Nationwide Financial Services, Inc. Q1 2008 Earnings Call Transcript

Nationwide Financial Services, Inc. (NFS)

Q1 FY08 Earnings Call

May 8, 2008, 11:00 AM ET

Executives

Mark Barnett - VP of IR

Mark R. Thresher - President and COO

John L. Carter - Sr. VP of Non Affiliated Sales

Timothy G. Frommeyer - Sr. VP and CFO

Analysts

Andrew Kligerman - UBS

Darin Arita - Deutsche Bank

Tamara Kravec - Banc of America

Eric Burg - Lehman Brothers

Jeffery Schuman - Keefe, Bruyette & Woods

Presentation

Operator

Good morning and welcome to the Nationwide Financial Services First Quarter Earnings Call. My name is Vijay, and I will be your conference facilitator. All lines have been placed on mute to prevent background noise. A question-and-answer session will follow the speakers’ remarks. [Operator Instructions]. This conference is being recorded.

At this time, I would like to introduce your host Mr. Mark Barnett, Vice President, Investor Relations.

Mark Barnett - Vice President of Investor Relations

All right, thank you Vijay. Good morning and thank you for joining us on our first quarter 2008 conference call. Joining me today on the call is Mark Thresher, our President and Chief Operating Officer, who will provide his perspective on our performance during the quarter. Following his remarks, John Carter, President of our non-affiliated sales organization will discuss sales results, and then Tim Frommeyer, our Chief Financial Officer will review the quarter’s financial highlights and discuss our 2008 outlook. Then we will open the call for questions.

But first, I’d like to remind everyone that we are committed to transparency, including an open and candid dialog about our current operations and future prospects. Comments made during this conference call may incorporate certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This may include statements concerning such topics as sales and earnings growth goals, operational plans and other opportunities we foresee. Underpinning these forward-looking statements are certain risks and uncertainties. We refer our listeners to the Safe Harbor disclosures contained in the first quarter earnings release and our latest SEC filings to appreciate those factors that may cause actual results to differ from those contemplated in such forward-looking statements. In addition, comments during this call will include certain non-GAAP financial measures governed by SEC Regulation G. For a reconciliation of these measures, please refer to exhibit 3 of our first quarter earnings press release.

And with that, I’ll turn the call over to Mark Thresher.

Mark R. Thresher - President and Chief Operating Officer

Thanks Mark. Good morning and thanks for joining us today. As Mark said, during my remarks, I’ll comment on our first quarter financial results, spend a few minutes on some of our 2008 priorities. Then I’ll briefly comment on the status of the merger proposal.

Let me start by saying that the volatility of the capital markets along with the weakening economy combined to create a difficult operating environment, which negatively affected sales in several of our businesses and impacted our bottom line results. However, even with these challenges, we generally maintained operating margins and delivered solid operating results through our continued focus on quality execution and expense management.

Additionally, our balance sheet remains strong as our risk management capabilities are proving effective and our well diversified investment portfolio is performing as expected.

Our results are certainly not where we want them to be, given the challenges we faced during the quarter, the quality of our operating results are a positive reflection of the strength and balance of our underlying business mix. The earning shortfall, we did see in the quarter was primarily limited to structured products and alternative investments in our corporate segment in an unusually high more mortality in our life insurance business, a trend that several of our peers also experienced this quarter.

Turning to the numbers, first quarter net operating earnings were $132 million, or $0.95 per diluted share compared to $176 million or $1.20 per diluted share in the first quarter of last year. Unusual items in the quarter negatively impacted results by about $0.16 to $0.18 per diluted share, the details of which Tim will cover in a moment. Excluding the unusual items, our more normalized net operating earnings for the quarter were about $1.11 or $1.13 per diluted share.

Our operating return on equity for the quarter was 9.8%, after adjusting for the unusual items, we considered 11.5%, to be the more normalized ROE for the quarter.

Total customer funds managed and administered at the end of the quarter were $153 billion. Net flows declined from the year ago quarter due to several factors, including lower private sector retirement plan deposits in the current year and the favorable impact of deposits on a public sector investment-only contract in the first quarter of 2007.

Annuity flows in the quarter were mixed. Fixed annuity outflows continue to improve as expected, however variable annuity outflows increased moderately sequentially and compared to the first quarter of 2007, driven by softening sales. While the adverse environment is slowing our progress, we are still optimistic that we can achieve positive variable annuity flows later this year.

With respect to expenses, we continue to look for opportunities to drive operating efficiencies at lower costs. This discipline helped to offset the pressure on equity market and spread-related revenues, enabling us to generally maintain operating margins during the first quarter.

So, all things considered, I think our business performed well during the quarter with a solid strategy and an unrelenting focus on execution. We are making the necessary changes to enhance our competitive position and support future growth.

There is little question that market volatility and a softening economy are taking a toll on both investment professionals and consumers, resulting in an increased sense of financial insecurity and indecision with respect to managing financial matters. Many are just sitting on the side lines.

More worrisome is that we are seeing a moderation of 401(k) contribution in the markets we serve and according to a recent Wall Street Journal article, employee borrowing from 401(k) plan is surging, 18% of participants had loans outstanding on their plan at end of 2007 compared to 11% in 2006. I suspect that number might even be higher today.

While these factors will continue to create headwind in the near term, I think that over the longer term today’s market volatility and slowing economy will alternatively be good for NFS and the life insurance industry as whole because these conditions highlight the need for in the value of guaranteed living benefits.

The life insurance industry has a unique ability to provide consumer guarantees of principal, income and even rates of return. As both investor professionals and consumers become more aware of the inherent value of living benefits within an investment portfolio, we think the life industry will take a greater share of total retirement assets. Therefore, my focus remains on making the necessary changes to our business model that will enhance our competitive position as we capitalize on these emerging trends.

In other words, my priority remains on long-term growth and we are avoiding the temptations to take actions that might appear to derive an improvement in short-term results at the expense of longer term objectives. We are not interested in what we view as overly aggressive or irrational tactics that some may initiate to achieve short-term sales objectives. While we are not going so far as to say that we are currently seeing irrational behavior, we are seeing increasing evidence of pricing pressure and aggressive feature [ph] wars.

While aggressive competition is healthy; we believe it is important that we maintain an appropriate balance between the underlying value of what our product provides for the consumer and adequate returns for NFS’s shareholders. That said we are not sitting on the sidelines either. We are aggressively looking at ways to better position or enhance our existing product portfolio.

In addition we continue to develop a pipeline of innovative product solutions. For example, we are developing a new product category called portfolio insurance. The concept of portfolio insurance is to provide living benefit guarantees, such as lifetime income to an ordinary investment account without having to purchase an annuity wrapper. We recently filed our initial prospectus with the SEC which is pending their review.

The bottom line is that we are making steady progress toward our longer term financial targets. We have a strong strategy in working as evidenced by the dramatic turnaround in VA sales we achieved over the last several quarters and more recently the robust growth we are achieving in our individual life policy sales.

By strengthening our business operations, exiting underperforming businesses, adding new capabilities, such as banking and mutual funds and continuing pursuing our commitment to simpler solutions, Nationwide Financial is well positioned to weather the challenges we’re facing in today’s business environment.

More importantly through our ongoing focus on these priorities we are enhancing our ability to take advantage of the favorable trends and market conditions as they begin to improve.

So before closing let me briefly comment on the status of the merger proposal. As I’m sure most of you know, our Board of Directors had received a proposal from Nationwide Mutual to acquire by merger all of the outstanding publicly held Class A shares of common stock .Currently the Special Committee of the Board of Directors in consultation with independent legal and financial advisors is evaluating that proposal.

There is no specific timeframe on this process. In the mean time we will not be providing further comments on the specifics until this process is completed and either a definitive agreement is reached or discussed have terminated. My focus during this time remains on high quality execution of our strategy.

So in conclusion while the turmoil in the capital markets and the threat of recession are creating headwinds from a fundamental business perspective, NFS is well positioned for long-term growth or remain optimistic with the enhancements to our operations, combined with the addition of higher return in businesses, disciplined expense management and an increasingly more efficient capital structure will result in further progress towards achieving our long-term financial targets.

With that let me turn it over to John to review our sales results.

John L. Carter - Senior Vice President of Non-Affiliated Sales

Thanks, Mark, and good morning. Overall in light of the challenging capital market environment and the impact of the softening economy, I’m satisfied with our first quarter sales performance. Despite difficult market conditions, our focus remains on delivering long-term sustainable and profitable growth as Mark outlined. We’re not taking short-term actions that could compromise our long-term objectives.

Accordingly, we’re working hard to maintain a product portfolio that provides real value to the consumer, balanced with disciplined pricing and risk management. We’re also focusing on deepening relationships with key distribution partners, and delivering on our commitment to simpler solutions, for both investment professionals and their clients. This effort is helping us to successfully differentiate our business and maintain stable, profitable, sales growth.

Turing to the numbers, first quarter VA sales were down 3% versus the prior year quarter to $1.2 billion, which appears to be inline with the industry results for the quarter. The good news is that while there has been an industry wide slowdown in VA sales, we’re not seeing the dramatic decline in VA sales that the industry has historically experienced in times of severe market distress.

As we’ve discussed on the last call, the stock market is causing some consumers as well as investment professionals to stay on the side lines, resulting in slower sales growth during the quarter. But over the longer term, we’re optimistic that the current market conditions will serve to further strengthen the growth prospects for variable annuities and guaranteed living benefits and we expect that they will become an important component of the wealth management value proposition offered by our distribution partners.

In the near-term however, we’re seeing pricing pressure and a continuation of the feature wars. As Mark pointed out, we welcome healthy competition. We also believe is equally important that we preserve an appropriate balance between the underlying value of what our products provide to consumers and earning adequate returns. We are confident in our strategy, in the sales process and will continue to compete on our ability to provide innovative financial solutions in simple ways and at a reasonable cost.

In retirement plan, sales were mixed. Public sector sales continue to be strong, up 7% from the prior year quarter. Much of this growth is driven by increased participation in large state plans such as New York and California.

Private sector sales were down 8% over the first quarter of last year. This decline was caused by a combination of factors including a reluctance by plan sponsors to make changes to their plans in this environment, as well as lower contributions in year [ph] deferral increases by participants in light of the slowing economy and increasing costs for food and fuel.

In addition, the decline was also partially caused by the loss of productivity, associated with wholesaler turnover that occurred during 2007, as we focused efforts on upgrading sales management and recruiting wholesaler talent, with skill-sets to complement our new selling system.

As we mentioned on our year-end call, due to the turnover we expected lower productivity as we moved into 2008. This however combined with the market and economic turmoil resulted in a first quarter sales shortfall that was greater than anticipated. We therefore are lowering our sales outlook for the full year accordingly.

That said, our expectations remain very high for the private sector business and I am confident that the actions that we’ve taken will make us a stronger competitor going forward.

In individual protection, sales for first year individual life products continue to be strong, as the actions we have taken over the last several quarters are getting momentum. First year sales of fixed year life products increased a 143% and total first year individual life policy sales rose 58%.

In addition corporate and bank owned life insurance sales were up 79% over the prior year quarter. While we have more work to do, we are encouraged by the strong sale results that we achieved this quarter.

The improved results are been driven by several factors, including a more competitive product portfolio, and improved sales process, and a more effective marketing to target investment professionals and consumer segments.

Before I turn the call over to Tim, let me briefly comment on the progress we’re making against our 2008 objectives. As Mark pointed out, it’s important that we do not become distracted by the external market issues that are largely beyond our control. The fact is, the nature of our business is such that over the near term volatility in the capital markets and a slowing economy will negatively impact our sales performance in equity sensitive products.

Accordingly, we are continuing to focus on those things that we can control and taking the actions that we believe will create sustainable and profitable long-term sales growth. As I’ve mentioned on previous calls, client firms are becoming more selective, seeking manufacturing partners that are easy to do business with and that can help them achieve their broader firm objectives. If anything, the current market turmoil and economic uncertainty is reinforcing this trend and causing firms to increase the pace by which they are realigning their distribution partnerships.

To meet this need, we continue to better align our distribution model to more effectively bring the full range of what Nationwide Financial has to offer to the table. A comprehensive portfolio of innovative financial solutions backed by a trusted brand, outstanding service and an organization that is designed that is easy to do business with.

This distribution strategy is proving effective as evidenced by the positive sales results we’re achieving in our focus firms, even during this turbulent market times, results that we believe are directly attributed to the changes in our distribution model.

Moving forward, we’ll continue to build on this strategy working to align our resources and distribution processes, to more effectively serve the needs of client firms and investment professionals throughout 2008.

Now I’ll turn the call to Tim.

Timothy G. Frommeyer - Senior Vice President and Chief Financial Officer

Thanks, John and good morning everyone. As Mark noted our core results for the quarter was solid, particularly given the challenging, operating environment, providing further evidence that our efforts to strengthen the company are working and a positive reflection on the strength and balance of our underlying business mix.

The earning shortfall we did see this quarter was primarily limited to structured products and alternative investments along with unusually high mortality in our life business.

I’ll begin my discussion with a few comments on the performance of the investment portfolio. It is a high quality well-diversified portfolio with sufficient liquidity to meet ongoing business needs even in these turbulent times. During the quarter we had $88 million of net realized losses of which $58 million was driven by impairments and $24 million was associated with mark-to-market of living benefit liabilities.

The impairments were across the number of different asset classes. $16 million was subprime primarily issues backed by second lien collateral, $17 million were corporate securities driven by names specific credit concerns, $18 million was CDOs or CLOs reflecting the restructuring of securities that had market value triggers and the last $7 million related to lower rated CMBS securities.

With respect to living benefit liabilities, our hedges continued to perform within our expectations related to the economic value of the liabilities that we hedge. As previously discussed the primary focus of our hedging strategy is on the economic risk of the benefit rider, while paying close attention to be associated with accounting impacts. Accordingly we do expect some hedge breakage when the equity markets, interest rates and volatility move as they did in the first quarter.

Now moving on to normalizing items in the quarter; In total unusual items negatively impacted results by about $0.17 per share. In our corporate segment these included about $0.09 related to losses on structured products coming from the mark-to-market of commercial mortgage loans as spreads widened significantly during the quarter. $0.05 related to alternative investment portfolio returns that were well below historical and planned expectation. $0.01 related to prepayment penalty in prepayment premium income that was well below planned levels, partially offset by $0.02 in lower than run rate expenses.

In our individual protection segment, there was $0.04 associated with the unusually high mortality experienced. Excluding these items, the more normalized net operating earnings for the quarter were about $1.11 to $1.13 per share.

Now I’m turning to the core drivers of our results. Operating revenues net of interest credited decreased 8% versus last quarter as the 10% drop in equity markets, resulted in lower asset based fees. Regarding interest paid revenue, the impact of alternative investments and lower prepayment penalty income drove interest spread and margins down compared to last quarter.

With respect to expenses, we’re continuing to exercise good spend discipline, which helped us to maintain operating margins despite pressure on equity market and spread related revenues. First quarter operating expenses were slightly below the prior quarter and flat compared to first quarter of last year.

Turning to our outlook, we believe capital market and economic trends indicate that remainder of 2008 will continue to be a difficult environment and have adjusted our outlook accordingly. We have made some minor modifications to our interest spread margin, to our expectations for earnings in the corporate and other segment, and have also adjusted our sales outlook.

I would note that we have not made any changes to our segment operating margin outlooks, as we believe we can maintain operating margins within the ranges provided through prudent expense management, even as revenue are pressured.

In individual investments, we reduced our interest spread margin by five basis points to 180 to 185, assuming we received eight basis points of prepayments over the full year.

In retirement plans, we have increased our interest spread margin guidance by five basis points to 190 to 195, which assumes that we will receive 10 basis points of prepayment.

In the corporate and other segment, we are lowering our outlook to $15 million to 20 million per quarter for the remainder of the year driven by an expectation of lower net investment income.

Turning to sales; for variable annuities we now expect 7% to 12% sales growth for the full year. For private sector retirement plans, we now expect 0 to 4% sales growth for the full year and for variable universal life, our outlook is now 7% to 10%. For fixed life first year sales we anticipate continue momentum from product, distribution, expansion initiatives and have improved our outlook to 40% to 50%.

Finally, at the consolidated level our full year ROE outlook is 11% to 11.5% based on the normalized first quarter results, I just discussed.

That completes my prepared remarks. Operator, please open the call for Q&A.

Question and Answer

Operator

[Operator Instructions]

And so, our first question comes from Andrew Kligerman from UBS. Please go ahead.

Andrew Kligerman - UBS

Hey, good morning, quick question first on variable annuity sales. They were down 3% in the quarter yet you are holding up guidance to 7% to 12% growth for the year. So, I am just curious as to what you are seeing either marketwise and/or is that nationwide specifically that would… we’d get to see that more optimistic outlook in the first quarter. Then, I have another question?

John L. Carter - Senior Vice President of Non-Affiliated Sales

Okay, on the first question. This is John and what we are seeing.. I mean our strategy that we talked about on previous calls was the targeting those advisors that in the past really didn’t do a lot of VA sales and in that segmented sales plan and annuities being part of their process of moving their customers from asset accumulation to income harvesting, we see a lot of opportunity with that. So primarily, our expectations is that we are going to reach those advisors, that typically have not done annuity business in the past but will be willing to do that as part of their retirement income planning.

Andrew Kligerman - UBS

Okay. But I’m sure there are many others trying to reach those advisors as well, so what would give you the optimism that given that you were down to 3% in the quarter that you could see that nice pick up. Do you that the industry issues will mitigate, is that it?

Mark R. Thresher - President and Chief Operating Officer

Andrew, this is Mark. I think it’s just our belief in the focused firm strategy that we’ve put in place, the segmentation work that we’re doing with those firms to target the right advisors. We believe it’s achievable. It’s aggressive, but we believe it’s achievable.

Andrew Kligerman - UBS

Okay. Mark. I just heard of Nationwide Financial and when you took over as Head of the Operation, you set some objectives, it seems like you are getting very close to it achieving those objectives. In my view, you’ve got a wonderful business mix of retirement and another asset accumulation and protection businesses. I know you can’t comment on the process of what your special committee is doing, but a 1.2 times booked take-out multiples is probably the lowest I’ve seen in a very, very long time. And so as head of the company representing the shareholders, what are your views on what you would like to get for shareholders? What are your views of value in Nationwide in terms of a multiple or valuation of the company?

Mark R. Thresher - President and Chief Operating Officer

Andrew I can’t really go there I mean it is in the hands of the special committee as I commented on. They have their both financial and legal advisors in place and I will tell you that they are very committed to… if there is a transaction to providing adequate value to shareholders and that’s what they’re using their advisors determine.

Andrew Kligerman - UBS

I mean are you committed to that as well?

Mark R. Thresher - President and Chief Operating Officer

Absolutely.

Andrew Kligerman - UBS

Okay and I mean and how would you feel… let me ask you this question and I’ll end it. I mean how do you feel about Nationwide Financial per se versus your peer group i.e. MetLife, Lincoln National Corporation, Prudential. How do you view Nationwide Financial versus those companies in terms of your skill set and your businesses, just more of a general question?

Mark R. Thresher - President and Chief Operating Officer

Andrew, I would tend to agree with your opening comments that I believe that we have built a very solid platform with five businesses now. As I have said before our focus on 2008 is to leverage those five businesses across multiple distribution channels and I think we’ve got some great opportunities going forward.

Andrew Kligerman - UBS

I agree thanks.

Operator

Our next question comes from Darin Arita from Deutsche Bank. Please proceed.

Darin Arita - Deutsche Bank

Thank you and good morning. Mark in your opening comments you’ve mentioned that was a feature in articles talking about increased borrowing against 401(k) plans. Were those numbers related from… were those industry numbers or where those Nationwide numbers that you were citing?

Mark R. Thresher - President and Chief Operating Officer

Those were industry numbers.

Darin Arita - Deutsche Bank

Okay. And do you know where Nationwide’s numbers look relative to that?

Mark R. Thresher - President and Chief Operating Officer

Well. Relatively on that same range.

Darin Arita - Deutsche Bank

Okay. And can you talk about, how you think about the economic affected increased borrowing against the 401 (k) plans?

Mark R. Thresher - President and Chief Operating Officer

Well, clearly when there is a loan, the asset leaves the plan, so revenue for us… we don’t collect revenue on those assets. We’re not taking charges on and we’re not having necessarily expense reimbursements, depending on the structure of the funds in there. So, until they’re paid back, there obviously… those are less assets in the plans that we’re receiving fees on. From a assets, if that’s what you’re talking about the economic impact and obviously its just well known to tough economic time for consumers these days and they not only maybe borrowing money but at the same time they’re and backing off on contributions.

Darin Arita - Deutsche Bank

Okay, that’s helpful. And just turning to the portfolio insurance product, you mentioned. Can you talk a little more about how that would work and how Nationwide would manage the risk?

Mark R. Thresher - President and Chief Operating Officer

Yeah. And I’ll let Tim jump in a little bit, but its really providing, if you’re familiar with our product, the link rider its really providing the benefits of the rider on a managed account program. The way we would manage the risk, is in a similar way but it’s also by limiting those partners that we would deal with. We’re not putting that portfolio income on just any set of managed accounts, but we would… similar to how we limit choices within the variable annuity to either our models or specific funds, so that we can understand the investments underlying there and put the right hedging programs in place and Tim do you like to add anything.

Timothy G. Frommeyer - Senior Vice President and Chief Financial Officer

Yes. I would also add that we expect that the fees for the rider will be higher and that the benefits will not quite be as rich, that’s what you’ve seen in the normal straight GMWB product.

Darin Arita - Deutsche Bank

Great, thanks very much.

Operator

Our next question comes from Tamara Kravec of Banc of America. Please go ahead.

Tamara Kravec - Banc of America

Thank you. Good morning. I wanted to dive into your alternative investment portfolio in more detail and get your views on how the different assets classes in that portfolio is performing and what your outlook would be for the remainder of this year? Thanks.

Timothy G. Frommeyer - Senior Vice President and Chief Financial Officer

You know, Tamara, are high levels -- we saw some volatility that hurt us particularly in the private equity and hedge fund space and we generally have expectations for, let’s say, the aggregate of that portfolio to perform in the 8% to 10% return range -- annualized return, and we saw those numbers actually negative during the first quarter. So, our outlook is that there was a lot of volatility that we experienced in first quarter and we are quite diversified in our portfolio and we are pleased with what we have and what we are doing there and that we expect the performance of that portfolio to return to what we have been experiencing. You may recall, last year we had a number of quarters where alternative income was higher than our expectations and we explained that as the same volatility issues experienced us in higher income. I would say this quarter is has got to the other side of that.

Tamara Kravec - Banc of America

Okay, and then on the -- you talked about the hedging program is performing well. But I think you had said that you had some breakage and I was wondering if you could quantify that?

Timothy G. Frommeyer - Senior Vice President and Chief Financial Officer

Yeah, the breakage we had was $24 million.

Tamara Kravec - Banc of America

Okay. Alright, thank you.

Operator

Our next question comes from Eric Burg from Lehman Brothers. Please proceed.

Eric Burg - Lehman Brothers

Thanks very much. With respect to your corporate area and in general the -- I just had a question regarding financial report, the mark-to-market or what you would consider to be unusual items; you mentioned the loss on structured finance. Quick question, how does booked in the corporate area. How does that get accounted for? Is it a loss [meaning] a permanent impairment? Wouldn’t you take that outside of operating earnings? How are those securities been accounted for? What do we mean by an operating loss and sort of how does all that flow through the financials? And I have one follow-up.

Timothy G. Frommeyer - Senior Vice President and Chief Financial Officer

Eric, this is Tim. A number of years ago, we determined that it was a core business that we had a good skill around and we decided to put those earnings even though the sale of our loans to a securitization platform comes through realized gains. We decided to put that up above the line in operating earnings within our corporate segment. We are also accounting for those loans we’ve elected FAS 159 treatment on that loan. So, we will be marked to marketing -- marking to market the portfolio of loans, both up and down. So, we didn’t sell any loans this quarter to a securitization platform. The impact that was experienced was simply the marked-to-market on the loans that -- and any of the commitments that we are holding. So again…

Eric Burg - Lehman Brothers

So these are mortgage loans, Tim, that you had -- Nationwide Financial has originated?

Timothy G. Frommeyer - Senior Vice President and Chief Financial Officer

That’s right; for the purpose of sale to a securitization platform.

Eric Burg - Lehman Brothers

And in the quarter the loss that you recorded in the corporate segment was a marking to market of those loans in the warehouse, so to speak?

Timothy G. Frommeyer - Senior Vice President and Chief Financial Officer

That’s right.

Eric Burg - Lehman Brothers

Okay. The other question relates -- it’s actually a follow-on to Tamara’s question and that has to do with your expected returns on private equity and hedge funds. I would think that at least with respect to private equity, given the natural lower liquidity associated with private equity than with publicly traded common stocks, you would be seeking a much higher return than 8% to 10%, a level of return that I would normally consider to be sort of in line with publically stock returns. Why same expectations?

Timothy G. Frommeyer - Senior Vice President and Chief Financial Officer

What I was quoting was the aggregate or say average of the portfolio and right now we have a much larger exposure to the hedge fund business than we do private equity. So, I agree with your assessment that would expect much higher on private equity, it’s just our private equity portfolio is much smaller than our hedge fund portfolio.

Eric Burg - Lehman Brothers

Thank you very much.

Operator

Our next question comes from Jeff Schuman from KBW.

Jeffery Schuman - Keefe, Bruyette & Woods

Good morning. Mark I was wondering if you could just put a little finer point on the comments about the fine contribution -- contributions and loans, sort of being able to pressure on the economies. Is this something that affects public and private plans about the same or is there a distinction historically?

Mark R. Thresher - President and Chief Operating Officer

Well, the distinction is, there tends to be hardship, probably more hardship withdrawals in the public sector market than loans in the deferred comp plans. So, doesn’t work quite, but the asset leave the same way leave outside of our economics but money tends to be taken out from a hardship withdrawal rather than loans. We are seeing an increase in that activity as well as seeing increase in the loans and (inaudible) case base.

Jeffery Schuman - Keefe, Bruyette & Woods

Okay, so I mean the technicals are a little different but the impact...

Mark R. Thresher - President and Chief Operating Officer

The impacts are same.

Jeffery Schuman - Keefe, Bruyette & Woods

Pretty much the same .Okay, thank you.

Mark R. Thresher - President and Chief Operating Officer

Yes.

Operator

We have no further questions at this time Mr. Barnett I would like to turn the call back over to you for any final comments.

Mark Barnett - Vice President of Investor Relations

Okay. Again I just like to thank everyone for taking the time to join us on the call this morning and as always feel free to call myself or anyone on the Investor Relations team. Thank you.

Operator

Thank you for joining this Nationwide Financial Services conference call. You may now disconnect

Copyright policy: All transcripts on this site are copyright Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.