##### Table of Contents









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,
    2005                                             
|  
|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 the
charter)


|                                                                                            |  |                                            
|------------------------------------------------------------------------------------------- |  | -------------------------------------------
|DELAWARE                                                                                    |  | 20-0432760                                 
|(State or other jurisdiction of
    incorporation or organization)                          |  | (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)




---

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

None


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

Common Stock, $0.01 par value


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.     o

Indicate by check mark if 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 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 was approximately
$133 million as of June 30, 2005 (assuming
Class B shares are exchangeable one-for-one with
Class A shares). As of March 1, 2006,
14,680,688 shares of Class A common stock and
374,768 shares of Class B common stock 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 May 2, 2006. The definitive
proxy statement shall be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year
to which this report relates. See page 40 for the exhibit
index.



---






---



##### 










SPECIALTY UNDERWRITERS ALLIANCE,
INC.

TABLE OF CONTENTS

|                                                       |  |                                                                                                                      |     |      |    | 
|------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------- | --- | ---- | -- | 
|                                                       |  |                                                                                                                      |     | Page |   
|                                                       |  |                                                                                                                      |     |      |   
|PART I                                                
|ITEM 1.                                                |  | Business                                                                                                             |     |      | 3  | 
|ITEM 1A.                                               |  | Risk Factors                                                                                                         |     |      | 16 | 
|ITEM 1B.                                               |  | Unresolved Staff Comments                                                                                            |     |      | 26 | 
|ITEM 2.                                                |  | Properties                                                                                                           |     |      | 26 | 
|ITEM 3.                                                |  | Legal Proceedings                                                                                                    |     |      | 26 | 
|ITEM 4.                                                |  | Submission of Matters to a
    Vote of Security holders                                                              |     |      | 26 | 
|PART II                                               
|ITEM 5.                                                |  | Market for Registrants
    Common Equity, Related Stockholder Matters and Issuer Purchases
    of Equity Securities |     |      | 26 | 
|ITEM 6.                                                |  | Selected Financial Data                                                                                              |     |      | 27 | 
|ITEM 7.                                                |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                            |     |      | 30 | 
|ITEM 7A.                                               |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                       |     |      | 37 | 
|ITEM 8.                                                |  | Financial Statements and
    Supplementary Data                                                                      |     |      | 38 | 
|ITEM 9.                                                |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure                             |     |      | 38 | 
|ITEM 9A.                                               |  | Controls and Procedures                                                                                              |     |      | 38 | 
|ITEM 9B.                                               |  | Other Information                                                                                                    |     |      | 39 | 
|PART III                                              
|ITEM 10.                                               |  | Directors and Executive
    Officers of the Registrant                                                               |     |      | 39 | 
|ITEM 11.                                               |  | Executive Compensation                                                                                               |     |      | 39 | 
|ITEM 12.                                               |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters               |     |      | 40 | 
|ITEM 13.                                               |  | Certain Relationships and
    Related Transactions                                                                   |     |      | 40 | 
|ITEM 14.                                               |  | Principal Accounting Fees
    and Services                                                                           |     |      | 40 | 
|PART IV                                               
|ITEM 15.                                               |  | Exhibits and Financial
    Statement Schedules                                                                       |     |      | 40 | 
|Index to Financial
    Statements and Schedule         |  |                                                                                                                      | F-1 |     
|Amendment No. 1 to the Partner Agent Program Agreement
|Partner Agent Program Agreement                       
|Securities Purchase Agreement                         
|Exhibit 23.1                                          
|Exhibit 23.2                                          
|Certification of CEO Pursuant to Section 302          
|Certification of CFO Pursuant to Section 302          
|Certification of CEO Pursuant to Section 906          
|Certification of CFO Pursuant to Section 906          



2



---



##### Table of Contents



FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on
Form 10-K 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. We may, in some cases, use words such as
project, believe,
anticipate, plan, expect,
estimate, intend, should,
would, could, will, or
may, or other words that convey uncertainty of
future events or outcomes to identify these forward-looking
statements.

Even though we believe our expectations regarding
future events are based on reasonable assumptions,
forward-looking statements are not guarantees of future
performance. Important factors could cause actual results to
differ materially from our expectations contained in our
forward-looking statements.

There are a number of important factors that
could cause actual results to differ materially from the results
anticipated by these forward-looking statements. These important
factors include those that we discuss under the caption
Risk Factors. You should read these factors and
other cautionary statements as being applicable to all related
forward-looking statements wherever they appear. If one or more
of these factors materialize, or if any underlying assumptions
prove incorrect, our actual results, performance or achievements
may vary materially from any future results, performance or
achievements expressed or implied by these forward-looking
statements. We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new
information, future events or otherwise.




PART I






|        |         
|------- | --------
|ITEM 1. | BUSINESS

Overview

We were formed in April 2003 and, through our
wholly-owned subsidiary, SUA Insurance Company, offer commercial
property and casualty insurance to selected customer groups. We
believe that we are different from other specialty insurance
companies because we have created an innovative business model
that emphasizes partner relationships with key agents, or
partner agents, knowledgeable in the types of business classes
we underwrite. Highly specialized business knowledge of these
business classes is required to achieve underwriting profits.
Historically, we believe that this segment of the industry has
been underserved by most standard property and casualty
insurance companies because they lack such specialized knowledge
and are not willing to make the necessary investment to support
select business classes.

Generally, insurance agents are paid by up-front
commissions. As a result, agents make money even if the
insurance carrier does not make an underwriting profit. Often,
in the specialty program business, insurance agents historically
have had underwriting authority and were responsible for
handling claims. We believe that this system has not served the
carriers, the agents or the insureds very well. Poor
underwriting results have led to underwriting losses for
carriers, and instability in the insurance market from carrier
turnover. In turn, agents have incurred additional costs in
searching for, and converting to, new carriers. Policyholders
have experienced uncertainty regarding the placement of their
coverage from year to year and the quality of service.

Our business model is designed to realign the
interests of carriers, agents and insureds. We have entered into
on-going arrangements with partner agents. Our agreements with
the partner agents 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, they purchase shares of Class B common stock of
our company, with returns on their investment tied to our
performance. 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 are implementing 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.

3



---



##### Table of Contents



We have a secure category rating of
B+ (Very Good) from A.M. Best, which is the sixth
highest of 15 rating levels.

The fourth quarter of 2004 we completed our
initial public offering of 13,122,000 shares of
Class A common stock, or common stock, at an initial public
offering price of $9.50 per share. Concurrent with the
closing of the initial public offering, we sold
1,000,000 shares of our common stock at a price of
$8.835 per share in a private placement. Simultaneously
with the closing of our initial public offering, Courtney C.
Smith, Peter E. Jokiel, William S. Loder and Gary J.
Ferguson, each an executive officer, purchased directly from us
22,637, 33,956, 16,978 and 16,978 shares of our common
stock, respectively. Additionally, at the closing of our initial
public offering, we sold 26,316 shares of our Class B
common stock to our partner agents at a total aggregate amount
of $250,000. The net proceeds to us from all these transactions
after deducting expenses were approximately $123.5 million.

Simultaneously with the closing of the initial
public offering, we acquired all of the outstanding common stock
of Potomac Insurance Company of Illinois, or Potomac, which was
licensed in 41 states and the District of Columbia, from
OneBeacon Insurance Company, or OneBeacon, for
$22.0 million. We refer to this transaction as the
Acquisition. After giving effect to the Acquisition,
we changed the name of Potomac Insurance Company of Illinois to
SUA Insurance Company.

SUA Insurance Company is licensed to conduct
insurance business in 42 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
approximately 90% of the population of the United States. SUA
Insurance Company is not licensed in Hawaii, Maine, Minnesota,
Montana, New Hampshire, North Carolina, Oregon and Wyoming.
However, in the future we may apply for licenses in the states
listed above.

Prior to the Acquisition, SUA Insurance Company
entered into a transfer and assumption agreement with OneBeacon
whereby all of its liabilities, including all direct liabilities
under existing insurance policies, were transferred to and
assumed by OneBeacon.

In the event of the failure to pay by OneBeacon,
SUA Insurance Company could experience losses which could
materially adversely affect our business and results of
operations. OneBeacon currently has a rating of A
(Excellent) from A.M. Best, which is the third 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 SEC filings, including amendments to these reports, 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, or on the site of our third-party service provider, is
not incorporated by reference into this report.

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

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.

4



---



##### Table of Contents



We believe the insurance industry is currently
recovering from a prolonged period of excess underwriting
capacity. A decline in underwriting margins in the late 1980s
and incidences of large natural catastrophes led to increases in
rates and a recovery in industry profitability in the
mid-to-late 1990s. As a result of favorable loss levels and
strong investment returns beginning in 1995, the insurance
industry experienced increased competition and industry
capacity, driving property and casualty premium rates down.
However, significant catastrophic losses in 1999 and the
subsequent contraction of capacity in the market resulted in
improvement in rates, terms and conditions for insurers
beginning in 2000, as the demand for insurance has increased.
These dislocations have recently been exacerbated by recent
hurricane activity in 2004 and 2005.

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. Such an agent generally is
an outsourced underwriting department for the insurer. It
markets to independent agents, processes submissions, selects
risks, binds and issues policies on behalf of the insurer, and
in some cases, handles claims on 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 long-term 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 and agents. 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 will be 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 common stock. We believe that offering
an ownership interest to 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, we anticipate that all
transaction processing will be done through our proprietary
technology system in order to ensure data integrity and
efficiency. As of March 1, 2006, we have entered into
definitive agreements with six partner agents, American Team
Managers, AEON Insurance Group, Inc., Risk Transfer Holdings,
Inc, Specialty Risk Solutions, LLC, Appalachian Underwriters,
Inc., and American Patriot Insurance Agency, Inc. We have also
entered into a non-binding letter of intent with an additional
partner agent.

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 common stock. 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, as long as the partner agents contract is in
    force. These Class B shares will be subject to substantial
    restrictions on transferability during such 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 at the lower of cost or fair
    market value the partner agents Class B shares. If
    after five years following the effective date of the applicable
    partner agent agreement such partner agents contract is
    terminated, we may repurchase at

5



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | fair market value the partner agents
    Class B shares. After the five-year period, for as long as
    the partner agent has an agency contract with us, such partner
    agent would be required to hold shares of Class B common
    stock worth at least 50% of its aggregate initial investment
    commitment in our Class B common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Commission.We pay
    each partner agent an up-front commission designed to cover its
    costs. Such commission is likely to be lower than they had been
    receiving from other companies. In exchange for this reduced
    commission, we are responsible, through our own technology
    system, for policy issuance and administration, as well as for
    claims. In addition, each partner agent may receive a meaningful
    share of the underwriting profits for each of its programs,
    subject to a cap. 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 if we
    decline to offer coverage to a prospective insured) with us. 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 only with
    that 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 for
    material breach of our agreement, insolvency, or failure to
    maintain appropriate licenses. We also may terminate a partner
    agent that is acquired by a third party, but cannot restrict the
    acquisition of a partner agent. 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. Upon termination, at our discretion, the
    partner agent must service the existing business until it is
    terminated. At such point, the partner agent is allowed to place
    such business with other insurers. In addition, there are no
    provisions in the agreements with our partner agents that grant
    renewal rights to either party. Further, the agreements with our
    partner agents do not give us any right to acquire a partner
    agent.

Our Insurance Product Lines

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



| |                       
| | ----------------------
| | American Team Managers



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | General Contractors
    Program.This program services general
    contractors with less than $8 million in annual revenue.
    Eligible accounts under this program include residential or
    commercial contractors that are involved in remodeling and
    tenant improvements, commercial building and residential home
    building (limited to those contractors who build no more than
    five homes of three stories or fewer per year). The program
    offers only general liability coverage in the state of
    California.
|
| |  | Artisan Contractors
    Program.This program services artisan
    contractors in California with less than $500,000 in payroll
    expenses and $2,000,000 in annual revenues. We limit
    participation in this program to 52 classes of relatively
    low-exposure contractors, such as:                                                                                                                                                                                                                                            



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | Appliances and accessories (installation,
    servicing and repair);                    
|
| |  | Carpentry;                                                                              
|
| |  | Driveways, parking areas or sidewalks (paving or
    repairing);                        
|
| |  | Electrical work (within buildings);                                                     
|
| |  | Heating and air conditioning systems or equipment
    (installation, service or repair);
|
| |  | Paper hanging; and                                                                      
|
| |  | Plumbing                                                                                

6



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | California Comp.
    Program.This program uses technology
    to fully automate a disciplined underwriting approach to writing
    small premium workers compensation business initially in
    California. Our online product is available to small businesses
    of less than $25,000 in premium with relatively low hazard
    grades (low exposure to loss).



| |                           
| | --------------------------
| | AEON Insurance Group, Inc.



| |   |                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Towing and Recovery
    Program.This program services
    professional towing operators who have garage operations with
    towing and recovery operators for hire and towing for auto
    auctions. The program offers policies that include property,
    inland marine, general liability, garage and automobile
    coverages on a national basis.



| |                             
| | ----------------------------
| | Risk Transfer Holdings, Inc.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | PEO Program.Professional Employer Organizations, or PEOs, take on the
    employment responsibilities of human resources, benefits
    administration and insurance purveyor, while allowing their
    clients to focus on their core business objectives. This program
    specializes in workers compensation. While the risks are
    aggregated, each account is underwritten and priced individually
    in this program.



| |                              
| | -----------------------------
| | Specialty Risk Solutions, LLC



| |   |                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Public Entities
    Program.This program specializes in
    providing general liability insurance to public entity clients,
    including schools, other educational institutions and
    municipalities.



| |                                   
| | ----------------------------------
| | Appalachian Underwriters,
    Inc.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Small Artisan and General Contractors
    Program.This program services small
    artisan and general contractors including carpenters,
    electricians, and interior decorators, as well as suppliers to
    the construction industry, such as drywall suppliers. The
    program offers policies that include commercial general
    liability and commercial auto liability. Currently, the program
    focuses on twelve southeastern states, and will look to expand
    into additional states in the future.



| |                                            
| | -------------------------------------------
| | American Patriot Insurance Agency,
    Inc.



| |   |                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Roofing Contractors
    Program.This program services the
    small to medium roofing industry. The program provides
    commercial general liability and commercial auto liability both
    directly and through retail brokers. Currently, the program
    focuses on the central and southern regions.

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, and our reinsurers
may pay us ceding commissions.

For our workers compensation business, our
reinsurers are responsible for losses between $1 million
and $5 million due to any single occurrence under a policy
and for losses in excess of $5 million up to
$24 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 this business, our reinsurers are
responsible between $1 million and $19 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

7



---



##### Table of Contents



profitable results through targeted permissible
loss ratios complemented by a low expense ratio. Because we are
unlikely to seek or obtain mid-term cancellations of existing
policies produced by our partner agents, we seek to transition
policies over a 12-month period following the execution of each
partner agent agreement as the policies are renewed, subject to
our underwriting and pricing guidelines.


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 records of achievement in the industry, including
    minimum business volumes, attractive combined loss ratios and
    long-term relationships with their insurance carriers. We grant
    partner agents 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 revenue levels. Most
    of our partner agents have a previous affiliation with members
    of our senior management or a referral from Guy
    Carpenter & Company, Inc., or Guy Carpenter, or an
    existing partner agent.                                                                                                                                                                                                               
|
| |  | We maintain strict control of our underwriting
    process.Our underwriters work with
    each partner agent to develop specific underwriting strategies,
    pricing structure, 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 will
    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.We review potential partner
    agents with our existing agents. Our partner agents have input
    on new programs and territorial assignments. This enables us to
    work with our partner agents to avoid channel conflicts and
    promote the growth of profitable programs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | We are implementing a centralized processing
    system to control data.As part of our
    infrastructure strategy, we finalized our technology plans for
    policy administration by contracting for a new system that will
    allow us to more efficiently quote, issue and manage insurance
    polices while controlling data from the first entry into the
    system. Our system will provide transmission of account
    information from the retail agents to the partner agents and us.
    We are customizing the system for each partner agent program and
    customer segment. The system will allow our underwriters to
    provide approval of submissions at the point of entry using
    predetermined underwriting, pricing and coverage guidelines. Our
    underwriters continue to oversee the underwriting process by
    having access to the system as the agents enter information and
    approve quotes. In selected circumstances, the system will
    receive and approve online quotes with minimal underwriter
    intervention, based on predetermined underwriting criteria. All
    data used to underwrite risk and to handle claims will be
    controlled by us rather than controlled by agents, third party
    administrators or other intermediaries.
|
| |  | We have a strict audit and operational review
    process.Our audit reviews focus on
    rate adequacy, line of business analysis, and authority and
    compliance guidelines. They are performed at least twice per
    year and are led by corporate underwriting which is separate
    from our program teams. Our program                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

8



---



##### Table of Contents



| |  |                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | reviews focus on premium volume and profitability
    of our individual partner agents and is led by our program
    teams. Our intent is to perform program reviews quarterly with
    interim reviews if necessary. Any partner agent that does not
    meet acceptable standards after remediation will be presented
    before our senior management for assessment and possible
    termination.

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 are implementing an Internet-based technology
system to allow our program teams and partner agents to control
underwriting, policy issuance and claims administration. We
believe that this centralized system, simultaneously accessible
to us and our partner agents, will help us to reduce high
processing costs and eliminate duplication of 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, which has
resulted in difficulties with resolving disputes. We believe
that processing insurance transactions should be user friendly
and fully automated. Our objective is to use a system that would
provide a real-time communication link with our partner agents
and improve data communication throughout our company.

Outsourcing Arrangements

We entered into an arrangement with Syndicated
Services Company, Inc., or SSC, for administrative and operation
support dated November 1, 2003 for a term of
26 months. For the 2005 calendar year the Company was
obligated to pay SSC a fee of approximately $8.8 million.
On September 30, 2005, the Company and SSC mutually agreed
to terminate the agreement effective December 31, 2005. We
have substantially completed the transition process through both
internal hiring and outsourcing to provide for these back office
activities.

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 investment or industry concentrations. Our
strategy considers liability durations and provides for unseen
cash outflow needs. We use an external investment manager with
significant assets under management and experience in insurance
company portfolio requirements.

9



---



##### Table of Contents



Competition

We compete with a large number of major U.S. and
non-U.S. insurers such as American International Group,
Inc., or AIG, CNA Financial Corporation, or CNA, and ACE
Limited, or ACE, in our selected lines of business such as
workers compensation, automobile liability and general
liability. We also face competition both from specialty
insurance companies, underwriting agencies and intermediaries,
as well as diversified financial services companies such as W.R.
Berkley Corporation, or W.R. Berkley, Markel Corporation, or
Markel, Philadelphia Consolidated Holding Corporation, or
Philadelphia, RLI Corporation, or RLI, Arch Insurance Group, or
Arch, Meadowbrook Insurance Group, or Meadowbrook, Argonaut
Insurance Company, or Argonaut, and Zurich Financial Services,
or Zurich. Finally, for our California workers
compensation business, we face competition from the State
Compensation Insurance Fund. Our competitors have greater name
and brand recognition than we have. Many of them also have
higher 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 expect, or will be able, to offer.

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. 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.

Employees

As of December 31, 2005, we had sixty
full-time employees. Our future performance depends
significantly on the continued service of our key personnel.
None of our employees are covered by collective bargaining
arrangements. We believe our employee relations are 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.

Some agents may be unwilling or unable to write
certain lines of business with us because of our rating. We may
seek to enter into fronting arrangements under which policies
may be nominally written by a higher-rated insurer to allow our
partner agents to produce business in these lines, but there can
be no assurances that these arrangements will be available at a
reasonable price or acceptable to agents.

Regulation

We develop our business through SUA Insurance
Company, our wholly owned subsidiary. SUA Insurance Company
is licensed to conduct insurance business in 42 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 systems,
including acquisitions, dividends, the terms of affiliate
transactions, and other related matters. Our operating
subsidiary is domiciled in Illinois.

10



---



##### Table of Contents



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 repricing 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 that
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. A few states have recently considered or
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.

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 and management and other fees,
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 principals, 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.

11



---



##### Table of Contents



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 securityholders
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.

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, the
National Association of Insurance Commissioners, or 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 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.         

12



---



##### Table of Contents



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 measuring statutory
surplus and, in some instances, would require divestiture. As of
December 31, 2005, 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,

13



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 apply, 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.

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. These laws establish a
federal assistance program to help the commercial property and
casualty insurance industry cover claims related to

14



---



##### Table of Contents



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 the
Extension Act as an act of terrorism, resulting in aggregate
losses greater than $5 million through March 31, 2006,
$50 million for the remainder of 2006, and
$100 million in 2007. 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 acting on behalf of any foreign person
or foreign interest 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. As with TRIA, we are
currently unable to predict the extent to which the Extension
Act may affect the demand for our products or the risks that may
be available for us to consider underwriting. The extent to
which coverage for acts of terrorism will be offered by the
insurance and reinsurance markets in the future remain to be
uncertain and we may or may not offer such coverage in the
future.

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.

Executive Officers of the Registrant

Our executive officers are as follows:

|                     |  |     |    |  |          |                                                                                           
|-------------------- |  | --- | -- |  | -------- | ------------------------------------------------------------------------------------------
|Name                 |  | Age |    |  | Position
|                     |  |     |    |  |         
|Courtney C. Smith    |  |     | 58 |  |          | Chief Executive Officer, President and Chairman
    of the Board of Directors             
|Peter E. Jokiel      |  |     | 58 |  |          | Executive Vice President, Chief Financial
    Officer, Treasurer and Director             
|William S. Loder     |  |     | 57 |  |          | Senior Vice President and Chief Underwriting
    Officer                                  
|Gary J. Ferguson     |  |     | 62 |  |          | Senior Vice President and Chief Claims Officer                                            
|Scott W. Goodreau    |  |     | 38 |  |          | Vice President, General Counsel, Administration
    and Corporate Relations, and Secretary
|Scott K. Charbonneau |  |     | 47 |  |          | Vice President and Chief Actuary                                                          
|Barry G. Cordeiro    |  |     | 59 |  |          | Vice President and Chief Information Officer                                              

Courtney C. Smith.Chief Executive Officer, President and Director. Mr. Smith
was appointed as the Chairman of our board in May 2004, as our
President and a director in April 2003 and as our Chief
Executive Officer in December 2003. 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. While at TIG, Mr. Smith
was instrumental in restructuring the company and changed TIG
from an outsourced company to a controlled program specialty
company.

Peter E. Jokiel.Executive Vice President, Chief Financial Officer, Treasurer and
Director. Mr. Jokiel was appointed as our Chief Financial
Officer, Treasurer and a director in December 2003 and was
appointed as our Executive Vice President in June 2004.
Mr. Jokiel has over 30 years experience in the
insurance

15



---



##### Table of Contents



industry. From April 1997 to January 2001,
Mr. Jokiel was President and Chief Executive Officer of CNA
Financial Corporations life operations.


William S. Loder.Senior Vice President and Chief Underwriting Officer.
Mr. Loder was appointed as our Senior Vice President and
Chief Underwriting Officer in December 2003. Mr. Loder has
over 30 years of experience in the insurance industry. From
July 2000 to July 2002, Mr. Loder worked for TIG Specialty
Insurance, where he was responsible for corporate strategies,
planning and company underwriting.

Gary J. Ferguson.Senior Vice President and Chief Claims Officer.
Mr. Ferguson was appointed our Senior Vice President and
Chief Claims Officer in December 2003. 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 Specialty
Insurance. From December 1997 to October 2001, Mr. Ferguson
served as Senior Vice President for Zenith Insurance Company.

Scott W. Goodreau.Vice President, General Counsel, Administration and Corporate
Relations. Mr. Goodreau was appointed General Counsel on
November 17, 2004 and Vice President Administration and
Corporate Relations on March 8, 2005. From December 2003
until the completion of our public offering, Mr. Goodreau
worked for us as an independent contractor. Before joining SUA,
Mr. Goodreau worked as Vice President & General Counsel
for AscendantOne, 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.

Scott K.
Charbonneau.Vice President and Chief
Actuary. Mr. Charbonneau was appointed our Chief Actuary in
January 2005 and Vice President on March 8, 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.

Barry G. Cordeiro.Vice President and Chief Information Officer. Mr. Cordeiro
was appointed our Chief Information Officer in July 2005 and
Vice President on August 9, 2005. 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 and from 1999-2001, Mr. Cordeiro served as Chief
Information Officer and EVP of the eBusiness group of CNA
Insurance.




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, which could cause you to lose all
or part of your investment. 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.

16



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on a limited number of partner
    agents. 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 six partner agents. We have entered
into a non-binding letter of intent with an additional partner
agent. We hope to enter into additional 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 common stock.
Our ability to add new partner agents may be limited by our
level of capital. In addition, due to our limited number of
partner agents, a lack of premium production from any one
partner agent may adversely effect our business. Because we are
unlikely to seek or obtain mid-term cancellations of existing
policies produced by our partner agents, we will seek to
transition policies over a 12-month period as they are renewed.
We will be unable to generate premium revenue until policies are
written by us, and a delay in our ability to write or transition
policies could lead to a significant delay in our ability to
generate substantial revenue.



| |                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have received a secure category rating
    of B+ (Very 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 Company, Inc., or 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.

We have received a secure category rating of
B+ (Very 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 future 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. We may seek to
enter into fronting arrangements under which policies may be
nominally written by a higher rated insurer to allow our partner
agents to produce business in these lines, but there can be no
assurances that these arrangements will be available at a
reasonable price or acceptable to agents, and the cost of these
arrangements will reduce our operating profit.



| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | A delay or other problem in the
    implementation of our centralized technology system could have a
    material adverse effect on our business plan.

We are implementing a centralized technology
system for underwriting, policy issuance and claims
administration through each partner agents website. We
must rely on our chosen vendors in integrating their technology
in order to implement our system and they have relatively
limited experience in doing so. As a

17



---



##### Table of Contents



result, we cannot assure you that our vendors
will be able to develop our technology system for us in a timely
manner and at the price we anticipate. A delay in implementation
of our centralized technology system would inhibit us from
automating our underwriting, policy issuance and claims
administration. Instead, we would need to manually process our
policies and claims that could lead to less efficiency and the
possibility of a decrease in premium volume. Accordingly, a
delay or other problems in our implementation schedule could
have a material adverse effect on our business plan.




| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | 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, and particularly important to start-up companies such as
ours. We believe that 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. We are presently looking at a
variety of financing alternatives including the potential
issuance of a trust preferred security that would provide
capital for future growth. 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, your
interest in our company would be diluted, and the securities we
issue may have rights, preferences and privileges that are
senior. If we cannot obtain additional adequate capital, our
business, financial condition and results of operations could be
adversely affected.



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 82% 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 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. We expect that
our success will depend on the ability of our underwriters to
accurately assess the risks associated with the businesses that
we insure. We expect that underwriting for specialty program
lines will require 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

18



---



##### Table of Contents



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;                                    
|
| |  | 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 compete with a large number of companies
    in the insurance industry for underwriting
    revenues.

We compete with a large number of other companies
in our selected lines of business. We compete with major U.S.
and non-U.S. insurers such as AIG, CNA, and ACE, that offer
the lines of insurance that we offer and that target the same
market as we do and utilize similar business strategies. We face
competition both from specialty insurance companies,
underwriting agencies and intermediaries, as well as diversified
financial services companies such as W.R. Berkley, Markel,
Philadelphia, RLI, Arch, Meadowbrook, Argonaut, and Zurich.
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,
we expect that our competitors will have greater name and brand
recognition than we have. Many of them also have higher
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, 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 (tow trucks,
workers compensation) that do not require A
level A.M. Best ratings. We work with a limited number of
partner agents which will 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 have
recently commenced operations, we may not be able to compete
successfully on many, or any, of these bases. In addition, some
companies in our lines of business are increasing their
capital-raising activities, which could result in additional new
entrants to our markets and an excess of capital in the
industry. 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

19



---



##### Table of Contents



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

Our subsidiary, SUA Insurance Company, has a
transfer and assumption agreement with OneBeacon whereby all of
SUA Insurance Companys liabilities existing as of the
acquisition of Potomac, 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 consent to the transfer in writing. Additionally, in some
states insurance regulatory approval is required in addition to
policyholder consents.

To the extent the legal requirements for novation
have been met, OneBeacon will become directly liable to those
policyholders for any claims arising from insured events under
the policy, and SUA Insurance Companys obligation to those
policyholders would cease. Accordingly, SUA Insurance Company
would extinguish any recorded liabilities to such policyholders
and the related reinsurance recoverables, so no gain or loss
would occur.

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



| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | 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. Our partner agents cannot begin to transition
policies to be written in those states to us until we have
completed this process. Because we are unlikely to seek or
obtain mid-term cancellations of existing policies produced by
our partner agents, we will seek to transition policies over a
12-month period as they are renewed. We will be unable to
generate premium revenue until policies are written by us, and a
delay in our ability to write or transition policies could lead
to a significant delay in our ability to generate substantial
amounts of revenue.



| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | Our reliance on retail agents to market our
    products subjects us to their credit risk.

We market our insurance products primarily
through retail insurance agents who produce business for our
partner agents. Our clients pay premiums for insurance policies
to a retail agent for payment over to us. These premiums are
considered to have been paid and, in most cases, the client will
no longer be liable to us for those amounts. We also make claims
payments to these agents and under local law we are likely to be
liable to our client if the agent does not forward the claim
payment to the client. Consequently, we assume a degree of
credit risk associated with retail agents with respect to most
of our insurance business. We receive business from many retail
agents and will not be able to determine the creditworthiness of
all of them.

20



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. Currently,
there is a high level of demand for these arrangements, and 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
$5 million due to any single occurrence under a policy and
for losses in excess of $5 million up to $24 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 this business, our reinsurers are responsible
between $1 million and $19 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 expect to be subject to credit
risk with respect to our reinsurance arrangements because the
ceding of risk to reinsurers will 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 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.

21



---



##### Table of Contents





| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | 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. TRIA applies to the insurance written by
us.

TRIA requires some U.S. commercial property
and casualty insurers, including us, 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 TRIA may affect the demand for our products, or
the risks that may be available for them to consider
underwriting. We may or may not offer such coverage in the
future and if we do offer coverage we are unable to assure the
adequacy of the premium we will charge to cover losses.



| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | 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
and our investment portfolio initially consists of highly rated
and 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, we expect that 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 business, financial condition or results of
operations 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, we expect our liquidity needs will be substantial and
may arise 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 profitability may be adversely impacted
    by inflation.

The effects of inflation could cause the severity
of claims from catastrophes or other events to rise in the
future. We expect that our reserve for losses and loss
adjustment expenses will include assumptions about future
payments for settlement of claims and claims handling expenses,
such as medical treatments and litigation costs and the length
of time claims are settled and paid. To the extent inflation
causes these costs to increase above reserves established for
these costs (particularly on liability coverages which often
take many years to settle), we expect to be required to increase
our loss reserves with a corresponding reduction in our net
income in the period in which the deficiency is identified.

22



---



##### Table of Contents





| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | 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 expect to not 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.

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 securityholders until 30 days after 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 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;

23



---



##### Table of Contents





| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | 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, 2005, the capital
and surplus of our operating subsidiary was approximately
$80 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 an 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 capital and surplus for Illinois, its state of
domicile (which currently is $2.2 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.

Insurance departments also conduct periodic
examinations of the affairs of insurance companies and require
the filing of annual and other reports relating to financial
condition, holding company issues and other matters. These
regulatory requirements may adversely affect or inhibit our
ability to achieve some or all of our business objectives.

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. This 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.



| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our results of operations and revenues may
    fluctuate as a result of many factors, including cyclical
    changes in the insurance industry, which may cause the price of
    our shares to decline.

The results of operations of companies in the
insurance industry historically have been subject to significant
fluctuations and uncertainties. Our profitability can be
affected significantly by:



| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the differences between actual and expected
    losses that we cannot reasonably anticipate using historical
    loss data and other identifiable factors at the time we price
    our products;     
|
| |  | volatile and unpredictable developments,
    including man-made, weather-related and other natural
    catastrophes or terrorist attacks, or court grants of large
    awards for particular damages;

24



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in the amount of loss reserves resulting
    from new types of claims and new or changing judicial
    interpretations relating to the scope of insurers
    liabilities; and                                                                                  
|
| |  | fluctuations in equity markets, interest rates,
    credit risk and foreign currency exposure, inflationary
    pressures and other changes in the investment environment, which
    affect returns on invested assets and may impact the ultimate
    payout of losses.

In addition, the demand for the types of
insurance we will offer can vary significantly, rising as the
overall level of economic activity increases and falling as that
activity decreases, causing our revenues to fluctuate. These
fluctuations in results of operations and revenues may cause the
price of our securities to be volatile.



| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We do not currently intend to pay dividends
    to our stockholders and any determination to pay dividends in
    the future will be at the discretion of our board of
    directors.

We currently intend to retain any profits to
provide capacity to write insurance and to accumulate reserves
and surplus for the payment of claims. As a result, our board of
directors currently does not intend to declare dividends or make
any other distributions to our stockholders. Our board of
directors plans to periodically reevaluate our dividend policy.
Any determination to pay dividends to our stockholders in the
future will be at the discretion of our board of directors and
will depend upon our results of operations, financial condition
and other factors deemed relevant by our board of directors.
Consequently, it is uncertain when, if ever, we will declare
dividends to our stockholders. If no dividends are paid,
investors will only obtain a return on their investment if the
value of our shares of common stock appreciates.



| |                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Provisions in our certificate of
    incorporation and bylaws and 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 you 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.

25



---



##### Table of Contents






ITEM
1B.     UNRESOLVED STAFF
COMMENTS

None.






|        |           
|------- | ----------
|ITEM 2. | PROPERTIES

We lease our headquarters in Chicago, Illinois.
Our headquarters have approximately 25,000 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 material
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
    SECURITYHOLDERS

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 National 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 National Market for the periods presented. Our shares of
common stock began trading on the Nasdaq National Market on
November 23, 2004.

|                                                |  |      |       |  |     |   |      | 
|----------------------------------------------- |  | ---- | ----- |  | --- | - | ---- | 
|Period                                          |  | High |       |  | Low |  
|                                                |  |      |       |  |     |  
|2005                                            |  |      |       |  |     |   |      | 
|First Quarter                                   |  | $    | 10.27 |  |     | $ | 8.92 | 
|Second Quarter                                  |  | $    | 9.11  |  |     | $ | 7.55 | 
|Third Quarter                                   |  | $    | 10.25 |  |     | $ | 8.06 | 
|Fourth Quarter                                  |  | $    | 8.25  |  |     | $ | 5.95 | 
|2004                                            |  |      |       |  |     |   |      | 
|November 23, 2004 through December 31,
    2004 |  | $    | 9.69  |  |     | $ | 9.25 | 

As of March 1, 2006, there were ten record
holders of our common stock.

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, if any, 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 and such
other factors as our board of directors may, in its discretion,
consider relevant.

Repurchases of Common
Stock.We did not repurchase any of
our common stock in 2005 and we have no plans to do so in the
foreseeable future.

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.

26



---



##### Table of Contents








|        |                        
|------- | -----------------------
|ITEM 6. | SELECTED FINANCIAL DATA

|                           |  |                                           |         |   |              |   |        |              |  |   |      |  
|-------------------------- |  | ----------------------------------------- | ------- | - | ------------ | - | ------ | ------------ |  | - | ---- | -
|                           |  |                                          
|                           |  | Successor                                 |        
|                           |  |                                           |        
|                           |  | Year                                      |         |   | Year         |   |        | Period from  | 
|                           |  | Ended                                     |         |   | Ended        |   |        | April 3 to   | 
|                           |  | December 31,                              |         |   | December 31, |   |        | December 31, | 
|                           |  | 2005                                      |         |   | 2004         |   |        | 2003         | 
|                           |  |                                           |         |   |              |   |        |              | 
|                           |  |                                          
|                           |  | (In thousands, except for per share data) |        
|Results of operations      |  |                                           |         |   |              |   |        |              |  |   |      |  
|Earned premiums            |  | $                                         | 26,611  |   |              | $ |       |              |  | $ |     |  
|Net investment income      |  |                                           | 3,558   |   |              |   | 278    |              |  |   |     |  
|Net realized gain/(loss)   |  |                                           | (4      | ) |              |   | 2      |              |  |   |     |  
|Total revenues             |  |                                           | 30,165  |   |              |   | 280    |              |  |   |     |  
|Net income (loss)          |  |                                           | (17,996 | ) |              |   | (8,155 | )            |  |   | (578 | )
|Net income(loss) per share |  |                                           |         |   |              |   |        |              |  |   |      |  
|Basic                      |  | $                                         | (1.22   | ) |              | $ | (4.59  | )            |  | $ |     |  
|Diluted                    |  | $                                         | (1.22   | ) |              | $ | (4.59  | )            |  | $ |     |  

|                              |  |              |         |  |              |   |         | 
|----------------------------- |  | ------------ | ------- |  | ------------ | - | ------- | 
|                              |  |             
|                              |  | Successor    |        
|                              |  |              |        
|                              |  | As of        |         |  | As of        |  
|                              |  | December 31, |         |  | December 31, |  
|                              |  | 2005         |         |  | 2004         |  
|                              |  |              |         |  |              |  
|Financial condition           |  |              |         |  |              |   |         | 
|Investments                   |  | $            | 102,991 |  |              | $ | 97,835  | 
|Total assets                  |  |              | 277,163 |  |              |   | 217,231 | 
|Total liabilities             |  |              | 176,348 |  |              |   | 98,301  | 
|Shareholders equity          |  |              | 100,815 |  |              |   | 118,930 | 
|Book value data               |  |              |         |  |              |   |         | 
|Book value per share          |  | $            | 6.76    |  |              | $ | 8.09    | 
|Tangible book value per share |  | $            | 6.04    |  |              | $ | 7.36    | 

|                      |  |                               |       |  |              |   |        | 
|--------------------- |  | ----------------------------- | ----- |  | ------------ | - | ------ | 
|                      |  |                              
|                      |  | Predecessor                   |      
|                      |  |                               |      
|                      |  | Period from                   |       |  | Year         |  
|                      |  | January 1 to                  |       |  | Ended        |  
|                      |  | November 23,                  |       |  | December 31, |  
|                      |  | 2004                          |       |  | 2003         |  
|                      |  |                               |       |  |              |  
|                      |  |                              
|                      |  | (In thousands, except for per |      
|                      |  | share data)                   |      
|Results of operations |  |                               |       |  |              |   |        | 
|Earned premiums       |  | $                             |      |  |              | $ | 9,961  | 
|Net investment income |  |                               | 1,329 |  |              |   | 2,128  | 
|Total revenues        |  |                               | 1,719 |  |              |   | 11,941 | 
|Net income (loss)     |  |                               | 650   |  |              |   | 1,359  | 

27



---



##### Table of Contents



The following table includes the loss development
history of loss and loss adjustment expense reserves of
Specialty Underwriters Alliance, Inc. for business
generated subsequent to its acquisition of Potomac Insurance
Company of Illinois on November 23, 2004. The Company did
not commence its operations until 2005.

|                                                 |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|------------------------------------------------ |  | ------------------------------------------------- |  |  | --------------- |  |  | ---- |  |  | ---- |  |  | ---- |  |  | ---- |  |  | ---- |  |  | ---- |  |  | ---- |  |  | ---- |  |  | ---- |  |  |  |  |  |  |  |  |  |  | ------ | 
|                                                 |  |                                                   |  | 
|                                                 |  | Successor (Specialty Underwriters Alliance Inc.) |  |  | Successor (SUA) | 
|                                                 |  | Year Ended December 31,                           |  |  | Year Ended      | 
|($000)                                           |  |                                                   |  |  | December 31,    | 
|Y/E 12/31                                        |  | 1995                                              |  |  | 1996            |  |  | 1997 |  |  | 1998 |  |  | 1999 |  |  | 2000 |  |  | 2001 |  |  | 2002 |  |  | 2003 |  |  | 2004 |  |  | 2005 | 
|                                                 |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      | 
|LIABILITY FOR UNPAID CLAIMS & CLAIM
    ADJ. EXP |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  | 18,134 | 
|CUMULATIVE PAID AS OF:                           |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|1 YEAR LATER                                     |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|2 YEARS LATER                                    |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|3 YEARS LATER                                    |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|4 YEARS LATER                                    |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|5 YEARS LATER                                    |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|6 YEARS LATER                                    |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|7 YEARS LATER                                    |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|8 YEARS LATER                                    |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|9 YEARS LATER                                    |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|10 YEARS LATER                                   |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 

|                                              |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|--------------------------------------------- |  | ------------------------------------------------- |  |  | --------------- |  |  | ---- |  |  | ---- |  |  | ---- |  |  | ---- |  |  | ---- |  |  | ---- |  |  | ---- |  |  | ---- |  |  | ---- |  |  |  |  |  |  |  |  |  |  | ------ | 
|                                              |  |                                                   |  | 
|                                              |  | Successor (Specialty Underwriters Alliance Inc.) |  |  | Successor (SUA) | 
|                                              |  | Year Ended December 31,                           |  |  | Year Ended      | 
|($000)                                        |  |                                                   |  |  | December 31,    | 
|Y/E 12/31                                     |  | 1995                                              |  |  | 1996            |  |  | 1997 |  |  | 1998 |  |  | 1999 |  |  | 2000 |  |  | 2001 |  |  | 2002 |  |  | 2003 |  |  | 2004 |  |  | 2005 | 
|                                              |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      | 
|RE-ESTIMATED LIABILITY AS OF:                 |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|END OF YEAR                                   |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  | 18,134 | 
|1 YEAR LATER                                  |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|2 YEARS LATER                                 |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|3 YEARS LATER                                 |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|4 YEARS LATER                                 |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|5 YEARS LATER                                 |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|6 YEARS LATER                                 |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|7 YEARS LATER                                 |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|8 YEARS LATER                                 |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|9 YEARS LATER                                 |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|10 YEARS LATER                                |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|RED (DEF) Dec 2004                            |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|% REDUNDANCY (DEFICIENCY) REPORTED AS
    OF: |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|1 YEAR LATER                                  |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|2 YEARS LATER                                 |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|3 YEARS LATER                                 |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|4 YEARS LATER                                 |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|5 YEARS LATER                                 |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|6 YEARS LATER                                 |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|7 YEARS LATER                                 |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|8 YEARS LATER                                 |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|9 YEARS LATER                                 |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 
|10 YEARS LATER                                |  |                                                   |  |  |                 |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |      |  |  |  |  |  |  |  |  |  |  |        | 

28



---



##### Table of Contents



The following table includes 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, |        
|                                                 |  |                                               |        
|Direct Basis ($000) Y/E 12/31                    |  | 1995                                          |         |  | 1996 |  |         | 1997 |  |  | 1998    |  |  | 1999 |         |  | 2000 |  |         | 2001 |  |  | 2002    |  |  | 2003 |         |  | 2004 |  |         | 2005 | 
|                                                 |  |                                               |         |  |      |  |         |      |  |  |         |  |  |      |         |  |      |  |         |      |  |  |         |  |  |      |         |  |      |  |         |      | 
|LIABILITY FOR UNPAID CLAIMS & CLAIM
    ADJ. EXP |  |                                               | 91,831  |  |      |  | 115,880 |      |  |  | 131,700 |  |  |      | 160,244 |  |      |  | 235,376 |      |  |  | 297,408 |  |  |      | 255,128 |  |      |  | 176,069 |      |  |  | 140,542 |  |  |  | 95,959 |  |  |  | 86,736 | 
|CUMULATIVE PAID AS OF:                           |  |                                               |         |  |      |  |         |      |  |  |         |  |  |      |         |  |      |  |         |      |  |  |         |  |  |      |         |  |      |  |         |      |  |  |         |  |  |  |        |  |  |  |        | 
|1 YEAR LATER                                     |  |                                               | 37,000  |  |      |  | 53,647  |      |  |  | 62,659  |  |  |      | 81,545  |  |      |  | 98,963  |      |  |  | 86,980  |  |  |      | 76,958  |  |      |  | 58,815  |      |  |  | 10,090  |  |  |  | 26,653 |  |  |  |        | 
|2 YEARS LATER                                    |  |                                               | 61,051  |  |      |  | 84,611  |      |  |  | 108,284 |  |  |      | 128,261 |  |      |  | 163,656 |      |  |  | 159,584 |  |  |      | 134,008 |  |      |  | 68,756  |      |  |  | 66,724  |  |  |  |        |  |  |  |        | 
|3 YEARS LATER                                    |  |                                               | 77,409  |  |      |  | 112,193 |      |  |  | 131,940 |  |  |      | 163,498 |  |      |  | 220,344 |      |  |  | 213,116 |  |  |      | 143,601 |  |      |  | 125,152 |      |  |  |         |  |  |  |        |  |  |  |        | 
|4 YEARS LATER                                    |  |                                               | 95,415  |  |      |  | 124,855 |      |  |  | 151,753 |  |  |      | 191,357 |  |      |  | 261,115 |      |  |  | 222,556 |  |  |      | 199,328 |  |      |  |         |      |  |  |         |  |  |  |        |  |  |  |        | 
|5 YEARS LATER                                    |  |                                               | 103,816 |  |      |  | 135,029 |      |  |  | 166,365 |  |  |      | 212,314 |  |      |  | 270,071 |      |  |  | 275,099 |  |  |      |         |  |      |  |         |      |  |  |         |  |  |  |        |  |  |  |        | 
|6 YEARS LATER                                    |  |                                               | 109,322 |  |      |  | 143,667 |      |  |  | 176,712 |  |  |      | 215,134 |  |      |  | 311,462 |      |  |  |         |  |  |      |         |  |      |  |         |      |  |  |         |  |  |  |        |  |  |  |        | 
|7 YEARS LATER                                    |  |                                               | 114,002 |  |      |  | 148,722 |      |  |  | 177,865 |  |  |      | 236,584 |  |      |  |         |      |  |  |         |  |  |      |         |  |      |  |         |      |  |  |         |  |  |  |        |  |  |  |        | 
|8 YEARS LATER                                    |  |                                               | 116,673 |  |      |  | 149,304 |      |  |  | 188,880 |  |  |      |         |  |      |  |         |      |  |  |         |  |  |      |         |  |      |  |         |      |  |  |         |  |  |  |        |  |  |  |        | 
|9 YEARS LATER                                    |  |                                               | 117,095 |  |      |  | 156,013 |      |  |  |         |  |  |      |         |  |      |  |         |      |  |  |         |  |  |      |         |  |      |  |         |      |  |  |         |  |  |  |        |  |  |  |        | 
|10 YEARS LATER                                   |  |                                               | 121,677 |  |      |  |         |      |  |  |         |  |  |      |         |  |      |  |         |      |  |  |         |  |  |      |         |  |      |  |         |      |  |  |         |  |  |  |        |  |  |  |        | 

|                                              |  |                                               |         |   |      |  |         |      |  |  |         |   |  |      |          |   |      |  |          |      |  |  |         |   |  |      |         |   |      |  |         |      |  |  |         |   |  |  |         |   |  |  |        | 
|--------------------------------------------- |  | --------------------------------------------- | ------- | - | ---- |  | ------- | ---- |  |  | ------- | - |  | ---- | -------- | - | ---- |  | -------- | ---- |  |  | ------- | - |  | ---- | ------- | - | ---- |  | ------- | ---- |  |  | ------- | - |  |  | ------- | - |  |  | ------ | 
|                                              |  |                                              
|                                              |  | Predecessor (Potomac) Year Ended December 31, |        
|                                              |  |                                               |        
|Direct Basis ($000) Y/E 12/31                 |  | 1995                                          |         |   | 1996 |  |         | 1997 |  |  | 1998    |   |  | 1999 |          |   | 2000 |  |          | 2001 |  |  | 2002    |   |  | 2003 |         |   | 2004 |  |         | 2005 | 
|                                              |  |                                               |         |   |      |  |         |      |  |  |         |   |  |      |          |   |      |  |          |      |  |  |         |   |  |      |         |   |      |  |         |      | 
|RE-ESTIMATED LIABILITY AS OF:                 |  |                                               |         |   |      |  |         |      |  |  |         |   |  |      |          |   |      |  |          |      |  |  |         |   |  |      |         |   |      |  |         |      |  |  |         |   |  |  |         |   |  |  |        | 
|END OF YEAR                                   |  |                                               | 91,831  |   |      |  | 115,880 |      |  |  | 131,700 |   |  |      | 160,244  |   |      |  | 235,376  |      |  |  | 297,408 |   |  |      | 255,128 |   |      |  | 176,069 |      |  |  | 140,542 |   |  |  | 95,959  |   |  |  | 86,736 | 
|1 YEAR LATER                                  |  |                                               | 96,003  |   |      |  | 118,878 |      |  |  | 145,067 |   |  |      | 211,516  |   |      |  | 326,426  |      |  |  | 326,203 |   |  |      | 247,629 |   |      |  | 198,858 |      |  |  | 110,371 |   |  |  | 113,389 |   |  |  |        | 
|2 YEARS LATER                                 |  |                                               | 96,301  |   |      |  | 127,693 |      |  |  | 184,404 |   |  |      | 272,353  |   |      |  | 359,245  |      |  |  | 320,706 |   |  |      | 270,997 |   |      |  | 168,770 |      |  |  | 153,388 |   |  |  |         |   |  |  |        | 
|3 YEARS LATER                                 |  |                                               | 100,950 |   |      |  | 158,274 |      |  |  | 222,057 |   |  |      | 279,420  |   |      |  | 350,765  |      |  |  | 344,771 |   |  |      | 240,368 |   |      |  | 211,738 |      |  |  |         |   |  |  |         |   |  |  |        | 
|4 YEARS LATER                                 |  |                                               | 125,181 |   |      |  | 181,078 |      |  |  | 221,608 |   |  |      | 266,482  |   |      |  | 366,736  |      |  |  | 318,382 |   |  |      | 284,706 |   |      |  |         |      |  |  |         |   |  |  |         |   |  |  |        | 
|5 YEARS LATER                                 |  |                                               | 141,469 |   |      |  | 179,581 |      |  |  | 209,018 |   |  |      | 273,463  |   |      |  | 351,129  |      |  |  | 358,428 |   |  |      |         |   |      |  |         |      |  |  |         |   |  |  |         |   |  |  |        | 
|6 YEARS LATER                                 |  |                                               | 139,473 |   |      |  | 168,994 |      |  |  | 212,266 |   |  |      | 265,763  |   |      |  | 384,034  |      |  |  |         |   |  |      |         |   |      |  |         |      |  |  |         |   |  |  |         |   |  |  |        | 
|7 YEARS LATER                                 |  |                                               | 129,867 |   |      |  | 169,519 |      |  |  | 208,048 |   |  |      | 282,360  |   |      |  |          |      |  |  |         |   |  |      |         |   |      |  |         |      |  |  |         |   |  |  |         |   |  |  |        | 
|8 YEARS LATER                                 |  |                                               | 129,675 |   |      |  | 168,778 |      |  |  | 217,864 |   |  |      |          |   |      |  |          |      |  |  |         |   |  |      |         |   |      |  |         |      |  |  |         |   |  |  |         |   |  |  |        | 
|9 YEARS LATER                                 |  |                                               | 126,347 |   |      |  | 175,067 |      |  |  |         |   |  |      |          |   |      |  |          |      |  |  |         |   |  |      |         |   |      |  |         |      |  |  |         |   |  |  |         |   |  |  |        | 
|10 YEARS LATER                                |  |                                               | 130,897 |   |      |  |         |      |  |  |         |   |  |      |          |   |      |  |          |      |  |  |         |   |  |      |         |   |      |  |         |      |  |  |         |   |  |  |         |   |  |  |        | 
|RED (DEF) Dec 2004                            |  |                                               | (39,066 | ) |      |  | (59,187 | )    |  |  | (86,164 | ) |  |      | (122,117 | ) |      |  | (148,658 | )    |  |  | (61,019 | ) |  |      | (29,578 | ) |      |  | (35,669 | )    |  |  | (12,846 | ) |  |  | (17,430 | ) |  |  |        | 
|% REDUNDANCY (DEFICIENCY) REPORTED AS
    OF: |  |                                               |         |   |      |  |         |      |  |  |         |   |  |      |          |   |      |  |          |      |  |  |         |   |  |      |         |   |      |  |         |      |  |  |         |   |  |  |         |   |  |  |        | 
|1 YEAR LATER                                  |  |                                               | (5      | ) |      |  | (3      | )    |  |  | (10     | ) |  |      | (32      | ) |      |  | (39      | )    |  |  | (10     | ) |  |      | 3       |   |      |  | (13     | )    |  |  | 21      |   |  |  | (18     | ) |  |  |        | 
|2 YEARS LATER                                 |  |                                               | (5      | ) |      |  | (10     | )    |  |  | (40     | ) |  |      | (70      | ) |      |  | (53      | )    |  |  | (8      | ) |  |      | (6      | ) |      |  | 4       |      |  |  | (9      | ) |  |  |         |   |  |  |        | 
|3 YEARS LATER                                 |  |                                               | (10     | ) |      |  | (37     | )    |  |  | (69     | ) |  |      | (74      | ) |      |  | (49      | )    |  |  | (16     | ) |  |      | 6       |   |      |  | (20     | )    |  |  |         |   |  |  |         |   |  |  |        | 
|4 YEARS LATER                                 |  |                                               | (36     | ) |      |  | (56     | )    |  |  | (68     | ) |  |      | (66      | ) |      |  | (56      | )    |  |  | (7      | ) |  |      | (12     | ) |      |  |         |      |  |  |         |   |  |  |         |   |  |  |        | 
|5 YEARS LATER                                 |  |                                               | (54     | ) |      |  | (55     | )    |  |  | (59     | ) |  |      | (71      | ) |      |  | (49      | )    |  |  | (21     | ) |  |      |         |   |      |  |         |      |  |  |         |   |  |  |         |   |  |  |        | 
|6 YEARS LATER                                 |  |                                               | (52     | ) |      |  | (46     | )    |  |  | (61     | ) |  |      | (66      | ) |      |  | (63      | )    |  |  |         |   |  |      |         |   |      |  |         |      |  |  |         |   |  |  |         |   |  |  |        | 
|7 YEARS LATER                                 |  |                                               | (41     | ) |      |  | (46     | )    |  |  | (58     | ) |  |      | (76      | ) |      |  |          |      |  |  |         |   |  |      |         |   |      |  |         |      |  |  |         |   |  |  |         |   |  |  |        | 
|8 YEARS LATER                                 |  |                                               | (41     | ) |      |  | (46     | )    |  |  | (65     | ) |  |      |          |   |      |  |          |      |  |  |         |   |  |      |         |   |      |  |         |      |  |  |         |   |  |  |         |   |  |  |        | 
|9 YEARS LATER                                 |  |                                               | (38     | ) |      |  | (51     | )    |  |  |         |   |  |      |          |   |      |  |          |      |  |  |         |   |  |      |         |   |      |  |         |      |  |  |         |   |  |  |         |   |  |  |        | 
|10 YEARS LATER                                |  |                                               | (43     | ) |      |  |         |      |  |  |         |   |  |      |          |   |      |  |          |      |  |  |         |   |  |      |         |   |      |  |         |      |  |  |         |   |  |  |         |   |  |  |        | 

29



---



##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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 on Form 10-K. 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 on Form 10-K.

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
initial public offering, or IPO, and concurrent private
placements and completed the acquisition of Potomac Insurance
Company of Illinois, or Potomac. After giving effect to the
acquisition, we changed the name of Potomac Insurance Company of
Illinois 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.

The historical results of Potomac, our accounting
predecessor, reflects Potomacs operations as a member of
the OneBeacon Insurance Company, or OneBeacon, inter-company
pooling arrangement, or Pool, under which Potomac ceded all of
its insurance business into the Pool and assumed 0.5% of the
Pools insurance business. On April 1, 2004, effective
January 1, 2004, Potomac ceased its participation in the
Pool and entered into reinsurance agreements whereby it ceded
all of its business to OneBeacon. As a result, Potomac did not,
and 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.

Results of Operations for Specialty
Underwriters Alliance, Inc. (Successor) for the Years
Ended December 31, 2005, December 31, 2004, and for
the Period from April 3, 2003 to December 31, 2003 and
for Potomac Insurance Company of Illinois (Predecessor) for the
Period from January 1, 2004 to November 23, 2004 and
for the Year Ended December 31, 2003

On January 1, 2005 we commenced our
insurance operations. However, due to the lead times necessary
to quote and place business, we did not effectively begin
writing policies until March 2005. The Company is still in early
stages of developing its operations and introducing its products
through its partner agents to the insurance marketplace. During
these early stages of development, insurance revenues and
investment income were not sufficient to absorb the
companys operating expenses and operating losses resulted.
Further, the benefits of tax losses generated will not be
recognized until the Companys operating results and future
outlook produce sufficient taxable income.

Gross written premiums for the year ended
December 31, 2005 were $90.6 million.

Our Partner Agent, Risk Transfer Holdings, Inc.,
or RTH, specializes in providing workers compensation
coverage to PEOs, which are organizations that provide small
employers with human resource services, employee benefits, and
workers compensation insurance. Currently we are writing
business in California,

30



---



##### Table of Contents



Florida, Georgia, Alabama, South Carolina and
most recently Texas and Illinois. We are also targeting other
states that offer favorable environments. RTH produced total
written premiums of $50.2 million for the year ended
December 31, 2005.


AEON Insurance Group, Inc., or AEON, the
Companys partner agent specializing in commercial auto,
general liability, inland marine and property coverages for tow
truck operators and vehicle repossessors, on a national basis,
produced total written premiums of $11.0 million for the
year ended December 31, 2005.

American Team Managers, or ATM, specializes in
general liability coverage for artisan contractors
(electricians, plumbers and other trades) and general
contractors and workers compensation for small to midsize
businesses all within California. Total written premiums for the
year ended December 31, 2005 were $22.1 million.

Specialty Risk Solutions, LLC, or SRS,
specializes in providing general liability to the public entity
segment including schools, municipalities and special districts.
SRS signed a partner agent program agreement with us in May
2005. Total written premiums for the year ended
December 31, 2005 were $7.0 million all within
California and Florida.

Appalachian Underwriters, Inc., or AUI,
specializes in providing commercial general liability and
commercial auto liability to residential and small commercial
contractors in mid-south and central states. AUI signed a
partner agent program agreement with us in October 2005 and
began writing business in December 2005. Total written premiums
for the year ended December 31, 2005 were $0.3 million.

Our premiums in 2005 were primarily concentrated
in California and Florida. California approved a 15.3% decrease
in advisory pure premium rate for workers compensation
effective as of January 1, 2006. This decrease was in
response to an improvement in loss experience caused by recent
workers compensation reform. Given the recent reforms, we
still believe that California is an attractive workers
compensation market. However, future experience may lead us to
conclude otherwise. Our gross written premiums by state were as
follows:

|             |  |                       |      |  |                     |  |       |  
|------------ |  | --------------------- | ---- |  | ------------------- |  | ----- | -
|             |  | Gross Written         |      |  | Percentage of Gross | 
|             |  | Premium               |      |  | Written Premium     | 
|             |  |                       |      |  |                     | 
|             |  |                      
|             |  | (Dollars in millions) |     
|California   |  | $                     | 35.7 |  |                     |  | 39.4  | %
|Florida      |  |                       | 38.6 |  |                     |  | 42.6  | %
|Other States |  |                       | 16.3 |  |                     |  | 18.0  | %
|             |  |                       |      |  |                     | 
|Total        |  | $                     | 90.6 |  |                     |  | 100.0 | %
|             |  |                       |      |  |                     | 

We expect that premium volume from our existing
agents will continue to increase. Our business written for 2005
was approximately 69% workers compensation and our longer
term goal is to have a more even balance between workers
compensation, general liability and commercial auto. We are also
continuing to explore the appointments of new partner agents to
increase our volume and balance our book of business.

Total revenues consisted of earned premium of
$26.6 million and investment income of $3.6 million.
Total expenses were $48.2 million consisting of loss and
loss adjustment expense of $19.1 million, amortization of
deferred acquisition cost of $6.1 million, service company
fees of $8.8 million and other operating expenses of
$14.2 million. Other operating expenses include
$5.2 million of salaries and benefit costs (excluding
$2.9 million of salary and benefit costs classified as loss
adjustment expenses and acquisition expenses), $3.0 million
of professional and consulting fees, $1.8 million of
depreciation and amortization and $4.2 million of other
expenses. For the year ended December 31, 2005 we reported
a net loss of $18.0 million.

Our loss and loss adjustment expense ratio was
66.7% on a direct basis (before reinsurance) and 71.8% on a net
basis (after reinsurance). Our net loss and loss adjustment
expense ratio was 5.1% higher than our direct loss ratio due to
the fact that we paid minimum premiums to reinsurers that were
in excess of the actual premiums expected when the reinsurance
was originally priced. Further, our loss experience in the
excess layers reinsured (typically losses above $1 million)
was better than the loss experience in the lower layers

31



---



##### Table of Contents



retained by us. We have entered into new
reinsurance arrangements for 2006 which we expect will produce
ceded results more in line with our direct results.


Our direct loss and loss adjustment expense
ratios by statutory line of business were as follows:

|                      |  |                       |       |  |               |   |      |              |  |   |      | 
|--------------------- |  | --------------------- | ----- |  | ------------- | - | ---- | ------------ |  | - | ---- | 
|                      |  | Loss and Loss         |       |  |               |   |     
|                      |  | Adjustment Expense    |       |  | Gross Written |   |      | Gross Earned | 
|                      |  | Ratio                 |       |  | Premium       |   |      | Premium      | 
|                      |  |                       |       |  |               |   |      |              | 
|                      |  |                      
|                      |  | (Dollars in millions) |      
|Workers Compensation |  |                       | 69.0% |  |               | $ | 62.3 |              |  | $ | 21.5 | 
|Commercial Automobile |  |                       | 69.7% |  |               |   | 9.4  |              |  |   | 3.6  | 
|General Liability     |  |                       | 43.6% |  |               |   | 10.7 |              |  |   | 4.5  | 
|All Other             |  |                       | 84.8% |  |               |   | 8.2  |              |  |   | 2.4  | 
|                      |  |                       |       |  |               |   |      |              | 
|Total                 |  |                       | 66.7% |  |               | $ | 90.6 |              |  | $ | 32.0 | 
|                      |  |                       |       |  |               |   |      |              | 

Our direct and net loss and loss adjustment
expense ratio was also negatively affected by the level of the
unallocated loss adjustment expense ratio, which was 7.5% on a
direct basis and 9.0% on a net basis. This high level of
unallocated loss adjustment expense was due to lower than
expected premium volume, while having to incur the costs
necessary to build a claim infrastructure and management process.

Due to the lower than expected premium volume in
our first year of operations, our expense levels were
disproportionate to our earned premium. As we increase our
future premium volume through existing and newly appointed
partner agents we expect that our expense ratio will improve.
Further, we were unable to achieve a satisfactory resolution
with Syndicated Services, Inc., or SSC, our service company, and
have mutually agreed to terminate our relationship effective
December 31, 2005. The contract with SSC required us to pay
$8.8 million for 2005 services. We have substantially
completed the transition process through both internal hiring
and outsourcing. We anticipate an expense reduction associated
with these back office activities of at least 50% in 2006 and
beyond.

Also, as part of our infrastructure strategy, we
finalized our technology plans for policy administration by
contracting for a new system that will allow us to
comprehensively process and issue policies for all lines of
business. We believe this new system and resultant technology
improvements will provide the ability to write business more
efficiently. As a result of this new system direction,
approximately $0.4 million of capitalized software will no
longer be used and was expensed.

For the year ended December 31, 2004 we
reported a net loss of $8.1 million as a result of start-up
costs while not recording any revenues. Revenue consisted solely
of investment income of $0.3 million earned on capital from
our initial funding date of November 23, 2004 through
December 31, 2004. Total expenses consisted of service
company fees of $4.6 million and other operating expenses
of $3.8 million.

We were formed on April 3, 2003 and did not
have any financial activity until our initial funding date of
December 12, 2003. For the period April 3, 2003 to
December 31, 2003, we reported a net loss of
$0.6 million.

Potomacs pre-tax income was
$1.0 million for the period from January 1, 2004
through November 23, 2004 and $2.1 million for the
year ended December 31, 2003. As of January 1, 2004,
Potomac ceased its participation in the OneBeacon Amended and
Restated Reinsurance (Pooling) Agreement, or the Pool. As a
result, net written premiums, net earned premiums, losses and
underwriting expenses for the period from January 1, 2004
through November 23, 2004 were zero and, therefore, are not
comparable with 2003 results.

Liquidity and Capital Resources

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 substantially all of our insurance operations.

As a holding company, we will have 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.

32



---



##### Table of Contents



Funds to meet these obligations are expected to
come primarily from dividends and other statutorily permissible
payments from our operating subsidiary. The ability of our
operating subsidiary to make payments to us will be limited by
the applicable laws and regulations of Illinois. There will be
restrictions on the payment of dividends by our insurance
subsidiary to us.


For the year ended December 31,
2005 net cash from operating activities was
$8.4 million principally consisting of premium and deposit
collections exceeding losses and expenses paid out. Further cash
used in investment activities was $13.6 million principally
representing increases in investments and additions to equipment
and capitalized software. Further, we had cash flows from
financing activities of $1.5 million from sales of
Class B shares to partner agents.

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. We
expect that operating cash flows will continue to grow and
remain positive.

For the year ended December 31, 2004, our
increase in cash was $8.8 million. Cash was provided from
the net proceeds of our initial public offering of
$123.5 million and $3.2 million from term loans. Net
cash used for investment activities during the twelve month
period ended December 31, 2004 totaled $110.0 million
and was primarily related to the acquisition of Potomac and
subsequent purchases of investments with the proceeds from the
initial public offering. Cash used for operating activities
during the period from January 1, 2004 to December 31,
2004 totaled $7.9 million and was primarily related to our
initial start-up costs.

For the period from April 3, 2003 to
December 31, 2003, our increase in cash was
$0.2 million generated from short term loans of
$0.7 million net of start-up costs of $0.5 million.

As of January 1, 2004, Potomac ceased its
participation in the Pool and entered into a transfer and
assumption reinsurance agreement whereby it transferred all of
its direct insurance business written to OneBeacon. As a result,
Potomac no longer has any insurance assets or liabilities on a
net basis and will not share in any favorable or unfavorable
development of prior year losses recorded by the Pool after
January 1, 2004 unless OneBeacon fails to perform.

In 2004, Potomacs sources of cash consisted
primarily of net investment income and proceeds from sales and
maturities of investments. Potomacs uses of cash were
primarily investing expenses and the purchase of investments.
Prior to January 1, 2004, the effective date of
Potomacs withdrawal from the Pool, its sources of cash
also included premium collections and its uses included claim
payments and operating expenses.

During 2004 Potomac declared and paid
$18.6 million in cash dividends and capital distributions
and distributed $13.3 million of net assets to OneBeacon.

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 December 31, 2005 was
$94.1 million compared to amortized cost of
$95.8 million. The aggregate fair market value of our fixed
maturity investments at December 31, 2004 was
$50.5 million compared to amortized cost of
$50.5 million.

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 terms that are acceptable to us.

33



---



##### Table of Contents



Insurers are 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. Higher financial ratings
would enable us to write more business. Maintaining adequate
capital consistent with business objectives is critical to any
insurers future, and particularly important to start-up
companies such as ours. We believe that 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. We are presently
looking at a variety of financing alternatives including the
potential issuance of a trust preferred security that would
provide capital for future growth.

If we cannot maintain or obtain adequate capital
to manage our business strategy and expected growth targets, our
business, results of operations and financial condition may be
adversely affected.

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, 2005.

Table of Contractual Obligations

|                                                                                       |  |                        |       |           |        |   |     |           |           |   |           |  |  |         |     |  |  |   |       | 
|-------------------------------------------------------------------------------------- |  | ---------------------- | ----- | --------- | ------ | - | --- | --------- | --------- | - | --------- |  |  | ------- | --- |  |  | - | ----- | 
|                                                                                       |  |                       
|                                                                                       |  | Payment Due by Period  |      
|                                                                                       |  |                        |      
|                                                                                       |  |                        |       | Less Than |        |   |     |           | More Than |  
|Contractual Obligations                                                                |  | Total                  |       |           | 1 Year |   |     | 1-3 Years |           |   | 3-5 Years |  |  | 5 Years |    
|                                                                                       |  |                        |       |           |        |   |     |           |           |   |           |  |  |         |    
|                                                                                       |  |                       
|                                                                                       |  | (Dollars in thousands) |      
|Long-Term Debt Obligations                                                             |  | $                      |      |           |        | $ |    |           |           | $ |          |  |  | $       |    |  |  | $ |      | 
|Capital Lease Obligations                                                              |  |                        |      |           |        |   |    |           |           |   |          |  |  |         |    |  |  |   |      | 
|Operating Lease Obligations                                                            |  |                        | 6,492 |           |        |   | 160 |           |           |   | 693       |  |  |         | 879 |  |  |   | 4,760 | 
|Purchase Obligations                                                                   |  |                        |      |           |        |   |    |           |           |   |          |  |  |         |    |  |  |   |      | 
|Other Long-Term Liabilities Reflected on the
    Registrants Balance Sheet under GAAP |  |                        |      |           |        |   |    |           |           |   |          |  |  |         |    |  |  |   |      | 
|Total                                                                                  |  | $                      | 6,492 |           |        | $ | 160 |           |           | $ | 693       |  |  | $       | 879 |  |  | $ | 4,760 | 

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                                                                                           

34



---



##### Table of Contents



| |  |                                                                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

Related Party Transactions

Prior to November 23, 2004, Potomac had a
service contract with White Mountains Advisors LLC, or Advisors,
a wholly-owned subsidiary of OneBeacon. Under this agreement,
Advisors provided investment research and advice, including the
execution of orders for the purchase and sale of securities. The
amounts charged to Potomac by Advisors for such services were
based on a fixed fee applied to the month-end market values of
the investments being managed.

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, 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.

Recent Accounting Pronouncements

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. As permitted by FAS 123,
our company currently accounts for share-based payments to
employees using APB 25s intrinsic value method and,
as such, generally recognizes no compensation expense for
employee stock options. Accordingly, the adoption of
FAS 123Rs fair value method will have a significant
impact on our result of operations, although it will have no
impact on our overall financial position. The impact of adoption
of FAS 123R cannot be predicted at this time because it
will depend on levels of share-based payments granted in the
future. However, had we adopted FAS 123R in prior periods,
the impact of that standard would have approximated the impact
of FAS 123 as described in the disclosure of pro forma net
income and earnings per share in Note 7 to our consolidated
financial statements. FAS 123R also requires the benefits
of tax deductions in excess of recognized compensation expense
to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase
net financing cash flows in periods after adoption. While we
cannot estimate what those amounts will be in the future
(because they depend on, among other things, when employees
exercise stock options), the amount of operating cash flows
recognized in prior periods for such excess tax deductions were
zero in 2005 and 2004, as we had a net operating loss carry
forwards and have never paid any tax.

Premium Income

Net premiums written consists 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 increase, the effect of those
increases will not immediately affect earned premium. Rather,
those increases will be recognized ratably over the period of
coverage. 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 exposure units over the period of
coverage, such as payroll increases/decreases and changes in risk

35



---



##### Table of Contents



classifications and therefore the 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.

We use quoted market prices in determining the
fair value of fixed maturities and short-term investments in
most cases. Where quoted market prices are unavailable, we
expect to base the estimate on recent trading. 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.

Deferred Policy Acquisition Costs

We establish an asset for deferred policy
acquisition costs such as up-front commissions, premium taxes
and other variable costs incurred in connection with writing our
lines of business. Deferred policy acquisition costs will be
amortized over the period of coverage of the policies written.
We assess the recoverability of deferred policy acquisition
costs. The loss and loss adjustment expense ratio we use to
estimate the recoverability of deferred costs is based primarily
on the assumption that the future loss and loss adjustment
expense ratio will include consideration of the recent
experience. Such adjustments, if any, are recorded through
operations in the period identified. Actual results could differ
materially from such estimates, requiring future adjustments to
the recorded deferred policy acquisition cost asset.

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 for the
excess of book value over fair value.

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, or IBNR,
referred to as IBNR Reserves.

The estimate of these reserves is subjective and
complex and require 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

36



---



##### Table of Contents



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.


For IBNR losses, we estimate the amount of
reserves for each line of business on the basis of historical
and statistical information. We consider 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 accident year. The
utilization of company specific loss experience will increase
over time, which will reduce the inherent uncertainty that
exists in reserving for our newer book of business. The actual
future development of our loss reserves may have a material
adverse impact on our financial condition and results of
operation.

To establish loss and loss adjustment expense
reserves, we make estimates and assumptions that affect the
amounts of assets, liabilities, revenues and expenses reported
in our financial statements. Actual results could differ
materially from those estimates. The effects of inflation could
cause the severity of claims to increase in the future. Our
estimates for losses and loss adjustment expenses will include
assumptions, including those relating to inflation, about future
payments for settlement of claims and claims handling expenses.
To the extent inflation causes these costs to increase above our
estimated reserves that will be established for these claims, we
will be required to increase reserves for losses and loss
adjustment expenses with a corresponding reduction in our
earnings in the period in which the increase is identified. The
actual effects of inflation on our results cannot be accurately
determined until claims are ultimately settled.

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.

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.






|         |                                                               
|-------- | --------------------------------------------------------------
|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 will 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 will be mitigated, however, by
corresponding and partially offsetting changes in the economic
value of our insurance reserves to the extent we have
established such loss reserves. We will monitor this exposure
through periodic reviews of our consolidated asset and liability
positions. We will 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.

37



---



##### Table of Contents



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

|                  |  |                        |         |                |                      |                |                 |               |           |          |                |  |  |   |        |  
|----------------- |  | ---------------------- | ------- | -------------- | -------------------- | -------------- | --------------- | ------------- | --------- | -------- | -------------- |  |  | - | ------ | -
|                  |  |                        |         |                |                      | Estimated Fair |                 |               | After Tax |         
|                  |  |                        |         | Assumed Change |                      |                | Value After     |               |           | Increase |               
|                  |  | Fair Value             |         |                | in Relevant Interest |                |                 | Change in     |           |          | (Decrease) in  | 
|                  |  | at 12/31/05            |         |                | Rate                 |                |                 | Interest Rate |           |          | Carrying Value | 
|                  |  |                        |         |                |                      |                |                 |               |           |          |                | 
|                  |  |                       
|                  |  | (Dollars in thousands) |        
|Total Investments |  | $                      | 102,991 |                |                      |                | 100 bp decrease |               |           | $        | 105,779        |  |  | $ | 2,788  |  
|                  |  |                        |         |                |                      |                | 50 bp decrease  |               |           | $        | 104,419        |  |  | $ | 1,428  |  
|                  |  |                        |         |                |                      |                | 50 bp increase  |               |           | $        | 101,540        |  |  | $ | (1,451 | )
|                  |  |                        |         |                |                      |                | 100 bp increase |               |           | $        | 100,065        |  |  | $ | (2,926 | )

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 plan 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, 2005. The
following table summarizes bond ratings at carrying value.

|                                                     |       |                    |        |            |           |  |      |     |  
|---------------------------------------------------- | ----- | ------------------ | ------ | ---------- | --------- |  | ---- | --- | -
|                                                     |       |                   
|                                                     |       | As of December 31, |       
|                                                     |       | 2005               |       
|                                                     |       |                    |       
|                                                     |       |                    |        | Percent of |          
|Bond Ratings                                         |       | Amount             |        |            | Portfolio | 
|                                                     |       |                    |        |            |           | 
|U.S. Government and affiliated agency
    securities |       | $                  | 41,279 |            |           |  | 43.9 | %  
|AA rated                                             |       |                    | 15,940 |            |           |  | 16.9 | %  
|A rated                                              |       |                    | 36,910 |            |           |  | 39.2 | %  
|                                                     |       |                    |        |            |           | 
|                                                     | Total |                    | $      | 94,129     |           |  |      | 100 | %
|                                                     |       |                    |        |            |           | 

We also have other receivable amounts subject to
credit risk, including reinsurance recoverables from OneBeacon.
To mitigate the risk of counterparties 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 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

38



---



##### Table of Contents



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, 2005 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 have concluded that the
design and operation of our internal controls over financial
reporting are effective as of December 31, 2005.

Managements assessment of the effectiveness
of our internal control over financial reporting as of
December 31, 2005, 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.




ITEM 9B.     OTHER
INFORMATION

None.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE
    REGISTRANT

The information required by Item 10 as to
our executive officers is disclosed in Part I under the
caption Executive Officers of the Registrant. The
information required by Item 10 as to our directors 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 director or
executive officer.






|         |                       
|-------- | ----------------------
|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.

39



---



##### Table of Contents








|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|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

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, FINANCIAL STATEMENT
    SCHEDULES

(a) 1. and 2. 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.

3. Exhibits

|        |   |    |             |                                                                                                                                                                                                                                                                                                                    
|------- | - | -- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |    |            
|Number  |   |    | Description
|        |   |    |            
|        | 2 | .1 |             | Stock Purchase Agreement, dated March 22,
    2004, between Registrant and OneBeacon Insurance Company
    (Incorporated by reference to Exhibit 2.1, filed with
    Specialty Underwriters Alliance, Inc.s Registration
    Statement on Form S-1 (File No. 333-117722))                                        
|        | 2 | .2 |             | Amendment No. 1, dated May 4, 2004, to
    Stock Purchase Agreement between Registrant and OneBeacon
    Insurance Company (Incorporated by reference to
    Exhibit 2.2, filed with Specialty Underwriters
    Alliance, Inc.s Registration Statement on Form S-1
    (File No. 333-117722))                    
|        | 2 | .3 |             | Amendment No. 2, dated July 1, 2004, to
    Stock Purchase Agreement between Registrant and OneBeacon
    Insurance Company (Incorporated by reference to
    Exhibit 2.3, filed with Specialty Underwriters
    Alliance, Inc.s Registration Statement on Form S-1
    (File No. 333-117722))                   
|        | 2 | .4 |             | Amendment No. 3, dated July 13, 2004,
    to Stock Purchase Agreement between Registrant and OneBeacon
    Insurance Company (Incorporated by reference to
    Exhibit 2.4, filed with Specialty Underwriters
    Alliance, Inc.s Registration Statement on Form S-1
    (File No. 333-117722))                  
|        | 2 | .5 |             | Amendment No. 4, dated October 12,
    2004, to Stock Purchase Agreement between Registrant and
    OneBeacon Insurance Company (Incorporated by reference to
    Exhibit 2.5, filed with Specialty Underwriters
    Alliance, Inc.s Registration Statement on Form S-1
    (File No. 333-117722))               
|        | 2 | .6 |             | Amendment No. 5, dated November 16,
    2004, to Stock Purchase Agreement between Registrant and
    OneBeacon Insurance Company (Incorporated by reference to
    Exhibit 2.6, filed with Specialty Underwriters
    Alliance, Inc.s Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2004)
|        | 3 | .1 |             | Amended and Restated Certificate of Incorporation
    (Incorporated by reference to Exhibit 3.1, filed with
    Specialty Underwriters Alliance. Inc.s Registration
    Statement on Form S-1 (File No. 333-124263))                                                                                             
|        | 3 | .2 |             | Amended and Restated Bylaws (Incorporated by
    reference to Exhibit 3.2, filed with Specialty
    Underwriters Alliance, Inc.s Registration Statement
    on Form S-1 (File No. 333-117722))                                                                                                                   

40



---



##### Table of Contents



|        |    |      |             |                                                                                                                                                                                                                                                                                                                       
|------- | -- | ---- | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |            
|Number  |    |      | Description
|        |    |      |            
|        | 4  | .1   |             | Amended and Restated Senior Secured Note to the
    order of Friedman, Billings, Ramsey Group, Inc. for up to
    $2,000,000 (Incorporated by reference to Exhibit 4.1, filed
    with Specialty Underwriters Alliance, Inc.s
    Registration Statement on Form S-1 (File
    No. 333-117722))                     
|        | 4  | .2   |             | Amended and Restated Subordinated Note to the
    order of Courtney C. Smith for up to $260,000 (Incorporated by
    reference to Exhibit 4.2, filed with Specialty
    Underwriters Alliance, Inc.s Registration Statement
    on Form S-1 (File No. 333-117722))                                                  
|        | 4  | .3   |             | Amended and Restated Subordinated Note to the
    order of Peter E. Jokiel for up to $114,000 (Incorporated by
    reference to Exhibit 4.3, filed with Specialty
    Underwriters Alliance, Inc.s Registration Statement
    on Form S-1 (File No. 333-117722))                                                    
|        | 4  | .4   |             | Amended and Restated Subordinated Note to the
    order of William S Loder for up to $45,000 (Incorporated by
    reference to Exhibit 4.4, filed with Specialty
    Underwriters Alliance, Inc.s Registration Statement
    on Form S-1 (File No. 333-117722))                                                     
|        | 4  | .5   |             | Amended and Restated Subordinated Note to the
    order of Gary J. Ferguson for up to $31,000 (Incorporated by
    reference to Exhibit 4.5, filed with Specialty
    Underwriters Alliance, Inc.s Registration Statement
    on Form S-1 (File No. 333-117722))                                                    
|        | 4  | .6   |             | Amended and Restated Amended and Restated Senior
    Secured Note to the order of Standard American Insurance Limited
    for up to $1,450,000 (Incorporated by reference to
    Exhibit 4.6, filed with Specialty Underwriters
    Alliance, Inc.s Registration Statement on Form S-1
    (File No. 333-117722))   
|        | 4  | .7   |             | Warrant No. W-1 B issued to Friedman,
    Billings, Ramsey Group, Inc. (Incorporated by reference to
    Exhibit 4.7, filed with the Specialty Underwriters
    Alliance, Inc.s Registration Statement on Form S-1
    (File No. 333-117722))                                                                       
|        | 4  | .8   |             | Warrant No. W-1 C issued to Friedman,
    Billings, Ramsey Group, Inc. (Incorporated by reference to
    Exhibit 4.8, filed with Specialty Underwriters
    Alliance, Inc.s Registration Statement on Form S-1
    (File No. 333-117722))                                                                           
|        | 4  | .9   |             | Warrant No. W-2 B issued to Courtney C.
    Smith (Incorporated by reference to Exhibit 4.9, filed with
    Specialty Underwriters Alliance, Inc.s Registration
    Statement on Form S-1 (File No. 333-117722))                                                                                                    
|        | 4  | .10  |             | Warrant No. W-2 C issued to Courtney C.
    Smith (Incorporated by reference to Exhibit 4.10, filed
    with Specialty Underwriters Alliance, Inc.s
    Registration Statement on Form S-1 (File
    No. 333-117722))                                                                                               
|        | 4  | .11  |             | Warrant No. W-3 B issued to Peter E. Jokiel
    (Incorporated by reference to Exhibit 4.11, filed with
    Specialty Underwriters Alliance, Inc.s Registration
    Statement on Form S-1 (File No. 333-117722))                                                                                                     
|        | 4  | .12  |             | Warrant No. W-4 B issued to William S. Loder
    (Incorporated by reference to Exhibit 4.12, filed with
    Specialty Underwriters Alliance, Inc.s Registration
    Statement on Form S-1 (File No. 333-117722))                                                                                                    
|        | 4  | .13  |             | Warrant No. W-5 B issued to Gary J. Ferguson
    (Incorporated by reference to Exhibit 4.13, filed with
    Specialty Underwriters Alliance, Inc.s Registration
    Statement on Form S-1 (File No. 333-117722))                                                                                                    
|        | 4  | .14  |             | Warrant No. W-6 issued to Standard American
    Insurance Limited (Incorporated by reference to
    Exhibit 4.14, filed with Specialty Underwriters
    Alliance, Inc.s Registration Statement on Form S-1
    (File No. 333-117722))                                                                               
|        | 10 | .1.1 |             | Management and Administrative Services Agreement,
    dated November 1, 2003, between the Registrant and
    Syndicated Services Company, Inc. (Incorporated by reference to
    Exhibit 10.1.1, filed with Specialty Underwriters
    Alliance, Inc.s Registration Statement on Form S-1
    (File No. 333-117722))
|        | 10 | .1.2 |             | Engagement letter, dated November 24, 2003
    between the Registrant and MMC Securities Corp. (Incorporated by
    reference to Exhibit 10.1.2, filed with Specialty
    Underwriters Alliance, Inc.s Registration Statement
    on Form S-1 (File No. 333-117722))                                                

41



---



##### Table of Contents



|        |    |       |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------- | -- | ----- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |            
|Number  |    |       | Description
|        |    |       |            
|        | 10 | .1.3  |             | Agreement, dated March 15, 2004, between the
    Registrant and Guy Carpenter & Company, Inc.
    (Incorporated by reference to Exhibit 10.1.3, filed with
    Specialty Underwriters Alliance, Inc.s Registration
    Statement on Form S-1 (File No. 333-117722))                                                                                                                                                                              
|        | 10 | .1.4  |             | Addendum I to the Management and Administrative
    Services Agreement, dated April 26, 2004, between the
    Registrant and Syndicated Services Company, Inc. (Incorporated
    by reference to Exhibit 10.1.4, filed with Specialty
    Underwriters Alliance, Inc.s Registration Statement
    on Form S-1 (File No. 333-117722))                                                                                                             
|        | 10 | .1.5  |             | Amended and Restated Stock Option Plan dated as
    of November 10, 2004 (Incorporated by reference to
    Exhibit 10.1.5, filed with Specialty Underwriters
    Alliance, Inc.s Registration Statement on Form S-1
    (File No. 333-117722))                                                                                                                                                                                                   
|        | 10 | .1.6  |             | Addendum II to the Management and
    Administrative Services Agreement, dated June 10, 2004,
    between the Registrant and Syndicated Services Company, Inc.
    (Incorporated by reference to Exhibit 10.1.6, filed with
    Specialty Underwriters Alliance, Inc.s Registration
    Statement on Form S-1 (File No. 333-117722))                                                                                                             
|        | 10 | .1.7  |             | First Amendment to Engagement Letter, dated
    June 24, 2004, between the Registrant and MMC Securities
    Corp. (Incorporated by reference to Exhibit 10.1.7, filed
    with Specialty Underwriters Alliance, Inc.s
    Registration Statement on Form S-1 (File
    No. 333-117722))                                                                                                                                                         
|        | 10 | .1.8  |             | 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
    Registration Statement on Form S-1 (File
    No. 333-117722))                                                                                                                                                   
|        | 10 | .1.9  |             | 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
    Registration Statement on Form S-1 (File
    No. 333-117722))                                                                                                                                                     
|        | 10 | .1.10 |             | 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
    Registration Statement on Form S-1 (File
    No. 333-117722))                                                                                                                                                   
|        | 10 | .1.11 |             | 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
    Registration Statement on Form S-1 (File
    No. 333-117722))                                                                                                                                                   
|        | 10 | .1.12 |             | Amended and Restated Senior Loan and Security
    Agreement, dated July 23, 2004, among Friedman, Billings,
    Ramsey Group, Inc., Standard American Insurance Limited and
    Registrant (Incorporated by reference to Exhibit 10.1.12,
    filed with Specialty Underwriters Alliance, Inc.s
    Registration Statement on Form S-1 (File
    No. 333-117722))                                                                                
|        | 10 | .1.13 |             | Amended and Restated Subordinated Loan and
    Security Agreement, dated July 23, 2004, among Friedman,
    Billings, Ramsey Group, Inc., Standard American Insurance
    Limited, Registrant, Courtney C. Smith, Peter E. Jokiel, William
    S. Loder and Gary Ferguson (Incorporated by reference to
    Exhibit 10.1.12, filed with Specialty Underwriters
    Alliance, Inc.s Registration Statement on Form S-1
    (File No. 333-117722)) 
|        | 10 | .1.14 |             | Amended and Restated Intercreditor and
    Subordination Agreement, dated July 23, 2004, among
    Friedman, Billings, Ramsey Group, Inc., Standard American
    Insurance Limited, Registrant, Courtney C. Smith, Peter E.
    Jokiel, William S. Loder and Gary Ferguson (Incorporated by
    reference to Exhibit 10.1.12, filed with Specialty
    Underwriters Alliance, Inc.s Registration Statement
    on Form S-1 (File No. 333-117722))
|        | 10 | .1.15 |             | 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
    Registration Statement on Form S-1 (File
    No. 333-117722))                                                                                                                                                        
|        | 10 | .1.16 |             | Amended and Restated Securities Purchase
    Agreement, dated September 30, 2004, between the Registrant
    and AEON Insurance Group, Inc. (Incorporated by reference to
    Exhibit 10.1.16, filed with Specialty Underwriters
    Alliance, Inc.s Registration Statement on Form S-1
    (File No. 333-117722))                                                                                                                               

42



---



##### Table of Contents



|        |    |       |             |                                                                                                                                                                                                                                                                                                                                                                             
|------- | -- | ----- | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |            
|Number  |    |       | Description
|        |    |       |            
|        | 10 | .1.17 |             | 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
    Registration Statement on Form S-1 (File
    No. 333-117722))                                                                                      
|        | 10 | .1.18 |             | Amended and Restated Securities Purchase
    Agreement, dated August 16, 2004, between the Registrant
    and American Team Managers (Incorporated by reference to
    Exhibit 10.1.18, filed with Specialty Underwriters
    Alliance, Inc.s Registration Statement on Form S-1
    (File No. 333-117722))                                                               
|        | 10 | .1.19 |             | 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 | .1.20 |             | 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 Registration Statement on Form S-1
    (File No. 333-117722))                                               
|        | 10 | .1.21 |             | Warrant Exchange Agreement, dated August 31,
    2004, among the Registrant, Friedman, Billings, Ramsey Group,
    Inc., Courtney C. Smith, Peter E. Jokiel, William S. Loder and
    Gary Ferguson (Incorporated by reference to
    Exhibit 10.1.23, filed with Specialty Underwriters
    Alliance, Inc.s Registration Statement on Form S-1
    (File No. 333-117722))
|        | 10 | .1.22 |             | Second Amendment to Engagement Letter, dated
    September 7, 2004, between the Registrant and MMC
    Securities Corp. (Incorporated by reference to
    Exhibit 10.1.24, filed with Specialty Underwriters
    Alliance, Inc.s Registration Statement on Form S-1
    (File No. 333-117722))                                                                            
|        | 10 | .1.23 |             | 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 Registration
    Statement on Form S-1 (File No. 333-117722))                                                                                                   
|        | 10 | .1.24 |             | Promissory Note, dated September 30, 2004,
    in favor of the Registrant (Incorporated by reference to
    Exhibit 10.1.26, filed with Specialty Underwriters
    Alliance, Inc.s Registration Statement on Form S-1
    (File No. 333-117722))                                                                                                                          
|        | 10 | .1.25 |             | 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 Registration Statement
    on Form S-1 (File No. 333-117722))                                                                                                          
|        | 10 | .1.26 |             | Promissory Note, dated August 16, 2004, in
    favor of the Registrant (Incorporated by reference to
    Exhibit 10.1.28, filed with Specialty Underwriters
    Alliance, Inc.s Registration Statement on Form S-1
    (File No. 333-117722))                                                                                                                             
|        | 10 | .1.27 |             | Letter Agreement, dated September 15, 2004,
    between the Registrant and Syndicated Services Company, Inc.
    (Incorporated by reference to Exhibit 10.1.31, filed with
    Specialty Underwriters Alliance, Inc.s Registration
    Statement on Form S-1 (File No. 333-117722))                                                                                       
|        | 10 | .1.28 |             | 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 Registration Statement on Form S-1
    (File No. 333-117722))                                                                           
|        | 10 | .1.29 |             | Amended and Restated Securities Purchase
    Agreement, dated November 3, 2004, between the Registrant
    and Risk Transfer Holdings, Inc. (Incorporated by reference to
    Exhibit 10.1.33, filed with Specialty Underwriters
    Alliance, Inc.s Registration Statement on Form S-1
    (File No. 333-117722))                                                        
|        | 10 | .1.30 |             | Side Letter, dated November 3, 2004, between
    the Registrant and Risk Transfer Holdings, Inc. (Incorporated by
    reference to Exhibit 10.1.34, filed with Specialty
    Underwriters Alliance, Inc.s Registration Statement
    on Form S-1 (File No. 333-117722))                                                                                                   
|        | 10 | .1.31 |             | Promissory Note, dated November 3, 2004, in
    favor of the Registrant (Incorporated by reference to
    Exhibit 10.1.35, filed with Specialty Underwriters
    Alliance, Inc.s Registration Statement on Form S-1
    (File No. 333-117722))                                                                                                                            

43



---



##### Table of Contents



|        |    |       |             |                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------- | -- | ----- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |            
|Number  |    |       | Description
|        |    |       |            
|        | 10 | .1.32 |             | 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 Registration Statement
    on Form S-1 (File No. 333-117722))                                                                                               
|        | 10 | .1.33 |             | 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 Registration Statement
    on Form S-1 (File No. 333-117722))                                                                                              
|        | 10 | .1.34 |             | First Amendment to Amended and Restated Senior
    Loan and Security Agreement, dated November 11, 2004, among
    FBR, Standard American Insurance Limited and Registrant
    (Incorporated by reference to Exhibit 10.1.38, filed with
    Specialty Underwriters Alliance, Inc.s Registration
    Statement on Form S-1 (File No. 333-117722))                                                                                    
|        | 10 | .1.35 |             | First Amendment to Amended and Restated
    Subordinated Loan and Security Agreement, dated
    November 11, 2004, among FBR, Standard American Insurance
    Limited, Registrant, Courtney C. Smith, Peter E. Jokiel, William
    S. Loder and Gary Ferguson. (Incorporated by reference to
    Exhibit 10.1.39, filed with Specialty Underwriters
    Alliance, Inc.s Registration Statement on Form S-1
    (File No. 333-117722))
|        | 10 | .1.36 |             | 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 Registration
    Statement on Form S-1 (File No. 333-117722))                                                                                                                                                        
|        | 10 | .1.37 |             | Form of Registration Rights Agreement, by and
    between the Registrant and Friedman, Billings, Ramsey Group,
    Inc. (Incorporated by reference to Exhibit 10.1.41, filed
    with Specialty Underwriters Alliance, Inc.s
    Registration Statement on Form S-1 (File
    No. 333-117722))                                                                                                                                       
|        | 10 | .1.38 |             | 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 Registration
    Statement on Form S-1 (File No. 333-117722))                                                                                                                                                
|        | 10 | .1.39 |             | 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 Registration Statement on Form S-1
    (File No. 333-117722))                                                                                                         
|        | 10 | .1.40 |             | 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)                                                                      
|        | 10 | .1.41 |             | Amendment No. 1 to 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)                                                                                                                  
|        | 10 | .1.42 |             | Partner Agent Program Agreement, dated
    May 11, 2005, between the Registrant and Specialty Risk
    Solutions, LLC. (Incorporated by reference to
    Exhibit 10.1.42 with Specialty Underwriters Alliance.
    Inc.s Registration Statement on Form S-1 (File
    No. 333-124263))                                                                                                                                               
|        | 10 | .1.43 |             | 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 Registration
    Statement on Form S-1 (File No. 333-124263))                                                                                                                                                      
|        | 10 | .1.44 |             | Partner Agent Program Agreement, dated
    October 11, 2005, between the Registrant and Appalachian
    Underwriters, Inc. (Incorporated by reference to
    Exhibit 10.1.44 with Specialty Underwriters Alliance.
    Inc.s Registration Statement on Form S-1 (File
    No. 333-124263))                                                                                                                                           
|        | 10 | .1.45 |             | Securities Purchase Agreement, dated
    October 11, 2005, between the Registrant and Appalachian
    Underwriters, Inc. (Incorporated by reference to
    Exhibit 10.1.45 with Specialty Underwriters Alliance.
    Inc.s Registration Statement on Form S-1 (File
    No. 333-124263))                                                                                                                                             

44



---



##### Table of Contents



|        |    |        |             |                                                                                                                                                                                                                                                                                                                  
|------- | -- | ------ | ----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |        |            
|Number  |    |        | Description
|        |    |        |            
|        | 10 | .1.46  |             | First Amendment to the Securities Purchase
    Agreement, dated October 21, 2005, between the Registrant
    and Appalachian Underwriters, Inc. (Incorporated by reference to
    Exhibit 10.1.46 with Specialty Underwriters Alliance.
    Inc.s Registration Statement on Form S-1 (File
    No. 333-124263))
|        | 10 | .1.47  |             | Third Amendment to the Securities Purchase
    Agreement, dated October 21, 2005, between the Registrant
    and Specialty Risk Solutions, LLC. (Incorporated by reference to
    Exhibit 10.1.47 with Specialty Underwriters Alliance.
    Inc.s Registration Statement on Form S-1 (File
    No. 333-124263))
|        | 10 | .1.48* |             | Amendment No. 1 to the Partner Agent Program
    Agreement, dated December 13, 2005, between the Registrant
    and Appalachian Underwriters, Inc.                                                                                                                                                               
|        | 10 | .1.49* |             | Partner Agent Program Agreement, dated
    January 24, 2006, between the Registrant and American
    Patriot Insurance Agency, Inc.                                                                                                                                                                              
|        | 10 | .1.50* |             | Securities Purchase Agreement, dated
    January 24, 2006, between the Registrant and American
    Patriot Insurance Agency, Inc.                                                                                                                                                                                
|        | 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)                                                                               
|        | 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)                                                                                                             
|        | 23 | .1*    |             | Consent of PricewaterhouseCoopers, LLP with
    respect to Registrant.                                                                                                                                                                                                                                           
|        | 23 | .2*    |             | 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.

45



---



##### Table of Contents






INDEX TO AUDITED CONSOLIDATED FINANCIAL
STATEMENTS AND SCHEDULES

|                                                                                                                                                                                                                                                                                                                                                                                                                       |  |          |      | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ---- | 
|                                                                                                                                                                                                                                                                                                                                                                                                                       |  | Page No. |     
|                                                                                                                                                                                                                                                                                                                                                                                                                       |  |          |     
|Reports of Independent
    Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                                           |  |          | F-2  | 
|Consolidated Balance Sheets
    of Specialty Underwriters Alliance, Inc. (Successor) as of
    December 31, 2005 and December 31, 2004                                                                                                                                                                                                                                                                                |  |          | F-5  | 
|Consolidated Statements of
    Income and Comprehensive Income of Specialty Underwriters
    Alliance, Inc. (Successor) for the years ended December 31,
    2005, December 31, 2004 and for the period from
    April 3, 2003 to December 31, 2003 and Potomac
    Insurance Company of Illinois (Predecessor) for the period from
    January 1, 2004 to November 23, 2004 and the year
    ended December 31, 2003 |  |          | F-6  | 
|Consolidated Statement of
    Stockholders Equity of Specialty Underwriters
    Alliance, Inc. (Successor) as of December 31, 2005 and
    December 31, 2004                                                                                                                                                                                                                                                         |  |          | F-7  | 
|Consolidated Statements of
    Cash Flows for Specialty Underwriters Alliance, Inc.
    (Successor) for the years ended December 31, 2005,
    December 31, 2004 and the period from April 3, 2003 to
    December 31, 2003 and Potomac Insurance Company of Illinois
    (Predecessor) for the period from January 1, 2004 to
    November 23, 2004 and for the year ended December 31,
    2003                     |  |          | F-8  | 
|Notes to Consolidated
    Financial Statements                                                                                                                                                                                                                                                                                                                                                                         |  |          | F-9  | 
|Financial Statement Schedules                                                                                                                                                                                                                                                                                                                                                                                          |  |          |      | 
|Schedule I 
    Specialty Underwriters Alliance, Inc.  Summary
    of Investments other than investments in related parties at
    December 31, 2005                                                                                                                                                                                                                                                                |  |          | F-24 | 
|Schedule II 
    Specialty Underwriters Alliance, Inc. 
    Condensed Financial Information of Registrant for the years
    ended December 31, 2005, December 31, 2004 and for the
    period from April 3, 2003 to December 31, 2003                                                                                                                                                                               |  |          | F-25 | 
|Schedule III 
    Specialty Underwriters Alliance, Inc. 
    Supplementary Insurance Information for the years ended
    December 31, 2005, December 31, 2004 and for the
    period from April 3, 2003 to December 31, 2003                                                                                                                                                                                        |  |          | F-28 | 
|Schedule IV 
    Specialty Underwriters Alliance, Inc. 
    Reinsurance for the years ended December 31, 2005,
    December 31, 2004 and for the period from April 3,
    2003 to December 31, 2003                                                                                                                                                                                                                 |  |          | F-29 | 
|Schedule V 
    Specialty Underwriters Alliance, Inc. 
    Valuation and Qualifying Accounts of Registrant for the years
    ended December 31, 2005, December 31, 2004 and
    December 31, 2003                                                                                                                                                                                                                   |  |          | F-30 | 
|Schedule VI 
    Specialty Underwriters Alliance, Inc. 
    Supplemental Information Concerning Property and Casualty
    Insurance Operations for the years ended December 31, 2005,
    December 31, 2004 and for the period from April 3,
    2003 to December 31, 2003                                                                                                                                          |  |          | F-31 | 
|Schedule III 
    Potomac Insurance Company of Illinois  Supplementary
    Insurance Information for the period from January 1, 2004
    to November 23, 2004 and for the year ended
    December 31, 2003                                                                                                                                                                                                           |  |          | F-32 | 
|Schedule IV 
    Potomac Insurance Company of Illinois  Reinsurance
    for the period from January 1, 2004 to November 23,
    2004 and for the year ended December 31, 2003                                                                                                                                                                                                                                        |  |          | F-33 | 
|Schedule V 
    Potomac Insurance Company of Illinois  Valuation and
    Qualifying Accounts of Registrant for the year ended
    December 31, 2003                                                                                                                                                                                                                                                                  |  |          | F-34 | 
|Schedule VI 
    Potomac Insurance Company of Illinois  Supplemental
    Information for Property and Casualty Insurance Underwriters for
    the period from January 1, 2004 to November 23, 2004
    and for the year ended December 31, 2003                                                                                                                                                                      |  |          | F-35 | 

F-1



---



##### Table of Contents






Report of Independent Registered Public
Accounting Firm

To the Board of Directors and Shareholders of
Specialty Underwriters Alliance, Inc.:

We have completed an integrated audit of
Specialty Underwriters Alliance, Inc.s 2005
consolidated financial statements and of its internal control
over financial reporting as of December 31, 2005 and audits
of its 2004 and 2003 consolidated financial statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our
audits, are presented below.

Consolidated financial statements and
financial statement schedules

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, 2005 and 2004, and the results of their
operations and their cash flows for the years then ended, and
the period from April 3, 2003 (date of inception) to
December 31, 2003 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 presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial
statements and financial statement schedules are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedules based on our
audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit of financial statements includes
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. We believe that our audits provide a reasonable
basis for our opinion.

Internal control over financial
reporting

Also, in our opinion, managements
assessment, included in Managements Report on Internal
Control over Financial Reportingappearing under
Item 9A, that the Company maintained effective internal
control over financial reporting as of December 31, 2005
based on criteria established in Internal Control 
Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly
stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2005, based on criteria
established in Internal Control  Integrated
Frameworkissued by the COSO. The Companys management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express opinions on managements assessment and on
the effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit
of internal control over financial reporting in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an
understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating
the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.

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;

F-2



---



##### Table of Contents



(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 3, 2006


F-3



---



##### Table of Contents



Report of Independent Registered Public
Accounting Firm

To the Board of Directors and Shareholders of
Specialty Underwriters Alliance, Inc.:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In our opinion, the financial statements listed
    in the accompanying index of Potomac Insurance Company of
    Illinois present fairly, in all material respects, the results
    of its operations and its cash flows for the period from
    January 1, 2004 to November 23, 2004 and for the year
    ended December 31, 2003 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 financial statements. These
    financial statements and financial statement schedules are the
    responsibility of the Companys management. Our
    responsibility is to express an opinion on these financial
    statements and financial statement schedules based on our
    audits. We conducted our audits of these statements in
    accordance with the standards of the Public Company Accounting
    Oversight Board (United States). Those standards require that we
    plan and perform the audit to obtain reasonable assurance about
    whether the financial statements are free of material
    misstatement. An audit includes 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. We believe that our
    audits provide a reasonable basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts

March 28, 2005


F-4



---



##### Table of Contents






Balance Sheets

|                                                                                                                                                     |                            |                         |         |         |              |   |         |         | 
|---------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ----------------------- | ------- | ------- | ------------ | - | ------- | ------- | 
|                                                                                                                                                     |                            |                        
|                                                                                                                                                     |                            | Specialty Underwriters |        
|                                                                                                                                                     |                            | Alliance, Inc.          |        
|                                                                                                                                                     |                            |                         |        
|                                                                                                                                                     |                            | December 31,            |         |         | December 31, |  
|                                                                                                                                                     |                            | 2005                    |         |         | 2004         |  
|                                                                                                                                                     |                            |                         |         |         |              |  
|                                                                                                                                                     |                            |                        
|                                                                                                                                                     |                            | (Dollars in thousands)  |        
|ASSETS                                                                                                                                              
|Fixed maturity investments, at fair value
    (amortized cost: $95,760 and $50,455)                                                                  |                            | $                       | 94,129  |         |              | $ | 50,465  |        
|Short-term investments, at amortized cost (which
    approximates fair value)                                                                        |                            |                         | 8,862   |         |              |   | 47,370  |        
|                                                                                                                                                     |                            |                         |         |         |              |  
|                                                                                                                                                     | Total investments          |                         |         | 102,991 |              |   |         | 97,835  | 
|Cash                                                                                                                                                 |                            |                         | 5,329   |         |              |   | 8,986   |        
|Insurance premiums receivable                                                                                                                        |                            |                         | 44,868  |         |              |   |        |        
|Reinsurance recoverable on unpaid loss and loss
    adjustment expenses                                                                              |                            |                         | 88,997  |         |              |   | 95,959  |        
|Prepaid reinsurance premiums                                                                                                                         |                            |                         | 3,492   |         |              |   | 3       |        
|Investment income accrued                                                                                                                            |                            |                         | 1,102   |         |              |   | 677     |        
|Equipment and capitalized software at cost (less
    accumulated depreciation of $1,488 and $0)                                                      |                            |                         | 5,566   |         |              |   | 2,389   |        
|Intangible assets                                                                                                                                    |                            |                         | 10,745  |         |              |   | 10,745  |        
|Deferred acquisition costs                                                                                                                           |                            |                         | 11,279  |         |              |   |        |        
|Other assets                                                                                                                                         |                            |                         | 2,794   |         |              |   | 637     |        
|                                                                                                                                                     |                            |                         |         |         |              |  
|Total assets                                                                                                                                         |                            | $                       | 277,163 |         |              | $ | 217,231 |        
|                                                                                                                                                     |                            |                         |         |         |              |  
|                                                                                                                                                    
|LIABILITIES                                                                                                                                         
|Loss and loss adjustment expense reserves                                                                                                            |                            | $                       | 104,870 |         |              | $ | 95,959  |        
|Unearned insurance premiums                                                                                                                          |                            |                         | 58,595  |         |              |   | 3       |        
|Payable for securities purchased                                                                                                                     |                            |                         |        |         |              |   | 1,000   |        
|Insured deposit funds                                                                                                                                |                            |                         | 7,159   |         |              |   |        |        
|Accounts payable and other liabilities                                                                                                               |                            |                         | 5,724   |         |              |   | 1,339   |        
|                                                                                                                                                     |                            |                         |         |         |              |  
|                                                                                                                                                     | Total liabilities          |                         |         | 176,348 |              |   |         | 98,301  | 
|                                                                                                                                                     |                            |                         |         |         |              |  
|Commitments (Note 9)                                                                                                                                 |                            |                         |         |         |              |   |         |        
|Stockholders equity                                                                                                                                 |                            |                         |         |         |              |   |         |        
|Common stock Class A at $.01 par value
    per share  authorized 30,000,000 and
    75,000,000 shares; issued and outstanding
    14,680,688 shares |                            |                         | 147     |         |              |   | 147     |        
|Common stock Class B at $.01 par value
    per share  authorized 2,000,000 shares; issued
    and outstanding 223,694 and 26,316 shares             |                            |                         | 2       |         |              |   |        |        
|Paid-in capital  Class A                                                                                                                            |                            |                         | 127,256 |         |              |   | 127,256 |        
|Paid-in capital  Class B                                                                                                                            |                            |                         | 1,770   |         |              |   | 250     |        
|Accumulated deficit                                                                                                                                  |                            |                         | (26,729 | )       |              |   | (8,733  | )      
|Accumulated other comprehensive income (loss)                                                                                                        |                            |                         | (1,631  | )       |              |   | 10      |        
|                                                                                                                                                     |                            |                         |         |         |              |  
|                                                                                                                                                     | Total stockholders equity |                         |         | 100,815 |              |   |         | 118,930 | 
|                                                                                                                                                     |                            |                         |         |         |              |  
|Total liabilities and stockholders
    equity                                                                                                       |                            | $                       | 277,163 |         |              | $ | 217,231 |        
|                                                                                                                                                     |                            |                         |         |         |              |  

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

F-5



---



##### Table of Contents






Statements of Operations and Comprehensive
Income (Loss)

|                                                                            |                                                                               |                            |         |             |                           |   |             |              |       |   |              |            |     |              |       |       |     |   |        |       |       | 
|--------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | -------------------------- | ------- | ----------- | ------------------------- | - | ----------- | ------------ | ----- | - | ------------ | ---------- | --- | ------------ | ----- | ----- | --- | - | ------ | ----- | ----- | 
|                                                                            |                                                                               |                            |         |            
|                                                                            |                                                                               | Specialty Underwriters    |         |             | Potomac Insurance Company |  
|                                                                            |                                                                               | Alliance, Inc. (Successor) |         |             | of Illinois (Predecessor) |  
|                                                                            |                                                                               |                            |         |             |                           |  
|                                                                            |                                                                               |                            |         | Period from |                           |   | Period from |              |       |  
|                                                                            |                                                                               | Year Ended                 |         |             | Year Ended                |   |             | April 3 to   |       |   | January 1 to |            |     | Year Ended   |      
|                                                                            |                                                                               | December 31,               |         |             | December 31,              |   |             | December 31, |       |   | November 23, |            |     | December 31, |      
|                                                                            |                                                                               | 2005                       |         |             | 2004                      |   |             | 2003         |       |   | 2004         |            |     | 2003         |      
|                                                                            |                                                                               |                            |         |             |                           |   |             |              |       |   |              |            |     |              |      
|                                                                            |                                                                               |                           
|                                                                            |                                                                               | (Dollars in thousands)     |        
|Revenues                                                                    |                                                                               |                            |         |             |                           |   |             |              |       |   |              |            |     |              |       |       |     |   |        |      
|                                                                            | Earned insurance premiums                                                     |                            | $       | 26,611      |                           |   | $           |             |       |   | $            |           |     |              | $     |      |     |   | $      | 9,961 |      
|                                                                            | Net investment income                                                         |                            |         | 3,558       |                           |   |             | 278          |       |   |              |           |     |              |       | 1,329 |     |   |        | 2,128 |      
|                                                                            | Net realized gain (losses)                                                    |                            |         | (4          | )                         |   |             | 2            |       |   |              |           |     |              |       | 390   |     |   |        | (466  | )    
|                                                                            | Other revenue                                                                 |                            |         |            |                           |   |             |             |       |   |              |           |     |              |       |      |     |   |        | 318   |      
|                                                                            |                                                                               |                            |         |             |                           |   |             |              |       |   |              |            |     |              |      
|                                                                            |                                                                               |                            | 30,165  |             |                           |   | 280         |              |       |   |             |            |     |              | 1,719 |       |     |   | 11,941 |      
|                                                                            |                                                                               |                            |         |             |                           |   |             |              |       |   |              |            |     |              |      
|Expenses                                                                    |                                                                               |                            |         |             |                           |   |             |              |       |   |              |            |     |              |       |       |     |   |        |      
|                                                                            | Loss and loss adjustment expenses                                             |                            |         | 19,099      |                           |   |             |             |       |   |              |           |     |              |       |      |     |   |        | 6,821 |      
|                                                                            | Amortization of deferred acquisition costs                                    |                            |         | 6,122       |                           |   |             |             |       |   |              |           |     |              |       | 674   |     |   |        | 1,843 |      
|                                                                            | Service company fees                                                          |                            |         | 8,798       |                           |   |             | 4,650        |       |   |              | 205        |     |              |       |      |     |   |        |      |      
|                                                                            | Other operating expenses                                                      |                            |         | 14,142      |                           |   |             | 3,517        |       |   |              | 216        |     |              |       | 45    |     |   |        | 939   |      
|                                                                            | Financing expenses                                                            |                            |         |            |                           |   |             | 268          |       |   |              | 157        |     |              |       |      |     |   |        |      |      
|                                                                            | Accretion of loss and loss adjustment expense                                 |                            |         |            |                           |   |             |             |       |   |              |           |     |              |       |      |     |   |        | 243   |      
|                                                                            |                                                                               |                            |         |             |                           |   |             |              |       |   |              |            |     |              |      
|                                                                            |                                                                               | Total expenses             |         |             | 48,161                    |   |             |              | 8,435 |   |              |            | 578 |              |       |       | 719 |   |        |       | 9,846 | 
|                                                                            |                                                                               |                            |         |             |                           |   |             |              |       |   |              |            |     |              |      
|Pretax income (loss)                                                        |                                                                               |                            | (17,996 | )           |                           |   | (8,155      | )            |       |   | (578         | )          |     |              | 1,000 |       |     |   | 2,095  |      
|                                                                            | Federal income tax expense                                                    |                            |         |            |                           |   |             |             |       |   |              |           |     |              |       | (350  | )   |   |        | (736  | )    
|                                                                            |                                                                               |                            |         |             |                           |   |             |              |       |   |              |            |     |              |      
|Net income (loss)                                                           |                                                                               |                            | (17,996 | )           |                           |   | (8,155      | )            |       |   | (578         | )          |     |              | 650   |       |     |   | 1,359  |      
|                                                                            | Net change in unrealized gains and losses for
    investments held, after tax |                            |         | (1,641      | )                         |   |             | 10           |       |   |              |           |     |              |       | (391  | )   |   |        | (25   | )    
|                                                                            |                                                                               |                            |         |             |                           |   |             |              |       |   |              |            |     |              |      
|Comprehensive income (loss)                                                 |                                                                               | $                          | (19,637 | )           |                           | $ | (8,145      | )            |       | $ | (578         | )          |     | $            | 259   |       |     | $ | 1,334  |      
|                                                                            |                                                                               |                            |         |             |                           |   |             |              |       |   |              |            |     |              |      
|Earnings (loss) per share available to common
    stockholders (in dollars) |                                                                               |                            |         |             |                           |   |             |              |       |   |              |            |     |              |       |       |     |   |        |      
|                                                                            | Basic                                                                         |                            | $       | (1.22       | )                         |   | $           | (4.59        | )     |   | $            | (57,800.00 | )   |              | $     | NM    |     |   | $      | NM    |      
|                                                                            | Diluted                                                                       |                            | $       | (1.22       | )                         |   | $           | (4.59        | )     |   | $            | (57,800.00 | )   |              | $     | NM    |     |   | $      | NM    |      
|Average Shares Outstanding                                                  |                                                                               |                            |         |             |                           |   |             |              |       |   |              |            |     |              |       |       |     |   |        |      
|                                                                            | Basic                                                                         |                            |         | 14,774      |                           |   |             | 1,779        |       |   |              |           |     |              |       | NM    |     |   |        | NM    |      
|                                                                            | Diluted                                                                       |                            |         | 14,774      |                           |   |             | 1,779        |       |   |              |           |     |              |       | NM    |     |   |        | NM    |      

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

F-6



---



##### Table of Contents






Statement of Stockholders
Equity

|                                                           |  |                        |     |  |         |   |         |         |  |   |         |             |  |           |       |  |               |   |         |               |  |   |        |   |  |   |         |  
|---------------------------------------------------------- |  | ---------------------- | --- |  | ------- | - | ------- | ------- |  | - | ------- | ----------- |  | --------- | ----- |  | ------------- | - | ------- | ------------- |  | - | ------ | - |  | - | ------- | -
|                                                           |  |                        |     |  |         |   |         |         |  |   |         | Accumulated |  |           |      
|                                                           |  |                        |     |  |         |   |         |         |  |   |         | Other       |  |           |      
|                                                           |  | Common                 |     |  | Paid-in |   |         | Common  |  |   | Paid-in |             |  | Retained  |       |  | Comprehensive |   |         | Total         | 
|                                                           |  | Stock                  |     |  | Capital |   |         | Stock   |  |   | Capital |             |  | Earnings  |       |  | Income        |   |         | Stockholders | 
|(Successor)                                                |  | Class A                |     |  | Class A |   |         | Class B |  |   | Class B |             |  | (Deficit) |       |  | (Loss)        |   |         | Equity        | 
|                                                           |  |                        |     |  |         |   |         |         |  |   |         |             |  |           |       |  |               |   |         |               | 
|                                                           |  |                       
|                                                           |  | (Dollars in thousands) |    
|Balance at December 31, 2003                               |  | $                      |    |  |         | $ |        |         |  | $ |        |             |  | $         |      |  |               | $ | (578    | )             |  | $ |       |   |  | $ | (578    | )
|Net loss                                                   |  |                        |    |  |         |   |        |         |  |   |        |             |  |           |      |  |               |   | (8,155  | )             |  |   |       |   |  |   | (8,155  | )
|Net change in unrealized investment losses, net
    of tax |  |                        |    |  |         |   |        |         |  |   |        |             |  |           |      |  |               |   |        |               |  |   | 10     |   |  |   | 10      |  
|Stock issuance                                             |  |                        | 147 |  |         |   | 127,256 |         |  |   |        |             |  |           | 250   |  |               |   |        |               |  |   |       |   |  |   | 127,653 |  
|                                                           |  |                        |     |  |         |   |         |         |  |   |         |             |  |           |       |  |               |   |         |               | 
|Balance at December 31, 2004                               |  | $                      | 147 |  |         | $ | 127,256 |         |  | $ |        |             |  | $         | 250   |  |               | $ | (8,733  | )             |  | $ | 10     |   |  | $ | 118,930 |  
|                                                           |  |                        |     |  |         |   |         |         |  |   |         |             |  |           |       |  |               |   |         |               | 
|Net loss                                                   |  |                        |    |  |         |   |        |         |  |   |        |             |  |           |      |  |               |   | (17,996 | )             |  |   |       |   |  |   | (17,996 | )
|Net change in unrealized investment losses, net
    of tax |  |                        |    |  |         |   |        |         |  |   |        |             |  |           |      |  |               |   |        |               |  |   | (1,641 | ) |  |   | (1,641  | )
|Stock issuance                                             |  |                        |    |  |         |   |        |         |  |   | 2       |             |  |           | 1,520 |  |               |   |        |               |  |   |       |   |  |   | 1,522   |  
|                                                           |  |                        |     |  |         |   |         |         |  |   |         |             |  |           |       |  |               |   |         |               | 
|Balance at December 31, 2005                               |  | $                      | 147 |  |         | $ | 127,256 |         |  | $ | 2       |             |  | $         | 1,770 |  |               | $ | (26,729 | )             |  | $ | (1,631 | ) |  | $ | 100,815 |  
|                                                           |  |                        |     |  |         |   |         |         |  |   |         |             |  |           |       |  |               |   |         |               | 

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

F-7



---



##### Table of Contents






Statements of Cash Flows

|                                                               |                                                                                 |                            |         |             |                           |   |             |              |   |   |              |        |   |              |         |         |   |   |         |          |  
|-------------------------------------------------------------- | ------------------------------------------------------------------------------- | -------------------------- | ------- | ----------- | ------------------------- | - | ----------- | ------------ | - | - | ------------ | ------ | - | ------------ | ------- | ------- | - | - | ------- | -------- | -
|                                                               |                                                                                 |                            |         |            
|                                                               |                                                                                 | Specialty Underwriters    |         |             | Potomac Insurance Company |  
|                                                               |                                                                                 | Alliance, Inc. (Successor) |         |             | of Illinois (Predecessor) |  
|                                                               |                                                                                 |                            |         |             |                           |  
|                                                               |                                                                                 |                            |         | Period from |                           |   | Period from |              |   |  
|                                                               |                                                                                 | Year Ended                 |         |             | Year Ended                |   |             | April 3 to   |   |   | January 1 to |        |   | Year Ended   |        
|                                                               |                                                                                 | December 31,               |         |             | December 31,              |   |             | December 31, |   |   | November 23, |        |   | December 31, |        
|                                                               |                                                                                 | 2005                       |         |             | 2004                      |   |             | 2003         |   |   | 2004         |        |   | 2003         |        
|                                                               |                                                                                 |                            |         |             |                           |   |             |              |   |   |              |        |   |              |        
|                                                               |                                                                                 |                           
|                                                               |                                                                                 | (Dollars in thousands)     |        
|Cash flows from operations                                     |                                                                                 |                            |         |             |                           |   |             |              |   |   |              |        |   |              |         |         |   |   |         |         
|Net income (loss)                                              |                                                                                 | $                          | (17,996 | )           |                           | $ | (8,155      | )            |   | $ | (578         | )      |   | $            | 650     |         |   | $ | 1,359   |         
|                                                               |                                                                                 |                            |         |             |                           |   |             |              |   |   |              |        |   |              |        
|Charges (credits) to reconcile net income to
    cash          |                                                                                 |                            |         |             |                           |   |             |              |   |   |              |        |   |              |         |         |   |   |         |         
|                                                               | flows from operations:                                                          |                            |         |             |                           |   |             |              |   |   |              |        |   |              |         |         |   |   |         |          |  
|                                                               | Federal income tax expense                                                      |                            |         |            |                           |   |             |             |   |   |              |       |   |              |         | 350     |   |   |         | 736      |  
|                                                               | Net realized losses                                                             |                            |         | 4           |                           |   |             | (2           | ) |   |              |       |   |              |         | (390    | ) |   |         | 466      |  
|                                                               | Amortization of bond discount                                                   |                            |         | 495         |                           |   |             |             |   |   |              |       |   |              |         |        |   |   |         |         |  
|                                                               | Depreciation                                                                    |                            |         | 1,760       |                           |   |             |             |   |   |              |       |   |              |         |        |   |   |         |         |  
|                                                               | Accrued interest costs exchanged for common stock                               |                            |         |            |                           |   |             | 234          |   |   |              |       |   |              |         |        |   |   |         |         |  
|                                                               | Write off of capitalized software                                               |                            |         | 418         |                           |   |             |             |   |   |              |       |   |              |         |        |   |   |         |         |  
|Net change in:                                                 |                                                                                 |                            |         |             |                           |   |             |              |   |   |              |        |   |              |        |         |   |   |        |         
|                                                               | Deferred charges                                                                |                            |         |            |                           |   |             | 4,730        |   |   |              | (4,730 | ) |              |         |        |   |   |         |         |  
|                                                               | Stock warrants                                                                  |                            |         |            |                           |   |             | (4,795       | ) |   |              | 4,795  |   |              |         |        |   |   |         |         |  
|                                                               | Reinsurance recoverable on unpaid loss and loss
    adjustment expense reserves |                            |         | 6,962       |                           |   |             | (95,959      | ) |   |              |       |   |              |         | 42,008  |   |   |         | 35,591   |  
|                                                               | Loss and loss adjustment expense reserves                                       |                            |         | 8,911       |                           |   |             | 95,959       |   |   |              |       |   |              |         | (57,017 | ) |   |         | (39,385  | )
|                                                               | Insurance premiums receivable                                                   |                            |         | (44,868     | )                         |   |             |             |   |   |              |       |   |              |         | 2,119   |   |   |         | 686      |  
|                                                               | Unearned insurance premiums                                                     |                            |         | 58,592      |                           |   |             | 3            |   |   |              |       |   |              |         | (4,823  | ) |   |         | (1,159   | )
|                                                               | Deferred acquisition costs                                                      |                            |         | (11,279     | )                         |   |             |             |   |   |              |       |   |              |         | 674     |   |   |         | 117      |  
|                                                               | Prepaid reinsurance premiums                                                    |                            |         | (3,489      | )                         |   |             |             |   |   |              |       |   |              |         |        |   |   |         |         |  
|                                                               | Insured deposit funds                                                           |                            |         | 7,159       |                           |   |             |             |   |   |              |       |   |              |         |        |   |   |         |         |  
|                                                               | Other, net                                                                      |                            |         | 1,770       |                           |   |             | 21           |   |   |              | 13     |   |              |         | (683    | ) |   |         | (1,966   | )
|                                                               |                                                                                 |                            |         |             |                           |   |             |              |   |   |              |        |   |              |        
|Total adjustments                                              |                                                                                 |                            | 26,435  |             |                           |   | 191         |              |   |   | 78           |        |   |              | (17,762 | )       |   |   | (4,914  | )       
|                                                               |                                                                                 |                            |         |             |                           |   |             |              |   |   |              |        |   |              |        
|Net cash flows provided by (used for)
    operations           |                                                                                 |                            | 8,439   |             |                           |   | (7,964      | )            |   |   | (500         | )      |   |              | (17,112 | )       |   |   | (3,555  | )       
|                                                               |                                                                                 |                            |         |             |                           |   |             |              |   |   |              |        |   |              |        
|Cash flows from investing activities                           |                                                                                 |                            |         |             |                           |   |             |              |   |   |              |        |   |              |         |         |   |   |         |         
|                                                               | Net decrease in short-term investments                                          |                            |         | 38,508      |                           |   |             | (47,370      | ) |   |              |       |   |              |         | 12,020  |   |   |         | (10,022  | )
|                                                               | Sales of fixed maturity investments                                             |                            |         |            |                           |   |             |             |   |   |              |       |   |              |         | 34,272  |   |   |         | 314,811  |  
|                                                               | Redemptions, calls and maturities of fixed
    maturity investments             |                            |         | 6,387       |                           |   |             |             |   |   |              |       |   |              |         | 13,697  |   |   |         | 267      |  
|                                                               | Purchases of fixed maturity investments                                         |                            |         | (52,192     | )                         |   |             | (39,230      | ) |   |              |       |   |              |         | (33,555 | ) |   |         | (324,867 | )
|                                                               | Unsettled net investment purchases                                              |                            |         | (1,000      | )                         |   |             |             |   |   |              |       |   |              |         |        |   |   |         |         |  
|                                                               | Purchase of equipment and capitalized software                                  |                            |         | (5,321      | )                         |   |             | (2,389       | ) |   |              |       |   |              |         |        |   |   |         |         |  
|                                                               | Net cash paid for acquisition                                                   |                            |         |            |                           |   |             | (20,978      | ) |   |              |       |   |              |         |        |   |   |         |         |  
|                                                               |                                                                                 |                            |         |             |                           |   |             |              |   |   |              |        |   |              |        
|Net cash flows provided by (used for)
    investing activities |                                                                                 |                            | (13,618 | )           |                           |   | (109,967    | )            |   |   |             |        |   |              | 26,434  |         |   |   | (19,811 | )       
|                                                               |                                                                                 |                            |         |             |                           |   |             |              |   |   |              |        |   |              |        
|Cash flows from financing activities                           |                                                                                 |                            |         |             |                           |   |             |              |   |   |              |        |   |              |         |         |   |   |         |         
|                                                               | Cash distributions paid to Parent                                               |                            |         |            |                           |   |             |             |   |   |              |       |   |              |         | (18,610 | ) |   |         |         |  
|                                                               | Proceeds from short-term borrowings                                             |                            |         |            |                           |   |             | 3,200        |   |   |              | 700    |   |              |         |        |   |   |         |         |  
|                                                               | Issuance of common stock                                                        |                            |         | 1,522       |                           |   |             | 123,517      |   |   |              |       |   |              |         |        |   |   |         |         |  
|                                                               |                                                                                 |                            |         |             |                           |   |             |              |   |   |              |        |   |              |        
|Net cash provided by (used for) financing
    activities       |                                                                                 |                            | 1,522   |             |                           |   | 126,717     |              |   |   | 700          |        |   |              | (18,610 | )       |   |   |        |         
|                                                               |                                                                                 |                            |         |             |                           |   |             |              |   |   |              |        |   |              |        
|Net (decrease) increase in cash during the
    period          |                                                                                 |                            | (3,657  | )           |                           |   | 8,786       |              |   |   | 200          |        |   |              | (9,288  | )       |   |   | (23,366 | )       
|Cash at beginning of the period                                |                                                                                 |                            | 8,986   |             |                           |   | 200         |              |   |   |             |        |   |              | 10,307  |         |   |   | 33,673  |         
|                                                               |                                                                                 |                            |         |             |                           |   |             |              |   |   |              |        |   |              |        
|Cash at end of the period                                      |                                                                                 | $                          | 5,329   |             |                           | $ | 8,986       |              |   | $ | 200          |        |   | $            | 1,019   |         |   |   | 10,307  |         
|                                                               |                                                                                 |                            |         |             |                           |   |             |              |   |   |              |        |   |              |        

On November 23, 2004 the Company repaid
short term debt of $3.9 million by the issuance of common
stock.

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

F-8



---



##### Table of Contents






NOTES TO FINANCIAL STATEMENTS 
SPECIALTY UNDERWRITERS ALLIANCE, INC.

(dollars in thousands)


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. The Company was organized to
provide specialty program commercial property and casualty
insurance through wholly owned insurance subsidiaries.

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.

Prior to completing the IPO, the Companys
sole source of cash was $3,900 in term loans with senior and
subordinated lenders. Concurrent with the IPO, all outstanding
loans, together with accrued interest of $236 were repaid,
through an exchange for common stock.

On March 22, 2004, the Company entered into
a stock purchase agreement to acquire all of the outstanding
shares of Potomac Insurance Company of Illinois, or Potomac,
from OneBeacon Insurance Company, or OneBeacon. 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.

As of December 31, 2004 the Company had not
written any insurance policies. As a result its operations
consisted only of investment activities, start-up costs and
operating expenses. The Company began its insurance operations
in 2005.

Our premiums in 2005 were primarily concentrated
in California and Florida. Our gross written premiums by state
were as follows:

|             |  |                       |      |  |                     |  |       |  
|------------ |  | --------------------- | ---- |  | ------------------- |  | ----- | -
|             |  | Gross Written         |      |  | Percentage of Gross | 
|             |  | Premium               |      |  | Written Premium     | 
|             |  |                       |      |  |                     | 
|             |  |                      
|             |  | (Dollars in millions) |     
|California   |  | $                     | 35.7 |  |                     |  | 39.4  | %
|Florida      |  |                       | 38.6 |  |                     |  | 42.6  | %
|Other States |  |                       | 16.3 |  |                     |  | 18.0  | %
|             |  |                       |      |  |                     | 
|Total        |  | $                     | 90.6 |  |                     |  | 100.0 | %
|             |  |                       |      |  |                     | 

Our gross written premium by line of business
were as follows:

|                      |  |                       |      |  |                     |  |       |  
|--------------------- |  | --------------------- | ---- |  | ------------------- |  | ----- | -
|                      |  | Gross Written         |      |  | Percentage of Gross | 
|                      |  | Premium               |      |  | Written Premium     | 
|                      |  |                       |      |  |                     | 
|                      |  |                      
|                      |  | (Dollars in millions) |     
|Workers Compensation |  | $                     | 62.3 |  |                     |  | 68.8  | %
|Commercial Automobile |  |                       | 9.4  |  |                     |  | 10.4  | %
|General Liability     |  |                       | 10.7 |  |                     |  | 11.8  | %
|All Other             |  |                       | 8.2  |  |                     |  | 9.0   | %
|                      |  |                       |      |  |                     | 
|Total                 |  | $                     | 90.6 |  |                     |  | 100.0 | %
|                      |  |                       |      |  |                     | 

F-9



---



##### Table of Contents



NOTES TO FINANCIAL STATEMENTS 
SPECIALTY UNDERWRITERS ALLIANCE, INC.


(dollars in
thousands)  (Continued)


NOTE 2  ACQUISITION

The sole reason for the purchase of Potomac was
to obtain the insurance licenses of Potomac. The purchase price
for Potomac was $21,997. Potomacs results of operations
are included in the consolidated income statement of the Company
from November 23, 2004.

The purchase price has been allocated based on an
estimate of the fair value of assets and liabilities assumed as
of November 23, 2004, as follows:

|                                                  |  |   |         |  
|------------------------------------------------- |  | - | ------- | -
|Cash                                              |  | $ | 1,019   |  
|Investments                                       |  |   | 10,233  |  
|Cost of insurance licenses                        |  |   | 10,745  |  
|Reinsurance recoverable on paid and unpaid losses |  |   | 97,270  |  
|Loss reserves                                     |  |   | (97,270 | )
|                                                  |  |   |        
|Purchase price                                    |  | $ | 21,997  |  
|                                                  |  |   |        

Investments are valued at quoted market price at
the date of acquisition. Insurance licenses are valued at their
purchase price of $250 for each of the 42 licenses plus
transaction cost of $245.

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.

Prior to the completion of the acquisition,
OneBeacon liquidated all of Potomacs assets other than
cash and investments backing statutory capital and surplus, and
settled or assumed Potomacs remaining non-insurance
liabilities.

NOTE 3  SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

The accompanying consolidated financial
statements 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 of the results presented.

Cash and
Investments

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 (loss). Estimated fair value is based on
quoted market prices. Where quoted market prices are

F-10



---



##### Table of Contents



NOTES TO FINANCIAL STATEMENTS 
SPECIALTY UNDERWRITERS ALLIANCE, INC.


(dollars in
thousands)  (Continued)


unavailable, the estimated fair value is based on
recent trading. Premium and discounts on fixed maturity
investments are accreted to income over the anticipated life of
the investment.

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.

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, 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 the Companys 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.

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 will be depreciated over three to five years.
Capitalized software costs are related to computer software that
has been purchased/developed for internal use. These costs
generally consist of software and licensing costs. The
amortization period for capitalized costs is three to five
years. None of these assets were placed in service or were ready
for their intended use at December 31, 2004, and as a
result there was no depreciation or amortization recorded in
2004.



| |                 
| | ----------------
| | Deferred Charges

Deferred charges consist of deferred stock
issuance costs, primarily legal and accounting fees, and
deferred financing costs, associated with stock warrants granted
to lenders. Deferred financing costs were amortized over the
original term of the debt using the interest method. A liability
for the fair value of the warrants was accrued at the grant
date, offset by a related deferred charge for debt issue costs.
Stock warrants were terminated prior to the completion of the
IPO on November 23, 2004 and all associated charges were
reversed. All other deferred charges were settled and recorded
as a reduction of paid in capital as part of the stock issuance
costs for the IPO.



| |                  
| | -----------------
| | 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.



| |                
| | ---------------
| | Short-Term Debt

All outstanding short-term debt as of
December 31, 2003, together with additional borrowings
during 2004 and accrued interest, were exchanged for common
stock at the completion of the IPO.



| |               
| | --------------
| | Stock Warrants

In connection with the short-term senior and
subordinated loan agreements, the Company issued warrants to the
lenders, respectively, to purchase for $0.01 per share, the
number of shares of common stock of the Company that could be
purchased in the planned IPO for $4,795.

F-11



---



##### Table of Contents



NOTES TO FINANCIAL STATEMENTS 
SPECIALTY UNDERWRITERS ALLIANCE, INC.


(dollars in
thousands)  (Continued)


A liability for the fair value of the warrants
was accrued at the grant date, offset by a related deferred
charge for debt issue costs. The Company valued the warrants at
their estimated intrinsic value as if the planned IPO were
successful because of the inherent subjectivity in estimating
the fair value of the warrants at the date of grant. In 2004,
prior to the completion of the IPO in the fourth quarter, the
warrants were terminated and the warrants and associated charges
were reversed in the financial statements.



| |                                           
| | ------------------------------------------
| | 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.



| |                                      
| | -------------------------------------
| | Deferred Policy Acquisition
    Costs

Costs 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 policy acquisition costs 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.



| |             
| | ------------
| | Income Taxes

The Company records deferred income taxes to
reflect the tax effect of temporary differences between carrying
amounts of assets and liabilities for financial reporting
purposes and their tax basis. Deferred tax assets are reduced by
a valuation allowance when management believes it is more likely
than not that some, or all, of the deferred tax assets will not
be realized.



| |            
| | -----------
| | 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 collectibility 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. As of December 31,
2004 all these liabilities consisted of the remaining direct
obligations of our predecessor, Potomac Insurance Company of
Illinois, whose claim handling and reserving are continued to be
provided to the Company by OneBeacon.

For business generated by the Company, 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

F-12



---



##### Table of Contents



NOTES TO FINANCIAL STATEMENTS 
SPECIALTY UNDERWRITERS ALLIANCE, INC.


(dollars in
thousands)  (Continued)


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 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. We consider 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.

Ultimate loss and LAE are generally determined by
extrapolation of claim emergence and settlement patterns
observed in the past that can reasonably be expected to persist
into the future. In forecasting ultimate loss and LAE, past
experience is the primary resource, but cannot be relied upon in
isolation.



| |              
| | -------------
| | Stock Options

The Company accounts for stock-based compensation
plans in accordance with Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued
to Employees (APB 25) and related
interpretations. No compensation expense for options is
reflected in net income, as all options granted under the plan
had an exercise price equal to the market value of the
underlying common stock on the date of the grant.



| |                   
| | ------------------
| | Earnings Per Share

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

In calculating diluted earnings per share, the
weighted average of Class A 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 antidilutive.

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.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

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. As permitted by FAS 123,
the Company currently accounts for share-based payments to
employees using APB 25s intrinsic value method and,
as such, generally recognizes no compensation expense for
employee stock options. Accordingly, the adoption of
FAS 123Rs fair value method will have a significant
impact on our result of operations, although it will have no
impact on our overall financial position. The impact of adoption
of FAS 123R cannot be predicted at this time because it
will depend on levels of share-based payments granted in the
future. However, had the Company adopted FAS 123R in prior
periods, the impact of that standard would have approximated the
impact of FAS 123 as described in the disclosure of pro
forma net income and earnings per share in Note 7 to the
consolidated financial statements. FAS 123R also requires
the benefits of tax deductions in excess of recognized
compensation expense to be reported as a financing cash flow,
rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash
flows and increase net financing cash flows in periods after
adoption. While the Company cannot estimate what those amounts
will be in the future (because they depend on, among other
things, when employees exercise stock options), the amount of
operating cash flows recognized in prior periods for such excess
tax

F-13



---



##### Table of Contents



NOTES TO FINANCIAL STATEMENTS 
SPECIALTY UNDERWRITERS ALLIANCE, INC.


(dollars in
thousands)  (Continued)


deductions were zero in 2005, as the Company had
a net operating loss carry forward in 2005 and has never paid
any tax.

NOTE 4  INVESTMENTS

The cost or amortized cost and estimated fair
values of fixed maturities at December 31, 2005 were as
follows:

|                                    |  |                |        |       |            |   |       |            |  |   |            |   |  |   |        | 
|----------------------------------- |  | -------------- | ------ | ----- | ---------- | - | ----- | ---------- |  | - | ---------- | - |  | - | ------ | 
|                                    |  |                |        | Gross |            |   | Gross |            |  |  
|                                    |  | Cost or        |        |       | Unrealized |   |       | Unrealized |  |   | Estimated  |  
|2005                                |  | Amortized Cost |        |       | Gains      |   |       | Losses     |  |   | Fair Value |  
|                                    |  |                |        |       |            |   |       |            |  |   |            |  
|U.S. Treasury Securities            |  | $              | 10,273 |       |            | $ | 8     |            |  | $ | (109       | ) |  | $ | 10,172 | 
|U.S. Government Agencies Securities |  |                | 13,840 |       |            |   | 3     |            |  |   | (205       | ) |  |   | 13,638 | 
|Corporate Securities                |  |                | 49,178 |       |            |   | 4     |            |  |   | (1,047     | ) |  |   | 48,135 | 
|Mortgage Backed Securities          |  |                | 22,469 |       |            |   | 22    |            |  |   | (307       | ) |  |   | 22,184 | 
|                                    |  |                |        |       |            |   |       |            |  |   |            |  
|Total Fixed Maturities              |  | $              | 95,760 |       |            | $ | 37    |            |  | $ | (1,668     | ) |  | $ | 94,129 | 
|                                    |  |                |        |       |            |   |       |            |  |   |            |  

The cost or amortized cost and estimated fair
values of fixed maturities at December 31, 2004 were as
follows:

|                                    |  |                |        |       |            |   |       |            |  |   |            |   |  |   |        | 
|----------------------------------- |  | -------------- | ------ | ----- | ---------- | - | ----- | ---------- |  | - | ---------- | - |  | - | ------ | 
|                                    |  |                |        | Gross |            |   | Gross |            |  |  
|                                    |  | Cost or        |        |       | Unrealized |   |       | Unrealized |  |   | Estimated  |  
|2004                                |  | Amortized Cost |        |       | Gains      |   |       | Losses     |  |   | Fair Value |  
|                                    |  |                |        |       |            |   |       |            |  |   |            |  
|U.S. Treasury Securities            |  | $              | 6,458  |       |            | $ |      |            |  | $ | (8         | ) |  | $ | 6,450  | 
|U.S. Government Agencies Securities |  |                | 9,153  |       |            |   | 23    |            |  |   | (3         | ) |  |   | 9,173  | 
|Corporate Securities                |  |                | 29,936 |       |            |   | 34    |            |  |   | (43        | ) |  |   | 29,927 | 
|Mortgage Backed Securities          |  |                | 4,908  |       |            |   | 12    |            |  |   | (5         | ) |  |   | 4,915  | 
|                                    |  |                |        |       |            |   |       |            |  |   |            |  
|Total Fixed Maturities              |  | $              | 50,455 |       |            | $ | 69    |            |  | $ | (59        | ) |  | $ | 50,465 | 
|                                    |  |                |        |       |            |   |       |            |  |   |            |  

Temporary losses on investment securities are
recorded as unrealized losses. Temporary losses do not impact
net income but do reduce comprehensive net income and
stockholders equity. Unrealized losses subsequently
identified as other-than-temporary impairments are recorded as
realized losses. The Companys methodology for assessing
other-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 will 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. As a result,
subsequent adverse changes in an issuers credit quality or
subsequent weakening of market conditions that differ from
expectations could result in additional other-than-temporary
impairments. The Company did not record any other-than-temporary
impairment charges on investment securities for the years ended
December 31, 2005 and 2004.

F-14



---



##### Table of Contents



NOTES TO FINANCIAL STATEMENTS 
SPECIALTY UNDERWRITERS ALLIANCE, INC.


(dollars in
thousands)  (Continued)


The cost or amortized cost and fair values of
fixed maturities by contractual maturity at December 31,
2005 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.

|                                       |       |                |        |        |       |   |        |        | 
|-------------------------------------- | ----- | -------------- | ------ | ------ | ----- | - | ------ | ------ | 
|                                       |       | Cost or        |        |        | Fair  |  
|                                       |       | Amortized Cost |        |        | Value |  
|                                       |       |                |        |        |       |  
|Due in one year or less                |       | $              | 2,046  |        |       | $ | 2,028  |       
|Due after one year through five years  |       |                | 61,337 |        |       |   | 60,223 |       
|Due after five years through ten years |       |                | 7,917  |        |       |   | 7,726  |       
|Due after ten years                    |       |                | 24,460 |        |       |   | 24,152 |       
|                                       |       |                |        |        |       |  
|                                       | Total |                | $      | 95,760 |       |   | $      | 94,129 | 
|                                       |       |                |        |        |       |  

As of December 31, 2005, there were
approximately 78 securities in an unrealized loss position. Of
these securities, 21 securities have been in an unrealized loss
position for twelve months or greater. Those fixed maturity
investments with unrealized losses as of December 31, 2005
are summarized as follows:

|                                |  |       |        |  |           |                   |        |              |  |   |       |   |  |   |        |  
|------------------------------- |  | ----- | ------ |  | --------- | ----------------- | ------ | ------------ |  | - | ----- | - |  | - | ------ | -
|                                |  |       |        |  |           | Unrealized Losses |        |              | 
|                                |  | Fair  |        |  | Less than |                   |        | Greater than |  |   |      
|                                |  | Value |        |  | 12 Months |                   |        | 12 Months    |  |   | Total |  
|                                |  |       |        |  |           |                   |        |              |  |   |       |  
|US Treasury Securities          |  | $     | 10,172 |  |           | $                 | (91    | )            |  | $ | (18   | ) |  | $ | (109   | )
|US Government Agency Securities |  |       | 13,639 |  |           |                   | (174   | )            |  |   | (31   | ) |  |   | (205   | )
|Corporate Securities            |  |       | 48,135 |  |           |                   | (548   | )            |  |   | (499  | ) |  |   | (1,047 | )
|Mortgage Backed Securities      |  |       | 22,183 |  |           |                   | (279   | )            |  |   | (28   | ) |  |   | (307   | )
|                                |  |       |        |  |           |                   |        |              |  |   |       |  
|Total Fixed Maturities          |  | $     | 94,129 |  |           | $                 | (1,092 | )            |  | $ | (576  | ) |  | $ | (1,668 | )
|                                |  |       |        |  |           |                   |        |              |  |   |       |  

Fixed maturities with carrying values of $11,302
were on deposit with insurance regulatory authorities as
required by law at December 31, 2005.

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

|                              |  |              |    |   |              |   |   | 
|----------------------------- |  | ------------ | -- | - | ------------ | - | - | 
|                              |  | Year Ended   |    |   | Year Ended   |  
|                              |  | December 31, |    |   | December 31, |  
|                              |  | 2005         |    |   | 2004         |  
|                              |  |              |    |   |              |  
|Proceeds from voluntary sales |  | $            |   |   |              | $ |  | 
|Gross realized gains          |  |              | 4  |   |              |   | 2 | 
|Gross realized losses         |  |              | (8 | ) |              |   |  | 

Realized gains and losses are from redemptions in
both 2005 and 2004.

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

|                        |                       |              |       |       |              |   |     |     | 
|----------------------- | --------------------- | ------------ | ----- | ----- | ------------ | - | --- | --- | 
|                        |                       | Year Ended   |       |       | Year Ended   |  
|                        |                       | December 31, |       |       | December 31, |  
|                        |                       | 2005         |       |       | 2004         |  
|                        |                       |              |       |       |              |  
|Fixed maturities        |                       | $            | 3,421 |       |              | $ | 113 |    
|Short-term investments  |                       |              | 310   |       |              |   | 165 |    
|                        |                       |              |       |       |              |  
|Gross investment income |                       |              | 3,731 |       |              |   | 278 |    
|Investment Expenses     |                       |              | (173  | )     |              |   |    |    
|                        |                       |              |       |       |              |  
|                        | Net investment income |              | $     | 3,558 |              |   | $   | 278 | 
|                        |                       |              |       |       |              |  

F-15



---



##### Table of Contents



NOTES TO FINANCIAL STATEMENTS 
SPECIALTY UNDERWRITERS ALLIANCE, INC.


(dollars in
thousands)  (Continued)




| |            
| | -----------
| | Predecessor

Information relating to Potomacs
investments is shown below:

|                              |  |              |        |   |              |   |         |  
|----------------------------- |  | ------------ | ------ | - | ------------ | - | ------- | -
|                              |  | Period from  |        |   |             
|                              |  | January 1 to |        |   | Year Ended   |  
|                              |  | November 23, |        |   | December 31, |  
|                              |  | 2004         |        |   | 2003         |  
|                              |  |              |        |   |              |  
|Proceeds from voluntary sales |  | $            | 34,272 |   |              | $ | 314,811 |  
|Gross realized gains          |  |              | 687    |   |              |   | 812     |  
|Gross realized losses         |  |              | (297   | ) |              |   | (1,278  | )

The components of Potomacs net investment
income follow:

|                        |                           |                       |       |       |              |   |       |       |       | 
|----------------------- | ------------------------- | --------------------- | ----- | ----- | ------------ | - | ----- | ----- | ----- | 
|                        |                           | Period from           |       |       |             
|                        |                           | January 1 to          |       |       | Year Ended   |  
|                        |                           | November 23,          |       |       | December 31, |  
|                        |                           | 2004                  |       |       | 2003         |  
|                        |                           |                       |       |       |              |  
|Fixed maturities        |                           | $                     | 1,408 |       |              | $ | 2,146 |      
|Short-term investments  |                           |                       | 15    |       |              |   | 135   |      
|Other investment income |                           |                       | 14    |       |              |   | 33    |      
|                        |                           |                       |       |       |              |  
|                        | Gross investment income   |                       |       | 1,437 |              |   |       | 2,314 |      
|                        | Less: investment expenses |                       |       | 108   |              |   |       | 186   |      
|                        |                           |                       |       |       |              |  
|                        |                           | Net investment income |       | $     | 1,329        |   |       | $     | 2,128 | 
|                        |                           |                       |       |       |              |  

NOTE 5  FEDERAL INCOME
TAXES

As of December 31, 2005, December 31,
2004 and December 31, 2003 the Company had tax basis net
operating loss carryforwards of $26,887, $7,726 and $3,
respectively, which will expire on December 31, 2025,
December 31, 2024, and December 31, 2023,
respectively. The Company also accumulated start-up and
organization expenditures, through December 31, 2004 and
December 31, 2003, of $2,364 and $424, respectively that
are deductible over a 60 month period commencing on
November 23, 2004. The Company has not paid any federal
income tax since its inception in 2003. Based on these facts,
the Company has recorded a full valuation allowance against all
potential tax assets shown below in the deferred tax assets and
liabilities chart, until such time as its operating results and
future outlook produce sufficient taxable income to realize
these tax assets.

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

|                                      |  |                |        |   |              |             |        |              |  |   |      |  
|------------------------------------- |  | -------------- | ------ | - | ------------ | ----------- | ------ | ------------ |  | - | ---- | -
|                                      |  |                |        |   |              | Period from |       
|                                      |  | Year Ended     |        |   | Year Ended   |             |        | April 3 to   | 
|                                      |  | December 31,   |        |   | December 31, |             |        | December 31, | 
|                                      |  | 2005           |        |   | 2004         |             |        | 2003         | 
|                                      |  |                |        |   |              |             |        |              | 
|                                      |  |               
|                                      |  | (In thousands) |       
|Income tax benefit at statutory rates |  | $              | 6,119  |   |              | $           | 2,773  |              |  | $ | 196  |  
|Tax expense from permanent difference |  |                | (7     | ) |              |             | (5     | )            |  |   |     |  
|Valuation allowance                   |  |                | (6,112 | ) |              |             | (2,768 | )            |  |   | (196 | )
|                                      |  |                |        |   |              |             |        |              | 
|Actual income tax benefit (expense)   |  | $              |       |   |              | $           |       |              |  | $ |     |  
|                                      |  |                |        |   |              |             |        |              | 

The components of current and deferred income
taxes for the years ended December 31, 2005, 2004, and 2003
are zero due to book and tax loss carryforwards.

F-16



---



##### Table of Contents



NOTES TO FINANCIAL STATEMENTS 
SPECIALTY UNDERWRITERS ALLIANCE, INC.


(dollars in
thousands)  (Continued)


The components of the Companys deferred tax
assets and liabilities at December 31, 2005 and 2004,
respectively, are noted in the table below.

|                                   |  |              |        |   |              |   |        |  
|---------------------------------- |  | ------------ | ------ | - | ------------ | - | ------ | -
|                                   |  | Year Ended   |        |   | Year Ended   |  
|                                   |  | December 31, |        |   | December 31, |  
|Deferred Tax Assets (Liabilities)  |  | 2005         |        |   | 2004         |  
|                                   |  |              |        |   |              |  
|Loss & LAE reserves                |  | $            | 603    |   |              | $ |       |  
|Unearned premium reserves          |  |              | 3,984  |   |              |   |       |  
|Deferred acquisition cost          |  |              | (3,835 | ) |              |   |       |  
|Equipment and capitalized software |  |              | (705   | ) |              |   | (213   | )
|Net operating loss carryforwards   |  |              | 9,142  |   |              |   | 2,627  |  
|Start up costs                     |  |              | 617    |   |              |   | 777    |  
|Prepaid assets                     |  |              | (432   | ) |              |   | (215   | )
|Unrealized loss on investments     |  |              | 555    |   |              |   | (3     | )
|Other, net                         |  |              | (298   | ) |              |   | (12    | )
|                                   |  |              |        |   |              |  
|Deferred tax asset                 |  |              | 9,631  |   |              |   | 2,961  |  
|Valuation allowance                |  |              | (9,631 | ) |              |   | (2,961 | )
|                                   |  |              |        |   |              |  
|Net deferred tax asset             |  | $            |       |   |              | $ |       |  
|                                   |  |              |        |   |              |  



| |            
| | -----------
| | Predecessor

The components of Potomacs federal income
taxes and a reconciliation of the Potomacs expected and
actual federal income taxes follow:

|                                     |  |              |     |  |              |   |     | 
|------------------------------------ |  | ------------ | --- |  | ------------ | - | --- | 
|                                     |  | Period from  |     |  |             
|                                     |  | January 1 to |     |  | Year Ended   |  
|                                     |  | November 23, |     |  | December 31, |  
|                                     |  | 2004         |     |  | 2003         |  
|                                     |  |              |     |  |              |  
|Current                              |  | $            |    |  |              | $ |    | 
|Deferred                             |  |              | 350 |  |              |   | 736 | 
|                                     |  |              |     |  |              |  
|Income tax expense                   |  | $            | 350 |  |              | $ | 736 | 
|                                     |  |              |     |  |              |  
|Expected federal income taxes at 35% |  | $            | 350 |  |              | $ | 733 | 
|Other, net                           |  |              |    |  |              |   | 3   | 
|                                     |  |              |     |  |              |  
|Income tax expense                   |  | $            | 350 |  |              | $ | 736 | 
|                                     |  |              |     |  |              |  

NOTE 6  OTHER COMPREHENSIVE
INCOME

The components of the Companys other
comprehensive income follow:

|                                                  |                                                   |              |   |        |              |             |   |              |  |  |   |   | 
|------------------------------------------------- | ------------------------------------------------- | ------------ | - | ------ | ------------ | ----------- | - | ------------ |  |  | - | - | 
|                                                  |                                                   |              |   |        |              | Period from
|                                                  |                                                   | Year Ended   |   |        | Year Ended   |             |   | April 3 to  
|                                                  |                                                   | December 31, |   |        | December 31, |             |   | December 31,
|                                                  |                                                   | 2005         |   |        | 2004         |             |   | 2003        
|                                                  |                                                   |              |   |        |              |             |   |             
|Other comprehensive income (loss) for the period: |                                                   |              |   |        |              |             |   |              |  |  |   |  
|                                                  | Unrealized gains on investments                   |              | $ | (1,641 | )            |             | $ | 10           |  |  | $ |  | 
|                                                  | Less related federal income tax expense (benefit) |              |   |       |              |             |   |             |  |  |   |  | 
|                                                  |                                                   |              |   |        |              |             |   |              | 
|                                                  | Total                                             |              | $ | (1,641 | )            |             | $ | 10           |  |  | $ |  | 
|                                                  |                                                   |              |   |        |              |             |   |              | 

F-17



---



##### Table of Contents



NOTES TO FINANCIAL STATEMENTS 
SPECIALTY UNDERWRITERS ALLIANCE, INC.


(dollars in
thousands)  (Continued)


The components of the Companys accumulated
other comprehensive income follows:

|                                               |                                     |              |   |        |              |  |   |              |  |  |   |   | 
|---------------------------------------------- | ----------------------------------- | ------------ | - | ------ | ------------ |  | - | ------------ |  |  | - | - | 
|                                               |                                     | Year Ended   |   |        | Year Ended   |  |   | Year Ended  
|                                               |                                     | December 31, |   |        | December 31, |  |   | December 31,
|                                               |                                     | 2005         |   |        | 2004         |  |   | 2003        
|                                               |                                     |              |   |        |              |  |   |             
|Accumulated other comprehensive income (loss): |                                     |              |   |        |              |  |   |              |  |  |   |  
|                                               | Net unrealized gains on investments |              | $ | (1,631 | )            |  | $ | 10           |  |  | $ |  | 
|                                               | Less related federal income taxes   |              |   |       |              |  |   |             |  |  |   |  | 
|                                               |                                     |              |   |        |              |  |   |              | 
|                                               | Total                               |              | $ | (1,631 | )            |  | $ | 10           |  |  | $ |  | 
|                                               |                                     |              |   |        |              |  |   |              | 



| |            
| | -----------
| | Predecessor

The components of Potomacs other
comprehensive income follow:

|                                                  |       |              |      |      |              |   |      |     |  
|------------------------------------------------- | ----- | ------------ | ---- | ---- | ------------ | - | ---- | --- | -
|                                                  |       | Period from  |      |      |             
|                                                  |       | January 1 to |      |      | Year Ended   |  
|                                                  |       | November 23, |      |      | December 31, |  
|                                                  |       | 2004         |      |      | 2003         |  
|                                                  |       |              |      |      |              |  
|Other comprehensive income (loss) for the period: |       |              |      |      |              |   |      |    
|Unrealized (losses) gains on investments          |       | $            | 197  |      |              | $ | (504 | )  
|Adjustment for unrealized gains (losses) realized |       |              | (390 | )    |              |   | 466  |    
|Dividend to parent                                |       |              | (409 | )    |              |   |     |    
|Less related federal income tax expense (benefit) |       |              | 211  |      |              |   | 13   |    
|                                                  |       |              |      |      |              |  
|                                                  | Total |              | $    | (391 | )            |   | $    | (25 | )
|                                                  |       |              |      |      |              |  

NOTE 7  STOCK
OPTIONS

The Board of Directors approved the Stock Option
Plan during 2004. The Stock Option Plan authorizes the grant of
options to certain personnel for up to 850,000 shares of
the Companys common stock. All options granted have
ten-year terms and vest ratably over the three-year period
following the date of grant. The number of shares available for
the granting of options under the Stock Option Plan as of
December 31, 2005, was 122,534.

The following table presents activity under the
Stock Option Plan during 2005.

|                                   |  |           |         |          |           |   |      |           |          |  |           |  |  |   |      | 
|---------------------------------- |  | --------- | ------- | -------- | --------- | - | ---- | --------- | -------- |  | --------- |  |  | - | ---- | 
|                                   |  |           |         |         
|                                   |  | 2005      |         |          | 2004      |  
|                                   |  |           |         |          |           |  
|                                   |  |           |         | Weighted |           |   |      |           | Weighted | 
|                                   |  |           |         | Average  |           |   |      |           | Average  | 
|                                   |  |           |         | Exercise |           |   |      |           | Exercise | 
|                                   |  | Number    |         |          | Price per |   |      | Number    |          |  | Price per | 
|Option Plan Activity               |  | of Shares |         |          | Share     |   |      | of Shares |          |  | Share     | 
|                                   |  |           |         |          |           |   |      |           |          |  |           | 
|Balance at January 1               |  |           | 624,800 |          |           | $ | 9.50 |           |          |  |          |  |  | $ |     | 
|Options granted                    |  |           | 146,666 |          |           |   | 8.99 |           |          |  | 624,800   |  |  |   | 9.50 | 
|Options exercised                  |  |           |        |          |           |   |     |           |          |  |          |  |  |   |     | 
|Options forfeited                  |  |           | 44,000  |          |           |   | 9.39 |           |          |  |          |  |  |   |     | 
|                                   |  |           |         |          |           |   |      |           |          |  |           | 
|Balance at December 31             |  |           | 727,466 |          |           | $ | 9.40 |           |          |  | 624,800   |  |  | $ | 9.50 | 
|                                   |  |           |         |          |           |   |      |           |          |  |           | 
|Options exercisable at December 31 |  |           | 196,940 |          |           | $ | 9.50 |           |          |  |          |  |  | $ |     | 
|                                   |  |           |         |          |           |   |      |           |          |  |           | 

The weighted-average fair value per share of
options granted in 2005 was $3.84.

The weighted average remaining contractual term
on the 727,466 options outstanding at December 31, 2005 is
8.97 years, and the range of exercise prices on those
options was $8.10 to $10.02.

F-18



---



##### Table of Contents



NOTES TO FINANCIAL STATEMENTS 
SPECIALTY UNDERWRITERS ALLIANCE, INC.


(dollars in
thousands)  (Continued)


Pro forma information regarding net income and
earnings per share is required by FAS No. 123,
Accounting for Stock-Based Compensation
(FAS 123) to reflect net income and earnings
per share under the fair value method. In December 2002, the
FASB issued FAS No. 148, Accounting for
Stock-Based Compensation  Transition and
Disclosure (FAS 148). FAS 148 amends
the disclosure requirements of FAS 123 to require prominent
disclosure in both annual and interim financial statements
regarding the method of accounting for stock-based compensation
and the effect of the method used on reported results.

|                                   |  |              |         |   |              |   |        |  
|---------------------------------- |  | ------------ | ------- | - | ------------ | - | ------ | -
|                                   |  | Year Ended   |         |   | Year Ended   |  
|                                   |  | December 31, |         |   | December 31, |  
|                                   |  | 2005         |         |   | 2004         |  
|                                   |  |              |         |   |              |  
|Net income (loss) as reported      |  | $            | (17,996 | ) |              | $ | (8,155 | )
|Deduct: Compensation expense       |  |              | (1,035  | ) |              |   | (115   | )
|                                   |  |              |         |   |              |  
|Pro forma net income (loss)        |  | $            | (19,031 | ) |              | $ | (8,270 | )
|                                   |  |              |         |   |              |  
|Basic earnings (loss) per share:   |  |              |         |   |              |   |        |  
|As reported                        |  | $            | (1.22   | ) |              | $ | (4.59  | )
|Pro forma                          |  | $            | (1.29   | ) |              | $ | (4.65  | )
|Diluted earnings (loss) per share: |  |              |         |   |              |   |        |  
|As reported                        |  | $            | (1.22   | ) |              | $ | (4.59  | )
|Pro forma                          |  | $            | (1.29   | ) |              | $ | (4.65  | )

The fair value of options issued is estimated on
the date of grant using the binomial lattice option-pricing
model, with the following weighted-average assumptions used for
grants in 2005: dividend yield of 0% expected for five years
beginning 2006 and no more than 2% expected for five years
beginning 2011, expected volatility of 45%, risk free interest
rate of 3.50% to 4.33% and an expected life of 5.09 years.

NOTE 8  RELATED PARTY
TRANSACTIONS

The Company had no related party transactions for
the years ended December 31, 2005 and 2004.



| |            
| | -----------
| | Predecessor

Potomac had a service contract with White
Mountains Advisors LLC, or Advisors, a wholly-owned subsidiary
of OneBeacon. Under this agreement, Advisors provided investment
research and advice, including the execution of orders for the
purchase and sale of securities. The amounts charged to Potomac
by Advisors for such services were based on a fixed fee applied
to the month-end market values of the investments being managed.
During the periods ended November 23, 2004 and
December 31, 2003 Potomac incurred a total of $102 and $185
of fees and expenses, respectively, with Advisors for services
provided.

As of January 1, 2004, with its withdrawal
from the Pool, Potomac settled its net loss and LAE reserves of
$15,278, unearned insurance premiums of $4,097 and other net
insurance-related liabilities of $77 with the Pool in exchange
for $19,298 in cash.

During 2004 Potomac declared and paid cash
dividends and capital distributions of $18,610 and distributed
net assets of $13,276 to OneBeacon.

NOTE 9  COMMITMENTS

On February 3, 2005, the Company entered
into a lease agreement for its office space that commences on
May 1, 2005 and terminates on April 30, 2020. The
Companys future net lease obligations are $1,432 for years
1 through 5, $2,374 for years 6 through 10 and $2,686 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

F-19



---



##### Table of Contents



NOTES TO FINANCIAL STATEMENTS 
SPECIALTY UNDERWRITERS ALLIANCE, INC.


(dollars in
thousands)  (Continued)


the lease agreement, 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 the end of the fifth year or at the end of the tenth year.
Upon notice of termination, Company is obligated to pay six
months of the then current rent and the unamortized balance of
abated rent, brokerage commissions, and construction allowance.
If the Company opted to terminate as of the end of the fifth
year, the Company would be obligated to pay approximately $1,950
plus operating expenses, taxes, and brokerage commissions.

NOTE 10  REINSURANCE

The effects of Specialty Underwriters
Alliance, Inc. reinsurance follow:

|                                     |         |              |   |        |              |  |   |   |   | 
|------------------------------------ | ------- | ------------ | - | ------ | ------------ |  | - | - | - | 
|                                     |         | Year Ended   |   |        | Year Ended  
|                                     |         | December 31, |   |        | December 31,
|                                     |         | 2005         |   |        | 2004        
|                                     |         |              |   |        |             
|Premiums written:                    |         |              |   |        |              |  |   |  
|                                     | Direct  |              | $ | 90,639 |              |  | $ |  |  
|                                     | Assumed |              |   |       |              |  |   |  |  
|                                     | Ceded   |              |   | 5,433  |              |  |   |  |  
|                                     |         |              |   |        |              | 
|                                     |         | Net          |   | $      | 85,206       |  |   | $ |  | 
|                                     |         |              |   |        |              | 
|Premiums earned:                     |         |              |   |        |              |  |   |  
|                                     | Direct  |              | $ | 32,047 |              |  | $ |  |  
|                                     | Assumed |              |   |       |              |  |   |  |  
|                                     | Ceded   |              |   | 5,436  |              |  |   |  |  
|                                     |         |              |   |        |              | 
|                                     |         | Net          |   |        | 26,611       |  |   | $ |  | 
|                                     |         |              |   |        |              | 
|Losses and loss adjustment expenses: |         |              |   |        |              |  |   |  
|                                     | Direct  |              | $ | 21,362 |              |  | $ |  |  
|                                     | Assumed |              |   |       |              |  |   |  |  
|                                     | Ceded   |              |   | 2,263  |              |  |   |  |  
|                                     |         |              |   |        |              | 
|                                     |         | Net          |   | $      | 19,099       |  |   | $ |  | 
|                                     |         |              |   |        |              | 

F-20



---



##### Table of Contents



NOTES TO FINANCIAL STATEMENTS 
SPECIALTY UNDERWRITERS ALLIANCE, INC.


(dollars in
thousands)  (Continued)


The effects of Potomacs reinsurance follow:

|                                     |         |              |   |          |              |   |   |         |       | 
|------------------------------------ | ------- | ------------ | - | -------- | ------------ | - | - | ------- | ----- | 
|                                     |         | Period from  |   |          |             
|                                     |         | January 1 to |   |          | Year Ended   |  
|                                     |         | November 23, |   |          | December 31, |  
|                                     |         | 2004         |   |          | 2003         |  
|                                     |         |              |   |          |              |  
|Premiums written:                    |         |              |   |          |              |   |   |        
|                                     | Direct  |              | $ | 267      |              |   | $ | 928     |      
|                                     | Assumed |              |   | (4,823   | )            |   |   | 8,886   |      
|                                     | Ceded   |              |   | (267     | )            |   |   | (928    | )    
|                                     |         |              |   |          |              |  
|                                     |         | Net          |   | $        | (4,823       | ) |   | $       | 8,886 | 
|                                     |         |              |   |          |              |  
|Premiums earned:                     |         |              |   |          |              |   |   |        
|                                     | Direct  |              | $ | 667      |              |   | $ | 1,597   |      
|                                     | Assumed |              |   |         |              |   |   | 9,961   |      
|                                     | Ceded   |              |   | (667     | )            |   |   | (1,597  | )    
|                                     |         |              |   |          |              |  
|                                     |         | Net          |   | $        |             |   |   | $       | 9,961 | 
|                                     |         |              |   |          |              |  
|Losses and loss adjustment expenses: |         |              |   |          |              |   |   |        
|                                     | Direct  |              | $ | (130,439 | )            |   | $ | 24,803  |      
|                                     | Assumed |              |   |         |              |   |   | 6,821   |      
|                                     | Ceded   |              |   | 130,439  |              |   |   | (24,803 | )    
|                                     |         |              |   |          |              |  
|                                     |         | Net          |   | $        |             |   |   | $       | 6,821 | 
|                                     |         |              |   |          |              |  

NOTE 11  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, 2005 the Company reported
gross loss and loss adjustment expense reserves of $104,870 of
which $86,736 represented the gross direct loss and loss
adjustment expenses reserves of Potomac, which is fully
reinsured by OneBeacon. At December 31, 2004 the Company
reported gross loss and loss adjustment expense reserves of
$95,959, all of which represented the gross direct loss and loss
adjustment expense reserves of Potomac, which are fully
reinsured by OneBeacon.

F-21



---



##### Table of Contents



NOTES TO FINANCIAL STATEMENTS 
SPECIALTY UNDERWRITERS ALLIANCE, INC.


(dollars in
thousands)  (Continued)


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

|                                     |                               |                               |   |         |            |  |     |              |        |              |      |         |         |  |   |        |        | 
|------------------------------------ | ----------------------------- | ----------------------------- | - | ------- | ---------- |  | --- | ------------ | ------ | ------------ | ---- | ------- | ------- |  | - | ------ | ------ | 
|                                     |                               |                               |   |        
|                                     |                               | Year                          |   |         |           
|                                     |                               | Ended                         |   |         |           
|                                     |                               | December 31,                  |   |         |           
|                                     |                               | 2005                          |   |         |           
|                                     |                               |                               |   |         | Year Ended | 
|                                     |                               | Potomac                       |   |         |            |  | SUA |              |        | December 31, |     
|                                     |                               | of Illinois                   |   |         | SUA        |  |     | Consolidated |        |              | 2004 |        
|                                     |                               |                               |   |         |            |  |     |              |        |              |      |        
|Beginning of period:                 |                               |                               |   |         |            |  |     |              |        |              |      |         |         |  |   |       
|                                     | Gross                         |                               | $ | 95,959  |            |  | $   |             |        |              | $    | 95,959  |         |  | $ |       |       
|                                     | Less reinsurance recoverables |                               |   | (95,959 | )          |  |     |             |        |              |      | (95,959 | )       |  |   |       |       
|                                     |                               |                               |   |         |            |  |     |              |        |              |      |        
|                                     |                               | Net                           |   |         |           |  |     |              |       |              |      |         |        |  |   |        |       | 
|                                     |                               |                               |   |         |            |  |     |              |        |              |      |        
|Incurred losses and LAE relating to: |                               |                               |   |         |            |  |     |              |        |              |      |         |         |  |   |       
|                                     | Current year                  |                               |   |        |            |  |     | 19,099       |        |              |      | 19,099  |         |  |   |       |       
|                                     | Prior years                   |                               |   |        |            |  |     |             |        |              |      |        |         |  |   |       |       
|                                     |                               |                               |   |         |            |  |     |              |        |              |      |        
|                                     |                               | Total incurred losses and LAE |   |         |           |  |     |              | 19,099 |              |      |         | 19,099  |  |   |        |       | 
|                                     |                               |                               |   |         |            |  |     |              |        |              |      |        
|Paid losses and LAE related to:      |                               |                               |   |         |            |  |     |              |        |              |      |         |         |  |   |       
|                                     | Current year                  |                               |   |        |            |  |     | 3,226        |        |              |      | 3,226   |         |  |   |       |       
|                                     | Prior years                   |                               |   |        |            |  |     |             |        |              |      |        |         |  |   |       |       
|                                     |                               |                               |   |         |            |  |     |              |        |              |      |        
|                                     |                               | Total paid losses and LAE     |   |         |           |  |     |              | 3,226  |              |      |         | 3,226   |  |   |        |       | 
|                                     |                               |                               |   |         |            |  |     |              |        |              |      |        
|End of period:                       |                               |                               |   |         |            |  |     |              |        |              |      |         |         |  |   |       
|                                     | Net                           |                               |   |        |            |  |     | 15,873       |        |              |      | 15,873  |         |  |   |       |       
|                                     |                               |                               |   |         |            |  |     |              |        |              |      |        
|                                     | Plus reinsurance recoverables |                               |   | 86,736  |            |  |     | 2,261        |        |              |      | 88,997  |         |  |   | 95,959 |       
|                                     |                               |                               |   |         |            |  |     |              |        |              |      |        
|                                     |                               | Gross                         |   | $       | 86,736     |  |     | $            | 18,134 |              |      | $       | 104,870 |  |   | $      | 95,959 | 
|                                     |                               |                               |   |         |            |  |     |              |        |              |      |        

NOTE 12  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, 2005 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

F-22



---



##### Table of Contents



NOTES TO FINANCIAL STATEMENTS 
SPECIALTY UNDERWRITERS ALLIANCE, INC.


(dollars in
thousands)  (Continued)


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   |         |   | Year Ended   |  
|                                        |  | December 31, |         |   | December 31, |  
|                                        |  | 2005         |         |   | 2004         |  
|                                        |  |              |         |   |              |  
|Ending capital and surplus              |  | $            | 79,757  |   |              | $ | 100,725 |  
|Net income/(loss)                       |  | $            | (30,505 | ) |              | $ | (3,383  | )
|Company action level risk-based capital |  | $            | 32,630  |   |              | $ | 830     |  

NOTE 13  QUARTERLY FINANCIAL
DATA (UNAUDITED)

The following tables sets forth the unaudited
financial data for the years ended December 31, 2005,
December 31, 2004 and for the period April 1, 2003
(date of inception) to December 31, 2003.

|                            |  |                                       |        |   |        |   |        |       |  |   |        |   |  |      |        |   |  |   |         |  
|--------------------------- |  | ------------------------------------- | ------ | - | ------ | - | ------ | ----- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------- | -
|                            |  | First                                 |        |   | Second |   |        | Third |  |   | Fourth |   |  | Year |       
|Quarterly Financial Data    |  | 2005                                  |        |   | 2005   |   |        | 2005  |  |   | 2005   |   |  | 2005 |       
|                            |  |                                       |        |   |        |   |        |       |  |   |        |   |  |      |       
|                            |  |                                      
|                            |  | (In thousands, except per share data) |       
|Revenues                    |  | $                                     | 1,265  |   |        | $ | 4,072  |       |  | $ | 9,145  |   |  | $    | 15,683 |   |  | $ | 30,165  |  
|Expenses                    |  |                                       | 5,757  |   |        |   | 8,082  |       |  |   | 13,969 |   |  |      | 20,353 |   |  |   | 48,161  |  
|                            |  |                                       |        |   |        |   |        |       |  |   |        |   |  |      |       
|Net income (loss)           |  | $                                     | (4,492 | ) |        | $ | (4,010 | )     |  | $ | (4,824 | ) |  | $    | (4,670 | ) |  | $ | (17,996 | )
|                            |  |                                       |        |   |        |   |        |       |  |   |        |   |  |      |       
|Net income (loss) per share |  | $                                     | (.31   | ) |        | $ | (.27   | )     |  | $ | (.32   | ) |  | $    | (.32   | ) |  | $ | (1.22   | )

|                            |  |                                       |             |   |        |   |             |       |  |   |             |   |  |      |        |   |            |   |        |   |  |   |            |  
|--------------------------- |  | ------------------------------------- | ----------- | - | ------ | - | ----------- | ----- |  | - | ----------- | - |  | ---- | ------ | - | ---------- | - | ------ | - |  | - | ---------- | -
|                            |  | First                                 |             |   | Second |   |             | Third |  |   | Fourth      |   |  | Year |        |   | Fourth and |  
|Quarterly Financial Data    |  | 2004                                  |             |   | 2004   |   |             | 2004  |  |   | 2004        |   |  | 2004 |        |   | Year 2003  |  
|                            |  |                                       |             |   |        |   |             |       |  |   |             |   |  |      |        |   |            |  
|                            |  |                                      
|                            |  | (In thousands, except per share data) |            
|Revenues                    |  | $                                     |            |   |        | $ |            |       |  | $ |            |   |  | $    | 280    |   |            | $ | 280    |   |  | $ |           |  
|Expenses                    |  |                                       | 1,808       |   |        |   | 5,635       |       |  |   | 2,109       |   |  |      | (1,117 | ) |            |   | 8,435  |   |  |   | 578        |  
|                            |  |                                       |             |   |        |   |             |       |  |   |             |   |  |      |        |   |            |  
|Net income (loss)           |  | $                                     | (1,808      | ) |        | $ | (5,635      | )     |  | $ | (2,109      | ) |  | $    | 1,397  |   |            | $ | (8,155 | ) |  | $ | (578       | )
|                            |  |                                       |             |   |        |   |             |       |  |   |             |   |  |      |        |   |            |  
|Net income (loss) per share |  | $                                     | (180,800.00 | ) |        | $ | (563,500.00 | )     |  | $ | (210,900.00 | ) |  | $    | 0.20   |   |            | $ | (4.59  | ) |  | $ | (57,800.00 | )

Warrants were issued to original lenders for
$4,795 in 2003. Expense was recognized for the warrants in the
amount of $151, $1,311 and $3,333 in the fourth quarter of 2003,
first quarter of 2004 and second quarter of 2004, respectively.
The warrants were reduced to $3,996 in the third quarter of
2004, resulting in a gain of $799. The warrants were cancelled
in the fourth quarter of 2004 resulting in a gain of $3,996.

F-23



---



##### Table of Contents






SCHEDULE I

SPECIALTY UNDERWRITERS ALLIANCE,
INC.

SUMMARY OF INVESTMENTS  OTHER
THAN

INVESTMENTS IN RELATED PARTIES


At December 31, 2005


|                       |                                     |                        |         |        |            |   |         |        | 
|---------------------- | ----------------------------------- | ---------------------- | ------- | ------ | ---------- | - | ------- | ------ | 
|                       |                                     | Cost                   |         |        | Fair Value |  
|                       |                                     |                        |         |        |            |  
|                       |                                     |                       
|                       |                                     | (Dollars in thousands) |        
|Fixed maturities:      |                                     |                        |         |        |            |   |         |       
|                       | U.S. treasury securities            |                        | $       | 10,273 |            |   | $       | 10,172 | 
|                       | U.S. government agencies securities |                        |         | 13,840 |            |   |         | 13,638 | 
|                       | Corporate securities                |                        |         | 49,178 |            |   |         | 48,135 | 
|                       | Mortgage backed securities          |                        |         | 22,469 |            |   |         | 22,184 | 
|                       |                                     |                        |         |        |            |  
|                       | Total fixed maturities              |                        |         | 95,760 |            |   |         | 94,129 | 
|Short-term investments |                                     |                        | 8,862   |        |            |   | 8,862   |       
|                       |                                     |                        |         |        |            |  
|Total investments      |                                     | $                      | 104,622 |        |            | $ | 102,991 |       
|                       |                                     |                        |         |        |            |  

F-24



---



##### Table of Contents






SCHEDULE II

SPECIALTY UNDERWRITERS ALLIANCE,
INC.

CONDENSED FINANCIAL INFORMATION OF
REGISTRANT

|                                                                                                                                                     |                            |                            |         |         |              |   |         |         | 
|---------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | -------------------------- | ------- | ------- | ------------ | - | ------- | ------- | 
|                                                                                                                                                     |                            |                           
|                                                                                                                                                     |                            | Specialty Underwriters    |        
|                                                                                                                                                     |                            | Alliance, Inc. (Successor) |        
|                                                                                                                                                     |                            |                            |        
|                                                                                                                                                     |                            | December 31,               |         |         | December 31, |  
|Balance Sheets                                                                                                                                       |                            | 2005                       |         |         | 2004         |  
|                                                                                                                                                     |                            |                            |         |         |              |  
|                                                                                                                                                     |                            |                           
|                                                                                                                                                     |                            | (Dollars in thousands)     |        
|ASSETS                                                                                                                                              
|Investments in subsidiary                                                                                                                            |                            | $                          | 98,330  |         |              | $ | 113,812 |        
|                                                                                                                                                     |                            |                            |         |         |              |  
|                                                                                                                                                     | Total investments          |                            |         | 98,330  |              |   |         | 113,812 | 
|Cash                                                                                                                                                 |                            |                            | 2,369   |         |              |   | 4,960   |        
|Other assets                                                                                                                                         |                            |                            | 291     |         |              |   | 481     |        
|                                                                                                                                                     |                            |                            |         |         |              |  
|Total assets                                                                                                                                         |                            | $                          | 100,990 |         |              | $ | 119,253 |        
|                                                                                                                                                     |                            |                            |         |         |              |  
|                                                                                                                                                    
|LIABILITIES                                                                                                                                         
|Accounts payable and other liabilities                                                                                                               |                            |                            | 175     |         |              |   | 323     |        
|                                                                                                                                                     |                            |                            |         |         |              |  
|                                                                                                                                                     | Total liabilities          |                            |         | 175     |              |   |         | 323     | 
|Stockholders equity                                                                                                                                 |                            |                            |         |         |              |   |         |        
|Common stock Class A at $.01 par value
    per share  authorized 30,000,000 and
    75,000,000 shares; issued and outstanding
    14,680,688 shares |                            |                            | 147     |         |              |   | 147     |        
|Common stock Class B at $.01 par value
    per share  authorized 2,000,000 shares; issued
    and outstanding 223,694 and 26,316 shares             |                            |                            | 2       |         |              |   |        |        
|Paid-in capital  Class A                                                                                                                            |                            |                            | 127,256 |         |              |   | 127,256 |        
|Paid-in capital  Class B                                                                                                                            |                            |                            | 1,770   |         |              |   | 250     |        
|Retained earnings                                                                                                                                    |                            |                            | (26,729 | )       |              |   | (8,733  | )      
|Accumulated other comprehensive income, net of tax                                                                                                   |                            |                            | (1,631  | )       |              |   | 10      |        
|                                                                                                                                                     |                            |                            |         |         |              |  
|                                                                                                                                                     | Total stockholders equity |                            |         | 100,815 |              |   |         | 118,930 | 
|                                                                                                                                                     |                            |                            |         |         |              |  
|Total liabilities and stockholders
    equity                                                                                                       |                            | $                          | 100,990 |         |              | $ | 119,253 |        
|                                                                                                                                                     |                            |                            |         |         |              |  

F-25



---



##### Table of Contents



SCHEDULE II 
(Continued)

SPECIALTY UNDERWRITERS ALLIANCE,
INC.

CONDENSED FINANCIAL INFORMATION OF
REGISTRANT

|                                                               |                                                           |                            |         |        |              |   |        |       |       | 
|-------------------------------------------------------------- | --------------------------------------------------------- | -------------------------- | ------- | ------ | ------------ | - | ------ | ----- | ----- | 
|                                                               |                                                           |                           
|                                                               |                                                           | Specialty Underwriters    |        
|                                                               |                                                           | Alliance, Inc. (Successor) |        
|                                                               |                                                           |                            |        
|                                                               |                                                           | Year Ended                 |         |        | Year Ended   |  
|                                                               |                                                           | December 31,               |         |        | December 31, |  
|Statement of Operations                                        |                                                           | 2005                       |         |        | 2004         |  
|                                                               |                                                           |                            |         |        |              |  
|                                                               |                                                           |                           
|                                                               |                                                           | (Dollars in thousands      |        
|                                                               |                                                           | except per share data)     |        
|Revenues:                                                      |                                                           |                            |         |        |              |   |        |      
|                                                               |                                                           | Total revenues             |         | $      | 23           |   |        | $     |      | 
|                                                               |                                                           |                            |         |        |              |  
|Expenses:                                                      |                                                           |                            |         |        |              |   |        |      
|                                                               | Service company fees                                      |                            |         |       |              |   |        | 2,511 |      
|                                                               | Financing expenses                                        |                            |         |       |              |   |        | 268   |      
|                                                               | General and administrative expenses                       |                            |         | 328    |              |   |        | 2,180 |      
|                                                               | Loss of subsidiary                                        |                            |         | 17,691 |              |   |        | 3,196 |      
|                                                               |                                                           |                            |         |        |              |  
|                                                               |                                                           | Total expenses             |         |        | 18,019       |   |        |       | 8,155 | 
|                                                               |                                                           |                            |         |        |              |  
|Pretax income (loss)                                           |                                                           |                            | (17,996 | )      |              |   | (8,155 | )    
|                                                               | Federal income tax expense                                |                            |         |       |              |   |        |      |      
|                                                               |                                                           |                            |         |        |              |  
|Net income (loss)                                              |                                                           |                            | (17,996 | )      |              |   | (8,155 | )    
|                                                               |                                                           |                            |         |        |              |  
|                                                               | Net change in unrealized investment gains, net of
    tax |                            |         | (1,641 | )            |   |        | 10    |      
|                                                               |                                                           |                            |         |        |              |  
|Comprehensive net income (loss)                                |                                                           | $                          | (19,637 | )      |              | $ | (8,145 | )    
|                                                               |                                                           |                            |         |        |              |  
|Earnings (loss) per share available to common
    stockholders |                                                           |                            |         |        |              |   |        |      
|                                                               | Basic                                                     |                            | $       | (1.22  | )            |   | $      | (4.59 | )    
|                                                               | Diluted                                                   |                            | $       | (1.22  | )            |   | $      | (4.59 | )    

F-26



---



##### Table of Contents



SCHEDULE II 
(Continued)

SPECIALTY UNDERWRITERS ALLIANCE,
INC.

CONDENSED FINANCIAL INFORMATION OF
REGISTRANT

|                                                                             |                                             |                            |         |        |              |   |          |         |  
|---------------------------------------------------------------------------- | ------------------------------------------- | -------------------------- | ------- | ------ | ------------ | - | -------- | ------- | -
|                                                                             |                                             |                           
|                                                                             |                                             | Specialty Underwriters    |        
|                                                                             |                                             | Alliance, Inc. (Successor) |        
|                                                                             |                                             |                            |        
|                                                                             |                                             | Year Ended                 |         |        | Year Ended   |  
|                                                                             |                                             | December 31,               |         |        | December 31, |  
|Statement of Cash Flows                                                      |                                             | 2005                       |         |        | 2004         |  
|                                                                             |                                             |                            |         |        |              |  
|                                                                             |                                             |                           
|                                                                             |                                             | (Dollars in thousands)     |        
|Cash flows from operations:                                                  |                                             |                            |         |        |              |   |          |        
|Net income (loss)                                                            |                                             | $                          | (17,996 | )      |              | $ | (8,155   | )      
|Charges (credits) to reconcile net income to
    cash flows from operations: |                                             |                            |         |        |              |   |          |        
|                                                                             | Loss (income) of subsidiary                 |                            |         | 17,691 |              |   |          | 3,196   |  
|                                                                             | Depreciation expense                        |                            |         | 171    |              |   |          |        |  
|                                                                             | Write off of capitalized software           |                            |         | 19     |              |   |          |        |  
|                                                                             | Interest expense exchanged for common stock |                            |         |       |              |   |          | 234     |  
|Net change in:                                                               |                                             |                            |         |        |              |   |          |        
|                                                                             | Deferred charges                            |                            |         |       |              |   |          | 4,730   |  
|                                                                             | Stock warrants                              |                            |         |       |              |   |          | (4,795  | )
|                                                                             | Other, net                                  |                            |         | (148   | )            |   |          | 311     |  
|                                                                             |                                             |                            |         |        |              |  
|Total adjustments                                                            |                                             |                            | 17,733  |        |              |   | 3,676    |        
|                                                                             |                                             |                            |         |        |              |  
|Net cash flows provided by (used for)
    operations                         |                                             |                            | (263    | )      |              |   | (4,479   | )      
|Cash flows from investing
    activities:                                    |                                             |                            |         |        |              |   |          |        
|                                                                             | Purchase of insurance subsidiary            |                            |         |       |              |   |          | (21,998 | )
|                                                                             | Capital contributions to subsidiary         |                            |         | (3,850 | )            |   |          | (95,000 | )
|                                                                             | Purchase of capitalized software            |                            |         |       |              |   |          | (480    | )
|                                                                             |                                             |                            |         |        |              |  
|Net cash flows provided by (used for)
    investing activities               |                                             |                            | (3,850  | )      |              |   | (117,478 | )      
|Cash flows from financing activities                                         |                                             |                            |         |        |              |   |          |        
|                                                                             | Issuance of common stock                    |                            |         | 1,522  |              |   |          | 123,517 |  
|                                                                             | Short-term borrowings                       |                            |         |       |              |   |          | 3,200   |  
|                                                                             |                                             |                            |         |        |              |  
|Net cash flows provided by (used for)
    financing activities               |                                             |                            | 1,522   |        |              |   | 126,717  |        
|                                                                             |                                             |                            |         |        |              |  
|Net increase from cash during the
    period                                 |                                             |                            | (2,591  | )      |              |   | 4,760    |        
|Cash at beginning of the period                                              |                                             |                            | 4,960   |        |              |   | 200      |        
|                                                                             |                                             |                            |         |        |              |  
|Cash at end of the period                                                    |                                             | $                          | 2,369   |        |              | $ | 4,960    |        
|                                                                             |                                             |                            |         |        |              |  

F-27



---



##### Table of Contents






SCHEDULE III

SPECIALTY UNDERWRITERS ALLIANCE,
INC.

SUPPLEMENTARY INSURANCE INFORMATION

|                                         |  |                        |        |               |             |   |         |          |              |            |          |  |          |     |           |            |             |              |            |             |  |             |       |  |           |   |        |          |  |   |       |  |  |   |        |  |  |   |        | 
|---------------------------------------- |  | ---------------------- | ------ | ------------- | ----------- | - | ------- | -------- | ------------ | ---------- | -------- |  | -------- | --- | --------- | ---------- | ----------- | ------------ | ---------- | ----------- |  | ----------- | ----- |  | --------- | - | ------ | -------- |  | - | ----- |  |  | - | ------ |  |  | - | ------ | 
|Column A                                 |  | Column B               |        |               | Column C    |   |         | Column D |              |            | Column E |  | Column F |     |           | Column G   |             |              | Column H   |             |  | Column I    |       |  | Column J  |   |        | Column K | 
|                                         |  |                        |        |               |             |   |         |          |              |            |          |  |          |     |           |            |             |              |            |             |  |             |       |  |           |   |        |          | 
|                                         |  |                        |        | Future Policy |             |   |         |          |              |            |          |  |          |     |           |            |             |              |            |             | 
|                                         |  |                        |        | Benefits,     |             |   |         |          |              |            |          |  |          |     | Benefits, |            |             |              |            |             |  |            
|                                         |  |                        |        | Losses,       |             |   |         |          | Other Policy |            |          |  |          |     | Claims,   |            |             | Amortization |            |             |  |             |      
|                                         |  | Deferred               |        |               | Claims, and |   |         |          |              | Claims and |          |  |          | Net |           |            | Losses, and |              |            | of Deferred |  |             | Other |  |           |  
|                                         |  | Acquisition            |        |               | Loss        |   |         | Unearned |              |            | Benefits |  | Premiums |     |           | Investment |             |              | Settlement |             |  | Policy      |       |  | Operating |   |        | Premiums | 
|                                         |  | Costs                  |        |               | Expenses    |   |         | Premiums |              |            | Payable  |  | Earned   |     |           | Income     |             |              | Expenses   |             |  | Acquisition |       |  | Expenses  |   |        | Written  | 
|                                         |  |                        |        |               |             |   |         |          |              |            |          |  |          |     |           |            |             |              |            |             |  |             |       |  |           |   |        |          | 
|                                         |  |                       
|                                         |  | (Dollars in thousands) |       
|Year ended December 31, 2005             |  | $                      | 11,279 |               |             | $ | 104,870 |          |              | $          | 58,595   |  |          | $   |          |            |             | $            | 26,611     |             |  | $           | 3,558 |  |           | $ | 19,099 |          |  | $ | 6,122 |  |  | $ | 22,940 |  |  | $ | 85,206 | 
|Year ended December 31, 2004             |  | $                      |       |               |             | $ | 95,959  |          |              | $          | 3        |  |          | $   |          |            |             | $            |           |             |  | $           | 278   |  |           | $ |       |          |  | $ |      |  |  | $ | 8,435  |  |  | $ |       | 
|Period from April 3 to December 31, 2003 |  | $                      |       |               |             | $ |        |          |              | $          |         |  |          | $   |          |            |             | $            |           |             |  | $           |      |  |           | $ |       |          |  | $ |      |  |  | $ | 578    |  |  | $ |       | 

F-28



---



##### Table of Contents






SCHEDULE IV

SPECIALTY UNDERWRITERS ALLIANCE,
INC.

REINSURANCE

|                                         |  |                        |        |                |           |   |              |                 |  |               |        |  |                |   |        |  |  |  |   | 
|---------------------------------------- |  | ---------------------- | ------ | -------------- | --------- | - | ------------ | --------------- |  | ------------- | ------ |  | -------------- | - | ------ |  |  |  | - | 
|Column A                                 |  | Column B               |        |                | Column C  |   |              | Column D        |  | Column E      |        |  | Column F       |  
|                                         |  |                        |        |                |           |   |              |                 |  |               |        |  |                |  
|                                         |  |                        |        |                |           |   |              |                 |  | Percentage of |       
|Premiums                                 |  |                        |        | Ceded to Other |           |   | Assumed from |                 |  |               | Amount | 
|Earned                                   |  | Direct Amount          |        |                | Companies |   |              | Other Companies |  | Net Amount    |        |  | Assumed to Net |  
|                                         |  |                        |        |                |           |   |              |                 |  |               |        |  |                |  
|                                         |  |                       
|                                         |  | (Dollars in thousands) |       
|Year ended December 31, 2005             |  | $                      | 32,047 |                |           | $ | 5,436        |                 |  | $             |       |  |                | $ | 26,611 |  |  |  |  | 
|Year ended December 31, 2004             |  | $                      | 9      |                |           | $ | 9            |                 |  | $             |       |  |                | $ |       |  |  |  |  | 
|Period from April 3 to December 31, 2003 |  | $                      |       |                |           | $ |             |                 |  | $             |       |  |                | $ |       |  |  |  |  | 

F-29



---



##### Table of Contents






SCHEDULE V

SPECIALTY UNDERWRITERS ALLIANCE,
INC.

VALUATION AND QUALIFYING ACCOUNTS

|                                                                  |  |                        |       |                          |            |   |            |          |  |                 |       |            |  |   |   |  |  |   |       | 
|----------------------------------------------------------------- |  | ---------------------- | ----- | ------------------------ | ---------- | - | ---------- | -------- |  | --------------- | ----- | ---------- |  | - | - |  |  | - | ----- | 
|                                                                  |  |                        |       |                          |            |   |            |         
|Column A                                                          |  | Column B               |       |                          | Column C   |   |            | Column D |  | Column E        |      
|                                                                  |  |                        |       |                          |            |   |            |          |  |                 |      
|                                                                  |  |                        |       |                          |            |   |            |         
|                                                                  |  |                        |       | Additions (Subtractions) |            |   |            |          | 
|                                                                  |  |                        |       |                          |            |   |            |          | 
|                                                                  |  | Balance at             |       |                          | Charged to |   | Charged to |          |  |                 |       | Balance at | 
|                                                                  |  | Beginning              |       |                          | Costs and  |   | Other      |          |  | Deductions      |       | End of     | 
|                                                                  |  | of Period              |       |                          | Expenses   |   | Accounts   |          |  | Described(1)(2) |       | Period     | 
|                                                                  |  |                        |       |                          |            |   |            |          |  |                 |       |            | 
|                                                                  |  |                       
|                                                                  |  | (Dollars in thousands) |      
|Year ended December 31, 2005
    Deferred tax valuation allowance |  | $                      | 2,961 |                          |            | $ |           |          |  | $               | 6,670 |            |  | $ |  |  |  | $ | 9,631 | 
|Year ended December 31, 2004
    Deferred tax valuation allowance |  | $                      | 196   |                          |            | $ |           |          |  | $               | 2,765 |            |  | $ |  |  |  | $ | 2,961 | 
|Year ended December 31, 2003
    Deferred tax valuation allowance |  | $                      |      |                          |            | $ |           |          |  | $               | 196   |            |  | $ |  |  |  | $ | 196   | 

F-30



---



##### Table of Contents






SCHEDULE VI

SPECIALITY UNDERWRITERS ALLIANCE,
INC.

SUPPLEMENTAL INFORMATION CONCERNING PROPERTY
AND CASUALTY INSURANCE OPERATIONS

|                                         |  |                        |        |              |            |   |              |             |  |          |   |  |          |                   |                   |            |              |   |          |             |          |        |       |             |            |   |            |  |  |          |   |  |  |   |       |  |  |   |       |  |  |   |        |  |  |  |  | 
|---------------------------------------- |  | ---------------------- | ------ | ------------ | ---------- | - | ------------ | ----------- |  | -------- | - |  | -------- | ----------------- | ----------------- | ---------- | ------------ | - | -------- | ----------- | -------- | ------ | ----- | ----------- | ---------- | - | ---------- |  |  | -------- | - |  |  | - | ----- |  |  | - | ----- |  |  | - | ------ |  |  |  |  | 
|                                         |  |                        |        |              |            |   |              |             |  |          |   |  |          |                   |                   |            |              |   |          |             |          |       
|Column A                                 |  | Column B               |        |              | Column C   |   |              | Column D    |  | Column E |   |  | Column F |                   |                   | Column G   |              |   | Column H |             | Column I |        |       | Column J    |            |   | Column K   |  |  |         
|                                         |  |                        |        |              |            |   |              |             |  |          |   |  |          |                   |                   |            |              |   |          |             |          |        |       |             |            |   |            |  |  |         
|                                         |  |                        |        |              |            |   |              |             |  |          |   |  |          |                   |                   |            |              |   |          |             |          |       
|                                         |  |                        |        |              |            |   |              |             |  |          |   |  |          | Claims and Claims |                   |            |              |   |          |             |          |       
|                                         |  |                        |        |              |            |   |              |             |  |          |   |  |          | Adjustment        |                   |            |              |   |          |             |          |       
|                                         |  |                        |        | Reserves for |            |   |              |             |  |          |   |  |          |                   | Expenses Incurred |            |              |   |          |             |          |        |      
|                                         |  |                        |        | Unpaid       |            |   |              |             |  |          |   |  |          |                   | Related to        |            | Amortization |   |          |             |          |        |       |            
|                                         |  |                        |        | Claims and   |            |   | Discount, if |             |  |          |   |  |          |                   |                   |            | of Deferred  |   |          | Paid Claims |          |        |       |             |           
|                                         |  | Deferred               |        |              | Claims     |   |              | any,        |  |          |   |  |          | Net               |                   |            | (1)          |   |          | (2)         |          | Policy |       |             | and Claims |   |            |  |  |         
|                                         |  | Acquisition            |        |              | Adjustment |   |              | Deducted in |  | Unearned |   |  | Earned   |                   |                   | Investment |              |   | Current  |             |          | Prior  |       | Acquisition |            |   | Adjustment |  |  | Premiums |   |  | 
|                                         |  | Costs                  |        |              | Expenses   |   |              | Column C    |  | Premiums |   |  | Premiums |                   |                   | Income     |              |   | Year     |             |          | Year   |       | Costs       |            |   | Expenses   |  |  | Written  |   |  | 
|                                         |  |                        |        |              |            |   |              |             |  |          |   |  |          |                   |                   |            |              |   |          |             |          |        |       |             |            |   |            |  |  |          |   |  | 
|                                         |  |                        |        |             
|                                         |  | (Dollars in thousands) |        |              |           
|Year ended December 31, 2005             |  | $                      | 11,279 |              |            | $ | 104,870      |             |  | $        |  |  |          | $                 | 58,595            |            |              | $ | 26,611   |             |          | $      | 3,558 |             |            | $ | 19,099     |  |  | $        |  |  |  | $ | 6,122 |  |  | $ | 3,226 |  |  | $ | 85,206 |  |  |  |  | 
|Year ended December 31, 2004             |  | $                      |       |              |            | $ | 95,959       |             |  | $        |  |  |          | $                 | 3                 |            |              | $ |         |             |          | $      | 278   |             |            | $ |           |  |  | $        |  |  |  | $ |      |  |  | $ |      |  |  | $ |       |  |  |  |  | 
|Period from April 3 to December 31, 2003 |  | $                      |       |              |            | $ |             |             |  | $        |  |  |          | $                 |                  |            |              | $ |         |             |          | $      |      |             |            | $ |           |  |  | $        |  |  |  | $ |      |  |  | $ |      |  |  | $ |       |  |  |  |  | 

F-31



---



##### Table of Contents






SCHEDULE III

POTOMAC INSURANCE COMPANY OF
ILLINOIS

SUPPLEMENTARY INSURANCE INFORMATION

|                                                     |  |                        |     |               |             |   |         |          |              |            |          |  |          |     |           |            |             |              |            |             |  |             |       |  |           |   |       |          |  |   |       |  |  |   |     |  |  |   |        |  
|---------------------------------------------------- |  | ---------------------- | --- | ------------- | ----------- | - | ------- | -------- | ------------ | ---------- | -------- |  | -------- | --- | --------- | ---------- | ----------- | ------------ | ---------- | ----------- |  | ----------- | ----- |  | --------- | - | ----- | -------- |  | - | ----- |  |  | - | --- |  |  | - | ------ | -
|Column A                                             |  | Column B               |     |               | Column C    |   |         | Column D |              |            | Column E |  | Column F |     |           | Column G   |             |              | Column H   |             |  | Column I    |       |  | Column J  |   |       | Column K | 
|                                                     |  |                        |     |               |             |   |         |          |              |            |          |  |          |     |           |            |             |              |            |             |  |             |       |  |           |   |       |          | 
|                                                     |  |                        |     | Future Policy |             |   |         |          |              |            |          |  |          |     |           |            |             |              |            |             | 
|                                                     |  |                        |     | Benefits,     |             |   |         |          |              |            |          |  |          |     | Benefits, |            |             |              |            |             |  |            
|                                                     |  |                        |     | Losses,       |             |   |         |          | Other Policy |            |          |  |          |     | Claims,   |            |             | Amortization |            |             |  |             |      
|                                                     |  | Deferred               |     |               | Claims, and |   |         |          |              | Claims and |          |  |          | Net |           |            | Losses, and |              |            | of Deferred |  |             | Other |  |           |  
|                                                     |  | Acquisition            |     |               | Loss        |   |         | Unearned |              |            | Benefits |  | Premiums |     |           | Investment |             |              | Settlement |             |  | Policy      |       |  | Operating |   |       | Premiums | 
|                                                     |  | Costs                  |     |               | Expenses    |   |         | Premiums |              |            | Payable  |  | Earned   |     |           | Income     |             |              | Expenses   |             |  | Acquisition |       |  | Expenses  |   |       | Written  | 
|                                                     |  |                        |     |               |             |   |         |          |              |            |          |  |          |     |           |            |             |              |            |             |  |             |       |  |           |   |       |          | 
|                                                     |  |                       
|                                                     |  | (Dollars in thousands) |    
|Period from January 1, 2004 to
    November 23, 2004 |  | $                      |    |               |             | $ |        |          |              | $          |         |  |          | $   |          |            |             | $            |           |             |  | $           | 1,329 |  |           | $ |      |          |  | $ |      |  |  | $ | 45  |  |  | $ | (4,823 | )
|Year ended December 31, 2003                         |  | $                      | 674 |               |             | $ | 154,287 |          |              | $          | 4,835    |  |          | $   |          |            |             | $            | 9,961      |             |  | $           | 2,218 |  |           | $ | 6,821 |          |  | $ | 1,843 |  |  | $ | 939 |  |  | $ | 8,886  |  

F-32



---



##### Table of Contents






SCHEDULE IV

POTOMAC INSURANCE COMPANY OF
ILLINOIS

REINSURANCE

|                                                     |  |                        |       |          |           |   |        |                 |  |   |               |  |  |                |       |  |  |  |     |  
|---------------------------------------------------- |  | ---------------------- | ----- | -------- | --------- | - | ------ | --------------- |  | - | ------------- |  |  | -------------- | ----- |  |  |  | --- | -
|Column A                                             |  | Column B               |       |          | Column C  |   |        | Column D        |  |   | Column E      |  |  | Column F       |      
|                                                     |  |                        |       |          |           |   |        |                 |  |   |               |  |  |                |      
|                                                     |  |                        |       | Ceded to |           |   |        |                 |  |   | Percentage of | 
|Premiums                                             |  | Gross                  |       |          | Other     |   |        | Assumed from    |  |   | Net           |  |  | Amount         |      
|Earned                                               |  | Amount                 |       |          | Companies |   |        | Other Companies |  |   | Amount        |  |  | Assumed to Net |      
|                                                     |  |                        |       |          |           |   |        |                 |  |   |               |  |  |                |      
|                                                     |  |                       
|                                                     |  | (Dollars in thousands) |      
|Period from January 1, 2004 to
    November 23, 2004 |  | $                      | 667   |          |           | $ | (667   | )               |  | $ |              |  |  | $              |      |  |  |  |    |  
|Year ended December 31, 2003                         |  | $                      | 1,597 |          |           | $ | (1,597 | )               |  | $ | 9,961         |  |  | $              | 9,961 |  |  |  | 100 | %

F-33



---



##### Table of Contents






SCHEDULE V

POTOMAC INSURANCE COMPANY OF
ILLINOIS

VALUATION AND QUALIFYING ACCOUNTS

|                                            |  |                        |     |                          |            |   |          |            |  |                 |   |            |        |   |     |   |  |   |     | 
|------------------------------------------- |  | ---------------------- | --- | ------------------------ | ---------- | - | -------- | ---------- |  | --------------- | - | ---------- | ------ | - | --- | - |  | - | --- | 
|                                            |  |                        |     |                          |            |   |          |           
|                                            |  | Column B               |     |                          | Column C   |   | Column D |            |  | Column E        |  
|                                            |  |                        |     |                          |            |   |          |            |  |                 |  
|                                            |  |                        |     |                          |            |   |          |           
|Column A                                    |  |                        |     | Additions (Subtractions) |            |   |          |           
|                                            |  |                        |     |                          |            |   |          |           
|                                            |  | Balance at             |     |                          | Charged to |   |          | Charged to |  |                 |   | Balance at |       
|                                            |  | Beginning              |     |                          | Costs and  |   |          | Other      |  | Deductions      |   |            | End of |  
|                                            |  | of Period              |     |                          | Expenses   |   |          | Accounts   |  | Described(1)(2) |   |            | Period |  
|                                            |  |                        |     |                          |            |   |          |            |  |                 |   |            |        |  
|                                            |  |                       
|                                            |  | (Dollars in thousands) |    
|Year ended December 31, 2003                |  |                        |     |                          |            |   |          |            |  |                 |   |            |        |   |     |   |  |   |     | 
|Allowance for insurance balances receivable |  | $                      | 340 |                          |            | $ | (167     | )          |  | $               |  |            |        | $ | (58 | ) |  | $ | 115 | 
|Allowance for reinsurance recoverable       |  |                        | 83  |                          |            |   |         |            |  |                 |  |            |        |   | (13 | ) |  |   | 70  | 



---



|    |                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------
|(1) | As of January 1, 2004 with its withdrawal
    from the Pool, Potomac transferred its valuation and qualifying
    accounts to OneBeacon.
|   
|(2) | Represent write-offs of balances receivables.                                                                                           

F-34



---



##### Table of Contents






SCHEDULE VI

POTOMAC INSURANCE COMPANY OF
ILLINOIS

SUPPLEMENTAL INFORMATION FOR PROPERTY AND
CASUALTY INSURANCE UNDERWRITERS

|                                                     |  |                        |     |              |            |   |              |             |  |   |          |     |  |                   |                   |  |            |              |             |          |     |             |          |        |  |             |            |  |            |   |     |          |  |   |       |  |  |   |        |  |  |   |        |  
|---------------------------------------------------- |  | ---------------------- | --- | ------------ | ---------- | - | ------------ | ----------- |  | - | -------- | --- |  | ----------------- | ----------------- |  | ---------- | ------------ | ----------- | -------- | --- | ----------- | -------- | ------ |  | ----------- | ---------- |  | ---------- | - | --- | -------- |  | - | ----- |  |  | - | ------ |  |  | - | ------ | -
|Column                                               |  |                        |     |              |            |   |              |             |  |   |          |     |  |                   |                   |  |            |              |             |         
|A                                                    |  | Column B               |     |              | Column C   |   |              | Column D    |  |   | Column E |     |  | Column F          |                   |  | Column G   |              |             | Column H |     |             | Column I |        |  | Column J    |            |  | Column K   |  
|                                                     |  |                        |     |              |            |   |              |             |  |   |          |     |  |                   |                   |  |            |              |             |          |     |             |          |        |  |             |            |  |            |  
|                                                     |  |                        |     |              |            |   |              |             |  |   |          |     |  |                   |                   |  |            |              |             |         
|                                                     |  |                        |     |              |            |   |              |             |  |   |          |     |  | Claims and Claims |                   |  |            |              |             |          |    
|                                                     |  |                        |     |              |            |   |              |             |  |   |          |     |  | Adjustment        |                   |  |            |              |             |          |    
|                                                     |  |                        |     | Reserves for |            |   |              |             |  |   |          |     |  |                   | Expenses Incurred |  |            |              |             |          |     |            
|                                                     |  |                        |     | Unpaid       |            |   |              |             |  |   |          |     |  |                   | Related to        |  |            | Amortization |             |          |     |             |         
|                                                     |  |                        |     | Claims and   |            |   | Discount, if |             |  |   |          |     |  |                   |                   |  |            |              | of Deferred |          |     | Paid Claims |          |        | 
|                                                     |  | Deferred               |     |              | Claims     |   |              | any,        |  |   |          |     |  |                   | Net               |  |            | (1)          |             |          | (2) |             |          | Policy |  |             | and Claims |  |            |  
|                                                     |  | Acquisition            |     |              | Adjustment |   |              | Deducted in |  |   | Unearned |     |  | Earned            |                   |  | Investment |              |             | Current  |     |             | Prior    |        |  | Acquisition |            |  | Adjustment |   |     | Premiums | 
|                                                     |  | Costs                  |     |              | Expenses   |   |              | Column C    |  |   | Premiums |     |  | Premiums          |                   |  | Income     |              |             | Year     |     |             | Year     |        |  | Costs       |            |  | Expenses   |   |     | Written  | 
|                                                     |  |                        |     |              |            |   |              |             |  |   |          |     |  |                   |                   |  |            |              |             |          |     |             |          |        |  |             |            |  |            |   |     |          | 
|                                                     |  |                       
|                                                     |  | (Dollars in thousands) |    
|Period from January 1, 2004 to
    November 23, 2004 |  | $                      |    |              |            | $ |             |             |  | $ |         |     |  | $                 |                  |  |            | $            |            |          |     | $           | 1,329    |        |  | $           |           |  |            | $ |    |          |  | $ |      |  |  | $ |       |  |  | $ | (4,823 | )
|Year ended December 31, 2003                         |  | $                      | 674 |              |            | $ | 154,287      |             |  | $ | 190      | (1) |  | $                 | 4,835             |  |            | $            | 9,961       |          |     | $           | 2,218    |        |  | $           | 6,086      |  |            | $ | 735 |          |  | $ | 1,843 |  |  | $ | 10,995 |  |  | $ | 8,886  |  



---



|    |                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The amounts shown exclude unamortized fair value
    adjustments to reserves of $0, $578, and $821, for unpaid claims
    and claims adjustment expenses made in purchase accounting as a
    result of White Mountains purchase of Potomac for the
    period from January 1, 2004 through November 1, 2004
    and the year ended December 31, 2003.

F-35



---



##### Table of Contents





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: | Chief Executive Officer

Date: March 6, 2006

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. SmithCourtney C. Smith         |  | Chairman, Chief Executive Officer And Director
    (Principal Executive Officer)                                    |  | March 6, 2006
|                                              
|/s/ Peter E. JokielPeter E. Jokiel             |  | Executive Vice President,
    Chief Financial Officer and Director (Principal Financial and
    Accounting Officer) |  | March 6, 2006
|                                              
|/s/ Robert E. DeanRobert E. Dean               |  | Director                                                                                                            |  | March 6, 2006
|                                              
|/s/ Raymond C. GrothRaymond C. Groth           |  | Director                                                                                                            |  | March 6, 2006
|                                              
|/s/ Paul A. PhilpPaul A. Philp                 |  | Director                                                                                                            |  | March 6, 2006
|                                              
|/s/ Robert H. WhiteheadRobert H. Whitehead     |  | Director                                                                                                            |  | March 6, 2006
|                                              
|/s/ Russell E. ZimmermannRussell E. Zimmermann |  | Director                                                                                                            |  | March 6, 2006