Nationwide Financial Reports Fourth Quarter Results
Record full year net operating earnings per diluted share; Quarterly variable annuity sales up 16%, individual life 1st year sales up 46%
FOR IMMEDIATE RELEASE
Investor Contact:
Mark Barnett
614-249-8437
Media Contact:
Erica Lewis
614-249-0184
Columbus, Ohio — Nationwide Financial Services, Inc. (NYSE: NFS), a leading provider of long-term savings and retirement products, today reported fourth quarter 2007 net income of $74.2 million, or $0.53 per diluted share compared to $158.4 million, or $1.06 per diluted share, in the prior year quarter.
Net income for the quarter included losses from discontinued operations, net of taxes, of $21.3 million, or $0.15 per diluted share, related to the planned sale of an interest in a corporate-owned life insurance distribution business. Additionally, due to the challenging capital markets in the fourth quarter of 2007, the current quarter included non-operating realized investment losses including related adjustments to amortization, net of taxes, of $66.2 million, or $0.48 per diluted share, compared to gains in the prior year quarter.
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 top of page 10 reconciles net operating earnings to net income, including the related diluted per share amounts for the periods indicated.
“Nationwide Financial reported strong operating performance in the fourth quarter, underscoring the progress we’ve made toward improving our business model,” said Jerry Jurgensen, chief executive officer.
“We had record net operating revenues and net operating earnings per share, among other milestones. Additionally, despite the volatility in the capital markets, our risk management capabilities are proving effective and our balance sheet remains very strong,” Jurgensen added.
“As we move into 2008, we believe that NFS is well positioned for growth. We’ve stabilized and refocused the company by strengthening core capabilities, exited underperforming businesses and added new capabilities such as banking and mutual funds,” Jurgensen said.
“During 2008, we expect that the enhancements to our core operations, combined with the addition of higher-return businesses, disciplined expense management and an increasingly more efficient capital structure, will result in further progress toward achieving our long-term financial targets,” Jurgensen said.
Highlights from the quarter:
Fourth quarter 2007 net operating earnings were $161.7 million, or
$1.16 per diluted share, compared to net operating earnings of $149.7
million, or $1.00 per diluted share, for the same period a year ago.
Earnings benefited from higher policy charges including asset based fees
and insurance charges and lower operating expenses, partially offset by
increased life insurance benefits. For the full year, the Company
achieved record net operating earnings per diluted share of $4.83.
Total sales (as defined in Exhibit 3) increased 3 percent compared to a year ago, as sales through non-affiliated and affiliated distribution channels increased by 3 percent and 4 percent, respectively. Non-affiliated sales growth was driven primarily by increased sales of variable annuities and individual life products. Affiliated sales growth was driven by higher public sector retirement plans sales.
Net inflows for the Company, excluding corporate and other, were $33.5
million compared to $1.3 billion in the prior year quarter. The decrease
in net flows was primarily the result of two large case corporate- and
bank-owned life insurance (COLI/BOLI) deposits totaling $952.4 million in
the prior year as well as lower net flows from an investment only
contract in public sector retirement plans.
Net operating revenues, defined as operating revenues net of interest
credited, increased 6 percent due to higher policy charges and interest
spread income. Total revenues declined 8 percent compared to the prior
year quarter primarily driven by realized investment losses in the
quarter compared to gains in the prior year quarter.
Book value per basic share, excluding accumulated other comprehensive
income (AOCI), increased 2 percent to $39.03 per basic share as of
December 31, 2007, compared to $38.29 per basic share as of December 31,
2006.
Net operating return on average equity (as defined in Exhibit 3) was
12.0 percent for the quarter compared to 10.7 percent in the fourth
quarter of 2006. The improvement was due to better operating results and
disciplined capital management.
“The fourth quarter capped a solid year of continued progress in our
efforts to accelerate growth and improve returns for shareholders,” said
Mark Thresher, chief operating officer. “With a solid strategy and a
relentless focus on execution, we’re making changes to enhance our
competitive position and support future growth. Moreover, our bottom line
results reflect the strength and balance of our underlying business mix
in the face of volatile markets and a challenging operating
environment.”
“Excluding unusual items, all of our operating segments improved their
profitability during the fourth quarter due to solid execution and
disciplined expense management. Additionally, product innovations, a
focus on key distribution partners, and a commitment to simpler solutions
– for investment professionals and their clients – are driving sales
growth across the segments.
“Most notably, first year sales of fixed life products increased 75
percent over last year and individual investment life first year sales
increased 23 percent, indicating that we’re making significant progress
on the plan we outlined during 2007 to improve individual life sales.”
Operating Segment Fourth Quarter Financial Highlights
Nationwide Financial reports its results in three primary business
segments: individual investments, retirement plans and individual
protection. Following are 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
Fourth quarter individual investments sales improved 13 percent over the prior year. Variable annuity sales continue to drive segment sales growth, up 16 percent compared to the fourth quarter of 2006. The Company’s focus on key distribution partners supported by a consistent selling process, combined with the appeal of its annuity and living benefit portfolio, helped fuel significant sales growth in 2007.
Net outflows were $484.3 million in the fourth quarter of 2007 compared to $513.7 million in the fourth quarter a year ago and $799.5 million in the third quarter of 2007. Net flows improved by $315.2 million, or 39 percent compared to the third quarter of 2007, driven by increased variable annuity sales and lower fixed annuity withdrawals and lapse rates.
Pre-tax operating earnings in the quarter were $69.1 million compared to $45.9 million in the same quarter a year ago, as higher asset fees and seasonally lower operating expenses and disciplined expense management were partially offset by a decline in interest spread income.
Interest spread income was 13 percent lower than in the same quarter a year ago as lower general account assets were partially offset by increased margins. Included in the interest spread margin were 18 basis points of income from prepayments, or $5.0 million, compared to 17 basis points, or $5.5 million, in the fourth quarter a year ago.
Retirement Plans Segment
Fourth quarter 2007 retirement plans sales increased 3 percent over the prior year quarter driven by 8 percent growth of public sector sales, while private sector sales were flat compared to a strong quarter in the prior year. Public sector sales growth was primarily driven by increased participation in large state plans.
Retirement plans net inflows were $231.8 million compared to $726.0 million in the same quarter a year ago as increased sales were more than offset by higher withdrawals in both the public and private sectors. Lower net flows from an investment only contract in the public sector combined with increased withdrawals in the private sector drove the decline in net flows.
Pre-tax operating earnings were $75.9 million compared to $46.2 million a year ago. The year over year increase was due to higher asset based fees, lower operating expenses and increased interest spread income. Lower expenses were the result of unusually high expenses in the prior year, related to the launch of a simplified sales process, combined with seasonally lower expenses and disciplined expense management in the current year.
Interest spread income increased 12 percent compared to a year ago due to increased core spread margin and higher prepayment income. Included in the interest spread margin were 18 basis points of income from prepayments, or $5.0 million, compared to 9 basis points, or $2.5 million, in the fourth quarter a year ago.
Individual Protection Segment
Total first year individual protection sales were $147.0 million for the quarter, compared to $307.2 million in the prior year. First year sales of fixed life products increased 75 percent compared to the same period a year ago, and individual investment life first year sales increased by 23 percent. COLI/BOLI first year sales were $61.3 million in the quarter compared to $248.3 million in the year ago quarter, which included a large case plan of $225.0 million in first year sales.
Pre-tax operating earnings were $69.3 million compared to $80.8 million a year ago. Earnings in the prior year quarter reflected a $17.4 million reduction of deferred policy acquisition cost (DAC) amortization due to an unlocking in the fixed life line of business. Additionally, higher policy charges on stronger fixed life sales were partially offset by higher policy benefits.
Interest spread income increased 1 percent, driven by higher prepayment income. Included in the current quarter were 24 basis points, or $4.6 million, of income from prepayments, compared to 5 basis points, or $1.0 million a year ago.
Total first year individual protection sales were $147.0 million for the quarter, compared to $307.2 million in the prior year. First year sales of fixed life products increased 75 percent compared to the same period a year ago, and individual investment life first year sales increased by 23 percent. COLI/BOLI first year sales were $61.3 million in the quarter compared to $248.3 million in the year ago quarter, which included a large case plan of $225.0 million in first year sales.
Pre-tax operating earnings were $69.3 million compared to $80.8 million a year ago. Earnings in the prior year quarter reflected a $17.4 million reduction of deferred policy acquisition cost (DAC) amortization due to an unlocking in the fixed life line of business. Additionally, higher policy charges on stronger fixed life sales were partially offset by higher policy benefits.
Interest spread income increased 1 percent, driven by higher prepayment income. Included in the current quarter were 24 basis points, or $4.6 million, of income from prepayments, compared to 5 basis points, or $1.0 million a year ago.
Corporate and Other Segment
Corporate and other segment pre-tax operating earnings were $2.3
million in the fourth quarter of 2007 compared to $18.6 million in the
fourth quarter of 2006. Increased earnings from Nationwide Bank,
Nationwide Funds Group and the medium-term note (MTN) program were more
than offset by an increase in general operating expenses and operating
losses from structured products transactions that resulted from an
unfavorable capital market environment.
The current quarter interest spread margin for the MTN business was 116 basis points compared to 111 basis points in the prior year. The increase was primarily due to higher prepayment income. During the current quarter, no medium-term notes were issued or matured.
Non-Operating Realized Investment Losses Including Related
Adjustments to Amortization
The Company reported non-operating realized investment losses
including related adjustments to amortization, net of taxes, of $66.2
million in the quarter. Of that amount, $52.7 million was related to
other-than-temporary impairments, which included $33.8 million related to
a corporate bond, $13.7 million related to securities backed by sub-prime
collateral and $5.2 million related to other miscellaneous items.
Additionally, non-operating realized investment losses including related
adjustments to amortization net of taxes, in the quarter included a net
loss of $8.5 million associated with the mark-to-market of living benefit
liabilities.
Discontinued Operations
Included in the current quarter’s results was a loss resulting from
management’s commitment to a plan of sale of its interest in TBG
Insurance Services Corporation d/b/a TBG Financial (TBG Financial). Based
on management’s determination that the carrying value of this business
exceeded its estimated fair value, the Company wrote down associated
goodwill to fair value, resulting in a $23.3 million charge, net of
taxes, or $0.17 per diluted share. In the quarter, the loss and the
operating results for TBG Financial, which are recorded as discontinued
operations, total $21.3 million, or $0.15 per diluted share. The results
for TBG Financial are reflected as discontinued operations for all
periods presented.
Capital and Share Repurchases
During the fourth quarter of 2007, the Company’s Board of Directors
authorized a $500 million extension of the Company’s share repurchase
program. Following this action, the Company repurchased 647,000 shares of
its Class A common stock in the open market for a total of $29.0 million
at an average price per share of $44.91. At year end, the Company had
$471.0 million remaining under its current authorization. The Company
also paid a quarterly dividend of $0.26 per share during the quarter.
The Company returned $656.3 million to shareholders in 2007, including $511.4 million in share repurchases and $144.9 million in quarterly dividends.
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 is 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 results are subject to the factors described in the forward-looking information section found on page 10.
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 1.5 to 1.75 percent per quarter during 2008.
Supplemental Financial Information
More detailed financial information can be found in the Nationwide
Financial statistical supplement for the fourth quarter of 2007, which is
available on the investor relations section of the Company’s Web site at
www.nationwide.com.
Earnings Conference Call
Nationwide Financial will host a conference call from 10 a.m. to 11
a.m. EST on Friday, February 8, 2008, to discuss fourth quarter 2007
results. To participate in the call, dial 1-412-858-4600 and provide your
name and company name to the operator. Please dial into the call 10 to 15
minutes early to facilitate a timely connection. A simultaneous webcast
of the call also will be accessible on the investor relations section of
our Web site at www.nationwide.com.
Anyone unable to participate in the call can listen to a replay starting at 2 p.m. EST time on February 8, 2008, through noon EST on February 15, 2008, by dialing 1-412-317-0088, account number 414859. 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
After the end of each quarter, the Company has a quiet period during
which it no longer publishes or updates its current outlook and during
which Company representatives do not comment on financial results or
expectations. The quiet period will extend until the day when the next
earnings announcement is published. For the first quarter of 2008, the
quiet period will be April 16, 2008 through May 7, 2008.
About Nationwide Financial
Columbus-based Nationwide Financial is the holding company for the
domestic retirement savings operations of Nationwide, which owns 66.3
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
2006 Annual Report to Shareholders, 2006 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
www.nationwide.com.
Forward-Looking Information
The information included herein contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform
Act of 1995 with respect to the results of operations and businesses of
the Nationwide Financial Services, Inc. and subsidiaries (NFS or
collectively, the Company). These forward-looking statements involve
certain risks and uncertainties. Factors that may cause actual results to
differ materially from those contemplated or projected, forecast,
estimated or budgeted in such forward-looking statements include, among
other, the following possibilities: (i) change in Nationwide
Corporation’s control of the Company through its beneficial ownership of
95.2% of the combined voting power of all the outstanding common stock
and 66.3% 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 United States Securities and
Exchange Commission 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 DAC and/or
value of business acquired, 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 that 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 the outbreak of a pandemic illness, such as
Avian Flu), morbidity and interest rates used in calculating reserve
amounts and in pricing the Company’s products; (xvii) adverse litigation
results and/or resolution of litigation and/or arbitration, investigation
and/or inquiry 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.
Non-GAAP Measures Used in this Earnings Announcement by Nationwide
Financial
Nationwide Financial Services, Inc. (NFS) 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, NFS analyzes operating
performance using certain non-GAAP financial measures. The following
non-GAAP financial measures appear in the accompanying earnings
announcement.
Net operating revenues are calculated by adjusting total revenues to include only net realized investment gains and losses that are 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), net of interest credited to policyholder accounts.
Operating realized investment gains and losses include net realized investment gains and losses that are 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).
Net operating earnings are calculated by adjusting net income to exclude the following (all net of taxes): non-operating net realized investment gains and losses; discontinued operations; and the cumulative effect of adoption of accounting principles.
Net operating earnings per common diluted share is calculated by
dividing net operating earnings by the number of weighted average common
diluted shares outstanding for the period indicated.
Net operating return on average equity is calculated by annualizing net
operating earnings and dividing by average shareholders’ equity excluding
accumulated other comprehensive income (AOCI).
Book value per basic share excluding AOCI is calculated by dividing
total shareholders’ equity less AOCI by the number of common shares
outstanding as of the date indicated.
Sales refers to a production volume metric that Nationwide Financial regularly monitors and reports. Sales or similar measures are commonly used in the insurance industry as a measure of the volume of new and renewal business generated in a period.
Sales are not derived from any specific GAAP income statement accounts or line items and should not be viewed as a substitute for any financial measure determined in accordance with GAAP, including sales as it relates to non-insurance companies. Additionally, Nationwide Financial’s definition of sales may differ from that used by other companies. As used in the insurance industry, sales, or similarly titled measures, generate customer funds managed and administered, which ultimately drive revenues.
As calculated and analyzed by management, statutory premiums and deposits on individual and group annuities and life insurance products calculated in accordance with accounting practices prescribed or permitted by regulatory authorities and deposits on administration-only group retirement plans and the advisory services program are adjusted as described below to arrive at sales.
Life insurance premiums determined on a GAAP basis are significantly different than statutory premiums and deposits. Life insurance premiums determined on a GAAP basis are recognized as revenue when due, as calculated on an accrual basis in proportion to the service provided and performance rendered under the contract. In addition, many life insurance and annuity products involve an initial deposit or a series of deposits from customers. These deposits are accounted for as such on a GAAP basis and therefore are not reflected in the GAAP income statement. On a statutory basis, life insurance premiums collected (cash basis) and deposits received (cash basis) are aggregated and reported as statutory premiums and annuity consideration revenues.
Sales, as reported by Nationwide Financial, are stated net of internal replacements, which management believes provides a more meaningful disclosure of production in a given period. In addition, Nationwide Financial’s definition of sales excludes funding agreements issued under its medium term note program; asset transfers associated with large case bank-owned life insurance and large case retirement plan acquisitions; and deposits into Nationwide employee and agent benefit plans. Although these products contribute to asset and earnings growth, their production flows potentially can mask trends in the underlying business and thus do not provide meaningful comparisons and analyses.
Management believes that the presentation of sales as measured for management purposes enhances the understanding of the Company’s business and helps depict longer-term trends that may not be apparent in the results of operations due to differences between the timing of sales and revenue recognition.
Use of Non-GAAP Measures in Practice
Operating revenues, operating realized investment gains and losses,
net operating earnings, net operating earnings per common diluted share,
operating return on average equity, book value per common share excluding
AOCI, sales 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 NFS’ overall
results of operations, and NFS’ 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 investment gains
and losses, pre-tax operating earnings, net operating earnings, net
operating earnings per common diluted share, operating return on average
equity, book value per common share excluding AOCI and sales should not
be viewed as substitutes for total revenues, net realized investment
gains and losses, income from continuing operations before federal income
tax expense, net income, earnings per common diluted share, return on
average equity, book value per common share, and revenues, 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 investment gains and losses, 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.
