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~~June 3130, 2009


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. Employer
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)
Incorporation or Organization)		Identification Number)
222 South Riverside Plaza, Chicago, Illinois		60606
222 South Riverside Plaza,
Chicago, Illinois		60606
(Address of Principal Executive Offices)		(Zip Code)

(888) 782-4672

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o ~~(Do not check if a smaller reporting company)~~

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

As of ~~May~~August 73, 2009, there were 14,~~437~~574,~~355~~596 shares of our common stock, $0.01 par value, or the Common Stock, outstanding and 1,~~371~~354,~~934~~328 shares of our Class B common stock, $0.01 par value, or the Class B Shares, outstanding.

SPECIALTY UNDERWRITERS’ ALLIANCE, INC.

TABLE OF CONTENTS

	Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		1215
Item 3. Quantitative and Qualitative Disclosures About Market Risk		1621
Item 4. Controls and Procedures		1722
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		1824
Item 1A. Risk Factors		1824
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		1825
Item 3. Defaults Upon Senior Securities		1825
Item 4. Submission of Matters to a Vote of Security Holders		1825
Item 5. Other Information		1826
Item 6. Exhibits		1826
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-10.6
EX-10.7
EX-10.8
EX-10.9
EX-10.10
EX-10.11
EX-10.12
EX-10.13
EX-10.14
EX-31.1
EX-31.2
EX-32.1
EX-32.2

2009 ~~First~~Second Quarter Form 10-Q Specialty Underwriters’ Alliance, Inc.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Specialty Underwriters’ Alliance, Inc. Consolidated Balance Sheets As of ~~March~~June 3130, 2009 and December 31, 2008 (in thousands, except share data)

	3/31/2009			12/31/2008
	6/30/2009			12/31/2008
	(unaudited)
ASSETS
Fixed maturity investments, at fair value (amortized cost: $222,583 and $220,744)	$	219,462		$	216,708
Fixed maturity investments, at fair value (amortized cost: $231,131 and $220,744)	$	231,891		$	216,708
Short-term investments, at amortized cost (which approximates fair value)		4233,~~039~~153			46,697
Total Investments	$	~~261~~265,~~501~~044		$	263,405
Cash		~~408~~1,383			208
Insurance premiums receivable		5968,~~700~~484			60,715
Reinsurance recoverable on paid and unpaid loss and loss adjustment expenses		79,~~887~~725			79,598
Prepaid reinsurance premiums		~~539~~245			309
Investment income accrued		2,~~280~~554			2,467
Equipment and capitalized software at cost (less accumulated depreciation of $17,171 and $15,486)		13,119			13,562
Equipment and capitalized software at cost (less accumulated depreciation of $18,823 and $15,486)		12,901			13,562
Intangible assets		10,745			10,745
Deferred acquisition costs		1516,~~858~~982			18,156
Deferred tax asset		21,~~973~~602			3,146
Other assets		42,~~740~~867			2,426
Total Assets	$	~~451~~462,~~750~~532		$	454,737
LIABILITIES & STOCKHOLDERS’ EQUITY
Liabilities
Loss and loss adjustment expense reserves	$	~~216~~218,~~085~~400		$	214,953
Unearned insurance premiums		7279,~~773~~247			80,600
Insured deposit funds		1613,~~199~~737			15,806
Accounts payable and other liabilities		810,~~631~~435			7,089
Total Liabilities	$	~~313~~321,~~688~~819		$	318,448
Commitments (Note 8)
Stockholders’ equity
Common stock at $0.01 par value per share — authorized: 30,000,000 shares; issued: 14,712,355 shares; and outstanding: 14,437,355 shares	$	147		$	147
Common stock at $0.01 par value per share — authorized: 30,000,000 shares; issued: 14,779,417 and 14,712,355 shares; and outstanding: 14,571,596 and 14,437,355 shares		148			147
Class B common stock at $0.01 par value per share — authorized: 2,000,000 shares; issued and outstanding: 1,371,934 shares and 1,368,562 shares		14			14
Class B common stock at $0.01 par value per share — authorized: 2,000,000 shares; issued and outstanding: 1,333,884 shares and 1,368,562 shares		13			14
Paid-in capital — Common Stock		130,~~100~~394			129,926
Paid-in capital — Class B Common Stock		87,~~089~~694			8,077
Accumulated earnings		2,~~686~~573			1,693
Treasury stock		(1,347	)		(1,347	)
Treasury stock (207,821 and 275,000 shares of common stock)		(1,003	)		(1,347	)
Accumulated other comprehensive income (loss)		~~(1,627~~894	)		(2,221	)
Total Stockholders’ Equity	$	~~138~~140,~~062~~713		$	136,289
Total Liabilities & Stockholders’ Equity	$	~~451~~462,~~750~~532		$	454,737

The accompanying notes are an integral part of these consolidated financial statements.

2009 ~~First~~Second Quarter Form 10-Q Specialty Underwriters’ Alliance, Inc.

Specialty Underwriters’ Alliance, Inc. Consolidated Statements of Operations and Comprehensive Income For the Three and Six Months Ended ~~March~~June 3130, 2009 and 2008 (Unaudited — in thousands, except for earnings per share)

	Three Months Ended						Six Months Ended
	3/31/2009			3/31/2008
	6/30/2009			6/30/2008			6/30/2009			6/30/2008
Revenues
Earned insurance premiums	$	3435,~~775~~365		$	3534,~~750~~195		$	70,140		$	69,945
Net investment income		2,~~774~~775			2,~~653~~670			5,549			5,323
Net realized gains (losses)		(67	)		31
Net realized gains, other than impairments		24			7			168			38
Total revenue		37,482			38,434
Subtotal: Revenue before impairments		38,164			36,872			75,857			75,306
Expenses
Other than temporary impairment losses		(1,624	)		-			(1,835	)		-
Loss and loss adjustment expenses		20,934			21,058
Portion of loss recognized in other comprehensive income		1,259			-			1,259			-
Acquisition expenses		8,525			8,731
Subtotal: Net impairment recognized in earnings		(365	)		-			(576	)		-
Other operating expenses		6,585			5,899
Total revenue		37,799			36,872			75,281			75,306
Total expenses		36,044			35,688
Expenses
Pretax income		1,438			2,746
Loss and loss adjustment expenses		23,045			20,941			43,979			41,999
Income tax (expense) benefit		(445	)		719
Acquisition expenses		8,359			7,267			16,884			15,970
Net income		993			3,465
Other operating expenses		7,141			5,412			13,726			11,339
Net change in unrealized gains and losses for investments held, after tax		594			452
Total expenses		38,545			33,620			74,589			69,308
Comprehensive income	$	1,587		$	3,917
Pretax income (loss)		(746	)		3,252			692			5,998
Earnings per share available to common stockholders (in dollars)
Income tax (expense) benefit		270			(1,002	)		(175	)		(283	)
Basic	$	0.06		$	0.22
Net income (loss)		(476	)		2,250			517			5,715
Diluted	$	0.06		$	0.22
Net change in unrealized gains and losses for investments held, after tax		2,066			(2,685	)		2,660			(2,233	)
Weighted average shares outstanding
Impairments included in other comprehensive income (loss), after tax		818			-			818			-
Basic		15,808			15,579
Comprehensive income (loss)	$	2,408		$	(435	)	$	3,995		$	3,482
Diluted		15,945			15,579
Earnings (loss) per share available to common stockholders (in dollars)
Basic	$	(0.03	)	$	0.14		$	0.03		$	0.37
Diluted	$	(0.03	)	$	0.14		$	0.03		$	0.36
Weighted average shares outstanding
Basic		15,877			15,666			15,843			15,623
Diluted		15,917			15,809			15,941			15,766

The accompanying notes are an integral part of these consolidated financial statements.

2009 ~~First~~Second Quarter Form 10-Q Specialty Underwriters’ Alliance, Inc.

Specialty Underwriters’ Alliance, Inc. Consolidated Statement of Stockholders’ ~~EquityAs~~Equity As of ~~March~~June 3130, 2009 (Unaudited — in thousands)

																Accum.
																Other			Total
	Common		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)			Equity
Balance at Dec. 31, 2008	$	147	$	129,926	$	14		$	8,077		$	1,693	$	(1,347	)	$	(2,221	)	$	136,289
Net income		-		-		-			-			~~993~~517		-			-			~~993~~517
Net change in unrealized investment gains, net of tax		-		-		-			-			-		-			~~594~~2,660			~~594~~2,660
Stock issuance		-		-		-			12			-		-			-			12
Impairments included in other comprehensive income, net of tax		-		-		-			-			-		-			818			818
Stock based compensation		-		174		-			-			-		-			-			174
Stock issuance		1		111		(1	)		(383	)		-		344			-			72
Balance at March 31, 2009	$	147	$	130,100	$	14		$	8,089		$	2,686	$	(1,347	)	$	(1,627	)	$	138,062
Stock based compensation		-		357		-			-			-		-			-			357
Cumulative effect of adopting FSP FAS 115-2		-		-		-			-			363		-			(363	)		-
Balance at June 30, 2009	$	148	$	130,394	$	13		$	7,694		$	2,573	$	(1,003	)	$	894		$	140,713

The accompanying notes are an integral part of these consolidated financial statements.

2009 ~~First~~Second Quarter Form 10-Q Specialty Underwriters’ Alliance, Inc.

Specialty Underwriters’ Alliance, Inc. Consolidated Statements of Cash Flows For the ~~Three~~Six Months Ended ~~March~~June 3130, 2009 and 2008 (Unaudited — in thousands)

	Three Months Ended
	Six Months Ended
	3/31/2009			3/31/2008
	6/30/2009			6/30/2008
Cash flows from operations
Net income	$	~~993~~517		$	35,~~465~~715
Charges (credits) to reconcile net income to cash flows from operations:
Change in deferred income tax		(~~147~~332	)		(~~756~~307	)
Net realized losses (gains)		67408			(3138	)
Amortization of bond premium (discount)		4697			(2510	)
Depreciation		13,~~685~~337			13,~~524~~171
Net change in:
Reinsurance recoverable on unpaid loss and loss adjustment expense reserves		(289	)		2,382
Reinsurance recoverable (payable) on unpaid loss and loss adjustment expense reserves		(127	)		3,806
Loss and loss adjustment expense reserves		13,~~132~~447			410,~~874~~134
Insurance premiums receivable		1(7,~~015~~769	)		~~8,344~~491
Unearned insurance premiums		(71,~~827~~353	)		(148,~~040~~253	)
Deferred acquisition costs		21,~~298~~174			31,~~083~~705
Prepaid reinsurance premiums		~~(230~~64	)		~~(381~~214	)
Insured deposit funds		~~393~~(2,069	)		1,~~236~~277
Other, net		~~(413~~3,129	)		~~2,056~~(312	)
Total adjustments		~~(2,270~~6	)		811,~~266~~878
Net cash flows provided by (used for) operations		(1,277	)		11,731
Net cash flows provided by operations		523			17,593
Cash flows from investing activities
Net decrease in short-term investments		413,~~658~~545			1512,~~199~~710
Redemptions, calls and maturities of fixed maturity investments		1219,~~636~~051			1018,~~712~~042
Purchases of fixed maturity investments		(1429,~~587~~384	)		(3544,~~279~~938	)
Purchases of equipment and capitalized software		(12,~~242~~676	)		(13,~~992~~643	)
Net cash flows (used for) provided by investing activities		1,465			(11,360	)
Net cash flows provided by (used for) investing activities		536			(17,829	)
Cash flows from financing activities
Issuance of common stock		12116			~~405~~762
Net cash provided by financing activities		12			405
Treasury Stock Purchases		-			(1,347	)
Net increase in cash during the period		200			776
Net cash provided by (used for) financing activities		116			(585	)
Cash at beginning of the period	$	208		$	968
Net increase (decrease) in cash during the period		1,175			(821	)
Cash at the end of the period	$	408		$	1,744
Cash at beginning of the period		208			968
Cash at the end of the period	$	1,383		$	147

The accompanying notes are an integral part of these consolidated financial statements.

2009 ~~First~~Second Quarter Form 10-Q Specialty Underwriters’ Alliance, Inc.

Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited — in thousands, except earnings per share)

Note 1. Basis of Presentation

The Consolidated Financial Statements (unaudited) include the accounts of Specialty Underwriters’ Alliance, Inc., and its consolidated subsidiary, SUA Insurance Company, together referred to as SUA or the Company. SUA completed an initial public offering, or IPO, of its common stock on November 23, 2004. Concurrent with the IPO, SUA completed the acquisition of Potomac Insurance Company of Illinois, or Potomac. Potomac has subsequently been renamed SUA Insurance Company.

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP. Certain financial information that is normally included in annual financial statements, including certain financial statements footnotes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in SUA’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission, or SEC.

The interim financial data as of ~~March~~June 3130, 2009, and for the periods ended ~~March~~June 3130, 2009 and ~~March~~June 3130, 2008 is unaudited. However, in the opinion of management, the interim data includes all adjustments, consisting of normal recurring accruals, necessary for a fair statement of the Company’s results for the interim periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made to prior period financial statement line items to enhance the comparability of the results presented.

Note 2. Recent Accounting Pronouncements

In April 2009, the FASB issued FASB Staff Position, (“or FSP”) Financial Accounting Standard, (“or FAS”) 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” ~~(“FSP~~or ~~FAS~~FSP FAS 157-4”), which provides guidance on how to determine the fair value of assets and liabilities in an an environment where the volume and level of activity for the asset or liability has significantly decreased and re-emphasizes that the objective of a fair value measurement remains an exit price. FSP FAS 157-4 is effective for periods ending after June 15, 2009, with earlier adoption permitted. The adoption of FSP FAS 157-4 in the period ending June 30, 2009 isdid not ~~expected to~~ have a material effect on the Company’s financial position or results of operations.

In April 2009, the FASB issued FSP FAS 115-2 “Recognition and Presentation of Other-Than-Temporary Impairments,” (“or FSP FAS 115-2”). The guidance applies to investments in debt securities for which other-than-temporary impairments may be recorded. If an entity’s management asserts that it does not have the intent to sell a debt security and it is more likely than not that it will not have to sell the security before recovery of its cost basis, then an entity may separate other-than-temporary impairments into two components: (1) the amount related to credit losses (recorded in earnings), and (2) all other amounts (recorded in other comprehensive income). This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 ~~with early adoption permitted for periods ending after March 15, 2009~~. The adoption of FSP FAS 115-2 in the period ending June 30, 2009 isdid not ~~expected to~~ have a material effect on the Company’s financial position or results of operations.

In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board ~~(APB)~~ 28-1 ~~"Interim~~ “Interim Disclosures about Fair Value of Financial Instruments,” (“or FSP FAS 107-1”). FSP FAS 107-1 ~~amends~~ amends Statement of Financial Accounting Standards No. 107 “Disclosures about Fair Value of ~~Financial~~ Financial Instruments” to require an entity to provide disclosures about fair value of financial ~~instruments~~ instruments in interim financial information. FSP FAS 107-1 is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009. The adoption of FSP FAS 107-1 in the period ending June 30, 2009 isdid not ~~expected to~~ have a material effect on the Company’s financial position or results of operations.

In January 2009, the FASB issued FSP Emerging Issues Task Force, (“or EITF”) No. 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20,” (“or FSP EITF 99-20-1”), which is effective for interim and annual periods ending after December 15, 2008. FSP EITF 99-20-1 amends EITF 99-20 to align the impairment guidance in EITF 99-20 with the impairment guidance in FAS 115, “Accounting for Certain Investments in Debt and Equity Securities"”. FSP EITF 99-20-1 amends the cash flows model used to analyze an other-than-temporary impairment under EITF 99-20 by replacing the market participant view with management’s assumption of whether it is probable ~~that there is an~~ ~~adverse change in the estimated cash flows. The adoption of FSP EITF 99-20-1 in 2008 did not have a material effect on the Company’s results of operations, financial position or liquidity.~~

2009 ~~First~~Second Quarter Form 10-Q Specialty Underwriters’ Alliance, Inc.

Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited — in thousands, except earnings per share)

that there is an adverse change in the estimated cash flows. The adoption of FSP EITF 99-20-1 in 2009 did not have a material effect on the Company’s results of operations, financial position or liquidity.

Note 3. Earnings Per Share

Basic earnings per share is based on the weighted -average number of common shares ~~outstanding~~ outstanding during the period, while diluted earnings per share includes the weighted -average number of common shares and potential dilution from shares issuable pursuant to equity incentive compensation using the treasury stock method. The following table shows the computation of the Company’s earnings per share:

	Three Months Ended					Six Months Ended
	3/31/2009			3/31/2008
	6/30/2009			6/30/2008		6/30/2009		6/30/2008
Numerator for earnings per share
Net income	$	993		$	3,465
Net income (loss)	$	(476	)	$	2,250	$	517	$	5,715
Denominator for earnings per share
Weighted average shares outstanding used in computation of earnings per share
Weighted-average shares outstanding used in computation of earnings per share
Common stock (class A and B) issued		16,~~083~~097			15,~~579~~684		16,090		15,632
Common stock in treasury		~~275~~220			-18		247		9
Weighted average shares outstanding - basic		15,~~808~~877			15,~~579~~666		15,843		15,623
Effect of dilutive securities1 Stock awards		~~137~~40			-143		98		143
Weighted average shares outstanding - diluted		15,~~945~~917			15,~~579~~809		15,941		15,766
Earnings per share
Basic	$	(0.0603	)	$	0.2214	$	0.03	$	0.37
Diluted	$	(0.0603	)	$	0.2214	$	0.03	$	0.36

1 Outstanding options of 718,066 ~~and 732~~ as of ~~March~~June 3130, 2009 and ~~March~~June 3130, 2008, respectively, have been excluded from the diluted earnings per share calculation for the three and six months ended ~~March~~June 3130, 2009 and ~~March~~June 3130, 2008, as they were anti-dilutive.

Note 4. Income Taxes

AsThe components of ~~March 31,~~current ~~2009~~ and ~~December 31,~~deferred ~~2008~~income ~~the~~taxes ~~Company~~for ~~had~~the nothree ~~tax basis net operating loss carry forwards. The Company accumulated start-up~~ and ~~organization~~six ~~expenditures~~months ~~through~~ended ~~December~~June 3130, ~~2004~~2009 ofand ~~$2,364~~2008 ~~that~~ are ~~deductible~~as ~~over a 60-month period commencing on November 23,~~follows: ~~2004. The unamortized portions of these costs were $284 and $402 at March 31, 2009 and December 31, 2008, respectively.~~

Beginning in first quarter of 2008, based on continuing profitability trends, the Company believed, and continues to believe, that it is more likely than not that the deferred income tax assets will be realized. As such, the Company elected to eliminate its valuation allowance, with the exception of certain State tax net operating loss carryforwards that may not be realized in the future totaling $168, for which a valuation allowance has been maintained since December 31, 2008.


	Three Months Ended					Six Months Ended
	6/30/09			6/30/08		6/30/09			6/30/08
Current tax expense	$	(85	)	$	553	$	507		$	590
Deferred tax (benefit) expense		(185	)		449		(332	)		(307	)

Total income tax (benefit) expense	$	(270	)	$	1,002	$	175		$	283

~~The~~During ~~components~~the first quarter of ~~current~~2008, ~~and~~based on profitability trends at the time, the Company believed that it was more likely than not that the deferred income ~~taxes~~tax ~~for~~assets would be realized. As such, the ~~three~~Company ~~months~~elected ~~ended~~to ~~March 31~~eliminate its valuation allowance of $1,458. ~~2009~~During the fourth quarter ~~and~~of 2008, ~~are~~the asCompany ~~follows:~~believed and continues to believe that certain state tax net operating loss carryforwards may not be realized in the future totaling $168 for which a valuation allowance has been maintained since December 31, 2008.

	Three Months Ended
	3/31/09			3/31/08
Current tax (expense)	$	(592	)	$	(37	)
Deferred tax benefit (expense)		147			756
Total income tax benefit (expense)	$	(445	)	$	719

As of June 30, 2009 and December 31, 2008, the Company had no tax basis net operating loss carry forwards. The Company accumulated start-up and organization expenditures through December 31, 2004 of $2,364 that are deductible over a 60-month period commencing on November 23, 2004. The unamortized portions of these costs were $166 and $402 at June 30, 2009 and December 31, 2008, respectively.

~~Note~~2009 5.Second ~~Unpaid~~Quarter ~~Loss~~Form 10-Q Specialty ~~and~~Underwriters’ ~~Loss~~Alliance, ~~Adjustment Expense Reserves~~ Inc.

Loss and loss adjustment expense (or LAE) reserves are estimates of amounts needed to pay claims and related expenses in the future for insured events that have already occurred. The Company establishes estimates of amounts recoverable from its reinsurers in a manner consistent with the claims liability covered by the reinsurance contracts, net of an allowance for uncollectible amounts. The Company’s loss and LAE reserves represent management’s best

2009 First Quarter Form 10-Q Specialty Underwriters’ Alliance, Inc.

~~estimate~~Specialty ~~of reserves~~Underwriters’ ~~based~~Alliance, onInc. Notes ato ~~composite~~Consolidated ofFinancial ~~the~~Statements (unaudited ~~results~~— ofin ~~various actuarial methods~~thousands, asexcept ~~well~~earnings asper ~~consideration~~share) ~~of known facts and trends.~~

~~At March 31, 2009, the Company reported gross loss and LAE reserves of $216,085, of which~~Note ~~$51,394 represented the gross direct loss and LAE reserves of Potomac, which is fully reinsured by OneBeacon Insurance Company, or OneBeacon~~5. AtUnpaid ~~December 31,~~Loss ~~2008, the Company reported gross loss~~ and ~~LAE~~Loss ~~reserves~~Adjustment ofExpense ~~$214,953, of which $53,262 represented the gross direct loss and LAE reserves~~Reserves of Potomac, which are fully reinsured by OneBeacon. Included in the reserves for the Company are tabular reserve discounts for workers’ compensation and excess workers’ compensation pension claims of $2,910 as of March 31, 2009 and $2,612 as of December 31, 2008. The reserves are discounted on a tabular basis at four percent using the 2001 United States Actuarial Life Tables for Female and Male population.

Loss and loss adjustment expense, or LAE reserves are estimates of amounts needed to pay claims and related expenses in the future for insured events that have already occurred. The Company establishes estimates of amounts recoverable from its reinsurers in a manner consistent with the claims liability covered by the reinsurance contracts, net of an allowance for uncollectible amounts. The Company’s loss and LAE reserves represent management’s best estimate of reserves based on a composite of the results of various actuarial methods, as well as consideration of known facts and trends.

As of June 30, 2009, the Company reported gross loss and LAE reserves of $218,400, of which $49,522 represented the gross direct loss and LAE reserves of Potomac, which is fully reinsured by OneBeacon Insurance Company, or OneBeacon. As of December 31, 2008, the Company reported gross loss and LAE reserves of $214,953, of which $53,262 represented the gross direct loss and LAE reserves of Potomac, which are fully reinsured by OneBeacon. Included in the reserves for the Company are tabular reserve discounts for workers’ compensation and excess workers’ compensation pension claims of $3,218 as of June 30, 2009 and $2,612 as of December 31, 2008. The reserves are discounted on a tabular basis at four percent using the 2001 United States Actuarial Life Tables for Female and Male population.

Potomac was a participant in the OneBeacon Amended and Restated Reinsurance Agreement. Under that agreement, Potomac ceded all of its insurance assets and liabilities into a pool, or Pool, and assumed a 0.5% share of the Pool’s assets and liabilities. On April 1, 2004, Potomac ceased its participation in the Pool and entered into reinsurance agreements whereby Potomac reinsured all of its business written with OneBeacon effective as of January 1, 2004. As a result, Potomac will not share in any favorable or unfavorable development of prior losses recorded by it or the Pool after January 1, 2004, unless OneBeacon fails to perform on its reinsurance obligation.

Note 6. Investments

~~SFAS~~The ~~No. 157~~cost ~~establishes~~or aamortized ~~fair~~cost ~~value~~and ~~hierarchy~~estimated ~~which~~fair ~~requires~~values ~~maximizing the use~~ of ~~observable~~ ~~inputs and minimizing~~ the ~~use~~Company’s offixed ~~unobservable~~maturity investments ~~inputs~~at ~~when~~June 30, ~~measuring~~2009 ~~fair~~were ~~value.~~as follows:

As of March 31, 2009, assets measured at fair value on a recurring basis are summarized below:


	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
Category	Cost		Gains		Losses			Value
U.S. Treasury	$	9,791	$	656	$	-		$	10,447
U.S. Government Agencies		30,239		1,562		(117	)		31,684
Municipals		64,495		2,115		(214	)		66,396
Corporate Fixed Maturity		62,233		2,413		(666	)		63,980
Agency Mortgage Backed		39,338		1,852		-			41,190
Non-Agency Mortgage Backed		7,341		-		(1,939	)		5,402
Commercial Mortgage Backed		13,394		-		(2,805	)		10,589
Asset Backed		4,300		-		(2,097	)		2,203


Total Fixed Maturities	$	231,131	$	8,598	$	(7,838	)	$	231,891

			Fair Value Measurement Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
	Fair		Identical		Observable		Unobservable
	Value at		Assets		Inputs		Inputs
Category	3/31/2009		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury	$	10,764	$	-	$	10,764	$	-
U.S. Government Agency		32,039		-		32,039		-
Municipal		57,743		-		57,743		-
Corporate Fixed Maturity		62,116		-		62,116		-
Agency Mortgage Backed		40,214		-		40,214		-
Non-Agency Mortgage Backed		5,271		-		-		5,271
Commercial Mortgage Backed		9,586		-		-		9,586
Asset-Backed		1,729		-		-		1,729
Total Fixed Maturity Investments	$	219,462	$	-	$	202,876	$	16,586

2009 Second Quarter Form 10-Q
Specialty Underwriters’ Alliance, Inc.

The Company uses an independent pricing service to determine the fair value of substantially all of our investment assets. As of March 31, 2009, a total of six securities with a total fair market value of $1,993 were not priced by our independent pricing service, all of which were categorized Level 3 securities. The Company uses the following pricing methodology for each instrument in its portfolio.

• 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.

2009 First Quarter Form 10-Q Specialty Underwriters’ Alliance, Inc.

•Specialty ~~Third,~~Underwriters’ ~~if a broker-dealer quote is unavailable for the instrument~~Alliance, ~~the~~Inc. Notes ~~Company~~to ~~uses~~Consolidated aFinancial ~~matrix~~Statements (unaudited ~~pricing~~— ~~formula~~in ~~based on various factors provided from multiple broker-dealers including yield spreads~~thousands, ~~reported~~except ~~trades,~~earnings ~~sector~~per ~~or grouping information and for certain securities, other factors such as timeliness of payment, default experience and prepayment speed assumptions.~~share)

The cost or amortized cost and estimated fair values of Company’s fixed maturity investments at December 31, 2008 were as follows:


	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
Category	Cost		Gains		Losses			Value
U.S. Treasury	$	9,794	$	1,109	$	-		$	10,903
U.S. Government Agencies		35,109		2,118		-			37,227
Municipals		54,655		959		(679	)		54,935
Corporate Fixed Maturity		56,368		858		(1,691	)		55,535
Agency Mortgage Backed		39,066		1,373		-			40,439
Non-Agency Mortgage Backed		7,781		-		(2,617	)		5,164
Commercial Mortgage Backed		13,301		-		(3,412	)		9,889
Asset Backed		4,670		-		(2,054	)		2,616


Total Fixed Maturities	$	220,744	$	6,417	$	(10,453	)	$	216,708

In addition to the above investments, the Company also held, at amortized cost, $33,153 and $46,697 in short term investments as of June 30, 2009 and December 31, 2008, respectively. The Company did not have any other investments.

Measuring Fair Value

SFAS No. 157 establishes a fair value hierarchy which requires maximizing the use of observable inputs and minimizing the use of unobservable inputs when measuring fair value.

As of June 30, 2009, assets measured at fair value on a recurring basis are summarized below:


			Fair Value Measurement Using:

			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
	Fair Value		Identical		Observable		Unobservable
	as of		Assets		Inputs		Inputs
Category	6/30/2009		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury	$	10,447	$	-	$	10,447	$	-
U.S. Government Agency		31,684		-		31,684		-
Municipal		66,396		-		66,396		-
Corporate Fixed Maturity		63,980		-		63,033		947
Agency Mortgage Backed		41,190		-		41,190		-
Non-Agency Mortgage Backed		5,402		-		-		5,402
Commercial Mortgage Backed		10,589		-		-		10,589
Asset Backed		2,203		-		-		2,203


Total Fixed Maturity Investments	$	231,891	$	-	$	212,750	$	19,141

2009 Second Quarter Form 10-Q
Specialty Underwriters’ Alliance, Inc.

Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited — in thousands, except earnings per share)

As of December 31, 2008, assets measured at fair value on a recurring basis are summarized below:


			Fair Value Measurement Using:

			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
	Fair Value		Identical		Observable		Unobservable
	as of		Assets		Inputs		Inputs
Category	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		54,934				54,934
Corporate Fixed Maturity		55,536				55,536
Agency Mortgage Backed		40,439				40,439
Non-Agency Mortgage Backed		5,164						5,164
Commercial Mortgage Backed		9,889				8,676		1,213
Asset Backed		2,616				204		2,412


Total Fixed Maturity Investments	$	216,708	$	-	$	207,919	$	8,789

The Company uses an independent pricing service to determine the fair value of substantially all of its investment assets. As of June 30, 2009, a total of nine securities with a total fair value of $4,828 were not priced by the Company’s independent pricing service, all of which were categorized Level 3 securities. The Company uses the following pricing methodology for each instrument in its portfolio.

•		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.

The Company then validates the price or quote received by examining its reasonableness. The Company’s review process includes: (i) quantitative analysis (including yield spread and interest rate and price fluctuations on a monthly basis); (ii) initial and ongoing evaluation of methodologies used by outside parties to calculate fair value; and (iii) comparing the fair value estimates to its knowledge of the current market. If a price or a quote as provided is deemed unreasonable, the Company will use the second or the third pricing methodology to determine the fair value of the instrument.

In order to determine the proper SFAS 157 classification for each instrument, the Company obtains from its outside pricing sources the pricing procedures and inputs used to price the instrument. The Company analyzes this information taking into account asset type, rating and liquidity to determine what inputs are observable and unobservable and thereby determines the suggested SFAS 157 Level.

~~The~~2009 ~~following~~Second ~~table~~Quarter ~~presents a reconciliation of the beginning and ending balances for all~~Form 10-Q ~~investments~~Specialty ~~measured~~Underwriters’ ~~at fair value using Level 3 inputs during the three months ended March 31~~Alliance, Inc. ~~2009:~~

	Three Months
	Ended
	3/31/2009
Level 3 investments as of beginning of period	$	8,789
Transfers into (out of) level 3 (at beginning period value)		8,677
Purchases, sales, issuances, and settlements, net		(159	)
Total gains or losses (realized/unrealized):
Included in earnings		(211	)
Included in comprehensive income		(510	)
Level 3 investments as of March 31, 2009	$	16,586

Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited — in thousands, except earnings per share)

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value using Level 3 inputs during the three months ended June 30, 2009:


	Three Months			Six Months
	Ended			Ended
	6/30/2009			6/30/2009
Level 3 investments as of beginning of period	$	16,586		$	8,789
Transfers into level 3 (at beginning period value)		911			9,618
Purchases, sales, issuances, and settlements, net		(348	)		(507	)
Total gains or losses (realized/unrealized):
Included in earnings		(365	)		(576	)
Included in comprehensive income		2,357			1,817


Level 3 investments as of June 30, 2009	$	19,141		$	19,141

The transfer into Level 3 during the first quarter of 2009 of securities with a fair value, as of December 31, 2008, of $8,677 was the result of reduced liquidity, and therefore reduced price transparency, related to commercial mortgage backed securities.

~~Temporary~~Impairment ~~losses on investment securities are primarily a result of market illiquidity and~~Review ~~certain asset classes being out of favor with investors and are recorded as unrealized losses.~~

The Company’s methodology for assessing other-than-temporary impairments, or OTTI, is based on security-specific facts and circumstances as of the balance sheet date. Factors considered in evaluating whether a decline in value is other than temporary included: (i) the length of time and the extent to which the fair value has been less than cost; (ii) the financial conditions and near-term prospects of the issuer; and (iii) the Company’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery. The majority of the Company’s structured securities are subject to Emerging Issues Task Force Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets,” or EITF 99-20, and FSP EITF 99-20-1 which allows management to analyze whether it is probable that there is an adverse change in the estimated cash flows. Accordingly, on a quarterly basis, when significant changes in estimated cash flows from the cash flows previously estimated occur due to actual prepayment and credit loss experience, and the present value of the revised cash flow is less than the present value previously estimated, OTTI is deemed to have occurred. Based on recent guidance in FSP FAS 115-2 and FAS 124-2 “Recognition and Presentation of Other-Than-Temporary Impairments,” a company that does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before recovery of its amortized cost basis, is required to separate the decline in fair value into (a) the amount representing the credit loss and ~~estimated~~(b) the amount related to all other factors. The amount of the total decline in fair ~~values~~value related to the credit loss is recognized in earnings as OTTI, with the amount related to other factors recognized in accumulated other comprehensive net loss, net of ~~fixed~~applicable ~~maturities~~income attaxes. ~~March 31~~OTTI credit losses result in a permanent reduction of the cost basis of the underlying investment. The determination of OTTI is a subjective process, ~~2009~~and ~~were~~different asjudgments ~~follows:~~and assumptions could affect the timing of loss realization.

	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
Category	Cost		Gains		Losses			Value
U.S. Treasury	$	9,793	$	971	$	-		$	10,764
U.S. Government Agencies		30,248		1,815		(24	)		32,039
Municipals		55,817		2,114		(188	)		57,743
Corporate Fixed Maturity		63,307		1,196		(2,387	)		62,116
Agency Mortgage Backed		38,218		1,996		-			40,214
Non-Agency Mortgage Backed		7,460		-		(2,189	)		5,271
Commercial Mortgage Backed		13,306		-		(3,720	)		9,586
Asset Backed		4,434		-		(2,705	)		1,729
Total Fixed Maturities	$	222,583	$	8,092	$	(11,213	)	$	219,462

The Company recorded an OTTI charge of $1,624 on investment securities during the three months ended June 30, 2009 of which $365 was recognized as a loss in earnings and $1,259 was recognized, net of taxes, as a loss in comprehensive income. The Company recorded an OTTI charge of $1,835 on investment securities during the six months ended June 30, 2009 of which $576 was recognized as a loss in earnings and $1,259 was recognized, net of taxes, as a loss in comprehensive income.

2009 ~~First~~Second Quarter Form 10-Q Specialty Underwriters’ Alliance, Inc.

1012

~~The~~Specialty ~~cost~~Underwriters’ orAlliance, ~~amortized~~Inc. Notes ~~cost~~to ~~and~~Consolidated ~~estimated~~Financial ~~fair~~Statements (unaudited ~~values~~— ofin ~~fixed~~thousands, ~~maturities~~except atearnings ~~December 31,~~per ~~2008~~share) ~~were as follows:~~

	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
Category	Cost		Gains		Losses			Value
U.S. Treasury	$	9,794	$	1,109	$	-		$	10,903
U.S. Government Agencies		35,109		2,118		-			37,227
Municipals		54,655		959		(679	)		54,935
Corporate Fixed Maturity		56,368		858		(1,691	)		55,535
Agency Mortgage Backed		39,066		1,373		-			40,439
Non-Agency Mortgage Backed		7,781		-		(2,617	)		5,164
Commercial Mortgage Backed		13,301		-		(3,412	)		9,889
Asset Backed		4,670		-		(2,054	)		2,616
Total Fixed Maturities	$	220,744	$	6,417	$	(10,453	)	$	216,708

The following table provides a roll-forward of the OTTI showing the amounts that have been included in earnings and other comprehensive net loss.

The Company’s methodology for assessing other-than-temporary impairments (“OTTI”) is based on security-specific facts and circumstances as of the balance sheet date. Factors considered in evaluating whether a decline in value is other than temporary included: the length of time and the extent to which the fair value has been less than cost; the financial conditions and near-term prospects of the issuer; and the Company’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery. The majority of the Company’s structured securities are subject to Emerging Issues Task Force Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (“EITF 99-20”) and FSP EITF 99-20-1 which allows management to analyze whether it is probable that there is an adverse change in the estimated cash flows, in which case, the amount of accretive yield is prospectively adjusted and an OTTI loss is recognized. The Company recorded an OTTI charge of $211 on two investment securities during the three months ended March 31, 2009.


	Recognized In
				Other
				Compre-
				hensive
	Earnings			Net Loss		Total
Beginning Balance, April 1, 2009	$	1,060		$	-	$	1,060
Cumulative effect of adjustment resulting from adoption of FSP115-2, before income taxes		(559	)		559		-

Subtotal		501			559		1,060
Other-than-temporary impairment loss		365			1,259		1,624

Ending balance, June 30, 2009	$	866		$	1,818	$	2,684

Unrealized Losses

Significant factors influencing the Company’s determination that unrealized losses were temporary included (i) the magnitude of the unrealized losses in relation to each security’s cost, (ii) the nature of the investment and (iii) that management does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these investments for a period of time sufficient to allow for anticipated recovery of fair value to the Company’s cost basis. The following table presents information regarding the Company’s invested assets that were in an unrealized loss position at June 30, 2009 by amount of time in a continuous unrealized loss position:


			Unrealized Losses
			Less than			Greater than
	Fair Value		12 Months			12 Months			Total
U.S. Government Agency	$	3,063	$	(37	)	$	(80	)	$	(117	)
Municipal		15,043		(87	)		(127	)		(214	)
Corporate Fixed Maturity		10,709		(25	)		(641	)		(666	)
Non-Agency Mortgage Backed		4,790		-			(1,939	)		(1,939	)
Commercial Mortgage Backed		10,589		(52	)		(2,753	)		(2,805	)
Asset Backed		1,555		-			(2,097	)		(2,097	)

Total Fixed Maturities	$	45,749	$	(201	)	$	(7,637	)	$	(7,838	)

The following table presents information regarding the Company’s invested assets that were in an unrealized loss position at December 31, 2008 by amount of time in a continuous unrealized loss position:


			Unrealized Losses
			Less than			Greater than
	Fair Value		12 Months			12 Months			Total
Municipal	$	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	)

Temporary losses on investment securities are primarily a result of market illiquidity and certain asset classes being out of favor with investors and are recorded as unrealized losses. The Company considered all relevant factors, including expected recoverability of cashflows, in assessing whether the loss was other-than-temporary. The Company does not intend to sell its fixed maturity securities, and it is not more likely than not that the Company will be required to sell these investments, until there is a recovery of fair value to the Company’s original cost basis, which may be at maturity.

2009 Second Quarter Form 10-Q
Specialty Underwriters’ Alliance, Inc.

Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements
(unaudited — in thousands, except earnings per share)

Note 7. Equity-Based Compensation

On May 1, 2007, the stockholders of the Company approved the 2007 Stock Incentive Plan, or or 2007 Plan. The 2007 Plan replaces the 2004 Stock Option Plan, or 2004 Plan. Options previously granted under the 2004 Plan will continue for the life of such options. The 2007 Plan provides for the issuance of up to 800,000 shares of the Company’s common stock in the form of stock options, stock appreciation rights, restricted stock awards, and deferred stock awards. In addition, should any of the options outstanding under the 2004 Plan be terminated, those shares will become available under the 2007 Plan.

OnThe ~~January 14,~~2007 ~~2009~~Plan ~~the~~provides ~~Compensation~~for ~~Committee~~an ofautomatic ~~the~~grant ~~Board~~ of ~~Directors granted deferred stock awards for 110~~3,000 unrestricted shares of common stock to each ~~the~~independent ~~Company’s~~director ~~executive~~on ~~officers~~the ~~and~~first onbusiness ~~March 3, 2009~~day ~~the~~following ~~Compensation~~such ~~Committee~~director’s ofre-election ~~the~~to the Board of Directors ~~granted~~at ~~deferred~~the ~~stock~~Annual ~~awards~~Meeting ~~for 45,600 shares~~ of ~~common stock to~~ the ~~Company’s~~Stockholders. ~~non-executive~~On ~~employees.~~May 6, ~~The~~2009, ~~awards~~15,000 shares were granted to ~~the non-executive~~independent ~~employees~~directors ~~vest~~who onwere ~~the~~re-elected ~~first~~to ~~anniversary of~~ the ~~grant~~Board ~~date~~at ~~and~~ the ~~awards~~2009 ~~for~~Annual Meeting of the ~~executive~~Stockholders ~~officers~~held ~~vest equally~~ on ~~the~~May 5, ~~first four anniversaries of the grant date~~2009.

The compensation cost associated with the ~~January 14, 2009~~ grants ~~is $363, based on the fair market value~~ of ~~the~~common ~~shares~~stock on the date of grant pursuant to SFAS 123R. Of that amount $35 was recognized during the first quarter of 2009, the remaining $328 of unrecognized compensation expense will be amortized over the vesting period of the award. The compensation cost associated with the MarchMay 36, 2009 ~~grants~~ is $~~140,~~51 based on the fair market value of the shares on the date of grant pursuant to SFAS 123R. Ofwhich ~~that amount $12~~ was completely recognized during the ~~first~~second quarter of 2009~~, the remaining $129 of unrecognized compensation expense will be amortized over the vesting period of the award~~.

No other awards were made under the 2007 Plan or the 2004 Plan and ~~950~~50 shares subject to grant were forfeited under the 2007 Plan in the ~~first~~second quarter of 2009.

In addition there was equity based compensation expenses of $3, relating to stock options previously granted.

~~2009~~Note ~~First~~8. ~~Quarter~~Commitments ~~Form 10-Q Specialty~~and ~~Underwriters’ Alliance, Inc.~~Contingencies

11 FBR Capital Markets & Co., or FBR, acted as financial advisor to the Company in connection with the entry into the Amended and Restated Agreement and Plan of Merger by and among the Company, Tower Group, Inc., or Tower, and Tower S.F. Merger Corporation, a wholly owned subsidiary of Tower, effective as of June 21, 2009 as well as other merger proposals received by the Company in 2008 and 2009 and received an aggregate of $100 in retainers for its services. FBR also received a fee of $500 in connection with the delivery of its fairness opinion and will receive a fee equal to 1.25% of the aggregate consideration of the merger as of the consummation thereof, less any retainer and fairness opinion fees. Assuming an average Tower stock price of $25.00, the total fee to FBR (including the retainer fees and opinion fee previously paid) would be approximately $1,392.

2009 Second Quarter Form 10-Q
Specialty Underwriters’ Alliance, Inc.

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 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~~ 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 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, 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

We were formed on April 3, 2003 for the purpose of offering products in the specialty commercial property and casualty insurance market by using an innovative business model. Specialty insurance typically serves niche groups of insureds that require highly specialized knowledge of a business class to achieve underwriting profits. This segment has traditionally been underserved by most standard commercial property and casualty insurers, due to the complex business knowledge and the investment required to achieve attractive underwriting profits. Competition in this segment is based primarily on client service, availability of insurance capacity, specialized policy forms, efficient claims handling and other value-based considerations, rather than just price.

On November 23, 2004 we completed our IPO and concurrent private placements and completed the acquisition of Potomac. After giving effect to the acquisition, we changed the name of Potomac to SUA Insurance Company. On January 1, 2005 we commenced our insurance operations.

On June 21, 2009, ~~First~~the ~~Quarter~~Company, ~~Form 10~~Tower Group, Inc., or Tower, and Tower S.F. Merger Corporation, a wholly-Qowned subsidiary of Tower, or Merger Sub, entered into an Agreement and Plan of Merger, ~~Specialty~~pursuant ~~Underwriters~~to which, subject to the terms and conditions set forth therein, Merger Sub will merge into the Company, with the Company continuing as the surviving corporation and a wholly-owned subsidiary of Tower. Upon the consummation of the merger, the Company’s ~~Alliance~~common stock will be delisted. On July 22, ~~Inc~~2009, the Company, Tower and Merger Sub executed an Amended and Restated Agreement and Plan of Merger, or the merger agreement, effective as of June 21, 2009, to make certain corrections to the original merger agreement. For further information about the merger or to view the merger agreement, see our current reports on Forms 8-K and 8-K/A filed with the Securities and Exchange Commission on June 22, 2009 and July 24, 2009.

122009 Second Quarter Form 10-Q Specialty Underwriters’ Alliance, Inc.

Three Months Ended ~~March~~June 3130, 2009 as compared to the Three Months Ended ~~March~~June 3130, 2008

RESULTS OF OPERATIONS

	Three Months Ended
	3/31/2009			3/31/2008			% Change
	6/30/2009			6/30/2008			% Change
	(in millions, except for earnings
	(in millions, except for
	per share)
	earnings per share)
Gross written premiums	$	2943.09		$	2441.18			205.30%
Net written premiums		2741.08			2139.79			~~24.~~4.8%
Earned premiums	$	3435.84		$	3534.82			-23.85%
Net investment income		2.8			2.7			3.7%
Net realized gains (losses)		(0.13	)		—-			*
Total revenues		37.59			3836.59			-2.67%
Net loss and loss adjustment expense		2023.90			2120.19			-010.90%
Acquisition expenses		8.64			8.7.3			-115.1%
Other operating expenses		67.62			5.94			1133.93%
Total expenses		3638.16			3533.76			114.19%
Pre-tax income		1.4			2.8			-50.0%
Pre-tax income (loss)		(0.7	)		3.3			*
Federal income tax		(0.4	)		0.7			*
Federal income (tax) benefit		0.2			(1.0	)		*
Net income	$	1.0		$	3.5			-71.4%
Net income (loss)	$	(0.5	)	$	2.3			*
Basic	$	(0.0603	)	$	0.2214			~~-72.7%~~*
Diluted	$	(0.0603	)	$	0.2214			~~-72.7%~~*
Basic		15.89			15.67			1.3%
Diluted		15.9			15.68			10.96%
Key operating ratios
Net loss and loss adjustment expense ratio		6065.10%			5861.92%			16.92%
Ratio of acquisition expense to earned premiums		2423.7%			2421.3%			111.72%
Ratio of all other expenses to gross written premiums		2216.84%			2413.50%			-726.02%


*		Not meaningful

Net ~~income~~loss for the quarter ended ~~March~~June 3130, 2009 was $1.0.5 million, compared to net income of $32.53 million for the quarter ended ~~March~~June 3130, 2008. ~~Earnings~~Loss per share for the quarter ended ~~March 31~~June 30, 2009 was $0.0603, versus earnings per share of $0.2214 for the quarter ended ~~March~~June 3130, 2008. The decrease in our net income was due to aseveral ~~decrease~~factors, inincluding ~~our~~(i) the ~~pre-tax~~operating ~~income~~expenses incurred ~~and~~as ana ~~increase~~result inof ~~our~~both ~~taxes resulting from~~ the ~~full~~proxy ~~utilization~~contest ofwaged ~~tax~~at ~~loss~~the ~~carry~~annual ~~forwards~~meeting ~~which~~of ~~occurred~~stockholders inheld ~~the second quarter~~on ofMay 5, ~~2008.~~2009 ~~The~~and ~~decrease~~the innegotiation ~~our~~of ~~pre-tax~~the ~~income~~merger ~~was~~agreement ~~primarily~~we ~~due~~entered tointo awith ~~decrease~~Tower inon ~~our earned~~June 21, ~~premiums~~2009, an(ii) the increase onto our net loss and loss adjustment ~~expense~~ ratio resulting from several large losses in our commercial automobile line and an(iii) the increase in our ~~other~~acquisition expense ratio ~~operating~~resulting ~~expenses~~from ~~(further~~higher ~~explained~~commission ~~below)~~rates paid to our partner agents.

Gross written premiums were $2943.09 million for the three months ended ~~March~~June 3130, 2009 compared to to $2441.18 million for the three months ended ~~March~~June 3130, 2008. The increase in gross written premiums ~~was~~ was attributable to increased premiums ~~written~~in ~~under~~ our ~~workers’~~commercial ~~compensation~~automobile line. ~~These~~of ~~were~~business offset by ~~rate~~ rate reductions inaffecting ~~our~~the ~~workers’~~renewal ~~compensation~~business ~~line and decreasing premiums~~ in our ~~general~~workers’ ~~liability line~~compensation ~~resulting from continuing deteriorating economic conditions~~line.

2009 ~~First~~Second Quarter Form 10-Q Specialty Underwriters’ Alliance, Inc.

1316

Our gross written premiums by partner agent for the three months ended ~~March~~June 3130, 2009 and 2008 were as follows:

	3/31/2009				3/31/2008
	6/30/2009				6/30/2008
	Gross Written		% of Total Gross		Gross Written		% of Total Gross
	Premium		Written Premium		Premium		Written Premium
	(in millions)
Risk Transfer Holdings, Inc.	$	11.0		37.9%	$	9.2		38.2%
Risk Transfer Programs, LLC	$	17.6		40.1%	$	22.3		53.3%
American Team Managers		56.54		1914.06%		6.25		2515.76%
Appalachian Underwriters, Inc.		5.59		1913.04%		12.81		7.5.0%
AEON Insurance Group, Inc.		4.0		13.8%		5.6		23.2%
Specialty Risk Solutions, LLC		4.1		9.3%		0.9		2.2%
First Light Program Manager, Inc.		1.3		4.5%		0.4		1.7%
Northern Star Management, Inc.		3.5		8.0%		2.0		4.8%
Northern Star Management, Inc.		1.1		3.8%		-		0.0%
AEON Insurance Group, Inc.		3.4		7.7%		5.2		12.4%
Insential, Inc		0.2		0.7%		0.3		1.2%
First Light Program Manager, Inc.		2.9		6.6%		1.0		2.4%
Flying Eagle Insurance Service, Inc		0.1		0.3%		0.2		0.8%
Insential, Inc.		0.2		0.5%		0.4		1.0%
Specialty Risk Solutions, LLC		-		0.0%		-		0.0%
Flying Eagle Insurance Service, Inc.		-		0.0%		0.3		0.7%
Other		(0.31)		1.-0.2%		01.41		12.76%
Total	$	2943.09		100.0%	$	2441.18		100.0%

Our gross written premiums for the three months ended ~~March~~June 3130, 2009 and 2008 by state were as follows:

	3/31/2009				3/31/2008
	6/30/2009				6/30/2008
			% of Total				% of Total
	Gross		% of Total		Gross		% of Total
	Gross Written		Gross Written		Gross Written		Gross Written
	Written		Gross Written		Written		Gross Written
	Premium		Premium		Premium		Premium
	(in millions)
California	$	8.9		30.7%	$	11.5		47.7%
Florida	$	12.2		27.8%	$	10.7		25.6%
Texas		2.6		9.0%		4.9		20.3%
California		11.0		25.1%		14.2		34.0%
Florida		1.4		4.8%		1.7		7.1%
Texas		4.5		10.3%		1.3		3.1%
Other States		16.1		55.5%		6.0		24.9%
Other states		16.2		36.8%		15.6		37.3%
Total	$	2943.09		100.0%	$	2441.18		100.0%

Our gross written premiums by line of business for the three months ended ~~March~~June 3130, 2009 ~~and~~ and 2008 were as follows:

	3/31/2009				3/31/2008
	6/30/2009				6/30/2008
			% of Total				% of Total
	Gross		% of Total		Gross		% of Total
	Gross Written		Gross Written		Gross Written		Gross Written
	Written		Gross Written		Written		Gross Written
	Premium		Premium		Premium		Premium
	(in millions)
Workers’ compensation	$	1825.47		6358.46%	$	1126.94		4963.42%
Commercial automobile		813.40		29.06%		710.64		3124.59%
General liability		14.67		510.57%		34.92		1610.20%
All Other		0.6		2.1%		0.7		2.9%
All other		0.5		1.1%		0.8		1.9%
Total	$	2943.09		100.0%	$	2441.18		100.0%

The change in our mix of business by agent, state and line of business was influenced by ~~several~~an ~~large~~increase ~~accounts that we wrote in the first quarter~~ of ~~2009~~premium in our ~~workers’~~commercial ~~compensation~~automobile line in ~~the state~~ of ~~Michigan~~business which was partially offset by ~~a continued reduction in our contractors~~ ~~business~~rate ~~due~~reductions toaffecting the ~~downturn~~renewal business in ~~the~~our ~~construction~~workers’ ~~industry~~compensation line.

Earned premiums were $3435.84 million for the quarter ended ~~March~~June 3130, 2009 compared to $3534.82 million for the quarter ended ~~March~~June 3130, 2008.

2009 ~~First~~Second Quarter Form 10-Q Specialty Underwriters’ Alliance, Inc.

1417

Net investment income was $2.8 million for the three months ended ~~March~~June 3130, 2009 versus $2.7 million for the three months ended ~~March~~June 3130, 2008.

Acquisition expenses were $8.64 million for the three months ended ~~March~~June 3130, 2009 compared to $8.7.3 million for the quarter ended ~~March~~June 3130, 2008. The increase in acquisition expenses was primarily the result of higher commission rates paid to our partner agents resulting from the continuation of a soft insurance market.

Other operating expenses were $67.62 million for the quarter ended ~~March~~June 3130, 2009 compared to $5.94 million for the quarter ended ~~March~~June 3130, 2008. The increase in other operating expenses was ~~resulted~~primarily ~~mainly~~attributable ~~from~~to athe one-time ~~expense~~expenses ~~relating~~of toapproximately $1.6 million incurred as a result of both the proxy contest waged byat ~~Hallmark~~the ~~Financial~~annual meeting of stockholders held on May 5, 2009 and the ~~Services~~negotiation of the merger agreement entered into with Tower Group, Inc. on June 21, 2009.

For the ~~first~~second quarter of 2009, our net loss and loss adjustment expense ratio was 6065.10%, compared to 5861.92% for the comparable quarter in 2008. This increase was primarily driven by higher loss ratios in our ~~workers’~~commercial ~~compensation~~automobile ~~book~~line of business ~~due~~resulting tofrom ~~state~~several ~~mandated~~large ~~lower~~losses ~~rates~~ in ~~Florida~~that line. This was partially offset by favorable prior year loss development for the ~~first quarter~~second quarter of 2009 of $01.80 million primarily attributable to favorable loss development in our ~~workers’ compensation~~general liability line of business. For the three months ended ~~March~~June 3130, 2008 we experienced favorable prior year loss development of $0.6 million ~~primarily~~across ~~within~~all ~~our~~lines ~~commercial automobile line~~ of business.

Six Months Ended June 30, 2009 as compared to the Six Months Ended June 30, 2008

RESULTS OF OPERATIONS


	Six Months Ended
	6/30/2009			6/30/2008			% Change
	(in millions, except for
	earnings per share)
Gross written premiums	$	72.9		$	65.9			10.6	%
Net written premiums		68.8			61.6			11.7	%

Earned premiums	$	70.1		$	69.9			0.3	%
Net investment income		5.6			5.3			5.7	%
Net realized gains (losses)		(0.4	)		0.1			*

Total revenues		75.3			75.3			0.0	%

Net loss and loss adjustment expense		44.0			42.0			4.8	%
Acquisition expenses		16.9			16.0			5.6	%
Other operating expenses		13.7			11.3			21.2	%

Total expenses		74.6			69.3			7.6	%

Pre-tax income		0.7			6.0			-88.3	%
Federal income tax		(0.2	)		(0.3	)		*

Net income	$	0.5		$	5.7			-91.2	%


Basic	$	0.03		$	0.37			-91.4	%
Diluted	$	0.03		$	0.36			-91.3	%

Basic		15.8			15.6			1.3	%
Diluted		15.9			15.8			0.6	%

Key operating ratios
Net loss and loss adjustment expense ratio		62.8	%		60.0	%		4.6	%
Ratio of acquisition expense to earned premiums		24.1	%		22.8	%		5.7	%
Ratio of all other expenses to gross written premiums		18.8	%		17.2	%		9.3	%


*		Not meaningful

Net income for the six months ended June 30, 2009 was $0.5 million, compared to net income of $5.7 million for the comparable period ended June 30, 2008. Earnings per share for the six months ended June 30, 2009 was $0.03, versus earnings per share of $0.37 and $0.36 on a basic and diluted basis, respectively, for the same period

2009 Second Quarter Form 10-Q
Specialty Underwriters’ Alliance, Inc.

ended June 30, 2008. The decrease in our net income was due to several factors, including (i) the operating expenses incurred as a result of both the proxy contest waged at the annual meeting of stockholders held on May 5, 2009 and the negotiation of the merger agreement entered into with Tower on June 21, 2009, (ii) the increase to our net loss and loss adjustment ratio resulting from several large losses in our commercial automobile line and (iii) the increase in our acquisition expense ratio resulting from higher commission rates paid to our partner agents.

Gross written premiums were $72.9 million for the six months ended June 30, 2009 compared to $65.9 million for the six months ended June 30, 2008. The increase in gross written premiums was attributable to increased premiums in our workers’ compensation and commercial automobile lines of business which increase was partially offset by rate reductions affecting the renewal business in our workers’ compensation line of business and by decreasing premiums in the first quarter of 2009 in our general liability line of business resulting from continuing deteriorating economic conditions.

Our gross written premiums by partner agent for the six months ended June 30, 2009 and 2008 were as follows:


	6/30/2009					6/30/2008
	Gross Written		% of Total Gross			Gross Written		% of Total Gross
	Premium		Written Premium			Premium		Written Premium
	(in millions)
Risk Transfer Programs, LLC	$	28.6		39.3	%	$	31.5		47.7	%
American Team Managers		11.9		16.3	%		12.7		19.3	%
Appalachian Underwriters, Inc.		11.4		15.6	%		3.9		5.9	%
AEON Insurance Group, Inc.		7.4		10.2	%		10.8		16.4	%
Northern Star Management, Inc.		4.6		6.3	%		2.0		3.0	%
First Light Program Manager, Inc.		4.2		5.8	%		1.4		2.1	%
Specialty Risk Solutions, LLC		4.1		5.6	%		0.9		1.4	%
Insential, Inc.		0.4		0.5	%		0.7		1.1	%
Flying Eagle Insurance Service, Inc.		0.1		0.1	%		0.5		0.8	%
Other		0.2		0.3	%		1.5		2.3	%

Total	$	72.9		100.0	%	$	65.9		100.0	%

Our gross written premiums for the six months ended June 30, 2009 and 2008 by state were as follows:


	6/30/2009					6/30/2008
			% of Total					% of Total
	Gross Written		Gross Written			Gross Written		Gross Written
	Premium		Premium			Premium		Premium
	(in millions)
California	$	19.9		27.3	%	$	25.7		39.0	%
Florida		13.6		18.7	%		12.4		18.8	%
Texas		7.1		9.7	%		6.2		9.4	%
Other states		32.3		44.3	%		21.6		32.8	%

Total	$	72.9		100.0	%	$	65.9		100.0	%

2009 Second Quarter Form 10-Q
Specialty Underwriters’ Alliance, Inc.

Our gross written premiums by line of business for the six months ended June 30, 2009 and 2008 were as follows:


	6/30/2009					6/30/2008
			% of Total					% of Total
	Gross Written		Gross Written			Gross Written		Gross Written
	Premium		Premium			Premium		Premium
	(in millions)
Workers’ compensation	$	44.1		60.5	%	$	38.3		58.1	%
Commercial automobile		21.4		29.4	%		18.0		27.3	%
General liability		6.3		8.6	%		8.1		12.3	%
All other		1.1		1.5	%		1.5		2.3	%

Total	$	72.9		100.0	%	$	65.9		100.0	%

The change in our mix of business by agent, state and line of business was influenced by increased premiums in our commercial automobile and our workers’ compensation lines of business which were partially offset by rate reductions affecting the renewal business in our workers’ compensation line of business and continued reduction in our contractors business due to the downturn in the construction industry.

Earned premiums were $70.1 million for the six months ended June 30, 2009 compared to $69.9 million for the comparable period ended June 30, 2008.

Net investment income was $5.6 million for the six months ended June 30, 2009 versus $5.3 million for the three same period ended June 30, 2008.

Acquisition expenses were $16.9 million for the six months ended June 30, 2009 compared to $16.0 million for the six months ended June 30, 2008. The increase in acquisition expenses was primarily the result of higher commission rates paid to our partner agents resulting from the continuation of a soft insurance market.

Other operating expenses were $13.7 million for the six months ended June 30, 2009 compared to $11.3 million for the six months ended June 30, 2008. The increase in other operating expenses was primarily attributable to the one-time expenses of approximately $1.7 million incurred as a result of both the proxy contest waged at the annual meeting of stockholders held on May 5, 2009 and the negotiation of the merger agreement entered into with Tower Group, Inc. on June 21, 2009.

For the first half of 2009, our net loss and loss adjustment expense ratio was 62.8%, compared to 60.0% for the comparable period in 2008. This increase was primarily driven by higher loss ratios in our commercial automobile line of business resulting from several large losses in that line. The increase in our loss ratio was partially offset by favorable prior year loss development for the six months ended June 30, 2009 of $1.8 million primarily attributable to favorable loss development in our contractors and workers’ compensation lines of business. For the six months ended June 30, 2008, we experienced favorable prior year loss development of $1.3 million primarily within our commercial automobile line of business.

Liquidity and Capital Resources

Specialty Underwriters’ Alliance, Inc. is organized as a holding company and, as such, has no direct operations of its own. Its assets consist primarily of investments in its subsidiary, through which it conducts substantially all of its insurance operations.

As a holding company, Specialty Underwriters’ Alliance, Inc. has continuing funding needs for general corporate expenses, the payment of principal and interest on future borrowings, if any, taxes and the payment of other obligations. Funds to meet these obligations come primarily from dividends and other statutorily permissible payments from our operating subsidiary. The ability of our operating subsidiary to make payments to us is limited by the applicable laws and regulations of Illinois. There are restrictions on the payment of dividends to us by our insurance subsidiary.

2009 Second Quarter Form 10-Q
Specialty Underwriters’ Alliance, Inc.

Cash Flows

A summary of our cash flows is as follows:

	Three Months Ended
	Six Months Ended
	3/31/2009			3/31/2008
	6/30/2009			6/30/2008
	(in millions)
Cash provided by (used in)
Operating activities	$	(10.35	)	$	1117.76
Investing activities		10.56			(1117.38	)
Financing activities		0.01			(0.46	)
Change in cash	$	01.2		$	(0.8	)

For the ~~three~~six months ended ~~March~~June 3130, 2009, net cash used by operating activities was $10.35 million, principally consisting of ~~losses~~premium and ~~expenses~~deposit ~~paid~~collections ~~out~~ exceeding ~~premium~~losses and ~~deposit~~expenses ~~collections~~paid out. This amount compares to net cash from operating activities of $1117.76 million for the ~~three~~ three months ended ~~March~~June 3130, 2008. The decrease in net cash provided by operating activities was ~~primarily~~ primarily driven by the increase in loss and LAE payments resulting from the maturation of our book of of business and a decrease in written premiums during 2008.

Cash provided by investment activities was $10.56 million for the ~~three~~six months ended ~~March~~June 3130, 2009, resulting from sales, redemptions, calls and maturities of investments exceeding purchases of new fixed maturity investments and purchases of equipment and capitalized software. For the three months ended ~~March~~June 3130, 2008, cash used in investment activities was $1117.38 million, ~~also~~ principally representing increases in investments and purchases of equipment and capitalized software.

For the ~~three~~six months ended ~~March~~June 3130, 2009, cash flows from financing activities from sales of Class B Shares to partner agents were ~~negligible~~$0.1 million. For the ~~three~~six months ended ~~March~~June 3130, 2008, cash flows ~~from~~used for financing activities were $0.6 million primarily relating to the repurchase of treasury shares partially offset from sales of Class B Shares to partner agents ~~were $0~~.~~4 million.~~

2009 First Quarter Form 10-Q Specialty Underwriters’ Alliance, Inc.

Fixed Maturity Investments

Our investment portfolio consists of marketable fixed maturity and short-term investments. All fixed maturity investments are classified as available for sale and are reported at their estimated fair value. Realized gains and losses are credited or charged to income in the period in which they are realized. Changes in unrealized gains or losses are reported as a separate component of comprehensive income, and accumulated unrealized gains or losses are reported as a separate component of accumulated other comprehensive income in stockholders’ equity.

The aggregate fair market value of our fixed maturity investments atas ~~March~~of June 3130, 2009 was $~~219~~231.5 9 million compared to amortized cost of $~~222~~231.61 million. The aggregate fair market value of our ~~fixed~~ fixed maturity investments atas of December 31, 2008 was $216.7 million compared to amortized cost of $220.7 million.

During the ~~first~~second quarter of 2009, ~~two~~a total of six of our available-for-sale securities with a fair market value of $02.53 million, ~~and~~as ~~a book value~~ of ~~$0.7~~June ~~million~~30, 2009, have experienced an other-than-temporary impairment of $1.6 million of which $0.24 million was recognized in earnings and $1.2 million ~~For~~was recognized ~~information~~in ~~about~~other ~~our~~comprehensive ~~methodology~~net ~~for~~earnings. ~~determining~~During ~~whether~~the asix ~~security~~months ~~has~~ended June 30, 2009, six of ~~experienced~~our ~~impairment~~available-for-sale ~~see~~securities ~~the~~with ~~discussion~~a ~~under~~fair ~~the~~market ~~heading~~value “of ~~Item 1~~$2.3 million, ~~Financial~~as ~~Statements~~of June 30, 2009, -have ~~Note~~experienced 5an —other-than-temporary ~~Recent~~impairment ~~Accounting~~of ~~Pronouncements”~~$1.8 million, ~~and~~of ~~Note~~which $0.6 million —was recognized ~~Investments”~~in ofearnings ~~this~~and ~~quarterly~~$1.2 million was recognized in ~~report~~comprehensive income.

~~Item 3:~~ For ~~Quantitative~~information about our methodology for determining whether a security has experienced impairment see the discussion under the heading “ ITEM 1. FINANCIAL STATEMENTS — Note 2 — Recent Accounting Pronouncements” and ~~Qualitative~~“Note ~~Disclosures~~6 ~~About~~— ~~Market~~Investments” of ~~Risk~~this quarterly report.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk can be described as the risk of change in fair value of a financial instrument due to changes in interest rates, creditworthiness, foreign exchange rates or other factors. We seek to mitigate that risk by a number of actions, as described below.

2009 Second Quarter Form 10-Q
Specialty Underwriters’ Alliance, Inc.

Interest Rate Risk

Our exposure to market risk for changes in interest rates is concentrated in our investment portfolio. We monitor this exposure through periodic reviews of our consolidated asset and liability positions. We model and periodically review estimates of cash flows, as well as the impact of interest rate fluctuations relating to the investment portfolio and insurance reserves.

The table below summarizes the estimated effects of hypothetical increases and decreases in market interest rates on the fair value of our fixed maturity investments, including our short-term investments, as of ~~March~~June 3130, 2009:

Estimated

Fair Value

Assumed Change

After Change

Increase

Fair Value at

in Relevant

in Interest

(Decrease) in

Fair Value as

in Relevant

in Interest

(Decrease) in

3/31/2009

Interest Rate

Rate

Fair Value

of 6/30/2009

Interest Rate

Rate

Fair Value

(in thousands)

Total Investments

~~261~~265,~~501~~044

100 bp decrease

~~270~~275,~~952~~352

910,~~451~~308

50 bp decrease

~~266~~270,~~170~~144

45,~~669~~100

50 bp increase

~~256~~260,~~939~~112

(4,~~562~~932

)

100 bp increase

~~252~~255,~~488~~293

(9,~~013~~751

)

The average duration of our fixed maturity investments at ~~March~~June 3130, 2009 was approximately 3.5888 years.

Credit Risk

Our portfolio includes primarily fixed income securities and short-term investments, which are subject to credit risk. This risk is defined as default or the potential loss in market value resulting from adverse changes in the borrower’s ability to repay the debt. In our risk management strategy and investment policy, we earn competitive relative returns while investing in a diversified portfolio of securities of high credit quality issuers to limit the amount of credit exposure to any one issuer.

The portfolio of fixed maturities investments consists solely of high quality bonds and short-term investments atas ~~March~~of June 3130, 2009. The following table summarizes bond ratings at fair value:

2009 First Quarter Form 10-Q Specialty Underwriters’ Alliance, Inc.


	As of 6/30/2009
			Percent of
Bond Ratings	Amount		Portfolio
	(in thousands)
AAA rated and U.S. Government and affiliated agency securities	$	133,077		50.2	%
AA rated		59,949		22.6	%
A rated		62,058		23.4	%
BBB rated		6,848		2.6	%
BB rated		2,638		1.0	%
B Rated		50		0.0	%
C Rated		424		0.2	%


Total	$	265,044		100.0	%

	As of 3/31/2009
			Percent of
Bond Ratings	Amount		Portfolio
	(in thousands)
AAA rated and U.S. Government and affiliated agency securities	$	144,593		55.3	%
AA rated		53,804		20.6	%
A rated		58,043		22.2	%
BBB rated		4,153		1.6	%
BB rated		763		0.3	%
B Rated		145		0.0	%
Total	$	261,501		100.0	%

We also have other receivable amounts subject to credit risk, including reinsurance recoverables from OneBeacon Insurance Company. To mitigate the risk of counterparties’ nonpayment of amounts due under these arrangements, we established business and financial standards for reinsurer approval, incorporating ratings by major rating agencies and considering then-current market information.

Item 4: Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures. Disclosure controls and procedures are our controls and procedures that are designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934, or the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

2009 Second Quarter Form 10-Q
Specialty Underwriters’ Alliance, Inc.

required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by SEC Rules 13a-15(b) and 15d-15(b), we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer. Based on this evaluation, these officers have concluded that the design and operation of our disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting. There were no changes to our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, these internal controls.

Inherent Limitations on Effectiveness of Controls. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure controls and procedures and internal control over financial reporting systems are met.

2009 ~~First~~Second Quarter Form 10-Q Specialty Underwriters’ Alliance, Inc.

1723

PART II — OTHER INFORMATION

~~Item~~ ITEM 1: ~~Legal~~LEGAL ~~Proceedings~~PROCEEDINGS

None.

~~Item~~ ITEM 1A: ~~Risk~~RISK ~~Factors~~FACTORS

~~There~~You should carefully consider the following risks. These risks, which are norelated ~~material~~to ~~changes~~our proposed merger, which we refer to as the ~~risk~~merger, ~~factors~~with ~~previously~~Tower ~~reported~~Group, inInc., ~~our~~or ~~Annual~~Tower ~~Report~~and onTower S.F. ~~Form~~Merger 10Corporation, or Merger Sub, a wholly-Kowned ~~for~~subsidiary of Tower, could have a material adverse effect on our business, financial condition, results of operations or prospects and cause the ~~year~~value ~~ended~~of ~~December~~our stock to decline. The merger is pursuant to an Amended and Restated Agreement and Plan of Merger entered into on July 3122, ~~2008.~~2009 ~~For~~and ~~more~~dated ~~information~~as ~~regarding~~of ~~such~~June 21, ~~risk~~2009, ~~factors~~by and between us, ~~please~~Tower ~~refer~~and Merger Sub, or the merger agreement. These risks are not exclusive and additional risks to ~~Item 1A~~which we are subject include, but are not limited to, the risks of our ~~Annual~~businesses in our Annual Report on Form 10-K for the year ended December 31, 2008 and the factors mentioned in any forward-looking statements contained herein or therein.

~~Item 2:~~Failure ~~Recent~~to ~~Sales~~complete the merger may negatively impact our business, financial condition, results of operations, ~~Unregistered~~prospects ~~Securities~~and stock price.

~~There~~The ~~were~~merger nois ~~sales~~subject to the satisfaction or waiver of ~~unregistered~~a ~~securities~~number of closing conditions and there can be no assurance that ~~have~~the ~~not~~conditions ~~been~~to ~~previously~~the ~~reported~~completion onof ~~a Current~~the ~~Report~~merger onwill ~~Form~~be ~~8-K~~satisfied or waived. These conditions include:

~~Item 3:~~• ~~Defaults~~adoption ~~Upon~~by ~~Senior~~holders ~~Securities~~ of our Common Stock of the merger agreement; • receipt of required regulatory approvals, including approvals by the California and Illinois departments of insurance; • the absence of any injunctions or other legal restraints, having the effect of making the merger illegal or preventing the completion of the merger; • the absence of any event or development that has had or would reasonably be expected to have, individually or in the aggregate, a material adverse effect (as defined in the merger agreement) on us; • receipt of a legal opinion by each of Tower and us from our respective counsel to the effect that the merger will be treated as a “reorganization” within the meaning of Section 368(a) of the Code; • effectiveness of a proxy statement/prospectus and the absence of a stop order or proceedings threatened or initiated by the SEC for that purpose; • other customary closing conditions.

If the merger is not completed, we will be subject to several risks, including:


•		the current market price of our common stock may reflect a market assumption that the merger will occur and a failure to complete the merger could result in a negative perception of us by equity investors and a resulting decline in the market price of the common stock;

•		we may be required to pay a termination fee of $3,000,000, if the merger agreement is terminated under certain circumstances, as well as the reimbursement of certain reasonable, out-of-pocket transaction expenses up to $1,000,000;

•		we expect to incur substantial transaction costs in connection with the merger; and

•		we would not realize any of the anticipated benefits of having completed the merger.

The merger agreement also restricts us from engaging in certain actions and taking certain action without Tower’s approval, which could prevent us from pursuing opportunities that may arise prior to the closing of the merger or termination of the merger agreement.

2009 Second Quarter Form 10-Q
Specialty Underwriters’ Alliance, Inc.

If the merger is not completed, these risks may materialize and materially adversely affect our business, financial condition, results of operations, prospects and stock price.

The announcement and pendency of the merger could have an adverse effect on our stock price, business, financial conditions, results of operations or business prospects.

The announcement and pendency of the merger could disrupt our business in the following ways, among others:


•		employees may experience uncertainty regarding their future roles with the combined company, which might adversely affect our ability to retain, recruit and motivate key personnel;

•		the attention of our management may be directed toward the completion of the merger and transaction-related considerations and may be diverted from the day-to-day business operations of our company, and matters related to the merger may require commitments of time and resources that could otherwise have been devoted to other opportunities that might have been beneficial to us; and

•		third parties with business relationships with us may seek to terminate and/or renegotiate their relationships with us as a result of the merger, whether pursuant to the terms of their existing agreements or otherwise.

Any of these matters could adversely affect our business, financial condition, results of operations, prospects and stock price.

ITEM 2: RECENT SALES OF UNREGISTERED SECURITIES

On June 4, 2009 and June 8, 2009, American Team Managers Insurance Services, Inc., or ATM, exchanged 62,062 and 5,000 Class B Shares, respectively, into an equal number of shares of our Common Stock, pursuant to the terms of the Amended and Restated Securities Purchase Agreement between the Company and ATM dated September 8, 2005, as amended, or the Purchase Agreement.

The issuance of the Common Stock as a result of the conversion of the Class B Shares pursuant to the Purchase Agreement was made in reliance on the exemption from the registration requirements under Section 4(2) of the Securities Act of 1933.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

~~Item~~ ITEM 4: ~~Submission~~SUBMISSION ofOF ~~Matters~~MATTERS toTO aA ~~Vote~~VOTE ofOF ~~Security~~SECURITY ~~Holders~~HOLDERS

At our Annual Meeting of stockholders held on May 5, 2009, the stockholders elected each of the following director nominees to hold office until the next annual meeting of stockholders or until their successors are duly elected and qualified, with the following votes:


	For		Withheld
Courtney C. Smith		6,607,622		85,615
Robert E. Dean		6,607,622		85,615
Raymond C. Groth		6,607,622		85,615
Paul A. Philp		6,607,622		85,615
Robert H. Whitehead		6,607,622		85,615
Russell E. Zimmermann		6,607,622		85,615

With respect to the Board seat held prior to the May 5, 2009 meeting by Peter E. Jokiel, none of the remaining four nominees — Robert M. Fishman, C. Gregory Peters, Mark E. Pape and Mr. Jokiel - received a plurality of the votes of the shares present in person or represented by proxy at the Annual Meeting. Mr. Fishman, Mr. Peters and Mr. Pape, nominated by Hallmark Financial Services, Inc. and certain related parties, or Hallmark, each received 6,225,738 votes. Mr. Jokiel, nominated by the Company, received 4,881,184 votes.

On July 1, 2009, Mr. Jokiel resigned as a member of the board of directors of the Company. Concurrently with Mr. Jokiel’s resignation, upon the recommendation of the nominating and corporate governance committee of the Company, or the committee, the board appointed Mr. Pape to fill the vacancy created by Mr. Jokiel’s resignation. Mr. Pape was appointed as a director pursuant to an agreement entered into by and among the Company and Hallmark on June 5, 2009. Under the terms of the agreement, the Company agreed that the committee would meet with two individuals nominated by Hallmark and, to the extent the committee found any such persons qualified to

2009 Second Quarter Form 10-Q
Specialty Underwriters’ Alliance, Inc.

serve as a director of the Company, recommend one such person to the Board to be appointed as a director simultaneously with Mr. Jokiel’s resignation. Mr. Pape was appointed to the Board pursuant to this procedure.

At the same meeting, the selection of PricewaterhouseCoopers LLP as independent registered accounting firm for the current year was ratified, with the following votes:


For	Against		Abstentions
12,697,447		27,072		260,881

ITEM 5: OTHER INFORMATION

None.

~~Item 5~~ITEM 6: ~~Other Information~~ EXHIBITS

None.

Item 6: Exhibits

Exhibits:

Exhibit
Number		Description
	31.1	Certification of Courtney C. Smith, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	2.1	Amended and Restated Agreement and Plan of Merger, executed on July 22, 2009 and dated as of June 21, 2009, between the Registrant, Tower Group, Inc. and Tower S.F. Merger Corporation (Incorporated by reference to Exhibit 2.1, filed with the Registrant’s Current Report on Form 8-K filed on July 24, 2009)
	31.2	Certification of Peter E. Jokiel, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	10.1*	Stock Purchase Agreement, dated March 22, 2004, between the Registrant and OneBeacon Insurance Company, including Exhibit A, Instrument of Transfer and Assumption, dated February 10, 2004, between OneBeacon Insurance Company and Potomac Insurance Company of Illinois
	32.1	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 2002
	10.2*	Amendment No. 7 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated April 30, 2009, between the Registrant and American Team Managers Insurance Services, Inc.
	32.2	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
	10.3*	Amendment No. 2 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated May 18, 2009, between the Registrant and AEON Insurance Group, Inc.
	10.4*	Second Amendment to the Amended and Restated Securities Purchase Agreement, dated June 4, 2009, between the Registrant and American Team Managers Insurance Services, Inc.
	10.5*	Amended and Restated SUA Insurance Company Partner Agent Program Agreement, dated June 10, 2009, between the Registrant and Risk Transfer Holdings, Inc.
	10.6*	Second Amendment to the Amended and Restated Securities Purchase Agreement, dated June 10, 2009, between the Registrant and Risk Transfer Holdings, Inc.
	10.7*	Partner Agent Assignment and Assumption Agreement, dated June 10, 2009, between the Registrant, Risk Transfer Holdings, Inc. and Risk Transfer Programs, LLC
	10.8*	Securities Purchase Assignment and Assumption Agreement, dated June 10, 2009, between the Registrant, Risk Transfer Holdings, Inc. and Risk Transfer Programs, LLC
	10.9*	Amendment No. 2 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated June 11, 2009, between the Registrant and Specialty Risk Solutions, LLC
	10.10*	Fifth Amendment to the Securities Purchase Agreement, dated June 11, 2009, between the Registrant and Specialty Risk Solutions, LLC
	10.11*	Amendment No. 3 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated June 18, 2009, between the Registrant and AEON Insurance Group, Inc.
	10.12*	Amendment No. 8 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated June 18, 2009, between the Registrant and American Team Managers Insurance Services, Inc.
	10.13*	Amendment No. 3 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated June 18, 2009, between the Registrant and Specialty Risk Solutions, LLC
	10.14*	Amendment No. 1 to the SUA Insurance Company Amended and Restated Partner Agent Program Agreement, dated June 19, 2009, between the Registrant and Risk Transfer Programs, LLC
	31.1*	Certification of Courtney C. Smith, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2*	Certification of Peter E. Jokiel, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1*	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 2002
	32.2*	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

~~2009~~* ~~First~~Filed ~~Quarter Form 10-Q Specialty Underwriters’ Alliance, Inc.~~ herewith

182009 Second Quarter Form 10-Q Specialty Underwriters’ Alliance, Inc.

~~Signatures~~SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	SPECIALTY UNDERWRITERS’ ALLIANCE, INC. (Registrant)
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.(Registrant)
By:	~~By:~~/s/ Courtney C. Smith	~~/s/ Courtney C. Smith Name: Courtney C. Smith~~
		Title: President and Chief Executive Officer
	Name: Courtney C. Smith
	Date: May 8, 2009
	Title: President and Chief Executive Officer
	By:	/s/ Peter E. Jokiel Name: Peter E. Jokiel
Date: August 7, 2009
		Title: Executive Vice President and Chief Financial Officer
By:	/s/ Peter E. Jokiel
	Date: May 8, 2009
	Name: Peter E. Jokiel
	Title: Executive Vice President and Chief
	Financial Officer
Date: August 7, 2009

2009 ~~First~~Second Quarter Form 10-Q Specialty Underwriters’ Alliance, Inc.

1927

Exhibits Index:

Exhibit
Number		Description
	31.1	Certification of Courtney C. Smith, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	2.1	Amended and Restated Agreement and Plan of Merger, executed on July 22, 2009 and dated as of June 21, 2009, between the Registrant, Tower Group, Inc. and Tower S.F. Merger Corporation (Incorporated by reference to Exhibit 2.1, filed with the Registrant’s Current Report on Form 8-K filed on July 24, 2009)
	31.2	Certification of Peter E. Jokiel, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	10.1*	Stock Purchase Agreement, dated March 22, 2004, between the Registrant and OneBeacon Insurance Company, including Exhibit A, Instrument of Transfer and Assumption, dated February 10, 2004, between OneBeacon Insurance Company and Potomac Insurance Company of Illinois
	32.1	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 2002
	10.2*	Amendment No. 7 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated April 30, 2009, between the Registrant and American Team Managers Insurance Services, Inc.
	32.2	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
	10.3*	Amendment No. 2 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated May 18, 2009, between the Registrant and AEON Insurance Group, Inc.
	10.4*	Second Amendment to the Amended and Restated Securities Purchase Agreement, dated June 4, 2009, between the Registrant and American Team Managers Insurance Services, Inc.
	10.5*	Amended and Restated SUA Insurance Company Partner Agent Program Agreement, dated June 10, 2009, between the Registrant and Risk Transfer Holdings, Inc.
	10.6*	Second Amendment to the Amended and Restated Securities Purchase Agreement, dated June 10, 2009, between the Registrant and Risk Transfer Holdings, Inc.
	10.7*	Partner Agent Assignment and Assumption Agreement, dated June 10, 2009, between the Registrant, Risk Transfer Holdings, Inc. and Risk Transfer Programs, LLC
	10.8*	Securities Purchase Assignment and Assumption Agreement, dated June 10, 2009, between the Registrant, Risk Transfer Holdings, Inc. and Risk Transfer Programs, LLC
	10.9*	Amendment No. 2 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated June 11, 2009, between the Registrant and Specialty Risk Solutions, LLC
	10.10*	Fifth Amendment to the Securities Purchase Agreement, dated June 11, 2009, between the Registrant and Specialty Risk Solutions, LLC
	10.11*	Amendment No. 3 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated June 18, 2009, between the Registrant and AEON Insurance Group, Inc.
	10.12*	Amendment No. 8 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated June 18, 2009, between the Registrant and American Team Managers Insurance Services, Inc.
	10.13*	Amendment No. 3 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated June 18, 2009, between the registrant and Specialty Risk Solutions, LLC
	10.14*	Amendment No. 1 to the SUA Insurance Company Amended and Restated Partner Agent Program Agreement, dated June 19, 2009, between the registrant and Risk Transfer Programs, LLC
	31.1*	Certification of Courtney C. Smith, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2*	Certification of Peter E. Jokiel, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1*	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 2002
	32.2*	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

~~2009~~* ~~First~~Filed ~~Quarter Form 10-Q Specialty Underwriters’ Alliance, Inc.~~ herewith

202009 Second Quarter Form 10-Q Specialty Underwriters’ Alliance, Inc.

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Filing Compare · Specialty Underwriters Alliance, Inc.