United National Group, Ltd. Business Information, Profile, and History

Company Perspectives:

Our Strategy: Maintaining a Leadership Role in the E&S and Specialty Admitted Markets; Focusing on Specific Niche Markets in Which We Have Demonstrated Underwriting Expertise; Opportunistically Managing a Diverse Product Portfolio; Maintaining a Conservative Balance Sheet and Strong A.M. Best Rating; Building Shareholder Value.

History of United National Group, Ltd.

United National Group, Ltd. (UNG) was formed as a holding company by investment firm Fox Paine to acquire the United National group of insurance companies. Cornerstone United National Insurance Company ranks among the largest surplus line insurers in the United States. The company offers specialty insurance products in areas that standard insurers generally do not cover.

Growing from Philadelphia Roots: 1960s to Mid-1990s

The original UNG company, United National Insurance Company (UNIC), was established in 1960 to write specialty personal and commercial lines of insurance in the Philadelphia area. In 1972, one of the founders, Raymond L. Freudberg, established American Insurance Service, Inc. (AIS), which took ownership of United National. Seven years later, a group of private trusts controlled by Philadelphia's Ball family acquired AIS.

Additional insurance companies joined United National in the 1980s. Diamond State Insurance Company (DSIC) was formed in 1981. United National Specialty Insurance Company (formerly Hallmark Insurance Company) was acquired in 1985. Freudberg served as president and CEO from 1960 until 1986, when he moved to the position of chairman. Seth D. Freudberg succeeded him as president and CEO.

In the early 1990s, United National was writing on a non-admitted basis in all states but Pennsylvania, where its subsidiaries Diamond State and Hallmark were approved non-admitted insurers, according to Business Insurance. The company provided coverage for risks that might be viewed as too large, difficult, or unusual by companies licensed to do business in a particular state.

In 1995, the umbrella and excess casualty insurance line brought in the majority of non-admitted premiums, followed by primary liability and property and miscellaneous lines. Overall, non-admitted premiums fell to $173.9 million from a record $260.7 million in 1994. According to the company, business backlogged from 1993 drove up 1994 figures, while a procedural accounting change in 1994 had a downward impact on 1995 numbers.

The loss of some program business also contributed to the 1995 drop-off. A trucking program and a contractors liability program ended when the reinsurer discontinued its backing. But, a positive environment in the investment market allowed United National to post a gain in net income of 15 percent to $19.9 million.

The insurance business experienced increased softness during the year. Property casualty premiums, which had been growing, fell off, joining the premium slide in general liability and excess liability insurance. Umbrella insurance was even weaker.

During 1995, United National reduced its number of brokers. They had found that 80 percent of the business generated in this way was produced by 20 percent of the brokers. Concurrently, the company established relationships with an increased number of managing general agencies (MGAs). In addition to new business, the MGAs brought in new programs.

United National financed new program business through its relationship with reinsurance companies. Mergers among reinsurers had created larger companies with more capital to offer but cut down on the number of reinsurance options for companies such as United National.

New program business helped boost United National's non-admitted premiums to $195.8 million in 1996. Business Insurance ranked the company as eighth largest among surplus line insurers. New products included a habitational program, for buildings such as condominiums and apartments; two product liability programs; and one employment practices program. Generally, United National was adding a number of smaller programs and in a variety of areas. The company's largest program was for hospitals, nursing homes, and other healthcare facilities, which had limits of $35 million. Umbrella and excess casualty had the next largest limit, $10 million.

Like the primary insurance market, the reinsurance market had been softening, giving United National less costly and more flexible financing. But, the door also opened to others seeking to expand their capacity. In addition, some competitors had been writing policies at rates below what United National would consider. United National had dropped policyholders wanting large rate cuts, leaving the company in search of replacement accounts. Admitted insurers had also increasingly entered the surplus lines markets, placing more pressure on the market.

Moving to Meet Marketplace Challenges: 1997-2000

To increase business in challenging market conditions, United National bolstered its marketing department in 1997 and made plans to acquire managing general agencies. To further strengthen the company, the underwriting department was reorganized into Eastern, Central, and Western regions.

Non-admitted gross premiums rose in 1998 aided by the expanded marketing department, underwriter generated activity, and business coming from newly established offices. Moreover, programs added the prior year had come up to speed. The company brought on seven new programs and dropped five that were not profitable, leaving a total of 88 specialty programs by the end of 1998. A total of 15 binding authorities also got the ax. Agents cut included those who had other binding authorities of greater priority than those to United National. In addition, in response to the movement of admitted insurers into the surplus market, Diamond State and Hallmark units were seeking admitted status on a state-by-state level in order for the company to compete on that level.

In 1999, American Re Corp. moved to buy AIS, the holding company for the United National Group of insurance companies. American Re, the largest reinsurer of program business for United National, was a part of one of the world's leading reinsurance groups, Germany-based Munich Re.

The Ball family's decision to sell all outstanding AIS shares to American Re was prompted by its desire to diversify its portfolio, according to National Underwriter Property & Casualty. The deal was estimated at slightly less than $300 million, the approximate book value of the company.

The company would continue to operate as an independent operation, with Seth Freudberg remaining in place as president and CEO. The insurance group included United National, the main excess and surplus line unit; admitted insurers Diamond and Hallmark; an inactive offshore insurer in Barbados; an in-house claims adjuster; and three managing general agencies.

By purchasing excess and surplus companies, such reinsurers as American Re could embark on new areas of business without encroaching directly on their clients. United National would be on the receiving end of new business from American Re and probably would not lose the business of American Re competitors because of its sound reputation in such a specialized area of insurance.

In December 1999, American Re received approval in both Wisconsin and Indiana to proceed with the purchase of United National. But, the Pennsylvania insurance commissioner withheld action on the request due to concerns over the payment of Holocaust-era claims by Munich Re subsidiaries.

The commissioner was an alternative member of the International Holocaust Commission, a group of insurers and regulators working on resolution of unpaid claims. Munich Re had joined a different group, the German Foundation Initiative. Ultimately, the issue killed the American Re deal. After more than ten months of delays in the Pennsylvania application process, marked by legal action by both the state insurance commissioner and American Re, AIS terminated the purchase agreement in August 2000.

Ups and Downs: 2001-03

Double-digit rate increases helped boost non-admitted premiums by 54.1 percent to $382.3 million in 2001, putting United National in the number six spot in Business Insurance rankings. Three-quarters of the year's growth came from existing customers buying more policies and paying the higher rates.

United National dropped out of residential contracting coverage in 2001, citing the increasing risk of litigation in the sector. "We believe in writing tough risks and finding creative ways of underwriting them," Seth Freudberg told Business Insurance in August 2002. "We don't want to run out of a line of business when everyone else is, unless the volatility is so unpredictable that you're purely rolling the dice."

In 2002, United National experienced a net loss--the first in a half decade. Although the company's premium numbers were up, a huge increase in reserves for prior accident years plus costs related to a canceled reinsurance agreement drove net losses past the $50 million mark.

A federal court ruling in early 2003 gave United National the right to pursue fraud charges against a former managing general agent, whose binding activities left United National and others with large claims related to weather derivative policies. Enron Corp. was among the companies covered against such losses. United National subsidiary Diamond State claimed the agent had exceeded his authority and hid unauthorized business from the company. In January 2004, the company paid the Bank of America $17.9 million to settle claims related to one of those contracts.

An ownership change was placed on the table again, when the longtime owners of United National agreed to sell majority interest to funds managed by Fox Paine & Company, L.L.C. The firm, which managed investment funds in excess of $1.5 billion, was founded in 1997 by Saul A. Fox, former general partner in Kohlberg Kravis Roberts & Co. (KKR), and W. Dexter Paine III, former general partner in Kohlberg & Co. In the proposed deal, the Ball family would retain a minority interest in the company they had held for more than two decades.

The players in this transaction were connected through previous business transactions. The AMC Group L.L.C. Management Co., which oversaw Ball family interests in United National and other businesses--such as manufacturing, real estate development, and franchising--had, as a private investor, backed a fund managed by Fox Paine. Saul Fox, in turn, had managed the $1.5 billion acquisition of American Re by KKR in 1992. Munich Re bought American Re from KKR four years later.

California-based Fox Paine embarked on restructuring United National beginning in August 2003. United National Group, Ltd. (UNG) was established in the Cayman Islands as a holding company to acquire United National's U.S. operations. A non-U.S. operation was formed in Barbados to offer insurance products to third parties and reinsurance to its U.S. operations. The offshore entity planned to specialize in property and casualty insurance for social service agencies, equine mortality risks, and insurance for vacant property risks.

Fox Paine made a $240 million investment on September 5 in exchange for ten million Class B common shares and 14 million Series A preferred shares. UNG used $100 million of the capital infusion to buy out Wind River Investment Corp., controlled by a group of Ball family trusts, which also received a combination of common and preferred shares and notes. As for the balance of the new money, $80 million went to U.S. operations, $43.5 million to capitalize non-U.S. operations, and the remainder to fees and expenses connected to the acquisition. Fox Paine was scheduled to receive an initial management fee of $13.2 million plus annual sums of $1.2 million.

UNG filed for an initial public offering (IPO) under the ticker symbol UNGL in September 2003. The company was among a throng of financial service companies making IPOs during the year. The insurance industry was experiencing an upswing in premiums that fueled capital investment. Previous surges in equity financing for the insurance industry took place in 1985-86 and 1993. The most recent flow of funds actually began following the attacks on New York and Washington, D.C., when new reinsurers entered the marketplace to meet the demands of a changing environment.

The majority of the proceeds from the IPO were earmarked for redeeming all outstanding preferred shares: Fox Paine held 83 percent and the Ball family 17 percent. Because of the weighting of shares, following the IPO, Fox Paine would actually increase its control over the board of directors.

In December, 9.75 million Class A common shares were offered for $17 per share on the NASDAQ. When completed the IPO brought in $166 million in net proceeds.

In February 2004, UNG announced a pro forma net operating income for 2003 of $27 million, reversing the net operating loss of $54.1 million a year earlier. The company benefited from another year of favorable pricing in commercial, property, and casualty insurance sectors and from the shedding of unprofitable business. Net retention grew year over year despite the increase in premiums.

Principal Subsidiaries: United National Insurance Company; Diamond State Insurance Company; United National Specialty Insurance Company; [dn3]United National Casualty Insurance Company.[up3]

Principal Competitors: American International Group, Inc. (AIG); Nationwide Mutual Insurance Co.; W.R. Berkley Corp.

Chronology

• Key Dates:
• 1960: United National Insurance Company begins writing specialty personal and commercial lines of insurance in the Philadelphia area.
• 1972: American Insurance Service, Inc. (AIS) is formed as a holding company.
• 1979: AIS is acquired by private related trusts of Philadelphia's Ball family.
• 1981: Diamond State Insurance Company (DSIC) is formed.
• 1985: Hallmark Insurance Company, Inc. is acquired and later called United National Specialty Insurance Company (UNSIC).
• 1994: A record level of $260.7 million in non-admitted premiums is reached.
• 2000: A deal in which United National would be acquired by American Re falls through.
• 2001: United National Casualty Insurance Company (UNCIC) is formed.
• 2003: Fox Paine becomes the majority owner.