Transcript Document
United America Indemnity, Ltd. Investor Presentation January 2005 Safe Harbor Statement Safe Harbor statement: United National has filed a registration statement on Form S-4 in connection with the transaction, and United National and PennAmerica 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 and Penn- 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. 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 America Indemnity, Ltd. Participants 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 Net Premiums Written Fox Paine Transaction ($ in millions) Fox Paine Transaction 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 LTM 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 LTM ($ in millions) Adjusted GAAP Equity 4 Overview of Penn-America Group, Inc. 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 Other multi-family dwellings Daycare operations Special event coverage Net Premiums Written GAAP Equity 5 LTM 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 LTM 2003 2002 2001 2000 1999 1998 1997 1996 ($ in millions) 1995 1994 1993 ($ in millions) 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 Net Commission Revenues(1) ($mm) Adjusted EBITDA(2) ($mm) $25 $22 $15 $6 $16 $5 $3 $2 2000 2001 2002 2000 2003 2001 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). 6 2002 2003 Highlights of UAI Business Combination Summary of UAI Business Combination Terms Parent Base Platform Acquired / Merged 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 Expected Closing First Quarter 2005 Approvals Required Customary regulatory and shareholder approvals for PNG and UNGL PNG Public Consideration PIC Consideration 8 Financial Benefits to the Transaction Accretive on both an earnings and book value basis UNGL 2003 Earnings Per Share 2004 YTD Earnings Per Share(1) 09/30/04 Book Value per Share 2005E Earnings Per Share $1.08 $0.77 $14.73 (1) UAI $1.31 $0.93 $15.51 Accretion 21.8% 20.8% 5.3% 20.8% Through 9/30/2004 Source: 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 $17.89 weighted average closing UNGL share price, extrapolated between data points on page 66 of the merger proxy. 9 Competitive Financial Landscape UAI’s pro forma book value and net operating income are comparable to Philadelphia Consolidated and RLI Book Value ($mm) $1,976 $1,000~ $373 $1,506 $1,163 ~ $80 ~ $750 $606 ~ ~ Net Operating Income ($mm) $149 ~ $122 $70 $60 $588 $53 $559 $417 $500 $250 $49 $40 $28 $17 $20 $140 $0 $0 BER MKL HCC PHLY RLI UAI UNGL PNG BER Source: Company reports. Note: Financial information is for the last twelve months ended September 30, 2004. 10 MKL HCC PHLY RLI UAI UNGL PNG LTM Operating Metrics and Trading Statistics ($ in millions) Gross Written Premiums 15% $1,116 $690 UAI ’04E – ’05E EPS Growth 5YR EPS Growth Rate 14% 15% 62.3% $759 RLI 36.1% PHLY UAI RLI PHLY UAI 2.5x PHLY 14.1x 12.0x 1.7x 1.1x (1) RLI Price / 2005E EPS Price / Book UAI 53.1% 9.6x RLI (2) PHLY UAI (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. 11 RLI PHLY UAI Management Organization Structure United America Indemnity, Ltd. Chairman- Saul A. Fox CEO – David Bradley President – Jon Saltzman CFO – Kevin Tate United National Group CEO – Bill Schmidt Wind River (Bermuda) CEO – Seth Freudberg Penn-America Group Penn Independent Corporation CEO – Joe Morris CEO – Bob Lear Businesses will remain separate and retain their identities in the marketplace 12 Similar Businesses, Different Distribution Approaches And Clients Penn-America Business Lines United National Property General Liability Umbrella Property General Liability Umbrella Professional Liability Specialized Programs & Products Commercial Binding Authority Umbrella Specialized Programs & Products Commercial Binding Authority Umbrella Professional Liability Other Primary Liability 65 85 Retail Agents 30,000 34,000 Average Policy Size $2,000 $3,000 Geographic Focus Countrywide - Suburban and Rural Communities Countrywide – Urban, Suburban and Rural Communities Family-run General Agencies General Agencies and Wholesale Brokers 84% 67% Client Focus Wholesale Agents Distribution E & S Proportion Source: Company reports. 13 Historical Underwriting Performance 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% Statutory Combined Ratios 170% P&C Industry Average: 108% 110% 100% 90% 80% 70% 60% 1991 1992 1993 1994 1995 1996 United National 1997 1998 Penn-America 1999 2000 2001 2002 Industry Average 2003 2004 YTD 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.” 14 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 $2,000) Specialty markets (horses, vacant buildings, chiropractors, bike shops) Less competition and greater defensible platforms have led to outperformance UNGL 20-year compounded book value growth of 17% PNG compounded book value growth of 13% since public offering in 1993 A focused approach creates an ability to develop new products, defend markets and grow premium and book value even in the most challenging cycles Note: Financial information at or for the twelve months ended September 30, 2004. 15 Pro Forma Financial Implications and Merits Financial Profile of the Combined Business ($ in millions) Pro Forma UNGL PNG PIC Consolidated Income Statement (1) Gross premiums written Net premiums written Premiums earned & net commissions Net income $439 257 207 28 $251 216 194 17 NA NA 25 4 $690 473 426 49(1) Balance Sheet (1) Cash & investments Shareholders’ equity Assets $901 417 2,743 $403 140 526 $70 7 60 $1,201 (1) 559 (1) 3,297 (1) AM Best and Market Data Rating Market capitalization “A” (Excellent) $512 “A-” (Excellent) $221 NA NA 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. 17 653(1) 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 6.5x 7.0x 6.0x 5.0x 2.7x 4.0x 2.4x 2.2x 1.6x 3.0x 1.0x 1.0x 2.0x 1.0x 0.0x December 2002 December 2003 United National June 2004 September 2004 December 2004 Pro forma(1) UAI Pro Forma Projected (1) December 2005 Projected(1) Competing Group Median 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. 18 Competing Group Median Underleveraged Capital Base UAI’s underleveraged capital base shows an ability to grow without accessing equity markets NPW/GAAP Book Value 2.1x 2.50x 1.5x 2.00x 1.4x 0.9x 1.50x 0.9x 0.9x 1.00x 0.50x 0.00x BER A.M. Best Rating A PHLY MKL HCC RLI UAI A+ A A+ A+ A (1) 5.7% 36.2% (Debt + Preferred)/Total Capital 34.0% 21.7% 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) 19 20.0% 20.0% Concluding Remarks 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 Opportunity to Partner in Business Situations New UNGL products in need of distribution Consider leveraging capital base New PIC product ideas in need of insurance market (“ear to the ground”) Combine Functions Brokerage business Investment management Public company responsibilities Reinsurance purchasing PIC Closer to Newly Arising Surplus Lines Market Needs Marketing Enable PNG agents access to UNGL products Evaluate Other Synergies 21 Bring more value to investments in UNGL product development capabilities 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 22