Back to GetFilings.com
1
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, 1996 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 or organization) (I.R.S. Employer 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
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
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 FEBRUARY 28, 1997.
COMMON STOCK - 3,814,779 SHARES ISSUED AND OUTSTANDING AS OF DECEMBER 31, 1996
(Title of Class)
2
PART I
ITEM 1 BUSINESS
- ------ --------
Organization
Nationwide Life Insurance Company (NLIC) was incorporated in 1929
and is an Ohio stock legal reserve life insurance company. NLIC
offers a variety of forms of variable annuities, fixed annuities,
ordinary life insurance, universal life insurance, variable
universal life insurance and term and endowment coverage on a
participating and a non-participating basis. During 1996, NLIC
discontinued its individual and group accident and health
insurance and group life insurance business and in connection
therewith, has entered into reinsurance agreements to cede all
existing and any future writings to other affiliated companies and
is implementing a plan to cease writing any new business prior to
December 31, 1997.
As of December 31, 1996, NLIC was wholly owned by Nationwide
Corporation (Nationwide Corp.). Wholly owned subsidiaries of NLIC
as of December 31, 1996 include Nationwide Life and Annuity
Insurance Company (NLAIC), Employers Life Insurance Company of
Wausau (ELICW), National Casualty Company (NCC), West Coast Life
Insurance Company (WCLIC), Nationwide Advisory Services, Inc.
(NAS), Nationwide Investment Services Corporation (NISC) and NWE,
Inc. (NWE). NLIC and its subsidiaries are collectively referred to
as "the Company."
The Company is a member of the Nationwide Insurance Enterprise
(Enterprise), which consists of Nationwide Mutual Insurance
Company (NMIC) and all of its subsidiaries and affiliates.
In November 1996, Nationwide Corp. formed Nationwide Financial
Services, Inc. (NFS) as a holding company for NLIC and the other
companies of the Enterprise that offer or distribute long-term
savings and retirement products. On January 27, 1997, Nationwide
Corp. contributed to NFS the common stock of the Company and three
marketing and distribution companies.
In anticipation of the restructuring described above, on September
24, 1996, NLIC's Board of Directors declared a dividend payable
January 1, 1997 to Nationwide Corp. consisting of the outstanding
shares of common stock of certain subsidiaries (ELICW, NCC and
WCLIC) 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 ELICW and
NMIC effective January 1, 1996.
NLAIC offers universal life insurance, variable universal life
insurance and individual annuity contracts on a non-participating
basis. ELICW, purchased on December 31, 1994, writes group
accident and health insurance and group life insurance business.
On December 31, 1993, Nationwide Corp. contributed all of the
outstanding shares of common stock of NCC, WCLIC and NAS to the
Company. NCC is a property casualty company that serves as a
fronting company for a property casualty subsidiary of NMIC. WCLIC
principally writes high dollar term life insurance business. NAS
is a registered broker-dealer providing investment management and
administration services. NISC, contributed by Nationwide Corp. on
April 5, 1996, is a registered broker-dealer doing business solely
in the deferred compensation market. NWE was formed by NLIC on
January 18, 1994 to hold special investments.
2
3
Description of Business
The Company is a leading provider of long-term savings and
retirement products to retail and institutional customers
throughout the United States (U.S.). The Company offers variable
annuities, fixed annuities and life insurance as well as mutual
funds and pension products and administrative services. 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 wholesale and
retail distribution channels, including financial planners,
pension plan administrators, securities firms, banks and
Enterprise insurance agents.
The Company is one of the leaders in the development and sale of
variable annuities. For the year ended December 31, 1996, the
Company was the fourth largest U.S. writer of individual variable
annuity contracts based on sales, according to The Variable
Annuity Research & Data Service. Its principal variable annuity
series, The Best of America, allows the customer to choose from 36
investment options, including mutual funds managed by such
well-known firms as American Century, Dreyfus, Fidelity, Janus,
Neuberger & Berman, Oppenheimer, T. Rowe Price, Templeton,
Vanguard and Warburg Pincus, as well as mutual funds managed by
the Company.
In the mid-1970's, to capitalize on anticipated opportunities in
the growing market for long-term savings and retirement products,
the Company embarked on a specific strategy of broadening its
distribution channels and product offerings beyond selling
traditional life insurance. Over a 20-year period, the Company
added financial planners, pension plan administrators, securities
firms and banks as new distribution channels. Such distribution
channels in the aggregate accounted for approximately 93.8% of the
Company's sales in 1996. Currently, the Company administers
approximately 15,000 pension plans and has distribution
arrangements with 151 banks and other financial institutions, over
1,000 broker/dealers and over 30,000 registered representatives.
The Company has payroll deduction variable annuity enrollee
customers in approximately 6,000 state and local government
entities and 1,800 school districts, which have been obtained
principally through sponsorship relationships with the National
Association of Counties and The United States Conference of Mayors
and an exclusive contractual arrangement with The National
Education Association of the United States.
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.
The Company believes that demographic trends and shifts in
attitudes toward retirement savings will continue to support
increased consumer demand for its products. According to U.S.
Census Bureau projections, the number of Americans between the
ages of 45 and 64 will grow from 55.7 million in 1996 to 71.1
million in 2005, making this "preretirement" age group the fastest
growing segment of the U.S. population. The Company believes that
Americans increasingly are supplementing traditional sources of
retirement income, such as employer-provided defined benefit plans
and Social Security, with self-directed investments.
Product Segments
During 1996, the Company changed its reporting segments to better
reflect the way the businesses are managed. Prior periods have
been restated to reflect these changes. Operating segment data is
presented in note 16 to the consolidated financial statements and
in Financial Statement Schedule III.
3
4
The Company has three primary operating segments: Variable
Annuities, Fixed Annuities and Life Insurance. The Variable
Annuities segment, which accounted for $90.2 million (or 28.7%) of
the Company's operating income (which excludes realized gains and
losses on investments and discontinued operations) before federal
income tax expense for 1996, consists of annuity contracts that
provide the customer with the opportunity to invest in mutual
funds managed by independent investment managers and the Company,
with investment returns accumulating on a tax-deferred basis. The
Fixed Annuities segment, which accounted for $135.4 million (or
43.0%) of the Company's operating income before federal income tax
expense for 1996, consists of annuity contracts that generate a
return for the customer at a specified interest rate, fixed for a
prescribed period, with returns accumulating on a tax-deferred
basis. Such contracts consist of single premium deferred
annuities, flexible premium deferred annuities and single premium
immediate annuities. The Fixed Annuities segment also includes the
fixed option under the Company's variable annuity contracts, which
accounted for 70.5% of the Company's fixed annuity policy reserves
as of December 31, 1996. For the year ended December 31, 1996, the
average crediting rates on contracts (including the fixed option
under the Company's variable annuity contracts) in the Fixed
Annuities segment was 6.3%. Substantially all of the Company's
crediting rates on its fixed annuity contracts are guaranteed for
a period not exceeding 15 months. The Life Insurance segment,
which accounted for $67.2 million (or 21.4%) of the Company's
operating income before federal income tax expense for 1996,
consists of insurance products, including variable life insurance
products, that provide a death benefit and may also allow the
customer to build cash value on a tax-deferred basis. In addition,
the Company reports corporate income and expenses not specifically
allocated to its product segments in a Corporate and Other
segment, which accounted for $21.8 million (or 6.9%) of the
Company's operating income before federal income tax expense for
1996.
Regulation
NLIC and its insurance company subsidiaries, 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 stockholders. The
Company can not predict the effect that any proposed or future
legislation may have on the financial condition or results of
operations of the Company.
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. National banks, with their
preexisting customer bases for financial services products, may
pose increasing competition in the future to insurers who sell
annuities, including the Company, as a result of the U.S. Supreme
Court's 1994 decision in NationsBank of North Carolina v. Variable
Annuity Life Insurance Company, which permits national banks to
sell annuity products of life insurance companies in certain
circumstances.
Several proposals to repeal or modify the Glass-Steagall Act of
1933, as amended, and the Bank Holding Company Act of 1956, as
amended, have been made by members of Congress and the Clinton
Administration. Currently, the Bank Holding Company Act restricts
banks from being affiliated with insurance companies. None of
these proposals has yet been enacted, and it is not possible to
predict whether any of these proposals will be enacted, or, if
enacted, their potential effect on the Company.
4
5
Employees
As of December 31, 1996, the Company had approximately 3,200
employees. None of the employees of the Company are covered by a
collective bargaining agreement and the Company believes that its
employee relations are satisfactory.
ITEM 2 PROPERTIES
- ------ ----------
The Company's principal executive offices are located in Columbus,
Ohio. The Company leases its home office complex, consisting of
approximately 465,000 square feet, from NMIC and its subsidiaries
at One Nationwide Plaza, Two Nationwide Plaza and Three Nationwide
Plaza, Columbus, Ohio. The Company believes that its present
facilities are adequate for the anticipated needs of the Company.
ITEM 3 LEGAL PROCEEDINGS
- ------ -----------------
From time to time 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
defendents in lawsuits, including class action lawsuits, relating
to life insurance pricing and sales practices. A number of these
lawsuits have resulted in substantial jury awards or settlements.
In October 1996, a policyholder of NLIC filed a complaint in
Alabama state court against NLIC and an agent of NLIC (Wayne M.
King v. Nationwide Life Insurance Company and Danny Nix) related
to the sale of a whole life policy on a "vanishing premium" basis
and seeking unspecified compensatory and punitive damages. In
February 1997, NLIC was named as a defendant in a lawsuit filed in
New York Supreme Court also related to the sale of whole life
policies on a "vanishing premium" basis (John H. Snyder v.
Nationwide Mutual Insurance Company, Nationwide Mutual Insurance
Co. and Nationwide Life Insurance Co.). The plaintiff in such
lawsuit seeks to represent a national class of NLIC policyholders
and claims unspecified compensatory and punitive damages. This
lawsuit is in the early stage and has not been certified as a
class action. NLIC intends to defend these cases vigorously. There
can be no assurance that any future litigation relating to pricing
and sales practices will not have a material effect on the
Company.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
On April 3, 1996, a special meeting of the sole shareholder of
NLIC was held. The purpose of this meeting was to vote on a
proposal to amend and restate the Code of Regulations of
Nationwide Life Insurance Company to update the titles and duties
of certain officers and consider revisions in the indemnification
provisions. The Proxy Committee cast all 3,814,779 shares in favor
of the resolution, none against. No shares were withheld from the
vote.
5
6
On April 4, 1996, NLIC held its annual shareholder meeting. At the
annual meeting, the shareholder elected as Directors the six
nominees of the Board of Directors by the following vote of the
Proxy Committee:
Nominee Shares For Shares Withheld
------- ---------- ---------------
One-Year Term:
Joseph J. Gasper 3,814,779 -0-
Three-Year Term:
Keith W. Eckel 3,814,779 -0-
Charles L. Fuellgraf, Jr. 3,814,779 -0-
Dimon Richard McFerson 3,814,779 -0-
Arden L. Shisler 3,814,779 -0-
Harold W. Weihl 3,814,779 -0-
The term of office of the Directors, Lewis J. Alphin, Willard J.
Engel, Fred C. Finney, Henry S. Holloway, David O. Miller, C. Ray
Noecker, James F. Patterson, Robert L. Stewart and Nancy C.
Thomas, continued after the meeting.
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. As of December 31, 1996, none of the
3,814,779 shares of NLIC's common stock issued and outstanding was
held by public shareholders. Nationwide Corp. was the sole
shareholder of NLIC's common stock until January 27, 1997, when it
contributed all of the outstanding shares of NLIC's common stock
to NFS.
NLIC paid cash dividends of $50,000,000 and $7,450,000 to
Nationwide Corp. during 1996 and 1995, respectively. On September
24, 1996, NLIC's Board of Directors declared a dividend payable
January 1, 1997 to Nationwide Corp., consisting of the outstanding
shares of common stock of ELICW, NCC and WCLIC, amounting to
$485,707,298.
On February 6, 1997 NLIC's Board of Directors declared an
$850,000,000 dividend which was paid on February 24, 1997 to NFS,
which then made an equivalent distribution to Nationwide Corp.
This dividend payment was approved by the Department of Insurance
of the State of Ohio.
NLIC currently does not have a formal dividend policy. Management
of NLIC currently does not anticipate making further dividend
payments during 1997.
Reference is made to Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operations and note 12 to
the consolidated financial statements for information regarding
dividend restrictions.
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA
- ------ ------------------------------------
The following table sets forth certain summary consolidated
financial data. The consolidated income statement data set forth
below for the years ended December 31, 1992 through 1996 and the
consolidated balance sheet data as of December 31, 1992 through
1996 are derived from the consolidated financial statements of the
Company. The summary consolidated financial data set forth below
should be read in conjunction with the consolidated financial
statements of the Company and notes thereto and the other
financial information, including Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations,
included elsewhere herein.
6
7
Selected Consolidated Financial Data (1)
($000's omitted)
As of and for the year ended December 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- ------------- ------------- ------------- --------------
Total revenues $ 1,992,838 1,798,651 1,599,499 1,597,993 1,368,429
Total benefits and expenses 1,677,341 1,511,079 1,357,641 1,319,985 1,239,877
--------------- ------------- ------------- ------------- --------------
Income from continuing operations
before federal income tax expense
and cumulative effect of changes
in accounting principles 315,497 287,572 241,858 278,008 128,552
Federal income tax expense 110,889 99,808 78,589 94,905 33,804
--------------- ------------- ------------- ------------- --------------
Income from continuing operations
before other items 204,608 187,764 163,269 183,103 94,748
Income from discontinued
operations (less federal income
tax expense) 11,324 24,714 20,459 28,637 2,067
Cumulative effect of changes in
accounting principles - - - (231) -
--------------- ------------- ------------- ------------- --------------
Net income $ 215,932 212,478 183,728 211,509 96,815
=============== ============= ============= ============= ==============
Total assets $ 47,766,246 38,507,633 29,246,024 24,700,213 20,763,028
=============== ============= ============= ============= ==============
----------
(1) Consolidated financial data of the Company as of and for the
years ended December 31, 1995, 1994, 1993 and 1992 has been
restated to reflect the discontinued operations treatment of
certain NLIC subsidiaries and lines of business that were
unrelated to the long-term savings and retirement products
business. See note 2 to the consolidated financial
statements herein for additional information regarding the
discontinued operations treatment.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
INTRODUCTION
The following analysis of consolidated results of operations and
financial condition of the Company should be read in conjunction
with Item 6 - Selected Consolidated Financial Data and the
consolidated financial statements and related notes included
elsewhere herein.
RESULTS OF OPERATIONS
Policy Charges. Policy charges include asset fees, which are
primarily earned from separate account assets generated from sales
of variable annuities; administration fees, which include fees
charged per contract on a variety of the Company's products and
premium loads on universal life insurance products; surrender
fees, which are charged as a percentage of assets withdrawn during
a specified period (usually the first seven years) of annuity and
certain life insurance contracts; and cost-of-insurance charges
earned on universal life insurance products. For 1996, policy
charges were $400.9 million, a 39.9% increase from $286.5 million
in 1995. Policy charges increased 32.0% in 1995 from $217.2
million in 1994. Increases in policy charges have resulted
primarily from increases in separate account assets and the
resulting higher levels of asset fees, as well as a moderate
increase in all of the fees discussed above due to the growth in
customer accounts.
7
8
Life Insurance Premiums. Life insurance premiums are earned
primarily from traditional life insurance in the Life Insurance
segment, but are also earned from the sale of life-contingent
immediate annuities in the Fixed Annuities segment. Life insurance
premiums from traditional life insurance policies are recognized
as revenue when due from the policyholder. For life-contingent
immediate annuities, net premium (i.e., the portion of the premium
which covers benefits and expenses) is recognized as revenue when
received. Any premium received in excess of the net premium is
deferred and recognized as revenue over the expected benefit
period. Traditional life insurance products accounted for 87.9%,
83.5% and 88.6% of the total life insurance premiums in 1996, 1995
and 1994, respectively. Life insurance premiums were $198.6
million for 1996, a 0.3% decrease from $199.1 million for 1995.
The slight decrease in 1996 was due to an $8.7 million decrease in
sales of life-contingent immediate annuities offset by an $8.3
million increase in traditional life insurance premiums. Life
insurance premiums increased 12.7% in 1995 from $176.7 million in
1994. The 1995 increase in life insurance premiums resulted from
an increase in traditional life insurance in-force in the Life
Insurance segment and growth in the Fixed Annuities segment.
Net Investment Income. Net investment income includes the gross
investment income earned on investments supporting fixed annuities
and certain life insurance products as well as the yield on the
Company's general account invested assets which are not allocated
to product segments. Net investment income was $1.36 billion in
1996, $1.29 billion in 1995 and $1.21 billion in 1994. Net
investment income has increased as a result of growth in the
Company's general account invested assets. General account
invested assets were $18.31 billion, $17.78 billion and $15.18
billion as of December 31, 1996, 1995 and 1994, respectively.
Realized Gains/(Losses) on Investments. Realized gains (losses) on
investments are not considered by the Company to be a recurring
source of earnings (operations). The Company makes decisions
concerning the sale of invested assets based on a variety of
market, business, tax and other factors. All realized gains and
losses are reported in the Corporate and Other segment. Net
realized losses on investments were $0.3 million in 1996, $1.7
million in 1995 and $16.5 million in 1994.
Other Income. Other income consists of investment management fees
earned by a subsidiary of the Company from the management of
Nationwide mutual funds. Net investment management fees earned on
Nationwide mutual fund assets selected as investment options for
variable annuity products and variable life insurance products are
reported in the Variable Annuities segment and Life Insurance
segment, respectively. The Company also sells its mutual fund
products separately, and investment management fees from these
assets are included in the Corporate and Other segment. Other
income was $35.9 million in 1996, $20.7 million in 1995 and $11.3
million in 1994. The increase in other income in 1996 and 1995
resulted primarily from an increase in asset management fees
earned on mutual fund assets.
Benefits and Claims. Benefits and claims consist primarily of
interest credited on fixed annuity products and life insurance
benefits in the Life Insurance segment. Benefits and claims
increased 4.0% to $1.16 billion in 1996 from 1995. Benefits and
claims increased 12.4% to $1.12 billion in 1995 from $992.7
million in 1994. The changes in benefits and claims from year to
year are primarily attributable to the changes in interest
credited which are discussed in the Fixed Annuities segment
results below. Life insurance benefits have remained consistent
over the periods.
Policyholder Dividends. Policyholder dividends are paid on certain
participating policies, primarily in the Life Insurance segment.
Policyholder dividends were $41.0 million in 1996, a 2.8% increase
over 1995. Policyholder dividends increased 2.8% to $39.9 million
in 1995 from $38.8 million in 1994.
Amortization of DAC. Amortization of deferred policy acquisition
costs (DAC) results from the capitalization of commissions and
other costs of acquiring new contracts and the amortization of
these costs over the estimated life of the contract. Amortization
of DAC was $133.4 million in 1996, a 61.3% increase over 1995.
Amortization of DAC decreased 3.4% to $82.7 million in 1995 from
$85.6 million in 1994. The increase in 1996 was primarily
attributable to growth in all product segments while the decrease
in 1995 resulted from a decrease in the amortization rate for
variable and fixed individual annuities due to lower than
anticipated lapse rates and strong separate account asset
performance.
8
9
Operating Expenses. Operating expenses were $342.4 million in
1996, an 25.4% increase from 1995. Operating expenses increased
13.4% to $273.0 million in 1995 from $240.7 million in 1994. These
increases were primarily due to the increasing number of
individual and group annuity contracts in-force and the related
increase in administrative processing costs. The Company has
controlled its operating expenses by taking advantage of economies
of scale and by increasing productivity through investments in
technology. As a result, the ratio of operating expenses to total
assets declined to 0.72% in 1996 and 0.71% in 1995 from 0.82% in
1994.
Federal Income Tax Expense. Federal income tax expense was $110.9
million, $99.8 million and $78.6 million, representing effective
tax rates of 35.2%, 34.7% and 32.5% for 1996, 1995 and 1994,
respectively. The increase in the 1996 effective tax rate is the
result of greater benefits in 1995 and 1994 from charitable
donations of appreciated securities.
Net Operating Income. Net operating income is net income,
excluding realized gains and losses on investments (net of related
federal income tax) and discontinued operations. Net operating
income for 1996 was $203.7 million, an 8.5% increase from 1995.
The Company's net operating income increased 8.2% to $187.7
million in 1995 from $173.5 million in 1994.
Discontinued Operations. Discontinued operations include the
results of (i) the three NLIC subsidiaries whose outstanding
capital stock, on September 24, 1996, was declared as a dividend
to Nationwide Corp. and (ii) all of NLIC's accident and health and
group life business which was ceded to affiliates effective
January 1, 1996. NLIC did not recognize any gain or loss on the
disposal of these subsidiaries or discontinuance of the accident
and health and group life insurance business. Income from
discontinued operations was $11.3 million in 1996, a 54.3%
decrease from $24.7 million in 1995. The decrease is attributable
to losses incurred on group accident and health business, which
are due to increases in the volume of claims and medical costs.
Income from discontinued operations was $24.7 million in 1995, a
20.5% increase from $20.5 million in 1994. The increase is
attributable to the income reported by ELICW, which NLIC acquired
effective December 31, 1994.
EFFECT OF DIVIDEND AND CAPITAL CONTRIBUTIONS
On February 24, 1997, NLIC paid a dividend to NFS, which
subsequently made a dividend payment to Nationwide Corp.,
consisting of securities having an aggregate fair value of $850.0
million. On March 10, 1997 and March 11, 1997, NFS made cash
capital contributions to NLIC totaling $836.8 million. These
transactions resulted in a net decrease in invested assets of NLIC
of $13.2 million, which is expected to result in a decrease in net
investment income in the future.
RESULTS OF OPERATIONS BY PRODUCT SEGMENT
The Company has three product segments: Variable Annuities, Fixed
Annuities and Life Insurance. In addition, the Company reports
corporate income and expenses and investments and related
investment income supporting capital not specifically allocated to
its product segments in a Corporate and Other segment. All
information set forth below relating to the Company's Variable
Annuities segment excludes the fixed option under the Company's
variable annuity contracts. Such information is included in the
Company's Fixed Annuities segment.
9
10
The table below presents summary financial data for the Company by
segment.
As of and for the Year Ended
December 31,
------------------------------------------
1996 1995 1994
------------------------------------------
(Dollars in millions)
REVENUES:
Variable Annuities (1) $ 284.6 189.0 132.7
Fixed Annuities (1) 1,092.6 1,052.0 939.9
Life Insurance 435.6 409.1 383.1
Corporate and Other 180.3 150.3 160.3
------------------------------------------
Total operating revenues 1,993.1 1,800.4 1,616.0
Realized losses on investments (0.3) (1.7) (16.5)
------------------------------------------
Total revenues $ 1,992.8 1,798.7 1,599.5
==========================================
INCOME FROM CONTINUING OPERATIONS BEFORE FEDERAL
INCOME TAX EXPENSE:
Variable Annuities $ 90.3 50.8 24.6
Fixed Annuities 135.4 137.0 139.0
Life Insurance 67.2 67.6 53.0
Corporate and Other 22.9 33.9 41.8
------------------------------------------
Total operating income 315.8 289.3 258.4
Realized losses on investments (0.3) (1.7) (16.5)
------------------------------------------
Total income from continuing operations before federal
income tax expense $ 315.5 287.6 241.9
==========================================
POLICY RESERVES:
Variable Annuities (2) $24,278.1 16,761.8 10,751.1
Fixed Annuities (2) 13,511.8 12,784.0 11,247.0
Life Insurance 2,938.9 2,660.5 2,425.2
Corporate and Other 3,302.5 2,644.3 2,252.7
------------------------------------------
Total policy reserves (3) $44,031.3 34,850.6 26,676.0
==========================================
----------
(1) Revenues related to the fixed option under the Company's
variable annuity contracts are included in Fixed Annuities.
(2) Policy reserves related to the fixed option under the
Company's variable annuity contracts are included in Fixed
Annuities. As of December 31, 1996, 1995 and 1994, such policy
reserves represented $9.52 billion, $8.83 billion and $7.27
billion, respectively.
(3) Total policy reserves as presented here differ from the
amounts set forth in the Company's financial statements
because the presented amounts exclude (i) accident and health
and group life insurance business ceded to other members of
the Enterprise and (ii) the fixed annuity policy reserves
ceded to Franklin Life Insurance Company (Franklin Life). See
Item 13 - Certain Relationships and Related Transactions.
10
11
Variable Annuities
Revenues. Revenues in the Variable Annuities segment consist of
policy charges and other income. Policy charges consist of asset
fees, which are generally a percentage of separate account assets
deposited for the purchase of variable annuities; administration
fees, which are generally a specific dollar amount per contract;
and surrender fees, which are charged against assets withdrawn
during a specified period (generally the first seven years) of
variable annuity contracts. The separate account assets generated
by the Variable Annuities segment do not contribute to net
investment income of the Company because the customer receives the
investment benefit and bears the investment risk of these assets.
Other income includes net investment management fees earned on
separate account assets held in mutual funds managed by a
subsidiary of NLIC.
Revenues were $284.6 million in 1996, a 50.6% increase from 1995.
Revenues increased 42.4% to $189.0 million in 1995 from $132.7
million in 1994. Revenues have increased primarily as a result of
growth in separate account assets related to this segment and the
corresponding growth in asset fees, which were $261.8 million,
$172.8 million and $120.4 million in 1996, 1995 and 1994,
respectively. Asset fees as a percentage of variable annuity
separate account assets have remained relatively stable during the
periods presented, reflecting minimal changes in the levels of
asset fees charged on most variable annuity products.
Income from Continuing Operations Before Federal Income Tax
Expense. Income from continuing operations before federal income
tax expense was $90.3 million in 1996, a 77.8% increase from 1995.
Income from continuing operations before federal income tax
expense increased 106.5% to $50.8 million in 1995 from $24.6
million in 1994. Increases have primarily resulted from growth in
variable annuity separate account assets and the corresponding
increases in asset fees combined with expense levels which have
decreased as a percentage of revenues. Total expenses were $189.7
million, $135.4 million and $105.8 million, or 66.7%, 71.6% and
79.7% of total revenues, for 1996, 1995 and 1994, respectively.
During the period, the Company has controlled its operating
expenses by taking advantage of economies of scale and by
increasing productivity through investments in technology.
Policy Reserves. Variable annuity policy reserves increased 44.9%
from $16.76 billion as of December 31, 1995 to $24.28 billion as
of December 31, 1996. Of this increase, $2.72 billion was due to
market appreciation of separate account assets, while $6.50
billion of statutory premiums and deposits offset by $1.70 billion
of withdrawals and policy charges resulted in the remainder of the
increase. Variable annuity policy reserves increased 55.9% to
$16.76 billion as of December 31, 1995 from $10.75 billion as of
December 31, 1994, which was a 36.8% increase from $7.86 billion
as of December 31, 1993. Market appreciation accounted for $2.93
billion of the increase in 1995 while market depreciation
accounted for an $84.0 million decrease in 1994. Statutory
premiums and deposits were $4.40 billion and $3.82 billion, while
withdrawals and policy charges were $1.32 billion and $840.0
million, in 1995 and 1994, respectively.
Fixed Annuities
Revenues. Revenues in the Fixed Annuities segment consist mainly
of net investment income, which is earned on invested assets
allocated to support fixed annuity policy reserves and
shareholders' equity allocated to such segment. Total revenues
were $1.09 billion, $1.05 billion and $939.9 million in 1996, 1995
and 1994, respectively. Net investment income was $1.05 billion,
$1.00 billion and $903.7 million, representing average pre-tax
yields on the assets supporting this segment of 8.22%, 8.50% and
8.59%, in 1996, 1995 and 1994, respectively. The increase in net
investment income for each period presented is the result of the
increases in policy reserves discussed below and the corresponding
increase in invested assets.
Interest Credited. Interest credited on account balances was
$805.0 million, $775.7 million and $680.9 million, representing
crediting rates of 6.30%, 6.58% and 6.47%, for 1996, 1995 and
1994, respectively. The differential between net investment income
and interest credited on account balances resulted in spreads of
$245.6 million, $227.1 million and $222.8 million, or 1.92%, 1.92%
and 2.12%, in 1996, 1995 and 1994, respectively. Spreads vary
depending on crediting rates offered by competitors, performance
of the investment portfolio and other factors. The higher spread
in 1994 is primarily the result of declining interest rates in
late 1993 and early 1994 which resulted in lower crediting rates.
11
12
Income from Continuing Operations Before Federal Income Tax
Expense. Income from continuing operations before federal income
tax expense was $135.4 million in 1996, a 1.2% decrease from 1995.
Income from continuing operations before federal income tax
expense decreased 1.4% to $137.0 million in 1995 from $139.0
million in 1994. Narrowing spreads, offset by asset growth, caused
1996 and 1995 earnings to decline from 1994.
Policy Reserves. Fixed annuity policy reserves increased 5.7% to
$13.51 billion as of December 31, 1996, from $12.78 billion as of
December 31, 1995. Statutory premiums and deposits of $1.60
billion and interest credited of $805.0 million were offset by
$1.68 billion of withdrawals, annuity benefits and policy charges.
Policy reserves increased 13.6% to $12.78 billion as of December
31, 1995 from $11.25 billion as of December 31, 1994. Statutory
premiums and deposits were $1.86 billion and $1.31 billion, while
interest credited was $775.7 million and $680.9 million in 1995
and 1994, respectively. Withdrawals and policy charges were $1.10
billion and $895.0 million in 1995 and 1994, respectively.
Life Insurance
Revenues. Revenues in the Life Insurance segment consist of the
life insurance premiums and policy charges, as well as net
investment income. Total revenues were $435.6 million, $409.1
million and $383.1 million for 1996, 1995 and 1994, respectively.
The increases are attributed to increases in life insurance
in-force with the majority of the growth coming from the variable
universal life product.
Income from Continuing Operations Before Federal Income Tax
Expense. Income from continuing operations before federal income
tax expense was $67.2 million in 1996, a 0.6% decrease from $67.6
million for 1995. The decrease is attributable to the increased
amount of amortization of DAC due to increased volume and higher
general expenses due to increased sales offset by an increase in
revenues from the variable universal product. Income from
continuing operations before federal income tax expense increased
27.5% to $67.6 million in 1995 from $53.0 million in 1994. The
increase is due to growth in insurance in-force, particularly
variable universal life, combined with only minimal increases in
expenses.
Life Insurance In-Force. Life insurance in-force was $37.72
billion, $33.41 billion and $30.13 billion as of December 31,
1996, 1995 and 1994, respectively. Nearly two-thirds of the growth
of life insurance in-force is in variable universal life and term
insurance policies.
Corporate and Other
Revenues. Revenues in the Corporate and Other segment consist of
net investment income on invested assets not allocated to the
three product segments, all realized investment gains and losses,
investment management fees and other revenues earned from
Nationwide mutual funds other than the portion allocated to the
Variable Annuities and Life Insurance segments and net investment
income and policy charges from group annuity contracts issued to
Enterprise employee and agent benefit plans. Total revenues
excluding realized gains and losses were $180.3 million for 1996,
a 20.0% increase from 1995. The increase in 1996 is the result of
an increase in investment income and investment management fees
earned. Total revenues excluding realized gains and losses were
$150.3 million and $160.3 million in 1995 and 1994, respectively.
The decrease is a result of a reduction of $155.0 million of
invested assets. Effective December 31, 1994, the Company
transferred $155.0 million of invested assets from the Corporate
and Other segment for the purchase of ELICW. Realized losses on
investments were $0.3 million, $1.7 million and $16.5 million in
1996, 1995 and 1994, respectively.
Income from Continuing Operations Before Federal Income Tax
Expense. Income from continuing operations before federal income
tax expense excluding realized gains and losses was $22.9 million,
$33.9 million and $41.8 million in 1996, 1995 and 1994,
respectively. The decrease in 1996 from 1995 is due to a decrease
in net investment income and higher operating expenses. The change
from 1994 to 1995 is primarily attributed to the change in
revenues discussed above.
12
13
INTERCOMPANY AGREEMENTS
The Company has existing arrangements with NMIC and other
affiliates that address the sharing of federal income taxes, the
leasing of office space and the sharing of certain operational and
administrative services. These arrangements have been in effect
for all periods for which financial data is presented herein. See
Item 13 - Certain Relationships and Related Transactions-Existing
Arrangements with the Enterprise. The Company does not believe
that expenses recognized under the intercompany arrangements are
materially different from expenses that would have been recognized
had the Company operated on a stand-alone basis.
NMIC and its U.S. subsidiaries, including the Company, file a
consolidated federal income tax return. The members of the
consolidated group currently have a tax sharing arrangement which
provides for each member to bear essentially the same federal
income tax liability as if separate tax returns were filed. For
the years ended December 31, 1996, 1995 and 1994, the Company made
federal income tax payments under the tax sharing arrangement of
$115.8 million, $51.8 million and $83.2 million, respectively. See
Item 13 - Certain Relationships and Related Transactions-Existing
Arrangements with the Enterprise-Federal Income Taxes.
The Company leases approximately 465,000 square feet of office
space at a current market rate of $19.53 per square foot, with
limited exceptions, from NMIC and certain of its subsidiaries. For
the years ended December 31, 1996, 1995 and 1994, the Company made
lease payments to NMIC and its subsidiaries of $9.1 million, $9.0
million and $8.1 million, respectively. See Item 13 - Certain
Relationships and Related Transactions-Existing Arrangements with
the Enterprise-Lease.
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. Amounts allocated to the Company were $101.6
million, $107.1 million and $100.6 million for the years ended
December 31, 1996, 1995 and 1994, respectively. Under the cost
sharing agreement, expenses are allocated in accordance with NAIC
guidelines and are based on standard allocation techniques and
procedures acceptable under general cost accounting practices.
Measures used to allocate expenses include individual employee
estimates of time spent, special cost studies, salary expense,
commissions expense and other measures that are agreed to by the
participating companies and are within regulatory and industry
guidelines and practices. The cost sharing agreement will remain
in effect until terminated upon the consent of both NMIC and the
Company. See Item 13 - Certain Relationships and Related
Transactions-Existing Arrangements with the Enterprise-Cost
Sharing Agreement.
REINSURANCE
The Company follows the customary industry practice of reinsuring
(ceding) a portion of its life insurance and annuity risks with
other companies in order to reduce net liability on individual
risks, to provide protection against large losses and to obtain
greater diversification of risks. The ceding of risk does not
discharge the original insurer from its primary obligation to the
policyholder. The Company has entered into a reinsurance contract
to cede a portion of its general account individual annuity
reserves to Franklin Life. Total recoveries due from Franklin Life
were $240.5 million and $245.3 million as of December 31, 1996 and
1995, respectively. Under the terms of the contract, Franklin Life
has established a trust as collateral for the recoveries. The
trust assets are invested in investment grade securities, the
market value of which must at all times be greater than or equal
to 102% of the reinsured reserves. The Company has no other
material reinsurance arrangements with unaffiliated reinsurers.
13
14
The only material reinsurance agreements which the Company has
with affiliates are the modified coinsurance agreements pursuant
to which NLIC reinsured all of its accident and health and group
life insurance business to ELICW and NMIC. See Item 13 - Certain
Relationships and Related Transactions-Existing Arrangements with
the Enterprise-Modified Coinsurance Agreements. NLIC entered into
these reinsurance agreements because its accident and health and
group life insurance business was unrelated to NLIC's long-term
savings and retirement products. Accordingly, all accident and
health and group life insurance business is accounted for as
discontinued operations. Under the modified coinsurance
agreements, invested assets are retained by the ceding company and
investment earnings are paid to the reinsurer. Under the terms of
such agreements, the investment risk associated with changes in
interest rates is borne by ELICW or NMIC, as the case may be. Risk
of asset default is retained by the Company, although a fee is
paid by ELICW or NMIC, as the case may be, to NLIC for NLIC's
retention of such risk. The contracts will remain in force until
all policy obligations are settled. However, with respect to the
agreement between NLIC and NMIC, either party may terminate the
contract on January 1 of any year with prior notice. NLIC believes
that the terms of such modified coinsurance agreements are
consistent in all material respects with what NLIC could have
obtained with unaffiliated parties.
Total premiums ceded under the intercompany reinsurance agreements
were $321.6 million during 1996. The effect of the reinsurance
agreements was an increase in NLIC's income from discontinued
operations before federal income tax expense of $4.5 million
during 1996. NLIC does not expect the intercompany reinsurance
agreements to have any material adverse effect on NLIC's future
operations.
LIQUIDITY AND CAPITAL RESOURCES
State insurance laws generally restrict the ability of insurance
companies to pay cash dividends in excess of certain prescribed
limitations without prior approval. The ability of NLIC to pay
dividends is subject to restrictions set forth in the insurance
laws and regulations of Ohio, its domiciliary state. The Ohio
insurance laws require 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 policyholders' surplus
as of the prior December 31 or (ii) the 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. 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 NLIC and its stockholder. NLIC currently does not expect such
regulatory requirements to impair its ability to pay operating
expenses and dividends in the future. However, NLIC can give no
assurance that dividends will be declared or paid.
As a result of the $850.0 million dividend paid on February 24,
1997 and the dividend by NLIC of the stock of certain subsidiaries
that do not operate in the long-term savings and retirement
market, any dividend paid by NLIC during the 12-month period
immediately following the $850.0 million dividend would be an
extraordinary dividend under Ohio insurance laws. Accordingly, no
such dividend could be paid without prior regulatory approval.
NLIC has no reason to believe that any reasonably foreseeable
dividend to be paid by NLIC would not receive the required
approval.
NLIC's statutory capital and surplus was $1.00 billion as of
December 31, 1996. NLIC paid a dividend of $850.0 million on
February 24, 1997. NFS contributed amounts totaling $836.8 million
to NLIC on March 10, 1997 and March 11, 1997. NLIC believes that
after such dividend and such contribution from NFS, NLIC has
adequate statutory capital and surplus to satisfy all regulatory
requirements and to support its growth over the following year.
14
15
NLIC paid the dividend by transferring primarily fixed maturity
investments with an aggregate market value on February 24, 1997 of
$850.0 million from the Corporate and Other segment. NLIC
recognized a gain of $14.4 million on the transfer of the
securities. The related tax impact of the gain will be recognized
but will not be paid as long as the securities are held by NMIC
and NLIC remains within the consolidated federal tax return of
NMIC.
NLIC's principal sources of funds are premiums and other
considerations paid, contract charges earned, net investment
income received and proceeds from investments called, redeemed or
sold. The principal uses of these funds are the payment of
benefits on annuity contracts and life insurance policies,
operating expenses and the purchase of investments. Net cash
provided by operating activities (reflecting principally (i)
premiums and contract charges collected, less (ii) benefits paid
on life insurance products, plus (iii) income collected on
invested assets, less (iv) commissions and other general expenses
paid) was $346.2 million, $187.6 million and $39.9 million for the
years ended December 31, 1996, 1995 and 1994, respectively. Net
cash used by investing activities (principally reflecting
investments purchased less investments called, redeemed or sold)
was $771.3 million, $1.72 billion and $1.39 billion in the years
ended December 31, 1996, 1995 and 1994, respectively. Net cash
provided by financing activities (principally reflecting deposits
to investment product and universal life insurance product account
balances less withdrawals from such account balances and capital
contributions less dividends paid) was $459.5 million, $1.54
billion and $1.34 billion for the years ended December 31, 1996,
1995 and 1994, respectively.
A primary liquidity concern with respect to life insurance and
annuity products is the risk of early policyholder and
contractholder withdrawal. The Company closely evaluates and
manages this risk. The following table summarizes the Company's
annuity policy reserves as of December 31, 1996 and 1995 by the
contractholder's ability to withdraw funds.
As of As of
December 31, 1996 December 31, 1995
----------------------- ------------------------
Policy Policy
Reserves % Reserves %
------------- --------- ------------- ----------
(Dollars in millions)
Not subject to discretionary withdrawal $ 1,139.5 2.8% $ 1,087.2 3.4%
Subject to discretionary withdrawal with adjustment:
With market value adjustment 35,463.2 86.3 27,312.1 84.8
At contract value, less surrender charge of 5% or more 1,046.6 2.5 992.1 3.1
------------- --------- ------------- ----------
37,649.3 91.6 29,391.4 91.3
Subject to discretionary withdrawal at contract value with
no surrender charge or surrender charge less than 5% 3,443.2 8.4 2,798.7 8.7
------------- --------- ------------- ----------
Total annuity policy reserves $41,092.5 100.0% $32,190.1 100.0%
============= ========= ============= ==========
Life insurance policies are also subject to withdrawal. However,
they are less susceptible to withdrawal than are annuity contracts
because policyholders may incur surrender charges and undergo a
new underwriting process in order to obtain a new insurance
policy.
NLIC's principal sources of liquidity to meet unexpected cash
outflows are its portfolio of liquid assets and its net operating
cash flow.
The short- and long-term liquidity requirements of the Company are
monitored regularly to match cash inflows with cash requirements.
The Company periodically reviews its short- and long-term
projected sources and uses of funds and the asset/liability,
investment and cash flow assumptions underlying these projections.
Adjustments are made periodically with respect to the Company's
investment policies to reflect changes in the Company's short- and
long-term cash needs and changing business and economic
conditions.
15
16
The Company employs an asset/liability management approach
tailored to the specific requirements of each of its product
lines. The Company's general account invested assets are primarily
managed in a number of pools that are separated by weighted
average maturity of the assets acquired by the pools. On bonds and
mortgages, the weighted average maturity is based on repayments
which are scheduled to occur under the terms of the asset. For
mortgage backed securities, repayments are determined using the
current rate of repayment of the underlying pool of mortgages and
the terms of the securities. Each product line has an investment
strategy based on the specific characteristics of such product
line. The strategy establishes asset duration, quality and other
guidelines. The Company's actuaries determine the amount of new
investments needed for each line to arrive at the amount of new
investments needed for each pool by month. The investments
acquired for each pool are shared on a proportional basis by each
of the lines requesting investments in the pool based on their
actual investment needs.
For all business having future benefits which cannot be changed at
the option of the policyholder, the underlying assets are managed
in a separate pool. The duration of assets and liabilities in this
pool are kept as close together as possible. For assets, the
repayment cash flows, plus anticipated coupon payments, are used
in calculating asset duration. Future benefits and expenses are
used for liabilities. On December 31, 1996, the average duration
of assets in this pool was 6.80 years and the average duration of
the liabilities was 7.44 years. Policy reserves on this business
were $1.11 billion as of December 31, 1996.
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 as
a final step in its asset/liability management process. Annually,
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 under a number of
possible future interest rate scenarios the anticipated cash flows
from such business and the assets required to support such
business. The first seven of these scenarios are required by state
insurance laws. Projections are also made using 13 additional
scenarios which involve more extreme fluctuations in future
interest rates. Finally, to get a statistical analysis of possible
results and to minimize any bias in the 20 predetermined
scenarios, additional projections are made using 200 randomly
generated interest rate scenarios. For the Company's 1996 cash
flow testing process, interest rates for 90-day treasury bills
ranged from 0.4% to 11.5% under the 20 predetermined scenarios and
0.8% to 25.3% under the 200 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 for year end 1996 indicated that the
Company's reserves were adequate as of December 31, 1996.
The Company manages its investment portfolio in part to reduce its
exposure to interest rate fluctuations. In general, the fair value
of the Company's fixed maturity portfolio increases or decreases
in inverse relationship with fluctuations in interest rates. For
example, if interest rates rise, the Company's fixed maturity
investments will generally decrease in value. Additionally, the
Company's net investment income may be affected by interest rate
changes. If interest rates decline, net investment income will
decrease if high-yielding fixed maturity investments mature or are
sold and the proceeds therefrom are reinvested in securities
yielding a lower rate.
16
17
On August 12, 1996, NLIC and NMIC entered into a Credit Facility
(Credit Facility) which provides for a $600.0 million loan over a
five-year term on a fully revolving basis with a group of banks
led by Morgan Guaranty Trust Company of New York. The Credit
Facility provides for several and not joint liability with respect
to any amount drawn by either NLIC or NMIC. To date, neither NLIC
nor NMIC has drawn down any amount under the Credit Facility. The
Credit Facility provides for several borrowing options including
interest at a spread over LIBOR, money market auction, CD or base
rate. The Credit Facility also provides covenants, including, but
not limited to, restrictions on decreases in the statutory surplus
of NMIC below $2.75 billion, mergers and sales of assets if a
default has occurred and is continuing, transactions with
affiliates (which must be on an arm's-length basis on terms at
least as favorable to NLIC or NMIC as could have been obtained
from a third party who was not affiliated with NLIC or NMIC) and
restrictions on the creation, assumption or suffering to exist of
liens. In addition, the Credit Facility provides for customary
representations, warranties and events of default. Pursuant to the
terms of the Credit Facility, NLIC may not declare or pay a
dividend if it is, or if the payment thereof would cause it to be,
in default under such facility. Events of default under the Credit
Facility include, among others, the failure of NMIC and its
affiliates to maintain beneficial ownership of more than 50% of
the combined voting power of NLIC's outstanding voting stock and
the failure of NLIC to maintain statutory surplus in excess of
$875.0 million. Amounts borrowed under the Credit Facility may be
used for, among other things, general corporate purposes.
Given the Company's historic cash flow and current financial
results, management of the Company believes that the cash flow
from the operating activities of the Company over the next year
will provide sufficient liquidity for the operations of the
Company, as well as provide sufficient funds to enable the Company
to make dividend payments.
INVESTMENTS
General
The Company's assets are divided between separate account and
general account assets. As of December 31, 1996, $26.9 billion (or
56.3%) of the Company's total assets were held in separate
accounts and $20.9 billion (or 43.7%) were held in the Company's
general account, including $18.3 billion of general account
investments. Separate account assets consist primarily of deposits
from the Company's variable annuity business. Most separate
account assets are invested in various mutual fund options
available within the variable annuity products sold by the
Company. All of the investment risk in the Company's separate
account assets is borne by the Company's customers, with the
exception of $280.2 million of policy reserves as of December 31,
1996 ($205.7 million as of December 31, 1995) for which the
Company bears the investment risk. General account assets consist
mainly of investments generated by premiums on life insurance
products and deposits in the Company's Fixed Annuities segment.
The Company generates profits on these products in part, based on
the spread between the yield on general account invested assets
and crediting rates on these products.
The Company's general account investment policies emphasize high
quality, diversification across asset classes and individual
risks, and a buy and hold strategy. The Company's general account
assets are invested primarily in fixed maturity securities and
commercial mortgage loans. The Company has a general policy of
diversifying investments within asset categories. Additionally,
the Company's investment policy provides that fixed maturity
investments are limited to purchases of investment grade
securities or unrated securities which, in the opinion of the
Company, should qualify for such rating. The Company monitors its
exposure to individual borrowers, credit risks, industries or
property types and geographic locations. The Company's investments
are subject to suitability and diversification requirements under
applicable insurance laws. The Investment Committee of the Board
of Directors of the Company, which is comprised of the Chairman
and five outside directors, meets ten times a year. Such committee
approves investment policy and strategy, approves all mortgage
loans and large private placements and reviews and ratifies all
other investments. In relation to the life insurers reporting to
the American Council of Life Insurance (ACLI), the Company's
general account investment portfolio has achieved (i) higher net
investment yields, (ii) lower bond default rates and (iii) lower
mortgage delinquency rates, in each case in each of the three
years ended December 31, 1996.
17
18
Fixed Maturity
As of December 31, 1996, general account fixed maturity securities
were $12.3 billion (or 67.2%) of the carrying value of
consolidated general account invested assets. As of such date,
public and private fixed maturity securities constituted $8.4
billion (or 68.3%) and $3.9 billion (or 31.7%), respectively, of
total general account fixed maturity securities. The Company's
general account fixed maturity securities portfolio consists
primarily of investment grade corporate fixed maturity securities,
high-quality mortgage-backed securities and U.S. government and
agency obligations.
Below investment grade fixed maturity securities in the Company's
general account as of December 31, 1996 included the securities of
23 issuers representing approximately 1.8% of the carrying value
of total fixed maturity securities. The Company's investment
policy provides that fixed maturity investments are limited to
purchases of investment grade securities or unrated securities
which, in the opinion of the Company, should qualify for such
rating. All of the below grade fixed maturity securities held in
the Company's general account as of December 31, 1996 were
investment grade securities when purchased by the Company.
The National Association of Insurance Commissioners (NAIC) assigns
securities quality ratings and uniform valuations called "NAIC
Designations" which are used by insurers when preparing their
annual statements. The NAIC assigns designations to publicly
traded as well as privately placed securities. The designations
assigned by the NAIC range from class 1 to class 6, with a
designation in class 1 being of the highest quality. Of the
Company's general account fixed maturity securities, 98.2% by the
carrying value were in the highest two NAIC Designations as of
December 31, 1996.
The following table sets forth an analysis of credit quality, as
determined by NAIC Designation, of the Company's general account
fixed maturity securities portfolio as of December 31, 1996 and
1995.
General Account Fixed Maturity Securities - Credit Quality
As of December 31, 1996 As of December 31, 1995
--------------------------- ---------------------------
NAIC Rating Agency Carrying % of Carrying % of
Designation (1) Equivalent Designation (2) Value Total Value Total
---------------- ----------------------------- --------------- ----------- ---------------------------
(Dollars in millions)
1 Aaa/Aa/A $ 8,447.5 68.7% $ 8,643.9 69.2%
2 Baa 3,629.9 29.5 3,562.9 28.5
3 Ba 166.6 1.3 224.1 1.8
4 B 49.7 0.4 44.9 0.4
5 Caa and lower 10.9 0.1 2.8 -
6 In or near default - - 7.0 0.1
--------------- ----------- ---------------------------
$12,304.6 100.0% $12,485.6 100.0%
=============== =========== ===========================
----------
(1) NAIC Designations are assigned no less frequently than
annually. Some designations for securities shown as of
December 31, 1996 have been assigned to securities not yet
assigned an NAIC Designation in a manner approximating
equivalent public rating categories.
(2) Comparison's between NAIC and Moody's designations are
published by the NAIC. In the event no Moody's rating is
available, the Company has assigned internal ratings
corresponding to the public rating.
The Company maintains significant general account investments in
mortgage-backed securities (MBSs). The Company's general account
MBS investments include residential MBSs and commercial MBSs. As
of December 31, 1996, MBSs were $3.67 billion (or 29.8%) of the
carrying value of the general account fixed maturity securities,
all of which were guaranteed by the U.S. government or an agency
of the U.S. government.
18
19
The Company believes that general account MBS investments add
diversification, liquidity, credit quality and additional yield to
its general account fixed maturity securities portfolio. The
objective of the Company's general account MBS investments is to
provide reasonable cash flow stability and increased yield.
General account MBS investments include collateralized mortgage
obligations (CMOs) and mortgage-backed pass-through securities.
The Company's general account MBS investments do not include
interest-only securities or principal-only securities or other
MBSs which may exhibit extreme market volatility.
Prepayment risk is an inherent risk of holding MBSs. However, the
degree of prepayment risk is particular to the type of MBS held.
The Company limits its exposure to prepayments by purchasing less
volatile types of MBSs. As of December 31, 1996, $2.97 billion (or
81.0% of the carrying value of the general account MBS portfolio
was invested in planned amortization class CMOs (PACs). PACs are
securities whose cash flows are designed to remain constant over a
variety of mortgage prepayment environments. Other classes in the
CMO security are structured to accept the volatility of mortgage
prepayment changes, thereby insulating the PAC class. Of the
remaining general account MBS portfolio, $2.5 million (or 0.1%)
was invested in mortgage-backed pass-through or sequential CMOs.
Pass-throughs are securities in which the monthly cash flows of
principal and interest (both scheduled and prepayments) generated
by the underlying mortgages are distributed on a pro rata basis to
the holders of the securities. A sequential MBS is structured to
divide the CMO security into sequentially ordered classes. Receipt
of principal payments are made currently on all classes. While
these securities are more sensitive to prepayment risk than PACs,
the Company does not consider them highly volatile securities.
The following table sets forth the distribution by investment type
of the Company's general account MBS portfolio as of December 31,
1996.
General Account Mortgage-Backed Securities - Investment Type (1)
As of December 31, 1996
-----------------------------
Carrying % of
Value Total
--------------- ------------
(Dollars in millions)
Accrual $ 41.4 1.1%
Planned Amortization Class 2,970.6 81.0
Sequential 2.5 0.1
Scheduled 167.2 4.6
Targeted Amortization Class 87.7 2.4
Very Accurately Defined Maturity 395.9 10.8
--------------- ------------
$3,665.3 100.0%
=============== ============
----------
(1) All general account mortgage-backed securities are agency-backed.
Pursuant to the Company's investment policies, the Company does
not invest in derivative securities other than MBSs.
19
20
Mortgage Loans
As of December 31, 1996, general account mortgage loans were $5.27
billion (or 28.8%) of the carrying value of consolidated general
account invested assets. As of such date, commercial mortgage
loans constituted substantially all (99.9%) of total general
account mortgage loans with the remainder being 76 residual
residential loans originated prior to 1981 with a principal
balance of $2.7 million. These mortgages, substantially all of
which are made on a non-recourse basis, consist primarily of fixed
rate mortgages on existing income-producing properties. As of
December 31, 1996, there were two second mortgages totaling $2.6
million and no construction loans, participating or convertible
mortgages or land development loans. Commitments to fund mortgage
loans of $327.5 million extending into 1997 were outstanding as of
December 31, 1996.
See notes 5 and 9 to the consolidated financial statements for an
analysis of activity in the valuation allowance account for
mortgage loans and a summary of mortgage loans by region and
property type.
The Company aggressively seeks to manage and resolve its troubled
commercial mortgage loans. Commercial mortgage loans are placed
into default immediately following the Company failing to receive
payment when due. With respect to a delinquent mortgage loan, the
Company seeks to enforce the assignment of rents clause in order
to gain control of the rental income from the property shortly
following the default in payment. The foreclosure process with
respect to a delinquent mortgage loan is generally initiated by
the Company prior to the second mortgage payment becoming
delinquent. Over the last five years, the Company has recovered
approximately 74% of the unpaid principal of all of its mortgage
loans in default.
The following table sets forth the delinquency, foreclosure and
restructured commercial mortgage loan experience for the Company
and for the life insurers reporting to the ACLI for the periods
indicated.
The Company and Life Insurance Industry
Problem Loan Comparison
For the Year Ended For the Year Ended For the Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
------------------------ ----------------------- ------------------------
Company ACLI (1) Company ACLI (1) Company ACLI (1)
------------ ----------- ----------- ----------- ----------- ------------
Delinquent (2) 0.79% 1.79% 0.63% 2.35% 0.48% 3.38%
In foreclosure (3) 0.79 1.10 0.63 1.45 0.48 1.80
Restructured (4) 1.11 6.81 1.48 8.27 1.95 9.58
------------ ----------- ----------- ----------- ----------- ------------
Subtotal 1.90 8.60 2.11 10.62 2.43 12.96
Foreclosed - year to date 0.35 1.01 0.74 1.75 1.18 2.52
------------ ----------- ----------- ----------- ----------- ------------
Total 2.25% 9.61% 2.85% 12.37% 3.61% 15.48%
============ =========== =========== =========== =========== ============
----------
(1) Source: ACLI Investment Bulletins entitled "Quarterly Survey
of Mortgage Loan Delinquencies and Foreclosures," numbers
1367, 1326 and 1289, dated March 6, 1997, February 28, 1996
and March 9, 1995, respectively.
(2) Commercial mortgage loans are classified by the Company and
the ACLI as delinquent when they are 60 days or more past
due.
(3) Delinquent includes loans in foreclosure; therefore,
subtotal and total lines exclude "In foreclosure" amounts.
(4) Commercial mortgage loans are classified by the Company and
the ACLI as restructured when they are in good standing, but
the basic terms have been modified as a result of an actual
or anticipated delinquency.
20
21
INFLATION
Many of the Company's assets and liabilities are monetary in
nature and sensitive to the interest rate environment which can be
affected by inflation. The Company is exposed to the risk of a
reduction in interest spread or profit margins when interest rates
fluctuate. Bond calls, mortgage prepayments, contract surrenders
and withdrawals of annuities and life insurance policies are
influenced by the interest rate environment. In general, the fair
value of the Company's fixed maturities portfolio increases or
decreases inversely with fluctuations in interest rates. For
example, if interest rates rise, the Company's fixed maturity
investments will generally decrease in value. Additionally, the
Company's net investment income may be affected by the interest
rate changes. If interest rates decline, net investment income
will decrease if high-yielding fixed maturity investments mature
or are sold and the proceeds therefrom are reinvested in
securities yielding a lower rate. Management attempts to mitigate
the negative impact if interest rate changes through
asset/liability management, product design, management of
crediting rates, relatively high surrender charges and management
of mortality charges and dividend scales with respect to its
in-force life insurance policies, but there can be no assurance
that such attempts will be completely successful. Extreme changes
in the interest rate environment could cause net interest margins
to fluctuate from historical levels.
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
---------------------
Not applicable.
21
22
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
The following table provides information regarding the executive
officers and directors of the Company. Executive officers perform
duties for the Company and other members of the Enterprise.
Name Age Position with the Company
-------------------------------- ------ ----------------------------------------------------------------------
Dimon Richard McFerson (1) 59 Chairman and Chief Executive Officer - Nationwide
Insurance Enterprise and Director
Joseph J. Gasper 53 President and Chief Operating Officer and Director
Gordon E. McCutchan 61 Executive Vice President - Law and Corporate Services and
Secretary
Robert A. Oakley 50 Executive Vice President - Chief Financial Officer
Robert J. Woodward, Jr. 55 Executive Vice President - Chief Investment Officer
James E. Brock 49 Senior Vice President - Life Company Operations
Thomas L. Crumrine 54 Senior Vice President - Property and Casualty Insurance
W. Sidney Druen 54 Senior Vice President and General Counsel and Assistant Secretary
Mark E. Fiebrink 45 Senior Vice President - Chief Actuary - Property and Casualty
Danny M. Fullerton 48 Senior Vice President - Property and Casualty Marketing
Harvey S. Galloway, Jr. 62 Senior Vice President - Chief Actuary - Life, Health and Annuities
Richard A. Karas 54 Senior Vice President - Sales-Financial Services
James A. Taylor 52 Senior Vice President - Property and Casualty Insurance
Susan A. Wolken 46 Senior Vice President - Enterprise Administration
Duane M. Campbell 61 Vice President and Treasurer
Lewis J. Alphin (3) 48 Director
Keith W. Eckel (3) 50 Director
Willard J. Engel (2)(3) 57 Director
Fred C. Finney (2) 50 Director
Charles L. Fuellgraf, Jr.(1)(2) 65 Director
Henry S. Holloway (1)(2) 64 Director
David O. Miller (1)(2) 58 Director
C. Ray Noecker (3) 50 Director
James F. Patterson (3) 54 Director
Arden L. Shisler (1) 55 Director
Robert L. Stewart (3) 60 Director
Nancy C. Thomas (1)(2) 62 Director
Harold W. Weihl 64 Director
----------
(1) Member of the Executive Committee.
(2) Member of the Salary and Compensation Committee.
(3) Member of the Audit Committee.
Biographical information for each of the individuals listed in the
above table is set forth below.
DIMON RICHARD MCFERSON has been Chief Executive Officer of the
Enterprise since December 1992. He has been Chairman and Chief
Executive Officer-Enterprise of the Company since April 1996 and a
director of the Company since April 1988. Previously, he was
elected President and Chief Executive Officer-Enterprise of NLIC
and NLAIC in December 1993. He was President and General Manager
from April 1988 to April 1991; President and Chief Operating
Officer from April 1991 to December 1992; and President and Chief
Executive Officer from December 1992 to April 1996 of NMIC,
Nationwide Mutual Fire Insurance Company and Nationwide Property
and Casualty Insurance Company. Mr. McFerson has been with the
Enterprise for 17 years.
22
23
JOSEPH J. GASPER has been President and Chief Operating Officer
and a director of the Company since April 1996. Previously, he was
Executive Vice President-Property/Casualty Operations of the
Enterprise from April 1995 to April 1996 and Senior Vice President
Property/Casualty Operations of the Enterprise from September 1993
to April 1995. Prior to that time, Mr. Gasper held numerous
positions within the Enterprise. Mr. Gasper has been with the
Enterprise for 30 years.
GORDON E. MCCUTCHAN has been Executive Vice President-Law and
Corporate Services and Secretary of the Company since September
1994. Previously, he was Executive Vice President, General Counsel
and Secretary of the Enterprise from November 1989 to September
1994. Prior to that time, Mr. McCutchan held several positions
within the Enterprise. Mr. McCutchan has been with the Enterprise
for 33 years.
ROBERT A. OAKLEY has been Executive Vice President-Chief Financial
Officer of the Company since April 1995. Previously, he was Senior
Vice President-Chief Financial Officer of the Enterprise from
October 1993 to April 1995. Prior to that time, Mr. Oakley held
several positions within the Enterprise. Mr. Oakley has been with
the Enterprise for 21 years.
ROBERT J. WOODWARD, JR. has been Executive Vice President-Chief
Investment Officer of the Company since August 1995. Previously,
he was Senior Vice President-Fixed Income Investments of the
Enterprise from March 1991 to August 1995. Prior to that time, Mr.
Woodward held several positions within the Enterprise. Mr.
Woodward has been with the Enterprise for 32 years.
JAMES E. BROCK has been Senior Vice President-Life Company
Operations of the Company since April 1996. Previously, he was
Senior Vice President-Investment Product Operations of the
Enterprise from November 1990 to April 1996. Prior to that time,
Mr. Brock held several positions within the Enterprise. Mr. Brock
has been with the Enterprise for 27 years.
THOMAS L. CRUMRINE has been Senior Vice President-Property and
Casualty Insurance of the Company since March 1996. Previously, he
was Senior Vice President-Claims of the Enterprise from April 1995
to March 1996. Prior to that time, Mr. Crumrine held several
positions within the Enterprise. Mr. Crumrine has been with the
Enterprise for 30 years.
W. SIDNEY DRUEN has been Senior Vice President and General Counsel
and Assistant Secretary of the Company since September 1994.
Previously, he was Vice President, Deputy General Counsel and
Assistant Secretary of the Enterprise from October 1989 to
September 1994. Prior to that time, Mr. Druen held several
positions within the Enterprise. Mr. Druen has been with the
Enterprise for 27 years.
MARK E. FIEBRINK has been Senior Vice President-Chief
Actuary-Property and Casualty of the Company since May 1993.
Previously, he was Senior Vice President-Finance of Employers
Insurance of Wausau A Mutual Company and Wausau Service
Corporation from May 1992 to May 1993. Prior to that time, Mr.
Fiebrink held several positions with the Wausau Insurance
Companies. Mr. Fiebrink has been with the Enterprise for 11 years.
DANNY M. FULLERTON has been Senior Vice President-Property and
Casualty Marketing of the Company since November 1996. Previously,
he was Vice President-Agency Operations of the Enterprise from
July 1994 to November 1996. Prior to that time, Mr. Fullerton held
several positions within the Enterprise. Mr. Fullerton has been
with the Enterprise for 12 years.
HARVEY S. GALLOWAY, JR. has been Senior Vice President-Chief
Actuary-Life, Health and Annuities of the Company since April
1993. Previously, he was Senior Vice President and Chief Actuary
of the Enterprise from January 1983 to April 1993. Prior to that
time, Mr. Galloway held several positions within the Enterprise.
Mr. Galloway has been with the Enterprise for 27 years.
RICHARD A. KARAS has been Senior Vice President-Sales-Financial
Services of the Company since March 1993. Previously, he was Vice
President-Sales-Financial Services of the Enterprise from February
1989 to March 1993. Prior to that time, Mr. Karas held several
positions within the Enterprise. Mr. Karas has been with the
Enterprise for 32 years.
23
24
JAMES A. TAYLOR has been Senior Vice President-Property and
Casualty Insurance of the Company since March 1996. Previously, he
was Vice President-North Carolina/Alabama/Georgia of the
Enterprise from January 1996 to March 1996. Prior to that time,
Mr. Taylor held several positions within the Enterprise. Mr.
Taylor has been with the Enterprise for 30 years.
SUSAN A. WOLKEN has been Senior Vice President-Enterprise
Administration of the Company since July 1996. Previously, she was
Senior Vice President-Human Resources of the Enterprise from April
1995 to July 1996. Prior to that time, she held several positions
within the Enterprise. Ms. Wolken has been with the Enterprise for
22 years.
DUANE M. CAMPBELL has been Vice President and Treasurer of the
Company since August 1996. Previously, he was Assistant Treasurer
of the Enterprise from January 1987 to August 1996. Prior to that
time, Mr. Campbell held several positions within the Enterprise.
Mr. Campbell has been with the Enterprise for 33 years.
LEWIS J. ALPHIN has been a director of the Company since April
1993. Mr. Alphin has been a farm owner and operator in Mt. Olive,
North Carolina, since 1971. Mr. Alphin serves on the board of
directors of several members of the Enterprise.
KEITH W. ECKEL has been a director of the Company since April
1996. Mr. Eckel has been Partner of Fred W. Eckel Sons and
President of Eckel Farms, Inc. since May 1968. Mr. Eckel serves on
the board of directors of several members of the Enterprise. He is
also an advisory board member of Penn Security Bank and Trust
Company.
WILLARD J. ENGEL has been a director of the Company since April
1994. Mr. Engel has been General Manager of Lyon County
Co-operative Oil Co. since March 1975. Mr. Engel serves on the
board of directors of several members of the Enterprise.
FRED C. FINNEY has been a director of the Company since April
1992. Mr. Finney has been owner and operator of Moreland Fruit
Farm and operator of Melrose Orchard since January 1985. Mr.
Finney serves on the board of directors of several members of the
Enterprise.
CHARLES L. FUELLGRAF, JR. has been a director of the Company since
April 1969. Mr. Fuellgraf has been Chief Executive Officer of
Fuellgraf Electric Company, an electrical contractor, of Butler,
Pennsylvania, and Nashville, Tennessee, since 1986. He is Chairman
of the Board of Nationwide Communications Inc. and serves on the
board of directors of several members of the Enterprise.
HENRY S. HOLLOWAY has been a director of the Company since April
1986. Mr. Holloway has been a farm owner and operator in
Darlington, Maryland, since 1959. He is Chairman of the Board of
the Nationwide Life Insurance Company, Nationwide Life and Annuity
Insurance Company and Nationwide Corp. and serves on the board of
directors of several members of the Enterprise. He is also a
director of the National Cooperative Business Association and the
Forest Hill State Bank.
DAVID O. MILLER has been a director of the Company since April
1985. Mr. Miller has been a farm owner and land developer since
1962. He is the President of the Owen Potato Farm Inc., the owner
of The Berry Barn and is a partner of M&M Enterprises in Licking
County, Ohio. He is Chairman of the Board of the Wausau Insurance
Companies and serves on the board of directors of several members
of the Enterprise. He is also a director of the National
Cooperative Business Association.
C. RAY NOECKER has been a director of the Company since April
1994. Mr. Noecker has been owner and manager of Noecker Farms
since March 1969. Mr. Noecker serves on the board of directors of
several members of the Enterprise.
24
25
JAMES F. PATTERSON has been a director of the Company since April
1989. Mr. Patterson has operated the Patterson Fruit Farm in
Chesterland, Ohio, since 1964 and has been the President of
Patterson Farms, Inc. since December 1991. He is Chairman of the
Board of Nationwide Mutual Fire Insurance Company and serves on
the board of directors of several members of the Enterprise. He is
also a trustee of The Ohio State University and serves on the
board of directors of the University Hospitals Health System in
Cleveland, Ohio, and Geauga Hospital, Inc. in Chardon, Ohio.
ARDEN L. SHISLER has been a director of the Company since April
1984. Mr. Shisler has been President and Chief Executive Officer
of K & B Transport, Inc., a trucking firm in Dalton, Ohio, since
January 1992. Previously, he was Chief Operating Officer of K & B
Transport, Inc. from April 1986 to January 1992. Prior to that
time, Mr. Shisler held several positions with K & B Transport,
Inc. He is Chairman of the Board of Nationwide Mutual Insurance
Company and serves on the board of directors of several members of
the Enterprise. He is also a director of the National Cooperative
Business Association.
ROBERT L. STEWART has been a director of the Company since April
1989. Mr. Stewart has been owner/operator of Sunnydale Farms since
1960 and owner/operator of Sunnydale Mining since 1989. He is
Chairman of the Board of Farmland Insurance Companies and serves
on the board of directors of several members of the Enterprise.
NANCY C. THOMAS has been a director of the Company since April
1986. Mrs. Thomas has been a farm owner/operator of Da-Ma-Lor
Farms since November 1958. She is Chairman of the Board of
Nationwide Property and Casualty Insurance Company and serves on
the board of directors of several members of the Enterprise.
She is also a director of Farm Credit Services (4th District).
HAROLD W. WEIHL has been a director of the Company since April
1990. Mr. Weihl has been owner and operator of Weihl Farms since
April 1950. He is Chairman of the Board of Nationwide General
Insurance Company and serves on the board of directors of several
members of the Enterprise.
The Company's Board of Directors currently consists of fifteen
directors, divided into three classes. The term of the first class
will expire at the annual meeting of the sole shareholder to be
held in 1997, the term of the second class will expire at the
annual meeting of the sole shareholder in 1998 and the term of the
third class will expire at the annual meeting of the sole
shareholder in 1999. Messrs. Alphin, Engel, Gasper, Miller and
Noecker are members of the first class; Messrs. Finney, Holloway,
Patterson and Stewart and Mrs. Thomas are members of the second
class; and Messrs. Eckel, Fuellgraf, McFerson, Shisler and Weihl
are members of the third class. At each annual meeting of the sole
shareholder, directors will be elected for a three-year term to
succeed the directors whose terms are then to expire. Officers of
the Company are elected annually and serve until their retirement,
resignation or removal.
The Board of Directors has an Audit Committee currently consisting
of six directors, none of whom is an officer or employee of the
Company. Messrs. Alphin, Eckel, Engel, Noecker, Patterson and
Stewart are the members of such committee. The Audit Committee
recommends to the Board of Directors the selection of independent
certified public accountants to audit annually the books and
records of the Company, reviews the activities and the reports of
the independent certified public accountants and reports the
results of such review to the Board of Directors. The Audit
Committee also considers the adequacy of the Company's internal
controls and internal auditing methods and procedures.
The Board of Directors has a Salary and Compensation Committee
currently consisting of six directors, none of whom is an officer
or employee of the Company, which, as authorized by the Board of
Directors, makes determinations with respect to non-cash
compensation to officers, directors and employees of the Company.
Messrs. Engel, Finney, Fuellgraf, Holloway and Miller and Mrs.
Thomas are the members of such committee.
The Board of Directors has an Executive Committee currently
consisting of six directors, which, to the extent authorized by
the Board of Directors, exercises all the powers and authority of
the Board of Directors in the management of the business and
affairs of the Company. Messrs. Fuellgraf, Holloway, McFerson,
Miller and Shisler and Mrs. Thomas are the members of such
committee.
25
26
ITEM 11 EXECUTIVE COMPENSATION
- ------- ----------------------
The following summary compensation table sets forth information
regarding the compensation of the Chief Executive Officer and each
of the four most highly compensated executive officers of the
Company (collectively, the "Named Executive Officers") for the
fiscal year ended December 31, 1996 solely for services rendered
to NLIC and its subsidiaries. Pursuant to a cost sharing
agreement, the salaries and benefits of certain of the officers
and employees of the Company, including the Named Executive
Officers, will be paid by NMIC and reimbursed in accordance with
the terms of such agreement. See Item 13 - Certain Relationships
and Related Transactions for a complete description of the cost
sharing agreement.
Summary Compensation Table
Long-term
Annual Compensation Compensation
----------------------------------------- ----------------
Other Annual LTIP All Other
Name and Bonus Compensation Payouts Compensation
principal position Year Salary (1) (2) (3) (4)
----------------------------- ------ ----------- ----------- ----------------- ---------------- -----------------
Dimon Richard McFerson 1996 $324,790 80,058 - 149,803 13,363
Chairman and Chief 1995 122,072 34,208 - 133,272 7,360
Executive Officer - 1994 127,568 41,244 - 70,427 6,891
Nationwide Insurance
Enterprise
Harvey S. Galloway, Jr. (5) 1996 239,531 67,645 - 71,708 11,587
Senior Vice President and 1995 - - - - -
Chief Actuary - Life, 1994 - - - - -
Health and Annuities
Robert J. Woodward, Jr. 1996 222,784 59,399 - 64,698 10,610
Executive Vice President - 1995 174,717 48,059 - 99,319 9,873
Chief Investment Officer 1994 172,172 57,559 - 43,981 8,486
Joseph J. Gasper (6) 1996 232,959 - - - 10,650
President and Chief 1995 - - - - -
Operating Officer 1994 - - - - -
James E. Brock 1996 158,420 43,421 - 47,412 7,641
Senior Vice President - 1995 150,982 40,819 - 44,790 7,303
Life Company Operations 1994 140,478 40,060 - 41,513 6,868
----------
(1) Represents the amount received by the Named Executive Officer
under the Management Incentive Plan. See description of the
plan following this table.
(2) Aggregate perquisites and other personal benefits are less
than the lower of $50,000 or 10% of combined salary and bonus.
(3) Represents the amount received by the Named Executive Officer
under the Executive Incentive Plan and under the Sustained
Performance Incentive Plan in 1995. No payouts were made in
1996 or 1994 under the Sustained Performance Incentive Plan.
See description of each plan following this table.
(4) Represents contributions made or credited to the Named
Executive Officer by the Company under the Nationwide
Insurance Enterprise Savings Plan and the Nationwide Insurance
Enterprise Supplemental Defined Contribution Plan. See
description of each plan following this table.
26
27
(5) Represents compensation received by Mr. Galloway solely for
his services rendered to the Company in 1996 as allocated
pursuant to a cost sharing agreement. During 1995 and 1994,
compensation received by Mr. Galloway was allocated to
Nationwide Corp. pursuant to the cost sharing agreement. Such
compensation is not reflected in the table.
(6) Represents compensation received by Mr. Gasper solely for his
services rendered to the Company in 1996 as allocated pursuant
to a cost sharing agreement. Prior to April 1996, Mr. Gasper
was Executive Vice President - Property/Casualty Operations of
NMIC and received compensation from NMIC and its
property/casualty insurance subsidiaries for services rendered
to such companies. Such compensation is not reflected in the
table.
INCENTIVE PLANS
Sustained Performance Incentive Plan
Prior to 1997, NMIC and certain of its subsidiaries and
affiliates, including NLIC, maintained the Sustained Performance
Incentive Plan (SPIP). Under the SPIP, payments were made to the
Named Executive Officers and other senior officers of the
participating companies in each odd numbered calendar year based
on the achievement of measures tied to the performance of the
Enterprise over the preceding four years. Performance measures
were based on profitability, growth and strategic objectives for
the Enterprise which were established in advance by the Boards of
Directors of the participating companies. Under the SPIP,
participants were granted target incentive amounts that
represented a percentage (10% to 20% depending on the
participant's position within the participating company) of the
sum of the participant's base salary for the last two years of the
performance cycle. The actual amount received by the participant
ranged from zero to twice the target incentive amount, depending
solely on the achievement of the performance measures.
NMIC and the participating subsidiaries and affiliates terminated
the SPIP at the close of calendar year 1996. If a payment under
the SPIP is made in 1997, covering performance measured for the
period from 1993 to 1996, such payment will be made in cash as
provided in the SPIP. To facilitate the termination of the SPIP,
the performance measurement period for 1995 to 1998 was closed at
the end of calendar 1996. Payments made in 1997 for such
performance measurement period will be made in shares of
restricted stock of NFS.
Executive Incentive Plan
NMIC and certain of its subsidiaries and affiliates, including
NLIC, maintain the Executive Incentive Plan (EIP). Under the EIP,
annual payments are made to the Named Executive Officers and
certain other officers of the participating companies based on the
achievement of measures tied to the performance of the Enterprise
and the relevant operating company over the preceding three years.
Performance measures are based on profitability and growth
objectives which are established in advance by the Board of
Directors of the participating company. Under the EIP, the
participant will be granted a target incentive amount that
represents a percentage (from 5% to 25% depending on the
participant's position within the participating company) of the
participant's base salary. The actual amount received by the
participant will range from zero to twice the target incentive
amount, depending solely on the achievement of the performance
measures.
27
28
Management Incentive Plan
NMIC and certain of its subsidiaries and affiliates, including
NLIC, maintain the Management Incentive Plan (MIP). Under the MIP,
annual payments are made to the Named Executive Officers and
certain other management employees of the participating companies
based on the achievement of measures tied to the performance of
the Enterprise, the relevant operating company, the relevant
business unit and the individual participant over the preceding
year. Performance measures are based on profitability, growth,
expense management and key strategic objectives which are
established in advance. Under the MIP, the participant will be
granted a target incentive amount that represents a percentage
(from 5% to 15% depending on the participant's position within the
participating company) of the participant's base salary. The
actual amount received by the participant under the MIP will range
from zero to twice the target incentive amount, depending solely
on the achievement of the performance measures.
PENSION PLANS
Nationwide Insurance Enterprise Retirement Plan
NMIC and certain of its subsidiaries and affiliates, including
NLIC, maintain a qualified defined benefit plan, the Nationwide
Insurance Enterprise Retirement Plan (Retirement Plan). In
general, a participant's annual retirement benefit under the
Retirement Plan will be equal to the sum of (i) 1.25% of the
participant's Final Average Compensation times years of service
(to a maximum of 35 years) and (ii) 0.50% of the participant's
Final Average Compensation in excess of Social Security Covered
Compensation times years of service (to a maximum of 35 years).
Final Average Compensation, for the portion of the participant's
benefit which is attributable to service on or after January 1,
1996, is the average of the highest five consecutive covered
compensation amounts of the participant in the participant's last
10 years of service. For the portion of a participant's benefit
attributable to service prior to January 1, 1996, Final Average
Compensation is the average of the highest 3 consecutive covered
compensation amounts of the participant in the participant's last
10 years of service. Covered compensation, for purposes of
determining Final Average Compensation under either method, is
calculated on a calendar year basis and includes compensation from
any member of the Enterprise. Covered compensation for all of the
Named Executive Officers includes the amounts set forth under the
headings Salary, Bonus and LTIP Payouts and a portion of the
compensation that is included under the heading Other Annual
Compensation in the Summary Compensation Table and additional
compensation amounts received for services rendered to other
members of the Enterprise. Social Security Covered Compensation
means the average of the social security wage bases in effect
during the 35 year period ending with the last day of the year the
participant attains social security retirement age. The portion of
a participant's benefit attributable to years of service credited
prior to 1996 is also subject to post-retirement increases
following the commencement of benefits or the participant's
attainment of age 65, whichever is later.
A participant becomes fully vested after the completion of five
years of vesting service. The Retirement Plan generally provides
for payments to or on behalf of each vested participant upon such
participant's retirement on his or her normal retirement date or
later, although provision is made for payment of early retirement
benefits on a reduced basis commencing at age 55 for those
participants with 15 or more years of vesting service or at age 62
for those with 5 or more years of vesting service. The normal
retirement date under the Retirement Plan is the later of the date
the participant attains age 65 or completes five years of vesting
service. Death benefits are payable to a participant's spouse or,
under certain circumstances, the named beneficiary, of a
participant who dies with a vested benefit under the Retirement
Plan or while an employee. The Retirement Plan also provides for
the funding of retiree medical benefits under Section 401(h) of
the Internal Revenue Code (IRC).
28
29
Nationwide Insurance Enterprise Excess Benefit and Supplemental
Retirement Plans
NMIC and certain of its subsidiaries and affiliates, including
NLIC, maintain an unfunded, nonqualified defined benefit excess
benefit plan, the Nationwide Insurance Enterprise Excess Benefit
Plan (Excess Plan) and an unfunded, nonqualified defined benefit
supplemental benefit plan pursuant to which certain participants
may receive a supplemental retirement benefit, the Nationwide
Insurance Enterprise Supplemental Retirement Plan (Supplemental
Plan). Any participant whose benefits are limited under the
Retirement Plan by reason of limitations under Section 415 of the
IRC on the maximum benefit that may be paid under the Retirement
Plan will receive, under the Excess Plan, that portion of the
benefit that he or she would have been entitled to receive under
the Retirement Plan in the absence of such limitations. Officers
who earn in excess of $160,000 annually, have at least 5 years of
vesting service and whose benefits under the Retirement Plan are
limited by reason of other certain limitations under the IRC, may
receive benefits under the Supplemental Plan. Benefits under the
Supplemental Plan will be the sum of (i) 1.25% of the
participant's Final Average Compensation times years of service
(up to a maximum of 40 years) and (ii) 0.75% of the participant's
Final Average Compensation in excess of Social Security Covered
Compensation times years of service (up to a maximum of 40 years)
reduced by benefits accrued under the Retirement Plan and the
Excess Plan. The benefits under the Excess and Supplemental Plans
vest at the same time as benefits vest under the Retirement Plan.
The chart below indicates the estimated maximum annual retirement
benefits that a hypothetical participant would be entitled to
receive under the Retirement Plan (including payments made under
the Excess and Supplemental Plans as a result of limitations
imposed by the IRC) computed on a straight-life annuity basis, if
retirement occurred at age 65 and the number of credited years of
service and Final Average Compensation equaled the amounts
indicated. For purposes of the chart, it is assumed that the Final
Average Compensation is the same whether measured over the
three-year averaging period that applies to service accumulated
prior to 1996 or the five-year period that applies to service
accumulated after 1995. In actual operation, the total benefit
received under the Retirement Plan (including payments made under
the Excess and Supplemental Plans) would be the total of the
benefit determined based on years of service earned under each
method.
Pension Plan Table
Years of Service
Final Average ------------------------------------------------------------------
Compensation 15 20 25 30 35
-------------------------------------------------------------------------------------
$125,000 30,744 40,992 51,241 61,489 71,737
150,000 41,898 55,864 69,830 83,795 97,761
175,000 49,398 65,864 82,330 98,795 115,261
200,000 56,898 75,864 94,830 113,795 132,761
225,000 64,398 85,864 107,330 128,795 150,261
250,000 71,898 95,864 119,830 143,795 167,761
300,000 86,898 115,864 144,830 173,795 202,761
400,000 116,898 155,864 194,830 233,795 272,761
450,000 131,898 175,864 219,830 263,795 307,761
500,000 146,898 195,864 244,830 293,795 342,761
All Named Executive Officers have a portion of their benefit
calculated based on the post-1995 definition of Final Average
Compensation. As of December 31, 1995, the number of credited
years of service under the Retirement Plan for Messrs. McFerson,
Galloway, Woodward, Gasper and Brock was 23 years, 26.5 years,
32.7 years, 29.5 years and 26.5 years, respectively. Mr.
McFerson's credited years of service include, pursuant to an
agreement with NMIC, 8.17 years in excess of those actually earned
through employment by the Enterprise. The benefit attributable to
those additional years will be paid by NMIC (not the Retirement
Plan) and is reduced by the benefit payable under the retirement
plan of Mr. McFerson's previous employer.
29
30
Each of the Named Executive Officers earned an additional year of
service in 1996 and their benefit for such year and all future
years will be calculated under the new definition of Final Average
Compensation. Covered compensation paid by the Company for the
fiscal year ended December 31, 1996 for Messrs. McFerson,
Galloway, Woodward, Gasper and Brock was $444,217, $392,313,
$348,003, $349,412 and $343,167, respectively.
SAVINGS PLANS
Nationwide Insurance Enterprise Savings Plan
NMIC and certain of its subsidiaries and affiliates, including
NLIC, maintain the Nationwide Insurance Enterprise Savings Plan
(Savings Plan), a qualified profit sharing plan including a
qualified cash or deferred arrangement covering eligible employees
of participating companies within the Enterprise. Under the
Savings Plan, participants who are not residents of Puerto Rico
may elect to contribute between 1% and 16% of their compensation
to accounts established on their behalf under the Savings Plan in
the form of voluntary salary reductions on a pre-tax basis and
participants who are residents of Puerto Rico may make
contributions on an after-tax basis. The participating companies
are obligated to make matching employer contributions, for the
benefit of their participating employees, at the rate of 70% of
the first 2% of compensation deferred or contributed to the
Savings Plan by each employee, and 40% of the next 4% of
compensation deferred or contributed by each employee to the
Savings Plan. All amounts contributed to the Savings Plan are held
in a separate account for each participant and are invested in one
or more funds made available under the Savings Plan and selected
by the participant. Normally, a participant receives the value of
his or her account upon termination of employment, although a
participant may withdraw all or a part of the amounts credited to
his or her accounts during employment under certain circumstances
including attainment of age 59 1/2, or receive a loan of a portion
of his or her account balance. Under the Savings Plan, a
participant is immediately vested in all amounts credited to his
or her account as a result of salary deferrals (and earnings on
those deferrals) or after-tax contributions (and earnings on those
contributions), as applicable. A participant is vested in amounts
attributable to employer matching contributions (and earnings on
those contributions) over a period of five years.
Nationwide Insurance Enterprise Supplemental Defined Contribution
Plan
NMIC and certain of its subsidiaries and affiliates, including
NLIC, maintain an unfunded, nonqualified defined contribution
supplemental benefit plan, the Nationwide Insurance Enterprise
Supplemental Defined Contribution Plan (DC Supplemental Plan),
which provides benefits, equal to employer matching contributions
that would have been made under the Savings Plan for the
participants, in the absence of the IRC limitations on
compensation that can be considered and amounts that can be
deferred under the Savings Plan less actual matching contributions
to the Savings Plan in the absence of the limitations under IRC
Sections 401(a)(17) and 402(g), reduced by actual employer
contributions made to the Savings Plan. Participants are limited
to those officers earning in excess of $160,000 annually. Benefits
under the DC Supplemental Plan vest at the same time as employer
matching contributions vest under the Savings Plan.
DEFERRED COMPENSATION PROGRAM
NMIC and certain of its subsidiaries and affiliates, including
NLIC, maintain a deferred compensation program (Officers' Deferred
Compensation Program) pursuant to which officers of participating
companies may elect to defer payment of amounts otherwise payable
to them. In addition, participants receive credit for employer
matching contributions which were not made under the Savings Plan
or DC Supplemental Plan and any reduction in benefits under the
Retirement Plan, Supplemental Plan or Excess Plan as a result of
salary or other deferrals under the Deferred Compensation Program.
An eligible officer is permitted to enter into a deferral
agreement pursuant to which such officer may annually elect to
defer a portion of his or her salary or his or her incentive
compensation earned under the Management Incentive Plan or
Executive Incentive Plan during the following year. Any such
election is effective prospectively. Amounts deferred under the
Officers' Deferred Compensation Program will generally be payable
in annual installments beginning in January of the calendar year
following the calendar year in which the officer terminates
employment. Amounts deferred under the Officers' Deferred
Compensation Program are credited with interest. The interest rate
is based on the fixed rate option in the Savings Plan.
30
31
NATIONWIDE SALARIED EMPLOYEES SEVERANCE PAY PLAN
NMIC and certain of its subsidiaries and affiliates, including
NLIC, maintain the Nationwide Salaried Employees Severance Pay
Plan (Severance Plan), an unfunded plan which provides severance
benefits to employees whose employment is involuntarily terminated
due to unsatisfactory job performance or job elimination without
an offer of replacement employment within the Enterprise or with a
successor employer. Employees will not be entitled to benefits if
their employment is terminated as a result of theft, absenteeism,
insubordination and other similar problems. The benefit provided
is a lump sum payment determined on the basis of years of service
completed (a minimum of 6 months of service is required) and
salary, with a maximum benefit of 8 weeks of salary plus an
additional week of salary for each full or partial year of service
in excess of 11 years.
DIRECTOR COMPENSATION
Directors of the Company also serve as a director on the boards of
various other Enterprise companies. Compensation for services as a
director consists of a base annual rate for each director plus
varying amounts for fringe benefits and reimbursement of
out-of-pocket expenses. Directors who are also officers are
excluded from this arrangement. The following table represents
total compensation payments made to the directors, who are not
also officers, from the Company for the fiscal year ended December
31, 1996.
Director Compensation
--------------------------- -------------------
Lewis J. Alphin $10,344
Keith W. Eckel 7,222
Willard J. Engel 10,188
Fred C. Finney 11,648
Charles L. Fuellgraf, Jr. 8,820
Henry S. Holloway 14,059
David O. Miller 13,783
C. Ray Noecker 10,847
James F. Patterson 10,949
Arden L. Shisler 13,621
Robert L. Stewart 12,039
Nancy C. Thomas 10,072
Harold W. Weihl 9,856
Directors' Deferred Compensation Program
NMIC and certain of its subsidiaries and affiliates, including
NLIC, maintain a deferred compensation program applicable to
nonemployee members of their Board of Directors (Directors'
Deferred Compensation Program). Each director who has been elected
to the board of directors at least twice and has served for at
least 3 years on the Board of Directors of a participating company
is entitled to monthly payments, following termination of his or
her service on the board of directors, of a monthly amount equal
to the monthly director's fee being received by that director at
the time of his or her retirement from the Board of Directors. The
number of monthly payments will equal the number of months the
individual served on the Board of Directors (other than months in
which he or she was also a salaried officer of the participating
company).
31
32
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
Security Ownership of Certain Beneficial Owners as of February 28,
1997.
Amount and Nature of Percent
Title of Class Name and Address of Beneficial Owner Beneficial Ownership of Class
---------------- ----------------------------------------------------------------------- ----------
Common Stock Nationwide Financial Services, Inc. 3,814,779 Shares of 100%
One Nationwide Plaza record and
Columbus, Ohio 43215 beneficially (1)
----------
(1) Sole voting and investment power
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ($000's omitted)
- ------- ----------------------------------------------
EXISTING ARRANGEMENTS WITH THE ENTERPRISE
Organization of the Company
The Company is member of the Enterprise and offers and distributes
long-term savings and retirement products. On September 24, 1996,
NLIC's Board of Director's declared a dividend payable January 1,
1997 to Nationwide Corp. consisting of the outstanding common
stock of those subsidiaries of NLIC that do not operate in the
long-term savings and retirement market. On January 27, 1997,
Nationwide Corp. contributed to NFS all of the outstanding common
stock of NLIC and the other companies within the Enterprise that
offer or distribute long-term savings and retirement products.
On December 31, 1996, NLIC paid a $50,000 cash dividend to
Nationwide Corp. In addition, on February 24, 1997, NLIC made a
dividend to NFS consisting of securities having an aggregate
market value of $850,000.
On March 10, 1997 and March 11, 1997, NFS made cash capital
contributions to NLIC totaling $295,740 and $541,040,
respectively.
Effective January 1, 1996, NLIC entered into a 100% modified
coinsurance agreement with ELICW pursuant to which all of NLIC's
group accident and health and group life insurance business was
reinsured by ELICW. NLIC also entered into a 100% modified
coinsurance agreement with NMIC effective January 1, 1996,
pursuant to which all of NLIC's individual accident and health
insurance business was reinsured by NMIC. See Modified Coinsurance
Agreements.
Federal Income Taxes
NMIC and its U.S. subsidiaries, including the NLIC and its
subsidiaries, file a consolidated federal income tax return. The
members of the consolidated group currently 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. For the year ended December 31, 1996, the
Company made federal income tax payments under the tax sharing
arrangement of $115,839.
32
33
Legal Services
The attorneys in the Office of General Counsel of NMIC also
operate as the law firm of Druen, Rath & Dietrich. Pursuant to a
partnership agreement, the firm limits its representation to the
members of the Enterprise. The partnership was formed to assure
compliance with Ohio law that prohibits corporations from
practicing law. Through a retainer arrangement, an annual retainer
fee is paid by each member of the Enterprise based upon an
estimate of time spent by each attorney working on legal matters
related to the respective member during the previous year. W.
Sidney Druen, Senior Vice President and General Counsel of the
Company, is the senior partner in such firm, and all attorneys and
other employees of the firm are salaried employees of NMIC. The
firm applies all of its retainer fees toward office overhead under
a rental and office expense agreement with NMIC. For the year
ended December 31, 1996, the Company paid the firm $1,580 for
legal services rendered to the Company which amounts were
immediately remitted to NMIC.
Lease
Pursuant to an arrangement between NMIC and certain of its
subsidiaries, the Company leases approximately 465,000 square feet
of office space at One Nationwide Plaza, Two Nationwide Plaza and
Three Nationwide Plaza, Columbus, Ohio, at a current market rate
of $19.53 per square foot, with limited exceptions. Under the
arrangement, the Company determines the amount of office space
necessary to conduct its operations and leases such space from
NMIC, subject to availability. For the year ended December 31,
1996, the Company made payments to NMIC and its subsidiaries
totaling $9,065 under such arrangement.
Modified Coinsurance Agreements
Effective January 1, 1996, NLIC entered into a 100% modified
coinsurance agreement with ELICW. Under the agreement, NLIC cedes
to ELICW, and ELICW assumes, NLIC's group accident and health and
group life insurance business and any ceded or assumed reinsurance
applicable to such group business. For the year ended December 31,
1996, NLIC ceded $224,224 of premium to ELICW.
Effective January 1, 1996, NLIC also entered into a 100% modified
coinsurance agreement with NMIC. Under the agreement, NLIC cedes
to NMIC, and NMIC assumes, NLIC's individual accident and health
insurance business and any ceded or assumed reinsurance applicable
to such business. For the year ended December 31, 1996, NLIC ceded
$97,331 of premium to NMIC.
NLIC entered into these reinsurance agreements because the
accident and health and group life insurance business was
unrelated to NLIC's long-term savings and retirement products.
Under the modified coinsurance agreements, invested assets are
retained by the ceding company and investment earnings are paid to
the reinsurer. Under the terms of such agreements, the investment
risk associated with changes in interest rates is borne by ELICW
or NMIC, as the case may be. Risk of asset default is retained by
NLIC, although a fee is paid by ELICW or NMIC, as the case may be,
to NLIC for the NLIC's retention of such risk. The contracts will
remain in force until all policy obligations are settled. However,
with respect to the agreement between NLIC and NMIC, either party
may terminate the contract on January 1 of any year with prior
notice. NLIC believes that the terms of such modified coinsurance
contracts are consistent in all material respects with what NLIC
could have obtained with unaffiliated parties.
33
34
Cost Sharing Agreement
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. Under such agreement, for the year ended December
31, 1996, the Company made payments to NMIC totaling $101,584.
Under the cost sharing agreement, expenses are allocated in
accordance with National Association of Insurance Commissioner's
guidelines and are based on standard allocation techniques and
procedures acceptable under general cost accounting practices.
Measures used to allocate expenses include individual employee
estimates of time spent, special cost studies, salary expense,
commissions expense and other measures that are agreed to by the
participating companies and are within regulatory and industry
guidelines and practices.
Cash Management Agreements
NMIC has entered into separate Investment Agency Agreements with
Nationwide Cash Management Company (NCMC) and California Cash
Management Company (CCMC), each an affiliate of the Company.
Pursuant to the terms of such agreements, NCMC and CCMC make, hold
and administer short-term investments (those maturing in one year
or less) for NMIC and certain of its affiliates, including NLIC
and it's subsidiaries. Under each agreement, expenses of NCMC or
CCMC, as the case may be, are allocated pro rata among the
participants based upon the participant's ownership percentage of
total assets held by NCMC or CCMC. For the year ended December 31,
1996, the Company paid NCMC and CCMC fees and expenses totaling
$41 under such agreements.
Benefit Plans
The Company participates in the common employee benefit programs
with NMIC and its subsidiaries. Included in these programs are
accident and health benefits, disability income benefits and life
insurance benefits. The Company ultimately pays for all benefits
provided to its employees under the benefit program plus an
administrative processing fee, reduced by employee contributions.
The administrative processing fee paid by the Company was
approximately $1,000 for the year ended December 31, 1996.
The Company also participates, along with NMIC and its
subsidiaries and affiliates, in life insurance and health care
benefit plans for qualifying retirees. Such plans are funded in
amounts determined at the discretion of management of NMIC based
on current and anticipated future costs. Contributions to the plan
by the participating companies are primarily invested in group
annuity contracts of NLIC. Contributions by the Company
approximated $1,495 for the year ended December 31, 1996.
Repurchase Agreement
NLIC and certain of it's subsidiaries are party to a master
repurchase agreement pursuant to which securities or other
financial instruments are transferred between parties against the
transfer of funds by the transferee for a period of time ending on
a specific date or upon the demand of the transferor.
FUTURE TRANSACTIONS WITH THE ENTERPRISE
In the future, the Company may enter into agreements with members
of the Enterprise that will not be the result of arm's length
negotiations between independent parties. Conflicts of interests
could arise in the future with respect to transactions involving
members of the Enterprise, on the one hand, and the Company, on
the other hand. In addition, under the Ohio insurance laws,
arrangements and agreements between the Company and other members
of the Enterprise must be fair and equitable and may be subject to
the approval of the Superintendent of Insurance of the State of
Ohio. The Credit Facility requires that any transaction between
NLIC and any of its affiliates be on an arm's-length basis on
terms at least as favorable to NLIC as could have been obtained
from a third party which is not an affiliate.
34
35
Reference is made to note 13 to the consolidated financial
statements herein for additional information regarding
transactions with affiliates.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ------- ----------------------------------------------------------------
Page
--------
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Shareholder's Equity for the years
ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994 F-6
Notes to Consolidated Financial Statements F-7
FINANCIAL STATEMENT SCHEDULES:
Schedule I Consolidated Summary of Investments - Other Than Investments in
Related Parties as of December 31, 1996 F-26
Schedule III Supplementary Insurance Information as of December 31, 1996, 1995 and
1994 and for each of the years then ended F-27
Schedule IV Reinsurance as of December 31, 1996, 1995 and 1994 and for each of the
years then ended F-28
Schedule V Valuation and Qualifying Accounts for the years ended December 31,
1996, 1995 and 1994 F-29
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 E-1
35
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NATIONWIDE LIFE INSURANCE COMPANY (Registrant)
By /s/ Dimon R. McFerson
-----------------------------------------------
Dimon R. McFerson, Chairman and Chief Executive
Officer - Nationwide Insurance Enterprise
Date: March 5, 1997
36
37
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 indicated on March 5, 1997.
/s/ Dimon R. McFerson /s/ Joseph J. Gasper
- ------------------------------------------------------------- -----------------------------------------------------------
Dimon R. McFerson, Chairman and Chief Executive Joseph J. Gasper, President and Chief Operating
Officer - Nationwide Insurance Enterprise and Director Officer and Director
/s/ Lewis J. Alphin /s/ Keith W. Eckel
- ------------------------------------------------------------- -----------------------------------------------------------
Lewis J. Alphin, Director Keith W. Eckel, Director
/s/ Willard J. Engel /s/ Fred C. Finney
- ------------------------------------------------------------- -----------------------------------------------------------
Willard J. Engel, Director Fred C. Finney, Director
/s/ Charles L. Fuellgraf, Jr. /s/ Henry S. Holloway
- ------------------------------------------------------------- -----------------------------------------------------------
Charles L. Fuellgraf, Jr., Director Henry S. Holloway, Director
/s/ David O. Miller /s/ C. Ray Noecker
- ------------------------------------------------------------- -----------------------------------------------------------
David O. Miller, Director C. Ray Noecker, Director
/s/ James F. Patterson /s/ Arden L. Shisler
- ------------------------------------------------------------- -----------------------------------------------------------
James F. Patterson, Director Arden L. Shisler, Director
/s/ Robert L. Stewart /s/ Nancy C. Thomas
- ------------------------------------------------------------- -----------------------------------------------------------
Robert L. Stewart, Director Nancy C. Thomas, Director
/s/ Harold W. Weihl /s/ Robert A. Oakley
- ------------------------------------------------------------- -----------------------------------------------------------
Harold W. Weihl, Director Robert A. Oakley, Executive Vice President - Chief
Financial Officer
/s/ Mark R. Thresher
- -------------------------------------------------------------
Mark R. Thresher, Vice President - Controller
37
38
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
--------------------------------------------
Consolidated Financial Statements
December 31, 1996, 1995 and 1994
For Inclusion in Form 10-K
To Securities and Exchange Commission
F-1
39
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Nationwide Life Insurance Company:
We have audited the consolidated financial statements of Nationwide Life
Insurance Company and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nationwide Life
Insurance Company and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
In 1994, the Company adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
KPMG Peat Marwick LLP
Columbus, Ohio
January 31, 1997
F-2
40
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
($000's omitted)
Assets 1996 1995
------ ----------------- ----------------
Investments (notes 5, 8 and 9):
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $11,970,878 in 1996; $11,862,556 in 1995) $12,304,639 12,485,564
Equity securities (cost $43,890 in 1996; $23,617 in 1995) 59,131 29,953
Mortgage loans on real estate, net 5,272,119 4,602,764
Real estate, net 265,759 229,442
Policy loans 371,816 336,356
Other long-term investments 28,668 61,989
Short-term investments (note 13) 4,789 32,792
----------------- ----------------
18,306,921 17,778,860
----------------- ----------------
Cash 43,784 9,455
Accrued investment income 210,182 212,963
Deferred policy acquisition costs 1,366,509 1,020,356
Investment in subsidiaries classified as discontinued operations (notes 1 and 2) 485,707 506,677
Other assets (note 6) 426,441 388,214
Assets held in Separate Accounts (note 8) 26,926,702 18,591,108
----------------- ----------------
$47,766,246 38,507,633
================= ================
Liabilities and Shareholder's Equity
------------------------------------
Future policy benefits and claims (notes 6 and 8) $17,179,060 16,358,614
Policyholders' dividend accumulations 361,401 348,027
Other policyholder funds 60,073 65,297
Accrued federal income tax (note 7):
Current 30,170 35,301
Deferred 162,212 246,627
----------------- ----------------
192,382 281,928
----------------- ----------------
Dividend payable to shareholder (notes 1 and 2) 485,707 -
Other liabilities 423,047 234,147
Liabilities related to Separate Accounts (note 8) 26,926,702 18,591,108
----------------- ----------------
45,628,372 35,879,121
----------------- ----------------
Commitments and contingencies (notes 6, 9 and 15)
Shareholder's equity (notes 3, 4, 5, 12 and 13):
Capital shares, $1 par value. Authorized 5,000,000 shares, issued and
outstanding 3,814,779 shares 3,815 3,815
Additional paid-in capital 527,874 657,118
Retained earnings 1,432,593 1,583,275
Unrealized gains on securities available-for-sale, net 173,592 384,304
----------------- ----------------
2,137,874 2,628,512
----------------- ----------------
$47,766,246 38,507,633
================= ================
See accompanying notes to consolidated financial statements.
F-3
41
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1996, 1995 and 1994
($000's omitted)
1996 1995 1994
--------------- -------------- -------------
Revenues (note 16):
Investment product and universal life insurance product policy charges $ 400,902 286,534 217,245
Traditional life insurance premiums 198,642 199,106 176,658
Net investment income (note 5) 1,357,759 1,294,033 1,210,811
Realized losses on investments (note 5) (326) (1,724) (16,527)
Other income 35,861 20,702 11,312
--------------- -------------- -------------
1,992,838 1,798,651 1,599,499
--------------- -------------- -------------
Benefits and expenses:
Benefits and claims 1,160,580 1,115,493 992,667
Provision for policyholders' dividends on participating policies (note 12) 40,973 39,937 38,754
Amortization of deferred policy acquisition costs 133,394 82,695 85,568
Other operating expenses (note 13) 342,394 272,954 240,652
--------------- -------------- -------------
1,677,341 1,511,079 1,357,641
--------------- -------------- -------------
Income from continuing operations before federal income tax expense 315,497 287,572 241,858
--------------- -------------- -------------
Federal income tax expense (benefit) (note 7):
Current 116,512 88,700 73,559
Deferred (5,623) 11,108 5,030
--------------- -------------- -------------
110,889 99,808 78,589
--------------- -------------- -------------
Income from continuing operations 204,608 187,764 163,269
Income from discontinued operations (less federal income tax expense of
$4,453, $7,446 and $10,915 in 1996, 1995 and 1994, respectively) (note 2) 11,324 24,714 20,459
--------------- -------------- -------------
Net income $ 215,932 212,478 183,728
=============== ============== =============
See accompanying notes to consolidated financial statements.
F-4
42
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Shareholder's Equity
Years ended December 31, 1996, 1995 and 1994
($000's omitted)
Unrealized
gains (losses)
Additional on securities Total
Capital paid-in Retained available-for- shareholder's
shares capital earnings sale, net equity
----------- ------------- --------------- ----------------- ---------------
1994:
Balance, beginning of year $3,815 406,089 1,194,519 6,745 1,611,168
Capital contribution - 200,000 - - 200,000
Net income - - 183,728 - 183,728
Adjustment for change in accounting for
certain investments in debt and equity
securities, net (note 4) - - - 212,553 212,553
Unrealized losses on securities available-
for-sale, net - - - (338,971) (338,971)
----------- ------------- --------------- ----------------- ---------------
Balance, end of year $3,815 606,089 1,378,247 (119,673) 1,868,478
=========== ============= =============== ================= ===============
1995:
Balance, beginning of year 3,815 606,089 1,378,247 (119,673) 1,868,478
Capital contribution (note 13) - 51,029 - (4,111) 46,918
Dividends to shareholder - - (7,450) - (7,450)
Net income - - 212,478 - 212,478
Unrealized gains on securities available-
for-sale, net - - - 508,088 508,088
----------- ------------- --------------- ----------------- ---------------
Balance, end of year $3,815 657,118 1,583,275 384,304 2,628,512
=========== ============= =============== ================= ===============
1996:
Balance, beginning of year 3,815 657,118 1,583,275 384,304 2,628,512
Capital contribution (note 13) - 25 5 - 30
Dividends to shareholder - (129,269) (366,619) (39,819) (535,707)
Net income - - 215,932 - 215,932
Unrealized losses on securities available-
for-sale, net - - - (170,893) (170,893)
----------- ------------- --------------- ----------------- ---------------
Balance, end of year $3,815 527,874 1,432,593 173,592 2,137,874
=========== ============= =============== ================= ===============
See accompanying notes to consolidated financial statements.
F-5
43
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
($000's omitted)
1996 1995 1994
---------------- --------------- ---------------
Cash flows from operating activities:
Net income $ 215,932 212,478 183,728
Adjustments to reconcile net income to net cash provided by operating
activities:
Capitalization of deferred policy acquisition costs (422,572) (321,327) (242,431)
Amortization of deferred policy acquisition costs 133,394 82,695 85,568
Amortization and depreciation 6,962 10,234 3,603
Realized (gains) losses on invested assets, net (284) 3,250 16,094
Deferred federal income tax expense (benefit) 7,603 (30,673) 9,946
Decrease (increase) in accrued investment income 2,781 (16,999) (12,808)
(Increase) decrease in other assets (38,876) 39,880 (102,676)
Increase in policy liabilities 305,755 135,937 118,361
Increase in policyholders' dividend accumulations 13,374 12,639 15,298
(Decrease) increase in accrued federal income tax payable (5,131) 30,836 (5,714)
Increase in other liabilities 188,900 26,851 506
Other, net (61,679) 1,832 (29,595)
--------------- --------------- ---------------
Net cash provided by operating activities 346,159 187,633 39,880
---------------- --------------- ---------------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale 1,162,766 634,553 544,843
Proceeds from sale of securities available-for-sale 299,558 107,345 228,308
Proceeds from maturity of fixed maturity securities held-to-maturity - 564,450 491,862
Proceeds from repayments of mortgage loans on real estate 309,050 207,832 190,574
Proceeds from sale of real estate 18,519 48,331 46,713
Proceeds from repayments of policy loans and sale of other invested assets 22,795 53,587 120,506
Cost of securities available-for-sale acquired (1,573,640) (1,942,413) (1,816,370)
Cost of fixed maturity securities held-to-maturity acquired - (593,636) (410,379)
Cost of mortgage loans on real estate acquired (972,776) (796,026) (471,570)
Cost of real estate acquired (7,862) (10,928) (6,385)
Policy loans issued and other invested assets acquired (57,740) (75,910) (65,302)
Short-term investments, net 28,003 77,837 (89,376)
Purchase of affiliate (note 13) - - (155,000)
---------------- --------------- ---------------
Net cash used in investing activities (771,327) (1,724,978) (1,391,576)
---------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from capital contributions 30 - 200,000
Dividends paid to shareholder (50,000) (7,450) -
Increase in investment product and universal life insurance
product account balances 2,293,933 2,809,385 3,547,976
Decrease in investment product and universal life insurance
product account balances (1,784,466) (1,258,758) (2,412,595)
---------------- --------------- --------------
Net cash provided by financing activities 459,497 1,543,177 1,335,381
---------------- --------------- --------------
Net increase (decrease) in cash 34,329 5,832 (16,315)
---------------- --------------- ---------------
Cash, beginning of year 9,455 3,623 19,938
---------------- --------------- ---------------
Cash, end of year $ 43,784 9,455 3,623
================ =============== ===============
See accompanying notes to consolidated financial statements.
F-6
44
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
($000's omitted)
(1) Organization and Description of Business
----------------------------------------
Nationwide Life Insurance Company (NLIC) is a wholly owned subsidiary
of Nationwide Corporation (Nationwide Corp.). Wholly owned subsidiaries
of NLIC include Nationwide Life and Annuity Insurance Company (NLAIC),
Employers Life Insurance Company of Wausau and subsidiaries (ELICW),
National Casualty Company (NCC), West Coast Life Insurance Company
(WCLIC), Nationwide Advisory Services, Inc. (formerly Nationwide
Financial Services, Inc.), Nationwide Investment Services Corporation
(formerly PEBSCO Securities Corporation) (NISC) and NWE, Inc. NLIC and
its subsidiaries are collectively referred to as "the Company."
Nationwide Corp. formed Nationwide Financial Services, Inc. (NFS) in
November 1996 as a holding company for NLIC and the other companies of
the Nationwide Insurance Enterprise that offer or distribute long-term
savings and retirement products. On January 27, 1997, Nationwide Corp.
contributed to NFS the common stock of NLIC and three marketing and
distribution companies. NFS is planning an initial public offering of
its Class A common stock during the first quarter of 1997.
In anticipation of the restructuring described above, on September 24,
1996, NLIC's Board of Directors declared a dividend payable January 1,
1997 to Nationwide Corp. consisting of the outstanding shares of common
stock of certain subsidiaries (ELICW, NCC and WCLIC) 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 ELICW and another affiliate effective January 1, 1996. These
subsidiaries and all accident and health and group life insurance
business have been accounted for as discontinued operations for all
periods presented. See notes 2 and 13.
In addition, as part of the restructuring described above, NLIC intends
to make an $850,000 distribution to NFS which will then make an
equivalent distribution to Nationwide Corp.
The Company is a leading provider of long-term savings and retirement
products to retail and institutional customers and is subject to
competition from other financial services providers throughout the
United States. The Company is subject to regulation by the Insurance
Departments of states in which it is licensed, and undergoes periodic
examinations by those departments.
The following is a description of the most significant risks facing
life insurers and how the Company mitigates those risks:
LEGAL/REGULATORY RISK is the risk that changes in the legal or
regulatory environment in which an insurer operates will create
additional expenses not anticipated by the insurer in pricing its
products. That is, regulatory initiatives, new legal theories or
insurance company insolvencies through guaranty fund assessments
may create costs for the insurer beyond those currently recorded
in the consolidated financial statements. 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.
CREDIT RISK is the risk that issuers of securities owned by the
Company or mortgagors on mortgage loans on real estate owned by
the Company will default or that other parties, including
reinsurers, which owe the Company money, will not pay. The Company
minimizes this risk by adhering to a conservative investment
strategy, by maintaining reinsurance and credit and collection
policies and by providing for any amounts deemed uncollectible.
F-7
45
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
INTEREST RATE RISK is the risk that interest rates will change and
cause a decrease in the value of an insurer's investments. This
change in rates may cause certain interest-sensitive products to
become uncompetitive or may cause disintermediation. The Company
mitigates this risk by charging fees for non-conformance with
certain policy provisions, by offering products that transfer this
risk to the purchaser, and/or by attempting to match the maturity
schedule of its assets with the expected payouts of its
liabilities. To the extent that liabilities come due more quickly
than assets mature, an insurer would have to borrow funds or sell
assets prior to maturity and potentially recognize a gain or loss.
(2) Discontinued Operations
-----------------------
As discussed in note 1, NFS is a holding company for NLIC and certain
other companies that offer or distribute long-term savings and
retirement products. Prior to the contribution by Nationwide Corp. to
NFS of the outstanding common stock of NLIC and other companies, NLIC
effected certain transactions with respect to certain subsidiaries and
lines of business that were unrelated to long-term savings and
retirement products.
On September 24, 1996, NLIC's Board of Directors declared a dividend to
Nationwide Corp. consisting of the outstanding shares of common stock
of three subsidiaries: ELICW, NCC and WCLIC. ELICW writes group
accident and health and group life insurance business and maintains it
offices in Wausau, Wisconsin. NCC is a property and casualty company
that serves as a fronting company for a property and casualty
subsidiary of Nationwide Mutual Insurance Company (NMIC), an affiliate.
NCC maintains its offices in Scottsdale, Arizona. WCLIC writes high
dollar term life insurance policies and is located in San Francisco,
California. ELICW, NCC and WCLIC have been accounted for as
discontinued operations for all periods presented. NLIC did not
recognize any gain or loss on the disposal of these subsidiaries.
A summary of the combined results of operations, including the results
of the accident and health and group life insurance business ELICW
assumed from NLIC in 1996, and assets and liabilities of ELICW, NCC and
WCLIC as of and for the years ended December 31, 1996, 1995 and 1994 is
as follows:
1996 1995 1994
------------ ----------- -----------
Revenues $ 668,870 422,149 84,226
Net income 11,324 26,456 11,753
Assets, consisting primarily of investments 3,029,293 2,967,326 2,537,692
Liabilities, consisting primarily of policy benefits and claims 2,543,586 2,460,649 2,179,263
During 1996, NLIC entered into two reinsurance agreements whereby all
of NLIC's accident and health and group life insurance business was
ceded to ELICW and NMIC, effective January 1, 1996. See note 13 for a
complete discussion of the reinsurance agreements. NLIC has
discontinued its accident and health and group life insurance business
and in connection therewith has entered into reinsurance agreements to
cede all existing and any future writings to other affiliated companies
and will cease writing any new business prior to December 31, 1997.
NLIC's accident and health and group life insurance business is
accounted for as discontinued operations for all periods presented.
NLIC did not recognize any gain or loss on the disposal of the accident
and health and group life insurance business. The assets, liabilities,
results of operations and activities of discontinued operations are
distinguished physically, operationally and for financial reporting
purposes from the remaining assets, liabilities, results of operations
and activities of NLIC.
F-8
46
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
A summary of the results of operations, net of amounts ceded to ELICW
and NMIC in 1996, and assets and liabilities of NLIC's accident and
health and group life insurance business as of and for the years ended
December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994
------------ ----------- -----------
Revenues $ - 354,788 362,476
Net income (loss) - (1,742) 8,706
Assets, consisting primarily of investments 259,185 239,426 234,082
Liabilities, consisting primarily of policy benefits and claims 259,185 239,426 234,082
(3) Summary of Significant Accounting Policies
------------------------------------------
The significant accounting policies followed by the Company that
materially affect financial reporting are summarized below. The
accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) which
differ from statutory accounting practices prescribed or permitted by
regulatory authorities. Annual Statements for NLIC and its insurance
subsidiaries, filed with the department of insurance of each insurance
company's state of domicile, are prepared on the basis of accounting
practices prescribed or permitted by each department. Prescribed
statutory accounting practices include a variety of publications of the
National Association of Insurance Commissioners (NAIC), as well as
state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not
so prescribed. The Company has no material permitted statutory
accounting practices.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of contingent
assets and liabilities as of the date of the consolidated financial
statements and the reported amounts of revenues and expenses for the
reporting period. Actual results could differ significantly from those
estimates.
The most significant estimates include those used in determining
deferred policy acquisition costs, valuation allowances for mortgage
loans on real estate and real estate investments and the liability for
future policy benefits and claims. Although some variability is
inherent in these estimates, management believes the amounts provided
are adequate.
(a) Consolidation Policy
--------------------
The consolidated financial statements include the accounts of NLIC
and its wholly owned subsidiaries. Subsidiaries that are
classified and reported as discontinued operations are not
consolidated but rather are reported as "Investment in
Subsidiaries Classified as Discontinued Operations" in the
accompanying consolidated balance sheets and "Income for
Discontinued Operations" in the accompanying consolidated
statements of income. All significant intercompany balances and
transactions have been eliminated.
(b) Valuation of Investments and Related Gains and Losses
-----------------------------------------------------
The Company is required to classify its fixed maturity securities
and equity securities as either held-to-maturity,
available-for-sale or trading. Fixed maturity securities are
classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity and are
stated at amortized cost. Fixed maturity securities not classified
as held-to-maturity and all equity securities are classified as
available-for-sale and are stated at fair value, with the
unrealized gains and losses, net of adjustments to deferred policy
acquisition costs and deferred federal income tax, reported as a
separate component of shareholder's equity. The adjustment to
deferred policy acquisition costs represents the change in
amortization of deferred policy acquisition costs that would have
been required as a charge or credit to operations had such
unrealized amounts been realized. The Company has no fixed
maturity securities classified as held-to-maturity or trading as
of December 31, 1996 or 1995.
F-9
47
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 are 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 annuities, annuities without life contingencies
and guaranteed investment contracts. Universal life insurance
products include universal life insurance, variable universal 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.
ACCIDENT AND HEALTH INSURANCE PRODUCTS: Accident and health
insurance premiums are recognized as revenue over the terms of the
policies. Policy claims are charged to expense in the period that
the claims are incurred. All accident and health insurance
business is accounted for as discontinued operations. See note 2.
(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 agency 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. For traditional life 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. 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 3(b).
F-10
48
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(e) Separate Accounts
-----------------
Separate Account assets and liabilities represent contractholders'
funds which have been segregated into accounts with specific
investment objectives. 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 using a net level premium method based on
estimates of mortality, morbidity, investment yields and
withdrawals which were used or which were being experienced at the
time the policies were issued, rather than the assumptions
prescribed by state regulatory authorities. See note 6.
Future policy benefits and claims for collectively renewable
long-term disability policies and group long-term disability
policies are the present value of amounts not yet due on reported
claims and an estimate of amounts to be paid on incurred but
unreported claims. The impact of reserve discounting is not
material. Future policy benefits and claims on other group health
insurance policies are not discounted. All health insurance
business is accounted for as discontinued operations. See note 2.
(g) Participating Business
----------------------
Participating business represents approximately 52% in 1996 (54%
in 1995 and 55% in 1994) of the Company's life insurance in force,
78% in 1996 (79% in 1995 and 79% in 1994) of the number of life
insurance policies in force, and 40% in 1996 (47% in 1995 and 51%
in 1994) of life insurance premiums. The provision for
policyholder dividends is based on current dividend scales. Future
dividends are provided for ratably in future policy benefits based
on dividend scales in effect at the time the policies were issued.
(h) Federal Income Tax
------------------
The Company, with the exception of ELICW, files a consolidated
federal income tax return with NMIC, the majority shareholder of
Nationwide Corp. The members of the consolidated tax return group
have a tax sharing arrangement which provides, in effect, for each
member to bear essentially the same federal income tax liability
as if separate tax returns were filed. Through 1994, ELICW filed a
consolidated federal income tax return with Employers Insurance of
Wausau A Mutual Company, an affiliate. Beginning in 1995, ELICW
files a separate federal income tax return.
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.
F-11
49
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(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. All of the Company's accident
and health and group life insurance business is ceded to
affiliates and is accounted for as discontinued operations. See
notes 2 and 13.
(j) Reclassification
----------------
Certain items in the 1995 and 1994 consolidated financial
statements have been reclassified to conform to the 1996
presentation.
(4) Change in Accounting Principle
------------------------------
Effective January 1, 1994, the Company changed its method of accounting
for certain investments in debt and equity securities in connection
with the issuance of STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS)
NO. 115 - ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES. As of January 1, 1994, the Company classified fixed
maturity securities with amortized cost and fair value of $6,299,665
and $6,721,714, respectively, as available-for-sale and recorded the
securities at fair value. Previously, these securities were recorded at
amortized cost. The effect as of January 1, 1994 has been recorded as a
direct credit to shareholder's equity as follows:
Excess of fair value over amortized cost of fixed maturity
securities available-for-sale $ 422,049
Adjustment to deferred policy acquisition costs (95,044)
Deferred federal income tax (114,452)
--------------
$ 212,553
==============
(5) Investments
-----------
The amortized cost and estimated fair value of securities
available-for-sale were as follows as of December 31, 1996:
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
------------ ---------- ----------- -----------
1996:
Fixed maturity securities:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 275,696 4,795 (1,340) 279,151
Obligations of states and political subdivisions 6,242 450 (2) 6,690
Debt securities issued by foreign governments 100,656 2,141 (857) 101,940
Corporate securities 7,999,310 285,946 (33,686) 8,251,570
Mortgage-backed securities 3,588,974 91,438 (15,124) 3,665,288
------------ ---------- ------------ ------------
Total fixed maturity securities 11,970,878 384,770 (51,009) 12,304,639
Equity securities 43,890 15,571 (330) 59,131
------------ ---------- ------------ ------------
$12,014,768 400,341 (51,339) 12,363,770
============ ========== ============ ============
F-12
50
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The amortized cost and estimated fair value of securities
available-for-sale were as follows as of December 31, 1995:
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
------------ ---------- ----------- ---------------
1995:
Fixed maturity securities:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 310,186 12,764 (1) 322,949
Obligations of states and political subdivisions 8,655 1,205 (1) 9,859
Debt securities issued by foreign governments 101,414 4,387 (66) 105,735
Corporate securities 7,888,440 473,681 (25,742) 8,336,379
Mortgage-backed securities 3,553,861 165,169 (8,388) 3,710,642
------------ ---------- ----------- ---------------
Total fixed maturity securities 11,862,556 657,206 (34,198) 12,485,564
Equity securities 23,617 6,382 (46) 29,953
------------ ---------- ----------- ---------------
$11,886,173 663,588 (34,244) 12,515,517
============ ========== =========== ===============
The amortized cost and estimated fair value of fixed maturity
securities available-for-sale as of December 31, 1996, by contractual
maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Amortized Estimated
cost fair value
--------------- --------------
Fixed maturity securities available-for-sale:
Due in one year or less $ 440,235 444,214
Due after one year through five years 3,937,010 4,053,152
Due after five years through ten years 2,809,813 2,871,806
Due after ten years 1,194,846 1,270,179
--------------- --------------
8,381,904 8,639,351
Mortgage-backed securities 3,588,974 3,665,288
--------------- --------------
$11,970,878 12,304,639
=============== ==============
The components of unrealized gains on securities available-for-sale,
net, were as follows as of December 31:
1996 1995
--------------- --------------
Gross unrealized gains $349,002 629,344
Adjustment to deferred policy acquisition costs (81,939) (138,914)
Deferred federal income tax (93,471) (171,649)
--------------- --------------
173,592 318,781
Unrealized gains on securities available-for-sale, net, of
subsidiaries classified as discontinued operations (note 2) - 65,523
--------------- --------------
$173,592 384,304
=============== ==============
F-13
51
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
An analysis of the change in gross unrealized gains (losses) on
securities available-for-sale and fixed maturity securities
held-to-maturity follows for the years ended December 31:
1996 1995 1994
--------------- ------------- --------------
Securities available-for-sale:
Fixed maturity securities $(289,247) 876,332 (675,373)
Equity securities 8,905 (26) (1,927)
Fixed maturity securities held-to-maturity - 75,626 (398,183)
--------------- ------------- --------------
$(280,342) 951,932 (1,075,483)
=============== ============= ==============
Proceeds from the sale of securities available-for-sale during 1996,
1995 and 1994 were $299,558, $107,345 and $228,308, respectively.
During 1996, gross gains of $6,606 ($4,838 and $3,045 in 1995 and 1994,
respectively) and gross losses of $6,925 ($2,147 and $21,280 in 1995
and 1994, respectively) were realized on those sales.
During 1995, the Company transferred fixed maturity securities
classified as held-to-maturity with amortized cost of $25,429 to
available-for-sale securities due to evidence of a significant
deterioration in the issuer's creditworthiness. The transfer of those
fixed maturity securities resulted in a gross unrealized loss of
$3,535.
As permitted by the Financial Accounting Standards Board's Special
Report, A GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, issued in November
1995 the Company transferred all of its fixed maturity securities
previously classified as held-to-maturity to available-for-sale. As of
December 14, 1995, the date of transfer, the fixed maturity securities
had amortized cost of $3,320,093, resulting in a gross unrealized gain
of $155,940.
Investments that were non-income producing for the twelve month period
preceding December 31, 1996 amounted to $26,805 ($27,712 in 1995) and
consisted of $248 ($6,982 in 1995) in fixed maturity securities,
$20,633 ($14,740 in 1995) in real estate and $5,924 ($5,990 in 1995) in
other long-term investments.
Real estate is presented at cost less accumulated depreciation of
$30,338 as of December 31, 1996 ($30,482 as of December 31, 1995) and
valuation allowances of $15,219 as of December 31, 1996 ($25,819 as of
December 31, 1995).
The recorded investment of mortgage loans on real estate considered to
be impaired (under SFAS NO. 114 - ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN as amended by SFAS NO. 118 - ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN-INCOME RECOGNITION AND DISCLOSURE)
as of December 31, 1996 was $51,765 ($44,409 as of December 31, 1995),
which includes $41,663 ($23,975 as of December 31, 1995) of impaired
mortgage loans on real estate for which the related valuation allowance
was $8,485 ($5,276 as of December 31, 1995) and $10,102 ($20,434 as of
December 31, 1995) of impaired mortgage loans on real estate for which
there was no valuation allowance. During 1996, the average recorded
investment in impaired mortgage loans on real estate was approximately
$39,674 ($22,181 in 1995) and interest income recognized on those loans
was $2,103 ($387 in 1995), 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:
1996 1995
------------- --------------
Allowance, beginning of year $49,128 46,381
Additions charged to operations 4,497 7,433
Direct write-downs charged against the allowance (2,587) (4,686)
------------- -------------
Allowance, end of year $51,038 49,128
============= ==============
F-14
52
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
An analysis of investment income by investment type follows for the
years ended December 31:
1996 1995 1994
--------------- ------------- ------------
Gross investment income:
Securities available-for-sale:
Fixed maturity securities $ 917,135 685,787 647,927
Equity securities 1,291 1,330 509
Fixed maturity securities held-to-maturity - 201,808 185,938
Mortgage loans on real estate 432,815 395,478 372,734
Real estate 44,332 38,344 40,170
Short-term investments 4,155 10,576 6,141
Other 3,998 7,239 2,121
--------------- ------------- --------------
Total investment income 1,403,726 1,340,562 1,255,540
Less investment expenses 45,967 46,529 44,729
--------------- ------------- ---------------
Net investment income $1,357,759 1,294,033 1,210,811
=============== ============= ==============
An analysis of realized gains (losses) on investments, net of valuation
allowances, by investment type follows for the years ended December 31:
1996 1995 1994
------------ ------------ ------------
Securities available-for-sale:
Fixed maturity securities $(3,462) 4,213 (7,296)
Equity securities 3,143 3,386 1,422
Mortgage loans on real estate (4,115) (7,091) (20,446)
Real estate and other 4,108 (2,232) 9,793
------------ ------------ ------------
$ (326) (1,724) (16,527)
============ ============ ============
Fixed maturity securities with an amortized cost of $6,161 and $5,592
as of December 31, 1996 and 1995, respectively, were on deposit with
various regulatory agencies as required by law.
(6) Future Policy Benefits and Claims
---------------------------------
The liability for future policy benefits for investment contracts
represents approximately 87% and 87% of the total liability for future
policy benefits as of December 31, 1996 and 1995, respectively. The
average interest rate credited on investment product policies was
approximately 6.3%, 6.6% and 6.5% for the years ended December 31,
1996, 1995 and 1994, respectively.
The liability for future policy benefits for traditional life insurance
policies has been established based upon the following assumptions:
Interest rates: Interest rates vary as follows:
--------------
Year of issue Interest rates
----------------- ----------------------------------------
1996 6.6%, not graded
1984-1995 6.0% to 10.5%, not graded
1966-1983 6.0% to 8.1%, graded over 20 years to 4.0% to 6.6%
1965 and prior generally lower than post 1965 issues
F-15
53
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
WITHDRAWALS: Rates, which vary by issue age, type of coverage
and policy duration, are based on Company experience.
MORTALITY: Mortality and morbidity rates are based on
published tables, modified for the Company's actual
experience.
The Company has entered into a reinsurance contract to cede a portion
of its general account individual annuity business to The Franklin Life
Insurance Company (Franklin). Total recoveries due from Franklin were
$240,451 and $245,255 as of December 31, 1996 and 1995, respectively.
The contract is immaterial to the Company's results of operations. The
ceding of risk does not discharge the original insurer from its primary
obligation to the policyholder. Under the terms of the contract,
Franklin has established a trust as collateral for the recoveries. The
trust assets are invested in investment grade securities, the market
value of which must at all times be greater than or equal to 102% of
the reinsured reserves.
The Company has reinsurance agreements with certain affiliates as
described in note 13. All other reinsurance agreements are not material
to either premiums or reinsurance recoverables.
(7) 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, 1996
and 1995 are as follows:
1996 1995
----------------- ---------------
Deferred tax assets:
Future policy benefits $175,571 149,192
Liabilities in Separate Accounts 188,426 129,120
Mortgage loans on real estate and real estate 23,366 25,165
Other policyholder funds 7,407 7,424
Other assets and other liabilities 53,757 41,847
----------------- ---------------
Total gross deferred tax assets 448,527 352,748
Less valuation allowances (7,000) (7,000)
----------------- ---------------
Net deferred tax assets 441,527 345,748
================= ===============
Deferred tax liabilities:
Deferred policy acquisition costs 399,345 299,579
Fixed maturity securities 133,210 227,345
Deferred tax on realized investment gains 37,597 40,634
Equity securities and other long-term investments 8,210 3,780
Other 25,377 21,037
----------------- ---------------
Total gross deferred tax liabilities 603,739 592,375
----------------- ---------------
$162,212 246,627
================= ===============
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion of the
total gross deferred tax assets will not be realized. Nearly all future
deductible amounts can be offset by future taxable amounts or recovery
of federal income tax paid within the statutory carryback period. There
has been no change in the valuation allowance for the years ended
December 31, 1996, 1995 and 1994.
F-16
54
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Total federal income tax expense for the years ended December 31, 1996,
1995 and 1994 differs from the amount computed by applying the U.S.
federal income tax rate to income before tax as follows:
1996 1995 1994
---------------------- ---------------------- ----------------------
Amount % Amount % Amount %
---------------------- ---------------------- ----------------------
Computed (expected) tax expense $110,424 35.0 $100,650 35.0 $84,650 35.0
Tax exempt interest and dividends
received deduction (212) (0.1) (18) (0.0) (130) (0.1)
Other, net 677 0.3 (824) (0.3) (5,931) (2.5)
------------ -------- ------------- -------- ------------- --------
Total (effective rate of each year) $110,889 35.2 $ 99,808 34.7 $78,589 32.5
============ ======== ============= ======== ============= ========
Total federal income tax paid was $115,839, $51,840 and $83,239
during the years ended December 31, 1996, 1995 and 1994,
respectively.
(8) Disclosures about Fair Value of Financial Instruments
-----------------------------------------------------
SFAS NO. 107 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(SFAS 107) requires disclosure of fair value information about existing
on and off-balance sheet financial instruments. SFAS 107 defines the
fair value of a financial instrument 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 based on estimates 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. SFAS 107 excludes certain assets and
liabilities from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying
value of the Company.
Although insurance contracts, other than policies such as annuities
that are classified as investment contracts, are specifically exempted
from SFAS 107 disclosures, estimated fair value of policy reserves on
life insurance contracts is provided to make the fair value disclosures
more meaningful.
The tax ramifications of the related unrealized gains and losses can
have a significant effect on fair value estimates and have not been
considered in the estimates.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures:
CASH, SHORT-TERM INVESTMENTS AND POLICY LOANS: The carrying amount
reported in the consolidated balance sheets for these instruments
approximates their fair value.
FIXED MATURITY AND EQUITY SECURITIES: 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.
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 includes certain surrender
charges.
F-17
55
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
MORTGAGE LOANS ON REAL ESTATE: 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 mortgages in default is the estimated fair value of
the underlying collateral.
INVESTMENT CONTRACTS: Fair value for the Company's liabilities
under investment type contracts is disclosed using two methods.
For investment contracts without defined maturities, fair value is
the amount payable on demand. For investment contracts with known
or determined maturities, fair value is estimated using discounted
cash flow analyses. Interest rates used are similar to currently
offered contracts with maturities consistent with those remaining
for the contracts being valued.
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.
POLICYHOLDERS' DIVIDEND ACCUMULATIONS AND OTHER POLICYHOLDER
FUNDS: 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.
Carrying amount and estimated fair value of financial instruments
subject to SFAS 107 and policy reserves on life insurance contracts
were as follows as of December 31, 1996 and 1995:
1996 1995
------------------------------ -------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------------------------------ --------------- ---------------
Assets
------
Investments:
Securities available-for-sale:
Fixed maturity securities $12,304,639 12,304,639 12,485,564 12,485,564
Equity securities 59,131 59,131 29,953 29,953
Mortgage loans on real estate, net 5,272,119 5,397,865 4,602,764 4,961,655
Policy loans 371,816 371,816 336,356 336,356
Short-term investments 4,789 4,789 32,792 32,792
Cash 43,784 43,784 9,455 9,455
Assets held in Separate Accounts 26,926,702 26,926,702 18,591,108 18,591,108
Liabilities
-----------
Investment contracts 13,914,441 13,484,526 13,229,360 12,876,798
Policy reserves on life insurance contracts 2,971,337 2,775,991 2,836,323 2,733,486
Policyholders' dividend accumulations 361,401 361,401 348,027 348,027
Other policyholder funds 60,073 60,073 65,297 65,297
Liabilities related to Separate Accounts 26,926,702 26,164,213 18,591,108 18,052,362
(9) Additional Financial Instruments Disclosures
--------------------------------------------
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. These instruments involve, to varying
degrees, elements of credit risk in excess of amounts recognized on the
consolidated balance sheets.
F-18
56
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 $327,456 extending into
1997 were outstanding as of December 31, 1996.
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 21% (20% in 1995) in any geographic area and no more than 2% (2%
in 1995) with any one borrower as of December 31, 1996.
The Company had a significant reinsurance recoverable balance from one
reinsurer as of December 31, 1996 and 1995. See note 6.
The summary below depicts loans by remaining principal balance as of
December 31, 1996 and 1995:
Apartment
Office Warehouse Retail & other Total
------------ ------------- ------------- ------------- --------------
1996:
East North Central $139,518 119,069 549,064 215,038 1,022,689
East South Central 33,267 22,252 172,968 90,623 319,110
Mountain 17,972 43,027 113,292 73,390 247,681
Middle Atlantic 129,077 54,046 160,833 18,498 362,454
New England 33,348 43,581 161,960 - 238,889
Pacific 202,562 325,046 424,295 110,108 1,062,011
South Atlantic 103,889 134,492 482,934 385,185 1,106,500
West North Central 126,467 2,441 75,180 40,529 244,617
West South Central 104,877 120,314 197,090 304,256 726,537
------------- ------------- ------------- -------------- ------------
$890,977 864,268 2,337,616 1,237,627 5,330,488
============ ============= ============= =============
Less valuation allowances and unamortized discount 58,369
--------------
Total mortgage loans on real estate, net $5,272,119
==============
1995:
East North Central $138,965 101,925 514,995 175,213 931,098
East South Central 21,329 13,053 180,858 82,383 297,623
Mountain - 17,219 138,220 45,274 200,713
Middle Atlantic 116,187 64,813 158,252 10,793 350,045
New England 9,559 39,525 148,449 1 197,534
Pacific 183,206 233,186 374,915 105,419 896,726
South Atlantic 106,246 73,541 446,800 278,265 904,852
West North Central 133,899 14,205 78,065 36,651 262,820
West South Central 69,140 92,594 190,299 267,268 619,301
------------ ------------ ------------- ------------- --------------
$778,531 650,061 2,230,853 1,001,267 4,660,712
============ ============= ============= =============
Less valuation allowances and unamortized discount 57,948
--------------
Total mortgage loans on real estate, net $4,602,764
==============
F-19
57
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Pension Plan
------------
The Company is a participant, together with other affiliated companies,
in a pension plan covering all employees who have completed at least
one thousand hours of service within a twelve-month period and who have
met certain age requirements. 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.
Effective January 1, 1995, the plan was amended to provide enhanced
benefits for participants who met certain eligibility requirements and
elected early retirement no later than March 15, 1995. The entire cost
of the enhanced benefit was borne by NMIC and certain of its property
and casualty insurance company affiliates.
Effective December 31, 1995, the Nationwide Insurance Companies and
Affiliates Retirement Plan was merged with the Farmland Mutual
Insurance Company Employees' Retirement Plan and the Wausau Insurance
Companies Pension Plan to form the Nationwide Insurance Enterprise
Retirement Plan. Immediately prior to the merger, the plans were
amended to provide consistent benefits for service after January 1,
1996. These amendments had no significant impact on the accumulated
benefit obligation or projected benefit obligation as of December 31,
1995.
Pension costs charged to operations by the Company during the years
ended December 31, 1996, 1995 and 1994 were $7,381, $10,478 and
$10,063, respectively.
The Company's net accrued pension expense as of December 31, 1996 and
1995 was $1,075 and $1,392, respectively.
The net periodic pension cost for the Nationwide Insurance Enterprise
Retirement Plan as a whole for the year ended December 31, 1996 and for
the Nationwide Insurance Companies and Affiliates Retirement Plan as a
whole for the years ended December 31, 1995 and 1994 follows:
1996 1995 1994
--------------- --------------- ---------------
Service cost (benefits earned during the period) $ 75,466 64,524 64,740
Interest cost on projected benefit obligation 105,511 95,283 73,951
Actual return on plan assets (210,583) (249,294) (21,495)
Net amortization and deferral 101,795 143,353 (62,150)
--------------- --------------- ---------------
$ 72,189 53,866 55,046
=============== =============== ===============
Basis for measurements, net periodic pension cost:
1996 1995 1994
--------------- --------------- ---------------
Weighted average discount rate 6.00% 7.50% 5.75%
Rate of increase in future compensation levels 4.25% 6.25% 4.50%
Expected long-term rate of return on plan assets 6.75% 8.75% 7.00%
F-20
58
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Information regarding the funded status of the Nationwide Insurance
Enterprise Retirement Plan as a whole as of December 31, 1996 and 1995
follows:
1996 1995
--------------- ---------------
Accumulated benefit obligation:
Vested $1,338,554 1,236,730
Nonvested 11,149 26,503
--------------- ---------------
$1,349,703 1,263,233
=============== ===============
Net accrued pension expense:
Projected benefit obligation for services rendered to
date $1,847,828 1,780,616
Plan assets at fair value 1,947,933 1,738,004
--------------- ---------------
Plan assets in excess of (less than) projected benefit
obligation 100,105 (42,612)
Unrecognized prior service cost 37,870 42,845
Unrecognized net gains (201,952) (63,130)
Unrecognized net asset at transition 37,158 41,305
--------------- ---------------
$ (26,819) (21,592)
=============== ===============
Basis for measurements, funded status of plan:
1996 1995
--------------- ---------------
Weighted average discount rate 6.50% 6.00%
Rate of increase in future compensation levels 4.75% 4.25%
Assets of the Nationwide Insurance Enterprise Retirement Plan are
invested in group annuity contracts of NLIC and ELICW.
(11) Postretirement Benefits Other Than Pensions
-------------------------------------------
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; 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,
1996 and 1995 was $34,884 and $33,537, respectively, and the net
periodic postretirement benefit cost (NPPBC) for 1996, 1995 and 1994
was $3,286, $3,132 and $4,284, respectively.
F-21
59
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The amount of NPPBC for the plan as a whole for the years ended
December 31, 1996, 1995 and 1994 was as follows:
1996 1995 1994
----------- ----------- -----------
Service cost (benefits attributed to employee service during the year) $ 6,541 6,235 8,586
Interest cost on accumulated postretirement benefit obligation 13,679 14,151 14,011
Actual return on plan assets (4,348) (2,657) (1,622)
Amortization of unrecognized transition obligation of affiliates 173 2,966 568
Net amortization and deferral 1,830 (1,619) 1,622
----------- ----------- -----------
$17,875 19,076 23,165
=========== =========== ===========
Information regarding the funded status of the plan as a whole as of
December 31, 1996 and 1995 follows:
1996 1995
--------------- ---------------
Accrued postretirement benefit expense:
Retirees $ 92,954 88,680
Fully eligible, active plan participants 23,749 28,793
Other active plan participants 83,986 90,375
--------------- ---------------
Accumulated postretirement benefit obligation (APBO) 200,689 207,848
Plan assets at fair value 63,044 54,325
--------------- ---------------
Plan assets less than accumulated postretirement benefit obligation (137,645) (153,523)
Unrecognized transition obligation of affiliates 1,654 1,827
Unrecognized net gains (23,225) (1,038)
--------------- ---------------
$(159,216) (152,734)
=============== ===============
Actuarial assumptions used for the measurement of the APBO as of
December 31, 1996 and 1995 and the NPPBC for 1996, 1995 and 1994 were
as follows:
1996 1996 1995 1995 1994
APBO NPPBC APBO NPPBC NPPBC
------------ ----------- ----------- ----------- ------------
Discount rate 7.25% 6.65% 6.75% 8.00% 7.00%
Long-term rate of return on plan
assets, net of tax - 4.80% - 8.00% N/A
Assumed health care cost trend rate:
Initial rate 11.00% 11.00% 11.00% 10.00% 12.00%
Ultimate rate 6.00% 6.00% 6.00% 6.00% 6.00%
Uniform declining period 12 Years 12 Years 12 Years 12 Years 12 Years
The health care cost trend rate assumption has an effect on the amounts
reported. For the plan as a whole, a one percentage point increase in
the assumed health care cost trend rate would increase the APBO as of
December 31, 1996 by $701 and the NPPBC for the year ended December 31,
1996 by $83.
(12) Shareholder's Equity, Regulatory Risk-Based Capital, Retained Earnings
and Dividend Restrictions
---------------------------------------------------------------------
Each insurance company'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 each of its
insurance company subsidiaries exceed the minimum risk-based capital
requirements.
F-22
60
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The statutory capital shares and surplus of NLIC as of December 31,
1996, 1995 and 1994 was $1,000,647, $1,363,031 and $1,262,861,
respectively. The statutory net income of NLIC for the years ended
December 31, 1996, 1995 and 1994 was $73,218, $86,529 and $76,532,
respectively.
NLIC is limited in the amount of shareholder dividends it may pay
without prior approval by the Department of Insurance of the State of
Ohio (the Department). NLIC's dividend of the outstanding shares of
common stock of certain companies which was declared on September 24,
1996 and the anticipated $850,000 dividend (as discussed in note 1) are
deemed extraordinary under Ohio insurance laws. As a result of such
dividends, any dividend paid by NLIC during the 12-month period
immediately following the $850,000 dividend would also be an
extraordinary dividend under Ohio insurance laws. Accordingly, no such
dividend could be paid without prior regulatory 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 stockholder.
The Company currently does not expect such regulatory requirements to
impair its ability to pay operating expenses and stockholder dividends
in the future.
(13) Transactions With Affiliates
----------------------------
The Company leases office space from NMIC and certain of its
subsidiaries. For the years ended December 31, 1996, 1995 and 1994, the
Company made lease payments to NMIC and its subsidiaries of $9,065,
$8,986 and $8,133, 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 this agreement are subject to
allocation among NMIC, the Company and other affiliates. Amounts
allocated to the Company were $101,584, $107,112, and $100,601 in 1996,
1995 and 1994, respectively. The allocations are based on techniques
and procedures in accordance with insurance regulatory guidelines.
Measures used to allocate expenses among companies include individual
employee estimates of time spent, special cost studies, salary expense,
commissions expense and other methods agreed to by the participating
companies that are within industry guidelines and practices. The
Company believes these allocation methods are reasonable. In addition,
the Company does not believe that expenses recognized under the
intercompany agreements are materially different than expenses that
would have been recognized had the Company operated on a stand alone
basis. Amounts payable to NMIC from the Company under the cost sharing
agreement were $15,111 and $1,186 as of December 31, 1996 and 1995,
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 a stated period, the securities
will be repurchased by the seller at the original sales price plus a
price differential. Transactions under the agreements during 1996 and
1995 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.
F-23
61
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Intercompany reinsurance contracts exist between NLIC and, respectively
NMIC and ELICW whereby all of NLIC's accident and health and group life
insurance business is ceded on a modified coinsurance basis. NLIC
entered into the reinsurance agreements during 1996 because the
accident and health and group life insurance business was unrelated to
NLIC's long-term savings and retirement products. Accordingly, the
accident and health and group life insurance business has been
accounted for as discontinued operations for all periods presented.
Under modified coinsurance agreements, invested assets are retained by
the ceding company and investment earnings are paid to the reinsurer.
Under the terms of NLIC's agreements, the investment risk associated
with changes in interest rates is borne by NMIC or ELICW, as the case
may be. Risk of asset default is retained by NLIC, although a fee is
paid by NMIC or ELICW, as the case may be, to NLIC for the NLIC's
retention of such risk. The agreements will remain in force until all
policy obligations are settled. However, with respect to the agreement
between NLIC and NMIC, either party may terminate the contract on
January 1 of any year with prior notice. The ceding of risk does not
discharge the original insurer from its primary obligation to the
policyholder. NLIC believes that the terms of the modified coinsurance
agreements are consistent in all material respects with what NLIC could
have obtained with unaffiliated parties.
Amounts ceded to ELICW in 1996 are included in ELICW's results of
operations for 1996 which, combined with the results of WCLIC and NCC,
are summarized in note 2. Amounts ceded to ELICW in 1996 include
premiums of $224,224, net investment income and other revenue of
$14,833, and benefits, claims and other expenses of $246,641. Amounts
ceded to NMIC in 1996 include premiums of $97,331, net investment
income of $10,890, and benefits, claims and other expenses of $100,476.
The Company and various affiliates entered into agreements with
Nationwide Cash Management Company (NCMC) and California Cash
Management Company (CCMC), both affiliates, under which NCMC and CCMC
act as common agents in handling the purchase and sale of short-term
securities for the respective accounts of the participants. Amounts on
deposit with NCMC and CCMC were $4,789 and $9,654 as of December 31,
1996 and 1995, respectively, and are included in short-term investments
on the accompanying consolidated balance sheets.
On April, 5 1996, Nationwide Corp. contributed all of the outstanding
shares, with shareholder equity value of $30, of NISC to NLIC. NLIC
contributed an additional $500 to NISC on August 30, 1996.
On March 1, 1995, Nationwide Corp. contributed all of the outstanding
shares of common stock of Farmland Life Insurance Company (Farmland) to
NLIC. Farmland merged into WCLIC effective June 30, 1995. The
contribution resulted in a direct increase to consolidated
shareholder's equity of $46,918. As discussed in note 2, WCLIC is
accounted for as discontinued operations.
Effective December 31, 1994, NLIC purchased all of the outstanding
shares of common stock of ELICW from Wausau Service Corporation (WSC)
for $155,000. NLIC transferred fixed maturity securities and cash with
a fair value of $155,000 to WSC on December 28, 1994, which resulted in
a realized loss of $19,239 on the disposition of the securities. The
purchase price approximated both the historical cost basis and fair
value of net assets of ELICW. ELICW has and will continue to share home
office, other facilities, equipment and common management and
administrative services with WSC. As discussed in note 2, ELICW is
accounted for as discontinued operations.
Certain annuity products are sold through three affiliated companies
which are also subsidiaries of Nationwide Corp. Total commissions and
fees paid to these affiliates for the years ended December 31, 1996,
1995 and 1994 were $76,922, $57,280 and $50,168, respectively.
(14) Bank Lines of Credit
--------------------
In August 1996, NLIC, along with NMIC, established a $600,000 revolving
credit facility which provides for a $600,000 loan over a five year
term on a fully revolving basis with a group of national financial
institutions. The credit facility provides for several and not joint
liability with respect to any amount drawn by either NLIC or NMIC. NLIC
and NMIC pay facility and usage fees to the financial institutions to
maintain the revolving credit facility. All previously existing line of
credit agreements were canceled.
F-24
62
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15) Contingencies
-------------
The Company is a defendant in various lawsuits. In the opinion of
management, the effects, if any, of such lawsuits are not expected to
be material to the Company's financial position or results of
operations.
(16) Segment Information
-------------------
The Company has three primary segments: Variable Annuities, Fixed
Annuities and Life Insurance. The Variable Annuities segment consists
of annuity contracts that provide the customer with the opportunity to
invest in mutual funds managed by the Company and independent
investment managers, with the investment returns accumulating on a
tax-deferred basis. The Fixed Annuities segment consists of annuity
contracts that generate a return for the customer at a specified
interest rate, fixed for a prescribed period, with returns accumulating
on a tax-deferred basis. The Life Insurance segment consists of
insurance products that provide a death benefit and may also allow the
customer to build cash value on a tax-deferred basis. In addition, the
Company reports corporate expenses and investments, and the related
investment income supporting capital not specifically allocated to its
product segments in a Corporate and Other segment. In addition, all
realized gains and losses, investment management fees and other revenue
earned from mutual funds, other than the portion allocated to the
variable annuities and life insurance segments, are reported in the
Corporate and Other segment.
During 1996, the Company changed its reporting segments to better
reflect the way the businesses are managed. Prior periods have been
restated to reflect these changes.
The following table summarizes the revenues and income from continuing
operations before federal income tax expense for the years ended
December 31, 1996, 1995 and 1994 and assets as of December 31, 1996,
1995 and 1994, by business segment.
1996 1995 1994
----------------- --------------- ---------------
Revenues:
Variable Annuities $ 284,638 189,071 132,687
Fixed Annuities 1,092,566 1,051,970 939,868
Life Insurance 435,657 409,135 383,150
Corporate and Other 179,977 148,475 143,794
----------------- --------------- ---------------
$ 1,992,838 1,798,651 1,599,499
================= =============== ===============
Income from continuing operations before federal income tax
expense:
Variable Annuities 90,244 50,837 24,574
Fixed Annuities 135,405 137,000 138,950
Life Insurance 67,242 67,590 53,046
Corporate and Other 22,606 32,145 25,288
----------------- --------------- ---------------
$ 315,497 287,572 241,858
================= =============== ===============
Assets:
Variable Annuities 25,069,725 17,333,039 11,146,465
Fixed Annuities 13,994,715 13,250,359 11,668,973
Life Insurance 3,353,286 3,027,420 2,752,283
Corporate and Other 5,348,520 4,896,815 3,678,303
----------------- --------------- ---------------
$47,766,246 38,507,633 29,246,024
================= =============== ===============
F-25
63
SCHEDULE I
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Summary of Investments -
Other Than Investments in Related Parties
As of December 31, 1996
($000's omitted)
- --------------------------------------------------------------- --------------- -------------- -----------------
Column A Column B Column C Column D
- --------------------------------------------------------------- --------------- -------------- -----------------
Amount at which
shown in the
consolidated
Type of Investment Cost Market value balance sheet
- --------------------------------------------------------------- --------------- -------------- -----------------
Fixed maturity securities available-for-sale:
Bonds:
U.S. Government and government agencies and authorities $ 3,757,887 3,834,762 3,834,762
States, municipalities and political subdivisions 6,242 6,690 6,690
Foreign governments 100,656 101,940 101,940
Public utilities 1,798,736 1,843,938 1,843,938
All other corporate 6,307,357 6,517,309 6,517,309
--------------- -------------- -----------------
Total fixed maturity securities available-for-sale 11,970,878 12,304,639 12,304,639
--------------- -------------- -----------------
Equity securities available-for-sale:
Common stocks:
Industrial, miscellaneous and all other 43,501 50,405 50,405
Non-redeemable preferred stock 389 8,726 8,726
--------------- -------------- -----------------
Total equity securities available-for-sale 43,890 59,131 59,131
--------------- -------------- -----------------
Mortgage loans on real estate, net 5,327,317 5,272,119 (1)
Real estate, net:
Investment properties 253,383 217,611 (1)
Acquired in satisfaction of debt 57,933 48,148 (1)
Policy loans 371,816 371,816
Other long-term investments 27,370 28,668 (2)
Short-term investments 4,789 4,789
--------------- ----------------
Total investments $18,057,376 18,306,921
=============== ================
- ----------
(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 Management's Discussion and Analysis of Financial Condition and Results
of Operations and note 5 to the consolidated financial statements.
(2) Difference from Column B is primarily due to operating gains of investments
in limited partnerships.
See accompanying independent auditors' report.
F-26
64
SCHEDULE III
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Supplemental Insurance Information
As of December 31, 1996, 1995 and 1994
and for each of the years then ended
($000's omitted)
- ----------------------------------- -------------- ------------------ ----------------- ------------------ ---------------
Column A Column B Column C Column D Column E Column F
- ----------------------------------- -------------- ------------------ ----------------- ----------------- ---------------
Deferred Future policy Other policy
policy benefits, losses, claims and
acquisition claims and Unearned premiums benefits payable Premium
Segment costs loss expenses (1) (2) revenue
- ----------------------------------- -------------- ------------------ ----------------- ---------------- --------------
1996: Variable Annuities $ 791,611 - - -
Fixed Annuities 242,421 14,952,877 687 24,030
Life Insurance 414,417 1,995,802 395,739 174,612
Corporate and Other (81,940) 230,381 25,048 -
-------------- ------------------ ---------------- --------------
Total $1,366,509 17,179,060 421,474 198,642
============== ================== ================ ==============
1995: Variable Annuities 571,283 - - -
Fixed Annuities 221,111 14,221,622 455 32,774
Life Insurance 366,876 1,898,641 383,983 166,332
Corporate and Other (138,914) 238,351 28,886 -
-------------- ------------------ ---------------- --------------
Total $1,020,356 16,358,614 413,324 199,106
============== ================== ================ ==============
1994: Variable Annuities 395,397 - - -
Fixed Annuities 198,639 12,633,253 240 20,134
Life Insurance 327,079 1,806,762 371,984 156,524
Corporate and Other 74,445 233,569 26,927 -
-------------- ------------------ ---------------- --------------
Total $ 995,560 14,673,584 399,151 176,658
============== ================== ================ ==============
- ----------------------------------- -------------- ------------------- ----------------- ---------------- --------------
Column A Column G Column H Column I Column J Column K
- ----------------------------------- -------------- ------------------- ----------------- ---------------- --------------
Net Amortization Other
investment Benefits, claims, of deferred operating
income losses and policy expenses Premiums
Segment (3) settlement expenses acquisition costs (3) written
- ----------------------------------- -------------- ------------------- ----------------- ----------------- --------------
1996: Variable Annuities $ (21,449) 4,624 57,412 132,357
Fixed Annuities 1,050,557 838,533 38,635 79,737
Life Insurance 174,002 211,386 37,347 78,965
Corporate and Other 154,649 106,037 - 51,335
-------------- ------------------- ----------------- -----------------
Total $1,357,759 1,160,580 133,394 342,394
============== =================== ================= =================
1995: Variable Annuities (17,640) 2,881 26,264 109,089
Fixed Annuities 1,002,718 804,980 29,499 80,260
Life Insurance 171,255 201,986 31,021 68,832
Corporate and Other 137,700 105,646 (4,089) 14,773
-------------- ------------------- ----------------- -----------------
Total $1,294,033 1,115,493 82,695 272,954
============== =================== ================= =================
1994: Variable Annuities (13,415) 2,277 22,135 83,701
Fixed Annuities 903,572 702,082 29,849 69,975
Life Insurance 166,329 191,006 29,495 69,861
Corporate and Other 154,325 97,302 4,089 17,115
-------------- ------------------- ----------------- -----------------
Total $1,210,811 992,667 85,568 240,652
============== =================== ================= =================
- ----------
(1) Unearned premiums are included in Column C amounts.
(2) Column E agrees to the sum of the Balance Sheet captions, Policyholders'
dividend accumulations and Other policyholder funds.
(3) Allocations of net investment income and certain general expenses are based
on a number of assumptions and estimates, and reported operating results
would change by segment if different methods were applied.
See accompanying independent auditors' report.
F-27
65
SCHEDULE IV
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Reinsurance
As of December 31, 1996, 1995 and 1994
and for each of the years then ended
($000's omitted)
- ------------------------------- ----------------- ----------------- ---------------- ---------------- ---------------
Column A Column B Column C Column D Column E Column F
- ------------------------------- ----------------- ----------------- ---------------- ---------------- ---------------
Percentage
Ceded to Assumed from of amount
Gross amount other companies other companies Net amount assumed to net
----------------- ----------------- ---------------- ---------------- ---------------
1996:
Life insurance in force $47,071,264 6,633,567 288,593 40,726,290 0.7%
================= ================= ================ ================ ===============
Premiums:
Life insurance 225,615 29,282 2,309 198,642 1.2%
Accident and health insurance 291,871 305,789 13,918 - N/A
----------------- ----------------- ---------------- ---------------- ---------------
Total $ 517,486 335,071 16,227 198,642 8.2%
================= ================= ================ ================ ===============
1995:
Life Insurance in force $41,087,025 8,935,743 391,174 32,542,456 1.2%
================= ================= ================ ================ ===============
Premiums:
Life insurance 221,257 24,360 2,209 199,106 1.1%
Accident and health insurance 298,058 313,036 14,978 - N/A
----------------- ----------------- ---------------- ---------------- ---------------
Total $ 519,315 337,396 17,187 199,106 8.6%
================= ================= ================ ================ ===============
1994:
Life Insurance in force $35,926,633 7,550,623 829,742 29,205,752 2.8%
================= ================= ================ ================ ===============
Premiums:
Life insurance 198,705 24,912 2,865 176,658 1.6%
Accident and health insurance 303,435 321,696 18,261 - N/A
----------------- ----------------- ---------------- ---------------- ---------------
Total $ 502,140 346,608 21,126 176,658 12.0%
================= ================= ================ ================ ===============
- ----------
Note: The life insurance caption represents principally premiums from
traditional life insurance and life-contingent immediate annuities and
excludes deposits on invesment products and universal life insurance
products.
See accompanying independent auditors' report.
F-28
66
SCHEDULE V
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1996, 1995 and 1994
($000's omitted)
- ------------------------------------------------- ------------ ----------------------------- ------------ -------------
Column A Column B Column C Column D Column E
- ------------------------------------------------- ------------ ----------------------------- ------------ -------------
Balance at Charged to Balance at
beginning of costs and Charged to Deductions end of
Description period expenses other accounts (1) period
- ------------------------------------------------- ------------ ------------ -------------- ------------ -------------
1996:
Valuation allowances - mortgage loans on real
estate $49,128 4,497 - 2,587 51,038
Valuation allowances - real estate 25,819 (10,600) - - 15,219
------------ ------------ -------------- ------------ -------------
Total $74,947 (6,103) - 2,587 66,257
============ ============ ============== ============ =============
1995:
Valuation allowances - fixed maturity securities - 8,908 - 8,908 -
Valuation allowances - mortgage loans on real
estate 46,381 7,433 - 4,686 49,128
Valuation allowances - real estate 27,330 (1,511) - - 25,819
------------ ------------ -------------- ------------ -------------
Total $73,711 14,830 - 13,594 74,947
============ ============ ============== ============ =============
1994:
Valuation allowances - fixed maturity securities 4,800 (4,800) - - -
Valuation allowances - mortgage loans on real
estate 42,150 20,445 - 16,214 46,381
Valuation allowances - real estate 31,357 (4,027) - - 27,330
------------ ------------ -------------- ------------ -------------
Total $78,307 11,618 - 16,214 73,711
============ ============ ============== ============ =============
- ----------
(1) Amounts represent direct write-downs charged against the valuation allowance.
See accompanying independent auditors' report.
F-29
67
EXHIBIT INDEX
Exhibit Page
- ------------ --------
3 Form of Amended and Restated Code of Regulations of Nationwide Life Insurance Company E-2
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 (Incorporated by reference to Exhibit 10.2 to Form S-1,
Registration Number 333-18527, filed March 5, 1997)
10.2 Form of First Amendment to Cost Sharing Agreement among parties named therein
(Incorporated by reference to Exhibit 10.3 to Form S-1, Registration Number
333-18527, filed March 5, 1997)
10.3 Modified Coinsurance Agreement between Nationwide Life Insurance Company and Nationwide
Mutual Insurance Company (Incorporated by reference to Exhibit 10.4 to Form S-1,
Registration Number 333-18527, filed March 5, 1997)
10.4 Modified Coinsurance Agreement between Employers Life Insurance Company of Wausau and
Nationwide Life Insurance Company (Incorporated by reference to Exhibit 10.5 to Form S-1,
Registration Number 333-18527, filed March 5, 1997)
10.5 Credit Facility, dated August 12, 1996, among Nationwide Life Insurance Company,
Nationwide Mutual Insurance Company, the banks named therein and Morgan Guaranty
Trust Company of New York, the administrative agent (Incorporated by reference to
Exhibit 10.6 to Form S-1, Registration Number 333-18527, filed March 5, 1997)
10.6 Form of Lease Agreement between Nationwide Life Insurance Company and Nationwide Mutual
Insurance Company (Incorporated by reference to Exhibit 10.7 to Form S-1, Registration
Number 333-18527, filed March 5, 1997)
10.7 General Description of Nationwide Insurance Enterprise Executive Incentive Plan (Incorporated by
reference to Exhibit 10.9 to Form S-1, Registration Number 333-18527, filed March 5, 1997)
10.8 General Description of Nationwide Insurance Enterprise Management Incentive Plan (Incorporated
by reference to Exhibit 10.10 to Form S-1, Registration Number 333-18527, filed March 5, 1997)
10.9 Nationwide Insurance Enterprise Excess Benefit Plan effective as of December 31, 1996
(Incorporated by reference to Exhibit 10.11 to Form S-1, Registration Number 333-18527,
filed March 5, 1997)
10.10 Nationwide Insurance Enterprise Supplemental Retirement Plan effective as of December 31, 1996
(Incorporated by reference to Exhibit 10.12 to Form S-1, Registration Number 333-18527, filed
March 5, 1997)
10.11 Nationwide Salaried Employees Severance Pay Plan (Incorporated by reference to Exhibit 10.13 to
Form S-1, Registration Number 333-18527, filed March 5, 1997)
10.12 Nationwide Insurance Enterprise Supplemental Defined Contribution Plan effective as of
January 1, 1996 (Incorporated by reference to Exhibit 10.14 to Form S-1, Registration
Number 333-18527, filed March 5, 1997)
10.13 General Description of Nationwide Insurance Enterprise Individual Deferred Compensation Program
(Incorporated by reference to Exhibit 10.15 to Form S-1, Registration Number 333-18527, filed
March 5, 1997)
10.14 General Description of Nationwide Mutual Insurance Company Directors Deferred Compensation
Program (Incorporated by reference to Exhibit 10.16 to Form S-1, Registration Number 333-18527,
filed March 5, 1997)
10.15 Deferred Compensation Agreement, dated as of September 3, 1979, between Nationwide Mutual
Insurance Company and D. Richard McFerson (Incorporated by reference to Exhibit 10.11 to Form
S-1, Registration Number 333-18527, filed March 5, 1997)
21 Subsidiaries of the Registrant E-10
27.1 Financial Data Schedule - 1996
27.2 Restated Financial Data Schedule - 1995
27.3 Restated Financial Data Schedule - 1994
- ----------
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.
E-1