Specialty Underwriters Alliance (SUAI) is a specialty property & casualty insurance company writing commercial insurance in a variety of niche markets through partner agents who are compensated via a unique arrangement based on the long-term profitability of their written policies. First posted on VIC over two years ago by spike945 at what was already a reasonable price of $8.50 per share (well below its recent $9.50 IPO), SUAI's stock price has languished further in the face of relatively intact fundamentals, now leaving it trading at compellingly cheap levels in relation to book value and trailing earnings power (0.64 and 6.6) and ignoring the potential for above average profitability resulting from its favorable business and incentive structure.

Spike's 2005 writeup and the ensuing thread provide an excellent discussion of the business and are well worth a read. The basic thesis holds that SUAI's unique approach of focusing on specialty niche markets with relatively limited competition and inefficient pricing, and compensating partner agents on long term profitable underwriting rather than sheer volume of written policies, should create the potential for above average long term returns on capital. Management has a strong track record in the insurance business, and is explicitly focused on long term shareholder value rather than premium volumes. Partner agencies have each invested significant sums in SUAI common stock at prices higher than today's, further aligning their interests with those of long term shareholders.

Although growth in written premiums has not reached the levels foreseen in the original writeup and recent profitability by combined ratio has been disappointing, the stock price decline and recent growth in earnings and book value now make SUAI compellingly cheap even for an insurer capable of only average performance. If the factors mentioned above are eventually able to improve profitability from recent levels, as I believe is reasonable, the shares could see a dramatic markup as this recent startup matures.

Any exposure to the subprime mortgage crisis appears to be limited - as of the latest 10-Q, only $4.8 million out of SUAI's $164 million in total assets had any subprime exposure, all of which were rated A or above. There are no signs of any significant impairment to the overall asset portfolio, consisting of 65% government and AAA-rated bonds with the remainder essentially all rated A or above. In addition to initial direct investments by partner agents, insiders have bought over $120k worth of stock on the open market over the past year at significantly higher prices than today's.

I'm not going to attempt to make specific timetables or forecasts of future written premiums and profitability, only to state that SUAI's discounts to trailing earnings and book value are now significant enough that they make it significantly underpriced for a mediocre P&C insurer, while fully discounting the niche businesses and incentive structure that create significant opportunites for profitability to improve.