decreased 3.2 points from 70.0% in 2008 to 66.8% in 2009 primarily due to changes in our mix of business. Casualty net premiums earned for 2009 and 2008 were $146.9 million and $236.3 million, respectively.

Net losses and loss adjustment expenses were $146.2 million for 2009, compared with $293.8 million for 2008, a decrease of $147.6 million or 50.2%. Excluding the $9.1 million reduction of net losses and loss adjustment expenses for prior accident years in 2009 and the $33.0 million increase of net losses and loss adjustment expenses for prior accident years in 2008, the current accident year net losses and loss adjustment expenses were $155.3 million and $260.8 million for 2009 and 2008, respectively. This decrease is primarily attributable to a decrease in net premiums earned and the decline in the loss ratio as described above.

Acquisition Costs and Other Underwriting Expenses

Acquisition costs and other underwriting expenses were $106.3 million for 2009, compared with $137.3 million for 2008, a decrease of $31.0 million or 22.6%. The decrease is due to a $32.5 million decrease in acquisition costs, offset by a $1.5 million increase in other underwriting expenses.


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

	•	The increase in other underwriting expenses is primarily due to the incurrence of 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 42.4% for 2009, compared with 36.7% for 2008. The expense ratio is a non-GAAP financial measure that is calculated by dividing the sum of acquisition costs and other underwriting expenses by net premiums earned. The increase in the expense ratio is primarily due to the decrease in net premiums earned noted above.

The combined ratio for our Insurance Operations was 100.8% for 2009, compared with 115.2% for 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 $9.1 million reduction of prior accident year loss reserves in 2009 and a $33.0 million increase of prior accident year loss reserves in 2008, the combined ratio decreased from 106.4% for 2008 to 104.4% for 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 a loss from underwriting for our Insurance Operations of $2.1 million for 2009, compared with a loss from underwriting of $56.9 million for 2008, a decrease in the loss of $54.8 million.

Reinsurance Operations

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


						Increase/(Decrease)
	2009		2008			$			%
(Dollars in thousands)

Gross premiums written	$	73,007	$	25,570		$	47,437			185.5	%

Net premiums written	$	72,731	$	3,601		$	69,130			1,919.7	%

Net premiums earned	$	51,265	$	8,334		$	42,931			515.1	%
Losses and expenses:
Net losses and loss adjustment expenses		23,185		11,354			11,831			104.2	%
Acquisition costs and other underwriting expenses		13,632		5,473			8,159			149.1	%

Income (loss) from underwriting	$	14,448	$	(8,493	)	$	22,941			NM

Underwriting Ratios:
Loss ratio:
Current accident year		45.2		112.8			(67.6	)
Prior accident year		—		23.4			(23.4	)

Calendar year loss ratio		45.2		136.2			(91.0	)
Expense ratio		26.6		65.7			(39.1	)

Combined ratio		71.8		201.9			(130.1	)

NM — Not meaningful.

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 $73.0 million for 2009, compared with $25.6 million for 2008, an increase of $47.4 million or 185.5%. 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, was $72.7 million for 2009, compared with $3.6 million for 2008, an increase of $69.1 million or 1,919.7%. The increase was primarily due to several new reinsurance treaties that commenced during the first quarter of 2009 and an increase in the amount of gross premiums retroceded to our reinsurers in 2008.

The ratio of net premiums written to gross premiums written was 99.6% for 2009 and 14.1% for 2008, an increase of 85.5 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 $51.3 million for 2009, compared with $8.3 million for 2008, an increase of $43.0 million or 515.1%. The increase was primarily due to several new reinsurance treaties that commenced during the first quarter of 2009 and an increase in the amount of gross premiums retroceded to our reinsurers in 2008. Property net premiums earned for 2009 and 2008 were $23.5 million and $0.6 million, respectively. Casualty net premiums earned for 2009 and 2008 were $27.8 million and $7.7 million, respectively.

Net Losses and Loss Adjustment Expenses

The loss ratio for our Reinsurance Operations was 45.2% for 2009 compared with 136.2% for 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 23.4 points resulting from an increase of net losses and loss adjustment expenses for prior accident years of $0.03 million in 2009 and an increase of net losses and loss adjustment expenses for prior accident years of $1.9 million in 2008. When analyzing loss reserves and prior year development, we consider many factors, including the frequency and severity of claims, loss credit trends, case reserve settlements that may have resulted in significant development, and any other additional or pertinent factors that may impact reserve estimates.


	•	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 $1.9 million, which primarily consisted of an increase of $2.6 million in our professional liability lines, offset by reductions of $0.6 million in our general liability lines and $0.1 million in our property lines. The increase to the professional liability lines was related to accident year 2008. The reduction to the general liability lines was related to accident years 2004 through 2006. The reduction in the property lines was related to accident year 2007.

In 2009, the current accident year loss ratio decreased 67.6 points from 112.8% in 2008 to 45.2% 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.

Net losses and loss adjustment expenses were $23.2 million for 2009, compared with $11.3 million for 2008, an increase of $11.9 million or 104.2%. Excluding the $0.03 million increase of net losses and loss adjustment expenses for prior accident years in 2009 and the $1.9 million increase of net losses and loss adjustment expenses for prior accident years in 2008, the current accident year net losses and loss adjustment expenses were $23.2 million and $9.4 million for 2009 and 2008, respectively. This increase is primarily attributable to an increase in net premiums earned, which increased from $8.3 million in 2008 to $51.3 million in 2009, offset partially by an improved loss ratio in 2009 compared with 2008 as described below.

Acquisition Costs and Other Underwriting Expenses

Acquisition costs and other underwriting expenses were $13.6 million for 2009, compared with $5.5 million for 2008, an increase of $8.1 million or 149.1%. The increase is due to a $7.8 million increase in acquisition costs and a $0.3 million increase in other underwriting expenses.


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

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

Expense and Combined Ratios

The expense ratio for our Reinsurance Operations was 26.6% for 2009, compared with 65.7% for 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 71.8% for 2009, compared with 201.9% for 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 2009 and a $1.9 million increase of prior accident year loss reserves in 2008, the combined ratio increased from 178.5% for 2008 to 71.8% for 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 $14.4 million for 2009, compared with a loss from underwriting of $8.5 million for 2008, an increase in income of $22.9 million.

Unallocated Corporate Items

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


							Increase/(Decrease)
	2009			2008			$			%
(Dollars in thousands)

Net investment income	$	70,214		$	67,830		$	2,384			3.5	%
Net realized investment gains (losses)		15,862			(50,259	)		66,121			NM
Corporate and other operating expenses		(16,752	)		(13,918	)		(2,834	)		20.4	%
Interest expense		(7,216	)		(8,657	)		1,441			(16.6	)%
Impairments of goodwill and intangible assets		—			(96,449	)		96,449			100.0	%
Income tax benefit (expense)		(4,310	)		29,216			(33,526	)		NM
Equity in net loss of partnership, net of tax		5,276			(3,890	)		9,166			NM

NM — Not meaningful.

Net Investment Income

Net investment income, which is gross investment income less investment expenses, was $70.2 million for 2009, compared with $67.8 million for 2008, an increase of $2.4 million or 3.5%.


	•	Gross investment income, excluding realized gains and losses, was $74.9 million for 2009, compared with $72.8 million for 2008, an increase of $2.1 million or 2.8%. The increase was primarily due to gross investment income of $8.6 million generated from liquidating some of our limited partnership investments offset by reductions due to decreases in interest rates. There was no investment income generated by our limited partnership investments for 2008. Excluding distributions from our limited partnership investments, gross investment income for 2009 decreased 9.0% compared to 2008. This decrease is due to reductions in interest rates. Cash and invested assets, net of payable for securities purchased of $37.3 million, increased to $1,694.1 million as of December 31, 2009 from $1,598.8 million as of December 31, 2008, an increase of $95.3 million or 6.0%. This increase was primarily due to proceeds from the Rights Offering. A portion of these proceeds was invested in a limited partnership which resulted in $1.7 million of equity in net income of partnerships in the consolidated statement of operations. This ownership was redeemed in December 2009. The remaining portion of the proceeds were invested short-term until later in the year at which time they were invested in assets which are expected to produce higher yields in 2010.

	•	Investment expenses were $4.7 million for 2009, compared with $5.0 million for 2008, a decrease of $0.3 million or 6.3%. The decrease was primarily due to the decrease in trust fees and a change in fee structure resulting from a change in investment managers.

The average duration of our fixed maturities portfolios was 2.8 years as of December 31, 2009, compared with 3.1 years as of December 31, 2008. Including cash and short-term investments, the average duration of our investments as of December 31, 2009 and 2008 was 2.5 years. At December 31, 2009, our book yield on our fixed maturities, not including cash, was 4.34% compared with 4.95% at December 31, 2008. The book yield on the $194.0 million of municipal bonds in our portfolio was 3.88% at December 31, 2009.

Net Realized Investment Gains (Losses)

Net realized investment gains were $15.9 million for 2009, compared with net realized investment losses of $50.3 million for 2008. The net realized investment gains for 2009 consist primarily of net gains of $5.4 million relative to market value changes in our convertible portfolio and net gains of $16.1 million relative to our fixed

maturities and equity portfolios, offset by other than temporary impairment losses of $5.6 million. The net realized investment losses for 2008 consist primarily of net losses of $5.2 million relative to market value declines in our convertible portfolios, other than temporary impairment losses of $32.1 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 3 of the notes to the consolidated financial statements in Item 8 of Part II of this report for an analysis of total investment return on an after-tax basis for the years ended December 31, 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 $16.8 million for 2009, compared with $13.9 million for 2008, an increase of $2.8 million or 20.4%. This increase is primarily due to professional fees related to domestication and other corporate initiatives.

Interest Expense

Interest expense was $7.2 million and $8.7 million for 2009 and 2008, respectively. The reduction is due to retiring $15.5 million of trust preferred debt in May 2008, as well as a reduction in LIBOR rates during 2009, which is the basis for interest paid on the trust preferred debt. See Note 9 of the notes to the consolidated financial statements in Item 8 of Part II of this report for details on our debt.

Impairments of Goodwill and Intangible Assets

Impairments of goodwill and intangible assets were $96.4 million for 2008. There were no impairments in 2009. See Note 5 of the notes to the consolidated financial statements in Item 8 of Part II of this report for details on our impairments.

Income Tax Expense (Benefit)

Income tax expense was $4.3 million for 2009, compared with income tax benefit of $29.3 million for 2008. See Note 7 of the notes to the consolidated financial statements in Item 8 of Part II of this report for a comparison of income tax expense between periods.

Equity in Net Earnings (Loss) of Partnerships

Equity in net earnings of partnerships, net of tax was $5.3 million for 2009, compared with equity in net loss of partnerships, net of tax of $3.9 million for 2008, an increase in income of $9.2 million. 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 corporate loans. The value of these investments was $1.1 million as of December 31, 2009, so this performance is not likely to repeat in future years.

Net Income (Loss)

The factors described above resulted in net income of $75.4 million for 2009, compared with net loss of $141.6 million for 2008, an increase in income of $217.0 million.

Year Ended December 31, 2008 Compared with the Year Ended December 31, 2007

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:


							Increase/(Decrease)
	2008			2007			$			%
(Dollars in thousands)

Gross premiums written:
Penn-America	$	172,869		$	286,439		$	(113,570	)		(39.6	)%
United National		88,884			132,311			(43,427	)		(32.8	)%
Diamond State		91,377			118,085			(26,708	)		(22.6	)%

Total	$	353,130		$	536,835		$	(183,705	)		(34.2	)%

Net premiums written:
Penn-America	$	158,136		$	266,874		$	(108,738	)		(40.7	)%
United National		74,964			110,649			(35,685	)		(32.3	)%
Diamond State		72,379			100,751			(28,372	)		(28.2	)%

Total	$	305,479		$	478,274		$	(172,795	)		(36.1	)%

Net premiums earned:
Penn-America	$	200,991		$	317,826		$	(116,835	)		(36.8	)%
United National		92,449			115,118			(22,669	)		(19.7	)%
Diamond State		80,734			97,572			(16,838	)		(17.3	)%

Total		374,174			530,516			(156,342	)		(29.5	)%
Losses and expenses:
Net losses and loss adjustment expenses		293,820			295,624			(1,804	)		(0.6	)%
Acquisition costs and other underwriting expenses(1)		137,294			170,611			(33,317	)		(19.5	)%

Income (loss) from underwriting	$	(56,940	)	$	64,281		$	(121,221	)		(188.6	)%

Underwriting Ratios:
Loss ratio:
Current accident year		69.7			61.2			8.5
Prior accident year		8.8			(5.5	)		14.3

Calendar year		78.5			55.7			22.8
Expense ratio		36.7			32.2			4.5

Combined ratio		115.2			87.9			27.3


(2)		Includes excise tax of $1,871 and $2,390 related to cessions from our U.S. Insurance Companies to Wind River Reinsurance for 2008 and 2007, 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 $353.1 million for 2008, compared with $536.8 million for 2007, a decrease of $183.7 million or 34.2%.

• Penn-America gross premiums written were $172.9 million for 2008, compared with $286.4 million for 2007, a decrease of $113.5 million, or 39.6%. The decrease was primarily due to a reduction of $41.6 million due to terminations of business that did not meet our profitability requirements, a reduction of $39.3 million from agents that write business in coastal catastrophe prone areas, and a reduction of $32.6 million from price decreases in the aggregate of approximately 4.4% and other market factors. • United National gross premiums written were $84.8 million for 2008, compared with $132.3 million for 2007, a decrease of $47.5 million, or 35.9%. The decrease was primarily due to a reduction of $24.9 million due to terminations of business that did not meet our profitability requirements and a reduction of $22.7 million from price decreases in the aggregate of approximately 4.2% and other market factors. • Diamond State gross premiums written were $95.5 million for 2008, compared with $118.1 million for 2007, a decrease of $22.6 million, or 19.1%. The decrease was primarily due to a reduction of $5.6 million due to terminations of business that did not meet our profitability requirements and a reduction of $17.0 million from price decreases in the aggregate of approximately 2.1% and other market factors.


	•	Penn-America gross premiums written were $172.9 million for 2008, compared with $286.4 million for 2007, a decrease of $113.5 million, or 39.6%. The decrease was primarily due to a reduction of $41.6 million due to terminations of business that did not meet our profitability requirements, a reduction of $39.3 million from agents that write business in coastal catastrophe prone areas, and a reduction of $32.6 million from price decreases in the aggregate of approximately 4.4% and other market factors.

	•	United National gross premiums written were $88.9 million for 2008, compared with $132.3 million for 2007, a decrease of $43.4 million, or 32.8%. The decrease was primarily due to a reduction of $24.9 million


		due to terminations of business that did not meet our profitability requirements and a reduction of $18.5 million from price decreases in the aggregate of approximately 4.2% and other market factors.


	•	Diamond State gross premiums written were $91.4 million for 2008, compared with $118.1 million for 2007, a decrease of $26.7 million, or 22.6%. The decrease was primarily due to a reduction of $5.6 million due to terminations of business that did not meet our profitability requirements and a reduction of $21.1 million from price decreases in the aggregate of approximately 2.1% and other market factors.

Net premiums written, which equal gross premiums written less ceded premiums written, were $305.5 million for 2008, compared with $478.3 million for 2007, a decrease of $172.8 million or 36.1%. The decrease was primarily due to the reduction of gross premiums written noted above.

The ratio of net premiums written to gross premiums written was 86.5% for 2008 and 89.1% for 2007, a decline of 2.6 points, which was primarily due to changes in our mix of business, and an additional $3.0 million of ceded written premiums under our catastrophe reinsurance treaty resulting from the reinstatement of limits related to losses from Hurricane Ike.

Net premiums earned were $374.2 million for 2008, compared with $530.5 million for 2007, a decrease of $156.3 million or 29.5%. The decrease was primarily due to the reduction of gross premiums written noted above.

Net Losses and Loss Adjustment Expenses

The loss ratio for our Insurance Operations was 78.5% for 2008 compared with 55.7% for 2007. 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 14.3 points resulting from an increase of net losses and loss adjustment expenses for prior accident years of $33.0 million in 2008 compared to a $29.0 million reduction of net losses and loss adjustment expenses for prior accident years in 2007.

InThe ~~2008,~~impact weof ~~increased~~changes ~~our~~to prior accident ~~year~~years ~~loss~~is ~~reserves by $29~~14.~~9 million~~3 ~~and increased our allowance for uncollectible~~points ~~reinsurance~~resulting byfrom ~~$3.1 million.~~an ~~The loss reserves~~ increase of ~~$29.9 million~~ ~~consisted~~net oflosses ~~increases~~and ofloss ~~$15.9 million~~adjustment inexpenses ~~our~~for ~~general~~prior ~~liability~~accident ~~lines~~years ~~and~~of $1533.70 million in ~~our~~2008 ~~professional~~compared ~~liability~~to ~~lines,~~a ~~offset by reductions of~~ $129.~~2 million in our property lines and $~~0.5 million ~~in our~~reduction ~~umbrella lines. The increase to the general liability lines consisted~~ of ~~increases~~net oflosses ~~$20.5 million related to accident~~and ~~years~~loss ~~2006,~~adjustment ~~2007,~~expenses ~~and~~for ~~2001 and~~ prior, ~~offset by reductions of $4.6 million related to~~ accident years ~~2002~~in ~~through 2005. The increase to the professional liability lines consisted of increases of $17.7 million related to accident years 2006 and~~ 2007~~, offset by reductions of $2~~.~~0 million~~ ~~related to~~When ~~accident~~analyzing ~~years~~loss ~~2005~~reserves and prior. ~~The~~year ~~reduction~~development, inwe ~~property lines~~consider ~~consisted~~many offactors, ~~reductions~~including ofthe ~~$2.6 million~~frequency ~~related to accident years 2007~~ and ~~2003~~severity ~~and~~of ~~prior~~claims, ~~offset by increases of~~ ~~$1.4 million~~loss ~~primarily~~credit ~~related~~trends, tocase ~~accident~~reserve ~~years~~settlements ~~2004 through~~that ~~2006.~~may ~~The reduction in umbrella lines was primarily~~have ~~related~~resulted toin ~~accident~~significant ~~years~~development, ~~2004~~ and ~~prior.~~any ~~The~~other ~~increases~~additional ~~in 2006~~or ~~and~~pertinent ~~2007~~factors inthat ~~our~~may ~~professional~~impact ~~and~~reserve ~~general liability lines are primarily related to greater severity~~estimates.

• In ~~2007~~2008, we ~~reduced~~increased our prior accident year loss reserves by $2429.6 9 million and ~~reduced~~increased our allowance for uncollectible reinsurance by $43.4 1 million. The loss reserves ~~reduction~~increase of $2429.6 9 million consisted of aincreases ~~net reduction~~ of $4215.5 9 million ~~for~~in ~~primary~~our general liability, ~~umbrella~~lines and ~~excess, construction~~$15.7 ~~defect,~~million ~~and~~in our professional liability lines, offset by reductions of $1.2 million in ~~run-off~~our ~~due~~property tolines ~~both~~ and $0.5 million in our umbrella lines.

63 1. The increase to the general liability lines consisted of increases of $20.5 million related to accident years 2006, 2007, and 2001 and prior, offset by reductions of $4.6 million related to accident years 2002 through 2005. The increases in 2006 and 2007 are primarily related to greater severity. 2. The increase to the professional liability lines consisted of increases of $17.7 million related to accident years 2006 and 2007, offset by reductions of $2.0 million related to accident years 2005 and prior. The increases in 2006 and 2007 in are primarily related to greater severity. 3. The reduction in property lines consisted of reductions of $2.6 million related to accident years 2007 and 2003 and prior, offset by increases of $1.4 million primarily related to accident years 2004 through 2006. 4. The reduction in umbrella lines was primarily related to accident years 2004 and prior. The increases in 2006 and 2007 in our professional and general liability lines are primarily related to greater severity.


	•	In 2007, we reduced our prior accident year loss reserves by $24.6 million and reduced our allowance for uncollectible reinsurance by $4.4 million. The loss reserves reduction of $24.6 million consisted of a net reduction of $42.5 million for primary liability, umbrella and excess, construction defect, and lines in run- off due to both lower than expected frequency and severity emergence, offset by a $17.8 million increase in net reserves for unallocated loss adjustment expenses (“ULAE”) and A&E.

~~lower~~The ~~than~~current ~~expected~~accident ~~frequency~~year ~~and~~loss ~~severity~~ratio ~~emergence,~~increased ~~offset~~8.5 bypoints in a2008 ~~$17.8 million~~primarily due to an increase in ~~net~~both ~~reserves~~the ~~for~~current ~~unallocated~~property ~~loss~~and ~~adjustment~~casualty ~~expenses~~loss ~~(“ULAE”) and A&E.~~ratios:

The current accident year loss ratio increased 8.5 points in 2008 primarily due to an increase in both the current property and casualty loss ratios. The current accident year property loss ratio increased 19.7 points from 49.4% in 2007 to 69.1% in 2008, which consists of a 14.3 point increase in the catastrophe loss ratio from 1.0% in 2007 to 15.3% in 2008 and a 5.3 point increase in the non-catastrophe loss ratio from 46.0% in 2007 to 51.3% in 2008. The increase in the catastrophe loss ratio is due to $21.1 million of net loss and loss adjustment expenses primarily related to Hurricanes Ike and Gustav, which occurred in September 2008, and storms in the Midwest that occurred in the first half of 2008, compared to $2.0 million of catastrophe losses in 2007. Loss and loss adjustments related to Hurricanes Ike and Gustav was $14.0 million in 2008. The increase in the non-catastrophe loss ratio is primarily due to higher frequency related to weather-related losses early in 2008. The current accident year casualty loss ratio increased 2.5 points from 67.5% in 2007 to 70.0% in 2008 primarily due to increased loss trends, higher severity on product lines that we are exiting, and the impact of lower pricing.


	•	The current accident year property loss ratio increased 19.7 points from 49.4% in 2007 to 69.1% in 2008, which consists of a 14.3 point increase in the catastrophe loss ratio from 1.0% in 2007 to 15.3% in 2008 and a 5.3 point increase in the non-catastrophe loss ratio from 46.0% in 2007 to 51.3% in 2008. The increase in the catastrophe loss ratio is due to $21.1 million of net loss and loss adjustment expenses primarily related to Hurricanes Ike and Gustav, which occurred in September 2008, and storms in the Midwest that occurred in the first half of 2008, compared to $2.0 million of catastrophe losses in 2007. Loss and loss adjustments related to Hurricanes Ike and Gustav was $14.0 million in 2008. The increase in the non-catastrophe loss ratio is primarily due to higher frequency related to weather-related losses early in 2008.

	•	The current accident year casualty loss ratio increased 2.5 points from 67.5% in 2007 to 70.0% in 2008 primarily due to increased loss trends, higher severity on product lines that we are exiting, and the impact of lower pricing.

Net losses and loss adjustment expenses were $293.8 million for 2008, compared with $295.6 million for 2007, a decrease of $1.8 million or 0.6%. Excluding the $33.0 million increase of net losses and loss adjustment expenses for prior accident years in 2008 and the $29.0 million reduction of net losses and loss adjustment expenses for prior accident years in 2007, the current accident year net losses and loss adjustment expenses were $260.8 million and $324.6 million for 2008 and 2007, respectively. This decrease is primarily attributable to a decrease in net premiums earned, partially offset by an increase in property losses due to the factors noted above and casualty loss cost inflation. Property net premiums earned for 2008 and 2007 were $137.8 million and $186.7 million, respectively. Casualty net premiums earned for 2008 and 2007 were $236.3 million and $343.8 million, respectively.

Acquisition Costs and Other Underwriting Expenses

Acquisition costs and other underwriting expenses, excluding intercompany eliminations, were $137.3 million for 2008, compared with $170.6 million for 2007, a decrease of $33.3 million or 19.5%. The decrease is due to a $3637.90 million decrease in acquisition costs, offset by a $3.67 million increase in other underwriting expenses.


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

	•	The increase in other underwriting expenses is primarily due to an increase in total compensation expenses and property and office costs.

Expense and Combined Ratios

The expense ratio for our Insurance Operations was 36.7% for 2008, compared with 32.2% for 2007. The expense ratio is a non-GAAP financial measure that is calculated by dividing the sum of acquisition costs and other underwriting expenses by net premiums earned. The increase in the expense ratio is primarily due to the decrease in net premiums earned noted above.

The combined ratio for our Insurance Operations was 115.2% for 2008, compared with 87.9% for 2007. The combined ratio is a non-GAAP financial measure and is the sum of our loss and expense ratios. Excluding the impact of ana $33.0 million increase of prior accident year loss reserves in 2008 and a $29.0 million reduction of prior accident year loss reserves in 2007, the combined ratio increased from 93.4% for 2007 to 106.4% for 2008. 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~~Loss) from underwriting

The factors described above resulted in loss from underwriting for our Insurance Operations of $56.9 million for 2008, compared with income from underwriting of $64.3 million for 2007, a decrease of $121.2 million.

6472

Reinsurance Operations

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


							Increase/(Decrease)
	2008			2007			$			%
(Dollars in thousands)

Gross premiums written	$	25,570		$	26,277		$	(707	)		(2.7	)%

Net premiums written	$	3,601		$	12,261		$	(8,660	)		(70.6	)%

Net premiums earned	$	8,334		$	5,807		$	2,527			43.5	%
Losses and expenses:
Net losses and loss adjustment expenses		11,354			3,617			7,737			213.9	%
Acquisition costs and other underwriting expenses		5,473			4,113			1,360			33.1	%

Income (loss) from underwriting	$	(8,493	)	$	(1,923	)	$	(6,570	)		341.7	%

Underwriting Ratios:
Loss ratio:
Current accident year		112.8			64.5			48.3
Prior accident year		23.4			(2.2	)		25.6

Calendar year loss ratio		136.2			62.3			73.9
Expense ratio		65.7			70.8			(5.1	)

Combined ratio		201.9			133.1			68.8

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 $25.6 million for 2008, compared with $26.3 million for 2007, a decrease of $0.7 million or 2.7%. The decrease was primarily due to the non-renewal in 2008 of a treaty ~~that~~we ~~did not~~had ~~meet~~written in 2007 that no longer met our profitability requirements.

Net premiums written, which equal gross premiums written less ceded premiums written, were $3.6 million for 2008, compared with $12.3 million for 2007, a decrease of $8.7 million or 70.6%. The decrease was ~~primarily~~ due to an increase in the ~~termination~~amount of gross premiums retroceded to our reinsurers. With respect to the non-renewed treaty referred to above, in 2007, we retroceded a smaller percentage of gross written premiums under that treaty compared to other treaties we wrote. Therefore, in 2008, the non-renewal of that ~~did~~treaty ~~not~~had ~~meet~~a disproportionate ~~our~~impact ~~profitability~~on net written premiums when compared to ~~requirements~~gross written premiums.

The ratio of net premiums written to gross premiums written was 14.1% for 2008 and 46.7% for 2007, a decline of 32.6 points, which was primarily due to changes in our mix of business.

Net premiums earned were $8.3 million for 2008, compared with $5.8 million for 2007, an increase of $2.5 million or 43.5%. The increase was primarily due to business written in the latter part of 2007.

Net Losses and Loss Adjustment Expenses

The loss ratio for our Reinsurance Operations was 136.2% for 2008 compared with 62.3% for 2007. 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 25.6 points resulting from an increase of net losses and loss adjustment expenses for prior accident years of $1.9 million in 2008 compared to a $0.1 million reduction of net losses and loss adjustment expenses for prior accident years in 2007.

InThe ~~2008,~~impact weof ~~increased~~changes ~~our~~to prior accident ~~year~~years ~~loss~~is ~~reserves~~25.6 bypoints ~~$1.9 million,~~resulting ~~which~~from ~~primarily consisted of~~ an increase of ~~$2.6 million~~ innet ~~our~~losses ~~professional~~and ~~liability~~loss ~~lines, offset by~~adjustment ~~reductions~~expenses for prior accident years of $01.69 million in ~~our general liability lines~~2008 ~~and~~compared to a $0.1 million inreduction ~~our~~of ~~property~~net ~~lines.~~losses ~~The~~and ~~increase~~loss adjustment toexpenses ~~the~~for prior accident years in 2007. When ~~professional~~analyzing ~~liability~~loss ~~lines~~reserves ~~was~~and ~~related~~prior ~~to accident~~year

6573

~~year~~development, ~~2007.~~we ~~The~~consider ~~reduction~~many tofactors, including the ~~general~~frequency and ~~liability~~severity ~~lines~~of ~~was related~~claims, toloss ~~accident~~credit ~~years~~trends, ~~2004~~case ~~through~~reserve settlements ~~2006.~~that ~~The~~may ~~reduction~~have resulted in significant development, ~~the~~and ~~property~~any ~~lines~~other ~~was~~additional ~~related~~or topertinent ~~accident~~factors ~~year~~that ~~2007~~may impact reserve estimates.

In 2007, we reduced our prior accident year loss reserves by $0.1 million which consisted of a reduction in our general liability lines for accident year 2005.


	•	In 2008, we increased our prior accident year loss reserves by $1.9 million, which primarily consisted of an increase of $2.6 million in our professional liability lines, offset by reductions of $0.6 million in our general liability lines and $0.1 million in our property lines. The increase to the professional liability lines was related to accident year 2007. The reduction to the general liability lines was related to accident years 2004 through 2006. The reduction in the property lines was related to accident year 2007.

	•	In 2007, we reduced our prior accident year loss reserves by $0.1 million which consisted of a reduction in our general liability lines for accident year 2005.

The current accident year loss ratio increased 48.3 points in 2008 primarily due to an increase in the current accident year property loss and current accident year casualty loss ratios. The current accident year property loss ratio increased 35.8 points from 35.6% in 2007 to 71.4% in 2008. The increase is due to $0.4 million of net loss and loss adjustment expenses primarily related to Hurricanes Ike and Gustav, which occurred in September 2008. The current accident year casualty loss ratio increased 49.9 points from 66.0% in 2007 to 115.9% in 2008 primarily due to increased loss trends.

Net losses and loss adjustment expenses were $11.3 million for 2008, compared with $3.6 million for 2007, an increase of $7.7 million or 213.9%. Excluding the $1.9 million increase of net losses and loss adjustment expenses for prior accident years in 2008 and the $0.1 million reduction of net losses and loss adjustment expenses for prior accident years in 2007, the current accident year net losses and loss adjustment expenses were $9.4 million and $3.7 million for 2008 and 2007, respectively. This increase is primarily attributable to an increase in net premiums earned and casualty loss cost inflation. Property net premiums earned for 2008 and 2007 were $0.6 million and $0.3 million, respectively. Casualty net premiums earned for 2008 and 2007 were $7.8 million and $5.5 million, respectively.

Acquisition Costs and Other Underwriting Expenses

Acquisition costs and other underwriting expenses were $5.5 million for 2008, compared with $4.1 million for 2007, an increase of $1.4 million or 33.1%. The increase is due to a $2.0 million increase in acquisition costs, offset by a $0.6 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, legal fees, and consulting costs.

Expense and Combined Ratios

The expense ratio for our Reinsurance Operations was 65.7% for 2008, compared with 70.8% for 2007. 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 201.9% for 2008, compared with 133.1% for 2007. The combined ratio is a non-GAAP financial measure and is the sum of our loss and expense ratios. Excluding the impact of a $1.9 million increase of prior accident year loss reserves in 2008 and a $0.1 million reduction of prior accident year loss reserves in 2007, the combined ratio increased from 135.3% for 2007 to 178.5% for 2008. 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.

6674

Loss from underwriting

The factors described above resulted in a loss from underwriting for our Reinsurance Operations of $8.5 million for 2008, compared with a loss from underwriting of $1.9 million for 2007, an increase of $6.6 million or 341.7%.

Unallocated Corporate Items

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

							Increase/(Decrease)
	2008			2007			$			%
(Dollars in thousands)
Net investment income	$	67,830		$	77,341		$	(9,511	)		(12.3	)%
Net realized investment gains (losses)		(50,259	)		968			(51,227	)		~~(5292.0~~NM	)%
Corporate and other operating expenses		(1413,~~052~~918	)		(11,~~691~~643	)		2,~~361~~275			2019.25	%
Interest expense		(8,657	)		(11,372	)		(2,715	)		(23.9	)%
Impairments of goodwill and intangible assets		(96,449	)		—			(96,449	)		—
Income tax benefit (expense)		29,~~263~~216			(18,~~680~~697	)		(47,~~943~~913	)		~~(256.7~~NM	)%
Equity in net loss of partnership, net of tax		(3,890	)		(581	)		(3,309	)		(569.5	)%
Discontinued operations, net of tax		87			31			56			180.6	%

NM — Not meaningful.

Net Investment Income

Net investment income, which is gross investment income less investment expenses, was $67.8 million for 2008, compared with $77.3 million for 2007, a decrease of $9.5 million or 12.3%.


	•	Gross investment income, excluding realized gains and losses, was $72.8 million for 2008, compared with $83.4 million for 2007, a decrease of $10.6 million or 12.7%. The decrease was primarily due to reductions in short-term interest rates and a reduction of our cash and invested assets. Cash and invested assets decreased to $1,599.5 million as of December 31, 2008, from $1,765.1 million as of December 31, 2007, a decrease of $165.6 million or 9.4%. This decrease was due to negative operating cash flow of $18.2 million, realized and unrealized losses in our investment portfolio of $78.6 million, and the remaining $68.8 million is mainly due to share repurchases and debt repayments that occurred earlier in the year. Our limited partnership investments did not generate gross investment income in 2008; they generated gross investment income of $0.4 million for 2007. Excluding limited partnership distributions, gross investment income for 2008 decreased 12.3% compared to 2007.

	•	Investment expenses were $5.0 million for 2008, compared with $6.1 million for 2007, a decrease of $1.1 million or 17.7%. The decrease was primarily due to the decrease in the average fair value of our invested assets and a decrease in trust fees.

The average duration of our bonds was 3.1 years as of December 31, 2008, compared with 3.7 years as of December 31, 2007. Including cash and short-term investments, the average duration of our investments as of December 31, 2008 and ~~2007~~2008 was 2.5 and 3.1 years, respectively. At December 31, 2008, our ~~embedded~~ book yield on our bonds, not including cash, was 4.95% compared with 5.02% at at December 31, 2007. The ~~embedded~~ book yield on the $234.6 million of municipal bonds in our portfolio was 3.87% at December 31, 2008.

Net Realized Investment Gains (Losses)

Net realized investment losses were $50.3 million for 2008, compared with net realized investment gains of $1.0 million for 2007. The net realized investment losses for 2008 consist primarily of net losses of $5.2 million relative to market value declines in our convertible portfolios, other than temporary impairment losses of $32.1 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. The net realized investment gains for 2007 consist primarily of net gains of $1.7 million relative to our bond portfolios, net of other than temporary

6775

impairments of $0.7 million, net gains of $2.1 million relative to our equity portfolio, net losses of $2.6 million relative to our convertible portfolios, and net losses of $0.2 million relative to our limited partnership portfolios.

See Note 43 of the notes to the consolidated financial statements in Item 8 of Part II of this report for an analysis of total investment return on an after-tax basis for the years ended December 31, 2008 and 2007.

Corporate and Other Operating Expenses

Corporate and other operating expenses consist of outside legal fees, other professional fees, directors’ fees, management fees, salaries and benefits for holding company personnel, and taxes incurred which are not directly related to operations. Corporate and other operating expenses were $1413.19 million for 2008, compared with $11.76 million for 2007, an increase of $2.43 million or 2019.25%. This increase is primarily due to an increase in travel expenses, legal fees, accounting and audit fees, and other miscellaneous expenses.

Interest Expense

Interest expense was $8.7 million and $11.4 million for 2008 and 2007, respectively. The reduction is primarily due to retiring $15.5 million of trust preferred debt in December 2007, and $15.5 million in May 2008. See Note 109 of the notes to the consolidated financial statements in Item 8 of Part II of this report for details on our debt.

Impairments of Goodwill and Intangible Assets

Impairments of goodwill and intangible assets were $96.4 million for 2008. See Note 65 of the notes to the consolidated financial statements in Item 8 of Part II of this report for details on our impairments.

Income Tax Expense (Benefit)

Income tax benefit relating to continuing operations was $29.32 million for 2008, compared with income tax expense of $18.7 million for 2007. See Note 87 of the notes to the consolidated financial statements in Item 8 of Part II of this report for a comparison of income tax expense between periods.

Our alternative minimum tax (“AMT”) credit carryforward as of December 31, 2008 and 2007 was $0.8 million and $0.0 million, respectively. In 2008, there were $29.0 million of other than temporary impairment losses on invested assets held by our U.S. Subsidiaries. If these invested assets are sold and the impairment losses are realized in ~~2009~~2008, the AMT credit carryforward could increase by $4.4 million to $5.2 million.

Equity in Net Loss of Partnerships

Equity in net loss of partnerships, net of tax was $3.9 million for 2008, compared with $0.6 million for 2007, an increase of $3.3 million. The increase in the loss was due to the performance of a limited partnership investment which invests mainly in high yield bonds.

Discontinued Operations

Discontinued operations consists of the net results of operations of our Agency Operations. Income from discontinued operations, net of tax was $0.09 million for 2008, compared with $0.03 million for 2007, an increase of $0.06 million. The increase is primarily due to the re-estimation of remaining liabilities.

Net Income (Loss)

The factors described above resulted in net loss of $141.6 million for 2008, compared with net income of $98.9 million for 2007, a decrease of $240.5 million or 243.1%.

Year Ended December 31, 2007 Compared with the Year Ended December 31, 2006

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:

							Increase / (Decrease)
	2007			2006(1)			$			%
(Dollars in thousands)
Gross premiums written:
Penn-America	$	286,439		$	390,260		$	(103,821	)		(26.6	)%
United National		132,311			154,114			(21,803	)		(14.1	)%
Diamond State		118,085			108,591			9,494			8.7	%
Total	$	536,835		$	652,965		$	(116,130	)		(17.8	)%
Net premiums written:
Penn-America	$	266,874		$	355,428		$	(88,554	)		(24.9	)%
United National		110,649			114,718			(4,069	)		(3.5	)%
Diamond State		100,751			90,389			10,362			11.5	%
Total	$	478,274		$	560,535		$	(82,261	)		(14.7	)%
Net premiums earned:
Penn-America	$	317,826		$	354,242		$	(36,416	)		(10.3	)%
United National		115,118			108,125			6,993			6.5	%
Diamond State		97,572			84,102			13,470			16.0	%
Total		530,516			546,469			(15,953	)		(2.9	)%
Losses and expenses:
Net losses and loss adjustment expenses		295,624			304,355			(8,731	)		(2.9	)%
Acquisition costs and other underwriting expenses		170,611	(2)		175,346			(4,735	)		(2.7	)%
Income (loss) from underwriting	$	64,281		$	66,768		$	(2,487	)		(3.7	)%
Underwriting Ratios:
Loss ratio:
Current accident year		61.2			58.5			2.7
Prior accident year		(5.5	)		(2.8	)		(2.7	)
Calendar year loss ratio		55.7			55.7			—
Expense ratio		32.2			32.1			0.1
Combined ratio		87.9			87.8			0.1

(1)		Includes results from the predecessor of Wind River Reinsurance.
(2)		Includes excise tax of $2,390 relating to cessions from our U.S. Insurance Companies to Wind River Reinsurance.

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 $536.8 million for 2007, compared with $653.0 million for 2006, a decrease of $116.2 million or 17.8%.

• Penn-America gross premiums written decreased $103.8 million, or 26.6%, due to increased competition from both surplus lines and standard carriers and the cancellation of business that did not meet our profitability standards. Premium rates on renewal business on average were down 0.1% during 2007. • United National gross premiums written decreased $21.8 million, or 14.1%, primarily due to a decrease in a 100% reinsured property program, combined with a reduction in umbrella and non-owned auto business. Premium rates on renewal business on average were down 5.0% during 2007. • Diamond State gross premiums written increased $9.5 million, or 8.7%, primarily due to growth in our property and allied health brokerage products. Premium rates on renewal business on average were down 4.3% during 2007.

Net premiums written, which equal gross premiums written less ceded premiums written, were $478.3 million for 2007, compared with $560.5 million for 2006, a decrease of $82.2 million or 14.7%. The decrease was primarily due to the reduction of gross premiums written noted above.

The ratio of net premiums written to gross premiums written was 89.1% for 2007 and 85.8% for 2006, a decline of 3.3 points, which was primarily due to changes in our mix of business.

Net premiums earned were $530.5 million for 2007, compared with $546.5 million for 2006, a decrease of $16.0 million or 2.9%%. The decrease was primarily due to the reduction of gross premiums written noted above.

Net Losses and Loss Adjustment Expense

The loss ratio for our Insurance Operations was 55.7% for 2007 and 2006. 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 2.7 points resulting from a reduction of net losses and loss adjustment expenses for prior accident years of $29.0 million in 2007 compared to a $15.6 million reduction of net losses and loss adjustment expenses for prior accident years in 2006.

In 2007, we reduced our prior accident year loss reserves by $24.6 million and reduced our allowance for uncollectible reinsurance by $4.4 million. The loss reserves reduction of $24.6 million consisted of a net reduction of $42.5 million for primary liability, umbrella and excess, construction defect, and lines in run-off due to both lower than expected frequency and severity emergence, offset by a $17.8 million increase in net reserves for ULAE and A&E.

In 2006, we reduced our prior accident year loss reserves by $7.0 million and reduced our allowance for uncollectible reinsurance by $8.6 million. The loss reserves reduction of $7.0 million consisted of reductions related to accident years 2005 and prior for construction defect losses as well as primary general liability, umbrella and excess, and A&E.

The current accident year loss ratio increased 2.7 points in 2007 primarily due to an increase in the current accident year property loss and current accident year casualty loss ratios. The current accident year property loss ratio increased 3.3 points from 46.2% in 2006 to 49.5% in 2007, which consists of a 1.6 point decrease in the catastrophe loss ratio from 2.5% in 2006 to 0.9% in 2007 and a 4.9 point increase in the non-catastrophe loss ratio from 43.7% in 2006 to 48.6% in 2007. The decrease in the catastrophe loss ratio is due to an absence of major activity in 2007 and 2006. The increase in the non-catastrophe loss ratio is primarily due to an increase in severity. The current accident year casualty loss ratio increased 2.8 points from 64.7% in 2006 to 67.5% in 2007 primarily due to cost inflation in excess of rate increases.

Net losses and loss adjustment expenses were $295.6 million for 2007, compared with $304.3 million for 2006, a decrease of $8.7 million or 2.9%. Excluding the $29.0 million reduction of net losses and loss adjustment expenses

for prior accident years in 2007 and the $15.6 million reduction of net losses and loss adjustment expenses for prior accident years in 2006, the current accident year net losses and loss adjustment expenses were $324.6 million and $319.9 million for 2007 and 2006, respectively. The increase from $319.9 million for 2006 to $324.6 million for 2007 is primarily attributable to an increase in the severity of non-catastrophe property losses, and casualty loss cost inflation.

Acquisition Costs and Other Underwriting Expenses

Acquisition costs and other underwriting expenses, excluding intercompany eliminations, were $170.6 million for 2007, compared with $175.3 million for 2006, a decrease of $4.7 million or 2.7%. This change is due to a $2.4 million decrease in acquisition costs and a $2.3 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 other underwriting expenses in the prior year of our Bermuda subsidiary, which was classified in our Insurance Operations segment in 2006, relating to direct business, offset by an increase in legal expenses, stock options, and consulting expenses. Other underwriting expenses for 2006 included $0.3 million of severance costs resulting from our restructuring in 2006.

Expense and Combined Ratios

The expense ratio for our Insurance Operations was 32.2% for 2007, compared with 32.1% for 2006. 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 a result of the decrease in net premiums earned.

The combined ratio for our Insurance Operations was 87.9% for 2007, compared with 87.8% for 2006. The combined ratio is a non-GAAP financial measure and is the sum of our loss and expense ratios. Excluding the impact of the reductions in our reinsurance reserve allowance and the releases of prior year loss reserves, the combined ratio increased from 90.6% for 2006 to 93.4% for 2007. See discussion of loss ratio in “Net Losses and Loss Adjustment Expenses” above and discussion of expense ratio in preceding paragraph above for an explanation of this increase.

Income from underwriting

The factors described above resulted in income from underwriting for our Insurance Operations of $64.3 million for 2007, compared with $66.8 million for 2006, a decrease of $2.5 million or 3.7%.

Reinsurance Operations

There are no results for 2006 since Wind River Reinsurance began offering third party reinsurance in the third quarter of 2006 and entered into its initial third party reinsurance contracts during the first quarter of 2007, concentrating on excess and surplus lines as well as specialty business which it believes provide attractive risk/reward opportunities. The components of income (loss) from underwriting and underwriting ratios of our Reinsurance Operations segment for 2007 are as follows:

	2007
(Dollars in thousands)
Gross premiums written	$	26,277
Net premiums written	$	12,261
Net premiums earned	$	5,807
Losses and expenses:
Net losses and loss adjustment expenses		3,617
Acquisition costs and other underwriting expenses		4,113
Income (loss) from underwriting	$	(1,923	)
Underwriting Ratios:
Loss ratio:
Current accident year		64.5
Prior accident year		(2.2	)
Calendar year loss ratio		62.3
Expense ratio		70.8
Combined ratio		133.1

Unallocated Corporate Items

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

							Increase / (Decrease)
	2007			2006			$			%
(Dollars in thousands)
Net investment income	$	77,341		$	66,538		$	10,803			16.2	%
Net realized investment gains (losses)		968			(570	)		1,538			(269.8	)%
Corporate and other operating expenses		(11,691	)		(16,515	)		4,824			(29.2	)%
Interest expense		(11,372	)		(11,393	)		21			(0.2	)%
Income tax expense (benefit)		(18,680	)		(18,177	)		(503	)		2.8	%
Equity in net loss of partnership, net of tax		(581	)		1,026			(1,607	)		(156.6	)%
Discontinued operations, net of tax		31			10,081			(10,050	)		(99.7	)%

Net Investment Income

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

• Gross investment income, excluding realized gains and losses, was $83.4 million for 2007, compared with $72.4 million for 2006, an increase of $11.0 million or 15.1%. The increase was primarily due to growth in the average market value of our invested assets, interest earned on our cash, and an increase in the investment yields on both our bond and short term investment portfolios, offset by a decrease in limited partnership distributions. Cash and invested assets grew to $1,765.1 million as of December 31, 2007, from $1,656.7 million as of December 31, 2006, an increase of $108.4 million or 6.5%. This increase was due to positive operating cash flow

of $148.0 million and net realized and unrealized gains in our investment portfolio of $23.8 million, offset by a decrease of $63.7 million, which is mainly due to share repurchases and debt pay-downs that occurred earlier in the year. Our limited partnership investments generated gross investment income of $0.4 million and $3.9 million for 2007 and 2006, respectively. Excluding limited partnership distributions, gross investment income for 2007 increased 21.0% compared to 2006.

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

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

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

Net Realized Investment Gains (Losses)

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

See Note 4 of the notes to the consolidated financial statements in Item 8 of Part II of this report for an analysis of total investment return on an after-tax basis for the years ended December 31, 2007 and 2006.

Corporate and Other Operating Expenses

Corporate and other operating expenses consist of outside legal fees, other professional fees, directors’ fees, management fees, salaries and benefits for holding company personnel, and taxes incurred which are not directly related to operations. Corporate and other operating expenses were $11.7 million for 2007, compared with $16.5 million for 2006, a decrease of $4.8 million or 29.2%. This decrease is primarily due to reductions in stock option expenses, recruiting and relocation expenses, compensation expenses, and other miscellaneous corporate expenses.

Interest Expense

Interest expense was $11.4 million for each of 2007 and 2006. See Note 10 of the notes to the consolidated financial statements in Item 8 of Part II of this report for details on our debt.

Income Tax Expense

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

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

Equity in Net Income (Loss) of Partnerships

Equity in net loss of partnerships was $0.6 million for 2007, compared with equity in net income of partnerships of $1.0 million for 2006, a decrease of $1.6 million. The decrease is due to the performance of a limited partnership investment which invests mainly in high yield bonds.

Discontinued Operations

Discontinued operations consists of the net results of operations of our Agency Operations, including the gain on the sale of substantially all of the assets of our Agency Operations. The assets of our Agency Operations were sold on September 30, 2006, and as a result, Agency Operations only had run-off activity in 2007. Income from discontinued operations, net of tax was $0.03 million for 2007, compared with $10.08 million for 2006, a decrease of $10.05 million.

Net Income

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

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.

~~On March 4, 2009, we announced a $100.0 million rights~~ ~~offering, fully back-stopped by Fox Paine & Company,~~76 under which we will distribute to holders of record of our Class A and Class B common shares on March 16, 2009 non-transferable rights to subscribe for Class A and Class B common shares.

United America Indemnity Group, Inc. (“United America Indemnity Group”) owes $90.0 million to unrelated third parties in guaranteed senior notes. The notes are guaranteed by United America Indemnity, Ltd. See Note 10 of the notes to consolidated financial statements in Item 8 of Part II of this report for the terms of these notes. In the event that debt service obligations were not satisfied, United America Indemnity Group would be precluded from paying dividends to U.A.I. (Luxembourg) Investment S.à r.l., its parent company.

AIS owes $30.9 million to affiliated parties in junior subordinated debentures. Interest is payable quarterly. See Note 10 of the notes to consolidated financial statements in Item 8 of Part II of this report for the terms of these notes. In the event that debt service obligations were not satisfied, AIS would be precluded from paying dividends to United America Indemnity Group, its parent company.

The principal source of cash that United America Indemnity, United America Indemnity Group, and AIS need to meet their short term and long term liquidity needs, including corporate expenses, includes dividends, other permitted disbursements from their direct and indirect subsidiaries, and reimbursement to United America Indemnity from its subsidiaries for equity awards granted to employees. The principal sources of funds at these direct and indirect subsidiaries include underwriting operations, commissions, investment income, and proceeds from sales and redemptions of investments. Funds are used principally to pay claims and operating expenses, to make debt payments, to purchase investments, and to make dividend payments. The future liquidity of United America Indemnity, United America Indemnity Group, and AIS is dependent on the ability of their subsidiaries to

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

In ~~July~~May ~~2008~~2009, United America Indemnity ~~completed~~received ~~its~~gross ~~purchase~~proceeds of $100.01 million offrom ~~its~~the ~~Class A~~issuance ~~common shares as part~~ of ~~two~~ ~~$50~~17.02 million ~~share buyback programs that were~~and ~~initiated~~11.4 million inof ~~November~~its ~~2007~~Class A and ~~February~~Class B ~~2008~~common shares, respectively., ~~Wind River~~in ~~Reinsurance~~conjunction ~~loaned~~with ~~United~~the ~~America~~Rights ~~Indemnity funds to~~Offering ~~enable~~that itwas toannounced ~~execute~~in ~~the~~March ~~buybacks~~2009. The ~~loan~~net ~~currently~~proceeds ~~bears~~of ~~interest at 3~~$91.~~75%~~8 million ~~per~~were ~~year.~~used Into ~~June~~support ~~2008,~~strategic ~~Wind River Reinsurance~~initiatives, ~~declared~~enhance liquidity and ~~paid~~financial aflexibility, ~~dividend~~and offor ~~$50.0 million to United~~other ~~America~~general ~~Indemnity~~corporate purposes. ~~United~~See ~~America~~Note 10 ~~Indemnity used proceeds from the dividend~~ to ~~repay a portion of~~ the ~~loan. We anticipate that~~consolidated ~~Wind~~financial ~~River~~statements ~~Reinsurance will pay additional dividends~~ in ~~the future~~Item 8 ~~and~~of ~~that~~Part II ~~United~~of ~~America Indemnity will use the proceeds~~this toreport ~~repay~~for ~~the~~details ~~remainder~~concerning of the ~~loan~~Rights Offering.

AtUnited ~~December~~America Indemnity Group owes $90.0 31million to unrelated third parties in guaranteed senior notes. On July 20, ~~2008~~2011 and on each anniversary thereafter to and including July 20, 2014, United America Indemnity ~~owed~~Group is required to prepay $4818.70 million inof the principal amount. On July 20, 2015, United America Indemnity Group is required to ~~Wind~~pay ~~River~~any ~~Reinsurance~~remaining outstanding principal amount on the notes. The notes are guaranteed by United America Indemnity, $6Ltd.~~0 million~~ inIn ~~principal~~the event that debt service obligations were not satisfied, United America Indemnity Group would be precluded from paying dividends to U.A.I. (Luxembourg) Investment S.à r.l. ~~(“UAI Luxembourg Investment”)~~, ~~and $2.9 million~~its inparent ~~related accrued interest~~company.

~~The~~AIS ~~United~~owes ~~National~~$30.9 million ~~Insurance~~to ~~Companies~~affiliated ~~and~~parties ~~the Penn-America Insurance~~in ~~Companies are restricted by statute as to the amount~~junior ofsubordinated ~~dividends~~debentures, ~~that~~which ~~they~~are ~~may~~due ~~pay~~in ~~without the prior approval of regulatory authorities~~2033. ~~The~~Interest ~~United National Insurance Companies~~is ~~and~~payable ~~the Penn-America Insurance Companies may pay dividends without advance regulatory approval only out of unassigned surplus~~quarterly. See Note 179 of the notes to consolidated financial statements in Item 8 of Part II of this report for the ~~dividends~~terms ~~declared~~of ~~and~~these ~~paid by~~notes. In the ~~United~~event ~~National~~that ~~Insurance Companies and the~~debt ~~Penn-America Insurance~~service ~~Companies~~obligations inwere ~~2008~~not ~~and~~satisfied, ~~the~~AIS ~~maximum~~would ~~amount~~be ofprecluded ~~distributions~~from ~~that~~paying ~~they~~dividends ~~could~~to ~~pay~~United asAmerica ~~dividends~~Indemnity inGroup, ~~2009~~its parent company.

~~For~~In ~~2009~~July 2008, weUnited ~~believe~~America ~~that~~Indemnity ~~Wind~~completed ~~River~~its ~~Reinsurance~~purchase ~~should have~~of ~~sufficient~~$100.0 million ~~liquidity~~of ~~and~~its ~~solvency~~Class A tocommon ~~pay~~shares ~~dividends.~~as ~~Wind~~part ~~River~~of ~~Reinsurance~~two is$50.0 million ~~prohibited,~~share ~~without~~buyback ~~the~~programs ~~approval~~that ~~of the BMA, from~~were ~~reducing~~initiated byin ~~15%~~November or2007 ~~more~~and ~~its~~February ~~total~~2008, ~~statutory~~respectively. ~~capital as set out~~Wind inRiver ~~its~~Reinsurance ~~previous~~loaned ~~year’s~~United ~~statutory~~America ~~financial~~Indemnity ~~statements,~~funds ~~and~~to ~~any~~enable ~~application~~it ~~for~~to ~~such~~execute ~~approval~~the ~~must~~buybacks. ~~include~~The ~~such~~loan ~~information~~currently bears asinterest ~~the~~at ~~BMA~~3.75% ~~may~~per ~~require~~year. ~~Based~~In ~~upon~~June ~~the~~2008, ~~total~~Wind ~~statutory~~River ~~capital~~Reinsurance ~~plus~~declared ~~the~~and ~~statutory~~paid ~~surplus~~a asdividend ~~set~~of ~~out~~$50.0 million into ~~its 2008 statutory~~United ~~financial~~America ~~statements~~Indemnity. ~~that~~United ~~will~~America beIndemnity ~~filed~~used inproceeds ~~2009, Wind River~~from ~~Reinsurance~~the ~~could~~dividend ~~pay~~to repay a ~~dividend~~portion of upthe ~~to $170~~loan.~~9 million~~ ~~without requesting BMA approval.~~

At December 31, 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 $4.0 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. See Note 16 of the notes to consolidated financial statements in Item 8 of Part II of this report for the dividends declared and paid by the United National Insurance Companies and the Penn-America Insurance Companies in 2009 and the maximum amount of distributions that they could pay as dividends in 2010.

For 2010, we believe that Wind River Reinsurance should have sufficient liquidity and solvency to pay dividends. Wind River Reinsurance is prohibited, without the approval of the BMA, from reducing by 15% or more its total statutory capital as set out in its previous year’s statutory financial statements, and any application for such approval must include such information as the BMA may require. Based upon the total statutory capital plus the statutory surplus as set out in its 2009 statutory financial statements that will be filed in 2010, Wind River Reinsurance could pay a dividend of up to $175.8 million without requesting BMA approval.

Surplus Levels

Each company in our Insurance Operations is required by law to maintain a certain minimum level of policyholders’ surplus on a statutory basis. Policyholders’ surplus is calculated by subtracting total liabilities from total assets. The NAIC adopted risk-based capital standards that are designed to identify property and casualty insurers that may be inadequately capitalized based on the inherent risks of each insurer’s assets and liabilities and mix of net premiums written. Insurers falling below a calculated threshold may be subject to varying degrees of regulatory action. Based on the standards currently adopted, the policyholders’ surplus of each company in our Insurance Operations is in excess of the prescribed minimum company action level risk-based capital requirements.

Cash Flows

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

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


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

	•	the timing of our settlements with our reinsurers; and

	•	the timing of our loss payments.

Net cash was provided by (used for) operating activities in ~~2008~~2009, ~~2007~~2008, and ~~2006~~2007 of $(1852.26) million, $~~148~~(18.02) million and $~~180~~148.80 million, respectively. In ~~2008, we realized a net decrease in operating cash flows of approximately $166.2 million primarily as a result of the following:~~

• In a2009, the decrease in ~~net~~operating ~~premiums~~cash ~~collected~~flows of approximately $~~179~~35.9 4 million, anfrom ~~increase~~the inprior ~~net~~year ~~losses~~was ~~paid~~primarily ~~of $26.3 million, offset by~~ a ~~decrease~~net result ~~in acquisition costs and other underwriting expenses paid~~ of ~~$36.3~~the ~~million;~~following items:


	2009			2008			Change

Net premiums collected	$	270,512		$	324,785		$	(54,273	)
Net losses paid		(282,144	)(1)		(261,553	)		(20,591	)
Acquisition costs and other underwriting expenses		(128,725	)		(145,810	)		17,085
Net investment income		76,791			76,827			(36	)
Net federal income taxes recovered (paid)		18,311			(5,670	)		23,981
Interest paid		(7,292	)		(9,016	)		1,724
Other		(96	)		2,206			(2,302	)

Net cash provided by (used for) operating activities	$	(52,643	)	$	(18,231	)	$	(34,412	)


(1)		Includes out-of-period adjustment of $(18.6) million. See Note 2 in Item 8 of Part II of this report for details concerning this adjustment.

In 2008, the decrease in operating cash flows of approximately $166.3 million from the prior year was primarily a net result of the following items:


	2008			2007			Change

Net premiums collected	$	324,785		$	504,643		$	(179,858	)
Net losses paid		(261,553	)		(235,218	)		(26,335	)
Acquisition costs and other underwriting expenses		(145,810	)		(182,088	)		36,278
Net investment income		76,827			85,406			(8,579	)
Net federal income taxes recovered (paid)		(5,670	)		(17,182	)		11,512
Interest paid		(9,016	)		(11,180	)		2,164
Other		2,206			3,638			(1,432	)

Net cash provided by (used for) operating activities	$	(18,231	)	$	148,019		$	(166,250	)

	•	a decrease in net investment income collected of $8.6 million; and
	•	a decrease in net federal income taxes paid of $11.5 million.

In 2007, we realized a net decrease in operating cash flows of approximately $33.8 million primarily as a result of the following:

• a decrease in net premiums collected of $38.3 million, an increase in net losses paid of $14.3 million, offset by a decrease in acquisition costs and other underwriting expenses paid of $8.0 million; • an increase in net investment income collected of $11.3 million; • an increase in net federal income taxes paid of $5.9 million; and • a decrease in agency commissions and fee revenues of $22.0 million offset by a decrease in agency commissions and operating expenses paid of $27.9 million.

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

Liquidity

Each company in our Insurance Operations and our Reinsurance Operations maintains sufficient liquidity to pay claims through cash generated by operations and investments in liquid investments. At December 31, ~~2008~~2009, United America Indemnity had cash and cash equivalents of $~~292~~186.61 million.

~~The~~In ~~United~~May ~~National~~2009, ~~Insurance~~United ~~Companies~~America ~~participate~~Indemnity inreceived ~~an intercompany~~gross ~~pooling~~proceeds ~~arrangement whereby premiums, losses, and~~of ~~expenses~~$100.1 million ~~are~~from ~~shared pro rata among~~ the ~~members~~issuance of ~~the group~~17. ~~United~~2 million ~~National Insurance Company is not an authorized reinsurer~~and ~~in all states~~11.4 million Asof aits ~~result,~~Class A ~~any losses~~ and ~~unearned~~Class B ~~premium that~~common ~~are~~shares, ~~ceded~~respectively, toin ~~United~~conjunction ~~National~~with ~~Insurance Company by~~ the ~~other companies~~Rights ~~in the group must be collateralized. To satisfy this~~Offering ~~requirement,~~that ~~United~~was ~~National~~announced ~~Insurance~~in ~~Company~~March ~~has set up custodial trust accounts on behalf of the other group members~~2009. ~~The~~ ~~state~~See ~~insurance~~Note 10 ~~departments that regulate the parties~~ to the ~~intercompany~~consolidated ~~pooling~~financial ~~agreements~~statements ~~also~~in ~~require~~Item 8 ~~United~~of ~~National~~Part II ~~Insurance~~of ~~Company~~this toreport ~~place~~for ~~assets~~details onconcerning ~~deposit subject to trust agreements for~~ the ~~protection~~Rights ~~of other group members~~Offering.

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

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

~~Our~~There were two intercompany pooling arrangements in place for ~~Non-U~~the United National Insurance Companies.S The first pooling agreement governed policies that were written prior to July 1, 2002. The second pooling agreement governed policies that were written on or after July ~~Insurance~~1, 2002. The ~~Operations~~method ~~commenced~~by ~~offering~~which intercompany reinsurance tois ceded was different for each pool. In the first pool, the United National Insurance Companies ceded all business to United National Insurance Company. ~~Companies~~United National Insurance Company ceded in ~~January~~turn ~~2004~~to external ~~through~~reinsurers. ~~quota~~The ~~share~~remaining net premiums retained were ~~arrangements~~allocated to the companies in the group according to their respective pool participation percentages. ~~These~~In ~~reinsurance~~the ~~arrangements~~second ~~resulted~~pool, each company in 60the group first ceded to external reinsurers. The remaining net was ceded to United National Insurance Company where the net premiums written of the group were pooled and reallocated to the group based on their respective participation percentages. The second pool required less collateral by United National Insurance Company as a result of it assuming less business from the other group members. United National Insurance Company only had to fund the portion that was ceded to it after cessions had occurred with external reinsurers. United National Insurance Company retained 80.0% of the risk associated with each pool.

The 76Penn-America Insurance Companies participated in an intercompany pooling arrangement whereby premiums, losses, and expenses were shared pro rata among the members of the group. These parties were not authorized reinsurers in all states. As a result, any losses and unearned premium that were ceded to Penn-Star Insurance Company by the other group members had to be collateralized. The state insurance departments that regulate the parties to the intercompany pooling agreements required Penn-Star Insurance Company to place assets on deposit subject to trust agreements for the protection of other group members.

Current Intercompany Pooling Arrangement and Stop Loss Agreement

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.

~~the United National Insurance Companies’ net retained~~ ~~insurance liability on new or renewal business being ceded to~~Quota ~~Wind~~Share ~~River Reinsurance or its predecessors through~~Arrangements ~~December 31, 2006.~~

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

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

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

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

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

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

In ~~2009~~2010, we ~~anticipate~~expect that, ~~all~~in of the ~~U.S. Insurance Companies will participate in a single pool~~aggregate, ~~which~~our ~~will lower~~Insurance ~~loss~~Operations ~~volatility. The U.S. Insurance Companies~~ and ~~Wind River~~our Reinsurance ~~also~~Operations ~~negotiated~~will ahave ~~new stop loss agreement that~~sufficient ~~provides~~liquidity ~~protection~~to inpay aclaims. ~~loss~~We ~~corridor~~monitor ~~from~~our ~~70%~~portfolios to ~~90%. Both the~~assure ~~pooling~~liability ~~agreement~~ and ~~stop~~investment ~~loss~~durations ~~agreement~~ are ~~dependent~~closely ~~on regulatory approval~~matched. ~~The documents for approval have been filed,~~ ~~but have not yet been approved at the time of the filing of this report.~~

In 2009, we expect that, in the aggregate, our Insurance Operations and our Reinsurance Operations will have positive cash flow and will have sufficient liquidity to pay claims. We monitor our portfolios to assure liability and investment durations are closely matched.

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

We have access to various capital sources including dividends from insurance subsidiaries, invested assets in our Non-U.S. Subsidiaries, and access to the debt and equity capital markets. United National Insurance Company also has a discretionary line of credit; however, the financial institution that provides the line has temporarily precluded United National Insurance Company from drawing on the line. We believe we have sufficient liquidity to meet our capital needs. See Note 1716 of the notes to the consolidated financial statements in Item 8 of Part II of this report for a discussion of our dividend capacity.

Capital Resources

In ~~July~~May ~~2005~~2009, United America Indemnity ~~Group~~received ~~sold~~gross proceeds of $90100.01 million offrom ~~guaranteed~~the ~~senior~~issuance ~~notes, due July 20, 2015. These senior notes have an interest rate~~ of 617.~~22%,~~2 million ~~payable~~and ~~semi-annually~~11.4 million Onof ~~July~~its Class ~~20,~~A ~~2011~~ and onClass B ~~each anniversary~~common ~~thereafter~~shares, torespectively, ~~and~~in ~~including~~conjunction ~~July 20,~~with ~~2014,~~the ~~United~~Rights ~~America~~Offering ~~Indemnity~~that ~~Group~~was isannounced ~~required~~in toMarch ~~repay $18~~2009.0 See Note ~~million~~10 ofto the ~~principal~~consolidated ~~amount.~~financial Onstatements ~~July~~in Item ~~20,~~8 ~~2015,~~of ~~United America~~Part II ~~Indemnity~~of ~~Group~~this isreport ~~required~~for todetails ~~pay~~concerning ~~any remaining outstanding principal amount on~~ the ~~notes.~~Rights ~~The notes are guaranteed by United America Indemnity, Ltd~~Offering.

In July 2005, United America Indemnity Group sold 77$90.0 million of guaranteed senior notes, due July 20, 2015. These senior notes have an interest rate of 6.22%, payable semi-annually. On July 20, 2011 and on each anniversary thereafter to and including July 20, 2014, United America Indemnity Group is required to repay $18.0 million of the principal amount. On July 20, 2015, United America Indemnity Group is required to pay any

~~United~~remaining outstanding principal amount on the notes. United America Indemnity Group is dependent on dividends received from its U.S. Insurance Operations to fund this debt service. ~~service~~The notes are guaranteed by United America Indemnity, Ltd.

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

On January 18, 2006, U.A.I. Luxembourg Investment loaned $6.0 million to United America Indemnity, Ltd. The loan has been used to pay operating expenses that arise in the normal course of business. The loan is a demand loan and bears interest at 4.38%. At December 31, ~~2008~~2009, there was $01.80 million of accrued interest on the loan. United America Indemnity, Ltd. is dependent on its subsidiaries to pay it dividends and its operating expenses.

On November 12, 2007, Wind River Reinsurance issued a $50.0 million demand line of credit to United America Indemnity, Ltd. that bears interest at 5.25%. The proceeds of the line were used to fund the purchases of our Class A common shares. See Item 5 in Part II of this report for details concerning these purchases.

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Filing Compare · UNITED AMERICA INDEMNITY, LTD