##### 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 September 30, 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 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
  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




---



##### 



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
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures About Market
Risk
    
    17Item 4.
    
    Controls and Procedures
    
    18PART II  OTHER INFORMATIONItem 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
    

21EX-31.1EX-31.2EX-32.1EX-32.2
  
 2




---



##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Business
 Specialty Underwriters Alliance, Inc.
Consolidated Balance Sheets
As of September 30, 2008 and December 31, 2007
(in thousands)
 9/30/2008
    
    
    12/31/2007(unaudited)ASSETSFixed maturity investments, at fair value (amortized cost: $216,130 and
$176,592)
    
    $
    208,155
    
    
    $
    177,735Short-term investments, at amortized cost (which approximates fair value)
    
    
    45,928
    
    
    
    51,652Total Investments
    
    
    254,083
    
    
    
    229,387Cash
    
    
    519
    
    
    
    968Insurance premiums receivable
    
    
    60,078
    
    
    
    68,887Reinsurance recoverable on paid and unpaid loss and loss adjustment
expenses
    
    
    74,148
    
    
    
    77,204Prepaid reinsurance premiums
    
    
    690
    
    
    
    631Investment income accrued
    
    
    2,177
    
    
    
    1,909Equipment and capitalized software at cost (less accumulated
depreciation of $13,858 and $8,927)
    
    
    13,167
    
    
    
    12,796Intangible assets
    
    
    10,745
    
    
    
    10,745Deferred acquisition costs
    
    
    17,322
    
    
    
    17,495Deferred tax asset
    
    
    3,396
    
    
    
    Other assets
    
    
    2,192
    
    
    
    2,512Total Assets
    
    $
    438,517
    
    
    $
    422,534LIABILITIES & STOCKHOLDERS EQUITYLiabilitiesLoss and loss adjustment expense reserves
    
    $
    202,310
    
    
    $
    184,736Unearned insurance premiums
    
    
    83,447
    
    
    
    86,741Insured deposit funds
    
    
    13,510
    
    
    
    12,515Accounts payable and other liabilities
    
    
    6,989
    
    
    
    7,405Total Liabilities
    
    
    306,256
    
    
    
    291,397Stockholders equityCommon stock at $.01 par value per share  authorized: 30,000,000 shares;
issued: 14,712,355 shares and 14,697,355 shares; and outstanding: 14,437,355
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: 1,094,339 shares and 869,738 shares
    
    
    11
    
    
    
    9Paid-in capital  common stock
    
    
    129,786
    
    
    
    129,431Paid-in capital  class B common stock
    
    
    7,255
    
    
    
    6,139Accumulated earnings (deficit)
    
    
    1,284
    
    
    
    (5,732
    )Treasury stock
    
    
    (1,347
    )
    
    
    Accumulated other comprehensive income (loss)
    
    
    (4,875
    )
    
    
    1,143Total Stockholders Equity
    
    
    132,261
    
    
    
    131,137Total Liabilities & Stockholders Equity
    
    $
    438,517
    
    
    $
    422,534
  
 3




---



##### Table of Contents



Specialty Underwriters Alliance, Inc.
Consolidated Statements of Operations and Comprehensive Income
For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited  in thousands, except for earnings per share)
 Three Months Ended
    
    
    Nine Months Ended9/30/2008
    
    
    9/30/2007
    
    
    9/30/2008
    
    
    9/30/2007RevenuesEarned insurance premiums
    
    $
    37,208
    
    
    $
    40,377
    
    
    $
    107,153
    
    
    $
    112,933Net investment income
    
    
    2,662
    
    
    
    2,517
    
    
    
    7,985
    
    
    
    6,935Net realized gains (losses)
    
    
    (845
    )
    
    
    1
    
    
    
    (807
    )
    
    
    28Total revenue
    
    
    39,025
    
    
    
    42,895
    
    
    
    114,331
    
    
    
    119,896ExpensesLoss and loss adjustment expenses
    
    
    22,444
    
    
    
    24,047
    
    
    
    64,443
    
    
    
    66,077Acquisition expenses
    
    
    8,531
    
    
    
    9,683
    
    
    
    24,501
    
    
    
    27,583Other operating expenses
    
    
    6,234
    
    
    
    5,741
    
    
    
    17,573
    
    
    
    16,656Total expenses
    
    
    37,209
    
    
    
    39,471
    
    
    
    106,517
    
    
    
    110,316Pretax income
    
    
    1,816
    
    
    
    3,424
    
    
    
    7,814
    
    
    
    9,580Income tax expense
    
    
    (515
    )
    
    
    (61
    )
    
    
    (798
    )
    
    
    (185
    )Net income
    
    
    1,301
    
    
    
    3,363
    
    
    
    7,016
    
    
    
    9,395Net change in unrealized gains and losses for
investments held, after tax
    
    
    (3,785
    )
    
    
    2,121
    
    
    
    (6,018
    )
    
    
    336Comprehensive income (loss)
    
    $
    (2,484
    )
    
    $
    5,484
    
    
    $
    998
    
    
    $
    9,731Earnings per share available to common
stockholders (in dollars)Basic
    
    $
    0.08
    
    
    $
    0.22
    
    
    $
    0.45
    
    
    $
    0.61Diluted
    
    $
    0.08
    
    
    $
    0.22
    
    
    $
    0.45
    
    
    $
    0.61Weighted average shares outstandingBasic
    
    
    15,516
    
    
    
    15,431
    
    
    
    15,587
    
    
    
    15,404Diluted
    
    
    15,567
    
    
    
    15,431
    
    
    
    15,743
    
    
    
    15,404
  
 4




---



##### Table of Contents



Specialty Underwriters Alliance, Inc.
Consolidated Statement of Stockholders Equity
 As of September 30, 2008
(Unaudited   in thousands)
 AccumulatedOther Comp-
    
    
    TotalCommon
    
    
    Paid-in
    
    
    Common
    
    
    Paid-in
    
    
    Retained
    
    
    
    
    
    
    rehensive
    
    
    Stock-Stock
    
    
    Capital
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Treasury
    
    
    Income
    
    
    holdersClass A
    
    
    Class A
    
    
    Class B
    
    
    Class B
    
    
    (Deficit)
    
    
    Stock
    
    
    (Loss)
    
    
    EquityBalance at Dec. 31, 2007
    
    $
    147
    
    
    $
    129,431
    
    
    $
    9
    
    
    $
    6,139
    
    
    $
    (5,732
    )
    
    $
    
    
    
    $
    1,143
    
    
    $
    131,137Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,016
    
    
    
    
    
    
    
    
    
    
    
    7,016Net change in unrealized investment gains, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,018
    )
    
    
    (6,018
    )Stock issuance
    
    
    
    
    
    
    74
    
    
    
    2
    
    
    
    1,116
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,192Treasury stock purchases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,347
    )
    
    
    
    
    
    
    (1,347
    )Stock based compensation
    
    
    
    
    
    
    281
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    281Balance at Sept. 30, 2008
    
    $
    147
    
    
    $
    129,786
    
    
    $
    11
    
    
    $
    7,255
    
    
    $
    1,284
    
    
    $
    (1,347
    )
    
    $
    (4,875
    )
    
    $
    132,261
  
 5




---



##### Table of Contents



Specialty Underwriters Alliance, Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2008 and 2007
(Unaudited   in thousands)
 Nine Months Ended9/30/2008
    
    
    9/30/2007Cash flows from operationsNet income
    
    $
    7,016
    
    
    $
    9,395Charges (credits) to reconcile net income to cash flows from operations:Change in deferred income tax
    
    
    (309
    )
    
    
    (50
    )Net realized losses (gains)
    
    
    807
    
    
    
    (28
    )Amortization of bond premium (discount)
    
    
    71
    
    
    
    (6
    )Depreciation
    
    
    4,931
    
    
    
    3,416Net change in:Reinsurance recoverable on unpaid loss and loss adjustment
expense reserves
    
    
    3,056
    
    
    
    4,812Loss and loss adjustment expense reserves
    
    
    17,574
    
    
    
    27,776Insurance premiums receivable
    
    
    8,809
    
    
    
    4,653Unearned insurance premiums
    
    
    (3,294
    )
    
    
    (4,190
    )Deferred acquisition costs
    
    
    173
    
    
    
    2,335Prepaid reinsurance premiums
    
    
    (59
    )
    
    
    3,400Insured deposit funds
    
    
    995
    
    
    
    1,129Other, net
    
    
    4
    
    
    
    2,786Total adjustments
    
    
    32,758
    
    
    
    46,033Net cash flows provided by operations
    
    
    39,774
    
    
    
    55,428Cash flows from investing activitiesNet (increase) decrease in short-term investments
    
    
    5,724
    
    
    
    (31,379
    )Redemptions, calls and maturities of fixed maturity investments
    
    
    21,416
    
    
    
    14,233Purchases of fixed maturity investments
    
    
    (61,832
    )
    
    
    (33,449
    )Purchase of equipment and capitalized software
    
    
    (5,302
    )
    
    
    (6,818
    )Net cash flows used for investing activities
    
    
    (39,994
    )
    
    
    (57,413
    )Cash flows from financing activitiesIssuance of common stock
    
    
    1,118
    
    
    
    488Treasury stock purchases
    
    
    (1,347
    )
    
    
    Net cash provided by (used for) financing activities
    
    
    (229
    )
    
    
    488Net decrease in cash during the period
    
    
    (449
    )
    
    
    (1,497
    )Cash at beginning of the period
    
    
    968
    
    
    
    2,375Cash at the end of the period
    
    $
    519
    
    
    $
    878
  
 6




---



##### Table of Contents



Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited   in thousands, except earnings per share)
 Note 1. Basis of Presentation
    Note 2. Earnings Per Share
  Three Months Ended
    
    
    Nine Months Ended9/30/08
    
    
    9/30/07
    
    
    9/30/08
    
    
    9/30/07Numerator for earnings per shareNet income
    
    $
    1,301
    
    
    $
    3,363
    
    
    $
    7,016
    
    
    $
    9,395Denominator for earnings per shareWeighted average shares outstanding used in

computation of earnings per shareCommon stock (class A and B) issued
    
    
    15,791
    
    
    
    15,431
    
    
    
    15,685
    
    
    
    15,404Common stock in treasury
    
    
    275
    
    
    
    
    
    
    
    98
    
    
    
    Weighted average shares outstanding  basic
    
    
    15,516
    
    
    
    15,431
    
    
    
    15,587
    
    
    
    15,404Effect of dilutive securities1
Stock awards
    
    
    51
    
    
    
    
    
    
    
    156
    
    
    
    Weighted average shares outstanding  diluted
    
    
    15,567
    
    
    
    15,431
    
    
    
    15,743
    
    
    
    15,404Earnings per shareBasic
    
    $
    0.08
    
    
    $
    0.22
    
    
    $
    0.45
    
    
    $
    0.61Diluted
    
    $
    0.08
    
    
    $
    0.22
    
    
    $
    0.45
    
    
    $
    0.61
 
 1
    
    Outstanding options of 718 and 739 as of September 30, 2008 and
September 30, 2007, respectively, have been excluded from the diluted earnings per share
calculation for the three and nine months ended September 30, 2008 and September 30, 2007,
as they were anti-dilutive. Note 3. Income Taxes
  
 7




---



##### Table of Contents



Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited   in thousands, except earnings per share)
    Three Months Ended
    
    
    Nine Months Ended9/30/08
    
    
    9/30/07
    
    
    9/30/08
    
    
    9/30/07Current tax expense
    
    $
    517
    
    
    $
    85
    
    
    $
    1,107
    
    
    $
    235Deferred tax (benefit)/expense
    
    
    (2
    )
    
    
    (24
    )
    
    
    (309
    )
    
    
    (50
    )Total income tax expense
    
    $
    515
    
    
    $
    61
    
    
    $
    798
    
    
    $
    185
 Note 4. Unpaid Loss and Loss Adjustment Expense Reserves
    Note 5. Recent Accounting Pronouncements
    
 8




---



##### Table of Contents



Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited   in thousands, except earnings per share)
 Fair Value Measurement Using:Quoted Prices in
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableFair Value at
    
    
    Assets
    
    
    Inputs
    
    
    InputsCategory
    
    9/30/08
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)U.S. Treasury
    
    $
    10,338
    
    
    $
    -
    
    
    $
    10,338
    
    
    $
    -U.S. Government Agency
    
    
    35,848
    
    
    
    
    
    
    
    35,848Municipal
    
    
    49,948
    
    
    
    
    
    
    
    49,948Corporate Fixed Maturity
    
    
    49,374
    
    
    
    
    
    
    
    49,374Agency Mortgage Backed
    
    
    40,022
    
    
    
    
    
    
    
    40,022Non-Agency Mortgage Backed
    
    
    6,411
    
    
    
    
    
    
    
    
    
    
    
    6,411Commercial Mortgage Backed
    
    
    12,821
    
    
    
    
    
    
    
    
    
    
    
    12,821Asset-Backed
    
    
    3,393
    
    
    
    
    
    
    
    
    
    
    
    3,393Total Fixed Maturity Investments
    
    $
    208,155
    
    
    $
    -
    
    
    $
    185,530
    
    
    $
    22,625
  Three Months Ended
    
    
    Nine Months Ended9/30/2008
    
    
    9/30/2008Level 3 investments as of beginning of period
    
    $
    7,171
    
    
    $
    -Transfers into level 3 (at beginning period value)
    
    
    18,410
    
    
    
    29,332Purchases, sales, issuances, and settlements (net)
    
    
    (987)
    
    
    
    (2,068)Total gains or losses (realized/unrealized):Included in earnings
    
    
    (849)
    
    
    
    (849)Included in comprehensive income
    
    
    (1,120)
    
    
    
    (3,790)Level 3 investments as of September 30, 2008
    
    $
    22,625
    
    
    $
    22,625
  
    
    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.
  
 9




---



##### Table of Contents



Specialty Underwriters Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited   in thousands, except earnings per share)
    Note 6. Investments
  
 
 10




---



##### 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 Item 1A of this Quarterly Report on Form 10-Q and 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
   
 11




---



##### Table of Contents



Three Months Ended September 30, 2008 as compared to the Three Months Ended September 30, 2007
 RESULTS OF OPERATION
 Three Months Ended9/30/2008

    
    9/30/2007

    
    % Change(in millions, except for earnings per share)Gross written premiums
    
    $
    44.2
    
    
    $
    33.5
    
    
    
    31.9
    %Net written premiums
    
    
    42.1
    
    
    
    30.9
    
    
    
    36.2
    %Earned premiums
    
    $
    37.2
    
    
    $
    40.4
    
    
    
    -7.9
    %Net investment income
    
    
    2.6
    
    
    
    2.5
    
    
    
    4.0
    %Net realized gains (losses)
    
    
    (0.8
    )
    
    
    -
    
    
    
    *Total revenues
    
    
    39.0
    
    
    
    42.9
    
    
    
    -9.1
    %Net loss and loss adjustment expense
    
    
    22.4
    
    
    
    24.1
    
    
    
    -7.1
    %Acquisition expenses
    
    
    8.5
    
    
    
    9.7
    
    
    
    -12.4
    %Other operating expenses
    
    
    6.3
    
    
    
    5.7
    
    
    
    10.5
    %Total expenses
    
    
    37.2
    
    
    
    39.5
    
    
    
    -5.8
    %Pre-tax income
    
    
    1.8
    
    
    
    3.4
    
    
    
    -47.1
    %Federal income tax
    
    
    (0.5
    )
    
    
    -
    
    
    
    *Net income
    
    $
    1.3
    
    
    $
    3.4
    
    
    
    -61.8
    %Earnings per share available to common stockholdersBasic
    
    $
    0.08
    
    
    $
    0.22
    
    
    
    -63.6
    %Diluted
    
    $
    0.08
    
    
    $
    0.22
    
    
    
    -63.6
    %Weighted average shares outstandingBasic
    
    
    15.5
    
    
    
    15.4
    
    
    
    0.6
    %Diluted
    
    
    15.6
    
    
    
    15.4
    
    
    
    1.3
    %Key operating ratiosNet loss and loss adjustment expense ratio
    
    
    60.3%
    
    
    
    59.6%
    
    
    
    1.2%Ratio of acquisition expense to earned premiums
    
    
    22.9%
    
    
    
    23.8%
    
    
    
    -3.8%Ratio of all other expenses to gross written premiums
    
    
    14.1%
    
    
    
    17.4%
    
    
    
    -19.0%
 
 *
    
    Not meaningful   
 12




---



##### Table of Contents



9/30/2008
    
    
    9/30/2007% of Total
    
    
    
    
    
    
    % of TotalGross Written
    
    
    Gross Written
    
    
    Gross Written
    
    
    Gross WrittenPremium
    
    
    Premium
    
    
    Premium
    
    
    Premium(in millions)Specialty Risk Solutions, LLC
    
    $
    16.1
    
    
    
    36.5
    %
    
    $
    1.8
    
    
    
    5.4
    %Risk Transfer Holdings, Inc.
    
    
    12.5
    
    
    
    28.3
    %
    
    
    12.1
    
    
    
    36.1
    %American Team Managers
    
    
    6.2
    
    
    
    14.0
    %
    
    
    7.1
    
    
    
    21.2
    %AEON Insurance Group, Inc.
    
    
    5.1
    
    
    
    11.5
    %
    
    
    7.9
    
    
    
    23.6
    %Appalachian Underwriters, Inc.
    
    
    1.6
    
    
    
    3.6
    %
    
    
    2.7
    
    
    
    8.0
    %Northern Star Management, Inc.
    
    
    1.6
    
    
    
    3.6
    %
    
    
    
    
    
    
    0.0
    %First Light Program Manager, Inc.
    
    
    0.6
    
    
    
    1.4
    %
    
    
    
    
    
    
    0.0
    %Insential, Inc
    
    
    0.3
    
    
    
    0.7
    %
    
    
    0.5
    
    
    
    1.5
    %Flying Eagle Insurance Service, Inc
    
    
    0.1
    
    
    
    0.2
    %
    
    
    1.2
    
    
    
    3.6
    %Other
    
    
    0.1
    
    
    
    0.2
    %
    
    
    0.2
    
    
    
    0.6
    %Total
    
    $
    44.2
    
    
    
    100.0
    %
    
    $
    33.5
    
    
    
    100.0
    %
  9/30/2008
    
    
    9/30/2007% of Total
    
    
    
    
    
    
    % of TotalGross Written
    
    
    Gross Written
    
    
    Gross Written
    
    
    Gross WrittenPremium
    
    
    Premium
    
    
    Premium
    
    
    Premium(in millions)California
    
    $
    26.0
    
    
    
    58.8
    %
    
    $
    14.1
    
    
    
    42.1
    %Texas
    
    
    6.9
    
    
    
    15.6
    %
    
    
    6.3
    
    
    
    18.8
    %Florida
    
    
    3.3
    
    
    
    7.5
    %
    
    
    2.8
    
    
    
    8.4
    %Other States
    
    
    8.0
    
    
    
    18.1
    %
    
    
    10.3
    
    
    
    30.7
    %Total
    
    $
    44.2
    
    
    
    100.0
    %
    
    $
    33.5
    
    
    
    100.0
    %
  9/30/2008
    
    
    9/30/2007% of Total
    
    
    
    
    
    
    % of TotalGross Written
    
    
    Gross Written
    
    
    Gross Written
    
    
    Gross WrittenPremium
    
    
    Premium
    
    
    Premium
    
    
    Premium(in millions)General liability
    
    $
    18.8
    
    
    
    42.5
    %
    
    $
    9.5
    
    
    
    28.3
    %Workers compensation
    
    
    15.7
    
    
    
    35.5
    %
    
    
    14.3
    
    
    
    42.7
    %Commercial automobile
    
    
    9.0
    
    
    
    20.4
    %
    
    
    8.5
    
    
    
    25.4
    %All Other
    
    
    0.7
    
    
    
    1.6
    %
    
    
    1.2
    
    
    
    3.6
    %Total
    
    $
    44.2
    
    
    
    100.0
    %
    
    $
    33.5
    
    
    
    100.0
    %
    
 13




---



##### Table of Contents



Nine Months Ended September 30, 2008 as compared to the Nine Months Ended September 30, 2007
 RESULTS OF OPERATION
 Nine Months Ended9/30/2008
    
    9/30/2007
    
    % Change(in millions, except for
earnings per share)Gross written premiums
    
    $
    110.0
    
    
    $
    117.1
    
    
    
    -6.1
    %Net written premiums
    
    
    103.8
    
    
    
    108.7
    
    
    
    -4.5
    %Earned premiums
    
    $
    107.2
    
    
    $
    112.9
    
    
    
    -5.0
    %Net investment income
    
    
    7.9
    
    
    
    7.0
    
    
    
    12.9
    %Net realized gains (losses)
    
    
    (0.8
    )
    
    
    
    
    
    
    *Total revenues
    
    
    114.3
    
    
    
    119.9
    
    
    
    -4.7
    %Net loss and loss adjustment expense
    
    
    64.4
    
    
    
    66.1
    
    
    
    -2.6
    %Acquisition expenses
    
    
    24.5
    
    
    
    27.6
    
    
    
    -11.2
    %Other operating expenses
    
    
    17.6
    
    
    
    16.6
    
    
    
    6.0
    %Total expenses
    
    
    106.5
    
    
    
    110.3
    
    
    
    -3.4
    %Pre-tax income
    
    
    7.8
    
    
    
    9.6
    
    
    
    -18.8
    %Federal income tax
    
    
    (0.8
    )
    
    
    (0.2
    )
    
    
    *Net income
    
    $
    7.0
    
    
    $
    9.4
    
    
    
    -25.5
    %Earnings per share available to common stockholdersBasic
    
    $
    0.45
    
    
    $
    0.61
    
    
    
    -26.2
    %Diluted
    
    $
    0.45
    
    
    $
    0.61
    
    
    
    -26.2
    %Weighted average shares outstandingBasic
    
    
    15.6
    
    
    
    15.4
    
    
    
    1.3
    %Diluted
    
    
    15.7
    
    
    
    15.4
    
    
    
    1.9
    %Key operating ratiosNet loss and loss adjustment expense ratio
    
    
    60.1%
    
    
    
    58.5%
    
    
    
    2.7
    %Ratio of acquisition expense to earned premiums
    
    
    22.9%
    
    
    
    24.2%
    
    
    
    -5.4
    %Ratio of all other expenses to gross written premiums
    
    
    16.0%
    
    
    
    14.4%
    
    
    
    11.1
    %
 
 *
    
    Not meaningful  
 14




---



##### Table of Contents



9/30/2008

    
    9/30/2007% of Total
    
    
    
    
    
    
    % of TotalGross Written
    
    
    Gross Written
    
    
    Gross Written
    
    
    Gross WrittenPremium

    
    Premium

    
    Premium

    
    Premium(in millions)Risk Transfer Holdings, Inc.
    
    $
    44.0
    
    
    
    40.0
    %
    
    $
    49.6
    
    
    
    42.3
    %American Team Managers
    
    
    18.9
    
    
    
    17.2
    %
    
    
    27.3
    
    
    
    23.3
    %Specialty Risk Solutions, LLC
    
    
    17.0
    
    
    
    15.4
    %
    
    
    3.0
    
    
    
    2.6
    %AEON Insurance Group, Inc.
    
    
    15.8
    
    
    
    14.4
    %
    
    
    19.7
    
    
    
    16.8
    %Appalachian Underwriters, Inc.
    
    
    5.5
    
    
    
    5.0
    %
    
    
    12.9
    
    
    
    11.0
    %Northern Star Management, Inc.
    
    
    3.6
    
    
    
    3.3
    %
    
    
    -
    
    
    
    0.0
    %First Light Program Manager, Inc.
    
    
    2.0
    
    
    
    1.8
    %
    
    
    -
    
    
    
    0.0
    %Insential, Inc
    
    
    1.0
    
    
    
    0.9
    %
    
    
    1.3
    
    
    
    1.1
    %Flying Eagle Insurance Service, Inc
    
    
    0.6
    
    
    
    0.5
    %
    
    
    2.3
    
    
    
    2.0
    %Other
    
    
    1.6
    
    
    
    1.5
    %
    
    
    1.0
    
    
    
    0.9
    %Total
    
    $
    110.0
    
    
    
    100.0
    %
    
    $
    117.1
    
    
    
    100.0
    %
  9/30/2008

    
    9/30/2007% of Total
    
    
    
    
    
    
    % of TotalGross Written
    
    
    Gross Written
    
    
    Gross Written
    
    
    Gross WrittenPremium

    
    Premium

    
    Premium

    
    Premium(in millions)California
    
    $
    51.7
    
    
    
    47.0
    %
    
    $
    42.8
    
    
    
    36.6
    %Florida
    
    
    15.7
    
    
    
    14.3
    %
    
    
    25.3
    
    
    
    21.6
    %Texas
    
    
    13.1
    
    
    
    11.9
    %
    
    
    12.1
    
    
    
    10.3
    %Other States
    
    
    29.5
    
    
    
    26.8
    %
    
    
    36.9
    
    
    
    31.5
    %Total
    
    $
    110.0
    
    
    
    100.0
    %
    
    $
    117.1
    
    
    
    100.0
    %
  9/30/2008

    
    9/30/2007% of Total
    
    
    
    
    
    
    % of TotalGross Written
    
    
    Gross Written
    
    
    Gross Written
    
    
    Gross WrittenPremium

    
    Premium

    
    Premium

    
    Premium(in millions)Workers compensation
    
    $
    53.9
    
    
    
    49.0
    %
    
    $
    60.2
    
    
    
    51.4
    %Commercial automobile
    
    
    27.0
    
    
    
    24.5
    %
    
    
    25.8
    
    
    
    22.0
    %General liability
    
    
    26.9
    
    
    
    24.5
    %
    
    
    28.1
    
    
    
    24.0
    %All Other
    
    
    2.2
    
    
    
    2.0
    %
    
    
    3.0
    
    
    
    2.6
    %Total
    
    $
    110.0
    
    
    
    100.0
    %
    
    $
    117.1
    
    
    
    100.0
    %
 
 15




---



##### Table of Contents



Liquidity and Capital Resources
   Cash Flows
  Nine Months Ended9/30/2008

    
    9/30/2007(in millions)Cash provided by (used in)Operating activities
    
    $
    39.8
    
    
    $
    55.4Investing activities
    
    
    (40.0
    )
    
    
    (57.4
    )Financing activities
    
    
    (0.2
    )
    
    
    0.5Change in cash
    
    
    (0.4
    )
    
    
    (1.5
    )
  
 16




---



##### Table of Contents



Fixed Maturity Investments
    
 Item 3: Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
   Estimated FairAssumed Change
    
    Value After
    
    IncreaseFair Value at
    
    in Relevant
    
    Change in
    
    (Decrease) in9/30/2008
    
    Interest Rate
    

Interest Rate
    
    Fair Value(in thousands)Total Investments
    
    $
    254,083
    
    
    100 bp decrease
    
    $
    262,677
    
    
    $
    8,59450 bp decrease
    
    
    258,397
    
    
    
    4,31450 bp increase
    
    
    249,763
    
    
    
    (4,320
    )100 bp increase
    
    
    245,471
    
    
    
    (8,612
    )
  
 17




---



##### Table of Contents



Credit Risk
   As of 9/30/2008Percent ofBond Ratings
    
    Amount
    
    
    Portfolio(in thousands)AAA rated and U.S. Government and affiliated agency securities
    
    $
    114,223
    
    
    
    54.8
    %AA rated
    
    
    42,270
    
    
    
    20.3
    %A rated
    
    
    46,126
    
    
    
    22.2
    %BBB rated
    
    
    5,536
    
    
    
    2.7
    %Total
    
    $
    208,155
    
    
    
    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.
 
 18




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1: Legal Proceedings
  
 Item 1A: Risk Factors
  Current difficult conditions in the global financial markets and the
economy generally may materially adversely affect our business and results of operations.
    
 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
 
 19




---



##### Table of Contents



Signatures
  SPECIALTY UNDERWRITERS ALLIANCE, INC.
(Registrant)By:
    /s/ Courtney C. SmithName:
    Courtney C. SmithTitle:
    President and Chief Executive
OfficerDate: November 6, 2008By:
    /s/ Peter E. JokielName:
    Peter E. JokielTitle:
    Executive Vice President and
Chief 
Financial OfficerDate: November 6, 2008 
 20




---



##### Table of Contents



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
 
 21