National Financial Partners CEO Discusses Q4 2010 Results - Earnings Call Transcript

Feb. 9.11 | About: National Financial (NFP)

National Financial Partners Corp. (NYSE:NFP)

Q4 2010 Earnings Call

February 9, 2011 8:00 a.m. ET


Abbe Goldstein - SVP of IR

Jessica Bibliowicz – CEO

Doug Hammond – COO

Donna Blank - CFO


Mark Finkelstein – Macquarie Research Equities

Keith Walsh – Citi

Dan Mazer-Harvest Capital

Andrew Kliderman – UBS


Good day, ladies and gentlemen, and welcome to the Q4 2010 National Financial Partners earnings conference call. My name is Michael and I will be your coordinator for today.

At this time, all participants are in listen-only mode. We will be facilitating a question-and answer-session towards the end of today’s conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I will now turn the presentation over to your host for today’s conference, Ms. Abbe Goldstein, Senior Vice President Investor Relations. Please proceed.

Abbe Goldstein

Thank you. Good morning, everyone, and thank you for joining us on our fourth quarter 2010 earnings conference call.

During this call, management may make certain statements regarding their expectations and projections for NFP relating to future results and events, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based on management's current views with respect to future results and events and are subject to risks and uncertainties that could cause actual results and events to differ materially from those contemplated by a forward-looking statement.

Forward-looking statements speak only as of the date on which they are made. NFP expressly disclaims any obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. We refer you to the risk factors described in NFP's filings with the SEC such as NFP's Annual Report on Form 10-K for the year ended December 31, 2009.

Our fourth quarter earnings conference call will be accompanied by a presentation that is available for electronic download on NFP's website at or upon connecting to the audio webcast of this call at the same website.

A reconciliation of the non-GAAP measures discussed on this call can be found in the presentation or in the quarterly financial supplement, which is available on the investor relations section of NFPs website.

At this time, I would like to turn the call over to our CEO, Jessica Bibliowicz and her presentation starts on Slide 7.

Jessica Bibliowicz

Great, thanks Abbe, and good morning everyone. 2010 was a turn-around year for NFP, highlighted by a return to organic growth. We reorganized our business into three client-centric segments. This strategic change enabled us to improve our internal view of our business lines as well as increased transparency externally through segment reporting.

In 2010, we continued to generate strong cash flow and improved our financial flexibility. We completed a multi-step recapitalization, enhancing our balance sheet by maintaining our debt level and extending our debt maturities.

We also successfully launched new branding initiatives for NFP, created to enhance consolidated brand awareness in our market. We are pleased to have received public recognition as a leader in benefits, insurance, and wealth management throughout 2010.

We generated positive organic growth in each of our business segments with the strongest growth from the Corporate Client Group and the Advisor Services Group. Results in our Individual Client Group remained challenged, particularly in life insurance.

Turning to the fourth quarter of 2010, revenue increased 2.6% and organic revenue grew 8.6%. Revenue growth in the quarter was driven by growth in the Corporate Client Group and the Advisor Services Group.

Turning to Slide 8, you can see NFP’s three business segments and their percentage revenue contribution to the company in 2010. The Corporate Client Group and Individual Client Group each represented 39% and our Advisor Services Group represented the remaining 22%.

Turning to Slide 9, CCG’s revenue breakdown was corporate benefits at 88% and executive benefits at 12%. In the Corporate Client Group, we continue to show steady performance in 2010.

Looking ahead for CCG, we expect moderate organic revenue growth in this business as we acquire new clients and expand products and services to our existing clients. We expect to enhance our organic growth with strategic acquisitions and sub-acquisitions.

Turning to Slide 10, the Individual Clients Group revenue breakdown for 2010 was retailed life at 33% and our marketing organizations and wholesale life brokerage operations at 53%. These two units make up our high net worth life insurance business.

For most of the year, the life insurance market was faced with uncertainty regarding estate taxes. On December 17, a two-year resolution for estate taxes was put in place. With this resolution, we see increased opportunities, albeit in the higher wealth levels because of the higher-than-expected exemptions.

We also continue to focus on recruiting and deployment of resources into life insurance, which will enable broader diversification of advisors using our platforms.

The remaining portion of our Individual Client Group is the Investment Advisory Business, which accounted for 14% of the group’s total revenue in 2010. These businesses have performed well and are positioned to benefit from a generally positive market environment. We will continue to explore long-term growth opportunities for our Wealth Management Business through acquisitions, sub-acquisitions, and recruitment.

Turning to Slide 11, within the Advisor Services Group asset-based fees accounted for 57% of revenue while commissions accounted for the remaining 43%. As part of our continuing growth plan for the Advisor Services Group, we started to increase our recruiting efforts in the fourth quarter of 2010.

Advisors are still clearly in transition and our unique platform, products and services make NFP a compelling place for them. We are ramping up our recruiting efforts in 2011.

Turning to Slide 12, a key focus of ours over the last several years has been to enhance the stability of our revenues and earnings. While the Corporate Client Group represents the biggest components of our recurring revenue, all three of our business segments include recurring revenue components.

In 2010, recurring revenue accounted for 57% of total revenue, an increase from 56% in 2009. Our 2010 accomplishment to positioned us well in 2011 to manage the company for growth, drive value for our shareholders, and importantly serve our clients.

As our cash position continues to build, we plan on taking a balanced approach towards using cash for future opportunities. We expect to make acquisitions and sub-acquisitions in our recurring revenue businesses and make investments that enhance our competitive offering and improve our internal processes.

Importantly, any decisions we make regarding deployment of capital related to dividends and share buybacks will be announced on our first quarter 2011 earnings conference call.

At this time, I would like to turn the call over to our Chief Operating Officer, Doug Hammond. Doug?

Doug Hammond

Thanks, Jessica, and good morning. This morning I'll discuss the significant factors we see driving performance in our businesses.

Turning to Slide 14, our Corporate Client Group is a leading advisor to middle-market corporate customers. In CCG, we continue to enhance our position as trusted client advisors, and build on our strong position in the corporate middle market.

Our branding initiative has positively impacted our market recognition where we have been recognized by Best Review as the ninth largest global insurance broker. CCGs positive fourth quarter performance was driven by our ongoing push to diversify our Health and Welfare businesses by expanding our service offerings, particularly in 401-K and executive benefits.

In our 401-K business, we are seeing positive market drivers including more favorable financial market conditions and a return by plans that sponsors to matching programs. We also have seen an uptick in activity in our executive benefits business as clients have started to come back to the table to fund existing and implement new executive benefit plans focused on retention, deferment and rebuilding wealth for retirement.

In our Group Health and Welfare business, benefits from medical inflation in certain regions and markets were somewhat offset by pressure on commissions. This is largely a result of the new medical loss ratio or MLR requirements being imposed on the carriers. MLR is affecting advisors in two ways.

First, in certain markets we have seen some commission reductions. In most incidences, this has been done by carriers operating predominately in the individual and small group markets which have struggled more to meet the MLR requirements. This reduction manifest either directly through a cut in commission rates or indirectly through a transition from commissions to per-head or capitated rates. Capitated rates could reduce commissions over time because they mitigate the benefit of medical inflation.

In 2010, we saw certain carriers reduce commissions and several shift from commissions to capitated fees. This has not happened in all markets and in some cases the cut in commission rates has been offset by medical inflation and higher bonuses. While there is some pressure on revenue in certain market segments, it has not materially impacted our business.

Second, we expected the MLR requirements would drive a growing shift towards fee-based arrangements. In our business, fee-based arrangements have been a common practice for clients with over 500 employees. We believe that the market trend is driving the fee-based client size lower. We welcome this trend as we have experience in fee-based compensation and are confident that our value proposition clearly outweighs independent competitors and is in line with our national brand peers.

While the Healthcare Reform law and it’s almost daily changes will continue to create a challenging and uncertain environment, it this far continues to present us with opportunity in that we are in unique position based on our scale and resources to differentiate ourselves in the market and prove our value to clients every day.

A trend of customers putting plans out to bid for cost saving continues to provide us an opportunity to showcase our strength. As our firms with NCCG embrace a more regionalized model of doing business, we continue to focus on cost controls and efficiencies with NCCG.

In addition, we continue to centralize resources with NCCG to offload back office work and expand client offerings without increased cost. For example, in our retirement business, we leveraged a key product developed at one of firms in order to offer it more broadly to all CCG firm clients.

Since launched, about half of our retirement planning businesses are utilizing this service and adoption continues across our network. These efforts continue and are directed at expanding the margin performance of the CCG business as a whole.

Expanding our P&C business continues to be a growth opportunity in CCG as we see regular opportunities to offer our existing benefits clients P&C.

In 2010, we accelerated our practice of placing P&C producers in select benefits offices around the country in order to serve regional needs.

Turning to Slide 15, the Individual Client Group is a leading provider of life insurance and wealth management solutions for high net-worth individuals. While our investment advisory business has continue to perform well, ICGs performance was largely driven by estate tax uncertainty in a high net-worth market during most of the year.

The two-year resolution announced in December should help clarify planning decisions, but it came too late in the year to drive significant business in the fourth quarter. We believe our core carriers saw a similar decline in production from our market segment.

I’d like to make some observations regarding how we believe the current estate tax could impact our business. For our wealthier client, those with investful assets over $20 million, the new law should serve as a positive business catalyst with re-unification and the increases in estate, gift and generations-skipping tax, exemptions to 5 million per spouse, planning should focus on gifting and the implementation of GST exempt trust.

Life insurance compliments this planning by leveraging exemption amounts to obtain substantial death benefits. Life insurance further hedges against the two biggest risk faced by most gift and GST tax planning techniques by delivering certainty to address uncertain future events such as mortality and financial market exposure.

For those clients with investful assets between 5 and 10 million, the increased exemption amounts and decrease estate tax exposure could reduce sales. However, important practical reasons remain for these clients to acquire life insurance including business succession, family protection, and estate liquidity needs.

Also, and perhaps most important, very high state inheritance taxes in places like New York and New Jersey, which each decoupled from the Federal system, dramatically increased state estate tax at much lower exemption levels.

In addition, our advisors are working with clients to clarify the risks associated with waiting past the two-year timeframe to plan. Future changes to the estate tax rate and exemptions could prove to be less flexible than they are today, justifying planning today as a contingency.

With our scale and resources, NFPs well suited to benefit from these market dynamics in life insurance. Our Wholesale Life business has continue the positive trend from last quarter of growth in our institutional business with increases in production and average case size.

Our recruiting efforts continue to produce positive results as more agents look to partner with an industry-leading marketing or wholesale operation. As noted, our Investment Advisory business continued to be impacted by positive market drivers including financial market performance and improved investor sentiment.

Like our Corporate business, we see opportunities to improve margin performance over the long-term in our Investment Advisory firms by leveraging the best resources in individual businesses for the benefit of all firms.

Turning to Slide 16, in ASG our 19% growth and assets under management to 9.3 billion is attributable to new assets, advisor recruitment, and financial market performance. Through technology investment and strategic partnerships, we have improved the overall value proposition of our corporate RIA and DB platform to drive margin improvement and recruit new advisors to ASG.

Now I’ll turn the call over to our CFO Donna Blank.

Donna Blank

Thanks, Doug, and good morning everyone. Turning to Slide 18, fourth quarter 2010 cash earnings was $27.4 million or $0.60 per diluted share compared with $26.2 million or $0.61 per diluted share in the fourth quarter of 2009.

Cash earnings in the fourth quarter 2010 included a net gain after taxes related to legal settlements. Excluding this gain, fourth quarter 2010 cash earnings was $26.6 million or $0.59 per diluted share.

Cash earnings in the fourth quarter 2009 included a one-time largely non-cash related charge, related to a particular sub-lease of NFP’s corporate headquarters. NFP reported fourth quarter 2010 net income of $15.3 million compared with net income of $1.9 million in the same period last year.

Adjusted EBITDA in the fourth quarter of 2010 was $36.1 million compared to $26.9 million in the same period last year. As a percentage of revenue, the adjusted EBITDA margin was 12.7% compared to 9.7% in the fourth quarter of last year.

Turning to Slide 19, you can see the drivers that impacted the change in the full-year adjusted EBITDA from 2009 to 2010. In 2009, adjusted EBITDA included $9 million in expense related to the partial sub-lease of our New York City headquarters.

The new PIP program began in the fourth quarter of 2009. That program, which ran through the third quarter of 2010, was accrued on a straight-line basis. Starting in the fourth quarter of 2010, the new PIP was accrued in accordance with the historic seasonality of our business. This will be the methodology that will be used on a go-forward basis as well.

The impact of this change combined with the impact of higher targets for the new plan that began this quarter and lower year-over-year performance against PIP targets, particularly in ICG was about $4 million in total.

In 2010, we recognized higher stock-based compensation of $2.7 million excluding the charge for the accelerated vesting partially due to our previous long-term incentive plan for principles. This incentive program was in place in late 2009 and was terminated in September 2010.

Lastly, we recognized a $1.9 million expense related to a sublet of office space in CCG.

By recognizing the impact of these items, you can develop a better view of the underlining business performance of our segments.

For CCG we saw a $3.4 million increase in adjusted EBITDA from last year as we continue to show steady performance. In ICG, as a result of the market challenges discussed earlier, we saw a $10.7 million decrease in adjusted EBITDA from last year.

Lastly, in ASG, our expansion efforts have produced some favorable results and we saw a $5.4 million increase from last year in adjusted EBITDA.

Now, turning to Slide 20, we believe that it is most relevant to review our management fees on a segment basis because NFP has a different priority interest percentage in each of the segments.

On average, NFPs priority interest in CCG was 60.6% and was 47.2% for ICG. Therefore, on an annual basis on average, the management fees should run at approximately 40% in CCG and 53% in ICG reflecting the principle interest in the earnings of each subsidiary.

There will likely always be some differences from the average due to difference in performance, incentive programs, and priority interest levels that differ across the different businesses within each segment.

For the year, CCG management fee percentage of adjusted income before management fees was 43.2% including a 1.2% PIP accrual compared with 42.4% including a 1.3% PIP in 2009. The increase is attributable to the year-over-year increase in stock-based compensation related to our previous principle long-term incentive plan. As I just mentioned, this incentive program was in place in late 2009 and was terminated in September 2010.

For the year, ICG management fee percentage of adjusted income before management fees was 59.8% including a 2.5% PIP accrual compared with 59.2% including a 5.4% PIP accrual in the prior period.

The difference in ICGs management fees for the year is attributable to restructure the certain management agreement and the year-over-year increase in stock-based compensation.

For the fourth quarter 2010, consolidated PIP accrual was $3.3 million representing a 3.5% of adjusted income before management fees. This compares to $9 million or 9% of adjusted income before management fees in the fourth quarter of 2009.

The difference in the percentage PIP accrual year over year for the quarter is partly due to the lower earnings performance of certain subsidiaries, particularly in ICG. We have also raised the bar and generally set the PIP targets higher with payouts triggered when there is growth above earnings achieved during the previous plan.

In addition, the decrease can be partly attributed to the change in methodology for recognizing this expense. For our current plan, as previously disclosed, we are accruing based on the historic seasonality of our businesses. This change in accrual methodology will also have an impact when we compare expected results in 2011 to our 2010 performance.

We believe using the new seasonal mythology will be more in line with quarterly earnings trends. We expect the full-year 2011 PIP accrual will be in the 3 to 4% of adjusted income before management fee range, consistent with the prior plan.

The drive consolidated results of the company motivate growth through cross selling and ensure alignment between principals and shareholders. In the third quarter 2010, we introduced a three-year long-term incentive plan for our principal. The plan will be based on NFPs adjusted EBITDA growth from January 2011 through December 2013.

The adjusted EBITDA growth threshold starts at 6%, which would generate a $5 million total payout for the 3 years and be accrued on a quarterly basis. The plan will max out at a $20 million total payout for the three years generated by growth in adjusted EBITDA of 12% or higher.

Our adjusted EBITDA growth calculation will include the expense associated with these payouts. Plan participants could be eligible for cash payments in the first quarter of 2014 to the extent incentive targets are achieved.

In terms of taxes, the effective tax rate for the fourth quarter 2010 was 39%. For 2011 we expect an effective tax rate of approximately 40% excluding impairments.

Turning to Slide 21, cash flow from operations for the fourth quarter was $43.1 million compared to $40.8 million for the same period last year. The fourth quarter cash flow was impacted by the payments of the first PIP incentive program. This expense was $10.7 million recognized in the four quarters of the plan. There was not a comparable PIP payment made in the fourth quarter of 2009.

For the full-year 2010, we generated $119.5 million of operating cash flow compared to $123.8 million in 2009. Recall that the third quarter of 2010 was impacted by the payment of $7.4 million in cash to accelerate the vesting of principle RSUs.

As we consider uses of cash, we need to consider the restrictions we have based on our credit agreement. Certain uses of cash such as stock buybacks and dividends are considered restricted payments. It is the fixed-charge coverage ratio that determines the allowable amount of restricted payments. The numerator of the consolidated fixed charge coverage ratio is EBITDA minus CapEx and taxes paid in cash. This EBITDA calculation defined by the credit facility is a bit different from our adjusted EBITDA. One notable difference is that the bank definition adds back stock-based compensation.

The denominator of the consolidated fixed-charge coverage ratio is the sum of our fixed charges which include consolidated net interest expense, that is interest income less cash interest expense, other scheduled payments related to our debt and including our quarterly principle amortizing on our term loan are announce in other contingent consideration paid in cash and any restricted payments paid in cash.

The consolidated fixed-charge coverage ratio was calculated on a trailing 12-month basis and the minimum required consolidated fixed-charge coverage ratio is 2 to 1. Any commitment we make with respect to restricted payments must take into consideration future investments and expenditures.

As Jessica mentioned, any decision we make regarding the use of capital will be announced on our first quarter of 2011 earnings conference call. I’d now like to open the lines to question.

Question-and-Answer Session


(Operator instructions).

And your first question comes from the line of Mark Finkelstein of Macquarie.

You may proceed.

Mark Finkelstein – Macquarie Research Equities

Good morning.

Jessica Bibliowicz

Good morning, Mark.

Mark Finkelstein-Macquarie Research Equities

I’ve got a few here. I guess you talked about the impact of minimum loss ratios in Healthcare Reform, I guess just based on what you are seeing currently, I guess is it your expectation that you will see continued margin pressures in Corporate Client Group? And if so, how many for would we expect this to be? I know there are a lot of moving parts, but I mean, are we seeing an acceleration of the fee pressures, and how should we think about that margin for 2011 knowing that we’re kind of in that 18 ½ % EBITDA margin range over the last two quarters?

Doug Hammond

Yeah, I think based on what we’re seeing it’s very isolated. I mean, it’s in certain market segments. In other market segments, we’re getting benefits still on the commission side for medical inflation. At this point, we’re just managing it at we see it, and as we develop – as we monitor the results of the insurance companies. But we, thus far, have really had very little impact in terms of the overall financial performance, and we continue to diversify the offering around it.

Mark Finkelstein-Macquarie Research Equities

Okay. I mean, I know one large MCO recently moved to kind of a fee-based structure away from a set commission. From these kinds of impacts, when it actually shifts to a fee-based, how many full of an impact on commissions are you actually seeing on a percentage basis?

Doug Hammond

Yeah, we’ve reviewed that a little bit in my comments, and from our perspective on the transition of, in response it’s like what Aetna did for the over-100 life category, where they’re not paying commissions, and it’s only allowing a fee-based arrangement. We see that as a benefit. We’ve got a lot of that going on in the company already for our over-500 lives. We see it increasing below that. We talked in the comments about a trend to lower fee-based arrangements, but for us it just allows us to showcase what we have to offer and it differentiates us in the marketplace, particularly in the independent channel. So we actually see that as a positive.

Mark Finkelstein – Macquarie Research Equities

Okay, on the two-year temporary provision for estate taxes, you kind of talked about the over-20 million’s benefit, the below-20 million, it’s a little bit less clear. When you think about, for 2011, knowing we were coming out of a pretty difficult period, do you see the estate tax provision as a positive, neutral or negative when you think about 2011 organic growth?

Doug Hammond

Yeah. We tried to bifurcate the discussion in our comments so that the higher category, the over-20 million and the 5-10 million category. I think assuming that everyone gets it and everyone understands what’s occurred, this two-year timeframe from an estate tax planning perspective for very wealthy individuals is pretty much as good as it gets. It’s a full funding from a trust perspective, on a tax exempt basis up to $5 million per spouse, which if leveraged with life insurance could really benefit that business in those categories.

The question at the end of the day is the expense at which folks adopt it, folks start buying insurance and start engaging in planning. I think there was a real slow down in the year in which there was a repeal, there would be effective repeal estate tax because remember, in addition to repealing estate tax, the exemptions were also repealed. So from a funding perspective, there were gift consequences, and folks couldn’t really get their arms around whether or not the benefits associated within a trust would ultimately be tax efficient. All of those issues have been clarified. So at the upper ends we do see opportunity.

Mark Finkelstein – Macquarie Research Equities

Okay, thank you.

Jessica Bibliowicz

Thanks Mark. Thanks.


Your next question comes from the line of Keith Walsh of Citi.

You may proceed.

Keith Walsh – Citi

Good morning, everybody. First question, just thinking about the EBITDA margin, 2010 versus the prior year, it looks like it went up 30 bits, to 11.9 %. I guess that’s great and everything, but 6.9% organic is what I’m seeing, and it just seems like when I think about other insurance brokers out there, they’re able to keep their margins neutral to slightly higher on a much, much less lower level of organics. So if you could just help me understand, what’s the growth rate, organic growth rate you need to kind of get to neutral on your margins?

Donna Blank

That’s a good question. I think that probably changes a lot by category. I think in the Individual Client Group you’d really need to see revenues start growing to see margin improve there. I think that’s the biggest compression on margins in the individual groups. So there you would want to see a return to organic growth, Keith, when you look at it combined.

I would say on the Corporate Client Group, Doug talked about some of the weighing of pressures on the margin, yet our firm’s continue to expand the business. But I think as we move forward, we’re looking to, and Doug described a lot of the things in his comments of improving the margins over time and helping the firms operate on a more regional basis, improve the cross-selling opportunities, so I think with time we’ll be able to see some margin improvement there. And then in the Advisors Service Group, we definitely believe that that is a scale business. You are seeing significant margin improvement there year over year.

This is a good margin quarter for the Advisor Services Group, but we see it more in the 3 ½ to 4% range, and then scale will continue to improve that margin. Scale there for us means the continued recruitment of new advisors in who are bringing fee-based revenue and commission based revenue to the company. B So, I think you have to break it down.

Keith Walsh-Citi

Okay, that’s helpful. The second question I’ve got, I know for M&A you don’t have anything to talk about right now, but just philosophically, anything as we look back over the last couple of years, anything you’re thinking about differently than maybe the past? Specifically, I point to you, I’m looking at the CCG business, it’s consistently more consistent than the rest of the company, and you have a higher interest there typically, as you showed on your sides than you do on the other parts of your business. If you could just talk to are you thinking about maybe taking a larger ownership stake in deals as you go forward, or is it still going to be similar to what we’ve seen historically? Thanks.

Donna Blank

I think you’re right-on on both points, and I did discuss that a little bit in my comments; that a lot of the deployment of capital for acquisitions will be in CCG related to its recurring revenue, and the opportunities that we see in that business, deals done prior to that ’05 to ’08 period. We did acquire a large percentage of the earnings because of the quality of the recurring revenue. We would expect to see that going forward. I did use the word strategic acquisitions, and Doug and I both spoke about cross selling the property and casualty side and really expanding our capabilities there, so it’s not only good for the firm that we’re acquiring, but also to help our firms bring property and casualty to more of their benefits relationships.

So that’s how we look at it there, in CCG. The other area, again, with the recurring revenue that we will continue to look at, which has just been very strong for us, is the Wealth Management business, the Investment Advisory business. Again, you have that recurring fee-based environment and we see a lot of opportunities for the independence in this space and the continue kind of move in to clients there.

So, those would be the two big acquisition areas for us, Keith.

Keith Walsh-Citi

All right, thanks a lot.

Donna Blank

Thank you.


Your next question comes from the line of Dan Mazer of Harvest Capital. You may proceed.

Dan Mazer – Harvest Capital

Good morning. I just wanted to get clarity, did you change the PIP accounting? Is it now more just kind of straight lined over the year, versus what you did in 2010?

Donna Blank

Yeah, it’s actually not straight line. We’re trying to reflect the seasonality of the business and the way that we allocate the target to the different quarters.

Dan Mazer – Harvest Capital


Donna Blank

But the biggest change really is in the setting of the targets. They’re higher because they were reset at the level that the firm achieved by the end of the first PIP program, and that’s really the biggest driver on the change in results.

Dan Mazer – Harvest Capital

Would you expect to have negative accruals like you did last year, or how you’ve changed it, that wouldn’t happen?

Donna Blank

We’re hoping that we’ve moved some of that volatility out, so we wouldn’t expect a negative.

Dan Mazer – Harvest Capital

Okay, and I think you alluded a little bit to this. You had a $3 million negative conjure expense in the first quarter last year, if you don’t have that, it’s just with a change in accounting you’ll show some more seasonality in your cash EPS. I mean, I think that’s, if you showed $2 million [inaudible].

Jessica Bibliowicz

We saw a little bit of reverse seasonality, yeah, in 2010, so we’re hoping this really reflect the fact that if you have a lower target in the quarter that’s traditionally lower earnings, then you won’t get that kind of volatility and negative accrual.

Donna Blank

The biggest part of that, obviously, will reflect in the ICG?

Jessica Bibliowicz

Right, the Individual Client Group because that’s where you see it.

Donna Blank

You saw there wasn’t that much of a difference on the PIP and CCG year over year.

Dan Mazer – Harvest Capital

Okay, but we’ll see, at 3-4 % of management fees, we will see an expense in the first quarter, so we’re looking at $0.07-$0.08 hit year over year which is kind of a change in how you set up that.

Donna Blank

Well, remember it’s a 3-4 % of adjusted income before management fees, so that’s sort of your starting point, and we wouldn’t expect as we said, to see the negative in the first couple of quarters again.

Dan Mazer – Harvest Capital

Okay, thanks.

Donna Blank

Thanks, Dan.


Your next question comes from the line of Andrew Kligerman of UBS. You may proceed.

Andrew Kliderman – UBS


Donna Blank

Hi, Andrew.

Andrew Kliderman – UBS

A few questions. If you could maybe talk a little bit about how much you could do, or what you could budget for in terms of acquisitions this year.

Donna Blank

We talked about that. We’re looking at somewhere around half of our cash flows of 58-60 million of acquisitions dollars spent is about what we’re thinking right now.

Andrew Kliderman – UBS

Great, and with respect to the individual life area, you’ve got some clarity around Bush tax extension for two years, you’ve got some color on the crummy trust, so what’s the climate like now in the first quarter? What are you seeing in terms of sales, since this legislation was passed in late December?

Donna Blank

Yeah, we don’t comment on the current quarter, but I think in general, when you talk to attorneys out there, and people’s recognition of the fact that the generation skipping trust environment is really positive. One of the things you will keep seeing is that there is a continuation of funding of trusts, money is moving, so that’s sort of a nice precursor to what could happen, but we’re not in a position to comment on the first quarter, yet.

Andrew Kliderman – UBS

How about the year in general? Are you really upbeat about a significant pick up, or is it too early?

Donna Blank

I think it was described well in Doug’s comments, that when you look at the high net worth marketplace, you can really kind of see that there is clarity and opportunity; that’s always a place that we’ve excelled. There is compression in the [inaudible], but sort of that next segment of the marketplace that might not find life insurance as compelling in this two year environment, so it’s a little bit of longer term discussion with them, but in addition to that, we continue, we think, to have the best resources related to life insurance, including estate planning, [inaudible], a whole bunch of other protection uses of life, and so one area also that we’re focusing on, is the continued recruitment in to NFP of quality advisors who will use our resources, so I think, Andrew, it’s a little bit early to say what the ultimate trend in sales will be because of this, but these are sort of the key driving factors.

Doug Hammond

We think that there are a lot of good things to talk about with clients, not only the clients on the insurance side, but the clients in our wealth management side related to the opportunities, and the question remains whether they pull the trigger on life insurance to execute under these new planning opportunities.

So, it’s a big education at this point; lots of discussions with clients.

Donna Blank

Early to tell the total trend for the year.

Andrew Kliderman – UBS

Then, lastly, I think you’ve touched on the EBITDA more, I think just more specifically, and corporate clients EBITDA contracted year over year on the expense ratio was-commission expense ratio was around 10 %, it was 8 % around fourth quarter of last year, what was going on there? Was that a shift in the business mix, and what kind of commission expense ratio would you expect going forward?

Doug Hammond

We saw your comments actually, and took a closer look at that, and we do think that it’s some operations in the quarter that drove that, just sort of a mix of business over two firms that typically have a higher commission expense level, and also one of our businesses that actually expanded in to a line of business that has a fairly significant commission expense.

Andrew Kliderman – UBS

So it reversed back maybe toward the 8 % level?

Doug Hammond

Yeah, I mean, the one thing we would keep an eye on, is that one business, and the extent to which that one business because of the new business line that they operate in, if it really expands, it could impact those numbers a little bit, but right now, I think it’s too early to tell. If that occurs, then I think it’s an easy thing for us to discuss on the first quarter call.

Andrew Kliderman – UBS

Okay, thank you.

Donna Blank

Thank you.

Jessica Bibliowicz

Thanks, Andrew, and I believe that’s the end of the queue? Operator, are there more questions?


(Operator instructions). There are no further questions at this time. I would now like to send the call over to Jessica Bibliowicz for closing remarks.

Jessica Bibliowicz

Very good, thank you all for attending the call today, and I hope you have a great day. Thank you.


Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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