Variable Annuity Sales Gaining Momentum
COLUMBUS, Ohio, May 4 /PRNewswire-FirstCall/ -- Nationwide Financial
Services, Inc. (NYSE: NFS), a leading provider of long-term savings and
retirement products, today reported first quarter 2006 net income of $142.3
million, or $0.93 per diluted share, compared with first quarter 2005 net
income of $160.5 million, or $1.05 per diluted share. Net realized losses
on investments, hedging instruments and hedged items compared to gains in
the first quarter of 2005 was the primary driver for the year-over-year
decline in net income.
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. A table later in this news
release reconciles net operating earnings to net income, including the
related diluted per share amounts for the periods indicated.
The quarter's net operating earnings were $144.3 million, or $0.94 per
diluted share, compared to net operating earnings of $142.4 million, or
$0.93 per diluted share, a year ago. The year-over-year increase was driven
by improved operating results in the retirement plans segment partially
offset by a decline in the operating earnings in the individual
investments, individual protection and corporate and other segments.
"First quarter results were in line with our expectations given the
sales performance in our individual businesses over the last few years and
the corresponding impact on our asset base," said Jerry Jurgensen, chief
executive officer. "While there is still much work to be done," Jurgensen
added, "I am encouraged by the progress we made against our strategic
priorities during the first quarter, highlighted by the improving sales
momentum in our variable annuity business. Our priority focus during 2006
remains on continuing to drive sales growth in our individual product lines
and building new sources of higher return business."
Highlights from the quarter:
Three months ended
March 31,
(in millions) 2006 2005
(Unaudited) (Unaudited) Change
Net income $142.3 $160.5 -11%
Net income per diluted share $0.93 $1.05 -11%
Net operating earnings $144.3 $142.4 1%
Net operating earnings per diluted
share $0.94 $0.93 1%
Sales $4,967.0 $4,601.0 8%
Net flows 500.8 1,297.7 -61%
Total revenues 1,091.6 1,089.3 0%
Total operating revenues 1,099.7 1,062.0 4%
Customer funds managed and
administered $162,451.6 $149,093.4 9%
Total assets $116,558.7 $116,005.9 0%
Shareholders' equity excluding AOCI $5,204.1 $4,924.7 6%
Net operating return on average
equity excluding AOCI 11.0% 11.7% N/A
Book value per diluted share
excluding AOCI $34.93 $32.19 9%
- Non-affiliated distribution sales improved, increasing 5 percent
compared to the first quarter of 2005 driven by improved variable
annuity sales. Affiliated distribution sales also increased, growing
by 12 percent compared to the first quarter of 2005. The increase was
driven primarily by higher public and private sector retirement plans
sales combined with improved Agency and Nationwide Financial Network
(NFN) sales of individual investment products.
- Total net inflows, or customer deposits net of withdrawals, were $0.5
billion in the first quarter of 2006 compared to $1.3 billion in the
first quarter of 2005. The decline in net flows was driven primarily
by lower investment life deposits, as the prior year included two large
bank-owned life insurance (BOLI) cases, and increased withdrawals in
the individual investments segment. Excluding the impact of the large
BOLI cases in the prior period, net inflows were up 4 percent year-
over-year.
- A 4 percent increase in operating revenues was offset by net realized
losses on investments, hedging instruments and hedged items in the
first quarter of 2006 compared to gains in the prior year quarter,
resulting in flat total revenues year-over-year.
- Excluding accumulated other comprehensive income (AOCI), shareholders'
equity was $5.2 billion, or $34.93 per share, versus $5.2 billion, or
$34.42 per share, as of year-end 2005.
- Operating return on average equity excluding AOCI, as defined in
Exhibit 3, was 11.0 percent for the quarter, compared to 11.7 percent
in the first quarter of 2005. The decline was driven by net growth in
shareholders' equity.
"Overall, our results in the first quarter were solid," said Mark
Thresher, president and chief operating officer. "Our retirement plans
business continues to produce strong top- and bottom-line growth and we
returned more than $200 million to our shareholders through a combination
of dividends and share repurchases.
"In addition, for the first time in several years, we achieved strong
year-over-year and sequential growth in variable annuity sales during the
quarter - and we continued to see strong growth through April," Thresher
continued. "We attribute the improvement in sales momentum to the
enhancements we made to the competitiveness of our products during 2005,
improved marketing and the work we're doing to improve our sales and
support processes.
"During the quarter, we continued to take important steps toward re-
establishing Nationwide Financial as an industry leading provider of
innovative investment and protection products. We launched our new variable
annuity withdrawal benefit. We are also one of the first to take living
benefits into the individual life market via the introduction of a variable
universal life product that provides principal protection while enabling
policyholders to lock in positive market performance. As consumers prepare
for and live in retirement, we will continue to innovate around their needs
as personal retirement savings and withdrawal strategies assume greater
importance.
"We are also making investments during 2006 that are important to our
future," Thresher added. "We made progress in expanding our retail
distribution capacity as we are in the process of integrating several
hundred Nationwide Insurance agents into the Nationwide Financial Network
and are nearing completion of a mutual fund strategy. Also, in April, we
received approval from the Office of Thrift Supervision to establish
full-service banking and we expect to launch banking services later this
year."
Operating Segment First 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.
Individual Investments Segment
Three months ended
March 31,
(in millions) 2006 2005
(Unaudited) (Unaudited) Change
Individual variable annuity sales* $986.4 $849.9 16%
Individual fixed annuity sales* 39.5 55.0 -28%
Income product sales 58.5 44.9 30%
Advisory services program sales 62.6 53.2 18%
Total sales $1,147.0 $1,003.0 14%
Net flows $(750.5) $(425.8) -76%
Operating revenues 382.6 371.8 3%
Pre-tax operating earnings 56.4 61.3 -8%
Ending account values $52,318.2 $51,423.3 2%
Interest spread on average
general account values 2.02% 1.87%
Pre-tax operating earnings to
average account values 0.44% 0.47%
Return on average allocated capital 11.9% 11.1%
* Excluding 2005 sales of annuities sold through discontinued offshore
operations
Individual variable annuity sales improved for the second consecutive
quarter driven by increasing demand for the Capital Preservation Plus with
Lifetime Income (CPP/LI) benefit. The Company's continued pricing
discipline in the fixed annuity market resulted in a year-over-year decline
in fixed annuity sales. Sales of income products and advisory services
sales both experienced growth compared to the same quarter a year ago.
Net outflows increased from $425.8 million in the first quarter a year
ago to $750.5 million in the current quarter. Increased inflows from new
sales were outweighed by higher variable annuity withdrawals as well as
withdrawals associated with the Company's aging blocks of fixed annuity
business.
Pre-tax operating earnings in this segment were $56.4 million compared
to $61.3 million in the prior year. Increased asset-based fee revenues were
more than offset by increased amortization of deferred policy acquisition
costs (DAC) driven by increased profits, and higher expenses compared to
the first quarter of 2005.
Interest spread income declined 2 percent compared to last year despite
improved interest spread margin as the fixed annuity net outflows drove a
decline in general account assets. Included in the interest spread margin
in current quarter were 11 basis points, or $4.1 million, of income from
prepayment penalties on commercial mortgage loans and bond call premiums,
compared to 17 basis points, or $7.0 million, during the first quarter of
last year.
Retirement Plans Segment
Three months ended
March 31,
(in millions) 2006 2005
(Unaudited) (Unaudited) Change
Private plan sales $2,233.5 $2,062.7 8%
Public plan sales 1,019.9 952.3 7%
Total sales $3,253.4 $3,015.0 8%
Net flows $797.8 $970.6 -18%
Operating revenues 278.6 263.7 6%
Pre-tax operating earnings 53.6 47.1 14%
Ending account values $87,979.1 $77,091.8 14%
Interest spread on average
general account values 1.81% 2.06%
Pre-tax operating earnings to
average account values 0.25% 0.25%
Return on average allocated capital 19.4% 18.6%
Sales growth in both the public and private sectors remained strong, up
7 percent and 8 percent, respectively, compared to last year. Retirement
plans net inflows were $797.8 million in the quarter compared to $970.6
million in the same period a year ago. Lower net inflows primarily resulted
from increased withdrawals in the private sector compared to the first
quarter of last year.
Pre-tax operating earnings increased 14 percent compared to a year ago.
Other income, which includes administrative fees and asset-based fees from
the trust product small-plan 401(k) platform, increased $18.6 million, or
32 percent, compared to first quarter 2005, the result of strong flows in
small- case 401(k) plans and improved equity market performance. This
increase was partially offset by lower asset fees due to the continued
shift from annuity- based to trust-based products, higher commission
expense from higher sales volumes, and lower interest spread income.
Interest spread income in this segment declined by $3.5 million driven
primarily by lower prepayment penalty income. Included in the current
quarter were 9 basis points, or $2.5 million, of prepayment penalty income,
compared to 25 basis points, or $6.8 million, in the first quarter a year
ago.
Individual Protection Segment
Three months ended
March 31,
(in millions) 2006 2005
(Unaudited) (Unaudited) Change
Individual investment life
first year sales $39.2 $34.4 14%
BOLI/COLI first year sales 83.5 57.6 45%
Traditional/Universal life
first year sales 21.6 26.6 -19%
Total first year sales $144.3 $118.6 22%
Net flows $328.5 $989.7 -67%
Operating revenues 338.4 338.6 0%
Pre-tax operating earnings 64.9 71.8 -10%
Policy reserves $18,032.3 $16,416.9 10%
Life insurance in-force $127,999.3 $122,001.8 5%
Pre-tax operating earnings to
operating revenues 19.2% 21.2%
Return on average allocated capital 9.8% 11.0%
Total first year sales for the individual protection segment increased
22 percent compared to a year ago driven by strong sales in individual
investment life and corporate insurance products. In individual investment
life, sales increased by 25 percent in the independent broker dealer
channel and by 37 percent in the affiliated channels compared to a year
ago. First year corporate- and bank-owned life insurance (BOLI/COLI) sales
increased 45 percent over the prior year driven by the placement of two new
large cases during the quarter. First year sales of traditional and
universal life products decreased 19 percent compared to the first quarter
of 2005, however we anticipate that the introduction of a more
competitively priced product at the end of the second quarter will reverse
this trend.
Individual protection net inflows declined from $989.7 million in the
prior year to $328.5 million in the first quarter of 2006. The decrease
primarily was driven by two large separate account BOLI cases that closed
during the first quarter of 2005, making it a difficult comparison.
Excluding the two large BOLI cases in the prior period, which totaled $815
million, net inflows increased 88 percent year-over-year.
Pre-tax operating earnings in this segment declined 10 percent
year-over- year as 19 percent growth in fixed life was more than offset by
a 24 percent decline in pre-tax operating earnings in investment life
compared to last year. The increase in fixed life pre-tax earnings was
primarily related to a reserve release and a reinsurance premium refund
totaling $6.6 million, partially offset by adverse mortality. A previously
announced $5.5 million goodwill impairment charge, related to the MullinTBG
joint venture, and adverse mortality drove the decline in investment life
pre-tax operating earnings.
Corporate and Other Segment
Corporate and other segment pre-tax operating earnings were $11.6
million in the first quarter of 2006, compared to $12.9 million in the
first quarter of 2005. Lower general operating expenses were more than
offset by lower other income resulting from a decrease in the number of
structured products transactions that originated during the quarter.
An aggregate principal amount of $250 million of medium term notes
(MTN) were issued during the quarter and $125 million matured. Current
quarter interest spread margin for the MTN business was 120 basis points
compared to 135 basis points in the same quarter a year ago.
Capital and Share Repurchase
During the first quarter, Nationwide Financial repurchased 1.5 million
shares at a total cost of $65.3 million, or an average price of $43.22 per
share, in the open market. In addition, as previously announced, the
Company executed an accelerated share repurchase (ASR) at an initial cost
of $120 million resulting in the repurchase of approximately 2.8 million
shares.
Nationwide Financial paid a quarterly dividend of $0.19 per share
during the first quarter of 2006. Through a combination of share
repurchases and dividends, a total of $214.3 million was returned to
shareholders in the quarter. Also during the quarter, the Company's board
of directors approved an increase in the regular quarterly dividend from
$0.19 to $0.23 per share, reflecting the Company's strong financial
condition and continuing performance.
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.
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 diluted share
during 2006.
2006 Business Outlook
Individual Investments Segment
Interest-spread margin 190 - 195 bps
Pre-tax operating earnings to
average account values 40 - 45 bps
Sales:
Variable annuities 15% - 20% growth
Fixed annuities $200m - $300m
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:
Private sector 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 30% - 40% 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%
Supplemental Financial Information
More detailed financial information can be found in the Nationwide
Financial Statistical Supplement for the first quarter of 2006, which is
available on the investor relations section of the Company's Web site at
http://www.nationwide.com.
Earnings Conference Call
Nationwide Financial will host a conference call from 10 a.m. to 11
a.m. EDT on Friday, May 5, 2006, to discuss first quarter 2006 results. To
participate in the call, dial 1-706-679-3234 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 our Web site at
http://www.nationwide.com. Anyone unable to participate in the call can listen to
a replay starting at 2 p.m. EDT May 5, 2006, through midnight EDT May 12,
2006 by dialing 1-706-645-9291, conference ID 7707510. An audio archive and
transcript of the call will be posted to the investor relations section of
the Company's Web site within 48 hours of the call.
Quiet Period
Toward the end of each quarter, the Company has a quiet period during
which 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 second quarter of 2006, the quiet period will be July
19, 2006 through August 2, 2006.
About Nationwide Financial
Columbus-based Nationwide Financial is the holding company for the
domestic retirement savings operations of Nationwide, which owns 64.2
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 2005 Annual
Report to Shareholders, 2005 Annual Report on Form 10-K, quarterly
statistical supplements and other corporate announcements, please visit the
investor relations section of the Company's Web site at http://www.nationwide.com.
Reconciliation of net income to net operating earnings
Three months ended March 31,
2006 2005
Per Per
diluted diluted
(in millions, except per share data) Amount share Amount share
Net operating earnings $144.3 $0.94 $142.4 $0.93
Net realized losses on investments,
hedging instruments and hedged
items, net of taxes* (5.3) (0.03) 17.8 0.12
Adjustment to DAC amortization
related to net realized losses,
net of taxes 3.3 0.02 (1.0) (0.01)
Discontinued operations, net of
taxes** - - 1.3 0.01
Net income $142.3 $0.93 $160.5 $1.05
* 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) are presented as discontinued
operations for all periods.
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 94.7% of the combined voting
power of all the outstanding common stock and 64.2% 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, the
SEC 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), reduction in separate
account assets 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 the impact of political, regulatory, judicial,
economic or financial events, including terrorism, 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
(including as a result of a pandemic illness, such as Avian Flu), 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 First Quarter 2006 Earnings Announcement
Nationwide Financial Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
Three months ended
March 31,
(in millions, except per share data) 2006 2005
(Unaudited) (Unaudited)
Revenues:
Policy charges $321.0 $309.1
Life insurance premiums 107.8 95.9
Net investment income 577.3 576.1
Net realized (losses) gains on
investments, hedging instruments
and hedged items (6.8) 27.5
Other 92.3 80.7
Total revenues 1,091.6 1,089.3
Benefits and Expenses:
Interest credited to policyholder
account values 342.1 334.5
Other benefits and claims 156.1 136.2
Policyholder dividends on
participating policies 20.2 26.9
Amortization of deferred policy
acquisition costs 120.6 123.4
Amortization of value of business
acquired 11.6 12.0
Interest expense on debt 26.1 26.1
Other operating expenses 231.4 211.4
Total benefits and expenses 908.1 870.5
Income from continuing
operations before federal
income tax expense 183.5 218.8
Federal income tax expense 41.2 59.6
Income from continuing
operations 142.3 159.2
Discontinued operations, net of taxes - 1.3
Net income $142.3 $160.5
Earnings from continuing operations
per common share:
Basic $0.93 $1.04
Diluted $0.93 $1.04
Earnings per common share:
Basic $0.93 $1.05
Diluted $0.93 $1.05
Weighted average common shares outstanding:
Basic 152.3 152.7
Diluted 152.9 153.5
Cash dividends declared per common
share $0.23 $0.19
Exhibit 2 to First Quarter 2006 Earnings Announcement
Nationwide Financial Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31 December 31,
(in millions) 2006 2005
(Unaudited)
Assets
Investments:
Securities available-for-sale, at
fair value:
Fixed maturity securities $28,645.0 $30,106.0
Equity securities 76.5 75.6
Trading assets, at fair value 27.8 34.4
Mortgage loans on real estate, net 9,048.3 9,148.6
Real estate, net 108.6 108.7
Policy loans 933.9 930.6
Other long-term investments 688.9 691.9
Short-term investments, including
amounts managed by a related
party 2,830.5 2,073.2
Total investments 42,359.5 43,169.0
Cash 23.9 16.4
Accrued investment income 398.9 396.3
Deferred policy acquisition costs 3,794.7 3,685.4
Value of business acquired 443.3 449.7
Other intangible assets 45.4 45.6
Goodwill 359.0 364.5
Other assets 2,200.3 2,069.2
Assets held in separate accounts 66,933.7 65,963.8
Total assets $116,558.7 $116,159.9
Liabilities and Shareholders' Equity
Liabilities:
Future policy benefits and claims $39,519.4 $39,748.1
Short-term debt 147.4 252.3
Long-term debt 1,398.3 1,398.0
Other liabilities 3,433.7 3,447.3
Liabilities related to separate
accounts 66,933.7 65,963.8
Total liabilities 111,432.5 110,809.5
Shareholders' equity:
Class A common stock 0.7 0.7
Class B common stock 1.0 1.0
Additional paid-in capital 1,702.5 1,670.8
Retained earnings 3,991.1 3,883.1
Accumulated other comprehensive
(loss) income (77.9) 100.7
Treasury stock (489.5) (304.2)
Other, net (1.7) (1.7)
Total shareholders' equity 5,126.2 5,350.4
Total liabilities and
shareholders' equity $116,558.7 $116,159.9
Exhibit 3 to First Quarter 2006 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 First Quarter 2006 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. 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 March 31,
(in millions) 2006 (2) 2005 (2)
Operating revenues $1,099.7 $1,062.0
Net realized (losses) gains on
investments, hedging instruments and
hedged items (1) (8.1) 27.3
Revenues $1,091.6 $1,089.3
Operating net realized gains to net realized (losses) gains on
investments, hedging instruments and hedged items
Three months ended March 31,
(in millions) 2006 2005
Operating net realized gains $1.3 $0.2
Net realized (losses) gains on
investments, hedging instruments and
hedged items (1) (8.1) 27.3
Net realized (losses) gains on
investments, hedging instruments
and hedged items $(6.8) $27.5
Pre-tax operating earnings to income from continuing operations
before federal income taxes
Three months ended March 31,
(in millions) 2006 (2) 2005 (2)
Pre-tax operating earnings $186.5 $193.1
Net realized (losses) gains on
investments, hedging instruments and
hedged items (1) (8.1) 27.3
Adjustment to DAC amortization
related to net realized losses
(gains) 5.1 (1.6)
Income from continuing operations
before federal income taxes $183.5 $218.8
Net operating earnings to net income and net operating return
on average equity to return on average equity
Three months ended March 31,
2006 2005
Ratio (annualized) Ratio(annualized)
(in millions) Amount Ex AOCI w/AOCI Amount Ex AOCI w/AOCI
Net operating earnings $144.3 11.0% 11.0% $142.4 11.7% 11.0%
Net realized (losses)
gains on investments,
hedging instruments and
hedged items, net
of taxes (1) (5.3) (0.4%) (0.4%) 17.8 1.5% 1.4%
Adjustment to
amortization of DAC
related to net realized
losses (gains), net of
taxes 3.3 0.3% 0.3% (1.0) (0.1%) (0.1%)
Discontinued operations,
net of taxes - - - 1.3 0.1% 0.1%
Net income $142.3 10.9% 10.9% $160.5 13.2% 12.4%
Average equity,
excluding AOCI $5,226.9 $4,853.8
Average AOCI 11.4 327.4
Average equity $5,238.3 $5,181.2
Book value per share excluding AOCI to book value per share
As of March 31, 2006 As of December 31, 2005
(in millions, except per Per Per
share data) Amount share Amount share
Total equity, excluding AOCI $5,204.1 $34.93 $5,249.7 $34.42
AOCI (77.9) (0.53) 100.7 0.66
Total equity $5,126.2 $34.40 $5,350.4 $35.08
Shares outstanding 149.0 152.5
(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
Officer, Public Relations
614 249-6339
SOURCE Nationwide Financial Services, Inc.
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Related links:
http://www.nationwide.com/
CONTACT:
Investors, Mark Barnett, Vice President,
Investor Relations, +1-614-677-5331, or Media, Jeff Botti,
Officer, Public Relations, +1-614-249-6339, both of Nationwide
Financial Services, Inc.
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