##### 



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 1934For the fiscal year ended
    December 31, 2006ORo

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
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ
  one-for-one
  DOCUMENTS
    INCORPORATED BY REFERENCE




---



##### 



SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
  TABLE OF
    CONTENTS
  PagePART IITEM 1.


Business


3ITEM 1A.


Risk
    Factors


15ITEM 1B.


Unresolved Staff
    Comments


23ITEM 2.


Properties


23ITEM 3.


Legal
    Proceedings


23ITEM 4.


Submission of
    Matters to a Vote of Security Holders


23PART IIITEM 5.


Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


23ITEM 6.


Selected Financial
    Data


24ITEM 7.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


28ITEM 7A.


Quantitative and
    Qualitative Disclosures About Market Risk


41ITEM 8.


Financial
    Statements and Supplementary Data


41ITEM 9.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


42ITEM 9A.


Controls and
    Procedures


42ITEM 9B.


Other
    Information


42PART IIIITEM 10.


Directors,
    Executive Officers and Corporate Governance


42ITEM 11.


Executive
    Compensation


43ITEM 12.


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


43ITEM 13.


Certain
    Relationships and Related Transactions, and Director
    Independence


43ITEM 14.


Principal
    Accountant Fees and Services


43PART IVITEM 15.


Exhibits and
    Financial Statement Schedules


43Index to Financial
    Statements and Schedules


F-1  2




---



##### 



FORWARD-LOOKING
    STATEMENTS
  Form 10-K
     PART I  ITEM 1.
    BUSINESS  Overview
       3




---



##### 



Form 10-K, Form 10-Q, Form 8-K,
  (888) 782-4672.
  Industry
    Historical
    Industry Model
   4




---



##### 



Our
    Model
      
    Equity Ownership.  Each partner agent must
    purchase shares of our non-voting Class B Common Stock. The
    Class B Common Stock 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. Class B Common Stock
    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 Common Stock. 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 fair market value the partner agents Class B
    Common Stock. 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. 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 specific partner agents. Our
    partner agents may have one or a number of their programs with
    us. We expect 5




---



##### 



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
    AEON
    Insurance Group, Inc.
  
    Towing and Recovery Program.  This program
    services professional towers. The program offers policies that
    include property, inland marine, general liability, garage and
    automobile coverages on a national basis.  American
    Patriot Insurance Agency, Inc.
  
    Roofing Contractors Program.  This program
    services small to medium roofers. The program provides
    commercial general liability and commercial auto liability both
    directly and through retail brokers. Currently, the program
    operates in the central and southern regions.  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
    $1 million in payroll expenses and $3 million 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.
    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).
    Local and Intermediate Trucking Program.  This
    program provides commercial auto, general liability, and garage
    coverages for the specialized local and intermediate trucking
    industries. The program, which began in March 2006, will
    initially focus on California business with the potential for
    expansion.  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 operates in twelve
    southeastern states, and will look to expand into additional
    states in the future. 6




---



##### 




    Small Workers Compensation Program.  This
    program provides workers compensation to small businesses
    with less than $15,000 in premium with relatively low hazard
    grades (low exposure to loss). The program, which began in
    January 2007, will initially focus on Texas, Nevada and Illinois
    and will likely expand to additional states in the future.  Risk
    Transfer Holdings, Inc.
  
    PEO Program.  Professional Employer
    Organizations, or PEOs, take on the employment responsibilities
    of human resources, benefits administration and employee related
    insurance needs, while allowing their clients to focus on their
    core business objectives. This program provides workers
    compensation. While the risks are aggregated, each account is
    underwritten and priced individually in this program. Currently,
    the program operates in California, Florida, Georgia, Alabama,
    South Carolina, Texas, Illinois, Michigan and Nevada.  Specialty
    Risk Solutions, LLC
  
    Public Entities Program.  This program provides
    general liability insurance to public entity clients, including
    schools, other educational institutions and municipalities.
    Currently, the program operates in California and Florida.  Reinsurance
      Underwriting
      
    We carefully scrutinize prospective partner
    agents.  We contract only with agents that we
    believe have strong reputations and significant specialized
    knowledge of the market they serve. Our partner agents possess
    extensive knowledge in their specialties. We grant partner
    agents 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.
    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 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. 7




---



##### 




    We have established a partner agent advisory
    process.  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 utilize a centralized policy processing system to control
    data.  As part of our infrastructure strategy, we
    implemented our technology plans for policy administration which
    allows us to more efficiently quote, issue and manage insurance
    polices while controlling data from the first entry into the
    system. Our system provides transmission of account information
    from the retail agents to the partner agents and us. We are in
    the process of customizing the system for each partner agent and
    customer segment. The system allows our underwriters to provide
    approval of submissions at the point of entry using
    predetermined underwriting, pricing and coverage guidelines. Our
    underwriters oversee the underwriting process by having access
    to the system as the agents enter information and approve
    quotes. In selected circumstances, the system receives and
    approves online quotes with minimal underwriter intervention,
    based on predetermined underwriting criteria. Data used to
    underwrite risk and to handle claims is controlled by us rather
    than controlled by agents, third party administrators or other
    intermediaries.
    We have audit and operational review
    processes.  Our audits focus on rate adequacy,
    line of business analysis, and authority and compliance
    guidelines. Our program reviews focus on premium volume and
    profitability of our individual partner agents and is led by our
    program teams.  Monitoring
    Rate Adequacy
    Program
    Performance Management
    Claims
    Control
    Information
    Technology
     8




---



##### 



Investment
    Philosophy
    Competition
  non-U.S. insurers
    Employees
    Ratings
    Regulation
    General.
   9




---



##### 



and/or
      Insurance Regulation Concerning Change or Acquisition of
    Control.
  Regulation of Dividends and Other Payments from Our Operating
    Subsidiary.
   10




---



##### 



30-day 12-month
    Statutory Surplus and Capital.
  Risk-Based Capital.
  
    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.    
    insurer is required to submit a plan for corrective action;
    insurer is subject to examination, analysis and specific
    corrective action;
    regulators may place insurer under regulatory control; and
    regulators are required to place insurer under regulatory
    control.  Accreditation
   11




---



##### 



NAIC IRIS
    Ratios
    Investment
    Regulation
    Guaranty
    Funds and Assigned Risk Plans
    Credit
    for Reinsurance
    
    if the reinsurer is licensed in the state in which the primary
    insurer is domiciled or, in some instances, in certain states in
    which the primary insurer is licensed;
    if the reinsurer is an accredited or otherwise
    approved reinsurer in the state in which the primary insurer is
    domiciled or, in some instances, in certain states in which the
    primary insurer is licensed;
    in some instances, if the reinsurer (1) is domiciled in a
    state that is deemed to have substantially similar credit for
    reinsurance standards as the state in which the primary insurer
    is domiciled and (2) meets financial requirements; or
    if none of the above 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
   12




---



##### 



Federal
    Regulation
        sub-limit
   13




---



##### 



Legislative
    and Regulatory Proposals
    Executive
    Officers of the Registrant
    Name

Age

PositionCourtney C. Smith


59


Chief Executive Officer, President
    and Chairman of the Board of DirectorsPeter E. Jokiel


59


Executive Vice President, Chief
    Financial Officer, Treasurer and DirectorBarry G. Cordeiro


60


Senior Vice President and Chief
    Information OfficerGary J. Ferguson


63


Senior Vice President and Chief
    Claims OfficerScott W. Goodreau


39


Senior Vice President, General
    Counsel, Administration and Corporate Relations, and SecretaryWilliam S. Loder


58


Senior Vice President and Chief
    Underwriting OfficerScott K. Charbonneau


47


Vice President and Chief ActuaryDaniel J. Rohan


50


Vice President and Controller   Courtney C. Smith.
  Peter E. Jokiel.
  Barry G. Cordeiro. 1999-2001,
  Gary J. Ferguson.
 14




---



##### 



Scott W. Goodreau.
  William S. Loder.
  Scott K. Charbonneau.
  Daniel J. Rohan.
  ITEM 1A.
    RISK
    FACTORS  We believe the following risk factors, as well as the other
    information contained in this Annual Report on
    Form 10-K,
    are material to an understanding of our company. Any of the
    following risks as well as other risks and uncertainties
    discussed in this Annual Report on
    Form 10-K
    could have a material adverse effect on our business, financial
    condition, results of operations or prospects and cause the
    value of our stock to decline. Additional risks and
    uncertainties that we are unaware of, or that are currently
    deemed immaterial, also may become important factors that affect
    us.
  We
    have a limited operating history. If we are unable to implement
    our business strategy or operate our business as we currently
    expect, our results may be adversely affected.
    We
    rely on a limited number of partner agents, one of which
    accounts for a substantial portion of business written. 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.
   15




---



##### 



We
    have received a secure category rating of B+ (Good)
    from A.M. Best. A future downgrade in our ratings could
    affect our competitive position with customers, and our rating
    may put us at a disadvantage with higher-rated
    carriers.
      Our
    rating may place us at a competitive disadvantage or cause us to
    incur additional expenses.
    We may
    require additional capital in the future, which may not be
    available on favorable terms or at all.
  start-up
 16




---



##### 



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 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.
    Our
    actual insured losses may be greater than our loss reserves,
    which would negatively impact our financial condition and
    results of operation.
    
    trends in claim frequency and severity;
    changes in operations;
    emerging economic and social trends;
    inflation; and
    changes in the regulatory and litigation environments.   17




---



##### 



We
    compete with a large number of companies in the insurance
    industry for underwriting revenues.
  non-U.S. insurers
    and/or
  If we
    are unable to obtain regulatory approval in a timely manner, our
    ability to generate revenue could be delayed.
    Our
    reliance on retail agents to market our products subjects us to
    their credit risk.
    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.
   18




---



##### 



The
    occurrence of severe catastrophic events may have a material
    adverse effect on us.
    The
    effects of emerging claim and coverage issues on our business
    are uncertain.
    Recent
    federal legislation may negatively affect the business
    opportunities we perceive are available to us in the
    market.
     19




---



##### 



sub-limit
  We may
    be subject to losses if OneBeacon fails to honor its reinsurance
    obligations to us.
          A
    significant amount of our invested assets is subject to market
    volatility, and we may be adversely affected by interest rate
    changes.
       20




---



##### 



Our
    holding company structure and certain regulatory and other
    constraints affect our ability to pay dividends and make other
    payments.
          30-day 12-month
  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.
    
    approval of policy forms and premium rates;
    standards of solvency, including risk-based capital measurements;
    licensing of insurers and their agents;
    restrictions on the nature, quality and concentration of
    investments;
    restrictions on the ability of our insurance company subsidiary
    to pay dividends to us;
    restrictions on transactions between insurance company
    subsidiaries and their affiliates;
    restrictions on the size of risks insurable under a single
    policy; 21




---



##### 




    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.          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.
   22




---



##### 



ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS    ITEM 2.
    PROPERTIES    ITEM 3.
    LEGAL
    PROCEEDINGS    ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS   PART II  ITEM 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY SECURITIES  Common Stock.
 23




---



##### 



Period

High


Low2006First Quarter

$
6.80


$
5.90Second Quarter

$
6.87


$
6.18Third Quarter

$
8.95


$
6.39Fourth Quarter

$
10.38


$
8.322005First Quarter

$
10.27


$
8.92Second Quarter

$
9.11


$
7.55Third Quarter

$
10.25


$
8.06Fourth Quarter

$
8.25


$
5.952004November 23, 2004 through
    December 31, 2004

$
9.69


$
9.25       Repurchases of Common Stock.
    ITEM 6.
    SELECTED
    FINANCIAL DATA  SuccessorYear Ended December 31,2006


2005


2004(In thousands, except for per share data)Results of operationsEarned premiums

$
110,891


$
26,611


$
Net investment income


6,087



3,558



278Net realized gain/(loss)


275



(4
)


2Total revenues


117,253



30,165



280Net income (loss)


8,408



(17,996
)


(8,155
)Net income (loss) per
    shareBasic

$
.55


$
(1.22
)

$
(4.59
)Diluted

$
.55


$
(1.22
)

$
(4.59
)   24




---



##### 



PredecessorPeriod fromJanuary 1to November 23,


Year Ended December 31,2004


2003


2002(In thousands, except for per share data)Results of operationsEarned premiums

$



$
9,961


$
13,518Net investment income


1,329



2,128



1,580Total revenues


1,719



11,941



15,915Net income (loss)


650



1,359



3,721   SuccessorAs of December 31,2006


2005


2004(In thousands, except per share data)Financial conditionInvestments

$
164,058


$
102,991


$
97,835Total assets


363,297



277,163



217,231Total liabilities


249,315



176,348



98,301Shareholders equity


113,982



100,815



118,930Book value dataBook value per share

$
7.42


$
6.76


$
8.09Tangible book value per share

$
6.72


$
6.04


$
7.36   PredecessorAs of December 31,2003


2002(In thousands, except per share data)Financial conditionInvestments

$
49,113


$
30,087Total assets


204,355



246,255Total liabilities


161,850



205,084Shareholders equity


42,505



41,171  25




---



##### 



Successor (Specialty Underwriters Alliance Inc.)($000)

Year Ended December 31,Y/E
    12/31

1996


1997


1998


1999


2000


2001


2002


2003


2004


2005


2006LIABILITY FOR UNPAID
    CLAIMS & CLAIM ADJ. EXPGROSS LIABILITY






































18,134



69,608REINSURANCE
    RECOVERABLE






































2,261



9,384NET LIABILITY






































15,873



60,224DISCOUNT (IN NET
    LIABILITIES)






































192



1,016NET LIABILITY
    (UNDISCOUNTED)






































16,065



61,240   Successor (Specialty Underwriters Alliance Inc.)($000)

Year Ended December 31,Y/E
    12/31

1996


1997


1998


1999


2000


2001


2002


2003


2004


2005CUMULATIVE PAID AS OF:1 YEAR LATER






































5,3342 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.)($000)

Year Ended December 31,Y/E
    12/31

1996


1997


1998


1999


2000


2001


2002


2003


2004


2005


2006RE-ESTIMATED LIABILITY AS
    OF:END OF YEAR






































16,065



61,2401 YEAR LATER






































15,1762 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






































889% REDUNDANCY (DEFICIENCY)
    REPORTED AS OF:1 YEAR LATER






































62 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


  26




---



##### 



Direct Basis ($000)

Predecessor (Potomac) Year Ended December 31,Y/E
    12/31

1996


1997


1998


1999


2000


2001


2002


2003


2004


2005


2006LIABILITY FOR UNPAID
    CLAIMS & CLAIM ADJ. EXP


115,880



131,700



160,244



235,376



297,408



255,128



176,069



140,542



96,196



86,736



71,592CUMULATIVE PAID AS OF:1 YEAR LATER


53,647



62,659



81,545



98,963



86,980



76,958



58,815



40,169



26,653



14,9432 YEARS LATER


84,611



108,284



128,261



163,656



170,546



134,008



98,730



66,724



41,5963 YEARS LATER


112,193



131,940



163,498



220,344



227,597



172,991



125,152



81,6544 YEARS LATER


124,855



151,753



191,357



261,115



266,579



199,328



140,0775 YEARS LATER


135,029



166,365



212,314



291,524



292,916



214,2226 YEARS LATER


143,667



176,712



224,957



311,462



307,8107 YEARS LATER


148,722



183,164



236,584



323,4278 YEARS LATER


153,115



188,880



243,2029 YEARS LATER


156,013



192,90210 YEARS LATER


158,842   Predecessor (Potomac) Year Ended December 31,Direct Basis ($000) Y/E
    12/31

1996


1997


1998


1999


2000


2001


2002


2003


2004


2005


2006RE-ESTIMATED LIABILITY AS
    OF:END OF YEAR


115,880



131,700



160,244



235,376



297,408



255,128



176,069



140,542



96,196



86,736



71,5921 YEAR LATER


118,878



145,067



211,516



326,426



326,203



247,629



198,858



136,237



113,389



86,5352 YEARS LATER


127,693



184,404



272,353



359,245



320,706



270,997



194,561



153,388



113,1893 YEARS LATER


158,274



222,057



279,420



350,765



344,771



267,512



211,738



153,1734 YEARS LATER


181,078



221,608



266,482



366,736



342,982



284,706



211,4595 YEARS LATER


179,581



209,018



273,463



371,520



358,428



284,4336 YEARS LATER


168,994



212,266



273,308



384,034



358,2647 YEARS LATER


169,519



211,532



282,360



382,0018 YEARS LATER


171,203



217,864



276,2659 YEARS LATER


175,067



207,96510 YEARS LATER


164,539RED (DEF) Dec 2004


(48,659
)


(76,266
)


(116,021
)


(146,625
)


(60,856
)


(29,305
)


(35,391
)


(12,631
)


(16,993
)


201



% REDUNDANCY (DEFICIENCY)
    REPORTED AS OF:1 YEAR LATER


(3
)


(10
)


(32
)


(39
)


(10
)


3



(13
)


3



(18
)


2 YEARS LATER


(10
)


(40
)


(70
)


(53
)


(8
)


(6
)


(11
)


(9
)


(18
)3 YEARS LATER


(37
)


(69
)


(74
)


(49
)


(16
)


(5
)


(20
)


(9
)4 YEARS LATER


(56
)


(68
)


(66
)


(56
)


(15
)


(12
)


(20
)5 YEARS LATER


(55
)


(59
)


(71
)


(58
)


(21
)


(11
)6 YEARS LATER


(46
)


(61
)


(71
)


(63
)


(20
)7 YEARS LATER


(46
)


(61
)


(76
)


(62
)8 YEARS LATER


(48
)


(65
)


(72
)9 YEARS LATER


(51
)


(58
)10 YEARS LATER


(42
)  27




---



##### 



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
      start-up
     28




---



##### 



Results
    of Operations
    PercentageChangeYear Ended December 31,


2006 vs.2006


2005


2004


2005(Dollars in millions)Results of operationsGross written premiums

$
153.2


$
90.6


$




69.1
%Net written premiums


142.1



85.2







66.8
%Earned premiums


110.9



26.6







316.9
%Net investment income


6.1



3.6



0.3



69.4
%Net realized gain (loss)

$
0.3











*Total revenues

$
117.3


$
30.2


$
0.3



288.4
%Net loss and loss adjustment
    expense

$
62.7


$
19.1


$




228.3
%Amortization of deferred
    acquisition costs


25.6



6.1







319.7
%Service company fees






8.8



4.6



*Other operating expenses


20.3



14.2



3.8



43.0
%Total expenses

$
108.6


$
48.2


$
8.4



125.3
%Pre-tax income

$
8.7


$
(18.0
)

$
(8.1
)


*Federal income tax (expense)


(0.3
)










*Net income (loss)

$
8.4


$
(18.0
)

$
(8.1
)


*Net income(loss) per
    shareBasic and diluted

$
0.55


$
(1.22
)

$
(4.59
)


*Average common shares outstanding
    (basic and diluted)


15,211



14,774



1,779



*     *
    
    Not meaningful  Year
    Ended December 31, 2006 Compared to the Year Ended
    December 31, 2005
             29




---



##### 



2006


2005Percentage of





Percentage ofGross Written


Gross Written


Gross Written


Gross WrittenPremium


Premium


Premium


Premium(Dollars in millions)Risk Transfer Holdings, Inc.

$
81.4



53.1
%

$
50.1



55.3
%American Team Managers


31.7



20.7
%


22.1



24.4
%AEON Insurance Group, Inc.


21.8



14.2
%


11.0



12.1
%Appalachian Underwriters,
    Inc.


14.5



9.5
%


0.4



0.5
%Specialty Risk Solutions, LLC


2.0



1.3
%


7.0



7.7
%American Patriot Insurance
    Agency, Inc.


1.5



1.0
%







%Other


0.3



0.2
%







%Total

$
153.2



100.0
%

$
90.6



100.0
%  30




---



##### 



2006


2005Percentage of





Percentage ofGross Written


Gross Written


Gross Written


Gross WrittenPremium


Premium


Premium


Premium(Dollars in millions)Florida

$
58.5



38.2
%

$
38.6



42.6
%California


47.4



30.9
%


35.7



39.4
%Other States


47.3



30.9
%


16.3



18.0
%Total

$
153.2



100.0
%

$
90.6



100.0
%     2006


2005Percentage of





Percentage ofGross Written


Gross Written


Gross Written


Gross WrittenPremium


Premium


Premium


Premium(Dollars in millions)Workers compensation

$
89.3



58.3
%

$
62.3



68.8
%General liability


35.8



23.4
%


10.7



11.8
%Commercial automobile


25.5



16.6
%


9.4



10.4
%All other


2.6



1.7
%


8.2



9.0
%Total

$
153.2



100.0
%

$
90.6



100.0
%       For the Year EndedDecember 31,2006


2005Gross premiums written

$
153.2


$
90.6Net premiums earned

$
110.9


$
26.6Net loss and loss adjustment
    expense ratio


56.5
%


71.8
%Ratio of amortization of deferred
    acquisition expense to earned premiums


23.1
%


23.0
%Ratio of all other expenses to
    gross written premiums


13.2
%


25.3
%  31




---



##### 



Loss and Loss AdjustmentExpense Ratio2006


2005General liability


45.0
%


43.6
%Workers compensation


56.6
%


69.0
%Commercial automobile


76.6
%


69.7
%All other


78.2
%


84.8
%Total


57.2
%


66.7
%   Year
    Ended December 31, 2005 Compared to the Year Ended
    December 31, 2004 and for Potomac Insurance Company of
    Illinois (Predecessor) for the Period from January 1, 2004
    to November 23, 2004
    start-up
    start-up
     32




---



##### 



Liquidity
    and Capital Resources
      Cash
    Flows
    Year Ended December 31,2006


2005


2004(Dollars in millions)Cash and cash equivalents provided
    by (used in)Operating activities

$
60.3


$
8.4


$
(8.0
)Investing activities


(66.4
)


(13.6
)


(110.0
)Financing activities


3.1



1.5



126.7Change in cash and cash equivalents

$
(3.0
)

$
(3.7
)

$
8.8   start-up
       33




---



##### 



Fixed
    Maturity Investments
      Capital
    Requirements
    start-up
  Off
    Balance Sheet Arrangements
   34




---



##### 



Contractual
    Obligations
    Payment Due by PeriodLess Than


1-3


3-5


More ThanTable of Contractual Obligations

Total


1 Year


Years


Years


5 Years(Dollars in thousands)Long-Term Debt Obligations

$



$



$



$



$
Capital Lease Obligations


















Operating Lease Obligations


8,758



353



1,155



1,252



5,998Purchase Obligations


















Other Long-Term Liabilities
    Reflected on the Registrants Balance Sheet under GAAP


















Loss & Loss Adjustment
    Expense Reserves  SUA Insurance Company


69,608



18,531



22,269



9,535



19,273Loss & Loss Adjustment
    Expense Reserves  Potomac Insurance Company of
    Illinois(1)


71,592



19,254



27,732



15,215



9,391Total Loss & Loss
    Adjustment Expense Reserves


141,200



37,785



50,001



24,750



28,664Total Contractual Obligations

$
149,958


$
38,138


$
51,156


$
26,002


$
34,662     (1)
    
    On November 23, 2004, Specialty Underwriters
    Alliance, Inc. acquired Potomac and subsequently renamed the
    company SUA Insurance Company. Prior to the acquisition, Potomac
    entered into a transfer and assumption agreement with OneBeacon,
    whereby all of its liabilities existing as of the acquisition,
    including all direct liabilities under existing insurance
    policies, were ceded to and assumed by OneBeacon. We will not
    experience any gains or losses with respect to such legacy
    policies unless OneBeacon fails to honor its reinsurance
    obligation. To date, OneBeacon continues to handle, adjudicate
    and pay all claims that have arisen from such legacy policies.    
    Long-Term Debt Obligationmeans: (i) a
    payment obligation (included in the Companys consolidated
    financial statements) under long-term borrowings referenced in
    FASB Statement of Financial Accounting Standards No. 47,
    Disclosure of Long-Term Obligations, (March 1981),
    as may be modified or supplemented, and (ii) interest
    payment obligations related to such long-term borrowings.
    Capital Lease Obligationmeans a payment
    obligation under a lease classified as a capital lease pursuant
    to FASB Statement of Financial Accounting Standards No. 13,
    Accounting for Leases, (November 1976), as may be
    modified or supplemented.
    Operating Lease Obligationmeans a payment
    obligation under a lease classified as an operating lease and
    disclosed pursuant to FASB Statement of Financial Accounting
    Standards No. 13, Accounting for Leases,
    (November 1976), as may be modified or supplemented. All
    operating lease obligations are for facilities.
    Purchase Obligationmeans an agreement to
    purchase goods or services that is enforceable and legally
    binding on the registrant that specifies all significant terms,
    including: fixed or minimum quantities to be purchased; fixed,
    minimum or variable price provisions; and the approximate timing
    of the transaction. This table does not include our accounts
    payable reflected in our audited consolidated balance sheet data
    that are included in our consolidated financial statements
    contained elsewhere in this report.
    Loss & Loss Adjustment Expense Reservesdo not have a contractual maturity date and as discussed
    herein are subject to change due to a wide variety of factors
    and cannot be predicted with certainty. Actual future loss
    payments may differ materially from the current estimates shown
    in the table above. 35




---



##### 



Related
    Party Transactions
    Critical
    Accounting Policies and Estimates
      Premium
    Income
    Investments
  available-for-sale Available-for-sale
  available-for-sale
    Deferred
    Policy Acquisition Costs
   36




---



##### 



Intangible
    Assets
    Losses,
    Claims and Settlement Expenses
     37




---



##### 



December 31, 2006


December 31, 2005Case


IBNR


Total


Case


IBNR


Total(Dollars in thousands)Gross ReservesWorkers compensation

$
13,026


$
30,922


$
43,948


$
5,349


$
7,596


$
12,945General liability


1,173



8,513



9,686



29



3,151



3,180Auto liability


4,750



3,998



8,748



894



730



1,624Other


2,613



4,613



7,226



206



179



385SUA Insurance Company (SUA)


21,562



48,046



69,608



6,478



11,656



18,134Potomac Insurance Company of
    Illinois(1)


59,132



12,460



71,592



70,409



16,327



86,736Total gross reported loss and loss
    adjustment expense reserves


80,694



60,506



141,200



76,887



27,983



104,870Ceded ReservesSUA ceded reinsurance recoverables


2,221



7,163



9,384



774



1,487



2,261Potomac Insurance Company of
    Illinois(1)


59,132



12,460



71,592



70,409



16,327



86,736Total ceded loss and loss
    adjustment expense reserves


61,353



19,623



80,976



71,183



17,814



88,997Total net loss and loss adjustment
    expense reserves

$
19,341


$
40,883


$
60,224


$
5,704


$
10,169


$
15,873     (1)
    
    On November 23, 2004, Specialty Underwriters
    Alliance, Inc. acquired Potomac, and subsequently renamed the
    company SUA Insurance Company. Prior to the acquisition, Potomac
    entered into a transfer and assumption agreement with OneBeacon,
    whereby all of its liabilities existing as of the acquisition,
    including all direct liabilities under existing insurance
    policies, were ceded to and assumed by OneBeacon. We will not
    experience any gains or losses with respect to such legacy
    policies unless OneBeacon fails to honor its reinsurance
    obligation. To date, OneBeacon continues to handle, adjudicate
    and pay all claims that have arisen from such legacy policies.  Workers
    compensation
      
    mortality trends of injured workers with lifetime benefits and
    medical treatment or dependents entitled to survivor benefits;
    claim handling philosophies;
    state workers compensation benefit laws and reform
    initiatives;
    mix between indemnity and medical-type claims;
    future wage
    and/or
    medical inflation; and 38




---



##### 




    costs of medical treatments, including prescription drugs and
    underlying fee schedules, and use of preferred provider networks
    and other medical cost containment practices.  General
    liability
      
    claim handling philosophies;
    policy provisions or court interpretations of such provisions;
    legal environment, such as theories of liability, amount of jury
    awards, propensity to sue, statutes of limitations, tort law,
    and settlement patterns;
    large losses resulting from individual accounts or unique
    occurrences;
    subrogation potential; and
    cost and type of medical treatments.  Commercial
    automobile liability
      
    claim handling philosophies;
    policy provisions or court interpretations of such provisions;
    legal environment, such as theories of liability, amount of jury
    awards, propensity to sue, statutes of limitations, tort law,
    and settlement patterns;
    large losses resulting from individual accounts or unique
    occurrences;
    subrogation potential; and
    cost and type of medical treatments.  Reserving
    Methodologies
    
    Paid loss development methods use historical loss payments over
    discrete periods of time to estimate losses. Historical paid
    loss development methods assume that the ratio of losses paid to
    ultimate loss in one period to the ratio of losses paid to
    ultimate loss in earlier periods will remain reasonably
    consistent.
    Incurred loss development methods assume that the ratio of
    losses in one period to losses in earlier periods will remain
    reasonably consistent in the future. 39




---



##### 




    Expected loss ratio methods are based on the assumption that
    ultimate losses vary proportionately to premiums. Expected loss
    ratios are typically developed based upon the information used
    in pricing, such as certain industry information and bureau
    analysis, and are multiplied by the total amount of premiums
    earned to calculate ultimate losses.
    Bornhuetter-Ferguson paid and incurred loss development methods
    combine the expected loss ratio method with the traditional
    historical paid and incurred loss development methods.          Gross ReservesLow


Carried


High(Dollars in thousands)Range of Estimates

$
55,562






$
80,939Reserves





$
69,608     Deferred
    Income Taxes
    Recent
    Accounting Pronouncements
   40




---



##### 



ITEM 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    Interest
    Rate Risk
      Estimated Fair


After TaxAssumed Change


Value After


Increase (Decrease)Fair Value


in Relevant


Change in


in Carryingat
    12/31/06


Interest Rate


Interest Rate


Value(Dollars in thousands)Total Investments

$
164,058



100 bp decrease


$
168,896


$
4,83850 bp decrease


$
166,537


$
2,47950 bp increase


$
161,437


$
(2,621
)100 bp increase


$
158,744


$
(5,314
)   Credit
    Risk
      As of December 31, 2006Percent ofBond Ratings

Amount


PortfolioU.S. Government and
    affiliated agency securities

$
88,843



61.5
%AA rated


15,959



11.0
%A rated


39,718



27.5
%Total

$
144,520



100.0
%     ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA  page F-1 Form 10-K.
 41




---



##### 



ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    ITEM 9A.
    CONTROLS
    AND PROCEDURES  Conclusion Regarding the Effectiveness of Disclosure Controls
    and Procedures.
  Rules 13a-15(b) 15d-15(b),
  Changes in Internal Control Over Financial
    Reporting.
  Managements Report on Internal Control Over Financial
    Reporting. Rules 13a-15(f) 15d-15(f).
    Inherent Limitations on Effectiveness of
    Controls.
  ITEM 9B.
    OTHER
    INFORMATION   PART III  ITEM 10.
    DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE   42




---



##### 



ITEM 11.
    EXECUTIVE
    COMPENSATION    ITEM 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS    ITEM 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
    INDEPENDENCE    ITEM 14.
    PRINCIPAL
    ACCOUNTANT FEES AND SERVICES   PART IV  ITEM 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES  1. and 2. Financial Statements and Financial
    Statement Schedules
  page F-1.
  Exhibits
  ExhibitNumber

Description2
.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)) 43




---



##### 



ExhibitNumber

Description2
.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))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)) 44




---



##### 



ExhibitNumber

Description10
.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)) 45




---



##### 



ExhibitNumber

Description10
.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)) 46




---



##### 



ExhibitNumber

Description10
.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)) 47




---



##### 



ExhibitNumber

Description10
.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.10
.1.51

Amendment No. 2 to Partner
    Agent Program Agreement, dated March 20, 2006 between
    Registrant and American Team Managers (Incorporated by reference
    to Exhibit 10.1.1 with Specialty Underwriters
    Alliance. Inc.s March 31, 2006 Quarterly Report on
    Form 10-Q
    (File
    No. 333-124263))10
.1.52

Amendment No. 2 to the
    Specialty Underwriters Alliance, Inc. Partner Agent
    Program Agreement  American Patriot Insurance Agency
    (Incorporated by reference to Exhibit 99.1 with Specialty
    Underwriters Alliance. Inc.s June 30, 2006
    Quarterly Report on
    Form 10-Q
    (File
    No. 333-124263))10
.1.53

Amendment No. 1 to the
    Specialty Underwriters Alliance, Inc. Partner Agent
    Program Agreement  AEON Insurance Group, Inc
    (Incorporated by reference to Exhibit 99.2 with Specialty
    Underwriters Alliance. Inc.s June 30, 2006
    Quarterly Report on
    Form 10-Q
    (File
    No. 333-124263))10
.1.54

Amendment No. 2 to the
    Specialty Underwriters Alliance, Inc. Partner Agent
    Program Agreement  Risk Transfer Holdings, Inc.
    (Incorporated by reference to Exhibit 99.3 with Specialty
    Underwriters Alliance. Inc.s June 30, 2006
    Quarterly Report on
    Form 10-Q
    (File
    No. 333-124263))10
.1.55

Amendment No. 2 to the
    Specialty Underwriters Alliance, Inc. Partner Agent
    Program Agreement  Appalachian Underwriters, Inc.
    (Incorporated by reference to Exhibit 99.1 with Specialty
    Underwriters Alliance. Inc.s September 30, 2006
    Quarterly Report on
    Form 10-Q
    (File
    No. 333-124263))10
.1.56

Amendment No. 1 to the
    Specialty Underwriters Alliance, Inc. Partner Agent
    Program Agreement  Specialty Risk Solutions, LLC
    (Incorporated by reference to Exhibit 99.2 with Specialty
    Underwriters Alliance. Inc.s September 30, 2006
    Quarterly Report on
    Form 10-Q
    (File
    No. 333-124263))10
.1.57

First Amendment to the Amended and
    Restated Securities Purchase Agreement between Specialty
    Underwriters Alliance, Inc. and AEON Insurance Group, Inc.
    (Incorporated by reference to Exhibit 99.3 with Specialty
    Underwriters Alliance. Inc.s September 30, 2006
    Quarterly Report on
    Form 10-Q
    (File
    No. 333-124263))10
.1.58

Amendment No. 3 to the
    Specialty Underwriters Alliance, Inc. Partner Agent
    Program Agreement  American Team Managers
    (Incorporated by reference to Exhibit 99.4 with Specialty
    Underwriters Alliance. Inc.s September 30, 2006
    Quarterly Report on
    Form 10-Q
    (File
    No. 333-124263))10
.1.59

First Amendment to the Securities
    Purchase Agreement between Specialty Underwriters
    Alliance, Inc. and American Patriot Agency, Inc. (Incorporated
    by reference to Exhibit 99.5 with Specialty
    Underwriters Alliance. Inc.s September 30, 2006
    Quarterly Report on
    Form 10-Q
    (File
    No. 333-124263))10
.1.60

Amendment No. 3 to the
    Specialty Underwriters Alliance, Inc. Partner Agent
    Program Agreement  American Patriot Insurance Agency,
    Inc. (Incorporated by reference to Exhibit 99.6 with
    Specialty Underwriters Alliance. Inc.s
    September 30, 2006 Quarterly Report on
    Form 10-Q
    (File
    No. 333-124263))10
.1.61

First Amendment to the Amended and
    Restated Securities Purchase Agreement between Specialty
    Underwriters Alliance, Inc. and Risk Transfer Holdings
    Inc. (Incorporated by reference to Exhibit 99.7 with
    Specialty Underwriters Alliance. Inc.s
    September 30, 2006 Quarterly Report on
    Form 10-Q
    (File
    No. 333-124263)) 48




---



##### 



ExhibitNumber

Description10
.1.62

First Amendment to the Amended and
    Restated Securities Purchase Agreement between Specialty
    Underwriters Alliance, Inc. and American Team Managers
    (Incorporated by reference to Exhibit 99.8 with Specialty
    Underwriters Alliance. Inc.s September 30, 2006
    Quarterly Report on
    Form 10-Q
    (File
    No. 333-124263))10
.1.63*

Third Amendment to the Amended and
    Restated Securities Purchase Agreement between Specialty
    Underwriters Alliance, Inc. and Appalachian Underwriters,
    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 200231
.2*

Certification of Peter E. Jokiel,
    Chief Financial Officer, pursuant to Section 302 of the
    Sarbanes-Oxley Act of 200232
.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 200232
.2*

Certification of Peter E. Jokiel,
    Chief Financial Officer, pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002     *
    
    Filed herewith.+
    
    Indicates a management contract or compensatory plan or
    arrangement. 49




---



##### 



INDEX TO
    AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
    SCHEDULES  Page No.Reports of
    Independent Registered Public Accounting Firm


F-2Consolidated
    Balance Sheets of Specialty Underwriters Alliance, Inc.
    (Successor) as of December 31, 2006 and December 31,
    2005


F-5Consolidated
    Statements of Operations and Comprehensive Income (Loss) of
    Specialty Underwriters Alliance, Inc. (Successor) for the
    years ended December 31, 2006, December 31, 2005 and
    December 31, 2004 and Potomac Insurance Company of Illinois
    (Predecessor) for the period from January 1, 2004 to
    November 23, 2004


F-6Consolidated
    Statement of Stockholders Equity of Specialty
    Underwriters Alliance, Inc. (Successor) as of
    December 31, 2006 and December 31, 2005


F-7Consolidated
    Statements of Cash Flows for Specialty Underwriters
    Alliance, Inc. (Successor) for the years ended December 31,
    2006, December 31, 2005, and December 31, 2004 and
    Potomac Insurance Company of Illinois (Predecessor) for the
    period from January 1, 2004 to November 23,
    2004


F-8Notes to
    Consolidated Financial Statements


F-9Financial Statement SchedulesSchedule
    I  Specialty Underwriters Alliance,
    Inc.  Summary of Investments Other Than Investments
    in Related Parties at December 31, 2006


F-26Schedule II 
    Specialty Underwriters Alliance, Inc. 
    Condensed Financial Information of Registrant for the years
    ended December 31, 2006, December 31, 2005 and
    December 31, 2004


F-27Schedule III 
    Specialty Underwriters Alliance, Inc. 
    Supplementary Insurance Information for the years ended
    December 31, 2006, December 31, 2005 and
    December 31, 2004


F-30Schedule
    IV  Specialty Underwriters Alliance,
    Inc.  Reinsurance for the years ended
    December 31, 2006, December 31, 2005, and
    December 31, 2004


F-31Schedule
    V  Specialty Underwriters Alliance,
    Inc.  Valuation and Qualifying Accounts of Registrant
    for the years ended December 31, 2006 and December 31,
    2005


F-32Schedule
    VI  SUA Insurance Company  Supplemental
    Information Concerning Property and Casualty Insurance
    Operations for the years ended December 31, 2006,
    December 31, 2005 and December 31, 2004


F-33Schedule III 
    Potomac Insurance Company of Illinois  Supplementary
    Insurance Information for the period from January 1, 2004
    to November 23, 2004


F-34Schedule
    IV  Potomac Insurance Company of Illinois 
    Reinsurance for the period from January 1, 2004 to
    November 23, 2004


F-35Schedule
    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


F-36  F-1




---



##### 



Report of
    Independent Registered Public Accounting Firm      Consolidated
    financial statements and financial statement
    schedules
      Internal
    control over financial reporting
  Managements Report on Internal Control Over Financial
    Reporting Internal Control  Integrated Framework Internal Control 
    Integrated Framework
   F-2




---



##### 



F-3




---



##### 



Report of
    Independent Registered Public Accounting Firm
      
    F-4




---



##### 



Consolidated
    Balance Sheets  Specialty Underwriters Alliance, Inc.As of December 31,2006


2005(Dollars in thousands)ASSETSFixed maturity investments, at
    fair value (amortized cost: $145,581 and $95,760)

$
144,520


$
94,129Short-term investments, at
    amortized cost (which approximates fair value)


19,538



8,862Total investments


164,058



102,991Cash


2,375



5,329Insurance premiums receivable


68,310



44,868Reinsurance recoverable on unpaid
    loss and loss adjustment expenses


80,976



88,997Prepaid reinsurance premiums


3,577



3,492Investment income accrued


1,566



1,102Equipment and capitalized software
    at cost (less accumulated depreciation of $3,915 and $1,488)


8,643



5,566Intangible assets


10,745



10,745Deferred acquisition costs


19,876



11,279Other assets


3,171



2,794Total assets

$
363,297


$
277,163LIABILITIESLoss and loss adjustment expense
    reserves

$
141,200


$
104,870Unearned insurance premiums


89,804



58,595Insured deposit funds


10,366



7,159Accounts payable and other
    liabilities


7,945



5,724Total liabilities


249,315



176,348Commitments (Note 10)Stockholders
    equityCommon Stock at $.01 par
    value per share  authorized 30,000,000 shares;
    issued and outstanding 14,682,355 and 14,680,688 shares


147



147Class B Common Stock at
    $.01 par value per share  authorized
    2,000,000 shares; issued and outstanding 679,152 and
    223,694 shares


7



2Paid-in capital  Common
    Stock


128,372



127,256Paid-in capital 
    Class B Common Stock


4,838



1,770Accumulated deficit


(18,321
)


(26,729
)Accumulated other comprehensive
    income (loss)


(1,061
)


(1,631
)Total stockholders equity


113,982



100,815Total liabilities and
    stockholders equity

$
363,297


$
277,163    F-5




---



##### 



Consolidated
    Statements of Operations and Comprehensive Income
    (Loss)  Potomac InsuranceCompany of Illinois(Predecessor)Period fromSpecialty Underwriters Alliance, Inc. (Successor)


January 1 toYear Ended December 31,


November 23,2006


2005


2004


2004(Dollars in thousands)RevenueEarned insurance premiums

$
110,891


$
26,611


$



$
Net investment income


6,087



3,558



278



1,329Net realized gain (losses)


275



(4
)


2



390Total revenue


117,253



30,165



280



1,719ExpensesLoss and loss adjustment expenses


62,682



19,099







Amortization of deferred
    acquisition costs


25,633



6,122







674Service company fees






8,798



4,650



Other operating expenses


20,283



14,142



3,517



45Financing expenses










268



Total expenses


108,598



48,161



8,435



719Pretax income (loss)


8,655



(17,996
)


(8,155
)


1,000Federal income tax expense


(247
)










(350
)Net income (loss)


8,408



(17,996
)


(8,155
)


650Net change in unrealized gains and
    losses for investments held, after tax


570



(1,641
)


10



(391
)Comprehensive income
    (loss)

$
8,978


$
(19,637
)

$
(8,145
)

$
259Earnings (loss) per share
    available to common stockholders (in dollars)Basic

$
.55


$
(1.22
)

$
(4.59
)

$
Diluted

$
.55


$
(1.22
)

$
(4.59
)

$
Average shares
    outstandingBasic


15,211



14,774



1,779



Diluted


15,211



14,774



1,779



    F-6




---



##### 



Consolidated
    Statement of Stockholders Equity  AccumulatedCommon


Paid-in


Common


Paid-in





OtherStock


Capital


Stock


Capital


Retained


Comprehensive


TotalClass


Class


Class


Class


Earnings


Income


Stockholders(Successor)

A


A


B


B


(Deficit)


(Loss)


Equity(Dollars in thousands)Balance at December 31,
    2004

$
147


$
127,256


$



$
250


$
(8,733
)

$
10


$
118,930Net loss


















(17,996
)






(17,996
)Net change in unrealized investment
    gains (losses),
    net of tax






















(1,641
)


(1,641
)Stock issuance










2



1,520











1,522Balance at December 31,
    2005

$
147


$
127,256


$
2


$
1,770


$
(26,729
)

$
(1,631
)

$
100,815Net loss


















8,408







8,408Net change in unrealized investment
    gains (losses), net of tax






















570



570Stock issuance






15



5



3,068











3,088Stock based compensation






1,101



















1,101Balance at December 31,
    2006

$
147


$
128,372


$
7


$
4,838


$
(18,321
)

$
(1,061
)

$
113,982    F-7




---



##### 



Consolidated
    Statements of Cash Flows  PotomacInsuranceCompany ofIllinois(Predecessor)Period fromSpecialty Underwriters Alliance, Inc. (Successor)


January 1 toYear Ended December 31,


November 23,2006


2005


2004


2004(Dollars in thousands)Cash flows from
    operationsNet income (loss)

$
8,408


$
(17,996
)

$
(8,155
)

$
650Charges (credits) to reconcile net
    income to cash flows from operations:Change in deferred taxes


247











350Net realized (gains) losses


(275
)


4



(2
)


(390
)Amortization of bond premium
    (discount)


342



495







Depreciation


2,577



1,760







Accrued interest costs exchanged
    for common stock










234



Net change in:














Deferred charges










4,730



Stock warrants










(4,795
)


Reinsurance recoverable on unpaid
    loss and loss adjustment expense reserves


8,021



6,962



(95,959
)


42,008Loss and loss adjustment expense
    reserves


36,330



8,911



95,959



(57,017
)Insurance premiums receivable


(23,442
)


(44,868
)






2,119Unearned insurance premiums


31,209



58,592



3



(4,823
)Deferred acquisition costs


(8,597
)


(11,279
)






674Prepaid reinsurance premiums


(85
)


(3,489
)






Insured deposit funds


3,207



7,159







Other, net


2,369



2,188



21



(683
)Total adjustments


51,903



26,435



191



(17,762
)Net cash flows provided by (used
    for) operations


60,311



8,439



(7,964
)


(17,112
)Cash flows from investing
    activitiesNet decrease in short-term
    investments


(10,676
)


38,508



(47,370
)


12,020Sales of fixed maturity investments


7,174











34,272Redemptions, calls and maturities
    of fixed maturity investments


9,502



6,387







13,697Purchases of fixed maturity
    investments


(66,575
)


(52,192
)


(39,230
)


(33,555
)Unsettled net investment purchases






(1,000
)






Purchase of equipment and
    capitalized software


(5,778
)


(5,321
)


(2,389
)


Net cash paid for acquisition










(20,978
)


Net cash flows provided by (used
    for) investing activities


(66,353
)


(13,618
)


(109,967
)


26,434Cash flows from financing
    activitiesCash distributions paid to Parent














(18,610
)Proceeds from short-term borrowings










3,200



Issuance of common stock


3,088



1,522



123,517



Net cash provided by (used for)
    financing activities


3,088



1,522



126,717



(18,610
)Net (decrease) increase in cash
    during the period


(2,954
)


(3,657
)


8,786



(9,288
)Cash at beginning of the
    period


5,329



8,986



200



10,307Cash at end of the
    period

$
2,375


$
5,329


$
8,986


$
1,019      F-8




---



##### 



SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
  NOTES TO
    FINANCIAL STATEMENTS
 (Dollars
    in thousands)
  NOTE 1 
    NATURE OF OPERATIONS
        2006


2005Percentage of


Percentage ofGross Written


Gross WrittenPremium


PremiumRisk Transfer Holdings, Inc.


53.1
%


55.3
%American Team Managers


20.7
%


24.4
%AEON Insurance Group, Inc.


14.2
%


12.1
%Appalachian Underwriters,
    Inc.


9.5
%


0.5
%Specialty Risk Solutions, LLC


1.3
%


7.7
%American Patriot Insurance Agency,
    Inc.


1.0
%



%Other


0.2
%



%Total


100.0
%


100.0
%     2006


2005Percentage of


Percentage ofGross Written


Gross WrittenPremium


PremiumCalifornia


30.9
%


39.4
%Florida


38.2
%


42.6
%Other states


30.9
%


18.0
%Total


100.0
%


100.0
%  F-9




---



##### 



SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    2006


2005Percentage of


Percentage ofGross Written


Gross WrittenPremium


PremiumWorkers compensation


58.3
%


68.8
%Commercial automobile


16.6
%


10.4
%General liability


23.4
%


11.8
%All other


1.7
%


9.0
%Total


100.0
%


100.0
%   NOTE 2 
    ACQUISITION
      Cash

$
1,019Investments


10,233Cost of insurance licenses


10,745Reinsurance recoverable on paid
    and unpaid losses


97,270Loss reserves


(97,270
)Purchase price

$
21,997       NOTE 3 
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
       F-10




---



##### 



SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
   Cash
    and Investments
    available-for-sale
  other-than-temporary
    Equipment
    and Capitalized Software
    Deferred
    Charges
    Intangible
    Assets
    Short-Term
    Debt
   F-11




---



##### 



SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
   Stock
    Warrants
      Earned
    and Unearned Insurance Premiums
    Deferred
    Policy Acquisition Costs
    Income
    Taxes
      Reinsurance
      Unpaid
    Loss and LAE
   F-12




---



##### 



SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
        Stock
    Options
    Earnings
    Per Share
        Recent
    Accounting Pronouncements
     F-13




---



##### 



SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    NOTE 4 
    INVESTMENTS
    Cost or


Gross Unrealized


Gross Unrealized


Estimated Fair2006

Amortized Cost


Gains


Losses


ValueU.S. Treasury Securities

$
10,805


$
12


$
(154
)

$
10,663U.S. Government Agencies
    Securities


34,678



241



(216
)


34,703Corporate Securities


49,033



58



(958
)


48,133Mortgage Backed Securities


51,065



326



(370
)


51,021Total Fixed Maturities

$
145,581


$
637


$
(1,698
)

$
144,520     Cost or


Gross Unrealized


Gross Unrealized


Estimated Fair2005

Amortized Cost


Gains


Losses


ValueU.S. Treasury Securities

$
10,273


$
8


$
(109
)

$
10,172U.S. Government Agencies
    Securities


13,840



3



(205
)


13,638Corporate Securities


49,178



4



(1,047
)


48,135Mortgage Backed Securities


22,469



22



(307
)


22,184Total Fixed Maturities

$
95,760


$
37


$
(1,668
)

$
94,129     Cost or


Gross Unrealized


Gross Unrealized


Estimated Fair2004

Amortized Cost


Gains


Losses


ValueU.S. Treasury Securities

$
6,458


$



$
(8
)

$
6,450U.S. Government Agencies
    Securities


9,153



23



(3
)


9,173Corporate Securities


29,936



34



(43
)


29,927Mortgage Backed Securities


4,908



12



(5
)


4,915Total Fixed Maturities

$
50,455


$
69


$
(59
)

$
50,465   other-than-temporary other-than-temporary
   F-14




---



##### 



SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Cost or


FairAmortized Cost


ValueDue in one year or less

$
5,787


$
5,735Due after one year through five
    years


63,983



63,104Due after five years through ten
    years


32,922



32,920Due after ten years


42,889



42,761Total

$
145,581


$
144,520     Unrealized LossesFair


Less Than


Greater ThanValue


12 Months


12 Months


TotalUS Treasury Securities

$
7,144


$
(25
)

$
(129
)

$
(154
)US Government Agency Securities


16,424



(34
)


(182
)


(216
)Corporate Securities


44,722



(39
)


(919
)


(958
)Mortgage Backed Securities


27,348



(39
)


(331
)


(370
)Total Fixed Maturities

$
95,638


$
(137
)

$
(1,561
)

$
(1,698
)       Year Ended December 31,2006


2005


2004Proceeds from voluntary sales

$
7,174


$



$
Gross realized gains


333



4



2Gross realized losses


(58
)


(8
)


       Year Ended December 31,2006


2005


2004Fixed maturities

$
5,516


$
3,421


$
113Short-term investments


759



310



165Gross investment income


6,275



3,731



278Investment Expenses


(188
)


(173
)


Net investment income

$
6,087


$
3,558


$
278  F-15




---



##### 



SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Period fromJanuary 1to November 23,2004Proceeds from voluntary sales

$
34,272Gross realized gains


687Gross realized losses


(297
)     Period fromJanuary 1to November 23,2004Fixed maturities

$
1,408Short-term investments


15Other investment income


14Gross investment income


1,437Less: investment expenses


108Net investment income

$
1,329   NOTE 5 
    FEDERAL INCOME TAXES
  start-up
      Year Ended December 31,2006


2005


2004(Dollars in thousands)Income tax (expense) benefit at
    statutory rates

$
(2,943
)

$
6,119


$
2,773Tax expense from permanent
    difference


(132
)


(7
)


(5
)Valuation allowance


2,839



(6,112
)


(2,768
)Other


(11
)






Actual income tax benefit (expense)

$
(247
)

$



$
  F-16




---



##### 



SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Year Ended December 31,2006


2005


2004(Dollars in thousands)Current tax benefit (expense)

$
(157
)

$



$
Deferred tax benefit (expense)


(90
)






Total income tax benefit (expense)

$
(247
)

$



$
     Year Ended December 31,Deferred Tax Assets Arising From

2006


2005Loss & LAE reserves

$
2,256


$
603Unearned premium reserves


6,107



3,984Net operating loss carryforwards


6,207



9,142Unrealized loss on investments


361



555Start up costs


457



617Other


643



Total deferred tax
    assets


16,031



14,901   Deferred Tax Liabilities Arising FromDeferred acquisition costs


6,758



3,835Equipment and capitalized software


1,849



705Prepaid assets


298



432Intangible asset


480



232Other


138



66Total deferred tax
    liabilities


9,523



5,270Net deferred tax asset (liability)


6,508



9,631Valuation allowance


(6,598
)


(9,631
)Net deferred tax asset
    (liability) after valuation allowance

$
(90
)

$
  F-17




---



##### 



SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Period fromJanuary 1to November 23,2004Current

$
Deferred


350Income tax expense

$
350Expected federal income taxes at
    35%

$
350Other, net


Income tax expense

$
350   NOTE 6 
    OTHER COMPREHENSIVE INCOME
    Year Ended December 31,2006


2005


2004Other comprehensive income (loss)
    for the period:Unrealized gains (losses) on
    investments

$
570


$
(1,641
)

$
10Less related federal income tax
    expense (benefit)










Total

$
570


$
(1,641
)

$
10     Year Ended December 31,2006


2005


2004Accumulated other comprehensive
    income (loss):Net unrealized gains (losses) on
    investments

$
(1,061
)

$
(1,631
)

$
10Less related federal income taxes










Total

$
(1,061
)

$
(1,631
)

$
10     Period fromJanuary 1to November 23,2004Other comprehensive income (loss)
    for the period:Unrealized (losses) gains on
    investments

$
197Adjustment for unrealized gains
    (losses) realized


(390
)Dividend to parent


(409
)Less related federal income tax
    expense (benefit)


211Total

$
(391
)  F-18




---



##### 



SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  NOTE 7 
    STOCK OPTIONS
        Year Ended December 31,2005


2004(Dollars in thousands, except per share amounts)Net loss as reported

$
(17,996
)

$
(8,155
)Deduct: compensation expense


(1,035
)


(115
)Pro forma net loss

$
(19,031
)

$
(8,270
)Basic and diluted net earnings
    (loss) per share:As reported

$
(1.22
)

$
(4.59
)Pro forma

$
(1.29
)

$
(4.65
)      F-19




---



##### 



SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    WeightedAverage


Aggregate


Weighted AverageNumber of


Exercise Price


Intrinsic


ContractualOption Plan Activity

Shares


Per Share


Value


Remaining Life(Actual dollar and share amounts)Balance at January 1, 2006


727,466


$
9.40


$




8.97 yearsOptions granted


25,000


$
6.22


$




10.00 yearsOptions exercised


(1,667
)

$
9.00


$
1,767



Options forfeited


(8,333
)

$
7.33


$




Balance at December 31, 2006


742,466


$
9.32


$
60,100



8.00 yearsTotal options vested at
    December 31, 2006


437,764


$
9.45


$
5,501



7.93 years     Weighted AverageGrant Date FairNumber of Shares


Value(Actual Shares)


(In Dollars)(Actual dollar and share amounts)Non-vested balance at
    January 1, 2006


530,526


$
4.46Options granted


25,000


$
2.89Options vested


(242,491
)

$
4.45Options forfeited


(8,333
)

$
3.49Total non-vested options at
    December 31, 2006


304,702


$
4.37     NOTE 8 
    EMPLOYEE BENEFIT PLANS
    NOTE 9 
    RELATED PARTY TRANSACTIONS
     F-20




---



##### 



SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
       NOTE 10 
    COMMITMENTS
      NOTE 11 
    REINSURANCE
   F-21




---



##### 



SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
     Year Ended December 31,2006


2005


2004Premiums written:Direct

$
152,841


$
90,639


$
Assumed


335







Ceded


(11,076
)


(5,433
)


Net

$
142,100


$
85,206


$
Premiums earned:Direct

$
121,698


$
32,047


$
Assumed


269







Ceded


(11,076
)


(5,436
)


Net

$
110,891


$
26,611


$
Losses and loss adjustment
    expenses:Direct

$
69,545


$
21,362


$
Assumed


238







Ceded


(7,101
)


(2,263
)


Net

$
62,682


$
19,099


$
     Period fromJanuary 1to November 23,2004Premiums written:Direct

$
267Assumed


(4,823
)Ceded


(267
)Net

$
(4,823
)Premiums earned:Direct

$
667Assumed


Ceded


(667
)Net

$
Losses and loss adjustment
    expenses:Direct

$
(130,439
)Assumed


Ceded


130,439Net

$
  F-22




---



##### 



SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  NOTE 12 
    UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
          Year Ended December 31, 2006Potomac of





SUAIllinois


SUA


ConsolidatedBeginning of period:Gross

$
86,736


$
18,134


$
104,870Less reinsurance recoverables


(86,736
)


(2,261
)


(88,997
)Net






15,873



15,873Incurred losses and LAE relating
    to:Current year






63,546



63,546Prior years






(864
)


(864
)Total incurred losses and LAE






62,682



62,682Paid losses and LAE related to:Current year






12,997



12,997Prior years






5,334



5,334Total paid losses and LAE






18,331



18,331End of period:Net






60,224



60,224Plus reinsurance recoverables


71,592



9,384



80,976Gross

$
71,592


$
69,608


$
141,200   F-23




---



##### 



SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Year Ended December 31, 2005Potomac of





SUAIllinois


SUA


ConsolidatedBeginning of period:Gross

$
95,959


$



$
95,959Less reinsurance recoverables


(95,959
)






(95,959
)Net










Incurred losses and LAE relating
    to:Current year






19,099



19,099Prior years










Total incurred losses and LAE






19,099



19,099Paid losses and LAE related to:Current year






3,226



3,226Prior years










Total paid losses and LAE






3,226



3,226End of period:Net






15,873



15,873Plus reinsurance recoverables


86,736



2,261



88,997Gross

$
86,736


$
18,134


$
104,870   NOTE 13 
    STATUTORY INFORMATION
          
    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. F-24




---



##### 



SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
       Year Ended December 31,2006


2005


2004Ending capital and surplus

$
77,308


$
79,757


$
100,725Net income/(loss)


1,052


$
(30,505
)

$
(3,383
)Company action level risk-based
    capital


42,264


$
32,630


$
830   NOTE 14 
    QUARTERLY FINANCIAL DATA (UNAUDITED)
    First


Second


Third


FourthQuarterly Financial Data

2006


2006


2006


2006(Dollars in thousands, except per share data)Revenues

$
24,401


$
26,659


$
33,613


$
32,580Expenses including taxes


24,601



24,492



30,031



29,721Net income (loss)

$
(200
)

$
2,167


$
3,582


$
2,859Net income (loss) per share

$
(.01
)

$
.14


$
.24


$
.18   First


Second


Third


FourthQuarterly Financial Data

2005


2005


2005


2005(Dollars in thousands, except per share data)Revenues

$
1,265


$
4,072


$
9,145


$
15,683Expenses including taxes


5,757



8,082



13,969



20,353Net income (loss)

$
(4,492
)

$
(4,010
)

$
(4,824
)

$
(4,670
)Net income (loss) per share

$
(.31
)

$
(.27
)

$
(.32
)

$
(.32
)  F-25




---



##### 



SCHEDULE I  SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
    SUMMARY OF INVESTMENTS  OTHER THAN
    INVESTMENTS IN RELATED PARTIES
    At December 31, 2006
  AmortizedCost


Fair Value(Dollars in thousands)Fixed maturities:U.S. treasury securities

$
10,805


$
10,663U.S. government agencies
    securities


34,678



34,703Corporate securities


49,033



48,133Mortgage backed securities


51,065



51,021Total fixed maturities


145,581



144,520Short-term investments


19,538



19,538Total investments

$
165,119


$
164,058  F-26




---



##### 



SCHEDULE II  SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
  CONDENSED
    FINANCIAL INFORMATION OF REGISTRANT
  Specialty Underwriters Alliance, Inc. (Successor)As of December 31,Balance Sheets

2006


2005(Dollars in thousands)ASSETSInvestments in subsidiary

$
108,469


$
98,330Short-term
    investments, at amortized cost (which approximates fair value)


5,203



1,023Total investments


113,672



99,353Cash


204



1,346Other assets


134



291Total assets

$
114,010


$
100,990LIABILITIESAccounts payable and other
    liabilities


28



175Total liabilities


28



175Stockholders
    equityCommon Stock at $.01 par
    value per share  authorized 30,000,000 shares;
    issued and outstanding 14,682,355 and 14,680,688 shares


147



147Class B Common Stock at
    $.01 par value per share  authorized
    2,000,000 shares; issued and outstanding 679,152 and
    223,694 shares


7



2Paid-in capital  Common
    Stock


128,372



127,256Paid-in capital 
    Class B Common Stock


4,838



1,770Retained earnings


(18,321
)


(26,729
)Accumulated other comprehensive
    income, net of tax


(1,061
)


(1,631
)Total stockholders equity


113,982



100,815Total liabilities and
    stockholders equity

$
114,010


$
100,990     F-27




---



##### 



SCHEDULE II 
    (Continued)
  SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
  CONDENSED
    FINANCIAL INFORMATION OF REGISTRANT
  Specialty Underwriters Alliance, Inc.(Successor)Year Ended December 31,Statement of Operations

2006


2005


2004(Dollars in thousandsexcept per share data)Revenues:Total revenues

$
184


$
23


$
Expenses:Service company fees










2,511Financing expenses










268General and administrative expenses


1,344



328



2,180(Gain) loss of subsidiary


(9,568
)


17,691



3,196Total expenses


(8,224
)


18,019



8,155Pretax income (loss)


8,408



(17,996
)


(8,155
)Federal income tax expense










Net income (loss)


8,408



(17,996
)


(8,155
)Net change in unrealized
    investment gains, net of tax


570



(1,641
)


10Comprehensive net income
    (loss)

$
8,978


$
(19,637
)

$
(8,145
)Earnings (loss) per share
    available to common
    stockholdersBasic

$
.55


$
(1.22
)

$
(4.59
)Diluted

$
.55


$
(1.22
)

$
(4.59
)     F-28




---



##### 



SCHEDULE II 
    (Continued)
  SPECIALTY
    UNDERWRITERS ALLIANCE, INC.
  CONDENSED
    FINANCIAL INFORMATION OF REGISTRANT
  Specialty Underwriters Alliance, Inc. (Successor)Year Ended December 31,Statement of Cash Flows

2006


2005


2004(Dollars in thousands)Cash flows from
    operations:Net income (loss)

$
8,408


$
(17,996
)

$
(8,155
)Charges (credits) to reconcile net
    income to cash flows from operations:Loss (income) of subsidiary


(9,568
)


17,691



3,196Depreciation expense


144



171



Write off of capitalized software


12



19



Interest expense exchanged for
    common stock










234Net change in:Deferred charged










4,730Stock warrants










(4,795
)Other, net


953



(148
)


311Total adjustments


(8,459
)


17,733



3,676Net cash flows provided by
    (used for) operations


(51
)


(263
)


(4,479
)Cash flows from investing
    activities:Net (increase) decrease in
    short-term
    investments


(4,179
)


(1,023
)


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


(4,179
)


(4,873
)


(117,478
)Cash flows from financing
    activitiesIssuance of common stock


3,088



1,522



123,517Short-term borrowings










3,200Net cash flows provided by
    (used for) financing activities


3,088



1,522



126,717Net increase from cash during
    the period


(1,142
)


(3,614
)


4,760Cash at beginning of the
    period


1,346



4,960



200Cash at end of the
    period

$
204


$
1,346


$
4,960    F-29




---



##### 



SCHEDULE III
    SPECIALTY UNDERWRITERS ALLIANCE, INC.
    SUPPLEMENTARY INSURANCE INFORMATION Column

Column


Column


Column


Column


Column


Column


Column


Column


Column


ColumnA

B


C


D


E


F


G


H


I


J


KFuturePolicyBenefits,





OtherLosses,





Policy








Benefits,Claims,





Claims








Claims,


Amortization ofDeferred


and





and





Net


Losses, and


Deferred


OtherAcquisition


Loss


Unearned


Benefits


Premium


Investment


Settlement


Policy


Operating


PremiumsCosts


Expenses


Premiums


Payable


Revenue


Income


Expenses


Acquisition


Expenses


Written(Dollars in thousands)Year ended December 31, 2006

$
19,876


$
141,200


$
89,804


$



$
110,891


$
6,087


$
62,682


$
25,633


$
20,283


$
142,100Year ended December 31, 2005

$
11,279


$
104,870


$
58,595


$



$
26,611


$
3,558


$
19,099


$
6,122


$
22,940


$
85,206Year ended December 31, 2004

















$



$
278


$



$



$
8,435


$
  F-30




---



##### 



SCHEDULE IV



SPECIALTY
    UNDERWRITERS ALLIANCE, INC.



REINSURANCE  Column

Column


Column


Column


Column


ColumnA

B


C


D


E


FAssumed





PercentageCeded


from





of AmountDirect


to Other


Other


Net


AssumedAmount


Companies


Companies


Amount


to Net(Dollars in thousands)Year ended December 31, 2006

$
121,698


$
11,076


$
269


$
110,891



Year ended December 31, 2005

$
32,047


$
5,436


$



$
26,611



Year ended December 31, 2004

$
9


$
9


$



$




  F-31




---



##### 



SCHEDULE V



SPECIALTY
    UNDERWRITERS ALLIANCE, INC.



VALUATION
    AND QUALIFYING ACCOUNTS  Column

Column


Column


Column


ColumnA

B


C


D


EAdditions (Subtractions)Balance


Chargedat


to Costs


Charged to





Balance atBeginning


and


Other


Deductions


End ofof Period


Expenses


Accounts


Described(1)(2)


Period(Dollars in thousands)Year ended December 31, 2006
    Deferred tax valuation allowance

$
9,631


$
90


$
(3,123
)

$



$
6,598Year ended December 31, 2005
    Deferred tax valuation allowance

$
2,961


$



$
6,670


$



$
9,631  F-32




---



##### 



SCHEDULE VI



SUA
    INSURANCE COMPANY



SUPPLEMENTAL
    INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE
    OPERATIONS  Column

Column


Column


Column


Column


Column


Column


Column


Column


Column


ColumnA

B


C


D


E


F


G


H


I


J


KReservesfor UnpaidClaims


Discount, if











Claims and Claimsand


any,











AdjustmentClaims


Deducted











Expenses


Amortization


Paid ClaimsDeferred


Policy


in Claims








Net


Incurred Related to


of Deferred


andAcquisition


Adjustment


Column


Unearned


Earned


Investment


Current


Prior


Acquisition


Adjustment


PremiumsCosts


Expenses


C


Premiums


Premiums


Income


Year


Year


Costs


Expenses


Written(Dollars in thousands)Year ended December 31, 2006

$
19,876


$
141,200


$
1,016


$
89,804


$
110,891


$
6,087


$
63,546


$
(864
)

$
25,633


$
18,331


$
142,100Year ended December 31, 2005

$
11,279


$
104,870


$
192


$
58,595


$
26,611


$
3,558


$
19,099


$



$
6,122


$
3,226


$
85,206Year ended December 31, 2004

















$



$
278


$



$



$



$



$
  F-33




---



##### 



SCHEDULE III
    POTOMAC INSURANCE COMPANY OF ILLINOIS
    SUPPLEMENTARY INSURANCE INFORMATION Column

Column


Column


Column


Column


Column


Column


Column


Column


Column


ColumnA

B


C


D


E


F


G


H


I


J


KFuturePolicyBenefits,





Other








Benefits,Losses,





Policy








Claims,Claims,





Claims








Losses,


AmortizationDeferred


and





and





Net


and


of Deferred


OtherAcquisition


Loss


Unearned


Benefits


Premiums


Investment


Settlement


Policy


Operating


PremiumsCosts


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
)  F-34




---



##### 



SCHEDULE IV
    POTOMAC INSURANCE COMPANY OF ILLINOIS
    REINSURANCE Column

Column


Column


Column


Column


ColumnA

B


C


D


E


FAssumed





PercentageCeded to


from





of AmountDirect


Other


Other


Net


AssumedAmount


Companies


Companies


Amount


to Net(Dollars in thousands)Period from January 1, 2004
    to November 23, 2004

$
667


$
(667
)

$



$




  F-35




---



##### 



SCHEDULE VI



POTOMAC
    INSURANCE COMPANY OF ILLINOIS



SUPPLEMENTAL
    INFORMATION FOR PROPERTY AND CASUALTY INSURANCE
    UNDERWRITERS  Column

Column


Column


Column


Column


Column


Column


Column


Column


Column


ColumnA

B


C


D


E


F


G


H


I


J


KClaims andClaimsAdjustmentReserves for














ExpensesUnpaid


Discount,











Incurred


AmortizationClaims and


if any,











Related to


of Deferred


Paid ClaimsDeferred


Claims


Deducted








Net


(1)


(2)


Policy


and ClaimsAcquisition


Adjustment


in Column


Unearned


Earned


Investment


Current


Prior


Acquisition


Adjustment


PremiumsCosts


Expenses


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
)     (1)
    
    The amounts shown exclude unamortized fair value adjustments to
    reserves of $0, $578 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. F-36




---



##### 



SIGNATURES
      By:
    /s/  Courtney
    C. Smith   Title:
    Chief Executive Officer      Signature

Title

Date/s/  Courtney
    C. SmithCourtney
    C. Smith

Chairman, Chief Executive Officer
    And Director (Principal Executive Officer)

March 1, 2007/s/  Peter
    E. JokielPeter
    E. Jokiel

Executive Vice President, Chief
    Financial Officer and Director (Principal Financial and
    Accounting Officer)

March 1, 2007/s/  Robert
    E. DeanRobert
    E. Dean

Director

March 1, 2007/s/  Raymond
    C. GrothRaymond
    C. Groth

Director

March 1, 2007/s/  Paul
    A. PhilpPaul
    A. Philp

Director

March 1, 2007/s/  Robert
    H. WhiteheadRobert
    H. Whitehead

Director

March 1, 2007/s/  Russell
    E. ZimmermannRussell
    E. Zimmermann

Director

March 1, 2007