10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2007
	Or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-50891

SPECIALTY UNDERWRITERS’ ALLIANCE, INC.

(Exact name of registrant as specified in its charter)

DELAWARE (State or other jurisdiction of incorporation or organization)	20-0432760 (I.R.S. Employer Identification Number)
222 South Riverside Plaza, Chicago, Illinois (Address of principal executive offices)	60606 (Zip Code)

Registrant’s telephone number, including area code (888) 782-4672

Securities registered pursuant to Section 12(b) of the Act:

	Name of each exchange
Title of each class	on which registered
Common Stock, par value $0.01 per share	The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No þ

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No þ

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

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 the definitions 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
(Do not check if a smaller reporting company) 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

The aggregate market value of the voting and non-voting common stock held by non-affiliates as of June 30, 2007 was approximately $122 million (assuming all of the outstanding shares of the Company’s Class B non-voting common stock, par value $0.01 per share, or the Class B Shares, are exchanged into an equal numbers of shares of the Company’s voting common stock, par value $0.01 per share, or the Common Stock). As of February 25, 2008, 14,697,355 shares of Common Stock and 870,755 Class B Shares were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this report, to the extent not set forth herein, is incorporated herein by reference from Specialty Underwriters’ Alliance, Inc.’s definitive proxy statement for its annual meeting of stockholders scheduled for Tuesday May 6, 2008.

SPECIALTY UNDERWRITERS’ ALLIANCE, INC.

TABLE OF CONTENTS

			Page
PART I
	Item 1.	Business		3
	Item 1A.	Risk Factors		16
	Item 1B.	Unresolved Staff Comments		24
	Item 2.	Properties		24
	Item 3.	Legal Proceedings		24
	Item 4.	Submission of Matters to a Vote of Security Holders		24
PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		24
	Item 6.	Selected Financial Data		26
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		44
	Item 8.	Financial Statements and Supplementary Data		45
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		45
	Item 9A.	Controls and Procedures		45
	Item 9B.	Other Information		46
PART III
	Item 10.	Directors, Executive Officers and Corporate Governance		46
	Item 11.	Executive Compensation		46
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		46
	Item 13.	Certain Relationships and Related Transactions, and Director Independence		46
	Item 14.	Principal Accounting Fees and Services		46
PART IV
	Item 15.	Exhibits and Financial Statement Schedules		46
		Exhibit Index		46
		Index to Financial Statements and Schedules		F-1

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FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K are based on the Company’s assumptions and expectations concerning future events and financial performance and are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are subject to the safe harbor provisions of this legislation. Forward-looking statements can generally be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “could,” “would,” “project,” “expect,” “intend,” “estimate,” “anticipate,” “believe” or “plan” or other words that convey uncertainty of future events or outcomes.

Even though we believe our expectations regarding future events and financial performance are based on reasonable assumptions, forward-looking statements are not guarantees of future performance. Such statements are subject to significant business, economic and competitive risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statement.

There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements such as the ineffectiveness or obsolescence of our business strategy due to changes in current or future market conditions; increased competition on the basis of pricing, capacity, coverage terms or other factors; the effects of acts of terrorism or war; developments in the world’s financial and capital markets that adversely affect the performance of our investments; changes in regulations or laws applicable to us, our subsidiaries, brokers or customers; acceptance of our products and services, including new products and services; decreased demand for our insurance products; loss of the services of any of our executive officers or other key personnel; the effects of mergers, acquisitions and divestitures; changes in legal theories of liability under our insurance policies; changes in accounting policies or practices; and changes in general economic conditions. Additional information on factors that could cause actual results to differ materially from those presented are discussed under the caption “RISK FACTORS.” You should read these cautionary statements as being applicable to all forward-looking statements wherever they appear. In light of the significant uncertainties inherent in forward-looking statements, readers are cautioned not to place undue reliance on the forward-looking statements contained within, which speak only as of the date on which they are made.

We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

PART I

Item 1.   Business

Overview

Specialty Underwriters’ Alliance, Inc. was incorporated in April 2003, and through its wholly-owned subsidiary, SUA Insurance Company, or SUA, offers specialty commercial property and casualty insurance products through independent general agents, or partner agents, that serve niche groups of insureds. These targeted customer groups require specialized knowledge due to their unique risk characteristics. We believe that this segment of the industry has historically been underserved by most standard property and casualty insurance companies because they lack this specialized knowledge and are not willing to make the necessary investment to gain the knowledge required to achieve underwriting profits.

Additionally, in the specialty property and casualty program business, insurance agents often have underwriting authority, are responsible for handling claims and are paid by up-front commissions on the amount of premiums written. We believe that this system does not serve the carriers, the agents or the insureds well. Poor underwriting results have led to underwriting losses for the carriers, which results in carrier turnover in the specialty program business, thereby creating instability in the niche insurance markets being served. In turn, agents incur additional costs in searching for, and converting to, new carriers and policyholders experience uncertainty regarding the placement of their coverage and quality of service from year to year.

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Our business model is designed to better serve the specialty property and casualty marketplace by recognizing the void that exists in these underserved niche markets and the problems that undisciplined underwriting has created. Our business model emphasizes our relationship with a select number of partner agents, who have specialized business knowledge in the types of business classes we underwrite. We rely on these partner agents for industry insights and their understanding of the specific risks in the niche markets we serve. We bring together that knowledge with our disciplined underwriting practices and leading-edge technology and systems capabilities to provide insurance programs and products that are customized to the needs of the specialty markets that we serve.

Our business model is also designed to realign the interests of carriers, agents and insureds. Each of our partner agents are required to enter into agreements with us which provide that in exchange for marketing and pre-qualifying business for us, our partner agents receive an up-front commission designed to cover their costs and an underwriting profit-based commission paid over several years. In addition, each partner agent is required to purchase Class B Shares, which further aligns their interests with us and that of our shareholders. In return, we provide our partner agents with a five-year exclusive arrangement (generally allowing partner agents to offer other companies’ products if we decline to offer coverage to a prospective insured) covering a specific class of business and territory. Further, we have implemented a centralized information system designed to reduce processing and administrative time. Lastly, we are a stable, dedicated source of specialty program commercial property and casualty insurance capacity.

SUA currently has a secure category rating of “B+” (Good) from A.M. Best Company, Inc., or A.M. Best, which is the sixth highest of 15 rating levels.

Our website address is www.suainsurance.com. We make available on this website under “Investor Relations,” free of charge, our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, Forms 3, 4 and 5 filed via Edgar by our directors and executive officers and various other filings, including amendments thereto, with the Securities and Exchange Commission, or SEC, as soon as reasonably practicable after we electronically file or furnish such reports to the SEC. We also make available on our website our Corporate Governance Guidelines and Principles, our Code of Business Conduct and Ethics and the charters of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. This information also is available by written request to Investor Relations at our executive office address listed below. The information on our website is not incorporated by reference into this report.

Our principal executive offices are located at 222 South Riverside Plaza, Suite 1600, Chicago, Illinois 60606 and our telephone number is (888) 782-4672.

Capital Structure and Business Acquisitions

In the fourth quarter of 2004 we completed our initial public offering, or IPO, of 13,122,000 shares of Common Stock, at a price of $9.50 per share. Concurrent with the closing of the IPO, we (a) sold 1,000,000 shares of our Common Stock at a price of $8.835 per share in a private placement and (b) sold 90,549 shares of our Common Stock to certain of our executive officers at a price of $8.835 per share. Additionally, at the closing of our initial public offering, we sold 26,316 shares of our Class B Shares to our initial partner agents for an aggregate purchase price of $250,000. The net proceeds to us from all these transactions after deducting expenses were approximately $123.5 million. In addition to the initial sales of Class B Shares, as of December 31, 2007, our partner agents have purchased, pursuant to their agreements, additional Class B Shares for an aggregate purchase price of $5.9 million and are contractually obligated to purchase an additional $1.9 million worth of Class B Shares in the future.

Simultaneously with the closing of the IPO, we acquired all of the outstanding common stock of Potomac Insurance Company of Illinois, or Potomac, from OneBeacon Insurance Company, or OneBeacon, for $22.0 million. We refer to this transaction as the “Acquisition.” At the time of the Acquisition, Potomac was licensed in 41 states and the District of Columbia. Prior to the closing of the Acquisition, Potomac entered into a transfer and assumption agreement with OneBeacon whereby all of its liabilities, including all direct liabilities under insurance policies predating the Acquisition, were transferred to and assumed by OneBeacon. In the event OneBeacan fails to pay its assumed liabilities, SUA would be liable and could experience losses which could be materially adverse to our business and results of operations. OneBeacon currently has a rating of “A” (Excellent) from A.M. Best, which is

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the third highest of 15 rating levels. Upon completion of the Acquisition, we changed the name of Potomac to SUA Insurance Company, or SUA.

SUA is currently licensed to conduct insurance business in 43 states and the District of Columbia. We consider these jurisdictions to be those that are important to our current business plan because they account for over 90% of the population of the United States. SUA is not licensed in Hawaii, Maine, Minnesota, Montana, New Hampshire, North Carolina, or Wyoming. However, in the future we may apply for licenses in these states.

Industry

The property and casualty insurance industry has historically been cyclical. When excess underwriting capacity exists, increased competition generally results in lower pricing and less favorable policy terms and conditions for insurers. As underwriting capacity contracts, pricing and policy terms and conditions generally become more favorable for insurers. In the past, underwriting capacity has been impacted by several factors, including catastrophes, industry losses, recognition of reserve deficiencies, changes in the law and regulatory requirements, investment returns and the ratings and financial strength of competitors.

Historical Industry Model

Specialty commercial property and casualty insurance underwriting requires in-depth knowledge of a particular business class and often personal knowledge of the participants in a business class. As a result, insurers rely on skilled agents to procure business. An agent generally is an outsourced underwriting department for the insurer that markets to independent agents, processes submissions, selects risks, binds and issues policies on behalf of the insurer, and in some cases, handles claims on the underwritten businesses. Such agents and insurers commonly work with a reinsurer, which participates in the pool of risks selected by such agents. Without an insurer providing licensed policy paper and a reinsurer providing capacity, such agents are unable to service their independent agent clients, which ultimately affects the policyholders.

Historically, insurance carriers have engaged key agents under contracts to produce and underwrite businesses, often processed through each such agent’s proprietary policy issuance and management information systems, with claims adjustment assigned to third parties. Agents and such third parties were generously compensated through these arrangements, but the compensation was not linked to the underlying profitability of the business. We believe that this strategy has led to a lack of alignment of interests between carriers, agents and the insureds. In addition, we believe that this system has resulted in weak underwriting and pricing controls, poor claims management and high costs due to the duplication of activities.

Our Model

We believe that our strategy of developing relationships with partner agents is a fundamental shift in the way insurance companies do business. We enter into contractual relationships with our partner agents in order to encourage them to work with us in building our portfolio of specialty program commercial property and casualty insurance business. A significant portion of the compensation paid to our partner agents is directly tied to the underwriting profitability of their specific programs. In addition, our partner agents purchase an equity interest in our company, in the form of non-voting Class B Shares. We believe that requiring an ownership interest by our partner agents encourages them to direct business to us, regardless of future market cycles. We expect our partner agents to provide prequalified leads through their retail agents. We retain control over underwriting and claims activities. In addition, all transaction processing is done through our proprietary technology system in order to ensure data integrity and efficiency. As of February 1, 2008, we have entered into definitive agreements with the following eight partner agents — AEON Insurance Group, Inc., American Team Managers, Inc., Appalachian Underwriters, Inc., First Light Program Managers, Inc., Flying Eagle Insurance Services, Inc., Insential, Inc., Risk Transfer Holdings, Inc, and Specialty Risk Solutions, LLC.

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The key features of our relationship with our partner agents are as follows:

Equity Ownership. Each partner agent must purchase shares of our non-voting Class B Shares. The Class B Shares will become exchangeable, one-for-one with our Common Stock, five years after the effective date of the applicable partner agent agreement, unless such agreement has been terminated. The Class B Shares are subject to substantial restrictions on transferability during this period. If prior to five years after the effective date of the applicable partner agent agreement such partner agent’s contract is terminated, we may repurchase such partner agent’s Class B Shares at the lower of cost or the current market value (as defined in the agreement). If after five years following the effective date of the applicable partner agent agreement such partner agent’s contract is terminated, we may repurchase the partner agent’s Class B Shares at the current market value. After the five-year period, and for so long as the partner agent agreement has not been terminated, such partner agent is required to hold Class B Shares worth at least 50% of its aggregate initial investment commitment in our Class B Shares.

Commission. We pay each partner agent an up-front commission designed to cover its costs. In addition, each partner agent may receive a meaningful share of the underwriting profits for each of its programs, subject to a cap. No further profit sharing calculation will be performed if the Partner Agent Agreement is terminated prior to five years. If, after five years, the partner agent agreement is terminated, for any reason, the profit sharing calculations will be performed annually until all payout periods and earned profit sharing are satisfied.

Long-Term Contractual Commitment. Each partner agent has an exclusive five-year contractual arrangement (generally allowing partner agents to offer other companies’ products only if we decline to offer coverage to a prospective insured). We have no obligation to accept business that does not meet our guidelines. We agree to write only that class of business and lines of business by program in a defined territory with the specific partner agent. Our partner agents may have one or a number of their programs with us. We expect that we will be a significant percentage of our partner agents’ program business. Each partner agent has the right to terminate its relationship with us on 180 days’ notice. We have the right to terminate our relationship with our partner agents if they materially breach our agreements with them, they become insolvent, or they fail to maintain appropriate licenses. In addition, we can terminate our relationship if a partner agent does not meet certain profitability and production guidelines that are established under each agreement or if a third party should acquire them. Upon termination, at our discretion, the partner agent must service the existing policies until such policies expire or are terminated, at which time the partner agent is allowed to place such business with other insurers.

Our Insurance Product Lines

Our insurance operations, through our eight partner agents, are focused on the following programs:

•    AEON Insurance Group, Inc.

Towing and Collateral Recovery Program. This program offers commercial automobile, property, inland marine and general liability coverages. Eligible accounts include towing operators, garage operations with towing and recovery, as well as towing operations for auto auctions. The program is currently available in 41 states and the District of Columbia.

•    American Team Managers, Inc.

General Contractors Program. Insurance and risk management services for general contractors engaged in residential and/or commercial construction. The program is open to general contractors that are involved in new construction, remodeling and tenant improvements, including new residential home building. The program offers general liability coverage in Arizona and California

Artisan Contractors Program. Insurance and risk management services for certain artisan and specialty trade contractors engaged in residential and/or commercial construction. The program is open to contractors that are involved in new construction, remodeling and tenant improvements, including new residential home building. The program offers general liability coverage in Arizona and California.

Trucking Program. Commercial insurance for truckers of all sizes (specializing in intermodal) including owner/operators offering commercial automobile liability, physical damage and general liability coverages in California.

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Workers’ Compensation Program. This program uses technology to fully automate a disciplined underwriting approach to writing small premium workers’ compensation business in California. Our online product is available to small and medium sized businesses.

•    Appalachian Underwriters, Inc.

Artisan Contractors Program. Insurance and risk management services for certain artisan and specialty trade contractors engaged in residential and/or commercial construction. The program is open to contractors that are involved in new construction, remodeling and tenant improvements, including new residential home building. The program currently offers general liability and automobile coverage in 16 states.

General Contractors Program. Insurance and risk management services for general contractors engaged in residential and/or commercial construction. The program is open to general contractors that are involved in new construction, remodeling and tenant improvements, including new residential home building. The program currently offers general liability and automobile coverage in 16 states.

Workers’ Compensation Program. This program uses technology to fully automate a disciplined underwriting approach to writing small premium workers compensation business in 17 states. Our online product is available to small and medium sized businesses.

•    First Light Program Managers, Inc.

Trucking Program. This program serves selected classes within the trucking industry in Florida. Policies include commercial automobile liability, physical damage and general liability.

•    Flying Eagle Insurance Services, Inc.

Artisan Contractors Program. Insurance and risk management services for certain artisan and specialty trade contractors engaged in residential and/or commercial construction. Program is open to contractors that are involved in new construction, remodeling and tenant improvements, including new residential home building. The program currently offers general liability coverage in nine states.

General Contractors Program. Insurance and risk management services for general contractors engaged in residential and/or commercial construction. The program is open to general contractors that are involved in new construction, remodeling and tenant improvements, including new residential home building. The program currently offers general liability coverage in nine states.

Roofing Contractors Program. Insurance and risk management services for small to medium sized roofing contractors engaged in commercial and residential work. The program currently offers general liability coverage in 11 states.

•    Insential, Inc.

Roofing Contractors Program. Insurance and risk management services for small to medium sized roofing contractors engaged in commercial and residential work. The program currently offers general liability and automobile coverage in 17 states.

•    Risk Transfer Holdings, Inc.

PEO Program. Lighthouse, LLC, a subsidiary of Risk Transfer Holdings, Inc, serves staffing entities that are responsible for insurance procurement, human resources management and payroll and tax remittance. This program provides workers’ compensation solutions to professional employer organizations clients in 22 states.

Temporary Staffing Agencies Program. Lighthouse also serves the temporary staffing industry. This program provides workers’ compensation solutions to temporary staffing entities in 22 states.

•    Specialty Risk Solutions, LLC

Not-for-Profit Organizations Program. This program is for qualifying not-for-profit organizations in Florida. Excess coverage is available for workers’ compensation and commercial automobile.

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Public Entities Program. This program specializes in providing workers compensation, general liability and commercial automobile insurance (all on an excess basis) to public entity clients, including schools, other educational institutions and municipalities in California and Florida.

Reinsurance

We have entered into reinsurance agreements to cover our casualty lines of business. Coverage of our casualty lines of business includes general liability, auto liability and workers’ compensation. We purchased reinsurance from reinsurers that are rated at least “A−” (Excellent) or better by A.M. Best and our reinsurers will be compensated by sharing specified percentages of premiums. Our reinsurers may pay us ceding commissions.

For our workers’ compensation business, our reinsurers are responsible for losses between $1 million and $10 million due to any single occurrence under a policy and for losses in excess of $10 million up to $35 million for a multiple loss occurrence. For our non-workers’ compensation casualty business, we do not write policies above $1 million and therefore do not need reinsurance protection for single loss occurrences; our reinsurers are responsible between $1 million and $5 million of losses for a multiple loss occurrence.

Underwriting

We produce all of our business through our partner agents, and select our partner agents based on a shared underwriting philosophy. Our underwriting strategy focuses on strict control of underwriting, pricing, coverage, partner agent relationships and customer segmentation. Our primary underwriting goal is to achieve an underwriting profit.

Our underwriting philosophy has five components:

We carefully scrutinize prospective partner agents. We contract only with agents that we believe have strong reputations and significant specialized knowledge of the market they serve. Our partner agents possess extensive knowledge in their specialties. We grant partner agents territorial program exclusivity so that partner agents do not market against each other. Partner agents are required to have the ability to expand their operations, have resources dedicated to selected programs and maintain minimum premium production levels.

We maintain strict control of our underwriting process. Our underwriters work with each partner agent to develop specific underwriting strategies, pricing structures, and acceptable coverage and initial customer requirements. Senior underwriting personnel experienced in specialty classes, pricing, coverage and multiple lines of business along with actuarial, claims and systems personnel form a program team to work with each partner agent. In addition, we develop a specific underwriting strategy for each customer segment. Each customer segment includes a demographic study of the number of prospective customers available, as well as the number of customers each partner agent expects to provide to us. We also create eligibility guidelines, which include size requirements for each account within the customer segment, acceptability for loss history, financial and ownership stability and adherence to loss prevention and safety practices. Ineligible operations are identified and eliminated from the customer segment. With the cooperation of the partner agents, each program team conducts the market research and analysis to develop specific customer segments, line of business coverage guidelines and pricing requirements. Each customer segment or business opportunity has minimum standards and business performance measures. We do not allow our partner agents to set rates on any program. We use in-house actuaries, as well as outside actuarial consultants, to validate the rating and pricing plans.

We have established a partner agent advisory process. Our partner agents have input on new programs and territorial assignments. This interaction with our partner agents enables us to avoid channel conflicts and promote the growth of profitable programs.

We utilize a centralized policy processing system to control data. As part of our infrastructure strategy, we implemented our technology plans for policy administration which allows us to more efficiently quote, issue and manage insurance polices while controlling data from the first entry into the system. We are in the process of customizing the system for each partner agent and customer segment. The system allows our underwriters to provide approval of submissions at the point of entry using predetermined underwriting, pricing and coverage

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guidelines. Our underwriters oversee the underwriting process by having access to the system as the agents enter information and approve quotes. In selected circumstances, the system receives and approves online quotes with minimal underwriter intervention, based on predetermined underwriting criteria. Data used to underwrite risk and to handle claims is controlled by us rather than controlled by agents, third party administrators or other intermediaries.

We have audit and operational review processes. Our audits focus on rate adequacy, line of business analysis, and authority and compliance guidelines. Our program reviews focus on premium volume and profitability of our individual partner agents and is led by our program teams.

Monitoring Rate Adequacy

We develop estimated rate minimums, which are designed to help achieve profitable results.

Program Performance Management

Our program performance management process consists of a series of reports that evaluates data associated with essential variables, and measures production, rate adequacy, loss analysis, adherence to guidelines, claims activity and trends.

Claims Control

Claims control is a critical factor in driving company performance. We view claims control as one of our core areas of expertise. We believe that assigning integrated teams in the claims, underwriting and actuarial areas to specific customer groups will produce the best results. By doing this, our claim handlers become familiar with the uniqueness of customers and their businesses. This approach encourages more insightful investigations, enhanced legal defenses and more efficient claims resolution. Also, we believe that improved communications between claims, underwriting and actuarial teams enhance risk selection, timely revision of underwriting criteria and program stability.

Information Technology

We utilize an Internet-based technology system that allows our program teams and partner agents to control underwriting, policy issuance and claims administration. We believe that this centralized system helps us to reduce high processing costs, eliminate duplication of data and more effectively analyze data.

Historically, various parties to an insurance contract have stored data relating to the same transaction in their proprietary systems. As a result, we believe they have been unable to effectively integrate this information. Our objective is to use a system that provides a communication link with our partner agents and improves data communication throughout our company.

Investment Philosophy

Our investments are concentrated in highly liquid and highly rated instruments, primarily in fixed income securities, with reasonably short durations. Our portfolio of fixed maturities consists solely of investment grade bonds. We have no significant concentrations in a particular industry or issuer. Our strategy considers liability durations and provides for unforeseen cash outflow needs. We use an external investment manager with significant assets under management and experience in insurance company portfolio requirements.

Competition

We compete with a large number of U.S. and non-U.S. insurers, insurance agencies and intermediaries, and diversified financial services companies such as Lincoln General Insurance Company, Wausau Insurance Companies, American International Group, Inc., RLI Corp., Zurich Financial Services, Liberty Mutual Holding Company, Inc, Navigators Insurance Co., Swiss Re. and Berkshire Hathaway, Inc. Finally, for our California workers’ compensation business, we face competition from the State Compensation Insurance Fund.

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Our competitive position is based on many factors, including our perceived financial strength, ratings assigned by independent rating agencies, geographic scope of business, client relationships, premiums charged, contract terms and conditions, products and services offered (including the ability to design customized programs), speed of claims payment, reputation, experience and qualifications of employees, and local presence.

Employees

As of February 11, 2008, we had 102 full-time employees and five part time employees. Our future performance depends significantly on the continued service of our key personnel. Our employees are not covered by collective bargaining arrangements and we believe our relationship with our employees is good.

Ratings

Our financial strength is regularly reviewed by independent rating agencies, who assign a rating based upon items such as results of operations, capital resources and minimum policyholders’ surplus requirements. We currently have a secure category rating of “B+” from A.M. Best.

Insurance Regulation

We develop our business through SUA Insurance Company, our wholly owned subsidiary. SUA Insurance Company is licensed to conduct insurance business in 43 states and the District of Columbia.

General. Our operating subsidiary is subject to detailed regulation throughout the United States. Although there is limited federal regulation of the insurance business, each state has a comprehensive system for regulating insurers operating in that state. The laws of the various states establish supervisory agencies with broad authority to regulate, among other things, licenses to transact business, premium rates for certain coverages, trade practices, market conduct, agent licensing, policy forms, underwriting and claims practices, reserve adequacy, transactions with affiliates and insurer solvency. Many states also regulate investment activities on the basis of quality, distribution and other quantitative criteria. Further, most states compel participation in and regulate composition of various shared market mechanisms. States also have enacted legislation that regulates insurance holding company practices, including acquisitions, dividends, the terms of affiliate transactions, and other related matters. Our operating subsidiary is domiciled in Illinois.

Insurance companies also are affected by a variety of state and federal legislative and regulatory measures and judicial decisions that define and qualify the risks and benefits for which insurance is sought and provided. These include redefinitions of risk exposure in such areas as product liability, environmental damage and workers’ compensation. In addition, individual state insurance departments may prevent premium rates for some classes of insureds from reflecting the level of risk assumed by the insurer for those classes. Such developments may result in adverse effects on the profitability of various lines of insurance. In some cases, these adverse effects on profitability can be minimized, when possible, through the re-pricing of coverages if permitted by applicable regulations, or the limitation or cessation of the affected business, which may be restricted by state law.

Most states have insurance laws requiring property and casualty rate schedules, policy or coverage forms, and other information be filed with the state’s regulatory authority. In many cases, such rates and/or policy forms must be approved prior to use. Some states have considered enacting or have enacted limitations on the ability of insurers to share data used to compile rates.

Insurance companies are required to file detailed annual reports with the state insurance regulators in each of the states in which they do business, and their business and accounts are subject to examination by such regulators at any time. In addition, these insurance regulators periodically examine each insurer’s financial condition, adherence to statutory accounting practices, and compliance with insurance department rules and regulations.

Applicable state insurance laws, rather than federal bankruptcy laws, apply to the liquidation or reorganization of insurance companies.

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Insurance Regulation Concerning Change or Acquisition of Control. The insurance regulatory codes in our operating subsidiary’s domiciliary state contain provisions (subject to certain variations) to the effect that the acquisition of “control” of a domestic insurer or of any person that directly or indirectly controls a domestic insurer cannot be consummated without the prior approval of the domiciliary insurance regulator. In general, a presumption of “control” arises from the direct or indirect ownership, control, possession with the power to vote or possession of proxies with respect to 10% or more of the voting securities of a domestic insurer or of a person that controls a domestic insurer. A person seeking to acquire control, directly or indirectly, of a domestic insurance company or of any person controlling a domestic insurance company generally must file with the relevant insurance regulatory authority a statement relating to the acquisition of control containing certain information required by statute and published regulations and provide a copy of such statement to the domestic insurer and obtain the prior approval of such regulatory agency for the acquisition. In addition, certain state insurance laws contain provisions that require pre-acquisition notification to state agencies of a change in control of a non-domestic insurance company admitted in that state. While such pre-acquisition notification statutes do not authorize the state agency to disapprove the change of control, such statutes do authorize certain remedies, including the issuance of a cease and desist order with respect to the non-domestic admitted insurer doing business in the state if certain conditions exist, such as undue market concentration.

Regulation of Dividends and Other Payments from Our Operating Subsidiary. We are a legal entity separate and distinct from our subsidiary. As a holding company with no other business operations, our primary sources of cash to meet our obligations, including principal and interest payments with respect to indebtedness, will be available dividends and other statutorily permitted payments, such as tax allocation payments, from our operating subsidiary. Our operating subsidiary is subject to various state statutory and regulatory restrictions, including regulatory restrictions that are imposed as a matter of administrative policy, applicable generally to any insurance company in its state of domicile, which limit the amount of dividends or distributions an insurance company may pay to its stockholders without prior regulatory approval. The restrictions are generally based on certain levels or percentages of surplus, investment income and operating income as determined in accordance with statutory accounting principals, or SAP, which differ from generally accepted accounting principles in the United States of America, or GAAP. Generally, dividends may be paid only out of earned surplus. In every case, surplus subsequent to the payment of any dividends must be reasonable in relation to an insurance company’s outstanding liabilities and must be adequate to meet its financial needs.

Illinois law provides that no dividend or other distribution may be declared or paid at any time except out of earned surplus, rather than contributed surplus. A dividend or other distribution may not be paid if the surplus of the domestic insurer is at an amount less than that required by Illinois law for the kind or kinds of business to be transacted by such insurer, nor when payment of a dividend or other distribution by such insurer would reduce its surplus to less than such amount. A domestic insurer, which is a member of a holding company system, must report to the insurance director, or the Director, all ordinary dividends or other distributions to stockholders within five business days following the declaration and no less than 10 business days prior to the payment thereof.

Illinois law further provides that no domestic insurer, which is a member of a holding company system, may pay any extraordinary dividend or make any other extraordinary distribution to its security holders until: (1) 30 days after the Director has received notice of the declaration thereof and has not within such period disapproved the payment; or (2) the Director approves such payment within the 30-day period. Illinois law defines an extraordinary dividend or distribution as “any dividend or distribution of cash or other property whose fair market value, together with that of other dividends or distributions, made within the period of 12 consecutive months ending on the date on which the proposed dividend is scheduled for payment or distribution exceeds the greater of: (a) 10% of the company’s surplus as regards policyholders as of the 31st day of December next preceding, or (b) the net income of the company for the 12-month period ending the 31st day of December next preceding, but does not include pro rata distributions of any class of the company’s own securities.”

If insurance regulators determine that payment of a dividend or any other payments to an affiliate (such as payments under a tax-sharing agreement or payments for employee or other services) would, because of the financial condition of the paying insurance company or otherwise, be hazardous to such insurance company’s policyholders, the regulators may prohibit such payments that would otherwise be permitted without prior approval.

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Specialty Underwriters’ Alliance, Inc.

Statutory Surplus and Capital. In connection with the licensing of insurance companies, an insurance regulator may limit or prohibit the writing of new business by an insurance company within its jurisdiction when, in the regulator’s judgment, the insurance company is not maintaining adequate statutory surplus or capital. We do not currently anticipate that any regulator would limit the amount of new business that our operating subsidiary may write.

Risk-Based Capital. In order to enhance the regulation of insurer solvency, in December 1993 the National Association of Insurance Commissioners, or NAIC, adopted a formula and model law to implement risk-based capital requirements for property and casualty insurance companies. These risk-based capital requirements are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholder obligations. The risk-based capital model for property and casualty insurance companies measures three major areas of risk facing property and casualty insurers:

•     underwriting, which encompasses the risk of adverse loss developments and inadequate pricing;

•     declines in asset values arising from credit risk; and

•     declines in asset values arising from investment risks.

Under the approved formula, an insurer’s statutory surplus is compared to its risk-based capital requirement. If this ratio is above a minimum threshold, no company or regulatory action is necessary. Below this threshold are four distinct action levels at which a regulator can intervene with increasing degrees of authority over an insurer as the ratio of surplus to risk-based capital requirement decreases. The four action levels include:

•     insurer is required to submit a plan for corrective action;

•     insurer is subject to examination, analysis and specific corrective action;

•     regulators may place insurer under regulatory control; and

•     regulators are required to place insurer under regulatory control.

Accreditation

The NAIC has instituted its Financial Regulatory Accreditation Standards Program, or FRASP, in response to federal initiatives to regulate the business of insurance. FRASP provides a set of standards designed to establish effective state regulation of the financial condition of insurance companies. Under FRASP, a state must adopt certain laws and regulations, institute required regulatory practices and procedures, and have adequate personnel to enforce these laws and regulations in order to become an “accredited” state. Accredited states are not able to accept certain financial examination reports of insurers prepared solely by the regulatory agency in an unaccredited state.

NAIC IRIS Ratios

In the 1970s, the NAIC developed a set of financial relationships or “tests” called the Insurance Regulatory Information System, or IRIS, that were designed to facilitate early identification of companies that may require special attention by insurance regulatory authorities. Insurance companies submit data on an annual basis to the NAIC, which in turn analyzes the data utilizing ratios covering 12 categories of financial data with defined “usual ranges” for each category. An insurance company may fall out of the usual range for one or more ratios because of specific transactions that are in themselves immaterial or eliminated at the consolidated level. Generally, an insurance company may become subject to increased scrutiny if it falls outside the usual ranges on four or more of the ratios.

Investment Regulation

Our operating subsidiary is subject to state laws and regulations that require diversification of investment portfolios and that limit the amount of investments in certain investment categories. Failure to comply with these laws and regulations may cause non-conforming investments to be treated as non-admitted assets for purposes of

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measuring statutory surplus and, in some instances, would require divestiture. As of December 31, 2007, we believe our investments complied with such laws and regulations.

Guaranty Funds and Assigned Risk Plans

Most states require all admitted insurance companies to participate in their respective guaranty funds that cover various claims against insolvent insurers. Solvent insurers licensed in these states are required to cover the losses paid on behalf of insolvent insurers by the guaranty funds and generally are subject to annual assessments in the state by its guaranty fund to cover these losses. Some states also require licensed insurance companies to participate in assigned risk plans that provide coverage for automobile insurance and other lines for insureds that, for various reasons, cannot otherwise obtain insurance in the open market. This participation may take the form of reinsuring a portion of a pool of policies or the direct issuance of policies to insureds. The calculation of an insurer’s participation in these plans is usually based on the amount of premium for that type of coverage that was written by the insurer on a voluntary basis in a prior year. Participation in assigned risk pools tends to produce losses that result in assessments to insurers writing the same lines on a voluntary basis.

Credit for Reinsurance

A primary insurer ordinarily will enter into a reinsurance agreement only if it can obtain credit for the reinsurance ceded on its statutory financial statements. In general, credit for reinsurance is allowed in the following circumstances:

•     if the reinsurer is licensed in the state in which the primary insurer is domiciled or, in some instances, in certain states in which the primary insurer is licensed;

•     if the reinsurer is an “accredited” or otherwise approved reinsurer in the state in which the primary insurer is domiciled or, in some instances, in certain states in which the primary insurer is licensed;

•     in some instances, if the reinsurer (1) is domiciled in a state that is deemed to have substantially similar credit for reinsurance standards as the state in which the primary insurer is domiciled and (2) meets financial requirements; or

•     if none of the above applies, to the extent that the reinsurance obligations of the reinsurer are secured appropriately, typically through the posting of a letter of credit for the benefit of the primary insurer or the deposit of assets into a trust fund established for the benefit of the primary insurer.

Statutory Accounting Principles

Statutory accounting principles, or SAP, is a basis of accounting developed to assist insurance regulators in monitoring and regulating the solvency of insurance companies. It is primarily concerned with measuring an insurer’s surplus to policyholders. Accordingly, statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable in each insurer’s domiciliary state.

GAAP is concerned with a company’s solvency, but it is also concerned with other financial measurements, such as income and cash flows. Accordingly, GAAP gives more consideration to appropriate matching of revenue and expenses and accounting for management’s stewardship of assets than does SAP. As a direct result, different assets and liabilities and different amounts of assets and liabilities will be reflected in financial statements prepared in accordance with GAAP as opposed to SAP.

Statutory accounting practices established by the NAIC and adopted, in part, by state insurance departments will determine, among other things, the amount of our statutory surplus and statutory net income, which will affect, in part, the amount of funds our operating subsidiary has available to pay dividends to us.

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2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Federal Regulation

Although state regulation is the dominant form of regulation for insurance and reinsurance business, the federal government has shown increasing concern over the adequacy of state regulation. It is not possible to predict the future impact of any potential federal regulations or other possible laws or regulations on our capital and operations, and the enactment of such laws or the adoption of such regulations could materially adversely affect our business.

The Gramm Leach Bliley Act, or GLBA, which made fundamental changes in the regulation of the financial services industry in the United States, was enacted on November 12, 1999. The GLBA permits the transformation of the already converging banking, insurance and securities industries by permitting mergers that combine commercial banks, insurers and securities firms under one holding company, a “financial holding company.” Bank holding companies and other entities that qualify and elect to be treated as financial holding companies may engage in activities, and acquire companies engaged in activities, that are “financial” in nature or “incidental” or “complementary” to such financial activities. Such financial activities include acting as principal, agent or broker in the underwriting and sale of life, property, casualty and other forms of insurance and annuities.

Until the passage of the GLBA, the Glass-Steagall Act of 1933 had limited the ability of banks to engage in securities-related businesses, and the Bank Holding Company Act of 1956, as amended, had restricted banks from being affiliated with insurers. With the passage of the GLBA, among other things, bank holding companies may acquire insurers and insurance holding companies may acquire banks. The ability of banks to affiliate with insurers may affect our product lines by substantially increasing the number, size and financial strength of potential competitors.

In response to the tightening of supply in some insurance markets resulting from, among other things, the terrorist attacks of September 11, 2001, The Terrorism Risk Insurance Act of 2002, or TRIA, was enacted to ensure the availability of insurance coverage for terrorist acts in the United States. Although TRIA originally contained a sunset provision expiring December 31, 2005, the Terrorism Risk Insurance Extension Act of 2005, or Extension Act, was enacted extending TRIA for two additional years. On December 26, 2007 President Bush signed the Terrorism Risk Insurance Program Reauthorization Act of 2007, or TRIPRA, which extends the federal terrorism insurance program for an additional seven years. These laws establish a federal assistance program to help the commercial property and casualty insurance industry cover claims related to certified acts of terrorism, regulate the terms of insurance relating to terrorism coverage and require some U.S. commercial property and casualty insurers to make available to their policyholders terrorism insurance coverage for certified acts of terrorism at the same limits and terms as is available for other coverages. Exclusions or sub-limit coverage for certified acts of terrorism may be established, but solely at the discretion of the insured.

A certified act of terrorism is defined by TRIPRA as an act of terrorism resulting in aggregate losses greater than $100 million. An act of terrorism is a loss that is violent or dangerous to human life, property or infrastructure, resulting in damage within the United State or its territories and possessions, or outside the United States in the case of a U.S. flagged vessel, air carrier or mission, committed by an individual or individuals in an effort to coerce the U.S. civilian population or influence the policy of or affect the U.S. government’s conduct by coercion. We are currently unable to predict the extent to which TRIPRA may affect the demand for our products or the risks that may be available for us to consider underwriting.

Legislative and Regulatory Proposals

From time to time, various regulatory and legislative changes have been proposed in the insurance and reinsurance industry. These proposals have included the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers. We are unable to predict whether any of these or other proposed laws and regulations will be adopted, the form in which any such laws and regulations would be adopted, or the effect, if any, these developments would have on our operations and financial condition.

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2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Executive Officers of the Registrant

Our executive officers are as follows:

Name	Age		Position
Courtney C. Smith		60	Chief Executive Officer, President and Chairman of the Board of Directors
Peter E. Jokiel		60	Executive Vice President, Chief Financial Officer, Treasurer and Director
Barry G. Cordeiro		61	Senior Vice President and Chief Information Officer
Gary J. Ferguson		64	Senior Vice President and Chief Claims Officer
Scott W. Goodreau		40	Senior Vice President, General Counsel, Administration and Corporate Relations, and Secretary
Daniel A. Cacchione		59	Vice President and Chief Underwriting Officer
Scott K. Charbonneau		48	Vice President and Chief Actuary
Daniel J. Rohan		51	Vice President and Controller

Courtney C. Smith. Chief Executive Officer, President and Chairman of the Board of Directors. Mr. Smith has served as President, Chief Executive Officer and a Director since the company’s inception. He was appointed as the Chairman of our board in May 2004. Mr. Smith has over 30 years of experience in the property and casualty insurance industry. Prior to joining us, from April 1999 to April 2002, Mr. Smith served as Chief Executive Officer and President of TIG Specialty Insurance, or TIG, a leading specialty insurance underwriter.

Peter E. Jokiel. Executive Vice President, Chief Financial Officer, Treasurer and Director. Mr. Jokiel has served as Chief Financial Officer, Treasurer and a Director since the company’s inception. He was appointed as an Executive Vice President in June 2004. Mr. Jokiel has over 30 years experience in the insurance industry. From April 1997 to January 2001, Mr. Jokiel was President and Chief Executive Officer of CNA Financial Corporation’s life operations.

Barry G. Cordeiro. Senior Vice President and Chief Information Officer. Mr. Cordeiro has served as a Vice President and Chief Information Officer since July 2005 and was appointed as a Senior Vice President in February 2007. Mr. Cordeiro has over 20 years of experience in programming, developing and managing software and hardware for various businesses, including significant experience in the insurance industry. From 2003 to 2005, Mr. Cordeiro served as President of Chicago Financial Technology, a global technology consulting and integration company. From 1999 to 2001, Mr. Cordeiro served as Chief Information Officer and EVP of the eBusiness group of CNA Insurance.

Gary J. Ferguson. Senior Vice President and Chief Claims Officer. Mr. Ferguson has served as a Senior Vice President and Chief Claims Officer since the company’s inception. Mr. Ferguson has over 30 years of experience in the insurance industry. From February 2002 to July 2003, Mr. Ferguson was managing director responsible for claims functions at TIG. From December 1997 to October 2001, Mr. Ferguson served as Senior Vice President for Zenith Insurance Company.

Scott W. Goodreau. Senior Vice President, General Counsel, Administration & Corporate Relations and Secretary. Mr. Goodreau has served as a Vice President and General Counsel and has led the company’s Administration & Corporate Relations functions since the company’s inception. He was appointed as a Senior Vice President in February 2007. Prior to joining the company, Mr. Goodreau worked as Vice President & General Counsel for Ascendant One, Inc., a business unit of Insurance Services Office, Inc. in the insurance technology field. Mr. Goodreau also worked as Executive Vice President and General Counsel of a real estate development company and as an associate at Cahill Gordon & Reindel in its corporate department. Mr. Goodreau is a graduate of Harvard Law School.

Daniel A. Cacchione. Vice President and Chief Underwriting Officer. Mr. Cacchione has served as a Vice President and our Chief Underwriting Officer since December 2007. Mr. Cacchione has been a program director with SUA since the company’s inception and has been responsible for managing the underwriting relationship with

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2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Risk Transfer Holdings, Inc. and Specialty Risk Solutions, LLC. He has over 20 years of experience in the property and casualty insurance industry with particular expertise in the specialty area. From 2001 to 2003, Mr. Cacchione served as Vice President of Marketing for Kemper Insurance, Middle Markets Group and prior to that, he has also held several leadership positions at CNA Financial Corporation, most recently as a Senior Vice President in charge of its Commercial Affiliation Marketing (CAM) programs which focus on specialty business.

Scott K. Charbonneau. Vice President and Chief Actuary. Mr. Charbonneau has served as a Vice President and Chief Actuary since January 2005. Mr. Charbonneau has over 20 years of experience in the insurance industry, most recently serving as Vice President and Chief Reserving Officer for Kemper Insurance Companies from 2001 to 2004. Mr. Charbonneau also served as Chief Actuary and held other various offices at Interstate Insurance Company from 1993 to 2001.

Daniel J. Rohan. Vice President and Controller. Mr. Rohan has served as a Vice President and Controller since the company’s inception and became an executive officer in November 2006. Mr. Rohan has over 25 years of experience in accounting. Prior to joining the company, Mr. Rohan served as Controller for Statewide Insurance Company. From 1994 to 2002, Mr. Rohan served as Assistant Vice President of Insurance Reporting of CNA Financial Corporation.

Item 1A. Risk Factors

We believe the following risk factors, as well as the other information contained in this Annual Report on Form 10-K, are material to an understanding of our company. Any of the following risks as well as other risks and uncertainties discussed in this Annual Report on Form 10-K could have a material adverse effect on our business, financial condition, results of operations or prospects and cause the value of our stock to decline. Additional risks and uncertainties that we are unaware of, or that are currently deemed immaterial, also may become important factors that affect us.

We have a limited operating history. If we are unable to implement our business strategy or operate our business as we currently expect our results may be adversely affected.

We effectively commenced operations with the closing of our initial public offering, but did not start to write insurance policies until the first quarter of 2005. The business of Potomac, our accounting predecessor, is not representative of, or comparable with, our primary business strategy. Businesses such as ours that are in their initial stages of development present substantial business and financial risks and may suffer significant losses. Additionally, we are still in the process of developing business relations, continuing to establish operating procedures, and implementing new systems. If we are unable to implement these actions in a timely manner, our results may be adversely affected.

We rely on a limited number of partner agents, one of which accounts for a substantial portion of business. Our failure to recruit and retain partner agents could materially adversely affect our results. Our transition of our partner agents’ business may significantly delay our ability to generate revenue.

We have only eight partner agents. We hope to enter into additional partner agent relationships in the future. Our ability to recruit and retain partner agents may be negatively impacted by certain aspects of our business model, including our requirement that partner agents defer and make contingent a portion of their agency commissions and purchase, or commit to purchase, shares of our Class B Shares. Our ability to add new partner agents may be limited by our level of capital. In addition, several partner agents make up a significant portion of our written premiums. A lack of premium production from any one these partner agent may adversely affect our business. Similarly, a reliance on any one partner agent to produce premium may adversely affect our business. For the year ended December 31, 2007, our partner agent Risk Transfer Holdings, or RTH, produced approximately 49% of our total gross written premiums. Any deterioration of our relationship with RTH or decrease in RTH’s premium production could materially adversely affect our results in future periods.

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2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Our business is heavily concentrated in California and Florida. If our premiums are reduced in these states in the future, it could have a material adverse effect on our business.

We currently write approximately 61% of our business in California and Florida. We may be unable to write in these states in the future due to regulatory prohibitions such as disapproval of policy forms and premium rates, inability to meet solvency standards or revocation of our licenses. We may also face competition that reduces our premiums in these states. A reduction in our premium volume in these states could have a material adverse effect on our business.

We face competition from companies with greater financial resources, broader product lines, higher rating and stronger financial performance than us, which may impair our ability to retain existing customers and maintain our profitability and financial strength.

We compete with a large number of U.S. and non-U.S. insurers, insurance agencies and intermediaries, and diversified financial services companies such as Lincoln General Insurance Company, Wausau Insurance Companies, American International Group, Inc., RLI Corp., Zurich Financial Services, Liberty Mutual Holding Company, Inc, Navigators Insurance Co., Swiss Re. and Berkshire Hathaway, Inc. Other newly formed and existing insurance companies also may be preparing to enter the same market segments in which we compete or raise new capital. Since we have limited operating history, our competitors have greater name and brand recognition than we have. Many of them also have greater financial strength and ratings assigned by independent ratings agencies and more (in some cases substantially more) capital and greater marketing and management resources than we have and may offer a broader range of products and more competitive pricing than we offer.

Our competitive position is based on many factors, including our perceived financial strength, market conditions overall and in the property and casualty insurance business, ratings assigned by independent rating agencies, geographic scope of business, client relationships, premiums charged, contract terms and conditions, products and services offered (including the ability to design customized programs), speed of claims payment, reputation, experience and qualifications of employees and local presence. We choose types and lines of businesses (such as tow trucks and workers’ compensation) that do not require “A” level A.M. Best ratings. As insurance capacity grows either as a result of limited loss events or new competitors entering the market, insurance companies may either begin or increase writing premiums in the specialty insurance markets thereby increasing competition for, and downward pricing pressure on, our products. We work with a limited number of partner agents, which enable us to provide them with customized approaches to their business and give them long- term (five years) exclusive arrangements. Our systems capability is designed for this type of business, which enables us to change and adapt quicker to changes in the marketplace. Since we are a relatively new company, we may not be able to compete successfully on many, or any, of these bases. If competition limits our ability to write new business at adequate rates, our return on capital may be adversely affected.

In addition, a number of new, proposed or potential legislative or industry developments could further increase competition in our industry. In certain states, state-sponsored entities provide property insurance in catastrophe-prone areas or other “alternative markets” types of coverage. Furthermore, the growth of services offered over the Internet may lead to greater competition in the insurance business. New competition from these developments could cause the supply and/or demand for insurance to change, which could adversely affect our underwriting results.

We have received a secure category rating of “B+” (Good) from A.M. Best. A future downgrade in our ratings could affect our competitive position with customers, and our rating may put us at a disadvantage with higher-rated carriers.

Competition in the types of insurance business that we underwrite is based on many factors, including the perceived financial strength of the insurer and ratings assigned by independent rating agencies. A.M. Best is generally considered to be a significant rating agency with respect to the evaluation of insurance companies. A.M. Best’s ratings are based on a quantitative evaluation of a company’s performance with respect to profitability, leverage and liquidity and a qualitative evaluation of spread of risk, investments, reinsurance programs, reserves and management. Insurance ratings are used by customers, reinsurers and reinsurance intermediaries as an important means of assessing the financial strength and quality of insurers.

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2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

We have received a secure category rating of “B+” (Good) from A.M. Best, which is the sixth highest of 15 rating levels and indicates A.M. Best’s opinion of our financial strength and ability to meet ongoing obligations to our policyholders. The rating is not a recommendation to buy, sell or hold our securities. We cannot assure you that we will be able to maintain this rating. If we experience a significant ratings downgrade, we may experience a substantial loss of business as policyholders might purchase insurance from companies with higher claims-paying and financial strength ratings instead of from us.

Our rating may place us at a competitive disadvantage or cause us to incur additional expenses.

Certain financial institutions and banks require property owners with loans to be insured by insurers with at least an “A−” rating by A.M. Best. Certain other insureds choose to insure their own property and casualty risks only with such higher-rated insurers. Also, due to financial responsibility laws, some states and the federal government require certain regulated entities to purchase mandatory insurance from insurers holding a minimum of “A−” rating by A.M. Best. Some agents may be unwilling or unable to write certain lines of business such as property, long-tail liability lines and automobile liability with insurers that are not rated at least “A−” by A.M Best. Although we have entered into a fronting arrangement under which policies may be nominally written by a higher rated insurer to allow our partner agents to produce business in the public entity and non-profit organization programs, there can be no assurances that this arrangement will continue to be available at a reasonable price or acceptable to independent agents, and each policy written using the fronting arrangement will increase our acquisition costs relating to that policy. If we are not able to continue this fronting arrangement, we may lose access to certain types of customers.

We may misevaluate the risks we seek to insure. If we misevaluate these risks, our business, reputation, financial condition and results of operations could be materially and adversely affected.

We were formed to provide commercial lines insurance to specialty program markets through our operating subsidiary. The market for commercial lines insurance to specialty programs differs significantly from the standard market. In the standard market, insurance rates and forms are highly regulated, products and coverages are largely uniform and have relatively predictable exposures and companies tend to compete for customers on the basis of price. In contrast, the specialty market provides coverage for risks that do not fit the underwriting criteria of most standard carriers. Our success depends on the ability of our underwriters to accurately assess the risks associated with the businesses that we insure. Underwriting for specialty program lines requires us to make assumptions about matters that are inherently unpredictable and beyond our control, and for which historical experience and probability analysis may not provide sufficient guidance. Such matters include, but are not limited to the effects of future inflation on our claim trends, future law changes in jurisdictions where we do business, judicial interpretations regarding policy coverage, the predictability and frequency of catastrophic events, and medical protocol changes. If we fail to adequately evaluate the risks to be insured, our business, financial condition and results of operations could be materially and adversely affected, since our claims experience could be significantly different than what we assumed in our pricing, resulting in reduced underwriting profits or underwriting losses.

Our actual insured losses may be greater than our loss reserves, which would negatively impact our financial condition and results of operation.

Our success depends upon our ability to assess accurately the risks associated with the businesses that we insure. Significant periods of time often elapse between the occurrence of an insured loss, the reporting of the loss to an insurer and payment by the insurer of that loss. As we write insurance business and recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities. These reserves represent estimates of amounts needed to pay reported losses and unreported losses and the related loss adjustment expense. Loss reserves are only an estimate of what an insurer anticipates the ultimate costs of claims to be and do not represent an exact calculation of liability. Estimating loss reserves is a difficult and complex process involving many variables and subjective judgments, particularly for new companies, such as ours, that have limited loss development experience. As part of our reserving process, we review historical data as well as actuarial and statistical projections and consider the impact of various factors such as:

•     trends in claim frequency and severity;

•     changes in operations;

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2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

•     emerging economic and social trends;

•     inflation; and

•     changes in the regulatory and litigation environments.

This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. There is no precise method, however, for evaluating the impact of any specific factor on the adequacy of reserves, and actual results are likely to differ from original estimates. In addition, unforeseen losses, the type or magnitude of which we cannot predict, may emerge in the future. To the extent our loss reserves are insufficient to cover actual losses or loss adjustment expenses, we will have to add to these loss reserves and incur a charge to our earnings, which could have a material adverse effect on our financial condition, results of underwriting and cash flows.

We may require additional capital in the future, which may not be available on favorable terms or at all.

We expect that our future capital requirements will depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover our losses. Maintaining adequate capital consistent with business objectives and regulatory requirements is critical to any insurer’s future. We believe that our current level of capital is sufficient, but may need to be augmented to further expand our business strategy, enter new business lines, and manage our expected growth or to deal with higher than expected expenses or poorer than expected results. Any equity or debt financing, if available at all, may be on terms that are not favorable to us. If we are able to raise capital through equity financings, our common stockholder’s interest in our company could be diluted, and the securities we issue may have rights, preferences and privileges that are senior to those of our current common stockholders. If we cannot obtain additional adequate capital, our business, financial condition and results of operations could be adversely affected.

If we are unable to obtain regulatory approval in a timely manner, our ability to generate revenue could be delayed.

We must successfully receive approval of our rates and forms in order to issue policies in certain jurisdictions. A delay in our ability to receive timely approval could lead to a significant delay in our ability to generate revenues.

The availability of reinsurance that we use to limit our exposure to risks may be limited, and counterparty credit and other risks associated with our reinsurance arrangements may result in losses that could adversely affect our financial condition and results of operations.

To limit our risk of loss, we use reinsurance. The availability and cost of reinsurance protection is subject to market conditions, which are beyond our control. We cannot assure you that we will be able to obtain, or in the future renew, adequate protection at cost-effective levels. For our workers’ compensation business, our reinsurers are responsible for losses between $1 million and $10 million due to any single occurrence under a policy and for losses in excess of $10 million up to $35 million for a multiple loss occurrence. For our non-workers’ compensation casualty business, we do not write policies above $1 million and therefore do not need reinsurance protection for single loss occurrences. For this business, our reinsurers are responsible between $1 million and $5 million of losses for a multiple loss occurrence.

As a result of market conditions and other factors, we may not be able to successfully alleviate risk through reinsurance. Further, we are subject to credit risk with respect to our reinsurance arrangements because the ceding of risk to reinsurers does not relieve us of our liability to the clients or companies we insure. Our failure to establish adequate reinsurance arrangements or the failure of our reinsurance arrangements to protect us from overly concentrated risk exposure could adversely affect our business, financial condition and results of operations.

The occurrence of severe catastrophic events may have a material adverse effect on us.

We underwrite property and casualty insurance which covers catastrophic events. Therefore, we have large aggregate exposures to natural and man-made disasters, such as hurricane, typhoon, windstorm, flood, earthquake, acts of war, acts of terrorism and political instability. We expect that our loss experience generally will include infrequent events of great severity. Although we may attempt to exclude losses from terrorism and other similar

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2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

risks from some coverages we write, we may not be successful in doing so. The risks associated with natural and man-made disasters are inherently unpredictable, and it is difficult to predict the timing of such events with statistical certainty or estimate the amount of loss any given occurrence will generate. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. While we attempt to limit our net exposure in any area and to any one catastrophe, we may not be able to do so. Therefore, the occurrence of losses from catastrophic events could have a material adverse effect on our results of operations and financial condition. These losses could adversely affect our net worth and reduce our stockholders’ equity and statutory surplus of our operating subsidiary (which is the amount remaining after all liabilities, including loss reserves, are subtracted from all admitted assets, as determined under statutory accounting principles, or SAP). A decrease in statutory surplus would adversely affect our operating subsidiary’s ability to write new business. Increases in the values and geographic concentrations of insured property and the effects of inflation have resulted in increased severity of industry losses in recent years and we expect that those factors will increase the severity of catastrophe losses in the future.

The effects of emerging claim and coverage issues on our business are uncertain.

As industry practices and legal, judicial, social and other environmental conditions change, unexpected issues related to claims and coverage may emerge with respect to various segments of our business. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, the effects of these changes may not become apparent until some time after we have issued insurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a contract is issued. An example of this is a growing trend of plaintiffs targeting property and casualty insurers in purported class action litigation relating to claims-handling, insurance sales practices and other practices related to the conduct of business in our industry. The effects of these and other unforeseen emerging claim and coverage issues are extremely hard to predict and could harm our business, financial condition and results of operations.

Recent federal legislation may negatively affect the business opportunities we perceive are available to us in the market.

The Terrorism Risk Insurance Act of 2002, or TRIA, was enacted by the U.S. Congress and became effective in November 2002 in response to the tightening of supply in some insurance markets resulting from, among other things, the terrorist attacks of September 11, 2001. Although TRIA originally contained a sunset provision expiring December 31, 2005, the Terrorism Risk Insurance Extension Act of 2005, or Extension Act, was enacted extending TRIA for two additional years. On December 26, 2007, President Bush signed the Terrorism Risk Insurance Program Reauthorization Act of 2007, or TRIPRA, which extends the federal terrorism insurance program for an additional seven years.

TRIPRA requires some U.S. commercial property and casualty insurers to make available to their policyholders terrorism insurance coverage for certified acts of terrorism at the same limits and terms as are available for other coverages. Exclusions or sub-limit coverage for certified acts of terrorism may be established, but solely at the discretion of an insured. We are currently unable to predict the extent to which TRIPRA may affect the demand for our products, or the risks that we may be willing to underwriting. We are unable to assure the adequacy of the premium we will charge to cover losses mandated by TRIPRA.

We may be subject to losses if OneBeacon fails to honor its reinsurance obligations to us.

Specialty Underwriters’ Alliance, Inc. acquired Potomac and subsequently renamed the company SUA Insurance Company. Prior to the acquisition, Potomac entered into a transfer and assumption agreement with OneBeacon, whereby all of its liabilities, including all direct liabilities under existing insurance policies, were ceded to and assumed by OneBeacon. The legal requirements to transfer insurance obligations from one insurer to another, sometimes referred to as a novation, vary from state to state, generally based on the state in which the policy was issued. In some states, if certain notifications are made to policyholders and they do not object to the transfer within certain periods of time, they are deemed to have agreed to the transfer. In other states, policyholders must

20

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

consent to the transfer in writing. Additionally, in some states insurance regulatory approval is required in addition to policyholder consents.

To the extent that the legal requirements for novation have been met with regards to specific policies, OneBeacon is directly liable to those policyholders for any claims arising from insured events under those policies, and SUA no longer has any obligation to those policyholders. Accordingly, SUA has extinguished any recorded liabilities to such policyholders and the related reinsurance recoverables, so no gain or loss has occurred.

Where a novation has not been achieved, SUA continues to be directly liable to legacy policyholders for claims arising under their policies, but has reinsurance coverage from OneBeacon to reimburse SUA for any such claims. Thus, SUA should not experience any gains or losses with respect to such legacy policies unless OneBeacon fails to honor its reinsurance obligation. In the event of OneBeacon’s failure to pay, SUA might experience losses that could materially adversely affect our business and results of operations.

A significant amount of our invested assets is subject to market volatility, and we may be adversely affected by interest rate changes.

We invest the premiums we receive from customers. Our investment portfolio consists of highly rated, liquid fixed income securities. The fair market value of these assets and the investment income from these assets will fluctuate depending on general economic and market conditions. Because we classify substantially all of our invested assets as available for sale, changes in the market value of our securities will be reflected in our consolidated balance sheet. In addition, market fluctuations and market volatility will affect the value of our investment portfolio and could adversely affect our liquidity. Our investment results and, therefore, our financial condition may be impacted by changes in the financial condition of the entities in which we invest, as well as changes in interest rates, government monetary policies, general economic conditions and overall market conditions.

Our investment portfolio contains interest rate-sensitive instruments, such as bonds, which may be adversely affected by changes in interest rates. Because of the unpredictable nature of losses that may arise under insurance policies, our liquidity needs are substantial and may increase at any time. Increases in interest rates during periods when we sell investments to satisfy liquidity needs may result in losses. Changes in interest rates also could have an adverse effect on our investment income and results of operations and may expose us to prepayment risks on certain fixed income investments.

Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Although we attempt to take measures to manage the risks of investing in a changing interest rate environment, we may not be able to mitigate interest rate sensitivity effectively. Our mitigation efforts include maintaining a high quality portfolio with a relatively short duration to reduce the effect of interest rate changes on book value. Despite our mitigation efforts, a significant increase in interest rates could have a material adverse effect on our book value.

Our holding company structure and certain regulatory and other constraints affect our ability to pay dividends and make other payments.

We are a holding company. As a result, we do not have, and do not expect to have, any significant operations or assets other than our ownership of the shares of our subsidiary. Dividends and other permitted distributions from our operating subsidiary are our primary source of funds to pay dividends, if any, to stockholders and to meet ongoing cash requirements, including debt service payments and other expenses. The inability of our operating subsidiary to pay dividends in an amount sufficient to enable us to meet our cash requirements at the holding company level could have a material adverse effect on our operations.

The ability of our operating subsidiary to pay dividends or make other distributions to stockholders is subject to statutory and regulatory restrictions under Illinois law, including restrictions imposed as a matter of administrative policy, which are applicable generally to any insurance company in its state of domicile that limit such payments or distributions without prior approval by regulatory authorities.

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2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Illinois law provides that no dividend or other distribution may be declared or paid at any time except out of earned surplus, rather than contributed surplus. A dividend or other distribution may not be paid if the surplus of the domestic insurer is at an amount less than that required by Illinois law for the kind or kinds of business to be transacted by such insurer, or when payment of a dividend or other distribution by such insurer would reduce its surplus to less than such amount. Additionally, if insurance regulators determine that payment of a dividend or any other payments to an affiliate would, because of the financial condition of the paying insurance company or otherwise, be hazardous to such insurance company’s policyholders, the regulators may prohibit such payments that would otherwise be permitted without prior approval.

Illinois law provides that a domestic insurer which is a member of a holding company system may not pay any extraordinary dividend nor make any other extraordinary distribution to its security holders until 30 days after the director of the Illinois Division of Insurance, or the Director, has received notice of the declaration thereof and has not within such period disapproved the payment unless the Director approves such payment within the 30-day period. Illinois law defines an extraordinary dividend or distribution as “any dividend or distribution of cash or other property whose fair market value, together with that of other dividends or distributions, made within the period of 12 consecutive months, ending on the date on which the proposed dividend is scheduled for payment or distribution, exceeds the greater of: (a) 10% of the company’s surplus as regards policyholders as of the 31st day of December next preceding, or (b) the net income of the company for the 12-month period ending the 31st day of December next preceding, but does not include pro rata distributions of any class of the company’s own securities.”

We are subject to extensive regulation, which may adversely affect our ability to achieve our business objectives. If we do not comply with these regulations, we may be subject to penalties, including fines, suspensions and withdrawals of licenses, which may adversely affect our financial condition and results of operations.

We are subject to extensive governmental regulation and supervision. Most insurance regulations are designed to protect the interests of policyholders rather than stockholders and other investors. These regulations, generally administered by a department of insurance in each jurisdiction in which we do business or expect to do business, relate to, among other things:

•     approval of policy forms and premium rates;

•     standards of solvency, including risk-based capital measurements;

•     licensing of insurers and their agents;

•     restrictions on the nature, quality and concentration of investments;

•     restrictions on the ability of our insurance company subsidiary to pay dividends to us;

•     restrictions on transactions between insurance company subsidiaries and their affiliates;

•     restrictions on the size of risks insurable under a single policy;

•     requiring certain methods of accounting;

•     periodic examinations of our operations and finances;

•     prescribing the form and content of records of financial condition required to be filed; and

•     requiring reserves for unearned premium, losses and other purposes.

For example, our operating subsidiary is subject to minimum capital and surplus requirements imposed by the laws of the jurisdictions in which it is licensed to transact an insurance business. As of December 31, 2007, the capital and surplus of our operating subsidiary was approximately $89.8 million. If our operating subsidiary does not maintain the required minimum capital and surplus of any jurisdiction in which it is licensed, it could be subject to regulatory action in such jurisdiction, including, but not limited to, the suspension or revocation of its license to transact insurance business in such jurisdiction. No jurisdiction in which our operating subsidiary is licensed has minimum capital and surplus requirements in excess of $35 million for the lines of insurance for which our operating subsidiary is licensed. Additionally, if our operating subsidiary does not maintain the required minimum

22

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

capital and surplus for Illinois, its state of domicile, (which currently is $2.5 million) it could be placed into receivership in Illinois. Also, any new minimum capital and surplus requirements adopted in the future may require us to increase the capital and surplus of our operating subsidiary, which we may not be able to do.

In addition, regulatory authorities have relatively broad discretion to deny or revoke licenses for various reasons, including the violation of regulations. We base some of our practices on our interpretations of regulations or practices that we believe are generally followed by the industry. These practices may turn out to be different from the interpretations of regulatory authorities. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or otherwise penalize us. These actions could adversely affect our ability to operate our business. Further, changes in the level of regulation of the insurance industry or changes in laws or regulations themselves or interpretations by regulatory authorities could adversely affect our ability to operate our business.

In recent years, the state insurance regulatory framework in the United States has come under increased federal scrutiny, and some state legislators have considered or enacted laws that may alter or increase state authority to regulate insurance companies and insurance holding companies. Moreover, the National Association of Insurance Commissioners, or NAIC, which is an association of the senior insurance regulatory officials of all 50 states and the District of Columbia, and state insurance regulators regularly reexamine existing laws and regulations, interpretations of existing laws and the development of new laws, which may be more restrictive or may result in higher costs to us than current statutory requirements.

Provisions in our certificate of incorporation and bylaws and regulations under Delaware law could prevent or delay transactions that stockholders may favor and entrench current management.

We are incorporated in Delaware. Our certificate of incorporation and bylaws, as well as Delaware corporate law, contain provisions that could delay or prevent a change of control or changes in our management that a stockholder might consider favorable, including a provision that authorizes our board of directors to issue preferred stock with such voting rights, dividend rates, liquidation, redemption, conversion and other rights as our board of directors may fix and without further stockholder action. The issuance of preferred stock with voting rights could make it more difficult for a third party to acquire a majority of our outstanding voting stock. This can frustrate a change in the composition of our board of directors, which could result in entrenchment of current management. Takeover attempts generally include offering stockholders a premium for their stock. Therefore, preventing a takeover attempt may cause our stockholders to lose an opportunity to sell your shares at a premium. If a change of control or change in management is delayed or prevented, the market price of our common stock could decline.

Delaware law also prohibits a corporation from engaging in a business combination with any holder of 15% or more of its capital stock until the holder has held the stock for three years unless, among other possibilities, the board of directors approves the transaction. This provision may prevent changes in our management or corporate structure. Also, under applicable Delaware law, our board of directors is permitted to and may adopt additional anti-takeover measures in the future.

Delaware law provides that no person shall enter into an agreement to merge with or acquire control of any person controlling a domestic insurer (including an insurance holding company) unless, at the time any such agreement is entered into, the agreement or acquisition has been approved by the Commissioner of the Delaware Department of Insurance. Control is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, 10% or more of the voting securities of any other person.

We completed our initial public offering in November 2004, and we do not have a significant presence in the Market. You may have difficulty selling your Common Stock because of the limited trading volume for such shares.

Our Common Stock began trading on the Nasdaq Global Market in November 2004. As a relatively new public company, there may be less coverage of our Common Stock by securities analysts. In addition our Common Stock has limited trading volumes. One or both of these factors could result in price volatility and serve to depress the liquidity and market price of our Common Stock.

23

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We lease our headquarters in Chicago, Illinois. Our headquarters have approximately 34,000 square feet and our lease expires in 2020. We believe that our facility will support our future business requirements or that we will be able to lease additional space, if needed, on reasonable terms.

Item 3. Legal Proceedings

We are not currently involved in any litigation other than routine litigation arising in the ordinary course of business and that is either expected to be covered by liability insurance or to have no material impact on our financial position and results of operations.

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

None.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock. Our shares of Common Stock trade on the Nasdaq Global Market under the symbol “SUAI.” The following table sets forth the high and low sales price of our shares of Common Stock on the Nasdaq Global Market for the periods presented. Our shares of Common Stock began trading on the Nasdaq Global Market on November 23, 2004.

	2007
Period	High		Low
2007
First Quarter	$	8.50	$	7.12
Second Quarter	$	8.32	$	7.62
Third Quarter	$	8.05	$	6.78
Fourth Quarter	$	7.17	$	5.15
2006
First Quarter	$	6.80	$	5.90
Second Quarter	$	6.87	$	6.18
Third Quarter	$	8.95	$	6.39
Fourth Quarter	$	10.38	$	8.32

As of February 27, 2008, there were approximately 1,103 beneficial owners and nine shareholders of record of our Common Stock and eight shareholders of record of our Class B Shares.

Performance Graph. The following line graph sets forth for the period of November 23, 2004 through December 31, 2007, a comparison of the percentage change in the cumulative total stockholder return on the Company’s Common Stock compared to the cumulative total return of the Standard & Poor’s (“S&P”) 500 Stock Index and the S&P 500 Property & Casualty Insurance Index.

24

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

The graph assumes that the shares of the Company’s Common Stock were bought at the price of $100 per share and that the value of the investment in each of the Company’s Common Stock and the indices was $100 at the beginning of the period. The graph further assumes the reinvestment of dividends when paid.

Payment of Dividends. We never have paid or declared any cash dividends on our Common Stock and have no plans to do so in the foreseeable future. We currently intend to retain future earnings to finance the growth and development of our business. Future dividends, if any, will depend on, among other things, our results of operations, capital requirements, contractual, regulatory and other restrictions on the payment of dividends by our subsidiary to us, and such other factors as our board of directors may, in its discretion, consider relevant. For information regarding restrictions on the payment of dividends by SUA, see the discussion under the heading “Item 1. Business — Insurance Regulation” in PART I of this annual report.

Repurchases of Common Stock. We have not repurchased any of our common stock.

Our equity compensation plan information is included in Item 12, which is incorporated by reference to the definitive proxy statement to be filed pursuant to Regulation 14A.

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2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Item 6.   Selected Financial Data

The following table sets forth our selected historical financial information and that of our predecessor for the periods ended and as of the dates indicated. This information comes from our consolidated financial statements and those of our predecessor. You should read the following selected financial information along with the information contained in our financial statements and related notes and the reports of the independent registered public accounting firm included under the heading “Item 8. Financial Statements And Supplementary Data‘ in PART II of this annual report. These historical results are not indicative of results to be expected for any future period.

	Specialty Underwriters’ Alliance, Inc.											Predecessor
									Nov. 23 to			Jan.1 to		Year Ended
	Year Ended December 31,								Dec. 31			Nov. 22		Dec. 31
	2007			2006		2005			2004			2004		2003
	(in thousands, except for per share data)
Results of operations
Earned premiums	$	152,469		$	110,891	$	26,611		$	-		$	-	$	9,961
Net investment income		9,553			6,087		3,558			278			1,329		2,128
Net realized gain/(loss)		(27	)		275		(4	)		2
Total revenues		161,995			117,253		30,165			280			1,719		11,941
Net income (loss)		12,589			8,408		(17,996	)		(8,155	)		650		1,359
Net income (loss) per share
Basic	$	0.82		$	0.55	$	(1.22	)	$	(4.59	)
Diluted	$	0.82		$	0.55	$	(1.22	)	$	(4.59	)

	Specialty Underwriters’ Alliance, Inc.								Predecessor
	As of December 31,
	2007		2006		2005		2004		2003
	(in thousands, except for per share data)
Financial condition
Investments	$	229,387	$	164,058	$	102,991	$	97,835	$	49,113
Total assets		422,534		363,297		277,163		217,231		204,355
Total liabilities		291,397		249,315		176,348		98,301		161,850
Shareholders’ equity		131,137		113,982		100,815		118,930		42,505
Book value data
Book value per share	$	8.42	$	7.42	$	6.76	$	8.09
Tangible book value per share	$	7.73	$	6.72	$	6.04	$	7.36

26

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

The following tables include our loss development history of loss and loss adjustment expense reserves for business generated subsequent to our acquisition of Potomac Insurance Company of Illinois on November 23, 2004. We commenced our operations in 2005.

	Specialty Underwriters’ Alliance Inc. (Successor)
	Year Ended December 31,
	1997		1998		1999		2000		2001		2002		2003		2004		2005			2006		2007
	(in thousands)
LIABILITY FOR UNPAID CLAIMS & CLAIM ADJUSTMENT EXPENSE:
Gross Liability		-		-		-		-		-		-		-		-		18,134			69,608		121,207
Reinsurance Recoverable		-		-		-		-		-		-		-		-		2,261			9,384		13,635
Net Liability		-		-		-		-		-		-		-		-		15,873			60,224		107,572
Discount (In Net Liability)		-		-		-		-		-		-		-		-		192			1,016		1,505
Net Liability (Undiscounted)		-		-		-		-		-		-		-		-		16,065			61,240		109,077
CUMULATIVE PAID AS OF:
One Year Later		-		-		-		-		-		-		-		-		5,334			17,870
Two Years Later		-		-		-		-		-		-		-		-		7,465
Three Years Later		-		-		-		-		-		-		-		-
Four Years Later		-		-		-		-		-		-		-
Five Years Later		-		-		-		-		-		-
Six Years Later		-		-		-		-		-
Seven Years Later		-		-		-		-
Eight Years Later		-		-		-
Nine Years Later		-		-
Ten Years Later		-
RE-ESTIMATED LIABILITY AS OF:
End of Year		-		-		-		-		-		-		-		-		16,065			61,240		109,077
One Year Later		-		-		-		-		-		-		-		-		15,176			58,898
Two Years Later		-		-		-		-		-		-		-		-		14,441
Three Years Later		-		-		-		-		-		-		-		-
Four Years Later		-		-		-		-		-		-		-
Five Years Later		-		-		-		-		-		-
Six Years Later		-		-		-		-		-
Seven Years Later		-		-		-		-
Eight Years Later		-		-		-
Nine Years Later		-		-
Ten Years Later		-
Redundancy (Def.)		-		-		-		-		-		-		-		-		1,624			2,342
Percentage Redundancy (Def.) Reported As Of:
One Year Later		-		-		-		-		-		-		-		-		6	%		4%
Two Years Later		-		-		-		-		-		-		-		-		10	%
Three Years Later		-		-		-		-		-		-		-		-
Four Years Later		-		-		-		-		-		-		-
Five Years Later		-		-		-		-		-		-
Six Years Later		-		-		-		-		-
Seven Years Later		-		-		-		-
Eight Years Later		-		-		-
Nine Years Later		-		-
Ten Years Later		-

27

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

The following tables include the complete loss development history of the direct gross loss and loss adjustment expense or LAE reserves of Potomac Insurance Company of Illinois, or Potomac. Effective January 1, 2004, Potomac entered into a transfer and assumption agreement with its parent company, OneBeacon, which reinsured all its direct liabilities to OneBeacon. Therefore, effective January 1, 2004, Potomac had no net liabilities for unpaid Losses and LAE. On November 23, 2004, we purchased Potomac and subsequently received approval from the Illinois Department of Insurance to rename the company SUA Insurance Company. SUA Insurance Company remains liable for the Loss and LAE reserves generated from its predecessor’s (Potomac’s) direct business should OneBeacon be unable to honor its reinsurance obligation in the future.

	Predecessor (Potomac)
	Year Ended December 31,
	1997			1998			1999			2000			2001			2002			2003			2004			2005			2006			2007
	Direct Basis (in thousands)
Liability for Unpaid Cliams & Claim Adjustment Expense		131,700			160,244			235,376			297,408			255,128			176,069			140,542			96,196			86,736			71,592			63,529
CUMULATIVE PAID AS OF:
One Year Later		62,659			81,545			98,963			86,980			76,958			58,815			40,169			26,653			14,943			14,442
Two Years Later		108,284			128,261			163,656			170,546			134,008			98,730			66,724			41,596			29,385
Three Years Later		131,940			163,498			220,344			227,597			172,991			125,152			81,654			56,038
Four Years Later		151,753			191,357			261,115			266,579			199,328			140,077			96,096
Five Years Later		166,365			212,314			291,524			292,916			214,222			154,489
Six Years Later		176,712			224,957			311,462			307,810			228,553
Seven Years Later		183,164			236,584			323,427			322,141
Eight Years Later		188,880			243,202			335,085
Nine Years Later		192,902			249,492
Ten Years Later		195,844
RE-ESTIMATED LIABILITY AS OF:
End of Year		131,700			160,244			235,376			297,408			255,128			176,069			140,542			96,196			86,736			71,592			63,529
One Year Later		145,067			211,516			326,426			326,203			247,629			198,858			136,237			113,389			86,535			77,971
Two Years Later		184,404			272,353			359,245			320,706			270,997			194,561			153,388			113,189			92,914
Three Years Later		222,057			279,420			350,765			344,771			267,512			211,738			153,173			119,567
Four Years Later		221,608			266,482			366,736			342,982			284,706			211,459			156,561
Five Years Later		209,018			273,463			371,520			358,428			284,433			217,832
Six Years Later		212,266			273,308			384,034			358,264			290,856
Seven Years Later		211,532			282,360			382,001			363,621
Eight Years Later		217,864			276,265			387,062
Nine Years Later		207,965			278,832
Ten Years Later		209,210
Redundancy (Def.)		(77,511	)		(118,588	)		(151,686	)		(66,213	)		(35,728	)		(41,763	)		(19,018	)		(23,372	)		(6,178	)		(6,378	)
Percentage Redundancy (Def.) Reported As Of:
One Year Later		-10	%		-32	%		-39	%		-10	%		3	%		-13	%		3	%		-18	%		0	%		-9%
Two Years Later		-40	%		-70	%		-53	%		-8	%		-6	%		-11	%		-9	%		-18	%		-7	%
Three Years Later		-69	%		-74	%		-49	%		-16	%		-5	%		-20	%		-9	%		-24	%
Four Years Later		-68	%		-66	%		-56	%		-15	%		-12	%		-20	%		-14	%
Five Years Later		-59	%		-71	%		-58	%		-21	%		-11	%		-24	%
Six Years Later		-61	%		-71	%		-63	%		-20	%		-14	%
Seven Years Later		-61	%		-76	%		-62	%		-22	%
Eight Years Later		-65	%		-72	%		-64	%
Nine Years Later		-58	%		-74	%
Ten Years Later		-59	%

28

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Specialty Underwriters’ Alliance, Inc.

The following discussion and analysis of financial condition and results of operations should be read together with “Selected Financial Data” and our financial statements and accompanying notes appearing elsewhere in this Annual Report. Certain reclassifications have been made to prior period financial statement line items to enhance the comparability with prior years. This discussion contains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many important factors, including those set forth under “Risk Factors,” “Forward-Looking Statements” and elsewhere in this Annual Report.

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.

Additionally, in the specialty property and casualty program business, insurance agents often have underwriting authority, are responsible for handling claims and are paid by up-front commissions on the amount of premiums written. We believe that this system does not serve the carriers, the agents or the insureds well. Poor underwriting results have led to underwriting losses for the carriers, which results in carrier turnover in the specialty program business thereby creating instability in the niche insurance markets being served. In turn, agents incur additional costs in searching for, and converting to, new carriers and policyholders experience uncertainty regarding the placement of their coverage and quality of service from year to year.

Our business model is designed to better serve the specialty property and casualty marketplace by recognizing the void that exists in these underserved niche markets and the problems that undisciplined underwriting has created. Our business model emphasizes our relationship with a select number of partner agents, who have specialized business knowledge in the types of business classes we underwrite. We rely on these partner agents for industry insights and their understanding of the specific risks in the niche markets we serve. We bring together that knowledge with our disciplined underwriting practices and leading-edge technology and systems capabilities to provide insurance programs and products that are customized to the needs of the specialty markets that we serve.

Our business model is also designed to realign the interests of carriers, agents and insureds. Each of our partner agents are required to enter into agreements with us which provide that in exchange for marketing and pre-qualifying business for us, our partner agents receive an up-front commission designed to cover their costs and an underwriting profit-based commission paid over several years. In addition, each partner agent is required to purchase Class B Shares, which further aligns their interests with us and that of our shareholders. In return, we provide our partner agents with a five-year exclusive arrangement (generally allowing partner agents to offer other companies’ products if we decline to offer coverage to a prospective insured) covering a specific class of business and territory. Further, we have implemented a centralized information system designed to reduce processing and administrative time. Lastly, we are a stable, dedicated source of specialty program commercial property and casualty insurance capacity.

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.

29

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Key Operating Measures

In evaluating our business, we focus on the following ratios:

•     the net loss and loss adjustment expense ratio,

•     the acquisition expense ratio, and

•     the other operating expense ratio.

The net loss and loss adjustment expense ratio and the acquisition expense ratio are calculated by dividing the respective expense amounts by net premiums earned. The other operating expense ratio is calculated by dividing other operating expenses by gross premiums written. Gross premiums written represents all premiums written by an insurance company during a specified period. Net premiums written is the difference between gross premiums written and premiums ceded to reinsurers. Premiums are earned over the terms of the related policies. At the end of each accounting period, the portions of premiums that are not yet earned are included in unearned premiums and are realized as revenue in subsequent periods over the remaining terms of the policies. Our policies have terms of 12 months. Thus, for example, for a policy that is written on July 1, 2007, one-half of the premiums would be earned in 2007 and the other half would be earned in 2008. Premiums earned, represents the earned portion of our net premiums written.

Results of Operations

The following table summarizes our results of operations for the years ended December 31, 2007, 2006 and 2005, respectively:

	Year Ended December 31,									% Change			% Change
	2007			2006			2005			’06 to ’07			’05 to ’06
	(dollars in millions, except for per share data)
Gross written premiums	$	160.4		$	153.2		$	90.6			4.7	%		69.1	%
Net written premiums		149.4			142.1			85.2			5.1	%		66.8	%
Earned premiums		152.5			110.9			26.6			37.5	%		316.9	%
Net investment income		9.5			6.1			3.6			55.7	%		69.4	%
Net realized gain (loss)		-			0.3			-			*			*
Total revenues		162.0			117.3			30.2			38.1	%		288.4	%
Net loss and loss adjustment expense		90.0			62.7			19.1			43.5	%		228.3	%
Acquisition expenses		36.6			26.0			6.2			40.8	%		319.4	%
Service company fees		-			-			8.8			*			*
Other operating expenses		22.6			19.9			14.1			13.6	%		41.1	%
Total expenses		149.2			108.6			48.2			37.4	%		125.3	%
Pre-tax income		12.8			8.7			(18.0	)		47.1	%		*
Federal income tax (expense)		(0.2	)		(0.3	)		-			33.3	%		*
Net income (loss)	$	12.6		$	8.4		$	(18.0	)		50.0	%		*
Net income(loss) per share
Basic and diluted	$	0.82		$	0.55		$	(1.22	)		49.1	%		*
Average number of common shares outstanding (basic and diluted)		15.4			15.2			14.8			1.3	%		2.7	%
Key operating ratios
Net loss and loss adjustment expense ratio		59.0	%		56.5	%		71.8	%		4.4	%		-21.3	%
Ratio of acquisition expense to earned premiums		24.0	%		23.4	%		23.3	%		2.6	%		0.4	%
Ratio of all other expenses to gross written premiums		14.1	%		13.0	%		25.3	%		8.5	%		-48.6	%

*  Not meaningful

30

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006

In 2007 as compared to 2006, insurance revenues and investment income continued to increase and, after payment of operating expenses, were sufficient to generate increased operating profits. In addition, we continued to utilize the benefits of tax losses generated in earlier years. However, in our lines of business, we faced greater competition, lower rates and reduced exposure bases which led to lower premium growth.

Net income for the year ended December 31, 2007 was $12.6 million, compared to a net income for the year ended December 31, 2006 of $8.4 million. Earnings per share for 2007 were $0.82 versus $0.55 for 2006.

Gross written premiums increased 4.7% from $153.2 million for 2006 to $160.4 million for 2007. The increase in premiums was primarily driven by growth within our existing programs, along with the addition of one of our new partner agents, Flying Eagle Insurance Service, Inc. and a new program writing small workers’ compensation with Appalachian Underwriters, Inc.

We continue to increase our number of partner agents. On October 1, 2007 we signed First Light Program Managers, Inc. as a partner agent, writing commercial general liability, commercial automobile and physical damage for selected customer classes in the trucking industry in the southeastern region. Also, we continue to add new programs such as temporary staffing with Risk Transfer Holdings, Inc.

Our written premium is still concentrated in four of our eight partner agents, though there was continued diversification in the percentage of premium written. We expect to see additional diversification as our relationship with these new partner agents mature. Premium breakdown by partner agent was as follows:

	2007				2006
	Gross Written		% of Total Gross		Gross Written		% of Total Gross
	Premium		Written Premium		Premium		Written Premium
	(dollars in millions)
Risk Transfer Holdings, Inc.	$	78.6		49.0%	$	81.4		53.1%
American Team Managers		33.5		20.9%		31.7		20.7%
AEON Insurance Group, Inc.		25.7		16.0%		21.8		14.2%
Appalachian Underwriters, Inc.		13.9		8.7%		14.5		9.5%
Specialty Risk Solutions, LLC		3.1		1.9%		2.0		1.3%
Flying Eagle Insurance Service, Inc		2.8		1.7%		-		n/a
Insential, Inc		1.7		1.1%		1.5		1.0%
First Light Program Manager, Inc.		-		0.0%		-		n/a
Other		1.1		0.7%		0.3		0.2%
Total	$	160.4		100.0%	$	153.2		100.0%

Although more diversified in 2007 than in 2006, our premiums in 2007 remained concentrated in California, Florida and, to a lesser extent, Texas. Our gross written premiums for 2007 and 2006 by state were as follows:

	2007				2006
	Gross Written		% of Total Gross		Gross Written		% of Total Gross
	Premium		Written Premium		Premium		Written Premium
	(dollars in millions)
Florida	$	53.9		33.6%	$	58.5		38.2%
California		44.1		27.5%		47.4		30.9%
Texas		16.7		10.4%		12.4		8.1%
Other States		45.7		28.5%		34.9		22.8%
Total	$	160.4		100.0%	$	153.2		100.0%

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2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

While more diversified, our business written for the year ended December 31, 2007 was heavily weighted in workers’ compensation. Our gross written premiums by line of business as a percentage of total gross written premiums for the years ended December 31, 2007 and 2006 were as follows:

	2007				2006
	Gross Written		% of Total Gross		Gross Written		% of Total Gross
	Premium		Written Premium		Premium		Written Premium
	(dollars in millions)
Workers’ compensation	$	92.0		57.4%	$	89.3		58.3%
General liability		32.5		20.2%		35.8		23.4%
Commercial automobile		31.9		19.9%		25.5		16.6%
All Other		4.0		2.5%		2.6		1.7%
Total	$	160.4		100.0%	$	153.2		100.0%

Our workers’ compensation business was impacted by rate decreases in Florida and California and could be further impacted by future decreases in these states and others. Florida approved a rate decrease recommended by the National Council for Compensation Insurance, or the NCCI, of 15.7% effective January 1, 2007 and a 16.5% decrease effective January 1, 2008. We matched the recommended rate decrease in Florida. The California Insurance Commissioner recommended a 9.5% decrease in advisory pure premium rates on new and renewal policies effective on or after January 1, 2007. On May 29, 2007, the California Insurance Commissioner recommended a 14.2% decrease in rates effective July 1, 2007. On September 20, 2007, the WCIRB submitted a filing with the California Insurance Commissioner recommending a 4.2% increase in advisory pure premium rates on new and renewal policies effective on or after January 1, 2008. The filing was based on a review of loss and loss adjustment experience through June 30, 2007. On October 19, 2007, the WCIRB amended its filing, increasing the proposed rate increase to 5.2% based on the projected impact of Assembly Bill No. 338 (AB 338) that was signed into law on October 13, 2007. AB 338 increases the period of time, from two years to five years, from the date of injury during which disability benefits, limited to a maximum of 104 weeks, may be provided. The California Insurance Commissioner has declined to recommend the increase. As of January 1, 2008 our rates matched the California Insurance Commissioner’s recommended rate.

Earned premiums grew 37.5% to $152.5 million for 2007 compared to $110.9 million for 2006. The increase in earned premium was primarily attributable to increased premium writings in 2006, continuing into the first half of 2007.

Net investment income was $9.5 million for 2007 versus $6.1 million for 2006. The increase in net investment income reflects a significant growth in our cash and invested assets from $166.4 million at December 31, 2006 to $230.4 million at December 31, 2007. The net investment yield for average invested assets for 2007 and 2006 was 4.6%. There where no realized gains in 2007 and $0.3 million in 2006. The increases in average invested assets primarily relates to the cash flow from operations, including premium growth and favorable underwriting results.

Acquisition expenses were $36.6 million for the year ended December 31, 2007, compared to acquisition expenses of $26.0 million for the year ended December 31, 2006. The increase in acquisition expenses was driven primarily by the increase in earned premium as well as partner agent profit sharing from 2006 to 2007.

Loss and loss adjustment expenses were $90.0 million for the year ended December 31, 2007, compared to $62.7 million for the year ended December 31, 2006. The increase in loss and loss adjustment expenses was driven by the increase in earned premium. Our net loss and loss adjustment expense ratio increased in 2007 compared to 2006 primarily due to an increase in large losses in our commercial automobile line of business partially offset by improvements in workers’ compensation and general liability in prior years. We have instituted price increases to address this loss ratio increase in our commercial automobile business.

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2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Our net loss and loss adjustment expense ratio by line of business for the years ended December 31, 2007 and December 31, 2006 was as follows:

	For the Year Ended
	December 31,
	2007		2006
General liability		43.8%		46.1%
Workers’ compensation		54.5%		54.6%
Commercial automobile		90.9%		78.0%
All other		45.3%		78.2%
Total		59.0%		56.5%

Other operating expenses were $22.6 million for the year ended December 31, 2007, which consisted of salaries and benefit costs of $7.0 million, $3.2 million of professional and consulting fees, $5.0 million of depreciation and amortization expense, $1.1 million of stock based compensation expense and $6.3 million of other expenses. For the year ended December 31, 2006, other operating expenses were $19.9 million, which consisted of salaries and benefit costs of $6.1 million, $4.2 million of professional and consulting fees, $2.6 million of depreciation and amortization, $1.1 million of stock based compensation expense and $5.9 million of other expenses. We remain committed to operating efficiently and increasing staff only as our business volume requires. The increase in salaries and benefit costs in 2007 was offset by a decrease in professional and consulting services as we continued to bring previously outsourced services in-house.

Our ratio of all other operating expenses to gross written premiums increased in 2007 as compared to 2006 primarily as a result of slowed growth in written premiums and increased depreciation expense resulting from information systems being fully deployed. The increase in depreciation expense was partially offset by a decrease in audit and tax services and stock option expenses. We have built an infrastructure that should allow for scalability for future premium growth.

Tax expense of $0.2 million and $0.3 million for the year ended December 31, 2007 and December 31, 2006, respectively, resulted from deferred tax liabilities associated with our acquisition of Potomac, which have an indefinite life and therefore cannot be offset with deferred tax assets, which consist primarily of tax loss carryforwards.

Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005

In 2006, we moved beyond the early stages of developing our operations. Insurance revenues and investment income were sufficient to absorb the company’s operating expenses, operating profits resulted and we began realizing benefits of tax losses generated in earlier years. In addition, our expense levels were more proportional to our earned premium.

Net income for the year ended December 31, 2006 was $8.4 million, compared to a net loss for the year ended December 31, 2005 of $18.0 million. Earnings per share for 2006 were $0.55 versus a net loss per share of $1.22 for 2005.

Gross written premiums increased 69.1% from $90.6 million for 2005 to $153.2 million for 2006.

Earned premiums grew 316.9% to $110.9 million for 2006 compared to $26.6 million for 2005. Premiums are earned ratably over the terms of our insurance policies, which is generally 12 months.

Net investment income was $6.1 million for 2006 versus $3.6 million for 2005. The increase in net investment income reflects a significant growth in our cash and invested assets from $108.3 million at December 31, 2005 to $166.4 million at December 31, 2006. The net investment yield for average invested assets for 2006 was 4.6%. For 2005, the net investment yield on average invested assets was 3.5%. Realized gains were $0.3 million in 2006 and $0 million in 2005.

33

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Loss and loss adjustment expenses were $62.7 million for the year ended December 31, 2006, compared to $19.1 million for the year ended December 31, 2005. Acquisition expenses were $26.0 million for the year ended December 31, 2006, compared to acquisitions expenses of $6.2 million for the year ended December 31, 2005. The increase in loss and loss adjustment expenses and acquisition expenses was driven by an increase in earned premium from 2005 to 2006.

Other operating expenses were $19.9 million for the year ended December 31, 2006, which consisted of salaries and benefit costs of $6.1 million, $4.2 million of professional and consulting fees, $2.6 million of depreciation and amortization and $7.0 million of other expenses. For the year ended December 31, 2005, other operating expenses were $14.1 million, comprised of salaries and benefit costs of $5.2 million, $3.0 million of professional and consulting fees, $1.8 million of depreciation and amortization and $4.1 million of other expenses. Other operating expenses for 2006 included $1.1 million associated with our stock option program. This expense represents a change in our accounting policy through the adoption of FAS No. 123 (revised 2004), “Share-Based Payment,” or FAS 123R, whereby we recognize compensation expense for stock options. Prior to the first quarter of 2006 we followed the accounting principles under the intrinsic value method of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” or APB 25. For 2006, we did not incur any service company fees because we terminated our service company contract effective December 31, 2005. In 2005, we incurred $8.8 million of service company fees. We have assumed the responsibilities previously provided by our service company, which expenses are included in other operating expenses. We remain committed to operating efficiently and increasing staff only as our business volume requires.

Tax expense of $0.3 million for the year ended December 31, 2006 resulted from deferred tax liabilities associated with our acquisition of Potomac, which have an indefinite life and therefore cannot be offset with deferred tax assets, which consist primarily of tax loss carryforwards. We did not incur tax expense in 2005 because we had a net loss for the year.

Premium breakdown by partner agent was as follows:

	2006				2005
	Gross Written		% of Total Gross		Gross Written		% of Total Gross
	Premium		Written Premium		Premium		Written Premium
	(dollars in millions)
Risk Transfer Holdings, Inc.	$	81.4		53.1%	$	50.1		55.3%
American Team Managers		31.7		20.7%		22.1		24.4%
AEON Insurance Group, Inc.		21.8		14.2%		11.0		12.1%
Appalachian Underwriters, Inc.		14.5		9.5%		0.4		0.5%
Specialty Risk Solutions, LLC		2.0		1.3%		7.0		7.7%
Insential, Inc.		1.5		1.0%		n/a		n/a
Other		0.3		0.2%		-		0.0%
Total	$	153.2		100.0%	$	90.6		100.0%

34

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Although more diversified in 2006 than in 2005, our premiums in 2006 were primarily concentrated in Florida and California. Florida approved a rate decrease of 15.7% effective January 1, 2007. California approved rate decreases of 29.2% for 2006 and 9.5% for 2007. These decreases were in response to an improvement in loss experience caused by recent workers’ compensation reforms. Given the recent reforms, we still believe that Florida and California are attractive workers’ compensation markets. However, future experience may lead us to conclude otherwise. Our gross written premiums for 2006 and 2005 by state were as follows:

	2006				2005
	Gross Written		% of Total Gross		Gross Written		% of Total Gross
	Premium		Written Premium		Premium		Written Premium
	(dollars in millions)
Florida	$	58.5		38.2%	$	38.6		42.6%
California		47.4		30.9%		35.7		39.4%
Texas		12.4		8.1%		7.1		7.8%
Other States		34.9		22.8%		9.2		10.2%
Total	$	153.2		100.0%	$	90.6		100.0%

Although more diversified in 2006 than in 2005, our business written for the year ended December 31, 2006 was heavily weighted in workers’ compensation. Our gross written premiums by line of business as a percentage of total gross written premiums for the years ended December 31, 2006 and 2005 were as follows:

	2006				2005
	Gross Written		% of Total Gross		Gross Written		% of Total Gross
	Premium		Written Premium		Premium		Written Premium
	(dollars in millions)
Workers’ compensation	$	89.3		58.3%	$	62.3		68.8%
General liability		35.8		23.4%		10.7		11.8%
Commercial automobile		25.5		16.6%		9.4		10.4%
All Other		2.6		1.7%		8.2		9.0%
Total	$	153.2		100.0%	$	90.6		100.0%

Our workers’ compensation business was impacted by rate decreases in Florida and California and could be further impacted by future decreases in these states and others.

Our net loss and loss adjustment expense ratio has improved for the year ended December 31, 2006 compared to the year ended December 31, 2005. For 2006, our loss and loss adjustment expense ratio was 57.2% on a direct basis (before reinsurance) and 56.5% on a net basis (after reinsurance). We experienced favorable prior year loss development of $0.9 million. For 2005, our loss and loss adjustment expense ratio was 66.7% on a direct basis and 71.8% on a net basis. The improved loss and loss adjustment expense ratio in 2006 reflects more favorable terms under our reinsurance contracts, as well as our adherence to conservative pricing and underwriting and an improved unallocated loss adjustment expense ratio arising from increased earned premium. Our ratio of all other expenses to gross written premiums also improved due to increased premiums.

35

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Our net loss and loss adjustment expense ratio by line of business for the years ended December 31, 2006 and December 31, 2005 were as follows:

	For the Year Ended December 31,
	2006		2005
General liability		46.1%		60.4%
Workers’ compensation		54.6%		73.5%
Commercial automobile		78.0%		79.0%
All other		78.2%		95.8%
Total		56.5%		71.8%

Cash Flows

A summary of our cash flows is as follows:

	Year Ended December 31,
	2007		2006		2005
	(dollars in millions)
Cash provided by (used in)
Operating activities	$	69.6	$	60.3	$	8.4
Investing activities		(72.3)		(66.4)		(13.6)
Financing activities		1.3		3.1		1.5
Change in cash	$	(1.4)	$	(3.0)	$	(3.7)

For the year ended December 31, 2007 net cash from operating activities was $69.6 million, principally consisting of premium and deposit collections exceeding losses and expenses paid out. This amount compares to net cash from operating activities of $60.3 million for the year ended December 31, 2006, which also consisted principally of premium and deposit collections exceeding losses and expenses paid out. Our insurance operations commenced in early 2005 and as a result cash flows were negative for the majority of 2005 and first became positive in the fourth quarter of 2005.

Cash used for investment activities was $72.3 million for the year ended December 31, 2007, principally representing purchases of investments of $63.1 million and additions to equipment and capitalized software of $9.2 million. For the year ended December 31, 2006, cash used for investment activities was $66.4 million also principally representing increases in investments and additions to equipment and capitalized software. For the year ended December 31, 2005, cash used for investment activities was $13.6 million also principally representing increases in investments and additions to equipment and capitalized software.

We had cash flows from financing activities of $1.3 million from sales of Class B Shares to our partner agents during the year ended December 31, 2007. We had cash flows from financing activities of $3.1 million from sales of Class B Shares to our partner agents during the year ended December 31, 2006. For the year ended December 31, 2005, cash flows from financing activities from sales of Class B Shares to our partner agents was $1.5 million. The increase from 2005 to 2006 resulted from an increased number of partner agents, each of which is contractually obligated to purchase a set amount of Class B Shares over a negotiated period of time. The decrease from 2006 to 2007 resulted from a substantial number of our partner agents having fulfilled their contractual obligation to purchase Class B Shares during 2006 which was partially offset by our signing two new partner agents in 2007.

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 based on prices obtained from independent third-party pricing services. 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

36

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

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 December 31, 2007 was $177.7 million, compared to amortized cost of $176.6 million. This amount compares to the aggregate fair market value of our fixed maturity investments of $144.5 million compared to amortized cost of $145.6 million, as of December 31, 2006.

We have concluded that none of the available-for-sale securities with unrealized losses at December 31, 2007 has experienced an “other-than-temporary” impairment. We considered our intent and ability to hold the securities for a sufficient time to allow for a recovery in value in this determination. As of December 31, 2007, we held $4.5 million in fair value, $5.0 million in book value, of investments with sub-prime exposure, all of which were rated “A” or better by established rating agencies.

Liquidity and Capital Resources

Liquidity Requirements of Specialty Underwriters’ Alliance, Inc. We are organized as a holding company and, as such, have no direct operations of our own. Our assets consist primarily of investments in our subsidiary, through which we conduct all of our insurance operations. As a holding company, we have continuing funding needs for general corporate expenses, taxes, the payment of principal and interest on future borrowings, if any, and the payment of other obligations as they come due. 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 which limit and restrict the payment of dividends to us by our insurance subsidiary.

Liquidity. SUA generates liquidity primarily by collecting and investing earned premiums in advance of paying claims. We believe that SUA maintains sufficient liquidity to pay claims and operating expenses, as well as meet commitments in the event of unforeseen events such as reserve deficiencies, inadequate premium rates or reinsurer insolvencies. The principal sources of liquidity are existing cash and short-term investments. Cash and short-term investments were $52.6 million at December 31, 2007, a $30.7 million increase over December 31, 2006.

The liquidity requirements of SUA relate primarily to the liabilities associated with its products and its operating costs as well as the payments of dividends, if any, and taxes to us. Historically cash flows from earned premiums and investment income have provided sufficient funds to meet these requirements without requiring the sale of investments. If our cash flows change from our historical patterns, for example, as a result of a decrease in earned premiums or an increase in claims paid or operating expenses, we may be required to sell securities before their maturity, possibly at a loss. SUA generally holds a significant amount of highly liquid, short-term investments to meet its liquidity needs. Funds received in excess of SUA’s liquidity requirements are generally invested in additional marketable securities. The ability of our operating subsidiary to pay dividends or make other distributions to stockholders is subject to statutory and regulatory restrictions under Illinois law, including restrictions imposed as a matter of administrative policy, which are applicable generally to any insurance company in its state of domicile that limit such payments or distributions without prior approval by regulatory authorities. For information regarding restrictions on the payment of dividends by SUA, see the discussion under the heading “ITEM 1. BUSINESS — Insurance Regulation” in PART I of this annual report.

Capital Requirements of SUA Insurance Company. While insurance regulation differs by location, each jurisdiction requires that minimum levels of capital be maintained in order to write insurance business. Factors that affect capital requirements generally include premium volume, the extent and nature of loss and loss adjustment expense reserves, the type and form of insurance business underwritten and the availability of reinsurance protection from adequately rated reinsurers on acceptable terms. SUA is required to maintain certain minimum levels of capital and risk-based capital, the calculation of which includes numerous factors as specified by the respective insurance regulatory authorities and the related insurance regulations. We have capitalized our insurance operations in excess of the minimum regulatory requirements so that we may maintain adequate financial ratings. Our current level of capital is sufficient, but would need to be augmented to further expand our business strategy, enter new business lines, and manage our expected growth or to deal with higher than expected expenses or poorer than expected results.

37

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Off Balance Sheet Arrangements

None.

Contractual Obligations

The following table of contractual obligations includes information with respect to our known contractual obligations as of December 31, 2007:

	Payments Due by Period
			Less Than		1 to 3		3 to 5		More Than
	Total		1 Year		Years		Years		5 Years
	(dollars in thousands)
Long-Term Debt Obligations	$	-	$	-	$	-	$	-	$	-
Capital Lease Obligations		-		-		-		-		-
Operating Lease Obligations		8,405		555		1,217		1,288		5,345
Purchase Obligations		-		-		-		-		-
Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP		-		-		-		-		-
Sub Total	$	8,405	$	555	$	1,217	$	1,288	$	5,345
Loss & Loss Adjustment Expense Reserves — SUA Insurance Company		121,207		32,795		36,156		16,454		32,801
Loss & Loss Adjustment Expense Reserves — Potomac Insurance Company of Illinois(1)		63,529		17,085		24,609		13,502		8,334
Total Loss & Loss Adjustment Expense Reserves	$	184,736	$	49,880	$	60,765	$	29,956	$	41,135
Total Contractual Obligations	$	193,141	$	50,435	$	61,982	$	31,244	$	46,480

(1) On November 23, 2004, Specialty Underwriters’ Alliance, Inc. acquired Potomac and subsequently renamed the company SUA Insurance Company. Prior to the acquisition, Potomac entered into a transfer and assumption agreement with OneBeacon, whereby all of its liabilities, including all direct liabilities under existing insurance policies, were ceded to and assumed by OneBeacon. We will not experience any gains or losses with respect to such legacy policies unless OneBeacon fails to honor its reinsurance obligation. To date, OneBeacon continues to handle, adjudicate and pay all claims that have arisen from such legacy policies.

For purposes of this table:

“Long-Term Debt Obligation” means: (i) a payment obligation (included in the Company’s consolidated financial statements) under long-term borrowings referenced in FASB Statement of Financial Accounting Standards No. 47, “Disclosure of Long-Term Obligations,” (March 1981), as may be modified or supplemented, and (ii) interest payment obligations related to such long-term borrowings.

“Capital Lease Obligation” means a payment obligation under a lease classified as a capital lease pursuant to FASB Statement of Financial Accounting Standards No. 13, “Accounting for Leases,” (November 1976), as may be modified or supplemented.

“Operating Lease Obligation” means a payment obligation under a lease classified as an operating lease and disclosed pursuant to FASB Statement of Financial Accounting Standards No. 13, “Accounting for Leases,” (November 1976), as may be modified or supplemented. All operating lease obligations are for facilities.

“Purchase Obligation” means an agreement to purchase goods or services that is enforceable and legally binding on the registrant that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. This table does not include our accounts payable reflected in our audited consolidated balance sheet data that are included in our consolidated financial statements contained elsewhere in this report.

“Loss & Loss Adjustment Expense Reserves” do not have a contractual maturity date and as discussed herein are subject to change due to a wide variety of factors and cannot be predicted with certainty. Actual future loss payments may differ materially from the current estimates shown in the table above.

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2007 Form 10-K
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Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our financial statements, which have been prepared in accordance with generally accepted accounting principals in the United States of America, or GAAP. The financial statements presented herein include all adjustments considered necessary by management to fairly present the financial position, results of operations and cash flows of the Company. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Management believes that the following critical accounting policies affect our more significant estimates used in the preparation of our financial statements.

Premium Income

Net premiums written consist of direct premiums written less ceded premiums. The components of net premiums written are recognized as revenue over the period that coverage is provided. When premium rates change, the effect of the change will not immediately affect earned premium. Rather, the increase or decrease will be recognized ratably over the period of coverage which is twelve months. Unearned premiums and prepaid reinsurance premiums, which are recorded on the balance sheets, will represent that portion of premiums written that are applicable to the unexpired terms of policies in force. Certain policies are subject to adjustment based on changes in risk exposure over the period of coverage, such as payroll increases/decreases and changes in risk classifications and therefore direct written premiums are estimated during the policies term until final audit of the policy occurs.

Investments

We have classified all fixed maturity investment securities upon acquisition as available-for-sale securities. Available-for-sale fixed maturities securities are reported at fair value. Short-term investments are recorded at cost.

Short term securities and cash equivalents are valued at their book value. Other fixed maturities are valued at prices obtained from independent third-party pricing services, and as a result, there is no management involvement in determining fair value. The independent third-party services employ various models that take into consideration such factors as recent sales, the credit rating of the issuer, duration of the security, yields on comparably rated publicly traded securities and risk-free yield curves to estimate the value of these investments. Unrealized appreciation or depreciation of available-for-sale investments carried at fair value are excluded from net income and credited or charged directly to accumulated other comprehensive income, a separate component of stockholders’ equity. The change in unrealized appreciation or depreciation is reported as a component of other comprehensive income.

We monitor the difference between our cost basis and the fair value of our investments to determine, when the fair value is below cost, if this is other than a temporary impairment. Factors considered in evaluating whether a decline in value is other than temporary include: 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 our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery. Other than temporary impairment charges on investments are recorded based on the fair value of the investments at the balance sheet date, and are included in net realized gains and losses.

Acquisition Expenses

We establish an asset for certain acquisition expenses such as up-front commissions, premium taxes and other variable costs incurred in connection with writing our lines of business. These acquisition expenses are deferred and amortized over the period of coverage of the policies written which is 12 months. Acquisition expenses that do not vary with premium production are expensed immediately. We assess the recoverability of deferred acquisition expenses which are limited to the estimated amounts recoverable from future income after providing for losses and expenses included in future income that are expected to be incurred, based upon historical and current experience. If such costs are estimated to be unrecoverable, they will be expensed. Judgments as to ultimate recoverability of such

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2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

deferred acquisition expenses is highly dependent on future estimates of loss costs associated with unearned premium. The process of establishing loss reserves is complex and judgmental, as it must take into consideration many variables that are subject to the outcome of future events. There have been no historical changes in the recoverability of our deferred acquisition expenses. We do not believe that any reasonably likely change in our loss development will affect the recoverability of acquisition expenses. See the heading “Losses, Claims and Settlement Expenses” below.

At December 31, 2007, acquisition expenses were fully recoverable.

Intangible Assets

We recorded an indefinite-life intangible asset for the value of insurance licenses acquired in connection with the acquisition of Potomac. Indefinite-lived intangible assets are not subject to amortization. If the aggregate fair value of insurance licenses declines to an amount less than their book value, impairment will be recorded as a realized loss.

Losses, Claims and Settlement Expenses

Our most significant estimates relate to our reserves for property and casualty losses and loss adjustment expenses. We establish reserves for the estimated total unpaid cost of losses and loss adjustment expenses for events that have already occurred. These reserves reflect our best estimates of the total cost of claims that were reported to us, but not yet paid, referred to as case reserves, and the cost of claims “incurred but not yet reported” to us, referred to as IBNR Reserves.

The estimate of these reserves is subjective and complex and requires us to make estimates about the future payout of claims, which is inherently uncertain. We establish and adjust reserves based on our knowledge of the circumstances and facts of claims. Upon notice of a claim, we establish a case reserve for losses based on the claims information reported to us at that time. Subsequently, we conduct an investigation of each reported claim, which allows us to more fully understand the factors contributing to the loss and our potential exposure. This investigation may extend over a long period of time. As our investigations of claims develop and as our claims personnel identify trends in claims activity, we refine and adjust our estimates of case reserves. When we establish reserves, we do so based on our knowledge of the circumstances and claim facts. We continually review our reserves, and as experience develops and additional information becomes known, we adjust the reserves. Such adjustments are recorded through operations in the period identified. To evaluate and refine our overall reserving process, we track and monitor all claims until they are settled and paid in full and all salvage and subrogation claims are resolved.

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Loss and LAE reserves, by line of business at December 31, 2007, 2006 and 2005 for our insurance operations were as follows:

	December 31, 2007						December 31, 2006						December 31, 2005
	Case		IBNR		Total		Case		IBNR		Total		Case		IBNR		Total
	(dollars in thousands)
Gross Reserves
Workers’ compensation	$	25,049	$	44,797	$	69,546	$	13,026	$	30,922	$	43,948	$	5,349	$	7,596	$	12,945
General liability		6,054		20,318		26,372		1,173		8,513		9,686		29		3,151		3,180
Auto liability		11,459		12,233		23,692		4,750		3,998		8,748		894		730		1,624
Other		676		621		1,297		2,613		4,613		7,226		206		179		385
SUA Insurance Company (SUA)		43,238		77,969		121,207		21,562		48,046		69,608		6,478		11,656		18,134
Potomac Insurance Company of Illinois(1)		48,187		15,342		63,529		59,132		12,460		71,592		70,409		16,327		86,736
Total gross reported loss and loss adjustment expense reserves		91,425		93,311		184,736		80,694		60,506		141,200		76,887		27,983		104,870
Ceded Reserves
SUA ceded reinsurance recoverables		417		13,218		13,635		2,221		7,163		9,384		774		1,487		2,261
Potomac Insurance Company of Illinois(1)		48,187		15,342		63,529		59,132		12,460		71,592		70,409		16,327		86,736
Total ceded loss and loss adjustment expense reserves		48,604		28,560		77,164		61,353		19,623		80,976		71,183		17,814		88,997
Total net loss and loss adjustment expense reserves	$	42,821	$	64,751	$	107,572	$	19,341	$	40,883	$	60,224	$	5,704	$	10,169	$	15,873

(1) On November 23, 2004, Specialty Underwriters’ Alliance, Inc. acquired Potomac, and subsequently renamed the company SUA Insurance Company. Prior to the acquisition, Potomac entered into a transfer and assumption agreement with OneBeacon, whereby all of its liabilities, including all direct liabilities under existing insurance policies, were ceded to and assumed by OneBeacon. We will not experience any gains or losses with respect to such legacy policies unless OneBeacon fails to honor its reinsurance obligation. To date, OneBeacon continues to handle, adjudicate and pay all claims that have arisen from such legacy policies.

Workers’ compensation

Workers’ compensation is generally considered a long-tail coverage, as it takes a relatively long period of time to finalize claims from a given accident year even though most claims are reported early. While certain characteristics, such as initial medical treatment or temporary wage replacement for the injured worker are known early on, some others are discovered over the course of several years, such as permanent partial injuries. In addition, some characteristics can run as long as the injured worker’s life, such as permanent disability benefits and ongoing medical care.

Examples of reserving factors for workers’ compensation include:

•     mortality trends of injured workers with lifetime benefits and medical treatment or dependents entitled to survivor benefits;

•     claim handling philosophies;

•     state workers’ compensation benefit laws and reform initiatives;

•     mix between indemnity and medical-type claims;

•     future wage and/or medical inflation; and

•     costs of medical treatments, including prescription drugs and underlying fee schedules, and use of preferred provider networks and other medical cost containment practices.

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2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

General liability

Our general liability product line is considered a long-tail coverage, as it takes a relatively long period of time to finalize claims from a given accident year. General liability reserves are comprised primarily of bodily injury and, to a lesser extent, property damage. Bodily injury claims arise from physical injury as a result of the policyholder’s legal obligation arising from non-intentional acts such as negligence, subject to the insurance policy provisions. In some cases the damages can include future wage loss (which is a function of future earnings power and wage inflation) and future medical treatment. Property damage claims arise from damages to the claimant’s private property arising from the policyholder’s legal obligation for non-intentional acts. In most cases, property damage losses are a function of costs as of the loss date, or soon thereafter.

Examples of reserving factors for general liability include:

•     claim handling philosophies;

•     policy provisions or court interpretations of such provisions;

•     legal environment, such as theories of liability, amount of jury awards, propensity to sue, statutes of limitations, tort law, and settlement patterns;

•     large losses resulting from individual accounts or unique occurrences;

•     subrogation potential; and

•     cost and type of medical treatments.

Commercial automobile liability

The commercial automobile product line is mostly liability coverage which is primarily long-tail coverage. Claims relating to physical damage to the automobile (property) and property damage (liability) are easier to estimate and are resolved more quickly. Claims relating to bodily injury take longer to formalize and are more difficult to estimate.

Examples of reserving factors for commercial automobile liability include:

•     claim handling philosophies;

•     policy provisions or court interpretations of such provisions;

•     legal environment, such as theories of liability, amount of jury awards, propensity to sue, statutes of limitations, tort law, and settlement patterns;

•     large losses resulting from individual accounts or unique occurrences;

•     subrogation potential; and

•     cost and type of medical treatments.

Reserving Methodologies

Instead of any single method, we use a combination of various actuarial and analytical methods to estimate the amount of reserves for each line of business on the basis of historical, statistical and industry information. The primary methods that we utilize to determine our ultimate losses and loss adjustment expenses include:

•     Paid loss development methods use historical loss payments over discrete periods of time to estimate losses. Historical paid loss development methods assume that the ratio of losses paid to ultimate loss in one period to the ratio of losses paid to ultimate loss in earlier periods will remain reasonably consistent.

•     Incurred loss development methods assume that the ratio of losses in one period to losses in earlier periods will remain reasonably consistent in the future.

•     Expected loss ratio methods are based on the assumption that ultimate losses vary proportionately to premiums. Expected loss ratios are typically developed based upon the information used in pricing, such

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2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

as certain industry information and bureau analysis, and are multiplied by the total amount of premiums earned to calculate ultimate losses.

•     Bornhuetter-Ferguson paid and incurred loss development methods combine the expected loss ratio method with the traditional historical paid and incurred loss development methods.

Because we have a limited operating history, and thus have limited historical loss development data, we rely on methodologies that focus on utilizing industry information and pricing expectations, such as the Bornhuetter-Ferguson methods and the expected loss ratio methods. Methods that utilize historical data to project ultimate losses, such as the loss development methods, are calculated and reviewed but are less relied upon. IBNR reserves represent our best estimate of ultimate losses after subtracting case incurred loss and loss adjustment expenses.

Management meets with its actuaries and evaluates the methods and factors previously discussed affecting each line of business in determining its reserves. Management uses its discretion in considering these methods and factors without discretely measuring the impact of any factor. We do not believe that it is reasonably likely that any change or changes in any factor or combination of factors would result in a material adjustment to our reserves.

The estimation of ceded reinsurance loss and loss adjustment expense reserves will be subject to the same factors as the estimation of insurance loss and loss adjustment expense reserves.

The following table shows for SUA the recorded reserves and the high and low ends of the range of reasonable loss and LAE reserve estimates at December 31, 2007.

	Net Reserves
	Low		Carried		High
	(dollars in thousands)
Range of Estimates		97,229				122,591
Reserves				107,572

We determined the range of reserve estimates by reviewing various actuarial methods as well as testing the possible ultimate losses by applying simulated expected future loss development patterns. The probability that ultimate losses will fall outside of the ranges of estimates by line of business is higher for each line of business individually than it is for the sum of the estimates for all lines taken together. Although we believe our reserves are reasonably stated, ultimate losses may deviate, perhaps materially, from the recorded reserve amounts and could be above the high end of the range of actuarial projections. This is because ranges are developed based on known events as of the valuation date, whereas the ultimate disposition of losses is subject to the outcome of events and circumstances that may be unknown as of the valuation date.

Deferred Income Taxes

We have established a valuation allowance for the portion of any deferred tax asset that management believes may not be realized. The establishment and ongoing evaluation of a valuation allowance for deferred tax assets requires the use of judgment and estimates. Actual results could differ materially from those estimates.

Recent Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting for uncertainty in income tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of an income tax position taken, or expected to be taken, in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and additional disclosures. The Company’s adoption of FIN 48 on January 1, 2007, did not require an adjustment to the liability for unrecognized tax benefits.

In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements,” or FAS 157. FAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value pronouncements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within the year of adoption. Based on the Company’s current use of

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2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

fair value measurements, the Company believes that the implementation of FAS 157 will have no material impact on its financial statements.

In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” or FAS 159. FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. FAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within the year of adoption. The Company believes that the implementation of FAS 159 will have no material impact on its financial statements.

Item 7A. 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 expect that changes in investment values attributable to interest rate changes are mitigated by corresponding and partially offsetting changes in the economic value of our insurance reserves to the extent we have established such loss reserves. We monitor this exposure through periodic reviews of our consolidated asset and liability positions.

The table below summarizes the estimated effects of hypothetical increases and decreases in market interest rates on our fixed maturity portfolio as of December 31, 2007:

					Estimated Fair		After Tax
			Assumed Change in		Value After		Increase
	Fair Value at		Relevant		Change in		(Decrease) in
	12/31/07		Interest Rate		Interest Rate		Carrying Value
			(dollars in thousands)
Total Investments	$	229,387		100 bp decrease	$	235,287	$	5,900
				50 bp decrease	$	232,412	$	3,025
				50 bp increase	$	226,233	$	(3,154)
				100 bp increase	$	222,993	$	(6,394)

The average duration of our fixed maturity investments at December 31, 2007 was approximately 2.75 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 seek to earn competitive relative returns while investing in a diversified portfolio of securities of high credit quality issuers and to limit the amount of credit exposure to any one issuer.

The portfolio of fixed maturities consisted solely of high quality bonds at December 31, 2007. The following table summarizes bond ratings at carrying value:

	As of December 31, 2007
			Percent of
Bond Ratings	Amount		Portfolio
	(dollars in thousands)
AAA rated and U.S. Government and affiliated agency securities	$	114,683		64.6%
AA rated		21,188		11.9%
A rated		39,671		22.3%
BBB Rated		2,193		1.2%
Total	$	177,735		100.0%

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2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

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

Item 8.   Financial Statements and Supplementary Data

The information required by this item is set forth beginning on page F-1 of this Annual Report on Form 10-K.

Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.   Controls And Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures. Disclosure controls and procedures are the 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 annual 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 controls over financial reporting that occurred during the quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, these internal controls.

Management’s Report on Internal Control Over Financial Reporting. Our management, under the supervision of our principal executive officer and principal financial officer, is also responsible for establishing and maintaining adequate internal control over financial reporting as defined in SEC Rules 13a-15(f) and 15d-15(f). Management evaluated the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management, including our principal executive officer and principal financial officer, has concluded that the design and operation of our internal controls over financial reporting are effective as of December 31, 2007.

The effectiveness of our internal control over financial reporting as of December 31, 2007, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included in Item 8.

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 controls over financial reporting are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control and internal control over financial reporting systems are met.

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2007 Form 10-K
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Item 9B.   Other Information

None.

PART III

Item 10.   Directors, Executive Officers and Corporate Governance

The information required by Item 10 as to our executive officers and our code of business conduct and ethics is disclosed in Part I, Item I under the headings “Executive Officers of the Registrant” and “Overview,” respectively. The information required by Item 10 as to our directors, compliance with section 16 of the Exchange Act, and corporate governance is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A. We are not aware of any family relationships between any of our directors or executive officers.

Item 11.   Executive Compensation

The information required by Item 11 is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A.

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by Item 12 regarding security ownership of certain beneficial owners and executive officers and directors is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A.

Item 13   Certain Relationships and Related Transactions, and Director Independence

The information required by Item 13 is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A.

Item 14.   Principal Accounting Fees and Services

The information required by Item 14 is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A.

PART IV

Item 15.   Exhibits and Financial Statement Schedules

Financial Statements and Financial Statement Schedules

The consolidated financial statements and financial statement schedules of Specialty Underwriters’ Alliance, Inc. required by Part II, Item 8, are included in Part IV of this report. See Index to Consolidated Financial Statements and Financial Statement Schedules beginning on page F-1 below.

Exhibits

Exhibit
Number			Description
	3	.1	Amended and Restated Certificate of Incorporation dated May 19, 2005 (Incorporated by reference to Exhibit 3.1, filed with Specialty Underwriters’ Alliance. Inc.’s Amendment No. 1 to the Registration Statement on Form S-1/A filed on May 31, 2005 (File No. 333-124263))

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Specialty Underwriters’ Alliance, Inc.

3	.2	Amended and Restated Bylaws dated October 29, 2007 (Incorporated by reference to Exhibit 3.1, filed with Specialty Underwriters’ Alliance, Inc.’s Quarterly Report on Form 10-Q for the 3rd Quarter ended September 30, 2007, filed on November 2, 2007
10	.1+	2004 Stock Option Plan of Specialty Underwrites’ Alliance, Inc. (as Amended and Restated as of November 11, 2004) (Incorporated by reference to Exhibit 10.1.5, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 6 to the Registration Statement on Form S-1/A filed on November 12, 2004 (File No. 333-117722))
10	.2+	Amended and Restated Employment Agreement, dated November 11, 2004, between the Registrant and Courtney C. Smith (Incorporated by reference to Exhibit 10.1.8, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 6 to the Registration Statement on Form S-1/A filed on November 12, 2004 (File No. 333-117722))
10	.3+	Amended and Restated Employment Agreement, dated November 11, 2004, between the Registrant and Peter E. Jokiel (Incorporated by reference to Exhibit 10.1.9, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 6 to the Registration Statement on Form S-1/A filed on November 12, 2004 (File No. 333-117722))
10	.4+	Amended and Restated Employment Agreement, dated November 11, 2004, between the Registrant and William S. Loder (Incorporated by reference to Exhibit 10.1.10, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 6 to the Registration Statement on Form S-1/A filed on November 12, 2004 (File No. 333-117722))
10	.5+	Amended and Restated Employment Agreement, dated November 11, 2004, between the Registrant and Gary J. Ferguson (Incorporated by reference to Exhibit 10.1.11, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 6 to the Registration Statement on Form S-1/A filed on November 12, 2004 (File No. 333-117722))
10	.6	Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated May 18, 2004, between the Registrant and AEON Insurance Group, Inc. (Incorporated by reference to Exhibit 10.1.15, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 2 to the Registration Statement on Form S-1/A filed on October 20, 2004 (File No. 333-117722))
10	.7	Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated May 1, 2004, between the Registrant and American Team Managers (Incorporated by reference to Exhibit 10.1.17, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 2 to the Registration Statement on Form S-1/A filed on October 20, 2004 (File No. 333-117722))
10	.8	Software License Maintenance and Support Agreement, dated May 20, 2004, between the Registrant and ISO Strategic Solutions, Inc. (Incorporated by reference to Exhibit 10.1.21, filed with Specialty Underwriters’ Alliance, Inc.’s Registration Statement on Form S-1 (File No. 333-117722))
10	.9	Master Software Sales and Services, Agreement (Americas), dated May 19, 2004, between the Registrant and SunGard Sherwood Systems (US), Inc. (Incorporated by reference to Exhibit 10.1.22, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 1 to the Registration Statement on Form S-1/A filed on September 17, 2004 (File No. 333-117722))
10	.10	Side letter, dated September 30, 2004, between the Registrant and AEON Insurance Group, Inc. (Incorporated by reference to Exhibit 10.1.25, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 2 to the Registration Statement on Form S-1/A filed on October 20, 2004 (File No. 333-117722))
10	.11	Promissory Note, dated September 30, 2004, in favor of the Registrant by AEON Insurance Group, Inc. (Incorporated by reference to Exhibit 10.1.26, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 2 to the Registration Statement on Form S-1/A filed on October 20, 2004 (File No. 333-117722))
10	.12	Side letter, dated August 16, 2004, between the Registrant and American Team Managers (Incorporated by reference to Exhibit 10.1.27, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 2 to the Registration Statement on Form S-1/A filed on October 20, 2004 (File No. 333-117722))
10	.13	Promissory Note, dated August 16, 2004, in favor of the Registrant by American Team Managers (Incorporated by reference to Exhibit 10.1.28, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 2 to the Registration Statement on Form S-1/A filed on October 20, 2004 (File No. 333-117722))
10	.14	Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated November 3, 2004, between the Registrant and Risk Transfer Holdings, Inc. (Incorporated by reference to Exhibit 10.1.32, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 5 to the Registration Statement on Form S-1/A filed on November 10, 2004 (File No. 333-117722))
10	.15	Side Letter, dated November 3, 2004, between the Registrant and Risk Transfer Holdings, Inc. Amendment No. 5 to the (Incorporated by reference to Exhibit 10.1.34, filed with Specialty Underwriters’ Alliance, Inc.’s Registration Statement on Form S-1/A filed on November 10, 2004 (File No. 333-117722))
10	.16	Promissory Note, dated November 3, 2004, in favor of the Registrant by Risk Transfer Holdings, Inc. (Incorporated by reference to Exhibit 10.1.35, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 5 to the Registration Statement on Form S-1/A filed on November 10, 2004 (File No. 333-117722))
10	.17	First Amendment to Software License Maintenance and Support Agreement, dated October 13, 2004, between the Registrant and ISO Strategic Solutions, Inc. (Incorporated by reference to Exhibit 10.1.36, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 5 to the Registration Statement on Form S-1/A filed on November 10, 2004 (File No. 333-117722))
10	.18	Second Amendment to Software License Maintenance and Support Agreement, dated November 9, 2004, between the Registrant and ISO Strategic Solutions, Inc. (Incorporated by reference to Exhibit 10.1.37, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 5 to the Registration Statement on Form S-1/A filed on November 10, 2004 (File No. 333-117722))
10	.19	Form of Voting Agreement, by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (Incorporated by reference to Exhibit 10.1.40, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 6 to the Registration Statement on Form S-1/A filled on November 12, 2004 (File No. 333-117722))

47

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

10	.20	Form of Stock Purchase Agreement, by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (Incorporated by reference to Exhibit 10.1.42, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 6 to the Registration Statement on Form S-1/A filled on November 12, 2004 (File No. 333-117722))
10	.21	Third Amendment to the Software License and Maintenance and Support Agreement by and between ISO Strategic Solutions, Inc. and the Registrant (Incorporated by reference to Exhibit 10.1.43, filed with Specialty Underwriters’ Alliance, Inc.’s Amendment No. 6 to the Registration Statement on Form S-1/A filed on November 12, 2004 (File No. 333-117722))
10	.22	Lease Agreement, dated February 7, 2005, between SUA Insurance Company, the wholly owned operating subsidiary of the Registrant, and 222 South Riverside Property LLC (Incorporated by reference to Exhibit 10.1.40, filed with Specialty Underwriters’ Alliance, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004 filed on March 31, 2005)
10	.23	Amendment No. 1 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated January 17, 2005, between the Registrant and American Team Managers (Incorporated by reference to Exhibit 10.1.41, filed with Specialty Underwriters’ Alliance, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004 filed on March 31, 2005)
10	.24*	First Amendment to Lease, dated May 5, 2005, between SUA Insurance Company, the wholly owned operating subsidiary of the Registrant, and 222 South Riverside Property, LLC
10	.25	Securities Purchase Agreement, dated May 11, 2005, between the Registrant and Specialty Risk Solutions, LLC. (Incorporated by reference to Exhibit 10.1.43 with Specialty Underwriters’ Alliance. Inc.’s Amendment No. 1 to the Registration Statement on Form S-1/A filed on May 31, 2005 (File No. 333-124263))
10	.26*	Amended and Restated Securities Purchase Agreement, dated June 10, 2005, between the Registrant and Risk Transfer Holdings, Inc.
10	.27*	Amendment No. 1 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated June 30, 2005, between the Registrant and Risk Transfer Holdings, Inc.
10	.28*	Amended and Restated Securities Purchase Agreement, dated September 8, 2005, between the Registrant and American Team Managers
10	.29*	Amended and Restated Securities Purchase Agreement, dated September 28, 2005, between the Registrant and AEON Insurance Group, Inc.
10	.30	Amendment No. 2 to Specialty Underwrites’ Alliance, Inc. Partner Agent Program Agreement, dated March 20, 2006, between Registrant and American Team Managers (Incorporated by reference to Exhibit 10.1.1 with Specialty Underwriters’ Alliance. Inc.’s Quarterly Report on Form 10-Q for the 1st Quarter ended March 31, 2006 filed on May 9, 2006)
10	.31*	Second Amendment to Lease, dated April 24, 2006, between SUA Insurance Company, the wholly owned operating subsidiary of the Registrant, and 222 South Riverside Property, LLC
10	.32	Amendment No. 1 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated June 10, 2006, between the Registrant and AEON Insurance Group, Inc (Incorporated by reference to Exhibit 99.2 with Specialty Underwriters’ Alliance. Inc.’s Quarterly Report on Form 10-Q for the 2nd Quarter ended June 30, 2006 filed on August 4, 2006)
10	.33	Amendment No. 2 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated June 12, 2006, between the Registrant and Risk Transfer Holdings, Inc. (Incorporated by reference to Exhibit 99.3 with Specialty Underwriters’ Alliance. Inc.’s Quarterly Report on Form 10-Q for the 2nd Quarter ended June 30, 2006 filed on August 4, 2006)
10	.34	First Amendment to the Amended and Restated Securities Purchase Agreement, dated July 16, 2006, between Registrant and AEON Insurance Group, Inc. (Incorporated by reference to Exhibit 99.3 with Specialty Underwriters’ Alliance. Inc.’s Quarterly Report on Form 10-Q for the 3rd Quarter ended September 30, 2006 filed on November 6, 2006)
10	.35	Amendment No. 3 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated July 18, 2006, between the Registrant and American Team Managers (Incorporated by reference to Exhibit 99.4 with Specialty Underwriters’ Alliance. Inc.’s Quarterly Report on Form 10-Q for the 3rd Quarter ended September 30, 2006 filed on November 6, 2006)
10	.36	First Amendment to the Amended and Restated Securities Purchase Agreement, dated September 21, 2006, between the Registrant and Risk Transfer Holdings, Inc. (Incorporated by reference to Exhibit 99.7 with Specialty Underwriters’ Alliance. Inc.’s Quarterly Report on Form 10-Q for the 3rd Quarter ended September 30, 2006 filed on November 6, 2006)
10	.37	First Amendment to the Amended and Restated Securities Purchase Agreement, dated September 25, 2006, between the Registrant and American Team Managers (Incorporated by reference to Exhibit 99.8 with Specialty Underwriters’ Alliance. Inc.’s Quarterly Report on Form 10-Q for the 3rd Quarter ended September 30, 2006 filed on November 6, 2006)
10	.38+	2007 Stock Incentive Plan of Specialty Underwriters’ Alliance, Inc., dated March 31, 2007(Incorporated by reference to Appendix A with Specialty Underwriters’ Alliance, Inc.’s Definitive Proxy Statement on Form DEF 14A for the year ended December 31, 2006 filed on April 2, 2007)
10	.39+	Description of 2007 Officer Bonus Program for the Registrant (Incorporated by reference to Exhibit 99.1 with Specialty Underwriters’ Alliance, Inc.’s Current Report on Form 8-K filed on May 18, 2007)
10	.40+	Transition Agreement, dated October 26, 2007, between the Registrant and William Loder (Incorporated by reference to Exhibit 10.1 with Specialty Underwriters’ Alliance, Inc.’s Current Report on Form 8-K filed on October 31, 2007)
10	.41	Amendment No. 4 to the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement, dated October 29, 2007, between the Registrant and American Team Managers (Incorporated by reference to Exhibit 10.1 with Specialty Underwriters’ Alliance, Inc.’s Quarterly Report on Form 10-Q for the 3rd Quarter ended September 30, 2007 filed on November 2, 2007)

48

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

10	.42+	Form of Restricted Stock Agreement for Directors under the 2007 Stock Incentive Plan of the Registrant (Incorporated by reference to Exhibit 10.4 with Specialty Underwriters’ Alliance, Inc.’s Quarterly Report on Form 10-Q for the 3rd Quarter ended September 30, 2007 filed on November 2, 2007)
10	.43+	Form of Restricted Stock Agreement for Employees under the 2007 Stock Incentive Plan of the Registrant (Incorporated by reference to Exhibit 10.4 with Specialty Underwriters’ Alliance, Inc.’s Quarterly Report on Form 10-Q for the 3rd Quarter ended September 30, 2007 filed on November 2, 2007)
10	.44+	Form of Option Agreement-Non - Qualified Stock Option under the 2007 Stock Incentive Plan of the Registrant (Incorporated by reference to Exhibit 10.4 with Specialty Underwriters’ Alliance, Inc.’s Quarterly Report on Form 10-Q for the 3rd Quarter ended September 30, 2007 filed on November 2, 2007)
10	.45+	Form of Option Agreement - Incentive Stock Option under the 2007 Stock Incentive Plan of the Registrant (Incorporated by reference to Exhibit 10.4 with Specialty Underwriters’ Alliance, Inc.’s Quarterly Report on Form 10-Q for the 3rd Quarter ended September 30, 2007 filed on November 2, 2007)
10	.46+*	Form of Deferred Stock Award Agreement for Employees under the 2007 Stock Incentive Plan of the Registrant
14	.1	Code of Ethics of Specialty Underwriters’ Alliance, Inc. (Incorporated by reference to Exhibit 14.1 with Specialty Underwriters’ Alliance, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004 filed on March 31, 2005)
21	.1	Subsidiaries of the Registrant (Incorporated by reference to Exhibit 21.1 with Specialty Underwriters’ Alliance, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004 filed on March 31, 2005)
23	.1*	Consent of PricewaterhouseCoopers LLP with respect to Registrant.
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

*	Filed herewith.
+	Indicates a management contract or compensatory plan or arrangement.

49

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Index To Audited Consolidated Financial Statements And Schedules

	Page No.
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets of Specialty Underwriters’ Alliance, Inc. as of December 31, 2007 and December 31, 2006		F-3
Consolidated Statements of Operations and Comprehensive Income (Loss) of Specialty Underwriters’ Alliance, Inc. for the years ended December 31, 2007, December 31, 2006 and December 31, 2005		F-4
Consolidated Statement of Stockholders’ Equity of Specialty Underwriters’ Alliance, Inc. as of December 31, 2007 and December 31, 2006		F-5
Consolidated Statements of Cash Flows for Specialty Underwriters’ Alliance, Inc. for the years ended December 31, 2007, December 31, 2006, and December 31, 2005		F-6
Notes to Consolidated Financial Statements		F-7
Financial Statement Schedules
Schedule I — Specialty Underwriters’ Alliance, Inc. — Summary of Investments Other Than Investments in Related Parties as of December 31, 2007		F-21
Schedule II — Specialty Underwriters’ Alliance, Inc. — Condensed Financial Information of Registrant as of December 31, 2007 and December 31, 2006 or for the years ended December 31, 2007, December 31, 2006 and December 31, 2005, as appropriate		F-22
Schedule III — Specialty Underwriters’ Alliance, Inc. — Supplementary Insurance Information for the years ended December 31, 2007, December 31, 2006 and December 31, 2005		F-25
Schedule IV — Specialty Underwriters’ Alliance, Inc. — Reinsurance for the years ended December 31, 2007, December 31, 2006, and December 31, 2005		F-26
Schedule V — Specialty Underwriters’ Alliance, Inc. — Valuation and Qualifying Accounts of Registrant for the years ended December 31, 2006, December 31, 2006 and December 31, 2005		F-27
Schedule VI — SUA Insurance Company — Supplemental Information Concerning Property and Casualty Insurance Operations for the years ended December 31, 2007, December 31, 2006 and December 31, 2005		F-28
Amendment to Lease
Amended and Restated Securities Purchase Agreement
Amendment to the partner Agent Program Agreement
Amended and Restated Securities Purchase Agreement
Amended and Restated Securities Purchase Agreement
Second Amendment to Lease
Form of Deferred Stock Award Agreement
Consent
Certification
Certification
Certification
Certification

F-1

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Specialty Underwriters’ Alliance, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Specialty Underwriters’ Alliance, Inc. and its subsidiary at December 31, 2007 and December 31, 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in 2006.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PRICEWATERHOUSECOOPERS LLP

Chicago, Illinois

March 7, 2008

F-2

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Consolidated Balance Sheets of
Specialty Underwriters’ Alliance, Inc.
As of December 31, 2007 and 2006

	2007			2006
	(dollars in thousands)
ASSETS
Fixed maturity investments, at fair value (amortized cost: $176,592 and $145,581)	$	177,735		$	144,520
Short-term investments, at amortized cost (which approximates fair value)		51,652			19,538
Total investments	$	229,387		$	164,058
Cash		968			2,375
Insurance premiums receivable		68,887			68,310
Reinsurance recoverable on unpaid loss and loss adjustment expenses		77,204			80,976
Prepaid reinsurance premiums		631			3,577
Investment income accrued		1,909			1,566
Equipment and capitalized software at cost (less accumulated depreciation of $8,927 and $3,915)		12,796			8,643
Intangible assets		10,745			10,745
Deferred acquisition costs		17,495			19,876
Other assets		2,512			3,171
Total assets	$	422,534		$	363,297
LIABILITIES & STOCKHOLDERS’ EQUITY
LIABILITIES
Loss and loss adjustment expense reserves	$	184,736		$	141,200
Unearned insurance premiums		86,741			89,804
Insured deposit funds		12,515			10,366
Accounts payable and other liabilities		7,405			7,945
Total liabilities	$	291,397		$	249,315
Commitments (Note 8)
STOCKHOLDERS’ EQUITY
Common Stock at $.01 par value per share — authorized 30,000,000 shares; issued and outstanding 14,697,355 and 14,682,355 shares	$	147		$	147
Class B Common Stock at $.01 par value per share — authorized 2,000,000 shares; issued and outstanding 869,738 and 679,152 shares		9			7
Paid-in capital — Common Stock		129,431			128,372
Paid-in capital — Class B Common Stock		6,139			4,838
Accumulated deficit		(5,732	)		(18,321	)
Accumulated other comprehensive income (loss)		1,143			(1,061	)
Total stockholders’ equity	$	131,137		$	113,982
Total liabilities and stockholders’ equity	$	422,534		$	363,297

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

F-3

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss) of
Specialty Underwriters’ Alliance, Inc.
For the Years Ended December 31, 2007, 2006 and 2005

	2007			2006			2005
	(dollars in thousands, except earnings per share)
REVENUE
Earned insurance premiums	$	152,469		$	110,891		$	26,611
Net investment income		9,553			6,087			3,558
Net realized gain (losses)		(27	)		275			(4	)
Total revenue	$	161,995		$	117,253		$	30,165
EXPENSES
Loss and loss adjustment expenses	$	89,990		$	62,682		$	19,099
Acquisition expenses		36,601			26,032			6,207
Service company fees		-			-			8,798
Other operating expenses		22,568			19,884			14,057
Total expenses	$	149,159		$	108,598		$	48,161
Pretax income (loss)		12,836			8,655			(17,996	)
Federal income tax expense		(247	)		(247	)		-
Net income (loss)	$	12,589		$	8,408		$	(17,996	)
Net change in unrealized gains and losses for investments held, after tax		2,204			570			(1,641	)
Comprehensive income (loss)	$	14,793		$	8,978		$	(19,637	)
Earnings (loss) per share available to common stockholders (in dollars)
Basic	$	0.82		$	0.55		$	(1.22	)
Diluted	$	0.82		$	0.55		$	(1.22	)
Average shares outstanding
Basic		15,431			15,211			14,774
Diluted		15,431			15,211			14,774

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

F-4

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Consolidated Statement of Stockholders’ Equity of
Specialty Underwriters’ Alliance, Inc.
As of December 31, 2007 and 2006

	Common		Paid-in		Common		Paid-in		Retained			Acumulated			Total
	Stock Class		Capital Class		Stock Class		Capital Class		Earnings			Other Comp.			Stockholders’
	A		A		B		B		(Deficit)			Income			Equity
							(dollars in thousands)
Balance at December 31, 2005	$	147	$	127,256	$	2	$	1,770	$	(26,729	)	$	(1,631	)	$	100,815
Net income		-		-		-		-		8,408			-			8,408
Net change in unrealized investment gains, net of tax		-		-		-		-		-			570			570
Stock issuance		-		15		5		3,068		-			-			3,088
Stock based compensation		-		1,101		-		-		-			-			1,101
Balance at December 31, 2006	$	147	$	128,372	$	7	$	4,838	$	(18,321	)	$	(1,061	)	$	113,982
Net Income		-		-		-		-		12,589			-			12,589
Net change in unrealized investment gains, net of tax		-		-		-		-		-			2,204			2,204
Stock issuance		-		123		2		1,301		-			-			1,426
Stock based compensation		-		936		-		-		-			-			936
Balance at December 31, 2007	$	147	$	129,431	$	9	$	6,139	$	(5,732	)	$	1,143		$	131,137

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

F-5

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Consolidated Statements of Cash Flows of
Specialty Underwriters’ Alliance, Inc.
For the Years Ended 2007, 2006 and 2005

	2007			2006			2005
	(dollars in thousands)
Cash Flows From Operations
Net income (loss)	$	12,589		$	8,408		$	(17,996	)
Charges (credits) to reconcile net income to cash flows from operations:
Change in deferred taxes		(77	)		90			-
Net realized (gains) losses		27			(275	)		4
Amortization of bond premium (discount)		(5	)		342			495
Depreciation		5,012			2,577			1,760
Net change in:
Reinsurance recoverable on unpaid loss and loss adjustment expense reserves		3,772			8,021			6,962
Loss and loss adjustment expense reserves		43,536			36,330			8,911
Insurance premiums receivable		(577	)		(23,442	)		(44,868	)
Unearned insurance premiums		(3,063	)		31,209			58,592
Deferred acquisition costs		2,381			(8,597	)		(11,279	)
Prepaid reinsurance premiums		2,946			(85	)		(3,489	)
Insured deposit funds		2,149			3,207			7,159
Other, net		912			2,526			2,188
Total adjustments		57,013			51,903			26,435
Net cash flows provided by (used for) operations		69,602			60,311			8,439
Cash flows from investing activities
Net decrease (increase) in short-term investments		(32,114	)		(10,676	)		38,508
Sales of fixed maturity investments		9,938			7,174			-
Redemptions, calls and maturities of fixed maturity investments		10,003			9,502			6,387
Purchases of fixed maturity investments		(50,974	)		(66,575	)		(52,192	)
Unsettled net investment purchases					-			(1,000	)
Purchase of equipment and capitalized software		(9,165	)		(5,778	)		(5,321	)
Net cash flows provided by (used for) investing activities		(72,312	)		(66,353	)		(13,618	)
Cash flows from financing activities
Issuance of common stock		1,303			3,088			1,522
Net cash provided by (used for) financing activities		1,303			3,088			1,522
Net (decrease) increase in cash during the period		(1,407	)		(2,954	)		(3,657	)
Cash at beginning of the period		2,375			5,329			8,986
Cash at end of the period	$	968		$	2,375		$	5,329

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

F-6

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)

Note 1 — Nature of Operations

UAI Holdings, Inc., a Delaware holding company, was organized on April 3, 2003. There was no financial activity between the organizational date and the initial funding date of December 12, 2003. On November 5, 2003, UAI Holdings, Inc. changed its name to Specialty Underwriters’ Alliance, Inc., or the Company.

On November 23, 2004, the Company successfully completed an initial public offering, or the IPO, which generated net proceeds of $119,789. On December 22, 2004 the Company received proceeds of $3,728 from the underwriter’s exercise of the over allotment option. Concurrent with the initial public offering the Company purchased Potomac for $21,997 which was equivalent to Potomac’s statutory basis capital and surplus as of the closing date plus $10,745. On the same date, the Illinois Department of Insurance approved an amendment to Potomac’s charter to change its name to SUA Insurance Company.

The Company began its insurance operations in 2005. It is organized to provide specialty program commercial property and casualty insurance through exclusive partner agents.

Note 2 — Summary of Significant Accounting Policies

The accompanying consolidated financial statements, which include the accounts of Specialty Underwriters’ Alliance, Inc. and its consolidated subsidiary, SUA Insurance Company, have been prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP. All intercompany amounts have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Certain reclassifications have been made to prior period financial statement line items to enhance the comparability with prior years.

Cash and Investments

Cash consists of demand deposits. Short-term investments consist of investments with original maturities of less than one year, as determined on the date of purchase.

All fixed maturity investment securities are classified as available for sale. As such, they are reported at estimated fair value; unrealized appreciation or depreciation of available-for-sale investments carried at fair value are excluded from net income and credited or charged, net of applicable deferred income taxes, directly to accumulated other comprehensive income, a separate component of stockholders’ equity. The change in unrealized appreciation or depreciation during the year is reported as a component of other comprehensive income. Estimated fair value is based on prices obtained from independent third-party pricing services, and as a result, there is no management involvement in determining fair value. The independent third-party services employ various models that take into consideration such factors as recent sales, the credit rating of the issuer, duration of the security, yields on comparably rated publicly traded securities and risk-free yield curves to estimate the value of these investments. Premium and discounts on fixed maturity investments are either accreted or amortized to income over the anticipated life of the investment.

The Company monitors the difference between its cost basis and the fair value of its investments to determine when the fair value is below cost and other than a temporary impairment. Factors considered in evaluating whether a decline in value is other than temporary include: 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

F-7

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)

retain the investment for a period of time sufficient to allow for any anticipated recovery. Other than temporary impairment charges on investments are recorded based on the fair value of the investments at the balance sheet date. Temporary losses do not impact net income but reduce comprehensive net income and stockholders’ equity. Unrealized losses identified as other-than-temporary impairments are recorded as realized losses.

Investment income is recorded when earned. Realized investment gains and losses are recognized using specific identification of the security sold.

Equipment and Capitalized Software

Equipment consists of office furniture and equipment and is depreciated over three to five years. Capitalized software costs are purchased computer software or external consulting development costs and are depreciated over three years.

Intangible Assets

The cost of insurance licenses is an indefinite life intangible asset because the licenses will remain in effect indefinitely as long as the Company complies with relevant state insurance regulations. This intangible asset will not be amortized, but will be evaluated for impairment at least annually or upon the occurrence of certain triggering events.

Earned and Unearned Insurance Premiums

Premiums are recognized as revenue over the coverage period of policies written on a daily pro rata basis. Certain policies are subject to adjustment based on changes in exposure units over the period of coverage, such as payroll increases/decreases and changes in risk classifications and therefore the direct written premiums are estimated during the policies term until final audit of the policy occurs. Unearned insurance premiums represent the portion of premiums written relating to the remaining term of each policy.

Acquisition Expenses

Acquisition expenses related to the writing of insurance policies such as up-front commissions, premium taxes and other costs associated with premium writings are deferred and subsequently amortized to income over the period of coverage. Deferred acquisition expenses are assessed for recoverability using loss and loss adjustment expense ratios which are based primarily on the assumption that the future loss and loss adjustment expense ratio will include consideration of the recent experience. Adjustments to the asset for future recoverability are recorded through operations in the period identified. Acquisition expenses related to earned premiums are expensed immediately.

Income Taxes

Income taxes are accounted for in accordance with the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” or SFAS 109. Deferred tax assets and liabilities are recognized consistent with the asset and liability method required by SFAS 109. Our deferred tax assets and liabilities primarily result from temporary differences between the amounts recorded in our consolidated financial statements and the tax basis of our assets and liabilities.

At each balance sheet date, management assesses the need to establish a valuation allowance that reduces deferred tax assets when it is more likely than not that all, or some portion, of the deferred tax assets will not be realized.

F-8

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)

Reinsurance

Reinsurance premiums, commissions, expense reimbursements and reserves related to reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other companies are reported as a reduction of premiums earned.

Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. The collectability of reinsurance recoverables is subject to the solvency of the reinsurers.

Unpaid Loss and LAE

Liabilities for loss and loss adjustment expenses, or LAE, are comprised of case basis estimates for claims and claim expenses reported prior to year-end and estimates of incurred but not reported, or IBNR, losses and loss expenses, net of estimated salvage and subrogation recoverable. These estimates are recorded gross of reinsurance and are continually reviewed and updated with any resulting adjustments reflected in current operating results.

Case reserves are estimated based on the experience and knowledge of claims staff regarding the nature and potential cost of each claim and are adjusted as additional information becomes known or payments are made. IBNR reserves are regarded as the most uncertain reserve segment and are derived by subtracting paid loss and LAE and case reserves from estimates of ultimate loss and LAE. Actuaries estimate ultimate loss and LAE using various generally accepted actuarial methods applied to known losses, earned premium and other relevant information. Like case reserves, IBNR reserves are adjusted as additional information becomes known or payments are made.

For IBNR losses, the amount of reserves is estimated on the basis of historical and statistical information. The Company considers historical patterns of paid and reported claims, industry data and the probable number and nature of losses arising from claims that have occurred but have not yet been reported for a given year.

Stock Options

In December 2004, the FASB issued FAS No. 123 (revised 2004), “Share-Based Payment,” or FAS 123R. FAS 123R replaces FAS No. 123, “Accounting for Stock-Based Compensation,” or FAS 123, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” or APB 25. The Company adopted FAS 123R at the beginning of the first quarter of 2006, applying the “modified prospective application,” which requires the Company to value stock options granted prior to its adoption of FAS 123R which have not vested under the fair value method and expense those amounts over the stock option’s remaining vesting period. Stock options granted subsequent to the adoption of FAS 123R are valued using the fair value method and expensed over the vesting period. In adopting the modified prospective application, the Company did not restate results for earlier periods. Under FAS 123R, the Company has opted to use the binomial lattice option pricing model to determine fair value.

Earnings Per Share

Basic earnings per share is computed using the weighted average number of shares of Common Stock and Class B Shares outstanding during the period.

In calculating diluted earnings per share, the weighted average of shares of Common Stock and Class B Shares outstanding for the period is increased to include all potentially dilutive securities using the treasury stock method. Any common stock equivalent shares are excluded from the computation if their effect is anti-dilutive.

Basic and diluted earnings per share are calculated by dividing income available to ordinary shareholders by the applicable weighted average number of shares outstanding during the year.

F-9

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)

Recent Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting for uncertainty in income tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of an income tax position taken, or expected to be taken, in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and additional disclosures. The Company’s adoption of FIN 48 on January 1, 2007, did not require an adjustment to the liability for unrecognized tax benefits. As of December 31, 2007, the Company has taken no tax position which would require disclosure under the new guidance. Although the IRS is not currently examining any of the Company’s income tax returns, tax years 2003 through 2006 remain open and are subject to examination.

In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements,” or FAS 157. FAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value pronouncements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within the year of adoption. Based on the Company’s current use of fair value measurements, the Company believes that the implementation of FAS 157 will have no material impact on its financial statements.

In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” or FAS 159. FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. FAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within the year of adoption. The Company believes that the implementation of FAS 159 will have no material impact on its financial statements.

Note 3 — Concentration of Premium

Concentration of premium by partner agent for 2007, 2006 and 2005 was as follows:

	Percentage of Gross Written Premium
	2007		2006		2005
Risk Transfer Holdings, Inc.		49.0%		53.1%		55.3%
American Team Managers		20.9%		20.7%		24.4%
AEON Insurance Group, Inc.		16.0%		14.2%		12.1%
Appalachian Underwriters, Inc.		8.7%		9.5%		0.5%
Specialty Risk Solutions, LLC		1.9%		1.3%		7.7%
Flying Eagle Insurance Service, Inc		1.7%		n/a		n/a
Insential, Inc		1.1%		1.0%		n/a
First Light Program Manager, Inc.		0.0%		n/a		n/a
Other		0.7%		0.2%		0.0%
Total		100.0%		100.0%		100.0%

F-10

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)

Concentration of premium by state for 2007, 2006 and 2005 was as follows:

	Percentage of Gross Written Premium
	2007		2006		2005
Florida		33.6%		38.2%		42.6%
California		27.5%		30.9%		39.4%
Texas		10.4%		8.1%		7.8%
Other states		28.5%		22.8%		10.2%
Total		100.0%		100.0%		100.0%

Concentration of premium by line of business for 2007, 2006 and 2005 was as follows:

	Percentage of Gross Written Premium
	2007		2006		2005
Workers’ compensation		57.4%		58.3%		68.8%
Commercial automobile		20.2%		16.6%		10.4%
General liability		19.9%		23.4%		11.8%
All other		2.5%		1.7%		9.0%
Total		100.0%		100.0%		100.0%

Note 4 — Investments

The cost or amortized cost and estimated fair values of fixed maturities at December 31, 2007 were as follows:

	Cost or		Gross		Gross			Fair
	Amortized		Unrealized		Unrealized			Estimated
2007	Cost		Gains		Losses			Value
U.S. Treasury Securities	$	9,801	$	366	$	-		$	10,167
U.S. Government Agencies Securities		37,023		1,172		(5	)		38,190
Municipals		5,264		90		-			5,354
Corporate Securities		58,672		429		(395	)		58,706
Mortgage Backed Securities		65,832		728		(1,242	)		65,318
Total Fixed Maturities	$	176,592	$	2,785	$	(1,642	)	$	177,735

The cost or amortized cost and estimated fair values of fixed maturities at December 31, 2006 were as follows:

	Cost or		Gross		Gross			Fair
	Amortized		Unrealized		Unrealized			Estimated
2006	Cost		Gains		Losses			Value
U.S. Treasury Securities	$	10,805	$	12	$	(154	)	$	10,663
U.S. Government Agencies Securities		34,678		241		(216	)		34,703
Corporate Securities		49,033		58		(958	)		48,133
Mortgage Backed Securities		51,065		326		(370	)		51,021
Total Fixed Maturities	$	145,581	$	637	$	(1,698	)	$	144,520

Temporary losses on investment securities are primarily a result of increases in interest rates on the security from the time of purchase and are recorded as unrealized losses. The Company’s methodology for assessing other-

F-11

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)

than-temporary impairments 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 Company has not recorded any other-than-temporary impairment charges on investment securities for the years ended December 31, 2007 and 2006. As of December 31, 2007, we held $4.5 million in fair value, $5.0 million in book value, of investments with sub-prime exposure, all of which were rated “A” or better by established rating agencies.

The cost or amortized cost and fair values of fixed maturities by contractual maturity at December 31, 2007 are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

The maturities for mortgage backed securities with an amortized cost of $65,832 and a fair value of $65,318 were allocated between the durations below by averaging various expected prepayment assumptions that are developed through a model which takes into account recent prepayment patterns and future estimates on different agency coupons and structures.

	Cost or
	Amortized Cost		Fair Value
Due in one year or less	$	12,704	$	12,678
Due after one year through five years		64,443		65,238
Due after five years through ten years		45,263		46,090
Due after ten years		54,182		53,729
Total	$	176,592	$	177,735

As of December 31, 2007, there were 58 out of 161 securities in an unrealized loss position. Of these, 46 securities have been in an unrealized loss position for twelve months or greater. Those fixed maturity investments with unrealized losses as of December 31, 2007 are summarized as follows:

			Unrealized Losses
			Less than			Greater than
	Fair Value		12 Months			12 Months			Total
US Treasury Securities	$	-	$	-		$	-		$	-
US Government Agency Securities		2,177		-			(5	)		(5	)
Corporate Securities		32,220		(101	)		(294	)		(395	)
Mortgage Backed Securities		21,974		(400	)		(842	)		(1,242	)
Total Fixed Maturities	$	56,371	$	(501	)	$	(1,141	)	$	(1,642	)

Fixed maturities with carrying values of $18,902 were on deposit with insurance regulatory authorities as required by law at December 31, 2007.

Information relating to the Company’s investments is shown below:

	Year Ended December 31,
	2007			2006			2005
Proceeds from voluntary sales and redemptions	$	9,938		$	7,174		$	-
Gross realized gains		62			333			4
Gross realized losses		(81	)		(58	)		(8)

F-12

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)

The components of the Company’s net investment income were as follows:

	Year Ended December 31,
	2007			2006			2005
Fixed maturities	$	8,098		$	5,516		$	3,421
Short-term investments		1,751			759			310
Gross investment income		9,849			6,275			3,731
Investment Expenses		(296	)		(188	)		(173	)
Net investment income	$	9,553		$	6,087		$	3,558

Note 5 — Federal Income Taxes

As of December 31, 2007, December 31, 2006 and December 31, 2005 the Company had tax basis net operating loss carryforwards of $2,068, $18,751 and $26,136, respectively, each of which will expire on December 31, 2025. The Company also 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 portion of these costs was $873, $1,344 and $1,815 at December 31, 2007, December 31, 2006 and December 31, 2005, respectively. The Company did not incur any federal income tax from its inception in 2003 through 2005. The Company incurred income taxes in the amount of $324 and $157, arising from alternative minimum tax obligations in 2007 and 2006, respectively. Based on these facts, the Company has recorded a valuation allowance of $1,626 at December 31, 2007 against net deferred tax assets, until such time as its operating results and future outlook produce sufficient taxable income to realize these tax assets.

The Company has recorded a tax provision for the year equal to the current year increase in deferred tax liabilities associated with indefinite lived intangible assets. Due to the indefinite nature of these intangible assets for financial reporting purposes, these deferred tax liabilities do not represent a source of income to realize the Company’s deferred tax assets.

A reconciliation of the Company’s expected to actual federal income taxes are shown below.

	Year Ended December 31,
	2007			2006			2005
	(dollars in thousands)
Income tax (expense) benefit at statutory rates	$	(4,364	)	$	(2,943	)	$	6,119
Tax expense from permanent difference		(106	)		(132	)		(7	)
Valuation allowance		4,228			2,839			(6,112	)
Other		(5	)		(11	)
Actual income tax benefit (expense)	$	(247	)	$	(247	)	$	-

The components of current and deferred income taxes for the years ended December 31, 2007, 2006 and 2005 are as follows:

	Year Ended December 31,
	2007			2006			2005
	(dollars in thousands)
Current tax benefit (expense)	$	(324	)	$	(157	)	$	-
Deferred tax benefit (expense)		77			(90	)		-
Total income tax benefit (expense)	$	(247	)	$	(247	)	$	-

F-13

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)

The components of the Company’s deferred tax assets and liabilities at December 31, 2007 and December 31, 2006, respectively, are noted in the table below.

	Year Ended December 31,
	2007			2006
Deferred Tax Assets Arising From	(dollars in thousands)
Loss & LAE reserves	$	4,002		$	2,256
Unearned premium reserves		5,898			6,107
Net operating loss carryforwards		703			6,207
Stock Option Expense		504			265
Unrealized loss on investments		-			361
Start up costs		297			457
AMT Tax Credit		481			158
Other		670			220
Total deferred tax assets		12,555			16,031
Deferred Tax Liabilities Arising From
Deferred acquisition costs		5,948			6,758
Equipment and capitalized software		3,395			1,849
Unrealized gain on investment		389			-
Prepaid assets		255			298
Intangible asset		727			480
Other		228			138
Total deferred tax liabilities		10,942			9,523
Net deferred tax asset (liability)		1,613			6,508
Valuation allowance		(1,626	)		(6,598	)
Net deferred tax asset (liability) after valuation allowance	$	(13	)	$	(90	)

Note 6 — Stock Options

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, and no more grants or awards may be made under the 2004 Plan. Options previously granted under the 2004 Plan will continue for the life of such options, unless earlier terminated, cancelled, expired or exercised. 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 (as well as dividend equivalents in connection with deferred stock awards). In addition, should any of the 732,466 options currently outstanding under the 2004 Plan be terminated, those shares will also be available under the 2007 Plan. All grants of options or awards of stock under the 2007 Plan must be approved by the Compensation Committee of the Board of Directors, which consists entirely of independent directors. All options granted under the 2004 Plan have ten-year terms and vest in equal annual installments over either a three or four year period following the date of grant with an exercise price equal to the fair market value of the Company’s common stock on the date of grant.

F-14

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)

The 2007 Plan provides for an automatic grant of 3,000 shares of common stock each to an independent director upon the first business day following re-election to the Board of Directors at the annual meeting of stockholders. On May 2, 2007, 15,000 shares were issued to the independent directors who were re-elected to the Board at the 2007 annual meeting held on May 1, 2007. This automatic grant replaced an automatic grant under the 2004 Plan of 10,000 options to each independent director upon re-election to the Board at the annual meetings. The compensation expense associated with the automatic grant of 15,000 shares was $123, based on the fair market value of the shares on the date of grant under FAS 123R. No other awards have been made in 2007.

In December 2004, the FASB issued FAS No. 123 (revised 2004), “Share-Based Payment,” or FAS 123R. FAS 123R replaces FAS No. 123, “Accounting for Stock-Based Compensation,” or FAS 123, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” or APB 25. The Company adopted FAS 123R at the beginning of the first quarter of 2006, applying the “modified prospective application,” which requires the Company to value stock options granted prior to its adoption of FAS 123R which have not vested under the fair value method and expense those amounts over the stock option’s remaining vesting period. Stock options granted subsequent to the adoption of FAS 123R are valued using the fair value method and expensed over the vesting period. In adopting the modified prospective application, the Company did not restate results for earlier periods. Under FAS 123R, the Company has opted to use the binomial lattice option pricing model to determine fair value. In addition, FAS 123R requires the Company to reflect the tax savings resulting from tax deductions in excess of expense reflected in its financial statements as a financing cash flow, rather than as an operating cash flow. The amount of financing cash flows recognized for such excess tax deductions was $0 for the year ended December 31, 2007.

Compensation expense recognized for stock-based compensation for the years ended December 31, 2007 and December 31, 2006 were $935 and $1,101, respectively. If compensation expense for the Company’s stock-based compensation had been determined based on the fair value at the grant dates for awards made prior to December 31, 2005, under the 2004 Plan, consistent with FAS 123R, the Company’s net income per share would have been adjusted to the pro forma amounts indicated below:

	Year Ended
	December 31, 2005
Net loss as reported	$	(17,996	)
Deduct: compensation expense		(1,035	)
Pro forma net loss	$	(19,031	)
Basic and diluted net earnings (loss) per share:
As reported	$	(1.22	)
Pro forma	$	(1.29	)

The remaining unrecognized compensation expense related to unvested awards at December 31, 2007 is approximately $84 and the weighted-average period of time over which this cost will be recognized is 0.8 years.

F-15

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)

There were no options granted in 2007. The fair value of each option grant is estimated at the date of grant using the binomial lattice option pricing model with the following assumptions used for grants issued in 2006: risk free interest rate range of 4.56% - 4.60%; expected life range of 3.1 – 7.5 years; expected volatility of 45%; and expected dividend yield of 2% beginning after five years. The following assumptions were used for grants issued in 2005: risk free interest rate range of 3.50% - 4.33%; expected life range of 3.7 – 6.9 years; expected volatility of 45%; and expected dividend yield of 2% beginning after five years.

The following table presents activity under the Plan for 2007:

				Weighted				Weighted
				Average				Average
				Exercise		Aggregate		Contractual
	Number of			Price Per		Intrinsic		Remaining
Option Plan Activity	Shares			Share		Value		Life
	(actual dollar and share amounts)							(years)
Balance at January 1, 2007		742,466		$	9.32	$	60,100		8	.00
Options granted		-					-		n/a
Options exercised		-					-		n/a
Option expired		(6,667	)		9.50		-		n/a
Options forfeited		(3,333	)		9.50		-		n/a
Balance at December 31, 2007		732,466		$	9.32	$	-		7	.00
Total options vested at December 31, 2007		673,581		$	9.41				6	.95

A summary of the status of the Company’s non-vested shares as of December 31, 2007 and changes during the year ended December 31, 2007 is presented below:

				Weighted
	Number of			Average Grant
	Shares			Date Fair Value
	(actual dollar and share amounts)
Non-vested balance at January 1, 2007		304,702		$	4.37
Options granted		-
Options vested		(242,484	)		4.53
Options forfeited		(3,333	)		4.64
Total non-vested options at December 31, 2007		58,885		$	3.70

The weighted average grant-date fair value of options granted during the years ended December 31, 2006 and December 31, 2005 were $2.89 and $3.84, respectively. The grant-date fair value of options vested during the years ended December 31, 2007, December 31, 2006 and December 31, 2005 were $1,098, $1,078 and $894, respectively. Cash received from option exercises under the Plan for the year ended December 31, 2006 was $15. There were no options exercised during the years ended December 31, 2007 or December 31, 2005.

Note 7 — Employee Benefit Plans

Company employees who have completed three months of consecutive service are eligible for participation in the Company’s 401(k) Plan. The 401(k) Plan provides for matching contributions by the Company up to four percent of eligible compensation contributed by the employee. During 2007, 2006 and 2005, the matching contributions made by the Company were $301, $228 and $103, respectively.

F-16

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)

Note 8 — Commitments

On February 3, 2005, the Company entered into a lease agreement, or Lease, for its home office space that commenced on May 1, 2005 and terminates on April 30, 2020. On April 24, 2006, the Company amended the Lease to include additional premises effective September 1, 2006. The Company’s net Lease obligations are $1,871 for years 1 through 5, $3,294 for years 6 through 10 and $3,753 for years 11 through 15. Included in the Lease terms are scheduled rent escalations, improvement incentives and rent abatements all of which are recognized on a straight line basis over the Lease term in relation to square footage occupied by the Company. To secure the Lease, the Company is required to hold an irrevocable standby letter of credit in the amount of $1,500.

The Company has the option to terminate the Lease at August 31, 2011. Upon notice of termination, the Company is obligated to pay six months of the then current rent plus certain costs. If the Company opted to terminate as of August 31, 2011, the Company would be obligated to pay approximately $2,440 plus operating expenses, taxes, and brokerage commissions.

Note 9 — Reinsurance

For workers’ compensation business, the Company’s reinsurers are responsible for losses between $1,000 and $10,000 due to any single occurrence under a policy and for losses in excess of $10,000 up to $35,000 for a multiple loss occurrence. For non-workers’ compensation casualty business, the Company does not write policies above $1,000 and therefore does not need reinsurance protection for single loss occurrences; its reinsurers are responsible between $1,000 and $5,000 of losses for a multiple loss occurrence. Reinsurance does not extinguish the Company’s primary liability under the policies written.

The effects of reinsurance follow:

	Year Ended December 31,
	2007			2006			2005
Premiums written:
Direct	$	159,290		$	152,841		$	90,639
Assumed		1,100			335			-
Ceded		(10,984	)		(11,076	)		(5,433	)
Net	$	149,406		$	142,100		$	85,206
Premiums earned:
Direct	$	162,501		$	121,698		$	32,047
Assumed		952			269			-
Ceded		(10,984	)		(11,076	)		(5,436	)
Net	$	152,469		$	110,891		$	26,611
Losses and loss adjustment expenses:
Direct	$	97,052		$	69,545		$	21,362
Assumed		756			238			-
Ceded		(7,818	)		(7,101	)		(2,263	)
Net	$	89,990		$	62,682		$	19,099

F-17

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)

Note 10 — Unpaid Loss And Loss Adjustment Expenses

Loss and 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 represents management’s best estimate of reserves based on a composite of the results of the various actuarial methods, as well as consideration of known facts and trends.

At December 31, 2007 the Company reported gross loss and loss adjustment expense reserves of $184,736 of which $63,529 represented the gross direct loss and loss adjustment expense reserves of Potomac, which is fully reinsured by OneBeacon. The Company experienced favorable prior year loss development of $2,177 due to favorable claims experience within the workers compensation and general liability lines. At December 31, 2006 the Company reported gross loss and loss adjustment expense reserves of $141,200 of which $71,592 represented the gross direct loss and loss adjustment expenses reserves of Potomac, which is fully reinsured by OneBeacon.

Potomac was a participant in a OneBeacon inter-company pooling arrangement under which Potomac ceded all of its insurance business into the Pool and assumed 0.5% of the Pool’s insurance business. Potomac ceased its participation in the Pool effective January 1, 2004 and entered into reinsurance agreements whereby it ceded all of its business to OneBeacon. 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 obligations.

Included in the reserves for the Company is tabular reserve discount for workers’ compensation and excess workers’ compensation pension claims of $1,505 as of December 31, 2007 and $1,016 as of December 31, 2006. The reserves are discounted on a tabular basis at four percent using the 2001 United States Actuarial Life Tables for Female and Male population.

Changes in the liability for loss and loss adjustment expense reserves were as follows:

	Year Ended December 31, 2007									Year Ended December 31, 2006									Year Ended December 31, 2005
	Potomac of						SUA			Potomac of						SUA			Potomac of					SUA
	Illinois			SUA			Consolidated			Illinois			SUA			Consolidated			Illinois			SUA		Consolidated
Beginning of period:
Gross	$	71,592		$	69,608		$	141,200		$	86,736		$	18,134		$	104,870		$	95,959		$	-	$	95,959
Less reinsurance recoverables		(71,592	)		(9,384	)		(80,976	)		(86,736	)		(2,261	)		(88,997	)		(95,959	)		-		(95,959	)
Net		-			60,224			60,224			-			15,873			15,873			-			-		-
Incurred losses and LAE relating to:
Current year		-			92,167			92,167			-			63,546			63,546			-			19,099		19,099
Prior years		-			(2,177	)		(2,177	)		-			(864	)		(864	)		-			-		-
Total incurred losses and LAE		-			89,990			89,990			-			62,682			62,682			-			19,099		19,099
Paid losses and LAE related to:
Current year		-			24,772			24,772			-			12,997			12,997			-			3,226		3,226
Prior years		-			17,870			17,870			-			5,334			5,334			-			-		-
Total paid losses and LAE		-			42,642			42,642			-			18,331			18,331			-			3,226		3,226
End of period:
Net		-			107,572			107,572			-			60,224			60,224			-			15,873		15,873
Plus reinsurance recoverables		63,529			13,635			77,164			71,592			9,384			80,976			86,736			2,261		88,997
Gross	$	63,529		$	121,207		$	184,736		$	71,592		$	69,608		$	141,200		$	86,736		$	18,134	$	104,870

F-18

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)

Note 11 — Statutory Information

Statutory accounting is a basis of accounting developed to assist insurance regulators in monitoring and regulating the solvency of insurance companies. It is primarily concerned with measuring an insurer’s surplus to policyholders. Accordingly, statutory accounting focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with appropriate insurance law and regulatory provisions applicable to each insurer’s domiciliary state.

Statutory accounting practices established by the National Association of Insurance Commissioners, or NAIC, and adopted, in part, by state insurance departments will determine, among other things, the amount of statutory surplus and statutory net income, which will affect, in part, the amount of funds available to pay dividends.

As an Illinois property and casualty insurer the maximum amount of dividends which can be paid by the SUA Insurance Company to shareholders without prior approval of the Director of Insurance is the greater of net income or 10% of statutory surplus, further limited to earned surplus. At December 31, 2007 SUA Insurance Company has no earned surplus and therefore no dividend capacity without the prior approval of the Illinois Director of Insurance.

In order to enhance the regulation of insurer solvency, the NAIC adopted in December 1993 a formula and model law to implement risk-based capital requirements for property and casualty insurance companies. These risk-based capital requirements are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholder obligations. The risk-based capital model for property and casualty insurance companies measures three major areas of risk facing property and casualty insurers:

•     underwriting, which encompasses the risk of adverse loss development and inadequate pricing;

•     declines in asset values arising from credit risk; and

•     declines in asset values arising from investment risk.

An insurer’s statutory surplus is compared to its risk-based capital requirement. If adjusted statutory surplus falls below company action level risk based capital, the company would be subject to regulatory action including submission of a report to insurance regulators outlining the corrective action the company intends to take.

SUA Insurance Company’s statutory information is as follows:

	Year Ended December 31,
	2007		2006		2005
Ending capital and surplus	$	89,845	$	77,308	$	79,757
Net income/(loss)		16,312		1,052		(30,505	)
Company action level risk-based capital		43,408		42,265		32,630

F-19

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

Specialty Underwriters’ Alliance, Inc.
Notes to Consolidated Financial Statements (continued)
(dollars in thousands, except per share amounts)

Note 12 — Quarterly Financial Data (Unaudited)

The following table sets forth the unaudited financial data for the years ended December 31, 2007, December 31, 2006 and December 31, 2005.

	2007
Quarterly Financial Data	First		Second		Third		Fourth
Revenues	$	37,445	$	39,556	$	42,895	$	42,099
Expenses including taxes		34,423		36,546		39,532		38,905
Net income	$	3,022	$	3,010	$	3,363	$	3,194
Net income per share	$	0.20	$	0.20	$	0.22	$	0.20

	2006
Quarterly Financial Data	First			Second		Third		Fourth
Revenues	$	24,401		$	26,659	$	33,613	$	32,580
Expenses including taxes		24,601			24,492		30,031		29,721
Net income (loss)	$	(200	)	$	2,167	$	3,582	$	2,859
Net income (loss) per share	$	(0.01	)	$	0.14	$	0.24	$	0.18

	2005
Quarterly Financial Data	First			Second			Third			Fourth
Revenues	$	1,265		$	4,072		$	9,145		$	15,683
Expenses including taxes		5,757			8,082			13,969			20,353
Net income (loss)	$	(4,492	)	$	(4,010	)	$	(4,824	)	$	(4,670	)
Net income (loss) per share	$	(0.31	)	$	(0.27	)	$	(0.32	)	$	(0.32	)

F-20

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

SCHEDULE I
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.

SUMMARY OF INVESTMENTS — OTHER THAN
INVESTMENTS IN RELATED PARTIES
As of December 31, 2007

	Amortized Cost		Fair Value
	(dollars in thousands)
Fixed maturities:
U.S. treasury securities	$	9,801	$	10,167
U.S. government agencies securities		37,023		38,190
Municipals		5,264		5,354
Corporate securities		58,672		58,706
Mortgage backed securities		65,832		65,318
Total fixed maturities		176,592		177,735
Short-term investments		51,652		51,652
Total investments	$	228,244	$	229,387

F-21

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

SCHEDULE II
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
As of December 31, 2007 and 2006

	As of December 31,
Balance Sheet	2007			2006
	(dollars in thousands)
ASSETS
Investments in subsidiary	$	124,270		$	108,469
Short-term investments, at amortized cost (which approximates fair value)		6,514			5,203
Total investments		130,784			113,672
Cash		390			204
Other assets		4			134
Total assets	$	131,178		$	114,010
LIABILITIES & STOCKHOLDERS’ EQUITY
Liabilities
Accounts payable and other liabilities	$	41		$	28
Total liabilities		41			28
Stockholders’ equity
Common Stock at $.01 par value per share — authorized 30,000,000 shares; issued and outstanding 14,697,355 and 14,682,355 shares		147			147
Class B Common Stock at $.01 par value per share — authorized 2,000,000 shares; issued and outstanding 869,738 and 679,152 shares		9			7
Paid-in capital — Common Stock		129,431			128,372
Paid-in capital — Class B Common Stock		6,139			4,838
Retained earnings		(5,732	)		(18,321)
Accumulated other comprehensive income, net of tax		1,143			(1,061)
Total stockholders’ equity		131,137			113,982
Total liabilities and stockholders’ equity	$	131,178		$	114,010

The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto.

F-22

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

SCHEDULE II — (Continued)
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
For the Years Ended December 31, 2007, 2006 and 2005

	Year Ended December 31,
Statement of Operations	2007			2006			2005
	(dollars in thousands, except per share data)
Revenues:
Total revenues	$	279		$	184		$	23
Expenses:
General and administrative expenses		1,287			1,344			328
(Gain) loss of subsidiary		(13,597	)		(9,568	)		17,691
Total expenses		(12,310	)		(8,224	)		18,019
Pretax income (loss)		12,589			8,408			(17,996)
Federal income tax expense		-			-			-
Net income (loss)		12,589			8,408			(17,996)
Net change in unrealized investment gains, net of tax		2,204			570			(1,641)
Comprehensive net income (loss)	$	14,793		$	8,978		$	(19,637)
Earnings (loss) per share available to common stockholders
Basic	$	0.82		$	0.55		$	(1.22)
Diluted	$	0.82		$	0.55		$	(1.22)

The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto.

F-23

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

SCHEDULE II — (Continued)
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
For the Years Ended December 31, 2007, 2006 and 2005

	Year Ended December 31,
Statement of Cash Flows	2007			2006			2005
	(dollars in thousands)
Cash flows from operations:
Net income (loss)	$	12,589		$	8,408		$	(17,996)
Charges (credits) to reconcile net income to cash flows from operations:
Loss (income) of subsidiary		(13,597	)		(9,568	)		17,691
Depreciation expense		132			144			171
Write off of capitalized software					12			19
Other, net		1,070			953			(148)
Total adjustments		(12,395	)		(8,459	)		17,733
Net cash flows provided by (used for) operations		194			(51	)		(263)
Cash flows from investing activities:
Net (increase) decrease in short-term investments		(1,311	)		(4,179	)		(1,023)
Capital contributions to subsidiary					-			(3,850)
Net cash flows provided by (used for) investing activities		(1,311	)		(4,179	)		(4,873)
Cash flows from financing activities
Issuance of common stock		1,303			3,088			1,522
Net cash flows provided by (used for) financing activities		1,303			3,088			1,522
Net increase from cash during the period		186			(1,142	)		(3,614)
Cash at beginning of the period		204			1,346			4,960
Cash at end of the period	$	390		$	204		$	1,346

The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto.

F-24

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

SCHEDULE III
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.

SUPPLEMENTARY INSURANCE INFORMATION
For the Years Ended December 31, 2007, 2006 and 2005

													Benefits,
			Future Policy				Other Policy						Claims,
	Deferred		Benefits, Losses,				Claims and				Net		Losses				Other
	Acquisition		Claims and Loss		Unearned		Benefits		Premium		Investment		and Settlement		Acquisition		Operating		Premium
	Costs		Expenses		Premiums		Payable		Revenue		Income		Expenses		Expenses		Expenses		Written
									(dollars in thousands)
Year ended December 31, 2007	$	17,495	$	184,736	$	86,741	$	-	$	152,469	$	9,553	$	89,990	$	36,601	$	22,568	$	149,406
Year ended December 31, 2006		19,876		141,200		89,804		-		110,891		6,087		62,682		26,032		19,884		142,100
Year ended December 31, 2005		11,279		104,870		58,595		-		26,611		3,558		19,099		6,207		22,855		85,206

F-25

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

SCHEDULE IV
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.

REINSURANCE
For the Years Ended December 31, 2007, 2006 and 2005

									Column
			Column		Column				F
			C		D				Percentage of
	Column		Ceded to		Assumed from		Column		Amount
Column	B		Other		Other		E		Assumed to
A	Direct Amount		Companies		Companies		Net Amount		Net
			(dollars in thousands)
Year ended December 31, 2007	$	162,501	$	10,984	$	952	$	152,469		-
Year ended December 31, 2006		121,698		11,076		269		110,891		-
Year ended December 31, 2005		32,047		5,436		-		26,611		-

F-26

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

SCHEDULE V
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.

VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2007, 2006 and 2005

			Column
	Column		C
	B		Additions						Column		Column
	Balance at		Charged to			(Subtractions)			D		E
Column	Beginning of		Cost and			Charged to Other			Deductions		Balance at End
A	Period		Expenses			Accounts			Described(1)(2)		of Period
						(dollars in thousands)
Year ended December 31, 2007
Deferred tax valuation allowance	$	6,598	$	(77	)	$	(4,895	)	$	-	$	1,626
Allowance for Doubtful Accounts, Insurance Premium Receivables		-		600			-			-		600
Year ended December 31, 2006
Deferred tax valuation allowance		9,631		90			(3,123	)		-		6,598
Year ended December 31, 2005 Deferred tax valuation allowance		2,961		-			6,670			-		9,631

F-27

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

SCHEDULE VI
SUA INSURANCE COMPANY

SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
For the Years Ended December 31, 2007, 2006 and 2005

Column	Column		Column		Column		Column		Column		Column		Column					Column		Column		Column
A	B		C		D		E		F		G		H					I		J		K
			Reserves for		Dicount, if								Claims and Claim
			Unpaid		Any,								Adjustment							Paid Claims
	Deferred		Claims and		Deducted in								Expenses Incurred							and
	Acquisition		Claims Policy		Claims		Unearned		Earned		Net Investment		Current		Prior			Acquisition		Adjustment		Premiums
	Costs		Expenses		Column C		Premiums		Premiums		Income		Year		Year			Expenses		Paid Expenses		Written
									(dollars in thousands)
Year ended December 31, 2007	$	17,495	$	184,736	$	1,505	$	86,741	$	152,469	$	9,553	$	92,167	$	(2,177	)	$	36,601	$	42,642	$	149,406
Year ended December 31, 2006		19,876		141,200		1,016		89,804		110,891		6,087		63,546		(864	)		26,032		18,331		142,100
Year ended December 31, 2005		11,279		104,870		192		58,595		26,611		3,558		19,099		-			6,207		3,226		85,206

F-28

2007 Form 10-K
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: March 4, 2008

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.

Signature	Title	Date
/s/  Courtney C. Smith By: Courtney C. Smith	President, Chief Executive Officer and Chairman of the Board of Director (Principal Executive Officer)	March 4, 2008
/s/  Peter E. Jokiel By: Peter E. Jokiel	Executive Vice President, Chief Financial Officer and Director (Principal Financial and Accounting Officer)	March 4, 2008
/s/  Robert E. Dean By: Robert E. Dean	Director	March 4, 2008
/s/  Raymond C. Groth By: Raymond C. Groth	Director	March 4, 2008
/s/  Paul A. Philp By: Paul A. Philp	Director	March 4, 2008
/s/  Robert H. Whitehead By: Robert H. Whitehead	Director	March 4, 2008
/s/  Russell E. Zimmermann By: Russell E. Zimmermann	Director	March 4, 2008

2007 Form 10-K
Specialty Underwriters’ Alliance, Inc.

EX-10.24

Exhibit 10.24

FIRST AMENDMENT TO LEASE

     THIS FIRST AMENDMENT TO LEASE (“Amendment”), entered into this 5^th day of May, 2005 by and between 222 SOUTH RIVERSIDE PROPERTY LLC, a Delaware limited liability company, as Landlord, and SUA INSURANCE COMPANY, an Illinois statutory insurance company, as Tenant.

R E C I T A L S:

     A. Landlord and Tenant entered into that certain Office Lease Agreement dated as of February 3, 2005 (the “Lease”) for approximately 24,987 square feet of rentable area (the “Premises”) located on the 16^th floor of the building located at 222 South Riverside Plaza, Chicago, Illinois, (the “Building”).

     B. Landlord and Tenant have heretofore entered into that certain Temporary Occupancy Agreement dated December 22, 2004 (“23^rd Floor Temporary Occupancy Agreement”) pursuant to which Landlord is permitting Tenant to temporarily occupy approximately 5,581 square feet of rentable area (“Original Temporary Premises”) designated as Suites 2350 and 2360 and located on the 23^rd floor of the Building.

     C. Landlord and Tenant have also heretofore entered into that certain Temporary Occupancy Agreement dated February 22, 2005 (“8^th Floor Temporary Occupancy Agreement”) pursuant to which Landlord is permitting Tenant to temporarily occupy approximately 1,732 square feet of rentable area located on the 8^th floor of the Building and designated as Suite 865 (the "8^th Floor Temporary Premises”).

     D. Landlord and Tenant desire (i) to terminate the 23^rd Floor Temporary Occupancy Agreement, (ii) to permit Tenant to occupy, on a temporary basis, 5,267 square feet of rentable area located on the 18^th floor of the Building and depicted on Exhibit A-1 attached hereto (the “Substitute Temporary Premises”) consisting of Suite 1855 (containing approximately 2,894 square feet of rentable area) and Suite 1870 (containing approximately 2,373 square feet of rentable area) and (iii) to extend the term of the 8^th Floor Temporary Occupancy Agreement to August 31, 2005.

     E. Landlord and Tenant desire to amend the Lease on the terms and conditions hereinafter set forth.

     NOW, THEREFORE, in consideration of the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree to amend the Lease as follows:

     1. Surrender of Original Temporary Premises. Tenant shall, no later than May 22, 2005 (the “Surrender Date”), (a) remove all Tenant’s wiring, cabling, fixtures, furniture and other property from the Original Temporary Premises; (b) surrender possession of the Original Temporary Premises to Landlord in broom-clean condition; and (c) surrender to Landlord all keys for the Original Temporary Premises. If Tenant performs all of its obligations under the immediately preceding sentence before May 22, 2005, the date on which Tenant has

performed the last of such obligations shall be deemed to be the “Surrender Date”. Tenant does hereby acknowledge and agree that Tenant’s surrender of the Original Temporary Premises to Landlord shall not terminate the Lease with respect to the Premises or release Tenant from its obligations under the 23^rd Floor Temporary Occupancy Agreement including, but not limited to, Tenant’s obligation to pay Gross Rent (as defined in the 23^rd Floor Temporary Occupancy Agreement), and all other charges imposed on Tenant under the 23^rd Floor Temporary Occupancy Agreement accruing with respect to the Original Temporary Premises up to and including the Surrender Date. Tenant shall be liable to Landlord for costs incurred by Landlord as a result of Tenant’s failure to perform any of the foregoing, which liability shall survive the Surrender Date.

     Tenant hereby certifies, with respect to Tenant’s rights in and occupancy of the Original Temporary Premises, that the following statements are true as of the date hereof and will be true on the Surrender Date:

     (a) There exist no subleases affecting the Original Temporary Premises or any part thereof;

     (b) Tenant has not assigned or encumbered Tenant’s interest under the 23^rd Floor Temporary Occupancy Agreement or any part thereof;

     (c) Tenant has not at any time done or suffered any act or omission and will not do or suffer any act or omission whereby the Original Temporary Premises or any part thereof is or may be in any way charged, assessed or encumbered. No contracts for the furnishing of any labor or materials with respect to improvements or alterations in or about the Original Temporary Premises have been let by Tenant or are outstanding that have not been performed and satisfied; and

     (d) Tenant has full authority to execute and deliver this Amendment.

     Tenant agrees to defend, indemnify and save Landlord harmless from and against all loss, cost, damage and expense sustained by Landlord (including, without limitation, all expenses, costs and reasonable attorneys’ fees of Landlord in any action or defense undertaken by Landlord to protect itself from such loss or damage) resulting from any breach by Tenant of the covenants, representations and warranties made herein, from any lien, charge, encumbrance or claim against the Original Temporary Premises relating to any work or action caused or undertaken by or on behalf of Tenant prior to the Surrender Date, from any failure of Tenant to surrender possession of the Original Temporary Premises on or before the Surrender Date in the manner required hereunder, and from any claim against Landlord for which the Tenant is responsible or which has occurred as a result of Tenant’s action or inaction, which obligation shall survive the Surrender Date. Tenant’s failure to surrender possession of the Original Temporary Premises to Landlord by the Surrender Date in the manner required hereunder shall be deemed a Default under the Lease entitling Landlord, without the necessity of any further notice, to exercise all of its rights and remedies in connection therewith, including, without limitation, the right to recover holdover rent from Tenant with respect to the Original Temporary Premises at a rate equal to two hundred

2

percent (200%) of the Gross Rent due under the 23^rd Floor Temporary Occupancy Agreement for the period of such holdover.

     2. Substitute Temporary Premises. Effective as of the Substitute Temporary Premises Commencement Date (hereinafter defined), the Substitute Temporary Premises shall be added to the Premises upon all of the terms and conditions of the Lease as modified herein. The Lease of the Substitute Temporary Premises shall terminate upon the earlier to occur of (a) August 31, 2005, and (b) the expiration or sooner termination of the Lease with respect to the Premises. Tenant shall have the right to terminate the Lease with respect to the Substitute Temporary Premises (but not with respect to the portion of the Premises located on the 16^th floor of the Building) prior to August 31, 2005 in the event that the initial tenant improvement work to be performed in the portion of the Premises located on the 16^th floor of the Building has been completed, by delivering 30 days prior written notice of such early termination to Landlord. The term “Substitute Temporary Premises Commencement Date” shall mean the date upon which Landlord delivers possession of the Substitute Temporary Premises to Tenant, which date shall be within two (2) business days after the date this Amendment is fully executed and delivered. Notwithstanding the foregoing, Landlord’s failure to deliver possession of the Additional Space to Tenant by such date for reasons outside Landlord’s reasonable control shall not affect the enforceability of this Amendment, or subject Landlord to any liability to Tenant for damages or be deemed a default by Landlord of its obligations under the Lease. Tenant’s failure to surrender possession of the Substitute Temporary Premises to Landlord by the end of the term of the Lease with the respect to the Substitute Temporary Premises shall be deemed a Default under the Lease entitling the Landlord, without the necessity of any further notice, to exercise all of its rights and remedies in connection therewith, including, without limitation, the right to recover holdover rent from Tenant with respect to the Substitute Temporary Premises at a rate equal to 200% of the temporary premises rent for the period of such holdover.

     3. Gross Rent. Commencing on the Substitute Temporary Premises Commencement Date, Tenant shall, in addition to the Base Rent and Additional Rent payable with respect to the Premises, pay to Landlord rent (“Temporary Premises Rent”) with respect to the Substitute Temporary Premises in the manner and at the times set forth in Section 6 of the Lease for the payment of Base Rent and in the amounts hereinafter provided, without demand, deduction or setoff, except as expressly provided in the Lease. Temporary Premises Rent shall be payable in equal monthly installments of $10,972.92.

     4. Condition of Substitute Temporary Premises. Tenant acknowledges that it is leasing the Substitute Temporary Premises in its “as is” condition, and that no agreements to alter, remodel, decorate, clean or improve the Substitute Temporary Premises have been made by Landlord or any party acting on Landlord’s behalf. Tenant acknowledges and agrees that it shall not perform any alterations in the Substitute Temporary Premises.

     5. 8^th Floor Temporary Premises. The term of the 8^th Floor Temporary Occupancy Agreement is hereby extended to August 31, 2005 (the “8^th Floor Temporary Premises Expiration Date”). Tenant shall have the right to terminate the 8^th Floor Temporary Occupancy Agreement (but not with respect to the portion of the Premises located on the 16^th floor of the Building) prior to August 31, 2005 if the initial tenant improvement work to be performed in the

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portion of the Premises located on the 16^th floor of the Building has been completed, by delivering 30 days prior written notice of such early termination to Landlord. Tenant shall pay Landlord monthly rent for use of the 8^th Floor Temporary Premises through the 8^th Floor Temporary Premises Expiration Date in the amount of $3,608.33. On or before the 8^th Floor Temporary Premises Expiration Date, Tenant shall (a) remove all Tenant’s wiring, cabling, fixtures, furniture and other property from the 8^th Floor Temporary Premises; (b) surrender possession of the 8^th Floor Temporary Premises to Landlord in broom-clean condition; and (c) surrender to Landlord all keys for the 8^th Floor Temporary Premises. Tenant’s failure to surrender possession of the 8^th Floor Temporary Premises to Landlord by the 8^th Floor Temporary Premises Expiration Date in the condition required above shall be deemed a Default under the Lease entitling Landlord, without necessity of any further notice, to exercise all of its rights and remedies in connection therewith, including, without limitation, the right to recover holdover rent from Tenant with respect to the 8^th Floor Temporary Premises at a rate equal to two hundred percent (200%) of the Temporary Premises Rent for the period of such holdover.

     6. Electricity. Tenant shall pay for electricity used at the Substitute Temporary Premises and the 8^th Floor Temporary Premises directly to the electric utility company.

     7. Brokers. Landlord and Tenant each represent and warrant to the other that the only broker they have dealt with in connection with this Amendment is The John Buck Company, whose commission and fees shall be paid by Landlord pursuant to a separate written agreement. Landlord and Tenant each agree to defend, indemnify and hold the other harmless from and against all claims by any other broker for fees, commissions or other compensation to the extent such broker alleges to have been retained by the indemnifying party in connection with the execution of this Amendment. The provisions of this paragraph shall survive the expiration or sooner termination of the Lease.

     8. Limitation of Landlord’s Liability. The obligations of Landlord under the Lease as amended by this Amendment do not constitute personal obligations of the individual partners, members, directors, officers, shareholders, trustees or beneficiaries of Landlord, and Tenant shall not seek recourse against the partners, members, directors, officers, shareholders, trustees or beneficiaries of Landlord, or any of their personal assets for satisfaction of any liability with respect to the Lease as amended by this Amendment. In the event of any default by Landlord under the Lease as amended by this Amendment, Tenant’s sole and exclusive remedy shall be against Landlord’s interest in the Building and the real property on which it is located. The provisions of this paragraph are not designed to relieve Landlord from the performance of any of its obligations hereunder, but rather to limit Landlord’s liability in the case of the recovery of a judgment against it, as aforesaid, nor shall any of the provisions of this paragraph be deemed to limit or otherwise affect Tenant’s right to obtain injunctive relief or specific performance or availability of any other right or remedy which may be accorded Tenant by law or the Lease. In the event of sale or other transfer of Landlord’s right, title and interest in the Building, Landlord shall be released from all liability and obligations thereafter accruing under the Lease as amended by this Amendment; provided, that this paragraph shall inure to the benefit of any such purchaser or transferee.

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     9. Miscellaneous. Except as modified herein, the Lease and all of the terms and provisions thereof shall remain unmodified and in full force and effect as originally written. In the event of any conflict or inconsistency between the provisions of the Lease and the provisions of this Amendment, the provisions of this Amendment shall control. All terms used herein but not defined herein which are defined in the Lease shall have the same meaning for purposes hereof as they do for purposes of the Lease. The Recitals set forth above in this Amendment are hereby incorporated by this reference. This Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective beneficiaries, successors and assigns.

     10. Counterparts. This Amendment may be executed in any number of counterparts and by each of the undersigned on separate counterparts, which counterparts taken together shall constitute one and the same instrument.

[SIGNATURE PAGE FOLLOWS]

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     IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the day and year first above written.

LANDLORD:

222 SOUTH RIVERSIDE PROPERTY LLC,
a Delaware limited liability company

By: BCSP III Illinois Manager LLC,
a Delaware limited liability company, its Manager

By: Beacon Capital Strategic Partners III, L.P.,
a Delaware limited partnership, its sole member

By: BCP Strategic Partners III, L.P.,
a Delaware limited partnership,
its General Partner

By: Beacon Capital Partners, LLC,
a Delaware limited liability company,
its Manager

By:	/s/ Philip J. Brannigan, Jr.
	Name:
	Title:

TENANT:

SUA INSURANCE COMPANY, an Illinois
statutory insurance company

By:	/s/ Scott Goodreau
	Name:	Scott Goodreau
	Title:	VP, General Counsel

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EXHIBIT A-1

SUBSTITUTE TEMPORARY PREMISES

A-1

A-2

EX-10.26

Exhibit 10.26

AMENDED AND RESTATED
SECURITIES PURCHASE AGREEMENT

          This Securities Purchase Agreement (this “Agreement”) is made as of June 10, 2005, by and among the purchaser listed on Schedule A attached hereto (the “Purchaser”) and Specialty Underwriters’ Alliance, Inc., a Delaware corporation (the “Company”).

          WHEREAS, the Company desires to sell to Purchaser shares of the Company’s Class B Common Stock, par value $.01 per share (the “Shares”),

          NOW THEREFORE, in consideration of the foregoing recitals and the mutual covenants, agreements, and other consideration set forth herein, the parties hereto, intending to be legally bound hereby, agree as follows:

1. Sale and Purchase of Securities; Closing.

     (a) Authorization. The Company has authorized the issuance and sale of the Shares, having the rights, preferences, privileges and restrictions set forth in the Company’s Amended and Restated Certificate of Incorporation, a copy of which is attached hereto as Schedule B (the “Certificate of Incorporation”).

     (b) Sale and Purchase. Subject to the terms, conditions, representations, warranties, covenants and agreements contained in this Agreement, the Purchaser agrees to purchase from the Company, and the Company agrees to sell, assign, transfer and deliver to the Purchaser, from time to time, as set forth herein, the applicable number of Shares for the consideration specified in Section 1(c).

     (c) Purchase Price. The Purchaser agrees to pay to the Company an aggregate purchase price of $1,000,000 (the “Purchase Price”) to purchase Shares in installments, as provided for on Schedule C attached hereto (the “Installment Schedule,” and each date individually, an “Installment Date”). The number of Shares that Purchaser will receive in consideration for such payments will be determined by dividing (i) the applicable portion of the purchase price due on each Installment Date (each individually, a “Payment”) by (ii) the Closing Price of the Company’s Common Stock on the date of actual payment (with fractional Shares rounded up to the next whole Share). If Purchaser fails to make full payment on any Installment Date, the number of Shares that Purchaser shall be entitled to receive, with respect to such Installment Date, will be equal to the Payment divided by the Closing Price of the Common Stock on the date of actual payment, or if such day is not a Trading Day, the Trading Day first preceding the date of actual payment. Each Payment shall be made by wire transfer in immediately available funds to an account designated by the Company.

     (d) Delivery. With respect to each installment, the Company shall deliver, or cause to be delivered, the applicable number of Shares to the Purchaser as promptly as practical after full payment was made.

2. Representations and Warranties of the Purchaser.

     The Purchaser hereby represents and warrants to the Company as follows:

     (a) The Purchaser is purchasing the Shares for its own account, for investment purposes only, and not with a view to, or in connection with, any resale or other distribution of the Shares.

     (b) The Purchaser has such knowledge and experience in financial and business matters that the Purchaser is capable of evaluating the merits and risks of its investment in the Company and of protecting its own interests in connection therewith. The Purchaser is an “accredited investor” within the meaning of Rule 501(a) promulgated under the Securities Act.

     (c) The Purchaser has had the opportunity to review all documents and information that the Purchaser has requested concerning its investment in the Company. The Purchaser has had the opportunity to ask questions of the Company’s management, which questions were answered to its satisfaction.

     (d) The Purchaser acknowledges that an investment in the Company involves substantial risks. The Purchaser is able to bear the economic risk of its investment for an indefinite period of time.

     (e) The Purchaser has not paid or given any commission or other remuneration in connection with the purchase of the Shares. The Purchaser has not received any public media advertisements and has not been solicited by any form of mass mailing solicitation.

     (f) This Agreement has been duly executed and delivered by the Purchaser and has been duly authorized by the Purchaser by all necessary action. This Agreement is a valid and binding obligation of the Purchaser, enforceable in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting creditors’ rights generally or by the principles governing the availability of equitable remedies.

     (g) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will violate or result in any violation of, or be in conflict with or constitute a default under, or require the consent of any person under any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to the Purchaser, except such that are obtained or waived. No consent, approval, order or authorization of, or registration, declaration or filing with, any governmental authority is required on the part of the Purchaser in connection with the execution and delivery of this Agreement or the performance by the Purchaser of its obligations hereunder.

3. Representations and Warranties of the Company.

     The Company hereby represents and warrants to the Purchaser as follows:

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     (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware.

     (b) The Company has full corporate power and authority to execute and deliver this Agreement and to sell, transfer, assign and deliver the Shares to the Purchaser.

     (c) This Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting creditors’ rights generally or by the principles governing the availability of equitable remedies.

     (d) All of the Shares, when delivered in accordance with the terms of this Agreement, will be validly issued and outstanding, fully paid and nonassessable.

     (e) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will violate or result in any violation of, or be in conflict with or constitute a default under, or require the consent of any person under any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to the Company, except such that are obtained or waived. No consent, approval, order or authorization of, or registration, declaration or filing with, any governmental authority is required on the part of the Company in connection with the execution and delivery of this Agreement or the performance by the Company of its obligations hereunder.

     (f) The Company has delivered to the Purchaser true, correct and complete copies of the Company’s Certificate of Incorporation and By-laws of the Company, reflecting all amendments thereto. Such Certificate of Incorporation and By-laws have not been amended, modified or waived since the date thereof.

4. Terms of the Class B Common Stock.

     (a) Voting Rights; Redemption Rights. Holders of Class B Stock are not entitled to any voting rights in the Company. Holders of Class B Stock have no redemption or preemptive rights, except as provided herein.

     (b) Dividends; Liquidation and Distribution. Subject to the terms of any outstanding series of preferred stock of the Company, holders of Class B Stock are entitled to dividends in amounts and at times as may be declared by the board of directors of the Company out of funds legally available, in the same proportion as holders of the Company’s common stock, par value $.01 per share (the “Common Stock”). Upon liquidation or distribution, holders of Class B Stock will be entitled to share ratably, pari passu with the holders of the Common Stock, in all net assets available for distribution to stockholders, after payment of any liquidation preferences to holders of preferred stock of the Company.

     (c) Exchange Right. (i) At any time and from time to time after the fifth anniversary of the date of that certain Partner Agent Program Agreement between the Company and the Purchaser (the “Partner Agent Agreement”), provided that the Partner Agent Agreement is still

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in effect and has not been terminated by either party thereto, the Purchaser shall have the right, but not the obligation, to exchange its shares of Class B Stock for an equal number of shares of Common Stock (subject to equitable adjustment in the event of any stock dividend, stock split, combination, reorganization, recapitalization, reclassification or other similar event involving a change in such security); provided, further, that after the fifth anniversary of the date of the Partner Agent Agreement and for so long as the Partner Agent Agreement is in effect, including any day or days on which the Purchaser exercises such exchange right, the Purchaser must retain legal and beneficial ownership for its own benefit of such number of shares of Class B Stock as could be exchanged for the same number of shares of Common Stock with a value on such date of $500,000, as determined pursuant to Section 4(g).

          (ii) Upon the Purchaser’s exercise of the exchange right, the Purchaser shall surrender the certificate or certificates for the shares of Class B Stock to be so exchanged, accompanied by written notice of exchange duly executed, to the Company at any time during regular business hours at the office of the Company. If so required by the Company, the shares of Class B Stock so exchanged shall be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company, duly executed by the Purchaser.

     (d) Issuance of Shares on Exchange. (i) As promptly as practicable after the surrender, as provided herein, of any shares of Class B Stock for exchange, the Company shall deliver to the Purchaser certificates representing the number of fully paid and nonassessable shares of Common Stock into which such shares of Class B Stock have been exchanged in accordance with the provisions of Section 4(c)(i). Such exchange shall be deemed to have been made as of the close of business on the date that such shares of Class B Stock shall have been surrendered for exchange by delivery thereof with a written notice of exchange duly executed, so that the rights of the Purchaser as a holder of the shares of Class B Stock so exchanged shall cease at such time and, subject to the following provisions of this section, the Purchaser shall be treated for all purposes as having become the record holder of such shares of Common Stock at such time; provided, however, that no such surrender on any date when the stock transfer books of the Company shall be closed shall be effective to constitute the Purchaser as the record holder of such shares of Common Stock on such date, but such surrender shall be effective to constitute the Purchaser as the record holder thereof for all purposes at the close of business on the next succeeding day on which such stock transfer books are open. The Company shall issue and deliver to the Purchaser, at the expense of the Company, a new certificate covering the number of shares of Class B Stock representing the unexchanged portion of the certificate so surrendered, which new certificate shall entitle in all respects the Purchaser to the rights of the Class B Stock represented thereby to the same extent as if the certificate theretofore covering such unexchanged shares had not been surrendered for exchange.

          (ii) All shares of Class B Stock that shall have been surrendered for exchange as provided herein shall no longer be deemed to be outstanding and all rights with respect to such shares shall immediately cease and terminate on the surrender date, except only the right of the Purchaser to receive shares of Common Stock in exchange therefor, and such shares shall not thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose whatsoever.

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     (e) Repurchase Right. (i) (A) At any time prior to the fifth anniversary of the execution of the Partner Agent Agreement, if the Partner Agent Agreement is terminated by either the Company or the Purchaser, for any reason, the Company shall have the right, but not the obligation, to repurchase the Shares currently held by the Purchaser for a price per Share equal to the lesser of (1) the weighted average price per Share as provided herein or (2) the Current Market Price (as defined herein) of the Common Stock; and (B) at any time on or after the fifth anniversary of the execution of the Partner Agent Agreement, if the Partner Agent Agreement is terminated by either the Company or the Purchaser, for any reason, the Company shall have the right, but not the obligation, to repurchase the Shares currently held by the Purchaser for a price per Share equal to the Current Market Price of the Common Stock. Such right of the Company may be exercised by providing a notice of repurchase (the “Repurchase Notice”) to the Purchaser not less than five business days prior to the date repurchase is to be made pursuant to this Section 4(e), specifying the date of such repurchase (the “Repurchase Date”) and the number of shares of Class B Stock to be repurchased. The Repurchase Notice having been so given by the Company, the aggregate repurchase price for the shares of Class B Stock to be so repurchased shall become due and payable on the Repurchase Date.

          (ii) For purposes of this Agreement:

               (A) “Current Market Price” per share of a security at any date herein shall mean the average daily Closing Price (as defined herein) of such security for the 20 consecutive Trading Days (as defined herein) preceding such date (subject to equitable adjustment in the event of any stock dividend, stock split, combination, reorganization, recapitalization, reclassification or other similar event involving a change in such security); provided, however, that in the case of the Common Stock, where no public market exists for the Common Stock at the time of exchange, the Current Market Price per share of the Common Stock shall be as determined by an independent investment banking firm experienced in the valuation of securities of property and casualty insurance companies and selected by the Company (at the Company’s expense); provided that, after receipt of the determination by such firm, the Purchaser shall have the right to select (at the expense of the Purchaser) a second such investment banking firm to make such determination, in which case the Current Market Price shall be the average of the two determinations; and provided further that such determination need not be made more frequently than once every six months and any determination shall be superceded by a good faith determination by the Company’s board of directors that shall be required if a material event reasonably likely to affect the value of the Common Stock (such as a placement of equity securities) should occur after the next preceding determination, whether by an investment banking firm or firms, or by the Company’s board of directors.

               (B) “Closing Price” shall mean, with respect to any Trading Day: (1) if the Common Stock is listed or admitted to trading on a national securities exchange, the last reported sale price of the Common Stock, regular way, or in case no sale takes place on such day, the average of the reported closing bid and asked prices of the Common Stock, regular way, in either case as reported on such exchange; or (2) if the Common Stock is not listed or admitted to trading on any national securities exchange, but is listed on the Nasdaq National Market, the closing sale price of the Common Stock on such day, or in case no sale is publicly reported for such day, the average of the representative closing bid and asked quotations for the Common

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Stock, as reported on Nasdaq; or (3) if the Common Stock is not listed or admitted to trading on the Nasdaq National Market, the average of the bid and asked prices for the Common Stock as furnished for such day by Nasdaq, or, if not furnished by Nasdaq, by any New York Stock Exchange, Inc. member firm regularly making a market in the Common Stock and selected for such purpose by the Company’s board of directors.

               (C) “Trading Day” shall mean, in the case of any security, any day on which trading takes place (1) if such security is then listed or admitted to trading on a national securities exchange, on the principal national securities exchange on which such security is then listed or admitted to trading, (2) if such security is then listed or admitted to trading on the Nasdaq National Market, on the Nasdaq National Market, or (3) otherwise, in the over-the-counter market.

          (iii) On or prior to the Repurchase Date, the Purchaser shall surrender such shares of Class B Stock to the Company in the manner and at the place designated by the Company. From and after the Repurchase Date, unless there shall have been a default in the payment of the repurchase price, all rights of the Purchaser with respect to the Shares shall cease, and such Shares shall not thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose whatsoever.

     (f) Provisions in Case of a Change of Control. In case of any “Change of Control”; that is: (i) any sale, lease, exchange or other transfer of all or substantially all of the property and assets of the Company to a non-affiliated third party; (ii) any merger or consolidation with a non-affiliated third party to which the Company is a party and as a result of which the holders of the voting securities of the Company immediately prior thereto own less than a majority of the outstanding voting securities of the surviving entity immediately following such transaction; or (iii) any Person or group of Persons (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) shall beneficially own (as defined in Rule 13d-3 under the Exchange Act) securities of the Company representing 50% or more of the combined voting power of the voting securities of the Company then outstanding, then the Purchaser shall thereafter have the right to convert its shares of the Class B Stock into the kind and amount of securities, cash and other property receivable upon such reorganization, reclassification, consolidation, merger or disposition by the Purchaser of the number of shares of Common Stock that the Purchaser would have received had it converted its shares of Class B Stock immediately prior to such reorganization, reclassification, consolidation, merger or disposition pursuant to Section 4(c)(i). For purposes of this section, “voting securities” shall mean securities, the holders of which are ordinarily, in the absence of contingencies, entitled to elect the corporate directors (or Persons performing similar functions). The foregoing provisions of this section shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers or dispositions.

     (g) Purchase obligation. Following the five-year anniversary of the date of this Agreement, on each six-month anniversary thereafter, the Company shall determine the aggregate value of the shares of Class B Stock held by the Purchaser. The value of each share of Class B Stock shall equal the fair market value of one share of the Common Stock on such date, to be calculated as follows: (i) if the Common Stock is listed or admitted to trading on a national

6

securities exchange, the last reported sale price of the Common Stock, regular way, on such day or in case no sale takes place on such day, the average of the reported closing bid and asked prices of the Common Stock, regular way, on such day, in either case as reported on such exchange; or (ii) if the Common Stock is not listed or admitted to trading on any national securities exchange, but is listed on the Nasdaq National Market, the closing sale price of the Common Stock on such day, or in case no sale is publicly reported for such day, the average of the representative closing bid and asked quotations for the Common Stock, as reported on Nasdaq; or (iii) if the Common Stock is not listed or admitted to trading on the Nasdaq National Market, the average of the bid and asked prices for the Common Stock as furnished for such day by Nasdaq, or, if not furnished by Nasdaq, by any New York Stock Exchange, Inc. member firm regularly making a market in the Common Stock and selected for such purpose by the Company’s board of directors; or (iv) if no public market exists for the Common Stock, as determined in good faith by the Company’s board of directors. If the aggregate value of the Class B Stock held by the Purchaser is determined to be less than $500,000, then the Purchaser shall purchase from the Company such number of shares of Class B Stock as would equal the difference between the value of the Class B Stock as determined herein and $500,000. The purchase price of such shares of Class B Stock would be payable to the Company by wire transfer in immediately available funds to an account designated by the Company no later than one business day after the determination of the value as provided herein. If such six-month anniversary falls on any day that is not a business day, then the determination of the value of the Class B Stock shall be made on the next immediately following business day.

5. Taxes on Exchange. The Company will pay any and all stamp or similar taxes that may be payable in respect of the issuance and delivery of shares of Common Stock upon exchange of shares of Class B Stock pursuant to Section 4(c)(i).

6. No Registration under Federal or State Securities Laws. (a) The Purchaser acknowledges that the Shares have not been registered under the Securities Act or the securities laws of any state by reason of a specific exemption or exemptions from registration under the Securities Act and applicable state securities laws, and that the Company’s reliance on such exemptions is predicated on the accuracy and completeness of the Purchaser’s representations, warranties, acknowledgements and agreements contained herein. Accordingly, the Shares may not be offered, sold, transferred, pledged or otherwise disposed of by the Purchaser without an effective registration statement under the Securities Act and any applicable state securities laws or an opinion of counsel acceptable to the Company that the proposed transaction will be exempt from registration. The Purchaser acknowledges that the Company is not required to register the Shares under the Securities Act or any applicable state securities laws or to make any exemption from registration available. The Purchaser understands that the Shares, and any shares of Common Stock issued in exchange for Shares, will bear legends substantially to the effect of the following:

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE. THE SHARES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR

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OTHERWISE DISPOSED OF WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS, RECEIPT OF A NO-ACTION LETTER ISSUED BY THE SECURITIES AND EXCHANGE COMMISSION (TOGETHER WITH EITHER REGISTRATION OR AN EXEMPTION UNDER APPLICABLE STATE SECURITIES LAWS) OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT THE PROPOSED TRANSACTION WILL BE EXEMPT FROM REGISTRATION UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS.”

and that the Company will place a stop order against the transfer of the certificates representing the Shares and refuse to effect any transfers thereof in the absence of satisfying the conditions contained in the foregoing legend.

     (b) The Purchaser acknowledges that no public market now exists for Class B Common Stock and there is no assurance that a public market will ever exist for such securities.

7. Transfers. The Purchaser shall not sell, assign, transfer, pledge, hypothecate, mortgage or dispose of, by gift or otherwise, or in any way encumber, any shares of Class B Stock owned by the Purchaser, except for exchanges and repurchases in compliance with Section 4.

8. No Preemptive Rights. The Purchaser shall have no preemptive or preferential right of subscription to any shares of stock of the Company, or to options, warrants or other interests therein or therefor, or to any obligations convertible or exchangeable into stock of the Company (except as provided herein), issued or sold, or any right of subscription to any security thereof other than such, if any, as the Company’s board of directors, in its discretion, may determine from time to time and at such price or prices as the Company’s board of directors may fix from time to time.

9. Miscellaneous.

     (a) Payment of Expenses. Each party shall pay its own expenses incurred in connection with this Agreement.

     (b) Entire Agreement; Amendments. This Agreement constitutes the entire agreement of the parties with respect to the transactions contemplated hereby and may not be modified, amended, altered or supplemented except upon the execution and delivery of a written agreement executed by the party or parties sought to be affected.

     (c) Binding Effect. This Agreement shall be binding upon, inure to the benefit of and be enforceable by, the Company and the Purchaser, and the Company’s or the Purchaser’s respective heirs, beneficiaries, executors, successors, representatives and assigns, as the case may be.

     (d) Further Assurances. From time to time, at the other party’s request and without further consideration, each party hereto shall execute and deliver such additional documents and

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take all such further lawful action as may be necessary or desirable to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement.

     (e) Notices. All notices, claims, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given at the time when hand delivered, when received if sent by facsimile or by same day or overnight recognized commercial courier service, or three days after being mailed (registered or certified mail, postage prepaid, return receipt requested) as follows:

If to the Purchaser:

Risk Transfer Holdings, Inc.
301 East Pine Street, Suite 350
Orlando, Florida 38201
Facsimile: 305-832-7909
Attention: Paul Hughes, CEO

If to the Company:

Specialty Underwriters’ Alliance, Inc.

222 South Riverside Plaza
Chicago, Illinois 60606
Facsimile: 312-277-1800
Attention: Scott W. Goodreau

with a copy to:

Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038
Facsimile: 212-806-6006
Attention: William W. Rosenblatt, Esq.

or to such other address as the person to whom notice is to be given may have previously furnished to the other party in writing in the manner set forth above (provided that notice of any change of address shall be effective only upon receipt thereof).

     (f) Severability. Whenever possible, each provision or portion of any provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law; however, if any provision or portion of any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or portion of any provision in such jurisdiction, and this Agreement will be reformed, construed and

9

enforced in such jurisdiction as if such invalid, illegal or unenforceable provision or portion of any provision had never been contained herein.

     (g) Remedies Cumulative. All rights, powers and remedies provided under this Agreement or otherwise available in respect hereof at law or in equity shall be cumulative and not alternative, and the exercise of any thereof by any party shall not preclude the simultaneous or later exercise of any other such right, power or remedy by such party. All representations, warranties, covenants and agreements contained herein shall survive the execution and delivery of this Agreement, the closing and any investigation made by any party hereto.

     (h) No Waiver. The failure of any party hereto to exercise any right, power or remedy provided under this Agreement or otherwise available in respect hereof at law or in equity, or to insist upon compliance by any other party hereto with its obligations hereunder, and any custom or practice of the parties at variance with the terms hereof, shall not constitute a waiver by such party of its right to exercise any such or other right, power or remedy or to demand such compliance.

     (i) No Third Party Beneficiaries. This Agreement is not intended to be for the benefit of, and shall not be enforceable by, any person or entity who or which is not a party hereto.

     (j) Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed to be an original, but all of which together will constitute one and the same instrument.

     (k) Governing Law. This Agreement will be governed as to formation, performance, interpretation and enforcement by the laws of the state of New York, without regard to principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby.

     (l) Arbitration. (i) Any dispute arising out of the interpretation, performance or breach of this Agreement, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators. Notice requesting arbitration shall be in writing and sent certified or registered mail, return receipt requested. One arbitrator shall be chosen by each of the Company and the Purchaser and the two arbitrators shall, before instituting the hearing, choose an impartial third arbitrator who shall preside at the hearing. If either party fails to appoint its arbitrator within thirty (30) days after being requested to do so by the other party, the latter, after ten (10) days’ notice by certified or registered mail of its intention to do so, shall request the American Arbitration Association (“AAA”) to appoint the second arbitrator. If the two arbitrators are unable to agree upon the third arbitrator within thirty (30) days of their appointment, the arbitrators shall request the AAA to select the third arbitrator.

          (ii) Within thirty (30) days after notice of appointment of all arbitrators, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules for hearings. The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. Unless the panel agrees otherwise, arbitration shall take place

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in New York, New York, and the panel shall apply the law of the state of New York. The decision of any two arbitrators when rendered in writing shall be final and binding. The panel is empowered to grant interim relief as it may deem appropriate. In no event shall the panel award punitive or exemplary damages. The panel shall make its decision considering the custom and practice of the applicable insurance business within forty-five (45) days following the termination of the hearings. Either party may apply to a United States District Court or to a State Court of competent jurisdiction for an order confirming the arbitration award; a judgment of such court shall thereupon be entered on the award. If such an order is issued, the attorneys’ fees of the party so applying and court costs will be paid by the party against whom confirmation is sought.

          (iii) The parties hereto shall share the expense of the arbitrators equally. The remaining costs of the arbitration shall be allocated by the panel. The panel may, at its discretion, award such further costs, interest and expenses as it considers appropriate, including but not limited to attorneys’ fees, to the extent not prohibited by law.

          (iv) Any arbitration proceeding under this Agreement will not be consolidated or joined with any arbitration proceeding under any other agreement, or involving any other property or premises, and will not proceed as a class action.

     (m) Jurisdiction. Subject to the provisions of Section 10(l), the Company and the Purchaser each (i) hereby irrevocably submits to the jurisdiction of the state and federal courts located in the city and state of New York for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement or the transactions contemplated hereby and (ii) hereby waives to the extent not prohibited by applicable law, and agrees not to assert, by way of motion, as a defense or otherwise, in any such proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that any such proceedings brought in one of the above-named courts is improper, or that this Agreement, or the transactions contemplated hereby, may not be enforced in or by such court. Nothing contained in this section shall affect the right of the Company or the Purchaser to serve process in any other manner permitted by law or commence legal proceedings or otherwise proceed against the Company or the Purchaser in any other jurisdiction. In the event the Company or the Purchaser should commence or maintain any action arising out of or related to this Agreement in a forum other than the state and federal courts located in the city and state of New York, the Purchaser or the Company, as the case may be, shall be entitled to request the dismissal of such action, and the Company or the Purchaser, as the case may be, stipulate that such action shall be dismissed.

     (n) Descriptive Headings. The descriptive headings used herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.

     (o) Gender and Number. Any words used in the masculine, feminine or neuter shall read and be construed in the masculine, feminine or neuter where they would so apply. Words in the singular shall be read and construed as though used in the plural in all cases where they would so apply.

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[Remainder of Page Intentionally Left Blank]

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     IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the Purchaser and the Company as of the day and year first above written.

THE COMPANY: SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
By:	/s/ Courtney C. Smith
	Name:	Courtney C. Smith
	Title:	President and CEO
THE PURCHASER: RISK TRANSFER HOLDINGS, INC.
By:	/s/ Paul Hughes
	Name:	Paul Hughes
	Title:	Chief Executive Officer

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Schedule A

PURCHASER:

Risk Transfer Holdings, Inc.
301 East Pine Street, Suite 350
Orlando, Florida 38201
Facsimile: 305-832-7909
Attention: Paul Hughes, CEO

Schedule B

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.

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Schedule C

INSTALLMENT SCHEDULE

Monthly payments in the amount of $47,222.22, commencing on July 1, 2005.

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EX-10.27

Exhibit 10.27

AMENDMENT NO. 1
TO THE
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
PARTNER AGENT PROGRAM AGREEMENT

This amendment modifies the Specialty Underwriters’ Alliance, Inc. Partner Agent Program Agreement by and between Company and Partner Agent., dated November 3^rd, 2004 as amended (the “Agreement”). Any capitalized terms defined in the Agreement and used herein shall have the same meaning in this Addendum as in the Agreement. Except as amended hereby, the Agreement remains in full force and effect after the date hereof and each of the parties by its execution hereof ratifies and confirms the provisions of said Agreement.

Now, therefore, in accordance with Section IX, D of the Agreement and in consideration of the mutual agreements and covenants hereinafter set forth, the parties wish to amend the Agreement as follows:

1.	“Lighthouse, LLC and any other entity which produces business for the programs contemplated under this agreement” inserted immediately following any reference to “Risk Transfer Holdings, Inc.”
2.	Section VI, PREMIUMS AND ACCOUNTING, line 3 shall be modified by replacing “fifteenth” with “tenth”.
3.	Section VIII F, TERM AND TERMINATION, shall be amended by deleting the Company’s address and replacing “222 South Riverside Plaza, Chicago, IL 60606.”
	and replacing “Daryl B. Williams, President” with “Paul R. Hughes, CEO”
4.	Exhibit A, Section A shall be modified by adding the following:

Program Description	Line of Business	Maximum Rate of Commission
E-Comp.	Workers’ Comp.	12%

5.	Exhibit B, shall be modified by inserting the following as the first sentence of the page.
	“A separate profit sharing calculation will be completed for each individual program managed by the Partner Agent.”
6.	Exhibit B, LEGEND, Table 1, Line 15, page 12 shall be modified by inserting the following after “$20 Million”:
	“for an individual program”

7.	Exhibit B, LEGEND, other defined terms used in this Agreement, Section B, shall be modified by deleting the first sentence and replacing with the following:
	“The Initial Profit Sharing Year of this Agreement shall be from January 1, 2005 to December 31, 2005.”

This Amendment may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

This Amendment shall be deemed to be made in and in all respects shall be interpreted, construed and governed by and in accordance with the law of the State of Delaware without regard to principles of conflicts of laws that would require application of the law of a jurisdiction other than the State of Delaware.

Signed this 30^th day of June, 2005.

COMPANY: Specialty Underwriters’ Alliance, Inc., for and on behalf of itself and its subsidiaries existing now or hereafter

BY:	/s/ William Loder
NAME:	William Loder
TITLE:	Chief Underwriting Officer
PARTNER AGENT
BY:	/s/ Paul Hughes
NAME:	Paul R. Hughes
TITLE:	Chief Executive Officer

EX-10.28

Exhibit 10.28

AMENDED AND RESTATED
SECURITIES PURCHASE AGREEMENT

               This Securities Purchase Agreement (this “Agreement”) is made as of September 8, 2005, by and among the purchaser listed on Schedule A attached hereto (the “Purchaser”) and Specialty Underwriters’ Alliance, Inc., a Delaware corporation (the “Company”).

          WHEREAS, the Company desires to sell to Purchaser shares of the Company’s Class B Common Stock, par value $.01 per share (the “Shares”),

          NOW THEREFORE, in consideration of the foregoing recitals and the mutual covenants and agreements set forth herein, the parties hereto, intending to be legally bound hereby, agree as follows:

1. Sale and Purchase of Securities; Closing.

     (a) Authorization. The Company has authorized the issuance and sale of the Shares, having the rights, preferences, privileges and restrictions set forth in the Company’s Amended and Restated Certificate of Incorporation, a copy of which is attached hereto as Schedule B (the “Certificate of Incorporation”).

     (b) Sale and Purchase. Subject to the terms, conditions, representations, warranties, covenants and agreements contained in this Agreement, the Purchaser agrees to purchase from the Company, and the Company agrees to sell, assign, transfer and deliver to the Purchaser, from time to time, as set forth herein, the applicable number of Shares for the consideration specified in Section 1(c).

     (c) Purchase Price. The Purchaser agrees to pay to the Company an aggregate purchase price of $1,000,000 (the “Purchase Price”) to purchase Shares in installments, as provided for on Schedule C attached hereto (the “Installment Schedule,” and each date individually, an “Installment Date”). The number of Shares that Purchaser will receive in consideration for such payments will be determined by dividing (i) the applicable portion of the purchase price due on each Installment Date (each individually, a “Payment”) (ii) the Closing Price of the Company’s Common Stock on the date of actual payment (with fractional Shares rounded up to the next whole Share). If Purchaser fails to make full payment on any Installment Date, the number of Shares that Purchaser shall be entitled to receive, with respect to such Installment Date, will be equal to the Payment divided by the Closing Price of the Common Stock on the date of actual payment, or if such day is not a Trading Day, the Trading Day first preceding the date of actual payment. Each Payment shall be made by wire transfer in immediately available funds to an account designated by the Company.

     (d) Delivery. With respect to each installment, the Company shall deliver, or cause to be delivered, the applicable number of Shares to the Purchaser as promptly as practical after full payment was made.

2. Representations and Warranties of the Purchaser.

     The Purchaser hereby represents and warrants to the Company as follows:

     (a) The Purchaser is purchasing the Shares for its own account, for investment purposes only, and not with a view to, or in connection with, any resale or other distribution of the Shares.

     (b) The Purchaser has such knowledge and experience in financial and business matters that the Purchaser is capable of evaluating the merits and risks of its investment in the Company and of protecting its own interests in connection therewith. The Purchaser is an “accredited investor” within the meaning of Rule 501(a) promulgated under the Securities Act.

     (c) The Purchaser has had the opportunity to review all documents and information that the Purchaser has requested concerning its investment in the Company. The Purchaser has had the opportunity to ask questions of the Company’s management, which questions were answered to its satisfaction.

     (d) The Purchaser acknowledges that an investment in the Company involves substantial risks. The Purchaser is able to bear the economic risk of its investment for an indefinite period of time.

     (e) The Purchaser has not paid or given any commission or other remuneration in connection with the purchase of the Shares. The Purchaser has not received any public media advertisements and has not been solicited by any form of mass mailing solicitation.

     (f) This Agreement has been duly executed and delivered by the Purchaser and has been duly authorized by the Purchaser by all necessary action. This Agreement is a valid and binding obligation of the Purchaser, enforceable in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting creditors’ rights generally or by the principles governing the availability of equitable remedies.

     (g) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will violate or result in any violation of, or be in conflict with or constitute a default under, or require the consent of any person under any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to the Purchaser, except such that are obtained or waived. No consent, approval, order or authorization of, or registration, declaration or filing with, any governmental authority is required on the part of the Purchaser in connection with the execution and delivery of this Agreement or the performance by the Purchaser of its obligations hereunder.

3. Representations and Warranties of the Company.

     The Company hereby represents and warrants to the Purchaser as follows:

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     (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware.

     (b) The Company has full corporate power and authority to execute and deliver this Agreement and to sell, transfer, assign and deliver the Shares to the Purchaser.

     (c) This Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting creditors’ rights generally or by the principles governing the availability of equitable remedies.

     (d) On the date hereof, the Company has full record and beneficial ownership of, and good, valid and marketable title to, the Shares, free and clear of all liens, encumbrances, security interests, rights, claims or equities of any nature whatsoever (including, without limitation, any voting rights granted to any third party with respect to the Shares). All of the Shares, when delivered in accordance with the terms of this Agreement, will be validly issued and outstanding, fully paid and nonassessable.

     (e) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will violate or result in any violation of, or be in conflict with or constitute a default under, or require the consent of any person under any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to the Company, except such that are obtained or waived. No consent, approval, order or authorization of, or registration, declaration or filing with, any governmental authority is required on the part of the Company in connection with the execution and delivery of this Agreement or the performance by the Company of its obligations hereunder.

     (f) The Company has delivered to the Purchaser true, correct and complete copies of the Company’s Certificate of Incorporation and By-laws of the Company, reflecting all amendments thereto. Such Certificate of Incorporation and By-laws have not been amended, modified or waived since the date thereof.

4. Terms of the Class B Common Stock.

     (a) Voting Rights; Redemption Rights. Holders of Class B Stock are not entitled to any voting rights in the Company. Holders of Class B Stock have no redemption or preemptive rights, except as provided herein.

     (b) Dividends; Liquidation and Distribution. Subject to the terms of any outstanding series of preferred stock of the Company, holders of Class B Stock are entitled to dividends in amounts and at times as may be declared by the board of directors of the Company out of funds legally available, in the same proportion as holders of the Company’s common stock, par value $.01 per share (the “Common Stock”). Upon liquidation or distribution, holders of Class B Stock will be entitled to share ratably, pari passu with the holders of the Common Stock, in all net assets available for distribution to stockholders, after payment of any liquidation preferences to holders of preferred stock of the Company.

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     (c) Exchange Right. (i) At any time and from time to time after the fifth anniversary of the date of that certain Partner Agent Program Agreement between the Company and the Purchaser (the “Partner Agent Agreement”), provided that the Partner Agent Agreement is still in effect and has not been terminated by either party thereto, the Purchaser shall have the right, but not the obligation, to exchange its shares of Class B Stock for an equal number of shares of Common Stock (subject to equitable adjustment in the event of any stock dividend, stock split, combination, reorganization, recapitalization, reclassification or other similar event involving a change in such security); provided, further, that after the fifth anniversary of the date of the Partner Agent Agreement and for so long as the Partner Agent Agreement is in effect, including any day or days on which the Purchaser exercises such exchange right, the Purchaser must retain legal and beneficial ownership for its own benefit of such number of shares of Class B Stock as could be exchanged for the same number of shares of Common Stock with a value on such date of $500,000, as determined pursuant to Section 4(g).

          (ii) Upon the Purchaser’s exercise of the exchange right, the Purchaser shall surrender the certificate or certificates for the shares of Class B Stock to be so exchanged, accompanied by written notice of exchange duly executed, to the Company at any time during regular business hours at the office of the Company. If so required by the Company, the shares of Class B Stock so exchanged shall be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company, duly executed by the Purchaser.

     (d) Issuance of Shares on Exchange. (i) As promptly as practicable after the surrender, as provided herein, of any shares of Class B Stock for exchange, the Company shall deliver to the Purchaser certificates representing the number of fully paid and nonassessable shares of Common Stock into which such shares of Class B Stock have been exchanged in accordance with the provisions of Section 4(c)(i). Such exchange shall be deemed to have been made as of the close of business on the date that such shares of Class B Stock shall have been surrendered for exchange by delivery thereof with a written notice of exchange duly executed, so that the rights of the Purchaser as a holder of the shares of Class B Stock so exchanged shall cease at such time and, subject to the following provisions of this section, the Purchaser shall be treated for all purposes as having become the record holder of such shares of Common Stock at such time; provided, however, that no such surrender on any date when the stock transfer books of the Company shall be closed shall be effective to constitute the Purchaser as the record holder of such shares of Common Stock on such date, but such surrender shall be effective to constitute the Purchaser as the record holder thereof for all purposes at the close of business on the next succeeding day on which such stock transfer books are open. The Company shall issue and deliver to the Purchaser, at the expense of the Company, a new certificate covering the number of shares of Class B Stock representing the unexchanged portion of the certificate so surrendered, which new certificate shall entitle in all respects the Purchaser to the rights of the Class B Stock represented thereby to the same extent as if the certificate theretofore covering such unexchanged shares had not been surrendered for exchange.

          (ii) All shares of Class B Stock that shall have been surrendered for exchange as provided herein shall no longer be deemed to be outstanding and all rights with respect to such shares shall immediately cease and terminate on the surrender date, except only the right of the Purchaser to receive shares of Common Stock in exchange therefor, and such shares shall not

4

thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose whatsoever.

     (e) Repurchase Right. (i) (A) At any time prior to the fifth anniversary of the execution of the Partner Agent Agreement, if the Partner Agent Agreement is terminated by either the Company or the Purchaser, for any reason, the Company shall have the right, but not the obligation, to repurchase the Shares currently held by the Purchaser for a price per Share equal to the lesser of (1) the purchase price per Share as provided herein or (2) the Current Market Price (as defined herein) of the Common Stock; and (B) at any time on or after the fifth anniversary of the execution of the Partner Agent Agreement, if the Partner Agent Agreement is terminated by either the Company or the Purchaser, for any reason, the Company shall have the right, but not the obligation, to repurchase the Shares currently held by the Purchaser for a price per Share equal to the Current Market Price of the Common Stock. Such right of the Company may be exercised by providing a notice of repurchase (the “Repurchase Notice”) to the Purchaser not less than five business days prior to the date repurchase is to be made pursuant to this Section 4(e), specifying the date of such repurchase (the “Repurchase Date”) and the number of shares of Class B Stock to be repurchased. The Repurchase Notice having been so given by the Company, the aggregate repurchase price for the shares of Class B Stock to be so repurchased shall become due and payable on the Repurchase Date.

          (ii) For purposes of this Agreement:

               (A) “Current Market Price” per share of a security at any date herein shall mean the average daily Closing Price (as defined herein) of such security for the 20 consecutive Trading Days (as defined herein) preceding such date (subject to equitable adjustment in the event of any stock dividend, stock split, combination, reorganization, recapitalization, reclassification or other similar event involving a change in such security); provided, however, that in the case of the Common Stock, where no public market exists for the Common Stock at the time of exchange, the Current Market Price per share of the Common Stock shall be as determined by an independent investment banking firm experienced in the valuation of securities of property and casualty insurance companies and selected by the Company (at the Company’s expense); provided that, after receipt of the determination by such firm, the Purchaser shall have the right to select (at the expense of the Purchaser) a second such investment banking firm to make such determination, in which case the Current Market Price shall be the average of the two determinations; and provided further that such determination need not be made more frequently than once every six months and any determination shall be superceded by a good faith determination by the Company’s board of directors that shall be required if a material event reasonably likely to affect the value of the Common Stock (such as a placement of equity securities) should occur after the next preceding determination, whether by an investment banking firm or firms, or by the Company’s board of directors.

               (B) “Closing Price” shall mean, with respect to any Trading Day: (1) if the Common Stock is listed or admitted to trading on a national securities exchange, the last reported sale price of the Common Stock, regular way, or in case no sale takes place on such day, the average of the reported closing bid and asked prices of the Common Stock, regular way, in either case as reported on such exchange; or (2) if the Common Stock is not listed or admitted

5

to trading on a national securities exchange, but is listed on the Nasdaq National Market, the closing sale price of the Common Stock on such day, or in case no sale is publicly reported for such day, the average of the representative closing bid and asked quotations for the Common Stock, as reported on Nasdaq; or (3) if the Common Stock is not listed or admitted to trading on the Nasdaq National Market, the average of the bid and asked prices for the Common Stock as furnished for such day by Nasdaq, or, if not furnished by Nasdaq, by any New York Stock Exchange, Inc. member firm regularly making a market in the Common Stock and selected for such purpose by the Company’s board of directors.

               (C) “Trading Day” shall mean, in the case of any security, any day on which trading takes place (1) if such security is then listed or admitted to trading on a national securities exchange, on the principal national securities exchange on which such security is then listed or admitted to trading, (2) if such security is then listed or admitted to trading on the Nasdaq National Market, on the Nasdaq National Market, or (3) otherwise, in the over-the-counter market.

          (iii) On or prior to the Repurchase Date, the Purchaser shall surrender such shares of Class B Stock to the Company in the manner and at the place designated by the Company. From and after the Repurchase Date, unless there shall have been a default in the payment of the repurchase price, all rights of the Purchaser with respect to the Shares shall cease, and such Shares shall not thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose whatsoever.

     (f) Provisions in Case of a Change of Control. In case of any “Change of Control”; that is: (i) any sale, lease, exchange or other transfer of all or substantially all of the property and assets of the Company to a non-affiliated third party; (ii) any merger or consolidation with a non-affiliated third party to which the Company is a party and as a result of which the holders of the voting securities of the Company immediately prior thereto own less than a majority of the outstanding voting securities of the surviving entity immediately following such transaction; or (iii) any Person or group of Persons (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) shall beneficially own (as defined in Rule 13d-3 under the Exchange Act) securities of the Company representing 50% or more of the combined voting power of the voting securities of the Company then outstanding, then the Purchaser shall thereafter have the right to convert its shares of the Class B Stock into the kind and amount of securities, cash and other property receivable upon such reorganization, reclassification, consolidation, merger or disposition by the Purchaser of the number of shares of Common Stock that the Purchaser would have received had it converted its shares of Class B Stock immediately prior to such reorganization, reclassification, consolidation, merger or disposition pursuant to Section 4(c)(i). For purposes of this section, “voting securities” shall mean securities, the holders of which are ordinarily, in the absence of contingencies, entitled to elect the corporate directors (or Persons performing similar functions). The foregoing provisions of this section shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers or dispositions.

     (g) Purchase obligation. Following the five-year anniversary of the date of this Agreement, on each six-month anniversary thereafter, the Company shall determine the

6

aggregate value of the shares of Class B Stock held by the Purchaser. The value of each share of Class B Stock shall equal the fair market value of one share of the Common Stock on such date, to be calculated as follows: (i) if the Common Stock is listed or admitted to trading on a national securities exchange, the last reported sale price of the Common Stock, regular way, on such day or in case no sale takes place on such day, the average of the reported closing bid and asked prices of the Common Stock, regular way, on such day, in either case as reported on such exchange; or (ii) if the Common Stock is not listed or admitted to trading on any national securities exchange, but is listed on the Nasdaq National Market, the closing sale price of the Common Stock on such day, or in case no sale is publicly reported for such day, the average of the representative closing bid and asked quotations for the Common Stock, as reported on Nasdaq; or (iii) if the Common Stock is not listed or admitted to trading on the Nasdaq National Market, the average of the bid and asked prices for the Common Stock as furnished for such day by Nasdaq, or, if not furnished by Nasdaq, by any New York Stock Exchange, Inc. member firm regularly making a market in the Common Stock and selected for such purpose by the Company’s board of directors; or (iv) if no public market exists for the Common Stock, as determined in good faith by the Company’s board of directors. If the aggregate value of the Class B Stock held by the Purchaser is determined to be less than $500,000, then the Purchaser shall purchase from the Company such number of shares of Class B Stock as would equal the difference between the value of the Class B Stock as determined herein and $500,000. The purchase price of such shares of Class B Stock would be payable to the Company by wire transfer in immediately available funds to an account designated by the Company no later than one business day after the determination of the value as provided herein. If such six-month anniversary falls on any day that is not a business day, then the determination of the value of the Class B Stock shall be made on the next immediately following business day.

5. Taxes on Exchange. The Company will pay any and all stamp or similar taxes that may be payable in respect of the issuance and delivery of shares of Common Stock upon exchange of shares of Class B Stock pursuant to Section 4(c)(i).

6. No Registration under Federal or State Securities Laws. (a) The Purchaser acknowledges that the Shares have not been registered under the Securities Act or the securities laws of any state by reason of a specific exemption or exemptions from registration under the Securities Act and applicable state securities laws, and that the Company’s reliance on such exemptions is predicated on the accuracy and completeness of the Purchaser’s representations, warranties, acknowledgements and agreements contained herein. Accordingly, the Shares may not be offered, sold, transferred, pledged or otherwise disposed of by the Purchaser without an effective registration statement under the Securities Act and any applicable state securities laws or an opinion of counsel acceptable to the Company that the proposed transaction will be exempt from registration. The Purchaser acknowledges that the Company is not required to register the Shares under the Securities Act or any applicable state securities laws or to make any exemption from registration available. The Purchaser understands that the Shares, and any shares of Common Stock issued in exchange for Shares, will bear legends substantially to the effect of the following:

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES

7

ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE. THE SHARES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS, RECEIPT OF A NO-ACTION LETTER ISSUED BY THE SECURITIES AND EXCHANGE COMMISSION (TOGETHER WITH EITHER REGISTRATION OR AN EXEMPTION UNDER APPLICABLE STATE SECURITIES LAWS) OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT THE PROPOSED TRANSACTION WILL BE EXEMPT FROM REGISTRATION UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS.”

and that the Company will place a stop order against the transfer of the certificates representing the Shares and refuse to effect any transfers thereof in the absence of satisfying the conditions contained in the foregoing legend.

     (b) The Purchaser acknowledges that no public market now exists for any of the securities issued by the Company and there is no assurance that a public market will ever exist for the Common Stock.

7. Transfers. The Purchaser shall not sell, assign, transfer, pledge, hypothecate, mortgage or dispose of, by gift or otherwise, or in any way encumber, any shares of Class B Stock owned by the Purchaser, except for exchanges and repurchases in compliance with Section 4.

8. No Preemptive Rights. The Purchaser shall have no preemptive or preferential right of subscription to any shares of stock of the Company, or to options, warrants or other interests therein or therefor, or to any obligations convertible or exchangeable into stock of the Company (except as provided herein), issued or sold, or any right of subscription to any security thereof other than such, if any, as the Company’s board of directors, in its discretion, may determine from time to time and at such price or prices as the Company’s board of directors may fix from time to time.

9. Miscellaneous.

     (a) Payment of Expenses. Each party shall pay its own expenses incurred in connection with this Agreement.

     (b) Entire Agreement; Amendments. This Agreement constitutes the entire agreement of the parties with respect to the transactions contemplated hereby and may not be modified, amended, altered or supplemented except upon the execution and delivery of a written agreement executed by the party or parties sought to be affected.

     (c) Binding Effect. This Agreement shall be binding upon, inure to the benefit of and be enforceable by, the Company and the Purchaser, and the Company’s or the Purchaser’s

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respective heirs, beneficiaries, executors, successors, representatives and assigns, as the case may be.

     (d) Further Assurances. From time to time, at the other party’s request and without further consideration, each party hereto shall execute and deliver such additional documents and take all such further lawful action as may be necessary or desirable to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement.

     (e) Notices. All notices, claims, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given at the time when hand delivered, when received if sent by facsimile or by same day or overnight recognized commercial courier service, or three days after being mailed (registered or certified mail, postage prepaid, return receipt requested) as follows:

If to the Purchaser:

American Team Managers Insurance Services, Inc.
1030 North Armando Street
Anaheim, CA 92806
Facsimile: 714-414-1290
Attention: Chris Michaels, CEO

If to the Company:

Specialty Underwriters’ Alliance, Inc.

222 South Riverside Plaza
Chicago, Illinois 60606
Facsimile: 312-277-1800
Attention: Scott W. Goodreau

with a copy to:

Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038
Facsimile: 212-806-6006
Attention: William W. Rosenblatt, Esq.

or to such other address as the person to whom notice is to be given may have previously furnished to the other party in writing in the manner set forth above (provided that notice of any change of address shall be effective only upon receipt thereof).

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     (f) Severability. Whenever possible, each provision or portion of any provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law; however, if any provision or portion of any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or portion of any provision in such jurisdiction, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision or portion of any provision had never been contained herein.

     (g) Remedies Cumulative. All rights, powers and remedies provided under this Agreement or otherwise available in respect hereof at law or in equity shall be cumulative and not alternative, and the exercise of any thereof by any party shall not preclude the simultaneous or later exercise of any other such right, power or remedy by such party. All representations, warranties, covenants and agreements contained herein shall survive the execution and delivery of this Agreement, the closing and any investigation made by any party hereto.

     (h) No Waiver. The failure of any party hereto to exercise any right, power or remedy provided under this Agreement or otherwise available in respect hereof at law or in equity, or to insist upon compliance by any other party hereto with its obligations hereunder, and any custom or practice of the parties at variance with the terms hereof, shall not constitute a waiver by such party of its right to exercise any such or other right, power or remedy or to demand such compliance.

     (i) No Third Party Beneficiaries. This Agreement is not intended to be for the benefit of, and shall not be enforceable by, any person or entity who or which is not a party hereto.

     (j) Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed to be an original, but all of which together will constitute one and the same instrument.

     (k) Governing Law. This Agreement will be governed as to formation, performance, interpretation and enforcement by the laws of the state of New York, without regard to principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby.

     (l) Arbitration. (i) Any dispute arising out of the interpretation, performance or breach of this Agreement, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators. Notice requesting arbitration shall be in writing and sent certified or registered mail, return receipt requested. One arbitrator shall be chosen by each of the Company and the Purchaser and the two arbitrators shall, before instituting the hearing, choose an impartial third arbitrator who shall preside at the hearing. If either party fails to appoint its arbitrator within thirty (30) days after being requested to do so by the other party, the latter, after ten (10) days’ notice by certified or registered mail of its intention to do so, shall request the American Arbitration Association (“AAA”) to appoint the second arbitrator. If the two arbitrators are unable to agree upon the third arbitrator within thirty (30) days of their appointment, the arbitrators shall request the AAA to select the third arbitrator.

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          (ii) Within thirty (30) days after notice of appointment of all arbitrators, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules for hearings. The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. Unless the panel agrees otherwise, arbitration shall take place in New York, New York, and the panel shall apply the law of the state of New York. The decision of any two arbitrators when rendered in writing shall be final and binding. The panel is empowered to grant interim relief as it may deem appropriate. In no event shall the panel award punitive or exemplary damages. The panel shall make its decision considering the custom and practice of the applicable insurance business within forty-five (45) days following the termination of the hearings. Either party may apply to a United States District Court or to a State Court of competent jurisdiction for an order confirming the arbitration award; a judgment of such court shall thereupon be entered on the award. If such an order is issued, the attorneys’ fees of the party so applying and court costs will be paid by the party against whom confirmation is sought.

          (iii) The parties hereto shall share the expense of the arbitrators equally. The remaining costs of the arbitration shall be allocated by the panel. The panel may, at its discretion, award such further costs, interest and expenses as it considers appropriate, including but not limited to attorneys’ fees, to the extent not prohibited by law.

          (iv) Any arbitration proceeding under this Agreement will not be consolidated or joined with any arbitration proceeding under any other agreement, or involving any other property or premises, and will not proceed as a class action.

     (m) Jurisdiction. Subject to the provisions of Section 10(l), the Company and the Purchaser each (i) hereby irrevocably submits to the jurisdiction of the state and federal courts located in the city and state of New York for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement or the transactions contemplated hereby and (ii) hereby waives to the extent not prohibited by applicable law, and agrees not to assert, by way of motion, as a defense or otherwise, in any such proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that any such proceedings brought in one of the above-named courts is improper, or that this Agreement, or the transactions contemplated hereby, may not be enforced in or by such court. Nothing contained in this section shall affect the right of the Company or the Purchaser to serve process in any other manner permitted by law or commence legal proceedings or otherwise proceed against the Company or the Purchaser in any other jurisdiction. In the event the Company or the Purchaser should commence or maintain any action arising out of or related to this Agreement in a forum other than the state and federal courts located in the city and state of New York, the Purchaser or the Company, as the case may be, shall be entitled to request the dismissal of such action, and the Company or the Purchaser, as the case may be, stipulate that such action shall be dismissed.

     (n) Descriptive Headings. The descriptive headings used herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.

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     (o) Gender and Number. Any words used in the masculine, feminine or neuter shall read and be construed in the masculine, feminine or neuter where they would so apply. Words in the singular shall be read and construed as though used in the plural in all cases where they would so apply.

[Remainder of Page Intentionally Left Blank]

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     IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the Purchaser and the Company as of the day and year first above written.

THE COMPANY: SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
By:	/s/ William S. Loder
	Name:	William S. Loder
	Title:	Chief Underwriting Officer
THE PURCHASER: AMERICAN TEAM MANAGERS INSURANCE SERVICES, INC.
By:	/s/ Chris Michaels
	Name:	Chris Michaels
	Title:	Chief Executive Officer

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Schedule A

PURCHASER:

American Team Managers Insurance Services, Inc.
1030 North Armando Street
Anaheim, CA 92806
Facsimile: 714-414-1290
Attention: Chris Michaels, CEO

Schedule B

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.

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Schedule C

INSTALLMENT SCHEDULE

$100,000 due and payable at the closing of a Qualified Equity Offering (as defined herein) and $50,000 due and payable monthly, commencing on the sixtieth day following the Qualified Equity Offering. For purposes hereof, a “Qualified Equity Offering” shall mean a private equity offering of the capital stock of the Company pursuant to an effective registration statement under the Securities Act of 1933, as amended, other than pursuant to a registration statement on Form S-4 or Form S-8 or any successor or similar form, in each case in which the proceeds to the Company are not less than $100,000,000, before deduction of underwriting commissions, placement agent fees or similar charges, and other offering expenses.

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EX-10.29

Exhibit 10.29

AMENDED AND RESTATED
SECURITIES PURCHASE AGREEMENT

          This Securities Purchase Agreement (this “Agreement”) is made as of September 28, 2005, by and among the purchaser listed on Schedule A attached hereto (the “Purchaser”) and Specialty Underwriters’ Alliance, Inc., a Delaware corporation (the “Company”).

          WHEREAS, the Company desires to sell to Purchaser shares of the Company’s Class B Common Stock, par value $.01 per share (the “Shares”),

          NOW THEREFORE, in consideration of the foregoing recitals and the mutual covenants and agreements set forth herein, the parties hereto, intending to be legally bound hereby, agree as follows:

1. Sale and Purchase of Securities; Closing.

     (a) Authorization. The Company has authorized the issuance and sale of the Shares, having the rights, preferences, privileges and restrictions set forth in the Company’s Amended and Restated Certificate of Incorporation, a copy of which is attached hereto as Schedule B (the “Certificate of Incorporation”).

     (b) Sale and Purchase. Subject to the terms, conditions, representations, warranties, covenants and agreements contained in this Agreement, the Purchaser agrees to purchase from the Company, and the Company agrees to sell, assign, transfer and deliver to the Purchaser, from time to time, as set forth herein, the applicable number of Shares for the consideration specified in Section 1(c).

     (c) Purchase Price. The Purchaser agrees to pay to the Company an aggregate purchase price of $1,000,000 (the “Purchase Price”) to purchase Shares in installments, as provided for on Schedule C attached hereto (the “Installment Schedule,” and each date individually, an “Installment Date”). The number of Shares that Purchaser will receive in consideration for such payments will be determined by dividing (i) the applicable portion of the purchase price due on each Installment Date (each individually, a “Payment”) (ii) the Closing Price of the Company’s Common Stock on the date of actual payment (with fractional Shares rounded up to the next whole Share). If Purchaser fails to make full payment on any Installment Date, the number of Shares that Purchaser shall be entitled to receive, with respect to such Installment Date, will be equal to the Payment divided by the Closing Price of the Common Stock on the date of actual payment, or if such day is not a Trading Day, the Trading Day first preceding the date of actual payment. Each Payment shall be made by wire transfer in immediately available funds to an account designated by the Company.

     (d) Delivery. With respect to each installment, the Company shall deliver, or cause to be delivered, the applicable number of Shares to the Purchaser as promptly as practical after full payment was made.

2. Representations and Warranties of the Purchaser.

     The Purchaser hereby represents and warrants to the Company as follows:

     (a) The Purchaser is purchasing the Shares for its own account, for investment purposes only, and not with a view to, or in connection with, any resale or other distribution of the Shares.

     (b) The Purchaser has such knowledge and experience in financial and business matters that the Purchaser is capable of evaluating the merits and risks of its investment in the Company and of protecting its own interests in connection therewith. The Purchaser is an “accredited investor” within the meaning of Rule 501(a) promulgated under the Securities Act.

     (c) The Purchaser has had the opportunity to review all documents and information that the Purchaser has requested concerning its investment in the Company. The Purchaser has had the opportunity to ask questions of the Company’s management, which questions were answered to its satisfaction.

     (d) The Purchaser acknowledges that an investment in the Company involves substantial risks. The Purchaser is able to bear the economic risk of its investment for an indefinite period of time.

     (e) The Purchaser has not paid or given any commission or other remuneration in connection with the purchase of the Shares. The Purchaser has not received any public media advertisements and has not been solicited by any form of mass mailing solicitation.

     (f) This Agreement has been duly executed and delivered by the Purchaser and has been duly authorized by the Purchaser by all necessary action. This Agreement is a valid and binding obligation of the Purchaser, enforceable in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting creditors’ rights generally or by the principles governing the availability of equitable remedies.

     (g) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will violate or result in any violation of, or be in conflict with or constitute a default under, or require the consent of any person under any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to the Purchaser, except such that are obtained or waived. No consent, approval, order or authorization of, or registration, declaration or filing with, any governmental authority is required on the part of the Purchaser in connection with the execution and delivery of this Agreement or the performance by the Purchaser of its obligations hereunder.

3. Representations and Warranties of the Company.

     The Company hereby represents and warrants to the Purchaser as follows:

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     (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware.

     (b) The Company has full corporate power and authority to execute and deliver this Agreement and to sell, transfer, assign and deliver the Shares to the Purchaser.

     (c) This Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting creditors’ rights generally or by the principles governing the availability of equitable remedies.

     (d) On the date hereof, the Company has full record and beneficial ownership of, and good, valid and marketable title to, the Shares, free and clear of all liens, encumbrances, security interests, rights, claims or equities of any nature whatsoever (including, without limitation, any voting rights granted to any third party with respect to the Shares). All of the Shares, when delivered in accordance with the terms of this Agreement, will be validly issued and outstanding, fully paid and nonassessable.

     (e) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will violate or result in any violation of, or be in conflict with or constitute a default under, or require the consent of any person under any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to the Company, except such that are obtained or waived. No consent, approval, order or authorization of, or registration, declaration or filing with, any governmental authority is required on the part of the Company in connection with the execution and delivery of this Agreement or the performance by the Company of its obligations hereunder.

     (f) The Company has delivered to the Purchaser true, correct and complete copies of the Company’s Certificate of Incorporation and By-laws of the Company, reflecting all amendments thereto. Such Certificate of Incorporation and By-laws have not been amended, modified or waived since the date thereof.

4. Terms of the Class B Common Stock.

     (a) Voting Rights; Redemption Rights. Holders of Class B Stock are not entitled to any voting rights in the Company. Holders of Class B Stock have no redemption or preemptive rights, except as provided herein.

     (b) Dividends; Liquidation and Distribution. Subject to the terms of any outstanding series of preferred stock of the Company, holders of Class B Stock are entitled to dividends in amounts and at times as may be declared by the board of directors of the Company out of funds legally available, in the same proportion as holders of the Company’s common stock, par value $.01 per share (the “Common Stock”). Upon liquidation or distribution, holders of Class B Stock will be entitled to share ratably, pari passu with the holders of the Common Stock, in all net assets available for distribution to stockholders, after payment of any liquidation preferences to holders of preferred stock of the Company.

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     (c) Exchange Right. (i) At any time and from time to time after the fifth anniversary of the date of that certain Partner Agent Program Agreement between the Company and the Purchaser (the “Partner Agent Agreement”), provided that the Partner Agent Agreement is still in effect and has not been terminated by either party thereto, the Purchaser shall have the right, but not the obligation, to exchange its shares of Class B Stock for an equal number of shares of Common Stock (subject to equitable adjustment in the event of any stock dividend, stock split, combination, reorganization, recapitalization, reclassification or other similar event involving a change in such security); provided, further, that after the fifth anniversary of the date of the Partner Agent Agreement and for so long as the Partner Agent Agreement is in effect, including any day or days on which the Purchaser exercises such exchange right, the Purchaser must retain legal and beneficial ownership for its own benefit of such number of shares of Class B Stock as could be exchanged for the same number of shares of Common Stock with a value on such date of $500,000, as determined pursuant to Section 4(g).

          (ii) Upon the Purchaser’s exercise of the exchange right, the Purchaser shall surrender the certificate or certificates for the shares of Class B Stock to be so exchanged, accompanied by written notice of exchange duly executed, to the Company at any time during regular business hours at the office of the Company. If so required by the Company, the shares of Class B Stock so exchanged shall be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company, duly executed by the Purchaser.

     (d) Issuance of Shares on Exchange. (i) As promptly as practicable after the surrender, as provided herein, of any shares of Class B Stock for exchange, the Company shall deliver to the Purchaser certificates representing the number of fully paid and nonassessable shares of Common Stock into which such shares of Class B Stock have been exchanged in accordance with the provisions of Section 4(c)(i). Such exchange shall be deemed to have been made as of the close of business on the date that such shares of Class B Stock shall have been surrendered for exchange by delivery thereof with a written notice of exchange duly executed, so that the rights of the Purchaser as a holder of the shares of Class B Stock so exchanged shall cease at such time and, subject to the following provisions of this section, the Purchaser shall be treated for all purposes as having become the record holder of such shares of Common Stock at such time; provided, however, that no such surrender on any date when the stock transfer books of the Company shall be closed shall be effective to constitute the Purchaser as the record holder of such shares of Common Stock on such date, but such surrender shall be effective to constitute the Purchaser as the record holder thereof for all purposes at the close of business on the next succeeding day on which such stock transfer books are open. The Company shall issue and deliver to the Purchaser, at the expense of the Company, a new certificate covering the number of shares of Class B Stock representing the unexchanged portion of the certificate so surrendered, which new certificate shall entitle in all respects the Purchaser to the rights of the Class B Stock represented thereby to the same extent as if the certificate theretofore covering such unexchanged shares had not been surrendered for exchange.

          (ii) All shares of Class B Stock that shall have been surrendered for exchange as provided herein shall no longer be deemed to be outstanding and all rights with respect to such shares shall immediately cease and terminate on the surrender date, except only the right of the Purchaser to receive shares of Common Stock in exchange therefor, and such shares shall not

4

thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose whatsoever.

     (e) Repurchase Right. (i) (A) At any time prior to the fifth anniversary of the execution of the Partner Agent Agreement, if the Partner Agent Agreement is terminated by either the Company or the Purchaser, for any reason, the Company shall have the right, but not the obligation, to repurchase the Shares currently held by the Purchaser for a price per Share equal to the lesser of (1) the purchase price per Share as provided herein or (2) the Current Market Price (as defined herein) of the Common Stock; and (B) at any time on or after the fifth anniversary of the execution of the Partner Agent Agreement, if the Partner Agent Agreement is terminated by either the Company or the Purchaser, for any reason, the Company shall have the right, but not the obligation, to repurchase the Shares currently held by the Purchaser for a price per Share equal to the Current Market Price of the Common Stock. Such right of the Company may be exercised by providing a notice of repurchase (the “Repurchase Notice”) to the Purchaser not less than five business days prior to the date repurchase is to be made pursuant to this Section 4(e), specifying the date of such repurchase (the “Repurchase Date”) and the number of shares of Class B Stock to be repurchased. The Repurchase Notice having been so given by the Company, the aggregate repurchase price for the shares of Class B Stock to be so repurchased shall become due and payable on the Repurchase Date.

          (ii) For purposes of this Agreement:

               (A) “Current Market Price” per share of a security at any date herein shall mean the average daily Closing Price (as defined herein) of such security for the 20 consecutive Trading Days (as defined herein) preceding such date (subject to equitable adjustment in the event of any stock dividend, stock split, combination, reorganization, recapitalization, reclassification or other similar event involving a change in such security); provided, however, that in the case of the Common Stock, where no public market exists for the Common Stock at the time of exchange, the Current Market Price per share of the Common Stock shall be as determined by an independent investment banking firm experienced in the valuation of securities of property and casualty insurance companies and selected by the Company (at the Company’s expense); provided that, after receipt of the determination by such firm, the Purchaser shall have the right to select (at the expense of the Purchaser) a second such investment banking firm to make such determination, in which case the Current Market Price shall be the average of the two determinations; and provided further that such determination need not be made more frequently than once every six months and any determination shall be superceded by a good faith determination by the Company’s board of directors that shall be required if a material event reasonably likely to affect the value of the Common Stock (such as a placement of equity securities) should occur after the next preceding determination, whether by an investment banking firm or firms, or by the Company’s board of directors.

               (B) “Closing Price” shall mean, with respect to any Trading Day: (1) if the Common Stock is listed or admitted to trading on a national securities exchange, the last reported sale price of the Common Stock, regular way, or in case no sale takes place on such day, the average of the reported closing bid and asked prices of the Common Stock, regular way, in either case as reported on such exchange; or (2) if the Common Stock is not listed or admitted

5

to trading on any national securities exchange, but is listed on the Nasdaq National Market, the closing sale price of the Common Stock on such day, or in case no sale is publicly reported for such day, the average of the representative closing bid and asked quotations for the Common Stock, as reported on Nasdaq; or (3) if the Common Stock is not listed or admitted to trading on the Nasdaq National Market, the average of the bid and asked prices for the Common Stock as furnished for such day by Nasdaq, or, if not furnished by Nasdaq, by any New York Stock Exchange, Inc. member firm regularly making a market in the Common Stock and selected for such purpose by the Company’s board of directors.

               (C) “Trading Day” shall mean, in the case of any security, any day on which trading takes place (1) if such security is then listed or admitted to trading on a national securities exchange, on the principal national securities exchange on which such security is then listed or admitted to trading, (2) if such security is then listed or admitted to trading on the Nasdaq National Market, on the Nasdaq National Market, or (3) otherwise, in the over-the-counter market.

          (iii) On or prior to the Repurchase Date, the Purchaser shall surrender such shares of Class B Stock to the Company in the manner and at the place designated by the Company. From and after the Repurchase Date, unless there shall have been a default in the payment of the repurchase price, all rights of the Purchaser with respect to the Shares shall cease, and such Shares shall not thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose whatsoever.

     (f) Provisions in Case of a Change of Control. In case of any “Change of Control”; that is: (i) any sale, lease, exchange or other transfer of all or substantially all of the property and assets of the Company to a non-affiliated third party; (ii) any merger or consolidation with a non-affiliated third party to which the Company is a party and as a result of which the holders of the voting securities of the Company immediately prior thereto own less than a majority of the outstanding voting securities of the surviving entity immediately following such transaction; or (iii) any Person or group of Persons (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) shall beneficially own (as defined in Rule 13d-3 under the Exchange Act) securities of the Company representing 50% or more of the combined voting power of the voting securities of the Company then outstanding, then the Purchaser shall thereafter have the right to convert its shares of the Class B Stock into the kind and amount of securities, cash and other property receivable upon such reorganization, reclassification, consolidation, merger or disposition by the Purchaser of the number of shares of Common Stock that the Purchaser would have received had it converted its shares of Class B Stock immediately prior to such reorganization, reclassification, consolidation, merger or disposition pursuant to Section 4(c)(i). For purposes of this section, “voting securities” shall mean securities, the holders of which are ordinarily, in the absence of contingencies, entitled to elect the corporate directors (or Persons performing similar functions). The foregoing provisions of this section shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers or dispositions.

     (g) Purchase obligation. Following the five-year anniversary of the date of this Agreement, on each six-month anniversary thereafter, the Company shall determine the

6

aggregate value of the shares of Class B Stock held by the Purchaser. The value of each share of Class B Stock shall equal the fair market value of one share of the Common Stock on such date, to be calculated as follows: (i) if the Common Stock is listed or admitted to trading on a national securities exchange, the last reported sale price of the Common Stock, regular way, on such day or in case no sale takes place on such day, the average of the reported closing bid and asked prices of the Common Stock, regular way, on such day, in either case as reported on such exchange; or (ii) if the Common Stock is not listed or admitted to trading on any national securities exchange, but is listed on the Nasdaq National Market, the closing sale price of the Common Stock on such day, or in case no sale is publicly reported for such day, the average of the representative closing bid and asked quotations for the Common Stock, as reported on Nasdaq; or (iii) if the Common Stock is not listed or admitted to trading on the Nasdaq National Market, the average of the bid and asked prices for the Common Stock as furnished for such day by Nasdaq, or, if not furnished by Nasdaq, by any New York Stock Exchange, Inc. member firm regularly making a market in the Common Stock and selected for such purpose by the Company’s board of directors; or (iv) if no public market exists for the Common Stock, as determined in good faith by the Company’s board of directors. If the aggregate value of the Class B Stock held by the Purchaser is determined to be less than $500,000, then the Purchaser shall purchase from the Company such number of shares of Class B Stock as would equal the difference between the value of the Class B Stock as determined herein and $500,000. The purchase price of such shares of Class B Stock would be payable to the Company by wire transfer in immediately available funds to an account designated by the Company no later than one business day after the determination of the value as provided herein. If such six-month anniversary falls on any day that is not a business day, then the determination of the value of the Class B Stock shall be made on the next immediately following business day.

5. Taxes on Exchange. The Company will pay any and all stamp or similar taxes that may be payable in respect of the issuance and delivery of shares of Common Stock upon exchange of shares of Class B Stock pursuant to Section 4(c)(i).

6. No Registration under Federal or State Securities Laws. (a) The Purchaser acknowledges that the Shares have not been registered under the Securities Act or the securities laws of any state by reason of a specific exemption or exemptions from registration under the Securities Act and applicable state securities laws, and that the Company’s reliance on such exemptions is predicated on the accuracy and completeness of the Purchaser’s representations, warranties, acknowledgements and agreements contained herein. Accordingly, the Shares may not be offered, sold, transferred, pledged or otherwise disposed of by the Purchaser without an effective registration statement under the Securities Act and any applicable state securities laws or an opinion of counsel acceptable to the Company that the proposed transaction will be exempt from registration. The Purchaser acknowledges that the Company is not required to register the Shares under the Securities Act or any applicable state securities laws or to make any exemption from registration available. The Purchaser understands that the Shares, and any shares of Common Stock issued in exchange for Shares, will bear legends substantially to the effect of the following:

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES

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ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE. THE SHARES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS, RECEIPT OF A NO-ACTION LETTER ISSUED BY THE SECURITIES AND EXCHANGE COMMISSION (TOGETHER WITH EITHER REGISTRATION OR AN EXEMPTION UNDER APPLICABLE STATE SECURITIES LAWS) OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT THE PROPOSED TRANSACTION WILL BE EXEMPT FROM REGISTRATION UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS.”

and that the Company will place a stop order against the transfer of the certificates representing the Shares and refuse to effect any transfers thereof in the absence of satisfying the conditions contained in the foregoing legend.

     (b) The Purchaser acknowledges that no public market now exists for any of the securities issued by the Company and there is no assurance that a public market will ever exist for the Common Stock.

7. Transfers. The Purchaser shall not sell, assign, transfer, pledge, hypothecate, mortgage or dispose of, by gift or otherwise, or in any way encumber, any shares of Class B Stock owned by the Purchaser, except for exchanges and repurchases in compliance with Section 4.

8. No Preemptive Rights. The Purchaser shall have no preemptive or preferential right of subscription to any shares of stock of the Company, or to options, warrants or other interests therein or therefor, or to any obligations convertible or exchangeable into stock of the Company (except as provided herein), issued or sold, or any right of subscription to any security thereof other than such, if any, as the Company’s board of directors, in its discretion, may determine from time to time and at such price or prices as the Company’s board of directors may fix from time to time.

9. Miscellaneous.

     (a) Payment of Expenses. Each party shall pay its own expenses incurred in connection with this Agreement.

     (b) Entire Agreement; Amendments. This Agreement constitutes the entire agreement of the parties with respect to the transactions contemplated hereby and may not be modified, amended, altered or supplemented except upon the execution and delivery of a written agreement executed by the party or parties sought to be affected.

     (c) Binding Effect. This Agreement shall be binding upon, inure to the benefit of and be enforceable by, the Company and the Purchaser, and the Company’s or the Purchaser’s

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respective heirs, beneficiaries, executors, successors, representatives and assigns, as the case may be.

     (d) Further Assurances. From time to time, at the other party’s request and without further consideration, each party hereto shall execute and deliver such additional documents and take all such further lawful action as may be necessary or desirable to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement.

     (e) Notices. All notices, claims, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given at the time when hand delivered, when received if sent by facsimile or by same day or overnight recognized commercial courier service, or three days after being mailed (registered or certified mail, postage prepaid, return receipt requested) as follows:

If to the Purchaser:

ÆON Insurance Group, Inc.
18525 Sutter Blvd., Suite 140
Morgan Hill, CA 95037
Facsimile: 408-779-7399
Attention: Lee Wendleton, President

If to the Company:

Specialty Underwriters’ Alliance, Inc.

222 South Riverside Plaza
Chicago, Illinois 60606
Facsimile: 312-277-1800
Attention: Scott W. Goodreau

with a copy to:

Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038
Facsimile: 212-806-6006
Attention: William W. Rosenblatt, Esq.

or to such other address as the person to whom notice is to be given may have previously furnished to the other party in writing in the manner set forth above (provided that notice of any change of address shall be effective only upon receipt thereof).

     (f) Severability. Whenever possible, each provision or portion of any provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable

9

law; however, if any provision or portion of any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or portion of any provision in such jurisdiction, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision or portion of any provision had never been contained herein.

     (g) Remedies Cumulative. All rights, powers and remedies provided under this Agreement or otherwise available in respect hereof at law or in equity shall be cumulative and not alternative, and the exercise of any thereof by any party shall not preclude the simultaneous or later exercise of any other such right, power or remedy by such party. All representations, warranties, covenants and agreements contained herein shall survive the execution and delivery of this Agreement, the closing and any investigation made by any party hereto.

     (h) No Waiver. The failure of any party hereto to exercise any right, power or remedy provided under this Agreement or otherwise available in respect hereof at law or in equity, or to insist upon compliance by any other party hereto with its obligations hereunder, and any custom or practice of the parties at variance with the terms hereof, shall not constitute a waiver by such party of its right to exercise any such or other right, power or remedy or to demand such compliance.

     (i) No Third Party Beneficiaries. This Agreement is not intended to be for the benefit of, and shall not be enforceable by, any person or entity who or which is not a party hereto.

     (j) Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed to be an original, but all of which together will constitute one and the same instrument.

     (k) Governing Law. This Agreement will be governed as to formation, performance, interpretation and enforcement by the laws of the state of New York, without regard to principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby.

     (l) Arbitration. (i) Any dispute arising out of the interpretation, performance or breach of this Agreement, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators. Notice requesting arbitration shall be in writing and sent certified or registered mail, return receipt requested. One arbitrator shall be chosen by each of the Company and the Purchaser and the two arbitrators shall, before instituting the hearing, choose an impartial third arbitrator who shall preside at the hearing. If either party fails to appoint its arbitrator within thirty (30) days after being requested to do so by the other party, the latter, after ten (10) days’ notice by certified or registered mail of its intention to do so, shall request the American Arbitration Association (“AAA”) to appoint the second arbitrator. If the two arbitrators are unable to agree upon the third arbitrator within thirty (30) days of their appointment, the arbitrators shall request the AAA to select the third arbitrator.

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          (ii) Within thirty (30) days after notice of appointment of all arbitrators, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules for hearings. The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. Unless the panel agrees otherwise, arbitration shall take place in New York, New York, and the panel shall apply the law of the state of New York. The decision of any two arbitrators when rendered in writing shall be final and binding. The panel is empowered to grant interim relief as it may deem appropriate. In no event shall the panel award punitive or exemplary damages. The panel shall make its decision considering the custom and practice of the applicable insurance business within forty-five (45) days following the termination of the hearings. Either party may apply to a United States District Court or to a State Court of competent jurisdiction for an order confirming the arbitration award; a judgment of such court shall thereupon be entered on the award. If such an order is issued, the attorneys’ fees of the party so applying and court costs will be paid by the party against whom confirmation is sought.

          (iii) The parties hereto shall share the expense of the arbitrators equally. The remaining costs of the arbitration shall be allocated by the panel. The panel may, at its discretion, award such further costs, interest and expenses as it considers appropriate, including but not limited to attorneys’ fees, to the extent not prohibited by law.

          (iv) Any arbitration proceeding under this Agreement will not be consolidated or joined with any arbitration proceeding under any other agreement, or involving any other property or premises, and will not proceed as a class action.

     (m) Jurisdiction. Subject to the provisions of Section 10(l), the Company and the Purchaser each (i) hereby irrevocably submits to the jurisdiction of the state and federal courts located in the city and state of New York for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement or the transactions contemplated hereby and (ii) hereby waives to the extent not prohibited by applicable law, and agrees not to assert, by way of motion, as a defense or otherwise, in any such proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that any such proceedings brought in one of the above-named courts is improper, or that this Agreement, or the transactions contemplated hereby, may not be enforced in or by such court. Nothing contained in this section shall affect the right of the Company or the Purchaser to serve process in any other manner permitted by law or commence legal proceedings or otherwise proceed against the Company or the Purchaser in any other jurisdiction. In the event the Company or the Purchaser should commence or maintain any action arising out of or related to this Agreement in a forum other than the state and federal courts located in the city and state of New York, the Purchaser or the Company, as the case may be, shall be entitled to request the dismissal of such action, and the Company or the Purchaser, as the case may be, stipulate that such action shall be dismissed.

     (n) Descriptive Headings. The descriptive headings used herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.

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     (o) Gender and Number. Any words used in the masculine, feminine or neuter shall read and be construed in the masculine, feminine or neuter where they would so apply. Words in the singular shall be read and construed as though used in the plural in all cases where they would so apply.

[Remainder of Page Intentionally Left Blank]

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     IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the Purchaser and the Company as of the day and year first above written.

THE COMPANY: SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
By:	/s/ William S. Loder
	Name:	William S. Loder
	Title:	Chief Underwriting Officer
THE PURCHASER: ÆON INSURANCE GROUP, INC.
By:	/s/ Lee Wendleton
	Name:	Lee Wendleton
	Title:	President

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Schedule A

PURCHASER:

ÆON Insurance Group, Inc.
18525 Sutter Blvd., Suite 140
Morgan Hill, CA 95037
Facsimile: 408-779-7399
Attention: Lee Wendleton, President

Schedule B

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.

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Schedule C

INSTALLMENT SCHEDULE

$50,000 due and payable at the closing of a Qualified Equity Offering (as defined herein), $50,000 due and payable 180 days after the closing of a Qualified Equity Offering, $100,000 due and payable on the one year anniversary after the closing of a Qualified Equity Offering (the “Anniversary”), $150,000 due and payable 180 after the Anniversary and $650,000 due and payable on the two year anniversary after the closing of a Qualified Equity Offering. For purposes hereof, a “Qualified Equity Offering” shall mean a private equity offering of the capital stock of the Company pursuant to an effective registration statement under the Securities Act of 1933, as amended, other than pursuant to a registration statement on Form S-4 or Form S-8 or any successor or similar form, in each case in which the proceeds to the Company are not less than $100,000,000, before deduction of underwriting commissions, placement agent fees or similar charges, and other offering expenses.

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EX-10.31

Exhibit 10.31

SECOND AMENDMENT TO LEASE

     THIS SECOND AMENDMENT TO LEASE (this “Amendment”) is entered into as of April 24, 2006 by and between 222 S. RIVERSIDE PROPERTY, LLC, a Delaware limited liability company (“Landlord”), and SUA INSURANCE COMPANY, a Illinois statutory insurance company (“Tenant”).

R E C I T A L S:

     A. Landlord and Tenant entered into that certain Lease dated February 3, 2003; as amended by that certain First Amendment to Lease dated May 5, 2005 (collectively, the “Lease”) for certain premises (the “Original Premises”) on the 16^th floor of the building located at 222 S. Riverside Plaza, Chicago, Illinois (the “Building”).

     B. The Original Premises currently consists of approximately 24,987 square feet of rentable area.

     C. Tenant desires to lease an additional portion of the Building containing approximately 9,017 square feet of rentable area located on the 16^th floor of the Building, Suite 1650, and depicted on Exhibit A attached hereto (the “Additional Space”).

     D. Landlord and Tenant desire to amend the Lease on the terms and conditions hereinafter set forth.

     NOW, THEREFORE, in consideration of the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree to amend the Lease as follows:

     1. Additional Space Commencement Date. Effective as of the Additional Space Commencement Date (hereinafter defined), the Additional Space shall be added to the Original Premises (the Original Premises and the Additional Space shall be comprised of 34,004 square feet of rentable area in the aggregate and shall be collectively referred to as the “Premises”) upon all of the terms and conditions of the Lease as modified herein. As used herein, the term “Additional Space Commencement Date” shall mean September 1, 2006. Landlord anticipates delivering possession of the Additional Space to Tenant on the date which is three (3) business days following full execution and delivery of this Amendment provided that Landlord’s failure to deliver possession of the Additional Space to Tenant by such date for reasons outside Landlord’s reasonable control, shall not affect the enforceability of this Amendment, or subject Landlord to any liability to Tenant for damages or be deemed a default by Landlord of its obligations under the Lease.

     2. Base Rent. Commencing on the Additional Space Commencement Date, Tenant shall in addition to Base Rent payable for the Original Premises, pay to Landlord Base Rent with respect to the Additional Space in the manner and at the times set forth in Section 2 of the Lease and in the amounts set forth below, without demand, deduction or setoff, except as expressly provided in the Lease.

	Annual Base Rent per		Annual		Monthly Installments
Period	Rentable Square Foot		Base Rent		of Base Rent
9/1/06 to 8/31/07	$	17.25	$	155,543.25	$	12,961.94
9/1/07 to 8/31/08	$	17.77	$	160,232.09	$	13,352.67
9/1/08 to 8/31/09	$	18.30	$	165,011.10	$	13,750.93
9/1/09 to 8/31/10	$	18.85	$	169,970.45	$	14,164.20
9/1/10 to 8/31/11	$	19.42	$	175,110.14	$	14,592.51
9/1/11 to 8/31/12	$	19.99	$	180,249.83	$	15,020.82
9/1/12 to 8/31/13	$	20.60	$	185,750.20	$	15,479.18
9/1/13 to 8/31/14	$	21.22	$	191,340.74	$	15,945.06
9/1/14 to 8/31/15	$	21.85	$	197,021.45	$	16,418.45
9/1/15 to 8/31/16	$	22.51	$	202,972.67	$	16,914.39
9/1/16 to 8/31/17	$	23.18	$	209,014.06	$	17,417.84
9/1/17 to 8/31/18	$	23.88	$	215,325.96	$	17,943.83
9/1/18 to 8/31/19	$	24.59	$	221,728.03	$	18,477.34
9/1/19 to 4/30/20	$	25.33	$	228,400.61	$	19,033.38

     Notwithstanding anything herein to the contrary, as long as Tenant is not in default under the terms of this Lease beyond any applicable notice and cure periods, Tenant shall be entitled to an abatement of Base Rent for the Additional Space only and Tenant’s Proportionate Share of Expenses and Taxes for the Additional Space only for the first twelve (12) full calendar months following the Additional Space Commencement Date (the “Rent Abatement Period”). The total amount of Rent abated during the Rent Abatement Period shall be referred to as (the “Abated Rent”). In the event Tenant defaults at any time during the Lease Term beyond any applicable notice and cure periods, all Abated Rent shall immediately become due and payable. The payment by Tenant of all Abated Rent in the event of a default shall not limit or affect any of Landlord’s other rights, pursuant to this Lease or at law or inequity.

     3. Additional Rent. Notwithstanding anything in Section 7 of the Basic Lease Provisions to the contrary, commencing on the Additional Space Commencement Date, (i) Tenant’s Proportionate Share for the Premises shall be 3.059% (calculated by dividing the rentable area of the Premises by 1,111,782, being the number of square feet of rentable area of the Building), and (ii) Tenant shall pay Tenant’s Proportionate Share of Expenses and Taxes for the Premises for each year on a net basis, and without regard to any base year or “stop” in accordance with the terms of the Lease.

     4. Condition of New Premises. Tenant acknowledges that it is leasing the Original Premises and Additional Space in its “as is” condition, and that no agreements to alter, remodel, decorate, clean or improve the Original Premises, Additional Space or the Building have been made by Landlord or any party acting on Landlord’s behalf. Notwithstanding the foregoing, Landlord acknowledges that Tenant intends to perform certain alterations and improvements to the Additional Space (“Tenant’s Work”). Tenant shall be permitted to perform Tenant’s Work (subject to Tenant’s compliance with the provisions of Section 21 of the Lease) through a general contractor and subcontractors chosen from Landlord’s approved contractor list and pursuant to plans and specifications approved by Landlord in advance which approval shall not to be

2

unreasonably withheld. Tenant must use Landlord’s MEP engineer for Tenant’s drawings and Tenant’s Architect is subject to Landlord’s prior approval. Tenant shall reimburse Landlord for Landlord’s reasonable out of pocket costs in reviewing Tenant’s plans for Tenant’s Work. Tenant and its contractors shall obtain and pay for insurance (from insurance companies satisfactory to Landlord) in connection with Tenant’s Work, which insurance coverages and amounts shall be satisfactory to Landlord in its reasonable discretion. Tenant shall, prior to the commencement of Tenant’s Work, deliver to Landlord evidence of such insurance satisfactory to Landlord. Tenant’s entry into the Additional Space prior to the Additional Space Commencement Date shall be subject to all of the terms and conditions of the Lease, except that Base Rent and Additional Rent shall not commence to accrue until the Additional Space Commencement Date. Tenant’s Work shall be performed in a good and workmanlike manner, lien-free and in compliance with all applicable laws. All costs of Tenant’s Work shall be borne by Tenant; provided, however, Landlord shall contribute up to Five Hundred Forty One Thousand Twenty Dollars and 00/100 ($541,020.00), being $60.00 per square foot of rentable area of the Additional Space (the “Construction Allowance”), toward the cost of Tenant’s Work. The Construction Allowance shall be available to reimburse Tenant for the actual, documented cost of Tenant’s Work, including hard and soft construction costs, including by not limited to furnishings, contractor fees, architectural fees, permit costs, wiring, cabling and telecommunication costs. In the event that the Construction Allowance exceeds the total cost of Tenant’s Work, and further provided that (i) Tenant is not in default under the Lease beyond any applicable notice and cure periods and (ii) is operating its business within the Additional Space, then upon written election to Landlord (the “Rent Credit Notice”), Tenant may apply up to 50% of the Construction Allowance or $270,510.00 towards Rent next due under the Lease for the Additional Space.

     Prior to commencing Tenant’s Work, Tenant shall submit to Landlord an itemized statement of the estimated costs of completing Tenant’s Work, including, without limitation, costs of obtaining permits; architectural, engineering and contracting fees; Landlord’s Fee (hereinafter defined); and costs of labor and materials (collectively, the “Estimated Cost of Work”). If the Estimated Cost of Work exceeds the Construction Allowance, Tenant shall, prior to commencing Tenant’s Work, deposit with Landlord, or with a construction escrowee designated by Landlord, the amount by which the Estimated Cost of Work exceeds the Construction Allowance (which amount shall be referred to herein as “Tenant’s Deposit”). Landlord shall pay to Tenant, or to Tenant’s general contractor directly, Tenant’s Deposit, if applicable, and the portion of the Construction Allowance for which Tenant has qualified for disbursement, following the completion of Tenant’s Work within thirty (30) days after receipt by Landlord of Tenant’s written demand therefor accompanied by (i) a reasonably detailed description of Tenant’s Work, including, without limitation, the identification of all contractors and material suppliers who have supplied labor or materials in connection with Tenant’s Work,, (ii) lien waivers from all contractors and material suppliers identified pursuant to clause (i), and (iv) Tenant’s certification that Tenant’s Work has been completed pursuant to the provisions of this paragraph and Section 10 of the Lease. Landlord’s obligation to fund the Construction Allowance shall expire and be of no further force or effect if Tenant fails to complete Tenant’s Work and deliver to Landlord written demand for payment of the Construction Allowance accompanied by the items described in clauses (i) through (iv) above (or the Rent Credit Notice electing a credit on Rent next due is not delivered by) no later than the first (1^st) anniversary of

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the Additional Space Commencement Date. Notwithstanding anything to the contrary contained herein, Landlord shall not be obligated to disburse any portion of the Construction Allowance or Tenant’s Deposit, if applicable, during the continuance of an uncured default under the Lease, and Landlord’s obligation to disburse shall resume only when and if such default is cured. Tenant shall pay to Landlord a construction supervision fee (“Landlord’s Fee”) in connection with Tenant’s Work in amount equal to $4,508.50 ($.50 per square foot of rentable area of the Additional Space). Landlord’s Fee shall be payable upon demand and Landlord shall be entitled to deduct the same from the Construction Allowance or Tenant’s Deposit, if applicable.

     5. Security Deposit. Notwithstanding anything in Section 10 of the Lease to the contrary, with respect to the reduction of the amount of the Letter of Credit, the following shall apply:

     “Notwithstanding the foregoing, so long as Tenant is not in Default under this Lease, and provided there has never been a Default with respect to Tenant’s monetary obligations under this Lease, the amount of the Letter of Credit shall be reduced as follows:

	AMOUNT OF LETTER OF
	CREDIT/SECURITY
PERIOD	DEPOSIT*
Commencement Date to 6th Anniversary of Commencement Date	$	1,500,000.00
6th Anniversary of Commencement Date through 8th Anniversary of Commencement Date	$	1,200,000.00
8th Anniversary of Commencement Date through 10th Anniversary of Commencement Date	$	900,000.00
10th Anniversary of Commencement Date through 12th Anniversary of Commencement Date	$	600,000.00
12th Anniversary of Commencement Date through 14th Anniversary of Commencement Date	$	300,000.00
14th Anniversary of the Commencement Date through 60 days after the expiration of the Lease Term	$	200,000.00

* Notwithstanding the above, the amount of the Letter of Credit shall not be reduced if the Tenant has been in Default of this Lease at anytime during the prior twelve (12) month period. If the Tenant was in Default of this Lease at anytime during the prior twelve (12) month period, the amount of the Letter of Credit for the twelve (12) month period immediately following the period of the Default (said period shall hereinafter be referred to as the “Non-Reduction Period”) shall not be reduced and the amount of the Letter of Credit shall remain unchanged for the entire Non-Reduction Period. If Tenant is not in Default of this Lease at anytime during the Non-Reduction Period, the amount of the Letter of Credit shall once again be reduced as provided in the above schedule, provided there is no further Default by Tenant. Tenant agrees that there shall be no reduction in the Letter of Credit, pursuant to the terms and provisions of this Section 10 or otherwise, until Landlord notifies the issuer of the Letter of Credit, in writing,

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to reduce the amount of Letter of Credit. Upon Tenant’s written request, Landlord, pursuant to the terms and provisions of this Section 10, agrees to promptly notify the issuer of any reduction in the amount of the Letter of Credit.”

     6. Tenant’s Termination Option. Notwithstanding anything to the contrary contained in Section 65 of the Lease, (a) The Early Termination Date for the 5 Year Termination Option shall be August 31, 2011 and Tenant shall deliver notice of its election to exercise the 5 Year Termination Option by August 31, 2010 and (b) the Termination Payment (as defined in Section 65 of the Lease) shall be increased to include (i) six (6) months of the then current Base Rent for the Additional Space, plus Tenant’s Share of Operating Expenses and Taxes for the Additional Space for such six (6) month period plus (ii) the unamortized balance of the Additional Space Leasing Costs (hereinafter defined) as of the Early Termination Date had the Additional Space Leasing Costs been loaned to Tenant as of the Additional Space Commencement Date at the interest rate of ten percent (10%) per annum and had such loaned amount been repaid in equal monthly installments commencing on the Additional Space Commencement Date in amounts sufficient to fully amortize such loaned amount and the imputed interest thereon on the Expiration Date (as defined in the Lease). The term "Additional Space Leasing Costs” shall mean the sum of (i) the brokers’ commissions incurred by Landlord in connection with this Amendment; (ii) the Construction Allowance (including, without limitation, portions of the Construction Allowance applied as abatement of rent to the extent the same is funded by Landlord or applied to rent), and (iii) the Abated Rent set forth in Section 2 of this Amendment.

     7. Renewal Option. The Renewal Option granted to Tenant in Section 64 of the Lease shall apply to the entire Premises, including the Additional Space.

     8. Brokers. Landlord and Tenant each represent and warrant to the other that the only broker they have dealt with in connection with this Amendment is Buck Management Group LLC for Landlord and Corporate Real Estate Consultants LLC for Tenant, whose commission and fees shall be paid by Landlord pursuant to a separate written agreement. Landlord and Tenant each agree to defend, indemnify and hold the other harmless from and against all claims by any other broker for fees, commissions or other compensation to the extent such broker alleges to have been retained by the indemnifying party in connection with the execution of this Amendment. The provisions of this paragraph shall survive the expiration or sooner termination of the Lease.

     9. Limitation of Landlord’s Liability. The obligations of Landlord under the Lease as amended by this Amendment do not constitute personal obligations of the individual partners, members, directors, officers, shareholders, trustees or beneficiaries of Landlord, and Tenant shall not seek recourse against the partners, members, directors, officers, shareholders, trustees or beneficiaries of Landlord, or any of their personal assets for satisfaction of any liability with respect to the Lease as amended by this Amendment. In the event of any default by Landlord under the Lease as amended by this Amendment, Tenant’s sole and exclusive remedy shall be against Landlord’s interest in the Building and the real property on which it is located. The provisions of this paragraph are not designed to relieve Landlord from the performance of

5

any of its obligations hereunder, but rather to limit Landlord’s liability in the case of the recovery of a judgment against it, as aforesaid, nor shall any of the provisions of this paragraph be deemed to limit or otherwise affect Tenant’s right to obtain injunctive relief or specific performance or availability of any other right or remedy which may be accorded Tenant by law or the Lease. In the event of sale or other transfer of Landlord’s right, title and interest in the Building, Landlord shall be released from all liability and obligations thereafter accruing under the Lease as amended by this Amendment; provided, that this paragraph shall inure to the benefit of any such purchaser or transferee.

     10. Miscellaneous. Except as modified herein, the Lease and all of the terms and provisions thereof shall remain unmodified and in full force and effect as originally written. In the event of any conflict or inconsistency between the provisions of the Lease and the provisions of this Amendment, the provisions of this Amendment shall control. All terms used herein but not defined herein which are defined in the Lease shall have the same meaning for purposes hereof as they do for purposes of the Lease. The Recitals set forth above in this Amendment are hereby incorporated by this reference. This Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective beneficiaries, successors and assigns.

     11. Counterparts. This Amendment may be executed in any number of counterparts and by each of the undersigned on separate counterparts, which counterparts taken together shall constitute one and the same instrument.

[SIGNATURE PAGE FOLLOWS]

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     IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the day and year first above written.

LANDLORD:

222 SOUTH RIVERSIDE PROPERTY LLC,
a Delaware limited liability company

By: BCSP III Illinois Manager LLC, a Delaware
limited liability company, its Manager

By: Beacon Capital Strategic Partners III, L.P.,
a Delaware limited partnership, its Sole Member

By: BCP Strategic Partners, III, L.L.C.,
a Delaware limited liability company, its General Partner

By:	/s/ Philip J. Brannigan, Jr.
	Name:	Philip J. Brannigan, Jr.
	Title:	Managing Director

TENANT: SUA INSURANCE COMPANY, an Illinois statutory insurance company
By:	/s/ Scott Goodreau
	Name:	Scott Goodreau
	Title:	Vice President, General Counsel

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EXHIBIT A
ADDITIONAL SPACE

8

EX-10.46

Exhibit 10.46

Form of Deferred Stock Award
Agreement for Employees

2007 STOCK INCENTIVE PLAN
OF
SPECIALTY UNDERWRITERS’ ALLIANCE, INC.

DEFERRED STOCK AWARD AGREEMENT

     AGREEMENT made as of _________, 20___, by and between SPECIALTY UNDERWRITERS’ ALLIANCE, INC., a Delaware corporation (the “Company”), and _________(the “Holder”).

W I T N E S S E T H:

     WHEREAS, the Company has adopted the 2007 Stock Incentive Plan of Specialty Underwriters’ Alliance, Inc. (the “Stock Incentive Plan”) pursuant to which deferred stock awards with respect to shares of the Company’s common stock (“Shares”) may be awarded to employees and directors of the Company and its subsidiaries (“Subsidiaries”); and

     WHEREAS, the Company has granted to the Holder a deferred stock award pursuant to the Stock Incentive Plan; and

     WHEREAS, it is intended that this Agreement shall set forth the terms, conditions and restrictions imposed with respect to said deferred stock award;

     NOW, THEREFORE, in consideration of the mutual covenants herein contained and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

     FIRST: Pursuant to the Stock Incentive Plan, the Holder has been awarded on _________, 20___(the “Award Date”), a deferred stock award with respect to _________Shares (the “Deferred Stock Award” and such Shares, the “Deferred Shares”), subject to the terms, conditions and restrictions set forth in the Stock Incentive Plan and in this Agreement.

     SECOND: Except as otherwise provided pursuant to the Stock Incentive Plan and this Agreement, the Deferred Stock Award shall vest [100% on the first anniversary of the Award Date -OR- at the rate of 20% on each of the first five anniversaries of the Award Date (each such anniversary being referred to herein as a “Deferred Share Delivery Date”)], provided the Holder is still in the employ or service of the Company or a Subsidiary on each respective vesting date. If the Holder’s employment with the Company and its Subsidiaries terminates prior to the date on which any portion of the Deferred Stock Award becomes vested, then the number of Deferred Shares that have not vested shall not be issuable to the Holder. [Notwithstanding the foregoing, if (i) the Holder retires from the Company or a Subsidiary at or after age 55 and after at least five years of employment with the Company or a Subsidiary following the initial public offering of the Company (“Post-IPO Employment”), and (ii) the sum of the Holder’s (A) age at retirement and (B) Post-IPO Employment at retirement exceeds 65, then a portion of the Deferred Stock Award which was not previously vested shall become vested, in accordance with the following schedule, provided that the Holder has given the Company a nine-month advance written notice of such retirement (which notice requirement may be waived by the Committee in its sole discretion) and that the Holder continues to comply, through the applicable Deferred Share Delivery Dates, with the non-competition requirements of the Holder’s Employment and Change of Control Agreement with the Company:

50% — 5 years of Post-IPO Employment at Retirement
60% — 6 years of Post-IPO Employment at Retirement
70% — 7 years of Post-IPO Employment at Retirement
80% — 8 years of Post-IPO Employment at Retirement
90% — 9 years of Post-IPO Employment at Retirement

100% — 10 years of Post-IPO Employment at Retirement]

     The number of Deferred Shares with respect to which the Deferred Stock Award has become vested, if any, shall be issued to the Holder on or as soon as practicable following the applicable

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Deferred Share Delivery Date, and in no event later than the end of the calendar year which includes the Deferred Share Delivery Date; provided, however, that if the vesting of the Deferred Stock Award is accelerated pursuant to the acceleration provisions of the Stock Incentive Plan, then the Deferred Shares shall be issued to the Holder as soon as practicable after having become vested, and in no event later than 2-1/2 months following the end of the calendar year in which such vesting occurs. With respect to any issuance of Deferred Shares, any applicable restrictions or conditions under the requirements of any stock exchange upon which the Deferred Shares or shares of the same class are listed at the time of issuance, and under any securities law applicable to such Shares, shall be imposed.

     THIRD: Prior to the date on which the Deferred Shares are issued to the Holder, the Holder shall have no rights of a stockholder of the Company or any other rights with respect to any assets of the Company, other than the rights of a general unsecured creditor of the Company.

     FOURTH: If, with respect to the Deferred Stock Award or the Deferred Shares, the Company shall be required to withhold amounts under applicable federal, state or local tax laws, rules or regulations, the Company shall be entitled to take such action as it deems appropriate in order to ensure compliance with such withholding requirements and may, at its election, have the Company or its agents withhold such vested number of Deferred Shares as would otherwise be issuable and which shall have a Fair Market Value, valued on the date on which such Deferred Shares were issued to the Holder.

     FIFTH: The Company and the Holder each hereby agree to be bound by the terms and conditions set forth in the Stock Incentive Plan, which terms and conditions are hereby

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incorporated by reference. Any capitalized terms used in this Agreement which are not defined herein shall have the same definitions as set forth in the Stock Incentive Plan.

     SIXTH: This Agreement shall not be construed as giving the Holder any rights to be an employee of the Company or any of its Subsidiaries, or any other employment rights or relationship.

     SEVENTH: This Agreement shall inure to the benefit of, and be binding on, the Company and its successors and assigns, and shall inure to the benefit of, and be binding on, the Holder and his heirs, executors, administrators and legal representatives. This Agreement shall not be assignable by the Holder.

     EIGHTH: Each provision of this Agreement is intended to be severable. If any term or provision hereof is held by a court of competent jurisdiction to be illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity of the remaining provisions of this Agreement, which shall continue in full force and effect.

     NINTH: Except as required by Delaware corporate law, this Agreement shall be subject to, and construed in accordance with, the laws of the State of Illinois without giving effect to principles of conflicts of law. The Company and the Holder each hereby consent to the personal jurisdiction and venue of the state (and federal, if applicable) courts in the State of Illinois, for resolution of all disputes and causes of action arising out of the Stock Incentive Plan, the Deferred Stock Award or this Agreement, and the Company and the Holder each hereby waive all questions of personal jurisdiction and venue of such courts, including, without limitation, the claim or defense therein that such courts constitute an inconvenient forum. THE COMPANY AND THE HOLDER EACH HEREBY WAIVE THEIR RESPECTIVE

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RIGHT TO A JURY TRIAL IN ANY ACTION ARISING OUT OF THE STOCK INCENTIVE PLAN, THE DEFERRED STOCK AWARD OR THIS AGREEMENT.

     TENTH: This Agreement, together with the Stock Incentive Plan, constitutes the entire agreement between the parties hereto with respect to the Deferred Stock Award.

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above.

SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
 

By:  

[Name of Holder] 

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EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-124263) of Specialty Underwriters’ Alliance, Inc. of our report dated March 7, 2008 relating to the financial statements, financial statement schedules, and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ PRICEWATERHOUSECOOPERS LLP

Chicago, Illinois
March 7, 2008

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Courtney C. Smith, certify that:

     I have reviewed this annual report on Form 10-K of Specialty Underwriters’ Alliance, Inc.;

     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 4, 2008	By:	/s/ Courtney C. Smith
		Name:	Courtney C. Smith
		Title:	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Peter E. Jokiel, certify that:

     I have reviewed this annual report on Form 10-K of Specialty Underwriters’ Alliance, Inc.;

     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 4, 2008	By:	/s/ Peter E. Jokiel
		Name:	Peter E. Jokiel
		Title:	Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

     I, Courtney C. Smith, Chief Executive Officer of Specialty Underwriters’ Alliance, Inc. (the “Company”), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, do hereby certify as follows:

     The annual report on Form 10-K of the Company for the period ended December 31, 2007 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     The information contained in such Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

     IN WITNESS WHEREOF, I have executed this Certification this 4th day of March 2008.

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

     A signed original of this written statement required by Section 906 has been provided to Specialty Underwriters’ Alliance, Inc. and will be retained by Specialty Underwriters’ Alliance, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

     I, Peter E. Jokiel, Chief Financial Officer of Specialty Underwriters’ Alliance, Inc. (the “Company”), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, do hereby certify as follows:

     The annual report on Form 10-K of the Company for the year ended December 31, 2007 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     The information contained in such Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

     IN WITNESS WHEREOF, I have executed this Certification this 4th day of March 2008.

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

     A signed original of this written statement required by Section 906 has been provided to Specialty Underwriters’ Alliance, Inc. and will be retained by Specialty Underwriters’ Alliance, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.