Pursuant to an arrangement between NMIC and certain of its subsidiaries, during 2004 the Company leased on average approximately 911,000 square feet of office space in the three building home office complex and in other offices in central Ohio. The Company believes that its present facilities are adequate for the anticipated needs of the Company.
Management regularly reviews each investment in its fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments.
Pension and other postretirement employee benefits (OPEB) assumptions are revised annually in conjunction with preparation of the Company’s Annual Report on Form 10-K. The 2004 pension expense for substantially all of the Company’s employees and certain agents totaled $13.7 million, an increase of $0.5 million over 2003 pension expense of $13.2 million. The increase primarily was due to decreasing interest rates at the plan level, reflected in a lower discount rate. For the Company’s primary pension plan, the discount rate used to value cash flows was lowered to 5.50% to determine 2004 pension expense from 6.00% used in 2003, and the long-term expected rate of return on plan assets was lowered to 7.25% for 2004 from 7.75% for 2003.
Federal income tax expense in 2004, 2003 and 2002 was $120.0 million, $96.2 million and $8.7 million, respectively, representing an effective tax rate of 22.4%, 22.1% and 5.1%, respectively. The effective tax rate for 2004 remained flat as permanent tax deductions increased at approximately the same rate as pre-tax earnings. The increase in permanent tax deductions in 2004 primarily was due to the release of the Phase III tax liability along with the release of tax reserves as a result of a current valuation of tax exposure items. The tax benefit of $121.5 million associated with the $347.1 million of accelerated DAC amortization in third quarter 2002 was calculated at the U.S. federal corporate income tax rate of 35%, which significantly impacted the effective tax rate. The effective tax rate for 2002 was 25.2%, excluding the accelerated DAC amortization and related tax benefit.
The Company sells its products through a diverse distribution network. Unaffiliated entities that sell the Company’s products to their own customer bases include independent broker/dealers, financial institutions, wirehouse and regional firms, pension plan administrators, life insurance specialists and representatives of certain certified public accounting (CPA) firms. Representatives of affiliates who market products directly to a customer base include Nationwide Retirement Solutions, Inc. (NRS), Nationwide Financial Network (NFN, formerly referred to as Nationwide Provident) producers and TBG Insurance Services Corporation (TBG Financial). The Company also distributes products through the agency distribution force of its ultimate parent, Nationwide Mutual Insurance Company (NMIC), or Nationwide agents.
Pre-tax operating earnings totaled $220.0 million in 2004, up 32% compared to 2003 earnings of $166.3 million and a loss of $125.0 million in 2002. The higher earnings in 2004 were primarily driven by higher asset fees and interest spread income, somewhat offset by higher DAC amortization and other operating expenses. Excluding $328.3 million of accelerated DAC amortization, the lower 2003 earnings were primarily driven by lower policy charges and higher policy benefits primarily related to GMDB expenses, partially offset by an increase in interest spread income.
Sales decreased 8% in 2004, to $3.22 billion compared to $3.51 billion in 2003 and $4.03 billion in 2002. The decrease is discussed in detail below.
Public sector retirement plan sales increased 5% to $1.51 billion for 2004 from $1.44 billion in 2003 and $1.38 billion in 2002. The increases in 2004 and 2003 reflects a combination of strong flows, primarily from existing plans, and increased rollover activity associated with pension reform legislation, which expanded the portability of public plan assets.
The Company has a comprehensive portfolio monitoring process for fixed maturity and equity securities to identify and evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. See “Impairment Losses on Investments” in the “Critical Accounting Policies and Recently Issued Accounting Standards” section of Part II, Item 7 - Management’s Narrative Analysis of the Results of Operations (MD&A) of this report for a complete discussion of this process.
Primarily related to investments in low-income-housing tax credit partnerships. Call dates for the obligations presented are either date or event specific. The date specific requirement mandates the Company fund a specified amount on a stated date provided there are no defaults under the agreement. The event specific requirement is such that the Company is obligated to fund a specified amount of its capital commitment when a property becomes fully stabilized. The ultimate call date of these commitments may extend beyond one year but have been reflected in payments due in less than one year due to the call features. The Company’s capital typically is called within one to four years, depending on when the events contemplated in the documents transpire.