Third quarter net income of $166.7 million, or $1.08 per diluted share
COLUMBUS, Ohio, Nov. 2 /PRNewswire-FirstCall/ -- Nationwide Financial
Services, Inc. (NYSE: NFS), a leading provider of long-term savings and
retirement products, today reported third quarter 2005 net income of
$166.7 million, or $1.08 per diluted share, compared with third quarter 2004
net income of $136.4 million, or $0.89 per diluted share.
"While our core businesses posted solid earnings and returns in the
quarter, sales growth remains a challenge," said Jerry Jurgensen, chief
executive officer. "We understand the need to demonstrate stronger sales
growth in the short term; however, our emphasis continues to be on strategies
that will deliver value over the long term to our customers, partners and
shareholders."
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 September 30,
2005 2004
Per Per
diluted diluted
(in millions, except per share data) Amount share Amount share
Net operating earnings $174.0 $1.13 $140.6 $0.92
Net realized losses on investments,
hedging instruments and hedged
items, net of taxes* (9.0) (0.06) (3.1) (0.02)
Adjustment to DAC amortization
related to net realized losses,
net of taxes 2.9 0.02 - -
Discontinued operations, net of tax (1.2) (0.01) (1.1) (0.01)
Net income $166.7 $1.08 $136.4 $0.89
* Excluding operating items (periodic net coupon settlements on non-
qualifying derivatives, trading portfolio realized gains and losses, and
trading portfolio valuation changes).
The quarter's net operating earnings were $174.0 million, or $1.13 per
diluted share, compared to net operating earnings of $140.6 million, or $0.92
per diluted share, a year ago. The 24 percent year-over-year increase was
primarily driven by the recognition of additional federal income tax benefits
related to tax years 2000 through 2005. These benefits were primarily related
to the identification of additional separate account dividend received
deductions (DRD) due to the refinement of our estimation process which
resulted in a $42.6 million increase in net operating earnings in the third
quarter. This was partially offset by a $14.1 million after-tax non-cash
charge related to the redemption of the 7.10% Trust Preferred Securities as
previously announced on August 26th. Excluding the debt extinguishment costs,
pre-tax operating earnings in the third quarter of 2005 were 1 percent lower
than the third quarter of 2004 as improvements in the individual investments
and retirement plans segments were offset by modest declines in the individual
protection and corporate and other segments.
"Accelerating sales growth within individual product lines remains our top
priority," said Mark Thresher, president and chief operating officer. "The
combination of recently launched enhancements to existing products, as well as
new products and features in the pipeline for next year will improve our
competitiveness across the spectrum of individual savings and protection
products."
"However, product is only part of the solution," Thresher added. "The work
we're doing on improving our sales and support processes, augmented by the
addition of John Carter as our new sales leader, will also be critical to
establishing sustainable sales growth."
Highlights from the quarter:
* Sales totaled $4.1 billion, with $1.8 billion, or 43 percent, of sales
from affiliated distribution and $2.3 billion, or 57 percent, from non-
affiliated distribution.
- Affiliated distribution sales increased 19 percent compared to the
third quarter of 2004. The increase was driven by higher public and
private retirement plans sales combined with an increase in corporate-
owned life insurance (COLI) sales.
- Non-affiliated distribution sales declined 11 percent compared to the
prior year. The decline was driven primarily by lower individual
fixed and variable annuity sales in the financial institutions
channel, partially offset by continued improvement in private sector
retirement plans sales in the independent broker/dealer channel.
* Total net inflows, or customer deposits net of withdrawals, were $363.7
million in the third quarter of 2005 compared to $882.9 million in the
third quarter of 2004.
- Individual investments net outflows in the quarter were
$715.1 million, compared to net outflows of $81.1 million a year ago.
Lower individual annuity sales combined with increased surrenders on
aging blocks of business drove the decline.
- Retirement plans net inflows increased to $738.7 million from $650.8
million a year ago. Both public sector and private sector experienced
higher net inflows year-over-year.
- Individual protection net inflows were $310.6 million compared to
$330.1 million in the third quarter a year ago. Increased net inflows
in COLI were more than offset by declines in net inflows in fixed and
individual investment life.
* Total revenues increased 3 percent to $1.1 billion compared to the third
quarter of 2004. Higher net investment income and other asset-based
fees drove the increase.
* Total assets as of September 30, 2005 were $117.4 billion, which
increased from $117.0 billion as of December 31, 2004.
- Included in the current period's total assets were $65.8 billion in
assets held in separate accounts, an increase of 1 percent compared to
$64.9 billion as of December 31, 2004.
- General account assets were $51.6 billion, a 1 percent decrease
compared to $52.1 billion as of December 31, 2004.
* Shareholders' equity was $5.4 billion, or $35.09 per basic share, as of
September 30, 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 was $5.2 billion, or $33.81 per share, versus $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 13.6 percent for the quarter, compared to 12.2 percent
in the third quarter of 2004. The current quarter return on average
equity includes an additional 220 net basis points as a result of the
additional DRD benefits and the non-cash charge related to debt
extinguishment noted previously in the release.
* Nationwide Financial repurchased 91,100 shares of common stock, at an
average price of $38.82, from September 27, 2005 to September 30, 2005
for an aggregate price of $3.5 million.
Operating Segment Second 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
September 30,
(in millions) 2005 2004 Change
Individual Investments
Sales $946.9 $1,321.0 (28%)
Net flows (715.1) (81.1) NM
Operating revenues 398.6 383.5 4%
Pre-tax operating earnings 58.9 57.4 3%
Ending account values 52,541.7 49,963.9 5%
Interest spread on average general
account values 2.03% 1.88%
Pre-tax operating earnings to average
account values 0.45% 0.46%
Return on average allocated capital 17.1% 10.1%
Retirement Plans
Sales $2,669.4 $2,330.2 15%
Net flows 738.7 650.8 14%
Operating revenues 271.4 255.5 6%
Pre-tax operating earnings 45.4 44.9 1%
Ending account values 81,909.1 68,410.6 20%
Interest spread on average general
account values 1.83% 2.04%
Pre-tax operating earnings to average
account values 0.23% 0.26%
Return on average allocated capital 25.1% 18.5%
Individual Protection
Sales $460.2 $421.0 9%
Net flows 310.6 330.1 (6%)
Operating revenues 332.7 337.2 (1%)
Pre-tax operating earnings 64.4 67.0 (4%)
Policy reserves 17,150.0 14,677.8 17%
Life insurance in force 124,773.1 107,415.9 16%
Pre-tax operating earnings to
operating revenues 19.4% 19.9%
Return on average allocated capital 10.9% 10.5%
Individual Investments Segment
Third quarter individual investments sales of $946.9 million decreased 15
percent compared to last quarter and 28 percent compared to a year ago.
Individual variable annuity sales of $801.0 million decreased 14 percent
compared to last quarter, and 12 percent compared to a year ago. Individual
fixed annuity sales of $31.5 million decreased 90 percent compared to a year
ago, and 53 percent compared to the second quarter of 2005.
Advisory services program sales were $65.1 million during the quarter, an
increase of 30 percent versus third quarter a year ago and 2 percent over the
second quarter of 2005. Income product sales of $49.3 million were higher
than both last year and the prior quarter by 2 percent and 3 percent,
respectively.
Pre-tax operating earnings grew 3 percent compared to the third quarter of
2004, driven by increased policy charges and interest-spread income, and lower
policy benefits and general operating expenses. The increase in interest-
spread income was primarily driven by prepayments. Partially offsetting this
gain was an increase in amortization of deferred policy acquisition costs
(DAC) resulting from increased profits and a true up related to fixed
annuities. Pre-tax operating earnings declined 14 percent compared to the
second quarter, primarily due to higher amortization of DAC as a result of
true ups.
Interest spread income grew 7 percent, or $5.2 million, versus the year
ago quarter. The interest spread margin, defined as interest spread income on
average general account assets, was 203 basis points in the third quarter,
compared to 188 basis points in the third quarter a year ago and 195 basis
points in the second quarter of 2005. Included in the current quarter were 30
basis points, or $12.0 million, of income from prepayment penalties on
mortgage loans and bond call premiums, compared to 17 basis points, or $7.0
million, in the third quarter a year ago and 17 basis points, or $6.8 million,
in the second quarter of 2005.
The individual investments segment operating margin, defined as the ratio
of pre-tax operating earnings to average account values, was 45 basis points
for the quarter, compared to 46 basis points a year ago and 53 basis points in
the prior quarter. Return on average allocated capital was 17.1 percent for
the quarter, compared to 10.1 percent reported for the third quarter of 2004
and 12.3 percent last quarter. The current quarter return on average
allocated capital includes an additional 5.7 percent as a result of the
additional DRD benefits previously discussed.
Retirement Plans Segment
Sales in this segment grew 15 percent compared to the third quarter of
2004. Public sector sales grew 10 percent compared to a year ago, driven by
continued strong growth from the New York and California state cases as well
as the city of Phoenix. Private sector sales increased 17 percent versus a
year ago, driven by double digit sales increases in both the large- and small-
plan 401(k) market.
Pre-tax operating earnings increased to $45.4 million compared to $44.9
million a year ago as higher other income, primarily from the trust-based
business, was offset by lower policy charges in the annuity-based business, as
well as increases in both operating expenses and 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 $19.6 million or 40 percent, compared to
the third quarter 2004. The mix shift from annuity-based business to trust-
based business contributed to the decrease in policy charges, as trust-based
policy charges are reported as other income.
Interest spread income was 3 percent lower than the prior year primarily
due to lower prepayments and higher interest credited. The interest-spread
margin was 183 basis points in the quarter, compared to 204 basis points in
the same period a year ago and 185 basis points in the second quarter of 2005.
Included in the current quarter were 18 basis points, or $5.0 million, of
prepayment penalty income, compared to 30 basis points, or $7.6 million, in
the third quarter a year ago, and 19 basis points, or $5.2 million, last
quarter.
The operating margin, defined as the ratio of pre-tax operating earnings
to average account values, was 23 basis points for the quarter. This compares
to 26 basis points for the same quarter a year ago and 23 basis points last
quarter. Return on average allocated capital was 25.1 percent in the quarter,
up from 18.5 percent a year ago and 17.7 percent in the second 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 $64.4 million
for the quarter, a 4 percent decrease from $67.0 million reported last year.
Lower DAC amortization in the prior period from a true up related to systems
conversions drove the decrease in earnings versus a year ago. Fixed life
products pre-tax operating earnings were flat while investment life products
pre-tax operating earnings were 6 percent lower than a year ago.
The operating margin for the segment, defined as the ratio of pre-tax
operating earnings to operating revenues, was 19.4 percent for the quarter,
compared to 19.9 percent in the same quarter of 2004 and 18.4 percent in the
second quarter of 2005. Return on average allocated capital of 10.9 percent
for the quarter increased from 10.5 percent in the same quarter last year and
9.5 percent in the previous quarter. The current quarter return on average
allocated capital includes an additional 80 basis points due to the additional
DRD benefits noted previously.
Highlights from the life insurance businesses include:
Investment life: COLI sales grew 37 percent compared to last year driven
by several large cases funding during the quarter. Individual variable
life sales were $162.6 million for the third quarter of 2005 compared to
$173.9 million a year ago.
Investment life pre-tax operating earnings were $40.6 million compared to
$43.2 million in the third quarter of 2004. This decrease was driven by
higher mortality expense and increased amortization of DAC, partially
offset by lower general operating expenses and improved interest spread
income.
Fixed life: Individual fixed life sales increased 3 percent to $122.8
million compared to $119.3 million posted during the prior year quarter.
Third quarter fixed life pre-tax operating earnings of $23.8 million were
flat compared to last year. Increased mortality expense was offset by
lower amortization of DAC.
Corporate and Other Segment
The corporate and other segment pre-tax operating loss was $1.7 million in
the third quarter of 2005, compared to $22.0 million of earnings in the third
quarter of 2004 and $21.4 million of earnings in the second quarter of 2005.
Current quarter results include debt extinguishment costs of $21.7 million.
In structured products, guaranteed low-income-housing tax credits and
securitization of commercial mortgage-backed securities transactions during
the quarter contributed $1.6 million of pre-tax operating earnings. This
compares to $1.9 million of pre-tax operating earnings from structured
products in the third quarter of 2004 and $3.3 million in the second quarter
of 2005.
During the quarter, $400.0 million of medium-term notes (MTN) were issued
and $370.5 million matured. Current quarter interest-spread margin for the
MTN business was 109 basis points, compared to 148 basis points in the same
quarter last year and 139 basis points last quarter. MTN related interest-
spread income declined during the period as interest credited increased, due
to variable rate liabilities, and prepayment penalty income decreased to 6
basis points compared to 30 basis points in the prior year and 26 basis points
in the prior quarter.
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 earnings
drivers and is based on the performance of the equity markets and the related
performance of Nationwide Financial's separate account assets achieving a
return of 0 to 1-1/2 percent during the fourth quarter of 2005.
2005 Business Outlook
Individual Investments Segment
Interest-spread margin 190-195 bps
Pre-tax operating earnings to
average account values 43-48 bps
Retirement Plans Segment
Interest-spread margin 180-185 bps
Pre-tax operating earnings to
average account values 20-25 bps
Individual Protection Segment
Investment Life
Pre-tax operating earnings to
operating revenues 22-24%
Fixed Life
Pre-tax operating earnings to
operating revenues 12-14%
Nationwide Financial
Operating return on average equity 11.5-12.0%
Earnings Conference Call
Nationwide Financial will host a conference call from 10 a.m. to 11 a.m.
ET on Thursday, November 3rd, 2005 to discuss third 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.nationwidefinancial.com. Anyone unable to participate in the call can
listen to a replay starting at 2 p.m. ET time November 3, 2005 through
midnight ET November 10, 2005 by dialing 1-706-645-9291, conference ID
1248745. 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.
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 fourth quarter of 2005, the quiet period will be January 19, 2006 through
February 9, 2006.
Columbus-based Nationwide Financial is the holding company for the
domestic life insurance and retirement savings operations of Nationwide, which
owns 62.4 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.nationwidefinancial.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 94.3% of the combined voting power of all the
outstanding common stock and 62.4% 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, including the recent bankruptcy filings by Delta Air Lines, Inc.
and Northwest Airlines Corporation; (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 Third Quarter 2005 Earnings Announcement
Nationwide Financial Services, Inc. and Subsidiaries
Consolidated Statements of Income - Unaudited
Three months ended Nine months ended
September 30, September 30,
(in millions, except per share data) 2005 2004 2005 2004
Revenues:
Policy charges $318.4 $307.1 $942.4 $920.2
Life insurance premiums 97.2 102.1 292.8 298.2
Net investment income 601.9 582.7 1,783.4 1,698.4
Net realized (losses) gains on
investments, hedging instruments
and hedged items (13.3) (2.4) 17.1 (47.7)
Other 81.4 66.8 245.1 201.2
Total revenues 1,085.6 1,056.3 3,280.8 3,070.3
Benefits and Expenses:
Interest credited to policyholder
account values 356.8 341.7 1,051.8 1,006.9
Other benefits and claims 143.5 141.2 427.1 414.4
Policyholder dividends on
participating policies 27.1 25.0 80.3 73.4
Amortization of deferred policy
acquisition costs 122.0 101.9 366.5 321.7
Amortization of value of business
acquired 11.3 15.6 35.0 42.0
Interest expense on debt 28.0 25.5 80.9 76.8
Debt extinguishment costs 21.7 - 21.7 -
Other operating expenses 217.6 218.8 642.7 645.6
Total benefits and expenses 928.0 869.7 2,706.0 2,580.8
Income from continuing
operations before federal
income tax expense 157.6 186.6 574.8 489.5
Federal income tax (benefit) expense (10.3) 49.1 101.1 123.0
Income from continuing
operations 167.9 137.5 473.7 366.5
Discontinued operations, net of
taxes (1.2) (1.1) (5.3) (2.9)
Cumulative effect of adoption of
accounting principle, net of taxes - - - (3.4)
Net income $166.7 $136.4 $468.4 $360.2
Earnings from continuing operations
per common share:
Basic $1.10 $0.90 $3.10 $2.41
Diluted $1.09 $0.90 $3.08 $2.40
Earnings per common share:
Basic $1.09 $0.90 $3.06 $2.37
Diluted $1.08 $0.89 $3.05 $2.36
Weighted average common shares
outstanding:
Basic 153.1 152.1 153.0 152.0
Diluted 153.9 152.9 153.7 152.9
Cash dividends declared per common
share $0.19 $0.18 $0.57 $0.54
Exhibit 2 to Third Quarter 2005 Earnings Announcement
Nationwide Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, December 31,
(in millions) 2005 2004
(Unaudited)
Assets
Investments:
Securities available-for-sale, at
fair value
Fixed maturity securities $31,092.2 $31,516.8
Equity securities 78.6 87.0
Trading assets, at fair value 34.7 15.9
Mortgage loans on real estate, net 9,332.5 9,267.5
Real estate, net 107.7 108.3
Policy loans 935.6 987.2
Other long-term investments 617.6 604.2
Short-term investments, including
amounts managed by a related party 2,104.2 2,009.9
Total investments 44,303.1 44,596.8
Cash 47.6 52.4
Accrued investment income 436.8 428.7
Deferred policy acquisition costs 3,710.4 3,561.1
Value of business acquired 457.7 480.4
Other intangible assets 46.1 48.7
Goodwill 389.6 382.3
Other assets 2,227.5 2,497.0
Assets held in separate accounts 65,802.5 64,903.2
Total assets $117,421.3 $116,950.6
Liabilities and Shareholders' Equity
Liabilities:
Future policy benefits and claims $40,787.4 $41,077.2
Short-term debt 391.2 230.8
Long-term debt 1,406.0 1,406.0
Other liabilities 3,658.6 4,118.3
Liabilities related to separate accounts 65,802.5 64,903.2
Total liabilities 112,045.7 111,735.5
Shareholders' equity:
Class A common stock 0.7 0.7
Class B common stock 1.0 1.0
Additional paid-in capital 1,660.7 1,634.6
Retained earnings 3,778.2 3,400.0
Accumulated other comprehensive income 196.1 432.2
Treasury stock (259.7) (251.4)
Other, net (1.4) (2.0)
Total shareholders' equity 5,375.6 5,215.1
Total liabilities and
shareholders' equity $117,421.3 $116,950.6
Exhibit 3 to Third 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 also analyzes operating performance using the
following non-GAAP financial measures. The non-GAAP financial measures below
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 and cumulative effect of
adoption of accounting principles, if any, to exclude 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) and realized gains and losses related to
securitizations, if any. 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 cumulative
effect of adoption of accounting principles, if any, all net of tax.
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 net realized gains and losses on investments
not related to securitizations and periodic net coupon settlements on non-
qualifying derivatives, hedging instruments and hedged items, net of tax, from
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 from net operating
earnings, if any, as such adjustments are not reflective of the continuing
operations of Nationwide Financial's business.
Exhibit 3 to Third 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 ($0.17) per weighted average diluted share in 2004 and
ranged from ($0.08) to ($0.44) 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 Nine months ended
September 30, September 30,
(in millions) 2005 2004(2) 2005 2004(2)
Operating revenues $1,099.4 $1,061.0 $3,265.2 $3,125.5
Net realized (losses)
gains on investments,
hedging instruments
and hedged items(1) (13.8) (4.7) 15.6 (55.2)
Revenues $1,085.6 $1,056.3 $3,280.8 $3,070.3
Operating net realized gains to net realized (losses) gains on
investments, hedging instruments and hedged items
Three months ended Nine months ended
September 30, September 30,
(in millions) 2005 2004(2) 2005 2004(2)
Operating net realized
gains $0.5 $2.3 $1.5 $7.5
Net realized (losses)
gains on investments,
hedging instruments
and hedged items(1) (13.8) (4.7) 15.6 (55.2)
Net realized (losses)
gains on investments,
hedging instruments
and hedged items $(13.3) $(2.4) $17.1 $(47.7)
Pre-tax operating earnings to income from continuing operations before
federal income taxes
Three months ended Nine months ended
September 30, September 30,
(in millions) 2005 2004(2) 2005 2004(2)
Pre-tax operating
earnings $167.0 $191.3 $560.1 $544.7
Net realized (losses)
gains on investments,
hedging instruments
and hedged items(1) (13.8) (4.7) 15.6 (55.2)
Adjustment to DAC
amortization related
to net realized
gains (losses) 4.4 - (0.9) -
Income from continuing
operations before
federal income taxes $157.6 $186.6 $574.8 $489.5
Net operating earnings to net income and net operating return on average
equity to return on average equity
Three months ended September 30,
2005 2004(2)
Ratio (annualized) Ratio (annualized)
(in millions) Amount Ex AOCI w/AOCI Amount Ex AOCI w/AOCI
Net operating
earnings $174.0 13.6% 12.9% $140.6 12.2% 11.3%
Net realized
losses on
investments,
hedging
instruments and
hedged items,
net of taxes(1) (9.0) (0.7%) (0.7%) (3.1) (0.3%) (0.3%)
Adjustment to
DAC amortization
related to net
realized losses,
net of taxes 2.9 0.3% 0.2% - - -
Discontinued
operations,
net of taxes (1.2) (0.1%) (0.1%) (1.1) - (0.1%)
Net income $166.7 13.1% 12.3% $136.4 11.9% 10.9%
Average equity,
excluding
accumulated
other
comprehensive
income (AOCI) $5,109.4 $4,602.4
Average AOCI 295.9 387.5
Average equity $5,405.3 $4,989.9
Nine months ended September 30,
2005 2004(2)
Ratio (annualized) Ratio (annualized)
(in millions) Amount Ex AOCI w/AOCI Amount Ex AOCI w/AOCI
Net operating
earnings $464.1 12.4% 11.7% $402.4 11.9% 10.7%
Net realized
gains (losses)
on investments,
hedging
instruments and
hedged items,
net of taxes(1) 10.2 0.3% 0.2% (35.9) (1.1%) (1.0%)
Adjustment to DAC
amortization
related to net
realized gains,
net of taxes (0.6) - - - - -
Discontinued
operations,
net of taxes (5.3) (0.2%) (0.1%) (2.9) (0.1%) -
Cumulative
effect of
adoption of
accounting
principle,
net of taxes - - - (3.4) (0.1%) (0.1%)
Net income $468.4 12.5% 11.8% $360.2 10.6% 9.6%
Average equity,
excluding AOCI $4,981.6 $4,510.7
Average AOCI 311.6 485.9
Average equity $5,293.2 $4,996.6
Book value per share excluding AOCI to book value per share
(in millions,
except per
share data) As of September 30, 2005 As of December 31, 2004
Amount Per share Amount Per share
Total equity,
excluding AOCI $5,179.5 $33.81 $4,782.9 $31.36
AOCI 196.1 1.28 432.2 2.84
Total equity $5,375.6 $35.09 $5,215.1 $34.20
Shares
outstanding 153.2 152.5
(1)Excluding operating items (periodic net coupon settlements on non-
qualifying derivatives, trading portfolio realized gains and losses,
and trading portfolio valuation changes).
(2)Prior periods exclude operations of Cap Pro Holding, Inc., which have
been reclassified as discontinued operations.
Contact:
Investor Contact:
Mark Barnett
Vice President, Investor Relations,
614 677-5331
Media
Jeff Botti
Director, Corporate Communications,
614 249-6339
SOURCE Nationwide Financial Services, Inc.
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Related links:
http://www.nationwidefinancial.com
Company News On-Call:
http://www.prnewswire.com/comp/607050.html
CONTACT:
Investors, Mark Barnett, Vice President,
Investor Relations, +1-614-677-5331, or Media, Jeff Botti,
Director, Corporate Communications, +1-614-249-6339, both of
Nationwide Financial Services, Inc.
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