While the non-standard auto insurance sector in general has performed poorly since

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1 August 2012 Non-Standard Auto Insurance Market Overview & M&A Trends While the non-standard auto insurance sector in general has performed poorly since 2007, we believe that it is poised for a rebound. Some of the weaker competitors have exited or will exit the market during the next two years, either by insolvency or sale/merger. The expected decrease in the number of market competitors combined with an improving operating environment should drive attractive top-line growth and profitability in the near-term. In addition to the expected improvement in some of the macro trends in the sector, other factors that make the non-standard auto insurance sector attractive relative to the overall property & casualty insurance industry include: (i) it has historically been a faster growing segment of the market than the standard auto insurance sector, (ii) it generates significant risk-free fee income through policy fees, installment/ cancellation fees, and the sale of ancillary products, (iii) it is not an A.M. Best ratingsdriven business and thus capital can be more effectively leveraged, and (iv) it is relatively short-tail (i.e., the average duration of an auto insurance company s claims are typically less than two years). A Historical Perspective The non-standard auto insurance sector has historically been defined as the higher-risk sector of the overall auto insurance industry. Higher-risk generally meant an insured fell into one or more of the following categories: (i) a new driver, (ii) a driver with previous moving violations, and/or (iii) a driver with a rare or unusual type of vehicle. The sector has evolved to include drivers who purchase insurance policies with the state mandated minimum limits, typically lower income drivers or recent immigrants to the United States. The customer base is also characterized as one that typically pays for an auto insurance policy on a monthly basis, makes purchasing decisions based primarily on the cost of the initial down payment for the policy, and has a high cancellation or non-renewal rate. Higher rates of insurance fraud and staged accidents are also more prevalent among the non-standard auto customer base than among the standard or preferred auto insurance customer base. The company that has historically been most identified with the non-standard auto insurance sector is Progressive Corporation (NYSE: PGR). Progressive was initially founded in 1937 by Joe Lewis, but it was not until 1956 after Joe s death that his son Peter Lewis founded Progressive Casualty Insurance Company to focus on higher risk customers that were being shunned by standard or preferred auto insurers. Progressive gathered and analyzed underwriting data to help the company identify factors for higher risk customers that predicted lower losses going forward, yet still charged them higher premium rates. While the underwriting strategy sounds relatively simple identify the best high-risk customers and charge them high rates many carriers had historically chosen to avoid higher-risk drivers altogether. Not until the 1980s did other large Copyright 2012 StoneRidge Advisors, LLC

2 insurance companies like Allstate Corporation (NYSE: ALL) and Integon realize that there was money to be made and entered the non-standard auto insurance market seeking to emulate Progressive s success. In turn, the decision of standard auto writers to enter the non-standard auto insurance sector prompted Progressive to enter the standard auto insurance sector. The decision has proven remarkably successful, as Progressive has since grown from a non-standard auto market specialty underwriter to the fourth largest private passenger auto insurance writer in the U.S. with approximately $13.4 billion of direct premiums written in A large part of the company s success in moving into the standard market can be attributed to its impressive data mining and pricing/actuarial capabilities that had helped the company conquer the high-risk segment of the market. 1800% 1700% 1600% 1500% 1400% 1300% 1200% 1100% 1000% 900% 800% 700% 600% 500% 400% 300% 200% 100% 0% -100% Relative Stock Performance, August August 2012 Progressive Corp. (NYSE:PGR) - Share Pricing S&P 500 Insurance (Industry Group) Index (^IUX) - Index Value S&P 500 Index (^SPX) - Index Value Source:C apitaliq Estimated Market Size and Players While Progressive is now chasing market share across the entire $166 billion U.S. personal auto insurance pie versus primarily in the estimated $35 billion non-standard auto slice, a number of competitors have stepped in to serve the higher risk market segment. By our estimation, about 95 of the 330 insurance organizations (groups or unaffiliated single companies) that wrote in the private passenger auto market in 2011 wrote non-standard auto insurance. Fifteen of the 95 companies, including large personal lines companies like Progressive, Allstate, Nationwide Mutual, Farmers Insurance, and Mercury General Corporation (NYSE: MCY), can be categorized as primarily standard companies that also write non-standard auto insurance through subsidiaries they have acquired over the past 25 years. These fifteen large companies write approximately $28 billion of non-standard auto insurance. The other 80 companies that participate in the sector are primarily regional players like Infinity Property & Casualty Corporation (NASDAQ: IPCC) and Home State Insurance Group, Inc. that write the remaining $7 billion of non-standard auto insurance premium U.S. Auto Insurance Market Size Preferred / Standard Auto Market ~ $131BB Non-Standard Auto Market ~ $35BB Standard Carriers Writing NSA ~ $28BB Non-Standard Auto Only ~ $7BB Source: A.M. Best 2

3 The last five years have been difficult for the overall non-standard auto insurance sector given the soft property & casualty insurance market cycle. A soft pricing environment hurt the sector not only due to lower premiums (and correspondingly higher losses) per policy but also because of increased competition from standard auto insurance carriers looking for premium growth that have entered or expanded their writings in the sector. 40% 30% Composite P&C Rate Change, % 115% YoY % Change in P&C DPW 20% 15% 20% 10% 0% -10% -20% Source: MarketScout 110% 105% 100% 95% 90% Combined Ratio DPW Growth Source: A.M. Best 10% 5% 0% -5% In addition many of the carriers that use owned-retail stores for distribution struggled with the fixed operating expenses of the retail store network given the lower premiums. In a hard market, owning retail storefronts is a positive because the insurance carrier controls its distribution and captures the increase in premiums. In a soft market pricing environment, however, the fixed overhead costs of operating these retail storefronts can be a tremendous drag on operating profits. Companies utilizing the owned-retail storefront distribution model such as Affirmative, AssuranceAmerica (OTCPK: ASAM), and First Acceptance (NYSE: FAC) have all seen their financial results suffer over the past few years. The weak economic environment in the U.S. also hurt the sector because unemployed or underemployed non-standard consumers often forgo insurance costs when faced with bill payment decisions. Insurance payments are often near the bottom of the list after essentials like food, rent, and car payments. Going forward, however, we see improvements for the sector. Our outlook for 2012 and 2013 is as follows: Increasing M&A Activity We expect there to be an increasing number of M&A transactions in the space during the next months. Our rationale is based on three factors: (i) private equity firms that own non-standard auto companies at the end of their holding periods will be seeking liquidity, (ii) increased demand for acquisitions from new private equity firms seeking to enter the sector as well as from strategic competitors seeking to build greater scale and eliminate competitors, and (iii) rising interest from mutual insurance companies seeking platforms in the sector. Financial Sponsor / Non-Standard Auto M&A Transactions, Closed Date Investor Target Name Deal Value 01/14/08 Genstar Capital, LLC Confie Seguros, Inc. $ /30/07 Calera Capital / TPG Capital Direct General Corporation /30/05 J.C. Flowers & Co, LLC Affirmative Insurance Holdings, Inc /14/04 Inverness Management, LLC/Wand Partners Inc. American Independent Insurance Co, Inc /30/04 Liberte Investors, Inc. (nka First Acceptance Corp.) USAuto Holdings, Inc

4 In addition to the potential for an increased supply of non-standard auto insurance companies on the market, there is also evidence of rising demand in the sector. One example is the August 2011 investment by Excellere Partners in Personable Holdings, Inc., a California-based provider of non-standard auto insurance focused on California, Florida, Georgia, and Texas. We expect to see additional investments by private equity firms in the sector in the next few years, especially in larger MGAs or in profitable insurance companies with variable cost distribution models. Valuations have declined substantially from levels seen at the height of the market, and sellers seem more willing to come to the table with reasonable expectations than in past years. More recently large mutual insurance companies with excess capital have shown an interest in the non-standard auto insurance sector. Western National Mutual Insurance Company, Utica Mutual Insurance Company, and Mutual of Enumclaw are three examples of mutual insurance companies that have acquired non-standard auto insurance companies recently. All three companies have in excess of $250 million of statutory surplus and had underwriting leverage ratios of 1.30x or less at the time the acquisitions were announced. For Utica Mutual and Mutual of Enumclaw, these acquisitions represent their entry into a new sector in new geographic territories. Given that excess capital is earning historically low investment yields, it is not surprising that large insurance companies with excess capital would rather invest in a potentially high returning line of business with shorttail risk exposure. We expect to see other overcapitalized mutual insurance companies pursuing acquisitions in the sector going forward as well. Improving Sector Fundamentals Will Lead to Better Returns We are increasingly seeing tangible and hearing anecdotal evidence of rising pricing in the non-standard auto insurance sector in While non-standard auto insurance rate trends tend to vary by state, this is certainly different than the decreasing or flat rate environment we have seen and heard about over the past several years. For example, Florida personal injury protection (PIP) rates have increased by double digit rate percentages this year, and reforms enacted by the Florida legislature should help drive some fraud out of the system. California competitors are seeing rate increases in the mid- to high-single digit percentages, and certain carriers are pulling back from the sector or tightening underwriting standards in response to poor underwriting results. Arizona, Georgia, Nevada, and Pennsylvania are a few of the other states with favorable rate environments of late. There are a number of factors that are driving the recent upward rate activity in the non-standard auto sector, including: (i) declining loss & LAE reserve redundancies, (ii) historically low investment yields, and (iii) increasing loss cost inflation. For example, Infinity recently reported $0.1 million of reserve redundancies in its 1Q2012 results, versus $3.0 million in 1Q2011. Similarly, Mercury General reported a $6.0 million reserve deficiency in its 1Q2012 results, versus a $1.0 million deficiency in 1Q2011. With current accident year combined ratios near 100% and little to no redundancies to boost earnings, auto insurance carriers are raising rates to generate underwriting profits. Increasing Investment in Direct / Online Distribution One direct distribution channel that has exploded in popularity over the past fifteen years is the internet. An increasing number of customers, non-standard or otherwise, are comparing prices and purchasing insurance online. While many non-standard auto insurance customers still prefer to buy their policies from their local retail insurance agency, the younger generation of Americans is increasingly comfortable making purchases online. It makes sense for non-standard auto insurance carriers to cultivate some type of alternative or online distribution presence if they have not already done so. We have seen evidence of this trend in 2012, as both American Independent and First 4

5 Acceptance announced new direct / online capabilities, allowing customers to quote and purchase policies online. And while not necessarily in the non-standard sector, Allstate s acquisition of Esurance from White Mountains certainly fits the bill of an established auto insurance company upgrading its online auto insurance distribution capabilities. Similarly, Farmers Insurance had acquired 21 st Century Insurance in July 2009 to deepen its internet presence and direct response marketing channel. We would expect the nonstandard auto insurance companies to increasingly invest in their direct / online brands to drive premium growth. Continued Growth Driven by Changing Customer Demographics The Hispanic sector of the U.S. population represents approximately 16% of the U.S. population, or 50.5 million. This sector is one of the fastest growing segments of the U.S. population, having increased by approximately 43% from 2000 to Census experts expect the Hispanic population in the U.S. to double to over 100 million people by the year Given the projected growth in the Hispanic population in the U.S. and their growing share as part of the non-standard auto sector, we would expect continued growth in the non-standard auto market. Conclusion Given the expected increase in M&A activity, improving sector fundamentals and a slowly improving U.S. economy, we expect the non-standard auto insurance sector to garner increased interest and post improved results over the next two years. Recent Non-Standard Auto Insurance Sector Transactions has acquired has raised $15 million of senior debt financing from has acquired and the assets of The undersigned acted as a financial advisor to Alliance United Group, Inc. The undersigned acted as a financial advisor to Personable Holdings, Inc. The undersigned acted as a financial advisor to Personable Holdings, Inc. July 2012 March 2012 December

6 About StoneRidge Advisors 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 Consulting Services Financial Advisory Business Valuations Fairness Opinions Consulting Services Contacts Rocky Golem Jay Poorman Peter North Patrick O Hara South LaSalle Street Suite 1510 Chicago, IL Doug Tegen David Gaebler Avenue of the Americas Suite 4003 New York, NY

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