UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number: 000-50891
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE
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20-0432760
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification Number)
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222 South Riverside Plaza, Chicago, Illinois
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60606
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code (888) 782-4672
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange
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Title of each class
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on which registered
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Common Stock, par value $0.01 per share
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
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No
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Indicate by check mark whether the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
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No
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of registrants’
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated
filer
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(Do not check if a smaller reporting company)
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Smaller reporting
company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes
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No
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The aggregate market value of the voting and non-voting common stock held by non-affiliates as
of June 30, 2008 was approximately $82 million (assuming all of the outstanding shares of the
Company’s Class B non-voting common stock, par value $0.01 per share, or the Class B Shares, are
exchanged into an equal numbers of shares of the Company’s voting common stock, par value $0.01 per
share, or the Common Stock). As of February 26, 2009, 14,437,355 shares of Common Stock and
1,371,934 Class B Shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the extent not set forth herein, is
incorporated herein by reference from Specialty Underwriters’ Alliance, Inc.’s definitive proxy
statement for its annual meeting of stockholders scheduled for Tuesday May 5, 2009.
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
TABLE OF CONTENTS
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2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K are based on the Company’s assumptions
and expectations concerning future events and financial performance and are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements are subject to the safe harbor provisions of
this legislation. Forward-looking statements can generally be identified by the use of
forward-looking terminology such as “may,” “will,” “should,” “could,” “would,” “project,” “expect,”
“intend,” “estimate,” “anticipate,” “believe” or “plan” or other words that convey uncertainty of
future events or outcomes.
Even though we believe our expectations regarding future events and financial performance are
based on reasonable assumptions, forward-looking statements are not guarantees of future
performance. Such statements are subject to significant business, economic and competitive risks
and uncertainties that could cause actual results to differ materially from those reflected in the
forward-looking statement.
There are a number of important factors that could cause actual results to differ materially
from the results anticipated by these forward-looking statements such as the ineffectiveness or
obsolescence of our business strategy due to changes in current or future market conditions;
increased competition on the basis of pricing, capacity, coverage terms or other factors; the
effects of acts of terrorism or war; developments in the world’s financial and capital markets that
adversely affect the performance of our investments; changes in regulations or laws applicable to
us, our subsidiaries, brokers or customers; acceptance of our products and services, including new
products and services; decreased demand for our insurance products; loss of the services of any of
our executive officers or other key personnel; the effects of mergers, acquisitions and
divestitures; changes in legal theories of liability under our insurance policies; changes in
accounting policies or practices; and changes in general economic conditions. Additional
information on factors that could cause actual results to differ materially from those presented
are discussed under the caption “RISK FACTORS.” You should read these cautionary statements as
being applicable to all forward-looking statements wherever they appear. In light of the
significant uncertainties inherent in forward-looking statements, readers are cautioned not to
place undue reliance on the forward-looking statements contained within, which speak only as of the
date on which they are made.
We undertake no obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future developments or otherwise.
PART I
Item 1.
Business
Overview
Specialty Underwriters’ Alliance, Inc. was incorporated in April 2003, and through its
wholly-owned subsidiary, SUA Insurance Company, or SUA, offers specialty commercial property and
casualty insurance products through independent general agents, or partner agents, that serve niche
groups of insureds. These targeted customer groups require specialized knowledge due to their
unique risk characteristics. We believe that this segment of the industry has historically been
underserved by most standard property and casualty insurance companies because they lack this
specialized knowledge and are not willing to make the necessary investment to gain the knowledge
required to achieve underwriting profits.
Additionally, in the specialty property and casualty program business, insurance agents often
have underwriting authority, are responsible for handling claims and are paid by up-front
commissions on the amount of premiums written. We believe that this system does not serve the
carriers, the agents or the insureds well. Poor underwriting results have led to underwriting
losses for the carriers, which results in carrier turnover in the specialty program business,
thereby creating instability in the niche insurance markets being served. In turn, agents incur
additional costs in searching for, and converting to, new carriers and policyholders experience
uncertainty regarding the placement of their coverage and quality of service from year to year.
Our business model is designed to better serve the specialty property and casualty marketplace
by recognizing the void that exists in these underserved niche markets and the problems that
undisciplined underwriting creates. Our business model emphasizes our relationship with a select
number of partner agents, who have specialized business knowledge in the types of business classes
we underwrite. We rely on these partner agents for industry
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Form 10-K
Specialty Underwriters’ Alliance, Inc.
insights and their understanding of the specific risks in the niche markets we serve. We
bring together that knowledge with our disciplined underwriting practices and leading-edge
technology and systems capabilities to provide insurance programs and products that are customized
to the needs of the specialty markets that we serve.
Our business model is also designed to realign the interests of carriers, agents and insureds.
Each of our partner agents are required to enter into agreements with us that provide that in
exchange for marketing and pre-qualifying business for us, they receive an up-front commission
designed to cover their costs and an underwriting profit-based commission paid over several years.
In addition, each partner agent is required to purchase Class B Shares, which further aligns their
interests with us and that of our shareholders. In return, we provide our partner agents with a
five-year exclusive arrangement (generally allowing partner agents to offer other companies’
products if we decline to offer coverage to a prospective insured) covering a specific class of
business and territory. Further, we have implemented a centralized information system designed to
reduce processing and administrative time. Lastly, we are a stable, dedicated source of specialty
program commercial property and casualty insurance capacity.
SUA currently has a secure category rating of “B+” (Good) from A.M. Best Company, Inc., or
A.M. Best, which is the sixth highest of 15 rating levels.
Our website address is www.suainsurance.com. We make available on this website under
“Investor Relations,” free of charge, our annual reports on Form 10-K, our quarterly reports on
Form 10-Q, our current reports on Form 8-K, Forms 3, 4 and 5 filed via Edgar by our directors and
executive officers and various other filings, including amendments thereto, with the Securities and
Exchange Commission, or SEC, as soon as reasonably practicable after we electronically file or
furnish such reports to the SEC. We also make available on our website our Corporate Governance
Guidelines and Principles, our Code of Business Conduct and Ethics and the charters of our Audit
Committee, Compensation Committee and Nominating and Corporate Governance Committee. This
information also is available by written request to Investor Relations at our executive office
address listed below. The information on our website is not incorporated by reference into this
report.
Our principal executive offices are located at 222 South Riverside Plaza, Suite 1600, Chicago,
Illinois 60606 and our telephone number is (888) 782-4672.
Capital Structure and Business Acquisitions
In the fourth quarter of 2004 we completed our initial public offering, or IPO, of
13,122,000 shares of Common Stock at a price of $9.50 per share. Concurrent with the closing of
the IPO, we (a) sold 1,000,000 shares of our Common Stock at a price of $8.835 per share in a
private placement and (b) sold 90,549 shares of our Common Stock to certain of our executive
officers at a price of $8.835 per share. Additionally, at the closing of our IPO, we sold
26,316 shares of our Class B Shares to our initial partner agents for an aggregate purchase price
of $250,000. The net proceeds to us from all these transactions after deducting expenses were
approximately $123.5 million. In addition to the initial sales of Class B Shares, as of December
31, 2008, our partner agents have purchased, pursuant to their agreements, additional Class B
Shares for an aggregate purchase price of $8.06 million and are contractually obligated to purchase
an additional $0.94 million worth of Class B Shares in the future.
Simultaneously with the closing of the IPO, we acquired all of the outstanding common stock of
Potomac Insurance Company of Illinois, or Potomac, from OneBeacon Insurance Company, or OneBeacon,
for $22.0 million. We refer to this transaction as the “Acquisition.” At the time of the
Acquisition, Potomac was licensed in 41 states and the District of Columbia. Prior to the closing
of the Acquisition, Potomac entered into a transfer and assumption agreement with OneBeacon whereby
all of its liabilities, including all direct liabilities under insurance policies predating the
Acquisition, were transferred to and assumed by OneBeacon. In the event OneBeacon fails to pay its
assumed liabilities, SUA would be liable and could experience losses which could be materially
adverse to our business and results of operations. OneBeacon currently has a rating of “A”
(Excellent) from A.M. Best, which is the third highest of 15 rating levels. Upon completion of the
Acquisition, we changed the name of Potomac to SUA Insurance Company, or SUA.
SUA is currently licensed to conduct insurance business in 45 states and the District of
Columbia, most recently having received a Certificate of Authority to write all property and
casualty lines in Hawaii effective September 17, 2008 and Minnesota effective January 20, 2009.
SUA is not licensed in Maine, Montana, New Hampshire, North Carolina, or Wyoming. However, in the
future we may apply for licenses in these states.
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Specialty Underwriters’ Alliance, Inc.
Industry
The property and casualty insurance industry has historically been cyclical. When excess
underwriting capacity exists, increased competition generally results in lower pricing and less
favorable policy terms and conditions for insurers. As underwriting capacity contracts, pricing
and policy terms and conditions generally become more favorable for insurers. In the past,
underwriting capacity has been impacted by several factors, including catastrophes, industry
losses, recognition of reserve deficiencies, changes in the law and regulatory requirements,
investment returns and the ratings and financial strength of competitors.
Historical Industry Model
Specialty commercial property and casualty insurance underwriting requires in-depth knowledge
of a particular business class and often personal knowledge of the participants in a business
class. As a result, insurers rely on skilled wholesale agents to procure business. An agent
generally is an outsourced underwriting department for the insurer that markets to independent
agents, processes submissions, selects risks, binds and issues policies on behalf of the insurer,
and in some cases, handles claims on the underwritten businesses. Such agents and insurers
commonly work with a reinsurer, which participates in the pool of risks selected by such agents.
Without an insurer providing licensed policy paper and a reinsurer providing capacity, such agents
are unable to service their independent agent clients, which ultimately affects the policyholders.
Historically, insurance carriers have engaged key agents under contracts to produce and
underwrite businesses, often processed through each such agent’s proprietary policy issuance and
management information systems, with claims adjustment assigned to third parties. Agents and such
third parties were generously compensated through these arrangements, but the compensation was not
linked to the underlying profitability of the business. We believe that this strategy has led to a
lack of alignment of interests between carriers, agents and the insureds. In addition, we believe
that this system has resulted in weak underwriting and pricing controls, poor claims management and
high costs due to the duplication of activities.
Our Model
We believe that our strategy of developing relationships with partner agents is a fundamental
shift in the way insurance companies do business. We enter into contractual relationships with our
partner agents in order to encourage them to work with us in building our portfolio of specialty
program commercial property and casualty insurance business. A portion of the compensation paid to
our partner agents is directly tied to the underwriting profitability of their specific programs.
In addition, our partner agents purchase an equity interest in our company, in the form of
non-voting Class B Shares. We believe that requiring an ownership interest by our partner agents
encourages them to direct business to us, regardless of future market cycles. We expect our
partner agents to provide prequalified leads through their retail agents. We retain control over
underwriting and claims activities. In addition, all transaction processing is done through our
proprietary technology system in order to ensure data integrity and efficiency. As of February 1,
2009, we have entered into definitive agreements with the following nine partner agents — AEON
Insurance Group, Inc., American Team Managers, Inc., Appalachian Underwriters, Inc., First Light
Program Managers, Inc., Flying Eagle Insurance Services, Inc., Insential, Inc., Northern Star
Management, Inc., Risk Transfer Holdings, Inc, and Specialty Risk Solutions, LLC.
The key features of our relationship with our partner agents are as follows:
Equity Ownership.
Each partner agent must purchase shares of our non-voting Class B Shares.
The Class B Shares will become exchangeable, one-for-one with our Common Stock, five years after
the effective date of the applicable partner agent agreement, unless such agreement has been
terminated. The Class B Shares are subject to substantial restrictions on transferability during
this period. If prior to the fifth anniversary the effective date of the applicable partner agent
agreement such partner agent’s contract is terminated, we may repurchase such partner agent’s Class
B Shares at the lower of cost or the current market value (as defined in the applicable partner
agent agreement). If after five years following the effective date of the applicable partner agent
agreement such partner agent’s contract is terminated, we may repurchase the partner agent’s
Class B Shares at the current market value. After the five-year period, and for so long as the
partner agent agreement has not been terminated, such partner agent is required to hold Class B
Shares worth at least 50% of its aggregate initial investment commitment in our Class B Shares.
Commission.
We pay each partner agent a commission designed to cover the costs associated
with binding each policy. In addition, each partner agent may receive a meaningful share of the
underwriting profits for each of its
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Form 10-K
Specialty Underwriters’ Alliance, Inc.
programs, subject to a cap. No further profit sharing calculation will be performed if the
Partner Agent Agreement is terminated prior to five years. If, after five years, the partner agent
agreement is terminated, for any reason, the profit sharing calculations will be performed annually
until all payout periods and earned profit sharing are satisfied.
Long-Term Contractual Commitment.
Each partner agent has an exclusive five-year contractual
arrangement (generally allowing partner agents to offer other companies’ products only if we
decline to offer coverage to a prospective insured). We have no obligation to accept business that
does not meet our guidelines. We agree to write only that class of business and lines of business
by program in a defined territory with the specific partner agent, or under certain circumstances, Partner Agents may agree to share a similar program in a defined territory. Our partner agents may have one
or a number of their programs with us. We expect that we will be a significant percentage of our
partner agents’ program business. Each partner agent has the right to terminate its relationship
with us on 180 days’ notice. We have the right to terminate our relationship with our partner
agents if they materially breach our agreements with them, they become insolvent, or they fail to
maintain appropriate licenses. In addition, we can terminate our relationship if a partner agent
does not meet certain profitability and production guidelines that are established under each
agreement or if a third party should acquire them. Upon termination, at our discretion, the
partner agent must service the existing policies until such policies expire or are terminated, at
which time the partner agent is allowed to place such business with other insurers.
Our Insurance Product Lines
Our insurance operations, through our nine partner agents, are focused on the following
programs:
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AEON Insurance Group, Inc.
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Auto Transporters Program.
This program offers commercial automobile coverage to companies
that transport cars between two geographical points. The program is currently available in 41
states and the District of Columbia.
Towing and Collateral Recovery Program.
This program offers commercial automobile, property,
inland marine and general liability coverages. Eligible accounts include towing operators, garage
operations with towing and recovery, as well as towing operations for auto auctions. The program
is currently available in 41 states and the District of Columbia.
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American Team Managers, Inc.
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Artisan Contractors Program.
This program offers insurance and risk management services for
certain artisan and specialty trade contractors engaged in residential and/or commercial
construction. The program is open to contractors that are involved in new construction, remodeling
and tenant improvements, including new residential home building. The program offers general
liability coverage in Arizona and California.
General Contractors Program.
This program offers insurance and risk management services for
general contractors engaged in residential and/or commercial construction. The program is open to
general contractors that are involved in new construction, remodeling and tenant improvements,
including new residential home building. The program offers general liability coverage in Arizona
and California
Trucking Program.
This program offers commercial insurance for truckers of all sizes
including owner/operators offering commercial automobile liability, physical damage and general
liability coverages in seven states.
Workers’ Compensation Program.
This program uses technology to fully automate a disciplined
underwriting approach to writing small premium workers’ compensation business in California. The
online product is available to small and medium sized businesses.
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Appalachian Underwriters, Inc.
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Artisan Contractors Program.
This program provides insurance and risk management services for
certain artisan and specialty trade contractors engaged in residential and/or commercial
construction. The program is open to contractors that are involved in new construction, remodeling
and tenant improvements, including new residential home building. The program currently offers
general liability and automobile coverage in 16 states.
General Contractors Program.
This program provides insurance and risk management services for
general contractors engaged in residential and/or commercial construction. The program is open to
general contractors that are involved in new construction, remodeling and tenant improvements,
including new residential home building. The program currently offers general liability and
automobile coverage in 16 states.
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Specialty Underwriters’ Alliance, Inc.
Workers’ Compensation Program.
This program uses technology to fully automate a disciplined
underwriting approach to writing small premium workers compensation
business in 20 states, 11 of which are shared territories with
Northern Star Management, Inc. The
online product is available to small and medium sized businesses.
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First Light Program Managers, Inc.
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Trucking Program.
This program services selected classes within the trucking industry
offering commercial automobile liability, physical damage and general liability. The program is
currently available in nine states.
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Flying Eagle Insurance Services, Inc.
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Artisan Contractors Program.
This program offers insurance and risk management services for
certain artisan and specialty trade contractors engaged in residential and/or commercial
construction. Program is open to contractors that are involved in new construction, remodeling and
tenant improvements, including new residential home building. The program currently offers general
liability coverage in nine states.
General Contractors Program.
This program offers insurance and risk management services for
general contractors engaged in residential and/or commercial construction. The program is open to
general contractors that are involved in new construction, remodeling and tenant improvements,
including new residential home building. The program currently offers general liability coverage
in nine states.
Roofing Contractors Program.
This program offers insurance and risk management services for
small to medium sized roofing contractors engaged in commercial and residential work. The program
currently offers general liability coverage in 11 states.
Roofing Contractors Program.
This program provides insurance and risk management services for
small to medium sized roofing contractors engaged in commercial and residential work. The program
currently offers general liability and automobile coverage in 17 states.
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Risk Transfer Holdings, Inc.
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PEO Program.
This program services staffing entities that are responsible for insurance
procurement, human resources management and payroll and tax remittance. The program provides
workers’ compensation solutions to professional employer
organizations clients in 25 states.
Temporary Staffing Agencies Program.
This program services the temporary staffing industry.
The program provides workers’ compensation solutions to
temporary staffing entities in 25
states.
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Northern Star Management, Inc.
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Trucking Program.
This program services truckers of all sizes including owner/operators in
the Middle Atlantic states. This program provides commercial general liability, commercial auto
liability and physical damage in six states.
Workers’ Compensation Program.
This program uses technology to fully automate a disciplined
underwriting approach to writing small premium workers’
compensation business in 12 states, 11 of which are shared territories with Appalachian Underwriters, Inc. The online product is available to small and medium sized
businesses.
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Specialty Risk Solutions, LLC
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Not-for-Profit Organizations Program.
This program is for qualifying not-for-profit
organizations in Florida. Excess coverage is available for workers’ compensation and commercial
automobile.
Public Entities Program.
This program specializes in providing workers compensation, general
liability and commercial automobile insurance (all on an excess basis) to public entity clients,
including schools, other educational institutions and municipalities
in 20 states.
Reinsurance
We have entered into reinsurance agreements to cover our casualty lines of business. Coverage
of our casualty lines of business includes general liability, auto liability and workers’
compensation. We purchased reinsurance from reinsurers that are rated at least “A–” (Excellent) or
better by A.M. Best and our reinsurers are compensated by sharing specified percentages of
premiums.
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Specialty Underwriters’ Alliance, Inc.
For our workers’ compensation business, our reinsurers are responsible for losses between
$1 million and $10 million due to any single occurrence under a policy and for losses in excess of
$10 million up to $35 million for a multiple loss occurrence. For our non-workers’ compensation
casualty business, we do not write policies above $1 million and therefore do not need reinsurance
protection for single loss occurrences; our reinsurers are responsible for losses between
$1 million and $5 million for a multiple loss occurrence.
Underwriting
We produce all of our business through our partner agents, and select our partner agents based
on a shared underwriting philosophy. Our underwriting strategy focuses on strict control of
underwriting, pricing, coverage, partner agent relationships and customer segmentation. Our
primary underwriting goal is to achieve an underwriting profit.
Our underwriting philosophy has five components:
We carefully scrutinize prospective partner agents.
We contract only with agents that we
believe have strong reputations and significant specialized knowledge of the market they serve.
Our partner agents possess extensive knowledge in their specialties. We grant partner agents
territorial program exclusivity so that partner agents do not market against each other. Partner
agents are required to have the ability to expand their operations, have resources dedicated to
selected programs and maintain minimum premium production levels.
We maintain strict control of our underwriting process.
Our underwriters work with each
partner agent to develop specific underwriting strategies, pricing structures, and acceptable
coverage and initial customer requirements. Senior underwriting personnel experienced in specialty
classes, pricing, coverage and multiple lines of business along with actuarial and claims personnel
form a program team to work with each partner agent. In addition, we develop a specific
underwriting strategy for each customer segment. Each customer segment includes a demographic
study of the number of prospective customers available, as well as the number of customers each
partner agent expects to provide to us. We also create eligibility guidelines, which include size
requirements for each account within the customer segment, acceptability for loss history, and
adherence to loss prevention and safety practices. Ineligible operations are identified and
eliminated from the customer segment. With the cooperation of the partner agents, each program
team conducts the market research and analysis to develop specific customer segments, line of
business coverage guidelines and pricing requirements. Each customer segment or business
opportunity has minimum standards and business performance measures. We do not allow our partner
agents to set rates on any program. We use actuaries to validate the rating and pricing plans.
We have established a partner agent advisory process.
Our partner agents have input on new
programs and territorial assignments. This interaction with our partner agents enables us to avoid
channel conflicts and promote the growth of profitable programs.
We utilize a centralized policy processing system to control data.
As part of our
infrastructure strategy, we utilize a centralized policy administration system, which allows us to
more efficiently quote, issue and manage insurance polices while controlling data from the first
entry into the system. We customize the system for each partner agent and customer segment. The
system allows our underwriters to provide approval of submissions at the point of entry using
predetermined underwriting, pricing and coverage guidelines. Our underwriters oversee the
underwriting process by having access to the system as the agents enter information and approve
quotes. In selected circumstances, the system receives and approves online quotes with minimal
underwriter intervention, based on predetermined underwriting criteria. Data used to underwrite
risk and to handle claims is controlled by us rather than controlled by agents, third party
administrators or other intermediaries.
We monitor rate adequacy and review program performance.
We develop estimated rate minimums,
which are designed to help achieve profitable results and are based on our audits which focus on
rate adequacy, line of business analysis and authority and compliance guidelines. Quarterly
program reviews are conducted where variance to both profit and production of each partner agent is
analyzed. We generate a series of reports that evaluate data associated with essential variables,
and measures production, rate adequacy, loss analysis, adherence to guidelines, claims activity and
trends. Actions are developed and implemented to address any negative variances.
Claims Control
Claims control is a critical factor in driving company performance. We view claims control as
one of our core areas of expertise. We believe that assigning integrated teams in the claims,
underwriting and actuarial areas to specific customer groups produces the best results. By doing
this, our claim handlers become familiar with the
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uniqueness of customers and their businesses. This approach encourages more insightful
investigations, enhanced legal defenses and more efficient claims resolution. Also, we believe
that improved communications between claims, underwriting and actuarial teams enhance risk
selection, timely revision of underwriting criteria and program stability.
To improve our customer service, better manage our claims and control our costs, we have
opened two claims offices, one in the Midwest operating out of Chicago, Illinois and the other in
the South operating out of Irving, Texas. A third claim office is scheduled to open in the second
quarter of 2009 in Florida. We expect to open additional claims offices in other regions as
business volume warrants.
Information Technology
We utilize an Internet-based technology system that allows our program teams and partner
agents to control underwriting, policy issuance and claims administration. We believe that this
centralized system helps us to reduce high processing costs, eliminate duplication of data and more
effectively analyze data.
Historically, various parties to an insurance contract have stored data relating to the same
transaction in their proprietary systems. As a result, we believe they have been unable to
effectively integrate this information. Our objective is to use a system that provides a
communication link with our partner agents and improves data communication throughout our company.
Investment Philosophy
Our investment philosophy is based on managing underwriting risk, not investment risk. As a
result, our investments are concentrated in highly liquid and highly rated fixed income securities
with, on average, reasonably short durations. We do not invest in equity or preferred securities.
Our portfolio of fixed maturities consists solely of investment grade bonds. We have no
significant concentrations in a particular industry or issuer. Our strategy considers liability
durations and provides for unforeseen cash outflow needs. During the second quarter of 2007 we
stopped purchasing mortgage backed securities that were not guaranteed by the United States
Government. In addition, during 2008, we significantly increased our investment in tax exempt
municipal securities as a result of the fact that we are no longer in
a net operating loss position.
We use an external investment manager with significant assets under management and experience
in insurance company portfolio requirements.
Competition
We compete with a large number of U.S. and non-U.S. insurers, insurance agencies and
intermediaries, and diversified financial services companies, such as Lincoln General Insurance
Company, American International Group, Inc., CNA Financial Corporation, Travelers Companies, Inc.,
Zenith National Insurance Corp., National Interstate Corporation, RLI Corp., Zurich Financial
Services, Liberty Mutual Holding Company, Inc, Navigators Insurance Co., and Swiss Re. Finally,
for our California workers’ compensation business, we face competition from the State Compensation
Insurance Fund.
Our competitive position is based on many factors, including our perceived financial strength,
ratings assigned by independent rating agencies, geographic scope of business, client
relationships, premiums charged, contract terms and conditions, products and services offered
(including the ability to design customized programs), speed of claims payment, reputation,
experience and qualifications of employees, and local presence.
Employees
As of February 23, 2009, we had 131 fulltime employees and four part-time employees. Our
future performance depends significantly on the continued service of our key personnel. Our
employees are not covered by collective bargaining arrangements, and we believe our relationship
with our employees is good.
Ratings
Our financial strength is regularly reviewed by independent rating agencies, who assign a
rating based upon items such as results of operations, capital resources and minimum policyholders’
surplus requirements. We currently have a secure category rating of “B+” from A.M. Best. We have
entered into a fronting arrangement under which policies may be nominally written by a higher rated
insurer to allow our partner agents to produce business in the public entity and non-profit
organization programs. Each policy written using the fronting arrangement will increase our
acquisition costs relating to that policy.
9
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
Insurance Regulation
We develop our business through SUA Insurance Company, our wholly owned subsidiary.
SUA Insurance Company is licensed to conduct insurance business in 45 states and the District of
Columbia.
General.
Our operating subsidiary is subject to extensive regulation throughout the United
States. Although there is limited federal regulation of the insurance business, each state has a
comprehensive system for regulating insurers operating in that state. The laws of the various
states establish supervisory agencies with broad authority to regulate, among other things,
licenses to transact business, premium rates for certain coverages, trade practices, market
conduct, agent licensing, policy forms, underwriting and claims practices, reserve adequacy,
transactions with affiliates and insurer solvency. Many states also regulate investment activities
on the basis of quality, distribution and other quantitative criteria. Further, most states compel
participation in and regulate composition of various shared market mechanisms. States also have
enacted legislation that regulates insurance holding company practices, including acquisitions,
dividends, terms of affiliate transactions and other related matters. Our operating subsidiary is
domiciled in Illinois.
Insurance companies also are affected by a variety of state and federal legislative and
regulatory measures and judicial decisions that define and qualify the risks and benefits for which
insurance is sought and provided. These include redefinitions of risk exposure. In addition,
individual state insurance departments may prevent premium rates for some classes of insureds from
reflecting the level of risk assumed by the insurer for those classes. Such developments may
result in adverse effects on the profitability of various lines of insurance. In some cases, these
adverse effects on profitability can be minimized, when possible, through the re-pricing of
coverages if permitted by applicable regulations, or the limitation or cessation of the affected
business, which may be restricted by state law.
Most states have insurance laws requiring property and casualty rate schedules, policy or
coverage forms and other information to be filed with the state’s regulatory authority. In many
cases, such rates and/or policy forms must be approved prior to use.
Insurance companies are required to file detailed annual reports with the state insurance
regulators in each state in which they do business, and their business and accounts are subject to
examination by such regulators at any time. In addition, these insurance regulators periodically
examine each insurer’s market conduct, financial condition, adherence to statutory accounting
practices, and compliance with applicable laws and insurance department rules and regulations.
Applicable state insurance laws, rather than federal bankruptcy laws, apply to the liquidation
or reorganization of insurance companies.
Insurance Regulation Concerning Change or Acquisition of Control.
The insurance regulatory
codes in our operating subsidiary’s state of domicile contain provisions (subject to certain
variations) to the effect that the acquisition of “control” of a domestic insurer or of any person
that directly or indirectly controls a domestic insurer cannot be consummated without the prior
approval of the insurance commissioner. In general, a presumption of “control” arises from the
direct or indirect ownership, control, possession with the power to vote or possession of proxies
with respect to 10% or more of the voting securities of a domestic insurer or of a person that
controls a domestic insurer. A person seeking to acquire control, directly or indirectly, of a
domestic insurance company or of any person controlling a domestic insurance company generally must
file with the relevant insurance regulatory authority a statement relating to the acquisition of
control containing information required by statute and regulation. A copy of such statement must
be provided to the insurer. In addition, certain state insurance laws contain provisions that
require pre-acquisition notification to state agencies of a change in control of a non-domestic
insurance company admitted in that state. While such pre-acquisition notification statutes do not
authorize the state agency to disapprove the change of control, such statutes do authorize certain
remedies, including the issuance of a cease and desist order with respect to the non-domestic
admitted insurer doing business in the state if certain conditions exist, such as market disruption
or undue market concentration.
Regulation of Dividends and Other Payments from Our Operating Subsidiary.
We are a legal
entity separate and distinct from our subsidiary. As a holding company with no other business
operations, our primary sources of cash to meet our obligations, including principal and interest
payments with respect to indebtedness, come from available dividends and other statutorily
permitted payments, such as tax allocation payments, from our operating subsidiary. Our operating
subsidiary is subject to various state statutory and regulatory restrictions, including regulatory
restrictions imposed as a matter of administrative policy, applicable generally to any insurance
company in its state of domicile, which limit the amount of dividends or distributions an insurance
company may pay to its
10
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
stockholders without prior regulatory approval. The restrictions are generally based on
certain levels or percentages of surplus, investment income and operating income as determined in
accordance with statutory accounting principals, or SAP, which differ from generally accepted
accounting principles in the United States of America, or GAAP. Generally, dividends may be paid
only out of earned surplus. In every case, surplus subsequent to the payment of any dividends must
be reasonable in relation to an insurance company’s outstanding liabilities and must be adequate to
meet its financial needs.
Illinois law states that no dividend or other distribution may be declared or paid at any time
except out of earned surplus, rather than contributed surplus. A dividend or other distribution
may not be paid if the surplus of the domestic insurer is at an amount less than that required by
Illinois law for the kind or kinds of business such insurer is licensed to transact, nor when
payment of a dividend or other distribution by such insurer would reduce its surplus to less than
such amount. A domestic insurer, which is a member of a holding company system, must report to the
insurance director, or the Director, all ordinary dividends or other distributions to stockholders
within five business days following the declaration and no less than 10 business days prior to the
payment thereof.
Illinois law further provides that no domestic insurer, which is a member of a holding company
system, may pay any extraordinary dividend or make any other extraordinary distribution to its
security holders until: (1) 30 days after the Director has received notice of the declaration
thereof and has not within such period disapproved the payment; or (2) the Director approves such
payment within the 30-day period. Illinois law defines an extraordinary dividend or distribution
as “any dividend or distribution of cash or other property whose fair market value, together with
that of other dividends or distributions, made within the period of 12 consecutive months ending on
the date on which the proposed dividend is scheduled for payment or distribution exceeds the
greater of: (a) 10% of the company’s surplus as regards policyholders as of the 31st day of
December next preceding, or (b) the net income of the company for the 12-month period ending the
31st day of December next preceding, but does not include pro rata distributions of any class of
the company’s own securities.”
If insurance regulators determine payment of a dividend or any other payment to an affiliate
(such as a payment under a tax-sharing agreement or a payment for employees or other services)
would, because of the financial condition of the paying insurance company or otherwise, be
hazardous to such insurance company’s policyholders, the regulators may prohibit such payments.
Statutory Surplus and Capital.
In connection with the licensing of insurance companies, an
insurance regulator may limit or prohibit the writing of new business by an insurance company
within its jurisdiction when, in the regulator’s judgment, the insurance company is not maintaining
adequate statutory surplus or capital. We do not currently anticipate any regulator would limit
the amount of new business our operating subsidiary may write.
Risk-Based Capital.
In order to enhance the regulation of insurer solvency, in December 1993
the National Association of Insurance Commissioners, or NAIC, adopted a formula and model law to
implement risk-based capital requirements for property and casualty insurance companies. These
risk-based capital requirements are designed to assess capital adequacy and to raise the level of
protection that statutory surplus provides for policyholder obligations. The risk-based capital
model for property and casualty insurance companies measures three major areas of risk facing
property and casualty insurers:
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underwriting, which encompasses the risk of adverse loss developments and inadequate
pricing;
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declines in asset values arising from credit risk; and
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declines in asset values arising from investment risk.
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Under the approved formula, an insurer’s statutory surplus is compared to its risk-based
capital requirement. If this ratio is above a minimum threshold, no company or regulatory action is
necessary. Below this threshold are four distinct action levels at which a regulator may intervene
with increasing degrees of authority over an insurer as the ratio of surplus to risk-based capital
requirement decreases. The four action levels are:
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insurer is required to submit a plan for corrective action;
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insurer is subject to examination, analysis and specific corrective action;
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regulators may place insurer under regulatory control; and
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regulators are required to place insurer under regulatory control.
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11
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
Accreditation
. The NAIC has instituted its Financial Regulatory Accreditation Standards
Program, or FRASP, in response to federal initiatives to regulate the business of insurance. FRASP
provides a set of standards designed to establish effective state regulation of the financial
condition of insurance companies. Under FRASP, a state must adopt certain laws and regulations,
institute required regulatory practices and procedures, and have adequate personnel and other
resources to enforce these laws and regulations in order to become an “accredited” state.
Accredited states are not able to accept certain financial examination reports of insurers prepared
solely by the regulatory agency in an unaccredited state.
NAIC IRIS Ratios
. In the 1970s, the NAIC developed a set of financial relationships or
“tests” called the Insurance Regulatory Information System, or IRIS, that were designed to
facilitate early identification of companies that may require special attention by insurance
regulatory authorities. Insurance companies submit data on an annual basis to the NAIC, which in
turn analyzes the data utilizing ratios covering 12 categories of financial data with defined
“usual ranges” for each category. An insurance company may fall out of the usual range for one or
more ratios because of specific transactions that are in themselves immaterial or eliminated at the
consolidated level. Generally, an insurance company may become subject to increased scrutiny if it
falls outside the usual ranges on four or more of the ratios.
Investment Regulation
. Our operating subsidiary is subject to state laws and regulations that
require diversification of investment portfolios and that limit the amount of investments in
certain investment categories. Failure to comply with these laws and regulations may cause
non-conforming investments to be treated as non-admitted assets for purposes of measuring statutory
surplus and, in some instances, would require divestiture. As of December 31, 2008, we believe our
investments complied with such laws and regulations.
Guaranty Funds and Assigned Risk Plans
. Most states require all admitted insurance companies
to participate in their respective guaranty funds that cover various claims against insolvent
insurers. Solvent insurers licensed in these states are required to fund the losses paid on behalf
of insolvent insurers by the guaranty funds and generally are subject to annual assessments in the
state by its guaranty fund to fund these losses. Some states also require licensed insurance
companies to participate in assigned risk plans that provide coverage for automobile insurance and
other lines of business for insureds that, for various reasons, cannot otherwise obtain insurance
in the open market. This participation may take the form of reinsuring a portion of a pool of
policies or the direct issuance of policies to insureds. The calculation of an insurer’s
participation in these plans is usually based on the amount of premium for that type of coverage
that was written by the insurer on a voluntary basis in a prior year. Participation in assigned
risk pools tends to produce losses that result in assessments to insurers writing the same lines on
a voluntary basis.
Credit for Reinsurance
. A primary insurer ordinarily will enter into a reinsurance agreement
only if it can obtain credit for the reinsurance ceded on its statutory financial statements. In
general, credit for reinsurance is currently allowed in the following circumstances:
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if the reinsurer is licensed in the state in which the primary insurer is domiciled or,
in some instances, in certain states in which the primary insurer is licensed;
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if the reinsurer is an “accredited” or otherwise approved reinsurer in the state in
which the primary insurer is domiciled or, in some instances, in certain states in which
the primary insurer is licensed;
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in some instances, if the reinsurer (1) is domiciled in a state that is deemed to have
substantially similar credit for reinsurance standards as the state in which the primary
insurer is domiciled and (2) meets financial requirements; or
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if none of the above applies, to the extent that the reinsurance obligations of the
reinsurer are secured appropriately, typically through the posting of a letter of credit
for the benefit of the primary insurer or the deposit of assets into a trust fund
established for the benefit of the primary insurer.
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Statutory Accounting Principles
. Statutory Accounting Principles, or SAP, is a basis of
accounting developed to assist insurance regulators in monitoring and regulating the financial
condition of insurance companies. It is primarily concerned with measuring an insurer’s surplus to
policyholders. Accordingly, statutory accounting focuses on valuing assets and liabilities of
insurers at financial reporting dates in accordance with appropriate insurance law and regulatory
provisions applicable in each insurer’s domiciliary state.
12
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
GAAP is concerned with a company’s net worth, as well as other financial measurements, such as
income and cash flows. Accordingly, GAAP gives more consideration to appropriate matching of
revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a
direct result, different assets and liabilities and different amounts of assets and liabilities
will be reflected in financial statements prepared in accordance with GAAP as opposed to SAP.
Statutory accounting practices established by the NAIC and substantially adopted by state
insurance departments will determine, among other things, the amount of our statutory surplus and
statutory net income, which will affect, in part, the amount of funds our operating subsidiary has
available to pay dividends to us.
Federal Regulation
. Although state regulation is the dominant form of regulation for
insurance and reinsurance business, the federal government has shown increasing concern over the
adequacy of state regulation. It is not possible to predict the future impact of any potential
federal regulations or other possible laws or regulations on our capital and operations, and the
enactment of such laws or the adoption of such regulations could materially adversely affect our
business.
The Gramm Leach Bliley Act, or GLBA, which made fundamental changes in the regulation of the
financial services industry in the United States, was enacted on November 12, 1999. The GLBA
permits the transformation of the already converging banking, insurance and securities industries
by permitting mergers that combine commercial banks, insurers and securities firms under one
holding company, a “financial holding company.” Bank holding companies and other entities that
qualify and elect to be treated as financial holding companies may engage in activities, and
acquire companies engaged in activities, that are “financial” in nature or “incidental” or
“complementary” to such financial activities. Such financial activities include acting as
principal, agent or broker in the underwriting and sale of life, property, casualty and other forms
of insurance and annuities.
Until the passage of the GLBA, the Glass-Steagall Act of 1933 had limited the ability of banks
to engage in securities-related businesses, and the Bank Holding Company Act of 1956, as amended,
had restricted banks from being affiliated with insurers. With the passage of the GLBA, among
other things, bank holding companies may acquire insurers and insurance holding companies may
acquire banks. The ability of banks to affiliate with insurers may affect our product lines by
substantially increasing the number, size and financial strength of potential competitors.
In response to the tightening of supply in some insurance markets resulting from, among other
things, the terrorist attacks of September 11, 2001, The Terrorism Risk Insurance Act of 2002, or
TRIA, was enacted to ensure the availability of insurance coverage for terrorist acts in the United
States. Although TRIA originally contained a sunset provision expiring December 31, 2005, the
Terrorism Risk Insurance Extension Act of 2005, or Extension Act, was enacted extending TRIA for
two additional years. In 2007, President Bush signed the Terrorism Risk Insurance Program
Reauthorization Act of 2007, or TRIPRA, which extends the federal terrorism insurance program for
an additional seven years. These laws establish a federal assistance program to help the
commercial property and casualty insurance industry cover claims related to certified acts of
terrorism, regulate the terms of insurance relating to terrorism coverage and require some
commercial property and casualty insurers to make available to their policyholders terrorism
insurance coverage for certified acts of terrorism at the same limits and terms as is available for
other coverages. Exclusions or sub-limit coverage for certified acts of terrorism may be
established, but solely at the discretion of the insured.
A certified act of terrorism is defined by TRIPRA as an act of terrorism resulting in
aggregate losses greater than $100 million. An act of terrorism is a loss that is violent or
dangerous to human life, property or infrastructure, resulting in damage within the United State or
its territories and possessions, or outside the United States in the case of a United States
flagged vessel, air carrier or mission, committed by an individual or individuals in an effort to
coerce the United States civilian population or influence the policy of or affect the United States
government’s conduct by coercion. We are currently unable to predict the extent to which TRIPRA
may affect the demand for our products or the risks that may be available for us to consider
underwriting.
Legislative and Regulatory Proposals
. From time to time, various regulatory and legislative
changes have been proposed in the insurance and reinsurance industry. These proposals have
included the possible introduction of federal regulation in addition to, or in lieu of, the current
system of state regulation of insurers. We are unable to predict whether any of these or other
proposed laws and regulations will be adopted, the form in which any such laws and regulations
would be adopted, or the effect, if any, these developments would have on our operations and
financial condition.
13
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
Executive Officers of the Registrant
Our executive officers are as follows:
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Name
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Age
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Position
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Courtney C. Smith
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61
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President, Chief Executive Officer and Chairman of the Board of Directors
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Peter E. Jokiel
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Executive Vice President, Chief Financial Officer, Treasurer and Director
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Daniel A. Cacchione
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60
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Senior Vice President and Chief Underwriting Officer
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Barry G. Cordeiro
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Senior Vice President and Chief Information Officer
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Gary J. Ferguson
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Senior Vice President and Chief Claims Officer
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Scott W. Goodreau
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Senior Vice President, General Counsel, Administration and Corporate
Relations and Secretary
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Scott K. Charbonneau
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Vice President and Chief Actuary
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Daniel J. Rohan
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Vice President and Controller
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Courtney C. Smith.
Chief Executive Officer, President and Chairman of the Board of Directors.
Mr. Smith has served as President, Chief Executive Officer and a Director since the company’s
inception. He was appointed as the Chairman of our board in May 2004. Mr. Smith has over 30 years
of experience in the property and casualty insurance industry. Prior to joining us, from April
1999 to April 2002, Mr. Smith served as Chief Executive Officer and President of TIG Specialty
Insurance, or TIG, a leading specialty insurance underwriter.
Peter E. Jokiel.
Executive Vice President, Chief Financial Officer, Treasurer and Director.
Mr. Jokiel has served as Chief Financial Officer, Treasurer and a Director since the company’s
inception. He was appointed as an Executive Vice President in June 2004. Mr. Jokiel has over
30 years experience in the insurance industry. From April 1997 to January 2001, Mr. Jokiel was
President and Chief Executive Officer of CNA Financial Corporation’s life operations.
Daniel A. Cacchione.
Senior Vice President and Chief Underwriting Officer. Mr. Cacchione has
served as a Vice President and our Chief Underwriting Officer since December 2007 and was appointed
as a Senior Vice President in January of 2009. Mr. Cacchione has been a program director with SUA
since the company’s inception and has been responsible for managing the underwriting relationship
with Risk Transfer Holdings, Inc. and Specialty Risk Solutions, LLC. He has over 20 years of
experience in the property and casualty insurance industry with particular expertise in the
specialty area. From 2001 to 2003, Mr. Cacchione served as Vice President of Marketing for Kemper
Insurance, Middle Markets Group and prior to that, he has also held several leadership positions at
CNA Financial Corporation, most recently as a Senior Vice President in charge of its Commercial
Affiliation Marketing (CAM) programs which focus on specialty business.
Barry G. Cordeiro.
Senior Vice President and Chief Information Officer. Mr. Cordeiro has
served as a Vice President and Chief Information Officer since July 2005 and was appointed as a
Senior Vice President in February 2007. Mr. Cordeiro has over 20 years of experience in
programming, developing and managing software and hardware for various businesses, including
significant experience in the insurance industry. From 2003 to 2005, Mr. Cordeiro served as
President of Chicago Financial Technology, a global technology consulting and integration company.
From 1999 to 2001, Mr. Cordeiro served as Chief Information Officer and EVP of the eBusiness group
of CNA Insurance.
Gary J. Ferguson.
Senior Vice President and Chief Claims Officer. Mr. Ferguson has served as
a Senior Vice President and Chief Claims Officer since the company’s inception. Mr. Ferguson has
over 30 years of experience in the insurance industry. From February 2002 to July 2003,
Mr. Ferguson was managing director responsible for claims functions at TIG. From December 1997 to
October 2001, Mr. Ferguson served as Senior Vice President for Zenith Insurance Company.
Scott W. Goodreau.
Senior Vice President, General Counsel, Administration & Corporate
Relations and Secretary. Mr. Goodreau has served as a Vice President and General Counsel and has
led the company’s Administration & Corporate Relations functions since the company’s inception. He
was appointed as a Senior Vice
14
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
President in February 2007. Prior to joining the company, Mr. Goodreau worked as Vice
President & General Counsel for AscendantOne, Inc., a business unit of Insurance Services Office,
Inc. in the insurance technology field. Mr. Goodreau also worked as Executive Vice President and
General Counsel of a real estate development company and as an associate at Cahill Gordon & Reindel
in its corporate department. Mr. Goodreau received his JD from Harvard Law School and his MBA from
the Kellogg School of Management of Northwestern University.
Scott K. Charbonneau.
Vice President and Chief Actuary. Mr. Charbonneau has served as a Vice
President and Chief Actuary since January 2005. Mr. Charbonneau has over 20 years of experience in
the insurance industry, most recently serving as Vice President and Chief Reserving Officer for
Kemper Insurance Companies from 2001 to 2004. Mr. Charbonneau also served as Chief Actuary and
held other various offices at Interstate Insurance Company from 1993 to 2001.
Daniel J. Rohan
. Vice President and Controller. Mr. Rohan has served as a Vice President and
Controller since the company’s inception and became an executive officer in November 2006. Mr.
Rohan has over 25 years of experience in accounting. Prior to joining the company, Mr. Rohan
served as Controller for Statewide Insurance Company. From 1994 to 2002, Mr. Rohan served as
Assistant Vice President of Insurance Reporting of CNA Financial Corporation.
Item 1A.
Risk Factors
We believe the following risk factors, as well as the other information contained in this
Annual Report on
Form 10-K
, are material to an understanding of our company. Any of the following
risks as well as other risks and uncertainties discussed in this Annual Report on
Form 10-K
could
have a material adverse effect on our business, financial condition, results of operations or
prospects and cause the value of our stock to decline. Additional risks and uncertainties that we
are unaware of, or that are currently deemed immaterial, also may become important factors that
affect us.
We rely on a limited number of partner agents, one of which accounts for a substantial portion of
business. Our failure to recruit and retain partner agents could materially adversely affect our
results. Our transition of our partner agents’ business may significantly delay our ability to
generate revenue.
We have only nine partner agents. We hope to enter into additional partner agent
relationships in the future. Our ability to recruit and retain partner agents may be negatively
impacted by certain aspects of our business model, including our requirement that partner agents
defer and make contingent a portion of their agency commissions and purchase, or commit to
purchase, shares of our Class B Shares. Our ability to add new partner agents may be limited by our
level of capital. In addition, several partner agents make up a significant portion of our written
premiums. A lack of premium production from any one these partner agent may adversely affect our
business. Similarly, a reliance on any one partner agent to produce premium may adversely affect
our business. For the year ended December 31, 2008, our partner agent Risk Transfer Holdings,
Inc., or RTH, produced approximately 44.7% of our total gross written premiums. Any deterioration
of our relationship with RTH or decrease in RTH’s premium production could materially adversely
affect our results in future periods.
Our business is heavily concentrated in California and Florida. If our premiums are reduced in
these states in the future, it could have a material adverse effect on our business.
We currently write approximately 63.2% of our business in California and Florida. We may be
unable to write in these states in the future due to regulatory prohibitions such as disapproval of
policy forms and premium rates, inability to meet solvency standards or revocation of our licenses.
We may also face competition that reduces our premiums in these states. A reduction in our
premium volume in these states could have a material adverse effect on our business.
We face competition from companies with greater financial resources, broader product lines, higher
ratings and stronger financial performance than us, which may impair our ability to retain existing
customers and maintain our profitability and financial strength.
We compete with a large number of U.S. and non-U.S. insurers, insurance agencies and
intermediaries, and diversified financial services companies such as Lincoln General Insurance
Company, American International Group, Inc., CNA Financial Corporation, Travelers Companies, Inc.,
Zenith National Insurance Corp., National Interstate Corporation, RLI Corp., Zurich Financial
Services, Liberty Mutual Holding Company, Inc, Navigators Insurance Co., and Swiss Re. Other newly
formed and existing insurance companies also may be preparing to enter
15
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
the same market segments in which we compete or raise new capital. Since we have limited
operating history, our competitors have greater name and brand recognition than we have. Many of
them also have greater financial strength and ratings assigned by independent ratings agencies and
more (in some cases substantially more) capital and greater marketing and management resources than
we have and may offer a broader range of products and more competitive pricing than we offer.
Our competitive position is based on many factors, including our perceived financial strength,
market conditions overall and in the property and casualty insurance business, ratings assigned by
independent rating agencies, geographic scope of business, client relationships, premiums charged,
contract terms and conditions, products and services offered (including the ability to design
customized programs), speed of claims payment, reputation, experience and qualifications of
employees and local presence. We choose types and lines of businesses (such as tow trucks and
workers’ compensation) that do not require “A” level A.M. Best ratings or that can utilize the
fronting relationships that we have established (such as public
entities). As insurance capacity
grows either as a result of limited loss events or new competitors entering the market, insurance
companies may either begin or increase writing premiums in the specialty insurance markets thereby
increasing competition for, and downward pricing pressure on, our products. We work with a limited
number of partner agents, which enable us to provide them with customized approaches to their
business and give them long-term (five years) exclusive arrangements. Our systems capability is
designed for this type of business, which enables us to change and adapt quicker to changes in the
marketplace. Since we are a relatively new company, we may not be able to compete successfully on
many, or any, of these bases. If competition limits our ability to write new business at adequate
rates, our return on capital may be adversely affected.
In addition, a number of new, proposed or potential legislative or industry developments could
further increase competition in our industry. In certain states, state-sponsored entities provide
property insurance in catastrophe-prone areas or other “alternative markets” types of coverage.
Furthermore, the growth of services offered over the Internet may lead to greater competition in
the insurance business. New competition from these developments could cause the supply and/or
demand for insurance to change, which could adversely affect our underwriting results.
Our secure category rating of “B+” (Good) from A.M. Best may place us at a competitive disadvantage
or cause us to incur additional expenses. A future downgrade in our ratings could affect our
competitive position with customers, and our rating may put us at a disadvantage with higher-rated
carriers.
Competition in the types of insurance business that we underwrite is based on many factors,
including the perceived financial strength of the insurer and ratings assigned by independent
rating agencies. A.M. Best is generally considered to be a significant rating agency with respect
to the evaluation of insurance companies. A.M. Best’s ratings are based on a quantitative
evaluation of a company’s performance with respect to profitability, leverage and liquidity and a
qualitative evaluation of spread of risk, investments, reinsurance programs, reserves and
management. Insurance ratings are used by customers, reinsurers and reinsurance intermediaries as
an important means of assessing the financial strength and quality of insurers.
Our secure category rating of “B+” (Good) from A.M. Best is the sixth highest of 15 rating
levels and indicates A.M. Best’s opinion of our financial strength and ability to meet ongoing
obligations to our policyholders. The rating is not a recommendation to buy, sell or hold our
securities. We cannot assure you that we will be able to maintain this rating. If we experience a
ratings downgrade, we may experience a substantial loss of business as policyholders might purchase
insurance from companies with higher claims-paying and financial strength ratings instead of from
us.
Certain financial institutions and banks require property owners with loans to be insured by
insurers with at least an “A–” rating by A.M. Best. Certain other insureds choose to insure their
own property and casualty risks only with such higher-rated insurers. Also, due to financial
responsibility laws, some states and the federal government require certain regulated entities to
purchase mandatory insurance from insurers holding a minimum of “A–” rating by A.M. Best. Some
agents may be unwilling or unable to write certain lines of business such as property, long-tail
liability lines and automobile liability with insurers that are not rated at least “A–” by A.M.
Best. Although we have entered into a fronting arrangement under which policies may be nominally
written by a higher rated insurer to allow our partner agents to produce business in the public
entity and non-profit organization programs, there can be no assurances that this arrangement will
continue to be available at a reasonable price or acceptable to independent agents, and each policy
written using the fronting arrangement will increase our acquisition costs relating to that policy.
If we are not able to continue this fronting arrangement, we may lose access to certain types of
customers.
16
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
We may misevaluate the risks we seek to insure. If we misevaluate these risks, our business,
reputation, financial condition and results of operations could be materially and adversely
affected.
We were formed to provide commercial lines insurance to specialty program markets through our
operating subsidiary. The market for commercial lines insurance to specialty programs differs
significantly from the standard market. In the standard market, insurance rates and forms are
highly regulated, products and coverages are largely uniform and have relatively predictable
exposures and companies tend to compete for customers on the basis of price. In contrast, the
specialty market provides coverage for risks that do not fit the underwriting criteria of most
standard carriers. Our success depends on the ability of our underwriters to accurately assess the
risks associated with the businesses that we insure. Underwriting for specialty program lines
requires us to make assumptions about matters that are inherently unpredictable and beyond our
control, and for which historical experience and probability analysis may not provide sufficient
guidance. Such matters include, but are not limited to the effects of future inflation on our
claim trends, future law changes in jurisdictions where we do business, judicial interpretations
regarding policy coverage, the predictability and frequency of catastrophic events, and medical
protocol changes. If we fail to adequately evaluate the risks to be insured, our business,
financial condition and results of operations could be materially and adversely affected, since our
claims experience could be significantly different than what we assumed in our pricing, resulting
in reduced underwriting profits or underwriting losses.
Our actual insured losses may be greater than our loss reserves, which would negatively impact our
financial condition and results of operation.
Our success depends upon our ability to assess accurately the risks associated with the
businesses that we insure. Significant periods of time often elapse between the occurrence of an
insured loss, the reporting of the loss to an insurer and payment by the insurer of that loss. As
we write insurance business and recognize liabilities for unpaid losses, we establish reserves as
balance sheet liabilities. These reserves represent estimates of amounts needed to pay reported
losses and unreported losses and the related loss adjustment expense. Loss reserves are only an
estimate of what an insurer anticipates the ultimate costs of claims to be and do not represent an
exact calculation of liability. Estimating loss reserves is a difficult and complex process
involving many variables and subjective judgments, particularly for new companies, such as ours,
that have limited loss development experience. As part of our reserving process, we review
historical data as well as actuarial and statistical projections and consider the impact of various
factors such as:
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trends in claim frequency and severity;
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changes in operations;
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emerging economic and social trends;
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inflation; and
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changes in the regulatory and litigation environments.
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This process assumes that past experience, adjusted for the effects of current developments
and anticipated trends, is an appropriate basis for predicting future events. There is no precise
method, however, for evaluating the impact of any specific factor on the adequacy of reserves, and
actual results are likely to differ from original estimates. In addition, unforeseen losses, the
type or magnitude of which we cannot predict, may emerge in the future. To the extent our loss
reserves are insufficient to cover actual losses or loss adjustment expenses, we will have to add
to these loss reserves and incur a charge to our earnings, which could have a material adverse
effect on our financial condition, results of underwriting and cash flows.
We may require additional capital in the future, which may not be available on favorable terms or
at all.
We expect that our future capital requirements will depend on many factors, including our
ability to write new business successfully and to establish premium rates and reserves at levels
sufficient to cover our losses. Maintaining adequate capital consistent with business objectives
and regulatory requirements is critical to any insurer’s future. We believe that our current level
of capital is sufficient, but may need to be augmented to further expand our business strategy,
enter new business lines, and manage our expected growth or to deal with higher than expected
expenses or poorer than expected results. Any equity or debt financing, if available at all, may
be on terms that are not favorable to us. If we are able to raise capital through equity
financings, our common stockholder’s interest in our company could be diluted, and the securities
we issue may have rights, preferences and
17
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
privileges that are senior to those of our current common stockholders. If we cannot obtain
additional adequate capital, our business, financial condition and results of operations could be
adversely affected.
Current difficult conditions in the global financial markets and the economy generally may
materially adversely affect our business and results of operations.
Our results of operations are materially affected by conditions in the global financial
markets and the economy generally. The stress experienced by global financial markets that began
in the second half of 2007 continued and substantially increased during 2008. The volatility and
disruption in the global financial markets have reached unprecedented levels. The availability and
cost of credit has been materially affected. These factors, combined with volatile oil prices,
depressed home prices and increasing foreclosures, falling equity market values, declining business
and consumer confidence and the risks of increased inflation and unemployment, have precipitated an
economic slowdown and fears of a severe recession.
The global fixed-income markets are experiencing a period of both extreme volatility and
limited market liquidity conditions, which has affected a broad range of asset classes and sectors.
As a result, the market for fixed income instruments has experienced decreased liquidity,
increased price volatility, credit downgrade events and increased probability of default. These
events and the continuing market upheavals have had, and may continue to have, an adverse effect on
us. Our revenues could decline in such circumstances, the cost of meeting our obligations to our
customers may increase, and our profit margins could erode. In addition, in the event of a
prolonged economic downturn, we could incur significant losses in our investment portfolio.
The demand for our insurance products could be adversely affected in an economic downturn.
Our policyholders may choose to defer or stop paying insurance premiums. We cannot predict whether
or when such actions may occur, or what impact, if any, such actions could have on our business,
results of operations, cash flows and financial condition.
If we are unable to obtain regulatory approval in a timely manner, our ability to generate revenue
could be delayed.
We must successfully receive approval of our rates and forms in order to issue policies in
certain jurisdictions. A delay in our ability to receive timely approval could lead to a
significant delay in our ability to generate revenues.
The availability of reinsurance that we use to limit our exposure to risks may be limited, and
counterparty credit and other risks associated with our reinsurance arrangements may result in
losses that could adversely affect our financial condition and results of operations.
To limit our risk of loss, we purchase reinsurance. The availability and cost of reinsurance
protection is subject to market conditions, which are beyond our control. We cannot assure you
that we will be able to obtain, or in the future renew, adequate protection at cost-effective
levels. For our workers’ compensation business, our reinsurers are responsible for losses between
$1 million and $10 million due to any single occurrence under a policy and for losses in excess of
$10 million up to $35 million for a multiple loss occurrence. For our non-workers’ compensation
casualty business, we do not write policies above $1 million and therefore do not need reinsurance
protection for single loss occurrences. For this business, our reinsurers are responsible between
$1 million and $5 million of losses for a multiple loss occurrence.
As a result of market conditions and other factors, we may not be able to successfully
mitigate our exposure to loss by purchasing reinsurance to the extent we would desire. Further, we
are subject to credit risk with respect to our reinsurance arrangements because the ceding of risk
to reinsurers does not relieve us of our liability to the clients or companies we insure. Our
failure to establish adequate reinsurance arrangements or the failure of our reinsurance
arrangements to protect us from overly concentrated risk exposure could adversely affect our
business, financial condition and results of operations.
The occurrence of severe catastrophic events may have a material adverse effect on us.
We underwrite property and casualty insurance which covers catastrophic events. Therefore, we
have large aggregate exposures to natural and man-made disasters, such as hurricane, typhoon,
windstorm, flood, earthquake, acts of war, acts of terrorism and political instability. We expect
that our loss experience generally will include infrequent events of great severity. Although we
may attempt to exclude losses from terrorism and other similar risks from some coverages we write,
we may not be successful in doing so. The risks associated with natural and man-made disasters are
inherently unpredictable, and it is difficult to predict the timing of such events with
18
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
statistical certainty or estimate the amount of loss any given occurrence will generate. The
extent of losses from a catastrophe is a function of both the total amount of insured exposure in
the area affected by the event and the severity of the event. While we attempt to limit our net
exposure in any area and to any one catastrophe, we may not be able to do so. Therefore, the
occurrence of losses from catastrophic events could have a material adverse effect on our results
of operations and financial condition. These losses could adversely affect our net worth and reduce
our stockholders’ equity and statutory surplus of our operating subsidiary (which is the amount
remaining after all liabilities, including loss reserves, are subtracted from all admitted assets,
as determined under statutory accounting principles, or SAP). A decrease in statutory surplus would
adversely affect our operating subsidiary’s ability to write new business. Increases in the values
and geographic concentrations of insured property and the effects of inflation have resulted in
increased severity of industry losses in recent years and we expect that those factors will
increase the severity of catastrophe losses in the future.
The effects of emerging claim and coverage issues on our business are uncertain.
As industry practices and legal, judicial, social and other environmental conditions change,
unexpected issues related to claims and coverage may emerge with respect to various segments of our
business. These issues may adversely affect our business by either extending coverage beyond our
underwriting intent or by increasing the number or size of claims. In some instances, the effects
of these changes may not become apparent until some time after we have issued insurance contracts
that are affected by the changes. As a result, the full extent of liability under our insurance
contracts may not be known for many years after a contract is issued. An example of this is a
growing trend of plaintiffs targeting property and casualty insurers in purported class action
litigation relating to claims-handling, insurance sales practices and other practices related to
the conduct of business in our industry. The effects of these and other unforeseen emerging claim
and coverage issues are extremely hard to predict and could harm our business, financial condition
and results of operations.
We may be subject to losses if OneBeacon fails to honor its reinsurance obligations to us.
Specialty Underwriters’ Alliance, Inc. acquired Potomac and subsequently renamed the company
SUA Insurance Company. Prior to the acquisition, Potomac entered into a transfer and assumption
agreement with OneBeacon, whereby all of its liabilities, including all direct liabilities under
existing insurance policies, were ceded to and assumed by OneBeacon. The legal requirements to
transfer insurance obligations from one insurer to another, sometimes referred to as a novation,
vary from state to state, generally based on the state in which the policy was issued. In some
states, if certain notifications are made to policyholders and they do not object to the transfer
within certain periods of time, they are deemed to have agreed to the transfer. In other states,
policyholders must consent to the transfer in writing. Additionally, in some states insurance
regulatory approval is required in addition to policyholder consents.
To the extent that the legal requirements for novation have been met with regards to specific
policies, OneBeacon is directly liable to those policyholders for any claims arising from insured
events under those policies, and SUA no longer has any obligation to those policyholders.
Accordingly, SUA has extinguished any recorded liabilities to such policyholders and the related
reinsurance recoverables, so no gain or loss has occurred.
Where a novation has not been achieved, SUA continues to be directly liable to legacy
policyholders for claims arising under their policies, but has reinsurance coverage from OneBeacon
to reimburse SUA for any such claims. Thus, SUA should not experience any gains or losses with
respect to such legacy policies unless OneBeacon fails to honor its reinsurance obligation. In the
event of OneBeacon’s failure to pay, SUA might experience losses that could materially adversely
affect our business and results of operations.
A significant amount of our invested assets may be adversely affected by market volatility and
interest rate changes.
We invest the premiums we receive from customers. Our investment portfolio consists of
highly rated, liquid fixed income securities. The fair market value of these assets and the
investment income from these assets will fluctuate depending on general economic and market
conditions. Because we classify all of our invested assets as available for sale, changes in the
market value of our securities will be reflected in our consolidated balance sheet. In addition,
market fluctuations will affect the value of our investment portfolio and could adversely affect
our liquidity. Our investment results and, therefore, our financial condition may be impacted by
changes in the financial condition of the entities in which we invest, as well as changes in
interest rates, government monetary policies, general economic conditions and overall market
conditions.
19
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
Our investment portfolio contains interest rate-sensitive instruments, such as bonds, which
may be adversely affected by changes in interest rates. Because of the unpredictable nature of
losses that may arise under insurance policies, our liquidity needs are substantial and may
increase at any time. Increases in interest rates during periods when we sell investments to
satisfy liquidity needs may result in losses. Changes in interest rates also could have an adverse
effect on our investment income and results of operations and may expose us to prepayment risks on
certain fixed income investments.
Interest rates are highly sensitive to many factors, including governmental monetary policies,
domestic and international economic and political conditions and other factors beyond our control.
Although we attempt to take measures to manage the risks of investing in a changing interest rate
environment, we may not be able to mitigate interest rate sensitivity effectively. Our mitigation
efforts include maintaining a high quality portfolio with a relatively short duration to reduce the
effect of interest rate changes on book value. Despite our mitigation efforts, a significant
increase in interest rates could have a material adverse effect on our book value.
Our holding company structure and certain regulatory and other constraints affect our ability to
pay dividends and make other payments.
We are a holding company. As a result, we do not have, and do not expect to have, any
significant operations or assets other than our ownership of the shares of our subsidiary.
Dividends and other permitted distributions from our operating subsidiary are our primary source of
funds to pay dividends, if any, to stockholders and to meet ongoing cash requirements, including
debt service payments, if any, and other expenses. The inability of our operating subsidiary to
pay dividends in an amount sufficient to enable us to meet our cash requirements at the holding
company level could have a material adverse effect on our operations.
The ability of our operating subsidiary to pay dividends or make other distributions to
stockholders is subject to statutory and regulatory restrictions under Illinois law, including
restrictions imposed as a matter of administrative policy, which are applicable generally to any
insurance company in its state of domicile that limit such payments or distributions without prior
approval by regulatory authorities.
Illinois law provides that no dividend or other distribution may be declared or paid at any
time except out of earned surplus, rather than contributed surplus. A dividend or other
distribution may not be paid if the surplus of the domestic insurer is at an amount less than that
required by Illinois law for the kind or kinds of business to be transacted by such insurer, or
when payment of a dividend or other distribution by such insurer would reduce its surplus to less
than such amount. Additionally, if insurance regulators determine that payment of a dividend or
any other payments to an affiliate would, because of the financial condition of the paying
insurance company or otherwise, be hazardous to such insurance company’s policyholders, the
regulators may prohibit such payments that would otherwise be permitted without prior approval.
Illinois law provides that a domestic insurer which is a member of a holding company system
may not pay any extraordinary dividend nor make any other extraordinary distribution to its
security holders until 30 days after the director of the Illinois Division of Insurance, or the
Director, has received notice of the declaration thereof and has not within such period disapproved
the payment unless the Director approves such payment within the 30-day period. Illinois law
defines an extraordinary dividend or distribution as “any dividend or distribution of cash or other
property whose fair market value, together with that of other dividends or distributions, made
within the period of 12 consecutive months, ending on the date on which the proposed dividend is
scheduled for payment or distribution, exceeds the greater of: (a) 10% of the company’s surplus as
regards policyholders as of the 31st day of December next preceding, or (b) the net income of the
company for the 12-month period ending the 31st day of December next preceding, but does not
include pro rata distributions of any class of the company’s own securities.”
We are subject to extensive regulation, which may adversely affect our ability to achieve our
business objectives. If we do not comply with these regulations, we may be subject to penalties,
including fines, suspensions and withdrawals of licenses, which may adversely affect our financial
condition and results of operations.
We are subject to extensive governmental regulation and supervision. Most insurance
regulations are designed to protect the interests of policyholders rather than stockholders and
other investors. These regulations, generally administered by a department of insurance in each
jurisdiction in which we do business or expect to do business, relate to, among other things:
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approval of policy forms and premium rates;
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standards of solvency, including risk-based capital measurements;
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20
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
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licensing of insurers and their agents;
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restrictions on the nature, quality and concentration of investments;
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restrictions on the ability of our insurance company subsidiary to pay dividends to us;
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restrictions on transactions between insurance company subsidiaries and their
affiliates;
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restrictions on the size of risks insurable under a single policy;
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requiring certain methods of accounting;
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periodic examinations of our operations and finances;
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prescribing the form and content of records of financial condition required to be
filed; and
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requiring reserves for unearned premium, losses and other purposes.
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For example, our operating subsidiary is subject to minimum capital and surplus requirements
imposed by the laws of the jurisdictions in which it is licensed to transact an insurance business.
As of December 31, 2008, the capital and surplus of our operating subsidiary was approximately
$93.9 million. If our operating subsidiary does not maintain the required minimum capital and
surplus of any jurisdiction in which it is licensed, it could be subject to regulatory action in
such jurisdiction, including, but not limited to, the suspension or revocation of its license to
transact insurance business in such jurisdiction. No jurisdiction in which our operating
subsidiary is licensed has minimum capital and surplus requirements in excess of $35 million for
the lines of insurance for which our operating subsidiary is licensed. Additionally, if our
operating subsidiary does not maintain the required minimum capital and surplus for Illinois, its
state of domicile, (which currently is $2.5 million) it could be placed into receivership in
Illinois. Also, any new minimum capital and surplus requirements adopted in the future may require
us to increase the capital and surplus of our operating subsidiary, which we may not be able to do.
In addition, regulatory authorities have relatively broad discretion to deny or revoke
licenses for various reasons, including the violation of regulations. We base some of our
practices on our interpretations of regulations or practices that we believe are generally followed
by the industry. These practices may turn out to be different from the interpretations of
regulatory authorities. If we do not have the requisite licenses and approvals or do not comply
with applicable regulatory requirements, insurance regulatory authorities could preclude or
temporarily suspend us from carrying on some or all of our activities or otherwise penalize us.
These actions could adversely affect our ability to operate our business. Further, changes in the
level of regulation of the insurance industry or changes in laws or regulations themselves or
interpretations by regulatory authorities could adversely affect our ability to operate our
business.
In recent years, the state insurance regulatory framework in the United States has come under
increased federal scrutiny, and some state legislators have considered or enacted laws that may
alter or increase state authority to regulate insurance companies and insurance holding companies.
Moreover, the National Association of Insurance Commissioners, or NAIC, which is an association of
the senior insurance regulatory officials of all 50 states and the District of Columbia, and state
insurance regulators regularly reexamine existing laws and regulations, interpretations of existing
laws and the development of new laws, which may be more restrictive or may result in higher costs
to us than current statutory requirements.
Provisions in our certificate of incorporation and bylaws and regulations under Delaware law could
prevent or delay transactions that stockholders may favor and entrench current management.
We are incorporated in Delaware. Our certificate of incorporation and bylaws, as well as
Delaware corporate law, contain provisions that could delay or prevent a change of control or
changes in our management that a stockholder might consider favorable, including a provision that
authorizes our board of directors to issue preferred stock with such voting rights, dividend rates,
liquidation, redemption, conversion and other rights as our board of directors may fix and without
further stockholder action. The issuance of preferred stock with voting rights could make it more
difficult for a third party to acquire a majority of our outstanding voting stock. This can
frustrate a change in the composition of our board of directors, which could result in entrenchment
of current management. Takeover attempts generally include offering stockholders a premium for
their stock. Therefore, preventing a takeover attempt may cause our stockholders to lose an
opportunity to sell your shares at a premium. If a change of control or change in management is
delayed or prevented, the market price of our common stock could decline.
21
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
Delaware law also prohibits a corporation from engaging in a business combination with any
holder of 15% or more of its capital stock until the holder has held the stock for three years
unless, among other possibilities, the board of directors approves the transaction. This provision
may prevent changes in our management or corporate structure. Also, under applicable Delaware law,
our board of directors is permitted to and may adopt additional anti-takeover measures in the
future.
We completed our initial public offering in November 2004, and we do not have a significant
presence in the Market. You may have difficulty selling your Common Stock because of the limited
trading volume for such shares.
Our Common Stock began trading on the Nasdaq Global Market in November 2004. As a relatively
new public company, there may be less coverage of our Common Stock by securities analysts. In
addition our Common Stock has limited trading volumes. One or both of these factors could result
in price volatility and serve to depress the liquidity and market price of our Common Stock.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
We lease our headquarters in Chicago, Illinois. Our headquarters have approximately
34,000 square feet and our lease expires in 2020. We believe that our facility will support our
future business requirements or that we will be able to lease additional space, if needed, on
reasonable terms.
Item 3.
Legal Proceedings
We are not currently involved in any litigation other than routine litigation arising in the
ordinary course of business and that is either expected to be covered by liability insurance or to
have no material impact on our financial position and results of operations.
Item 4.
Submission of Matters to a Vote of Security Holders
None.
22
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
PART II
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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Common Stock.
Our shares of Common Stock trade on the Nasdaq Global Market under the symbol
“SUAI.” The following table sets forth the high and low sales price of our shares of Common Stock
on the Nasdaq Global Market for the periods presented. Our shares of Common Stock began trading on
the Nasdaq Global Market on November 23, 2004.
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Sales Price
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Period
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High
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Low
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2008
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First Quarter
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$
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5.64
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$
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4.11
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Second Quarter
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$
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5.61
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$
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4.43
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Third Quarter
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$
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5.60
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$
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4.65
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Fourth Quarter
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$
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4.75
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$
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2.26
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2007
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First Quarter
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$
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8.50
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$
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7.12
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Second Quarter
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$
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8.32
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$
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7.62
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Third Quarter
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$
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8.05
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$
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6.78
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Fourth Quarter
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$
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7.17
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$
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5.15
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As of February 26, 2009, there were approximately 1,005 beneficial owners and nine
shareholders of record of our Common Stock and ten shareholders of record of our Class B Shares.
There were no sales of unregistered securities that have not been previously reported on a
Current Report on Form 8-K.
Performance Graph.
The following line graph sets forth for the period of November 23, 2004
through December 31, 2008, a comparison of the percentage change in the cumulative total
stockholder return on the Company’s Common Stock compared to the cumulative total return of the
Standard & Poor’s (“S&P”) 500 Stock Index and the S&P 500 Property & Casualty Insurance Index.
The graph assumes that the shares of the Company’s Common Stock were bought at the price of
$100 per share and that the value of the investment in each of the Company’s Common Stock and the
indices was $100 at the beginning of the period. The graph further assumes the reinvestment of
dividends when paid.
Payment of Dividends.
We never have paid or declared any cash dividends on our Common Stock
and have no plans to do so in the foreseeable future. We currently intend to retain future
earnings to finance the growth and development of our business. Future dividends, if any, will
depend on, among other things, our results of operations, capital requirements, contractual,
regulatory and other restrictions on the payment of dividends by our subsidiary to us, and such
other factors as our board of directors may, in its discretion, consider relevant. For information
regarding restrictions on the payment of dividends by SUA, see the discussion under the heading
“
Item 1.
Business
— Insurance Regulation” in PART I of this annual report.
Repurchases of Common Stock.
The company did not repurchase any of its Common Stock during
the fourth quarter of 2008.
Our equity compensation plan information is included in Item 12, which is incorporated by
reference to the definitive proxy statement to be filed pursuant to Regulation 14A.
23
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
Item 6.
Selected Financial Data
The following table sets forth our selected historical financial information and that of our
predecessor for the periods ended and as of the dates indicated. This information comes from our
consolidated financial statements and those of our predecessor. You should read the following
selected financial information along with the information contained in our financial statements and
related notes and the reports of the independent registered public accounting firm included under
the heading “
Item 8. Financial Statements And Supplementary Data”
in PART II of this
annual report. These historical results are not indicative of results to be expected for any
future period.
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Specialty Underwriters’ Alliance, Inc.
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Predecessor
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Nov. 23 to
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Jan.1 to
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Year Ended December 31,
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Dec. 31
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Nov. 22
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2008
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2007
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2006
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2005
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2004
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2004
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(in thousands, except for per share data)
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Results of operations
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
|
$
|
143,465
|
|
|
$
|
152,469
|
|
|
$
|
110,891
|
|
|
$
|
26,611
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Net investment income
|
|
|
10,837
|
|
|
|
9,553
|
|
|
|
6,087
|
|
|
|
3,558
|
|
|
|
278
|
|
|
|
1,329
|
|
|
Net realized gain/(loss)
|
|
|
(811
|
)
|
|
|
(27
|
)
|
|
|
275
|
|
|
|
(4
|
)
|
|
|
2
|
|
|
|
|
|
|
Total revenues
|
|
|
153,491
|
|
|
|
161,995
|
|
|
|
117,253
|
|
|
|
30,165
|
|
|
|
280
|
|
|
|
1,719
|
|
|
Net income (loss)
|
|
|
7,425
|
|
|
|
12,589
|
|
|
|
8,408
|
|
|
|
(17,996
|
)
|
|
|
(8,155
|
)
|
|
|
650
|
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.48
|
|
|
$
|
0.82
|
|
|
$
|
0.55
|
|
|
$
|
(1.22
|
)
|
|
$
|
(4.59
|
)
|
|
|
|
|
|
Diluted
|
|
$
|
0.47
|
|
|
$
|
0.82
|
|
|
$
|
0.55
|
|
|
$
|
(1.22
|
)
|
|
$
|
(4.59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Underwriters’ Alliance, Inc.
|
|
|
|
|
As of December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(in thousands, except for per share data)
|
|
|
Financial condition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
263,405
|
|
|
$
|
229,387
|
|
|
$
|
164,058
|
|
|
$
|
102,991
|
|
|
$
|
97,835
|
|
|
Total assets
|
|
|
454,737
|
|
|
|
422,534
|
|
|
|
363,297
|
|
|
|
277,163
|
|
|
|
217,231
|
|
|
Total liabilities
|
|
|
318,448
|
|
|
|
291,397
|
|
|
|
249,315
|
|
|
|
176,348
|
|
|
|
98,301
|
|
|
Shareholders’ equity
|
|
|
136,289
|
|
|
|
131,137
|
|
|
|
113,982
|
|
|
|
100,815
|
|
|
|
118,930
|
|
|
Book value data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share
|
|
$
|
8.62
|
|
|
$
|
8.42
|
|
|
$
|
7.42
|
|
|
$
|
6.76
|
|
|
$
|
8.09
|
|
|
Tangible book value per share
|
|
$
|
7.94
|
|
|
$
|
7.73
|
|
|
$
|
6.72
|
|
|
$
|
6.04
|
|
|
$
|
7.36
|
|
24
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
The following tables include our loss development history of loss and loss adjustment expense
reserves for business generated subsequent to our acquisition of Potomac Insurance Company of
Illinois on November 23, 2004. We commenced our operations in 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Underwriters' Alliance Inc. (Successor)
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
1998
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
(in thousands)
|
|
|
LIABILITY FOR UNPAID CLAIMS &
CLAIM ADJUSTMENT EXPENSE:
|
|
|
|
Gross Liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,134
|
|
|
|
69,608
|
|
|
|
121,207
|
|
|
|
161,691
|
|
|
Reinsurance Recoverable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,261
|
|
|
|
9,383
|
|
|
|
13,635
|
|
|
|
26,336
|
|
|
Net Liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,873
|
|
|
|
60,224
|
|
|
|
107,572
|
|
|
|
135,355
|
|
|
Discount (In Net Liability)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
192
|
|
|
|
1,016
|
|
|
|
1,505
|
|
|
|
2,612
|
|
|
Net Liability (Undiscounted)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,065
|
|
|
|
61,240
|
|
|
|
109,077
|
|
|
|
137,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CUMULATIVE PAID AS OF:
|
|
|
|
|
|
|
|
One Year Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,334
|
|
|
|
17,870
|
|
|
|
35,918
|
|
|
|
|
|
|
Two Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,465
|
|
|
|
27,713
|
|
|
|
|
|
|
|
|
|
|
Three Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten Years Later
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RE-ESTIMATED LIABILITY AS OF:
|
|
|
|
End of Year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,065
|
|
|
|
61,240
|
|
|
|
109,076
|
|
|
|
137,967
|
|
|
One Year Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,176
|
|
|
|
58,898
|
|
|
|
107,245
|
|
|
|
|
|
|
Two Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,441
|
|
|
|
54,145
|
|
|
|
|
|
|
|
|
|
|
Three Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten Years Later
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redundancy (Def.)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,338
|
|
|
|
7,095
|
|
|
|
1,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
Redundancy (Def.)
Reported As Of:
|
|
|
|
|
|
|
|
One Year Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
%
|
|
|
4
|
%
|
|
|
2
|
%
|
|
|
|
|
|
Two Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
Three Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Years Later
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten Years Later
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
The following tables include the complete loss development history of the direct gross loss
and loss adjustment expense or LAE reserves of Potomac Insurance Company of Illinois, or Potomac.
Effective January 1, 2004, Potomac entered into a transfer and assumption agreement with its parent
company, OneBeacon, which reinsured all its direct liabilities to OneBeacon. Therefore, effective
January 1, 2004, Potomac had no net liabilities for unpaid Losses and LAE. On November 23, 2004, we
purchased Potomac and subsequently received approval from the Illinois Department of Insurance to
rename the company SUA Insurance Company. SUA Insurance Company remains liable for the Loss and
LAE reserves generated from its predecessor’s (Potomac’s) direct business should OneBeacon be
unable to honor its reinsurance obligation in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor (Potomac)
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
1998
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
Direct Basis (in thousands)
|
|
|
Liability
for Unpaid
Claims & Claim
Adjustment
Expense
|
|
|
160,244
|
|
|
|
235,376
|
|
|
|
297,408
|
|
|
|
255,128
|
|
|
|
176,069
|
|
|
|
140,542
|
|
|
|
96,196
|
|
|
|
86,736
|
|
|
|
71,592
|
|
|
|
63,529
|
|
|
|
53,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CUMULATIVE PAID AS
OF:
|
|
|
|
One Year Later
|
|
|
81,545
|
|
|
|
98,963
|
|
|
|
86,980
|
|
|
|
76,958
|
|
|
|
58,815
|
|
|
|
40,169
|
|
|
|
26,653
|
|
|
|
14,943
|
|
|
|
14,442
|
|
|
|
11,427
|
|
|
|
|
|
|
Two Years Later
|
|
|
128,261
|
|
|
|
163,656
|
|
|
|
170,546
|
|
|
|
134,008
|
|
|
|
98,730
|
|
|
|
66,724
|
|
|
|
41,596
|
|
|
|
29,385
|
|
|
|
25,868
|
|
|
|
|
|
|
|
|
|
|
Three Years Later
|
|
|
163,498
|
|
|
|
220,344
|
|
|
|
227,597
|
|
|
|
172,991
|
|
|
|
125,152
|
|
|
|
81,654
|
|
|
|
56,038
|
|
|
|
40,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Years Later
|
|
|
191,357
|
|
|
|
261,115
|
|
|
|
266,579
|
|
|
|
199,328
|
|
|
|
140,077
|
|
|
|
96,096
|
|
|
|
67,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Years Later
|
|
|
212,314
|
|
|
|
291,524
|
|
|
|
292,916
|
|
|
|
214,222
|
|
|
|
154,489
|
|
|
|
107,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Years Later
|
|
|
224,957
|
|
|
|
311,462
|
|
|
|
307,810
|
|
|
|
228,553
|
|
|
|
165,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Years Later
|
|
|
236,584
|
|
|
|
323,427
|
|
|
|
322,141
|
|
|
|
239,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Years Later
|
|
|
243,202
|
|
|
|
335,085
|
|
|
|
314,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Years Later
|
|
|
249,492
|
|
|
|
345,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten Years Later
|
|
|
256,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RE-ESTIMATED
LIABILITY AS OF:
|
|
|
|
End of Year
|
|
|
160,244
|
|
|
|
235,376
|
|
|
|
297,408
|
|
|
|
255,128
|
|
|
|
176,069
|
|
|
|
140,542
|
|
|
|
96,196
|
|
|
|
86,736
|
|
|
|
71,592
|
|
|
|
63,529
|
|
|
|
53,262
|
|
|
One Year Later
|
|
|
211,516
|
|
|
|
326,426
|
|
|
|
326,203
|
|
|
|
247,629
|
|
|
|
198,858
|
|
|
|
136,237
|
|
|
|
113,389
|
|
|
|
86,535
|
|
|
|
77,971
|
|
|
|
64,689
|
|
|
|
|
|
|
Two Years Later
|
|
|
272,353
|
|
|
|
359,245
|
|
|
|
320,706
|
|
|
|
270,997
|
|
|
|
194,561
|
|
|
|
153,388
|
|
|
|
113,189
|
|
|
|
92,914
|
|
|
|
79,131
|
|
|
|
|
|
|
|
|
|
|
Three Years Later
|
|
|
279,420
|
|
|
|
350,765
|
|
|
|
344,771
|
|
|
|
267,512
|
|
|
|
211,738
|
|
|
|
153,173
|
|
|
|
119,567
|
|
|
|
94,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Years Later
|
|
|
266,482
|
|
|
|
366,736
|
|
|
|
342,982
|
|
|
|
284,706
|
|
|
|
211,459
|
|
|
|
156,561
|
|
|
|
120,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Years Later
|
|
|
273,463
|
|
|
|
371,520
|
|
|
|
358,428
|
|
|
|
284,433
|
|
|
|
217,832
|
|
|
|
160,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Years Later
|
|
|
273,308
|
|
|
|
384,034
|
|
|
|
358,264
|
|
|
|
290,856
|
|
|
|
219,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Years Later
|
|
|
282,360
|
|
|
|
382,001
|
|
|
|
363,621
|
|
|
|
292,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Years Later
|
|
|
276,265
|
|
|
|
387,062
|
|
|
|
366,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Years Later
|
|
|
278,832
|
|
|
|
394,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten Years Later
|
|
|
291,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redundancy (Def.)
|
|
|
(131,092
|
)
|
|
|
(158,631
|
)
|
|
|
(69,398
|
)
|
|
|
(37,347
|
)
|
|
|
(43,152
|
)
|
|
|
(20,240
|
)
|
|
|
(24,531
|
)
|
|
|
(7,337
|
)
|
|
|
(7,539
|
)
|
|
|
(1,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
Redundancy (Def.)
Reported As Of:
|
|
|
|
|
|
|
|
One Year Later
|
|
|
-32
|
%
|
|
|
-39
|
%
|
|
|
-10
|
%
|
|
|
3
|
%
|
|
|
-13
|
%
|
|
|
3
|
%
|
|
|
-18
|
%
|
|
|
0
|
%
|
|
|
-9
|
%
|
|
|
-2
|
%
|
|
|
|
|
|
Two Years Later
|
|
|
-70
|
%
|
|
|
-53
|
%
|
|
|
-8
|
%
|
|
|
-6
|
%
|
|
|
-11
|
%
|
|
|
-9
|
%
|
|
|
-18
|
%
|
|
|
-7
|
%
|
|
|
-11
|
%
|
|
|
|
|
|
|
|
|
|
Three Years Later
|
|
|
-74
|
%
|
|
|
-49
|
%
|
|
|
-16
|
%
|
|
|
-5
|
%
|
|
|
-20
|
%
|
|
|
-9
|
%
|
|
|
-24
|
%
|
|
|
-8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Years Later
|
|
|
-66
|
%
|
|
|
-56
|
%
|
|
|
-15
|
%
|
|
|
-12
|
%
|
|
|
-20
|
%
|
|
|
-14
|
%
|
|
|
-26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Years Later
|
|
|
-71
|
%
|
|
|
-58
|
%
|
|
|
-21
|
%
|
|
|
-11
|
%
|
|
|
-24
|
%
|
|
|
-14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Years Later
|
|
|
-71
|
%
|
|
|
-63
|
%
|
|
|
-20
|
%
|
|
|
-14
|
%
|
|
|
-25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Years Later
|
|
|
-76
|
%
|
|
|
-62
|
%
|
|
|
-22
|
%
|
|
|
-15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Years Later
|
|
|
-72
|
%
|
|
|
-64
|
%
|
|
|
-23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Years Later
|
|
|
-74
|
%
|
|
|
-67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten Years Later
|
|
|
-82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
|
|
|
|
|
Item 7.
|
|
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
|
Specialty Underwriters’ Alliance, Inc.
The following discussion and analysis of financial condition and results of operations should
be read together with “Selected Financial Data” and our financial statements and accompanying notes
appearing elsewhere in this Annual Report. Certain reclassifications have been made to prior
period financial statement line items to enhance the comparability with prior years. This
discussion contains forward-looking statements, based on current expectations and related to future
events and our future financial performance, that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward-looking statements as a
result of many important factors, including those set forth under “Risk Factors,” “Forward-Looking
Statements” and elsewhere in this Annual Report.
Overview
We were formed on April 3, 2003 for the purpose of offering products in the specialty
commercial property and casualty insurance market by using an innovative business model. Specialty
insurance typically serves niche groups of insureds that require highly specialized knowledge of a
business class to achieve underwriting profits. This market has traditionally been underserved by
most standard commercial property and casualty insurers, due to the complex business knowledge and
the investment required to achieve attractive underwriting profits. Competition in this segment is
based primarily on client service, availability of insurance capacity, specialized policy forms,
efficient claims handling and other value-based considerations, rather than just price.
Additionally, in the specialty property and casualty program business, insurance agents often
have underwriting authority, are responsible for handling claims and are paid by up-front
commissions on the amount of premiums written. We believe that this system does not serve the
carriers, the agents or the insureds well. Poor underwriting results have led to underwriting
losses for the carriers, which results in carrier turnover in the specialty program business
thereby creating instability in the niche insurance markets being served. In turn, agents incur
additional costs in searching for, and converting to, new carriers and policyholders experience
uncertainty regarding the placement of their coverage and quality of service from year to year.
Our business model is designed to better serve the specialty property and casualty marketplace
by recognizing the void that exists in these underserved niche markets and the problems that
undisciplined underwriting has created. Our business model emphasizes our relationship with a
select number of partner agents, who have specialized business knowledge in the types of business
classes we underwrite. We rely on these partner agents for industry insights and their
understanding of the specific risks in the niche markets we serve. We bring together that
knowledge with our disciplined underwriting practices and leading-edge technology and systems
capabilities to provide insurance programs and products that are customized to the needs of the
specialty markets that we serve.
Our business model is also designed to realign the interests of carriers, agents and insureds.
Our partner agents are required to enter into agreements with us which provide that in exchange
for marketing and pre-qualifying business for us, our partner agents receive an up-front commission
designed to cover their costs and an underwriting profit-based commission paid over several years.
In addition, each partner agent is required to purchase Class B Shares, which further aligns their
interests with us and that of our shareholders. In return, we provide our partner agents with a
five-year exclusive arrangement (generally allowing partner agents to offer other companies’
products if we decline to offer coverage to a prospective insured) covering a specific class of
business and territory. Further, we have implemented a centralized information system designed to
reduce processing and administrative time. Lastly, we are a stable, dedicated source of specialty
program commercial property and casualty insurance capacity.
Key Operating Measures
In evaluating our business, we focus on the following ratios:
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•
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the net loss and loss adjustment expense ratio,
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•
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the acquisition expense ratio, and
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•
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the other operating expense ratio.
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27
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
The net loss and loss adjustment expense ratio and the acquisition expense ratio are
calculated by dividing the respective expense amounts by net premiums earned. The other operating
expense ratio is calculated by dividing other operating expenses by gross premiums written. Gross
premiums written represents all premiums written by an insurance company during a specified period.
Net premiums written is the difference between gross premiums written and premiums ceded to
reinsurers. Premiums are earned over the terms of the related policies. At the end of each
accounting period, the portions of premiums that are not yet earned are included in unearned
premiums and are realized as revenue in subsequent periods over the remaining terms of the
policies. Our policies have terms of 12 months. Thus, for example, for a policy that is written
on July 1, 2008, one-half of the premiums would be earned in 2008 and the other half would be
earned in 2009. Premiums earned represents the earned portion of our net premiums written.
Results of Operations
The following table summarizes our results of operations for the years ended December 31,
2008, 2007 and 2006, respectively:
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|
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Year Ended December 31,
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% Change
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% Change
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2008
|
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2007
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2006
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’07 to ’08
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’06 to ’07
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(in millions, except for per share data)
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Gross written premiums
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$
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146.2
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$
|
160.4
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$
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153.2
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-8.9
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%
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4.7
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%
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|
Net written premiums
|
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137.3
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|
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|
149.4
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|
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|
142.1
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-8.1
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%
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5.1
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%
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Earned premiums
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143.5
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152.5
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110.9
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-5.9
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%
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37.5
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%
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Net investment income
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10.8
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9.5
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6.1
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13.7
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%
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55.7
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%
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Net realized gain (loss)
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(0.8
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)
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|
-
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|
0.3
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*
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*
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Total revenues
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153.5
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|
162.0
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|
117.3
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-5.2
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%
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|
38.1
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%
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|
|
|
|
|
|
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|
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Net loss and loss adjustment expense
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89.4
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|
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|
90.0
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62.7
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-0.7
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%
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43.5
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%
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Acquisition expenses
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33.0
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|
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36.6
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26.0
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-9.8
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%
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40.8
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%
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Other operating expenses
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23.1
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|
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|
22.6
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19.9
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2.2
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%
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|
|
13.6
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%
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|
|
|
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|
|
|
|
|
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|
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|
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|
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Total expenses
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145.5
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|
149.2
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108.6
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-2.5
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%
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|
37.4
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%
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|
|
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|
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Pre-tax income
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8.0
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12.8
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8.7
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-37.5
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%
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47.1
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%
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Income tax expense
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|
(0.6
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)
|
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|
(0.2
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)
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|
(0.3
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)
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|
200.0
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%
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-33.3
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%
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Net income (loss)
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$
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7.4
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$
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12.6
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$
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8.4
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-41.3
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%
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50.0
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%
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Net income per share
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Basic
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$
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0.48
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$
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0.82
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$
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0.55
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-41.5
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%
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49.1
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%
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Diluted
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|
0.47
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|
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|
0.82
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0.55
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-42.7
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%
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|
49.1
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%
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|
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|
|
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|
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|
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Weighted average shares outstanding
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|
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Basic
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|
15.6
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|
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|
15.4
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|
|
15.2
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|
|
|
1.3
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%
|
|
|
1.3
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%
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|
Diluted
|
|
|
15.8
|
|
|
|
15.4
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|
|
|
15.2
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|
2.6
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%
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|
|
1.3
|
%
|
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|
|
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|
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|
Key operating ratios
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Net loss and loss adjustment expense ratio
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|
|
62.3
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%
|
|
|
59.0
|
%
|
|
|
56.5
|
%
|
|
|
5.6
|
%
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|
|
4.4
|
%
|
|
Ratio of acquisition expense to earned premiums
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|
|
23.0
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%
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|
|
24.0
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%
|
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|
23.4
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%
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|
-4.2
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%
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|
|
2.6
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%
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|
Ratio of all other expenses to gross written
premiums
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|
15.8
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%
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|
|
14.1
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%
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|
|
13.0
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%
|
|
|
12.1
|
%
|
|
|
8.5
|
%
|
* Not meaningful
Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007
Net income for 2008 was $7.4 million, compared to net income of $12.6 million for 2007.
Earnings per share on an undiluted basis for 2008 was $0.48 versus earnings per share of $0.82 for
2007. The decrease in our net income was due to a decrease in our pre-tax income and an increase
in our taxes resulting from the full utilization of tax loss carry forwards which occurred in the
second quarter of 2008. The decrease in our pre-tax income was due to several factors, most
significantly, a decrease in our earned premiums, an other-than-temporary impairment
28
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
on certain of
our investment securities resulting in a $0.8 realized loss, and an increase in our net loss and
loss adjustment expense ratio, which amounts were partially offset by an increase in our investment
income and decrease in our acquisition expense ratio. The decrease in earned premiums was due to
several factors, most significantly, reductions in our workers’ compensation rates in Florida,
increased competition and overall weak economic conditions.
Gross written premiums were $146.2 million for the year ended December 31, 2008 compared to
$160.4 million for the comparable period ended December 31, 2007. The decrease in gross written
premiums is attributable to decreasing premiums in our workers’ compensation and general liability
lines of business. The decrease in gross written premiums was partially offset by the addition of
our eighth and ninth partner agents, First Light Program Managers, Inc. and Northern Star
Management, Inc., during the third quarter of 2007 and first quarter of 2008, respectively, which
both principally produce commercial automobile.
Our written premiums are still concentrated in four of our nine partner agents, though there
was continued diversification in the percentage of premiums written with the top four partner
agents writing 85.8% of our business in 2008 as compared to 94.6% in 2007. We expect to see
additional diversification as our relationship with these new partner agents mature. The breakdown
of gross written premiums by partner agent for the years ended December 31, 2008 and 2007 was as
follows:
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|
2008
|
|
|
2007
|
|
|
|
|
Gross Written
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|
% of Total Gross
|
|
|
Gross Written
|
|
|
% of Total Gross
|
|
|
|
|
Premium
|
|
|
Written Premium
|
|
|
Premium
|
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|
Written Premium
|
|
|
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(in millions)
|
|
|
Risk Transfer Holdings, Inc.
|
|
$
|
65.4
|
|
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|
44.7%
|
|
|
$
|
78.6
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|
|
|
49.0%
|
|
|
American Team Managers
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|
|
23.4
|
|
|
|
16.0%
|
|
|
|
33.5
|
|
|
|
20.9%
|
|
|
AEON Insurance Group, Inc.
|
|
|
19.5
|
|
|
|
13.4%
|
|
|
|
25.7
|
|
|
|
16.0%
|
|
|
Specialty Risk Solutions, LLC
|
|
|
17.1
|
|
|
|
11.7%
|
|
|
|
3.1
|
|
|
|
1.9%
|
|
|
Appalachian Underwriters, Inc.
|
|
|
8.2
|
|
|
|
5.6%
|
|
|
|
13.9
|
|
|
|
8.7%
|
|
|
Northern Star Mnagement
|
|
|
5.6
|
|
|
|
3.8%
|
|
|
|
-
|
|
|
|
-
|
|
|
First Light Program Manager, Inc.
|
|
|
3.2
|
|
|
|
2.2%
|
|
|
|
-
|
|
|
|
-
|
|
|
Insential, Inc
|
|
|
1.2
|
|
|
|
0.8%
|
|
|
|
1.7
|
|
|
|
1.1%
|
|
|
Flying Eagle Insurance Service, Inc
|
|
|
0.7
|
|
|
|
0.5%
|
|
|
|
2.8
|
|
|
|
1.7%
|
|
|
Other
|
|
|
1.9
|
|
|
|
1.3%
|
|
|
|
1.1
|
|
|
|
0.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
146.2
|
|
|
|
100.0%
|
|
|
$
|
160.4
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our gross written premiums for the years ended December 31, 2008 and 2007 by state were as
follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Gross Written
|
|
|
% of Total Gross
|
|
|
Gross Written
|
|
|
% of Total Gross
|
|
|
|
|
Premium
|
|
|
Written Premium
|
|
|
Premium
|
|
|
Written Premium
|
|
|
|
|
(in millions)
|
|
|
California
|
|
$
|
61.9
|
|
|
|
42.3%
|
|
|
$
|
53.9
|
|
|
|
33.6%
|
|
|
Florida
|
|
|
30.5
|
|
|
|
20.9%
|
|
|
|
44.1
|
|
|
|
27.5%
|
|
|
Texas
|
|
|
14.7
|
|
|
|
10.1%
|
|
|
|
16.7
|
|
|
|
10.4%
|
|
|
Other States
|
|
|
39.1
|
|
|
|
26.7%
|
|
|
|
45.7
|
|
|
|
28.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
146.2
|
|
|
|
100.0%
|
|
|
$
|
160.4
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our premiums in 2008 remained concentrated in California, Florida and Texas. The increase in
California premium resulted from an increase in commercial automobile writings, the addition of our
temporary staffing program, and a significant public entity account which increase was offset by a
significant reduction in our contractors program due to the economic downturn affecting the housing
and construction markets. The decrease in Florida premium resulted from a rate decrease in
workers’ compensation of 18.4% in 2008. An additional rate decrease of 18.6% went into effect on
January 1, 2009 which should be partially offset by a 6.4% increase due to go into effect on April
1, 2009 and an expected further increase in January of 2010.
29
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
While more diversified, our business written for the year ended December 31, 2008 was heavily
weighted in workers’ compensation. Our gross written premiums by line of business for the years
ended December 31, 2008 and 2007 were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Gross Written
|
|
|
% of Total Gross
|
|
|
Gross Written
|
|
|
% of Total Gross
|
|
|
|
|
Premium
|
|
|
Written Premium
|
|
|
Premium
|
|
|
Written Premium
|
|
|
|
|
(in millions)
|
|
|
Workers’ compensation
|
|
$
|
80.1
|
|
|
|
54.8%
|
|
|
$
|
92.0
|
|
|
|
57.4%
|
|
|
Commercial automobile
|
|
|
34.5
|
|
|
|
23.6%
|
|
|
|
31.9
|
|
|
|
19.9%
|
|
|
General liability
|
|
|
28.8
|
|
|
|
19.7%
|
|
|
|
32.5
|
|
|
|
20.2%
|
|
|
All Other
|
|
|
2.8
|
|
|
|
1.9%
|
|
|
|
4.0
|
|
|
|
2.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
146.2
|
|
|
|
100.0%
|
|
|
$
|
160.4
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our mix of business by agent, state and line of business was influenced by a large general
liability account we wrote in the third quarter of 2008 in our public entity customer class which
partially offset a continued reduction in our contractors program as a result of fewer construction
projects being started, the rate reduction in workers’ compensation in Florida and changes in the
makeup of our insured’s payrolls resulting in lower exposure bases and therefore less premium.
Earned premiums were $143.5 million for the twelve months ended December 31, 2008 compared to
$152.5 million for the comparable period in 2007.
Net investment income was $10.8 million for 2008 versus $9.5 million for 2007. The increase
in net investment income is due to an increase in our invested assets. Our investment assets
increased from $229.4 million at December 31, 2007 to $263.4 million at December 31, 2008 resulting
from positive operating cash flow.
Acquisition expenses were $33.0 million for the year ended December 31, 2008, compared to
acquisition expenses of $36.6 million for the year ended December 31, 2007. The decrease in our
acquisition expense is the result of a decrease in premiums.
For the year ended December 31, 2008, our net loss and loss adjustment expense ratio was
62.3%, compared to 59.0% for the comparable twelve months in 2007. This increase was driven by
higher loss ratios in our workers’ compensation book of business due primarily to lower rates and
certain large losses in our commercial automobile and workers’ compensation lines, partially offset
by favorable prior year loss development of $1.8 million principally in our general liability
lines. For the year ended December 31, 2007 we experienced favorable prior year loss development
of $2.2 million.
Our net loss and loss adjustment expense ratio by line of business for the years ended
December 31, 2008 and December 31, 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Workers’ compensation
|
|
|
66.4%
|
|
|
|
54.5%
|
|
|
Commercial automobile
|
|
|
80.5%
|
|
|
|
90.9%
|
|
|
General liability
|
|
|
34.6%
|
|
|
|
43.8%
|
|
|
All other
|
|
|
37.9%
|
|
|
|
45.3%
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
62.3%
|
|
|
|
59.0%
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008, other operating expenses were $23.1 million, which
consisted of salaries and benefit costs of $8.5 million, $2.5 million of professional and
consulting fees, $6.6 million of depreciation and amortization, $0.5 million of stock based
compensation expense and $5.0 million of other expenses. Other operating expenses were $22.6
million for the year ended December 31, 2007, which consisted of salaries and benefit costs of $7.0
million, $3.2 million of professional and consulting fees, $5.0 million of depreciation and
amortization expense, $1.1 million of stock based compensation expense and $6.3 million of other
expenses. We remain committed to operating efficiently and increasing staff only as our business
volume requires.
30
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
The increase in salaries and benefit costs in 2008 was offset by a decrease in
professional and consulting services as we continued to bring previously outsourced services
in-house.
Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
In 2007 as compared to 2006, insurance revenues and investment income continued to increase
and, after payment of operating expenses, were sufficient to generate increased operating profits.
In addition, we continued to utilize the benefits of tax losses generated in earlier years.
However, in our lines of business, we faced greater competition, lower rates and reduced exposure
bases which led to lower premium growth.
Net income for the year ended December 31, 2007 was $12.6 million, compared to a net income
for the year ended December 31, 2006 of $8.4 million. Earnings per share for 2007 were $0.82
versus $0.55 for 2006.
Gross written premiums increased 4.7% from $153.2 million for 2006 to $160.4 million for 2007.
The increase in premiums was primarily driven by growth within our existing programs, along with
the addition of one of our new partner agents, Flying Eagle Insurance Service, Inc. and a new
program writing small workers’ compensation with Appalachian Underwriters, Inc.
We continued to increase our number of partner agents. On October 1, 2007 we signed First
Light Program Managers, Inc. as a partner agent, writing commercial general liability, commercial
automobile and physical damage for selected customer classes in the trucking industry in the
southeastern region. We continued to add new programs during 2007, such as temporary staffing with
Risk Transfer Holdings, Inc.
Our written premium was concentrated in four of our eight partner agents, though there was
continued diversification in the percentage of premium written. Premium breakdown by partner agent
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Gross Written
|
|
|
% of Total Gross
|
|
|
Gross Written
|
|
|
% of Total Gross
|
|
|
|
|
Premium
|
|
|
Written Premium
|
|
|
Premium
|
|
|
Written Premium
|
|
|
|
|
(in millions)
|
|
|
Risk Transfer Holdings, Inc.
|
|
$
|
78.6
|
|
|
|
49.0%
|
|
|
$
|
81.4
|
|
|
|
53.1%
|
|
|
American Team Managers
|
|
|
33.5
|
|
|
|
20.9%
|
|
|
|
31.7
|
|
|
|
20.7%
|
|
|
AEON Insurance Group, Inc.
|
|
|
25.7
|
|
|
|
16.0%
|
|
|
|
21.8
|
|
|
|
14.2%
|
|
|
Appalachian Underwriters, Inc.
|
|
|
13.9
|
|
|
|
8.7%
|
|
|
|
14.5
|
|
|
|
9.5%
|
|
|
Specialty Risk Solutions, LLC
|
|
|
3.1
|
|
|
|
1.9%
|
|
|
|
2.0
|
|
|
|
1.3%
|
|
|
Flying Eagle Insurance Service, Inc
|
|
|
2.8
|
|
|
|
1.7%
|
|
|
|
-
|
|
|
|
0.0%
|
|
|
Insential, Inc
|
|
|
1.7
|
|
|
|
1.1%
|
|
|
|
1.5
|
|
|
|
1.0%
|
|
|
First Light Program Manager, Inc.
|
|
|
-
|
|
|
|
0.0%
|
|
|
|
-
|
|
|
|
0.0%
|
|
|
Other
|
|
|
1.1
|
|
|
|
0.7%
|
|
|
|
0.3
|
|
|
|
0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
160.4
|
|
|
|
100.0%
|
|
|
$
|
153.2
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Although more diversified in 2007 than in 2006, our premiums in 2007 remained concentrated in
California, Florida and, to a lesser extent, Texas. Our gross written premiums for 2007 and 2006
by state were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Gross Written
|
|
|
% of Total Gross
|
|
|
Gross Written
|
|
|
% of Total Gross
|
|
|
|
|
Premium
|
|
|
Written Premium
|
|
|
Premium
|
|
|
Written Premium
|
|
|
|
|
(in millions)
|
|
|
California
|
|
$
|
53.9
|
|
|
|
33.6%
|
|
|
$
|
47.4
|
|
|
|
30.9%
|
|
|
Florida
|
|
|
44.1
|
|
|
|
27.5%
|
|
|
|
58.5
|
|
|
|
38.2%
|
|
|
Texas
|
|
|
16.7
|
|
|
|
10.4%
|
|
|
|
12.4
|
|
|
|
8.1%
|
|
|
Other States
|
|
|
45.7
|
|
|
|
28.5%
|
|
|
|
34.9
|
|
|
|
22.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
160.4
|
|
|
|
100.0%
|
|
|
$
|
153.2
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
While more diversified, our business written for the year ended December 31, 2007 was heavily
weighted in workers’ compensation. Our gross written premiums by line of business as a percentage
of total gross written premiums for the years ended December 31, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Gross Written
|
|
|
% of Total Gross
|
|
|
Gross Written
|
|
|
% of Total Gross
|
|
|
|
|
Premium
|
|
|
Written Premium
|
|
|
Premium
|
|
|
Written Premium
|
|
|
|
|
(in millions)
|
|
|
Workers’ compensation
|
|
$
|
92.0
|
|
|
|
57.4%
|
|
|
$
|
89.3
|
|
|
|
58.3%
|
|
|
General liability
|
|
|
32.5
|
|
|
|
20.2%
|
|
|
|
35.8
|
|
|
|
23.4%
|
|
|
Commercial automobile
|
|
|
31.9
|
|
|
|
19.9%
|
|
|
|
25.5
|
|
|
|
16.6%
|
|
|
All Other
|
|
|
4.0
|
|
|
|
2.5%
|
|
|
|
2.6
|
|
|
|
1.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
160.4
|
|
|
|
100.0%
|
|
|
$
|
153.2
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our workers’ compensation business was impacted by rate decreases in Florida and California.
Florida approved a rate decrease recommended by the National Council for Compensation Insurance, or
the NCCI, of 15.7% effective January 1, 2007. We matched the recommended rate decrease in Florida.
The California Insurance Commissioner recommended a 9.5% decrease in advisory pure premium rates
on new and renewal policies effective on or after January 1, 2007. On May 29, 2007, the California
Insurance Commissioner recommended a 14.2% decrease in rates effective July 1, 2007.
Earned premiums grew 37.5% to $152.5 million for 2007 compared to $110.9 million for 2006.
The increase in earned premium was primarily attributable to increased premium writings in 2006,
continuing into the first half of 2007.
Net investment income was $9.5 million for 2007 versus $6.1 million for 2006. The increase in
net investment income reflected a significant growth in our cash and invested assets from $164.1
million at December 31, 2006 to $229.4 million at December 31, 2007. The net investment yield for
average invested assets for 2007 and 2006 was 4.6%. There were no realized gains in 2007 and $0.3
million in 2006. The increases in average invested assets primarily related to the cash flow from
operations, including premium growth and favorable underwriting results.
Acquisition expenses were $36.6 million for the year ended December 31, 2007, compared to
acquisition expenses of $26.0 million for the year ended December 31, 2006. The increase in
acquisition expenses was driven primarily by the increase in earned premium as well as partner
agent profit sharing from 2006 to 2007.
Loss and loss adjustment expenses were $90.0 million for the year ended December 31, 2007,
compared to $62.7 million for the year ended December 31, 2006. The increase in loss and loss
adjustment expenses was driven by the increase in earned premium. Our net loss and loss adjustment
expense ratio increased in 2007 compared to 2006 primarily due to an increase in large losses in
our commercial automobile line of business partially offset by improvements in workers’
compensation and general liability in prior years.
Our net loss and loss adjustment expense ratio by line of business for the years ended
December 31, 2007 and December 31, 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Workers’ compensation
|
|
|
54.5%
|
|
|
|
54.6%
|
|
|
General liability
|
|
|
43.8%
|
|
|
|
46.1%
|
|
|
Commercial automobile
|
|
|
90.9%
|
|
|
|
78.0%
|
|
|
All other
|
|
|
45.3%
|
|
|
|
78.2%
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
59.0%
|
|
|
|
56.5%
|
|
|
|
|
|
|
|
|
|
Other operating expenses were $22.6 million for the year ended December 31, 2007, which
consisted of salaries and benefit costs of $7.0 million, $3.2 million of professional and
consulting fees, $5.0 million of depreciation and amortization expense, $1.1 million of stock based
compensation expense and $6.3 million of other expenses. For
32
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
the year ended December 31, 2006,
other operating expenses were $19.9 million, which consisted of salaries and benefit costs of $6.1
million, $4.2 million of professional and consulting fees, $2.6 million of depreciation and
amortization, $1.1 million of stock based compensation expense and $5.9 million of other expenses.
We remain committed to operating efficiently and increasing staff only as our business volume
requires. The increase in salaries and benefit costs in 2007 was offset by a decrease in
professional and consulting services as we continued to bring previously outsourced services
in-house.
Our ratio of all other operating expenses to gross written premiums increased in 2007 as
compared to 2006 primarily as a result of slowed growth in written premiums and increased
depreciation expense resulting from information systems being fully deployed. The increase in
depreciation expense was partially offset by a decrease in audit and tax services and stock option
expenses. We have built an infrastructure that should allow for scalability for future premium
growth.
Tax expense of $0.2 million and $0.3 million for the year ended December 31, 2007 and December
31, 2006, respectively, resulted from deferred tax liabilities associated with our acquisition of
Potomac, which have an indefinite life and therefore cannot be offset with deferred tax assets,
which consist primarily of tax loss carryforwards.
Cash Flows
A summary of our cash flows is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(in millions)
|
|
|
Cash provided by
(used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
46.1
|
|
|
$
|
69.6
|
|
|
$
|
60.3
|
|
|
Investing activities
|
|
|
(47.5)
|
|
|
|
(72.3)
|
|
|
|
(66.4)
|
|
|
Financing activities
|
|
|
0.6
|
|
|
|
1.3
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash
|
|
|
(0.8)
|
|
|
|
(1.4)
|
|
|
|
(3.0)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008 net cash from operating activities was $46.1 million,
principally consisting of premium and deposit collections exceeding losses and expenses paid out.
This amount compares to net cash from operating activities of $69.6 million for the year ended
December 31, 2007, which also consisted principally of premium and deposit collections exceeding
losses and expenses paid out. For the year ended December 31, 2006, net cash from operating
activities was $60.3 million, which also consisted principally of premium and deposit collections
exceeding losses and expenses paid out. The decrease in net cash from operating activities from
2007 to 2008 is a result of the maturation of our business combined with a decrease in premium in
2008.
Cash used for investment activities was $47.5, $72.3 and $66.4 million for the years ended
December 31, 2008, 2007 and 2006, respectively, principally representing new purchases of
investments of $40.2, $63.1 and $60.6 million and additions to equipment and capitalized software
of $7.3, $9.2 and $5.8 million, respectively.
We had cash flows from financing activities of $0.6 million resulting from sales of Class B
Shares to our partner agents during the year ended December 31, 2008 partially offset by our
repurchase of 275,000 shares of Common Stock during the second quarter of 2008. We had cash flows
from financing activities of $1.3 million from sales of Class B Shares to our partner agents during
the year ended December 31, 2007. For the year ended December 31, 2006, cash flows from financing
activities from sales of Class B Shares to our partner agents was $3.1 million. The decrease from
2006 to 2007 to 2008 resulted from a substantial number of our partner agents having fulfilled
their contractual obligation to purchase Class B Shares during 2006 and 2007 which was partially
offset by our signing a new partner agent in 2008.
Fixed Maturity Investments
Our investment portfolio consists of marketable fixed maturity and short-term investments. All
fixed maturity investments are classified as available for sale and are reported at their estimated
fair value. Realized gains and losses are credited or charged to income in the period in which
they are realized. Changes in unrealized gains or
losses are reported as a separate component of
comprehensive income, and accumulated unrealized gains or
33
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
losses are reported as a separate
component of accumulated other comprehensive income in stockholders’ equity.
The aggregate fair market value of our fixed maturity investments at December 31, 2008 was
$216.7 million, compared to amortized cost of $220.7 million. The aggregate fair market value of
our fixed maturity investments at December 31, 2007 was $177.7 million compared to amortized cost
of $176.6 million. During 2008 we increased our investment in municipal bonds to $54.9 million
from $4.3 million, at fair value, due to their favorable tax treatment. The average duration of
our fixed maturity investments at December 31, 2008 was approximately 3.66 years.
During the third quarter of 2008, certain of our available-for-sale securities with a fair
value of $0.9 million and a book value of $1.7 million experienced an other-than-temporary
impairment of $0.8 million. For information about our methodology for determining whether a
security has experienced impairment see the discussion under the heading “
Item 8. Financial
Statements
- Note 2 — Summary of significant Accounting Policies” in PART II of this annual
report.
Liquidity and Capital Resources
Liquidity Requirements of Specialty Underwriters’ Alliance, Inc.
We are organized as a
holding company and, as such, have no direct operations of our own. Our assets consist primarily
of investments in our subsidiary, through which we conduct all of our insurance operations. As a
holding company, we have continuing funding needs for general corporate expenses, taxes, the
payment of principal and interest on future borrowings, if any, and the payment of other
obligations as they come due. Funds to meet these obligations come primarily from dividends and
other statutorily permissible payments from our operating subsidiary. The ability of our operating
subsidiary to make payments to us is limited by the applicable laws and regulations of Illinois
which limit and restrict the payment of dividends to us by our insurance subsidiary.
Liquidity.
SUA generates liquidity primarily by collecting and investing earned premiums in
advance of paying claims. We believe that SUA maintains sufficient liquidity to pay claims and
operating expenses, as well as meet commitments in the event of unforeseen events such as reserve
deficiencies, inadequate premium rates or reinsurer insolvencies. The principal sources of
liquidity are existing cash and short-term investments. Cash and short-term investments were $46.9
million at December 31, 2008, compared to $52.6 million at December 31, 2007.
The liquidity requirements of SUA relate primarily to the liabilities associated with its
products and its operating costs. Historically, cash flows from earned premiums and investment
income have provided sufficient funds to meet these requirements without requiring the sale of
investments. If our cash flows change from our historical patterns, for example, as a result of a
decrease in earned premiums or an increase in claims paid or operating expenses, we may be required
to sell securities before their maturity, possibly at a loss. SUA generally holds a significant
amount of highly liquid, short-term investments to meet its liquidity needs. Funds received in
excess of SUA’s liquidity requirements are generally invested in additional marketable securities.
The ability of our operating subsidiary to pay dividends or make other distributions to
stockholders is subject to statutory and regulatory restrictions under Illinois law, including
restrictions imposed as a matter of administrative policy, which
are applicable generally to any insurance company in its state of domicile that limit such
payments or distributions without prior approval by regulatory authorities. For information
regarding restrictions on the payment of dividends by SUA, see the discussion under the heading
"
Item 1. Business
- Insurance Regulation” in PART I of this annual report.
Capital Requirements of SUA Insurance Company.
While insurance regulation differs by
location, each jurisdiction requires that minimum levels of capital be maintained in order to write
insurance business. Factors that affect capital requirements generally include premium volume, the
extent and nature of loss and loss adjustment expense reserves, the type and form of insurance
business underwritten and the availability of reinsurance protection from adequately rated
reinsurers on acceptable terms. SUA is required to maintain certain minimum levels of capital and
risk-based capital, the calculation of which includes numerous factors as specified by the
respective insurance regulatory authorities and the related insurance regulations. We have
capitalized our insurance operations in excess of the minimum regulatory requirements so that we
may maintain adequate financial ratings. Our current level of capital is sufficient, but may need
to be augmented to further expand our business strategy or to deal with significantly poorer than
expected results.
34
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
Off Balance Sheet Arrangements
None.
Contractual Obligations
The following table of contractual obligations includes information with respect to our known
contractual obligations as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
1 to 3
|
|
|
3 to 5
|
|
|
More Than
|
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
|
(in thousands)
|
|
|
Operating Lease Obligations
|
|
$
|
8,039
|
|
|
$
|
632
|
|
|
$
|
1,324
|
|
|
$
|
1,404
|
|
|
$
|
4,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub Total
|
|
$
|
8,039
|
|
|
$
|
632
|
|
|
$
|
1,324
|
|
|
$
|
1,404
|
|
|
$
|
4,679
|
|
|
Loss & Loss Adjustment Expense Reserves —
SUA
Insurance Company
|
|
|
161,691
|
|
|
|
44,312
|
|
|
|
51,630
|
|
|
|
21,569
|
|
|
|
44,180
|
|
|
Loss & Loss Adjustment Expense Reserves —
Potomac
Insurance Company of Illinois
(1)
|
|
|
53,262
|
|
|
|
14,324
|
|
|
|
20,632
|
|
|
|
11,319
|
|
|
|
6,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loss & Loss Adjustment Expense Reserves
|
|
$
|
214,953
|
|
|
$
|
58,636
|
|
|
$
|
72,262
|
|
|
$
|
32,888
|
|
|
$
|
51,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$
|
222,992
|
|
|
$
|
59,268
|
|
|
$
|
73,586
|
|
|
$
|
34,292
|
|
|
$
|
55,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) On November 23, 2004, Specialty Underwriters’ Alliance, Inc. acquired Potomac and
subsequently renamed the company SUA Insurance Company. Prior to the acquisition, Potomac
entered into a transfer and assumption agreement with OneBeacon, whereby all of its liabilities,
including all direct liabilities under existing insurance policies, were ceded to and assumed by
OneBeacon. We will not experience any gains or losses with respect to such legacy policies
unless OneBeacon fails to honor its reinsurance obligation. To date, OneBeacon continues to
handle, adjudicate and pay all claims that have arisen from such legacy policies.
|
For purposes of this table:
“Long-Term Debt Obligation”
means: (i) a payment obligation (included in the Company’s
consolidated financial statements) under long-term borrowings referenced in FASB Statement of
Financial Accounting Standards No. 47, “Disclosure of Long-Term Obligations,” (March 1981), as may
be modified or supplemented, and (ii) interest payment obligations related to such long-term
borrowings.
“Capital Lease Obligation”
means a payment obligation under a lease classified as a capital
lease pursuant to FASB Statement of Financial Accounting Standards No. 13, “Accounting for Leases,”
(November 1976), as may be modified or supplemented.
“Operating Lease Obligation”
means a payment obligation under a lease classified as an
operating lease and disclosed pursuant to FASB Statement of Financial Accounting Standards No. 13,
“Accounting for Leases,” (November 1976), as may be modified or supplemented. All operating lease
obligations are for facilities.
“Purchase Obligation”
means an agreement to purchase goods or services that is enforceable and
legally binding on the registrant that specifies all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing
of the transaction. This table does not include our accounts payable reflected in our audited
consolidated balance sheet data that are included in our consolidated financial statements
contained elsewhere in this report.
“
Loss & Loss Adjustment Expense Reserves
” do not have a contractual maturity date and as
discussed herein are subject to change due to a wide variety of factors and cannot be predicted
with certainty. Actual future loss payments may differ materially from the current estimates shown
in the table above.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations
discusses our financial statements, which have been prepared in accordance with generally accepted
accounting principals in the United States of America, or GAAP. The financial statements presented
herein include all adjustments considered necessary by management to fairly present the financial
position, results of operations and cash flows of the Company. The preparation of financial
statements in conformity with GAAP requires management to make
35
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Management believes that the following critical accounting policies affect our more
significant estimates used in the preparation of our financial statements.
Earned and Unearned Insurance Premiums.
Premiums are recognized as revenue over the coverage
period of policies written on a daily pro rata basis. Certain policies are subject to adjustment
based on changes in exposure units over the period of coverage, such as payroll increases/decreases
and changes in risk classifications and therefore the direct written premiums are estimated during
the policies term until final audit of the policy occurs. Unearned insurance premiums represent
the portion of premiums written relating to the remaining term of each policy.
Acquisition Expenses
. We establish an asset for certain acquisition expenses such as up-front
commissions, premium taxes and other variable costs incurred in connection with writing our lines
of business. These acquisition expenses are deferred and amortized over the period of coverage of
the policies written which is 12 months. Acquisition expenses that do not vary with premium
production are expensed immediately. We assess the recoverability of deferred acquisition expenses
which are limited to the estimated amounts recoverable from future income after providing for
losses and expenses included in future income that are expected to be incurred, based upon
historical and current experience. If such costs are estimated to be unrecoverable, they will be
expensed. Judgments as to ultimate recoverability of such deferred acquisition expenses is highly
dependent on future estimates of loss costs associated with unearned premium. The process of
establishing loss reserves is complex and judgmental, as it must take into consideration many
variables that are subject to the outcome of future events. There have been no historical changes
in the recoverability of our deferred acquisition expenses. We do not believe that any reasonably
likely change in our loss development will affect the recoverability of acquisition expenses. See
the subheading “
Losses, Claims and Settlement Expenses
” below.
At December 31, 2008, acquisition expenses were fully recoverable.
Losses, Claims and Settlement Expenses
. Our most significant estimates relate to our reserves
for property and casualty losses and loss adjustment expenses. We establish reserves for the
estimated total unpaid cost of losses and loss adjustment expenses for events that have already
occurred. These reserves reflect our best estimates of the total cost of claims that were reported
to us, but not yet paid, referred to as case reserves, and the cost of claims “incurred but not yet
reported” to us, referred to as IBNR Reserves.
The estimate of these reserves is subjective and complex and requires us to make estimates
about the future payout of claims, which is inherently uncertain. We establish and adjust reserves
based on our knowledge of the circumstances and facts of claims. Upon notice of a claim, we
establish a case reserve for losses based on the claims information reported to us at that time.
Subsequently, we conduct an investigation of each reported claim, which allows us to more fully
understand the factors contributing to the loss and our potential exposure. This investigation
may extend over a long period of time. As our investigations of claims develop and as our
claims personnel identify trends in claims activity, we refine and adjust our estimates of case
reserves. When we establish reserves, we do so based on our knowledge of the circumstances and
claim facts. We continually review our reserves, and as experience develops and additional
information becomes known, we adjust the reserves. Such adjustments are recorded through
operations in the period identified. To evaluate and refine our overall reserving process, we
track and monitor all claims until they are settled and paid in full and all salvage and
subrogation claims are resolved.
36
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
Loss and LAE reserves, by line of business at December 31, 2008 and 2007 for our insurance
operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
Case
|
|
|
IBNR
|
|
|
Total
|
|
|
Case
|
|
|
IBNR
|
|
|
Total
|
|
|
|
|
(in thousands)
|
|
|
Gross Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers’ compensation
|
|
$
|
46,148
|
|
|
$
|
50,065
|
|
|
$
|
96,213
|
|
|
$
|
25,049
|
|
|
$
|
44,797
|
|
|
$
|
69,846
|
|
|
General liability
|
|
|
8,369
|
|
|
|
25,950
|
|
|
|
34,319
|
|
|
|
6,054
|
|
|
|
20,318
|
|
|
|
26,372
|
|
|
Commercial automobile liability
|
|
|
16,259
|
|
|
|
11,983
|
|
|
|
28,242
|
|
|
|
11,459
|
|
|
|
12,233
|
|
|
|
23,692
|
|
|
Other
|
|
|
1,521
|
|
|
|
1,396
|
|
|
|
2,917
|
|
|
|
676
|
|
|
|
621
|
|
|
|
1,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUA Insurance Company (SUA)
|
|
|
72,297
|
|
|
|
89,394
|
|
|
|
161,691
|
|
|
|
43,238
|
|
|
|
77,969
|
|
|
|
121,207
|
|
|
Potomac Insurance Company of Illinois
(1)
|
|
|
37,164
|
|
|
|
16,098
|
|
|
|
53,262
|
|
|
|
48,187
|
|
|
|
15,342
|
|
|
|
63,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross loss and loss adjustment expense
reserves
|
|
|
109,461
|
|
|
|
105,492
|
|
|
|
214,953
|
|
|
|
91,425
|
|
|
|
93,311
|
|
|
|
184,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUA ceded reinsurance recoverables
|
|
|
12,163
|
|
|
|
14,173
|
|
|
|
26,336
|
|
|
|
417
|
|
|
|
13,218
|
|
|
|
13,635
|
|
|
Potomac Insurance Company of Illinois
(1)
|
|
|
37,164
|
|
|
|
16,098
|
|
|
|
53,262
|
|
|
|
48,187
|
|
|
|
15,342
|
|
|
|
63,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ceded loss and loss adjustment expense
reserves
|
|
|
49,327
|
|
|
|
30,271
|
|
|
|
79,598
|
|
|
|
48,604
|
|
|
|
28,560
|
|
|
|
77,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net loss and loss adjustment expense reserves
|
|
$
|
60,134
|
|
|
$
|
75,221
|
|
|
$
|
135,355
|
|
|
$
|
42,821
|
|
|
$
|
64,751
|
|
|
$
|
107,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) On November 23, 2004, Specialty Underwriters’ Alliance, Inc. acquired Potomac,
and subsequently renamed the company SUA Insurance Company. Prior to the acquisition, Potomac
entered into a transfer and assumption agreement with OneBeacon, whereby all of its liabilities,
including all direct liabilities under existing insurance policies, were ceded to and assumed by
OneBeacon. We will not experience any gains or losses with respect to such legacy policies unless
OneBeacon fails to honor its reinsurance obligation. To date, OneBeacon continues to handle,
adjudicate and pay all claims that have arisen from such legacy policies.
Workers’ compensation
Workers’ compensation is generally considered a long-tail coverage, as it takes a relatively
long period of time to finalize claims from a given accident year even though most claims are
reported early. While certain characteristics, such as initial medical treatment or temporary wage
replacement for the injured worker are known early on, some others are discovered over the course
of several years, such as permanent partial injuries. In addition, some characteristics can run as
long as the injured worker’s life, such as permanent disability benefits and ongoing medical care.
Examples of reserving factors for workers’ compensation include:
|
|
•
|
|
mortality trends of injured workers with lifetime benefits and medical treatment or
dependents entitled to survivor benefits;
|
|
|
|
|
•
|
|
claim handling philosophies;
|
|
|
|
|
•
|
|
state workers’ compensation benefit laws and reform initiatives;
|
|
|
|
|
•
|
|
mix between indemnity and medical-type claims;
|
|
|
|
|
•
|
|
future wage and/or medical inflation; and
|
|
|
|
|
•
|
|
costs of medical treatments, including prescription drugs and underlying fee schedules,
and use of preferred provider networks and other medical cost containment practices.
|
General liability
Our general liability product line is considered a long-tail coverage, as it takes a
relatively long period of time to finalize claims from a given accident year. General liability
reserves are comprised primarily of bodily injury and, to a lesser extent, property damage. Bodily
injury claims arise from physical injury as a result of the policyholder’s legal obligation arising
from non-intentional acts such as negligence, subject to the insurance policy provisions. In some
cases the damages can include future wage loss (which is a function of future earnings power and
wage
37
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
inflation) and future medical treatment. Property damage claims arise from damages to the
claimant’s private property arising from the policyholder’s legal obligation for non-intentional
acts. In most cases, property damage losses are a function of costs as of the loss date, or soon
thereafter.
Examples of reserving factors for general liability include:
|
|
•
|
|
claim handling philosophies;
|
|
|
|
|
•
|
|
policy provisions or court interpretations of such provisions;
|
|
|
|
|
•
|
|
legal environment, such as theories of liability, amount of jury awards, propensity to
sue, statutes of limitations, tort law, and settlement patterns;
|
|
|
|
|
•
|
|
large losses resulting from individual accounts or unique occurrences;
|
|
|
|
|
•
|
|
subrogation potential; and
|
|
|
|
|
•
|
|
cost and type of medical treatments.
|
Commercial automobile liability
The commercial automobile product line is mostly liability coverage which is primarily
long-tail coverage. Claims relating to physical damage to the automobile (property) and property
damage (liability) are easier to estimate and are resolved more quickly. Claims relating to bodily
injury take longer to formalize and are more difficult to estimate.
Examples of reserving factors for commercial automobile liability include:
|
|
•
|
|
claim handling philosophies;
|
|
|
|
|
•
|
|
policy provisions or court interpretations of such provisions;
|
|
|
|
|
•
|
|
legal environment, such as theories of liability, amount of jury awards, propensity to
sue, statutes of limitations, tort law, and settlement patterns;
|
|
|
|
|
•
|
|
large losses resulting from individual accounts or unique occurrences;
|
|
|
|
|
•
|
|
subrogation potential; and
|
|
|
|
|
•
|
|
cost and type of medical treatments.
|
Reserving Methodologies
. Instead of any single method, we use a combination of various
actuarial and analytical methods to estimate the amount of reserves for each line of business on
the basis of historical, statistical and industry information. The primary methods that we utilize
to determine our ultimate losses and loss adjustment expenses include:
Paid loss development methods use historical loss payments over discrete periods of time to
estimate losses. Historical paid loss development methods assume that the ratio of losses paid to
ultimate loss in one period to the ratio of losses paid to ultimate loss in earlier periods will
remain reasonably consistent.
Incurred loss development methods assume that the ratio of losses in one period to losses in
earlier periods will remain reasonably consistent in the future.
Expected loss ratio methods are based on the assumption that ultimate losses vary
proportionately to premiums. Expected loss ratios are typically developed based upon the
information used in pricing, such as certain industry
information and bureau analysis, and are multiplied by the total amount of premiums earned to
calculate ultimate losses.
Bornhuetter-Ferguson paid and incurred loss development methods combine the expected loss
ratio method with the traditional historical paid and incurred loss development methods.
Because we have a limited operating history, and thus have limited historical loss development
data, we rely on methodologies that focus on utilizing industry information and pricing
expectations, such as the Bornhuetter-Ferguson methods and the expected loss ratio methods.
Methods that utilize historical data to project ultimate losses, such as the loss development
methods, are calculated and reviewed but are less relied upon. IBNR reserves represent our best
estimate of ultimate losses after subtracting case incurred loss and loss adjustment expenses.
38
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
Management meets with its actuaries and evaluates the methods and factors previously discussed
affecting each line of business in determining its reserves. Management uses its discretion in
considering these methods and factors without discretely measuring the impact of any factor. We do
not believe that it is reasonably likely that any change or changes in any factor or combination of
factors would result in a material adjustment to our reserves.
The estimation of ceded reinsurance loss and loss adjustment expense reserves will be subject
to the same factors as the estimation of insurance loss and loss adjustment expense reserves.
The following table shows for SUA the recorded reserves and the high and low ends of the range
of reasonable loss and LAE reserve estimates at December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Reserves
|
|
|
|
|
Low
|
|
|
Carried
|
|
|
High
|
|
|
|
|
(in thousands)
|
|
|
Range of Estimates
|
|
|
124,326
|
|
|
|
|
|
|
|
150,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
|
|
|
|
|
|
|
135,355
|
|
|
|
|
|
We determined the range of reserve estimates by reviewing various actuarial methods as well as
testing the possible ultimate losses by applying simulated expected future loss development
patterns. The probability that ultimate losses will fall outside of the ranges of estimates by
line of business is higher for each line of business individually than it is for the sum of the
estimates for all lines taken together. Although we believe our reserves are reasonably stated,
ultimate losses may deviate, perhaps materially, from the recorded reserve amounts and could be
above the high end of the range of actuarial projections. This is because ranges are developed
based on known events as of the valuation date, whereas the ultimate disposition of losses is
subject to the outcome of events and circumstances that may be unknown as of the valuation date.
For additional information about our accounting practices and policies see the discussion
under the heading “
Item 8. Financial Statements
- Note 2 — Summary of significant
Accounting Policies” in PART II of this annual report.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157
defines fair value, establishes a framework for measuring fair value and expands disclosure
requirements regarding fair value measurement. Where applicable, SFAS No. 157 simplifies and
codifies previously issued guidance on fair value. The Company’s adoption of FAS 157, effective
January 1, 2008, results in additional financial statement disclosures and has no effect on the
conduct of the Company’s business, its financial condition and results of operations.
In October 2008, the FASB issued FASB Staff Position No. 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset is Not Active” (“FSP FAS 157-3”). FSP FAS 157-3
clarifies the application of SFAS 157, Fair Value Measurements, in a market that is not active.
The Company adopted FSP FAS 157-3 on issuance, applicable to the third quarter 2008 financial
statements. The adoption of this standard did not have any material impact on the Company’s
financial statements.
In January 2009, the FASB issued FASB Staff Position No. 99-20-1, “Amendments to the
Impairment Guidance of EITF Issue No. 99-20” (“FSP EITF 99-20-1”), which is effective for interim
and annual ending after
December 15, 2008. FSP EITF 99-20-1 amends EITF 99-2“Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (“EITF
99-20”), to align the impairment guidance in EITF 99-20 with the impairment guidance in FAS 115,
“Accounting for Certain Investments in Debt and Equity Securities.” FSP EITF 99-20-1 amends the
cash flows model used to analyze an other-than-temporary impairment under EITF 99-20 by replacing
the market participant view with management’s assumption of whether it is probable that there is an
adverse change in the estimated cash flows. The adoption of FSP EITF 99-20-1 in the fourth quarter
did not have a material effect on the Company’s results of operations, financial position or
liquidity.
39
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Market risk can be described as the risk of change in fair value of a financial instrument due
to changes in interest rates, creditworthiness, foreign exchange rates or other factors. We seek
to mitigate that risk by a number of actions, as described below.
Interest Rate Risk
Our exposure to market risk for changes in interest rates is concentrated in our investment
portfolio. We expect that changes in investment values attributable to interest rate changes are
mitigated by corresponding and partially offsetting changes in the economic value of our insurance
reserves to the extent we have established such loss reserves. We monitor this exposure through
periodic reviews of our consolidated asset and liability positions.
The table below summarizes the estimated effects of hypothetical increases and decreases in
market interest rates on our fixed maturity portfolio as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair
|
|
|
|
|
|
|
|
|
|
Assumed Change in
|
|
Value After
|
|
Increase
|
|
|
|
Fair Value at
|
|
Relevant
|
|
Change in
|
|
(Decrease) in
|
|
|
|
12/31/08
|
|
Interest Rate
|
|
Interest Rate
|
|
Carrying Value
|
|
|
|
(in thousands)
|
|
Total Investments
|
|
$
|
263,405
|
|
|
100 bp decrease
|
|
$
|
272,910
|
|
|
$
|
9,505
|
|
|
|
|
|
|
|
|
50 bp decrease
|
|
|
268,158
|
|
|
|
4,753
|
|
|
|
|
|
|
|
|
50 bp increase
|
|
|
258,701
|
|
|
|
(4,704)
|
|
|
|
|
|
|
|
|
100 bp increase
|
|
|
254,078
|
|
|
|
(9,327)
|
|
Credit Risk
Our portfolio includes primarily fixed income securities and short-term investments, which are
subject to credit risk. This risk is defined as default or the potential loss in market value
resulting from adverse changes in the borrower’s ability to repay the debt. In our risk management
strategy and investment policy, we seek to earn competitive relative returns while investing in a
diversified portfolio of securities of high credit quality issuers and to limit the amount of
credit exposure to any one issuer.
The portfolio of fixed maturities consisted solely of high quality bonds at December 31, 2008.
The following table summarizes bond ratings at market or fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
|
Fair Value
|
|
|
Percent of
|
|
|
Bond Ratings
|
|
Amount
|
|
|
Portfolio
|
|
|
|
|
(in thousands)
|
|
|
AAA rated and U.S. Government and affiliated agency securities
|
|
$
|
156,817
|
|
|
|
59.5%
|
|
|
AA rated
|
|
|
47,163
|
|
|
|
17.9%
|
|
|
A rated
|
|
|
54,808
|
|
|
|
20.8%
|
|
|
BBB Rated
|
|
|
4,617
|
|
|
|
1.8%
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
263,405
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
We also have other receivable amounts subject to credit risk, including reinsurance
recoverables from OneBeacon. To mitigate the risk of nonpayment of amounts due under these
arrangements, we have established business and financial standards for reinsurer approval,
incorporating ratings by major rating agencies and considering then-current market information.
Item 8.
Financial Statements and Supplementary Data
The information required by this item is set forth beginning on page F-1 of this Annual Report
on Form 10-K.
|
|
|
|
|
Item 9.
|
|
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
None.
40
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
Item 9A.
Controls And Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures.
Disclosure
controls and procedures are the controls and procedures that are designed to ensure that
information required to be disclosed by us in our reports that we file or submit under the
Securities Exchange Act of 1934, or the Exchange Act, is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file under the Exchange Act is accumulated
and communicated to our management, including our principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by SEC Rules 13a-15(b) and 15d-15(b), we have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures as of the end of the period covered
by this annual report. This evaluation was carried out under the supervision and with the
participation of our management, including our principal executive officer and principal financial
officer. Based on this evaluation, these officers have concluded that the design and operation of
our disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting.
There were no changes to our internal
controls over financial reporting that occurred during the quarter ended December 31, 2008 that
have materially affected, or are reasonably likely to materially affect, these internal controls.
Management’s Report on Internal Control Over Financial Reporting.
Our management, under the
supervision of our principal executive officer and principal financial officer, is also responsible
for establishing and maintaining adequate internal control over financial reporting as defined in
SEC Rules 13a-15(f) and 15d-15(f). Management evaluated the effectiveness of our internal control
over financial reporting based on the framework in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management, including our principal executive officer and principal financial officer, has
concluded that the design and operation of our internal controls over financial reporting are
effective as of December 31, 2008.
The effectiveness of our internal control over financial reporting as of December 31, 2008,
has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm,
as stated in their report which is included in Item 8.
Inherent Limitations on Effectiveness of Controls.
A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the control system are met. Because of inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues, if any, within a company have
been detected. Accordingly, our disclosure controls and procedures
and internal controls over financial reporting are designed to provide reasonable, not
absolute, assurance that the objectives of our disclosure control and internal control over
financial reporting systems are met.
Item 9b.
Other Information
Item 1.01 Entry into a Material Definitive Agreement.
DIRECTOR INDEMNIFICATION AGREEMENTS
On
March 3, 2009, the Company entered in individual indemnification
agreements (the “Indemnification Agreements”) with each
person currently serving as a director of the Company (each an
“Indemnitee”). The purpose of the Indemnification
Agreements is to provide each Indemnitee with a contractual right to
indemnification in addition to the indemnification rights included in
the Company’s amended and restated certificate of incorporation
and amended and restated by-laws.
Each
Indemnification Agreement provides, among other things, that the
Indemnitee is indemnified against expenses, judgments and other
losses resulting from being a party to, or otherwise
participating in, any proceeding by virtue of having served as a
director, officer, employee, agent or fiduciary of
the Company or of any affiliate of the Company. For proceedings
brought by or on behalf of the Company, indemnification is limited to
expenses incurred by the Indemnitee. The Company will advance
expenses incurred by an Indemnitee in defending against such
proceedings.
The
foregoing description is qualified in its entirety by
reference to the form of Indemnification Agreement, which is filed as
Exhibit 10.52 to this Annual Report on Form 10-K.
41
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain
Officers; Compensatory Arrangements of Certain Officers.
2009 OFFICER BONUS PROGRAM
On
March 3, 2008, the Company adopted its 2009 officer bonus program (the “Bonus Program”).
All of our named executive officers, including our principal executive officer and our principal
financial officer, are eligible to receive cash bonuses under the Bonus Program.
The Bonus Program is intended to reward a covered employee for his contribution to the
overall success of the Company. The Bonus Program has two components:
(1) Individual performance goals are established for each of the officers as follows: (A) for
the Chief Executive Officer (the “CEO”), by the Compensation Committee of the Board of Directors
(the “Compensation Committee”); and (B) for the Executive Vice President (the “EVP”), the Senior
Vice Presidents (each an “SVP”) and the Vice Presidents (each a “VP”), by the Compensation
Committee with input from the Chief Executive Officer.
Each officer is eligible for a discretionary cash bonus related to individual performance of
up to a specific percentage of his base salary. The CEO, EVP and each
SVP is eligible
for a discretionary cash bonus of up to 25% of his base salary relating to individual performance
and each VP is eligible for a discretionary cash bonus of up to 20%
of his base
salary relating to individual performance. Each discretionary cash bonus relates to individual
performance and is based on an evaluation of the achievement or lack of achievement of such
individual’s performance goals and of such officer’s overall contribution to the success of the
Company during 2009. The Company’s financial results for 2009
will be considered by the Compensation Committee when bonus
determinations are made under the Bonus Program.
(2) The Compensation Committee has determined that the most significant portion of the Bonus
Program should be dependent upon the results of operations of the Company during 2009, as measured
by the Company’s after-tax return on equity (“ROE”) for that year. ROE is one of the most common
and accepted measurements used by investors in assessing the efficacy of their investments and the
effectiveness of deployed capital. For 2009, the Company’s ROE will be calculated by dividing the
after-tax net income earned by the Company in 2009 by its beginning equity of approximately $136
million at January 1, 2009.
Each officer is eligible for a discretionary cash bonus related to Company performance of up
to a specific percentage of his base salary that is tied to specified levels of ROE for the
Company for fiscal year 2009. The CEO, EVP and the SVP is eligible for a discretionary
cash bonus of up to 75% of his base salary relating to Company
performance and each VP is eligible for a discretionary cash bonus of
up to 55% of his base salary relating to
Company performance.
Although the Bonus Program has set parameters, the determination to pay any person a bonus
under the Bonus Program, the size of any bonus and the criteria, including individual performance
goals, used in making such determination is entirely at the discretion of the Compensation
Committee.
A description of the 2009 Officer Bonus Program is filed as Exhibit 10.50 to this Annual
Report on Form 10-K and is incorporated herein by reference.
AMENDMENT TO CHANGE OF CONTROL AGREEMENT
Daniel A. Cacchione (the “Employee”) received a promotion from Vice President to Senior Vice
President January 1, 2009. Since the Company has different terms for its change in control
agreements with its Senior Vice Presidents than it does with its Vice Presidents, on March 3, 2009,
the Company entered into the First Amendment to the Change in Control Agreement (the “Amendment”)
to amend the Change in Control Agreement (“Agreement”) entered into by the parties on April 7,
2008. The material terms of the Amendment are as follows:
The Amendment replaces Section (A)(i) of the Agreement with the following text: “The Company
shall pay to the Employee an amount equal to the sum of (a) two times the Employee’s annual base
salary and (b) any unreimbursed business expenses or other amounts due to the Employee from the
Company as of the Employee’s date of termination”.
A copy of the Amendment is filed as Exhibit 10.51 to this Annual Report on Form 10-K and is
incorporated herein by reference.
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by Item 10 as to our executive officers and our code of business
conduct and ethics is disclosed in Part I, Item I under the headings “Executive Officers of the
Registrant” and “Overview,” respectively. The information required by Item 10 as to our directors,
compliance with section 16 of the Exchange Act, and corporate governance is incorporated herein by
reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A. We are not
aware of any family relationships between any of our directors or executive officers.
Item 11.
Executive Compensation
The information required by Item 11 is incorporated herein by reference to the definitive
Proxy Statement to be filed pursuant to Regulation 14A.
42
2008
Form 10-K
Specialty Underwriters’ Alliance, Inc.
|
|
|
|
|
Item 12.
|
|
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
The information required by Item 12 regarding security ownership of certain beneficial owners
and executive officers and directors is incorporated herein by reference to the definitive Proxy
Statement to be filed pursuant to Regulation 14A.
|
|
|
|
|
Item 13
|
|
Certain Relationships and Related Transactions, and Director Independence
|
The information required by Item 13 is incorporated herein by reference to the definitive
Proxy Statement to be filed pursuant to Regulation 14A.
|
|
|
|
|
Item 14.
|
|
Principal Accounting Fees and Services
|
The information required by Item 14 is incorporated herein by reference to the definitive
Proxy Statement to be filed pursuant to Regulation 14A.
PART IV
|
|
|
|
|
Item 15.
|
|
Exhibits and Financial Statement Schedules
|
Financial Statements and Financial Statement Schedules
The consolidated financial statements and financial statement schedules of Specialty
Underwriters’ Alliance, Inc. required by Part II, Item 8, are included in Part IV of this report.
See Index to Consolidated Financial Statements and Financial Statement Schedules beginning on page
F-1 below.
Exhibits
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description
|
|
|
3.1
|
|
|
Amended and Restated Certificate of Incorporation dated May 19, 2005 (Incorporated by reference to Exhibit 3.1,
filed with Specialty Underwriters’ Alliance. Inc.’s Amendment No. 1 to the Registration Statement on Form S-1/A
filed on May 31, 2005 (File No. 333-124263))
|
|
|
3.2
|
|
|
Amended and Restated Bylaws dated August 5, 2008 (Incorporated by reference to Exhibit 3.1, filed with Specialty
Underwriters’ Alliance, Inc.’s Quarterly Report on Form 10-Q for the 2
nd
Quarter ended June 30, 2008,
filed on August 8, 2008
|
|
|
10.1
|
+
|
|
2004 Stock Option Plan of Specialty Underwrites’ Alliance, Inc. (as Amended and Restated as of November 11, 2004)
(Incorporated by reference to Exhibit 10.1.5, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 6
to the Registration Statement on Form S-1/A filed on November 12, 2004 (File No. 333-117722))
|
|
|
10.2
|
|
|
Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated May 18, 2004, between the Registrant
and AEON Insurance Group, Inc. (Incorporated by reference to Exhibit 10.1.15, filed with Specialty Underwriters’
Alliance, Inc.’s Amendment No. 2 to the Registration Statement on Form S-1/A filed on October 20, 2004 (File
No. 333-117722))
|
|
|
10.3
|
|
|
Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated May 1, 2004, between the Registrant
and American Team Managers (Incorporated by reference to Exhibit 10.1.17, filed with Specialty Underwriters’
Alliance, Inc.’s Amendment No. 2 to the Registration Statement on Form S-1/A filed on October 20, 2004 (File
No. 333-117722))
|
|
|
10.4
|
|
|
Side letter, dated September 30, 2004, between the Registrant and AEON Insurance Group, Inc. (Incorporated by
reference to Exhibit 10.1.25, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 2 to the
Registration Statement on Form S-1/A filed on October 20, 2004 (File No. 333-117722))
|
|
|
10.5
|
|
|
Securities Purchase Agreement, dated September 30, 2004, between the Registrant and AEON Insurance Group, Inc.
(Incorporated by reference to Exhibit 10.1.26, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 2
to the Registration Statement on Form S-1/A filed on October 20, 2004 (File No. 333-117722))
|
|
|
10.6
|
|
|
Side letter, dated August 16, 2004, between the Registrant and American Team Managers (Incorporated by reference to
Exhibit 10.1.27, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 2 to the Registration Statement
on Form S-1/A filed on October 20, 2004 (File No. 333-117722))
|
43
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description
|
|
|
|
|
|
|
10.7
|
|
|
Securities Purchase Agreement, dated August 16, 2004, between the Registrant and American Team Managers
(Incorporated by reference to Exhibit 10.1.28, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 2
to the Registration Statement on Form S-1/A filed on October 20, 2004 (File No. 333-117722))
|
|
|
10.8
|
|
|
Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated November 3, 2004, between the
Registrant and Risk Transfer Holdings, Inc. (Incorporated by reference to Exhibit 10.1.32, filed with Specialty
Underwriters’ Alliance, Inc.’s Amendment No. 5 to the Registration Statement on Form S-1/A filed on November 10,
2004 (File No. 333-117722))
|
|
|
10.9
|
|
|
Side Letter, dated November 3, 2004, between the Registrant and Risk Transfer Holdings, Inc. Amendment No. 5 to the
(Incorporated by reference to Exhibit 10.1.34, filed with Specialty Underwriters’ Alliance, Inc.’s Registration
Statement on Form S-1/A filed on November 10, 2004 (File No. 333-117722))
|
|
|
10.10
|
|
|
Securities Purchase Agreement, dated November 3, 2004, between the Registrant and Risk Transfer Holdings, Inc.
(Incorporated by reference to Exhibit 10.1.35, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 5
to the Registration Statement on Form S-1/A filed on November 10, 2004 (File No. 333-117722))
|
|
|
10.11
|
|
|
Lease Agreement, dated February 7, 2005, between SUA Insurance Company, the wholly owned operating subsidiary of
the Registrant, and 222 South Riverside Property LLC (Incorporated by reference to Exhibit 10.1.40, filed with
Specialty Underwriters’ Alliance, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004 filed on
March 31, 2005)
|
|
|
10.12
|
|
|
Amendment No. 1 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated January 17,
2005, between the Registrant and American Team Managers (Incorporated by reference to Exhibit 10.1.41, filed with
Specialty Underwriters’ Alliance, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004 filed on
March 31, 2005)
|
|
|
10.13
|
|
|
First Amendment to Lease, dated May 5, 2005, between SUA Insurance Company, the wholly owned operating subsidiary
of the Registrant, and 222 South Riverside Property, LLC (Incorporated by reference to Exhibit 10.24, filed with
Specialty Underwriters’ Alliance, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on
March 7, 2008)
|
|
|
10.14
|
|
|
Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated May 11, 2004, between the Registrant
and Specialty Risk Solutions, LLC (Incorporated by reference to Exhibit 10.1.42, filed with Specialty Underwriters’
Alliance. Inc.’s Amendment No. 1 to the Registration Statement on Form S-1/A filed on May 31, 2005 (File
No. 333-124263))
|
|
|
10.15
|
|
|
Securities Purchase Agreement, dated May 11, 2005, between the Registrant and Specialty Risk Solutions, LLC
(Incorporated by reference to Exhibit 10.1.43, filed with Specialty Underwriters’ Alliance. Inc.’s Amendment No. 1
to the Registration Statement on Form S-1/A filed on May 31, 2005 (File No. 333-124263))
|
|
|
10.16
|
|
|
Amended and Restated Securities Purchase Agreement, dated June 10, 2005, between the Registrant and Risk Transfer
Holdings, Inc. (Incorporated by reference to Exhibit 10.26, filed with Specialty Underwriters’ Alliance, Inc.’s
Annual Report on Form 10-K for the year ended December 31, 2007 filed on March 7, 2008)
|
|
|
10.17
|
|
|
Amendment No. 1 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated June 30, 2005,
between the Registrant and Risk Transfer Holdings, Inc. (Incorporated by reference to Exhibit 10.27, filed with
Specialty Underwriters’ Alliance, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on
March 7, 2008)
|
|
|
10.18
|
|
|
Amended and Restated Securities Purchase Agreement, dated September 8, 2005, between the Registrant and American
Team Managers (Incorporated by reference to Exhibit 10.28, filed with Specialty Underwriters’ Alliance, Inc.’s
Annual Report on Form 10-K for the year ended December 31, 2007 filed on March 7, 2008)
|
|
|
10.19
|
*
|
|
First Amendment to the Securities Purchase Agreement, dated September 13, 2005, between Registrant and Specialty
Risk Solutions, LLC
|
|
|
10.20
|
|
|
Amended and Restated Securities Purchase Agreement, dated September 28, 2005, between the Registrant and AEON
Insurance Group, Inc. (Incorporated by reference to Exhibit 10.29, filed with Specialty Underwriters’ Alliance,
Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on March 7, 2008)
|
|
|
10.21
|
*
|
|
Second Amendment to the Securities Purchase Agreement, dated September 30, 2005, between Registrant and Specialty
Risk Solutions, LLC
|
|
|
10.22
|
|
|
Third Amendment to the Securities Purchase Agreement, dated October 21, 2005, between Registrant and Specialty Risk
Solutions, LLC (Incorporated by reference to Exhibit 10.1.47, filed with Post-Effective Amendment No. 2 to
Registration Statement on Form S-3 filed on December 15, 2005 (File No. 333-124263))
|
|
|
10.23
|
|
|
Amendment No. 2 to Specialty Underwrites’ Alliance, Inc. Partner Agent Program Agreement, dated March 20, 2006,
between Registrant and American Team Managers (Incorporated by reference to Exhibit 10.1.1, filed with Specialty
Underwriters’ Alliance. Inc.’s Quarterly Report on Form 10-Q for the 1
st
Quarter ended March 31, 2006
filed on May 9, 2006)
|
44
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description
|
|
|
|
|
|
|
10.24
|
|
|
Second Amendment to Lease, dated April 24, 2006, between SUA Insurance Company, the wholly owned operating
subsidiary of the Registrant, and 222 South Riverside Property, LLC (Incorporated by reference to Exhibit 10.31,
filed with Specialty Underwriters’ Alliance, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007
filed on March 7, 2008)
|
|
|
10.25
|
|
|
Amendment No. 1 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated June 10, 2006,
between the Registrant and AEON Insurance Group, Inc (Incorporated by reference to Exhibit 99.2, filed with
Specialty Underwriters’ Alliance. Inc.’s Quarterly Report on Form 10-Q for the 2
nd
Quarter ended June
30, 2006 filed on August 4, 2006)
|
|
|
10.26
|
|
|
Amendment No. 2 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated June 12, 2006,
between the Registrant and Risk Transfer Holdings, Inc. (Incorporated by reference to Exhibit 99.3, filed with
Specialty Underwriters’ Alliance. Inc.’s Quarterly Report on Form 10-Q for the 2
nd
Quarter ended June
30, 2006 filed on August 4, 2006)
|
|
|
10.27
|
|
|
Amendment No. 1 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement – Specialty Risk
Solutions, LLC (Incorporated by reference to Exhibit 99.2 with Specialty Underwriters’ Alliance. Inc.’s Quarterly
Report on Form 10-Q for the 3
rd
Quarter ended September 30, 2006 filed on November 6, 2006)
|
|
|
10.28
|
|
|
First Amendment to the Amended and Restated Securities Purchase Agreement, dated July 16, 2006, between Registrant
and AEON Insurance Group, Inc. (Incorporated by reference to Exhibit 99.3, filed with Specialty Underwriters’
Alliance. Inc.’s Quarterly Report on Form 10-Q for the 3
rd
Quarter ended September 30, 2006 filed on
November 6, 2006)
|
|
|
10.29
|
|
|
Amendment No. 3 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated July 18, 2006,
between the Registrant and American Team Managers (Incorporated by reference to Exhibit 99.4, filed with Specialty
Underwriters’ Alliance. Inc.’s Quarterly Report on Form 10-Q for the 3
rd
Quarter ended September 30,
2006 filed on November 6, 2006)
|
|
|
10.30
|
|
|
First Amendment to the Amended and Restated Securities Purchase Agreement, dated September 21, 2006, between the
Registrant and Risk Transfer Holdings, Inc. (Incorporated by reference to Exhibit 99.7, filed with Specialty
Underwriters’ Alliance. Inc.’s Quarterly Report on Form 10-Q for the 3
rd
Quarter ended September 30,
2006 filed on November 6, 2006)
|
|
|
10.31
|
|
|
First Amendment to the Amended and Restated Securities Purchase Agreement, dated September 25, 2006, between the
Registrant and American Team Managers (Incorporated by reference to Exhibit 99.8, filed with Specialty
Underwriters’ Alliance. Inc.’s Quarterly Report on Form 10-Q for the 3
rd
Quarter ended September 30,
2006 filed on November 6, 2006)
|
|
|
10.32
|
+
|
|
2007 Stock Incentive Plan of Specialty Underwriters’ Alliance, Inc., dated March 31, 2007 (Incorporated by
reference to Appendix A, filed with Specialty Underwriters’ Alliance, Inc.’s Definitive Proxy Statement on Form DEF
14A for the year ended December 31, 2006 filed on April 2, 2007)
|
|
|
10.33
|
|
|
Fourth Amendment to the Securities Purchase Agreement, dated June 18, 2007, between Registrant and Specialty Risk
Solutions, LLC (Incorporated by reference to Exhibit 10.1, filed with Specialty Underwriters’ Alliance, Inc.’s
Quarterly Report on Form 10-Q for the 2nd Quarter ended June 30, 2007 filed on August 6, 2007)
|
|
|
10.34
|
|
|
Amendment No. 4 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated October 29,
2007, between the Registrant and American Team Managers (Incorporated by reference to Exhibit 10.1, filed with
Specialty Underwriters’ Alliance, Inc.’s Quarterly Report on Form 10-Q for the 3
rd
Quarter ended
September 30, 2007 filed on November 2, 2007)
|
|
|
10.35
|
+
|
|
Form of Restricted Stock Agreement for Directors under the 2007 Stock Incentive Plan of the Registrant
(Incorporated by reference to Exhibit 10.4, filed with Specialty Underwriters’ Alliance, Inc.’s Quarterly Report on
Form 10-Q for the 3
rd
Quarter ended September 30, 2007 filed on November 2, 2007)
|
|
|
10.36
|
+
|
|
Form of Restricted Stock Agreement for Employees under the 2007 Stock Incentive Plan of the Registrant
(Incorporated by reference to Exhibit 10.4, filed with Specialty Underwriters’ Alliance, Inc.’s Quarterly Report on
Form 10-Q for the 3
rd
Quarter ended September 30, 2007 filed on November 2, 2007)
|
|
|
10.37
|
+
|
|
Form of Option Agreement — Non-Qualified Stock Option under the 2007 Stock Incentive Plan of the Registrant
(Incorporated by reference to Exhibit 10.4, filed with Specialty Underwriters’ Alliance, Inc.’s Quarterly Report on
Form 10-Q for the 3
rd
Quarter ended September 30, 2007 filed on November 2, 2007)
|
|
|
10.38
|
+
|
|
Form of Option Agreement — Incentive Stock Option under the 2007 Stock Incentive Plan of the Registrant
(Incorporated by reference to Exhibit 10.4, filed with Specialty Underwriters’ Alliance, Inc.’s Quarterly Report on
Form 10-Q for the 3
rd
Quarter ended September 30, 2007 filed on November 2, 2007)
|
|
|
10.39
|
+
|
|
Form of Deferred Stock Award Agreement for Employees under the 2007 Stock Incentive Plan of the Registrant
(Incorporated by reference to Exhibit 10.1, filed with Specialty Underwriters’ Alliance, Inc.’s Quarterly Report on
Form 10-Q for the 1
ST
Quarter ended March 31, 2008 filed on May 9, 2008)
|
|
|
10.40
|
+
|
|
Employment Agreement, dated April 7, 2008 between the Registrant and Courtney C. Smith (Incorporated by reference
to Exhibit 10.1, filed with Specialty Underwriters’ Alliance, Inc.’s Quarterly Report on Form 10-Q for the
2
nd
Quarter ended June 30, 2008 filed on August 8, 2008)
|
45
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description
|
|
|
|
|
|
|
10.41
|
+
|
|
Employment Agreement, dated April 7, 2008 between the Registrant and Peter E. Jokiel (Incorporated by reference to
Exhibit 10.2, filed with Specialty Underwriters’ Alliance, Inc.’s Quarterly Report on Form 10-Q for the
2
nd
Quarter ended June 30, 2008 filed on August 8, 2008)
|
|
|
10.42
|
+
|
|
Employment Agreement, dated April 7, 2008 between the Registrant and Gary J. Ferguson (Incorporated by reference to
Exhibit 10.3, filed with Specialty Underwriters’ Alliance, Inc.’s Quarterly Report on Form 10-Q for the
2
nd
Quarter ended June 30, 2008 filed on August 8, 2008)
|
|
|
10.43
|
+
|
|
Change of Control Agreement, dated April 7, 2008 between the Registrant and Barry G. Cordeiro (Incorporated by
reference to Exhibit 10.4, filed with Specialty Underwriters’ Alliance, Inc.’s Quarterly Report on Form 10-Q for
the 2
nd
Quarter ended June 30, 2008 filed on August 8, 2008)
|
|
|
10.44
|
+
|
|
Change of Control Agreement, dated April 7, 2008 between the Registrant and Scott W. Goodreau (Incorporated by
reference to Exhibit 10.5, filed with Specialty Underwriters’ Alliance, Inc.’s Quarterly Report on Form 10-Q for
the 2
nd
Quarter ended June 30, 2008 filed on August 8, 2008)
|
|
|
10.45
|
+
|
|
Change of Control Agreement, dated April 7, 2008 between the Registrant and Scott K. Charbonneau (Incorporated by
reference to Exhibit 10.6, filed with Specialty Underwriters’ Alliance, Inc.’s Quarterly Report on Form 10-Q for
the 2
nd
Quarter ended June 30, 2008 filed on August 8, 2008)
|
|
|
10.46
|
+
|
|
Change of Control Agreement, dated April 7, 2008 between the Registrant and Daniel A. Cacchione (Incorporated by
reference to Exhibit 10.7, filed with Specialty Underwriters’ Alliance, Inc.’s Quarterly Report on Form 10-Q for
the 2
nd
Quarter ended June 30, 2008 filed on August 8, 2008)
|
|
|
10.47
|
+
|
|
Change of Control Agreement, dated April 7, 2008 between the Registrant and Daniel J. Rohan (Incorporated by
reference to Exhibit 10.8, filed with Specialty Underwriters’ Alliance, Inc.’s Quarterly Report on Form 10-Q for
the 2
nd
Quarter ended June 30, 2008 filed on August 8, 2008)
|
|
|
10.48
|
*
|
|
Amendment No. 5 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated April 10,
2008, between the Registrant and American Team Managers
|
|
|
10.49
|
*
|
|
Amendment No. 6 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated October 15,
2008, between the Registrant and American Team Managers
|
|
|
10.50
|
*+
|
|
Description of 2009 Officer Bonus Program for the Registrant
|
|
|
10.51
|
*+
|
|
First Amendment to the Change in Control Agreement dated March 3, 2009 between the Registrant and Daniel A. Cacchione
|
|
|
10.52
|
*
|
|
Form of Indemnification Agreement between the Registrant and each of its Directors
|
|
|
14.1
|
|
|
Code of Ethics of Specialty Underwriters’ Alliance, Inc. (Incorporated by reference to Exhibit 14.1 with Specialty
Underwriters’ Alliance, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004 filed on March 31,
2005)
|
|
|
21.1
|
|
|
Subsidiaries of the Registrant (Incorporated by reference to Exhibit 21.1, filed with Specialty Underwriters’
Alliance, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004 filed on March 31, 2005)
|
|
|
23.1
|
*
|
|
Consent of PricewaterhouseCoopers LLP with respect to Registrant.
|
|
|
31.1
|
*
|
|
Certification of Courtney C. Smith, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
31.2
|
*
|
|
Certification of Peter E. Jokiel, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
32.1
|
*
|
|
Certification of Courtney C. Smith , Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
32.2
|
*
|
|
Certification of Peter E. Jokiel, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
*
|
|
Filed herewith.
|
|
|
|
+
|
|
Indicates a management contract or compensatory plan or arrangement.
|
46
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Index To Audited Consolidated Financial Statements And Schedules
|
|
|
|
|
|
|
|
|
Page No.
|
|
|
|
|
F-2
|
|
|
|
|
|
F-3
|
|
|
|
|
|
F-4
|
|
|
|
|
|
F-5
|
|
|
|
|
|
F-6
|
|
|
|
|
|
F-7
|
|
|
Financial Statement Schedules
|
|
|
|
|
|
|
|
|
F-21
|
|
|
|
|
|
F-22
|
|
|
|
|
|
F-25
|
|
|
|
|
|
F-26
|
|
|
|
|
|
F-27
|
|
|
|
|
|
F-28
|
|
F-1
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Specialty Underwriters’ Alliance, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Specialty Underwriters’ Alliance, Inc.
and its subsidiary at December 31, 2008 and December 31, 2007, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2008 in
conformity with accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedules listed in the accompanying index
present fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s
management is responsible for these financial statements and financial statement schedules, for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in Management’s Report on
Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to
express opinions on these financial statements, on the financial statement schedules, and on the
Company’s internal control over financial reporting based on our integrated audits. We conducted
our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide a reasonable basis
for our opinions.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
/s/ PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
March 6, 2009
F-2
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Consolidated Balance Sheets of
Specialty Underwriters’ Alliance, Inc.
As of December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(in thousands)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Fixed maturity investments, at fair value (amortized cost: $220,744 and $176,592)
|
|
$
|
216,708
|
|
|
$
|
177,735
|
|
|
Short-term investments, at amortized cost (which approximates fair value)
|
|
|
46,697
|
|
|
|
51,652
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
263,405
|
|
|
$
|
229,387
|
|
|
Cash
|
|
|
208
|
|
|
|
968
|
|
|
Insurance premiums receivable
|
|
|
60,715
|
|
|
|
68,887
|
|
|
Reinsurance recoverable on unpaid loss and loss adjustment expenses
|
|
|
79,598
|
|
|
|
77,204
|
|
|
Prepaid reinsurance premiums
|
|
|
309
|
|
|
|
631
|
|
|
Investment income accrued
|
|
|
2,467
|
|
|
|
1,909
|
|
|
Equipment
and capitalized software at cost (less accumulated depreciation of $15,486 and $8,927)
|
|
|
13,562
|
|
|
|
12,796
|
|
|
Intangible assets
|
|
|
10,745
|
|
|
|
10,745
|
|
|
Deferred acquisition costs
|
|
|
18,156
|
|
|
|
17,495
|
|
|
Deferred tax asset
|
|
|
3,146
|
|
|
|
-
|
|
|
Other assets
|
|
|
2,426
|
|
|
|
2,512
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
454,737
|
|
|
$
|
422,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense reserves
|
|
$
|
214,953
|
|
|
$
|
184,736
|
|
|
Unearned insurance premiums
|
|
|
80,600
|
|
|
|
86,741
|
|
|
Insured deposit funds
|
|
|
15,806
|
|
|
|
12,515
|
|
|
Accounts payable and other liabilities
|
|
|
7,089
|
|
|
|
7,405
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
318,448
|
|
|
$
|
291,397
|
|
|
|
|
|
|
|
|
|
|
Commitments (Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Common Stock
at $.01 par value per share — authorized 30,000,000 shares; issued 14,712,355 and 14,697,355 and outstanding 14,437,355 and 14,697,355 shares
|
|
$
|
147
|
|
|
$
|
147
|
|
|
Class B Common Stock at $.01 par value per
share — authorized 2,000,000 shares; issued and outstanding 1,368,562 and 869,738 shares
|
|
|
14
|
|
|
|
9
|
|
|
Paid-in capital — Common Stock
|
|
|
129,926
|
|
|
|
129,431
|
|
|
Paid-in capital — Class B Common Stock
|
|
|
8,077
|
|
|
|
6,139
|
|
|
Accumulated earnings (deficit)
|
|
|
1,693
|
|
|
|
(5,732
|
)
|
|
Treasury stock
|
|
|
(1,347
|
)
|
|
|
-
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
(2,221
|
)
|
|
|
1,143
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
$
|
136,289
|
|
|
$
|
131,137
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
454,737
|
|
|
$
|
422,534
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-3
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Consolidated Statements of Operations and Comprehensive Income of
Specialty Underwriters’ Alliance, Inc.
For the Years Ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(in thousands, except earnings per share)
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned insurance premiums
|
|
$
|
143,465
|
|
|
$
|
152,469
|
|
|
$
|
110,891
|
|
|
Net investment income
|
|
|
10,837
|
|
|
|
9,553
|
|
|
|
6,087
|
|
|
Net realized gain (losses)
|
|
|
(811
|
)
|
|
|
(27
|
)
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
153,491
|
|
|
$
|
161,995
|
|
|
$
|
117,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses
|
|
$
|
89,385
|
|
|
$
|
89,990
|
|
|
$
|
62,682
|
|
|
Acquisition expenses
|
|
|
32,990
|
|
|
|
36,601
|
|
|
|
26,032
|
|
|
Other operating expenses
|
|
|
23,132
|
|
|
|
22,568
|
|
|
|
19,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
145,507
|
|
|
$
|
149,159
|
|
|
$
|
108,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income
|
|
|
7,984
|
|
|
|
12,836
|
|
|
|
8,655
|
|
|
Federal income tax expense
|
|
|
(559
|
)
|
|
|
(247
|
)
|
|
|
(247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,425
|
|
|
$
|
12,589
|
|
|
$
|
8,408
|
|
|
Net change in unrealized gains and losses for investments held,
after tax
|
|
|
(3,364
|
)
|
|
|
2,204
|
|
|
|
570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
4,061
|
|
|
$
|
14,793
|
|
|
$
|
8,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share available to common stockholders (in dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.48
|
|
|
$
|
0.82
|
|
|
$
|
0.55
|
|
|
Diluted
|
|
$
|
0.47
|
|
|
$
|
0.82
|
|
|
$
|
0.55
|
|
|
Weighted Average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,608
|
|
|
|
15,431
|
|
|
|
15,211
|
|
|
Diluted
|
|
|
15,776
|
|
|
|
15,431
|
|
|
|
15,211
|
|
The accompanying notes are an integral part of these financial statements.
F-4
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Consolidated Statement of Stockholders’ Equity of
Specialty Underwriters’ Alliance, Inc.
As of December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acum.
|
|
|
|
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
Stock Class
|
|
|
Capital Class
|
|
|
Stock Class
|
|
|
Capital
|
|
|
Earnings
|
|
|
Treasury
|
|
|
Comp.
|
|
|
Stockholders’
|
|
|
|
|
A
|
|
|
A
|
|
|
B
|
|
|
Class B
|
|
|
(Deficit)
|
|
|
Stock
|
|
|
Income
|
|
|
Equity
|
|
|
|
|
(in thousands)
|
|
|
Balance at 12/31/06
|
|
$
|
147
|
|
|
$
|
128,372
|
|
|
$
|
7
|
|
|
$
|
4,838
|
|
|
$
|
(18,321
|
)
|
|
$
|
-
|
|
|
$
|
(1,061
|
)
|
|
$
|
113,982
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,589
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,589
|
|
|
Net change
in unrealized investment
gains, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,204
|
|
|
|
2,204
|
|
|
Stock issuance
|
|
|
-
|
|
|
|
123
|
|
|
|
2
|
|
|
|
1,301
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,426
|
|
|
Stock based compensation
|
|
|
-
|
|
|
|
936
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 12/31/07
|
|
$
|
147
|
|
|
$
|
129,431
|
|
|
$
|
9
|
|
|
$
|
6,139
|
|
|
$
|
(5,732
|
)
|
|
$
|
-
|
|
|
$
|
1,143
|
|
|
$
|
131,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,425
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,425
|
|
|
Net change in
unrealized investment
gains, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,364
|
)
|
|
|
(3,364
|
)
|
|
Stock issuance
|
|
|
-
|
|
|
|
67
|
|
|
|
5
|
|
|
|
1,938
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,010
|
|
|
Treasury stock purchases
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,347
|
)
|
|
|
-
|
|
|
|
(1,347
|
)
|
|
Stock based compensation
|
|
|
-
|
|
|
|
428
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 12/31/08
|
|
$
|
147
|
|
|
$
|
129,926
|
|
|
$
|
14
|
|
|
$
|
8,077
|
|
|
$
|
1,693
|
|
|
$
|
(1,347
|
)
|
|
$
|
(2,221
|
)
|
|
$
|
136,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-5
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Consolidated Statements of Cash Flows of
Specialty Underwriters’ Alliance, Inc.
For the Years Ended 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(in thousands)
|
|
|
Cash Flows From Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,425
|
|
|
$
|
12,589
|
|
|
$
|
8,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in deferred taxes
|
|
|
(1,344
|
)
|
|
|
(77
|
)
|
|
|
90
|
|
|
Net realized (gains) losses
|
|
|
811
|
|
|
|
27
|
|
|
|
(275
|
)
|
|
Amortization of bond premium (discount)
|
|
|
116
|
|
|
|
(5
|
)
|
|
|
342
|
|
|
Depreciation
|
|
|
6,559
|
|
|
|
5,012
|
|
|
|
2,577
|
|
|
Net change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
recoverable on unpaid loss and loss adjustment expense reserves
|
|
|
(2,394
|
)
|
|
|
3,772
|
|
|
|
8,021
|
|
|
Loss and loss adjustment expense reserves
|
|
|
30,217
|
|
|
|
43,536
|
|
|
|
36,330
|
|
|
Insurance premiums receivable
|
|
|
8,172
|
|
|
|
(577
|
)
|
|
|
(23,442
|
)
|
|
Unearned insurance premiums
|
|
|
(6,141
|
)
|
|
|
(3,063
|
)
|
|
|
31,209
|
|
|
Deferred acquisition costs
|
|
|
(661
|
)
|
|
|
2,381
|
|
|
|
(8,597
|
)
|
|
Prepaid reinsurance premiums
|
|
|
322
|
|
|
|
2,946
|
|
|
|
(85
|
)
|
|
Insured deposit funds
|
|
|
3,291
|
|
|
|
2,149
|
|
|
|
3,207
|
|
|
Other, net
|
|
|
(277
|
)
|
|
|
912
|
|
|
|
2,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
38,671
|
|
|
|
57,013
|
|
|
|
51,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used for) operations
|
|
|
46,096
|
|
|
|
69,602
|
|
|
|
60,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease (increase) in short-term investments
|
|
|
4,955
|
|
|
|
(32,114
|
)
|
|
|
(10,676
|
)
|
|
Sales of fixed maturity investments
|
|
|
6,108
|
|
|
|
9,938
|
|
|
|
7,174
|
|
|
Redemptions, calls and maturities of fixed maturity investments
|
|
|
19,990
|
|
|
|
10,003
|
|
|
|
9,502
|
|
|
Purchases of fixed maturity investments
|
|
|
(71,180
|
)
|
|
|
(50,974
|
)
|
|
|
(66,575
|
)
|
|
Purchase of equipment and capitalized software
|
|
|
(7,325
|
)
|
|
|
(9,165
|
)
|
|
|
(5,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used for investing activities
|
|
|
(47,452
|
)
|
|
|
(72,312
|
)
|
|
|
(66,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
1,943
|
|
|
|
1,303
|
|
|
|
3,088
|
|
|
Treasury stock purchases
|
|
|
(1,347
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
596
|
|
|
|
1,303
|
|
|
|
3,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash during the period
|
|
|
(760
|
)
|
|
|
(1,407
|
)
|
|
|
(2,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of the period
|
|
|
968
|
|
|
|
2,375
|
|
|
|
5,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of the period
|
|
$
|
208
|
|
|
$
|
968
|
|
|
$
|
2,375
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-6
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
Note 1 — Nature of Operations
UAI Holdings, Inc., a Delaware holding company, was organized on April 3, 2003. There was no
financial activity between the organizational date and the initial funding date of December 12,
2003. On November 5, 2003, UAI Holdings, Inc. changed its name to Specialty Underwriters’
Alliance, Inc.
On November 23, 2004, Specialty Underwriters’ Alliance, Inc., or the Company, successfully
completed an initial public offering, or the IPO, which generated net proceeds of $119,789. On
December 22, 2004 the Company received proceeds of $3,728 from the underwriter’s exercise of the
over allotment option. Concurrent with the initial public offering the Company purchased Potomac
for $21,997 which was equivalent to Potomac’s statutory basis capital and surplus as of the closing
date plus $10,745. On the same date, the Illinois Department of Insurance approved an amendment to
Potomac’s charter to change its name to SUA Insurance Company.
The Company began its insurance operations in 2005. It is organized to provide specialty
program commercial property and casualty insurance through exclusive partner agents.
Note 2 — Summary of Significant Accounting Policies
The accompanying consolidated financial statements, which include the accounts of Specialty
Underwriters’ Alliance, Inc. and its consolidated subsidiary, SUA Insurance Company, have been
prepared in conformity with accounting principles generally accepted in the United States of
America, or GAAP. All intercompany amounts have been eliminated.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates.
Certain reclassifications have been made to prior period financial statement line items to
enhance the comparability with prior years.
Cash and Investments
Cash consists of demand deposits. Short-term investments consist of investments with original
maturities of less than one year, as determined on the date of purchase.
All fixed maturity investment securities are classified upon acquisition as
available-for-sale. As such, they are reported at estimated fair value. The Company uses an
independent pricing service to determine the fair value of substantially all of the investment
assets. For more information about the pricing of the investment securities please see “Note 5 –
Investments” in Notes to the Consolidated Financial Statements. Short term securities are valued
at amortized cost.
The Company monitors the difference between its cost basis and the fair value of its
investments to determine, when the fair value is below cost, if this difference is other than a
temporary impairment. Factors considered in evaluating whether a decline in value is other than
temporary include: the length of time and the extent to which the fair value has been less than
cost; the financial conditions and near-term prospects of the issuer; and the Company’s intent and
ability to retain the investment for a period of time sufficient to allow for any anticipated
recovery. In addition, the Company’s structured securities are subject to Emerging Issues Task
Force Issue No. 99-20,
“Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets”
(“EITF 99-20”) and are monitored for
significant adverse changes in cash flow projections. If there are material adverse changes in
cash flows, the amount of accretive yield is prospectively adjusted and an other-than-temporary
impairment loss is recognized.
Other than temporary impairment charges on investments are recorded based on the fair value of
the investments at the balance sheet date, and are included in net realized gains and losses. The
unrealized appreciation or depreciation of available-for-sale investments carried at fair value are
excluded from net income and credited or charged directly to accumulated other comprehensive
income, a separate component of stockholders’ equity. The change in unrealized appreciation or
depreciation is reported as a component of other comprehensive income.
Investment income is recorded when earned. Realized investment gains and losses are
recognized using specific identification of the security sold.
F-7
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)
Equipment and Capitalized Software
Equipment consists of office furniture and equipment and is depreciated over three to five
years. Capitalized software costs are purchased computer software or external consulting
development costs and are depreciated over three to five years.
Intangible Assets
The cost of insurance licenses is an indefinite life intangible asset because the licenses
will remain in effect indefinitely as long as the Company complies with relevant state insurance
regulations. This intangible asset will not be amortized, but will be evaluated for impairment at
least annually or upon the occurrence of certain triggering events.
Earned and Unearned Insurance Premiums
Premiums are recognized as revenue over the coverage period of policies written on a daily pro
rata basis. Certain policies are subject to adjustment based on changes in exposure units over the
period of coverage, such as payroll increases/decreases and changes in risk classifications and
therefore the direct written premiums are estimated during the policies term until final audit of
the policy occurs. Unearned insurance premiums represent the portion of premiums written relating
to the remaining term of each policy.
Acquisition Expenses
Acquisition expenses related to the writing of insurance policies such as up-front
commissions, premium taxes and other costs associated with premium writings are deferred and
subsequently amortized to income over the period of coverage. Deferred acquisition expenses are
assessed for recoverability using loss and loss adjustment expense ratios which are based primarily
on the assumption that the future loss and loss adjustment expense ratio will include consideration
of the recent experience. Adjustments to the asset for future recoverability are recorded through
operations in the period identified. Acquisition expenses related to earned premiums are expensed
immediately.
Income Taxes
Income taxes are accounted for in accordance with the provisions of Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes,” or SFAS 109. Deferred tax assets and
liabilities are recognized consistent with the asset and liability method required by SFAS 109.
Our deferred tax assets and liabilities primarily result from temporary differences between the
amounts recorded in our consolidated financial statements and the tax basis of our assets and
liabilities.
At each balance sheet date, management assesses the need to establish a valuation allowance
that reduces deferred tax assets when it is more likely than not that all, or some portion, of the
deferred tax assets will not be realized.
Reinsurance
Reinsurance premiums, commissions, expense reimbursements and reserves related to reinsured
business are accounted for on a basis consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts. Premiums ceded to other companies are
reported as a reduction of premiums earned.
Amounts recoverable from reinsurers are estimated in a manner consistent with the claim
liability associated with the reinsured policies. The collectability of reinsurance recoverables
is subject to the solvency of the reinsurers.
Unpaid Loss and LAE
Liabilities for loss and loss adjustment expenses, or LAE, are comprised of case basis
estimates for claims and claim expenses reported prior to year-end and estimates of incurred but
not reported, or IBNR, losses and loss expenses, net of estimated salvage and subrogation
recoverable. These estimates are recorded gross of reinsurance and are continually reviewed and
updated with any resulting adjustments reflected in current operating results.
Case reserves are estimated based on the experience and knowledge of claims staff regarding
the nature and potential cost of each claim and are adjusted as additional information becomes
known or payments are made. IBNR reserves are regarded as the most uncertain reserve segment and
are derived by subtracting paid loss and LAE
F-8
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)
and case reserves from estimates of ultimate loss and LAE. Actuaries estimate ultimate loss
and LAE using various generally accepted actuarial methods applied to known losses, earned premium
and other relevant information. Like case reserves, IBNR reserves are adjusted as additional
information becomes known or payments are made.
For IBNR losses, the amount of reserves is estimated on the basis of historical and
statistical information. The Company considers historical patterns of paid and reported claims,
industry data and the probable number and nature of losses arising from claims that have occurred
but have not yet been reported for a given year.
Equity Compensation
Stock options granted subsequent to the adoption of FAS No. 123 (revised 2004), “Share-Based
Payment,” or FAS 123R, are valued using the fair value method and expensed over the vesting period.
Under FAS 123R, the Company has opted to use the binomial lattice option pricing model to
determine fair value. Restricted stock awards granted subsequent to the adoption of 123R are
valued using the measurement and recognition provisions of FAS 123R. Accordingly, the fair value
of the restricted stock award is measured on the date of grant and recognized in earnings over the
requisite service period for each separately vesting portion of the award.
Earnings Per Share
Basic earnings per share is computed using the weighted average number of shares of Common
Stock and Class B Shares outstanding during the period.
In calculating diluted earnings per share, the weighted average of shares of Common Stock and
Class B Shares outstanding for the period is increased to include all potentially dilutive
securities using the treasury stock method. Any common stock equivalent shares are excluded from
the computation if their effect is anti-dilutive.
Basic and diluted earnings per share are calculated by dividing income available to ordinary
shareholders by the applicable weighted average number of shares outstanding during the year.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157
defines fair value, establishes a framework for measuring fair value and expands disclosure
requirements regarding fair value measurement. Where applicable, SFAS No. 157 simplifies and
codifies previously issued guidance on fair value. The Company’s adoption of FAS 157, effective
January 1, 2008, results in additional financial statement disclosures and has no effect on the
conduct of the Company’s business, its financial condition and results of operations.
In October 2008, the FASB issued FASB Staff Position No. 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset is Not Active” (“FSP FAS 157-3”). FSP FAS 157-3
clarifies the application of SFAS 157, Fair Value Measurements, in a market that is not active.
The Company adopted FSP FAS 157-3 on issuance, applicable to the third quarter 2008 financial
statements. The adoption of this standard did not have any material impact on the Company’s
financial statements.
In January 2009, the FASB issued FASB Staff Position No. 99-20-1, “Amendments to the
Impairment Guidance of EITF Issue No. 99-20” (“FSP EITF 99-20-1”), which is effective for interim
and annual periods ending after December 15, 2008. FSP EITF 99-20-1 amends EITF 99-20 to align the
impairment guidance in EITF 99-20 with the impairment guidance in FAS 115, “
Accounting for Certain
Investments in Debt and Equity Securities.
” FSP EITF 99-20-1 amends the cash flows model used to
analyze an other-than-temporary impairment under EITF 99-20 by replacing the market participant
view with management’s assumption of whether it is probable that there is an adverse change in the
estimated cash flows. The adoption of FSP EITF 99-20-1 in the fourth quarter did not have a
material effect on the Company’s results of operations, financial position or liquidity.
Note 3 —
Earnings Per Share
Basic earnings per share are based on the weighted average number of common shares outstanding
during the period, while diluted earnings per share includes the weighted average number of common
shares and potential dilution from shares issuable pursuant to equity incentive compensation using
the treasury stock method.
F-9
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)
The following table shows the computation of the Company’s earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Numerator for earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,425
|
|
|
$
|
12,589
|
|
|
$
|
8,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding used in
computation of earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock (class A and B) issued
|
|
|
15,751
|
|
|
|
15,431
|
|
|
|
15,211
|
|
|
Common stock in treasury
|
|
|
143
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — basic
|
|
|
15,608
|
|
|
|
15,431
|
|
|
|
15,211
|
|
|
Effect of dilutive securities
1
Stock awards
|
|
|
168
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — diluted
|
|
|
15,776
|
|
|
|
15,431
|
|
|
|
15,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.48
|
|
|
$
|
0.82
|
|
|
$
|
0.55
|
|
|
Diluted
|
|
$
|
0.47
|
|
|
$
|
0.82
|
|
|
$
|
0.55
|
|
|
|
|
|
|
1
|
|
Outstanding options of 718, 732 and 742 as of December 31, 2008, 2007 and 2006,
respectively, have been excluded from the diluted earnings per share calculation for
the year ended December 31, 2008, 2007 and 2006, as they were anti-dilutive.
|
Note
4 — Concentration of Premium
Concentration of premium by partner agent for 2008, 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Gross Written Premium
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Risk Transfer Holdings, Inc.
|
|
|
44.7
|
%
|
|
|
49.0
|
%
|
|
|
53.1
|
%
|
|
American Team Managers
|
|
|
16.0
|
%
|
|
|
20.9
|
%
|
|
|
20.7
|
%
|
|
AEON Insurance Group, Inc.
|
|
|
13.4
|
%
|
|
|
16.0
|
%
|
|
|
14.2
|
%
|
|
Specialty Risk Solutions, LLC
|
|
|
11.7
|
%
|
|
|
1.9
|
%
|
|
|
1.3
|
%
|
|
Appalachian Underwriters, Inc.
|
|
|
5.6
|
%
|
|
|
8.7
|
%
|
|
|
9.5
|
%
|
|
Northern Star Management, Inc.
|
|
|
3.8
|
%
|
|
|
n/a
|
|
|
n/a
|
|
Flying Eagle Insurance Service, Inc
|
|
|
2.2
|
%
|
|
|
1.7
|
%
|
|
|
n/a
|
|
Insential, Inc
|
|
|
0.8
|
%
|
|
|
1.1
|
%
|
|
|
1.0
|
%
|
|
First Light Program Manager, Inc.
|
|
|
0.5
|
%
|
|
|
n/a
|
|
|
n/a
|
|
Other
|
|
|
1.3
|
%
|
|
|
0.7
|
%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
Concentration of premium by state for 2008, 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Gross Written Premium
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
California
|
|
|
42.3
|
%
|
|
|
33.6
|
%
|
|
|
30.9
|
%
|
|
Florida
|
|
|
20.9
|
%
|
|
|
27.5
|
%
|
|
|
38.2
|
%
|
|
Texas
|
|
|
10.1
|
%
|
|
|
10.4
|
%
|
|
|
8.1
|
%
|
|
Other states
|
|
|
26.7
|
%
|
|
|
28.5
|
%
|
|
|
22.8
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
F-10
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)
Concentration of premium by line of business for 2008, 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Gross Written Premium
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Workers’ compensation
|
|
|
54.8
|
%
|
|
|
57.4
|
%
|
|
|
58.3
|
%
|
|
Commercial automobile
|
|
|
23.6
|
%
|
|
|
19.9
|
%
|
|
|
16.6
|
%
|
|
General liability
|
|
|
19.7
|
%
|
|
|
20.2
|
%
|
|
|
23.4
|
%
|
|
All other
|
|
|
1.9
|
%
|
|
|
2.5
|
%
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
Note 5 — Investments
SFAS No. 157 establishes a fair value hierarchy which requires maximizing the use of
observable inputs and minimizing the use of unobservable inputs when measuring fair value.
As of December 31, 2008, assets measured at fair value on a recurring basis are summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using:
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
Fair Value at
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Category
|
|
12/31/08
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
U.S. Treasury
|
|
$
|
10,903
|
|
|
$
|
-
|
|
|
$
|
10,903
|
|
|
$
|
-
|
|
|
U.S. Government Agency
|
|
|
37,227
|
|
|
|
|
|
|
|
37,227
|
|
|
|
|
|
|
Municipal
|
|
|
54,934
|
|
|
|
|
|
|
|
54,934
|
|
|
|
|
|
|
Corporate Fixed Maturity
|
|
|
55,536
|
|
|
|
|
|
|
|
55,536
|
|
|
|
|
|
|
Agency Mortgage Backed
|
|
|
40,439
|
|
|
|
|
|
|
|
40,439
|
|
|
|
|
|
|
Non-Agency Mortgage Backed
|
|
|
5,164
|
|
|
|
|
|
|
|
|
|
|
|
5,164
|
|
|
Commercial Mortgage Backed
|
|
|
9,889
|
|
|
|
|
|
|
|
8,676
|
|
|
|
1,213
|
|
|
Asset Backed
|
|
|
2,616
|
|
|
|
|
|
|
|
204
|
|
|
|
2,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturity Investments
|
|
$
|
216,708
|
|
|
$
|
-
|
|
|
$
|
207,919
|
|
|
$
|
8,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents a reconciliation of the beginning and ending balances for all
investments measured at fair value using Level 3 inputs during the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
12/31/2008
|
|
|
Level 3 investments as of beginning of period
|
|
$
|
-
|
|
|
Transfers into (out of) level 3 (at beginning period value)
|
|
|
16,224
|
|
|
Purchases, sales, issuances, and settlements (net)
|
|
|
(1,386
|
)
|
|
Total gains or losses (realized/unrealized):
|
|
|
|
|
|
Included in earnings
|
|
|
(849
|
)
|
|
Included in comprehensive income
|
|
|
(5,200
|
)
|
|
|
|
|
|
|
Level 3 investments as of December 31, 2008
|
|
$
|
8,789
|
|
|
|
|
|
|
The Company uses an independent pricing service to determine the fair value of substantially
all of its investment assets. As of December 31, 2008, a total of seven securities with a total
fair market value of $2,780 were not priced by the independent pricing service, of which all were
Level 3 securities. The Company uses the following pricing methodology for each instrument in its
portfolio.
|
|
•
|
|
First, the Company requests a single non-binding price from its independent pricing
service.
|
F-11
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)
|
|
•
|
|
Second, if no price is available from the pricing service for the instrument, the
Company requests one or more non-binding broker–dealer quotes. A single quote is
sought from a broker–dealer who has significant knowledge of the instrument being
priced. If such broker-dealer is not available to quote, then an average is used from
quotes solicited from multiple broker–dealers.
|
|
|
|
|
•
|
|
Third, if a broker–dealer quote is unavailable for the instrument, the Company uses
a matrix pricing formula based on various factors provided from multiple broker–dealers
including yield spreads, reported trades, sector or grouping information and for
certain securities, other factors such as timeliness of payment, default experience and
prepayment speed assumptions.
|
The Company then validates the price or quote received by examining its reasonableness. The
Company’s review process includes (i) quantitative analysis (including yield spread and interest
rate and price fluctuations on a monthly basis); (ii) initial and ongoing evaluation of
methodologies used by outside parties to calculate fair value; and (iii) comparing the fair value
estimates to its knowledge of the current market. If a price or a quote as provided is deemed
unreasonable, the Company will use the second or the third pricing methodology to determine the
fair value of the instrument. During the fourth quarter of 2008, the
Company deemed the pricing of one security unreasonable and adjusted
the fair value to $668 from $141 based on estimated cash flows and
available yield spreads.
The transfer into Level 3 during the year 2008 of securities with a fair value, as of January
1, 2008, of $16,224 was primarily the result of reduced liquidity, and therefore reduced price
transparency, related to mortgage backed and asset backed securities.
In order to determine the proper SFAS 157 classification for each instrument, the Company, on
an investment category basis, examines the pricing procedures and inputs available to price the
instruments in that investment category. The Company analyzes this information taking into account
asset type, rating and liquidity to determine what inputs are observable and unobservable and
thereby determines the suggested SFAS 157 Level.
The cost or amortized cost and estimated fair values of fixed maturities at December 31, 2008
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
2008
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
U.S. Treasury
|
|
$
|
9,794
|
|
|
$
|
1,109
|
|
|
|
|
|
|
$
|
10,903
|
|
|
U.S. Government Agencies
|
|
|
35,109
|
|
|
|
2,118
|
|
|
|
|
|
|
|
37,227
|
|
|
Municipals
|
|
|
54,655
|
|
|
|
959
|
|
|
|
(679
|
)
|
|
|
54,935
|
|
|
Corporate Fixed Maturity
|
|
|
56,368
|
|
|
|
858
|
|
|
|
(1,691
|
)
|
|
|
55,535
|
|
|
Agency Mortgage Backed
|
|
|
39,066
|
|
|
|
1,373
|
|
|
|
-
|
|
|
|
40,439
|
|
|
Non-Agency Mortgage Backed
|
|
|
7,781
|
|
|
|
-
|
|
|
|
(2,617
|
)
|
|
|
5,164
|
|
|
Commercial Mortgage Backed
|
|
|
13,301
|
|
|
|
-
|
|
|
|
(3,412
|
)
|
|
|
9,889
|
|
|
Asset Backed
|
|
|
4,670
|
|
|
|
-
|
|
|
|
(2,054
|
)
|
|
|
2,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities
|
|
$
|
220,744
|
|
|
$
|
6,417
|
|
|
$
|
(10,453
|
)
|
|
$
|
216,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The cost or amortized cost and estimated fair values of fixed maturities at December 31, 2007
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
2007
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
U.S. Treasury
|
|
$
|
9,801
|
|
|
$
|
366
|
|
|
$
|
-
|
|
|
$
|
10,167
|
|
|
U.S. Government Agencies
|
|
|
37,023
|
|
|
|
1,172
|
|
|
|
(5
|
)
|
|
|
38,190
|
|
|
Municipals
|
|
|
5,264
|
|
|
|
90
|
|
|
|
-
|
|
|
|
5,354
|
|
|
Corporate Fixed Maturity
|
|
|
58,672
|
|
|
|
429
|
|
|
|
(395
|
)
|
|
|
58,706
|
|
|
Mortgage Backed
|
|
|
65,832
|
|
|
|
728
|
|
|
|
(1,242
|
)
|
|
|
65,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities
|
|
$
|
176,592
|
|
|
$
|
2,785
|
|
|
$
|
(1,642
|
)
|
|
$
|
177,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporary losses on investment securities are primarily a result of market illiquidity and
certain asset classes being out of favor with investors and are recorded as unrealized losses.
The Company’s methodology for assessing other-than-temporary impairments (“OTTI”) is based on
security-specific facts and circumstances as of the balance sheet date. Factors considered in
evaluating whether a decline in
F-12
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)
value is other than temporary included: the length of time and the
extent to which the fair value has been less than cost; the financial conditions and near-term
prospects of the issuer; and the Company’s intent and ability to retain the investment for a period
of time sufficient to allow for any anticipated recovery. The Company’s structured securities are
subject to EITF 99-20 and FSP EITF 99-20-1 which allows management to analyze whether it is
probable that there is an adverse change in the estimated cash flows, in which case, the amount of
accretive yield is prospectively adjusted and an OTTI loss is recognized. The Company did not
record any OTTI charges on investment securities during the three months ended December 31, 2008.
During the third quarter of 2008, based on the market participant analysis of EITF 99-20, certain
of our available-for-sale securities with a fair value of $0.9 million and a book value of $1.7
million experienced an other-than-temporary impairment of $0.8 million.
The cost or amortized cost and fair values of fixed maturities by contractual maturity at
December 31, 2008 are shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties. The maturities for mortgage backed securities with an amortized cost of
$64,818 and a fair value of $58,108 were allocated in the following table by averaging various
expected prepayment assumptions that are developed through a model which takes into account recent
prepayment patterns and future estimates on different agency coupons and structures.
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
Amortized
|
|
|
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Due in one year or less
|
|
$
|
56,957
|
|
|
$
|
56,826
|
|
|
Due after one year through five years
|
|
|
92,563
|
|
|
|
89,887
|
|
|
Due after five years through ten years
|
|
|
84,918
|
|
|
|
83,447
|
|
|
Due after ten years
|
|
|
33,003
|
|
|
|
33,245
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
267,441
|
|
|
$
|
263,405
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, there were 90 out of 196 securities in an unrealized loss position.
Of these, 38 securities have been in an unrealized loss position for twelve months or greater.
Those fixed maturity investments with unrealized losses as of December 31, 2008 are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Losses
|
|
|
|
|
|
|
|
|
Less than
|
|
|
Greater than 12
|
|
|
|
|
|
2008
|
|
Fair Value
|
|
|
12 Months
|
|
|
Months
|
|
|
Total
|
|
|
Municipal
|
|
$
|
21,713
|
|
|
$
|
(679
|
)
|
|
$
|
-
|
|
|
$
|
(679
|
)
|
|
Corporate Fixed Maturity
|
|
|
35,201
|
|
|
|
(560
|
)
|
|
|
(1,130
|
)
|
|
|
(1,690
|
)
|
|
Agency Mortgage Backed
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Non-Agency Mortgage Backed
|
|
|
5,164
|
|
|
|
(279
|
)
|
|
|
(2,339
|
)
|
|
|
(2,618
|
)
|
|
Commercial Mortgage Backed
|
|
|
9,889
|
|
|
|
(1,811
|
)
|
|
|
(1,601
|
)
|
|
|
(3,412
|
)
|
|
Asset Backed
|
|
|
2,616
|
|
|
|
-
|
|
|
|
(2,054
|
)
|
|
|
(2,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities
|
|
$
|
74,583
|
|
|
$
|
(3,329
|
)
|
|
$
|
(7,124
|
)
|
|
$
|
(10,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Those fixed maturity investments with unrealized losses as of December 31, 2007 are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Losses
|
|
|
|
|
|
|
|
|
Less than
|
|
|
Greater than 12
|
|
|
|
|
|
2007
|
|
Fair Value
|
|
|
12 Months
|
|
|
Months
|
|
|
Total
|
|
|
US Government Agency Securities
|
|
$
|
2,177
|
|
|
$
|
-
|
|
|
$
|
(5
|
)
|
|
$
|
(5
|
)
|
|
Corporate Securities
|
|
|
32,220
|
|
|
|
(101
|
)
|
|
|
(294
|
)
|
|
|
(395
|
)
|
|
Mortgage Backed Securities
|
|
|
21,974
|
|
|
|
(400
|
)
|
|
|
(842
|
)
|
|
|
(1,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities
|
|
$
|
56,371
|
|
|
$
|
(501
|
)
|
|
$
|
(1,141
|
)
|
|
$
|
(1,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities with carrying values of $32,419 and fair value of $34,928 were on deposit
with insurance regulatory authorities as required by law at December 31, 2008.
Information relating to the Company’s investments is shown below:
F-13
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Proceeds from voluntary sales and redemptions
|
|
$
|
6,108
|
|
|
$
|
9,938
|
|
|
$
|
7,174
|
|
|
Gross realized gains
|
|
|
29
|
|
|
|
62
|
|
|
|
333
|
|
|
Gross realized losses
|
|
|
(884
|
)
|
|
|
(81
|
)
|
|
|
(58
|
)
|
The components of the Company’s net investment income were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Fixed maturities
|
|
$
|
10,154
|
|
|
$
|
8,098
|
|
|
$
|
5,516
|
|
|
Short-term investments
|
|
|
1,161
|
|
|
|
1,751
|
|
|
|
759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment income
|
|
|
11,315
|
|
|
|
9,849
|
|
|
|
6,275
|
|
|
Investment Expenses
|
|
|
(478
|
)
|
|
|
(296
|
)
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
10,837
|
|
|
$
|
9,553
|
|
|
$
|
6,087
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6 — Federal Income Taxes
As of December 31, 2008, December 31, 2007 and December 31, 2006 the Company had tax basis net
operating loss carryforwards of $0, $2,135 and $18,751, respectively. The Company also accumulated
start-up and
organization expenditures, through December 31, 2004 of $2,364 that are deductible over a 60
month period commencing on November 23, 2004. The unamortized portion of these costs was $402,
$873 and $1,344 at December 31, 2008, December 31, 2007 and December 31, 2006, respectively.
In 2007 and 2006 the Company had tax basis net operating loss carryforwards, but incurred
current income taxes in the amount of $324 and $157 arising from alternative minimum tax
obligations in 2007 and 2006, respectively. The Company also recorded in 2007 and 2006 a tax
provision for the year equal to the current year increase in deferred tax liabilities associated
with indefinite lived intangible assets. Due to the indefinite nature of these intangible assets
for financial reporting purposes, these deferred tax liabilities do not represent a source of
income to realize the Company’s deferred tax assets. Based on these facts the Company recorded
valuation allowances of $1,626 and $6,598 in 2007 and 2006, respectively, against all remaining net
deferred tax assets, until such time as its operating results and future outlook produce sufficient
taxable income to realize these tax assets.
Beginning in 2008, based on continuing profitability trends, the Company believes that it is
more likely than not that the deferred income tax assets will be realized. As such, the Company
elected to eliminate its valuation allowance and establish the full net deferred tax asset, with
the exception of certain State tax net operating loss carryforwards that may not be realized in the
future totaling $168, for which a valuation allowance was maintained.
A reconciliation of the Company’s expected to actual federal income taxes are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(dollars in thousands)
|
|
|
Income tax expense at statutory rates
|
|
$
|
(2,715
|
)
|
|
$
|
(4,364
|
)
|
|
$
|
(2,943
|
)
|
|
Tax benefit from tax exempt interest income
|
|
|
451
|
|
|
|
-
|
|
|
|
-
|
|
|
Tax expense from other permanent differences
|
|
|
(51
|
)
|
|
|
(106
|
)
|
|
|
(132
|
)
|
|
State tax expense
|
|
|
328
|
|
|
|
-
|
|
|
|
-
|
|
|
Valuation allowance
|
|
|
1,458
|
|
|
|
4,228
|
|
|
|
2,839
|
|
|
Other
|
|
|
(30
|
)
|
|
|
(5
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual income tax expense
|
|
$
|
(559
|
)
|
|
$
|
(247
|
)
|
|
$
|
(247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
F-14
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)
The components of current and deferred income taxes for the years ended December 31, 2008,
2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(dollars in thousands)
|
|
|
Current tax expense
|
|
$
|
(1,903
|
)
|
|
$
|
(324
|
)
|
|
$
|
(157
|
)
|
|
Deferred tax benefit (expense)
|
|
|
1,344
|
|
|
|
77
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
(559
|
)
|
|
$
|
(247
|
)
|
|
$
|
(247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The Company paid federal income taxes of $1,885, $468 and $0 in 2008, 2007 and 2006, respectively.
The components of the Company’s deferred tax assets and liabilities at December 31, 2008 and
December 31, 2007, respectively, are noted in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred Tax Assets Arising From
|
|
(dollars in thousands)
|
|
|
Loss & LAE reserves
|
|
$
|
6,079
|
|
|
$
|
4,002
|
|
|
Unearned premium reserves
|
|
|
5,645
|
|
|
|
5,898
|
|
|
Net operating loss carryforwards
|
|
|
-
|
|
|
|
703
|
|
|
Stock Option and Grant Expense
|
|
|
646
|
|
|
|
504
|
|
|
Unrealized loss on investments
|
|
|
1,414
|
|
|
|
-
|
|
|
Start up costs
|
|
|
141
|
|
|
|
297
|
|
|
Other than temporary Impairments
|
|
|
298
|
|
|
|
-
|
|
|
State Tax Net Operating Loss Carryforwards
|
|
|
337
|
|
|
|
-
|
|
|
AMT Tax Credit
|
|
|
-
|
|
|
|
481
|
|
|
Other
|
|
|
455
|
|
|
|
670
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
15,015
|
|
|
|
12,555
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities Arising From
|
|
|
|
|
|
|
|
|
|
Deferred acquisition costs
|
|
|
6,362
|
|
|
|
5,948
|
|
|
Equipment and capitalized software
|
|
|
3,803
|
|
|
|
3,395
|
|
|
Unrealized gain on investment
|
|
|
-
|
|
|
|
389
|
|
|
Prepaid assets
|
|
|
202
|
|
|
|
255
|
|
|
Intangible asset
|
|
|
1,004
|
|
|
|
727
|
|
|
Other
|
|
|
330
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
11,701
|
|
|
|
10,942
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
3,314
|
|
|
|
1,613
|
|
|
Valuation allowance
|
|
|
(168
|
)
|
|
|
(1,626
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability) after valuation allowance
|
|
$
|
3,146
|
|
|
$
|
(13
|
)
|
|
|
|
|
|
|
|
|
Note 7 — Equity Compensation
On May 1, 2007, the stockholders of the Company approved the 2007 Stock Incentive Plan, or
2007 Plan. The 2007 Plan replaces the 2004 Stock Option Plan, or 2004 Plan, and no more grants or
awards may be made under the 2004 Plan. Options previously granted under the 2004 Plan will
continue for the life of such options, unless earlier terminated, cancelled, expired or exercised.
The 2007 Plan provides for the issuance of up to 800,000 shares of the Company’s common stock in
the form of stock options, stock appreciation rights, restricted stock awards, and deferred stock
awards (as well as dividend equivalents in connection with deferred stock awards). In addition,
should any of the 718,066 options currently outstanding under the 2004 Plan be terminated, those
shares will also be available under the 2007 Plan. All grants of options or awards of stock under
the 2007 Plan must be approved by the Compensation Committee of the Board of Directors, which
consists entirely of independent directors. All options granted under the 2004 Plan have ten-year
terms and vest in equal annual installments over either a three or four year period following the
date of grant with an exercise price equal to the fair market value of the Company’s common stock
on the date of grant.
F-15
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)
Compensation expense recognized for all stock-based compensation for the years ended December
31, 2008, 2007 and 2006 were $495, $1,059 and $1,101, respectively.
Stock Options
There were no options granted in 2008 or 2007. The fair value of each option grant is
estimated at the date of grant using the binomial lattice option pricing model with the following
assumptions used for grants issued in 2006 and earlier: risk free interest rate range of 4.56% –
4.60%; expected life range of 3.1 – 7.5 years; expected volatility of 45%; and expected dividend
yield of 2% beginning after five years.
The following table presents stock option activity under the 2004 Plan for 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
Number of
|
|
|
Average Exercise
|
|
|
Aggregate
|
|
|
Contractual
|
|
|
Stock Option Activity
|
|
Shares
|
|
|
Price Per Share
|
|
|
Intrinsic Value
|
|
|
Remaining Life
|
|
|
|
|
(actual dollar and share amounts)
|
|
|
(years)
|
|
|
Balance at January 1, 2008
|
|
|
732,466
|
|
|
$
|
9.32
|
|
|
$
|
-
|
|
|
|
7.00
|
|
|
Options granted
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
n/a
|
|
|
Options exercised
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
n/a
|
|
|
Option expired
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
n/a
|
|
|
Options forfeited
|
|
|
(14,400
|
)
|
|
|
9.50
|
|
|
|
-
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
718,066
|
|
|
$
|
9.32
|
|
|
|
-
|
|
|
|
6.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total options vested at December 31, 2008
|
|
|
708,066
|
|
|
$
|
9.36
|
|
|
|
-
|
|
|
|
5.98
|
|
|
Total options un-vested at December 31, 2008
|
|
|
10,000
|
|
|
$
|
6.22
|
|
|
|
-
|
|
|
|
7.15
|
|
The weighted average grant-date fair value of options granted during the year ended December
31, 2006 was $2.89. The grant-date fair value of options vested during the years ended December
31, 2008, 2007, and 2006 were $187, $1,098 and $1,078, respectively. There were no options
exercised during the years ended December 31, 2008 or 2007 and cash received for options exercised
during the year ended December 31, 2006 was $15. The remaining unrecognized compensation expense
related to unvested stock options at December 31, 2008 is approximately $16 and the
weighted-average period of time over which this cost will be recognized is 1.2 years
Restricted Stock Awards
The 2007 Plan provides for an automatic grant of 3,000 shares of common stock to each
independent director upon the first business day following re-election to the Board of Directors at
the annual meeting of stockholders. On both May 7, 2008, and May 2, 2007, 15,000 shares were
issued to the independent directors who were re-elected to the Board at the 2008 and 2007 annual
meeting, respectively. The compensation expense associated with these automatic grants was $67 and
$123 for 2008 and 2007, respectively, and is based on the fair market value of the shares on the
date of grant.
On April 4, 2008 the Compensation Committee of the Board of Directors granted deferred stock
awards for 258,750 shares of common stock to all employees of the Company, including the executive
officers. The awards granted to the non-executive employees vest on the first anniversary of the
grant date and the awards for the executive officers vest equally on either the first four or the
first five anniversaries of the grant date. No restricted stock awards were made in 2006.
F-16
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)
A summary of the status of the Company’s non-vested restricted stock awards as of December 31,
2008 and changes during the year ended December 31, 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average Grant
|
|
|
|
|
Number of
|
|
|
Date Fair
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
|
|
(actual dollar and share amounts)
|
|
|
Non-vested award balance at January 1, 2008
|
|
|
-
|
|
|
$
|
-
|
|
|
Awards granted
|
|
|
273,750
|
|
|
|
4.70
|
|
|
Awards vested
|
|
|
15,000
|
|
|
|
4.49
|
|
|
Awards forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Total non-vested awards at December 31, 2008
|
|
|
258,750
|
|
|
$
|
4.71
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant-date fair value of restricted stock awards granted during the year
ended December 31, 2008 and 2007 was $4.70 and 8.21, respectively. The grant-date fair value of
restricted stock awards that vested during the years ended December 31, 2008 and 2007 were $67 and
$123 respectively. The remaining unrecognized compensation expense related to unvested stock
options at December 31, 2008 is approximately $850 and the weighted-average period of time over
which this cost will be recognized is 2.1 years
FAS 123R requires the Company to reflect the tax savings resulting from tax deductions in
excess of expense reflected in its financial statements as a financing cash flow, rather than as an
operating cash flow. The amount of financing cash flows recognized for such excess tax deductions
was $0 for the year ended December 31, 2008.
Note 8 — Employee Benefit Plans
Company employees who have completed three months of consecutive service are eligible for
participation in the Company’s 401(k) Plan. The 401(k) Plan provides for matching contributions by
the Company up to four percent of eligible compensation contributed by the employee. During 2008,
2007 and 2006, the matching contributions made by the Company were $364, $301 and $228,
respectively.
Note 9 — Commitments
On February 3, 2005, the Company entered into a lease agreement, or Lease, for its home
office space that commenced on May 1, 2005 and terminates on April 30, 2020. On April 24, 2006,
the Company amended the Lease to include additional premises effective September 1, 2006. The
Company’s net Lease obligations are $1,871 for years 1 through 5, $3,294 for years 6 through 10 and
$3,753 for years 11 through 15. Included in the Lease terms are scheduled rent escalations,
improvement incentives and rent abatements all of which are recognized on a straight line basis
over the Lease term in relation to square footage occupied by the Company. To secure the Lease,
the Company is required to hold an irrevocable standby letter of credit in the amount of $1,500.
The Company has the option to terminate the Lease at August 31, 2011. Upon notice of
termination, the Company is obligated to pay six months of the then current rent plus certain
costs. If the Company opted to terminate as of August 31, 2011, the Company would be obligated to
pay approximately $2,437 plus operating expenses, taxes, and brokerage commissions.
Note 10 — Stock Repurchase
In April 2008, the board of directors authorized the repurchase of up to 275,000 shares
of the Company’s Common Stock at an aggregate purchase price of up to $1,650. Under the
authorization, repurchases may be made from time to time in the open market, pursuant to trading
plans meeting the requirements of Rule 10b-18 under the Securities Exchange Act of 1934, in private
transactions or otherwise. The authorization expired on October 15, 2008. During the three months
ended June 30, 2008, the Company repurchased all 275,000 shares of Common Stock under its stock
repurchase authorization for a total cost of approximately $1,347. The average cost per share
repurchased was $4.90 including commission. At June 30, 2008, the Company had fully utilized its
authority to repurchase shares of Common Stock.
F-17
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)
Note 11 — Reinsurance
For workers’ compensation business, the Company’s reinsurers are responsible for losses
between $1,000 and $10,000 due to any single occurrence under a policy and for losses in excess of
$10,000 up to $35,000 for a multiple loss occurrence. For non-workers’ compensation casualty
business, the Company does not write policies above $1,000 and therefore does not need reinsurance
protection for single loss occurrences; its reinsurers are responsible between $1,000 and $5,000 of
losses for a multiple loss occurrence. Reinsurance does not extinguish the Company’s primary
liability under the policies written.
The effects of reinsurance are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
130,204
|
|
|
$
|
159,290
|
|
|
$
|
152,841
|
|
|
Assumed
1
|
|
|
15,987
|
|
|
|
1,100
|
|
|
|
335
|
|
|
Ceded
|
|
|
(8,916
|
)
|
|
|
(10,984
|
)
|
|
|
(11,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
137,275
|
|
|
$
|
149,406
|
|
|
$
|
142,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
143,539
|
|
|
$
|
162,501
|
|
|
$
|
121,698
|
|
|
Assumed
|
|
|
8,792
|
|
|
|
952
|
|
|
|
269
|
|
|
Ceded
|
|
|
(8,866
|
)
|
|
|
(10,984
|
)
|
|
|
(11,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
143,465
|
|
|
$
|
152,469
|
|
|
$
|
110,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
96,652
|
|
|
$
|
97,052
|
|
|
$
|
69,545
|
|
|
Assumed
|
|
|
5,381
|
|
|
|
756
|
|
|
|
238
|
|
|
Ceded
|
|
|
(12,648
|
)
|
|
|
(7,818
|
)
|
|
|
(7,101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
89,385
|
|
|
$
|
89,990
|
|
|
$
|
62,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
The majority of the assumed business in 2008 results from the Company’s fronting arrangement for public entity business.
|
Note 12 — Unpaid Loss And Loss Adjustment Expenses
Loss and LAE reserves are estimates of amounts needed to pay claims and related expenses in
the future for insured events that have already occurred. The Company establishes estimates of
amounts recoverable from its reinsurers in a manner consistent with the claims liability covered by
the reinsurance contracts, net of an allowance for uncollectible amounts. The Company’s loss and
LAE reserves represents management’s best estimate of reserves based on a composite of the results
of the various actuarial methods, as well as consideration of known facts and trends.
At December 31, 2008 the Company reported gross loss and loss adjustment expense reserves of
$214,953 of which $53,262 represented the gross direct loss and loss adjustment expense reserves of
Potomac, which is fully reinsured by OneBeacon. The Company experienced favorable prior year loss
development of $1,844 primarily attributable to improved loss development in our general liability
line of business. At December 31, 2007 the Company reported gross loss and loss adjustment expense
reserves of $184,736 of which $63,529 represented the gross direct loss and loss adjustment
expenses reserves of Potomac, which is fully reinsured by OneBeacon.
Potomac was a participant in a OneBeacon inter-company pooling arrangement under which Potomac
ceded all of its insurance business into the Pool and assumed 0.5% of the Pool’s insurance
business. Potomac ceased its participation in the Pool effective January 1, 2004 and entered into
reinsurance agreements whereby it ceded all of its business to OneBeacon. As a result, Potomac will
not share in any favorable or unfavorable development of prior losses recorded by it or the Pool
after January 1, 2004, unless OneBeacon fails to perform on its reinsurance obligations.
Included in the reserves for the Company is tabular reserve discount for workers’ compensation
and excess workers’ compensation pension claims of $2,612 as of December 31, 2008 and $1,505 as of
December 31, 2007. The reserves are discounted on a tabular basis at four percent using the 2004
United States Actuarial Life Tables for Female and Male population.
F-18
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)
Changes in the liability for loss and loss adjustment expense reserves were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
Year Ended December 31, 2007
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
Potomac of
|
|
|
|
|
|
|
SUA
|
|
|
Potomac of
|
|
|
|
|
|
|
SUA
|
|
|
Potomac of
|
|
|
|
|
|
|
SUA
|
|
|
|
|
Illinois
|
|
|
SUA
|
|
|
Consolidated
|
|
|
Illinois
|
|
|
SUA
|
|
|
Consolidated
|
|
|
Illinois
|
|
|
SUA
|
|
|
Consolidated
|
|
|
Beginning of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
$
|
63,529
|
|
|
$
|
121,207
|
|
|
$
|
184,736
|
|
|
$
|
71,592
|
|
|
$
|
69,608
|
|
|
$
|
141,200
|
|
|
$
|
86,736
|
|
|
$
|
18,134
|
|
|
$
|
104,870
|
|
|
Less reinsurance recoverables
|
|
|
(63,529
|
)
|
|
|
(13,635
|
)
|
|
|
(77,164
|
)
|
|
|
(71,592
|
)
|
|
|
(9,384
|
)
|
|
|
(80,976
|
)
|
|
|
(86,736
|
)
|
|
|
(2,261
|
)
|
|
|
(88,997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
-
|
|
|
|
107,572
|
|
|
|
107,572
|
|
|
|
-
|
|
|
|
60,224
|
|
|
|
60,224
|
|
|
|
-
|
|
|
|
15,873
|
|
|
|
15,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred losses and LAE relating to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
-
|
|
|
|
91,229
|
|
|
|
91,229
|
|
|
|
-
|
|
|
|
92,167
|
|
|
|
92,167
|
|
|
|
-
|
|
|
|
63,546
|
|
|
|
63,546
|
|
|
Prior years
|
|
|
-
|
|
|
|
(1,844
|
)
|
|
|
(1,844
|
)
|
|
|
-
|
|
|
|
(2,177
|
)
|
|
|
(2,177
|
)
|
|
|
-
|
|
|
|
(864
|
)
|
|
|
(864
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred losses and LAE
|
|
|
-
|
|
|
|
89,385
|
|
|
|
89,385
|
|
|
|
-
|
|
|
|
89,990
|
|
|
|
89,990
|
|
|
|
-
|
|
|
|
62,682
|
|
|
|
62,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid losses and LAE related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
-
|
|
|
|
25,684
|
|
|
|
25,684
|
|
|
|
-
|
|
|
|
24,772
|
|
|
|
24,772
|
|
|
|
-
|
|
|
|
12,997
|
|
|
|
12,997
|
|
|
Prior years
|
|
|
-
|
|
|
|
35,918
|
|
|
|
35,918
|
|
|
|
-
|
|
|
|
17,870
|
|
|
|
17,870
|
|
|
|
-
|
|
|
|
5,334
|
|
|
|
5,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid losses and LAE
|
|
|
-
|
|
|
|
61,602
|
|
|
|
61,602
|
|
|
|
-
|
|
|
|
42,642
|
|
|
|
42,642
|
|
|
|
-
|
|
|
|
18,331
|
|
|
|
18,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
-
|
|
|
|
135,355
|
|
|
|
135,355
|
|
|
|
-
|
|
|
|
107,572
|
|
|
|
107,572
|
|
|
|
-
|
|
|
|
60,224
|
|
|
|
60,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus reinsurance recoverables
|
|
|
53,262
|
|
|
|
26,336
|
|
|
|
79,598
|
|
|
|
63,529
|
|
|
|
13,635
|
|
|
|
77,164
|
|
|
|
71,592
|
|
|
|
9,384
|
|
|
|
80,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
$
|
53,262
|
|
|
$
|
161,691
|
|
|
$
|
214,953
|
|
|
$
|
63,529
|
|
|
$
|
121,207
|
|
|
$
|
184,736
|
|
|
$
|
71,592
|
|
|
$
|
69,608
|
|
|
$
|
141,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13 — Statutory Information
Statutory accounting is a basis of accounting developed to assist insurance regulators in
monitoring and regulating the solvency of insurance companies. It is primarily concerned with
measuring an insurer’s surplus to policyholders. Accordingly, statutory accounting focuses on
valuing assets and liabilities of insurers at financial reporting dates in accordance with
appropriate insurance law and regulatory provisions applicable to each insurer’s domiciliary state.
Statutory accounting practices established by the National Association of Insurance
Commissioners, or NAIC, and adopted, in part, by state insurance departments will determine, among
other things, the amount of statutory surplus and statutory net income, which will affect, in part,
the amount of funds available to pay dividends.
As an Illinois property and casualty insurer the maximum amount of dividends which can be paid
by SUA Insurance Company to shareholders without prior approval of the Illinois Director of
Insurance is the greater of net income or 10% of statutory surplus, further limited to earned
surplus. At December 31, 2008, SUA Insurance Company has no earned surplus and therefore no
dividend capacity without the prior approval of the Illinois Director of Insurance.
In order to enhance the regulation of insurer solvency, in December 1993, the NAIC adopted a
formula and model law to implement risk-based capital requirements for property and casualty
insurance companies. These risk-based capital requirements are designed to assess capital adequacy
and to raise the level of protection that statutory surplus provides for policyholder obligations.
The risk-based capital model for property and casualty insurance companies measures three major
areas of risk facing property and casualty insurers:
|
|
•
|
|
underwriting, which encompasses the risk of adverse loss development and inadequate
pricing;
|
|
|
|
|
•
|
|
declines in asset values arising from credit risk; and
|
|
|
|
|
•
|
|
declines in asset values arising from investment risk.
|
An insurer’s statutory surplus is compared to its risk-based capital requirement. If adjusted
statutory surplus falls below company action level risk based capital, the company would be subject
to regulatory action including submission of a report to insurance regulators outlining the
corrective action the company intends to take.
F-19
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)
SUA Insurance Company’s statutory information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Ending capital and surplus
|
|
$
|
93,884
|
|
|
$
|
89,845
|
|
|
$
|
77,308
|
|
|
Net income
|
|
|
4,485
|
|
|
|
16,312
|
|
|
|
1,052
|
|
|
Company action level risk-based capital
|
|
|
37,850
|
|
|
|
43,408
|
|
|
|
42,265
|
|
Note 14 — Quarterly Financial Data (Unaudited)
The following table sets forth the unaudited financial data for the years ended December 31,
2008, December 31, 2007 and December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
Quarterly Financial Data
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
Revenues
|
|
$
|
38,434
|
|
|
$
|
36,872
|
|
|
$
|
39,025
|
|
|
$
|
39,160
|
|
|
Expenses including taxes
|
|
|
34,969
|
|
|
|
34,622
|
|
|
|
37,724
|
|
|
|
38,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,465
|
|
|
$
|
2,250
|
|
|
$
|
1,301
|
|
|
$
|
409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (basic)
|
|
$
|
0.22
|
|
|
$
|
0.14
|
|
|
$
|
0.08
|
|
|
$
|
0.03
|
|
|
Net income per share (diluted)
|
|
$
|
0.22
|
|
|
$
|
0.14
|
|
|
$
|
0.08
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
Quarterly Financial Data
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
Revenues
|
|
$
|
37,445
|
|
|
$
|
39,556
|
|
|
$
|
42,895
|
|
|
$
|
42,099
|
|
|
Expenses including taxes
|
|
|
34,423
|
|
|
|
36,546
|
|
|
|
39,532
|
|
|
|
38,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,022
|
|
|
$
|
3,010
|
|
|
$
|
3,363
|
|
|
$
|
3,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (basic/diluted)
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.22
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
Quarterly Financial Data
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
Revenues
|
|
$
|
24,401
|
|
|
$
|
26,659
|
|
|
$
|
33,613
|
|
|
$
|
32,580
|
|
|
Expenses including taxes
|
|
|
24,601
|
|
|
|
24,492
|
|
|
|
30,031
|
|
|
|
29,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(200
|
)
|
|
$
|
2,167
|
|
|
$
|
3,582
|
|
|
$
|
2,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (basic/diluted)
|
|
$
|
(0.01
|
)
|
|
$
|
0.14
|
|
|
$
|
0.24
|
|
|
$
|
0.18
|
|
F-20
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
SCHEDULE I
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
SUMMARY OF INVESTMENTS — OTHER THAN
INVESTMENTS IN RELATED PARTIES
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
|
(dollars in thousands)
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
9,794
|
|
|
$
|
10,903
|
|
|
U.S. Government Agencies
|
|
|
35,109
|
|
|
|
37,227
|
|
|
Municipals
|
|
|
54,655
|
|
|
|
54,934
|
|
|
Corporate Fixed Maturity
|
|
|
56,368
|
|
|
|
55,536
|
|
|
Agency Mortgage Backed
|
|
|
39,066
|
|
|
|
40,439
|
|
|
Non-Agency Mortgage Backed
|
|
|
7,781
|
|
|
|
5,164
|
|
|
Commercial Mortgage Backed
|
|
|
13,301
|
|
|
|
9,889
|
|
|
Asset Backed
|
|
|
4,670
|
|
|
|
2,616
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
220,744
|
|
|
|
216,708
|
|
|
Short-term investments
|
|
|
46,697
|
|
|
|
46,697
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
267,441
|
|
|
$
|
263,405
|
|
|
|
|
|
|
|
|
|
F-21
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
SCHEDULE II
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
As of December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
Balance Sheet
|
|
2008
|
|
|
2007
|
|
|
|
|
(dollars in thousands)
|
|
ASSETS
|
|
Investments in subsidiary
|
|
$
|
126,103
|
|
|
$
|
124,270
|
|
|
Short-term investments, at amortized cost (which approximates fair value)
|
|
|
7,410
|
|
|
|
6,514
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
133,513
|
|
|
|
130,784
|
|
|
Cash
|
|
|
245
|
|
|
|
390
|
|
|
Deferred tax asset
|
|
|
787
|
|
|
|
(294
|
)
|
|
Current tax asset
|
|
|
1,817
|
|
|
|
294
|
|
|
Other assets
|
|
|
1
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
136,363
|
|
|
$
|
131,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
Liability
|
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities
|
|
$
|
74
|
|
|
$
|
41
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
74
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
|
Common Stock at $.01 par value per share — authorized 30,000,000 shares; issued
14,712,355 and 14,697,355 and outstanding 14,437,355 and 14,697,355 shares
|
|
|
147
|
|
|
|
147
|
|
|
Class B Common Stock at $.01 par value per share — authorized 2,000,000 shares;
issued and outstanding 1,368,562 and 869,738 shares
|
|
|
14
|
|
|
|
9
|
|
|
Paid-in capital — Common Stock
|
|
|
129,926
|
|
|
|
129,431
|
|
|
Paid-in capital — Class B Common Stock
|
|
|
8,077
|
|
|
|
6,139
|
|
|
Retained earnings
|
|
|
1,693
|
|
|
|
(5,732
|
)
|
|
Treasury stock
|
|
|
(1,347
|
)
|
|
|
|
|
|
Accumulated other comprehensive income (loss), net of tax
|
|
|
(2,221
|
)
|
|
|
1,143
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
136,289
|
|
|
|
131,137
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
136,363
|
|
|
$
|
131,178
|
|
|
|
|
|
|
|
|
|
The condensed financial statements should be read in conjunction with the consolidated financial
statements and notes thereto.
F-22
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
SCHEDULE II — (Continued)
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
For the Years Ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Statement of Operations
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(dollars in thousands except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain of subsidiary
|
|
$
|
5,491
|
|
|
$
|
13,597
|
|
|
$
|
9,568
|
|
|
Other Revenues
|
|
|
163
|
|
|
|
279
|
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
5,654
|
|
|
|
13,876
|
|
|
|
9,752
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
539
|
|
|
|
1,287
|
|
|
|
1,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
539
|
|
|
|
1,287
|
|
|
|
1,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income
|
|
|
5,115
|
|
|
|
12,589
|
|
|
|
8,408
|
|
|
Federal income tax benefit
|
|
|
2,310
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
7,425
|
|
|
|
12,589
|
|
|
|
8,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized investment gains, net of tax
|
|
|
(3,364
|
)
|
|
|
2,204
|
|
|
|
570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive net income
|
|
$
|
4,061
|
|
|
$
|
14,793
|
|
|
$
|
8,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share available to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.48
|
|
|
$
|
0.82
|
|
|
$
|
0.55
|
|
|
Diluted
|
|
$
|
0.47
|
|
|
$
|
0.82
|
|
|
$
|
0.55
|
|
The condensed financial statements should be read in conjunction with the consolidated financial
statements and notes thereto.
F-23
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
SCHEDULE II — (Continued)
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
For the Years Ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Statement of Cash Flows
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(dollars in thousands)
|
|
|
Cash flows from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,425
|
|
|
$
|
12,589
|
|
|
$
|
8,408
|
|
|
Charges (credits) to reconcile net income to
cash flows from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income of subsidiary
|
|
|
(5,491
|
)
|
|
|
(13,597
|
)
|
|
|
(9,568
|
)
|
|
Change in deferred taxes
|
|
|
(1,081
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Change in current tax receivable
|
|
|
(1,523
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Depreciation expense
|
|
|
2
|
|
|
|
132
|
|
|
|
144
|
|
|
Write off of capitalized software
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
Other, net
|
|
|
823
|
|
|
|
1,070
|
|
|
|
953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
(7,270
|
)
|
|
|
(12,395
|
)
|
|
|
(8,459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by operations
|
|
|
155
|
|
|
|
194
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in short-term investments
|
|
|
(896
|
)
|
|
|
(1,311
|
)
|
|
|
(4,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used for investing activities
|
|
|
(896
|
)
|
|
|
(1,311
|
)
|
|
|
(4,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
1,943
|
|
|
|
1,303
|
|
|
|
3,088
|
|
|
Treasury Stock
|
|
|
(1,347
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by financing activities
|
|
|
596
|
|
|
|
1,303
|
|
|
|
3,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from cash during the period
|
|
|
(145
|
)
|
|
|
186
|
|
|
|
(1,142
|
)
|
|
Cash at beginning of the period
|
|
|
390
|
|
|
|
204
|
|
|
|
1,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of the period
|
|
$
|
245
|
|
|
$
|
390
|
|
|
$
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
The condensed financial statements should be read in conjunction with the consolidated financial
statements and notes thereto.
F-24
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
SCHEDULE III
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
SUPPLEMENTARY INSURANCE INFORMATION
For the Years Ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future
|
|
|
|
|
|
|
Column
|
|
|
|
|
|
|
|
|
|
|
Column
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy
|
|
|
|
|
|
|
E
|
|
|
|
|
|
|
|
|
|
|
H
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column
|
|
|
Benefits,
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Column
|
|
|
Benefits,
|
|
|
|
|
|
|
Column
|
|
|
|
|
|
|
|
B
|
|
|
Losses,
|
|
|
Column
|
|
|
Policy
|
|
|
Column
|
|
|
G
|
|
|
Claims,
|
|
|
Column
|
|
|
J
|
|
|
Column
|
|
|
|
|
Deferred
|
|
|
Claims and
|
|
|
D
|
|
|
Claims and
|
|
|
F
|
|
|
Net
|
|
|
Losses and
|
|
|
I
|
|
|
Other
|
|
|
K
|
|
|
Column
|
|
Acquisition
|
|
|
Loss
|
|
|
Unearned
|
|
|
Benefits
|
|
|
Premium
|
|
|
Investment
|
|
|
Settlement
|
|
|
Acquisition
|
|
|
Operating
|
|
|
Premium
|
|
|
A
|
|
Costs
|
|
|
Expenses
|
|
|
Premiums
|
|
|
Payable
|
|
|
Revenue
|
|
|
Income
|
|
|
Expenses
|
|
|
Expenses
|
|
|
Expenses
|
|
|
Written
|
|
|
|
|
(dollars in thousands)
|
|
|
Year ended
December 31, 2008
|
|
$
|
18,156
|
|
|
$
|
214,953
|
|
|
$
|
80,600
|
|
|
$
|
-
|
|
|
$
|
143,465
|
|
|
$
|
10,837
|
|
|
$
|
89,385
|
|
|
$
|
32,990
|
|
|
$
|
23,132
|
|
|
$
|
137,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2007
|
|
|
17,495
|
|
|
|
184,736
|
|
|
|
86,741
|
|
|
|
-
|
|
|
|
152,469
|
|
|
|
9,553
|
|
|
|
89,990
|
|
|
|
36,601
|
|
|
|
22,568
|
|
|
|
149,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2006
|
|
|
19,876
|
|
|
|
141,200
|
|
|
|
89,804
|
|
|
|
-
|
|
|
|
110,891
|
|
|
|
6,087
|
|
|
|
62,682
|
|
|
|
26,032
|
|
|
|
19,884
|
|
|
|
142,100
|
|
F-25
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
SCHEDULE IV
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
REINSURANCE
For the Years Ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column
|
|
|
|
|
|
|
|
|
|
|
|
|
Column
|
|
|
|
|
|
|
F
|
|
|
|
|
|
|
|
|
Column
|
|
|
D
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
Column
|
|
|
C
|
|
|
Assumed from
|
|
|
Column
|
|
|
Amount
|
|
|
Column
|
|
B
|
|
|
Ceded to Other
|
|
|
Other
|
|
|
E
|
|
|
Assumed to
|
|
|
A
|
|
Direct Amount
|
|
|
Companies
|
|
|
Companies
|
|
|
Net Amount
|
|
|
Net
|
|
|
|
|
(dollars in thousands)
|
|
|
Year ended December 31, 2008
|
|
$
|
143,539
|
|
|
$
|
8,866
|
|
|
$
|
8,792
|
|
|
$
|
143,465
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007
|
|
|
162,501
|
|
|
|
10,984
|
|
|
|
952
|
|
|
|
152,469
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
|
121,698
|
|
|
|
11,076
|
|
|
|
269
|
|
|
|
110,891
|
|
|
|
-
|
|
F-26
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
SCHEDULE V
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column
|
|
|
|
|
|
|
|
|
|
|
Column
|
|
|
C
|
|
|
Column
|
|
|
|
|
|
|
|
B
|
|
|
Additions
|
|
|
|
|
|
|
D
|
|
|
Column
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
(Subtractions)
|
|
|
Deductions
|
|
|
E
|
|
|
Column
|
|
Beginning of
|
|
|
Cost and
|
|
|
Charged to Other
|
|
|
Described
|
|
|
Balance at
|
|
|
A
|
|
Period
|
|
|
Expenses
|
|
|
Accounts
|
|
|
(1)(2)
|
|
|
End of Period
|
|
|
|
|
(dollars in thousands)
|
|
|
Year ended December
31, 2008 deferred
tax valuation
allowance
|
|
$
|
1,626
|
|
|
$
|
(1,344
|
)
|
|
$
|
(114
|
)
|
|
|
|
|
|
$
|
168
|
|
|
Allowance for
doubtful accounts,
insurance premium
receivables
|
|
|
600
|
|
|
|
670
|
|
|
|
(500
|
)
|
|
|
|
|
|
|
770
|
|
|
Year ended December
31, 2007 deferred
tax valuation
allowance
|
|
|
6,598
|
|
|
|
(77
|
)
|
|
|
(4,895
|
)
|
|
|
-
|
|
|
|
1,626
|
|
|
Allowance for
doubtful accounts,
insurance premium
receivables
|
|
|
-
|
|
|
|
600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
600
|
|
|
Year ended December
31, 2006 deferred
tax valuation
allowance
|
|
|
9,631
|
|
|
|
90
|
|
|
|
(3,123
|
)
|
|
|
-
|
|
|
|
6,598
|
|
F-27
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
SCHEDULE VI
SUA INSURANCE COMPANY
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
For the Years Ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column
|
|
Column
|
|
|
Column
|
|
|
Column
|
|
|
Column
|
|
|
Column
|
|
|
Column
|
|
|
Column
|
|
|
Column
|
|
|
Column
|
|
|
Column
|
|
|
A
|
|
B
|
|
|
C
|
|
|
D
|
|
|
E
|
|
|
F
|
|
|
G
|
|
|
H
|
|
|
I
|
|
|
J
|
|
|
K
|
|
|
|
|
|
|
|
|
Reserves for
|
|
|
Dicount,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and Claim
|
|
|
|
|
|
|
Paid Claims
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
if Any,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment Expenses
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
|
Deferred
|
|
|
Claims and
|
|
|
Deducted
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Incurred Related to
|
|
|
|
|
|
|
Adjustment
|
|
|
|
|
|
|
|
Acquisition
|
|
|
Claims Policy
|
|
|
in Claims
|
|
|
Unearned
|
|
|
Earned
|
|
|
Investment
|
|
|
Current
|
|
|
Prior
|
|
|
Acquisition
|
|
|
Paid
|
|
|
Premiums
|
|
|
|
|
Costs
|
|
|
Expenses
|
|
|
Column C
|
|
|
Premiums
|
|
|
Premiums
|
|
|
Income
|
|
|
Year
|
|
|
Year
|
|
|
Expenses
|
|
|
Expenses
|
|
|
Written
|
|
|
|
|
(dollars in thousands)
|
|
|
Year ended
December 31, 2008
|
|
$
|
18,156
|
|
|
$
|
214,953
|
|
|
$
|
2,612
|
|
|
$
|
80,600
|
|
|
$
|
143,465
|
|
|
$
|
10,837
|
|
|
$
|
91,229
|
|
|
$
|
(1,844
|
)
|
|
$
|
32,990
|
|
|
$
|
61,602
|
|
|
$
|
137,275
|
|
|
Year ended
December 31, 2007
|
|
|
17,495
|
|
|
|
184,736
|
|
|
|
1,505
|
|
|
|
86,741
|
|
|
|
152,469
|
|
|
|
9,553
|
|
|
|
92,167
|
|
|
|
(2,177
|
)
|
|
|
36,601
|
|
|
|
42,642
|
|
|
|
149,406
|
|
|
Year ended
December 31, 2006
|
|
|
19,876
|
|
|
|
141,200
|
|
|
|
1,016
|
|
|
|
89,804
|
|
|
|
110,891
|
|
|
|
6,087
|
|
|
|
63,546
|
|
|
|
(864
|
)
|
|
|
26,032
|
|
|
|
18,331
|
|
|
|
142,100
|
|
F-28
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
|
|
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
(Registrant)
|
|
|
|
By:
|
/s/ Courtney C. Smith
|
|
|
|
|
Name:
|
Courtney C. Smith
|
|
|
|
|
Title:
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
Date: March 3, 2009
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
/s/ Courtney C. Smith
By: Courtney C. Smith
|
|
President, Chief
Executive Officer
and Chairman of the
Board of Director
(Principal
Executive Officer)
|
|
March 3, 2009
|
|
|
|
|
|
|
/s/ Peter E. Jokiel
By: Peter E. Jokiel
|
|
Executive Vice
President, Chief
Financial Officer
and Director
(Principal
Financial and
Accounting Officer)
|
|
March 3, 2009
|
|
|
|
|
|
|
|
/s/ Robert E. Dean
|
|
|
|
|
|
|
|
Director
|
|
March 3, 2009
|
|
|
|
|
|
|
|
/s/ Raymond C. Groth
|
|
|
|
|
|
|
|
Director
|
|
March 3, 2009
|
|
|
|
|
|
|
|
/s/ Paul A. Philp
|
|
|
|
|
|
|
|
Director
|
|
March 3, 2009
|
|
|
|
|
|
|
|
/s/ Robert H. Whitehead
|
|
|
|
|
|
|
|
Director
|
|
March 3, 2009
|
|
|
|
|
|
|
|
/s/ Russell E. Zimmermann
|
|
|
|
|
By: Russell E. Zimmermann
|
|
Director
|
|
March 3, 2009
|
2008 Form 10-K
Specialty Underwriters’ Alliance, Inc.
Specialty Underwriters Alliance (NASDAQ:SUAI)
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