##### 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, 2006
  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
    
    20-0432760(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification Number)222 South Riverside PlazaChicago, Illinois
    
    60606(Address of principal executive office)
    
    (Zip Code)
 (888) 782-4672
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
 o þ




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##### Table of Contents



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
    
    
    12Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4: Controls and Procedures
    
    
    18PART II  OTHER INFORMATION
    
    
    19Item 1: Legal Proceedings
    
    
    19Item 1A: Risk Factors
    
    
    19Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3: Defaults Upon Senior Securities
    
    
    19Item 4: Submission of Matters to a Vote of Security Holders
    
    
    19Item 5: Other Information
    
    
    19Item 6: Exhibits
    
    
    19Signatures
    
    
    20CertificationsAmendment No.2 to Partner Agent Program AgreementSection 302 CertificationSection 302 CertificationSection 906 CertificationSection 906 Certification
 2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1: Financial Statements
 Specialty Underwriters Alliance, Inc.
Balance Sheets
(dollars in thousands)
 March 31,
    
    
    December 31,2006
    
    
    2005(unaudited)AssetsFixed maturity investments, at fair value (amortized cost: $109,269 and $95,760)
    
    $
    106,800
    
    
    $
    94,129Short-term investments, at amortized cost (which approximates fair value)
    
    
    14,509
    
    
    
    8,862Total investments
    
    
    121,309
    
    
    
    102,991Cash and cash equivalents
    
    
    1,772
    
    
    
    5,329Insurance premium receivables
    
    
    52,881
    
    
    
    44,868Reinsurance recoverable on unpaid loss and loss adjustment expenses
    
    
    85,880
    
    
    
    88,997Prepaid reinsurance premiums
    
    
    256
    
    
    
    3,492Investment income accrued
    
    
    862
    
    
    
    1,102Equipment and capitalized software at cost (less accumulated depreciation of $1,930 and $1,488)
    
    
    6,106
    
    
    
    5,566Intangible assets
    
    
    10,745
    
    
    
    10,745Deferred acquisition costs
    
    
    13,112
    
    
    
    11,279Other assets
    
    
    2,147
    
    
    
    2,794Total assets
    
    $
    295,070
    
    
    $
    277,163LiabilitiesLoss and loss adjustment expense reserves
    
    $
    113,578
    
    
    $
    104,870Unearned insurance premiums
    
    
    62,690
    
    
    
    58,595Payable for securities purchased
    
    
    957
    
    
    
    Insured deposit funds
    
    
    10,367
    
    
    
    7,159Accounts payable and other liabilities
    
    
    6,091
    
    
    
    5,724Total liabilities
    
    
    193,683
    
    
    
    176,348Commitments (Note 4)Stockholders equityCommon Stock at $.01 par value per share -
authorized 30,000,000 and 30,000,000 shares; issued and outstanding 14,680,688 shares
    
    
    147
    
    
    
    147Class B Common Stock at $.01 par value per share -
authorized 2,000,000 shares; issued and outstanding 435,754 and 223,694 shares
    
    
    4
    
    
    
    2Paid-in
capital - Common Stock
    
    
    127,527
    
    
    
    127,256Paid-in
capital - Class B Common Stock
    
    
    3,107
    
    
    
    1,770Accumulated deficit
    
    
    (26,929
    )
    
    
    (26,729
    )Accumulated other comprehensive income (loss)
    
    
    (2,469
    )
    
    
    (1,631
    )Total stockholders equity
    
    
    101,387
    
    
    
    100,815Total liabilities and stockholders equity
    
    $
    295,070
    
    
    $
    277,163
  3




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Specialty Underwriters Alliance, Inc.
Statements of Operations and Comprehensive Income (Loss)
(dollars in thousands)
 Three MonthsEndedMarch 31,2006
    
    
    2005(unaudited)RevenuesEarned insurance premiums
    
    $
    23,256
    
    
    $
    470Net investment income
    
    
    1,144
    
    
    
    793Net realized gain (losses)
    
    
    1
    
    
    
    224,401
    
    
    
    1,265ExpensesLoss and loss adjustment expenses
    
    
    13,997
    
    
    
    471Amortization of deferred acquisition costs
    
    
    5,947
    
    
    
    100Service company fees
    
    
    
    
    
    
    2,205Other operating expenses
    
    
    4,595
    
    
    
    2,981Total expenses
    
    
    24,539
    
    
    
    5,757Pretax income (loss)
    
    
    (138
    )
    
    
    (4,492
    )Federal income tax expense
    
    
    (62
    )
    
    
    Net income (loss)
    
    
    (200
    )
    
    
    (4,492
    )Net change in unrealized gains and losses for investments held, after tax
    
    
    (838
    )
    
    
    (1,171
    )Comprehensive income (loss)
    
    $
    (1,038
    )
    
    $
    (5,663
    )Earnings (loss) per share available
to common stockholders (in dollars)Basic
    
    $
    (0.01
    )
    
    $
    (0.31
    )Diluted
    
    $
    (0.01
    )
    
    $
    (0.31
    )Average Shares OutstandingBasic
    
    
    15,014
    
    
    
    14,707Diluted
    
    
    15,014
    
    
    
    14,707
  4




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##### Table of Contents



Specialty Underwriters Alliance, Inc.
Statement of Stockholders Equity
(dollars in thousands)
 Paid-in
    
    
    
    
    
    
    AccumulatedPaid-in
    
    
    Class B
    
    
    Capital
    
    
    Retained
    
    
    Other
    
    
    TotalCommon
    
    
    Capital
    
    
    Common
    
    
    Class B
    
    
    Earnings
    
    
    Comprehensive
    
    
    StockholdersStock
    
    
    Common Stock
    
    
    Stock
    
    
    Common Stock
    
    
    (Deficit)
    
    
    Income (Loss)
    
    
    EquityBalance at December 31, 2005
    
    
    147
    
    
    
    127,256
    
    
    
    2
    
    
    
    1,770
    
    
    
    (26,729
    )
    
    
    (1,631
    )
    
    
    100,815Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (200
    )
    
    
    
    
    
    
    (200
    )Net change in unrealized investment
losses, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (838
    )
    
    
    (838
    )Stock issuance
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    1,337
    
    
    
    
    
    
    
    
    
    
    
    1,339Stock based compensation
    
    
    
    
    
    
    271
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    271Balance at March 31, 2006 (unaudited)
    
    $
    147
    
    
    $
    127,527
    
    
    $
    4
    
    
    $
    3,107
    
    
    $
    (26,929
    )
    
    $
    (2,469
    )
    
    $
    101,387
  5




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Specialty Underwriters Alliance, Inc.
Statements of Cash Flows
(dollars in thousands)
 Three MonthsEndedMarch 31,2006
    
    
    2005(unaudited)Cash flows from operationsNet income (loss)
    
    $
    (200
    )
    
    $
    (4,492
    )Charges (credits) to reconcile net income to cash
flows from operations:Change in deferred income tax
    
    
    62
    
    
    
    Net realized gains
    
    
    (1
    )
    
    
    (2
    )Amortization of bond discount
    
    
    121
    
    
    
    136Depreciation
    
    
    442
    
    
    
    447Net change in:Reinsurance recoverable on unpaid loss and loss adjustment expense reserves
    
    
    3,117
    
    
    
    401Loss and loss adjustment expense reserves
    
    
    8,708
    
    
    
    (127
    )Insurance premiums receivable
    
    
    (8,013
    )
    
    
    (6,791
    )Unearned insurance premiums
    
    
    4,095
    
    
    
    7,954Deferred acquisition costs
    
    
    (1,833
    )
    
    
    (1,707
    )Prepaid reinsurance premiums
    
    
    3,236
    
    
    
    (868
    )Insured deposit funds
    
    
    3,208
    
    
    
    Other, net
    
    
    1,462
    
    
    
    356Total adjustments
    
    
    14,604
    
    
    
    (201
    )Net cash flows from (used for) operations
    
    
    14,404
    
    
    
    (4,693
    )Cash flows from investing activitiesNet increase in short-term investments
    
    
    (5,647
    )
    
    
    34,129Sales of fixed maturity investments
    
    
    
    
    
    
    4,865Redemptions, calls and maturities of fixed maturity investments
    
    
    2,375
    
    
    
    Purchases of fixed maturity investments
    
    
    (16,003
    )
    
    
    (39,720
    )Unsettled net investment purchases
    
    
    957
    
    
    
    (1,004
    )Purchase of equipment and capitalized software
    
    
    (982
    )
    
    
    (1,250
    )Net cash flows used for investing activities
    
    
    (19,300
    )
    
    
    (2,980
    )Cash flows from financing activitiesIssuance of common stock
    
    
    1,339
    
    
    
    150Net cash from financing activities
    
    
    1,339
    
    
    
    150Net (decrease) increase in cash and cash equivalents
during the period
    
    
    (3,557
    )
    
    
    (7,523
    )Cash and cash equivalents at beginning of the period
    
    
    5,329
    
    
    
    8,986Cash and cash equivalents at end of the period
    
    $
    1,772
    
    
    $
    1,463
  6




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NOTES TO FINANCIAL STATEMENTS   SPECIALTY UNDERWRITERS
ALLIANCE, INC. (dollars in thousands)
 Note 1  Basis of Presentation
    Note 2. Net Loss Per Share
  Three Months
    
    Three MonthsEnded
    
    EndedMarch 31, 2006
    
    March 31, 2005Net loss, as reported
    
    $
    (200
    )
    
    $
    (4,492
    )Average common shares outstanding (basic and
diluted)
    
    
    15,014
    
    
    
    14,707Net loss per share (in dollars) (basic and diluted)
    
    $
    (0.01
    )
    
    $
    (0.31
    )
 Note 3. Income Taxes
  7




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NOTES TO FINANCIAL STATEMENTS   SPECIALTY UNDERWRITERS
ALLIANCE, INC. (dollars in thousands)  (Continued)
   Note 4. Commitments
   Note 5. Stock Options
   8




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NOTES TO FINANCIAL STATEMENTS   SPECIALTY UNDERWRITERS
ALLIANCE, INC. (dollars in thousands)  (Continued)
   Three Months EndedMarch 31, 2005(in thousands dollars, exceptper share amounts)Net income (loss) as reported
    
    $
    (4,492
    )Deduct: compensation expense
    
    
    (238
    )Pro forma net income (loss)
    
    $
    (4,730
    )Basic earnings (loss) per share:As reported
    
    $
    (0.31
    )Pro forma
    
    $
    (0.32
    )Diluted earnings (loss) per share:As reported
    
    $
    (0.31
    )Pro forma
    
    $
    (0.32
    )
  9




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NOTES TO FINANCIAL STATEMENTS   SPECIALTY UNDERWRITERS
ALLIANCE, INC. (dollars in thousands)  (Continued)
  2006
    
    2005Risk free interest rate
    
    4.56  4.68%
    
    2.63  4.32%Expected life
    
    3.1  6.9 years
    
    3.7  6.9 yearsExpected volatility
    
    
    45
    %
    
    
    45
    %Expected dividend yield
    

2%
beginning after 5 years
    
    2% beginning after 5 years
   WeightedAverage
    
    
    
    
    
    WeightedExercise
    
    
    
    
    
    AveragePrice Per
    
    Aggregate
    
    ContractualNumber of
    
    Share (in
    
    Intrinsic
    
    RemainingOption Plan Activity
    
    Shares
    
    dollars)
    
    Value
    
    LifeBalance at December 31, 2005
    
    
    727,466
    
    
    $
    9.40
    
    
    $
    
    
    
    8.97 yearsOptions granted
    
    
    25,000
    
    
    $
    6.22
    
    
    $
    15
    
    
    9.90 yearsOptions exercised
    
    
    
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AOptions forfeited
    
    
    
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ABalance at March 31, 2006
    
    
    752,466
    
    
    $
    9.30
    
    
    $
    15
    
    
    8.76 yearsTotal options vested at
March 31, 2006
    
    
    209,163
    
    
    $
    9.51
    
    
    $
    
    
    
    8.64 years
  Weighted AverageExercise Price Per ShareShares
    
    (in dollars)Nonvested at December 31, 2005
    
    
    530,526
    
    
    $
    9.37Options granted
    
    
    25,000
    
    
    $
    6.22Options vested
    
    
    (12,223
    )
    
    $
    9.64Options forfeited
    
    
    
    
    
    
    N/ANonvested at March 31, 2006
    
    
    543,303
    
    
    $
    9.22
 10




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NOTES TO FINANCIAL STATEMENTS  SPECIALTY UNDERWRITERS
ALLIANCE, INC. (dollars in thousands)  (Continued)
  Note 6. Unpaid Loss and Loss Adjustment Expenses
    11




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Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
  The Company
 Overview
    Results of Operations for the Three Months Ended March 31, 2006 and March 31, 2005
  12




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13




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##### Table of Contents



For the Quarter
    
    For the YearEnded
    
    EndedMarch 31, 2006
    
    December 31, 2005California
    
    
    33.8
    %
    
    
    39.4
    %Florida
    
    
    31.8
    %
    
    
    42.6
    %Other States
    
    
    34.4
    %
    
    
    18.0
    %Total
    
    
    100
    %
    
    
    100
    %
  For the Quarter
    
    For the YearEnded
    
    EndedMarch 31, 2006
    
    December 31, 2005Workers compensation
    
    
    68.0
    %
    
    
    68.8
    %Commercial automobile
    
    
    10.7
    %
    
    
    10.4
    %General liability
    
    
    20.0
    %
    
    
    11.8
    %All other
    
    
    1.3
    %
    
    
    9.0
    %Total
    
    
    100
    %
    
    
    100
    %
   14




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##### Table of Contents



For the Quarter
    
    For the QuarterEnded
    
    EndedMarch 31, 2006
    
    March 31, 2005Gross premiums written
    
    $
    30.8
    
    
    $
    8.5Net premiums earned
    
    $
    23.3
    
    
    $
    0.5Net loss and loss adjustment expense ratio
    
    
    60.2
    %
    
    
    100.0
    %Ratio of amortization of deferred
acquisition expense to earned premium
    
    
    25.6
    %
    
    
    21.3
    %Ratio of all other expenses to gross
written premium
    
    
    14.9
    %
    
    
    61.3
    %
  15




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Liquidity and Capital Resources
       
 Item 3: Quantitative and Qualitative Disclosures About Market Risk
  16




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Interest Rate Risk
   EstimatedAssumed Change
    
    Fair Value After
    
    IncreaseFair Value
    
    in Relevant
    
    Change in
    
    (Decrease)$ in thousands
    
    at 3/31/06
    
    Interest Rate
    
    Interest Rate
    
    in Carrying ValueFixed Maturity Investments
    
    $121,309
    
    100 bp decrease
    
    $
    123,914
    
    
    $
    2,60550 bp decrease
    
    $
    122,629
    
    
    $
    1,32050 bp increase
    
    $
    119,959
    
    
    $
    (1,350
    )100 bp increase
    
    $
    117,260
    
    
    $
    (2,716
    )
 Credit Risk
   3/31/2006
    
    
    12/31/2005Market Value
    
    
    Percent of
    
    
    Market Value
    
    
    Percent of(000) omitted
    
    
    Portfolio
    
    
    (000) omitted
    
    
    PortfolioUS Govt & Other Bonds
    
    $
    51,880
    
    
    
    48.6
    %
    
    $
    41,279
    
    
    
    43.9
    %AA Rated
    
    $
    16,783
    
    
    
    15.7
    %
    
    $
    15,940
    
    
    
    16.9
    %A Rated
    
    $
    38,137
    
    
    
    35.7
    %
    
    $
    36,910
    
    
    
    39.2
    %$
    106,800
    
    
    
    100.0
    %
    
    $
    94,129
    
    
    
    100.0
    %
 17




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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.
 18




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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
  
 Item 6: Exhibits
  ExhibitNumber
    
    Description10.1.1
    
    Amendment No. 2 to Partner Agent Program Agreement, dated March
20, 2006 between the Registrant and American Team Managers31.1
    
    Certification of Courtney C. Smith pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Peter E. Jokiel pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Courtney C. Smith pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 200232.2
    
    Certification of Peter E. Jokiel pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
 19




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##### Table of Contents



SPECIALTY UNDERWRITERS ALLIANCE, INC.(Registrant)Dated:
May 9th, 2006
    
    By:
    
    /s/ Courtney C. SmithName: Courtney C. SmithTitle: President and Chief Executive Officer(Principal Executive Officer)Dated:
May 9th, 2006
    
    By:
    
    /s/ Peter E. JokielName: Peter E. JokielTitle: Executive Vice President, Chief FinancialOfficer and Treasurer (Principal Financial Officer)
 20




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##### Table of Contents



ExhibitNumber
    
    Description10.1.1
    
    Amendment No. 2 to Partner Agent Program Agreement, dated March
20, 2006 between Registrant and American Team Managers31.1
    
    Certification of Courtney C. Smith pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Peter E. Jokiel pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Courtney C. Smith pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 200232.2
    
    Certification of Peter E. Jokiel pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
 21