S-1/A 1 g03932a2sv1za.htm AMWINS GROUP, INC. AmWINS Group, Inc.
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As filed with the Securities and Exchange Commission on March 5, 2007
Registration No. 333-138635
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Amendment No. 2
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
AmWINS Group, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
 
         
Delaware   6411   13-4009411
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
4064 Colony Road, Suite 450
Charlotte, North Carolina 28211
(704) 943-2000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
 
 
 
M. Steven DeCarlo
President and Chief Executive Officer
AmWINS Group, Inc.
4064 Colony Road, Suite 450
Charlotte, North Carolina 28211
(704) 943-2000
(704) 943-9000 (facsimile)
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
 
 
 
Copies of all communications, including communications sent to agent for service, should be sent to:
     
     
Patrick S. Bryant
Krista R. Bowen
Robinson, Bradshaw & Hinson, P.A.
101 North Tryon Street, Suite 1900
Charlotte, North Carolina 28246
(704) 377-2536
(704) 378-4000 (facsimile)
  Robert S. Rachofsky
LeBoeuf, Lamb, Greene & MacRae LLP
125 West 55th Street
New York, New York 10019
(212) 424-8088
(212) 649-9479 (facsimile)
 
 
 
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this registration statement.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
 
 
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 


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The information contained in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
Subject to Completion
Preliminary Prospectus Dated March 5, 2007
 
PROSPECTUS
 
           Shares
 
(AmWINS LOGO)
 
Common Stock
 
 
 
 
This is the initial public offering of common stock of AmWINS Group, Inc. We are offering           shares of common stock, and the selling stockholders are offering        shares of common stock.
 
Prior to this offering, there has been no public market for our common stock. We expect the initial public offering price of our common stock will be between $      and $      per share. We have applied to list our common stock on the New York Stock Exchange under the symbol “AGI.”
 
Investing in our common stock involves risks. See “Risk Factors” beginning on page 12.
 
 
 
 
         
   
Per Share
 
Total
 
Public offering price
  $   $
Underwriting discounts
  $   $
Proceeds, before expenses, to us
  $   $
Proceeds, before expenses, to the selling stockholders
  $   $
 
The underwriters have a 30-day option to purchase up to a maximum of           additional shares of common stock from us, and up to a maximum of        additional shares of common stock from the selling stockholders, at the public offering price, less the underwriting discounts and commissions, to cover overallotments of shares, if any.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
Delivery of the shares of common stock will be made on or about          , 2007.
 
 
 
 
Joint Book-Running Managers
 
Merrill Lynch & Co. Wachovia Securities
 
 
 
 
Cochran Caronia Waller William Blair & Company Piper Jaffray
 
 
 
 
The date of this prospectus is          , 2007.


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  F-1
 Exhibit 23.1
 Exhibit 23.2
 
ABOUT THIS PROSPECTUS
 
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. You should assume that the information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
 
 
The name “AmWINS” is a registered trademark of AmWINS Group, Inc. This prospectus also includes other registered and unregistered trademarks and service marks of AmWINS Group, Inc. and other persons, which are the property of their respective holders.


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PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus. Because this is only a summary, it does not contain all of the information you should consider before buying shares of our common stock in this offering. To understand us and this offering fully, you should read the entire prospectus carefully, especially the information in the “Risk Factors” section beginning on page 12, and our financial statements and the accompanying notes included elsewhere in this prospectus.
 
Except where the context otherwise requires, “AmWINS®,” “our company,” “we,” “us,” and “our” refer to AmWINS Group, Inc., a Delaware corporation, and, where appropriate, its subsidiaries. Prior to our name change in November 2006, we conducted business under the name “American Wholesale Insurance Group, Inc.”
 
All of the outstanding shares of our common stock currently are owned by American Wholesale Insurance Holding Company, LLC, a Delaware limited liability company (Holdings). Immediately prior to the completion of this offering, Holdings will distribute approximately     % of the outstanding shares of our common stock to its members in proportion to their relative interests in Holdings. These members thereafter will own shares of our common stock directly. Certain members of Holdings own “profits-only” interests in Holdings, and the amount of shares distributable to Holdings’ members will depend on the aggregate value of the shares distributed, which will be determined based on the initial public offering price of our shares in this offering. Information in this prospectus with respect to the number of shares owned by our stockholders and their proportionate ownership interest of our outstanding shares is based on an assumed initial public offering price of $           (the mid-point of the price range set forth on the cover page of this prospectus).
 
Unless the context otherwise requires or the text otherwise indicates, all information in this prospectus (1) gives effect to the distribution discussed above, (2) assumes no exercise of the underwriters’ overallotment option and (3) gives effect to a           for          stock split that will occur prior to the completion of this offering.
 
AmWINS Group
 
Overview
 
We are a leading wholesale distributor of specialty insurance products and services in the United States. We distribute a wide range and diversified mix of property and casualty and group benefits insurance products from insurance carriers to retail insurance brokerage firms. We also offer value-added customized services to support some of these products, including policy underwriting for certain insurance carriers, premium and claims administration and actuarial services. In September 2006, we were recognized by Business Insurance as the largest wholesale insurance broker operating in the United States. We do not take any insurance underwriting risk in the operation of our business.
 
Our business has grown substantially since January 1, 2003. Revenues for the years ended December 31, 2003, 2004, 2005 and 2006 have grown, period over period, by 63.9%, 45.4%, 68.2% and 30.2%, respectively. From 2003 to 2006, our operating income increased by $29.5 million, or 766%, from $3.8 million to $33.3 million. This growth was driven by both acquisitions and organic growth. Our organic revenue growth for the years ended December 31, 2003, 2004, 2005 and 2006 was 13.3%, 19.1%, 14.4% and 11.9%, respectively.
 
Our management team has substantial experience with AmWINS and within the insurance industry. We have cultivated an entrepreneurial and decentralized sales culture that provides our brokers and underwriters with flexibility to react to opportunities in the marketplace and better serve the needs of insurance carriers and our retail insurance broker clients. At the same time, we have centralized substantially all of our finance, human resource, legal, licensing, compliance and risk management operations to allow us to effectively oversee our national operations. We believe our centralized infrastructure positions us to achieve synergies when we acquire businesses and add new brokers and offices.


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Wholesale distribution of insurance products is an integral part of the insurance industry. As a wholesale distributor, we are a critical intermediary between insurance carriers and retail insurance brokers, which deal directly with insured parties. Many specialty insurance carriers distribute products primarily through wholesale insurance brokers to avoid the cost and complexity of dealing directly with a large number of retail insurance firms. We provide insurance carriers with an efficient variable-cost distribution channel through our licensed brokers in all 50 states and our extensive relationships with retail insurance brokers. Our distribution structure enables the insurance carriers with which we do business to reach a large number of retail insurance brokers.
 
We have extensive knowledge of the specialty insurance products that we distribute, which allows us to assist retail insurance brokers in placing business outside of their core expertise or capacity. Our size and strong relationships with insurance carriers enhance our ability to provide retail insurance brokers with broader access to the insurance markets. We have established relationships with over 100 insurance carriers, including property/casualty and health/life carriers owned by ACE Limited (ACE), AEGON USA (AEGON), Alleghany Insurance Holdings (Alleghany), American International Group, Inc. (AIG) and The Hartford Financial Services Group, Inc. (The Hartford). We also use our product expertise and relationships with insurance carriers to structure new insurance programs and products to respond to opportunities in the marketplace.
 
We distribute insurance products and services through our three divisions:
 
  •      Property & Casualty Brokerage.  With most of its operations under the AmWINS Brokerage brand name, our Property & Casualty Brokerage division distributes a broad range of property and casualty insurance products. We place a significant amount of insurance in the excess and surplus (E&S) lines market for businesses and governmental entities that are unable to obtain coverage through standard insurance products because of their risk profile or the nature or size of the risk. In 2006, our Property & Casualty Brokerage division represented approximately 70.3% of our total revenues.
 
  •      Specialty Underwriting.  Our Specialty Underwriting division consists of a number of niche property and casualty insurance programs for which we act as a managing general underwriter (MGU). As an MGU, we act on behalf of insurance carriers who have given us the authority to underwrite and bind coverage for specified risks within prescribed limitations. Our Specialty Underwriting division currently administers a number of programs that offer commercial insurance for specific product lines or industry classes. In 2006, our Specialty Underwriting division represented approximately 9.4% of our total revenues.
 
  •      Group Benefits.  Our Group Benefits division, which has experienced the most significant overall organic revenue growth of our three divisions since January 1, 2002, distributes group health and other benefit products and provides a full range of related administrative services. A substantial and growing part of this division’s business involves the placement and administration of retiree medical and prescription drug programs for businesses and governmental entities that are trying to reduce, control or eliminate the increasing cost of providing retiree benefits. Through our call center, we offer insurance carriers and plan sponsors the ability to outsource plan administration. We currently administer retiree health plans for over 800 employer groups and 74 member groups. Additionally, we operate a third-party claims administrator with over 100,000 lives under management. We also offer pharmacy benefit management services and distribute an approved prescription drug plan under Part D of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Medicare Modernization Act). In addition, we act as the exclusive general agent for small employers, defined as employers with 50 or fewer employees, for Blue Cross Blue Shield of Rhode Island. In 2006, our Group Benefits division represented approximately 20.2% of our total revenues.


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Industry Trends
 
We believe that we are well positioned to capitalize on many of the trends occurring in our markets, including:
 
      Trends Affecting the Property and Casualty Market
 
  •      Greater Opportunity with Large Retail Insurance Brokers.  Until recently, Aon Corporation (Aon), Marsh & McLennan Companies, Inc. (Marsh) and Willis North America Inc. (Willis), three of the largest retail insurance brokerage firms, owned their own wholesale insurance brokerage operations. During 2005, we acquired Willis’ wholesale insurance brokerage operations, and Aon and Marsh sold their wholesale insurance brokerage operations to private equity firms. Before these transactions, it generally was difficult for independent wholesale insurance brokers to conduct a significant amount of business with Aon, Marsh and Willis. Independent wholesale insurance brokers, such as AmWINS, now have greater opportunities to do business with these three firms. Additionally, we recently have observed that some large retail insurance brokerage firms have become more attentive to the number of wholesale insurance brokers they use and the compliance systems and financial position of these brokers. We believe this development may result in a reduction in the number of wholesale distributors used by these large retail insurance brokerage firms, which may benefit firms like us that have invested in and maintain compliance systems and procedures.
 
  •      Important Sustainable Market.  The E&S lines market is a growing part of the commercial property and casualty insurance marketplace. Based on information published by A.M. Best Company, Inc. (A.M. Best), direct premiums written for E&S lines insurance policies in relation to total premiums for the commercial property and casualty lines market increased from approximately 6.4% in 1995 to approximately 12.7% in 2005, and premiums on E&S property and casualty lines insurance increased from $9.2 billion in 1995 to $33.3 billion in 2005. Apart from a slight decline in 1996, the E&S lines market has grown annually in terms of aggregate premium dollars written for the past 15 years for a variety of reasons, including the implementation of more conservative underwriting criteria and risk-selection techniques by standard insurance carriers, the elimination of non-core lines of business by standard insurance carriers and substantial losses resulting from the terrorist attacks on September 11, 2001 and natural disasters. Moreover, as reported by A.M. Best, a significant amount of capital has been invested in the E&S market during the last five years to capitalize on favorable market conditions, as evidenced by an increase in the number of start-up companies entering the E&S market, such as AXIS Capital Holdings Limited (AXIS), Allied World Assurance Company Holdings Limited (Allied World) and Endurance Specialty Holdings Limited (Endurance). Many insurance carriers operating in the E&S market distribute their products primarily through wholesale insurance distributors.
 
      Trends Affecting the Group Benefits Market
 
  •      Rising Health Care Costs.  In the United States, national expenditures on health care increased from $912.6 billion to approximately $2.0 trillion, or approximately 117.8%, from 1993 to 2006, and are projected to reach $4.1 trillion by 2016, according to the U.S. Department of Health and Human Services (HHS). On a per person basis, annual health care spending grew 49.5% during the seven-year period beginning January 1, 1999, reaching an estimated average of $6,683 per person in 2005, with spending projected to grow to approximately $12,357 per person by 2015, according to HHS and U.S. Census Bureau statistics.
 
  •      Aging Population.  As a result of increases in life expectancy, the percentage of U.S. citizens age 65 and older is increasing in proportion to the overall U.S. population.


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  According to the U.S. Census Bureau, the proportion of the population age 65 and older was 12.4%, or 36.8 million people, in 2005, and is expected to increase to 14.2%, or 46.4 million people, by 2015, and to 16.3%, or 54.6 million people, by 2020. The age 65 and over population accounts for a disproportionate percentage of total health care costs. According to data published in Age Estimates in National Health Accounts, Health Care Financing Review, in 1999, people age 65 and older spent, on average, four times more on health care than the average person under age 65. The combination of increasing post-retirement life spans and disproportionate benefit costs, coupled with the general rise in health care spending, have led employers to seek ways to manage the costs or shift the burden of providing health benefits to retirees.
 
  •      Accounting Changes.  We believe that recent changes in accounting principles generally accepted in the United States of America (GAAP) have increased the level of attention given to the cost of providing retiree health care benefits. The Governmental Accounting Standards Board (GASB) recently promulgated Statement No. 45, Accounting and Financial Reporting by Employers for Post-Employment Benefits Other Than Pensions (GASB No. 45). GASB No. 45, which will be phased in beginning in 2007, will require state and local governmental entities either to fund the cost of retiree benefits or recognize this obligation as a liability on their financial statements, as opposed to the prior practice of recognizing these costs on a pay-as-you-go basis. We believe GASB No. 45 is prompting many governmental entities to focus on the costs of retiree benefits and to seek ways to reduce these costs.
 
  •      Medicare Part D.  The Medicare Modernization Act, which created the federal Voluntary Prescription Drug Benefit Program under Part D of the Social Security Act, added a new entitlement for Medicare-eligible beneficiaries for prescription drug costs. Effective as of January 1, 2006, eligible Medicare beneficiaries are able to obtain prescription drug coverage under Part D by enrolling in a prescription drug plan or in a Medicare Advantage plan, which is also known as an MA-PD. Under the Medicare Modernization Act, employers that provide retiree prescription drug benefits now have a greater number of options, including the elimination of these benefits entirely, the establishment of company-sponsored plans that are eligible for a government subsidy, the adoption of a company-sponsored prescription drug plan and the establishment of plans designed to supplement the benefits available through a prescription drug plan or Medicare Advantage plan (MA-PD). As a result of the Medicare Modernization Act, insurance products that provide prescription drug benefits for Medicare-eligible individuals now compete with the entitlement program created under Part D. We believe the Medicare Modernization Act generally has resulted in the development of new insurance products available for employers that desire to provide greater benefits than are available through a prescription drug plan or Medicare Advantage plan (MA-PD). We also believe this trend has benefited insurance brokers that have developed the expertise and product distribution capabilities to assist employers in responding to these developments.
 
Competitive Strengths
 
We believe that our competitive strengths include:
 
  •      Extensive Relationships with Retail Insurance Brokers.  We believe that our national operations, product expertise, extensive relationships with insurance carriers and focus on compliance make us an attractive business partner for retail insurance brokers. During 2006, we did business with over 4,500 retail insurance brokerage firms, including substantially all of the 100 largest U.S. retail insurance brokers as identified by Business Insurance in July 2006. We also work with small to mid-size retail insurance brokerage firms, which in many cases do not have direct access to certain of the insurance carriers with which we do business. Our extensive


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  relationships with retail insurance brokers make us an attractive distribution channel for insurance carriers.
 
  •      Established Insurance Carrier Relationships.  We have established relationships with over 100 insurance carriers. We believe that many insurance carriers view us as a valued customer because of our expertise, experienced brokers and underwriters and national platform, which enable us to produce a significant amount of business for them. Our access to insurance carriers is key to our business. Through years of experience in the insurance industry, our management has close relationships with the management teams of many insurance carriers at the most senior levels. We understand our insurance carriers’ underwriting preferences for particular lines of business and areas of geographic focus. We believe that the scope of our relationships with insurance carriers and our product knowledge allow us to better serve the needs of our retail insurance brokerage clients.
 
  •      Proven and Experienced Brokers and Underwriters.  As of December 31, 2006, we employed 221 brokers and underwriters, many of whom have substantial experience in the insurance industry. Our brokers and underwriters typically specialize in either certain product lines or industry classes and have, in many cases, developed close relationships with the insurance carrier underwriters for these product lines and industry classes. We believe we have been able to use our size, diverse product knowledge and extensive relationships with insurance carriers to improve the productivity of our existing brokers and recruit new brokers who can leverage these resources to increase revenues.
 
  •      Seasoned Management Team.  Our Chief Executive Officer and division presidents have substantial experience and long-standing relationships developed over an average of 21 years of service in the insurance industry. Our management team draws on its industry experience to identify opportunities to expand our business and collaborate with insurance carriers to help develop products to respond to market trends. Through their extensive relationships in the insurance industry, our management team has contributed to the successful recruitment of key brokers and underwriters to join AmWINS. Having completed nine acquisitions since January 1, 2002, our management team has a proven track record of successfully identifying and structuring acquisitions and integrating the businesses acquired.
 
  •      Business Diversification.  The scope of our operations distinguishes us from traditional property and casualty wholesale insurance brokers. By operating in both the group benefits market and the property and casualty market, we believe we are better positioned to detect, analyze and capitalize on opportunities to expand our business than are companies with a more narrow market focus. In addition, our product diversity and ability to provide value-added underwriting, administrative and other services provide us with broader access to insurance carriers and enhance our ability to help retail insurance brokerage firms deliver products that meet the wide-ranging needs of their clients.
 
  •      Efficient Use of Information.  We believe the way we collect and analyze information using AmLINK, our proprietary enterprise operating system, will improve the efficiency and productivity of our brokers and underwriters. For example, we can access our database to identify individual insurance carrier underwriters that typically underwrite a specific type of business, making it more likely we can place a particular risk for our customers. We also intentionally capture and store data for business we are unable to place so we can analyze missed opportunities and improve our chances to place this business in the future. We believe that AmLINK allows us to more effectively manage and control our operations.


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Business Challenges
 
We face several challenges in conducting our business that are discussed in more detail in the section entitled “Risk Factors,” including, but not limited to, the following:
 
  •  Potential for Disintermediation.  We act as an intermediary between retail insurance brokers and insurance carriers that, in some cases, will not transact business directly with retail insurance brokers. If insurance carriers change the way they conduct business and begin to transact business directly with retail insurance brokers, our role in the distribution of insurance products could be eliminated or significantly reduced.
 
  •  Business Concentration with Willis and AIG.  In April 2005, we acquired Willis’ wholesale insurance brokerage operations, formerly operated under the name Stewart Smith Group. Willis accounted for approximately 15.0% and 12.8% of our revenues in 2005 and 2006, respectively. Our business would suffer if we lost Willis as a client or if there was a substantial reduction in the volume of business we do with Willis. In addition, approximately 11.5% and 9.3% of our revenues in 2005 and 2006, respectively, were derived from insurance policies provided by AIG. We would be required to incur additional expense and could lose market share if AIG terminated or significantly reduced the amount of business we do with it.
 
  •  Recruitment and Retention of Brokers/Underwriters and Executive Officers.  Our future operating performance and success depend on our ability to recruit and retain highly qualified brokers, underwriters and key executive officers. Competition for these persons is intense. Our inability to recruit and retain these brokers, underwriters and officers could harm our business and operating performance.
 
  •  Changing Conditions in the Markets in Which We Operate.  We may be negatively affected by changes in the markets in which we operate. Premium pricing within the commercial property and casualty insurance market historically has been cyclical based on the underwriting capacity of the insurance carriers operating in this market and also has been impacted by general economic conditions. These factors may affect the commissions we receive and fees we are able to charge for our services. Currently, we are encountering declining rates for the types of property and casualty insurance products we place, which we believe reflect additional capacity in these markets. In addition, federal and state sponsored health care programs as well as proposals to alter the level of spending under these programs could affect the market for the group health insurance products we distribute. In particular, as a result of the adoption of the Medicare Modernization Act, insurance products that provide prescription drug benefits to Medicare-eligible individuals now compete with the entitlement program under Part D of the Social Security Act.
 
  •  Competitive Markets.  The wholesale insurance brokerage industry is highly competitive. A number of firms actively compete with us for clients and access to insurance carriers. Our ability to remain competitive will, in large part, determine our future success.
 
Key Elements of Our Growth Strategy
 
Our goal is to achieve superior long-term returns for our stockholders while establishing ourselves as the premier national wholesale distributor of insurance products and services. To accomplish this goal, we intend to focus on the following key areas:
 
  •      Increase Growth by Expanding Distribution.  We strive to prudently grow our business by expanding our distribution channels. Since January 1, 2003, we have opened five new offices in our Property & Casualty Brokerage division and hired 124 new brokers, excluding brokers hired in connection with acquisitions. We intend to continue pursuing opportunities to expand into new geographic markets and increase our presence in existing geographic markets. We also seek to expand our business by marketing our diverse product capabilities through targeted advertisements, client seminars and client marketing events.


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  •      Access New Markets and Products.  We are focused on expanding our access to new markets and products to better serve the needs of our retail insurance brokerage clients. For example, because certain admitted insurance carriers will not do business directly with small retail insurance brokerage firms, but will do business with us, we are developing our AmWINS Access platform to provide these brokerage firms with access to a greater variety of standard insurance products. We also are actively working to develop new MGU programs. In our Group Benefits division, we continue to explore opportunities to work with our insurance carrier partners to develop new products that help employers manage the rising cost of health care.
 
  •      Capitalize on Industry Changes.  We believe that recent governmental investigations into the insurance industry caused many insurance carriers and large retail insurance brokerage firms to pay greater attention to the intermediaries they use. We believe these insurance carriers and brokerage firms increasingly are seeking to solidify their business relationships with financially stable intermediaries with acceptable reporting, compliance and other administrative systems. Aon, Marsh and Willis all recently sold their wholesale insurance brokerage firms, and we believe that we can use our national platform and organizational structure to build upon our relationships with these and other firms. In addition, we intend to pursue opportunities to distribute retiree health products to employer groups to help them better respond to rising health care costs, an aging U.S. population and changes in the way they are required to account for retiree benefits.
 
  •      Pursue Strategic Acquisitions.  We plan to pursue strategic acquisitions that will complement our existing business or potentially expand into new wholesale distribution channels. We have substantial experience in selecting and integrating companies and are positioned to take advantage of acquisition opportunities that arise. We believe that our entrepreneurial culture and centralized administrative support system make us an attractive partner to acquisition targets. We believe this offering enhances our business profile and our ability to structure future acquisitions we decide to pursue.
 
Risks Related to Our Business and Growth Strategy
 
We are subject to numerous risks, which are described in greater detail in the section entitled “Risk Factors” immediately following this summary. These risks may prevent us from successfully implementing our business and growth strategy and affect the future profitability of our business. In addition to the challenges summarized above under “— Business Challenges,” we are subject to other risks in the operation of our business, including the following:
 
  •  Our ability to grow organically depends on our ability to open new offices and recruit new brokers and underwriters. We cannot assure you that we will be able to successfully open new offices, recruit new brokers and underwriters or recover our investment in new offices, brokers or underwriters, or that any new offices, brokers and underwriters will ever achieve profitability;
 
  •  If we are unable to successfully acquire or integrate acquired businesses, or if they do not perform as we expect, our competitiveness, operating results and financial condition could be harmed;
 
  •  If any of our MGU programs are terminated or changed, our business and operating results could be harmed;
 
  •  We depend on our information processing systems, the interruption or loss of which could harm our business;
 
  •  We are subject to errors and omissions claims, which can be costly to defend and could negatively affect us;
 
  •  We are subject to governmental regulation and supervision, and increased costs of compliance or failure to comply with applicable laws and regulations could increase our expenses, restrict our growth and limit our ability to conduct our business;


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  •  There have been governmental investigations and private litigation involving some retail insurance brokerage firms regarding the propriety of contingent commissions. Although we currently are not subject to any of these investigations or litigation matters and are unable to predict how these matters will affect us, these investigations and litigation matters may alter the manner in which wholesale insurance brokers are compensated or conduct business;
 
  •  Our offices are geographically dispersed across the United States, and we may not be able to respond quickly to operational or financial problems or promote the desired level of cooperation and interaction among our offices, which could harm our business and operating results;
 
  •  We may lose clients or business as a result of consolidation within the retail insurance brokerage industry;
 
  •  As a public company, our expenses will increase and our management will be required to devote substantial time to complying with public company requirements; and
 
  •  We will continue to have substantial indebtedness following this offering, the terms of which are restrictive, may prevent us from expanding our business and may restrict our flexibility and place us at a competitive disadvantage.
 
For further discussion of these and other risks you should consider before making an investment in our common stock, see the section entitled “Risk Factors” immediately following this summary.
 
Our Ownership
 
In October 2005, investment funds affiliated with Parthenon Capital, LLC (Parthenon Capital), a leading private equity firm, acquired a controlling interest in AmWINS. As of December 31, 2006, including vested options, AmWINS Holdings, LLC (Parthenon HoldCo), a Delaware company formed by Parthenon Capital and its investors, owned  % of our outstanding stock, and our officers and employees owned  % of our outstanding stock. For information regarding our ownership before and after this offering, see “Principal Stockholders.”
 
Our Offices
 
Founded in 1998, we are a Delaware corporation. Our principal executive offices are located at 4064 Colony Road, Suite 450, Charlotte, North Carolina 28211. Our telephone number at this location is (704) 943-2000, and our website address is www.amwins.com. Information on our website is not intended to be a prospectus and is not incorporated into this prospectus.


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The Offering
 
Common stock we are offering           shares
 
Common stock offered by the selling stockholders
          shares
 
Common stock to be outstanding after the offering
          shares
 
Overallotment shares           shares
 
Use of proceeds We estimate that our net proceeds from this offering will be approximately $      million, based on an assumed initial public offering price of $      per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting the underwriting discounts and commissions and our estimated offering costs of $      million. If the underwriters exercise their overallotment option in full, we estimate our net proceeds will be approximately $      million. We intend to use approximately $      million of the net proceeds from this offering to repay debt and the remainder for working capital and general corporate purposes, including possible acquisitions.
 
We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.
 
Risk factors See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.
 
Dividend policy We do not anticipate declaring or paying cash dividends for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors.
 
Proposed New York Stock Exchange symbol
AGI
 
The number of shares of our common stock to be outstanding after this offering is based on shares outstanding at December 31, 2006, and excludes:
 
  •                 shares of common stock issuable upon the exercise of warrants issued to Holdings, with a weighted average exercise price of $      per share;
 
  •                 shares of common stock issuable upon the exercise of outstanding stock options with a weighted average exercise price of $      per share; and
 
  •      any additional shares of common stock that we may issue in the future to comply with our agreements to pay additional contingent purchase price in connection with certain business acquisitions. For more information about these agreements, refer to the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Commitments and Contingencies — Contingent Purchase Price for Acquisitions.”


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Summary Historical Financial Data
 
The following table sets forth:
 
  •      our balance sheet data as of December 31, 2006 on an actual basis and as adjusted to reflect:
 
  •      the sale of           shares of our common stock in this offering at an assumed initial public offering price of $      per share (the mid-point of the price range set forth on the cover page of this prospectus); and
 
  •      the application of the estimated net proceeds from this offering as described under “Use of Proceeds”; and
 
  •      our statement of operations data for:
 
  •      the year ended December 31, 2004;
 
  •      the period from January 1, 2005 to October 27, 2005, the date of the Recapitalization, and the period from October 28, 2005 to December 31, 2005; and
 
  •      the year ended December 31, 2006.
 
You should read the following historical consolidated financial data in conjunction with our audited and unaudited consolidated financial statements, including the notes to the financial statements, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “The Recapitalization” included elsewhere in this prospectus. In the table below and throughout this prospectus, we refer to AmWINS as our “Predecessor” for all periods prior to and including October 27, 2005, the date of our Recapitalization, and as our “Successor” for all periods following the Recapitalization. As a result of the Recapitalization, we have applied push-down accounting, as required by Staff Accounting Bulletin (SAB) No. 54, Application of “Pushdown” Basis of Accounting in Financial Statements of Subsidiaries Acquired by Purchase (SAB No. 54), as interpreted by Emerging Issues Task Force Topic D-97, Pushdown Accounting (EITF D-97), which resulted in a write-up in the fair value of our net assets by approximately $84.1 million, or $76.5 million net of tax, at October 27, 2005. As a result, our basis of accounting following the Recapitalization differs from that prior to the Recapitalization, which affects the comparability of our financial data. In addition, since 2004, we have acquired a significant number of businesses. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Acquisitions and Dispositions.” As a result of these acquisitions and the Recapitalization, our financial information for the periods shown below may not be comparable period-to-period.
 
We derived the following balance sheet and statement of operations data from our audited consolidated financial statements appearing elsewhere in this prospectus.
 
                 
    As of December 31, 2006  
    Actual     As Adjusted  
    (in thousands)  
Balance Sheet Data:
               
Cash and cash equivalents
  $ 21,872          
Goodwill
    256,436          
Other identifiable intangible assets, net
    39,603          
Total assets
    648,534          
Total debt
    167,297          
Stockholder’s equity
    161,081          


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                  For the
                           
                  Period from
      Year
                   
    Year Ended
    For the Period
      October 28 to
      Ended
                   
    December 31,     Ended October 27,       December 31,       December 31,                    
    2004     2005       2005       2006                    
    Predecessor       Successor                    
    (in thousands, except per share data)                    
Statement of Operations Data:(a)
                                                           
Commissions and fees
  $ 83,452     $ 110,791       $ 29,722       $ 178,634                          
Other income
    1,152       850         906         6,651                          
                                                             
Total revenues
    84,604       111,641         30,628         185,285                          
Employee compensation and benefits (including non-cash equity compensation of $1,003 for the year ended December 31, 2006(b))
    52,523       66,412         17,388         108,769                          
Other operating expenses
    16,588       19,431         5,498         34,785                          
Depreciation
    1,475       1,855         536         3,622                          
Amortization
    3,873       5,716         636         4,809                          
                                                             
Total operating expenses
    74,459       93,414         24,058         151,985                          
                                                             
Operating income
    10,145       18,227         6,570         33,300                          
Interest expense
    2,498       8,516         2,949         17,151                          
Loss on extinguishment of debt(c)
    994       9,799                                          
Non-operating income
                          (3,495 )                        
                                                             
Income before income taxes and minority interest and discontinued operations
    6,653       (88 )       3,621         19,644                          
Minority interest
    (67 )                                              
Income tax expense
    2,930       772         1,503         8,808                          
                                                             
Income from continuing operations
    3,790       (860 )       2,118         10,836                          
Income from discontinued operations, net of minority interest and income taxes
    578                                                
Loss on sale of discontinued operations(d)
    (67 )                                              
                                                             
Net income
  $ 4,301     $ (860 )     $ 2,118         10,836                          
                                                             
Income from continuing operations per share:
                                                           
Basic
  $       $         $                                      
Diluted
  $       $         $                                      
Income from discontinued operations per share:
                                                           
Basic
  $       $         $                                      
Diluted
  $       $         $                                      
Loss on sale of discontinued operations per share:
                                                           
Basic
  $       $         $                                      
Diluted
  $       $         $                                      
Income per share:
                                                           
Basic
  $       $         $                                      
Diluted
  $       $         $                                      
Weighted average shares:
                                                           
Basic
                                                           
Diluted
                                                           
(a) See “Management’s Discussion and Analysis of Financial Position and Results of Operations — Acquisitions and Dispositions” for information regarding our acquisitions and dispositions during these periods, which affect the comparability of our financial data for these periods.
 
 
(b) We adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)) as of January 1, 2006, which resulted in the recognition of equity compensation expense for the year ended December 31, 2006. See Note 11 to our 2006 consolidated financial statements for the pro forma effect of recording this expense in periods prior to the adoption of SFAS No. 123(R).
 
 
(c) Reflects the write-off of unamortized financing fees and expenses and associated prepayment fees related to the refinancing of previous credit facilities.
 
 
(d) In November 2004, we sold our premium finance business. The results of operations of this business are segregated and reported as discontinued operations for the year ended December 31, 2004.


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RISK FACTORS
 
An investment in our common stock involves a number of risks. You should carefully consider the following risk factors in addition to the other information contained in this prospectus before investing in our common stock. If any of the following risks or uncertainties occurs, our business, financial condition and operating results could be materially and adversely affected, the trading price of our common stock could decline and you may lose all or a part of your investment in our common stock.
 
Risks Related to Our Business and Industry
 
The loss of the services of any of our highly qualified brokers or our executive officers could harm our business and operating results.
 
Our future performance depends on our ability to recruit and retain highly qualified brokers, including brokers who work in the businesses that we have acquired or may acquire in the future. Competition for productive brokers is intense, and our inability to recruit or retain these brokers could harm our business and operating results. Although many of our senior brokers own an equity interest in us and have entered into employment agreements with us, we cannot assure you that these brokers will serve the term of their employment agreements or renew their employment agreements upon expiration. Moreover, we cannot assure you that any of the brokers who leave our firm will comply with the provisions of their employment agreements that preclude them from competing with us or soliciting our customers and employees, or that these provisions will be enforceable under applicable law or sufficient to protect us from the loss of any business. In addition, we do not have employment, non-competition or non-solicitation agreements with all of our brokers. We may not be able to retain or replace the business generated by a broker who leaves our firm or replace that broker with an equally qualified broker who is acceptable to our clients.
 
Our success also depends on our key executive officers and the skills and relationships they bring to our business, as well as on our ability to attract and retain additional executive officers and key management personnel. Our executive officers are important to our company. In particular, M. Steven DeCarlo, our President and Chief Executive Officer, and Scott M. Purviance, our Chief Financial Officer, were instrumental in structuring and managing our significant growth over the last five years, including the acquisitions that we have completed, and are very involved in the day-to-day management and oversight of our operations. In addition, Samuel H. Fleet has managed our Group Benefits division since July 2000, and Mark M. Smith has overseen our Property & Casualty Brokerage division since our acquisition of Stewart Smith East, Inc. and related affiliates (together, Stewart Smith Group) in April 2005. We do not maintain “key man” life insurance policies for any of our executive officers or key management personnel. The loss of the services of any of our executive officers, particularly Messrs. DeCarlo, Purviance, Fleet or Smith, or our inability to attract and retain additional executive officers or key management personnel, could prevent us from fully implementing our business strategy and could adversely affect our ability to capitalize on market opportunities and grow our business, as well as have an adverse effect on our operating results.
 
We may be negatively affected by the cyclicality of and the economic conditions in the markets in which we operate.
 
Premium pricing within the commercial property and casualty insurance market in which we operate historically has been cyclical based on the underwriting capacity of the insurance carriers operating in this market and has been impacted by general economic conditions. In a period of decreasing insurance capacity, insurance carriers typically raise premium rates. This type of market frequently is referred to as a “hard” market. In a period of increasing insurance capacity, insurance carriers tend to reduce premium rates. This type of market frequently is referred to as a “soft” market. Because our commission rates usually are calculated as a percentage of the gross premium charged for the insurance products that we place, our revenues are affected by the pricing cycle of the market. The frequency and severity of natural disasters and other catastrophic events can affect the timing, duration and extent of industry cycles for many of the product lines we distribute. It is very difficult to predict the severity, timing or duration of these cycles. The cyclical


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nature of premium pricing in the commercial property and casualty insurance market may make our operating results volatile and unpredictable.
 
In 2001, capital available to underwrite property and casualty insurance contracted significantly, primarily due to realized underwriting losses from earlier years, lower returns on investments and the effect of the September 11, 2001 terrorist attacks, which resulted in increasing premium rates. During 2004, we began to see an increase in underwriting capacity for property insurance products, which resulted in declining premium rates for most lines of property insurance we place. Although this trend continued well into 2005, the consequences of Hurricanes Katrina, Rita and Wilma significantly reduced capacity and increased prices within the property insurance market, which accelerated in 2006 primarily as a result of increased reinsurance costs for primary insurance carriers. We believe that during the latter part of 2006 and continuing into 2007, additional capacity entered the property market, which should make property catastrophe coverage more affordable than it was during 2006. Additionally, recent legislative developments in Florida have reduced the cost and increased the limits of reinsurance available to insurance carriers through the Florida Hurricane Catastrophe Fund and are expected to add even more capacity to the overall property catastrophe market. Pricing for casualty insurance that we place generally has not experienced the recent volatility affecting the property market, and we have generally encountered declining rates for casualty insurance throughout 2006 and continuing into 2007.
 
Economic conditions generally and within the insurance industry also may affect:
 
  •      The commission rates paid by insurance carriers on products we distribute;
 
  •      The portion of commissions we receive from insurance carriers that we pay to our retail insurance brokerage clients in connection with policy placement. The amount of these commissions is negotiated by us and retail insurance brokers on a case-by-case basis and can be affected by a number of factors, including the amount of business that a retail insurance brokerage firm places with us, competition within the wholesale insurance brokerage market, whether the retail insurance broker is being compensated by its client on a fee basis and the difficulty of obtaining insurance to cover a particular risk;
 
  •      The fees we charge for certain insurance products we distribute, which are in addition to the commissions we receive and are negotiated on a case-by-case basis; and
 
  •      The fees we are able to charge for providing ancillary services such as premium and claims administration and actuarial services.
 
In 2006, our Group Benefits division derived a substantial majority of its revenues from group health insurance plans. Premium rates for group health insurance plans are affected by several factors, including health care costs, which have increased significantly in recent years, and general economic conditions such as changes in the level of employment and other factors that may affect employer spending for employee benefits. Federal and state sponsored health care programs as well as proposals to alter the level of spending under these programs also can affect the market for group health insurance plans. For example, as a result of the adoption of the Medicare Modernization Act, insurance products that provide prescription drug benefits to Medicare-eligible individuals now compete with the entitlement program under Part D of the Social Security Act. Moreover, there are discussions at both the federal and state levels regarding proposals to reform the U.S. health care system, which may affect the procurement practices and operations of health care industry participants. Several groups are urging the U.S. Congress to consider a national health care plan, which could include the replacement of the existing employer-based system of insurance with a “single-payer” financing mechanism under which one governmental entity would collect all health care fees and pay out all health care costs. All of these factors could affect the market for the health insurance products that we place or reduce the commission revenues we receive from placing these products.


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If any of our MGU programs are terminated or changed, our business and operating results could be harmed.
 
In our Specialty Underwriting division, we act as an MGU for insurance carriers that have given us authority to bind coverage on their behalf. Our MGU programs are governed by contracts between us and the insurance carriers. These contracts establish, among other things, the underwriting and pricing guidelines for the program, the scope of our authority and our commission rates for policies that we underwrite under the program. These contracts typically can be terminated by the insurance carrier with very little advance notice. Moreover, upon expiration of the contract term, insurance carriers may request changes in the terms of the program, including the amount of commissions we receive, which could reduce our revenues from the program. The termination of any of our MGU programs, or a change in the terms of any of these programs, could harm our business and operating results. For example, in May 2005, one of our insurance carrier partners terminated a commercial trucking MGU program operated by us, which contributed to a decline in revenues from our Specialty Underwriting division for the year ended December 31, 2006 in relation to the year ended December 31, 2005. We cannot assure you that other MGU programs will not be terminated or modified in the future. Moreover, we cannot assure you that we will be able to replace any of our MGU programs that are terminated with a similar program with another insurance carrier. Our Specialty Underwriting division generated 30.7%, 23.3%, 13.8% and 9.4% of our consolidated total revenues for 2003, 2004, 2005 and 2006, respectively.
 
We conduct a significant amount of our Property & Casualty Brokerage business with Willis, and if we lose Willis as a client or there is a substantial reduction in the volume of business we do with Willis, our business, results of operations and cash flows would be materially harmed.
 
In April 2005, we acquired Willis’ wholesale insurance brokerage operations, formerly operated under the name Stewart Smith Group. Willis is a subsidiary of Willis Group Holdings Limited, one of the largest global retail insurance brokers. Since our acquisition of Stewart Smith Group, the amount of business we do with Willis has increased significantly. Willis accounted for approximately 1.0% of our historical revenues for the year ended December 31, 2004, but increased to 15.0% and 12.8% of our historical revenues for the years ended December 31, 2005 and December 31, 2006, respectively. We believe that the divestiture by Willis of its wholesale insurance brokerage operations has intensified competition among us and other wholesale insurance brokers who seek to do business with Willis. If, as a result of increased competition or other factors beyond our control, including changes within Willis or the way Willis does business, we lose Willis as a client or there is a substantial reduction in the volume of business we do with Willis, our business, results of operations and cash flows would be materially harmed.
 
We place a significant amount of our Property & Casualty Brokerage business with AIG, and the termination or significant reduction of the business we do with AIG could result in additional expense and loss of market share.
 
For the years ended December 31, 2005 and 2006, approximately 11.5% and 9.3%, respectively, of our total revenues were derived from insurance policies provided by AIG, which is the largest insurance company operating in the E&S lines market. If AIG seeks to terminate or significantly reduce the amount of business we do with it, we believe that we could locate other insurance carriers to underwrite most of the business that we place with AIG. However, we would incur additional expense and could lose market share in the process of locating other insurance carriers to take this business.
 
Competition in the markets in which we do business is intense, and if we are unable to compete effectively, our business and operating results will be harmed.
 
The wholesale insurance brokerage industry is highly competitive, and a number of firms actively compete with us for clients and access to insurance carriers. Some of our primary competitors have substantially greater resources than we have, which may give them an advantage over us. Our ability to remain competitive will, in large part, determine our future success. If we fail to compete successfully, our business and operating results could be adversely affected.


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Based on information published by the National Association of Professional Surplus Lines Offices, Ltd., there are over 450 wholesale insurance brokerage firms operating in the United States. In our Property & Casualty Brokerage division, our largest competitors are Swett & Crawford Group (Swett & Crawford), CRC Insurance Services, Inc. (CRC), which is owned by BB&T Corporation, Crump Insurance Services, Inc. (Crump) and Risk Placement Services, Inc. (RPS), which is owned by Arthur J. Gallagher & Co. We believe that in terms of aggregate premiums placed, we currently are comparable in size to Swett & Crawford and CRC, and larger than Crump and RPS, based on information published by Business Insurance. Our Specialty Underwriting division competes with a variety of firms that provide insurance similar to the products we distribute, including insurance carriers that compete with the insurance carriers we represent. We believe the largest MGU firms in the United States are Victor O. Schinnerer & Co., Inc., a subsidiary of Marsh, K&K Insurance Group, a subsidiary of Aon, Arrowhead General Insurance Agency, Inc. and U.S. Risk Insurance Company, Inc., most of which we believe are substantially larger than our Specialty Underwriting division. Although there are no large national wholesale insurance brokerage firms with which our Group Benefits division regularly competes, our Group Benefits division competes with a variety of other businesses, including retail insurance brokers that distribute products similar to the types of products we distribute, insurance carriers that distribute these products directly through retail insurance brokers or to insured parties, benefit consultants that are able to assist in the distribution of these products and a number of other companies that provide group benefit administrative services.
 
The divestitures by Aon, Marsh and Willis of their wholesale distribution operations have created growth opportunities for us. However, there can be no assurance that we will succeed in taking advantage of them. Other wholesale brokers will now find it easier to do business with these large retail insurance brokerage firms. Although our business with Aon and Marsh has increased dramatically since their respective divestitures, it is unlikely that we will maintain the same rate of growth with them due to competition from others and the fact that our recent growth rate with them is measured in comparison to a low starting base.
 
We depend on our information processing systems. Interruption or loss of our information processing systems could harm our business.
 
Our ability to operate our business depends on our capacity to store, retrieve, process and manage significant databases and expand and upgrade periodically our information processing capabilities. Interruption or loss of our information processing capabilities through loss of stored data, breakdown or malfunctioning of computer equipment and software systems, telecommunications failure, or damage caused by fire, tornadoes, lightning, electrical power outage, natural or other disasters or other disruption could harm our business and operating results. Although we have disaster recovery procedures in place and insurance to protect against certain contingencies, we cannot assure you that our recovery procedures will be effective or that our insurance will continue to be available at reasonable prices, cover all such losses or compensate us for the loss of business occurring during any period in which we are unable to provide services.
 
If we are unable to successfully acquire or integrate acquired businesses, or if they do not perform as we expect, our competitiveness, operating results and financial condition could be harmed.
 
One of our growth strategies is to acquire businesses that complement, expand upon or diversify our current operations. We have acquired nine businesses since January 1, 2002, and we anticipate that we will continue to look for opportunities to acquire additional businesses. Competition for new acquisitions is intense. We are unable to predict whether or when we will be able to identify suitable acquisition candidates, consummate any acquisitions we pursue or prevail over our acquisition competitors, who often are larger than we are and have greater resources than we do. Our current senior secured credit facilities, which were implemented in October 2005 in connection with the Recapitalization, prevent us from making acquisitions without the consent of our lenders, unless the aggregate consideration paid by us (excluding earn-out consideration) is less than $15.0 million per acquisition and $50.0 million in the aggregate for all acquisitions. To date, we have not been required to obtain approval from the lenders under these senior secured credit facilities for any acquisitions that we have desired to pursue. We can give no assurance that we will be able to secure their consent if and when needed in the future. We may also require additional capital to complete


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acquisitions we deem attractive, but may be unable to secure such capital on satisfactory terms. Our senior secured credit facilities limit the amount of additional debt we may incur, and our ability to secure future financing would depend on a number of factors, some of which are beyond our control, such as prevailing conditions in the capital markets, our future operating performance and then-existing debt levels and cash flows. If we fail to execute our acquisition strategy, it is likely that our revenue and earnings growth will suffer, and we may be unable to remain competitive.
 
Despite due diligence investigations we conduct before acquiring a business, we may not succeed in identifying all material risks and uncertainties associated with that business. Unanticipated contingencies or liabilities, such as litigation, the loss of significant clients or accounts, the termination or amendment of significant contracts and the loss of key brokers, are inherent risks in acquisitions. Furthermore, these businesses may not achieve expected levels of revenue, profitability or productivity or otherwise operate in a manner consistent with our expectations or comparable to our existing businesses due to events beyond our control, such as changes in market conditions, increased competition and other factors. The failure of the businesses that we acquire to achieve our performance goals could have an adverse impact on our operating results and overall business.
 
When we acquire an entity, a portion of the purchase price may be allocated to goodwill and other indefinite-lived intangible assets. The amount of purchase price allocated to goodwill is determined by the excess of the purchase price over the fair market value of identifiable net assets we acquire. Accounting rules require that we conduct annual impairment testing of goodwill and indefinite-lived intangible assets. Deterioration in our operating results, including the loss of a significant client or clients at one of our acquired businesses, could result in an impairment of goodwill and intangible assets, which would cause us to record a charge for the impairment. Such a charge could adversely affect our results of operations.
 
We cannot assure you that we can successfully integrate the businesses that we acquire. The integration of a business involves a number of factors that may affect our operations. These factors include:
 
  •      retention of personnel;
 
  •      diversion of management’s attention;
 
  •      difficulties in the integration of acquired operations, systems and processes;
 
  •      entry into new or unfamiliar markets;
 
  •      unanticipated problems or liabilities; and
 
  •      tax and accounting issues.
 
To date, we believe we have been successful in integrating the businesses we have acquired without material disruption to our existing business or the acquired business. However, we can give no assurances that we will not encounter issues associated with integrating existing businesses or new acquisitions in the future. Our failure to successfully integrate acquired businesses may disrupt our operations and harm our overall business and operating results.
 
We permit many of our acquired businesses to remain under the day-to-day management of previous owners or other individuals who played a key role in their development. We cannot predict how long these individuals will continue to be actively engaged in our business. In many cases, the reputation and skills of these individuals and the relationships they have with their clients are critical to our success. Our business and operating results could be harmed if any of these individuals retire or otherwise limit their involvement in the day-to-day management of our business, and we are not able to identify a suitable successor or if the individual’s successor is not as successful.
 
We are subject to errors and omissions claims, which can be costly to defend and could negatively affect us.
 
We are subject to claims and litigation in the ordinary course of business resulting from alleged and actual errors and omissions. These types of litigation matters can involve claims for substantial amounts of money for direct and consequential damages and significant defense costs. For example, we may be subject to


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errors and omissions claims if we fail (or are alleged to have failed) to provide an insurance carrier with complete and accurate information relating to the risk being insured, to request or secure coverage for a particular type of risk, for the requested amounts or on the requested terms, or to comply with state law notice and other requirements typically applicable to insurance policies issued by non-admitted insurance carriers in the E&S lines market. We also are subject to claims that we mishandled the payment of premiums, the adjudication of claims or other administrative functions in our benefit administration business. We are unable to predict with certainty the frequency, nature or magnitude of these claims. It is not always possible to prevent or detect errors and omissions, and the precautions we take may not be effective in all cases.
 
We have purchased errors and omissions insurance in amounts that we believe are adequate to protect us, subject to deductible amounts, policy exclusions and other conditions, against the risk of liability resulting from alleged and actual errors and omissions. To date, we have not incurred a material amount of out-of-pocket expenses to defend and settle errors and omissions claims. However, our insurance may not adequately protect us against every errors and omissions claim. Moreover, we may not be able to purchase coverage that is appropriate in relation to our assessment of the risks involved on commercially reasonable terms or at all.
 
Our business and operating results may be negatively affected if our errors and omissions insurance proves to be inadequate or unavailable. In addition, errors and omissions claims may harm our reputation and divert management resources away from operating our business.
 
We are subject to governmental regulation and supervision, and increased costs of compliance or failure to comply with applicable laws and regulations could increase our expenses, restrict our growth and limit our ability to conduct our business.
 
Our business is subject to governmental regulation and supervision. In states in which we do business as an insurance broker, we generally are required to be licensed or to have received regulatory approval to conduct business. In addition, most states require that our employees who engage in brokerage activities in that state be licensed personally. We also are required in many states to report, collect and remit surplus lines taxes to state taxing authorities for insurance policies placed in the E&S lines market. The laws and regulations regarding the calculation of surplus lines taxes vary significantly from state to state, and it can be difficult and time consuming to determine the amount of surplus lines taxes due to a particular state, especially for insurance policies covering risks located in more than one state. From time to time, we and our licensed employees are subject to inspection by state governmental authorities with regard to our compliance with state insurance laws and regulations and the collection of surplus lines taxes. To date, these inspections have not had a material effect on our business or results of operations. Our Group Benefits division also generally is required to be licensed in states in which it provides administrative services. We also are affected by the governmental regulation and supervision of insurance carriers. For example, when we act as an MGU for an insurance carrier, we may be required to comply with laws and regulations affecting the insurance carrier. Moreover, regulation affecting the insurance carriers with which we place business can affect how we conduct operations.
 
State laws grant supervisory agencies, including state insurance departments, broad regulatory authority. State insurance regulators and the National Association of Insurance Commissioners continually reexamine existing laws and regulations, some of which affect us. These supervisory agencies regulate, among other things, the licensing of insurance brokers and group benefits administrators, the handling and investment of third-party funds held in a fiduciary capacity and the marketing practices of insurance brokers, in the context of curbing unfair trade practices. This continual reexamination may result in the enactment of laws and regulations, or the issuance of interpretations of existing laws and regulations, that adversely affect our business. More restrictive laws, rules or regulations may be adopted in the future that could make compliance more difficult and expensive or adversely affect our business. Violations of applicable federal or state laws or regulations could result in the imposition of fines or censures, disciplinary actions, including the revocation of licenses or registrations, damage to our reputation, or a limitation on our business. Moreover, the costs of complying with these regulations may increase our operating expenses.


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There have been governmental investigations and private litigation involving some retail insurance brokerage firms regarding the propriety of contingent commissions and other business practices, and the results of these investigations and litigation matters could harm our business and operating results.
 
There have been a number of investigations of some large retail insurance brokerage firms regarding the propriety of certain compensation arrangements between insurance carriers and insurance brokers and other business practices. Some of these investigations have focused on whether retail insurance brokers have adequately disclosed to their customers the receipt of contingent commissions that are paid by insurance carriers to brokers based on the volume of the business placed by the broker with the insurance carrier or other factors. As a wholesale insurance broker, we transact business with retail insurance brokers and not directly with insured parties. To date, we have not been subject to any investigations that are focused on the disclosure of contingent commissions by us.
 
The propriety of these contingent commissions is also the subject of litigation against certain insurance agents involving allegations that the existence of these commission arrangements results in a breach of fiduciary duties by causing brokers to place insurance policies with insurance carriers who pay these commissions instead of based on the coverage needs of their clients. To date, we have not been made or threatened to be made a party to any litigation involving the propriety of contingent commissions.
 
We are unable to predict how these matters will affect us. However, these investigations and litigation matters may alter the manner in which wholesale insurance brokers are compensated or conduct business.
 
Our growth strategy may involve opening new offices and will involve hiring new brokers and underwriters, which will require substantial investment by us and may adversely affect our results of operations and cash flows in a particular period. We cannot assure you that we will be able to successfully open new offices or hire new brokers and underwriters or recover our investment in new offices, brokers or underwriters, or that these new offices, brokers or underwriters will achieve profitability.
 
Our ability to grow organically depends in part on our ability to open new offices and recruit new brokers and underwriters. We can give no assurances that we will be successful in any efforts to open new offices or hire new brokers or underwriters. The costs of opening a new office and hiring the necessary personnel to staff the office can be substantial, and we often are required to commit to multi-year, non-cancellable lease agreements. It has been our experience that our new brokerage offices may not achieve profitability on a stand-alone basis until they have been in operation for at least three years. In addition, we often hire new brokers and underwriters with the expectation that they will not become profitable until two to three years after they are hired. The cost of investing in new offices, brokers and underwriters may affect our results of operations and cash flows in a particular period. Moreover, we cannot assure you that we will be able to recover our investment in new offices, brokers or underwriters or that these offices, brokers and underwriters will achieve profitability.
 
Since January 1, 2003, we have opened five new offices in our Property & Casualty Brokerage division and hired 124 new brokers and underwriters, excluding brokers and underwriters hired in connection with acquisitions. We currently are in the process of opening one small office in our Property & Casualty Brokerage division in Fresno, California, and a few small offices to support the administrative services provided by our Group Benefits division. We currently do not have any other plans or commitments to open any new offices over the next 12 months. However, we intend to pursue opportunities to open new offices as they develop.
 
If insurance carriers begin to transact business without relying on wholesale insurance brokers, our business, results of operations, financial condition and cash flows could suffer.
 
As a wholesale distributor of insurance products, we act as an intermediary between retail insurance brokers and insurance carriers that, in some cases, will not transact business directly with retail insurance brokers. If insurance carriers change the way they conduct business and begin to transact business with retail insurance brokers without including us, our role in the distribution of insurance products could be eliminated


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or substantially reduced, and our business, results of operations, financial condition and cash flows could suffer. Such a change could result from a change in business model, advancements in technology or other factors.
 
Our offices are geographically dispersed across the United States, and we may not be able to respond quickly to operational or financial problems or promote the desired level of cooperation and interaction among our offices, which could harm our business and operating results.
 
At December 31, 2006, we had 33 offices across the United States. Substantially all of these offices are under the day-to-day management of individuals who previously owned acquired businesses or played a key role in the development of an office. These individuals may not report negative developments that occur in their businesses to management on a timely basis because of, among other things, damage to their reputation, the risk that they may lose all or some of their operational control, or the risk that they may be personally liable to us under the indemnification provisions of the agreements pursuant to which their businesses were acquired. Moreover, there can be no assurances that management will be able independently to detect adverse developments that occur in particular offices. We review the financial performance of our offices on a monthly basis, maintain frequent contact with all of our offices and work with our offices on an annual basis to prepare a detailed operating budget for revenue production by office. Although we believe that these and other measures have allowed us generally to detect and address known operational issues that might have a material effect on our operating results, they may not detect all issues in time to permit us to take appropriate corrective action. Our business and operating results may be harmed if our management does not become aware, on a timely basis, of negative business developments, such as the possible loss of an important client, threatened litigation or regulatory action, or other developments.
 
In addition, our ability to grow organically will require the cooperation of the individuals who manage our offices. We cannot assure you that these individuals will cooperate with our efforts to improve the operating results in offices for which they are not directly responsible. Our dispersed operations may impede our integration efforts and organic growth, which could harm our business and operating results.
 
We may lose clients or business as a result of consolidation within the retail insurance brokerage industry.
 
We derive a substantial portion of our business from our relationships with small to mid-size retail insurance brokerage firms. There has been considerable consolidation in the retail insurance brokerage industry, driven primarily by the acquisition of small and mid-size retail insurance brokerage firms by larger brokerage firms, financial institutions or other organizations. We expect this trend to continue. As a result, we may lose all or a substantial portion of the business we obtain from retail insurance brokerage firms that are acquired by other firms with their own wholesale insurance brokerage operations or relationships with other wholesale insurance brokerage firms. To date, our business has not been materially affected by consolidation among retail insurance brokers. However, we cannot assure you that we will not be affected by industry consolidation that occurs in the future, particularly if any of our significant retail insurance brokerage clients are acquired by retail insurance brokers with their own wholesale insurance brokerage operations.
 
As a public company, our costs will increase and our management will be required to devote substantial time to complying with public company regulations.
 
We have never operated as a public company. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), as well as new rules subsequently implemented by the Securities and Exchange Commission (SEC) and the New York Stock Exchange (NYSE), have imposed various new requirements on public companies, including changes in corporate governance practices, and these requirements will continue to evolve. Our management and other personnel will need to devote a substantial amount of time to comply with these evolving requirements. Moreover, these rules and regulations relating to public companies will increase our legal and financial compliance costs and will make certain activities more time-consuming and costly.


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As a public company, we will be required to comply with significant requirements for enhanced financial reporting and internal controls. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls and disclosure controls that are adequate to satisfy our reporting obligations as a public company. Failure to design, implement and maintain effective internal controls could prevent us from accurately reporting our financial results and could harm our business and operating results. We will also be required to perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, but will need to put in place an internal audit function, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge to satisfy the ongoing requirements of Section 404 and the rules of the NYSE.
 
Risks Related to Our Indebtedness
 
The terms of our senior secured credit facilities are restrictive and may prevent us from expanding our business. Our failure to comply with any of these terms could result in a default and allow the lenders to require the immediate repayment by us of all amounts that are owed under these facilities. Our indebtedness could also restrict our flexibility and place us at a competitive disadvantage.
 
Our senior secured credit facilities contain a number of restrictive covenants. Subject to certain exceptions, these covenants limit our ability, among other things, to:
 
  •  expand our business beyond those activities that we carried on as of the date that we entered into our senior secured credit facilities;
 
  •  incur additional indebtedness;
 
  •  grant additional liens on our assets;
 
  •  make acquisitions;
 
  •  pay dividends, repurchase stock or issue new capital stock;
 
  •  make payments on indebtedness, other than the indebtedness owed to the lenders under our senior secured credit facilities, including deferred purchase price obligations on our acquisitions, unless those payments meet certain standards;
 
  •  liquidate, consolidate or merge;
 
  •  make certain asset dispositions; and
 
  •  engage in certain transactions with our affiliates.
 
Our senior secured credit facilities also require us to maintain minimum fixed charge coverage, interest coverage and total debt to EBITDA (earnings before income taxes, depreciation and amortization) ratios and limit our capital expenditures in any fiscal year. We must satisfy these financial condition tests at the end of each fiscal quarter. As of December 31, 2006, we believe we were in compliance with all of the restrictive and financial covenants in our senior secured credit facilities. However, developments affecting our business may require us to seek waivers or amendments of these and other covenants. We cannot assure you that we will be able to obtain such waivers or amendments at all, or on terms acceptable to us. Our ability to meet these covenants may be affected by events beyond our control. These covenants may prevent us from obtaining financing to expand our business, including through acquisitions. A breach of any of these covenants in existing or future financing agreements, or the occurrence of certain change of control events, could result in an event of default under our senior secured credit facilities and permit our lenders to accelerate the related


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debt and declare all borrowings outstanding under these facilities to be due and payable. If we are unable to repay debt to our lenders, these lenders could foreclose on our assets.
 
As of December 31, 2006, we had total debt of $167.3 million ($      million as adjusted to give effect to this offering). We may incur additional indebtedness from time to time, depending on our cash needs and financial condition at the time and the availability and terms upon which we could obtain funding through other sources, such as the issuance of equity. We may incur future debt to, among other things, fund acquisitions, significant capital projects, operations or unanticipated cash needs. The extent to which we are leveraged from time to time could have important consequences to us, including the following: (i) a substantial portion of our cash flow from operations may be dedicated to the payment of principal and interest on our indebtedness and would not be available for other purposes; (ii) our ability to obtain additional financing in the future may be impaired; (iii) we may become more leveraged than certain of our competitors, which may place us at a competitive disadvantage; (iv) our debt agreements may impose significant financial and operating restrictions on us; and (v) our degree of leverage could make us more vulnerable to changes in general economic conditions.
 
If we had completed this offering on December 31, 2006 and used a portion of the net proceeds therefrom to repay a portion of our outstanding indebtedness as described in “Use of Proceeds,” we would be required to make the following scheduled payments of principal and interest during the next three years:
 
                         
Year
  Principal     Interest     Total  
 
2007
  $           $           $        
2008
                       
2009
                       
 
For additional information about the effect of this offering on our contractual obligations as of December 31, 2006, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Cash Flow; Pro Forma Contractual Obligations.”
 
Risks Related to this Offering
 
An active market for our common stock may not develop, which may cause our common stock to trade at a discount and make it difficult to sell the common stock you purchase.
 
Prior to this offering, there has been no public market for our common stock. We cannot assure you that an active trading market for our common stock will develop or be sustained after this offering. The initial public offering price for our common stock will be determined by negotiations among the underwriters and us and will reflect then-existing market conditions. We cannot assure you that the initial public offering price will correspond to the price at which our common stock will trade in the public market subsequent to this offering or that the price of our common stock available in the public market will reflect our actual financial performance. Consequently, you may not be able to sell shares of our common stock at prices equal to or greater than the price paid by you in the offering.
 
Future sales of our common stock may cause our stock price to decline.
 
Sales by us or our stockholders of a substantial number of shares of our common stock in the public markets following this offering, or the perception that these sales might occur, could cause the market price of our common stock to decline or could impair our ability to raise capital or pay for acquisitions using our equity securities. Upon completion of this offering, there will be           shares of our common stock outstanding (or           shares if the underwriters exercise their overallotment option in full). Of our outstanding shares, the shares of our common stock sold in this offering will be freely transferable, except for any shares sold in this offering to our “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933, as amended (Securities Act). The remaining shares will be “restricted securities” subject to the volume limitations and the other conditions of Rule 144.
 
All of our officers and employees who are existing stockholders have entered into an agreement with us under which they will not, without our prior written consent, for a period of one year from the


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consummation of this offering, sell or otherwise dispose of any shares of our common stock. As of the date of this prospectus, approximately          , or     %, of the outstanding shares of our common stock will be subject to this restriction (or           shares, or     %, if the underwriters exercise their overallotment option in full). See “Shares Eligible for Future Sale — Restrictive Agreements.” In addition, we, our directors, executive officers and all existing stockholders have agreed, with limited exceptions, that we and they will not, without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch), on behalf of the underwriters, directly or indirectly sell or otherwise dispose of any shares of our common stock, for a period of 180 days after the date of this prospectus.
 
Following the completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act to register an aggregate of           shares of our common stock reserved for issuance under our stock-based incentive compensation plans. Subject to the exercise of issued and outstanding options, shares registered under the registration statement on Form S-8 will be available for sale into the public markets after the expiration of the 180-day lock-up agreements. Sales of substantial amounts of these shares, or the perception that these sales may occur, could adversely affect the price of our common stock.
 
In addition, if either Parthenon HoldCo or Holdings exercises its registration rights under the registration agreement or otherwise determines to sell a significant portion of its shares, our stock price may be negatively affected. The registration rights agreement will cover approximately          , or     %, of the outstanding shares of our common stock as of the date of this prospectus (or           shares, or     %, if the underwriters exercise their overallotment option in full). The exercise of these registration rights, or similar registration rights for securities we may issue in the future, could result in additional sales of our common stock in the market, which may have an adverse effect on our stock price. See “Shares Eligible for Future Sale — Registration Agreement.”
 
The issuance of additional stock will dilute our stockholders.
 
After this offering, we will have an aggregate of           shares of common stock authorized but unissued. We may issue all of these shares without any action or approval by our stockholders, except as NYSE rules require. Upon completion of this offering, we will be required to issue:
 
  •                 shares of common stock upon the exercise of warrants that have been issued to Holdings with a weighted average exercise price of $      per share;
 
  •                 shares of common stock upon the exercise of outstanding stock options with a weighted average exercise price of $      per share; and
 
  •      additional shares of our common stock that we may issue in the future to comply with our agreements to pay additional contingent purchase price in connection with certain business acquisitions. For more information about these agreements, refer to the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Commitments and Contingencies — Contingent Purchase Price for Acquisitions.”
 
We intend to continue to pursue acquisitions of other businesses and may issue shares of common stock in connection with these acquisitions. In addition, we may need to issue shares to raise additional capital to support our operations or take advantage of opportunities to acquire other businesses. If we issue equity securities to raise capital or acquire a business, the percentage interests of our stockholders will be reduced, our stockholders may experience additional dilution, and the equity securities we issue may have rights, preferences or privileges senior to our common stock.
 
The price of our common stock may fluctuate substantially, which could negatively affect us and the holders of our common stock.
 
The trading price of our common stock may fluctuate in response to a number of factors, many of which are beyond our control, including actual or anticipated variations in our quarterly financial results, changes in financial estimates for us by securities analysts and announcements by us or our competitors of significant developments or events, such as business acquisitions, additions or departures of key personnel,


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legal proceedings or regulatory matters. In addition, our financial results may be below the expectations of securities analysts and investors. If any of these events were to occur, the market price of our common stock could decrease, perhaps significantly. Any volatility of or a significant decrease in the market price of our common stock could also negatively affect our ability to make acquisitions using our common stock as consideration.
 
In addition, the U.S. securities markets have historically experienced significant price and volume fluctuations. These fluctuations may be unrelated to the operating performance of companies in these markets. Broad market and industry factors may negatively affect the price of our common stock, regardless of our operating performance. You may not be able to sell your common stock at or above the initial public offering price, or at all. Further, if we were to be the object of securities class action litigation as a result of volatility in our common stock price or for other reasons, it could result in substantial costs and diversion of our management’s attention and resources, which could negatively affect our financial results. If we decided to settle any class action litigation against us, our decision to settle might not necessarily be related to the merits of the claim.
 
Investors in this offering will suffer immediate and substantial dilution.
 
The initial public offering price of our common stock will be substantially higher than the net tangible book value per share of our common stock outstanding immediately after this offering. If you purchase our common stock in this offering, you will experience immediate and substantial dilution of $      in the net tangible book value per share of our common stock based on an assumed initial public offering price of $      (the mid-point of the price range set forth on the cover page of this prospectus). Additional dilution will occur upon the exercise of outstanding options. See “Dilution.”
 
Our principal stockholder may have interests that are different from yours and, therefore, may make decisions that are adverse to your interests.
 
After this offering, Parthenon HoldCo will beneficially own approximately  % of our outstanding voting common stock (or  % if the underwriters exercise their overallotment option in full). As a result, Parthenon HoldCo will have the ability to control matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, including mergers, consolidations and the sale of all or substantially all of our assets. Parthenon HoldCo may have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. In addition, this concentration of ownership may have the effect of preventing, discouraging or deferring a change of control, which could depress the market price of our common stock.
 
Upon completion of this offering, we expect to be a “controlled company” within the meaning of the NYSE rules, which would qualify us for exemptions from certain corporate governance requirements. If we choose to rely on these exemptions, our stockholders will not have all of the same protections as stockholders of companies that are subject to all of the NYSE corporate governance requirements.
 
A company of which more than 50% of the voting power is held by an individual, group or another company meets the definition of a “controlled company” under the rules of the NYSE. A controlled company may elect not to comply with certain of the NYSE’s corporate governance rules, including the requirements that a majority of its board of directors be “independent” and that it maintain compensation and nominating/governance committees of the board consisting entirely of “independent” directors. We expect that upon completion of this offering, we will qualify for this “controlled company” exception because Parthenon HoldCo will hold more than 50% of our common stock. We currently intend to comply with all applicable NYSE governance requirements, subject to any temporary transition relief provided by these rules. However, for so long as we qualify for this controlled company exception, we cannot assure you that Parthenon HoldCo’s influence and ability to control matters requiring stockholder approval, such as the composition of our board of directors, or other factors, will not result in our reliance on these controlled company exemptions. In such event, you would not be afforded the same protections as stockholders of companies that are subject to all of these corporate governance requirements.


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Certain provisions of our charter documents and Delaware law could delay or prevent a change in control of our company, which could adversely impact the value of our common stock.
 
Provisions in our certificate of incorporation and bylaws, each as to be amended and restated in connection with this offering, may delay or prevent a change in control of our company or a change in management. These provisions will include the following:
 
  •      Our board of directors is classified with three-year terms for each class of directors, which could prevent our stockholders from replacing a majority of our board of directors at an annual meeting and discourage unsolicited stockholder proposals that may be in the best interest of stockholders;
 
  •      Our board of directors has the right to fill vacancies occurring on our board of directors as a result of an increase in the number of our directors or the resignation, death or removal of a director, which prevents our stockholders from being able to fill vacancies on our board of directors;
 
  •      Our stockholders may not act by written consent, which means that any stockholder or group of stockholders that controls a majority of our outstanding shares of common stock would not be able to take certain actions without holding a stockholders’ meeting;
 
  •      Stockholders must provide advance notice to nominate persons to serve as directors and to propose other actions to be taken at a stockholders’ meeting, which may discourage or deter a potential acquiror from attempting to solicit proxies to elect the acquiror’s own slate of directors or otherwise attempting to acquire control of our company; and
 
  •      Our board of directors may, without stockholder approval, issue authorized but unissued shares of our common stock or preferred stock, which could be used to impede an acquiror from obtaining control of our company.
 
In addition, as a Delaware corporation we are subject to Section 203 of the Delaware General Corporation Law, which imposes certain restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. Delaware law prohibits a publicly held corporation from engaging in a “business combination” with an “interested stockholder” for three years after the stockholder becomes an interested stockholder, unless the corporation’s board of directors and stockholders approve the business combination in a prescribed manner. These provisions could make it difficult for a third party to acquire us, or for members of our board of directors to be replaced, even if doing so would be beneficial to our stockholders. Any delay or prevention of a change in control transaction or changes in our board of directors or management could deter potential acquirers or prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then current market price for their shares.
 
We do not currently intend to pay dividends on our common stock in the foreseeable future.
 
We currently intend to retain our future earnings to fund the development and growth of our business. It is uncertain when, if ever, we will pay dividends to our stockholders. Our senior secured credit facilities prohibit us from paying dividends, and future debt agreements may contain similar prohibitions. In addition, our principal assets are equity interests in our subsidiaries, and we would have to rely on distributions from these subsidiaries if we were to pay any dividends to our stockholders. You should not invest in our common stock if you require or expect dividend income. For the foreseeable future, we expect that the only return on an investment in us, if any, would come from the capital appreciation of our common stock.


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FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements that reflect our views about future events and financial performance. Forward-looking statements typically are identified by words such as “may,” “will,” “should,” “anticipate,” “estimate,” “expect,” “plan,” “believe,” “predict,” “potential,” “intend,” “continue” and similar expressions, although some forward-looking statements are expressed differently. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors, including those set forth in “Risk Factors,” that could cause actual results to differ materially from those projected. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this prospectus. You should consider carefully the statements under “Risk Factors” and in other sections of this prospectus, which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements. The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made, and we undertake no ongoing obligation to update these statements.


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THE RECAPITALIZATION
 
Since May 2000, Holdings has owned all of our outstanding capital stock. Until the Recapitalization, private equity funds managed by Pegasus Investors, L.P. (Pegasus) owned a majority of the outstanding equity of Holdings, and our management and employees owned substantially all of the remaining equity of Holdings. On October 27, 2005, Parthenon HoldCo acquired a controlling interest in Holdings in a series of transactions that we refer to as the Recapitalization. In connection with the Recapitalization:
 
  •      We repaid in full all amounts outstanding under our prior credit facilities with the proceeds from a new first lien credit facility and second lien credit facility with aggregate principal amounts of $123.0 million and $48.0 million, respectively (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Senior Secured Credit Facilities” for more information regarding the terms of these two credit facilities);
 
  •      Holdings redeemed a portion of its outstanding equity in exchange for shares of our common stock, and we then redeemed these shares for approximately $32.6 million with existing cash resources and a portion of the proceeds from our new credit facilities;
 
  •      Parthenon HoldCo acquired a majority equity interest in Holdings from a group consisting of Pegasus and other equity holders who elected to exercise their “tag-along” right to participate in the sale, as permitted under Holdings’ operating agreement;
 
  •      Parthenon HoldCo acquired an additional equity interest in Holdings directly from Holdings for approximately $11.6 million, and Holdings used that cash to acquire additional equity in AmWINS; and
 
  •      All members of our senior management team and a substantial majority of our other employees who owned an interest in Holdings agreed to retain their interests in Holdings as opposed to exercising their tag-along right to participate in the sale to Parthenon HoldCo.
 
Immediately following the Recapitalization, Parthenon HoldCo owned approximately 70% of the outstanding equity of Holdings, and members of our senior management and our employees owned substantially all of the remaining 30% of our outstanding equity. To account for the Recapitalization, we have applied push-down accounting, as required by SAB No. 54 and EITF D-97. Under the requirements of SAB No. 54, we increased the fair value of our net assets by approximately $84.1 million, or $76.5 million after tax, at October 27, 2005. Our basis of accounting following the Recapitalization differs from that prior to the Recapitalization, which affects the comparability of our financial data. Therefore, our financial information for periods prior to the Recapitalization is not directly comparable to the financial information for periods following the Recapitalization.
 
In connection with the Recapitalization, we entered into an advisory services agreement with PCap, L.P. (PCap), an affiliate of Parthenon Capital. Under this agreement, PCap received a transaction fee of $2,407,500 plus fees and expenses incurred in connection with the closing of the Recapitalization. PCap is also entitled to an annual management fee of approximately $800,000 and transaction fees in connection with each acquisition, divestiture, financing, refinancing, merger, recapitalization or other similar transaction by AmWINS or its affiliates in an amount equal to 0.75% of the aggregate gross value of the transaction. To date, we have not been required to pay PCap any of these additional transaction fees. We have agreed in principle to amend the advisory services agreement with PCap such that PCap will receive a fee of the lesser of $2,000,000 or 2.0% of the aggregate gross proceeds to AmWINS from this offering. This fee is included in our offering costs. Approximately 60% of this fee is payable upon completion of this offering, with the remainder payable at the end of 2007. We have also agreed in principle to pay PCap a director services fee of $50,000 per quarter so long as a Parthenon Capital-affiliated director serves on our board, subject to a maximum fee of $400,000. We are required to reimburse PCap for its out-of-pocket expenses in connection with the provision of services under the advisory services agreement. The agreement, as proposed to be amended, will terminate as a result of this offering, subject to our obligation to pay the amounts payable prior to termination and the director services fee described above.


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In connection with the Recapitalization, we entered into a registration agreement with Holdings and Parthenon HoldCo. Pursuant to the terms of the agreement, the holders of a majority of the shares owned by Holdings and Parthenon HoldCo may from time to time request us to register all or any portion of their shares of our common stock for sale under the Securities Act. Parthenon HoldCo and Holdings may also participate and sell all or any portion of their shares of our common stock in any registered offering that we initiate under the Securities Act, subject to certain exceptions. In connection with these offerings, we have agreed to pay all fees and expenses of the offering (excluding underwriting discounts and commissions attributable to shares sold by Parthenon HoldCo or Holdings), including the fees and expenses of one counsel retained by Holdings and Parthenon HoldCo. For more information about the registration agreement, see “Shares Eligible for Future Sale — Registration Agreement.”
 
As part of the Recapitalization, Holdings implemented an equity incentive plan for selected members of management of AmWINS. Awards under the plan consist of “profits-only” equity interests in Holdings that entitle their holders to participate in distributions from Holdings on a pro rata basis if and when Parthenon HoldCo has realized specified rates of return on its investment in Holdings. There are four classes of equity incentive interests under the plan, and these classes participate in distributions from Holdings on a pro rata basis if and to the extent Parthenon HoldCo has realized a designated internal rate of return on its investment in Holdings. In general, 20% of these units vested on October 27, 2006, with the remainder vesting ratably over a four-year period.
 
Prior to this offering, Holdings owned all of the outstanding shares of our common stock. In connection with this offering, Holdings will distribute approximately     % of the outstanding shares of our common stock to its members (other than the holders of the incentive equity, as described in the preceding paragraph) in proportion to their relative interests. Holdings will continue to own the remaining shares of our common stock until Holdings is able to determine the amount of distributions payable to the holders of the incentive equity.
 
For additional information regarding the Recapitalization and related transactions and agreements described above, see “Related Party Transactions” and “Management — Holdings Equity Compensation Arrangements.”


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USE OF PROCEEDS
 
We estimate that we will receive net proceeds of approximately $      million from the sale of shares of our common stock in this offering. This estimate is based upon an assumed initial public offering price of $   per share (the mid-point of the price range set forth on the cover page of this prospectus), and after deducting estimated underwriting discounts and commissions and offering costs payable by us. If the underwriters exercise their overallotment option in full, we estimate that our net proceeds will be approximately $      million.
 
We intend to use approximately $      million of the net proceeds from this offering to repay up to $      million of the amounts outstanding under our first lien credit facility and all amounts outstanding under our second lien credit facility. At December 31, 2006, approximately $118.8 million of debt was outstanding under our first lien credit facility, and approximately $48.0 million of debt was outstanding under our second lien credit facility. The indebtedness under our first lien credit facility bears interest at LIBOR plus 275 to 350 basis points, depending on our financial ratios. As of December 31, 2006, we were paying an interest rate of approximately 8.35% to 8.38% under this facility. The indebtedness under our second lien credit facility bears interest at LIBOR plus 750 basis points, which was 12.86% at December 31, 2006. Our effective rates of interest are lower than the stated interest rates because we have entered into an interest rate swap agreement, which has a total notional amount of $68.5 million. The interest rate swap causes us to pay interest at a fixed rate of 4.74% and receive interest at the three-month LIBOR each quarter through January 2009. Our first lien credit facility consists of a $123.0 million term loan facility and a $25.0 million revolving line of credit that mature on October 27, 2011. The first lien term loan amortizes in quarterly installments of $307,500. Our second lien credit facility is structured as a $48.0 million term loan, which is payable in full on April 27, 2012. We entered into and borrowed a total of $171.0 million under these two credit facilities in connection with the Recapitalization. See “The Recapitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Senior Secured Credit Facilities.”
 
We intend to use the remaining net proceeds to us from this offering for working capital and general corporate purposes, including possible acquisitions. We have entered into a non-binding letter of intent to acquire a small MGU business for initial consideration of approximately $6.0 million, of which $3.0 million would be paid in cash, plus earn-out consideration payable in cash over the five-year period after closing in an amount equal to 40% of the amount by which the acquired business generates cash flow in excess of an agreed-upon amount. We currently have no other agreements or commitments with respect to any acquisitions. Pending such uses, we plan to invest the net proceeds in short-term, investment-grade securities.
 
We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.
 
DIVIDEND POLICY
 
We have never declared or paid dividends on our capital stock and do not expect to pay dividends in the foreseeable future. We anticipate that we will retain future earnings, if any, to support our operations and to finance the growth and development of our business. Covenants in our senior secured credit facilities currently prohibit us from paying dividends to holders of our capital stock. In addition, because we are a holding company whose primary assets are the equity interests in our subsidiaries, our ability to pay dividends to our stockholders in the future will depend upon the receipt of distributions from our subsidiaries and their receipt of distributions from their subsidiaries. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, earnings, cash needs, growth plans, legal and contractual requirements and other factors that our board of directors deems relevant.


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CAPITALIZATION
 
The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2006 on:
 
  •      an actual basis; and
 
  •      as adjusted to reflect:
 
  •      the sale of           shares of our common stock in this offering at an assumed initial public offering price of $      per share (the mid-point of the price range set forth on the cover page of this prospectus); and
 
  •      the application of the estimated net proceeds from this offering as described under “Use of Proceeds.”
 
You should read this table together with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock” and our consolidated financial statements and related notes included elsewhere in this prospectus.
 
                 
    As of
 
    December 31, 2006  
    Actual     As Adjusted  
    (in thousands)  
 
Cash and cash equivalents
  $ 21,872          
                 
Outstanding debt:
               
First lien credit facility
  $ 118,826          
Second lien credit facility
    48,000          
Other debt
    471          
                 
Total debt
    167,297          
                 
Stockholders’ equity:
               
Preferred Stock, $      par value;           shares authorized; no shares issued and outstanding
             
Common Stock, $0.01 par value; 15,000,000 shares authorized; 11,864,858 shares issued and outstanding, actual;           shares issued and outstanding, as adjusted
    118          
Additional paid-in capital
    147,721          
Retained earnings
    12,954          
Accumulated other comprehensive income
    288          
                 
Total stockholders’ equity
    161,081          
                 
Total capitalization
  $ 328,378          
                 
 
The above table does not include:
 
  •                 shares of common stock issuable upon the exercise of warrants issued to Holdings during 2006 with a weighted average exercise price of $      per share;
 
  •                 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2006 with a weighted average exercise price of $      per share; and
 
  •      any additional shares of our common stock that we may issue in the future to comply with our agreements to pay additional contingent purchase price in connection with certain business acquisitions. For more information about these agreements, refer to the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Commitments and Contingencies — Contingent Purchase Price for Acquisitions.”


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DILUTION
 
If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the adjusted net tangible book value per share of common stock upon completion of this offering.
 
Our net tangible book value as of December 31, 2006 was approximately $      million, or $      per share of our common stock. Net tangible book value represents the amount of our total tangible assets minus our total liabilities, divided by the           shares of our common stock that were outstanding on December 31, 2006. Tangible assets represent total assets excluding goodwill and other intangible assets. After giving effect to the sale by us of           shares of our common stock in this offering at an assumed initial public offering price of $      per share (the mid-point of the price range set forth on the cover page of this prospectus) after deducting estimated underwriting discounts and commissions and offering costs, and the application of our estimated net proceeds therefrom as set forth in “Use of Proceeds,” our net tangible book value on December 31, 2006 would have been approximately $      million, or $      per share. This represents an immediate increase in net tangible book value of $      per share to our existing stockholders and an immediate dilution of $      per share to new investors purchasing shares of our common stock in this offering at the assumed initial public offering price. The following table shows this immediate per share dilution:
 
                 
Assumed initial public offering price per share
  $              
Historical net tangible book value per share as of December 31, 2006
  $            
Increase per share attributable to new investors
  $            
                 
As adjusted net tangible book value per share after this offering
          $      
                 
Dilution per share to new investors
          $    
                 
 
The following table summarizes, as of December 31, 2006, the differences between the average price per share paid by our existing stockholders and by new investors purchasing shares of common stock in this offering at an assumed initial public offering price of $      per share, before deducting estimated underwriting discounts and commissions and offering costs payable by us:
 
                                         
    Shares Purchased     Total Consideration     Average Price
 
    Number     Percent     Amount     Percent     per Share  
 
Existing stockholders
                %   $             %   $     
New investors
                                       
                                         
Total
                                       
                                         
 
The discussion and tables above are based on the number of shares of common stock outstanding as of December 31, 2006. The discussion and tables do not include the following shares:
 
  •                 shares of common stock that may be issued pursuant to the underwriters’ overallotment option;
 
  •                 shares of common stock issuable upon the exercise of warrants issued to Holdings during 2006 with a weighted average exercise price of $      per share;
 
  •                 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2006 with a weighted average exercise price of $      per share; and
 
  •      additional shares of our common stock that we may issue in the future to comply with our agreements to pay additional contingent purchase price in connection with certain business acquisitions. For more information about these agreements, refer to the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Commitments and Contingencies — Contingent Purchase Price for Acquisitions.”
 
To the extent any such shares of common stock are issued, new investors may experience further dilution.


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SELECTED CONSOLIDATED FINANCIAL DATA
 
The following table sets forth:
 
  •      our statement of operations data for:
 
  •      the years ended December 31, 2002, 2003 and 2004;
 
  •      the period from January 1, 2005 to October 27, 2005, the date of the Recapitalization, and the period from October 28, 2005 to December 31, 2005; and
 
  •      the year ended December 31, 2006; and
 
  •      our balance sheet data as of December 31, 2002, 2003, 2004, 2005 and 2006.
 
You should read the following selected consolidated financial data in conjunction with our audited and unaudited consolidated financial statements, including the notes to the financial statements, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “The Recapitalization” included elsewhere in this prospectus. In the table below and throughout this prospectus, we refer to AmWINS as our “Predecessor” for all periods prior to October 27, 2005, the date of the Recapitalization, and as our “Successor” for all periods following the Recapitalization. As a result of the Recapitalization, we have applied push-down accounting, as required by SAB No. 54 and EITF D-97, which resulted in a write-up in the fair value of our net assets by approximately $84.1 million, or $76.5 million after tax, at October 27, 2005. As a result, our basis of accounting following the Recapitalization differs from that prior to the Recapitalization, which affects the comparability of our financial data. In addition, since 2001, we have acquired a significant number of businesses. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Acquisitions and Dispositions.” As a result of these acquisitions and the Recapitalization, our financial information for the periods shown below may not be directly comparable.
 
We derived the following statement of operations data for the year ended December 31, 2004, the period from January 1, 2005 to October 27, 2005, the period from October 28, 2005 to December 31, 2005, and the year ended December 31, 2006, as well as the balance sheet data at December 31, 2005 and December 31, 2006, from our audited consolidated financial statements appearing elsewhere in this prospectus. We derived the following statement of operations data for the year ended December 31, 2003 and the balance sheet data at December 31, 2004 from our audited consolidated financial statements that are not included in this prospectus. We derived the following statement of operations data for the year ended December 31, 2002 and the balance sheet data at December 31, 2002 and 2003 from our unaudited consolidated financial statements that are not included in this prospectus.
 


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                  For the
       
          For the
      Period from
       
          Period Ended
      October 28 to
    Year Ended
 
    Years Ended December 31,     October 27,       December 31,     December 31,  
    2002     2003     2004     2005       2005     2006  
    Predecessor       Successor  
    (in thousands, except per share data)  
Statement of Operations Data:(a)
                                                 
Commissions and fees
  $ 36,160     $ 57,681     $ 83,452     $ 110,791       $ 29,722     $ 178,634  
Other income
    (652 )     503       1,152       850         906       6,651  
                                                   
Total revenues
    35,508       58,184       84,604       111,641         30,628       185,285  
Employee compensation and benefits (including non-cash equity compensation of $1,003 for the year ended December 31, 2006)(b)
    21,163       37,594       52,523       66,412         17,388       108,769  
Other operating expenses
    7,851       13,421       16,588       19,431         5,498       34,785  
Depreciation
    1,318       1,256       1,475       1,855         536       3,622  
Amortization
    1,261       2,068       3,873       5,716         636       4,809  
                                                   
Total operating expenses
    31,593       54,339       74,459       93,414         24,058       151,985  
                                                   
Operating (loss) income
    3,915       3,845       10,145       18,227         6,570       33,300  
Interest expense
    290       288       2,498       8,516         2,949       17,151  
Loss on extinguishment of debt(c)
                994       9,799                
Non-operating income
                                    (3,495 )
                                                   
(Loss) income before income taxes and minority interest and discontinued operations
    3,625       3,557       6,653       (88 )       3,621       19,644  
Minority interest
    (153 )     (258 )     (67 )                    
Income tax (benefit) expense
    (4,380 )     406       2,930       772         1,503       8,808  
                                                   
(Loss) income from continuing operations
    8,158       3,409       3,790       (860 )       2,118       10,836  
Income from discontinued operations, net of minority interest and income taxes
    866       812       578                      
Loss on sale of discontinued operations(d)
                (67 )                    
                                                   
Net (loss) income
  $ 9,024     $ 4,221     $ 4,301     $ (860 )     $ 2,118     $ 10,836  
                                                   
(Loss) income from continuing operations per share:
                                                 
Basic
  $       $       $       $         $       $    
Diluted
  $       $       $       $         $       $    
Income from discontinued operations per share:
                                                 
Basic
  $       $       $       $         $       $    
Diluted
  $       $       $       $         $       $    
Loss on sale of discontinued operations per share:
                                                 
Basic
  $       $       $       $         $       $    
Diluted
  $       $       $       $         $       $    
(Loss) income per share:
                                                 
Basic
  $       $       $       $         $       $    
Diluted
  $       $       $       $         $       $    
Weighted average shares:
                                                 
Basic
                                                 
Diluted
                                                 
 
                                           
    As of December 31,       As of December 31,  
    2002     2003     2004       2005     2006  
    Predecessor       Successor  
    (in thousands)  
Balance Sheet Data:
                                         
Cash and cash equivalents
  $ 8,626     $ 9,539     $ 10,055       $ 19,151     $ 21,872  
Goodwill
    29,806       39,100       82,102         243,409       256,436  
Other identifiable intangible assets, net
    13,294       13,229       26,904         42,292       39,603  
Total assets
    188,838       212,609       267,185         622,495       648,534  
Total debt
    3,406       5,850       37,895         171,299       167,297  
Stockholder’s equity
    50,722       62,450       79,680         144,081       161,081  
 
(a) See “Management’s Discussion and Analysis of Financial Position and Results of Operations — Acquisitions and Dispositions,” for information regarding our acquisitions and dispositions during these periods, which affect the comparability of our financial data for these periods.
 
(b) We adopted the provisions of SFAS No. 123(R) as of January 1, 2006, which resulted in the recognition of equity compensation expense for the year ended December 31, 2006. See Note 11 to our 2006 consolidated financial statements for the pro forma effect of recording this expense in periods prior to the adoption of SFAS No. 123(R).
 
(c) Reflects the write-off of unamortized financing fees and expenses and associated prepayment fees related to the refinancing of previous credit facilities.
 
(d) In November 2004, we sold our premium finance business. The results of operations of this business are segregated and reported as discontinued operations for the years ended December 31, 2002, 2003 and 2004.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
You should read the following discussion together with our consolidated financial statements and the related notes and other financial information included elsewhere in this prospectus. This discussion includes forward-looking statements that involve risks and uncertainties which may cause our actual results to differ materially from those anticipated in these forward-looking statements. For more information about these risks and uncertainties, refer to “Forward-Looking Statements” and “Risk Factors.”
 
Overview
 
We are a leading wholesale distributor of specialty insurance products and services. We operate our business through three divisions, as follows:
 
  •      Property & Casualty Brokerage.  Our Property & Casualty Brokerage division distributes property and casualty insurance products through our retail insurance brokerage clients.
 
  •      Specialty Underwriting.  Our Specialty Underwriting division operates our MGU programs. As an MGU, we have contractual authority from various insurance carriers to underwrite, bind, issue and administer insurance policies on their behalf. This division also distributes its products through our retail insurance brokerage clients.
 
  •      Group Benefits.  Our Group Benefits division distributes group benefit insurance products through retail insurance brokerage clients and provides related administrative services.
 
The Recapitalization
 
On October 27, 2005, we completed the transactions described in “The Recapitalization.” As a result of the Recapitalization, we have applied push-down accounting, as required by SAB No. 54 and EITF D-97, which resulted in a write-up in the fair value of our net assets by approximately $84.1 million, or $76.5 million after tax, at October 27, 2005. For more information regarding the accounting treatment of the Recapitalization, refer to “The Recapitalization” and Note 1 to our 2006 consolidated financial statements included elsewhere in this prospectus.
 
As a result of the Recapitalization, our basis of accounting following the Recapitalization differs from that prior to the Recapitalization. Therefore, our financial data with respect to periods prior to the Recapitalization may not be comparable to the data for the periods subsequent to the Recapitalization. For purposes of the following discussion of our financial results, we have shown our 2005 historical operating results on a combined basis by adding, for each item of income or expense addressed, our pre-Recapitalization results to our post-Recapitalization results. Although it is generally not permissible under generally acceptable accounting principles to combine pre-Recapitalization and post-Recapitalization periods for purposes of our audited financial statements, we believe that this approach provides the most meaningful basis of comparison for purposes of our full-year 2005 operating results and is consistent with how management evaluates our 2005 operating results in comparison to other periods.


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Our results of operations for the years ended December 31, 2004, 2005 and 2006 were as follows:
 
                         
    Year Ended December 31,  
    2004     2005*     2006  
    (in thousands)  
 
Revenues
                       
Commissions and fees
  $ 83,452     $ 140,513     $ 178,634  
Other income
    1,152       1,756       6,651  
                         
Total revenues
    84,604       142,269       185,285  
                         
Expenses
                       
Employee compensation and benefits (includes non-cash equity compensation of $1,003 for 2006)
    52,523       83,800       108,769  
Other operating expense
    16,588       24,929       34,785  
Depreciation
    1,475       2,391       3,622  
Amortization
    3,873       6,352       4,809  
                         
Total operating expenses
    74,459       117,472       151,985  
                         
Operating income
    10,145       24,797       33,300  
Interest expense
    2,498       11,465       17,151  
Loss on extinguishment of debt
    994       9,799        
Non-operating income
                (3,495 )
                         
Income before income taxes and minority interest
    6,653       3,533       19,644  
Minority interest
    (67 )            
Income tax expense
    2,930       2,275       8,808  
                         
Income from continuing operations
    3,790       1,258       10,836  
Income from discontinued operations, net of minority interest and income taxes
    578              
Loss on sale of discontinued operations
    (67 )            
                         
Net income
  $ 4,301     $ 1,258     $ 10,836  
                         
 
Shown on a combined basis.


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Acquisitions and Dispositions
 
Acquisitions of businesses have been and will continue to be part of our growth strategy. We historically have used a combination of cash, seller notes and equity to pay the purchase price of our acquisitions. The following table summarizes our acquisition activity since January 1, 2004 and the allocation of the initial purchase price among these forms of consideration:
 
                                 
    Years Ended December 31,        
    2004     2005     2006        
    (in thousands, except number of acquisitions closed)        
 
Number of acquisitions closed
    2       1       2          
Consideration1:
                               
Cash
  $ 40,577     $ 103,131     $ 6,324          
Equity
    11,688             2,000          
Seller notes
    2,000                      
                                 
Total consideration
  $ 54,265     $ 103,131     $ 8,324          
                                 
 
(1) The table above includes transaction expenses, any cash acquired as part of the acquisitions and the effect of any working capital and related adjustments made when we completed these acquisitions. Not included in the table above are any amounts paid or payable by us as additional purchase price based on the performance of the acquired businesses. As of December 31, 2006, we had paid additional consideration in the aggregate amount of $1.7 million, consisting of $0.7 million of equity and $1.0 million of cash, based on the performance of an acquisition that closed in 2004. We are required to pay an additional $5.4 million related to the 2006 performance of the same 2004 acquisition, which we expect to pay 75% in cash and 25% in shares of our stock. The aggregate amount that we could be required to pay as additional purchase price for this acquired business through the end of the contract period on December 31, 2008 is not limited. In addition, during 2006 we paid $0.2 million in cash and are required to pay an additional $0.4 million in cash based on the 2006 performance of one of the businesses we acquired in 2006. We may also be required to pay up to $7.0 million and $2.7 million to the former owners of two businesses we acquired in 2006 through the end of their contract periods on April 21, 2008 and September 9, 2009, respectively.
 
We have structured a number of our acquisitions to provide for contingent purchase price payments that depend upon the business reaching specified financial targets in the future (commonly referred to as earnouts). See “— Commitments and Contingencies —  Contingent Purchase Price for Acquisitions.” We generally pay this contingent purchase price in a combination of cash and equity and account for these payments as an increase to the purchase price of the business acquired. We may use this structure for any acquisitions we complete in the future.
 
During 2006, we acquired Communitas and the policy administration division of CBCA Administrators, Inc. (CBCA), two businesses based in Texas, to expand the products and services we provide through our Group Benefits division. Communitas provides group benefit claims administration services, which we historically had not provided. The business we acquired from CBCA provides several unique administrative services for insurance company clients as well as premium administration services for associations that are similar to certain existing services provided by our Group Benefits division. Additionally in December 2006, we completed the sale of certain assets of our Specialty Underwriting division to a start-up insurance company. We received total consideration of approximately $3.7 million and recorded a gain of approximately $3.5 million.
 
In April 2005, we acquired Stewart Smith Group from Willis for $100.0 million. This acquisition is our largest acquisition to date. Stewart Smith Group operated Willis’ property and casualty wholesale brokerage operation. By acquiring Stewart Smith Group, we expanded our geographic presence, added a significant number of new brokers and gained a significant business relationship with Willis. For more information about Stewart Smith Group, see the audited combined financial statements of Stewart Smith Group included elsewhere in this prospectus.


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In 2004, we:
 
  •      acquired The Quaker Agency of the South, Inc. (Quaker), a property and casualty wholesale insurance brokerage business based in Charlotte, North Carolina;
 
  •      acquired Property Risk Services LLC (PRS), a wholesale insurance brokerage firm based in New Jersey that specializes in the placement of large complex property accounts; and
 
  •      sold Capitol Payment Plan, Inc., a premium finance business.
 
In December 2006, we entered into a non-binding letter of intent to acquire a small MGU business for initial consideration of $6.0 million, of which $3.0 million would be payable in cash and $3.0 million would be paid in shares of our stock. In addition, the letter of intent contemplates that we would also pay earn-out consideration over the five year period following closing equal to 40% of the amount by which the acquired business generates EBITDA above an agreed-upon threshold. We currently are in the process of performing our due diligence review of the business.
 
Although we believe that we will continue to have opportunities to complete acquisitions in the future, there can be no assurance that we will be successful in identifying and completing additional acquisitions. Acquisitions involving a purchase price paid at closing in excess of $15.0 million for each acquisition, or $50.0 million in the aggregate for all acquisitions, require approval of the lenders under our senior secured credit facilities. Any change in our financial results, financial condition or markets could affect our ability to identify and complete acquisitions.
 
As a result of our acquisitions, our results for the periods discussed below and shown in “Selected Consolidated Financial Data” may not be directly comparable. The financial statements of Stewart Smith Group have been included in this prospectus pursuant to the requirements of Rule 3-05 of Regulation S-X.
 
Revenues
 
The following table sets forth revenues for each of our divisions, expressed as a percentage of total revenues for the periods indicated:
 
                         
    Years Ended December 31,  
    2004     2005*     2006  
 
Property & Casualty Brokerage
    57.3 %     72.0 %     70.3 %
Specialty Underwriting
    23.3 %     13.8 %     9.4 %
Group Benefits
    18.8 %     13.8 %     20.2 %
Other(a)
    0.6 %     0.4 %     0.1 %
                         
Total
    100 %     100 %     100 %
                         
Shown on a combined basis.
 
(a) Reflects revenues not generated by our reportable segments.
 
Commissions and Fees.  Our commissions and fees consist of commissions paid by insurance companies and fees paid for services we provide, net of the portion of the commissions and fees we pay to retail insurance brokers. For certain placements, we also charge additional fees that are billed to our retail insurance brokerage clients. The commissions we receive from insurance carriers typically are calculated as a percentage of the premiums paid for the insurance products we distribute. For property and casualty products, we typically earn our commissions on the later of the effective date of the policy or the date coverage is bound. For group benefits products and services, we typically earn our commissions and administrative fees monthly based on eligible enrollment for each plan. We pay our retail insurance brokerage clients a portion of the gross commissions we receive from insurance carriers for placing all types of insurance. Insurance carriers often pay a greater commission rate to wholesale insurance brokers than to retail insurance brokers. Thus, we frequently are able to pay our retail insurance broker clients the same commission rates they would receive if they placed the business directly with an insurance carrier.


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Commission revenues are generally calculated as a percentage of the premiums paid for a policy and are affected by fluctuations in the amount of premium charged by insurance carriers. These premiums fluctuate based on, among other factors, the amount of capital available in the insurance marketplace, the type of risk being insured, the nature of the insured party, and the terms of the insurance purchased. If premiums increase or decrease, our revenues typically move in a corresponding fashion. In a declining premium rate environment, the resulting decline in our revenue may be offset, in whole or in part, by an increase by insurance carriers of their commission rates and the fact that insured parties may use the savings generated by the reduction in premium rates to purchase greater coverage. In an increasing pricing environment, the resulting increase in our revenue may be offset, in whole or in part, by a decrease by insurance carriers of their commission rates and the fact that insured parties may determine to reduce the amount of coverage they purchase.
 
The market for property and casualty insurance products is cyclical from a capacity and pricing perspective. In 2001, capital available to underwrite property and casualty insurance contracted significantly, primarily due to realized underwriting losses from earlier years, lower returns on investments and the effect of the September 11, 2001 terrorist attacks, which resulted in increasing premium rates. We refer to a period of reduced capacity and rising premium rates as a “hard” market. During 2004, we began to see an increase in underwriting capacity for property insurance products, which resulted in declining premium rates for most lines of property insurance that we place. We refer to a period of increased capacity for insurance and decreasing premium rates as a “soft” market. Although this trend continued well into 2005, the consequences of Hurricanes Katrina, Rita and Wilma significantly reduced capacity and increased prices within the property market, which accelerated in 2006 primarily as a result of increased reinsurance costs for primary insurance carriers. We believe that during the latter part of 2006 and continuing into 2007, additional capacity entered the property market, which should make property catastrophe coverage more affordable than it was during 2006. Additionally, recent legislative developments in Florida have reduced the cost and increased the limits of reinsurance available to insurance carriers through the Florida Hurricane Catastrophe Fund and are expected to add even more capacity to the overall property catastrophe market. Pricing for casualty insurance that we place generally has not experienced the recent volatility affecting the property market, and we have generally encountered declining rates for casualty insurance throughout 2006 and continuing into 2007.
 
The market for group benefit insurance is dominated by health insurance products. Premium rates in the health insurance industry have increased steadily in recent years due to increasing health care costs, offset slightly by declining employment levels. According to the Employee Benefit Research Institute, total spending on employee benefits, excluding retirement savings benefits, grew from an estimated $446.8 billion in 1999 to an estimated $686.1 billion in 2004, accounting for approximately 10.3% of employers’ total spending on compensation in 2005. A substantial part of our Group Benefits revenues is derived from retiree medical and prescription drug plans, reflecting a trend by employers to reduce or eliminate the cost of providing health benefits to retired employees. The retiree medical and prescription drug plans that we distribute and administer often allow companies and governmental entities to reduce or eliminate this benefit while providing their retirees with an alternative insured plan at attractive group rates.
 
Gross commission rates for the property and casualty insurance products that we distribute, whether acting as a wholesale broker or as an MGU, generally range from 10% to 25% of the annual premium for the policy. Commissions for our Property & Casualty Brokerage business, net of commissions paid to retail insurance brokers, typically range from 4% to 12%, and net commissions for our Specialty Underwriting business generally range from 7% to 12%. Gross commission rates for the group benefit insurance products that we distribute generally range from 2% to 15% of the annual premium for the policy, and our net commissions from these products usually range from 1% to 10% of the gross premium.
 
Our revenues fluctuate seasonally based on policy renewal dates in our Property & Casualty Brokerage and Specialty Underwriting divisions. July and December are our largest revenue months due to the concentration of renewals on July 1st and December 31st. Accordingly, our revenues in the first two calendar quarters of any year historically have been lower than our revenues in the following two quarters. In addition, our quarterly revenues may be affected by new placements, cancellations or non-renewals of large property and casualty policies, because commission revenue is earned on the effective date as opposed to ratably over the year.


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Other Income.  We also generate additional revenues, which we classify as other income, from other commissions and fees. Other income includes profit-based contingent commissions earned by some of our MGU programs and a profit commission we receive from a related party reinsurance entity with respect to our Group Benefits prescription drug product. These profit commissions are based on the profitability of the business that we underwrite or broker on the insurance carrier’s behalf. Profit-based contingent commissions typically range from 1% to 5% of the annual premium and are generally paid within 75 to 180 days after year end. We record these commissions as other income when they are paid, unless we have the necessary information to calculate them during the period they are earned. We receive virtually no volume-based contingent commissions from insurance carriers. However, from time to time, we pay certain retail insurance brokerage clients additional commissions depending on the volume of business they do with us, and we account for these additional commissions as a reduction to other income in the periods the related revenue is earned from the placement of business for these retail insurance brokers. Other income also includes actuarial and consulting services provided by our corporate division and investment income that consists primarily of interest earned on premiums collected and held in a fiduciary capacity before being remitted to insurance carriers.
 
Expenses
 
Our most significant operating expenses relate to employee compensation, including bonuses and benefits, and other operating expenses, which consist primarily of rent, insurance, professional fees, technology costs, travel and entertainment and advertising. Bonus compensation for a majority of our brokers is based on a percentage of the revenues they generate, after deducting their base salary compensation. Bonuses for the remaining employees are discretionary based on an evaluation of their individual performance and the performance of their particular office as well as our entire firm. A substantial portion of our depreciation and amortization expense consists of amortization of definite-lived intangible assets, such as purchased customer accounts and noncompete agreements, which were acquired as part of our business acquisitions. We also have interest expense relating to our credit facilities and seller notes issued in our business acquisitions.
 
The following table sets forth these operating expenses as a percentage of revenue for the periods indicated:
 
                         
    Years Ended December 31,  
    2004     2005*     2006  
 
Total revenue
    100.0%       100.0%       100.0%  
Employee compensation and benefits
    62.1%       58.9%       58.7%  
Other operating expenses
    19.6%       17.5%       18.8%  
Depreciation and amortization
    6.3%       6.1%       4.6%  
Interest expense
    3.0%       8.1%       9.3%  
 
Shown on a combined basis.
 
Results of Operations
 
Overview
 
Our business has grown substantially since January 1, 2003. Revenues for the years ended December 31, 2003, 2004 and 2005 and 2006 have grown, period over period, by 63.9%, 45.4%, 68.2% and 30.2%, respectively. From 2003 to 2006, our operating income increased by $29.5 million, or 766%, from $3.8 million to $33.3 million. This growth was driven by both acquisitions and organic growth, as described in the next paragraph. Our organic revenue growth for the years ended December 31, 2003, 2004, 2005 and 2006 was 13.3%, 19.1%, 14.4% and 11.9% respectively.
 
Although we have acquired a number of businesses since January 1, 2004, we focus on our ability to generate organic revenue growth. We calculate organic revenue by comparing the change in our revenues,


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period over period, excluding revenues of businesses acquired during the first 12 months following the acquisition date. We include revenues from acquired businesses in the current period and base period beginning in the 13th month following the acquisition date, as both periods will fully reflect the revenues of the acquired business. The only exception we have made to our approach to calculating organic growth relates to our acquisition of Stewart Smith Group, which we acquired on April 13, 2005. We fully integrated Stewart Smith Group with our other Property & Casualty Brokerage businesses effective January 1, 2006, and we are unable to determine its stand-alone operating results after January 1, 2006. We have audited operating results for Stewart Smith Group for the entire 2005 year, and we have measured our organic growth for all periods in 2006 by comparing our 2006 results of operations to the comparable period in 2005 on a pro forma basis with the operating results of Stewart Smith Group included for all of 2005. With respect to the disposition of Capitol Payment Plan, Inc. (CPP), we have excluded the revenue of CPP in all years for purposes of calculating organic growth in all years presented. This approach is consistent with the presentation of CPP as discontinued operations in our consolidated financial statements.
 
Our Property & Casualty Brokerage division has generated a majority of our revenues since January 1, 2003, and its operating results include the effects of the industry cycles in the property and casualty market. Our Property & Casualty Brokerage business generally performs better in hard markets characterized by increasing premium rates, although our operating results depend also on market factors affecting the specific types of products we place. General market conditions for property and casualty insurance products have fluctuated over the last five years. Commencing in 2001, premium rates generally increased across all lines of property and casualty markets before stabilizing during late 2003 and declining in 2004 and 2005. Following the effects of the 2005 hurricane season, premium rates for property insurance began to increase substantially. We believe that during the latter part of 2006 and continuing into 2007, additional capacity entered the property market, which should make property catastrophe coverage more affordable than it was during 2006. Additionally, recent legislative developments in Florida have reduced the cost and increased the limits of reinsurance available to insurance carriers through the Florida Hurricane Catastrophe Fund and are expected to add even more capacity to the overall property catastrophe market. Pricing for casualty insurance that we place generally has not experienced the recent volatility affecting the property market, and we have generally encountered declining rates for casualty insurance throughout 2006 and continuing into 2007.
 
Unlike the property and casualty market, the market for group benefits, particularly group health products, has continued to experience rate increases over the past five years. We historically have experienced a high level of recurring revenues in our Group Benefits division, primarily because of the fact that employers who sponsor many of the health, retiree medical and retiree prescription drug plans we distribute have outsourced the administration of these plans to us, which makes it more difficult to change plans.
 
A number of factors relating to our acquisition growth affected our income from continuing operations from January 1, 2003 through December 31, 2006, including the effect of additional amortization of definite-lived intangible assets acquired as part of these acquisitions, the impact of additional debt we have incurred to finance certain of these acquisitions and the effect of refinancing our debt. Our amortization and interest expense increased, in the aggregate, from $2.4 million in 2003 to $22.0 million in 2006. Moreover, since January 1, 2003, we have refinanced our debt on three occasions: in February 2004 in connection with our acquisition of PRS, in April 2005 in connection with our acquisition of Stewart Smith Group and in October 2005 in connection with the Recapitalization. In 2005, we incurred a loss on the early extinguishment of debt of $9.8 million, compared to a similar charge of $1.0 million in 2004.
 
As a private company, we have incurred a substantial amount of debt to fund our acquisition growth as well as the repurchase of shares in connection with the Recapitalization. We intend to use a portion of the net proceeds from this offering to repay a substantial amount of the debt outstanding under our current credit facilities, thus reducing our interest cost going forward and substantially decreasing our debt-to-equity ratio. This repayment will result in a prepayment penalty of $0.5 million and a pro-rata write-off of unamortized debt issuance costs of approximately $1.1 million.


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Segment Operating Results
 
The following table reconciles segment information to our consolidated results and provides a summary of other key financial information for each segment. The “Other” revenues and “Other” segment income shown in the table below are not intended to equal “Other income” as reflected in the statement of operations included in our consolidated financial statements.
 
                                                 
    Year Ended December 31,                    
    2004     2005*     2006                    
    (in thousands)                    
 
Revenue
                                               
Property & Casualty Brokerage
  $ 48,476     $ 102,496     $ 130,305                          
Specialty Underwriting
    19,716       19,592       17,431                          
Group Benefits
    15,890       19,623       37,332                          
Other
    522       558       217                          
                                                 
Total
  $ 84,604     $ 142,269     $ 185,285                          
                                                 
                                                 
Segment income (loss)
                                               
Property & Casualty Brokerage
  $ 10,491     $ 31,856     $ 41,801                          
Specialty Underwriting
    4,762       3,865       2,933                          
Group Benefits
    5,624       7,718       11,023                          
Other
    (5,384 )     (9,899 )     (13,023 )                        
                                                 
Total
    15,493       33,540       42,734                          
                                                 
Non-cash equity compensation
                1,003                          
Depreciation
    1,475       2,391       3,622                          
Amortization
    3,873       6,352       4,809                          
Interest expense
    2,498       11,465       17,151                          
Loss on extinguishment of debt
    994       9,799                                
Non-operating income
                (3,495 )                        
                                                 
Total
    8,840       30,007       23,090                          
                                                 
Income before income taxes
  $ 6,653     $ 3,533     $ 19,644                          
                                                 
 
Shown on a combined basis.
 
We conduct our business through three divisions: (i) Property & Casualty Brokerage; (ii) Specialty Underwriting; and (iii) Group Benefits. We do not allocate certain revenues and costs to our operating divisions. These items primarily consist of corporate-related income and overhead expenses, which are reflected as “Other” in the table above, amortization, depreciation, interest income and expense and income taxes. We measure the profitability of our operating divisions without allocation of these expenses. We refer to this measure of profitability as segment income (loss). The variability of our segment operating margins is significantly affected by our revenues because a large component of our operating expenses is fixed. Our revenues are affected by many factors, including the prevailing commission rates, the cyclical nature of many of our markets, particularly the E&S lines market, and other economic factors that may affect our business. A significant portion of our segment expenses are fixed and therefore difficult to adjust in response to short-term revenue fluctuations. This fixed cost structure may benefit us as revenue grows. These fixed expenses consist of lease expenses under long-term office lease agreements, employee benefits expense and fixed compensation payable to our employees. Certain other segment expenses such as bonus compensation payable based on revenue generation, particularly in our Property & Casualty Brokerage division, are variable. For additional information regarding segment revenues and operating expenses, refer to Note 14 of our 2006 consolidated financial statements included elsewhere in this prospectus.


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Year Ended December 31, 2006 Compared with the Year Ended December 31, 2005
 
Revenues
 
Commissions and Fees.  Commissions and fees increased $38.1 million, or 27.1%, to $178.6 million in 2006 compared to 2005. Acquisitions accounted for approximately $25.4 million of the revenue growth, with the remaining $12.7 million generated from our existing businesses, resulting in an organic growth rate of approximately 9.0%. This organic growth was attributable primarily to growth in our Property & Casualty Brokerage and Group Benefits divisions.
 
The organic growth of approximately $13.4 million, or 11.5%, in our Property & Casualty Brokerage division was attributable to the hardening property market in the first part of 2006. In addition to significant rate increases, insurance carriers sharply reduced the limits of insurance they were willing to underwrite during this period. These market conditions required some insured parties to increase the number of insurance carriers participating in their insurance programs and pay substantially higher premiums, which has contributed to our organic growth.
 
Our Group Benefits division’s organic growth of $1.5 million, or 8.1%, for 2006 was driven primarily by new business from retiree medical and prescription drug insurance products. Our Specialty Underwriting division’s revenue declined by $2.3 million primarily due to a decline in revenue from our commercial trucking MGU program due to the termination of its primary underwriting contract in mid-2005 and a decline in revenues generated by our habitational (apartments and condominiums) MGU program in late 2006 due to significantly increased competition.
 
Other Income.  Other income increased $4.9 million to $6.7 million in 2006 compared to 2005. Other income primarily consists of investment income, profit commissions (net of contingent commissions due our retail brokerage clients) and miscellaneous other income. Investment income increased $2.9 million to $4.7 million in 2006 compared to 2005. The increase in investment income was primarily attributable to greater fiduciary cash balances as a result of the growth of our overall business and to increased interest rates earned on those balances. Profit commissions increased $3.1 to $5.5 million in 2006 compared to 2005 due primarily to an increase in the profit commissions earned on our prescription drug program in our Group Benefits division. The increase in other income was partially offset by an increase of $1.1 million in contingent commission expenses in 2006 related to a new healthcare group purchasing program.
 
Expenses
 
Employee Compensation and Benefits.  Employee compensation and benefits increased $25.0 million, or 29.8%, to $108.8 million in 2006 compared to 2005. The increase was primarily attributable to: (a) higher salaries of $16.8 million, or 32.3%; (b) an increase in bonus expense of $3.4 million, or 15.1%; and (c) an increase in benefit costs of $3.8 million, or 40.3%. These increases were primarily related to additional personnel associated with acquisitions and, to a lesser extent, costs associated with supporting the growth of our existing business. Employee compensation and benefits were also impacted by $1.0 million of expenses resulting from the adoption of SFAS No. 123(R) in 2006. SFAS No. 123(R) requires that compensation cost be recognized for all equity-based awards granted on or after January 1, 2006 and for all equity-based awards granted prior to January 1, 2006 that remain unvested as of that date. As a percentage of revenues, employee compensation and benefits were 58.7% for 2006 compared to 58.9% for 2005, reflecting an improvement in personnel efficiencies notwithstanding the expenses associated with the adoption of SFAS No. 123(R) in 2006.
 
Other Operating Expenses.  Other operating expenses increased $9.9 million, or 39.5%, to $34.8 million in 2006 compared to 2005. The increase was primarily attributable to (a) a $2.0 million, or 36.3%, increase in occupancy expenses; (b) a $1.8 million, or 41.1%, increase in travel and entertainment expenses; (c) a $0.9 million, or 57.0%, increase in professional fees; and (d) a $4.4 million, or 33.3%, increase in other miscellaneous expenses. These increases were primarily related to acquisitions and, to a lesser extent, costs associated with supporting the growth of our existing business. Other operating expenses were also impacted by a $0.9 million management fee paid to an affiliate of Parthenon Capital in 2006 compared to a $0.1 million fee paid in 2005. See “Related Party Transactions.” As a percentage of revenues, other operating


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expenses were 18.8% in 2006 compared to 17.5% for 2005. The increase was primarily due to the increase in the management fee and the acquisition of Communitas in April 2006. Communitas’s operating margins are generally lower than our other businesses, and it incurs a number of expenses from using third-party service providers as part of its administrative services. These expenses include printing costs, electronic claims transfer fees and outsourced data entry services, which totaled approximately $1.3 million for 2006.
 
Depreciation.  Depreciation increased $1.2 million, or 51.5%, to $3.6 million in 2006 compared to 2005. The increase in depreciation was primarily due to capital expenditures on new computers, leasehold improvements and software, as well as depreciation associated with assets of acquired businesses.
 
Amortization.  Amortization decreased $1.5 million, or 24.3%, to $4.8 million in 2006 compared to 2005. The decrease was due to an increase in the estimated useful lives of our definite-lived intangible assets resulting from the revaluation of our assets in connection with the Recapitalization.
 
Other
 
Interest Expense.  Interest expense increased $5.7 million, or 49.6%, to $17.2 million in 2006 compared to 2005. This increase was attributable to additional debt incurred in connection with our acquisition of Stewart Smith Group and the Recapitalization. In April 2005, we increased our debt by $114.8 million in connection with our acquisition of Stewart Smith Group (including transaction expenses and $8.2 million of working capital for general corporate purposes), and in October 2005 we increased our debt by an additional $21.6 million in connection with the Recapitalization. Additionally, as LIBOR increased, our average cost of borrowing was higher in 2006 compared to 2005, which contributed to the increase in interest expense.
 
Loss on Extinguishment of Debt.  In 2005, we incurred $9.8 million of expenses for the write-off of unamortized financing fees and expenses and related prepayment fees in connection with refinancing our prior credit facilities. We refinanced our credit facilities in connection with our acquisition of Stewart Smith Group and again in connection with the Recapitalization. There was no comparable write-off in 2006.
 
Non-operating Income.  In December 2006, we recognized a $3.5 million gain on the sale of certain assets of our Specialty Underwriting division to a reinsurance company. There was no comparable transaction in 2005.
 
Income Taxes.  Income taxes increased $6.5 million, or 287.2%, to $8.8 million in 2006 compared to 2005. The increase in income tax expense was due primarily to higher income before income taxes, partially offset by a decrease in our effective tax rate to 44.8% in 2006 from 64.4% in 2005. The effective tax rate differs from the federal statutory rate of 35% primarily because of certain expenses that are not deductible for tax purposes, as well as the effects of state taxes, which vary significantly by state. The effect of these items was magnified in 2005 by the lower levels of pre-tax income.
 
Year Ended December 31, 2005 Compared with the Year Ended December 31, 2004
 
Revenues
 
Commissions and Fees.  Commissions and fees increased $57.1 million, or 68.4%, to $140.5 million in 2005 compared to 2004. This growth was due primarily to the acquisition of Stewart Smith Group in April 2005, the acquisition of Quaker in December 2004 and organic growth of our existing businesses. Acquisitions accounted for $45.4 million of the revenue growth, with the remaining $11.7 million generated from our existing businesses, resulting in an organic growth rate of 14.0%.
 
The organic growth was driven by our Property & Casualty Brokerage and Group Benefits divisions. The organic growth of $8.2 million, or 16.7%, from our Property & Casualty Brokerage division was due primarily to revenue growth from four new offices opened during 2004, as well as the hiring of new brokers. This growth was generated despite a property market that was softening during the first eight months of 2005 prior to Hurricanes Katrina, Rita and Wilma, which generated over $56 billion in insured property losses for the insurance industry, according to the Insurance Information Institute.


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Our Group Benefits division generated organic growth of $3.7 million, or 24.2%, in 2005. This growth was attributable primarily to the continued growth of retiree medical and prescription drug insurance products and related pharmacy benefit management services we began providing during 2004.
 
Other Income.  Other income increased $0.6 million, or 52.4%, to $1.8 million in 2005 compared to 2004. Investment income increased $1.2 million to $1.8 million in 2005 compared to 2004. The increase in investment income was primarily attributable to greater premium cash balances as a result of our acquisitions of Stewart Smith Group and Quaker in April 2005 and December 2004, respectively. Profit commissions increased $1.1 million to $2.5 million in 2005 compared to 2004 due to profit commissions earned on our prescription drug program in our Group Benefits division. The increase in other income was partially offset by an increase of $0.7 million in contingent commission expenses related to our acquisition of Stewart Smith Group and arrangements in place with its retail brokerage clients. Miscellaneous other income decreased $1.2 million, of which $0.5 million relates to the restructuring of our pharmacy benefit management program.
 
Expenses
 
Employee Compensation and Benefits.  Employee compensation and benefits increased $31.3 million, or 59.5%, to $83.8 million in 2005 compared to 2004. The increase was attributable to (a) higher salaries of $17.7 million, or 51.5%; (b) an increase in bonus expense of $10.4 million, or 86.8%; and (c) an increase in benefit costs of $3.2 million, or 51.6%. These increases were primarily related to additional personnel associated with acquisitions and, to a lesser extent, costs associated with supporting the growth of our existing business. As a percentage of revenues, employee compensation and benefits were 58.9% in 2005 compared to 62.1% in 2004. This decrease primarily reflects that many of our employee compensation and benefit expenses are fixed and did not increase in proportion to revenue increases. Additionally, the increased productivity of many brokers hired during 2004 contributed to the reduction in employee compensation and benefits as a percentage of net revenue.
 
Other Operating Expenses.  Other operating expenses increased $8.3 million, or 50.3%, to $24.9 million in 2005 compared to 2004. The increase was attributable to: (a) a $2.2 million, or 67.8%, increase in occupancy expenses; (b) a $1.9 million, or 75.3%, increase in travel and entertainment expenses; (c) a $0.8 million, or 42.2%, increase in insurance expenses; (d) a $0.5 million, or 62.5%, increase in technology expenses; and (e) a $2.7 million, or 34.2%, increase in other miscellaneous expenses. These increases were primarily related to acquisitions and, to a lesser extent, costs associated with supporting the growth of our existing business. Other operating expenses in 2005 were also impacted by a $0.1 million management fee paid to an affiliate of Parthenon Capital. There was no comparable fee in 2004. As a percentage of revenue, other operating expenses were 17.5% in 2005 compared to 19.6% in 2004. Our organic growth did not require a commensurate increase in certain other operating expenses such as office rent, office supplies, information technology and telephone costs.
 
Depreciation.  Depreciation increased $0.9 million, or 62.1%, to $2.4 million in 2005 compared to 2004. The increase in depreciation was primarily due to capital expenditures on new computers, leasehold improvements and software, as well as depreciation associated with assets of acquired businesses.
 
Amortization.  Amortization increased $2.5 million, or 64.0%, to $6.4 million in 2005 compared to 2004 due primarily to additional amortization of definite-lived intangible assets acquired as part of our acquisitions. This increase was partially offset by an increase in the estimated useful lives of our definite-lived intangible assets resulting from the revaluation of our assets in connection with the Recapitalization.
 
Other
 
Interest Expense.  Interest expense increased by $9.0 million, or 359.0%, to $11.5 million in 2005 compared to 2004. This increase was attributable to additional debt incurred in connection with our acquisition of Stewart Smith Group and the Recapitalization. In April 2005, we increased our debt by $114.8 million in connection with our acquisition of Stewart Smith Group (including transaction expenses and $8.2 million of working capital for general corporate purposes), and in October 2005, we increased our debt by an additional $21.6 million in connection with the Recapitalization.


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Loss on Extinguishment of Debt.  In 2005, we incurred $9.8 million of expenses for the write-off of unamortized financing fees and expenses and related prepayment fees in connection with refinancing our prior credit facilities. We refinanced our credit facilities in connection with our acquisition of Stewart Smith Group and again in connection with the Recapitalization. In 2004, we incurred a non-cash expense related to the write-off of $1.0 million of unamortized financing fees and expenses and related prepayment fees in connection with the refinancing of a prior credit facility.
 
Income Taxes.  Income tax expense decreased $0.7 million, or 22.4%, to $2.3 million in 2005 compared to 2004. The decrease in income tax expense is due primarily to lower income before income taxes as a result of the $9.8 million loss from early extinguishment of debt, offset by an increase in our effective tax rate to 64.4% in 2005 from 44.0% in 2004. The effective tax rate differs from the federal statutory rate of 34% primarily because of certain expenses that are not deductible for tax purposes, as well as the effects of state taxes. The effect of these items was magnified by the impact of lower levels of pretax income in 2005.
 
Liquidity and Capital Resources
 
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, capital expenditures, debt service, acquisitions and other commitments and contractual obligations. We historically have derived our liquidity from our cash flow from operations, bank financing and sales of our equity to third parties.
 
When considering our liquidity, it is important to note that we hold cash in a fiduciary capacity as a result of premiums received from insured parties that have not yet been paid to insurance carriers. The fiduciary cash is recorded as an asset on our balance sheet with a corresponding liability, net of our commissions, to insurance carriers. In addition, for policy premiums that have been billed but not collected, we record a receivable on our balance sheet for the full amount of the premiums billed, with a corresponding liability, net of our commissions, to insurance carriers. We earn interest on the premium cash during the period of time between receipt of the funds and payment of these funds to insurance carriers.
 
We believe that the proceeds of this offering, funds generated from our operations and funds available under our senior secured credit facilities will be sufficient to satisfy our existing commitments and provide us with adequate financial flexibility. However, if circumstances change, we may need to raise debt or equity capital in the future.
 
Senior Secured Credit Facilities
 
In connection with the Recapitalization, we entered into two syndicated senior secured credit facilities. These facilities consist of a first lien credit facility with a $123.0 million term loan and a $25.0 million revolving line of credit and a second lien credit facility with a $48.0 million term loan. The first lien revolving credit facility also provides for the issuance of letters of credit up to $5.0 million. We have granted a security interest in all of our assets, including the equity in our subsidiaries, to the lenders under these two credit facilities as collateral for the loans. We borrowed $171.0 million under these facilities in connection with the Recapitalization. As of December 31, 2006, there was $118.8 million outstanding under the first lien term loan and $48.0 million outstanding under the second lien term loan. As of December 31, 2006, there were no amounts outstanding under the first lien revolving line of credit. We expect to use a portion of the net proceeds from this offering to repay $      million of the amounts outstanding under our first lien credit facility and all of the amounts outstanding under our second lien credit facility.
 
The first lien credit facility, including the revolving line of credit, matures on October 27, 2011, and the second lien credit facility matures on April 27, 2012. The first lien term loan amortizes in quarterly installments of $307,500, and the second lien credit facility has no required amortization. The first lien term loan bears interest at LIBOR plus 275 to 350 basis points, depending on the ratio of our total debt to our EBITDA. The interest rate on our outstanding borrowings under the first lien credit facility as of December 31, 2006 ranged from 8.35% to 8.38%, based on LIBOR maturity dates. The second lien credit facility bears interest at LIBOR plus 750 basis points. The interest rate on our outstanding borrowings under the second lien credit facility as of December 31, 2006 was 12.86%. Our effective rates of interest are lower than the stated


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interest rates because of our interest rate swap agreement, which has a total notional amount of $68.5 million. The interest rate swap causes us to pay interest at a fixed rate of 4.74% and receive interest at the 3-month LIBOR each quarter through January 2009.
 
Our senior secured credit facilities also require us to maintain certain financial covenants and ratios. We are required to maintain: (i) a fixed charge coverage ratio of at least 1.25 under the first lien credit facility and 1.125 under the second lien credit facility; (ii) an interest coverage ratio ranging from 1.80 to 2.475 over the life of the first lien credit facility and 2.00 to 2.75 over the life of the second lien credit facility; and (iii) a maximum total debt to EBITDA ratio of 5.38 for the first year of the facility decreasing periodically to 3.50 for the last two years of the first lien credit facility and from 5.92 decreasing to 3.85 during the term of the second lien credit facility. Our senior secured credit facilities also limit the aggregate amount of capital expenditures we may make in any fiscal year, with a maximum of $3.25 million under the first lien credit facility and $3.75 million under the second lien credit facility, plus, in each case, 50% of any amounts under the respective caps that we did not use for capital expenditures in the immediately preceding fiscal year. Our credit facilities also include various other customary restrictive covenants. See “Risk Factors — The terms of our senior secured credit facilities are restrictive and may prevent us from expanding our business. Our failure to comply with any of these terms could result in a default and allow the lenders to require the immediate repayment by us of all amounts that are owed under these facilities. Our indebtedness could also restrict our flexibility and place us at a competitive disadvantage.” Failure to comply with these restrictive and financial covenants may result in an acceleration of the borrowings outstanding under the facilities. As of December 31, 2006, we believe we were in compliance with all of the covenants in our credit facilities.
 
Cash Flow
 
Cash and Cash Equivalents
 
At December 31, 2006, we had cash and marketable securities, excluding premium cash that we hold in trust for insurance carriers, of $21.9 million, as compared to $19.2 million at December 31, 2005.
 
The following table summarizes our cash flow activity for the years ended December 31, 2004, 2005 and 2006:
 
                         
    Years Ended December 31,  
Net Cash Provided by (Used in)
  2004     2005*     2006  
    (in thousands)  
 
Operating activities of continuing operations
  $ 13,837     $ 18,776     $ 11,642  
Investing activities of continuing operations
    (37,707 )     (105,583 )     (9,689 )
Financing activities of continuing operations
    24,386       95,903       768  
 
* Shown on a combined basis.
 
Operating Activities of Continuing Operations
 
Net cash provided by operating activities decreased $7.1 million to $11.6 million in 2006 from $18.8 million in 2005. The comparison of net cash provided by operating activities in 2006 and 2005 was affected by approximately $4.3 million in lower cash tax payments in 2005 due to a $9.8 million loss on the early extinguishment of debt recorded in 2005. In addition, during 2006 we recognized $3.5 million in profit commission revenue in our Group Benefits division that is not scheduled to be collected until after 2006. Also in 2006, we paid additional cash bonus payments of $2.5 million as a result of our decision to begin paying a portion of bonus compensation semi-annually as opposed to annually after the end of each year. These three items were offset by an increase in cash of $1.9 million attributable to an increase in the net amount of premium cash, premiums receivable and premiums payable resulting from differences in the timing of receiving and paying premiums.
 
Net cash provided by operating activities increased $4.9 million from $13.8 million in 2004 to $18.8 million in 2005. The comparison of net cash provided by operating activities in 2005 and 2004 was


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affected by approximately $4.3 million in lower cash tax payments in 2005 due to a $9.8 million loss on the early extinguishment of debt recorded in 2005. Also, we had an increase in the accrual of bonuses payable of approximately $7.5 million as of the end of 2005, reflecting new personnel added during 2005 primarily as a result of the acquisition of Stewart Smith Group in April 2005. Offsetting these items was a decrease in cash of $6.5 million attributable to a decrease in the net amount of premium cash, premiums receivable and premiums payable resulting from differences in the timing of receiving and paying premiums.
 
Investing Activities of Continuing Operations
 
Net cash used in investing activities was $9.7 million for 2006 compared to $105.6 million for 2005. Cash flows used in investing activities in 2005 included the previously discussed acquisition of Stewart Smith Group in 2005 for approximately $103.0 million (including transaction expenses), compared with the acquisitions of Communitas and the policy administration division of CBCA in 2006 for approximately $6.0 million.
 
Net cash used in investing activities was $105.6 million in 2005 compared to $37.7 million in 2004. Cash used in investing activities in 2005 included the acquisition of Stewart Smith Group for approximately $103.0 million (including transaction expenses) compared with the 2004 acquisitions of Quaker and PRS for cash consideration of approximately $40.5 million. In addition, 2004 investing activities included proceeds from the sale of our premium finance business for $6.1 million.
 
Financing Activities of Continuing Operations
 
Net cash provided by financing activities was $0.8 million for 2006 compared to $95.9 million for 2005. Cash provided by financing activities in 2005 included issuance of long-term debt, net of repayments, of $107.2 million primarily to fund the acquisition of Stewart Smith Group.
 
Net cash provided by financing activities was $95.9 million in 2005 compared to $24.4 million in 2004. Cash provided by financing activities in 2005 included issuance of long-term debt, net of repayments, of $122.0 million, compared to $28.4 million in 2004. In addition, 2005 financing activities included cash payments by us related to the repurchase of shares of $32.6 million and cash received from the issuance of shares of $11.6 million in connection with the Recapitalization.
 
Contractual Obligations
 
As of December 31, 2006, our contractual obligations were as follows:
 
                                         
    Payments Due by Period  
          Less than
                More than
 
Contractual Obligations (1)
  Total     1 year     1-3 Years     3-5 Years     5 Years  
    (in thousands)  
 
Long-term debt
  $ 167,297     $ 1,253     $ 2,908     $ 115,136     $ 48,000  
Capital lease obligations
    4,696       1,910       2,059       727        
Operating leases
    30,713       7,552       10,821       6,657       5,683  
Interest obligations(2)
    78,832       15,997       31,686       29,623       1,526  
                                         
Total
  $ 281,538     $ 26,712     $ 47,474     $ 152,143     $ 55,209  
                                         
 
(1) Excludes additional earnout consideration payable under acquisition agreements. See “—Commitments and Contingencies — Contingent Purchase Price for Acquisitions.”
 
(2) Includes all interest payments through the stated maturity of the related long-term debt. Variable rate interest obligations are estimated based on interest rates in effect at December 31, 2006, and, as applicable, the variable rate interest includes the effects of our interest rate swaps through the expiration of those swap agreements.


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Pro Forma Contractual Obligations
 
The table below shows the pro forma effect on our contractual obligations as of December 31, 2006 assuming we had applied approximately $           of our estimated net proceeds from the offering as of that date to repay debt under our first and second lien credit facilities as described in “Use of Proceeds”:
 
                                         
    Payments Due by Period  
          Less than
                More than
 
Pro Forma Contractual Obligations (1)
  Total     1 year     1-3 Years     3-5 Years     5 Years  
    (in thousands)  
 
Long-term debt
  $       $       $       $       $    
Capital lease obligations
                                     
Operating leases
                                       
Interest obligations(2)
                                       
                                         
Total
  $       $       $       $       $  
                                         
 
(1) Excludes additional earnout consideration payable under acquisition agreements. See “—Commitments and Contingencies — Contingent Purchase Price for Acquisitions.”
 
(2) Includes all interest payments through the stated maturity of the related long-term debt assumed to be outstanding following completion of the offering. See “Use of Proceeds” and “Capitalization.” Variable rate interest obligations are estimated based on interest rates in effect at December 31, 2006, and, as applicable, the variable rate interest includes the effects of our interest rate swaps through the expiration of those swap agreements.
 
Capital Expenditures
 
Our capital expenditures are primarily for office furniture, computers, communication equipment and software. Our senior secured credit facilities restrict us from making capital expenditures in excess of $3.3 million per year plus 50% of any amounts not utilized in the prior year. We spent $1.6 million, $2.1 million and $3.8 million on capital expenditures during 2004, 2005 and 2006, respectively.
 
Commitments and Contingencies
 
Legal Matters
 
Various claims and legal proceedings that seek remedies or damages, all arising from the ordinary course of business, are pending against us with respect to insurance placed by us or other contractual matters. Our management does not believe that any liability that may finally be determined with respect to these claims and proceedings will have a material adverse effect on our consolidated financial position or future results of operations.
 
Contingent Purchase Price for Acquisitions
 
In order to better determine the economic value of the businesses we have acquired, we have incorporated contingent consideration, or earnout, provisions into the structure of certain acquisitions. These arrangements generally provide for the payment of additional consideration to the sellers upon the satisfaction of certain financial targets by the acquired businesses. Contingent consideration is recorded when the outcome of the contingency is determinable beyond a reasonable doubt. Contingent consideration paid to the sellers of our acquired businesses is treated as additional purchase consideration. We are obligated to pay additional purchase price to the former owners of some of the businesses we have acquired, as described below.
 
  •      Property Risk Services.  In connection with our acquisition of PRS, we agreed to pay the former owners of PRS additional purchase price for the acquired business based on the performance of the business during the years ending December 31, 2004, 2005, 2006, 2007 and 2008. Specifically, we must pay the former owners of PRS the amount by which EBITDA of PRS for the year in question exceeds the greater of $6,000,000 or 35% of its net revenues for the year. Each former owner of PRS may elect to receive up to 75% of this payment in cash,


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  and the remainder will be paid in our common stock. We have the option to pay the entire amount in cash. We paid additional consideration of $0.9 million and $0.8 million for the years ended 2004 and 2005, respectively. We believe that the additional consideration for 2006 will be approximately $5.4 million, of which we anticipate paying approximately 75% in cash and 25% in stock.
 
  •      Communitas.  In connection with the acquisition of Communitas, we agreed to pay the former owners of Communitas a maximum amount of $7.0 million in additional purchase price based on the performance of the acquired business during the period from April 21, 2007 to April 21, 2008. We have the option to make all or any portion of any additional purchase price payment in cash or in shares of our common stock.
 
  •      CBCA Premium Administration Division.  In connection with the acquisition of the premium administration division of CBCA, we agreed to pay a maximum amount of $3.3 million in additional purchase price to the sellers of this business based on the performance of the acquired business during the period from June 1, 2006 to September 1, 2009. We are required to pay the entire amount of the additional purchase price in cash. The total amount paid or payable as additional purchase price for 2006 is $0.6 million.
 
Critical Accounting Policies and Estimates
 
The preparation of our consolidated financial statements in accordance with GAAP requires management to make estimates that affect the reported amounts of our assets, liabilities, revenues and expenses. We periodically evaluate these estimates, which are based on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. If actual performance should differ from historical experience or if the underlying assumptions were to change, our financial condition and results of operations might be materially impacted. In addition, some accounting policies require significant judgment to apply complex principles of accounting to certain transactions, such as acquisitions, in determining the most appropriate accounting treatment. See Note 1 to our 2006 consolidated financial statements.
 
We believe the following significant accounting estimates and policies are material to our financial reporting and are subject to a degree of subjectivity and/or complexity.
 
Revenue Recognition and Reserves
 
Commission income and fees from the sale of property and casualty insurance products are recorded as of the effective date of the insurance coverage or the date the coverage is bound, whichever is later. At that point, the earnings process has been completed, and we can reasonably estimate the impact of policy cancellations for refunds and establish reserves based primarily on our historical cancellation experience, as adjusted for significant known circumstances as well as management’s judgment about known conditions. Commission income from the sale of group benefits insurance products or services is recognized as earned over the policy or contract period, which typically corresponds to the monthly billing cycle based on eligibility.
 
We record a reserve for policy cancellations, which is evaluated periodically and adjusted as necessary based upon historical cancellation experience. Subsequent commission adjustments are recognized upon notification from insurance carriers. We utilize our historical actual cancellation experience to develop an estimated percentage of premiums cancelled. We believe this methodology is reasonable based on the fact that the data is from a large pool of homogenous transactions. This percentage is applied to each year’s actual revenue to derive the estimated portion of that year’s revenues that will be cancelled in a future period. Our historical policy cancellation experience has not fluctuated materially in the past. However, a change in our historical cancellation experience could cause us to adjust our estimated reserve in future periods. Cancellation trends could change based on significant changes in insurance capacity or pricing. In general, we expect policy cancellations to increase during a market experiencing significant price declines, and we expect cancellations to decrease during a market experiencing increasing prices.


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Commission revenue is reported net of commission paid to retail insurance brokers. Profit commission income is generally recognized based on the receipt of cash from these arrangements. Revenues may be recorded in advance of cash receipts in cases where the amounts due to be received have been calculated or have been confirmed by the insurance company. Profit commission income is primarily derived from profit sharing agreements related to the Specialty Underwriting and Group Benefits divisions. We pay volume-based incentive commissions to certain retail insurance brokers. These contingent commission expenses generally are recognized based on the timing of the revenue earned from placing business for these retail insurance brokers.
 
Business Acquisitions and Purchase Price Allocations
 
We account for business combinations in accordance with the provisions of SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. These standards require that all business combinations be accounted for using the purchase method. Accordingly, the net assets and results of operations of these acquired businesses are included in our financial statements on their respective acquisition dates. These statements provide guidance on the initial recognition and measurement of goodwill and other intangible assets arising from such business combinations and require that goodwill and intangible assets with indefinite lives be tested for impairment annually applying a fair value test rather than being amortized. In connection with these acquisitions, we record the estimated value of the net tangible assets purchased and the value of the identifiable intangible assets purchased, which typically consist of purchased customer accounts and noncompete agreements. Purchased customer accounts include the physical records and files obtained from acquired businesses that contain information about insurance policies, customers and other matters essential to policy renewals, but primarily represent the present value of the underlying cash flows expected to be received over the estimated future renewal periods of insurance policies comprising those purchased customer accounts. The valuation of purchased customer accounts involves significant estimates and assumptions concerning matters such as cancellation frequency, expenses and discount rates. Any change in these assumptions could affect the carrying value of purchased customer accounts. Noncompete agreements are valued based on the duration and any unique features of each specific agreement. Purchased customer accounts and noncompete agreements are amortized based on the expected undiscounted cash flows over the related estimated lives and contract periods, which range from seven to 14 years. The excess of the purchase price of an acquisition over the fair value of the identifiable tangible and intangible assets is assigned to goodwill and is not amortized.
 
Both the allocation of the purchase price to intangible assets we acquire and the determination of the estimated useful lives of intangible assets other than goodwill require significant judgment by management and affect the amount of future amortization and possible impairment charges. If historical fact patterns, such as the rate of attrition of acquired customer accounts, were to change, we might be required to allocate a greater portion of the purchase price to goodwill or accelerate the amortization of purchased accounts, which might in turn have a material adverse effect on our financial position or results of operations.
 
We evaluate long-lived assets, including identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An asset is considered impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. We assess the recoverability of our long-lived and intangible assets by determining whether the unamortized balances can be recovered through undiscounted future net cash flows of the related assets. The amount of impairment, if any, is measured based on projected discounted future net cash flows.
 
Income Taxes
 
Determining our consolidated provision for income tax expense, deferred tax assets and liabilities and any related valuation allowance involves judgment. We record deferred tax assets and liabilities for the estimated future tax effects attributed to temporary differences and carryforwards based on provisions of the


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enacted tax law and current tax rates. We also project how our revenues will be apportioned for purposes of state income tax liabilities. We do not anticipate the effects of future changes in tax laws or rates. Temporary differences are differences between the tax basis of an asset or liability and its reported amount in our financial statements. Carryforwards primarily include items such as capital loss carryforwards, which may be carried forward subject to certain limitations. A summary of the significant deferred tax assets and liabilities relating to our temporary differences and carryforwards is included in Note 9, “Income Taxes,” to our 2006 consolidated financial statements.
 
Derivatives
 
In 2006, we entered into an interest rate swap agreement to manage the exposure to fluctuations in interest rates on $68.5 million of our variable rate debt. The terms of the agreement require that we pay a fixed rate on the notional amount to a bank, and the bank pays us a variable rate on the notional amount equal to a base LIBOR. We have assessed this derivative as a highly effective cash flow hedge, and accordingly, changes in the fair market value of the interest rate swap are reflected in other comprehensive income. Any differences between the fair value of the hedge and the item being hedged, referred to as the ineffective portion of the hedge, is immediately recognized in earnings as other operating expense. The fair market value of this instrument is determined by quotes obtained from the related counterparties in combination with a valuation model utilizing discounted cash flows. The valuation of this derivative instrument is a significant estimate that is largely affected by changes in interest rates. If interest rates increase or decrease, the value of this instrument will change accordingly.
 
New Accounting Pronouncements
 
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), which replaces SFAS No. 123 and supersedes APB Opinion No. 25. This revised statement, which requires the cost of all share-based payment transactions be recognized in the financial statements, establishes fair value as the measurement objective and requires entities to apply a fair-value-based measurement method in accounting for share-based payment transactions. The revised statement applies to all awards granted, modified, repurchased or cancelled after January 1, 2006. SFAS No. 123(R) permits nonpublic entities which used the fair value method of disclosure to account for the adoption of this revised standard using either the modified prospective or modified retrospective method. Effective January 1, 2006, we adopted SFAS No. 123(R) and accounted for the adoption using the modified prospective method. The prospective method requires compensation cost to be recognized as a component of salary and employee benefits expense beginning on January 1, 2006 based on the requirements of SFAS No. 123(R) for all share-based payments granted after January 1, 2006. For awards granted prior to January 1, 2006, compensation cost must be recognized, as of January 1, 2006, for the portion of awards for which the requisite service has not been rendered.
 
In June 2006, FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting treatment for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We do not expect the adoption of FIN 48 to have a material impact on our financial position or results of operations.
 
In September 2006, FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit the use of fair value as the relevant measurement attribute. The provisions of SFAS No. 157 are to be applied prospectively as of fiscal periods beginning after November 15, 2007. We are currently assessing what impact, if any, SFAS No. 157 will have on our consolidated financial position and results of operations.


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In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently assessing what impact, if any, SFAS No. 159 will have on our consolidated financial position and results of operations.
 
Quantitative and Qualitative Disclosures About Market Risk
 
Market risk is the risk that we will incur losses due to adverse changes in market rates and prices. We have exposure to market risk primarily through our financing activities. Our primary market risk exposure is to changes in interest rates. We use both fixed and variable rate debt as sources of financing. We have not entered, and do not plan to enter, into any derivative financial instruments for trading or speculative purposes.
 
Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. Our exposure to interest rate changes primarily results from our financing activities.
 
Our outstanding debt under our first lien credit facility at December 31, 2006 was $118.8 million. Interest on borrowings under this facility is at LIBOR plus 275 to 350 basis points, depending on the ratio of total debt to our EBITDA. Our outstanding debt under our second lien credit facility at December 31, 2006 was $48.0 million. Interest on borrowings under this facility is at LIBOR plus 750 basis points. Based on the outstanding balance at December 31, 2006, a change of 1% in the interest rate would cause a change in interest expense of approximately $1.4 million on an annual basis, net of the effect of our interest rate swap agreement.
 
In January 2006, we entered into an interest rate swap agreement with a total notional amount of $68.5 million. The interest rate swap resulted in us paying interest at a fixed rate of 4.74% and receiving interest at three-month LIBOR each quarter through January 2009. We use this interest rate swap to manage interest cost and cash flows associated with the variable interest rates on our senior secured credit facilities.


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OUR BUSINESS
 
Overview
 
We are a leading wholesale distributor of specialty insurance products and services in the United States. We distribute a wide range and diversified mix of property and casualty and group benefit insurance products from insurance carriers to retail insurance brokerage firms. We also offer value-added customized services to support some of these products, including policy underwriting for certain insurance carriers, premium and claims administration and actuarial services. In September 2006, we were recognized by Business Insurance as the largest wholesale insurance broker operating in the United States. We do not take any insurance underwriting risk in the operation of our business.
 
We provide insurance carriers with an efficient variable-cost distribution channel through our licensed brokers in all 50 states and our extensive relationships with retail insurance brokers. Our distribution structure enables the insurance carriers with which we do business to reach a large number of retail insurance brokers. We have cultivated an entrepreneurial, decentralized sales culture that provides our brokers and underwriters with flexibility to react to opportunities in the marketplace and better serve the needs of insurance carriers and our retail insurance broker clients. At the same time, we have centralized substantially all of our finance, human resource, legal, licensing, compliance and risk management operations to allow us to effectively oversee our national operations. We believe our centralized infrastructure enables us to integrate new brokers and offices.
 
We have extensive knowledge of the specialty insurance products that we distribute, which allows us to assist retail insurance brokers in placing business outside of their core expertise or capacity. Our size and strong relationships with insurance carriers enhance our ability to provide retail insurance brokers with better and broader access to the insurance markets. We have established relationships with over 100 insurance carriers, including property/casualty and health/life carriers owned by ACE, AEGON, Alleghany, AIG and The Hartford. We also use our product expertise and relationships with insurance carriers to structure new insurance programs and products to respond to opportunities in the marketplace.
 
We distribute insurance products and services through our three divisions: Property & Casualty Brokerage, Specialty Underwriting and Group Benefits.
 
Industry Background
 
We distribute insurance products in two distinct markets: property and casualty, and group benefits.
 
Property and Casualty
 
Insurance carriers sell commercial property and casualty insurance products in the United States through “admitted” insurance carriers, which are carriers that are licensed in the state in which the risk is located, and “non-admitted” insurance carriers, which sell their products in the E&S lines market. Within the admitted market, there are standard insurance products and specialty insurance products. For standard insurance products, insurance rates and forms are regulated, products and coverage are relatively uniform, and insurance carriers tend to compete for customers primarily on the basis of reputation, financial strength, price, claims service and commissions. Specialty insurance products are sold to insured parties with more difficult risks that do not fit the underwriting criteria of standard insurance products. Although price tends to be a key basis of competition among specialty insurance carriers, the coverage terms also are an important competitive factor.
 
The E&S lines market generally provides insurance for businesses that are unable to obtain coverage from admitted insurance carriers because of their risk profile or the unique nature or size of the risk. State insurance regulations often require an insured party to be declined by one or more admitted insurance carriers before obtaining insurance in the E&S lines market. Insurance carriers operating in the E&S lines market depend on wholesale and retail insurance brokers to have the necessary licenses required to distribute their E&S lines insurance products in the states where the insured party or risk is located. Participation in the E&S


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lines market requires knowledge of the insurance products available, a relationship with the insurance carriers that operate in this market and an understanding of the risks that they are willing to insure.
 
The E&S lines market is a growing part of the commercial property and casualty insurance marketplace. Based on information published by A.M. Best, direct premiums written for E&S lines insurance policies in relation to total premiums for the commercial property and casualty lines market increased from approximately 6.4% in 1995 to approximately 12.7% in 2005, and premiums on E&S property and casualty lines insurance increased from $9.2 billion in 1995 to $33.3 billion in 2005. Apart from a slight decline in 1996, the E&S lines market has grown annually in terms of aggregate premium dollars written for the past 15 years for a variety of reasons, including the implementation of more conservative underwriting criteria and risk-selection techniques by standard insurance carriers, the elimination of non-core lines of business by standard insurance carriers and substantial losses during this period resulting from the terrorist attacks on September 11, 2001 and natural disasters. Moreover, as reported by A.M. Best, a significant amount of capital has been invested in the E&S market during the last five years to capitalize on favorable market conditions, as evidenced by an increase in the number of start-up companies entering the E&S market, such as AXIS, Allied World and Endurance. Many insurance carriers operating in the E&S market distribute their products primarily through wholesale insurance distributors.
 
Until recently, Aon, Marsh and Willis, three of the largest retail insurance brokerage firms, owned their own wholesale insurance brokerage operations. During 2005, we acquired Willis’ wholesale insurance brokerage operations, and Aon and Marsh sold their wholesale insurance brokerage operations to private equity firms. Before these transactions, it generally was difficult for independent wholesale insurance brokers to conduct a significant amount of business with Aon, Marsh and Willis. Independent wholesale insurance brokers, such as AmWINS, now have greater opportunities to do business with these three firms. Additionally, we recently have observed that some large retail insurance brokerage firms have become more attentive to the number of wholesale insurance brokers they use and the compliance systems and financial position of these brokers. We believe this development may result in a reduction in the number of wholesale distributors used by these large retail insurance brokerage firms, which may benefit firms like us that have invested in and maintain compliance systems and procedures.
 
Group Benefits
 
Group benefit insurance products are sold by life and health insurance carriers, which transact business with both wholesale and retail insurance brokers and, in some cases, directly with the sponsoring organization. Wholesale distributors of group benefit products generally place specialized group benefit products for unusual, unique or specific types of coverage. Some wholesale distributors also provide administrative services, such as premiums, claims and other administrative services, to both insurance carriers and sponsoring organizations to support these products.
 
Health insurance products represent a significant portion of spending for employee group benefits. Based on information published by the Employee Benefit Research Institute, in 2004 total spending by employers for group health benefits was $482.5 billion. Health care spending has continued to increase significantly. According to data published by HHS, annual health care costs increased from $912.6 billion to approximately $2.0 trillion, or approximately 117.8%, from 1993 to 2005, and are projected to reach $4.1 trillion by 2016. Moreover, individual health care spending is increasing. On a per person basis, annual health care spending grew 49.5% during the seven-year period beginning on January 1, 1999, reaching an estimated average of $6,683 per person in 2005, with spending projected to grow to approximately $12,357 per person by 2015, according to HHS and U.S. Census Bureau statistics.
 
The cost of health care for the 65 and over population represents a substantial part of health care spending. Although the population age 65 and over comprises less than 13.0% of the U.S. population, it accounted for 36.0% of all health care expenditures in 1999 according to data published in Age Estimates in National Health Accounts, Health Care Financing Review. According to this same source people age 65 and over spent, in 1999, on average, four times more on health care than the average person under age 65. Moreover, the U.S. population is aging. Based on information published by the U.S. Census Bureau, it is


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estimated that 12.4% of the population was age 65 or older in 2005, and this percentage is projected to grow to 14.2% in 2015 and 16.3% in 2020 as baby boomers start reaching age 65 in 2011.
 
We believe that recent changes in GAAP have increased the level of attention given to the cost of providing retiree health care benefits. GASB No. 45, which will be phased in beginning in 2007, will require state and local governmental entities either to fund the cost of retiree benefits or recognize this obligation as a liability on their financial statements, as opposed to the prior practice of recognizing these costs on a pay-as-you-go basis. We believe GASB No. 45 is prompting many governmental entities to focus on the costs of retiree benefits and to seek ways to reduce these costs.
 
The Medicare Modernization Act, which created the federal Voluntary Prescription Drug Benefit Program under Part D of the Social Security Act, added a new entitlement for Medicare-eligible beneficiaries for prescription drug costs. Effective as of January 1, 2006, eligible Medicare beneficiaries are able to obtain prescription drug coverage under Part D by enrolling in a prescription drug plan or a Medicare Advantage plan (MA-PD). Under the Medicare Modernization Act, employers that provide retiree prescription drug benefits now have a greater number of options, including the elimination of these benefits entirely, the establishment of company-sponsored plans that are eligible for a government subsidy, the adoption of a company-sponsored prescription drug plan and the establishment of plans designed to supplement the benefits available through a prescription drug plan or Medicare Advantage plan (MA-PD). As a result of the Medicare Modernization Act, insurance products that provide prescription drug benefits for Medicare-eligible individuals now compete with the entitlement program created under Part D. We believe the Medicare Modernization Act generally has resulted in the development of new insurance products available for employers that desire to provide greater benefits than are available through a prescription drug plan or Medicare Advantage plan (MA-PD). We also believe this trend has benefited insurance brokers that have developed the expertise and product distribution capabilities to assist employers in responding to these developments.
 
Our Group Benefits division derives a substantial portion of its revenues from the placement of retiree health insurance products. In many cases, U.S. employers are not legally obligated to offer employee health benefit plans and typically have the discretion to unilaterally reduce or eliminate these plan benefits. Several factors are causing employers to change the way they provide retiree health care, including the rapidly increasing cost of health care and the overall aging of the U.S. population. Other factors that we believe may affect the market for retiree health insurance products are the promulgation of accounting standards requiring governmental employers to estimate their liability for future benefits in their financial statements, as discussed above.
 
The Wholesale Distribution Channel for Specialty Insurance Products and Services
 
Retail insurance brokers typically work directly with insured parties to evaluate their insurance needs, determine the appropriate amount and type of coverage, and locate an insurance carrier capable of providing the necessary coverage. Wholesale insurance brokers act as intermediaries between insurance carriers and retail insurance brokers by assisting retail insurance brokers in placing business they would not be able to place themselves because the type of risk is outside of their core expertise or they lack direct access to certain insurance carriers. Wholesale insurance brokers often provide retail insurance brokers with specialty and E&S insurance products offered by admitted and non-admitted insurance carriers. It is not uncommon for retail insurance brokerage firms to use several wholesale insurance brokerage firms to place the same type of insurance. Similarly, insurance carriers typically distribute their products through multiple wholesale insurance brokerage firms.
 
We believe the wholesale distribution channel allows insurance carriers to distribute their products more efficiently. Insurance carriers use wholesale insurance brokers because of their product expertise and distribution capabilities, allowing them to reduce or avoid the infrastructure and personnel costs associated with maintaining relationships with a large number of retail insurance brokerage firms. In some cases, wholesale insurance brokers act as an MGU for an insurance carrier. An MGU generally has authority to bind coverage on behalf of an insurance carrier for a specific type of risk, subject to agreed-upon guidelines and limits. MGUs receive submissions for insurance directly from retail insurance brokers and evaluate, price and


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make underwriting decisions regarding these submissions and issue policies on behalf of an insurance carrier. An MGU typically does not, however, take underwriting risks for the products that it distributes. Insurance carriers typically create MGU programs for harder-to-place insurance products in niche product lines or industry classes, in cases where historical data indicate that these types of programs can be operated profitably.
 
The distribution channel for property and casualty insurance products placed through insurance brokers is depicted below:
 
CHART
 
 
1 This chart illustrates typical transactions in the brokered market for insurance products. Wholesale insurance brokers may also place some standard insurance products, and retail insurance brokers generally also have the ability to directly place some E&S and specialty insurance products.
 
For group benefit insurance products, retail insurance brokers generally use wholesale insurance brokers to place products for unusual, unique or specific types of coverage.
 
Although there has been considerable consolidation among brokerage firms, both the retail and wholesale segments of the insurance brokerage industry remain fragmented. The wholesale insurance brokerage segment consists of over 450 firms operating in the United States based on information published by the National Association of Professional Surplus Lines Offices, Ltd. Based on information published in the Journal of Risk and Insurance, in 2004 there were approximately 39,000 independent retail insurance firms in the United States.
 
Wholesale insurance brokers typically are compensated by commissions paid by the insurance carrier, although they can also receive fees in addition to commissions for placing certain insurance policies. Commissions generally are calculated as a percentage of the gross premium for the underlying insurance policy. Many factors affect commission rates, including the type of insurance, competition among insurance


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carriers for that type of insurance, the particular insurance carrier involved, market cycles, and the nature of the services provided by the wholesale insurance broker. When retail insurance brokers use wholesale insurance brokers to assist in placing coverage, they will agree how to split commissions paid by the insurance carrier. Historically, insurance carriers have frequently paid a greater commission rate on products distributed through wholesale insurance brokers because of the expertise provided by wholesale insurance brokers and because insurance carriers have lower infrastructure and other distribution costs for products distributed through the wholesale distribution channel. In addition, some wholesale insurance brokers receive contingent commissions that depend on the volume of business they place with a particular company or the profitability of that business.
 
Competitive Strengths
 
We believe that our competitive strengths include:
 
  •      Extensive Relationships with Retail Insurance Brokers.  We believe that our national operations, product expertise, extensive relationships with insurance carriers and focus on compliance make us an attractive business partner for retail insurance brokers. During 2006, we did business with over 4,500 retail insurance brokerage firms, including substantially all of the 100 largest U.S. retail insurance brokers as identified by Business Insurance in July 2006. We also work with small to mid-size retail insurance brokerage firms, which in many cases do not have direct access to certain of the insurance carriers with which we do business. Our extensive relationships with retail insurance brokers make us an attractive distribution channel for insurance carriers.
 
  •      Established Insurance Carrier Relationships.  We have established relationships with over 100 insurance carriers. We believe that many insurance carriers view us as a valued customer because of our expertise, experienced brokers and underwriters and national platform, which enable us to produce a significant amount of business for them. Our access to insurance carriers is key to our business. Through years of experience in the insurance industry, our management has close relationships with the management teams of many insurance carriers at the most senior levels. We understand our insurance carriers’ underwriting preferences for particular lines of business and areas of geographic focus. We believe that the scope of our relationships with insurance carriers and our product knowledge allow us to better serve the needs of retail insurance brokerage clients.
 
  •      Proven and Experienced Brokers and Underwriters.  As of December 31, 2006, we employed 221 brokers and underwriters, many of whom have substantial experience in the insurance industry. Our brokers and underwriters typically specialize in either certain product lines or industry classes and have, in many cases, developed close relationships with the insurance carrier underwriters for these product lines and industry classes. We believe we have been able to use our size, diverse product knowledge and extensive relationships with insurance carriers to improve the productivity of our existing brokers and recruit new brokers who can leverage these resources to increase revenues.
 
  •      Seasoned Management Team.  Our Chief Executive Officer and division presidents have substantial experience and long-standing relationships developed over an average of 21 years of service in the insurance industry. Our management team draws on its industry experience to identify opportunities to expand our business and collaborate with insurance carriers to help develop products to respond to market trends. Through their extensive relationships in the insurance industry, our management team has contributed to the successful recruitment of key brokers and underwriters to join AmWINS. Having completed nine acquisitions since January 1, 2002, our management team has a proven track record of successfully identifying and structuring acquisitions and integrating the businesses acquired.
 
  •      Business Diversification.  The scope of our operations distinguishes us from traditional property and casualty wholesale insurance brokers. By operating in both the group benefits


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  market and the property and casualty market, we believe we are better positioned to detect, analyze and capitalize on opportunities to expand our business than are companies with a more narrow market focus. In addition, our product diversity and ability to provide value-added underwriting, administrative and other services provide us with broader access to insurance carriers and enhance our ability to help retail insurance brokerage firms deliver products that meet the wide-ranging needs of their clients.
 
  •      Efficient Use of Information.  We believe the way we collect and analyze information using AmLINK, our proprietary enterprise operating system, will improve the efficiency and productivity of our brokers and underwriters. For example, we can access our database to identify individual insurance carrier underwriters that typically underwrite a specific type of business, making it more likely we can place a particular risk for our customers. We also intentionally capture and store data for business we are unable to place so we can analyze missed opportunities and improve our chances to place this business in the future. We believe that AmLINK allows us to more effectively manage and control our operations.
 
Key Elements of Our Growth Strategy
 
Our goal is to achieve superior long-term returns for our stockholders while establishing ourselves as the premier national wholesale distributor of insurance products and services. To accomplish this goal, we intend to focus on the following key areas:
 
  •      Increase Growth by Expanding Distribution.  We strive to prudently grow our business by expanding our distribution channels. Since January 1, 2003, we have opened five new offices in our Property & Casualty Brokerage division and hired 124 new brokers, excluding brokers hired in connection with acquisitions. We intend to continue pursuing opportunities to expand into new geographic markets and increase our presence in existing geographic markets. We also seek to expand our business by marketing our diverse product capabilities through targeted advertisements, client seminars and client marketing events.
 
  •      Access New Markets and Products.  We are focused on expanding our access to new markets and products to better serve the needs of our retail insurance brokerage clients. For example, because certain admitted insurance carriers will not do business directly with small retail insurance brokerage firms, but will do business with us, we are developing our AmWINS Access platform to provide these brokerage firms with access to a greater variety of standard insurance products. We also are actively working to develop new MGU programs. In our Group Benefits division, we continue to explore opportunities to work with our insurance carrier partners to develop new products that help employers manage the rising cost of health care.
 
  •      Capitalize on Industry Changes.  We believe that recent governmental investigations into the insurance industry caused many insurance carriers and large retail insurance brokerage firms to pay greater attention to the intermediaries they use. We believe these carriers and brokerage firms increasingly are seeking to solidify their business relationships with financially stable intermediaries with acceptable reporting, compliance and other administrative systems. Aon, Marsh and Willis all recently sold their wholesale insurance brokerage firms, and we believe that we can use our national platform and organizational structure to build upon our relationships with these and other firms. In addition, we intend to pursue opportunities to distribute retiree health products to employer groups to help them better respond to rising health care costs, an aging U.S. population and changes in the way they are required to account for retiree benefits.
 
  •      Pursue Strategic Acquisitions.  We plan to pursue strategic acquisitions that will complement our existing business or potentially expand into new wholesale distribution channels. We have substantial experience in selecting and integrating companies and are positioned to take advantage of acquisition opportunities that arise. We believe that our entrepreneurial culture and centralized administrative support system make us an attractive partner to acquisition targets.


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  We believe this offering enhances our business profile and ability to structure future acquisitions we decide to pursue.
 
Products and Services
 
We distribute our products and provide our services through our three divisions described below:
 
Property & Casualty Brokerage
 
Our Property & Casualty Brokerage division provides access to a broad range of specialty property and casualty insurance products. With a national platform of over 20 offices located across the United States, we are involved in the placement of many lines of property and casualty insurance products, including complex, multi-layered property and casualty insurance as well as stand-alone property catastrophe, general commercial liability, commercial automobile liability, automobile physical damage, umbrella/excess liability and excess workers’ compensation insurance. Our casualty products also include a broad range of financial insurance products such as directors’ and officers’ liability, professional liability, and fidelity and surety insurance. We believe our knowledge and experience allow us to assist retail insurance brokers with virtually all types of property and casualty insurance products.
 
Historically, our Property & Casualty Brokerage division has generated a substantial majority of its commission revenues by distributing insurance products in the E&S lines market. Many of the insurance carriers operating in this market also offer specialized and standard insurance products in the admitted market. One of our key growth strategies is to increase the amount of business we do with admitted insurance carriers through programs such as our AmWINS Access program, which provides small retail insurance brokerage firms with a greater variety of standard insurance products by offering access to additional insurance carriers that do not deal directly with these small firms. Our Property & Casualty Brokerage division also has some binding authority programs for specific types of risk that generally involve small premiums, very limited authority and little flexibility as to price and terms.
 
In 2006, we earned 47.3% of our revenues in this division from the placement of property insurance products, with the remaining 52.7% attributable to casualty insurance products.
 
As of December 31, 2006, our Property & Casualty Brokerage division had 494 employees, including 166 brokers.
 
Specialty Underwriting
 
Through our Specialty Underwriting division, we operate our stand-alone MGU programs. Under our MGU programs, insurance carriers have authorized us to bind coverage on their behalf, subject to underwriting guidelines, policy limits and pricing parameters that typically are developed by us and our insurance carriers on a collaborative basis and that vary widely from program to program. We have MGU programs with many major property and casualty insurance carriers, including insurers owned by ACE, AIG, Munich American Reinsurance Company, Fireman’s Fund Insurance Company, Lloyd’s of London (Lloyd’s), Markel, Scottsdale Insurance Company and Zurich Financial Services Group (Zurich). Although a component of the commissions we receive for acting as an MGU sometimes depends on the overall profitability of the underlying program, we do not take underwriting risks for any of the insurance products we distribute.
 
As an MGU, we have underwriting authority from one or more insurance carriers for insurance products in certain product lines or industries. We receive requests for insurance directly from retail insurance brokers. We evaluate the risk based on the information submitted, and if we decide to bind coverage, we price and issue policies on behalf of the insurance carriers that we represent. We typically also bill and collect premiums on behalf of insurance carriers. However, we currently do not administer claims for any of our programs.


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Our primary MGU programs currently consist of:
 
  •      Refuse Haulers.  We underwrite commercial automobile, general liability and workers’ compensation insurance for refuse haulers. This program has been endorsed since 1987 by the Environmental Industry Association, an international trade association for companies that manage solid and medical waste or manufacture and distribute waste equipment.
 
  •      Storage Tanks.  We underwrite pollution liability insurance for businesses with underground and aboveground storage tanks, such as convenience stores, fuel oil dealerships, hospitals, hotels, petroleum distributors and service stations.
 
  •      Apartments and Condominiums.  We underwrite property, general liability and umbrella insurance for owners of apartments and condominiums in California.
 
  •      Woodworking.  We underwrite primarily property insurance for businesses with woodworking operations, such as sawmills, furniture manufacturers, wood chip mills and wood treatment plants.
 
  •      Welding Distributors.  We underwrite all lines of property and liability insurance except workers’ compensation for businesses that supply gas and propane tanks to welders.
 
  •      Pizza Delivery.  We underwrite various types of insurance, including property, automobile and workers’ compensation, for businesses that own pizza delivery franchises.
 
  •      Long-Haul Commercial Trucking.  We underwrite commercial automobile liability, physical damage and cargo insurance for long-haul trucking carriers.
 
  •      Middle Market Property.  We underwrite property insurance for owners of mid-size commercial property.
 
We use our on-staff actuaries to support our MGU programs. Our actuarial staff provides actuarial and catastrophe management analysis to our insurance carrier partners to help improve the overall profitability of these programs. Our actuaries also monitor the performance of our programs and work with our underwriters and insurance carriers to develop rate tracking mechanisms, pricing models and other underwriting tools. The ability to analyze loss rates for our MGU programs enables us to develop more accurate product pricing and modeling parameters, which we believe makes us an attractive business partner for the insurance carriers that have given us underwriting authority.
 
One of our strategic goals is to use our existing product expertise and relationships with insurance carriers to develop new MGU programs. We currently are evaluating a number of potential programs. We plan to pursue opportunities to develop or acquire new programs, which may involve recruiting underwriters who have developed niche product expertise as well as strategic acquisitions of businesses that have their own MGU programs.
 
As of December 31, 2006, our Specialty Underwriting division had 106 employees, including 35 underwriters.
 
Group Benefits
 
Through our Group Benefits division, we distribute a range of employee benefit products, including:
 
  •      retiree medical and prescription drug insurance plans, which have represented a significant part of our growth in this division since January 1, 2003;
 
  •      group benefit products designed for member groups, such as trade associations, chambers of commerce, unions and professional organizations; and
 
  •      group benefit products sold by Blue Cross Blue Shield of Rhode Island, which has appointed us as its exclusive general agent for employer groups with 50 or fewer employees.


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We also distribute a Medicare-approved prescription drug plan under Part D of the Social Security Act, primarily to employer groups that desire for their Medicare-eligible retirees to participate in an eligible prescription drug plan.
 
We also provide a range of related services, including:
 
  •      premium administration services for insurance carriers, employers and member organizations;
 
  •      third-party claims administration services for insurance carriers and employer groups;
 
  •      pharmacy benefit management services for insurance carriers, employer groups, unions, member groups and third-party administrators; and
 
  •      other ancillary services, including limited-authority underwriting services for certain insurance carriers.
 
The following is a list of the products and services offered by our Group Benefits division:
 
             
        Blue Cross
   
        Blue Shield of
   
Retiree Products   Member Groups   Rhode Island   Services
 
•  Retiree Medical
•  Retiree Prescription
  Drug
•  Life
 
•  Critical Illness
•  Dental
•  Life
•  Long-Term Disability
•  Long-Term Care
•  Retiree Medical
•  Retiree Prescription
  Drug
•  Student Health
 
•  COBRA
  Administration
•  Flexible Spending
  Accounts
•  Group Dental
•  Group Health
•  Group Life
•  Group Long-Term
  Disability
•  Group Short-Term
  Disability
•  Health Reimbursement
•  Retiree Medical
•  Retiree Prescription
  Drug
•  Voluntary Benefits
•  Individual Long-Term
  Care
 
•  Claims Administration
•  Premium
  Administration
•  Limited-Authority
  Underwriting
•  Pharmacy Benefit
  Management Services
 
A substantial part of our business in this division involves the placement of retiree medical and prescription drug insurance products. We believe that demand for these insurance products is driven in part by a desire by employers, particularly those with self-funded plans, to control, reduce or eliminate the rising costs of retiree health benefits and the administrative burden of providing these benefits. Using the knowledge we gained over a number of years from placing and administering group benefit plans for member groups, in 2002 we began to focus on distributing a group retiree health benefit product, known as Retiree Benefit Advantage, for companies experiencing financial difficulty. This product allows employers to implement an insured medical/prescription drug plan that may be funded by the employer, its retired employees or both on a shared basis, at attractive group rates. In connection with our entry into this product line, we substantially increased the size and capabilities of our call center to permit us to support this product with an array of administrative services, including plan enrollment and billing and collection, thereby allowing employers to outsource the administration of retiree benefits to us.
 
Our first significant account for our Retiree Benefit Advantage product was a large public manufacturing company that filed for bankruptcy protection in the second half of 2001. Faced with the prospect of terminating retiree health benefits as a result of its financial difficulties, this company and its non-union retirees elected to acquire a retiree group health insurance plan placed and administered by us. As


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employers have increasingly sought to control and reduce the cost of retiree benefits in response to the rising cost of health care and the aging of the U.S. population, we have also been able to distribute our retiree health products to financially sound companies and governmental entities that in many cases have elected to replace their self-funded retiree health plans with a group insurance product. We have placed retiree health and prescription drug plans for a number of employer groups, including Aon, Brown University, Brunswick Corporation, Continental Tire North America, Inc., Nationwide Financial Services, Inc., Snap-On Incorporated and Yale New Haven Health System.
 
The enactment of Medicare Part D under the Social Security Act generally has provided employers with more options regarding prescription drug benefits for retirees age 65 and older. Under Part D of the Social Security Act, effective January 1, 2006 eligible Medicare beneficiaries are able to obtain prescription drug coverage by enrolling in a prescription drug plan or a Medicare Advantage plan (MA-PD) that offers prescription drug coverage. Employers who provide prescription drug benefits to retirees can elect to: (i) continue providing these benefits with no governmental assistance; (ii) implement a plan offering the actuarial equivalent of a Medicare Part D plan with a subsidy payment from the U.S. government; (iii) create their own prescription drug plan or Medicare Advantage plan (MA-PD); (iv) terminate their retiree prescription drug benefits; or (v) supplement coverage available to Medicare-eligible retirees through an independent prescription drug plan or a Medicare Advantage plan (MA-PD).
 
As a result of the Medicare Modernization Act, insurance products that cover prescription drug benefits for Medicare-eligible individuals now compete with the entitlement program created under Part D of the Social Security Act. We believe the Medicare Modernization Act generally has resulted in the development of new insurance products available for employers that desire to continue to offer their retired employees access to prescription drug benefits. We distribute a prescription drug plan designed specifically for employer groups as well as customized insurance products that permit employers to supplement the benefits available to their retired employees through an independent prescription drug plan or Medicare Advantage plan (MA-PD).
 
We also place and administer a wide array of group benefit products for member organizations. These products are acquired by national, regional and local member groups that frequently do not have the capability or desire to administer these plans and that seek ways to make membership in their organizations more appealing. Through our relationships with our insurance carrier partners, we are able to help design customized group benefit plans to respond to the varying needs of these organizations.
 
We are able to handle virtually all aspects of administering the types of group benefit products that we place, including plan enrollment, eligibility, billing, collection and claims administration. We have made a substantial investment in a call center that we use to provide assistance and support for the plans we administer. We provide administrative services to both insurance carriers and employers for plans that we distribute as well as plans distributed by others. We currently administer retiree health plans for over 800 employer groups and 74 member groups. In addition, in April 2006 we acquired Communitas, which provides third-party claim administrative services primarily for self-insured group health plans. As of December 31, 2006, Communitas administered plans covering more than 100,000 lives.
 
One advantage of providing administrative services for the retiree health plans we distribute is that it increases the likelihood that we will remain the wholesale insurance broker for the plan. After an employer has outsourced the administration of a retiree health plan, it is more difficult to re-establish the ability to administer the plan internally or to transition the plan to a new outsourced provider. The costs, administrative burden and confusion that such a switch could create among an organization’s retirees all create potential customer retention advantages for us.
 
As of December 31, 2006, our Group Benefits division had 307 full-time employees, including 20 brokers.
 
Acquisition Strategy
 
We seek opportunities to acquire companies whose businesses would complement, expand upon or diversify our current operations. We often are familiar with the owners or management of acquisition targets


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before we initiate discussions with them. We believe that our operating philosophy makes us an attractive business partner because it offers the management team of acquisition targets access to the resources of a large national firm without losing the entrepreneurial freedom of a small firm. We believe our technology, marketing, finance and other resources as well as our long-standing relationships in key markets are appealing to the owners and managers of wholesale distribution firms.
 
We are experienced in acquiring companies. Since January 1, 2002, we have acquired nine businesses. We perform due diligence on all acquisition targets, and we evaluate their ongoing business operations and key business drivers. Our due diligence efforts typically involve the assistance of our actuarial staff to evaluate the business and product risks associated with acquisition targets.
 
We generally consider a variety of factors in negotiating acquisitions, including cash flow, rates of return and strategic fit. Frequently, we require that part of the purchase price be deferred or subject to an earnout to align the interests of the sellers with ours and to protect us from post-acquisition uncertainties. We typically retain management of the firms that we acquire to continue to oversee the day-to-day sales operations of the acquired business. Our acquisition contracts, which typically include employment agreements for the key brokers and underwriters involved in the acquired business, generally subject the former owners and key brokers and underwriters of the business being acquired to various restrictions, including non-competition and non-solicitation covenants. After an acquisition has been completed, we integrate the acquired company’s accounting and other systems into our company-wide systems.
 
There are certain risks inherent in pursuing growth through acquisitions. Accordingly, we can give no assurance that we will be successful in identifying, acquiring or integrating businesses that enhance our business or results of operations or otherwise perform as we expect. See “Risk Factors — Risks Related to Our Business and Industry — If we are unable to successfully acquire or integrate acquired businesses, or if they do not perform as we expect, our competitiveness, operating results and financial condition could be harmed.”
 
Operations
 
As of December 31, 2006, we had 33 offices located across the United States. Substantially all of our Property & Casualty Brokerage offices operate under the “AmWINS Brokerage” brand name. Most of the Specialty Underwriting and Group Benefits businesses continue to operate under their original names because of their close association with the products they have distributed for a number of years.
 
Although our operations are spread across the United States, we adhere to a “one firm” philosophy, with the intent that our employees and customers view us as one firm nationally. Substantially all of our operations are connected through a centralized IT system. We have centralized substantially all of our human resources, marketing, finance, merger and acquisition, legal, licensing, compliance and risk management operations. We also provide our businesses with technical, underwriting and regulatory support. We have implemented our enterprise operating system, AmLINK, to centralize the majority of our premium collection, accounting and administrative functions in our Charlotte service center and a satellite service center in Chicago. Although we have focused on centralizing our administrative operations, we remain committed to our decentralized sales and product development culture to provide our brokers with greater flexibility to adapt to the changing needs of their customers.
 
Sales and Marketing
 
Virtually all of our sales and marketing efforts are directed at developing and maintaining relationships with retail insurance brokers and key employees of insurance carriers who underwrite the products that we distribute. We seek to develop new business with retail insurance brokers who can benefit from our expertise and access to insurance carriers. We also strive to maintain frequent contact with key insurance carrier underwriting personnel so that we understand their product preferences and they understand our distribution capabilities.
 
Our decentralized sales culture provides our brokers with the entrepreneurial freedom and flexibility they need to better serve their clients and detect client-specific opportunities for new business. Our sales


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efforts are driven by individual brokers and underwriters under the direction of the management of our offices, practice groups and divisions. We foster an environment that recognizes and rewards cooperation among our brokers. We believe our ability to work in teams helps us better compete for large and complex accounts.
 
We support our localized sales efforts through a national marketing program. Our marketing department works closely with each division’s management team to develop a marketing strategy that best suits each division. We market ourselves through trade publications, trade shows, trade seminars and other events sponsored by us, as well through our website and other sales and marketing materials.
 
Clients
 
During 2006, we placed business for more than 4,500 retail insurance brokerage firms of varying sizes, ranging from large, multinational retail insurance brokers such as Aon, Marsh and Willis to small, one-office firms. We have entered into agreements with Aon, Marsh and Willis under which they have appointed us on a national basis to work with them. Although we do business with all of the large, national retail insurance brokerage firms, we derive a substantial part of our business from mid-size retail insurance brokers. In 2006, our 10 largest retail insurance brokerage clients represented approximately 29.1% of our consolidated revenues.
 
Willis accounted for approximately 15.0% and 12.8% of our revenues for the years ended December 31, 2005 and 2006, respectively. If we lose Willis as a retail insurance brokerage client or there is a substantial reduction in the volume of business we do with Willis, our business and operating results would be materially harmed.
 
In connection with our acquisition of Stewart Smith Group from Willis, we entered into a business agreement with Willis that: (i) requires Willis to name us as the broker of record for each policy placed by us for Willis, unless Willis determines that naming us as the broker of record is not in the best interest of its client; (ii) requires Willis to engage us for the placement and renewal of an insurance policy acquired by a client of Willis for which we are the broker of record, unless Willis determines that the engagement of us is not in the best interest of the client; (iii) requires Willis and us to negotiate and reach an agreement on a case-by-case basis regarding how to share commissions paid in connection with the placement of insurance policies by us for Willis, and if we are unable to agree, generally provides terms on which we share commissions with Willis; (iv) requires Willis to provide us with 10-days’ advance notice if it determines to use another brokerage firm for this business; and (v) prohibits Willis from using certain designated brokers of Stewart Smith Group who terminate their employment with us and accept employment with any of our competitors. The agreement expires on April 13, 2009, and will renew for successive one-year periods after that date unless either party provides notice of non-renewal to the other party. In addition, either party may terminate the agreement if the other party materially breaches any provision of the agreement.
 
Insurance Carriers
 
We have been appointed to do business with over 100 insurance carriers, including large insurance carriers operating internationally as well as smaller insurance carriers operating in the United States. Our five largest insurance carriers in terms of total premiums placed during 2006 by us were ACE, AIG, Alleghany, Lloyd’s and Zurich.
 
We periodically review the performance, financial health and ratings of all insurance carriers with which we do business, and we generally advise our clients against doing business with any insurance carrier failing to maintain a financial strength rating of at least “A−” and a financial size category of at least “VII” (often expressed together in a manner such as “A−, VII”) from A.M. Best.
 
For the years ended December 31, 2005 and 2006, approximately 11.5% and 9.3%, respectively, of our revenues were derived from insurance policies provided by AIG. If AIG terminated or significantly reduced the amount of business we place with it, we would need to locate other insurance carriers to underwrite this business, which would increase our expenses and could result in the loss of market share while we located other insurance carriers for this business.


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In our Specialty Underwriting division, we act as an MGU for insurance carriers that have given us authority to bind coverage on their behalf. Our MGU programs are governed by contracts between us and the insurance carriers that have given us authority to bind insurance under the program. These contracts typically can be terminated by the insurance carrier with very little advance notice. The termination of any of our MGU programs, or a change in the terms of any of these programs, could harm our business and operating results.
 
Competition
 
The wholesale insurance brokerage industry is highly competitive, and a number of firms actively compete with us for clients and access to insurance carriers. Our competition includes other wholesale insurance brokerage firms, some of which are owned by large retail insurance brokerage firms, banks or financial service companies, as well as retail insurance brokerage firms and insurance companies. Some of our primary competitors are owned by our clients, and some have substantially greater resources than we have.
 
The largest competitors of our Property & Casualty Brokerage division are Swett & Crawford, CRC, Crump and RPS. We believe that, in terms of aggregate premiums placed, we currently are comparable in size to Swett & Crawford and CRC and larger than Crump and RPS, based on information published by Business Insurance. In this division, we also compete with a number of smaller wholesale insurance brokers. Our Property & Casualty Brokerage division competes for clients on the basis of product knowledge, access to insurance carriers and markets and quality of client service. We believe that some property and casualty insurance carriers and large retail insurance brokerage firms are becoming more attentive to the compliance systems and financial position of the wholesale insurance brokers they use. We believe this development may cause these firms to decrease the number of wholesale insurance brokers they use, which may benefit firms like ours that have invested in and maintain compliance systems and procedures. We believe our size, scope of operations, product diversity and infrastructure enable us to compete favorably in our markets.
 
Our Specialty Underwriting division competes with a variety of sources for standard and specialized insurance products that provide coverage similar to the types of products we distribute. In many cases, our competitors are other insurance carriers that provide these products. In addition, we frequently compete with small to mid-size wholesale distribution firms that provide products that are similar to the products offered by our MGU programs. We believe the largest MGU firms in the United States are Victor O. Schinnerer & Co., Inc, a subsidiary of Marsh, K&K Insurance Group, a subsidiary of Aon, Arrowhead General Insurance Agency, Inc. and U.S. Risk Insurance Company, Inc., most of which we believe are substantially larger than our Specialty Underwriting division. Our MGU programs compete for clients on the basis of product coverage and pricing.
 
Although there are no large national wholesale insurance brokerage firms with which our Group Benefits division regularly competes, our Group Benefits division competes with a variety of other businesses, including retail insurance brokers that distribute products similar to the types of products we distribute, insurance carriers that distribute these products directly through retail insurance brokers or to insured parties, benefit consultants that are able to assist in the distribution of these products and a number of other companies that provide group benefit administrative services. Our Group Benefits division competes for clients on the basis of product design and pricing, product knowledge and ability to provide ancillary administrative services, as well as the cost of these services.
 
Governmental Regulation
 
Our insurance brokerage and administrative service activities are subject to regulation and supervision by state authorities. These requirements are generally designed to protect insured parties by establishing minimum standards of conduct and practice. Although the scope of regulation and form of supervision may vary from state to state, insurance laws generally grant broad discretion to supervisory authorities in adopting regulations and supervising regulated activities. Generally, in every state in which we do business as an insurance broker, we are required to be licensed or to have received regulatory approval to conduct business. In addition, most states require that our employees who engage in brokerage activities in that state be licensed personally. We also are required in many states to report, collect and remit surplus lines taxes to state taxing


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authorities for insurance policies placed in the E&S lines market. The laws and regulations regarding the calculation of surplus lines taxes vary significantly from state to state, and it can be difficult and time consuming to determine the amount of surplus lines taxes due to a particular state, especially for insurance policies covering risks located in more than one state. From time to time, we and our licensed employees are subject to inspection by state governmental authorities with regard to our compliance with state insurance laws and regulations and the collection of surplus lines taxes. We also are affected by the governmental regulation and supervision of insurance carriers. For example, if we act as an MGU for an insurance carrier, we may be required to comply with laws and regulations affecting the insurance carrier. Moreover, regulation affecting the insurance carriers with which we place business can affect how we conduct operations. Our Group Benefits division also generally is required to be licensed in states in which it provides administrative services.
 
Laws and regulations vary from state to state and are always subject to amendment or interpretation by regulatory authorities. These authorities have substantial discretion as to the decision to grant, renew and revoke licenses and approvals. Our continuing ability to do business in the states in which we currently operate depends on the validity of and continued good standing under the licenses and approvals pursuant to which we operate. More restrictive laws, rules or regulations may be adopted in the future that could make compliance more difficult and expensive or adversely affect our business. See “Risk Factors — Risks Related to Our Business and Industry — We are subject to governmental regulation and supervision, and increased costs of compliance or failure to comply with applicable laws and regulations could increase our expenses, restrict our growth and limit our ability to conduct our business.”
 
Employees
 
As of December 31, 2006, we employed 976 employees. None of our employees is represented by a labor union. We believe that our relationship with our employees is good.
 
Legal Proceedings
 
In the ordinary course of our business, we are involved in various claims and legal proceedings relating to our business. We maintain errors and omissions and employee practices insurance that is intended to cover many of these claims. Based on information currently available and discussions with legal counsel, our management does not believe that any pending or threatened proceedings will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
 
Properties
 
Our headquarters are located in Charlotte, North Carolina. We own no real property, and lease all space for our office locations throughout the United States. We believe that our offices are in good condition and adequate for our current needs. If necessary, we expect that suitable additional space will be available as required.


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MANAGEMENT
 
Executive Officers and Directors
 
The following table presents information concerning the persons who will be our executive officers and directors upon the completion of this offering:
 
           
Name
  Age  
Position
 
M. Steven DeCarlo
    49   President and Chief Executive Officer; Director
Scott M. Purviance
    37   Chief Financial Officer, Vice President and Secretary
Samuel H. Fleet
    46   President — Group Benefits Division
J. Scott Reynolds
    42   President — Specialty Underwriting Division
Mark M. Smith
    53   President — Property & Casualty Brokerage Division
David W. Dabbs
    45   General Counsel
Kristin L. Downey
    34   Director of Human Resources
Joseph E. Consolino
    40   Director
Brian P. Golson
    36   Director
John W. Long
    51   Director
Marc R. Rubin
    33   Director
John C. Rutherford
    57   Director
 
M. Steven DeCarlo has served as President and Chief Executive Officer of AmWINS since December 2000. Prior to joining AmWINS, Mr. DeCarlo held various management positions with Royal & SunAlliance USA, Inc. from 1988 to 2000, including Senior Vice President for Business Insurance (1998-2000) and Executive Vice President and Chief Financial Officer of Royal Specialty Underwriting Inc., Royal & SunAlliance’s excess and surplus division (1988-1998). He has served on the AmWINS board of directors since he joined AmWINS in December 2000.
 
Scott M. Purviance has been the Chief Financial Officer, Vice President and Secretary of AmWINS since July 2001. Previously, Mr. Purviance was Vice President of Finance for the Business Insurance Division of Royal & SunAlliance USA, Inc. (1999-2001) and was employed by PricewaterhouseCoopers LLP in the insurance services group within the Assurance and Business Advisory Services (ABAS) practice (1992-1999).
 
Samuel H. Fleet has served as President of our Group Benefits division since April 2004. Mr. Fleet founded National Employee Benefit Companies, Inc. (NEBCO) and related companies and served as the principal executive officer of these companies until they were acquired by us in July 2000. Mr. Fleet has continued to serve as President of NEBCO since that time.
 
J. Scott Reynolds has served as President of our Specialty Underwriting division since April 2006. Mr. Reynolds formerly served as Chief Actuary of AmWINS from July 2002 to April 2006. Prior to joining AmWINS, Mr. Reynolds worked as Actuarial and Pricing Manager of the Business Insurance Division of Royal & SunAlliance USA, Inc. (1999-2002).
 
Mark M. Smith has served as President of our Property & Casualty Brokerage division since April 2005. Prior to that time, Mr. Smith served as the Chief Executive Officer and President of Stewart Smith Group from December 1999 to April 2005, when we acquired Stewart Smith Group. From 1990 to 1999, Mr. Smith served in various other executive positions with Stewart Smith Group and its affiliates.
 
David W. Dabbs has served as General Counsel of AmWINS since September 2006. Prior to joining AmWINS, Mr. Dabbs was engaged in the private practice of law for over 16 years. From 1997 to 2006, Mr. Dabbs was a partner in the firm of Robinson, Bradshaw & Hinson, P.A.
 
Kristin L. Downey has served as Director of Human Resources of AmWINS since December 2002. Prior to joining AmWINS, Ms. Downey was employed by PricewaterhouseCoopers LLP, where she spent five years in the Assurance and Business Advisory Services (ABAS) practice and two years as the Recruiting Manager for the Carolinas ABAS and Tax practice.


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Joseph E. Consolino has served as a director of AmWINS since December 2006. Since March 2006, Mr. Consolino has served as Executive Vice President and Chief Financial Officer of Validus Holdings, Ltd., a reinsurer based in Bermuda. From 1998 until joining Validus Holdings, Mr. Consolino served as a Managing Director in the investment banking division of Merrill Lynch. Mr. Consolino also currently serves on the board of directors of National Interstate Corporation.
 
Brian P. Golson has served as a director of AmWINS since October 2005. Mr. Golson is a Partner at Parthenon Capital, LLC. Prior to joining Parthenon Capital, LLC in 2002, Mr. Golson was the Chief Financial Officer and Vice President of Operations at Everdream Corporation, a software company headquartered in Fremont, California.
 
John W. Long was elected as a director of AmWINS in January 2007. Since June 2003, Mr. Long has served as Chief Executive Officer of First Advantage Corporation (First Advantage), a business services and consulting firm based in St. Petersburg, Florida. From 1990 to June 2003, Mr. Long served in various positions with subsidiaries of First American Corporation (First American), which owns a majority of the outstanding stock of First Advantage. From 1993 to 2000, Mr. Long was president and chief executive officer of First American Real Estate Information Services, Inc., a subsidiary of First American that provides financial and information services to the mortgage lending industry. From March 2000 until June 2003, Mr. Long was Chief Executive Officer of HireCheck, Inc., a background screening company formerly owned by First American that is now a wholly owned subsidiary of First Advantage.
 
Marc R. Rubin has served as a director of AmWINS since October 2005. Mr. Rubin is a Principal of Parthenon Capital, LLC, which he joined in 2000. Prior to joining Parthenon Capital, LLC, Mr. Rubin was a Principal at The Parthenon Group, a strategic advisory firm.
 
John C. Rutherford has served as a director of AmWINS since October 2005. Mr. Rutherford is a founder and Managing Partner of Parthenon Capital, LLC and is co-founder and former Chairman of The Parthenon Group. Before founding The Parthenon Group in 1998, Mr. Rutherford was a director of Bain & Company.
 
Board of Directors
 
Our board of directors currently consists of six directors, four of whom have been appointed pursuant to the operating agreement of Holdings, which currently entitles Parthenon HoldCo to designate a majority of our directors. We expect to amend these provisions in connection with the consummation of this offering to provide that our board of directors will consist of such number of directors as determined by our board and elected by our stockholders in accordance with our bylaws.
 
Only two of our current directors, Mr. Consolino and Mr. Long, are “independent” as defined under the rules of the NYSE for purposes of board membership generally and for purposes of service on our Compensation, Audit and Governance Committees. Our board of directors has considered, and does not believe, that Mr. Consolino’s prior employment with Merrill Lynch, including his past service as an advisor to us in connection with certain acquisition and other strategic transactions, impairs his independence as a board member or prospective committee member. Under the phase-in provisions of the NYSE rules relating to the governance of companies such as AmWINS that are listing in conjunction with an initial public offering, we have a period of 12 months from the completion of this offering to comply with the rule that a majority of our directors be “independent” within the meaning of the NYSE rules. In addition, the phase-in rules require that our Compensation, Audit and Governance Committees include at least one “independent” director at the time of initial listing upon completion of this offering, that a majority of the members of these committees be independent within 90 days of initial listing and that all members of these committees be independent within 12 months of initial listing. We intend to restructure our board of directors and key committees to comply with these independence requirements as soon as possible, but in no event later than the NYSE phase-in deadlines.


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Controlled Company
 
Upon the completion of this offering, because Parthenon HoldCo will own more than 50% of the voting power of AmWINS, we will be a “controlled company” within the meaning of the NYSE corporate governance standards. Although we do not currently intend to rely upon any of the “controlled company” exemptions from the NYSE corporate governance standards, we cannot assure you Parthenon HoldCo’s influence or other factors will not result in our reliance on these exemptions. See “Risk Factors — Risks Related to this Offering — Our principal stockholder may have interests that are different from yours and, therefore, make decisions that are adverse to your interests” and “— Upon completion of this offering, we expect to be a “controlled company” within the meaning of the NYSE rules, which would qualify us for exemptions from certain corporate governance requirements. If we choose to rely on these exemptions, our stockholders will not have all of the same protections as stockholders of companies that are subject to all of the NYSE corporate governance requirements.”
 
Committees of the Board of Directors
 
Our board of directors will establish three committees: an Audit Committee, a Compensation Committee and a Governance Committee.
 
Audit Committee.  The primary function of our Audit Committee will be to assist our board of directors in overseeing our accounting and financial reporting processes generally, the audits of our financial statements and our systems of internal controls regarding finance and accounting. Our Audit Committee’s responsibilities will include:
 
  •      selecting and overseeing our independent registered public accounting firm;
 
  •      reviewing the qualifications, performance and independence of our independent registered public accounting firm;
 
  •      approving all audit and non-audit services rendered by our independent registered public accounting firm;
 
  •      reviewing our annual and quarterly financial statements with our management and independent registered public accounting firm;
 
  •      reviewing the integrity and adequacy of our financial reporting processes;
 
  •      reviewing and resolving any disagreements between our management and our independent registered public accounting firm in connection with the preparation of our financial statements;
 
  •      establishing procedures for the confidential, anonymous submission by our employees of concerns or complaints regarding questionable accounting or auditing matters;
 
  •      reviewing and approving all related party transactions involving us and our directors and executive officers; and
 
  •      preparing any report of the Audit Committee that the SEC requires us to include in our annual proxy statements or other filings.
 
We will, within the time period required by the NYSE rules described above, appoint independent directors to our Audit Committee as required by the rules of the SEC and the listing standards of the NYSE, including the financial literacy requirements. Our board of directors will adopt a written charter of our Audit Committee, which will be posted on our website on or before the completion of this offering.
 
Compensation Committee.  Our Compensation Committee’s primary function will be to assist our board of directors in determining compensation paid to our executive officers and directors. Its responsibilities will include:
 
  •      reviewing and recommending compensation plans in which our executive officers and directors participate;
 
  •      overseeing our executive compensation programs;


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  •      approving the compensation paid to our chief executive officer and directors;
 
  •      reviewing and administering our equity-based compensation plans; and
 
  •      preparing any report of the Compensation Committee that the SEC requires us to include in our annual proxy statements or other filings.
 
We will appoint independent directors, within the meaning of the NYSE listing standards, to serve on our Compensation Committee within the time period required by the NYSE. Our board of directors will adopt a written charter for our Compensation Committee, which will be posted on our website on or before the completion of this offering.
 
Governance Committee.  Our Governance Committee will assist our board of directors regarding matters involving our corporate governance. Its responsibilities will include:
 
  •      identifying, evaluating and recommending candidates for appointment and reelection to our board of directors;
 
  •      evaluating the composition, size and governance of our board of directors;
 
  •      reviewing and recommending changes, as needed, to our corporate governance principles;
 
  •      conducting or overseeing periodic evaluations of the board of directors and management; and
 
  •      reviewing compliance with our code of ethics.
 
We will appoint independent directors to serve on our Governance Committee as required by the NYSE listing standards. Our board of directors will adopt a written charter for our Governance Committee, which will be posted on our website on or before the completion of the offering.
 
Compensation Committee Interlocks and Insider Participation
 
We will appoint directors to our Compensation Committee who have never been employed by us as an officer or employee. None of our executive officers has ever served as a member of the board of directors or compensation committee of any entity that has one or more of its executive officers serving as a member of our board of directors.
 
Compensation of Directors
 
In 2006, we did not pay our directors any compensation for service as directors. We did, however, reimburse directors for out-of-pocket expenses they incurred in connection with their attendance at meetings of the board of directors. We have agreed in principle to amend our advisory services agreement with PCap (an affiliate of Parthenon Capital), such that after completion of this offering, PCap will receive a director services fee of $50,000 per quarter so long as a Parthenon Capital-affiliated director serves on our board, subject to a maximum fee of $400,000. We have also agreed to reimburse PCap for certain expenses incurred by Parthenon-affiliated directors who serve on our board. See “Related Party Transactions — Parthenon Advisory Services Agreement.”
 
Prior to completion of this offering, we intend to adopt a director compensation plan to compensate our directors who are neither our employees nor Parthenon Capital-affiliated directors. Under this plan, each such director will receive an annual retainer of $25,000, quarterly meeting fees of $1,500 for meetings of the board of directors and a fee of $1,000 per meeting of each committee on which such director serves. In addition, the chairman of the Audit Committee will receive an annual retainer of $10,000, the chairman of the Compensation Committee will receive an annual retainer of $5,000 and the chairman of the Governance Committee will receive annual retainer of $2,500. Participating directors may elect to receive all or any portion of their annual and chairman’s retainers, if any, in cash or our common stock, valued as of the closing market value of our shares on the date of grant. In addition, each such director will, upon joining the board, receive a grant of options to purchase 15,000 shares of our common stock, with an exercise price generally equal to the closing market price on the date of grant. However, options granted to independent directors who join our board of directors prior to the completion of our initial public offering, including Mr. Consolino and Mr. Long, will be exercisable at the initial public offering price of our shares. These options will vest in three


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equal annual installments beginning on the first anniversary of the date of grant. Each such director will receive a new grant of options to purchase an additional 15,000 shares of our common stock, subject to similar exercise and vesting terms, on the third anniversary of the commencement of service on our board of directors. Equity grants due under our director compensation plan will be satisfied through grants under a new equity incentive plan we intend to implement prior to the consummation of our initial public offering.
 
Executive Compensation
 
Compensation Discussion and Analysis
 
Overview
 
Our company-wide compensation policy is generally performance-based, with a substantial component of compensation paid to our brokers and underwriters based on the volume of revenue they generate. Certain of our division presidents, who are “named executive officers” in the Summary Compensation Table below, are similarly entitled to additional payments based on the performance of their division, as discussed below. See “— Components of Compensation; Annual Cash Bonuses.” The compensation of most of our other named executive officers is the product of fully negotiated compensation terms that reflect our private equity owner’s subjective assessment of their unique value to our company.
 
Historically, our executive compensation program generally, and specific executive officer compensation arrangements, have reflected the following factors:
 
  •      Since we were formed in 1998, we have been owned by private equity firms, and the compensation paid to certain of our executive officers reflects negotiations between these firms and officers. Until October 27, 2005, the date of the Recapitalization, Pegasus and related investment funds owned a majority of the outstanding equity of Holdings, our parent company. In connection with the Recapitalization, Parthenon HoldCo acquired a controlling interest in Holdings and negotiated employment agreements with our President and Chief Executive Officer and Chief Financial Officer.
 
  •      In connection with our acquisition of certain businesses, we have negotiated employment agreements with the key managers of these businesses, some of whom are currently named executive officers. These negotiations typically reflected our judgment regarding the volume of business generated by the acquired businesses and our subjective assessment of the relative importance of these managers to the overall success of these businesses. In one case, we have renegotiated the employment agreement with a key manager to modify the performance-based mix of his compensation to provide additional incentive payments upon achievement of certain levels of performance.
 
  •      As we have grown, we have been required to recruit additional executive officers to join our company. The overall amounts and mix of compensation paid to these officers primarily reflect negotiations with them in connection with their recruitment. Although in some cases we have relied on available data regarding the level of compensation paid by other companies to persons with similar responsibilities, we have not engaged a third-party compensation consultant to assist us with any of these negotiated recruitments.
 
To date, our board of directors, subject to the control of our private equity owner, generally has reviewed and approved the material terms of compensation arrangements with our named executive officers, with significant input from our President and Chief Executive Officer regarding the compensation of other officers. In connection with our initial public offering, we will establish a Compensation Committee that will oversee the terms and conditions of our executive compensation program and the compensation arrangements of our senior executive officers.
 
As indicated above, we have employment agreements with many of our executive officers, and the compensation paid to these officers largely is determined by the terms of their respective employment agreements. See “— Employment Agreements.” Although these employment agreements generally require us


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to pay severance compensation if these executive officers are terminated under certain circumstances and limit our flexibility to adjust the compensation paid to these officers, we believe we derive substantial value from these arrangements from having non-competition and non-solicitation provisions with these executive officers. For executive officers who do not have employment agreements, we determine an appropriate level and type of compensation with substantial input from our President and Chief Executive Officer as well as review by our board of directors.
 
Our objective as it relates to our executive compensation program is to offer compensation packages that will attract and retain highly qualified, knowledgeable and seasoned executive officers and to reward them for their contributions to the development of our business.
 
Components of Compensation
 
Our compensation program consists of three basic components:
 
  •      Base Salaries;
 
  •      Annual Cash Bonuses; and
 
  •      Equity Awards.
 
Base Salaries.  We believe base salaries are an essential element of a competitive compensation program to attract and retain qualified executives. For those executive officers who have employment agreements, we pay base salaries in accordance with the terms of these agreements. For executive officers without employment agreements, we pay compensation initially in accordance with terms negotiated upon hire and thereafter based on our assessment of their relative responsibilities, contributions and performance.
 
Annual Cash Bonuses.  We believe the payment of cash bonuses is consistent with our performance-based compensation philosophy and provides meaningful incentives and reward opportunities for performance that benefits our business. Cash bonuses paid to some of our executive officers, including our President and Chief Executive Officer and Chief Financial Officer, are within the discretion of our board of directors under the terms of their employment agreements, subject to certain minimum bonus amounts if we are in compliance with the terms of our senior secured credit facilities and any other material debt agreements. For 2006, we intend to pay the minimum amount of bonuses to these executive officers. Annual bonuses paid to certain other executive officers are paid at the discretion of our board of directors and generally reflect a number of subjective considerations, including the performance of our company overall and the contributions of these executives during the period.
 
A substantial part of total compensation paid to the presidents of our Property & Casualty Brokerage division and Group Benefits division is performance-based compensation that is determined based on the overall performance of these divisions. These named executive officers can earn a substantial amount of performance-based compensation, but only if their respective divisions perform at a high level. The President of our Group Benefits division is entitled to receive a bonus based on the amount by which levels of EBITDA margin and growth in net revenues of this division exceed pre-determined targets. These targets, which were established in 2003 in conjunction with the most recent negotiation of this officer’s employment agreement, require performance consistently in excess of the prior year’s results. Similarly, the President of our Property & Casualty Brokerage division is entitled to receive an annual bonus of up to 200% of his base salary, based on the satisfaction of certain predetermined EBITDA goals for this division, as determined by our board of directors. These targets require performance in excess of annual budgeted levels in order to result in any payout and were not met for 2006.
 
Equity Ownership.  We believe equity ownership provides appropriate long-term incentives to our executives and aligns their interests with those of our other equity holders. All of our executive officers own a substantial equity interest in Holdings, our current parent company. Certain of these officers acquired their equity interest in us when we acquired the firms with which they previously were employed.


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In March 2002, we established an equity compensation program for our President and Chief Executive Officer and Chief Financial Officer under which these officers were awarded “profits-only” interests in Holdings. These awards generally vested over a period of three years and entitle these executive officers to receive their pro rata share of distributions from Holdings in excess of $25.0 million. In connection with our acquisition of Stewart Smith Group, we entered into a similar arrangement with the President of our Property & Casualty Brokerage division under which he will be entitled to receive his pro rata share of distributions from Holdings in excess of $151.0 million. This award vests over five years.
 
We have adopted the 2002 Stock Option Plan, and we have awarded options under this plan to certain executive officers who otherwise did not have a meaningful equity interest in our company. These options generally vest over a period of five years, subject to the officer’s continued employment, and have all been granted at option prices that are no less than our determination of the value of our common stock at the time of the award. We believe these options will benefit these executive officers only to the extent there is appreciation in the value of our common stock. We intend to adopt a new equity compensation plan in connection with this offering.
 
In connection with the Recapitalization, we also implemented an equity incentive program under which selected employees, including certain of our executive officers, received performance based “profits-only” interests in Holdings that entitle them to share in the value of Holdings on a pro rata basis if and to the extent that Parthenon HoldCo has received distributions from Holdings in excess of certain predetermined amounts. These incentive awards generally vest over a period of five years, subject to the continued employment of our executive officers. See “— Holdings Equity Compensation Arrangements.”
 
Section 162(m)
 
Section 162(m) of the Internal Revenue Code limits publicly held companies to an annual deduction for federal income tax purposes of $1.0 million for compensation paid to their chief executive officer and the four other highest compensated executive officers determined at the end of each year. Under a special rule that applies to corporations that become public through an initial public offering, this limitation in Section 162(m) generally will not apply to compensation that is paid under the 2002 Stock Option Plan and any other compensation plan described in the “Management” section of this prospectus before the first meeting of our stockholders in 2010 at which directors will be elected.
 
Performance-based compensation that meets certain requirements, including stockholder approval, is excluded from this limitation under Section 162(m). In general, compensation qualifies as performance-based compensation under Section 162(m) if (i) it is conditioned on the achievement of one or more pre-established, objective performance goals, (ii) such goal or goals are established by a committee of the board of directors consisting solely of two or more independent directors and (iii) the material terms of the performance goals under which the compensation is payable are disclosed to, and subsequently approved by, the corporation’s stockholders prior to payment. Although awards granted under the plans described above are temporarily exempt from the limitations of Section 162(m), our board and Compensation Committee will consider the future impact of Section 162(m), along with other relevant considerations, in designing and administering our compensation plans. However, compensation actions may not always qualify for tax deductibility under Section 162(m) or other favorable tax treatment to us.


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Summary Compensation Table
 
The following summary compensation table sets forth information concerning the cash and non-cash compensation earned by, awarded to or paid to our principal executive officer, our principal financial officer and each of our three other most highly compensated executive officers during the year ending December 31, 2006. We refer to these officers as our “named executive officers” in other parts of this prospectus.
 
Summary Compensation Table
 
                                                                 
                        Change in
       
                        Pension Value and
       
                        Nonqualified
       
                    Non-Equity
  Deferred
       
                Stock
  Incentive Plan
  Compensation
  All Other
   
Name and
      Salary
  Bonus
  Awards
  Compensation
  Earnings
  Compensation
   
Principal Position
  Year   ($)   ($)   ($)   ($)   ($)   ($)   Total
 
M. Steven DeCarlo
    2006     $ 720,000     $ 280,000     $ 105,823 (1)               $ 32,460 (2)   $ 1,138,283  
President and
                                                               
Chief Executive Officer
                                                               
Samuel H. Fleet
    2006       300,000             19,240 (1)   $ 1,981,602     $ 2,407       18,600 (3)     2,321,849  
President of
                                                               
Group Benefits division
                                                               
Mark M. Smith
    2006       750,000             298,167 (4)                 39,366 (5)     1,087,533  
President of Property &
                                                               
Casualty Brokerage division
                                                               
Scott M. Purviance
    2006       300,000       110,000       28,551 (1)           47       15,254 (6)     453,852  
Vice President and
                                                               
Chief Financial Officer
                                                               
J. Scott Reynolds
    2006       230,000       30,000       14,120 (1)                 12,804 (7)     286,924  
President of Specialty
                                                               
Underwriting division
                                                               
 
 
(1) These amounts include performance-based “profits-only” interests that Holdings agreed to issue in connection with the Recapitalization, which were issued in the third quarter of 2006. These interests are evidenced by Class B units, Class C units, Class D units and Class E units of Holdings that participate in distributions from Holdings on a pro rata basis if and to the extent that Parthenon HoldCo has received distributions from Holdings representing an annualized compounded internal rate of return on its investment in Holdings in excess of 10% (for Class B units), 20% (for Class C units), 30% (for Class D units) and 40% (for Class E units). Mr. DeCarlo received 137,500 of each class of these units, Mr. Purviance received 37,500 of each class of these units, Mr. Fleet received 25,000 of each class of these units and Mr. Reynolds received 18,750 of each class of these units. Of these grants, 23.33% were vested as of December 31, 2006, and the remainder will vest at the rate of 12/3% per month through October 2010. The assumptions made in valuing these units are set forth in Note 11 to our audited consolidated financial statements at and for the year ended December 31, 2006 included elsewhere in this prospectus.
 
(2) This amount includes the following: a $15,000 automobile allowance; $5,400 of country club membership dues; a $6,600 matching contribution to Mr. DeCarlo’s 401(k) account; and $5,460 we paid for life and disability insurance.
 
(3) This amount includes the following: a $6,000 automobile allowance; $6,000 of country club membership dues; and a $6,600 matching contribution to Mr. Fleet’s 401(k) account.
 
(4) This amount represents a portion of “profits-only” interests issued by Holdings in April 2005 to Mr. Smith that vested during 2006. These interests are evidenced by Class Z units of Holdings and entitle Mr. Smith to receive a pro rata share of distributions made by Holdings in excess of approximately $151 million. In accordance with the terms of an exchange agreement between Holdings and Mr. Smith, 33.33% of these units were vested as of December 31, 2006, and the remainder will continue to vest at the rate of 12/3% per month through April 2010. The assumptions made in valuing these units are set forth in Note 11 to our audited consolidated financial statements at and for the year ended December 31, 2006 included elsewhere in this prospectus.


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(5) This amount includes the following: a $15,860 automobile allowance; $9,131 of country club membership dues; a $4,375 matching contribution to Mr. Smith’s 401(k) account; and $10,000 in reimbursement of personal legal expenses incurred by Mr. Smith in connection with the negotiation of his employment agreement with us.
 
(6) This amount includes the following: $5,520 of country club membership dues; a $6,600 matching contribution to Mr. Purviance’s 401(k) account; and $3,134 we paid for life and disability insurance.
 
(7) This amount includes the following: $6,204 of country club membership dues; and a $6,600 matching contribution to Mr. Reynolds’ 401(k) account.
 
As discussed above in “— Compensation Discussion and Analysis,” the base salaries, bonuses, and perquisites payable to our named executive officers and reflected in the Summary Compensation Table above are largely determined by the provisions of their respective employment agreements. See “— Employment Agreements” below for further information regarding the terms of these employment agreements.
 
Holdings Equity Compensation Arrangements
 
Prior to this offering, all of our outstanding capital stock was held by Holdings. From time to time, Holdings has issued incentive equity awards to certain members of our management team and other employees, including the following:
 
  •      “Profits-only” interests issued by Holdings in March 2002 to M. Steven DeCarlo, our President and Chief Executive Officer, and Scott M. Purviance, our Vice President, Chief Financial Officer and Secretary. These interests are evidenced by Class Y units of Holdings, 656,000 of which are held by Mr. DeCarlo and 164,000 of which are held by Mr. Purviance. The Class Y units entitle Messrs. DeCarlo and Purviance to receive their respective pro rata shares of distributions made by Holdings in excess of $25 million. These units vested over the three-year period following the date of grant.
 
  •      “Profits-only” interests issued by Holdings in April 2005 to Mark M. Smith, President of our Property & Casualty Brokerage division. These interests initially were evidenced by 319,922 Class Z units of Holdings. In December 2006, Holdings redeemed 32,500 of these units for nominal consideration, leaving Mr. Smith with an outstanding balance of 287,422 Class Z units. These units entitle Mr. Smith to receive a pro rata share of distributions made by Holdings in excess of approximately $151 million. In accordance with the terms of an exchange agreement between Holdings and Mr. Smith, these units vest over the five-year period following the date of grant.
 
  •      Restricted units issued in the second quarter of 2006 by Holdings to certain non-executive officer employees of AmWINS. These units consist of common units of Holdings, which generally participate in all distributions from Holdings on a pro rata basis. These units vest in full in one installment on January 1, 2011.
 
  •      Performance-based “profits-only” interests that Holdings agreed to issue in connection with the Recapitalization, which were issued in the third quarter of 2006 to certain members of our management team, including certain of the named executive officers. These interests are evidenced by Class B units, Class C units, Class D units and Class E units of Holdings. These incentive units participate in distributions from Holdings on a pro rata basis if and to the extent that Parthenon HoldCo has received distributions from Holdings representing an annualized compounded internal rate of return on its investment in Holdings in excess of 10% (for Class B units), 20% (for Class C units), 30% (for Class D units) and 40% (for Class E units). In general, 20% of these units vested on October 27, 2006, and the remainder vest ratably over a four year period thereafter. Mr. DeCarlo received 137,500 of each class of these units, Mr. Purviance received 37,500 of each class of these units, Mr. Fleet received 25,000 of each class of these units and Mr. Reynolds received 18,750 of each class of these units.


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In our consolidated financial statements, we record compensation expense in accordance with SFAS No. 123(R) for the unit awards that were granted or vest on or after January 1, 2006.
 
In addition, in the second quarter of 2006, Holdings implemented a Unit Purchase Plan pursuant to which selected key employees who are “accredited investors,” as defined in Regulation D adopted under the Securities Act, were offered the opportunity to acquire common units in Holdings for $15.29 per unit. In accordance with the terms of the Unit Purchase Plan, employees who elected to participate in the Unit Purchase Plan received a loan from AmWINS for 50% of the purchase price. The full amount of interest and principal on this loan is payable in full in one installment on the fifth anniversary of the date these notes were issued. All of our executive officers who purchased units under the Unit Purchase Plan have repaid in full all amounts outstanding under their notes. The note receivable has been recorded in prior periods against the total amount of equity recorded.
 
Immediately prior to the completion of this offering, the outstanding units of Holdings, including the units discussed above, were as follows:
 
         
    No. of Units
 
Class of Unit
  Outstanding  
 
Common Units
    11,175,409  
Class B Units
    343,750  
Class C Units
    343,750  
Class D Units
    343,750  
Class E Units
    343,750  
Class Y Units
    820,000  
Class Z Units
    287,422  
         
Total Units
    13,657,831  
         
 
In connection with this offering, Holdings will distribute approximately     % of the outstanding shares of our common stock to the holders of common units, Class Y units and Class Z units. The remaining outstanding shares of our common stock will continue to be held by Holdings pending the final determination of the amounts payable to the holders of Class B, Class C, Class D and Class E units.


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The following table provides information regarding awards of equity and non-equity incentive plan compensation to our named executive officers during the year ended December 31, 2006. For more information regarding the Class B, C, D and E units in Holdings listed in the table, see “— Holdings Equity Compensation Arrangements” above.
 
Grants of Plan-Based Awards
 
                                         
            Estimated Future
  Estimated Future
   
            Payouts Under Non-
  Payouts Under
  Grant Date
            Equity Incentive
  Equity Incentive
  Fair Value of
            Plan Awards   Plan Awards(1)   Stock and
    Grant
  Approval
  Target
  Target
  Option Awards
Name
  Date   Date(2)   ($)   (#)   ($)
 
M. Steven DeCarlo
    7/28/06       4/17/06             137,500 Class B Units     $ 259,521  
      7/28/06       4/17/06               137,500 Class C Units       124,229  
      7/28/06       4/17/06               137,500 Class D Units       51,229  
      7/28/06       4/17/06               137,500 Class E Units       18,550  
Samuel H. Fleet
    7/28/06       4/17/06     $ 1,981,602 (3)     25,000 Class B Units       47,186  
      7/28/06       4/17/06               25,000 Class C Units       22,587  
      7/28/06       4/17/06               25,000 Class D Units       9,314  
      7/28/06       4/17/06               25,000 Class E Units       3,373  
Mark M. Smith
                             
Scott M. Purviance
    9/29/06       9/29/06             6,250 Class B Units       11,557  
      7/28/06       4/17/06               31,250 Class B Units       58,982  
      9/29/06       9/29/06               6,250 Class C Units       5,158  
      7/28/06       4/17/06               31,250 Class C Units       28,234  
      9/29/06       9/29/06               6,250 Class D Units       1,942  
      7/28/06       4/17/06               31,250 Class D Units       11,643  
      9/29/06       9/29/06               6,250 Class E Units       631  
      7/28/06       4/17/06               31,250 Class E Units       4,216  
J. Scott Reynolds
    9/29/06       9/29/06             6,250 Class B Units       11,557  
      7/28/06       4/17/06               12,500 Class B Units       23,593  
      9/29/06       9/29/06               6,250 Class C Units       5,158  
      7/28/06       4/17/06               12,500 Class C Units       11,294  
      9/29/06       9/29/06               6,250 Class D Units       1,942  
      7/28/06       4/17/06               12,500 Class D Units       4,657  
      9/29/06       9/29/06               6,250 Class E Units       631  
      7/28/06       4/17/06               12,500 Class E Units       1,686  
 
 
(1) All equity incentive awards shown in this table are “profits-only” interests evidenced by Class B units, Class C units, Class D units and Class E units of Holdings and were issued in the third quarter of 2006. See Note 1 to the Summary Compensation Table and “— Holdings Equity Compensation Arrangements” for further information regarding the terms of these units. The assumptions made in valuing these units are set forth in Note 11 to our audited consolidated financial statements at and for the year ended December 31, 2006.
 
(2) The difference between the date these awards were approved and their grant date is due to a lapse of time between the approval date and the time that award documents were finalized and executed to evidence these awards.
 
(3) Mr. Fleet’s bonus opportunity for 2007 is determined under NEBCO’s Management Bonus Plan, as described in Mr. Fleet’s employment agreement, and is based on the extent to which target levels of EBITDA margin (as defined in the agreement) and growth in net revenues (as defined in the agreement) are met. Because the formula for determining Mr. Fleet’s 2007 bonus is the same formula that was used to determine his 2006 bonus, the amount shown here represents the amount of bonus Mr. Fleet would earn for 2007 under the Management Bonus Plan assuming that NEBCO’s 2007 results with respect to these performance measures were the same as in 2006.


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The following table provides information with respect to unexercised options, unvested stock, and outstanding equity incentive plan awards for the named executive officers as of December 31, 2006.
 
Outstanding Equity Awards at Fiscal Year-End
 
                                                                         
    Option Awards     Stock Awards  
                                                    Equity
 
                                              Equity
    Incentive
 
                                              Incentive
    Plan Awards:
 
                Equity
                            Plan
    Market or
 
                Incentive
                            Awards:
    Payout
 
                Plan Awards:
                      Market
    Number of
    Value of
 
    Number of
    Number of
    Number of
                Number of
    Value of
    Unearned
    Unearned
 
    Securities
    Securities
    Securities
                Shares or
    Shares or
    Shares,
    Shares,
 
    Underlying
    Underlying
    Underlying
                Units of
    Units of
    Units or
    Units or
 
    Unexercised
    Unexercised
    Unexercised
    Option
          Stock That
    Stock That
    Other Rights
    Other Rights
 
    Options
    Options
    Unearned
    Exercise
    Option
    Have Not
    Have Not
    That Have
    That Have
 
    (#)
    (#)
    Options
    Price
    Expiration
    Vested
    Vested
    Not Vested
    Not Vested
 
Name
  Exercisable     Unexercisable     (#)     ($)     Date     (#)     ($)     (#)     ($)  
 
M. Steven DeCarlo
    75,000 (1)               $ 30.78       1/1/11                       421,674 (2)     (3 )
Samuel H. Fleet
                                                  76,668 (2)     (3 )
Mark M. Smith
                                  191,624 (4)     (3 )             (3 )
Scott M. Purviance
                                                  115,002 (2)     (3 )
J. Scott Reynolds
    50,000 (5)                   12.09       4/24/13                       57,501 (2)     (3 )
 
 
(1) This amount represents fully vested options to acquire Holdings common units.
 
(2) These amounts represent performance-based “profits-only” interests of Holdings evidenced by equal amounts of Class B units, Class C units, Class D units and Class E units of Holdings. See Note 1 to the Summary Compensation Table. This unvested portion of the grants, representing 76.67% of the entire grants, will continue to vest at the rate of 12/3% per month through October 2010.
 
(3) As “profits-only” interests, the value of which is determinable only after distributions to Holdings exceed certain thresholds, the payout value of these units is undeterminable until these distributions occur. See “— Holdings Equity Compensation Arrangements.”
 
(4) This amount represents “profits-only” interests issued by Holdings in April 2005 to Mr. Smith. This unvested portion of the grant, representing 66.67% of the entire outstanding grant, will continue to vest at the rate of 12/3% per month through April 2010.
 
(5) This amount represents fully vested options to acquire shares of our common stock.
 
The following table shows information regarding the exercise of options by, and the vesting of restricted stock held by, our named executive officers during the year ending December 31, 2006.
 
Option Exercises and Stock Vested
 
                                 
    Option Awards     Stock Awards  
    Number of
          Number of
       
    Shares
    Value
    Shares
    Value
 
    Acquired on
    Realized on
    Acquired on
    Realized on
 
    Exercise
    Exercise
    Vesting
    Vesting
 
Name
  (#)     ($)     (#)     ($)  
 
M. Steven DeCarlo
                128,326 (1)     (2 )
Samuel H. Fleet
                23,332 (1)     (2 )
Mark M. Smith
    29,100 (3)   $ 95,448 (4)     57,484 (5)     (2 )
Scott M. Purviance
                34,998 (1)     (2 )
J. Scott Reynolds
                      (2 )
 
 
(1) These aggregate numbers represent equal amounts of “profits-only” Class B, C, D and E units in Holdings that vested in 2006. See Note 1 to the Summary Compensation Table above.


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(2) As “profits-only” interests, the value of which is determinable only after distributions to Holdings exceed certain thresholds, the value of these units is undeterminable until these distributions occur. See “— Holdings Equity Compensation Arrangements.”
 
(3) These represent common units in Holdings.
 
(4) This amount is based on an assumed value of $15.29 per common unit, as determined for purposes of other transactions in common units most closely preceding the time of exercise of these options.
 
(5) These represent “profits-only” Class Z units in Holdings that vested during 2006. See Note 4 to the Summary Compensation Table above.
 
The following table sets forth information for the year ending December 31, 2006 for the named executive officers with respect to our suspended nonqualified deferred compensation plan.
 
Nonqualified Deferred Compensation
 
                                         
    Executive
    Registrant
    Aggregate
    Aggregate
    Aggregate
 
    Contributions
    Contributions
    Earnings in
    Withdrawals/
    Balance at
 
    in Last FY
    in Last FY
    Last FY
    Distributions
    Last FYE
 
Name
  ($)     ($)     ($)     ($)     ($)  
 
M. Steven DeCarlo
                             
Samuel H. Fleet
              $ 2,407           $ 61,533  
Mark M. Smith
                             
Scott M. Purviance
                47             47  
J. Scott Reynolds
                             
 
Equity Compensation Arrangements
 
2002 Stock Option Plan
 
In 2002, we adopted the American Wholesale Insurance Group, Inc. 2002 Stock Option Plan (2002 Stock Option Plan). The purpose of the plan is to allow eligible persons who provide services to us to acquire a proprietary interest in us as an incentive to continue their employment or service. Persons eligible to participate in this plan are our employees, non-employee members of our board of directors or the board of directors of any of our subsidiaries and consultants and other independent advisors who provide services to us. The plan permits us to grant options to purchase up to           shares of our common stock. Upon completion of this offering, we will suspend the 2002 Stock Option Plan, after which time no additional options will be granted under the plan. This action will not affect options that are currently outstanding under the 2002 Stock Option Plan. As of December 31, 2006, we had issued options to acquire an aggregate of           shares of our common stock under this plan at exercise prices ranging from $      per share to $      per share, with a weighted average exercise price of $      per share. No named executive officer other than Mr. Reynolds holds any of these options.
 
The 2002 Stock Option Plan permits us to grant incentive stock options, which are options that comply with the requirements of Section 422 of the Internal Revenue Code, and non-statutory options that do not meet the requirements of Section 422. We are permitted to grant incentive stock options only to our employees. We may grant non-statutory stock options to anyone who is eligible to participate in the plan. To date, all options granted under the plan have been non-statutory options.
 
Our board of directors currently administers the plan. The board of directors is authorized to determine who will receive options under the plan and the terms and conditions of option grants. The board also has the power to (1) accelerate the date upon which options become exercisable, including in connection with a transaction or series of transactions that results in a change in control of AmWINS; (2) interpret the plan; (3) make all determinations under the plan; and (4) amend the plan.
 
The maximum term of the options under the 2002 Stock Option Plan is 10 years. Upon exercise of an option, the exercise price must be paid in cash, by certified, bank or cashier’s check or in such other manner


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as permitted by the board of directors, which may include the surrender of shares of common stock or other unexercised options held by the optionee.
 
  2007 Stock Incentive Plan
 
In March 2007, we adopted the 2007 Stock Incentive Plan (2007 Stock Incentive Plan) to further align the interests of eligible participants with those of our company and stockholders by enabling participants to acquire or increase their proprietary interest in our company and to reward improvements in our performance in a manner consistent with increased stockholder value.
 
The following is a summary of the material terms of the 2007 Stock Incentive Plan, which is qualified in its entirety by the complete terms of the plan, a copy of which will be filed as an exhibit to the Registration Statement of which this prospectus is a part.
 
The 2007 Plan provides for the grant of stock options intended to qualify as incentive stock options, or ISOs, under Section 422 of the Code, nonqualified stock options, or NSOs, that are not intended to qualify as ISOs, stock appreciation rights, or SARs, restricted stock, restricted stock units, or RSUs, performance units, cash awards and other equity-related awards. These awards are described in more detail below.
 
  Shares Available for Issuance
 
An aggregate of           shares of our common stock are authorized for issuance under the 2007 Stock Incentive Plan. In addition, the following sublimits apply with respect to specific types of awards that may be issued under the 2007 Stock Incentive Plan:
 
  •  no more than           shares of common stock may be issued under the plan pursuant to options intending to qualify as ISOs (as described below), and the aggregate fair market value of shares of common stock for which one or more awards of ISOs become exercisable for the first time during any calendar year may not exceed $100,000 for any individual;
 
  •  no more than           shares of common stock may be issued under the 2007 Stock Incentive Plan pursuant to awards of restricted stock; and