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 SEPTEMBER 30, 2012

or

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

FOR THE TRANSITION PERIOD FROM              TO             

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, 20th 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  ¨

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   x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a 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	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	¨

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

The number of outstanding shares of the registrant’s Common Stock, $0.10 par value, as of October 25, 2012 was 39,836,091.

National Financial Partners Corp. and Subsidiaries

Form 10-Q

INDEX

			Page
Part I Financial Information:
	Item 1.	Financial Statements (Unaudited):		4
		Consolidated Statements of Financial Condition as of September 30, 2012 and December 31, 2011		4
		Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2012 and 2011		5
		Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011		6
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011		7
		Notes to Consolidated Financial Statements		8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		50
	Item 4.	Controls and Procedures		51
Part II Other Information:
	Item 1.	Legal Proceedings		51
	Item 1A.	Risk Factors		51
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		51
	Item 5.	Other Information		52
	Item 6.	Exhibits		53
	Signatures			54

2

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, 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. 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 risks and uncertainties include, without limitation: (1) the ability of the Company to implement its business initiatives, including increasing recurring revenue and executing management contract buyouts; (2) NFP’s ability, through its operating structure, to respond quickly to operational, financial or regulatory situations impacting its businesses; (3) the ability of the Company’s businesses to perform successfully following acquisition, including through the diversification of product and service offerings, and NFP’s ability to manage its business effectively and profitably through its principals and employees and through the Company’s reportable segments; (4) any losses or charges that NFP may take with respect to dispositions, restructures, the collectability of amounts owed to it, impairments or otherwise; (5) seasonality or an economic environment that results in fewer sales of financial products or services; (6) NFP’s success in acquiring and retaining high-quality independent financial services businesses and their managers and key producers, and the ability of the Company to retain its broker-dealers’ financial advisors and recruit new financial advisors; (7) changes in premiums and commission rates or the rates of other fees paid to the Company’s businesses, due to requirements related to medical loss ratios stemming from the Patient Protection and Affordable Care Act or otherwise; (8) NFP’s ability to operate effectively within the restrictive covenants of its credit facility; (9) changes that adversely affect NFP’s ability to manage its indebtedness or capital structure, including changes in interest rates or credit market conditions; (10) the impact of capital markets behavior, such as fluctuations in the price of NFP’s common stock, or the dilutive impact of capital raising efforts; (11) adverse results or other consequences from matters including litigation, arbitration, settlements, regulatory investigations or compliance initiatives, such as those related to business practices, compensation agreements with insurance companies, policy rescissions or chargebacks, or activities within the life settlements industry; (12) the impact of legislation or regulations on NFP’s businesses, such as the possible adoption of exclusive federal regulation over interstate insurers, the uncertain impact of legislation regulating the financial services industry, such as the recent Dodd-Frank Wall Street Reform and Consumer Protection Act, the impact of the adoption of the Patient Protection and Affordable Care Act and resulting changes in business practices, potential changes in estate tax laws, or changes in regulations affecting the value or use of benefits programs, any of which may adversely affect the demand for or profitability of the Company’s services; (13) adverse developments in the Company’s markets, such as those related to compensation agreements with insurance companies or activities within the life settlements industry, which could result in decreased sales of financial products or services; (14) the effectiveness or financial impact of NFP’s incentive plans; (15) the impact of the adoption or change in interpretation of certain accounting treatments or policies and changes in underlying assumptions relating to such treatments or policies, which may lead to adverse financial statement results; (16) the loss of services of key members of senior management; (17) failure by the Company’s broker-dealers to comply with net capital requirements; (18) the Company’s ability to compete against competitors with greater resources, such as those with greater name recognition; (19) developments in the availability, pricing, design, tax treatment or underwriting of insurance products, including insurance carriers’ potential change in accounting for deferred acquisition costs, revisions in mortality tables by life expectancy underwriters or changes in the Company’s relationships with insurance companies; (20) 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; (21) the occurrence of adverse economic conditions or an adverse legal or regulatory climate in New York, Florida or California; and (22) the Company’s ability to effect smooth succession planning.

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, 2011, filed with the SEC on February 13, 2012.

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.

3

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)

	September 30,			December 31,
	2012			2011
ASSETS
Current assets:
Cash and cash equivalents	$	80,646		$	135,239
Fiduciary funds—restricted related to premium trust accounts		75,762			75,503
Commissions, fees, and premiums receivable, net		116,256			119,945
Due from principals and/or certain entities they own		9,380			4,308
Notes receivable, net		3,921			4,224
Deferred tax assets		10,209			10,209
Other current assets		39,193			18,706
Total current assets		335,367			368,134
Property and equipment, net		30,611			33,937
Deferred tax assets		4,055			5,023
Intangibles, net		310,708			320,066
Goodwill, net		138,043			102,039
Notes receivable, net		23,399			23,661
Other non-current assets		29,110			41,307
Total assets	$	871,293		$	894,167
LIABILITIES
Current liabilities:
Premiums payable to insurance carriers	$	85,280		$	74,145
Current portion of long term debt		12,500			12,500
Income taxes payable		—			3,045
Due to principals and/or certain entities they own		21,632			37,886
Accounts payable		20,819			30,584
Accrued liabilities		65,583			70,855
Total current liabilities		205,814			229,015
Long term debt		99,375			93,750
Deferred tax liabilities		1,679			1,605
Convertible senior notes		95,428			91,887
Other non-current liabilities		70,523			71,960
Total liabilities		472,819			488,217
STOCKHOLDERS’ EQUITY
Preferred stock, $0.01 par value: Authorized 200,000 shares; none issued		—			—
Common stock, $0.10 par value: Authorized 180,000 shares; 47,046 and 46,656 issued and 39,913 and 40,749 outstanding, respectively		4,704			4,665
Additional paid-in capital		905,178			905,774
Accumulated deficit		(383,028	)		(391,202	)
Treasury stock, 7,133 and 5,907 shares, respectively, at cost		(127,523	)		(112,278	)
Accumulated other comprehensive loss		(857	)		(1,009	)
Total stockholders’ equity		398,474			405,950
Total liabilities and stockholders’ equity	$	871,293		$	894,167

See accompanying notes to consolidated financial statements.

4

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenue:
Commissions and fees	$	252,036		$	251,531		$	761,603		$	724,230
Operating expenses:
Commissions and fees		76,169			80,297			237,292			236,283
Compensation expense—employees		72,667			66,601			216,716			197,119
Fees to principals		30,055			33,201			89,908			89,709
Non-compensation expense		40,715			39,252			120,162			114,832
Amortization of intangibles		8,480			8,348			24,969			24,207
Depreciation		2,973			3,126			9,232			9,240
Impairment of goodwill and intangible assets		18,407			2,466			31,194			3,386
(Gain) Loss on sale of businesses, net		(439	)		40			(4,837	)		53
Change in estimated acquisition earn-out payables		1,085			53			7,988			53
Management contract buyout		—			—			7,537			—
Total operating expenses		250,112			233,384			740,161			674,882
Income from operations		1,924			18,147			21,442			49,348
Non-operating income and expenses
Interest income	$	617		$	700		$	1,886		$	2,600
Interest expense		(4,173	)		(4,006	)		(12,440	)		(11,751	)
Other, net		1,229			1,303			3,181			5,819
Non-operating income and expenses, net		(2,327	)		(2,003	)		(7,373	)		(3,332	)
(Loss) income before income taxes		(403	)		16,144			14,069			46,016
Income tax (benefit) expense		(454	)		6,823			3,534			20,329
Net income	$	51		$	9,321		$	10,535		$	25,687
Earnings per share:
Basic	$	0.00		$	0.22		$	0.26		$	0.59
Diluted	$	0.00		$	0.21		$	0.25		$	0.58
Weighted average shares outstanding:
Basic		40,043			42,480			40,348			43,384
Diluted		41,732			43,476			41,872			44,375

See accompanying notes to consolidated financial statements.

5

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited—in thousands)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012		2011
Net income	$	51	$	9,321		$	10,535	$	25,687
Other comprehensive income, net of tax:
Foreign currency translation adjustments		69		(231	)		26		(160	)
Unrealized gain (loss) on cash flow hedge		44		(345	)		126		(882	)
Other comprehensive (loss) income, net of tax		113		(576	)		152		(1,042	)
Comprehensive income	$	164	$	8,745		$	10,687	$	24,645

See accompanying notes to consolidated financial statements.

6

NATIONAL FINANCIAL PARTNERS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited—in thousands)

	Nine Months Ended September 30,
	2012			2011
Cash flow from operating activities:
Net income	$	10,535		$	25,687
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation		4,112			4,130
Impairment of goodwill and intangible assets		31,194			3,386
Amortization of intangibles		24,969			24,207
Depreciation		9,232			9,240
Accretion of senior convertible notes discount		3,541			3,197
(Gain) Loss on sale of businesses, net		(4,837	)		53
Change in estimated acquisition earn-out payables		7,988			53
Payments on acquisition earn-outs in excess of original estimated payables		(830	)		—
Bad debt expense		1,198			2,349
Other, net		—			(1,515	)
(Increase) decrease in operating assets:
Fiduciary funds-restricted related to premium trust accounts		34			7,687
Commissions, fees and premiums receivable, net		6,556			29,859
Due from principals and/or certain entities they own		(5,260	)		(3,425	)
Notes receivable, net—current		(20	)		1,537
Other current assets		(20,499	)		48
Notes receivable, net—non-current		999			1,916
Other non-current assets		618			2,830
Increase (decrease) in operating liabilities:
Premiums payable to insurance carriers		10,874			(3,753	)
Income taxes payable		(3,010	)		1,552
Due to principals and/or certain entities they own		(16,445	)		(12,113	)
Accounts payable		(12,253	)		(18,152	)
Accrued liabilities		(6,038	)		200
Other non-current liabilities		(4,125	)		797
Total adjustments		27,998			54,083
Net cash provided by operating activities		38,533			79,770
Cash flow from investing activities:
Proceeds from disposal of businesses		7,502			738
Purchases of property and equipment, net		(5,881	)		(6,368	)
Payments for acquired firms, net of cash		(62,022	)		(48,535	)
Payments for contingent consideration		(6,934	)		(80	)
Net cash used in investing activities		(67,335	)		(54,245	)
Cash flow from financing activities:
Payments on acquisition earn-outs		(8,798	)		—
Borrowings on revolving credit facility		20,000			—
Payments on revolving credit facility		(5,000	)		—
Repayment of long term debt		(9,375	)		(9,375	)
(Payments for) proceeds from stock-based awards, including tax benefit		(875	)		2,603
Shares cancelled to pay withholding taxes		(3,793	)		(3,021	)
Repurchase of common stock		(17,903	)		(28,563	)
Dividends paid		—			(1	)
Net cash used in financing activities		(25,744	)		(38,357	)
Effect of exchange rate changes on cash and cash equivalents		(47	)		—
Net decrease in cash and cash equivalents		(54,593	)		(12,832	)
Cash and cash equivalents, beginning of the period		135,239			128,830
Cash and cash equivalents, end of the period	$	80,646		$	115,998
Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	26,167		$	15,812
Cash paid for interest	$	6,637		$	5,361
Non-cash transactions:
See Note 10

See accompanying notes to consolidated financial statements.

7

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. NFP and its benefits, insurance and wealth management businesses (together with NFP, the “Company”), provide a full range of advisory and brokerage services to the Company’s clients. NFP serves corporate and high net worth individual clients throughout the United States and in Canada, with a focus on the middle market and entrepreneurs.

The Company has grown organically and through acquisitions, operating in the independent distribution channel. This distribution channel offers independent advisors the flexibility to sell products and services from multiple non-affiliated providers to deliver objective and comprehensive solutions. The number of products and services available to independent advisors is large and can lead to a fragmented marketplace. NFP facilitates the efficient sale of products and services in this marketplace by using its scale and market position to contract with leading product providers. These relationships foster access to a broad array of insurance and financial products and services as well as better underwriting support and operational services.

Note 2—Summary of Significant Accounting Policies

Basis of presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows of the Company for the interim periods presented have been included. The consolidated financial statements include the accounts of NFP and its majority-owned subsidiaries, its controlled subsidiaries and variable interest entities for which NFP is considered to be the primary beneficiary. All material intercompany balances and transactions have been eliminated. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2011, included in NFP’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission on February 13, 2012 (the “2011 10-K”).

All dollar amounts, except per share data in the text and tables herein, are stated in thousands unless otherwise indicated.

Use of estimates

The preparation of the accompanying consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Recently adopted accounting guidance

Fair Value — In May 2011, new accounting guidance on fair value measurements was issued, which requires updates to fair value measurement disclosures to conform to U.S. GAAP and International Financial Reporting Standards. This guidance includes additional disclosure requirements about Level 3 fair value measurements and is effective for interim and annual periods beginning after December 15, 2011. The adoption of the new guidance did not affect the Company’s financial position, results of operations or cash flows, but required additional disclosure (see “Note 11—Commitments and Contingencies—Contingent consideration arrangements” and “Note 5—Goodwill and other intangible assets—Impairment of non-amortizing intangible assets”).

Comprehensive Income — In June 2011, the Financial Accounting Standards Board (the “FASB”) issued authoritative guidance which requires the presentation of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements, but required a change in the presentation of the Company’s comprehensive income from the statement of stockholder’s equity, where it was previously disclosed. The Company elected to present a consolidated statement of comprehensive income separate from, but consecutive to, its consolidated statements of income.

8

Goodwill Impairment — In September 2011, the FASB issued authoritative guidance which simplifies goodwill impairment testing by allowing an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying value. An entity is no longer required to determine the fair value of a reporting unit unless it is more likely than not that the fair value is less than the carrying value. The guidance was effective for the Company during the first quarter of 2012 and did not have an impact on the Company’s consolidated financial statements. The Company has elected to bypass the qualitative assessment for its reporting unit and proceed directly to Step One of the goodwill impairment test and validate the conclusion by measuring fair value. The Company can resume performing the qualitative assessment in any subsequent period (see “Note 5—Goodwill and other intangible assets—Impairment of non-amortizing intangible assets”).

Offsetting Assets and Liabilities — In December 2011, the FASB issued authoritative guidance relating to disclosures about offsetting assets and liabilities. The guidance requires entities to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The guidance becomes effective for NFP as of January 1, 2013, and its adoption is not expected to have a significant impact on the Company’s consolidated financial statements.

Indefinite-lived Intangible Assets — In July 2012, the FASB issued authoritative guidance to amend previous guidance on the annual and interim testing of indefinite-lived intangible assets for impairment. The guidance provides entities with the option of first assessing qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If it is determined, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is more likely than not less than the carrying amount, a quantitative impairment test would still be required. The guidance becomes effective for NFP as of January 1, 2013, and its adoption is not expected to have a significant impact on the Company’s consolidated financial statements.

Income taxes

During the three months ended September 30, 2012, the Company’s unrecognized tax benefits decreased by $1.0 million as a result of a statute lapse. Interest and penalties increased by $0.3 million. The Company’s total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate, decreased by $1.0 million. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits could significantly decrease within the next twelve months due to the settlement of state income tax audits and expiration of statutes of limitation in various federal and state and local jurisdictions, in an amount ranging from $2.2 million to $3.5 million based on current estimates.

The effective tax rate for the third quarter of 2012 was higher than the effective tax rate for the third quarter of 2011 primarily due to the tax benefit in the third quarter of 2012 associated with dispositions.

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial assets and liabilities, including cash and cash equivalents, fiduciary funds-restricted related to premium trust accounts, premiums payable to insurance carriers and the current portion of long-term debt approximate fair value because of the short-term maturity of these instruments. The carrying amounts of the Company’s notes receivable, net approximate fair value because they are short term in nature and/or carry interest rates which are comparable to market-based rates. The carrying amount of NFP’s long-term debt approximates fair value since the 2010 Credit Facility (as defined below) bears interest at a variable rate. See “Note 7—Borrowings” for the reported fair value amount of the 2010 Notes (as defined below).

Note 3—Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other instruments to issue common stock were exercised or converted into common stock.

The Company’s potentially dilutive shares include outstanding stock awards, shares issuable under the employee stock purchase plan and stock-based contingent consideration. Diluted earnings per share may also reflect shares issuable upon conversion of the 4.0% convertible senior notes due June 15, 2017 (the “2010 Notes”), or an exercise of the warrants relating to the 2010 Notes (see “Note 7—Borrowings”).

9

Since the principal amount of the 2010 Notes will be settled in cash upon conversion, only amounts in excess of the principal amount are included in the calculation of diluted earnings per share. As such, the 2010 Notes only have an impact on diluted earnings per share if the weighted average market price of NFP’s common stock exceeds the conversion price of the 2010 Notes of $12.87. Similarly, the warrants only have an impact on diluted earnings per share if the average market price of NFP’s common stock exceeds the exercise price of the warrants of $15.77. If the average market price of NFP’s common stock exceeds the conversion or exercise price, the Company includes the effect of the additional shares that may be issued upon conversion of the 2010 Notes or exercise of the warrants using the treasury stock method in the diluted earnings per share calculation. For the three months ended September 30, 2012 and September 30, 2011, NFP’s weighted average stock price was $14.98 and $11.66, respectively. For the nine months ended September 30, 2012 and September 30, 2011, NFP’s weighted average stock price was $14.65 and $12.89, respectively.

The call options to purchase NFP’s common stock, which were purchased to hedge against potential dilution upon conversion of the 2010 Notes (see “Note 7—Borrowings”), are not considered for purposes of calculating the total dilutive weighted average shares outstanding, as their effect would be anti-dilutive if the weighted average market price of NFP’s common stock exceeds the conversion price of the 2010 Notes of $12.87. Upon exercise, the call options will mitigate the dilutive effect of the 2010 Notes.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Basic:
Net income	$	51	$	9,321	$	10,535	$	25,687
Weighted average number of shares outstanding		40,043		42,480		40,348		43,384
Basic earnings per share	$	0.00	$	0.22	$	0.26	$	0.59
Diluted:
Net income	$	51	$	9,321	$	10,535	$	25,687
Weighted average number of shares outstanding		40,043		42,480		40,348		43,384
Stock-based compensation		320		991		344		978
Convertible senior notes		1,364		—		1,175		8
Other		5		5		5		5
Total		41,732		43,476		41,872		44,375
Diluted earnings per share	$	0.00	$	0.21	$	0.25	$	0.58

For the three months ended September 30, 2012 and September 30, 2011, the calculation of diluted earnings per share excluded approximately 553,010 and 774,532 shares of stock-based awards, respectively, because the effect would be anti-dilutive. For the nine months ended September 30, 2012 and September 30, 2011, the calculation of diluted earnings per share excluded approximately 574,107 and 783,309 shares of stock-based awards, respectively, because the effect would be anti-dilutive.

Note 4—Acquisitions and Divestitures

Acquisitions

During the nine months ended September 30, 2012, NFP completed two acquisitions, one step acquisition and six sub-acquisitions. The step acquisition consisted of NFP acquiring the remaining outstanding interests of Nemco Group, LLC (“Nemco”). Prior to this transaction, NFP owned a 38% minority preferred interest in Nemco. The acquisition date fair value of the preferred interest was $11.8 million and is included in the measurement of the consideration transferred in the table below. The aggregate purchase price allocation for all acquisitions completed during this period was $85.7 million, including $62.4 million of cash payments, the issuance of $0.2 million in notes payable, $11.3 million of recorded earn-out payables and $11.8 million of fair value of non-controlling interest.

During the same period in the previous year, NFP completed two acquisitions and three sub-acquisitions. The aggregate purchase price of these acquisitions was $61.6 million, including $49.0 million of cash payments and $12.7 million of recorded earn-out payables.

10

For acquisitions completed after January 1, 2009, the recorded purchase price includes an estimation of the fair value of liabilities associated with any potential earn-out payment provisions associated with both short-term and long-term contingent consideration. Subsequent changes in the fair value of earn-out obligations are recorded in the consolidated statements of income when incurred. The fair value of earn-out payables are based on the present value of the expected future payments to be made to the sellers of the acquired businesses in accordance with the provisions outlined in the respective purchase agreements. The fair value of the earn-out payables are allocated to goodwill. In determining fair value of the contingent consideration, the acquired business’s future performance is estimated using financial projections for the acquired business developed by management. These are measured against the performance targets specified in each purchase agreement. The fair value of the Company’s earn-out payables are established using a simulation model in a risk-neutral framework. For each simulation path, the earn-out payments are calculated and then discounted to the valuation date. The value of the earn-out payable is then estimated to be the arithmetic average of all simulation paths.

Based on the acquisition date and the complexity of the underlying valuation work, certain amounts included in the Company’s consolidated financial statements may be provisional and thus subject to further adjustments within the permitted measurement period. The Company continues to evaluate certain assets and liabilities related to acquisitions completed during the recent periods. Changes to amounts recorded as assets or liabilities may result in a corresponding adjustment to goodwill.

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

	Nine Months Ended September 30,
	2012		2011
Consideration:
Cash paid	$	62,432	$	48,993
Notes payable		165		—
Recorded earn-out payable		11,329		12,653
Fair value of non-controlling interest		11,800		—
Total consideration	$	85,726	$	61,646
Allocation of purchase price:
Net tangible assets	$	407	$	873
Cost assigned to intangibles:
Book of Business	$	37,837	$	23,666
Management Contract		—		5,395
Non-Compete Agreement		1,265		590
Goodwill, net of deferred taxes of $1.0 million in 2012 and $3.0 million in 2011		46,217		31,122
Total	$	85,726	$	61,646

The weighted average useful lives for the above acquired amortizable intangibles are as follows: book of businesses – 10 years; management contracts – 25 years; and non-compete agreements – 5-6 years.

For the acquisitions completed during the nine months ended September 30, 2012, of the total goodwill of $46.2 million, $28.5 million is deductible for income tax purposes and $7.1 million is non-deductible. The remaining $10.6 million relates to the earn-out payables and will not be deductible until it is earned and paid. For the acquisitions completed during the nine months ended September 30, 2011, of the total goodwill of $31.1 million, $18.1 million is deductible for income tax purposes and $2.9 million is non-deductible. The remaining $10.1 million relates to the earn-out payables and will not be deductible until it is earned and paid.

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The results of operations for the acquisitions completed during 2012 have been combined with those of the Company since their respective acquisition dates. The total revenues and income before income taxes from the acquisitions completed during 2012 and included in the Company’s consolidated statements of income for the nine months ended September 30, 2012 are $16.6 million and $4.1 million, respectively. If the acquisitions had occurred as of the beginning of the comparable prior annual reporting period, the Company’s estimated results of operations would be as shown in the following table:

	Three Months Ended September 30,					Nine Months Ended September 30,
(Pro-forma)	2012			2011		2012		2011
Total revenues	$	252,744		$	258,502	$	767,452	$	746,601
(Loss) Income before income taxes		(212	)		17,804		15,682		51,397
Net income		170			10,350		11,535		29,023
Net income per share:
Basic	$	0.00		$	0.24	$	0.29	$	0.67
Diluted	$	0.00		$	0.24	$	0.28	$	0.65
Weighted average number of shares outstanding:
Basic		40,043			42,480		40,348		43,384
Diluted		41,732			43,476		41,872		44,375

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, 2012 and 2011, respectively, nor is it necessarily indicative of future operating results.

For acquisitions consummated prior to January 1, 2009, contingent consideration paid to sellers as a result of purchase agreement earn-out provisions are recorded as adjustments to purchase price when the contingencies are settled. For the nine months ended September 30, 2012, the net contingent consideration paid in cash by the Company was $6.9 million, of which $6.3 million was allocated to goodwill during 2011, and the remaining $0.6 million was allocated during 2012. For the nine months ended September 30, 2011, the Company paid $0.1 million in cash in connection with contingent consideration.

For acquisitions consummated after January 1, 2009, the fair value of the estimated initial earn-out payable included in the purchase price allocation was based on NFP’s assessment, at the time of closing, of earnings levels during the earn-out period. In developing these estimates, the Company considered earnings projections, historical results, the general macroeconomic environment and industry trends. This fair value measurement is based on significant inputs, only some of which are observed in the market, and represents a Level 3 measurement. For the nine months ended September 30, 2012, the Company paid $9.6 million in cash in connection with earn-out payables. For the nine months ended September 30, 2011, the Company paid less than $0.1 million in cash in connection with earn-out payables.

As of September 30, 2012, the fair values of the estimated acquisition earn-out payables were re-valued and measured at fair value using both observable and unobservable inputs. The resulting additions, payments and net changes on the estimated acquisition earn-out payables for the nine months ended September 30, 2012 and 2011 were as follows:

	Nine Months Ended September 30,
Change in estimated acquisition earn-out payables:	2012			2011
Balance as of January 1,	$	13,120		$	134
Additions to estimated acquisition earn-out payables		11,329			13,871
Payments for acquisition earn-out payables		(9,628	)		(352	)
Net change in fair value on estimated acquisition earn-out payables		7,988			53
Purchase accounting adjustment		125			—
Balance as of September 30,	$	22,934		$	13,706

Divestitures

During the nine months ended September 30, 2012, the Company disposed of nine businesses, receiving an aggregate consideration of $7.5 million in cash, $2.7 million in promissory notes and 5,439 shares of NFP common stock with a value of less than $0.1 million. These disposals resulted in a gain on sale of businesses, net in the Company’s consolidated statements of income. During the nine months ended September 30, 2011, the Company disposed of one business, receiving an aggregate consideration of $0.2 million in cash and 766 shares of NFP common stock with a value of less than $0.1 million, which resulted in a loss on sale of businesses, net in the Company’s consolidated statements of income.

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Change in estimate

For certain acquisitions completed during 2011, a separate intangible asset for non-compete agreements was recorded. Such non-compete agreements were valued based on the expected receipt of future economic benefits protected by clauses in the non-compete agreements that restrict competitive behavior. To value these non-compete agreements, the Company used a comparative business valuation method that evaluated the difference in the sum of the present value of future cash flows in two scenarios: (1) with the non-compete agreements in place and (2) without the non-compete agreements in place. Key assumptions utilized in this comparative business valuation method were significant unobservable inputs (Level 3), in which the Company estimated the probability of the amount of revenue and operating income that would be lost if these employees were not bound by the non-compete agreements and engaged in competitive behavior. Other considerations included the potential losses resulting from such competition, the enforceability of the terms of the non-compete agreement and the likelihood of competition in the absence of the non-compete agreement.

The preliminary allocation of the purchase price was based upon preliminary estimates and assumptions regarding information that NFP had at that time. Fair value estimates for purchase price allocations may change during the allowable measurement period, which is currently up to one year from the acquisition date. The key estimates included in the initial preliminary valuation were the probability of competition and the percentage of revenue lost due to competition. During 2012, NFP refined its estimate regarding the probability of competition by noting that the subject employees’ incentives to compete were lower than originally anticipated. This change had the effect of reallocating the purchase price amongst the intangibles and decreasing goodwill. The non-compete agreement was reduced by $3.2 million, the book of business increased by $5.1 million, the net adjustment to goodwill was $1.8 million and the recorded earn-out payable increased by $0.1 million.

Note 5—Goodwill and other intangible assets

Goodwill

The changes in the carrying amount of goodwill for the nine months ended September 30, 2012 are as follows:

	Corporate Client Group			Individual Client Group			Advisor Services Group		Total
Balance as of January 1, 2012
Goodwill, net of accumulated amortization	$	429,977		$	318,693		$	—	$	748,670
Prior years accumulated impairments		(351,442	)		(295,189	)		—		(646,631	)
		78,535			23,504			—		102,039
Goodwill acquired during the year, including goodwill related to deferred tax liability of $950		35,397			—			11,770		47,167
Contingent consideration accrual		606			78			—		684
Firm disposals		—			(810	)		—		(810	)
Purchase accounting adjustments		(1,756	)		—			—		(1,756	)
Impairments		—			(9,281	)		—		(9,281	)
Total as of September 30, 2012	$	112,782		$	13,491		$	11,770	$	138,043

The Company recorded a measurement period adjustment to goodwill as a result of a revision in its estimate. See “Note 4— Acquisitions and Divestitures—Change in estimate.”

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Acquired intangible assets

	As of September 30, 2012
	Corporate Client Group					Individual Client Group					Advisor Services Group					Total
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Amortizing identified intangible assets:
Book of Business	$	217,822	$	(119,076	)	$	37,566	$	(32,590	)	$	8,551	$	(214	)	$	263,939	$	(151,880	)
Management Contracts		141,883		(43,424	)		135,228		(50,174	)		—		—			277,111		(93,598	)
Institutional Customer Relationships		—		—			15,700		(6,542	)		—		—			15,700		(6,542	)
Non-Compete Agreement		1,801		(265	)		—		—			53		(2	)		1,854		(267	)
Total	$	361,506	$	(162,765	)	$	188,494	$	(89,306	)	$	8,604	$	(216	)	$	558,604	$	(252,287	)
Non-amortizing intangible assets:
Goodwill	$	113,367	$	(585	)	$	14,826	$	(1,335	)	$	11,770	$	—		$	139,963	$	(1,920	)
Trade name		723		(26	)		3,724		(30	)		—		—			4,447		(56	)
Total	$	114,090	$	(611	)	$	18,550	$	(1,365	)	$	11,770	$	—		$	144,410	$	(1,976	)

	As of December 31, 2011
	Corporate					Individual
	Client Group					Client Group					Total
	Gross Carrying		Accumulated			Gross Carrying		Accumulated			Gross Carrying		Accumulated
	Amount		Amortization			Amount		Amortization			Amount		Amortization
Amortizing identified intangible assets:
Book of Business	$	183,433	$	(105,500	)	$	42,580	$	(35,464	)	$	226,013	$	(140,964	)
Management Contracts		149,385		(40,634	)		164,713		(56,490	)		314,098		(97,124	)
Institutional Customer Relationships		—		—			15,700		(5,887	)		15,700		(5,887	)
Non-Compete Agreement		3,783		(315	)		—		—			3,783		(315	)
Total	$	336,601	$	(146,449	)	$	222,993	$	(97,841	)	$	559,594	$	(244,290	)
Non-amortizing intangible assets:
Goodwill	$	79,120	$	(585	)	$	24,857	$	(1,353	)	$	103,977	$	(1,938	)
Trade name		723		(26	)		4,097		(32	)		4,820		(58	)
Total	$	79,843	$	(611	)	$	28,954	$	(1,385	)	$	108,797	$	(1,996	)

Amortization expense for amortizing intangible assets for the nine months ended September 30, 2012 was $25.0 million. Intangibles related to book of business, management contracts, institutional customer relationships and non-compete agreements are being amortized over a 10-year, 25-year, 18-year and a 5-6-year period, respectively. Based on the Company’s acquisitions as of September 30, 2012, estimated amortization expense for each of the next five years is $33.6 million per year.

Impairment of non-amortizing intangible assets

The Company has acquired significant intangible assets through business acquisitions. These assets consist of book of business, management contracts, institutional customer relationships, non-compete agreements, trade name, and the excess of purchase price over the fair value of identifiable net assets acquired (goodwill). The determination of estimated useful lives and the allocation of the purchase price to the intangible assets requires significant judgment and affects the amount of future amortization and possible impairment charges.

On a regular basis, and at least once a year, the Company evaluates whether events and circumstances have occurred that indicate whether or not the Company should be impairing its intangible assets. As previously disclosed in NFP’s periodic reports for the year ended December 31, 2011 and periods ended March 31, 2012 and June 30, 2012, certain reporting units within the Individual Client Group (the “ICG”) have experienced a recurring trend of market challenges in life insurance. During the third quarter of 2012, NFP once again determined that sufficient indicators of potential impairment existed to require an interim goodwill impairment analysis for the reporting units within the ICG.

In accordance with U.S. GAAP, 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. Indicators at the reporting unit level include but are not limited to: (i) when a reporting unit experiences a significant deterioration in its Adjusted EBITDA compared to its financial plan or prior year performance, (ii) loss of key personnel, (iii) a decrease in NFP’s market capitalization below its book value or (iv) an expectation that a reporting unit will be sold or otherwise disposed of. 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.

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A two-step impairment test is performed on goodwill for reporting units that demonstrate indicators of impairment. In the first step, NFP compares the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value, NFP must perform the second step of the impairment test to measure the amount of impairment loss. In the second step, the reporting unit's fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in a similar manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit's goodwill is less than the carrying value, the difference is recorded as an impairment loss.

NFP determines the fair value of its reporting units by blending two valuation approaches: the income approach and a market value approach. In order to determine the relative fair value of each of the reporting units the income approach is conducted first. These relative values are then scaled to the estimated market value of NFP. Under the income approach, management uses certain assumptions to determine the reporting unit’s fair value. The Company’s cash flow projections for each reporting unit are 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 assumes that revenue will stabilize and the Company will resume normalized long-term stable growth rates. The significant assumptions of these five-year forecasts included business-level budgets by quarter for the current year which are aggregated to produce reportable segment financial plans. These reportable segment budgets are then projected forward for four years using annual growth assumptions for revenue and expenses.

The Company established an internal long range financial plan for each of its reporting units and measures the actual performance of its reporting units against this financial plan on a quarterly basis. As previously disclosed in NFP’s periodic reports for the year ended December 31, 2011 and periods ended March 31, 2012 and June 30, 2012, due to market challenges in life insurance the ICG has experienced a decline in earnings and its Adjusted EBITDA has exhibited significant deterioration compared to its financial plan. NFP has been carefully monitoring this situation to assess if any future impairments would be warranted.

For the quarter ended September 30, 2012, the future cash flows were tax affected and discounted to present value using blended discount rates, ranging from 6.89% to 9.24%. Since NFP retains a cumulative preferred position in certain of its businesses, NFP assigned a rate of return to that portion of its cash flow that would be represented by yields seen on preferred equity securities of 6.73%. For cash flows retained by NFP in excess of target earnings and below base earnings, NFP assigned a discount rate ranging from 6.73% to 11.20%. Terminal values for all reporting units were calculated using a Gordon growth methodology using blended discount rates ranging from 7.03% to 9.24% with a long-term growth rate of 3.0%. Although these rates fluctuate each quarter, their fluctuation has a relatively minor impact on the perceived value of the respective reporting unit.

As of September 30, 2012, the retail life reporting unit’s fair value was less than its carrying value. The Company therefore performed the second step of the goodwill impairment assessment to quantify the amount of impairment. This process involved calculating the implied fair value of goodwill, determined in a similar manner as if the reporting unit was being acquired in a business combination, and comparing the residual implied fair value attributed to the reporting unit’s goodwill to the carrying value of the reporting unit’s goodwill. NFP’s impairment analysis for the quarter ended September 30, 2012 resulted in an impairment charge to ICG’s retail life reporting unit of $9.6 million, of which $9.3 million relates to goodwill and $0.3 million relates to trade name, thereby reducing the carrying value of the non-amortizing intangible assets in this reporting unit to zero.

Impairment of amortizing intangible assets

In accordance with U.S. GAAP, the Company generally performs its recoverability test for its long-lived asset groups (book of business, management contracts, institutional customer relationships and non-compete agreements) whenever events or changes in circumstances indicate that these carrying amounts may not be recoverable. These events or changes in circumstances include, but are not limited to: (i) when a reporting unit experiences a significant deterioration in its Adjusted EBITDA compared to its financial plan or prior year performance, (ii) loss of key personnel, (iii) a change in the extent or manner in which the long-lived asset is being used or (iv) a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of before the end of its previously estimated useful life.

Such events occurred during the nine months ended September 30, 2012 when certain transactions under consideration indicated that the anticipated disposal values for several businesses were beneath their carrying values. Accordingly, during the nine months ended September 30, 2012, the Company’s long-lived assets generated $21.6 million of impairments. Of this amount, $5.9 million related to management contract buyouts in the Corporate Client Group (the “CCG”), $1.3 million related to the early termination of a management contract in the ICG, and the remaining $14.4 million related to the actual or anticipated disposal value of certain management contract assets in the ICG.

15

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

			Fair Value Measurements Using
	As of September 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Goodwill	$	138,043	$	—	$	—	$	138,043	$	(9,281	)
Trade name		4,391		—		—		4,391		(350	)
Total	$	142,434	$	—	$	—	$	142,434	$	(9,631	)

Note 6—Notes Receivable, net

A rollforward of notes receivable for the nine months ended September 30, 2012 consists of the following:

	As of December 31, 2011			New Notes		Discount		Paid down			Change in allowance			As of September 30, 2012
Notes receivable from Principals and/or certain entities they own	$	26,868		$	6,221	$	—	$	(7,671	)	$	—		$	25,418
Notes received in connection with dispositions		9,526			6,235		—		(4,800	)		—			10,961
Other notes receivable		4,878			501		43		(570	)		—			4,852
		41,272			12,957		43		(13,041	)		—			41,231
Less: allowance for uncollectible notes		(13,387	)		—		—		—			(524	)		(13,911	)
Total notes receivable, net	$	27,885		$	12,957	$	43	$	(13,041	)	$	(524	)	$	27,320

The following table represents the rollforward of the allowance for uncollectible notes for the nine months ended September 30, 2012:

	As of December 31, 2011			Charge-offs		Recoveries		Provision			As of September 30, 2012
Notes receivable from Principals and/or certain entities they own	$	(4,160	)	$	—	$	347	$	(394	)	$	(4,207	)
Notes received in connection with dispositions		(7,177	)		—		326		(803	)		(7,654	)
Other notes receivable		(2,050	)		—		—		—			(2,050	)
Total allowance for uncollectible notes	$	(13,387	)	$	—	$	673	$	(1,197	)	$	(13,911	)

Notes receivable bear interest at rates typically between 4.0% and 8.0% (with a weighted average of 6.5% at September 30, 2012) and 3.0% and 11.0% (with a weighted average of 7.1% at September 30, 2011), and mature at various dates through April 1, 2023. Notes receivable from principals and/or certain entities they own are taken on a full recourse basis to the principal and/or such entity.

NFP considers applying a reserve to a promissory note when it becomes apparent that conditions exist that may lead to NFP’s inability to fully collect on outstanding amounts due. Such conditions include delinquent or late payments on loans, deterioration in the creditworthiness of the borrower and other relevant factors. When such conditions leading to expected losses exist, NFP generally applies a reserve by assigning a loss ratio calculation per loan category to the outstanding loan balance, less the fair value of the collateral. The reserve is generally based on NFP’s payment and collection experience and whether NFP has an ongoing relationship with the borrower. In instances where the borrower is a principal, NFP has the contractual right to offset fees to principals earned with any payments due under a promissory note.

An aging of past due notes receivable including interest outstanding at September 30, 2012 is as follows:

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due
Notes receivable from Principals and/or certain entities they own	$	22	$	22	$	3,303	$	3,347
Notes received in connection with dispositions		—		—		6,056		6,056
Other notes receivable		—		—		2,151		2,151
Total	$	22	$	22	$	11,510	$	11,554

Approximately $11.5 million of the total allowance for uncollectible notes are those with a past due balance of greater than 90 days as of September 30, 2012. The remainder of the $13.9 million is determined based on a credit risk assessment of the borrowers.

16

Note 7—Borrowings

For a detailed discussion of: (i) the termination on July 8, 2010 of the credit agreement among NFP, the lenders party thereto and Bank of America, N.A., as administrative agent, dated as of August 22, 2006, (ii) the retirement of NFP’s 0.75% convertible senior notes due February 1, 2012 pursuant to a cash tender offer and a privately-negotiated transaction, (iii) the 2010 Notes and related note hedges and warrants and (iv) NFP’s entry into a $225.0 million credit agreement, dated July 8, 2010, among NFP, the lenders party thereto and Bank of America, N.A., as administrative agent (the “2010 Credit Facility”), see “Note 7—Borrowings” in the 2011 10-K.

Issuance of 2010 Notes

The 2010 Notes are senior unsecured obligations and rank equally with NFP’s existing or future senior debt and senior to any subordinated debt. The 2010 Notes are 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 private placement of the 2010 Notes resulted in proceeds to NFP of $120.3 million, after certain fees and expenses, which were used to pay a portion of the retirement of NFP’s 0.75% convertible senior notes due February 1, 2012 and the net cost of certain convertible note hedge and warrant transactions. The initial conversion rate for the 2010 Notes was 77.6714 shares of common stock per $1,000 principal amount of 2010 Notes, equivalent to a conversion price of approximately $12.87 per share of common stock.

Concurrent with the issuance of the 2010 Notes, NFP entered into convertible note hedge and warrant transactions. The transactions are expected to reduce the potential dilution to NFP’s common stock upon future conversions of the 2010 Notes. Under the convertible note hedge, NFP purchased 125,000 call options for an aggregate premium of $33.9 million. Each call option entitles NFP to repurchase an equivalent number of shares issued upon conversion of the 2010 Notes at the same strike price (initially $12.87 per share), generally subject to the same adjustments. The call options expire on the maturity date of the 2010 Notes. NFP also sold warrants for an aggregate premium of $21.0 million. The warrants expire ratably over a period of 120 scheduled trading days between September 15, 2017 and March 8, 2018, 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, but NFP may elect cash settlement subject to certain conditions. The net cost of the convertible note hedge and warrants to NFP was $12.9 million. The economic impact of the convertible note hedge and warrants was to increase the conversion price of the 2010 Notes to approximately $15.77.

2010 Credit Facility

On July 8, 2010, NFP entered into the 2010 Credit Facility. The 2010 Credit Facility is structured as (i) a $100.0 million four-year revolving credit facility that includes a $35.0 million sub-limit for standby letters of credit and a $10.0 million sub-limit for the issuance of swingline loans and (ii) a $125.0 million four-year term loan facility. The proceeds of the term loan were used to pay for a portion of the retirement of NFP’s 0.75% convertible senior notes due February 1, 2012. The term loan facility requires 2.5% quarterly principal amortization payments, beginning on September 30, 2010, with the remaining balance of the term loan facility payable on the maturity date of the 2010 Credit Facility, which is July 8, 2014. On April 28, 2011, NFP entered into the First Amendment to the 2010 Credit Facility. See “Note 13—Subsequent Events” for a discussion of the Second Amendment to the 2010 Credit Facility, entered into subsequent to September 30, 2012.

Under the terms of the 2010 Credit Facility, loans will bear interest at either LIBOR or the base rate, at NFP’s election, plus an applicable margin, based on NFP’s leverage ratio, as set forth below:

Leverage Ratio	Applicable Margin for LIBOR Loans			Applicable Margin for Base Rate Loans
Greater than or equal to 2.0 to 1.0		3.25	%		2.25	%
Less than 2.0 to 1.0 but greater than or equal to 1.5 to 1.0		3.00	%		2.00	%
Less than 1.5 to 1.0 but greater than or equal to 1.0 to 1.0		2.75	%		1.75	%
Less than 1.0 to 1.0		2.50	%		1.50	%

17

Scheduled long-term debt principal repayments under the 2010 Credit Facility and total cash obligations under the 2010 Notes consist of the following:

	Total		2012		2013		2014		2015		2016		Thereafter through 2017
2010 Credit Facility	$	111,875	$	3,125	$	12,500	$	96,250	$	—	$	—	$	—
2010 Notes	$	148,542	$	1,250	$	5,000	$	5,000	$	5,000	$	5,000	$	127,292
Total obligations	$	260,417	$	4,375	$	17,500	$	101,250	$	5,000	$	5,000	$	127,292

The 2010 Credit Facility provides for the issuance of letters of credit of up to $35.0 million on NFP’s behalf, provided that, after giving effect to the letters of credit, NFP’s available borrowing amount is greater than zero. The Company was contingently obligated for letters of credit in the amount of less than $0.1 million as of September 30, 2012. During the nine months ended September 30, 2012, the Company made net drawings under the $100.0 million revolving credit facility of $15.0 million.

As of September 30, 2012, the year-to-date weighted average interest rate for NFP’s 2010 Credit Facility was 3.36%. The liability and equity components related to the 2010 Notes consist of the following:

	September 30, 2012			December 31, 2011
Principal amount of the liability component	$	125,000		$	125,000
Unamortized debt discount		(29,572	)		(33,113	)
Net carrying amount of the liability component		95,428			91,887
Carrying amount of the equity component		39,578			39,578

The unamortized debt discount will be amortized as additional interest expense through June 15, 2017. The equity component associated with the 2010 Notes is reflected as an increase to additional paid-in capital. As of September 30, 2012, NFP’s 2010 Notes were fair valued at approximately $183.9 million, as measured based on market prices. The fair value measurement is classified within Level 2 of the hierarchy as an observable market input.

Note 8—Derivative Instruments and Hedging Activities

In connection with the 2010 Credit Facility, NFP executed a one-month LIBOR interest rate swap on July 14, 2010 to hedge $50.0 million of general corporate variable debt based on one-month LIBOR, beginning on April 14, 2011. The swap has been designated as a hedging instrument in a cash flow hedge by effectively converting a portion of the variable rate debt to a fixed rate basis.

The following table provides a summary of the fair value and balance sheet classification of the swap:

	September 30, 2012		December 31, 2011
Other non-current liabilities	$	1,507	$	1,710
Accumulated other comprehensive loss, net of tax of $597 in 2012, and $674 in 2011		910		1,036

The fair value measurement is classified within Level 2 of the hierarchy as an observable market input and was readily available as the basis for the fair value measurement.

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Note 9—Stockholders’ equity

The changes in stockholders’ equity during the nine months ended September 30, 2012 are summarized as follows:

	Common shares outstanding			Par value		Additional paid-in capital			Accumulated deficit			Treasury stock			Accumulated other comprehensive loss			Total
Balance at December 31, 2011		40,749		$	4,665	$	905,774		$	(391,202	)	$	(112,278	)	$	(1,009	)	$	405,950
Net Income		—			—		—			10,535			—			—			10,535
Translation adjustments, net of tax effect of $(16)		—			—		—			—			—			26			26
Unrealized gain on cash flow hedge, net of tax effect of $(77)		—			—		—			—			—			126			126
Common stock repurchased		(1,292	)		—		—			—			(18,305	)		—			(18,305	)
Stock issued through Employee Stock Purchase Plan		66			—		—			(2,361	)		3,060			—			699
Stock-based awards exercised/lapsed, including tax benefit		390			39		(915	)		—			—			—			(876	)
Shares cancelled to pay withholding taxes		—			—		(3,793	)		—			—			—			(3,793	)
Amortization of unearned stock-based compensation, net of cancellations		—			—		4,112			—			—			—			4,112
Balance at September 30, 2012		39,913		$	4,704	$	905,178		$	(383,028	)	$	(127,523	)	$	(857	)	$	398,474

Stock repurchases

On April 28, 2011, NFP’s Board of Directors (the “Board”) authorized the repurchase of up to $50.0 million of NFP’s common stock on the open market, at times and in such amounts as management deemed appropriate. The timing and actual number of shares repurchased was dependent on a variety of factors, including capital availability, share price and market conditions. This repurchase program was completed on February 6, 2012, resulting in 3,992,799 shares being repurchased at an average cost of $12.45 per share and a total cost of approximately $49.7 million. The Company currently intends to hold the repurchased shares as treasury stock.

On February 6, 2012, the Board authorized a new repurchase of up to $50.0 million of NFP’s common stock on the open market, at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors, including the limitations under the 2010 Credit Facility, capital availability, share price and market conditions. As of September 30, 2012, 725,537 shares were repurchased under this program at an average cost of $13.70 per share and a total cost of approximately $9.9 million. As of September 30, 2012, there remains an aggregate of approximately $40.1 million available for repurchases under this stock repurchase program. The Company currently intends to hold the repurchased shares as treasury stock.

For the nine months ended September 30, 2012, a total of 1,266,043 shares were repurchased during 2012 through both repurchase programs at an average cost of $14.14. NFP also reacquired 20,073 shares relating to the satisfaction of promissory notes and 5,439 shares relating to the disposal of a business.

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 (such as 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 awards issued to the Company’s employees are classified as equity awards. The Company accounts for equity classified stock-based awards issued to its employees based on the fair value of the award on the date of grant and recorded as an expense as part of compensation expense—employees in the consolidated statements of income. The expense is recorded ratably over the service period, which is generally the vesting period. The offsetting entry is to additional paid in capital in stockholders’ equity.

Stock-based awards issued to the Company’s principals are classified as liability awards, as principals are non-employees. The Company has not issued stock-based awards to its principals since the accelerated vesting of certain restricted stock units (“RSUs”) in 2010. The Company accounted for liability classified stock-based awards issued to its principals as part of fees to principals expense in the consolidated statements of income. Liability classified stock-based compensation was adjusted each reporting period to account for subsequent changes in the fair value of NFP’s common stock. As of September 30, 2012, the Company did not have any outstanding liability awards.

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All stock-based compensation related to firm employees and activities and principals have been included in operating expenses. Summarized below is the amount of stock-based compensation expensed in the consolidated statements of income:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Operating expenses:
Compensation expense—employees	$	1,378	$	1,350	$	4,112	$	4,081
Fees to principals		—		20		—		49
Total stock-based compensation cost	$	1,378	$	1,370	$	4,112	$	4,130

As of September 30, 2012, there was approximately $9.0 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 2.3 years.

Note 10—Non-cash transactions

The following are non-cash activities:

	Nine Months Ended September 30,
	2012			2011
Net assets acquired in connection with acquisitions	$	407		$	844
Stock repurchased, note receivable and satisfaction of an accrued liability in connection with divestitures of acquired firms		(171	)		(9	)
Stock repurchased in exchange for satisfaction of a note receivable, due from principals and/or certain entities they own and other assets		(231	)		(442	)
Excess tax benefit from stock-based awards exercised/lapsed, net		1,081			636
Stock issued through employee stock purchase plan		699			656
Accrued liability for contingent consideration		684			(350	)
Estimated acquisition earn-out payables recognized as an increase in goodwill		11,329			12,528

Note 11—Commitments and Contingencies

Legal matters

In the ordinary course of business, the Company is involved in lawsuits and other claims. Management will continue to respond appropriately to these lawsuits and claims and vigorously defend the Company’s interests. The settlement of these matters, whether leading to gains or losses to the Company, are reflected in other, net under non-operating income and expenses in the Company’s consolidated statements of income. The Company has errors and omissions (E&O) and other insurance to provide protection against certain losses that arise in such matters, although such insurance may not cover the costs or losses incurred by the Company. In addition, the sellers of businesses 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.

During the nine months ended September 30, 2012, the Company entered into a settlement agreement with Security Life of Denver Insurance Company (“Security Life of Denver”) and various unaffiliated individuals and corporate entities concerning a 2010 placement of insurance policies, for which NFP and its subsidiaries provided services. While the services generated approximately $13.0 million from Security Life of Denver that resulted in payments to the various participants in the transaction, the settlement agreement required the settling parties to repay Security Life of Denver $11.0 million in the aggregate. Of this amount, the Company has paid approximately $8.5 million to Security Life of Denver as of September 30, 2012. The Company is owed certain amounts from participants to the transaction and has received a portion of such amounts. The settlement agreement provides for full and complete mutual releases among the settling parties.

From time to time, NFP’s subsidiaries received subpoenas and other informational requests from governmental authorities. The Company has cooperated and will continue to cooperate fully with all governmental agencies. Management continues to believe that the resolution of these governmental inquiries will not have a material adverse impact on the Company’s consolidated financial position.

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The Company cannot predict at this time the effect that any other 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 and Canada, it is possible that the Company will become subject to further governmental inquiries and subpoenas and have lawsuits filed against it. 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

As discussed in “Note 4—Acquisitions and Divestitures,” for acquisitions consummated prior to January 1, 2009, contingent consideration is considered to be additional purchase consideration and is accounted for as part of the purchase price allocation of the Company’s acquired businesses when the outcome of the contingency is determined beyond a reasonable doubt. Consequently, contingent consideration paid to the former owners of the businesses is considered to be additional purchase consideration. For acquisitions completed after January 1, 2009, earn-out payables are recorded at fair value at the acquisition date and are included on that basis in the purchase price consideration at the time of the acquisition, with subsequent changes recorded in the consolidated statements of operations, based on current estimates. As of September 30, 2012, the maximum future contingency payments related to all acquisitions totaled $71.9 million, of which $0.4 million related to acquisitions consummated prior to January 1, 2009 and $71.5 million related to acquisitions consummated subsequent to January 1, 2009.

As of September 30, 2012, the estimated earn-out payable was $22.9 million, of which $10.5 million was recorded as current liabilities and $12.4 million was recorded as non-current liabilities.

In determining fair value of the contingent consideration, the acquired business’s future performance is estimated using financial projections for the acquired business developed by management. These are measured against the performance targets specified in each purchase agreement. The fair value of the Company’s earn-out payables are established using a simulation model in a risk-neutral framework. For each simulation path, the earn-out payments are calculated and then discounted to the valuation date. The value of the earn-out payable is then estimated to be the arithmetic average of all simulation paths.

Unobservable inputs used in Level 3 fair value measurements at September 30, 2012, are summarized below:

			Quantitative Information about Level 3 Fair Value  Measurements
	Fair Value at  September 30, 2012		Valuation Techniques	Unobservable Input	Range
Estimated earn-out payable	$	22,934	Monte Carlo Simulation	Forecasted growth rates	0.0% - 15.0%
				Volatility	16.58% - 33.78%

The significant unobservable inputs used in the fair value measurement of the Company’s estimated earn-out payable are (1) the forecasted growth rates over the measurement period and (2) the volatility applied to projected earnings. Significant increases (decreases) in the Company’s forecasted growth rates over the measurement period and expected volatility would result in a higher (lower) fair value measurement.

Incentive Plans

During the three months ended September 30, 2012, NFP maintained an incentive plan for principals and certain employees of its businesses, the Annual Principal Incentive Plan (the “PIP”). Certain employees participate in employee-specific bonus programs that are earned on specified growth thresholds.

A 2012 PIP is in place for the 12-month performance period of January 1, 2012 through December 31, 2012 (the “2012 PIP”), the terms of which are materially consistent with previous PIPs as previously disclosed in NFP’s 2011 10-K. As of September 30, 2012, the Company has accrued $4.0 million within fees to principals expense relating to the 2012 PIP.

During the first quarter of 2012, the Company paid out $7.3 million in cash relating to the prior year’s PIP.

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Note 12—Segment Information

The Company’s three reportable segments provide distinct products and services to different client bases. The Company’s main source of revenue from its reportable segments is commissions and fees revenue from the sale of products and services. Each reportable segment is separately managed and has separate financial information evaluated regularly by the Company’s chief operating decision maker in determining resource allocation and assessing performance. The Company’s three reportable segments are the CCG, the ICG and the Advisor Services Group (the “ASG”).

• The CCG is one of the leading corporate benefits advisors in the middle market, offering independent solutions for health and welfare, retirement planning, executive benefits and property and casualty insurance. The CCG serves corporate clients by providing advisory and brokerage services related to the planning and administration of benefits plans that take into account the overall business profile and needs of the corporate client.

• The ICG is a leader in the delivery of independent life insurance, annuities, long-term care and wealth transfer solutions for high net worth individuals. In evaluating their clients’ near-term and long-term financial goals, the ICG’s advisors serve wealth accumulation, preservation and transfer needs, including estate planning, business succession, charitable giving and financial advisory services.

• The ASG serves independent financial advisors whose clients are high net worth individuals and companies by offering broker-dealer and asset management products and services through NFP Securities, Inc. (“NFPSI”), NFP’s corporate registered investment advisor and independent broker-dealer. The ASG attracts financial advisors seeking to provide clients with sophisticated resources and an open choice of products.

Expenses associated with NFP’s corporate shared services are allocated to NFP’s three reportable segments largely based on performance by segment and on other reasonable assumptions and estimates as it relates to NFP’s corporate shared services support of the reportable segments.

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Financial information relating to NFP’s reportable segments is as follows:

Three Months Ended September 30, 2012	Corporate Client Group			Individual Client Group			Advisor Services Group		Total
Revenue:
Commissions and fees	$	115,138		$	78,165		$	58,733	$	252,036
Operating expenses:
Commissions and fees		13,681			15,912			46,576		76,169
Compensation expense—employees		41,076			27,240			4,351		72,667
Fees to principals		16,601			13,454			—		30,055
Non-compensation expense		21,569			14,117			5,029		40,715
Amortization of intangibles		6,097			2,167			216		8,480
Depreciation		1,324			988			661		2,973
Impairment of goodwill and intangible assets		(1	)		18,408			—		18,407
Gain on sale of businesses, net		—			(439	)		—		(439	)
Change in estimated acquisition earn-out payables		1,035			—			50		1,085
Total operating expenses		101,382			91,847			56,883		250,112
Income (loss) from operations	$	13,756		$	(13,682	)	$	1,850	$	1,924

Nine Months Ended September 30, 2012	Corporate Client Group		Individual Client Group			Advisor Services Group		Total
Revenue:
Commissions and fees	$	339,805	$	239,625		$	182,173	$	761,603
Operating expenses:
Commissions and fees		40,618		49,873			146,801		237,292
Compensation expense—employees		120,765		83,311			12,640		216,716
Fees to principals		48,797		41,111			—		89,908
Non-compensation expense		60,832		45,239			14,091		120,162
Amortization of intangibles		17,884		6,869			216		24,969
Depreciation		4,159		3,007			2,066		9,232
Impairment of goodwill and intangible assets		5,933		25,261			—		31,194
Loss (Gain) on sale of businesses, net		46		(4,883	)		—		(4,837	)
Change in estimated acquisition earn-out payables		7,938		—			50		7,988
Management contract buyout		7,537		—			—		7,537
Total operating expenses		314,509		249,788			175,864		740,161
Income (loss) from operations	$	25,296	$	(10,163	)	$	6,309	$	21,442

At September 30, 2012	Corporate Client Group		Individual Client Group		Advisor Services Group		Corporate Items and Eliminations		Total
Intangibles, net	$	199,438	$	102,882	$	8,388	$	—	$	310,708
Goodwill, net	$	112,782	$	13,491	$	11,770	$	—	$	138,043
Total assets	$	492,970	$	171,911	$	91,914	$	114,498	$	871,293

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Three Months Ended September 30, 2011	Corporate Client Group		Individual Client Group		Advisor Services Group		Total
Revenue:
Commissions and fees	$	105,768	$	84,781	$	60,982	$	251,531
Operating expenses:
Commissions and fees		11,728		18,523		50,046		80,297
Compensation expense—employees		36,007		26,634		3,960		66,601
Fees to principals		19,276		13,925		—		33,201
Non-compensation expense		18,564		16,446		4,242		39,252
Amortization of intangibles		5,622		2,726		—		8,348
Depreciation		1,363		927		836		3,126
Impairment of goodwill and intangible assets		—		2,466		—		2,466
Loss on sale of businesses, net		—		40		—		40
Change in estimated acquisition earn-out payables		53		—		—		53
Total operating expenses		92,613		81,687		59,084		233,384
Income from operations	$	13,155	$	3,094	$	1,898	$	18,147

Nine Months Ended September 30, 2011	Corporate Client Group			Individual Client Group		Advisor Services Group		Total
Revenue:
Commissions and fees	$	295,633		$	244,437	$	184,160	$	724,230
Operating expenses:
Commissions and fees		31,390			52,801		152,092		236,283
Compensation expense—employees		103,547			81,737		11,835		197,119
Fees to principals		51,136			38,573		—		89,709
Non-compensation expense		54,661			48,477		11,694		114,832
Amortization of intangibles		15,901			8,306		—		24,207
Depreciation		4,602			3,209		1,429		9,240
Impairment of goodwill and intangible assets		—			3,386		—		3,386
(Gain) Loss on sale of businesses, net		(47	)		100		—		53
Change in estimated acquisition earn-out payables		53			—		—		53
Total operating expenses		261,243			236,589		177,050		674,882
Income from operations	$	34,390		$	7,848	$	7,110	$	49,348

At December 31, 2011	Corporate Client Group		Individual Client Group		Advisor Services Group		Corporate Items and Eliminations		Total
Intangibles, net	$	190,849	$	129,217	$	—	$	—	$	320,066
Goodwill, net	$	78,535	$	23,504	$	—	$	—	$	102,039
Total assets	$	445,529	$	214,424	$	109,891	$	124,323	$	894,167

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Note 13—Subsequent Events

Lane McVicker, LLC Acquisition

Subsequent to September 30, 2012, the Company acquired Lane McVicker, LLC ("LMV"). LMV will be integrated into NFP Property and Casualty Services, Inc. The upfront consideration for this acquisition was paid in cash and no stock was issued. Further information related to the accounting for this acquisition has not been disclosed, as the activities required to complete the initial accounting have not been completed as of the issuance date of these consolidated financial statements.

Second Amendment to 2010 Credit Facility

On October 30, 2012, NFP entered into the Second Amendment (the “Second Amendment”) to the 2010 Credit Facility. Capitalized terms used and not defined in this description have the meanings set forth in the 2010 Credit Facility, as amended to date by the Second Amendment.

The Second Amendment primarily amends the definition of EBITDA to include, with respect to the fourth fiscal quarter of 2011 and thereafter, certain expenses incurred in connection with Permitted Management Contract Buyouts. Additionally, for purposes of calculating EBITDA in a Reference Period, EBITDA shall be calculated after giving pro forma effect as if any Material Management Contract Buyout consummated during such Reference Period occurred on the first day of such Reference Period.

Pursuant to the Second Amendment, the Company may make Permitted Management Contract Buyouts provided that, among other things, both before and after giving effect to such transaction, no Default or Event of Default shall have occurred or be continuing or could reasonably be expected to result therefrom, and after giving effect to such transaction, Minimum Liquidity shall not be less than $50.0 million.

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

The following discussion should be read in conjunction with the Consolidated Financial Statements (Unaudited) of the Company and the related notes contained 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.

NFP’s principal and executive offices are located at 340 Madison Avenue, New York, New York, 10173 and the telephone number is (212) 301-4000. On NFP’s Web site, www.nfp.com, NFP posts the following filings as soon as reasonably practicable after they are electronically filed or furnished with the SEC: NFP’s annual reports on Form 10-K, NFP’s quarterly reports on Form 10-Q, NFP’s current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All such filings on NFP’s Web site are available free of charge. Information on NFP’s Web site does not constitute part of this report.

Executive Overview

NFP and its benefits, insurance and wealth management businesses provide a full range of advisory and brokerage services to the Company’s clients. NFP serves corporate and high net worth individual clients throughout the United States and in Canada, with a focus on the middle market and entrepreneurs.

Founded in 1998, the Company has grown organically and through acquisitions, operating in the independent distribution channel. This distribution channel offers independent advisors the flexibility to sell products and services from multiple non-affiliated providers to deliver objective, comprehensive solutions. The number of products and services available to independent advisors is large and can lead to a fragmented marketplace. NFP facilitates the efficient sale of products and services in this marketplace by using its scale and market position to contract with leading product providers. These relationships foster access to a broad array of insurance and financial products and services as well as underwriting support and operational services. In addition, the Company is able to operate effectively in this distribution channel by leveraging financial and intellectual capital, technology solutions, the diversification of product and service offerings and regulatory compliance support across the Company. The Company’s marketing and wholesale organizations also provide an independent distribution channel for benefits, insurance and investment products and services, serving both third-party affiliates as well as member NFP-owned businesses.

NFP is organized into three reportable segments: the CCG, the ICG and the ASG. The CCG is one of the leading corporate benefits advisors in the middle market, offering independent solutions for health and welfare, retirement planning, executive benefits and property and casualty insurance. The ICG is a leader in the delivery of independent life insurance, annuities, long-term care and wealth transfer solutions for high net worth individuals and includes wholesale life brokerage, retail life and wealth management services. The ASG, including NFPSI, a leading independent broker-dealer and corporate registered investment advisor, serves independent financial advisors whose clients are high net worth individuals and companies, by offering broker-dealer and asset management products and services. The ASG attracts financial advisors seeking to provide clients with sophisticated resources and an open choice of products. NFP promotes collaboration among its business lines to provide its clients the advantages of a single coordinated resource to address their corporate and individual benefits, insurance and wealth management planning needs.

NFP enhances its competitive position by offering its clients a broad array of insurance and financial solutions. NFP’s continued investments in marketing, compliance and product support provide its independent advisors with the resources to deliver strong client service. NFP believes its operating structure allows its businesses to effectively and objectively serve clients at the local level while having access to the resources of a national company. NFP’s senior management team is composed of experienced insurance and financial services leaders. The Company’s principals and employees who manage the day-to-day operations of NFP’s businesses are professionals who are well positioned to understand client needs.

The economic environment remains challenging and many economic indicators continue to point to a slow and uneven recovery. This uncertain environment has reduced the demand for the Company’s services and the products the Company distributes, particularly in the life insurance market. NFP’s impairment analysis for the quarter ended September 30, 2012 resulted in a goodwill impairment charge of $9.6 million in connection with the ICG’s retail life business line, thereby reducing the value of goodwill within the retail life business line to zero. 2010’s temporary estate tax laws have also had a continuing impact on the high net worth life insurance market by increasing the value of the estate that is exempt from federal estate tax and thereby decreasing the size of the target market.

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Reportable Segments

Corporate Client Group

The CCG is one of the leading corporate benefits advisors in the middle market, offering independent solutions for health and welfare, retirement planning, executive benefits and property and casualty insurance. The CCG serves corporate clients by providing advisory and brokerage services related to the planning and administration of benefits plans that take into account the overall business profile and needs of the corporate client. The CCG accounted for approximately 44.6% and 40.8% of NFP’s revenue for the nine months ended September 30, 2012 and 2011, respectively. The CCG has organized its operations by region in order to facilitate the sharing of resources and investments among its advisors to address clients’ needs.

Effective July 1, 2011, NFP’s property and casualty business is presented as a separate business line. Previously, NFP’s property and casualty business was included within the corporate benefits business line. The CCG now operates primarily through its corporate benefits, executive benefits and property and casualty business lines. Prior periods presented have been conformed to the current period presentation.

The corporate benefits business line accounted for approximately 80.5% and 82.8% of the CCG’s revenue for the nine months ended September 30, 2012 and 2011, respectively. Generally, corporate benefits are available to a broad base of employees within an organization and include products and services such as group medical and disability insurance, group life insurance and retirement planning. The corporate benefits business line consists of both retail and wholesale benefits operations. These businesses have access to advanced benchmarking and analysis tools and comprehensive support services which are provided to both NFP-owned businesses and non-owned entities through NFP Benefits Partners. NFP Benefits Partners is a division of NFP Insurance Services, Inc., a licensed insurance agency and an insurance marketing organization wholly owned by NFP.

The executive benefits business line accounted for approximately 10.5% and 10.2% of the CCG’s revenue for the nine months ended September 30, 2012 and 2011, respectively. Executive benefits products and services provide employers with the ability to establish plans that create or reinstate benefits for highly-compensated employees, typically through non-qualified plans or disability plans. Clients may utilize a corporate-owned life insurance funding strategy to finance future compensation due under these plans. The executive benefits business line consists of NFP-owned businesses and non-owned entities that pay membership fees for membership in one of NFP’s marketing and wholesale organizations.

The property and casualty business line accounted for approximately 9.0% and 7.0% of the CCG’s revenue for the nine months ended September 30, 2012 and 2011, respectively. Property and casualty products and services provide risk management capabilities to businesses and individuals by protecting against property damage, the associated interruption of business and related expenses, or against other damages incurred in the normal course of operations. In addition to managing their own operations, NFP’s property and casualty resources are positioned to serve NFP’s businesses and members of NFP’s marketing and wholesale organizations with commercial, personal and surety line capabilities.

The CCG earns commissions on the sale of insurance policies and fees for the development, implementation and administration of corporate and executive benefits programs and property and casualty products and services. In the corporate benefits business line, commissions and fees are generally paid each year as long as the client continues to use the product and maintains its broker of record relationship with NFP’s business. Commissions are based on a percentage of insurance premium or are based on a fee per plan participant. In some cases, such as for the administration of retirement-focused products like 401(k) plans, fees earned are based on the value of assets under administration or advisement. Generally, in the executive benefits business line, consulting fees are earned relative to the completion of specific client engagements, administration fees are earned throughout the year on policies, and commissions are earned as a calculated percentage of the premium in the year that the policy is originated and during subsequent renewal years, as applicable. Through the property and casualty business line, the CCG offers property and casualty insurance brokerage and consulting services for which it earns commissions and fees. These fees are paid each year as long as the client continues to use the product and maintains its broker of record relationship with NFP’s business.

NFP believes that the corporate benefits business line and the property and casualty business line provides a relatively consistent source of revenue to NFP because recurring revenue is earned each year a policy or service remains in effect. NFP believes that the CCG has a high rate of client retention. NFP estimates that the majority of revenue from the executive benefits business line is recurring revenue while the remainder is concentrated in the year of sale. Historically, revenue earned by the CCG is weighted towards the fourth quarter.

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Individual Client Group

The ICG is a leader in the delivery of independent life insurance, annuities, long-term care and wealth transfer solutions for high net worth individuals. In evaluating their clients’ near-term and long-term financial goals, the ICG’s advisors serve wealth accumulation, preservation and transfer needs, including estate planning, business succession, charitable giving and financial advisory services. The ICG accounted for 31.5% and 33.8% of NFP’s revenue for the nine months ended September 30, 2012 and 2011, respectively. The ICG operates through its marketing organization, PartnersFinancial, its wholesale life brokerage businesses, consisting of Highland Capital Brokerage, Inc. and other NFP-owned brokerage general agencies, as well as through its retail life and wealth management business lines.

The marketing organization and wholesale life brokerage business line accounted for approximately 51.0% and 52.1% of the ICG’s revenue for the nine months ended September 30, 2012 and 2011, respectively. Annual fees are paid for membership in PartnersFinancial, which develops relationships and contracts with selected preferred insurance carriers, earning override commissions when those contracts are used. The ICG is supported by shared service technology investments, product management department, advanced case design team, underwriting advocacy specialists, training and marketing services. Highland Capital Brokerage, Inc. has a significant focus on financial institutions, providing point of sale and insurance marketing support. Highland Capital Brokerage, Inc. and the ICG’s other wholesale life brokerage businesses operate through a brokerage general agency model that provides brokers, typically either independent life insurance advisors or institutions, support as needed. The independent life insurance advisors or institutions then distribute life insurance products and services directly to individual clients. The support provided by the wholesale life brokerage businesses may include underwriting, marketing, point of sale, case management, advanced case design, compliance or technical support.

The ICG’s retail life business line accounted for 28.6% and 28.8% of the ICG’s revenue for the nine months ended September 30, 2012 and 2011, respectively. The retail life business line provides individual clients with life insurance products and services and consists of NFP-owned businesses. NFP’s impairment analysis for the quarter ended September 30, 2012 resulted in a goodwill impairment charge of $9.6 million in connection with the ICG’s retail life business line, thereby reducing the value of goodwill within the retail life business line to zero.

The ICG’s wealth management business line accounted for 20.4% and 19.1% of the ICG’s revenue for the nine months ended September 30, 2012 and 2011, respectively. The ICG’s wealth management business line provides retail financial services to individual clients. This business line consists of NFP-owned businesses.

The ICG’s clients are generally high net worth individuals who the ICG accesses both directly through its retail life and wealth management business lines and indirectly through its marketing organization and wholesale life brokerage business line.

Commissions paid by insurance companies are based on a percentage of the premium that the insurance company charges to the policyholder. In the marketing organization and wholesale life brokerage business line, the ICG generally receives commissions paid by the insurance carrier for facilitating the placement of the product. Wholesale life brokerage revenue also includes amounts received by NFP’s life brokerage entities, including its life settlements brokerage entities, which assist advisors with the placement and sale of life insurance. In the retail life business line, commissions are generally calculated as a percentage of premiums, generally paid in the first year. The ICG receives renewal commissions for a period following the first year. The ICG’s wealth management business line earns fees for offering financial advisory and related services. These fees are generally based on a percentage of assets under management and are paid quarterly. In addition, the ICG may earn commissions related to the sale of securities and certain investment-related insurance products.

Many of the NFP-owned businesses comprising the wealth management business line of the ICG conduct securities or wealth management business through NFPSI. Like the other business lines in the ICG, the wealth management business line generally targets high net worth individuals as clients. In contrast, the ASG’s primary clients are independent investment advisors, who in turn serve high net worth individuals and companies. The ICG’s wealth management business line is composed of NFP-owned businesses. In contrast, the ASG serves independent financial advisors associated with both NFP-owned and non-owned businesses. When independent financial advisors associated with NFP-owned businesses place business through NFPSI, NFPSI receives a commission and the independent financial advisor associated with the NFP-owned business receives the remaining commission. When independent financial advisors associated with non-owned businesses place business through NFPSI, NFPSI receives a commission and the independent financial advisor associated with the non-owned business receives the remaining commission. See also “—Advisor Services Group.”

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Revenue generated by the marketing organization and wholesale life brokerage and retail life business lines tends to be concentrated in the year that the policy is originated. Historically, revenue earned by the marketing organization and wholesale life brokerage and retail life business lines is weighted towards the fourth quarter as clients finalize tax planning decisions at year-end. 2010’s temporary estate tax laws have had a continuing impact on the high net worth life insurance market by increasing the value of the estate that is exempt from federal estate tax and thereby decreasing the size of the target market. Revenue generated by the ICG’s wealth management business line is generally recurring given high client retention rates and is influenced by the performance of the financial markets and the economy, as well as asset allocation decisions, if fees are based on assets under management.

Advisor Services Group

The ASG serves independent financial advisors whose clients are high net worth individuals and companies by offering broker-dealer and asset management products and services through NFPSI, NFP’s corporate registered investment advisor and independent broker-dealer. The ASG attracts financial advisors seeking to provide clients with sophisticated resources and an open choice of products. The ASG accounted for 23.9% and 25.4% of NFP’s revenue for the nine months ended September 30, 2012 and 2011, respectively.

The ASG accesses high net worth individuals through retail investment and insurance planners, corporate benefits advisors who distribute qualified plans or COLI/BOLI and wholesale life insurance advisors who utilize the ASG’s capabilities. The ASG derives a significant portion of revenue from members of NFP’s marketing and wholesale organizations.

The ASG earns fees for providing the platform for financial advisors to offer financial advice and execute financial planning strategies. These fees are based on a percentage of assets under management and are generally paid quarterly. The ASG may also earn fees for the development of a financial plan or annual fees for advising clients on asset allocation. The ASG also earns commissions related to the sale of securities and certain investment-related insurance products. Such commission income and related expenses are recorded on a trade date basis. Transaction-based fees, including incentive fees, are recognized when all contractual obligations have been satisfied. Most NFP-owned businesses and members of NFP’s marketing and wholesale organizations conduct securities or investment advisory business through NFPSI.

Independent broker-dealers/corporate registered investment advisors, such as NFPSI, tend to offer extensive product and financial planning services and heavily emphasize investment advisory platforms and packaged products and services such as mutual funds, variable annuities and wrap fee programs. NFP believes that broker-dealers serving the independent channel tend to be more responsive to the product and service requirements of their registered representatives than wire houses or regional brokerage firms. Advisors using the ASG benefit from a compliance program in place at NFPSI, as broker-dealers are subject to regulations which cover all aspects of the securities business.

Revenue generated by the ASG based on assets under management and the volume of securities transactions is influenced by the performance of the financial markets and the economy.

Acquisitions

In executing on its acquisition strategy, NFP focuses on businesses that provide high levels of recurring revenue and strategically complement its existing businesses. Businesses that supplement the Company’s geographic reach and improve product capabilities across business lines are of particular interest to NFP. Previously, the Company primarily used a relatively standard acquisition model (described below under “—Acquisition Model—Management Contract”) to effect transactions. The Company now enters into transactions or joint ventures on terms that may vary by transaction in order to allow it to pursue its business objectives.

Acquisition Model—Employment Contract

NFP has recently completed acquisition transactions that emphasize a more integrated business model, where the former owners of the acquired business become employees instead of principals, and NFP owns all EBITDA associated with such business. The former owners are typically party to employment contracts, and are subject to certain non-competition and non-solicitation covenants during the term of the employment contract and for a certain period thereafter. Incentive compensation is also a component of the employment contract. This acquisition model is contemplated typically in businesses with higher levels of recurring revenue. Additional contingent consideration may be paid to the former owners upon the satisfaction of certain compounded growth rate thresholds following the closing of the acquisition.

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Management Contract Buyouts

NFP has also recently completed “management contract buyouts.” In these transactions, NFP either purchases the entity (the “Management Company”) that is owned by the principals and is a party to the management contract, with the right to receive a portion of the business’s Target EBITDA (as defined below), or purchases a principal’s economic interest in the management contract. In either scenario, NFP ends up acquiring a greater economic interest in the business than it had prior to the management contract buyout. The principals of such businesses who enter into the management contract buyouts with NFP generally become employees of the business who are party to employment contracts, and are subject to certain non-competition and non-solicitation covenants during the term of the employment contract and for a certain period thereafter. Incentive compensation is also a component of the employment contract. To the extent a principal exits the business after a management contract buyout, NFP has appropriate personnel in place to continue managing such business. Management contract buyouts generally result in an expense to NFP. Management contract buyouts are contemplated typically in businesses with higher levels of recurring revenue and where NFP has had a successful working relationship with the former principals or where appropriate personnel is in place to continue managing such business. Additional payments may be paid to the former principals upon the satisfaction of certain compounded growth rate thresholds following the closing of the transaction.

Acquisition Model—Management Contract

NFP has historically utilized an acquisition model in which NFP acquired businesses on terms that were relatively standard across acquisitions. Acquisition price was determined by establishing a target business’s earnings, calculated by taking the target business’s annual earnings, before interest, taxes, depreciation and amortization and adjusted for expenses that will not continue post-acquisition, such as compensation to former owners who become principals (“Target EBITDA”). The target business’s Target EBITDA is considered “target earnings,” a multiple of “base earnings.” Base earnings are the portion of target earnings in which NFP has a priority earnings position on a yearly basis. Historically, upfront acquisition consideration has been a multiple of base earnings, typically five to nine times. Under certain circumstances, NFP has paid higher multiples due to the specific attributes of the target business or transaction that justified the higher value according to NFP estimates. Earnings in excess of target earnings are typically shared between NFP and the principals in the same ratio as base earnings to target earnings. Additional contingent consideration may be paid to the former owners of the business upon the satisfaction of certain compounded growth rate thresholds following the closing of the acquisition.

In this type of acquisition model, at the time of acquisition, the business, the principals, the Management Company and NFP typically enter into a management contract. Pursuant to the management contract, NFP generally has the contractual right to a percentage of Target EBITDA, with a priority interest in base earnings. NFP’s contractual rights may change through restructures, as discussed below. The principals and the Management Company generally have the contractual right to the remaining percentage of Target EBITDA in the form of fees to principals, once the business achieves a minimum amount of base earnings. Post-acquisition, the principals continue to manage the day-to-day operations of the businesses actively for an initial five-year term, renewable annually thereafter, subject to termination for cause and supervisory oversight as required by applicable law and the terms of the management contracts. The principals also agree to certain non-competition and non-solicitation covenants during the term of the management contract and for a certain period thereafter.

Regarding this type of acquisition model, NFP has previously disclosed and concluded that it maintains the power criterion since the Company directs the activities that impact the underlying economics of the business (see “Note 19—Variable Interest Entities” in the 2011 10-K).

Regulation

The Company is subject to extensive regulation in the United States, certain United States territories and Canada. Failure to comply with applicable federal or state law or regulatory requirements could result in actions by regulators, potentially leading to fines and penalties, adverse publicity and damage to the Company’s reputation. The interpretations of regulations by regulators may change and statutes may be enacted with retroactive impact. In extreme cases, revocation of a subsidiary’s authority to do business in one or more jurisdictions could result from failure to comply with regulatory requirements. NFP could also face lawsuits by clients, insureds or other parties for alleged violations of laws and regulations.

The insurance industry continues to be subject to a significant level of scrutiny by various regulatory bodies, including state attorneys general and insurance departments, concerning certain practices within the insurance industry. These practices include, without limitation, conducting stranger-owned life insurance sales in which the policy purchaser may not have a sufficient insurable interest as required by some states’ laws or regulations, the receipt of contingent commissions by insurance brokers and agents from insurance companies and the extent to which such compensation has been disclosed, bid rigging and related matters. From time to time, NFP’s subsidiaries receive subpoenas and other informational requests from regulatory bodies relating to these or other matters.

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Employees

As of September 30, 2012, the Company had approximately 2,869 employees. NFP believes that its relations with the Company’s employees are generally satisfactory. None of the Company’s employees are represented by a union.

Results of Operations

The Company earns revenue that consists primarily of commissions and fees earned from the sale of financial products and services to its clients. The Company also incurs commissions and fees expense and compensation and non-compensation expense in the course of earning revenue. The Company refers to revenue earned by the Company’s businesses less the operating expenses of its businesses and allocated shared expenses associated with shared corporate resources as income (loss) from operations. The Company’s operating expenses include commissions and fees, compensation expense—employees, fees to principals, non-compensation expense, amortization of intangibles, depreciation, impairment of goodwill and intangible assets, (gain) loss on sale of businesses, net, change in estimated acquisition earn-out payables and management contract buyout. Prior to the 2011 10-K, NFP referred to “compensation expense—employees” as “compensation expense” and referred to “fees to principals” as “management fees.”

Information with respect to all sources of revenue, income (loss) from operations and Adjusted EBITDA by reportable segment for the three and nine months ended September 30, 2012 and 2011 is presented below.

	Three Months Ended					Nine Months Ended
	September 30, 2012			September 30, 2011		September 30, 2012			September 30, 2011
Revenue
Commissions and fees
Corporate Client Group	$	115,138		$	105,768	$	339,805		$	295,633
Individual Client Group		78,165			84,781		239,625			244,437
Advisor Services Group		58,733			60,982		182,173			184,160
Total	$	252,036		$	251,531	$	761,603		$	724,230
Income (Loss) from operations
Corporate Client Group	$	13,756		$	13,155	$	25,296		$	34,390
Individual Client Group		(13,682	)		3,094		(10,163	)		7,848
Advisor Services Group		1,850			1,898		6,309			7,110
Total	$	1,924		$	18,147	$	21,442		$	49,348
Adjusted EBITDA
Corporate Client Group	$	22,211		$	20,193	$	68,793		$	54,899
Individual Client Group		7,442			9,253		20,091			22,849
Advisor Services Group		2,777			2,734		8,641			8,539
Total	$	32,430		$	32,180	$	97,525		$	86,287

Adjusted EBITDA

The Company reports its financial results in accordance with U.S. GAAP; however, management believes that the evaluation of the Company’s ongoing operating results may be enhanced by a presentation of Adjusted EBITDA, which is a non-GAAP financial measure. Adjusted EBITDA is defined as net income excluding income tax expense; interest income; interest expense; gain on early extinguishment of debt; other, net; amortization of intangibles; depreciation; impairment of goodwill and intangible assets; (gain) loss on sale of businesses, net; the accelerated vesting of certain RSUs; any change in estimated acquisition earn-out payables recorded in accordance with purchase accounting that have been subsequently adjusted and recorded in the consolidated statements of operations and the expense related to management contract buyouts.

Management believes that the presentation of Adjusted EBITDA provides useful information to investors because Adjusted EBITDA reflects the underlying performance and profitability of the Company’s business by excluding items that generally do not have a current cash impact and are therefore not representative of the Company’s current operating performance. Additionally, Adjusted EBITDA excludes certain items that are not necessarily comparable from period to period because they are dependent on the outcome of specific transactions. The Company uses Adjusted EBITDA as a measure of operating performance (on an individual business line, segment and consolidated basis); for planning purposes, including the preparation of budgets and forecasts; as the basis for allocating resources to enhance the performance of the Company’s businesses; to evaluate the effectiveness of its business strategies; as a factor in shaping the Company’s acquisition activity; and as a factor in determining compensation and incentives to employees.

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The Company believes that the use of Adjusted EBITDA provides an additional meaningful method of evaluating certain aspects of the Company’s operating performance from period to period on a basis that may not be otherwise apparent under U.S. GAAP when used in addition to, and not in lieu of, U.S. GAAP measures.

A reconciliation of Adjusted EBITDA to its U.S. GAAP counterpart on a consolidated and segment basis for the three and nine months ended September 30, 2012 and September 30, 2011 is provided in the tables below. The reconciliation of Adjusted EBITDA per reportable segment does not include the following items, which are not allocated to any of the Company’s reportable segments: income tax expense; interest income; interest expense; gain on early extinguishment of debt and other, net. These items are included in the reconciliation of Adjusted EBITDA to net income on a consolidated basis.

	Consolidated Three Months  Ended September 30,						Consolidated Nine Months  Ended September 30,
	2012			2011			2012			2011
Adjusted EBITDA Reconciliation
Net income	$	51		$	9,321		$	10,535		$	25,687
Income tax (benefit) expense		(454	)		6,823			3,534			20,329
Interest income		(617	)		(700	)		(1,886	)		(2,600	)
Interest expense		4,173			4,006			12,440			11,751
Other, net		(1,229	)		(1,303	)		(3,181	)		(5,819	)
Income from operations	$	1,924		$	18,147		$	21,442		$	49,348
Amortization of intangibles		8,480			8,348			24,969			24,207
Depreciation		2,973			3,126			9,232			9,240
Impairment of goodwill and intangible assets		18,407			2,466			31,194			3,386
(Gain) Loss on sale of businesses, net		(439	)		40			(4,837	)		53
Change in estimated acquisition earn-out payables		1,085			53			7,988			53
Management contract buyout		—			—			7,537			—
Adjusted EBITDA	$	32,430		$	32,180		$	97,525		$	86,287
Adjusted EBITDA as a % of revenue		12.9	%		12.8	%		12.8	%		11.9	%

	Corporate Client Group Three Months Ended September 30,						Corporate Client Group Nine Months Ended September 30,
	2012			2011			2012			2011
Adjusted EBITDA Reconciliation
Income from operations	$	13,756		$	13,155		$	25,296		$	34,390
Amortization of intangibles		6,097			5,622			17,884			15,901
Depreciation		1,324			1,363			4,159			4,602
Impairment of goodwill and intangible assets		(1	)		—			5,933			—
Loss (Gain) on sale of businesses, net		—			—			46			(47	)
Change in estimated acquisition earn-out payables		1,035			53			7,938			53
Management contract buyout		—			—			7,537			—
Adjusted EBITDA	$	22,211		$	20,193		$	68,793		$	54,899
Adjusted EBITDA as a % of revenue		19.3	%		19.1	%		20.2	%		18.6	%

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	Individual Client Group Three Months Ended September 30,						Individual Client  Group Nine Months Ended September 30,
	2012			2011			2012			2011
Adjusted EBITDA Reconciliation
(Loss) Income from operations	$	(13,682	)	$	3,094		$	(10,163	)	$	7,848
Amortization of intangibles		2,167			2,726			6,869			8,306
Depreciation		988			927			3,007			3,209
Impairment of goodwill and intangible assets		18,408			2,466			25,261			3,386
(Gain) Loss on sale of businesses, net		(439	)		40			(4,883	)		100
Adjusted EBITDA	$	7,442		$	9,253		$	20,091		$	22,849
Adjusted EBITDA as a % of revenue		9.5	%		10.9	%		8.4	%		9.3	%

	Advisor Services Group Three Months Ended September 30,						Advisor Services Group Nine Months Ended September 30,
	2012			2011			2012			2011
Adjusted EBITDA Reconciliation
Income from operations	$	1,850		$	1,898		$	6,309		$	7,110
Amortization of intangibles		216			—			216			—
Depreciation		661			836			2,066			1,429
Change in estimated acquisition earn-out payables		50			—			50			—
Adjusted EBITDA	$	2,777		$	2,734		$	8,641		$	8,539
Adjusted EBITDA as a % of revenue		4.7	%		4.5	%		4.7	%		4.6	%

Overview of the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011

During the nine months ended September 30, 2012, revenue increased $37.4 million, or 5.2%, as compared to the nine months ended September 30, 2011. The revenue increase was driven by revenue increases within the CCG of $44.2 million, partially offset by decreases within the ICG and ASG of $4.8 million and $2.0 million, respectively. Results in the CCG included commissions and fees revenue from acquisitions of $30.2 million that had no comparable operations in the same period of 2011. Excluding the impact of dispositions of $4.1 million, overall revenue in the CCG increased by $18.1 million due to growth at existing businesses and higher profit commission bonuses. Excluding the impact of dispositions within the ICG of $5.6 million, revenue increased slightly by $0.8 million for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. The overall decline in ASG revenue resulted from a continuation of the lower volume of transactional business, driven by financial market volatility as well as a decline in the sale of variable universal life products. While assets under management increased, managed account revenue remained flat because a portion of the increase related to assets where the primary revenues were reflected in the ICG’s wealth management business line and another portion of the increase related to third quarter asset values that will not impact ASG revenues until the fourth quarter of 2012.

Income from operations decreased $27.9 million, or 56.5%, in the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011. The decrease in income from operations was driven by a $27.8 million increase in impairments of goodwill and intangible assets due to management contract buyouts, firm disposals and the performance of the retail life business line, a $7.9 million change in estimated acquisition earn-out payables related to net adjustments in the estimated fair market values of estimated acquisition earn-out payables, primarily due to revised projections of future performance and actual results for certain acquisitions completed in 2011 and 2012, and a $7.5 million expense for the buyout of three management contracts. Compensation expense – employees also increased within the CCG, due to acquisitions that had no comparable operations in 2011. The decreases to income from operations were partially offset by an overall increase in revenue.

Adjusted EBITDA for the nine months ended September 30, 2012 was $97.5 million, compared to $86.3 million for the nine months ended September 30, 2011, an increase of 13.0%. As a percentage of revenue, the Adjusted EBITDA margin for the nine months ended September 30, 2012 was 12.8% compared to 11.9% in the comparable period last year. CCG Adjusted EBITDA increased with revenue growth from existing businesses as well as from newly-acquired businesses that had no comparable operations in 2011. ICG Adjusted EBITDA decreased as declines in commissions and fees expense and non-compensation expense was more than offset by an increase in fees to principals expense, compensation expense – employees and a decline in revenue. ASG Adjusted EBITDA remained relatively flat period to period as lower commission payouts were largely offset by lower revenue.

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Revenue

Many 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.

The Company generates revenue primarily from the following sources:

• Corporate Client Group. The CCG earns commissions on the sale of insurance policies and fees for the development, implementation and administration of corporate and executive benefits programs and property and casualty products and services. In the corporate benefits business line, commissions and fees are generally paid each year as long as the client continues to use the product and maintains its broker of record relationship with NFP’s business. Commissions are based on a percentage of insurance premium or are based on a fee per plan participant. In some cases, such as for the administration of retirement-focused products like 401(k) plans, fees earned are based on the value of assets under administration or advisement. Generally, in the executive benefits business line, consulting fees are earned relative to the completion of specific client engagements, administration fees are earned throughout the year on policies and commissions are earned as a calculated percentage of the premium in the year that the policy is originated and during subsequent renewal years, as applicable. Through the property and casualty business line, the CCG offers property and casualty insurance brokerage and consulting services for which it earns commissions and fees. These fees are paid each year as long as the client continues to use the product and maintains its broker of record relationship with NFP’s business.

• Individual Client Group. Commissions paid by insurance companies are based on a percentage of the premium that the insurance company charges to the policyholder. In the marketing organization and wholesale life brokerage business line, the ICG generally receives commissions paid by the insurance carrier for facilitating the placement of the product. Wholesale life brokerage revenue also includes amounts received by NFP’s life brokerage entities, including its life settlements brokerage entities which assist advisors with the placement and sale of life insurance. In the retail life business line, commissions are generally calculated as a percentage of premiums, generally paid in the first year. The ICG receives renewal commissions for a period following the first year. The ICG’s wealth management business line earns fees for offering financial advisory and related services. These fees are generally based on a percentage of assets under management and are paid quarterly. In addition, the ICG may earn commissions related to the sale of securities and certain investment-related insurance products.

• Advisor Services Group. The ASG earns fees for providing the platform for financial advisors to offer financial advice and execute financial planning strategies. These fees are based on a percentage of assets under management and are generally paid quarterly. The ASG may also earn fees for the development of a financial plan or annual fees for advising clients on asset allocation. The ASG also earns commissions related to the sale of securities and certain investment-related insurance products. Such commission income and related expenses are recorded on a trade date basis. Transactional fees, including incentive fees, are recognized when all contractual obligations have been satisfied. Most NFP-owned businesses and members of NFP’s marketing and wholesale organizations conduct securities or wealth management business through NFPSI.

Some of the Company’s businesses also earn additional compensation in the form of incentive and marketing support revenue from manufacturers of financial services products, based on the volume, consistency and profitability of business generated by the Company. 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 businesses and sales by NFP’s third-party affiliates. The vast majority of the Company’s revenue is generated from its United States operations.

From 1999, the year NFP began operations, until 2009, the Company earned approximately 65% to 70% of its revenue in the first three quarters of the year and approximately 30% to 35% of its revenue in the fourth quarter. In 2011, NFP earned 28% of its revenue in the fourth quarter, whereas in 2010 and 2009, NFP earned 29% of its revenue in the fourth quarter. This change resulted primarily from a weaker sales environment for life insurance products in the ICG. Historically, life insurance sales had been concentrated in the fourth quarter as clients finalized their estate and tax planning decisions. Continued relative weakness in this market has meant a change in the revenue patterns for the business. 2010’s temporary estate tax laws have also had a continuing impact on the high net worth life insurance market by increasing the value of the estate that is exempt from federal estate tax and thereby decreasing the size of the target market.

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Operating expenses

With respect to its operating results, NFP provides the following ratios in the discussion that follows: (i) commission expense ratio, (ii) total compensation expense ratio and (iii) non-compensation expense ratio. The commission expense ratio is derived by dividing commissions and fees expense by revenue. The total compensation expense ratio is derived by dividing the sum of compensation expense—employees and fees to principals by revenue. The non-compensation expense ratio is derived by dividing non-compensation expense by revenue. Included within the CCG, ICG and ASG’s revenue are amounts recorded to eliminate intercompany revenue between the Company’s business lines.

Commissions and fees. Commissions and fees are typically paid to third-party producers who are affiliated with the Company’s businesses. Commissions and fees are also paid to producers who utilize the services of one or more of the Company’s life brokerage entities, including the Company’s life settlements brokerage entities. Additionally, commission s and fees are paid to producers who provide referrals and specific product expertise. When earnings are generated solely by a principal, no commission expense is incurred because principals are only paid from a share of the EBITDA of the business through fees to principals. 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. Rather than collecting the full commission and remitting a portion to a third-party producer, a business 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 business will record only the commissions and fees it receives directly as revenue and have no commission expense. As a result, the business will have lower revenue and commission expense and a higher income from operations as a percentage of revenue. Dollars generated from income from operations will be the same. The transactions in which a business is listed as the sole producer and pays commissions to a third-party producer, compared with transactions in which the carrier pays each producer directly, will cause NFP’s income from operations as a percentage of revenue to fluctuate without affecting income from operations. In addition, within the ASG, NFPSI pays commissions to the Company’s affiliated third-party distributors who transact business through NFPSI.

Wholly-owned businesses that utilize the Company’s marketing organization, wholesale life brokerage businesses and NFPSI receive commissions and fees that are eliminated in consolidation.

Compensation expense—employees. The Company’s businesses incur operating expenses related to compensating producing and non-producing staff. In addition, NFP allocates compensation expense—employees associated with corporate shared services to NFP’s three reportable segments largely based on performance of the segments and other reasonable assumptions and estimates as it relates to the corporate shared services support of the operating segments. Compensation expense—employees includes both cash and stock-based compensation. NFP records share-based payments related to employees and activities as well as allocated amounts from its corporate shared services to compensation expense—employees as a component of compensation expense—employees.

Fees to principals. NFP pays fees to principals to the principals and/or certain entities they own based on the financial performance of the business they manage. From a cash perspective, NFP may advance monthly fees to principals that have not yet been earned due to the seasonality of the earnings of certain subsidiaries, particularly in the life insurance businesses in the ICG. NFP typically pays a portion of the fees to principals monthly in advance. Once NFP receives its cumulative preferred earnings, or base earnings, the principals and/or entity the principals own will earn fees to principals equal to earnings above base earnings up to target earnings. Additional fees to principals are 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 receive 60%. As the Company moves towards a more integrated business model, where the former owners of the acquired business become employees instead of principals, such ratios of base to target earnings will be proportionately impacted and become less meaningful.

Fees to principals also include an accrual for certain performance-based incentive amounts payable under the PIP. For a more detailed discussion of the PIP, see “Note 11—Commitments and Contingencies—Incentive Plans” to the Company’s Consolidated Financial Statements (Unaudited) contained in this report.

The Company accounts for stock-based awards to principals as part of fees to principals expense in the consolidated statements of operations as liability awards. Liability classified stock-based compensation is adjusted each reporting period to account for subsequent changes in the fair value of NFP’s common stock.

Fees to principals may be offset by amounts paid by the principals and/or certain entities they own under the terms of the management contract 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 fees to principals.” Amounts recorded in deferred reduction in fees to principals are amortized as a reduction in fees to principals expense generally over the useful life of the asset. Since the ASG is primarily comprised of NFPSI, NFP’s registered broker-dealer and investment advisor, no fees to principals are paid in this segment.

35

Non-compensation expense. The Company’s businesses incur operating expenses related to occupancy, professional fees, insurance, promotional, travel and entertainment, telecommunication, technology, legal, internal audit, certain compliance costs and other general expenses. In addition, NFP allocates non-compensation expense associated with NFP’s corporate shared services to NFP’s three reportable segments largely based on performance of the segments and other reasonable assumptions and estimates as it relates to the corporate shared services support of the operating segments.

Amortization of intangibles. The Company incurs amortization expense related to the amortization of certain identifiable intangible assets.

Depreciation. The Company incurs depreciation expense related to capital assets, such as investments in technology, office furniture and equipment, as well as amortization for its leasehold improvements. Depreciation expense related to the Company’s businesses as well as allocated amounts related to corporate shared services are recorded within this line item.

Impairment of goodwill and intangible assets. The Company evaluates its amortizing (long-lived assets) and non-amortizing intangible assets for impairment in accordance with U.S. GAAP. See “Note 5—Goodwill and other intangible assets” to the Company’s Consolidated Financial Statements (Unaudited) contained in this report.

(Gain) loss on sale of businesses. From time to time, NFP has disposed of businesses or certain assets of businesses. In these dispositions, NFP may realize a gain or loss on such sale.

Change in estimated acquisition earn-out payables. The recorded purchase price for all acquisitions consummated after January 1, 2009 includes an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of these estimated earn-out obligations are recorded in the consolidated statements of operations in each reporting period.

Management contract buyout. In executing on its acquisition strategy, NFP may complete management contract buyouts. In these transactions, NFP purchases the entity owned by the principals and party to the management contract that had a right to a portion of the business’s Target EBITDA, or purchases a principal’s economic interest in the management contract, in either scenario acquiring a greater economic interest in a business than originally structured. The principals of such businesses who have their interests purchased generally become employees who are party to employment contracts and are subject to certain non-competition and non-solicitation covenants during the term of the employment contract and for a certain period thereafter. The acquisition of this greater economic interest is treated for accounting purposes as the settlement of an executory contract and expensed in the consolidated statements of operations.

Incentive Plans

NFP views incentive plans as an essential component in compensating principals and as a way to activate growth across the Company. For a more detailed discussion of the PIP, see “Note 11—Commitments and Contingencies—Incentive Plans” to the Company’s Consolidated Financial Statements (Unaudited) contained in this report.

36

Three months ended September 30, 2012 compared with the three months ended September 30, 2011

Corporate Client Group

The CCG accounted for 45.7% of NFP’s revenue for the three months ended September 30, 2012. The financial information below relates to the CCG for the periods presented:

	Three Months Ended September 30,
	2012			2011			$Change			% Change
Revenue:
Commissions and fees	$	115,138		$	105,768		$	9,370			8.9	%
Operating expenses:
Commissions and fees		13,681			11,728			1,953			16.7	%
Compensation expense - employees		41,076			36,007			5,069			14.1	%
Fees to principals		16,601			19,276			(2,675	)		-13.9	%
Non-compensation expense		21,569			18,564			3,005			16.2	%
Amortization of intangibles		6,097			5,622			475			8.4	%
Depreciation		1,324			1,363			(39	)		-2.9	%
Impairment of goodwill and intangible assets		(1	)		—			(1	)		N/M
Change in estimated acquistion earn-out payables		1,035			53			982			N/M
Total operating expenses		101,382			92,613			8,769			9.5	%
Income from operations	$	13,756		$	13,155		$	601			4.6	%
Commission expense ratio		11.9	%		11.1	%
Total compensation expense ratio		50.1	%		52.3	%
Non-compensation expense ratio		18.7	%		17.6	%

N/M indicates the metric is not meaningful

Summary

Income from operations. Income from operations increased $0.6 million for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011. The increase in income from operations is due to an increase in commissions and fees revenue, as well as a decrease in fees to principals, partially offset by increases in commissions and fees expense, compensation expense – employees, non-compensation expense, amortization of intangibles, and change in estimated acquisition earn-out payables.

Revenue

Commissions and fees. Commissions and fees revenue for the three months ended September 30, 2012 increased $9.4 million, as compared to the three months ended September 30, 2011, of which approximately $5.9 million represented commissions and fees revenue from the net impact of acquisitions and dispositions affecting the current period. Excluding this impact, overall revenue in the CCG increased by $3.5 million due to growth at existing businesses, including stronger production from certain firms higher profit commission bonuses.

Operating expenses

Commissions and fees. Commissions and fees expense increased $2.0 million for the three months ended September 30, 2012 compared with the same period last year. The increase was largely attributable to the growth in businesses with higher commission expense payouts, and certain management contract buyouts and restructures, in which fees to principals expense was converted into commissions and fees expense.

Compensation expense—employees. Compensation expense—employees increased $5.1 million for the three months ended September 30, 2012 compared with the same period in the prior year. Approximately $2.8 million of the increase was due to compensation expense—employees from the net impact of acquisitions and dispositions affecting the current period. Excluding this impact, compensation expense—employees increased by $2.3 million, due to increased headcount at existing businesses, increases in salaries and wages and certain management contract buyouts, in which fees to principals expense was converted into compensation expense—employees.

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Fees to principals. Fees to principals decreased $2.7 million in the three months ended September 30, 2012 compared with the same period last year. The decrease in fees to principals is a result of management contract buyouts and restructures, in which fees to principals expense was converted into commissions and fees expense and compensation expense—employees.

The total compensation expense ratio was 50.1% for the three months ended September 30, 2012 compared with 52.3% for the three months ended September 30, 2011.

Non-compensation expense. Non-compensation expense increased $3.0 million for the three months ended September 30, 2012 compared with the same period in the prior year. Approximately $0.9 million of the increase represented non-compensation expense from the net impact of acquisitions and dispositions affecting the current period. Excluding this impact, non-compensation expense increased by $2.1 million, due to an increase in professional fees.

The non-compensation expense ratio was 18.7% for the three months ended September 30, 2012 compared with 17.6% for the three months ended September 30, 2011.

Amortization of intangibles. Amortization expense increased as a result of a 2.0% increase in amortizing intangibles, primarily from acquisitions.

Change in estimated acquisition earn-out payables. During the third quarter of 2012, the CCG recognized $1.0 million of an expense related to net adjustments in the estimated fair market values of earn-out obligations. The adjustment in estimated acquisition earn-out payables is related to the accretion of the discount recorded for earn-out obligations associated with prior acquisitions.

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Individual Client Group

The ICG accounted for 31.0% of NFP’s revenue for the three months ended September 30, 2012. The financial information below relates to the ICG for the periods presented:

	Three Months Ended September 30,
	2012			2011			$ Change			% Change
Revenue:
Commissions and fees	$	78,165		$	84,781		$	(6,616	)		-7.8	%
Operating expenses:
Commissions and fees		15,912			18,523			(2,611	)		-14.1	%
Compensation expense—employees		27,240			26,634			606			2.3	%
Fees to principals		13,454			13,925			(471	)		-3.4	%
Non-compensation expense		14,117			16,446			(2,329	)		-14.2	%
Amortization of intangibles		2,167			2,726			(559	)		-20.5	%
Depreciation		988			927			61			6.6	%
Impairment of goodwill and intangible assets		18,408			2,466			15,942			646.5	%
(Gain) Loss on sale of businesses, net		(439	)		40			(479	)		N/M
Total operating expenses		91,847			81,687			10,160			12.4	%
(Loss) Income from operations	$	(13,682	)	$	3,094		$	(16,776	)		-542.2	%
Commission expense ratio		20.4	%		21.8	%
Total compensation expense ratio		52.1	%		47.8	%
Non-compensation expense ratio		18.1	%		19.4	%

Summary

(Loss) Income from operations. Income from operations decreased $16.8 million for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011. The decrease in income from operations is due to a decrease in commissions and fees revenue as well as an overall increase in operating expenses, in particular operating expenses due to impairments and compensation expense – employees, partially offset by reductions in commissions and fees expense, fees to principals, non-compensation expense, amortization of intangibles and a gain on sale of businesses, net.

Revenue

Commissions and fees. Commissions and fees revenue decreased $6.6 million for the three months ended September 30, 2012 as compared with the three months ended September 30, 2011. Excluding the impact of dispositions of $2.2 million, revenue from existing businesses within the ICG decreased by $4.4 million. The decline in ICG revenue was the result of continuing challenges in the high net worth life insurance market driven by low interest rates which impact carrier capacity and client purchasing activity.

Operating expenses

Commissions and fees. Commissions and fees expense decreased $2.6 million for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011. Excluding the impact of dispositions of $0.2 million, commissions from existing businesses declined by $2.8 million primarily relating to the decline in revenue.

Compensation expense—employees. Compensation expense—employees increased $0.6 million for the three months ended September 30, 2012 compared with the same period in the prior year. After the impact from dispositions of $0.8 million, compensation expense—employees increased $1.4 million due to increases in headcount in certain growing businesses and variable compensation paid to performing businesses.

Fees to principals. Fees to principals decreased $0.5 million for the three months ended September 30, 2012 as compared with the three months ended September 30, 2011. Excluding the impact of dispositions of $0.6 million, fees to principals remained relatively flat.

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The total compensation expense ratio was 52.1% for the three months ended September 30, 2012 compared with 47.8% for the three months ended September 30, 2011. The increase in the total compensation expense ratio is primarily the result of the increase in compensation expense—employees.

Amortization of intangibles. Amortization expense declined $0.6 million for the three months ended September 30, 2012 as compared with the three months ended September 30, 2011. Amortization expense declined as a result of a 27.1% decrease in amortizing intangible assets resulting primarily from dispositions and impairments.

Impairment of goodwill and intangible assets. Impairment of goodwill and intangible assets increased $15.9 million for the three months ended September 30, 2012 as compared with the three months ended September 30, 2011. The impairment taken in the third quarter of 2012 reflects an $8.8 million reduction in carrying value for two businesses that are anticipated to be sold in the fourth quarter of 2012, as well as a $9.6 million reduction in goodwill relating to the Company’s retail life business line. The impairments in the third quarter of 2011 relate to one firm that was anticipated to be disposed of in the third quarter of 2011 and was disposed of in the subsequent quarter.

(Gain) Loss on sale of businesses. During the three months ended September 30, 2012, the ICG recognized a net gain from the disposition of three businesses of $0.4 million. During the three months ended September 30, 2011, the ICG recognized a net loss of less than $0.1 million from the disposition of one business.

Advisor Services Group

The ASG accounted for 23.3% of NFP’s revenue for the three months ended September 30, 2012. The financial information below relates to the ASG for the periods presented:

	Three Months Ended September 30,
	2012			2011			$ Change			% Change
Revenue:
Commissions and fees	$	58,733		$	60,982		$	(2,249	)		-3.7	%
Operating expenses:
Commissions and fees		46,576			50,046			(3,470	)		-6.9	%
Compensation expense—employees		4,351			3,960			391			9.9	%
Non-compensation expense		5,029			4,242			787			18.6	%
Amortization of intangibles		216			—			216			N/M
Depreciation		661			836			(175	)		-20.9	%
Change in estimated acquistion earn-out payables		50			—			50			N/M
Total operating expenses		56,883			59,084			(2,201	)		-3.7	%
Income from operations	$	1,850		$	1,898		$	(48	)		-2.5	%
Commission expense ratio		79.3	%		82.1	%
Total compensation expense ratio		7.4	%		6.5	%
Non-compensation expense ratio		8.6	%		7.0	%

Summary

Income from operations. Income from operations decreased less than $0.1 million for the three months ended September 30, 2012, as compared to the three months ended September 30, 2011. The decrease in income from operations is due to a decrease in commissions and fees revenue, increases in compensation expense – employees, non-compensation expense, amortization of intangibles and a change in estimated acquisition earn-out payables, partially offset by decreases in commissions and fees expense and depreciation.

Revenue

Commissions and fees. Commissions and fees revenue decreased $2.2 million for the three months ended September 30, 2012, as compared to the three months ended September 30, 2011. Results in the ASG were driven by a continuation of the lower volume of transactional business, driven by financial market volatility as well as a decline in the sale of variable universal life products. Assets under management for the ASG increased 17.2% to $10.5 billion as of September 30, 2012 compared to $9.0 billion as of September 30, 2011. While assets under management increased, managed account revenue remained flat because a portion of the increase related to assets where the primary revenues were reflected in the ICG’s wealth management business line and another portion of the increase related to third quarter asset values that will not impact ASG revenues until the fourth quarter of 2012.

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Operating expenses

Commissions and fees. Commissions and fees expense decreased $3.5 million for the three months ended September 30, 2012, as compared to the three months ended September 30, 2011. The decrease in commissions and fees is related to the acquisition of Fusion Advisory Network (“Fusion”), which reduced commissions and fees expense, the renegotiation of certain contracts, thereby lowering commissions and fees expense, a decline in sales of variable universal life products and a decline in transactional fees.

Compensation expense—employees. Compensation expense—employees increased $0.4 million for the three months ended September 30, 2012, as compared to the three months ended September 30, 2011, due to increases in salaries as well as headcount. The total compensation expense ratio was 7.4% for the three months ended September 30, 2012, as compared to 6.5% for the three months ended September 30, 2011.

Non-compensation expense. Non-compensation expense increased $0.8 million for the three months ended September 30, 2012, as compared to the three months ended September 30, 2011. The non-compensation expense ratio was 8.6% for the three months ended September 30, 2012, as compared with 7.0% for the three months ended September 30, 2011. The increase primarily related to the acquisition of Fusion, as well as increases in professional and regulatory-related fees.

Amortization of intangibles. Amortization expense increased as a result of an acquisition.

Depreciation. Depreciation expense decreased $0.2 million for the three months ended September 30, 2012, as compared with the same period last year. The decrease in depreciation resulted from a reclassification of assets between segments.

Corporate Items

The financial information below relates to items not allocated to any of NFP’s three reportable segments for the periods presented:

	Three Months Ended September 30,
	2012			2011			$ Change			% Change
Consolidated income from operations	$	1,924		$	18,147		$	(16,223	)		-89.4	%
Interest income		617			700			(83	)		-11.9	%
Interest expense		(4,173	)		(4,006	)		(167	)		4.2	%
Other, net		1,229			1,303			(74	)		-5.7	%
Non-operating income and expenses, net		(2,327	)		(2,003	)		(324	)		16.2	%
Income before income taxes		(403	)		16,144			(16,547	)		-102.5	%
Income tax (benefit) expense		(454	)		6,823			(7,277	)		-106.7	%
Net income	$	51		$	9,321		$	(9,270	)		-99.5	%

Interest income. Interest income slightly decreased $0.1 million for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011. The slight decrease in interest income was mainly due to the satisfaction of certain promissory notes.

Interest expense. Interest expense slightly increased $0.2 million for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011. The slight increase in interest expense was primarily due to an increase in revolver borrowings under the 2010 Credit Facility as compared to the same period in the prior year.

Other, net. Other, net, which primarily consists of income from equity method investments, rental income and net expenses relating to the settlement or reserving of legal matters, remained relatively flat period over period.

Income tax (benefit) expense. Income tax benefit was $0.5 million in the three months ended September 30, 2012 compared with income tax expense of $6.8 million in the same period during the prior year. The effective tax rate for the third quarter of 2012 was 112.7%. This compares with an effective tax rate of 42.3% for the third quarter of 2011. The effective tax rate for the third quarter of 2012 was higher than the effective tax rate for the third quarter of 2011 primarily due to the tax benefit in the third quarter of 2012 associated with dispositions.

41

Nine months ended September 30, 2012 compared with the nine months ended September 30, 2011

Corporate Client Group

The CCG accounted for 44.6% of NFP’s revenue for the nine months ended September 30, 2012. The financial information below relates to the CCG for the periods presented:

	Nine Months Ended September 30,
	2012			2011			$ Change			% Change
Revenue:
Commissions and fees	$	339,805		$	295,633		$	44,172			14.9	%
Operating expenses:
Commissions and fees		40,618			31,390			9,228			29.4	%
Compensation expense—employees		120,765			103,547			17,218			16.6	%
Fees to principals		48,797			51,136			(2,339	)		-4.6	%
Non-compensation expense		60,832			54,661			6,171			11.3	%
Amortization of intangibles		17,884			15,901			1,983			12.5	%
Depreciation		4,159			4,602			(443	)		-9.6	%
Impairment of goodwill and intangible assets		5,933			—			5,933			N/M
Loss (Gain) on sale of businesses, net		46			(47	)		93			-197.9	%
Change in estimated acquistion earn-out payables		7,938			53			7,885			N/M
Management contract buyout		7,537			—			7,537			N/M
Total operating expenses		314,509			261,243		$	53,266			20.4	%
Income from operations	$	25,296		$	34,390		$	(9,094	)		-26.4	%
Commission expense ratio		12.0	%		10.6	%
Total compensation expense ratio		49.9	%		52.3	%
Non-compensation expense ratio		17.9	%		18.5	%

N/M indicates the metric is not meaningful

Summary

Income from operations. Income from operations decreased $9.1 million for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. Income from operations decreased due to an overall increase in operating expenses, in particular operating expenses due to management contract buyouts and the impairments associated with them, for which there were no comparable expenses in the prior period, as well as increases in compensation expense – employees, commissions and fees expense, non-compensation expense and change in estimated acquisition earn-out payables largely due to acquisitions. These increases in expenses were partially offset by an increase in commissions and fees revenue.

Revenue

Commissions and fees. Commissions and fees revenue for the nine months ended September 30, 2012 increased $44.2 million, as compared to the nine months ended September 30, 2011, of which approximately $26.1 million represented commissions and fees revenue from the net impact of acquisitions and dispositions affecting the current period. Excluding this impact, overall revenue in the CCG increased by $18.1 million due to growth at existing businesses, increased profit contingency commissions and other performance bonuses.

Operating expenses

Commissions and fees. Commissions and fees expense increased $9.2 million for the nine months ended September 30, 2012 compared with the same period last year, of which approximately $1.4 million represented commissions and fees expense from the net impact of acquisitions and dispositions affecting the current period. Excluding this impact, overall commissions and fees expense in the CCG increased by $7.8 million and was largely attributable to the growth in businesses with higher commission expense ratios, certain management contract buyouts and restructures, in which fees to principals expense was converted into commissions and fees expense.

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Compensation expense—employees. Compensation expense—employees increased $17.2 million for the nine months ended September 30, 2012 compared with the same period in the prior year. Approximately $12.2 million of the increase was due to compensation expense—employees from the net impact of acquisitions and dispositions affecting the current period. Excluding this impact, compensation expense – employees in the CCG increased by $5.0 million, due to increased headcount at existing businesses, increases in salaries and wages and certain management contract buyouts, in which fees to principals expense was converted into compensation expense—employees.

Fees to principals. Fees to principals decreased $2.3 million in the nine months ended September 30, 2012 compared with the same period last year. Approximately $0.4 million of the decrease was due to fees to principals from the net impact of acquisitions and dispositions affecting the current period. The remaining decrease of $1.9 million is a result of management contract buyouts and restructures, in which fees to principals expense was converted into commissions and fees expense and compensation expense—employees.

The total compensation expense ratio was 49.9% for the nine months ended September 30, 2012 compared with 52.3% for the nine months ended September 30, 2011. The decrease in total compensation expense ratio was attributable to revenue growth exceeding the growth in fees to principals.

Non-compensation expense. Non-compensation expense increased $6.2 million for the nine months ended September 30, 2012 compared with the same period in the prior year. Approximately $4.0 million of the increase represented non-compensation expense from the net impact of acquisitions and dispositions affecting the current period. After this impact, non-compensation expense increased by $2.2 million, due to an increase in professional fees.

The non-compensation expense ratio was 17.9% for the nine months ended September 30, 2012 compared with 18.5% for the nine months ended September 30, 2011.

Amortization of intangibles. Amortization expense increased as a result of a 2.0% increase in amortizing intangibles, primarily from acquisitions.

Impairment of goodwill and intangible assets. The impairment of goodwill and intangible assets of $5.9 million in 2012 related to two management contract buyouts.

Loss on sale of businesses. During the nine months ended September 30, 2012, the CCG recognized a loss of less than $0.1 million on the disposal of one business. During the nine months ended September 30, 2011, the CCG recognized a gain of less than $0.1 million on the disposal of one business.

Change in estimated acquisition earn-out payables. During 2012, the CCG recognized $7.9 million of an expense related to net adjustments in the estimated fair market values of earn-out obligations related to the revised projections of future performance and the actual results for certain acquisitions completed in 2011 and 2012. The fair values of the estimated acquisition earn-out payables increased during the first nine months of 2012 since certain acquisitions performed at a level better than originally projected as well as an increase in accretion of the discount recorded for earn-out obligations associated with prior acquisitions.

Management contract buyout. During the nine months ended September 30, 2012, the CCG recognized a $7.5 million expense related to three management contract buyouts. During the nine months ended September 30, 2011, there were no such buyouts.

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Individual Client Group

The ICG accounted for 31.5% of NFP’s revenue for the nine months ended September 30, 2012. The financial information below relates to the ICG for the periods presented:

	Nine Months Ended September 30,
	2012			2011			$ Change			% Change
Revenue:
Commissions and fees	$	239,625		$	244,437		$	(4,812	)		-2.0	%
Operating expenses:
Commissions and fees		49,873			52,801			(2,928	)		-5.5	%
Compensation expense—employees		83,311			81,737			1,574			1.9	%
Fees to principals		41,111			38,573			2,538			6.6	%
Non-compensation expense		45,239			48,477			(3,238	)		-6.7	%
Amortization of intangibles		6,869			8,306			(1,437	)		-17.3	%
Depreciation		3,007			3,209			(202	)		-6.3	%
Impairment of goodwill and intangible assets		25,261			3,386			21,875			646.0	%
(Gain) Loss on sale of businesses, net		(4,883	)		100			(4,983	)		N/M
Total operating expenses		249,788			236,589		$	13,199			5.6	%
(Loss) Income from operations	$	(10,163	)	$	7,848		$	(18,011	)		-229.5	%
Commission expense ratio		20.8	%		21.6	%
Total compensation expense ratio		51.9	%		49.2	%
Non-compensation expense ratio		18.9	%		19.8	%

Summary

(Loss) Income from operations. Income from operations decreased $18.0 million for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. The decrease in income from operations is due to an overall increase in operating expenses, in particular operating expenses due to impairments, fees to principals and compensation expense – employees, and a decrease in commissions and fees revenue. These changes were partially offset by a gain on sale of businesses, net, a decrease in non-compensation expense, commissions and fees expense and amortization of intangibles expense.

Revenue

Commissions and fees. Commissions and fees revenue decreased $4.8 million for the nine months ended September 30, 2012 as compared with the nine months ended September 30, 2011. Excluding the impact of dispositions of $5.6 million, revenue from existing businesses within the ICG increased by $0.8 million. Results in the ICG were impacted by continuing challenges in the high net worth life insurance market driven by low interest rates which impact carrier capacity and client purchasing activity.

Operating expenses

Commissions and fees. Commissions and fees expense decreased $2.9 million for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. Excluding the impact of dispositions of $0.3 million, commissions and fees expense from existing businesses decreased by $2.7 million. The commission expense ratio was 20.8% in the nine months ended September 30, 2012 compared with 21.6% in the nine months ended September 30, 2011.

Compensation expense—employees. Compensation expense—employees increased $1.6 million for the nine months ended September 30, 2012 compared with the same period in the prior year. After the impact from dispositions of $1.9 million, compensation expense—employees increased by $3.5 million due to increases in headcount in certain growing businesses and variable compensation paid to performing businesses.

Fees to principals. Fees to principals increased $2.5 million for the nine months ended September 30, 2012 as compared with the nine months ended September 30, 2011. Excluding the impact of dispositions of $1.1 million, overall fees to principals increased by $3.6 million. The increase is a result of improved earnings performance in certain businesses.

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The total compensation expense ratio was 51.9% for the nine months ended September 30, 2012 compared with 49.2% for the nine months ended September 30, 2011. The increase in the total compensation expense ratio is primarily the result of the increase in fees to principals.

Non-compensation expense. Non-compensation expense decreased $3.2 million for the nine months ended September 30, 2012 as compared with the nine months ended September 30, 2011. After the impact from dispositions of $2.0 million, non-compensation expense decreased by $1.3 million due to reserves taken on promissory notes in the prior year period.

Amortization of intangibles. Amortization expense declined $1.4 million for the nine months ended September 30, 2012 as compared with the nine months ended September 30, 2011. Amortization expense declined as a result of a 27.1% decrease in amortizing intangible assets resulting primarily from dispositions and impairments.

Impairment of goodwill and intangible assets. Impairment of goodwill and intangible assets increased $21.9 millio