United National

Insurance Co.

3 Bala Plaza East, Suite 300,

Bala Cynwyd, Pa. 19004;

610-664-1500; fax: 610-660-8882

1996 1995

Gross premiums $270,148,508 $242,336,639

Non-admitted $195,765,451 $173,873,102

Commercial risks 97% 97%

Net premiums $77,807,064 $69,576,218

Paid-in-capital $5,000,000 $5,000,000

Capital & surplus $196,175,542 $179,745,093

Employees 148 152

Combined ratio 98.4 94.4

Rating agency 98.4 94.4

Net income $19,826,361 $19,875,829

Best's rating A+ A+

S&P rating Aq AAq

An increased amount of program business helped United National Insurance Co. beat the soft insurance market in 1996 and record double-digit growth in premium volume.

But it was a struggle, and in 1997 the company is striving just to maintain its current premium volume, said Seth D. Freudberg, president and chief executive officer.

"We are working twice as hard just to maintain our current position," he said.

The relentless soft market held back growth in most of the company's existing programs, but the addition of several diverse new books of program business made 1996 a relatively buoyant year for United National.

And, while premium growth slowed in the first half of 1997, it is expected to pick up again in the second half of the year because of good renewals, Mr. Freudberg said.

By maintaining a reputation as a producer-driven company that will consider any risk it thinks it can underwrite successfully, United National should continue to prosper, he said.

In 1996, non-admitted premiums at United National increased 12.6% to $195.8 million from 1995, making it the eighth-largest surplus lines insurer, down a slot from last year, according to Business Insurance's rankings. The 1996 premium volume still does not compare to United National's high of $260.7 million in non-admitted premiums in 1994, and though the company is maintaining its position, it is unlikely to see rapid premium growth in 1997, said Mr. Freudberg.

In the first six months of 1997, non-admitted premiums dipped 3.5% to $81.6 million from the year-earlier period due to continued rate softening, he said.

United National is walking away from some accounts where policyholders are demanding large rate cuts, and the insurer is finding it hard to replace that business with other profitable business, he said.

But, he added, "it's certainly not as big a loss of business as you might expect given the state of the market."

The recent successes for United National have largely been the addition of new program business, said Robert Cohen, senior vp.

"There is not one great big program that we have taken on, but we have taken on a number of smallish ones," he said.

Included in the 15 new programs are: two product liability programs; two general liability; one employment practices; one habitational, for buildings such as apartments and condominiums; and an inland marine program, Mr. Cohen said.

Program business is good both for United National and its producers, who are able to use their relationship with the insurer to build a dependable book of business, he said.

"Producers are looking to develop a special relationship with one insurer," Mr. Cohen said.

United National is well-positioned to take on a wide variety of programs because it is a distribution-driven rather than product-driven company, said Mr. Freudberg.

"We don't say to producers: 'Here is what we are looking for; now please bring the accounts in,' so people try us out on a lot of things. Our view is that if it makes good underwriting sense and we have the expertise to handle it, we'll consider it," he said.

But while the insurer will consider a variety of programs, it is continuing to trim the number of brokers it deals with, said Mr. Cohen.

For the past several years, the company has tried to develop better relationships with the brokers that bring in the most business and has ended relationships with brokers that produced only a negligible amount.

United National has relationships with about 100 brokerages, Mr. Cohen said.

The insurer did add 20 new managing general agents in 1996 to take the total number of MGAs it deals with to 115. The new agents include the 15 that brought the new programs plus another five that have general property/casualty books, Mr. Cohen said.

The diverse programs can enjoy eight-figure limits backed by facultative reinsurance. The largest program United National writes is an excess casualty program for hospitals, nursing homes and other health care facilities that has limits of $35 million. But usually the limits are more modest, Mr. Freudberg said.

Usually the automatic limits without special reinsurance arrangements are: $10 million for umbrella and excess casualty; $1 million per occurrence for general liability; $5 million for property; and $5.5 million for excess property.

The largest line of business for United National is umbrella and excess casualty, which accounted for $127 million, or 65%, of its non-admitted premiums in 1996.

The next biggest line is primary liability, which accounts for $48 million, or 25%; with property and other miscellaneous lines accounting for the remaining $20 million, or 10%, of non-admitted premiums, Mr. Freudberg said.

Reinsurance supports much of United National's capacity. The principal reinsurers the company uses changed little in 1996.

Employers Reinsurance Corp. remains the lead on the liability reinsurance treaty program, and Constitution Reinsurance Corp. leads the property reinsurance program.

To support its new programs in 1996, United National increased its activity with several reinsurers, including: Zurich Reinsurance Centre Inc.; Underwriters Reinsurance Co.; Swiss Reinsurance America Corp.; St. Paul Fire & Marine Insurance Co; and Everest Reinsurance Co.

Other reinsurers United National uses include American Re-In Continued on page 3Continued from page 32

surance Co., General Reinsurance Corp., and Odyssey Reinsurance Corp.

United National carefully chooses its reinsurers, said Kevin L. Tate, senior vp.

"We have a choice of a lot of reinsurers, and we very much go for financial strength, high ratings and consistent underwriting," Mr. Tate said.

Like the primary market it backs, the reinsurance market generally is experiencing falling rates, said Mr. Freudberg.

While property catastrophe reinsurance prices remain relatively high, they are softening. In most other areas, the reinsurance market is already soft, he said.

"On balance, it is favorable for us because we can buy reinsurance more economically and reinsurers are more flexible," he said.

But the soft reinsurance market also enables United National's competitors to expand their capacity, said Raymond L. Freudberg, chairman of United National.

"Insurers that previously would not have had the capacity to compete with us have it today. They are taking business that we would have gotten. But, in our view, they are writing it for premiums that are too low," he said.

United National has not taken full advantage of the lower reinsurance rates, though, as it has increased its retentions to help maintain its own net premium growth, said Seth Freudberg.

Those increased retentions have had negative effects on United National's net income and combined ratio, said Mr. Tate. The combined ratio edged up to 98.4% in 1996 from 94.4% in 1995, and net income edged down to $19.8 million from $19.9 million.

In part, the slight deterioration is due to a reduction in volume of ceding commissions from reinsurers and an increase in the level of loss reserves for the higher retentions, Mr. Tate said.

"The year that the premium is brought on to the books, we reserve at a very high level," he explained.

In addition to increased competition from other surplus lines insurers, United National is experiencing increased competition from the admitted insurance market, said Seth Freudberg.

"There is a general shift out of surplus lines into the admitted market, and we are seeing increased pressure to write programs on an admitted basis," he said.

United National has two subsidiaries that are admitted in most states: Diamond State Insurance Co. and Hallmark Insurance Co.

The pressure to write on an admitted basis has little to do with regulatory issues, Mr. Freudberg said.

"It is more because it's a hassle for agents to go through the surplus lines insurance placement process," he said.

Also, the premium taxes are paid by the policyholder rather than the insurance company in a surplus lines payment, he said.

United National writes on a non-admitted basis in all states except Pennsylvania, where Diamond State and Hallmark are approved non-admitted insurers.

In addition to Seth and Raymond Freudberg and Messrs. Tate and Cohen, other top executives at United National are Richard S. March, senior vp, and Daniel J. Kelleher, treasurer.