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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 | |