Nationwide Financial Reports Third Quarter Results
Net Loss Driven by Investment Losses and DAC Unlock
Capital Position Remains Strong
COLUMBUS, Ohio--(BUSINESS WIRE)--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,” added Jurgensen. “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.
| Three months ended | |||||||||||
| September 30, | |||||||||||
| (in millions) | 2008 | 2007 | Change | ||||||||
| (Unaudited) | (Unaudited) | ||||||||||
| Net (loss) income | $ | (346.4 | ) | $ | 147.0 | n.m. | |||||
| Net (loss) income per diluted share | $ | (2.51 | ) | $ | 1.03 | n.m. | |||||
| Net operating (loss) earnings | $ | (21.8 | ) | $ | 154.6 | n.m. | |||||
| Net operating (loss) earnings per diluted share | $ | (0.16 | ) | $ | 1.08 | n.m. | |||||
| Sales | $ | 3,892.1 | $ | 4,444.2 | -12 | % | |||||
| Net flows (excluding corporate and other segment) | (135.7 | ) | (270.1 | ) | 50 | % | |||||
| Total revenues | 484.6 | 1,131.8 | -57 | % | |||||||
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Total net operating revenues(a) |
717.7 | 815.5 | -12 | % | |||||||
| Customer funds managed and administered | $ | 140,882.5 | $ | 165,275.2 | -15 | % | |||||
| Total assets | $ | 102,086.9 | $ | 121,460.5 | -16 | % | |||||
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Shareholders' equity excluding AOCI(b) |
$ | 5,056.0 | $ | 5,401.5 | -6 | % | |||||
| Net operating return on average equity excluding AOCI | -1.7 | % | 11.3 | % | n.m. | ||||||
| Book value per basic share excluding AOCI | $ | 36.64 | $ | 38.92 | -6 | % | |||||
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(a) Total operating revenues, net of interest credited to policyholder accounts |
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(b)Accumulated other comprehensive income (AOCI) |
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Total revenues declined 57 percent compared to the prior year quarter driven by realized investment losses, primarily the result of impairments.
Net operating revenues, defined as operating revenues net of interest credited to policyholder accounts, decreased 12 percent compared to the same period last year. The decline in both total and net operating revenues resulted from decreased asset-based fees associated with lower variable account values. Additionally, interest spread income declined due to lower investment income on hedge fund and private equity investments in the corporate and other segment, as previously discussed.
Book value per basic share, excluding accumulated other comprehensive income (AOCI), was $36.64 per basic share as of September 30, 2008, compared to $39.03 per basic share as of December 31, 2007.
Net operating return on average equity, excluding AOCI (as defined in Exhibit 3), was negative 1.7 percent for the quarter compared to 11.3 percent in the third quarter of 2007.
“Third quarter sales growth and bottom-line results were adversely affected by the severe disruptions in the financial markets and slowing economy, reflected by a 9 percent sequential and 16 percent year-over-year decline in the S&P 500 daily average,” said Mark Thresher, president and chief operating officer. “As would be expected in this type of environment, revenue and earnings in our core businesses were pressured by lower net asset-based fees and interest spread income, which was further compounded by significantly higher amortization associated with the DAC unlock.”
“While the turmoil in the financial system negatively impacted our quarterly profitability, NFS remains a strong and stable company that is well-positioned to effectively compete in these challenging market conditions. We entered this crisis with significant excess capital and strong cash flows. While losses this quarter reduced our level of excess capital, NFS remains well-capitalized with a strong balance sheet. The strength of our capital position is reflected by our consolidated risk-based capital (RBC) ratio, which we estimate to be approximately 495 percent as of the end of the third quarter. The consolidated RBC ratio includes capital at the NFS holding company and all life companies,” Thresher added.
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 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) | 2008 | 2007 | Change | |||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||
| Individual variable annuity sales | $ | 894.0 | $ | 1,393.5 | -36 | % | ||||||||
| Individual fixed annuity sales | 77.2 | 37.0 | 109 | % | ||||||||||
| Income product sales | 37.7 | 54.4 | -31 | % | ||||||||||
| Advisory services program sales | 4.6 | 42.6 | -89 | % | ||||||||||
| Total sales | $ | 1,013.5 | $ | 1,527.5 | -34 | % | ||||||||
| Net flows | $ | (803.8 | ) | $ | (799.5 | ) | -1 | % | ||||||
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Net operating revenues(a) |
221.2 | 249.3 | -11 | % | ||||||||||
| Pre-tax operating (loss) earnings | (120.7 | ) | 65.0 | -286 | % | |||||||||
| Ending account values | $ | 44,287.2 | $ | 54,933.6 | -19 | % | ||||||||
| Interest spread on average general account values | 1.58 | % | 1.76 | % | ||||||||||
| Pre-tax operating (loss) earnings to average account values | -1.04 | % | 0.48 | % | ||||||||||
| Return on average allocated capital | -21.7 | % | 15.4 | % | ||||||||||
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(a) Total operating revenues, net of interest credited to policyholder accounts |
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Third quarter individual investments sales declined 34 percent compared to the prior year. The decline was driven by lower demand for variable annuities due to market volatility and a corresponding slowdown in consumer demand for equity-linked products. The market volatility helped drive a fixed annuity sales increase of 109 percent, or $40.2 million, over the prior year quarter.
Net outflows were $803.8 million in the third quarter of 2008 compared to $799.5 million in the third quarter a year ago.
The pre-tax operating loss in the quarter was $120.7 million compared to earnings of $65.0 million in the same quarter a year ago. Included in the quarter was a $177.2 million increase in amortization of DAC and other related balances as previously discussed. Additionally, lower asset fees and interest spread income were partially offset by lower operating expenses.
Interest spread income declined 23 percent compared to the prior year quarter primarily attributable to lower general account assets caused by fixed annuity net outflows.
Retirement Plans Segment
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Three months ended September 30, |
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| (in millions) | 2008 | 2007 | Change | |||||||||
| (Unaudited) | (Unaudited) | |||||||||||
| Private sector sales | $ | 1,404.4 | $ | 1,504.5 | -7 | % | ||||||
| Public sector sales | 1,127.5 | 1,066.1 | 6 | % | ||||||||
| Total sales | $ | 2,531.9 | $ | 2,570.6 | -2 | % | ||||||
| Net flows | $ | 484.3 | $ | 387.2 | 25 | % | ||||||
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Net operating revenues(a) |
164.2 | 173.1 | -5 | % | ||||||||
| Pre-tax operating earnings | 55.3 | 59.6 | -7 | % | ||||||||
| Ending account values | $ | 71,223.2 | $ | 81,031.3 | -12 | % | ||||||
| Interest spread on average general account values | 1.89 | % | 1.80 | % | ||||||||
| Pre-tax operating earnings to average account values | 0.30 | % | 0.29 | % | ||||||||
| Return on average allocated capital | 19.9 | % | 23.5 | % | ||||||||
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(a) Total operating revenues, net of interest credited to policyholder accounts |
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Third quarter 2008 retirement plans sales decreased 2 percent compared to the prior year quarter. Private sector sales declined 7 percent as the continued volatility in the capital markets has reduced the number and size of takeover cases. Public sector sales grew 6 percent compared to a year ago driven by increased deposits into several large plans.
Retirement plans net inflows were $484.3 million compared to $387.2 million in the same period a year ago. The increase in net flows was driven by an increase in public sector sales and lower private sector withdrawals.
Pre-tax operating earnings were $55.3 million in the current quarter compared to $59.6 million a year ago. The year-over-year decline of 7 percent was primarily due to lower net asset-based fees, partially offset by lower operating expenses.
Interest spread income increased 6 percent, driven by a modest improvement in the earned rate and lower crediting rates.
Individual Protection Segment
| Three months ended | ||||||||||||
| September 30, | ||||||||||||
| (in millions) | 2008 | 2007 | Change | |||||||||
| (Unaudited) | (Unaudited) | |||||||||||
| Individual investment life first year sales | $ | 25.6 | $ | 41.1 | -38 | % | ||||||
| COLI/BOLI first year sales | 36.7 | 20.6 | 78 | % | ||||||||
| Traditional/universal life first year sales | 31.6 | 32.0 | -1 | % | ||||||||
| Total first year sales | $ | 93.9 | $ | 93.7 | 0 | % | ||||||
| Net flows | $ | 183.8 | $ | 142.2 | 29 | % | ||||||
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Net operating revenues(a) |
296.2 | 284.6 | 4 | % | ||||||||
| Pre-tax operating earnings | 72.2 | 65.2 | 11 | % | ||||||||
| Policy reserves | $ | 18,520.9 | $ | 20,956.4 | -12 | % | ||||||
| Life insurance in-force | $ | 142,481.1 | $ | 134,750.0 | 6 | % | ||||||
| Pre-tax operating earnings to operating revenues | 20.8 | % | 19.6 | % | ||||||||
| Return on average allocated capital | 9.5 | % | 9.4 | % | ||||||||
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(a) Total operating revenues, net of interest credited to policyholder accounts |
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Total first year individual protection sales were $93.9 million for the quarter, compared to $93.7 million in the prior year quarter. An increase in corporate- and bank-owned life insurance (COLI/BOLI) first year sales was largely offset by a decline in individual investment life sales. Fixed life (traditional and universal life) first-year sales were flat year-over-year.
Pre-tax operating earnings were $72.2 million in the current quarter compared to $65.2 million a year ago. Net operating revenues increased 4 percent driven by higher policy charges and net investment income, partially offset by higher benefit expenses. Interest spread income increased 6 percent, driven by a higher earned rate.
Corporate and Other Segment
The corporate and other segment pre-tax operating loss was $50.4 million in the third quarter of 2008 compared to earnings of $13.9 million in the third quarter of 2007. Results were adversely impacted by a $21.2 million operating loss in the Company’s structured products business and other investments subject to mark-to-market adjustments. Additionally, a $36.8 million decrease in interest spread income was primarily driven by lower income from hedge fund and private equity investments.
The current quarter interest spread margin on the medium-term note program was 85 basis points compared to 93 basis points in the prior year. During the current quarter, $125.0 million of medium-term notes were issued and $735.0 million matured.
Business Outlook
Due to the pending transaction with Nationwide Mutual to take Nationwide Financial private in late 2008 or in the first quarter of 2009, the Company will no longer provide guidance for future periods.
Supplemental Financial Information
More detailed financial information can be found in the Nationwide Financial statistical supplement for the third quarter of 2008, which is available on the investor relations section of the company’s Web site at www.nationwide.com.
About Nationwide Financial
Nationwide Financial Services, Inc. (NYSE: NFS), a publicly traded company based in Columbus, Ohio, provides a variety of financial services that help consumers invest and protect their long-term assets, and offers retirement plans and services through both public- and private-sector employers.
Nationwide Financial is part of the Nationwide group of companies, which offers diversified insurance and financial services. The group is led by Nationwide Mutual Insurance Company, which is ranked No. 108 on the Fortune 500 based on 2007 revenue. To obtain investor materials, including the Company's 2007 Annual Report to Shareholders, 2007 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.
| Reconciliation of net operating (loss) earnings to net (loss) income | |||||||||||||
| Three months ended September 30, | |||||||||||||
| 2008 | 2007 | ||||||||||||
| (in millions, except per share data) | Amount | Per diluted share | Amount | Per diluted share | |||||||||
| Net operating (loss) earnings | $ | (21.8 | ) | $ | (0.16 | ) | $ | 154.6 | $ | 1.08 | |||
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Non-operating realized investment losses including 1 related adjustments to amortization, net of taxes |
(315.4 | ) | (2.29 | ) | (8.4 | ) | (0.06 | ) | |||||
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Discontinued operations, net of taxes 2 |
(9.2 | ) | (0.06 | ) | 0.8 | 0.01 | |||||||
| Net (loss) income | $ | (346.4 | ) | $ | (2.51 | ) | $ | 147.0 | $ | 1.03 | |||
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1 Excluding operating items (periodic net amounts paid or received on interest rate swaps that do not qualify for hedge accounting treatment, trading portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses) |
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2 The results of operations of TBG Financial are reflected as discontinued. |
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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) t