united america indemnity, ltd. investor presentation january 2005
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Safe Harbor statement: United National has filed a registration statement on Form S-4 in connection with the transaction, and United National and Penn-America have mailed a joint proxy statement/prospectus to their respective shareholders in connection with the transaction. Investors and security holders of United National and Penn-America are urged to read the joint proxy statement/prospectus because it contains important information about United National, Penn-America and the transaction. Investors and security holders may obtain a free copy of the joint proxy statement/prospectus at the SEC's web site at http://www.sec.gov. A free copy of the joint proxy statement/prospectus may also be obtained from United National or Penn- America.
United National and its executive officers and directors may be deemed to be participants in the solicitation of proxies from the shareholders of United National and Penn-America in favor of the transaction.Information regarding the interests of United National's officers and directors in the transaction is included in the joint proxy statement/prospectus. Penn-America and its executive officers and directors may also be deemed to be participants in the solicitation of proxies from the shareholders of United National and Penn- America in favor of the transaction. Information regarding the interests of Penn-America's officers and directors in the transaction is included in the joint proxy statement/prospectus.
In addition to the registration statement on Form S-4 filed by United National in connection with the transaction, and the joint proxy statement/prospectus mailed to the shareholders of United National andPenn- America in connection with the transaction, each of United National and Penn- America file annual, quarterly and special reports, proxy and information statements, and other information with the SEC.Investors may read and obtain a copy of any of these reports, statements and other information at the SEC's public reference rooms located at 450 5th Street, N.W., Washington, D.C., 20549, or any of the SEC's other public reference rooms located in New York and Chicago. Investors should call the SEC at 1-800-SEC-0330 for further information on these public reference rooms. The reports, statements and other information filed by United National and Penn-America with the SEC are also available for free at the SEC's web site at http://www.sec.gov. A free copy of these reports, statements and other information may also be obtained from United National or Penn-America.
This communication shall not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.
Safe Harbor Statement
1
Executive Summary
Overview of United America Indemnity, Ltd. Participants United National Group, Ltd. Penn-America Group, Inc. Penn Independent Corporation
Highlights of UAI Business Combination
Pro Forma Financial Implications and Merits
Concluding Remarks
2
Overview of United National Group, Ltd.
Headquartered outside Philadelphia, PA
44-year operating history of underwriting specialty general liability, professional liability, commercial property and multi-peril insurance
Average combined ratio in last 20 years of 95%, placing UNGL in highest rank within P&C class
Products distributed through 85 wholesale general agents, who in turn access more than 34,000 retail insurance brokers
Niche insureds consist of: Social service agencies Equine mortality Vacant property
Public officials, educators Small businesses (bicycle shops, restaurants) Attorneys, chiropractors and massage parlors
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($ in millions) ($ in millions)
Adjusted GAAP EquityNet Premiums Written
21% CAGR
17% CAGR
Fox Paine Transaction
Fox Paine Transaction
4
Headquartered outside Philadelphia, PA
28-year operating history underwriting specialty general liability, commercial property and multi-peril insurance
Average combined ratio of 98% since going public in 1993
PNG distributes insurance products through 65 wholesale general agents, who in turn access more than 30,000 retail insurance brokers
Niche insureds consist of: Restaurants Non-residential artisan contractors Retail stores
Overview of Penn-America Group, Inc.
Other multi-family dwellings Daycare operations Special event coverage
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($ in millions) ($ in millions)
GAAP EquityNet Premiums Written
21% CAGR 13% CAGR
5
Overview of Penn Independent Corporation
Headquartered outside Philadelphia, PA
57 years of operating history
Primary insurance agency operations include: Delaware Valley Underwriting Authority – Wholesale agency primarily providing insurance policies on an E&S lines
basis for small to middle market businesses Apex – Serves the specialty P&C insurance and reinsurance needs of governmental agencies Summit – A subsidiary of Apex; provides claims administration services for policies written by Apex and other
professional liability providers Stratus – Places insurance for association based programs and unique classes of business PIFSI – Provides premium financing for those who are insured by P&C agents
Source: Company reports.(1) Gross commission received by wholesale general agent less commission paid to retail agents.(2) Excludes non-recurring and extraordinary charges for PIC and subsidiaries historically, shown before realized investment gains/(losses ).
Adjusted EBITDA(2) ($mm)Net Commission Revenues(1) ($mm)
$2
$3
$5
$6
2000 2001 2002 2003
$15$16
$22$25
2000 2001 2002 2003
6
Summary of UAI Business Combination Terms
United America Indemnity, Ltd. (NASDAQ/”UNGL”) United National Group, Ltd. Penn-America Group, Inc. (NYSE/”PNG”) Penn-Independent Corp., a privately-held insurance company which owns 31.4% of PNG
and three independent brokerage businesses
$15.375 per PNG share ($156 million)
— $13.875 of UNGL Class A common shares per PNG share (7.9 million UNGL shares) — $1.50 cash per PNG share
$97 million cash transaction
— PNG shares - $13.39 per share for 4.8 million shares of PNG stock (Including options) — Agency businesses - $32 million
First Quarter 2005 Customary regulatory and shareholder approvals for PNG and UNGL
Parent
Base Platform
Acquired / Merged
PNG Public Consideration
PIC Consideration
Expected Closing
Approvals Required
8
Accretive on both an earnings and book value basis
Financial Benefits to the Transaction
9
UNGL UAI Accretion
2003 Earnings Per Share $1.08 $1.31 21.8%2004 YTD Earnings Per Share(1) $0.77 $0.93 20.8%09/30/04 Book Value per Share $14.73 $15.51 5.3%2005E Earnings Per Share 20.8%
(1) Through 9/30/2004Source: United National Form S-4 dated December 16, 2004. Refer to "Opinion of Financial Advisor to the United National Group Board of Directors - Illustrative Pro Forma Earnings Analysis" and " - Other Considerations" for assumptions and other considerations related to Merrill Lynch's analysis.Note: 2005E earnings per share assumes $17.89 weighted average closing UNGL share price, extrapolated between data points on page 66 of the merger proxy.
UAI’s pro forma book value and net operating income are comparable to Philadelphia Consolidated and RLI
Competitive Financial Landscape
$1,976 $1,506$1,163
$606 $588 $559
$417
$140
$0
$250
$500
$750
$1,000
BER MKL HCC PHLY RLI UAI UNGL PNG
Book Value ($mm)
~~~
10
$373 $149$122
$70
$53$49
$28
$17
$0
$20
$40
$60
$80
BER MKL HCC PHLY RLI UAI UNGL PNG
Net Operating Income ($mm)
~~~
Source: Company reports.Note: Financial information is for the last twelve months ended September 30, 2004.
~~~~~~~~~ ~~~
LTM Operating Metrics and Trading Statistics
(1) Based on pro forma UAI book value as of Sept. 30, 2004. (2) Based on UNGL stock price of $17.72 (as of Jan. 21, 2005) and UNGL IBES estimate of $1.85 per share.Source: Company reports, First Call.Note: Financial information is at or for the twelve months ended September 30, 2004. Market statistics as of January 21, 2005.
Gross Written Premiums 5YR EPS Growth Rate ’04E – ’05E EPS Growth
Price / Book Price / 2005E EPS
$690$759
$1,116
UAI RLI PHLY
15% 14% 15%
UAI RLI PHLY
($ in millions)
1.1x
1.7x
2.5x
UAI RLI PHLY
9.6x
14.1x
12.0x
UAI RLI PHLY
11
(2)(1)
62.3%
36.1%
53.1%
UAI RLI PHLY
UAI Management Organization Structure
Businesses will remain separate and retain their identities in the marketplace
United America Indemnity, Ltd.
Chairman- Saul A. FoxCEO – David Bradley
President – Jon SaltzmanCFO – Kevin Tate
United National Group
CEO – Bill Schmidt
Wind River (Bermuda)
CEO – Seth Freudberg
Penn-America Group
CEO – Joe Morris
Penn Independent Corporation
CEO – Bob Lear
12
Similar Businesses, Different Distribution Approaches And Clients
Penn-America United National
Business Lines
Client Focus
Wholesale Agents
Average Policy Size
Geographic Focus
Distribution
E & S Proportion
Property PropertyGeneral Liability General LiabilityUmbrella Umbrella
Professional Liability
Specialized Programs & Products Specialized Programs & ProductsCommercial Binding Authority Commercial Binding AuthorityUmbrella Umbrella
Professional LiabilityOther Primary Liability
65 85
30,000 34,000
$2,000 $3,000
Countrywide - Suburban Countrywide – Urban,and Rural Communities Suburban and Rural Communities
Family-run General Agencies General Agencies and Wholesale Brokers
84% 67%
Source: Company reports.
Retail Agents
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60%
70%
80%
90%
100%
110%
170%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004YTD
United National Penn-America Industry Average
Historical Underwriting Performance S
tatu
tory
Co
mb
ine
d R
ati
os
Strong Underwriting Performance:
► UNGL has a 95% combined ratio for the last 20 years
► PNG has a 98% combined ratio since public (1993)
► P&C industry average is 108%
Source: Company reports, A.M. Best.Note: Statutory combined ratio. In 2002, UNGL increased net loss reserves relative to accident years 2001 and prior by $47.8 million primarily due to higher than
anticipated losses in the multi-peril and other liability lines of business and by $23.6 million due to the conclusion of an arbitration proceeding. The net losses and loss adjustment expenses ratio increased by 43.9 percentage points in 2002 due to this $71.4 million increase in net loss reserves. 2003 is adjusted for certain expenses related to the acquisition as well as other one-time costs. “UNG 2004 results reported on a GAAP basis to reflect the combined business of its domestic and international operations.”
P&C Industry
Average: 108%
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Differentiated Business Model
Focus on Excess and Surplus Lines – Highest percentage of non-admitted writings of any competitor PNG – 84%, UNGL 67%, Average of Top 20 Comparables – approximately 13%
Focus on general agents, Focus on franchise value UAI is the only dedicated general agent business model 80% - 90% relationships are exclusive or #1 with general agents in non-admitted
markets Average relationship approximates 8 years for UNGL, 10 years for PNG
Opportunistic market approach Small markets (UNGL average premium $3,000, PNG average premium $2,000) Specialty markets (horses, vacant buildings, chiropractors, bike shops)
Less competition and greater defensible platforms have led to outperformance UNGL 20-year compounded book value growth of 17% PNG compounded book value growth of 13% since public offering in 1993
Note: Financial information at or for the twelve months ended September 30, 2004.
A focused approach creates an ability to develop new products, defend markets and grow premium and book value even in the most challenging cycles
15
UNGL PNG PIC
Pro Forma
Consolidated
Income Statement (1) Gross premiums written $439 $251 NA $690
Net premiums written 257 216 NA 473
Premiums earned & net commissions 207 194 25 426
Net income 28 17 4 49(1)
Balance Sheet (1) Cash & investments $901 $403 $70 $1,201 (1)
Shareholders’ equity 417 140 7 559 (1)
Assets 2,743 526 60 3,297 (1)
AM Best and Market Data Rating “A” (Excellent) “A-” (Excellent) NA
Market capitalization $512 $221 NA 653(1)
Financial Profile of the Combined Business
Source: Company reports, A.M. Best.Note: Financial information at or for the twelve months ended September 30, 2004. Market statistics as of January 21, 2005.(1) On a consolidated basis pro forma for the transaction. Cash is adjusted to reflect cash uses for transaction consideration. Book value
is UNGL book value plus $141mm equity issued for the transaction minus fair-value equity adjustments. PIC is pro forma to adjust for investment in PNG. Pro forma net income is historical for last twelve months and does not reflect transaction adjustments or cost synergies. Market capitalization includes UNGL equity issued to PNG public shareholders.
($ in millions)
17
Competing Group Median
Reinsurance Recoverables to GAAP Equity
Net reinsurance recoverable $925.1 million as of September 30, 2004, a decrease of $119.1 million vs. December 31, 2003 This represents approximately a $900 million (50%) reduction in uncollateralized
recoverables since the Fox Paine investment in 2003
(1) Derived using 9/30/2004 balances per Proxy statement, less previously stated improvements expected from UNGL (per earnings release investor call transcripts)
Note: Net of collateral.Source: Company reports, SNL Financial and management estimates.
6.5x
2.7x2.4x 2.2x
1.6x1.0x 1.0x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
December2002
December2003
June2004
September2004
December2004
Pro forma(1)
Competing Group Median
UAI Pro Forma ProjectedUnited National
December2005
Projected(1)
18
50% Reduction in Net Receivables ($900 million)
Underleveraged Capital Base
UAI’s underleveraged capital base shows an ability to grow without accessing equity markets
2.1x
1.5x 1.4x
0.9x 0.9x 0.9x
0.00x
0.50x
1.00x
1.50x
2.00x
2.50x
A.M. Best Rating
A A+ A A+ A (1)A+
(Debt + Preferred)/Total Capital
34.0% 5.7% 36.2% 21.7%20.0%20.0%
Source: Company reports, A. M. Best.Note: Financial information is at or for the nine months ended September 30, 2004 annualized.(1) UNGL Barbados and US operations rated A (Excellent), PNG and UN Bermuda rated A- (Excellent)
NPW/GAAP Book Value
BER PHLY MKL HCC UAIRLI
19
United America Indemnity, Ltd. Growth Strategy
United National & Penn-America United National & Penn Independent
Avoid price competition by emphasizing
specialty programs, small average premiums,
focus on franchise value, and access to
Bermuda or US
Consider leveraging capital base
Combine Functions Investment management
Public company responsibilities
Reinsurance purchasing
Marketing Enable PNG agents access to UNGL products
Evaluate Other Synergies
Opportunity to Partner in Business
Situations
New UNGL products in need of
distribution
New PIC product ideas in need of
insurance market (“ear to the ground”)
Brokerage business
PIC Closer to Newly Arising Surplus Lines
Market Needs
Bring more value to investments in
UNGL product development
capabilities
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United America Indemnity, Ltd.Transaction Highlights
Fox Paine sponsorship, diligence and execution
Partnership of three leaders in excess and surplus lines specialty property & casualty industry
Outstanding historical operational performance and prospects for growth
Longstanding relationships with 150 market-leading general agents
Increased market size, asset base, agency networks and public float
Immediate value creation for shareholders
Increase in financial stability, diversity and strength
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