UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For The Quarterly Period Ended September 30, 2007

or

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

For the Transition Period from                      to                     

Commission file number 000-50891

SPECIALTY UNDERWRITERS’ ALLIANCE, INC.

(Exact name of registrant as specified in the 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 office)	60606 (Zip Code)

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

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

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

Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o

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

As of November 1, 2007, there were 14,697,355 shares of common stock, $0.01 par value, outstanding and 813,314 shares of non-voting Class B common stock, $0.01 par value, outstanding.

SPECIALTY UNDERWRITERS’ ALLIANCE, INC.

INDEX

	Page No.
PART I – FINANCIAL INFORMATION		3
Item 1: Financial Statements		3
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3: Quantitative and Qualitative Disclosures About Market Risk		17
Item 4: Controls and Procedures		18
PART II – OTHER INFORMATION		19
Item 1: Legal Proceedings		19
Item 1A: Risk Factors		19
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds		19
Item 3: Defaults Upon Senior Securities		19
Item 4: Submission of Matters to a Vote of Security Holders		19
Item 5: Other Information		19
Item 6: Exhibits		20
Signatures		21
Exhibit 3.1
Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 10.4
Exhibit 10.5
Exhibit 10.6
Exhibit 10.7
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

2

PART I — FINANCIAL INFORMATION

Item 1: Financial Statements

Specialty Underwriters’ Alliance, Inc.
Consolidated Balance Sheets
(dollars in thousands)

	As of
	September 30,			December 31,
	2007			2006
	(unaudited)
Assets
Fixed maturity investments, at fair value (amortized cost: $164,831 and $145,581)	$	164,106		$	144,520
Short-term investments, at amortized cost (which approximates fair value)		50,917			19,538
Total investments		215,023			164,058
Cash		878			2,375
Insurance premiums receivable		63,657			68,310
Reinsurance recoverable on paid and unpaid loss and loss adjustment expenses		76,164			80,976
Prepaid reinsurance premiums		177			3,577
Investment income accrued		1,413			1,566
Equipment and capitalized software at cost (less accumulated depreciation of $7,331 and $3,915)		12,045			8,643
Intangible assets		10,745			10,745
Deferred acquisition costs		17,541			19,876
Other assets		2,186			3,171
Total assets	$	399,829		$	363,297
Liabilities
Loss and loss adjustment expense reserves	$	168,976		$	141,200
Unearned insurance premiums		85,614			89,804
Insured deposit funds		11,495			10,366
Accounts payable and other liabilities		8,595			7,945
Total liabilities		274,680			249,315
Stockholders’ equity
Common stock at $.01 par value per share — authorized 30,000,000 shares; issued and outstanding 14,697,355 shares 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 742,088 shares and 679,152 shares		7			7
Paid-in capital — common stock		129,320			128,372
Paid-in capital — class B common stock		5,326			4,838
Accumulated deficit		(8,926	)		(18,321	)
Accumulated other comprehensive loss		(725	)		(1,061	)
Total stockholders’ equity		125,149			113,982
Total liabilities and stockholders’ equity	$	399,829		$	363,297

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

3

Specialty Underwriters’ Alliance, Inc.
Consolidated Statements of Operations and Comprehensive Income
(dollars in thousands, except for earnings per share)
(unaudited)

	Three Months						Nine Months
	Ended						Ended
	September 30,						September 30,
	2007			2006			2007			2006
Revenues
Earned insurance premiums	$	40,377		$	31,712		$	112,933		$	80,198
Net investment income		2,517			1,628			6,935			4,204
Net realized gains (losses)		1			273			28			271
Total revenue		42,895			33,613			119,896			84,673
Expenses
Loss and loss adjustment expenses		24,047			18,250			66,077			46,722
Acquisition expenses		9,609			6,701			27,340			17,432
Other operating expenses		5,815			5,019			16,899			14,785
Total expenses		39,471			29,970			110,316			78,939
Pretax income		3,424			3,643			9,580			5,734
Federal income tax expense		(61	)		(61	)		(185	)		(185	)
Net income		3,363			3,582			9,395			5,549
Net change in unrealized gains and losses for investments held, after tax		2,121			2,273			336			637
Comprehensive income	$	5,484		$	5,855		$	9,731		$	6,186
Earnings per share available to common stockholders (in dollars)
Basic	$	0.22		$	0.24		$	0.61		$	0.37
Diluted	$	0.22		$	0.24		$	0.61		$	0.37
Weighted Average Shares Outstanding
Basic		15,431			15,293			15,404			15,162
Diluted		15,431			15,293			15,404			15,162

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

4

Specialty Underwriters’ Alliance, Inc.
Consolidated Statement of Stockholders’ Equity
(dollars in thousands)
(unaudited)

												Accumulated
	Common		Paid-in		Common		Paid-in		Retained			Other			Total
	Stock		Capital		Stock		Capital		Earnings			Comprehensive			Stockholders’
	Class A		Class A		Class B		Class B		(Deficit)			Income (Loss)			Equity
Balance at December 31, 2006	$	147	$	128,372	$	7	$	4,838	$	(18,321	)	$	(1,061	)	$	113,982
Net income										9,395						9,395
Net change in unrealized investment gains and (losses), net of tax													336			336
Stock issuance				123				488								611
Stock based compensation				825												825
Balance at September 30, 2007	$	147	$	129,320	$	7	$	5,326	$	(8,926	)	$	(725	)	$	125,149

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

5

Specialty Underwriters’ Alliance, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)

	Nine Months
	Ended
	September 30,
	2007			2006
	(unaudited)
Cash flows from operations
Net income	$	9,395		$	5,549
Charges (credits) to reconcile net income to cash flows from operations:
Change in deferred income tax		185			185
Net realized (gains) losses		(28	)		(271	)
Amortization of bond premium (discount)		(6	)		296
Depreciation		3,416			1,768
Net change in:
Reinsurance recoverable on unpaid loss and loss adjustment expense reserves		4,812			6,730
Loss and loss adjustment expense reserves		27,776			29,341
Insurance premiums receivable		4,653			(17,839	)
Unearned insurance premiums		(4,190	)		18,503
Deferred acquisition costs		2,335			(4,869	)
Prepaid reinsurance premiums		3,400			1,126
Insured deposit funds		1,129			3,522
Other, net		2,551			2,124
Total adjustments		46,033			40,616
Net cash flows provided by operations		55,428			46,165
Cash flows from investing activities
Net increase in short-term investments		(31,379	)		(9,882	)
Redemptions, calls and maturities of fixed maturity investments		14,233			13,590
Purchases of fixed maturity investments		(33,449	)		(51,493	)
Purchase of equipment and capitalized software		(6,818	)		(3,805	)
Net cash flows used for investing activities		(57,413	)		(51,590	)
Cash flows from financing activities
Issuance of common stock		488			2,822
Net cash provided by financing activities		488			2,822
Net (decrease) in cash during the period		(1,497	)		(2,603	)
Cash at beginning of the period		2,375			5,329
Cash at the end of the period	$	878		$	2,726

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

6

NOTES TO FINANCIAL STATEMENTS – SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
(dollars in thousands)

Note 1. Basis of Presentation

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

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP. Certain financial information that is normally included in annual financial statements, including certain financial statements footnotes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in SUA’s Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission, or SEC.

The interim financial data as of September 30, 2007, and for the three and nine month periods ended September 30, 2007 and September 30, 2006 is unaudited. However, in the opinion of management, the interim data includes all adjustments, consisting of normal recurring accruals, necessary for a fair statement of the Company’s results for the interim periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made to prior period financial statement line items to enhance the comparability of the results presented.

On January 1, 2007, the Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes.” FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on the related derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition of certain tax positions. 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. 

Note 2. Earnings Per Share

Basic earnings per share are based on the weighted average number of common shares outstanding during the period, while diluted earnings per share includes the weighted average number of common shares and potential dilution from shares issuable pursuant to stock options using the treasury stock method. Outstanding options of 739,133 and 747,466 for the three months ended September 30, 2007 and September 30, 2006 have been excluded from diluted earnings per share, as they were anti-dilutive.

	Three Months Ended		Three Months Ended
	Sept. 30, 2007		Sept. 30, 2006
	(in thousands, except per share data)
Net income	$	3,363	$	3,582
Weighted average common shares outstanding (basic and diluted)		15,431		15,293
Earnings per share (basic and diluted)	$	0.22	$	0.24

Outstanding options of 739,133 and 747,466 for the nine months ended September 30, 2007 and September 30, 2006 have been excluded from diluted earnings per share, as they were anti-dilutive.

	Nine Months Ended		Nine Months Ended
	Sept. 30, 2007		Sept. 30, 2006
	(in thousands, except per share data)
Net income	$	9,395	$	5,549
Weighted average common shares outstanding (basic and diluted)		15,404		15,162
Earnings per share (basic and diluted)	$	0.61	$	0.37

7

NOTES TO FINANCIAL STATEMENTS — SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
(dollars in thousands)

Note 3. Income Taxes

As of September 30, 2007 and December 31, 2006 the Company had tax basis net operating loss carryforwards of $6,786 and $18,564, respectively, which will expire on December 31, 2026 and December 31, 2025, respectively. 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 portions of these costs were $991 and $1,344 at September 30, 2007 and December 31, 2006, respectively.

The Company has recorded a tax provision for the quarter equal to the current quarter’s 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.

Note 4. Unpaid Loss and Loss Adjustment Expense Reserves

Loss and loss adjustment expense (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. The Company’s loss and LAE reserves represent management’s best estimate of reserves based on a composite of the results of various actuarial methods, as well as consideration of known facts and trends.

At September 30, 2007, the Company reported gross loss and LAE reserves of $168,976, of which $61,119 represented the gross direct loss and LAE reserves of Potomac, which is fully reinsured by OneBeacon Insurance Company, or OneBeacon. At December 31, 2006, the Company reported gross loss and LAE reserves of $141,200, of which $71,592 represented the gross direct loss and LAE reserves of Potomac, which are fully reinsured by OneBeacon. Included in the reserves for the Company are tabular reserve discounts for workers’ compensation and excess workers’ compensation pension claims of $1,481 as of September 30, 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.

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

Note 5. Recent Accounting Pronouncements

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. Based on the Company’s current use of fair value measurements in conjunction with its investment philosophy and mix, the Company believes that the implementation of FAS 159 will have no material impact on its financial statements.

8

NOTES TO FINANCIAL STATEMENTS — SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
(dollars in thousands)

Note 6. Equity Based Compensation

On May 1, 2007, the stockholders of the Company approved the 2007 Stock Incentive Plan, or 2007 Plan. The 2007 Plan replaces the 2004 Stock Option Plan, or 2004 Plan. Options previously granted under the 2004 Plan will continue for the life of such options. The 2007 Plan provides for the issuance of up to 800,000 shares of the Company’s common stock in the form of stock options, stock appreciation rights, restricted stock awards, and deferred stock awards (as well as dividend equivalents in connection with deferred stock awards). In addition, should any of the 742,466 options outstanding under the 2004 Plan as of the date of adoption of the 2007 Plan be terminated, those shares will also be available under the 2007 Plan.

The 2007 Plan provides for an automatic grant of 3,000 unrestricted shares of common stock to independent directors upon the first business day following re-election to the Board of Directors at the Annual Meeting of the Stockholders. On May 2, 2007, 15,000 shares were issued to independent directors who were re-elected to the Board at the 2007 Annual Meeting of the Stockholders held on May 1, 2007. This automatic grant replaced an automatic grant under the 2004 Plan of 10,000 options to independent directors 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 under the 2007 Plan or the 2004 Plan in 2007.

9

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, the discussions of our operating and growth strategy. Investors are cautioned that all forward-looking statements involve risks and uncertainties including, without limitation, those set forth under the caption “Risk Factors” in the Business section of our Annual Report on Form 10-K for the year ended December 31, 2006. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could prove to be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

Overview

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

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

Prior to our IPO, all activities consisted of start-up activities related to our IPO and costs to establish the infrastructure required to commence insurance operations.

On January 1, 2005 we commenced our insurance operations.

10

Three Months Ended September 30, 2007 as compared to the Three Months Ended September 30, 2006

							Percentage Change
	Three Months Ended Sept. 30,						2007 vs.
	2007			2006			2006
	(unaudited)
	(dollars in millions, except percentages and per share data)
Results of operations:
Gross written premiums	$	33.5		$	38.9			(13.9	)%
Net written premiums		30.9			36.4			(15.1	)%
Earned premiums		40.4			31.7			27.4	%
Net investment income		2.5			1.6			56.3	%
Net realized gains (losses)		—			0.3			*
Total revenues	$	42.9		$	33.6			27.7	%
Loss and loss adjustment expense	$	24.1		$	18.3			31.7	%
Acquisition expenses		9.6			6.7			43.3	%
Other operating expenses		5.8			5.0			16.0	%
Total expenses	$	39.5		$	30.0			31.7	%
Pre-tax income	$	3.4		$	3.6			(5.6	)%
Federal income tax (expense)		—			—			*
Net income (loss)	$	3.4		$	3.6			(5.6	)%
Earnings (loss) per share
Basic and diluted	$	0.22		$	0.24			(8.3	)%
Weighted average common shares outstanding (basic and diluted)		15.4			15.3			0.7	%
Key ratios
Net loss and loss adjustment expense ratio		59.6	%		57.6	%		2.0	%
Ratio of acquisition expenses to earned premiums		23.8	%		21.1	%		2.7	%
Ratio of all other expenses to gross written premiums		17.4	%		12.9	%		4.5	%

* Not meaningful

Net income for the quarter ended September 30, 2007 was $3.4 million, compared to net income of $3.6 million for the quarter ended September 30, 2006. Earnings per share for the quarter ended September 30, 2007 was $0.22, versus earnings per share of $0.24 for the quarter ended September 30, 2006.

Gross written premiums were $33.5 million for the three months ended September 30, 2007 compared to $38.9 million for the three months ended September 30, 2006. The decrease in premium production was primarily the result of greater competition, lower rates, and reduced exposure bases. This was partially offset by the addition of a new partner agent and customer classes in 2007, including the addition of Flying Eagle Insurance Services, Inc. and a small workers’ compensation program with Appalachian Underwriters, Inc.

Earned premiums grew 27.4% to $40.4 million for the quarter ended September 30, 2007 compared to $31.7 million for the quarter ended September 30, 2006. The increase in earned premium was primarily attributable to increased premium writings in 2006, continuing into the first half of 2007. Premiums are earned ratably over the terms of our insurance policies, which are 12 months.

Net investment income was $2.5 million for the quarter ended September 30, 2007 versus $1.6 million for the quarter ended September 30, 2006. The increase in net investment income reflects significant growth in our total investments from $151.4 million at September 30, 2006 to $215.0 million at September 30, 2007 resulting from positive operating cash flows.

11

Other operating expenses were $5.8 million for the quarter ended September 30, 2007, which consisted of salaries and benefit costs of $2.0 million (excluding $1.4 million of salary and benefit costs classified as loss adjustment expenses and acquisition expenses), $0.5 million of professional and consulting fees, $1.3 million of depreciation and amortization, $0.2 million of stock based compensation expense and $1.8 million of other expenses. For the quarter ended September 30, 2006, other operating expenses were $5.0 million, comprised of salaries and benefit costs of $1.4 million (excluding $1.1 million of salary and benefit costs classified as loss adjustment expenses and acquisition expenses), $0.9 million of professional and consulting fees, $0.8 million of depreciation and amortization, $0.3 million of stock based compensation expense and $1.6 million of other expenses.

Acquisition expenses were $9.6 million for the three months ended September 30, 2007, compared to $6.7 million for the three months ended September 30, 2006. This increase was primarily due to a greater level of earned premium as well as partner agent profit sharing.

For the third quarter of 2007, our net loss and loss adjustment expense ratio was 59.6 percent, an increase of 2.0 percent compared to the comparable quarter in 2006 and an increase of 3.1 percent as compared to year-end. These increases were primarily driven by an increase in large losses associated with our commercial automobile business in the current accident year, partially offset by improvements in workers’ compensation and general liability for prior accident years.

Written premium by partner agent was as follows:

	Three Months Ended					Three Months Ended
	Sept. 30, 2007					Sept. 30, 2006
			Percentage of					Percentage of
	Gross Written		Gross Written			Gross Written		Gross Written
	Premium		Premium			Premium		Premium
	(dollars in millions)
AEON Insurance Group, Inc.	$	7.9		23.6	%	$	8.1		20.8	%
American Team Managers		7.1		21.2	%		8.9		22.9	%
Appalachian Underwriters, Inc.		2.7		8.0	%		3.5		9.0	%
Flying Eagle Insurance Services, Inc.		1.2		3.6	%		—		0.0	%
Insential, Inc.		0.5		1.5	%		0.6		1.6	%
Risk Transfer Holdings, Inc.		12.1		36.1	%		15.6		40.1	%
Specialty Risk Solutions, LLC		1.8		5.4	%		2.0		5.1	%
Involuntary risk		0.2		0.6	%		0.2		0.5	%
Total	$	33.5		100.0	%	$	38.9		100.0	%

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.

Our gross written premiums for the three months ended September 30, 2007 and 2006 by state were as follows:

	Three Months Ended					Three Months Ended
	Sept. 30, 2007					Sept. 30, 2006
			Percentage of					Percentage of
	Gross Written		Gross Written			Gross Written		Gross Written
	Premium		Premium			Premium		Premium
	(dollars in millions)
California	$	14.1		42.1	%	$	13.7		35.2	%
Florida		2.8		8.4	%		11.2		28.8	%
Other States		16.6		49.5	%		14.0		36.0	%
Total	$	33.5		100.0	%	$	38.9		100.0	%

The reduction in Florida premium primarily resulted from one large account originally written in the third quarter of 2006 that was cancelled and rewritten in the fourth quarter of 2006.

12

Our gross written premiums by line of business as a percentage of total gross written premiums for the three months ended September 30, 2007 and 2006 were as follows:

	Three Months Ended					Three Months Ended
	Sept. 30, 2007					Sept. 30, 2006
			Percentage of					Percentage of
	Gross Written		Gross Written			Gross Written		Gross Written
	Premium		Premium			Premium		Premium
	(dollars in millions)
Workers’ compensation	$	14.3		42.7	%	$	17.5		45.0	%
General liability		9.5		28.3	%		11.7		30.0	%
Commercial automobile		8.5		25.4	%		8.8		22.6	%
All other		1.2		3.6	%		0.9		2.4	%
Total	$	33.5		100.0	%	$	38.9		100.0	%

For workers’ compensation, Florida approved a rate decrease of 15.7% effective January 1, 2007. California also recently approved a rate decrease of 9.5% for 2007. Despite these rate decreases, we still believe that Florida and California are attractive workers’ compensation markets.

13

Nine Months Ended September 30, 2007 as compared to the Nine Months Ended September 30, 2006

							Percentage Change
	Nine Months Ended Sept. 30,						2007 vs.
	2007			2006			2006
	(unaudited)
	(dollars in millions, except percentages and per share data)
Results of operations:
Gross written premiums	$	117.1		$	107.2			9.2	%
Net written premiums		108.7			98.7			10.1	%
Earned premiums		112.9			80.2			40.8	%
Net investment income		7.0			4.2			66.7	%
Net realized gains (losses)		—			0.3			*
Total revenues	$	119.9		$	84.7			41.6	%
Loss and loss adjustment expense	$	66.1		$	46.7			41.5	%
Acquisition expenses		27.3			17.4			56.9	%
Other operating expenses		16.9			14.8			14.2	%
Total expenses	$	110.3		$	78.9			39.8	%
Pre-tax income	$	9.6		$	5.7			68.4	%
Federal income tax (expense)		(0.2	)		(0.2	)		*
Net income (loss)	$	9.4		$	5.5			70.9	%
Earnings (loss) per share
Basic and diluted	$	0.61		$	0.37			64.9	%
Weighted average common shares outstanding (basic and diluted)		15.4			15.2			1.3	%
Key ratios
Net loss and loss adjustment expense ratio		58.5	%		58.3	%		0.2	%
Ratio of acquisition expenses to earned premiums		24.2	%		21.7	%		2.5	%
Ratio of all other expenses to gross written premiums		14.4	%		13.8	%		0.6	%

* Not meaningful

Net income for the nine months ended September 30, 2007 was $9.4 million, compared to net income of $5.5 for the nine months ended September 30, 2006. Earnings per share for the nine months ended September 30, 2007 was $0.61, versus earnings per share of $0.37 for the nine months ended September 30, 2006.

Gross written premiums increased 9.2% from $107.2 million for the nine months ended September 30, 2006 to $117.1 million for the nine months ended September 30, 2007. The increase in premiums was primarily driven by organic growth within our existing books of business, as well as the addition of Flying Eagle Insurance Services, Inc. as a partner agent and a small workers’ compensation program for Appalachian Underwriters, Inc. in 2007. This increase was partially offset by greater competition, lower rates and reduced exposure bases.

Earned premiums grew 40.8% to $112.9 million for the nine months ended September 30, 2007 compared to $80.2 million for the nine months ended September 30, 2006. The increase in earned premium was primarily attributable to increased premium writings in 2006, continuing into the first half of 2007. Premiums are earned ratably over the terms of our insurance policies, which are 12 months.

Net investment income was $7.0 million for the nine months ended September 30, 2007 versus $4.2 million for the nine months ended September 30, 2006. The increase in net investment income reflects significant growth in our total investments from $151.4 million at September 30, 2006 to $215.0 million at September 30, 2007 resulting from positive operating cash flows.

14

Other operating expenses were $16.9 million for the nine months ended September 30, 2007, which consisted of salaries and benefit costs of $5.3 million (excluding $4.6 million of salary and benefit costs classified as loss adjustment expenses and acquisition expenses), $2.2 million of professional and consulting fees, $3.4 million of depreciation and amortization, $0.9 million of stock based compensation expense and $5.1 million of other expenses. For the nine months ended September 30, 2006, other operating expenses were $14.8 million, comprised of salaries and benefit costs of $4.2 million (excluding $3.2 million of salary and benefit costs classified as loss adjustment expenses and acquisition expenses), $3.1 million of professional and consulting fees, $1.8 million of depreciation and amortization, $0.8 million of stock based compensation expense and $4.9 million of other expenses.

Acquisition expenses were $27.3 million for the nine months ended September 30, 2007, compared to $17.4 million for the nine months ended September 30, 2006. This increase was primarily due to a greater level of earned premium as well as partner agent profit sharing.

For the nine months ended September 30, 2007, our net loss and loss adjustment expense ratio was 58.5 percent, an increase of 0.2 percent compared to the comparable period in 2006 and an increase of 2.0 percent as compared to year-end. These increases were primarily driven by an increase in large losses associated with our commercial automobile business in the current accident year partially offset by improvements in workers’ compensation, and general liability for prior accident years.

Tax expense of $0.2 million for the nine months ended September 30, 2007 and September 30, 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.

Written premium by partner agent was as follows:

	Nine Months Ended					Nine Months Ended
	Sept. 30, 2007					Sept. 30, 2006
			Percentage of					Percentage of
	Gross Written		Gross Written			Gross Written		Gross Written
	Premium		Premium			Premium		Premium
	(dollars in millions)
AEON Insurance Group, Inc.	$	19.7		16.8	%	$	15.7		14.7	%
American Team Managers		27.3		23.3	%		23.6		22.0	%
Appalachian Underwriters, Inc.		12.9		11.0	%		8.5		7.9	%
Flying Eagle Insurance Services, Inc.		2.3		2.0	%		—		0.0	%
Insential, Inc.		1.3		1.1	%		1.0		0.9	%
Risk Transfer Holdings, Inc.		49.6		42.3	%		56.1		52.3	%
Specialty Risk Solutions, LLC		3.0		2.6	%		2.0		1.9	%
Involuntary risk		1.0		0.9	%		0.3		0.3	%
Total	$	117.1		100.0	%	$	107.2		100.0	%

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.

Our gross written premiums for the nine months ended 2007 and 2006 by state were as follows:

	Nine Months Ended					Nine Months Ended
	Sept. 30, 2007					Sept. 30, 2006
			Percentage of					Percentage of
	Gross Written		Gross Written			Gross Written		Gross Written
	Premium		Premium			Premium		Premium
	(dollars in millions)
California	$	42.8		36.6	%	$	35.7		33.3	%
Florida		25.3		21.6	%		39.4		36.8	%
Other States		49.0		41.8	%		32.1		29.9	%
Total	$	117.1		100.0	%	$	107.2		100.0	%

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The reduction in Florida premium primarily resulted from one large account originally written in the third quarter of 2006 that was cancelled and rewritten in the fourth quarter of 2006.

Our gross written premiums by line of business as a percentage of total gross written premiums for the nine months ended September 30, 2007 and 2006 were as follows:

	Nine Months Ended					Nine Months Ended
	Sept. 30, 2007					Sept. 30, 2006
			Percentage of					Percentage of
	Gross Written		Gross Written			Gross Written		Gross Written
	Premium		Premium			Premium		Premium
	(dollars in millions)
Workers’ compensation	$	60.2		51.4	%	$	62.0		57.8	%
General liability		28.1		24.0	%		25.4		23.7	%
Commercial automobile		25.8		22.0	%		17.9		16.7	%
All other		3.0		2.6	%		1.9		1.8	%
Total	$	117.1		100.0	%	$	107.2		100.0	%

For workers’ compensation, Florida approved a rate decrease of 15.7% effective January 1, 2007. California also recently approved a rate decrease of 9.5% for 2007. Despite these rate decreases, we still believe that Florida and California are attractive workers’ compensation markets.

Liquidity and Capital Resources

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

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

Cash Flows

A summary of our cash flows is as follows:

	Nine Months Ended Sept. 30,
	2007			2006
	(dollars in millions)
Cash provided by (used for)
Operating activities	$	55.4		$	46.2
Investing activities		(57.4	)		(51.6	)
Financing activities		0.5			2.8
Change in cash	$	(1.5	)	$	(2.6	)

For the nine months ended September 30, 2007, net cash from operating activities was $55.4, principally consisting of premium and deposit collections exceeding losses and expenses paid out. This amount compares to net cash from operating activities of $46.2 million for the nine months ended September 30, 2006. The increase in net cash provided by operating activities reflects the overall growth in our business for 2007 compared to 2006.

Cash used for investment activities was $57.4 million for the nine months ended September 30, 2007, principally representing purchases of investments and additions to equipment and capitalized software. For the nine months ended September 30, 2006, cash used in investment activities was $51.6 million, also principally representing increases in investments and additions to equipment and capitalized software.

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We had cash flows from financing activities of $0.5 million from sales of Class B Common Stock to partner agents for the nine months ended September 30, 2007. For the nine months ended September 30, 2006, cash flows from financing activities from sales of Class B Common Stock to partner agents was $2.8 million.

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 quoted market prices. Realized gains and losses are credited or charged to income in the period in which they are realized. Changes in unrealized gains or losses are reported as a separate component of comprehensive income, and accumulated unrealized gains or losses are reported as a separate component of accumulated other comprehensive income in stockholders’ equity.

The aggregate fair market value of our fixed maturity investments at September 30, 2007 was $164.1 million compared to amortized cost of $164.8 million. The aggregate fair market value of our fixed maturity investments at December 31, 2006 was $144.5 million compared to amortized cost of $145.6 million.

We have concluded that none of the available-for-sale securities with unrealized losses at September 30, 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.

At September 30, 2007, we held $4.8 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.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk

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

The table below summarizes the estimated effects of hypothetical increases and decreases in market interest rates on our investment portfolio:

			Assumed Change	Estimated Fair Value		Increase
	Fair Value at		in Relevant	After Change in		(Decrease) in
	Sept. 30, 2007		Interest Rate	Interest Rate		Carrying Value
			(dollars in thousands)
Total investments	$	215,023	100 bp decrease	$	220,444	$	5,421
			50 bp decrease	$	217,807	$	2,784
			50 bp increase	$	212,121	$	(2,902	)
			100 bp increase	$	209,151	$	(5,872	)

The average duration of our fixed maturity investments at September 30, 2007 was approximately 2.7 years.

Credit Risk

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

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The portfolio of fixed maturities consists solely of high quality bonds at September 30, 2007 and December 31, 2006. The following table summarizes bond ratings at market or fair value:

	As of Sept. 30, 2007					As of December 31, 2006
	Market Value		Percent of			Market Value		Percent of
	(dollars in thousands)		Portfolio			(dollars in thousands)		Portfolio
US Govt & AAA Bonds	$	106,529		64.9	%	$	88,843		61.5	%
AA Rated		20,819		12.7	%		15,959		11.0	%
A Rated		34,573		21.1	%		39,718		27.5	%
BBB Rated		2,185		1.3	%		—		—	%
Total	$	164,106		100.0	%	$	144,520		100.0	%

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

Item 4: Controls and Procedures

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

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

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

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

Item 1: Legal Proceedings

None.

Item 1A: Risk Factors

There have been no material changes to the Risk Factors previously disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

Item 2: Recent Sales of Unregistered Securities

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

Item 3: Defaults Upon Senior Securities

None.

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

None.

Item 5: Other Information

On October 29, 2007, our Board of Directors adopted Amended and Restated By-Laws. The following is a description of the main provisions that were adopted or changed in the Amended and Restated By-Laws.

Consent of Stockholders in Lieu of a Meeting

The provisions regarding stockholder action taken by written consent were revised to remove extraneous language relating to a qualified public offering.

Election of Directors

Provisions regarding the election of our directors were revised to remove extraneous language relating to the rights of a former lender to the Company that were in effect while the Company was private. These rights were automatically terminated in connection with our initial public offering.

Direct Registration Program

The Company is listed on The NASDAQ Stock Market, LLC (“NASDAQ”), which requires that all listed securities be eligible to participate in a “direct registration program” on or after January 1, 2008. Although the existing By-Laws contemplated the issuance of uncertificated shares, Sections 5.01, 5.03 and 5.04 of our Amended and Restated By-Laws were amended to allow the Company to issue, record and transfer shares without the issuance of a physical certificate, making the Company eligible to participate in a direct registration program.

Electronic Transmission

Provisions were added to clarify that an “electronic transmission” means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved, and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such recipient through an automated process.

19

Emergency By-Laws Provisions

Pursuant Section 110 of the Delaware General Corporation Law, provisions were added with respect to the conduct of the business of the Company during an emergency resulting from a catastrophe, disaster, calamity or other similar event.

The foregoing is a description of the amendments to the Company’s Amended and Restated By-Laws and is qualified in its entirety by reference to the full text of the Amended and Restated By-Laws. This description should be read in conjunction with the Amended and Restated By-Laws, a copy of which is filed as Exhibit 3.1 to this Quarterly Report on Form 10-Q and which is incorporated by reference herein.

Item 6: Exhibits

Exhibits:

Exhibit
Number	Description
3.1	Amended and Restated Bylaws of the Registrant dated as of October 29, 2007
10.1	Amendment No. 4 to the Partner Agent Program Agreement between the Registrant and American Team Managers
10.2	SUA Insurance Company Partner Agent Program Agreement between the Registrant and First Light Program Managers, Inc.
10.3	Securities Purchase Agreement between the Registrant and First Lights Program Managers, Inc.
10.4	Form of Restricted Stock Agreement for Directors under the 2007 Stock Incentive Plan of the Registrant
10.5	Form of Restricted Stock Agreement for Employees under the 2007 Stock Incentive Plan of the Registrant
10.6	Form of Nonqualified Stock Option Agreement under the 2007 Stock Incentive Plan of the Registrant
10.7	Form of Incentive Stock Option Agreement under the 2007 Stock Incentive Plan of the Registrant
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

20

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SPECIALTY UNDERWRITERS’ ALLIANCE, INC.
	(Registrant)
Dated: November 2, 2007	By:	/s/ Courtney C. Smith
	Name: Courtney C. Smith
	Title: President and Chief Executive Officer (Principal Executive Officer)
Dated: November 2, 2007	By:	/s/ Peter E. Jokiel
	Name: Peter E. Jokiel
	Title: Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)

21

Exhibits Index

Exhibit
Number	Description
3.1	Amended and Restated Bylaws of the Registrant dated as of October 29, 2007
10.1	Amendment No. 4 to the Partner Agent Program Agreement between the Registrant and American Team Managers
10.2	SUA Insurance Company Partner Agent Program Agreement between the Registrant and First Light Program Managers, Inc.
10.3	Securities Purchase Agreement between the Registrant and First Lights Program Managers, Inc.
10.4	Form of Restricted Stock Agreement for Directors under the 2007 Stock Incentive Plan of the Registrant
10.5	Form of Restricted Stock Agreement for Employees under the 2007 Stock Incentive Plan of the Registrant
10.6	Form of Nonqualified Stock Option Agreement under the 2007 Stock Incentive Plan of the Registrant
10.7	Form of Incentive Stock Option Agreement under the 2007 Stock Incentive Plan of the Registrant
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

22