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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, 2000 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 incorporation (I.R.S. Employer
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, 2001.
COMMON STOCK (par value $1 per share) - 3,814,779 shares issued and outstanding
as of March 20, 2001 (Title of Class)
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, or collectively with its
subsidiaries, the Company) was incorporated in 1929 and is an Ohio
stock legal reserve life insurance company. NLIC offers a variety
of forms of individual annuities, private and public sector
pension plans 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 6,
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, 2000 include
Nationwide Life and Annuity Insurance Company (NLAIC), Nationwide
Advisory Services, Inc. (NAS) and Nationwide Investment Services
Corporation (NISC).
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 and NISC are
registered broker/dealers.
The Company is a leading provider of long-term savings and
retirement products in the United States (U.S.). The Company
develops and sells a diverse range of products including
individual annuities, private and public sector 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, brokerage firms, pension plan administrators, life
insurance specialists, financial institutions, Nationwide agents
and Nationwide Retirement Solutions.
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The Company is one of the leaders in the development and sale of
variable annuities. As of December 31, 2000, the Company was the
third largest writer of individual variable annuity contracts in
the U.S., 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 redefined its business segments in order to align
this disclosure with the way management currently views its core
operations. This updated view better reflects the different
economics of the Company's various businesses and also aligns well
with the Company's current market focus. As a result, the Company
now reports three product segments: Individual Annuity,
Institutional Products 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 and revenues and expenses of
its broker/dealer subsidiaries in a Corporate segment.
The Individual Annuity segment, which accounted for $281.7 million
(40%) of the Company's operating income before federal income tax
expense for 2000, consists of both variable and fixed annuity
contracts. Individual annuity contracts provide the customer with
tax-deferred accumulation of savings and flexible payout options
including lump sum, systematic withdrawal or a stream of payments
for life. In addition, variable annuity contracts provide the
customer with access to a wide range of investment options and
asset protection in the event of an untimely death, while fixed
annuity contracts generate a return for the customer at a
specified interest rate fixed for a prescribed period. The
Company's individual annuity products consist of single premium
deferred annuities, flexible premium deferred annuities and single
premium immediate annuities.
The Institutional Products segment, which accounted for $230.7
million (33%) of the Company's operating income before federal
income tax expense for 2000, is comprised of the Company's group
and payroll deduction business, both public and private sectors,
and medium-term note program. The public sector includes the 457
business in the form of fixed and variable annuities. The private
sector includes the 401(k) business generated through fixed and
variable annuities.
The Life Insurance segment, which accounted for $152.9 million
(22%) of the Company's operating income before federal income tax
expense for 2000, is composed of a wide range of insurance
products including universal life insurance, corporate-owned life
insurance (COLI) and bank-owned life insurance (BOLI), which
provide a death benefit and also allow the customer to build cash
value on a tax-advantaged basis.
The Corporate segment accounted for $37.1 million (5%) of the
Company's operating income (which excludes net realized gains and
losses on investments) before federal income tax expense for 2000.
Additional information related to the Company's business segments
is included in note 15 to the consolidated financial statements
and Financial Statement Schedule III.
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4
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 "Aa3" (Excellent) by Moody's Investors Service,
Inc. (Moody's), "AA" (Very Strong) by Standard & Poor's, a
Division of The McGraw-Hill Companies, Inc. (S&P), and "AA+" (Very
Strong) by Fitch.
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.
The Company's financial strength is also reflected in the ratings
of commercial paper. The commercial paper is rated "A-1+" by S&P
and "P-1" by Moody's.
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 U.S. and allows banks, securities firms
and insurance companies to affiliate more directly than they have
been permitted to do in the past. While the Act facilitates these
affiliations, to date no significant competitors of the Company
have acquired, or been acquired by, a banking entity under
authority of the Act. Nevertheless, it is not possible to
anticipate whether such affiliations might occur in the future.
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 cannot 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, 2000, the Company had approximately 4,100
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
Pursuant to an arrangement between NMIC and certain of its
subsidiaries, during 2000 the Company leased on average
approximately 734,000 square feet of office space primarily in the
four building home office complex in 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.
As was previously disclosed in the Company's Form 10-Q for the
quarterly period ended March 31, 2000, the Robert Young and David
D. Distad v. Nationwide Life Insurance Company et al lawsuit was
dismissed by the court with prejudice on February 9, 2000.
5
6
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.
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 $50.0 million and $61.0 million in dividends to NFS
during 2000 and 1999, respectively. In addition, NLIC sought and
obtained prior regulatory approval from the Ohio Department of
Insurance to return $120.0 million and $175.0 million of capital
to NFS during 2000 and 1999, respectively.
NLIC currently does not have a formal dividend policy.
Reference is made to note 11 of the consolidated financial
statements for information regarding dividend restrictions.
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA
Omitted due to reduced disclosure format.
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, 2000
follows. This discussion should be read in conjunction with the
consolidated financial statements and related notes included
elsewhere in this report.
6
7
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
Financial Accounting Standards Board; (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, development of new products and/or changes to
certain existing products and acceptance of the new and/or revised
products in the market; (vii) changes in interest rates and the
capital markets causing a reduction of investment income and/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 rating
organizations; and (x) inaccuracies in assumptions regarding
future persistency, mortality, morbidity and interest rates used
in calculating reserve amounts.
RESULTS OF OPERATIONS
In addition to net income, the Company reports net operating
income, which excludes net 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) 2000 1999 1998
----------------------------------------------------------------------------------------------------------
Net income $ 475.3 $ 405.1 $ 366.7
Net realized losses (gains) on investments, net of tax 12.6 7.6 (18.5)
----------------------------------------------------------------------------------------------------------
Net operating income $ 487.9 $ 412.7 $ 348.2
==========================================================================================================
Revenues
Total operating revenues, which exclude net realized gains and
losses on investments, increased to $3.00 billion in 2000 compared
to $2.70 billion for 1999 and $2.45 billion for 1998. The growth
in operating 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 individual and
group variable annuities and investment 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) 2000 1999 1998
----------------------------------------------------------------------------------------------------------
Asset fees $ 714.6 $ 616.5 $ 494.7
Cost of insurance charges 156.5 117.0 88.8
Administrative fees 134.2 102.4 73.8
Surrender fees 86.1 59.6 41.6
----------------------------------------------------------------------------------------------------------
Total policy charges $ 1,091.4 $ 895.5 $ 698.9
==========================================================================================================
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The growth in asset fees reflects increases in total average
separate account assets of $11.99 billion (21%) in 2000 and $13.26
billion (30%) in 1999. Net flows into variable annuity and
investment life insurance products as well as market appreciation,
as measured on a daily average basis, in each of the last three
years have resulted in the increase in average separate account
balances.
Cost of insurance charges are assessed on 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 amount charged is based on the insured's age
and other underwriting factors. The increase in cost of insurance
charges is due primarily to growth in the net amount at risk
related to individual investment life insurance reflecting
expanded distribution and increased acceptance by producers and
consumers. The net amount at risk related to individual investment
life insurance grew to $24.69 billion at the end of 2000 compared
to $19.76 billion and $14.95 billion at the end of 1999 and 1998,
respectively.
The growth in administrative fees is attributable to a significant
increase in premiums on individual investment life policies and
certain corporate-owned life policies where the company collects a
premium load. The substantial majority of the increase in
surrender charges over the past two years is attributable to
policyholder withdrawals in the Individual Annuity segment, and is
driven by an overall increase in individual variable annuity
policy reserves and a heightened competitive environment in the
individual annuity marketplace.
Net investment income includes the 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
of related investment expenses. General account assets supporting
insurance products are closely correlated to the underlying
reserves on these products. Net investment income grew from $1.48
billion and $1.52 billion in 1998 and 1999, respectively, to $1.65
billion in 2000 primarily due to increased invested assets to
support growth in individual fixed annuity, institutional products
and life insurance policy reserves. General account reserves
supporting these products grew by $322.0 million and $2.09 billion
in 2000 and 1999, respectively, and were $22.18 billion at
December 31, 2000. The change in net investment income was also
impacted by average yields on investments, which increased by 24
basis points in 2000 and declined by 24 basis points in 1999
following market interest rate trends.
Realized gains and losses on investments are not considered by the
Company 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.
Other income includes fees earned by the Company's broker/dealers
and in 1999 and 1998, fees for investment management services, as
well as commissions and other income for marketing, distribution
and administration services.
Benefits and Expenses
Interest credited to policyholder account balances totaled $1.18
billion in 2000 compared to $1.10 billion in 1999 and $1.07
billion in 1998 and principally relates to fixed annuities, both
individual and institutional, and investment life insurance
products. The growth in interest credited reflects the increase in
policy reserves previously discussed and an overall increase in
average crediting rates during 2000. The average crediting rate on
fixed annuity policy reserves in the Individual Annuity and
Institutional Products segments was 5.64% and 5.98% in 2000
compared to 5.72% and 5.72% in 1999 and 5.89% and 6.16% in 1998,
respectively.
Amortization of deferred policy acquisition costs (DAC) increased
$79.5 million in 2000 and $58.1 million in 1999 principally due to
the Individual Annuity segment as a result of growth in the number
of policies in-force in each of the last two years coupled with
increased surrender activity during 2000. Amortization of DAC
increased in the Life Insurance segment as a result of growth in
policies in-force.
Operating expenses were $478.9 million in 2000, a 3% increase from
1999 operating expenses of $463.4 million. Operating expenses were
$419.7 million in 1998. The increase reflects the growth in the
number of annuity and life insurance contracts in-force and the
related increase in administrative processing costs. 1999 and 1998
also include costs associated with investment management
activities which were assigned to an affiliate in mid-1999.
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Federal income tax expense was $207.7 million representing an
effective tax rate of 30.4% for 2000. Federal income tax expense
in 1999 and 1998 was $201.4 million and $190.4 million,
respectively, representing effective rates of 33.2% and 34.2%. An
increase in tax exempt income and investment tax credits resulted
in the decrease in effective rates.
Recently Issued Accounting Pronouncements
See note 2(j) to the consolidated financial statements for a
discussion of recently issued accounting pronouncements.
Sales Information
Sales are comprised of annuities, pension plans and life insurance
products sold to a wide variety of customer bases. The 1999 and
1998 sales information has been restated to conform to the 2000
presentation, which better reflects multi-product sales across all
distribution channels.
Sales are stated net of internal replacements, which in the
Company's opinion provides a more meaningful disclosure of sales.
In addition, sales exclude: funding agreements issued to secure
notes issued to foreign investors through an unrelated third party
trust under the Company's $2 billion medium-term note program;
bank-owned life insurance (BOLI); large case pension plan
acquisitions; and deposits into Nationwide employee and agent
benefit plans. Although these products contribute to asset and
earnings growth, they do not produce steady production flow that
lends itself to meaningful comparisons and are therefore excluded
from sales.
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,
brokerage firms, financial institutions, pension plan
administrators, life insurance specialists and Nationwide agents.
Representatives of the Company who market products directly to a
customer base identified by the Company include Nationwide
Retirement Solutions.
Sales by distribution channel for each of the last three years are
summarized as follows:
(in millions) 2000 1999 1998
==========================================================================================================
Independent broker/dealers $ 5,933.4 $ 5,097.8 $ 4,841.8
Brokerage firms 1,183.8 900.2 601.3
Financial institutions 2,868.0 2,431.2 2,005.5
Pension plan administrators 1,044.2 1,165.7 1,015.8
Nationwide Retirement Solutions 2,328.6 2,470.3 2,445.9
Nationwide agents 815.8 787.9 731.8
Life insurance specialists 711.4 420.0 91.1
----------------------------------------------------------------------------------------------------------
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 16% in 2000 reflecting the
strength of the Company's multiple product strategy, appointment
of new distributors, introduction of new products and features and
a broad distribution network. Sales through financial institutions
grew 18% during 2000 and 21% during 1999 driven mainly by the
appointment of new distributors in the bank channel and increased
fixed annuity sales.
The increase in sales through life insurance specialists reflects
$711.4 million of COLI sales in 2000 compared to $409.2 million in
1999. NLIC 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
products allow customers to choose from 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.
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10
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.
Sales by product and segment for each of the last three years are
as follows:
(in millions) 2000 1999 1998
==========================================================================================================
The BEST of AMERICA products $ 5,475.4 $ 4,639.2 $ 4,656.1
Private label annuities 998.7 947.8 778.1
Other 90.9 382.5 332.9
----------------------------------------------------------------------------------------------------------
Total individual variable annuity sales 6,565.0 5,969.5 5,767.1
----------------------------------------------------------------------------------------------------------
Deferred fixed annuities 534.8 332.5 315.2
Immediate fixed annuities 127.7 64.2 52.9
----------------------------------------------------------------------------------------------------------
Total individual fixed annuity sales 662.5 396.7 368.1
----------------------------------------------------------------------------------------------------------
Total individual annuity sales $ 7,227.5 $ 6,366.2 $ 6,135.2
==========================================================================================================
The BEST of AMERICA products $ 3,931.4 $ 3,537.7 $ 2,760.0
Other 47.3 83.1 41.8
----------------------------------------------------------------------------------------------------------
Total private sector pension plan sales 3,978.7 3,620.8 2,801.8
----------------------------------------------------------------------------------------------------------
IRC Section 457 annuities 2,148.8 2,190.3 2,143.0
----------------------------------------------------------------------------------------------------------
Total public sector pension plan sales 2,148.8 2,190.3 2,143.0
----------------------------------------------------------------------------------------------------------
Total institutional products sales $ 6,127.5 $ 5,811.1 $ 4,944.8
==========================================================================================================
The BEST of AMERICA variable life series $ 573.4 $ 425.9 $ 316.0
Corporate-owned life insurance 711.4 409.2 91.1
Traditional/Universal life insurance 245.4 260.8 246.1
----------------------------------------------------------------------------------------------------------
Total life insurance sales $ 1,530.2 $ 1,095.9 $ 653.2
==========================================================================================================
BUSINESS SEGMENTS
The Company has redefined its business segments in order to align
this disclosure with the way management currently views its core
operations. This updated view better reflects the different
economics of the Company's various businesses and also aligns well
with the current market focus. The Company has three product
segments: Individual Annuity, Institutional Products and Life
Insurance. In addition, the Company reports certain other revenues
and expenses in a Corporate segment. All 1999 and 1998 amounts
have been restated to reflect the new business segments.
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) 2000 1999 1998
==========================================================================================================
Individual Annuity $ 281.7 $ 259.2 $ 231.5
Institutional Products 230.7 217.8 180.4
Life Insurance 152.9 120.8 88.8
Corporate 37.1 20.3 28.0
----------------------------------------------------------------------------------------------------------
Operating income before federal income tax expense $ 702.4 $ 618.1 $ 528.7
==========================================================================================================
10
11
Individual Annuity
The Individual Annuity segment consists of both variable and fixed
annuity contracts. Individual annuity contracts provide the
customer with tax-deferred accumulation of savings and flexible
payout options including lump sum, systematic withdrawal or a
stream of payments for life. In addition, variable annuity
contracts provide the customer with access to a wide range of
investment options and asset protection in the event of an
untimely death, while fixed annuity contracts generate a return
for the customer at a specified interest rate fixed for a
prescribed period. The Company's individual annuity products
consist of single premium deferred annuities, flexible premium
deferred annuities and single premium immediate annuities.
The following table summarizes certain selected financial data for
the Company's Individual Annuity segment for the years indicated.
(in millions) 2000 1999 1998
==========================================================================================================
INCOME STATEMENT DATA
Revenues:
Policy charges $ 573.2 $ 484.6 $ 389.5
Net investment income 483.2 458.9 431.7
Premiums on immediate annuities 52.7 26.8 23.1
----------------------------------------------------------------------------------------------------------
1,109.1 970.3 844.3
----------------------------------------------------------------------------------------------------------
Benefits and expenses:
Interest credited to policyholder account balances 396.4 384.9 357.9
Amortization of DAC 238.7 170.9 129.2
Other benefits 54.0 23.8 22.5
Other operating expenses 138.3 131.5 103.2
----------------------------------------------------------------------------------------------------------
827.4 711.1 612.8
----------------------------------------------------------------------------------------------------------
Operating income before federal income tax expense $ 281.7 $ 259.2 $ 231.5
==========================================================================================================
OTHER DATA
Sales:
Individual variable annuities $ 6,565.0 $ 5,969.5 $ 5,767.1
Individual fixed annuities 662.5 396.7 368.1
----------------------------------------------------------------------------------------------------------
Total individual annuity sales $ 7,227.5 $ 6,366.2 $ 6,135.2
==========================================================================================================
Average account balances:
Separate account $ 37,934.0 $ 31,929.2 $ 25,563.9
General account 6,942.9 6,712.5 6,072.8
----------------------------------------------------------------------------------------------------------
Total average account balances $ 44,876.9 $ 38,641.7 $ 31,636.7
==========================================================================================================
Account balances as of year end:
Individual variable annuities $ 39,621.9 $ 40,274.7 $ 32,029.2
Individual fixed annuities 3,941.8 3,722.2 3,280.9
----------------------------------------------------------------------------------------------------------
Total account balances $ 43,563.7 $ 43,996.9 $ 35,310.1
==========================================================================================================
Return on average equity 20.4% 19.7% 20.2%
Pre-tax operating income to average account balances 0.63% 0.67% 0.73%
----------------------------------------------------------------------------------------------------------
Pre-tax operating earnings reached $281.7 million in 2000, up 9%
compared to 1999 earnings of $259.2 million, which were up 12%
from 1998. Improved segment results are primarily due to growth in
asset fees partially offset by increased DAC amortization.
Asset fees were $478.5 million in 2000 up 15% from $415.0 million
in 1999 and totaled $337.8 million in 1998. Asset fees are
calculated daily and charged as a percentage of separate account
reserves. Average separate account assets have increased
substantially in the past three years as a result of net market
appreciation and net flows of $675.2 million, $1.28 billion and
$3.08 billion in 2000, 1999 and 1998, respectively. While separate
account assets reflect market depreciation in 2000, there was
substantial market appreciation in the first half of the year,
which contributed to the growth in average separate account
assets.
11
12
Amortization of DAC increased 40% to $238.7 million in 2000
compared to $170.9 million and $129.2 million in 1999 and 1998,
respectively. The growth in DAC amortization is consistent with
the overall growth in the individual annuity business and the
increase in surrender activity.
The following table depicts the interest spread on average general
account reserves in the Individual Annuity segment for each of the
last three years.
2000 1999 1998
==========================================================================================================
Net investment income 7.88% 7.58% 7.77%
Interest credited 5.64 5.72 5.89
----------------------------------------------------------------------------------------------------------
Interest spread 2.24% 1.86% 1.88%
==========================================================================================================
During 1998 and 1999 the Company experienced an increase in
mortgage loan and bond prepayment fees and such income accounted
for approximately 4 basis points of the interest spread in 2000
compared to 7 basis points and 11 basis points in 1999 and 1998,
respectively. Increases in interest rates in early 2000 generated
higher net investment income and slowed prepayment activity.
The Company is able to mitigate the effects of changes in
investment yields by periodically resetting the rates credited on
fixed features of individual annuity contracts. As of December 31,
2000, individual fixed annuity policy reserves and fixed option of
variable annuity reserves of $2.42 billion and $2.50 billion,
respectively, are in contracts that adjust the crediting rate
periodically with portions resetting in each calendar quarter. The
Company also has $398.7 million of fixed option of variable
annuity policy reserves related to private label annuities that
call for the crediting rate to be reset annually on each January 1
and $1.52 billion of individual fixed annuity policy reserves that
are in payout status where the Company has guaranteed periodic,
typically monthly, payments.
Led by variable product deposits of $8.20 billion and withdrawals
and surrenders of $5.98 billion, Individual Annuity segment
deposits in 2000 of $8.87 billion offset by withdrawals and
surrenders totaling $6.47 billion generated net flows of $2.40
billion compared to the $2.83 billion and $3.63 billion achieved
in 1999 and 1998, respectively. Despite the competitive nature of
the individual annuity market, the Company has demonstrated the
ability to generate positive net flows by leveraging its broad
distribution network and innovative product development resources.
The Company successfully introduced new products, features and
retention strategies during 2000.
Changes in the Company's products, including the introduction of
new products with reduced policy charges have slightly decreased
the ratio of asset fees to average separate account assets within
the segment. This ratio was 1.26% in 2000 compared to 1.29% and
1.30% in 1999 and 1998, respectively.
The decrease in pre-tax operating income to average assets in 2000
and 1999 is primarily driven by the mix of products, which is
demonstrated by average separate account assets accounting for
84.4%, 82.6% and 80.8% of total average account balances in 2000,
1999 and 1998, respectively. Higher sales of trail commission
individual variable annuities and increased amortization of policy
acquisition costs are also impacting margins.
Individual Annuity sales, which exclude internal replacements,
during 2000 were $7.23 billion compared to sales of $6.37 billion
in 1999 and $6.14 billion in 1998. Sales growth in 2000 was driven
by The BEST of AMERICA variable annuities and reflects the
successful introduction of the Extra Value rider, which accounted
for $2.65 billion of sales. In addition, sales of deferred fixed
annuities increased 61% to $534.8 million driven by additional
bank distribution.
Institutional Products
The Institutional Products segment is comprised of the Company's
group pension and payroll deduction business, both public and
private sectors, and medium-term note program. The public sector
includes the 457 business in the form of fixed and variable
annuities. The private sector includes the 401(k) business
generated through fixed and variable annuities. The sales figures
do not include business generated through the Company's
medium-term note program, large case pension plan acquisitions and
Nationwide employee and agent benefit plans, however the income
statement data does reflect this business.
12
13
The following table summarizes certain selected financial data for
the Company's Institutional Products segment for the years
indicated.
(in millions) 2000 1999 1998
==========================================================================================================
INCOME STATEMENT DATA
Revenues:
Asset fees $ 220.2 $ 190.3 $ 149.0
Net investment income 827.4 771.2 784.7
Other 31.4 21.6 18.8
----------------------------------------------------------------------------------------------------------
1,079.0 983.1 952.5
----------------------------------------------------------------------------------------------------------
Benefits and expenses:
Interest credited to policyholder account balances 628.8 580.9 595.7
Other benefits and expenses 219.5 184.4 176.4
----------------------------------------------------------------------------------------------------------
848.3 765.3 772.1
----------------------------------------------------------------------------------------------------------
Operating income before federal income tax expense $ 230.7 $ 217.8 $ 180.4
==========================================================================================================
OTHER DATA
Sales:
Private sector pension plans $3,978.7 $3,620.8 $2,801.8
Public sector pension plans 2,148.8 2,190.3 2,143.0
----------------------------------------------------------------------------------------------------------
Total institutional products sales $6,127.5 $5,811.1 $4,944.8
==========================================================================================================
Average account balances:
Separate account $27,806.7 $22,350.3 $16,995.4
General account 10,521.2 10,147.7 9,667.4
----------------------------------------------------------------------------------------------------------
Total average account balances $38,327.9 $32,498.0 $26,662.8
==========================================================================================================
Account balances as of year end:
Private sector pension plans $18,001.4 $19,246.2 $14,568.8
Public sector pension plans 17,294.5 18,949.2 15,801.4
Medium-term notes 1,627.7 574.5 -
----------------------------------------------------------------------------------------------------------
Total account balances $36,923.6 $38,769.9 $30,370.2
==========================================================================================================
Return on average equity 24.2% 24.5% 22.0%
Pre-tax operating income to average account balances 0.59% 0.65% 0.66%
----------------------------------------------------------------------------------------------------------
Institutional Products segment earnings growth in 2000 and 1999
was driven by higher asset fees from 24% and 32% increases in
average separate account assets in 2000 and 1999, respectively.
Net investment income increased $56.2 million in 2000 to $827.4
million, following a decline in 1999 of $13.5 million to $771.2
million. The change in net investment income was driven by higher
average general account assets in each year and an increase in
average investment yields in 2000 and a decrease in average
investment yields in 1999. The increase in interest credited in
2000 is primarily the result of a 4% increase in average general
account reserves and an increase in the average crediting rate of
26 basis points. The decrease in interest credited in 1999 is
primarily the result of a 44 basis point decrease in the average
interest-crediting rate reflecting lower market rates, offset by a
5% increase in average general account reserves. Higher operating
expenses in 2000 reflect the significant technology investments
made as part of the new business model in the public sector
business.
13
14
The following table depicts the interest spread on average general
account reserves in the Institutional Products segment for each of
the last three years.
2000 1999 1998
==========================================================================================================
Net investment income 7.86% 7.60% 8.12%
Interest credited 5.98 5.72 6.16
----------------------------------------------------------------------------------------------------------
Interest spread 1.88% 1.88% 1.96%
==========================================================================================================
During 1998 and 1999 the Company experienced an increase in
mortgage loan and bond prepayment fees and such income accounted
for approximately 4 basis points of the interest spread in 2000
compared to 8 basis points and 22 basis points in 1999 and 1998,
respectively. Increases in interest rates in early 2000 generated
higher net investment income and slowed prepayment activity.
The Company is able to mitigate the effects of changes in
investment yields by periodically resetting the rates credited on
fixed features sold through group annuity contracts. Fixed annuity
policy reserves in the Institutional Products segment as of
December 31, 2000, included $7.03 billion in contracts where the
guaranteed interest rate is reestablished each quarter and $545.9
million in contracts that adjust the crediting rate periodically
with portions resetting in each calendar quarter. In this segment,
the Company also has $809.4 million of fixed option of variable
annuity policy reserves that call for the crediting rate to be
reset annually on January 1. The remaining $1.63 billion 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 either fixed for the term of the contract or
variable, based on an underlying index.
Institutional Products segment deposits in 2000 of $6.33 billion
offset by participant withdrawals and surrenders totaling $5.59
billion generated net flows from participant activity of $738.9
million. Net flows in 2000 are down from the $1.55 billion and
$2.00 billion achieved in 1999 and 1998, respectively. Net case
(terminations) acquisitions were ($1.32) billion in 2000, $810.8
million in 1999 and none in 1998. The increase in net terminations
in 2000 reflects the increasingly competitive environment
particularly in the public sector market.
Changes in the Company's products, including the introduction of
new institutional products with reduced policy charges, and the
mix of business have slightly decreased the ratio of asset fees to
average separate account assets within the segment. This ratio was
0.79% in 2000 compared to 0.83% and 0.86% in 1999 and 1998,
respectively.
The Company has recently experienced decreases in pre-tax
operating income to average account balances, which reached 0.59%
in 2000, compared to 0.65% in 1999 and to 0.66% in 1998. The
decreases were primarily driven by a change in the mix of
products, including new products with reduced policy charges and
the growth in separate account products.
Institutional Products sales during 2000 reached $6.13 billion
compared to sales of $5.81 billion in 1999 and $4.94 billion in
1998. The growth in each year is primarily attributable to private
sector plans. The independent broker/dealer, brokerage firms and
financial institutions channels all reported sales growth in
excess of 10 percent each year.
Life Insurance
The Life Insurance segment consists of insurance products,
including universal life insurance, COLI and BOLI products, which
provide a death benefit and also allow the customer to build cash
value on a tax-advantaged basis.
14
15
The following table summarizes certain selected financial data for
the Company's Life Insurance segment for the years indicated.
(in millions) 2000 1999 1998
==========================================================================================================
INCOME STATEMENT DATA
Revenues:
Total policy charges $ 266.6 $ 199.0 $ 141.6
Other 476.5 447.1 402.5
----------------------------------------------------------------------------------------------------------
743.1 646.1 544.1
----------------------------------------------------------------------------------------------------------
Benefits 389.3 359.5 308.3
Operating expenses 200.9 165.8 147.0
----------------------------------------------------------------------------------------------------------
590.2 525.3 455.3
----------------------------------------------------------------------------------------------------------
Operating income before federal income tax expense $ 152.9 $ 120.8 $ 88.8
==========================================================================================================
OTHER DATA
Sales:
The BEST of AMERICA variable life series $ 573.4 $ 425.9 $ 316.0
Corporate-owned life insurance 711.4 409.2 91.1
Traditional/Universal life insurance 245.4 260.8 246.1
----------------------------------------------------------------------------------------------------------
Total life insurance sales $ 1,530.2 $ 1,095.9 $ 653.2
==========================================================================================================
Policy reserves as of year end:
Individual investment life insurance $ 2,092.0 $ 1,832.3 $ 1,270.1
Corporate investment life insurance 2,552.3 1,498.6 903.6
Traditional life insurance 1,813.0 1,787.0 1,689.4
Universal life insurance 768.2 795.9 750.3
----------------------------------------------------------------------------------------------------------
Total policy reserves $ 7,225.5 $ 5,913.8 $ 4,613.4
==========================================================================================================
Return on average equity 11.5% 11.0% 8.9%
----------------------------------------------------------------------------------------------------------
Life Insurance segment earnings in 2000 increased 27% to $152.9
million, up from $120.8 million a year ago and $88.8 million in
1998. Continued strong sales and reserve growth from both
individual and corporate investment life insurance products
contributed to the sharp earnings increases.
Driven primarily by increased policy charges, revenues from
investment life products increased to $322.4 million in 2000
compared to $226.5 million in 1999 and $145.4 million in 1998. The
revenue growth reflects significantly increased policy reserve
levels as individual investment life reserves increased 14% in
2000 to $2.09 billion compared to $1.83 billion a year ago and
$1.27 billion at the end of 1998. Corporate investment life
reserves, which include both COLI and BOLI products, reached $2.55
billion, up from $1.50 billion and $903.6 million at the end of
1999 and 1998, respectively.
Pre-tax earnings from investment life products reached $85.3
million in 2000 compared to $53.4 million a year ago and $29.6
million in 1998. The strong revenue growth discussed previously
more than offset increased operating expenses associated with the
growth in business.
Traditional/Universal life pre-tax earnings slightly increased to
$67.6 million in 2000 compared to $67.4 million in 1999 and were
$59.2 million in 1998. The 1998 results reflect additional
expenses related to the installation of a new policy
administration system.
Total life insurance sales, excluding all BOLI and Nationwide
employee and agent benefit plan sales increased 40% to $1.53
billion in 2000 compared to $1.10 billion during 1999 and $653.2
million in 1998. Sales in 2000 include record levels of production
for individual investment life insurance and COLI, reflecting the
Company's efforts to sell through multiple channels and growing
producer and consumer acceptance of these product offerings.
15
16
Corporate
The Corporate segment includes net investment income not allocated
to the three product segments, unallocated expenses and interest
expense on short-term borrowings. 1999 and 1998 results also
include investment management activities associated with
Nationwide mutual funds. During 1999, these investment management
activities were assigned to an affiliate. In addition to these
operating revenues and expenses, the Company also reports net
realized gains and losses on investments in the Corporate segment.
The following table summarizes certain selected financial data for
the Company's Corporate segment for the years indicated.
(in millions) 2000 1999 1998
==========================================================================================================
INCOME STATEMENT DATA
Operating revenues $ 72.1 $ 103.7 $ 106.4
Operating expenses 35.0 83.4 78.4
----------------------------------------------------------------------------------------------------------
Operating income before federal income tax expense (1) $ 37.1 $ 20.3 $ 28.0
==========================================================================================================
----------
(1) Excludes net realized gains (losses) on investments.
In addition to the operating revenues presented in the table
above, the Company also reports net realized gains and losses on
investments in the Corporate segment. The Company realized net
investment (losses) gains of ($19.4) million, ($11.6) million and
$28.4 million during 2000, 1999 and 1998, respectively. During
2000 the Company recognized a total of $19.4 million of realized
losses on three fixed maturity security holdings.
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, 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
3.0% 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 2000. The average crediting rate of fixed
annuity products during 2000 was 5.64% and 5.98% for the
Individual Annuity and Institutional Products segments,
respectively, 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- and asset-backed
securities with limited prepayment exposure.
16
17
Conversely, a rising interest rate environment could result in a
reduction of interest spread income or an increase in policyholder
surrenders. Existing general account investments supporting
annuity liabilities have a weighted average maturity of
approximately 4.5 years as of December 31, 2000 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 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- and asset-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.
Each product line has an investment strategy based on its specific
characteristics. The strategy establishes asset maturity and
duration, quality and other guidelines. 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- and asset-backed securities, repayments are
determined using the current rate of repayment of the underlying
mortgages or assets and the terms of the securities.
For individual immediate annuities 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. As of December 31,
2000, the average duration of assets in this pool was 7.40 years
and the average duration of the liabilities was 7.51 years.
Individual immediate annuity policy reserves on this business were
$1.52 billion as of December 31, 2000.
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 11
additional scenarios, which involve more extreme fluctuations in
future interest rates and equity markets. Finally, to get a
statistical analysis of possible results and to minimize any bias
in the 18 predetermined scenarios, additional projections are made
using 50 randomly generated interest rate scenarios. For the
Company's 2000 cash flow testing process, interest rates for
90-day treasury bills ranged from 1.02% to 12.99% under the 18
predetermined scenarios and 0.39% to 28.48% 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, 2000.
Characteristics of Interest Rate Sensitive Financial Instruments
The following table provides information about the Company's
financial instruments as of December 31, 2000 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.
17
18
1999
There- Fair Fair
(in millions) 2001 2002 2003 2004 2005 after Total Value Value
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Fixed maturity securities:
Corporate bonds:
Principal $ 1,578.1 $ 1,565.5 $ 1,169.1 $ 1,018.9 $ 1,313.1 $ 3,388.1 $ 10,032.8 $ 9,858.2 $ 9,536.5
Average interest rate 7.4% 7.4% 7.2% 7.4% 7.6% 8.2% 7.7%
Mortgage and other asset-
backed securities:
Principal $ 1,193.7 $ 991.3 $ 725.7 $ 555.5 $ 431.1 $ 1,295.5 $ 5,192.8 $ 5,169.7 $ 5,196.9
Average interest rate 7.3% 7.4% 7.5% 7.6% 7.8% 7.8% 7.6%
Other fixed maturity securities:
Principal $ 56.0 $ 8.8 $ 26.1 $ 49.0 $ 12.3 $ 346.4 $ 498.6 $ 415.1 $ 560.6
Average interest rate 7.0% 10.9% 8.3% 7.9% 7.6% 8.0% 7.9%
Mortgage loans on real estate:
Principal $ 253.6 $ 393.8 $ 487.5 $ 488.2 $ 776.9 $ 3,812.4 $ 6,212.4 $ 6,327.8 $ 5,745.5
Average interest rate 8.7% 8.6% 8.1% 7.9% 8.2% 7.9% 8.0%
LIABILITIES
Deferred fixed annuities:
Principal $ 2,239.0 $ 1,495.0 $ 1,282.0 $ 1,105.0 $ 964.0 $ 9,404.9 $ 16,430.3 $ 15,697.8 $16,197.4
Average credited rate 5.8% 5.8% 5.9% 6.0% 6.1% 6.2% 6.1%
Immediate annuities:
Principal $ 45.0 $ 41.0 $ 35.0 $ 32.0 $ 28.0 $ 204.0 $ 385.0 $ 282.0 $ 237.8
Average credited rate 7.2% 7.2% 7.2% 7.2% 7.3% 7.3% 7.3%
Short-term borrowings
Principal $ 120.0 $ -- $ -- $ -- $ -- $ -- $ 120.0 $ 118.7 $ --
Average interest rate 6.5% -- -- -- -- -- 6.5%
DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swaps:
Pay fixed/receive variable
Notional value $ - $ 30.0 $ 62.5 $ 133.9 $ 290.6 $ 417.8 $ 934.8 $ (21.3)$ 4.8
Weighted average pay rate - 4.1% 6.7% 6.8% 6.4% 6.9% 6.6%
Weighted average receive rate - 7.8% 6.6% 6.7% 7.0% 6.8% 6.9%
Pay variable/receive fixed
Notional value $ - $ 5.0 $ 28.1 $ 343.4 $ 394.2 $ 293.5 $ 1,064.2 $ (32.1)$ (25.3)
Weighted average pay rate - 6.8% 6.9% 7.0% 7.1% 7.0% 7.1%
Weighted average receive rate - 7.0% 4.0% 3.1% 2.6% 5.4% 3.6%
Pay variable/receive variable
Notional value $ - $ - $ 375.9 $ 9.0 $ 316.0 $ 30.0 $ 730.9 $ 5.2 $ -
Weighted average pay rate - - 6.9% 6.9% 6.8% 7.2% 6.9%
Weighted average receive rate - - 4.0% 6.8% 5.0% 7.4% 4.6%
Interest rate futures:
Long positions
Contract amount/notional $ 36.0 $ 34.0 $ 6.0 $ 4.0 $ 1.0 $ - $ 81.0 $ 0.3 $ -
Weighted average settlement
price $ 92.8 $ 92.8 $ 92.5 $ 92.3 $ 92.3 $ - $ 92.8
Short positions
Contract amount/notional $ 1,685.8 $ 1,349.0 $ 922.0 $ 696.0 $ 403.0 $ 523.0 $ 5,578.8 $ (16.3)$ 1.3
Weighted average settlement
price $ 93.5 $ 93.0 $ 93.0 $ 92.9 $ 92.8 $ 92.6 $ 93.0
Additional information about the characteristics of the financial
instruments and assumptions underlying the data presented in the
table above are as follows:
Mortgage- and asset-backed securities (MBSs and ABSs): The
maturity year is determined based on the terms of the securities
and the current rate of prepayment of the underlying pools of
mortgages or assets. The Company limits its exposure to
prepayments by purchasing less volatile types of MBSs and ABSs.
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.
18
19
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 representing $8.39 billion of
general account liabilities as of December 31, 2000, which are
generally subject to market value adjustment upon surrender and
which may also be subject to surrender charges. Of the total group
annuity liabilities, $7.03 billion were in contracts where the
crediting rate is reset quarterly, $545.9 million were in
contracts that adjust the crediting rate on an annual basis with
portions resetting in each calendar quarter and $809.4 million
were in contracts where the crediting rate is reset annually on
January 1. Fixed annuity policy reserves of $1.63 billion relate
to funding agreements issued in conjunction with the Company's
medium-term note program where the crediting rate is either fixed
for the term of the contract or variable, based on an underlying
index. Also included in deferred fixed annuities are certain
individual annuity contracts, which 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. At December 31,
2000, individual annuity general account liabilities totaling
$4.92 billion were in contracts where the crediting rate is reset
periodically, with portions resetting in each calendar quarter and
$398.7 million that reset annually on January 1. 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.
Short-term borrowings: The maturity year is the stated maturity
date of the obligation.
Derivative financial instruments: The maturity year is based on
the terms of the related contracts. Interest rate swaps include
cross-currency swaps that eliminate all foreign currency exposure
the Company has with existing assets and liabilities. Underlying
details by currency have therefore been omitted. Variable swap
rates and settlement prices reflect those in effect at December
31, 2000.
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, 2000, 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.
INFLATION
The rate of inflation did not have a material effect on the
revenues or operating results of the Company during 2000, 1999 or
1998.
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.
19
20
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, 2000 and 1999 F-2
Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 F-3
Consolidated Statements of Shareholder's Equity for the years
ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999
and 1998 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, 2000 F-27
Schedule III Supplementary Insurance Information as of December 31, 2000, 1999 and
1998 and for each of the years then ended F-28
Schedule IV Reinsurance as of December 31, 2000, 1999 and 1998 and for each of the
years then ended F-29
Schedule V Valuation and Qualifying Accounts for the years ended December 31,
2000, 1999 and 1998 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 23
20
21
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/ W. G. Jurgensen
-------------------
W. G. Jurgensen, Chief Executive Officer -
Nationwide Life Insurance Company
Date: February 27, 2001
21
22
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/ David O. Miller February 7, 2001 /s/ W. G. Jurgensen February 27, 2001
- --------------------------------------------- -------------------- --------------------------------------------- ------------------
David O. Miller, Chairman of the Board Date W. G. Jurgensen, Chief Executive Officer Date
and Director
/s/ Joseph J. Gasper February 27, 2001 /s/ Lewis J. Alphin February 27, 2001
- --------------------------------------------- -------------------- --------------------------------------------- ------------------
Joseph J. Gasper, President, Chief Date Lewis J. Alphin, Director Date
Operating Officer and Director
/s/ A.I. Bell February 27, 2001 /s/ Nancy C. Breit February 27, 2001
- --------------------------------------------- -------------------- --------------------------------------------- ------------------
A.I. Bell, Director Date Nancy C. Breit, Director Date
/s/ Kenneth D. Davis February 27, 2001 /s/ Keith W. Eckel February 27, 2001
- --------------------------------------------- -------------------- --------------------------------------------- ------------------
Kenneth D. Davis, Director Date Keith W. Eckel, Director Date
/s/ Willard J. Engel February 27, 2001 /s/ Fred C. Finney February 27, 2001
- --------------------------------------------- -------------------- --------------------------------------------- ------------------
Willard J. Engel, Director Date Fred C. Finney, Director Date
/s/ Yvonne M. Curl February 27, 2001 /s/ Ralph M. Paige February 27, 2001
- --------------------------------------------- -------------------- --------------------------------------------- ------------------
Yvonne M. Curl, Director Date Ralph M. Paige, Director Date
/s/ James F. Patterson February 27, 2001 /s/ Arden L. Shisler February 27, 2001
- --------------------------------------------- -------------------- --------------------------------------------- ------------------
James F. Patterson, Director Date Arden L. Shisler, Director Date
/s/ Robert L. Stewart February 27, 2001 /s/ Robert A. Oakley February 27, 2001
- --------------------------------------------- -------------------- --------------------------------------------- ------------------
Robert L. Stewart, Director Date Robert A. Oakley, Executive Vice Date
President - Chief Financial Officer
/s/ Mark R. Thresher February 27, 2001
- --------------------------------------------- --------------------
Mark R. Thresher, Senior Vice President - Date
Finance - Nationwide Financial
(Chief Accounting Officer)
22
23
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 3.2 to Form 10-Q,
Commission File Number 2-28596, filed August 14, 2000, 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)
10.1.2 Second Amendment to the Tax Sharing Agreement among Nationwide
Mutual Insurance Company and any corporation that may hereafter be
a subsidiary of Nationwide Mutual Insurance Company (filed as
Exhibit 10.2.2 to Form 10-K, Commission File Number 1-12785, filed
March 29, 2001, and incorporated herein by reference)
10.1.3 Third Amendment to the Tax Sharing Agreement among Nationwide Mutual
Insurance Company and any corporation that may hereafter be a
subsidiary of Nationwide Mutual Insurance Company (filed as
Exhibit 10.2.3 to Form 10-K, Commission File Number 1-12785, filed
March 29, 2001, 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 Five Year Credit Agreement, dated May 25, 2000, among Nationwide
Financial Services, Inc., Nationwide Life Insurance Company,
Nationwide Mutual Insurance Company, the banks named therein and
Bank One, NA, as agent (filed as Exhibit 10.5 to Form 10-K,
Commission File Number 1-12785, filed March 29, 2001, and
incorporated herein by reference)
10.4.1 Amendment dated as of September 29, 2000 to the Five Year Credit
Agreement dated as of May 25, 2000 among Nationwide Financial
Services, Inc., Nationwide Life Insurance Company, Nationwide
Mutual Insurance Company, the banks party thereto and Bank One,
NA, as agent (filed as Exhibit 10.5.1 to Form 10-K, Commission
File Number 1-12785, filed March 29, 2001, and incorporated herein
by reference)
10.5 364-Day Credit Agreement, dated May 25, 2000, among Nationwide
Financial Services, Inc., Nationwide Life Insurance Company,
Nationwide Mutual Insurance Company, the banks named therein and
Bank One, NA, as agent (filed as Exhibit 10.6 to Form 10-K,
Commission File Number 1-12785, filed March 29, 2001, and
incorporated herein by reference)
10.5.1 Amendment dated as of September 29, 2000 to the 364-Day Credit
Agreement dated as of May 25, 2000 among Nationwide Financial
Services, Inc., Nationwide Life Insurance Company, Nationwide
Mutual Insurance Company, the banks party thereto and Bank One,
NA, as agent (filed as Exhibit 10.6.1 to Form 10-K, Commission
File Number 1-12785, filed March 29, 2001, 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 Performance Incentive Plan (filed
as Exhibit 10.9 to Form 10-K, Commission File Number 1-12785,
filed March 29, 2001, and incorporated herein by reference)
10.8 Form of Nationwide Office of Investment Incentive Plan (filed as
Exhibit 10.10 to Form 10-K, Commission File Number 1-12785, filed
March 29, 2001, 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)
23
24
Exhibit
- ----------
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 Nationwide Financial Services, Inc. and certain
subsidiaries of Nationwide Financial Services, Inc. (previously
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 (previously filed as Exhibit 10.20 to
Form 10-K, Commission File Number 1-12785, filed March 29, 2000,
and incorporated herein by reference)
10.18 Form of Employment Agreement, dated January 1, 2000, between
Nationwide Mutual Insurance Company and John Cook (previously
filed as Exhibit 10.24 to Form 10-Q, Commission File Number
1-12785, filed August 14, 2000, and incorporated herein by
reference)
10.19 Form of Employment Agreement, dated January 1, 2000, between
Nationwide Mutual Insurance Company and Patricia Hatler
(previously filed as Exhibit 10.25 to Form 10-Q, Commission File
Number 1-12785, filed August 14, 2000, and incorporated herein by
reference)
10.20 Form of Employment Agreement, dated January 1, 2000, between
Nationwide Mutual Insurance Company and Richard Headley
(previously filed as Exhibit 10.26 to Form 10-Q, Commission File
Number 1-12785, filed August 14, 2000, and incorporated herein by
reference)
10.21 Form of Employment Agreement, dated January 1, 2000, between
Nationwide Mutual Insurance Company and Donna James (previously
filed as Exhibit 10.27 to Form 10-Q, Commission File Number
1-12785, filed August 14, 2000, and incorporated herein by
reference)
10.22 Form of Employment Agreement, dated January 1, 2000, between
Nationwide Mutual Insurance Company and Greg Lashutka (previously
filed as Exhibit 10.28 to Form 10-Q, Commission File Number
1-12785, filed August 14, 2000, and incorporated herein by
reference)
10.23 Form of Employment Agreement, dated January 1, 2000, between
Nationwide Mutual Insurance Company and Robert Oakley (previously
filed as Exhibit 10.29 to Form 10-Q, Commission File Number
1-12785, filed August 14, 2000, and incorporated herein by
reference)
10.24 Form of Employment Agreement, dated January 1, 2000, between
Nationwide Mutual Insurance Company and Robert Woodward
(previously filed as Exhibit 10.30 to Form 10-Q, Commission File
Number 1-12785, filed August 14, 2000, and incorporated herein by
reference)
10.25 Form of Employment Agreement, dated August 11, 2000, between
Nationwide Mutual Insurance Company and Michael Helfer (previously
filed as Exhibit 10.31 to Form 10-Q, Commission File Number
1-12785, filed August 14, 2000, and incorporated herein by
reference)
10.26 Form of Employment Agreement, dated May 26, 2000, between
Nationwide Mutual Insurance Company and W.G. Jurgensen (previously
filed as Exhibit 10.32 to Form 10-Q, Commission File Number
1-12785, filed November 13, 2000, and incorporated herein by
reference)
10.27 Form of Employment Agreement, dated July 1, 2000, between
Nationwide Financial Services, Inc. and Joseph Gasper (previously
filed as Exhibit 10.33 to Form 10-Q, Commission File Number
1-12785, filed November 13, 2000, and incorporated herein by
reference)
10.28 Form of Retention Agreement, dated July 1, 2000, between
Nationwide Financial Services, Inc. and Joseph Gasper (previously
filed as Exhibit 10.34 to Form 10-Q, Commission File Number
1-12785, filed November 13, 2000, and incorporated herein by
reference)
24
25
Exhibit
- ----------
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.
25
26
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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. 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 26, 2001
F-1
27
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,
------------------------------------
2000 1999
============================================================================================================================
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities $ 15,443.0 $ 15,294.0
Equity securities 109.0 92.9
Mortgage loans on real estate, net 6,168.3 5,786.3
Real estate, net 310.7 254.8
Policy loans 562.6 519.6
Other long-term investments 101.8 73.8
Short-term investments 442.6 416.0
- ----------------------------------------------------------------------------------------------------------------------------
23,138.0 22,437.4
- ----------------------------------------------------------------------------------------------------------------------------
Cash 18.4 4.8
Accrued investment income 251.4 238.6
Deferred policy acquisition costs 2,865.6 2,554.1
Other assets 396.7 305.9
Assets held in separate accounts 65,897.2 67,135.1
- ----------------------------------------------------------------------------------------------------------------------------
$ 92,567.3 $ 92,675.9
============================================================================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims $ 22,183.6 $ 21,861.6
Short-term borrowings 118.7 -
Other liabilities 1,164.9 914.2
Liabilities related to separate accounts 65,897.2 67,135.1
- ----------------------------------------------------------------------------------------------------------------------------
89,364.4 89,910.9
- ----------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 9 and 14)
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 646.1 766.1
Retained earnings 2,436.3 2,011.0
Accumulated other comprehensive income (loss) 116.7 (15.9)
- ----------------------------------------------------------------------------------------------------------------------------
3,202.9 2,765.0
- ----------------------------------------------------------------------------------------------------------------------------
$ 92,567.3 $ 92,675.9
============================================================================================================================
See accompanying notes to consolidated financial statements.
F-2
28
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,
---------------------------------------------
2000 1999 1998
===========================================================================================================================
Revenues:
Policy charges $ 1,091.4 $ 895.5 $ 698.9
Life insurance premiums 240.0 220.8 200.0
Net investment income 1,654.9 1,520.8 1,481.6
Realized (losses) gains on investments (19.4) (11.6) 28.4
Other 17.0 66.1 66.8
- ---------------------------------------------------------------------------------------------------------------------------
2,983.9 2,691.6 2,475.7
- ---------------------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Interest credited to policyholder account balances 1,182.4 1,096.3 1,069.0
Other benefits and claims 241.6 210.4 175.8
Policyholder dividends on participating policies 44.5 42.4 39.6
Amortization of deferred policy acquisition costs 352.1 272.6 214.5
Interest expense on short-term borrowings 1.3 - -
Other operating expenses 479.0 463.4 419.7
- ---------------------------------------------------------------------------------------------------------------------------
2,300.9 2,085.1 1,918.6
- ---------------------------------------------------------------------------------------------------------------------------
Income before federal income tax expense 683.0 606.5 557.1
Federal income tax expense 207.7 201.4 190.4
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 475.3 $ 405.1 $ 366.7
===========================================================================================================================
See accompanying notes to consolidated financial statements.
F-3
29
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, 2000, 1999 and 1998
(in millions)
Accumulated
Additional other Total
Common paid-in Retained comprehensive shareholder's
stock capital earnings income (loss) equity
=========================================================================================================================
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
Return of capital to shareholder - (175.0) - - (175.0)
Dividends to shareholder - - (61.0) - (61.0)
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1999 3.8 766.1 2,011.0 (15.9) 2,765.0
=========================================================================================================================
Comprehensive income:
Net income - - 475.3 - 475.3
Net unrealized gains on securities
available-for-sale arising during
the year - - - 132.6 132.6
---------------
Total comprehensive income 607.9
---------------
Return of capital to shareholder - (120.0) - - (120.0)
Dividends to shareholder - - (50.0) - (50.0)
- -------------------------------------------------------------------------------------------------------------------------
December 31, 2000 $ 3.8 $ 646.1 $ 2,436.3 $ 116.7 $ 3,202.9
=========================================================================================================================
See accompanying notes to consolidated financial statements.
F-4
30
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,
----------------------------------------------
2000 1999 1998
==============================================================================================================================
Cash flows from operating activities:
Net income $ 475.3 $ 405.1 $ 366.7
Adjustments to reconcile net income to net cash provided by operating
activities:
Interest credited to policyholder account balances 1,182.4 1,096.3 1,069.0
Capitalization of deferred policy acquisition costs (778.9) (637.0) (584.2)
Amortization of deferred policy acquisition costs 352.1 272.6 214.5
Amortization and depreciation (12.7) 2.4 (8.5)
Realized losses (gains) on invested assets, net 19.4 11.6 (28.4)
Increase in accrued investment income (12.8) (7.9) (8.2)
(Increase) decrease in other assets (92.0) 122.9 16.4
Decrease in policy liabilities (0.3) (20.9) (8.3)
Increase (decrease) in other liabilities 229.3 149.7 (34.8)
Other, net 22.3 (8.6) (11.3)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,384.1 1,386.2 982.9
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale 2,988.7 2,307.9 1,557.0
Proceeds from sale of securities available-for-sale 602.0 513.1 610.5
Proceeds from repayments of mortgage loans on real estate 911.7 696.7 678.2
Proceeds from sale of real estate 18.7 5.7 103.8
Proceeds from repayments of policy loans and sale of other invested assets 79.3 40.9 23.6
Cost of securities available-for-sale acquired (3,475.5) (3,724.9) (3,182.8)
Cost of mortgage loans on real estate acquired (1,318.0) (971.4) (829.1)
Cost of real estate acquired (7.1) (14.2) (0.8)
Short-term investments, net (26.6) (27.5) 69.3
Other, net (182.3) (110.9) (88.4)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (409.1) (1,284.6) (1,058.7)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Capital returned to shareholder (120.0) (175.0) -
Net proceeds from issuance of short-term borrowings (commercial paper) 118.7 - -
Cash dividends paid (100.0) (13.5) (100.0)
Increase in investment product and universal life insurance
product account balances 4,517.0 3,799.4 2,682.1
Decrease in investment product and universal life insurance
product account balances (5,377.1) (3,711.1) (2,678.5)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (961.4) (100.2) (96.4)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 13.6 1.4 (172.2)
Cash, beginning of year 4.8 3.4 175.6
- ------------------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 18.4 $ 4.8 $ 3.4
==============================================================================================================================
See accompanying notes to consolidated financial statements.
F-5
31
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Nationwide Life Insurance Company (NLIC, or collectively with its
subsidiaries, the Company) 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 individual
annuities, private and public sector pension plans and other investment
products sold to institutions and life insurance. 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 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.
(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 accounting principles generally accepted in the United
States of America 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, the liability for
future policy benefits and claims and federal income taxes. 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
32
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. The Company classifies fixed
maturity and equity securities as available-for-sale.
Available-for-sale securities 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.
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
33
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 $1.12 billion and $915.4
million of separate account assets at December 31, 2000 and 1999,
respectively, 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.
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.
(g) PARTICIPATING BUSINESS
Participating business represents approximately 21% in 2000 (29%
in 1999 and 40% in 1998) of the Company's life insurance in force,
66% in 2000 (69% in 1999 and 74% in 1998) of the number of life
insurance policies in force, and 8% in 2000 (13% in 1999 and 14%
in 1998) 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 NFS. 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.
F-8
34
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
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 June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS
133). SFAS 133, as amended by SFAS 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133 and SFAS 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, is
effective for the Company as of January 1, 2001.
SFAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires an
entity to recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at
fair value.
As of January 1, 2001, the Company had $755.4 million notional
amount of freestanding derivatives with a market value of ($7.0)
million. All other derivatives qualified for hedge accounting
under SFAS 133. Adoption of SFAS 133 will result in the Company
recording a net transition adjustment loss of $4.8 million (net of
related income tax of $2.6 million) in net income. In addition, a
net transition adjustment loss of $3.6 million (net of related
income tax of $2.0 million) will be recorded in accumulated other
comprehensive income at January 1, 2001. The adoption of SFAS 133
will result in the Company derecognizing $17.0 million of deferred
assets related to hedges, recognizing $10.9 million of additional
derivative instrument liabilities and $1.3 million of additional
firm commitment assets, while also decreasing hedged future policy
benefits by $3.0 million and increasing the carrying amount of
hedged investments by $10.6 million. Further, the adoption of SFAS
133 will result in the Company reporting total derivative
instrument assets and liabilities of $44.8 million and $107.1
million, respectively.
Also, the Company expects that the adoption of SFAS 133 will
increase the volatility of reported earnings and other
comprehensive income. The amount of volatility will vary with the
level of derivative and hedging activities and fluctuations in
market interest rates and foreign currency exchange rates during
any period.
(k) RECLASSIFICATION
Certain items in the 1999 and 1998 consolidated financial
statements have been reclassified to conform to the 2000
presentation.
F-9
35
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, 2000 and
1999 were:
Gross Gross
Amortized unrealized unrealized Estimated
(in millions) cost gains losses fair value
=========================================================================================================================
December 31, 2000
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 277.5 $ 33.4 $ 0.1 $ 310.8
Obligations of states and political subdivisions 8.6 0.2 - 8.8
Debt securities issued by foreign governments 94.1 1.5 0.1 95.5
Corporate securities 9,758.3 235.0 135.1 9,858.2
Mortgage-backed securities - U.S. Government backed 2,719.1 46.1 3.8 2,761.4
Asset-backed securities 2,388.2 36.3 16.2 2,408.3
-------------------------------------------------------------------------------------------------------------------------
Total fixed maturity securities 15,245.8 352.5 155.3 15,443.0
Equity securities 103.5 9.5 4.0 109.0
-------------------------------------------------------------------------------------------------------------------------
$ 15,349.3 $ 362.0 $ 159.3 $ 15,552.0
=========================================================================================================================
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 9,390.4 110.3 179.9 9,320.8
Mortgage-backed securities - U.S. Government backed 3,423.1 25.8 30.3 3,418.6
Asset-backed securities 2,024.0 8.6 38.6 1,994.0
-------------------------------------------------------------------------------------------------------------------------
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
=========================================================================================================================
The amortized cost and estimated fair value of fixed maturity
securities available-for-sale as of December 31, 2000, 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.
F-10
36
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Amortized Estimated
(in millions) cost fair value
===========================================================================================================
Fixed maturity securities available for sale:
Due in one year or less $ 1,288.7 $ 1,287.0
Due after one year through five years 4,577.9 4,572.4
Due after five years through ten years 3,071.3 3,136.6
Due after ten years 1,200.6 1,277.3
-----------------------------------------------------------------------------------------------------------
10,138.5 10,273.3
Mortgage-backed securities 2,719.1 2,761.4
Asset-backed securities 2,388.2 2,408.3
-----------------------------------------------------------------------------------------------------------
$ 15,245.8 $ 15,443.0
===========================================================================================================
The components of unrealized gains (losses) on securities available-for-sale, net, were as follows as of
each December 31:
(in millions)
2000 1999
===========================================================================================================
Gross unrealized gains (losses) $ 202.7 $ (75.3)
Adjustment to deferred policy acquisition costs (23.2) 50.9
Deferred federal income tax (62.8) 8.5
-----------------------------------------------------------------------------------------------------------
$ 116.7 $ (15.9)
===========================================================================================================
An analysis of the change in gross unrealized gains (losses) on securities available-for-sale for the years
ended December 31:
(in millions) 2000 1999 1998
===========================================================================================================
Securities available-for-sale:
Fixed maturity securities $ 280.5 $ (607.1) $ 52.6
Equity securities (2.5) (8.8) 4.2
-----------------------------------------------------------------------------------------------------------
$ 278.0 $ (615.9) $ 56.8
===========================================================================================================
Proceeds from the sale of securities available-for-sale during 2000,
1999 and 1998 were $602.0 million, $513.1 million and $610.5 million,
respectively. During 2000, gross gains of $12.1 million ($10.4 million
and $9.0 million in 1999 and 1998, respectively) and gross losses of
$25.6 million ($28.0 million and $7.6 million in 1999 and 1998,
respectively) were realized on those sales.
The Company had $13.0 million and $15.6 million of real estate
investments at December 31, 2000 and 1999, respectively, that were
non-income producing the preceding twelve months.
Real estate is presented at cost less accumulated depreciation of $25.7
million as of December 31, 2000 ($24.8 million as of December 31, 1999)
and valuation allowances of $5.2 million as of December 31, 2000 ($5.5
million as of December 31, 1999).
F-11
37
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The recorded investment of mortgage loans on real estate considered to
be impaired was $9.8 million as of December 31, 2000 ($3.7 million as
of December 31, 1999), which includes $5.3 million (none as of December
31, 1999) of impaired mortgage loans on real estate for which the
related valuation allowance was $1.6 million (none as of December 31,
1999) and $4.5 million ($3.7 million as of December 31, 1999) of
impaired mortgage loans on real estate for which there was no valuation
allowance. During 2000, the average recorded investment in impaired
mortgage loans on real estate was $7.7 million ($3.7 million in 1999)
and interest income recognized on those loans totaled $0.4 million in
2000 (none in 1999) which is equal to interest income recognized using
a cash-basis method of income recognition.
Activity in the valuation allowance account for mortgage loans on real
estate is summarized for the years ended December 31:
(in millions) 2000 1999 1998
===========================================================================================================
Allowance, beginning of year $ 44.4 $ 42.4 $ 42.5
Additions (reductions) charged to operations 4.1 0.7 (0.1)
Direct write-downs charged against the allowance (3.2) -- --
Allowance on acquired mortgage loans -- 1.3 --
-----------------------------------------------------------------------------------------------------------
Allowance, end of year $ 45.3 $ 44.4 $ 42.4
===========================================================================================================
An analysis of investment income by investment type follows for the years ended December 31:
(in millions) 2000 1999 1998
===========================================================================================================
Gross investment income:
Securities available-for-sale:
Fixed maturity securities $ 1,095.5 $ 1,031.3 $ 982.5
Equity securities 2.6 2.5 0.8
Mortgage loans on real estate 494.5 460.4 458.9
Real estate 32.2 28.8 40.4
Short-term investments 27.0 18.6 17.8
Other 53.2 26.5 30.7
-----------------------------------------------------------------------------------------------------------
Total investment income 1,705.0 1,568.1 1,531.1
Less investment expenses 50.1 47.3 49.5
-----------------------------------------------------------------------------------------------------------
Net investment income $ 1,654.9 $ 1,520.8 $ 1,481.6
===========================================================================================================
An analysis of realized gains (losses) on investments, net of valuation allowances, by investment type
follows for the years ended December 31:
(in millions) 2000 1999 1998
===========================================================================================================
Securities available-for-sale:
Fixed maturity securities $ (18.2) $ (25.0) $ (0.7)
Equity securities 4.7 7.4 2.1
Mortgage loans on real estate (4.2) (0.6) 3.9
Real estate and other (1.7) 6.6 23.1
-----------------------------------------------------------------------------------------------------------
$ (19.4) $ (11.6) $ 28.4
===========================================================================================================
Fixed maturity securities with an amortized cost of $12.8 million and
$9.1 million were on deposit with various regulatory agencies as
required by law as of December 31, 2000 and 1999, respectively.
F-12
38
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(4) SHORT-TERM BORROWINGS
NLIC established a $300 million commercial paper program in October
2000. Borrowings under the commercial paper program are unsecured and
are issued for terms of 364 days or less. As of December 31, 2000 the
Company had $118.7 million of commercial paper outstanding at an
average effective rate of 6.48%. See also note 13.
(5) 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 and foreign currency 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. See note 2 (j)
regarding accounting for derivatives under SFAS 133 effective January
1, 2001.
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. Currently, 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 and cross currency swaps hedging foreign
denominated debt instruments, 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. 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. 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.
F-13
39
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The notional amount of derivative financial instruments outstanding as
of December 31, 2000 and 1999 were as follows:
(in millions ) 2000 1999
===========================================================================================================
Interest rate swaps
Pay fixed/receive variable rate swaps hedging investments $ 934.8 $ 362.7
Pay variable/receive fixed rate swaps hedging investments 98.8 28.5
Pay variable/receive variable rate swaps hedging investments 184.0 9.0
Other contracts hedging investments 20.4 10.1
Pay variable/receive fixed rate swaps hedging liabilities 965.3 577.2
Pay variable/receive variable rate swaps hedging liabilities 546.9 --
Foreign currency swaps
Hedging foreign currency denominated investments $ 30.5 $ 14.8
Hedging foreign currency denominated liabilities 1,542.2 577.2
Interest rate futures contracts $ 5,659.8 $ 781.6
-----------------------------------------------------------------------------------------------------------
(6) 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, 2000 and 1999 were as follows:
(in millions) 2000 1999
===========================================================================================================
Deferred tax assets:
Fixed maturity securities $ -- $ 5.3
Future policy benefits 34.7 149.5
Liabilities in separate accounts 462.7 373.6
Mortgage loans on real estate and real estate 18.8 18.5
Other assets and other liabilities 40.3 51.1
-----------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 556.5 598.0
Valuation allowance (7.0) (7.0)
-----------------------------------------------------------------------------------------------------------
Net deferred tax assets 549.5 591.0
-----------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Fixed maturity securities 98.8 --
Equity securities and other long-term investments 6.4 10.8
Deferred policy acquisition costs 783.7 724.4
Deferred tax on realized investment gains 29.0 34.7
Other 38.1 26.5
-----------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 956.0 796.4
-----------------------------------------------------------------------------------------------------------
Net deferred tax liability $ 406.5 $ 205.4
===========================================================================================================
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. Future taxable
amounts or recovery of federal income tax paid within the statutory
carryback period can offset nearly all future deductible amounts. The
valuation allowance was unchanged for the years ended December 31,
2000, 1999 and 1998.
F-14
40
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The Company's current federal income tax liability was $108.9 million
and $104.7 million as of December 31, 2000 and 1999, respectively.
Federal income tax expense for the years ended December 31 was as
follows:
(in millions) 2000 1999 1998
===========================================================================================================
Currently payable $ 78.0 $ 53.6 $ 186.1
Deferred tax expense 129.7 147.8 4.3
-----------------------------------------------------------------------------------------------------------
$ 207.7 $ 201.4 $ 190.4
===========================================================================================================
Total federal income tax expense for the years ended December 31, 2000,
1999 and 1998 differs from the amount computed by applying the U.S.
federal income tax rate to income before tax as follows:
2000 1999 1998
---------------------- ---------------------- ----------------------
(in millions) Amount % Amount % Amount %
==================================================================================================================
Computed (expected) tax expense $239.1 35.0 $212.3 35.0 $195.0 35.0
Tax exempt interest and dividends
received deduction (24.7) (3.6) (7.3) (1.2) (4.9) (0.9)
Income tax credits (8.0) (1.2) (4.3) (0.7) - -
Other, net 1.3 0.2 0.7 0.1 0.3 0.1
------------------------------------------------------------------------------------------------------------------
Total (effective rate of each year) $207.7 30.4 $201.4 33.2 $190.4 34.2
==================================================================================================================
Total federal income tax paid was $74.6 million, $29.8 million and
$173.4 million during the years ended December 31, 2000, 1999 and 1998,
respectively.
(7) 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 for the years ended December 31, 2000, 1999 and 1998 were as
follows:
(in millions) 2000 1999 1998
===========================================================================================================
Unrealized gains (losses) on securities available-for-sale arising
during the period:
Gross $ 264.5 $ (665.3) $ 58.2
Adjustment to deferred policy acquisition costs (74.0) 167.5 (12.9)
Related federal income tax (expense) benefit (66.7) 171.4 (15.9)
-----------------------------------------------------------------------------------------------------------
Net 123.8 (326.4) 29.4
-----------------------------------------------------------------------------------------------------------
Reclassification adjustment for net (gains) losses on securities
available-for-sale realized during the period:
Gross 13.5 17.6 (1.4)
Related federal income tax expense (benefit) (4.7) (6.2) 0.5
-----------------------------------------------------------------------------------------------------------
Net 8.8 11.4 (0.9)
-----------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) $ 132.6 $ (315.0) $ 28.5
===========================================================================================================
F-15
41
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(8) 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.
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 Company in estimating its fair value disclosures used the following
methods and assumptions:
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 impaired mortgage loans 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 based on one of 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
42
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.
SHORT-TERM BORROWINGS: The carrying amount reported in the
consolidated balance sheets for these instruments approximates
their 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 9.
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:
2000 1999
------------------------------- -------------------------------
Carrying Estimated Carrying Estimated
(in millions) amount fair value amount fair value
==============================================================================================================
Assets:
Investments:
Securities available-for-sale:
Fixed maturity securities $ 15,451.3 $ 15,451.3 $ 15,289.7 $ 15,289.7
Equity securities 109.0 109.0 92.9 92.9
Mortgage loans on real estate, net 6,168.3 6,327.8 5,786.3 5,745.5
Policy loans 562.6 562.6 519.6 519.6
Short-term investments 442.6 442.6 416.0 416.0
Cash 18.4 18.4 4.8 4.8
Assets held in separate accounts 65,897.2 65,897.2 67,135.1 67,135.1
Liabilities:
Investment contracts (16,815.3) (15,979.8) (16,977.7) (16,428.6)
Policy reserves on life insurance contracts (5,368.4) (5,128.5) (4,883.9) (4,607.9)
Short-term borrowings (118.7) (118.7) -- --
Liabilities related to separate accounts (65,897.2) (64,237.6) (67,135.1) (66,318.7)
Derivative financial instruments:
Interest rate swaps hedging assets (8.3) (8.3) 4.3 4.3
Interest rate swaps hedging liabilities (26.2) (32.2) (11.5) (24.2)
Foreign currency swaps (24.3) (30.9) (11.8) (11.8)
Futures contracts (16.0) (16.0) 1.3 1.3
--------------------------------------------------------------------------------------------------------------
(9) RISK DISCLOSURES
The following is a description of the most significant risks
facing life insurers and how the Company mitigates those risks:
F-17
43
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
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.
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 could
potentially 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 $360.6 million
extending into 2001 were outstanding as of December 31, 2000. The
Company also had $55.6 million of commitments to purchase fixed
maturity securities outstanding as of December 31, 2000.
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. As of December 31,
2000, NLIC's credit risk from these derivative financial instruments
was $44.8 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 22% (23% in 1999) in any geographic area and no more than 1% (2%
in 1999) with any one borrower as of December 31, 2000. As of December
31, 2000, 36% (39% in 1999) of the remaining principal balance of the
Company's commercial mortgage loan portfolio financed retail
properties.
F-18
44
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 reinsurance contracts to cede
a portion of its individual annuity business to The Franklin Life
Insurance Company (Franklin) and beginning in 2000 with Security
Benefit Life Insurance Company (SBL). Total recoveries due from
Franklin were $97.7 million and $143.6 million as of December 31, 2000
and 1999, respectively, while amounts due from SBL totaled $45.4
million at December 31, 2000. The contracts are 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 and SBL have each 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% and 100% of the reinsured
reserves for Franklin and SBL, respectively.
(10) 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 and who have met certain age requirements. Plan
contributions are invested in a group annuity contract of NLIC.
Benefits are based upon the highest average annual salary of a
specified number of consecutive years of the last ten years 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.
Pension cost (benefit) charged to operations by the Company during the
years ended December 31, 2000, 1999 and 1998 were $1.9 million, $(8.3)
million and $2.0 million, respectively. The Company has recorded a
prepaid pension asset of $13.6 million and $13.3 million as of December
31, 2000 and 1999, 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,
2000 and 1999 was $51.0 million and $49.6 million, respectively and the
net periodic postretirement benefit cost (NPPBC) for 2000, 1999 and
1998 was $3.8 million, $4.9 million and $4.1 million, respectively.
F-19
45
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, 2000 and 1999 follows:
Pension Benefits Postretirement Benefits
---------------------------- ---------------------------
(in millions) 2000 1999 2000 1999
===================================================================================================================
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,811.4 $ 2,185.0 $ 239.8 $ 270.1
Service cost 81.4 80.0 12.2 14.2
Interest cost 125.3 109.9 18.7 17.6
Actuarial loss (gain) 34.8 (95.0) 16.1 (64.4)
Plan settlement -- (396.1) -- --
Benefits paid (71.2) (72.4) (10.4) (11.0)
Acquired companies -- -- -- 13.3
-------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 1,981.7 1,811.4 276.4 239.8
-------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 2,247.6 2,541.9 91.3 77.9
Actual return on plan assets 140.9 161.8 12.2 3.5
Employer contribution -- 12.4 26.3 20.9
Plan curtailment in 2000/settlement in 1999 19.8 (396.1) -- --
Benefits paid (71.2) (72.4) (10.4) (11.0)
-------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 2,337.1 2,247.6 119.4 91.3
-------------------------------------------------------------------------------------------------------------------
Funded status 355.4 436.2 (157.0) (148.5)
Unrecognized prior service cost 25.0 28.2 -- --
Unrecognized net gains (311.7) (402.0) (34.1) (46.7)
Unrecognized net (asset) obligation at transition (6.4) (7.7) 1.0 1.1
-------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 62.3 $ 54.7 $ (190.1) $ (194.1)
===================================================================================================================
Assumptions used in calculating the funded status of the pension plan
and postretirement life and health care benefit plan were as follows:
Pension Benefits Postretirement Benefits
--------------------------- ---------------------------
2000 1999 2000 1999
===================================================================================================================
Weighted average discount rate 6.75% 7.00% 7.50% 7.80%
Rate of increase in future compensation levels 5.00% 5.25% -- --
Assumed health care cost trend rate:
Initial rate -- -- 15.00% 15.00%
Ultimate rate -- -- 5.50% 5.50%
Uniform declining period -- -- 5 Years 5 Years
-------------------------------------------------------------------------------------------------------------------
F-20
46
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The components of net periodic pension cost for the pension plan as a
whole for the years ended December 31, 2000, 1999 and 1998 were as
follows:
(in millions) 2000 1999 1998
=========================================================================================================
Service cost (benefits earned during the period) $ 81.4 $ 80.0 $ 87.6
Interest cost on projected benefit obligation 125.3 109.9 123.4
Expected return on plan assets (184.5) (160.3) (159.0)
Recognized gains (11.8) (9.1) (3.8)
Amortization of prior service cost 3.2 3.2 3.2
Amortization of unrecognized transition obligation (asset) (1.3) (1.4) 4.2
---------------------------------------------------------------------------------------------------------
$ 12.3 $ 22.3 $ 55.6
=========================================================================================================
Effective December 31, 1998, Wausau Service Corporation (WSC) ended its
affiliation with Nationwide and employees of WSC ended participation in
the plan resulting in a curtailment gain of $67.1 million. During 1999,
the Plan transferred assets to settle its obligation related to WSC
employees, resulting in a gain of $32.9 million. The spin-off of
liabilities and assets was completed in the year 2000, resulting in an
adjustment to the curtailment gain of $19.8 million.
Assumptions used in calculating the net periodic pension cost for the
pension plan were as follows:
2000 1999 1998
================================================================================================================
Weighted average discount rate 7.00% 6.08% 6.00%
Rate of increase in future compensation levels 5.25% 4.33% 4.25%
Expected long-term rate of return on plan assets 8.25% 7.33% 7.25%
----------------------------------------------------------------------------------------------------------------
The components of NPPBC for the postretirement benefit plan as a whole for the years ended December 31, 2000,
1999 and 1998 were as follows:
(in millions) 2000 1999 1998
================================================================================================================
Service cost (benefits attributed to employee service during the year) $ 12.2 $ 14.2 $ 9.8
Interest cost on accumulated postretirement benefit obligation 18.7 17.6 15.4
Expected return on plan assets (7.9) (4.8) (4.4)
Amortization of unrecognized transition obligation of affiliates 0.6 0.6 0.2
Net amortization and deferral (1.3) (0.5) 0.6
----------------------------------------------------------------------------------------------------------------
$ 22.3 $ 27.1 $ 21.6
================================================================================================================
Actuarial assumptions used for the measurement of the NPPBC for the
postretirement benefit plan for 2000, 1999 and 1998 were as follows:
2000 1999 1998
================================================================================================================
Discount rate 7.80% 6.65% 6.70%
Long-term rate of return on plan assets, net of tax in 1999 and 1998 8.30% 7.15% 5.83%
Assumed health care cost trend rate:
Initial rate 15.00% 15.00% 12.00%
Ultimate rate 5.50% 5.50% 6.00%
Uniform declining period 5 Years 5 Years 12 Years
----------------------------------------------------------------------------------------------------------------
F-21
47
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Because current plan costs are very close to the employer dollar caps,
the health care cost trend has an immaterial effect on plan obligations
for the postretirement benefit plan as a whole. For this reason, the
effect of a one percentage point increase or decrease in the assumed
health care cost trend rate on the APBO as of December 31, 2000 and on
the NPPBC for the year ended December 31, 2000 was not calculated.
(11) 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, 2000, 1999
and 1998 was $1.28 billion, $1.35 billion and $1.32 billion,
respectively. The statutory net income of NLIC for the years ended
December 31, 2000, 1999 and 1998 was $158.7 million, $276.2 million and
$171.0 million, respectively.
The NAIC completed a project to codify statutory accounting principles
(Codification), which is effective January 1, 2001 for NLIC and its
insurance company subsidiary. The resulting change to NLIC's January 1,
2001 surplus was an increase of approximately $80.0 million. The
significant change for NLIC, as a result of Codification, was the
recording of deferred taxes, which were not recorded prior to the
adoption of Codification.
The Company is limited in the amount of shareholder dividends it may
pay without prior approval by the Department. As of December 31, 2000
no dividends could be paid by NLIC without prior approval.
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 shareholders.
The Company currently does not expect such regulatory requirements to
impair its ability to pay operating expenses and shareholder dividends
in the future.
(12) 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 net income in 1999.
F-22
48
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
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, 2000, 1999 and 1998 were $170.1 million, $193.0
million, and $216.9 million, respectively, while benefits, claims and
expenses ceded were $168.0 million, $197.3 million and $259.3 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, 2000, 1999 and 1998, the Company made
payments to NMIC and Nationwide Services Company totaling $150.3
million, $124.1 million, and $95.0 million, respectively. 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, 2000, 1999 and 1998, the
Company made lease payments to NMIC and its subsidiaries of $14.1
million, $9.9 million and $8.0 million, respectively.
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 after a stated period, the
seller will repurchase the securities at the original sales price plus
a price differential. Transactions under the agreements during 2000,
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 $321.1 million and $411.7 million as
of December 31, 2000 and 1999, respectively, and are included in
short-term investments on the accompanying consolidated balance sheets.
Certain annuity products are sold through affiliated companies, which
are also subsidiaries of NFS. Total commissions and fees paid to these
affiliates for the three years ended December 31, 2000 were $65.0
million, $79.7 million and $74.9 million, respectively.
F-23
49
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(13) BANK LINES OF CREDIT
Also available as a source of funds to the Company is a $1 billion
revolving credit facility entered into by NFS, NLIC and NMIC. The
facility is comprised of a five year $700 million agreement and a 364
day $300 million agreement with a group of national financial
institutions. The facility provides for several and not joint liability
with respect to any amount drawn by any party. The facility provides
covenants, including, but not limited to, requirements that NLIC
maintain statutory surplus in excess of $935 million. The Company had
no amounts outstanding under this agreement as of December 31, 2000. Of
the total facility, $300 million is designated to back NLIC's $300
million commercial paper program. Therefore, borrowing capacity under
this facility would be reduced by the amount of any commercial paper
outstanding.
(14) 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.
(15) SEGMENT INFORMATION
The Company has redefined its business segments in order to align this
disclosure with the way management currently views its core operations.
This updated view better reflects the different economics of the
Company's various businesses and also aligns well with the current
market focus. As a result, the Company now reports three product
segments: Individual Annuity, Institutional Products and Life
Insurance. In addition, the Company reports certain other revenues and
expenses in a Corporate segment. All 1999 and 1998 amounts have been
restated to reflect the new business segments.
The Individual Annuity segment consists of both variable and fixed
annuity contracts. Individual annuity contracts provide the customer
with tax-deferred accumulation of savings and flexible payout options
including lump sum, systematic withdrawal or a stream of payments for
life. In addition, variable annuity contracts provide the customer with
access to a wide range of investment options and asset protection in
the event of an untimely death, while fixed annuity contracts generate
a return for the customer at a specified interest rate fixed for a
prescribed period. The Company's individual annuity products consist of
single premium deferred annuities, flexible premium deferred annuities
and single premium immediate annuities.
The Institutional Products segment is comprised of the Company's group
pension and payroll deduction business, both public and private
sectors, and medium-term note program. The public sector includes the
457 business in the form of fixed and variable annuities. The private
sector includes the 401(k) business generated through fixed and
variable annuities.
The Life Insurance segment consists of insurance products, including
universal life insurance, corporate-owned life insurance and bank-owned
life insurance products, which provide a death benefit and also allow
the customer to build cash value on a tax-advantaged basis.
F-24
50
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
In addition to the product segments, the Company reports a Corporate
segment. The Corporate segment includes net investment income not
allocated to the three product segments, certain revenues and expenses
of the Company's investment advisory and broker/dealer subsidiary,
unallocated expenses and interest expense on short-term borrowings. In
addition to these operating revenues and expenses, the Company also
reports net realized gains and losses on investments in the Corporate
segment.
The following table summarizes the financial results of the Company's
business segments for the years ended December 31, 2000, 1999 and 1998.
Individual Institutional Life
(in millions) Annuity Products Insurance Corporate Total
===================================================================================================================
2000:
Net investment income $ 483.2 $ 827.4 $ 289.2 $ 55.1 $ 1,654.9
Other operating revenue 625.9 251.6 453.9 17.0 1,348.4
-------------------------------------------------------------------------------------------------------------------
Total operating revenue(1) 1,109.1 1,079.0 743.1 72.1 3,003.3
-------------------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances 396.4 628.8 157.2 -- 1,182.4
Amortization of deferred policy
acquisition costs 238.7 49.2 64.2 -- 352.1
Interest expense on short-term
borrowings -- -- -- 1.3 1.3
Other benefits and expenses 192.3 170.3 368.8 33.7 765.1
-------------------------------------------------------------------------------------------------------------------
Total expenses 827.4 848.3 590.2 35.0 2,300.9
-------------------------------------------------------------------------------------------------------------------
Operating income before
federal income tax 281.7 230.7 152.9 37.1 702.4
Realized losses on investments -- -- -- (19.4) (19.4)
-------------------------------------------------------------------------------------------------------------------
Income before
federal income tax $ 281.7 $ 230.7 $ 152.9 $ 17.7 $ 683.0
===================================================================================================================
Assets as of year end $45,422.5 $37,217.3 $ 8,103.3 $ 1,824.2 $92,567.3
-------------------------------------------------------------------------------------------------------------------
1999:
Net investment income $ 458.9 $ 771.2 $ 253.1 $ 37.6 $ 1,520.8
Other operating revenue 511.4 211.9 393.0 66.1 1,182.4
-------------------------------------------------------------------------------------------------------------------
Total operating revenue(1) 970.3 983.1 646.1 103.7 2,703.2
-------------------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances 384.9 580.9 130.5 -- 1,096.3
Amortization of deferred policy
acquisition costs 170.9 41.6 60.1 -- 272.6
Other benefits and expenses 155.3 142.8 334.7 83.4 716.2
-------------------------------------------------------------------------------------------------------------------
Total expenses 711.1 765.3 525.3 83.4 2,085.1
-------------------------------------------------------------------------------------------------------------------
Operating income before
federal income tax 259.2 217.8 120.8 20.3 618.1
Realized losses on investments -- -- -- (11.6) (11.6)
-------------------------------------------------------------------------------------------------------------------
Income before
federal income tax $ 259.2 $ 217.8 $ 120.8 $ 8.7 $ 606.5
===================================================================================================================
Assets as of year end $45,667.8 $39,045.1 $ 6,616.7 $ 1,346.3 $92,675.9
-------------------------------------------------------------------------------------------------------------------
F-25
51
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Individual Institutional Life
(in millions) Annuity Products Insurance Corporate Total
===================================================================================================================
1998:
Net investment income $ 431.7 $ 784.7 $ 225.6 $ 39.6 $ 1,481.6
Other operating revenue 412.6 167.8 318.5 66.8 965.7
-------------------------------------------------------------------------------------------------------------------
Total operating revenue(1) 844.3 952.5 544.1 106.4 2,447.3
-------------------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances 357.9 595.7 115.4 -- 1,069.0
Amortization of deferred policy
acquisition costs 129.2 38.9 46.4 -- 214.5
Other benefits and expenses 125.7 137.5 293.5 78.4 635.1
-------------------------------------------------------------------------------------------------------------------
Total expenses 612.8 772.1 455.3 78.4 1,918.6
-------------------------------------------------------------------------------------------------------------------
Operating income before federal
income tax 231.5 180.4 88.8 28.0 528.7
Realized gains on investments -- -- -- 28.4 28.4
-------------------------------------------------------------------------------------------------------------------
Income before
federal income tax $ 231.5 $ 180.4 $ 88.8 $ 56.4 $ 557.1
===================================================================================================================
Assets as of year end $36,641.8 $30,618.4 $ 5,187.6 $ 1,894.3 $74,342.1
-------------------------------------------------------------------------------------------------------------------
----------
1 Excludes net 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
52
SCHEDULE I
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
(in millions)
As of December 31, 2000
- ------------------------------------------------------------------------ ------------- -------------- ---------------
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 $ 2,996.6 $ 3,072.2 $ 3,072.2
States, municipalities and political subdivisions 8.6 8.8 8.8
Foreign governments 94.1 95.5 95.5
Public utilities 1,186.6 1,195.9 1,195.9
All other corporate 10,959.9 11,070.6 11,070.6
---------- ---------- ----------
Total fixed maturity securities available-for-sale 15,245.8 15,443.0 15,443.0
---------- ---------- ----------
Equity securities available-for-sale:
Common stocks:
Industrial, miscellaneous and all other 103.5 109.0 109.0
Non-redeemable preferred stock -- -- --
---------- ---------- ----------
Total equity securities available-for-sale 103.5 109.0 109.0
---------- ---------- ----------
Mortgage loans on real estate, net 6,214.4 6,168.3(1)
Real estate, net:
Investment properties 255.0 270.1(2)
Acquired in satisfaction of debt 42.1 40.6(2)
Policy loans 562.6 562.6
Other long-term investments 95.1 101.8(3)
Short-term investments 442.6 442.6
---------- ----------
Total investments $ 22,961.1 $ 23,138.0
========== ==========
- ----------
(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 primarily results from undistributed earnings
from an unconsolidated real estate subsidiary that is carried on the
equity method, offset in part by valuation allowances for accumulated
depreciation and valuation allowances due to impairments on real estate.
See note 3 to the consolidated financial statements.
(3) Difference from Column B is primarily due to operating gains and/or losses
of investments in limited partnerships.
See accompanying independent auditors' report.
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53
SCHEDULE III
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(in millions)
As of December 31, 2000, 1999 and 1998 and for each of the years then ended
- ---------------------------------- ----------------- -------------------- ------------------- ------------------ ---------------
Column A Column B Column C Column D Column E Column F
- ---------------------------------- ----------------- -------------------- ------------------- ------------------ ---------------
Deferred Future policy
policy benefits, losses, Other policy
acquisition claims and Unearned claims and Premium
Segment costs loss expenses premiums(1) benefits payable(1) revenue
- ---------------------------------- ----------------- -------------------- ------------------- ------------------ ---------------
2000: Individual Annuities $ 1,711.6 $ 7,008.8 $ 52.7
Institutional Products 293.7 10,944.0 --
Life Insurance 877.8 3,995.6 187.3
Corporate (17.5) 235.2 --
--------------- -------------------- ---------------
Total $ 2,865.6 $ 22,183.6 $ 240.0
=============== ==================== ===============
1999: Individual Annuities $ 1,525.1 $ 7,337.8 $ 26.8
Institutional Products 275.2 10,833.4 --
Life Insurance 702.9 3,519.9 194.0
Corporate 50.9 170.5 --
--------------- -------------------- ---------------
Total $ 2,554.1 $ 21,861.6 $ 220.8
=============== ==================== ===============
1998: Individual Annuities $ 1,316.4 $ 6,579.0 $ 23.1
Institutional Products 248.2 9,792.8 --
Life Insurance 574.2 3,225.5 176.9
Corporate (116.6) 169.8 --
--------------- -------------------- ---------------
Total $ 2,022.2 $ 19,767.1 $ 200.0
=============== ==================== ===============
- ---------------------------------- ----------------- -------------------- ------------------- ------------------ ---------------
Column A Column G Column H Column I Column J Column K
- ---------------------------------- ----------------- -------------------- ------------------- ------------------ ---------------
Benefits, claims, Amortization Other
Net investment losses and of deferred policy operating Premiums
Segment income(2) settlement expenses acquisition costs expenses(2) written
- ---------------------------------------------------- -------------------- ------------------- ------------------ ---------------
2000: Individual Annuities $ 483.2 $ 450.4 $ 238.7 $ 138.3
Institutional Products 827.4 628.8 49.2 170.3
Life Insurance 289.2 344.8 64.2 136.7
Corporate 55.1 -- -- 33.7
--------------- -------------------- ------------------- ------------------
Total $ 1,654.9 $ 1,424.0 $ 352.1 $ 479.0
=============== ==================== =================== ==================
1999: Individual Annuities $ 458.9 $ 408.7 $ 170.9 $ 131.5
Institutional Products 771.2 580.9 41.6 142.8
Life Insurance 253.1 317.1 60.1 105.7
Corporate 37.6 -- -- 83.4
--------------- -------------------- ------------------- ------------------
Total $ 1,520.8 $ 1,306.7 $ 272.6 $ 463.4
=============== ==================== =================== ==================
1998: Individual Annuities $ 431.7 $ 380.4 $ 129.2 $ 103.2
Institutional Products 784.7 595.7 38.9 137.5
Life Insurance 225.6 268.7 46.4 100.6
Corporate 39.6 -- -- 78.4
--------------- -------------------- ------------------- ------------------
Total $ 1,481.6 $ 1,244.8 $ 214.5 $ 419.7
=============== ==================== =================== ==================
- ----------
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.
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54
SCHEDULE IV
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
REINSURANCE
(in millions)
As of December 31, 2000, 1999 and 1998 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
--------------- -------------- ------------- ------------- ------------
2000:
Life insurance in force $ 95,475.2 $ 31,101.6 $ 16.4 $ 64,390.0 0.0%
=============== ============== ============= ============= ============
Premiums:
Life insurance $ 254.6 $ 14.8 $ 0.2 $ 240.0 0.1%
Accident and health insurance 150.8 156.8 6.0 -- N/A
--------------- -------------- ------------- ------------- ------------
Total $ 405.4 $ 171.6 $ 6.2 $ 240.0 2.6%
=============== ============== ============= ============= ============
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%
=============== ============== ============= ============= ============
- ----------
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.
See accompanying independent auditors' report.
F-29
55
SCHEDULE V
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in millions)
Years ended December 31, 2000, 1999 and 1998
- ---------------------------------------------------------------------------------------------------- ----------------------------
Column A Column B Column C Column D Column E
- ---------------------------------------------------------------------------------------------------- ----------------------------
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of period expenses accounts Deductions(1) period
- -------------------------------------------------------------------------------------- ------------- ----------------------------
2000:
Valuation allowances - fixed maturity securities $ -- $ -- $ -- $ -- $ --
Valuation allowances - mortgage loans on real estate 44.4 4.1 -- 3.2 45.3
Valuation allowances - real estate 5.5 0.4 -- 0.7 5.2
---------------------------- ------------- ----------------------------
Total $ 49.9 $ 4.5 $ -- $ 3.9 $ 50.5
============================ ============= ============================
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
============================ ============= ============================
- ----------
1 Amounts represent direct write-downs charged against the valuation
allowance.
2 Allowance on acquired mortgage loans.
See accompanying independent auditors' report.
F-30