Nationwide Financial reports third quarter results
Net loss driven by investment losses and DAC unlock Capital position remains strong
FOR IMMEDIATE RELEASE
November 5, 2008
Mark Barnett (614) 249-8437
Jeff Botti (614) 249-6339
COLUMBUS, Ohio — Nationwide Financial Services, Inc. (NYSE: NFS), a leading provider of long-term savings and retirement products, today reported a third quarter 2008 net loss of $346.4 million, or $2.51 per diluted share, compared with third quarter 2007 net income of $147.0 million, or $1.03 per diluted share.
The net loss for the current quarter includes non-operating realized investment losses, net of related adjustments to amortization, of $315.4 million, or $2.29 per diluted share, compared to $8.4 million, or $0.06 per diluted share, in the prior year quarter. The $315.4 million non-operating investment loss was driven primarily by $257.8 million of other-than-temporary impairments, $17.2 million of net realized losses on sales and $42.0 million of losses related to the mark-to-market of variable annuity living benefit liabilities net of economic hedges and amortization related to net realized gains (losses).
Nationwide Financial analyzes operating performance using a non-GAAP financial measure called “net operating (loss)/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 8 reconciles net operating earnings to net income, including the related diluted per share amounts for the periods indicated.
“We, along with others in the industry, experienced large losses in our investment portfolio during the third quarter due to the unprecedented market conditions caused by the disruptions in the financial system,” said Jerry Jurgensen, chief executive officer. “While these losses had a significant impact on our quarterly profitability, given the environment, we do not see these results as surprising or as negatively impacting our long-term financial stability.”
“We are fortunate that we made significant progress over the last few
years to improve our financial condition, providing us with a strong
balance sheet and the liquidity to weather times like these,”
addedJurgensen. “Having entered this crisis from a strong financial
position, we believe we have the capital to keep our promises to
customers without hesitation.”
Highlights from the quarter:
The net operating loss for the third quarter was $21.8 million, or $0.16 per diluted share, compared to net operating earnings of $154.6 million, or $1.08 per diluted share, for the same period a year ago.
The operating loss was driven by several items, all related to the distress in the financial markets. During the third quarter, the Company retrospectively unlocked its deferred policy acquisition costs (DAC) for variable annuities due to unfavorable equity market returns, resulting in an increase in DAC amortization and other related balances totaling $177.2 million in the individual investments segment. The Company’s corporate and other segment results were adversely impacted by $49.1 million in losses from hedge funds and private equities and the mark-to-market of investments. Also during the third quarter, the Company refined its separate account dividends received deduction (DRD) calculation and estimation. As a result, the Company had a $10.0 million lower tax benefit from DRD than previously estimated.
Excluding the items listed above, net operating earnings were approximately $135.3 million, or $0.98 per diluted share. The decrease from the prior year quarter primarily was driven by lower asset-based fees, the result of the equity market driven decrease in variable assets.
Sales (as defined in Exhibit 3) were $3.9 billion in the third quarter of 2008 compared to $4.4 billion in the prior year quarter. Sales through affiliated channels decreased 1 percent as an increase in public sector sales through Nationwide Retirement Solutions was more than offset by lower Nationwide Financial Network (NFN) production. Sales through non-affiliated distribution channels decreased 18 percent due to lower variable annuity and private sector retirement plan sales.
Net outflows (excluding the corporate and other segment) were $135.7 million in the third quarter of 2008 compared to net outflows of $270.1 million in the prior year quarter. The improvement was driven by lower withdrawals in both the private sector and fixed annuities, partially offset by lower variable annuity deposits.