Navigating the Capital Markets: An Entrepreneur’s Guide to

Raising Capital

John Kraska, Managing PartnerLou Caltavuturo, Partner

Hales & Company | Hales Capital Securities

2

John KraskaManaging Partner

P: (212) 592-5709jkraska@halesgroup.com

Biographies

Louis CaltavuturoPartner

P: (212) 592-5707lcaltavuturo@halesgroup.com

Led management buyout of Hales from Arch Capital Group, Ltd in 2004

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

Over 20 years experience as a banker and regulatory to the financial services industry with an emphasis in insurance and healthcare

Prior experience with Fox-Pitt Kelton focusing on capital raising and Deutsche Bank focusing on lending and structured finance

Graduate of Columbia Business School and Colgate University

3Overview of Hales

Founded in 1973, we are one of the oldest and most experienced advisors specializing in the insurance industry

Hales Capital Securities is our registered broker-dealer that engages in securities related transactions on behalf of its clients

Our core business is advising agents, brokers, service providers and companies on corporate finance matters: merger & acquisition transactions and accessing equity and debt capital

We offer additional financial and strategic advisory services such as due diligence representation, valuation and perpetuation planning

Leading Advisor to the Insurance Industry

4Overview 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.

Firm 2005 2006 2007 2008 2009 2010

Hales & Company, Inc. $242.3 $628.2 $461.9 $568.6 $334.7 $14.5

Mystic Capital Advisors Group LLC 7.0 116.4 39.5 300.3 2.9 N/A

Marsh Berry & Co. Inc. 150.4 14.7 29.8 100.3 25.4 N/A

Reagan Consulting Inc. 41.2 104.8 34.4 N/A N/A N/A

Transaction Volume

Source: Hales and SNL DataSource, SNLi. Represents summary of insurance broker / agency sell-side transactions announced or completed in 2005, 2006, 2007, 2008 and 2009.

5Overview of Hales

Why We Are Different

We are SpecialistsWe are Specialists

Our Partners Execute Every Deal

Our Partners Execute Every Deal

Technical and Negotiating Expertise

Technical and Negotiating Expertise

We Don’t QuitWe Don’t Quit

Seasoned and senior professionals are involved from beginning to end.

Seasoned and senior professionals are involved from beginning to end.

We focus on the insurance industry and have unique insights into the business and transactions.

We focus on the insurance industry and have unique insights into the business and transactions.

We leverage our expertise and data on industry transactions to represent our

clients effectively.

We leverage our expertise and data on industry transactions to represent our

clients effectively.

We have a well-earned reputation for “getting deals done” and strive to achieve a

successful outcome for all clients

We have a well-earned reputation for “getting deals done” and strive to achieve a

successful outcome for all clients

We focus on the insurance industry and have unique insights into the business and

transactions.

We focus on the insurance industry and have unique insights into the business and

transactions.

6Overview of Hales

Representative Transactions

2010

Hales advised Risk Transfer Insurance Alliance

has been acquired by

2010

Hales advisedIRUS Corporation

has been acquired by

2010

Hales advisedHedden Insurance

has been acquired by

2010

Hales advisedStone Insurance Agencies

has been acquired by

2010Hales advised

USI Holdings Corp.

have been acquired by

National City Insurance Group Inc.

The Ohio, Kentucky and Missouri offices of

2010Hales advised Bowen, Miclette, Britt &

Merry of Arkansas Inc.

has been acquired by

Bowen, Miclette, Britt & Merry of Arkansas Inc.

a subsidiary of

2010

Hales advisedConfie Seguros

has been acquired by

2010

Hales advised Insurance Company of the West

has been acquired by

The Surety Division of

7Overview of Hales

Representative Transactions

2010

Hales advisedConfie Seguros

has been acquired by

2010Hales advised

Endorsed Administrators, Inc./J.J. Jerome Associates, Inc.

has been acquired by

Hales advised The Maksin Group

has been acquired by

2009

2010

Hales advisedMcCutcheon Burr & Sons

has been acquired by

2010

Hales advisedThe Gardner-Kirby Corporation

has been acquired by

The Gardner-Kirby Corporation

2009

Hales advised MeyersDining LLC

has been acquired by

2009

Hales advisedCaruso Benefits Group, Inc.

has been acquired by

Financial Associates LLC

selected assets of

2009

have provided equity and debt capital to

Hales advisedHigginbotham & Associates

Trident IV, L.P.a fund managed by

8Overview of Hales

Representative Transactions

2009Hales advised Key & Piskuran Insurance

Agency

has been acquired by

Key & Piskuran Key & Piskuran Insurance AgencyInsurance Agency

2009

Hales advised Slapin-Lieb & Co.

has been acquired by

Slapin-Lieb & Co.Slapin-Lieb & Co.

2009

Hales advisedJohn Grady Insurance, Inc.

has been acquired by

2009

Hales advisedIrving Weber Associates

has been acquired by

2009

Hales advisedBoston Insurance Brokerage, Inc.

have been acquired by

Select assets of

2009Hales advised

BridgeStreet Consulting & Ins. Svcs., Inc.

has been acquired by

2009

Hales advised Edgewood Partners Insurance Center

has been acquired by

2009

Hales advisedUnland Companies

has been acquired by

9Guide to Raising Capital

Complex Map of Capital Providers – Where to Begin?

• Private equity firms• Venture capital• Hedge funds

• Business development cos.• Insurance Companies

• Friends & family

• Commercial banks• Specialty lenders

• Insurance Companies

EQUITY DEBT

10Guide to Raising Capital

Different Kinds of Capital

SUBORDINATED DEBT(Bullet Loan w/Interest)

SUBORDINATED DEBT(Bullet Loan w/Interest)

PREFERRED SECURITIES

(Dividends, Convertibility)

PREFERRED SECURITIES

(Dividends, Convertibility)

SENIOR DEBT (Revolver / Term Loan)

SENIOR DEBT (Revolver / Term Loan)

Amortizing and secured against stock or personal guarantees

1.5 – 2.5x EBITDA; LIBOR + or Prime + pricing; strict financial covenants

Bullet loans

15% - 25% total cost depending on leverage

Liquidation preferences, mandatory put options / redemption privileges

Generally priced to achieve 25% - 40% returns

11Guide to Raising Capital

Common Misconceptions

“All Private Equity firms are the same”

“My company is worth X, so I can sell 33% of my company for 33% of X”

“Borrowing is always better than selling equity”

“I am only raising $10 million or less, that should be easy”

12Guide to Raising Capital

US Insurance Industry - Debt Market

Global financial crisis impacted debt raising by US Insurance companies. Amount raised fell to USD33 bn in 2008 and USD34 bn in 2009 from USD59 bn in 2007.

In 2007 and 2008 AIG, Inc. was the largest debt issuer raising 32% and 31% of the total amount raised, respectively.

In 2010, the scenario is looking much better both in terms of median transaction value and number of transactions.

162

4860

32

550

400

499

249

20

40

60

80

100

120

140

160

180

2007 2008 2009 2010*

100

200

300

400

500

600

No.of Transactions Median (USD mn)

* Until August 2010

59

33 34

22

10

20

30

40

50

60

70

2007 2008 2009 2010*

Pro

ceed

s (U

SD

bn)

* Until August 2010

Source: Thomson Banker Source: Thomson Banker

13Guide to Raising Capital

US Insurance Industry - Private Equity Market

Source:Pitchbook

0%

20%

40%

60%

80%

100%

2007 2008 2009 2010 H1

Capital Markets/Ins. Comm. Banks Insurance Other Finan.Serv.

Source:Pitchbook

PE Investment in Insurance

36

12

17

48

0

2

4

6

8

10

12

14

2007 2008 2009 2010 H1

0

10

20

30

40

50

60

Investment (USD bn) Number of deals

PE Investments across Financial Services

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.

Composition of Investments into insurance remained flat in H1 2010 (6% versus 7% in 2009).

14Guide to Raising Capital

627

211

6548

655

2,918

2,102

1,219

0

100

200

300

400

500

600

700

800

2007 2008 2009 2010 H1

0

500

1000

1500

2000

2500

3000

Capital Invested (USD bn) No. of Deals

0

20

40

60

80

100

120

140

160

2007 2008 2009 2010 Q2

Buyout - LBO PE Growth/Expansion Other PE Deal Types*

Total PE investments and No. of Deals Median PE investments by Type

Source:Pitchbook Source:Pitchbook

All Industries - Private Equity Market

15Guide to Raising Capital

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006 2007 2008 2009 2010 H1

Under USD 50mn USD50mn-250mn USD250mn-500mn USD500mn-1bn USD1bn-2.5bn Above USD2.5bn

PE Investment by Deal Size – 2003 to H1 2010

Source:Pitchbook

16Guide to Raising Capital

Step One: The Business Plan – Why am I raising capital?

Step Two: The Financial Plan – How much capital do I really need?

Step Three: The Capital Structure – What kind of capital can I attract?

Step Four: The Execution – Show me the money!

Four Simple Steps

17Step One: The Business Plan

Reasons for Seeking Capital

Pay DebtPay DebtBuy Out ShareholdersBuy Out Shareholders

GrowthGrowth

Debt or working capital obligations Legal matters

Perpetuation Fund down payments

Hire new producers Upgrade systems Fund acquisitions

18Step One: The Business Plan

Clear explanation for the use of capital

Investors never write blank checks or invest in blind pools

Differentiation in strategy or market – be specific

What advantage do you have over competitors?

What is happening in the market that may drive growth?

Honest self assessment of competitive threats

Management and track record

What Captures an Investor’s Attention?

19Step One: The Business Plan

Why Will You Grow When Industry Isn’t?

1.9%

5.0%

8.4%

15.3%

10.0%

3.9%

0.5%2.7%

-0.3% -0.5%-3.7%

-1.3%-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010(P)

Net Written Premium Growth

20Step One: The Business Plan

Why Will You Grow When Industry Isn’t?

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2003 2004 2005 2006 2007 2008 2009

Public Broker Median Organic Revenue Growth

Median

21Step Two: The Financial Plan

Detailed set of financial projections with assumptions

Earnings, Cash Flow and Balance Sheet

Detail demonstrates understanding and gives confidence

Growth rates and margins that make sense

Anticipate questions from financial analyst types

They have to defend recommendations to an investment committee

What Captures an Investor’s Attention?

22Step Three: The Capital Structure

What are Lenders demanding?

Collateral

Personal guarantees

Financial covenants

Co-investment of equity

Ability to get loans repaid

What are Equity Investors demanding?

Aggressive growth/margin hurdles

Control and governance (i.e., “Alignment”)

Liquidity

Investor / Lender Expectations

23Step Three: The Capital Structure

$35 m

TODAYEBITDA $5 milValue (7x) $35 mil

$75 m

YR 5EBITDA $10 milValue (7.5x) $75 mil

2.1x multiple16% annual ROI

$10 m 3.0x multiple25% annual ROI

NO LEVERAGE

W/ LEVERAGE

$25 m

$75 m

NOTE: Assumes debt prepaid out of CF

24Step Four: Execution

Prepare before Contacting Investors

Determine needs and types of capital

Control information flow versus reacting to investor demands

Resources and Focus

Contact multiple sources simultaneously in a competitive process

Time consuming: Meetings / Presentations / Follow-up Requests

Due Diligence and Documentation

As rigorous and costly as a sale

How to Successfully Complete a Capital Raise

25

Closing

Coordinate due diligence

Analyze terms

Negotiate / execute documentation

Regulatory approval(s)

Announcement

3 - 4 weeks 5 - 8 weeks 4 - 6 weeks 3 - 5 weeks

Information collection / diligence

Compile, screen and evaluate potential investors

Draft materials

Contact potential investors and sign NDA’s

Management presentations

Facilitate informational requests and queries

Solicit indications of interest

Hales in MarketDue Diligence &

NegotiationExecutionPrepare for Market

Step Four: Execution

26Conclusions

Raising capital is harder than you think

Lots of misconceptions; wide variety of capital sources

Preparation, process and focus are paramount to success