Losing Faith in National Financial Partners

IT WAS A HAPPY MOMENT in September 2003, when Jessica Bibliowicz rang the New York Stock Exchange bell to celebrate the IPO of her insurance sales company National Financial Partners. The 43-year-old chief executive wasn't in the shadow of her dad Sandy Weill, famous for putting together Travelers insurance and then Citigroup. He was on the trading floor proudly looking up at her.

The outlook's less bright now for Bibliowicz's company, which goes by the name and ticker NFP. In the past five months, shares of the New York City-based business have fallen from near 57 to below their initial offering price of 23. Sputtering sales and management turnover have left many investors doubtful of Bibliowicz's claim that her business is more than a "roll-up" of the 186 life-insurance brokers it's acquired in a decade. Without counting acquired revenues, the "gross profit" dollars that NFP got from its brokers actually declined in the last two years

NFP CEO Jessica Bibliowicz: "Our [deal] pipeline is very healthy."

"It's a little depressing because I don't think it's justified," says broker John T. Cash III, of the stock's drop. His Orlando firm was among the first to join NFP. He's continued to buy its shares. But NFP's largest early investor is all but gone from the stock: The private-equity firm Apollo Advisors got Bibliowicz's company to buy back 2.3 million of its shares last year when they were still going for $46.35.

Bibliowicz says NFP's business is good and its acquisitions ongoing. "Our pipeline is very healthy," she says. "We have not lost transactions because of stock price." The chief executive wants to diversify NFP revenues beyond the volatile life-insurance market into benefits, and she is working to redefine one of the components of the company's post-IPO growth: "life-settlement" contracts. NFP brokers were among the country's biggest producers of these transactions, in which an elderly person sells his life-insurance policy to investors for a lump of cash. But the life-settlement market cooled as regulators and consumers heard customers complain they'd been swindled. TV talk-show host Larry King is suing one of NFP's star brokers, in California State and federal courts over the product. NFP and the broker deny wrongdoing, and say King's advisers approved the deal.

Other stars in the NFP firmament are in situations that are strange for tax-advising professionals. The NFP broker with the biggest stake at the time of the IPO is being pursued in federal court by the Internal Revenue Service for over $800,000 in taxes and penalties unpaid for a decade. Another broker put her NFP stock into a Virgin Islands tax shelter whose promoters promise to help customers cut U.S. income taxes by 90%. The shelter even listed NFP as an "affiliated client" until Barron's asked about it last week. NFP had its name removed from the tax shelter's Website.

Industry roll-ups often lose steam because of a hazard similar to the insurance problem of adverse selection: the business owners most eager to sell are those looking to cash out and put their feet up. NFP structures buyouts to motivate productive brokers to keep revenue growing, but well-meant incentives haven't been enough lately. Last year's sales growth by brokers acquired five or more years ago was anemic -- and that doesn't account for dozens of NFP firms that didn't survive through 2007.

A depreciating stock price drives a vicious cycle for NFP, demoralizing acquired brokers and making future acquisitions dilutive. "It's one of these things that unravels as the price drops," says Mark Roberts, an influential stock analyst in Cambridge, Mass., whose Off Wall Street Consulting Group dissected NFP's ailments in a January report that probably contributed to the stock's sell-off.

At its sunken level, NFP stock might seem cheap at just eight times the $2.86 a share it says it earned in 2007 (when it also gave out 75 cents in dividends) -- but those earnings are a pro-forma number that ignores large non-cash expenses from amortizing all those buyouts and writing off the failures. The company's GAAP earnings were $1.35. "The stock is going to sink a lot more," predicts Roberts. "This business doesn't work."

NFP WAS THE BRAINCHILD OF Jerome J. Schwartz, who convinced Apollo to put up $125 million to combine his Los Angeles insurance business with that of two other entrepreneurs from Austin, Texas. In 1999, they recruited Bibliowicz to run the show. She was sharp, outgoing and eager to prove herself after an inconclusive stint running the mutual-fund business at her dad's Smith Barney.

NFP started buying little independent life-insurance firms that catered to affluent Baby Boomers. By September 2003, the company had acquired 132 firms. The sellers of those firms obviously wanted to monetize their businesses, but NFP structured the acquisitions to discourage sellers from taking the money and retiring. "This is anything but an exit strategy," says Bibliowicz.

In a typical acquisition, NFP pays about 2½ times a firm's cash earnings, with the payment made up of at least 30% NFP stock and the rest cash. For the next three years, NFP gets half of the firm's earnings above an agreed-upon base level, with the rest going to the firm's principals along with bonuses if the firm grows at least 10% a year. After the first three-year cycle, NFP raises the bar with another three-year contract.

The Bottom Line:

Even after losing more than half their value, NFP shares still look vulnerable. Using GAAP figures substantially trims the company's pro-forma earnings figures.

By NFP's September 2003 initial offering, the parent firm's share of the network's earnings -- which NFP calls its gross profit -- was growing at a better than 30% annual rate. NFP says its incentives have kept its "partner" firms entrepreneurial, while the parent company focuses on supplying insurance and investment products, accounting systems and capital for firms that want to make their own sub-acquisitions. Jordan R. Katz chairs the advisory council of NFP member firms, and he says that his Northbrook, IL, firm has doubled its annual earnings since joining NFP in 2000, with much of that due to collaborations with other NFP members.

For the first couple of years after the IPO, life-insurance sales kept booming, especially in the life-settlement market.

But regulators in New York and Florida started crackdowns on life-settlement abuses. In Larry King's California lawsuits, he says that NFP partner Alan L. Meltzer violated fiduciary duties by convincing the TV star to accept just $1.4 million for policies that could eventually have provided $15 million in benefits. Asking for dismissal of the complaint, Meltzer denies he was King's fiduciary and says King's lawyer and advisers approved the deal.

Bibliowicz says life settlements get cash to consumers whose insurance needs have changed. But cooled demand for the products is partly to blame for the collapse in "same-store sales" growth at NFP firms. NFP tells investors in its shares to watch "cash" earnings, which don't include losses from 44 restructured or shuttered acquisitions. As Barron's warily noted back at the time of NFP's IPO, that's like ignoring a bank's bad loans ("Betting on Bibliowicz," Sept. 29, 2003). GAAP earnings have fallen for two years running, and two top NFP executives recently departed their jobs.

In contrast to NFP, sales rose 75% last year to $2 billion for Portland, Ore.-based M Financial Group, a co-op of life-insurance sellers that decided against a roll-up model. Chief Executive Fred Jonske believes NFP can't replace the rainmakers who've harvested their firms' value in selling to NFP. "The roll-up model makes it very difficult to hire the future entrepreneurs."

And the loose-knit independence of NFP's partners can result in strange situations, like that of John T. Bourger, a New York-area partner whose family trust held more NFP shares at the IPO than anyone but Apollo. Lafayette College renamed its football field after him. But the IRS has sued Bourger in a Trenton, N.J. federal district court seeking $800,000 in back taxes and interest. Bourger didn't respond to inquiries from Barron's, and Bibliowicz wouldn't comment. In pleadings Bourger says the IRS seeks more than he rightly owes.

Almost as odd is the case of Sherry Spalding-Fardie, a South Florida-based NFP partner featured at the company's first analyst meeting. She initially listed her large NFP stake in her own name, but in subsequent share offerings it appeared as "Clearwater Consulting Concepts LLLP," a Virgin Islands tax shelter created by some controversial Arkansas promoters. After Barron's called Spalding-Fardie's Florida office, we heard back from NFP's Bibliowicz, who said Spalding-Fardie is a full-time Virgin Islands resident who says she pays all appropriate U.S. taxes.

Bibliowicz assured us that Spalding-Fardie was still producing for NFP.

That's great, but there do seem to be some partners who've stopped producing, on the evidence of NFP's overall numbers. "With roll-ups, it's difficult up front to separate acquisition growth from organic growth," says M Financial's Jonske. "But ultimately it will be found out."