FMG Acquisition Corp. (stock symbol: [t]FMGQ[/t]), which raised $37.8 million when it went public in October 2007, announced on April 2 that it had reached an agreement to merge with United Insurance Holdings:
FMG Acquisition Corp. to Merge with United Insurance Holdings, a Florida P&C Insurance Company with 2007 Revenues of $112.6 Million and Pre-Tax Income of $47.9 Million
Wednesday April 2, 4:10 pm ET
Highlights
Merger consideration: United owners to receive $95 million of consideration comprised of $25 million in cash and 8.75 million shares
-- Earn-out provision of up to $5 million in cash if 12 month or calendar 2009 net income exceeds $25 million
-- No external financing required to complete the merger
United Insurance Holdings, LC is a well-capitalized, profitable underwriter of homeowners insurance in Florida
-- 18.2% revenue CAGR (2005-2007)
-- Year-over-year pre-tax income grew 263% in 2007 to $47.9 million
-- Pro-forma net income (see footnote under Statement of Operations) grew 264% year-over-year to $29.9 million
Disciplined underwriting criteria and strong reinsurance protection mitigate risk from low probability, high-cost catastrophic events
Growth opportunities exist in "states in need," where major insurance companies have limited flexibility to offer competing products
Transaction valuation yields an attractive trailing P/E multiple(1) of 3.9x basic and 4.3x fully diluted; believed to be the lowest P/E multiple for any Special Purpose Acquisition Company (SPAC) to date
FARMINGTON, Conn. & ST. PETERSBURG, Fla.--(BUSINESS WIRE)--FMG Acquisition Corp. (OTCBB: FMGQ; FMGQW; FMGQU) (“FMG”) and privately-held United Insurance Holdings LC (“United” or the “Company”) today jointly announced that the companies have entered into a merger agreement whereby United will merge with a wholly-owned subsidiary of FMG.
United, through its three wholly-owned subsidiaries, is a responsive, stable and innovative provider of property and casualty insurance products and services within the state of Florida. The Company is predominantly a provider of homeowners insurance and presently services approximately 73,000 policies that for 2007 represented $145.0 million in annual gross premiums and $85.4 million in net premiums earned.
The Transaction
Under the terms of the transaction, United’s members will receive $25 million in cash, financed by FMG’s cash on hand, and 8.75 million newly issued, registered shares of FMG at closing, representing approximately 60% ownership in the combined entity. FMG will have approximately 14.7 shares outstanding after the closing of the transaction.
In addition, United’s members may earn additional cash consideration of up to a maximum of $5 million, based on management’s ability to generate net income in excess of $25 million during the 12-month period covering either (i) July 1, 2008 through June 30, 2009 or (ii) calendar year 2009. Under this earn-out plan, United’s members will receive $2 for every $1 of net income over $25 million. The maximum payout of $5 million assumes 12-month net income meets or exceeds $27.5 million. Based on its current book of business and reinsurance program, United reasonably believes that, excluding the occurrence of unpredictable catastrophic events, it will meet or exceed the $27.5 million net income target and therefore members will receive their maximum earn-out payment.
The transaction is subject to the review of FMG’s proxy materials by the Securities and Exchange Commission, stockholder approval by the holders of FMG common stock, member approval by United’s owners and other customary closing conditions.
Upon the closing of the transaction, which is anticipated in the second quarter of 2008, FMG will change its name to United Insurance Holdings Corp. (“UIHC”) and will seek an AMEX or Nasdaq listing.
The senior management of United, which averages more than 20 years of insurance industry experience and is led by Chairman Greg C. Branch and President/CEO Donald J. Cronin, will remain unchanged following the transaction. Gordon G. Pratt, Chairman, President and CEO of FMG, will become Vice Chairman of UIHC. Each of FMG and United will name three of UIHC’s six initial Board members.
Commenting on the transaction, Mr. Pratt stated, “We launched our search for a merger partner in the insurance industry with a focus on finding a well-managed, profitable, growing company that really knows how to manage risk. We were particularly drawn to insurance markets that can produce significant returns for stockholders. We believe that United represents a great match and an ideal merger partner; we very much appreciate our time working closely with United’s management and its Board. United’s history proves that it can manage rapid growth safely as a result of its disciplined underwriting and prudent reinsurance practices. Also, we believe that United operates in a segment of the insurance industry minimally affected by the broader stock markets or interest rate concerns.
“During our IPO, we pledged to seek a merger with a partner whose business and prospects showed real promise and on terms that should reward not only investors’ trust in us when we started but also their faith in us should they buy or hold our shares in the soon-to-be merged company. Our merger with United represents, to our knowledge, the most favorable P/E multiple (2007 P/E: 3.9x basic, 4.3x fully diluted) for any SPAC to date and offers the potential for substantial appreciation.”
United Insurance and the Florida Insurance Opportunity
In the early 1990s, Florida state legislators worked with insurers and regulators to create a hurricane catastrophe system designed to mitigate losses to the industry and promote the formation of homeowners insurance companies. This system included the creation of the Florida Hurricane Catastrophe Fund, a reinsurance-like entity funded by a portion of insurance premiums and managed by the Florida State Board of Administration.
Nine years ago today, United began operations to capitalize on these market conditions by underwriting homeowners insurance and selected small business insurance through a broad distribution network across the state of Florida. From its headquarters in St. Petersburg, United’s team of dedicated employees manages a completely integrated insurance company, including sales, underwriting, policyholder service and claims. The Company distributes its homeowners, dwelling fire, flood and garage liability products through 200 agency groups and conducts business through three wholly-owned subsidiaries. Homeowners insurance constitutes the majority of United’s premiums and policies.
The Company captured a record number of new business policies in 2007, all from “voluntary” sales and none from “take-out” or “block sale” transactions. United has strong relationships with top vendors in all aspects of its operations, including risk modeling, policy administration, IT, and actuarial services, which it believes provides United with a competitive advantage over many other insurance providers in Florida. The Company also has strong distribution channels with independent agents and marketing partnerships. The market is highly fragmented, as United represents just 1.0% of the Florida homeowners insurance market.
United’s audited total revenues for the period December 31, 2005 through 2007 increased from $80.6 million to $112.6 million, a compound annual growth rate (“CAGR”) of 18.2%. During this same period, the Company’s pre-tax income increased to $47.9 million in 2007 from 2005’s pre-tax loss of $1.4 million, which reflected the unusually active storm season in Florida that year.
Mr. Cronin, President and CEO of United, stated, “We are very excited at the prospect of going public through this merger with FMG, and believe that United is properly positioned for growth. This merger and subsequent national securities exchange listing will increase our flexibility and access to capital while also increasing our visibility within our industry. Our goal is to continue to build on our unique blend of experience and disciplined underwriting to drive our growth.”
Mr. Branch, United’s Chairman, said, “United is very proud to have built a high performing complementary team of professional managers and strategic thinkers who can deal with the ever-changing insurance environment and execute a win/win business plan for our shareholders and our policyholders. We considered many options for the Company, including remaining private. Through getting to know the people at FMG and how they could be helpful to the Company and its business, we have concluded that this merger sets the Company on the right path for the next leg of its journey.”
Risk Mitigation Through Disciplined Underwriting and Reinsurance Protection
United’s underwriting standards are designed to minimize loss, obtain appropriate premium and optimize geographic exposure with respect to probable maximum loss (“PML”). The Company licenses risk-modeling systems and operates them with an in-house, seasoned team of analysts. United’s process allows for appropriate geographic distribution of exposures and diversified capital allocation. United conducts regular analysis of its policy portfolio at the zip-code level to optimize portfolio exposure. Underwriting guidelines are adjusted periodically to address strategic goals, mitigate catastrophe risk exposure and improve attritional (day-to-day) loss results.
Following an unusually active storm season in 2005, United accelerated its plan to better position itself by:
-- shifting its business mix away from higher-risk areas;
-- increasing premium rates across the state (where appropriate);
-- underwriting homes with more windstorm damage protection; and
-- excluding “pool cages” (screened enclosures around pools that accounted for 35% of catastrophe losses in 2004-2005) from coverage under its policies.
For 2007, United purchased approximately $400 million in reinsurance protection and effectively retained $16.5 million (pre-tax) of exposure for each storm event. United’s reinsurers all are rated A- or better by A.M. Best.
Mr. Cronin continued, “One of the primary requirements of every homeowner insurance provider in a potential storm area is to expertly manage risk. This requires a proper balance of capital on hand, reinsurance protection, and underwriting experience. We believe that United’s competitive advantage in this area lies in our disciplined underwriting analysis and principles. We showed this during the highly improbable events of 2005. During that year, United reported a small operating loss, which demonstrated the effectiveness of our underwriting guidelines and reinsurance structure. Furthermore, the Company is now in an even stronger position to handle potential adverse weather events. We are ever-vigilant of potential exposures and believe that United outperforms our competition in this area.”
Growth Potential
Mr. Pratt concluded, “United’s management has extensive experience in the industry and has the infrastructure in place to properly manage the risk of major storms. In addition, we believe that the additional capital from this merger could be used to:
-- expand into other “states in need” where major insurance companies have limited flexibility to offer customers the products they need to protect their homes;
-- strengthen and make more flexible United’s reinsurance protection; and
-- support the merged Board’s consideration of initiating a target payout/dividend policy.
“We believe that this transaction represents a great opportunity for FMG stockholders and we look forward to keeping you apprised of our progress throughout the merger process.”
Statement from Bulldog Investors
Bulldog Investors (“Bulldog”) owns FMG securities equal to 21.7% voting power, as disclosed in Bulldog’s filing with the SEC dated March 26, 2008.
On March 18, 2008, FMG discussed its business combination criteria and Bulldog described its criteria for evaluating a proposed business combination and advised FMG that if FMG presented a business combination meeting Bulldog’s criteria, Bulldog’s intention is either to: (i) support the proposed business combination or (ii) accept a bid for some or all of its holdings of FMG’s common stock.
“We like good management teams forming SPACs to go out and find good deals to present to stockholders,” said Mr. Phillip Goldstein, Bulldog’s founder. “We appreciate FMG’s management and the work they have done to date. We look forward to evaluating FMG’s proxy materials and to the stockholder vote.”
Roadshow Schedule
The management of FMG and United will hold meetings with potential investors prior to the merger completion to further discuss the transaction. If any accredited investors are interested in meeting with management, please contact Adam Prior of The Equity Group at 212-836-9606 or aprior@equityny.com.
Pali Capital, Inc. is acting as financial advisor to FMG and Ellenoff, Grossman & Schole LLP is acting as legal advisor to FMG on this transaction. Piper Jaffray & Co. rendered a fairness opinion to FMG’s Board. Raymond James is acting as financial advisor to United and Foley & Lardner LLP is acting as legal advisor to United on this transaction.
For additional information on the acquisition see the Form 8-K, that will be filed by FMG on April 3, 2008, and can be obtained without charge, at the Securities and Exchange Commission's internet site (http://www.sec.gov). United’s website is www.upcic.com.
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