##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|   |  |                                                  
|-- |  | -------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)    
|   |  | OF THE SECURITIES EXCHANGE ACT OF 1934           
|  
|   |  | For the fiscal year ended December 31, 2004      
|  
|OR
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
|   |  | OF THE SECURITIES EXCHANGE ACT OF 1934           

COMMISSION FILE NUMBER: 000-50891


SPECIALTY UNDERWRITERS ALLIANCE, INC.


(Exact name of registrant as specified in the charter)


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

(888) 782-4672


(Registrants telephone number including area code)





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


None


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


Common Stock, $0.01 par value


þ o


þ


o þ






DOCUMENTS INCORPORATED BY REFERENCE












---










SPECIALTY UNDERWRITERS ALLIANCE, INC.


TABLE OF CONTENTS


|                                               |  |                                                                                                                      |     |      |    | 
|---------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- | --- | ---- | -- | 
|                                               |  |                                                                                                                      |     | Page |   
|                                               |  |                                                                                                                      |     |      |   
|PART I                                        
|ITEM 1.                                        |  | Business                                                                                                             |     |      | 1  | 
|ITEM 2.                                        |  | Properties                                                                                                           |     |      | 11 | 
|ITEM 3.                                        |  | Legal Proceedings                                                                                                    |     |      | 11 | 
|ITEM 4.                                        |  | Submission of Matters to a Vote of
    Securityholders                                                               |     |      | 12 | 
|PART II                                       
|ITEM 5.                                        |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |     |      | 12 | 
|ITEM 6.                                        |  | Selected Financial Data                                                                                              |     |      | 13 | 
|ITEM 7.                                        |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |     |      | 14 | 
|ITEM 7A.                                       |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |     |      | 24 | 
|ITEM 8.                                        |  | Financial Statements and Supplementary
    Data                                                                      |     |      | 24 | 
|ITEM 9.                                        |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |     |      | 24 | 
|ITEM 9A.                                       |  | Controls and Procedures                                                                                              |     |      | 24 | 
|ITEM 9B.                                       |  | Other Information                                                                                                    |     |      | 25 | 
|PART III                                      
|ITEM 10.                                       |  | Directors and Executive Officers of the
    Registrant                                                               |     |      | 25 | 
|ITEM 11.                                       |  | Executive Compensation                                                                                               |     |      | 25 | 
|ITEM 12.                                       |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |     |      | 25 | 
|ITEM 13.                                       |  | Certain Relationships and Related
    Transactions                                                                   |     |      | 25 | 
|ITEM 14.                                       |  | Principal Accounting Fees and Services                                                                               |     |      | 26 | 
|PART IV                                       
|ITEM 15.                                       |  | Exhibits and Financial Statement
    Schedules                                                                       |     |      | 26 | 
|Index to Financial Statements and
    Schedule |  |                                                                                                                      | F-1 |     
|EX-10.1.40                                    
|EX-10.1.41                                    
|EX-14.1                                       
|EX-21.1                                       
|EX-31.1                                       
|EX-31.2                                       
|EX-32.1                                       
|EX-32.2                                       



i



---



##### Table of Contents



FORWARD-LOOKING STATEMENTS











PART I







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

Overview








1



---



##### Table of Contents





















Industry




2



---



##### Table of Contents





Historical Industry Model






Our Model








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Equity Ownership. Each partner agent must purchase shares
    of our non-voting Class B common stock. The Class B
    shares will become exchangeable, one-for-one with our common
    stock, five years after the effective date of the applicable
    partner agent agreement, as long as the partner agents
    contract is in force. These Class B shares will be subject
    to substantial restrictions on transferability during such
    period. If prior to five years after the effective date of the
    applicable partner agent agreement such partner agents
    contract is terminated, we may repurchase at the lower of cost
    or fair market value the partner agents Class B
    shares. If after five years following the effective date of the
    applicable partner agent agreement such partner agents
    contract is terminated, we may repurchase at fair market value
    the partner agents Class B shares. After the
    five-year period, for as long as the partner agent has an agency
    contract with us, such partner agent would be required to hold
    shares of

3



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Class B common stock worth at least 50% of its aggregate
    initial investment commitment in our Class B common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Commission. We pay each partner agent an up-front
    commission designed to cover its costs. Such commission is
    likely to be lower than they had been receiving from other
    companies. In exchange for this reduced commission, we are
    responsible, through our own technology system, for policy
    issuance and administration, as well as for claims. In addition,
    each partner agent may receive a meaningful share of the
    underwriting profits for each of its programs, subject to a cap.
    If, after five years, the partner agent agreement is terminated,
    for any reason, the profit sharing calculations will be
    performed annually until all payout periods and earned profit
    sharing are satisfied.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Long-Term Contractual Commitment. Each partner agent has
    an exclusive five-year contractual arrangement (generally
    allowing partner agents to offer other companies products
    if we decline to offer coverage to a prospective insured) with
    us. We have no obligation to accept business that does not meet
    our guidelines. We agree to write only that class of business
    and lines of business by program in a defined territory only
    with that partner agent. Our partner agents may have one or a
    number of their programs with us. We expect that we will be a
    significant percentage of our partner agents program
    business. Each partner agent has the right to terminate its
    relationship with us on 180 days notice. We have the
    right to terminate our relationship with our partner agents for
    material breach of our agreement, insolvency, or failure to
    maintain appropriate licenses. We also may terminate a partner
    agent that is acquired by a third party, but cannot restrict the
    acquisition of a partner agent. In addition, we can terminate
    our relationship if a partner agent does not meet certain
    profitability and production guidelines that are established
    under each agreement. Upon termination, at our discretion, the
    partner agent must service the existing business until it is
    terminated. At such point, the partner agent is allowed to place
    such business with other insurers. In addition, there are no
    provisions in the agreements with our partner agents that grant
    renewal rights to either party. Further, the agreements with our
    partner agents do not give us any right to acquire a partner
    agent.

Our Insurance Product Lines






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



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

4



---



##### Table of Contents





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



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



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



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



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

Reinsurance






Underwriting




Monitoring Rate Adequacy




Program Performance Management




5



---



##### Table of Contents



Claims Control




Information Technology






Outsourcing Arrangements








| |   |                                        
| | - | ---------------------------------------
| |  | Program administration;                
|
| |  | Form, rate and rules filings;          
|
| |  | Billing and accounting for collections;
|
| |  | Regulatory compliance; and             
|
| |  | Information systems and services.      



Investment Philosophy




Competition




6



---



##### Table of Contents







Employees




Regulation




General.






7



---



##### Table of Contents







Regulation of Dividends and Other Payments from Our Operating
Subsidiary.






Risk-Based Capital.


Federal Regulation.




8



---



##### Table of Contents







Legislative and Regulatory Proposals.


Risk Factors


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




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





| |                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on a limited number of partner agents. Our failure
    to recruit and retain partner agents could materially adversely
    affect our results. Our transition of our partner agents
    business may significantly delay our ability to generate
    revenue.



9



---



##### Table of Contents





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











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



Executive Officers of the Registrant




|                  |  |     |    |  |          |                                                     
|----------------- |  | --- | -- |  | -------- | ----------------------------------------------------
|Name              |  | Age |    |  | Position
|                  |  |     |    |  |         
|Courtney C. Smith |  |     | 57 |  |          | Chief Executive Officer, President and Chairman     
|Peter E. Jokiel   |  |     | 57 |  |          | Executive Vice President and Chief Financial Officer
|William S. Loder  |  |     | 56 |  |          | Senior Vice President and Chief Underwriting Officer
|Gary J. Ferguson  |  |     | 61 |  |          | Senior Vice President and Chief Claims Officer      

Courtney C. Smith.


10



---



##### Table of Contents





Peter E. Jokiel.


William S. Loder.


Gary J. Ferguson.







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








|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS



11



---



##### Table of Contents








|        |                                                   
|------- | --------------------------------------------------
|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS






PART II







|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
    STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
    SECURITIES

Common Stock.




Use of Proceeds.








Purchases of Common Stock.




12



---



##### Table of Contents








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

|                                                                       |  |                                           |         |   |               |             |            |   |                 |  |   |               |  |  |               |         |  |              |   |         |  |  |   |         |  
|---------------------------------------------------------------------- |  | ----------------------------------------- | ------- | - | ------------- | ----------- | ---------- | - | --------------- |  | - | ------------- |  |  | ------------- | ------- |  | ------------ | - | ------- |  |  | - | ------- | -
|                                                                       |  | Successor                                 |         |   |               | Predecessor |           
|                                                                       |  |                                           |         |   |               |             |           
|                                                                       |  | Twelve Months                             |         |   | From April 3, |             |            |   | From January 1, |  |   | Twelve Months |  |  | Twelve Months |         |  | Seven Months |  
|                                                                       |  | Ended                                     |         |   | through       |             |            |   | through         |  |   | Ended         |  |  | Ended         |         |  | Ended        |  
|                                                                       |  | December 31                               |         |   | December 31   |             |            |   | November 23     |  |   | December 31   |  |  | December 31   |         |  | December 31  |  
|As of and for the Periods Ended                                        |  | 2004                                      |         |   | 2003          |             |            |   | 2004            |  |   | 2003          |  |  | 2002          |         |  | 2001         |  
|                                                                       |  |                                           |         |   |               |             |            |   |                 |  |   |               |  |  |               |         |  |              |  
|                                                                       |  | (In thousands, except for per share data) |        
|Results of Operations                                                  |  |                                           |         |   |               |             |            |   |                 |  |   |               |  |  |               |         |  |              |   |         |  |  |   |         |  
|Earned premiums                                                        |  | $                                         |        |   |               | $           |           |   |                 |  | $ |              |  |  | $             | 9,961   |  |              | $ | 13,518  |  |  | $ | 10,525  |  
|Net investment income                                                  |  |                                           | 278     |   |               |             |           |   |                 |  |   | 1,329         |  |  |               | 2,128   |  |              |   | 1,580   |  |  |   | 946     |  
|Total revenues                                                         |  |                                           | 280     |   |               |             |           |   |                 |  |   | 1,719         |  |  |               | 11,941  |  |              |   | 15,915  |  |  |   | 12,155  |  
|Net income(loss) before change in accounting principle, net of
    tax |  |                                           | (8,155  | ) |               |             | (578       | ) |                 |  |   | 650           |  |  |               | 1,359   |  |              |   | 595     |  |  |   | (576    | )
|Net income (loss)                                                      |  |                                           | (8,155  | ) |               |             | (578       | ) |                 |  |   | 650           |  |  |               | 1,359   |  |              |   | 3,721   |  |  |   | (576    | )
|Financial Condition                                                    |  |                                           |         |   |               |             |            |   |                 |  |   |               |  |  |               |         |  |              |   |         |  |  |   |         |  
|Investments                                                            |  | $                                         | 97,835  |   |               | $           |           |   |                 |  |   |               |  |  | $             | 49,113  |  |              | $ | 30,087  |  |  | $ | 65,907  |  
|Total assets                                                           |  |                                           | 217,231 |   |               |             | 4,940      |   |                 |  |   |               |  |  |               | 204,355 |  |              |   | 246,255 |  |  |   | 335,751 |  
|Total liabilities                                                      |  |                                           | 98,301  |   |               |             | 5,518      |   |                 |  |   |               |  |  |               | 161,850 |  |              |   | 205,084 |  |  |   | 296,460 |  
|Shareholders equity                                                   |  |                                           | 118,930 |   |               |             | (578       | ) |                 |  |   |               |  |  |               | 42,505  |  |              |   | 41,171  |  |  |   | 39,291  |  
|Net income(loss) per share                                             |  |                                           |         |   |               |             |            |   |                 |  |   |               |  |  |               |         |  |              |   |         |  |  |   |         |  
|Basic                                                                  |  | $                                         | (4.59   | ) |               | $           | (57,800.00 | ) |                 |  |   |               |  |  |               |         |  |              |   |         |  |  |   |         |  
|Diluted                                                                |  | $                                         | (4.59   | ) |               | $           | (57,800.00 | ) |                 |  |   |               |  |  |               |         |  |              |   |         |  |  |   |         |  



Specialty Underwriters Alliance Inc.


|                                             |  |                         |         |  |                 |              |         |      |  |  |         |  |  |      |         |  |      |  |         |      |  |  |         |  |  |      |         |  |      |  |         |  |      |  |         |  |  |  |         |  |  |  |  |        | 
|-------------------------------------------- |  | ----------------------- | ------- |  | --------------- | ------------ | ------- | ---- |  |  | ------- |  |  | ---- | ------- |  | ---- |  | ------- | ---- |  |  | ------- |  |  | ---- | ------- |  | ---- |  | ------- |  | ---- |  | ------- |  |  |  | ------- |  |  |  |  | ------ | 
|                                             |  |                         |         |  | Successor (SUA) |             
|                                             |  | Predecessor (Potomac)   |         |  |                 | Year Ended   |        
|                                             |  | Year Ended December 31, |         |  |                 | December 31, |        
|Direct Basis ($000)                          |  |                         |         |  |                 |              |        
|Y/E 12/31                                    |  | 1994                    |         |  | 1995            |              |         | 1996 |  |  | 1997    |  |  | 1998 |         |  | 1999 |  |         | 2000 |  |  | 2001    |  |  | 2002 |         |  | 2003 |  |         |  | 2004 | 
|                                             |  |                         |         |  |                 |              |         |      |  |  |         |  |  |      |         |  |      |  |         |      |  |  |         |  |  |      |         |  |      |  |         |  |      | 
|LIABILITY FOR UNPAID CLAIMS & CLAIM ADJ. EXP |  |                         | 83,862  |  |                 |              | 91,831  |      |  |  | 115,880 |  |  |      | 131,700 |  |      |  | 160,244 |      |  |  | 235,376 |  |  |      | 297,408 |  |      |  | 255,128 |  |      |  | 176,069 |  |  |  | 140,542 |  |  |  |  | 95,959 | 
|CUMULATIVE PAID AS OF:                       |  |                         |         |  |                 |              |         |      |  |  |         |  |  |      |         |  |      |  |         |      |  |  |         |  |  |      |         |  |      |  |         |  |      |  |         |  |  |  |         |  |  |  |  |        | 
|1 YEAR LATER                                 |  |                         | 38,313  |  |                 |              | 37,000  |      |  |  | 53,647  |  |  |      | 62,659  |  |      |  | 81,545  |      |  |  | 98,963  |  |  |      | 86,980  |  |      |  | 76,958  |  |      |  | 58,815  |  |  |  | 10,090  |  |  |  |  |        | 
|2 YEARS LATER                                |  |                         | 57,668  |  |                 |              | 61,051  |      |  |  | 84,611  |  |  |      | 108,284 |  |      |  | 128,261 |      |  |  | 163,656 |  |  |      | 159,584 |  |      |  | 134,008 |  |      |  | 68,756  |  |  |  |         |  |  |  |  |        | 
|3 YEARS LATER                                |  |                         | 71,448  |  |                 |              | 77,409  |      |  |  | 112,193 |  |  |      | 131,940 |  |      |  | 163,498 |      |  |  | 220,344 |  |  |      | 213,116 |  |      |  | 143,601 |  |      |  |         |  |  |  |         |  |  |  |  |        | 
|4 YEARS LATER                                |  |                         | 80,957  |  |                 |              | 95,415  |      |  |  | 124,855 |  |  |      | 151,753 |  |      |  | 191,357 |      |  |  | 261,115 |  |  |      | 222,556 |  |      |  |         |  |      |  |         |  |  |  |         |  |  |  |  |        | 
|5 YEARS LATER                                |  |                         | 92,790  |  |                 |              | 103,816 |      |  |  | 135,029 |  |  |      | 166,365 |  |      |  | 212,314 |      |  |  | 270,071 |  |  |      |         |  |      |  |         |  |      |  |         |  |  |  |         |  |  |  |  |        | 
|6 YEARS LATER                                |  |                         | 99,866  |  |                 |              | 109,322 |      |  |  | 143,667 |  |  |      | 176,712 |  |      |  | 215,134 |      |  |  |         |  |  |      |         |  |      |  |         |  |      |  |         |  |  |  |         |  |  |  |  |        | 
|7 YEARS LATER                                |  |                         | 102,876 |  |                 |              | 114,002 |      |  |  | 148,722 |  |  |      | 177,865 |  |      |  |         |      |  |  |         |  |  |      |         |  |      |  |         |  |      |  |         |  |  |  |         |  |  |  |  |        | 
|8 YEARS LATER                                |  |                         | 105,354 |  |                 |              | 116,673 |      |  |  | 149,304 |  |  |      |         |  |      |  |         |      |  |  |         |  |  |      |         |  |      |  |         |  |      |  |         |  |  |  |         |  |  |  |  |        | 
|9 YEARS LATER                                |  |                         | 106,752 |  |                 |              | 117,095 |      |  |  |         |  |  |      |         |  |      |  |         |      |  |  |         |  |  |      |         |  |      |  |         |  |      |  |         |  |  |  |         |  |  |  |  |        | 
|10 YEARS LATER                               |  |                         | 106,969 |  |                 |              |         |      |  |  |         |  |  |      |         |  |      |  |         |      |  |  |         |  |  |      |         |  |      |  |         |  |      |  |         |  |  |  |         |  |  |  |  |        | 

13



---



##### Table of Contents



|                                          |  |                         |         |   |                 |              |         |      |  |  |         |   |  |      |         |   |      |  |          |      |  |  |          |   |  |      |         |   |      |  |         |   |      |  |         |   |  |  |         |  |  |  |  |        | 
|----------------------------------------- |  | ----------------------- | ------- | - | --------------- | ------------ | ------- | ---- |  |  | ------- | - |  | ---- | ------- | - | ---- |  | -------- | ---- |  |  | -------- | - |  | ---- | ------- | - | ---- |  | ------- | - | ---- |  | ------- | - |  |  | ------- |  |  |  |  | ------ | 
|                                          |  |                         |         |   | Successor (SUA) |             
|                                          |  | Predecessor (Potomac)   |         |   |                 | Year Ended   |        
|                                          |  | Year Ended December 31, |         |   |                 | December 31, |        
|Direct Basis ($000)                       |  |                         |         |   |                 |              |        
|Y/E 12/31                                 |  | 1994                    |         |   | 1995            |              |         | 1996 |  |  | 1997    |   |  | 1998 |         |   | 1999 |  |          | 2000 |  |  | 2001     |   |  | 2002 |         |   | 2003 |  |         |   | 2004 | 
|                                          |  |                         |         |   |                 |              |         |      |  |  |         |   |  |      |         |   |      |  |          |      |  |  |          |   |  |      |         |   |      |  |         |   |      | 
|RE-ESTIMATED LIABILITY AS OF:             |  |                         |         |   |                 |              |         |      |  |  |         |   |  |      |         |   |      |  |          |      |  |  |          |   |  |      |         |   |      |  |         |   |      |  |         |   |  |  |         |  |  |  |  |        | 
|END OF YEAR                               |  |                         | 83,862  |   |                 |              | 91,831  |      |  |  | 115,880 |   |  |      | 131,700 |   |      |  | 160,244  |      |  |  | 235,376  |   |  |      | 297,408 |   |      |  | 255,128 |   |      |  | 176,069 |   |  |  | 140,542 |  |  |  |  | 95,959 | 
|1 YEAR LATER                              |  |                         | 91,041  |   |                 |              | 96,003  |      |  |  | 118,878 |   |  |      | 145,067 |   |      |  | 211,516  |      |  |  | 326,426  |   |  |      | 326,203 |   |      |  | 247,629 |   |      |  | 198,858 |   |  |  | 110,371 |  |  |  |  |        | 
|2 YEARS LATER                             |  |                         | 92,251  |   |                 |              | 96,301  |      |  |  | 127,693 |   |  |      | 184,404 |   |      |  | 272,353  |      |  |  | 359,245  |   |  |      | 320,706 |   |      |  | 270,997 |   |      |  | 168,770 |   |  |  |         |  |  |  |  |        | 
|3 YEARS LATER                             |  |                         | 93,099  |   |                 |              | 100,950 |      |  |  | 158,274 |   |  |      | 222,057 |   |      |  | 279,420  |      |  |  | 350,765  |   |  |      | 344,771 |   |      |  | 240,368 |   |      |  |         |   |  |  |         |  |  |  |  |        | 
|4 YEARS LATER                             |  |                         | 95,467  |   |                 |              | 125,181 |      |  |  | 181,078 |   |  |      | 221,608 |   |      |  | 266,482  |      |  |  | 366,736  |   |  |      | 318,382 |   |      |  |         |   |      |  |         |   |  |  |         |  |  |  |  |        | 
|5 YEARS LATER                             |  |                         | 112,451 |   |                 |              | 141,469 |      |  |  | 179,581 |   |  |      | 209,018 |   |      |  | 273,463  |      |  |  | 351,129  |   |  |      |         |   |      |  |         |   |      |  |         |   |  |  |         |  |  |  |  |        | 
|6 YEARS LATER                             |  |                         | 124,508 |   |                 |              | 139,473 |      |  |  | 168,994 |   |  |      | 212,266 |   |      |  | 265,763  |      |  |  |          |   |  |      |         |   |      |  |         |   |      |  |         |   |  |  |         |  |  |  |  |        | 
|7 YEARS LATER                             |  |                         | 123,464 |   |                 |              | 129,867 |      |  |  | 169,519 |   |  |      | 208,048 |   |      |  |          |      |  |  |          |   |  |      |         |   |      |  |         |   |      |  |         |   |  |  |         |  |  |  |  |        | 
|8 YEARS LATER                             |  |                         | 115,307 |   |                 |              | 129,675 |      |  |  | 168,778 |   |  |      |         |   |      |  |          |      |  |  |          |   |  |      |         |   |      |  |         |   |      |  |         |   |  |  |         |  |  |  |  |        | 
|9 YEARS LATER                             |  |                         | 114,454 |   |                 |              | 126,347 |      |  |  |         |   |  |      |         |   |      |  |          |      |  |  |          |   |  |      |         |   |      |  |         |   |      |  |         |   |  |  |         |  |  |  |  |        | 
|10 YEARS LATER                            |  |                         | 111,444 |   |                 |              |         |      |  |  |         |   |  |      |         |   |      |  |          |      |  |  |          |   |  |      |         |   |      |  |         |   |      |  |         |   |  |  |         |  |  |  |  |        | 
|RED (DEF) Dec 2004                        |  |                         | (27,583 | ) |                 |              | (34,516 | )    |  |  | (52,898 | ) |  |      | (76,348 | ) |      |  | (105,520 | )    |  |  | (115,753 | ) |  |      | (20,974 | ) |      |  | 14,760  |   |      |  | 7,298   |   |  |  | 30,171  |  |  |  |  |        | 
|% REDUNDANCY (DEFICIENCY) REPORTED AS OF: |  |                         |         |   |                 |              |         |      |  |  |         |   |  |      |         |   |      |  |          |      |  |  |          |   |  |      |         |   |      |  |         |   |      |  |         |   |  |  |         |  |  |  |  |        | 
|1 YEAR LATER                              |  |                         | (9      | ) |                 |              | (5      | )    |  |  | (3      | ) |  |      | (10     | ) |      |  | (32      | )    |  |  | (39      | ) |  |      | (10     | ) |      |  | 3       |   |      |  | (13     | ) |  |  | 21      |  |  |  |  |        | 
|2 YEARS LATER                             |  |                         | (10     | ) |                 |              | (5      | )    |  |  | (10     | ) |  |      | (40     | ) |      |  | (70      | )    |  |  | (53      | ) |  |      | (8      | ) |      |  | (6      | ) |      |  | 4       |   |  |  |         |  |  |  |  |        | 
|3 YEARS LATER                             |  |                         | (11     | ) |                 |              | (10     | )    |  |  | (37     | ) |  |      | (69     | ) |      |  | (74      | )    |  |  | (49      | ) |  |      | (16     | ) |      |  | 6       |   |      |  |         |   |  |  |         |  |  |  |  |        | 
|4 YEARS LATER                             |  |                         | (14     | ) |                 |              | (36     | )    |  |  | (56     | ) |  |      | (68     | ) |      |  | (66      | )    |  |  | (56      | ) |  |      | (7      | ) |      |  |         |   |      |  |         |   |  |  |         |  |  |  |  |        | 
|5 YEARS LATER                             |  |                         | (34     | ) |                 |              | (54     | )    |  |  | (55     | ) |  |      | (59     | ) |      |  | (71      | )    |  |  | (49      | ) |  |      |         |   |      |  |         |   |      |  |         |   |  |  |         |  |  |  |  |        | 
|6 YEARS LATER                             |  |                         | (48     | ) |                 |              | (52     | )    |  |  | (46     | ) |  |      | (61     | ) |      |  | (66      | )    |  |  |          |   |  |      |         |   |      |  |         |   |      |  |         |   |  |  |         |  |  |  |  |        | 
|7 YEARS LATER                             |  |                         | (47     | ) |                 |              | (41     | )    |  |  | (46     | ) |  |      | (58     | ) |      |  |          |      |  |  |          |   |  |      |         |   |      |  |         |   |      |  |         |   |  |  |         |  |  |  |  |        | 
|8 YEARS LATER                             |  |                         | (38     | ) |                 |              | (41     | )    |  |  | (46     | ) |  |      |         |   |      |  |          |      |  |  |          |   |  |      |         |   |      |  |         |   |      |  |         |   |  |  |         |  |  |  |  |        | 
|9 YEARS LATER                             |  |                         | (36     | ) |                 |              | (38     | )    |  |  |         |   |  |      |         |   |      |  |          |      |  |  |          |   |  |      |         |   |      |  |         |   |      |  |         |   |  |  |         |  |  |  |  |        | 
|10 YEARS LATER                            |  |                         | (33     | ) |                 |              |         |      |  |  |         |   |  |      |         |   |      |  |          |      |  |  |          |   |  |      |         |   |      |  |         |   |      |  |         |   |  |  |         |  |  |  |  |        | 






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






14



---



##### Table of Contents







Revenues






Expenses










15



---



##### Table of Contents







Results of Operations from January 1, 2004 to
December 31, 2004 and from April 3, 2003 to
December 31, 2003






Liquidity and Capital Resources










Sources of Cash






16



---



##### Table of Contents















Adequacy of Capital










Critical Accounting Estimates






Recent Accounting Pronouncements




17



---



##### Table of Contents





Premium Income




Investments








Deferred Policy Acquisition Costs




18



---



##### Table of Contents





Intangible Assets




Losses, Claims and Settlement Expenses












Deferred Income Taxes




19



---



##### Table of Contents



Contractual Obligations




Table of Contractual Obligations


|                                                                                       |  |                                              |       |           |        |   |       |           |           |           |   |         |  |   |   |  |  |   |   | 
|-------------------------------------------------------------------------------------- |  | -------------------------------------------- | ----- | --------- | ------ | - | ----- | --------- | --------- | --------- | - | ------- |  | - | - |  |  | - | - | 
|                                                                                       |  | Payment due by period (dollars in thousands)
|                                                                                       |  |                                             
|                                                                                       |  |                                              |       | Less than |        |   |       |           | More than
|Contractual Obligations                                                                |  | Total                                        |       |           | 1 Year |   |       | 1-3 Years |           | 3-5 Years |   | 5 Years
|                                                                                       |  |                                              |       |           |        |   |       |           |           |           |   |        
|Long-Term Debt Obligations                                                             |  | $                                            |      |           |        | $ |      |           |           | $         |  |         |  | $ |  |  |  | $ |  | 
|Capital Lease Obligations                                                              |  |                                              |      |           |        |   |      |           |           |           |  |         |  |   |  |  |  |   |  | 
|Operating Lease Obligations                                                            |  |                                              |      |           |        |   |      |           |           |           |  |         |  |   |  |  |  |   |  | 
|Purchase Obligations                                                                   |  |                                              | 8,733 |           |        |   | 8,733 |           |           |           |  |         |  |   |  |  |  |   |  | 
|Other Long-Term Liabilities Reflected on the Registrants
    Balance Sheet under GAAP |  |                                              |      |           |        |   |      |           |           |           |  |         |  |   |  |  |  |   |  | 
|Total                                                                                  |  | $                                            | 8,733 |           |        | $ | 8,733 |           |           | $         |  |         |  | $ |  |  |  | $ |  | 





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

Commitments




Quantitative and Qualitative Disclosures about Market Risk




20



---



##### Table of Contents



Effects of Inflation




Interest Rate Risk






|                           |  |                        |        |                |                      |                |                 |               |           |          |                |  |  |   |        |  
|-------------------------- |  | ---------------------- | ------ | -------------- | -------------------- | -------------- | --------------- | ------------- | --------- | -------- | -------------- |  |  | - | ------ | -
|                           |  |                        |        |                |                      | Estimated Fair |                 |               | After Tax |         
|                           |  |                        |        | Assumed Change |                      |                | Value After     |               |           | Increase |               
|                           |  | Fair Value             |        |                | in Relevant Interest |                |                 | Change in     |           |          | (Decrease) in  | 
|                           |  | at 12/31/04            |        |                | Rate                 |                |                 | Interest Rate |           |          | Carrying Value | 
|                           |  |                        |        |                |                      |                |                 |               |           |          |                | 
|                           |  | (Dollars in thousands) |       
|Fixed Maturity Investments |  | $                      | 97,835 |                |                      |                | 100 bp decrease |               |           | $        | 99,543         |  |  | $ | 1,708  |  
|                           |  |                        |        |                |                      |                | 50 bp decrease  |               |           | $        | 98,708         |  |  | $ | 873    |  
|                           |  |                        |        |                |                      |                | 50 bp increase  |               |           | $        | 96,981         |  |  | $ | (854   | )
|                           |  |                        |        |                |                      |                | 100 bp increase |               |           | $        | 96,085         |  |  | $ | (1,750 | )

Credit Risk






|                                                 |       |             |        |            |           |  |    |     |  
|------------------------------------------------ | ----- | ----------- | ------ | ---------- | --------- |  | -- | --- | -
|                                                 |       |             |        | Percent of |          
|Bond Ratings                                     |       | 2004        |        |            | Portfolio | 
|                                                 |       |             |        |            |           | 
|                                                 |       | (Dollars in |       
|                                                 |       | thousands)  |       
|U.S. Government and affiliated agency securities |       |             | 15,624 |            |           |  | 31 | %  
|AA rated                                         |       |             | 3,917  |            |           |  | 8  | %  
|A rated                                          |       |             | 30,924 |            |           |  | 61 | %  
|                                                 |       |             |        |            |           | 
|                                                 | Total |             |        | 50,465     |           |  |    | 100 | %
|                                                 |       |             |        |            |           | 



21



---



##### Table of Contents



Potomac Insurance Company of Illinois


The following discussion and analysis of financial condition
and results of operations should be read together with
Selected Financial Data and the 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. The 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.


Results of Operations from January 1, 2004 through
November 23, 2004 versus Year Ended December 31,
2003






Year Ended December 31, 2003 versus Year Ended
December 31, 2002






Liquidity and Capital Resources






22



---



##### Table of Contents







Related Party Transactions




Critical Accounting Policies and Estimates






Loss and Loss Adjustment Expenses








23



---



##### Table of Contents











Reinsurance Transactions











|         |                                                               
|-------- | --------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK








|        |                                            
|------- | -------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE








|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES



24



---



##### Table of Contents












|         |                  
|-------- | -----------------
|ITEM 9B. | OTHER INFORMATION






PART III







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








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



25



---



##### Table of Contents








|         |                                       
|-------- | --------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES






PART IV







|         |                                                                     
|-------- | --------------------------------------------------------------------
|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
    FORM 8-K



|    |                                                                     
|--- | --------------------------------------------------------------------
|(a) | 1. and 2. Financial Statements and Financial Statement
    Schedules



3. Exhibits


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

26



---



##### Table of Contents



|        |    |       |             |                                                                                                                                                                                                                                                                                                                                                      
|------- | -- | ----- | ----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |            
|Number  |    |       | Description
|        |    |       |            
|        | 4  | .7    |             | Warrant No. W-1 B issued to Friedman, Billings, Ramsey
    Group, Inc. (Incorporated by reference to Exhibit 4.7,
    filed with the Form S-1)                                                                                                                                                                                                       
|       
|        | 4  | .8    |             | Warrant No. W-1 C issued to Friedman, Billings, Ramsey
    Group, Inc. (Incorporated by reference to Exhibit 4.8,
    filed with the Form S-1)                                                                                                                                                                                                       
|       
|        | 4  | .9    |             | Warrant No. W-2 B issued to Courtney C. Smith (Incorporated
    by reference to Exhibit 4.9, filed with the Form S-1)                                                                                                                                                                                                                                
|       
|        | 4  | .10   |             | Warrant No. W-2 C issued to Courtney C. Smith (Incorporated
    by reference to Exhibit 4.10, filed with the Form S-1)                                                                                                                                                                                                                               
|       
|        | 4  | .11   |             | Warrant No. W-3 B issued to Peter E. Jokiel (Incorporated
    by reference to Exhibit 4.11, filed with the Form S-1)                                                                                                                                                                                                                                 
|       
|        | 4  | .12   |             | Warrant No. W-4 B issued to William S. Loder (Incorporated
    by reference to Exhibit 4.12, filed with the Form S-1)                                                                                                                                                                                                                                
|       
|        | 4  | .13   |             | Warrant No. W-5 B issued to Gary J. Ferguson (Incorporated
    by reference to Exhibit 4.13, filed with the Form S-1)                                                                                                                                                                                                                                
|       
|        | 4  | .14   |             | Warrant No. W-6 issued to Standard American Insurance
    Limited (Incorporated by reference to Exhibit 4.14, filed
    with the Form S-1)                                                                                                                                                                                                           
|       
|        | 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 the Form S-1)                                                                                                                            
|       
|        | 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 the Form S-1)                                                                                                                                                                            
|       
|        | 10 | .1.3  |             | Agreement, dated March 15, 2004, between the Registrant and
    Guy Carpenter & Company, Inc. (Incorporated by
    reference to Exhibit 10.1.3, filed with the Form S-1)                                                                                                                                                                             
|       
|        | 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 the Form S-1)                                                                                                            
|       
|        | 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 the Form S-1)                                                                                                                                                                                                  
|       
|        | 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 the Form S-1)                                                                                                            
|       
|        | 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 the Form S-1)                                                                                                                                                            
|       
|        | 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 the Form S-1)                                                                                                                                                  
|       
|        | 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 the Form S-1)                                                                                                                                                    
|       
|        | 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 the Form S-1)                                                                                                                                                  
|       
|        | 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 the Form S-1)                                                                                                                                                  
|       
|        | 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
    the Form S-1)                                                                               
|       
|        | 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 the Form S-1)

27



---



##### Table of Contents



|        |    |       |             |                                                                                                                                                                                                                                                                                                                                                       
|------- | -- | ----- | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |            
|Number  |    |       | Description
|        |    |       |            
|        | 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 the Form S-1)
|       
|        | 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
    the Form S-1)                                                                                                                                                        
|       
|        | 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 the Form S-1)                                                                                                                               
|       
|        | 10 | .1.17 |             | Partner Agent Program Agreement, dated May 1, 2004, between
    the Registrant and American Team Managers (Incorporated by
    reference to Exhibit 10.1.17, filed with the Form S-1)                                                                                                                                                                 
|       
|        | 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 the Form S-1)                                                                                                                                      
|       
|        | 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 the Form S-1)                                                                                                                                  
|       
|        | 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 the Form S-1)                                                                                                                      
|       
|        | 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
    the Form S-1)                                                                       
|       
|        | 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
    the Form S-1)                                                                                                                                                   
|       
|        | 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 the Form S-1)                                                                                                                                                                          
|       
|        | 10 | .1.24 |             | Promissory Note, dated September 30, 2004, in favor of the
    Registrant (Incorporated by reference to Exhibit 10.1.26,
    filed with the Form S-1)                                                                                                                                                                                                 
|       
|        | 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 the Form S-1)                                                                                                                                                                                 
|       
|        | 10 | .1.26 |             | Promissory Note, dated August 16, 2004, in favor of the
    Registrant (Incorporated by reference to Exhibit 10.1.28,
    filed with the Form S-1)                                                                                                                                                                                                    
|       
|        | 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 the
    Form S-1)                                                                                                                                                          
|       
|        | 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
    the Form S-1)                                                                                                                                                  
|       
|        | 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 the Form S-1)                                                                                                                               
|       
|        | 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 the Form S-1)                                                                                                                                                                          
|       
|        | 10 | .1.31 |             | Promissory Note, dated November 3, 2004, in favor of the
    Registrant (Incorporated by reference to Exhibit 10.1.35,
    filed with the Form S-1)                                                                                                                                                                                                   
|       
|        | 10 | .1.32 |             | First Amendment to Software License Maintenance and Support
    Agreement, dated October 13, 2004, between the Registrant
    and ISO Strategic Solutions, Inc. (Incorporated by reference to
    Exhibit 10.1.36, filed with the Form S-1)                                                                                                           
|       
|        | 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 the Form S-1)                                                                                                          

28



---



##### Table of Contents



|        |    |        |             |                                                                                                                                                                                                                                                                                                                                           
|------- | -- | ------ | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |        |            
|Number  |    |        | Description
|        |    |        |            
|        | 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 the Form S-1)                                                                                    
|       
|        | 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
    the Form S-1)
|       
|        | 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 the Form S-1)                                                                                                                                                        
|       
|        | 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
    the Form S-1)                                                                                                                                       
|       
|        | 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 the Form S-1)                                                                                                                                                
|       
|        | 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 the Form S-1)                                                                                                         
|       
|        | 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                                                                                                                                                             
|       
|        | 10 | .1.41* |             | Amendment No. 1 to Partner Agent Program Agreement, dated
    January 17, 2005, between the Registrant and American Team
    Managers                                                                                                                                                                                                     
|       
|        | 14 | .1*    |             | Code of Ethics of Specialty Underwriters Alliance, Inc.                                                                                                                                                                                                                                                                                  
|       
|        | 21 | .1*    |             | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                                            
|       
|        | 31 | .1*    |             | Certification of Courtney C. Smith, Chief Executive Officer,
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                
|       
|        | 31 | .2*    |             | Certification of Peter E. Jokiel, Chief Financial Officer,
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                  
|       
|        | 32 | .1*    |             | Certification of Courtney C. Smith , Chief Executive Officer,
    pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                            
|       
|        | 32 | .2*    |             | Certification of Peter E. Jokiel, Chief Financial Officer,
    pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                               






|  |                
|- | ---------------
|* | Filed herewith.

29



---



##### Table of Contents






INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
SCHEDULES


|                                                                                                                                                                                                                                                                                                                                                                                                                          |  |          |      | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ---- | 
|                                                                                                                                                                                                                                                                                                                                                                                                                          |  | Page No. |     
|                                                                                                                                                                                                                                                                                                                                                                                                                          |  |          |     
|Report of Independent Registered Public
    Accounting Firm                                                                                                                                                                                                                                                                                                                                                               |  |          | F-2  | 
|Consolidated Balance Sheets of Specialty
    Underwriters Alliance, Inc. (Successor) as of
    December 31, 2004 and 2003                                                                                                                                                                                                                                                                                                |  |          | F-4  | 
|Consolidated Statements of Income and
    Comprehensive Income of Specialty Underwriters Alliance,
    Inc. (Successor) for the year ended December 31, 2004 and
    for the period from April 3, 2003 to December 31, 2003
    and Potomac Insurance Company of Illinois (Predecessor) for the
    period from January 1, 2004 to November 23, 2004 and
    the years ended December 31, 2003 and December 31,
    2002 |  |          | F-5  | 
|Consolidated Statements of
    Stockholders Equity of Specialty Underwriters
    Alliance, Inc. (Successor) as of December 31, 2004 and
    December 31, 2003                                                                                                                                                                                                                                                           |  |          | F-6  | 
|Consolidated Statements of Cash Flows for
    Specialty Underwriters Alliance, Inc. (Successor) for the
    year ended December 31, 2004 and the period from
    April 3, 2003 to December 31, 2003 and Potomac
    Insurance Company of Illinois (Predecessor) for the period from
    January 1, 2004 to November 23, 2004 and for the years
    ended December 31, 2003 and December 31, 2002                         |  |          | F-7  | 
|Notes to Consolidated Financial
    Statements                                                                                                                                                                                                                                                                                                                                                                            |  |          | F-8  | 
|Financial Statement Schedules                                                                                                                                                                                                                                                                                                                                                                                             |  |          |      | 
|Schedule I  Specialty
    Underwriters Alliance, Inc.  Summary of
    Investments other than investments in related parties at
    December 31, 2004                                                                                                                                                                                                                                                                   |  |          | F-21 | 
|Schedule II  Specialty
    Underwriters Alliance, Inc.  Condensed
    Financial Information of Registrant for the year ended
    December 31, 2004 and for the period from April 3,
    2003 to December 31, 2003                                                                                                                                                                                                      |  |          | F-22 | 
|Schedule III  Specialty
    Underwriters Alliance, Inc.  Supplementary
    Insurance Information for the year ended December 31, 2004
    and for the period from April 3, 2003 to December 31,
    2003                                                                                                                                                                                                               |  |          | F-25 | 
|Schedule IV  Specialty
    Underwriters Alliance, Inc.  Reinsurance for
    the year ended December 31, 2004 and for the period from
    April 3, 2003 to December 31, 2003                                                                                                                                                                                                                                            |  |          | F-26 | 
|Schedule V  Specialty
    Underwriters Alliance, Inc.  Valuation and
    Qualifying Accounts of Registrant                                                                                                                                                                                                                                                                                                             |  |          | F-27 | 
|Schedule VI  Specialty
    Underwriters Alliance, Inc.  Supplemental
    Information Concerning Property and Casualty Insurance
    Operations for the year ended December 31, 2004 and for the
    period from April 3, 2003 to December 31, 2003                                                                                                                                                                     |  |          | F-28 | 
|Schedule III  Potomac
    Insurance Company of Illinois  Supplementary
    Insurance Information for the period from January 1, 2004
    to November 23, 2004 and for the years ended
    December 31, 2003 and 2002                                                                                                                                                                                                    |  |          | F-29 | 
|Schedule IV  Potomac
    Insurance Company of Illinois  Reinsurance for the
    period from January 1, 2004 to November 23, 2004 and
    for the years ended December 31, 2003 and 2002                                                                                                                                                                                                                                 |  |          | F-30 | 
|Schedule V  Potomac
    Insurance Company of Illinois  Valuation and
    Qualifying Accounts of Registrant for the year ended
    December 31, 2003                                                                                                                                                                                                                                                                     |  |          | F-31 | 
|Schedule VI  Potomac
    Insurance Company of Illinois  Supplemental
    Information for Property and Casualty Insurance Underwriters for
    the period from January 1, 2004 to November 23, 2004
    and for the years ended December 31, 2003 and 2002                                                                                                                                                               |  |          | F-32 | 

F-1



---



##### Table of Contents






Report of Independent Registered Public Accounting Firm






PricewaterhouseCoopers
LLP






F-2



---



##### Table of Contents



Report of Independent Registered Public Accounting Firm






PricewaterhouseCoopers
LLP






F-3



---



##### Table of Contents






Balance Sheets


|                                                                                                                                  |                            |                         |         |         |              |   |       |       |  
|--------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ----------------------- | ------- | ------- | ------------ | - | ----- | ----- | -
|                                                                                                                                  |                            | Specialty Underwriters |        
|                                                                                                                                  |                            | Alliance, Inc.          |        
|                                                                                                                                  |                            | (Successor)             |        
|                                                                                                                                  |                            |                         |        
|                                                                                                                                  |                            | December 31,            |         |         | December 31, |  
|                                                                                                                                  |                            | 2004                    |         |         | 2003         |  
|                                                                                                                                  |                            |                         |         |         |              |  
|                                                                                                                                  |                            | (Dollars in thousands)  |        
|ASSETS                                                                                                                           
|Fixed maturity investments, at fair value (cost:$50,455)                                                                          |                            | $                       | 50,465  |         |              | $ |      |      
|Short-term investments, at amortized cost (which approximates
    fair value)                                                     |                            |                         | 47,370  |         |              |   |      |      
|                                                                                                                                  |                            |                         |         |         |              |  
|                                                                                                                                  | Total investments          |                         |         | 97,835  |              |   |       |      |  
|Cash and cash equivalents                                                                                                         |                            |                         | 8,986   |         |              |   | 200   |      
|Reinsurance recoverable on paid and unpaid loss and loss
    adjustment expenses                                                  |                            |                         | 95,959  |         |              |   |      |      
|Investment income accrued                                                                                                         |                            |                         | 677     |         |              |   |      |      
|Equipment and capitalized software at cost (less accumulated
    depreciation of $0)                                              |                            |                         | 2,389   |         |              |   |      |      
|Prepaid expenses                                                                                                                  |                            |                         | 632     |         |              |   | 10    |      
|Deferred charges                                                                                                                  |                            |                         |        |         |              |   | 4,730 |      
|Intangible assets                                                                                                                 |                            |                         | 10,745  |         |              |   |      |      
|Other assets                                                                                                                      |                            |                         | 8       |         |              |   |      |      
|                                                                                                                                  |                            |                         |         |         |              |  
|Total assets                                                                                                                      |                            | $                       | 217,231 |         |              | $ | 4,940 |      
|                                                                                                                                  |                            |                         |         |         |              |  
|                                                                                                                                 
|LIABILITIES                                                                                                                      
|Loss and loss adjustment expense reserves                                                                                         |                            | $                       | 95,959  |         |              | $ |      |      
|Unearned insurance premiums                                                                                                       |                            |                         | 3       |         |              |   |      |      
|Short-term debt                                                                                                                   |                            |                         |        |         |              |   | 700   |      
|Payable for securities purchased                                                                                                  |                            |                         | 1,000   |         |              |   |      |      
|Accounts payable and other liabilities                                                                                            |                            |                         | 1,339   |         |              |   | 23    |      
|Stock warrants                                                                                                                    |                            |                         |        |         |              |   | 4,795 |      
|                                                                                                                                  |                            |                         |         |         |              |  
|                                                                                                                                  | Total liabilities          |                         |         | 98,301  |              |   |       | 5,518 |  
|                                                                                                                                  |                            |                         |         |         |              |  
|Commitments (Note 9)                                                                                                              |                            |                         |         |         |              |   |       |      
|Stockholders equity                                                                                                              |                            |                         |         |         |              |   |       |      
|Common stock Class A at $.01 par value per
    share  authorized 75,000,000 shares; issued and
    outstanding 14,680,688 shares |                            |                         | 147     |         |              |   |      |      
|Common stock Class B at $.01 par value per
    share  authorized 2,000,000 shares; issued and
    outstanding 26,316 shares      |                            |                         |        |         |              |   |      |      
|Paid-in capital  Class A                                                                                                         |                            |                         | 127,256 |         |              |   |      |      
|Paid-in capital  Class B                                                                                                         |                            |                         | 250     |         |              |   |      |      
|Accumulated deficit                                                                                                               |                            |                         | (8,733  | )       |              |   | (578  | )    
|Accumulated other comprehensive income, net of tax                                                                                |                            |                         | 10      |         |              |   |      |      
|                                                                                                                                  |                            |                         |         |         |              |  
|                                                                                                                                  | Total stockholders equity |                         |         | 118,930 |              |   |       | (578  | )
|                                                                                                                                  |                            |                         |         |         |              |  
|Total liabilities and stockholders equity                                                                                        |                            | $                       | 217,231 |         |              | $ | 4,940 |      
|                                                                                                                                  |                            |                         |         |         |              |  



F-4



---



##### Table of Contents






Statements of Income and Comprehensive Income


|                                                           |                                                                          |                                              |        |       |                 |                           |      |            |                 |               |   |              |       |       |      |       |       |        |   |       |        |        | 
|---------------------------------------------------------- | ------------------------------------------------------------------------ | -------------------------------------------- | ------ | ----- | --------------- | ------------------------- | ---- | ---------- | --------------- | ------------- | - | ------------ | ----- | ----- | ---- | ----- | ----- | ------ | - | ----- | ------ | ------ | 
|                                                           |                                                                          | Specialty Underwriters                      |        |       |                 | Potomac Insurance Company |     
|                                                           |                                                                          | Alliance, Inc. (Successor)                   |        |       |                 | of Illinois (Predecessor) |     
|                                                           |                                                                          |                                              |        |       |                 |                           |     
|                                                           |                                                                          | Twelve Months                                |        |       |                 |                           |      |            |                 | Twelve Months |  
|                                                           |                                                                          | Ended                                        |        |       | From April 3,   |                           |      |            | From January 1, |               |   | Ended        |      
|                                                           |                                                                          | December 31,                                 |        |       | to December 31, |                           |      |            | to November 23, |               |   | December 31, |      
|                                                           |                                                                          |                                              |        |       |                 |                           |      |            |                 |               |   |              |      
|                                                           |                                                                          | 2004                                         |        |       | 2003            |                           |      |            | 2004            |               |   | 2003         |       |       | 2002 |      
|                                                           |                                                                          |                                              |        |       |                 |                           |      |            |                 |               |   |              |       |       |      |      
|                                                           |                                                                          | (Dollars in thousands except per share data) |       
|Revenues:                                                  |                                                                          |                                              |        |       |                 |                           |      |            |                 |               |   |              |       |       |      |       |       |        |   |       |       
|                                                           | Earned insurance premiums                                                |                                              | $      |      |                 |                           | $    |           |                 |               |   | $            |      |       |      | $     | 9,961 |        |   | $     | 13,518 |       
|                                                           | Net investment income                                                    |                                              |        | 278   |                 |                           |      |           |                 |               |   |              | 1,329 |       |      |       | 2,128 |        |   |       | 1,580  |       
|                                                           | Net realized gains (losses)                                              |                                              |        | 2     |                 |                           |      |           |                 |               |   |              | 390   |       |      |       | (466  | )      |   |       | 426    |       
|                                                           | Other revenue                                                            |                                              |        |      |                 |                           |      |           |                 |               |   |              |      |       |      |       | 318   |        |   |       | 391    |       
|                                                           |                                                                          |                                              |        |       |                 |                           |      |            |                 |               |   |              |       |       |      |      
|                                                           |                                                                          | Total revenues                               |        |       | 280             |                           |      |            | 0               |               |   |              |       | 1,719 |      |       |       | 11,941 |   |       |        | 15,915 | 
|                                                           |                                                                          |                                              |        |       |                 |                           |      |            |                 |               |   |              |       |       |      |      
|Expenses:                                                  |                                                                          |                                              |        |       |                 |                           |      |            |                 |               |   |              |       |       |      |       |       |        |   |       |       
|                                                           | Loss and loss adjustment expenses                                        |                                              |        |      |                 |                           |      |           |                 |               |   |              |      |       |      |       | 6,821 |        |   |       | 10,068 |       
|                                                           | Insurance acquisition expenses                                           |                                              |        |      |                 |                           |      |           |                 |               |   |              | 674   |       |      |       | 1,843 |        |   |       | 2,990  |       
|                                                           | Service company fees                                                     |                                              |        | 4,650 |                 |                           |      | 205        |                 |               |   |              |      |       |      |       |      |        |   |       |       |       
|                                                           | Financing expenses                                                       |                                              |        | 268   |                 |                           |      | 157        |                 |               |   |              |      |       |      |       |      |        |   |       |       |       
|                                                           | General and administrative expenses                                      |                                              |        | 3,517 |                 |                           |      | 216        |                 |               |   |              | 45    |       |      |       | 939   |        |   |       | 1,537  |       
|                                                           | Accretion of loss and loss adjustment expense reserves to fair
    value |                                              |        |      |                 |                           |      |           |                 |               |   |              |      |       |      |       | 243   |        |   |       | 399    |       
|                                                           |                                                                          |                                              |        |       |                 |                           |      |            |                 |               |   |              |       |       |      |      
|                                                           |                                                                          | Total expenses                               |        |       | 8,435           |                           |      |            | 578             |               |   |              |       | 719   |      |       |       | 9,846  |   |       |        | 14,994 | 
|                                                           |                                                                          |                                              |        |       |                 |                           |      |            |                 |               |   |              |       |       |      |      
|Pretax income (loss)                                       |                                                                          |                                              | (8,155 | )     |                 |                           | (578 | )          |                 |               |   | 1,000        |       |       |      | 2,095 |       |        |   | 921   |       
|                                                           | Federal income tax expense                                               |                                              |        |      |                 |                           |      |           |                 |               |   |              | (350  | )     |      |       | (736  | )      |   |       | (326   | )     
|                                                           |                                                                          |                                              |        |       |                 |                           |      |            |                 |               |   |              |       |       |      |      
|Net income (loss) before change in accounting principle    |                                                                          |                                              | (8,155 | )     |                 |                           | (578 | )          |                 |               |   | 650          |       |       |      | 1,359 |       |        |   | 595   |       
|                                                           |                                                                          |                                              |        |       |                 |                           |      |            |                 |               |   |              |       |       |      |      
|                                                           | Cumulative effect of change in accounting principle, net of tax          |                                              |        |      |                 |                           |      |           |                 |               |   |              |      |       |      |       |      |        |   |       | 3,126  |       
|                                                           |                                                                          |                                              |        |       |                 |                           |      |            |                 |               |   |              |       |       |      |      
|Net income (loss)                                          |                                                                          |                                              | (8,155 | )     |                 |                           | (578 | )          |                 |               |   | 650          |       |       |      | 1,359 |       |        |   | 3,721 |       
|                                                           |                                                                          |                                              |        |       |                 |                           |      |            |                 |               |   |              |       |       |      |      
|                                                           | Net change in unrealized investment gains, net of tax                    |                                              |        | 10    |                 |                           |      |           |                 |               |   |              | (391  | )     |      |       | (25   | )      |   |       | 654    |       
|                                                           |                                                                          |                                              |        |       |                 |                           |      |            |                 |               |   |              |       |       |      |      
|Comprehensive net income (loss)                            |                                                                          | $                                            | (8,145 | )     |                 | $                         | (578 | )          |                 |               | $ | 259          |       |       | $    | 1,334 |       |        | $ | 4,375 |       
|                                                           |                                                                          |                                              |        |       |                 |                           |      |            |                 |               |   |              |       |       |      |      
|Earnings (loss) per share available to common stockholders |                                                                          |                                              |        |       |                 |                           |      |            |                 |               |   |              |       |       |      |       |       |        |   |       |       
|                                                           | Basic                                                                    |                                              | $      | (4.59 | )               |                           | $    | (57,800.00 | )               |               |   |              |       |       |      |       |       |        |   |       |        |       
|                                                           | Diluted                                                                  |                                              | $      | (4.59 | )               |                           | $    | (57,800.00 | )               |               |   |              |       |       |      |       |       |        |   |       |        |       



F-5



---



##### Table of Contents






Statements of Stockholders Equity


|                                                      |  |                        |     |  |         |   |         |         |  |         |   |             |           |   |     |                |  |   |               |   |  |   |    |  |  |   |         |  
|----------------------------------------------------- |  | ---------------------- | --- |  | ------- | - | ------- | ------- |  | ------- | - | ----------- | --------- | - | --- | -------------- |  | - | ------------- | - |  | - | -- |  |  | - | ------- | -
|                                                      |  |                        |     |  |         |   |         |         |  |         |   | Accumulated |           |   |    
|                                                      |  |                        |     |  |         |   |         |         |  |         |   | Other       |           |   |    
|                                                      |  | Common                 |     |  | Paid-in |   |         | Common  |  | Paid-in |   |             | Retained  |   |     | Comprehensive  |  |   | Total         |  
|Specialty Underwriters Alliance, Inc.                |  | Stock                  |     |  | Capital |   |         | Stock   |  | Capital |   |             | Earnings  |   |     | Income (Loss), |  |   | Stockholders |  
|(Successor)                                           |  | Class A                |     |  | Class A |   |         | Class B |  | Class B |   |             | (Deficit) |   |     | Net of Tax     |  |   | Equity        |  
|                                                      |  |                        |     |  |         |   |         |         |  |         |   |             |           |   |     |                |  |   |               |  
|                                                      |  | (Dollars in thousands) |    
|Balances at April 3, 2003                             |  | $                      |    |  |         | $ |        |         |  | $       |  |             |           | $ |    |                |  | $ |              |   |  | $ |   |  |  | $ |        |  
|Net loss                                              |  |                        |    |  |         |   |        |         |  |         |  |             |           |   |    |                |  |   | (578          | ) |  |   |   |  |  |   | (578    | )
|                                                      |  |                        |     |  |         |   |         |         |  |         |   |             |           |   |     |                |  |   |               |   | 
|Balances at December 31, 2003                         |  | $                      |    |  |         | $ |        |         |  | $       |  |             |           | $ |    |                |  | $ | (578          | ) |  | $ |   |  |  | $ | (578    | )
|Net loss                                              |  |                        |    |  |         |   |        |         |  |         |  |             |           |   |    |                |  |   | (8,155        | ) |  |   |   |  |  |   | (8,155  | )
|Net change in unrealized investment gains, net of tax |  |                        |    |  |         |   |        |         |  |         |  |             |           |   |    |                |  |   |              |   |  |   | 10 |  |  |   | 10      |  
|Stock issuance                                        |  |                        | 147 |  |         |   | 127,256 |         |  |         |  |             |           |   | 250 |                |  |   |              |   |  |   |   |  |  |   | 127,653 |  
|                                                      |  |                        |     |  |         |   |         |         |  |         |   |             |           |   |     |                |  |   |               |   | 
|Balances at December 31, 2004                         |  | $                      | 147 |  |         | $ | 127,256 |         |  | $       |  |             |           | $ | 250 |                |  | $ | (8,733        | ) |  | $ | 10 |  |  | $ | 118,930 |  
|                                                      |  |                        |     |  |         |   |         |         |  |         |   |             |           |   |     |                |  |   |               |   | 



F-6



---



##### Table of Contents






Statements of Cash flows


|                                                                                |                                                                                 |                            |          |         |                 |                           |      |        |                 |               |   |              |         |   |      |         |          |   |   |        |         |  
|------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | -------------------------- | -------- | ------- | --------------- | ------------------------- | ---- | ------ | --------------- | ------------- | - | ------------ | ------- | - | ---- | ------- | -------- | - | - | ------ | ------- | -
|                                                                                |                                                                                 | Specialty Underwriters    |          |         |                 | Potomac Insurance Company |     
|                                                                                |                                                                                 | Alliance, Inc. (Successor) |          |         |                 | of Illinois (Predecessor) |     
|                                                                                |                                                                                 |                            |          |         |                 |                           |     
|                                                                                |                                                                                 | Twelve Months              |          |         |                 |                           |      |        |                 | Twelve Months |  
|                                                                                |                                                                                 | Ended                      |          |         | From April 3,   |                           |      |        | From January 1, |               |   | Ended        |        
|                                                                                |                                                                                 | December 31,               |          |         | to December 31, |                           |      |        | to November 23, |               |   | December 31, |        
|                                                                                |                                                                                 |                            |          |         |                 |                           |      |        |                 |               |   |              |        
|                                                                                |                                                                                 | 2004                       |          |         | 2003            |                           |      |        | 2004            |               |   | 2003         |         |   | 2002 |        
|                                                                                |                                                                                 |                            |          |         |                 |                           |      |        |                 |               |   |              |         |   |      |        
|                                                                                |                                                                                 | (Dollars in thousands)     |         
|Cash flows from operations:                                                     |                                                                                 |                            |          |         |                 |                           |      |        |                 |               |   |              |         |   |      |         |          |   |   |        |        
|Net income (loss)                                                               |                                                                                 | $                          | (8,155   | )       |                 | $                         | (578 | )      |                 |               | $ | 650          |         |   | $    | 1,359   |          |   | $ | 3,721  |        
|Charges (credits) to reconcile net income to cash flows
    from operations:    |                                                                                 |                            |          |         |                 |                           |      |        |                 |               |   |              |         |   |      |         |          |   |   |        |        
|                                                                                | Federal income tax expense                                                      |                            |          |        |                 |                           |      |       |                 |               |   |              | 350     |   |      |         | 736      |   |   |        | 326     |  
|                                                                                | Net realized losses (gains)                                                     |                            |          | (2      | )               |                           |      |       |                 |               |   |              | (390    | ) |      |         | 466      |   |   |        | (426    | )
|                                                                                | Cumulative effect of change in accounting principle                             |                            |          |        |                 |                           |      |       |                 |               |   |              |        |   |      |         |         |   |   |        | (3,126  | )
|                                                                                | Accrued interest costs exchanged for common stock                               |                            |          | 234     |                 |                           |      |       |                 |               |   |              |        |   |      |         |         |   |   |        |        |  
|Net change in:                                                                  |                                                                                 |                            |          |         |                 |                           |      |        |                 |               |   |              |         |   |      |         |          |   |   |        |        
|                                                                                | Deferred charges                                                                |                            |          | 4,730   |                 |                           |      | (4,730 | )               |               |   |              |        |   |      |         |         |   |   |        |        |  
|                                                                                | Stock warrants                                                                  |                            |          | (4,795  | )               |                           |      | 4,795  |                 |               |   |              |        |   |      |         |         |   |   |        |        |  
|                                                                                | Reinsurance recoverable on unpaid loss and loss adjustment
    expense reserves |                            |          | (95,959 | )               |                           |      |       |                 |               |   |              | 42,008  |   |      |         | 35,591   |   |   |        | 79,010  |  
|                                                                                | Loss and loss adjustment expense reserves                                       |                            |          | 95,959  |                 |                           |      |       |                 |               |   |              | (57,017 | ) |      |         | (39,385  | ) |   |        | (81,995 | )
|                                                                                | Insurance premiums receivable                                                   |                            |          |        |                 |                           |      |       |                 |               |   |              | 2,119   |   |      |         | 686      |   |   |        | 1,746   |  
|                                                                                | Unearned insurance premiums                                                     |                            |          | 3       |                 |                           |      |       |                 |               |   |              | (4,823  | ) |      |         | (1,159   | ) |   |        | (6,444  | )
|                                                                                | Deferred acquisition costs                                                      |                            |          |        |                 |                           |      |       |                 |               |   |              | 674     |   |      |         | 117      |   |   |        | 394     |  
|                                                                                | Other, net                                                                      |                            |          | 21      |                 |                           |      | 13     |                 |               |   |              | (683    | ) |      |         | (1,966   | ) |   |        | 5,092   |  
|                                                                                |                                                                                 |                            |          |         |                 |                           |      |        |                 |               |   |              |         |   |      |        
|Total adjustments                                                               |                                                                                 |                            | 191      |         |                 |                           | 78   |        |                 |               |   | (17,762      | )       |   |      | (4,914  | )        |   |   | (5,423 | )      
|                                                                                |                                                                                 |                            |          |         |                 |                           |      |        |                 |               |   |              |         |   |      |        
|Net cash flows used for operations                                              |                                                                                 |                            | (7,964   | )       |                 |                           | (500 | )      |                 |               |   | (17,112      | )       |   |      | (3,555  | )        |   |   | (1,702 | )      
|Cash flows from investing activities:                                           |                                                                                 |                            |          |         |                 |                           |      |        |                 |               |   |              |         |   |      |         |          |   |   |        |        
|                                                                                | Net (increase) decrease in short-term investments                               |                            |          | (47,370 | )               |                           |      |       |                 |               |   |              | 12,020  |   |      |         | (10,022  | ) |   |        | 42,775  |  
|                                                                                | Sales of fixed maturity investments                                             |                            |          |        |                 |                           |      |       |                 |               |   |              | 34,272  |   |      |         | 314,811  |   |   |        | 44,777  |  
|                                                                                | Redemptions, calls and maturities of fixed maturity investments                 |                            |          |        |                 |                           |      |       |                 |               |   |              | 13,697  |   |      |         | 267      |   |   |        |        |  
|                                                                                | Purchases of fixed maturity investments                                         |                            |          | (39,230 | )               |                           |      |       |                 |               |   |              | (33,555 | ) |      |         | (324,867 | ) |   |        | (50,415 | )
|                                                                                | Purchase of equipment and capitalized software                                  |                            |          | (2,389  | )               |                           |      |       |                 |               |   |              |        |   |      |         |         |   |   |        |        |  
|                                                                                | Net cash paid for acquisition                                                   |                            |          | (20,978 | )               |                           |      |       |                 |               |   |              |        |   |      |         |         |   |   |        |        |  
|                                                                                |                                                                                 |                            |          |         |                 |                           |      |        |                 |               |   |              |         |   |      |        
|Net cash flows (used for) provided by investing activities                      |                                                                                 |                            | (109,967 | )       |                 |                           |     |        |                 |               |   | 26,434       |         |   |      | (19,811 | )        |   |   | 37,137 |        
|Cash flows from financing activities                                            |                                                                                 |                            |          |         |                 |                           |      |        |                 |               |   |              |         |   |      |         |          |   |   |        |        
|                                                                                | Cash contributions received from Parent                                         |                            |          |        |                 |                           |      |       |                 |               |   |              |        |   |      |         |         |   |   |        | 505     |  
|                                                                                | Cash distributions paid to Parent                                               |                            |          |        |                 |                           |      |       |                 |               |   |              | (18,610 | ) |      |         |         |   |   |        | (3,000  | )
|                                                                                | Issuance of common stock                                                        |                            |          | 123,517 |                 |                           |      |       |                 |               |   |              |        |   |      |         |         |   |   |        |        |  
|                                                                                | Short-term borrowings                                                           |                            |          | 3,200   |                 |                           |      | 700    |                 |               |   |              |        |   |      |         |         |   |   |        |        |  
|                                                                                |                                                                                 |                            |          |         |                 |                           |      |        |                 |               |   |              |         |   |      |        
|Net cash flows (used for) provided by financing activities                      |                                                                                 |                            | 126,717  |         |                 |                           | 700  |        |                 |               |   | (18,610      | )       |   |      |        |          |   |   | (2,495 | )      
|Net (decrease) or increase from cash and cash equivalents
    during the period |                                                                                 |                            | 8,786    |         |                 |                           | 200  |        |                 |               |   | (9,288       | )       |   |      | (23,366 | )        |   |   | 32,940 |        
|Cash and cash equivalents at beginning of the period                            |                                                                                 |                            | 200      |         |                 |                           |     |        |                 |               |   | 10,307       |         |   |      | 33,673  |          |   |   | 733    |        
|                                                                                |                                                                                 |                            |          |         |                 |                           |      |        |                 |               |   |              |         |   |      |        
|Cash and cash equivalents at end of the period                                  |                                                                                 | $                          | 8,986    |         |                 | $                         | 200  |        |                 |               | $ | 1,019        |         |   | $    | 10,307  |          |   | $ | 33,673 |        
|                                                                                |                                                                                 |                            |          |         |                 |                           |      |        |                 |               |   |              |         |   |      |        





F-7



---



##### Table of Contents






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


(dollars in thousands)


NOTE 1  NATURE OF OPERATIONS
















|         |            
|-------- | -----------
|NOTE 2  | ACQUISITION





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





F-8



---



##### Table of Contents



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








|                 |         |      |   |         |   | 
|---------------- | ------- | ---- | - | ------- | - | 
|December 31      |         | 2004 |  
|                 |         |      |  
|Premiums earned: |         |      |   |        
|                 | Direct  |      | $ | 9       |  
|                 | Assumed |      |   |        |  
|                 | Ceded   |      |   | (9      | )
|                 |         |      |  
|                 |         | Net  |   | $       |  | 
|                 |         |      |  
|Less reserves    |         |      |   |        
|                 | Direct  |      | $ | 95,959  |  
|                 | Assumed |      |   |        |  
|                 | Ceded   |      |   | (95,959 | )
|                 |         |      |  
|                 |         | Net  |   | $       |  | 
|                 |         |      |  

NOTE 3  SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES








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





| |                     
| | --------------------
| | Cash and Investments



F-9



---



##### Table of Contents



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












| |                                   
| | ----------------------------------
| | Equipment and Capitalized Software





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





| |                  
| | -----------------
| | Intangible Assets





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



F-10



---



##### Table of Contents



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


Stock Warrants






Earned and Unearned Insurance Premiums






| |            
| | -----------
| | Reinsurance







Unpaid Loss and LAE






F-11



---



##### Table of Contents



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






Stock Options




Recent Accounting Pronouncements






|         |            
|-------- | -----------
|NOTE 4  | INVESTMENTS



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

F-12



---



##### Table of Contents



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








|                                      |       |           |        |        |            |   |        |        | 
|------------------------------------- | ----- | --------- | ------ | ------ | ---------- | - | ------ | ------ | 
|                                      |       | Cost or   |        |        |           
|                                      |       | Amortized |        |        |           
|                                      |       | Cost      |        |        | Fair Value |  
|                                      |       |           |        |        |            |  
|Due in one year or less               |       | $         | 3,983  |        |            | $ | 3,990  |       
|Due after one year through five years |       |           | 28,845 |        |            |   | 28,816 |       
|Due after one year through ten years  |       |           | 17,467 |        |            |   | 17,499 |       
|Due after ten years                   |       |           | 160    |        |            |   | 160    |       
|                                      |       |           |        |        |            |  
|                                      | Total |           | $      | 50,455 |            |   | $      | 50,465 | 
|                                      |       |           |        |        |            |  







|                       |                       |               |     |     | 
|---------------------- | --------------------- | ------------- | --- | --- | 
|                       |                       | Twelve Months |    
|                       |                       | Ended         |    
|                       |                       | December 31,  |    
|                       |                       | 2004          |    
|                       |                       |               |    
|Fixed maturities       |                       | $             | 113 |    
|Short-term investments |                       |               | 165 |    
|                       |                       |               |    
|                       | Net investment income |               | $   | 278 | 
|                       |                       |               |    



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



|                              |  |              |        |               |              |   |         |      |  |   |        |  
|----------------------------- |  | ------------ | ------ | ------------- | ------------ | - | ------- | ---- |  | - | ------ | -
|                              |  |              |        | Twelve Months |             
|                              |  |              |        | Ended         |             
|                              |  | Period Ended |        |               | December 31, |  
|                              |  | November 23, |        |               |              |  
|                              |  | 2004         |        |               | 2003         |   |         | 2002 | 
|                              |  |              |        |               |              |   |         |      | 
|Proceeds from voluntary sales |  | $            | 34,272 |               |              | $ | 314,811 |      |  | $ | 44,777 |  
|Gross realized gains          |  |              | 687    |               |              |   | 812     |      |  |   | 445    |  
|Gross realized losses         |  |              | (297   | )             |              |   | (1,278  | )    |  |   | (19    | )

F-13



---



##### Table of Contents



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




|                        |                           |                       |       |               |              |   |       |       |       |   |     |       |       | 
|----------------------- | ------------------------- | --------------------- | ----- | ------------- | ------------ | - | ----- | ----- | ----- | - | --- | ----- | ----- | 
|                        |                           |                       |       | Twelve Months |             
|                        |                           |                       |       | Ended         |             
|                        |                           | Period Ended          |       |               | December 31, |  
|                        |                           | November 23,          |       |               |              |  
|                        |                           | 2004                  |       |               | 2003         |   |       | 2002  |      
|                        |                           |                       |       |               |              |   |       |       |      
|Fixed maturities        |                           | $                     | 1,408 |               |              | $ | 2,146 |       |       | $ | 869 |      
|Short-term investments  |                           |                       | 15    |               |              |   | 135   |       |       |   | 755 |      
|Other investment income |                           |                       | 14    |               |              |   | 33    |       |       |   | 109 |      
|                        |                           |                       |       |               |              |   |       |       |      
|                        | Gross investment income   |                       |       | 1,437         |              |   |       | 2,314 |       |   |     | 1,733 |      
|                        | Less: investment expenses |                       |       | 108           |              |   |       | 186   |       |   |     | 153   |      
|                        |                           |                       |       |               |              |   |       |       |      
|                        |                           | Net investment income |       | $             | 1,329        |   |       | $     | 2,128 |   |     | $     | 1,580 | 
|                        |                           |                       |       |               |              |   |       |       |      

NOTE 5  FEDERAL INCOME TAXES






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



|                                     |  |              |     |               |              |   |     |      |  |   |     | 
|------------------------------------ |  | ------------ | --- | ------------- | ------------ | - | --- | ---- |  | - | --- | 
|                                     |  |              |     | Twelve Months |             
|                                     |  |              |     | Ended         |             
|                                     |  | Period Ended |     |               | December 31, |  
|                                     |  | November 23, |     |               |              |  
|                                     |  | 2004         |     |               | 2003         |   |     | 2002 | 
|                                     |  |              |     |               |              |   |     |      | 
|Current                              |  | $            |    |               |              | $ |    |      |  | $ |    | 
|Deferred                             |  |              | 350 |               |              |   | 736 |      |  |   | 326 | 
|                                     |  |              |     |               |              |   |     |      | 
|Income tax expense                   |  | $            | 350 |               |              | $ | 736 |      |  | $ | 326 | 
|                                     |  |              |     |               |              |   |     |      | 
|Expected federal income taxes at 35% |  | $            | 350 |               |              | $ | 733 |      |  | $ | 322 | 
|Other, net                           |  |              |    |               |              |   | 3   |      |  |   | 4   | 
|                                     |  |              |     |               |              |   |     |      | 
|Income tax expense                   |  | $            | 350 |               |              | $ | 736 |      |  | $ | 326 | 
|                                     |  |              |     |               |              |   |     |      | 

NOTE 6  OTHER COMPREHENSIVE INCOME




|                                           |                                                   |               |   |    |                  |  |   |   | 
|------------------------------------------ | ------------------------------------------------- | ------------- | - | -- | ---------------- |  | - | - | 
|                                           |                                                   | Twelve Months |   |    |                 
|                                           |                                                   | Ended         |   |    | From April 3, to
|                                           |                                                   | December 31,  |   |    | December 31,    
|                                           |                                                   | 2004          |   |    | 2003            
|                                           |                                                   |               |   |    |                 
|Other comprehensive income for the period: |                                                   |               |   |    |                  |  |   |  
|                                           | Unrealized gains on investments                   |               | $ | 10 |                  |  | $ |  | 
|                                           | Less related federal income tax expense (benefit) |               |   |   |                  |  |   |  | 
|                                           |                                                   |               |   |    |                  | 
|                                           | Total                                             |               | $ | 10 |                  |  | $ |  | 
|                                           |                                                   |               |   |    |                  | 

F-14



---



##### Table of Contents



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




|                                        |                                     |              |   |    |              |  |   |   | 
|--------------------------------------- | ----------------------------------- | ------------ | - | -- | ------------ |  | - | - | 
|                                        |                                     | December 31, |   |    | December 31,
|                                        |                                     | 2004         |   |    | 2003        
|                                        |                                     |              |   |    |             
|Accumulated other comprehensive income: |                                     |              |   |    |              |  |   |  
|                                        | Net unrealized gains on investments |              | $ | 10 |              |  | $ |  | 
|                                        | Less related federal income taxes   |              |   |   |              |  |   |  | 
|                                        |                                     |              |   |    |              | 
|                                        | Total                               |              | $ | 10 |              |  | $ |  | 
|                                        |                                     |              |   |    |              | 



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



|                                           |                                                   |              |   |               |              |   |   |      |     |   |   |       |     | 
|------------------------------------------ | ------------------------------------------------- | ------------ | - | ------------- | ------------ | - | - | ---- | --- | - | - | ----- | --- | 
|                                           |                                                   |              |   | Twelve Months |             
|                                           |                                                   |              |   | Ended         |             
|                                           |                                                   | Period ended |   |               | December 31, |  
|                                           |                                                   | November 23, |   |               |              |  
|                                           |                                                   | 2004         |   |               | 2003         |   |   | 2002 |    
|                                           |                                                   |              |   |               |              |   |   |      |    
|Other comprehensive income for the period: |                                                   |              |   |               |              |   |   |      |     |   |   |      
|                                           | Unrealized (losses) gains on investments          |              | $ | 197           |              |   | $ | (504 | )   |   | $ | 1,432 |    
|                                           | Adjustment for unrealized gains (losses) realized |              |   | (390          | )            |   |   | 466  |     |   |   | (426  | )  
|                                           | Dividend to parent                                |              |   | (409          | )            |   |   |     |     |   |   |      |    
|                                           | Less related federal income tax expense (benefit) |              |   | 211           |              |   |   | 13   |     |   |   | (352  | )  
|                                           |                                                   |              |   |               |              |   |   |      |    
|                                           |                                                   | Total        |   | $             | (391         | ) |   | $    | (25 | ) |   | $     | 654 | 
|                                           |                                                   |              |   |               |              |   |   |      |    

NOTE 7  STOCK OPTIONS






|                                   |  |           |         |          |           |   |      | 
|---------------------------------- |  | --------- | ------- | -------- | --------- | - | ---- | 
|                                   |  | 2004      |        
|                                   |  |           |        
|                                   |  |           |         | Weighted |          
|                                   |  |           |         | Average  |          
|                                   |  |           |         | Exercise |          
|                                   |  | Number    |         |          | Price Per |  
|Option Plan Activity               |  | of Shares |         |          | Share     |  
|                                   |  |           |         |          |           |  
|Balance at January 1               |  |           |        |          |           | $ |     | 
|Options granted                    |  |           | 624,600 |          |           |   | 9.50 | 
|Options exercised                  |  |           |        |          |           |   |     | 
|Options forfeited                  |  |           |        |          |           |   |     | 
|                                   |  |           |         |          |           |  
|Balance at December 31             |  |           | 624,600 |          |           |   | 9.50 | 
|                                   |  |           |         |          |           |  
|Options exercisable at December 31 |  |           |        |          |           |   |     | 
|                                   |  |           |         |          |           |  





F-15



---



##### Table of Contents



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




|                                   |  |                                |        |  
|---------------------------------- |  | ------------------------------ | ------ | -
|                                   |  | 2004                           |       
|                                   |  |                                |       
|                                   |  | (In thousands of U.S. dollars, |       
|                                   |  | except per share amounts)      |       
|Net income (loss) as reported      |  | $                              | (8,155 | )
|Deduct: Compensation expense       |  |                                | (115   | )
|                                   |  |                                |       
|Pro forma net income (loss)        |  | $                              | (8,270 | )
|                                   |  |                                |       
|Basic earnings (loss) per share:   |  |                                |        |  
|As reported                        |  | $                              | (4.59  | )
|Pro forma                          |  | $                              | (4.65  | )
|Diluted earnings (loss) per share: |  |                                |        |  
|As reported                        |  | $                              | (4.59  | )
|Pro forma                          |  | $                              | (4.65  | )





|         |                           
|-------- | --------------------------
|NOTE 8  | RELATED PARTY TRANSACTIONS





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







NOTE 9  COMMITMENTS




F-16



---



##### Table of Contents



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






|          |                         
|--------- | ------------------------
|NOTE 10  | REINSURANCE Predecessor



|                                     |         |              |   |               |              |   |   |         |       |  |   |        |        | 
|------------------------------------ | ------- | ------------ | - | ------------- | ------------ | - | - | ------- | ----- |  | - | ------ | ------ | 
|                                     |         |              |   | Twelve Months |             
|                                     |         |              |   | Ended         |             
|                                     |         | Period Ended |   |               | December 31, |  
|                                     |         | November 23, |   |               |              |  
|                                     |         | 2004         |   |               | 2003         |   |   | 2002    |      
|                                     |         |              |   |               |              |   |   |         |      
|Premiums written:                    |         |              |   |               |              |   |   |         |       |  |   |       
|                                     | Direct  |              | $ | 267           |              |   | $ | 928     |       |  | $ | 3,542  |       
|                                     | Assumed |              |   | (4,823        | )            |   |   | 8,886   |       |  |   | 11,781 |       
|                                     | Ceded   |              |   | (267          | )            |   |   | (928    | )     |  |   | (3,542 | )     
|                                     |         |              |   |               |              |   |   |         |      
|                                     |         | Net          |   | $             | (4,823       | ) |   | $       | 8,886 |  |   | $      | 11,781 | 
|                                     |         |              |   |               |              |   |   |         |      
|Premiums earned:                     |         |              |   |               |              |   |   |         |       |  |   |       
|                                     | Direct  |              | $ | 667           |              |   | $ | 1,597   |       |  | $ | 8,236  |       
|                                     | Assumed |              |   |              |              |   |   | 9,961   |       |  |   | 13,518 |       
|                                     | Ceded   |              |   | (667          | )            |   |   | (1,597  | )     |  |   | (8,236 | )     
|                                     |         |              |   |               |              |   |   |         |      
|                                     |         | Net          |   |               |             |   |   | $       | 9,961 |  |   | $      | 13,518 | 
|                                     |         |              |   |               |              |   |   |         |      
|Losses and loss adjustment expenses: |         |              |   |               |              |   |   |         |       |  |   |       
|                                     | Direct  |              | $ | (130,439      | )            |   | $ | 24,803  |       |  | $ | 834    |       
|                                     | Assumed |              |   |              |              |   |   | 6,821   |       |  |   | 10,068 |       
|                                     | Ceded   |              |   | 130,439       |              |   |   | (24,803 | )     |  |   | (834   | )     
|                                     |         |              |   |               |              |   |   |         |      
|                                     |         | Net          |   |               |             |   |   | $       | 6,821 |  |   | $      | 10,068 | 
|                                     |         |              |   |               |              |   |   |         |      



|          |                                                      
|--------- | -----------------------------------------------------
|NOTE 11  | UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES Predecessor



F-17



---



##### Table of Contents



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




|                                                 |                               |                               |     |          |         |   |     |          |         |  
|------------------------------------------------ | ----------------------------- | ----------------------------- | --- | -------- | ------- | - | --- | -------- | ------- | -
|                                                 |                               | Twelve Months                 |    
|                                                 |                               | Ended                         |    
|                                                 |                               | December 31,                  |    
|                                                 |                               |                               |    
|                                                 |                               | 2003                          |     |          | 2002    |  
|                                                 |                               |                               |     |          |         |  
|Beginning of period:                             |                               |                               |     |          |         |   |     |         
|                                                 | Gross                         |                               | $   | 193,672  |         |   | $   | 275,667  |        
|                                                 | Less reinsurance recoverables |                               |     | (174,463 | )       |   |     | (253,509 | )      
|                                                 |                               |                               |     |          |         |  
|                                                 |                               | Net                           |     |          | 19,209  |   |     |          | 22,158  |  
|                                                 |                               |                               |     |          |         |  
|Incurred losses and LAE relating to:             |                               |                               |     |          |         |   |     |         
|                                                 | Current year                  |                               |     | 6,086    |         |   |     | 9,792    |        
|                                                 | Prior years                   |                               |     | 735      |         |   |     | 276      |        
|                                                 |                               |                               |     |          |         |  
|                                                 |                               | Total incurred losses and LAE |     |          | 6,821   |   |     |          | 10,068  |  
|                                                 |                               |                               |     |          |         |  
|Accretion of loss and LAE reserves to fair value |                               |                               | 243 |          |         |   | 399 |         
|Transfer of loss and LAE reserves to OneBeacon   |                               |                               | -   |          |         |   |    |         
|Paid losses and LAE related to:                  |                               |                               |     |          |         |   |     |         
|                                                 | Current year                  |                               |     | (3,145   | )       |   |     | (4,394   | )      
|                                                 | Prior years                   |                               |     | (7,850   | )       |   |     | (9,022   | )      
|                                                 |                               |                               |     |          |         |  
|                                                 |                               | Total paid losses and LAE     |     |          | (10,995 | ) |     |          | (13,416 | )
|                                                 |                               |                               |     |          |         |  
|End of period:                                   |                               |                               |     |          |         |   |     |         
|                                                 | Net                           |                               |     | 15,278   |         |   |     | 19,209   |        
|                                                 | Plus reinsurance recoverables |                               |     | 139,009  |         |   |     | 174,463  |        
|                                                 |                               |                               |     |          |         |  
|                                                 |                               | Gross                         |     | $        | 154,287 |   |     | $        | 193,672 |  
|                                                 |                               |                               |     |          |         |  









NOTE 12  STATUTORY INFORMATION




F-18



---



##### Table of Contents



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












| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | 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.                                          





|                                        |  |              |         |  
|--------------------------------------- |  | ------------ | ------- | -
|                                        |  | Period Ended |        
|                                        |  | December 31, |        
|                                        |  | 2004         |        
|                                        |  |              |        
|Ending capital and surplus              |  | $            | 100,725 |  
|Net income/(loss)                       |  | $            | (3,383  | )
|Company action level risk-based capital |  | $            | 830     |  



|          |                                     
|--------- | ------------------------------------
|NOTE 13  | QUARTERLY FINANCIAL DATA (UNAUDITED)



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

F-19



---



##### Table of Contents



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




F-20



---



##### Table of Contents






SCHEDULE I


SPECIALTY UNDERWRITERS ALLIANCE, INC.


SUMMARY OF INVESTMENTS  OTHER THAN


INVESTMENTS IN RELATED PARTIES


At December 31, 2004


|                       |                                     |                        |        |        |            |   |        |        | 
|---------------------- | ----------------------------------- | ---------------------- | ------ | ------ | ---------- | - | ------ | ------ | 
|                       |                                     | Cost                   |        |        | Fair Value |  
|                       |                                     |                        |        |        |            |  
|                       |                                     | (Dollars in thousands) |       
|Fixed maturities:      |                                     |                        |        |        |            |   |        |       
|                       | U.S. treasury securities            |                        | $      | 6,458  |            |   | $      | 6,450  | 
|                       | U.S. government agencies securities |                        |        | 9,153  |            |   |        | 9,173  | 
|                       | Corporate securities                |                        |        | 29,936 |            |   |        | 9,927  | 
|                       | Mortgage backed securities          |                        |        | 4,908  |            |   |        | 4,915  | 
|                       |                                     |                        |        |        |            |  
|                       | Total fixed maturities              |                        |        | 50,455 |            |   |        | 50,465 | 
|Short-term investments |                                     |                        | 47,370 |        |            |   | 47,370 |       
|                       |                                     |                        |        |        |            |  
|Total investments      |                                     | $                      | 97,825 |        |            | $ | 97,835 |       
|                       |                                     |                        |        |        |            |  

F-21



---



##### Table of Contents






SCHEDULE II


SPECIALTY UNDERWRITERS ALLIANCE, INC.


CONDENSED FINANCIAL INFORMATION OF REGISTRANT


|                                                                                                                                  |                            |                            |         |         |              |   |       |       |  
|--------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | -------------------------- | ------- | ------- | ------------ | - | ----- | ----- | -
|                                                                                                                                  |                            | Specialty Underwriters    |        
|                                                                                                                                  |                            | Alliance, Inc. (Successor) |        
|                                                                                                                                  |                            |                            |        
|                                                                                                                                  |                            | December 31,               |         |         | December 31, |  
|Balance Sheets                                                                                                                    |                            | 2004                       |         |         | 2003         |  
|                                                                                                                                  |                            |                            |         |         |              |  
|                                                                                                                                  |                            | (Dollars in thousands)     |        
|ASSETS                                                                                                                           
|Investments in subsidiaries                                                                                                       |                            | $                          | 113,812 |         |              | $ |      |      
|                                                                                                                                  |                            |                            |         |         |              |  
|                                                                                                                                  | Total investments          |                            |         | 113,812 |              |   |       |      |  
|Cash and cash equivalents                                                                                                         |                            |                            | 4,960   |         |              |   | 200   |      
|Deferred charges                                                                                                                  |                            |                            |        |         |              |   | 4,730 |      
|Other assets                                                                                                                      |                            |                            | 481     |         |              |   | 10    |      
|                                                                                                                                  |                            |                            |         |         |              |  
|Total assets                                                                                                                      |                            | $                          | 119,253 |         |              | $ | 4,940 |      
|                                                                                                                                  |                            |                            |         |         |              |  
|                                                                                                                                 
|LIABILITIES                                                                                                                      
|Short-term debt                                                                                                                   |                            |                            |        |         |              |   | 700   |      
|Accounts payable and other liabilities                                                                                            |                            |                            | 323     |         |              |   | 23    |      
|Stock warrants                                                                                                                    |                            |                            |        |         |              |   | 4,795 |      
|                                                                                                                                  |                            |                            |         |         |              |  
|                                                                                                                                  | Total liabilities          |                            |         | 323     |              |   |       | 5,518 |  
|Stockholders equity                                                                                                              |                            |                            |         |         |              |   |       |      
|Common stock Class A at $.01 par value per
    share  authorized 75,000,000 shares; issued and
    outstanding 14,680,688 shares |                            |                            | 147     |         |              |   |      |      
|Common stock Class B at $.01 par value per
    share  authorized 2,000,000 shares; issued and
    outstanding 26,316 shares      |                            |                            |        |         |              |   |      |      
|Paid-in capital  Class A                                                                                                         |                            |                            | 127,256 |         |              |   |      |      
|Paid-in capital  Class B                                                                                                         |                            |                            | 250     |         |              |   |      |      
|Retained earnings                                                                                                                 |                            |                            | (8,733  | )       |              |   | (578  | )    
|Accumulated other comprehensive income, net of tax                                                                                |                            |                            | 10      |         |              |   |      |      
|                                                                                                                                  |                            |                            |         |         |              |  
|                                                                                                                                  | Total stockholders equity |                            |         | 118,930 |              |   |       | (578  | )
|                                                                                                                                  |                            |                            |         |         |              |  
|Total liabilities and stockholders equity                                                                                        |                            | $                          | 119,253 |         |              | $ | 4,940 |      
|                                                                                                                                  |                            |                            |         |         |              |  

F-22



---



##### Table of Contents



SCHEDULE II


SPECIALTY UNDERWRITERS ALLIANCE, INC.


CONDENSED FINANCIAL INFORMATION OF REGISTRANT


|                                                           |                                                       |                              |        |       |              |   |      |            |     | 
|---------------------------------------------------------- | ----------------------------------------------------- | ---------------------------- | ------ | ----- | ------------ | - | ---- | ---------- | --- | 
|                                                           |                                                       | Specialty Underwriters      |       
|                                                           |                                                       | Alliance, Inc. (Successor)   |       
|                                                           |                                                       |                              |       
|                                                           |                                                       | Twelve Months                |        |       | From         |  
|                                                           |                                                       | Ended                        |        |       | April 3, to  |  
|                                                           |                                                       | December 31,                 |        |       | December 31, |  
|Statement of Operations                                    |                                                       | 2004                         |        |       | 2003         |  
|                                                           |                                                       |                              |        |       |              |  
|                                                           |                                                       | (Dollars in thousands except |       
|                                                           |                                                       | per share data)              |       
|Revenues:                                                  |                                                       |                              |        |       |              |   |      |           
|                                                           |                                                       | Total revenues               |        | $     |             |   |      | $          |    | 
|                                                           |                                                       |                              |        |       |              |  
|Expenses:                                                  |                                                       |                              |        |       |              |   |      |           
|                                                           | Service company fees                                  |                              |        | 2,511 |              |   |      | 205        |    
|                                                           | Financing expenses                                    |                              |        | 268   |              |   |      | 157        |    
|                                                           | General and administrative expenses                   |                              |        | 2,180 |              |   |      | 216        |    
|                                                           | Loss of subsidiary                                    |                              |        | 3,196 |              |   |      |           |    
|                                                           |                                                       |                              |        |       |              |  
|                                                           |                                                       | Total expenses               |        |       | 8,155        |   |      |            | 578 | 
|                                                           |                                                       |                              |        |       |              |  
|Pretax income (loss)                                       |                                                       |                              | (8,155 | )     |              |   | (578 | )         
|                                                           | Federal income tax expense                            |                              |        |      |              |   |      |           |    
|                                                           |                                                       |                              |        |       |              |  
|Net income (loss)                                          |                                                       |                              | (8,155 | )     |              |   | (578 | )         
|                                                           |                                                       |                              |        |       |              |  
|                                                           | Net change in unrealized investment gains, net of tax |                              |        | 10    |              |   |      |           |    
|                                                           |                                                       |                              |        |       |              |  
|Comprehensive net income (loss)                            |                                                       | $                            | (8,145 | )     |              | $ | (578 | )         
|                                                           |                                                       |                              |        |       |              |  
|Earnings (loss) per share available to common stockholders |                                                       |                              |        |       |              |   |      |           
|                                                           | Basic                                                 |                              | $      | (4.59 | )            |   | $    | (57,800.00 | )  
|                                                           | Diluted                                               |                              | $      | (4.59 | )            |   | $    | (57,800.00 | )  
|                                                           |                                                       |                              |        |       |              |  

F-23



---



##### Table of Contents



SCHEDULE II


SPECIALTY UNDERWRITERS ALLIANCE, INC.


CONDENSED FINANCIAL INFORMATION OF REGISTRANT


|                                                                             |                                             |                            |          |         |              |   |      |        |  
|---------------------------------------------------------------------------- | ------------------------------------------- | -------------------------- | -------- | ------- | ------------ | - | ---- | ------ | -
|                                                                             |                                             | Specialty Underwriters    |         
|                                                                             |                                             | Alliance, Inc. (Successor) |         
|                                                                             |                                             |                            |         
|                                                                             |                                             | Twelve Months              |          |         | From         |  
|                                                                             |                                             | Ended                      |          |         | April 3, to  |  
|                                                                             |                                             | December 31,               |          |         | December 31, |  
|Statement of Cash Flows                                                      |                                             | 2004                       |          |         | 2003         |  
|                                                                             |                                             |                            |          |         |              |  
|                                                                             |                                             | (Dollars in thousands)     |         
|Cash flows from operations:                                                  |                                             |                            |          |         |              |   |      |       
|Net income (loss)                                                            |                                             | $                          | (8,155   | )       |              | $ | (578 | )     
|Charges (credits) to reconcile net income to cash flows
    from operations: |                                             |                            |          |         |              |   |      |       
|                                                                             | Loss (income) of subsidiary                 |                            |          | 3,196   |              |   |      |       |  
|                                                                             | Interest expense exchanged for common stock |                            |          | 234     |              |   |      |       |  
|Net change in:                                                               |                                             |                            |          |         |              |   |      |       
|                                                                             | Deferred charges                            |                            |          | 4,730   |              |   |      | (4,730 | )
|                                                                             | Stock warrants                              |                            |          | (4,795  | )            |   |      | 4,795  |  
|                                                                             | Other, net                                  |                            |          | 311     |              |   |      | 13     |  
|                                                                             |                                             |                            |          |         |              |  
|Total adjustments                                                            |                                             |                            | 3,676    |         |              |   | 78   |       
|                                                                             |                                             |                            |          |         |              |  
|Net cash flows used for operations                                           |                                             |                            | (4,479   | )       |              |   | (500 | )     
|Cash flows from investing activities:                                        |                                             |                            |          |         |              |   |      |       
|                                                                             | Purchase of insurance subsidiary            |                            |          | (21,998 | )            |   |      |       |  
|                                                                             | Capital contributions to subsidiary         |                            |          | (95,000 | )            |   |      |       |  
|                                                                             | Purchase of capitalized software            |                            |          | (480    | )            |   |      |       |  
|                                                                             |                                             |                            |          |         |              |  
|Net cash flows (used for) provided by investing activities                   |                                             |                            | (117,478 | )       |              |   |     |       
|Cash flows from financing activities                                         |                                             |                            |          |         |              |   |      |       
|                                                                             | Issuance of common stock                    |                            |          | 123,517 |              |   |      |       |  
|                                                                             | Short-term borrowings                       |                            |          | 3,200   |              |   |      | 700    |  
|                                                                             |                                             |                            |          |         |              |  
|Net cash flows (used for) provided by financing activities                   |                                             |                            | 126,717  |         |              |   | 700  |       
|Net increase from cash and cash equivalents during the
    period            |                                             |                            | 4,760    |         |              |   | 200  |       
|Cash and cash equivalents at beginning of the period                         |                                             |                            | 200      |         |              |   |     |       
|                                                                             |                                             |                            |          |         |              |  
|Cash and cash equivalents at end of the period                               |                                             | $                          | 4,960    |         |              | $ | 200  |       
|                                                                             |                                             |                            |          |         |              |  

F-24



---



##### Table of Contents






SCHEDULE III


SPECIALTY UNDERWRITERS ALLIANCE, INC.


SUPPLEMENTARY INSURANCE INFORMATION


|                                  |  |                        |   |               |  |   |          |  |              |          |   |          |     |            |           |             |              |             |             |       |           |   |          |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   | 
|--------------------------------- |  | ---------------------- | - | ------------- |  | - | -------- |  | ------------ | -------- | - | -------- | --- | ---------- | --------- | ----------- | ------------ | ----------- | ----------- | ----- | --------- | - | -------- |  |  | - | - |  |  | - | - |  |  | - | - |  |  | - | - | 
|Column A                          |  | Column B               |   | Column C      |  |   | Column D |  |              | Column E |   | Column F |     | Column G   |           |             | Column H     |             | Column I    |       | Column J  |   | Column K
|                                  |  |                        |   |               |  |   |          |  |              |          |   |          |     |            |           |             |              |             |             |       |           |   |         
|                                  |  |                        |   | Future Policy |  |   |          |  |              |          |   |          |     |            | Benefits, |             |              |             |             |       |          
|                                  |  |                        |   | Benefits,     |  |   |          |  | Other Policy |          |   |          |     |            | Claims,   |             | Amortization |             |             |       |          
|                                  |  | Deferred               |   | Losses,       |  |   |          |  | Claims and   |          |   |          | Net |            |           | Losses, and |              | of Deferred |             | Other |           |  
|                                  |  | Acquisition            |   | Claims, and   |  |   | Unearned |  |              | Benefits |   | Premiums |     | Investment |           |             | Settlement   |             | Policy      |       | Operating |   | Premiums
|                                  |  | costs                  |   | Loss Expenses |  |   | Premiums |  |              | Payable  |   | Earned   |     | Income     |           |             | Expenses     |             | Acquisition |       | Expenses  |   | Written 
|                                  |  |                        |   |               |  |   |          |  |              |          |   |          |     |            |           |             |              |             |             |       |           |   |         
|                                  |  | (Dollars in thousands)
|Twelve months ended:              |  |                        |   |               |  |   |          |  |              |          |   |          |     |            |           |             |              |             |             |       |           |   |          |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   | 
|December 31, 2004                 |  | $                      |  |               |  | $ | 95,959   |  |              | $        | 3 |          |     | $          |          |             |              | $           |            |       |           | $ | 278      |  |  | $ |  |  |  | $ |  |  |  | $ |  |  |  | $ |  | 
|Period from:                      |  |                        |   |               |  |   |          |  |              |          |   |          |     |            |           |             |              |             |             |       |           |   |          |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   | 
|April 3 through December 31, 2003 |  | $                      |  |               |  | $ |         |  |              | $        |  |          |     | $          |          |             |              | $           |            |       |           | $ |         |  |  | $ |  |  |  | $ |  |  |  | $ |  |  |  | $ |  | 

F-25



---



##### Table of Contents






SCHEDULE IV


SPECIALTY UNDERWRITERS ALLIANCE, INC.


REINSURANCE


|                                   |  |                        |   |                |           |   |              |                 |  |               |        |                |  |   |   |  |  |  |     |  
|---------------------------------- |  | ---------------------- | - | -------------- | --------- | - | ------------ | --------------- |  | ------------- | ------ | -------------- |  | - | - |  |  |  | --- | -
|Column A                           |  | Column B               |   |                | Column C  |   |              | Column D        |  | Column E      |        | Column F       | 
|                                   |  |                        |   |                |           |   |              |                 |  |               |        |                | 
|                                   |  |                        |   |                |           |   |              |                 |  | Percentage of |       
|Premiums                           |  |                        |   | Ceded to Other |           |   | Assumed from |                 |  |               | Amount |               
|Earned                             |  | Direct Amount          |   |                | Companies |   |              | Other Companies |  | Net Amount    |        | Assumed to Net | 
|                                   |  |                        |   |                |           |   |              |                 |  |               |        |                | 
|                                   |  | (Dollars in thousands) |  
|Twelve months ended:               |  |                        |   |                |           |   |              |                 |  |               |        |                |  |   |   |  |  |  |     |  
|December 31, 2004                  |  | $                      | 9 |                |           | $ | 9            |                 |  | $             |       |                |  | $ |  |  |  |  | 0.0 | %
|Period from:                       |  |                        |   |                |           |   |              |                 |  |               |        |                |  |   |   |  |  |  |     |  
|From April 3, to December 31, 2003 |  | $                      |  |                |           | $ |             |                 |  | $             |       |                |  | $ |  |  |  |  |    |  

F-26



---



##### Table of Contents






SCHEDULE V


SPECIALTY UNDERWRITERS ALLIANCE, INC.


VALUATION AND QUALIFYING ACCOUNTS


NONE


F-27



---



##### Table of Contents






SCHEDULE VI


SPECIALITY UNDERWRITERS ALLIANCE, INC.


SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY
INSURANCE OPERATIONS


|                                        |  |                        |   |              |  |   |              |  |          |   |   |          |     |                   |                   |     |              |     |             |        |             |            |            |  |          |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   | 
|--------------------------------------- |  | ---------------------- | - | ------------ |  | - | ------------ |  | -------- | - | - | -------- | --- | ----------------- | ----------------- | --- | ------------ | --- | ----------- | ------ | ----------- | ---------- | ---------- |  | -------- | - | - |  |  | - | - |  |  | - | - |  |  | - | - |  |  | - | - | 
|Column A                                |  | Column B               |   | Column C     |  |   | Column D     |  | Column E |   |   | Column F |     | Column G          |                   |     | Column H     |     | Column I    |        | Column J    |            | Column K  
|                                        |  |                        |   |              |  |   |              |  |          |   |   |          |     |                   |                   |     |              |     |             |        |             |            |           
|                                        |  |                        |   |              |  |   |              |  |          |   |   |          |     | Claims and Claims |                   |     |              |     |             |       
|                                        |  |                        |   |              |  |   |              |  |          |   |   |          |     | Adjustment        |                   |     |              |     |             |       
|                                        |  |                        |   | Reserves for |  |   |              |  |          |   |   |          |     |                   | Expenses Incurred |     |              |     |             |        |            
|                                        |  |                        |   | Unpaid       |  |   | Discount, if |  |          |   |   |          |     |                   | Related to        |     | Amortization |     |             |        |            
|                                        |  |                        |   | Claims and   |  |   | any,         |  |          |   |   |          |     |                   |                   |     | of Deferred  |     | Paid Claims |        |            
|                                        |  | Deferred               |   | Claims       |  |   | Deducted     |  |          |   |   |          | Net |                   |                   | (1) |              | (2) |             | Policy |             | and Claims |            | 
|                                        |  | Acquisition            |   | Adjustment   |  |   | in Column    |  | Unearned |   |   | Earned   |     | Investment        |                   |     | Current      |     | Prior       |        | Acquisition |            | Adjustment |  | Premiums
|                                        |  | Costs                  |   | Expenses     |  |   | C            |  | Premiums |   |   | Premiums |     | Income            |                   |     | Year         |     | Year        |        | Costs       |            | Expenses   |  | Written 
|                                        |  |                        |   |              |  |   |              |  |          |   |   |          |     |                   |                   |     |              |     |             |        |             |            |            |  |         
|                                        |  | (Dollars in thousands)
|Twelve months ended:                    |  |                        |   |              |  |   |              |  |          |   |   |          |     |                   |                   |     |              |     |             |        |             |            |            |  |          |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   | 
|December 31, 2004                       |  | $                      |  |              |  | $ | 95,959       |  |          | $ |  |          |     | $                 | 3                 |     |              | $   |            |        |             | $          | 278        |  |          | $ |  |  |  | $ |  |  |  | $ |  |  |  | $ |  |  |  | $ |  | 
|Period from:                            |  |                        |   |              |  |   |              |  |          |   |   |          |     |                   |                   |     |              |     |             |        |             |            |            |  |          |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   | 
|April 3, 2003 through December 31, 2003 |  | $                      |  |              |  | $ |             |  |          | $ |  |          |     | $                 |                  |     |              | $   |            |        |             | $          |           |  |          | $ |  |  |  | $ |  |  |  | $ |  |  |  | $ |  |  |  | $ |  | 

F-28



---



##### Table of Contents






SCHEDULE III


POTOMAC INSURANCE COMPANY OF ILLINOIS


SUPPLEMENTARY INSURANCE INFORMATION


|                                         |                   |                        |   |               |               |   |   |          |              |            |          |       |          |     |           |            |             |              |            |             |  |             |       |       |           |   |   |          |  |   |   |       |  |   |    |       |  |   |        |        | 
|---------------------------------------- | ----------------- | ---------------------- | - | ------------- | ------------- | - | - | -------- | ------------ | ---------- | -------- | ----- | -------- | --- | --------- | ---------- | ----------- | ------------ | ---------- | ----------- |  | ----------- | ----- | ----- | --------- | - | - | -------- |  | - | - | ----- |  | - | -- | ----- |  | - | ------ | ------ | 
|Column A                                 |                   | Column B               |   |               | Column C      |   |   | Column D |              |            | Column E |       | Column F |     |           | Column G   |             |              | Column H   |             |  | Column I    |       |       | Column J  |   |   | Column K | 
|                                         |                   |                        |   |               |               |   |   |          |              |            |          |       |          |     |           |            |             |              |            |             |  |             |       |       |           |   |   |          | 
|                                         |                   |                        |   | Future Policy |               |   |   |          |              |            |          |       |          |     | Benefits, |            |             |              |            |             |  |            
|                                         |                   |                        |   | Benefits,     |               |   |   |          | Other Policy |            |          |       |          |     | Claims,   |            |             | Amortization |            |             |  |             |      
|                                         |                   | Deferred               |   |               | Losses,       |   |   |          |              | Claims and |          |       |          | Net |           |            | Losses, and |              |            | of Deferred |  |             | Other |       |           |  
|                                         |                   | Acquisition            |   |               | Claims, and   |   |   | Unearned |              |            | Benefits |       | Premiums |     |           | Investment |             |              | Settlement |             |  | Policy      |       |       | Operating |   |   | Premiums | 
|                                         |                   | Costs                  |   |               | Loss Expenses |   |   | Premiums |              |            | Payable  |       | Earned   |     |           | Income     |             |              | Expenses   |             |  | Acquisition |       |       | Expenses  |   |   | Written  | 
|                                         |                   |                        |   |               |               |   |   |          |              |            |          |       |          |     |           |            |             |              |            |             |  |             |       |       |           |   |   |          | 
|                                         |                   | (Dollars in thousands) |  
|Period from:                             |                   |                        |   |               |               |   |   |          |              |            |          |       |          |     |           |            |             |              |            |             |  |             |       |       |           |   |   |          |  |   |   |       |  |   |    |       |  |   |        |       
|January 1,2004 through November 23, 2004 |                   | $                      |  |               |               | $ |  |          |              | $          |         |       |          | $   |          |            |             | $            |           |             |  | $           | 1,329 |       |           | $ |  |          |  | $ |  |       |  | $ | 45 |       |  | $ | (4,823 | )     
|Twelve months ended:                     |                   |                        |   |               |               |   |   |          |              |            |          |       |          |     |           |            |             |              |            |             |  |             |       |       |           |   |   |          |  |   |   |       |  |   |    |       |  |   |        |       
|                                         | December 31, 2003 |                        | $ | 674           |               |   | $ | 154,287  |              |            | $        | 4,835 |          |     | $         |           |             |              | $          | 9,961       |  |             | $     | 2,218 |           |   | $ | 6,821    |  |   | $ | 1,843 |  |   | $  | 939   |  |   | $      | 8,886  | 
|                                         | December 31, 2002 |                        | $ | 791           |               |   | $ | 193,672  |              |            | $        | 6,394 |          |     | $         |           |             |              | $          | 13,518      |  |             | $     | 1,580 |           |   | $ | 10,068   |  |   | $ | 2,990 |  |   | $  | 1,537 |  |   | $      | 11,781 | 

F-29



---



##### Table of Contents






SCHEDULE IV


POTOMAC INSURANCE COMPANY OF ILLINOIS


REINSURANCE


|                                          |  |                        |       |          |           |   |        |                 |  |   |            |  |  |                |        |  |  |  |     |  
|----------------------------------------- |  | ---------------------- | ----- | -------- | --------- | - | ------ | --------------- |  | - | ---------- |  |  | -------------- | ------ |  |  |  | --- | -
|Column A                                  |  | Column B               |       |          | Column C  |   |        | Column D        |  |   | Column E   |  |  | Column F       |       
|                                          |  |                        |       |          |           |   |        |                 |  |   |            |  |  |                |       
|                                          |  |                        |       | Ceded to |           |   |        |                 |  |   | Percentage | 
|Premiums                                  |  | Gross                  |       |          | Other     |   |        | Assumed from    |  |   | Net        |  |  | of Amount      |       
|Earned                                    |  | Amount                 |       |          | Companies |   |        | Other Companies |  |   | Amount     |  |  | Assumed to Net |       
|                                          |  |                        |       |          |           |   |        |                 |  |   |            |  |  |                |       
|                                          |  | (Dollars in thousands) |      
|Period from:                              |  |                        |       |          |           |   |        |                 |  |   |            |  |  |                |        |  |  |  |     |  
|January 1, 2004 through November 23, 2004 |  | $                      | 667   |          |           | $ | (667   | )               |  | $ |           |  |  | $              |       |  |  |  |    |  
|Twelve months ended:                      |  |                        |       |          |           |   |        |                 |  |   |            |  |  |                |        |  |  |  |     |  
|December 31, 2003                         |  | $                      | 1,597 |          |           | $ | (1,597 | )               |  | $ | 9,961      |  |  | $              | 9,961  |  |  |  | 100 | %
|December 31, 2002                         |  | $                      | 8,236 |          |           | $ | (8,236 | )               |  | $ | 13,518     |  |  | $              | 13,518 |  |  |  | 100 | %

F-30



---



##### Table of Contents






SCHEDULE V


POTOMAC INSURANCE COMPANY OF ILLINOIS


VALUATION AND QUALIFYING ACCOUNTS


|                                            |  |                        |     |                          |            |   |          |            |  |                 |   |            |        |   |      |   |  |   |     | 
|------------------------------------------- |  | ---------------------- | --- | ------------------------ | ---------- | - | -------- | ---------- |  | --------------- | - | ---------- | ------ | - | ---- | - |  | - | --- | 
|Column A                                    |  | Column B               |     |                          | Column C   |   | Column D |            |  | Column E        |  
|                                            |  |                        |     |                          |            |   |          |            |  |                 |  
|                                            |  |                        |     | Additions (Subtractions) |            |   |          |           
|                                            |  |                        |     |                          |            |   |          |           
|                                            |  | Balance at             |     |                          | Charged to |   |          | Charged to |  |                 |   | Balance at |       
|                                            |  | Beginning              |     |                          | Costs and  |   |          | Other      |  | Deductions      |   |            | End of |  
|                                            |  | of Period              |     |                          | Expenses   |   |          | Accounts   |  | Described(1)(2) |   |            | Period |  
|                                            |  |                        |     |                          |            |   |          |            |  |                 |   |            |        |  
|                                            |  | (Dollars in thousands) |    
|Years ended:                                |  |                        |     |                          |            |   |          |            |  |                 |   |            |        |   |      |   |  |   |     | 
|December 31, 2003                           |  |                        |     |                          |            |   |          |            |  |                 |   |            |        |   |      |   |  |   |     | 
|Allowance for insurance balances receivable |  | $                      | 340 |                          |            | $ | (167     | )          |  | $               |  |            |        | $ | (58  | ) |  | $ | 115 | 
|Allowance for reinsurance recoverable       |  |                        | 83  |                          |            |   |         |            |  |                 |  |            |        |   | (13  | ) |  |   | 70  | 
|December 31, 2002                           |  |                        |     |                          |            |   |          |            |  |                 |   |            |        |   |      |   |  |   |     | 
|Allowance for insurance balances receivable |  | $                      | 480 |                          |            | $ | 24       |            |  | $               |  |            |        | $ | (164 | ) |  | $ | 340 | 
|Allowance for reinsurance recoverable       |  |                        | 120 |                          |            |   | (34      | )          |  |                 |  |            |        |   | (3   | ) |  |   | 83  | 






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

F-31



---



##### Table of Contents






SCHEDULE VI


POTOMAC INSURANCE COMPANY OF ILLINOIS


SUPPLEMENTAL INFORMATION FOR PROPERTY AND CASUALTY INSURANCE
UNDERWRITERS


|                       |                                           |             |   |              |            |  |           |             |  |  |          |     |     |                   |                   |       |            |              |             |          |     |             |          |        |  |             |            |       |            |  |   |          |  |  |   |       |  |  |   |        |  |  |   |        |  
|---------------------- | ----------------------------------------- | ----------- | - | ------------ | ---------- |  | --------- | ----------- |  |  | -------- | --- | --- | ----------------- | ----------------- | ----- | ---------- | ------------ | ----------- | -------- | --- | ----------- | -------- | ------ |  | ----------- | ---------- | ----- | ---------- |  | - | -------- |  |  | - | ----- |  |  | - | ------ |  |  | - | ------ | -
|Column                 |                                           |             |   |              |            |  |           |             |  |  |          |     |     |                   |                   |       |            |              |             |         
|A                      |                                           | Column B    |   |              | Column C   |  |           | Column D    |  |  | Column E |     |     | Column F          |                   |       | Column G   |              |             | Column H |     |             | Column I |        |  | Column J    |            |       | Column K   | 
|                       |                                           |             |   |              |            |  |           |             |  |  |          |     |     |                   |                   |       |            |              |             |          |     |             |          |        |  |             |            |       |            | 
|                       |                                           |             |   |              |            |  |           |             |  |  |          |     |     | Claims and Claims |                   |       |            |              |             |          |    
|                       |                                           |             |   |              |            |  |           |             |  |  |          |     |     | Adjustment        |                   |       |            |              |             |          |    
|                       |                                           |             |   | Reserves for |            |  |           |             |  |  |          |     |     |                   | Expenses Incurred |       |            |              |             |          |     |            
|                       |                                           |             |   | Unpaid       |            |  |           |             |  |  |          |     |     |                   | Related to        |       |            | Amortization |             |          |     |             |         
|                       |                                           |             |   | Claims and   |            |  | Discount, |             |  |  |          |     |     |                   |                   |       |            |              | of Deferred |          |     | Paid Claims |          |        | 
|                       |                                           | Deferred    |   |              | Claims     |  |           | if any,     |  |  |          |     |     |                   | Net               |       |            | (1)          |             |          | (2) |             |          | Policy |  |             | and Claims |       |            | 
|                       |                                           | Acquisition |   |              | Adjustment |  |           | Deducted in |  |  | Unearned |     |     | Earned            |                   |       | Investment |              |             | Current  |     |             | Prior    |        |  | Acquisition |            |       | Adjustment |  |   | Premiums | 
|                       |                                           | Costs       |   |              | Expenses   |  |           | Column C    |  |  | Premiums |     |     | Premiums          |                   |       | Income     |              |             | Year     |     |             | Year     |        |  | Costs       |            |       | Expenses   |  |   | Written  | 
|                       |                                           |             |   |              |            |  |           |             |  |  |          |     |     |                   |                   |       |            |              |             |          |     |             |          |        |  |             |            |       |            |  |   |          | 
|(Dollars in thousands) |                                          
|Period from:           |                                           |             |   |              |            |  |           |             |  |  |          |     |     |                   |                   |       |            |              |             |          |     |             |          |        |  |             |            |       |            |  |   |          |  |  |   |       |  |  |   |        |  |  |   |       
|                       | January 1, 2004 through November 23, 2004 |             | $ |             |            |  | $         |            |  |  | $        |    |     |                   | $                 |      |            |              | $           |         |     |             | $        | 1,329  |  |             | $          |      |            |  | $ |         |  |  | $ |      |  |  | $ |       |  |  | $ | (4,823 | )
|Twelve months ended:   |                                           |             |   |              |            |  |           |             |  |  |          |     |     |                   |                   |       |            |              |             |          |     |             |          |        |  |             |            |       |            |  |   |          |  |  |   |       |  |  |   |        |  |  |   |       
|                       | December 31, 2003                         |             | $ | 674          |            |  | $         | 154,287     |  |  | $        | 190 | (1) |                   | $                 | 4,835 |            |              | $           | 9,961    |     |             | $        | 2,218  |  |             | $          | 6,086 |            |  | $ | 735      |  |  | $ | 1,843 |  |  | $ | 10,995 |  |  | $ | 8,886  |  
|                       | December 31, 2002                         |             | $ | 791          |            |  | $         | 193,672     |  |  | $        | 211 | (1) |                   | $                 | 6,394 |            |              | $           | 13,518   |     |             | $        | 1,580  |  |             | $          | 9,792 |            |  | $ | 276      |  |  | $ | 2,990 |  |  | $ | 13,416 |  |  | $ | 11,781 |  






|    |                                                                                                                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The amounts shown exclude unamortized fair value adjustments to
    reserves of $0, $578, and $821, for unpaid claims and claims
    adjustment expenses made in purchase accounting as a result of
    White Mountains purchase of Potomac for the period from
    January 1, 2004 through November 1, 2004 and the years
    ended December 31, 2003 and December 31, 2002.

F-32



---



##### Table of Contents



SIGNATURES






| |                                                          
| | ---------------------------------------------------------
| | SPECIALTY UNDERWRITERS ALLIANCE, INC. 
     (Registrant)



| |     |                      
| | --- | ---------------------
| | By: | /s/ Courtney C. Smith

| |                                 
| | --------------------------------
| |                                 
| | Name: 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 30, 2005
|                                                  
|/s/ Peter E. JokielPeter
    E. Jokiel             |  | Executive Vice President, Chief Financial Officer and Director
    (Principal Financial and Accounting Officer) |  | March 30, 2005
|                                                  
|/s/ Robert E. DeanRobert
    E. Dean               |  | Director                                                                                                        |  | March 30, 2005
|                                                  
|/s/ Raymond C. GrothRaymond
    C. Groth           |  | Director                                                                                                        |  | March 30, 2005
|                                                  
|/s/ Paul A. PhilpPaul
    A. Philp                 |  | Director                                                                                                        |  | March 30, 2005
|                                                  
|/s/ Robert H. WhiteheadRobert
    H. Whitehead     |  | Director                                                                                                        |  | March 30, 2005
|                                                  
|/s/ Russell E. ZimmermannRussell
    E. Zimmermann |  | Director                                                                                                        |  | March 30, 2005