SUAI Specialty Underwriters Allianc (MM)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended March 31, 2009

Or

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

For the transition period from                      to                     

Commission File Number: 000-50891

SPECIALTY UNDERWRITERS’ ALLIANCE, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		20-0432760
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification Number)
222 South Riverside Plaza,
Chicago, Illinois		60606
(Address of Principal Executive Offices)		(Zip Code)

(888) 782-4672

     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 7, 2009, there were 14,437,355 shares of our common stock, $0.01 par value, or the Common Stock, outstanding and 1,371,934 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			12
Item 3. Quantitative and Qualitative Disclosures About Market Risk			16
Item 4. Controls and Procedures			17
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			18
Item 1A. Risk Factors			18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			18
Item 3. Defaults Upon Senior Securities			18
Item 4. Submission of Matters to a Vote of Security Holders			18
Item 5. Other Information			18
Item 6. Exhibits			18
EX-31.1
EX-31.2
EX-32.1
EX-32.2

2009 First 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 31, 2009 and December 31, 2008
(in thousands)

		3/31/2009				12/31/2008
		(unaudited)
ASSETS
Fixed maturity investments, at fair value (amortized cost: $222,583 and $220,744)		$	219,462			$	216,708
Short-term investments, at amortized cost (which approximates fair value)			42,039				46,697
Total Investments		$	261,501			$	263,405
Cash			408				208
Insurance premiums receivable			59,700				60,715
Reinsurance recoverable on paid and unpaid loss and loss adjustment expenses			79,887				79,598
Prepaid reinsurance premiums			539				309
Investment income accrued			2,280				2,467
Equipment and capitalized software at cost (less accumulated depreciation of $17,171 and $15,486)			13,119				13,562
Intangible assets			10,745				10,745
Deferred acquisition costs			15,858				18,156
Deferred tax asset			2,973				3,146
Other assets			4,740				2,426
Total Assets		$	451,750			$	454,737
LIABILITIES & STOCKHOLDERS’ EQUITY
Liabilities
Loss and loss adjustment expense reserves		$	216,085			$	214,953
Unearned insurance premiums			72,773				80,600
Insured deposit funds			16,199				15,806
Accounts payable and other liabilities			8,631				7,089
Total Liabilities		$	313,688			$	318,448
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
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
Paid-in capital — Common Stock			130,100				129,926
Paid-in capital — Class B Common Stock			8,089				8,077
Accumulated earnings			2,686				1,693
Treasury stock			(1,347	)			(1,347	)
Accumulated other comprehensive income (loss)			(1,627	)			(2,221	)
Total Stockholders’ Equity		$	138,062			$	136,289
Total Liabilities & Stockholders’ Equity		$	451,750			$	454,737

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

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

Specialty Underwriters’ Alliance, Inc.
Consolidated Statements of Operations and Comprehensive Income
For the Three Months Ended March 31, 2009 and 2008
(Unaudited — in thousands, except for earnings per share)

		Three Months Ended
		3/31/2009				3/31/2008
Revenues
Earned insurance premiums		$	34,775			$	35,750
Net investment income			2,774				2,653
Net realized gains (losses)			(67	)			31
Total revenue			37,482				38,434
Expenses
Loss and loss adjustment expenses			20,934				21,058
Acquisition expenses			8,525				8,731
Other operating expenses			6,585				5,899
Total expenses			36,044				35,688
Pretax income			1,438				2,746
Income tax (expense) benefit			(445	)			719
Net income			993				3,465
Net change in unrealized gains and losses for investments held, after tax			594				452
Comprehensive income		$	1,587			$	3,917
Earnings per share available to common stockholders (in dollars)
Basic		$	0.06			$	0.22
Diluted		$	0.06			$	0.22
Weighted average shares outstanding
Basic			15,808				15,579
Diluted			15,945				15,579

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

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

Specialty Underwriters’ Alliance, Inc.
Consolidated Statement of Stockholders’ Equity
As of March 31, 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				-				-				993
Net change in unrealized investment gains, net of tax			-				-				-				-				-				-				594				594
Stock issuance			-				-				-				12				-				-				-				12
Stock based compensation			-				174				-				-				-				-				-				174
Balance at March 31, 2009		$	147			$	130,100			$	14			$	8,089			$	2,686			$	(1,347	)		$	(1,627	)		$	138,062

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

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

Specialty Underwriters’ Alliance, Inc.
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2009 and 2008
(Unaudited — in thousands)

		Three Months Ended
		3/31/2009				3/31/2008
Cash flows from operations
Net income		$	993			$	3,465
Charges (credits) to reconcile net income to cash flows from operations:
Change in deferred income tax			(147	)			(756	)
Net realized losses (gains)			67				(31	)
Amortization of bond premium (discount)			46				(25	)
Depreciation			1,685				1,524
Net change in:
Reinsurance recoverable on unpaid loss and loss adjustment expense reserves			(289	)			2,382
Loss and loss adjustment expense reserves			1,132				4,874
Insurance premiums receivable			1,015				8,344
Unearned insurance premiums			(7,827	)			(14,040	)
Deferred acquisition costs			2,298				3,083
Prepaid reinsurance premiums			(230	)			(381	)
Insured deposit funds			393				1,236
Other, net			(413	)			2,056
Total adjustments			(2,270	)			8,266
Net cash flows provided by (used for) operations			(1,277	)			11,731
Cash flows from investing activities
Net decrease in short-term investments			4,658				15,199
Redemptions, calls and maturities of fixed maturity investments			12,636				10,712
Purchases of fixed maturity investments			(14,587	)			(35,279	)
Purchases of equipment and capitalized software			(1,242	)			(1,992	)
Net cash flows (used for) provided by investing activities			1,465				(11,360	)
Cash flows from financing activities
Issuance of common stock			12				405
Net cash provided by financing activities			12				405
Net increase in cash during the period			200				776
Cash at beginning of the period		$	208			$	968
Cash at the end of the period		$	408			$	1,744

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

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

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 31, 2009, and for the periods ended March 31, 2009 and March 31, 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 (“FSP”) Financial Accounting Standard (“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 FAS 157-4”), which provides guidance 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. 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 is 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 ” (“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 is 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 Disclosures about Fair Value of Financial Instruments ” (“FSP FAS 107-1”). FSP FAS 107-1 amends Statement of Financial Accounting Standards No. 107 “ Disclosures about Fair Value of Financial Instruments ” to require an entity to provide disclosures about fair value of financial 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 is 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 (“EITF”) No. 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20” (“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 Quarter Form 10-Q
Specialty Underwriters’ Alliance, Inc.

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
		3/31/2009				3/31/2008
Numerator for earnings per share
Net income		$	993			$	3,465
Denominator for earnings per share
Weighted average shares outstanding used in computation of earnings per share
Common stock (class A and B) issued			16,083				15,579
Common stock in treasury			275				-
Weighted average shares outstanding - basic			15,808				15,579
Effect of dilutive securities 1 Stock awards			137				-
Weighted average shares outstanding - diluted			15,945				15,579
Earnings per share
Basic		$	0.06			$	0.22
Diluted		$	0.06			$	0.22

Note 4. Income Taxes

     As of March 31, 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 $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.

     The components of current and deferred income taxes for the three months ended March 31, 2009 and 2008 are as follows:

		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

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

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

estimate of reserves based on a composite of the results of various actuarial methods, as well as consideration of known facts and trends.

     At March 31, 2009, the Company reported gross loss and LAE reserves of $216,085, of which $51,394 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 $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.

     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 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 March 31, 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				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

     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.

•

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 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 March 31, 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

     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 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 cost or amortized cost and estimated fair values of fixed maturities at March 31, 2009 were as follows:

		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

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

     The cost or amortized cost and estimated fair values of fixed maturities 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

     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.

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. 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.

     On January 14, 2009 the Compensation Committee of the Board of Directors granted deferred stock awards for 110,000 shares of common stock to the Company’s executive officers and on March 3, 2009 the Compensation Committee of the Board of Directors granted deferred stock awards for 45,600 shares of common stock to the Company’s non-executive employees. The awards granted to the non-executive employees vest on the first anniversary of the grant date and the awards for the executive officers vest equally on the first four anniversaries of the grant date.

     The compensation cost associated with the January 14, 2009 grants is $363, based on the fair market value of the shares 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 March 3, 2009 grants is $140, based on the fair market value of the shares on the date of grant pursuant to SFAS 123R. Of that amount $12 was recognized during the first 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 shares subject to grant were forfeited under the 2007 Plan in the first quarter of 2009.

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

2009 First 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 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.

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

Three Months Ended March 31, 2009 as compared to the Three Months Ended March 31, 2008

RESULTS OF OPERATIONS

		Three Months Ended
		3/31/2009				3/31/2008				% Change
		(in millions, except for earnings
		per share)
Gross written premiums		$	29.0			$	24.1				20.3%
Net written premiums			27.0				21.7				24.4%
Earned premiums		$	34.8			$	35.8				-2.8%
Net investment income			2.8				2.7				3.7%
Net realized gains (losses)			(0.1	)			—				*
Total revenues			37.5				38.5				-2.6%
Net loss and loss adjustment expense			20.9				21.1				-0.9%
Acquisition expenses			8.6				8.7				-1.1%
Other operating expenses			6.6				5.9				11.9%
Total expenses			36.1				35.7				1.1%
Pre-tax income			1.4				2.8				-50.0%
Federal income tax			(0.4	)			0.7				*
Net income		$	1.0			$	3.5				-71.4%
Basic		$	0.06			$	0.22				-72.7%
Diluted		$	0.06			$	0.22				-72.7%
Basic			15.8				15.6				1.3%
Diluted			15.9				15.6				1.9%
Key operating ratios
Net loss and loss adjustment expense ratio			60.1%				58.9%				1.9%
Ratio of acquisition expense to earned premiums			24.7%				24.3%				1.7%
Ratio of all other expenses to gross written premiums			22.8%				24.5%				-7.0%

     Net income for the quarter ended March 31, 2009 was $1.0 million, compared to net income of $3.5 million for the quarter ended March 31, 2008. Earnings per share for the quarter ended March 31, 2009 was $0.06, versus earnings per share of $0.22 for the quarter ended March 31, 2008. The decrease in our net income was due to a decrease in our pre-tax income and an increase in our taxes resulting from the full utilization of tax loss carry forwards which occurred in the second quarter of 2008. The decrease in our pre-tax income was primarily due to a decrease in our earned premiums, an increase on our loss and loss adjustment expense ratio and an increase in our other operating expenses (further explained below).

     Gross written premiums were $29.0 million for the three months ended March 31, 2009 compared to $24.1 million for the three months ended March 31, 2008. The increase in gross written premiums was attributable to premiums written under our workers’ compensation line. These were offset by rate reductions in our workers’ compensation line and decreasing premiums in our general liability line resulting from continuing deteriorating economic conditions.

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

     Our gross written premiums by partner agent for the three months ended March 31, 2009 and 2008 were as follows:

		3/31/2009								3/31/2008
		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%
American Team Managers			5.5				19.0%				6.2				25.7%
Appalachian Underwriters, Inc.			5.5				19.0%				1.8				7.5%
AEON Insurance Group, Inc.			4.0				13.8%				5.6				23.2%
First Light Program Manager, Inc.			1.3				4.5%				0.4				1.7%
Northern Star Management, Inc.			1.1				3.8%				-				0.0%
Insential, Inc			0.2				0.7%				0.3				1.2%
Flying Eagle Insurance Service, Inc			0.1				0.3%				0.2				0.8%
Specialty Risk Solutions, LLC			-				0.0%				-				0.0%
Other			0.3				1.0%				0.4				1.7%
Total		$	29.0				100.0%			$	24.1				100.0%

     Our gross written premiums for the three months ended March 31, 2009 and 2008 by state were as follows:

		3/31/2009								3/31/2008
						% of Total								% of Total
		Gross Written				Gross Written				Gross Written				Gross Written
		Premium				Premium				Premium				Premium
		(in millions)
California		$	8.9				30.7%			$	11.5				47.7%
Texas			2.6				9.0%				4.9				20.3%
Florida			1.4				4.8%				1.7				7.1%
Other States			16.1				55.5%				6.0				24.9%
Total		$	29.0				100.0%			$	24.1				100.0%

     Our gross written premiums by line of business for the three months ended March 31, 2009 and 2008 were as follows:

		3/31/2009								3/31/2008
						% of Total								% of Total
		Gross Written				Gross Written				Gross Written				Gross Written
		Premium				Premium				Premium				Premium
		(in millions)
Workers’ compensation		$	18.4				63.4%			$	11.9				49.4%
Commercial automobile			8.4				29.0%				7.6				31.5%
General liability			1.6				5.5%				3.9				16.2%
All Other			0.6				2.1%				0.7				2.9%
Total		$	29.0				100.0%			$	24.1				100.0%

     The change in our mix of business by agent, state and line of business was influenced by several large accounts that we wrote in the first quarter of 2009 in our workers’ compensation line in the state of Michigan which was partially offset by a continued reduction in our contractors business due to the downturn in the construction industry.

     Earned premiums were $34.8 million for the quarter ended March 31, 2009 compared to $35.8 million for the quarter ended March 31, 2008.

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

     Net investment income was $2.8 million for the three months ended March 31, 2009 versus $2.7 million for the three months ended March 31, 2008.

     Acquisition expenses were $8.6 million for the three months ended March 31, 2009 compared to $8.7 million for the quarter ended March 31, 2008.

     Other operating expenses were $6.6 million for the quarter ended March 31, 2009 compared to $5.9 million for the quarter ended March 31, 2008. The increase in other operating expenses resulted mainly from a one-time expense relating to the proxy contest waged by Hallmark Financial Services, Inc.

     For the first quarter of 2009, our net loss and loss adjustment expense ratio was 60.1%, compared to 58.9% for the comparable quarter in 2008. This increase was primarily driven by higher loss ratios in our workers’ compensation book of business due to state mandated lower rates in Florida. This was partially offset by favorable prior year loss development for the first quarter of 2009 of $0.8 million primarily attributable to favorable loss development in our workers’ compensation line of business. For the three months ended March 31, 2008 we experienced favorable prior year loss development of $0.6 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.

Cash Flows

     A summary of our cash flows is as follows:

		Three Months Ended
		3/31/2009				3/31/2008
		(in millions)
Cash provided by (used in)
Operating activities		$	(1.3	)		$	11.7
Investing activities			1.5				(11.3	)
Financing activities			0.0				0.4
Change in cash			0.2				0.8

     For the three months ended March 31, 2009, net cash used by operating activities was $1.3 million, principally consisting of losses and expenses paid out exceeding premium and deposit collections. This amount compares to net cash from operating activities of $11.7 million for the three months ended March 31, 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 and a decrease in written premiums during 2008.

     Cash provided by investment activities was $1.5 million for the three months ended March 31, 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 31, 2008, cash used in investment activities was $11.3 million, also principally representing increases in investments and purchases of equipment and capitalized software.

     For the three months ended March 31, 2009, cash flows from financing activities from sales of Class B Shares to partner agents were negligible. For the three months ended March 31, 2008, cash flows from financing activities 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 at March 31, 2009 was $219.5 million compared to amortized cost of $222.6 million. The aggregate fair market value of our fixed maturity investments at December 31, 2008 was $216.7 million compared to amortized cost of $220.7 million.

     During the first quarter of 2009, two of our available-for-sale securities with a fair value of $0.5 million and a book value of $0.7 million experienced an other-than-temporary impairment of $0.2 million. For information about our methodology for determining whether a security has experienced impairment see the discussion under the heading “ Item 1. Financial Statements - Note 5 — Recent Accounting Pronouncements” and Note 6 — Investments” of 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.

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 31, 2009:

										Estimated
										Fair Value
						Assumed Change				After Change				Increase
		Fair Value at				in Relevant				in Interest				(Decrease) in
		3/31/2009				Interest Rate				Rate				Fair Value
		(in thousands)
Total Investments		$	261,501			100 bp decrease				$	270,952			$	9,451
						50 bp decrease					266,170				4,669
						50 bp increase					256,939				(4,562	)
						100 bp increase					252,488				(9,013	)

     The average duration of our fixed maturity investments at March 31, 2009 was approximately 3.58 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 at March 31, 2009. The following table summarizes bond ratings at fair value:

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

		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.

     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 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. For more information regarding such risk factors, please refer to Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008.

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 First 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: May 8, 2009
		By:		/s/ Peter E. Jokiel   Name: Peter E. Jokiel
				Title: Executive Vice President and Chief Financial Officer
		Date: May 8, 2009

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

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