##### Table of Contents



UNITED
STATES  SECURITIES AND EXCHANGE COMMISSION
 Washington D.C. 20549
 
 FORM 10-K
 
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transition period from  to  .
 Commission file number 000-50041
 
 USI Holdings Corporation
 (Exact name of registrant as specified in its charter)
 Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    13-3771733
(IRS Employer
Identification No.)
 555 Pleasantville Road
Suite 160 South
Briarcliff Manor, New York 10510
(Address of principal executive offices, including zip code)
 (914) 749-8500
(Registrants telephone number, including area code)
 Securities
registered pursuant to 12(b) of the Act:
 Title of each class
    
    Name of exchange on which registeredCommon Stock, par value $0.01 per share
    
    The NASDAQ Stock Market LLC
 Securities
registered pursuant to section 12(g) of the ActNone
 o þ
 o þ
 þ o
 o
  þ o o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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USI HOLDINGS CORPORATION
 INDEX
 Page No.PART IForward-Looking Statements
    
    
    1Item 1.
    
    Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    6Item 1B.
    
    Unresolved Staff Comments
    
    
    13Item 2.
    
    Properties
    
    
    13Item 3.
    
    Legal Proceedings
    
    
    13Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    13PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    14Item 6.
    
    Selected Financial Data
    
    
    16Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    19Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    39Item 8.
    
    Financial Statements and Supplementary Data
    
    
    39Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    39Item 9A.
    
    Controls and Procedures
    
    
    39Item 9B.
    
    Other Information
    
    
    42PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    42Item 11.
    
    Executive Compensation
    
    
    45Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    65Item 13.
    
    Certain Relationships and Related Transactions and Director Independence
    
    
    67Item 14.
    
    Principal Accountant Fees and Services
    
    
    68PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    68Signatures
    
    
    
    
    99




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Forward-Looking Statements











PART I





Item 1. Business


Company Overview




1




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
    
    general and specialty property and casualty insurance, which we refer to as P&C insurance;
    
    individual and group health, life and disability insurance, which we refer to as employee benefits products;
    
    retirement and wealth management products;
    
    association and other endorsed products; and
    
    specialty wholesale products.





    
    sales of workplace benefits insurance products and services; and
    
    enrollment and communication services related to employee benefits.





    
    corporate management, acquisition processes, sales management, human resources, legal,
capital planning, financial and reporting support.




Our History










2



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Operations




Sales








Products and Services


3




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Insurance Brokerage


Property and Casualty Insurance
    
    Employee Benefits Products
    
    Retirement
    
    General Commercial Liability
    
    
    
    Health
    
    
    
    Defined Contribution
    
    Workers Compensation
    
    
    
    Life
    
    
    
    Defined Benefit
    
    Fidelity and Surety Bonds
    
    
    
    Disability
    
    
    
    Life & Disability
    
    Professional Liability
    
    
    
    Dental
    
    
    
    Estate Planning
    
    Personal Lines (Auto, Home, etc.)
    
    
    
    
    
    
    
    Annuities


Association & Other Endorsed Products
    
    Specialty Wholesale
    
    Life, Health and Disability
    
    
    
    Healthcare
    
    Professional Liability
    
    
    
    Primary & Excess General Liability
    
    Workers Compensation
    
    
    
    Executive Assurance
    
    General Commercial Liability
    
    
    
    Professional Liability and E&O
    
    Travel Insurance and Related Services
    
    
    
    Pharmaceutical Product Liability
    
    Personal Lines (Auto, Home, etc.)
    
    
    
    Long-term Care
    
    Non-standard Physicians


Specialized Benefits Services


Workplace Benefits
    
    Core Benefits
    
    Voluntary Benefits
    
    Section 125 Plans
    
    Flexible Spending Accounts
    
    Total Compensation
    
    Electronic Surveys
    
    Print Communications


Insurance Brokerage


Property and Casualty Insurance.


Employee Benefits Products.


Association and Other Endorsed Products.


Specialty Wholesale.


4




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Retirement Products
 Specialized Benefits Services
 Workplace Benefits.
 Insurance Carriers
  Customers
  Competition
    Regulation
   5




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Employees
   Website
  
 Item 1A. Risk Factors
 Risks
Related to the Merger with GS Capital Partners
 A
significant delay in consummating or a failure to consummate the
merger with GS Capital Partners could negatively
impact the value of our common stock and our future business and financial results.
    
    
    the payment of a termination fee of $41.0 million to GS Capital Partners under certain
circumstances, including, among others, if our Board of Directors recommends an alternative
transaction proposal or if we enter into an alternative transaction;
    
    the reimbursement of up to $10.0 million of GS Capital Partners costs and expenses in
connection with the merger agreement under certain circumstances, including, among others, if
we breach the merger agreement or if our stockholders do not approve the merger;
    
    the payment of certain costs relating to the merger that are payable whether or not the
merger is completed, including legal, accounting and financial advisor fees; and
    
    the diversion of managements focus toward the merger instead of on our core business and
other potential business opportunities.
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Restrictions on the conduct of our business prior to the completion of the merger may have a
negative impact on our operating results.
  Risks Related to Our Business
 We may be unsuccessful in adequately growing our cash earnings per share and our failure to do so
may negatively impact the price of our common stock and our financial position and results of
operations.
  We may be unsuccessful in growing revenues organically, and our failure to do so may
negatively impact the price of our common stock and our financial position and results of
operations.
  We may be unsuccessful in expanding our margins, and our failure to do so may negatively
impact the price of our common stock and our financial position and results of operations.
  We could fail to maintain an effective system of internal controls and, consequently, may not
be able to report our financial results accurately. As a result, our
current and potential stockholders could lose confidence in our financial reporting, which could harm our business and
the price of our common stock.
  7




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Recent litigation and state regulatory activities concerning industry practices and procedures
could negatively impact our business, financial condition and/or results of operations.
     Insurance Industry Investigations and
Other Developments
 Contingent commissions are less predictable than our other revenues, which makes it difficult
to forecast revenues; and decreases in these commissions may negatively impact our financial
condition or results of operations.
  Insurance Industry Investigations and Other Developments
 8




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The cyclical nature of P&C premium rates may make our financial results volatile and
unpredictable. Commissions from the brokering of insurance products represent a majority of our
revenues.
  We act as brokers for state insurance funds such as those in California and Florida which
could choose to reduce brokerage commissions and/or contingent commissions we receive, which could
negatively affect our financial results.
  Government regulation and resulting market dynamics relating to the group health plans we sell
could negatively affect our financial results.
  We are dependent on key sales and management professionals who could end their employment with
us, which could negatively affect our financial results and impair our ability to implement our
business strategy.
  9




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The loss of the services of David L. Eslick, our chairman, president and chief executive
officer, could adversely affect our ability to carry out our business plan.
  Our inability to acquire and integrate operations successfully may negatively affect our financial
results and internal control over financial reporting.
     Further expenses related to margin improvement efforts and acquisition integration charges could
adversely affect our financial results and negatively impact the price of our common stock.
   Our business, financial condition and/or results may be negatively affected by errors and
omissions claims and the outcome of factual and potential claims, lawsuits and proceedings.
  10




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Competition in our industry is intense and, if we are unable to compete effectively, we may
lose clients and our financial results may be negatively affected.












Our high level of indebtedness may put us at a competitive disadvantage relative to insurance
brokers and other distributors of financial products and services.




Failure to comply with financial covenants in our credit facility could cause all or a portion
of our debt to become immediately due and payable.


11




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If we are required to write down goodwill and other intangible assets, our financial condition
and results would be negatively affected.






The geographic concentration of our businesses could leave us vulnerable to an economic
downturn or regulatory changes in those areas, resulting in a decrease in our revenues.




Failure to comply with regulations applicable to us could restrict our ability to conduct our
business.








We depend on our information processing systems. Interruption or loss of our information
processing systems could have a material adverse effect on our business.


12




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Our
principal stockholders interests in our business may be different than those of our other
stockholders and, therefore, may make decisions that are adverse to
our other stockholders
interests.
  
 Item 1B. Unresolved Staff Comments
 None.
 
 Item 2. Properties
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
 None.
 13




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
 Market Information and Holders
  High
    
    Low2006Fourth Quarter
    
    $
    16.05
    
    
    $
    13.37Third Quarter
    
    $
    13.74
    
    
    $
    12.00Second Quarter
    
    $
    16.02
    
    
    $
    12.70First Quarter
    
    $
    16.13
    
    
    $
    13.292005Fourth Quarter
    
    $
    14.20
    
    
    $
    12.37Third Quarter
    
    $
    13.17
    
    
    $
    11.05Second Quarter
    
    $
    13.02
    
    
    $
    10.95First Quarter
    
    $
    12.01
    
    
    $
    10.98
   Issuer Purchases of Equity Securities
   14




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Maximumnumber (orapproximateTotal number of
    
    dollar value) ofshares (or units)
    
    shares (or units)purchased as part
    
    that may yet beTotal number of shares
    
    
    
    
    
    of publicly
    
    purchased under(or units)
    
    Average price paid per
    
    announced plans
    
    the plans orPlan Category
    
    purchased
    
    share (or unit)
    
    or programs*
    
    programsOctober 1,
2006 through
October 31, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    *November 1, 2006
through November
30, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    *December 1, 2006
through December
31, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    *Total
    
    
    
    
    
    
    
    
    
    
    
 
 *
    
    See the description of our limited stock repurchase plan preceding this table. Equity Compensation Plan Information as of December 31, 2006
 Number of securitiesremaining for futureNumber of securities to be
    
    
    Weighted-average
    
    
    issuance under equityissued upon exercise of
    
    
    exercise price of
    
    
    compensation plansoutstanding options
    
    
    outstanding options
    
    
    (excluding securitiesPlan Category
    
    and rights
    
    
    and rights
    
    
    reflected in column (a))Equity compensation
plans approved by security
holders
    
    
    5,680,258
    
    
    $
    11.16
    
    
    
    1,669,898Equity compensation plans
not approved by security
holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    5,680,258
    
    
    $
    11.16
    
    
    
    1,669,898
 15




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Item 6. Selected Financial Data
  Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(in thousands, except per share data)Income statement data:Revenues(a)Net commissions and fees and other revenues
    
    $
    546,307
    
    
    $
    504,426
    
    
    $
    401,836
    
    
    $
    338,513
    
    
    $
    313,684Investment income
    
    
    5,301
    
    
    
    3,858
    
    
    
    1,378
    
    
    
    2,488
    
    
    
    2,641Total revenues
    
    
    551,608
    
    
    
    508,284
    
    
    
    403,214
    
    
    
    341,001
    
    
    
    316,325Expenses(a)Compensation and employee benefits
    
    
    310,461
    
    
    
    290,386
    
    
    
    228,628
    
    
    
    192,946
    
    
    
    195,060Other operating expenses
    
    
    135,565
    
    
    
    115,198
    
    
    
    93,006
    
    
    
    75,193
    
    
    
    66,199Amortization of intangible assets
    
    
    34,536
    
    
    
    30,549
    
    
    
    23,099
    
    
    
    20,934
    
    
    
    20,306Depreciation
    
    
    10,282
    
    
    
    9,655
    
    
    
    8,589
    
    
    
    9,424
    
    
    
    10,831Interest
    
    
    20,690
    
    
    
    15,036
    
    
    
    8,531
    
    
    
    9,712
    
    
    
    17,239Margin improvement plan expenses(b)
    
    
    
    
    
    
    8,141
    
    
    
    12,371
    
    
    
    
    
    
    
    Acquisition integration expenses(b)
    
    
    1,419
    
    
    
    8,573
    
    
    
    276
    
    
    
    
    
    
    
    Early retirement of debt
    
    
    2,093
    
    
    
    
    
    
    
    
    
    
    
    4,049
    
    
    
    2,610Change in value of stock appreciation rights
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,995
    )Change in value of redeemable common stock
warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,070
    )Value of stock options exchanged for stock
appreciation rights
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,269Total expenses
    
    
    515,046
    
    
    
    477,538
    
    
    
    374,500
    
    
    
    312,258
    
    
    
    306,449Income from continuing operations before income tax
expense (benefit)
    
    
    36,562
    
    
    
    30,746
    
    
    
    28,714
    
    
    
    28,743
    
    
    
    9,876Income tax expense (benefit)
    
    
    15,953
    
    
    
    12,713
    
    
    
    12,653
    
    
    
    (5,039
    )
    
    
    (531
    )Income from continuing operations
    
    
    20,609
    
    
    
    18,033
    
    
    
    16,061
    
    
    
    33,782
    
    
    
    10,407(Loss) income from discontinued operations, net of
income taxes(c)
    
    
    
    
    
    
    (10,229
    )
    
    
    (7,760
    )
    
    
    1,747
    
    
    
    (13,222
    )Net income (loss)
    
    $
    20,609
    
    
    $
    7,804
    
    
    $
    8,301
    
    
    $
    35,529
    
    
    $
    (2,815
    )Reconciliation of net income (loss) to net income (loss)
available to common stockholders:Net income (loss)
    
    $
    20,609
    
    
    $
    7,804
    
    
    $
    8,301
    
    
    $
    35,529
    
    
    $
    (2,815
    )Change in aggregate liquidation preference of
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,708
    )Change in redemption value of Series N put rights
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138Net income (loss) available to common stockholders
    
    $
    20,609
    
    
    $
    7,804
    
    
    $
    8,301
    
    
    $
    35,529
    
    
    $
    (21,385
    )
 (Table continued on following page)
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(Continued from previous page)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(in thousands, except for per share data)Per share databasic:(d)Income (loss) from continuing operations
    
    $
    0.36
    
    
    $
    0.32
    
    
    $
    0.33
    
    
    $
    0.74
    
    
    $
    (0.93
    )(Loss) income from discontinued
operations, net of income taxes
    
    
    
    
    
    
    (0.18
    )
    
    
    (0.16
    )
    
    
    0.04
    
    
    
    (1.50
    )Net income (loss) per common share
    
    $
    0.36
    
    
    $
    0.14
    
    
    $
    0.17
    
    
    $
    0.78
    
    
    $
    (2.43
    )
 Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(in thousands, except for per share data)Per share datadiluted:(d)Income (loss) from continuing operations
    
    $
    0.36
    
    
    $
    0.32
    
    
    $
    0.33
    
    
    $
    0.73
    
    
    $
    (0.93
    )(Loss) income from discontinued
operations, net of income taxes
    
    
    
    
    
    
    (0.18
    )
    
    
    (0.16
    )
    
    
    0.04
    
    
    
    (1.50
    )Net income (loss) per common share
    
    $
    0.36
    
    
    $
    0.14
    
    
    $
    0.17
    
    
    $
    0.77
    
    
    $
    (2.43
    )
 As of December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(in thousands)Balance sheet data:Goodwill
    
    $
    508,330
    
    
    $
    405,490
    
    
    $
    309,195
    
    
    $
    214,067
    
    
    $
    178,402Expiration rights and other intangible assets, net
    
    
    226,016
    
    
    
    165,643
    
    
    
    114,842
    
    
    
    87,850
    
    
    
    85,221Total assets of continuing operations
    
    
    1,239,146
    
    
    
    1,018,931
    
    
    
    782,141
    
    
    
    644,304
    
    
    
    553,855Total debt of continuing operations(d)
    
    
    380,812
    
    
    
    236,532
    
    
    
    156,324
    
    
    
    156,460
    
    
    
    131,175Total stockholders equity(d)
    
    
    440,402
    
    
    
    409,981
    
    
    
    327,565
    
    
    
    262,862
    
    
    
    182,799Redeemable common stock(e)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,302
 
 (a)
    
    All amounts have been reclassified to reflect the impact of discontinued operations
announced in 2005 and 2004.(b)
    
    In the fourth quarter of 2004, we announced that our Board of Directors had approved a
margin improvement plan in order to reduce ongoing operating expenses. As a result of this
plan, we recorded expense of $12.4 million in the fourth quarter of 2004. The expense related
to employee severance and related benefits for 28 employees of $3.4 million, facilities
closures of $3.4 million, the modification of 34 sales professionals agreements of $2.9
million and service contract termination fees of $2.7 million. In 2005, we recorded an
additional $8.1 million in expense primarily for employee severance and related benefits in
connection with the margin improvement plan.In the fourth quarter of 2006, we recorded $1.4 million in integration expense, primarily
related to the Kibble acquisition. In 2005, we recorded acquisition integration expense of $8.6
million, which related primarily to the restructuring of certain SGP sales professionals and
executives employment agreements in the amount of $8.1 million. In exchange for cash and/or
restricted stock consideration, existing employment agreements were amended to conform to our
standard compensation structure for sales professionals and regional executives. The $8.1 million
in consideration to the SGP individuals was not included in purchase price for accounting purposes.(c)
    
    In December 2004, our Board of Directors approved plans to sell, or otherwise dispose of,
three operations in our Insurance Brokerage and Specialized Benefits Services segments that
exhibited significant earnings volatility or that did not fit with our core business strategy.
In the first quarter of 2005, we classified as discontinued operations two operations newly
acquired in the SGP acquisition that were determined not to fit with our core business
strategy. In June 2005, we approved a plan to sell or otherwise dispose of two additional
operations in the Insurance Brokerage segment that exhibited significant earnings volatility
or that did not fit with our core business strategy, one of which was acquired in the first
quarter of 2005 in the SGP acquisition. As a result of these actions, we classified these
entities as discontinued operations. See Note 16, Discontinued Operations in the notes to
Consolidated Financial Statements for details.(d)
    
    On October 25, 2002, we completed our IPO of 9.0 million common shares at a price of $10
per share. Upon the consummation of the IPO, all outstanding shares of preferred stock were
split adjusted (two-for-five reverse stock split) and converted into approximately 23.1
million shares of our common stock. The accretion dividends, with respect to the preferred
stock, were converted to approximately 9.1 million shares of our common stock at the IPO price
of $10 per share. At December 31, 2006, 2005, 2004, 2003 and 2002 we had approximately 58.5
million, 57.6 million, 51.5 million, 46.7 million and 42.4 million shares of common stock
outstanding, respectively. The IPO proceeds, net of the underwriting discount and expenses, of
approximately $78.4 million were used to repay indebtedness under our credit facility. 17




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(e)
    
    At December 31, 2002, we had approximately 2.2 million shares of common stock outstanding
on which the owners had put rights. These shares, and the related put obligation, were
reclassified to equity and liabilities, respectively, upon the adoption of SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity, in 2003. 18




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 The following discussion and analysis should be read in conjunction with our consolidated
financial statements and accompanying notes included in Part II-Item 8 of this report. Certain
information contained in Managements Discussion and Analysis of Financial Condition and Results
of Operations are forward-looking statements that involve risks and uncertainties. See Forward
Looking Statements included in this report. Our actual results may differ materially from the
results discussed in the forward-looking statements because of various factors, including those
discussed above and elsewhere herein.
 Management Overview
 Business
   Sources of Revenue
  
    
    commissions paid by insurance companies on the placement of P&C and employee benefits products;
    
    fees paid directly by clients and other third-parties for either P&C or employee benefit-related services; and
    
    interest income.
  
 Costs and Expenses
   19




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Insurance Industry Investigations and Other Developments
       20




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Industry Class Action Litigation. Opticare
Health Systems, Inc. v. Marsh & McLennan Companies, Inc., et al Lewis v. Marsh & McLennan Companies, Inc., et al Preuss v. Marsh & McLennan Companies, Inc., et al Palm Tree Computers Systems, Inc. et al. v. Ace,
USA et al., Bensley Construction, Inc. v.
Marsh & McLennan Companies, Inc. et al Opticare Palm Tree Bensley Bensley
   Industry Trends and Uncertainties Which May Impact Future Results of Operations
  Property & Casualty Market
  21




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Employee Benefits Market
   22




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Primary Financial Measures
  
    
    Organic Revenue growth (decline), which excludes the current periods total revenues
attributable to acquisitions and the prior periods total revenues from divested businesses
during the twelve months following an acquisition or divestiture; and
    
    Cash earnings per share (CEPS), which we define as income from continuing operations plus
amortization of intangible assets on a diluted per share basis. (In 2006, CEPS was adjusted
for acquisition integration expenses, non-cash stock-based compensation related to the
implementation of Statement of Financial Accounting Standards (SFAS) No. 123 (Revised)
Share-Based Payment, early extinguishment of debt expense, an impairment charge on the
intangible assets of one acquisition and costs related to the proposed purchase of our common
stock by GS Capital Partners. In 2005 and 2004, CEPS was adjusted for expenses related to
acquisition integration efforts, the margin improvement plan and other charges.)
   Our Strategies
  Maximize Organic Revenue Growth
  
    
    Cross-Selling.We believe we have a competitive advantage over other brokerage
firms as a result of our balanced mix of products, which enables us to serve as a single
source for a business customers insurance needs. We believe cross-selling enables us to
increase Organic Revenue growth and improve client retention. Our culture, organizational structure and sales force incentives have been
developed to motivate our sales professionals to cross-sell our broad range of products and
services.
    
    Increased Specialization within Property & Casualty Insurance Market. While
our employee benefits business is relatively differentiated through value-added services, we
have found that focusing on specific industries within the P&C insurance market generates
sales opportunities by capitalizing on the expertise and recognition we develop in those
industries. We have found that our specialized P&C insurance sales professionals are more
productive than their non-specialized counterparts, as measured by revenues per sales
professional.
    
    Increased Focus on Sales Force Retention, Recruiting and Management. We seek
to grow organically through incentivizing and consistently managing our sales professionals.
Our competitive commission-based compensation package is designed to retain and attract sales
professionals. As a direct result, we improve customer retention and drive our sales
professionals to generate new business. In addition, we have developed internal standards for
sales force management processes for our operations. As a result of these standards, we
actively manage our sales force through assistance in the generation of new business,
cross-selling opportunities and retention of existing clients.
 23




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##### Table of Contents



Improve Operating Efficiencies
  Select Strategic Acquisitions
   Critical Accounting Estimates and Policies
   Direct Bill Revenue Recognition
   Enrollment Revenue Recognition
   24




---



##### Table of Contents



Allowances for Bad Debts and Policy Cancellations
  Goodwill, Other Intangible Assets and Other Long-Lived Assets Impairment
   Business Acquisitions and Purchase Price Allocations
   Income Taxes
  25




---



##### Table of Contents



Litigation Matters
  New Accounting Pronouncements
  Factors Affecting Comparability
 Acquisitions
    26




---



##### Table of Contents



Discontinued Operations
   27




---



##### Table of Contents



Integration Efforts and Margin Improvement Plan
  Year Ended December 31,2006
    
    
    2005
    
    
    2004(in thousands)Integration effortsCompensation and employee benefits expenses
    
    $
    156
    
    
    $
    8,122
    
    
    $
    Other operating expenses
    
    
    1,263
    
    
    
    457
    
    
    
    Total integration efforts
    
    
    1,419
    
    
    
    8,579
    
    
    
    Margin improvement planCompensation and employee benefits expenses
    
    
    
    
    
    
    8,094
    
    
    
    6,277Other operating expenses
    
    
    
    
    
    
    47
    
    
    
    6,094Total margin improvement plan
    
    
    
    
    
    
    8,141
    
    
    
    12,371Total integration efforts and margin improvement plan
    
    $
    1,419
    
    
    $
    16,720
    
    
    $
    12,371
 Integration Efforts:
 Margin Improvement Plan:
  Early Extinguishment of Debt
  Direct Bill Adjustments
  28




---



##### Table of Contents



Results of Operations
 For the Year Ended December 31,Variance
    
    
    
    
    
    
    Variance2006
    
    
    Dollars
    
    
    %
    
    
    2005
    
    
    Dollars
    
    
    %
    
    
    2004(Dollars in thousands)Total revenues
    
    $
    551,608
    
    
    $
    43,324
    
    
    
    8.5
    %
    
    $
    508,284
    
    
    $
    105,070
    
    
    
    26.1
    %
    
    $
    403,214Expenses:Compensation and employee benefits
    
    
    310,461
    
    
    
    20,075
    
    
    
    6.9
    %
    
    
    290,386
    
    
    
    61,758
    
    
    
    27.0
    %
    
    
    228,628Other operating expenses
    
    
    132,331
    
    
    
    17,133
    
    
    
    14.9
    %
    
    
    115,198
    
    
    
    22,192
    
    
    
    23.9
    %
    
    
    93,006Amortization of intangible assets
    
    
    34,536
    
    
    
    3,987
    
    
    
    13.1
    %
    
    
    30,549
    
    
    
    7,450
    
    
    
    32.3
    %
    
    
    23,099Interest
    
    
    20,690
    
    
    
    5,654
    
    
    
    37.6
    %
    
    
    15,036
    
    
    
    6,505
    
    
    
    76.3
    %
    
    
    8,531Depreciation
    
    
    10,282
    
    
    
    627
    
    
    
    6.5
    %
    
    
    9,655
    
    
    
    1,066
    
    
    
    12.4
    %
    
    
    8,589Impairment charge
    
    
    3,234
    
    
    
    3,234
    
    
    NM
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Margin improvement plan expenses
    
    
    
    
    
    
    (8,141
    )
    
    NM
    
    
    8,141
    
    
    
    (4,230
    )
    
    
    (34.2)
    %
    
    
    12,371Acquisition integration expenses
    
    
    1,419
    
    
    
    (7,154
    )
    
    
    (83.4
    )%
    
    
    8,573
    
    
    
    8,297
    
    
    NM
    
    
    276Early extinguishment of debt
    
    
    2,093
    
    
    
    2,093
    
    
    NM
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total expenses
    
    
    515,046
    
    
    
    37,508
    
    
    
    7.9
    %
    
    
    477,538
    
    
    
    103,038
    
    
    
    27.5
    %
    
    
    374,500Income from continuing
operations, before income tax
expense
    
    
    36,562
    
    
    
    5,816
    
    
    
    18.9
    %
    
    
    30,746
    
    
    
    2,032
    
    
    
    7.1
    %
    
    
    28,714Income tax expense
    
    
    15,953
    
    
    
    3,240
    
    
    
    25.5
    %
    
    
    12,713
    
    
    
    60
    
    
    
    0.5
    %
    
    
    12,653Income from continuing operations
    
    $
    20,609
    
    
    $
    2,576
    
    
    
    14.3
    %
    
    $
    18,033
    
    
    $
    1,972
    
    
    
    12.3
    %
    
    $
    16,061
 29




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##### Table of Contents



For the Year ended December 31,AdjustmentChange
    
    
    for netRevenues
    
    
    
    
    
    
    Total revenue
    
    
    acquired
    
    
    Organic revenue2006
    
    
    2005
    
    
    Amount
    
    
    growth/(decline)
    
    
    businesses
    
    
    growth/(decline)(Dollars in thousands)ConsolidatedNet commissions and fees  property & casualty
    
    $
    273,464
    
    
    $
    260,132
    
    
    $
    13,332
    
    
    
    5.1
    %
    
    $
    (12,633
    )
    
    
    0.3
    %Net commissions and fees  benefits
    
    
    238,313
    
    
    
    212,890
    
    
    
    25,423
    
    
    
    11.9
    %
    
    
    (25,735
    )
    
    
    (0.1
    )%Total net commissions and fees
    
    
    511,777
    
    
    
    473,022
    
    
    
    38,755
    
    
    
    8.2
    %
    
    
    (38,368
    )
    
    
    0.1
    %Contingents and overrides
    
    
    26,134
    
    
    
    25,825
    
    
    
    309
    
    
    
    1.2
    %
    
    
    (1,094
    )
    
    
    (3.0
    )%Interest and other income
    
    
    13,697
    
    
    
    9,437
    
    
    
    4,260
    
    
    
    45.1
    %
    
    
    (262
    )
    
    
    42.4
    %Total revenues
    
    $
    551,608
    
    
    $
    508,284
    
    
    $
    43,324
    
    
    
    8.5
    %
    
    $
    (39,724
    )
    
    
    0.7
    %Insurance BrokerageNet commissions and fees  property &
casualty
    
    $
    273,464
    
    
    $
    260,132
    
    
    $
    13,332
    
    
    
    5.1
    %
    
    $
    (12,633
    )
    
    
    0.3
    %Net commissions and fees  benefits
    
    
    191,453
    
    
    
    169,669
    
    
    
    21,784
    
    
    
    12.8
    %
    
    
    (17,827
    )
    
    
    2.3
    %Total net commissions and fees
    
    
    464,917
    
    
    
    429,801
    
    
    
    35,116
    
    
    
    8.2
    %
    
    
    (30,460
    )
    
    
    1.1
    %Contingents and overrides
    
    
    26,134
    
    
    
    25,807
    
    
    
    327
    
    
    
    1.3
    %
    
    
    (1,094
    )
    
    
    (3.0
    %)Interest and other income
    
    
    13,452
    
    
    
    7,893
    
    
    
    5,559
    
    
    
    70.4
    %
    
    
    (262
    )
    
    
    67.1
    %Total revenues
    
    $
    504,503
    
    
    $
    463,501
    
    
    $
    41,002
    
    
    
    8.8
    %
    
    $
    (31,816
    )
    
    
    2.0
    %Specialized Benefits ServicesNet commissions and fees  benefits
    
    $
    46,860
    
    
    $
    43,221
    
    
    $
    3,639
    
    
    
    8.4
    %
    
    $
    (7,908
    )
    
    
    (9.9
    )%Contingents and overrides rest and other income
    
    
    
    
    
    
    18
    
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    Interest and other income
    
    
    2
    
    
    
    24
    
    
    
    (22
    )
    
    
    (91.7
    )%
    
    
    
    
    
    
    (91.7
    )%Total revenues
    
    $
    46,862
    
    
    $
    43,263
    
    
    $
    3,599
    
    
    
    8.3
    %
    
    $
    (7,908
    )
    
    
    (10.0
    )%CorporateInterest and other income
    
    $
    243
    
    
    $
    1,520
    
    
    $
    (1,277
    )
    
    
    (84.0
    )%
    
    $
    
    
    
    
    (84.0
    )%Total revenues
    
    $
    243
    
    
    $
    1,520
    
    
    $
    (1,277
    )
    
    
    (84.0
    )%
    
    $
    
    
    
    
    (84.0
    )%
   Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
 Revenues.
 Compensation and Employee Benefits Expenses.
 Other Operating Expenses.
 30




---



##### Table of Contents



Total expenses.
 Income From Continuing Operations.
 Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
 Revenues.
 Compensation and Employee Benefits Expenses.
 Other Operating Expenses.
 Total
expenses.
 Income From Continuing Operations.
 Our Segments
   
    
    general and specialty property and casualty insurance, which we refer to as P&C insurance;
    
    individual and group health, life and disability insurance,
which we refer to as employee benefits products;
    
    retirement and wealth management products;
    
    association and other endorsed products; and
    
    specialty wholesale products.
  
    
    sales of workplace benefits insurance products and services; and
    
    enrollment and communication services related to employee benefits.
  
    
    corporate management, acquisition processes, sales management, human resources, legal,
capital planning, financial and reporting support.
 31




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##### Table of Contents



Insurance Brokerage
 Year Ended December 31,Variance
    
    
    
    
    
    
    Variance2006
    
    
    Dollars
    
    
    %
    
    
    2005
    
    
    Dollars
    
    
    %
    
    
    2004(Dollars in thousands)Total revenues
    
    $
    504,503
    
    
    $
    41,002
    
    
    
    8.8
    %
    
    $
    463,501
    
    
    $
    86,263
    
    
    
    22.9
    %
    
    $
    377,238Expenses:Compensation and employee
benefits expenses
    
    
    272,033
    
    
    
    13,538
    
    
    
    5.2
    %
    
    
    258,495
    
    
    
    49,530
    
    
    
    23.7
    %
    
    
    208,965Non-cash stock-based compensation
    
    
    4,317
    
    
    
    2,176
    
    
    
    101.6
    %
    
    
    2,141
    
    
    
    1,937
    
    
    
    949.5
    %
    
    
    204Other operating expenses
    
    
    91,947
    
    
    
    10,840
    
    
    
    13.4
    %
    
    
    81,107
    
    
    
    14,471
    
    
    
    21.7
    %
    
    
    66,636Amortization of intangible assets
    
    
    31,368
    
    
    
    3,569
    
    
    
    12.8
    %
    
    
    27,799
    
    
    
    6,294
    
    
    
    29.3
    %
    
    
    21,505Interest
    
    
    934
    
    
    
    (156
    )
    
    
    (14.3
    )%
    
    
    1,090
    
    
    
    (71
    )
    
    
    (6.1)
    %
    
    
    1,161Depreciation
    
    
    7,969
    
    
    
    385
    
    
    
    5.1
    %
    
    
    7,584
    
    
    
    1,040
    
    
    
    15.9
    %
    
    
    6,544Impairment charge
    
    
    3,234
    
    
    
    3,234
    
    
    NM
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Margin improvement plan expenses
    
    
    
    
    
    
    (6,507
    )
    
    NM
    
    
    6,507
    
    
    
    (2,526
    )
    
    
    (28.0)
    %
    
    
    9,033Acquisition integration expenses
    
    
    1,419
    
    
    
    (7,154
    )
    
    
    (83.4
    )%
    
    
    8,573
    
    
    
    8,573
    
    
    NM
    
    
    Total expenses
    
    
    413,221
    
    
    
    19,925
    
    
    
    5.1
    %
    
    
    393,296
    
    
    
    79,248
    
    
    
    25.2
    %
    
    
    314,048Income from continuing
operations, before income taxes
    
    $
    91,282
    
    
    $
    21,077
    
    
    
    30.0
    %
    
    $
    70,205
    
    
    $
    7,015
    
    
    
    11.1
    %
    
    $
    63,190
  Comparisons for Years Ended December 31, 2006, 2005 and 2004
    32




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##### Table of Contents



Specialized Benefits Services
 Year Ended December 31,Variance
    
    
    
    
    
    
    Variance2006
    
    
    Dollars
    
    
    %
    
    
    2005
    
    
    Dollars
    
    
    %
    
    
    2004(Dollars in thousands)Total revenues
    
    $
    46,862
    
    
    $
    3,599
    
    
    
    8.3
    %
    
    $
    43,263
    
    
    $
    17,550
    
    
    
    68.3
    %
    
    $
    25,713Expenses:Compensation and employee
benefits expenses
    
    
    19,211
    
    
    
    3,542
    
    
    
    22.6
    %
    
    
    15,669
    
    
    
    5,885
    
    
    
    60.1
    %
    
    
    9,784Non-cash stock-based compensation
    
    
    224
    
    
    
    181
    
    
    
    420.9
    %
    
    
    43
    
    
    
    26
    
    
    
    152.9
    %
    
    
    17Other operating expenses
    
    
    23,481
    
    
    
    6,815
    
    
    
    40.9
    %
    
    
    16,666
    
    
    
    6,762
    
    
    
    68.3
    %
    
    
    9,904Amortization of intangible assets
    
    
    3,168
    
    
    
    418
    
    
    
    15.2
    %
    
    
    2,750
    
    
    
    1,156
    
    
    
    72.5
    %
    
    
    1,594Interest
    
    
    404
    
    
    
    43
    
    
    
    11.9
    %
    
    
    361
    
    
    
    (24
    )
    
    
    (6.2)
    %
    
    
    385Depreciation
    
    
    989
    
    
    
    360
    
    
    
    57.2
    %
    
    
    629
    
    
    
    224
    
    
    
    55.3
    %
    
    
    405Margin improvement plan expenses
    
    
    
    
    
    
    (82
    )
    
    NM
    
    
    82
    
    
    
    82
    
    
    NM
    
    
    Total expenses
    
    
    47,477
    
    
    
    11,277
    
    
    
    31.2
    %
    
    
    36,200
    
    
    
    14,111
    
    
    
    63.9
    %
    
    
    22,089Income from continuing
operations, before income taxes
    
    $
    (615
    )
    
    $
    (7,678
    )
    
    
    (108.7
    )%
    
    $
    7,063
    
    
    $
    3,439
    
    
    
    94.9
    %
    
    $
    3,624
  Comparisons for Years Ended December 31, 2006, 2005 and 2004
    33




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##### Table of Contents



Corporate
 Year Ended December 31,Variance
    
    
    
    
    
    
    Variance2006
    
    
    Dollars
    
    
    %
    
    
    2005
    
    
    Dollars
    
    
    %
    
    
    2004(Dollars in thousands)Total revenues
    
    $
    243
    
    
    $
    (1,277
    )
    
    
    (84.0
    )%
    
    $
    1,520
    
    
    $
    1,257
    
    
    
    477.9
    %
    
    $
    263Expenses:Compensation and employee
benefits expenses
    
    
    12,509
    
    
    
    (1,134
    )
    
    
    (8.3
    )%
    
    
    13,643
    
    
    
    4,181
    
    
    
    44.2
    %
    
    
    9,462Non-cash stock-based
compensation
    
    
    2,167
    
    
    
    1,772
    
    
    
    448.6
    %
    
    
    395
    
    
    
    199
    
    
    
    101.5
    %
    
    
    196Other operating expenses
    
    
    16,903
    
    
    
    (522
    )
    
    
    (3.0)
    %
    
    
    17,425
    
    
    
    959
    
    
    
    5.8
    %
    
    
    16,466Interest
    
    
    19,352
    
    
    
    5,767
    
    
    
    42.5
    %
    
    
    13,585
    
    
    
    6,600
    
    
    
    94.5
    %
    
    
    6,985Depreciation
    
    
    1,324
    
    
    
    (118
    )
    
    
    (8.2
    )%
    
    
    1,442
    
    
    
    (198
    )
    
    
    (12.1)
    %
    
    
    1,640Margin improvement plan expenses
    
    
    
    
    
    
    (1,552
    )
    
    NM
    
    
    1,552
    
    
    
    (1,786
    )
    
    
    (53.5)
    %
    
    
    3,338Acquisition integration expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (276
    )
    
    NM
    
    
    276Early extinguishment of debt
    
    
    2,093
    
    
    
    2,093
    
    
    NM
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total expenses
    
    
    54,348
    
    
    
    6,306
    
    
    
    13.1
    %
    
    
    48,042
    
    
    
    9,679
    
    
    
    25.2
    %
    
    
    38,363Loss from continuing
operations, before income taxes
    
    $
    (54,105
    )
    
    $
    (7,583
    )
    
    
    16.3
    %
    
    $
    (46,522
    )
    
    $
    (8,422
    )
    
    
    22.1
    %
    
    $
    (38,100
    )
 Comparisons for Years Ended December 31, 2006, 2005 and 2004
    Liquidity and Capital Resources
 Liquidity:
   34




---



##### Table of Contents



Historical Cash Flows:
     35




---



##### Table of Contents



Taxes
   Registration Statements
    Exercise of Warrants
  Stock Repurchase Plan
   36




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##### Table of Contents



Long-Term Debt
  As of December 31,2006
    
    
    2005(in thousands)Senior Credit Facility:Term loan
    
    $
    308,300
    
    
    $
    211,512Revolving credit facility
    
    
    50,000
    
    
    
    Other Debt:Notes issued in connection with
acquisitions, due various dates through 2014
at interest rates from 3% to 10%
    
    
    20,726
    
    
    
    21,518Other long-term debt, primarily capital leases
    
    
    1,786
    
    
    
    3,502Total debt
    
    
    380,812
    
    
    
    236,532Current portion of long-term debt
    
    
    (13,346
    )
    
    
    (11,470
    )Long-term debt
    
    $
    367,466
    
    
    $
    225,062
     37




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##### Table of Contents



Description of Covenant
    
    Actual
    
    CovenantConsolidated Indebtedness to Adjusted Pro Forma
EBITDA Ratio(a)
    
    
    2.92
    
    
    3.00 maximumFixed Charge Coverage Ratio(a)
    
    
    3.08
    
    
    2.00  minimum
 
 (a)
    
    As defined in our credit facility. Adjusted Pro Forma EBITDA is our actual trailing twelve
months EBITDA adjusted to reflect the full year impact of businesses acquired or sold. Contractual Obligations
  Less than
    
    
    
    
    
    
    
    
    
    
    AfterPayments due by period
    
    Total
    
    
    1 year
    
    
    2-3 years
    
    
    4-5 years
    
    
    5 years(Dollars in thousands)Credit facility
    
    $
    358,300
    
    
    $
    3,100
    
    
    $
    6,200
    
    
    $
    349,000
    
    
    $
    Other debt and capital lease obligations
    
    
    22,512
    
    
    
    10,246
    
    
    
    11,709
    
    
    
    531
    
    
    
    26Operating lease commitments
    
    
    83,134
    
    
    
    22,370
    
    
    
    33,271
    
    
    
    18,739
    
    
    
    8,754Variable rate interest obligations
    
    
    109,898
    
    
    
    17,552
    
    
    
    37,038
    
    
    
    37,156
    
    
    
    18,152Fixed rate interest obligations
    
    
    1,099
    
    
    
    699
    
    
    
    400
    
    
    
    
    
    
    
    Other
    
    
    450
    
    
    
    450
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    575,393
    
    
    $
    54,417
    
    
    $
    88,618
    
    
    $
    405,426
    
    
    $
    26,932
  Credit Facility
  Other Debt and Capital Lease Obligations
  Operating Leases
  Interest Obligations
   Other
  38




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##### Table of Contents



Off-Balance Sheet Commitments
  
 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
 None.
 
 Item 9A.
    
    Controls and Procedures
 Evaluation of disclosure controls and procedures
    39




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##### Table of Contents



Managements Report on Internal Control
      David L. Eslick
    
    Robert S. SchneiderChairman, President and
    
    Executive Vice President andChief Executive Officer
    
    Chief Financial OfficerFebruary 28, 2007
    
    February 28, 2007
 40




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal ControlIntegrated Framework
         41




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##### Table of Contents



Item 9B.
    
    Other Information
  
 PART III
 
 Item 10.
    
    Directors, Executive Officers and Corporate Governance
 DIRECTORS
  Name
    
    Age
    
    Position(s) Held with the CompanyDavid L. Eslick
    
    
    48
    
    
    Chairman of the Board of Directors,
President and Chief Executive OfficerWilliam L. Atwell
    
    
    56
    
    
    DirectorRonald E Frieden
    
    
    63
    
    
    DirectorThomas A. Hayes
    
    
    64
    
    
    DirectorL. Ben Lytle
    
    
    59
    
    
    DirectorRobert A. Spass
    
    
    50
    
    
    DirectorRobert F. Wright
    
    
    81
    
    
    Director
 EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
  Name
    
    Age
    
    Position(s) Held with the CompanyRobert S. Schneider
    
    
    53
    
    
    Executive Vice President and Chief
Financial OfficerEdward J. Bowler
    
    
    50
    
    
    Senior Vice President, Corporate DevelopmentStewart H. Gibson
    
    
    43
    
    
    Senior Vice President and Chief
Information OfficerPhilip E. Larson, III
    
    
    36
    
    
    Senior Vice President, OperationsRobert J. Nesbit
    
    
    50
    
    
    Senior Vice President and Chief Human
Resources OfficerErnest J. Newborn, II
    
    
    49
    
    
    Senior Vice President, General Counsel
and Secretary
 BIOGRAPHICAL INFORMATION
 DIRECTORS OF USI HOLDINGS CORPORATION
 David L. Eslick
  42




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##### Table of Contents



William L. Atwell
  Ronald E. Frieden
  Thomas A. Hayes
  L. Ben Lytle
  Robert A. Spass
  Robert F. Wright
  43




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##### Table of Contents



EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS OF USI HOLDINGS CORPORATION
 Robert S. Schneider
  Edward J. Bowler
  Stewart H. Gibson
  Philip E. Larson, III
  Robert J. Nesbit
  Ernest J. Newborn, II
  CODE OF ETHICS
 www.usi.biz
 44




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##### Table of Contents



CODE OF BUSINESS CONDUCT
  ETHICS HOTLINE
  AUDIT COMMITTEE
  SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
   
 Item 11. Executive Compensation
 Compensation Committee Report
  
 Guiding Principles and Policies
   45




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##### Table of Contents






    
    Reinforce a high performance culture. The Company places a strong emphasis on pay for performance.
The Companys variable pay programs are intended to drive a high performance culture that
emphasizes both near and longer-term results. The portion of total compensation at risk varies
with the responsibilities required of the role. In general, the greater the leadership
accountability, the larger the portion of total compensation at risk.



    
    Emphasize total compensation opportunities. The philosophy considers total compensation as
a mix of compensation programs. Communicating the value and role of all compensation elements
is an important step. Market data is collected and reviewed periodically and used with other
relevant data to ensure competitive target compensation structures. Consistent with the
Companys performance culture, actual compensation levels vary based on performance.



    
    Reinforce internal equity and consistency through one common compensation philosophy. The
Company believes a uniform approach towards compensation increases the effectiveness of
programs by limiting complexity, reinforcing collaboration, and minimizing a culture of
individual negotiation. However, the Company maintains flexibility to ensure that it has the
ability to timely respond to market changes, recruitment or retention issues, or other matters
as needed. Cost impact, experience, performance, and potential, among other factors, may be
considered along with market data in adjusting pay/opportunities.



    
    Communicate information about business plans, performance, and executive total
compensation. Communications between the Company and its NEOs are frequent and reinforce
ongoing linkages between business strategy, Company performance, and executive compensation.
Comprehensive reporting on program elements, features, and values helps to facilitate
understanding of potential program worth.



    
    To fully consider stakeholder perceptions and good governance practices when formulating
pay plans and actions. All facets of the total compensation program are tested for alignment
with stakeholder interests, including the views of employees and investors. These assessments,
along with governance best practices, help the Company avoid surprise reactions to pay
decision-making. This does not preclude the Company from making decisions that may be
unpopular among a particular group, as long as such decisions are in the best interest of the
Company.



    
    Ensure a reasonable return on total compensation expenditures. Total compensation
represents a major cost element for the Company. All compensation plans carefully evaluate the
business returns expected from such investments. Assessments of financial impact are
multi-faceted and will include after-tax expense, cash flow, and shareowner dilution.


Benchmarking and Peer Group Usage




46



---



##### Table of Contents



Primary
    
    SecondaryBrown & Brown, Inc.
    
    Advanta Corp InvestmentsClark Inc.
    
    Alfa Corp.Gallagher & Co.
    
    Allied Capital CorporationHilb Rogal & Hobbs
    
    Argonaut Group, Inc.Hub International Limited
    
    Ceres Group, Inc.Willis Group Holdings
    
    Chicago Mercantile Exchange Holdings Inc.Citizens Banking CorporationCommerce Bancshares, Inc.EMC Insurance Group Inc.Harleysville Group Inc.HCC Insurance Holdings, Inc.Investors Financial Services Corp.Leucadia National CorporationMoneyGram International, Inc.The Nasdaq Stock Market, Inc.National Financial Partners Corp.Navigators Group Inc.Ohio Casualty CorporationPhiladelphia Consolidated Holding Corp.Piper Jaffray CompaniesRLI Corp.SEI Investments CompanySovereign Bancorp, Inc.Student Loan CorporationValley National BancorpWesco Financial CorporationZenith National Insurance Corp.
 
    
    Total compensation is targeted at competitive median pay levels for all components of pay
as outlined below. These are intended as general guidelines for the entire executive group.
Incumbent-specific circumstances may dictate compensation levels that are above or below these
targeted guidelines. The Companys executive compensation strategy should allow for
flexibility in addressing specific situations in order to meet broader human resources
objectives.
 
    
    Base salaries and other fixed payments are targeted within a relevant range that approximates competitive median levels.
    
    Short-term (annual) incentives are targeted at or near competitive median levels for expected results.
    
    Long-term variable pay opportunities approximate competitive median levels, but also
consider share dilution implications and the expense of the plan when target award levels are
being determined.
    
    Benefits and perquisites are targeted at or near competitive median levels. Plan value may
depart from market standards in cases where material and cost-effective tax benefits may be
available to individuals.
  target actual
   47




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##### Table of Contents



Elements of Compensation
  Base Salary
   Executive
    
    Current Base SalaryMr. Eslick
    
    $
    600,000Mr. Schneider
    
    $
    315,000Mr. Jones
    
    $
    350,000Mr. Larson
    
    $
    300,000Mr. Newborn
    
    $
    275,000
     Management Incentive Plan (MIP)
     48




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##### Table of Contents







Threshold MIP
    
    Target MIP as a
    
    Maximum MIP as aas a percent of base
    
    percent of base
    
    percent of baseExecutive
    
    salary
    
    salary
    
    salaryMr. Eslick
    
    
    10
    %
    
    
    100
    %
    
    
    200
    %Mr. Schneider
    
    
    6.5
    %
    
    
    65
    %
    
    
    130
    %Mr. Jones
    
    
    7
    %
    
    
    70
    %
    
    
    140
    %Mr. Larson
    
    
    6
    %
    
    
    60
    %
    
    
    120
    %Mr. Newborn
    
    
    6
    %
    
    
    60
    %
    
    
    120
    %




Executive
    
    2006 MIP award as a percent of base salaryMr. Eslick
    
    
    75
    %Mr. Schneider
    
    
    49
    %Mr. Jones
    
    
    53
    %Mr. Larson
    
    
    41
    %Mr. Newborn
    
    
    45
    %




Equity Incentive Plan (EIP)








49




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##### Table of Contents



Executive
    
    2006 LTI Award ValueMr. Eslick
    
    $
    750,000Mr. Schneider
    
    $
    250,000Mr. Jones
    
    $
    250,000Mr. Larson
    
    $
    200,000Mr. Newborn
    
    $
    200,000
   Benefits
 Retirement Benefits
 
 Welfare Benefits
  Deferred Compensation Plan
  Employee Stock Purchase Plan
  50




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##### Table of Contents



Perquisites
      Termination Benefits
 Severance Benefits
  Change-in-Control Benefits
   Employment Agreements
  51




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##### Table of Contents



Impact of Accounting and Tax Treatments of Compensation
  COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 www.usi.biz
 Summary Compensation and Grants of Plan-Based Awards
  Employment Agreements
    Executive
    
    Employment agreement termination dateMr. Eslick
    
    December 31, 2011Mr. Schneider
    
    October 31, 2007Mr. Jones
    
    Perpetual term, unless terminated by either party pursuant
to agreementMr. Larson
    
    Perpetual term, unless terminated by either party pursuant
to agreementMr. Newborn
    
    December 31, 2011
 Compensation
Elements
    52




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##### Table of Contents



Change inPensionNonequity
    
    andIncentive
    
    NonqualifiedOption
    
    Plan
    
    Deferred
    
    All OtherSalary
    
    Bonus
    
    Stock Awards
    
    Awards
    
    Compensation
    
    Compensation
    
    Compensation
    
    TotalName and Principal Position
    
    Year
    
    ($)
    
    ($)
    
    ($)(1)
    
    ($)(2)
    
    ($)(3)
    
    Earnings ($)(4)
    
    ($)
    
    ($)David L Estick
    
    
    2006
    
    
    $
    576,000
    
    
    $
    
    
    
    $
    212,329
    
    
    $
    481,776
    
    
    $
    450,000
    
    
    $
    
    
    
    $
    51,315
    (5)
    
    $
    1,771,420Chairman of the Board, President
and Chief Executive OfficerRobert S. Schneider
    
    
    2006
    
    
    $
    315,000
    
    
    $
    
    
    
    $
    78,682
    
    
    $
    179,097
    
    
    $
    153,563
    
    
    $
    829
    
    
    $
    29,928
    (6)
    
    $
    757,099Executive Vice President and
Chief Financial OfficerJeffrey L. Jones (9)
    
    
    2006
    
    
    $
    350,000
    
    
    $
    595,000
    (10)
    
    $
    72,430
    
    
    $
    219,709
    
    
    $
    183,750
    
    
    $
    
    
    
    $
    46,300
    (7)
    
    $
    1,467,189Senior Vice President and
Chief Marketing OfficerPhilip E. Larson III
    
    
    2006
    
    
    $
    263,942
    
    
    $
    
    
    
    $
    21,965
    
    
    $
    264,645
    
    
    $
    123,750
    
    
    $
    
    
    
    $
    6,600
    
    
    $
    680,902Senior Vice President OperationsErnest J.
Newborn II
Senior Vice President, General Counsel and Secretary
    
    
    2006
    
    
    $
    275,000
    
    
    $
    
    
    
    $
    35,969
    
    
    $
    145,327
    
    
    $
    123,750
    
    
    $
    
    
    
    $
    24,190
    (8)
    
    $
    604,236
 
 1.
    
    The amounts in this column are based on the accounting expense recognized by the Company in
fiscal 2006 for grants of restricted stock awards for each of the NEOs. The assumptions used
to calculate the accounting expense are set forth in Note 7, Employee Benefit Plans in the
Companys Consolidated Financial Statements included in Part I, Item 8 of this report.2.
    
    The amounts in this column are based on the accounting expense recognized by the Company in
fiscal 2006 for grants of stock option awards for each of the NEOs. The assumptions used to
calculate the accounting expense are set forth in Note 8, Stock Option Plan in the Companys
Consolidated Financial Statements included in Part I, Item 8 of this report.3.
    
    The compensation included in this column is the actual MIP award granted for each NEO at the
February 2007 Compensation Committee meeting for performance during the 2006 fiscal year.4.
    
    This column reflects only non-qualified deferred compensation above-market earnings. The
above-market earnings are calculated based on the amount over 120% of the applicable federal
long-term rate. The rate used for the first 11 months of 2006 was the January 2005 rate of
4.76% (the date on which the investment choice was established). The rate used for the last
month of 2006 was the December 2006 rate of 4.9% (the date on which the investment choice
changed).5.
    
    Includes the following perquisites: car allowance; club allowance, Young Presidents
Organization membership, incremental cost to the Company of the Trump golf club membership;
and executive supplemental long-term disability (plan terminated October 1, 2006).6.
    
    Includes the following perquisites: car allowance; and the incremental cost to the Company of
the Trump golf club membership.7.
    
    Includes the following perquisites: car allowance; club allowance, incremental cost to the
Company of the Trump golf club membership; term life insurance; and executive supplemental
long-term disability (plan terminated October 1, 2006).8.
    
    Includes the following perquisites: car allowance; club allowance, and executive supplemental
long-term disability (plan terminated October 1, 2006).9.
    
    From December 2002 until December 2006, Mr. Jones served as the Companys senior vice
president and chief marketing officer. Effective as of December 30, 2006, Mr. Jones has
served as the regional CEO of the Companys California region. 53




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##### Table of Contents



10.
    
    As noted above, in December 2006, Mr. Jones accepted a reassignment from the corporate office
to a regional executive position. In connection with this reassignment, Mr. Jones and the
Company expressly terminated the
existing senior officer employment agreement and replaced it with a regional executive employment
agreement, which included a substantially reduced severance benefit to Mr. Jones in the event the
Company terminated his employment without cause. Under Mr. Jones new employment agreement dated
December 30, 2006 (the Jones Employment Agreement), Mr. Jones received a one-time signing bonus
of $595,000 (the Signing Bonus) as additional consideration for the new covenants and performance
of the revised obligations set forth in the Jones Employment Agreement. If Mr. Jones voluntarily
terminates employment without good reason prior to the second anniversary of the date of the Jones
Employment Agreement, Mr. Jones is required to repay to the Company the Signing Bonus within 30
days of the date of such termination. Grants of Plan-Based Awards Table
 All Other Stock
    
    
    
    
    
    Exercise orEstimated Future Payouts Under Non-Equity
    
    Awards: Number of
    
    All Other Option Awards:
    
    Base Price ofIncentive Plan Awards (1)
    
    Shares or Stock
    
    Number of Securities
    
    Option Awards
    
    FAS 123 GrantName and Principal Position
    
    Grant Date
    
    Threshold
    
    Target
    
    Maximum
    
    Units (#)
    
    Underlying Option (#)
    
    ($/Sh)
    
    Date Fair Value(2)
    
    (3)David L. Eslick
    
    
    2/28/2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,259
    
    
    
    45,420
    
    
    $
    14.34
    
    
    $
    477,274Chairman of the Board, President
    
    
    5/23/2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,153
    
    
    
    24,087
    
    
    $
    13.93
    
    
    $
    151,593and Chief Executive Officer
    
    
    N/A
    
    
    $
    60,000
    
    
    $
    600,000
    
    
    $
    1,200,000
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    N/ARobert S. Schneider
    
    
    2/28/2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,753
    
    
    
    15,140
    
    
    $
    14.34
    
    
    $
    159,091Executive Vice President and
    
    
    5/23/2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,051
    
    
    
    8,029
    
    
    $
    13.93
    
    
    $
    82,765Chief Financial Officer
    
    
    N/A
    
    
    $
    20,475
    
    
    $
    204,750
    
    
    $
    409,500
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    N/AJeffrey L. Jones
    
    
    2/28/2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,753
    
    
    
    15,140
    
    
    $
    14.34
    
    
    $
    159,091Senior Vice President and
    
    
    5/23/2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,051
    
    
    
    8,029
    
    
    $
    13.93
    
    
    $
    82,765Chief Marketing Officer
    
    
    N/A
    
    
    $
    24,500
    
    
    $
    245,000
    
    
    $
    490,000
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    N/APhilip E. Larson III
    
    
    2/28/2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,603
    
    
    
    12,112
    
    
    $
    14.34
    
    
    $
    127,282Senior Vice President Operations
    
    
    5/23/2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,441
    
    
    
    6,423
    
    
    $
    13.93
    
    
    $
    66,214N/A
    
    
    $
    16,500
    
    
    $
    165,000
    
    
    $
    330,000
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    N/AErnest J. Newborn II
    
    
    2/28/2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,603
    
    
    
    12,112
    
    
    $
    14.34
    
    
    $
    127,282Senior Vice President, General Counsel
    
    
    5/23/2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,441
    
    
    
    6,423
    
    
    $
    13.93
    
    
    $
    66,214and Secretary
    
    
    N/A
    
    
    $
    16,500
    
    
    $
    165,000
    
    
    $
    330,000
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    N/A
 
 1.
    
    The amounts shown under Estimated Future Payouts under Non-Equity Incentive Plan Awards
reflect the threshold, target and maximum pay levels under the MIP. These amounts are based
on the individuals salary as of December 31, 2006.2.
    
    The amounts shown reflect the restricted stock awards granted under the EIP during fiscal
year 2006.3.
    
    The amounts shown reflect the stock options awards granted under the EIP during fiscal year
2006. 54




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##### Table of Contents



Outstanding Equity Awards at Fiscal Year End Table
 Option
Awards
    

Stock AwardsNumber of
    
    Number of
    
    
    
    
    
    
    
    
    
    Number ofsecurities
    
    securities
    
    
    
    
    
    
    
    
    
    shares orunderlying
    
    underlying
    
    
    
    
    
    
    
    
    
    units of stock
    
    Market value ofunexercised
    
    unexercised
    
    Option
    
    Option
    
    that have
    
    shares or unitsoptions (#)
    
    options (#)
    
    exercise
    
    expiration
    
    not vested
    
    that have notName and Principal Position
    
    Grant Date
    
    exercisable
    
    unexercisable
    
    price ($)
    
    date
    
    (#)
    
    vested ($)David L. Eslick
    
    
    1/6/1997
    
    
    
    42,600
    
    
    
    
    
    
    $
    10,00
    
    
    
    11/27/2012
    
    
    
    
    
    
    $
    Chairman of the Board,
    
    
    1/1/1998
    
    
    
    100,000
    
    
    
    
    
    
    $
    10.00
    
    
    
    11/27/2012
    
    
    
    
    
    
    $
    President and Chief
    
    
    11/16/1999
    
    
    
    100,000
    
    
    
    
    
    
    $
    10.00
    
    
    
    11/27/2012
    
    
    
    
    
    
    $
    Executive Officer
    
    
    10/22/2002
    
    
    
    78,254
    
    
    
    151,905
    (1)
    
    $
    10.00
    
    
    
    10/22/2012
    
    
    
    
    
    
    $
    10/22/2002
    
    
    
    230,159
    
    
    
    
    
    
    $
    10.00
    
    
    
    10/22/2012
    
    
    
    
    
    
    $
    10/22/2002
    
    
    
    100
    
    
    
    
    
    
    $
    10.00
    
    
    
    10/22/2012
    
    
    
    
    
    
    $
    4/5/2004
    
    
    
    40,948
    
    
    
    
    
    
    $
    14.46
    
    
    
    4/5/2014
    
    
    
    7,780
    (17)
    
    $
    112,4994/6/2005
    
    
    
    14,253
    
    
    
    42,757
    (2)
    
    $
    11.54
    
    
    
    4/6/2015
    
    
    
    21,645
    (18)
    
    $
    249,7834/26/2005
    
    
    
    
    
    
    
    
    
    
    $
    11.35
    
    
    
    
    
    
    
    22,026
    (19)
    
    $
    249,9952/28/2006
    
    
    
    
    
    
    
    45,420
    (3)
    
    $
    14.34
    
    
    
    2/28/2016
    
    
    
    17,259
    (20)
    
    $
    247,4945/23/2006
    
    
    
    
    
    
    
    24,087
    (4)
    
    $
    13.93
    
    
    
    5/23/2016
    
    
    
    9,153
    (21)
    
    $
    127,501Robert S. Schneider
    
    
    11/1/2002
    
    
    
    80,000
    
    
    
    
    
    
    $
    10.00
    
    
    
    11/1/2012
    
    
    
    
    
    
    $
    Executive Vice President and
    
    
    11/1/2002
    
    
    
    27,200
    
    
    
    52,800
    (5)
    
    $
    10.00
    
    
    
    11/1/2012
    
    
    
    
    
    
    $
    Chief Financial Officer
    
    
    4/5/2004
    
    
    
    27,299
    
    
    
    
    
    
    $
    14.46
    
    
    
    4/5/2014
    
    
    
    5,187
    (22)
    
    $
    75,0044/6/2005
    
    
    
    6,414
    
    
    
    19,240
    (6)
    
    $
    11.54
    
    
    
    4/6/2015
    
    
    
    9,740
    (23)
    
    $
    112,4002/28/2006
    
    
    
    
    
    
    
    15,140
    (7)
    
    $
    14.34
    
    
    
    2/28/2016
    
    
    
    5,753
    (24)
    
    $
    82,4985/23/2006
    
    
    
    
    
    
    
    8,029
    (8)
    
    $
    13.93
    
    
    
    5/23/2016
    
    
    
    3,051
    (25)
    
    $
    42,500Jeffrey L. Jones
    
    
    6/1/1994
    
    
    
    13,115
    
    
    
    
    
    
    $
    10.00
    
    
    
    11/27/2012
    
    
    
    
    
    
    $
    Senior Vice President and
    
    
    7/1/1998
    
    
    
    6,667
    
    
    
    
    
    
    $
    10.00
    
    
    
    11/27/2012
    
    
    
    
    
    
    $
    Chief Marketing Officer
    
    
    11/16/1999
    
    
    
    90,000
    
    
    
    
    
    
    $
    10.00
    
    
    
    11/27/2012
    
    
    
    
    
    
    $
    10/22/2002
    
    
    
    100
    
    
    
    
    
    
    $
    10.00
    
    
    
    10/22/2012
    
    
    
    
    
    
    $
    10/22/2002
    
    
    
    29,620
    
    
    
    57,497
    (9)
    
    $
    10.00
    
    
    
    10/22/2012
    
    
    
    
    
    
    $
    10/22/2002
    
    
    
    87,117
    
    
    
    
    
    
    $
    10.00
    
    
    
    10/22/2012
    
    
    
    
    
    
    $
    12/13/2002
    
    
    
    20,000
    
    
    
    
    
    
    $
    10.10
    
    
    
    12/13/2012
    
    
    
    
    
    
    $
    12/13/2002
    
    
    
    6,800
    
    
    
    13,200
    (10)
    
    $
    10.10
    
    
    
    12/13/2012
    
    
    
    
    
    
    $
    4/5/2004
    
    
    
    22,749
    
    
    
    
    
    
    $
    14.46
    
    
    
    4/5/2014
    
    
    
    4,323
    (26)
    
    $
    62,5114/6/2005
    
    
    
    6,414
    
    
    
    19,240
    (6)
    
    $
    11.54
    
    
    
    4/6/2015
    
    
    
    9,740
    (23)
    
    $
    112,4002/28/2006
    
    
    
    
    
    
    
    15,140
    (7)
    
    $
    14.34
    
    
    
    2/28/2016
    
    
    
    5,753
    (24)
    
    $
    82,4985/23/2006
    
    
    
    
    
    
    
    8,029
    (8)
    
    $
    13.93
    
    
    
    5/23/2016
    
    
    
    3,051
    (25)
    
    $
    42,500$
    Philip E. Larson III
    
    
    10/22/2002
    
    
    
    8,000
    
    
    
    
    
    
    $
    10.00
    
    
    
    10/22/2012
    
    
    
    
    
    
    $
    Senior Vice President
    
    
    1/10/2004
    
    
    
    37,500
    
    
    
    37,500
    (11)
    
    $
    13.06
    
    
    
    1/10/2014
    
    
    
    
    
    
    $
    Operations
    
    
    4/6/2005
    
    
    
    1,996
    
    
    
    5,985
    (12)
    
    $
    11.54
    
    
    
    4/6/2015
    
    
    
    3,033
    (27)
    
    $
    35,0012/28/2006
    
    
    
    
    
    
    
    12,112
    (13)
    
    $
    14.34
    
    
    
    2/28/2016
    
    
    
    4,603
    (28)
    
    $
    66,0075/23/2006
    
    
    
    
    
    
    
    6,423
    (14)
    
    $
    13.93
    
    
    
    5/23/2016
    
    
    
    2,441
    (29)
    
    $
    34,003Ernest J. Newborn II
    
    
    9/14/1998
    
    
    
    16,000
    
    
    
    
    
    
    $
    10.00
    
    
    
    11/27/2012
    
    
    
    
    
    
    $
    Senior Vice President,
    
    
    11/16/1999
    
    
    
    50,000
    
    
    
    
    
    
    $
    10.00
    
    
    
    11/27/2012
    
    
    
    
    
    
    $
    General Counsel
    
    
    10/22/2002
    
    
    
    78,721
    
    
    
    
    
    
    $
    10.00
    
    
    
    10/22/2012
    
    
    
    
    
    
    $
    and Secretary
    
    
    10/22/2002
    
    
    
    26,765
    
    
    
    51,956
    (15)
    
    $
    10.00
    
    
    
    10/22/2012
    
    
    
    
    
    
    $
    10/22/2002
    
    
    
    100
    
    
    
    
    
    
    $
    10.00
    
    
    
    10/22/2012
    
    
    
    
    
    
    $
    4/5/2004
    
    
    
    9,100
    
    
    
    
    
    
    $
    14.46
    
    
    
    4/5/2014
    
    
    
    1,729
    (30)
    
    $
    25,0014/6/2005
    
    
    
    2,423
    
    
    
    7,269
    (16)
    
    $
    11.54
    
    
    
    4/6/2015
    
    
    
    3,680
    (31)
    
    $
    42,4672/28/2006
    
    
    
    
    
    
    
    12,112
    (13)
    
    $
    14.34
    
    
    
    2/28/2016
    
    
    
    4,603
    (28)
    
    $
    66,0075/23/2006
    
    
    
    
    
    
    
    6,423
    (14)
    
    $
    13.93
    
    
    
    5/23/2016
    
    
    
    2,441
    (29)
    
    $
    34,003
 
 1.
    
    Represents 151,905 options that become exercisable on October 22, 2007.2.
    
    Represents 42,757 options, which will vest as follows: 14,253 on April 6, 2007, 14,253 on
April 6, 2008 and 14,251 on April 6, 2009.3.
    
    Represents 45,420 options, which will vest as follows: 11,355 on February 28, 2007, 11,355
on February 28, 2008, 11,355 on February 28, 2009 and 11,355 on February 28, 2010.4.
    
    Represents 24,087 options, which will vest as follows: 6,022 on May 23, 2007, 6,022 on May
23, 2008, 6,022 on May 23, 2009 and 6,021 on May 23, 2010.5.
    
    Represents 52,800 options that become exercisable on November 1, 2007.6.
    
    Represents 19,240 options, which will vest as follows: 6,414 on April 6, 2007, 6,414 on
April 6, 2008 and 6,412 on April 6, 2009.7.
    
    Represents 15,140 options, which will vest as follows: 3,785 on February 28, 2007, 3,785 on
February 28, 2008, 3,785 on February 28, 2009 and 3,785 on February 28, 2010. 55




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##### Table of Contents



8.
    
    Represents 8,029 options, which will vest as follows: 2,008 on May 23, 2007, 2,008 on May
23, 2008, 2,008 on May 23, 2009 and 2,005 on May 23, 2010.9.
    
    Represents 57,497 options that become exercisable on October 22, 2007.10.
    
    Represents 13,200 options that become exercisable on December 13, 2007.11.
    
    Represents 37,500 options, which will vest as follows: 18,750 that has vested as of January
10, 2007 and 18,750 that will vest on January 10, 2008.12.
    
    Represents 5,985 options, which will vest as follows: 1,996 on April 6, 2007, 1,996 on April
6, 2008 and 1,993 on April 6, 2009.13.
    
    Represents 12,112 options, which will vest as follows: 3,028 on February 28, 2007, 3,028 on
February 28, 2008, 3,028 on February 28, 2009 and 3,028 on February 28, 2010.14.
    
    Represents 6,423 options, which will vest as follows: 1,606 on May 23, 2007, 1,606 on May
23, 2008, 1,606 on May 23, 2009 and 1,605 on May 23, 2010.15.
    
    Represents 51,956 options that become exercisable on October 22, 2007.16.
    
    Represents 7,269 options, which will vest as follows: 2,423 on April 6, 2007, 2,423 on April
6, 2008 and 2,423 on April 6, 2009.17.
    
    Represents 7,780 restricted shares, which will vest as follows: 3,890 on April 5, 2007 and
3,890 on April 5, 2008.18.
    
    Represents 21,645 restricted shares, which will vest as follows: 7,216 on April 6, 2008,
7,215 on April 6, 2009 and 7,214 on April 6, 2010.19.
    
    Represents 22,026 restricted shares, which will vest as follows: 7,343 on April 26, 2008,
7,342 on April 26, 2009 and 7,341 on April 26, 2010.20.
    
    Represents 17,259 restricted shares, which will vest as follows: 5,754 on February 28, 2009,
5,753 on February 28, 2010 and 5,752 on February 28, 2011.21.
    
    Represents 9,153 restricted shares, which will vest as follows: 3,052 on May 23, 2009, 3,051
on May 23, 2010 and 3,050 on May 23, 2011.22.
    
    Represents 5,187 restricted shares, which will vest as follows: 2,593 on April 5, 2007 and
2,594 on April 5, 2008.23.
    
    Represents 9,740 restricted shares, which will vest as follows: 3,247 on April 6, 2008,
3,247 on April 6, 2009 and 3,246 on April 6, 2010.24.
    
    Represents 5,753 restricted shares, which will vest as follows: 1,918 on February 28, 2009,
1,918 on February 28, 2010 and 1,917 on February 28, 2011.25.
    
    Represents 3,051 restricted shares, which will vest as follows: 1,018 on May 23, 2009, 1,017
on May 23, 2010 and 1,016 on May 23, 2011.26.
    
    Represents 4,323 restricted shares, which will vest as follows: 2,161 on April 5, 2007 and
2,162 on April 5, 2008.27.
    
    Represents 3,033 restricted shares, which will vest as follows: 1,012 on April 6, 2008,
1,011 on April 6, 2009 and 1,010 on April 6, 2010.28.
    
    Represents 4,603 restricted shares, which will vest as follows: 1,535 on February 28, 2009,
1,535 on February 28, 2010 and 1,533 on February 28, 2011.29.
    
    Represents 2,441 restricted shares, which will vest as follows: 814 on May 23, 2009, 814 on
May 23, 2010 and 813 on May 23, 2011.30.
    
    Represents 1,729 restricted shares, which will vest as follows: 865 on April 5, 2007 and 864
on April 5, 2008.31.
    
    Represents 3,680 restricted shares, which will vest as follows: 1,227 on April 6, 2008,
1,227 on April 6, 2009 and 1,226 on April 6, 2010. 56




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##### Table of Contents



Option Exercises and Stock-Vested Table
  Stock AwardsNumber ofSharesAcquired on
    
    Value RealizedVesting
    
    on VestingName and Principal Position
    
    (#)
    
    ($)David L. Eslick
    
    
    3,890
    
    
    $
    62,201Chairman of the Board, President
and Chief Executive OfficerRobert S. Schneider
    
    
    2,593
    
    
    $
    41,462Executive Vice President and
Chief Financial OfficerJeffrey L. Jones
    
    
    2,161
    
    
    $
    34,554Senior Vice President and
Chief Marketing OfficerPhilip E. Larson III
    
    
    
    
    
    $
    Senior Vice President OperationsErnest J. Newborn II
    
    
    864
    
    
    $
    13,815Senior Vice President, General Counsel
and Secretary
 57




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##### Table of Contents



Non-Qualified Deferred Compensation
     January 2006 throughInvestment Option
    
    November 2006 Rate of ReturnAIM Capital Development Fund
    
    
    16.82
    %AIM International Growth Fund
    
    
    23.41
    %Dreyfus International Value
    
    
    19.31
    %Dreyfus Stock Index Fund
    
    
    13.67
    %Fidelity Contrafund Portfolio
    
    
    11.19
    %Gartmore GVIT Money Market Fund: Class V
    
    
    3.95
    %Gartmore Inv. Dest Aggressive Fund
    
    
    15.11
    %Gartmore Inv. Dest. Conservative Fund
    
    
    5.78
    %Gartmore Inv. Dest. Moderate Fund
    
    
    10.36
    %Goldman Sachs Mid Cap Value Fund
    
    
    15.93
    %Oppenheimer Capital Appreciation Fund
    
    
    8.19
    %PIMCO Real Return Bond Portfolio: Admin Class
    
    
    2.99
    %Royce Capital Micro Cap Portfolio
    
    
    18.34
    %T. Rowe Price Equity Income Portfolio
    
    
    16.14
    %Van Kampen GVIT Multi-Sector Bond Fund
    
    
    4.82
    %Van Kampen UIF U.S. Real Estate Portfolio
    
    
    38.57
    %
 58




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##### Table of Contents



Investment Option
    
    December 2006 Rate of ReturnAmerican Funds American International
    
    
    2.551
    %Davis Selected Advisors, L.P. Fundamental Value
    
    
    2.068
    %Deutsche Asset Management Real Estate Securities
    
    
    -1.570
    %Grantham, Mayo, Van Otterloo & Co. LLC Intl Core
    
    
    3.062
    %MFC Global Investment Mgmt. 500 Index B
    
    
    1.398
    %MFC Global Investment Mgmt. Lifestyle Aggressive
    
    
    1.529
    %MFC Global Investment Mgmt. Lifestyle Balanced
    
    
    0.932
    %MFC Global Investment Mgmt. Lifestyle Conservative
    
    
    -0.061
    %MFC Global Investment Mgmt. Lifestyle Growth
    
    
    1.116
    %MFC Global Investment Mgmt. Lifestyle Moderate
    
    
    0.510
    %MFC Global Investment Mgmt. Money Market B
    
    
    0.412
    %MFC Global Investment Mgmt. Small Cap Index
    
    
    0.294
    %Pacific Investment Management Co. Real Return Bond
    
    
    -1.826
    %Pacific Investment Management Co. Total Returns
    
    
    -0.861
    %T. Rowe Price and Associates, Inc. Blue Chip Growth
    
    
    1.149
    %T. Rowe Price and Associates, Inc. Equity Income
    
    
    2.042
    %T. Rowe Price and Associates, Inc. Mid Value
    
    
    1.864
    %Wellington Management Co., LLP Mid Cap Stock
    
    
    1.130
    %Western Asset Management Company High Yield
    
    
    1.144
    %
 Non-Qualified Deferred Compensation Table
 Executive
    
    Registrant
    
    Aggregate earnings
    
    Aggregatecontributions in
    
    contributions in
    
    in last FY
    
    withdrawals/
    
    Aggregate balanceName and Principal Position
    
    last FY ($)
    
    last FY ($)
    
    ($)
    

distributions ($)
    
    at last FY ($)(1)David L
Eslick
Chairman of the Board, President
and Chief Executive Officer
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Robert S. Schneider
Executive Vice President and
Chief Financial Officer
    
    $
    
    
    
    $
    
    
    
    $
    1,690.29
    
    
    $
    
    
    
    $
    16,740.75Jeffrey L Jones
Senior Vice President and
Chief Marketing Officer
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Philip E. Larson III
Senior Vice President Operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Ernest J. Newborn II
Senior Vice President, General Counsel
and Secretary
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 1.
    
    The amount in this column includes the Change in Pension Value and Nonqualified Deferred
Compensation Earnings column of the Summary Compensation Table. 59




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##### Table of Contents



Potential Payments upon Termination or Change in Control
 Employment Agreements
  Death
 Incapacitation or disability
 Termination by the Company for cause
 
    
    Commission of a willful and material act of dishonesty in the course of the NEOs duties;
    
    Conviction by a court of competent jurisdiction of a crime constituting a felony or conviction in respect of any act
involving fraud, dishonesty, or moral turpitude;
    
    The NEOs performance under the influence of controlled substances, or continued habitual intoxication;
    
    Frequent or extended and unjustifiable absenteeism;
    
    Personal, willful, and continuing misconduct or refusal to perform duties and responsibilities; or
    
    Material non-compliance with the terms of his employment agreement.
 Termination by the Company without cause
 
    
    Mr. Eslick:
 
    
    (i)Three times base salary plus (ii) the higher of target annual incentive that he
would have otherwise received (but for such termination) for the year in which the
termination occurred or his annual incentive for the year immediately preceding the year
in which termination occurred for three years; and
    
    Healthcare coverage for three years following termination.
 
    
    Messrs. Schneider and Jones:
 
    
    One times base salary plus the target annual incentive that the NEO would have
otherwise received (but for such termination) for the year in which the termination
occurred; and
    
    Healthcare coverage for one year following termination.
 
    
    Mr. Larson:
 
    
    One times base salary; and
    
    Healthcare coverage for one year following termination.
 
    
    Mr. Newborn:
 
    
    Two times base salary plus (ii) the higher of the target annual incentive that he would
have otherwise received (but for such termination) for the year in which the termination
occurred or his annual incentive for the year immediately preceding the year in which termination occurred
for two years; and
    
    Healthcare coverage for two years following termination.
 Failure to extend
 60




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##### Table of Contents



Termination by the NEO for good reason
 
    
    A change-in-control, and within one year following such a change-in-control, there is a material diminution of his
duties and responsibilities;
    
    A material diminution by the Company of the NEOs position or duties;
    
    A default by the Company in the payment of any material sum or material benefit due to the
NEO under the employment agreement.
  
    
    A change-in-control, and within one year following such a change-in-control, there is a
material diminution of his duties and responsibilities;
    
    A default by the Company in the payment of any material sum or material benefit due to the
NEO under the employment agreement.
  
    
    A change-in-control, and within two years following such a change-in-control, there is a
material diminution of his duties and responsibilities;
    
    A default by the Company in the payment of any material sum or material benefit due to the
NEO under the employment agreement.
  Termination by the NEO without good reason
 Retirement
 Change-in-Control (CIC)
 
    
    Any transaction, or series of related transactions, the result of
which is that any individual or group becomes a beneficial owner,
directly or indirectly, of 50% or more of the Companys aggregate
outstanding voting stock;
    
    The Company consolidates with, or merges with or into, any entity
or any entity consolidates with or merges with or into the
Company, in any such event pursuant to a transaction in which any
of the outstanding voting stock of the Company is converted into or exchanged for cash, securities, or
other property, other than any such transaction where the voting stock of the Company
outstanding immediately prior to such transaction is converted into or exchanged for voting stock
of the surviving or transferee entity constituting 50% or more (immediately after giving effect
to such conversion or exchange) of the aggregate outstanding shares of such voting stock of such
surviving or transferee entity; or
    
    Substantially all of the Companys assets or earnings power is sold in any transaction or
series of related transactions.
 Restrictive Covenants
  Confidential Information
 61




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##### Table of Contents



Non-solicitation
 Non-competition
 Non-interference
 Equity Compensation
  Change in control.
 Merger or consolidation.
 62




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##### Table of Contents



Involuntary
    
    
    
    
    
    Change inNot
    
    
    
    
    
    Control-
    
    Change inVoluntary
    
    
    
    
    
    for Cause
    
    For Cause
    
    Remain
    
    Control-Termination
    
    Retirement
    
    Termination
    
    Termination
    
    Active
    
    Termination
    
    Disability
    
    DeathDavid L. Eslick
    
    Long-Term Incentive Compensation:Chairman of the Board, President
    
    Stock Options
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,058,315
    
    
    $
    1,058,315
    
    
    $
    
    
    
    $
    and Chief Executive Officer
    
    Restricted Shares
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,195,976
    
    
    $
    1,195,976
    
    
    $
    
    
    
    $
    Severance Benefits:Healthcare Benefits(1)
    
    $
    
    
    
    $
    
    
    
    $
    28,560
    
    
    $
    
    
    
    $
    
    
    
    $
    28,560
    
    
    $
    
    
    
    $
    Cash Severance
    
    $
    
    
    
    $
    
    
    
    $
    3,600,000
    
    
    $
    
    
    
    $
    
    
    
    $
    3,600,000
    
    
    $
    
    
    
    $
    Accrued Vacation Pay
    
    $
    28,846
    
    
    $
    28,846
    
    
    $
    28,846
    
    
    $
    28,846
    
    
    
    
    
    
    $
    28,846
    
    
    $
    28,846
    
    
    $
    28,846Robert S. Schneider
    
    Long-Term Incentive Compensation:Executive Vice President and
    
    Stock Options
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    383,429
    
    
    $
    383,429
    
    
    $
    
    
    
    $
    Chief Financial Officer
    
    Restricted Shares
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    364,508
    
    
    $
    364,508
    
    
    $
    
    
    
    $
    Severance Benefits:Healthcare Benefits(1)
    
    $
    
    
    
    $
    
    
    
    $
    6,205
    
    
    $
    
    
    
    $
    
    
    
    $
    6,205
    
    
    $
    
    
    
    $
    Cash Severance
    
    $
    
    
    
    $
    
    
    
    $
    519,750
    
    
    $
    
    
    
    $
    
    
    
    $
    519,750
    
    
    $
    
    
    
    $
    Accrued Vacation Pay
    
    $
    10,312
    
    
    $
    10,312
    
    
    $
    10,312
    
    
    $
    10,312
    
    
    
    
    
    
    $
    10,312
    
    
    $
    10,312
    
    
    $
    10,312Jeffrey L. Jones
    
    Long-Term Incentive Compensation:Senior Vice President and
    
    Stock Options
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    478,037
    
    
    $
    478,037
    
    
    $
    
    
    
    $
    Chief Marketing Officer
    
    Restricted Shares
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    351,237
    
    
    $
    351,237
    
    
    $
    
    
    
    $
    Severance Benefits:Healthcare Benefits (1)
    
    $
    
    
    
    $
    
    
    
    $
    9,520
    
    
    $
    
    
    
    $
    
    
    
    $
    9,520
    
    
    $
    
    
    
    $
    Cash Severance
    
    $
    
    
    
    $
    
    
    
    $
    595,000
    
    
    $
    
    
    
    $
    
    
    
    $
    595,000
    
    
    $
    
    
    
    $
    Accrued Vacation Pay
    
    $
    20,821
    
    
    $
    20,821
    
    
    $
    20,821
    
    
    $
    20,821
    
    
    
    
    
    
    $
    20,821
    
    
    $
    20,821
    
    
    $
    20,821Philip E. Larson III
    
    Long-Term Incentive Compensation:Senior Vice President Operations
    
    Stock Options
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    130,652
    
    
    $
    130,652
    
    
    $
    
    
    
    $
    Restricted Shares
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    154,783
    
    
    $
    154,783
    
    
    $
    
    
    
    $
    Severance Benefits:Healthcare Benefits (1)
    
    $
    
    
    
    $
    
    
    
    $
    9,520
    
    
    $
    
    
    
    $
    
    
    
    $
    9,520
    
    
    $
    
    
    
    $
    Cash Severance
    
    $
    
    
    
    $
    
    
    
    $
    3,00,000
    
    
    $
    
    
    
    $
    
    
    
    $
    4,80,000
    
    
    $
    
    
    
    $
    Accrued Vacation Pay
    
    $
    14,808
    
    
    $
    14,808
    
    
    $
    14,808
    
    
    $
    14,808
    
    
    
    
    
    
    $
    14,808
    
    
    $
    14,808
    
    
    $
    14,808Ernest J. Newborn II
    
    Long-Term Incentive Compensation:Senior Vice President, General
    
    Stock Options
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    327,791
    
    
    $
    327,791
    
    
    $
    
    
    
    $
    Counsel and Secretary
    
    Restricted Shares
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    191,278
    
    
    $
    191,278
    
    
    $
    
    
    
    $
    Severance Benefits:Healthcare Benefits (1)
    
    $
    
    
    
    $
    
    
    
    $
    22,849
    
    
    $
    
    
    
    $
    
    
    
    $
    22,849
    
    
    $
    
    
    
    $
    Cash Severance
    
    $
    
    
    
    $
    
    
    
    $
    880,000
    
    
    $
    
    
    
    $
    
    
    
    $
    880,000
    
    
    $
    
    
    
    $
    Accrued Vacation Pay
    
    $
    9,531
    
    
    $
    9,531
    
    
    $
    9,531
    
    
    $
    9,531
    
    
    
    
    
    
    $
    9,531
    
    
    $
    9,531
    
    
    $
    9,531
 
 1.
    
    Healthcare benefits represent the employer cost of continuing medical and dental coverage
and assumes 2007 costs remain unchanged for the duration of the severance period. Director Compensation
 The Company uses a combination of cash and stock-based compensation to attract and retain
qualified individuals to serve on the Board of Directors. Compensation is paid only to non-employee
Board of Directors members, defined as directors who are not otherwise employed by the Company. The
following is a detail of the director compensation program for the 2006 fiscal year.Non-employee directors are entitled to receive an annual cash retainer of $30,000. This
retainer may be paid in the form of company stock upon election by the director. They also receive
annual equity grants of fully vested shares valued at $30,000 each.Non-employee directors receive meeting fees for each Board of Directors and Committee meeting
attended either in person or telephonically. Each independent director receives $1,500 for each
Board of Directors meeting attended and $1,000 for each Committee meeting attended, provided that
the director is a member of the Committee.For their increased responsibilities, an additional retainer is paid to each of the Committee
Chairs. The Audit Committee Chair receives $20,000; the Compensation Committee Chair, and the
Nominating and Governance Committee Chair each receives $15,000. The Committee Chairs may elect to
receive between 50% and 100% of the retainers in Company stock.
 63




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##### Table of Contents



Deferred Compensation Plan
 Director Compensation Table
 Fees earned or
    
    Stock
    
    Option
    
    All otherpaid in cash
    
    awards
    
    awards
    
    compensation
    
    TotalName
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)(1,4,5)
    
    (2,6)William L. Atwell
    
    $
    115,000
    
    
    $
    36,110
    
    
    $
    
    
    
    $
    
    
    
    $
    151,110Ronald E. Frieden
    
    $
    148,000
    
    
    $
    30,003
    
    
    $
    
    
    
    $
    
    
    
    $
    178,003Thomas A. Hayes
    
    $
    132,000
    
    
    $
    30,003
    
    
    $
    9,408
    
    
    $
    
    
    
    $
    171,411L. Ben Lytle
    
    $
    62,000
    
    
    $
    30,003
    
    
    $
    8,950
    
    
    $
    
    
    
    $
    100,953Robert A. Spass (3)
    
    $
    48,000
    
    
    $
    30,003
    
    
    $
    20,734
    
    
    $
    
    
    
    $
    98,737Robert F. Wright
    
    $
    141,500
    
    
    $
    30,003
    
    
    $
    9,408
    
    
    $
    
    
    
    $
    180,911
 
 1.
    
    The amounts in this column are based on the accounting expense recognized by the Company
in fiscal 2006 for grants of stock awards for each of the NEOs. The assumptions used to
calculate the accounting expense are set forth in Note 7, Employee Benefit Plans in the
Companys Consolidated Financial Statements included in Part II, Item 8 of this report.
With the exception of Mr. Atwell, the expense numbers are equivalent to the SFAS 123(R)
grant-date fair value.2.
    
    The amounts in this column are based on the accounting expense recognized by the
Company in fiscal 2006 for grants of stock option awards for each of the NEOs. The
assumptions used to calculate the accounting expense are set forth in Note 8, Stock Option
Plan in the Companys Consolidated Financial Statements included in Part II, Item 8 of
this report.3.
    
    The amount shown as expense for Mr. Spass includes shares and/or options granted to Mr.
Spass and/or Capital Z Management LLC.4.
    
    Includes $25,000 for pro-rated annual equity grant based on Mr. Atwells service from
March 1, 2006 through December 31, 2006. In addition, this includes the expense of a new
director restricted stock grant valued at $11,110. The SFAS 123(R) for this restricted
stock award is $40,004.5.
    
    As of December 31, 2006 each director has the following number of options outstanding:
Mr. Atwell, 0; Mr. Frieden, 10,000; Mr. Hayes, 12,000; Mr. Lytle, 10,000; Mr. Spass,
28,000; and Mr. Wright, 12,000.6.
    
    As of December 31, 2006 each director has the following number of restricted shares:
Mr. Atwell, 2,740; Mr. Frieden, 0; Mr. Hayes, 0; Mr. Lytle, 0; Mr. Spass, 0; and Mr.
Wright, 0.
 64




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##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters
 Number ofsecuritiesremaining availableNumber of
    
    
    
    
    
    
    for future issuancesecurities to be
    
    
    
    
    
    
    under equityissued upon
    
    
    Weighted-average
    
    
    compensation plansexercise of
    
    
    exercise price of
    
    
    (excludingoutstanding
    
    
    outstanding
    
    
    securitiesoptions, warrants
    
    
    options, warrants
    
    
    reflected in columnPlan Category
    
    and rights
    
    
    and rights
    
    
    (a))(a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    5,680,258
    
    
    $
    11.16
    
    
    
    1,669,898Equity compensation
plans not approved by
security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    5,680,258
    
    
    $
    11.16
    
    
    
    1,669,898
  
    
    each person known by the Company to own beneficially more than 5% of common stock;
    
    each of the Companys directors;
    
    the Companys NEOs; and
    
    all of the Companys directors and executive officers as a group.
  PERSONS KNOWN TO OWN MORE THAN 5% OF COMMON STOCK OUTSTANDING
 Amount and natureof beneficialTitle of Class
    
    Name and address of beneficial owner
    
    ownership
    
    Percent of ClassCapital Z Financial Services Fund II, L.P.230 Park Avenue South11th FloorCommon Stock
    
    New York, NY 10003
    
    
    9,514,878
    
    
    
    16.3
    %MSD Capital, L.P.645 Fifth Avenue, 21st FloorCommon Stock
    
    New York, NY 10022-5910
    
    
    4,460,396
    
    
    
    7.6
    %Wasatch Advisors, Inc.150 Social Hall Avenue, 4th FloorCommon Stock
    
    Salt Lake City, UT 84111
    
    
    3,739,395
    
    
    
    6.4
    %Lord, Abbett & Co. LLC90 Hudson Street, 11th FloorCommon Stock
    
    Jersey City, NJ 07302
    
    
    3,378,999
    
    
    
    5. 8
    %Reed Conner & Birdwell, LLC11111 Santa Monica Boulevard, Suite 1700Common Stock
    
    Los Angeles, CA 90025
    
    
    2,950,603
    
    
    
    5.0
    %
 65




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DIRECTOR AND EXECUTIVE OFFICER COMMON STOCK OWNERSHIP
 Shares of commonstock beneficially
    
    PercentageName of Beneficial Owner
    
    Position
    
    owned
    
    beneficially ownedChairman of the Board ofDirectors, President and ChiefDavid L. Eslick (7)(8)
    
    Executive Officer
    
    
    757,975
    
    
    
    1.3
    %William L. Atwell (7)
    
    Director
    
    
    5,549
    
    
    
    *Ronald E. Frieden (8)
    
    Director
    
    
    19,221
    
    
    
    *Thomas A. Hayes (8)
    
    Director
    
    
    33,096
    
    
    
    *L. Ben Lytle (8)
    
    Director
    
    
    28,140
    
    
    
    *Robert A. Spass (8)(9)
    
    Director
    
    
    9,856,958
    
    
    
    16.9
    %Robert F. Wright (8)
    
    Director
    
    
    35,362
    
    
    
    *Executive Vice President andRobert S. Schneider (7)(8)
    
    Chief Financial Officer
    
    
    176,101
    
    
    
    *Senior Vice President and ChiefJeffrey L. Jones (7)(8)(10)
    
    Marketing Officer
    
    
    421,952
    
    
    
    *Philip E. Larson, III (7)(8)
    
    Senior Vice President, Operations
    
    
    94,463
    
    
    
    *Senior Vice President, GeneralErnest J. Newborn, II (7)(8)
    
    Counsel and Secretary
    
    
    212,692
    
    
    
    *Directors and executive
officers as a group 14
people (7)(8)
    
    
    
    
    11,856,134
    
    
    
    20.3
    %
 
 *
    
    = less than one percent(1)
    
    Applicable percentage of ownership is based on 58,490,586 shares of common stock outstanding
on February 21, 2007.(2)
    
    Based upon the information contained in a Schedule 13D filed on October 25, 2006, the
following persons beneficially own in the aggregate 9,514,878 of the Companys
shares:
 Shares
    
    Sole
    
    Shared
    
    Sole
    
    Sharedbeneficially
    
    voting
    
    voting
    
    dispositive
    
    dispositiveShareholder
    
    owned
    
    power
    
    power
    
    power
    
    powerCapital Z Financial
Services Fund II, L.P.
    
    
    9,464,573
    
    
    
    9,464,573
    
    
    
    0
    
    
    
    9,464,573
    
    
    
    0Capital Z Financial
Services Private Fund
II, L.P.
    
    
    50,305
    
    
    
    50,305
    
    
    
    0
    
    
    
    50,305
    
    
    
    0Capital Z Partners, L.P.
    
    
    9,514,878
    
    
    
    9,514,878
    
    
    
    0
    
    
    
    9,514,878
    
    
    
    0Capital Z Partners, Ltd.
    
    
    9,514,878
    
    
    
    9,514,878
    
    
    
    0
    
    
    
    9,514,878
    
    
    
    0
 
 (3)
    
    Based upon the information contained in a Schedule 13G/A filed on February 14, 2006, the
following persons beneficially own in the aggregate 4,460,396 of the Companys shares:
 Shares
    
    Sole
    
    Shared
    
    Sole
    
    Sharedbeneficially
    
    voting
    
    voting
    
    dispositive
    
    dispositiveShareholder
    
    owned
    
    power
    
    power
    
    power
    
    powerMSD Capital, L.P.
    
    
    4,460,396
    
    
    
    0
    
    
    
    4,460,396
    
    
    
    
    
    
    
    4,460,396MSD Torchlight, L.P.
    
    
    1,230,149
    
    
    
    0
    
    
    
    1,230,149
    
    
    
    
    
    
    
    1,230,149MSD SBI, L.P.
    
    
    1,607,590
    
    
    
    0
    
    
    
    1,607,590
    
    
    
    
    
    
    
    1,607,590MSD Value Investments, L.P.
    
    
    1,622,657
    
    
    
    0
    
    
    
    1,622,657
    
    
    
    
    
    
    
    1,622,657
 
 (4)
    
    Based upon the information contained in a Schedule 13G filed on February 14, 2005 by
Wasatch Advisors, Inc.(5)
    
    Based upon the information contained in a Schedule 13G filed on February 14, 2005 by Lord,
Abbett & Co., LLC.(6)
    
    Based upon the information contained in a Schedule 13D filed on November, 20 2006 by Reed
Conner & Birdwell, LLC (RCB). RCB is the beneficial owner of 2,950,603 shares of common
stock. RCB has shared voting power over 2,950,603 shares of common stock and shared
dispositive power over 2,950,603 shares of common stock.
 66




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##### Table of Contents



(7)
    
    Includes restricted stock held as follows: 77,863 shares held by Mr. Eslick; 2,740 shares
held by Mr. Atwell; 23,731 shares held by Mr. Schneider; 22,867 shares held by Mr. Jones;
12,453 shares held by Mr. Newborn; 12,453 shares held by Mr. Bowler; 10,077 held by Mr.
Larson; and 11,724 held by Mr. Nesbit.(8)
    
    Includes shares of stock that are held directly or indirectly for the benefit of such
individuals or jointly, or directly or indirectly for members of such individuals families,
with respect to which beneficial ownership in certain cases may be disclaimed. Also includes
shares of stock which may be acquired within sixty days of March 1, 2007, through the exercise
of stock options as follows: Mr. Eslick, 631,922 shares; Mr. Frieden, 10,000 shares; Mr.
Hayes, 12,000 shares; Mr. Lytle, 7,500 shares; Mr. Spass, 28,000 shares; Mr. Wright, 12,000
shares; Mr. Schneider, 151,112 shares; Mr. Jones, 292,781 shares; Mr. Newborn, 188,560 shares;
Mr. Bowler, 150,126 shares; Mr. Larson, 71,270 shares; Mr. Nesbit, 27,874 shares; and Mr.
Gibson, 2,500 shares.(9)
    
    Mr. Spass owns 304,000 shares. Because Mr. Spass is the chairman and CEO of Capital Z
Management, LLC, he may be deemed to beneficially own 10,080 shares of stock and 28,000
options owned by Capital Z Management, LLC. Mr. Spass disclaims beneficial ownership of these
shares and options, except to the extent of his pecuniary interest therein. Because Mr. Spass
is a partner of Capital Z Financial Services Fund II, L.P., he may be deemed to beneficially
own shares owned by Capital Z Financial Services Fund II, L.P. and its affiliates. All such
other shares are beneficially owned as described in footnote (2), and Mr. Spass disclaims
beneficial ownership of these shares, except to the extent of his pecuniary interest therein.(10)
    
    From December 2002 until December 30, 2006, Mr. Jones served as the Companys senior vice
president and chief marketing officer. Effective as of December 30, 2006, Mr. Jones has
served as the regional CEO of the Companys California region.
 
 Item 13.
Certain Relationships and Related Transactions and Director
Independence
 RELATED PARTY TRANSACTIONS
    REVIEW, APPROVAL OR RATIFICATION OF TRANSACTIONS WITH RELATED PERSONS
   67




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##### Table of Contents



Item 14. Principal Accountant Fees and Services
 Deloitte & Touché LLPYear ended
    
    
    Year endedDecember 31, 2006
    
    
    December 31, 2005Audit Fees (1)
    
    $
    2,131,000
    
    
    $
    2,217,000Audit-Related Fees (2)
    
    
    176,000
    
    
    
    84,000Tax Fees (3)
    
    
    
    
    
    
    133,000Total
    
    $
    2,307,000
    
    
    $
    2,434,000
 
 (1)
    
    Fees for audit services included fees associated with the annual audit of the Companys
financial statements on Form 10-K, the audit of managements assessment of the effectiveness
of the Companys internal control over financial reporting, reviews of the Companys quarterly
reports on Form 10-Q and for procedures performed in connection with filing the Companys
registration statements on Form S-3 and S-8 in 2005.(2)
    
    Fees for audit-related services principally included fees for an audit of the Companys
401(k) Plan, services related to due diligence on the Company by GS Capital Partners, FIN 48
implementation and acquisitions.(3)
    
    The 2005 amount represents Deloitte fees for tax services, primarily tax compliance.
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 (a)
    
    Listing of Documents.
 (1)
    
    Financial Statements.
  (2)
    
    Financial Statement Schedules.(3)
    
    Exhibits:
  68




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##### Table of Contents



USI Holdings Corporation
and Subsidiaries
 2006 CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
 ContentsReport of Deloitte & Touche LLP, Independent Registered Public Accounting Firm
    
    
    72Audited Consolidated Financial Statements:Consolidated Balance Sheets
    
    
    73Consolidated Statements of Operations
    
    
    74Consolidated Statements of Stockholders Equity
    
    
    75Consolidated Statements of Cash Flows
    
    
    76Notes to Consolidated Financial Statements
    
    
    77EX-10.22: EMPLOYMENT AGREEMENTEX-21.1: SUBSIDIARIESEX-23.1: CONSENT OF DELOITTE & TOUCHE LLPEX-24.1: POWERS OF ATTORNEYEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION
 69




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     Internal ControlIntegrated
Framework
 
  70




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USI HOLDINGS CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
 December 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    36,683
    
    
    $
    27,289Fiduciary fundsrestricted
    
    
    114,448
    
    
    
    103,887Premiums and
commissions receivable, net of allowance for bad debts and cancellations of $9,743 and $7,300, respectively (Note 1)
    
    
    284,815
    
    
    
    244,372Other current assets
    
    
    21,542
    
    
    
    25,048Deferred tax asset (Note 9)
    
    
    11,694
    
    
    
    14,887Current assets held for discontinued operations (Note 16)
    
    
    3,000
    
    
    
    4,843Total current assets
    
    
    472,182
    
    
    
    420,326Goodwill (Note 3)
    
    
    508,330
    
    
    
    405,490Expiration rights (Note 3)
    
    
    400,785
    
    
    
    312,382Other intangible assets (Note 3)
    
    
    57,301
    
    
    
    50,800Accumulated amortization
    
    
    (232,070
    )
    
    
    (197,539
    )Total
identifiable intangible assets
    
    
    226,016
    
    
    
    165,643Property and equipment, net (Note 4)
    
    
    32,308
    
    
    
    28,475Other non-current assets
    
    
    3,310
    
    
    
    3,840Total assets
    
    $
    1,242,146
    
    
    $
    1,023,774Liabilities and stockholders equityCurrent liabilities:Premiums payable to insurance companies
    
    $
    298,026
    
    
    $
    259,286Accrued expenses
    
    
    75,621
    
    
    
    77,120Current portion of long-term debt (Note 5)
    
    
    13,346
    
    
    
    11,470Other
    
    
    14,039
    
    
    
    16,829Total current liabilities
    
    
    401,032
    
    
    
    364,705Long-term debt (Note 5)
    
    
    367,466
    
    
    
    225,062Deferred tax liability (Note 9)
    
    
    25,782
    
    
    
    16,237Other liabilities
    
    
    7,239
    
    
    
    7,789Other liabilities held for discontinued operations
    
    
    225
    
    
    
    Total liabilities
    
    
    801,744
    
    
    
    613,793Commitments and contingencies (Notes 11 and 15)Stockholders equity (Note 6):Common
stockvotingpar $.01, 300,000 shares authorized; 59,226 and 58,308 shares issued, respectively
    
    
    592
    
    
    
    583Additional paid-in capital
    
    
    676,157
    
    
    
    663,436Accumulated deficit
    
    
    (225,464
    )
    
    
    (246,073
    )Less treasury stock at cost, 827 and 620 shares, respectively
    
    
    (10,883
    )
    
    
    (7,965
    )Total stockholders equity
    
    
    440,402
    
    
    
    409,981Total liabilities and stockholders equity
    
    $
    1,242,146
    
    
    $
    1,023,774
  71




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##### Table of Contents



USI HOLDINGS CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Revenues:Net commissions and fees
    
    $
    511,777
    
    
    $
    473,022
    
    
    $
    379,533Contingents and overrides
    
    
    26,134
    
    
    
    25,825
    
    
    
    18,979Investment income
    
    
    5,301
    
    
    
    3,858
    
    
    
    1,378Other Income
    
    
    8,396
    
    
    
    5,579
    
    
    
    3,324Total revenues
    
    
    551,608
    
    
    
    508,284
    
    
    
    403,214Expenses:Compensation and employee benefits expenses
    
    
    310,617
    
    
    
    306,769
    
    
    
    235,181Other operating expenses
    
    
    136,828
    
    
    
    115,529
    
    
    
    99,100Amortization of intangible assets (Note 3)
    
    
    34,536
    
    
    
    30,549
    
    
    
    23,099Depreciation (Note 4)
    
    
    10,282
    
    
    
    9,655
    
    
    
    8,589Interest
    
    
    20,690
    
    
    
    15,036
    
    
    
    8,531Early extinguishment of debt (Note 5)
    
    
    2,093
    
    
    
    
    
    
    
    Total expenses
    
    
    515,046
    
    
    
    477,538
    
    
    
    374,500Income from continuing operations before income tax expense
    
    
    36,562
    
    
    
    30,746
    
    
    
    28,714Income tax expense (Note 9)
    
    
    15,953
    
    
    
    12,713
    
    
    
    12,653Income from continuing operations
    
    
    20,609
    
    
    
    18,033
    
    
    
    16,061Loss from discontinued operations, net (Note 16)
    
    
    
    
    
    
    (10,229
    )
    
    
    (7,760
    )Net income
    
    $
    20,609
    
    
    $
    7,804
    
    
    $
    8,301Reconciliation of net income to net income available to
common stockholders:Net income
    
    $
    20,609
    
    
    $
    7,804
    
    
    $
    8,301Net income available to common stockholders
    
    $
    20,609
    
    
    $
    7,804
    
    
    $
    8,301Per share databasic (Note 17):Income from continuing operations
    
    $
    0.36
    
    
    $
    0.32
    
    
    $
    0.33Loss from discontinued operations, net
    
    
    
    
    
    
    (0.18
    )
    
    
    (0.16
    )Net income per common share
    
    $
    0.36
    
    
    $
    0.14
    
    
    $
    0.17Per share datadiluted (Note 17):Income from continuing operations
    
    $
    0.36
    
    
    $
    0.32
    
    
    $
    0.33Loss from discontinued operations, net
    
    
    
    
    
    
    (0.18
    )
    
    
    (0.16
    )Net income per common share
    
    $
    0.36
    
    
    $
    0.14
    
    
    $
    0.17
  72




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##### Table of Contents



USI HOLDINGS CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Amounts in thousands)
 Additional
    
    
    
    
    
    
    TotalCommon stock
    
    
    Treasury stock
    
    
    paid-in
    
    
    Accum.
    
    
    stockholdersShares
    
    
    Par
    
    
    Shares
    
    
    Amount
    
    
    capital
    
    
    Deficit
    
    
    equityBalance at January 1, 2004
    
    
    46,681
    
    
    $
    467
    
    
    
    
    
    
    $
    
    
    
    $
    524,573
    
    
    $
    (262,178
    )
    
    $
    262,862Common stock issued for
acquisitions
    
    
    2,078
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    30,396
    
    
    
    
    
    
    
    30,416Exercise of warrants
    
    
    76
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    Restricted stock grants, net of
forfeitures
    
    
    463
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    412`
    
    
    
    
    
    
    
    417Common stock issued under
Employee Stock Purchase Plan
    
    
    123
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1,347
    
    
    
    
    
    
    
    1,348Common stock issued under
equity forward contract
    
    
    1,781
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    24,213
    
    
    
    
    
    
    
    24,231Common stock issued under
Employee Stock Option Plan
    
    
    331
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3,780
    
    
    
    
    
    
    
    3,783Common stock repurchased during
the year
    
    
    
    
    
    
    
    
    
    
    (283
    )
    
    
    (3,943
    )
    
    
    
    
    
    
    
    
    
    
    (3,943
    )Other stock issued
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    150Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,301
    
    
    
    8,301Balance at December 31,
2004
    
    
    51,543
    
    
    
    515
    
    
    
    (283
    )
    
    
    (3,943
    )
    
    
    584,870
    
    
    
    (253,877
    )
    
    
    327,565Common stock issued for
acquisitions
    
    
    3,380
    
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    38,210
    
    
    
    
    
    
    
    38,244Restricted stock grants, net of
forfeitures
    
    
    525
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    2,115
    
    
    
    
    
    
    
    2,121Common stock issued under
Employee Stock Purchase Plan
    
    
    122
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1,249
    
    
    
    
    
    
    
    1,250Common stock issued under
equity forward contract
    
    
    2,244
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    31,503
    
    
    
    
    
    
    
    31,525Common stock issued under
Employee Stock Option Plan
    
    
    461
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5,060
    
    
    
    
    
    
    
    5,065Common stock repurchased during
the year
    
    
    
    
    
    
    
    
    
    
    (337
    )
    
    
    (4,022
    )
    
    
    
    
    
    
    
    
    
    
    (4,022
    )Other stock issued
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    429
    
    
    
    
    
    
    
    429Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,804
    
    
    
    7,804Balance at December 31,
2005
    
    
    58,308
    
    
    
    583
    
    
    
    (620
    )
    
    
    (7,965
    )
    
    
    663,436
    
    
    
    (246,073
    )
    
    
    409,981Net shares issued for acquisitions
    
    
    (34
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (718
    )
    
    
    
    
    
    
    (718
    )Restricted stock grants, net of
forfeitures
    
    
    312
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    2,779
    
    
    
    
    
    
    
    2,782Common stock issued under
Employee Stock Purchase Plan
    
    
    116
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1,568
    
    
    
    
    
    
    
    1,569Common stock issued under
Employee Stock Option Plan
    
    
    511
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5,971
    
    
    
    
    
    
    
    5,976Common stock repurchased during
the year
    
    
    
    
    
    
    
    
    
    
    (207
    )
    
    
    (2,918
    )
    
    
    
    
    
    
    
    
    
    
    (2,918
    )Stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,946
    
    
    
    
    
    
    
    2,946Other stock issued
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    175
    
    
    
    
    
    
    
    175Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,609
    
    
    
    20,609Balance at December 31,
2006
    
    
    59,226
    
    
    $
    592
    
    
    
    (827
    )
    
    $
    (10,883
    )
    
    $
    676,157
    
    
    $
    (225,464
    )
    
    $
    440,402
  73




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##### Table of Contents



USI HOLDINGS CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Operating ActivitiesNet income
    
    $
    20,609
    
    
    $
    7,804
    
    
    $
    8,301Less: Loss
from discontinued operations
    
    
    
    
    
    
    (10,229
    )
    
    
    (7,760
    )Income from
continuing operations
    
    
    20,609
    
    
    
    18,033
    
    
    
    16,061Adjustments to reconcile income from continuing operations to net cash provided by
operating activities:Amortization of intangible assets
    
    
    34,536
    
    
    
    30,549
    
    
    
    23,099Depreciation
    
    
    10,282
    
    
    
    9,655
    
    
    
    8,589Non-cash stock-based compensation
    
    
    6,708
    
    
    
    2,579
    
    
    
    417Provision for deferred income taxes
    
    
    810
    
    
    
    8,189
    
    
    
    6,170Loss (gain) on disposal of assets
    
    
    702
    
    
    
    (204
    )
    
    
    (349
    )Provisions for bad debts and policy cancellations
    
    
    1,788
    
    
    
    1,022
    
    
    
    1,523Impairment of intangible assets
    
    
    3,234Other non-cash items
    
    
    1,466
    
    
    
    2,045
    
    
    
    401Changes in operating assets and liabilities (net of purchased/divested companies):Fiduciary fundsrestricted
    
    
    (3,369
    )
    
    
    11,977
    
    
    
    (2,926
    )Premiums and commissions receivable
    
    
    (28,923
    )
    
    
    (13,096
    )
    
    
    (5,178
    )Other assets
    
    
    9,240
    
    
    
    (5,650
    )
    
    
    3,319Premiums payable to insurance companies
    
    
    21,786
    
    
    
    (6,954
    )
    
    
    (1,377
    )Accrued expenses and other liabilities
    
    
    (11,596
    )
    
    
    2,991
    
    
    
    (5,343
    )Net cash provided by continuing operating activities
    
    
    67,273
    
    
    
    61,136
    
    
    
    44,406Net cash provided by (used in) discontinued operating activities
    
    
    2,068
    
    
    
    (5,576
    )
    
    
    (431
    )Net Cash Provided by Operating Activities
    
    
    69,341
    
    
    
    55,560
    
    
    
    43,975Investing ActivitiesCash paid for businesses acquired and related costs
    
    
    (194,685
    )
    
    
    (129,478
    )
    
    
    (89,022
    )Cash obtained (funded) from businesses acquired
    
    
    6,821
    
    
    
    (1,755
    )
    
    
    2,671Purchases of property and equipment
    
    
    (11,421
    )
    
    
    (10,922
    )
    
    
    (11,106
    )Proceeds from sale of assets
    
    
    52
    
    
    
    404
    
    
    
    561Net cash used in investing activities
    
    
    (199,233
    )
    
    
    (141,751
    )
    
    
    (96,896
    )Net cash provided by (used in) discontinued investing activities
    
    
    
    
    
    
    6,167
    
    
    
    (50
    )Net Cash Used in Investing Activities
    
    
    (199,233
    )
    
    
    (135,584
    )
    
    
    (96,946
    )Financing ActivitiesProceeds from issuance of long-term debt
    
    
    435,172
    
    
    
    96,485
    
    
    
    30,484Payments of long-term debt issuance costs
    
    
    (2,613
    )
    
    
    (786
    )
    
    
    (494
    )Payments on long-term debt
    
    
    (297,662
    )
    
    
    (22,549
    )
    
    
    (43,851
    )Gross proceeds from issuance of common stock
    
    
    6,533
    
    
    
    37,404
    
    
    
    29,652Payments of issuance costs related to common stock
    
    
    
    
    
    
    
    
    
    
    (761
    )Payments for repurchases of common stock
    
    
    (2,918
    )
    
    
    (4,022
    )
    
    
    (3,943
    )Gross excess tax benefits from exercise of stock options
    
    
    774
    
    
    
    
    
    
    
    Net cash provided by continuing financing activities
    
    
    139,286
    
    
    
    106,532
    
    
    
    11,087Net cash used in discontinued financing activities
    
    
    
    
    
    
    (2,086
    )
    
    
    (820
    )Net Cash Provided by Financing Activities
    
    
    139,286
    
    
    
    104,446
    
    
    
    10,267Increase (decrease) in cash and cash equivalents
    
    
    9,394
    
    
    
    24,422
    
    
    
    (42,704
    )Cash and cash equivalents at beginning of year
    
    
    27,289
    
    
    
    2,867
    
    
    
    45,571Cash and Cash Equivalents at End of Year
    
    $
    36,683
    
    
    $
    27,289
    
    
    $
    2,867Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    18,273
    
    
    $
    11,958
    
    
    $
    6,924Cash paid for taxes
    
    $
    15,788
    
    
    $
    4,557
    
    
    $
    8,279Supplemental schedule of non-cash activities:Common stock issued for acquisitions, primarily intangibles
    
    $
    1,905
    
    
    $
    28,792
    
    
    $
    30,416Debt and other liabilities issued/assumed for acquisitions, primarily intangibles
    
    $
    4,686
    
    
    $
    34,530
    
    
    $
    19,246Long-term debt issued for insurance premium financing
    
    $
    4,971
    
    
    $
    4,441
    
    
    $
    Common stock issued for reduction in liabilities
    
    $
    
    
    
    $
    8,173
    
    
    $
    1,000Impairment
charge, continuing operations
    
    $
    3,234
    
    
    $
    
    
    
    $
    Impairment
charge, discontinued operations
    
    $
    
    
    
    $
    5,838
    
    
    $
    9,483
  74




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##### Table of Contents



USI HOLDINGS CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2006
(Amounts in Thousands, Except Per Share Data)
 1. Nature of Operations and Summary of Significant Accounting Policies
 Nature of Operations
  Basis of Presentation and Principles of Consolidation
  Revenue Recognition
     75




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##### Table of Contents

















Earnings per Share




Cash and Cash Equivalents




Fiduciary FundsRestricted




76




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##### Table of Contents







Property and Equipment






Goodwill, Other Intangible Assets and Other Long-Lived Assets










77




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##### Table of Contents



Business Acquisitions and Purchase Price Allocations
  Stock-Based Compensation
  Income Taxes
  Fair Value of Financial Instruments
  Use of Estimates
  Reclassifications
  New Accounting Pronouncements
  78




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##### Table of Contents



2. Acquisitions
  Debt and otherliabilities
    
    
    TotalCommon
    
    
    Common
    
    
    Cash paid/
    
    
    issued/
    
    
    purchaseName and effective date of acquisition
    
    shares issued
    
    
    share value
    
    
    to be paid
    
    
    assumed
    
    
    priceFrederick E. Penn (PENN), 6/29/06
    
    
    
    
    
    $
    
    
    
    $
    35,100
    
    
    $
    3,900
    
    
    $
    39,000Frank Siddons Insurance (SIDDONS),
7/12/06
    
    
    
    
    
    
    
    
    
    
    2,460
    
    
    
    
    
    
    
    2,460Tandem Benefits (TANDEM), 7/27/06
    
    
    
    
    
    
    
    
    
    
    10,054
    
    
    
    
    
    
    
    10,054Universal American Insurance Agency
(LENNAR), 8/18/06
    
    
    
    
    
    
    
    
    
    
    18,500
    
    
    
    
    
    
    
    18,500Leader Associates (LEADER), 9/1/06
    
    
    
    
    
    
    
    
    
    
    20,363
    
    
    
    
    
    
    
    20,363Kibble & Prentice Holding
Company(KIBBLE), 11/7/06
    
    
    
    
    
    
    
    
    
    
    88,248
    
    
    
    
    
    
    
    88,248Other, primarily books of business
    
    
    
    
    
    
    
    
    
    
    5,122
    
    
    
    786
    
    
    
    5,908Total
    
    
    
    
    
    $
    
    
    
    $
    179,847
    
    
    $
    4,686
    
    
    $
    184,533
 79




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##### Table of Contents









PENN
    
    
    SIDDONS
    
    
    TANDEM
    
    
    LEADER
    
    
    LENNAR
    
    
    KIBBLE
    
    
    Other
    
    
    TotalCurrent assets
    
    $
    7,133
    
    
    $
    1,775
    
    
    $
    1,674
    
    
    $
    80
    
    
    $
    
    
    
    $
    19,626
    
    
    $
    
    
    
    $
    30,288Property and equipment,
net
    
    
    90
    
    
    
    
    
    
    
    263
    
    
    
    
    
    
    
    
    
    
    
    3,209
    
    
    
    
    
    
    
    3,562Other long-term assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    168
    
    
    
    
    
    
    
    168Expiration rights
    
    
    16,610
    
    
    
    2,259
    
    
    
    3,516
    
    
    
    8,255
    
    
    
    17,680
    
    
    
    33,003
    
    
    
    6,199
    
    
    
    87,522Covenants not-to-compete
    
    
    1,246
    
    
    
    119
    
    
    
    264
    
    
    
    619
    
    
    
    930
    
    
    
    2,475
    
    
    
    45
    
    
    
    5,698Goodwill
    
    
    23,669
    
    
    
    
    
    
    
    5,010
    
    
    
    11,684
    
    
    
    
    
    
    
    44,642
    
    
    
    
    
    
    
    85,005Total assets acquired
    
    $
    48,748
    
    
    $
    4,153
    
    
    $
    10,727
    
    
    $
    20,638
    
    
    $
    18,610
    
    
    $
    103,123
    
    
    $
    6,244
    
    
    $
    212,243Total liabilities
assumed, less debt and
other liabilities
issued/assumed
    
    $
    9,748
    
    
    $
    1,693
    
    
    $
    673
    
    
    $
    275
    
    
    $
    110
    
    
    $
    14,875
    
    
    $
    336
    
    
    $
    27,710Total net assets acquired
    
    $
    39,000
    
    
    $
    2,460
    
    
    $
    10,054
    
    
    $
    20,363
    
    
    $
    18,500
    
    
    $
    88,248
    
    
    $
    5,908
    
    
    $
    184,533








80



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##### Table of Contents



(Unaudited)
    
    
    (Unaudited)2006
    
    
    2005Total revenues
    
    $
    601,415
    
    
    $
    582,519Income from continuing operations before income tax expense
    
    
    34,599
    
    
    
    28,455Net income
    
    
    19,502
    
    
    
    6,462Net income per share:Basic
    
    
    0.34
    
    
    
    0.12Diluted
    
    
    0.34
    
    
    
    0.11Weighted-average shares outstanding:Basic
    
    
    56,871
    
    
    
    55,963Diluted
    
    
    57,839
    
    
    
    56,640
  3. Goodwill and Other Intangible Assets
  SpecializedInsurance
    
    
    BenefitsBrokerage
    
    
    Services
    
    
    Corporate
    
    
    TotalJanuary 1, 2005
    
    $
    225,297
    
    
    $
    37,582
    
    
    $
    46,316
    
    
    $
    309,195Goodwill acquisitions/adjustments
    
    
    99,166
    
    
    
    6,130
    
    
    
    (9,001
    )
    
    
    96,295December 31, 2005
    
    
    324,463
    
    
    
    43,712
    
    
    
    37,315
    
    
    
    405,490Goodwill acquisitions/adjustments
    
    
    80,405
    
    
    
    6,992
    
    
    
    15,443
    
    
    
    102,840December 31, 2006
    
    $
    404,868
    
    
    $
    50,704
    
    
    $
    52,758
    
    
    $
    508,330
     81




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##### Table of Contents



Gross
    
    
    
    
    
    
    Net
    
    
    Weighted-averagecarrying
    
    
    Accumulated
    
    
    carrying
    
    
    amortizationvalue
    
    
    amortization
    
    
    value
    
    
    period2006Expiration rights
    
    $
    400,785
    
    
    $
    (190,083
    )
    
    $
    210,702
    
    
    9.5 yearsCovenants not-to-compete
    
    
    54,708
    
    
    
    (41,987
    )
    
    
    12,721
    
    
    6.8 yearsDeferred financing costs
    
    
    2,593
    
    
    
    
    
    
    
    2,593
    
    
    5.0 yearsTotal
    
    $
    458,086
    
    
    $
    (232,070
    )
    
    $
    226,0162005Expiration rights
    
    $
    312,382
    
    
    $
    (158,188
    )
    
    $
    154,194
    
    
    9.6 yearsCovenants not-to-compete
    
    
    48,088
    
    
    
    (39,351
    )
    
    
    8,737
    
    
    6.9 yearsDeferred financing costs
    
    
    2,712
    
    
    
    
    
    
    
    2,712
    
    
    5.0 yearsTotal
    
    $
    363,182
    
    
    $
    (197,539
    )
    
    $
    165,643
    4. Property and Equipment
  2006
    
    
    2005Furniture and equipment
    
    $
    79,985
    
    
    $
    73,510Leasehold improvements
    
    
    15,839
    
    
    
    13,45795,824
    
    
    
    86,967Less accumulated depreciation
    
    
    (63,516
    )
    
    
    (58,492
    )Property and equipment, net
    
    $
    32,308
    
    
    $
    28,475
  5. Long-Term Debt
  2006
    
    
    2005Senior Credit Facility:Term loan
    
    $
    308,300
    
    
    $
    211,512Revolving credit facility
    
    
    50,000
    
    
    
    Other Debt:Notes issued in connection with
acquisitions, due various dates through 2014
at interest rates from 3% to 10%
    
    
    20,726
    
    
    
    21,518Other long-term debt, primarily capital leases
    
    
    1,786
    
    
    
    3,502Total debt
    
    
    380,812
    
    
    
    236,532Current portion of long-term debt
    
    
    (13,346
    )
    
    
    (11,470
    )Long-term debt
    
    $
    367,466
    
    
    $
    225,062
   82




---



##### Table of Contents



Year
    
    Amount2007
    
    $
    13,3462008
    
    
    9,4772009
    
    
    8,4322010
    
    
    3,5802011
    
    
    345,951Thereafter
    
    
    26Total future maturities of debt
    
    $
    380,812
 6. Stockholders Equity
  83




---



##### Table of Contents



Common Stock
        Preferred Stock
  7. Employee Benefit Plans
 401(k) Plan
  84




---



##### Table of Contents



2002 Equity Incentive Plan
    Restricted Common Stock Grants2006
    
    
    2005Shares
    
    
    Fair value at
    
    
    Shares
    
    
    Fair value atVesting Schedule
    
    granted
    
    
    grant date
    
    
    granted
    
    
    grant date4 years at 25% per year
    
    
    
    
    
    $
    
    
    
    
    67
    
    
    $
    8595 years at 20% per year
    
    
    36
    
    
    
    550
    
    
    
    143
    
    
    
    1,6635 years at 1/3 each year end in years 3, 4 and 5
    
    
    236
    
    
    
    3,431
    
    
    
    235
    
    
    
    2,7303 years at 100% after year 3
    
    
    149
    
    
    
    2,088
    
    
    
    146
    
    
    
    1,705Other vesting arrangements
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    516421
    
    
    $
    6,069
    
    
    
    631
    
    
    $
    7,473
 Employee Stock Purchase Plan
  Non-Qualified Deferred Compensation Plan
     85




---



##### Table of Contents



8. Stock Option Plan
     Year ended December 31,2005
    
    
    2004Net income, as reported
    
    $
    7,804
    
    
    $
    8,301Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects
    
    
    1,504
    
    
    
    235Deduct: Total stock-based
compensation expense determined under
fair value based method for all
awards, net of related tax effects
    
    
    (4,434
    )
    
    
    (2,700
    )Pro forma net income
    
    $
    4,874
    
    
    $
    5,836EPS  basic:As reported
    
    $
    0.14
    
    
    $
    0.17Pro forma
    
    $
    0.09
    
    
    $
    0.12EPS  diluted:As reported
    
    $
    0.14
    
    
    $
    0.17Pro forma
    
    $
    0.09
    
    
    $
    0.12
  Year ended December 312006
    
    
    2005Weighted-average risk-free interest rate
    
    
    4.92
    %
    
    
    4.08
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Weighted-average volatility factor of the
Companys common stock
    
    
    23.7
    %
    
    
    31.2
    %Weighted-average expected life of option
    
    6 years
    
    6 yearsWeighted-average Black-Scholes value
    
    $
    4.85
    
    
    $
    4.47
  86




---



##### Table of Contents



WeightedShares
    
    averageunder
    
    strikeoption
    
    priceJanuary 1, 2004
    
    
    5,915
    
    
    $
    10.04Granted
    
    
    907
    
    
    
    14.37Exercised
    
    
    (331
    )
    
    
    10.01Canceled/Forfeited
    
    
    (247
    )
    
    
    10.19December 31, 2004
    
    
    6,244
    
    
    
    10.66Granted
    
    
    515
    
    
    
    11.59Exercised
    
    
    (461
    )
    
    
    10.04Canceled/Forfeited
    
    
    (598
    )
    
    
    11.07December 31, 2005
    
    
    5,700
    
    
    
    10.75Granted
    
    
    630
    
    
    
    14.56Exercised
    
    
    (511
    )
    
    
    10.17Canceled/Forfeited
    
    
    (139
    )
    
    
    13.18December 31, 2006
    
    
    5,680
    
    
    $
    11.16Exercisable at end of year
    
    
    4,140
    
    
    $
    10.74
   Non-vested
    
    Weighted-averageshares under
    
    grant priceoption
    
    per shareJanuary 1, 2006
    
    
    927
    
    
    $
    12.06Granted
    
    
    421
    
    
    
    14.42Forfeited
    
    
    (59
    )
    
    
    12.32Vested/other
    
    
    (148
    )
    
    
    12.55December 31, 2006
    
    
    1,141
    
    
    $
    12.86
    87




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##### Table of Contents



Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    average
    
    
    
    
    
    
    averageRange of
    
    Number of
    
    
    remaining
    
    
    exercise
    
    
    Number of
    
    
    exerciseexercise prices
    
    options
    
    
    contractual life
    
    
    price
    
    
    options
    
    
    price$7.50  $11.45
    
    
    3,910
    
    
    
    5.8
    
    
    $
    10.03
    
    
    
    3,383
    
    
    $
    10.03$11.54  $15.90
    
    
    1,770
    
    
    
    8.1
    
    
    $
    13.66
    
    
    
    757
    
    
    $
    13.92$7.50  $15.90
    
    
    5,680
    
    
    
    6.5
    
    
    $
    11.16
    
    
    
    4,140
    
    
    $
    10.74
 9. Income Taxes
  2006
    
    
    2005
    
    
    2004Current provision:Federal
    
    $
    11,890
    
    
    $
    1,347
    
    
    $
    2,413State
    
    
    4,873
    
    
    
    3,177
    
    
    
    4,070Total current provision
    
    
    16,763
    
    
    
    4,524
    
    
    
    6,483Deferred tax expense (benefit):Federal
    
    
    119
    
    
    
    8,389
    
    
    
    6,675State
    
    
    (625
    )
    
    
    (606
    )
    
    
    (19
    )Total deferred tax expense
    
    
    (506
    )
    
    
    7,783
    
    
    
    6,656Change in valuation allowance
    
    
    (304
    )
    
    
    406
    
    
    
    (486
    )Total income tax expense
    
    $
    15,953
    
    
    $
    12,713
    
    
    $
    12,653
  2006
    
    
    2005
    
    
    2004Expected provision
    
    $
    12,797
    
    
    
    35.0
    %
    
    $
    10,761
    
    
    
    35.0
    %
    
    $
    10,050
    
    
    
    35.0
    %Change in valuation allowance
    
    
    (304
    )
    
    
    (0.8
    )%
    
    
    406
    
    
    
    1.3
    %
    
    
    (486
    )
    
    
    (1.7
    )%State income and capital based
taxes, net of federal tax
benefit
    
    
    2,213
    
    
    
    6.1
    %
    
    
    1,529
    
    
    
    5.0
    %
    
    
    2,910
    
    
    
    10.1
    %Non-deductible meals and
entertainment
    
    
    558
    
    
    
    1.5
    %
    
    
    550
    
    
    
    1.8
    %
    
    
    710
    
    
    
    2.5
    %Recovery of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (636
    )
    
    
    (2.2
    )%Rate change
    
    
    397
    
    
    
    1.0
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    292
    
    
    
    0.8
    %
    
    
    (533
    )
    
    
    (1.7
    )%
    
    
    105
    
    
    
    0.4
    %Total income tax (benefit)
    
    $
    15,953
    
    
    
    43.6
    %
    
    $
    12,713
    
    
    
    41.4
    %
    
    $
    12,653
    
    
    
    44.1
    %
 88




---



##### Table of Contents



2006
    
    
    2005Current deferred tax assets:Allowance for bad debts and policy cancellations
    
    $
    2,747
    
    
    $
    1,233Accrued compensation
    
    
    2,745
    
    
    
    2,306Accrued severance
    
    
    920
    
    
    
    939Accrued errors and omissions claims
    
    
    2,246
    
    
    
    1,753Federal net operating loss carry-forwards
    
    
    752
    
    
    
    6,080Alternative minimum tax credit carry-forward
    
    
    
    
    
    
    549Deferred rent
    
    
    741
    
    
    
    954Charitable contribution carry-forward
    
    
    
    
    
    
    368Other
    
    
    1,543
    
    
    
    705Current deferred tax assets
    
    $
    11,694
    
    
    $
    14,887Non-current deferred tax assets (liabilities):Intangible assets
    
    $
    (35,311
    )
    
    $
    (23,808
    )Retention agreements
    
    
    434
    
    
    
    921Fixed assets
    
    
    (2,039
    )
    
    
    (1,971
    )State net operating loss carry-forwards
    
    
    1,231
    
    
    
    2,531Deferred rent
    
    
    1,461
    
    
    
    226Accrued compensation
    
    
    3,574
    
    
    
    2,284Federal net operating loss
    
    
    4,536
    
    
    
    5,288Other
    
    
    1,283
    
    
    
    907Non-current deferred tax liabilities
    
    
    (24,831
    )
    
    
    (13,622
    )Valuation allowance
    
    
    (951
    )
    
    
    (2,615
    )Net non-current deferred tax liability
    
    $
    (25,782
    )
    
    $
    (16,237
    )
    10. Lease Commitments
  Year
    
    Amount2007
    
    $
    22,3702008
    
    
    19,0632009
    
    
    14,2082010
    
    
    11,1672011
    
    
    7,572Thereafter
    
    
    8,754Total future minimum lease payments
    
    $
    83,134
  89




---



##### Table of Contents



11. Related Party Transactions
   12. Business Concentrations
  13. Segment Reporting
    SpecializedInsurance
    
    
    BenefitsBrokerage
    
    
    Services
    
    
    Corporate
    
    
    Total2006Revenues
    
    $
    504,503
    
    
    $
    46,862
    
    
    $
    243
    
    
    $
    551,608Compensation and other operating expenses
    
    
    368,633
    
    
    
    42,692
    
    
    
    29,412
    
    
    
    440,737Depreciation and amortization
    
    
    39,337
    
    
    
    4,157
    
    
    
    1,324
    
    
    
    44,818Interest expense
    
    
    934
    
    
    
    404
    
    
    
    19,352
    
    
    
    20,690Non-cash stock-based compensation
    
    
    4,317
    
    
    
    224
    
    
    
    2,167
    
    
    
    6,708Early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    2,093
    
    
    
    2,093Income (loss) from continuing operations before income taxes
    
    $
    91,282
    
    
    $
    (615
    )
    
    $
    (54,105
    )
    
    $
    36,5622005Revenues
    
    $
    463,501
    
    
    $
    43,263
    
    
    $
    1,520
    
    
    $
    508,284Compensation and other operating expenses
    
    
    354,682
    
    
    
    32,417
    
    
    
    32,620
    
    
    
    419,719Depreciation and amortization
    
    
    35,383
    
    
    
    3,379
    
    
    
    1,442
    
    
    
    40,204Interest expense
    
    
    1,090
    
    
    
    361
    
    
    
    13,585
    
    
    
    15,036Non-cash stock-based compensation
    
    
    2,141
    
    
    
    43
    
    
    
    395
    
    
    
    2,579Income (loss) from continuing operations before income taxes
    
    $
    70,205
    
    
    $
    7,063
    
    
    $
    (46,522
    )
    
    $
    30,7462004Revenues
    
    $
    377,238
    
    
    $
    25,713
    
    
    $
    263
    
    
    $
    403,214Compensation and other operating expenses
    
    
    284,634
    
    
    
    19,688
    
    
    
    29,542
    
    
    
    333,864Depreciation and amortization
    
    
    28,049
    
    
    
    1,999
    
    
    
    1,640
    
    
    
    31,688Interest expense
    
    
    1,161
    
    
    
    385
    
    
    
    6,985
    
    
    
    8,531Non-cash stock-based compensation
    
    
    204
    
    
    
    17
    
    
    
    196
    
    
    
    417Income (loss) from continuing operations before income taxes
    
    $
    63,190
    
    
    $
    3,624
    
    
    $
    (38,100
    )
    
    $
    28,714
 90




---



##### Table of Contents



2006
    
    
    2005Segment assets:Insurance brokerage
    
    $
    1,059,559
    
    
    $
    862,485Specialized benefits services
    
    
    125,250
    
    
    
    101,423Corporate
    
    
    54,337
    
    
    
    55,023Total assets for use in continuing operations
    
    
    1,239,146
    
    
    
    1,018,931Assets held for discontinued operations (Note 16)
    
    
    3,000
    
    
    
    4,843Total Assets
    
    $
    1,242,146
    
    
    $
    1,023,774
 14. Contingencies
      91




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##### Table of Contents



Industry Class Action Litigation. Opticare Health Systems, Inc. v. Marsh & McLennan Companies, Inc., et al Lewis v. Marsh & McLennan Companies, Inc., et al Preuss v. Marsh & McLennan Companies, Inc., et al Palm Tree Computers Systems, Inc. et al.
v. Ace, USA et al., Bensley
Construction, Inc. v. Marsh & McLennan Companies, Inc. et al Opticare Palm Tree Bensley Bensley
   92




---



##### Table of Contents



Graham Litigation Graham v. Thomas P. Haughey and USI MidAtlantic, Inc.
 Twin City Fire Insurance Company, et al. USI Holdings Corporation, et al
  Rodenfels Litigation USI of Southern California Insurance
Services, Inc., et al., v. Rodenfels,
  93




---



##### Table of Contents



Levy Investments Ltd. Class Action. Levy Investments Ltd. v. USI Holdings Corp.,
et al
 15.
    
    Integration Efforts and Margin Improvement Plan
   Terminated
    
    
    Producer
    
    
    Terminatedemployee
    
    
    compensation
    
    
    office lease
    
    
    Contract
    
    
    Otherseverance
    
    
    restructuring
    
    
    costs
    
    
    termination
    
    
    integrationliability
    
    
    liability
    
    
    liability
    
    
    liability
    
    
    costs
    
    
    TotalJanuary 1, 2004
    
    $
    509
    
    
    $
    273
    
    
    $
    88
    
    
    $
    
    
    
    $
    
    
    
    $
    870Margin improvement
plan
    
    
    3,384
    
    
    
    2,893
    
    
    
    3,444
    
    
    
    2,650
    
    
    
    
    
    
    
    12,371Used in year
    
    
    (216
    )
    
    
    (272
    )
    
    
    (88
    )
    
    
    (2,650
    )
    
    
    
    
    
    
    (3,226
    )December 31, 2004
    
    
    3,677
    
    
    
    2,894
    
    
    
    3,444
    
    
    
    
    
    
    
    
    
    
    
    10,015Margin improvement
plan
    
    
    6,115
    
    
    
    1,979
    
    
    
    47
    
    
    
    
    
    
    
    
    
    
    
    8,141SGP acquisition
compensation
    
    
    
    
    
    
    8,122
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,122Integration expense
    
    
    8
    
    
    
    
    
    
    
    431
    
    
    
    18
    
    
    
    
    
    
    
    457Used in year
    
    
    (5,665
    )
    
    
    (11,595
    )
    
    
    (3,335
    )
    
    
    (18
    )
    
    
    
    
    
    
    (20,613
    )December 31, 2005
    
    
    4,135
    
    
    
    1,400
    
    
    
    587
    
    
    
    
    
    
    
    
    
    
    
    6,122Integration expense
    
    
    156
    
    
    
    
    
    
    
    1,107
    
    
    
    
    
    
    
    156
    
    
    
    1,419Used in year
    
    
    (4,060
    )
    
    
    (990
    )
    
    
    (1,184
    )
    
    
    
    
    
    
    (156
    )
    
    
    (6,390
    )December 31, 2006
    
    $
    231
    
    
    $
    410
    
    
    $
    510
    
    
    $
    
    
    
    $
    
    
    
    $
    1,151
 94




---



##### Table of Contents



Terminated
    
    
    Terminatedemployee
    
    
    office leaseseverance
    
    
    costsliability
    
    
    liability
    
    
    TotalLiability at January 1, 2005
    
    $
    2,344
    
    
    $
    3,444
    
    
    $
    5,788Expense related to exit activity
    
    
    6,115
    
    
    
    47
    
    
    
    6,162Amount paid related to exit activity
    
    
    (5,548
    )
    
    
    (2,982
    )
    
    
    (8,530
    )Liability at December 31, 2005
    
    
    2,911
    
    
    
    509
    
    
    
    3,420Expense related to exit activity
    
    
    
    
    
    
    
    
    
    
    Amount paid related to exit activity
    
    
    (2,911
    )
    
    
    (509
    )
    
    
    (3,420
    )Liability at December 31, 2006
    
    $
    
    
    
    $
    
    
    
    $
    
  SpecializedInsurance
    
    BenefitsBrokerage
    
    Services
    
    Corporate
    
    TotalExpense related to exit activity2005
    
    $
    4,528
    
    
    $
    82
    
    
    $
    1,552
    
    
    $
    6,162Expense
related to exit activity2004
    
    $
    4,915
    
    
    $
    
    
    
    $
    3,338
    
    
    $
    8,253
 16.
    
    Discontinued Operations
    2005
    
    
    2004Revenues
    
    $
    3,998
    
    
    $
    7,426Expenses
Compensation and employee benefits expenses
    
    
    4,632
    
    
    
    6,129Other operating expenses
    
    
    10,221
    
    
    
    3,206Amortization of intangible assets
    
    
    152
    
    
    
    1,159Depreciation
    
    
    70
    
    
    
    157Interest
    
    
    110
    
    
    
    262Impairment of long-lived assets
    
    
    5,838
    
    
    
    9,483Total expenses
    
    
    21,023
    
    
    
    20,396Loss from discontinued operations
    
    
    (17,025
    )
    
    
    (12,970
    )Income tax (benefit) expense
    
    
    (6,796
    )
    
    
    (5,210
    )(Loss) income from discontinued operations
    
    $
    (10,229
    )
    
    $
    (7,760
    )
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17.
    
    Earnings Per Share
  2006
    
    
    2005
    
    
    2004Numerator:Income from continuing operations
    
    $
    20,609
    
    
    $
    18,033
    
    
    $
    16,061Loss from discontinued operations, net of income tax
    
    
    
    
    
    
    (10,229
    )
    
    
    (7,760
    )Net income
    
    
    20,609
    
    
    
    7,804
    
    
    
    8,301Numerator for basic and diluted EPSincome available to
common stockholders
    
    $
    20,609
    
    
    $
    7,804
    
    
    $
    8,301Denominator:Weighted-average shares outstanding used in calculation of
basic EPS
    
    
    56,871
    
    
    
    55,963
    
    
    
    48,242Dilutive effect of stock options, RSUs and warrants using
treasury stock method
    
    
    968
    
    
    
    677
    
    
    
    885Weighted-average shares outstanding used in calculation of
diluted EPS
    
    
    57,839
    
    
    
    56,640
    
    
    
    49,127EPSbasic:Income from continuing operations
    
    $
    0.36
    
    
    $
    0.32
    
    
    $
    0.33Loss from discontinued operations, net of income tax
    
    
    
    
    
    
    (0.18
    )
    
    
    (0.16
    )Net income
    
    $
    0.36
    
    
    $
    0.14
    
    
    $
    0.17EPSdiluted:Income from continuing operations
    
    $
    0.36
    
    
    $
    0.32
    
    
    $
    0.33Loss from discontinued operations, net of income tax
    
    
    
    
    
    
    (0.18
    )
    
    
    (0.16
    )Net income
    
    $
    0.36
    
    
    $
    0.14
    
    
    $
    0.17
   96




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18.
    
    Selected Quarterly Financial Data (Unaudited)
 Three-Month Period EndedMarch 31(3)
    
    
    June 30
    
    
    September 30
    
    
    December 31(2)(3)
    
    
    Total2006Revenues:Net commissions and fees
    
    $
    135,268
    
    
    $
    132,537
    
    
    $
    130,483
    
    
    $
    148,019
    
    
    $
    546,307Investment income
    
    
    1,360
    
    
    
    1,345
    
    
    
    1,212
    
    
    
    1,384
    
    
    
    5,301Total revenues
    
    $
    136,628
    
    
    $
    133,882
    
    
    $
    131,695
    
    
    $
    149,403
    
    
    $
    551,608Income from continuing operations
    
    $
    7,720
    
    
    $
    7,266
    
    
    $
    4,840
    
    
    $
    783
    
    
    $
    20,609EPSbasic:Income from continuing operations(1)
    
    $
    0.14
    
    
    $
    0.13
    
    
    $
    0.09
    
    
    $
    0.01
    
    
    $
    0.36EPSdiluted:Income from continuing operations(1)
    
    $
    0.13
    
    
    $
    0.13
    
    
    $
    0.08
    
    
    $
    0.01
    
    
    $
    0.362005Revenues:Net commissions and fees
    
    $
    121,348
    
    
    $
    121,677
    
    
    $
    126,205
    
    
    $
    135,196
    
    
    $
    504,426Investment income
    
    
    664
    
    
    
    878
    
    
    
    1,062
    
    
    
    1,254
    
    
    
    3,858Total revenues
    
    $
    122,012
    
    
    $
    122,555
    
    
    $
    127,267
    
    
    $
    136,450
    
    
    $
    508,284Income from continuing operations
    
    $
    1,985
    
    
    $
    5,293
    
    
    $
    5,490
    
    
    $
    5,265
    
    
    $
    18,033EPSbasic:Income from continuing operations(1)
    
    $
    0.04
    
    
    $
    0.09
    
    
    $
    0.10
    
    
    $
    0.09
    
    
    $
    0.32EPSdiluted:Income from continuing operations(1)
    
    $
    0.04
    
    
    $
    0.09
    
    
    $
    0.09
    
    
    $
    0.09
    
    
    $
    0.32
 
 (1)
    
    The quarterly EPS amounts, when added, may not coincide with the full year EPS reported on
the Consolidated Statements of Operations due to differences in the computed weighted-average
shares outstanding, as well as rounding differences.(2)
    
    Revenues and income from continuing operations in the fourth quarter are generally higher
than the preceding three quarters due primarily to the seasonality of business in the
Companys Specialized Benefits Services segment. As further discussed in Note 15, Integration
Efforts and Margin Improvement Plan, the Company recorded $1,419 and $16,720 of expense in
2006 and 2005, respectively.(3)
    
    Amounts included in the quarter ended March 31, 2005 have not previously been presented net
of discontinued operations. March 31, 2005 results include adjustments for discontinued
operations of $(805) in revenues, $687 in income from continuing operations, $0.02 in
per-share income from continuing operations-basic and $0.02 in per-share income from
continuing operations-diluted. 19.
    
    Subsequent Events
   97




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98




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SIGNATURES
  USI HOLDINGS CORPORATION 
(Registrant)DATE: March 1, 2007
    By:
    /s/ David L. EslickName:
    David L. EslickTitle:
    Chairman, President and Chief Executive
Officer  Signature
    
    Title
    
    Date/s/ David L. Eslick

 
David L. Eslick
    
    Chairman, President and Chief
Executive Officer (Principal
Executive Officer) and Director
    
    March 1, 2007/s/ Robert S. Schneider

 
Robert S. Schneider
    
    Chief Financial Officer (Principal Financial
Officer)
    
    March 1, 2007/s/ David A. Hess

 
David A. Hess
    
    Vice President, Finance (Principal
Accounting Officer)
    
    March 1, 2007/s/ Thomas A. Hayes*

 
Thomas A. Hayes
    
    Director
    
    March 1, 2007/s/ Ronald E. Frieden*

 
Ronald E. Frieden
    
    Director
    
    March 1, 2007/s/ L. Ben Lytle*

 
L. Ben Lytle
    
    Director
    
    March 1, 2007/s/ Robert A. Spass*

 
Robert A. Spass
    
    Director
    
    March 1, 2007/s/ Robert F. Wright*

 
Robert F. Wright
    
    Director
    
    March 1, 2007/s/ William L. Atwell*

 
William L. Atwell
    
    Director
    
    March 1, 2007/s/ David L. Eslick

 
Attorney-in-Fact
    
    
    
    March 1, 2007/s/ Robert S. Schneider

Attorney-in-Fact
    
    
    
    March 1, 2007
 99




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##### Table of Contents



USI HOLDINGS CORPORATION
 Exhibit Index
 Exhibit No.
    
    Description3.1*
    
    Amended and Restated Certificate of Incorporation of USI Holdings Corporation dated May 26, 2005.3.2*
    
    Amended and Restated By-laws of USI Holdings Corporation.4.1*
    
    Form of Common Stock Certificate of USI Holdings Corporation.4.2*
    
    Shareholders and Warrantholders Agreement among USI Holdings Corporation and the parties
signatory thereto dated as of September 17, 1999.4.3*
    
    Amendment to Shareholders and Warrantholders Agreement among USI Holdings Corporation and the
parties signatory thereto dated as of December 27, 2001.4.4*
    
    Amendment to Shareholders and Warrantholders Agreement among USI Holdings Corporation and the
parties signatory thereto.10.1*
    
    Joint Venture Agreement between Maryland Casualty Company and USI of Illinois, Inc. dated as of
April 16, 1998.10.2*(a)
    
    Restated and Amended Employment Agreement between USI Insurance Services Corp. and David L.
Eslick dated as of January 22, 2002.10.3*(a)
    
    Restated and Amended Employment Agreement between USI Insurance Services Corp. and Edward J.
Bowler dated as of January 22, 2002.10.4*(a)
    
    Restated and Amended Employment Agreement between USI Insurance Services Corp. and Ernest J.
Newborn, II dated as of January 22, 2002.10.5*(a)
    
    2000 Management Incentive Program of USI Insurance Services Corp.10.6*(a)
    
    USI Holdings Corporation 1995 Long Term Incentive and Share Award Plan.10.7*(a)
    
    USI Holdings Corporation 2002 Equity Incentive Plan.10.8*(a)
    
    USI Holdings Corporation Employee Stock Purchase Plan.10.9*(a)
    
    Employment Agreement between USI Insurance Services Corp. and Robert S. Schneider dated as of
November 1, 2002.10.10*(a)
    
    Amendment to Employment Agreement between USI Insurance Services Corp. and Robert S. Schneider
dated as of June 2, 2003.10.11*(a)
    
    Amendment to Employment Agreement between USI Insurance Services Corp. and Edward J. Bowler
dated as of June 2, 2003.10.12*
    
    Credit Agreement among USI Holdings Corporation and Various Lending Institutions, JP Morgan
Chase Bank, Bank of America, N.A., Lasalle Bank National Association, Sun Trust Banks, Inc. and
Fifth Third Bank dated as of August 11, 2003.10.13*
    
    First Amendment to Credit Agreement, dated as of March 26, 2004, among USI Holdings Corporation,
Banc of America Securities LLC, J.P. Morgan Securities Inc., the lenders from time to time party
thereto, Bank of America N.A. and J.P. Morgan Chase Bank.10.14*
    
    Second Amendment to Credit Agreement, dated January 11, 2005, among USI Holdings Corporation,
J.P. Morgan Securities Inc., JPMorgan Chase Bank N. A. and the lenders from time to time party
thereto.
 100




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##### Table of Contents



Exhibit No.
    
    Description10.15*(a)
    
    Form of Restricted Stock Award Notice.10.16*(a)
    
    Form of Stock Option Award Notice.10.17*
    
    Agreement and Plan of Merger, dated
as of October 18, 2006, by and among USI Services Corporation,
Kibble & Prentice Holding Company, Distribution Partners
Investment Capital, L.P., The Arlen I. Prentice LLC,
Arlen I. Prentice, Christopher J. Prentice, David F. Ross, Ellen R.M. Boyer, and James J. Doud, as Stockholder
Representative.10.18*(a)
    
    Separation Agreement, dated as of March 31, 2005, between USI Services Corporation and
Thomas E. ONeil.10.19*(a)
    
    Amendment to Restated and Amended Employment Agreement, dated April 26, 2005, between
USI Services Corporation and David L. Eslick.10.20*(a)
    
    Employment Agreement between USI Services Corporation and Philip E. Larson,
dated as of January 26, 2004.10.21*(a)
    
    Employment Agreement between USI Services Corporation and Robert Nesbit,
dated as of December 15, 2003.10.22**(a)
    
    Employment Agreement between USI Services Corporation and Jeffrey Jones, dated as of
December 30, 2006.14.1*
    
    USI Holdings Corporation Code of Ethics for Directors and Officers.21.1**
    
    Subsidiaries of USI Holdings Corporation.23.1**
    
    Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.24.1**
    
    Powers of Attorney pursuant to which this Form 10-K has been signed on behalf of
certain Directors of the Registrant.31.1**
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.31.2**
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.32.1**
    
    Certification of 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 Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Previously filed.**
    
    Furnished herewith.(a)
    
    Executive compensation plans or arrangements. 101