AB

Business Context and Reporting Period

Company: AllianceBernstein Holding L.P. (Holding) and AllianceBernstein L.P. (Operating Partnership).
Reporting Period: Fiscal year ended December 31, 2009.
Business Overview: A global investment management firm providing research, diversified investment management, and related services to institutional, retail, and private clients. The firm operates through four primary service lines: Institutional Services, Retail Services, Private Client Services, and Bernstein Research Services. AXA and its subsidiaries hold an approximate 62.1% economic interest in the firm.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net revenues decreased 17.3% to $2.91 billion, driven primarily by a 32.4% drop in investment advisory fees due to lower average AUM and a 26.7% decline in distribution revenues.
• Profitability Impact: Net income attributable to unitholders fell 33.7% to $556.1 million. Operating income decreased 36.2% to $590.8 million.
• AUM Recovery: Total AUM increased 7.3% to $495.5 billion, recovering from the 42.3% decline in 2008. This growth was driven by $107.4 billion in market appreciation, which partially offset $73.9 billion in net outflows.
• Expense Reduction: Total expenses decreased 10.5% to $2.32 billion. This was achieved through a 22.9% reduction in headcount (nearly 1,300 staff members) since the third quarter of 2008, reducing fixed compensation costs by approximately $130 million.
• Investment Gains: Investment gains (losses) swung from a $349.2 million loss in 2008 to a $144.5 million gain in 2009, largely due to mark-to-market gains on investments related to deferred compensation plans.

Guidance, Outlook, and Risks

Management Commentary: Management views 2009 as a transitional year focused on improving investment performance, reducing net outflows, and right-sizing the firm. The firm reported strong relative investment returns in 2009, particularly in blend strategies and fixed income. Management expects the trend of improving sales and declining net outflows to continue into 2010.

Outlook: The firm anticipates continued growth in its sell-side research footprint and expansion of client services. However, profitability remains at 30-year lows, and the firm expects corporate earnings to rise, creating opportunities for active asset managers.

Key Risks and Contingencies:

• Performance-Based Fees: Approximately 89% of hedge fund AUM subject to high-watermarks was below those marks by 10% or more at year-end, making it difficult to earn performance fees in 2010.
• Asset Impairment: Prolonged weakness in asset values could lead to impairment of goodwill, intangible assets, and the deferred sales commission asset.
• Legal Proceedings: The firm is involved in various litigation matters, including the Hindo class action regarding market timing and late trading. While a $30 million settlement for certain claims has been disbursed, derivative claims on behalf of Holding remain pending with unspecified damages.
• Regulatory Changes: Proposed tax legislation could alter the tax status of publicly-traded partnerships, potentially subjecting Holding to corporate income tax.

Investor Verification Checklist

• AUM Flows: Verify the sustainability of the reduction in net outflows and the ability to generate net inflows in 2010 despite the challenging market environment.
• Expense Leverage: Monitor whether the reduced expense base (post-headcount cuts) allows for operating leverage as AUM recovers.
• Performance Fees: Assess the timeline for hedge fund AUM to recover to high-watermarks to unlock performance-based fee revenue.
• Deferred Sales Commissions: Review the quarterly impairment testing of the deferred sales commission asset, particularly given the cessation of back-end load share offerings to new investors in January 2009.
• Related Party Transactions: Confirm that fees charged to and received from AXA affiliates remain at arm's-length terms, as AXA represents a significant portion of AUM and revenue.