Fortegra Financial's CEO Discusses Q4 2012 Results - Earnings Call Transcript

Apr. 1.13 | About: Fortegra Financial (FRF)

Fortegra Financial Corporation (NYSE:FRF)

Q4 2012 Earnings Call

April 1, 2013 8:30 am ET

Executives

Richard Kahlbaugh – Chairman, President, Chief Executive Officer

Walt Mascherin – Chief Financial Officer

Stephanie Gannon – Investor Relations

Analysts

Dan Altscher – FBR Capital Markets

Raymond Iardella – Macquarie

Adam Klauber – William Blair

Operator

Greetings and welcome to the Fortegra Financial Corporation’s Fourth Quarter 2012 Earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Stephanie Gannon. Thank you, Ms. Gannon. You may begin.

Stephanie Gannon

Thank you, Operator. With me today are Rick Kahlbaugh, Fortegra’s President and Chief Executive Officer, and Walt Mascherin, our Chief Financial Officer. They will provide an overview of our results for the fourth quarter and full year 2012 and then we’ll open up the call for your questions. If you haven’t already received it, our press release is available on the Investor Relations section of our website at fortegra.com. In addition, we have added further disclosures such as the fiscal supplement which is also available on the Investor Relations section of our website at fortegra.com.

Additional information concerning Fortegra and its business, including factors that potentially could materially affect Fortegra’s financial results is contained in Fortegra’s filings with the SEC which are available free of charge at the SEC’s website at SEC.gov. As a reminder, this call is being recorded and a replay will be available later today.

Before we begin, we want to caution you about today’s call. It will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties. All statements other than statements of historical fact included in the press release are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of our operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as anticipate, estimate, expect, project, plan, intend, believe, may, should, can have, likely, and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

The forward-looking statements made on today’s call are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments, and other factors we believe are appropriate under the circumstances. You should understand that these statements are not guarantees of performance or results. They involve risks and uncertainties, some of which are beyond our control and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results and cause them to differ materially from those anticipated in the forward-looking statements. We believe these factors include but are not limited to those described under Item 1(a) Risk Factors in Fortegra’s annual report on Form 10-K and quarterly reports on Form 10-Q. Should one or more of these risks or uncertainties materialize or should any of these assumptions prove incorrect, our actual results may vary in material respect from those projected in the forward-looking statements.

Any forward-looking statement made by us on this call speaks only as of that date on which we make it. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future developments or otherwise, except as may be required by law.

And now, I’ll turn the call over to Fortegra’s President and Chief Executive Officer, Rick Kahlbaugh. Rick?

Richard Kahlbaugh

Thanks Stephanie and good morning everyone. Thank you all for joining us to discuss our fourth quarter and full year 2012 financial results. 2012 was a successful year filled with considerable progress as well as some headwinds for Fortegra. If the tough economic and regulatory environment for our clients weren’t challenging enough, tropical storm Sandy stepped in to make sure we were bringing our A-game to work every day.

Despite Sandy presenting additional financial obstacles to overcome this quarter, I am pleased to report that our team was up to the challenge. Although the quarter was impacted by the factors I just outlined, I am pleased to report we still delivered full year-over-year top line growth and solid double-digit net revenue growth after excluding realized gains. We had another record-setting year of direct and assumed written premiums and effectively took steps to lower our ongoing operating costs materially. Posting full year-over-year growth in today’s economic and regulatory environment is no easy feat, but fortunately the company’s diversified portfolio approach is well suited to maneuver through tough environments.

On the surface, Q4 may numerically reflect the estimated $0.02 per share impact of Sandy, the macro pressures I alluded to, and additional investment in our direct-to-consumer channel development efforts, but I would also urge you to take time to look beyond our short-term financial performance to better appreciate the opportunity Fortegra presents. There were several transformational steps we embarked upon in the fourth quarter of 2012 that will have a positive impact on our business in 2013 and beyond. We took decisive action to bring down our operating cost and enhance the segments of our business that offer Fortegra the best opportunity for immediate growth going forward. The impact of these decisions and their effect on our growth are reflected in our guidance.

In 2013, we expect to generate between 145 and $150 million in revenue and adjusted EBITDA of 34% to 36%. As you can see from our guidance, we are very optimistic about the company’s prospects for 2013. Our optimism is based on the organic performance we expect out of the business, incorporating the recent transformational acquisitions announced late in Q4, and factoring in the impact of the ongoing savings from our cost containment initiatives.

Let’s take a minute and discuss in more detail how we’ve bent our operating cost curve and why our growth profile is poised to accelerate. First on the cost side, we understand that the market conditions we currently face must be reflected in our operating cost structure. We’ve conducted a thorough evaluation of our administrative and customer support operations in order to streamline and right-size those areas. We identified several measures that will yield annualized savings of approximately 4 million without sacrificing revenue development. We were able to realize synergies in claims and premium processing that eliminated redundancies in those functions. Importantly, we are already seeing a positive impact of these changes not only on the cost side but in our operational performance as well. We are pleased with the progress we have made thus far but we consider this an ongoing process. Expect us to continue to look for opportunities to improve our margins as the year progresses.

Now turning to our two recent acquisitions, ProtectCELL and 4Warranty. These two companies are high quality properties that are extremely complementary to our existing businesses. We expect their addition will markedly increase our growth trajectory and strengthen the platform from which we go to market. I suggest our investors and analysts take a close look at these acquisitions to appreciate the magnitude and potential they offer for Fortegra.

ProtectCELL provides membership plans that provide loss, theft and damage protection for mobile wireless devices and data management. They offer a complementary product to our payment protection platform and they give us entry into the high growth cell phone warranty business. With the addition of ProtectCELL, Fortegra substantially increased its presence as a warranty provider. ProtectCELL’s platform is an excellent launching pad by which we can expand our existing warranty and service contract business for mobile and wireless devices and other new products where we can leverage their established network and broad distribution. ProtectCELL has a track record of solid growth and will benefit from the additional resources and support Fortegra can provide. This is exactly the type of acquisition that can bolster our growth objectives and help us broaden our presence in the market.

4Warranty is another important and strategic acquisition that adds a critical component to our company. The acquisition of 4Warranty will allow us to become a vertically integrated contract administrator and expand our risk management and service capabilities to our clients. In addition to contract administration, they are a leading warranty and extended service contract company with extensive expertise in furniture, electronics, appliances, lawn and garden, and fitness equipment. We were fortunate to bring two companies of this caliber on board and you should expect to see their impact showing up in our results in the coming quarters.

Now I’ll turn the call over to Walt to discuss our financial results in more detail. Walt?

Walter Mascherin

Thanks, Rick. In the fourth quarter, net revenues excluding realized gains grew year-over-year from $28.3 million to $30.5 million, an increase of 7.5%. The increase was driven by momentum in our payment protection and BPO segments. For the year, net revenues rose 5.1% to $118 million compared to $112.3 million over 2011. It should be noted that 2011 net revenues benefited from $4.2 million in realized gains. By segment, payment protection net revenues grew by 4.1% to $17.2 million in the quarter and up 4.8% compared to 2011. The increase for the quarter as well as the year was driven by strong premium volume at Life of the South.

BPO net revenues increased 8.1% in the fourth quarter year-over-year and 18.2% over the full year 2011. The year-over-year increase resulted from a $3 million increase in revenues from Pacific Benefits Group. The segment’s performance continued to be hindered by the regulatory issues facing its largest customer. Those issues have been recently resolved and the client has commenced marketing efforts; however, it is difficult to predict the potential financial benefit to Fortegra as they return to the market.

Net revenues for brokerage decreased 7.4% to $8.4 million in the quarter compared to 2011. The drop was primarily due to a $1 million decline in fees from eReinsure somewhat offset by a $300,000 increase at Bliss & Glennon. As Rick mentioned previously, eRe’s business was impacted by business closures in the northeast as a result of Tropical Storm Sandy. For the full year 2012, net revenues for the brokerage segment were essentially flat.

Adjusted EBITDA in the fourth quarter was $10.3 million compared to $12.2 million for the fourth quarter 2011. As stated earlier, a challenging economy, regulatory environment, and Tropical Storm Sandy all weakened our fourth quarter performance. In addition, our fourth quarter 2011 results benefited favorably by $1.8 million in realized gains. For the year, adjusted EBITDA increased by 1.3 million to 40.6 million compared to 39.3 million. Total year 2011 included $4.2 million of realized gains.

Overall adjusted EBITDA margin for the fourth quarter was 33.9% compared to 40.6% a year ago. For the year, adjusted EBITDA margin was 34.4% compared to 35% in 2011.

Net income for the fourth quarter was 3.8 million or $0.18 per diluted share compared to 4.9 million or $0.24 per diluted share in the year-ago period, which in 2011 included the benefit of $1.8 million in pre-tax realized gains. Adjusted net income for the fourth quarter of 2012 was 4.4 million or $0.21 per diluted share compared to adjusted net income of 5.4 million or $0.26 per diluted share for the prior year period, which benefited from again $1.8 million of pre-tax realized gains.

For the 12 months ended December 31, 2012, total revenues increased 3.6% to 291.6 million compared to 281.6 million for the prior year period. Net revenues increased 5.1% to 118 million compared to 112.3 million for the 12 months ended December 31, 2011. Both revenues and net revenues in 2011 benefited from $4.2 million in realized gains. Net income was 15.2 million or $0.74 per diluted share for the 12 months ended December 31, 2012 compared to 13.5 million or $0.64 per diluted share for the prior year period. We remain in compliance and well positioned with regards to our debt covenants. Our total outstanding debt at year-end was 124.4 million and we have 34.3 million of availability on our revolving credit facility.

I’ll now turn the call back to Rick to further discuss in more detail key developments in the three segments this past quarter.

Richard Kahlbaugh

Thanks, Walt. Before we move to take your questions, I wanted to take a minute to provide you with some perspective of how much Fortegra has improved its operating platform and our competitive position in just a few short years since going public.

As I discussed earlier, ProtectCELL and 4Warranty were seminal transactions for Fortegra, and as such we have significantly expanded our distribution and capabilities. I believe that we have assembled many of the key parts necessary that will enable Fortegra to grow in any economic environment as we are now able to leverage our strengths better than ever before.

First and foremost, the team we have in place is as strong as its ever been, but seasoned management alone will not succeed without the necessary resources and scale to effectively compete. For those that have been following us closely over the past few years, you have seen Fortegra make investments to broaden its product and service offerings and vertically integrate. We have greatly expanded our car club and warranty offerings and streamlined our servicing and administration. We now have high quality outbound call center capabilities and direct response market expertise. We possess the ability to recycle lost sales and revenue opportunities, develop new products and bring them to market faster than ever before.

So as a result of strategic investments and market-driven planning over the past few years, we are a far stronger competitor today. Fortegra has become an industry leader in the market where we targeted, and I’m very excited about the prospects for our payment protection businesses. That is not to suggest that investors overlook the potential opportunity in our other two segments, brokerage and BPO. Our brokerage business is a very attractive asset but has not enjoyed the benefit of a sustained hardening market since we have gone public. Rest assured, when the market does harden we expect that business to generate significant returns.

The last point I would make is that over the past two years, the BPO business has been under pressure since our largest customer in that segment had to withdraw from the market. Their recent return is a positive sign, but we will have to wait and see if and when they can return to their prior production. Understand that our guidance does not contemplate a hardening of the brokerage market or a rapid bounce-back of BPO to prior levels.

So as we look ahead in 2013 and as you’ve just heard, we are very excited about the prospects for our business. We believe our recent acquisitions, targeted business objectives, and our expense reduction efforts have put us on the path towards accelerated growth. Our goals remain the same – increase our organic growth rate and profitability, leverage our platform, and gain market share. The difference this year is that we have never been in a better position to achieve those goals in our company’s history.

With that, I’ll now open the call for your questions. Operator?

Question and Answer Session

Operator

Thank you. We will now be conducting a question and answer session. [Operator instructions.

Our first question is coming from Randy Binner from FBR Capital Markets. Please proceed with your question.

Dan Altscher – FBR Capital Markets

Good morning, this is Dan Altscher on for Randy. About the 2013 guidance, appreciate it on the consolidate level. Can you maybe give us a little bit more color as to how we can think about it on an organic basis versus with the contributions from ProtectCELL and 4Warranty, or maybe even getting a little more granular on an individual segment basis?

Richard Kahlbaugh

Good morning, I hope you had a nice weekend.

Dan Altscher – FBR Capital Markets

Yeah, it was.

Richard Kahlbaugh

First and foremost, I think what we expect is the basic—the base business, being BPO, the brokerage segments and our payment protection group without the acquisitions, we expect them to grow in the quarter by 5 to 7% this year. That’s kind of what we’ve planned and that’s what we expect out of them, so the balance of the growth is primarily driven by ProtectCELL. 4Warranty certainly will make a contributor but ProtectCELL is the big contributor.

Dan Altscher – FBR Capital Markets

Okay. Are there any differences in EBITDA margin expectations for the core business versus ProtectCELL?

Richard Kahlbaugh

Yes, let’s just walk through those. When you look at just the core business with the cost takeouts that we’ve described here this morning, we would expect the core business – and that’s how I’ll refer to it in responding to your question – to be at the higher end of our range of guidance. Now, ProtectCELL’s margins are slightly lower, so when you combine the two you would be in that 34 to 36% range.

Dan Altscher – FBR Capital Markets

All right, great. That’s perfect. Getting a little bit further down the line of the income statement, thinking about how financing—you know, the two acquisitions. Is it right to assume that it’s primarily going to be—they were debt financed?

Richard Kahlbaugh

Yes, they were. They were debt financed.

Walter Mascherin

And it’s reflected in our year-end debt position on our balance sheet.

Dan Altscher – FBR Capital Markets

Okay, so that’s all-in, already in there. Okay, that’s great. And then also just another one on share buybacks – there weren’t any in the quarter, which was fine; but how do you think about share buybacks going forward, open market purchases or something maybe a little bit more structured, given the liquidity in the stock?

Richard Kahlbaugh

Yeah, I think there is a couple things to consider there. In the first quarter we are generally a cash consumer because premium taxes are due, our federal income taxes are due, and we’re settling up the commissions from our biggest production quarter. So generally speaking, first quarter we’re a cash consumer.

As we get into the second quarter, especially later in the second quarter, I would expect us to return to buying back shares and I would expect us later in the year to look more thoroughly at a structured environment. The Board has considered it, but there are issues surrounding a more structured deal and we’ll have to look at that time more closely. But right now, our intention is later in the second quarter to be back in the marketplace and using our buyback facility, managed by Wells Fargo, to buy back shares as they become available.

Dan Altscher – FBR Capital Markets

Okay, great. Thanks. I’ll drop back in the queue.

Richard Kahlbaugh

Okay, thank you.

Operator

Thank you. As a reminder, if you’d like to be placed in the question queue, please press star, one on your telephone keypad. Our next question is coming from Raymond Iardella from Macquarie. Please proceed with your question.

Raymond Iardella – Macquarie

Thanks and good morning. I just wanted to maybe touch on the last question a little bit. I’m assuming sort of the thought process around that tender offer that we talked about on the last call and the potential for that – can you talk about some of the issues with doing something like that? I know you mentioned a cash consumer in the first quarter, but are there any other issues, kind of what you guys are thinking about that’s maybe delaying a potential tender?

Richard Kahlbaugh

Yeah, I think any time you have a large control shareholder, as we do here, they have reservations about tenders and how to best execute those without sparking discontent in the general marketplace, and then there are a host of legal issues that their advisors have raised. The Board is very conscious of those and we are working through those to understand precisely what we can do, what we can’t do, and certainly we don’t want to compromise anyone’s position. We don’t want to compromise any shareholder’s position, so we’re taking a very cautious approach, Ray. I think it’s warranted, given the heavy litigious environment that always surrounds these types of transactions, whether they are small tenders or large tenders, whether it’s a take-private transaction – whatever the case may be, and I’m not suggesting that is at all in play.

But the point I’m trying to emphasize is there are attendant legal issues that need to be fully vetted before the Board as a whole is willing to sign off on something like that.

Raymond Iardella – Macquarie

Okay. I think the comment you made on the last call was 60 days, we kind of have more. Obviously it seems like there’s a little bit more concern on the legal side in terms of doing something like that.

Richard Kahlbaugh

No, I think what happened, Ray, is the Board turned its attention in the near term to getting ProtectCELL and 4Warranty done, and now we’ve kind of got the year behind us and we’ve got the year closed, and now it’s just full steam ahead. So I would expect that to be in the agenda and I would expect us to have more information for you certainly on the next call.

Raymond Iardella – Macquarie

Okay. And I know you had talked in the past a little bit, Rick, about the upside that you guys saw in the warranty and the warranty administration business. Can you talk about—I know you had mentioned high growth, maybe what you can expect in terms of growth in that business, and then sort of as a follow-on to that, can you talk about the trade-off between growth and margin, given that that business appears to have a little bit lower margin than the rest of the other businesses.

Richard Kahlbaugh

Yeah, let’s just talk about ProtectCELL, and I’m going to use round numbers here; but in 2010—2011, excuse me and on their convert to written premium, their written premium or membership fees was roughly $48 million. I think that’s 100% accurate. Last year in 2012, their written premium or membership fees were approximately $90 million, and this year we’re expecting it to be approximately $110 million. So you can see this is a pretty high growth environment. There’s a lot of turnover in cell phones. I’m sure you folks are very familiar with Asurion and how profitable Asurion is and their growth and their trajectory over the last several years. This is a little bit of a different take. Asurion works specifically with the cell phone providers such as AT&T and Verizon. We focus on the retailers, the authorized retailers of those large providers. So we think that there are the following—we think they’re going to have this growth, but then when you complement that with the premium finance capabilities that we bring, our ability to offer a fully insured program through our own companies and they do not need to pay for that outside the Fortegra family, the ability to take PBG – that’s Pacific Benefits Group – and assume 100% of their call center, outbound and inbound call center responsibilities, eliminating roughly $60,000 a month in expense and bringing that in-house.

All of these things will tend to improve the operation as a whole, and I would be absolutely remiss if I didn’t remark on the terrific team they have at ProtectCELL, from Rob Emery and Chris Beyersdorff, Brian Finnerty, Scott McLaren, Arun Desouza. They have a wonderful team and they’re going to make a large and broad contribution in the Fortegra family. So as a whole, that trade-off I’m willing to make – slightly lower margins. They would be in that 28 to 32% range, depending on their claims activity, but we generally think that the high growth environment was well worth the investment and a slight compromise in our margin targets.

That being said, I always remind folks around here – double-digit return on sales and an EBITDA margin in the mid-30s is a pretty strong business. So I think we’re not compromising it a lot, Ray, but I’m willing to make that trade-off.

Raymond Iardella – Macquarie

Okay no, that’s helpful. Last one and then I’ll requeue – I guess in terms of the guidance margin, the EBITDA margin guidance, the 34 to 36, what exactly changed about the core business because I guess you’re taking $4 million of costs out and then on top of that adding in the two acquisitions; but overall, just a lower margin. So is it necessarily the BPO that is really just struggling in terms of margin and that’s where the majority of the cost is coming out, and maybe can you help me understand that a little bit?

Richard Kahlbaugh

A couple things – where the cost is coming out, so let’s just start with that basic proposition. What we saw in the second half of the year was the influence of the CFPB throughout the business, whether it’s BPO or whether it’s the payment protection business, it’s not that it’s not growing. Yeah, our existing customers are growing, they are making more loans and hence they are complementing those transactions with our products. What’s not happening is when we introduce new products, there is a reluctance until it becomes clear what the CFPB’s approach is going to be to these products and how to sell these products, that caution is the word or order of the day. So the new product acceptance has been a little bit slower, so what we looked to do, because the growth started to slow down slightly, is that we looked to consolidate in every arena where we could.

So let’s just start with car clubs. In car clubs, when we bought the car clubs, we kept them separate for a period of time while we learned the business. After a couple years, we determined that it was appropriate for us to do all the premium intake here in our office, so we were able to eliminate some redundancies in premium intake in the car clubs, which rolls up under payment protection. We also found that in consolidating the claims groups between BPO and car clubs and payment protection, we were able to eliminate some redundancy in claims management. That allowed us to take some cost out.

We also found that there were redundancies in the management group that was managing those aspects of that administration, so again that allowed us to take out some cost without cutting into muscle and compromising our ability to support the business when we expect it to start to ramp up aggressively again. So we did not take out a significant amount of cost in Consecta that would have compromised its ability to support AIG and Chubb as they return—as AIG returns to the marketplace, which they did last week. So I think we’ve targeted, Ray, just those places where there were redundancies, and then finally we had a significant amount of redundant IT resources, programmers that were very vital to helping AIG and the BPO business program all the compliance components to the system that were mandated as a result of the insurance department’s review of the products that were marketed by AIG. We no longer needed them because we completed those projects, so we were able to take that cost out of the business completely.

So it was a combination of a lot of different things, Ray. It wasn’t just us targeting one business or another business; we looked across the whole spectrum and looked to consolidate where we could, create more efficiencies, but also being mindful that we’re going to have to support a business that’s going to start to have a much higher growth trajectory.

Raymond Iardella – Macquarie

Okay, that’s helpful. I’ll requeue.

Operator

Thank you. As a reminder, if you’d like to be placed in the question queue, please press star, one on your telephone keypad. If you’re using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Our next question is going to be a follow-up from Mr. Iardella from Macquarie Group. Please proceed with your question.

Raymond Iardella – Macquarie

Guess I didn’t need to go through that! The other question I guess I wanted to hit on a little bit is on the brokerage side. I think, Rick, last quarter you had talked about B&G in particular having one of their renewals pushed out to the end of the fourth quarter. (NYSE:A), did that actually happen; and then (b), what was the organic growth at B&G maybe with and without that transaction?

Richard Kahlbaugh

Walt wants to jump in here, but let me just take this. Yeah, that did happen. It happened in the first quarter and that was largely a function of Sandy and some other components. But it did happen – it happened in the first quarter so it will be reflected in the first quarter numbers.

Raymond Iardella – Macquarie

Okay, that’s helpful. And the other question I had in the brokerage segment – the large client I guess you guys had come online and start using the business, I think they went live in the fourth quarter. Can you maybe talk about production from that one client, and then I guess if Sandy had a negative impact as well for them?

Richard Kahlbaugh

It sure did. Sandy impacted eRe significantly, basically about $500,000 of revenue in December alone, and what we did see is the transaction volume increase in January. So I think that we were fairly confident that this was all Sandy related. As you know living up there, Ray, there were significant parts of November and early December where the financial district, where many of the facultative reinsurance purchasing activities occur for the larger customers and our portfolio customers, and they were just pencils down. So yes, we did bring on that customer; yes, they are active. We still see that eRe is a very, very attractive business. They have a lot of growth opportunities and new customer opportunities in their pipeline. Very slow sales cycle, so we would expect to add a couple of those this year but not more than that, and we do expect the facultative purchasing to remain fairly consistent with 2012 this year. As you know, people are taking more risk net because investment yields are down and the market is hardening a little bit, so they are taking more risk net, not buying as much back. So we have planned for them to be flat, maybe up a little bit but largely flat for the year.

Raymond Iardella – Macquarie

Okay, that’s helpful. And last one, I guess just touching on guidance again – what’s the downside in you guys not hitting your guidance this year? I mean, it seems pretty realistic, but at the same time 23% growth on the top line at sort of the midpoint is what I’m calculating, then 27% growth in EBITDA. It seems like a pretty decent guidance, but maybe talk about some of the risk there.

Richard Kahlbaugh

I think—let’s just take them one by one. I think the payment protection group, I think the credit insurance side and debt cancellation side is pretty stable, so I expect them to grow at the rates they have in the plan. I think the car clubs certainly will improve later in the second half of this year. Dale Bullard has assumed leadership of that group and is doing a spectacular job of filling the pipeline with sales opportunities. We will announce in the not-too-distant future a fairly substantial sales win in the car clubs, and certainly that’s going to help the second half of the year for them. So payment protection as a whole, Ray, I think I’m very satisfied that they are going to hit their targets.

BPO, I’m fairly confident that we have it planned properly. We expect them to be flat, maybe up a little bit but largely flat because we could not predict how quickly AIG would be back in the market, how successful the campaigns are that they are planning here in the second and third and fourth quarters. We’ll just have to wait and see. And our brokerage business is fairly predictable, so I think we’ve got that planned out pretty well, so I feel pretty confident in both revenue and EBITDA in our core business.

4Warranty – the interesting thing about 4Warranty is we’ve been doing business with them for many years, so I’m fairly confident that we have that one pegged correctly as well. ProtectCELL, I’m very confident in that team’s growth abilities. The only wildcard there is what will the loss ratio be on their product. Historically, it runs 35 to 45%. Will we see any spikes on loss ratio? We would have no reason to expect that, but that could compromise the EBITDA margin slightly because, again, we’re taking risk in that environment. That’s a claim-paying organization, and despite relatively consistent actuarial results, you just never kind of know. So there’s a little bit of uncertainty there, but nothing that’s creating heartburn for me right now.

Raymond Iardella – Macquarie

Okay, thanks for taking all the questions.

Operator

Thank you. Our next question is coming from Adam Klauber from William Blair. Please proceed with your question.

Adam Klauber – William Blair

Thank you. Good morning everyone. Could you comment on the M&A environment in the warranty space right now? Are prices coming up in the last, say, 12 or 18 months, and given that you’ve done a couple of recent deals, what’s your appetite for 2013?

Richard Kahlbaugh

Let me just talk about generally speaking what we see in the warranty space, and I’m going to include auto service contracts in this discussion. I think the assets are fairly well priced. We see some transactions getting done that are larger, that are a little pricier, and I’m talking about roughly a billion dollar transaction, something that would be well outside our capabilities. They are a little—for that kind of scale, people are paying a significant premium, especially in the auto service contract space.

For businesses that we would be attracted to, something in the auto service contract space that’s between, let’s say, 5 and $15 million of EBITDA, generally speaking they are trading between 6 and 8 times trailing EBITDA.

Adam Klauber – William Blair

Thanks. And what about your appetite to do more deals this year?

Richard Kahlbaugh

As I’ve said before, we really are focused on the warranty and service contract space. We completed the one on cell phones to round that out. We worked hard on the 4Warranty deal to give us capabilities in furniture, appliances and a whole host of other environments. The one that is missing is auto service contracts. We are growing that greenfield with Tom Arnieri and Dale Bullard. We’ll be in the marketplace with our own product May-June time period. So we’ll be looking around for something like that, but I don’t see there to be any rush to complete one this year in 2013.

Adam Klauber – William Blair

Okay. And another question on Bliss & Glennon – it seems like there was solid growth in 2012. Would you say the environment is healthy and stable, or is it accelerating at all?

Richard Kahlbaugh

I would say it’s stable. What they are getting the benefit of is really two things. One is there is no doubt that Sandy has caused some hardening in the property market – absolutely the case. The other thing is construction is starting to improve. We have a number of brokers within the Bliss & Glennon family who are experts in construction and construction wraps and the attendant risks, so as construction begins to pick up, we would expect the growth attendant with that, those risks being placed through Bliss & Glennon to increase as well. So we are certainly bullish on Bliss & Glennon – it’s a fabulous company. It has great young brokers in it, and now that the economy is returning I would expect them to continue down the path with the growth that we’ve seen over the last year.

Adam Klauber – William Blair

Okay, thank you very much.

Operator

Thank you. Our next question is a follow-up from the line of Randy Binner with FBR Capital Markets. Please proceed with your question.

Dan Altscher – FBR Capital Markets

Thanks. This is Dan Altscher again for Randy. I had a quick question about the interest expense. It seemed like it was a little low this quarter – it looks like 1.4 million. But if the acquisitions were financed by debt and going forward, how do we think about this? Was there something like an anomaly this quarter, or was there a lower rate? What drove the lower interest expense in the quarter, and what’s the run rate going forward?

Walter Mascherin

Yeah, just to let you know Dan, the acquisitions closed on December 31 of the year, so we had the acquisition debt basically for one day. So if you look at the acquisitions, they are going to be—we increased our debt by about 23, $24 million associated with those acquisitions and that will carry over into the first quarter. You should adjust upwards for that additional debt.

Dan Altscher – FBR Capital Markets

Right.

Richard Kahlbaugh

What’s (inaudible) cost of that?

Walter Mascherin

It’s probably in the 400, $500 range.

Dan Altscher – FBR Capital Markets

Okay, perfect. Thank you.

Operator

Thank you. Once again, if you’d like to be placed in the question queue, please press star, one on your telephone keypad. Please hold while we poll for further questions.

If there are no further questions at this time, I’d like to turn the floor back over to management for any further or closing comments.

Richard Kahlbaugh

I’d like to thank everyone again for calling in this morning. We look forward to having a call in the next eight weeks when we’ll review the first quarter. Thank you for your time and I’m sure we’ll be in touch. Have a great day. Bye bye.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!