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3 Bala Plaza East, Suite 300,

Bala Cynwyd, Pa. 19004;

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

1997 1996

Gross premiums $264,568,836 $270,148,508

Non-Admitted $191,534,066 $195,765,451

Commercial risks 99% 97%

Net premiums $76,582,113 $77,807,064

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

Capital & surplus $233,411,241 $196,175,542

Employees 142 148

Combined ratio 85.9 98.4%

Rating agency 85.9 98.8%

Net income $32,274,190 $19,826,361

Best's rating A+ A+

S&P rating Aq Aq

United National Insurance Co. is beefing up its armory as it continues to fight an uphill battle against declining rates.

The surplus lines insurer has increased its marketing department to more aggressively pitch itself as an underwriter of program-based products. In the future, it also plans to grow with the acquisition of managing general agencies.

The increased emphasis on growth comes as United National struggles to maintain its premiums in a difficult market for surplus lines insurers.

But by working according to the old maxim of "the best defense is a strong offense," United National hopes to beat the soft market, said Seth D. Freudberg, president and chief executive officer.

In 1997, the market got the upper hand, when non-admitted premiums fell 2.2% to $191.5 million. Mr. Freudberg stressed that premiums dropped in the highly competitive market despite an increase in program business at United National.

He said that United National's competition is increasing on three fronts:

* Admitted insurers are increasingly targeting business that has traditionally been covered by surplus lines insurers, such as tough products liability risks.

* Other surplus lines insurers are becoming much more aggressive in searching for new business and holding on to their existing business.

* There is a growing movement among wholesalers and MGAs to establish captive insurers for their profitable businesses so that they can share in the underwriting profits.

"All three factors can be traced back to the fact that the industry is ridiculously overcapitalized," Mr. Freudberg said.

But United National's prospects look better for 1998. In the first six months, non-admitted premiums reached $89.7 million, up 9.9% from the first half of 1997. First-half net income jumped 30.2% to $16.8 million a year ago.

This year the insurer has implemented strategies to enhance its growth, Mr. Freudberg explained.

For example, over the past year it increased its marketing staff to three people from one, he said.

Those marketing staffers are working to promote United National as a stable insurer that is particularly adept at handling program business, said Robert Cohen, senior vp. "Producers don't want to jump around carriers but they have to be sensitive to the insureds, so it's important for us to pass on the message that we are a stable, long-term market."

The consistency of United National is also played up to win program business, which the insurer specifically targets, Mr. Cohen said. "If you are an MGA seeking to set up a program, you want a top-notch carrier, because you are going to spend a lot of time developing the program, and you don't want the carrier to drop the ball."

United National is now more pro-active in calling on intermediaries, MGAs and reinsurers to convince them of its strengths, Mr. Cohen said.

In 1997, United National put on nine new programs, including programs for habitational risks such as condominium complexes; hospitality risks such as bars and restaurants; and an employers indemnity program for Texas employers that opt out of the workers compensation program.

The insurer also added four producers with traditional binding authority.

At year-end, United National had 86 producers with program business and 42 producers with binding authority, Mr. Cohen said. United National also has relationships with about 100 brokers.

In addition to augmenting its marketing department, United National has reorganized its underwriting department. That department is now divided into Eastern, Central and Western regions to encourage stronger relationships between underwriters and producers in the three regions, Mr. Freudberg said.

In the future, United National hopes to grow its business even more by buying MGAs. "If you own a general agent, you don't have to worry about him moving his book of business. Also, whenever you make an acquisition, you are bringing in underwriting talent," Mr. Freudberg said.

By buying MGAs, United National also would be able to use its excess capital, he said.

Risks insured with United National can enjoy eight-figure limits backed by facultative reinsurance. The largest program it writes is an excess casualty program for hospitals, nursing homes and other health care facilities. It has limits of $35 million.

Automatic limits without special reinsurance are more modest: $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 $125 million of non-admitted premiums in 1997.

The next largest is primary liability, which accounted for $47 million. Property and miscellaneous lines accounted for the remaining $19 million.

Much of the capacity is supported by reinsurance; however, United National is seeking to increase its net retentions, Mr. Freudberg said. "We remain loyal to our reinsurers, but we have our own financial pressures."

The principal reinsurers the company uses remain little changed over the past year. Employers Reinsurance Corp. remains the lead on the liability reinsurance treaty program, and Constitution Reinsurance Corp., which Gerling Global Reinsurance Co. plans to buy, leads the property reinsurance program.

United National does, however, place business with a wide range of reinsurers. Over the past year, it has increased the amount of business it cedes to Winterthur Reinsurance Corp. This is due in part to the existing strong relationship that William F. Schmidt, senior vp and chief underwriting officer, had with the reinsurer prior to joining United National last year. Mr. Schmidt previously was with Gryphon Insurance Group.

The consolidation among reinsurers has a mixed effect on their cedents, Mr. Freudberg said. "It can be very positive from a financial statement standpoint, because the bigger and more financially sound they are, the better the security they provide."

On the other hand, relationships between individuals at reinsurers and cedents can be disrupted with management changes, Mr. Freudberg said.

For example, if a particular wording on a reinsurance contract is unclear, cedents may now elect to spend a significant amount of time clarifying the contract before committing to it. Previously, the cedent may have gone ahead and sealed the deal and trusted that people it knew well at the reinsurer would not quibble over minor details in the event of a claim.

Although premiums at United National have fallen due the soft market, profits have increased significantly. In addition to the gains in the first half of 1998, 1997 net income jumped 62.8% over 1996 earnings to $32.3 million.

Most of the gain was due to the favorable investment market in 1997, said Kevin L. Tate, senior vp and chief financial officer. Also, reserve releases due to favorable loss development helped increase profits, he said.

United National's combined ratio also improved in 1997, dropping to 85.9% from 98.4% in 1996, thanks to conservative reserving for past losses and a lack of significant losses in 1997, Mr. Tate said.

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

In 1997, United National saw the continuation of pressure to write business on an admitted basis, Mr. Freudberg said. "It's overwhelming," he admitted.

Policyholders seek the added security of state guaranty funds supporting admitted insurers regardless of the security of many surplus lines insurers, Mr. Freudberg said.

Also, in a surplus lines placement, the premium taxes are paid by the policyholder rather than the insurance company, 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 Messrs. Freudberg, Cohen, Tate and Schmidt, other top executives at United National are Chairman Raymond L. Freudberg and Senior Vp Richard S. March.