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 September 30, 2009
 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 of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification 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
 o o
  Large accelerated filer o        Accelerated filer þ        Non-accelerated filer o        Smaller reporting company o
 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
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market
Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
    
    
    25Item 3. Defaults Upon Senior Securities
    
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    
    25Item 5. Other Information
    
    
    25Item 6. Exhibits
    
    
    25
 
 2




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##### 



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Specialty Underwriters Alliance, Inc.
Consolidated Balance Sheets
As of September 30, 2009 and December 31, 2008
(in thousands, except share data)
 9/30/2009
    
    
    12/31/2008(unaudited)ASSETSFixed maturity investments, at fair value (amortized cost: $236,290 and $220,744)
    
    $
    244,135
    
    
    $
    216,708Short-term investments, at amortized cost (which approximates fair value)
    
    
    60,454
    
    
    
    46,697Total Investments
    
    
    304,589
    
    
    
    263,405Cash
    
    
    1,520
    
    
    
    208Insurance premiums receivable
    
    
    59,222
    
    
    
    60,715Reinsurance recoverable on paid and unpaid loss and loss adjustment expenses
    
    
    73,883
    
    
    
    79,598Prepaid reinsurance premiums
    
    
    337
    
    
    
    309Investment income accrued
    
    
    2,476
    
    
    
    2,467Equipment and capitalized software at cost (less accumulated depreciation of $20,465
and $15,486)
    
    
    12,323
    
    
    
    13,562Intangible assets
    
    
    10,745
    
    
    
    10,745Deferred acquisition costs
    
    
    21,408
    
    
    
    18,156Federal income tax recoverable
    
    
    1,173
    
    
    
    115Deferred tax asset
    
    
    -
    
    
    
    3,146Other assets
    
    
    4,201
    
    
    
    2,426Total Assets
    
    $
    491,877
    
    
    $
    454,852LIABILITIES & STOCKHOLDERS EQUITYLiabilitiesLoss and loss adjustment expense reserves
    
    $
    222,232
    
    
    $
    214,953Unearned insurance premiums
    
    
    103,275
    
    
    
    80,600Insured deposit funds
    
    
    13,261
    
    
    
    15,806Deferred tax liability
    
    
    691
    
    
    
    -Accounts payable and other liabilities
    
    
    8,103
    
    
    
    7,204Total Liabilities
    
    
    347,562
    
    
    
    318,563Commitments (Note 8)Stockholders equityCommon stock
at $0.01 par value per share  authorized: 30,000,000 shares; issued: 14,779,417 shares and 14,712,355 shares; and outstanding: 14,574,596 shares and
14,437,355 shares
    
    
    148
    
    
    
    147Class B common stock at $0.01 par value per share  authorized: 2,000,000 shares;
issued and outstanding: 1,354,328 shares and 1,368,562 shares
    
    
    13
    
    
    
    14Paid-in capital  common stock
    
    
    130,553
    
    
    
    129,926Paid-in capital  class B common stock
    
    
    7,832
    
    
    
    8,077Accumulated earnings
    
    
    1,276
    
    
    
    1,693Treasury stock (204,821 and 275,000 shares of common stock)
    
    
    (1,003
    )
    
    
    (1,347
    )Accumulated other comprehensive income (loss)
    
    
    5,496
    
    
    
    (2,221
    )Total Stockholders Equity
    
    
    144,315
    
    
    
    136,289Total Liabilities & Stockholders Equity
    
    $
    491,877
    
    
    $
    454,852
  
 3




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##### 



Specialty Underwriters Alliance, Inc.
Consolidated Statements of Operations and Comprehensive Income
For the Three and Nine Months Ended September 30, 2009 and 2008
(Unaudited  in thousands, except for earnings per share)
 Three Months Ended
    
    
    Nine Months Ended9/30/2009
    
    9/30/2008
    
    
    9/30/2009
    
    
    9/30/2008RevenuesEarned insurance premiums
    
    $
    44,280
    
    $
    37,208
    
    
    $
    114,420
    
    
    $
    107,153Net investment income
    
    
    2,722
    
    
    2,662
    
    
    
    8,271
    
    
    
    7,985Net realized gains (losses)
    
    
    (381
    )
    
    4
    
    
    
    (213
    )
    
    
    42Subtotal: Revenue before impairments
    
    
    46,621
    
    
    39,874
    
    
    
    122,478
    
    
    
    115,180Other than temporary impairment losses
    
    
    (363
    )
    
    (849
    )
    
    
    (2,198
    )
    
    
    (849
    )Loss (gain) recognized in other comprehensive income
    
    
    (253
    )
    
    -
    
    
    
    1,006
    
    
    
    -Subtotal: Net impairment recognized in earnings
    
    
    (616
    )
    
    (849
    )
    
    
    (1,192
    )
    
    
    (849
    )Total revenue
    
    
    46,005
    
    
    39,025
    
    
    
    121,286
    
    
    
    114,331ExpensesLoss and loss adjustment expenses
    
    
    31,812
    
    
    22,444
    
    
    
    75,791
    
    
    
    64,443Acquisition expenses
    
    
    10,470
    
    
    8,531
    
    
    
    27,354
    
    
    
    24,501Other operating expenses
    
    
    5,795
    
    
    6,234
    
    
    
    19,521
    
    
    
    17,573Total expenses
    
    
    48,077
    
    
    37,209
    
    
    
    122,666
    
    
    
    106,517Pretax income (loss)
    
    
    (2,072
    )
    
    1,816
    
    
    
    (1,380
    )
    
    
    7,814Income tax (expense) benefit
    
    
    775
    
    
    (515
    )
    
    
    600
    
    
    
    (798
    )Net income (loss)
    
    
    (1,297
    )
    
    1,301
    
    
    
    (780
    )
    
    
    7,016Net change in unrealized gains and losses for
investments held, after tax
    
    
    4,438
    
    
    (3,785
    )
    
    
    8,734
    
    
    
    (6,018
    )Impairments included in other comprehensive income
(loss), after tax
    
    
    164
    
    
    -
    
    
    
    (654
    )
    
    
    -Comprehensive income (loss)
    
    $
    3,305
    
    $
    (2,484
    )
    
    $
    7,300
    
    
    $
    998Earnings (losses) per share available to
common stockholders (in dollars)Basic and
diluted
    
    $
    (0.08
    )
    $
    0.08
    
    
    $
    (0.05
    )
    
    $
    0.45Weighted average shares outstandingBasic
    
    
    15,924
    
    
    15,516
    
    
    
    15,870
    
    
    
    15,587Diluted
    
    
    15,924
    
    
    15,567
    
    
    
    15,870
    
    
    
    15,743
  
 4




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##### 



Specialty Underwriters Alliance, Inc.
Consolidated Statement of Stockholders Equity
As of September 30, 2009
(Unaudited  in thousands)
 Accum.Other
    
    
    TotalCommon
    
    
    Paid-in
    
    
    Common
    
    
    Paid-in
    
    
    
    
    
    
    
    
    
    
    Comp.
    
    
    Stock-Stock
    
    
    Capital
    
    
    Stock
    
    
    Capital
    
    
    Retained
    
    
    Treasury
    
    
    Income
    
    
    holdersClass A
    
    
    Class A
    
    
    Class B
    
    
    Class B
    
    
    Earnings
    
    
    Stock
    
    
    (Loss)
    
    
    EquityBalance at Dec. 31, 2008
    
    $

    147
    
    
    $
    129,926
    
    
    $
    14
    
    
    $
    8,077
    
    
    $
    1,693
    
    
    $
    (1,347
    )
    
    $
    (2,221
    )
    
    $
    136,289Net income
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (780
    )
    
    
    -
    
    
    
    -
    
    
    
    (780
    )Net change in unrealized
investment gains, net of tax
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    8,734
    
    
    
    8,734Impairments included in
other comprehensive income,
net of tax
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (654
    )
    
    
    (654
    )Stock issuance
    
    
    1
    
    
    
    110
    
    
    
    (1
    )
    
    
    (245
    )
    
    
    -
    
    
    
    344
    
    
    
    -
    
    
    
    209Treasury stock purchases
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -Stock based compensation
    
    
    -
    
    
    
    517
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    517Cumulative effect of
adopting FSP FAS 115-2
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    363
    
    
    
    -
    
    
    
    (363
    )
    
    
    -Balance at Sept. 30, 2009
    
    $
    148
    
    
    $
    130,553
    
    
    $
    13
    
    
    $
    7,832
    
    
    $
    1,276
    
    
    $
    (1,003
    )
    
    $
    5,496
    
    
    $
    144,315
  
 5




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##### 



Specialty Underwriters Alliance, Inc.  Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2009 and 2008
(Unaudited  in thousands)
 Nine Months Ended9/30/2009
    
    
    9/30/2008Cash flows from operationsNet income
    
    $
    (780
    )
    
    $
    7,016Charges (credits) to reconcile net income to cash flows from operations:Change in deferred income tax
    
    
    (522
    )
    
    
    (309
    )Net realized losses
    
    
    1,405
    
    
    
    807Amortization of bond premium
    
    
    214
    
    
    
    71Depreciation
    
    
    4,979
    
    
    
    4,931Net change in:Reinsurance recoverable on unpaid loss and loss adjustment expense reserves
    
    
    5,715
    
    
    
    3,056Loss and loss adjustment expense reserves
    
    
    7,279
    
    
    
    17,574Insurance premiums receivable
    
    
    1,493
    
    
    
    8,809Unearned insurance premiums
    
    
    22,675
    
    
    
    (3,294
    )Deferred acquisition costs
    
    
    (3,252
    )
    
    
    173Prepaid reinsurance premiums
    
    
    (28
    )
    
    
    (59
    )Insured deposit funds
    
    
    (2,545
    )
    
    
    995Other, net
    
    
    (1,469
    )
    
    
    4Total adjustments
    
    
    35,944
    
    
    
    32,758Net cash flows provided by operations
    
    
    35,164
    
    
    
    39,774Cash flows from investing activitiesNet (increase) decrease in short-term investments
    
    
    (13,757
    )
    
    
    5,724Sales, redemptions, calls and maturities of fixed maturity investments
    
    
    26,096
    
    
    
    21,416Purchases of fixed maturity investments
    
    
    (42,706
    )
    
    
    (61,832
    )Purchase of equipment and capitalized software
    
    
    (3,740
    )
    
    
    (5,302
    )Net cash flows used for investing activities
    
    
    (34,107
    )
    
    
    (39,994
    )Cash flows from financing activitiesIssuance of common stock
    
    
    255
    
    
    
    1,118Treasury stock purchases
    
    
    -
    
    
    
    (1,347
    )Net cash provided by (used for) financing activities
    
    
    255
    
    
    
    (229
    )Net increase (decrease) in cash during the period
    
    
    1,312
    
    
    
    (449
    )Cash at beginning of the period
    
    
    208
    
    
    
    968Cash at the end of the period
    
    $
    1,520
    
    
    $
    519
  
 6




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##### 



Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited  in thousands, except earnings per share)
 Note 1. Basis of Presentation
    Note 2. Recent Accounting Pronouncements
 Generally Accepted Accounting Principles
 Subsequent Events
 Fair Value
Measurements and Disclosures
 Investments  Debt and Equity
Securities
 
 7




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##### 



Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited  in thousands, except earnings per share)
  Financial Instruments
 Investments  Other
 Note 3. Earnings Per Share
  Three Months Ended
    
    
    Nine Months Ended9/30/09
    
    
    9/30/08
    
    
    9/30/09
    
    
    9/30/08Numerator for earnings per shareNet income (loss)
    
    $
    (1,297
    )
    
    $
    1,301
    
    
    $
    (780
    )
    
    $
    7,016Denominator for earnings per shareWeighted
average shares outstanding used in 
computation of earnings per shareCommon stock (class A and B) issued
    
    
    16,129
    
    
    
    15,791
    
    
    
    16,103
    
    
    
    15,685Common stock in treasury
    
    
    205
    
    
    
    275
    
    
    
    233
    
    
    
    98Weighted
average shares outstanding - basic
    
    
    15,924
    
    
    
    15,516
    
    
    
    15,870
    
    
    
    15,587Effect of dilutive securities1,2Stock awards
    
    
    
    
    
    
    51
    
    
    
    
    
    
    
    156Weighted
average shares outstanding - diluted
    
    
    15,924
    
    
    
    15,567
    
    
    
    15,870
    
    
    
    15,743Earnings (losses) per shareBasic and diluted
    
    $
    (0.08
    )
    
    $
    0.08
    
    
    $
    (0.05
    )
    
    $
    0.45
 
 1
    
    Outstanding stock options for 718 shares at September 30,
2009 and 2008 have been excluded from the diluted earnings per share calculation for the
three and nine months ended September 30, 2009 and 2008, as they were anti-dilutive.2
    
    Potential common shares have been excluded in the computation of diluted earnings per share for the three
and nine months ended September 30, 2009 since for each of these periods the Company experienced a net loss and inclusion of potential
common shares would therefore be anti-dilutive. Note 4. Income Taxes
  Three Months Ended
    
    
    Nine Months Ended9/30/09
    
    
    9/30/08
    
    
    9/30/09
    
    
    9/30/08Current tax (benefit) expense
    
    $
    (585
    )
    
    $
    517
    
    
    $
    (78
    )
    
    $
    1,107Deferred tax (benefit) expense
    
    
    (190
    )
    
    
    (2
    )
    
    
    (522
    )
    
    
    (309
    )Total income tax (benefit) expense
    
    $
    (775
    )
    
    $
    515
    
    
    $
    (600
    )
    
    $
    798
 
 8




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##### 



Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited  in thousands, except earnings per share)
    Note 5. Unpaid Loss and Loss Adjustment Expense Reserves
    Note 6. Investments
  Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCategory
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury
    
    $
    9,790
    
    
    $
    702
    
    
    $
    -
    
    
    $
    10,492U.S. Government Agencies
    
    
    28,729
    
    
    
    1,652
    
    
    
    -
    
    
    
    30,381Municipals
    
    
    71,942
    
    
    
    4,996
    
    
    
    (5
    )
    
    
    76,933Corporate Fixed Maturity
    
    
    63,413
    
    
    
    4,008
    
    
    
    (148
    )
    
    
    67,273Agency Mortgage Backed
    
    
    38,407
    
    
    
    2,341
    
    
    
    -
    
    
    
    40,748Non-Agency Mortgage Backed
    
    
    6,625
    
    
    
    1
    
    
    
    (2,031
    )
    
    
    4,595Commercial Mortgage Backed
    
    
    13,386
    
    
    
    51
    
    
    
    (1,678
    )
    
    
    11,759Asset Backed
    
    
    3,998
    
    
    
    -
    
    
    
    (2,044
    )
    
    
    1,954Total Fixed Maturities
    
    $
    236,290
    
    
    $
    13,751
    
    
    $
    (5,906
    )
    
    $
    244,135
 
 9




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##### 



Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited  in thousands, except earnings per share)
  Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCategory
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury
    
    $
    9,794
    
    
    $
    1,109
    
    
    $
    -
    
    
    $
    10,903U.S. Government Agencies
    
    
    35,109
    
    
    
    2,118
    
    
    
    -
    
    
    
    37,227Municipals
    
    
    54,655
    
    
    
    959
    
    
    
    (679
    )
    
    
    54,935Corporate Fixed Maturity
    
    
    56,368
    
    
    
    858
    
    
    
    (1,691
    )
    
    
    55,535Agency Mortgage Backed
    
    
    39,066
    
    
    
    1,373
    
    
    
    -
    
    
    
    40,439Non-Agency Mortgage Backed
    
    
    7,781
    
    
    
    -
    
    
    
    (2,617
    )
    
    
    5,164Commercial Mortgage Backed
    
    
    13,301
    
    
    
    -
    
    
    
    (3,412
    )
    
    
    9,889Asset Backed
    
    
    4,670
    
    
    
    -
    
    
    
    (2,054
    )
    
    
    2,616Total Fixed Maturities
    
    $
    220,744
    
    
    $
    6,417
    
    
    $
    (10,453
    )
    
    $
    216,708
   Measuring Fair Value
   Fair Value Measurement Using:Quoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantFair Value
    
    
    Identical
    
    
    Observable
    
    
    Unobservableat
    
    
    Assets
    
    
    Inputs
    
    
    InputsCategory
    
    9/30/09
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)U.S. Treasury
    
    $
    10,492
    
    
    $
    -
    
    
    $
    10,492
    
    
    $
    -U.S. Government Agency
    
    
    30,381
    
    
    
    -
    
    
    
    30,381
    
    
    
    -Municipal
    
    
    76,933
    
    
    
    -
    
    
    
    76,933
    
    
    
    -Corporate Fixed Maturity
    
    
    67,273
    
    
    
    -
    
    
    
    67,273
    
    
    
    -Agency Mortgage Backed
    
    
    40,748
    
    
    
    -
    
    
    
    40,748
    
    
    
    -Non-Agency Mortgage Backed
    
    
    4,595
    
    
    
    -
    
    
    
    -
    
    
    
    4,595Commercial Mortgage Backed
    
    
    11,759
    
    
    
    -
    
    
    
    -
    
    
    
    11,759Asset-Backed
    
    
    1,954
    
    
    
    -
    
    
    
    -
    
    
    
    1,954Total Fixed Maturity Investments
    
    $
    244,135
    
    
    $
    -
    
    
    $
    225,827
    
    
    $
    18,308
 
 10




---



##### 



Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited  in thousands, except earnings per share)
  Fair Value Measurement Using:Quoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantFair Value
    
    
    Identical
    
    
    Observable
    
    
    Unobservableat
    
    
    Assets
    
    
    Inputs
    
    
    InputsCategory
    
    12/31/08
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)U.S. Treasury
    
    $
    10,903
    
    
    $
    -
    
    
    $
    10,903
    
    
    $
    -U.S. Government Agency
    
    
    37,227
    
    
    
    -
    
    
    
    37,227
    
    
    
    -Municipal
    
    
    54,935
    
    
    
    -
    
    
    
    54,935
    
    
    
    -Corporate Fixed Maturity
    
    
    55,535
    
    
    
    -
    
    
    
    55,535
    
    
    
    -Agency Mortgage Backed
    
    
    40,439
    
    
    
    -
    
    
    
    40,439
    
    
    
    -Non-Agency Mortgage Backed
    
    
    5,164
    
    
    
    -
    
    
    
    -
    
    
    
    5,164Commercial Mortgage Backed
    
    
    9,889
    
    
    
    -
    
    
    
    8,676
    
    
    
    1,213Asset-Backed
    
    
    2,616
    
    
    
    -
    
    
    
    204
    
    
    
    2,412Total Fixed Maturity Investments
    
    $
    216,708
    
    
    $
    -
    
    
    $
    207,919
    
    
    $
    8,789
  
    
    First, the Company requests a single non-binding price from our independent pricing
service.
 
    
    Second, if no price is available from the pricing service for the instrument, the
Company requests one or more non-binding broker-dealer quotes. A single quote is
sought from a broker-dealer who has significant knowledge of the instrument being
priced. If such broker-dealer is not available to quote, then an average is used from
quotes solicited from multiple broker-dealers.
 
    
    Third, if a broker-dealer quote is unavailable for the instrument, the Company uses
a matrix pricing formula based on various factors provided from multiple broker-dealers
including yield spreads, reported trades, sector or grouping information and for
certain securities, other factors such as timeliness of payment, default experience and
prepayment speed assumptions.
   
 11




---



##### 



Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited  in thousands, except earnings per share)
  Three Months
    
    
    Nine MonthsEnded
    
    
    Ended9/30/2009
    
    
    9/30/2009Level 3 investments as of beginning of period
    
    $
    19,141
    
    
    $
    8,789Transfers into level 3 (at beginning period value)
    
    
    -
    
    
    
    9,618Purchases, sales, issuances, and settlements, net
    
    
    (943
    )
    
    
    (1,450
    )Total gains or losses (realized/unrealized):
    
    
    
    
    
    
    -Included in earnings
    
    
    (1,086
    )
    
    
    (1,661
    )Included in comprehensive income
    
    
    1,196
    
    
    
    3,012Level 3 investments as of September 30, 2009
    
    $
    18,308
    
    
    $
    18,308
  Unrealized Losses
  Unrealized LossesLess than
    
    
    Greater thanFair Value
    
    
    12 Months
    
    

12 Months
    
    
    TotalMunicipal
    
    $
    1,050
    
    
    $
    (5
    )
    
    $
    -
    
    
    $
    (5
    )Corporate Fixed Maturity
    
    
    2,863
    
    
    
    -
    
    
    
    (148
    )
    
    
    (148
    )Non-Agency Mortgage Backed
    
    
    4,395
    
    
    
    -
    
    
    
    (2,031
    )
    
    
    (2,031
    )Commercial Mortgage Backed
    
    
    6,819
    
    
    
    -
    
    
    
    (1,678
    )
    
    
    (1,678
    )Asset Backed
    
    
    1,954
    
    
    
    (272
    )
    
    
    (1,772
    )
    
    
    (2,044
    )Total Fixed Maturities
    
    $
    17,081
    
    
    $
    (277
    )
    
    $
    (5,629
    )
    
    $
    (5,906
    )
  Unrealized LossesLess than
    
    
    Greater thanFair Value
    
    
    12 Months
    
    

12 Months
    
    
    TotalMunicipal
    
    $
    21,713
    
    
    $
    (679
    )
    
    $
    -
    
    
    $
    (679
    )Corporate Fixed Maturity
    
    
    35,201
    
    
    
    (560
    )
    
    
    (1,131
    )
    
    
    (1,691
    )Non-Agency Mortgage Backed
    
    
    5,164
    
    
    
    (279
    )
    
    
    (2,338
    )
    
    
    (2,617
    )Commercial Mortgage Backed
    
    
    9,889
    
    
    
    (1,811
    )
    
    
    (1,601
    )
    
    
    (3,412
    )Asset Backed
    
    
    2,616
    
    
    
    -
    
    
    
    (2,054
    )
    
    
    (2,054
    )Total Fixed Maturities
    
    $
    74,583
    
    
    $
    (3,329
    )
    
    $
    (7,124
    )
    
    $
    (10,453
    )
  
 12




---



##### 



Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited  in thousands, except earnings per share)
  Impairment Review
    Recognized InOtherCompre-hensiveIncomeEarnings
    
    
    (Loss)
    
    
    TotalBeginning Balance, July 1, 2009
    
    $
    (866
    )
    
    $
    (1,818
    )
    
    $
    (2,684
    )Cumulative effect of adjustment
resulting from adoption of FSP
115-2, before income taxes
    
    
    -
    
    
    
    -
    
    
    
    -Subtotal
    
    
    (866
    )
    
    
    (1,818
    )
    
    
    (2,684
    )Other-than-temporary impairment loss
    
    
    (616
    )
    
    
    253
    
    
    
    (363
    )Ending balance, September 30, 2009
    
    $
    (1,482
    )
    
    $
    (1,565
    )
    
    $
    (3,047
    )
 
 13




---



##### 



Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited  in thousands, except earnings per share)
  Recognized InOtherCompre-hensiveIncomeEarnings
    
    
    (Loss)
    
    
    TotalBeginning Balance, April 1, 2009
    
    $
    (1,060
    )
    
    $
    -
    
    
    $
    (1,060
    )Cumulative
effect of adjustment  resulting from adoption
 of FSP
115-2, before income taxes
    
    
    559
    
    
    
    (559
    )
    
    
    -Subtotal
    
    
    (501
    )
    
    
    (559
    )
    
    
    (1,060
    )Other-than-temporary impairment loss
    
    
    (981
    )
    
    
    (1,006
    )
    
    
    (1,987
    )Ending balance, September 30, 2009
    
    $
    (1,482
    )
    
    $
    (1,565
    )
    
    $
    (3,047
    )
 Realized Gains and Losses
  Three Months
    
    
    Nine MonthsEnded
    
    
    Ended9/30/09
    
    
    9/30/09Gross gain on sales
    
    $
    80
    
    
    $
    203Gross loss on sales
    
    
    (470
    )
    
    
    (483
    )Net gain (loss) on calls, redemptions, maturity and sinking fund
    
    
    9
    
    
    
    67Net gain (loss)
    
    $
    (381
    )
    
    $
    (213
    )Number of sales transactions resulting in gain or loss
    
    
    2
    
    
    
    9
  Note 7. Equity-Based Compensation
   
 14




---



##### 



Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited  in thousands, except earnings per share)
  Note 8. Commitments and Contingencies
  
 15




---



##### 



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
Item 1A of Part II of the Quarterly Report on Form 10-Q for the period ended June 30, 2009 and in
the Business section of our Annual Report on Form 10-K for the year ended December 31, 2008.
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
    
 16




---



##### 



Three Months Ended September 30, 2009 as compared to the Three Months Ended September 30, 2008
 RESULTS OF OPERATION
 Three Months Ended9/30/2009
    
    
    9/30/2008
    
    

% Change(in millions, except forearnings per share)Gross written premiums
    
    $
    70.5
    
    
    $
    44.2
    
    
    
    59.5%Net written premiums
    
    
    68.3
    
    
    
    42.1
    
    
    
    62.2%Earned premiums
    
    $
    44.3
    
    
    $
    37.2
    
    
    
    19.1%Net investment income
    
    
    2.7
    
    
    
    2.6
    
    
    
    3.8%Net realized losses
    
    
    (1.0
    )
    
    
    (0.8
    )
    
    
    *Total revenues
    
    
    46.0
    
    
    
    39.0
    
    
    
    17.9%Net loss and loss adjustment expense
    
    
    31.8
    
    
    
    22.4
    
    
    
    42.0%Acquisition expenses
    
    
    10.5
    
    
    
    8.5
    
    
    
    23.5%Other operating expenses
    
    
    5.8
    
    
    
    6.3
    
    
    
    -7.9%Total expenses
    
    
    48.1
    
    
    
    37.2
    
    
    
    29.3%Pre-tax income (loss)
    
    
    (2.1
    )
    
    
    1.8
    
    
    
    *Federal income tax benefit (expense)
    
    
    0.8
    
    
    
    (0.5
    )
    
    
    *Net income (loss)
    
    $
    (1.3
    )
    
    $
    1.3
    
    
    
    *Earnings (losses) per share available to common stockholdersBasic and
diluted
    
    $
    (0.08
    )
    
    $
    0.08
    
    
    
    *Weighted average shares outstandingBasic
    
    
    15.9
    
    
    
    15.5
    
    
    
    2.6%Diluted
    
    
    15.9
    
    
    
    15.6
    
    
    
    1.9%Key operating ratiosNet loss and loss adjustment expense ratio
    
    
    71.8%
    
    
    
    60.2%
    
    
    
    19.2%Ratio of acquisition expense to earned premiums
    
    
    23.7%
    
    
    
    22.8%
    
    
    
    3.7%Ratio of all other expenses to gross written premiums
    
    
    8.2%
    
    
    
    14.3%
    
    
    
    -42.3%
 
 *
    
    Not meaningful   
 17




---



##### 



9/30/2009
    
    
    9/30/2008% of Total
    
    
    
    
    
    
    % of TotalGross Written
    
    
    Gross Written
    
    
    Gross Written
    
    
    Gross WrittenPremium
    
    
    Premium
    
    
    Premium
    
    
    Premium(in millions)Specialty Risk Solutions, LLC
    
    $
    42.6
    
    
    
    60.4%
    
    
    $
    16.1
    
    
    
    36.5%Risk Transfer Programs, LLC
    
    
    6.7
    
    
    
    9.5%
    
    
    
    12.5
    
    
    
    28.3%American Team Managers
    
    
    6.1
    
    
    
    8.7%
    
    
    
    6.2
    
    
    
    14.0%Appalachian Underwriters, Inc.
    
    
    5.7
    
    
    
    8.1%
    
    
    
    1.6
    
    
    
    3.6%AEON Insurance Group, Inc.
    
    
    3.8
    
    
    
    5.4%
    
    
    
    5.1
    
    
    
    11.5%Northern Star Management, Inc.
    
    
    3.7
    
    
    
    5.2%
    
    
    
    1.6
    
    
    
    3.6%First Light Program Manager, Inc.
    
    
    1.6
    
    
    
    2.3%
    
    
    
    0.6
    
    
    
    1.4%Insential, Inc
    
    
    0.2
    
    
    
    0.3%
    
    
    
    0.3
    
    
    
    0.7%Flying Eagle Insurance Service, Inc
    
    
    -
    
    
    
    0.0%
    
    
    
    0.1
    
    
    
    0.2%Other
    
    
    0.1
    
    
    
    0.1%
    
    
    
    0.1
    
    
    
    0.2%Total
    
    $
    70.5
    
    
    
    100.0%
    
    
    $
    44.2
    
    
    
    100.0%Our gross written premiums for the three months ended September 30, 2009 and 2008 by state
were as follows:9/30/2009
    
    
    9/30/2008% of Total
    
    
    
    
    
    
    % of TotalGross Written
    
    
    Gross Written
    
    
    Gross Written
    
    
    Gross WrittenPremium
    
    
    Premium
    
    
    Premium
    
    
    Premium(in millions)California
    
    $
    51.0
    
    
    
    72.4%
    
    
    $
    26.0
    
    
    
    58.8%Florida
    
    
    5.1
    
    
    
    7.2%
    
    
    
    3.3
    
    
    
    7.5%Texas
    
    
    2.5
    
    
    
    3.5%
    
    
    
    6.9
    
    
    
    15.6%Other States
    
    
    11.9
    
    
    
    16.9%
    
    
    
    8.0
    
    
    
    18.1%Total
    
    $
    70.5
    
    
    
    100.0%
    
    
    $
    44.2
    
    
    
    100.0%Our gross written premiums by line of business for the three months ended September 30, 2009
and 2008 were as follows:9/30/2009
    
    
    9/30/2008% of Total
    
    
    
    
    
    
    % of TotalGross Written
    
    
    Gross Written
    
    
    Gross Written
    
    
    Gross WrittenPremium
    
    
    Premium
    
    
    Premium
    
    
    Premium(in millions)General liability
    
    $
    43.5
    
    
    
    61.7%
    
    
    $
    18.8
    
    
    
    42.5%Workers compensation
    
    
    15.5
    
    
    
    22.0%
    
    
    
    15.7
    
    
    
    35.5%Commercial automobile
    
    
    10.9
    
    
    
    15.4%
    
    
    
    9.0
    
    
    
    20.4%All Other
    
    
    0.6
    
    
    
    0.9%
    
    
    
    0.7
    
    
    
    1.6%Total
    
    $
    70.5
    
    
    
    100.0%
    
    
    $
    44.2
    
    
    
    100.0%
    
 18




---



##### 



Nine Months Ended September 30, 2009 as compared to the Nine Months Ended September 30, 2008
 RESULTS OF OPERATION
 Nine Months Ended9/30/2009
    
    
    9/30/2008
    
    
    % Change(in millions, except forearnings per share)Gross written premiums
    
    $
    143.4
    
    
    $
    110.0
    
    
    
    30.4%Net written premiums
    
    
    137.1
    
    
    
    103.8
    
    
    
    32.1%Earned premiums
    
    $
    114.4
    
    
    $
    107.2
    
    
    
    6.7%Net investment income
    
    
    8.3
    
    
    
    7.9
    
    
    
    5.1%Net realized losses
    
    
    (1.4
    )
    
    
    (0.8
    )
    
    
    *Total revenues
    
    
    121.3
    
    
    
    114.3
    
    
    
    6.1%Net loss and loss adjustment expense
    
    
    75.8
    
    
    
    64.4
    
    
    
    17.7%Acquisition expenses
    
    
    27.4
    
    
    
    24.5
    
    
    
    11.8%Other operating expenses
    
    
    19.5
    
    
    
    17.6
    
    
    
    10.8%Total expenses
    
    
    122.7
    
    
    
    106.5
    
    
    
    15.2%Pre-tax income (loss)
    
    
    (1.4
    )
    
    
    7.8
    
    
    
    *Federal income tax benefit (expense)
    
    
    0.6
    
    
    
    (0.8
    )
    
    
    *Net income (loss)
    
    $
    (0.8
    )
    
    $
    7.0
    
    
    
    *Earnings (losses) per share available to common stockholdersBasic and
diluted
    
    $
    (0.05
    )
    
    $
    0.45
    
    
    
    *Weighted average shares outstandingBasic
    
    
    15.9
    
    
    
    15.6
    
    
    
    1.9%Diluted
    
    
    15.9
    
    
    
    15.7
    
    
    
    1.3%Key operating ratiosNet loss and loss adjustment expense ratio
    
    
    66.3%
    
    
    
    60.1%
    
    
    
    10.3%Ratio of acquisition expense to earned premiums
    
    
    24.0%
    
    
    
    22.9%
    
    
    
    4.8%Ratio of all other expenses to gross written premiums
    
    
    13.6%
    
    
    
    16.0%
    
    
    
    -15.0%
 
 *
    
    Not meaningful  
 19




---



##### 



9/30/2009
    
    
    9/30/2008of Total
    
    
    
    
    
    
    % of TotalGross Written
    
    
    Gross Written
    
    
    Gross Written
    
    
    Gross WrittenPremium
    
    
    Premium
    
    
    Premium
    
    
    Premium(in millions)Specialty Risk Solutions, LLC
    
    $
    46.7
    
    
    
    32.6%
    
    
    $
    17.0
    
    
    
    15.4%Risk Transfer Programs, LLC
    
    
    35.3
    
    
    
    24.6%
    
    
    
    44.0
    
    
    
    40.0%American Team Managers
    
    
    18.0
    
    
    
    12.6%
    
    
    
    18.9
    
    
    
    17.2%Appalachian Underwriters, Inc.
    
    
    17.1
    
    
    
    11.9%
    
    
    
    5.5
    
    
    
    5.0%AEON Insurance Group, Inc.
    
    
    11.2
    
    
    
    7.8%
    
    
    
    15.8
    
    
    
    14.4%Northern Star Management, Inc.
    
    
    8.3
    
    
    
    5.8%
    
    
    
    3.6
    
    
    
    3.3%First Light Program Manager, Inc.
    
    
    5.8
    
    
    
    4.0%
    
    
    
    2.0
    
    
    
    1.8%Insential, Inc
    
    
    0.6
    
    
    
    0.4%
    
    
    
    1.0
    
    
    
    0.9%Flying Eagle Insurance Service, Inc
    
    
    0.1
    
    
    
    0.1%
    
    
    
    0.6
    
    
    
    0.5%Other
    
    
    0.3
    
    
    
    0.2%
    
    
    
    1.6
    
    
    
    1.5%Total
    
    $
    143.4
    
    
    
    100.0%
    
    
    $
    110.0
    
    
    
    100.0%
  9/30/2009
    
    
    9/30/2008% of Total
    
    
    
    
    
    
    % of TotalGross Written
    
    
    Gross Written
    
    
    Gross Written
    
    
    Gross WrittenPremium
    
    
    Premium
    
    
    Premium
    
    
    Premium(in millions)California
    
    $
    70.9
    
    
    
    49.5%
    
    
    $
    51.7
    
    
    
    47.0%Florida
    
    
    18.7
    
    
    
    13.0%
    
    
    
    15.7
    
    
    
    14.3%Texas
    
    
    9.6
    
    
    
    6.7%
    
    
    
    13.1
    
    
    
    11.9%Other States
    
    
    44.2
    
    
    
    30.8%
    
    
    
    29.5
    
    
    
    26.8%Total
    
    $
    143.4
    
    
    
    100.0%
    
    
    $
    110.0
    
    
    
    100.0%
 
 20




---



##### 



9/30/2009
    
    
    9/30/2008% of Total
    
    
    
    
    
    
    % of TotalGross Written
    
    
    Gross Written
    
    
    Gross Written
    
    
    Gross WrittenPremium
    
    
    Premium
    
    
    Premium
    
    
    Premium(in millions)Workers compensation
    
    $
    59.6
    
    
    
    41.6%
    
    
    $
    53.9
    
    
    
    49.0%General liability
    
    
    49.8
    
    
    
    34.7%
    
    
    
    26.9
    
    
    
    24.5%Commercial automobile
    
    
    32.3
    
    
    
    22.5%
    
    
    
    27.0
    
    
    
    24.5%All Other
    
    
    1.7
    
    
    
    1.2%
    
    
    
    2.2
    
    
    
    2.0%Total
    
    $
    143.4
    
    
    
    100.0%
    
    
    $
    110.0
    
    
    
    100.0%
        Liquidity and Capital Resources
   
 21




---



##### 



Cash Flows
  Nine Months Ended9/30/2009
    
    
    9/30/2008(in millions)Cash provided by (used in)Operating activities
    
    $
    35.2
    
    
    $
    39.8Investing activities
    
    
    (34.1
    )
    
    
    (40.0
    )Financing activities
    
    
    0.2
    
    
    
    (0.2
    )Change in cash
    
    
    1.3
    
    
    
    (0.4
    )
    Fixed Maturity Investments
    Item 1. Financial
Statements
 
 22




---



##### 



Item 3: Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
   EstimatedFair ValueAssumed Change
    
    After Change
    
    IncreaseFair Value at
    
    in Relevant
    
    in Interest
    
    (Decrease) in9/30/2009

    
    Interest Rate

    
    Interest Rate

    

Fair Value(in thousands)Fixed Maturity Investments
    
    
    $244,135
    
    
    100 bp decrease
    
    
    $254,733
    
    
    
    $  10,59850 bp decrease
    
    
    249,377
    
    
    
    5,24250 bp increase
    
    
    239,030
    
    
    
    (5,105
    )100 bp increase
    
    
    234,067
    
    
    
    (10,068
    )
  Credit Risk
   As of 9/30/2009Percent ofBond Ratings
    
    Amount
    
    
    Portfolio(in thousands)AAA rated and U.S. Government and affiliated agency securities
    
    $
    98,234
    
    
    
    40.3
    %AA rated
    
    
    65,618
    
    
    
    26.9
    %A rated
    
    
    70,063
    
    
    
    28.7
    %BBB rated
    
    
    7,180
    
    
    
    2.9
    %BB rated or below
    
    
    3,040
    
    
    
    1.2
    %Total
    
    $
    244,135
    
    
    
    100.0
    %
  
 Item 4: Controls and Procedures
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures.
 
 23




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##### 



Changes in Internal Control Over Financial Reporting
 Inherent Limitations on Effectiveness of Controls.
 
 24




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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
 Exhibits:
 ExhibitNumber
    
    Description31.1
    
    
    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
 
 25




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##### 



Signatures
  SPECIALTY UNDERWRITERS ALLIANCE, INC.(Registrant)By:
    
    /s/ Courtney C. SmithName: Courtney C. SmithTitle: President and Chief Executive OfficerDate: November 9, 2009By:
    
    /s/ Peter E. JokielName: Peter E. JokielTitle: Executive Vice President and ChiefFinancial OfficerDate: November 9, 2009
 
 26




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##### 



Exhibits Index:
 ExhibitNumber
    
    Description31.1
    
    
    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
 
 27