The Company adopted Statement of Position (SOP) 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-1), effective January 1, 2004, which resulted in a $3.4 million charge, net of taxes, as the cumulative effect of adoption of this accounting principle. See Note 3 to the audited consolidated financial statements included in the F pages of this report for a complete description of SOP 03-1.
On November 2, 2006, NFS and NMIC announced that they were in discussions regarding the Philadelphia-based retail asset management operations of NWD. On December 21, 2006, NFS and NMIC announced that they had reached an agreement outlining the preliminary terms for NFS’ purchase of NWD. On February 2, 2007, NFS entered into a stock purchase agreement with Nationwide Corporation. Total consideration in the transaction will be $225.0 million in cash, plus the value of NWD’s tangible shareholders’ equity at closing. The transaction is expected to be completed during the second quarter of 2007 and is subject to the approval of the shareholders of the affected NWD funds to be acquired by NFS.
The slight decrease in total sales in 2005 primarily was driven by continued challenges within the Individual Investments segment, which was negatively impacted by the Company’s announced exit from the offshore fixed annuity business in the second quarter of 2005 due to a challenging rate environment that depressed margins on this business. In addition, the variable annuity line experienced lower sales of The BEST of AMERICA products, especially the MarketFLEX product. The overall decline in sales partially was offset by strong sales in the Retirement Plans segment, led by small 401(k) plan sales.
The increase in public sector sales was due to growth in large cases, including the State of New York, the State of California, the State of Maryland, the State of Florida and the City of Phoenix plans. Growth in the State of New York plan occurred due to increased participation at the state level, along with increased adoption of the state’s plan by smaller entities, which added large numbers of eligible participants. The increased sales in the State of California and the City of Phoenix plans primarily were due to higher plan transfers. The majority of the increases related to the State of Maryland and the State of Florida plans were associated with the re-introduction of the state-funded 401(a) plan.
Pre-tax operating earnings declined slightly due to the aforementioned debt extinguishment costs and lower other income, partially offset by higher interest spread income.
The Company has additional financing capacity under a shelf registration statement dated March 31, 2006. Under the shelf registration statement, NFS can offer various security instruments including, but not limited to, unsecured senior or subordinated debt securities, preferred stock, Class A common stock, warrants, stock purchase contracts or stock purchase units. In conjunction with owned trusts, capital securities guaranteed by NFS also may be issued.
The Company’s assets are divided between separate account and general account assets. As of December 31, 2006, $70.69 billion (59%) of the Company’s total assets were held in separate accounts ($65.96 billion, or 57%, as of December 31, 2005) and $48.72 billion (41%) were held in the Company’s general account ($50.20 billion, or 43%, as of December 31, 2005), including $41.20 billion of general account investments ($43.17 billion as of December 31, 2005).
As of December 31, 2006, general account mortgage loans were $8.91 billion (22%) of the carrying value of consolidated general account investments compared to $9.15 billion (21%) as of December 31, 2005. Substantially all of these loans were commercial mortgage loans. Commitments to fund mortgage loans of $139.5 million were outstanding as of December 31, 2006 compared to $293.7 million as of December 31, 2005.