Pet health insurance is a specialty property casualty product designed to help curb the

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1 August 2013 Copyright 2013 StoneRidge Advisors, LLC U.S. Pet Health Insurance Market Overview and Mergers & Acquisitions Trends Pet health insurance is a specialty property casualty product designed to help curb the cost of veterinary care associated with pet ownership. It is a unique insurance product with strong growth potential. The pet insurance industry has seen several false starts, with growth curtailed by adverse economic conditions and challenges in distribution. We believe the industry is entering a period of consolidation where recent entrants find strategic value in buyers with greater resources and established players seek non-organic growth. While the sector has clocked a 13% average annual growth rate in recent years, this is still below many industry expectations. The realization of these expectations is predicated on greater consumer awareness of the product and further development of distribution capabilities. While pet health insurance covers healthcare expenses, it is a limited indemnity product. Early entrants into the U.S. pet insurance market crafted their initial products with high deductibles and routine veterinary procedure exclusions. Consequently, market adoption in the U.S. initially lagged as pet owners failed to see the value in a complex product that offered limited coverage. As the U.S. market matured, pet health insurance providers simplified their policies, which now offer more standardized terms. Pet insurance is a low-limit policy paid through reimbursement with incidence limits usually ranging between $2,500 and $5,000. Coverage limits may reach $7,000 and higher for a significant premium increase. Annualized premiums for pet insurance average about $350 per year. Approximately 85% of insured pets are dogs, with cats and other pets comprising the remaining 15%. While pet health insurance currently comprises a small fraction of the U.S. property casualty industry, numerous factors indicate the U.S. market has potential for substantial growth. These factors include years of accumulated actuarial data, product development and increasing U.S. market awareness. As reflected in the table below, StoneRidge estimates loss ratios for pet insurance to be 10 to 15 points below the overall property casualty industry. There have been six startup pet health insurance companies founded in the U.S. since We believe the projected increase in U.S. veterinary costs, growing product awareness among pet owners and attractive profitability metrics will fuel growth and M&A activity in the U.S. pet health insurance industry over the next few years. This report, StoneRidge Advisors, LLC, and SRA Securities, LLC make no investment recommendations on individual securities or companies. In the past 12 months, SRA Securities, LLC has performed services for the Hartville Group, Inc. after which it received compensation.

2 HISTORICAL LOSS RATIOS: P/C INDUSTRY vs. PET INSURANCE SECTOR 70% Property Casualty Industry 65% 60% 55% Pet Insurance Sector 50% 45% Source: A.M. Best, StoneRidge estimates A Historical Perspective Pet health insurance has been in existence worldwide since the early 1900s but was not offered in North America until the 1980s, beginning with the formation of Veterinary Pet Insurance (VPI), owned by Nationwide. Since that time, many companies have entered the marketplace but few have achieved scale. This is primarily attributed to a challenging macroeconomic environment that stymied growth of new entrants, difficulties in calibrating the appropriate distribution model, and a continued lack of consumer awareness. The three largest domestic pet insurers (VPI, the Hartville Group, and Pethealth, Inc.) all entered the U.S. market before 2000 and thus benefited from a first mover advantage and positive macroeconomic factors. The majority of other pet insurers entered the U.S. market shortly before the economy went into recession in While most of these late entrants have remained in existence, only PetPlan has managed to capture a sizeable position relative to the three largest pet insurers. Distribution has restricted growth as companies have labored to find the appropriate mix of marketing tools. Regulatory restrictions in the United States limit direct marketing of pet insurance. Consumer awareness has lagged as a result. Partnerships with veterinarians and other pet organizations, as well as word-of-mouth referrals, have emerged as the dominant and most effective form of targeting and informing U.S. pet owners. Medical insurance coverage for pets is a relatively small but growing segment of the US property casualty industry. The North American pet insurance market grew from approximately $300 million in 2008 to an estimated $450 million in premiums in 2011, a compound annual growth rate of 12.8%. Assuming the industry continues at this growth rate, the North American pet health insurance market could grow to approximately $721 million by The market for pet insurance products is price sensitive and competes with other discretionary spending on pet products. However, with the overall increase in discretionary spending on pets in recent years, the potential total market for pet insurance has increased substantially. From 2001 to 2012, pet spending in the United States increased at an annual rate of 5.8%. 2

3 PET PRODUCTS SPENDING IN U.S. ($ in billions) $60 $55 $50 $45 $40 $35 $30 $25 $20 $15 CAGR = 5.8% $ Source: American Pet Product Manufacturers Association research, 2012 Rising Veterinary Costs According to the American Pet Products Association, veterinary costs have increased by approximately $600 million from $13.0 billion in 2011 to $13.6 billion in The complexity of veterinary care utilizing human technologies continues to drive up costs of care further, rendering euthanasia more likely when a pet is not insured. Accordingly, veterinarians themselves are increasingly aware of the benefits of pet insurance. Since 1983, household veterinary spending per dog has risen 335%, similar to the 350% increase in health care spending per person over the same time period. As veterinary care becomes more costly, it is expected that pet health insurance sales will increase to offset the rising cost of care. International Penetration Despite an average annual growth rate of approximately 13%, U.S. market saturation remains well below international pet insurance markets, as seen in the chart below. The United Kingdom has approximately 21 million pets, of which approximately 23% are insured, while less than 1% of the 65 million dogs and cats in the U.S. are currently covered. This is likely due in part to regulatory scrutiny in the U.S. insurance industry. Initial product acceptance was low due to the complexity of coverage, and any improvements to the product were required to be approved by regulators. However, the establishment of a more commoditized, comprehensive pet health insurance product in recent years presents compelling opportunities for U.S. market growth. Regulatory differences have also tempered distribution of pet insurance. For instance, in the U.K. and Australia, pet insurance is commonly sold through grocery stores. A similar distribution model in the U.S. would require licensed agents and policy form and rate approvals in 50 different states. If the U.S. pet health insurance market were to see the 5% penetration level of Australia, the U.S. market would have 3.2 million insured pets, or approximately $1.2 billion in premium. Similarly, if the U.S. witnessed penetration rates equal to the United Kingdom the U.S. pet health insurance market would reach $5.2 billion in premium. 3

4 PERCENTAGE OF PETS INSURED BY COUNTRY 35% 30% 30% 25% 23% 20% 15% 10% 5% 0% 1% 5% United States Australia United Kingdom Sweden Source: The Department of Clinical Veterinary Science; Pet Food Institute Pet insurance currently comprises only a small portion of the $13.6 billion spent on veterinary care in the U.S. in In 2012, Packaged Facts estimated pet insurance sales in the U.S. will climb to $760 million by 2014, up from $450 million in As product awareness grows and regulatory hurdles are overcome, we would expect increased market penetration. M&A Trends Since 2005, at least six new pet insurers have entered the U.S. market, including three backed by financial investors. The onset of broader economic headwinds beginning in 2007 hampered expected growth in the U.S. pet insurance sector, proving particularly difficult for less established players banking on continued industry growth. For example, PurinaCare entered the pet insurance market in 2008 only to exit in As the U.S. economy continues its recovery we believe a wave of consolidation may ensue in the pet insurance industry as institutional investors approach investment horizons and established players find value in companies with existing books of business or innovative distribution models. PET HEALTH INSURANCE M&A TRANSACTIONS, ($ in millions) Announced Buyer Target Name Deal Value July 2013 Beauvest Embrace Pet Insurance Agency, Inc. N/A May 2013 Fairfax Financial Hartville Group, Inc. $ 34.0 March 2013 Pethealth Inc. (TSX:PTZ) PurinaCare Insurance Services, Inc. 0.8 * August 2009 Private investor consortium PetFirst Healthcare LLC 1.3 May 2009 Private investor consortium Pets Best Insurance Services, LLC 2.6 July 2008 Pethealth Inc. (TSX:PTZ) Pet Protect Limited 7.0 *Renewal rights transaction Source: Cap IQ, public market information The U.S. pet insurance industry has already experienced increased M&A activity in This is also likely due to the continued maturation of the U.S. pet insurance market, with a number of pet insurers reaching profitability and a level of premium written that is attractive to larger players. Fairfax Financial s May 2013 acquisition of the Hartville Group, the second-largest U.S. pet health insurer, is illustrative of this selected growth. 4

5 With a number of entrants still relying on external funding, pressure to grow and reach profitability will increase. Consequently, we believe there will be a shakeout in the industry whereby smaller players are viewed as attractive acquisition targets by larger players seeking to boost policy growth and market share. Competitors with an organic growth model will likely struggle to keep pace with more established pet insurers willing to put strategic capital to use. We expect a barbell valuation spectrum where quality pet insurers will command premium valuations versus competitors with shrinking pet bases selling at discounted valuation multiples. Prospective acquirers of pet insurance companies include carriers looking to acquire expertise in a growing property casualty sector, financial buyers seeking add-on investments for existing platform companies, or existing competitors seeking market share through strategic acquisitions. Domestic carriers with excess capital are likely buyers. Similarly, foreign carriers with an existing footprint in pet insurance abroad may see significant value in a growing U.S. pet insurance market. U.S. pet insurers that have already reached critical mass may present meaningful value to foreign entrants seeking geographic expansion. However, to date, international pet insurers have largely remained at bay as differences in regulatory framework remain a hurdle in building a presence in the U.S. market. In addition to a demonstrated interest in insurance, financial buyers have displayed an appetite for the U.S. pet care industry, as seen in the historical transactions below. Given the high levels of partnership among pet products companies, veterinarians, and pet health insurance companies, pet health insurers are attractively positioned to boost profitability of existing platform investments. PRIVATE EQUITY TRANSACTIONS IN THE US PET CARE INDUSTRY, Closed Investor Target Name July 2013 Beauvest Embrace Pet Insurance Agency, Inc. April 2012 Highland Capital Partners Castor & Pollux Natural PetWorks April 2012 Highland Capital Partners Pet Appeal, Inc. October 2011 Highland Capital Partners Trupanion Pet Insurance August 2011 TPG Capital, Leonard Green & Partners PETCO Animal Supplies Inc. June 2011 Cybeck Capital Partners FETCH! Pet Care May 2011 Mistral Equity Partners LLC WorldWise, Inc. March 2011 Leonard Green & Partners Animal Health International, Inc. January 2011 MidOcean Partners Professor Connor's, Inc. January 2011 Wind Point Partners Petmate Holdings Co. January 2011 HIG Capital Pro-Pet, LLC August 2010 Irving Place Capital Pet Supplies Plus/U.S.A., Inc. November 2008 NCT Ventures, LLC Embrace Pet Insurance Agency, LLC April 2007 Summit Partners National Veterinary Associates April 2007 Maveron LLC Trupanion Pet Insurance October 2006 JumpStart, LLC Embrace Pet Insurance Agency, LLC July 2006 Highland Capital Partners PETCO Animal Supplies Inc. Source: Capital IQ, public market information Conclusion Given the recent increase in M&A activity, rising veterinary costs, increasing product awareness and an improving U.S. economy, we expect the U.S. pet health insurance sector to garner increased interest over the next two years. 5

6 Significant Transaction Description Fairfax Financial Holdings Limited s (TSX:FFH) acquisition of the Hartville Group, Inc. Fairfax Financial Holdings Limited (Fairfax) acquired the Hartville Group, Inc. (Hartville) in a transaction that was completed in July The acquisition of Hartville vertically integrates a line of business that has historically provided strong revenue and profitability to Crum & Forster, a wholly-owned subsidiary of Fairfax. Additional resources from Fairfax are expected to accelerate Hartville s growth in the U.S. pet insurance space. StoneRidge Advisors acted as financial advisor to Hartville in this transaction. StoneRidge Advisors Recent Transactions Contacts Peter North pnorth@stoneridgeadvisors.com Doug Tegen dtegen@stoneridgeadvisors.com Jay Poorman jpoorman@stoneridgeadvisors.com has acquired TURCO Claim Services, Inc. was sold to has acquired preferred stock from Rocky Golem rgolem@stoneridgeadvisors.com David Gaebler dgaebler@stoneridgeadvisors.com The undersigned acted as financial advisors to NCA Group The undersigned acted as financial advisors to Hartville Group, Inc. The undersigned acted as financial advisors to Ironshore, Inc. Jeff Cohen jcohen@stoneridgeadvisors.com August 2013 About StoneRidge Advisors May 2013 April 2013 Patrick O Hara pohara@stoneridgeadvisors.com StoneRidge Advisors is an investment banking firm that specializes in the insurance industry. Our clients include property, casualty, life and health insurance companies, reinsurance companies, as well as insurance brokerage, managing general agency, claims management, and other related service companies. Our firm combines extensive experience and best practices to help our clients achieve their strategic goals and financial objectives. Services StoneRidge Advisors provides services related to all aspects of an M&A transaction, including identification, valuation, negotiation, structuring, and financing. In addition, we assist companies in developing and executing upon capital raising initiatives. Mergers & Acquisitions Buy-Side Advisory Sell-Side Advisory Capital Raising Financial Advisory Business Valuations Fairness & Solvency Opinions Consulting Services 39 South LaSalle Street Suite 1510 Chicago, IL Avenue of the Americas Suite 4003 New York, NY Investment banking services provided through SRA Securities LLC, member FINRA and SPIC. All other services provided through StoneRidge Advisors LLC. To contact SRA Securities, please call