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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) |
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OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) |
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OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 000-50891
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
(Exact name of registrant as specified in the charter)
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DELAWARE
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20-0432760 |
(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
(Address of principal executive office) |
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60606
(Zip Code) |
(888) 782-4672
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.01 par value
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 if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrants’ knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. þ
Indicate by check mark if the registrant is an accelerated filer
(as defined in Exchange Act
Rule 12b-2). Yes o No þ
The registrant’s common stock was not publicly traded on
June 30, 2004.
As of March 15, 2005, 14,680,688 shares of common
stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the
extent not set forth herein, is incorporated herein by reference
from Specialty Underwriters’ Alliance, Inc.’s
definitive proxy statement for its annual meeting of
stockholders scheduled for May 12, 2005. The definitive
proxy statement shall be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year
to which this report relates.
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
TABLE OF CONTENTS
i
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K are
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These
statements are subject to the safe harbor provisions of this
legislation. We may, in some cases, use words such as
“project,” “believe,”
“anticipate,” “plan,” “expect,”
“estimate,” “intend,” “should,”
“would,” “could,” “will,” or
“may,” or other words that convey uncertainty of
future events or outcomes to identify these forward-looking
statements.
Even though we believe our expectations regarding future events
are based on reasonable assumptions, forward-looking statements
are not guarantees of future performance. Important factors
could cause actual results to differ materially from our
expectations contained in our forward-looking statements.
There are a number of important factors that could cause actual
results to differ materially from the results anticipated by
these forward-looking statements. These important factors
include those that we discuss under the caption “Risk
Factors.” You should read these factors and other
cautionary statements as being applicable to all related
forward-looking statements wherever they appear. If one or more
of these factors materialize, or if any underlying assumptions
prove incorrect, our actual results, performance or achievements
may vary materially from any future results, performance or
achievements expressed or implied by these forward-looking
statements. We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new
information, future events or otherwise.
PART I
Overview
We were formed in April 2003 and, through our wholly-owned
subsidiary, SUA Insurance Company, offer commercial property and
casualty insurance to selected customer groups. We believe that
we are different from other specialty insurance companies
because we have created an innovative business model that
emphasizes partner relationships with key agents, or partner
agents, knowledgeable in the types of business classes we
underwrite. Highly specialized business knowledge of these
business classes is required to achieve underwriting profits.
Historically, we believe that this segment of the industry has
been underserved by most standard property and casualty
insurance companies because they lack such specialized knowledge
and are not willing to make the necessary investment to support
select business classes.
Generally, insurance agents are paid by commission up-front. As
a result, agents make money even if the insurance carrier does
not make an underwriting profit. Often, in the specialty program
business, insurance agents historically have had underwriting
authority and were responsible for handling claims. We believe
that this system has not served the carriers, the agents or the
insureds very well. Poor underwriting results have led to
underwriting losses for carriers, and instability in the
insurance market from carrier turnover. In turn, agents have
incurred additional costs in searching for, and converting to,
new carriers. Policyholders have experienced uncertainty
regarding the placement of their coverage from year to year and
the quality of service.
Our business model is designed to realign the interests of
carriers, agents and insureds. We have entered into on-going
arrangements with key agents. Our agreements with the partner
agents provide that in exchange for marketing and pre-qualifying
business for us, our partner agents receive an up-front
commission designed to cover their costs and an underwriting
profit-based commission paid over several years. In addition,
they purchase shares of Class B common stock of our
company, with returns on their investment tied to our
performance. We provide our partner agents with a five-year
exclusive arrangement (generally allowing partner agents to
offer other companies’ products if we decline to offer
coverage to a prospective insured) covering a specific class of
business and territory. Further, we have implemented a
centralized information system designed to reduce processing and
administrative time. Lastly, we are a stable, dedicated source
of specialty program commercial property and casualty insurance
capacity.
1
We have a secure category rating of “B+” (Very Good)
from A.M. Best, which is the sixth highest of 15 rating levels.
On November 23, 2004, we completed our initial public
offering of 12,700,000 shares of common stock at an initial
public offering price of $9.50 per share. Concurrent with
the closing of the initial public offering, we sold
1,000,000 shares of our common stock at a price of
$8.835 per share in a private placement. Simultaneously
with the closing of our initial public offering, Courtney C.
Smith, Peter E. Jokiel, William S. Loder and Gary J. Ferguson,
each an executive officer, purchased directly from us 22,637,
33,956, 16,978 and 16,978 shares of our common stock,
respectively. Additionally, at the closing of our initial public
offering, we sold 26,316 shares of our Class B common
stock to our partner agents at a total aggregate amount of
$250,000. The net proceeds to us from all these transactions
after deducting expenses were approximately $119.8 million.
Simultaneously with the closing of the initial public offering,
we acquired all of the outstanding common stock of Potomac
Insurance Company of Illinois, or Potomac, which is licensed in
41 states and the District of Columbia, from OneBeacon
Insurance Company, or OneBeacon, for $22.0 million. We
refer to this transaction as the “Acquisition.” After
giving effect to the Acquisition, we changed the name of Potomac
Insurance Company of Illinois to SUA Insurance Company.
SUA Insurance Company is licensed to conduct insurance business
in 41 states and the District of Columbia. We consider
these jurisdictions to be those that are important to our
current business plan because they account for approximately 90%
of the population of the United States. SUA Insurance Company is
not licensed in Hawaii, Maine, Minnesota, Montana, New
Hampshire, North Carolina, Oregon, Tennessee and Wyoming.
However, in the future we may apply for licenses in the states
listed above.
Prior to the Acquisition, SUA Insurance Company entered into a
transfer and assumption agreement with OneBeacon whereby all of
its liabilities, including all direct liabilities under existing
insurance policies, were transferred to and assumed by OneBeacon.
In the event of the failure to pay by OneBeacon, SUA Insurance
Company could experience losses which could materially adversely
affect our business and results of operations. OneBeacon
currently has a rating of “A” (Excellent) from A.M.
Best, which is the third highest of 15 rating levels.
On December 22, 2004, we received additional proceeds of
$3.7 million from underwriters’ exercise of the over
allotment option, in which they purchased an additional
422,000 shares.
Our website address is www.suainsurance.com. We make available
on this website under “Investor Relations,” free of
charge, our annual reports on Form 10-K, our
quarterly reports on Form 10-Q, our current reports on
Form 8-K, Forms 3, 4 and 5 filed via Edgar by our
directors and executive officers and various other SEC filings,
including amendments to these reports, as soon as reasonably
practicable after we electronically file or furnish such reports
to the SEC. We also make available on our website our Corporate
Governance Guidelines and Principles, our Code of Business
Conduct and Ethics and the charters of our Audit Committee,
Compensation Committee and Nominating and Corporate Governance
Committee. This information also is available by written request
to Investor Relations at our executive office address listed
below. The information on our website, or on the site of our
third-party service provider, is not incorporated by reference
into this report.
Our principal executive offices are located at 222 South
Riverside Plaza, Chicago, Illinois 60606 and our telephone
number is (888) 782-4672.
Industry
The property and casualty insurance industry has historically
been cyclical. When excess underwriting capacity exists,
increased competition generally results in lower pricing and
less favorable policy terms and conditions for insurers. As
underwriting capacity contracts, pricing and policy terms and
conditions generally become more favorable for insurers. In the
past, underwriting capacity has been impacted by several
factors, including catastrophes, industry losses, recognition of
reserve deficiencies, changes in the law and regulatory
requirements, investment returns and the ratings and financial
strength of competitors.
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We believe the insurance industry is currently recovering from a
prolonged period of excess underwriting capacity. A decline in
underwriting margins in the late 1980s and incidences of large
natural catastrophes led to increases in rates and a recovery in
industry profitability in the mid-to-late 1990s. As a result of
favorable loss levels and strong investment returns beginning in
1995, the insurance industry experienced increased competition
and industry capacity, driving property and casualty premium
rates down. However, significant catastrophic losses in 1999 and
the subsequent contraction of capacity in the market resulted in
improvement in rates, terms and conditions for insurers
beginning in 2000, as the demand for insurance has increased.
Historical Industry Model
Specialty commercial property and casualty insurance
underwriting requires in-depth knowledge of a particular
business class, and often personal knowledge of the participants
in a business class. As a result, insurers rely on skilled
agents to procure business. Such an agent generally is an
outsourced underwriting department for the insurer. It markets
to independent agents, processes submissions, selects risks,
binds and issues policies on behalf of the insurer, and in some
cases, handles claims on underwritten businesses. Such agents
and insurers commonly work with a reinsurer, which participates
in the pool of risks selected by such agents. Without an insurer
providing licensed policy paper and a reinsurer providing
capacity, such agents are unable to service their independent
agent clients, which ultimately affects the policyholders.
Historically, insurance carriers have engaged key agents under
long-term contracts to produce and underwrite businesses, often
processed through each such agent’s proprietary policy
issuance and management information systems, with claims
adjustment assigned to third parties. Agents and such third
parties were generously compensated through these arrangements,
but the compensation was not linked to the underlying
profitability of the business. We believe that this strategy has
led to a lack of alignment of interests between carriers and
agents. In addition, we believe that this system has resulted in
weak underwriting and pricing controls, poor claims management
and high costs due to the duplication of activities.
Our Model
We believe that our strategy of developing relationships with
partner agents is a fundamental shift in the way insurance
companies do business. We enter into contractual relationships
with our partner agents in order to encourage them to work with
us in building our portfolio of specialty program commercial
property and casualty insurance business. A significant portion
of the compensation paid to our partner agents will be directly
tied to the underwriting profitability of their specific
programs. In addition, our partner agents purchase an equity
interest in our company, in the form of non-voting Class B
common stock. We believe that offering an ownership interest to
our partner agents encourages them to direct business to us,
regardless of future market cycles. We expect our partner agents
to provide prequalified leads through their retail agents. We
retain control over underwriting and claims activities. In
addition, we anticipate that all transaction processing will be
done through our proprietary technology system in order to
ensure data integrity and efficiency. As of December 31,
2004, we had entered into definitive agreements with three
partner agents, American Team Managers, AEON Insurance Group,
Inc. and Risk Transfer Holdings, Inc.
The key features of our relationship with our partner agents are
as follows:
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Equity Ownership. Each partner agent must purchase shares
of our non-voting Class B common stock. The Class B
shares will become exchangeable, one-for-one with our common
stock, five years after the effective date of the applicable
partner agent agreement, as long as the partner agent’s
contract is in force. These Class B shares will be subject
to substantial restrictions on transferability during such
period. If prior to five years after the effective date of the
applicable partner agent agreement such partner agent’s
contract is terminated, we may repurchase at the lower of cost
or fair market value the partner agent’s Class B
shares. If after five years following the effective date of the
applicable partner agent agreement such partner agent’s
contract is terminated, we may repurchase at fair market value
the partner agent’s Class B shares. After the
five-year period, for as long as the partner agent has an agency
contract with us, such partner agent would be required to hold
shares of |
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Class B common stock worth at least 50% of its aggregate
initial investment commitment in our Class B common stock. |
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Commission. We pay each partner agent an up-front
commission designed to cover its costs. Such commission is
likely to be lower than they had been receiving from other
companies. In exchange for this reduced commission, we are
responsible, through our own technology system, for policy
issuance and administration, as well as for claims. In addition,
each partner agent may receive a meaningful share of the
underwriting profits for each of its programs, subject to a cap.
If, after five years, the partner agent agreement is terminated,
for any reason, the profit sharing calculations will be
performed annually until all payout periods and earned profit
sharing are satisfied. |
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Long-Term Contractual Commitment. Each partner agent has
an exclusive five-year contractual arrangement (generally
allowing partner agents to offer other companies’ products
if we decline to offer coverage to a prospective insured) with
us. We have no obligation to accept business that does not meet
our guidelines. We agree to write only that class of business
and lines of business by program in a defined territory only
with that partner agent. Our partner agents may have one or a
number of their programs with us. We expect that we will be a
significant percentage of our partner agents’ program
business. Each partner agent has the right to terminate its
relationship with us on 180 days’ notice. We have the
right to terminate our relationship with our partner agents for
material breach of our agreement, insolvency, or failure to
maintain appropriate licenses. We also may terminate a partner
agent that is acquired by a third party, but cannot restrict the
acquisition of a partner agent. In addition, we can terminate
our relationship if a partner agent does not meet certain
profitability and production guidelines that are established
under each agreement. Upon termination, at our discretion, the
partner agent must service the existing business until it is
terminated. At such point, the partner agent is allowed to place
such business with other insurers. In addition, there are no
provisions in the agreements with our partner agents that grant
renewal rights to either party. Further, the agreements with our
partner agents do not give us any right to acquire a partner
agent. |
Our Insurance Product Lines
Our insurance operations, initially through our three partner
agents, are focused on the following programs:
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General Contractors Program. This program services
general contractors with less than $8 million in annual
revenue. Eligible accounts under this program include
residential or commercial contractors that are involved in
remodeling and tenant improvements, commercial building and
residential home building (limited to those contractors who
build no more than five homes of three stories or fewer per
year). The program offers only general liability coverage in the
state of California. |
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Artisan Contractors Program. This program services
artisan contractors in California with less than $500,000 in
payroll expenses and $2,000,000 in annual revenues. We expect to
limit participation in this program to 52 classes of relatively
low-exposure contractors, such as: |
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Appliances and accessories (installation, servicing and repair); |
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Carpentry; |
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Driveways, parking areas or sidewalks (paving or repairing); |
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Electrical work (within buildings); |
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Heating and air conditioning systems or equipment (installation,
service or repair); |
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Paper hanging; and |
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Plumbing |
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California Comp Program. This program uses technology to
fully automate a disciplined underwriting approach to writing
small premium workers’ compensation business initially in
California. Our online product is expected to be available to
small businesses of less than $25,000 in premium with relatively
low hazard grades (low exposure to loss). We also expect to
market workers’ compensation business in additional
geographical areas where adequate pricing is expected. |
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AEON Insurance Group, Inc. |
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Towing and Recovery Program. This program services
professional towing operators who have garage operations with
towing and recovery operators for hire and towing for auto
auctions. The program offers policies that will include
property, inland marine, general liability, garage and
automobile coverages on a national basis. |
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Risk Transfer Holdings, Inc. |
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PEO Program. Professional Employer Organizations take on
the employment responsibilities of human resources, benefits
administration and insurance purveyor, while allowing their
clients to focus on their core business objectives. This program
specializes in workers’ compensation. While the risks are
aggregated, each account is underwritten and priced individually
in this program which is concentrated in the Southeastern United
States. |
Reinsurance
We have entered into reinsurance agreements to cover our
casualty lines of business. Coverage of our casualty lines of
business includes general liability, auto liability, incidental
professional liability and workers’ compensation. We
purchased reinsurance from reinsurers that are rated at least
“A-” (Excellent) or better by A.M. Best. Our
reinsurers will be compensated by sharing specified percentages
of premiums, and our reinsurers may pay us ceding commissions.
We have entered into reinsurance agreements under which we
generally are responsible for the first $1 million of
losses resulting from a loss occurrence under a policy but would
generally have reinsurance coverage for the next
$19 million ($24 million in the case of a workers
compensation policy) under that policy relating to the
occurrence.
Underwriting
We produce all of our business through our partner agents, and
select our partner agents based on a shared underwriting
philosophy. Our underwriting strategy focuses on strict control
of underwriting, pricing, coverage, partner agent relationships
and customer segmentation. Our primary underwriting goal is to
achieve profitable results through targeted permissible loss
ratios complemented by a low expense ratio. Because we are
unlikely to seek or obtain mid-term cancellations of existing
policies produced by our partner agents, we will seek to
transition policies over a 12-month period following the
execution of each partner agent agreement as the policies are
renewed, subject to our underwriting and pricing guidelines.
Monitoring Rate Adequacy
We develop estimated rate minimums, which are designed to help
achieve profitable results. Our rate monitoring methods will
help us calculate expenses and profitability ratios and any
allocated loss adjustment expenses.
Program Performance Management
Our program performance management process consists of a series
of reports that evaluates data associated with essential
variables, and measures production, rate adequacy, loss
analysis, adherence to guidelines, claims activity and trends.
5
Claims Control
Claims control is a critical factor in driving company
performance. We view claims control as one of our core areas of
expertise. We believe that assigning integrated teams in the
claims, underwriting and actuarial areas to specific customer
groups will produce the best results. By doing this, our claim
handlers become familiar with the uniqueness of customers and
their businesses. This approach should encourage more insightful
investigations, enhanced legal defenses and more efficient
claims resolution. Also, we believe that improved communications
between claims, underwriting and actuarial teams enhance risk
selection, timely revision of underwriting criteria and program
stability.
Information Technology
We are implementing an Internet-based technology system to allow
our program teams and partner agents to control underwriting,
policy issuance and claims administration. We believe that this
centralized system, simultaneously accessible to us and our
partner agents, will help us to reduce high processing costs and
eliminate duplication of data.
Historically, various parties to an insurance contract have
stored data relating to the same transaction in their
proprietary systems. As a result, we believe they have been
unable to effectively integrate this information, which has
resulted in difficulties with resolving disputes. We believe
that processing insurance transactions should be user friendly
and fully automated. Our objective is to use a system that would
provide a real-time communication link with our partner agents
and improve data communication throughout our company.
Outsourcing Arrangements
We have entered into an arrangement with Syndicated Services
Company, Inc., or SSC, for administrative and operational
support. We believe that SSC is uniquely situated to provide us
with the resources and experience necessary in order to develop
and implement our partner agent program strategy.
SSC will provide us with expertise, support and service in the
following key areas:
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Program administration; |
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Form, rate and rules filings; |
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Billing and accounting for collections; |
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Regulatory compliance; and |
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Information systems and services. |
The integration of SSC into our innovative business strategy
gives us immediate assistance in our outsourcing needs and, on a
long-term basis, will help us to build a comprehensive system of
management capabilities and controls.
Investment Philosophy
Our investments are concentrated in highly liquid and highly
rated instruments, primarily in fixed income securities, with
reasonably short durations. Initially, we expect our portfolio
to consist of taxable bonds to average in the three- to
five-year duration range. We have no significant investment or
industry concentrations. Our strategy considers liability
durations and provides for unseen cash outflow needs. We use an
external investment manager with significant assets under
management and experience in insurance company portfolio
requirements.
Competition
We expect to compete with a large number of major U.S. and
non-U.S. insurers such as American International Group,
Inc., or AIG, Travelers Insurance Group Holdings Inc., CNA
Financial Corporation and
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ACE Limited in our selected lines of business such as
workers’ compensation, automobile liability, general
liability and limited property coverages. We expect to face
competition both from specialty insurance companies,
underwriting agencies and intermediaries, as well as diversified
financial services companies such as W.R. Berkley Corporation,
Markel, Philadelphia Consolidated Holding and RLI. In addition,
other newly formed and already-existing insurance companies such
as Arch, Meadowbrook and Argonant, may be preparing to enter the
same market segments in which we expect to compete. Since we
have no operating history, our competitors have greater name and
brand recognition than we expect to have. Many of them also have
higher financial strength and ratings assigned by independent
ratings agencies and more (in some cases substantially more)
capital and greater marketing and management resources than we
have and may offer a broader range of products and more
competitive pricing than we expect to, or will be able to, offer.
Our competitive position will be based on many factors,
including our perceived financial strength, ratings assigned by
independent rating agencies, geographic scope of business,
client relationships, premiums charged, contract terms and
conditions, products and services offered (including the ability
to design customized programs), speed of claims payment,
reputation, experience and qualifications of employees, and
local presence. We work with a limited number of partner agents
which enable us to provide them with customized approaches to
their business and give them long term (five years) exclusive
arrangements.
Employees
As of December 31, 2004, we had 17 full-time
employees. Our future performance depends significantly on the
continued service of our key personnel. None of our employees
are covered by collective bargaining arrangements. We believe
our employee relations are good.
Regulation
We develop our business through our subsidiary which is licensed
to conduct insurance business in 41 states and the District
of Columbia.
General. Our operating subsidiary is subject to detailed
regulation throughout the United States. Although there is
limited federal regulation of the insurance business, each state
has a comprehensive system for regulating insurers operating in
that state. The laws of the various states establish supervisory
agencies with broad authority to regulate, among other things,
licenses to transact business, premium rates for certain
coverages, trade practices, market conduct, agent licensing,
policy forms, underwriting and claims practices, reserve
adequacy, transactions with affiliates and insurer solvency.
Many states also regulate investment activities on the basis of
quality, distribution and other quantitative criteria. Further,
most states compel participation in and regulate composition of
various shared market mechanisms. States also have enacted
legislation that regulates insurance holding company systems,
including acquisitions, dividends, the terms of affiliate
transactions, and other related matters. Our operating
subsidiary is domiciled in Illinois.
Insurance companies also are affected by a variety of state and
federal legislative and regulatory measures and judicial
decisions that define and qualify the risks and benefits for
which insurance is sought and provided. These include
redefinitions of risk exposure in such areas as product
liability, environmental damage and workers’ compensation.
In addition, individual state insurance departments may prevent
premium rates for some classes of insureds from reflecting the
level of risk assumed by the insurer for those classes. Such
developments may result in adverse effects on the profitability
of various lines of insurance. In some cases, these adverse
effects on profitability can be minimized, when possible,
through the repricing of coverages if permitted by applicable
regulations, or the limitation or cessation of the affected
business, which may be restricted by state law.
Most states have insurance laws requiring that property and
casualty rate schedules, policy or coverage forms, and other
information be filed with the state’s regulatory authority.
In many cases, such rates and/or policy forms must be approved
prior to use. A few states have recently considered or enacted
limitations on the ability of insurers to share data used to
compile rates.
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Insurance companies are required to file detailed annual reports
with the state insurance regulators in each of the states in
which they do business, and their business and accounts are
subject to examination by such regulators at any time. In
addition, these insurance regulators periodically examine each
insurer’s financial condition, adherence to statutory
accounting practices, and compliance with insurance department
rules and regulations.
Applicable state insurance laws, rather than federal bankruptcy
laws, apply to the liquidation or reorganization of insurance
companies.
Regulation of Dividends and Other Payments from Our Operating
Subsidiary. We are a legal entity separate and distinct from
our subsidiary. As a holding company with no other business
operations, our primary sources of cash to meet our obligations,
including principal and interest payments with respect to
indebtedness, will be dividends and other statutorily permitted
payments, such as tax allocation payments and management and
other fees, from our operating subsidiary. Our operating
subsidiary will be subject to various state statutory and
regulatory restrictions, including regulatory restrictions that
are imposed as a matter of administrative policy, applicable
generally to any insurance company in its state of domicile,
which limit the amount of dividends or distributions an
insurance company may pay to its stockholders without prior
regulatory approval. The restrictions are generally based on
certain levels or percentages of surplus, investment income and
operating income. Generally, dividends may be paid only out of
earned surplus. In every case, surplus subsequent to the payment
of any dividends must be reasonable in relation to an insurance
company’s outstanding liabilities and must be adequate to
meet its financial needs.
Illinois law provides that no dividend or other distribution may
be declared or paid at any time except out of earned surplus,
rather than contributed surplus. A dividend or other
distribution may not be paid if the surplus of the domestic
insurer is at an amount less than that required by Illinois law
for the kind or kinds of business to be transacted by such
insurer, nor when payment of a dividend or other distribution by
such insurer would reduce its surplus to less than such amount.
A domestic insurer, which is a member of a holding company
system, must report to the insurance director, or the Director,
all ordinary dividends or other distributions to stockholders
within five business days following the declaration and no less
than 10 business days prior to the payment thereof.
Illinois law further provides that no domestic insurer, which is
a member of a holding company system, may pay any extraordinary
dividend or make any other extraordinary distribution to its
securityholders until: (1) 30 days after the Director
has received notice of the declaration thereof and has not
within such period disapproved the payment; or (2) the
Director approves such payment within the 30-day period.
Illinois law defines an extraordinary dividend or distribution
as “any dividend or distribution of cash or other property
whose fair market value, together with that of other dividends
or distributions, made within the period of 12 consecutive
months ending on the date on which the proposed dividend is
scheduled for payment or distribution exceeds the greater of:
(a) 10% of the company’s surplus as regards
policyholders as of the 31st day of December next
preceding, or (b) the net income of the company for the
12-month period ending the 31st day of December next
preceding, but does not include pro rata distributions of any
class of the company’s own securities.”
Risk-Based Capital. In order to enhance the regulation of
insurer solvency, the NAIC adopted in December 1993 a formula
and model law to implement risk-based capital requirements for
property and casualty insurance companies. These risk-based
capital requirements are designed to assess capital adequacy and
to raise the level of protection that statutory surplus provides
for policyholder obligations.
Federal Regulation. Although state regulation is the
dominant form of regulation for insurance and reinsurance
business, the federal government has shown increasing concern
over the adequacy of state regulation. It is not possible to
predict the future impact of any potential federal regulations
or other possible laws or regulations on our capital and
operations, and the enactment of such laws or the adoption of
such regulations could materially adversely affect our business.
The Gramm Leach Bliley Act, or GLBA, which made fundamental
changes in the regulation of the financial services industry in
the United States, was enacted on November 12, 1999. The
GLBA permits the
8
transformation of the already converging banking, insurance and
securities industries by permitting mergers that combine
commercial banks, insurers and securities firms under one
holding company, a “financial holding company.”
In response to the tightening of supply in some insurance
markets resulting from, among other things, the terrorist
attacks of September 11, 2001, the Terrorism Risk Insurance
Act of 2002, or TRIA, was enacted to ensure the availability of
insurance coverage for terrorist acts in the United States.
Legislative and Regulatory Proposals. From time to time,
various regulatory and legislative changes have been proposed in
the insurance and reinsurance industry. These proposals have
included the possible introduction of federal regulation in
addition to, or in lieu of, the current system of state
regulation of insurers. We are unable to predict whether any of
these or other proposed laws and regulations will be adopted,
the form in which any such laws and regulations would be
adopted, or the effect, if any, these developments would have on
our operations and financial condition.
Risk Factors
We believe the following risk factors, as well as the other
information contained in this Annual Report on Form 10-K,
are material to an understanding of our company. Any of the
following risks as well as other risks and uncertainties
discussed in this Annual Report on Form 10-K could have a
material adverse effect on our business, financial condition,
results of operations or prospects and cause the value of our
stock to decline, which could cause you to lose all or part of
your investment. Additional risks and uncertainties that we are
unaware of, or that are currently deemed immaterial, also may
become important factors that affect us.
|
|
|
We have a limited operating history. If we are unable to
implement our business strategy or operate our business as we
currently expect, our results may be adversely affected. |
We effectively commenced operations with the closing of our
initial public offering, but did not start to write insurance
policies until the first quarter of 2005. As a result, we have
not yet generated any significant revenues. The business of
Potomac, our accounting predecessor, is not representative of or
comparable with our primary business strategy. Businesses, such
as ours, that are starting up or in their initial stages of
development present substantial business and financial risks and
may suffer significant losses. We also are not yet able to
engage in certain insurance business in certain jurisdictions
because we have not received regulatory approval. Additionally,
we are still in the process of hiring key employees and other
staff, developing business relations, continuing to establish
operating procedures, obtaining additional facilities and
implementing new systems. If we are unable to implement these
actions in a timely manner, our results may be adversely
affected.
|
|
|
We rely on a limited number of partner agents. Our failure
to recruit and retain partner agents could materially adversely
affect our results. Our transition of our partner agents’
business may significantly delay our ability to generate
revenue. |
We have only three partner agents. We hope to enter into
additional agent relationships in the future. Our ability to
recruit and retain partner agents may be negatively impacted by
certain aspects of our business model, including our requirement
that partner agents defer and make contingent a portion of their
agency commissions and purchase, or commit to purchase, shares
of our Class B common stock. In addition, our ability to
add new partner agents may be limited by our level of capital.
Because we are unlikely to seek or obtain mid-term cancellations
of existing policies produced by our partner agents, we will
seek to transition policies over a 12-month period as they are
renewed. We will be unable to generate premium revenue until
policies are written by us, and a delay in our ability to write
or transition policies could lead to a significant delay in our
ability to generate substantial revenue.
9
|
|
|
We may be subject to losses if OneBeacon fails to honor
its reinsurance obligations to us. |
Our subsidiary, SUA Insurance Company, has a transfer and
assumption agreement with OneBeacon whereby all of SUA Insurance
Company’s liabilities existing as of the acquisition of
Potomac, including all direct liabilities under existing
insurance policies, were ceded to and assumed by OneBeacon.
The legal requirements to transfer insurance obligations from
one insurer to another, sometimes referred to as a novation,
vary from state to state, generally based on the state in which
the policy was issued. In some states, if certain notifications
are made to policyholders and they do not object to the transfer
within certain periods of time, they are deemed to have agreed
to the transfer. In other states, policyholders must consent to
the transfer in writing. Additionally, in some states insurance
regulatory approval is required in addition to policyholder
consents.
To the extent the legal requirements for novation have been met,
OneBeacon will become directly liable to those policyholders for
any claims arising from insured events under the policy, and SUA
Insurance Company’s obligation to those policyholders would
cease. Accordingly, SUA Insurance Company would extinguish any
recorded liabilities to such policyholders and the related
reinsurance recoverables, so no gain or loss would occur.
Until a novation is achieved, SUA Insurance Company continues to
be directly liable to legacy policyholders for claims arising
under their policies, but has reinsurance coverage from
OneBeacon to reimburse SUA Insurance Company for any such
claims. Thus SUA Insurance Company should not experience any
gains or losses with respect to such legacy policies unless
OneBeacon failed to honor its reinsurance obligation to SUA
Insurance Company. In the event of the failure to pay by
OneBeacon, SUA Insurance Company could experience losses that
could materially adversely affect our business and results of
operations.
|
|
|
A delay or other problem in the implementation of our
centralized technology system could have a material adverse
effect on our business plan. |
We are implementing a centralized technology system for
underwriting, policy issuance and claims administration through
each partner agent’s website. We must rely on our chosen
vendors in integrating their technology in order to implement
our system and they have relatively limited experience in doing
so. As a result, we cannot assure you that our vendors will be
able to develop our technology system for us in a timely manner
and at the price we anticipate. A delay in implementation of our
centralized technology system would inhibit us from automating
our underwriting, policy issuance and claims administration.
Instead, we would need to manually process our policies and
claims that could lead to less efficiency and the possibility of
a decrease in premium volume. Accordingly, a delay or other
problems in our implementation schedule could have a material
adverse effect on our business plan.
Executive Officers of the Registrant
Our executive officers are as follows:
| |
|
|
|
|
|
|
| Name |
|
Age | |
|
Position |
| |
|
| |
|
|
|
Courtney C. Smith
|
|
|
57 |
|
|
Chief Executive Officer, President and Chairman |
|
Peter E. Jokiel
|
|
|
57 |
|
|
Executive Vice President and Chief Financial Officer |
|
William S. Loder
|
|
|
56 |
|
|
Senior Vice President and Chief Underwriting Officer |
|
Gary J. Ferguson
|
|
|
61 |
|
|
Senior Vice President and Chief Claims Officer |
Courtney C. Smith. Chief Executive Officer, President and
Director. Mr. Smith was appointed as the Chairman of our
board in May 2004, as our President and a director in April 2003
and as our Chief Executive Officer in December 2003.
Mr. Smith has 32 years of experience in the property
and casualty insurance industry. From April 1999 to April 2002,
Mr. Smith was Chief Executive Officer and President of TIG
10
Specialty Insurance, or TIG, a leading specialty insurance
underwriter. While at TIG, Mr. Smith was instrumental in
restructuring the company and changed TIG from an outsourced
company to a controlled program specialty company. From November
1992 to March 1999, Mr. Smith was Chairman, Chief Executive
Officer and President of Coregis Group, Inc., an insurer
specializing in program business consolidated from the various
Crum & Forster companies. Prior thereto, he served in
various executive positions at Industrial Indemnity, AIG and
Hartford Insurance Group. Mr. Smith is a member of the
Society of Chartered Property and Casualty Underwriters, served
on the advisory board of Illinois State University’s Katie
Insurance School, was a member of the board of directors of the
Alliance of American Insurers and was a trustee of American
Institute of CPCU/ Insurance Institute of America.
Peter E. Jokiel. Executive Vice President, Chief
Financial Officer, Treasurer and Director. Mr. Jokiel was
appointed as our Chief Financial Officer, Treasurer and a
director in December 2003 and was appointed as our Executive
Vice President in June 2004. Mr. Jokiel has over
30 years experience in the insurance industry. From April
1997 to January 2001, Mr. Jokiel was President and Chief
Executive Officer of CNA Financial Corporation’s life
operations. From November 1990 to April 1997, he was Chief
Financial Officer of CNA Financial Corporation, or CNA. Prior to
that time, Mr. Jokiel served in various senior management
positions at CNA and was an accountant at Touche Ross &
Co. in Chicago. He is a certified public accountant and is a
member of the American Institute of Certified Public Accountants
and the Illinois Society of CPAs. Mr. Jokiel is a past
member of the FASB Emerging Issues Task Force and the AICPA
Insurance Companies Committee.
William S. Loder. Senior Vice President, Chief
Underwriting Officer and Secretary. Mr. Loder was appointed
as our Senior Vice President and Chief Underwriting Officer in
December 2003. Mr. Loder has over 30 years of
experience in the insurance industry. From July 2000 to July
2002, Mr. Loder worked for TIG Specialty Insurance, where
he was responsible for corporate strategies, planning and
company underwriting. From January 1983 to July 2000, he was
President of the CNA office in Atlanta, where he had management
responsibility for all insurance lines for production, profit,
claims and policy services. Prior to that time, Mr. Loder
held executive positions at CNA and Aetna Life &
Casualty.
Gary J. Ferguson. Senior Vice President and Chief Claims
Officer. Mr. Ferguson was appointed our Senior Vice
President and Chief Claims Officer in December 2003.
Mr. Ferguson has 38 years of experience in the
insurance industry. From February 2002 to July 2003,
Mr. Ferguson was managing director responsible for claims
functions at TIG Specialty Insurance. From December 1997 to
October 2001, Mr. Ferguson served as Senior Vice President
for Zenith Insurance Company. Mr. Ferguson served as Chief
Claims Officer of Coregis Group, Inc. from July 1992 to December
1997. From July 1966 to July 1992, he held senior claims
positions at Crum & Forster and Industrial Indemnity.
We lease our headquarters in Chicago, Illinois. Our headquarters
have approximately 24,987 square feet and our lease expires
in 2020. We believe that our facility will support our future
business requirements or that we will be able to lease
additional space, if needed, on reasonable terms.
|
|
| ITEM 3. |
LEGAL PROCEEDINGS |
We are not currently involved in any material litigation other
than routine litigation arising in the ordinary course of
business and that is either expected to be covered by liability
insurance or to have no material impact on our financial
position and results of operations.
11
|
|
| ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS |
None
PART II
|
|
| ITEM 5. |
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES |
Common Stock. Specialty Underwriters’ Alliance,
Inc.’s common stock began trading on the NASDAQ National
Market on November 23, 2004 under the symbol
“SUAI.” Before that date, no public market for our
common stock existed. From November 23, 2004 to
December 31, 2004, the closing price of our common stock as
quoted by Nasdaq has been as high as $9.69 per share and as
low as $9.25 per share. As of March 15, 2005,
Specialty Underwriters’ Alliance, Inc.’s common stock
was held by 8 stockholders of record and an estimated 681
additional stockholders whose shares were held for them in
street name or nominee accounts. On March 15, 2005, the
closing price of our common stock on NASDAQ National Market was
$10.04 per share.
We never have paid or declared any cash dividends on our common
stock and have no plans to do so in the foreseeable future. We
currently intend to retain future earnings, if any, to finance
the growth and development of our business. Future dividends, if
any, will depend on, among other things, our results of
operations, capital requirements and such other factors as our
board of directors may, in its discretion, consider relevant.
Use of Proceeds. On November 23, 2004, we closed our
initial public offering by selling 12,700,000 shares of our
common stock at a public offering price of $9.50 per share
in a firm commitment underwriting. On December 22, 2004, we
closed the sale of an additional 422,000 shares of our
common stock at the public offering price of $9.50 as a result
of the underwriters exercising their over-allotment option.
Concurrent with the closing of the initial public offering, we
sold 1,000,000 shares of our common stock at a price of
$8.835 per share in a private placement. Simultaneously
with the closing of our initial public offering, Courtney C.
Smith, Peter E. Jokiel, William S. Loder and Gary J. Ferguson,
each an executive officer, purchased directly from us 22,637,
33,956, 16,978 and 16,978 shares of our common stock,
respectively. Additionally, at the closing of our initial public
offering, we sold 26,316 shares of our Class B common
stock to our partner agents at a total aggregate amount of
$250,000. The net proceeds to us from all these transactions
after deducting expenses were approximately $123.5 million.
1. approximately $22.0 million was used to fund the
Acquisition;
2. approximately $95.0 million was contributed as
capital to SUA Insurance Company; and
3. the balance was retained by us for general corporate
purposes.
Purchases of Common Stock. We did not repurchase any of
our common stock in 2004 and we have no plans to do so in the
foreseeable future.
Our equity compensation plan information is included in
Item 12, which is incorporated by reference to the
definitive proxy statement to be filed pursuant to
Regulation 14A.
12
|
|
| ITEM 6. |
SELECTED FINANCIAL DATA |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Successor | |
|
|
Predecessor | |
| |
|
| |
|
|
| |
| |
|
Twelve Months | |
|
From April 3, | |
|
|
From January 1, | |
|
Twelve Months | |
|
Twelve Months | |
|
Seven Months | |
| |
|
Ended | |
|
through | |
|
|
through | |
|
Ended | |
|
Ended | |
|
Ended | |
| |
|
December 31 | |
|
December 31 | |
|
|
November 23 | |
|
December 31 | |
|
December 31 | |
|
December 31 | |
| As of and for the Periods Ended |
|
2004 | |
|
2003 | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
| |
|
| |
|
| |
|
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except for per share data) | |
|
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums
|
|
$ |
— |
|
|
$ |
— |
|
|
|
$ |
— |
|
|
$ |
9,961 |
|
|
$ |
13,518 |
|
|
$ |
10,525 |
|
|
Net investment income
|
|
|
278 |
|
|
|
— |
|
|
|
|
1,329 |
|
|
|
2,128 |
|
|
|
1,580 |
|
|
|
946 |
|
|
Total revenues
|
|
|
280 |
|
|
|
— |
|
|
|
|
1,719 |
|
|
|
11,941 |
|
|
|
15,915 |
|
|
|
12,155 |
|
|
Net income(loss) before change in accounting principle, net of
tax
|
|
|
(8,155 |
) |
|
|
(578 |
) |
|
|
|
650 |
|
|
|
1,359 |
|
|
|
595 |
|
|
|
(576 |
) |
|
Net income (loss)
|
|
|
(8,155 |
) |
|
|
(578 |
) |
|
|
|
650 |
|
|
|
1,359 |
|
|
|
3,721 |
|
|
|
(576 |
) |
|
Financial Condition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$ |
97,835 |
|
|
$ |
— |
|
|
|
|
|
|
|
$ |
49,113 |
|
|
$ |
30,087 |
|
|
$ |
65,907 |
|
|
Total assets
|
|
|
217,231 |
|
|
|
4,940 |
|
|
|
|
|
|
|
|
204,355 |
|
|
|
246,255 |
|
|
|
335,751 |
|
|
Total liabilities
|
|
|
98,301 |
|
|
|
5,518 |
|
|
|
|
|
|
|
|
161,850 |
|
|
|
205,084 |
|
|
|
296,460 |
|
|
Shareholders’ equity
|
|
|
118,930 |
|
|
|
(578 |
) |
|
|
|
|
|
|
|
42,505 |
|
|
|
41,171 |
|
|
|
39,291 |
|
|
Net income(loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(4.59 |
) |
|
$ |
(57,800.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
(4.59 |
) |
|
$ |
(57,800.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table includes the complete loss development
history of the direct gross loss and loss adjustment expense or
LAE reserves of Potomac Insurance Company of Illinois (Potomac).
Effective January 1, 2004, Potomac entered into a transfer
and assumption agreement with its parent company, OneBeacon,
which reinsured all its direct liabilities to OneBeacon.
Therefore, effective January 1, 2004, Potomac had no net
liabilities for unpaid Losses and LAE. On November 23,
2004, we purchased Potomac and subsequently received approval
from the Illinois Department of Insurance to rename the company
SUA Insurance Company. SUA Insurance Company did not issue any
policies in 2004, however, it remains liable for the Loss and
LAE reserves generated from its predecessor’s
(Potomac’s) direct business should OneBeacon be unable to
honor its reinsurance obligation in the future. Those Loss and
LAE reserves, including IBNR, totaled $95,959 at
December 31, 2004.
Specialty Underwriters’ Alliance Inc.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Successor (SUA) | |
| |
|
Predecessor (Potomac) | |
|
|
Year Ended | |
| |
|
Year Ended December 31, | |
|
|
December 31, | |
| Direct Basis ($000) |
|
| |
|
|
| |
| Y/E 12/31 |
|
1994 | |
|
1995 | |
|
1996 | |
|
1997 | |
|
1998 | |
|
1999 | |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| |
|
LIABILITY FOR UNPAID CLAIMS & CLAIM ADJ. EXP
|
|
|
83,862 |
|
|
|
91,831 |
|
|
|
115,880 |
|
|
|
131,700 |
|
|
|
160,244 |
|
|
|
235,376 |
|
|
|
297,408 |
|
|
|
255,128 |
|
|
|
176,069 |
|
|
|
140,542 |
|
|
|
|
95,959 |
|
|
CUMULATIVE PAID AS OF:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 YEAR LATER
|
|
|
38,313 |
|
|
|
37,000 |
|
|
|
53,647 |
|
|
|
62,659 |
|
|
|
81,545 |
|
|
|
98,963 |
|
|
|
86,980 |
|
|
|
76,958 |
|
|
|
58,815 |
|
|
|
10,090 |
|
|
|
|
|
|
|
2 YEARS LATER
|
|
|
57,668 |
|
|
|
61,051 |
|
|
|
84,611 |
|
|
|
108,284 |
|
|
|
128,261 |
|
|
|
163,656 |
|
|
|
159,584 |
|
|
|
134,008 |
|
|
|
68,756 |
|
|
|
|
|
|
|
|
|
|
|
3 YEARS LATER
|
|
|
71,448 |
|
|
|
77,409 |
|
|
|
112,193 |
|
|
|
131,940 |
|
|
|
163,498 |
|
|
|
220,344 |
|
|
|
213,116 |
|
|
|
143,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 YEARS LATER
|
|
|
80,957 |
|
|
|
95,415 |
|
|
|
124,855 |
|
|
|
151,753 |
|
|
|
191,357 |
|
|
|
261,115 |
|
|
|
222,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 YEARS LATER
|
|
|
92,790 |
|
|
|
103,816 |
|
|
|
135,029 |
|
|
|
166,365 |
|
|
|
212,314 |
|
|
|
270,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 YEARS LATER
|
|
|
99,866 |
|
|
|
109,322 |
|
|
|
143,667 |
|
|
|
176,712 |
|
|
|
215,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 YEARS LATER
|
|
|
102,876 |
|
|
|
114,002 |
|
|
|
148,722 |
|
|
|
177,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 YEARS LATER
|
|
|
105,354 |
|
|
|
116,673 |
|
|
|
149,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 YEARS LATER
|
|
|
106,752 |
|
|
|
117,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 YEARS LATER
|
|
|
106,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Successor (SUA) | |
| |
|
Predecessor (Potomac) | |
|
|
Year Ended | |
| |
|
Year Ended December 31, | |
|
|
December 31, | |
| Direct Basis ($000) |
|
| |
|
|
| |
| Y/E 12/31 |
|
1994 | |
|
1995 | |
|
1996 | |
|
1997 | |
|
1998 | |
|
1999 | |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| |
|
RE-ESTIMATED LIABILITY AS OF:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
END OF YEAR
|
|
|
83,862 |
|
|
|
91,831 |
|
|
|
115,880 |
|
|
|
131,700 |
|
|
|
160,244 |
|
|
|
235,376 |
|
|
|
297,408 |
|
|
|
255,128 |
|
|
|
176,069 |
|
|
|
140,542 |
|
|
|
|
95,959 |
|
|
1 YEAR LATER
|
|
|
91,041 |
|
|
|
96,003 |
|
|
|
118,878 |
|
|
|
145,067 |
|
|
|
211,516 |
|
|
|
326,426 |
|
|
|
326,203 |
|
|
|
247,629 |
|
|
|
198,858 |
|
|
|
110,371 |
|
|
|
|
|
|
|
2 YEARS LATER
|
|
|
92,251 |
|
|
|
96,301 |
|
|
|
127,693 |
|
|
|
184,404 |
|
|
|
272,353 |
|
|
|
359,245 |
|
|
|
320,706 |
|
|
|
270,997 |
|
|
|
168,770 |
|
|
|
|
|
|
|
|
|
|
|
3 YEARS LATER
|
|
|
93,099 |
|
|
|
100,950 |
|
|
|
158,274 |
|
|
|
222,057 |
|
|
|
279,420 |
|
|
|
350,765 |
|
|
|
344,771 |
|
|
|
240,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 YEARS LATER
|
|
|
95,467 |
|
|
|
125,181 |
|
|
|
181,078 |
|
|
|
221,608 |
|
|
|
266,482 |
|
|
|
366,736 |
|
|
|
318,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 YEARS LATER
|
|
|
112,451 |
|
|
|
141,469 |
|
|
|
179,581 |
|
|
|
209,018 |
|
|
|
273,463 |
|
|
|
351,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 YEARS LATER
|
|
|
124,508 |
|
|
|
139,473 |
|
|
|
168,994 |
|
|
|
212,266 |
|
|
|
265,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 YEARS LATER
|
|
|
123,464 |
|
|
|
129,867 |
|
|
|
169,519 |
|
|
|
208,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 YEARS LATER
|
|
|
115,307 |
|
|
|
129,675 |
|
|
|
168,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 YEARS LATER
|
|
|
114,454 |
|
|
|
126,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 YEARS LATER
|
|
|
111,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RED (DEF) Dec 2004
|
|
|
(27,583 |
) |
|
|
(34,516 |
) |
|
|
(52,898 |
) |
|
|
(76,348 |
) |
|
|
(105,520 |
) |
|
|
(115,753 |
) |
|
|
(20,974 |
) |
|
|
14,760 |
|
|
|
7,298 |
|
|
|
30,171 |
|
|
|
|
|
|
|
% REDUNDANCY (DEFICIENCY) REPORTED AS OF:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 YEAR LATER
|
|
|
(9 |
) |
|
|
(5 |
) |
|
|
(3 |
) |
|
|
(10 |
) |
|
|
(32 |
) |
|
|
(39 |
) |
|
|
(10 |
) |
|
|
3 |
|
|
|
(13 |
) |
|
|
21 |
|
|
|
|
|
|
|
2 YEARS LATER
|
|
|
(10 |
) |
|
|
(5 |
) |
|
|
(10 |
) |
|
|
(40 |
) |
|
|
(70 |
) |
|
|
(53 |
) |
|
|
(8 |
) |
|
|
(6 |
) |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
3 YEARS LATER
|
|
|
(11 |
) |
|
|
(10 |
) |
|
|
(37 |
) |
|
|
(69 |
) |
|
|
(74 |
) |
|
|
(49 |
) |
|
|
(16 |
) |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 YEARS LATER
|
|
|
(14 |
) |
|
|
(36 |
) |
|
|
(56 |
) |
|
|
(68 |
) |
|
|
(66 |
) |
|
|
(56 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 YEARS LATER
|
|
|
(34 |
) |
|
|
(54 |
) |
|
|
(55 |
) |
|
|
(59 |
) |
|
|
(71 |
) |
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 YEARS LATER
|
|
|
(48 |
) |
|
|
(52 |
) |
|
|
(46 |
) |
|
|
(61 |
) |
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 YEARS LATER
|
|
|
(47 |
) |
|
|
(41 |
) |
|
|
(46 |
) |
|
|
(58 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 YEARS LATER
|
|
|
(38 |
) |
|
|
(41 |
) |
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 YEARS LATER
|
|
|
(36 |
) |
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 YEARS LATER
|
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ITEM 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
Specialty Underwriters’ Alliance, Inc.
The following discussion and analysis of financial condition
and results of operations should be read together with
“Selected Financial Data” and our financial statements
and accompanying notes appearing elsewhere in this Annual Report
on Form 10-K. This discussion contains forward-looking
statements, based on current expectations and related to future
events and our future financial performance, that involve risks
and uncertainties. Our actual results may differ materially from
those anticipated in these forward-looking statements as a
result of many important factors, including those set forth
under “Risk Factors”, “Forward-Looking
Statements” and elsewhere in this Annual Report on
Form 10-K.
Overview
We were formed on April 3, 2003 for the purpose of
achieving attractive returns in the specialty commercial
property and casualty insurance business by using an innovative
business model. Specialty insurance typically serve 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 price.
We have not yet commenced substantive operations. During the
period April 3, 2003 to December 31, 2004, we incurred
costs related to our initial public offering and initial
start-up costs for infrastructure required
14
to commence insurance operations generating an accumulated
deficit of $8.7 million. Among these activities, we engaged
consultants to assist us in our business selection process of
partner agents, we contracted with a service company to assist
us in reviewing the business of those agents and developing
underwriting and pricing guidelines, we began the development of
our key business processing systems with vendors and
consultants, and we began work on the development of our
offering documents together with our underwriter and legal
counsel. Effective November 23, 2004, we completed our
initial public offering and concurrent private placements and
concurrently completed the acquisition of Potomac. Effective
with the completion of our initial public offering, we are in a
position to conduct our intended business activities. We plan to
commence writing insurance in 2005 utilizing the core group of
partner agents currently assembled. Because we are unlikely to
seek to or obtain cancellations of existing policies produced by
our partner agents prior to the end of their terms, we will seek
to transition policies over a 12-month period following the
commencement of our insurance operations. As of
December 31, 2004, we had not underwritten any insurance
business.
Our business model stresses a “partnership”
relationship with partner agents designed to better serve the
specialty program commercial property and casualty insurance
marketplace by addressing the typical misalignment of interests
between agent and carrier. Partner Agents will receive up-front
commissions capable of covering their costs and meaningful
underwriting profit-based commissions payable over several years
as compensation for writing business for us. As a result of
these commission arrangements, a substantial amount of our
commission expenses will be variable and will depend on the
underwriting profits of the business.
Revenues
We expect to derive the majority of our revenues from net earned
premiums from policies written by our insurance operations and
investment income from our investment portfolios. The amount of
our insurance premiums written will depend on the number and
type of policies we write, as well as prevailing market prices.
We will strive to focus on the profitability over time of our
blocks of policies rather than amount of premiums. As a result,
the volume of premiums written may not be indicative of our
ultimate expected profitability.
Our investment income will depend on the amount of invested
assets in our investment portfolios and the yield that we earn
on those invested assets. Our investment yield is a function of
market interest rates and the credit quality and maturity period
of our invested assets. In addition, we could realize capital
gains or losses on sales of investments as a result of changing
market conditions, including changes in market interest rates
and changes in the credit quality of our invested assets.
Expenses
We expect that our expenses will consist primarily of loss and
loss adjustment expenses, policy acquisition expenses and
general and administrative expenses.
Loss and loss adjustment expenses will depend on the number and
type of insurance contracts we write and will reflect our best
estimate of ultimate losses and loss adjustment expenses we
expect to incur on each contract written using various actuarial
analyses. Actual loss and loss adjustment expenses will depend
on actual costs to settle insurance claims. Our ability to
accurately estimate ultimate loss and loss adjustment expense at
the time of pricing each insurance contract will be a critical
factor in determining our profitability.
Policy acquisition expenses are expected to consist principally
of up-front commissions, fees, and tax expenses that are
directly related to obtaining and writing insurance contracts.
Typically, policy acquisition expenses are based on a certain
percentage of the premiums written on contracts of insurance.
Since our commission expense will include meaningful
underwriting profit-based commission accruals, as well as
up-front commissions, our commission expense is likely to be
higher in periods of greater profitability and lower in periods
with poorer underwriting results. We expect that these expenses
will be a function of the number and type of insurance contracts
written.
General and administrative expenses will consist primarily of
personnel expenses, payments to providers of outsourced
services, professional fees and other operating overhead. We
expect to use various third-party service providers as necessary
to administer and manage the insurance business that we
underwrite.
15
Additionally, from time to time we engage legal, accounting, tax
and financial advisors. General and administrative expenses are
a function of the development of our business, including the
growth in personnel and the overall volume of insurance
contracts written.
We plan to outsource most of our administrative services
primarily to a third-party services provider. Pursuant to these
arrangements, we will pay a fixed payment together with
additional amounts based on other factors. As a result, our
administrative expenses generally will vary with the volume of
our business as well as the other factors.
Results of Operations from January 1, 2004 to
December 31, 2004 and from April 3, 2003 to
December 31, 2003
We were formed April 3, 2003 and did not have any financial
activity until our initial funding date of December 12,
2003. For the period April 3, 2003 to December 31,
2003, we reported a net loss of $0.6 million.
For the period from January 1, 2004 to December 31,
2004, we reported a net loss of $8.2 million as a result of
initial start-up costs while recording no insurance revenues. We
did have investment income and realized gains of
$0.3 million. Total expenses of $8.4 million were
primarily comprised of $4.7 million in service company
fees, $1.5 million in consulting fees, $0.7 million in
salaries and benefits, $0.6 million in legal expenses,
interest expense of $0.3 million and $0.6 million of
miscellaneous expenses.
Liquidity and Capital Resources
We are organized as a Delaware holding company and, as such,
have no direct operations of our own. Our assets consist
primarily of investments in our subsidiary, through which we
will conduct substantially all of our insurance operations.
As a holding company, we will have 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 are expected
to come primarily from dividends, interest and other statutorily
permissible payments from our operating subsidiary. The ability
of our operating subsidiary to make these payments will be
limited by the applicable laws and regulations of Illinois.
There will be restrictions on the payment of dividends by our
insurance subsidiary to us.
Our principal consolidated cash requirements are expected to be
the servicing of future borrowing arrangements, if any, the
acquisition of and investment in operating subsidiaries,
expenses to develop and implement our business strategy, capital
expenditures, premiums ceded, losses and loss adjustment
expenses, commissions, policy administration expenses, taxes and
other operating expenses. The potential for a large claim under
one of our insurance contracts means that we may need to make
substantial and unpredictable payments within relatively short
periods of time. We currently do not intend to declare dividends
or make any other distributions to our stockholders. Our board
of directors plans to periodically reevaluate our dividend
policy. Our cash requirements also will include the payment of
any future dividends to our stockholders if and when our board
of directors determines to change our dividend policy.
As of December 31, 2004, we have made capital expenditures
of $2.4 million related to information systems.
Sources of Cash
On November 23, 2004, we received the proceeds of our
initial public offering and concurrent private placements. Total
proceeds after underwriting discounts and offering expenses were
$119.8 million. Concurrent with the offering we acquired
Potomac from OneBeacon for $22.0 million, including
transaction costs. On December 22, 2004 we received
proceeds of $3.7 million from underwriter’s exercise
of the over allotment option.
Prior to completing our initial public offering, our sole source
of cash was $3.9 million in term loans from senior and
subordinated lenders. Concurrent with the initial public
offering, all outstanding loans, together
16
with accrued interest of $0.2 million were repaid, through
an exchange for common stock. Further, warrants issued in
conjunction with the loans were cancelled resulting in a gain in
the fourth quarter of $4.0 million.
The proceeds of the loans were used to pay our operating
expenses and pay some of our offering expenses.
We expect our future sources of funds will consist of net
premiums written, reinsurance ceding commissions and recoveries,
investment income and proceeds from sales and redemptions of
investment assets.
We do not have any borrowings outstanding as of
December 31, 2004.
For the period from January 1, 2004 to December 31,
2004, our increase in cash was $8.8 million. Cash was
provided from the net proceeds of our initial public offering of
$119.8 million and proceeds of $3.7 million from
underwriter’s exercise of the over allotment option and
$3.2 million from term loans. Net cash used for investment
activities during the twelve month period ended
December 31, 2004 totaled $110.0 million and was
primarily related to the acquisition of Potomac and subsequent
purchases of investments with the proceeds from the initial
public offering. Net cash used for operating activities during
the period from January 1, 2004 to December 31, 2004
totaled $7.9 million and was primarily related to our
initial start-up costs.
We have no off-balance sheet arrangements or transactions with
unconsolidated, special purpose entities.
Adequacy of Capital
While insurance regulation differs by location, each
jurisdiction requires that minimum levels of capital be
maintained in order to write new insurance business. Factors
that affect capital requirements generally include premium
volume, the extent and nature of loss and loss adjustment
expense reserves, the type and form of insurance business
underwritten and the availability of reinsurance protection from
adequately rated reinsurers on terms that are acceptable to us.
Insurers are required to maintain certain minimum levels of
capital and risk-based capital, the calculation of which
includes numerous factors as specified by the respective
insurance regulatory authorities and the related insurance
regulations. We will capitalize our insurance operations in
excess of the minimum regulatory requirements so that we may
maintain adequate financial ratings.
We believe that the proceeds of the initial public offering and
the concurrent private placement will be sufficient to execute
our business strategy for at least the next 12 months. We
would need to raise additional funds to further expand our
business strategy, enter new business lines, and manage our
expected growth or to deal with higher than expected expenses or
poorer than expected results.
If we cannot maintain or obtain adequate capital to manage our
business strategy and expected growth targets, our business,
results of operations and financial condition may be adversely
affected.
Critical Accounting Estimates
Our significant accounting policies, as of December 31,
2003 and December 31, 2004, are described in the notes to
our financial statements.
After we begin our insurance operations, we expect that our
financial statements will contain certain amounts that are
inherently subjective in nature and require management to make
certain judgments and assumptions in the application of
accounting policies used to determine those amounts reported in
the financial statements. The use of different assumptions could
produce materially different estimates of the reported amounts.
We believe the following critical accounting policies will
affect significant estimates used in the preparation of the
financial statements after the commencement of our insurance
operations.
Recent Accounting Pronouncements
In December 2004, the FASB issued FAS No. 123 (revised
2004), “Share-Based Payment”
(“FAS 123R”). FAS 123R replaces
FAS No. 123, “Accounting for Stock-Based
Compensation” (“FAS 123”) and supersedes APB
Opinion No. 25, “Accounting for Stock Issued to
Employees”
17
(“APB 25”). As permitted by FAS 123, our
company currently accounts for share-based payments to employees
using APB 25’s intrinsic value method and, as such,
generally recognizes no compensation expense for employee stock
options. Accordingly, the adoption of FAS 123R’s fair
value method will have a significant impact on our result of
operations, although it will have no impact on our overall
financial position. The impact of adoption of FAS 123R
cannot be predicted at this time because it will depend on
levels of share-based payments granted in the future. However,
had we adopted FAS 123R in prior periods, the impact of
that standard would have approximated the impact of FAS 123
as described in the disclosure of pro forma net income and
earnings per share in Note 7 to our consolidated financial
statements. FAS 123R also requires the benefits of tax
deductions in excess of recognized compensation expense to be
reported as a financing cash flow, rather than as an operating
cash flow as required under current literature. This requirement
will reduce net operating cash flows and increase net financing
cash flows in periods after adoption. While we cannot estimate
what those amounts will be in the future (because they depend
on, among other things, when employees exercise stock options),
the amount of operating cash flows recognized in prior periods
for such excess tax deductions were zero in 2004, as we had a
net operating loss carry forward in 2004 and has never paid any
tax.
Premium Income
Net premiums written will consist of direct premiums written
less ceded premiums. The components of net premiums written will
be recognized as revenue over the period that coverage is
provided. When premium rates increase, the effect of those
increases will not immediately affect earned premium. Rather,
those increases will be recognized ratably over the period of
coverage. Unearned premiums and prepaid reinsurance premiums,
which are recorded on the balance sheets, will represent that
portion of premiums written that are applicable to the unexpired
terms of policies in force.
Investments
We have classified all fixed maturity investment securities upon
acquisition as available-for-sale securities. Available-for-sale
fixed maturities securities are reported at fair value.
Short-term investments are recorded at cost.
We use quoted market prices in determining the fair value of
fixed maturities and short-term investments in most cases. Where
quoted market prices are unavailable, we expect to base the
estimate on recent trading. Unrealized appreciation or
depreciation of available-for-sale investments carried at fair
value are excluded from net income and credited or charged, net
of applicable deferred income taxes, directly to accumulated
other comprehensive income, a separate component of
stockholders’ equity. The change in unrealized appreciation
or depreciation is reported as a component of other
comprehensive income.
We continually monitor the difference between our cost basis and
the estimated fair value of our investments. Our accounting
policy for impairment recognition for fixed maturities requires
other-than-temporary impairment charges to be recorded when we
determine that it is probable we will be unable to collect all
amounts due according to the contractual terms of the
investment. Impairment charges on investments are recorded based
on the fair value of the investments at the balance sheet date,
and are included in net realized gains and losses. Factors
considered in evaluating whether a decline in value is other
than temporary include: the length of time and the extent to
which the fair value has been less than cost; the financial
conditions and near-term prospects of the issuer; and our intent
and ability to retain the investment for a period of time
sufficient to allow for any anticipated recovery.
Deferred Policy Acquisition Costs
We will establish an asset for deferred policy acquisition costs
such as up-front commissions, premium taxes and other variable
costs incurred in connection with writing our lines of business.
Deferred policy acquisition costs will be amortized over the
period of coverage of the policies written. We will assess the
recoverability of deferred policy acquisition costs on a
quarterly basis. The loss and loss adjustment expense ratio we
use to estimate the recoverability of deferred costs is expected
to be based primarily on the
18
assumption that the future loss and loss adjustment expense
ratio will include consideration of the recent experience. Such
adjustments will be recorded through operations in the period
identified. Actual results could differ materially from such
estimates, requiring future adjustments to the recorded deferred
policy acquisition cost asset.
Intangible Assets
We recorded an indefinite-life intangible asset for the value of
insurance licenses acquired in connection with the acquisition
of Potomac. Indefinite-lived intangible assets are not subject
to amortization. If the aggregate fair value of insurance
licenses declines to an amount less than their book value,
impairment will be recorded as a realized loss for the excess of
book value over fair value
Losses, Claims and Settlement Expenses
Our most significant estimates will likely relate to our
reserves for property and casualty losses and loss adjustment
expenses. We will be required to establish reserves for the
estimated total unpaid cost of losses and loss adjustment
expenses for events that have already occurred. These reserves
should reflect our best estimates of the total cost of claims
that were reported to us, but not yet paid, referred to as Case
Reserves, and the cost of claims “incurred but not yet
reported” to us, or IBNR, referred to as IBNR Reserves.
The estimate of these reserves is subjective and complex and
will require us to make estimates about the future payout of
claims, which is inherently uncertain. When we establish and
adjust reserves, we will do so based on our knowledge of the
circumstances and facts of claims. Upon notice of a claim, we
will establish a Case Reserve for losses based on the claims
information reported to us at that time. Subsequently, we will
conduct an investigation of each reported claim, which will
allow us to more fully understand the factors contributing to
the loss and our potential exposure. This investigation may
extend over a long period of time. As our investigations of
claims develop and as our claims personnel identify trends in
claims activity, we plan to refine and adjust our estimates of
Case Reserves. When we establish reserves, we plan to do so
based on our knowledge of the circumstances and claim facts. We
plan to continually review our reserves, and as experience
develops and additional information becomes known, we will
adjust the reserves. Such adjustments will be recorded through
operations in the period identified. To evaluate and refine our
overall reserving process, we will track and monitor all claims
until they are settled and paid in full and all salvage and
subrogation claims are resolved.
For IBNR losses, we will estimate the amount of reserves for
each line of business on the basis of historical and statistical
information. We plan to consider historical patterns of paid and
reported claims, industry data and the probable number and
nature of losses arising from claims that have occurred but have
not yet been reported for a given accident year.
To establish loss and loss adjustment expense reserves, we will
need to make estimates and assumptions that affect the amounts
of assets, liabilities, revenues and expenses reported in our
financial statements. Actual results could differ materially
from those estimates.
The estimation of ceded reinsurance loss and loss adjustment
expense reserves will be subject to the same factors as the
estimation of insurance loss and loss adjustment expense
reserves.
Deferred Income Taxes
We have established a valuation allowance for the portion of any
deferred tax asset that management believes may not be realized.
The establishment and ongoing evaluation of a valuation
allowance for deferred tax assets requires the use of judgment
and estimates. Actual results could differ materially from those
estimates.
19
Contractual Obligations
The following table of contractual obligations includes
information with respect to our known contractual obligations as
of December 31, 2004.
Table of Contractual Obligations
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payment due by period (dollars in thousands) |
| |
|
|
| |
|
|
|
Less than | |
|
|
|
More than |
| Contractual Obligations |
|
Total | |
|
1 Year | |
|
1-3 Years |
|
3-5 Years |
|
5 Years |
| |
|
| |
|
| |
|
|
|
|
|
|
|
Long-Term Debt Obligations
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Capital Lease Obligations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Operating Lease Obligations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Purchase Obligations
|
|
|
8,733 |
|
|
|
8,733 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Other Long-Term Liabilities Reflected on the Registrant’s
Balance Sheet under GAAP
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total
|
|
$ |
8,733 |
|
|
$ |
8,733 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
For purposes of this table:
|
|
|
| |
• |
“Long-Term Debt Obligation” means: (i) a payment
obligation (included in the Company’s consolidated
financial statements) under long-term borrowings referenced in
FASB Statement of Financial Accounting Standards No. 47,
“Disclosure of Long-Term Obligations,” (March 1981),
as may be modified or supplemented, and (ii) interest
payment obligations related to such long-term borrowings. |
| |
| |
• |
“Capital Lease Obligation” means a payment obligation
under a lease classified as a capital lease pursuant to FASB
Statement of Financial Accounting Standards No. 13,
“Accounting for Leases,” (November 1976), as may be
modified or supplemented. |
| |
| |
• |
“Operating Lease Obligation” means a payment
obligation under a lease classified as an operating lease and
disclosed pursuant to FASB Statement of Financial Accounting
Standards No. 13, “Accounting for Leases,”
(November 1976), as may be modified or supplemented. All
operating lease obligations are for facilities. |
| |
| |
• |
“Purchase Obligation” means an agreement to purchase
goods or services that is enforceable and legally binding on the
registrant that specifies all significant terms, including:
fixed or minimum quantities to be purchased; fixed, minimum or
variable price provisions; and the approximate timing of the
transaction. This table does not include our accounts payable
reflected in our audited consolidated balance sheet data that
are included in our consolidated financial statements contained
elsewhere in this report. |
Commitments
On February 3, 2005, we entered into a lease agreement for
our office space that commences on May 1, 2005 and
terminates on April 30, 2020. Our future net lease
obligations are $1.43 million for years 1 through 5,
$2.37 million for years 6 through 10 and $2.69 million
for years 11 through 15.
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
will seek to mitigate that risk by a number of actions, as
described below.
20
Effects of Inflation
Inflation could have a significant effect on our results of
operations in some situations. The effects of inflation could
cause the severity of claims to increase in the future. Our
estimates for losses and loss adjustment expenses will include
assumptions, including those relating to inflation, about future
payments for settlement of claims and claims handling expenses.
To the extent inflation causes these costs to increase above our
estimated reserves that will be established for these claims, we
will be required to increase reserves for losses and loss
adjustment expenses with a corresponding reduction in our
earnings in the period in which the increase is identified. The
actual effects of inflation on our results cannot be accurately
determined until claims are ultimately settled.
Interest Rate Risk
Our exposure to market risk for changes in interest rates is
concentrated in our investment portfolio. We expect that changes
in investment values attributable to interest rate changes will
be mitigated, however, by corresponding and partially offsetting
changes in the economic value of our insurance reserves to the
extent we have established such loss reserves. We will monitor
this exposure through periodic reviews of our consolidated asset
and liability positions. We will 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 our fixed
maturity portfolio:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Estimated Fair | |
|
After Tax | |
| |
|
|
|
Assumed Change | |
|
Value After | |
|
Increase | |
| |
|
Fair Value | |
|
in Relevant Interest | |
|
Change in | |
|
(Decrease) in | |
| |
|
at 12/31/04 | |
|
Rate | |
|
Interest Rate | |
|
Carrying Value | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Fixed Maturity Investments
|
|
$ |
97,835 |
|
|
|
100 bp decrease |
|
|
$ |
99,543 |
|
|
$ |
1,708 |
|
| |
|
|
|
|
|
|
50 bp decrease |
|
|
$ |
98,708 |
|
|
$ |
873 |
|
| |
|
|
|
|
|
|
50 bp increase |
|
|
$ |
96,981 |
|
|
$ |
(854 |
) |
| |
|
|
|
|
|
|
100 bp increase |
|
|
$ |
96,085 |
|
|
$ |
(1,750 |
) |
Credit Risk
Our portfolio includes primarily fixed income securities and
short-term investments, which are subject to credit risk. This
risk is defined as default or the potential loss in market value
resulting from adverse changes in the borrower’s ability to
repay the debt. In our risk management strategy and investment
policy, we plan to earn competitive relative returns while
investing in a diversified portfolio of securities of high
credit quality issuers and to limit the amount of credit
exposure to any one issuer.
The portfolio of fixed maturities consists solely of high
quality bonds at December 31, 2004, and we had no
investments at December 31, 2003. The following table
summarizes bond ratings at carrying value.
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Percent of | |
| Bond Ratings |
|
2004 | |
|
Portfolio | |
| |
|
| |
|
| |
| |
|
(Dollars in | |
| |
|
thousands) | |
|
U.S. Government and affiliated agency securities
|
|
|
15,624 |
|
|
|
31 |
% |
|
AA rated
|
|
|
3,917 |
|
|
|
8 |
% |
|
A rated
|
|
|
30,924 |
|
|
|
61 |
% |
| |
|
|
|
|
|
|
| |
Total
|
|
|
50,465 |
|
|
|
100 |
% |
| |
|
|
|
|
|
|
We also have other receivable amounts subject to credit risk,
including reinsurance recoverables from our current reinsurer,
OneBeacon. To mitigate the risk of counterparties’
nonpayment of amounts due under these arrangements, we will
establish business and financial standards for reinsurer
approval, incorporating ratings by major rating agencies and
considering then-current market information.
21
Potomac Insurance Company of Illinois
The following discussion and analysis of financial condition
and results of operations should be read together with
“Selected Financial Data” and the financial statements
and accompanying notes appearing elsewhere in this Annual Report
on Form 10-K. This discussion contains forward-looking
statements, based on current expectations and related to future
events and our future financial performance, that involve risks
and uncertainties. The actual results may differ materially from
those anticipated in these forward-looking statements as a
result of many important factors, including those set forth
under “Risk Factors”, “Forward-Looking
Statements” and elsewhere in this Annual Report on
Form 10-K.
Results of Operations from January 1, 2004 through
November 23, 2004 versus Year Ended December 31,
2003
Potomac’s pre-tax income was $1.0 million for the
period from January 1, 2004 through November 23, 2004
and $2.1 million for the year ended December 31, 2003.
As of January 1, 2004, Potomac ceased its participation in
the OneBeacon Amended and Restated Reinsurance (Pooling)
Agreement, or the Pool. As a result, net written premiums, net
earned premiums, losses and underwriting expenses for the period
from January 1, 2004 through November 23, 2004 were $0
and, therefore, are not comparable with 2003 results.
Potomac’s net investment income decreased by
$0.8 million or 38% for the period from January 1,
2004 through November 23, 2004, primarily due to the
continued run-off of loss reserves in the latter part of 2003,
as well as reduced interest rates. Net realized gains increased
by $0.9 million in the same period when compared to 2003.
Year Ended December 31, 2003 versus Year Ended
December 31, 2002
Potomac’s pre-tax income for 2003 was $2.1 million,
compared to pre-tax income of $0.9 million for 2002. Total
revenues for 2003 declined by 25% compared to 2002, due
principally to a corresponding 26% decline in earned premiums.
The decline in earned premiums was due primarily to a reduction
in premiums assumed by OneBeacon and the Pool, of which Potomac
was a participant, from Liberty Mutual. On November 1,
2001, OneBeacon transferred its regional agency business in
42 states and the District of Columbia to Liberty Mutual.
Under the terms of the renewal rights agreement, the
underwriting results and cash flows of the renewed policies were
shared between OneBeacon and Liberty Mutual over a two year
period through a reinsurance agreement whereby OneBeacon assumed
two-thirds and one-third of the business renewed in the first
and second years, respectively. Total revenues for 2003 were
also impacted by realized losses on sales of fixed maturity
investments, partially offset by an increase in investment
income due to a shift of funds to longer term maturities.
Total expenses for 2003 declined by 34% compared to 2002,
primarily as a result of reduced premium writings and improved
underwriting performance. Improved underwriting performance
resulted from continued efforts to improve premium adequacy
through rate increases, aggressive rate pursuit actions and
re-underwriting efforts, such as changes in business mix away
from historically less profitable business lines and shifting
away from certain classes of risks within business lines. Total
expenses in 2003 also include net unfavorable prior accident
year reserve development of $0.7 million primarily related
to construction defect claims.
Liquidity and Capital Resources
As of January 1, 2004, Potomac ceased its participation in
the Pool and entered into a transfer and assumption reinsurance
agreement whereby it transferred all of its direct insurance
business written to OneBeacon. As a result, Potomac no longer
has any insurance assets or liabilities on a net basis and will
not share in any favorable or unfavorable development of prior
year losses recorded by the Pool after January 1, 2004
unless OneBeacon fails to perform.
In 2004, Potomac’s sources of cash consisted primarily of
net investment income and proceeds from sales and maturities of
investments. Potomac’s uses of cash were primarily
investing expenses and the purchase of
22
investments. Prior to January 1, 2004, the effective date
of Potomac’s withdrawal from the Pool, its sources of cash
also included premium collections and its uses included claim
payments and operating expenses.
During 2004 Potomac declared and paid $18.6 million in cash
dividends and capital distributions and distributed
$13.3 million of net assets to OneBeacon. During 2002
Potomac declared and paid $3.0 million in cash dividends to
OneBeacon and OneBeacon contributed $0.5 million in cash to
Potomac.
Related Party Transactions
Prior to November 23, 2004, Potomac had a service contract
with White Mountains Advisors LLC, or Advisors, a wholly-owned
subsidiary of OneBeacon. Under this agreement, Advisors provided
investment research and advice, including the execution of
orders for the purchase and sale of securities. The amounts
charged to Potomac by Advisors for such services were based on a
fixed fee applied to the month-end market values of the
investments being managed.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition
and Results of Operations discusses Potomac’s financial
statements, which have been prepared in accordance with GAAP.
The financial statements presented herein include all
adjustments considered necessary by management to fairly present
the financial position, results of operations and cash flows of
Potomac. The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period.
Management believes that its critical accounting policies affect
its more significant estimates used in the preparation of its
financial statements. The descriptions below are summarized and
have been simplified for clarity.
Loss and Loss Adjustment Expenses
Potomac establishes loss and LAE that are estimates of amounts
needed to pay claims and related expenses in the future for
insured events that have already occurred. Reinsurance is an
arrangement in which a reinsurance company contractually agrees
to indemnify an insurance company for all or a portion of the
insurance risks underwritten by the insurance company. Potomac
establishes estimates of amounts recoverable from its reinsurers
in a manner consistent with the claim liability covered by the
reinsurance contracts, net of an allowance for uncollectible
amounts. Net insurance loss reserves represent loss and LAE
reserves reduced by reinsurance recoverable on unpaid losses.
In a broad sense, loss and LAE reserves have two components:
(i) case reserves, which are reserves established within
the claims function for claims that have been reported to
Potomac and (ii) IBNR. Case reserves are estimated based on
the experience and knowledge of claims staff regarding the
nature and potential cost of each claim. OneBeacon’s claims
staff periodically adjusts case reserves as additional
information becomes known or payments are made. Generally
accepted actuarial methods are used to project estimates of
IBNR. Actuaries use a variety of statistical and analytical
methods to determine estimates of IBNR, which are based, in
part, on historical claim reporting and payment patterns. In
estimating IBNR, actuaries consider all available information,
including reinsurance protections, inflation and the effects of
legal, social and legislative trends on future claim payments.
Management exercises judgment based upon its knowledge of its
business, review of the outcome of actuarial studies, historical
experience and other factors to record an estimate it believes
reflects Potomac’s expected ultimate unpaid loss and LAE
and related reinsurance recoverables.
Potomac commenced business in 1982 at which time it was licensed
solely in Illinois and consequently started writing business on
a very limited basis. Potomac expanded its writings as it
gradually accumulated licenses in additional states during the
next several years. During this time, the insurance industry
came to recognize its exposure to asbestos and environmental
hazards and took actions to mitigate such exposure
23
through policy exclusions and underwriting restrictions.
Therefore, Potomac has very little direct exposure to the large
latent losses.
Potomac was a net participant in the Pool through 2003. The Pool
included several companies that had direct written business in
those years when asbestos and environmental losses were not
explicitly excluded by standard policy language. As a result,
through 2003 Potomac did have net exposure to such losses as a
result of its business assumed from the Pool.
Effective January 1, 2004, Potomac ceased its participation
in the Pool and no longer has any assumed liabilities, real or
contingent. At the time of de-pooling, Potomac also entered into
a transfer and assumption agreement which effectively
transferred all its direct liabilities to OneBeacon. Potomac
remains contingently liable for the insurance liabilities
associated with its former direct business to the extent
OneBeacon fails to perform.
Potomac has stopped writing business and virtually all its
policies have expired. Potomac’s contingent direct
liabilities were $97.3 million at November 23, 2004
which were fully reinsured by OneBeacon under the transfer and
assumption agreement. Approximately 90% of such liabilities
relate to accident years 1995 through 2000 and are principally
risks written on Commercial Multi-Peril and Workers’
Compensation policies.
Reinsurance Transactions
OneBeacon has entered into ceded reinsurance contracts from time
to time to protect their businesses from losses due to poor risk
diversification, to manage their operating leverage ratios and
to limit ultimate losses arising from catastrophic events.
Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the
reinsured policies. Amounts related to reinsurance contracts are
recorded in accordance with SFAS No. 113,
“Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts”.
The collectibility of reinsurance recoverables is subject to the
solvency and willingness to pay of the reinsurers. Potomac is
selective in regard to its reinsurers, placing reinsurance
principally with those reinsurers with strong financial
condition, industry ratings and underwriting ability. Management
monitors the financial condition and rating of its reinsurers on
an ongoing basis.
|
|
| ITEM 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK |
See discussion of Quantitative and Qualitative Disclosures about
Market Risk in Item 7.
|
|
| ITEM 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The information required by this item is set forth beginning on
page F-1 of this Annual Report on Form 10-K.
|
|
| ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
|
|
| ITEM 9A. |
CONTROLS AND PROCEDURES |
As required by SEC rules 13a-15(b) and 15d-15(b), we have
evaluated the effectiveness of the design and operation of its
disclosure controls and procedures as of the end of the period
covered by this annual report. This evaluation was carried out
under the supervision and with the participation of its
management, including its 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 sufficient. There were no
significant changes to our internal controls or in other factors
that occurred during the period that
24
have materially affected, or are reasonably likely to materially
effect, our internal controls over financial reporting.
Disclosure controls and procedures are our controls and
procedures that are designed to ensure that information required
to be disclosed by it in the reports that it files or submits
under the Securities Exchange Act of 1934, or the Exchange Act,
is recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to
be disclosed by it in the reports that it files under the
Exchange Act is accumulated and communicated to its management,
including its principal executive officer and principal
financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
|
|
| ITEM 9B. |
OTHER INFORMATION |
None.
PART III
|
|
| ITEM 10. |
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
The information required by Item 10 as to our executive
officers is disclosed in Part I under the caption
“Executive Officers of the Registrant.” The
information required by Item 10 as to our directors is
incorporated herein by reference to the definitive Proxy
Statement to be filed pursuant to Regulation 14A. We are
not aware of any family relationships between any director or
executive officer.
|
|
| ITEM 11. |
EXECUTIVE COMPENSATION |
The information required by Item 11 is incorporated herein
by reference to the definitive Proxy Statement to be filed
pursuant to Regulation 14A.
|
|
| ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by Item 12 regarding security
ownership of certain beneficial owners and executive officers
and directors is incorporated herein by reference to the
definitive Proxy Statement to be filed pursuant to
Regulation 14A.
|
|
| ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
The information required by Item 13 is incorporated herein
by reference to the definitive Proxy Statement to be filed
pursuant to Regulation 14A.
25
|
|
| ITEM 14. |
PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by Item 14 is incorporated herein
by reference to the definitive Proxy Statement to be filed
pursuant to Regulation 14A.
PART IV
|
|
| ITEM 15. |
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K |
|
|
| (a) |
1. and 2. Financial Statements and Financial Statement
Schedules |
The consolidated financial statements and financial statement
schedules of Specialty Underwriters’ Alliance, Inc.
required by Part II, Item 8, are included in
Part IV of this report. See Index to Consolidated Financial
Statements and Financial Statement Schedules beginning on page
F-1.
3. Exhibits
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
|
|
| |
2 |
.1 |
|
Stock Purchase Agreement, dated March 22, 2004, between
Registrant and OneBeacon Insurance Company (Incorporated by
reference to Exhibit 2.1, filed with the Form S-1) |
| |
| |
2 |
.2 |
|
Amendment No. 1, dated May 4, 2004, to Stock Purchase
Agreement between Registrant and OneBeacon Insurance Company
(Incorporated by reference to Exhibit 2.2, filed with the
Form S-1) |
| |
2 |
.3 |
|
Amendment No. 2, dated July 1, 2004, to Stock Purchase
Agreement between Registrant and OneBeacon Insurance Company
(Incorporated by reference to Exhibit 2.3, filed with the
Form S-1) |
| |
| |
2 |
.4 |
|
Amendment No. 3, dated July 13, 2004, to Stock
Purchase Agreement between Registrant and OneBeacon Insurance
Company (Incorporated by reference to Exhibit 2.4, filed
with the Form S-1) |
| |
| |
2 |
.5 |
|
Amendment No. 4, dated October 12, 2004, to Stock
Purchase Agreement between Registrant and OneBeacon Insurance
Company (Incorporated by reference to Exhibit 2.5, filed
with the Form S-1) |
| |
| |
2 |
.6 |
|
Amendment No. 5, dated November 16, 2004, to Stock
Purchase Agreement between Registrant and OneBeacon Insurance
Company (Incorporated by reference to Exhibit 2.6, filed
with Specialty Underwriters’ Alliance, Inc.’s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004) |
| |
| |
3 |
.1 |
|
Amended and Restated Certificate of Incorporation (Incorporated
by reference to Exhibit 3.1, filed with the Form S-1) |
| |
| |
3 |
.2 |
|
Amended and Restated Bylaws (Incorporated by reference to
Exhibit 3.2, filed with the Form S-1) |
| |
| |
4 |
.1 |
|
Amended and Restated Senior Secured Note to the order of
Friedman, Billings, Ramsey Group, Inc. for up to $2,000,000
(Incorporated by reference to Exhibit 4.1, filed with the
Form S-1) |
| |
| |
4 |
.2 |
|
Amended and Restated Subordinated Note to the order of Courtney
C. Smith for up to $260,000 (Incorporated by reference to
Exhibit 4.2, filed with the Form S-1) |
| |
| |
4 |
.3 |
|
Amended and Restated Subordinated Note to the order of Peter E.
Jokiel for up to $114,000 (Incorporated by reference to
Exhibit 4.3, filed with the Form S-1) |
| |
| |
4 |
.4 |
|
Amended and Restated Subordinated Note to the order of William S
Loder for up to $45,000 (Incorporated by reference to
Exhibit 4.4, filed with the Form S-1) |
| |
| |
4 |
.5 |
|
Amended and Restated Subordinated Note to the order of Gary J.
Ferguson for up to $31,000 (Incorporated by reference to
Exhibit 4.5, filed with the Form S-1) |
| |
| |
4 |
.6 |
|
Amended and Restated Amended and Restated Senior Secured Note to
the order of Standard American Insurance Limited for up to
$1,450,000 (Incorporated by reference to Exhibit 4.6, filed
with the Form S-1) |
26
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
4 |
.7 |
|
Warrant No. W-1 B issued to Friedman, Billings, Ramsey
Group, Inc. (Incorporated by reference to Exhibit 4.7,
filed with the Form S-1) |
| |
| |
4 |
.8 |
|
Warrant No. W-1 C issued to Friedman, Billings, Ramsey
Group, Inc. (Incorporated by reference to Exhibit 4.8,
filed with the Form S-1) |
| |
| |
4 |
.9 |
|
Warrant No. W-2 B issued to Courtney C. Smith (Incorporated
by reference to Exhibit 4.9, filed with the Form S-1) |
| |
| |
4 |
.10 |
|
Warrant No. W-2 C issued to Courtney C. Smith (Incorporated
by reference to Exhibit 4.10, filed with the Form S-1) |
| |
| |
4 |
.11 |
|
Warrant No. W-3 B issued to Peter E. Jokiel (Incorporated
by reference to Exhibit 4.11, filed with the Form S-1) |
| |
| |
4 |
.12 |
|
Warrant No. W-4 B issued to William S. Loder (Incorporated
by reference to Exhibit 4.12, filed with the Form S-1) |
| |
| |
4 |
.13 |
|
Warrant No. W-5 B issued to Gary J. Ferguson (Incorporated
by reference to Exhibit 4.13, filed with the Form S-1) |
| |
| |
4 |
.14 |
|
Warrant No. W-6 issued to Standard American Insurance
Limited (Incorporated by reference to Exhibit 4.14, filed
with the Form S-1) |
| |
| |
10 |
.1.1 |
|
Management and Administrative Services Agreement, dated
November 1, 2003, between the Registrant and Syndicated
Services Company, Inc. (Incorporated by reference to
Exhibit 10.1.1, filed with the Form S-1) |
| |
| |
10 |
.1.2 |
|
Engagement letter, dated November 24, 2003 between the
Registrant and MMC Securities Corp. (Incorporated by reference
to Exhibit 10.1.2, filed with the Form S-1) |
| |
| |
10 |
.1.3 |
|
Agreement, dated March 15, 2004, between the Registrant and
Guy Carpenter & Company, Inc. (Incorporated by
reference to Exhibit 10.1.3, filed with the Form S-1) |
| |
| |
10 |
.1.4 |
|
Addendum I to the Management and Administrative Services
Agreement, dated April 26, 2004, between the Registrant and
Syndicated Services Company, Inc. (Incorporated by reference to
Exhibit 10.1.4, filed with the Form S-1) |
| |
| |
10 |
.1.5 |
|
Amended and Restated Stock Option Plan dated as of
November 10, 2004 (Incorporated by reference to
Exhibit 10.1.5, filed with the Form S-1) |
| |
| |
10 |
.1.6 |
|
Addendum II to the Management and Administrative Services
Agreement, dated June 10, 2004, between the Registrant and
Syndicated Services Company, Inc. (Incorporated by reference to
Exhibit 10.1.6, filed with the Form S-1) |
| |
| |
10 |
.1.7 |
|
First Amendment to Engagement Letter, dated June 24, 2004,
between the Registrant and MMC Securities Corp. (Incorporated by
reference to Exhibit 10.1.7, filed with the Form S-1) |
| |
| |
10 |
.1.8 |
|
Amended and Restated Employment Agreement, dated
November 11, 2004, between the Registrant and Courtney C.
Smith (Incorporated by reference to Exhibit 10.1.8, filed
with the Form S-1) |
| |
| |
10 |
.1.9 |
|
Amended and Restated Employment Agreement, dated
November 11, 2004, between the Registrant and Peter E.
Jokiel (Incorporated by reference to Exhibit 10.1.9, filed
with the Form S-1) |
| |
| |
10 |
.1.10 |
|
Amended and Restated Employment Agreement, dated
November 11, 2004, between the Registrant and William S.
Loder (Incorporated by reference to Exhibit 10.1.10, filed
with the Form S-1) |
| |
| |
10 |
.1.11 |
|
Amended and Restated Employment Agreement, dated
November 11, 2004, between the Registrant and Gary J.
Ferguson (Incorporated by reference to Exhibit 10.1.11,
filed with the Form S-1) |
| |
| |
10 |
.1.12 |
|
Amended and Restated Senior Loan and Security Agreement, dated
July 23, 2004, among Friedman, Billings, Ramsey Group,
Inc., Standard American Insurance Limited and Registrant
(Incorporated by reference to Exhibit 10.1.12, filed with
the Form S-1) |
| |
| |
10 |
.1.13 |
|
Amended and Restated Subordinated Loan and Security Agreement,
dated July 23, 2004, among Friedman, Billings, Ramsey
Group, Inc., Standard American Insurance Limited, Registrant,
Courtney C. Smith, Peter E. Jokiel, William S.
Loder and Gary Ferguson (Incorporated by reference to
Exhibit 10.1.12, filed with the Form S-1) |
27
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
10 |
.1.14 |
|
Amended and Restated Intercreditor and Subordination Agreement,
dated July 23, 2004, among Friedman, Billings, Ramsey
Group, Inc., Standard American Insurance Limited, Registrant,
Courtney C. Smith, Peter E. Jokiel, William S.
Loder and Gary Ferguson (Incorporated by reference to
Exhibit 10.1.12, filed with the Form S-1) |
| |
| |
10 |
.1.15 |
|
Partner Agent Program Agreement, dated May 18, 2004,
between the Registrant and AEON Insurance Group, Inc.
(Incorporated by reference to Exhibit 10.1.15, filed with
the Form S-1) |
| |
| |
10 |
.1.16 |
|
Amended and Restated Securities Purchase Agreement, dated
September 30, 2004, between the Registrant and AEON
Insurance Group, Inc. (Incorporated by reference to
Exhibit 10.1.16, filed with the Form S-1) |
| |
| |
10 |
.1.17 |
|
Partner Agent Program Agreement, dated May 1, 2004, between
the Registrant and American Team Managers (Incorporated by
reference to Exhibit 10.1.17, filed with the Form S-1) |
| |
| |
10 |
.1.18 |
|
Amended and Restated Securities Purchase Agreement, dated
August 16, 2004, between the Registrant and American Team
Managers (Incorporated by reference to Exhibit 10.1.18,
filed with the Form S-1) |
| |
| |
10 |
.1.19 |
|
Software License Maintenance and Support Agreement, dated
May 20, 2004, between the Registrant and ISO Strategic
Solutions, Inc. (Incorporated by reference to
Exhibit 10.1.21, filed with the Form S-1) |
| |
| |
10 |
.1.20 |
|
Master Software Sales and Services, Agreement (Americas), dated
May 19, 2004, between the Registrant and SunGard Sherwood
Systems (US), Inc. (Incorporated by reference to
Exhibit 10.1.22, filed with the Form S-1) |
| |
| |
10 |
.1.21 |
|
Warrant Exchange Agreement, dated August 31, 2004, among
the Registrant, Friedman, Billings, Ramsey Group, Inc., Courtney
C. Smith, Peter E. Jokiel, William S. Loder and Gary Ferguson
(Incorporated by reference to Exhibit 10.1.23, filed with
the Form S-1) |
| |
| |
10 |
.1.22 |
|
Second Amendment to Engagement Letter, dated September 7,
2004, between the Registrant and MMC Securities Corp.
(Incorporated by reference to Exhibit 10.1.24, filed with
the Form S-1) |
| |
| |
10 |
.1.23 |
|
Side letter, dated September 30, 2004, between the
Registrant and AEON Insurance Group, Inc. (Incorporated by
reference to Exhibit 10.1.25, filed with the Form S-1) |
| |
| |
10 |
.1.24 |
|
Promissory Note, dated September 30, 2004, in favor of the
Registrant (Incorporated by reference to Exhibit 10.1.26,
filed with the Form S-1) |
| |
| |
10 |
.1.25 |
|
Side letter, dated August 16, 2004, between the Registrant
and American Team Managers (Incorporated by reference to
Exhibit 10.1.27, filed with the Form S-1) |
| |
| |
10 |
.1.26 |
|
Promissory Note, dated August 16, 2004, in favor of the
Registrant (Incorporated by reference to Exhibit 10.1.28,
filed with the Form S-1) |
| |
| |
10 |
.1.27 |
|
Letter Agreement, dated September 15, 2004, between the
Registrant and Syndicated Services Company, Inc. (Incorporated
by reference to Exhibit 10.1.31, filed with the
Form S-1) |
| |
| |
10 |
.1.28 |
|
Partner Agent Program Agreement, dated November 3, 2004,
between the Registrant and Risk Transfer Holdings, Inc.
(Incorporated by reference to Exhibit 10.1.32, filed with
the Form S-1) |
| |
| |
10 |
.1.29 |
|
Amended and Restated Securities Purchase Agreement, dated
November 3, 2004, between the Registrant and Risk Transfer
Holdings, Inc. (Incorporated by reference to
Exhibit 10.1.33, filed with the Form S-1) |
| |
| |
10 |
.1.30 |
|
Side Letter, dated November 3, 2004, between the Registrant
and Risk Transfer Holdings, Inc. (Incorporated by reference to
Exhibit 10.1.34, filed with the Form S-1) |
| |
| |
10 |
.1.31 |
|
Promissory Note, dated November 3, 2004, in favor of the
Registrant (Incorporated by reference to Exhibit 10.1.35,
filed with the Form S-1) |
| |
| |
10 |
.1.32 |
|
First Amendment to Software License Maintenance and Support
Agreement, dated October 13, 2004, between the Registrant
and ISO Strategic Solutions, Inc. (Incorporated by reference to
Exhibit 10.1.36, filed with the Form S-1) |
| |
| |
10 |
.1.33 |
|
Second Amendment to Software License Maintenance and Support
Agreement, dated November 9, 2004, between the Registrant
and ISO Strategic Solutions, Inc. (Incorporated by reference to
Exhibit 10.1.37, filed with the Form S-1) |
28
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
10 |
.1.34 |
|
First Amendment to Amended and Restated Senior Loan and Security
Agreement, dated November 11, 2004, among FBR, Standard
American Insurance Limited and Registrant (Incorporated by
reference to Exhibit 10.1.38, filed with the Form S-1) |
| |
| |
10 |
.1.35 |
|
First Amendment to Amended and Restated Subordinated Loan and
Security Agreement, dated November 11, 2004, among FBR,
Standard American Insurance Limited, Registrant, Courtney C.
Smith, Peter E. Jokiel, William S. Loder and Gary Ferguson.
(Incorporated by reference to Exhibit 10.1.39, filed with
the Form S-1) |
| |
| |
10 |
.1.36 |
|
Form of Voting Agreement, by and between the Registrant and
Friedman, Billings, Ramsey Group, Inc. (Incorporated by
reference to Exhibit 10.1.40, filed with the Form S-1) |
| |
| |
10 |
.1.37 |
|
Form of Registration Rights Agreement, by and between the
Registrant and Friedman, Billings, Ramsey Group, Inc.
(Incorporated by reference to Exhibit 10.1.41, filed with
the Form S-1) |
| |
| |
10 |
.1.38 |
|
Form of Stock Purchase Agreement, by and between the Registrant
and Friedman, Billings, Ramsey Group, Inc. (Incorporated by
reference to Exhibit 10.1.42, filed with the Form S-1) |
| |
| |
10 |
.1.39 |
|
Third Amendment to the Software License and Maintenance and
Support Agreement by and between ISO Strategic Solutions, Inc.
and the Registrant (Incorporated by reference to
Exhibit 10.1.43, filed with the Form S-1) |
| |
| |
10 |
.1.40* |
|
Lease Agreement, dated February 7, 2005, between SUA
Insurance Company, the wholly owned operating subsidiary of the
Registrant, and 222 South Riverside Property LLC |
| |
| |
10 |
.1.41* |
|
Amendment No. 1 to Partner Agent Program Agreement, dated
January 17, 2005, between the Registrant and American Team
Managers |
| |
| |
14 |
.1* |
|
Code of Ethics of Specialty Underwriters’ Alliance, Inc. |
| |
| |
21 |
.1* |
|
Subsidiaries of the Registrant |
| |
| |
31 |
.1* |
|
Certification of Courtney C. Smith, Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| |
31 |
.2* |
|
Certification of Peter E. Jokiel, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| |
32 |
.1* |
|
Certification of Courtney C. Smith , Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
| |
32 |
.2* |
|
Certification of Peter E. Jokiel, Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
29
INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
SCHEDULES
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Page No. | |
| |
|
| |
|
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|
F-2 |
|
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|
|
F-4 |
|
|
|
|
|
F-5 |
|
|
|
|
|
F-6 |
|
|
|
|
|
F-7 |
|
|
|
|
|
F-8 |
|
|
Financial Statement Schedules
|
|
|
|
|
|
|
|
|
F-21 |
|
|
|
|
|
F-22 |
|
|
|
|
|
F-25 |
|
|
|
|
|
F-26 |
|
|
|
|
|
F-27 |
|
|
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|
F-28 |
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F-29 |
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|
F-30 |
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|
F-31 |
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|
F-32 |
|
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Specialty
Underwriters’ Alliance, Inc.:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Specialty Underwriters’ Alliance,
Inc. and its subsidiary at December 31, 2004 and
December 31, 2003, and the results of their operations and
their cash flows for the year ended December 31, 2004 and
the period from April 3, 2003 (date of inception) to
December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedules listed in the
accompanying index present fairly, in all material respects, the
information set forth therein when read in conjunction with the
related consolidated financial statements. These financial
statements and financial statement schedules are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedules based on our
audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers
LLP
Chicago, Illinois
March 28, 2005
F-2
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Specialty
Underwriters’ Alliance, Inc.:
In our opinion, the financial statements listed in the
accompanying index of Potomac Insurance Company of Illinois
present fairly, in all material respects, the results of its
operations and its cash flows for the period from
January 1, 2004 to November 23, 2004 and for the two
years in the period ended December 31, 2003 in conformity
with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial
statement schedules listed in the accompanying index present
fairly, in all material respects, the information set forth
therein when read in conjunction with the related financial
statements. These financial statements and financial statement
schedules are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on
our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers
LLP
Chicago, Illinois
March 28, 2005
F-3
Balance Sheets
| |
|
|
|
|
|
|
|
|
|
| |
|
Specialty Underwriters’ | |
| |
|
Alliance, Inc. | |
| |
|
(Successor) | |
| |
|
| |
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
ASSETS |
|
Fixed maturity investments, at fair value (cost:$50,455)
|
|
$ |
50,465 |
|
|
$ |
— |
|
|
Short-term investments, at amortized cost (which approximates
fair value)
|
|
|
47,370 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
Total investments
|
|
|
97,835 |
|
|
|
— |
|
|
Cash and cash equivalents
|
|
|
8,986 |
|
|
|
200 |
|
|
Reinsurance recoverable on paid and unpaid loss and loss
adjustment expenses
|
|
|
95,959 |
|
|
|
— |
|
|
Investment income accrued
|
|
|
677 |
|
|
|
— |
|
|
Equipment and capitalized software at cost (less accumulated
depreciation of $0)
|
|
|
2,389 |
|
|
|
— |
|
|
Prepaid expenses
|
|
|
632 |
|
|
|
10 |
|
|
Deferred charges
|
|
|
— |
|
|
|
4,730 |
|
|
Intangible assets
|
|
|
10,745 |
|
|
|
— |
|
|
Other assets
|
|
|
8 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Total assets
|
|
$ |
217,231 |
|
|
$ |
4,940 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES |
|
Loss and loss adjustment expense reserves
|
|
$ |
95,959 |
|
|
$ |
— |
|
|
Unearned insurance premiums
|
|
|
3 |
|
|
|
— |
|
|
Short-term debt
|
|
|
— |
|
|
|
700 |
|
|
Payable for securities purchased
|
|
|
1,000 |
|
|
|
— |
|
|
Accounts payable and other liabilities
|
|
|
1,339 |
|
|
|
23 |
|
|
Stock warrants
|
|
|
— |
|
|
|
4,795 |
|
| |
|
|
|
|
|
|
| |
Total liabilities
|
|
|
98,301 |
|
|
|
5,518 |
|
| |
|
|
|
|
|
|
|
Commitments (Note 9)
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
|
Common stock Class A at $.01 par value per
share — authorized 75,000,000 shares; issued and
outstanding 14,680,688 shares
|
|
|
147 |
|
|
|
— |
|
|
Common stock Class B at $.01 par value per
share — authorized 2,000,000 shares; issued and
outstanding 26,316 shares
|
|
|
— |
|
|
|
— |
|
|
Paid-in capital — Class A
|
|
|
127,256 |
|
|
|
— |
|
|
Paid-in capital — Class B
|
|
|
250 |
|
|
|
— |
|
|
Accumulated deficit
|
|
|
(8,733 |
) |
|
|
(578 |
) |
|
Accumulated other comprehensive income, net of tax
|
|
|
10 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
Total stockholders’ equity
|
|
|
118,930 |
|
|
|
(578 |
) |
| |
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$ |
217,231 |
|
|
$ |
4,940 |
|
| |
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-4
Statements of Income and Comprehensive Income
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Specialty Underwriters’ | |
|
|
Potomac Insurance Company | |
| |
|
Alliance, Inc. (Successor) | |
|
|
of Illinois (Predecessor) | |
| |
|
| |
|
|
| |
| |
|
Twelve Months | |
|
|
|
|
|
|
Twelve Months | |
| |
|
Ended | |
|
From April 3, | |
|
|
From January 1, | |
|
Ended | |
| |
|
December 31, | |
|
to December 31, | |
|
|
to November 23, | |
|
December 31, | |
| |
|
| |
|
| |
|
|
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands except per share data) | |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Earned insurance premiums
|
|
$ |
— |
|
|
$ |
— |
|
|
|
$ |
— |
|
|
$ |
9,961 |
|
|
$ |
13,518 |
|
| |
Net investment income
|
|
|
278 |
|
|
|
— |
|
|
|
|
1,329 |
|
|
|
2,128 |
|
|
|
1,580 |
|
| |
Net realized gains (losses)
|
|
|
2 |
|
|
|
— |
|
|
|
|
390 |
|
|
|
(466 |
) |
|
|
426 |
|
| |
Other revenue
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
318 |
|
|
|
391 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total revenues
|
|
|
280 |
|
|
|
0 |
|
|
|
|
1,719 |
|
|
|
11,941 |
|
|
|
15,915 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Loss and loss adjustment expenses
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
6,821 |
|
|
|
10,068 |
|
| |
Insurance acquisition expenses
|
|
|
— |
|
|
|
— |
|
|
|
|
674 |
|
|
|
1,843 |
|
|
|
2,990 |
|
| |
Service company fees
|
|
|
4,650 |
|
|
|
205 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Financing expenses
|
|
|
268 |
|
|
|
157 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
General and administrative expenses
|
|
|
3,517 |
|
|
|
216 |
|
|
|
|
45 |
|
|
|
939 |
|
|
|
1,537 |
|
| |
Accretion of loss and loss adjustment expense reserves to fair
value
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
243 |
|
|
|
399 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total expenses
|
|
|
8,435 |
|
|
|
578 |
|
|
|
|
719 |
|
|
|
9,846 |
|
|
|
14,994 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss)
|
|
|
(8,155 |
) |
|
|
(578 |
) |
|
|
|
1,000 |
|
|
|
2,095 |
|
|
|
921 |
|
| |
Federal income tax expense
|
|
|
— |
|
|
|
— |
|
|
|
|
(350 |
) |
|
|
(736 |
) |
|
|
(326 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before change in accounting principle
|
|
|
(8,155 |
) |
|
|
(578 |
) |
|
|
|
650 |
|
|
|
1,359 |
|
|
|
595 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cumulative effect of change in accounting principle, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
3,126 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(8,155 |
) |
|
|
(578 |
) |
|
|
|
650 |
|
|
|
1,359 |
|
|
|
3,721 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net change in unrealized investment gains, net of tax
|
|
|
10 |
|
|
|
— |
|
|
|
|
(391 |
) |
|
|
(25 |
) |
|
|
654 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive net income (loss)
|
|
$ |
(8,145 |
) |
|
$ |
(578 |
) |
|
|
$ |
259 |
|
|
$ |
1,334 |
|
|
$ |
4,375 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share available to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
(4.59 |
) |
|
$ |
(57,800.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
$ |
(4.59 |
) |
|
$ |
(57,800.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-5
Statements of Stockholders’ Equity
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Other | |
|
|
| |
|
Common | |
|
Paid-in | |
|
Common |
|
Paid-in | |
|
Retained | |
|
Comprehensive | |
|
Total | |
| Specialty Underwriters’ Alliance, Inc. |
|
Stock | |
|
Capital | |
|
Stock |
|
Capital | |
|
Earnings | |
|
Income (Loss), | |
|
Stockholders’ | |
| (Successor) |
|
Class A | |
|
Class A | |
|
Class B |
|
Class B | |
|
(Deficit) | |
|
Net of Tax | |
|
Equity | |
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Balances at April 3, 2003
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(578 |
) |
|
|
— |
|
|
|
(578 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2003
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(578 |
) |
|
$ |
— |
|
|
$ |
(578 |
) |
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(8,155 |
) |
|
|
— |
|
|
|
(8,155 |
) |
|
Net change in unrealized investment gains, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10 |
|
|
|
10 |
|
|
Stock issuance
|
|
|
147 |
|
|
|
127,256 |
|
|
|
— |
|
|
|
250 |
|
|
|
— |
|
|
|
— |
|
|
|
127,653 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004
|
|
$ |
147 |
|
|
$ |
127,256 |
|
|
$ |
— |
|
|
$ |
250 |
|
|
$ |
(8,733 |
) |
|
$ |
10 |
|
|
$ |
118,930 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-6
Statements of Cash flows
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Specialty Underwriters’ | |
|
|
Potomac Insurance Company | |
| |
|
Alliance, Inc. (Successor) | |
|
|
of Illinois (Predecessor) | |
| |
|
| |
|
|
| |
| |
|
Twelve Months | |
|
|
|
|
|
|
Twelve Months | |
| |
|
Ended | |
|
From April 3, | |
|
|
From January 1, | |
|
Ended | |
| |
|
December 31, | |
|
to December 31, | |
|
|
to November 23, | |
|
December 31, | |
| |
|
| |
|
| |
|
|
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Cash flows from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(8,155 |
) |
|
$ |
(578 |
) |
|
|
$ |
650 |
|
|
$ |
1,359 |
|
|
$ |
3,721 |
|
|
Charges (credits) to reconcile net income to cash flows
from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal income tax expense
|
|
|
— |
|
|
|
— |
|
|
|
|
350 |
|
|
|
736 |
|
|
|
326 |
|
| |
Net realized losses (gains)
|
|
|
(2 |
) |
|
|
— |
|
|
|
|
(390 |
) |
|
|
466 |
|
|
|
(426 |
) |
| |
Cumulative effect of change in accounting principle
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
(3,126 |
) |
| |
Accrued interest costs exchanged for common stock
|
|
|
234 |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Net change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Deferred charges
|
|
|
4,730 |
|
|
|
(4,730 |
) |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Stock warrants
|
|
|
(4,795 |
) |
|
|
4,795 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Reinsurance recoverable on unpaid loss and loss adjustment
expense reserves
|
|
|
(95,959 |
) |
|
|
— |
|
|
|
|
42,008 |
|
|
|
35,591 |
|
|
|
79,010 |
|
| |
Loss and loss adjustment expense reserves
|
|
|
95,959 |
|
|
|
— |
|
|
|
|
(57,017 |
) |
|
|
(39,385 |
) |
|
|
(81,995 |
) |
| |
Insurance premiums receivable
|
|
|
— |
|
|
|
— |
|
|
|
|
2,119 |
|
|
|
686 |
|
|
|
1,746 |
|
| |
Unearned insurance premiums
|
|
|
3 |
|
|
|
— |
|
|
|
|
(4,823 |
) |
|
|
(1,159 |
) |
|
|
(6,444 |
) |
| |
Deferred acquisition costs
|
|
|
— |
|
|
|
— |
|
|
|
|
674 |
|
|
|
117 |
|
|
|
394 |
|
| |
Other, net
|
|
|
21 |
|
|
|
13 |
|
|
|
|
(683 |
) |
|
|
(1,966 |
) |
|
|
5,092 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
191 |
|
|
|
78 |
|
|
|
|
(17,762 |
) |
|
|
(4,914 |
) |
|
|
(5,423 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used for operations
|
|
|
(7,964 |
) |
|
|
(500 |
) |
|
|
|
(17,112 |
) |
|
|
(3,555 |
) |
|
|
(1,702 |
) |
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net (increase) decrease in short-term investments
|
|
|
(47,370 |
) |
|
|
— |
|
|
|
|
12,020 |
|
|
|
(10,022 |
) |
|
|
42,775 |
|
| |
Sales of fixed maturity investments
|
|
|
— |
|
|
|
— |
|
|
|
|
34,272 |
|
|
|
314,811 |
|
|
|
44,777 |
|
| |
Redemptions, calls and maturities of fixed maturity investments
|
|
|
— |
|
|
|
— |
|
|
|
|
13,697 |
|
|
|
267 |
|
|
|
— |
|
| |
Purchases of fixed maturity investments
|
|
|
(39,230 |
) |
|
|
— |
|
|
|
|
(33,555 |
) |
|
|
(324,867 |
) |
|
|
(50,415 |
) |
| |
Purchase of equipment and capitalized software
|
|
|
(2,389 |
) |
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Net cash paid for acquisition
|
|
|
(20,978 |
) |
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows (used for) provided by investing activities
|
|
|
(109,967 |
) |
|
|
— |
|
|
|
|
26,434 |
|
|
|
(19,811 |
) |
|
|
37,137 |
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash contributions received from Parent
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
505 |
|
| |
Cash distributions paid to Parent
|
|
|
— |
|
|
|
— |
|
|
|
|
(18,610 |
) |
|
|
— |
|
|
|
(3,000 |
) |
| |
Issuance of common stock
|
|
|
123,517 |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Short-term borrowings
|
|
|
3,200 |
|
|
|
700 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows (used for) provided by financing activities
|
|
|
126,717 |
|
|
|
700 |
|
|
|
|
(18,610 |
) |
|
|
— |
|
|
|
(2,495 |
) |
|
Net (decrease) or increase from cash and cash equivalents
during the period
|
|
|
8,786 |
|
|
|
200 |
|
|
|
|
(9,288 |
) |
|
|
(23,366 |
) |
|
|
32,940 |
|
|
Cash and cash equivalents at beginning of the period
|
|
|
200 |
|
|
|
— |
|
|
|
|
10,307 |
|
|
|
33,673 |
|
|
|
733 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period
|
|
$ |
8,986 |
|
|
$ |
200 |
|
|
|
$ |
1,019 |
|
|
$ |
10,307 |
|
|
$ |
33,673 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On November 23, 2004 the Company repaid short term debt of
$3.9 million by the issuance of common stock.
The accompanying notes are an integral part of these financial
statements.
F-7
NOTES TO FINANCIAL STATEMENTS – SPECIALTY
UNDERWRITERS’ ALLIANCE, INC.
(dollars in thousands)
NOTE 1 — NATURE OF OPERATIONS
UAI Holdings, Inc., a Delaware holding company, was organized on
April 3, 2003. There was no financial activity between the
organizational date and the initial funding date of
December 12, 2003. On November 5, 2003, UAI Holdings,
Inc. changed its name to Specialty Underwriters’ Alliance,
Inc. (the “Company”). The Company was organized to
provide specialty program commercial property and casualty
insurance through wholly owned insurance subsidiaries.
On November 23, 2004, the Company successfully completed an
initial public offering (“IPO”) which generated net
proceeds of $119,789. On December 22, 2004 the Company
received proceeds of $3,728 from the underwriter’s exercise
of the over allotment option.
Prior to completing the IPO, the Company’s sole source of
cash was $3,900 in term loans with senior and subordinated
lenders. Concurrent with the IPO, all outstanding loans,
together with accrued interest of $236 were repaid, through an
exchange for common stock.
On March 22, 2004, the Company entered into a stock
purchase agreement to acquire all of the outstanding shares of
Potomac Insurance Company of Illinois (“Potomac”) from
OneBeacon Insurance Company (“OneBeacon”). Concurrent
with the initial public offering the Company purchased Potomac
for $21,997 which was equivalent to Potomac’s statutory
basis capital and surplus as of the closing date plus $10,745.
On the same date, the Illinois Department of Insurance approved
an amendment to Potomac’s charter to change the name to SUA
Insurance Company.
As of December 31, 2004 the Company had not written any
insurance policies. As a result its operations consist only of
investment activities, start-up costs and operating expenses.
Certain reclassifications have been made to prior period
financial statement line items to enhance the comparability of
the results presented.
The sole reason for the purchase of Potomac was to obtain the
insurance licenses of Potomac. The purchase price for Potomac
was $21,997. Potomac’s results of operations are included
in the consolidated income statement of the Company from
November 23, 2004.
The purchase price has been allocated based on an estimate of
the fair value of assets and liabilities assumed as of
November 23, 2004, as follows:
| |
|
|
|
|
|
Cash
|
|
$ |
1,019 |
|
|
Investments
|
|
|
10,233 |
|
|
Cost of insurance licenses
|
|
|
10,745 |
|
|
Reinsurance recoverable on paid and unpaid losses
|
|
|
97,270 |
|
|
Loss reserves
|
|
|
(97,270 |
) |
| |
|
|
|
|
Purchase price
|
|
$ |
21,997 |
|
| |
|
|
|
Investments are valued at quoted market price at the date of
acquisition. Insurance licenses are valued at their purchase
price of $250 for each of the 42 licenses plus transaction cost
of $245.
Potomac was a participant in a OneBeacon inter-company pooling
arrangement under which Potomac ceded all of its insurance
business into the Pool and assumed 0.5% of the Pool’s
insurance business. Potomac ceased its participation in the Pool
effective January 1, 2004 and entered into reinsurance
agreements whereby it ceded all of its business to OneBeacon. As
a result, Potomac will not share in any favorable or unfavorable
F-8
NOTES TO FINANCIAL STATEMENTS – SPECIALTY
UNDERWRITERS’ ALLIANCE,
INC. — (Continued)
development of prior losses recorded by it or the Pool after
January 1, 2004, unless OneBeacon fails to perform on its
reinsurance obligations.
Prior to the completion of the acquisition, OneBeacon liquidated
all of Potomac’s assets other than cash and investments
backing statutory capital and surplus, and settled or assumed
Potomac’s remaining non-insurance liabilities.
The Company did not issue any policies or enter into any
reinsurance agreements after the acquisition date. As a result
all premium and loss values shown represent the direct premium
and loss reserves of Potomac for the period November 23,
2004 to December 31, 2004, which are fully reinsured by
OneBeacon.
| |
|
|
|
|
|
|
| December 31 |
|
2004 | |
| |
|
| |
|
Premiums earned:
|
|
|
|
|
| |
Direct
|
|
$ |
9 |
|
| |
Assumed
|
|
|
— |
|
| |
Ceded
|
|
|
(9 |
) |
| |
|
|
|
| |
|
Net
|
|
$ |
— |
|
| |
|
|
|
|
Less reserves
|
|
|
|
|
| |
Direct
|
|
$ |
95,959 |
|
| |
Assumed
|
|
|
— |
|
| |
Ceded
|
|
|
(95,959 |
) |
| |
|
|
|
| |
|
Net
|
|
$ |
— |
|
| |
|
|
|
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America (“GAAP”).
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
On January 1, 2002, Potomac adopted Statement of Financial
Accounting Standards (“SFAS”) No. 141 entitled
“Business Combinations” which requires the recognition
of all existing deferred credits arising from business
combinations prior to July 1, 2001 through the income
statement as a change in accounting principle on the first day
of the fiscal year beginning after December 15, 2001. In
accordance with SFAS No. 141, Potomac recognized its
entire December 31, 2001 unamortized deferred credit
balance of $3,126 on January 1, 2002 as a cumulative effect
of a change in accounting principle.
All fixed maturity investment securities are classified as
available for sale. As such, they are reported at estimated fair
value; unrealized appreciation or depreciation of
available-for-sale investments carried at fair value are
excluded from net income and credited or charged, net of
applicable deferred income taxes, directly to accumulated other
comprehensive income, a separate component of stockholders’
equity. The change in unrealized appreciation or depreciation
during the year will be reported as a component of other
comprehensive income (loss). Estimated fair value is based on
quoted market prices. Where quoted market prices are
F-9
NOTES TO FINANCIAL STATEMENTS – SPECIALTY
UNDERWRITERS’ ALLIANCE,
INC. — (Continued)
unavailable, we expect to base the estimate on recent trading.
Premium and discounts on fixed maturity investments are accreted
to income over the anticipated life of the investment.
Cash and cash equivalents include cash on hand, money market
funds and investments with remaining maturities of three months
or less, as determined on the date of purchase. Short-term
investments consist of investments with original maturities of
more than three months but less than one year, as determined on
the date of purchase.
The Company continually monitors the difference between the cost
basis and the estimated fair value of investments. The
accounting policy for impairment recognition for fixed
maturities requires other-than-temporary impairment charges to
be recorded when it is determined that it is probable the
Company will be unable to collect all amounts due according to
the contractual terms of the investment. Impairment charges on
investments are recorded based on the fair value of the
investments at the balance sheet date, and are included in net
realized gains and losses. Factors considered in evaluating
whether a decline in value is other than temporary include: the
length of time and the extent to which the fair value has been
less than cost; the financial conditions and near-term prospects
of the issuer; and intent and ability to retain the investment
for a period of time sufficient to allow for any anticipated
recovery.
Investment income is recorded when earned. Realized investment
gains and losses are recognized using specific identification of
the security sold.
|
|
|
Equipment and Capitalized Software |
Equipment consists of office furniture and equipment and will be
depreciated over three to five years. Capitalized software cost
are related to computer software that has been developed for
internal use. These costs generally consist of software and
licensing costs. The amortization period for capitalized costs
is three to five years. None of these assets were placed in
service or were ready for their intended use at
December 31, 2004, and as a result there was no
depreciation or amortization recorded in 2004 or 2003.
Deferred charges consist of deferred stock issuance costs,
primarily legal and accounting fees, and deferred financing
costs, associated with stock warrants granted to lenders.
Deferred financing costs were amortized over the original term
of the debt using the interest method. A liability for the fair
value of the warrants was accrued at the grant date, offset by a
related deferred charge for debt issue costs. Stock warrants
were terminated prior to the completion of the IPO on
November 23, 2004 and all associated charges were reversed.
All other deferred charges were settled and recorded as a
reduction of paid in capital as part of the stock issuance costs
for the IPO.
The cost of insurance licenses is an indefinite life intangible
asset because they will remain in effect indefinitely as long as
the Company complies with relevant state insurance regulations.
This intangible asset will not be amortized, but will be
evaluated for impairment at least annually or upon the
occurrence of certain triggering events.
All outstanding short-term debt as of December 31, 2003,
together with additional borrowings during 2004 and accrued
interest, were exchanged for common stock at the completion of
the IPO. As of December 31, 2004, the Company had no
short-term debt.
F-10
NOTES TO FINANCIAL STATEMENTS – SPECIALTY
UNDERWRITERS’ ALLIANCE,
INC. — (Continued)
Stock Warrants
In connection with the short-term senior and subordinated loan
agreements, the Company issued warrants to the lenders,
respectively, to purchase for $.01 per share, the number of
shares of common stock of the Company that could be purchased in
the planned IPO for $4,795.
A liability for the fair value of the warrants was accrued at
the grant date, offset by a related deferred charge for debt
issue costs. The Company valued the warrants at their estimated
intrinsic value as if the planned IPO were successful because of
the inherent subjectivity in estimating the fair value of the
warrants at the date of grant. In 2004, prior to the completion
of the IPO in the fourth quarter, the warrants were terminated
and the stock warrants and associated charges were reversed in
the financial statements.
Earned and Unearned Insurance Premiums
Premiums are recognized as revenue over the coverage period of
policies written on a daily pro rata basis. Unearned insurance
premiums represent the portion of premiums written relating to
the remaining term of each policy.
Reinsurance premiums, commissions expense reimbursements and
reserves related to reinsured business are accounted for on a
basis consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts.
Premiums ceded to other companies are reported as a reduction of
premiums written. Expense allowances received in connection with
reinsurance ceded will be accounted for as a reduction of the
related policy acquisition costs and are deferred and amortized
accordingly.
Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the
reinsured policies. The collectibility of reinsurance
recoverables is subject to the solvency of the reinsurers.
Specialty Underwriters’ Alliance, Inc. acquired Potomac
Insurance Company of Illinois on November 23, 2004 and did
not issue any policies after the acquisition date. As a result
all reserve values shown represent the direct loss and LAE
reserves of Potomac at December 31, 2004 which are fully
reinsured by OneBeacon Insurance Company.
Unpaid Loss and LAE
Liabilities for loss and loss adjustment expenses
(“LAE”) are comprised of case basis estimates for
claims and claim expenses reported prior to year-end and
estimates of incurred but not reported (“IBNR”) losses
and loss expenses, net of estimated salvage and subrogation
recoverable. These estimates are recorded gross of reinsurance
and are continually reviewed and updated with any resulting
adjustments reflected in current operating results. As of
December 31, 2004 all these liabilities consist of the
remaining direct obligations of our predecessor, Potomac
Insurance Company of Illinois, whose claim handling and
reserving are continued to be provided to the Company from
OneBeacon.
In the future, for business generated by the Company, case
reserves are estimated based on the experience and knowledge of
claims staff regarding the nature and potential cost of each
claim and are adjusted as additional information becomes known
or payments are made. IBNR reserves are regarded as the most
uncertain reserve segment and are derived by subtracting paid
loss and LAE and case reserves from estimates of ultimate loss
and LAE. Actuaries estimate ultimate loss and LAE using various
generally accepted actuarial methods applied to known losses and
other relevant information. Like case reserves, IBNR reserves
are adjusted as additional information becomes known or payments
are made.
F-11
NOTES TO FINANCIAL STATEMENTS – SPECIALTY
UNDERWRITERS’ ALLIANCE,
INC. — (Continued)
For IBNR losses, the amount of reserves for each line of
business are estimated on the basis of historical and
statistical information. We consider historical patterns of paid
and reported claims, industry data and the probable number and
nature of losses arising from claims that have occurred but have
not yet been reported for a given year.
Ultimate loss and LAE are generally determined by extrapolation
of claim emergence and settlement patterns observed in the past
that can reasonably be expected to persist into the future. In
forecasting ultimate loss and LAE with respect to any line of
business, past experience with respect to that line of business
is the primary resource, but cannot be relied upon in isolation.
Stock Options
The Company accounts for stock-based compensation plans in
accordance with Accounting Principles Board Opinion
(“APB”) No. 25, “Accounting for Stock Issued
to Employees” (“APB 25”) and related
interpretations. No compensation expense for options is
reflected in net income, as all options granted under the plan
had an exercise price equal to the market value of the
underlying common stock on the date of the grant.
Recent Accounting Pronouncements
In December 2004, the FASB issued FAS No. 123 (revised
2004), “Share-Based Payment”
(“FAS 123R”). FAS 123R replaces
FAS No. 123, “Accounting for Stock-Based
Compensation” (“FAS 123”) and supersedes APB
Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”). As permitted by
FAS 123, the Company currently accounts for share-based
payments to employees using APB 25’s intrinsic value
method and, as such, generally recognizes no compensation
expense for employee stock options. Accordingly, the adoption of
FAS 123R’s fair value method will have a significant
impact on our result of operations, although it will have no
impact on our overall financial position. The impact of adoption
of FAS 123R cannot be predicted at this time because it
will depend on levels of share-based payments granted in the
future. However, had the Company adopted FAS 123R in prior
periods, the impact of that standard would have approximated the
impact of FAS 123 as described in the disclosure of pro
forma net income and earnings per share in Note 7 to the
consolidated financial statements. FAS 123R also requires
the benefits of tax deductions in excess of recognized
compensation expense to be reported as a financing cash flow,
rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash
flows and increase net financing cash flows in periods after
adoption. While the Company cannot estimate what those amounts
will be in the future (because they depend on, among other
things, when employees exercise stock options), the amount of
operating cash flows recognized in prior periods for such excess
tax deductions were zero in 2004, as the Company had a net
operating loss carry forward in 2004 and has never paid any tax.
The cost or amortized cost and estimated fair values of fixed
maturities at December 31, 2004 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Gross | |
|
Gross | |
|
|
| |
|
Cost or | |
|
Unrealized | |
|
Unrealized | |
|
Estimated | |
| 2004 |
|
Amortized Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
| |
|
| |
|
| |
|
| |
|
| |
|
U.S. Treasury Securities
|
|
$ |
6,458 |
|
|
$ |
— |
|
|
$ |
(8 |
) |
|
$ |
6,450 |
|
|
U.S. Government Agencies Securities
|
|
|
9,153 |
|
|
|
23 |
|
|
$ |
(3 |
) |
|
|
9,173 |
|
|
Corporate Securities
|
|
|
29,936 |
|
|
$ |
34 |
|
|
|
(43 |
) |
|
|
29,927 |
|
|
Mortgage Backed Securities
|
|
|
4,908 |
|
|
|
12 |
|
|
$ |
(5 |
) |
|
|
4,915 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities
|
|
$ |
50,455 |
|
|
$ |
69 |
|
|
$ |
(59 |
) |
|
$ |
50,465 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
F-12
NOTES TO FINANCIAL STATEMENTS – SPECIALTY
UNDERWRITERS’ ALLIANCE,
INC. — (Continued)
There were no investments at December 31, 2003.
Temporary losses on investment securities are recorded as
unrealized losses. Temporary losses do not impact net income but
do reduce comprehensive net income and stockholders’
equity. Unrealized losses subsequently identified as
other-than-temporary impairments are recorded as realized
losses. The Company’s methodology for assessing
other-than-temporary impairments 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 will include: the length of time and the extent
to which the fair value has been less than cost; the financial
conditions and near-term prospects of the issuer; and our intent
and ability to retain the investment for a period of time
sufficient to allow for any anticipated recovery. As a result,
subsequent adverse changes in an issuers’ credit quality or
subsequent weakening of market conditions that differ from
expectations could result in additional other-than-temporary
impairments. The Company did not record any other-than-temporary
impairment charges on investment securities for the period ended
December 31, 2004.
The cost or amortized cost and fair values of fixed maturities
by contractual maturity at December 31, 2004 are shown
below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
| |
|
|
|
|
|
|
|
|
|
| |
|
Cost or | |
|
|
| |
|
Amortized | |
|
|
| |
|
Cost | |
|
Fair Value | |
| |
|
| |
|
| |
|
Due in one year or less
|
|
$ |
3,983 |
|
|
$ |
3,990 |
|
|
Due after one year through five years
|
|
|
28,845 |
|
|
|
28,816 |
|
|
Due after one year through ten years
|
|
|
17,467 |
|
|
|
17,499 |
|
|
Due after ten years
|
|
|
160 |
|
|
|
160 |
|
| |
|
|
|
|
|
|
| |
Total
|
|
$ |
50,455 |
|
|
$ |
50,465 |
|
| |
|
|
|
|
|
|
Fixed maturities with carrying values of $9,829 were on deposit
with insurance regulatory authorities as required by law at
December 31, 2004.
The Company had no sales on fixed maturities in the year ended
December 31, 2004.
The components of the Company’s net investment income
follow:
| |
|
|
|
|
|
| |
|
Twelve Months | |
| |
|
Ended | |
| |
|
December 31, | |
| |
|
2004 | |
| |
|
| |
|
Fixed maturities
|
|
$ |
113 |
|
|
Short-term investments
|
|
|
165 |
|
| |
|
|
|
| |
Net investment income
|
|
$ |
278 |
|
| |
|
|
|
Information relating to Potomac’s investments is shown
below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Twelve Months | |
| |
|
|
|
Ended | |
| |
|
Period Ended | |
|
December 31, | |
| |
|
November 23, | |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Proceeds from voluntary sales
|
|
$ |
34,272 |
|
|
$ |
314,811 |
|
|
$ |
44,777 |
|
|
Gross realized gains
|
|
|
687 |
|
|
|
812 |
|
|
|
445 |
|
|
Gross realized losses
|
|
|
(297 |
) |
|
|
(1,278 |
) |
|
|
(19 |
) |
F-13
NOTES TO FINANCIAL STATEMENTS – SPECIALTY
UNDERWRITERS’ ALLIANCE,
INC. — (Continued)
The components of Potomac’s net investment income follow:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Twelve Months | |
| |
|
|
|
Ended | |
| |
|
Period Ended | |
|
December 31, | |
| |
|
November 23, | |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Fixed maturities
|
|
$ |
1,408 |
|
|
$ |
2,146 |
|
|
$ |
869 |
|
|
Short-term investments
|
|
|
15 |
|
|
|
135 |
|
|
|
755 |
|
|
Other investment income
|
|
|
14 |
|
|
|
33 |
|
|
|
109 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Gross investment income
|
|
|
1,437 |
|
|
|
2,314 |
|
|
|
1,733 |
|
| |
Less: investment expenses
|
|
|
108 |
|
|
|
186 |
|
|
|
153 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Net investment income
|
|
$ |
1,329 |
|
|
$ |
2,128 |
|
|
$ |
1,580 |
|
| |
|
|
|
|
|
|
|
|
|
NOTE 5 — FEDERAL INCOME TAXES
As of December 31, 2004 and December 31, 2003 the
Company had net operating loss carryforwards of $5,812 and $3,
respectively. The Company also had, at December 31, 2004
and December 31, 2003, accumulated start-up and
organization expenditures that will be deductible over a
60 month period once operations commence, of $2,920 and
$427, respectively. These loss carryforwards and start up and
organization expenditures generate a potential asset of $2,969
and $146 at December 31, 2004 and 2003, respectively. The
Company has recorded a full valuation allowance against these
tax assets until such time as its operating results and future
outlook produce sufficient taxable income.
The components of Potomac’s federal income taxes and a
reconciliation of the Potomac’s expected and actual federal
income taxes follow:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Twelve Months | |
| |
|
|
|
Ended | |
| |
|
Period Ended | |
|
December 31, | |
| |
|
November 23, | |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Current
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Deferred
|
|
|
350 |
|
|
|
736 |
|
|
|
326 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$ |
350 |
|
|
$ |
736 |
|
|
$ |
326 |
|
| |
|
|
|
|
|
|
|
|
|
|
Expected federal income taxes at 35%
|
|
$ |
350 |
|
|
$ |
733 |
|
|
$ |
322 |
|
|
Other, net
|
|
|
— |
|
|
|
3 |
|
|
|
4 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$ |
350 |
|
|
$ |
736 |
|
|
$ |
326 |
|
| |
|
|
|
|
|
|
|
|
|
NOTE 6 — OTHER COMPREHENSIVE INCOME
The components of the Company’s other comprehensive income
follow:
| |
|
|
|
|
|
|
|
|
|
| |
|
Twelve Months | |
|
|
| |
|
Ended | |
|
From April 3, to |
| |
|
December 31, | |
|
December 31, |
| |
|
2004 | |
|
2003 |
| |
|
| |
|
|
|
Other comprehensive income for the period:
|
|
|
|
|
|
|
|
|
| |
Unrealized gains on investments
|
|
$ |
10 |
|
|
$ |
— |
|
| |
Less related federal income tax expense (benefit)
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
Total
|
|
$ |
10 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
F-14
NOTES TO FINANCIAL STATEMENTS – SPECIALTY
UNDERWRITERS’ ALLIANCE,
INC. — (Continued)
The components of the Company’s accumulated other
comprehensive income at December 31, 2004 and
December 31, 2003 follow:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
|
December 31, |
| |
|
2004 | |
|
2003 |
| |
|
| |
|
|
|
Accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
| |
Net unrealized gains on investments
|
|
$ |
10 |
|
|
$ |
— |
|
| |
Less related federal income taxes
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
Total
|
|
$ |
10 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
The components of Potomac’s other comprehensive income
follow:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Twelve Months | |
| |
|
|
|
Ended | |
| |
|
Period ended | |
|
December 31, | |
| |
|
November 23, | |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Other comprehensive income for the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Unrealized (losses) gains on investments
|
|
$ |
197 |
|
|
$ |
(504 |
) |
|
$ |
1,432 |
|
| |
Adjustment for unrealized gains (losses) realized
|
|
|
(390 |
) |
|
|
466 |
|
|
|
(426 |
) |
| |
Dividend to parent
|
|
|
(409 |
) |
|
|
— |
|
|
|
— |
|
| |
Less related federal income tax expense (benefit)
|
|
|
211 |
|
|
|
13 |
|
|
|
(352 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
(391 |
) |
|
$ |
(25 |
) |
|
$ |
654 |
|
| |
|
|
|
|
|
|
|
|
|
NOTE 7 — STOCK OPTIONS
The Board of Directors approved the Stock Option Plan during
2004. The Stock Option Plan authorizes the grant of options to
certain personnel for up to 850,000 shares of the
Company’s common stock. All options granted have ten-year
terms and vest ratably over the three-year period following the
date of grant. The number of shares available for the granting
of options under the Stock Option Plan as of December 31,
2004, was approximately 225,000.
The following table presents activity under the Stock Option
Plan during 2004.
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
| |
|
| |
| |
|
|
|
Weighted | |
| |
|
|
|
Average | |
| |
|
|
|
Exercise | |
| |
|
Number | |
|
Price Per | |
| Option Plan Activity |
|
of Shares | |
|
Share | |
| |
|
| |
|
| |
|
Balance at January 1
|
|
|
— |
|
|
$ |
— |
|
|
Options granted
|
|
|
624,600 |
|
|
|
9.50 |
|
|
Options exercised
|
|
|
— |
|
|
|
— |
|
|
Options forfeited
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Balance at December 31
|
|
|
624,600 |
|
|
|
9.50 |
|
| |
|
|
|
|
|
|
|
Options exercisable at December 31
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
The weighted-average fair value per share of options granted in
2004 was $4.61.
Pro forma information regarding net income and earnings per
share is required by FAS No. 123, “Accounting for
Stock-Based Compensation” (“FAS 123”) to
reflect net income and earnings per share under the fair value
method. In December 2002, the FASB issued FAS No. 148,
“Accounting for Stock-
F-15
NOTES TO FINANCIAL STATEMENTS – SPECIALTY
UNDERWRITERS’ ALLIANCE,
INC. — (Continued)
Based Compensation — Transition and Disclosure”
(“FAS 148”). FAS 148 amends the disclosure
requirements of FAS 123 to require prominent disclosure in
both annual and interim financial statements regarding the
method of accounting for stock-based compensation and the effect
of the method used on reported results.
| |
|
|
|
|
| |
|
2004 | |
| |
|
| |
| |
|
(In thousands of U.S. dollars, | |
| |
|
except per share amounts) | |
|
Net income (loss) as reported
|
|
$ |
(8,155 |
) |
|
Deduct: Compensation expense
|
|
|
(115 |
) |
| |
|
|
|
|
Pro forma net income (loss)
|
|
$ |
(8,270 |
) |
| |
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
As reported
|
|
$ |
(4.59 |
) |
|
Pro forma
|
|
$ |
(4.65 |
) |
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
As reported
|
|
$ |
(4.59 |
) |
|
Pro forma
|
|
$ |
(4.65 |
) |
The fair value of options issued is estimated on the date of
grant using the binomial lattice option-pricing model, with the
following weighted-average assumptions used for grants in 2004:
dividend yield of 0% expected for five years beginning 2005 and
no more than 2% expected for five years beginning 2011, expected
volatility of 45%, risk free interest rate of 2.24% to 4.43% and
an expected life of 7.93 years.
|
|
| NOTE 8 — |
RELATED PARTY TRANSACTIONS |
As of December 31, 2004, the Company had no related party
transactions.
Potomac had a service contract with White Mountains Advisors LLC
(“Advisors”), a wholly-owned subsidiary of OneBeacon.
Under this agreement, Advisors provided investment research and
advice, including the execution of orders for the purchase and
sale of securities. The amounts charged to Potomac by Advisors
for such services are based on a fixed fee applied to the
month-end market values of the investments being managed. During
the periods ended November 23, 2004, December 31, 2003
and December 31, 2002, Potomac incurred a total of $102,
$185 and $115 of fees and expenses, respectively, with Advisors
for services provided.
As of January 1, 2004, with its withdrawal from the Pool,
Potomac settled its net loss and LAE reserves of $15,278,
unearned insurance premiums of $4,097 and other net
insurance-related liabilities of $77 with the Pool in exchange
for $19,298 in cash.
During 2004 Potomac declared and paid cash dividends and capital
distributions of $18,610 and distributed net assets of $13,276
to OneBeacon. During 2002 Potomac declared and paid $3,000 in
cash dividends to OneBeacon and OneBeacon contributed $505 in
cash to Potomac.
NOTE 9 — COMMITMENTS
The Company has entered into an arrangement with Syndicated
Services Company, Inc. (“SSC”) for administrative and
operational support. The agreement with SSC, dated
November 1, 2003, is for a term of 26 months. For the
2005 calendar year the Company will pay SSC a fee of
approximately $8,733 in equal monthly installments, commencing
January 1, 2005. Either the Company or SSC can terminate
the agreement at any time after October 1, 2005 upon
90 days’ written notice.
F-16
NOTES TO FINANCIAL STATEMENTS – SPECIALTY
UNDERWRITERS’ ALLIANCE,
INC. — (Continued)
On February 3, 2005, the Company entered into a lease
agreement for its office space that commences on May 1,
2005 and terminates on April 30, 2020. The Company’s
future net lease obligations are $1,432 for years 1
through 5, $2,374 for years 6 through 10 and $2,686 for
years 11 through 15.
|
|
| NOTE 10 — |
REINSURANCE — Predecessor |
The effects of Potomac’s reinsurance follow:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Twelve Months | |
| |
|
|
|
Ended | |
| |
|
Period Ended | |
|
December 31, | |
| |
|
November 23, | |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Direct
|
|
$ |
267 |
|
|
$ |
928 |
|
|
$ |
3,542 |
|
| |
Assumed
|
|
|
(4,823 |
) |
|
|
8,886 |
|
|
|
11,781 |
|
| |
Ceded
|
|
|
(267 |
) |
|
|
(928 |
) |
|
|
(3,542 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net
|
|
$ |
(4,823 |
) |
|
$ |
8,886 |
|
|
$ |
11,781 |
|
| |
|
|
|
|
|
|
|
|
|
|
Premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Direct
|
|
$ |
667 |
|
|
$ |
1,597 |
|
|
$ |
8,236 |
|
| |
Assumed
|
|
|
— |
|
|
|
9,961 |
|
|
|
13,518 |
|
| |
Ceded
|
|
|
(667 |
) |
|
|
(1,597 |
) |
|
|
(8,236 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net
|
|
|
— |
|
|
$ |
9,961 |
|
|
$ |
13,518 |
|
| |
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Direct
|
|
$ |
(130,439 |
) |
|
$ |
24,803 |
|
|
$ |
834 |
|
| |
Assumed
|
|
|
— |
|
|
|
6,821 |
|
|
|
10,068 |
|
| |
Ceded
|
|
|
130,439 |
|
|
|
(24,803 |
) |
|
|
(834 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net
|
|
|
— |
|
|
$ |
6,821 |
|
|
$ |
10,068 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| NOTE 11 — |
UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES —
Predecessor |
Loss and LAE reserves are estimates of amounts needed to pay
claims and related expenses in the future for insured events
that have already occurred. Potomac establishes estimates of
amounts recoverable from its reinsurers in a manner consistent
with the claim liability covered by the reinsurance contracts,
net of an allowance for uncollectible amounts. Net loss and LAE
reserves represent gross loss and LAE reserves reduced by
reinsurance recoverable on unpaid losses. Potomac’s loss
and LAE reserves represent management’s best estimate of
reserves based on a composite of the results of the various
actuarial methods, as well as consideration of known facts and
trends. Potomac believes that its reserves are reasonably
stated; however, since the process of estimating loss and LAE
reserves involves a considerable degree of judgment by
management, ultimate loss and LAE for past accident years may
deviate, perhaps materially, from the amounts currently
reflected.
F-17
NOTES TO FINANCIAL STATEMENTS – SPECIALTY
UNDERWRITERS’ ALLIANCE,
INC. — (Continued)
Changes in the Potomac’s liability for unpaid losses and
LAE were as follows:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Twelve Months | |
| |
|
Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
Beginning of period:
|
|
|
|
|
|
|
|
|
| |
Gross
|
|
$ |
193,672 |
|
|
$ |
275,667 |
|
| |
Less reinsurance recoverables
|
|
|
(174,463 |
) |
|
|
(253,509 |
) |
| |
|
|
|
|
|
|
| |
|
Net
|
|
|
19,209 |
|
|
|
22,158 |
|
| |
|
|
|
|
|
|
|
Incurred losses and LAE relating to:
|
|
|
|
|
|
|
|
|
| |
Current year
|
|
|
6,086 |
|
|
|
9,792 |
|
| |
Prior years
|
|
|
735 |
|
|
|
276 |
|
| |
|
|
|
|
|
|
| |
|
Total incurred losses and LAE
|
|
|
6,821 |
|
|
|
10,068 |
|
| |
|
|
|
|
|
|
|
Accretion of loss and LAE reserves to fair value
|
|
|
243 |
|
|
|
399 |
|
|
Transfer of loss and LAE reserves to OneBeacon
|
|
|
- |
|
|
|
— |
|
|
Paid losses and LAE related to:
|
|
|
|
|
|
|
|
|
| |
Current year
|
|
|
(3,145 |
) |
|
|
(4,394 |
) |
| |
Prior years
|
|
|
(7,850 |
) |
|
|
(9,022 |
) |
| |
|
|
|
|
|
|
| |
|
Total paid losses and LAE
|
|
|
(10,995 |
) |
|
|
(13,416 |
) |
| |
|
|
|
|
|
|
|
End of period:
|
|
|
|
|
|
|
|
|
| |
Net
|
|
|
15,278 |
|
|
|
19,209 |
|
| |
Plus reinsurance recoverables
|
|
|
139,009 |
|
|
|
174,463 |
|
| |
|
|
|
|
|
|
| |
|
Gross
|
|
$ |
154,287 |
|
|
$ |
193,672 |
|
| |
|
|
|
|
|
|
The net unfavorable development of $735 recognized in 2003
related primarily to construction defect claims on
OneBeacon’s run-off operations. The 2003 net
unfavorable development also resulted from a significant 1995
property claim from a pool in which OneBeacon had participated
(the Industrial Risk Insurers pool) which was settled through an
arbitration decision during 2003.
The net unfavorable development of $276 recognized in 2002
related primarily to increases in reserves for workers
compensation coverages. This reserve increase related primarily
to a continuing unfavorable trend of increases in workers
compensation medical claims and indemnity costs.
In connection with purchase accounting for Potomac, OneBeacon
was required to adjust to fair value of Potomac’s loss and
LAE reserves and the related reinsurance recoverables by $3,234
and $1,734, respectively, thereby reducing such balances by
those amounts on Potomac’s June 1, 2001 balance sheet.
This reduction to net loss and LAE reserves of $1,500 is being
accreted through an income statement charge over the period that
the claims are expected to be settled. As a result, Potomac
recognized $243 and $399 of accretion to loss and LAE reserves
during 2003 and 2002, respectively.
As of January 1, 2004, with its withdrawal from the Pool,
Potomac transferred net loss and LAE reserves of $15,278 to
OneBeacon.
NOTE 12 — STATUTORY INFORMATION
Statutory accounting is a basis of accounting developed to
assist insurance regulators in monitoring and regulating the
solvency of insurance companies. It is primarily concerned with
measuring an insurer’s surplus
F-18
NOTES TO FINANCIAL STATEMENTS – SPECIALTY
UNDERWRITERS’ ALLIANCE,
INC. — (Continued)
to policyholders. Accordingly, statutory accounting focuses on
valuing assets and liabilities of insurers at financial
reporting dates in accordance with appropriate insurance law and
regulatory provisions applicable to each insurer’s
domiciliary state.
Statutory accounting practices established by the National
Association of Insurance Commissioners (NAIC) and adopted,
in part, by state insurance departments will determine, among
other things, the amount of statutory surplus and statutory net
income, which will affect, in part, the amount of funds
available to pay dividends.
As an Illinois property and casualty insurer the maximum amount
of dividends which can be paid by the SUA Insurance Company to
shareholders without prior approval of the Director of Insurance
is the greater of net income or 10% of statutory surplus,
further limited to earned surplus. At December 31, 2004 SUA
Insurance Company has no earned surplus and therefore no
dividend capacity without the prior approval of the Illinois
Director of Insurance.
In order to enhance the regulation of insurer solvency, the NAIC
adopted in December 1993 a formula and model law to implement
risk-based capital requirements for property and casualty
insurance companies. These risk-based capital requirements are
designed to assess capital adequacy and to raise the level of
protection that statutory surplus provides for policyholder
obligations. The risk-based capital model for property and
casualty insurance companies measures three major areas of risk
facing property and casualty insurers:
|
|
|
| |
• |
underwriting, which encompasses the risk of adverse loss
development and inadequate pricing; |
| |
| |
• |
declines in asset values arising from credit risk; and |
| |
| |
• |
declines in asset values arising from investment risk. |
An insurer’s statutory surplus is compared to its
risk-based capital requirement. If adjusted statutory surplus
falls below company action level risk based capital, the company
would be subject to regulatory action including submission of a
report to insurance regulators outlining the corrective action
the company intends to take.
SUA Insurance Company’s statutory information is as follows:
| |
|
|
|
|
| |
|
Period Ended | |
| |
|
December 31, | |
| |
|
2004 | |
| |
|
| |
|
Ending capital and surplus
|
|
$ |
100,725 |
|
|
Net income/(loss)
|
|
$ |
(3,383 |
) |
|
Company action level risk-based capital
|
|
$ |
830 |
|
|
|
| NOTE 13 — |
QUARTERLY FINANCIAL DATA (UNAUDITED) |
The following table sets forth the unaudited financial data for
the year ended December 31, 2004 and for the period
April 1, 2003 (date of inception) to December 31, 2003.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Fourth | |
| |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
Year | |
|
and Year | |
| Quarterly Financial Data |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Revenues
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
280 |
|
|
$ |
280 |
|
|
$ |
— |
|
|
Expenses
|
|
|
1,808 |
|
|
|
5,635 |
|
|
|
2,109 |
|
|
|
(1,117 |
) |
|
|
8,435 |
|
|
|
578 |
|
|
Net income (loss)
|
|
|
(1,808 |
) |
|
|
(5,635 |
) |
|
|
(2,109 |
) |
|
|
1,397 |
|
|
|
(8,155 |
) |
|
|
(578 |
) |
|
Net income (loss) per share
|
|
$ |
(180,800.00 |
) |
|
$ |
(563,500.00 |
) |
|
$ |
(210,900.00 |
) |
|
$ |
0.20 |
|
|
$ |
(4.59 |
) |
|
$ |
(57,800.00 |
) |
F-19
NOTES TO FINANCIAL STATEMENTS – SPECIALTY
UNDERWRITERS’ ALLIANCE,
INC. — (Continued)
Warrants were issued to original lenders for $4,795 in 2003.
Expense was recognized for the warrants in the amount of $151,
$1,311 and $3,333 in the fourth quarter of 2003, first quarter
of 2004 and second quarter of 2004, respectively. The warrants
were reduced to $3,996 in the third quarter of 2004, resulting
in a gain of $799. The warrants were cancelled in the fourth
quarter of 2004 resulting in a gain of $3,996.
F-20
SCHEDULE I
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
SUMMARY OF INVESTMENTS — OTHER THAN
INVESTMENTS IN RELATED PARTIES
At December 31, 2004
| |
|
|
|
|
|
|
|
|
|
| |
|
Cost | |
|
Fair Value | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
| |
U.S. treasury securities
|
|
$ |
6,458 |
|
|
$ |
6,450 |
|
| |
U.S. government agencies securities
|
|
|
9,153 |
|
|
|
9,173 |
|
| |
Corporate securities
|
|
|
29,936 |
|
|
|
9,927 |
|
| |
Mortgage backed securities
|
|
|
4,908 |
|
|
|
4,915 |
|
| |
|
|
|
|
|
|
| |
Total fixed maturities
|
|
|
50,455 |
|
|
|
50,465 |
|
|
Short-term investments
|
|
|
47,370 |
|
|
|
47,370 |
|
| |
|
|
|
|
|
|
|
Total investments
|
|
$ |
97,825 |
|
|
$ |
97,835 |
|
| |
|
|
|
|
|
|
F-21
SCHEDULE II
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
| |
|
|
|
|
|
|
|
|
|
| |
|
Specialty Underwriters’ | |
| |
|
Alliance, Inc. (Successor) | |
| |
|
| |
| |
|
December 31, | |
|
December 31, | |
| Balance Sheets |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
ASSETS |
|
Investments in subsidiaries
|
|
$ |
113,812 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
| |
Total investments
|
|
|
113,812 |
|
|
|
— |
|
|
Cash and cash equivalents
|
|
|
4,960 |
|
|
|
200 |
|
|
Deferred charges
|
|
|
— |
|
|
|
4,730 |
|
|
Other assets
|
|
|
481 |
|
|
|
10 |
|
| |
|
|
|
|
|
|
|
Total assets
|
|
$ |
119,253 |
|
|
$ |
4,940 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES |
|
Short-term debt
|
|
|
— |
|
|
|
700 |
|
|
Accounts payable and other liabilities
|
|
|
323 |
|
|
|
23 |
|
|
Stock warrants
|
|
|
— |
|
|
|
4,795 |
|
| |
|
|
|
|
|
|
| |
Total liabilities
|
|
|
323 |
|
|
|
5,518 |
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
|
Common stock Class A at $.01 par value per
share — authorized 75,000,000 shares; issued and
outstanding 14,680,688 shares
|
|
|
147 |
|
|
|
— |
|
|
Common stock Class B at $.01 par value per
share — authorized 2,000,000 shares; issued and
outstanding 26,316 shares
|
|
|
— |
|
|
|
— |
|
|
Paid-in capital — Class A
|
|
|
127,256 |
|
|
|
— |
|
|
Paid-in capital — Class B
|
|
|
250 |
|
|
|
— |
|
|
Retained earnings
|
|
|
(8,733 |
) |
|
|
(578 |
) |
|
Accumulated other comprehensive income, net of tax
|
|
|
10 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
Total stockholders’ equity
|
|
|
118,930 |
|
|
|
(578 |
) |
| |
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$ |
119,253 |
|
|
$ |
4,940 |
|
| |
|
|
|
|
|
|
F-22
SCHEDULE II
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Specialty Underwriters’ | |
| |
|
Alliance, Inc. (Successor) | |
| |
|
| |
| |
|
Twelve Months | |
|
From | |
| |
|
Ended | |
|
April 3, to | |
| |
|
December 31, | |
|
December 31, | |
| Statement of Operations |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands except | |
| |
|
per share data) | |
|
Revenues:
|
|
|
|
|
|
|
|
|
| |
|
Total revenues
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
| |
Service company fees
|
|
|
2,511 |
|
|
|
205 |
|
| |
Financing expenses
|
|
|
268 |
|
|
|
157 |
|
| |
General and administrative expenses
|
|
|
2,180 |
|
|
|
216 |
|
| |
Loss of subsidiary
|
|
|
3,196 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
Total expenses
|
|
|
8,155 |
|
|
|
578 |
|
| |
|
|
|
|
|
|
|
Pretax income (loss)
|
|
|
(8,155 |
) |
|
|
(578 |
) |
| |
Federal income tax expense
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(8,155 |
) |
|
|
(578 |
) |
| |
|
|
|
|
|
|
| |
Net change in unrealized investment gains, net of tax
|
|
|
10 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Comprehensive net income (loss)
|
|
$ |
(8,145 |
) |
|
$ |
(578 |
) |
| |
|
|
|
|
|
|
|
Earnings (loss) per share available to common stockholders
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
(4.59 |
) |
|
$ |
(57,800.00 |
) |
| |
Diluted
|
|
$ |
(4.59 |
) |
|
$ |
(57,800.00 |
) |
| |
|
|
|
|
|
|
F-23
SCHEDULE II
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
| |
|
|
|
|
|
|
|
|
|
| |
|
Specialty Underwriters’ | |
| |
|
Alliance, Inc. (Successor) | |
| |
|
| |
| |
|
Twelve Months | |
|
From | |
| |
|
Ended | |
|
April 3, to | |
| |
|
December 31, | |
|
December 31, | |
| Statement of Cash Flows |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Cash flows from operations:
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(8,155 |
) |
|
$ |
(578 |
) |
|
Charges (credits) to reconcile net income to cash flows
from operations:
|
|
|
|
|
|
|
|
|
| |
Loss (income) of subsidiary
|
|
|
3,196 |
|
|
|
— |
|
| |
Interest expense exchanged for common stock
|
|
|
234 |
|
|
|
— |
|
|
Net change in:
|
|
|
|
|
|
|
|
|
| |
Deferred charges
|
|
|
4,730 |
|
|
|
(4,730 |
) |
| |
Stock warrants
|
|
|
(4,795 |
) |
|
|
4,795 |
|
| |
Other, net
|
|
|
311 |
|
|
|
13 |
|
| |
|
|
|
|
|
|
|
Total adjustments
|
|
|
3,676 |
|
|
|
78 |
|
| |
|
|
|
|
|
|
|
Net cash flows used for operations
|
|
|
(4,479 |
) |
|
|
(500 |
) |
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
| |
Purchase of insurance subsidiary
|
|
|
(21,998 |
) |
|
|
— |
|
| |
Capital contributions to subsidiary
|
|
|
(95,000 |
) |
|
|
— |
|
| |
Purchase of capitalized software
|
|
|
(480 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
Net cash flows (used for) provided by investing activities
|
|
|
(117,478 |
) |
|
|
— |
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
| |
Issuance of common stock
|
|
|
123,517 |
|
|
|
— |
|
| |
Short-term borrowings
|
|
|
3,200 |
|
|
|
700 |
|
| |
|
|
|
|
|
|
|
Net cash flows (used for) provided by financing activities
|
|
|
126,717 |
|
|
|
700 |
|
|
Net increase from cash and cash equivalents during the
period
|
|
|
4,760 |
|
|
|
200 |
|
|
Cash and cash equivalents at beginning of the period
|
|
|
200 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period
|
|
$ |
4,960 |
|
|
$ |
200 |
|
| |
|
|
|
|
|
|
F-24
SCHEDULE III
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
SUPPLEMENTARY INSURANCE INFORMATION
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Column A |
|
Column B |
|
Column C | |
|
Column D | |
|
Column E |
|
Column F |
|
Column G | |
|
Column H |
|
Column I |
|
Column J |
|
Column K |
| |
|
|
|
| |
|
| |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Future Policy | |
|
|
|
|
|
|
|
|
|
Benefits, |
|
|
|
|
|
|
| |
|
|
|
Benefits, | |
|
|
|
Other Policy |
|
|
|
|
|
Claims, |
|
Amortization |
|
|
|
|
| |
|
Deferred |
|
Losses, | |
|
|
|
Claims and |
|
|
|
Net | |
|
Losses, and |
|
of Deferred |
|
Other |
|
|
| |
|
Acquisition |
|
Claims, and | |
|
Unearned | |
|
Benefits |
|
Premiums |
|
Investment | |
|
Settlement |
|
Policy |
|
Operating |
|
Premiums |
| |
|
costs |
|
Loss Expenses | |
|
Premiums | |
|
Payable |
|
Earned |
|
Income | |
|
Expenses |
|
Acquisition |
|
Expenses |
|
Written |
| |
|
|
|
| |
|
| |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
(Dollars in thousands) |
|
Twelve months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
$ |
— |
|
|
$ |
95,959 |
|
|
$ |
3 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
278 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Period from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 3 through December 31, 2003
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
F-25
SCHEDULE IV
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
REINSURANCE
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Column A |
|
Column B | |
|
Column C | |
|
Column D |
|
Column E |
|
Column F | |
| |
|
| |
|
| |
|
|
|
|
|
| |
| |
|
|
|
|
|
|
|
|
|
Percentage of | |
| Premiums |
|
|
|
Ceded to Other | |
|
Assumed from |
|
|
|
Amount | |
| Earned |
|
Direct Amount | |
|
Companies | |
|
Other Companies |
|
Net Amount |
|
Assumed to Net | |
| |
|
| |
|
| |
|
|
|
|
|
| |
| |
|
(Dollars in thousands) | |
|
Twelve months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
$ |
9 |
|
|
$ |
9 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
0.0 |
% |
|
Period from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From April 3, to December 31, 2003
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
— |
|
F-26
SCHEDULE V
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
VALUATION AND QUALIFYING ACCOUNTS
NONE
F-27
SCHEDULE VI
SPECIALITY UNDERWRITERS’ ALLIANCE, INC.
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY
INSURANCE OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Column A |
|
Column B |
|
Column C | |
|
Column D |
|
Column E | |
|
Column F |
|
Column G | |
|
Column H |
|
Column I |
|
Column J |
|
Column K |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and Claims |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment |
|
|
|
|
|
|
| |
|
|
|
Reserves for | |
|
|
|
|
|
|
|
|
|
Expenses Incurred |
|
|
|
|
|
|
| |
|
|
|
Unpaid | |
|
Discount, if |
|
|
|
|
|
|
|
Related to |
|
Amortization |
|
|
|
|
| |
|
|
|
Claims and | |
|
any, |
|
|
|
|
|
|
|
|
|
of Deferred |
|
Paid Claims |
|
|
| |
|
Deferred |
|
Claims | |
|
Deducted |
|
|
|
|
|
Net | |
|
(1) |
|
(2) |
|
Policy |
|
and Claims |
|
|
| |
|
Acquisition |
|
Adjustment | |
|
in Column |
|
Unearned | |
|
Earned |
|
Investment | |
|
Current |
|
Prior |
|
Acquisition |
|
Adjustment |
|
Premiums |
| |
|
Costs |
|
Expenses | |
|
C |
|
Premiums | |
|
Premiums |
|
Income | |
|
Year |
|
Year |
|
Costs |
|
Expenses |
|
Written |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
(Dollars in thousands) |
|
Twelve months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
$ |
— |
|
|
$ |
95,959 |
|
|
$ |
— |
|
|
$ |
3 |
|
|
$ |
— |
|
|
$ |
278 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Period from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 3, 2003 through December 31, 2003
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
F-28
SCHEDULE III
POTOMAC INSURANCE COMPANY OF ILLINOIS
SUPPLEMENTARY INSURANCE INFORMATION
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Column A |
|
Column B | |
|
Column C | |
|
Column D | |
|
Column E |
|
Column F | |
|
Column G | |
|
Column H | |
|
Column I | |
|
Column J | |
|
Column K | |
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
Future Policy | |
|
|
|
|
|
|
|
|
|
Benefits, | |
|
|
|
|
|
|
| |
|
|
|
Benefits, | |
|
|
|
Other Policy |
|
|
|
|
|
Claims, | |
|
Amortization | |
|
|
|
|
| |
|
Deferred | |
|
Losses, | |
|
|
|
Claims and |
|
|
|
Net | |
|
Losses, and | |
|
of Deferred | |
|
Other | |
|
|
| |
|
Acquisition | |
|
Claims, and | |
|
Unearned | |
|
Benefits |
|
Premiums | |
|
Investment | |
|
Settlement | |
|
Policy | |
|
Operating | |
|
Premiums | |
| |
|
Costs | |
|
Loss Expenses | |
|
Premiums | |
|
Payable |
|
Earned | |
|
Income | |
|
Expenses | |
|
Acquisition | |
|
Expenses | |
|
Written | |
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Period from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,2004 through November 23, 2004
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,329 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
45 |
|
|
$ |
(4,823 |
) |
|
Twelve months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
December 31, 2003
|
|
$ |
674 |
|
|
$ |
154,287 |
|
|
$ |
4,835 |
|
|
$ |
— |
|
|
$ |
9,961 |
|
|
$ |
2,218 |
|
|
$ |
6,821 |
|
|
$ |
1,843 |
|
|
$ |
939 |
|
|
$ |
8,886 |
|
| |
December 31, 2002
|
|
$ |
791 |
|
|
$ |
193,672 |
|
|
$ |
6,394 |
|
|
$ |
— |
|
|
$ |
13,518 |
|
|
$ |
1,580 |
|
|
$ |
10,068 |
|
|
$ |
2,990 |
|
|
$ |
1,537 |
|
|
$ |
11,781 |
|
F-29
SCHEDULE IV
POTOMAC INSURANCE COMPANY OF ILLINOIS
REINSURANCE
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Column A |
|
Column B | |
|
Column C | |
|
Column D | |
|
Column E | |
|
Column F | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
Ceded to | |
|
|
|
|
|
Percentage | |
| Premiums |
|
Gross | |
|
Other | |
|
Assumed from | |
|
Net | |
|
of Amount | |
| Earned |
|
Amount | |
|
Companies | |
|
Other Companies | |
|
Amount | |
|
Assumed to Net | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Period from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2004 through November 23, 2004
|
|
$ |
667 |
|
|
$ |
(667 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
|
— |
|
|
Twelve months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003
|
|
$ |
1,597 |
|
|
$ |
(1,597 |
) |
|
$ |
9,961 |
|
|
$ |
9,961 |
|
|
|
100 |
% |
|
December 31, 2002
|
|
$ |
8,236 |
|
|
$ |
(8,236 |
) |
|
$ |
13,518 |
|
|
$ |
13,518 |
|
|
|
100 |
% |
F-30
SCHEDULE V
POTOMAC INSURANCE COMPANY OF ILLINOIS
VALUATION AND QUALIFYING ACCOUNTS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Column A |
|
Column B | |
|
Column C |
|
Column D | |
|
Column E | |
| |
|
| |
|
|
|
| |
|
| |
| |
|
|
|
Additions (Subtractions) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
Balance at | |
|
Charged to | |
|
Charged to |
|
|
|
Balance at | |
| |
|
Beginning | |
|
Costs and | |
|
Other |
|
Deductions | |
|
End of | |
| |
|
of Period | |
|
Expenses | |
|
Accounts |
|
Described(1)(2) | |
|
Period | |
| |
|
| |
|
| |
|
|
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for insurance balances receivable
|
|
$ |
340 |
|
|
$ |
(167 |
) |
|
$ |
— |
|
|
$ |
(58 |
) |
|
$ |
115 |
|
|
Allowance for reinsurance recoverable
|
|
|
83 |
|
|
|
— |
|
|
|
— |
|
|
|
(13 |
) |
|
|
70 |
|
|
December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for insurance balances receivable
|
|
$ |
480 |
|
|
$ |
24 |
|
|
$ |
— |
|
|
$ |
(164 |
) |
|
$ |
340 |
|
|
Allowance for reinsurance recoverable
|
|
|
120 |
|
|
|
(34 |
) |
|
|
— |
|
|
|
(3 |
) |
|
|
83 |
|
|
|
| (1) |
As of January 1, 2004 with its withdrawal from the Pool,
Potomac transferred its valuation and qualifying accounts to
OneBeacon. |
| |
| (2) |
Represent write-offs of balances receivables. |
F-31
SCHEDULE VI
POTOMAC INSURANCE COMPANY OF ILLINOIS
SUPPLEMENTAL INFORMATION FOR PROPERTY AND CASUALTY INSURANCE
UNDERWRITERS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Column |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| A |
|
Column B | |
|
Column C | |
|
Column D | |
|
Column E | |
|
Column F | |
|
Column G | |
|
Column H | |
|
Column I | |
|
Column J | |
|
Column K | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and Claims | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment | |
|
|
|
|
|
|
| |
|
|
|
Reserves for | |
|
|
|
|
|
|
|
|
|
Expenses Incurred | |
|
|
|
|
|
|
| |
|
|
|
Unpaid | |
|
|
|
|
|
|
|
|
|
Related to | |
|
Amortization | |
|
|
|
|
| |
|
|
|
Claims and | |
|
Discount, | |
|
|
|
|
|
|
|
| |
|
of Deferred | |
|
Paid Claims | |
|
|
| |
|
Deferred | |
|
Claims | |
|
if any, | |
|
|
|
|
|
Net | |
|
(1) | |
|
(2) | |
|
Policy | |
|
and Claims | |
|
|
| |
|
Acquisition | |
|
Adjustment | |
|
Deducted in | |
|
Unearned | |
|
Earned | |
|
Investment | |
|
Current | |
|
Prior | |
|
Acquisition | |
|
Adjustment | |
|
Premiums | |
| |
|
Costs | |
|
Expenses | |
|
Column C | |
|
Premiums | |
|
Premiums | |
|
Income | |
|
Year | |
|
Year | |
|
Costs | |
|
Expenses | |
|
Written | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| (Dollars in thousands) | |
|
Period from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
January 1, 2004 through November 23, 2004
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,329 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(4,823 |
) |
|
Twelve months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
December 31, 2003
|
|
$ |
674 |
|
|
$ |
154,287 |
|
|
$ |
190 |
(1) |
|
$ |
4,835 |
|
|
$ |
9,961 |
|
|
$ |
2,218 |
|
|
$ |
6,086 |
|
|
$ |
735 |
|
|
$ |
1,843 |
|
|
$ |
10,995 |
|
|
$ |
8,886 |
|
| |
December 31, 2002
|
|
$ |
791 |
|
|
$ |
193,672 |
|
|
$ |
211 |
(1) |
|
$ |
6,394 |
|
|
$ |
13,518 |
|
|
$ |
1,580 |
|
|
$ |
9,792 |
|
|
$ |
276 |
|
|
$ |
2,990 |
|
|
$ |
13,416 |
|
|
$ |
11,781 |
|
|
|
| (1) |
The amounts shown exclude unamortized fair value adjustments to
reserves of $0, $578, and $821, for unpaid claims and claims
adjustment expenses made in purchase accounting as a result of
White Mountains’ purchase of Potomac for the period from
January 1, 2004 through November 1, 2004 and the years
ended December 31, 2003 and December 31, 2002. |
F-32
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: Chief Executive Officer |
Date: March 30, 2005
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated .
| |
|
|
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| |
/s/ Courtney C. Smith
Courtney
C. Smith |
|
Chairman, Chief Executive Officer and Director (Principal
Executive Officer) |
|
March 30, 2005 |
| |
/s/ Peter E. Jokiel
Peter
E. Jokiel |
|
Executive Vice President, Chief Financial Officer and Director
(Principal Financial and Accounting Officer) |
|
March 30, 2005 |
| |
/s/ Robert E. Dean
Robert
E. Dean |
|
Director |
|
March 30, 2005 |
| |
/s/ Raymond C. Groth
Raymond
C. Groth |
|
Director |
|
March 30, 2005 |
| |
/s/ Paul A. Philp
Paul
A. Philp |
|
Director |
|
March 30, 2005 |
| |
/s/ Robert H. Whitehead
Robert
H. Whitehead |
|
Director |
|
March 30, 2005 |
| |
/s/ Russell E. Zimmermann
Russell
E. Zimmermann |
|
Director |
|
March 30, 2005 |