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National Financial Partners Corporation (NYSE:NFP)

Q2 2011 Earnings Call

August 2, 2011 8:00 am ET

Executives

Abbe Goldstein - SVP of IR and Corporate Communications

Jessica Bibliowicz - CEO

Doug Hammond - COO

Donna Blank - CFO

Analysts

Matt Rohrmann - KBW

Ed Spehar - BofA Merrill Lynch

Robert Roell - PioneerPath Capital

Teague Sanders - Citi

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2011 NFP earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Ms. Abbe Goldstein, Senior Vice President of Investor Relations and Corporate Communications.

Abbe Goldstein

Thank you. Good morning, everyone, and thank you for joining us on our second quarter 2011 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 statement 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, 2010.

Our second quarter earnings conference call will be accompanied by a presentation that is available for electronic download on NFP's website at nfp.com/ir 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 NFP's website.

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

Jessica Bibliowicz

Good morning, everyone. We are proud to have recently been recognized as the eighth top global insurance broker by Best Review. Our scale and growth have been supported by continuing solid performance in the Corporate Client Group and Advisor Services Group as well as in Wealth Management.

For the quarter, we reported organic revenue growth of approximately 2%, while our adjusted EBITDA grew approximately 14% and our adjusted EBITDA margins expanded.

We remain committed to our balance capital allocation strategy that focuses on strategic acquisitions, reinvestments in our existing businesses and our share repurchase program.

In keeping with our strategy to increase the stability of our earnings and diversify our offerings, particularly in property and casualty, we closed the acquisition of Lapre Scali. This acquisition brings us experienced leadership and consolidation expertise.

In May, we announced authorization to repurchase up to $50 million of our stock. As of July 29th, we have repurchased 15.6 million of our stock and have 34.4 million remaining in buyback authorization.

Turning to Slide 8, you can see NFP's three business segments and their percentage revenue contribution to the company in the second quarter 2011. The Corporate Client Group represented 39% of total revenue with 5.6% organic growth. The Individual Client Group represented 34% of total revenue. Organic revenue in Individual Client Group declined 10.3%. Our Advisor Services Group represented the remaining 26% of total revenue with 17.1% organic growth.

Now turning to CCG on Slide 9, during the quarter our performance was strong in a challenging economic environment. Corporate benefits generated about 90% of CCG's revenue and executive benefits generated the remaining 10%. With the expansion of our NFP-P&C platform starting in the third quarter, we will break out the percentage of revenue attributable to NFP-P&C within CCG, which will include results from Lapre Scali.

For the first six months of 2011, organic growth in CCG was 4% and we expect organic growth on an ongoing basis for CCG to be approximately 3% to 4%. We also expect adjusted EBITDA margins in CCG to be generally consistent with last year.

Results for the Individual Client Group in the quarter were primarily driven by our life insurance business, which has been challenged by market conditions. Although, we are seeing activity in our life insurance pipeline, sales cycles continue to be long and outcomes remain uncertain.

Our wealth management business continued to have strong performance in the second quarter and now represents 19% of ICG's revenue, an increase from 15% in the second quarter of 2010. Growth in wealth management was driven by market performance, client retention and client acquisition.

Turning to the Advisor Services Group, we saw revenue growth and margin expansions. We remained focus on recruiting, as we continue to see opportunity, because of Advisor's in transition in the market. In the near term, we expect organic growth for ASG to be between 13% and 15%. For full year 2011, we expect adjusted EBITDA margins to be approximately 4.5% depending upon conditions in the financial markets.

Turning to Slide 10, 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 component of our recurring revenue, all three of our business segments include recurring revenue components. In the second quarter 2011, recurring revenue accounted for 62% of total revenue, an increase from 58% in the second quarter of 2010.

At this time, I would like to turn the call over to our COO, Doug Hammond.

Doug Hammond

Thanks, Jessica, and good morning. This morning, I'll briefly discuss certain factors driving performance in our businesses.

Turning to Slide 12, we saw positive performance in the Corporate Client Group in the second quarter. Although economic and employment headwinds continued, we experienced solid growth performance driven by our diverse products and service offerings as well as increasing client demand for specialized advice.

The broader industry trend discussed last quarter continued. We did not see any significant changes relating to healthcare reform, and medical inflation persists in our markets. We continue to leverage our resources to assist our corporate customers navigate the changing healthcare landscape. This solidifies our customer relationships and creates opportunities to do more with our clients.

In CCG, retirement and executive benefits were highlights in the quarter. Strength in our retirement business was driven by an increasing desire among corporate customers to work with advisors to evaluate the best options for their employees, particularly as new fee transparency requirements come online and enhance the ability of sophisticated advisors to help clients more accurately evaluate investment performance.

Strength in our executive benefits business was driven by increased voluntary enrollments in executive disability programs as well as an uptick in deferred compensation plan.

Service and product diversification remain a core initiative within CCG. To this end, we closed the acquisition of Lapre Scali, a property and casualty broker with annualized revenue of approximately $21 million. As part of this transaction, we brought on Terry Scali as our new leader of NFP's company-wide property and casualty initiatives.

In addition to the high quality of the Lapre Scali business, Terry's industry knowledge in acquisition and integration experience, particularly in the middle market, was a key driver of this deal. Under Terry's leadership, we expect our P&C business to grow organically and through strategic acquisitions.

The opportunity for us to expand our NFP-P&C platform is unique within the middle market. We have tens of thousands of established middle market corporate relationships with minimal P&C penetration. This foothold creates lead generation opportunities for P&C sales to the same clients and uniquely positions NFP as an attractive acquirer for P&C advisors looking to participate in future growth at what appears to be an opportune time in the rate cycle.

Turning to ICG, our wealth management business continued to perform well. ICG's performance was largely driven by challenges in the life insurance market.

As we discussed last quarter, predicting the performance of our life insurance business has been challenging. While our life insurance pipeline is active, the sales cycles remain long due to macroeconomic uncertainty. While our wealthiest clients are regularly utilizing the benefits of the temporary estate tax laws to transfer substantial wealth out of their estates, they are delaying decisions to leverage that transferred wealth through life insurance. The general view is that the clients are delaying are their buying decisions as they monitor the unfolding economic landscape.

Situations where business is closing typically involve older aged clients with health concerns where there is greater urgency and heightened underwriting complexity. These factors further extend the close cycle.

Another factor driving performance in our life business is that the high exemption levels under the temporary estate tax laws have limited the near-term need for estate tax planning for clients with assets under $20 million, which has reduced the size of our target market.

Based on the broader economic landscape and a rising tax environment, we believe it is likely that this factor's impact on sales will diminish as the temporary estate tax laws phase out after 2012.

As noted, our wealth management business continued to be impacted by asset growth due to positive market drivers. Our advisors continued to focus on client retention, new client acquisition and operational discipline. Our advisors continued to benefit from the strong need for independent financial advice among high net worth investors.

In ASG, our strong revenue performance was driven by an increase in fee and trail revenue on a larger asset base. In addition, ASG benefited from strong variable annuity in life sales as our life advisors continue to serve clients beyond the traditional fixed life insurance context.

Assets under management grew in the quarter by 22% to $10 billion compared to the second quarter of last year due to new assets, financial market performance and advisor recruiting.

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

Donna Blank

Thanks, Doug, and good morning everyone. Turning to Slide 14, second quarter 2011 cash earning was $21.6 million or $0.48 per diluted share compared with $25.2 million or $0.57 per diluted share in the second quarter 2010. Cash earnings in the second quarter 2010 included a $7.7 million pre-tax non-cash net gain on sale of businesses. Excluding this gain, cash earnings was $20.8 million or $0.47 per diluted share in the second quarter 2010.

NFP reported second quarter 2011 net income of $9.5 million compared with $12.1 million in the same period last year. The decline was primarily driven by the after-tax impact of the gain on sale of businesses in the second quarter of 2010 that I just mentioned.

Adjusted EBITDA in the second quarter of 2011 was $30.1 million compared to $26.3 million in the same period last year. As a percentage of revenue, the adjusted EBITDA margin was 12.6% compared to 11.2% in the second quarter of last year.

Margins improved in each of the segments. CCG and ASG margin improvement was driven by revenue growth and an ICG weakness in life insurance revenue was offset with expense reductions.

Now turning to Slide 15, 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, NFP's priority interest in CCG was 60.8% and was 46.9% for ICG. Therefore, on an annual basis on average, the basic management fees excluding the impact of incentive should run at approximately 39% in CCG and 53% in ICG, reflecting the principal's interest in the earnings of each subsidiary.

Total management fees will likely be different from the average due to differences in performance, incentive programs and priority interest levels across the businesses within each segment.

On a quarterly basis, the management fee percentage will likely rise throughout the year as revenues increase and NFP's priority interest is satisfied. However, on a year-to-date basis, the percentage will be fairly stable as you move later in the year.

For the six months ending June 30, 2011, CCG management fee percentage was 39.9% compared with 38.8% in the first six months of 2010. Changes in the year-over-year percentage were driven by positive earnings performance at several businesses.

For the first six months of 2011, ICG management fee percentage was 52.9%, relatively flat when compared with 52.7% in the same period last year. For the first six months of 2011, the combined PIP accrual for ICG and CCG was 1.3% of adjusted income before management fees. For 2011, we expect the combined 2011 PIP accrual for the year will be in the range of 2% to 2.5% of adjusted income before management fees.

Turning to taxes, the effective tax rate for the second quarter 2011 was 42.4%, consistent with the 42% effective tax rate in the second quarter last year. For the full year 2011, we expect our effective tax rate to be approximately 42% excluding impairment. Turning to Slide 16, cash flow from operations for the second quarter was $39.9 million compared to $37.3 million for the same period last year.

Lastly, turning to Slide 17, we are pleased to provide you with an update to our share repurchase program. On our last quarterly earnings call in May, we announced a buyback authorization for up to $50 million of NFP stock. During the second quarter 2011, NFP repurchased 731,000 shares at weighted average cost of $12.04 per share or $8.8 million.

As of June 30, 2011, the remaining outstanding share repurchase authorization was $41.2 million. In July 2011, NFP repurchased an additional 573,800 shares at a weighted average cost of $11.79 per share or $6.8 million. As of July 29, 2011, the remaining outstanding share repurchase authorization was $34.4 million.

We continue to execute on our balanced capital allocation strategy, using our strong cash flow to direct capital to shareholders through our repurchase plans, while maintaining financial flexibility to make acquisition and to reinvest in the company for long-term growth.

I'd now like to open the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from the line of Matt Rohrmann with KBW.

Matt Rohrmann - KBW

I know that the market's tough for ICG and wealth management has been doing well. On the life side, could you update us on with the tactical moves internally or that you're making to kind of deal with what's going on there?

Doug Hammond

I think one of the things we noted in the ASG performance is really the contribution of many of the life advisors that are also registered reps and advisors through our broker dealer, and corporate RIA that are actively engaged in wealth management activities with their clients, and also in more traditional variable annuity and life sales in this environment.

So in a diversification of their business during this period is a key focus. And they also participate in many of those businesses on the benefit side. So there is a continued push from recruiting education standpoint to advance the other resources that exist within the company. And in fact they are meaningful drivers in the other business lines.

Also the expense performance in the expense management, which in the Individual Client Group, which is almost exclusively concentrated on the life insurance side of the business has been an ongoing effort. And I think in the quarter, we really demonstrated our focused effort there to really keep costs under control and maintain some of the margin, and actually improve the margin a bit quarter-over-quarter.

Matt Rohrmann - KBW

And then with the remainder of the authorization it's sort of the general plan to utilize the full amount over the allotted 12 months for the $50 million in total?

Jessica Bibliowicz

We've said before, we're going to update every quarter and certainly we've made a good inroad into the overall plan in the last several months.

Matt Rohrmann - KBW

So sort of that pace would seem to be consistent going forward, I guess?

Donna Blank

It's hard to say, what will happen on a go-forward basis, but we certainly are committed to that program.

Matt Rohrmann - KBW

And then the last one guys. Obviously on the ASG side, the assets under management as Doug you said, getting some nice growth there. I guess, does that business ever really comp out? And are there any inflection points in terms of when you hit certain marks you'll have to add people or facilities et cetera?

Donna Blank

No, I think what we've said in that area is that we've got a very sophisticated broker dealer and that really is positioned for growth. And that can very actively recruit in that marketplace. So I would say, we're still relatively small. We're top 10, but we've got a lot of room for growth. And one of the areas where we have been adding consistently is in ASG, to make sure that we can continue to have the resources available, to grow through recruitment. So we do see a lot of upside there and it's a big focus of ours.

Operator

(Operator Instructions) And your next question comes from the line of Ed Spehar with BofA Merrill Lynch.

Ed Spehar - BofA Merrill Lynch

A couple of questions about ICG. Doug, could you provide again what you said about when you expect to see some lessening impact from the estate tax as a deterrent to buying insurance?

Doug Hammond

I think at the end of the day we said it's pretty difficult to sort of predict what's going on in that business, particularly as it relates to our high network of clients, where there can be a lot of volatility from a revenue perspective, because some cases are so large. Where we are seeing sort of ultra-high net worth group buying is where there is some urgency surrounding health considerations generally involving older age folks.

Those cases, while they can be large and the commission levels is going to be very high, tend to have a longer sales cycle to the extent they can get done it all, based on the underwriting issues that are attendant in those situations. So that's out there. Folks want to take advantage of the temporary provisions under estate tax laws. And those cases are being executed when they hit or if they hit is a tough thing to predict. But they're in the pipeline.

The other issue that we talked about was just kind of a segment of our market that hasn't disappeared, but it certainly has diminished to a certain extent. The Group of individuals that are in sort of the under $20 million to $25 million wealth category, really sort of with very high exemption levels combined at $10 million, have a lesser need for estate tax planning, and are just not focused on it in this environment, given the temporary rules.

They're still focused on business liquidity issues on estate tax issues. And many of them are focused on these ongoing conversations about what the estate tax environment will be after 2012. But that market definitely has less urgency than it had in the past. And as it relates to the very wealthy group, over $20 million to $25 million, that does not have urgency surrounding, the underwriting of cases and the uncertainty, given age considerations.

That group is just with their advisors, they are taking their time to assess the overall landscape and how they make their decisions. If they do make decisions in this environment to leverage up the assets that have been transferred out with life insurance, it will likely be towards the end of the temporary cycle.

Ed Spehar - BofA Merrill Lynch

And then one follow-up. Just on the typical seasonality that we see in the Individual Client Group, given what we're seeing now with a double digit decline here in organic revenue this quarter. Should we assume that we, and some of the other factors that you're talking about? I mean are we going to see this sort of typical seasonality or would we assume that sort of the earnings are going to be more of a flattish kind of trend this year, because of some of these factors?

Doug Hammond

I think there is always some level of seasonality and that we should likely see some uptake in the fourth quarter.

Jessica Bibliowicz

And that's just based on the tax planning for the year. So I think it's reasonable. It is though, I just want to say very hard to predict, as you can imagine.

Operator

And our next question will come from the line of Robert Roell with PioneerPath Capital.

Robert Roell - PioneerPath Capital

Couple of questions. I was hoping, maybe we have to wait until the third quarter. But I was hoping maybe if you could comment on your expectations of financial performance and impact to cash earnings and EBITDA from the Lapre Scali on the transaction in the first 12 months?

Donna Blank

Right, so you would see that in the third quarter.

Robert Roell - PioneerPath Capital

Any update on the health benefits market?

Doug Hammond

I mean generally, we've been very focused on diversifying the relationship with the clients that you saw in this quarter, some real nice contribution from the executive benefit side and from the ancillary side with the stability businesses. Those businesses we continue to invest in.

Also on retirement planning side with the 401(k) platform we've really made tremendous progress in advancing our client relationships through those resources. On the healthcare side, the MLR debate continues. There is some legislation proposed under HR 1206, in the house that has bipartisan support to exclude brokerage and aging commissions from the MLR calculations.

So there's some nice momentum there that is supported by NCOIL and NAHU and also the NAIC, whether or not that sort of actually comes to flourish, and frankly we have no idea. But it's nice to see in that debate, how much support there is around the role of the intermediary and helping clients navigate a very uncertain environment.

And from our perspective, as we said in prior quarters, our trend is around consulting fees and fees on the healthcare services. And we think that with the platform and resources that we have, we are best-in-class from a resources perspective and that there is value in that relationship whatever the environment brings in the future relative to MLR.

Robert Roell - PioneerPath Capital

As it stands now, is the business still moving toward decapitated fees?

Doug Hammond

Yes, we talked about some trend there. It's still as a total of the business it's not yet in percentage. We're still seeing the benefit of the medical inflation, which has been for persisting.

Robert Roell - PioneerPath Capital

What percent of the business would say is on a fee per head basis right now versus the older way?

Doug Hammond

I think it's still relatively low.

Robert Roell - PioneerPath Capital

And then finally, the stock repurchase program, I think on an ongoing basis during the forward 12 month is great. But still plenty of cash and cash flow generation to put a 3% yield on stock.

Operator

And our next question will come from the line of Teague Sanders with Citi.

Teague Sanders - Citi

I was just wondering if you could talk about M&A strategy and kind of your appetite in growing this in the second half. You'd mentioned that any acquisitions would be coming in second half. So just kind of talk about that a little bit.

Jessica Bibliowicz

Sure, I mean we talked about this asset that we had used approximately $50 million for acquisition. We have completed the Lapre Scali transaction, which was a nice one for us. And we continue to work on our pipeline and we'll continue to see if there are opportunities out there for us to be more acquisitions. But I think it was a very healthy start for us and gave us quite a bit of momentum. And we're in good shape and we expect to continue acquisitions beyond 2011 as well.

Teague Sanders - Citi

And then not to beat on ICG too much, but you guys have been getting away from the life aspect and then diversifying away from that. Was some of that negative organic growth just not focusing as much on that, and you're focusing in other places and we should expect more than the future or just how are you diversifying away, specifically?

Jessica Bibliowicz

Just to make some global comments, I think Doug touched on it a lot. Sort of hallmark of our life insurance business was always in the high net worth area and a big component of estate planning. And Doug has talked I think a lot about the reasons that that has sort of stalled in this environment with the temporary estate tax that are in place right now.

And again, I think the nimbleness of our advisors and how they are focusing on clients and thinking about how to help them is one of the areas you see, which is I think very consistent with what some of the insurance companies are saying is that you are seeing some real growth in the variable annuity sales, variable life sales.

And you do see that a little bit more in the ASG category, because it obviously runs through our broker dealer. There is no question that the income to NFP in that business is lighter. But I think what's important is that our firms continue to be nimble and serve their clients and are providing resources where our clients need the help. So you do see some work over there and also thinking about other ways that they can help their clients. And I think even with the P&C acquisition, as we begin over the over the long term to think about personnel lines and other areas, there are some real natural fits there. So we will continue to look for ways to help our firms serve their clients.

Doug Hammond

I think it's important to remember that we recruit through a highly diversified platform. So wherever we recruit an advisor into the company, whether it's through broker dealer or through the life channels or through the Corporate Client Group and our benefit partners' platforms, we're doing everything that we can to diversify the relationship with the advisors that we're doing business with. And that's a big recruiting attraction to the company, the ability to do more in the businesses that sort of are coming into the company through those affiliations.

Operator

And at this time, I show that we have now questions in queue. I'd like to turn the call back over to Jessica Bibliowicz for any closing remarks.

Jessica Bibliowicz

Great, everybody. We thank you very much for taking the time and as always we're here to answer any questions. And I hope you all have a great day. Thank you.

Operator

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Good day, everyone.

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