National Financial Partners (NFP)

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National Financial Partners 10-Q 2009

Documents found in this filing:

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

______________

FORM 10-Q

______________

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED June 30, 2009

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM

Commission File Number: 001-31781

NATIONAL FINANCIAL PARTNERS CORP.

(Exact name of registrant as specified in its charter)

Delaware	13-4029115
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

340 Madison Avenue, 19th Floor New York, New York	10173
(Address of principal executive offices)	(Zip Code)

(212) 301-4000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of outstanding shares of the registrant’s Common Stock, $0.10 par value, as of July 31, 2009 was 42,217,165.

National Financial Partners Corp. and Subsidiaries

Form 10-Q

INDEX

			Page

Part I	Financial Information:

	Item 1.	Financial Statements (Unaudited):	5

		Consolidated Statements of Financial Condition as of June 30, 2009 and December 31, 2008	5

		Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008	6

		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008	7

		Notes to Consolidated Financial Statements	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44

	Item 4.	Controls and Procedures	45

Part II	Other Information:

	Item 1.	Legal Proceedings	46

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

	Item 4.	Submission of Matters to a Vote of Security Holders	47

	Item 6.	Exhibits	48

	Signatures		51

Forward-Looking Statements

National Financial Partners Corp. (“NFP”) and its subsidiaries (together with NFP, the “Company”) and their representatives may from time to time make verbal or written statements, including certain statements in this report, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain the words “anticipate,” “expect,” “intend,” “plan,” “believe,” “estimate,” “may,” “project,” “will,” “continue” and similar expressions of a future or forward-looking nature. Forward-looking statements may include discussions concerning revenue, expenses, earnings, cash flow, impairments, losses, dividends, capital structure, credit facilities, market and industry conditions, premium and commission rates, interest rates, contingencies, the direction or outcome of regulatory investigations and litigation, income taxes and the Company’s operations or strategy.

These forward-looking statements are based on management’s current views with respect to future results, and are subject to risks and uncertainties. Forward-looking statements are based on beliefs and assumptions made by management using currently-available information, such as market and industry materials, experts’ reports and opinions, and current financial trends. These statements are only predictions and are not guarantees of future performance. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by a forward-looking statement. These factors include, without limitation:

•

NFP’s ability, through its operating structure, to respond quickly to regulatory, operational or financial situations impacting its firms;

•

the Company’s ability to manage its business effectively and profitably through the principals of its firms;

•

a recessionary economic environment, resulting in fewer sales of financial products or services, including rising unemployment which could impact group benefits sales based on reduced headcount, the availability of credit in connection with the purchase of such products or services, consumer hesitancy in spending or the insolvencies of or difficulties experienced by the Company’s clients, insurance companies or financial institutions;

•

the occurrence of events or circumstances that could be indicators of impairment to goodwill and intangible assets which require the Company to test for impairment, and the impact of any impairments that the Company may take;

•

the impact of the adoption or modification of certain accounting treatments or policies and changes in underlying assumptions relating to such treatments or policies (including with respect to impairments), which may lead to adverse financial results;

•

NFP’s success in acquiring and retaining high-quality independent financial services distribution firms and various factors inhibiting the Company’s ability to acquire and retain firms;

•

the performance of the Company’s firms following acquisition;

•

changes in interest rates or general economic conditions and credit market conditions, including changes that adversely affect NFP’s ability to access capital, such as the global credit crisis that began in 2007;

•

adverse developments or volatility in the markets in which the Company operates, resulting in fewer sales of financial products and services, including those related to compensation agreements with insurance companies and activities within the life settlements industry;

•

securities and capital markets behavior, including fluctuations in the price of NFP’s common stock, recent uncertainty in the U.S. financial markets, or the dilutive impact of any capital-raising efforts to finance operations or business strategy;

•

any losses that NFP may take with respect to firm dispositions, firm restructures or otherwise;

•

the continued availability of borrowings and letters of credit under NFP’s credit facility and NFP’s ability to manage its indebtedness and capital structure;

•

adverse results or other consequences from litigation, arbitration, regulatory investigations or compliance initiatives, including those related to business practices, compensation agreements with insurance companies, policy rescissions or chargebacks, regulatory investigations or activities within the life settlements industry;

•

uncertainty in the financial services, insurance or life settlement industries arising from investigations into certain business practices and subpoenas received from various governmental authorities and related litigation;

•

the impact of legislation or regulations in jurisdictions in which NFP’s subsidiaries operate, including the possible adoption of comprehensive and exclusive federal regulation over all interstate insurers and the uncertain impact of proposals for legislation regulating the financial services industry;

•

the reduction of the Company’s revenue and earnings due to the elimination or modification of compensation arrangements, including contingent compensation arrangements and the adoption of internal initiatives to enhance compensation transparency, including the transparency of fees paid for life settlements transactions;

•

changes in laws, including the elimination or modification of the federal estate tax, changes in the tax treatment of life insurance products, or changes in regulations affecting the value or use of benefits programs, such as government-sponsored insurance programs or other healthcare reform, which may adversely affect the demand for or profitability of the Company’s services;

•

developments in the availability, pricing, design or underwriting of insurance products, revisions in mortality tables by life expectancy underwriters or changes in the Company’s relationships with insurance companies;

•

changes in premiums and commission rates or the rates of other fees paid to the Company’s firms, including life settlements and registered investment advisory fees;

•

the occurrence of adverse economic conditions or an adverse regulatory climate in New York, Florida or California;

•

the loss of services of key members of senior management;

•

the availability or adequacy of errors and omissions insurance or other types of insurance coverage protection; and

•

the Company’s ability to effect smooth succession planning at its firms.

Additional factors are set forth in NFP’s filings with the Securities and Exchange Commission (the “SEC”), including its Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on February 13, 2009.

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.

Part I – Financial Information

Item 1. Financial Statements (Unaudited)

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)—(in thousands, except per share amounts)

	June 30, 2009			December 31, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	49,822		$	48,621
Cash, cash equivalents and securities purchased under resale agreements in premium trust accounts		79,258			75,109
Commissions, fees and premiums receivable, net		104,049			140,758
Due from principals and/or certain entities they own		21,334			16,329
Notes receivable, net		7,860			6,496
Deferred tax assets		8,926			9,435
Other current assets		18,897			19,284
Total current assets		290,146			316,032
Property and equipment, net		46,107			51,683
Deferred tax assets		109,983			24,889
Intangibles, net		410,789			462,123
Goodwill, net		57,914			635,693
Notes receivable, net		32,191			23,683
Other non-current assets		30,078			28,018
Total assets	$	977,208		$	1,542,121
LIABILITIES
Current liabilities:
Premiums payable to insurance carriers	$	81,126		$	73,159
Borrowings		115,000			148,000
Income taxes payable		—			11
Deferred tax liabilities		7			—
Due to principals and/or certain entities they own		17,000			38,791
Accounts payable		18,369			28,513
Accrued liabilities		47,127			54,380
Total current liabilities		278,629			342,854
Deferred tax liabilities		115,977			119,400
Convertible senior notes		198,984			193,475
Other non-current liabilities		61,427			62,874
Total liabilities		655,017			718,603
STOCKHOLDERS’ EQUITY
Preferred stock, $0.01 par value: Authorized 200,000 shares; none issued		—			—
Common stock, $0.10 par value: Authorized 180,000 shares; 44,087 and 43,875 issued and 41,104 and 39,753 outstanding, respectively		4,409			4,388
Additional paid-in capital		872,031			881,458
Retained (deficit) earnings		(440,230	)		97,178
Treasury stock, 2,984 and 4,122 shares, respectively, at cost		(114,117	)		(159,456	)
Accumulated other comprehensive income (loss)		98			(50	)
Total stockholders’ equity		322,191			823,518
Total liabilities and stockholders’ equity	$	977,208		$	1,542,121

See accompanying notes to consolidated financial statements.

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Revenue:
Commissions and fees	$	224,198		$	287,457		$	441,179		$	573,853
Cost of services:
Commissions and fees		62,474			93,991			124,875			190,271
Operating expenses (1)		91,250			100,358			186,441			204,197
Management fees		29,954			40,818			52,461			77,587
Total cost of services		183,678			235,167			363,777			472,055
Gross margin		40,520			52,290			77,402			101,798
Corporate and other expenses:
General and administrative		12,221			16,180			24,854			32,363
Amortization and depreciation		12,661			12,820			25,794			25,625
Impairment of goodwill and intangible assets		2,895			2,848			610,232			5,028
Gain on sale of subsidiaries		(1,279	)		(463	)		(662	)		(7,087	)
Total corporate and other expenses		26,498			31,385			660,218			55,929
Income (loss) from operations		14,022			20,905			(582,816	)		45,869

Interest and other income		7,489			1,187			9,333			2,756
Interest and other expense		(5,445	)		(5,217	)		(10,780	)		(10,810	)
Net interest and other		2,044			(4,030	)		(1,447	)		(8,054	)
Income (loss) before income taxes		16,066			16,875			(584,263	)		37,815
Income tax (benefit) expense		6,044			7,989			(78,486	)		20,398
Net income (loss)	$	10,022		$	8,886		$	(505,777	)	$	17,417
Earnings (loss) per share:
Basic	$	0.24		$	0.22		$	(12.48	)	$	0.44
Diluted	$	0.23		$	0.22		$	(12.48	)	$	0.42
Dividends declared per share	$	—		$	0.21		$	—		$	0.42
Weighted average shares outstanding:
Basic		41,144			39,562			40,541			39,501
Diluted		42,833			41,004			40,541			41,092

______________

(1)	Excludes amortization and depreciation which are shown separately under Corporate and other expenses.

See accompanying notes to consolidated financial statements.

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited—in thousands)

	Six Months Ended June 30,
	2009			2008
Cash flow from operating activities:
Net (loss) income	$	(505,777	)	$	17,417
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Deferred taxes		(88,106	)		414
Stock-based compensation		4,987			6,742
Impairment of goodwill and intangible assets		610,232			5,028
Amortization of intangibles		18,770			19,416
Depreciation		7,024			6,209
Accretion of senior convertible notes discount		5,509			5,167
Gain on sale of subsidiaries		(662	)		(7,087	)
(Increase) decrease in operating assets:
Cash, cash equivalents and securities purchased under resale agreements in premium trust accounts		(4,149	)		2,114
Commissions, fees and premiums receivable, net		35,073			38,124
Due from principals and/or certain entities they own		(5,005	)		(8,715	)
Notes receivable, net – current		(1,364	)		(953	)
Other current assets		420			(6,444	)
Notes receivable, net – non-current		(3,987	)		(8,472	)
Other non-current assets		(1,132	)		(14,156	)
Increase (decrease) in operating liabilities:
Premiums payable to insurance carriers		7,967			875
Income taxes payable		(11	)		(1,830	)
Due to principals and/or certain entities they own		(22,098	)		(42,464	)
Accounts payable		(10,163	)		(11,486	)
Accrued liabilities		(9,556	)		(20,554	)
Other non-current liabilities		(5,399	)		8,967
Total adjustments		538,350			(29,105	)
Net cash provided by (used in) operating activities		32,573			(11,688	)
Cash flow from investing activities:
Proceeds from disposal of subsidiaries		9,062			21,283
Purchases of property and equipment, net		(3,142	)		(24,883	)
Payments for acquired firms, net of cash, and contingent consideration		(979	)		(40,793	)
Net cash provided by (used in) investing activities		4,941			(44,393	)
Cash flow from financing activities:
Proceeds from borrowings		—			128,000
Repayments of borrowings		(33,000	)		(85,000	)
Proceeds from stock-based awards, including tax benefit		(3,104	)		3,204
Shares cancelled to pay withholding taxes		(159	)		(658	)
Payments for treasury stock repurchase		—			(21,921	)
Dividends paid		(50	)		(16,467	)
Net cash (used in) provided by financing activities		(36,313	)		7,158
Net increase (decrease) in cash and cash equivalents		1,201			(48,923	)
Cash and cash equivalents, beginning of the period		48,621			114,182
Cash and cash equivalents, end of the period	$	49,822		$	65,259
Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	13,678		$	22,019
Cash paid for interest	$	3,796		$	4,919
Non-cash transactions:
See Note 8

See accompanying notes to consolidated financial statements.

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2009

(Unaudited)

Note 1 - Nature of Operations

National Financial Partners Corp. (“NFP”), a Delaware corporation, was formed on August 27, 1998, but did not commence operations until January 1, 1999. The principal business of NFP is the acquisition and management of operating companies it acquires which form a national distribution network that offers financial services, including corporate and executive benefits, life insurance and wealth transfer, financial planning and investment advisory services to high net worth individuals and entrepreneurial corporate markets. As of June 30, 2009, NFP and its subsidiaries (the “Company”) owned more than 165 firms.

Note 2 - Summary of Significant Accounting Policies

Recently adopted accounting standards

On January 1, 2009, NFP adopted FASB Staff Position APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”). The provisions of FSP APB 14-1 apply to NFP’s $230.0 million (including over-allotment) aggregate principal amount of 0.75% convertible senior notes due February 1, 2012 (the “notes” or the “convertible senior notes”) (see “Note 6—Borrowings”). FSP APB 14-1 requires NFP to separate the convertible senior notes into two separate components: a non-convertible note and a conversion option. As a result, NFP is required to recognize interest expense on its convertible senior notes at their non-convertible debt borrowing rate (6.62%) rather than at their stated face rate (0.75%). With the change in accounting principle required by the adoption of FSP APB 14-1, NFP is required to amortize to interest expense the excess of the principal amount of the liability component of its notes over the carrying amount using the interest method, as described in paragraph 15 of APB Opinion No. 21, “Interest on Receivables and Payables,” and the non-cash portion of interest expense relating to the discount on the notes is now recognized as a charge to earnings. Previously, NFP recorded the cost incurred in connection with the convertible note hedge, including the related tax benefit, and the proceeds from the sale of the warrants as adjustments to additional paid-in capital. As such, the face value of the notes of $230.0 million was previously shown as a liability on the consolidated statement of financial condition and the discount was recognized as an adjustment to additional paid-in capital of $55.9 million. In addition, interest expense was previously recognized through earnings based only on the stated rate of the notes.

The notes are now presented on the consolidated statement of financial condition at their net carrying amount, or the face value of the notes less their unamortized discount. FSP APB 14-1 does not have any impact on cash payments or obligations due under the terms of the notes. NFP adopted FSP APB 14-1 on January 1, 2009 and as required, comparative financial statements of prior years have been adjusted to apply its provisions retrospectively.

The cumulative effect of the change in accounting principle for the adoption of FSP APB 14-1 on retained earnings and additional paid-in capital as of January 1, 2009 was a decrease of $11.8 million and an increase of $47.2 million, respectively, resulting in a net $35.4 million increase in total stockholder’s equity. In addition, the notes and income taxes payable decreased by $36.6 million resulting in total liabilities decreasing $36.6 million. Prepaid expenses decreased by $1.2 million resulting in a $1.2 million decrease in total assets as a result of the adoption.

The following financial statement line items within the consolidated statement of operations for the three month period ended June 30, 2008 and six month period ended June 30, 2008 were affected by the adoption of FSP APB 14-1:

	Three Months Ended June 30, 2008									Six Months Ended June 30, 2008
(in thousands, except per share data)	As Originally Reported			Effect of Change			After Adoption of FSP APB 14-1			As Originally Reported			Effect of Change			After Adoption of FSP APB 14-1
Interest and other expense	$	(2,698	)	$	(2,519	)	$	(5,217	)	$	(5,826	)	$	(4,984	)	$	(10,810	)
Income before income taxes		19,394			(2,519	)		16,875			42,799			(4,984	)		37,815
Provision for income taxes		8,994			(1,005	)		7,989			22,394			(1,996	)		20,398
Net income		10,400			(1,514	)		8,886			20,405			(2,988	)		17,417

Net income per share:
Basic		0.26			(0.04	)		0.22			0.52			(0.08	)		0.44
Diluted	$	0.25		$	(0.03	)	$	0.22		$	0.50		$	(0.08	)	$	0.42

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2009—(Continued)

(Unaudited)

The following financial statement line items within the consolidated statement of financial condition as of December 31, 2008 were affected by the adoption of FSP APB 14-1:

(in thousands)	As Originally Reported		Effect of Change			After Adoption of FSP APB 14-1
Deferred tax assets	$	24,858	$	31		$	24,889
Other non-current assets		29,213		(1,195	)		28,018
Income taxes payable		—		11			11
Deferred tax liabilities		119,399		1			119,400
Convertible senior notes		230,000		(36,525	)		193,475
Additional paid-in capital		834,263		47,195			881,458
Retained earnings	$	109,024	$	(11,846	)	$	97,178

The following financial statement line items within the consolidated statement of cash flows for the six month period ended June 30, 2008 were affected by the adoption of FSP APB 14-1:

(in thousands)	As Originally Reported			Effect of Change			After Adoption of FSP APB 14-1
Cash flow from operating activities:
Net (loss) income	$	20,405		$	(2,988	)	$	17,417
Adjustments to reconcile to net cash provided by operating activities:
Accretion of Sr. Convert Notes Discount	$	—		$	5,167		$	5,167
Other current assets		(5,730	)		(714	)		(6,444	)
(Increase) decrease in operating assets:
Other non-current assets		(13,973	)		(183	)		(14,156	)
Increase (decrease) in operating liabilities:
Income taxes payable		(547	)		(1,283	)		(1,830	)
Other non-current liabilities		8,966			1			8,967

Total adjustments	$	(11,284	)	$	2,988		$	(8,296	)

On January 1, 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Statement No. 141 (revised 2007), “Business Combinations,” (“SFAS 141R”). SFAS 141R requires that upon initially obtaining control, the acquiring entity in a business combination must recognize 100% of the fair value of the acquired assets, including goodwill and assumed liabilities, with only limited exceptions even if the acquirer has not acquired 100% of its target. Contingent consideration arrangements are now fair valued at the acquisition date and included on that basis in the purchase price consideration. The recognition of contingent consideration at a later date when the amount of that consideration is determinable beyond a reasonable doubt will no longer be applicable. All transaction costs are now expensed as incurred. On April 1, 2009, the FASB issued Staff Position FAS No. 141R-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” which is effective January 1, 2009, and amends the guidance in SFAS 141R to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If the acquisition date fair value of an asset acquired or a liability assumed that arises from a contingency cannot be determined, the asset or liability would be recognized in accordance with FASB Statement No. 5, “Accounting for Contingencies” (“SFAS 5”) and FASB Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss.” If the fair value is not determinable and the SFAS 5 criteria are not met, no asset or liability would be recognized.

On January 1, 2009, the Company adopted SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 provides guidance for entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners separately within the consolidated statement of financial condition within equity, but separate from the parent’s equity and separately on the face of the consolidated statement of operations. Further, the statement provides guidance that changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary should be accounted for consistently and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary should be initially measured at fair value. The adoption of SFAS 160 did not have a material impact on the Company.

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2009—(Continued)

(Unaudited)

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), which established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 sets forth:

•

the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements;

•

the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and

•

the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

SFAS 165 is effective for financial statements issued for interim and annual periods ending after June 15, 2009. The Company has adopted SFAS 165. See “Note 10—Subsequent Events” for further detail.

Recently issued accounting standards

In June 2009, the FASB issued SFAS No. 168, “FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162” (“SFAS 168”), which will become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (the “SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of SFAS 168, the FASB Accounting Standards Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the FASB Accounting Standards Codification will become nonauthoritative. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Upon the adoption of SFAS 168, beginning for the interim period ending September 30, 2009, references to authoritative accounting literature will be conformed to relevant sections of the FASB Accounting Standards Codification in future filings.

Basis of presentation

The unaudited interim consolidated financial statements of the Company included herein have been prepared in accordance with GAAP for interim financial information and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial position, results of operations and cash flows of the Company for the interim periods presented and are not necessarily indicative of a full year’s results.

All material intercompany balances and transactions have been eliminated. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2008, included in NFP’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on February 13, 2009.

Use of estimates

The preparation of consolidated financial statements in accordance with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates.

Property, equipment and depreciation

Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives, generally three to seven years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the terms of the leases. Amortization and depreciation expense totaling $4.0 million and $3.9 million for the six months ended June 30, 2009 and 2008, respectively, has been excluded from operating expenses in Cost of services and included in Corporate and other expenses.

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2009—(Continued)

(Unaudited)

Foreign currency translation

The functional currency of the Company is the United States (“U.S.”) dollar. The functional currency of the Company’s foreign operations is the applicable local currency. The translation of foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for income and expense accounts using monthly average exchange rates. The cumulative effects of translating the functional currencies into the U.S. dollar are included in Accumulated other comprehensive income.

Comprehensive income

SFAS No. 130, “Reporting Comprehensive Income,” establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. Accumulated other comprehensive income (loss) includes foreign currency translation. This information is provided in the Company’s statements of changes in stockholders’ equity and comprehensive income. Accumulated other comprehensive income (loss) on the consolidated balance sheets at December 31, 2008 represents accumulated foreign currency translation adjustments. See “Note 7—Stockholders’ Equity” for further detail.

Impairment of goodwill and other intangible assets

The Company evaluates its amortizing (long-lived assets) and non-amortizing intangible assets for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) and SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), respectively.

In accordance with SFAS 144, long-lived assets, such as purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company generally performs its recoverability test on a quarterly basis for each of its acquired firms that have experienced a significant deterioration in its business indicated principally by an inability to produce base earnings for a period of time. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted cash flows expected to be generated by the asset and by the eventual disposition of the asset. If the estimated undiscounted cash flows are less than the carrying amount of the underlying asset, an impairment may exist. The Company measures impairments on identifiable intangible assets subject to amortization by comparing the fair value of the asset to the carrying amount of the asset. In the event that the discounted cash flows are less than the carrying amount, an impairment charge will be recognized for the difference in the consolidated statements of income.

In accordance with SFAS 142, goodwill and intangible assets not subject to amortization are tested at least annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the intangible asset might be impaired. The Company generally performs its impairment test on a quarterly basis for each of its acquired firms that may have an indicator of impairment. Indicators at the Company level include but are not limited to: sustained operating losses or a trend of poor operating performance, loss of key personnel, a decrease in NFP’s market capitalization below its book value, and an expectation that a reporting unit will be sold or otherwise disposed of. Indicators of impairment at the reporting unit level may be due to the failure of the firms the Company acquires to perform as expected after the acquisition for various reasons, including legislative or regulatory changes that affect the products and services in which a firm specializes, the loss of key clients after acquisition, general economic factors that impact a firm in a direct way, and the death or disability of significant principals. If one or more indicators of impairment exist, NFP performs an evaluation to identify potential impairments. If an impairment is identified, NFP measures and records the amount of impairment loss.

A two-step impairment test is performed on goodwill. In the first step, NFP compared the fair value of each reporting unit to the carrying value of the net assets assigned to that reporting unit. NFP determined the fair value of its reporting units by blending two valuation approaches: supplementing the income approach with a market value approach. In order to determine the relative fair value of each of the reporting units the income approach was conducted first. These relative values were then scaled to the estimated market value of NFP as determined by the recent price range of the stock.

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2009—(Continued)

(Unaudited)

If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired and NFP is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying value of the goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in a manner that is consistent with the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.

See “Note 5—Goodwill and Other Intangible Assets—Impairment of goodwill and intangible assets.”

Fair value measurements

On January 1, 2009, the Company adopted FASB Statement No. 157, “Fair Value Measurements” (“SFAS 157”), which clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. In February 2008, the FASB issued Staff Position 157-2, “Effective Date of FASB Statement No. 157,” that deferred the effective date of SFAS 157 for one year for nonfinancial assets and liabilities recorded at fair value on a nonrecurring basis. On January 1, 2009, the Company adopted SFAS 157 for non-financial assets and liabilities recorded at fair value on a nonrecurring basis. SFAS 157 describes three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level (with the level 3 being the lowest) input that is significant to the fair value measurement of the instrument.

Income taxes

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires the recognition of tax benefits or expenses on the temporary differences between the financial reporting and tax bases of its assets and liabilities. Deferred tax assets and liabilities are measured utilizing statutory enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce the deferred tax assets to the amounts expected to be realized.

The Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” on January 1, 2007, which clarified the accounting for uncertain tax positions by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements.

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2009—(Continued)

(Unaudited)

Revenue recognition

Insurance and annuity commissions paid by insurance companies are based on a percentage of the premium that the insurance company charges to the policyholder. First-year commissions are calculated as a percentage of the first twelve months’ premium on the policy and earned in the year that the policy is originated. In many cases, the Company receives renewal commissions for a period following the first year, if the policy remains in force. Some of the Company’s firms also receive fees for the settlement of life insurance policies. These fees are generally based on a percentage of the settlement proceeds received by their clients, and recognized as revenue when the policy is transferred and the rescission period has ended. The Company also earns commissions on the sale of insurance policies written for benefits programs. The commissions are paid each year as long as the client continues to use the product and maintains its broker of record relationship with the Company. The Company also earns fees for the development and implementation of corporate and executive benefits programs as well as fees for the duration that these programs are administered. Asset-based fees are earned for administrative services or consulting related to certain benefits plans. Insurance commissions are recognized as revenue when the following criteria are met: (1) the policy application and other carrier delivery requirements are substantially complete, (2) the premium is paid, and (3) the insured party is contractually committed to the purchase of the insurance policy. Carrier delivery requirements may include additional supporting documentation, signed amendments and premium payments. Subsequent to the initial issuance of the insurance policy, premiums are billed directly by carriers. Commissions earned on renewal premiums are generally recognized upon receipt from the carrier, since that is typically when the Company is first notified that such commissions have been earned. The Company carries an allowance for policy cancellations, which approximated $1.2 million at both June 30, 2009 and 2008, that is periodically evaluated and adjusted as necessary. Miscellaneous commission adjustments are generally recorded as they occur. Contingent commissions are recorded as revenue when received which, in many cases, is the Company’s first notification of amounts earned. Contingent commissions are commissions paid by insurance underwriters and are based on the estimated profit and/or overall volume of business placed with the underwriter. The data necessary for the calculation of contingent commissions cannot be reasonably estimated prior to receipt of the commission.

The Company earns commissions related to the sale of securities and certain investment-related insurance products. The Company also earns fees for offering financial advice and related services. These fees are based on a percentage of assets under management and are generally paid quarterly. In certain cases, incentive fees are earned based on the performance of the assets under management. Some of the Company’s firms charge flat fees for the development of a financial plan or a flat fee annually for advising clients on asset allocation. Any investment advisory or related fees collected in advance are deferred and recognized as income on a straight-line basis over the period earned. Transaction-based fees, including performance fees, are recognized when all contractual obligations have been satisfied. Securities and mutual fund commission income and related expenses are recorded on a trade date basis.

Some of the Company’s firms earn additional compensation in the form of incentive and marketing support payments from manufacturers of financial services products, based on the volume, persistency and profitability of business generated by the Company from these three sources. Incentive and marketing support revenue is recognized at the earlier of notification of a payment or when payment is received, unless there exists historical data and other information which enable management to reasonably estimate the amount earned during the period.

Reclassifications and adjustments

During the three months ended June 30, 2009, the Company adjusted receivables of $1.0 million, net of tax that related to over-accrued revenue from prior quarters. If these receivables had been appropriately reflected in their respective quarters, the impact would have been immaterial to the interim consolidated financial statements.

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2009—(Continued)

(Unaudited)

Note 3 - Earnings Per Share

The computations of basic and diluted earnings per share are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009			2008
(in thousands, except per share amounts)
Basic:
Net (loss) income	$	10,022	$	8,886	$	(505,777	)	$	17,417
Average shares outstanding		41,139		39,372		40,539			39,406
Contingent consideration and incentive payments		5		190		2			95
Total		41,144		39,562		40,541			39,501
Basic earnings (loss) per share	$	0.24	$	0.22	$	(12.48	)	$	0.44
Diluted:
Net (loss) income		10,022		8,886	$	(505,777	)	$	17,417
Average shares outstanding		41,139		39,372		40,539			39,406
Stock held in escrow		—		37		—			37
Contingent consideration and incentive payments		390		322		2			322
Stock-based awards		1,246		1,266		—			1,317
Other		58		7		—			10
Total		42,833		41,004		40,541			41,092
Diluted earnings (loss) per share	$	0.23	$	0.22	$	(12.48	)	$	0.42

The calculation of diluted earnings (loss) per share excluded approximately 1.4 million shares for the six months ended June 30, 2009, because the effect of inclusion would be antidilutive.

Note 4 - Acquisitions

While acquisitions remain a component of the Company’s business strategy over the long term, NFP suspended acquisition activity (with the exception of certain sub-acquisitions) in the latter part of 2008 in order to conserve cash. During the six months ended June 30, 2009, the Company completed one sub-acquisition effective January 1, 2009, to augment the business of one of the Company’s existing benefits firms. During the six months ended June 30, 2008, the Company completed nine acquisitions that offer wealth transfer, corporate and executive benefits and other financial services to high net worth individuals and small to mid-size corporate markets. These acquisitions allowed NFP to expand into desirable geographic locations, further extend its presence in the financial services industry and increased the volume of services currently provided.

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2009—(Continued)

(Unaudited)

The purchase price, including direct costs, associated with acquisitions accounted for as purchases, and the allocations thereof, are summarized as follows:

	Six Months Ended June 30,
(in thousands)	2009		2008
Consideration:
Cash	$	279	$	29,563
Common stock		—		12,035
Other		186		499

Totals	$	465	$	42,097
Allocation of purchase price:
Net tangible assets	$	—	$	37
Cost assigned to intangibles:
Book of business		200		13,084
Management contract		112		10,663
Trade name		3		271
Goodwill, net of deferred tax adjustment of $0.1 million in 2009 and $6.2 million in 2008		150		18,042

Total	$	465	$	42,097

Regarding acquisitions completed through June 30, 2008, the number of shares issued by NFP is generally based upon an average fair market value of NFP’s publicly-traded common stock over a specified period of time prior to the closing date of the acquisition. No shares were issued in connection with the sub-acquisition completed during the six months ended June 30, 2009.

In connection with contingent consideration $2.1 million was paid in cash and NFP has issued 978,273 shares of common stock with a value of approximately $2.6 million for the six months ended June 30, 2009. $10.7 million was paid in cash and NFP issued 6,243 shares of common stock with a value of approximately $0.2 million for the six months ended June 30, 2008.

In connection with the sub-acquisition that occurred during the six months ended June 30, 2009, the Company has contingent obligations based upon the future earnings of the acquired entities that are not included in the purchase price that was recorded for this sub-acquisition at the date of acquisition. For acquisitions that were completed prior to the adoption of SFAS 141R on January 1, 2009, future payments made under this arrangement will be recorded as an adjustment to purchase price when the contingencies are settled. For acquisitions completed after January 1, 2009, in accordance with SFAS 141R, contingent consideration amounts are fair valued at the acquisition date and are included on the basis in the purchase price consideration at the time of the acquisition. As of June 30, 2009, the maximum amount of contingent obligations for the one sub-acquisition, which is largely based on growth in earnings, was $0.3 million. As of June 30, 2009, the amount recognized for contingent consideration relating to this sub-acquisition as of January 1, 2009 was $0.2 million. This arrangement results in the payment of additional consideration to the seller upon the firm’s attainment of certain revenue benchmarks following the closing of this sub-acquisition. The range of payments that may be made upon attainment of the benchmarks ranges from $0 through a maximum amount of $0.3 million. For the six months ended June 30, 2009, the amount recognized as contingent consideration relating to this sub-acquisition is $0.2 million.

In connection with this sub-acquisition, the Company does not expect any amounts of goodwill to be deductible over 15 years for tax purposes.

In connection with a 2008 acquisition of a group benefits intermediary and its subsequent merger with an existing wholly-owned subsidiary of the Company, a portion of the consideration, totaling $23.1 million, was treated as prepaid management fee which will be amortized to management fee expense over the remaining term of the management contract. Approximately $0.6 million was amortized to management fee expense for the six months ended June 30, 2009 and 2008; $1.2 million was included in Other current assets; and $20.0 million was included in Other non-current assets.

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2009—(Continued)

(Unaudited)

The following table summarizes the required disclosures of the pro forma combined entity, as if these acquisitions occurred at January 1, 2009 and 2008, respectively:

	Six Months Ended June 30,
(in thousands, except per share amounts)	2009			2008
Revenue	$	441,179		$	573,974
(Loss) income before income taxes		(584,263	)		37,771
Net (loss) income		(505,777	)		17,397
Earnings (loss) per share – basic		(12.48	)		0.44
Earnings (loss) per share – diluted	$	(12.48	)	$	0.42

The unaudited pro forma results above have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred at January 1, 2009 and 2008, respectively, nor is it necessarily indicative of future operating results.

Note 5 - Goodwill and Other Intangible Assets

Goodwill

The changes in the carrying amount of goodwill for the six months ended June 30, 2009 are as follows:

(in thousands)	2009
Balance as of January 1,	$	635,693
Goodwill acquired during the year, including goodwill related to the deferred tax liability of $127		277
Contingent consideration		7,554
Firm disposals, firm restructures and other, net		(979	)
Impairment of goodwill		(584,631	)

Balance as of June 30,	$	57,914

Acquired intangible assets

	As of June 30, 2009					As of December 31, 2008
(in thousands)	Gross carrying amount		Accumulated amortization			Gross carrying amount		Accumulated amortization
Amortizing identified intangible assets:
Book of business	$	222,357	$	(105,562	)	$	230,742	$	(99,445	)
Management contract		355,424		(78,453	)		385,656		(77,467	)
Institutional customer relationships		15,700		(3,707	)		15,700		(3,270	)
Total	$	593,481	$	(187,722	)	$	632,098	$	(180,182	)
Non-amortizing intangible assets:
Goodwill	$	60,942	$	(3,028	)	$	647,839	$	(12,146	)
Trade name		5,109		(79	)		10,337		(130	)
Total	$	66,051	$	(3,107	)	$	658,176	$	(12,276	)

Aggregate amortization expense for intangible assets subject to amortization for the six months ended June 30, 2009 was $18.8 million. Intangibles related to book of business, management contract and institutional customer relationships are being amortized over a 10-year, 25-year and 18-year period, respectively. Based on the Company’s acquisitions as of June 30, 2009, estimated amortization expense for each of the next five years is $36.3 million per year. Estimated amortization expense for each of the next five years may change primarily as the result of acquisitions.

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2009—(Continued)

(Unaudited)

Impairment of goodwill and intangible assets

The Company evaluates its amortizing (long-lived assets) and non-amortizing intangible assets for impairment in accordance with SFAS No. 144 and SFAS No. 142, respectively.

Under the income approach, management used certain assumptions to determine the reporting unit’s fair value. The Company’s cash flow projections for each reporting unit were based on five-year financial forecasts. The five-year forecasts were based on quarterly financial forecasts developed internally by management for use in managing its business. The forecast generally translates into an assumption that the recessionary economic environment will continue through 2009, revenues will stabilize at a reduced level in 2010 and the Company will resume normalized long-term growth rates in 2011. Given the continuing weakness in the economic environment, in conducting the income approach for the second quarter of 2009, NFP revised its cash flow projections for each reporting unit, leading to an overall downward adjustment as compared to those used in the first quarter. The significant assumptions of these five-year forecasts included quarterly revenue growth rates for various product categories, quarterly commission expense as a percentage of revenue and quarterly operating expense growth rates. The future cash flows were tax affected and discounted to present value using a blended discount rate, ranging from 9.82% to 10.35%. Since NFP retains a cumulative preferred position in its reporting units’ base earnings, NFP assigned a rate of return to that portion of its gross margin that would be represented by yields seen of preferred equity securities of 8.70%. For cash flows retained by NFP in excess of target earnings and below base earnings, NFP assigned a rate of return ranging from 11.34% to 14.25%. Terminal values for all reporting units were calculated using a Gordon growth methodology using a blended discount rate of 12.52% with a long-term growth rate of 3%.

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2009—(Continued)

(Unaudited)

On January 1, 2009, the Company adopted SFAS 157 for non-financial assets and liabilities, which emphasizes market-based measurement, rather than entity-specific measurement, in calculating reporting unit fair value. The Company conducted its impairment methodology in the first quarter of 2009 to incorporate information available from market participants about risks and other relevant factors. Significant market inputs that were considered include: NFP’s market value remaining below net book value, the recent performance of the Company in the current economic environment, discount rates that are risk adjusted to reflect both company-specific and market-based credit spreads and other relevant market data. Among other items, the market value reflected the stressed macroeconomic environment and its impact on the Company’s sales, particularly in the life insurance area, and the Company’s capital structure. In applying the market value approach, management derived an enterprise value of the Company as a whole as of June 30, 2009, taking into consideration market multiples, an appropriate equity premium and the current capital structure. The market value approach was used to derive the implied equity value of the entity as a whole which was then allocated to the individual reporting units based on the proportional fair value of each reporting unit derived using the income approach to the total entity fair value derived using the income approach.

The fair value for each reporting unit under the income approach was then blended with the fair value for each reporting unit under a market value approach. For the three months ended March 31, 2009, heavier weighting was given to the market value approach to derive current period fair value for each reporting unit due to the large difference between the valuation of the Company’s reporting units using an income approach and a market value approach. Subsequent to the first quarter of 2009, the weighting has been equalized due to various factors including, in particular, the difference in the results between the two approaches has declined and the gap between the Company’s market capitalization and book value narrowed.

As referenced above, the method to compute the amount of impairment incorporates quantitative data and qualitative criteria including new information and judgments that can dramatically change the decision about the valuation of an intangible asset in a very short period of time. The timing and amount of realized losses reported in earnings could vary if management’s conclusions were different. Any resulting impairment loss could have a material adverse effect on the Company’s reported financial position and results of operations for any particular quarterly or annual period.

Non-financial assets measured at fair value on a non-recurring basis are summarized below:

($ in thousands)	Six Months Ended June 30, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Book of business	$	116,795	$	—	$	—	$	116,795	$	(2,062	)
Management contract		276,971		—		—		276,971		(18,318	)
Institutional customer relationships		11,993		—		—		11,993		—
Trade name		5,030		—		—		5,030		(5,221	)
Goodwill	$	57,914	$	—	$	—	$	57,914	$	(584,631	)

In accordance with the provisions of SFAS 144, long-lived assets held and used with a carrying amount of $426.2 million were written down to their fair value of $405.8 million, resulting in an impairment charge of $20.4 million for amortizing intangibles, which was included in earnings for the six months ended June 30, 2009.

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2009—(Continued)

(Unaudited)

In accordance with the provisions of SFAS 142, goodwill and trade name of $652.7 million was written down to its implied fair value of $62.9 million, resulting in an impairment charge of $589.8 million, which was included in earnings for the six months ended June 30, 2009.

As previously stated in NFP’s Annual Report on Form 10-K for the year ended December 31, 2008 (the “2008 10-K”), NFP carefully monitors both the expected future cash flows of its reporting units and its market capitalization for the purpose of assessing the carrying values of its goodwill and intangible assets. As further stated in the 2008 10-K, if the stock price remained below the net book value per share, or other negative business factors existed as outlined in SFAS 142, NFP may be required to perform another Step 1 analysis and potentially a Step 2 analysis, which could result in an impairment of up to the entire balance of the Company’s remaining goodwill; if NFP performed a Step 2 goodwill impairment analysis as defined by SFAS 142, it would also be required to evaluate its intangible assets for impairment under SFAS 144. NFP’s impairment analysis for the six months ended June 30, 2009, consistent with the analysis previously stated in the 2008 10-K, led to the impairment charge taken for the six months ended June 30, 2009.

Note 6 - Borrowings

Credit Facility

NFP’s credit facility among NFP, the financial institutions party thereto and Bank of America, N.A., as administrative agent, is structured as a revolving credit facility and matures on August 22, 2011. NFP has previously amended its credit facility as described in its Annual Report on Form 10-K for the year ended December 31, 2008. On May 6, 2009, NFP executed the third amendment to its credit facility (the “Third Amendment”). Pursuant to the Third Amendment, the definition of EBITDA has been amended to expressly provide that the non-cash impairment of goodwill and intangible assets associated with the Company’s evaluation of intangible assets for the first quarter of 2009 in accordance with SFAS 144 and SFAS 142 will be disregarded in the calculation of EBITDA.

NFP may elect to pay down its outstanding balance at any time before August 22, 2011. Subject to legal or regulatory requirements, the credit facility is secured by the assets of NFP and its wholly-owned subsidiaries. Up to $35.0 million of the credit facility is available for the issuance of letters of credit and the sublimit for swingline loans is the lesser of $10.0 million or the total revolving commitments outstanding. The credit facility contains various customary restrictive covenants, subject to certain exceptions, that prohibit the Company from, among other things: (i) incurring additional indebtedness or guarantees, (ii) creating liens or other encumbrances on property or granting negative pledges, (iii) entering into a merger or similar transaction, (iv) selling or transferring certain property, (v) making certain restricted payments and (vi) making advances or loans. In addition, the credit facility contains financial covenants requiring the Company to maintain certain ratios.

As of June 30, 2009, the Company was in compliance with all of its debt covenants. Per the terms of its amended credit facility, the maximum consolidated leverage ratio, one of the Company’s most restrictive debt covenants, is required to be a maximum of 3.25 to 1.0 on the last day of the rolling four quarter period ended June 30, 2009. As of June 30, 2009, the consolidated leverage ratio was 2.5 to 1.0. However, if the Company’s earnings deteriorate, it is possible that NFP will fail to comply with the terms of its credit facility in the future, such as the consolidated leverage ratio covenant, and therefore be in default under the credit facility. Upon the occurrence of such event of default, the majority of lenders under the credit facility could cause amounts currently outstanding to be declared immediately due and payable. Such an acceleration could trigger “cross acceleration provisions” under NFP’s indenture governing the notes; see “—Convertible Senior Notes” below.

As of June 30, 2009, the year-to-date weighted average interest rate for NFP’s credit facility was 3.94%. The combined weighted average of the credit facility in the prior year period was 4.77%.

NFP had a balance of $115.0 million outstanding under its credit facility as of June 30, 2009 and a balance of $169.0 million as of June 30, 2008. At December 31, 2008, outstanding borrowings were $148.0 million.

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2009—(Continued)

(Unaudited)

Convertible Senior Notes

In January 2007, NFP issued $230.0 million (including over-allotment) aggregate principal amount of 0.75% convertible senior notes due February 1, 2012 (the “notes” or the “convertible senior notes”). The notes are senior unsecured obligations and rank equally with NFP’s existing or future senior debt and senior to any subordinated debt. The notes will be structurally subordinated to all existing or future liabilities of NFP’s subsidiaries and will be effectively subordinated to existing or future secured indebtedness to the extent of the value of the collateral. The notes were used to pay the net cost of the convertible note hedge and warrant transactions, repurchase 2.3 million shares of NFP’s common stock from Apollo Investment Fund IV, L.P. and Apollo Overseas Partners IV, L.P. (collectively, “Apollo”) and to repay a portion of outstanding amounts of principal and interest under NFP’s credit facility.

Holders may convert their notes at their option on any day prior to the close of business on the scheduled trading day immediately preceding December 1, 2011 only under the following circumstances: (1) during the five business-day period after any five consecutive trading-day period (the “measurement period”) in which the price per note for each day of that measurement period was less than 98% of the product of the last reported sale price of NFP’s common stock and the conversion rate on each such day; (2) during any calendar quarter (and only during such quarter) after the calendar quarter ended March 31, 2007, if the last reported sale price of NFP’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; or (3) upon the occurrence of specified corporate events. The notes are convertible, regardless of the foregoing circumstances, at any time from, and including, December 1, 2011 through the second scheduled trading day immediately preceding the maturity date. Default under the credit facility resulting in its acceleration would, subject to a 30-day grace period, trigger a default under the supplemental indenture governing the notes, in which case the trustee under the notes or holders of not less than 25% in principal amount of the outstanding notes could declare the principal of and accrued and unpaid interest on all such notes to be due and payable immediately.

Upon conversion, NFP will pay, at its election, cash or a combination of cash and common stock based on a daily conversion value calculated on a proportionate basis for each trading day of the relevant 20 trading day observation period. The initial conversion rate for the notes was 17.9791 shares of common stock per $1,000 principal amount of notes, equivalent to a conversion price of approximately $55.62 per share of common stock. The conversion price is subject to adjustment in some events but is not adjusted for accrued interest. As of June 30, 2009 the conversion rate for the notes is 18.0679 shares of common stock per $1,000 principal amount of notes, equivalent to a conversion price of approximately $55.35 per share of common stock. In addition, if a “fundamental change” (as defined in the First Supplemental Indenture governing the notes) occurs prior to the maturity date, NFP will, in some cases and subject to certain limitations, increase the conversion rate for a holder that elects to convert its notes in connection with such fundamental change.

Concurrent with the issuance of the notes, NFP entered into convertible note hedge and warrant transactions with an affiliate of one of the underwriters for the notes. A default under NFP’s credit facility would trigger a default under each of the convertible note hedge and warrant transactions, in which case the counterparty could designate early termination under either, or both, of these instruments. The transactions are expected to reduce the potential dilution to NFP’s common stock upon future conversions of the notes. Under the convertible note hedge, NFP purchased 230,000 call options for an aggregate premium of $55.9 million. Each call option entitles NFP to repurchase an equivalent number of shares issued upon conversion of the notes at the same strike price (initially $55.62 per share), generally subject to the same adjustments. The call options expire on the maturity date of the notes. NFP also sold warrants for an aggregate premium of $34 million. The warrants expire ratably over a period of 40 scheduled trading days between May 1, 2012 and June 26, 2012, on which dates, if not previously exercised, the warrants will be treated as automatically exercised if they are in the money. The warrants provide for net-share settlement. The net cost of the convertible note hedge and warrants to the Company is $21.9 million. Debt issuance costs associated with the notes of approximately $7.6 million are recorded in Other current assets and Other non-current assets and will be amortized over the term of the notes.

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2009—(Continued)

(Unaudited)

Adoption of FSP APB 14-1

On January 1, 2009, NFP adopted FSP APB 14-1. The provisions of FSP APB 14-1 apply to NFP’s convertible senior notes. FSP APB 14-1 requires NFP to separate the convertible senior notes into two separate components: a non-convertible note and a conversion option. As a result, NFP is required to recognize interest expense on its convertible senior notes at their non-convertible debt borrowing rate (6.62%) rather than at their stated face rate (0.75%). With the change in accounting principle required by the adoption of FSP APB 14-1, NFP is required to amortize to interest expense the excess of the principal amount of the liability component of its notes over the carrying amount using the interest method, as described in paragraph 15 of APB Opinion No. 21, “Interest on Receivables and Payables,” and the non-cash portion of interest expense relating to the discount on the notes is now recognized as a charge to earnings. FSP APB 14-1 does not have any impact on cash payments or obligations due under the terms of the notes. NFP adopted FSP APB 14-1 on January 1, 2009 and as required, comparative financial statements of prior years have been adjusted to apply its provisions retrospectively. For more detail on the effects of the change in accounting principle see “Note 2—Summary of Significant Accounting Policies—Recently adopted accounting standards.”

As of June 30, 2009 the net carrying amount of the notes was $199.0 million and the unamortized discount of the notes within additional paid-in capital was $31.0 million. As of December 31, 2008 the net carrying amount of the notes was $193.5 million and the unamortized discount was $36.5 million. As of June 30, 2009 and December 31, 2008 the principal amount of the notes was $230.0 million. The discount on the notes is being amortized over the life of the notes and as of June 30, 2009 the amortization period has 31 months remaining. The effective interest rate on the notes is 6.62%. For the six months ended June 30, 2009, the amount of interest expense incurred by NFP relating to the notes for cash interest paid and for the amortization of the discount is approximately $6.4 million.

As of June 30, 2009 the conversion rate for the notes is 18.0679 shares of common stock per $1,000 principal amount of notes, equivalent to a conversion price of approximately $55.35 per share of common stock. As of June 30, 2009 the instrument’s converted value did not exceed its principal amount of $230.0 million.

Note 7 - Stockholders’ Equity

The changes in stockholders’ equity and comprehensive income (loss) during the six months ended June 30, 2009 are summarized as follows:

(in thousands)	Par Value		Additional Paid-in Capital			Retained Earnings (Deficit)			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
Balance at December 31, 2008	$	4,388	$	881,458		$	97,178		$	(159,456	)	$	(50	)	$	823,518
Common stock issued for:
Contingent consideration		—		(6,801	)		(31,578	)		40,991			—			2,612
Incentive payments		—		—			—			—			—			—
Common stock repurchased		—		—			—			(320	)		—			(320	)
Common stock returned from escrow		—		—			—			(254	)		—			(254	)
Tax benefit from purchase of call options		—		38			—			—			—			38
Stock issued through Employee Stock Purchase Plan		—		(4,370	)		—			4,922			—			552
Stock-based awards exercised/lapsed, including tax benefit		21		(3,125	)		—			—			—			(3,104	)
Shares cancelled to pay withholding taxes		—		(159	)		—			—			—			(159	)
Amortization of unearned stock-based compensation, net of cancellations		—		4,987			—			—			—			4,987
Dividend Equivalents of stock-based awards		—		3			(53	)		—			—			(50	)
Components of comprehensive income (loss):
Translation adjustments, net of tax effect of $22		—		—			—			—			148			148
Net (Loss)		—		—			(505,777	)		—			—			(505,777	)
Comprehensive income (loss)		—		—			—			—			—			(505,629	)
Balance at June 30, 2009	$	4,409	$	872,031		$	(440,230	)	$	(114,117	)	$	98		$	322,191

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2009—(Continued)

(Unaudited)

Stock-based compensation

NFP is authorized under its 2009 Stock Incentive Plan to grant awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance-based awards or other stock-based awards that may be granted to officers, employees, Principals, independent contractors and non-employee directors of the Company and/or an entity in which the Company owns a substantial ownership interest (i.e., a subsidiary of the Company). Any shares covered by outstanding options or other equity awards that are forfeited, cancelled or expire after April 15, 2009 without the delivery of shares under NFP’s Amended and Restated 1998 Stock Incentive Plan, Amended and Restated 2000 Stock Incentive Plan, Amended and Restated 2000 Stock Incentive Plan for Principals and Managers, Amended and Restated 2002 Stock Incentive Plan or Amended and Restated 2002 Stock Incentive Plan for Principals and Managers, may also be issued under the 2009 Stock Incentive Plan.

Stock-based compensation expense was $2.5 million and $3.5 million for three months ended June 30, 2009 and 2008, respectively, and $5.0 million and $6.7 million for the six months ended June 30, 2009 and 2008, respectively.

Summarized below is the amount of stock-based compensation allocated between cost of services and corporate and other expenses in the consolidated statements of income.

	Three Months Ended June 30,				Six Months Ended June 30
(in thousands)	2009		2008		2009		2008
Cost of services:
Operating expenses	$	876	$	1,116	$	1,802	$	2,099
Management fees		402		552		803		917
Corporate and other expenses:
General and administrative		1,222		1,870		2,382		3,726
Total stock-based compensation cost	$	2,500	$	3,538	$	4,987	$	6,742

Employee Stock Purchase Plan

Effective January 1, 2007, NFP established an Employee Stock Purchase Plan (“ESPP”). The ESPP is designed to encourage the purchase of common stock by NFP’s employees, further aligning interests of employees and stockholders and providing incentive for current employees. Up to 3,500,000 shares of common stock are currently available for issuance under the ESPP. The ESPP enables all regular and part-time employees who have worked with NFP for at least one year to purchase shares of NFP common stock through payroll deductions of any whole dollar amount of eligible compensation, up to an annual maximum of $10,000. The employees’ purchase price is 85% of the lesser of the market price of the common stock on the first business day or the last business day of the quarterly offering period. The Company recognizes compensation expense related to the compensatory nature of the discount given to employees who participate in the ESPP, which totaled $0.4 million and $0.3 million for the six months ended June 30, 2009 and 2008, respectively.

Summarized ESPP information is as follows:

(in thousands, except per share amounts)	For the Period Ended June 30, 2009
Purchase price per share	$	2.76
Shares to be acquired		106
Employee contributions	$	293
Stock compensation expense recognized	$	374

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2009—(Continued)

(Unaudited)

Note 8 - Non-Cash Transactions

The following non-cash transactions occurred during the periods indicated:

	Six Months Ended June 30,
	2009			2008
Stock issued as consideration for acquisitions	$	—		$	12,035
Net assets acquired (liabilities assumed) in connection with acquisitions		(54	)		37
Stock issued as incentive compensation		—			5,524
Stock issued for contingent consideration and other		2,359			218
Stock repurchased, note receivable and satisfaction of an accrued liability in connection with divestitures of acquired firms		63			317
Stock repurchased in exchange for satisfaction of a note receivable, due from principal and/or certain entities they own and other assets		256			557
Excess (reduction in) tax benefit from stock-based awards exercised/lapsed, net		(3,035	)		(891	)
Accrued liability for contingent consideration	$	7,554		$	6,633

Note 9 - Commitments and Contingencies

Legal matters

In the ordinary course of business, the Company is involved in lawsuits and other claims. Management considers these lawsuits and claims to be without merit and the Company intends to defend them vigorously. In addition, the sellers of firms that the Company acquires typically indemnify the Company for loss or liability resulting from acts or omissions occurring prior to the acquisition, whether or not the sellers were aware of these acts or omissions. Several of the existing lawsuits and claims have triggered these indemnity obligations.

In addition to the foregoing lawsuits and claims, during 2004, several of the Company’s firms received subpoenas and other informational requests from governmental authorities, including the New York Attorney General’s Office, seeking information regarding compensation arrangements, any evidence of bid rigging and related matters. The Company has cooperated and will continue to cooperate fully with all governmental agencies.

In March 2006, NFP received a subpoena from the New York Attorney General’s Office seeking information regarding life settlement transactions. One of NFP’s subsidiaries received a subpoena seeking the same information. The Company is cooperating fully with the Attorney General’s investigation. The investigation, however, is ongoing and the Company is unable to predict the investigation’s outcome.

Management continues to believe that the resolution of these lawsuits or claims will not have a material adverse impact on the Company’s consolidated financial position.

The Company cannot predict at this time the effect that any current or future regulatory activity, investigations or litigation will have on its business. Given the current regulatory environment and the number of its subsidiaries operating in local markets throughout the country, it is possible that the Company will become subject to further governmental inquiries and subpoenas and have lawsuits filed against it. In addition, the stock market continues to experience significant price and volume fluctuations. When the market price of a company’s stock drops significantly, shareholders may institute securities class action litigation against that company. Any litigation against NFP could cause it to incur substantial costs, divert the time and attention of management and other resources, or otherwise harm the Company’s business. The Company’s ultimate liability, if any, in connection with these matters and any possible future such matters is uncertain and subject to contingencies that are not yet known.

Contingent consideration arrangements

The maximum contingent payment which could be payable as purchase consideration based on commitments outstanding as of June 30, 2009 is as follows:

(in thousands)	2009		2010		2011		2012		Thereafter
Maximum contingent payments payable as purchase consideration	$	77,955	$	117,853	$	79,276	$	241	$	400

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2009—(Continued)

(Unaudited)

Performance incentives

Management fees include an accrual for certain performance-based incentive amounts payable under NFP’s ongoing incentive program. Incentive amounts are paid in a combination of cash and NFP’s common stock. In addition to the incentive award, NFP pays an additional cash incentive equal to 50% of the incentive award elected to be received in the form of NFP’s stock. This election is made subsequent to the completion of the incentive period. For firms that began their incentive period prior to January 1, 2005, the principal can elect from 0% to 100% to be paid in NFP’s common stock. No accrual is made for these additional cash incentives until the related election is made. However, for firms beginning their incentive period on or after January 1, 2005 (with the exception of Highland Capital Holding Corporation firms which completed this incentive period in 2008), the principal is required to take a minimum of 30% (maximum 50%) of the incentive award in common stock. The Company accrues on a current basis for these firms the additional cash incentive (50% of the stock portion of the award) based upon the principal’s election or the minimum percentage required to be received in NFP stock. As of June 30, 2009, the maximum additional payment for this cash incentive that could be payable for all firms was approximately $0.4 million. Currently, NFP has elected to pay all incentive awards under this plan in cash.

2009 Principal Incremental Incentive Plan

For the year beginning January 1, 2009, NFP instituted the 2009 Principal Incremental Incentive Plan (the “2009 Plan”). The terms of the 2009 Plan provide that if NFP’s organic gross margin increases in 2009 relative to 2008, NFP will fund a new incentive pool (the “2009 Incentive Pool”) which will be equal to 50% of NFP’s organic gross margin increase. Generally, the 2009 Incentive Pool will be allocated pro rata with each firm’s contribution to organic gross margin growth. As of June 30, 2009 the Company has not accrued any amounts relating to the 2009 Plan. As of the second quarter of 2009, the Company refers to its “same store” metrics as organic metrics.

Self insured medical plan

Effective January 1, 2008, the Company is primarily self insured for medical insurance benefits provided to employees, and purchases insurance to protect the Company against claims, both on an individual and in aggregate basis, above certain levels. A health insurance carrier adjudicates and processes employee claims and is paid a fee for these services. The Company reimburses the health insurance carrier for paid claims. The Company estimates its exposure for claims incurred but not paid using historical census and other information provided by its health insurance carrier and other professionals. The Company has $2.9 million accrued for self insurance liabilities at June 30, 2009. As of June 30, 2008, the Company accrued $1.4 million for self insurance liabilities. As of December 31, 2008, the Company accrued $2.1 million for self insurance liabilities.

Deferred compensation plan

On March 25, 2009, NFP amended and restated its non-qualified deferred compensation plan for a select group of management and highly compensated employees of NFP, NFP Securities, Inc. and NFP Insurance Services, Inc. The plan is designed to aid NFP in retaining and attracting executive employees by providing them with tax-deferred savings opportunities. Under the plan, participants may elect to defer receipt of a portion of their annual eligible compensation. Amounts deferred under the plan are invested at the direction of the participant. NFP may make a matching contribution of up to 50% of the first 6% of the participant’s eligible compensation, not to exceed the participant’s deferred amounts. Matching contributions, if any, are credited to the participant’s deferral account as of the last day of each plan year. 50% of all matching contributions, plus an additional amount equal to 10% of such matching contributions is deemed to be invested in an NFP stock fund, and the remaining 50% of the matching contributions is allocated to other hypothetical investments selected by the participant. The participants are 100% vested in their deferred amounts at all times. Matching contributions shall vest based on a participant’s number of years of service. Subject to the terms of the plan, distributions from a participant’s deferral account will occur upon the end of the deferral period, upon death or disability, upon the occurrence of unforeseeable emergencies or upon separation of service. A maximum of 25% of deferred compensation may be invested in the NFP stock fund. 50% of future matching contributions, if any, shall be required to be invested in the NFP stock fund. As of June 30, 2009, the Company’s deferred compensation liability balance was $1.9 million. As of June 30, 2008, the Company’s deferred compensation liability balance was $0.6 million. As of December 31, 2008, the Company's deferred compensation liability balance was $1.5 million. NFP has decided that no matching contributions will be made for base compensation or incentive compensation earned for service in 2009.

Note 10 – Subsequent Events

The Company adopted SFAS 165 in June 2009 and evaluated subsequent events from July 1, 2009 through August 5, 2009. Through August 5, 2009, the Company did not have any significant subsequent events to report.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Company’s consolidated financial statements and the related notes included elsewhere in this report. In addition to historical information, this discussion includes forward-looking information that involves risks and assumptions, which could cause actual results to differ materially from management’s expectations. See “Forward-Looking Statements” included elsewhere in this report.

Executive Overview

The Company is a leading independent distributor of financial services products primarily to high net worth individuals and companies. Founded in 1998 and commencing operations on January 1, 1999, NFP has grown internally and through acquisitions and as of June 30, 2009, operates a national distribution network with over 165 firms. During the six months ended June 30, 2009, revenue decreased $132.7 million, or 23.1%, to $441.2 million from $573.9 million during the six months ended June 30, 2008. The Company experienced a net loss of $505.8 million for the six months ended June 30, 2009, a decrease of $523.2 million from net income of $17.4 million during the six months ended June 30, 2008. The net loss was due to a substantial increase in the level of impairment of goodwill and intangible assets from $5.0 million for the six months ended June 30, 2008 to $610.2 million for the six months ended June 30, 2009. Excluding the after tax impact of impairments, the net income decline was a result of lower revenue, particularly in life insurance, partially offset by declines in cost of services and general and administrative expense.

The Company’s firms earn revenue that consists primarily of commissions and fees earned from the sale of financial products and services to their clients. The Company’s firms also incur commissions and fees expense and operating expense in the course of earning revenue. NFP pays management fees to non-employee principals of its firms and/or certain entities they own based on the financial performance of each respective firm. The Company refers to revenue earned by the Company’s firms less the expenses of its firms, including management fees, as gross margin. The Company excludes amortization and depreciation from gross margin. These amounts are separately disclosed as part of Corporate and other expenses. Management uses gross margin as a measure of the performance of the firms that the Company has acquired. Gross margin declined from $101.8 million, or 17.7% of revenue, during the six months ended June 30, 2008 to $77.4 million, or 17.5% of revenue, during the six months ended June 30, 2009. Gross margin percentage remained largely stable despite the decrease in revenue as a result of decreases in the variable components of the Company’s cost structure.

The Company’s gross margin is offset by expenses that NFP incurs at the corporate level, including corporate and other expenses. Corporate and other expenses increased from $55.9 million during the six months ended June 30, 2008 to $660.2 million during the six months ended June 30, 2009. Corporate and other expenses include general and administrative expense, amortization, depreciation, impairment of goodwill and intangible assets, and (gain) loss on sale of subsidiaries. General and administrative expense includes the operating expenses of NFP’s corporate headquarters and a portion of stock-based compensation. General and administrative expense declined from $32.4 million during the six months ended June 30, 2008 to $24.9 million during the six months ended June 30, 2009. General and administrative expense as a percentage of revenue remained stable at 5.6% during the six months ended June 30, 2009.

During the first quarter of 2009, the Company recognized an impairment charge of $607.3 million and an impairment charge of $2.9 million during the second quarter. This represented a significant increase from impairments of $5.0 million in the prior year period. The increase in the impairment charge reflected the incorporation of market data, including NFP’s market value which had remained below net book value, the recent performance of the Company in the recessionary economic environment, discount rates that are risk adjusted to reflect both company-specific and market-based credit spreads and other relevant market data. Among other items, the market value reflected the stressed macroeconomic environment and its impact on the Company’s sales, particularly in the life insurance area, and the Company’s capital structure. As a result, the Company recognized an impairment charge of $610.2 during the six months ended June 30, 2009.

Many external factors affect the Company’s revenue and profitability, including economic and market conditions, legislative and regulatory developments and competition. Because many of these factors are unpredictable and generally beyond the Company’s control, the Company’s revenue and earnings will fluctuate from year to year and quarter to quarter. In the second quarter of 2009, the Company’s gross margin remained largely stable despite the decrease in revenue as a result of the variable components of the Company’s cost structure. The revenue decline was heavily concentrated in retail life, life brokerage and settlements revenue. Corporate and executive benefits, financial planning and investment advisory revenue all declined for the six month period ended June 30, 2009 but at a much lower rate than did life insurance.

The disruption in the global credit markets and the deterioration of the financial markets generally have created increasingly difficult conditions for companies in the financial services industry. In particular, poor economic conditions during the latter part of 2008 continued during the first six months of 2009. Continued financial market volatility and a recessionary economic environment may reduce the demand for the Company’s services or the products the Company distributes and could negatively affect the Company’s results of operations and financial condition. The potential for a significant insurer to experience economic stress or withdraw from writing certain types of insurance the Company currently offers its customers could negatively impact the availability of certain types of insurance and represent potentially reduced revenue and profitability for the Company.

In light of the financial environment, NFP has taken certain steps to streamline operations and conserve available cash and continues to explore further expense reductions. With the exception of certain sub-acquisitions, NFP does not anticipate completing acquisitions until market conditions and financial results stabilize. NFP continues to consider actions designed to strengthen its financial position, including evaluating its capital structure or further reducing indebtedness.

Acquisitions

While acquisitions remain a component of the Company’s business strategy over the long term, NFP suspended acquisition activity (with the exception of certain sub-acquisitions) in the latter part of 2008 in order to conserve cash. NFP will continue to reassess the market and economic environment. Under NFP’s typical acquisition structure, NFP acquires 100% of the equity of businesses that distribute financial services products on terms that are relatively standard across its acquisitions. To determine the acquisition price, NFP’s management first estimates the annual operating cash flow of the business to be acquired based on current levels of revenue and expense. For this purpose, management defines operating cash flow as cash revenue of the business less cash and non-cash expenses, other than amortization, depreciation and compensation to the business’ owners or individuals who subsequently become principals. Management refers to this estimated annual operating cash flow as “target earnings.” Typically, the acquisition price is a multiple (generally in a range of five to six times) of a portion of the target earnings, which management refers to as “base earnings.” Under certain circumstances, NFP has paid multiples in excess of six times based on the unique attributes of the transaction that in the Company’s view justify the higher value. Base earnings averaged 54% of target earnings for all firms owned at June 30, 2009. This percentage can vary based on the percentage of base earnings acquired, disposed, and/or restructured. In determining base earnings, management focuses on the recurring revenue of the business. Recurring revenue refers to revenue from sales previously made (such as renewal commissions on insurance products, commissions and administrative fees for ongoing benefits plans and mutual fund trail commissions) and fees for assets under management.

NFP enters into a management agreement with principals and/or certain entities they own. Under the terms of the management agreement, the principals and/or such entities are entitled to management fees consisting of:

•

all future earnings of the acquired business in excess of the base earnings up to target earnings; and

•

a percentage of any earnings in excess of target earnings generally based on the ratio of base earnings to target earnings.

NFP retains a cumulative preferred position in the base earnings. To the extent earnings of a firm in any year are less than base earnings, in the following year NFP is entitled to receive base earnings together with the prior years’ shortfall before any management fees are paid. In certain recent transactions involving large institutional sellers, the Company has provided minimum guaranteed compensation to certain former employees of the seller who became principals of the acquired business.

Additional purchase consideration is often paid to the former owners based on satisfying specified internal growth thresholds over the three-year period following the acquisition.

Sub-acquisitions

A sub-acquisition involves the acquisition by one of the Company’s firms of a business that is generally too small to qualify for a direct acquisition by NFP or where the individual running the business wishes to exit immediately or soon after the acquisition, prefers to partner with an existing principal or does not wish to become a principal. The acquisition multiple paid for sub-acquisitions is typically lower than the multiple paid for a direct acquisition by NFP.

Substantially all of NFP’s acquisitions have been paid for with a combination of cash and NFP common stock, valued at the fair market value at the time of acquisition. NFP typically requires its principals to take at least 30% of the total acquisition price in NFP common stock. However, in transactions involving institutional sellers, the purchase price typically consists of substantially all cash. Through June 30, 2009, principals have taken on average approximately 34% of the total acquisition price in NFP common stock. The following table shows acquisition activity (including sub-acquisitions) in the period:

(in thousands, except number of acquisitions)	Six Months Ended June 30, 2009
Number of acquisitions closed		1
Consideration:
Cash	$	279
Common stock		—
Other (1)		186
	$	465

______________

(1)	Represents obligations of the Company associated with this acquisition.

Although management believes that NFP will continue to have opportunities to complete acquisitions once market conditions stabilize, there can be no assurance that NFP will be successful in identifying and completing acquisitions. Any change in the Company’s financial condition or in the environment of the markets in which the Company operates could impact its ability to source and complete acquisitions.

Restructures and Disposals

Certain businesses acquired by NFP have been adversely affected by changes in the markets served, necessitating a change in the economic relationship between NFP and the principals. For the six months ended June 30, 2009, NFP has restructured twenty-two transactions, seventeen of which had not been previously restructured. These restructures generally result in either temporary or permanent reductions in base and target earnings and/or changes in the ratio of base to target earnings and the principals typically paying cash, surrendering NFP common stock, issuing notes or other concessions by principals. As part of the restructures that occurred during the six months ended June 30, 2009, the Company received greater operating control over the restructured firms, including expense control and limitations on management fee advances. Such restructures are an indicator of a need to assess whether an impairment exists. See “—Expenses—Corporate and other expenses—Impairment of goodwill and intangible assets.”

At times, the Company may dispose of firms, certain business units within a firm or firm assets for one or more of the following reasons: non-performance, changes resulting in firms no longer being part of the Company’s core business, change in competitive environment, regulatory changes, the cultural incompatibility of an acquired firm’s management team with the Company, change of business interests of a principal or other issues personal to a principal. In certain instances NFP may sell operating companies back to the principals. Principals generally buy back businesses by surrendering all of their NFP common stock and paying cash or issuing NFP a note. For the six months ended June 30, 2009, NFP has disposed of eight firms and certain assets of two more firms.

Revenue

The Company’s firms generate revenue primarily from the following sources:

•

Corporate and executive benefits commissions and fees. The Company’s firms earn commissions on the sale of insurance policies written for benefits programs. The commissions are paid each year as long as the client continues to use the product and maintains its broker of record relationship with the firm. The Company’s firms also earn fees for the development and implementation of corporate and executive benefits programs as well as fees for the duration that these programs are administered. Asset-based fees are also earned for administrative services or consulting related to certain benefits plans. Incidental to the corporate and executive benefits services provided to their customers, some of the Company’s firms offer property and casualty insurance brokerage and advisory services. The Company believes that these services complement the corporate and executive benefits services provided to the Company’s clients. In connection with these services, the Company earns commissions and fees.

•

Life insurance commissions and estate planning fees. Insurance and annuity commissions paid by insurance companies are based on a percentage of the premium that the insurance company charges to the policyholder. First-year commissions are calculated as a percentage of the first twelve months’ premium on the policy and earned in the year that the policy is originated. In many cases, the Company’s firms receive renewal commissions for a period following the first year. Some of the Company’s firms receive fees for the settlement of life insurance policies. These fees are generally based on a percentage of the settlement proceeds. The Company’s firms also earn fees for developing estate plans. Revenue from life insurance activities also includes amounts received by the Company’s life brokerage entities, including its life settlements brokerage entities, that assists non-affiliated producers with the placement and sale of life insurance.

•

Financial planning and investment advisory fees and securities commissions. The Company’s firms earn commissions related to the sale of securities and certain investment-related insurance products, as well as fees for offering financial advice and related services. These fees are based on a percentage of assets under management and are generally paid quarterly. In a few cases, incentive fees are earned based on the performance of the assets under management. Some of the Company’s firms charge flat fees for the development of a financial plan or a flat fee annually for advising clients on asset allocation.

Some of the Company’s firms also earn additional compensation in the form of incentive and marketing support revenue from manufacturers of financial services products, based on the volume, persistency and profitability of business generated by the Company from these three sources. Incentive and marketing support revenue is recognized at the earlier of notification of a payment or when payment is received, unless historical data or other information exists which enables management to reasonably estimate the amount earned during the period. These forms of payments are earned both with respect to sales by the Company’s owned firms and sales by NFP’s affiliated third-party distributors.

NFP Securities, Inc. (“NFPSI”), NFP’s registered broker-dealer and investment adviser, also earns commissions and fees on the transactions effected through it. Most principals of the Company’s firms, as well as many of the Company’s affiliated third-party distributors, conduct securities or investment advisory business through NFPSI.

Although NFP’s operating history is limited, historically a significant number of its firms earn approximately 65% to 70% of their revenue in the first three quarters of the year and approximately 30% to 35% of their revenue in the fourth quarter. In 2008, NFP earned 26% of its revenue in the fourth quarter. The Company believes that the continuation of a difficult economic environment punctuated by a deterioration in credit and liquidity, investment losses and a reduction in consumer confidence may result in a change in this historical pattern for the year ended December 31, 2009, as was the case for the year ended December 31, 2008.

Expenses

The following table sets forth certain expenses as a percentage of revenue for the periods indicated:

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
Total revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of services:
Commissions and fees	27.9		32.7		28.3		33.2
Operating expenses	40.7		34.9		42.3		35.6
Management fees	13.3		14.2		11.9		13.5
Total cost of services (excludes items shown separately below)	81.9		81.8		82.5		82.3
Gross margin	18.1		18.2		17.5		17.7
Corporate and other expenses:
General and administrative	5.4		5.6		5.6		5.6
Amortization	4.1		3.4		4.3		3.4
Depreciation	1.6		1.1		1.6		1.1
Impairment of goodwill and intangible assets	1.3		1.0		138.3		0.9
Loss (gain) on sale of subsidiaries	(0.6	)	(0.2	)	(0.2	)	(1.3	)
Total corporate and other expenses	11.8	%	10.9	%	149.6	%	9.7	%

Cost of services

Commissions and fees. Commissions and fees are typically paid to third-party producers, who are producers that are affiliated with the Company’s firms. Commission and fees are also paid to non-affiliated producers who utilize the services of one or more of the Company’s life brokerage entities including the Company’s life settlements brokerage entities. Commissions and fees are also paid to non-affiliated producers who provide referrals and specific product expertise to NFP’s firms. When business is generated solely by a principal, no commission expense is incurred because principals are only paid from a share of the cash flow of the acquired firm through management fees. However, when income is generated by a third-party producer, the producer is generally paid a portion of the commission income, which is reflected as commission expense of the acquired firm. Rather than collecting the full commission and remitting a portion to a third-party producer, a firm may include the third-party producer on the policy application submitted to a carrier. The carrier will, in these instances, directly pay each named producer their respective share of the commissions and fees earned. When this occurs the firm will record only the commissions and fees it receives directly as revenue and have no commission expense. As a result, the NFP firm will have lower revenue and commission expense and a higher gross margin percentage. Gross margin dollars will be the same. The transactions in which an NFP firm is listed as the sole producer and pays commissions to a third-party producer, versus transactions in which the carrier pays each producer directly, will cause NFP’s gross margin percentage to fluctuate without affecting gross margin dollars or earnings. In addition, NFPSI pays commissions to the Company’s affiliated third-party distributors who transact business through NFPSI.

Operating expenses. The Company’s firms incur operating expenses related to maintaining individual offices, including compensating producing and non-producing staff. Firm operating expenses also include the expenses of NFPSI and of NFP Insurance Services, Inc. (“NFPISI”), two subsidiaries that serve the Company’s acquired firms and through which the Company’s acquired firms and its third-party distributors who are members of its marketing organizations access insurance and financial services products and manufacturers. The Company records share-based payments related to firm employees and firm activities to operating expenses as a component of cost of services.

Management fees. NFP pays management fees to the principals of its firms and/or certain entities they own based on the financial performance of the firms they manage. NFP typically pays a portion of the management fees monthly in advance. Once NFP receives its cumulative preferred earnings (base earnings) from a firm, the principals and/or entity the principals own will earn management fees equal to earnings above base earnings up to target earnings. An additional management fee is paid in respect of earnings in excess of target earnings based on the ratio of base earnings to target earnings. For example, if base earnings equal 40% of target earnings, NFP receives 40% of earnings in excess of target earnings and the principals and/or the entities they own receives 60%. A majority of the Company’s acquisitions have been completed with a ratio of base earnings to target earnings of 50%. Management fees also include an accrual for certain performance-based incentive amounts payable under NFP’s ongoing incentive plan. Incentive amounts are paid in a combination of cash and NFP’s common stock. In addition to the incentive award, NFP pays an additional cash incentive equal to 50% of the incentive award elected to be received in NFP common stock. This election is made subsequent to the completion of the incentive period. For firms that began their incentive period prior to January 1, 2005, the principal could elect from 0% to 100% to be paid in NFP’s common stock. No accrual is made for these additional cash incentives until the incentive award is earned and the related election is made. However, for firms beginning their incentive period on or after January 1, 2005 (with the exception of Highland Capital Holding Corporation firms which completed this incentive period in 2008), the principal is required to take a minimum of 30% (maximum of 50%) of the incentive award in NFP common stock. The Company accrues on a current basis for these firms the additional cash incentive (50% of the stock portion of the award based upon the principal’s election) on the minimum percentage required to be received in company stock. Currently, NFP has elected to pay all incentive awards under this plan in cash. Management fees are reduced by amounts paid by the principals and/or certain entities they own under the terms of the management agreement for capital expenditures, including sub-acquisitions, in excess of $50,000. These amounts may be paid in full or over a mutually agreeable period of time and are recorded as a “deferred reduction in management fees.” Amounts recorded in deferred reduction in management fees are amortized as a reduction in management fee expense generally over the useful life of the asset. The ratio of management fees to gross margin before management fees is dependent on the percentage of total earnings of the Company’s firms capitalized by the Company, the performance of the Company’s firms relative to base earnings and target earnings, the growth of earnings of the Company’s firms in the periods after their first three years following acquisition and the earnings of NFPISI, NFPSI and a small number of firms without a principal, to whom which no management fees are paid. Due to NFP’s cumulative preferred position, if a firm produces earnings below target earnings in a given year, NFP’s share of the firm’s total earnings would be higher for that year. If a firm produces earnings at or above target earnings, NFP’s share of the firm’s total earnings would be equal to the percentage of the earnings capitalized by NFP in the initial transaction, less any percentage due to additional management fees earned under the ongoing incentive plan. The Company records share-based payments related to principals as management fees which are included as a component of cost of services.

The table below summarizes the results of operations of NFP’s firms for the periods presented and uses the following non-GAAP measures (i) gross margin before management fees, (ii) gross margin before management fees as a percentage of total revenue and (iii) management fees, as a percentage of gross margin before management fees. Gross margin before management fees represents the profitability of the Company’s business before principals receive participation in the earnings. Gross margin before management fees as a percentage of total revenue represents the base profitability of the Company divided by the total revenue of the Company’s business. Whether or not a principal participates in the earnings of a firm is dependent on the specific characteristics and performance of that firm. Management fees as a percentage of gross margin before management fees represents the percentage of earnings that is not retained by the Company as profit, but is paid out to principals.

The Company uses gross margin before management fees and gross margin before management fees as a percentage of total revenue to evaluate how the Company’s business is performing before giving consideration to a principal’s participation in their firm’s earnings. This measure is one for which the principal is compensated and reflects the principal’s performance and is a result of their direct operating authority and control. Management fees as a percentage of gross margin before management fees is a measure that management uses to evaluate how much of the Company’s margin and margin growth is being shared with principals. This management fee percentage is a variable, not a fixed, ratio. Management fees as a percentage of gross margin before management fees will fluctuate based upon the aggregate mix of earnings performance by individual firms. It is based on the percentage of the Company’s earnings that are capitalized at the time of acquisition, the performance relative to NFP’s preferred position in the earnings and the growth of the individual firms and in the aggregate. Management fees may be higher during periods of strong growth due to the increase in incentive accruals. Higher firm earnings will generally be accompanied by higher incentive accruals. Where firm earnings decrease, management fees and management fee percentage may be lower as incentive accruals are either reduced or eliminated. Further, since NFP retains a cumulative preferred interest in base earnings, the relative percentage of management fees generally decreases as firm earnings decline. For firms that do not achieve base earnings, principals earn no management fee. Thus, a principal generally earns more management fees only when firm earnings grow and, conversely, principals earn less when firm earnings decline. This structure provides the Company with protection against earnings shortfalls through reduced management fee expense; in this manner the interests of the principals and shareholders remain aligned.

Management uses these non-GAAP measures to evaluate the performance of its firms and the results of the Company’s model. This cannot be effectively illustrated using the corresponding GAAP measures as management fees would be included in these GAAP measures and produce a less meaningful measure for this evaluation. On a firm-specific basis the Company uses these measures to help the Company determine where to allocate corporate and other resources to assist firm principals to develop additional sources of revenue and improve their earnings performance. The Company may assist these firms in expense reductions, cross selling, providing new products or services, technology improvements, providing capital for sub-acquisitions or coordinating internal mergers. On a macro level, the Company uses these measurements to help it evaluate broad performance of products and services which, in turn, helps shape the Company’s acquisition policy. In recent years, the Company has emphasized acquiring businesses with a higher level of recurring revenue, such as benefits businesses, and those which expand the Company’s platform capabilities. The Company also may use these measures to help it assess the level of economic ownership to retain in new acquisitions or existing firms. Finally, the Company uses these measures to monitor the effectiveness of its ongoing incentive plan.

Management fees were 40.4% of gross margin before management fees for the six months ended June 30, 2009 compared with 43.3% for the three months ended June 30, 2008. As gross margin before management fees as a percentage of total revenue has decreased, the principals’ percentage participation in these earnings has also declined.

Three Months Ended
June 30,

Six Months Ended
June 30,

2009

2008

2009

2008

(dollars in thousands)

Revenue:

National Financial Partners (NFP)

Annual Reports

Quarterly Reports

8-K

Other

Documents found in this filing: