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 June 30, 2008
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
Incorporation or Organization)
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(I.R.S. Employer
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 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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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes
o
No
þ
As of August 1, 2008, there were 14,437,355 shares of our common stock, $0.01 par value, or
the Common Stock, outstanding and 1,069,844 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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10
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16
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17
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19
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19
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19
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19
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19
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20
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21
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2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
2
PART I FINANCIAL INFORMATION
Item 1.
Business
Specialty Underwriters Alliance, Inc.
Consolidated Balance Sheets
As of June 30, 2008 and December 31, 2007
(dollars in thousands)
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6/30/2008
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12/31/2007
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(unaudited)
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ASSETS
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Fixed maturity investments, at fair value (amortized
cost: $203,535 and $176,592)
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$
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201,294
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$
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177,735
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Short-term investments, at amortized cost (which approximates fair
value)
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38,942
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51,652
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Total Investments
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240,236
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229,387
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Cash
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147
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968
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Insurance premiums receivable
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68,396
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68,887
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Reinsurance recoverable on paid and unpaid loss and loss adjustment
expenses
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73,398
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77,204
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Prepaid reinsurance premiums
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417
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631
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Investment income accrued
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2,159
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1,909
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Equipment and capitalized software at cost (less accumulated
depreciation of $12,098 and $8,927)
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13,268
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12,796
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Intangible assets
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10,745
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10,745
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Deferred acquisition costs
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15,790
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17,495
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Deferred tax asset
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1,445
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Other assets
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2,595
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2,512
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Total Assets
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$
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428,596
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$
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422,534
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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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194,870
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$
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184,736
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Unearned insurance premiums
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78,488
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86,741
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Insured deposit funds
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13,792
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12,515
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Accounts payable and other liabilities
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7,231
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7,405
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Total Liabilities
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294,381
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291,397
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Stockholders equity
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Common stock at $.01 par value per share - authorized: 30,000,000
shares; issued: 14,712,355 and 14,697,355 shares; and
outstanding: 14,437,355 shares and 14,697,355 shares
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147
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147
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Class B common stock at $.01 par value per share -
authorized: 2,000,000 shares; issued and outstanding: 1,029,037
shares and 869,738 shares
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10
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9
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Paid-in capital - common stock
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129,612
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129,431
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Paid-in capital - class B common stock
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6,900
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6,139
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Accumulated deficit
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(17
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)
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(5,732
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)
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Treasury stock
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(1,347
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)
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Accumulated other comprehensive income
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(1,090
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)
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1,143
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Total Stockholders Equity
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134,215
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131,137
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Total Liabilities & Stockholders Equity
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$
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428,596
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$
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422,534
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The accompanying notes are an integral part of these consolidated financial statements.
2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
3
Specialty Underwriters Alliance, Inc.
Consolidated Statements of Operations and Comprehensive Income
For the Three and Six Months Ended June 30, 2008 and 2007
(Unaudited dollars in thousands, except for earnings per share)
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Three Months Ended
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Six Months Ended
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6/30/2008
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6/30/2007
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6/30/2008
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6/30/2007
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Revenues
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Earned insurance premiums
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$
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34,195
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$
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37,194
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$
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69,945
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$
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72,556
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Net investment income
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2,670
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2,338
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5,323
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4,418
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Net realized gains
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7
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24
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38
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27
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Total revenue
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36,872
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39,556
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75,306
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77,001
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Expenses
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Loss and loss adjustment expenses
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20,941
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21,894
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41,999
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42,030
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Acquisition expenses
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7,267
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9,172
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15,970
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17,900
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Other operating expenses
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5,412
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5,418
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11,339
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10,915
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Total expenses
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33,620
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36,484
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69,308
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70,845
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Pretax income
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3,252
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3,072
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5,998
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6,156
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Federal income tax expense
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(1,002
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)
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(62
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)
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(283
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)
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(124
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)
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Net income
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2,250
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3,010
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5,715
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6,032
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Net change in unrealized gains
and losses for
investments held, after tax
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(2,685
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)
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(2,418
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)
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(2,233
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)
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(1,785
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)
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Comprehensive income (loss)
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$
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(435
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)
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$
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592
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$
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3,482
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$
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4,247
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Earnings per share available to
common
stockholders (in dollars)
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Basic
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$
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0.14
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$
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0.20
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$
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0.37
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$
|
0.39
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Diluted
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$
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0.14
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$
|
0.20
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$
|
0.36
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$
|
0.39
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Weighted average shares
outstanding
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Basic
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15,666
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15,406
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15,623
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|
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15,390
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Diluted
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15,809
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15,406
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15,766
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15,390
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|
The accompanying notes are an integral part of these consolidated financial statements.
2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
4
Specialty Underwriters Alliance, Inc.
Consolidated Statement of Stockholders Equity
As of June 30, 2008
(Unaudited dollars in thousands)
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Accumulated
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|
|
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|
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|
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|
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|
|
|
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|
|
Other Comp-
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Total
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Common
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Paid-in
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Common
|
|
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Paid-in
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|
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Retained
|
|
|
|
|
|
|
rehensive
|
|
|
Stock-
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|
|
|
Stock
|
|
|
Capital
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
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|
Treasury
|
|
|
Income
|
|
|
holders
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|
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|
Class A
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Class A
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|
Class B
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Class B
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(Deficit)
|
|
|
Stock
|
|
|
(Loss)
|
|
|
Equity
|
|
Balance at December 31, 2007
|
|
$
|
147
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|
|
$
|
129,431
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|
|
$
|
9
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|
|
$
|
6,139
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|
|
$
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(5,732
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)
|
|
$
|
|
|
|
$
|
1,143
|
|
|
$
|
131,137
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|
|
|
|
|
|
|
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|
|
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|
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|
|
|
|
|
|
|
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Net income
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|
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|
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|
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|
5,715
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|
|
|
|
|
|
|
5,715
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Net change in unrealized investment gains, net of tax
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,233
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)
|
|
|
(2,233
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)
|
Stock issuance
|
|
|
|
|
|
|
74
|
|
|
|
1
|
|
|
|
761
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
836
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|
Treasury stock purchases
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
(1,347
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)
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|
|
|
|
|
|
(1,347
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)
|
Stock based compensation
|
|
|
|
|
|
|
107
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
107
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
$
|
147
|
|
|
$
|
129,612
|
|
|
$
|
10
|
|
|
$
|
6,900
|
|
|
$
|
(17
|
)
|
|
$
|
(1,347
|
)
|
|
$
|
(1,090
|
)
|
|
$
|
134,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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The accompanying notes are an integral part of these consolidated financial statements.
2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
5
Specialty Underwriters Alliance, Inc.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2008 and 2007
(Unaudited dollars in thousands)
|
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|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
6/30/2008
|
|
|
6/30/2007
|
|
Cash flows from operations
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,715
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|
|
$
|
6,032
|
|
|
|
|
|
|
|
|
Charges (credits) to reconcile net income to cash flows from
operations:
|
|
|
|
|
|
|
|
|
Change in deferred income tax
|
|
|
(307
|
)
|
|
|
(26
|
)
|
Net realized (gains) losses
|
|
|
(38
|
)
|
|
|
(27
|
)
|
Amortization of bond premium (discount)
|
|
|
(10
|
)
|
|
|
(23
|
)
|
Depreciation
|
|
|
3,171
|
|
|
|
2,148
|
|
Net change in:
|
|
|
|
|
|
|
|
|
Reinsurance recoverable on unpaid loss and loss adjustment expense
reserves
|
|
|
3,806
|
|
|
|
3,121
|
|
Loss and loss adjustment expense reserves
|
|
|
10,134
|
|
|
|
19,375
|
|
Insurance premiums receivable
|
|
|
491
|
|
|
|
(7,391
|
)
|
Unearned insurance premiums
|
|
|
(8,253
|
)
|
|
|
5,215
|
|
Deferred acquisition costs
|
|
|
1,705
|
|
|
|
647
|
|
Prepaid reinsurance premiums
|
|
|
214
|
|
|
|
2,892
|
|
Insured deposit funds
|
|
|
1,277
|
|
|
|
318
|
|
Other, net
|
|
|
(312
|
)
|
|
|
2,120
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
11,878
|
|
|
|
28,369
|
|
|
|
|
|
|
|
|
Net cash flows provided by operations
|
|
|
17,593
|
|
|
|
34,401
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Net (increase) decrease in short-term investments
|
|
|
12,710
|
|
|
|
(11,008
|
)
|
Redemptions, calls and maturities of fixed maturity investments
|
|
|
18,042
|
|
|
|
9,803
|
|
Purchases of fixed maturity investments
|
|
|
(44,938
|
)
|
|
|
(30,540
|
)
|
Purchase of equipment and capitalized software
|
|
|
(3,643
|
)
|
|
|
(4,798
|
)
|
|
|
|
|
|
|
|
Net cash flows used for investing activities
|
|
|
(17,829
|
)
|
|
|
(36,543
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
762
|
|
|
|
325
|
|
Treasury stock purchases
|
|
|
(1,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
(585
|
)
|
|
|
325
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash during the period
|
|
|
(821
|
)
|
|
|
(1,817
|
)
|
Cash at beginning of the period
|
|
|
968
|
|
|
|
2,375
|
|
|
|
|
|
|
|
|
Cash at the end of the period
|
|
$
|
147
|
|
|
$
|
558
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
6
Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited dollars in thousands, except per share and stock amounts)
Note 1.
Basis of Presentation
The Consolidated Financial Statements (unaudited) include the accounts of Specialty
Underwriters Alliance, Inc., or SUA or the Company, and its consolidated subsidiary, SUA Insurance
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, 2007 filed with the Securities and Exchange Commission, or
SEC.
The interim financial data as of June 30, 2008, and for the three and six month periods ended
June 30, 2008 and June 30, 2007 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.
Earnings Per Share
Basic earnings per share are based on the weighted average number of common shares outstanding
during the period, while diluted earnings per share includes the weighted average number of common
shares and potential dilution from shares issuable pursuant to equity incentive compensation using
the treasury stock method. The following table shows the computation of the Companys earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
6/30/08
|
|
|
6/30/07
|
|
|
6/30/08
|
|
|
6/30/07
|
|
Numerator for earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,250
|
|
|
$
|
3,010
|
|
|
$
|
5,715
|
|
|
$
|
6,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding used in
computation of
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock (class A and B) issued
|
|
|
15,684
|
|
|
|
15,406
|
|
|
|
15,632
|
|
|
|
15,390
|
|
Common stock in treasury
|
|
|
18
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
15,666
|
|
|
|
15,406
|
|
|
|
15,623
|
|
|
|
15,390
|
|
Effect of
dilutive
securities
1
Unvested deferred stock awards
|
|
|
143
|
|
|
|
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - diluted
|
|
|
15,809
|
|
|
|
15,406
|
|
|
|
15,766
|
|
|
|
15,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.14
|
|
|
$
|
0.20
|
|
|
$
|
0.37
|
|
|
$
|
0.39
|
|
Diluted
|
|
$
|
0.14
|
|
|
$
|
0.20
|
|
|
$
|
0.36
|
|
|
$
|
0.39
|
|
|
|
|
1
|
|
Outstanding options of 718,066 and 742,466 as of June 30, 2008 and June
30, 2007, respectively, have been excluded from the diluted earnings per share calculation
for the three and six months ended June 30, 2008 and June 30, 2007, as they were
anti-dilutive.
|
Note 3.
Income Taxes
As of June 30, 2008 and December 31, 2007 the Company had tax basis net operating loss
carryforwards of $0 and $2,068, respectively. The Company also accumulated start-up and
organization expenditures through December 31, 2004 of $2,364 that are deductible over a 60 month
period commencing on November 23, 2004. The unamortized portions of these costs were $637 and $873
at June 30, 2008 and December 31, 2007, respectively.
2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
7
Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited dollars in thousands, except per share and stock amounts)
Beginning in first quarter of 2008, based on continuing profitability trends, the Company
believes that it is more likely than not that the deferred income tax assets will be realized. As
such, the Company elected to eliminate its valuation allowance and establish the full net deferred
tax asset.
The components of current and deferred income taxes for the three months and six months ended June
30, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
6/30/08
|
|
|
6/30/07
|
|
|
6/30/08
|
|
|
6/30/07
|
|
Current tax expense
|
|
$
|
553
|
|
|
$
|
99
|
|
|
$
|
590
|
|
|
$
|
150
|
|
Deferred tax (benefit)/expense
|
|
|
449
|
|
|
|
(37
|
)
|
|
|
(307
|
)
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
1,002
|
|
|
$
|
62
|
|
|
$
|
283
|
|
|
$
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4.
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 June 30, 2008, the Company reported gross loss and LAE reserves of $194,870, of which
$57,555 represented the gross direct loss and LAE reserves of Potomac, which is fully reinsured by
OneBeacon Insurance Company, or OneBeacon. The Company experienced favorable prior year loss
development of $1,272 due to favorable claims experience primarily within our commercial automobile
business. At December 31, 2007, the Company reported gross loss and LAE reserves of $184,736, of
which $63,529 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 $1,831 as of June 30, 2008
and $1,505 as of December 31, 2007. 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.
Note 5.
Recent Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits
entities to choose to measure and report many financial instruments and certain other assets and
liabilities at fair value. The objective of SFAS No. 159 is to improve financial reporting by
providing entities the opportunity to reduce the complexity in accounting for financial instruments
and to mitigate volatility in reported earnings caused by measuring related assets and liabilities
differently. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We
have elected not to report any financial assets or liabilities at fair value under SFAS No. 159.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157
defines fair value, establishes a framework for measuring fair value and expands disclosure
requirements regarding fair value measurement. Where applicable, SFAS No. 157 simplifies and
codifies previously issued guidance on fair value. The Companys adoption of FAS 157, effective
January 1, 2008, results in additional financial statement disclosures and has no effect on the
conduct of the Companys business, its financial condition and results of operations.
SFAS No. 157 establishes a fair value hierarchy which requires maximizing the use of
observable inputs and minimizing the use of unobservable inputs when measuring fair value.
$194,122 of our financial instruments, all of which are fixed maturity investments, are Level 2, as
their fair value is determined using significant observable
2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
8
Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited dollars in thousands, except per share and stock amounts)
inputs such as recent sales, the credit
rating of the issuer, duration of the security, yields on comparably rated publicly traded
securities and risk-free yield curves. The remaining $7,171 of our financial instruments, also all
fixed maturity investments, which were previously categorized as Level 2 are now categorized
as Level 3, as their fair value is determined by a combination of matrix, dealer quotation and
pricing services.
During the three month period ended June 30, 2008, the change in unrealized gains and losses
for those instruments categorized as Level 3 was negative $720.
Note 6.
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. 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.
On April 4, 2008 the Compensation Committee of the Board of Directors granted deferred stock
awards for 258,750 shares of common stock to all employees of the Company, including the executive
officers. The awards granted to the non executive employees vest on the first anniversary of the
grant date and the awards for the executive officers vest equally on either the first four or the
first five anniversaries of the grant date.
The 2007 Plan provides for an automatic grant of 3,000 unrestricted shares of common stock to
each independent director on the first business day following such directors re-election to the
Board of Directors at the Annual Meeting of the Stockholders. On May 7, 2008, 15,000 shares were
issued to independent directors who were re-elected to the Board at the 2008 Annual Meeting of the
Stockholders held on May 6, 2008.
The compensation expense associated with the grants made during the second quarter of 2008 was
$135, based on the fair market value of the shares on the date of grant pursuant to SFAS 123R and
amortized over the vesting period of the award. No other awards were made under the 2007 Plan or
the 2004 Plan and 10,000 shares were terminated under the 2004 Plan in the second quarter of 2008.
In addition there was equity based compensation expenses of $46, relating to stock options
previously granted
Note 7.
Stock Repurchase
In April 2008, the board of directors authorized the repurchase of up to 275,000 shares of the
Companys Common Stock at an aggregate purchase price of up to $1,650. Under the authorization,
repurchases may be made from time to time in the open market, pursuant to trading plans meeting the
requirements of Rule 10b-18 under the Securities Exchange Act of 1934, in private transactions or
otherwise. The authorization expires on October 15, 2008. During the three months ended June 30,
2008, the Company repurchased all 275,000 shares of Common Stock under its stock repurchase
authorization for a total cost of approximately $1,347. The average cost per share repurchased was
$4.90 including commission. At June 30, 2008, the Company had fully utilized its authority to
repurchase shares of Common Stock.
2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
9
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
the Business section of our Annual Report on
Form 10-K
for the year ended December 31, 2007.
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.
Prior to our IPO, all activities consisted of start-up activities related to our IPO and costs
to establish the infrastructure required to commence insurance operations.
On January 1, 2005 we commenced our insurance operations.
2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
10
Three Months Ended June 30, 2008 as compared to the Three Months Ended June 30, 2007
RESULTS OF OPERATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
6/30/2008
|
|
|
6/30/2007
|
|
|
% Change
|
|
|
|
(dollars in millions,
|
|
|
|
except for per share data)
|
|
Gross written premiums
|
|
$
|
41.8
|
|
|
$
|
48.6
|
|
|
|
-14.0
|
%
|
Net written premiums
|
|
|
39.9
|
|
|
|
46.2
|
|
|
|
-13.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
|
$
|
34.2
|
|
|
$
|
37.2
|
|
|
|
-8.1
|
%
|
Net investment income
|
|
|
2.7
|
|
|
|
2.3
|
|
|
|
17.4
|
%
|
Net realized gains
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
36.9
|
|
|
|
39.6
|
|
|
|
-6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss adjustment expense
|
|
|
20.9
|
|
|
|
21.9
|
|
|
|
-4.6
|
%
|
Acquisition expenses
|
|
|
7.3
|
|
|
|
9.2
|
|
|
|
-20.7
|
%
|
Other operating expenses
|
|
|
5.4
|
|
|
|
5.4
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
33.6
|
|
|
|
36.5
|
|
|
|
-7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
|
3.3
|
|
|
|
3.1
|
|
|
|
6.5
|
%
|
Federal income tax
|
|
|
(1.0
|
)
|
|
|
(0.1
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.3
|
|
|
$
|
3.0
|
|
|
|
-23.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share available to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.14
|
|
|
$
|
0.20
|
|
|
|
-30.0
|
%
|
Diluted
|
|
$
|
0.14
|
|
|
$
|
0.20
|
|
|
|
-30.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15.7
|
|
|
|
15.4
|
|
|
|
1.9
|
%
|
Diluted
|
|
|
15.8
|
|
|
|
15.4
|
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key operating ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss adjustment expense ratio
|
|
|
61.2
|
%
|
|
|
58.9
|
%
|
|
|
3.9
|
%
|
Ratio of acquisition expense to earned premiums
|
|
|
21.3
|
%
|
|
|
24.7
|
%
|
|
|
-13.8
|
%
|
Ratio of all other expenses to gross written premiums
|
|
|
13.0
|
%
|
|
|
11.1
|
%
|
|
|
17.1
|
%
|
Net income for the quarter ended June 30, 2008 was $2.3 million, compared to net income of
$3.0 million for the quarter ended June 30, 2007. Earnings per share for the quarter ended June
30, 2008 was $0.14, versus earnings per share of $0.20 for the quarter ended June 30, 2007. The
primary reason for the decrease in net income was due to a change in our tax position. In the
second quarter of 2008 we became a full taxpayer due to the utilization of prior period remaining
tax loss carry forwards.
Gross written premiums were $41.8 million for the three months ended June 30, 2008 compared to
$48.6 million for the three months ended June 30, 2007. The decrease in gross written premiums is
attributable to several factors. We continue to experience a soft insurance market which has led
to downward pressure on premiums in all lines which the Company writes. The weakening economy has
resulted in (1) lower payrolls which have lowered our workers compensation exposure and therefore
premiums and (2) a reduction in our contractors program as a result of fewer construction projects
being started.
Earned premiums were $34.2 million for the quarter ended June 30, 2008 compared to $37.2
million for the quarter ended June 30, 2007. Premiums are earned ratably over the terms of our
insurance policies, which are 12 months. The decrease in earned premiums is a result of reduced
premium writing in prior quarters.
Net investment income was $2.7 million for the quarter ended June 30, 2008 versus $2.3 million
for the quarter ended June 30, 2007. The increase in net investment income reflects growth in our
total investments from $194.1 million at June 30, 2007 to $240.2 million at June 30, 2008 resulting
from positive operating cash flows.
2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
11
Other operating expenses were $5.4 million for the quarter ended June 30, 2008, which
consisted of salaries and benefit costs of $2.0 million, $0.2 million of professional and
consulting fees, $1.7 million of depreciation and amortization, $0.1 million of stock based
compensation expense and $1.4 million of other expenses. For the quarter ended June 30, 2007,
other operating expenses were $5.4 million, comprised of salaries and benefit costs of $1.7
million, $0.5 million of professional and consulting fees, $1.1 million of depreciation and
amortization, $0.4 million of stock based compensation expense and $1.7 million of other expenses.
Acquisition expenses were $7.3 million for the three months ended June 30, 2008 compared to
$9.2 for the quarter ended June 30, 2007. The decrease in our acquisition expense is the result
of a decrease in premiums.
For the second quarter of 2008, our net loss and loss adjustment expense ratio was 61.2%,
compared to 58.9% for the comparable quarter in 2007. This increase was primarily driven by higher
loss ratios in our workers compensation book of business due to lower rates. This was partially
offset by improvements of approximately $0.6 million across all lines for prior accident years.
Our gross written premiums by partner agent for the three months ended June 30, 2008 and 2007
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/30/2008
|
|
|
6/30/2007
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
% of Total
|
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
|
(dollars in millions)
|
|
Risk Transfer Holdings, Inc.
|
|
$
|
22.3
|
|
|
|
53.3
|
%
|
|
$
|
23.4
|
|
|
|
48.2
|
%
|
American Team Managers
|
|
|
6.5
|
|
|
|
15.6
|
%
|
|
|
9.0
|
|
|
|
18.5
|
%
|
AEON Insurance Group, Inc.
|
|
|
5.2
|
|
|
|
12.4
|
%
|
|
|
6.9
|
|
|
|
14.2
|
%
|
Appalachian Underwriters, Inc.
|
|
|
2.1
|
|
|
|
5.0
|
%
|
|
|
5.7
|
|
|
|
11.7
|
%
|
Northern Star Management, Inc.
|
|
|
2.0
|
|
|
|
4.8
|
%
|
|
|
|
|
|
|
0.0
|
%
|
First Light Program Manager, Inc.
|
|
|
1.0
|
|
|
|
2.4
|
%
|
|
|
|
|
|
|
0.0
|
%
|
Specialty Risk Solutions, LLC
|
|
|
0.9
|
|
|
|
2.2
|
%
|
|
|
1.2
|
|
|
|
2.5
|
%
|
Insential, Inc
|
|
|
0.4
|
|
|
|
1.0
|
%
|
|
|
0.5
|
|
|
|
1.0
|
%
|
Flying Eagle Insurance Service, Inc
|
|
|
0.3
|
|
|
|
0.7
|
%
|
|
|
1.1
|
|
|
|
2.3
|
%
|
Other
|
|
|
1.1
|
|
|
|
2.6
|
%
|
|
|
0.8
|
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41.8
|
|
|
|
100.0
|
%
|
|
$
|
48.6
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our gross written premiums for the three months ended June 30, 2008 and 2007 by state was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/30/2008
|
|
|
6/30/2007
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
% of Total
|
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
|
(dollars in millions)
|
|
California
|
|
$
|
14.2
|
|
|
|
34.0
|
%
|
|
$
|
14.9
|
|
|
|
30.6
|
%
|
Florida
|
|
|
10.7
|
|
|
|
25.6
|
%
|
|
|
15.2
|
|
|
|
31.3
|
%
|
Texas
|
|
|
1.3
|
|
|
|
3.1
|
%
|
|
|
3.3
|
|
|
|
6.8
|
%
|
Other States
|
|
|
15.6
|
|
|
|
37.3
|
%
|
|
|
15.2
|
|
|
|
31.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41.8
|
|
|
|
100.0
|
%
|
|
$
|
48.6
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reduction in gross written premiums in Florida was primarily driven by reduced exposure in
our workers compensation business.
2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
12
Our gross written premiums by line of business for the three months ended June 30, 2008 and
2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/30/2008
|
|
|
6/30/2007
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
% of Total
|
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
|
(dollars in millions)
|
|
Workers compensation
|
|
$
|
26.4
|
|
|
|
63.2
|
%
|
|
$
|
27.2
|
|
|
|
56.0
|
%
|
Commercial automobile
|
|
|
10.4
|
|
|
|
24.9
|
%
|
|
|
10.3
|
|
|
|
21.1
|
%
|
General liability
|
|
|
4.2
|
|
|
|
10.0
|
%
|
|
|
10.0
|
|
|
|
20.6
|
%
|
All Other
|
|
|
0.8
|
|
|
|
1.9
|
%
|
|
|
1.1
|
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41.8
|
|
|
|
100.0
|
%
|
|
$
|
48.6
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in our general liability business is due to a reduction in our contractors
programs as a result of fewer construction projects being started.
Six Months Ended June 30, 2008 as compared to the Six Months Ended June 30, 2007
RESULTS OF OPERATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
6/30/2008
|
|
|
6/30/2007
|
|
|
% Change
|
|
|
|
(dollars in millions,
|
|
|
|
except for per share data)
|
|
Gross written premiums
|
|
$
|
65.9
|
|
|
$
|
83.6
|
|
|
|
-21.2
|
%
|
Net written premiums
|
|
|
61.6
|
|
|
|
77.8
|
|
|
|
-20.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
|
$
|
69.9
|
|
|
$
|
72.6
|
|
|
|
-3.7
|
%
|
Net investment income
|
|
|
5.3
|
|
|
|
4.4
|
|
|
|
20.5
|
%
|
Net realized gains
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
75.3
|
|
|
|
77.0
|
|
|
|
-2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss adjustment expense
|
|
|
42.0
|
|
|
|
42.0
|
|
|
|
0.0
|
%
|
Acquisition expenses
|
|
|
16.0
|
|
|
|
17.9
|
|
|
|
-10.6
|
%
|
Other operating expenses
|
|
|
11.3
|
|
|
|
10.9
|
|
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
69.3
|
|
|
|
70.8
|
|
|
|
-2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
|
6.0
|
|
|
|
6.1
|
|
|
|
-1.6
|
%
|
Federal income tax
|
|
|
(0.3
|
)
|
|
|
(0.1
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5.7
|
|
|
$
|
6.0
|
|
|
|
-5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share available to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.37
|
|
|
$
|
0.39
|
|
|
|
-5.1
|
%
|
Diluted
|
|
$
|
0.36
|
|
|
$
|
0.39
|
|
|
|
-7.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15.6
|
|
|
|
15.4
|
|
|
|
1.3
|
%
|
Diluted
|
|
|
15.8
|
|
|
|
15.4
|
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key operating ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss adjustment expense ratio
|
|
|
60.0
|
%
|
|
|
57.9
|
%
|
|
|
3.6
|
%
|
Ratio of acquisition expense to earned premiums
|
|
|
22.8
|
%
|
|
|
24.7
|
%
|
|
|
-7.7
|
%
|
Ratio of all other expenses to gross written premiums
|
|
|
17.2
|
%
|
|
|
13.1
|
%
|
|
|
31.3
|
%
|
Net income for the six months ended June 30, 2008 was $5.7 million, compared to net income of
$6.0 million for the six months ended June 30, 2007. Earnings per share for the six months ended
June 30, 2008 was $0.37, basic or $0.36 diluted, versus earnings per share of $0.39, basic and
diluted, for the six months ended June 30, 2007.
2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
13
Gross written premiums were $65.9 million for the
six months ended June 30, 2008 compared to $83.6 million for the comparable period ended June 30,
2007. The decrease in gross written premiums is attributable to several factors. We continue to
experience a soft insurance market which has led to downward pressure on premiums in all lines
which the Company writes. The weakening economy has resulted in (1) lower payrolls which have
lowered our workers compensation exposure and therefore premiums and (2) a reduction in our
contractors program as a result of fewer construction projects being started.
Earned premiums were $69.9 million for the six months ended June 30, 2008 compared to $72.6
million for the six months ended June 30, 2007. Premiums are earned ratably over the terms of our
insurance policies, which are 12 months. The decrease in earned premiums is primarily a result of
decreased earned premiums during the second quarter of 2008 which resulted from reduced premium
writing in prior quarters.
Net investment income was $5.3 million for the six months ended June 30, 2008 versus $4.4
million for the six months ended June 30, 2007. The increase in net investment income reflects
growth in our total investments from $194.1 million at June 30, 2007 to 240.2 million at June 30,
2008 resulting from positive operating cash flows.
Other operating expenses were $11.3 million for the six months ended June 30, 2008, which
consisted of salaries and benefit costs of $4.2 million, $0.9 million of professional and
consulting fees, $3.2 million of depreciation and amortization, $0.2 million of stock based
compensation expense and $ 2.8 million of other expenses. For the six months ended June 30, 2007,
other operating expenses were $10.9 million, comprised of salaries and benefit costs of $3.3
million, $1.7 million of professional and consulting fees, $2.1 million of depreciation and
amortization, $0.7 million of stock based compensation expense and $3.1 million of other expenses.
Acquisition expenses were $16.0 million for the six months ended June 30, 2008 compared to
$17.9 for the six months ended June 30, 2007. The decrease in our acquisition expense is the
result of a decrease in premiums.
For the first six months of 2008, our net loss and loss adjustment expense ratio was 60.0%,
compared to 57.9% for the comparable six months in 2007. This increase was primarily driven by
higher loss ratios in our workers compensation book of business due to lower rates. This was
partially offset by improvements of approximately $1.3 million primarily in our commercial
automobile business for prior accident years.
Our gross written premiums by partner agent for the six months ended June 30, 2008 and 2007
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/30/2008
|
|
|
6/30/2007
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
% of Total
|
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
|
(dollars in millions)
|
|
Risk Transfer Holdings, Inc.
|
|
$
|
31.5
|
|
|
|
47.8
|
%
|
|
$
|
37.5
|
|
|
|
44.8
|
%
|
American Team Managers
|
|
|
12.7
|
|
|
|
19.2
|
%
|
|
|
20.2
|
|
|
|
24.2
|
%
|
AEON Insurance Group, Inc.
|
|
|
10.8
|
|
|
|
16.4
|
%
|
|
|
11.9
|
|
|
|
14.2
|
%
|
Appalachian Underwriters, Inc.
|
|
|
3.9
|
|
|
|
5.9
|
%
|
|
|
10.1
|
|
|
|
12.1
|
%
|
Northern Star Management, Inc.
|
|
|
2.0
|
|
|
|
3.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
First Light Program Manager, Inc.
|
|
|
1.4
|
|
|
|
2.1
|
%
|
|
|
|
|
|
|
0.0
|
%
|
Specialty Risk Solutions, LLC
|
|
|
0.9
|
|
|
|
1.4
|
%
|
|
|
1.2
|
|
|
|
1.4
|
%
|
Insential, Inc
|
|
|
0.7
|
|
|
|
1.1
|
%
|
|
|
0.8
|
|
|
|
1.0
|
%
|
Flying Eagle Insurance Service, Inc
|
|
|
0.5
|
|
|
|
0.8
|
%
|
|
|
1.1
|
|
|
|
1.3
|
%
|
Other
|
|
|
1.5
|
|
|
|
2.3
|
%
|
|
|
0.8
|
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
65.9
|
|
|
|
100.0
|
%
|
|
$
|
83.6
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our gross written premiums for the six months ended June 30, 2008 and 2007 by state was as
follows:
2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/30/2008
|
|
|
6/30/2007
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
% of Total
|
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
|
(dollars in millions)
|
|
California
|
|
$
|
25.7
|
|
|
|
39.0
|
%
|
|
$
|
28.7
|
|
|
|
34.3
|
%
|
Florida
|
|
|
12.4
|
|
|
|
18.8
|
%
|
|
|
22.5
|
|
|
|
26.9
|
%
|
Texas
|
|
|
6.2
|
|
|
|
9.4
|
%
|
|
|
8.3
|
|
|
|
9.9
|
%
|
Other States
|
|
|
21.6
|
|
|
|
32.8
|
%
|
|
|
24.1
|
|
|
|
28.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
65.9
|
|
|
|
100.0
|
%
|
|
$
|
83.6
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reduction in gross written premiums in Florida was primarily driven by reduced exposure in
our workers compensation business.
Our gross written premiums by line of business for the six months ended June 30, 2008 and 2007
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/30/2008
|
|
|
6/30/2007
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
% of Total
|
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
Gross Written
|
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
Premium
|
|
|
|
(dollars in millions)
|
|
Workers compensation
|
|
$
|
38.3
|
|
|
|
58.1
|
%
|
|
$
|
45.9
|
|
|
|
54.9
|
%
|
Commercial automobile
|
|
|
18.0
|
|
|
|
27.3
|
%
|
|
|
17.3
|
|
|
|
20.7
|
%
|
General liability
|
|
|
8.1
|
|
|
|
12.3
|
%
|
|
|
18.6
|
|
|
|
22.2
|
%
|
All Other
|
|
|
1.5
|
|
|
|
2.3
|
%
|
|
|
1.8
|
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
65.9
|
|
|
|
100.0
|
%
|
|
$
|
83.6
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in our general liability business is due to a reduction in our contractors
programs as a result of fewer construction projects being started. Our workers compensation
business has been impacted by rate decreases in Florida and California during 2007 and the first
quarter of 2008 as well as decreases in payrolls.
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.
Cash Flows
A summary of our cash flows is as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
6/30/2008
|
|
|
6/30/2007
|
|
|
|
(dollars in millions)
|
|
Cash provided by (used in)
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
17.6
|
|
|
$
|
34.4
|
|
Investing activities
|
|
|
(17.8
|
)
|
|
|
(36.5
|
)
|
Financing activities
|
|
|
(0.6
|
)
|
|
|
0.3
|
|
|
|
|
|
|
|
|
Change in cash
|
|
|
(0.8
|
)
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
15
For the six months ended June 30, 2008, net cash from operating activities was $17.6 million,
principally consisting of premium and deposit collections exceeding losses and expenses paid out.
This amount compares to net cash from operating activities of $34.4 million for the six months
ended June 30, 2007. The decrease in net cash provided by operating activities was primarily
driven by the reduction in written premiums.
Cash used for investment activities was $17.8 million for the six months ended June 30, 2008,
principally representing purchases of investments and additions to equipment and capitalized
software. For the six months ended June 30, 2007, cash used in investment activities was $36.5
million, also principally representing increases in investments and additions to equipment and
capitalized software.
For the six months ended June 30, 2008, we had net cash flows from financing activities of
negative $0.6 million as a result of the repurchase of shares of our Common Stock for $1.3 million
and the sales of Class B Shares to partner agents for $0.7 million. For the six months ended June
30, 2007, cash flows from financing activities from sales of Class B Shares to partner agents was
$0.3 million.
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 based on quoted market prices. 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 at June 30, 2008 was $240.2
million compared to amortized cost of $242.5 million. The aggregate fair market value of our fixed
maturity investments at December 31, 2007 was $229.4 million compared to amortized cost of $228.2
million. During the first six months of 2008 we increased our investment in municipal bonds to
$45.3 million from $4.3 million, at fair value, due to their favorable tax treatment.
We have concluded that none of the available-for-sale securities with unrealized losses at
June 30, 2008 has experienced an other-than-temporary impairment. We considered our intent and
ability to hold the securities for a sufficient time to allow for a recovery in value in this
determination.
At June 30, 2008, we held $3.4 million in fair value, $4.7 million in book value, of
investments with sub-prime exposure, all of which were rated A or better by established rating
agencies.
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.
2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
16
The table below summarizes the estimated effects of hypothetical increases and decreases in
market interest rates on our investment portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After Tax
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair
|
|
Increase
|
|
|
|
|
|
|
Assumed Change
|
|
Value After
|
|
(Decrease) in
|
|
|
Fair Value at
|
|
in Relevant
|
|
Change
|
|
Carrying
|
|
|
6/30/2008
|
|
Interest Rate
|
|
in Interest Rate
|
|
Value
|
|
|
(dollars in thousands)
|
Total Investments
|
|
$
|
240,236
|
|
|
100 bp decrease
|
|
$
|
248,834
|
|
|
$
|
8,598
|
|
|
|
|
|
|
|
50 bp decrease
|
|
|
244,580
|
|
|
|
4,344
|
|
|
|
|
|
|
|
50 bp increase
|
|
|
234,827
|
|
|
|
(5,409
|
)
|
|
|
|
|
|
|
100 bp increase
|
|
|
231,482
|
|
|
|
(8,754
|
)
|
The average duration of our fixed maturity investments at June 30, 2008 was approximately 3.7
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 consists solely of high quality bonds at June 30, 2008. The
following table summarizes bond ratings at market or fair value:
|
|
|
|
|
|
|
|
|
|
|
As of 6/30/2008
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
Amount
|
|
|
Portfolio
|
|
Bond Ratings
|
|
(dollars in thousands)
|
|
AAA rated and U.S. Government and affiliated agency securities
|
|
$
|
113,739
|
|
|
|
56.5
|
%
|
AA rated
|
|
|
49,420
|
|
|
|
24.6
|
%
|
A rated
|
|
|
35,519
|
|
|
|
17.6
|
%
|
BBB Rated
|
|
|
2,616
|
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
Total
|
|
$
|
201,294
|
|
|
|
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, 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.
2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
17
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.
2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
18
PART II
OTHER INFORMATION
Item 1: Legal Proceedings
None.
Item 1A: Risk Factors
There have been no material changes to the Risk Factors previously disclosed in Item 1A of the
Companys Annual Report on Form 10-K for the year ended December 31, 2007.
Item 2: Recent Sales of Unregistered Securities
Information with respect to purchases of our Common Stock during the three months ended June
30, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Number of
|
|
|
|
Total
|
|
|
Average
|
|
|
Shares Purchased
|
|
|
Shares that May Yet
|
|
|
|
Number of
|
|
|
Price
|
|
|
as Part of Publically
|
|
|
be Purchased Under
|
|
|
|
Shares
|
|
|
Paid per
|
|
|
Announced Plans or
|
|
|
the Plans or Programs
|
|
|
|
Purchased
1
|
|
|
Share
2
|
|
|
Programs
|
|
|
at End of Month
|
|
April 1 to April 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275,000
|
|
May 1 to May 31
|
|
|
97,300
|
|
|
$
|
4.7340
|
|
|
|
97,300
|
|
|
|
177,700
|
|
June 1 to June 30
|
|
|
177,700
|
|
|
|
4.9258
|
|
|
|
177,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
275,000
|
|
|
$
|
4.8580
|
|
|
|
275,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
The Company announced the repurchase program on April 8, 2008 for the
purchase of up to 275,000 shares of Common Stock for up to an aggregate purchase price
of $1.65 million. All shares available to be purchased under the program have been
acquired.
|
|
2
|
|
Price per share data does not include the $0.04 per share commission
|
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
At our Annual Meeting of stockholders held on May 6, 2008, the stockholders elected each of
the following director nominees to hold office until the next annual meeting of stockholders or
until their successors are duly elected and qualified, with the following votes:
|
|
|
|
|
|
|
|
|
|
|
For
|
|
Withheld
|
Courtney C. Smith
|
|
|
12,053,993
|
|
|
|
872,352
|
|
Peter E. Jokiel
|
|
|
10,896,120
|
|
|
|
2,029,255
|
|
Robert E. Dean
|
|
|
12,071,379
|
|
|
|
853,966
|
|
Raymond C. Groth
|
|
|
10,899,875
|
|
|
|
2,025,470
|
|
Paul A. Philp
|
|
|
12,072,879
|
|
|
|
852,466
|
|
Robert H. Whitehead
|
|
|
12,072,879
|
|
|
|
852,466
|
|
Russell E. Zimmermann
|
|
|
12,072,879
|
|
|
|
852,466
|
|
At the same meeting, the selection of PricewaterhouseCoopers LLP as independent auditors for
the current year was ratified, with the following votes:
|
|
|
|
|
For
|
|
Against
|
|
Abstentions
|
12,842,989
|
|
82,466
|
|
0
|
No other matters were voted on at the meeting.
2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
19
Item 5: Other Information
Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.
On August 5, 2008, the Board of the Company adopted amended and restated bylaws, effective on
August 5, 2008. Many of the amendments to the bylaws were made to update the bylaws to conform
with changes to applicable Delaware corporate laws and to clarify existing provisions of the
bylaws in accordance with modern corporate practice. The below description of certain of the
amendments to the Companys bylaws is qualified in its entirety by reference to the Amended and
Restated Bylaws of the Company, a copy of which is filed as Exhibit 3.1 to this Report on Form 10-Q
and incorporated by reference herein. The specific language of the Companys bylaws as they
existed prior to this amendment and restatement can be found in Exhibit 3.1 to the Companys
Quarterly Report on Form 10-Q filed by the Company on November 2, 2007, which is incorporated by
reference herein. The following is a summary of the amended sections of the Companys bylaws.
Section 1.02 Special Meetings
. The by-law regarding special meetings was amended to give
only the President (or, in the event of his or her absence or disability, any Vice President), a
majority of the Board of Directors or a majority of a committee thereof the authority to call
special meetings of the stockholders and to limit the purpose of a special meeting to only those
purposes stated in the notice for the meeting.
Section 1.04 Quorum
. The by-law regarding quorum was amended to clarify that a quorum for a
stockholder meeting consists of a majority of the aggregate voting power of the stock issued and
outstanding and entitled to vote at such meeting of the stockholders.
Section 1.07 Adjournment
. This by-law was amended to give the presiding officer at any
stockholder meeting the power to adjourn any stockholder meeting, whether or not a quorum is
present.
Section 1.09 Organization; Procedure
. This by-law was modified to give the Board of
Directors the authority to select the presiding officer of any stockholder meeting in the event of
the Presidents absence or disability.
Section 1.11 Conduct of Meetings
. This by-law was added to grant the presiding officer at
any stockholder meeting and the Board of Directors the ability to adopt rules and regulations
regarding meeting procedure, as well as grant the presiding officer the right and authority to
convene, to adjourn and to conclude any stockholder meeting and to establish rules, regulations and
procedures for the conduct of the meetings to maintain order and safety.
Section 1.12 Notice of Stockholder Business and Nominations
. This by-law was added to
provide that if a stockholder wishes to nominate a person or persons for election to the Board of
Directors or bring other business before a stockholders meeting, such stockholder may only do so by
delivering prior written notice to the Companys corporate secretary, within the time period
specified in the by-law, and by complying with certain other requirements specified therein. The
stockholders notice must include, among other things, certain information as to each person whom
the stockholder proposes to nominate for election as a director or as to each matter of business
that the stockholder proposes to bring before a stockholders meeting. The stockholders notice
must also include certain information as to the stockholder giving the notice and the beneficial
owner, if any, on whose behalf the nomination or proposal is made.
Section 2.02 Number and Term of Office
. This provision was amended to clarify that only the
Board of Directors may modify the number of Directors constituting the entire Board of Directors.
Section 2.12 Removal of Directors
. This by-law was amended to clarify that the affirmative
vote of the holders of not less than a majority of the voting power of all the shares of capital
stock of the Company issued and outstanding and entitled to vote for the election of such director
would be required to remove a director and provides that any vacancies resulting from removal of a
director may only be filled in accordance with Section 2.13 of the by-laws.
Section 2.13 Vacancies and Newly Created Directorships
. This by-law was amended to allow
only the Board of Directors to fill vacancies created by removal of a director or a newly created
directorship position, provided, however, if there are no Directors in office, or less than a
majority of the whole Board of Directors, then the vacancies may be filled in the manner provided
by statute.
Section 5.05 Record Dates
. This by-law was amended to require that any stockholder seeking
to take action by written consent shall give notice to the Board of Directors, such that the Board
of Directors may fix a record date for taking action by written consent.
2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
20
Section 9.01 Amendment
. This by-law was amended to change the voting threshold for
amendments, alterations or repeals of the by-laws by stockholders to the affirmative vote of
six-six and two-thirds percent of the voting power of all the shares of capital stock of the
Company issued and outstanding and entitled to vote thereon.
Item 6: Exhibits
Exhibits:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
|
|
|
3.1
|
|
|
Amended and Restated By-laws of the Company effective August 5, 2008
|
|
|
|
|
|
|
10.1+
|
|
|
Employment Agreement dated April 7, 2008 between the Company and Courtney C. Smith
|
|
|
|
|
|
|
10.2+
|
|
|
Employment Agreement dated April 7, 2008 between the Company and Peter E. Jokiel
|
|
|
|
|
|
|
10.3+
|
|
|
Employment Agreement dated April 7, 2008 between the Company and Gary J. Ferguson
|
|
|
|
|
|
|
10.4+
|
|
|
Change of Control Agreement dated April 7, 2008 between the Company and Barry G. Cordeiro
|
|
|
|
|
|
|
10.5+
|
|
|
Change of Control Agreement dated April 7, 2008 between the Company and Scott W. Goodreau
|
|
|
|
|
|
|
10.6+
|
|
|
Change of Control Agreement dated April 7, 2008 between the Company and Scott K. Charbonneau
|
|
|
|
|
|
|
10.7+
|
|
|
Change of Control Agreement dated April 7, 2008 between the Company and Daniel A. Cacchione
|
|
|
|
|
|
|
10.8+
|
|
|
Change of Control Agreement dated April 7, 2008 between the Company and Daniel J. Rohan
|
|
|
|
|
|
|
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
|
|
|
|
+
|
|
Indicates a management contract or compensatory plan or arrangement.
|
2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
21
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: August 8, 2008
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Peter E. Jokiel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name: Peter E. Jokiel
|
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Title: Executive Vice President and
Chief Financial Officer
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Date: August 8, 2008
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2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
22
Exhibits Index:
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Exhibit
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Number
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Description
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3.1
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Amended and Restated By-laws of the Company effective August 5, 2008
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10.1+
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Employment Agreement dated April 7, 2008 between the Company and Courtney C. Smith
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10.2+
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Employment Agreement dated April 7, 2008 between the Company and Peter E. Jokiel
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10.3+
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Employment Agreement dated April 7, 2008 between the Company and Gary J. Ferguson
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10.4+
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Change of Control Agreement dated April 7, 2008 between the Company and Barry G. Cordeiro
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10.5+
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Change of Control Agreement dated April 7, 2008 between the Company and Scott W. Goodreau
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10.6+
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Change of Control Agreement dated April 7, 2008 between the Company and Scott K. Charbonneau
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10.7+
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Change of Control Agreement dated April 7, 2008 between the Company and Daniel A. Cacchione
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10.8+
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Change of Control Agreement dated April 7, 2008 between the Company and Daniel J. Rohan
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31.1
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Certification of Courtney C. Smith, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
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31.2
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Certification of Peter E. Jokiel, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32.1
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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
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32.2
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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
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+
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Indicates a management contract or compensatory plan or arrangement.
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2008 Second Quarter Form 10-Q
Specialty Underwriters Alliance, Inc.
23
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