##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For The Quarterly Period Ended March 31, 2007
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period from  to
 Commission file number 000-50891
 SPECIALTY UNDERWRITERS ALLIANCE, INC.
  Delaware
(State or other jurisdiction of incorporation 
or organization)
    
    20-0432760
(I.R.S. Employer Identification
Number)
 222 South Riverside Plaza 
Chicago, Illinois
(Address of principal executive office)
    
    60606
(Zip Code)
 (888) 782-4672
 þ o
   Large accelerated filer o
    
    Accelerated filer
þ
    
    Non-accelerated filer o
 o þ




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##### 



SPECIALTY UNDERWRITERS ALLIANCE, INC.
 INDEX
 Page No.PART I  FINANCIAL INFORMATION
    
    
    3Item 1: Financial Statements
    
    
    3Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    13Item 4: Controls and Procedures
    
    
    14PART II  OTHER INFORMATION
    
    
    15Item 1: Legal Proceedings
    
    
    15Item 1A: Risk Factors
    
    
    15Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    15Item 3: Defaults Upon Senior Securities
    
    
    15Item 4: Submission of Matters to a Vote of Security Holders
    
    
    15Item 5: Other Information
    
    
    15Item 6: Exhibits
    
    
    16Signatures
    
    
    17CertificationsExhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1: Financial Statements
 Specialty Underwriters Alliance, Inc.
Consolidated Balance Sheets
(dollars in thousands)
 As ofMarch 31,
    
    
    December 31,2007
    
    
    2006Assets
    
    (unaudited)Fixed maturity investments, at fair value (amortized cost: $153,408 and $145,581)
    
    $
    152,980
    
    
    $
    144,520Short-term investments, at amortized cost (which approximates fair value)
    
    
    28,980
    
    
    
    19,538Total investments
    
    
    181,960
    
    
    
    164,058Cash
    
    
    1,547
    
    
    
    2,375Insurance premiums receivable
    
    
    66,487
    
    
    
    68,310Reinsurance recoverable on unpaid loss and loss adjustment expenses
    
    
    79,044
    
    
    
    80,976Prepaid reinsurance premiums
    
    
    3,988
    
    
    
    3,577Investment income accrued
    
    
    1,233
    
    
    
    1,566Equipment and capitalized software at cost (less accumulated depreciation of $4,893 and $3,915)
    
    
    10,068
    
    
    
    8,643Intangible assets
    
    
    10,745
    
    
    
    10,745Deferred acquisition costs
    
    
    18,927
    
    
    
    19,876Other assets
    
    
    2,983
    
    
    
    3,171Total assets
    
    $
    376,982
    
    
    $
    363,297LiabilitiesLoss and loss adjustment expense reserves
    
    $
    150,783
    
    
    $
    141,200Unearned insurance premiums
    
    
    86,071
    
    
    
    89,804Insured deposit funds
    
    
    13,851
    
    
    
    10,366Accounts payable and other liabilities
    
    
    8,192
    
    
    
    7,945Total liabilities
    
    
    258,897
    
    
    
    249,315Stockholders equityCommon stock at $.01 par value per share -
authorized 30,000,000 shares; issued and outstanding 14,682,355 shares
    
    
    147
    
    
    
    147Class B common stock at $.01 par value per share -
authorized 2,000,000 shares; issued and outstanding 701,442 and 679,152
shares
    
    
    7
    
    
    
    7Paid-in capital  common stock
    
    
    128,645
    
    
    
    128,372Paid-in capital  class B common stock
    
    
    5,013
    
    
    
    4,838Accumulated deficit
    
    
    (15,299
    )
    
    
    (18,321
    )Accumulated other comprehensive income (loss)
    
    
    (428
    )
    
    
    (1,061
    )Total stockholders equity
    
    
    118,085
    
    
    
    113,982Total liabilities and stockholders equity
    
    $
    376,982
    
    
    $
    363,297
   3




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##### Table of Contents



Specialty Underwriters Alliance, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(dollars in thousands)
 Three MonthsEndedMarch 31,2007
    
    
    2006(unaudited)RevenuesEarned insurance premiums
    
    $
    35,362
    
    
    $
    23,256Net investment income
    
    
    2,080
    
    
    
    1,144Net realized gains (losses)
    
    
    3
    
    
    
    1Total revenue
    
    
    37,445
    
    
    
    24,401ExpensesLoss and loss adjustment expenses
    
    
    20,136
    
    
    
    13,997Acquisition expenses
    
    
    8,628
    
    
    
    5,543Other operating expenses
    
    
    5,597
    
    
    
    4,999Total expenses
    
    
    34,361
    
    
    
    24,539Pretax income (loss)
    
    
    3,084
    
    
    
    (138
    )Federal income tax expense
    
    
    (62
    )
    
    
    (62
    )Net income (loss)
    
    
    3,022
    
    
    
    (200
    )Net change in unrealized gains and losses for investments held, after tax
    
    
    633
    
    
    
    (838
    )Comprehensive income (loss)
    
    $
    3,655
    
    
    $
    (1,038
    )Earnings (loss) per share available
to common stockholders (in dollars)Basic
    
    $
    0.20
    
    
    $
    (0.01
    )Diluted
    
    $
    0.20
    
    
    $
    (0.01
    )Weighted Average Shares OutstandingBasic
    
    
    15,374
    
    
    
    15,014Diluted
    
    
    15,374
    
    
    
    15,014
   4




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##### Table of Contents



Specialty Underwriters Alliance, Inc.
Consolidated Statement of Stockholders Equity
(dollars in thousands)
 AccumulatedCommon
    
    
    Paid-in
    
    
    Common
    
    
    Paid-in
    
    
    Retained
    
    
    Other
    
    
    TotalStock
    
    
    Capital
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Comprehensive
    
    
    Stockholders'Class A
    
    
    Class A
    
    
    Class B
    
    
    Class B
    
    
    (Deficit)
    
    
    Income (Loss)
    
    
    Equity(unaudited)Balance at December 31, 2006
    
    $
    147
    
    
    $
    128,372
    
    
    $
    7
    
    
    $
    4,838
    
    
    $
    (18,321
    )
    
    $
    (1,061
    )
    
    $
    113,982Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,022
    
    
    
    
    
    
    
    3,022Net change in unrealized
investment
losses, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    633
    
    
    
    633Stock issuance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    175
    
    
    
    
    
    
    
    
    
    
    
    175Stock based compensation
    
    
    
    
    
    
    273
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    273Balance at March 31, 2007
    
    $
    147
    
    
    $
    128,645
    
    
    $
    7
    
    
    $
    5,013
    
    
    $
    (15,299
    )
    
    $
    (428
    )
    
    $
    118,085
   5




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##### Table of Contents



Specialty Underwriters Alliance, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
 Three MonthsEndedMarch 31,2007
    
    
    2006(unaudited)Cash flows from operationsNet income (loss)
    
    $
    3,022
    
    
    $
    (200
    )Charges (credits) to reconcile net income to cash flows from operations:Change in deferred income tax
    
    
    62
    
    
    
    62Net realized (gains) losses
    
    
    (3
    )
    
    
    (1
    )Amortization of bond premium (discount)
    
    
    14
    
    
    
    121Depreciation
    
    
    978
    
    
    
    442Net change in:Reinsurance recoverable on unpaid loss and loss adjustment expense
reserves
    
    
    1,932
    
    
    
    3,117Loss and loss adjustment expense reserves
    
    
    9,583
    
    
    
    8,708Insurance premiums receivable
    
    
    1,823
    
    
    
    (8,013
    )Unearned insurance premiums
    
    
    (3,733
    )
    
    
    4,095Deferred acquisition costs
    
    
    949
    
    
    
    (1,833
    )Prepaid reinsurance premiums
    
    
    (411
    )
    
    
    3,236Insured deposit fund
    
    
    3,485
    
    
    
    3,208Other, net
    
    
    979
    
    
    
    1,462Total adjustments
    
    
    15,658
    
    
    
    14,604Net cash flows provided by (used for) operations
    
    
    18,680
    
    
    
    14,404Cash flows from investing activitiesNet increase in short-term investments
    
    
    (9,442
    )
    
    
    (5,647
    )Redemptions, calls and maturities of fixed maturity investments
    
    
    6,425
    
    
    
    2,375Purchases of fixed maturity investments
    
    
    (14,263
    )
    
    
    (16,003
    )Unsettled net investment purchases
    
    
    0
    
    
    
    957Purchase of equipment and capitalized software
    
    
    (2,403
    )
    
    
    (982
    )Net cash flows provided by (used for) investing activities
    
    
    (19,683
    )
    
    
    (19,300
    )Cash flows from financing activitiesIssuance of common stock
    
    
    175
    
    
    
    1,339Net cash provided by (used for) financing activities
    
    
    175
    
    
    
    1,339Net (decrease) increase in cash and cash equivalents during the period
    
    
    (828
    )
    
    
    (3,557
    )Cash at beginning of the period
    
    
    2,375
    
    
    
    5,329Cash at the end of the period
    
    $
    1,547
    
    
    $
    1,772
   6




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##### Table of Contents



Note 1. Basis of Presentation
     Note 2. Net Income (Loss) Per Share
  Three Months Ended
    
    
    Three Months EndedMarch 31, 2007
    
    
    March 31, 2006(dollars in thousands)Net income (loss)
    
    $
    3,022
    
    
    $
    (200
    )Average common shares outstanding (basic and diluted)
    
    
    15,374
    
    
    
    15,014Net income (loss) per share (in dollars) (basic and diluted).
    
    $
    0.20
    
    
    $
    (0.01
    )
 Note 3. Income Taxes
    7




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##### Table of Contents



Note 4. Unpaid Loss and Loss Adjustment Expense Reserves
    Note 5. Recent Accounting Pronouncements
    8




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##### Table of Contents



Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
 This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
the federal securities laws, which are intended to be covered by the safe harbors created thereby.
Those statements include, but may not be limited to, the discussions of our operating and growth
strategy. Investors are cautioned that all forward-looking statements involve risks and
uncertainties including, without limitation, those set forth under the caption Risk Factors in
the Business section of our Annual Report on Form 10-K for the year ended December 31, 2006.
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
      9




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Three Months Ended March 31, 2007 as compared to the Three Months Ended March 31, 2006
 PercentageChangeThree Months Ended March 31,
    
    
    2007 vs.2007
    
    
    2006
    
    
    2006(unaudited)(dollars in millions, except for percentages and pershare data)Results of operations:Gross written premiums
    
    $
    35.0
    
    
    $
    30.8
    
    
    
    13.6
    %Net written premiums
    
    
    31.6
    
    
    
    27.4
    
    
    
    15.3
    %Earned premiums
    
    
    35.4
    
    
    
    23.3
    
    
    
    51.9
    %Net investment income
    
    
    2.1
    
    
    
    1.1
    
    
    
    90.9
    %Total revenues
    
    $
    37.5
    
    
    $
    24.4
    
    
    
    53.7
    %Loss and loss adjustment expense
    
    $
    20.1
    
    
    $
    14.0
    
    
    
    43.6
    %Acquisition expenses
    
    
    8.6
    
    
    
    5.5
    
    
    
    56.4
    %Other operating expenses
    
    
    5.6
    
    
    
    5.0
    
    
    
    12.0
    %Total expenses
    
    $
    34.4
    
    
    $
    24.5
    
    
    
    40.0
    %Pre-tax income
    
    $
    3.1
    
    
    $
    (0.1
    )
    
    
    *Federal income tax (expense)
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    *Net income (loss)
    
    $
    3.0
    
    
    $
    (0.2
    )
    
    
    *Net income(loss) per shareBasic and diluted
    
    $
    0.20
    
    
    $
    (0.01
    )
    
    
    *Average common shares outstanding (basic and diluted).
    
    
    15.4
    
    
    
    15.0
    
    
    
    2.0
    %
 *
    
    Not meaningful
      10




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Three Months Ended
    
    
    Three Months EndedMarch 31, 2007
    
    
    March 31, 2006Percentage of
    
    
    
    
    
    
    Percentage ofGross Written
    
    
    Gross Written
    
    
    Gross Written
    
    
    Gross WrittenPremium
    
    
    Premium
    
    
    Premium
    
    
    Premium(dollars in millions)Risk Transfer Holdings, Inc.
    
    $
    14.1
    
    
    
    40.2
    %
    
    $
    18.3
    
    
    
    59.4
    %American Team Managers
    
    
    11.2
    
    
    
    32.0
    %
    
    
    7.2
    
    
    
    23.4
    %AEON Insurance Group, Inc.
    
    
    5.0
    
    
    
    14.3
    %
    
    
    3.5
    
    
    
    11.4
    %Appalachian Underwriters, Inc.
    
    
    4.4
    
    
    
    12.6
    %
    
    
    1.8
    
    
    
    5.8
    %Specialty Risk Solutions, LLC
    
    
    0.0
    
    
    
    0.0
    %
    
    
    0.0
    
    
    
    0.0
    %Insential, Inc. (American Patriot Insurance Agency, Inc.)
    
    
    0.3
    
    
    
    0.9
    %
    
    
    0.0
    
    
    
    0.0
    %Total
    
    $
    35.0
    
    
    
    100.0
    %
    
    $
    30.8
    
    
    
    100.0
    %
   Three Months Ended
    
    
    Three Months EndedMarch 31, 2007
    
    
    March 31, 2006Percentage of
    
    
    
    
    
    
    Percentage ofGross Written
    
    
    Gross Written
    
    
    Gross Written
    
    
    Gross WrittenPremium
    
    
    Premium
    
    
    Premium
    
    
    Premium(dollars in millions)Florida
    
    $
    7.3
    
    
    
    20.9
    %
    
    $
    9.8
    
    
    
    31.8
    %California
    
    
    13.8
    
    
    
    39.5
    %
    
    
    10.4
    
    
    
    33.8
    %Other States
    
    
    13.9
    
    
    
    39.6
    %
    
    
    10.6
    
    
    
    34.4
    %Total
    
    $
    35.0
    
    
    
    100.0
    %
    
    $
    30.8
    
    
    
    100.0
    %
  Three Months Ended
    
    
    Three Months EndedMarch 31, 2007
    
    
    March 31, 2006Percentage of
    
    
    
    
    
    
    Percentage ofGross Written
    
    
    Gross Written
    
    
    Gross Written
    
    
    Gross WrittenPremium
    
    
    Premium
    
    
    Premium
    
    
    Premium(dollars in millions)Workers compensation
    
    $
    18.7
    
    
    
    53.4
    %
    
    $
    20.9
    
    
    
    68.0
    %General liability
    
    
    8.6
    
    
    
    24.6
    %
    
    
    6.2
    
    
    
    20.0
    %Commercial automobile
    
    
    7.0
    
    
    
    20.0
    %
    
    
    3.3
    
    
    
    10.7
    %All other
    
    
    0.7
    
    
    
    2.0
    %
    
    
    0.4
    
    
    
    1.3
    %Total
    
    $
    35.0
    
    
    
    100.0
    %
    
    $
    30.8
    
    
    
    100.0
    %
   11




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##### Table of Contents



For the Three MonthsEnded March 31,2007
    
    
    2006(dollars in millions,except percentages)Gross premiums written
    
    $
    35.0
    
    
    $
    30.8Net premiums earned
    
    $
    35.4
    
    
    $
    23.3Net loss and loss adjustment expense ratio
    
    
    56.9
    %
    
    
    60.2
    %Ratio of acquisition expenses to earned premiums
    
    
    24.4
    %
    
    
    23.8
    %Ratio of all other expenses to gross written premiums
    
    
    16.0
    %
    
    
    16.3
    %
 Liquidity and Capital Resources
   Cash Flows
  Three Months Ended March 31,2007
    
    
    2006(dollars in millions)Cash provided by (used for)Operating activities
    
    $
    18.7
    
    
    $
    14.4Investing activities
    
    
    (19.7
    )
    
    
    (19.3
    )Financing activities
    
    
    0.2
    
    
    
    1.3Change in cash
    
    $
    (0.8
    )
    
    $
    (3.6
    )
     12




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Fixed Maturity Investments
   
 Item 3: Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
   Estimated Fair Value
    
    
    IncreaseFair Value at
    
    
    Assumed Change in
    
    After Change in
    
    
    (Decrease) in3/31/2007
    
    
    Relevant Interest Rate
    
    Interest Rate
    
    
    Carrying Value(dollars in thousands)Total investments
    
    $
    181,960
    
    
    100 bp decrease
    
    $
    186,912
    
    
    $
    4,95250 bp decrease
    
    $
    184,565
    
    
    $
    2,60550 bp increase
    
    $
    179,237
    
    
    $
    (2,723
    )100 bp increase
    
    $
    176,391
    
    
    $
    (5,569
    )
 Credit Risk
   3/31/2007
    
    
    12/31/2006Market Value
    
    
    Percent of
    
    
    Market Value
    
    
    Percent of(dollars in thousands)
    
    
    Portfolio
    
    
    (dollars in thousands)
    
    
    PortfolioUS Govt & Other Bonds
    
    $
    97,264
    
    
    
    63.6
    %
    
    $
    88,843
    
    
    
    61.5
    %AA Rated
    
    
    17,591
    
    
    
    11.5
    %
    
    
    15,959
    
    
    
    11.0
    %A Rated
    
    
    38,125
    
    
    
    24.9
    %
    
    
    39,718
    
    
    
    27.5
    %Total
    
    $
    152,980
    
    
    
    100.0
    %
    
    $
    144,520
    
    
    
    100.0
    %
  13




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##### Table of Contents



Item 4: Controls and Procedures
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures.
  Changes in Internal Control Over Financial Reporting.
 Inherent Limitations on Effectiveness of Controls.
  14




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1: Legal Proceedings
  
 Item 1A: Risk Factors
  
 Item 2: Recent Sales of Unregistered Securities
  
 Item 3: Defaults Upon Senior Securities
  
 Item 4: Submission of Matters to a Vote of Security Holders
  
 Item 5: Other Information
   15




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##### Table of Contents



Item 6: Exhibits
  ExhibitNumber
    
    Description10.1
    
    Partner Agent Program Agreement dated March 22, 2007 between SUA Insurance Company and Flying Eagle Insurance
Services, Inc.10.2
    
    Securities Purchase Agreement dated March 22, 2007 between the Registrant and Flying Eagle Insurance Services, Inc.10.3
    
    Amendment No. 4 to the Partner Agent Program Agreement between the Registrant and American Patriot Insurance
Agency, Inc.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  16




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##### Table of Contents



SPECIALTY UNDERWRITERS ALLIANCE, INC. 
(Registrant)Dated: May 4, 2007
    By:
    /s/  Courtney C. SmithName:
    Courtney C. SmithTitle:
    President and Chief Executive Officer 
(Principal Executive Officer)Dated: May 4, 2007
    By:
    /s/ Peter E. JokielName:
    Peter E. JokielTitle:
    Executive Vice President, Chief Financial Officer and
Treasurer (Principal Financial Officer)  17




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##### Table of Contents



ExhibitNumber
    
    Description10.1
    
    Partner Agent Program Agreement dated March 22, 2007 between SUA Insurance Company and Flying Eagle Insurance
Services, Inc.10.2
    
    Securities Purchase Agreement dated March 22, 2007 between the Registrant and Flying Eagle Insurance Services, Inc.10.3
    
    Amendment No. 4 to the Partner Agent Program Agreement between the Registrant and American Patriot Insurance
Agency, Inc.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  18