Independent Insurance Agents of Dallas

January 15, 2015

Presented to:

An Investment Bank Serving the Insurance IndustryPresented by:

Lorna Gunnersen, Director

LondonNew York CharlotteDenver

www.mysticcapital.com

Mystic Capital Advisors Group

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Services:- Mergers & Acquisitions Advisory

Services- Due Diligence- Valuation Support Services- Expert Witness- Strategic Consulting- Perpetuation Planning

Locations:- New York, NY- London, UK- Charlotte, NC- Denver, CO

Experienced Professionals

Founded in October 2001 by three former employees of The Hartford Financial Services Group, Inc.

Firm professionals have prior experience at Big 4 accounting firms, large investment banks, and insurance brokers (KPMG, Deloitte, Ernst & Young, PricewaterhouseCoopers, Merrill Lynch, and Benfield Group), and

Professional designations of employees include Certified Public Accountant (CPA), Chartered Property Casualty Underwriter (CPCU), Certified Insurance Counselor (CIC), Certified Valuation Analyst (CVA), and Chartered Financial Analyst (CFA).

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Experts in the Insurance Marketplace

Clients include:

Insurance Agents & Brokers, Insurance Companies, Program Administrators, Managing General Agents (MGA’s), Managing General Underwriters (MGU’s), Third Party Claims Administrators (TPA’s), Insurance Wholesale Agents, Financial Institutions, and Private Equity Groups

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Mystic Capital ExperienceExperienced Professionals:

Advised on over 180 insurance-related transactions since firm inception (source: SNL Financial) with an aggregate transaction value in excess of $2 billion

Consistently ranked among top 3 financial advisors in the U.S. insurance industry in terms of completed transactions

Know the current acquisition environment through current advisory engagements and constant discussion with active industry participants

Advising on numerous transactions in advanced deal stages throughout the U.S. and internationally

Firm2008-2013 # of Deals

Reported Transaction Value (USD)

Marsh, Berry & Company, Inc. 216 714

Dowling Hales 135 430

Mystic Capital Advisors Group, LLC 88 379Reagan Consulting, Inc. 71 248

Bank of America Merrill Lynch 53 51,083

Merger & Acquisition Services, Inc. 47 468

Macquarie Capital (USA) Inc. 50 13,116

Goldman, Sachs & Co. 44 61,678

Morgan Stanley 38 3,801

Keefe, Bruyette & Woods 38 3,801

TOP FINANCIAL ADVISORS IN US INSURANCE2008-2013

Source: SNL Financial

*It should be noted that not all transactions are publicly reported. In addition, many reported transaction do not disclose transaction value

Factors Driving M&A The M&A market is currently robust as there are more positive

factors driving M&A, than negative factors hindering it

Driving Factors

Seller’s Market, Multiples are Up

Cash at Close and Guarantees are up

Uncertainty of Future

# of Brokers/ Fragmentation of Industry

Low Organic Growth / Soft Market

Artificially Low Interest Rates/ Cheap Debt

Active Private Equity Buyers

Aging Ownership of Agencies

Hindering Factors

Economic “Recovery”

Regulatory Uncertainty/ Political Risk

Post Financial Crisis Risk Aversion

Uncertainty of Future/ Fear of Giving Up Control

Recent History A Large number of

transactions were completed in 4th Quarter 2012, driven by change in capital gains

1st Quarter 2013 was slow due to front loading of transactions in 4th Quarter 2012

Number of deals steadily increased throughout 2013 and has remained steady through 2014

U.S. Insurance Brokerage M&ASource: SNL Financial

M&A HistoryU.S. Insurance Brokerage M&A

Source: SNL Financial

Insurance Brokerage Demographics Drive M&A

Industry is extremely fragmented The number of independent agencies

in the U.S. is approximately 38,500 per the Independent Insurance Agents & Brokers of America

100th ranked broker had $23.6 million in annual revenue in 2013, therefore 99.7% of the firms in brokerage are outside of top 100

Lots of targets

Acquisition will continue to be a key factor for growth for larger agencies

For every firm purchased, the insurance brokerage industry is great at regenerating businesses as individuals and teams “peel off” to start new agencies

2014 Rank

2013 Rank

Company 2013 U.S. Broker Revenue (USD)

% change

1 1 Aon, PLC 5,561,106,600 4.6%2 2 Marsh & McLennan Cos., Inc. 5,521,500,000 5.2%3 3 Arthur J. Gallagher & Co. 2,111,340,000 10.7%4 4 Willis Group Holdings, PLC 1,743,840,000 7.3%5 6 BB&T Insurance Holdings, Inc. 1,582,443,400 6.9%6 7 Brown & Brown, Inc. 1,355,502,535 14.0%7 5 Wells Fargo Insurance Services 1,350,022,000 -14.3%8 8 Lockton Cos., LLC 826,448,280 12.4%9 10 USI Holdings Corp. 782,207,827 9.8%

10 11 Hub International Ltd. 768,865,200 21.5%11 9 National Financial Partners 741,974,806 -0.3%12 12 Alliant Insurance Services 546,944,009 8.6%13 14 AssuredPartners, Inc. 345,794,848 46.8%14 22 Jardine Lloyd Thompson Group, PLC 242,642,000 97.6%15 15 Leavitt Group 202,642,000 13.0%

97 97 M.J.Insurance, Inc. 24,913,083 11.3%98 99 Murray Securus 24,393,000 10.3%99 NR Ansay & Associates 24,327,509 13.8%

100 100 Rich & Cartmill 23,607,750 8.2%

… … … ……

100 Largest Brokers of U.S. BusinessSource: Business Insurance

Soft Market Pricing is driving M&A

After an extremely soft P&C marketplace that ran from 2005 through 2011, market rates in the P&C insurance industry hardened in 2012 and 2013, but rate growth has slowed to be nearly flat or no increases in recent months of 2014

Soft market places pressure on organic growth for brokers

M&A becomes critical to achieve growth

The Health Insurance marketplace is the exception as rates have continued to rise, but conversely, insurance companies are tightening belts and cutting commissions

Who is Acquiring?

HOT

Private Equity Backed Brokers (e.g. Acrisure, HUB, USI, AssuredPartners) Most active group Strong capital markets Light debt covenants Strong history of success over past several years. Few have failed to make

money

Publicly Traded Brokers (e.g. Aon, MMC, AJ Gallagher, Brown & Brown) Low organic growth Soft market Wall Street pressure to grow

Insurance Carriers (e.g. Markel, Argo, HIIG) View acquiring distribution as a cheap way to grow premium if they can

write business Especially competitive with mono-line MGA and program business where

they can bring on underwriting talent and eliminate a layer of expense Could also be a defensive measure to keep book

International Firms (e.g. JLT, Hyperion, BMS/Minova) For example, London brokers looking to access U.S. market and U.S. Brokers

looking to enter London market

Who is Acquiring?

COOL

Regional and Local Brokers Still very active, but they need to work harder to

distinguish themselves Small deals that they usually get are being gobbled up

by the big guys Often have to resort to friendlier terms (higher

commission to producers, bonus plans, etc…)

Banks Steady decline in bank owned insurance agencies since

mid-2000’s Realization that banking and insurance brokerage

cultures are different “Cross-sell” hard to realize In capital preservation mode, handcuffed by stress

testing Likely to see continued divestiture There are a group of banks (e.g. Wells Fargo, BB&T) that

are committed to the insurance brokerage space, but their insurance brokers tend to run almost independently of the bank

Factors Affecting Valuation and Deal Structure

Size of deal Earnings Before Interest Taxes Amortization &

Depreciation (EBITDA) Asset vs. Stock

C-Corp S-Corp, LLC, Personal Goodwill Transaction Over 80% of deals are asset deals, however, stock vs.

asset is less of an issue with larger transactions Risk Profile of Deal

Account concentration, carrier concentration, other Employment Agreements Sales Culture Age and Ability of Owners and/or Management Team

Management/Reputation % of Deal at Risk

The more at risk to the seller, the higher the multiple needed to entice seller

More guaranteed, the lower the multiple

Transaction Structure Components

Base Purchase Price What the seller would conservatively anticipate to

receive after the earn out period We typically assume 0% growth

Guaranteed Purchase Price This is as it says, GUARANTEED, not dependent on

performance Typically is the amount paid at closing, but some deals

have future payments that are guaranteed No ability to “claw back”

Potential Purchase Price “Upside” Amount the seller could potentially realize based on

future performance May require significant growth The “Everything fell into place perfectly” price

Trends in Deal Structuring The percentage of consideration at close and the % guaranteed has

gone up over the past year Deals that were 50%-70% down at close have moved to 60%-80% This is a function of competitive market Makes it harder for the “little guys” (Regional and Local brokers)

who need to work harder to attract deals▪ Network and build relationships so that when a seller is ready to

pull trigger, they think of you▪ Sweeten terms (possible examples include maintaining a higher

commission rate for seller’s producers, ensure a softer transition for employees)

Some groups are making a push to minimize or even eliminate earnouts altogether Mindset is “when we buy it, we own it” Don’t want seller focused on earnout, but rather goals of the

acquirer

Trends in Deal Structuring- Cont’d There is still uncertainty in Employee Benefits marketplace, especially

for small accounts with ACA exposure

Currently, the market is putting a significant discount on clients with less than 50 lives and there is even some discount in the 50 to 100 hundred live segment of the marketplace

Large group is viewed as the “best bet” and continues to attract similar multiples as P&C

Some acquirers have even gone as far as to segment the book of business when making an offer▪ For example, recently an offer was made where the small group

was priced at 1.5x revenue and paid over three years based on retention of accounts, while the large group offer was 2.5x revenue paid over one year

Types of Deals- So what are the Multiples?

Disclaimer: There is no “typical” deal and there are numerous risk factors that vary greatly for all deals (asset vs. stock values may be materially different).

Type of Deal Base Deal Guaranteed Potential DealPlatform Agency- Mega Deals 9.0x-12.0x 8.0x-11.0x 10.0x-13.0xPlatform Agency- Regional or Niche Deal 7.5x-9.5x 5.5x-7.5x 10.0x-12.0xCarrier Acquisition of Distribution 7.5x-9.5x 5.5x-7.5x 10.0x-12.0xFold-In Acquisition 6.0x-8.0x 4.0x-6.5x 6.5x-9.0xGroup Benefits Large Account 7.0x-9.0x 5.0x-7.0x 8.0x-10.0xGroup Benefits Small Account 4.0x-6.0x 2.0x-4.0x 5.0x-7.0xProducer Hire/ Book of Business 5.0x-7.0x 4.0x-6.5x 6.0x-8.0x

EBITDA Multiple Range

Future Outlook M&A environment will remain a sellers market until fundamentals change in

the economy

Availability of capital will likely create a more competitive market

If the market changes, it could turn very quickly (think 2008 financial crisis)

PE backed brokers are aggressively rushing to execute their strategy before the market turns (get to size, pay down debt, and get out)

The impact of health care reform has yet to be truly understood and will continue to have a significant effect on M&A, especially in small group

Larger Brokers brokerages continue move down stream, putting pressure on regionals and locals

Carriers and International brokers will have an increased presence in M&A, as the U.S. market is attractive

Banks, credit unions will “stick to their knitting”