Positive Sales Momentum in Individual Products Continues
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 2006 net income of $159.5
million, or $1.06 per diluted share, compared with third quarter 2005 net
income of $166.7 million, or $1.08 per diluted share.
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. Later in this document a
reconciliation of net operating earnings to net income includes the related
diluted per share amounts for the periods indicated.
"We're pleased with our overall performance in the quarter and the
solid results we achieved in our three operating segments," said Jerry
Jurgensen, chief executive officer. "We're on track to meet our full-year
expectations, and these results validate the progress we've made in
strengthening our core businesses, particularly in our individual product
lines, where sales have significantly improved over the last several
quarters.
"At the same time, we are making meaningful progress toward building
new capabilities that naturally complement our existing mix of businesses
and that will better serve the emerging needs of our distribution partners
and consumers," Jurgensen added. "These new capabilities include banking,
mutual funds and income products to help consumers prepare for and live in
retirement.
"In addition, we are particularly pleased that members of the
Nationwide Federal Credit Union recently approved a proposal to merge with
Nationwide Bank. This merger will provide a solid foundation of customers,
deposits and assets and should expedite the bank's path to profitability."
The quarter's net operating earnings were $154.7 million, or $1.03 per
diluted share, compared to net operating earnings of $172.3 million, or
$1.12 per diluted share, a year ago. In the prior year quarter, the Company
recognized $42.6 million, or $0.28 per diluted share, of additional
separate account dividends received deductions (DRD), partially offset by a
$14.1 million, or $0.09 per diluted share, after tax non-cash debt
extinguishment charge. Net of these items, net operating earnings increased
8 percent compared to the third quarter of 2005 driven primarily by
increased asset- based revenues, the result of market driven asset growth,
partially offset by lower investment spread income due to lower general
account assets.
Highlights from the quarter:
Three months ended
September 30,
(in millions) 2006 2005 Change
(Unaudited) (Unaudited)
Net income $159.5 $166.7 -4%
Net income per diluted share $1.06 $1.08 -2%
Net operating earnings $154.7 $172.3 -10%
Net operating earnings per diluted
share $1.03 $1.12 -8%
Sales $4,474.3 $4,076.5 10%
Net flows 153.7 363.7 -58%
Total revenues 1,121.7 1,071.1 5%
Total operating revenues 1,116.2 1,085.5 3%
Customer funds managed and
administered $163,240.5 $155,650.6 5%
Total assets $114,888.0 $117,421.3 -2%
Shareholders' equity excluding AOCI $5,582.2 $5,179.5 8%
Net operating return on average
equity excluding AOCI 11.2% 13.5% N/A
Book value per diluted share
excluding AOCI $37.29 $33.81 10%
- Sales through the Company's non-affiliated and affiliated distribution
channels increased by 16 percent and 1 percent, respectively, versus a
year ago. Non-affiliated distribution sales growth was driven by
strong variable annuity sales. Affiliated distribution sales growth
was driven primarily by higher private sector retirement plan sales at
The 401(k) Company and improved sales of individual investment products
through Nationwide Agents and the Nationwide Financial Network (NFN),
partially offset by lower corporate-owned life insurance sales through
TBG Financial.
- Total net inflows, or customer deposits net of withdrawals, were $153.7
million in the third quarter of 2006, compared to $363.7 in the third
quarter of 2005. The decrease was primarily driven by increased fixed
annuity withdrawals.
- Total revenues increased 5 percent year-over-year. This improvement
was driven by a 3 percent growth in operating revenues as well as net
realized gains on investments, hedging instruments and hedged items
compared to losses in the prior year.
- Shareholder's equity excluding accumulated other comprehensive income
(AOCI) increased 10% to $37.29 per share, compared to $33.81 per share,
September 30, 2005.
- Operating return on average equity excluding AOCI, as defined in
Exhibit 3, was 11.2 percent for the quarter, compared to 13.5 percent
in the third quarter of 2005. The aforementioned additional DRD and
debt extinguishment costs contributed 2.3 percent toward the prior
period's operating return on average equity excluding AOCI.
"Our strong year-over-year growth in individual product sales are
another indication of the significant progress we have made this year to
re-establish Nationwide Financial as an industry-leading provider of
innovative investment, protection and retirement products," said Mark
Thresher, president and chief operating officer. "The work that we are
doing around product innovation, distribution, building new capabilities
and capital management is beginning to bear fruit, and will set the stage
for growth in future years.
"Additionally, we believe that Nationwide Financial will play an
increasingly important role in helping Americans invest for, live in and
manage their retirement," Thresher continued. "We're very excited about the
recent launch of the Nationwide RetirAbility Check, based on groundbreaking
research by the Center for Retirement Research at Boston College. This free
online resource provides consumers with a simple and easy way to see if
they are on track for a healthy retirement. We believe this resource will
be a key asset helping individuals improve their retirement readiness,
further enhancing our brand by positioning Nationwide Financial as a leader
in helping consumers prepare for and live in retirement."
Operating Segment Third 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
September 30,
(in millions) 2006 2005 Change
(Unaudited)(Unaudited)
Individual variable annuity
sales $1,192.4 $801.0 49%
Individual fixed annuity
sales 57.2 31.5 82%
Income product sales 57.1 49.3 16%
Advisory services program
sales 47.7 65.1 -27%
Total sales $1,354.4 $946.9 43%
Net flows $(681.8) $(715.1) 5%
Operating revenues 382.3 385.3 -1%
Pre-tax operating earnings 60.4 56.3 7%
Ending account values $51,309.9 $52,541.7 -2%
Interest spread on average
general account values 2.15% 1.94%
Pre-tax operating earnings
to average account values 0.47% 0.43%
Return on average allocated
capital 13.1% 16.7%
Led by 49 percent growth in variable annuity sales, sales of individual
investment products increased 43 percent compared to the same quarter in
2005. Continuing acceleration of Lifetime Income (L.Inc.) sales and strong
demand for Capital Preservation Plus with Lifetime Income (CPP/LI) drove
variable annuity sales of $1.2 billion for the second consecutive quarter.
Net outflows improved 5 percent to $681.8 million from $715.1 in the
third quarter a year ago. Strong variable annuity sales drove a variable
annuity net flow improvement of 48 percent partially offset by increased
fixed annuity outflows related to aging blocks of fixed annuity business.
Pre-tax operating earnings in this segment were $60.4 million compared
to $56.3 million in the prior year. Increased asset-based fees, driven by
equity market growth, and lower fixed annuity DAC amortization, were
partially offset by increased policy benefits and lower interest spread
income.
Lower general account assets, resulting primarily from fixed annuity
net outflows, the disposition of the Company's offshore annuity business
and lower prepayment penalty income, drove a decline of 5 percent in
interest spread income despite improved core interest spread margins.
Included in the interest spread margin in the current quarter were 24 basis
points, or $8.2 million, of income from prepayment penalties on commercial
mortgage loans and bond call premiums, compared to 30 basis points, or
$12.1 million, during the third quarter of last year.
Retirement Plans Segment
Three months ended
September 30,
(in millions) 2006 2005 Change
(Unaudited) (Unaudited)
Private plan sales $1,738.6 $1,665.1 4%
Public plan sales 1,023.4 1,004.3 2%
Total sales $2,762.0 $2,669.4 3%
Net flows $651.2 $738.7 -12%
Operating revenues 286.5 271.4 6%
Pre-tax operating earnings 53.6 45.4 18%
Ending account values $89,548.3 $81,909.1 9%
Interest spread on average
general account values 1.92% 1.83%
Pre-tax operating earnings to
average account values 0.24% 0.23%
Return on average allocated
capital 18.8% 25.1%
Retirement plan sales increased 3 percent over the prior year quarter
driven by 4 percent growth in private sector sales and 2 percent growth in
public sector sales. Retirement plan net inflows were $651.2 million in the
quarter compared to $738.7 million in the same period a year ago. Increased
sales in the segment were more than offset by higher withdrawals in the
private sector at The 401(k) Company. Additionally, higher asset values
resulted in an increase in the size of the average withdrawal, contributing
to a higher level of total withdrawals compared to the prior period.
Pre-tax operating earnings of $53.6 million increased 18 percent
compared to a year ago. The earnings improvement resulted from higher
asset-based fees, from both annuity- and trust-based 401(k) products, and
higher interest spread income, partially offset by higher trail commissions
and general expenses.
Interest spread income in this segment improved by $2.2 million. This
was driven primarily by lower crediting rates, partially offset by lower
prepayments which were 12 basis points, or $3.4 million, compared to 18
basis points, or $5.0 million, in the third quarter a year ago.
Individual Protection Segment
Three months ended
September 30,
(in millions) 2006 2005 Change
(Unaudited) (Unaudited)
Individual investment life
first year sales $38.8 $34.7 12%
COLI/BOLI first year sales 10.2 79.7 -87%
Traditional/Universal life
first year sales 32.5 26.4 23%
Total first year sales $81.5 $140.8 -42%
Net flows $258.1 $310.6 -17%
Operating revenues 338.6 331.5 2%
Pre-tax operating earnings 71.0 63.8 11%
Policy reserves $18,412.4 $17,150.0 7%
Life insurance in-force $131,460.3 $124,773.1 5%
Pre-tax operating earnings to
operating revenues 21.0% 19.3%
Return on average allocated
capital 10.4% 10.9%
Total first year individual protection sales were $81.5 million
compared to $140.8 million in the prior year. First year sales of
traditional and universal life increased by 23 percent and individual
variable life sales increased 12 percent compared to the same period a year
ago as sales through both affiliated and non-affiliated distribution
channels improved. Corporate- and bank-owned life insurance (COLI/BOLI)
first year sales were $10.2 million in the quarter compared to $79.7
million a year ago.
Pre-tax operating earnings in this segment increased 11 percent, or
$7.2 million, to $71.0 million compared to $63.8 million in the prior year,
driven primarily by increased fixed life revenues and lower variable life
general operating expenses.
Interest spread income in this segment was 1 percent lower than the
prior year quarter as an increase in net investment income, due to higher
general account assets, was offset by lower prepayment penalty income.
Included in the current quarter was $0.6 million of prepayment penalty
income compared to $1.9 million in the third quarter a year ago.
Corporate and Other Segment
Corporate and other segment pre-tax operating earnings were $21.7
million in the third quarter of 2006, compared to a pre-tax operating loss
of $1.1 million in the third quarter of 2005. Excluding the $21.7 million
debt extinguishment costs, pre-tax operating earnings in the prior year
were $20.6 million. Higher securitization income and lower general
operating expenses driven in part by lower legal expenses due to favorable
case developments, were partially offset by lower income from private
equities and hedge funds.
No medium-term notes (MTN) were issued during the quarter while MTN
with an aggregate principal amount of $73.8 million matured. Current
quarter interest spread margin for the MTN business was 120 basis points
compared to 109 basis points in the same quarter a year ago. The increase
was driven primarily by improved base spreads as prepayment penalty income
was essentially flat.
Capital and Share Repurchase
As announced on April 4, the Company executed an accelerated share
repurchase (ASR) program during the first quarter of 2006. The ASR was
initiated on March 30 of this year, and the Company did not execute
additional open market share repurchases during the six months covered by
the ASR, which expired October 3, 2006. Including final adjustments, the
ASR resulted in the repurchase of 2.8 million shares at an average price of
$44.55. To date, including the ASR, the Company has repurchased $241
million of common stock, leaving $259 million available for future
repurchases under the current authorization of the Board of Directors.
Repurchases of the Company's common stock in the open market, in block
trades or otherwise, and through privately negotiated transactions, are to
be made in compliance with all applicable laws and regulations, including
the United States Securities and Exchange Commission rules. The program may
be superseded or discontinued at any time.
Nationwide Financial's management will determine the timing, financing
and amount of any repurchases based upon its evaluation of market
conditions, share price and other factors. As of October 27, 2006,
Nationwide Financial had 54,280,282 shares of Class A common stock
outstanding and 95,633,767 shares of Class B common stock outstanding.
During the quarter, Nationwide Financial paid a quarterly dividend of
$0.23 per share.
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 later in this document.
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 1 to 2
percent during the fourth quarter of 2006.
In addition, the business outlook includes the impact of stock
compensation expense, expected to be approximately $0.05 per diluted share
during the full year 2006.
2006 Business Outlook
Individual Investments Segment
Interest-spread margin 195 - 200 bps
Pre-tax operating earnings to average
account values 40 - 45 bps
Sales:
Variable annuities 30 - 35% growth
Fixed annuities $200m - $300m
Advisory services $200m - $300m
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 0 - 2% growth
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 13 - 15% growth
COLI 10 - 20% decrease
Fixed life 4 - 6% 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 third 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. EST on Friday, November 3, 2006, to discuss third 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 1 p.m. EST on November 3, 2006, through
midnight EST on November 17, 2006 by dialing 1-706-645-9291, conference ID
7878393. 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 fourth quarter of 2006, the quiet period will be
January 19, 2007 through February 8, 2007.
About Nationwide Financial
Columbus-based Nationwide Financial is the holding company for the
domestic retirement savings operations of Nationwide, which owns 63.9
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 September 30,
2006 2005
Per Per
diluted diluted
(in millions, except per share data) Amount share Amount share
Net operating earnings $154.7 $1.03 $172.3 $1.12
Net realized gains (losses) on
investments, hedging
instruments and hedged items,
net of taxes* 3.6 0.02 (9.3) (0.07)
Adjustment to amortization related to
net realized gains and losses,
net of taxes 1.2 0.01 2.9 0.02
Discontinued operations, net of
taxes** - - 0.8 0.01
Net income $159.5 $1.06 $166.7 $1.08
* Excluding operating items (periodic net coupon settlements on non-
qualifying derivatives, trading portfolio realized gains and losses,
trading portfolio valuation changes, and net realized gains and losses
related to securitizations).
** 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 94.6% of the combined voting
power of all the outstanding common stock and 63.9% 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 that could result
in monetary damages or impact the manner in which the Company conducts its
operations; and (xviii) adverse consequences, including financial and
reputation costs, regulatory problems and potential loss of customers
resulting from failure to meet privacy regulations and/or protect the
Company's customers' confidential information.
Exhibit 1 to Third Quarter 2006 Earnings Announcement
Nationwide Financial Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
Three months ended Nine months ended
September 30, September 30,
(in millions, except per share data) 2006 2005 2006 2005
(Unaudited) (Unaudited)
Revenues:
Policy charges $327.6 $315.0 $986.2 $931.1
Traditional life insurance and
immediate annuity premiums 110.5 97.2 328.0 292.8
Net investment income 577.9 593.0 1,727.3 1,756.2
Net realized gains (losses) on
investments, hedging instruments
and hedged items 9.6 (13.8) (7.1) 16.2
Other income 96.1 79.7 281.2 240.7
Total revenues 1,121.7 1,071.1 3,315.6 3,237.0
Benefits and Expenses:
Interest credited to policyholder
account values 348.2 350.6 1,036.0 1,033.2
Life insurance and annuity
benefits 163.8 142.9 476.3 425.0
Policyholder dividends on
participating policies 24.6 27.2 69.3 80.4
Amortization of deferred policy
acquisition costs 108.2 118.5 354.8 356.7
Amortization of value of business
acquired 14.5 11.3 38.6 35.0
Interest expense on debt 25.3 28.0 76.5 80.9
Debt extinguishment costs - 21.7 - 21.7
Other operating expenses 223.0 216.4 682.0 637.2
Total benefits and expenses 907.6 916.6 2,733.5 2,670.1
Income from continuing
operations before federal
income tax expense (benefit) 214.1 154.5 582.1 566.9
Federal income tax expense (benefit) 54.6 (11.4) 22.5 98.3
Income from continuing
operations 159.5 165.9 559.6 468.6
Discontinued operations, net of
taxes - 0.8 - (0.2)
Net income $159.5 $166.7 $559.6 $468.4
Earnings from continuing operations
per common share:
Basic $1.07 $1.08 $3.72 $3.06
Diluted $1.06 $1.08 $3.71 $3.05
Earnings per common share:
Basic $1.07 $1.09 $3.72 $3.06
Diluted $1.06 $1.08 $3.71 $3.05
Weighted average common shares
outstanding:
Basic 149.5 153.1 150.3 153.0
Diluted 150.3 153.9 151.0 153.7
Cash dividends declared per common
share $0.23 $0.19 $0.69 $0.57
Exhibit 2 to Third Quarter 2006 Earnings Announcement
Nationwide Financial Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, December 31,
(in millions) 2006 2005
(Unaudited)
Assets
Investments:
Securities available-for-sale, at
fair value
Fixed maturity securities $28,579.0 $30,106.0
Equity securities 65.2 75.6
Trading assets, at fair value 22.8 34.4
Mortgage loans on real estate, net 8,981.2 9,148.6
Real estate, net 104.8 108.7
Policy loans 957.7 930.6
Other long-term investments 680.6 691.9
Short-term investments, including
amounts managed by a related
party 1,917.4 2,073.2
Total investments 41,308.7 43,169.0
Cash 12.9 16.4
Accrued investment income 412.6 396.3
Deferred policy acquisition costs 3,783.5 3,685.4
Value of business acquired 399.1 449.7
Goodwill 359.0 364.5
Other assets 2,477.4 2,114.8
Assets held in separate accounts 66,126.8 65,963.8
Total assets $114,880.0 $116,159.9
Liabilities and Shareholders' Equity
Liabilities:
Future policy benefits and claims $38,131.9 $39,748.1
Short-term debt 88.6 252.3
Long-term debt 1,398.1 1,398.0
Other liabilities 3,504.6 3,447.3
Liabilities related to separate
accounts 66,126.8 65,963.8
Total liabilities 109,250.0 110,809.5
Shareholders' equity:
Class A common stock 0.7 0.7
Class B common stock 1.0 1.0
Additional paid-in capital 1,732.0 1,670.8
Retained earnings 4,339.6 3,883.1
Accumulated other comprehensive
income 47.8 100.7
Treasury stock (489.5) (304.2)
Other, net (1.6) (1.7)
Total shareholders' equity 5,630.0 5,350.4
Total liabilities and
shareholders' equity $114,880.0 $116,159.9
Exhibit 3 to Third 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 operating
items (periodic net coupon settlements on non-qualifying derivatives,
trading portfolio realized gains and losses, trading portfolio valuation
changes, and net realized gains and losses related to securitizations),
hedging instruments and hedged items.
Operating realized gains (losses) include net realized gains and losses on
investments related to operating items (periodic net coupon settlements on
non-qualifying derivatives, trading portfolio realized gains and losses,
trading portfolio valuation changes, and net realized gains and losses
related to securitizations), 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, trading portfolio valuation changes, and net realized gains and
losses related to securitizations); and (2) the adjustment to amortization
of DAC and VOBA 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, trading portfolio valuation changes, and net realized gains and
losses related to securitizations) 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 Third 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.
Page ten 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 September 30,
(in millions) 2006 (2) 2005 (2)
Operating revenues $1,116.2 $1,085.5
Net realized gains (losses) on
investments, hedging instruments and
hedged items (1) 5.5 (14.4)
Revenues $1,121.7 $1,071.1
Operating net realized gains to net
realized gains (losses) on
investments, hedging instruments and
hedged items
Three months ended September 30,
(in millions) 2006 2005
Operating net realized gains $4.1 $0.6
Net realized gains (losses) on
investments, hedging instruments and
hedged items (1) 5.5 (14.4)
Net realized gains (losses) on
investments, hedging instruments
and hedged items $9.6 $(13.8)
Pre-tax operating earnings to income
from continuing operations before
federal income taxes
Three months ended September 30,
(in millions) 2006 (2) 2005 (2)
Pre-tax operating earnings $206.7 $164.4
Net realized gains (losses) on
investments, hedging instruments and
hedged items (1) 5.5 (14.4)
Adjustment to amortization related to
net realized gains and losses 1.9 4.5
Income from continuing operations
before federal income taxes $214.1 $154.5
Net operating earnings to net income
and net operating return on average
equity to return on average equity
Three months ended September 30,
2006
Ratio (annualized)
(in millions) Amount Ex AOCI w/AOCI
Net operating earnings $154.7 11.2% 11.4%
Net realized gains (losses) on
investments, hedging instruments and
hedged items, net of taxes (1) 3.6 0.3% 0.2%
Adjustment to amortization related to
net realized gains and losses, net
of taxes 1.2 0.1% 0.1%
Discontinued operations, net of taxes - - -
Net income $159.5 11.6% 11.7%
Average equity, excluding AOCI $5,510.5
Average AOCI (77.1)
Average equity $5,433.4
Three months ended September 30,
2006
Ratio (annualized)
(in millions) Amount Ex AOCI w/AOCI
Net operating earnings $563.0 14.0% 14.1%
Net realized (losses) gains on
investments, hedging instruments and
hedged items, net of taxes (1) (8.9) (0.2%) (0.2%)
Adjustment to amortization related to
net realized gains and losses, net
of taxes 5.5 0.1% 0.1%
Discontinued operations, net of taxes - - -
Net income $559.6 13.9% 14.0%
Average equity, excluding AOCI $5,368.7
Average AOCI (32.9)
Average equity $5,335.8
Book value per share excluding AOCI
to book value per share
As of September 30, 2006
(in millions, except per share data) Amount Per share
Total equity, excluding AOCI $5,582.2 $37.29
AOCI 47.8 0.32
Total equity $5,630.0 $37.61
Shares outstanding 149.7
Operating revenues to revenues
Nine months ended September 30,
(in millions) 2006 (2) 2005 (2)
Operating revenues $3,329.2 $3,222.4
Net realized gains (losses) on
investments, hedging instruments and
hedged items (1) (13.6) 14.6
Revenues $3,315.6 $3,237.0
Operating net realized gains to net
realized gains (losses) on
investments, hedging instruments and
hedged items
Nine months ended September 30,
(in millions) 2006 2005
Operating net realized gains $6.5 $1.6
Net realized gains (losses) on
investments, hedging instruments and
hedged items (1) (13.6) 14.6
Net realized gains (losses) on
investments, hedging instruments
and hedged items $(7.1) $16.2
Pre-tax operating earnings to income
from continuing operations before
federal income taxes
Nine months ended September 30,
(in millions) 2006 (2) 2005 (2)
Pre-tax operating earnings $587.2 $553.2
Net realized gains (losses) on
investments, hedging instruments and
hedged items (1) (13.6) 14.6
Adjustment to amortization related to
net realized gains and losses 8.5 (0.9)
Income from continuing operations
before federal income taxes $582.1 $566.9
Net operating earnings to net income
and net operating return on average
equity to return on average equity
Nine months ended September 30,
2005
Ratio (annualized)
(in millions) Amount Ex AOCI w/AOCI
Net operating earnings $172.3 13.5% 12.8%
Net realized gains (losses) on
investments, hedging instruments and
hedged items, net of taxes (1) (9.3) (0.7%) (0.7%)
Adjustment to amortization related to
net realized gains and losses, net
of taxes 2.9 0.2% 0.2%
Discontinued operations, net of taxes 0.8 0.1% 0.1%
Net income $166.7 13.1% 12.4%
Average equity, excluding AOCI $5,109.4
Average AOCI 295.9
Average equity $5,405.3
Nine months ended September 30,
2005
Ratio (annualized)
(in millions) Amount Ex AOCI w/AOCI
Net operating earnings $459.6 12.3% 11.6%
Net realized (losses) gains on
investments, hedging instruments and
hedged items, net of taxes (1) 9.6 0.2% 0.2%
Adjustment to amortization related to
net realized gains and losses, net
of taxes (0.6) - -
Discontinued operations, net of taxes (0.2) - -
Net income $468.4 12.5% 11.8%
Average equity, excluding AOCI $4,981.6
Average AOCI 311.6
Average equity $5,293.2
Book value per share excluding AOCI
to book value per share
As of December 31, 2005
(in millions, except per share data) Amount Per share
Total equity, excluding AOCI $5,249.7 $34.42
AOCI 100.7 0.66
Total equity $5,350.4 $35.08
Shares outstanding 152.5
1 Excluding operating items (periodic net coupon settlements on non-
qualifying derivatives, trading portfolio realized gains and losses,
trading portfolio valuation changes, and net realized gains and losses
related to securitizations).
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.nationwidefinancial.com
http://www.prnewswire.com/comp/607050.html/
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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