United America Grilled On Sale Prospects

Management of specialty insurer United America Indemnity was questioned today about a possible sale of the company, after reporting its second-quarter net rose 28 percent.

Analysts participating in a company earnings conference call grilled executives about any potential sale. They responded that a sale is an option, but not a current focus.

Last night United America reported second-quarter net income of $25.9 million, or 69 cents per share, compared with $20.3 million, or 55 cents per share for the period last year.

But analysts expressed worries about company excess capital not being put to work–a situation they suggested will ultimately make it tough for the insurer to achieve decent returns on equity as market competition heats up.

The current level of income translates to a low-teens return on an annualized basis.

United America is a Cayman Islands-based holding company with two U.S. specialty operating units writing excess and surplus lines business–Penn America in Hatboro, Pa., and United National in Bala Cynwyd, Pa.–and a Bermuda-based reinsurer called Wind River.

With second-quarter net written premiums for the three operating units combined falling 8.4 percent below last year's second quarter to $130.5 million, and first-half net premiums down 4.8 percent to $264.6 million, one analyst observed that the premium-to-surplus ratio for the company (now at about .68-to-1) is on the decline as market conditions grow more competitive.

“How will you get the ROE up given the capital you have?” the analyst asked. “As I see it, you can try to grow more, which in this market is very tough; you can make acquisitions; you can buy back stock; or you can sell the company,” he said.

Chief Financial Officer Kevin Tate agreed that the company is not fully utilizing its capital. He added, however, that Chief Executive Officer Larry Frakes, who took the CEO post in late June, is currently trying to recruit presidents to lead Penn America and United National, and that once in place–hopefully in short order–they will focus on growing business profitably.

“Having said that, our board is…fully aware of all the options you just set forth, and is in the process of considering them.”

Mr. Frakes quickly added, however, that he and the board are primarily focused on growing the core earnings of the organization. “Our focus is not on selling the company,” he said later, responding to another analyst.

“Not every segment of the market is going to be so soft that you can't make a buck at it,” he said. “My focus is going to be to see that we are well positioned in all the E&S arenas that we want to be in, to react to market conditions as they change.”

Mr. Tate noted that investment income grew over 20 percent in the quarter and that he expects investment income growth to continue to boost earnings.

On the underwriting side, the company reported an overall combined ratio of 87.8 for the quarter, compared with 91.2 last year.

Mr. Frakes, a 35-year industry veteran of the industry, who spent the last 10 years at the Everest National specialty unit of Bermuda-based Everest Re, began the call by sharing his initial impressions of the company and the market.

He said that producer relationships are intact and business declines are a byproduct of market conditions. General agency partners, he said, are losing clients and seeing revenues decline as standard markets take on business that has recently resided in the excess and surplus lines market.

“We've seen a lot of different market cycles, [and] this one is not unlike some we've seen,” he said. “We have to work through hard and soft markets,” he said.

From a strategic perspective, he said that he envisions the three units each will operate more on a stand-alone basis going forward, noting that there had been a tendency to try to blend them in the recent past.

When an analyst asked if the company had been approached by perspective merger partners, Mr. Frakes responded, “It would be inappropriate for me to talk to that issue.”