UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2009
Or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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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(888) 782-4672
(Registrants Telephone Number, Including Area Code)
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
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes
o
No
o
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 definition 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
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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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
o
No
þ
As of November 6, 2009, there were 14,574,596 shares of our common stock, $0.01 par value, or
the Common Stock, outstanding and 1,354,328 shares of our Class B common stock, $0.01 par value,
or the Class B Shares, outstanding.
SPECIALTY UNDERWRITERS ALLIANCE, INC.
TABLE OF CONTENTS
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Page
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3
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16
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23
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23
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25
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25
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25
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25
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25
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25
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25
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2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
2
PART I FINANCIAL INFORMATION
Item 1.
Financial Statements
Specialty Underwriters Alliance, Inc.
Consolidated Balance Sheets
As of September 30, 2009 and December 31, 2008
(in thousands, except share data)
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9/30/2009
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12/31/2008
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(unaudited)
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ASSETS
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Fixed maturity investments, at fair value (amortized cost: $236,290 and $220,744)
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$
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244,135
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$
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216,708
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Short-term investments, at amortized cost (which approximates fair value)
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60,454
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46,697
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Total Investments
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304,589
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263,405
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Cash
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1,520
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208
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Insurance premiums receivable
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59,222
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60,715
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Reinsurance recoverable on paid and unpaid loss and loss adjustment expenses
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73,883
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79,598
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Prepaid reinsurance premiums
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|
337
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|
|
|
309
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Investment income accrued
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2,476
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2,467
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Equipment and capitalized software at cost (less accumulated depreciation of $20,465
and $15,486)
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12,323
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13,562
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Intangible assets
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10,745
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10,745
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Deferred acquisition costs
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21,408
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18,156
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Federal income tax recoverable
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1,173
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|
115
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Deferred tax asset
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-
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3,146
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Other assets
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4,201
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2,426
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Total Assets
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$
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491,877
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$
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454,852
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LIABILITIES & STOCKHOLDERS EQUITY
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Liabilities
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Loss and loss adjustment expense reserves
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$
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222,232
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$
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214,953
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Unearned insurance premiums
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103,275
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80,600
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Insured deposit funds
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13,261
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15,806
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Deferred tax liability
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691
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-
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Accounts payable and other liabilities
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8,103
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7,204
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Total Liabilities
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347,562
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318,563
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Commitments (Note 8)
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Stockholders equity
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Common stock
at $0.01 par value per share authorized: 30,000,000 shares; issued: 14,779,417 shares and 14,712,355 shares; and outstanding: 14,574,596 shares and
14,437,355 shares
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148
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147
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Class B common stock at $0.01 par value per share authorized: 2,000,000 shares;
issued and outstanding: 1,354,328 shares and 1,368,562 shares
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13
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14
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Paid-in capital common stock
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130,553
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129,926
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Paid-in capital class B common stock
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7,832
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8,077
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Accumulated earnings
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1,276
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1,693
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Treasury stock (204,821 and 275,000 shares of common stock)
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(1,003
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)
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(1,347
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)
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Accumulated other comprehensive income (loss)
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5,496
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(2,221
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)
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Total Stockholders Equity
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144,315
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136,289
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Total Liabilities & Stockholders Equity
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$
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491,877
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$
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454,852
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The accompanying notes are an integral part of these consolidated financial statements.
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
3
Specialty Underwriters Alliance, Inc.
Consolidated Statements of Operations and Comprehensive Income
For the Three and Nine Months Ended September 30, 2009 and 2008
(Unaudited in thousands, except for earnings per share)
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Three Months Ended
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Nine Months Ended
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9/30/2009
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9/30/2008
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9/30/2009
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9/30/2008
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Revenues
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Earned insurance premiums
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$
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44,280
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$
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37,208
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$
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114,420
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$
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107,153
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Net investment income
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2,722
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2,662
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8,271
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|
|
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7,985
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Net realized gains (losses)
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(381
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)
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4
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(213
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)
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42
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|
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Subtotal: Revenue before impairments
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46,621
|
|
|
39,874
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|
|
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122,478
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115,180
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Other than temporary impairment losses
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(363
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)
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(849
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)
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(2,198
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)
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|
|
(849
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)
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Loss (gain) recognized in other comprehensive income
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(253
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)
|
|
-
|
|
|
|
1,006
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|
|
-
|
|
|
|
|
|
|
|
|
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|
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Subtotal: Net impairment recognized in earnings
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|
(616
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)
|
|
(849
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)
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|
|
(1,192
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)
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|
|
(849
|
)
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|
|
|
|
|
|
|
|
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Total revenue
|
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|
46,005
|
|
|
39,025
|
|
|
|
121,286
|
|
|
|
114,331
|
|
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|
|
|
|
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Expenses
|
|
|
|
|
|
|
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|
|
|
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Loss and loss adjustment expenses
|
|
|
31,812
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|
|
22,444
|
|
|
|
75,791
|
|
|
|
64,443
|
|
Acquisition expenses
|
|
|
10,470
|
|
|
8,531
|
|
|
|
27,354
|
|
|
|
24,501
|
|
Other operating expenses
|
|
|
5,795
|
|
|
6,234
|
|
|
|
19,521
|
|
|
|
17,573
|
|
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|
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|
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|
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Total expenses
|
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|
48,077
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|
|
37,209
|
|
|
|
122,666
|
|
|
|
106,517
|
|
|
|
|
|
|
|
|
|
|
|
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Pretax income (loss)
|
|
|
(2,072
|
)
|
|
1,816
|
|
|
|
(1,380
|
)
|
|
|
7,814
|
|
Income tax (expense) benefit
|
|
|
775
|
|
|
(515
|
)
|
|
|
600
|
|
|
|
(798
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(1,297
|
)
|
|
1,301
|
|
|
|
(780
|
)
|
|
|
7,016
|
|
Net change in unrealized gains and losses for
investments held, after tax
|
|
|
4,438
|
|
|
(3,785
|
)
|
|
|
8,734
|
|
|
|
(6,018
|
)
|
Impairments included in other comprehensive income
(loss), after tax
|
|
|
164
|
|
|
-
|
|
|
|
(654
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
3,305
|
|
$
|
(2,484
|
)
|
|
$
|
7,300
|
|
|
$
|
998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (losses) per share available to
common stockholders (in dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
$
|
(0.08
|
)
|
$
|
0.08
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,924
|
|
|
15,516
|
|
|
|
15,870
|
|
|
|
15,587
|
|
Diluted
|
|
|
15,924
|
|
|
15,567
|
|
|
|
15,870
|
|
|
|
15,743
|
|
The accompanying notes are an integral part of these consolidated financial statements.
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
4
Specialty Underwriters Alliance, Inc.
Consolidated Statement of Stockholders Equity
As of September 30, 2009
(Unaudited in thousands)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accum.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Common
|
|
|
Paid-in
|
|
|
|
|
|
|
|
|
|
|
Comp.
|
|
|
Stock-
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Stock
|
|
|
Capital
|
|
|
Retained
|
|
|
Treasury
|
|
|
Income
|
|
|
holders
|
|
|
|
Class A
|
|
|
Class A
|
|
|
Class B
|
|
|
Class B
|
|
|
Earnings
|
|
|
Stock
|
|
|
(Loss)
|
|
|
Equity
|
|
Balance at Dec. 31, 2008
|
|
$
|
147
|
|
|
$
|
129,926
|
|
|
$
|
14
|
|
|
$
|
8,077
|
|
|
$
|
1,693
|
|
|
$
|
(1,347
|
)
|
|
$
|
(2,221
|
)
|
|
$
|
136,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(780
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized
investment gains, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,734
|
|
|
|
8,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments included in
other comprehensive income,
net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(654
|
)
|
|
|
(654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issuance
|
|
|
1
|
|
|
|
110
|
|
|
|
(1
|
)
|
|
|
(245
|
)
|
|
|
-
|
|
|
|
344
|
|
|
|
-
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock purchases
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
-
|
|
|
|
517
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of
adopting FSP FAS 115-2
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
363
|
|
|
|
-
|
|
|
|
(363
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Sept. 30, 2009
|
|
$
|
148
|
|
|
$
|
130,553
|
|
|
$
|
13
|
|
|
$
|
7,832
|
|
|
$
|
1,276
|
|
|
$
|
(1,003
|
)
|
|
$
|
5,496
|
|
|
$
|
144,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
5
Specialty Underwriters Alliance, Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2009 and 2008
(Unaudited in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
9/30/2009
|
|
|
9/30/2008
|
|
Cash flows from operations
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
(780
|
)
|
|
$
|
7,016
|
|
|
|
|
|
|
|
|
Charges (credits) to reconcile net income to cash flows from operations:
|
|
|
|
|
|
|
|
|
Change in deferred income tax
|
|
|
(522
|
)
|
|
|
(309
|
)
|
Net realized losses
|
|
|
1,405
|
|
|
|
807
|
|
Amortization of bond premium
|
|
|
214
|
|
|
|
71
|
|
Depreciation
|
|
|
4,979
|
|
|
|
4,931
|
|
Net change in:
|
|
|
|
|
|
|
|
|
Reinsurance recoverable on unpaid loss and loss adjustment expense reserves
|
|
|
5,715
|
|
|
|
3,056
|
|
Loss and loss adjustment expense reserves
|
|
|
7,279
|
|
|
|
17,574
|
|
Insurance premiums receivable
|
|
|
1,493
|
|
|
|
8,809
|
|
Unearned insurance premiums
|
|
|
22,675
|
|
|
|
(3,294
|
)
|
Deferred acquisition costs
|
|
|
(3,252
|
)
|
|
|
173
|
|
Prepaid reinsurance premiums
|
|
|
(28
|
)
|
|
|
(59
|
)
|
Insured deposit funds
|
|
|
(2,545
|
)
|
|
|
995
|
|
Other, net
|
|
|
(1,469
|
)
|
|
|
4
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
35,944
|
|
|
|
32,758
|
|
|
|
|
|
|
|
|
Net cash flows provided by operations
|
|
|
35,164
|
|
|
|
39,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Net (increase) decrease in short-term investments
|
|
|
(13,757
|
)
|
|
|
5,724
|
|
Sales, redemptions, calls and maturities of fixed maturity investments
|
|
|
26,096
|
|
|
|
21,416
|
|
Purchases of fixed maturity investments
|
|
|
(42,706
|
)
|
|
|
(61,832
|
)
|
Purchase of equipment and capitalized software
|
|
|
(3,740
|
)
|
|
|
(5,302
|
)
|
|
|
|
|
|
|
|
Net cash flows used for investing activities
|
|
|
(34,107
|
)
|
|
|
(39,994
|
)
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
255
|
|
|
|
1,118
|
|
Treasury stock purchases
|
|
|
-
|
|
|
|
(1,347
|
)
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
255
|
|
|
|
(229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash during the period
|
|
|
1,312
|
|
|
|
(449
|
)
|
|
Cash at beginning of the period
|
|
|
208
|
|
|
|
968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at the end of the period
|
|
$
|
1,520
|
|
|
$
|
519
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
6
Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited in thousands, except earnings per share)
Note 1.
Basis of Presentation
The Consolidated Financial Statements (unaudited) include the accounts of Specialty
Underwriters Alliance, Inc., and its consolidated subsidiary, SUA Insurance Company, together
referred to as SUA or the Company. SUA completed an initial public offering, or IPO, of its common
stock on November 23, 2004. Concurrent with the IPO, SUA completed the acquisition of Potomac
Insurance Company of Illinois, or Potomac. Potomac has subsequently been renamed SUA Insurance
Company.
The accompanying financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America, or GAAP. Certain financial
information that is normally included in annual financial statements, including certain financial
statements footnotes, prepared in accordance with GAAP, is not required for interim reporting
purposes and has been condensed or omitted. These statements should be read in conjunction with
the consolidated financial statements and notes thereto included in SUAs Annual Report on Form
10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission, or
SEC.
The interim financial data as of September 30, 2009, and for the three and nine month periods
ended September 30, 2009 and September 30, 2008 is unaudited. However, in the opinion of
management, the interim data includes all adjustments, consisting of normal recurring accruals,
necessary for a fair statement of the Companys results for the interim periods. The results of
operations for the interim periods are not necessarily indicative of the results to be expected for
the full year. Certain reclassifications have been made to prior period financial statement line
items to enhance the comparability of the results presented.
Note 2.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Codification (ASC) 105,
Generally Accepted Accounting Principles
, a replacement of FASB Statement
No. 162 (the Codification). The Codification reorganized existing U.S. accounting and reporting
standards issued by the FASB and other related private sector standard setters into a single source
of authoritative accounting principles arranged by topic. The Codification supersedes all existing
U.S. accounting standards; all other accounting literature not included in the Codification (other
than Securities and Exchange Commission guidance for publicly-traded companies) is considered
non-authoritative. The Codification was effective on a prospective basis for interim and annual
reporting periods ending after September 15, 2009. The adoption of the Codification changed the
Companys references to U.S. GAAP accounting standards but did not impact the Companys results of
operations, financial position or liquidity.
In May 2009, the FASB issued ASC 855,
Subsequent Events
, which provides guidance on
managements general standards for and disclosure of events that occur after the balance sheet
date, but before financial statements are issued or are available to be issued. The standard is
effective for interim or annual financial periods ending after June 15, 2009. The standard does
not apply to subsequent events or transactions that are within the scope of other applicable GAAP
standards that provide different guidance on the accounting treatment for subsequent events or
transactions. The initial applications of the standard have had no impact on the Companys
financial position or results of operations. The Company evaluates subsequent events through the
date and time of the filing of the applicable periodic report with the SEC.
In April 2009, the FASB issued new guidance, which is now part of ASC 820,
Fair Value
Measurements and Disclosures
on how to determine the fair value of assets and liabilities in an
environment where the volume and level of activity for the asset or liability has significantly
decreased and re-emphasizes that the objective of a fair value measurement remains an exit price.
The provisions of the new guidance were effective for interim periods ending after June 15, 2009.
The adoption of the new guidance has not had a material effect on the Companys financial position
or results of operations.
In April 2009, the FASB issued new guidance for the accounting of other-than-temporary
impairments. The new guidance, which is now part of ASC 320,
Investments Debt and Equity
Securities
, applies to investments in debt securities for which other-than-temporary impairments
may be recorded. If an entitys management asserts that it does not have the intent to sell a debt
security and it is more likely than not that it will not have to sell the security before recovery
of its cost basis, then an entity may separate other-than-temporary impairments into two
components: (1) the amount related to credit losses (recorded in earnings), and (2) all other
amounts (recorded in other comprehensive income). This new guidance is to be applied prospectively
and is effective for interim and
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
7
Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited in thousands, except earnings per share)
annual periods ending after June 15, 2009. The adoption of the new guidance has not had a
material effect on the Companys financial position or results of operations.
In April 2009, the FASB issued new guidance related to the disclosure of the fair value of
financial instruments. The new guidance, which is now part of ASC 825,
Financial Instruments
,
requires an entity to provide disclosures about fair value of financial instruments in interim
financial information. The provisions of the new guidance are to be applied prospectively and are
effective for interim and annual periods ending after June 15, 2009. The adoption of the new
guidance has not had a material effect on the Companys financial position or results of
operations.
In January 2009, the FASB issued new guidance for the accounting of other-than-temporary
impairments for beneficial interests in securitized financial assets. The new guidance, which is
now part of ASC 325,
Investments Other
, and is effective for interim and annual periods ending
after December 15, 2008, amends the cash flows model used to analyze an other-than-temporary
impairment by replacing the market participant view with managements assumption of whether it is
probable that there is an adverse change in the estimated cash flows. The adoption of the new
guidance has not had a material effect on the Companys financial position or results of
operations.
Note 3.
Earnings Per Share
|
Basic earnings per share is 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. The following table shows the computation of the
Companys earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
9/30/09
|
|
|
9/30/08
|
|
|
9/30/09
|
|
|
9/30/08
|
|
Numerator for earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,297
|
)
|
|
$
|
1,301
|
|
|
$
|
(780
|
)
|
|
$
|
7,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding used in
computation of earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock (class A and B) issued
|
|
|
16,129
|
|
|
|
15,791
|
|
|
|
16,103
|
|
|
|
15,685
|
|
Common stock in treasury
|
|
|
205
|
|
|
|
275
|
|
|
|
233
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
15,924
|
|
|
|
15,516
|
|
|
|
15,870
|
|
|
|
15,587
|
|
Effect of dilutive securities
1,2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock awards
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - diluted
|
|
|
15,924
|
|
|
|
15,567
|
|
|
|
15,870
|
|
|
|
15,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (losses) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.08
|
)
|
|
$
|
0.08
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.45
|
|
|
|
|
1
|
|
Outstanding stock options for 718 shares at September 30,
2009 and 2008 have been excluded from the diluted earnings per share calculation for the
three and nine months ended September 30, 2009 and 2008, as they were anti-dilutive.
|
|
2
|
|
Potential common shares have been excluded in the computation of diluted earnings per share for the three
and nine months ended September 30, 2009 since for each of these periods the Company experienced a net loss and inclusion of potential
common shares would therefore be anti-dilutive.
|
Note 4.
Income Taxes
The components of current and deferred income taxes for the three months and nine months
ended September 30, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
9/30/09
|
|
|
9/30/08
|
|
|
9/30/09
|
|
|
9/30/08
|
|
Current tax (benefit) expense
|
|
$
|
(585
|
)
|
|
$
|
517
|
|
|
$
|
(78
|
)
|
|
$
|
1,107
|
|
Deferred tax (benefit) expense
|
|
|
(190
|
)
|
|
|
(2
|
)
|
|
|
(522
|
)
|
|
|
(309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense
|
|
$
|
(775
|
)
|
|
$
|
515
|
|
|
$
|
(600
|
)
|
|
$
|
798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
8
Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited in thousands, except earnings per share)
During the first quarter of 2008, based on profitability trends at the time, the Company
believed that it was more likely than not that the deferred income tax assets would be realized.
As such, the Company elected to eliminate its valuation allowance of $1,458. During the fourth
quarter of 2008, the Company believed and continues to believe that certain state tax net operating
loss carry forwards may not be realized in the future totaling $168 for which a valuation allowance
has been maintained since December 31, 2008.
As of September 30, 2009 and December 31, 2008, the Company had no tax basis net operating
loss carry forwards. The Company 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 portions of these costs were $48 and $402 at September 30, 2009 and December
31, 2008, respectively.
The
Company utilized its tax loss carryforwards in early 2008 and
subsequently began investing in tax exempt securities. Further,
during the third quarter of 2009 the company experienced
deterioration in its underwriting profitability that led to a pre-tax
loss. This combined with tax exempt investment income led the
Companys effective tax rate to be above the federal income tax rate.
Note 5.
Unpaid Loss and Loss Adjustment Expense Reserves
Loss and loss adjustment expense (or 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 Companys loss and LAE reserves represent managements best estimate of
reserves based on a composite of the results of various actuarial methods, as well as consideration
of known facts and trends.
At September 30, 2009, the Company reported gross loss and LAE reserves of $222,232, of which
$43,704 represented the gross direct loss and LAE reserves of Potomac, which is fully reinsured by
OneBeacon Insurance Company, or OneBeacon. At December 31, 2008, the Company reported gross loss
and LAE reserves of $214,953, of which $53,262 represented the gross direct loss and LAE reserves
of Potomac, which are fully reinsured by OneBeacon. Included in the reserves for the Company are
tabular reserve discounts for workers compensation and excess workers compensation pension claims
of $4,134 as of September 30, 2009 and $2,612 as of December 31, 2008. The reserves are discounted
on a tabular basis at four percent using the 2001 United States Actuarial Life Tables for Female
and Male population.
Potomac was a participant in the OneBeacon Amended and Restated Reinsurance Agreement. Under
that agreement, Potomac ceded all of its insurance assets and liabilities into a pool, or Pool, and
assumed a 0.5% share of the Pools assets and liabilities. On April 1, 2004, Potomac ceased its
participation in the Pool and entered into reinsurance agreements whereby Potomac reinsured all of
its business written with OneBeacon effective as of January 1, 2004. 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 obligation.
The cost or amortized cost and estimated fair values of the Companys fixed maturity
investments at September 30, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
Category
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
U.S. Treasury
|
|
$
|
9,790
|
|
|
$
|
702
|
|
|
$
|
-
|
|
|
$
|
10,492
|
|
U.S. Government Agencies
|
|
|
28,729
|
|
|
|
1,652
|
|
|
|
-
|
|
|
|
30,381
|
|
Municipals
|
|
|
71,942
|
|
|
|
4,996
|
|
|
|
(5
|
)
|
|
|
76,933
|
|
Corporate Fixed Maturity
|
|
|
63,413
|
|
|
|
4,008
|
|
|
|
(148
|
)
|
|
|
67,273
|
|
Agency Mortgage Backed
|
|
|
38,407
|
|
|
|
2,341
|
|
|
|
-
|
|
|
|
40,748
|
|
Non-Agency Mortgage Backed
|
|
|
6,625
|
|
|
|
1
|
|
|
|
(2,031
|
)
|
|
|
4,595
|
|
Commercial Mortgage Backed
|
|
|
13,386
|
|
|
|
51
|
|
|
|
(1,678
|
)
|
|
|
11,759
|
|
Asset Backed
|
|
|
3,998
|
|
|
|
-
|
|
|
|
(2,044
|
)
|
|
|
1,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities
|
|
$
|
236,290
|
|
|
$
|
13,751
|
|
|
$
|
(5,906
|
)
|
|
$
|
244,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
9
Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited in thousands, except earnings per share)
The cost or amortized cost and estimated fair values of the Companys fixed maturity
investments at December 31, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
Category
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the above investments, the Company also held, at amortized cost, $60,454 and
$46,697 in short term investments as of September 30, 2009 and December 31, 2008, respectively.
The Companys short-term investments primarily consist of money market funds, but may also include
agency discount notes, treasury notes and other short term investments with original maturities of
less than one year. These securities are highly liquid investments that present negligible risk of
changes in value due to changes in interest rates. The money market investments are recorded at
amortized cost on the Companys balance sheet, which approximates fair value based on quoted market
prices and observable market inputs. The Company monitors quoted market prices on all its short
term investments to confirm that carrying amounts approximate fair values.
The Company did not have any other investments.
Measuring Fair Value
ASC 820 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 September 30, 2009, assets measured at fair value on a recurring basis are summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using:
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
Fair Value
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
at
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Category
|
|
9/30/09
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
U.S. Treasury
|
|
$
|
10,492
|
|
|
$
|
-
|
|
|
$
|
10,492
|
|
|
$
|
-
|
|
U.S. Government Agency
|
|
|
30,381
|
|
|
|
-
|
|
|
|
30,381
|
|
|
|
-
|
|
Municipal
|
|
|
76,933
|
|
|
|
-
|
|
|
|
76,933
|
|
|
|
-
|
|
Corporate Fixed Maturity
|
|
|
67,273
|
|
|
|
-
|
|
|
|
67,273
|
|
|
|
-
|
|
Agency Mortgage Backed
|
|
|
40,748
|
|
|
|
-
|
|
|
|
40,748
|
|
|
|
-
|
|
Non-Agency Mortgage Backed
|
|
|
4,595
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,595
|
|
Commercial Mortgage Backed
|
|
|
11,759
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,759
|
|
Asset-Backed
|
|
|
1,954
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturity Investments
|
|
$
|
244,135
|
|
|
$
|
-
|
|
|
$
|
225,827
|
|
|
$
|
18,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
10
Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited in thousands, except earnings per share)
As of December 31, 2008, assets measured at fair value on a recurring basis are summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using:
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
Fair Value
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
at
|
|
|
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
|
|
|
54,935
|
|
|
|
-
|
|
|
|
54,935
|
|
|
|
-
|
|
Corporate Fixed Maturity
|
|
|
55,535
|
|
|
|
-
|
|
|
|
55,535
|
|
|
|
-
|
|
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 Company uses an independent pricing service to determine the fair value of substantially
all of its investment assets. As of September 30, 2009, a total of four securities with a total
fair value of $1,914 were not priced by the Companys independent pricing service, all of which
were categorized 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 our independent pricing
service.
|
|
|
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
Companys 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 third quarter of 2009, the Company deemed the pricing of
four securities unreasonable since they were deemed to be derived from distressed sales in an
illiquid market and adjusted the total fair value of these four securities to $1,365 from $612
based on estimated cash flows and available yield spreads.
In order to determine the proper ASC 820 classification for each instrument, the Company
obtains from its outside pricing sources the pricing procedures and inputs used to price the
instrument. 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 ASC 820 Level. Certain securities, primarily commercial and
non-agency mortgage-backed and asset-backed securities, may not trade, be very thinly traded
or trade at a distressed price due to economic conditions and concerns in the securities market.
As a result, prices from independent third party pricing services, broker quotes or other
observable inputs are not always available or represent a price from a distressed sale. A model
using either a matrix pricing formula or future cash flow expectations is used to develop a fair
value for these securities. Due to the low level of transparency around inputs to this valuation
process these securities are classified within Level 3.
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
11
Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited in thousands, except earnings per share)
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 three and nine months ended
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
9/30/2009
|
|
|
9/30/2009
|
|
Level 3 investments as of beginning of period
|
|
$
|
19,141
|
|
|
$
|
8,789
|
|
Transfers into level 3 (at beginning period value)
|
|
|
-
|
|
|
|
9,618
|
|
Purchases, sales, issuances, and settlements, net
|
|
|
(943
|
)
|
|
|
(1,450
|
)
|
Total gains or losses (realized/unrealized):
|
|
|
|
|
|
|
-
|
|
Included in earnings
|
|
|
(1,086
|
)
|
|
|
(1,661
|
)
|
Included in comprehensive income
|
|
|
1,196
|
|
|
|
3,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 investments as of September 30, 2009
|
|
$
|
18,308
|
|
|
$
|
18,308
|
|
|
|
|
|
|
|
|
The transfer into Level 3 during the first quarter of 2009 of securities with a fair value, as
of December 31, 2008, of $8,677 was the result of reduced liquidity, and therefore reduced price
transparency, related to commercial mortgage backed securities.
Unrealized Losses
Significant factors influencing the Companys determination that unrealized losses were
temporary included (i) the magnitude of the unrealized losses in relation to each securitys cost,
(ii) the nature of the investment and (iii) that management does not intend to sell these
securities and it is not more likely than not that the Company will be required to sell these
investments before a period of time sufficient to allow for anticipated recovery of fair value to
the Companys cost basis. The following table presents information regarding the Companys
invested assets that were in an unrealized loss position at September 30, 2009 by amount of time in
a continuous unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Losses
|
|
|
|
|
|
|
|
Less than
|
|
|
Greater than
|
|
|
|
|
|
|
Fair Value
|
|
|
12 Months
|
|
|
12 Months
|
|
|
Total
|
|
Municipal
|
|
$
|
1,050
|
|
|
$
|
(5
|
)
|
|
$
|
-
|
|
|
$
|
(5
|
)
|
Corporate Fixed Maturity
|
|
|
2,863
|
|
|
|
-
|
|
|
|
(148
|
)
|
|
|
(148
|
)
|
Non-Agency Mortgage Backed
|
|
|
4,395
|
|
|
|
-
|
|
|
|
(2,031
|
)
|
|
|
(2,031
|
)
|
Commercial Mortgage Backed
|
|
|
6,819
|
|
|
|
-
|
|
|
|
(1,678
|
)
|
|
|
(1,678
|
)
|
Asset Backed
|
|
|
1,954
|
|
|
|
(272
|
)
|
|
|
(1,772
|
)
|
|
|
(2,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities
|
|
$
|
17,081
|
|
|
$
|
(277
|
)
|
|
$
|
(5,629
|
)
|
|
$
|
(5,906
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents information regarding the Companys invested assets that were in
an unrealized loss position at December 31, 2008 by amount of time in a continuous unrealized loss
position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Losses
|
|
|
|
|
|
|
|
Less than
|
|
|
Greater than
|
|
|
|
|
|
|
Fair Value
|
|
|
12 Months
|
|
|
12 Months
|
|
|
Total
|
|
Municipal
|
|
$
|
21,713
|
|
|
$
|
(679
|
)
|
|
$
|
-
|
|
|
$
|
(679
|
)
|
Corporate Fixed Maturity
|
|
|
35,201
|
|
|
|
(560
|
)
|
|
|
(1,131
|
)
|
|
|
(1,691
|
)
|
Non-Agency Mortgage Backed
|
|
|
5,164
|
|
|
|
(279
|
)
|
|
|
(2,338
|
)
|
|
|
(2,617
|
)
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 considered all relevant factors, including expected recoverability of cashflows, in
assessing whether the loss was other-than-temporary.
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
12
Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited in thousands, except earnings per share)
The Company does not intend to sell its fixed
maturity securities, and it is not more likely than not that the Company will be required to sell
these investments, until there is a recovery of fair value to the Companys original cost basis,
which may be at maturity. Other than investments for which the Company has recognized
other-than-temporary impairments, the Company has received all of its scheduled principle and
interest payments in a timely fashion and has experienced no defaults on any of its investments.
Impairment Review
The Companys methodology for assessing other-than-temporary impairments, or OTTI, is based on
security-specific facts and circumstances as of the balance sheet date. Factors considered in
evaluating whether a decline in value is other than temporary included: (i) the length of time and
the extent to which the fair value has been less than cost; (ii) the financial conditions and
near-term prospects of the issuer; and (iii) the Companys intent and ability to retain the
investment for a period of time sufficient to allow for any anticipated recovery. The majority of
the Companys structured securities are subject to ASC 325 which allows management to analyze
whether it is probable that there is an adverse change in the estimated cash flows. Accordingly,
on a quarterly basis, when significant changes in estimated cash flows from the cash flows
previously estimated occur due to actual prepayment and credit loss experience, and the present
value of the revised cash flow is less than the present value previously estimated, OTTI is deemed
to have occurred. Based on recent guidance in ASC 320 a company that does not intend to sell the
debt security and it is not more likely than not that the entity will be required to sell the debt
security before recovery of its amortized cost basis, is required to separate the decline in fair
value into (a) the amount representing the credit loss and (b) the amount related to all other
factors. The amount of the total decline in fair value related to the credit loss is recognized in
earnings as OTTI, with the amount related to other factors recognized in accumulated other
comprehensive net loss, net of applicable income taxes. OTTI credit losses result in a permanent
reduction of the cost basis of the underlying investment. The determination of OTTI is a subjective
process, and different judgments and assumptions could affect the timing of loss realization.
During the third quarter of 2009, four of the Companys securities experienced a decrease in
fair value of $363. Associated with this decline in fair value, the Company recognized a credit
loss of $616 in earnings and a credit of $253 was recognized in other comprehensive net income for
previously recorded impairments. The Company recorded an OTTI charge of $2,198 on investment
securities during the nine months ended September 30, 2009 of which $1,192 was recognized as a loss
in earnings and $1,006 was recognized as a loss in comprehensive income.
The following table provides a roll-forward of the OTTI showing the amounts that have been
included in earnings and other comprehensive income during the third quarter of 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized In
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Compre-
|
|
|
|
|
|
|
|
|
|
|
hensive
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
Earnings
|
|
|
(Loss)
|
|
|
Total
|
|
Beginning Balance, July 1, 2009
|
|
$
|
(866
|
)
|
|
$
|
(1,818
|
)
|
|
$
|
(2,684
|
)
|
Cumulative effect of adjustment
resulting from adoption
of FSP
115-2, before income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(866
|
)
|
|
|
(1,818
|
)
|
|
|
(2,684
|
)
|
Other-than-temporary impairment loss
|
|
|
(616
|
)
|
|
|
253
|
|
|
|
(363
|
)
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2009
|
|
$
|
(1,482
|
)
|
|
$
|
(1,565
|
)
|
|
$
|
(3,047
|
)
|
|
|
|
|
|
|
|
|
|
|
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
13
Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited in thousands, except earnings per share)
The following table provides a roll-forward of the OTTI showing the amounts that have been
included in earnings and other comprehensive income from April 1, 2009 through September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized In
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Compre-
|
|
|
|
|
|
|
|
|
|
|
hensive
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
Earnings
|
|
|
(Loss)
|
|
|
Total
|
|
Beginning Balance, April 1, 2009
|
|
$
|
(1,060
|
)
|
|
$
|
-
|
|
|
$
|
(1,060
|
)
|
Cumulative
effect of adjustment resulting from adoption
of FSP
115-2, before income taxes
|
|
|
559
|
|
|
|
(559
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(501
|
)
|
|
|
(559
|
)
|
|
|
(1,060
|
)
|
Other-than-temporary impairment loss
|
|
|
(981
|
)
|
|
|
(1,006
|
)
|
|
|
(1,987
|
)
|
|
|
|
|
|
|
|
|
|
|
Ending balance, September 30, 2009
|
|
$
|
(1,482
|
)
|
|
$
|
(1,565
|
)
|
|
$
|
(3,047
|
)
|
|
|
|
|
|
|
|
|
|
|
Realized Gains and Losses
The following table sets forth the gross realized gains and losses of the Company, excluding
losses resulting from other-than-temporary impairments, for the three and nine months ended
September 30, 2009 as well as the number of transactions during such periods resulting in such
realized gains or losses.
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
9/30/09
|
|
|
9/30/09
|
|
Gross gain on sales
|
|
$
|
80
|
|
|
$
|
203
|
|
Gross loss on sales
|
|
|
(470
|
)
|
|
|
(483
|
)
|
Net gain (loss) on calls, redemptions, maturity and sinking fund
|
|
|
9
|
|
|
|
67
|
|
|
|
|
|
|
|
|
Net gain (loss)
|
|
$
|
(381
|
)
|
|
$
|
(213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of sales transactions resulting in gain or loss
|
|
|
2
|
|
|
|
9
|
|
In the normal course of operations, the Company from time to time trades securities to
reinvest the proceeds into a more opportune investment. Such transactions are made at the
directive of the Companys management, and can generate realized gains or losses. Such trades
have been both infrequent and immaterial. The Company has never sold a security to meet capital or
liquidity needs.
Note 7.
Equity-Based 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. Options previously
granted under the 2004 Plan will continue for the life of such options and no further awards may be
made under the 2004 Plan. The 2007 Plan provides for the issuance of up to 800,000 shares of the
Companys common stock in the form of stock options, stock appreciation rights, restricted stock
awards and deferred stock awards. In addition, should any of the options outstanding under the
2004 Plan be terminated, those shares will become available under the 2007 Plan.
During the nine months ended September 30, 2009, the Company granted 155,600 deferred stock
awards and 15,000 shares of restricted stock, none of which were granted in the third quarter of
2009. During the nine months ended September 30, 2009, 1,450 shares subject to grants were
forfeited under the 2007 Plan of which 450 shares were forfeited in the third quarter of 2009. No
awards were forfeited under the 2004 Plan during the nine months ended September 30, 2009.
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
14
Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited in thousands, except earnings per share)
In addition there was equity based compensation expenses of $10 for the nine months ended
September 30, 2009 relating to stock options previously granted of which $3 was incurred in the
third quarter of 2009.
Note 8.
Commitments and Contingencies
FBR Capital Markets & Co., or FBR, acted as financial advisor to the Company in
connection with the proposed merger with Tower S.F. Merger Corporation, a wholly owned subsidiary
of Tower Group, Inc., or Tower, as well as other proposals received by the Company in 2008 and
2009, and FBR received an aggregate of $125 in retainers for its services. FBR also received a fee
of $500 in connection with the delivery of its fairness opinion relating to the proposed merger and
will receive a fee equal to 1.25% of the aggregate consideration of the merger as of the
consummation thereof, less any retainer and fairness opinion fees. Assuming the average price of
Towers common stock used to determine the value of the merger consideration payable to the
Companys stockholders is $25.00, the total amount of the contingency fee that would be owed to FBR
would be approximately $767.
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
15
Item 2:
Managements Discussion and Analysis of Financial Condition
and Results of Operations
This Quarterly Report on
Form 10-Q
contains forward-looking statements within the meaning
of the federal securities laws, which are intended to be covered by the safe harbors created
thereby. Those statements include, but may not be limited to, the discussions of our operating
and growth strategy. Investors are cautioned that all forward-looking statements involve risks and
uncertainties including, without limitation, those set forth under the caption Risk Factors in
Item 1A of Part II of the Quarterly Report on
Form 10-Q
for the period ended June 30, 2009 and in
the Business section of our Annual Report on
Form 10-K
for the year ended December 31, 2008.
Although we believe that the assumptions underlying the forward-looking statements contained herein
are reasonable, any of the assumptions could prove to be inaccurate, and therefore, there can be no
assurance that the forward-looking statements included in this Quarterly Report on
Form 10-Q
will
prove to be accurate. In light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be regarded as a
representation by us or any other person that our objectives and plans will be achieved. We
undertake no obligation to publicly release any revisions to any forward-looking statements
contained herein to reflect events and circumstances occurring after the date hereof or to reflect
the occurrence of unanticipated events.
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 segment 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.
On November 23, 2004 we completed our IPO and concurrent private placements and completed the
acquisition of Potomac. After giving effect to the acquisition, we changed the name of Potomac to
SUA Insurance Company. On January 1, 2005 we commenced our insurance operations.
On June 21, 2009, the Company, Tower Group, Inc., or Tower, and Tower S.F. Merger Corporation,
a wholly-owned subsidiary of Tower, or Merger Sub, entered into an Agreement and Plan of Merger,
pursuant to which, subject to the terms and conditions set forth therein, Merger Sub will merge
into the Company, with the Company continuing as the surviving corporation and a wholly-owned
subsidiary of Tower. Upon the consummation of the merger, the Companys common stock will be
delisted. On July 22, 2009, the Company, Tower and Merger Sub executed an Amended and Restated
Agreement and Plan of Merger, or the merger agreement, effective as of June 21, 2009, to make
certain corrections to the original merger agreement. For further information about the merger or
to view the merger agreement, see our current reports on Forms 8-K and 8-K/A filed with the
Securities and Exchange Commission on June 22, 2009 and July 24, 2009.
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
16
Three Months Ended September 30, 2009 as compared to the Three Months Ended September 30, 2008
RESULTS OF OPERATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
9/30/2009
|
|
|
9/30/2008
|
|
|
% Change
|
|
|
|
(in millions, except for
|
|
|
|
|
|
|
|
earnings per share)
|
|
|
|
|
|
Gross written premiums
|
|
$
|
70.5
|
|
|
$
|
44.2
|
|
|
|
59.5%
|
|
Net written premiums
|
|
|
68.3
|
|
|
|
42.1
|
|
|
|
62.2%
|
|
|
Earned premiums
|
|
$
|
44.3
|
|
|
$
|
37.2
|
|
|
|
19.1%
|
|
Net investment income
|
|
|
2.7
|
|
|
|
2.6
|
|
|
|
3.8%
|
|
Net realized losses
|
|
|
(1.0
|
)
|
|
|
(0.8
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
46.0
|
|
|
|
39.0
|
|
|
|
17.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss adjustment expense
|
|
|
31.8
|
|
|
|
22.4
|
|
|
|
42.0%
|
|
Acquisition expenses
|
|
|
10.5
|
|
|
|
8.5
|
|
|
|
23.5%
|
|
Other operating expenses
|
|
|
5.8
|
|
|
|
6.3
|
|
|
|
-7.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
48.1
|
|
|
|
37.2
|
|
|
|
29.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income (loss)
|
|
|
(2.1
|
)
|
|
|
1.8
|
|
|
|
*
|
|
Federal income tax benefit (expense)
|
|
|
0.8
|
|
|
|
(0.5
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1.3
|
)
|
|
$
|
1.3
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (losses) per share available to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
$
|
(0.08
|
)
|
|
$
|
0.08
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15.9
|
|
|
|
15.5
|
|
|
|
2.6%
|
|
Diluted
|
|
|
15.9
|
|
|
|
15.6
|
|
|
|
1.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key operating ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss adjustment expense ratio
|
|
|
71.8%
|
|
|
|
60.2%
|
|
|
|
19.2%
|
|
Ratio of acquisition expense to earned premiums
|
|
|
23.7%
|
|
|
|
22.8%
|
|
|
|
3.7%
|
|
Ratio of all other expenses to gross written premiums
|
|
|
8.2%
|
|
|
|
14.3%
|
|
|
|
-42.3%
|
|
Net loss for the quarter ended September 30, 2009 was $1.3 million, compared to net
income of $1.3 million for the quarter ended September 30, 2008. Losses per share for the quarter
ended September 30, 2009 was $0.08, versus earnings per share of $0.08 for the quarter ended
September 30, 2008. The decrease in our net income was due to the increase to our net loss and
loss adjustment ratio resulting from several large losses in our commercial automobile line of
business and lower rates in our workers compensation line of business and the increase in our
acquisition expense ratio resulting from higher commission rates paid to our partner agents.
Gross written premiums were $70.5 million for the three months ended September 30, 2009
compared to $44.2 million for the three months ended September 30, 2008. The increase in gross
written premiums was attributable to increased premiums in our general liability line of business
primarily due to two large accounts.
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
17
Our gross written premiums by partner agent for the three months ended September 30, 2009 and
2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/30/2009
|
|
|
9/30/2008
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
% of Total
|
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
|
(in millions)
|
|
Specialty Risk Solutions, LLC
|
|
$
|
42.6
|
|
|
|
60.4%
|
|
|
$
|
16.1
|
|
|
|
36.5%
|
|
Risk Transfer Programs, LLC
|
|
|
6.7
|
|
|
|
9.5%
|
|
|
|
12.5
|
|
|
|
28.3%
|
|
American Team Managers
|
|
|
6.1
|
|
|
|
8.7%
|
|
|
|
6.2
|
|
|
|
14.0%
|
|
Appalachian Underwriters, Inc.
|
|
|
5.7
|
|
|
|
8.1%
|
|
|
|
1.6
|
|
|
|
3.6%
|
|
AEON Insurance Group, Inc.
|
|
|
3.8
|
|
|
|
5.4%
|
|
|
|
5.1
|
|
|
|
11.5%
|
|
Northern Star Management, Inc.
|
|
|
3.7
|
|
|
|
5.2%
|
|
|
|
1.6
|
|
|
|
3.6%
|
|
First Light Program Manager, Inc.
|
|
|
1.6
|
|
|
|
2.3%
|
|
|
|
0.6
|
|
|
|
1.4%
|
|
Insential, Inc
|
|
|
0.2
|
|
|
|
0.3%
|
|
|
|
0.3
|
|
|
|
0.7%
|
|
Flying Eagle Insurance Service, Inc
|
|
|
-
|
|
|
|
0.0%
|
|
|
|
0.1
|
|
|
|
0.2%
|
|
Other
|
|
|
0.1
|
|
|
|
0.1%
|
|
|
|
0.1
|
|
|
|
0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
70.5
|
|
|
|
100.0%
|
|
|
$
|
44.2
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our gross written premiums for the three months ended September 30, 2009 and 2008 by state
were as follows:
|
|
|
|
9/30/2009
|
|
|
9/30/2008
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
% of Total
|
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
|
(in millions)
|
|
California
|
|
$
|
51.0
|
|
|
|
72.4%
|
|
|
$
|
26.0
|
|
|
|
58.8%
|
|
Florida
|
|
|
5.1
|
|
|
|
7.2%
|
|
|
|
3.3
|
|
|
|
7.5%
|
|
Texas
|
|
|
2.5
|
|
|
|
3.5%
|
|
|
|
6.9
|
|
|
|
15.6%
|
|
Other States
|
|
|
11.9
|
|
|
|
16.9%
|
|
|
|
8.0
|
|
|
|
18.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
70.5
|
|
|
|
100.0%
|
|
|
$
|
44.2
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our gross written premiums by line of business for the three months ended September 30, 2009
and 2008 were as follows:
|
|
|
|
9/30/2009
|
|
|
9/30/2008
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
% of Total
|
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
General liability
|
|
$
|
43.5
|
|
|
|
61.7%
|
|
|
$
|
18.8
|
|
|
|
42.5%
|
|
Workers compensation
|
|
|
15.5
|
|
|
|
22.0%
|
|
|
|
15.7
|
|
|
|
35.5%
|
|
Commercial automobile
|
|
|
10.9
|
|
|
|
15.4%
|
|
|
|
9.0
|
|
|
|
20.4%
|
|
All Other
|
|
|
0.6
|
|
|
|
0.9%
|
|
|
|
0.7
|
|
|
|
1.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
70.5
|
|
|
|
100.0%
|
|
|
$
|
44.2
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in our mix of business by agent, state and line of business was influenced by an
increase of premiums in our general liability line of business due to two large accounts written in
the third quarter of 2009.
Earned premiums were $44.3 million for the quarter ended September 30, 2009 compared to $37.2
million for the quarter ended September 30, 2008.
Net investment income was $2.7 million for the three months ended September 30, 2009 versus
$2.6 million for the three months ended September 30, 2008.
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
18
Acquisition expenses were $10.5 million for the three months ended September 30, 2009 compared
to $8.5 million for the quarter ended September 30, 2008. The increase in acquisition expenses was
primarily the result of higher commission rates paid to our partner agents resulting from the
continuation of a soft insurance market.
Other operating expenses were $5.8 million for the quarter ended September 30, 2009 compared
to $6.3 million for the quarter ended September 30, 2008.
For the third quarter of 2009, our net loss and loss adjustment expense ratio was 71.8%,
compared to 60.2% for the comparable quarter in 2008. This increase was driven by several factors
including (i) higher current accident year loss ratios in our commercial automobile line of
business resulting from several large losses, (ii) higher current accident year loss ratios in our
workers compensation line of business resulting from lower rates and (iii) unfavorable prior year
loss development for the third quarter of 2009 of $0.5 million contrasted with a $0.4 million
favorable development for the third quarter of 2008.
The unfavorable development during 2009 from prior accident years was primarily due to change
in ceded losses resulting from favorable case development primarily in the large deductible segment
of our workers compensation line of business for accident years 2006 and 2007.
Nine Months Ended September 30, 2009 as compared to the Nine Months Ended September 30, 2008
RESULTS OF OPERATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
9/30/2009
|
|
|
9/30/2008
|
|
|
% Change
|
|
|
|
(in millions, except for
|
|
|
|
|
|
|
|
earnings per share)
|
|
|
|
|
|
Gross written premiums
|
|
$
|
143.4
|
|
|
$
|
110.0
|
|
|
|
30.4%
|
|
Net written premiums
|
|
|
137.1
|
|
|
|
103.8
|
|
|
|
32.1%
|
|
|
Earned premiums
|
|
$
|
114.4
|
|
|
$
|
107.2
|
|
|
|
6.7%
|
|
Net investment income
|
|
|
8.3
|
|
|
|
7.9
|
|
|
|
5.1%
|
|
Net realized losses
|
|
|
(1.4
|
)
|
|
|
(0.8
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
121.3
|
|
|
|
114.3
|
|
|
|
6.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss adjustment expense
|
|
|
75.8
|
|
|
|
64.4
|
|
|
|
17.7%
|
|
Acquisition expenses
|
|
|
27.4
|
|
|
|
24.5
|
|
|
|
11.8%
|
|
Other operating expenses
|
|
|
19.5
|
|
|
|
17.6
|
|
|
|
10.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
122.7
|
|
|
|
106.5
|
|
|
|
15.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income (loss)
|
|
|
(1.4
|
)
|
|
|
7.8
|
|
|
|
*
|
|
Federal income tax benefit (expense)
|
|
|
0.6
|
|
|
|
(0.8
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.8
|
)
|
|
$
|
7.0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (losses) per share available to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
$
|
(0.05
|
)
|
|
$
|
0.45
|
|
|
|
*
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15.9
|
|
|
|
15.6
|
|
|
|
1.9%
|
|
Diluted
|
|
|
15.9
|
|
|
|
15.7
|
|
|
|
1.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key operating ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss adjustment expense ratio
|
|
|
66.3%
|
|
|
|
60.1%
|
|
|
|
10.3%
|
|
Ratio of acquisition expense to earned premiums
|
|
|
24.0%
|
|
|
|
22.9%
|
|
|
|
4.8%
|
|
Ratio of all other expenses to gross written premiums
|
|
|
13.6%
|
|
|
|
16.0%
|
|
|
|
-15.0%
|
|
Net loss for the nine months ended September 30, 2009 was $0.8 million, compared to net
income of $7.0 million for the comparable period ended September 30, 2008. Losses per share for
the nine months ended September 30, 2009 was $0.05, versus earnings per share of $0.45 for the same
period ended September 30, 2008. The decrease in our net income was due to (i) the increase to our
net loss and loss adjustment ratio resulting from
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
19
several large losses in our commercial automobile
line of business and lower rates in our workers compensation line of business, (ii) the increase
in our acquisition expense ratio resulting from higher commission rates paid to our partner agents
and (iii) the increase to our operating expenses incurred as a result of the proxy contest waged at
the annual meeting of stockholders held on May 5, 2009, the negotiation of the merger agreement and
the preparation of soliciting materials for the special meeting of stockholders to approve the
proposed merger.
Gross written premiums were $143.4 million for the nine months ended September 30, 2009
compared to $110.0 million for the nine months ended September 30, 2008. The increase in gross
written premiums was primarily attributable to increased premiums in our general liability line of
business and to a lesser extent by increased premiums in our commercial automobile and our workers
compensation lines of business
Our gross written premiums by partner agent for the nine months ended September 30, 2009 and
2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/30/2009
|
|
|
9/30/2008
|
|
|
|
|
|
|
|
of Total
|
|
|
|
|
|
|
% of Total
|
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Specialty Risk Solutions, LLC
|
|
$
|
46.7
|
|
|
|
32.6%
|
|
|
$
|
17.0
|
|
|
|
15.4%
|
|
Risk Transfer Programs, LLC
|
|
|
35.3
|
|
|
|
24.6%
|
|
|
|
44.0
|
|
|
|
40.0%
|
|
American Team Managers
|
|
|
18.0
|
|
|
|
12.6%
|
|
|
|
18.9
|
|
|
|
17.2%
|
|
Appalachian Underwriters, Inc.
|
|
|
17.1
|
|
|
|
11.9%
|
|
|
|
5.5
|
|
|
|
5.0%
|
|
AEON Insurance Group, Inc.
|
|
|
11.2
|
|
|
|
7.8%
|
|
|
|
15.8
|
|
|
|
14.4%
|
|
Northern Star Management, Inc.
|
|
|
8.3
|
|
|
|
5.8%
|
|
|
|
3.6
|
|
|
|
3.3%
|
|
First Light Program Manager, Inc.
|
|
|
5.8
|
|
|
|
4.0%
|
|
|
|
2.0
|
|
|
|
1.8%
|
|
Insential, Inc
|
|
|
0.6
|
|
|
|
0.4%
|
|
|
|
1.0
|
|
|
|
0.9%
|
|
Flying Eagle Insurance Service, Inc
|
|
|
0.1
|
|
|
|
0.1%
|
|
|
|
0.6
|
|
|
|
0.5%
|
|
Other
|
|
|
0.3
|
|
|
|
0.2%
|
|
|
|
1.6
|
|
|
|
1.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
143.4
|
|
|
|
100.0%
|
|
|
$
|
110.0
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our gross written premiums for the nine months ended September 30, 2009 and 2008 by state were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/30/2009
|
|
|
9/30/2008
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
% of Total
|
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
California
|
|
$
|
70.9
|
|
|
|
49.5%
|
|
|
$
|
51.7
|
|
|
|
47.0%
|
|
Florida
|
|
|
18.7
|
|
|
|
13.0%
|
|
|
|
15.7
|
|
|
|
14.3%
|
|
Texas
|
|
|
9.6
|
|
|
|
6.7%
|
|
|
|
13.1
|
|
|
|
11.9%
|
|
Other States
|
|
|
44.2
|
|
|
|
30.8%
|
|
|
|
29.5
|
|
|
|
26.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
143.4
|
|
|
|
100.0%
|
|
|
$
|
110.0
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
20
Our gross written premiums by line of business for the nine months ended September 30, 2009
and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/30/2009
|
|
|
9/30/2008
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
% of Total
|
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Workers compensation
|
|
$
|
59.6
|
|
|
|
41.6%
|
|
|
$
|
53.9
|
|
|
|
49.0%
|
|
General liability
|
|
|
49.8
|
|
|
|
34.7%
|
|
|
|
26.9
|
|
|
|
24.5%
|
|
Commercial automobile
|
|
|
32.3
|
|
|
|
22.5%
|
|
|
|
27.0
|
|
|
|
24.5%
|
|
All Other
|
|
|
1.7
|
|
|
|
1.2%
|
|
|
|
2.2
|
|
|
|
2.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
143.4
|
|
|
|
100.0%
|
|
|
$
|
110.0
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in our mix of business by agent, state and line of business was influenced by an
increase of premiums in our general liability line of business due to two large accounts written in
the third quarter of 2009.
Earned premiums were $114.4 million for the nine months ended September 30, 2009 compared to
$107.2 million for the comparable period ended September 30, 2008.
Net investment income was $8.3 million for the nine months ended September 30, 2009 versus
$7.9 million for the three same period ended September 30, 2008.
Acquisition expenses were $27.4 million for the nine months ended September 30, 2009 compared
to $24.5 million for the nine months ended September 30, 2008. The increase in acquisition
expenses was primarily the result of higher commission rates paid to our partner agents resulting
from the continuation of a soft insurance market.
Other operating expenses were $19.5 million for the nine months ended September 30, 2009
compared to $17.6 million for the nine months ended September 30, 2008. The increase in other
operating expenses was primarily attributable to the one-time expenses of approximately $2.1
million incurred as a result of both the proxy contest waged at the annual meeting of stockholders
held on May 5, 2009, the negotiation of the merger agreement, and the preparation of the soliciting
material for the special meeting of stockholders to approve the proposed merger.
For the nine months ended September 30, 2009, our net loss and loss adjustment expense ratio
was 66.3%, compared to 60.1% for the comparable period in 2008. This increase was primarily driven
by higher current accident year loss ratios in our commercial automobile line of business resulting
from several large losses and higher current accident year loss ratios in our workers compensation
line of business resulting from lower rates. We also had prior year favorable development for the
nine months ended September 30, 2009 of $1.4 million which was similar to the prior year favorable
development for the nine months ended September 30, 2008 of $1.7 million.
The favorable development was primarily due to better than expected claim emergence in our
general liability line of business for accident years 2008 and prior. The average expected loss
methods decreased due to lack of claims emergence. As a result, the ultimate incurred loss for our
general liability line of business was reduced by $3.4 million. This favorable development in our
general liability line of business was partially offset by adverse development in our workers
compensation line of business of $2.0 million due to increased case severity in accident year 2008.
Liquidity and Capital Resources
Specialty Underwriters Alliance, Inc. is organized as a holding company and, as such, has no
direct operations of its own. Its assets consist primarily of investments in its subsidiary,
through which it conducts substantially all of its insurance operations.
As a holding company, Specialty Underwriters Alliance, Inc. has continuing funding needs for
general corporate expenses, the payment of principal and interest on future borrowings, if any,
taxes and the payment of other obligations. 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. There are restrictions on the payment of dividends to us by our insurance subsidiary.
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
21
Cash Flows
A summary of our cash flows is as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
9/30/2009
|
|
|
9/30/2008
|
|
|
|
(in millions)
|
|
Cash provided by (used in)
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
35.2
|
|
|
$
|
39.8
|
|
Investing activities
|
|
|
(34.1
|
)
|
|
|
(40.0
|
)
|
Financing activities
|
|
|
0.2
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
Change in cash
|
|
|
1.3
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2009, net cash provided by operating activities was
$35.2 million, principally consisting of premium and deposit collections exceeding losses and
expenses paid out. This amount compares to net cash provided by operating activities of
$39.8 million for the nine months ended September 30, 2008. The decrease in net cash provided by
operating activities was primarily driven by the increase in loss and
LAE payments resulting from the maturation of our book of business which was partially offset
by an increase in written premiums during 2009.
Cash used by investment activities was $34.1 million for the nine months ended September 30,
2009, resulting from purchases of new fixed maturity investments and purchases of equipment and
capitalized software, exceeding sales, redemptions, calls and maturities of investments. For the
nine months ended September 30, 2008, cash used in investment activities was $40.0 million,
principally representing increases in investments and purchases of equipment and capitalized
software.
For the nine months ended September 30, 2009, cash flows from financing activities from sales
of Class B Shares to partner agents were $0.2 million. For the nine months ended September 30,
2008, cash flows used for financing activities were $0.2 million primarily relating to the
repurchase of treasury shares partially offset from sales of Class B Shares to partner agents.
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 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 as of September 30, 2009 was
$244.1 million compared to amortized cost of $236.3 million. The aggregate fair market value of
our fixed maturity investments as of December 31, 2008 was $216.7 million compared to amortized
cost of $220.7 million.
During the third quarter of 2009, a total of four of our available-for-sale securities that
were previously written down with a fair market value of $0.7 million, as of September 30, 2009,
have experienced a decrease in fair value of $0.4 million during the third quarter of 2009.
Associated with this decline in fair value we recognized a credit loss of $0.6 million which was
recognized in earnings and a credit of $0.2 million was recognized in other comprehensive income
for impairments previously recognized. During the nine months ended September 30, 2009, six of our
available-for-sale securities with a fair market value of $1.5 million, as of September 30, 2009,
have experienced an other-than-temporary impairment of $2.2 million, of which $1.2 million was
recognized as a loss in earnings and $1.0 million was recognized as a loss in comprehensive income.
For information about our methodology for determining whether a security has experienced
impairment see the discussion under the heading
Item 1. Financial
Statements
Note 2
Recent Accounting Pronouncements and Note 6 Investments of this quarterly report.
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
22
Item 3: 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 monitor this exposure through periodic reviews of our consolidated asset and
liability positions. We model and periodically review estimates of cash flows, as well as the
impact of interest rate fluctuations relating to the investment portfolio and insurance reserves.
The table below summarizes the estimated effects of hypothetical increases and decreases in
market interest rates on the fair value of our fixed maturity investments as of September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Assumed Change
|
|
After Change
|
|
Increase
|
|
|
Fair Value at
|
|
in Relevant
|
|
in Interest
|
|
(Decrease) in
|
|
|
9/30/2009
|
|
Interest Rate
|
|
Interest Rate
|
|
Fair Value
|
|
|
(in thousands)
|
|
Fixed Maturity Investments
|
|
|
$244,135
|
|
|
100 bp decrease
|
|
|
$254,733
|
|
|
|
$ 10,598
|
|
|
|
|
|
|
|
50 bp decrease
|
|
|
249,377
|
|
|
|
5,242
|
|
|
|
|
|
|
|
50 bp increase
|
|
|
239,030
|
|
|
|
(5,105
|
)
|
|
|
|
|
|
|
100 bp increase
|
|
|
234,067
|
|
|
|
(10,068
|
)
|
The average duration of our fixed maturity investments at September 30, 2009 was approximately
3.44 years.
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 borrowers ability to repay the debt. In our risk management
strategy and investment policy, we earn competitive relative returns while investing in a
diversified portfolio of securities of high credit quality issuers to limit the amount of credit
exposure to any one issuer.
The portfolio of fixed maturities investments consists primarily of high quality bonds as of
September 30, 2009. The following table summarizes bond ratings at fair value:
|
|
|
|
|
|
|
|
|
|
|
As of 9/30/2009
|
|
|
|
|
|
|
|
Percent of
|
|
Bond Ratings
|
|
Amount
|
|
|
Portfolio
|
|
|
|
(in thousands)
|
|
AAA rated and U.S. Government and affiliated agency securities
|
|
$
|
98,234
|
|
|
|
40.3
|
%
|
AA rated
|
|
|
65,618
|
|
|
|
26.9
|
%
|
A rated
|
|
|
70,063
|
|
|
|
28.7
|
%
|
BBB rated
|
|
|
7,180
|
|
|
|
2.9
|
%
|
BB rated or below
|
|
|
3,040
|
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
244,135
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
We also have other receivable amounts subject to credit risk, including reinsurance
recoverables from OneBeacon Insurance Company. To mitigate the risk of counterparties nonpayment
of amounts due under these arrangements, we established business and financial standards for
reinsurer approval, incorporating ratings by major rating agencies and considering then-current
market information.
Item 4: Controls and Procedures
|
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures.
Disclosure
controls and procedures are our 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,
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
23
processed, summarized and
reported, within the time periods specified in the SECs 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 quarterly 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
control over financial reporting that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, these internal controls.
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 control over financial reporting
are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure
controls and procedures and internal control over financial reporting systems are met.
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
24
PART II OTHER INFORMATION
Item 1: Legal Proceedings
None.
Item 1A: Risk Factors
There are no material changes to the risk factors previously reported in our Annual
Report on Form 10-K for the year ended December 31, 2008 and Quarterly Report on Form 10-Q for the
quarter ended June 30, 2009. For more information regarding such risk factors, please refer to
Items 1A of our Annual Report on Form 10-K for the year ended December 31, 2008 and Quarterly
Report on Form 10-Q for the quarter ended June 30, 2009.
Item 2: Recent Sales of Unregistered Securities
There were no sales of unregistered securities that have not been previously reported on
a Current Report on Form 8-K.
Item 3: Defaults Upon Senior Securities
None.
Item 4: Submission of Matters to a Vote of Security Holders
None.
Item 5: Other Information
None.
Exhibits:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
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
|
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
25
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: November 9, 2009
|
|
|
|
By:
|
|
/s/ Peter E. Jokiel
|
|
|
|
|
|
Name: Peter E. Jokiel
|
|
|
Title: Executive Vice President and Chief
|
|
|
Financial Officer
|
|
|
|
Date: November 9, 2009
|
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
26
Exhibits Index:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
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
|
2009 Third Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
27
Specialty Underwriters Alliance (NASDAQ:SUAI)
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