UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009


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
Incorporation or Organization)		Identification Number)

222 South Riverside Plaza, Chicago, Illinois		60606

(Address of Principal Executive Offices)		(Zip Code)

(888) 782-4672

(Registrant’s Telephone Number, Including Area Code)

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

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 November 6, 2009, there were 14,574,596 shares of our common stock, $0.01 par value, or the Common Stock, outstanding and 1,354,328 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		16
Item 3. Quantitative and Qualitative Disclosures About Market Risk		23
Item 4. Controls and Procedures		23

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		25
Item 1A. Risk Factors		25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 3. Defaults Upon Senior Securities		25
Item 4. Submission of Matters to a Vote of Security Holders		25
Item 5. Other Information		25
Item 6. Exhibits		25

2009 Third 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 September 30, 2009 and December 31, 2008
(in thousands, except share data)


	9/30/2009			12/31/2008
	(unaudited)
ASSETS
Fixed maturity investments, at fair value (amortized cost: $236,290 and $220,744)	$	244,135		$	216,708
Short-term investments, at amortized cost (which approximates fair value)		60,454			46,697


Total Investments		304,589			263,405
Cash		1,520			208
Insurance premiums receivable		59,222			60,715

Reinsurance recoverable on paid and unpaid loss and loss adjustment expenses		73,883			79,598
Prepaid reinsurance premiums		337			309
Investment income accrued		2,476			2,467
Equipment and capitalized software at cost (less accumulated depreciation of $20,465 and $15,486)		12,323			13,562
Intangible assets		10,745			10,745
Deferred acquisition costs		21,408			18,156
Federal income tax recoverable		1,173			115
Deferred tax asset		-			3,146
Other assets		4,201			2,426


Total Assets	$	491,877		$	454,852

LIABILITIES & STOCKHOLDERS’ EQUITY
Liabilities
Loss and loss adjustment expense reserves	$	222,232		$	214,953
Unearned insurance premiums		103,275			80,600
Insured deposit funds		13,261			15,806
Deferred tax liability		691			-
Accounts payable and other liabilities		8,103			7,204


Total Liabilities		347,562			318,563


Commitments (Note 8)
Stockholders’ equity
Common stock at $0.01 par value per share — authorized: 30,000,000 shares; issued: 14,779,417 shares and 14,712,355 shares; and outstanding: 14,574,596 shares and 14,437,355 shares		148			147
Class B common stock at $0.01 par value per share — authorized: 2,000,000 shares; issued and outstanding: 1,354,328 shares and 1,368,562 shares		13			14
Paid-in capital — common stock		130,553			129,926
Paid-in capital — class B common stock		7,832			8,077
Accumulated earnings		1,276			1,693
Treasury stock (204,821 and 275,000 shares of common stock)		(1,003	)		(1,347	)
Accumulated other comprehensive income (loss)		5,496			(2,221	)


Total Stockholders’ Equity		144,315			136,289


Total Liabilities & Stockholders’ Equity	$	491,877		$	454,852

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

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

Specialty Underwriters’ Alliance, Inc.
Consolidated Statements of Operations and Comprehensive Income
For the Three and Nine Months Ended September 30, 2009 and 2008
(Unaudited — in thousands, except for earnings per share)


	Three Months Ended						Nine Months Ended
	9/30/2009			9/30/2008			9/30/2009			9/30/2008
Revenues
Earned insurance premiums	$	44,280		$	37,208		$	114,420		$	107,153
Net investment income		2,722			2,662			8,271			7,985
Net realized gains (losses)		(381	)		4			(213	)		42

Subtotal: Revenue before impairments		46,621			39,874			122,478			115,180

Other than temporary impairment losses		(363	)		(849	)		(2,198	)		(849	)
Loss (gain) recognized in other comprehensive income		(253	)		-			1,006			-

Subtotal: Net impairment recognized in earnings		(616	)		(849	)		(1,192	)		(849	)

Total revenue		46,005			39,025			121,286			114,331

Expenses
Loss and loss adjustment expenses		31,812			22,444			75,791			64,443
Acquisition expenses		10,470			8,531			27,354			24,501
Other operating expenses		5,795			6,234			19,521			17,573

Total expenses		48,077			37,209			122,666			106,517

Pretax income (loss)		(2,072	)		1,816			(1,380	)		7,814
Income tax (expense) benefit		775			(515	)		600			(798	)

Net income (loss)		(1,297	)		1,301			(780	)		7,016
Net change in unrealized gains and losses for investments held, after tax		4,438			(3,785	)		8,734			(6,018	)
Impairments included in other comprehensive income (loss), after tax		164			-			(654	)		-

Comprehensive income (loss)	$	3,305		$	(2,484	)	$	7,300		$	998


Earnings (losses) per share available to common stockholders (in dollars)
Basic and diluted	$	(0.08	)	$	0.08		$	(0.05	)	$	0.45

Weighted average shares outstanding
Basic		15,924			15,516			15,870			15,587
Diluted		15,924			15,567			15,870			15,743

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

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

Specialty Underwriters’ Alliance, Inc.
Consolidated Statement of Stockholders’ Equity
As of September 30, 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		-		-		-			-			(780	)		-			-			(780	)

Net change in unrealized investment gains, net of tax		-		-		-			-			-			-			8,734			8,734

Impairments included in other comprehensive income, net of tax		-		-		-			-			-			-			(654	)		(654	)

Stock issuance		1		110		(1	)		(245	)		-			344			-			209

Treasury stock purchases		-		-		-			-			-			-			-			-

Stock based compensation		-		517		-			-			-			-			-			517

Cumulative effect of adopting FSP FAS 115-2		-		-		-			-			363			-			(363	)		-


Balance at Sept. 30, 2009	$	148	$	130,553	$	13		$	7,832		$	1,276		$	(1,003	)	$	5,496		$	144,315

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

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

Specialty Underwriters’ Alliance, Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2009 and 2008
(Unaudited — in thousands)


	Nine Months Ended
	9/30/2009			9/30/2008
Cash flows from operations
Net income	$	(780	)	$	7,016

Charges (credits) to reconcile net income to cash flows from operations:
Change in deferred income tax		(522	)		(309	)
Net realized losses		1,405			807
Amortization of bond premium		214			71
Depreciation		4,979			4,931
Net change in:
Reinsurance recoverable on unpaid loss and loss adjustment expense reserves		5,715			3,056
Loss and loss adjustment expense reserves		7,279			17,574
Insurance premiums receivable		1,493			8,809
Unearned insurance premiums		22,675			(3,294	)
Deferred acquisition costs		(3,252	)		173
Prepaid reinsurance premiums		(28	)		(59	)
Insured deposit funds		(2,545	)		995
Other, net		(1,469	)		4

Total adjustments		35,944			32,758

Net cash flows provided by operations		35,164			39,774


Cash flows from investing activities
Net (increase) decrease in short-term investments		(13,757	)		5,724
Sales, redemptions, calls and maturities of fixed maturity investments		26,096			21,416
Purchases of fixed maturity investments		(42,706	)		(61,832	)
Purchase of equipment and capitalized software		(3,740	)		(5,302	)

Net cash flows used for investing activities		(34,107	)		(39,994	)


Cash flows from financing activities
Issuance of common stock		255			1,118
Treasury stock purchases		-			(1,347	)


Net cash provided by (used for) financing activities		255			(229	)


Net increase (decrease) in cash during the period		1,312			(449	)

Cash at beginning of the period		208			968


Cash at the end of the period	$	1,520		$	519

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

2009 Third 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 September 30, 2009, and for the three and nine month periods ended September 30, 2009 and September 30, 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 June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) 105, Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (the Codification). The Codification reorganized existing U.S. accounting and reporting standards issued by the FASB and other related private sector standard setters into a single source of authoritative accounting principles arranged by topic. The Codification supersedes all existing U.S. accounting standards; all other accounting literature not included in the Codification (other than Securities and Exchange Commission guidance for publicly-traded companies) is considered non-authoritative. The Codification was effective on a prospective basis for interim and annual reporting periods ending after September 15, 2009. The adoption of the Codification changed the Company’s references to U.S. GAAP accounting standards but did not impact the Company’s results of operations, financial position or liquidity.

In May 2009, the FASB issued ASC 855, Subsequent Events, which provides guidance on management’s general standards for and disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued. The standard is effective for interim or annual financial periods ending after June 15, 2009. The standard does not apply to subsequent events or transactions that are within the scope of other applicable GAAP standards that provide different guidance on the accounting treatment for subsequent events or transactions. The initial applications of the standard have had no impact on the Company’s financial position or results of operations. The Company evaluates subsequent events through the date and time of the filing of the applicable periodic report with the SEC.

In April 2009, the FASB issued new guidance, which is now part of ASC 820, Fair Value Measurements and Disclosures on how to determine the fair value of assets and liabilities in 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. The provisions of the new guidance were effective for interim periods ending after June 15, 2009. The adoption of the new guidance has not had a material effect on the Company’s financial position or results of operations.

In April 2009, the FASB issued new guidance for the accounting of other-than-temporary impairments. The new guidance, which is now part of ASC 320, Investments — Debt and Equity Securities, 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 new guidance is to be applied prospectively and is effective for interim and

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

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

annual periods ending after June 15, 2009. The adoption of the new guidance has not had a material effect on the Company’s financial position or results of operations.

In April 2009, the FASB issued new guidance related to the disclosure of the fair value of financial instruments. The new guidance, which is now part of ASC 825, Financial Instruments, requires an entity to provide disclosures about fair value of financial instruments in interim financial information. The provisions of the new guidance are to be applied prospectively and are effective for interim and annual periods ending after June 15, 2009. The adoption of the new guidance has not had a material effect on the Company’s financial position or results of operations.

In January 2009, the FASB issued new guidance for the accounting of other-than-temporary impairments for beneficial interests in securitized financial assets. The new guidance, which is now part of ASC 325, Investments — Other, and is effective for interim and annual periods ending after December 15, 2008, amends the cash flows model used to analyze an other-than-temporary impairment 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 the new guidance has not had a material effect on the Company’s financial position or results of operations.

Note 3. Earnings Per Share

Basic earnings per share is based on the weighted average number of common shares 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					Nine Months Ended
	9/30/09			9/30/08		9/30/09			9/30/08
Numerator for earnings per share
Net income (loss)	$	(1,297	)	$	1,301	$	(780	)	$	7,016


Denominator for earnings per share
Weighted average shares outstanding used in computation of earnings per share
Common stock (class A and B) issued		16,129			15,791		16,103			15,685
Common stock in treasury		205			275		233			98

Weighted average shares outstanding - basic		15,924			15,516		15,870			15,587
Effect of dilutive securities^1,2
Stock awards		—			51		—			156

Weighted average shares outstanding - diluted		15,924			15,567		15,870			15,743


Earnings (losses) per share
Basic and diluted	$	(0.08	)	$	0.08	$	(0.05	)	$	0.45


¹		Outstanding stock options for 718 shares at September 30, 2009 and 2008 have been excluded from the diluted earnings per share calculation for the three and nine months ended September 30, 2009 and 2008, as they were anti-dilutive.

²		Potential common shares have been excluded in the computation of diluted earnings per share for the three and nine months ended September 30, 2009 since for each of these periods the Company experienced a net loss and inclusion of potential common shares would therefore be anti-dilutive.

Note 4. Income Taxes

The components of current and deferred income taxes for the three months and nine months ended September 30, 2009 and 2008 are as follows:


	Three Months Ended						Nine Months Ended
	9/30/09			9/30/08			9/30/09			9/30/08
Current tax (benefit) expense	$	(585	)	$	517		$	(78	)	$	1,107
Deferred tax (benefit) expense		(190	)		(2	)		(522	)		(309	)

Total income tax (benefit) expense	$	(775	)	$	515		$	(600	)	$	798

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

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

During the first quarter of 2008, based on profitability trends at the time, the Company believed that it was more likely than not that the deferred income tax assets would be realized. As such, the Company elected to eliminate its valuation allowance of $1,458. During the fourth quarter of 2008, the Company believed and continues to believe that certain state tax net operating loss carry forwards may not be realized in the future totaling $168 for which a valuation allowance has been maintained since December 31, 2008.

As of September 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 $48 and $402 at September 30, 2009 and December 31, 2008, respectively.

The Company utilized its tax loss carryforwards in early 2008 and subsequently began investing in tax exempt securities. Further, during the third quarter of 2009 the company experienced deterioration in its underwriting profitability that led to a pre-tax loss. This combined with tax exempt investment income led the Company’s effective tax rate to be above the federal income tax rate.

Note 5. Unpaid Loss and Loss Adjustment Expense Reserves

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.

At September 30, 2009, the Company reported gross loss and LAE reserves of $222,232, of which $43,704 represented the gross direct loss and LAE reserves of Potomac, which is fully reinsured by OneBeacon Insurance Company, or OneBeacon. At 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 $4,134 as of September 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

The cost or amortized cost and estimated fair values of the Company’s fixed maturity investments at September 30, 2009 were as follows:


	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
Category	Cost		Gains		Losses			Value
U.S. Treasury	$	9,790	$	702	$	-		$	10,492
U.S. Government Agencies		28,729		1,652		-			30,381
Municipals		71,942		4,996		(5	)		76,933
Corporate Fixed Maturity		63,413		4,008		(148	)		67,273
Agency Mortgage Backed		38,407		2,341		-			40,748
Non-Agency Mortgage Backed		6,625		1		(2,031	)		4,595
Commercial Mortgage Backed		13,386		51		(1,678	)		11,759
Asset Backed		3,998		-		(2,044	)		1,954


Total Fixed Maturities	$	236,290	$	13,751	$	(5,906	)	$	244,135

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

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

The cost or amortized cost and estimated fair values of the 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, $60,454 and $46,697 in short term investments as of September 30, 2009 and December 31, 2008, respectively. The Company’s short-term investments primarily consist of money market funds, but may also include agency discount notes, treasury notes and other short term investments with original maturities of less than one year. These securities are highly liquid investments that present negligible risk of changes in value due to changes in interest rates. The money market investments are recorded at amortized cost on the Company’s balance sheet, which approximates fair value based on quoted market prices and observable market inputs. The Company monitors quoted market prices on all its short term investments to confirm that carrying amounts approximate fair values.

The Company did not have any other investments.

Measuring Fair Value

ASC 820 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 September 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
	at		Assets		Inputs		Inputs
Category	9/30/09		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury	$	10,492	$	-	$	10,492	$	-
U.S. Government Agency		30,381		-		30,381		-
Municipal		76,933		-		76,933		-
Corporate Fixed Maturity		67,273		-		67,273		-
Agency Mortgage Backed		40,748		-		40,748		-
Non-Agency Mortgage Backed		4,595		-		-		4,595
Commercial Mortgage Backed		11,759		-		-		11,759
Asset-Backed		1,954		-		-		1,954


Total Fixed Maturity Investments	$	244,135	$	-	$	225,827	$	18,308

2009 Third 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
	at		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		54,935		-		54,935		-
Corporate Fixed Maturity		55,535		-		55,535		-
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 September 30, 2009, a total of four securities with a total fair value of $1,914 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. During the third quarter of 2009, the Company deemed the pricing of four securities unreasonable since they were deemed to be derived from distressed sales in an illiquid market and adjusted the total fair value of these four securities to $1,365 from $612 based on estimated cash flows and available yield spreads.

In order to determine the proper ASC 820 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 ASC 820 Level. Certain securities, primarily commercial and non-agency mortgage-backed and asset-backed securities, may not trade, be very thinly traded or trade at a distressed price due to economic conditions and concerns in the securities market. As a result, prices from independent third party pricing services, broker quotes or other observable inputs are not always available or represent a price from a distressed sale. A model using either a matrix pricing formula or future cash flow expectations is used to develop a fair value for these securities. Due to the low level of transparency around inputs to this valuation process these securities are classified within Level 3.

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

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 and nine months ended September 30, 2009:


	Three Months			Nine Months
	Ended			Ended
	9/30/2009			9/30/2009
Level 3 investments as of beginning of period	$	19,141		$	8,789
Transfers into level 3 (at beginning period value)		-			9,618
Purchases, sales, issuances, and settlements, net		(943	)		(1,450	)
Total gains or losses (realized/unrealized):					-
Included in earnings		(1,086	)		(1,661	)
Included in comprehensive income		1,196			3,012


Level 3 investments as of September 30, 2009	$	18,308		$	18,308

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.

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 before 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 September 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
Municipal	$	1,050	$	(5	)	$	-		$	(5	)
Corporate Fixed Maturity		2,863		-			(148	)		(148	)
Non-Agency Mortgage Backed		4,395		-			(2,031	)		(2,031	)
Commercial Mortgage Backed		6,819		-			(1,678	)		(1,678	)
Asset Backed		1,954		(272	)		(1,772	)		(2,044	)

Total Fixed Maturities	$	17,081	$	(277	)	$	(5,629	)	$	(5,906	)

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.

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

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

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. Other than investments for which the Company has recognized other-than-temporary impairments, the Company has received all of its scheduled principle and interest payments in a timely fashion and has experienced no defaults on any of its investments.

Impairment Review

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 ASC 325 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 ASC 320 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 (b) the amount related to all other factors. The amount of the total decline in fair 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 applicable income taxes. OTTI credit losses result in a permanent reduction of the cost basis of the underlying investment. The determination of OTTI is a subjective process, and different judgments and assumptions could affect the timing of loss realization.

During the third quarter of 2009, four of the Company’s securities experienced a decrease in fair value of $363. Associated with this decline in fair value, the Company recognized a credit loss of $616 in earnings and a credit of $253 was recognized in other comprehensive net income for previously recorded impairments. The Company recorded an OTTI charge of $2,198 on investment securities during the nine months ended September 30, 2009 of which $1,192 was recognized as a loss in earnings and $1,006 was recognized as a loss in comprehensive income.

The following table provides a roll-forward of the OTTI showing the amounts that have been included in earnings and other comprehensive income during the third quarter of 2009:


	Recognized In
				Other
				Compre-
				hensive
				Income
	Earnings			(Loss)			Total
Beginning Balance, July 1, 2009	$	(866	)	$	(1,818	)	$	(2,684	)
Cumulative effect of adjustment resulting from adoption of FSP 115-2, before income taxes		-			-			-

Subtotal		(866	)		(1,818	)		(2,684	)
Other-than-temporary impairment loss		(616	)		253			(363	)

Ending balance, September 30, 2009	$	(1,482	)	$	(1,565	)	$	(3,047	)

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

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

The following table provides a roll-forward of the OTTI showing the amounts that have been included in earnings and other comprehensive income from April 1, 2009 through September 30, 2009:


	Recognized In
				Other
				Compre-
				hensive
				Income
	Earnings			(Loss)			Total
Beginning Balance, April 1, 2009	$	(1,060	)	$	-		$	(1,060	)
Cumulative effect of adjustment resulting from adoption of FSP 115-2, before income taxes		559			(559	)		-

Subtotal		(501	)		(559	)		(1,060	)
Other-than-temporary impairment loss		(981	)		(1,006	)		(1,987	)

Ending balance, September 30, 2009	$	(1,482	)	$	(1,565	)	$	(3,047	)

Realized Gains and Losses

The following table sets forth the gross realized gains and losses of the Company, excluding losses resulting from other-than-temporary impairments, for the three and nine months ended September 30, 2009 as well as the number of transactions during such periods resulting in such realized gains or losses.


	Three Months			Nine Months
	Ended			Ended
	9/30/09			9/30/09
Gross gain on sales	$	80		$	203
Gross loss on sales		(470	)		(483	)
Net gain (loss) on calls, redemptions, maturity and sinking fund		9			67

Net gain (loss)	$	(381	)	$	(213	)


Number of sales transactions resulting in gain or loss		2			9

In the normal course of operations, the Company from time to time trades securities to reinvest the proceeds into a more opportune investment. Such transactions are made at the directive of the Company’s management, and can generate realized gains or losses. Such trades have been both infrequent and immaterial. The Company has never sold a security to meet capital or liquidity needs.

Note 7. Equity-Based Compensation

On May 1, 2007, the stockholders of the Company approved the 2007 Stock Incentive Plan, 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 and no further awards may be made under the 2004 Plan. 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.

During the nine months ended September 30, 2009, the Company granted 155,600 deferred stock awards and 15,000 shares of restricted stock, none of which were granted in the third quarter of 2009. During the nine months ended September 30, 2009, 1,450 shares subject to grants were forfeited under the 2007 Plan of which 450 shares were forfeited in the third quarter of 2009. No awards were forfeited under the 2004 Plan during the nine months ended September 30, 2009.

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

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

In addition there was equity based compensation expenses of $10 for the nine months ended September 30, 2009 relating to stock options previously granted of which $3 was incurred in the third quarter of 2009.

Note 8. Commitments and Contingencies

FBR Capital Markets & Co., or FBR, acted as financial advisor to the Company in connection with the proposed merger with Tower S.F. Merger Corporation, a wholly owned subsidiary of Tower Group, Inc., or Tower, as well as other proposals received by the Company in 2008 and 2009, and FBR received an aggregate of $125 in retainers for its services. FBR also received a fee of $500 in connection with the delivery of its fairness opinion relating to the proposed merger 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 the average price of Tower’s common stock used to determine the value of the merger consideration payable to the Company’s stockholders is $25.00, the total amount of the contingency fee that would be owed to FBR would be approximately $767.

2009 Third 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 the federal securities laws, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, the discussions of our operating and growth strategy. Investors are cautioned that all forward-looking statements involve risks and uncertainties including, without limitation, those set forth under the caption “Risk Factors” in Item 1A of Part II of the Quarterly Report on Form 10-Q for the period ended June 30, 2009 and in the Business section of our Annual Report on Form 10-K for the year ended December 31, 2008. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could prove to be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

Overview

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, the Company, Tower Group, Inc., or Tower, and Tower S.F. Merger Corporation, a wholly-owned subsidiary of Tower, or Merger Sub, entered into an Agreement and Plan of Merger, pursuant 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 common stock will be delisted. On July 22, 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.

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

Three Months Ended September 30, 2009 as compared to the Three Months Ended September 30, 2008

RESULTS OF OPERATION


	Three Months Ended
	9/30/2009			9/30/2008			% Change
	(in millions, except for
	earnings per share)
Gross written premiums	$	70.5		$	44.2			59.5%
Net written premiums		68.3			42.1			62.2%

Earned premiums	$	44.3		$	37.2			19.1%
Net investment income		2.7			2.6			3.8%
Net realized losses		(1.0	)		(0.8	)		*

Total revenues		46.0			39.0			17.9%

Net loss and loss adjustment expense		31.8			22.4			42.0%
Acquisition expenses		10.5			8.5			23.5%
Other operating expenses		5.8			6.3			-7.9%

Total expenses		48.1			37.2			29.3%

Pre-tax income (loss)		(2.1	)		1.8			*
Federal income tax benefit (expense)		0.8			(0.5	)		*

Net income (loss)	$	(1.3	)	$	1.3			*


Earnings (losses) per share available to common stockholders
Basic and diluted	$	(0.08	)	$	0.08			*

Weighted average shares outstanding
Basic		15.9			15.5			2.6%
Diluted		15.9			15.6			1.9%

Key operating ratios
Net loss and loss adjustment expense ratio		71.8%			60.2%			19.2%
Ratio of acquisition expense to earned premiums		23.7%			22.8%			3.7%
Ratio of all other expenses to gross written premiums		8.2%			14.3%			-42.3%


*		Not meaningful

Net loss for the quarter ended September 30, 2009 was $1.3 million, compared to net income of $1.3 million for the quarter ended September 30, 2008. Losses per share for the quarter ended September 30, 2009 was $0.08, versus earnings per share of $0.08 for the quarter ended September 30, 2008. The decrease in our net income was due to the increase to our net loss and loss adjustment ratio resulting from several large losses in our commercial automobile line of business and lower rates in our workers’ compensation line of business and the increase in our acquisition expense ratio resulting from higher commission rates paid to our partner agents.

Gross written premiums were $70.5 million for the three months ended September 30, 2009 compared to $44.2 million for the three months ended September 30, 2008. The increase in gross written premiums was attributable to increased premiums in our general liability line of business primarily due to two large accounts.

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

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


	9/30/2009				9/30/2008
			% of Total				% of Total
	Gross Written		Gross Written		Gross Written		Gross Written
	Premium		Premium		Premium		Premium
	(in millions)
Specialty Risk Solutions, LLC	$	42.6		60.4%	$	16.1		36.5%
Risk Transfer Programs, LLC		6.7		9.5%		12.5		28.3%
American Team Managers		6.1		8.7%		6.2		14.0%
Appalachian Underwriters, Inc.		5.7		8.1%		1.6		3.6%
AEON Insurance Group, Inc.		3.8		5.4%		5.1		11.5%
Northern Star Management, Inc.		3.7		5.2%		1.6		3.6%
First Light Program Manager, Inc.		1.6		2.3%		0.6		1.4%
Insential, Inc		0.2		0.3%		0.3		0.7%
Flying Eagle Insurance Service, Inc		-		0.0%		0.1		0.2%
Other		0.1		0.1%		0.1		0.2%

Total	$	70.5		100.0%	$	44.2		100.0%

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

	9/30/2009				9/30/2008
			% of Total				% of Total
	Gross Written		Gross Written		Gross Written		Gross Written
	Premium		Premium		Premium		Premium
	(in millions)
California	$	51.0		72.4%	$	26.0		58.8%
Florida		5.1		7.2%		3.3		7.5%
Texas		2.5		3.5%		6.9		15.6%
Other States		11.9		16.9%		8.0		18.1%

Total	$	70.5		100.0%	$	44.2		100.0%

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

	9/30/2009				9/30/2008
			% of Total				% of Total
	Gross Written		Gross Written		Gross Written		Gross Written
	Premium		Premium		Premium		Premium
			(in millions)
General liability	$	43.5		61.7%	$	18.8		42.5%
Workers’ compensation		15.5		22.0%		15.7		35.5%
Commercial automobile		10.9		15.4%		9.0		20.4%
All Other		0.6		0.9%		0.7		1.6%

Total	$	70.5		100.0%	$	44.2		100.0%

The change in our mix of business by agent, state and line of business was influenced by an increase of premiums in our general liability line of business due to two large accounts written in the third quarter of 2009.

Earned premiums were $44.3 million for the quarter ended September 30, 2009 compared to $37.2 million for the quarter ended September 30, 2008.

Net investment income was $2.7 million for the three months ended September 30, 2009 versus $2.6 million for the three months ended September 30, 2008.

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

Acquisition expenses were $10.5 million for the three months ended September 30, 2009 compared to $8.5 million for the quarter ended September 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 $5.8 million for the quarter ended September 30, 2009 compared to $6.3 million for the quarter ended September 30, 2008.

For the third quarter of 2009, our net loss and loss adjustment expense ratio was 71.8%, compared to 60.2% for the comparable quarter in 2008. This increase was driven by several factors including (i) higher current accident year loss ratios in our commercial automobile line of business resulting from several large losses, (ii) higher current accident year loss ratios in our workers compensation line of business resulting from lower rates and (iii) unfavorable prior year loss development for the third quarter of 2009 of $0.5 million contrasted with a $0.4 million favorable development for the third quarter of 2008.

The unfavorable development during 2009 from prior accident years was primarily due to change in ceded losses resulting from favorable case development primarily in the large deductible segment of our workers’ compensation line of business for accident years 2006 and 2007.

Nine Months Ended September 30, 2009 as compared to the Nine Months Ended September 30, 2008

RESULTS OF OPERATION


	Nine Months Ended
	9/30/2009			9/30/2008			% Change
	(in millions, except for
	earnings per share)
Gross written premiums	$	143.4		$	110.0			30.4%
Net written premiums		137.1			103.8			32.1%

Earned premiums	$	114.4		$	107.2			6.7%
Net investment income		8.3			7.9			5.1%
Net realized losses		(1.4	)		(0.8	)		*

Total revenues		121.3			114.3			6.1%

Net loss and loss adjustment expense		75.8			64.4			17.7%
Acquisition expenses		27.4			24.5			11.8%
Other operating expenses		19.5			17.6			10.8%

Total expenses		122.7			106.5			15.2%

Pre-tax income (loss)		(1.4	)		7.8			*
Federal income tax benefit (expense)		0.6			(0.8	)		*

Net income (loss)	$	(0.8	)	$	7.0			*


Earnings (losses) per share available to common stockholders
Basic and diluted	$	(0.05	)	$	0.45			*

Weighted average shares outstanding
Basic		15.9			15.6			1.9%
Diluted		15.9			15.7			1.3%

Key operating ratios
Net loss and loss adjustment expense ratio		66.3%			60.1%			10.3%
Ratio of acquisition expense to earned premiums		24.0%			22.9%			4.8%
Ratio of all other expenses to gross written premiums		13.6%			16.0%			-15.0%


*		Not meaningful

Net loss for the nine months ended September 30, 2009 was $0.8 million, compared to net income of $7.0 million for the comparable period ended September 30, 2008. Losses per share for the nine months ended September 30, 2009 was $0.05, versus earnings per share of $0.45 for the same period ended September 30, 2008. The decrease in our net income was due to (i) the increase to our net loss and loss adjustment ratio resulting from

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

several large losses in our commercial automobile line of business and lower rates in our workers’ compensation line of business, (ii) the increase in our acquisition expense ratio resulting from higher commission rates paid to our partner agents and (iii) the increase to our operating expenses incurred as a result of the proxy contest waged at the annual meeting of stockholders held on May 5, 2009, the negotiation of the merger agreement and the preparation of soliciting materials for the special meeting of stockholders to approve the proposed merger.

Gross written premiums were $143.4 million for the nine months ended September 30, 2009 compared to $110.0 million for the nine months ended September 30, 2008. The increase in gross written premiums was primarily attributable to increased premiums in our general liability line of business and to a lesser extent by increased premiums in our commercial automobile and our workers’ compensation lines of business

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


	9/30/2009				9/30/2008
			of Total				% of Total
	Gross Written		Gross Written		Gross Written		Gross Written
	Premium		Premium		Premium		Premium
			(in millions)
Specialty Risk Solutions, LLC	$	46.7		32.6%	$	17.0		15.4%
Risk Transfer Programs, LLC		35.3		24.6%		44.0		40.0%
American Team Managers		18.0		12.6%		18.9		17.2%
Appalachian Underwriters, Inc.		17.1		11.9%		5.5		5.0%
AEON Insurance Group, Inc.		11.2		7.8%		15.8		14.4%
Northern Star Management, Inc.		8.3		5.8%		3.6		3.3%
First Light Program Manager, Inc.		5.8		4.0%		2.0		1.8%
Insential, Inc		0.6		0.4%		1.0		0.9%
Flying Eagle Insurance Service, Inc		0.1		0.1%		0.6		0.5%
Other		0.3		0.2%		1.6		1.5%

Total	$	143.4		100.0%	$	110.0		100.0%

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


	9/30/2009				9/30/2008
			% of Total				% of Total
	Gross Written		Gross Written		Gross Written		Gross Written
	Premium		Premium		Premium		Premium
			(in millions)
California	$	70.9		49.5%	$	51.7		47.0%
Florida		18.7		13.0%		15.7		14.3%
Texas		9.6		6.7%		13.1		11.9%
Other States		44.2		30.8%		29.5		26.8%

Total	$	143.4		100.0%	$	110.0		100.0%

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

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


	9/30/2009				9/30/2008
			% of Total				% of Total
	Gross Written		Gross Written		Gross Written		Gross Written
	Premium		Premium		Premium		Premium
			(in millions)
Workers’ compensation	$	59.6		41.6%	$	53.9		49.0%
General liability		49.8		34.7%		26.9		24.5%
Commercial automobile		32.3		22.5%		27.0		24.5%
All Other		1.7		1.2%		2.2		2.0%

Total	$	143.4		100.0%	$	110.0		100.0%

Earned premiums were $114.4 million for the nine months ended September 30, 2009 compared to $107.2 million for the comparable period ended September 30, 2008.

Net investment income was $8.3 million for the nine months ended September 30, 2009 versus $7.9 million for the three same period ended September 30, 2008.

Acquisition expenses were $27.4 million for the nine months ended September 30, 2009 compared to $24.5 million for the nine months ended September 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 $19.5 million for the nine months ended September 30, 2009 compared to $17.6 million for the nine months ended September 30, 2008. The increase in other operating expenses was primarily attributable to the one-time expenses of approximately $2.1 million incurred as a result of both the proxy contest waged at the annual meeting of stockholders held on May 5, 2009, the negotiation of the merger agreement, and the preparation of the soliciting material for the special meeting of stockholders to approve the proposed merger.

For the nine months ended September 30, 2009, our net loss and loss adjustment expense ratio was 66.3%, compared to 60.1% for the comparable period in 2008. This increase was primarily driven by higher current accident year loss ratios in our commercial automobile line of business resulting from several large losses and higher current accident year loss ratios in our workers’ compensation line of business resulting from lower rates. We also had prior year favorable development for the nine months ended September 30, 2009 of $1.4 million which was similar to the prior year favorable development for the nine months ended September 30, 2008 of $1.7 million.

The favorable development was primarily due to better than expected claim emergence in our general liability line of business for accident years 2008 and prior. The average expected loss methods decreased due to lack of claims emergence. As a result, the ultimate incurred loss for our general liability line of business was reduced by $3.4 million. This favorable development in our general liability line of business was partially offset by adverse development in our workers’ compensation line of business of $2.0 million due to increased case severity in accident year 2008.

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

Cash Flows

A summary of our cash flows is as follows:


	Nine Months Ended
	9/30/2009			9/30/2008
	(in millions)
Cash provided by (used in)
Operating activities	$	35.2		$	39.8
Investing activities		(34.1	)		(40.0	)
Financing activities		0.2			(0.2	)

Change in cash		1.3			(0.4	)

For the nine months ended September 30, 2009, net cash provided by operating activities was $35.2 million, principally consisting of premium and deposit collections exceeding losses and expenses paid out. This amount compares to net cash provided by operating activities of $39.8 million for the nine months ended September 30, 2008. The decrease in net cash provided by operating activities was primarily driven by the increase in loss and LAE payments resulting from the maturation of our book of business which was partially offset by an increase in written premiums during 2009.

Cash used by investment activities was $34.1 million for the nine months ended September 30, 2009, resulting from purchases of new fixed maturity investments and purchases of equipment and capitalized software, exceeding sales, redemptions, calls and maturities of investments. For the nine months ended September 30, 2008, cash used in investment activities was $40.0 million, principally representing increases in investments and purchases of equipment and capitalized software.

For the nine months ended September 30, 2009, cash flows from financing activities from sales of Class B Shares to partner agents were $0.2 million. For the nine months ended September 30, 2008, cash flows used for financing activities were $0.2 million primarily relating to the repurchase of treasury shares partially offset from sales of Class B Shares to partner agents.

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 as of September 30, 2009 was $244.1 million compared to amortized cost of $236.3 million. The aggregate fair market value of our fixed maturity investments as of December 31, 2008 was $216.7 million compared to amortized cost of $220.7 million.

During the third quarter of 2009, a total of four of our available-for-sale securities that were previously written down with a fair market value of $0.7 million, as of September 30, 2009, have experienced a decrease in fair value of $0.4 million during the third quarter of 2009. Associated with this decline in fair value we recognized a credit loss of $0.6 million which was recognized in earnings and a credit of $0.2 million was recognized in other comprehensive income for impairments previously recognized. During the nine months ended September 30, 2009, six of our available-for-sale securities with a fair market value of $1.5 million, as of September 30, 2009, have experienced an other-than-temporary impairment of $2.2 million, of which $1.2 million was recognized as a loss in earnings and $1.0 million was recognized as a loss in comprehensive income.

For 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 “Note 6 — Investments” of this quarterly report.

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

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.

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 as of September 30, 2009:

Estimated

Fair Value

Assumed Change

After Change

Increase

Fair Value at

in Relevant

in Interest

(Decrease) in

9/30/2009

Interest Rate

Fair Value

(in thousands)

Fixed Maturity Investments

$244,135

100 bp decrease

$254,733

$ 10,598

50 bp decrease

249,377

5,242

50 bp increase

239,030

(5,105

)

100 bp increase

234,067

(10,068

)

The average duration of our fixed maturity investments at September 30, 2009 was approximately 3.44 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 primarily of high quality bonds as of September 30, 2009. The following table summarizes bond ratings at fair value:


	As of 9/30/2009
			Percent of
Bond Ratings	Amount		Portfolio
	(in thousands)
AAA rated and U.S. Government and affiliated agency securities	$	98,234		40.3	%
AA rated		65,618		26.9	%
A rated		70,063		28.7	%
BBB rated		7,180		2.9	%
BB rated or below		3,040		1.2	%


Total	$	244,135		100.0	%

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,

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

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.

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

PART II — OTHER INFORMATION

Item 1: Legal Proceedings

None.

Item 1A: Risk Factors

There are no material changes to the risk factors previously reported in our Annual Report on Form 10-K for the year ended December 31, 2008 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2009. For more information regarding such risk factors, please refer to Items 1A of our Annual Report on Form 10-K for the year ended December 31, 2008 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.

Item 2: Recent Sales of Unregistered Securities

There were no sales of unregistered securities that have not been previously reported on a Current Report on Form 8-K.

Item 3: Defaults Upon Senior Securities

None.

Item 4: Submission of Matters to a Vote of Security Holders

None.

Item 5: Other Information

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

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

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)

By:		/s/ Courtney C. Smith

		Name: Courtney C. Smith
		Title: President and Chief Executive Officer

Date: November 9, 2009

By:		/s/ Peter E. Jokiel

		Name: Peter E. Jokiel
		Title: Executive Vice President and Chief
		Financial Officer

Date: November 9, 2009

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

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

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

Specialty Underwriters Alliance, Inc. 10-Q