Insurance Agency Ownership Perpetuation

1. Insurance Agency Ownership Perpetuation Tom Doran

2. Reagan Perpetuation Studies

3. Insurance Agency Ownership Perpetuation • Two Excellent Options: or External Perpetuation Internal Perpetuation

4. The Four Pillars of Internal Perpetuation Healthy Operation Reasonable Sellers Able Buyers Effective Transfer Mechanism

5. The Four Pillars of Perpetuation • Healthy Operation • Reasonable Sellers • Able Buyers • Effective Transfer Mechanism

6. Profitability

7. Growth is Essential • Growth provides buyer purchasing power • Growth influences the EBITDA multiple, which impacts value • Growth means viability

8. The Four Pillars of Perpetuation • Healthy Operation • Reasonable Sellers • Able Buyers • Effective Transfer Mechanism

9. Accept Internal Valuations Are Sellers in Your Firm Willing to Take a Discount to a Third-Party Valuation?

10. Finance the Deal 12.5% Are Sellers receiving cash at close or are they financing the deal? MEDIAN DOWN PAYMENT 7 years MEDIAN FINANCING PERIOD

11. Time Share Sales Appropriately Current WASA 53.8 WASA in 10 Years 56.7 * Assumes sales at age 65 and no sales to younger employees

12. The Four Pillars of Perpetuation • Healthy Operation • Reasonable Sellers • Able Buyers • Effective Transfer Mechanism

13. Assessing Financial Ability BUYER COVERAGE RATIO Buyer Ownership Distributions or Bonuses Buyer Principal & Interest Payments • First-year metric: Does not contemplate growth in the business • Pre-tax metric: Taxes on ownership bonuses or distributions not included • Down payment not factored into the calculation

14. The Buyer Coverage Ratio Is Your Firm’s Buyer Coverage Ratio 100% or Higher?

15. 100% Buyer Coverage Ratio ≠ Free Ride Out of Pocket Costs (BCR = 100%) Typical Buyer Profile • 5% of $5 million firm • $25,000 down • Annual out-of-pocket tax expenses of $8,700 • 3% of $15 million firm • $45,000 down • Annual out-of-pocket tax expenses of $15,700 • Age 37 • Highly compensated Producer • Risk tolerant • Plays well with others

16. What Does a Buyer Transaction Look Like? 10% 8 years 100% MEDIAN DOWN PAYMENT MEDIAN FINANCING PERIOD MEDIAN BUYER COVERAGE RATIO

17. The Biggest Challenges to Finding Buyers

18. The Four Pillars of Perpetuation • Healthy Operation • Reasonable Sellers • Able Buyers • Effective Transfer Mechanism

19. Industry Use of Transfer Mechanisms What is Your Firm’s Primary Transfer Mechanism?

20. How Do the Pieces Fit Together?

21. Why remain independent? • Because this is an incredibly resilient industry • The future has never been brighter for creative and innovative brokers • The best talent in the industry follows the equity opportunities available at most independents • Unparalleled quality of life • Because the economic rewards are sizeable …

22. Agency values have increased during every economic period in past 2 decades 10.6% Annual Growth Rate Recovery The Leverage Bubble 9.4% Annual Growth Rate The Great Recession Hard Market 6.9% Annual Growth Rate The “Great Soft Market”

23. Keys to remaining Independent • Focus on operating results to support a robust internal valuation and distributable earnings • Hiring and developing of young professionals (aka buyers) • Plan for it, don’t assume it will simply happen

24. 1998 Business Insurance Top 100 Who has not changed hands? As of 7/19/99

25. 1998 Business Insurance Top 100 Who has not changed hands? As of 7/19/99

26. Why Sell to a Third-Party Buyer?

27. Valuation Realities *Reagan Value Index and Reagan Consulting analysis

28. Deal activity scorecard Most active buyers list unchanged, but deals down by half Notes: 1Through 12/15/13 Source: SNL Financial

29. Acquisition market share by type of buyer Private Equity from last to first Source: SNL Financial, Includes North American Deals

30. Keys to successful perpetuation – internal or external

31. Maximizing Valuation and Marketability - Start with a solid foundation Restrictive Agreements Legal Structure Ownership of Assets and Exit Strategies Align Ownership Interests People Investment Sales Culture

32. Build carefully to achieve desired results Advisory Team Maximize Profitability Careful Long-Term Investments Minimize Long-Term Commitments Clean Financial Statements Market Compensation Concentration Risk Restrictive Agreements Legal Structure Ownership of Assets and Exit Strategies Align Ownership Interests People Investment Sales Culture

33. To access Reagan’s Private Ownership Study, visit our webpage atwww.reaganconsulting.com

34. Tom DoranSenior Vice President & Principal Tom joined Reagan Consulting as a consultant in 1993 and became a principal in the firm in 1995.  He holds an undergraduate degree in Computer Information Systems and a Masters of Business Administration from Georgia State University. Before joining Reagan Consulting, he worked in the computer industry, both as a software developer and as a management consultant. Tom’s areas of expertise include merger and acquisition representation, agency valuation, ownership perpetuation planning, agency valuation enhancement and strategic planning facilitation. Tom is a regular contributor to Reagan Consulting’s industry studies and is frequently published in various insurance industry publications. He also speaks on a regular basis to industry trade groups and associations on a wide variety of topics concerning the insurance distribution system. 404.869.2534 tom@reaganconsulting.com