Q OGP ID: 9999 Current Value Driver Comparison

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1 Q OGP ID: 9999 Current Value Driver Comparison Organic Growth & Survey Organic Growth 12.0% 8.0% 6.0% 4.0% Total Agency Organic Growth Organic Growth by Product Line Reagan Consulting Observations Median organic growth was 5.8%, which fell slightly short of Q growth of 6.2% All lines grew at a slower pace than in Q Commercial lines slackened from 8.4% growth a year ago to 6.6% growth in Q1 2015, a similar rate as Q and % 2.0% 1.3% 1.1% Privately-held brokers continue to grow 1.0% faster than public brokers, who reported Sample OGP Survey OGP 75th Public organic growth of just 4.0%, on average Firm Median Percentile Brokers Commercial Personal Lines Group Benefits Lines OGP Projected 2015 Growth: 6.0% Similar to 2014 year end, agents and Your organic brokers project a fourth consecutive year 40th - 50th percentile Sample Firm OGP Median growth rank: of organic growth around 6% in % 5.8% 10.4% 4.0% 7.0% 6.0% 4.0% 3.0% % 6.6% 4.2% 4.5% Total Agency EBITDA Margin EBITDA Margin by Product Line Reagan Consulting Observations % Sample Firm 29.0% OGP Survey Median 38.1% OGP 75th Percentile 24.1% Public Brokers % 2 Commercial Lines 35.1% 33.5% 19.9% 18.2% Personal Lines Group Benefits Q margin was 29.0%, a slight decline from the record high margin in Q of 29.9%. This result is still strong and well above the next highest Q1 margin (27.9%). Median EBITDA figures are inflated by the cash-basis recognition of contingent income, which is largely received in the first quarter. Margins will decline through the year. Median operating margin declined for the second year in a row and now stands at 9.5%, compared to a high point of 12.0% in Q Your profitability OGP Projected 2015 Margin: 2 40th - 50th percentile Sample Firm OGP Median rank: This would be a one point decline from The Rule of 20 (see note below) About the Rule of 20 Total Agency Rule of 20 Rule of 20 by Product Line Reagan Consulting Observations Rule of 20 scores, like EBITDA margins, are inflated by cash-basis contingent income and will decline throughout the year Contingent income grew at 6.6% for the median firm in Q1 2015, less than half of Q1 2014's 15% growth Personal lines and group benefits Rule of 20 scores each fell over 5 points in Q Sample OGP Survey OGP 75th Public Both lines lost growth momentum and group Firm Median Percentile Brokers - benefits profit margins declined 7 points. Commercial Personal Lines Group Benefits Lines OGP Projected 2015 Score: 1 Your Rule of This projection is nearly half a point lower 40th - 50th percentile Sample Firm OGP Median 20 rank: than 2014's median score of 16.9 Reagan Consulting has developed a metric called the Rule of 20 to provide a quick means of benchmarking an agency's shareholder returns. The Rule of 20 is calculated by adding half of an agency's EBITDA margin to its organic revenue growth rate. An outcome of 20 or higher means an agency is likely generating, through profit distributions and / or share price appreciation, a shareholder return of approximately 15% - 17%, which is a typical agency / brokerage return under normal market conditions. Note: If data for your firm reads "" or "0.0" it may mean that no data was submitted for that metric. 1

2 (EBITDA Margin) Q OGP ID: 9999 Agency Organic Growth & Scatter Plot Organic Growth & Survey Bottom 25% Growth Top 25% Growth 5 Rule of 20 4 Top 25% WSH BRO 3 MMC 2 AON AJG Bottom 25% Rule of Organic Growth Surveyed firms with annual revenues less than $10 million Sample Firm Surveyed firms with annual revenues between $10 and $25 million Top and Bottom 25% of all firms Surveyed firms with annual revenues greater than $25 million Rule of 20 line (All points on this line indicate a Rule of 20 score of 20) About the Scatter Plot In the chart above, we've plotted every firm in the survey that completed both the total agency organic growth section and the total agency profitability section. Each firm's organic growth is plotted along the x-axis, and each firm's profitability is plotted along the y-axis. We've included a couple of guidelines on the graph to help in interpreting the data. The grey dotted lines show the top and bottom 25% of firms in organic growth and profitability. The solid blue line represents all combinations of organic growth and EBITDA margin that result in a Rule of 20 score of 20. Finally, we've broken the firms into groups based on revenue size, as distinguished by the different colored dots. The goal of this scatter plot is to show the wide range of organic growth and profitability results in the industry and to benchmark where your firm falls. 2

3 Q OGP ID: 9999 Historical Trending Organic Growth & Survey Quarterly Organic Growth - Total Agency Median (Q Present) 6.9% 6.8% 6.1% 6.1% 6.2% 6.2% 5.8% 6.0% 6.2% 5.8% 5.5% 5.4% 3.3% 3.3% 3.8% 3.7% 1.7% 1.9% 0.9% 1.0% 0.2% -0.6% -0.7% -1.4% -1.8% -1.4% III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I Comparative Median Organic Growth by Product Line (First Quarter Numbers, ) Commercial Lines 6.6% 6.8% 8.4% 6.6% Personal Lines 2.7% 3.0% 2.8% 7.3% Group Benefits 7.6% 2.9% 1.1% 1.3% 4.3% 3.7% 4.5% 2.3% -1.5% -2.9% -0.2% -0.8% Comparative Median and Rule of 20 Analysis (First Quarter Numbers, ) EBITDA Margin and Operating Margin Rule of % 21.9% 26.0% 24.1% 27.9% 29.9% 29.0% % 6.6% 9.1% 9.2% 12.0% 11.1% 9.5% EBITDA Margin Operating Margin About EBITDA Margin and Operating Margin EBITDA Margin is calculated by dividing a firm's pro-forma EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) by the firm's pro-forma net revenues. Operating Margin is calculated as EBITDA less contingent income, divided by pro-forma net revenues less contingent income. 3

4 Organic Growth & Survey Market Commentary (Q1 2015) Growth Slows, but Valuation Multiples Remain Strong by Kevin Stipe Broker growth rates are hanging in there, despite softening P&C pricing and an inconsistent U.S. economy. Overall organic growth was down only slightly to 5.8% versus 6.2% in Q The downturn in growth rates was widespread, however, as it occurred in all three major lines of business: commercial P&C growth fell to 6.6% from 8.4% a year ago, while group benefits fell to 4.5% versus and personal lines decelerated to 1.3% versus 2.8% in The most important line of business for many agencies in the OGP Survey is commercial P&C, since it averages about 60% of total revenue. This line of business is heavily influenced by trends in pricing organic growth can be relatively easy to achieve when prices are firming, but can be challenging when prices are softening. During Q1 2015, according to the CIAB s Commercial P/C Market Index Survey, pricing fell by 2.3%, which was the fastest rate of decline since The rate of decline in Q1 of 2015 is alarming, as it seems to signal the industry has moved from flat pricing to true softening. Thus far, commercial P&C growth rates have hung in there, but if these pricing trends continue, organic growth rates are likely to decelerate further. Organic Growth vs. Commercial P&C Pricing 3.7% 2.7% 6.2% 6.2% 6.2% 5.8% 2.1% -0.7% -2.3% Q Broker Organic Growth Commercial P&C Pricing Sales Velocity To avoid becoming passive victims of another soft market, many leading brokers are focusing on expanding their capabilities to consistently generate new client revenue. Firms that produce strong new client revenue tend to materially outgrow those that do not. Over the past several years, brokers in the Top 25% of new business production have grown roughly three times faster than those in the Bottom 25%. To measure this new business production, in 2014 we added the Sales Velocity metric to the OGP Survey. It measures the amount of new business written during a given period against the underlying book of business. For example, a firm that writes $1 million in new business on top of an existing $10 million book of business has a Sales Velocity of 10%. The chart below provides a look at Sales Velocity during Q1 of Top 25% Top 25% Median Median Bottom 25% 25% Sales Velocity of OGP Firms 8.8% 13.0% 16.7% If we are headed into another extended period of softening, Sales Velocity will be the key differentiator among the industry s winners and losers

5 Organic Growth & Survey Market Commentary (Q1 2015) M&A Activity and Agency Valuation Reagan Consulting recently hosted over 150 leaders at its biennial M&A and Perpetuation Workshop in Atlanta. Much of the discussion at the event was about the record high valuation multiples in the marketplace today, and how those multiples are impacting brokers. The table below provides guaranteed EBITDA multiples paid over the last several years for two groups of firms: those over $10 million in revenue ( Platform Acquisitions ) and smaller firms that range from $3-$10 million ( Secondary Acquisitions ). While there is nothing magic about being over $10 million in revenue, valuation multiples typically get progressively larger as firms grow beyond the $10 million threshold. This is because larger firms commonly have a more professional and dedicated management team; they have a greater spread of risk (producers, carriers, clients); they have a stronger, more builtout infrastructure; and their size frequently gives them a stronger brand recognition in their marketplace. Guaranteed Deal Multiples of EBITDA Q $3-$10M Agency $10M+ Agency As the chart indicates, the multiples being delivered have steadily increased in recent years. In fact, multiples have increased by roughly 8-10% over just the past 12 to 18 months. Depending on one s perspective, these record multiples create opportunity (for potential sellers), or are a major nuisance (for those desiring to remain independent) or are a source of frustration (for buyers who struggle to get deals done or fail to get strong financial returns based on the valuation they must deliver.) Whatever the perspective, today s valuations lead to a couple of key questions: Why are valuations so high in the first place? How long will they remain at these record levels? The answer to these questions may surprise you. It is clear that record demand is a key driver of valuation, since an unprecedented number of buyers are competing for deals. But even with strong demand, why are they willing to pay so much? Today s public brokers (Marsh, Aon, Willis, Arthur J. Gallagher and Brown & Brown) are trading at an unusually high average of 12.1 times EBITDA, which far exceeds the historical norm of between 9 and 10. The only time in the past 25 years that we ve seen multiples this high was during the hard market spike of , when investors bid up public broker stocks in anticipation of an earnings windfall. Yet as described earlier, today s P&C market is softening. The public broker multiples are crucial because they are relied upon by other large industry players that are not publicly traded (e.g., private equity-backed brokers) for a variety of uses, including determining their own valuation as well as how much they can conceivably pay for an acquisition. While buyers pursue acquisitions for a variety of strategic reasons, the simplest is to benefit from the opportunity to buy a firm at a lower valuation multiple than their own. It is a simple arbitrage play: buy at a lower multiple and then enjoy the lift of the buyer s higher multiple applied to the - 2 -

6 Organic Growth & Survey Market Commentary (Q1 2015) seller s EBITDA when that EBITDA is pooled with the buyer s. The differential between the high public broker EBITDA multiples and the lower acquisition multiples plotted in the accompanying graph create a picture of the acquisition arbitrage opportunity that exists. We ve labeled the yellow shaded section the Platform Acquisition Arbitrage Opportunity and the green section the Secondary Acquisition Arbitrage Opportunity. What is remarkable is that even with today s record valuations, the arbitrage opportunity for buyers remains near historic highs for both types of acquisitions. What does this actually mean? We would make three observations: 1) Despite today s record-breaking valuations, the magnitude of the Acquisition Arbitrage Opportunity indicates that deal pricing should remain at current levels or could possibly increase even further. The Arbitrage Opportunity is simply too lucrative for buyers to ignore. 2) The stock market is the primary catalyst behind today s high valuations. If there is a major correction that reduces public broker EBITDA multiples, acquisition multiples will inevitably follow. 3) Platform Acquisitions will continue to sell at premiums because once acquired they become the gateway through which smaller agencies can be acquired. The best investment returns come from capturing the enormous arbitrage windfall from smaller acquisitions, but large national buyers generally cannot efficiently pursue these directly. They must typically be sourced and managed by an acquired platform operation. Only time will tell what direction valuations will move from here. But with all of the benefits (and challenges) created by today s high valuations, it is at least very gratifying to see the investment community taking such a strong interest in the insurance brokerage industry. Public Broker Acquisition Arbitrage Opportunity Platform Acquisition Arbitrage Opportunity 9.0 Secondary Acquisition Arbitrage Opportunity Q $3-$10M Agency EBITDA Multiples $10M+ Agency EBITDA Multiples Public Brokers EBITDA Multiples Source for Public Broker Multiples: SEC Filings - 3 -