Insurance Newsletter

1st Quarter Report 2010

Select M&A Services’ Page 2 Projects

Upcoming Industry Page 3 Events

Current M&A Market for Page 4 Insurance Distribution

Current M&A Market for Page 6 Insurance Underwriters

About M&A Services & Page 8 Contact Details

Merger & Acquisition Services, Inc. 336 East 53rd Street, 4th Floor New York, NY 10022

Ph: (212) 750-0630 Fax: (917) 591-8998 http://www.merger-acquisition.net

Any information provided in or with this message are indicative only, subject to change and does not constitute an offer to purchase or sell. Principals retain the exclusive right to negotiate and evaluate any transactions and M&A has no authority to do so. M&A does not underwrite securities, nor advise on, nor effect transactions in securities for the account of others. All services are performed by registered representatives of Merger & Acquisition Capital Services, Inc. Securities are offered in the United States through Merger & Acquisition Capital Services, Inc. a U.S. registered broker-dealer and member FINRA/SIPC.

Copyright 2010 Merger & Acquisition Services, Inc. All Rights Reserved. Greetings from the advisors at Merger & Acquisition Services. While 2009 saw a slowdown in M&A activity, the insurance market has continued to be active for our firm as we completed 6 transactions, leading the SNL League Table by deal volume. Given some early indications, we expect it to increase through 2010. The purpose of this communication is to inform you of several of M&A Services’ active projects, and to provide you with our outlook on the current M&A market.

Sincerely,

Jason C. Murgio President Merger & Acquisition Services, Inc. Select M&A Services Active Projects1

Widely Licensed  M&A Services represents a publicly traded international P&C Shell Licenses insurance and reinsurance group writing in excess of 70 sub-classes in a targeted acquisition search for US based

MGA, MGU and E&S agencies with revenue of up to $50MM. WA ME MT ND If you are interested in exploring a strategic sale, please VTNH OR MN ID contact one of our advisors directly. All communications SD WI NY MA CT RI will be held in strict confidence. WY MI IA PA NE NJ NV IL IN OH DE UT WV CO MD KS VA DC  M&A Services represents a program seeking a carrier CA MO KY

TN NC partner to write primary and excess cover for a national AZ NM OK food and family restaurant insurance program. AR SC MS AL GA

TX LA  M&A Services represents a national MGA writing in excess of $150MM in premium looking to acquire personal lines FL HI AK operations, MGAs and retail operations. Admitted License Not Licensed  M&A Services represents a program seeking a carrier partner to write worker’s comp cover on a nursing home Widely Licensed and assisted living facilities program. E&S Shell Authorizations

 M&A Services represents a program seeking a carrier

WA partner to write small contractors’ worker’s comp cover in ME MT ND VTNH NY, CT, PA and NJ. OR MN ID SD WI NY MA CT MI RI  WY IA PA M&A Services represents an international insurance carrier NE NJ NV IL IN OH DE UT WV seeking a US admitted carrier partner or market to write CO MD KS VA DC profitable personal liability cover and personal umbrella CA MO KY TN NC AZ cover. NM OK AR SC MS AL GA  M&A Services represents a program broker seeking an TX LA

admitted market capability to write secondary and seasonal FL HO in 17 states, including FL (on an ex-cat basis), CA and HI AK Admitted License TX. Non-Admitted License Not Licensed

1 M&A Service has been retained on an exclusive basis for all active projects.

2 www.merger-acquisition.net Northeast Regional Admitted Additional Shell Licenses P&C Shell Licenses

1) Single State Shell License in New York WA ME MT ND VTNH OR MN ID MA 2) Regional Shell Licenses Available: Northeast, SD WI NY CT RI WY MI Southeast and Midwest IA PA NE NJ NV IL IN OH DE UT WV CO MD KS VA DC CA MO KY 3) P&C Admitted Shell — 15+ state licenses being sold by

TN NC an A Rated Parent AZ NM OK AR SC GA MS AL 4) L&H Shell — 5+ state licenses, including CA and LA TX TX FL

HI AK Admitted License Not Licensed 2 Widely Licensed P&C Shell Licenses Upcoming Industry Events Mono Line Surety Authority Several conferences are coming up on the calendar, and we wanted to let you know that advisors from Merger &

WA ME Acquisition Services will be available to meet at these MT ND VTNH OR MN locations. We would be happy to schedule a meeting to ID SD WI NY MA CT RI discuss the current market conditions and available WY MI IA PA NE NJ projects should you have an interest. Please contact us to NV IL IN OH DE UT WV CO MD schedule an appointment: KS VA DC CA MO KY

TN NC AZ NM OK AR SC MS AL GA PIA Connecticut ‘10 Convention TX LA March 1-2 FL Foxwoods Resort Casino HI AK Mashantucket, CT Admitted License Not Licensed Target Markets Mid-Year Meeting Widely Licensed April 12-14 L&H Shell Licenses Renaissance Harborplace Baltimore, MD

WA ME RIMS Annual Conference MT ND VTNH OR MN April 25 - 29 ID MA SD WI NY CT RI WY MI Boston Convention & Exhibition Center IA PA NE NJ Boston, MA NM IL IN OH DE UT WV CO MD KS VA DC CA MO KY

TN NC AZ NM OK AR SC 2 MS AL GA Merger & Acquisition Services is not affiliated in any way with the associations, societies, or organizations mentioned above. Reference herein to any specific TX LA association, society and/or organization does not constitute or imply its FL endorsement of Merger & Acquisition Services nor does it constitute or imply HI AK Merger & Acquisition Services is a member of such organization. Admitted License Not Licensed

3 www.merger-acquisition.net Current M&A Market for Insurance Distribution

During the 4th quarter of 2009 and as we start 2010, mergers and acquisitions of insurance distribution businesses has increased significantly. groups are actively seeking quality wholesale and retail agencies. Parthenon Capital LLC’s two insurance platforms, Ascension Insurance and AmWins, announced nine transactions in 2009, and have stated growth models through strategic acquisitions.3 Fortegra’s4 major acquisition of Bliss & Glennon, Inc., from Willis HRH, Inc. in April 2009, established their place in the M&A marketplace for wholesale insurance operations.

National brokers remain active in making strategic acquisitions, although pricing and terms in 2009 were conservative compared to prior years. Marsh McClellan Agency, LLC has announced its first transaction of Insurance Alliance and NIA Group in the 4th quarter 2009, and has a definitive intent to make numerous platform and fold-in acquisitions as part of its hub and spoke strategy. In 2009, Arthur J. Gallagher announced ten transactions, Hub International announced ten transactions, and AON announced three transactions.

We expect 2010 to be a very active year for mergers and acquisitions for several reasons. First, the economy and markets have recovered from the beginning of 2009, which gives acquiring companies more capital in their firm’s portfolios to make acquisitions. The market recovery and increased capital positions gives acquirers the ability and confidence to increase valuation multiples that they are willing to offer for acquisitions. This will shrink the gap between what acquirers are willing and able to offer and what owners are willing to accept for their firms.

Second, Federal Capital gains rates are the lowest that they have been since the Great Depression5, and will significantly increase in January 2011. At a minimum, the Bush administration tax cuts will expire, increasing capital gains from 15% to 20%. The current administration is very likely to look at increasing capital gains rates even higher to pay for the historic spending policies that are being put in place. This increase in capital gains rates will have a Higher Capital Gains direct effect on the after tax cash that the owner will have after the sale of the firm. Below is a historical chart of capital gains rates from 1934 to better illustrate the favorable tax environment that we are Calendar Year Closing Date 2010 2011 currently enjoying in 2010. Gross Revenue $5,000,000 $5,000,000 Pro Forma EBITDA $1,750,000 $1,750,000 Holding all other factors equal, the example to the side Multiple of EBITDA 6.0 6.0 demonstrates how an increase of capital gains rate Multiple of Gross Revenue 2.1 2.1 from 15% to 25% will affect the after tax cash Purchase Price $10,500,000 $10,500,000 retained by the shareholders of the firm.6 Basis $300,000 $300,000 Capital Gain $10,200,000 $10,200,000 This example shows an after-tax difference of Capital Gains Tax $1,530,000 $2,550,000 $1,020,000! To realize the same after-tax cash, the After Tax Cash $8,970,000 $7,950,000 owner(s) would have to grow their firm by 13% to break even in 2011.

3 Panthenon Capital LLC and Century Capital are equity investors in Ascension Insurance, Inc. See www.parthenoncapitalpartners.com and www.centurycap.com. 4 Fortegra is a platform investment of Summit Partners (www.summitpartners.com) 5 Citizens for Tax Justice at http://www.ctj.org/pdf/regcg.pdf 6 Assumptions include: (1) Pro forma EBITDA of 35%, (2) sales multiple of 6.0X pro forma EBITDA, accounting basis of business of $300,000. This is a hypothetical example only. Owners should consult their own legal and accounting professionals for specific tax and legal advice.

4 www.merger-acquisition.net Lastly, the credit markets for insurance transactions are much more accessible than in the first half of 2009, under Purchased very favorable interest rates. Insurbanc and Oak Street 2010 Funding are two active lenders exclusive to the insurance industry.7 Additionally, traditional lenders and private Completed equity investors are much better capitalized and willing to Transaction lend or re-capitalize insurance agency acquisitions. With this availability of credit, acquirers are able to leverage the purchase of acquisitions under more favorable pricing terms than existed a year ago. Advisor to NSM Group

The combination of (1) improved market conditions and valuations, (2) a twelve month window of low capital gains Select 2009 Completed rates, and (3) available credit under favorable terms, creates a very attractive environment for M&A activity in Transactions 2010.

It takes from four to twelve months to prepare, market, and close an insurance transaction. To take advantage of MPP Inc. the favorable tax and interest rate environment, principals Sold of insurance firms need to start the preparation process in Purchased the first half of 2010. Specialty Underwriters Merger & Acquisition Services, Inc. is a boutique Insurance Company investment servicing the insurance and reinsurance To Capitol Indemnity industry, with offices in New York, NY, Atlanta, GA, and Hartford, CT. Founded in 1989, the company provides Advisor to Tower Group Advisor to MPP Inc. investment banking and insurance services, including: merger and acquisition advisory, capital raising, valuation and fairness opinions, program placements / fronting, and reinsurance advisory. To learn more about Merger & Acquisition Services, Inc., please visit our website at http://www.merger-acquisition.net. Purchased Please call or email me directly to set up a confidential Merged with interview to determine if we can be of service to you. Victore Insurance Company & Agency Florida Doctors Respectfully, Bonding Insurance Company

Advisor to Victore Fairness Opinion

Purchased Purchased Christopher M. Hughes Director, Insurance Distribution Wellmark Community Merger & Acquisition Services, Inc. Healthcare Company Renaissance Life & Health Insurance Company Advisor to Guggenheim 7 See www.insurbanc.com and www.oakstreetfunding.com Advisor to TRH

5 www.merger-acquisition.net Current M&A Market for Insurance Underwriters

2009 Recap

Insurance company M&A during 2009 was muted. While there was a small flurry of 8 activity, most notably in Bermuda, there was Life and Health Deals a dearth of large transactions announced. This lack of activity can be attributed to a number 40 1.75x of factors, the least of which was the continuing uncertainty surrounding the state 35 $4.7 Bn 1.50x and future direction of the economy. Debt 30 spreads for high grade companies widened to 25 levels once reserved only for speculative 1.25x grade issuers. Rating agencies were active in 20 $1.4 Bn downgrading companies as the value of 1.00x 15 investment portfolios declined – despite a Price-to-Book favorable change in GAAP accounting Announced Deals 10 principles which allowed companies to mark 0.75x their assets to “model” instead of “market.” 5 Add to that backdrop, insurance company valuations were near cyclical lows. As a result, 0 0.50x managements were inwardly focused on 2008 2009 fortressing their balance sheets in an effort to weather the financial storm.

Transaction Review 9 P&C Deals 2009 saw 65 publicly announced insurance company transactions. Of those, there were 80 1.70x 13 deals greater than $50 million and only 5 70 $18.0 Bn above $500 million. That compares to a total 1.50x of 41 and 8 for deals greater than $50 million 60 and $500 million, respectively, during 2008. 1.30x Total deal volume dropped 60% in 2009 to 50 $7.6 Bn $9.1 billion vs. 2008’s total volume of $22.8 billion. 40 1.10x

30 Price-to-Book

Notable transactions in 2009 included the Announced Deals 0.90x Validus acquisition of IPC Holding, a rare 20 hostile deal; Partner Re’s purchase of Paris Re 0.70x from a private equity group; and GMAC’s sale 10 of its U.S. consumer P&C business to AmTrust 0 0.50x Financial. Valuations were down significantly, 2008 2009 in the P&C sector, deal multiples fell to a median of 0.94x book and 7.4x earnings vs. 1.51x book and 11.9x earnings in 2008. Life and managed care transaction multiples experienced similar declines.

8 & 9 Source: SNL Financial

6 www.merger-acquisition.net 2010 Outlook SNL M&A League Tables M&A will likely increase in 2010. The source of this activity will be two-fold. First, we expect to see companies seeking to address capital concerns by Top Financial Advisers in selling off non-core assets. The ongoing break up Ranked by Number of Deals of AIG is one example. Secondly, as organic Source: SNL Financial growth continues to slow as a result of the current Announce Date- 1/1/2004 - 12/31/2009 soft market, companies with strong balance sheets All States will be on the hunt for “bolt-on” acquisitions in Completed Transactions niche product areas. In particular, we continue to Whole Deals see a desire by many insurance companies to find Including In-house Advisers specialty managing general agencies which could be integrated into a carrier model. 2010 will likely Number of include more MGA acquisitions by carriers who Rank Firm Deals desire to add gross premium due to the perpetual 1 Merger & Acquisition Services, Inc. 48 soft market. Finally, another source of M&A in the 2 Bank of America Merrill Lynch 36 sector – Private Equity buyers – virtually non- existent in 2009, may begin to search for 3 Macquarie Capital (USA) Inc. 32 acquisitions to take advantage of low valuations 4 Goldman, Sachs & Co. 31 and deploy capital raised over the past two years. 5 J.P. Morgan Securities Inc. 24 6 Keefe, Bruyette & Woods, Inc. 22 Offshore in Bermuda, we continue to believe we 7 18 will see further consolidation as capital size has 7 Prisco Consulting, Inc. 18 become critical in a very competitive market. The 9 Global Markets Inc. 14 2009 Validus acquisition of IPC is a representative 10 Philo Smith & Company 13 example. Several potential suitors sought to 11 UBS Investment Bank 12 enlarge their capital and underwriting platforms 12 FBR Capital Markets and Co. 10 through a combination. 12 Fletcher Financial, Inc. 10 12 Freres & Co. LLC 10 To be sure, the pace of activity will be regulated by 15 Barclays Capital Inc. 9 the price expectations of both buyers and sellers. 15 (USA), Inc. 9 Creative deal structures with earn-outs or stock 15 Raymond James & Associates, Inc. 9 participation may grow in number as dealmakers 18 Sandler O'Neill & Partners, L.P. 8 seek to bridge the gap and consummate transactions. If the recovery continues to gain 19 Aon Benfield Securities, Inc. 7 traction, the second half of the year should be 20 Cain Brothers & Company, LLC 5 quite active. 20 5 20 MMC Securities Corp. 5 Respectfully, 20 MTS Health Partners, L.P. 5 24 Curtis Financial Group, LLC 4 24 Morgan Keegan & Company, Inc. 4 26 Duff & Phelps Corporation 3 26 Greenhill & Co., Inc. 3 26 LMC Capital LLC 3 26 Mystic Capital Advisors Group, LLC 3 26 Sagent Advisors Inc. 3 Corey B. Davis 26 Securities, LLC 3 Managing Director Merger & Acquisition Capital Services, Inc.

7 www.merger-acquisition.net About Merger & Acquisition Services

Merger & Acquisition Services, Inc., is an investment bank dedicated to providing the highest quality strategic advice to companies within the insurance sector. As a trusted and dedicated adviser to our clients, we provide insight into industry trends and the capital markets, with the ultimate goal of providing comprehensive services to foster strategic growth and liquidity.

The firm’s team brings together a multidisciplinary group of senior investment banking professionals with diverse backgrounds and a demonstrated track record of success within the insurance sector. Every engagement and every client receives our uncompromising commitment, expertise and attention to detail. With this insistence on excellence, Merger & Acquisition Services consistently exceeds our clients' expectations.

The firm provides the following core services:

 Merger & Acquisition Advisory to both buyers and sellers, including; insurance carriers, MGA’s/MGU’s, agencies and third party administrators  Capitalization Advisory, including; corporate finance structures and private placements  Strategic Corporate Advisory, including; special committee assignments, takeover defenses, strategic  partnerships, corporate development, joint ventures, valuations and fairness opinions  Insurance Services, including program placements, renewal rights transactions, fronting and reinsurance advisory New York Office Hartford Office Atlanta Office

336 East 53rd Street, 4th Floor 109 Pitkin Street 3525 Piedmont Road, Suite 300 New York, NY 10022 East Hartford, CT 06108 Atlanta, GA 30305

Ph: (212) 750-0630 Ph: (860) 819-6420 Ph: (770) 417-1119 Fax: (917) 591-8998 Fax: (860) 760-6838 Fax: (404) 521-4781 Jason C. Murgio Jason C. Murgio Jason C. Murgio President President President [email protected] [email protected] [email protected]

Donald A Emeigh Jr. Christopher M. Hughes David A. Schofield Managing Director Director, Insurance Distribution Valuation Advisor [email protected] [email protected] [email protected]

Corey B. Davis Danial J. Baransky, CFA Jeff Poulsen Managing Director, M&A Capital Vice President IT Manager [email protected] [email protected] [email protected]

Patrick Walker Eric Lohff Chief Compliance Officer, M&A Capital Office Manager [email protected] [email protected]

Daniel J. Barnsky, CFA Vice President [email protected]

Jack I. Lubitz Financial & Operations Principal, M&A Capital [email protected]

Alex P. Lindsey Analyst [email protected]

Paul A. Procops Analyst [email protected]

8 www.merger-acquisition.net 9 www.merger-acquisition.net