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Navigating the Capital Markets: An Entrepreneur’s Guide to Raising Capital John Kraska, Managing Partner Navigating the Capital Markets: An Entrepreneur’s Guide to Raising Capital John Kraska, Managing Partner Lou Caltavuturo, Partner Hales & Company | Hales Capital Securities

Biographies 2 Led management buyout of Hales from Arch Capital Group, Ltd in 2004 Biographies 2 Led management buyout of Hales from Arch Capital Group, Ltd in 2004 u Over 15 years experience as an investor and banker, having completed over 75 transactions, representing over $1. 5 billion in transaction value Graduate of Wharton School and University of Pennsylvania u P: (212) 592 -5709 [email protected] com u u John Kraska Managing Partner Over 20 years experience as a banker and regulatory to the financial services industry with an emphasis in insurance and healthcare u Prior experience with Fox-Pitt Kelton focusing on capital raising and Deutsche Bank focusing on lending and structured finance u Graduate of Columbia Business School and Colgate University Louis Caltavuturo Partner P: (212) 592 -5707 lcalta[email protected] com

Overview of Hales Leading Advisor to the Insurance Industry u Founded in 1973, we Overview of Hales Leading Advisor to the Insurance Industry u Founded in 1973, we are one of the oldest and most experienced advisors specializing in the insurance industry u Hales Capital Securities is our registered broker-dealer that engages in securities related transactions on behalf of its clients u Our core business is advising agents, brokers, service providers and companies on corporate finance matters: merger & acquisition transactions and accessing equity and debt capital u We offer additional financial and strategic advisory services such as due diligence representation, valuation and perpetuation planning 3

Overview of Hales Leadership Position Among Advisors We ranked as the #1 leading advisor Overview of Hales Leadership Position Among Advisors We ranked as the #1 leading advisor in each of the last five years – advised on over 150 completed transactions since 2004. Source: Hales and SNL Data. Source, SNLi. Represents summary of insurance broker / agency sell-side transactions announced or completed in 2005, 2006, 2007, 2008 and 2009. 4

Overview of Hales 5 Why We Are Different We are Specialists We focuson the Overview of Hales 5 Why We Are Different We are Specialists We focuson the insurance industry and have We focus on the insurance industry and unique insights into the business and have insights into the business and transactions. Our Partners Execute Every Deal Seasoned and senior professionals are involved from beginning to end. Technical and Negotiating Expertise We leverage our expertise and data on industry transactions to represent our clients effectively. We Don’t Quit We have a well-earned reputation for “getting deals done” and strive to achieve a successful outcome for all clients

Overview of Hales 6 Representative Transactions The Surety Division of has been acquired by Overview of Hales 6 Representative Transactions The Surety Division of has been acquired by The Ohio, Kentucky and Missouri offices of National City Insurance Group Inc. has been acquired by have been acquired by 2010 Hales advised Risk Transfer Insurance Alliance Hales advised IRUS Corporation Hales advised Insurance Company of the West Hales advised USI Holdings Corp. Bowen, Miclette, Britt & Merry of Arkansas Inc. a subsidiary of has been acquired by 2010 Hales advised Hedden Insurance Hales advised Confie Seguros Hales advised Stone Insurance Agencies Hales advised Bowen, Miclette, Britt & Merry of Arkansas Inc.

Overview of Hales 7 Representative Transactions The Gardner-Kirby Corporation has been acquired by 2010 Overview of Hales 7 Representative Transactions The Gardner-Kirby Corporation has been acquired by 2010 Hales advised Mc. Cutcheon Burr & Sons Hales advised Confie Seguros Hales advised The Gardner-Kirby Corporation Hales advised Endorsed Administrators, Inc. / J. J. Jerome Associates, Inc. Trident IV, L. P. has been acquired by selected assets of a fund managed by Financial Associates LLC has been acquired by 2009 Hales advised The Maksin Group have provided equity and debt capital to 2009 Hales advised Higginbotham & Associates has been acquired by 2009 Hales advised Meyers. Dining LLC Hales advised Caruso Benefits Group, Inc.

Overview of Hales 8 Representative Transactions has been acquired by 2009 Hales advised Slapin-Lieb Overview of Hales 8 Representative Transactions has been acquired by 2009 Hales advised Slapin-Lieb & Co. Hales advised Edgewood Partners Insurance Center have been acquired by has been acquired by 2009 Hales advised John Grady Insurance, Inc. Hales advised Boston Insurance Brokerage, Inc. Hales advised Irving Weber Associates Hales advised Unland Companies 2009 Hales advised Bridge. Street Consulting & Ins. Svcs. , Inc. Hales advised Key & Piskuran Insurance Agency Select assets of has been acquired by

Guide to Raising Capital 9 Complex Map of Capital Providers – Where to Begin? Guide to Raising Capital 9 Complex Map of Capital Providers – Where to Begin? EQUITY • Private equity firms • Venture capital • Hedge funds • Business development cos. • Insurance Companies • Friends & family DEBT • Commercial banks • Specialty lenders • Insurance Companies

Guide to Raising Capital 10 Different Kinds of Capital u Amortizing and secured against Guide to Raising Capital 10 Different Kinds of Capital u Amortizing and secured against stock or personal guarantees u 1. 5 – 2. 5 x EBITDA; LIBOR + or Prime + pricing; strict financial covenants u Bullet loans u 15% - 25% total cost depending on leverage u Liquidation preferences, mandatory put options / redemption privileges u Generally priced to achieve 25% - 40% returns SENIOR DEBT (Revolver / Term Loan) SUBORDINATED DEBT (Bullet Loan w/Interest) PREFERRED SECURITIES (Dividends, Convertibility)

Guide to Raising Capital Common Misconceptions u “All Private Equity firms are the same” Guide to Raising Capital Common Misconceptions u “All Private Equity firms are the same” u “My company is worth X, so I can sell 33% of my company for 33% of X” u “Borrowing is always better than selling equity” u “I am only raising $10 million or less, that should be easy” 11

Guide to Raising Capital 12 US Insurance Industry - Debt Market Source: Thomson Banker Guide to Raising Capital 12 US Insurance Industry - Debt Market Source: Thomson Banker u Global financial crisis impacted debt raising by US Insurance companies. Amount raised fell to USD 33 bn in 2008 and USD 34 bn in 2009 from USD 59 bn in 2007. u In 2007 and 2008 AIG, Inc. was the largest debt issuer raising 32% and 31% of the total amount raised, respectively. u In 2010, the scenario is looking much better both in terms of median transaction value and number of transactions.

Guide to Raising Capital 13 US Insurance Industry - Private Equity Market PE Investment Guide to Raising Capital 13 US Insurance Industry - Private Equity Market PE Investment in Insurance Source: Pitchbook PE Investments across Financial Services Source: Pitchbook u Private Equity investments in the US Insurance sector fell sharply in 2008 following the global financial crisis and the attached credit freezing in the financial markets. u Composition of Investments into insurance remained flat in H 1 2010 (6% versus 7% in 2009).

Guide to Raising Capital 14 All Industries - Private Equity Market Total PE investments Guide to Raising Capital 14 All Industries - Private Equity Market Total PE investments and No. of Deals Source: Pitchbook Median PE investments by Type Source: Pitchbook

Guide to Raising Capital PE Investment by Deal Size – 2003 to H 1 Guide to Raising Capital PE Investment by Deal Size – 2003 to H 1 2010 Source: Pitchbook 15

Guide to Raising Capital Four Simple Steps u Step One: The Business Plan – Guide to Raising Capital Four Simple Steps u Step One: The Business Plan – Why am I raising capital? u Step Two: The Financial Plan – How much capital do I really need? u Step Three: The Capital Structure – What kind of capital can I attract? u Step Four: The Execution – Show me the money! 16

Step One: The Business Plan 17 Reasons for Seeking Capital Buy Out Shareholders u Step One: The Business Plan 17 Reasons for Seeking Capital Buy Out Shareholders u u Pay Debt Perpetuation Fund down payments u u Growth u u u Hire new producers Upgrade systems Fund acquisitions Debt or working capital obligations Legal matters

Step One: The Business Plan What Captures an Investor’s Attention? u Clear explanation for Step One: The Business Plan What Captures an Investor’s Attention? u Clear explanation for the use of capital 4 Investors never write blank checks or invest in blind pools u Differentiation in strategy or market – be specific 4 What advantage do you have over competitors? 4 What is happening in the market that may drive growth? u Honest self assessment of competitive threats u Management and track record 18

Step One: The Business Plan Why Will You Grow When Industry Isn’t? 19 Step One: The Business Plan Why Will You Grow When Industry Isn’t? 19

Step One: The Business Plan Why Will You Grow When Industry Isn’t? 20 Step One: The Business Plan Why Will You Grow When Industry Isn’t? 20

Step Two: The Financial Plan What Captures an Investor’s Attention? u Detailed set of Step Two: The Financial Plan What Captures an Investor’s Attention? u Detailed set of financial projections with assumptions 4 Earnings, Cash Flow and Balance Sheet 4 Detail demonstrates understanding and gives confidence u Growth rates and margins that make sense u Anticipate questions from financial analyst types 4 They have to defend recommendations to an investment committee 21

Step Three: The Capital Structure Investor / Lender Expectations u What are Lenders demanding? Step Three: The Capital Structure Investor / Lender Expectations u What are Lenders demanding? 4 Collateral 4 Personal guarantees 4 Financial covenants 4 Co-investment of equity 4 Ability to get loans repaid u What are Equity Investors demanding? 4 Aggressive growth/margin hurdles 4 Control and governance (i. e. , “Alignment”) 4 Liquidity 22

Step Three: The Capital Structure TODAY EBITDA $5 mil Value (7 x) $35 mil Step Three: The Capital Structure TODAY EBITDA $5 mil Value (7 x) $35 mil 23 YR 5 EBITDA Value (7. 5 x) NO LEVERAGE $75 m $35 m 2. 1 x multiple 16% annual ROI W/ LEVERAGE $10 m $25 m 3. 0 x multiple 25% annual ROI NOTE: Assumes debt prepaid out of CF $75 m $10 mil $75 mil

Step Four: Execution How to Successfully Complete a Capital Raise u Prepare before Contacting Step Four: Execution How to Successfully Complete a Capital Raise u Prepare before Contacting Investors 4 Determine needs and types of capital 4 Control information flow versus reacting to investor demands u Resources and Focus 4 Contact multiple sources simultaneously in a competitive process 4 Time consuming: Meetings / Presentations / Follow-up Requests u Due Diligence and Documentation 4 As rigorous and costly as a sale 24

Step Four: Execution 3 - 4 weeks Prepare for Market 4 Information collection / Step Four: Execution 3 - 4 weeks Prepare for Market 4 Information collection / diligence 4 Compile, screen and evaluate potential investors 4 Draft materials 5 - 8 weeks Hales in Market 4 Contact potential 25 4 - 6 weeks Due Diligence & Negotiation 4 Coordinate due investors and sign diligence NDA’s 4 Analyze terms 4 Management presentations 4 Facilitate informational requests and queries 4 Solicit indications of interest 3 - 5 weeks Execution 4 Negotiate / execute documentation 4 Regulatory approval(s) 4 Announcement Closing

Conclusions u Raising capital is harder than you think u Lots of misconceptions; wide Conclusions u Raising capital is harder than you think u Lots of misconceptions; wide variety of capital sources u Preparation, process and focus are paramount to success 26