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Article by DailyStocks_admin    (11-26-08 06:49 AM)

Filed with the SEC from Nov 13 to Nov 19:

Specialty Underwriters' Alliance (SUAI)
The Philip Stephenson Revocable Living Trust reported ownership of 791,154 shares (5.5%), after buying 636,632 from Sept. 10 to Nov. 13 at $3.10 to $5.20 each. The trust acquired the shares because it believed they were "undervalued and represented an attractive investment opportunity." The trust intends to communicate with the company's board, management or other shareholders about exploring options for enhancing shareholder value.

BUSINESS OVERVIEW


Overview

Specialty Underwriters’ Alliance, Inc. was incorporated in April 2003, and through its wholly-owned subsidiary, SUA Insurance Company, or SUA, offers specialty commercial property and casualty insurance products through independent general agents, or partner agents, that serve niche groups of insureds. These targeted customer groups require specialized knowledge due to their unique risk characteristics. We believe that this segment of the industry has historically been underserved by most standard property and casualty insurance companies because they lack this specialized knowledge and are not willing to make the necessary investment to gain the knowledge required to achieve underwriting profits.

Additionally, in the specialty property and casualty program business, insurance agents often have underwriting authority, are responsible for handling claims and are paid by up-front commissions on the amount of premiums written. We believe that this system does not serve the carriers, the agents or the insureds well. Poor underwriting results have led to underwriting losses for the carriers, which results in carrier turnover in the specialty program business, thereby creating instability in the niche insurance markets being served. In turn, agents incur additional costs in searching for, and converting to, new carriers and policyholders experience uncertainty regarding the placement of their coverage and quality of service from year to year.

Our business model is designed to better serve the specialty property and casualty marketplace by recognizing the void that exists in these underserved niche markets and the problems that undisciplined underwriting has created. Our business model emphasizes our relationship with a select number of partner agents, who have specialized business knowledge in the types of business classes we underwrite. We rely on these partner agents for industry insights and their understanding of the specific risks in the niche markets we serve. We bring together that knowledge with our disciplined underwriting practices and leading-edge technology and systems capabilities to provide insurance programs and products that are customized to the needs of the specialty markets that we serve.

Our business model is also designed to realign the interests of carriers, agents and insureds. Each of our partner agents are required to enter into agreements with us which provide that in exchange for marketing and pre-qualifying business for us, our partner agents receive an up-front commission designed to cover their costs and an underwriting profit-based commission paid over several years. In addition, each partner agent is required to purchase Class B Shares, which further aligns their interests with us and that of our shareholders. In return, we provide our partner agents with a five-year exclusive arrangement (generally allowing partner agents to offer other companies’ products if we decline to offer coverage to a prospective insured) covering a specific class of business and territory. Further, we have implemented a centralized information system designed to reduce processing and administrative time. Lastly, we are a stable, dedicated source of specialty program commercial property and casualty insurance capacity.

SUA currently has a secure category rating of “B+” (Good) from A.M. Best Company, Inc., or A.M. Best, which is the sixth highest of 15 rating levels.

Our website address is www.suainsurance.com. We make available on this website under “Investor Relations,” free of charge, our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, Forms 3, 4 and 5 filed via Edgar by our directors and executive officers and various other filings, including amendments thereto, with the Securities and Exchange Commission, or SEC, as soon as reasonably practicable after we electronically file or furnish such reports to the SEC. We also make available on our website our Corporate Governance Guidelines and Principles, our Code of Business Conduct and Ethics and the charters of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. This information also is available by written request to Investor Relations at our executive office address listed below. The information on our website is not incorporated by reference into this report.

Our principal executive offices are located at 222 South Riverside Plaza, Suite 1600, Chicago, Illinois 60606 and our telephone number is (888) 782-4672.

Capital Structure and Business Acquisitions

In the fourth quarter of 2004 we completed our initial public offering, or IPO, of 13,122,000 shares of Common Stock, at a price of $9.50 per share. Concurrent with the closing of the IPO, we (a) sold 1,000,000 shares of our Common Stock at a price of $8.835 per share in a private placement and (b) sold 90,549 shares of our Common Stock to certain of our executive officers at a price of $8.835 per share. Additionally, at the closing of our initial public offering, we sold 26,316 shares of our Class B Shares to our initial partner agents for an aggregate purchase price of $250,000. The net proceeds to us from all these transactions after deducting expenses were approximately $123.5 million. In addition to the initial sales of Class B Shares, as of December 31, 2007, our partner agents have purchased, pursuant to their agreements, additional Class B Shares for an aggregate purchase price of $5.9 million and are contractually obligated to purchase an additional $1.9 million worth of Class B Shares in the future.

Simultaneously with the closing of the IPO, we acquired all of the outstanding common stock of Potomac Insurance Company of Illinois, or Potomac, from OneBeacon Insurance Company, or OneBeacon, for $22.0 million. We refer to this transaction as the “Acquisition.” At the time of the Acquisition, Potomac was licensed in 41 states and the District of Columbia. Prior to the closing of the Acquisition, Potomac entered into a transfer and assumption agreement with OneBeacon whereby all of its liabilities, including all direct liabilities under insurance policies predating the Acquisition, were transferred to and assumed by OneBeacon. In the event OneBeacan fails to pay its assumed liabilities, SUA would be liable and could experience losses which could be materially adverse to our business and results of operations. OneBeacon currently has a rating of “A” (Excellent) from A.M. Best, which is the third highest of 15 rating levels. Upon completion of the Acquisition, we changed the name of Potomac to SUA Insurance Company, or SUA.

SUA is currently licensed to conduct insurance business in 43 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 over 90% of the population of the United States. SUA is not licensed in Hawaii, Maine, Minnesota, Montana, New Hampshire, North Carolina, or Wyoming. However, in the future we may apply for licenses in these states.

Industry

The property and casualty insurance industry has historically been cyclical. When excess underwriting capacity exists, increased competition generally results in lower pricing and less favorable policy terms and conditions for insurers. As underwriting capacity contracts, pricing and policy terms and conditions generally become more favorable for insurers. In the past, underwriting capacity has been impacted by several factors, including catastrophes, industry losses, recognition of reserve deficiencies, changes in the law and regulatory requirements, investment returns and the ratings and financial strength of competitors.

Historical Industry Model

Specialty commercial property and casualty insurance underwriting requires in-depth knowledge of a particular business class and often personal knowledge of the participants in a business class. As a result, insurers rely on skilled agents to procure business. An agent generally is an outsourced underwriting department for the insurer that markets to independent agents, processes submissions, selects risks, binds and issues policies on behalf of the insurer, and in some cases, handles claims on the underwritten businesses. Such agents and insurers commonly work with a reinsurer, which participates in the pool of risks selected by such agents. Without an insurer providing licensed policy paper and a reinsurer providing capacity, such agents are unable to service their independent agent clients, which ultimately affects the policyholders.

Historically, insurance carriers have engaged key agents under contracts to produce and underwrite businesses, often processed through each such agent’s proprietary policy issuance and management information systems, with claims adjustment assigned to third parties. Agents and such third parties were generously compensated through these arrangements, but the compensation was not linked to the underlying profitability of the business. We believe that this strategy has led to a lack of alignment of interests between carriers, agents and the insureds. In addition, we believe that this system has resulted in weak underwriting and pricing controls, poor claims management and high costs due to the duplication of activities.

Our Model

We believe that our strategy of developing relationships with partner agents is a fundamental shift in the way insurance companies do business. We enter into contractual relationships with our partner agents in order to encourage them to work with us in building our portfolio of specialty program commercial property and casualty insurance business. A significant portion of the compensation paid to our partner agents is directly tied to the underwriting profitability of their specific programs. In addition, our partner agents purchase an equity interest in our company, in the form of non-voting Class B Shares. We believe that requiring an ownership interest by our partner agents encourages them to direct business to us, regardless of future market cycles. We expect our partner agents to provide prequalified leads through their retail agents. We retain control over underwriting and claims activities. In addition, all transaction processing is done through our proprietary technology system in order to ensure data integrity and efficiency. As of February 1, 2008, we have entered into definitive agreements with the following eight partner agents — AEON Insurance Group, Inc., American Team Managers, Inc., Appalachian Underwriters, Inc., First Light Program Managers, Inc., Flying Eagle Insurance Services, Inc., Insential, Inc., Risk Transfer Holdings, Inc, and Specialty Risk Solutions, LLC.

The key features of our relationship with our partner agents are as follows:

Equity Ownership. Each partner agent must purchase shares of our non-voting Class B Shares. The Class B Shares will become exchangeable, one-for-one with our Common Stock, five years after the effective date of the applicable partner agent agreement, unless such agreement has been terminated. The Class B Shares are subject to substantial restrictions on transferability during this period. If prior to five years after the effective date of the applicable partner agent agreement such partner agent’s contract is terminated, we may repurchase such partner agent’s Class B Shares at the lower of cost or the current market value (as defined in the agreement). If after five years following the effective date of the applicable partner agent agreement such partner agent’s contract is terminated, we may repurchase the partner agent’s Class B Shares at the current market value. After the five-year period, and for so long as the partner agent agreement has not been terminated, such partner agent is required to hold Class B Shares worth at least 50% of its aggregate initial investment commitment in our Class B Shares.

Commission. We pay each partner agent an up-front commission designed to cover its costs. In addition, each partner agent may receive a meaningful share of the underwriting profits for each of its programs, subject to a cap. No further profit sharing calculation will be performed if the Partner Agent Agreement is terminated prior to five years. If, after five years, the partner agent agreement is terminated, for any reason, the profit sharing calculations will be performed annually until all payout periods and earned profit sharing are satisfied.

Long-Term Contractual Commitment. Each partner agent has an exclusive five-year contractual arrangement (generally allowing partner agents to offer other companies’ products only if we decline to offer coverage to a prospective insured). We have no obligation to accept business that does not meet our guidelines. We agree to write only that class of business and lines of business by program in a defined territory with the specific partner agent. Our partner agents may have one or a number of their programs with us. We expect that we will be a significant percentage of our partner agents’ program business. Each partner agent has the right to terminate its relationship with us on 180 days’ notice. We have the right to terminate our relationship with our partner agents if they materially breach our agreements with them, they become insolvent, or they fail to maintain appropriate licenses. In addition, we can terminate our relationship if a partner agent does not meet certain profitability and production guidelines that are established under each agreement or if a third party should acquire them. Upon termination, at our discretion, the partner agent must service the existing policies until such policies expire or are terminated, at which time the partner agent is allowed to place such business with other insurers.

Our Insurance Product Lines

Our insurance operations, through our eight partner agents, are focused on the following programs:


• AEON Insurance Group, Inc.

Towing and Collateral Recovery Program. This program offers commercial automobile, property, inland marine and general liability coverages. Eligible accounts include towing operators, garage operations with towing and recovery, as well as towing operations for auto auctions. The program is currently available in 41 states and the District of Columbia.


• American Team Managers, Inc.

General Contractors Program. Insurance and risk management services for general contractors engaged in residential and/or commercial construction. The program is open to general contractors that are involved in new construction, remodeling and tenant improvements, including new residential home building. The program offers general liability coverage in Arizona and California

Artisan Contractors Program. Insurance and risk management services for certain artisan and specialty trade contractors engaged in residential and/or commercial construction. The program is open to contractors that are involved in new construction, remodeling and tenant improvements, including new residential home building. The program offers general liability coverage in Arizona and California.

Trucking Program. Commercial insurance for truckers of all sizes (specializing in intermodal) including owner/operators offering commercial automobile liability, physical damage and general liability coverages in California.

Workers’ Compensation Program. This program uses technology to fully automate a disciplined underwriting approach to writing small premium workers’ compensation business in California. Our online product is available to small and medium sized businesses.


• Appalachian Underwriters, Inc.

Artisan Contractors Program. Insurance and risk management services for certain artisan and specialty trade contractors engaged in residential and/or commercial construction. The program is open to contractors that are involved in new construction, remodeling and tenant improvements, including new residential home building. The program currently offers general liability and automobile coverage in 16 states.

General Contractors Program. Insurance and risk management services for general contractors engaged in residential and/or commercial construction. The program is open to general contractors that are involved in new construction, remodeling and tenant improvements, including new residential home building. The program currently offers general liability and automobile coverage in 16 states.

Workers’ Compensation Program. This program uses technology to fully automate a disciplined underwriting approach to writing small premium workers compensation business in 17 states. Our online product is available to small and medium sized businesses.


• First Light Program Managers, Inc.

Trucking Program. This program serves selected classes within the trucking industry in Florida. Policies include commercial automobile liability, physical damage and general liability.


• Flying Eagle Insurance Services, Inc.

Artisan Contractors Program. Insurance and risk management services for certain artisan and specialty trade contractors engaged in residential and/or commercial construction. Program is open to contractors that are involved in new construction, remodeling and tenant improvements, including new residential home building. The program currently offers general liability coverage in nine states.

General Contractors Program. Insurance and risk management services for general contractors engaged in residential and/or commercial construction. The program is open to general contractors that are involved in new construction, remodeling and tenant improvements, including new residential home building. The program currently offers general liability coverage in nine states.

Roofing Contractors Program. Insurance and risk management services for small to medium sized roofing contractors engaged in commercial and residential work. The program currently offers general liability coverage in 11 states.


• Insential, Inc.

Roofing Contractors Program. Insurance and risk management services for small to medium sized roofing contractors engaged in commercial and residential work. The program currently offers general liability and automobile coverage in 17 states.


• Risk Transfer Holdings, Inc.

PEO Program. Lighthouse, LLC, a subsidiary of Risk Transfer Holdings, Inc, serves staffing entities that are responsible for insurance procurement, human resources management and payroll and tax remittance. This program provides workers’ compensation solutions to professional employer organizations clients in 22 states.

Temporary Staffing Agencies Program. Lighthouse also serves the temporary staffing industry. This program provides workers’ compensation solutions to temporary staffing entities in 22 states.


• Specialty Risk Solutions, LLC

Not-for-Profit Organizations Program. This program is for qualifying not-for-profit organizations in Florida. Excess coverage is available for workers’ compensation and commercial automobile.

Public Entities Program. This program specializes in providing workers compensation, general liability and commercial automobile insurance (all on an excess basis) to public entity clients, including schools, other educational institutions and municipalities in California and Florida.

Reinsurance

We have entered into reinsurance agreements to cover our casualty lines of business. Coverage of our casualty lines of business includes general liability, auto liability and workers’ compensation. We purchased reinsurance from reinsurers that are rated at least “A−” (Excellent) or better by A.M. Best and our reinsurers will be compensated by sharing specified percentages of premiums. Our reinsurers may pay us ceding commissions.

For our workers’ compensation business, our reinsurers are responsible for losses between $1 million and $10 million due to any single occurrence under a policy and for losses in excess of $10 million up to $35 million for a multiple loss occurrence. For our non-workers’ compensation casualty business, we do not write policies above $1 million and therefore do not need reinsurance protection for single loss occurrences; our reinsurers are responsible between $1 million and $5 million of losses for a multiple loss occurrence.

Underwriting

We produce all of our business through our partner agents, and select our partner agents based on a shared underwriting philosophy. Our underwriting strategy focuses on strict control of underwriting, pricing, coverage, partner agent relationships and customer segmentation. Our primary underwriting goal is to achieve an underwriting profit.

Our underwriting philosophy has five components:

We carefully scrutinize prospective partner agents. We contract only with agents that we believe have strong reputations and significant specialized knowledge of the market they serve. Our partner agents possess extensive knowledge in their specialties. We grant partner agents territorial program exclusivity so that partner agents do not market against each other. Partner agents are required to have the ability to expand their operations, have resources dedicated to selected programs and maintain minimum premium production levels.

We maintain strict control of our underwriting process. Our underwriters work with each partner agent to develop specific underwriting strategies, pricing structures, and acceptable coverage and initial customer requirements. Senior underwriting personnel experienced in specialty classes, pricing, coverage and multiple lines of business along with actuarial, claims and systems personnel form a program team to work with each partner agent. In addition, we develop a specific underwriting strategy for each customer segment. Each customer segment includes a demographic study of the number of prospective customers available, as well as the number of customers each partner agent expects to provide to us. We also create eligibility guidelines, which include size requirements for each account within the customer segment, acceptability for loss history, financial and ownership stability and adherence to loss prevention and safety practices. Ineligible operations are identified and eliminated from the customer segment. With the cooperation of the partner agents, each program team conducts the market research and analysis to develop specific customer segments, line of business coverage guidelines and pricing requirements. Each customer segment or business opportunity has minimum standards and business performance measures. We do not allow our partner agents to set rates on any program. We use in-house actuaries, as well as outside actuarial consultants, to validate the rating and pricing plans.

We have established a partner agent advisory process. Our partner agents have input on new programs and territorial assignments. This interaction with our partner agents enables us to avoid channel conflicts and promote the growth of profitable programs.

We utilize a centralized policy processing system to control data. As part of our infrastructure strategy, we implemented our technology plans for policy administration which allows us to more efficiently quote, issue and manage insurance polices while controlling data from the first entry into the system. We are in the process of customizing the system for each partner agent and customer segment. The system allows our underwriters to provide approval of submissions at the point of entry using predetermined underwriting, pricing and coverage guidelines. Our underwriters oversee the underwriting process by having access to the system as the agents enter information and approve quotes. In selected circumstances, the system receives and approves online quotes with minimal underwriter intervention, based on predetermined underwriting criteria. Data used to underwrite risk and to handle claims is controlled by us rather than controlled by agents, third party administrators or other intermediaries.

We have audit and operational review processes. Our audits focus on rate adequacy, line of business analysis, and authority and compliance guidelines. Our program reviews focus on premium volume and profitability of our individual partner agents and is led by our program teams.

Monitoring Rate Adequacy

We develop estimated rate minimums, which are designed to help achieve profitable results.

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.

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 encourages more insightful investigations, enhanced legal defenses and more efficient claims resolution. Also, we believe that improved communications between claims, underwriting and actuarial teams enhance risk selection, timely revision of underwriting criteria and program stability.

Information Technology

We utilize an Internet-based technology system that allows our program teams and partner agents to control underwriting, policy issuance and claims administration. We believe that this centralized system helps us to reduce high processing costs, eliminate duplication of data and more effectively analyze data.

Historically, various parties to an insurance contract have stored data relating to the same transaction in their proprietary systems. As a result, we believe they have been unable to effectively integrate this information. Our objective is to use a system that provides a communication link with our partner agents and improves data communication throughout our company.

Investment Philosophy

Our investments are concentrated in highly liquid and highly rated instruments, primarily in fixed income securities, with reasonably short durations. Our portfolio of fixed maturities consists solely of investment grade bonds. We have no significant concentrations in a particular industry or issuer. Our strategy considers liability durations and provides for unforeseen cash outflow needs. We use an external investment manager with significant assets under management and experience in insurance company portfolio requirements.

Competition

We compete with a large number of U.S. and non-U.S. insurers, insurance agencies and intermediaries, and diversified financial services companies such as Lincoln General Insurance Company, Wausau Insurance Companies, American International Group, Inc., RLI Corp., Zurich Financial Services, Liberty Mutual Holding Company, Inc, Navigators Insurance Co., Swiss Re. and Berkshire Hathaway, Inc. Finally, for our California workers’ compensation business, we face competition from the State Compensation Insurance Fund.

Our competitive position is based on many factors, including our perceived financial strength, ratings assigned by independent rating agencies, geographic scope of business, client relationships, premiums charged, contract terms and conditions, products and services offered (including the ability to design customized programs), speed of claims payment, reputation, experience and qualifications of employees, and local presence.

Employees

As of February 11, 2008, we had 102 full-time employees and five part time employees. Our future performance depends significantly on the continued service of our key personnel. Our employees are not covered by collective bargaining arrangements and we believe our relationship with our employees is good.

Ratings

Our financial strength is regularly reviewed by independent rating agencies, who assign a rating based upon items such as results of operations, capital resources and minimum policyholders’ surplus requirements. We currently have a secure category rating of “B+” from A.M. Best.

Insurance Regulation

We develop our business through SUA Insurance Company, our wholly owned subsidiary. SUA Insurance Company is licensed to conduct insurance business in 43 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 practices, 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 re-pricing of coverages if permitted by applicable regulations, or the limitation or cessation of the affected business, which may be restricted by state law.

Most states have insurance laws requiring property and casualty rate schedules, policy or coverage forms, and other information be filed with the state’s regulatory authority. In many cases, such rates and/or policy forms must be approved prior to use. Some states have considered enacting or have enacted limitations on the ability of insurers to share data used to compile rates.

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.



CEO BACKGROUND

NOMINEES FOR ELECTION

(1) Member of the Executive Committee

(2) Member of the Audit Committee

(3) Member of the Compensation Committee

(4) Member of the Nominating and Corporate Governance Committee

All directors, if elected, will hold office until the next annual meeting of stockholders or until their successors have been duly elected and qualified.

Robert E. Dean has served as a director of Specialty Underwriters’ Alliance, Inc. since May 2004. Mr. Dean is a private investor. From October 2000 to December 2003, Mr. Dean was a Managing Director of Ernst & Young Corporate Finance LLC, a wholly owned broker-dealer subsidiary of Ernst & Young LLP, serving as member of the Board of Managers from December 2001 to December 2003. From June 1976 to September 2000, Mr. Dean was employed by Gibson, Dunn & Crutcher LLP, where he practiced corporate and securities law and represented numerous public and private companies and investment banks. Mr. Dean was Partner-in-Charge of the Orange County, California, office from 1993 to 1996, was a member of the law firm’s Executive Committee from 1996 to 1999 and co-chaired its financial institutions practice related to banks, thrifts, mortgage and insurance companies.

Raymond C. Groth has served as a director of Specialty Underwriters’ Alliance, Inc. since May 2004. Since March 2001, he has been an Adjunct Professor of Business Administration at The Fuqua School of Business, Duke University. From June 1994 to March 2001, Mr. Groth was Managing Director for First Union Securities, Inc., now called Wachovia Securities. Mr. Groth held several positions in The Investment Banking Department of The First Boston Corporation, now called Credit Suisse, from September 1979 to March 1992. From June 1972 to August 1979, Mr. Groth was an associate with Cravath, Swaine & Moore LLP. He currently serves as a director of The Charlotte Symphony Orchestra.

Peter E. Jokiel has served as Chief Financial Officer, Treasurer and a Director since the company’s inception. He was appointed as an Executive Vice President in June 2004. Mr. Jokiel has over 30 years experience in the insurance industry. From April 1997 to January 2001, Mr. Jokiel was President and Chief Executive Officer of CNA Financial Corporation’s life operations. 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.

Paul A. Philp has served as a director of Specialty Underwriters’ Alliance, Inc. since February 2005. He has over 30 years experience at the executive level in the insurance industry within multiple disciplines, including finance, operations, claims, technology and administration. Mr. Philp has served on the board of directors of various insurance related companies over the course of his career. Mr. Philp is currently a principal of Willowbrook Innovation Associates, an insurance consulting firm, and served as President, Chief Executive Officer and Chairman of the Board of Directors of AscendantOne, Inc. until 2003. In 1997, Mr. Philp founded Amherst Innovation Associates, an investment and technology consulting firm serving the insurance industry, and from 1992 until 1997 he served as President and Chief Financial Officer of AMS Services, an insurance technology vendor. From 1970 until 1992, Mr. Philp served as a Vice President of various subsidiaries of AIG.

Courtney C. Smith has served as President, Chief Executive Officer and Director since the Company’s inception. He was appointed as the Chairman of our board in May 2004. Mr. Smith has over 30 years of experience in the property and casualty insurance industry. Prior to joining us, from April 1999 to April 2002, Mr. Smith served as Chief Executive Officer and President of TIG Specialty Insurance, or TIG, a leading specialty insurance underwriter. From January 1993 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, American International Group, or 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.

Robert H. Whitehead has served as a director of Specialty Underwriters’ Alliance, Inc. since August 2004. Mr. Whitehead has over 40 years of experience in the insurance business. From 1994 to 1997, he was a director of FHP Financial Corporation, a California HMO. From June 1993 to June 1995, Mr. Whitehead was Chief Executive Officer and President of the Hawaiian Insurance Guaranty Company, Ltd., where he successfully completed the rehabilitation and sale of that company on behalf of the state. From December 1963 to June 1993, Mr. Whitehead worked at Industrial Indemnity Company of San Francisco, California where he held a number of positions, including President and Chief Operating Officer. In addition, from 1955 to 1963 he held numerous insurance and reinsurance positions in London, New York, Montreal and Toronto. In the past he has been heavily involved in insurance hearings and other legislative activities at the state level in California. Mr. Whitehead has been an independent consultant since 1995.

Russell E. Zimmermann has served as a director of Specialty Underwriters’ Alliance, Inc. since May 2004. He is a retired partner of Deloitte & Touche LLP, or Deloitte. Mr. Zimmermann was employed by Deloitte from March 1965 to May 2000. Mr. Zimmermann has 35 years of experience serving public and privately held companies in the insurance, manufacturing, banking, mutual fund and retail industries, including nearly 28 years serving as lead client services partner. He is a past member of the American Institute of Certified Public Accountants and the Illinois Society of Certified Public Accountants. Mr. Zimmermann currently serves as a director and chairman of the Audit Committee of ShoreBank Corporation, ShoreBank Chicago, and ShoreBank Pacific.

Each of the nominees has served as a director during the fiscal year ended December 31, 2007. If voting by proxy with respect to the election of directors, stockholders may vote in favor of all nominees, withhold their votes as to all nominees or withhold their votes for specific nominees.

In the judgment of the Board of Directors, each of the following directors of the Company meets the standards for independence required by NASDAQ: Robert E. Dean, Raymond C. Groth, Paul A. Philp, Robert H. Whitehead and Russell E. Zimmermann.


MANAGEMENT DISCUSSION FROM LATEST 10K


Specialty Underwriters’ Alliance, Inc.

The following discussion and analysis of financial condition and results of operations should be read together with “Selected Financial Data” and our financial statements and accompanying notes appearing elsewhere in this Annual Report. Certain reclassifications have been made to prior period financial statement line items to enhance the comparability with prior years. This discussion contains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many important factors, including those set forth under “Risk Factors,” “Forward-Looking Statements” and elsewhere in this Annual Report.

Overview

We were formed on April 3, 2003 for the purpose of offering products in the specialty commercial property and casualty insurance market by using an innovative business model. Specialty insurance typically serves niche groups of insureds that require highly specialized knowledge of a business class to achieve underwriting profits. This segment has traditionally been underserved by most standard commercial property and casualty insurers, due to the complex business knowledge and the investment required to achieve attractive underwriting profits. Competition in this segment is based primarily on client service, availability of insurance capacity, specialized policy forms, efficient claims handling and other value-based considerations, rather than just price.

Additionally, in the specialty property and casualty program business, insurance agents often have underwriting authority, are responsible for handling claims and are paid by up-front commissions on the amount of premiums written. We believe that this system does not serve the carriers, the agents or the insureds well. Poor underwriting results have led to underwriting losses for the carriers, which results in carrier turnover in the specialty program business thereby creating instability in the niche insurance markets being served. In turn, agents incur additional costs in searching for, and converting to, new carriers and policyholders experience uncertainty regarding the placement of their coverage and quality of service from year to year.

Our business model is designed to better serve the specialty property and casualty marketplace by recognizing the void that exists in these underserved niche markets and the problems that undisciplined underwriting has created. Our business model emphasizes our relationship with a select number of partner agents, who have specialized business knowledge in the types of business classes we underwrite. We rely on these partner agents for industry insights and their understanding of the specific risks in the niche markets we serve. We bring together that knowledge with our disciplined underwriting practices and leading-edge technology and systems capabilities to provide insurance programs and products that are customized to the needs of the specialty markets that we serve.

Our business model is also designed to realign the interests of carriers, agents and insureds. Each of our partner agents are required to enter into agreements with us which provide that in exchange for marketing and pre-qualifying business for us, our partner agents receive an up-front commission designed to cover their costs and an underwriting profit-based commission paid over several years. In addition, each partner agent is required to purchase Class B Shares, which further aligns their interests with us and that of our shareholders. In return, we provide our partner agents with a five-year exclusive arrangement (generally allowing partner agents to offer other companies’ products if we decline to offer coverage to a prospective insured) covering a specific class of business and territory. Further, we have implemented a centralized information system designed to reduce processing and administrative time. Lastly, we are a stable, dedicated source of specialty program commercial property and casualty insurance capacity.

On November 23, 2004 we completed our IPO and concurrent private placements and completed the acquisition of Potomac. After giving effect to the acquisition, we changed the name of Potomac to SUA Insurance Company. On January 1, 2005 we commenced our insurance operations.

Key Operating Measures

In evaluating our business, we focus on the following ratios:


• the net loss and loss adjustment expense ratio,

• the acquisition expense ratio, and

• the other operating expense ratio.

The net loss and loss adjustment expense ratio and the acquisition expense ratio are calculated by dividing the respective expense amounts by net premiums earned. The other operating expense ratio is calculated by dividing other operating expenses by gross premiums written. Gross premiums written represents all premiums written by an insurance company during a specified period. Net premiums written is the difference between gross premiums written and premiums ceded to reinsurers. Premiums are earned over the terms of the related policies. At the end of each accounting period, the portions of premiums that are not yet earned are included in unearned premiums and are realized as revenue in subsequent periods over the remaining terms of the policies. Our policies have terms of 12 months. Thus, for example, for a policy that is written on July 1, 2007, one-half of the premiums would be earned in 2007 and the other half would be earned in 2008. Premiums earned, represents the earned portion of our net premiums written.

Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006

In 2007 as compared to 2006, insurance revenues and investment income continued to increase and, after payment of operating expenses, were sufficient to generate increased operating profits. In addition, we continued to utilize the benefits of tax losses generated in earlier years. However, in our lines of business, we faced greater competition, lower rates and reduced exposure bases which led to lower premium growth.

Net income for the year ended December 31, 2007 was $12.6 million, compared to a net income for the year ended December 31, 2006 of $8.4 million. Earnings per share for 2007 were $0.82 versus $0.55 for 2006.

Gross written premiums increased 4.7% from $153.2 million for 2006 to $160.4 million for 2007. The increase in premiums was primarily driven by growth within our existing programs, along with the addition of one of our new partner agents, Flying Eagle Insurance Service, Inc. and a new program writing small workers’ compensation with Appalachian Underwriters, Inc.

We continue to increase our number of partner agents. On October 1, 2007 we signed First Light Program Managers, Inc. as a partner agent, writing commercial general liability, commercial automobile and physical damage for selected customer classes in the trucking industry in the southeastern region. Also, we continue to add new programs such as temporary staffing with Risk Transfer Holdings, Inc.

Our written premium is still concentrated in four of our eight partner agents, though there was continued diversification in the percentage of premium written. We expect to see additional diversification as our relationship with these new partner agents mature.

Our workers’ compensation business was impacted by rate decreases in Florida and California and could be further impacted by future decreases in these states and others. Florida approved a rate decrease recommended by the National Council for Compensation Insurance, or the NCCI, of 15.7% effective January 1, 2007 and a 16.5% decrease effective January 1, 2008. We matched the recommended rate decrease in Florida. The California Insurance Commissioner recommended a 9.5% decrease in advisory pure premium rates on new and renewal policies effective on or after January 1, 2007. On May 29, 2007, the California Insurance Commissioner recommended a 14.2% decrease in rates effective July 1, 2007. On September 20, 2007, the WCIRB submitted a filing with the California Insurance Commissioner recommending a 4.2% increase in advisory pure premium rates on new and renewal policies effective on or after January 1, 2008. The filing was based on a review of loss and loss adjustment experience through June 30, 2007. On October 19, 2007, the WCIRB amended its filing, increasing the proposed rate increase to 5.2% based on the projected impact of Assembly Bill No. 338 (AB 338) that was signed into law on October 13, 2007. AB 338 increases the period of time, from two years to five years, from the date of injury during which disability benefits, limited to a maximum of 104 weeks, may be provided. The California Insurance Commissioner has declined to recommend the increase. As of January 1, 2008 our rates matched the California Insurance Commissioner’s recommended rate.

Earned premiums grew 37.5% to $152.5 million for 2007 compared to $110.9 million for 2006. The increase in earned premium was primarily attributable to increased premium writings in 2006, continuing into the first half of 2007.

Net investment income was $9.5 million for 2007 versus $6.1 million for 2006. The increase in net investment income reflects a significant growth in our cash and invested assets from $166.4 million at December 31, 2006 to $230.4 million at December 31, 2007. The net investment yield for average invested assets for 2007 and 2006 was 4.6%. There where no realized gains in 2007 and $0.3 million in 2006. The increases in average invested assets primarily relates to the cash flow from operations, including premium growth and favorable underwriting results.

Acquisition expenses were $36.6 million for the year ended December 31, 2007, compared to acquisition expenses of $26.0 million for the year ended December 31, 2006. The increase in acquisition expenses was driven primarily by the increase in earned premium as well as partner agent profit sharing from 2006 to 2007.

Loss and loss adjustment expenses were $90.0 million for the year ended December 31, 2007, compared to $62.7 million for the year ended December 31, 2006. The increase in loss and loss adjustment expenses was driven by the increase in earned premium. Our net loss and loss adjustment expense ratio increased in 2007 compared to 2006 primarily due to an increase in large losses in our commercial automobile line of business partially offset by improvements in workers’ compensation and general liability in prior years. We have instituted price increases to address this loss ratio increase in our commercial automobile business.

Other operating expenses were $22.6 million for the year ended December 31, 2007, which consisted of salaries and benefit costs of $7.0 million, $3.2 million of professional and consulting fees, $5.0 million of depreciation and amortization expense, $1.1 million of stock based compensation expense and $6.3 million of other expenses. For the year ended December 31, 2006, other operating expenses were $19.9 million, which consisted of salaries and benefit costs of $6.1 million, $4.2 million of professional and consulting fees, $2.6 million of depreciation and amortization, $1.1 million of stock based compensation expense and $5.9 million of other expenses. We remain committed to operating efficiently and increasing staff only as our business volume requires. The increase in salaries and benefit costs in 2007 was offset by a decrease in professional and consulting services as we continued to bring previously outsourced services in-house.

Our ratio of all other operating expenses to gross written premiums increased in 2007 as compared to 2006 primarily as a result of slowed growth in written premiums and increased depreciation expense resulting from information systems being fully deployed. The increase in depreciation expense was partially offset by a decrease in audit and tax services and stock option expenses. We have built an infrastructure that should allow for scalability for future premium growth.

Tax expense of $0.2 million and $0.3 million for the year ended December 31, 2007 and December 31, 2006, respectively, resulted from deferred tax liabilities associated with our acquisition of Potomac, which have an indefinite life and therefore cannot be offset with deferred tax assets, which consist primarily of tax loss carryforwards.

Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005

In 2006, we moved beyond the early stages of developing our operations. Insurance revenues and investment income were sufficient to absorb the company’s operating expenses, operating profits resulted and we began realizing benefits of tax losses generated in earlier years. In addition, our expense levels were more proportional to our earned premium.

Net income for the year ended December 31, 2006 was $8.4 million, compared to a net loss for the year ended December 31, 2005 of $18.0 million. Earnings per share for 2006 were $0.55 versus a net loss per share of $1.22 for 2005.

Gross written premiums increased 69.1% from $90.6 million for 2005 to $153.2 million for 2006.

Earned premiums grew 316.9% to $110.9 million for 2006 compared to $26.6 million for 2005. Premiums are earned ratably over the terms of our insurance policies, which is generally 12 months.

Net investment income was $6.1 million for 2006 versus $3.6 million for 2005. The increase in net investment income reflects a significant growth in our cash and invested assets from $108.3 million at December 31, 2005 to $166.4 million at December 31, 2006. The net investment yield for average invested assets for 2006 was 4.6%. For 2005, the net investment yield on average invested assets was 3.5%. Realized gains were $0.3 million in 2006 and $0 million in 2005.

Loss and loss adjustment expenses were $62.7 million for the year ended December 31, 2006, compared to $19.1 million for the year ended December 31, 2005. Acquisition expenses were $26.0 million for the year ended December 31, 2006, compared to acquisitions expenses of $6.2 million for the year ended December 31, 2005. The increase in loss and loss adjustment expenses and acquisition expenses was driven by an increase in earned premium from 2005 to 2006.

Other operating expenses were $19.9 million for the year ended December 31, 2006, which consisted of salaries and benefit costs of $6.1 million, $4.2 million of professional and consulting fees, $2.6 million of depreciation and amortization and $7.0 million of other expenses. For the year ended December 31, 2005, other operating expenses were $14.1 million, comprised of salaries and benefit costs of $5.2 million, $3.0 million of professional and consulting fees, $1.8 million of depreciation and amortization and $4.1 million of other expenses. Other operating expenses for 2006 included $1.1 million associated with our stock option program. This expense represents a change in our accounting policy through the adoption of FAS No. 123 (revised 2004), “Share-Based Payment,” or FAS 123R, whereby we recognize compensation expense for stock options. Prior to the first quarter of 2006 we followed the accounting principles under the intrinsic value method of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” or APB 25. For 2006, we did not incur any service company fees because we terminated our service company contract effective December 31, 2005. In 2005, we incurred $8.8 million of service company fees. We have assumed the responsibilities previously provided by our service company, which expenses are included in other operating expenses. We remain committed to operating efficiently and increasing staff only as our business volume requires.

Tax expense of $0.3 million for the year ended December 31, 2006 resulted from deferred tax liabilities associated with our acquisition of Potomac, which have an indefinite life and therefore cannot be offset with deferred tax assets, which consist primarily of tax loss carryforwards. We did not incur tax expense in 2005 because we had a net loss for the year.



MANAGEMENT DISCUSSION FOR LATEST QUARTER


This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, the discussions of our operating and growth strategy. Investors are cautioned that all forward-looking statements involve risks and uncertainties including, without limitation, those set forth under the caption “Risk Factors” in Item 1A of this Quarterly Report on Form 10-Q and in the Business section of our Annual Report on Form 10-K for the year ended December 31, 2007. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could prove to be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

Overview

We were formed on April 3, 2003 for the purpose of offering products in the specialty commercial property and casualty insurance market by using an innovative business model. Specialty insurance typically serves niche groups of insureds that require highly specialized knowledge of a business class to achieve underwriting profits. This segment has traditionally been underserved by most standard commercial property and casualty insurers, due to the complex business knowledge and the investment required to achieve attractive underwriting profits. Competition in this segment is based primarily on client service, availability of insurance capacity, specialized policy forms, efficient claims handling and other value-based considerations, rather than just price.
On November 23, 2004 we completed our IPO and concurrent private placements and completed the acquisition of Potomac. After giving effect to the acquisition, we changed the name of Potomac to SUA Insurance Company. On January 1, 2005 we commenced our insurance operations.


Three Months Ended September 30, 2008 as compared to the Three Months Ended September 30, 2007

RESULTS OF OPERATION

Net income for the quarter ended September 30, 2008 was $1.3 million, compared to net income of $3.4 million for the quarter ended September 30, 2007. Earnings per share for the quarter ended September 30, 2008 was $0.08, versus earnings per share of $0.22 for the quarter ended September 30, 2007. The decrease in our net income was due to a decrease in our pre-tax income and an increase in our taxes resulting from the full utilization of tax loss carry forwards which occurred in the second quarter of 2008. The decrease in our pre-tax income was primarily due to a decrease in our earned premiums resulting from reductions in our workers’ compensation rates and weak economic conditions. In addition there were other-than-temporary impairment write-downs of investment assets for a realized loss of $0.8 million.
Gross written premiums were $44.2 million for the three months ended September 30, 2008 compared to $33.5 million for the three months ended September 30, 2007. The increase in gross written premiums was attributable to premiums written under our public entity business program offset by decreasing premiums in our other lines as a result of the continuing deterioration in economic conditions.

The change in our mix of business by agent, state and line of business was influenced by a large account we wrote in the third quarter of 2008 in our public entity customer class which was partially offset by a continued reduction in our contractors business due to the downturn in the construction industry.
Earned premiums were $37.2 million for the quarter ended September 30, 2008 compared to $40.4 million for the quarter ended September 30, 2007.
Net investment income was $2.6 million for the three months ended September 30, 2008 versus $2.5 million for the three months ended September 30, 2007. While investments increased $39.1 million from $215.0 million to $254.1 million at September 30, 2008, investment income increased only $0.1 million due to significantly decreased short-term yields and a shift into tax-exempt securities of $49.9 million.
Acquisition expenses were $8.5 million for the three months ended September 30, 2008 compared to $9.7 million for the quarter ended September 30, 2007. The decrease in our acquisition expense is the result of a decrease in premiums.
Other operating expenses were $6.3 million for the quarter ended September 30, 2008 compared to $5.7 million for the quarter ended September 30, 2007.
For the third quarter of 2008, our net loss and loss adjustment expense ratio was 60.3%, compared to 59.6% for the comparable quarter in 2007. This increase was primarily driven by higher loss ratios in our workers’ compensation book of business due to lower rates. This was partially offset by favorable prior year loss development for the third quarter of 2008 of $0.4 million primarily attributable to improved loss development in our general liability line of business. For the three months ended September 30, 2007 we experienced favorable prior year loss development of $1.6 million primarily within our workers’ compensation and general liability lines of business.


Nine Months Ended September 30, 2008 as compared to the Nine Months Ended September 30, 2007

RESULTS OF OPERATION

Net income for the nine months ended September 30, 2008 was $7.0 million, compared to net income of $9.4 million for the nine months ended September 30, 2007. Earnings per share for the nine months ended September 30, 2008 was $0.45 versus earnings per share of $0.61 for the nine months ended September 30, 2007. The decrease in our net income was due to a decrease in our pre-tax income and an increase in our taxes resulting from the full utilization of tax loss carry forwards which occurred in the second quarter of 2008. The decrease in our pre-tax income was primarily due to a decrease in our earned premiums offset by the increase in our investment income. The decrease in our earned premium was due to reductions in our workers’ compensation rates and weak economic conditions. In addition there were other-than-temporary impairment write-downs of investment assets for a realized loss of $0.8 million.
Gross written premiums were $110.0 million for the nine months ended September 30, 2008 compared to $117.1 million for the comparable period ended September 30, 2007. The decrease in gross written premiums is attributable to decreasing premiums in most of our lines of business as a result of the continuing deterioration in economic conditions.

The change in our mix of business by agent, state and line of business was influenced by a large account we wrote in the third quarter of 2008 in our public entity customer class which was partially offset by a continued reduction in our contractors program as a result of fewer construction projects being started. Our workers’ compensation business has been impacted by rate decreases in Florida and California during 2007 and the first quarter of 2008 as well as decreases in payrolls.
Earned premiums were $107.2 million for the nine months ended September 30, 2008 compared to $112.9 million for the nine months ended September 30, 2007.
Net investment income was $7.9 million for the nine months ended September 30, 2008 versus $7.0 million for the nine months ended September 30, 2007. The increase in net investment income reflects growth in our total investments from $215.0 million at September 30, 2007 to $254.1 million at September 30, 2008 resulting from positive operating cash flows.
Acquisition expenses were $24.5 million for the nine months ended September 30, 2008 compared to $27.6 for the nine months ended September 30, 2007. The decrease in our acquisition expense is the result of a decrease in premiums.
Other operating expenses were $17.6 million for the nine months ended September 30, 2008 compared to $16.6 million for the nine months ended September 30, 2007.
For the first nine months of 2008, our net loss and loss adjustment expense ratio was 60.1%, compared to 58.5% for the comparable nine months in 2007. This increase was primarily driven by higher loss ratios in our workers’ compensation book of business due to lower rates. This was partially offset by favorable prior year loss development for the nine months ended September 30, 2008 of $1.7 primarily attributable to improved loss development in our commercial automobile and general liability lines of business. For the nine months ended September 30, 2007 we experienced favorable prior year loss development of $2.1 million primarily within our workers’ compensation and general liability lines of business.
Liquidity and Capital Resources
Specialty Underwriters’ Alliance, Inc. is organized as a holding company and, as such, has no direct operations of its own. Its assets consist primarily of investments in its subsidiary, through which it conducts substantially all of its insurance operations.
As a holding company, Specialty Underwriters’ Alliance, Inc. has continuing funding needs for general corporate expenses, the payment of principal and interest on future borrowings, if any, taxes and the payment of other obligations. Funds to meet these obligations come primarily from dividends and other statutorily permissible payments from our operating subsidiary. The ability of our operating subsidiary to make payments to us is limited by the applicable laws and regulations of Illinois. There are restrictions on the payment of dividends to us by our insurance subsidiary.



CONF CALL

Leslie Loyet

Thank you. I'd like to thank everyone for joining us today.

Yesterday, we sent out a press release outlining the results for the fourth quarter and full year 2007. If anyone has not received the release, please visit the company's website at www.suainsurance.com to retrieve a copy.

Management will provide an overview of the quarter and the year and then we'll open the call up to your questions.

Before we begin, please be advised that this call may involve forward-looking statements, as discussed on the Add.2 and Add.3 pages of the press release. Risks associated with these statements can be found in the company's latest SEC filings. Additionally, we wanted to remind participants that the information contained in this call is current only as of the date of this call, March 7, 2008, and the company assumes no obligation to update any statements, including forward-looking statements made during this call. Listeners to any replay should understand that the passage of time by itself will diminish the quality of the statement.

Joining us today from management of Specialty Underwriters, we have Courtney Smith, President and Chief Executive Officer; Peter Jokiel, Executive Vice President and Chief Financial Officer; and Scott Goodreau, Vice President, General Counsel and Investor Relations.

At this point, I'd like to turn the call over to Courtney for his opening remarks. Please go ahead.

Courtney Smith

Thank you, Leslie. And welcome everyone to SUAI’s fourth quarter and full year 2007 earnings call.

In 2007, we accomplished important milestones despite a challenging time for the industry and our company. We achieved net income of $12.6 million or $0.82 per share which is an increase of 50% from the $8.4 million or $0.55 per share earned in 2006. Net income was $3.2 million for the fourth quarter of 2007 versus $2.9 million in the same period for 2006.

Earnings per share this quarter was $0.20 versus $0.18 for the prior year period. Our gross written premium increased from a $153.2 million to a $160.4 million. Our gross written premium was $43.3 million for the fourth quarter of 2007 versus $46 million for the fourth quarter of 2006. Production by Partner Agent was as follows. Risk transfer produced $78.6 million in premiums for the year versus $81.4 million in 2006, a reduction due primarily to rate decreases in California and Florida.

ATM produced $33.5 million in 2007 compared to $31.7 million in 2006. AEON produced $25.7 million in 2007 versus $21.8 million in 2006. AUI produced $13.9 million in 2007 compared to $14.5 million in 2006, slightly down due to the contractors booked. Insential produced $1.7 million in 2007 versus $1.5 million in 2006 and SRS produced $3.1 million in 2007 compared to $2 million in 2006. Flying Eagle began writing premium for us in 2007 and produced $2.8 million in written premiums. During 2007 total revenues were a $162 million versus a $117.3 million in 2006. Total revenues in 2007 were comprised of a $152.2 million of earned premium and $9.5 million of investment income compared to a $110.9 million of earned premium and $6.1 million of investment income and net realized gain of $300,000 in 2006.

For the fourth quarter 2007 total revenues increased to $42 million from $32.6 million for the comparable prior year period. 2007 expenses were $149.2 million, versus a $108.6 million in 2006. Expenses in 2007 were comprised of $90 million of loss and loss adjustment expense and $59.2 million of acquisition costs. General administrative and operating expenses compared to $62.7 million of loss adjustment expense and $45.9 million of acquisition costs, general administrative and operating expenses in 2006.

Fourth quarter expenses in 2007 were $38.8 million consisting $23.9 million of loss and loss adjustment expense and $14.9 million of acquisition, general administrative and operating expenses. Fourth quarter expenses in 2006 were $29.7 million comprised of loss and loss adjustment expense of $60 million and $13.7 million of acquisition, general administrative and operating expense. For the year ended December 31, 2007 our net loss and loss adjustment expense ratio was 59% compared to 56.5% in 2006.

For the fourth quarter of 2007 our net loss and loss adjustment expense ratio was 60.5% compared to 52.1% for the comparable quarter in 2006. We believe that we will be able to sustain our solid loss ratios through our underwriting discipline developing appropriate pricing along with our excellent claims management. As of December 31, 2007 total investments were $229.4 million. Within total investments we held $5 million in book value of securities with sub-prime exposure with a current market value of $4.5 million. All of which rated "A" or better by established rating agencies.

Our investments continue to grow and our investment leverage increased from $1.44 at the beginning of the year to $1.75 by the end of year. We do not leave that the current credit crisis will have a material impact on our financial conditions. Our workers' compensation and commercial auto lines were inline with our expectations. While the effects of the softening market can be seen in the contraction, in a general liability business in the fourth quarter, which is primarily driven by our various Contractor Programs which are affected by the current housing prices.

We have made great strides and continue to improve our top line including one, the signing of three additional Partner Agents, two, adding two customer programs, three, partner with an "A" rated company for our public [entity] customers, and four expanding our geographic recovery. We started in 2005 with three Partner Agents and have added two to three new Partner Agents every year.

We are pleased to announce the addition of Northern Star, our ninth Partner Agent who will write commercial auto and general liability in six of the Mid Atlantic regions -- states of the Mid Atlantic regions. This Agent brings 10 years of transportation insurance expertise at reps since a great opportunity to expand our transportation book of business.

Further our technology investments since our inception have resulted in a strong infrastructure. All of our Partner Agents for all of our lines of business will be able to utilize our systems in 2008 to process their business through an easy-to-use Internet interface. With the current infrastructure in place we can react quickly to change with minimal lead time. We're able to fully implement a new Partner Agent on our system within 60 days.

We also have significant control of our business data through a centralized data warehouse. This enables us to react quickly to the decisions we make by allowing us to analyze us our results on a real time basis. Additionally we have implemented a company-wide enterprise risk management system that institutional -- that is institutionalized throughout our organization.

With the infrastructure we have in place the company's current staffing of about approximately 100 employees can handle significantly more business with minimal additional staff or capital expense. One recent internal promotion that we are excited about is the elevation of Dan Cacchione to the position of Chief Underwriter.

Dan brings extensive experience within SUAI's [specialty business] and has been an instrumental part of our growth and profit. As we look to 2008 and beyond we are in excellent position to manage our business and take advantage of opportunities based on our deep understanding of our specialty business.

We intend to expand our existing programs with additional states and class codes as well as develop new programs with existing and new Partner Agents. We are always being mindful of our underwriting discipline, claims management and cost control.

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