Overview of the Year ended December 31, 2011 compared with the year ended December 31, 2010
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.
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.
Commissions and fees. Commissions and fees expense increased $29.1 million for the year ended December 31, 2011 as compared to last year. The increase in commissions and fees expense was attributable to the increase in revenue.
Gain on early extinguishment of debt. For the year ended December 31, 2010, NFP recognized a pre-tax gain of approximately $9.7 million related to the purchase and allocation of debt in the tender offer for its 2007 Notes, which expired in July 2010.
Income tax expense (benefit). Income tax expense was $26.5 million in 2010, compared with an income tax (benefit) of $(74.4) million in 2009. The effective tax rate in 2010 was 38.4%, compared with an effective tax rate of 13.1% in 2009. The estimated annual effective tax rate was higher for the year ended December 31, 2010 largely as a result of the reduction in tax benefits from dispositions, impairments and firm restructurings as compared to 2009. The estimated effective tax rate may be affected by future impairments, restructurings, state tax changes and, as a result, may impact income tax expense both in terms of absolute dollars and as a percentage of income before income taxes.
The Company’s Consolidated Financial Statements are prepared in accordance GAAP. The preparation of the Company’s Consolidated Financial Statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company continuously evaluates its estimates, which are based on historical experience and on assumptions that the Company believes to be reasonable under the circumstances. These estimates form the basis for judgments about the carrying values of the Company’s assets and liabilities, which values are not readily apparent from other sources. Actual results may differ from these estimates.
The Company accounts for uncertain tax positions by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the consolidated financial statements. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company’s unrecognized tax benefits decreased by $0.3 million, $4.0 million and $0.2 million during the years ended December 31, 2011, 2010 and 2009, respectively. Estimated interest and penalties related to the underpayment of income taxes and reported in income tax expense totaled $0.7 million in 2011, $0.4 million in 2010, and $0.9 million in 2009. The Company believes that it is reasonably possible that the total amounts 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 limitations in various state and local jurisdictions, in an amount ranging from $7.9 million to $9.6 million based on current estimates.