Rob Lieblein Executive Vice President

Harrisburg, PA Tel: (717) 695-7410 ext 101

Rob.Lieblein@MarshBerry.com www.MarshBerry.com

Organizational and Compensation Strategies Presented by

MarshBerry September 9-11, 2012 Phoenix, AZ

About the Presenter

Robert J. Lieblein – Executive Vice President Marsh Berry Rob Lieblein has over 25 years of experience and has been involved in more than 150 mergers & acquisitions and is known as one of the insurance industry’s leading financial advisors. He has written numerous articles for industry publications and is a frequent speaker for industry trade groups and associations. Mr. Lieblein is a Certified Public Accountant and spent 13 years with KMPG as a Senior Manager in the firm’s Financial Services practice. Rob also is the co-founder of Wharton Capital Partners, a private equity firm involved in starting and acquiring companies since 1997. Mr. Lieblein earned degrees in Accounting, Mathematics and Computer Science from Shippensburg University.

ADDRESS 2040 Linglestown Road

Suite 100 Harrisburg, PA 17110

TELEPHONE

717.695.7410 Ext. 101

EMAIL Rob.Lieblein@MarshBerry.com

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MarshBerry Overview

Offices 1. Ohio 2. California 3. Michigan 4. Texas 5. Pennsylvania Clientele 1. Insurance Agencies, Brokers, Wholesalers,

Program Managers, MGAs, Credit Unions, Insurance Companies and Banks

2. National Firm with Over 900 Clients in 50 States Firm 1. Founded in 1981 2. Privately-held 3. 15 Shareholders 4. Perpetuated Ownership

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Mission

MarshBerry is dedicated to the development of relationships

IDENTITY STATEMENT: MarshBerry is the nation’s preeminent provider of management consulting; peer-to-peer

exchange networks; informational services; and merger & acquisition advisory services within the insurance distribution system. We consult with organizations dedicated to realizing their

fullest business potential and willing to work as our partners toward that end. Organizations not directly engaged in insurance distribution retain MarshBerry to either acquire or access those

within the system.

MISSION STATEMENT: On behalf of our clients, continue to be the most notable authority, vital resource and essential factor engendering the anticipation, understanding and exploitation of equity enhancing change within the insurance distribution system while financially, operationally and ethically exceeding

the standards expected by our stakeholders.

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MarshBerry Solutions Information Services

Benchmarking Services Perspectives for High Performance (PHP) Sales Portal – Pipeline / Service Timeline (now a product of LexisNexis) Confidential Employee Morale Indexing Perpetuation Preparedness Operational Assessment Sales Management Benchmark Report MarshBerry.com Performance Calculators Forms & Documents Position Descriptions Discussion Groups Research Studies Market Data On-Line Value Estimator Published Articles Monthly Publications The MarshBerry Letter

a. Market & Financial b. Agency Compensation c. Agency Operations d. Surveys

For The Record (Statistical Analysis) Dealmaker’s Dialogue (M&A Advisory) Public Speaking Engagements Keynote / State of the Industry Topical education Carrier Services Distribution System Management Field Personnel Training and Development Agency Management Symposiums

Sales Management Cultural Mapping and Alignment Producer Goal Setting Accountability / Compensation Design Producer and Sales Manager Training Differentiation Design and Execution Business Planning Strategic Business Planning Execution / Action Plan Management Strategic Options Analysis Agency Valuation Agency Fair Market Valuation ESOP Valuations by Certified Appraisers Valuation Assessment

Perpetuation Plans Perpetuation Plan Design Plan Execution Management Transfer Strategies (Stock / Leadership /

Books-of-Business)

Financial Consulting Internal Financial Controls Compensation Consulting Value Enhancement Planning Contingent/Supplemental Plan Mgmt. Operational Consulting Staff Workload / Comp. Management Workflow and Procedures E&O Audit, Policies and Procedures E&O Market Access

Recruiting Position profile, search, screen, hire Compensation development plan Technical and sales training - year one

Peer Exchange Networks

Agency Peak Performance EXchange (APPEX)

Executive-level peer exchange network for improving agency value

Bank Agency NetworK (BANK) Executive-level peer exchange network for

improving bank-owned agencies Total Agency Sales Culture

(TASC) Network Nation’s leading organic growth agencies

enhancing new business production and retention strategies

Royal Sun Alliance (RSA) Summit Brokers Improvement Network

Canadian agencies affiliated with Royal & Sun Alliance Insurance Company

Standard Partner Services State of the Industry Research CEO Peer Exchange / Networking Semi-annual Conferences Semi-annual Consultation Regimented Benchmarking Services MarshBerry.com The MarshBerry Letter and other Monthly

Publications Priority Consulting Opportunities Exclusive Programs Distance Learning Groups (DLGs)

Management Consulting

Strategy Acquisition Planning Deal Return Modeling Strategic Options Analysis Alternative Buyer Comparison

Preparation Sale Preparation Management Offering Memorandum Development Strategic Pitch Book Design Candidate Profile Creation

Representation Buy Side Representation

(including Search and Screen) Sell Side Representation Letter of Intent / Negotiation Creative Deal Structure Alternatives

Analytics Agency Fair Market Valuation Market Comparables / Benchmarking After-Tax Return Optimization IRR, ROI and EPS Analysis

Execution Diagnostic Due Diligence Confirmatory Due Diligence Intangible Asset Allocation – GAAP Rep. Fairness Opinion Definitive Agreement (Best Terms /

Conditions)

Post-Deal Management Post-Closing Integration Goodwill Impairment Testing Peer to Peer CEO Exchange Earn-Out Maximization Consultation

M&A Advisory

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M&A Advisory

#1 Insurance Industry M&A Advisory Firm • MarshBerry is a buy-side and sell-side M&A Advisor • Closed 29% of total advised deal flow since 1999 • 287 M&A Transactions with the Top 100 Brokers • 163 Bank Insurance M&A transactions • 690 total M&A transactions closed • Ranked #1 by SNL for each of the past 15 years

#1 Insurance Management Consulting Firm MarshBerry is a consultant to 54 of the Top 100 Brokers and over 900 of the nation’s leading insurance agencies, brokerage firms and financial institutions in insurance.

• Valuation • Sales Management • Perpetuation • Producer Recruiting • Strategic Planning • Compensation Consulting

Peer Exchange Networks

#1 Insurance Industry Peer Networks

MarshBerry facilitates APPEX, BANK, TASC and RSA, which are CEO peer-to-peer exchange groups committed to driving organic growth and value.

• 180 insurance agencies and brokerage firms • $30 B in aggregate premium • $2.5 B in aggregate revenue

#1 Insurance Industry Information Resource MarshBerry maintains proprietary benchmark statistics on insurance agencies and brokerage firms across the United States and Canada.

• 1,000+ insurance agencies and brokerage firms • $50 B in aggregate premium • $4 B in aggregate revenue

Information Services

Management Consulting

MarshBerry Market Position

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An Agency’s Choice

Stay As You Are

For most agencies, not a good

option!

Maximize Shareholder Value

WRONG WAY

Sell The Agency

FOCUS HERE, but be prepared for

Modest “Course Corrections” Sustaining Investments

Acquire or Grow Organically Implement Organizational Strategies Alter Compensation Strategies Build a Sales Culture Engage in Strategic Planning

Commit to the Process Seek Professional Guidance Get Your House in Order Value Your Agency Be Proactive

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Organizational Strategies

What you can’t control – economy and product rates

However, you DO CONTROL desired behaviors, activities and outcomes.

90% of all agencies issues can be tied directly or indirectly to Flawed

Organizational and/or Compensation Strategies

Look Yourself in the Mirror Are You a “Process or Results Driven” Agency?

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Holding is Not An Option A Game of Chance or Skill

IF YOU HOLD

►External environment will define your future.

►Staff will age due to lack of reinvestment.

► Inability to retain high performing staff.

► Inability to perpetuate or satisfy shareholder financial requirements.

►Culture will deteriorate as “no vision for the future”.

► Inevitable sale at a discount.

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Organic Growth

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Why is Growth Important? 1. Culture: Energy and excitement 2. Carrier minimum volume requirements 3. Carrier compensation 4. Profit to reinvest in the next generation 5. Profit to pay bonuses and raises 6. Promotion opportunities for staff 7. Ability to hire quality new employees 8. Growth + Profit – Risk = Value 9. Sustainability: Control your future versus letting the

future control you

Income Statement Averages

Source: MarshBerry databases and 2011 IIABA Best Practices Study

Peer Group $1.25M - $25.0M

Average 25%

Profit 25%

Growth

Total Net Revenue 100.0% 100.0% 100.0%

Total Compensation Expenses 64.2% 55.7% 62.0%

Total Selling Expenses 3.8% 3.1% 3.5%

Total Operating Expenses 14.7% 12.7% 13.2%

Total Administrative Expenses 3.3% 1.1% 3.7%

Total Expenses 85.9% 72.5% 82.4%

Pre-Tax Profit 14.5% 27.5% 17.7%

Pro Forma EBITDA 22.7% 34.9% 25.9%

Pro Forma = Adjusted for discretionary expenses like owners excess comp, one-time revenue

EBITDA = Earnings before Interest Taxes Depreciation and Amortization

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Employee Efficiency

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Peer Group $1.25M - $25.0M

Employee Efficiency Average 25%

Profit 25%

Growth

Revenue Per Employee $156,000 $191,000 $170,000

Compensation Per Employee $ 99,000 $108,000 $106,000

Spread Per Employee $ 57,000 $ 83,000 $ 64,000

Source: MarshBerry databases and 2011 IIABA Best Practices Study

Organic Growth

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Organic Growth Average Top 25%

New Business as % of PY C&F 11.0% 19.9%

Leakage (rate, retention, compression) 8.3% 7.8%

Organic Growth 2.7% 12.1%

Source: MarshBerry databases

Producer Expectation

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Percentile Group

All Producers

Million $Producer

Executive Producer

Senior Producer

New Producer

80% to 100% 175,223$ 251,720$ 233,121$ 122,570$ 179,560$ 60% to 80% 95,491$ 167,669$ 131,472$ 74,153$ 80,626$ 40% to 60% 67,450$ 111,717$ 88,908$ 49,389$ 55,534$ 20% to 40% 47,100$ 95,621$ 55,281$ 36,022$ 36,017$ 0% to 20% 28,763$ 58,156$ 37,873$ 21,453$ 16,452$

$68K $126K $175K

$53K

High Performing Averages:

New = $68K

Senior = $53K

Executive = $126K

Million = $175K

High Performing agencies have double digit new business growth and no average new business

production below the 40th Percentile!

Mutual Understanding

You Are in a Sales Driven Environment

Build Your Organization Around a Sales Culture

You Will Die if You Do Not Grow – This is a FACT

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A Mission Statement For Selling, Servicing and Retaining

Create an organizational structure that supports the delivery of EXCEPTIONAL

QUALITY SERVICE that results in superior retention rates while providing

your producers TIME to SELL.

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Common Themes of a High Performing Sales Agency

►New business development is a culture

►Do not just talk about sales, demonstrate a commitment to sale: • Recruiting, training, managing, investing rewarding and supporting

sales efforts

►Culture of Accountability

►GREAT SERVICE IS A GIVEN, NOT A DIFFERENTIATOR

►Service Comparison – Insurance versus Hotel Industry

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Successful Characteristics

►Understands what a Trusted Advisor means! ►Has “Escaped the Commodity Trap” ►Provides a “Unique Experience” – not just value add ►Diagnostic and consultative ►Active network of clients and centers of influence who

provide a steady stream of referrals ►Hit ratios of greater than 80% ►Disciplined, strategic prospect research and qualification

system ►Process in place to benchmark customer loyalty and

satisfaction

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Producer Productivity

Best Practices

Peer Group $1.25M - $25.0M

Producer Productivity/Efficiency Top P&C

Producers Top L&H

Producers Average Time Spent Serving Book of Business 25.0% 44.0% 45.0%

Average Time Spent Selling 70.0% 38.0% 40.0%

Other - Management, Administrative, Non-client Related 5.0% 18.0% 15.0%

Total 100% 100% 100%

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Source: MarshBerry databases and 2011 IIABA Best Practices Study

Best Practices Organizational Structure

Build your organization around these common themes

Hunter versus Farmer

Selling Producer versus Servicing Producer Exceptional Client Service

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Why This Structure Works

►Allows producer to focus on selling – Let Them Be HUNTERS • Ideal goal is to have at least 50% of time selling, preferably 60%

to 70% selling

►Allows them to achieve goals with NO EXCUSES ►Aligns activities closer to agency goals ►Minimizes client risk if producer leaves ► Improves customer service ►Develops team concept in the agency

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Producer Definition

What is the Primary Responsibility of Your Sales Force? 1. Grow the Book? 2. Write New Business? 3. Retain Customers? 4. Proactively Identify and Close New Opportunities?

Have You Properly Defined and Articulated the Above? 1. Position Descriptions 2. Employment Agreements 3. Tiered Commissions 4. Enforcement 5. Coaching

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Ideal Organizational Structure

►People • Traditional Sales/Service Team

– Producer/Account Executive/Customer Service Representative – Producer “owns” the Relationship

• Trend – Sales and service separate – Producers “manage the client relationship” – Account executives “manage the client service/renewal” – Service teams are part of the sales process – House accounts or small business groups with no producer

involvement and no commissions

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► Institutionalized client service – Builds a Brand ►Minimize producer risk (“flight risk”) ► Improves cross selling ►Better coordination of efforts of sales/service ► Improves client service and retention ►Provides multiple knowledgeable contacts for customer ►Saves real dollars ►Builds career paths

Benefits of Building Service Teams

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Compensation Strategies

Is plan driving desired activity?

Is plan delivering results agency needs?

Are my producers producing? Shortfall?

Compensation Questions Examine Past Performance

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High Performing Agencies Create a Sales Culture of Accountability and Rewards by Providing Incentive Compensation to all

Sales and Service Employees

Compensation Plan Goal

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Compensation Strategy for Producers

►Sales goals clearly defined – minimum new business requirement

►Commission compensation structure that motivates salespeople to focus on new business development

► Incentive-based rewards (bonuses) ► “Penalties” for non performance ►Strict accountability and monitoring – proven correlation

to performance ►Pipeline and prospect sales meetings and monitoring ►Offer equity with success

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Flawed Legacy Compensation Strategy

►Historical • High commission year one • Renewal commissions equal or slightly lower • No minimum new business requirements • No minimum account size thresholds for paying commission • Focused on client retention and not new business

development (allowed producer to think they owned the book of business)

• Some incentives but not supportive of long term growth model • No alignment of incentives for non production employees

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Flaws with Legacy Compensation Plans

►Producers not effectively motivated to sell • Commission % is high for both new and renewal • No goal setting • No penalties for non performance • All sales dollars created “equal”

►Allows producer to earn “comfortable” income and books of business stop growing

►Non production staff compensation not aligned with agency goals and objectives

►Lack of information communicated with non production staff

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Time: Where Should We Focus? Create Capacity

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Break down each segment of your book by total revenue and percentage of book.

Accounts

Revenue

% of Resources

Top 5%

Top 20%

Bottom 40%

Bottom 20%

1-3%

4-6%

Innovative New Compensation Plan Design

►Trend • Commission year one significantly higher than renewal

commission (with upside potential) • Less customer maintenance, more focus on new sales • Account executives managing customer not sales – from date of

sale and beyond • More “corporate” in sales commission with less commission year

2 and beyond • “Penalties” built into compensation plan • Service is driver year 2 and beyond • Non production staff shares in risk/reward of new business

development and retention • Designed to increase shareholder value versus current income

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Recent Trends to Compensate Producers for High Performers

►New commissions – 40% to 50%

►Renewal commissions – 20% to 25%

►Payment on “growth in the book” not just new sales ►Not all sales treated “equally” – % increases with more sales

►Minimum new business requirements - $100,000+

►System of rewards and penalties based on performance

►Focus on “80-20” rule, “Top 40” and “Centers of Influence” theories

►No commissions on “small” accounts – direct correlation with minimum account threshold and average and high performers ($2,500 to $10,000 minimums)

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How to Fix “Broken Plans”

Fixing Broken Plans

►Freeze compensation structure for current book of business. • Implement change for new business going forward.

• Incorporate incentive plans to help “offset” producer “pain” (though not real!!)

• Incorporate “penalties” for existing book if new business goals are not obtained. Forces producer to change behavior.

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► Incrementally make changes to existing plan • Current plan calls for 50% commission for new and renewal • Year 1 – Renewal 47% • Year 2 – Renewal 43% • Year 3 – Renewal 38% • Year 4 – Renewal 32%

►Should include incentive or bonus payments ►Penalties for non performance ►New producers begin with the “new” plan (must

continue to invest in new producers)

37

Fixing Broken Plans

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Personal Production Incentive

►Set new business goals (e.g., $75,000) ►Basic new business commission – 50% ►Set increase comp based on exceeding target (20%,

30%, 40%, etc.) ►Actual new business – $100,000

• Incentive comp is to increase commission % to 60% going back to dollar $1

• Impact on agency – Based on old plan – $50,000 – Based on incentive plan – $60,000 – Net cost year 1 – $10,000 – Conclusion – IMMATERIAL

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Example Continued

► You can tier the incentive so each dollar become more valuable (assuming base commission 50% and goal $75,000) • 30% commission if less than $50,000 (or 50% of plan)

• 40% commission if between $50,000 and $75,000 (or 50% to 85% of plan)

• 50% commission if $75,000 (or 85% to 110% of plan)

• 55% commission if between $82,500 and $90,000 (or 110% to 120% of plan

• 60% commission if greater than $90,000 (or 120% of plan)

► If plan is not met, or some percentage of plan, say 85% of plan, then a reduction in commission • 85% of plan – 50% commission

• Every 1% below 85% a reduction in new commission % - not always 1 for 1 (e.g., 80% of plan could result in a 10% reduction 2:1 offset)

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Incentive Plan Based on Agency Goals

►Typical plan includes incentive bonus payment, as a percent of book of business (e.g., 3% - 5%), based on factors such as: • Total agency new business growth

• Retention rate of total agency

• Agency profit goal (either net income or operating profit after compensation and selling expenses)

• Eligibility is tied to achieving personal goals

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Incentive for Consistent Production

►Reward for consistent production • Increase or decrease commission % based on achieving

consistent production • Example – Assume basic commission is 30%

– 3 out of past 3 years – 33% – 2 out of past 3 years – 30% – 1 out of past 3 years – 27% – 0 out of past 3 years – 25%

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AE / AM / CSR Analysis

Peer Group

Average

Top Quartile

Average Commissions Serviced $ 568,000 $ 1,171,000

How Time Was Spent Selling New Business 8% Marketing 20% Claims Processing 12% Administrative 9% Customer Service 51%

TOTAL 100%

AE, AM Peer Group

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Account Exec./Account Mgr. Average

High

Low

Peer Group – Senior Account Exec. $ 93,000 $ 175,000 $ 49,000

Account Exec. $ 59,000 $ 77,000 $ 46,000

Account Manager $ 55,000 $ 85,000 $ 35,000

• Commissions for cross selling – 20% to 25% average, first year only • Incentive compensation – aligning goals and objectives with agency • Spot awards

AE / AM Compensation

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CSR / Account Rep. Comp. Average High Low

Peer Group $ 43,000 $ 71,000 $ 26,000

CSR / Account Rep. Compensation

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Keys to Non-Producer Compensation

►Realize that these employees are primarily driven by base salary but are motivated by incentives

►Need to align and reward compensation to a combination of: • Company goals (new business, retention rates, profit)

• Team goals

• Individual goals

• Discretionary goals

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Examples of Best Practices ►Average incentive compensation as a percentage of

“Targeted” base salary • AE – 15% to 25% • AM – 10% to 20% • CSR/Support – 5% to 12%

►AM have portion of “Target” base salary tied to book of business: • Book of business managed $500,000 • Target base salary $85,000 • Base salary $60,000 and 5% of monthly commissions

► Incentive compensation tied to growth in book – factors in new business development and retention

►Company goals tied to new business development, total commission revenue and agency profitability

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► Provide commission income for selling new services and products

► Must buy into “Gain and Pain” of retention and growth rates

► Need to provide them information so they better understand their role and how they fit into the organization

► Technology and standard processes will enhance efficiencies and productivity

Keys to Non-Producer Compensation

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Questions and Comments