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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NO. 2-28596
NATIONWIDE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
OHIO 31-4156830
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(614) 249-7111
(Address, including zip code, and telephone
number, including area code, of Registrant's
principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject
to the filing requirements for at least the past 90 days.
YES X NO
--- ---
All voting stock was held by affiliates of the Registrant on March 20, 2000.
COMMON STOCK (par value $1 per share) - 3,814,779 shares issued and outstanding
(Title of Class) as of March 20, 2000
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION I(1)(a) AND (b) OF FORM 10-K
AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
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PART I
ITEM 1 BUSINESS
ORGANIZATION
Nationwide Life Insurance Company (NLIC) was incorporated in 1929
and is an Ohio stock legal reserve life insurance company. NLIC
offers a variety of forms of variable annuities, fixed annuities
and life insurance on a participating and a non-participating
basis.
Prior to January 27, 1997, NLIC was wholly owned by Nationwide
Corporation (Nationwide Corp.). On that date, Nationwide Corp.
contributed the outstanding shares of NLIC's common stock to
Nationwide Financial Services, Inc. (NFS), a holding company
formed by Nationwide Corp. in November 1996 for NLIC and other
companies within the Nationwide group of companies that offer or
distribute long-term savings and retirement products. On March 11,
1997, NFS completed an initial public offering of its Class A
common stock.
During 1996 and 1997, Nationwide Corp. and NFS completed certain
transactions in anticipation of the initial public offering that
focused the business of NFS on long-term savings and retirement
products. On September 24, 1996, NLIC declared a dividend payable
to Nationwide Corp. on January 1, 1997 consisting of the
outstanding shares of common stock of certain subsidiaries that do
not offer or distribute long-term savings and retirement products.
In addition, during 1996, NLIC entered into two reinsurance
agreements whereby all of NLIC's accident and health and group
life insurance business was ceded to two affiliates effective
January 1, 1996. Additionally, NLIC paid $900.0 million of
dividends, $50.0 million to Nationwide Corp. on December 31, 1996
and $850.0 million to NFS, which then made an equivalent dividend
to Nationwide Corp., on February 24, 1997.
NFS contributed $836.8 million to the capital of NLIC during March
1997.
Wholly owned subsidiaries of NLIC as of December 31, 1998 include
Nationwide Life and Annuity Insurance Company (NLAIC), Nationwide
Advisory Services, Inc. (NAS) and Nationwide Investment Services
Corporation (NISC). NLIC and its subsidiaries are collectively
referred to as "the Company."
The Company is a member of the Nationwide group of companies
(Nationwide), which consists of Nationwide Mutual Insurance
Company (NMIC) and all of its subsidiaries and affiliates.
NLAIC offers universal life insurance, variable universal life
insurance, corporate-owned life insurance and individual annuity
contracts on a non-participating basis. NAS is a registered
broker-dealer providing investment management and administration
services. NISC is a registered broker-dealer doing business solely
in the deferred compensation market.
The Company is a leading provider of long-term savings and
retirement products in the United States. The Company develops and
sells a diverse range of products including individual annuities,
private and public pension plans, and life insurance. By
developing and offering a wide variety of products, the Company
believes that it has positioned itself to compete effectively in
various stock market and interest rate environments. The Company
markets its products through a broad spectrum of distribution
channels, including independent broker/dealers, national and
regional brokerage firms, pension plan administrators, life
insurance specialists, financial institutions, Nationwide
Retirement Solutions sales representatives and Nationwide agents.
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The Company is one of the leaders in the development and sale of
variable annuities. As of December 31, 1999, the Company was the
fifth largest writer of individual variable annuity contracts in
the United States (U.S.) based on assets, according to The
Variable Annuity Research & Data Service.
The Company has grown substantially in recent years as a result of
its long-term investment in developing the distribution channels
necessary to reach its target customers and the products required
to meet the demands of these customers. The Company believes its
growth has been further enhanced by favorable demographic trends,
the growing tendency of Americans to supplement traditional
sources of retirement income with self-directed investments, such
as products offered by the Company, and the performance of the
financial markets, particularly the U.S. stock markets, in recent
years.
BUSINESS SEGMENTS
The Company has three product segments: Variable Annuities, Fixed
Annuities and Life Insurance. In addition, the Company reports
corporate revenues and expenses, investments and related
investment income supporting capital not specifically allocated to
its product segments, revenues and expenses of its investment
advisor subsidiary and revenues and expenses related to group
annuity contracts sold to Nationwide employee benefits plans in a
Corporate and Other segment.
The Variable Annuities segment, which accounted for $290.3 million
(or 47%) of the Company's operating income before federal income
tax expense for 1999, consists of annuity contracts that provide
the customer with access to a wide range of investment options,
tax-deferred accumulation of savings, asset protection in the
event of an untimely death, and flexible payout options including
a lump sum, systematic withdrawal or a stream of payments for
life.
The Fixed Annuities segment, which accounted for $177.2 million
(or 29%) of the Company's operating income before federal income
tax expense for 1999, consists of annuity contracts that generate
a return for the customer at a specified interest rate, fixed for
a prescribed period, tax-deferred accumulation of savings and
flexible payout options including a lump sum, systematic
withdrawal or a stream of payments for life. Such contracts
consist of single premium deferred annuities, flexible premium
deferred annuities and single premium immediate annuities. The
Fixed Annuities segment also includes the fixed option under the
Company's variable annuity contracts, which accounted for 72% of
the Company's fixed annuity sales in 1999 and 71% of the Company's
fixed annuity policy reserves as of December 31, 1999. During
1999, the average crediting rates on contracts (including the
fixed option under the Company's variable annuity contracts) in
the Fixed Annuities segment was 5.59%. Approximately 87% of the
Company's crediting rates on its fixed annuity contracts are
guaranteed for a period not exceeding 15 months.
The Life Insurance segment, which accounted for $120.8 million (or
20%) of the Company's operating income before federal income tax
expense for 1999, is composed of a wide range of variable
universal life insurance, whole life insurance, universal life
insurance, term life insurance and corporate-owned life insurance
products that provide a death benefit and may also allow the
customer to build cash value on a tax-deferred basis.
The Corporate and Other segment accounted for $29.8 million (or
4%) of the Company's operating income (which excludes realized
gains and losses on investments) before federal income tax expense
for 1999.
Additional information related to the Company's business segments
is included in note 14 to the consolidated financial statements
and Financial Statement Schedule III.
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RATINGS
Ratings with respect to claims-paying ability and financial
strength have become an increasingly important factor in
establishing the competitive position of insurance companies.
Ratings are important to maintaining public confidence in the
Company and its ability to market its annuity and life insurance
products. Rating organizations continually review the financial
performance and condition of insurers, including the Company. Any
lowering of the Company's ratings could have a material adverse
effect on the Company's ability to market its products and could
increase the surrender of the Company's annuity products. Both of
these consequences could, depending upon the extent thereof, have
a material adverse effect on the Company's liquidity and, under
certain circumstances, net income. NLIC is rated "A+" (Superior)
by A.M. Best Company, Inc. and its claims-paying ability/financial
strength is rated "Aa2" (Excellent) by Moody's Investor Services,
Inc., "AA+" (Excellent) by Standard & Poor's Corporation and "AA+"
(Excellent) by Duff & Phelps Credit Rating Co.
The foregoing ratings reflect each rating agency's opinion of
NLIC's financial strength, operating performance and ability to
meet its obligations to policyholders and are not evaluations
directed toward the protection of investors. Such factors are of
concern to policyholders, agents and intermediaries.
COMPETITION
The Company competes with a large number of other insurers as well
as non-insurance financial services companies, such as banks,
broker/dealers and mutual funds, some of whom have greater
financial resources, offer alternative products and, with respect
to other insurers, have higher ratings than the Company. The
Company believes that competition in the Company's lines of
business is based on price, product features, commission
structure, perceived financial strength, claims-paying ratings,
service and name recognition.
On November 12, 1999, the Gramm-Leach-Bliley Act (the Act), was
signed into law. The Act modernizes the regulatory framework for
financial services in the United States and allows bank,
securities firms and insurance companies to affiliate more
directly than they have been permitted to do in the past. At this
time it is not possible to predict the effect the Act will have on
the financial services industry and the Company.
REGULATION
NLIC and NLAIC, as with other insurance companies, are subject to
extensive regulation and supervision in the jurisdictions in which
they do business. Such regulations limit the amount of dividends
and other payments that can be paid by insurance companies without
prior approval and impose restrictions on the amount and type of
investments insurance companies may hold. These regulations also
affect many other aspects of insurance companies businesses,
including licensing of insurers and their products and agents,
risk-based capital requirements and the type and amount of
required asset valuation reserve accounts. These regulations are
primarily intended to protect policyholders rather than
shareholders. The Company can not predict the effect that any
proposed or future legislation may have on the financial condition
or results of operations of the Company.
Insurance companies are required to file detailed annual and
quarterly financial statements with state insurance regulators in
each of the states in which they do business, and their business
and accounts are subject to examination by such agencies at any
time. In addition, insurance regulators periodically examine an
insurer's financial condition, adherence to statutory accounting
practices and compliance with insurance department rules and
regulations. Applicable state insurance laws, rather than federal
bankruptcy laws, apply to the liquidation or the restructuring of
insurance companies.
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5
As part of their routine regulatory oversight process, state
insurance departments conduct detailed examinations periodically
(generally once every three to four years) of the books, records
and accounts of insurance companies domiciled in their states.
Such examinations are generally conducted in cooperation with the
departments of two or three other states under guidelines
promulgated by the National Association of Insurance Commissioners
(NAIC). The most recently completed examination of the Company's
insurance subsidiaries was conducted by the Ohio and Delaware
insurance departments for the four-year period ended December 31,
1996. The final reports of these examinations did not result in
any significant issues or adjustments.
The payment of dividends by NLIC is subject to restrictions set
forth in the insurance laws and regulations of Ohio, its
domiciliary state. The Ohio insurance laws require Ohio-domiciled
life insurance companies to seek prior regulatory approval to pay
a dividend or distribution of cash or other property if the fair
market value thereof, together with that of other dividends or
distributions made in the preceding 12 months, exceeds the greater
of (i) 10% of statutory-basis policyholders' surplus as of the
prior December 31 or (ii) the statutory-basis net income of the
insurer for the 12-month period ending as of the prior December
31. The Ohio insurance laws also require insurers to seek prior
regulatory approval for any dividend paid from other than earned
surplus. Earned surplus is defined under the Ohio insurance laws
as the amount equal to the Company's unassigned funds as set forth
in its most recent statutory financial statements, including net
unrealized capital gains and losses or revaluation of assets.
Additionally, following any dividend, an insurer's policyholder
surplus must be reasonable in relation to the insurer's
outstanding liabilities and adequate for its financial needs. The
payment of dividends by NLIC may also be subject to restrictions
set forth in the insurance laws of New York that limit the amount
of statutory profits on NLIC's participating policies (measured
before dividends to policyholders) that can inure to the benefit
of the Company and its stockholders. The Company currently does
not expect such regulatory requirements to impair its ability to
pay operating expenses and dividends in the future.
EMPLOYEES
As of December 31, 1999, the Company had approximately 3,900
employees. None of the employees of the Company are covered by a
collective bargaining agreement and the Company believes that its
employee relations are satisfactory.
ITEM 2 PROPERTIES
The Company's principal executive offices are located in Columbus,
Ohio. The Company leases its home office complex, consisting of
approximately 523,000 square feet, from NMIC and its subsidiaries
at One Nationwide Plaza, Two Nationwide Plaza and Three Nationwide
Plaza, Columbus, Ohio. The Company believes that its present
facilities are adequate for the anticipated needs of the Company.
ITEM 3 LEGAL PROCEEDINGS
The Company is a party to litigation and arbitration proceedings
in the ordinary course of its business, none of which is expected
to have a material adverse effect on the Company.
In recent years, life insurance companies have been named as
defendants in lawsuits, including class action lawsuits relating
to life insurance and annuity pricing and sales practices. A
number of these lawsuits have resulted in substantial jury awards
or settlements.
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6
In November 1997, two plaintiffs, one who was the owner of a
variable life insurance contract and the other who was the owner
of a variable annuity contract, commenced a lawsuit in a federal
court in Texas against Nationwide Life and the American Century
group of defendants (Robert Young and David D. Distad v.
Nationwide Life Insurance Company et al.). In this lawsuit,
plaintiffs sought to represent a class of variable life insurance
contract owners and variable annuity contract owners whom they
claim were allegedly misled when purchasing these variable
contracts into believing that the performance of their underlying
mutual fund option managed by American Century, whose shares may
only be purchased by insurance companies, would track the
performance of a mutual fund, also managed by American Century,
whose shares are publicly traded. The amended complaint seeks
unspecified compensatory and punitive damages. On April 27, 1998,
the District Court denied, in part, and granted, in part, motions
to dismiss the complaint filed by NLIC and American Century. The
remaining claims against NLIC allege securities fraud, common law
fraud, civil conspiracy, and breach of contract. The District
Court, on December 2, 1998, issued an order denying plaintiffs'
motion for class certification and the appeals court declined to
review the order denying class certification upon interlocutory
appeal. On June 11, 1999, the District Court denied the
plaintiffs' motion to amend their complaint and reconsider class
certification. In January 2000 NLIC and American Century settled
this lawsuit now limited to the claims of the two named
plaintiffs. On February 9, 2000 the court dismissed this lawsuit
with prejudice.
On October 29, 1998, the Company was named in a lawsuit filed in
Ohio state court related to the sale of deferred annuity products
for use as investments in tax-deferred contributory retirement
plans (Mercedes Castillo v. Nationwide Financial Services, Inc.,
Nationwide Life Insurance Company and Nationwide Life and Annuity
Insurance Company). On May 3, 1999, the complaint was amended to,
among other things, add Marcus Shore as a second plaintiff. The
amended complaint is brought as a class action on behalf of all
persons who purchased individual deferred annuity contracts or
participated in group annuity contracts sold by the Company and
the other named Company affiliates which were used to fund certain
tax-deferred retirement plans. The amended complaint seeks
unspecified compensatory and punitive damages. No class has been
certified. On June 11, 1999, the Company and the other named
defendants filed a motion to dismiss the amended complaint. On
March 8, 2000, the court denied the motion to dismiss the amended
complaint filed by the Company and other named defendants. The
Company intends to defend this lawsuit vigorously.
There can be no assurance that any litigation relating to pricing
or sales practices will not have a material adverse effect on the
Company in the future.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted due to reduced disclosure format.
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PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
There is no established public trading market for the NLIC's
shares of common stock. All of the 3,814,779 shares of NLIC's
common stock issued and outstanding are owned by NFS.
NLIC declared $236.0 million in dividends to NFS during 1999. NLIC
paid cash dividends of $100.0 million to NFS during 1998 and no
cash dividends were paid during 1997.
On January 1, 1997, NLIC paid a dividend valued at $485.7 million
to Nationwide Corp. consisting of the outstanding shares of common
stock of ELOW, NCC and WCLIC. Also, on February 24, 1997, NLIC
paid a dividend to NFS, and NFS paid an equivalent dividend to
Nationwide Corp., consisting of securities having an aggregate
fair value of $850.0 million. The dividend payments were approved
by the Department of Insurance of the State of Ohio.
NLIC currently does not have a formal dividend policy.
Reference is made to note 10 of the consolidated financial
statements for information regarding dividend restrictions.
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA
Omitted due to reduced disclosure format.
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ITEM 7 MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
INTRODUCTION
Management's narrative analysis of the results of operations of
NLIC and subsidiaries for the three years ended December 31, 1999
follows. This discussion should be read in conjunction with the
consolidated financial statements and related notes included
elsewhere in this report.
Management's discussion and analysis 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 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 others, the following possibilities: (i) the potential
impact on the Company's reported net income that could result from
the adoption of certain accounting standards issued by the FASB;
(ii) tax law changes impacting the tax treatment of life insurance
and investment products; (iii) heightened competition, including
specifically the intensification of price competition, the entry
of new competitors and the development of new products by new and
existing competitors; (iv) adverse state and federal legislation
and regulation, including limitations on premium levels, increases
in minimum capital and reserves, and other financial viability
requirements; (v) failure to expand distribution channels in order
to obtain new customers or failure to retain existing customers;
(vi) inability to carry out marketing and sales plans, including,
among others, changes to certain products and acceptance of the
revised products in the market; (vii) changes in interest rates
and the capital markets causing a reduction of investment income
or asset fees, reduction in the value of the Company's investment
portfolio or a reduction in the demand for the Company's products;
(viii) general economic and business conditions which are less
favorable than expected; (ix) unanticipated changes in industry
trends and ratings assigned by nationally recognized statistical
rating organizations or A.M. Best Company, Inc.; and (x)
inaccuracies in assumptions regarding future persistency,
mortality, morbidity and interest rates used in calculating
reserve amounts and (xi) failure of the Company or its significant
business partners and vendors to identify and correct all non-Year
2000 compliant systems or to develop and execute adequate
contingency plans.
RESULTS OF OPERATIONS
In addition to net income, the Company reports net operating
income, which excludes realized investment gains and losses. Net
operating income is commonly used in the insurance industry as a
measure of on-going earnings performance.
The following table reconciles the Company's reported net income
to net operating income for each of the last three years.
(in millions) 1999 1998 1997
------ ------ ------
Net income $405.1 $366.7 $279.7
Realized losses (gains) on investments, net of tax 7.6 (18.5) (7.9)
------ ------ ------
Net operating income $412.7 $348.2 $271.8
====== ====== ======
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Revenues
Total revenues for 1999, excluding realized gains and losses on
investments, increased to $2.70 billion compared to $2.45 billion
for 1998 and $2.21 billion for 1997. The growth in revenues over
the past two years has primarily been driven by increases in
policy charges and net investment income.
Policy charges include asset fees, which are primarily earned from
separate account assets generated from sales of variable annuities
and variable life insurance products; cost of insurance charges
earned on universal life insurance products; administration fees,
which include fees charged per contract on a variety of the
Company's products and premium loads on universal life insurance
products; and surrender fees, which are charged as a percentage of
premiums withdrawn during a specified period of annuity and
certain life insurance contracts. Policy charges for each of the
last three years were as follows:
(in millions) 1999 1998 1997
------ ------ ------
Asset fees $ 616.5 $ 494.7 $ 384.8
Cost of insurance charges 117.0 88.8 68.5
Administrative fees 102.4 73.8 59.5
Surrender fees 59.6 41.6 32.4
-------- -------- --------
Total policy charges $ 895.5 $ 698.9 $ 545.2
======== ======== ========
The growth in asset fees reflects increases in total separate
account assets of $16.20 billion, or 32%, in 1999 and $13.2
billion, or 35%, in 1998. Record variable annuity sales and strong
equity market performance in each of the last three years have
resulted in separate account balances increasing 149% from $26.93
billion at the beginning of 1997 to $67.14 billion at the end of
1999.
Cost of insurance charges are assessed as a percentage of the net
amount at risk on universal life insurance policies. The net
amount at risk is equal to a policy's death benefit minus the
related policyholder account value. The increase in cost of
insurance charges is due primarily to growth in the net amount at
risk related to individual variable universal life insurance
reflecting expanded distribution and increased customer demand for
variable life products. The net amount at risk related to
individual variable universal life insurance grew to $19.76
billion at the end of 1999 compared to $14.95 billion and $10.44
billion at the end of 1998 and 1997, respectively.
The growth in administrative fees is attributable to a significant
increase in premiums on individual variable life policies and
certain corporate-owned life policies where the company collects a
premium load. Nearly all of the increase in surrender charges over
the past two years is attributable to policyholder withdrawals in
the Variable Annuities segment, and is driven by an overall
increase in variable annuity policy reserves and a heightened
competitive environment in the individual annuity marketplace.
Net investment income includes the gross investment income earned
on investments supporting fixed annuities and certain life
insurance products as well as the yield on the Company's general
account invested assets which are not allocated to product
segments. Net investment income grew from $1.41 billion and $1.48
billion in 1997 and 1998, respectively, to $1.52 billion in 1999
primarily due to increased invested assets to support growth in
fixed annuity and life insurance policy reserves. Fixed annuity
policy reserves, which include the fixed option of the Company's
variable annuity products, increased $704.7 million in 1998 and
$1.69 billion in 1999 and were $16.59 billion as of year end 1999.
The growth in life insurance reserves was led by corporate-owned
life insurance products, where fixed reserves increased $596.7
million in 1998 and $180.0 million in 1999. The increase in net
investment income due to growth in invested assets was partially
offset by declining investment yields in 1999 and 1998 due to
lower market interest rates.
The Company does not consider realized gains and losses on
investments to be recurring components of earnings. The Company
makes decisions concerning the sale of invested assets based on a
variety of market, business, tax and other factors.
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10
Benefits and Expenses
Interest credited to policyholder account balances totaled $1.10
billion in 1999 compared to $1.07 billion in 1998 and $1.02
billion in 1997 and principally relates to fixed annuity and
investment life insurance products. The growth in interest
credited reflects the increase in policy reserves previously
discussed partially offset by reduced average crediting rates. The
average crediting rate on fixed annuity policy reserves was 5.59%
in 1999 compared to 5.95% and 6.12% in 1998 and 1997,
respectively.
Amortization of deferred policy acquisition costs (DAC) increased
$58.1 million in 1999 and $47.3 million in 1998 principally due to
the Variable Annuities segment, which accounted for $38.9 million
and $36.1 million of the increases as a result of growth in the
number of policies and related policy reserves in each of the last
two years.
Operating expenses were $463.4 million in 1999, a 10% increase
from 1998 operating expenses of $419.7 million. Operating expenses
were $384.9 million in 1997. The increase reflects the growth in
the number of annuity and life insurance contracts in force,
particularly related to variable annuities and variable universal
life insurance, and the related increase in administrative
processing costs.
Federal income tax expense was $201.4 million representing an
effective tax rate of 33.2% for 1999. Federal income tax expense
in 1998 and 1997 was $190.4 million and $150.2 million,
respectively, representing effective rates of 34.2% and 34.9%.
Year 2000
The Company developed and implemented a plan to address issues
related to the Year 2000. The problem relates to many existing
computer systems using only two digits to identify a year in a
date field. These systems were designed and developed without
considering the impact of the change in the century. If not
corrected, many computer systems could fail or create erroneous
results when processing information dated after December 31, 1999.
Like many organizations, the Company was required to renovate or
replace many computer systems so that the systems would function
properly after December 31, 1999.
The Company completed an inventory and assessment of all computer
systems. The Company renovated or replaced all applications that
were not compliant. Testing of all systems included running each
application in a Year 2000 environment was completed as planned
during 1998. For applications being replaced, the Company had all
replacement systems in place and functioning as planned by
year-end 1998.
The Company completed an inventory and assessment of all vendor
products and tested and certified each as Year 2000 compliant. Any
vendor products that could not be certified as Year 2000 compliant
were replaced or eliminated in 1998.
The Company's facilities in Columbus, Ohio were inventoried,
assessed and tested as being Year 2000 compliant. Mission critical
systems supporting the Company's infrastructure such as
telecommunications, voice and networks were renovated and brought
into compliance as planned during the second quarter of 1999.
The Company also addressed issues associated with the exchange of
electronic data with external organizations. The Company completed
an inventory and assessment of all business partners utilizing
electronic interfaces with the Company and processes were put in
place to allow the Company to accept data regardless of the
format. Contingency plans were completed that allow the Company to
continue to send or receive data in the event of failures related
to electronic transmissions.
In addition to resolving internal Year 2000 readiness issues, the
Company conducted a due diligence effort with external
organizations, including mutual fund organizations, financial
institutions and wholesale producers. This involved communication
and follow-up with critical business partners to determine if they
will be in a position to continue doing business in the Year 2000
and beyond. All of our critical business partners have reported
that they are compliant.
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11
As part of its risk management strategy, the Company identified
risk scenarios including the identification of external risk
factors that could cause business interruptions from Year 2000
related events. These risk scenarios included increased customer
service volume, increased producer service volume, utility
failures, technology failures and disruptions in business
operations, finance and cash flow. The Company completed its
mitigation and contingency plans to address these risks that
would, except for complete utility failure, permit uninterrupted
service to customers and producers.
Operating expenses in 1998 and 1997 include approximately $44.7
million and $45.4 million, respectively, for technology projects,
including costs related to Year 2000. Year 2000 activities totaled
$6.4 million during 1999. The cost associated with the completion
of Year 2000 renovation and replacement efforts will not result in
a reduction in operating expenses. Rather, personnel and resources
that were allocated to the Year 2000 issues have been reassigned
to other technology-related projects.
Recently Issued Accounting Standards
See note 2(j) to the consolidated financial statements for a
discussion of recently issued accounting standards.
Sales Information
Sales, as measured by statutory premiums and deposits, by
distribution channel for each of the last three years are
summarized as follows:
(in millions) 1999 1998 1997
-------- -------- --------
Independent broker/dealers $ 5,441.6 $ 5,004.2 $ 4,976.6
National and regional brokerage firms (1) 919.3 615.3 --
Financial institutions 2,436.7 2,108.3 1,681.9
Pension plan administrators 1,169.7 1,015.8 916.7
Nationwide Retirement Solutions
sales representatives 2,549.0 2,470.1 1,937.0
Nationwide agents 965.6 959.7 630.2
Life insurance specialists 420.0 91.1 --
--------- --------- ---------
Total core premiums and deposits 13,901.9 12,264.5 10,142.4
--------- --------- ---------
Bank-owned life insurance (BOLI) 123.2 554.6 194.7
Institutional products 577.2 -- --
Nationwide employee
and agent benefit plans 334.1 323.3 174.9
--------- --------- ---------
Total sales $14,936.4 $13,142.4 $10,512.0
========= ========= =========
(1) Prior to 1998, national and regional brokerage firms
sales were included in independent broker/dealer sales.
The 1998 and 1997 statutory premiums and deposits have been
restated to conform to the 1999 presentation which better reflects
multi-product sales across all distribution channels.
Total core premiums and deposits represent amounts that are
recurring and are the sales figures management uses to set and
evaluate the Company's sales goals. Sales of institutional
products represent sales of funding agreements that secure notes
issued to foreign investors through a third party trust under the
Company's $2 billion medium-term note program. The program was
launched in July 1999 as a means to expand spread based product
offerings. The Company excludes institutional products and BOLI
sales as well as deposits into Nationwide employee and agent
benefit plans from its targeted sales comparisons. Although
funding agreements and BOLI contribute to asset and earnings
growth they do not produce steady production flow that lends
itself to meaningful comparisons. The Company achieved annual core
sales growth of 13%, 21%, and 19% in 1999, 1998 and 1997,
respectively.
11
12
The Company sells its products through a broad distribution
network. Unaffiliated entities that sell the Company's products to
their own customer base include independent broker/dealers,
national and regional brokerage firms, pension plan
administrators, life insurance specialists and financial
institutions. Representatives of the Company or its affiliates who
market products directly to a customer base identified by the
Company include Nationwide Retirement Solutions sales
representatives and Nationwide agents.
The competitive environment for individual annuity sales through
the independent broker/dealer channel has become very challenging;
however, total sales through this channel (including retirement
plans and life insurance) were up 9% in 1999 reflecting the
strength of the Company's multiple product strategy. Sales through
financial institutions grew 16% during 1999 and 25% during 1998
driven mainly by proprietary individual annuity products sales.
The increase in sales through life insurance specialists reflects
$409.2 million of corporate owned life insurance (COLI) sales in
1999 compared to $91.1 million in 1998. NFS entered the COLI
market in 1998 and has quickly become a market leader through a
focus on mid-sized cases.
The Company's flagship products are marketed under The BEST of
AMERICA(R) brand, and include individual and group variable
annuities and variable life insurance. The BEST of AMERICA(R)
products allow customers to choose from among investment options
managed by premier mutual fund managers. The Company has also
developed private label variable and fixed annuity products in
conjunction with other financial services providers which allow
those providers to sell products to their own customer bases under
their own brand name.
The Company also markets group deferred compensation retirement
plans to employees of state and local governments for use under
Internal Revenue Code (IRC) Section 457. The Company utilizes its
sponsorship by the National Association of Counties and The United
States Conference of Mayors when marketing IRC Section 457
products.
Core statutory premiums and deposits by product for each of the
last three years are as follows:
(in millions) 1999 1998 1997
-------- -------- --------
Best of America(R) products $ 4,665.3 $ 4,661.1 $ 4,267.3
Private label annuities 1,280.3 1,093.3 981.9
The NEA Valuebuilder annuities 168.5 172.6 134.8
Other 880.8 727.2 307.8
--------- --------- ---------
Total individual annuities 6,994.9 6,654.2 5,691.8
--------- --------- ---------
Best of America(R) group pension series 3,537.6 2,760.0 2,221.1
IRC Section 457 annuities 2,190.4 2,155.3 1,716.5
Other 83.1 41.8 44.3
--------- --------- ---------
Total group annuities 5,811.1 4,957.1 3,981.9
--------- --------- ---------
Traditional/Universal life insurance 260.8 246.1 248.3
Best of America(R) variable life series 425.9 316.0 220.4
Corporate owned life insurance 409.2 91.1 --
--------- --------- ---------
Total life insurance 1,095.9 653.2 468.7
--------- --------- ---------
Total core premiums and deposits $13,901.9 $12,264.5 $10,142.4
========= ========= =========
BUSINESS SEGMENTS
The Company has three product segments: Variable Annuities, Fixed
Annuities and Life Insurance. In addition, the Company reports
certain other revenues and expenses in a Corporate and Other
segment. All information set forth below relating to the Company's
Variable Annuities segment excludes the fixed option under the
Company's variable annuity contracts. Such information is included
in the Company's Fixed Annuities segment.
12
13
The following table summarizes operating income before federal
income tax expense for the Company's business segments for each of
the last three years.
(in millions) 1999 1998 1997
------ ------ ------
Variable Annuities $290.3 $218.4 $150.9
Fixed Annuities 177.2 175.3 169.5
Life Insurance 120.8 88.8 66.7
Corporate and Other 29.8 46.2 31.7
------ ------ ------
$618.1 $528.7 $418.8
====== ====== ======
Variable Annuities
The Variable Annuities segment consists of annuity contracts that
provide the customer with access to a wide range of investment
options, tax-deferred accumulation of savings, asset protection in
the event of an untimely death, and flexible payout options
including a lump sum, systematic withdrawal or a stream of
payments for life. The Company's variable annuity products consist
almost entirely of flexible premium deferred variable annuity
contracts.
The following table summarizes certain selected financial data for
the Company's Variable Annuities segment for the years indicated.
(in millions) 1999 1998 1997
--------- --------- ---------
INCOME STATEMENT DATA
Revenues $ 626.7 $ 501.6 $ 387.1
Benefits and expenses 336.4 283.2 236.2
--------- --------- ---------
Operating income before
federal income tax expense $ 290.3 $ 218.4 $ 150.9
========= ========= =========
OTHER DATA
Statutory premiums and deposits (1) $ 9,916.0 $ 9,543.3 $ 7,535.8
Policy reserves as of year end $61,197.2 $46,420.8 $34,486.7
Pre-tax operating income to average
policy reserves 0.55% 0.54% 0.51%
----------
(1) Statutory data have been derived from the Annual Statements of
the Company's life insurance subsidiaries, as filed with
insurance regulatory authorities and prepared in accordance
with statutory accounting practices.
Pre-tax operating earnings reached a record $290.3 million in
1999, up 33% compared to 1998. Improved Variable Annuity segment
results are primarily due to growth in asset fees partially offset
by increased DAC amortization.
Asset fees were $596.6 million in 1999 up 25% from $479.1 million
in 1998 and totaled $370.2 million in 1997. Asset fees are charged
as a percentage of policy reserves which have increased
substantially in the past three years as a result of strong net
cash flows and through market appreciation on investments
underlying reserves. Variable annuity policy reserves grew $14.78
billion during 1999 reaching $61.20 billion as of year end 1999
compared to growth in 1998 of $11.93 billion and year end 1998
reserves of $46.42 billion. During 1997, policy reserves increased
$10.21 billion.
13
14
Sales in 1999 of $9.92 billion offset by withdrawals and
surrenders totaling $6.52 billion generated net cash flows of
$3.40 billion. Although 1999 net cash flows are down from the
$5.28 billion and $4.85 billion achieved in 1998 and 1999,
respectively, the Company has shown the ability to consistently
generate substantial positive cash flows and increase its base of
asset fee generating reserves in a very competitive environment.
The increase in withdrawal and surrender activity is attributable
to an increase in competition in the individual variable annuity
market which has increased transfers to competitor's products and
the overall aging of the Company's book of individual annuity
business. The Company will introduce new products, new product
features and new retention strategies during 2000 in an effort to
decrease the rate of surrenders.
Although the equity markets have been more volatile in recent
years, equity market conditions over each of the past three years
have contributed significantly to the growth in variable annuity
policy reserves. Variable annuity policy reserves reflect market
appreciation of $10.55 billion, $6.80 billion and $5.21 billion in
1999, 1998 and 1997, respectively.
Amortization of DAC increased 31% to $162.8 million in 1999
compared to $123.9 million and $87.8 million in 1998 and 1997,
respectively. The growth in DAC amortization is consistent with
the overall growth in the variable annuity business.
Efficiencies achieved through improved operating scale have
enabled the Company to improve operating margins to 55 basis
points of average policy reserves, up from 54 basis points in 1998
and 51 basis points n 1997.
Fixed Annuities
The Fixed Annuities segment consists of annuity contracts that
generate a return for the customer at a specified interest rate
fixed for a prescribed period, tax-deferred accumulation of
savings and flexible payout options including a lump sum,
systematic withdrawal or a stream of payments for life. Such
contracts consist of single premium deferred annuities, flexible
premium deferred annuities and single premium immediate annuities.
The Fixed Annuities segment includes the fixed option under the
Company's variable annuity contracts.
The following table summarizes certain selected financial data for
the Company's Fixed Annuities segment for the years indicated.
(in millions) 1999 1998 1997
-------- -------- --------
INCOME STATEMENT DATA
Revenues:
Net investment income $ 1,134.5 $ 1,116.6 $ 1,098.2
Other 43.4 35.7 43.2
--------- --------- ---------
1,117.9 1,152.3 1,141.4
--------- --------- ---------
Benefits and expenses:
Interest credited to policyholder account balances 837.5 828.6 823.4
Other benefits and expenses 163.2 148.4 148.5
--------- --------- ---------
1,000.7 977.0 971.9
--------- --------- ---------
Operating income before federal income tax expense $ 177.2 $ 175.3 $ 169.5
========= ========= =========
OTHER DATA
Statutory premiums and deposits (1) $ 3,467.2 $ 2,068.0 $ 2,137.9
Policy reserves as of year end $16,591.9 $14,898.9 $14,194.2
Pre-tax operating income to average policy reserves 1.14% 1.21% 1.22%
----------
(1) Statutory data have been derived from the Annual Statements of
the Company's life insurance subsidiaries, as filed with
insurance regulatory authorities and prepared in accordance
with statutory accounting practices.
14
15
Fixed Annuities segment results reflect an increase in interest
spread income attributable to growth in fixed annuity policy
reserves offset by narrower interest margins during 1999. Interest
spread is the differential between net investment income and
interest credited to policyholder account balances. Interest
spreads vary depending on crediting rates offered by competitors,
performance of the investment portfolio, including the rate of
prepayments, changes in market interest rates and other factors.
The following table depicts the interest margins on general
account policy reserves in the Fixed Annuities segment for each of
the last three years.
1999 1998 1997
---- ---- ----
Net investment income 7.57% 8.02% 8.16%
Interest credited 5.59 5.95 6.12
---- ---- ----
1.98% 2.07% 2.04%
==== ==== ====
During 1998 and the first half of 1999 the Company experienced an
increase in mortgage loan and bond prepayment fees and such income
accounted for approximately 9 basis points of the interest spread
in 1999 compared to 16 basis points and 8 basis points in 1998 and
1997, respectively. The recent increases in interest rates have
slowed prepayment activity and the Company expects interest
spreads to remain at 190 to 195 basis points, excluding the impact
of mortgage loan and bond prepayment income.
The Company is able to mitigate the effects of changes in
investment yields by periodically resetting the rates credited on
fixed annuity contracts. As of December 31, 1999, $7.28 billion,
or 44% of fixed annuity policy reserves, were in contracts where
the guaranteed interest rate is reestablished each quarter. Fixed
annuity policy reserves of $5.89 billion are in contracts that
adjust the crediting rate on an annual basis with portions
resetting in each calendar quarter. The Company also has $1.39
billion of fixed annuity policy reserves that call for the
crediting rate to be reset annually on each January 1 and $1.45
billion of fixed annuity policy reserves are in payout status
where the Company has guaranteed periodic, typically monthly,
payments. The remaining $574.5 million of fixed annuity policy
reserves relate to funding agreements issued in conjunction with
the Company's medium-term note program where the crediting rate is
fixed for the term of the contract.
Fixed annuity policy reserves increased to $16.59 billion as of
year-end compared to $14.90 billion a year ago and $14.19 billion
as of the end of 1997. The 1999 growth reflects increased sales
levels as well as the acquisition of ELOW.
Fixed annuity sales during 1999 were $3.47 billion compared to
1998 sales of $2.07 billion. Sales in 1997 were $2.14 billion.
Sales in 1999 include $577.2 million of funding agreements issued
in conjunction with the Company's medium-term note program. Most
of the Company's fixed annuity sales are premiums allocated to the
fixed option of variable annuity contracts. Fixed annuity sales
for 1999 include $2.49 billion in premiums allocated to the fixed
option under a variable annuity contract, compared to $1.68
billion in 1998 and $1.67 billion in 1997. The increase in 1999
was driven by the Company's dollar cost averaging (DCA) program
that offers customers a first year bonus interest rate and
transfers the account balance systematically to variable options
over a six or twelve month period.
Life Insurance
The Life Insurance segment consists of insurance products,
including variable universal life insurance and corporate-owned
life insurance products, that provide a death benefit and also
allow the customer to build cash value on a tax-deferred basis.
15
16
The following table summarizes certain selected financial data for
the Company's Life Insurance segment for the years indicated.
(in millions) 1999 1998 1997
-------- -------- --------
INCOME STATEMENT DATA
Revenues $ 646.1 $ 544.1 $ 468.3
Benefits and expenses 525.3 455.3 401.6
-------- -------- --------
Operating income before federal income tax expense $ 120.8 $ 88.8 $ 66.7
======== ======== ========
OTHER DATA
Statutory premiums (1):
Variable universal life insurance $ 426.0 $ 315.9 $ 220.3
Corporate-owned life insurance $ 532.3 $ 645.8 $ 194.7
Traditional and universal life insurance $ 260.8 $ 246.1 $ 248.4
Policy reserves as of year end:
Variable universal life insurance $1,832.3 $1,270.1 $ 895.6
Corporate-owned life insurance $1,498.6 $ 903.6 $ 221.9
Traditional and universal life insurance $2,582.9 $2,439.7 $2,369.5
--------
(1) Statutory data have been derived from the Annual Statements
of the Company's life insurance subsidiaries, as filed with
insurance regulatory authorities and prepared in accordance
with statutory accounting practices.
Life Insurance segment earnings in 1999 increased 36% to $120.8
million, up from $88.8 million a year ago and $66.7 million in
1997. Continued strong sales and reserve growth from both
individual and corporate owned investment life insurance products
contributed to the sharp earnings increases.
Driven primarily by increased policy charges, revenues from
investment life products increased to $226.5 million in 1999
compared to $145.4 million in 1998 and $69.8 million 1997. The
revenue growth reflects significantly increased policy reserve
levels as individual investment life reserves increased 44% in
1999 to $1.83 billion compared to $1.27 billion a year ago and
$895.6 million at the end of 1997. Corporate owned investment life
reserves, which include both BOLI and corporate-owned (COLI)
products reached $1.50 billion, up from $903.6 million and $221.9
million at the end of 1998 and 1997, respectively.
Pre-tax earnings from investment life products reached $53.4
million 1999 compared to $29.6 million a year ago and $14.7
million in 1997. The strong revenue growth discussed previously
more than offset increased operating expenses and slightly
elevated mortality experience, which continues to remain within
pricing assumptions.
Traditional and universal life pre-tax earnings jumped 14% to
$67.4 million in 1999 compared to $59.2 million in 1998 and were
$52.0 million in 1997. The 1998 results reflect additional
expenses related to the installation of a new policy
administration system.
Total life insurance premiums and deposits for 1999 were $1.22
billion compared to $1.21 billion during 1998 and $663.4 million
in 1997. Excluding BOLI sales of $123.2 million in 1999 and $554.7
million in 1998, life insurance sales increased 68% in 1999 and
39% in 1998. Sales in 1999 include record levels of production for
individual variable life insurance and COLI, reflecting the
Company's efforts to sell variable life through multiple channels
and growing consumer and producer demand.
16
17
Corporate and Other
The following table summarizes certain selected financial data for
the Company's Corporate and Other segment for the years indicated.
(in millions) 1999 1998 1997
------ ------ ------
INCOME STATEMENT DATA
Revenues $252.5 $249.3 $209.5
Benefits and expenses 222.7 203.1 177.8
------ ------ ------
Operating income before
federal income tax expense (1) $ 29.8 $ 46.2 $ 31.7
====== ====== ======
------------
(1) Excludes realized gains (losses) on investments.
Revenues in the Corporate and Other segment consist of net
investment income on invested assets not allocated to the three
product segments, investment management fees and other revenues
earned from Nationwide mutual funds and net investment income and
policy charges from group annuity contracts issued to Nationwide
employee and agent benefit plans. During 1999, the Company
assigned its investment advisory and related agreements associated
with Nationwide mutual funds to an affiliate.
In addition to the operating revenues previously presented, the
Company also reports realized gains and losses on investments in
the Corporate and Other segment. The Company realized net
investment (losses) gains of $(11.6) million, $28.4 million and
$11.1 million during 1999, 1998 and 1997, respectively.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK SENSITIVE FINANCIAL INSTRUMENTS
The Company is subject to potential fluctuations in earnings and
the fair value of certain of its assets and liabilities, as well
as variations in expected cash flows due to changes in market
interest rates and equity prices. The following discussion focuses
on specific exposures the Company has to interest rate and equity
price risk and describes strategies used to manage these risks.
The discussion is limited to financial instruments subject to
market risks and is not intended to be a complete discussion of
all of the risks the Company is exposed to.
INTEREST RATE RISK
Fluctuations in interest rates can potentially impact the
Company's earnings and cash flows, and the fair value of its
assets and liabilities. Generally, in a declining interest rate
environment, the Company may be required to reinvest the proceeds
from matured and prepaid investments at rates lower than the
overall yield of the portfolio, which could reduce interest spread
income. In addition, minimum guaranteed crediting rates (typically
3% or 3.5%) on certain annuity contracts could result in a
reduction of the Company's interest spread income in the event of
a significant and prolonged decline in interest rates from market
rates at the end of 1999. The average crediting rate of annuity
products during 1999 was 5.59%, well in excess of the guaranteed
rates. The Company mitigates this risk by investing in assets with
maturities and durations that match the expected characteristics
of the liabilities and by investing in mortgage backed securities
with limited prepayment exposure.
17
18
Conversely, a rising interest rate environment could result in a
reduction of interest spread income or an increase in policyholder
surrenders. Investments supporting annuity liabilities generally
have a weighted average maturity of seven years when purchased and
therefore, the change in yield of the portfolio will lag changes
in market interest rates. This lag is increased if the rate of
prepayments of mortgage-backed securities slows. To the extent the
Company sets renewal rates based on current market rates, this
will result in reduced interest spreads. Alternatively, if the
Company sets renewal crediting rates while attempting to maintain
a desired spread from the portfolio yield, the rates offered by
the Company may be less than new money rates offered by
competitors. This difference could result in an increase in
surrender activity by policyholders. If the Company could not fund
the surrenders with its cash flow from operations, the Company may
be required to sell investments, which likely would have declined
in value due to the increase in interest rates. The Company
mitigates this risk by offering products that assess surrender
charges or market value adjustments at the time of surrender, by
investing in assets with maturities and durations that match the
expected characteristics of the liabilities, and by investing in
mortgage backed securities with limited prepayment exposure.
ASSET/LIABILITY MANAGEMENT STRATEGIES TO MANAGE INTEREST RATE RISK
The Company employs an asset/liability management approach
tailored to the specific requirements of each of its products. The
Company's general account investments are primarily managed in a
number of pools that are segregated by weighted average maturity
of the assets acquired by the pools. For fixed maturity securities
and mortgages, the weighted average maturity is based on
repayments which are scheduled to occur under the terms of the
asset. For mortgage backed securities, repayments are determined
using the current rate of repayment of the underlying mortgages
and the terms of the securities. Each product line has an
investment strategy based on its specific characteristics. The
strategy establishes asset duration, quality and other guidelines.
The Company determines the amount of new investments needed for
each line to arrive at the amount of new investments needed for
each pool by month. The investments acquired for each pool are
shared on a proportional basis by each of the lines requesting
investments in the pool based on their actual investment needs.
For all business having future benefits which cannot be changed at
the option of the policyholder, the underlying assets are managed
in a separate pool. The duration of assets and liabilities in this
pool are kept as close together as possible. For assets, the
repayment cash flows, plus anticipated coupon payments, are used
in calculating asset duration. Future benefits and expenses are
used for liabilities. On December 31, 1999, the average duration
of assets in this pool was 7.09 years and the average duration of
the liabilities was 7.41 years. Policy reserves on this business
were $1.5 billion as of December 31, 1999.
Because the timing of the payment of future benefits on the
majority of the Company's business can be changed by the
policyholder, the Company employs cash flow testing techniques in
its asset/liability management process. In addition, each year the
Company's annuity and insurance business is analyzed to determine
the adequacy of the reserves supporting such business. This
analysis is accomplished by projecting the anticipated cash flows
from such business and the assets required to support such
business under a number of possible future interest rate
scenarios. The first seven of these scenarios are required by
state insurance regulation. Projections are also made using 14
additional scenarios which involve more extreme fluctuations in
future interest rates. Finally, to get a statistical analysis of
possible results and to minimize any bias in the 21 predetermined
scenarios, additional projections are made using 50 randomly
generated interest rate scenarios. For the Company's 1999 cash
flow testing process, interest rates for 90-day treasury bills
ranged from 0.73% to 11.98% under the 21 predetermined scenarios
and 1.44% to 18.53% under the 50 random scenarios. Interest rates
for longer maturity treasury securities had comparable ranges. The
values produced by each projection are used to determine future
gains or losses from the Company's annuity and insurance business,
which, in turn, are used to quantify the adequacy of the Company's
reserves over the entire projection period. The results of the
Company's cash flow testing indicated that the Company's reserves
were adequate as of December 31, 1999.
18
19
CHARACTERISTICS OF INTEREST RATE SENSITIVE FINANCIAL INSTRUMENTS
The following table provides information about the Company's
financial instruments that are sensitive to changes in interest
rates. Insurance contracts that subject the Company to significant
mortality risk, including life insurance contracts and
life-contingent immediate annuities, do not meet the definition of
a financial instrument and are not included in the table.
(in millions) 2000 2001 2002 2003 2004 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Fixed maturity securities:
Corporate bonds:
Principal $1,088.8 $1,669.0 $1,674.3 $1,047.6 $ 971.6 $3,100.3 $ 9,551.6 $ 9,536.5
Average interest rate 7.5% 7.4% 7.1% 7.1% 7.2% 7.9%
Mortgage and other asset-
backed securities:
Principal $ 997.2 $ 920.5 $ 761.0 $ 551.8 $ 448.8 $1,606.6 $ 5,285.9 $ 5,196.9
Average interest rate 7.3% 7.3% 7.3% 7.3% 7.3% 7.4%
Other fixed maturity securities:
Principal $ 76.4 $ 70.3 $ 107.7 $ 34.0 $ 43.9 $ 207.5 $ 539.8 $ 560.6
Average interest rate 6.4% 6.0% 7.0% 7.8% 6.5% 8.3%
Mortgage loans on real estate:
Principal $ 292.8 $ 270.9 $ 369.9 $ 391.2 $ 483.2 $4,024.5 $ 5,832.5 $ 5,745.5
Average interest rate 9.0% 8.3% 8.6% 7.8% 7.7% 7.8%
LIABILITIES
Deferred fixed annuities:
Principal $2,076.0 $1,646.0 $1,448.0 $1,286.0 $1,149.0 $9,626.8 $17,231.8 $16,674.6
Average credited rate 5.5% 5.4% 5.4% 5.4% 5.4% 5.5%
Immediate annuities:
Principal $ 27.0 $ 24.0 $ 21.0 $ 19.0 $ 17.0 $ 123.0 $ 231.0 $ 237.8
Average credited rate 7.2% 7.2% 7.2% 7.3% 7.3% 7.3%
DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swaps:
Pay fixed/receive variable
Notional value - - $ 15.0 $ 16.0 $ 90.8 $ 240.9 $ 362.7 $ 4.8
Weighted average pay rate - - 2.7% 6.6% 6.8% 6.9%
Weighted average receive rate - - 7.5% 6.1% 6.1% 6.2%
Pay variable/receive fixed
Notional value - - - - $ 320.4 $ 285.3 $ 605.7 $ (25.3)
Weighted average pay rate - - - - 6.4% 6.5%
Weighted average receive rate - - - - 3.0% 5.4%
Interest rate futures:
Short positions
Contract amount/notional $ 323.6 $ 256.0 $ 168.0 $ 22.0 $ 9.0 $ 3.0 $ 781.6 $ 1.3
Weighted average settlement
price $ 94.4 $ 93.4 $ 93.2 $ 93.0 $ 92.8 $ 92.6
19
20
The following table provides information about the Company's
financial instruments as of December 31, 1998 that are sensitive
to changes in interest rates.
(in millions) 1999 2000 2001 2002 2003 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Fixed maturity securities:
Corporate bonds:
Principal $1,092.7 $1,049.2 $1,667.6 $1,386.3 $ 882.7 $2,864.0 $ 8,942.5 $ 9,364.2
Average interest rate 8.0% 7.5% 7.3% 7.2% 7.0% 7.6%
Mortgage and other asset-
backed securities:
Principal $ 905.3 $ 964.3 $ 870.7 $ 588.9 $ 367.3 $ 718.3 $ 4,414.8 $ 4,499.4
Average interest rate 7.3% 7.4% 7.2% 7.4% 7.4% 7.0%
Other fixed maturity securities:
Principal $ 7.8 $ 72.0 $ 54.6 $ 103.3 $ 60.6 $ 65.7 $ 364.0 $ 381.5
Average interest rate 8.5% 6.4% 7.0% 6.6% 6.9% 6.8%
Mortgage loans on real estate:
Principal $ 185.9 $ 373.9 $ 313.1 $ 339.5 $ 408.8 $3,749.6 $ 5,372.4 $ 5,527.6
Average interest rate 9.2% 9.3% 7.0% 8.5% 7.6% 7.1%
LIABILITIES
Deferred fixed annuities:
Principal $1,639.6 $1,548.3 $1,733.7 $1,232.5 $1,169.6 $8,270.7 $15,594.4 $15,282.0
Average credited rate 5.2% 4.8% 4.5% 4.3% 4.1% 4.1%
Immediate annuities:
Principal $ 20.6 $ 20.7 $ 22.3 $ 25.2 $ 29.9 $ 53.1 $ 171.8 $ 201.6
Average credited rate 7.3% 7.3% 7.3% 7.3% 7.4% 7.4%
Additional information about the characteristics of the financial
instruments and assumptions underlying the data presented in the
table above are as follows:
Mortgage and other asset-backed securities (MBSs): The maturity
year is determined based on the terms of the securities and the
current rate of prepayment of the underlying pools of mortgages.
The Company limits its exposure to prepayments by purchasing less
volatile types of MBSs.
Other Fixed Maturity Securities and Mortgage Loans on Real Estate:
The maturity year is determined based on the maturity date of the
security or loan.
Deferred Fixed Annuities: The maturity year is based on the
expected date of policyholder withdrawal, taking into account
actual experience, current interest rates, and contract terms.
Included are group annuity contracts ($9.70 billion) which are
generally subject to market value adjustment upon surrender and
may also be subject to surrender charges. Of the total group
annuity liabilities, $7.28 billion was in contracts where the
crediting rate is reset quarterly. For the remaining $2.42 billion
of group annuity reserves, the crediting rate is reset annually on
January 1. Also included are $5.89 billion of individual annuity
liabilities where the crediting rate is reset annually, with
portions resetting in each calendar quarter. Such individual
annuity contracts are also subject to surrender charges calculated
as a percentage of the lesser of deposits made or the amount
surrendered and assessed at declining rates during the first seven
years after a deposit is made. The average crediting rate is
calculated as the difference between the projected yield of the
assets backing the liabilities and a targeted interest spread.
However, for certain individual annuities the credited rate is
also adjusted to partially reflect current new money rates.
Immediate Annuities: Included are non-life contingent contracts in
payout status where the Company has guaranteed periodic, typically
monthly, payments. The maturity year is based on the terms of the
contract.
20
21
EQUITY MARKET RISK
Asset fees calculated as a percentage of the separate account
assets are a significant source of revenue to the Company. At
December 31, 1999, 88% of separate account assets were invested in
equity mutual funds. Gains and losses in the equity markets will
result in corresponding increases and decreases in the Company's
separate account assets and the reported asset fee revenue. In
addition, a decrease in separate account assets may decrease the
Company's expectations of future profit margins which may require
the Company to accelerate the amortization of deferred policy
acquisition costs.
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Nationwide Life Insurance
Company and Subsidiaries are included in a separate section of
this report which is indexed in Item 14 - Exhibits, Financial
Statement Schedules, and Reports on Form 8-K.
Semi-annual and annual reports are sent to contract owners of the
variable annuity and life insurance contracts issued through
registered separate accounts of the Company.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
21
22
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted due to reduced disclosure format.
ITEM 11 EXECUTIVE COMPENSATION
Omitted due to reduced disclosure format.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted due to reduced disclosure format.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted due to reduced disclosure format.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page
-------
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-2
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997 F-3
Consolidated Statements of Shareholder's Equity for the years
ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
FINANCIAL STATEMENT SCHEDULES:
Schedule I Consolidated Summary of Investments - Other Than
Investments in Related Parties as of December 31, 1999 F-27
Schedule III Supplementary Insurance Information as of December 31,
1999, 1998 and 1997 and for each of the years then ended F-28
Schedule IV Reinsurance as of December 31, 1999, 1998 and 1997 and for
each of the years then ended F-29
Schedule V Valuation and Qualifying Accounts for the years ended
December 31, 1999, 1998 and 1997 F-30
All other schedules are omitted because they are not applicable or not
required, or because the required information has been included in the
audited consolidated financial statements or notes thereto
EXHIBIT INDEX 25
22
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NATIONWIDE LIFE INSURANCE COMPANY (Registrant)
By /s/ Dimon R. McFerson
-------------------------------------
Dimon R. McFerson, Chairman and
Chief Executive Officer - Nationwide
Date: March 1, 2000
23
24
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Dimon R. McFerson March 1, 2000 /s/ Joseph J. Gasper March 1, 2000
- --------------------------------------------- ----------------- ------------------------------------------- -----------------
Dimon R. McFerson, Chairman and Chief Date Joseph J. Gasper, President and Chief Date
Executive Officer - Nationwide and Director Operating Officer and Director
/s/ Lewis J. Alphin March 1, 2000 /s/ A.I. Bell March 1, 2000
- --------------------------------------------- ----------------- ------------------------------------------- -----------------
Lewis J. Alphin, Director Date A.I. Bell, Director Date
/s/ Kenneth D. Davis March 1, 2000 /s/ Keith W. Eckel March 1, 2000
- --------------------------------------------- ----------------- ------------------------------------------- -----------------
Kenneth D. Davis, Director Date Keith W. Eckel, Director Date
/s/ Willard J. Engel March 1, 2000 /s/ Fred C. Finney March 1, 2000
- --------------------------------------------- ----------------- ------------------------------------------- -----------------
Willard J. Engel, Director Date Fred C. Finney, Director Date
/s/ David O. Miller March 1, 2000 /s/ Yvonne L. Montgomery March 1, 2000
- --------------------------------------------- ----------------- ------------------------------------------- -----------------
David O. Miller, Director Date Yvonne L. Montgomery, Director Date
/s/ Ralph M. Paige March 1, 2000 /s/ James F. Patterson March 1, 2000
- --------------------------------------------- ----------------- ------------------------------------------- -----------------
Ralph M. Paige, Director Date James F. Patterson, Director Date
/s/ Arden L. Shisler March 1, 2000 /s/ Robert L. Stewart March 1, 2000
- --------------------------------------------- ----------------- ------------------------------------------- -----------------
Arden L. Shisler, Director Date Robert L. Stewart, Director Date
/s/ Nancy C. Thomas March 1, 2000 /s/ Robert A. Oakley March 1, 2000
- --------------------------------------------- ----------------- ------------------------------------------- -----------------
Nancy C. Thomas, Director Date Robert A. Oakley, Executive Vice Date
President - Chief Financial Officer
/s/ Mark R. Thresher March 1, 2000
- --------------------------------------------- -----------------
Mark R. Thresher, Senior Vice President - Date
Finance - Nationwide Financial
(Chief Accounting Officer)
24
25
EXHIBIT INDEX
Exhibit
- ----------
3.1 Amended Articles of Incorporation of Nationwide Life Insurance
Company, dated March 14, 1986 (previously filed as Exhibit 3.1 to
Form 10-K, Commission File Number 2-28596, filed March 31,1998, and
incorporated herein by reference)
3.2 Form of Amended and Restated Code of Regulations of Nationwide Life
Insurance Company (previously filed as Exhibit 3 to Form 10-K,
Commission File Number 2-28596, filed March 28, 1997, and
incorporated herein by reference)
10.1 Form of Tax Sharing Agreement among Nationwide Mutual Insurance
Company, Nationwide Corporation and any corporation that may
hereafter be a subsidiary of Nationwide Corporation (previously
filed as Exhibit 10.1 to Form 10-K, Commission File Number 2-28596,
filed March 28, 1997, and incorporated herein by reference)
10.1.1 First Amendment to the Tax Sharing Agreement among Nationwide
Mutual Insurance Company, Nationwide Corporation and any
corporation that may hereafter be a subsidiary of Nationwide
Corporation (previously filed as Exhibit 10.2.1 to Form 10-K,
Commission File Number 1-12785, filed March 31, 1998, and
incorporated herein by reference)
10.2 Form of First Amendment to Cost Sharing Agreement among parties
named therein (previously filed as Exhibit 10.2 to Form 10-K,
Commission File Number 2-28596, filed March 28, 1997, and
incorporated herein by reference)
10.3 Modified Coinsurance Agreement between Nationwide Life Insurance
Company and Nationwide Mutual Insurance Company (previously filed
as Exhibit 10.3 to Form 10-K, Commission File Number 2-28596, filed
March 28, 1997, and incorporated herein by reference)
10.4 Modified Coinsurance Agreement between Employers Life Insurance
Company of Wausau and Nationwide Life Insurance Company (previously
filed as Exhibit 10.4 to Form 10-K, Commission File Number 2-28596,
filed March 28, 1997, and incorporated herein by reference)
10.5 Credit Facility, dated August 12, 1996, among Nationwide Life
Insurance Company, Nationwide Mutual Insurance Company, the banks
named therein and Morgan Guaranty Trust Company of New York, the
administrative agent (previously filed as Exhibit 10.5 to Form
10-K, Commission File Number 2-28596, filed March 28, 1997, and
incorporated herein by reference)
10.5.1 Amendment dated as of September 8, 1997 to the Credit Agreement
dated as of August 12, 1996 among Nationwide Mutual Insurance
Company, Nationwide Life Insurance Company, the banks party thereto
and Morgan Guaranty Trust Company of New York, as administrative
agent (previously filed as Exhibit 10(a) to Form 10-Q for the
quarterly period ended September 30, 1997, Commission File Number
1-12785, filed November 13, 1997, and incorporated herein by
reference)
10.6 Form of Lease Agreement between Nationwide Life Insurance Company
and Nationwide Mutual Insurance Company (previously filed as
Exhibit 10.6 to Form 10-K, Commission File Number 2-28596, filed
March 28, 1997, and incorporated herein by reference)
10.7 General Description of Nationwide Insurance Executive Incentive
Plan (previously filed as Exhibit 10.7 to Form 10-K, Commission
File Number 2-28596, filed March 28, 1997, and incorporated herein
by reference)
10.8 General Description of Nationwide Insurance Management Incentive
Plan (previously filed as Exhibit 10.8 to Form 10-K, Commission
File Number 2-28596, filed March 28, 1997, and incorporated herein
by reference)
10.9 Nationwide Insurance Excess Benefit Plan effective as of December
31, 1996 (previously filed as Exhibit 10.9 to Form 10-K, Commission
File Number 2-28596, filed March 28, 1997, and incorporated herein
by reference)
10.10 Nationwide Insurance Supplemental Retirement Plan effective as of
December 31, 1996 (previously filed as Exhibit 10.10 to Form 10-K,
Commission File Number 2-28596, filed March 28, 1997, and
incorporated herein by reference)
25
26
10.11 Nationwide Salaried Employees Severance Pay Plan (previously filed
as Exhibit 10.11 to Form 10-K, Commission File Number 2-28596,
filed March 28, 1997, and incorporated herein by reference)
10.12 Nationwide Insurance Supplemental Defined Contribution Plan
effective as of January 1, 1996 (previously filed as Exhibit 10.12
to Form 10-K, Commission File Number 2-28596, filed March 28, 1997,
and incorporated herein by reference)
10.13 General Description of Nationwide Insurance Individual Deferred
Compensation Program previously filed as Exhibit 10.13 to Form
10-K, Commission File Number 2-28596, filed March 28, 1997, and
incorporated herein by reference)
10.14 General Description of Nationwide Mutual Insurance Company
Directors Deferred Compensation Program (previously filed as
Exhibit 10.14 to Form 10-K, Commission File Number 2-28596, filed
March 28, 1997, and incorporated herein by reference)
10.15 Deferred Compensation Agreement, dated as of September 3, 1979,
between Nationwide Mutual Insurance Company and D. Richard McFerson
(previously filed as Exhibit 10.15 to Form 10-K, Commission File
Number 2-28596, filed March 28, 1997, and incorporated herein by
reference)
10.16 Investment Agency Agreement between Nationwide Cash Management
Company and National Financial Services, Inc. and certain
subsidiaries of Nationwide Financial Services, Inc. (filed as
Exhibit 10.19 to Form 10-K, Commission File Number 1-12785, filed
March 29, 2000, and incorporated herein by reference)
10.17 Master Repurchase Agreement between Nationwide Life Insurance
Company, Nationwide Life and Annuity Insurance Company, and
Nationwide Mutual Insurance Company and certain of its subsidiaries
and affiliates (filed as Exhibit 10.20 to Form 10-K, Commission
File Number 1-12785, filed March 29, 2000, and incorporated herein
by reference)
27 Financial Data Schedule (electronic filing only)
- ------
All other exhibits referenced by Item 601 of Regulation S-K are not
required under the related instructions or are inapplicable and
therefore have been omitted.
26
27
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Nationwide Life Insurance Company:
We have audited the consolidated financial statements of Nationwide Life
Insurance Company and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nationwide Life
Insurance Company and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
KPMG LLP
Columbus, Ohio
January 28, 2000
F-1
28
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
(in millions, except per share amounts)
December 31,
-----------------------------
Assets 1999 1998
------ --------- ---------
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities $15,294.0 $14,245.1
Equity securities 92.9 127.2
Mortgage loans on real estate, net 5,786.3 5,328.4
Real estate, net 254.8 243.6
Policy loans 519.6 464.3
Other long-term investments 73.8 44.0
Short-term investments 416.0 289.1
--------- ---------
22,437.4 20,741.7
--------- ---------
Cash 4.8 3.4
Accrued investment income 238.6 218.7
Deferred policy acquisition costs 2,554.1 2,022.2
Other assets 305.9 420.3
Assets held in separate accounts 67,135.1 50,935.8
--------- ---------
$92,675.9 $74,342.1
========= =========
Liabilities and Shareholder's Equity
------------------------------------
Future policy benefits and claims $21,861.6 $19,767.1
Other liabilities 914.2 866.1
Liabilities related to separate accounts 67,135.1 50,935.8
--------- ---------
89,910.9 71,569.0
--------- ---------
Commitments and contingencies (notes 8 and 13)
Shareholder's equity:
Common stock, $1 par value. Authorized 5.0 million shares;
3.8 million shares issued and outstanding 3.8 3.8
Additional paid-in capital 766.1 914.7
Retained earnings 2,011.0 1,579.0
Accumulated other comprehensive income (15.9) 275.6
--------- ---------
2,765.0 2,773.1
--------- ---------
$92,675.9 $74,342.1
========= =========
See accompanying notes to consolidated financial statements.
F-2
29
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Income
(in millions)
Years ended December 31,
---------------------------------------------
1999 1998 1997
-------- -------- --------
Revenues:
Policy charges $ 895.5 $ 698.9 $ 545.2
Life insurance premiums 220.8 200.0 205.4
Net investment income 1,520.8 1,481.6 1,409.2
Realized (losses) gains on investments (11.6) 28.4 11.1
Other 66.1 66.8 46.5
-------- -------- --------
2,691.6 2,475.7 2,217.4
-------- -------- --------
Benefits and expenses:
Interest credited to policyholder account balances 1,096.3 1,069.0 1,016.6
Other benefits and claims 210.4 175.8 178.2
Policyholder dividends on participating policies 42.4 39.6 40.6
Amortization of deferred policy acquisition costs 272.6 214.5 167.2
Other operating expenses 463.4 419.7 384.9
-------- -------- --------
2,085.1 1,918.6 1,787.5
-------- -------- --------
Income before federal income tax expense 606.5 557.1 429.9
Federal income tax expense 201.4 190.4 150.2
-------- -------- --------
Net income $ 405.1 $ 366.7 $ 279.7
======== ======== ========
See accompanying notes to consolidated financial statements.
F-3
30
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
Years ended December 31, 1999, 1998 and 1997
(in millions)
Accumulated
Additional other Total
Common paid-in Retained comprehensive shareholder's
stock capital earnings income equity
-------- -------- ---------- -------- ----------
December 31, 1996 $ 3.8 $ 527.9 $1,432.6 $173.6 $2,137.9
Comprehensive income:
Net income -- -- 279.7 -- 279.7
Net unrealized gains on securities
available-for-sale arising during
the year -- -- -- 73.5 73.5
--------
Total comprehensive income 353.2
--------
Capital contribution -- 836.8 -- -- 836.8
--------
Dividend to shareholder -- (450.0) (400.0) -- (850.0)
------ -------- -------- ------ --------
December 31, 1997 3.8 914.7 1,312.3 247.1 2,477.9
Comprehensive income:
Net income -- -- 366.7 -- 366.7
Net unrealized gains on securities
available-for-sale arising during
the year -- -- -- 28.5 28.5
--------
Total comprehensive income 395.2
--------
Dividend to shareholder -- -- (100.0) -- (100.0)
------ -------- -------- ------ --------
December 31, 1998 3.8 914.7 1,579.0 275.6 2,773.1
Comprehensive income:
Net income -- -- 405.1 -- 405.1
Net unrealized losses on securities
available-for-sale arising during
the year -- -- -- (315.0) (315.0)
--------
Total comprehensive income 90.1
--------
Capital contribution -- 26.4 87.9 23.5 137.8
--------
Dividends to shareholder -- (175.0) (61.0) -- (236.0)
------ -------- -------- ------ --------
December 31, 1999 $ 3.8 $ 766.1 $2,011.0 $(15.9) $2,765.0
====== ======== ======== ====== ========
See accompanying notes to consolidated financial statements.
F-4
31
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(in millions)
Years ended December 31,
-------------------------------------
1999 1998 1997
--------- --------- ---------
Cash flows from operating activities:
Net income $ 405.1 $ 366.7 $ 279.7
Adjustments to reconcile net income to net cash provided by operating
activities:
Interest credited to policyholder account balances 1,096.3 1,069.0 1,016.6
Capitalization of deferred policy acquisition costs (637.0) (584.2) (487.9)
Amortization of deferred policy acquisition costs 272.6 214.5 167.2
Amortization and depreciation 2.4 (8.5) (2.0)
Realized (gains) losses on invested assets, net 11.6 (28.4) (11.1)
Increase in accrued investment income (7.9) (8.2) (0.3)
Decrease (increase) in other assets 122.9 16.4 (12.7)
Decrease in policy liabilities (20.9) (8.3) (23.1)
Increase (decrease) in other liabilities 149.7 (34.8) 230.6
Other, net (8.6) (11.3) (10.9)
--------- --------- ---------
Net cash provided by operating activities 1,386.2 982.9 1,146.1
--------- --------- ---------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale 2,307.9 1,557.0 993.4
Proceeds from sale of securities available-for-sale 513.1 610.5 574.5
Proceeds from repayments of mortgage loans on real estate 696.7 678.2 437.3
Proceeds from sale of real estate 5.7 103.8 34.8
Proceeds from repayments of policy loans and sale of other invested assets 40.9 23.6 22.7
Cost of securities available-for-sale acquired (3,724.9) (3,182.8) (2,828.1)
Cost of mortgage loans on real estate acquired (971.4) (829.1) (752.2)
Cost of real estate acquired (14.2) (0.8) (24.9)
Short-term investments, net (27.5) 69.3 (354.8)
Other, net (110.9) (88.4) (62.5)
--------- --------- ---------
Net cash used in investing activities (1,284.6) (1,058.7) (1,959.8)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from capital contributions -- -- 836.8
Cash dividends paid (188.5) (100.0) --
Increase in investment product and universal life insurance
product account balances 3,799.4 2,682.1 2,488.5
Decrease in investment product and universal life insurance
product account balances (3,711.1) (2,678.5) (2,379.8)
--------- --------- ---------
Net cash used in financing activities (100.2) (96.4) 945.5
--------- --------- ---------
Net increase (decrease) in cash 1.4 (172.2) 131.8
Cash, beginning of year 3.4 175.6 43.8
--------- --------- ---------
Cash, end of year $ 4.8 $ 3.4 $ 175.6
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
32
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(1) Organization and Description of Business
Nationwide Life Insurance Company (NLIC) is a leading provider of
long-term savings and retirement products in the United States and is a
wholly owned subsidiary of Nationwide Financial Services, Inc. (NFS).
The Company develops and sells a diverse range of products including
variable annuities, fixed annuities and life insurance as well as
investment management and administrative services. NLIC markets its
products through a broad network of distribution channels, including
independent broker/dealers, national and regional brokerage firms,
financial institutions, pension plan administrators, life insurance
specialists, Nationwide Retirement Solutions sales representatives, and
Nationwide agents.
Wholly owned subsidiaries of NLIC include Nationwide Life and Annuity
Insurance Company (NLAIC), Nationwide Advisory Services, Inc., and
Nationwide Investment Services Corporation. NLIC and its subsidiaries
are collectively referred to as "the Company."
(2) Summary of Significant Accounting Policies
The significant accounting policies followed by the Company that
materially affect financial reporting are summarized below. The
accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, which differ
from statutory accounting practices prescribed or permitted by
regulatory authorities. Annual Statements for NLIC and NLAIC, filed
with the Department of Insurance of the State of Ohio (the Department),
are prepared on the basis of accounting practices prescribed or
permitted by the Department. Prescribed statutory accounting practices
include a variety of publications of the National Association of
Insurance Commissioners (NAIC), as well as state laws, regulations and
general administrative rules. Permitted statutory accounting practices
encompass all accounting practices not so prescribed. The Company has
no material permitted statutory accounting practices.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of contingent
assets and liabilities as of the date of the consolidated financial
statements and the reported amounts of revenues and expenses for the
reporting period. Actual results could differ significantly from those
estimates.
The most significant estimates include those used in determining
deferred policy acquisition costs, valuation allowances for mortgage
loans on real estate and real estate investments and the liability for
future policy benefits and claims. Although some variability is
inherent in these estimates, management believes the amounts provided
are adequate.
(a) Consolidation Policy
The consolidated financial statements include the accounts of NLIC
and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
F-6
33
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(b) Valuation of Investments and Related Gains and Losses
The Company is required to classify its fixed maturity securities
and equity securities as either held-to-maturity,
available-for-sale or trading. Fixed maturity securities are
classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity and are
stated at amortized cost. Fixed maturity securities not classified
as held-to-maturity and all equity securities are classified as
available-for-sale and are stated at fair value, with the
unrealized gains and losses, net of adjustments to deferred policy
acquisition costs and deferred federal income tax, reported as a
separate component of accumulated other comprehensive income in
shareholder's equity. The adjustment to deferred policy
acquisition costs represents the change in amortization of
deferred policy acquisition costs that would have been required as
a charge or credit to operations had such unrealized amounts been
realized. The Company has no fixed maturity securities classified
as held-to-maturity or trading as of December 31, 1999 or 1998.
Mortgage loans on real estate are carried at the unpaid principal
balance less valuation allowances. The Company provides valuation
allowances for impairments of mortgage loans on real estate based
on a review by portfolio managers. The measurement of impaired
loans is based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a
practical expedient, at the fair value of the collateral, if the
loan is collateral dependent. Loans in foreclosure and loans
considered to be impaired are placed on non-accrual status.
Interest received on non-accrual status mortgage loans on real
estate is included in interest income in the period received.
Real estate is carried at cost less accumulated depreciation and
valuation allowances. Other long-term investments are carried on
the equity basis, adjusted for valuation allowances. Impairment
losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the
assets' carrying amount.
Realized gains and losses on the sale of investments are
determined on the basis of specific security identification.
Estimates for valuation allowances and other than temporary
declines are included in realized gains and losses on investments.
(c) Revenues and Benefits
Investment Products and Universal Life Insurance Products:
Investment products consist primarily of individual and group
variable and fixed deferred annuities. Universal life insurance
products include universal life insurance, variable universal life
insurance, corporate owned life insurance and other
interest-sensitive life insurance policies. Revenues for
investment products and universal life insurance products consist
of net investment income, asset fees, cost of insurance, policy
administration and surrender charges that have been earned and
assessed against policy account balances during the period. Policy
benefits and claims that are charged to expense include interest
credited to policy account balances and benefits and claims
incurred in the period in excess of related policy account
balances.
Traditional Life Insurance Products: Traditional life insurance
products include those products with fixed and guaranteed premiums
and benefits and consist primarily of whole life insurance,
limited-payment life insurance, term life insurance and certain
annuities with life contingencies. Premiums for traditional life
insurance products are recognized as revenue when due. Benefits
and expenses are associated with earned premiums so as to result
in recognition of profits over the life of the contract. This
association is accomplished by the provision for future policy
benefits and the deferral and amortization of policy acquisition
costs.
F-7
34
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(d) Deferred Policy Acquisition Costs
The costs of acquiring new business, principally commissions,
certain expenses of the policy issue and underwriting department
and certain variable sales expenses have been deferred. For
investment products and universal life insurance products,
deferred policy acquisition costs are being amortized with
interest over the lives of the policies in relation to the present
value of estimated future gross profits from projected interest
margins, asset fees, cost of insurance, policy administration and
surrender charges. For years in which gross profits are negative,
deferred policy acquisition costs are amortized based on the
present value of gross revenues. Deferred policy acquisition costs
are adjusted to reflect the impact of unrealized gains and losses
on fixed maturity securities available-for-sale as described in
note 2(b). For traditional life insurance products, these deferred
policy acquisition costs are predominantly being amortized with
interest over the premium paying period of the related policies in
proportion to the ratio of actual annual premium revenue to the
anticipated total premium revenue. Such anticipated premium
revenue was estimated using the same assumptions as were used for
computing liabilities for future policy benefits.
(e) Separate Accounts
Separate account assets and liabilities represent contractholders'
funds which have been segregated into accounts with specific
investment objectives. For all but $915.4 million of separate
account assets, the investment income and gains or losses of these
accounts accrue directly to the contractholders. The activity of
the separate accounts is not reflected in the consolidated
statements of income and cash flows except for the fees the
Company receives.
(f) Future Policy Benefits
Future policy benefits for investment products in the accumulation
phase, universal life insurance and variable universal life
insurance policies have been calculated based on participants'
contributions plus interest credited less applicable contract
charges. The average interest rate credited on investment product
policy reserves was 5.6%, 6.0% and 6.1% for the years ended
December 31, 1999, 1998 and 1997, respectively.
Future policy benefits for traditional life insurance policies
have been calculated by the net level premium method using
interest rates varying from 6.0% to 10.5% and estimates of
mortality, morbidity, investment yields and withdrawals which were
used or which were being experienced at the time the policies were
issued, rather than the assumptions prescribed by state regulatory
authorities.
F-8
35
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(g) Participating Business
Participating business represents approximately 29% in 1999 (40%
in 1998 and 50% in 1997) of the Company's life insurance in force,
69% in 1999 (74% in 1998 and 77% in 1997) of the number of life
insurance policies in force, and 13% in 1999 (14% in 1998 and 27%
in 1997) of life insurance statutory premiums. The provision for
policyholder dividends is based on current dividend scales and is
included in "Future policy benefits and claims" in the
accompanying consolidated balance sheets.
(h) Federal Income Tax
The Company files a consolidated federal income tax return with
Nationwide Mutual Insurance Company (NMIC), the majority
shareholder of Nationwide Corp. The members of the consolidated
tax return group have a tax sharing arrangement which provides, in
effect, for each member to bear essentially the same federal
income tax liability as if separate tax returns were filed.
The Company utilizes the asset and liability method of accounting
for income tax. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. Under this method, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce the
deferred tax assets to the amounts expected to be realized.
(i) Reinsurance Ceded
Reinsurance premiums ceded and reinsurance recoveries on benefits
and claims incurred are deducted from the respective income and
expense accounts. Assets and liabilities related to reinsurance
ceded are reported on a gross basis.
(j) Recently Issued Accounting Pronouncements
In March 1998, The American Institute of Certified Public
Accountant's Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The
SOP, which has been adopted prospectively as of January 1, 1999,
requires the capitalization of certain costs incurred in
connection with developing or obtaining internal use software.
Prior to the adoption of SOP 98-1, the Company expensed internal
use software related costs as incurred. The effect of adopting the
SOP was to increase net income for 1999 by $8.3 million.
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). FAS 133 establishes accounting
and reporting standards for derivative instruments and for hedging
activities. Contracts that contain embedded derivatives, such as
certain investment and insurance contracts, are also addressed by
the Statement. FAS 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. In
July 1999 the FASB issued Statement No. 137 which delayed the
effective date of FAS 133 to fiscal years beginning after June 15,
2000. The Company plans to adopt this Statement in first quarter
2001 and is currently evaluating the impact on results of
operations and financial condition.
(k) Reclassification
Certain items in the 1998 and 1997 consolidated financial
statements have been reclassified to conform to the 1999
presentation.
F-9
36
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(3) Investments
The amortized cost, gross unrealized gains and losses and estimated
fair value of securities available-for-sale as of December 31, 1999 and
1998 were:
Gross Gross
Amortized unrealized unrealized Estimated
(in millions) cost gains losses fair value
--------- ------ ------- ---------
December 31, 1999:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 428.4 $ 23.4 $ (2.4) $ 449.4
Obligations of states and political subdivisions 0.8 -- -- 0.8
Debt securities issued by foreign governments 110.6 0.6 (0.8) 110.4
Corporate securities 11,414.7 118.9 (218.6) 11,315.0
Mortgage-backed securities 3,422.8 25.8 (30.2) 3,418.4
--------- ------ ------- ---------
Total fixed maturity securities 15,377.3 168.7 (252.0) 15,294.0
Equity securities 84.9 12.4 (4.4) 92.9
--------- ------ ------- ---------
$15,462.2 $181.1 $(256.4) $15,386.9
========= ====== ======= =========
December 31, 1998:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 255.9 $ 13.0 $ -- $ 268.9
Obligations of states and political subdivisions 1.6 -- -- 1.6
Debt securities issued by foreign governments 106.5 4.5 -- 111.0
Corporate securities 9,899.6 423.2 (18.7) 10,304.1
Mortgage-backed securities 3,457.7 104.2 (2.4) 3,559.5
--------- ------ ------- ---------
Total fixed maturity securities 13,721.3 544.9 (21.1) 14,245.1
Equity securities 110.4 18.3 (1.5) 127.2
--------- ------ ------- ---------
$13,831.7 $563.2 $ (22.6) $14,372.3
========= ====== ======= =========
The amortized cost and estimated fair value of fixed maturity
securities available-for-sale as of December 31, 1999, by expected
maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Amortized Estimated
(in millions) cost fair value
--------- ---------
Fixed maturity securities available for sale:
Due in one year or less $ 847.0 $ 847.0
Due after one year through five years 5,240.5 5,205.7
Due after five years through ten years 5,046.9 5,005.2
Due after ten years 4,242.9 4,236.1
--------- ---------
$15,377.3 $15,294.0
========= =========
F-10
37
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The components of unrealized (losses) gains on securities
available-for-sale, net, were as follows as of December 31:
(in millions) 1999 1998
------ -------
Gross unrealized (losses) gains $(75.3) $ 540.6
Adjustment to deferred policy acquisition costs 50.9 (116.6)
Deferred federal income tax 8.5 (148.4)
------ -------
$(15.9) $ 275.6
====== =======
An analysis of the change in gross unrealized (losses) gains on
securities available-for-sale for the years ended December 31:
(in millions) 1999 1998 1997
------- ----- ------
Securities available-for-sale:
Fixed maturity securities $(607.1) $52.6 $137.5
Equity securities (8.8) 4.2 (2.7)
------- ----- ------
$(615.9) $56.8 $134.8
======= ===== ======
Proceeds from the sale of securities available-for-sale during 1999,
1998 and 1997 were $513.1 million, $610.5 million and $574.5 million,
respectively. During 1999, gross gains of $10.4 million ($9.0 million
and $9.9 million in 1998 and 1997, respectively) and gross losses of
$28.0 million ($7.6 million and $18.0 million in 1998 and 1997,
respectively) were realized on those sales. In addition, gross gains of
$15.1 million and gross losses of $0.7 million were realized in 1997
when the Company paid a dividend to NFS, which then made an equivalent
dividend to Nationwide Corp., consisting of securities having an
aggregate fair value of $850.0 million.
The Company had $15.6 million of real estate investments at December
31, 1999 that were non-income producing the preceding twelve months.
During 1998 the Company had investments of $42.4 million that were
non-income producing, which consisted of $32.7 million of securities
available-for-sale and $9.7 million of real estate.
Real estate is presented at cost less accumulated depreciation of $24.8
million as of December 31, 1999 ($21.5 million as of December 31, 1998)
and valuation allowances of $5.5 million as of December 31, 1999 ($5.4
million as of December 31, 1998).
The recorded investment of mortgage loans on real estate considered to
be impaired was $3.7 million as of both December 31, 1999 and 1998. No
valuation allowance has been recorded for these loans as of December
31, 1999 or 1998. During 1999, the average recorded investment in
impaired mortgage loans on real estate was approximately $3.7 million
($9.1 million in 1998) and there was no interest income recognized on
those loans. Interest income recognized on impaired loans was $0.3
million in 1998 which is equal to interest income recognized using a
cash-basis method of income recognition.
F-11
38
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Activity in the valuation allowance account for mortgage loans on real
estate is summarized for the years ended December 31:
(in millions) 1999 1998 1997
----- ----- -----
Allowance, beginning of year $42.4 $42.5 $51.0
Additions (reductions) charged to operations 0.7 (0.1) (1.2)
Direct write-downs charged against the allowance -- -- (7.3)
Allowance on acquired mortgage loans 1.3 -- --
----- ----- -----
Allowance, end of year $44.4 $42.4 $42.5
===== ===== =====
An analysis of investment income by investment type follows for the
years ended December 31:
(in millions) 1999 1998 1997
-------- -------- --------
Gross investment income:
Securities available-for-sale:
Fixed maturity securities $1,031.3 $ 982.5 $ 911.6
Equity securities 2.5 0.8 0.8
Mortgage loans on real estate 460.4 458.9 457.7
Real estate 28.8 40.4 42.9
Short-term investments 18.6 17.8 22.7
Other 26.5 30.7 21.0
-------- -------- --------
Total investment income 1,568.1 1,531.1 1,456.7
Less investment expenses 47.3 49.5 47.5
-------- -------- --------
Net investment income $1,520.8 $1,481.6 $1,409.2
======== ======== ========
An analysis of realized gains (losses) on investments, net of valuation
allowances, by investment type follows for the years ended December 31:
(in millions) 1999 1998 1997
------- ----- -----
Securities available-for-sale:
Fixed maturity securities $(25.0) $(0.7) $ 3.6
Equity securities 7.4 2.1 2.7
Mortgage loans on real estate (0.6) 3.9 1.6
Real estate and other 6.6 23.1 3.2
------ ----- -----
$(11.6) $28.4 $11.1
====== ===== =====
Fixed maturity securities with an amortized cost of $9.1 million as of
December 31, 1999 and $6.5 million as of December 31, 1998 were on
deposit with various regulatory agencies as required by law.
(4) Derivative Financial Instruments
The Company uses derivative financial instruments, principally interest
rate swaps, interest rate futures contracts and foreign currency swaps,
to manage market risk exposures associated with changes in interest
rates and foreign currency exchange rates. Provided they meet specific
criteria, interest rate swaps and futures are considered hedges and are
accounted for under the accrual method and deferral method,
respectively. The Company has no significant derivative positions that
are not considered hedges.
F-12
39
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Interest rate swaps are primarily used to convert specific investment
securities and interest bearing policy liabilities from a fixed-rate to
a floating-rate basis. Amounts receivable or payable under these
agreements are recognized as an adjustment to net investment income or
interest credited to policyholder account balances consistent with the
nature of the hedged item. The changes in fair value of the interest
rate swap agreements are not recognized on the balance sheet, except
for interest rate swaps designated as hedges of fixed maturity
securities available-for-sale, for which changes in fair values are
reported in accumulated other comprehensive income.
Interest rate futures contracts are primarily used to hedge the risk of
adverse interest rate changes related to the Company's mortgage loan
commitments and anticipated purchases of fixed rate investments. Gains
and losses are deferred and, at the time of closing, reflected as an
adjustment to the carrying value of the related mortgage loans or
investments. The carrying value adjustments are amortized into net
investment income over the life of the related mortgage loans or
investments.
Foreign currency swaps are used to convert cash flows from specific
policy liabilities and investments denominated in foreign currencies
into U.S. dollars at specified exchange rates. Gains and losses on
foreign currency swaps are recorded in earnings based on the related
spot foreign exchange rate at the end of the reporting period. Gains
and losses on these contracts offset those recorded as a result of
translating the hedged foreign currency denominated liabilities and
investments to U.S. dollars.
The following table summarizes the notional amount of derivative
financial instruments classified as hedges outstanding as of December
31, 1999. Prior to 1999 the Company's activities in derivatives were
not significant.
(in millions)
-------------
Interest rate swaps
Pay fixed/receive variable rate swaps hedging investments $362.7
Pay variable/receive fixed rate swaps hedging investments $ 28.5
Other contracts hedging investments $ 19.1
Pay variable/receive fixed rate swaps hedging liabilities $577.2
Foreign currency swaps
Hedging foreign currency denominated investments $ 14.8
Hedging foreign currency denominated liabilities $577.2
Interest rate futures contracts $781.6
F-13
40
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(5) Federal Income Tax
The tax effects of temporary differences that give rise to significant
components of the net deferred tax liability as of December 31, 1999
and 1998 are as follows:
(in millions) 1999 1998
---- ----
Deferred tax assets:
Fixed maturity securities $ 5.3 $ --
Future policy benefits 149.5 207.7
Liabilities in separate accounts 373.6 319.9
Mortgage loans on real estate and real estate 18.5 17.5
Other assets and other liabilities 51.1 58.9
----- ------
Total gross deferred tax assets 598.0 604.0
Less valuation allowance (7.0) (7.0)
----- ------
Net deferred tax assets 591.0 597.0
----- ------
Deferred tax liabilities:
Deferred policy acquisition costs 724.4 568.7
Fixed maturity securities -- 212.2
Deferred tax on realized investment gains 34.7 34.8
Equity securities and other long-term investments 10.8 9.6
Other 26.5 21.6
------ ------
Total gross deferred tax liabilities 796.4 846.9
------ ------
Net deferred tax liability $205.4 $249.9
====== ======
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion of the
total gross deferred tax assets will not be realized. Nearly all future
deductible amounts can be offset by future taxable amounts or recovery
of federal income tax paid within the statutory carryback period. There
has been no change in the valuation allowance for the years ended
December 31, 1999, 1998 and 1997.
The Company's current federal income tax liability was $104.7 million
and $72.8 million as of December 31, 1999 and 1998, respectively.
Federal income tax expense for the years ended December 31 was as
follows:
(in millions) 1999 1998 1997
------ ------ ------
Currently payable $ 53.6 $186.1 $121.7
Deferred tax expense 147.8 4.3 28.5
------ ------ ------
$201.4 $190.4 $150.2
====== ====== ======
F-14
41
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Total federal income tax expense for the years ended December 31, 1999,
1998 and 1997 differs from the amount computed by applying the U.S.
federal income tax rate to income before tax as follows:
1999 1998 1997
---------------- ---------------- ----------------
(in millions) Amount % Amount % Amount %
------ ---- ------ ---- ------ ----
Computed (expected) tax expense $212.3 35.0 $195.0 35.0 $150.5 35.0
Tax exempt interest and dividends
received deduction (7.3) (1.2) (4.9) (0.9) -- --
Income tax credits (4.3) (0.7) -- -- -- --
Other, net 0.7 0.1 0.3 0.1 (0.3) (0.1)
------ ---- ------ ---- ------ ----
Total (effective rate of each year) $201.4 33.2 $190.4 34.2 $150.2 34.9
====== ==== ====== ==== ====== ====
Total federal income tax paid was $29.8 million, $173.4 million and
$91.8 million during the years ended December 31, 1999, 1998 and 1997,
respectively.
(6) Comprehensive Income
Comprehensive Income includes net income as well as certain items that
are reported directly within separate components of shareholder's
equity that bypass net income. Currently, the Company's only component
of Other Comprehensive Income is unrealized gains (losses) on
securities available-for-sale. The related before and after federal tax
amounts are as follows:
(in millions) 1999 1998 1997
------- ------ ------
Unrealized gains (losses) on securities available-for-sale
arising during the period:
Gross $(665.3) $ 58.2 $141.1
Adjustment to deferred policy acquisition costs 167.5 (12.9) (21.8)
Related federal income tax (expense) benefit 171.4 (15.9) (41.7)
------- ------ ------
Net (326.4) 29.4 77.6
------- ------ ------
Reclassification adjustment for net (gains) losses on
securities available-for-sale realized during the
period:
Gross 17.6 (1.4) (6.3)
Related federal income tax expense (benefit) (6.2) 0.5 2.2
------- ------ ------
Net 11.4 (0.9) (4.1)
------- ------ ------
Total Other Comprehensive Income $(315.0) $ 28.5 $ 73.5
======= ====== ======
(7) Fair Value of Financial Instruments
The following disclosures summarize the carrying amount and estimated
fair value of the Company's financial instruments. Certain assets and
liabilities are specifically excluded from the disclosure requirements
of financial instruments. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
F-15
42
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The fair value of a financial instrument is defined as the amount at
which the financial instrument could be exchanged in a current
transaction between willing parties. In cases where quoted market
prices are not available, fair value is to be based on estimates using
present value or other valuation techniques. Many of the Company's
assets and liabilities subject to the disclosure requirements are not
actively traded, requiring fair values to be estimated by management
using present value or other valuation techniques. These techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. Although fair value estimates
are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in the immediate settlement of the instruments.
Although insurance contracts, other than policies such as annuities
that are classified as investment contracts, are specifically exempted
from the disclosure requirements, estimated fair value of policy
reserves on life insurance contracts is provided to make the fair value
disclosures more meaningful.
The tax ramifications of the related unrealized gains and losses can
have a significant effect on fair value estimates and have not been
considered in the estimates.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures:
Fixed maturity and equity securities: The fair value for fixed
maturity securities is based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair
value is estimated using values obtained from independent pricing
services or, in the case of private placements, is estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the
investments. The fair value for equity securities is based on
quoted market prices. The carrying amount and fair value for fixed
maturity and equity securities exclude the fair value of
derivatives contracts designated as hedges of fixed maturity and
equity securities.
Mortgage loans on real estate, net: The fair value for mortgage
loans on real estate is estimated using discounted cash flow
analyses, using interest rates currently being offered for similar
loans to borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Fair value for mortgage loans in default is the estimated fair
value of the underlying collateral.
Policy loans, short-term investments and cash: The carrying amount
reported in the consolidated balance sheets for these instruments
approximates their fair value.
Separate account assets and liabilities: The fair value of assets
held in separate accounts is based on quoted market prices. The
fair value of liabilities related to separate accounts is the
amount payable on demand, which is net of certain surrender
charges.
Investment contracts: The fair value for the Company's liabilities
under investment type contracts is disclosed using two methods.
For investment contracts without defined maturities, fair value is
the amount payable on demand. For investment contracts with known
or determined maturities, fair value is estimated using discounted
cash flow analysis. Interest rates used are similar to currently
offered contracts with maturities consistent with those remaining
for the contracts being valued.
F-16
43
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Policy reserves on life insurance contracts: Included are
disclosures for individual life insurance, universal life
insurance and supplementary contracts with life contingencies for
which the estimated fair value is the amount payable on demand.
Also included are disclosures for the Company's limited payment
policies, which the Company has used discounted cash flow analyses
similar to those used for investment contracts with known
maturities to estimate fair value.
Commitments to extend credit: Commitments to extend credit have
nominal fair value because of the short-term nature of such
commitments. See note 8.
Futures contracts: The fair value for futures contracts is based
on quoted market prices.
Interest rate and foreign currency swaps: The fair value for
interest rate and foreign currency swaps are calculated with
pricing models using current rate assumptions.
Carrying amount and estimated fair value of financial instruments
subject to disclosure requirements and policy reserves on life
insurance contracts were as follows as of December 31:
1999 1998
------------------------ -------------------------
Carrying Estimated Carrying Estimated
(in millions) amount fair value amount fair value
--------- --------- --------- ----------
Assets:
Investments:
Securities available-for-sale:
Fixed maturity securities $15,294.0 $15,294.0 $14,245.1 $14,245.1
Equity securities 92.9 92.9 128.5 128.5
Mortgage loans on real estate, net 5,786.3 5,745.5 5,328.4 5,527.6
Policy loans 519.6 519.6 464.3 464.3
Short-term investments 416.0 416.0 289.1 289.1
Cash 4.8 4.8 3.4 3.4
Assets held in separate accounts 67,135.1 67,135.1 50,935.8 50,935.8
Liabilities:
Investment contracts (16,977.7) (16,428.6) (15,468.7) (15,158.6)
Policy reserves on life insurance contracts (4,883.9) (4,607.9) (3,914.0) (3,768.9)
Liabilities related to separate accounts (67,135.1) (66,318.7) (50,935.8) (49,926.5)
Derivative financial instruments:
Interest rate swaps hedging assets 4.3 4.3 - -
Interest rate swaps hedging liabilities - (24.2) - -
Foreign currency swaps (11.8) (11.8) - -
Futures contracts 1.3 1.3 (1.3) (1.3)
(8) Risk Disclosures
The following is a description of the most significant risks facing
life insurers and how the Company mitigates those risks:
Credit Risk: The risk that issuers of securities owned by the Company
or mortgagors on mortgage loans on real estate owned by the Company
will default or that other parties, including reinsurers, which owe the
Company money, will not pay. The Company minimizes this risk by
adhering to a conservative investment strategy, by maintaining
reinsurance and credit and collection policies and by providing for any
amounts deemed uncollectible.
F-17
44
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Interest Rate Risk: The risk that interest rates will change and cause
a decrease in the value of an insurer's investments. This change in
rates may cause certain interest-sensitive products to become
uncompetitive or may cause disintermediation. The Company mitigates
this risk by charging fees for non-conformance with certain policy
provisions, by offering products that transfer this risk to the
purchaser, and/or by attempting to match the maturity schedule of its
assets with the expected payouts of its liabilities. To the extent that
liabilities come due more quickly than assets mature, an insurer would
have to borrow funds or sell assets prior to maturity and potentially
recognize a gain or loss.
Legal/Regulatory Risk: The risk that changes in the legal or regulatory
environment in which an insurer operates will result in increased
competition, reduced demand for a company's products, or create
additional expenses not anticipated by the insurer in pricing its
products. The Company mitigates this risk by offering a wide range of
products and by operating throughout the United States, thus reducing
its exposure to any single product or jurisdiction, and also by
employing underwriting practices which identify and minimize the
adverse impact of this risk.
Financial Instruments with Off-Balance-Sheet Risk: The Company is a
party to financial instruments with off-balance-sheet risk in the
normal course of business through management of its investment
portfolio. These financial instruments include commitments to extend
credit in the form of loans and derivative financial instruments. These
instruments involve, to varying degrees, elements of credit risk in
excess of amounts recognized on the consolidated balance sheets.
Commitments to fund fixed rate mortgage loans on real estate are
agreements to lend to a borrower, and are subject to conditions
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment
of a deposit. Commitments extended by the Company are based on
management's case-by-case credit evaluation of the borrower and the
borrower's loan collateral. The underlying mortgage property represents
the collateral if the commitment is funded. The Company's policy for
new mortgage loans on real estate is to lend no more than 75% of
collateral value. Should the commitment be funded, the Company's
exposure to credit loss in the event of nonperformance by the borrower
is represented by the contractual amounts of these commitments less the
net realizable value of the collateral. The contractual amounts also
represent the cash requirements for all unfunded commitments.
Commitments on mortgage loans on real estate of $216.2 million
extending into 2000 were outstanding as of December 31, 1999. The
Company also had $28.0 million of commitments to purchase fixed
maturity securities outstanding as of December 31, 1999.
Notional amounts of derivative financial instruments, primarily
interest rate swaps, interest rate futures contracts and foreign
currency swaps, significantly exceed the credit risk associated with
these instruments and represent contractual balances on which
calculations of amounts to be exchanged are based. Credit exposure is
limited to the sum of the aggregate fair value of positions that have
become favorable to NLIC, including accrued interest receivable due
from counterparties. Potential credit losses are minimized through
careful evaluation of counterparty credit standing, selection of
counterparties from a limited group of high quality institutions,
collateral agreements and other contract provisions. At December 31,
1999, NLIC's credit risk from these derivative financial instruments
was $6.1 million.
Significant Concentrations of Credit Risk: The Company grants mainly
commercial mortgage loans on real estate to customers throughout the
United States. The Company has a diversified portfolio with no more
than 23% (22% in 1998) in any geographic area and no more than 2% (2%
in 1998) with any one borrower as of December 31, 1999. As of December
31, 1999, 39% (42% in 1998) of the remaining principal balance of the
Company's commercial mortgage loan portfolio financed retail
properties.
F-18
45
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Reinsurance: The Company has entered into a reinsurance contract to
cede a portion of its general account individual annuity business to
The Franklin Life Insurance Company (Franklin). Total recoveries due
from Franklin were $143.6 million and $187.9 million as of December 31,
1999 and 1998, respectively. The contract is immaterial to the
Company's results of operations. The ceding of risk does not discharge
the original insurer from its primary obligation to the policyholder.
Under the terms of the contract, Franklin has established a trust as
collateral for the recoveries. The trust assets are invested in
investment grade securities, the market value of which must at all
times be greater than or equal to 102% of the reinsured reserves.
(9) Pension Plan and Postretirement Benefits Other Than Pensions
The Company is a participant, together with other affiliated companies,
in a pension plan covering all employees who have completed at least
one year of service. The Company funds pension costs accrued for direct
employees plus an allocation of pension costs accrued for employees of
affiliates whose work efforts benefit the Company. Assets of the
Retirement Plan are invested in group annuity contracts of NLIC.
Pension cost (benefit) charged to operations by the Company during the
years ended December 31, 1999, 1998 and 1997 were $(8.3) million, $2.0
million and $7.5 million, respectively. The Company has recorded a
prepaid pension asset of $13.3 million and $5.0 million as of December
31, 1999 and 1998, respectively.
In addition to the defined benefit pension plan, the Company, together
with other affiliated companies, participates in life and health care
defined benefit plans for qualifying retirees. Postretirement life and
health care benefits are contributory and generally available to full
time employees who have attained age 55 and have accumulated 15 years
of service with the Company after reaching age 40. Postretirement
health care benefit contributions are adjusted annually and contain
cost-sharing features such as deductibles and coinsurance. In addition,
there are caps on the Company's portion of the per-participant cost of
the postretirement health care benefits. These caps can increase
annually, but not more than three percent. The Company's policy is to
fund the cost of health care benefits in amounts determined at the
discretion of management. Plan assets are invested primarily in group
annuity contracts of NLIC.
The Company elected to immediately recognize its estimated accumulated
postretirement benefit obligation (APBO), however, certain affiliated
companies elected to amortize their initial transition obligation over
periods ranging from 10 to 20 years.
The Company's accrued postretirement benefit expense as of December 31,
1999 and 1998 was $49.6 million and $40.1 million, respectively, and
the net periodic postretirement benefit cost (NPPBC) for 1999, 1998 and
1997 was $4.9 million, $4.1 million and $3.0 million, respectively.
F-19
46
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Information regarding the funded status of the pension plan as a whole
and the postretirement life and health care benefit plan as a whole as
of December 31, 1999 and 1998 follows:
Pension Benefits Postretirement Benefits
------------------ -----------------------
(in millions) 1999 1998 1999 1998
--------------------------------------------------------- -------- -------- ------- -------
Change in benefit obligation:
Benefit obligation at beginning of year $2,185.0 $2,033.8 $ 270.1 $ 237.9
Service cost 80.0 87.6 14.2 9.8
Interest cost 109.9 123.4 17.6 15.4
Actuarial (gain) loss (95.0) 123.2 (64.4) 15.6
Plan settlement in 1999/curtailment in 1998 (396.1) (107.2) -- --
Benefits paid (72.4) (75.8) (11.0) (8.6)
Acquired companies -- -- 13.3 --
-------- -------- ------- -------
Benefit obligation at end of year 1,811.4 2,185.0 239.8 270.1
-------- -------- ------- -------
Change in plan assets:
Fair value of plan assets at beginning of year 2,541.9 2,212.9 77.9 69.2
Actual return on plan assets 161.8 300.7 3.5 5.0
Employer contribution 12.4 104.1 20.9 12.1
Plan settlement (396.1) -- -- --
Benefits paid (72.4) (75.8) (11.0) (8.4)
-------- -------- ------- -------
Fair value of plan assets at end of year 2,247.6 2,541.9 91.3 77.9
-------- -------- ------- -------
Funded status 436.2 356.9 (148.5) (192.2)
Unrecognized prior service cost 28.2 31.5 -- --
Unrecognized net (gains) losses (402.0) (345.7) (46.7) 16.0
Unrecognized net (asset) obligation at transition (7.7) (11.0) 1.1 1.3
-------- -------- ------- -------
Prepaid (accrued) benefit cost $ 54.7 $ 31.7 $(194.1) $(174.9)
======== ======== ======= =======
F-20
47
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Basis for measurements, funded status of the pension plan and
postretirement life and health care benefit plan:
Pension Benefits Postretirement Benefits
---------------- -----------------------
1999 1998 1999 1998
---- ---- ------- ------
Weighted average discount rate 7.00% 5.50% 7.80% 6.65%
Rate of increase in future compensation levels 5.25% 3.75% -- --
Assumed health care cost trend rate:
Initial rate -- -- 15.00% 15.00%
Ultimate rate -- -- 5.50% 8.00%
Uniform declining period -- -- 5 Years 15 Years
The net periodic pension cost for the pension plan as a whole for the
years ended December 31, 1999, 1998 and 1997 follows:
(in millions) 1999 1998 1997
-------------------------------------------------------------------------------- ----------- ------------
Service cost (benefits earned during the period) $ 80.0 $ 87.6 $ 77.3
Interest cost on projected benefit obligation 109.9 123.4 118.6
Expected return on plan assets (160.3) (159.0) (139.0)
Recognized gains (9.1) (3.8) --
Amortization of prior service cost 3.2 3.2 3.2
Amortization of unrecognized transition obligation (asset) (1.4) 4.2 4.2
------- ------- --------
$ 22.3 $ 55.6 $ 64.3
======= ======= ========
Effective December 31, 1998, Wausau Service Corporation (WSC) ended its
affiliation with Nationwide Insurance and employees of WSC ended
participation in the plan. A curtailment gain of $67.1 million resulted
(consisting of a $107.2 million reduction in the projected benefit
obligation, net of the write-off of the $40.1 million remaining
unamortized transition obligation related to WSC). During 1999, the
plan transferred assets to settle its obligation related to WSC
employees . A settlement gain of $32.9 million was recognized.
Basis for measurements, net periodic pension cost for the pension plan:
1999 1998 1997
------ ----- -----
Weighted average discount rate 6.08% 6.00% 6.50%
Rate of increase in future compensation levels 4.33% 4.25% 4.75%
Expected long-term rate of return on plan assets 7.33% 7.25% 7.25%
F-21
48
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The amount of NPPBC for the postretirement benefit plan as a whole for
the years ended December 31, 1999, 1998 and 1997 was as follows:
(in millions) 1999 1998 1997
------- ----------- -----------
Service cost (benefits attributed to employee service during the year) $14.2 $ 9.8 $ 7.0
Interest cost on accumulated postretirement benefit obligation 17.6 15.4 14.0
Actual return on plan assets (3.5) (5.0) (3.6)
Amortization of unrecognized transition obligation of affiliates 0.6 0.2 0.2
Net amortization and deferral (1.8) 1.2 (0.5)
----- ----- -----
$27.1 $21.6 $17.1
===== ===== =====
Actuarial assumptions used for the measurement of the NPPBC for the
postretirement benefit plan for 1999, 1998 and 1997 were as follows:
1999 1998 1997
------- ------ ------
Discount rate 6.65% 6.70% 7.25%
Long term rate of return on plan
assets, net of tax 7.15% 5.83% 5.89%
Assumed health care cost trend rate:
Initial rate 15.00% 12.00% 11.00%
Ultimate rate 5.50% 6.00% 6.00%
Uniform declining period 5 Years 12 Years 12 Years
For the postretirement benefit plan as a whole, a one percentage point
increase or decrease in the assumed health care cost trend rate would
have no impact on the APBO as of December 31, 1999 and have no impact
on the NPPBC for the year ended December 31, 1999.
(10) Shareholder's Equity, Regulatory Risk-Based Capital, Retained Earnings
and Dividend Restrictions
Ohio, NLIC's and NLAIC's state of domicile, imposes minimum risk-based
capital requirements that were developed by the NAIC. The formulas for
determining the amount of risk-based capital specify various weighting
factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk. Regulatory compliance
is determined by a ratio of the company's regulatory total adjusted
capital, as defined by the NAIC, to its authorized control level
risk-based capital, as defined by the NAIC. Companies below specific
trigger points or ratios are classified within certain levels, each of
which requires specified corrective action. NLIC and NLAIC each exceed
the minimum risk-based capital requirements.
The statutory capital and surplus of NLIC as of December 31, 1999, 1998
and 1997 was $1.35 billion, $1.32 billion and $1.13 billion,
respectively. The statutory net income of NLIC for the years ended
December 31, 1999, 1998 and 1997 was $276.2 million, $171.0 million and
$111.7 million, respectively.
The Company is limited in the amount of shareholder dividends it may
pay without prior approval by the Department. As of December 31, 1999
$40.2 million of dividends could be paid by NLIC without prior
approval.
F-22
49
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
In addition, the payment of dividends by NLIC may also be subject to
restrictions set forth in the insurance laws of New York that limit the
amount of statutory profits on NLIC's participating policies (measured
before dividends to policyholders) that can inure to the benefit of the
Company and its shareholder.
The Company currently does not expect such regulatory requirements to
impair its ability to pay operating expenses and shareholder dividends
in the future.
(11) Transactions With Affiliates
During second quarter 1999 the Company entered into a modified
coinsurance arrangement to reinsure the 1999 operating results of an
affiliated company, Employers Life Insurance Company of Wausau (ELOW)
retroactive to January 1, 1999. In September 1999, NFS acquired ELOW
for $120.8 million and immediately merged ELOW into NLIC terminating
the modified coinsurance arrangement. Because ELOW was an affiliate,
the Company accounted for the merger similar to poolings-of-interests;
however, prior period financial statements were not restated due to
immateriality. The reinsurance and merger combined contributed $1.46
million to year to date net income.
The Company has a reinsurance agreement with NMIC whereby all of the
Company's accident and health business is ceded to NMIC on a modified
coinsurance basis. The agreement covers individual accident and health
business for all periods presented and group and franchise accident and
health business since July 1, 1999. Either party may terminate the
agreement on January 1 of any year with prior notice. Prior to July 1,
1999 group and franchise accident and health business and a block of
group life insurance policies were ceded to ELOW under a modified
coinsurance agreement. Under a modified coinsurance agreement, invested
assets are retained by the ceding company and investment earnings are
paid to the reinsurer. Under the terms of the Company's agreements, the
investment risk associated with changes in interest rates is borne by
the reinsurer. Risk of asset default is retained by the Company,
although a fee is paid to the Company for the retention of such risk.
The ceding of risk does not discharge the original insurer from its
primary obligation to the policyholder. The Company believes that the
terms of the modified coinsurance agreements are consistent in all
material respects with what the Company could have obtained with
unaffiliated parties. Revenues ceded to NMIC and ELOW for the years
ended December 31, 1999, 1998 and 1997 were $193.0 million, $216.9
million, and $315.3 million, respectively, while benefits, claims and
expenses ceded were $216.9 million, $259.3 million, and $326.6 million,
respectively.
Pursuant to a cost sharing agreement among NMIC and certain of its
direct and indirect subsidiaries, including the Company, NMIC provides
certain operational and administrative services, such as sales support,
advertising, personnel and general management services, to those
subsidiaries. Expenses covered by such agreement are subject to
allocation among NMIC and such subsidiaries. Measures used to allocate
expenses among companies include individual employee estimates of time
spent, special cost studies, salary expense, commission expense and
other methods agreed to by the participating companies that are within
industry guidelines and practices. In addition, beginning in 1999
Nationwide Services Company, a subsidiary of NMIC, provides computer,
telephone, mail, employee benefits administration, and other services
to NMIC and certain of its direct and indirect subsidiaries, including
the Company, based on specified rates for units of service consumed.
For the years ended December 31, 1999, 1998 and 1997, the Company made
payments to NMIC and Nationwide Services Company totaling $124.1
million, $95.0 million, and $85.8 million, respectively. In addition,
the Company does not believe that expenses recognized under these
agreements are materially different than expenses that would have been
recognized had the Company operated on a stand-alone basis.
The Company leases office space from NMIC and certain of its
subsidiaries. For the years ended December 31, 1999, 1998 and 1997, the
Company made lease payments to NMIC and its subsidiaries of $9.9
million, $8.0 million and $8.4 million, respectively.
F-23
50
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The Company also participates in intercompany repurchase agreements
with affiliates whereby the seller will transfer securities to the
buyer at a stated value. Upon demand or a stated period, the securities
will be repurchased by the seller at the original sales price plus a
price differential. Transactions under the agreements during 1999 and
1998 were not material. The Company believes that the terms of the
repurchase agreements are materially consistent with what the Company
could have obtained with unaffiliated parties.
The Company and various affiliates entered into agreements with
Nationwide Cash Management Company (NCMC), an affiliate, under which
NCMC acts as a common agent in handling the purchase and sale of
short-term securities for the respective accounts of the participants.
Amounts on deposit with NCMC were $411.7 million and $248.4 million as
of December 31, 1999 and 1998, respectively, and are included in
short-term investments on the accompanying consolidated balance sheets.
As part of certain restructuring activities that occurred prior to the
March 1997 IPO, the Company paid a dividend valued at $485.7 million to
Nationwide Corp. on January 1, 1997 consisting of the outstanding
shares of common stock of ELOW, National Casualty Company (NCC) and
West Coast Life Insurance Company (WCLIC). Also, on February 24, 1997,
the Company paid a dividend to NFS, and NFS paid an equivalent dividend
to Nationwide Corp., consisting of securities having an aggregate fair
value of $850.0 million. The Company recognized a gain of $14.4 million
on the transfer of securities.
Certain annuity products are sold through three affiliated companies,
which are also subsidiaries of NFS. Total commissions and fees paid to
these affiliates for the three years ended December 31, 1999 were $56.0
million, $60.0 million and $66.1 million, respectively.
(12) Bank Lines of Credit
NFS, NLIC and NMIC are parties to a $600.0 million revolving credit
facility which provides for a $600.0 million loan over a five year term
on a fully revolving basis with a group of national financial
institutions. The credit facility provides for several and not joint
liability with respect to any amount drawn by any party. NFS, NLIC and
NMIC pay facility and usage fees to the financial institutions to
maintain the revolving credit facility. As of December 31, 1999 the
Company had no amounts outstanding under the agreement.
(13) Contingencies
On October 29, 1998, the Company was named in a lawsuit filed in Ohio
state court related to the sale of deferred annuity products for use as
investments in tax-deferred contributory retirement plans (Mercedes
Castillo v. Nationwide Financial Services, Inc., Nationwide Life
Insurance Company and Nationwide Life and Annuity Insurance Company).
On May 3, 1999, the complaint was amended to, among other things, add
Marcus Shore as a second plaintiff. The amended complaint is brought as
a class action on behalf of all persons who purchased individual
deferred annuity contracts or participated in group annuity contracts
sold by the Company and the other named Company affiliates which were
used to fund certain tax-deferred retirement plans. The amended
complaint seeks unspecified compensatory and punitive damages. No class
has been certified. On June 11, 1999, the Company and the other named
defendants filed a motion to dismiss the amended complaint. On March 8,
2000, the court denied the motion to dismiss the amended complaint
filed by the Company and other named defendants. The Company intends to
defend this lawsuit vigorously.
(14) Segment Information
The Company uses differences in products as the basis for defining its
reportable segments. The Company reports three product segments:
Variable Annuities, Fixed Annuities and Life Insurance.
F-24
51
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The Variable Annuities segment consists of annuity contracts that
provide the customer with access to a wide range of investment options,
tax-deferred accumulation of savings, asset protection in the event of
an untimely death, and flexible payout options including a lump sum,
systematic withdrawal or a stream of payments for life. The Company's
variable annuity products consist almost entirely of flexible premium
deferred variable annuity contracts.
The Fixed Annuities segment consists of annuity contracts that generate
a return for the customer at a specified interest rate fixed for a
prescribed period, tax-deferred accumulation of savings, and flexible
payout options including a lump sum, systematic withdrawal or a stream
of payments for life. Such contracts consist of single premium deferred
annuities, flexible premium deferred annuities and single premium
immediate annuities. The Fixed Annuities segment includes the fixed
option under variable annuity contracts.
The Life Insurance segment consists of insurance products, including
variable universal life insurance and corporate-owned life insurance
products, that provide a death benefit and may also allow the customer
to build cash value on a tax-deferred basis.
In addition to the product segments, the Company reports corporate
revenue and expenses, investments and related investment income
supporting capital not specifically allocated to its product segments,
revenues and expenses of its investment advisor subsidiary, revenues
and expenses related to group annuity contracts sold to Nationwide
Insurance employee and agent benefit plans and all realized gains and
losses on investments in a Corporate and Other segment.
During 1999 the Company revised the allocation of net investment income
among its Life Insurance and Corporate and Other segments. Also,
certain amounts previously reported as other income were reclassified
to operating expense. Amounts reported for prior periods have been
restated to reflect these changes.
The following table summarizes the financial results of the Company's
business segments for the years ended December 31, 1999, 1998 and 1997.
Variable Fixed Life Corporate
(in millions) Annuities Annuities Insurance and Other Total
------------------------------------ --------- --------- --------- --------- ---------
1999:
Net investment income (1) $ (41.5) $ 1,134.5 $ 253.1 $ 174.7 $ 1,520.8
Other operating revenue 668.2 43.4 393.0 77.8 1,182.4
--------- --------- -------- -------- ---------
Total operating revenue (2) 626.7 1,177.9 646.1 252.5 2,703.2
--------- --------- -------- -------- ---------
Interest credited to policyholder
account balances -- 837.5 130.5 128.3 1,096.3
Amortization of deferred policy
acquisition costs 162.8 49.7 60.1 -- 272.6
Other benefits and expenses 173.6 113.5 334.7 94.4 716.2
--------- --------- -------- -------- ---------
Total expenses 336.4 1,000.7 525.3 222.7 2,085.1
--------- --------- -------- -------- ---------
Operating income before
federal income tax 290.3 177.2 120.8 29.8 618.1
Realized losses on investments -- -- -- (11.6) (11.6)
--------- --------- -------- -------- ---------
Consolidated income before
federal tax expense $ 290.3 $ 177.2 $ 120.8 $ 18.2 $ 606.5
========= ========= ======== ======== =========
Assets as of year end $62,599.7 $17,134.8 $6,616.7 $6,324.7 $92,675.9
========= ========= ======== ======== =========
F-25
52
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of
Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Variable Fixed Life Corporate
(in millions) Annuities Annuities Insurance and Other Total
------------------------------------ --------- --------- --------- --------- ---------
1998:
Net investment income (1) $ (31.3) $ 1,116.6 $ 225.6 $ 170.7 $ 1,481.6
Other operating revenue 532.9 35.7 318.5 78.6 965.7
--------- --------- -------- -------- ---------
Total operating revenue (2) 501.6 1,152.3 544.1 249.3 2,447.3
--------- --------- -------- -------- ---------
Interest credited to policyholder
account balances -- 828.6 115.4 125.0 1,069.0
Amortization of deferred policy
acquisition costs 123.9 44.2 46.4 -- 214.5
Other benefits and expenses 159.3 104.2 293.5 78.1 635.1
--------- --------- -------- -------- ---------
Total expenses 283.2 977.0 455.3 203.1 1,918.6
--------- --------- -------- -------- ---------
Operating income before federal
income tax 218.4 175.3 88.8 46.2 528.7
Realized gains on investments -- -- -- 28.4 28.4
--------- --------- -------- -------- ---------
Consolidated income before
federal tax expense $ 218.4 $ 175.3 $ 88.8 $ 74.6 $ 557.1
========= ========= ======== ======== =========
Assets as of year end $47,668.7 $15,215.7 $5,187.6 $6,270.1 $74,342.1
========= ========= ======== ======== =========
1997:
Net investment income (1) $ (26.8) $ 1,098.2 $ 184.9 $ 152.9 $ 1,409.2
Other operating revenue 413.9 43.2 283.4 56.6 797.1
--------- --------- -------- -------- ---------
Total operating revenue (2) 387.1 1,141.4 468.3 209.5 2,206.3
--------- --------- -------- -------- ---------
Interest credited to policyholder
account balances -- 823.4 78.5 114.7 1,016.6
Amortization of deferred policy
acquisition costs 87.8 39.8 39.6 -- 167.2
Benefits and expenses 148.4 108.7 283.5 63.1 603.7
--------- --------- -------- -------- ---------
Total expenses 236.2 971.9 401.6 177.8 1,787.5
--------- --------- -------- -------- ---------
Operating income before federal
income tax 150.9 169.5 66.7 31.7 418.8
Realized gains on investments -- -- -- 11.1 11.1
--------- --------- -------- -------- ---------
Consolidated income before
federal tax expense $ 150.9 $ 169.5 $ 66.7 $ 42.8 $ 429.9
========= ========= ======== ======== =========
Assets as of year end $35,278.7 $14,436.3 $3,901.4 $6,174.3 $59,790.7
========= ========= ======== ======== =========
- ----------
(1) The Company's method of allocating net investment income results in
a charge (negative net investment income) to the Variable Annuities
segment which is recognized in the Corporate and Other segment. The
charge relates to non-invested assets which support this segment on
a statutory basis.
(2) Excludes realized gains and losses on investments.
The Company has no significant revenue from customers located outside
of the United States nor does the Company have any significant
long-lived assets located outside the United States.
F-26
53
SCHEDULE I
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
(in millions)
As of December 31, 1999
- ----------------------------------------------------------------------------- --------- --------- -------------
Column A Column B Column C Column D
- ----------------------------------------------------------------------------- --------- --------- -------------
Amount at
which shown
in the
Market consolidated
Type of Investment Cost value balance sheet
- ----------------------------------------------------------------------------- --------- --------- -------------
Fixed maturity securities available-for-sale:
Bonds:
U.S. Government and government agencies and authorities $ 3,851.2 $ 3,867.8 $ 3,867.8
States, municipalities and political subdivisions 0.8 0.8 0.8
Foreign governments 110.6 110.4 110.4
Public utilities 1,309.4 1,309.5 1,309.5
All other corporate 10,105.3 10,005.5 10,005.5
--------- --------- ---------
Total fixed maturity securities available-for-sale 15,377.3 15,294.0 15,294.0
--------- --------- ---------
Equity securities available-for-sale:
Common stocks:
Industrial, miscellaneous and all other 84.9 92.9 92.9
Non-redeemable preferred stock -- -- --
--------- --------- ---------
Total equity securities available-for-sale 84.9 92.9 92.9
--------- --------- ---------
Mortgage loans on real estate, net 5,831.5 5,786.3(1)
Real estate, net:
Investment properties 219.3 224.9(1)
Acquired in satisfaction of debt 31.6 29.9(1)
Policy loans 519.6 519.6
Other long-term investments 73.5 73.8(2)
Short-term investments 416.0 416.0
--------- ---------
Total investments $22,553.7 $22,437.4
========= =========
- ----------
(1) Difference from Column B is primarily due to valuation allowances due to
impairments on mortgage loans on real estate and due to accumulated
depreciation and valuation allowances due to impairments on real estate.
See note 3 to the consolidated financial statements.
(2) Difference from Column B is primarily due to operating gains (losses) of
investments in limited partnerships.
See accompanying independent auditors' report.
F-27
54
SCHEDULE III
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(in millions)
As of December 31, 1999, 1998 and 1997 and for each of the years then ended
- ------------------------------------- ----------- ---------------- -------- ---------------- --------
Column A Column B Column C Column D Column E Column F
- ------------------------------------- ----------- ---------------- -------- ---------------- --------
Deferred Future policy Other policy
policy benefits, losses, Unearned claims and
acquisition claims and premiums benefits payable Premium
Segment costs loss expenses (1) (1) revenue
- ------------------------------------- ----------- ---------------- -------- ---------------- --------
1999: Variable Annuities $1,403.1 $ -- $ --
Fixed Annuities 397.2 16,077.3 26.8
Life Insurance 702.9 3,519.9 194.0
Corporate and Other 50.9 2,264.4 --
-------- --------- ------
Total $2,554.1 $21,861.6 $220.8
======== ========= ======
1998: Variable Annuities $1,247.9 $ -- $ --
Fixed Annuities 316.7 14,592.3 23.1
Life Insurance 574.2 3,173.9 176.9
Corporate and Other (116.6) 2,000.9 --
-------- --------- ------
Total $2,022.2 $19,767.1 $200.0
======== ========= ======
1997: Variable Annuities $1,018.4 $ -- $ --
Fixed Annuities 277.9 14,103.1 27.3
Life Insurance 472.9 2,683.4 178.1
Corporate and Other (103.8) 1,916.3 --
-------- --------- ------
Total $1,665.4 $18,702.8 $205.4
======== ========= ======
- ------------------------------------- -------------- -------------------- ------------------ --------- --------
Column A Column G Column H Column I Column J Column K
- ------------------------------------- -------------- -------------------- ------------------ --------- --------
Net investment Benefits, claims, Amortization Other
income losses and of deferred policy operating Premiums
Segment (2) settlement expenses acquisition costs expenses written
(2)
- ------------------------------------- -------------- -------------------- ------------------ --------- --------
1999: Variable Annuities $ (41.5) $ 2.2 $162.8 $176.3
Fixed Annuities 1,134.5 859.2 49.7 91.8
Life Insurance 253.1 317.1 60.1 105.7
Corporate and Other 174.7 128.2 -- 89.6
-------- -------- ------ ------
Total $1,520.8 $1,306.7 $272.6 $463.4
======== ======== ====== ======
1998: Variable Annuities $ (31.3) $ 3.5 $123.9 $155.8
Fixed Annuities 1,116.6 847.6 44.2 85.2
Life Insurance 225.6 268.7 46.4 100.6
Corporate and Other 170.7 125.0 -- 78.1
-------- -------- ------ ------
Total $1,481.6 $1,244.8 $214.5 $419.7
======== ======== ====== ======
1997: Variable Annuities $ (26.8) $ 5.9 $ 87.8 $142.5
Fixed Annuities 1,098.2 846.7 39.8 85.4
Life Insurance 184.9 227.5 39.6 93.9
Corporate and Other 152.9 114.7 -- 63.1
-------- -------- ------ ------
Total $1,409.2 $1,194.8 $167.2 $384.9
======== ======== ====== ======
- ----------
(1) Unearned premiums and other policy claims and benefits payable are
included in Column C amounts.
(2) Allocations of net investment income and certain operating expenses are
based on a number of assumptions and estimates, and reported operating
results would change by segment if different methods were applied.
See accompanying independent auditors' report.
F-28
55
SCHEDULE IV
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
REINSURANCE
(in millions)
As of December 31, 1999, 1998 and 1997 and for each of the years then ended
- ----------------------------------------------- --------------- -------------- ------------- ------------- ------------
Column A Column B Column C Column D Column E Column F
- ----------------------------------------------- --------------- -------------- ------------- ------------- ------------
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies Companies amount to net
--------------- -------------- ------------- ------------- ------------
1999:
Life insurance in force $84,845.3 $26,296.5 $ 14.9 $58,563.7 0.0%
========= ========= ====== ========= ====
Premiums:
Life insurance $ 242.2 $ 22.6 $ 1.2 $ 220.8 0.6%
Accident and health insurance 134.9 142.8 7.9 -- N/A
--------- --------- ------ --------- ----
Total $ 377.1 $ 165.4 $ 9.1 $ 220.8 4.2%
========= ========= ====== ========= ====
1998:
Life insurance in force $63,215.9 $17,413.4 $ 28.0 $45,830.5 0.1%
========= ========= ====== ========= ====
Premiums:
Life insurance $ 225.4 $ 27.4 $ 2.0 $ 200.0 1.0%
Accident and health insurance 169.7 179.4 9.7 -- N/A
--------- --------- ------ --------- ----
Total $ 395.1 $ 206.8 $ 11.7 $ 200.0 5.8%
========= ========= ====== ========= ====
1997:
Life Insurance in force $52,648.4 $13,678.7 $289.7 $39,259.4 0.7%
========= ========= ====== ========= ====
Premiums:
Life insurance $ 235.9 $ 32.7 $ 2.2 $ 205.4 1.1%
Accident and health insurance 261.2 272.6 11.4 -- N/A
--------- --------- ------ --------- ----
Total $ 497.1 $ 305.3 $ 13.6 $ 205.4 6.6%
========= ========= ====== ========= ====
- ------------
Note: The life insurance caption represents principally premiums from
traditional life insurance and life-contingent immediate annuities and
excludes deposits on investment products and universal life insurance
products.
F-29
56
SCHEDULE V
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in millions)
Years ended December 31, 1999, 1998 and 1997
- ---------------------------------------------------------- ------------ --------------------------- ------------- -------------
Column A Column B Column C Column D Column E
- ---------------------------------------------------------- ------------ --------------------------- ------------- -------------
Balance at Charged to Charged to Balance at
beginning costs and other Deductions end of
Description of period expenses accounts (1) period
- ---------------------------------------------------------- ------------ ------------- ------------- ------------- -------------
1999:
Valuation allowances - fixed maturity securities $ 7.5 $ -- $ -- $ 7.5 $ --
Valuation allowances - mortgage loans on real estate 42.4 0.7 1.3(2) -- 44.4
Valuation allowances - real estate 5.4 0.9 -- 0.8 5.5
----- ----- ---- ----- -----
Total $55.3 $ 1.6 $1.3 $ 8.3 $49.9
===== ===== ==== ===== =====
1998:
Valuation allowances - fixed maturity securities $ -- $ 7.5 $ -- $ -- $ 7.5
Valuation allowances - mortgage loans on real estate 42.5 (0.1) -- -- 42.4
Valuation allowances - real estate 11.1 (5.7) -- -- 5.4
----- ----- ---- ----- -----
Total $53.6 $ 1.7 $ -- $ -- $55.3
===== ===== ==== ===== =====
1997:
Valuation allowances - fixed maturity securities $ -- $16.2 $ -- $16.2 $ --
Valuation allowances - mortgage loans on real estate 51.0 (1.2) -- 7.3 42.5
Valuation allowances - real estate 15.2 (4.1) -- -- 11.1
----- ----- ---- ----- -----
Total $66.2 $10.9 $ -- $23.5 $53.6
===== ===== ==== ===== =====
- ------------
(1) Amounts represent direct write-downs charged against the valuation
allowance.
(2) Allowance on acquired mortgage loans.
F-30