National Financial Partners Corp. (NYSE:NFP)
BAML 2012 Insurance Conference
February 15, 2012; 03:45 pm ET
Jessica Bibliowicz - Chairman, President & Chief Executive Officer
Donna Blank - Chief Financial Officer
Doug Hammond - Chief Operating Officer
Abbe Goldstein - Investor Relations
Ed Spehar - Research Analyst, BofA Merrill Lynch
Ed Spehar - Research Analyst, BofA Merrill Lynch
Our next presenter is Jessica Bibliowicz from NFP, Chairman, President and CEO of the company. Unlike the other companies I cover, NFP is a distributor, not a manufacturer of insurance products. It derives its revenue from distribution of employee benefits, life insurance property casualty and asset management. So again, unlike insurance companies, it doesn’t have the level of balance sheet risk that obviously is a big concern in the market today.
So with that, I’d like to pass it to Jessica to get an update on the NFP story.
And I do know what time it is, so I will try and keep this a little bit lively today. Joining me is also Donna Blank our CFO and we also have Doug Hammond here who is our Chief Operating Officer and Abbe Goldstein who is our IR.
So let me just run though this. I’m sure you all know about forward-looking statements. I won’t keep you on here too long. Okay, and just to give you a sense of NFP and I think 2011 was really a very strong year for our company and a year where you can really see the strengths of our business and of our value proposition and as Ed says, we have the wonderful position of being right in the front of the clients, not actually manufacturing the products. So open architecture is a very big deal to us.
So we really are a leader and our ability to provide services in the benefits arena, insurance and wealth management. We have built the company through the organic growth of the businesses and we are also a very active acquirer. And one of the reasons why 2011 was so critical to us was that you saw us come back into the acquisition world and particularly in the world of employee benefits and property and causality.
Open architecture as I mentioned before is absolutely key to us. We really believe that that client relationship is everything and to be in a conflict to free environment to help client solve the problems is what differentiates in the market place and then finally, after some rough times during the downturn and I’ll kind of walk though the evolution of the company, we are really very well positioned for growth as we look forward.
We are organized in three client segments. Our first, our largest and the client segment that delivers the most recurring revenue is our corporate client group. There we provide health and welfare benefits to our corporate clients. We are in the 401-K business, we are in the ancillary business, we are in the group, life group disability business and then last year one of our major acquisitions was in the PNC business, to really help build our presence there, so we could also cross sell in that market place.
The majority of our corporate business is in the small middle market place, which we think has great opportunity for us. It’s really a big part of the growth of our country and in our executive benefits businesses where we actually deal with companies that tend to be larger in the fortune 100. So the majority of our business is in this sort of 100 to 3000 live world and then we do have some specialty areas that go all the way up to the Fortune 100. We are the eighth largest global insurance broker in the world. I think people don’t always realize that about us, but we really built our presence there.
Our second client segment is our individual client group. That’s where our life insurance business is as well as our wealth management business and I will again talk about the evolution of the company in a minute, but that’s really where we handle people that are in the high note worth market place. Our wealth management business has been extremely strong and its our life insurance business that of all of our categories has had the most challenges in this most recent environment and I’ll talk a little bit about that in a minute.
And then finally our third segment is our segment that services Independent Advisors in the market place and that’s our broker dealer and our registered investment advisor, where a top 10 broker dealer or registered investment advisor business has grown substantially and we have continued to invest in that business, so that we can really grow that business through the recruiting or independent advisors who are really looking for a much more transformational way to run there business.
So those are our three categories. Again, all independent, all of them we think have very storing growth potential.
Lets see if I can make these arrows work. I mentioned Open Architecture and again I think for us the vendor relationships are so important to us and what we are seeing today, particularly with a lot of the well diversified companies is that they look a lot like us. When you think of some of these major names up there, they might be dealing in the life insurance business, they will be the variable annuity business, they’ll be the group life business, they will be in the ancillary business, the benefit side and we really as a company can have a multi point relationship with them.
Our scale makes us very important in the life insurance business. We are really a top one, two or three player and we are a large player in all of our other markets as well. And what that does is that basically give us advantage pricing, technology support, compliance support, underwriting support, whatever it is. I think as you know when you get to be a pretty large distributor, you can make a lot of things happen on the manufacturing side and we try to really utilize that to the benefit of the NFP clients, both on the corporate and the individual side.
A little bit about the history of the company; I think its quite interesting. We were actually founded back in 1998 with an equity investment by Apollo. The genesis of the company and I think Ed remembers it, probably back to those days was life insurance distribution. We really were looking at a very fragmented market and said while there is an opportunity to bring all these independence together and to use their scale, to better service their clients and to allow them more choice on the product side.
That business was growing, the estate planning market was really building up, but as mangers and as mangers of a company we wanted to bring public one day. We really felt very, very strongly that diversification was going to be critical to the company’s long-term success. So when we were buying independent distribution in the beginning, it was all life insurance driven, but shortly thereafter, particularly in that 2004 era when life insurance sales were so strong, we were actually deploying capital into the purchase of companies that were doing corporate benefits, as well as wealth management. Because we like those characteristics of having fragmented markets, the independent was strong, but we know that scale and size could add a lot of value to what they were delivering to there clients and we also really wanted to build up the recurring revenue business of NFP, because the life insurance side had always been quite transactional.
In 2003 we went public. We had some phenomenal years in there and then alone behold comes the economic crisis which was tough on us, like it was touch on other companies, but we actually were able to maintain a very strong cash flow through that entire period and that’s all because we were building up the corporate benefits businesses and the wealth management business, so the cash flow continued.
We did like many other companies significantly want to deliver our company. And so during that period, particularly in 2009, we actually stopped all of our acquisitions for the first time in our history, we stopped our dividends, stopped buybacks and really put all of that cash flow to delevering the company very quickly and we are able to do that in a year and we also reorganized our capital structure.
But every importantly, because what we really are is the sales organization, we really wanted to take a fresh look at the company and think about how we can organize it to better deploy our capital, to motivate our firms, our principals, our mangers, to really think about the future and how they can do an even better job for their clients. So that’s when we – in 2009 we reorganized into the three clients segments that I showed you before.
We have done so much more on the regional side of our business to really bring these folks together, so that they are really thinking about cross selling and really trying to exploit the client relationships that we have. So diversification, cross selling were a key to what we were changing in 2009.
And by 2010 cash flow was there. We redid our capital structure and we were really well under way to be thinking about how to deploy capital for the future, not only for our shareholder return, but also to make sure we were continuing to invest in the growth of our company.
In 2011 we initiated in the spring on 2011 a $50 million share repurchase programs that was completed in February and we also announced and completed about $50 million of acquisitions.
The acquisitions that we focused on in 2011, and I’ll talk about 2012 in a second, are all in our corporate client group. They are in that segment that really has the recurring revenue. The businesses that we acquired were really in two major categories; one was in property and casualties I mentioned before, because we are diversification junkies at the end of the day. When you are dealing in the mid market and you are working with CFOs, HR, CEOs, you really want to be in there, able to provide as much as possible.
We are big players on the benefit side. It’s a very natural extension for us to want to bring in property and casualty capabilities and diversify and to really kind of have two businesses inside those companies that are not particularly correlated. And again, we also have a very strong presents in the 401-K side and the ancillary benefit side. So that’s the reason why we continue to invest in the property and casualty business and then also we were buying regional benefit firms that we through could really enhance our capabilities in local areas.
And the other big piece that we – I’m sorry, let just me just skip to one other. Where’s my branding slide, did that go away? Oh! It’s at the end, Okay. So anyway, when you look at our businesses today and when you think about 2012, again we announced, a repurchase program that will begin in May, a stock purchase program that will begin in May, again another $50 million.
But importantly, I think to show the confidence in our cash flow and what our opportunities for growth are, we also announced that we will be doing $80 million of acquisitions this year. $60 million of the acquisitions will be primarily, $20 million of the acquisitions will actually be to buy up the economics of firms that we already own, but that we weren’t entitled to. We will actually do management contract buyouts of our existing firms, so we’ll get a bigger portion of there economics. Most of those transactions again will occur in our corporate client group.
So our corporate client group in 2011 had 3.6% organic growth. We are projecting for 2012 a 3% to 4% organic rate there. Again, we expect that in the first half of 2012 our margins will be generally consistent around the 18.5% level with last year, but we’ll see some growth in those margins at the end of the year. So we are projecting about 19% to 20% margin there and again, growth from the acquisitions that I talked about before and that’s part of what really helps us build up the margin as the year progresses.
Our individual client group is the group that has had the decline in organic growth, largely driven as I mentioned before by some of the difficult environment that we have been experiencing in life insurance. For those of you that have listened to carries during the course of the day, they have talked about more difficulty in terms of the interest rate environment and how products look and how they re-priced and changed things.
You have had some adverse impact because the exclusions, the state tax extension that occurred in 2011 that will go though the end of this year. Took exclusions up to $5 million, which really narrowed the market for high end state planning and just general consumer confidence has been pretty much an issue throughout this.
That business is more transactional. It is harder for us to have visibility and we do not typically, we do not give organic growth expectations there, but we did tell people to expect that the first quarter is probably likely going to be weak and that we would expect to see improvements, when you see some bigger shifts in what’s happening on the state tax side.
That business as a percentage of our overall business has gotten much smaller over the years. The big drivers for the company really are CCG, Advisor Services Group and the wealth management business that lives in our individual client group, which has done extraordinary well over these years.
And then finally it’s our advisor services group, which we are extremely proud of. That’s a business that was always within NFP, but we never really spiked it out until we did this reorganization. Our broker dealer has about 1,400 reps in it today. It was primarily driven as a support service for our other NFP businesses, but during the downturn and we were thinking about the utilization of capital and which businesses we wanted to continue to grow and we actually invested in the technology of our broker dealer, so that we could emerge as one of the critic broker dealers from our recruiting capabilities.
We strongly believe and I think you’ve probably read a lot about this, that the independent channel is a channel of growth. People are leaving the large wire houses. There is just this strength in the independence and so we really wanted to be the broker dealer of choice. So we have invested in the technology, the open architecture, the platforms that we have and today we are very active recruiters and last year our margin in that business, actually our growth was 16% plus and our margin in that business was about 4.5%.
As we look forward after two years of double digit, organic growth in that business, revenue growth in that business, we think it will be about 5% to 6%. 4% to 5% organic growth this year with about a 4.5% to 5% margin and then again overtime as the recruits continue to come in then we will see we think some increasing bottom line there. So a very important business to us and one that was always within NFP, but just not spiked out as clearly as it is today.
The themes and I think what, if learn a lot from downturns and we all do, but for us, the two major themes have been diversify the business that will get you through any market segment. If we had stayed only in life insurance, the down turn was so severe the company would have been very severely impaired by that. It is the diversification that kept our flows up and then also for us, its really trying to build up the level of recurring revenue in our comply.
All three of our segments have recurring revenue. In the corporate client group, most of it is broker or record type business, so a large majority of that business is recurring revenue. In the individual client group, our life insurance as I mentioned is transactional, but our wealth management business is fee based. And in our broker dealer which has a transactional component, but that’s by the way more packaged product than it is trading on the New Your stock exchange. It’s more mutual funds, annuities and the like, but the big driver there is our RAA, which is obviously a fee-based business.
So today, for the fully year 2011, our recurring revenue was 62 plus percent and that’s where we expect to continue investing and where we expect to see the organic growth, as well as the growth from acquisitions. So we’d really like to see that number continue to go higher and it will.
So again, as we look forward to 2012, we think that this balanced capital strategy, I think really underscores the strength of our company and how we think about investing our cash flow to maximize shareholder value. So first place is our there, build scales, strategic acquisitions, the $80 million that I mentioned to you before.
So far this year we’ve actually executed our transition in Q1. We announced in our forth quarter earnings. We did a primary transaction of just a very strong benefits company in New York, its called AGS Benefits. They are primarily in New York although they’ve got businesses in Boston and other areas.
And then we took one of the strongest NFP firms we have, Dreyfuss & Burke in the New York area as well. We bought out their management contract, so we had increased our exposure, NFPs exposure to their earnings. These two business have been merged together and not only do we expect very strong growth dynamics out of the company from dealing with clients, but also a very strong orientation towards diversification and services offered and including the extension into property and causality.
We also did the new share repurchase that I mention before. So again, another 50 million deepening upon the market environment at that time. That share repurchase because of certain drivers in our credit facility is scheduled to begin in May and we’ll continue to reinvest in our existing businesses, so that we can continue to recruit the right kind of advisors into our broker dealer and into our live insurance business.
So again, we think the real drivers are we have true client centric businesses. We are in businesses that people really need. We are truly relevant, I think particularly in the world of small and mid sized companies, where protecting employees and given employees a valuable proposition in both health and welfare, as well as in retirement planning is absolutely critical to mangers these days. So it’s kind of nice to lead with a program like that.
The diversification again is critical to us. So what’s happening in, for example, health care reform, doesn’t really relate to the world of property and casualty and its different than what’s happening in our broker dealer dynamics and we think that kind of diversification protects our margins over time.
And then finally, because we’ve come a long way and really are branding as one company, we are really able to get that NFP brand out there. So that when an executive at a company is looking at us, they are seeing the strength of NFP, the strength of all of our firms combined. When people are looking at our broker dealer, they are seeing a large, very image centric company that’s behind them in the broker dealer. And then finally of course, what’s helped us all through these markets is a very strong sense of expense discipline.
And then finally – the brand that I was looking for before, sorry Abbe, but we are really excited about this. So during the downturn of course we didn’t have all the money to go to consultants and all that stuff, so we kind of did a lot of this in-house, but I think it really came out better, because we really worked closely with our management team and firms, to come out with branding that really would make senses and distinguish us. So we are not dark blue, I think that alone is a good things. We are green, we tell people what we do.
But I think what’s really interesting, so you can see our segments and that’s how we report to you and Donna will walk through a lot of that, and I think our reporting has become incredibly transparent, so that you can understand the moving metrics of our businesses. But to me just looking at how our firms are talking to clients I think is the critical component here.
So we have firms that are doing what we now call the more traditional branding of NFP. So its NFP first and its their independent name second and that’s nice for their clients to know that they are still there, because that’s key. But you are also seeing a moment to a much more homogenized brand that we think is going to be, really the future of the business.
So NFP property and causality, its one businesses, everything will be consolidated there; the same is true on executive benefits. And then with the New York firm that we just acquired, that’s been merged with our existing NFP firm. Because they are 100% NFP, there is no management agreements there, they are actually employees. They also will be talking on the NFP brand in their full form and that we think will be very significant as they move out and talk to clients and sort of compel them to the strength of overall NFP.
And we continue to run our member organizations, which help us build our scale. These are firms that do their business through us. They are generally wholesalers, so we are driving that scale up to the manufactures, but at the same time they are not owned entities. They are just going their business through us and we don’t actually run them as a subsidiary. So I think a pretty interesting branding architecture and one that you’ll be seeing a lot of over the near few years as the company continues to grow.
And with that, let me turn it over to Donna Blank who is our Chief Financial Officer. Donna.
Thanks Jessica. I’ll just start of with the financial highlands from 2011. A lot of Jess went through already, but you can see we reached revenue levels over $1 billion again. We had organic growth as well as growth from acquisitions, so the revenue growth overall was north of 3% and that’s even with one of the segments declining; we’ll go though that as well. We had margin expansion and EBITDA growth and then we also executed on the balance capacity strategy, which we have talked about.
In terms of the specifics here, the revenue you can see between – and the corporate client group grew in the year, that’s the green bars to $412 million. There was acquisition activity in there, the PNC acquisition that we talked about already. The segment in the dark gray is ICG that was way down by the life insurance performance. Again, we are just the distributor, we don’t have any of that risk on our balance sheet, but sales in that market have defiantly been challenging and you saw the decline there and then growth in the ASG, which is the independent broker dealer.
In terms of margins, you can see the margins stayed flat in CCG, the Corporate Client Group. They actually grew in ICG and that was not because of the revenue growth obviously, but because we saw the decline, but with expense countries we were able to get the margins up. In that group and advisor services, the margin improved also on a year-over-year basis. Remember, in that business it is a very high payout business. The commission levels for an independent broker dealer are very higher, so single digit margins is to be expected.
Compensation ratio; this is a metric we just introduced on our earnings call, I guess a week ago at this point. It basically is a combination of the fees to principals, our arrangement, our traditional arrangement with our producers where they are getting a share of the profits and that’s running through the P&L and fees to principals. And then we’ve combined it with the compensation expense for employees. And the reason behind that is because producers now are employees and some instances where we are changing the acquisitions structure. So we think that looking at our total compensation expense is a much more meaningful way at this point of looking at the P&L.
You can see it averages around 52% in the corporate client group. There’s a little bit more expense involved in administering that business than there is in the heavily weighted life insurance business, which does not have as much of a back office in a lot of the businesses; that’s 49% on average.
The margins; here we have broken them out on a quarterly basis and you can see Corporate Clients Group in the top. The green line is pretty stable. There is some variation by quarter and that will depend on whether there are bonuses coming through from the carriers at a certain point in time. There have been historically in first quarters, but it all depends on the way the volume comes through.
The individual client group, you can see in the middle, a lot of volatility. Not a lot of predictability; that scenario where we haven’t given a lot of guidance, just because again, there is so much volatility, it would be dangerous to do that; and advisor services. The thing that we focus on in that business is not the fact that it’s a low margin, but that it’s a growing margin. So it went from negative actually in ’09 and it was negative for the year in ’08 to now positive margins on a quarterly basis and creeping up general each year.
Operating cash flow has been very stable. It was the reason why we were able to delever as fast as we did, all the way through the downturn. We kept on generating that nice cash flow. There is a big seasonality component built into the cash flow and that is because of the way that we pay our principals on the traditional arrangements.
Basically in those compensation arrangements we are paying them one-twelfth of the difference between their base earnings and target on a monthly basis, so they get that on a monthly bases. But then in the first quarter of the next year, to the extent that they performed above target, they are getting that bonus in the first quarter. So there is a big cash outflow on our part that is rewarding them for their performance in the prior year and then we are obviously generating positive operating cash flow in the subsequent quarters.
In terms of the balance sheet, we delevered and we capitalized as we said in 2010. We minimized a lot of the refinancing risk by doing it at that point. We bought ourselves a lot of financial flexibility, so that we were able to start reinventing in the company. This is the maturity profile. Its composed of a bank credit facility. That’s composed on a term loan as well as a revolver.
That comes due in 2014 and the other component is a convertible that’s due in 2017. The strike price on the convert is $12.87. So we are not in the money on that and obviously that’s going to impact our EPS count or our share count and the EPS calculation on a go forward basis, hopefully as the share price accretes.
In terms of the balance capital allocation, as Jessica said, we already last year announced that we were going to really evenly spilt the capital we deploy during the year between acquisitions and buybacks. So we did spend just under $50 million on acquisitions, mainly it the P&C area that we talked about already, but also in benefits.
We are focusing on recurring revenue businesses, not in the ICG at this point and the stock buyback we were able to complete as of the February 6, the entire $50 million at an average price of $12.45 a share, which was nice execution given where the price is today.
So in summing it up, we are a leader in our markets. We believe there are attractive markets. As Jessica said, those are all products that employers want to provide to their employees and we are able to provide independent advice, so there is not a conflict involved in any of our sales, because we are truly independent. We have continued to diversify the business, which has helped protect the margins and protect the cash flow throughout the downturn and should be able to grow nicely over the long term and we’ve achieved the financial flexibility that allows us to have the balanced capital allocation going forward.
And what that, we can open up for a few questions.
Anybody have a question?
Ed has a question.
Ed Spehar - BofA Merrill Lynch
I have a question. The idea of the contract buyouts and more of the producers now employees, one of the arguments for the business model initially was the incentive that was built into the structure of the – they are only going to get rewarded if they produce and the value of the firm goes up and they are sort of skin in the game argument. How do you address that issue now with some of the changes that have been made?
Yes, I mean I think that by doing the bi-ops and doing 100% acquisitions, there’s a lot of benefits to us in terms of the NFP name, how we do the compliance, the controls, but the part that we always loved about our acquisition strategy was that entrepreneurs always had skin in the game and because your buying out the contracts, it doesn’t mean that your going to loose those kinds of incentives.
I think we are very good at keeping people engaged and focused, not just on the top line of the business, but on the bottom line of the business. So when those capitalization’s are done, it is with the understanding that there is still economics to reward and motivate those principles on a go forward basis and so we do keep that element in the transaction, even though we are buying out their management contracts. So they still have upside in the business, because we believe them. I’m sure you all do, but that’s really critical for the future performance.
We are also doing the buy outs of the management agreements with firms that have really performed in NFPs world and who really want to integrate even more into NFP, because they see the value from the client perspective, so we do not loose any incentives.
It’s also in recurring revenue businesses, where there’s been a lot less volatility in performance and they are performing above there and so the priority isn’t as much of an issue in those businesses.
Anything else? No. Okay, I hope you all have a great afternoon. I look forward to any questions you might have. Oh! All right.
Ed Spehar - BofA Merrill Lynch
Thank you. Okay sure, I’ll take one. We have time, one quick one. The chart on operating cash flow, if you look at it, that’s been a stable number, but at the same time you had growth and some growth in revenues, some growth in EBITDA. Why wouldn’t the operating cash flow number be growing as well?
There is an element of working capital change that is a big part of that operating cash flow number and that’s where you – the net income components of it have grown, but the operating cash flow component, oh sorry, the working capital has not and that’s really the…
Ed Spehar - BofA Merrill Lynch
So going forward would you expect it to be more of a matching kind of between…
On the net income components, yes, absolutely.
Ed Spehar - BofA Merrill Lynch
But no more working – the working capital changes sort of a – it works through it…
We did talk about on the call, the fact that for instance that the PIP incentive payments that we paid our principles would impact this year, in this 2012, because we hadn’t made any payments in 2011 and that obviously is positive working capital for 2011 that will impact 2012.
Ed Spehar - BofA Merrill Lynch
The margin slide with the three different business lines and the volatile individual client group, perspectively should there be – is there any sort of correlation between the individual client group’s margins and any industry data or industry product specific data or sadly no.
Sadly we operate in a very unique component of the life insurance market. So it’s a little bit harder, because you’ll see data that’s more aggregated among more middle market, but the core of our business is in the very high-end state planning side of the business. We do other things, we do term, we do other pieces, but it really has a very different set of dynamics to it, so as I mentioned before, the key dynamics or the drivers really are what happens at the end of this year with the estate tax rules and particularly with the exclusion.
The product cycles that our carriers are going through right now with the low and you heard it from Lincoln and some of the others this morning, with the low interest rates and the low funding rates, they have really re-priced those products typically up, which is not as appealing. So those are I think bigger drivers for that particular part of the market, so – but we’ll see some changes hopefully. Thank you.
Great, thanks everybody. I appreciate it. Have a good afternoon.
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