FRIEDMAN FLEISCHER & LOWE LLC The Insurance Industry's Ability to Attract Capital Given Historically Low ROE – A Perspective by Friedman Fleischer & Lowe

FRIEDMAN FLEISCHER & LOWE LLC

The Insurance Industry's Ability to Attract Capital Given Historically Low ROE

– A Perspective by Friedman Fleischer & Lowe LLC

Rajat Duggal

May 17, 2005

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Overview of Friedman Fleischer & Lowe LLC

• FFL Strategy

- Focus on U.S. middle-market companies with enterprise values of $50-$500 million

- Target outstanding companies, focusing on high ROIC

- Proactive industry focus with a generalist mindset

- Enhance business performance through effective company involvement

• FFL Capital Under Management

- $335MM committed to FFL I (1999 vintage)

- $815MM committed to FFL II (2004 vintage)

• Insurance Investments

- Montpelier Re (Startup capital – Dec. 2001)

- Wilton Re (Startup capital – Dec. 2004)

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Overview of Friedman Fleischer & Lowe, LLC

• Financial Services

• Insurance

• Business Services

• Education and Training

• Healthcare

• Consumer Products

• Marketing and Media

FFL I CommitmentsTargeted Industries

Healthcare9%

Consumer Products

36%

Business Services36%

Insurance11%

Financial Services

8%

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Reasons FFL Invests in the Insurance Industry

1. Cyclicality provides opportunities for above-average returns

2. Limited correlation to market allows for efficient portfolio diversification

3. Niche insurance opportunities can generate above-average returns

4. Certain insurance sectors enable low volatility investments

5. Opportunities for value-creation by improving operations

6. Less competitive buyout environment

7. Industry currently experiencing significant change

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-5%

0%

5%

10%

15%

20%

25%

1980 1985 1990 1995 2000

Property & Casualty Return on Equity

Source: A.M. Best, RAA Swiss Re Economic Research & Consulting, FPK

-5%

0%

5%

10%

15%

20%

25%

1980 1985 1990 1995 2000

Property & Casualty Return on Equity

Source: A.M. Best, RAA Swiss Re Economic Research & Consulting, FPK

1. Cyclicality

FFL Invests in Montpelier Re – Dec. 2001

FFL Exits Montpelier Re – 2003-2004

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1. Cyclicality

(0%)

20%

38%

23%

-5%

5%

15%

25%

35%

2001 2002 2003 2004

Montpelier Re Return on Equity

2003 P&C Industry ROE

IRR = 42.1%

Money Multiple = 2.1x

• Timing cycle well leads to high ROE and investment returns

-5%

5%

15%

25%

35%

2001 2002 2003 2004

Montpelier Re Return on Equity

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%Correlation to Market Performance By Industry

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%Correlation to Market Performance By Industry

2. Non-correlation to market

• Relative to other industries, returns in insurance are less correlated to overall market movement

• Enables diversification in portfolios with other industry holdings

P&C Insurance = 40%

Life Insurance = 50%

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3. Niche opportunities – Above Average Returns

• Certain insurances niches have outperformed rest of industry

• FFL seeks to make investments in these higher performing niches

- Evaluated investments in specialty property, MGAs and non-standard auto

8% 9%12%

-5%

5%

15%

25%

35%

2002 2003 2004P&C IndustryMercuryProgressive

Return on Equity

Picking the right insurance sub-segments can

generate above average returns

8% 9%12%

10.3%

15.0%

19.9%

-5%

5%

15%

25%

35%

2002 2003 2004P&C Industry MercuryProgressive

Return on Equity

8% 9%12%

10.3%

15.0%

19.9%21.3%

28.3%31.5%

-5%

5%

15%

25%

35%

2002 2003 2004

P&C Industry Mercury Progressive

Return on Equity

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4. Selective Insurance Sectors – Low Volatility

• Some insurance sectors (e.g. Life) have inherently lower volatility of returns

($15,000)

($10,000)

($5,000)

$0

$5,000

$10,000

$15,000

$20,000

1992 1994 1996 1998 2000 2002

P&C Life

U.S. Pre-Tax Operating Earnings ($MMs)

Source: A.M. Best, P&C and Life & Health 2004 Aggregates & Averages

($15,000)

($10,000)

($5,000)

$0

$5,000

$10,000

$15,000

$20,000

1992 1994 1996 1998 2000 2002

P&CLife

U.S. Pre-Tax Operating Earnings ($MMs)

Source: A.M. Best, P&C and Life & Health 2004 Aggregates & Averages

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Investing in low volatility businesses increases risk-adjusted returns and enables portfolio balancing and diversification

21%

28% 28%32% 34%

37%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Coke LifeAverage

GE Merck GM EBAY

Volatility - Last 4 Years

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72%68% 66% 65% 63% 65% 67% 69%

0%

10%

20%

30%

40%

50%

60%

70%

80%

1998 1999 2000 2001 2002 2003 2004 Q12005

LBO Debt/Total Cap


Lower leverage mitigates risks relative to typical LBO deal

Specialty

P&C

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5. Value-creation by improving operations

• Insurance industry has been relatively slow to adopt recent technologies

- Outsourcing business functions to more efficient providers

- Adoption of certain advanced business practices and technologies

• Provides opportunities to invest and improve operations

• Aligns well with FFL’s competencies and investment strategy

- FFL combines strong operational and investment expertise

David Lowe – Former CEO of ADAC and winner of Malcolm Baldridge National Quality Award for Business Excellence

FFL has worked extensively with portfolio companies to improve operations

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• Significant capital overhang exists among U.S. private equity firms

$0

$50

$100

$150U.S Uninvested Buyout Capital ($BN)

Source: “Private Equity Performance 2004; The Coming Shakeout” Thomson

.

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• Private equity investors are less willing to invest in insurance- Statutory accounting and actuarial analysis complex and different

- Balance sheet v. income statement orientation more typical for buyout funds

• Total current funds over $1BN under management is over 150

• But only a few funds are currently focused on insurance- Blackstone- CSFB- Cypress Group- Friedman Fleischer & Lowe- Hellman & Friedman- J.P. Morgan- MMC- Warburg Pincus

Insurance presents opportunities to invest in less competitive environments

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7. Rapidly Changing Industry Dynamics

• Changing business models

• Higher regulatory scrutiny

• Potential divestitures by entities under investigation

• Capital flight from industry leaves under-priced assets

• Elliot Spitzer . . . . Need I say more??

Change Creates Opportunity

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Summary

• Insurance industry will continue to be an attractive sector for investment

- Cyclicality will always exist

- Niche lines will produce above-average returns

- Portfolios will continue to need diversification and balancing

- Operational improvements will continue to create value creation opportunities

- Industry change creates opportunity

FFL will continue to opportunistically pursue investments in the insurance industry

Documents

FRIEDMAN FLEISCHER & LOWE LLC The Insurance Industry's Ability to Attract Capital Given Historically Low ROE – A Perspective by Friedman Fleischer & Lowe