Announces Outlook For 2006
COLUMBUS, Ohio, Feb. 9 /PRNewswire-FirstCall/ -- Nationwide Financial
Services, Inc. (NYSE: NFS), a leading provider of long-term savings and
retirement products, today reported fourth quarter 2005 net income of $130.3
million, or $0.85 per diluted share, compared with fourth quarter 2004 net
income of $141.8 million, or $0.93 per diluted share. The decrease was
primarily driven by the disposition of underperforming businesses which
resulted in a non-cash charge in the current quarter. Full-year 2005 net
income increased 19 percent to $598.7 million, or $3.90 per diluted share,
compared to $502.0 million, or $3.28 per diluted share, for the full-year
2004.
"We continued to make progress improving our bottom line performance
during 2005. However, we did not make satisfactory progress in restoring
sales momentum, a necessary step in our efforts to accelerate growth and
improve returns," said Jerry Jurgensen, chief executive officer.
"During 2006, it is imperative that we improve our core business
performance with a priority focus on restoring sales momentum," Jurgensen
added. "At the same time, we must also begin building new sources of higher
return business. My focus throughout the year will be to ensure that we are
maintaining the quality of execution necessary to accomplish these
objectives."
Nationwide Financial analyzes operating performance using a non-GAAP
financial measure called "net operating earnings," which the Company believes
enhances understanding and comparability of its performance by highlighting
its results from continuing operations and the underlying profitability
drivers. See Exhibit 3 for a description of non-GAAP financial measures
included in this earnings announcement, a reconciliation of non-GAAP financial
measures to GAAP financial measures and the substantive reasons why the
Company believes presentation of these non-GAAP financial measures provides
useful information to investors regarding its financial condition and results
of operations. The table on the following page reconciles net operating
earnings to net income, including the related diluted per share amounts, for
the periods indicated.
Three months ended December 31,
2005 2004
(in millions, except
per share data) Amount Per diluted Amount Per diluted
share share
Net operating earnings $152.2 $0.99 $133.1 $0.87
Net realized losses on
investments, hedging
instruments and hedged
items, net of taxes* 2.4 0.02 9.5 0.07
Adjustment to DAC
amortization related to
net realized losses,
net of taxes 0.1 - - -
Discontinued operations,
net of taxes** (24.4) (0.16) (0.8) (0.01)
Net income $130.3 $0.85 $141.8 $0.93
* Excluding operating items (periodic net coupon settlements on
non-qualifying derivatives, trading portfolio realized gains and
losses, and trading portfolio valuation changes).
** Results of operations of Cap Pro Holding, Inc. (Cap Pro), Nationwide
Financial Services (Bermuda), Ltd. (NFS Bermuda), and William J. Lynch
& Associates, Inc. (TBG Lynch) have been reclassified as discontinued
operations for all periods presented.
Fourth quarter's net operating earnings were $152.2 million, or $0.99 per
diluted share, compared to net operating earnings of $133.1 million, or $0.87
per diluted share, for the fourth quarter a year ago. The 14 percent year-
over-year increase was primarily driven by improved operating results in the
retirement plans and corporate and other segments. These increases were
partially offset by a modest decline in the operating results in the
individual investments segment.
Net operating earnings for full-year 2005 increased 15 percent to $611.8
million, or $3.98 per diluted share, compared to $533.1 million, or $3.49 per
diluted share, in 2004. The full-year increase was primarily driven by
improved operating results in individual protection, retirement plans and
individual investments, as well as federal income tax benefits related to the
refinement of the Company's estimation process for separate account dividends
received deductions (DRD).
"We are pleased with our bottom line financial performance during 2005,
and the progress we made against our strategic priorities," said Mark
Thresher, president and chief operating officer. "We launched several major
new products, exited several underperforming businesses, continued the
development of industry leading risk management capabilities, and strengthened
the management team with new sales and financial leadership."
"That said, we are not satisfied with where we are today. Our mandate
during 2006 is to accelerate the improvement of our core business
performance," Thresher continued. "We believe the combination of recently
launched enhancements to existing products, as well as new products and
features that we expect to launch by mid-year, will significantly improve our
competitiveness across the individual savings and protection markets. In
addition, the work we're doing to improve our sales and support processes,
augmented by the addition of John Carter as our new sales leader, are key
factors for establishing sustainable sales growth."
"With respect to our outlook for 2006, we will also be making investments
that are important to our future," Thresher added. "We are building new
capabilities that will enable NF to more fully serve consumer needs and
participate in higher growth and return markets. The planned investments
include: development of banking services, expanding and enhancing retail
distribution capabilities, building in-retirement solutions and developing
mutual fund opportunities. These investments will temper the earnings growth
in 2006 that the company might otherwise have achieved, although we expect
these investments to drive earnings and return growth in subsequent years."
Highlights from the quarter:
- Sales totaled $4.0 billion, with $1.7 billion, or 42 percent, of sales
from affiliated distribution and $2.3 billion, or 58 percent,
from non-affiliated distribution.
- Total net outflows, or customer deposits net of withdrawals, were
$253.4 million in the fourth quarter of 2005 compared to net inflows of
$226.1 million in the fourth quarter of 2004. Net inflows of $390.0
million in the retirement plans segment and $162.1 million in the
individual protection segment were not sufficient to offset the net
outflows of $765.5 million in the individual investments segment.
- Total revenues increased 3 percent to $1.1 billion compared to the
fourth quarter of 2004. Higher net investment income and asset-based
fees drove the increase.
- Total assets as of December 31, 2005, were $116.2 billion, compared to
$117.0 billion as of December 31, 2004.
- Assets held in separate accounts were $66.0 billion, an increase
of 2 percent, compared to $64.9 billion as of December 31, 2004.
- General account assets were $50.2 billion, a 4 percent decrease,
compared to $52.1 billion as of December 31, 2004.
- Shareholders' equity was $5.4 billion, or $35.08 per basic share, as of
December 31, 2005, compared to $5.2 billion, or $34.20 per basic share,
as of December 31, 2004.
- Excluding accumulated other comprehensive income (AOCI),
shareholders' equity increased 10 percent to $5.2 billion, or
$34.42 per share, from $4.8 billion, or $31.36 per share, as of
December 31, 2004.
- Operating return on average equity excluding AOCI, as defined in
Exhibit 3, increased to 11.7 percent for the quarter, compared to 11.3
percent in the fourth quarter of 2004.
- In order to focus resources on other strategic priorities, the Company
is disposing of its interests in NFS Bermuda and TBG Lynch. Therefore,
the financial results of these entities are presented as discontinued
operations for all periods. Although this resulted in a non-cash
charge in the current period, the decision allows the Company to focus
its resources on higher return businesses.
- A $13.2 million non-cash after-tax loss was recorded as
discontinued operations as a result of the sale of NFS Bermuda.
The sale was completed effective December 31, 2005.
- Based on a planned transaction involving TBG Lynch, an after-tax
impairment of $12.0 million was recognized in the fourth quarter
of 2005.
- During the quarter, the Company repurchased 1,148,050 shares of its
common stock at a total cost of $47.9 million, an average price of
$41.68 per share.
Highlights from the year
- Full-year 2005 net income increased 19 percent to $598.7 million, or
$3.90 per diluted share, compared to $502.0 million, or $3.28 per
diluted share, for 2004.
- Net operating earnings for full-year 2005 increased 15 percent to
$611.8 million, or $3.98 per diluted share, compared to $533.1 million,
or $3.49 per diluted share, in 2004.
- Total revenues increased 6 percent to $4.3 billion in 2005 from $4.1
billion in 2004.
- Total 2005 sales were $16.8 billion compared to $16.9 billion in 2004.
Increased sales of retirement plans and individual protection products
were offset by lower individual investments sales.
- Net operating return on average equity excluding AOCI was 12.2 percent
for the year, compared to 11.7 percent in 2004.
- During 2005, the Company repurchased 1,239,150 shares of its common
stock, at a total cost of $51.4 million, an average price of $41.47 per
share.
Operating Segment Fourth Quarter Financial Highlights
Nationwide Financial reports its results in three primary business
segments: individual investments, retirement plans and individual protection.
Following are the financial highlights and a discussion of the results for
each of these segments, plus a discussion of results for the corporate and
other segment:
Three months ended
December 31,
(in millions) 2005 2004 Change
Individual Investments
Sales $987.6 $1,073.9 (8%)
Net flows (765.5) (341.1) NM
Operating revenues 380.1 372.2 2%
Pre-tax operating earnings 53.4 57.9 (8%)
Ending account values 51,227.6 52,481.9 (2%)
Interest spread on average general
account values 1.95% 1.70%
Pre-tax operating earnings to average
account values 0.41% 0.45%
Return on average allocated capital 12.1% 10.4%
Retirement Plans
Sales $2,554.9 $2,389.1 7%
Net flows 390.0 465.6 (16%)
Operating revenues 276.0 256.3 8%
Pre-tax operating earnings 49.7 40.8 22%
Ending account values 82,998.5 76,661.2 8%
Interest spread on average general
account values 1.84% 1.81%
Pre-tax operating earnings to average
account values 0.24% 0.22%
Return on average allocated capital 20.1% 16.7%
Individual Protection
Sales $407.8 $396.8 3%
Net flows 162.1 524.7 (69%)
Operating revenues 339.7 345.8 (2%)
Pre-tax operating earnings 59.6 59.5 -
Policy reserves 17,388.6 15,683.0 11%
Life insurance in force 126,361.1 109,225.7 16%
Pre-tax operating earnings to
operating revenues 17.5% 17.2%
Return on average allocated capital 9.5% 9.4%
Individual Investments Segment
Fourth quarter individual investments sales of $987.6 million increased 4
percent compared to the third quarter, but were down 8 percent compared to a
year ago. Individual variable annuity sales of $851.0 million increased 6
percent compared to last quarter and were flat compared to the year ago
quarter. These sales have shown signs of gaining momentum, as the increase
versus last quarter increase exceeded the Company's expectations for industry
sales increases in the quarter. Individual fixed annuity sales of $32.6
million increased 3 percent compared to the third quarter, but were
significantly lower compared to sales of $106.6 million in the same period a
year ago driven by our continued pricing discipline in the fixed annuity
market.
Income product sales of $54.8 million were higher than both last year and
the prior quarter by 9 percent and 11 percent, respectively. Advisory
services program sales were $49.2 million during the quarter, versus third
quarter sales of $65.1 million and $64.2 million for the same period a year
ago.
Pre-tax operating earnings were $53.4 million in the quarter, compared to
$57.9 million in the fourth quarter of 2004. Increased policy charges and
interest spread income, the result of higher asset values, were offset by
increased amortization of deferred policy acquisition costs (DAC) and
increased benefits expense. Pre-tax operating earnings declined 5 percent
compared to the third quarter, primarily due to lower interest spread income
as a result of a reduction in general account assets.
Interest spread income in the fourth quarter grew 9 percent, or $6.4
million, versus a year ago. The interest spread margin was 195 basis points
in the fourth quarter, compared to 170 basis points in the fourth quarter a
year ago and 194 basis points in the third quarter of 2005. Included in the
current quarter were 19 basis points, or $7.2 million, of income from
prepayment penalties on mortgage loans and bond call premiums, compared to 8
basis points, or $3.2 million, in the fourth quarter a year ago and 30 basis
points, or $12.0 million, in the third quarter of 2005.
The individual investments segment operating margin, defined as the ratio
of pre-tax operating earnings to average account values, was 41 basis points
for the quarter, compared to 45 basis points a year ago and 43 basis points in
the prior quarter. Return on average allocated capital was 12.1 percent for
the quarter, compared to 10.4 percent reported for the fourth quarter of 2004
and 16.7 percent last quarter. The prior quarter return on average allocated
capital included an additional 5.8 percent resulting from additional tax
benefits driven by separate account DRD.
Retirement Plans Segment
Sales in this segment grew 7 percent compared to the fourth quarter of
2004. Public sector sales increased 2 percent compared to a year ago, driven
by continued growth from large cases. Private sector sales increased 10
percent versus a year ago, driven by increased small case sales through the
independent broker/dealer channels and large case administrative-only sales
through The 401(k) Company.
Pre-tax operating earnings increased to $49.7 million compared to $40.8
million a year ago, driven by growth in small case 401(k) assets, which was
partially offset by increased trail commissions. Other income, which includes
administrative fees from non-insurance retirement and deferred compensation
plans, and asset-based fees from the trust product small-plan 401(k) platform,
increased $17.8 million, or 34 percent, for the quarter compared to the fourth
quarter of 2004. The continuing mix shift from annuity-based business to
trust-based business contributed to the decline in policy charges, as trust-
based policy charges are reported as other income.
Interest spread income for the fourth quarter was 9 percent higher than
the prior year, primarily due to higher assets, prepayments and crediting rate
flexibility. The interest-spread margin was 184 basis points in the quarter,
compared to 181 basis points in the same period a year ago and 183 basis
points in the third quarter of 2005. Included in the current quarter were 19
basis points, or $5.2 million, of prepayment penalty income, compared to 11
basis points, or $2.8 million, in the fourth quarter a year ago, and 18 basis
points, or $5.0 million, last quarter.
The operating margin, defined as the ratio of pre-tax operating earnings
to average account values, was 24 basis points for the quarter. This compares
to 22 basis points for the same quarter a year ago and 23 basis points last
quarter. Return on average allocated capital was 20.1 percent in the quarter,
up from 16.7 percent a year ago and down from 25.1 percent in the third
quarter of 2005. The third quarter return on average allocated capital
includes an additional 7.4 percent due to the additional DRD benefits
previously discussed.
Individual Protection Segment
The individual protection segment reports results from two businesses:
investment life, which includes individual variable and corporate- and bank-
owned life insurance (COLI/BOLI), and fixed life, which includes universal,
whole and term life insurance products.
This segment reported total pre-tax operating earnings of $59.6 million,
which were flat compared to the prior year quarter. Fixed life products pre-
tax operating earnings were 1 percent higher while investment life products
pre-tax operating earnings were flat versus the fourth quarter of 2004.
The operating margin for the segment, defined as the ratio of pre-tax
operating earnings to operating revenues, was 17.5 percent for the quarter,
compared to 17.2 percent in the same quarter of 2004 and 19.3 percent in the
third quarter of 2005. Return on average allocated capital of 9.5 percent for
the quarter increased from 9.4 percent in the same quarter last year, but
declined from 10.9 percent in the previous quarter. The prior quarter return
on average allocated capital includes an additional 90 basis points due to the
additional DRD benefits noted previously.
Highlights from the life insurance businesses in the fourth quarter
include:
Investment life: First-year individual variable life sales of $40.8
million were up 3 percent compared to the prior year. Individual variable
life sales were $163.4 million compared to $172.3 million a year ago.
COLI sales grew 17 percent compared to last year driven by several
existing large cases funding during the quarter.
Investment life pre-tax operating earnings of $37.5 million were flat
compared to the fourth quarter of 2004. Other income and higher
administrative fees from a large BOLI case in the prior period were
offset by lower amortization of DAC and operating expenses.
Fixed life: First-year sales of $30.1 million were 11 percent higher
than in the prior year. Individual fixed life sales increased 3 percent
to $139.4 million compared to $134.7 million the prior year quarter.
Fourth quarter fixed life pre-tax operating earnings were $22.1 million,
compared to $21.8 million in the prior year quarter. Lower value of
business acquired (VOBA) amortization was partially offset by higher
general operating expenses.
Corporate and Other Segment
Corporate and other segment pre-tax operating earnings were $22.6 million
in the fourth quarter of 2005, compared to $15.1 million of earnings in the
fourth quarter of 2004 and a $1.1 million loss in the third quarter of 2005.
The increase compared to prior year was primarily driven by improved interest
spread income attributable to increased capital and surplus. The increase
compared to prior quarter was primarily driven by third quarter debt
extinguishment costs of $21.7 million related to the redemption of the 7.10%
Trust Preferred Securities.
During the quarter, medium term notes (MTN) with an aggregate principal
amount of $300.0 million were issued and $340.0 million matured. Current
quarter interest-spread margin for the MTN business was 128 basis points,
compared to 103 basis points in the same quarter last year and 109 basis
points last quarter. Interest spread income of $12.8 million was 8 percent
higher in the fourth quarter, compared to $11.9 million in the year ago
quarter.
In structured products, guaranteed low-income-housing tax credits and
securitization of commercial mortgage-backed securities transactions during
the quarter contributed $3.0 million of pre-tax operating earnings. This
compares to $4.7 million of pre-tax operating earnings from structured
products in the fourth quarter of 2004 and $1.6 million in the third quarter
of 2005.
Business Outlook
The information provided below includes certain forward-looking
statements, is based on current business conditions and incorporates a range
of possible results that are intended to illustrate the sensitivity of the
Company's margins and returns to these factors.
To the extent that equity-market performance varies from levels indicated
in this business outlook, the Company's results will vary accordingly.
Additionally, the Company's ability to meet the indicated outlook is subject
to the factors described in the forward-looking information section found on
the following page.
The table below outlines the Company's expectations for full-year sales
and earnings drivers and is based on the assumption that the equity markets
and the Company's separate account assets will achieve a return of 6 percent
during 2006.
In addition, the business outlook includes the impact of stock
compensation expense, expected to be approximately $0.05 per share during
2006.
2006 Business Outlook
Individual Investments Segment
Interest-spread margin 185-190 bps
Pre-tax operating earnings to average account values 40-45 bps
Sales:
Variable annuities 15-20% growth
Fixed annuities $150m-$200m
Advisory services $300m-$350m
Retirement Plans Segment
Interest-spread margin 180-185 bps
Pre-tax operating earnings to average account values 20-25 bps
Sales:
401(k) plans 10-12% growth
Public sector flat
Individual Protection Segment
Pre-tax operating earnings to operating revenues
Individual protection products 18-20%
Investment life 24-26%
Fixed life 13-15%
First-year Sales:
Individual VUL 8-10% growth
COLI 40-50% decrease
Fixed life 8-10% growth
Corporate and Other Segment
Quarterly pre-tax operating earnings $10m-$15m
Nationwide Financial
Operating return on average equity 10.5-11.0%
Earnings Conference Call
Nationwide Financial will host a conference call from 10 a.m. to 11 a.m.
ET on Friday, February 10, 2006 to discuss fourth quarter 2005 results. To
participate in the call, dial 1-706-634-1139 and provide your name and company
name to the operator. Please dial into the call 10-15 minutes early to
facilitate a timely connection. A simultaneous webcast of the call will also
be available from the investor relations section of the Company's Web site at
http://www.nationwide.com. Anyone unable to participate in the call can listen to a
replay starting at 2 p.m. ET time February 10, 2005 through midnight ET
February 17, 2005 by dialing 1-706-645-9291, conference ID 3994551. An audio
archive and transcript of the call will be posted to the investor relations
section of Nationwide Financial's Web site within 48 hours of the call.
Supplemental Financial Information
More detailed financial information can be found in the Nationwide
Financial Statistical Supplement for the fourth quarter of 2005, which is
available on the investor relations section of the Company's Web site at
http://www.nationwide.com.
Quiet Period
Toward the end of each quarter, the Company has a quiet period when it no
longer publishes or updates its current outlook, and Company representatives
will not comment on financial results or expectations. The quiet period will
extend until the day when the next earnings announcement is published. For
the first quarter of 2006, the quiet period will be April 12, 2006 through May
3, 2006.
Columbus-based Nationwide Financial is the holding company for the
domestic life insurance and retirement savings operations of Nationwide, which
owns approximately 63 percent of the outstanding common shares of Nationwide
Financial. The major operating subsidiary of Nationwide Financial is
Nationwide Life Insurance Company. To obtain investor materials, including
the Company's 2004 Annual Report to Shareholders, 2004 Annual Report on Form
10-K and other corporate announcements, please visit the investor relations
section of the Company's Web site at http://www.nationwide.com.
Forward-Looking Information
The information included herein contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995 with respect to the results of operations and businesses of the
Nationwide Financial Services, Inc. and subsidiaries (NFS or collectively, the
Company). These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially
from those contemplated or projected, forecast, estimated or budgeted in such
forward-looking statements include, among other, the following possibilities:
(i) change in Nationwide Corporation's control of the Company through its
beneficial ownership of 94.4% of the combined voting power of all the
outstanding common stock and 62.7% of the economic interest in the Company;
(ii) the Company's primary reliance, as a holding company, on dividends from
its subsidiaries to meet debt service obligations and the applicable
regulatory restrictions on the ability of the Company's subsidiaries to pay
such dividends; (iii) the potential impact on the Company's reported net
income and related disclosures that could result from the adoption of certain
accounting and/or financial reporting standards issued by the Financial
Accounting Standards Board, Public Company Accounting Oversight Board or other
standard-setting bodies; (iv) tax law changes impacting the tax treatment of
life insurance and investment products; (v) repeal of the federal estate tax;
(vi) heightened competition, including specifically the intensification of
price competition, the entry of new competitors and the development of new
products by new and existing competitors; (vii) adverse state and federal
legislation and regulation, including limitations on premium levels, increases
in minimum capital and reserves, and other financial viability requirements;
restrictions on mutual fund distribution payment arrangements such as revenue
sharing and 12b-1 payments; and regulation changes resulting from industry
practice investigations; (viii) failure to expand distribution channels in
order to obtain new customers or failure to retain existing customers; (ix)
inability to carry out marketing and sales plans, including, among others,
development of new products and/or changes to certain existing products and
acceptance of the new and/or revised products in the market; (x) changes in
interest rates and the equity markets causing a reduction of investment income
and/or asset fees; an acceleration of the amortization of deferred policy
acquisition costs (DAC) and/or value of business acquired (VOBA); or a
reduction in the demand for the Company's products; (xi) reduction in the
value of the Company's investment portfolio as a result of changes in interest
rates and yields in the market as well as geopolitical conditions and
political, regulatory, judicial, economic or financial events affecting the
market generally and companies in the Company's investment portfolio
specifically; (xii) general economic and business conditions which are less
favorable than expected; (xiii) competitive, regulatory or tax changes that
affect the cost of, or demand for, the Company's products; (xiv) unanticipated
changes in industry trends and ratings assigned by nationally recognized
rating organizations; (xv) settlement of tax liabilities for amounts that
differ significantly from those recorded on the balance sheet; (xvi)
deviations from assumptions regarding future persistency, mortality, morbidity
and interest rates used in calculating reserve amounts and in pricing the
Company's products; and (xvii) adverse litigation results and/or resolution of
litigation and/or arbitration or investigation results.
Exhibit 1 to Fourth Quarter 2005 Earnings Announcement
Nationwide Financial Services, Inc. and Subsidiaries
Consolidated Statements of Income
Three months ended Year ended
December 31, December 31,
($ in millions, except per
share data) 2005 2004 2005 2004
(Unaudited) (Unaudited) (Unaudited)
Revenues:
Policy charges $310.8 $311.1 $1,241.5 $1,222.6
Life insurance premiums 107.1 104.5 399.9 402.7
Net investment income 587.9 559.0 2,343.9 2,231.7
Net realized gains (losses)
on investments, hedging
instruments and hedged
items 4.8 15.8 20.8 (32.2)
Other 92.4 82.0 333.8 279.7
Total revenues 1,103.0 1,072.4 4,339.9 4,104.5
Benefits and Expenses:
Interest credited to
policyholder account
values 347.7 339.1 1,380.9 1,328.3
Other benefits and claims 149.9 136.1 574.9 548.6
Policyholder dividends on
participating policies 27.0 28.0 107.3 101.4
Amortization of deferred
policy acquisition costs 123.5 116.8 480.2 430.4
Amortization of value
of business acquired 10.0 10.3 45.0 52.3
Interest expense on debt 27.1 25.7 108.0 102.4
Debt extinguishment costs - - 21.7 -
Other operating expenses 228.6 228.5 866.1 867.7
Total benefits and
expenses 913.8 884.5 3,584.1 3,431.1
Income from continuing
operations before federal
income tax expense 189.2 187.9 755.8 673.4
Federal income tax expense 34.5 45.3 132.6 166.9
Income from continuing
operations 154.7 142.6 623.2 506.5
Discontinued operations,
net of taxes (24.4) (0.8) (24.5) (1.1)
Cumulative effect of
adoption of accounting
principles, net of taxes - - - (3.4)
Net income $130.3 $141.8 $598.7 $502.0
Earnings from continuing
operations per common
share:
Basic $1.01 $0.94 $4.08 $3.33
Diluted $1.01 $0.93 $4.06 $3.31
Earnings per common
share:
Basic $0.85 $0.93 $3.92 $3.30
Diluted $0.85 $0.93 $3.90 $3.28
Weighted average common
shares outstanding:
Basic 152.9 152.3 152.9 152.1
Diluted 153.6 153.1 153.6 152.9
Cash dividends declared
per common share $0.19 $0.18 $0.76 $0.72
Exhibit 2 to Fourth Quarter 2005 Earnings Announcement
Nationwide Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, December 31,
(in millions) 2005 2004
(Unaudited)
Assets
Investments:
Securities available-for-sale, at
fair value:
Fixed maturity securities $30,106.0 $31,516.8
Equity securities 75.6 87.0
Trading assets, at fair value 34.4 15.9
Mortgage loans on real estate, net 9,148.6 9,267.5
Real estate, net 108.7 108.3
Policy loans 930.6 987.2
Other long-term investments 691.9 604.2
Short-term investments, including
amounts managed by a related party 2,073.2 2,009.9
Total investments 43,169.0 44,596.8
Cash 16.4 52.4
Accrued investment income 396.3 428.7
Deferred policy acquisition costs 3,685.4 3,561.1
Value of business acquired 449.7 480.4
Other intangible assets 45.6 48.7
Goodwill 364.5 382.3
Other assets 2,069.2 2,497.0
Assets held in separate accounts 65,963.8 64,903.2
Total assets $116,159.9 $116,950.6
Liabilities and Shareholders' Equity
Liabilities:
Future policy benefits and claims $39,748.1 $41,077.2
Short-term debt 252.3 230.8
Long-term debt 1,398.0 1,406.0
Other liabilities 3,447.3 4,118.3
Liabilities related to separate
accounts 65,963.8 64,903.2
Total liabilities 110,809.5 111,735.5
Shareholders' equity:
Class A common stock 0.7 0.7
Class B common stock 1.0 1.0
Additional paid-in capital 1,670.8 1,634.6
Retained earnings 3,883.1 3,400.0
Accumulated other comprehensive
income 100.7 432.2
Treasury stock (304.2) (251.4)
Other, net (1.7) (2.0)
Total shareholders' equity 5,350.4 5,215.1
Total liabilities and
shareholders' equity $116,159.9 $116,950.6
Exhibit 3 to Fourth Quarter 2005 Earnings Announcement
Non-GAAP Measures Used in this Earnings Announcement by Nationwide Financial
Nationwide Financial prepares its consolidated financial statements in
accordance with accounting principles generally accepted in the United States
of America (GAAP). In addition to using the GAAP consolidated financial
statements, Nationwide Financial analyzes operating performance using certain
non-GAAP financial measures. The following non-GAAP financial measures appear
in the accompanying earnings announcement.
Operating revenues are calculated by adjusting total revenues to exclude
net realized gains and losses on investments not related to
securitizations and operating items (periodic net coupon settlements on
non-qualifying derivatives, trading portfolio realized gains and losses,
and trading portfolio valuation changes), hedging instruments and hedged
items.
Operating realized gains (losses) include net realized gains (losses) on
investments related to securitizations and operating items (periodic net
coupon settlements on non-qualifying derivatives, trading portfolio
realized gains and losses, and trading portfolio valuation changes),
hedging instruments and hedged items.
Pre-tax operating earnings are calculated by adjusting earnings from
continuing operations before federal income taxes, discontinued
operations and the cumulative effect of adoption of accounting principles
to exclude: (1) net realized gains and losses on investments, hedging
instruments and hedged items, except for operating items (periodic net
coupon settlements on non-qualifying derivatives, trading portfolio
realized gains and losses, and trading portfolio valuation changes); (2)
net realized gains and losses related to securitizations; and (3) the
adjustment to amortization of DAC related to net realized gains and
losses. Pre-tax operating earnings are a GAAP financial measure as it
relates to the individual investments, retirement plans, individual
protection and corporate and other segments, as this is the level at
which management evaluates operating results for these segments.
Net operating earnings are calculated by adjusting net income to exclude
non-operating net realized gains and losses on investments, hedging
instruments and hedged items, discontinued operations and the cumulative
effect of adoption of accounting principles, all net of taxes.
Net operating earnings per diluted share are calculated by dividing net
operating earnings by the number of weighted average diluted shares
outstanding for the period indicated.
Operating return on average equity is calculated by annualizing net
operating earnings and dividing by average shareholders' equity excluding
accumulated other comprehensive income.
Book value per share excluding accumulated other comprehensive income is
calculated by dividing total shareholders' equity less accumulated other
comprehensive income by the number of shares outstanding as of the date
indicated.
Use of Non-GAAP Measures in Practice
Operating revenues, operating realized gains (losses), pre-tax operating
earnings, net operating earnings, net operating earnings per diluted share,
operating return on average equity, book value per share excluding accumulated
other comprehensive income or similar measures are commonly used in the
insurance industry as measures of ongoing earnings performance.
Excluded Items and Cautionary Information
The excluded items are important in understanding Nationwide Financial's
overall results of operations, and Nationwide Financial's definition of these
non-GAAP financial measures may differ from those used by other companies.
None of these non-GAAP financial measures should be viewed as substitutes for
any GAAP financial measures.
Specifically, operating revenues, operating realized gains (losses), pre-
tax operating earnings, net operating earnings, net operating earnings per
diluted share, operating return on average equity and book value per share
excluding accumulated other comprehensive income should not be viewed as
substitutes for total revenues, net realized gains (losses) on investments,
hedging instruments and hedged items, income from continuing operations before
federal income taxes, net income, earnings per diluted share, return on
average equity and book value per share, respectively, determined in
accordance with GAAP. Nationwide Financial believes that the presentation of
these non-GAAP financial measures as they are measured for management purposes
enhances the understanding of Nationwide Financial's results of operations by
highlighting the results from continuing operations, on a pre- and post-tax
basis as applicable, and the underlying profitability drivers of Nationwide
Financial's business.
Nationwide Financial excludes operating items (periodic net coupon
settlements on non-qualifying derivatives, trading portfolio realized gains
and losses, and trading portfolio valuation changes) from net realized gains
and losses on investments, hedging instruments and hedged items, net of taxes,
in the calculation of these non-GAAP financial measures because such items are
often the result of a series of independent event-driven activities, the
timing of which may or may not be at Nationwide Financial's discretion.
Excluding the fluctuating effects of these transactions helps to depict trends
in the underlying profitability of Nationwide Financial's business without
consideration of these items. Nationwide Financial also excludes discontinued
operations and the cumulative effect of adoption of accounting principles,
both net of taxes, from net operating earnings, as such adjustments do not
reflect the continuing operations of Nationwide Financial's business.
Exhibit 3 to Fourth Quarter 2005 Earnings Announcement
Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures
The following tables reconcile non-GAAP financial measures used in the
accompanying Nationwide Financial earnings announcement to the most comparable
GAAP financial measures for each of the periods indicated. Page two of the
earnings announcement includes a reconciliation of net operating earnings to
net income, including per diluted share information. This table has not been
repeated in this exhibit. Also, a reconciliation of the forward-looking non-
GAAP financial measure net operating earnings per diluted share to net income
per diluted share has not been provided because Nationwide Financial does not
regularly forecast realized gains and losses on investments, hedging
instruments and hedged items(1) (realized gains and losses). Realized gains
and losses represented $0.14 per weighted average diluted share in 2005 and
ranged from $0.14 to ($0.60) per weighted average diluted share over the past
five full years. The results of past accounting periods, including quarterly
and annual results, are not necessarily indicative of the results to be
expected for any future accounting period.
Operating revenues to revenues
Three months ended Year ended
December 31, December 31,
(in millions) 2005(2) 2004(2) 2005(2) 2004(2)
Operating revenues $1,099.3 $1,057.8 $4,321.7 $4,145.4
Net realized gains
(losses) on
investments, hedging
instruments and
hedged items(1) 3.7 14.6 18.2 (40.9)
Revenues $1,103.0 $1,072.4 $4,339.9 $4,104.5
Operating net realized gains to net realized gains (losses) on
investments, hedging instruments and hedged items
Three months ended Year ended
December 31, December 31,
(in millions) 2005 2004 2005 2004
Operating net
realized gains $1.1 $1.2 $2.6 $8.7
Net realized gains
(losses) on
investments, hedging
instruments and
hedged items(1) 3.7 14.6 18.2 (40.9)
Net realized gains
(losses) on
investments,
hedging instruments
and hedged items $4.8 $15.8 $20.8 $(32.2)
Pre-tax operating earnings to income from continuing operations before
federal income taxes
Three months ended Year ended
December 31, December 31,
(in millions) 2005(2) 2004(2) 2005(2) 2004(2)
Pre-tax operating
earnings $185.3 $173.3 $738.4 $714.3
Net realized gains
(losses) on
investments,
hedging instruments
and hedged items(1) 3.7 14.6 18.2 (40.9)
Adjustment to
amortization of
DAC related to net
realized gains (losses) 0.2 - (0.8) -
Income from continuing
operations before
federal income taxes $189.2 $187.9 $755.8 $673.4
Net operating earnings to net income and net operating return on average
equity to return on average equity
Three months ended December 31,
2005 2004
Ratio(annualized) Ratio(annualized)
(in millions) Amount Ex AOCI w/AOCI Amount Ex AOCI w/AOCI
Net operating
earnings $152.2 11.7% 11.4% $133.1 11.3% 10.3%
Net realized
gains on
investments,
hedging
instruments
and hedged
items, net of
taxes(1) 2.4 0.2% 0.1% 9.5 0.8% 0.7%
Adjustment to
amortization
of DAC related
to net realized
gains, net of
taxes 0.1 - - - - -
Discontinued
operations,
net of taxes (24.4) (1.9%) (1.8%) (0.8) (0.1%) -
Net income $130.3 10.0% 9.7% $141.8 12.0% 11.0%
Average equity,
excluding
AOCI $5,214.6 $4,720.4
Average AOCI 148.4 455.8
Average
equity $5,363.0 $5,176.2
Year ended December 31,
2005 2004
Ratio Ratio
(in millions) Amount Ex AOCI w/AOCI Amount Ex AOCI w/AOCI
Net operating
earnings $611.8 12.2% 11.5% $533.1 11.7% 10.6%
Net realized
gains (losses)
on investments,
hedging
instruments
and hedged
items, net of
taxes(1) 11.9 0.2% 0.2% (26.6) (0.6%) (0.5%)
Adjustment to
amortization of
DAC related
to net
realized losses,
net of taxes (0.5) - - - - -
Discontinued
operations,
net of taxes (24.5) (0.5%) (0.4%) (1.1) - -
Cumulative
effect of
adoption of
accounting
principle,
net of taxes - - - (3.4) (0.1%) (0.1%)
Net income $598.7 11.9% 11.3% $502.0 11.0% 10.0%
Average equity,
excluding
AOCI $5,035.2 $4,565.1
Average AOCI 269.5 475.2
Average
equity $5,304.7 $5,040.3
Book value per share excluding AOCI to book value per share
As of December 31, 2005 As of December 31, 2004
Amount Per share Amount Per share
(in millions,
except per
share data)
Total equity,
excluding
AOCI $5,249.7 $34.42 $4,782.9 $31.36
AOCI 100.7 0.66 432.2 2.84
Total
equity $5,350.4 $35.08 $5,215.1 $34.20
Shares
outstanding 152.5 152.5
(1) Excluding operating items (periodic net coupon settlements on non-
qualifying derivatives, trading portfolio realized gains and losses,
and trading portfolio valuation changes).
(2) Excluding the results of operations of Cap Pro, NFSB and TBG Lynch,
which are presented as discontinued operations for all periods.
Investor Contact:
Mark Barnett
Vice President, Investor Relations
614 677-5331
Media Contact:
Jeff Botti
Corporate Communications Officer
614 249-6339
SOURCE Nationwide Financial Services, Inc.
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Related links:
http://www.nationwidefinancial.com
CONTACT:
Investor, Mark Barnett, Vice President,
Investor Relations, +1-614-677-5331, or Media, Jeff Botti,
Corporate Communications Officer, +1-614-249-6339, both of
Nationwide Financial Services, Inc.
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