##### 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, 2008
 Or
 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.
 (Exact name of registrant as specified in its charter)
 DELAWARE
    
    20-0432760(State or Other Jurisdiction ofIncorporation or Organization)
    
    (I.R.S. EmployerIdentification Number)222 South Riverside Plaza, 
Chicago, Illinois
    
    60606(Address of Principal Executive Offices)
    
    (Zip Code)
 (888) 782-4672  Registrants Telephone Number, Including Area Code)
  þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ




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##### 



SPECIALTY UNDERWRITERS ALLIANCE, INC.
 TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 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 INFORMATIONItem 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
    
    
    15Form of Deferred Stock Award AgreementCertification of Chief Executive Officer Pursuant to Section 302Certification of Chief Financial Officer Pursuant to Section 302Certification of Chief Executive Officer Pursuant to Section 906Certification of Chief Financial Officer Pursuant to Section 906
  
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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Business
 Specialty Underwriters Alliance, Inc.
Consolidated Balance Sheets
As of March 31, 2008 and December 31, 2007
(dollars in thousands)
 3/31/2008
    
    
    12/31/2007(unaudited)ASSETSFixed
maturity investments, at fair value (amortized cost: $201,213 and $176,592)
    
    $
    203,042
    
    
    $
    177,735Short-term investments, at amortized cost (which approximates fair value)
    
    
    36,453
    
    
    
    51,652Total Investments
    
    
    239,495
    
    
    
    229,387Cash
    
    
    1,744
    
    
    
    968Insurance premiums receivable
    
    
    60,543
    
    
    
    68,887Reinsurance
recoverable on paid and unpaid loss and loss adjustment expenses
    
    
    74,822
    
    
    
    77,204Prepaid reinsurance premiums
    
    
    1,012
    
    
    
    631Investment income accrued
    
    
    1,894
    
    
    
    1,909Equipment
and capitalized software at cost (less accumulated depreciation of $10,451 and $8,927)
    
    
    13,264
    
    
    
    12,796Intangible assets
    
    
    10,745
    
    
    
    10,745Deferred acquisition costs
    
    
    14,412
    
    
    
    17,495Deferred tax asset
    
    
    509
    
    
    
    Other assets
    
    
    2,905
    
    
    
    2,512Total Assets
    
    $
    421,345
    
    
    $
    422,534LIABILITIES & STOCKHOLDERS EQUITYLiabilitiesLoss and loss adjustment expense reserves
    
    $
    189,610
    
    
    $
    184,736Unearned insurance premiums
    
    
    72,701
    
    
    
    86,741Insured deposit funds
    
    
    13,751
    
    
    
    12,515Accounts payable and other liabilities
    
    
    9,765
    
    
    
    7,405Total Liabilities
    
    
    285,827
    
    
    
    291,397Stockholders equityCommon stock at $.01 par value per share  authorized 30,000,000 shares;
issued and outstanding 14,697,355 shares and 14,697,355 shares
    
    
    147
    
    
    
    147Class B common stock at $.01 par value per share  authorized 2,000,000
shares; issued and outstanding 959,460 shares and 869,738 shares
    
    
    10
    
    
    
    9Paid-in capital  common stock
    
    
    129,490
    
    
    
    129,431Paid-in capital  class B common stock
    
    
    6,543
    
    
    
    6,139Accumulated deficit
    
    
    (2,267
    )
    
    
    (5,732
    )Accumulated other comprehensive income
    
    
    1,595
    
    
    
    1,143Total Stockholders Equity
    
    
    135,518
    
    
    
    131,137Total Liability & Stockholders Equity
    
    $
    421,345
    
    
    $
    422,534
  
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##### Table of Contents



Specialty Underwriters Alliance, Inc.
Consolidated Statements of Operations and Comprehensive Income
For the Three Months Ended March 31, 2008 and 2007
(Unaudited  dollars in thousands, except for earnings per share)
 2008
    
    
    2007RevenuesEarned insurance premiums
    
    $
    35,750
    
    
    $
    35,362Net investment income
    
    
    2,653
    
    
    
    2,080Net realized gains
    
    
    31
    
    
    
    3Total revenue
    
    
    38,434
    
    
    
    37,445ExpensesLoss and loss adjustment expenses
    
    
    21,058
    
    
    
    20,136Acquisition expenses
    
    
    8,703
    
    
    
    8,728Other operating expenses
    
    
    5,927
    
    
    
    5,497Total expenses
    
    
    35,688
    
    
    
    34,361Pretax income
    
    
    2,746
    
    
    
    3,084Federal income tax benefit/(expense)
    
    
    719
    
    
    
    (62
    )Net income
    
    
    3,465
    
    
    
    3,022Net change in unrealized gains and losses for investments held, after tax
    
    
    452
    
    
    
    633Comprehensive income
    
    $
    3,917
    
    
    $
    $3,655Earnings per share available to common stockholders (in dollars)Basic
    
    $
    0.22
    
    
    $
    $0.20Diluted
    
    $
    0.22
    
    
    $
    $0.20Weighted Average Shares OutstandingBasic
    
    
    15,579
    
    
    
    15,374Diluted
    
    
    15,579
    
    
    
    15,374
  
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##### Table of Contents



Specialty Underwriters Alliance, Inc.
Consolidated Statement of Stockholders Equity
As of March 31, 2008
(Unaudited  dollars in thousands)
 Accum-ulatedOther Comp-
    
    
    TotalCommon
    
    
    Paid-in
    
    
    Common
    
    
    Paid-in
    
    
    Retained
    
    
    rehensive
    
    
    Stock-Stock
    
    
    Capital
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    holdersClass A
    
    
    Class A
    
    
    Class B
    
    
    Class B
    
    
    (Deficit)
    
    
    (Loss)
    
    
    EquityBalance at December 31,
2007
    
    $
    147
    
    
    $
    129,431
    
    
    $
    9
    
    
    $
    6,139
    
    
    $
    (5,732
    )
    
    $
    1,143
    
    
    $
    131,137Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,465
    
    
    
    
    
    
    
    3,465Net change in unrealized
invest-
ment gains, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    452
    
    
    
    452Stock issuance
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    404
    
    
    
    
    
    
    
    
    
    
    
    405Stock based compensation
    
    
    
    
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59Balance at March 31, 2008
    
    $
    147
    
    
    $
    129,490
    
    
    $
    10
    
    
    $
    6,543
    
    
    $
    (2,267
    )
    
    $
    1,595
    
    
    $
    135,518
  
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##### Table of Contents



Specialty Underwriters Alliance, Inc.
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2008 and 2007
(Unaudited  dollars in thousands)
 2008
    
    
    2007Cash flows from operationsNet income
    
    $
    3,465
    
    
    $
    3,022Charges (credits) to reconcile net income to cash flows from
operations:Change in deferred income tax
    
    
    (756
    )
    
    
    11Net realized (gains) losses
    
    
    (31
    )
    
    
    (3
    )Amortization of bond premium (discount)
    
    
    (25
    )
    
    
    14Depreciation
    
    
    1,524
    
    
    
    978Net change in:Reinsurance recoverable on unpaid loss and loss adjustment expense
reserves
    
    
    2,382
    
    
    
    1,932Loss and loss adjustment expense reserves
    
    
    4,874
    
    
    
    9,583Insurance premiums receivable
    
    
    8,344
    
    
    
    1,823Unearned insurance premiums
    
    
    (14,040
    )
    
    
    (3,733
    )Deferred acquisition costs
    
    
    3,083
    
    
    
    949Prepaid reinsurance premiums
    
    
    (381
    )
    
    
    (411
    )Insured deposit funds
    
    
    1,236
    
    
    
    3,485Other, net
    
    
    2,056
    
    
    
    1,030Total adjustments
    
    
    8,266
    
    
    
    15,658Net cash flows provided by operations
    
    
    11,731
    
    
    
    18,680Cash flows from investing activitiesNet increase in short-term investments
    
    
    15,199
    
    
    
    (9,442
    )Redemptions, calls and maturities of fixed maturity investments
    
    
    10,712
    
    
    
    6,425Purchases of fixed maturity investments
    
    
    (35,279
    )
    
    
    (14,263
    )Purchase of equipment and capitalized software
    
    
    (1,992
    )
    
    
    (2,403
    )Net cash flows used for investing activities
    
    
    (11,360
    )
    
    
    (19,683
    )Cash flows from financing activitiesIssuance of common stock
    
    
    405
    
    
    
    175Net cash provided by financing activities
    
    
    405
    
    
    
    175Net increase (decrease) in cash during the period
    
    
    776
    
    
    
    (828
    )Cash at beginning of the period
    
    
    968
    
    
    
    2,375Cash at the end of the period
    
    $
    1,744
    
    
    $
    1,547
  
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##### Table of Contents



Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited  dollars in thousands, except per share and stock amounts)
 Note 1. Basis of Presentation
    Note 2. Earnings Per Share
  Three Months EndedMarch 31,
    
    March 31,2008
    
    2007Net income
    
    $
    3,465
    
    
    $
    3,022Weighted average common shares outstanding (basic and diluted)
    
    
    15,579
    
    
    
    15,374Earnings per share (basic and diluted)
    
    $
    0.22
    
    
    $
    0.20
 Note 3. Income Taxes
   
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##### Table of Contents



Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited  dollars in thousands, except per share and stock amounts)
  Three Months EndedMarch
    
    
    March31,2008
    
    
    31,2007Current tax benefit (expense)
    
    
    (37
    )
    
    
    (51
    )Deferred tax benefit (expense)
    
    
    756
    
    
    
    (11
    )Total income tax benefit (expense)
    
    
    719
    
    
    
    (62
    )
 Note 4. Unpaid Loss and Loss Adjustment Expense Reserves
    Note 5. Recent Accounting Pronouncements
    
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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, 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
     
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##### Table of Contents



Three Months Ended March 31, 2008 as compared to the Three Months Ended March 31, 2007
 RESULTS OF OPERATION
 Three Months EndedMarch 31,
    
    
    %2008
    
    
    2007
    
    
    Change(dollars in millions, except for per share data)Gross written premiums
    
    $
    24.1
    
    
    $
    35.0
    
    
    
    -31.1
    %Net written premiums
    
    
    21.7
    
    
    
    31.6
    
    
    
    -31.3
    %Earned premiums
    
    $
    35.8
    
    
    $
    35.4
    
    
    
    1.1
    %Net investment income
    
    
    2.7
    
    
    
    2.1
    
    
    
    28.6
    %Total revenues
    
    
    38.5
    
    
    
    37.5
    
    
    
    2.7
    %Net loss and loss adjustment expense
    
    
    21.1
    
    
    
    20.2
    
    
    
    4.5
    %Acquisition expenses
    
    
    8.7
    
    
    
    8.7
    
    
    
    0.0
    %Other operating expenses
    
    
    5.9
    
    
    
    5.5
    
    
    
    7.3
    %Total expenses
    
    
    35.7
    
    
    
    34.4
    
    
    
    3.8
    %Pre-tax income
    
    
    2.8
    
    
    
    3.1
    
    
    
    -9.7
    %Federal income tax benefit/(expense)
    
    
    0.7
    
    
    
    (0.1
    )
    
    
    
    *Net income (loss)
    
    $
    3.5
    
    
    $
    3.0
    
    
    
    16.7
    %Net income per shareBasic and diluted
    
    $
    0.22
    
    
    $
    0.20
    
    
    
    12.2
    %Average number of common shares outstanding
(basic and diluted)
    
    
    15.6
    
    
    
    15.4
    
    
    
    1.3
    %Key operating ratiosNet loss and loss adjustment expense ratio
    
    
    58.9
    %
    
    
    56.9
    %
    
    
    3.4
    %Ratio of acquisition expense to earned premiums
    
    
    24.3
    %
    
    
    24.7
    %
    
    
    -1.4
    %Ratio of all other expenses to gross written premiums
    
    
    24.6
    %
    
    
    15.7
    %
    
    
    56.9
    %
 
 *
    
    Not meaningful      
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##### Table of Contents



2008
    
    
    2007% of Total
    
    
    
    
    
    
    % of TotalGross Written
    
    
    Gross Written
    
    
    Gross Written
    
    
    Gross WrittenPremium
    
    
    Premium
    
    
    Premium
    
    
    Premium(dollars in millions)Risk Transfer Holdings, Inc.
    
    $
    9.2
    
    
    
    38.2
    %
    
    $
    14.1
    
    
    
    40.2
    %American Team Managers
    
    
    6.2
    
    
    
    25.7
    %
    
    
    11.2
    
    
    
    32.0
    %AEON Insurance Group, Inc.
    
    
    5.6
    
    
    
    23.2
    %
    
    
    5.0
    
    
    
    14.3
    %Appalachian Underwriters, Inc.
    
    
    1.8
    
    
    
    7.5
    %
    
    
    4.4
    
    
    
    12.6
    %First Light Program Manager, Inc.
    
    
    0.4
    
    
    
    1.7
    %
    
    
    
    
    
    
    0.0
    %Insential, Inc
    
    
    0.3
    
    
    
    1.2
    %
    
    
    0.3
    
    
    
    0.9
    %Flying Eagle Insurance Service, Inc
    
    
    0.2
    
    
    
    0.8
    %
    
    
    
    
    
    
    0.0
    %Specialty Risk Solutions, LLC
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %Northern Star Management, Inc.
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %Other
    
    
    0.4
    
    
    
    1.7
    %
    
    
    
    
    
    
    0.0
    %Total
    
    $
    24.1
    
    
    
    100.0
    %
    
    $
    35.0
    
    
    
    100.0
    %
   2008
    
    
    2007% of Total
    
    
    
    
    
    
    % of TotalGross Written
    
    
    Gross Written
    
    
    Gross Written
    
    
    Gross WrittenPremium
    
    
    Premium
    
    
    Premium
    
    
    Premium(dollars in millions)California
    
    
    11.5
    
    
    
    47.7
    %
    
    
    13.8
    
    
    
    39.4
    %Texas
    
    
    4.9
    
    
    
    20.3
    %
    
    
    2.5
    
    
    
    7.1
    %Florida
    
    $
    1.7
    
    
    
    7.1
    %
    
    $
    7.3
    
    
    
    20.9
    %Other States
    
    
    6.0
    
    
    
    24.9
    %
    
    
    11.4
    
    
    
    32.6
    %Total
    
    $
    24.1
    
    
    
    100.0
    %
    
    $
    35.0
    
    
    
    100.0
    %
  
 11




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##### Table of Contents



2008
    
    
    2007% of Total
    
    
    
    
    
    
    % of TotalGross Written
    
    
    Gross Written
    
    
    Gross Written
    
    
    Gross WrittenPremium
    
    
    Premium
    
    
    Premium
    
    
    Premium(dollars in millions)Workers compensation
    
    $
    11.9
    
    
    
    49.4
    %
    
    $
    18.7
    
    
    
    53.4
    %Commercial automobile
    
    
    7.6
    
    
    
    31.5
    %
    
    
    7.0
    
    
    
    20.0
    %General liability
    
    
    3.9
    
    
    
    16.2
    %
    
    
    8.6
    
    
    
    24.6
    %All Other
    
    
    0.7
    
    
    
    2.9
    %
    
    
    0.7
    
    
    
    2.0
    %Total
    
    $
    24.1
    
    
    
    100.0
    %
    
    $
    35.0
    
    
    
    100.0
    %
  Liquidity and Capital Resources
   Cash Flows
  Three Months EndedMarch 31,2008
    
    
    2007(dollars in millions)Cash provided by (used in)Operating activities
    
    $
    11.7
    
    
    $
    18.7Investing activities
    
    
    (11.3
    )
    
    
    (19.7
    )Financing activities
    
    
    0.4
    
    
    
    0.2Change in cash
    
    
    0.8
    
    
    
    (0.8
    )
   
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##### Table of Contents



Fixed Maturity Investments
     
 Item 3: Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
   After TaxEstimated Fair
    
    IncreaseAssumed Change in
    
    Value After
    
    (Decrease) inFair Value at
    
    Relevant
    
    Change in
    
    Carrying3/31/2008
    
    Interest Rate
    
    Interest Rate
    
    Value(dollars in thousands)Total Investments
    
    $
    239,495
    
    
    100 bp decrease
    
    $
    247,734
    
    
    $
    8,23950 bp decrease
    
    $
    243,650
    
    
    $
    4,15550 bp increase
    
    $
    235,283
    
    
    $
    (4,212
    )100 bp increase
    
    $
    231,013
    
    
    $
    (8,482
    )
  Credit Risk
  
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##### Table of Contents



As of March 31, 2008Percent ofBond Ratings
    
    Amount
    
    
    Portfolio(dollars in thousands)AAA rated and U.S. Government and affiliated agency securities
    
    $
    135,962
    
    
    
    67.0
    %AA rated
    
    
    33,572
    
    
    
    16.5
    %A rated
    
    
    30,630
    
    
    
    15.1
    %BBB Rated
    
    
    2,878
    
    
    
    1.4
    %Total
    
    $
    203,042
    
    
    
    100.0
    %
  
 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.
 
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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
  
 Item 6: Exhibits
 Exhibits:
 ExhibitNumber
    
    Description10.1+*
    
    Form of Deferred Stock Award Agreement for Employees under the 2007 Stock Incentive Plan of the Registrant31.1*
    
    Certification of Courtney C. Smith, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of
200231.2*
    
    Certification of Peter E. Jokiel, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    Certification of Courtney C. Smith , Chief Executive Officer, 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, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Filed herewith.+
    
    Indicates a management contract or compensatory plan or arrangement. 
 15




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##### Table of Contents



Signatures
  SPECIALTY UNDERWRITERS ALLIANCE, INC.
(Registrant)By:
    /s/ Courtney C. SmithName:
    Courtney C. SmithTitle:
    President and Chief Executive
OfficerDate: May 9, 2008By:
    /s/ Peter E. Jokiel. SmithName:
    Peter E. JokielTitle:
    Executive Vice President and
Chief Financial OfficerDate: May 9, 2008 
 16




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##### Table of Contents



Exhibits Index:
 ExhibitNumber
    
    Description10.1+*
    
    Form of Deferred Stock Award Agreement for Employees under the 2007 Stock Incentive Plan of the Registrant31.1*
    
    Certification of Courtney C. Smith, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of
200231.2*
    
    Certification of Peter E. Jokiel, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    Certification of Courtney C. Smith , Chief Executive Officer, 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, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Filed herewith.+
    
    Indicates a management contract or compensatory plan or arrangement. 
 17