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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998 COMMISSION FILE NO. 2-28596
NATIONWIDE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
OHIO 31-4156830
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(614) 249-7111
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and
(2) has been subject to the filing requirements for at least the past 90 days.
YES X NO
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All voting stock was held by affiliates of the Registrant on March 19, 1999.
COMMON STOCK (par value $1 per share) - 3,814,779 shares issued and
outstanding as of March 20, 1999
(Title of Class)
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM
WITH THE REDUCED DISCLOSURE FORMAT.
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PART I
ITEM 1 BUSINESS
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ORGANIZATION
Nationwide Life Insurance Company (NLIC) was incorporated in 1929
and is an Ohio stock legal reserve life insurance company. NLIC
offers a variety of forms of variable annuities, fixed annuities
and life insurance on a participating and a non-participating
basis.
Prior to January 27, 1997, NLIC was wholly owned by Nationwide
Corporation (Nationwide Corp.). On that date, Nationwide Corp.
contributed the outstanding shares of NLIC's common stock to
Nationwide Financial Services, Inc. (NFS), a holding company
formed by Nationwide Corp. in November 1996 for NLIC and other
companies within the Nationwide Insurance Enterprise that offer or
distribute long-term savings and retirement products. On March 11,
1997, NFS completed an initial public offering of its Class A
common stock.
During 1996 and 1997, Nationwide Corp. and NFS completed certain
transactions in anticipation of the initial public offering that
focused the business of NFS on long-term savings and retirement
products. On September 24, 1996, NLIC declared a dividend payable
to Nationwide Corp. on January 1, 1997 consisting of the
outstanding shares of common stock of certain subsidiaries that do
not offer or distribute long-term savings and retirement products.
In addition, during 1996, NLIC entered into two reinsurance
agreements whereby all of NLIC's accident and health and group
life insurance business was ceded to two affiliates effective
January 1, 1996. These subsidiaries, Employers Life Insurance
Company of Wausau (ELICW), National Casualty Company (NCC) and
West Coast Life Insurance Company (WCLIC), through December 31,
1996, and all accident and health and group life insurance
business have been accounted for as discontinued operations.
Additionally, NLIC paid $900.0 million of dividends, $50.0 million
to Nationwide Corp. on December 31, 1996 and $850.0 million to
NFS, which then made an equivalent dividend to Nationwide Corp.,
on February 24, 1997.
NFS contributed $836.8 million to the capital of NLIC during March
1997.
Wholly owned subsidiaries of NLIC as of December 31, 1998 include
Nationwide Life and Annuity Insurance Company (NLAIC), Nationwide
Advisory Services, Inc. (NAS), 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,
which consists of Nationwide Mutual Insurance Company (NMIC) and
all of its subsidiaries and affiliates.
NLAIC offers universal life insurance, variable universal life
insurance, corporate-owned life insurance and individual annuity
contracts on a non-participating basis. NAS is a registered
broker-dealer providing investment management and administration
services. NISC, 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 to hold
special investments.
The Company is a leading provider of long-term savings and
retirement products. The Company offers variable annuities, fixed
annuities and life insurance as well as investment management
services 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 independent
broker/dealers, national and regional brokerage firms, pension
plan administrators, financial institutions, exclusive sales
representatives and Nationwide Insurance Enterprise insurance
agents.
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The Company is one of the leaders in the development and sale of
variable annuities. For the year ended December 31, 1998, the
Company was the third largest writer of individual variable
annuity contracts in the United States (U.S.) based on sales,
according to The Variable Annuity Research & Data Service. Its
principal annuity series, The BEST of AMERICA(R), allows the
customer to choose from up to 39 investment options, including
mutual funds managed by premier mutual fund managers.
The Company has grown substantially in recent years as a result of
its long-term investment in developing the distribution channels
necessary to reach its target customers and the products required
to meet the demands of these customers. The Company believes its
growth has been further enhanced by favorable demographic trends,
the growing tendency of Americans to supplement traditional
sources of retirement income with self-directed investments, such
as products offered by the Company, and the performance of the
financial markets, particularly the U.S. stock markets, in recent
years.
BUSINESS SEGMENTS
The Company has three product segments: Variable Annuities, Fixed
Annuities and Life Insurance. In addition, the Company reports
corporate revenues and expenses, investments and related
investment income supporting capital not specifically allocated to
its product segments, revenues and expenses of its investment
advisor subsidiary (other than the portion allocated to the
Variable Annuities and Life Insurance segments) and revenues and
expenses related to group annuity contracts sold to Nationwide
Insurance Enterprise employee benefits plans in a Corporate and
Other segment.
The Variable Annuities segment, which accounted for $218.4 million
(or 41%) of the Company's operating income before federal income
tax expense for 1998, 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 $175.3 million
(or 33%) of the Company's operating income before federal income
tax expense for 1998, 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 81% of the Company's fixed annuity sales in 1998 and
75% of the Company's fixed annuity policy reserves as of December
31, 1998. During 1998, the average crediting rates on contracts
(including the fixed option under the Company's variable annuity
contracts) in the Fixed Annuities segment was 5.95%. 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 $94.8 million (or
18%) of the Company's operating income before federal income tax
expense for 1998, is composed of a wide range of variable
universal life insurance, whole life insurance, universal life
insurance, term life insurance and corporate-owned life insurance
products that provide a death benefit and may also allow the
customer to build cash value on a tax-deferred basis.
The Corporate and Other segment accounted for $40.2 million (or
8%) of the Company's operating income (which excludes realized
gains and losses on investments) before federal income tax expense
for 1998.
Additional information related to the Company's business segments
is included in note 13 to the consolidated financial statements
and Financial Statement Schedule III.
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RATINGS
Ratings with respect to claims-paying ability and financial
strength have become an increasingly important factor in
establishing the competitive position of insurance companies.
Ratings are important to maintaining public confidence in the
Company and its ability to market its annuity and life insurance
products. Rating organizations continually review the financial
performance and condition of insurers, including the Company. Any
lowering of the Company's ratings could have a material adverse
effect on the Company's ability to market its products and could
increase the surrender of the Company's annuity products. Both of
these consequences could, depending upon the extent thereof, have
a material adverse effect on the Company's liquidity and, under
certain circumstances, net income. NLIC is rated "A+" (Superior)
by A.M. Best Company, Inc. and its claims-paying ability is rated
"Aa2" (Excellent) by Moody's Investor Services, Inc., "AA+"
(Excellent) by Standard & Poor's Corporation and "AA+" (Excellent)
by Duff & Phelps Credit Rating Co.
The foregoing ratings reflect each rating agency's opinion of
NLIC's financial strength, operating performance and ability to
meet its obligations to policyholders and are not evaluations
directed toward the protection of investors. Such factors are of
concern to policyholders, agents and intermediaries.
COMPETITION
The Company competes with a large number of other insurers as well
as non-insurance financial services companies, such as banks,
broker/dealers and mutual funds, some of whom have greater
financial resources, offer alternative products and, with respect
to other insurers, have higher ratings than the Company. The
Company believes that competition in the Company's lines of
business is based on price, product features, commission
structure, perceived financial strength, claims-paying ratings,
service and name recognition. 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.
REGULATION
NLIC and NLAIC, as with other insurance companies, are subject to
extensive regulation and supervision in the jurisdictions in which
they do business. Such regulations limit the amount of dividends
and other payments that can be paid by insurance companies without
prior approval and impose restrictions on the amount and type of
investments insurance companies may hold. These regulations also
affect many other aspects of insurance companies businesses,
including licensing of insurers and their products and agents,
risk-based capital requirements and the type and amount of
required asset valuation reserve accounts. These regulations are
primarily intended to protect policyholders rather than
shareholders. The Company can not predict the effect that any
proposed or future legislation may have on the financial condition
or results of operations of the Company.
Insurance companies are required to file detailed annual and
quarterly financial statements with state insurance regulators in
each of the states in which they do business, and their business
and accounts are subject to examination by such agencies at any
time. In addition, insurance regulators periodically examine an
insurer's financial condition, adherence to statutory accounting
practices and compliance with insurance department rules and
regulations. Applicable state insurance laws, rather than federal
bankruptcy laws, apply to the liquidation or the restructuring of
insurance companies.
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5
As part of their routine regulatory oversight process, state
insurance departments conduct detailed examinations periodically
(generally once every three to four years) of the books, records
and accounts of insurance companies domiciled in their states.
Such examinations are generally conducted in cooperation with the
departments of two or three other states under guidelines
promulgated by the National Association of Insurance Commissioners
(NAIC). The most recently completed examination of the Company's
insurance subsidiaries was conducted by the Ohio and Delaware
insurance departments for the four-year period ended December 31,
1996. The final reports of these examinations did not result in
any significant issues or adjustments.
The payment of dividends by NLIC is subject to restrictions set
forth in the insurance laws and regulations of Ohio, its
domiciliary state. The Ohio insurance laws require Ohio-domiciled
life insurance companies to seek prior regulatory approval to pay
a dividend or distribution of cash or other property if the fair
market value thereof, together with that of other dividends or
distributions made in the preceding 12 months, exceeds the greater
of (i) 10% of statutory-basis policyholders' surplus as of the
prior December 31 or (ii) the statutory-basis net income of the
insurer for the 12-month period ending as of the prior December
31. The Ohio insurance laws also require insurers to seek prior
regulatory approval for any dividend paid from other than earned
surplus. Earned surplus is defined under the Ohio insurance laws
as the amount equal to the Company's unassigned funds as set forth
in its most recent statutory financial statements, including net
unrealized capital gains and losses or revaluation of assets.
Additionally, following any dividend, an insurer's policyholder
surplus must be reasonable in relation to the insurer's
outstanding liabilities and adequate for its financial needs. The
payment of dividends by NLIC may also be subject to restrictions
set forth in the insurance laws of New York that limit the amount
of statutory profits on NLIC's participating policies (measured
before dividends to policyholders) that can inure to the benefit
of the Company and its stockholders. The Company currently does
not expect such regulatory requirements to impair its ability to
pay operating expenses and dividends in the future.
EMPLOYEES
As of December 31, 1998, the Company had approximately 3,660
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
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The Company's principal executive offices are located in Columbus,
Ohio. The Company leases its home office complex, consisting of
approximately 448,000 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
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The Company is a party to litigation and arbitration proceedings
in the ordinary course of its business, none of which is expected
to have a material adverse effect on the Company.
In recent years, life insurance companies have been named as
defendants in lawsuits, including class action lawsuits, relating
to life insurance and annuity pricing and sales practices. A
number of these lawsuits have resulted in substantial jury awards
or settlements.
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6
In February 1997, NLIC was named as a defendant in a lawsuit filed
in New York Supreme Court related to the sale of whole life
policies on a " vanishing premium" basis (John H. Snyder v.
Nationwide Mutual Insurance Company and Nationwide Life Insurance
Co.). In April 1998, NLIC was named as a defendant in a lawsuit
filed in Ohio State Court similar to the Snyder lawsuit (David and
Joan Mishler v. Nationwide Life Insurance Co.). In August 1998,
Nationwide Mutual Insurance Company and NLIC and the plaintiffs
executed a stipulation of settlement and submitted it to the New
York Supreme Court for approval. On August 20, 1998, the Court in
the Snyder lawsuit signed an order preliminarily approving a class
for settlement purposes (which would include the Mishler lawsuit)
and scheduled a fairness hearing for December 17, 1998. At that
hearing, the Court reviewed the fairness and reasonableness of the
proposed settlement and issued a final order and judgment. The
approved settlement provides for the dismissal of the Snyder and
Mishler lawsuits, bars class members from pursuing litigation
against Nationwide Mutual Insurance Company and its affiliates,
including the Company and its subsidiaries, relating to the
allegations in the Snyder lawsuit, and provides class members with
a potential value of approximately $100 million in policy
adjustments, discounted premiums, and discounted products.
In November 1997, two plaintiffs, one who was the owner of a
variable life insurance contract and the other who was the owner
of a variable annuity contract, commenced a lawsuit in a federal
court in Texas against NLIC and the American Century group of
defendants (Robert Young and David D. Distad v. Nationwide Life
Insurance Company et al.). In this lawsuit, plaintiffs seek to
represent a class of variable life insurance contract owners and
variable annuity contract owners whom they claim were allegedly
misled when purchasing these variable contracts into believing
that the performance of their underlying mutual fund option
managed by American Century, whose shares may only be purchased by
insurance companies, would track the performance of a mutual fund,
also managed by American Century, whose shares are publicly
traded. The amended complaint seeks unspecified compensatory and
punitive damages. On April 27, 1998, the District Court denied, in
part, and granted, in part, motions to dismiss the complaint filed
by NLIC and American Century. The remaining claims against NLIC
allege securities fraud, common law fraud, civil conspiracy, and
breach of contract. On December 2, 1998, the District Court issued
an order denying plaintiffs' motion for class certification. On
December 10, 1998, the District Court stayed the lawsuit pending
plaintiffs' petition to the United States Court of Appeals for the
Fifth Circuit for interlocutory review of the order denying class
certification. On December 14, 1998 plaintiffs filed their
petition for interlocutory review, on which the Fifth Circuit has
not yet ruled. NLIC intends to defend the case vigorously.
On October 29, 1998, the Company and certain of its affiliates
were named in a lawsuit filed in the Common Pleas Court of
Franklin County, Ohio related to the sale of deferred annuity
products for use as investments in tax-deferred contributory
retirement plans (Mercedes Castillo v. Nationwide Financial
Services, Inc., Nationwide Life Insurance Company and Nationwide
Life and Annuity Insurance Company). The plaintiff in such lawsuit
seeks to represent a national class of the Company's customers and
seeks unspecified compensatory and punitive damages. The Company
is currently evaluating this lawsuit, which has not been certified
as a class. The Company intends to defend this lawsuit vigorously.
There can be no assurance that any litigation relating to pricing
or sales practices will not have a material adverse effect on the
Company in the future.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Omitted due to reduced disclosure format.
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PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
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MATTERS
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There is no established public trading market for the NLIC's
shares of common stock. All of the 3,814,779 shares of NLIC's
common stock issued and outstanding are owned by NFS.
NLIC paid $100.0 million in dividends to NFS during 1998. No cash
dividends were paid during 1997 and $50.0 million was paid to
Nationwide Corp. during 1996.
On January 1, 1997, NLIC paid a dividend valued at $485.7 million
to Nationwide Corp. consisting of the outstanding shares of common
stock of ELICW, NCC and WCLIC. Also, on February 24, 1997, NLIC
paid a dividend to NFS, and NFS paid an equivalent dividend to
Nationwide Corp., consisting of securities having an aggregate
fair value of $850.0 million. The dividend payments were approved
by the Department of Insurance of the State of Ohio.
NLIC currently does not have a formal dividend policy.
Reference is made to note 9 of the consolidated financial
statements for information regarding dividend restrictions.
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA
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Omitted due to reduced disclosure format.
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ITEM 7 MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
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INTRODUCTION
Management's narrative analysis of the results of operations of
NLIC and subsidiaries for the three years ended December 31, 1998
follows. This discussion should be read in conjunction with the
consolidated financial statements and related notes included
elsewhere in this report.
Management's discussion and analysis contains certain
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 with respect to the
results of operations and businesses of the Company. These
forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ
materially from those contemplated or projected, forecast,
estimated or budgeted in such forward looking statements include,
among others, the following possibilities: (i) Nationwide
Corporation's control of the Company through its beneficial
ownership of approximately 97.8% of the combined voting power of
all the outstanding common stock and approximately 81.5% of the
economic interest in the Company; (ii) the Company's primary
reliance, as a holding company, on dividends from its subsidiaries
to meet debt payment obligations and the applicable regulatory
restrictions on the ability of the Company's subsidiaries to pay
such dividends; (iii) the potential impact on the Company's
reported net income that could result from the adoption of certain
accounting standards issued by the FASB; (iv) tax law changes
impacting the tax treatment of life insurance and investment
products; (v) heightened competition, including specifically the
intensification of price competition, the entry of new competitors
and the development of new products by new and existing
competitors; (vi) adverse state and federal legislation and
regulation, including limitations on premium levels, increases in
minimum capital and reserves, and other financial viability
requirements; (vii) failure to expand distribution channels in
order to obtain new customers or failure to retain existing
customers; (viii) inability to carry out marketing and sales
plans, including, among others, changes to certain products and
acceptance of the revised products in the market; (ix) changes in
interest rates and the capital markets causing a reduction of
investment income or asset fees, reduction in the value of the
Company's investment portfolio or a reduction in the demand for
the Company's products; (x) general economic and business
conditions which are less favorable than expected; (xi)
unanticipated changes in industry trends and ratings assigned by
nationally recognized statistical rating organizations or A.M.
Best Company, Inc.; (xii) inaccuracies in assumptions regarding
future persistency, mortality, morbidity and interest rates used
in calculating reserve amounts and (xiii) failure of the Company
or its significant business partners and vendors to identify and
correct all non-Year 2000 compliant systems or to develop and
execute adequate contingency plans.
RESULTS OF OPERATIONS
In addition to net income, the Company reports net operating
income, which excludes realized investment gains and losses and
results of discontinued operations. Net operating income is
commonly used in the insurance industry as a measure of on-going
earnings performance.
The following table reconciles the Company's reported net income
to net operating income for each of the last three years.
(in millions of dollars) 1998 1997 1996
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Net income $366.7 $279.7 $215.9
Realized gains on investments, net of tax (18.5) (7.9) (1.0)
Income from discontinued operations, net of tax -- -- (11.3)
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Net operating income $348.2 $271.8 $203.6
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Revenues
Total revenues for 1998, excluding realized gains and losses on
investments, increased to $2.45 billion compared to $2.21 billion
for 1997 and $1.99 billion for 1996. Increases in policy charges
and net investment income accounted for most of the growth.
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 premiums withdrawn during a specified
period of annuity and certain life insurance contracts; and cost
of insurance charges earned on universal life insurance products.
Policy charges for each of the last three years were as follows:
(in millions of dollars) 1998 1997 1996
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Asset fees $494.7 $384.8 $275.5
Cost of insurance charges 88.8 68.5 53.2
Administrative fees 73.8 59.5 50.1
Surrender fees 41.6 32.4 22.1
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Total policy charges $698.9 $545.2 $400.9
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The growth in asset fees reflects increases in total separate
account assets of $13.2 billion, or 35%, in 1998 and $10.8
billion, or 40%, in 1997. Record variable annuity sales and strong
equity market performance in each of the last three years have
resulted in separate account balances increasing 145% from $20.81
billion at the beginning of 1996 to $50.94 billion at the end of
1998.
Cost of insurance charges are assessed as a percentage of the net
amount at risk on universal life insurance policies. The net
amount at risk is equal to a policy's death benefit minus the
related policyholder account value. The increase in cost of
insurance charges is due primarily to growth in the net amount at
risk related to individual variable universal life insurance
reflecting expanded distribution and increased customer demand for
variable life products. The net amount at risk related to
individual variable universal life insurance grew to $14.95
billion at the end of 1998 compared to $10.44 billion and $7.52
billion at the end of 1997 and 1996, respectively.
The growth in administrative fees is consistent with the increased
number of annuity and life insurance contracts in force during
1998 compared to the prior two years. Nearly all of the increase
in surrender charges over the past two years is attributable to
policyholder withdrawals in the Variable Annuities segment, and is
driven by an overall increase in variable annuity policy reserves.
Net investment income includes the gross investment income earned
on investments supporting fixed annuities and certain life
insurance products as well as the yield on the Company's general
account invested assets which are not allocated to product
segments. Net investment income grew from $1.36 billion and $1.41
billion in 1996 and 1997, respectively, to $1.48 billion in 1998
primarily due to increased invested assets to support growth in
fixed annuity and life insurance policy reserves. Fixed annuity
policy reserves, which include the fixed option of the Company's
variable annuity products, increased $682.4 million in 1997 and
$704.7 million in 1998 and were $14.90 billion as of year end
1998. The growth in life insurance reserves was led by
corporate-owned life insurance products, where fixed reserves
increased $201.1 million in 1997 and $596.7 million in 1998. The
increase in net investment income due to growth in invested assets
was partially offset by declining investment yields in 1998 and
1997 due to lower market interest rates.
The $20.3 million and $10.6 million increases in other income
during 1998 and 1997, respectively, were primarily attributable to
growth in the Company's mutual fund operations.
Realized gains and losses on investments are not considered by the
Company to be recurring components of earnings. The Company makes
decisions concerning the sale of invested assets based on a
variety of market, business, tax and other factors.
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10
Benefits and Expenses
Interest credited to policyholder account balances totaled $1.07
billion in 1998 compared to $1.02 billion in 1997 and $982.3
million in 1996 and principally relates to fixed annuity and
corporate-owned life insurance products. The growth in interest
credited reflects the increase in policy reserves previously
discussed partially offset by reduced average crediting rates. The
average crediting rate on fixed annuity policy reserves was 5.95%
in 1998 compared to 6.12% and 6.30% in 1997 and 1996,
respectively.
Amortization of deferred policy acquisition costs (DAC) increased
$47.3 million in 1998 and $33.8 million in 1997 principally due to
the Variable Annuities segment, which accounted for $36.1 and
$30.4 million of the increases as a result of strong sales growth
in each of the last two years.
Operating expenses were $419.7 million in 1998, a 9% increase from
1997 operating expenses of $384.9 million. Operating expenses were
$342.4 million in 1996. The increase reflects the growth in the
number of annuity and life insurance contracts in-force and the
related increase in administrative processing costs. Increased
operating expenses in 1997 also reflect the cost of certain
technology initiatives.
Federal income tax expense was $190.4 million representing an
effective tax rate of 34.2% for 1998. Federal income tax expense
in 1997 and 1996 was $150.2 million and $110.9 million,
respectively, representing effective rates of 34.9% and 35.2%.
Year 2000
The Company has developed and implemented a plan to address issues
related to the Year 2000. The problem relates to many existing
computer systems using only two digits to identify a year in a
date field. These systems were designed and developed without
considering the impact of the upcoming change in the century. If
not corrected, many computer systems could fail or create
erroneous results when processing information dated after December
31, 1999. Like many organizations, the Company is required to
renovate or replace many computer systems so that the systems will
function properly after December 31, 1999.
The Company has completed an inventory and assessment of all
computer systems and has implemented a plan to renovate or replace
all applications that were identified as not Year 2000 compliant.
The Company has renovated all applications that required
renovation. Testing of the renovated programs included running
each application in a Year 2000 environment and was completed as
planned during 1998. For applications being replaced, the Company
had all replacement systems in place and functioning as planned by
year-end 1998. Conversions of existing traditional life policies
will continue through second quarter, 1999. In addition, the
shareholder services system that support mutual fund products will
be fully deployed in the first quarter of 1999.
The Company has completed an inventory and assessment of all
vendor products and has tested and certified that each vendor
product is Year 2000 compliant. Any vendor products that could not
be certified as Year 2000 compliant were replaced or eliminated in
1998.
The Company has also addressed issues associated with the exchange
of electronic data with external organizations. The Company has
completed an inventory and assessment of all business partners
including electronic interfaces. Processes have been put in place
and programs initiated to process data irrespective of the format
by converting non-compliant data into a Year 2000 compliant
format.
Systems supporting the Company's infrastructure such as
telecommunications, voice and networks will be compliant by March
1999. The Company's assessment of Year 2000 issues has also
included non-information technology systems with embedded computer
chips. The Company's building systems such as fire, security, and
elevators and escalators supporting facilities in Columbus, Ohio
have been tested and are Year 2000 compliant.
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11
In addition to resolving internal Year 2000 readiness issues, the
Company is surveying significant external organizations (business
partners) to assess if they will be Year 2000 compliant and be in
a position to do business in the Year 2000 and beyond.
Specifically, the Company has contacted mutual fund organizations
that provide funds for our variable annuity and life products. The
same action will continue during the first quarter of 1999 with
wholesale producers. The Company continues its efforts to identify
external risk factors and is planning to develop contingency plans
as part of its ongoing risk management strategy.
Operating expenses in 1998 and 1997 include approximately $44.7
million and $45.4 million, respectively, for technology projects,
including costs related to Year 2000. The company anticipates
spending approximately $5 million on Year 2000 activities in 1999.
Management does not anticipate that the completion of Year 2000
renovation and replacement activities will result in a reduction
in operating expenses. Rather, personnel and resources currently
allocated to Year 2000 issues will be assigned to other
technology-related projects.
Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133 - Accounting for
Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133
establishes accounting and reporting standards for derivative
instruments and for hedging activities. Contracts that contain
embedded derivatives, such as certain insurance contracts, are
also addressed by the Statement. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at
fair value. The Statement is effective for fiscal years beginning
after June 15, 1999. It may be implemented earlier provided
adoption occurs as of the beginning of any fiscal quarter after
issuance. The Company plans to adopt this Statement in first
quarter 2000 and is currently evaluating the impact on results of
operations and financial condition.
In March 1998, The American Institute of Certified Public
Accountant's Accounting Standards Executive Committee issued
Statement of Position 98-1 - Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use (SOP 98-1). SOP
98-1 provides guidance intended to standardize accounting
practices for costs incurred to develop or obtain computer
software for internal use. Specifically, SOP 98-1 provides
guidance for determining whether computer software is for internal
use and when costs incurred for internal use software are to be
capitalized. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company does
not expect the adoption of SOP 98-1, which occurred on January 1,
1999, to have a material impact on the Company's financial
statements.
Statutory Premiums and Deposits
The Company sells its products through a broad distribution
network comprised of wholesale and retail distribution channels.
Wholesale distributors are unaffiliated entities that sell the
Company's products to their own customer base and include
independent broker/dealers, national and regional brokerage firms,
pension plan administrators and financial institutions. Retail
distributors are representatives of the Company who market
products directly to a customer base identified by the Company and
include exclusive sales representatives and Nationwide Insurance
Enterprise insurance agents.
11
12
Statutory premiums and deposits by distribution channel for each
of the last three years are summarized as follows:
(in millions of dollars) 1998 1997 1996
---- ---- ----
Wholesale channels:
Independent broker/dealers $ 3,682.0 $ 3,699.1 $3,607.8
National and regional brokerage firms (1) 337.4 -- --
Financial institutions 2,036.0 1,653.2 947.2
Pension plan administrators 2,854.6 2,325.0 1,911.6
Life specialists 645.7 195.0 20.0
--------- --------- --------
Total wholesale channels 9,555.7 7,872.3 6,486.6
--------- --------- --------
Retail channels:
Exclusive retail sales representatives 2,327.9 1,862.1 1,528.0
Nationwide agents 935.5 602.7 525.5
--------- --------- --------
Total retail channels 3,263.4 2,464.8 2,053.5
--------- --------- --------
Total external premiums and deposits 12,819.1 10,337.1 8,540.1
--------- --------- --------
Nationwide Insurance Enterprise
employee and agent benefit plans 323.3 174.9 502.5
--------- --------- --------
Total statutory premiums and deposits $13,142.4 $10,512.0 $9,042.6
========= ========= ========
(1) Prior to 1998, national and regional brokerage firm sales
were included in independent broker/dealer sales.
Excluding Nationwide Insurance Enterprise benefit plan sales, the
Company achieved annual sales growth of 24%, 21%, and 29% in 1998,
1997 and 1996, respectively.
The Company's flagship products are marketed under The BEST of
AMERICA(R) brand, and include individual and group variable
annuities and variable life insurance. The BEST of AMERICA(R)
products allow customers to choose from among investment options
managed by premier mutual fund managers. The Company has also
developed private label variable and fixed annuity products in
conjunction with other financial services providers which allow
those providers to sell products to their own customer bases under
their own brand name.
The Company also markets group deferred compensation retirement
plans to employees of state and local governments for use under
Internal Revenue Code (IRC) Section 457. The Company utilizes its
sponsorship by the National Association of Counties and The United
States Conference of Mayors when marketing IRC Section 457
products. In addition, the Company utilizes an exclusive
arrangement with the National Education Association (NEA) to
market tax-qualified annuities under IRC 403(b) to NEA members.
Variable annuities developed for the NEA members are sold under
the NEA Valuebuilder brand.
12
13
External statutory premiums and deposits by product are as
follows:
(in millions of dollars) 1998 1997 1996
---- ---- ----
The BEST of AMERICA(R) products:
Individual variable annuities $ 4,661.1 $ 4,269.6 $3,801.5
Group variable annuities 2,760.0 2,220.5 1,807.1
Variable universal life 315.9 220.0 165.4
Private label annuities 1,093.3 1,006.4 625.9
IRC Section 457 annuities 2,155.3 1,716.5 1,425.8
The NEA Valuebuilder annuities 172.6 145.6 102.2
Traditional/Universal life 246.0 248.4 253.9
Corporate owned life insurance 645.8 195.0 20.0
Other 769.1 315.1 338.3
--------- --------- --------
$12,819.1 $10,337.1 $8,540.1
========= ========= ========
BUSINESS SEGMENTS
The Company has three product segments: Variable Annuities, Fixed
Annuities and Life Insurance. In addition, the Company reports
certain other revenues and expenses in a Corporate and Other
segment. All information set forth below relating to the Company's
Variable Annuities segment excludes the fixed option under the
Company's variable annuity contracts. Such information is included
in the Company's Fixed Annuities segment.
The following table summarizes operating income before federal
income tax expense for the Company's business segments for each of
the last three years.
(in millions of dollars) 1998 1997 1996
---- ---- ----
Operating income:
Variable annuities $218.4 $150.9 $ 90.3
Fixed annuities 175.3 169.5 135.4
Life insurance 94.8 70.9 67.2
Corporate and other 40.2 27.5 22.9
------ ------ ------
$528.7 $418.8 $315.8
====== ====== ======
Variable Annuities
The Variable Annuities segment 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
Company's variable annuity products consist almost entirely of
flexible premium deferred variable annuity contracts.
13
14
The following table summarizes certain selected financial data for
the Company's Variable Annuities segment for the years indicated.
(in millions of dollars) 1998 1997 1996
---- ---- ----
Income Statement Data:
Revenues $ 529.5 $ 404.0 $ 284.6
Benefits and expenses 311.1 253.1 194.3
--------- --------- ---------
Operating income before federal income tax expense $ 218.4 $ 150.9 $ 90.3
========= ========= =========
Other Data:
Statutory premiums and deposits (1) $ 9,543.3 $ 7,535.8 $ 6,500.3
Policy reserves as of year end $46,420.8 $34,486.7 $24,278.1
Pre-tax operating income to average policy reserves 0.54% 0.51% 0.44%
----------
(1) Statutory data have been derived from the Annual Statements
of the Company's life insurance subsidiaries, as filed with
insurance regulatory authorities and prepared in accordance
with statutory accounting practices.
Variable Annuities segment revenues reflect a significant increase
in policy charges, primarily asset fees, consistent with the
growth in variable annuity policy reserves. Asset fees were $479.1
million in 1998 up 29% from $370.2 million in 1997 and totaled
$261.8 million in 1996. Asset fees are charged as a percentage of
policy reserves which have increased substantially in the past
three years as a result of steady premium growth and through
market appreciation on investments underlying reserves. Variable
annuity policy reserves grew $11.93 billion during 1998 reaching
$46.42 billion as of year end 1998 compared to growth in 1997 of
$10.21 billion and year end 1997 reserves of $34.49 billion.
During 1996, policy reserves increased $7.52 billion.
The Company has continued to achieve high sales growth through
deeper penetration of existing distribution channels and the
addition of new sales outlets. In addition, growing consumer
acceptance of equity-based retirement savings products, a robust
United States stock market and low interest rates have all
combined to provide a very favorable environment for variable
annuity sales. The Company's broad network of strong distribution
relationships coupled with product innovation allowed the Company
to maintain its ranking as the third largest seller of individual
variable annuities in the United States during 1998. Company sales
of all variable annuities increased 27% during 1998 to a record
$9.54 billion compared to $7.54 billion in 1997. Variable annuity
sales in 1997 represented a 16% increase over 1996 sales of $6.50
billion.
An example of the Company's ability to develop innovative products
and to leverage its strong distributor relationships to maintain
its competitive position is America's FUTURE Annuity. This
individual variable annuity product was developed in late 1997 in
partnership with distributors and offers the customer greater
flexibility and investment choice with insurance charges lower
than comparable products sold through the financial planning
community. Sales of this product reached $2.4 billion during 1998,
its first full year of availability.
Although the equity markets were more volatile in 1998 than in the
previous two years, equity market conditions over each of the past
three years have contributed significantly to the growth in
variable annuity policy reserves. Variable annuity policy reserves
reflect market appreciation of $6.80 billion, $5.21 billion and
$2.72 billion in 1998, 1997 and 1996, respectively.
Increased variable annuity revenues were partially offset by
increased amortization of DAC in 1998 compared to 1997 and 1996
due to overall growth in the variable annuity business and by
increased operating expenses.
14
15
Operating expenses increased 15% during 1998 and 20% during 1997;
however, the growth in expenses was far outpaced by the 31% and
42% increases in revenues over those same periods. As a result,
operating income as a percentage of reserves has improved to 0.54%
in 1998 up 3 basis points from 1997 and up 10 basis points from
1996. The Company has controlled operating expense growth by
increasing productivity through investments in technology and
economies of scale.
Fixed Annuities
The Fixed Annuities segment consists of annuity contracts that
generate a return for the customer at a specified interest rate,
fixed for a prescribed period, 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 includes
the fixed option under the Company's variable annuity contracts.
The following table summarizes certain selected financial data for
the Company's Fixed Annuities segment for the years indicated.
(in millions of dollars) 1998 1997 1996
---- ---- ----
Income Statement Data:
Revenues:
Net investment income $ 1,116.6 $ 1,098.2 $ 1,050.6
Other 35.7 43.2 42.0
--------- --------- ---------
1,152.3 1,141.4 1,092.6
--------- --------- ---------
Benefits and expenses:
Interest credited to policyholder account balances 828.6 823.4 805.0
Other benefits and expenses 148.4 148.5 152.2
--------- --------- ---------
977.0 971.9 957.2
--------- --------- ---------
Operating income before federal income tax expense $ 175.3 $ 169.5 $ 135.4
========= ========= =========
Other Data:
Statutory premiums and deposits (1) $ 2,068.0 $ 2,137.9 $ 1,600.5
Policy reserves as of year end $14,898.9 $14,194.2 $13,511.8
Pre-tax operating income to average policy reserves 1.21% 1.22% 1.03%
----------
(1) Statutory data have been derived from the Annual Statements
of the Company's life insurance subsidiaries, as filed with
insurance regulatory authorities and prepared in accordance
with statutory accounting practices.
Fixed Annuities segment results reflect an increase in interest
spread income attributable to growth in fixed annuity policy
reserves and wider interest margins. Interest spread is the
differential between net investment income and interest credited
to policyholder account balances. Interest spreads vary depending
on crediting rates offered by competitors, performance of the
investment portfolio, changes in market interest rates and other
factors. The following table depicts the interest margins on
general account policy reserves in the Fixed Annuities segment for
each of the last three years.
1998 1997 1996
---- ---- ----
Net investment income 8.02% 8.16% 8.22%
Interest credited 5.95 6.12 6.30
---- ---- ----
2.07% 2.04% 1.92%
==== ==== ====
15
16
The declining interest rate environment has put pressure on
interest margins when fixed income investments mature or prepay
and are reinvested at lower rates; however, mortgage loan and bond
prepayment income actually increased interest margins in 1998.
Prepayment income added 8 additional basis points to the 1998
interest margin compared to 1997. The Company expects 1999
interest margins excluding prepayment income to return to
historically normal levels of 190 to 195 basis points.
The Company is able to mitigate the effects of lower investment
yields by periodically resetting the rates credited on fixed
annuity contracts. As of December 31, 1998, $7.17 billion, or 48%
of fixed annuity policy reserves, were in contracts where the
guaranteed interest rate is reestablished each quarter. Fixed
annuity policy reserves of $5.29 billion are in contracts that
adjust the crediting rate on an annual basis with portions
resetting in each calendar quarter. The Company also has $1.36
billion of fixed annuity policy reserves that call for the
crediting rate to be reset annually on each January 1. The
remaining $1.08 billion of fixed annuity policy reserves are in
payout status where the Company has guaranteed periodic, typically
monthly, payments.
Fixed annuity policy reserves increased to $14.90 billion as of
year-end compared to $14.19 billion a year ago and $13.51 billion
as of the end of 1996. Fixed annuity sales during 1998 were $2.07
billion, essentially even with 1997 sales of $2.14 billion,
reflecting the low interest rate environment and customer
preference for equity-linked products. Sales in 1996 were $1.60
billion. The increase in sales in 1998 and 1997 over 1996 reflects
the impact of first year bonus crediting rate programs for certain
of the Company's variable annuity products. Such programs
initially attract sales to the Fixed Annuities segment. Over the
subsequent twelve months, the funds are then systematically
transferred to variable investments. Most of the Company's fixed
annuity sales are premiums allocated to the guaranteed fixed
option of variable annuity contracts. Fixed annuity sales for 1998
include $1.68 billion in premiums allocated to the fixed option
under a variable annuity contract, compared to $1.67 billion in
1997 and $1.24 billion in 1996.
Results in 1996 were adversely impacted by a $13.0 million charge
related to reserve strengthening for the immediate annuity line.
Life Insurance
The Life Insurance segment consists of insurance products,
including variable universal life insurance and corporate-owned
life insurance products, that provide a death benefit and also
allow the customer to build cash value on a tax-deferred basis.
16
17
The following table summarizes certain selected financial data for
the Company's Life Insurance segment for the years indicated.
(in millions of dollars) 1998 1997 1996
---- ---- ----
Income Statement Data:
Revenues $ 551.2 $ 473.1 $ 435.6
Benefits and expenses 456.4 402.2 368.4
-------- -------- --------
Operating income before federal income tax expense $ 94.8 $ 70.9 $ 67.2
======== ======== ========
Other Data:
Statutory premiums (1):
Traditional and universal life $ 246.0 $ 248.4 $ 253.9
Variable universal life 316.0 220.0 165.4
Corporate-owned life 645.8 195.0 20.0
Policy reserves as of year end:
Traditional and universal life 2,439.7 2,369.5 2,295.5
Variable universal life 1,270.1 895.6 622.6
Corporate-owned life 903.6 221.9 20.8
----------
(1) Statutory data have been derived from the Annual Statements
of the Company's life insurance subsidiaries, as filed with
insurance regulatory authorities and prepared in accordance
with statutory accounting practices.
The increase in Life Insurance segment earnings is attributable to
strong growth in investment life insurance products, which include
individual variable universal life insurance and corporate-owned
life insurance, where the Company has aggressively expanded its
distribution capabilities. Investment life premiums and deposits
increased from $185.4 million in 1996 to $415.0 million in 1997 to
$961.8 million in 1998. As a result of the sales growth and high
persistency, revenues from investment life products increased to
$150.4 million in 1998 from $71.9 million in 1997 and $45.5
million in 1996. The Company believes there are growth
opportunities for investment life products and in 1999 will be
introducing new products and expanding distribution to new outlets
to better penetrate these markets.
The increase in benefits and expenses is composed primarily of
increased interest credited to policyholders and increased
operating expenses. Death claims and other policyholder benefits
reflected modest growth during 1997 and 1998. Interest credited to
policyholders increased $36.9 million in 1998 reaching $115.4
million compared to $78.5 million a year ago. Interest credited to
policyholders totaled $70.2 million in 1996. The increased
corporate-owned life insurance business discussed previously
accounted for most of the increases. Operating expenses grew to
$101.7 million in 1998 compared to $94.5 million and $78.9 million
in 1997 and 1996, respectively, reflecting the increased number of
policies in-force as well as technology related expenditures.
17
18
Corporate and Other
The following table summarizes certain selected financial data for
the Company's Corporate and Other segment for the years indicated.
(in millions of dollars) 1998 1997 1996
---- ---- ----
Income Statement Data:
Revenues $214.3 $187.8 $180.4
Benefits and expenses 174.1 160.3 157.5
------ ------ ------
Operating income before federal income tax expense(1) $ 40.2 $ 27.5 $ 22.9
====== ====== ======
----------
(1) Excludes realized gains (losses) on investments and
discontinued operations.
Revenues in the Corporate and Other segment consist of net
investment income on invested assets not allocated to the three
product segments, investment management fees and other revenues
earned from Nationwide mutual funds 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 Nationwide Insurance Enterprise employee and
agent benefit plans.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
MARKET RISK SENSITIVE FINANCIAL INSTRUMENTS
The Company is subject to potential fluctuations in earnings and
the fair value of certain of its assets and liabilities, as well
as variations in expected cash flows due to changes in market
interest rates and equity prices. The following discussion focuses
on specific exposures the Company has to interest rate and equity
price risk and describes strategies used to manage these risks.
The discussion is limited to financial instruments subject to
market risks and is not intended to be a complete discussion of
all of the risks the Company is exposed to.
INTEREST RATE RISK
Fluctuations in interest rates can potentially impact the
Company's earnings and cash flows, and the fair value of its
assets and liabilities. Generally, in a declining interest rate
environment, the Company may be required to reinvest the proceeds
from matured and prepaid investments at rates lower than the
overall yield of the portfolio, which could reduce interest spread
income. In addition, minimum guaranteed crediting rates (typically
3% or 3.5%) on certain annuity contracts could result in a
reduction of the Company's interest spread income in the event of
a significant and prolonged decline in interest rates from market
rates at the end of 1998. The average crediting rate of annuity
products during 1998 was 5.95%, well in excess of the guaranteed
rates. The Company mitigates this risk by investing in assets with
maturities and durations that match the expected characteristics
of the liabilities and by investing in mortgage backed securities
with limited prepayment exposure.
18
19
Conversely, a rising interest rate environment could result in a
reduction of interest spread income or an increase in policyholder
surrenders. Investments supporting annuity liabilities generally
have a weighted average maturity of seven years when purchased and
therefore, the change in yield of the portfolio will lag changes
in market interest rates. This lag is increased if the rate of
prepayments of mortgage-backed securities slows. To the extent the
Company sets renewal rates based on current market rates, this
will result in reduced interest spreads. Alternatively, if the
Company sets renewal crediting rates while attempting to maintain
a desired spread from the portfolio yield, the rates offered by
the Company may be less than new money rates offered by
competitors. This difference could result in an increase in
surrender activity by policyholders. If the Company could not fund
the surrenders with its cash flow from operations, the Company may
be required to sell investments, which likely would have declined
in value due to the increase in interest rates. The Company
mitigates this risk by offering products that assess surrender
charges or market value adjustments at the time of surrender, by
investing in assets with maturities and durations that match the
expected characteristics of the liabilities, and by investing in
mortgage backed securities with limited prepayment exposure.
ASSET/LIABILITY MANAGEMENT STRATEGIES TO MANAGE INTEREST RATE RISK
The Company employs an asset/liability management approach
tailored to the specific requirements of each of its products. The
Company's general account investments are primarily managed in a
number of pools that are segregated by weighted average maturity
of the assets acquired by the pools. For fixed maturity securities
and mortgages, the weighted average maturity is based on
repayments which are scheduled to occur under the terms of the
asset. For mortgage backed securities, repayments are determined
using the current rate of repayment of the underlying mortgages
and the terms of the securities. Each product line has an
investment strategy based on its specific characteristics. The
strategy establishes asset duration, quality and other guidelines.
The Company determines the amount of new investments needed for
each line to arrive at the amount of new investments needed for
each pool by month. The investments acquired for each pool are
shared on a proportional basis by each of the lines requesting
investments in the pool based on their actual investment needs.
For all business having future benefits which cannot be changed at
the option of the policyholder, the underlying assets are managed
in a separate pool. The duration of assets and liabilities in this
pool are kept as close together as possible. For assets, the
repayment cash flows, plus anticipated coupon payments, are used
in calculating asset duration. Future benefits and expenses are
used for liabilities. On December 31, 1998, the average duration
of assets in this pool was 7.5 years and the average duration of
the liabilities was 7.8 years. Policy reserves on this business
were $1.1 billion as of December 31, 1998.
Because the timing of the payment of future benefits on the
majority of the Company's business can be changed by the
policyholder, the Company employs cash flow testing techniques in
its asset/liability management process. 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 the 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 50 randomly generated interest rate
scenarios. For the Company's 1998 cash flow testing process,
interest rates for 90-day treasury bills ranged from 0.7% to 9.5%
under the 20 predetermined scenarios and 1.2% to 21.9% under the
50 random scenarios. Interest rates for longer maturity treasury
securities had comparable ranges. The values produced by each
projection are used to determine future gains or losses from the
Company's annuity and insurance business, which, in turn, are used
to quantify the adequacy of the Company's reserves over the entire
projection period. The results of the Company's cash flow testing
indicated that the Company's reserves were adequate as of December
31, 1998.
19
20
CHARACTERISTICS OF INTEREST RATE SENSITIVE FINANCIAL INSTRUMENTS
The following table provides information about the Company's
financial instruments that are sensitive to changes in interest
rates. Insurance contracts that subject the Company to significant
mortality risk, including life insurance contracts and
life-contingent immediate annuities, do not meet the definition of
a financial instrument and are not included in the table.
There- Fair
(in millions of dollars) 1999 2000 2001 2002 2003 after Total Value
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Fixed maturity securities:
Corporate bonds:
Principal $1,092.7 $1,049.2 $1,667.6 $1,386.3 $ 882.7 $2,864.0 $ 8,942.5 $ 9,364.2
Average interest rate 8.0% 7.5% 7.3% 7.2% 7.0% 7.6%
Mortgage and other asset-
backed securities:
Principal $ 905.3 $ 964.3 $ 870.7 $ 588.9 $ 367.3 $ 718.3 $ 4,414.8 $ 4,499.4
Average interest rate 7.3% 7.4% 7.2% 7.4% 7.4% 7.0%
Other fixed maturity securities:
Principal $ 7.8 $ 72.0 $ 54.6 $ 103.3 $ 60.6 $ 65.7 $ 364.0 $ 381.5
Average interest rate 8.5% 6.4% 7.0% 6.6% 6.9% 6.8%
Mortgage loans on real estate:
Principal $ 185.9 $ 373.9 $ 313.1 $ 339.5 $ 408.8 $3,749.6 $ 5,372.4 $ 5,527.6
Average interest rate 9.2% 9.3% 7.0% 8.5% 7.6% 7.1%
LIABILITIES
Deferred fixed annuities:
Principal $1,639.6 $1,548.3 $1,733.7 $1,232.5 $1,169.6 $8,270.7 $15,594.4 $15,282.0
Average credited rate 5.2% 4.8% 4.5% 4.3% 4.1% 4.1%
Immediate annuities:
Principal $ 20.6 $ 20.7 $ 22.3 $ 25.2 $ 29.9 $ 53.1 $ 171.8 $ 201.6
Average credited rate 7.3% 7.3% 7.3% 7.3% 7.4% 7.4%
Additional information about the characteristics of the financial
instruments and assumptions underlying the data presented in the
table above are as follows:
Mortgage and other asset-backed securities (MBSs): The maturity
year is determined based on the terms of the securities and the
current rate of prepayment of the underlying pools of mortgages.
The Company limits its exposure to prepayments by purchasing less
volatile types of MBSs (see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Investments -
Fixed Maturity Securities").
Other Fixed Maturity Securities and Mortgage Loans on Real Estate:
The maturity year is determined based on the maturity date of the
security or loan.
20
21
Deferred Fixed Annuities: The maturity year is based on the
expected date of policyholder withdrawal, taking into account
actual experience, current interest rates, and contract terms.
Included are group annuity contracts ($10.30 billion) which are
generally subject to market value adjustment upon surrender and
may also be subject to surrender charges. Of the total group
annuity liabilities, $7.17 billion was in contracts where the
crediting rate is reset quarterly. For the remaining $3.13 billion
of group annuity reserves, the crediting rate is reset annually on
January 1. Also included are $5.29 billion of individual annuity
liabilities where the crediting rate is reset annually, with
portions resetting in each calendar quarter. Such individual
annuity contracts are also subject to surrender charges calculated
as a percentage of the lesser of deposits made or the amount
surrendered and assessed at declining rates during the first seven
years after a deposit is made. The average crediting rate is
calculated as the difference between the projected yield of the
assets backing the liabilities and a targeted interest spread.
Immediate Annuities: Included are non-life contingent contracts in
payout status where the Company has guaranteed periodic, typically
monthly, payments. The maturity year is based on the terms of the
contract.
EQUITY MARKET RISK
Asset fees calculated as a percentage of the separate account
assets are a significant source of revenue to the Company. At
December 31, 1998, 86% of separate account assets were invested in
equity mutual funds. Gains and losses in the equity markets will
result in corresponding increases and decreases in the Company's
separate account assets and the reported asset fee revenue. In
addition, a decrease in separate account assets may decrease the
Company's expectations of future profit margins which may require
the Company to accelerate the amortization of deferred policy
acquisition costs.
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ --------------------------------------------------------
The consolidated financial statements of Nationwide Life Insurance
Company and Subsidiaries are included in a separate section of
this report which is indexed in Item 14 - Exhibits, Financial
Statement Schedules, and Reports on Form 8-K.
Semi-annual and annual reports are sent to contract owners of the
variable annuity and life insurance contracts issued through
registered separate accounts of the Company.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ ---------------------------------------------------------------
FINANCIAL DISCLOSURES
---------------------
None.
21
22
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
Omitted due to reduced disclosure format.
ITEM 11 EXECUTIVE COMPENSATION
- ------- ----------------------
Omitted due to reduced disclosure format.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
Omitted due to reduced disclosure format.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
Omitted due to reduced disclosure format.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ------- ----------------------------------------------------------------
Page
----
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-2
Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 F-3
Consolidated Statements of Shareholder's Equity for the years ended December 31, 1998,
1997 and 1996 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997
and 1996 F-5
Notes to Consolidated Financial Statements F-6
FINANCIAL STATEMENT SCHEDULES:
Schedule I Consolidated Summary of Investments - Other Than Investments in
Related Parties as of December 31, 1998 F-28
Schedule III Supplementary Insurance Information as of December 31, 1998, 1997 and
1996 and for each of the years then ended F-29
Schedule IV Reinsurance as of December 31, 1998, 1997 and 1996 and for each of the
years then ended F-30
Schedule V Valuation and Qualifying Accounts for the years ended December 31,
1998, 1997 and 1996 F-31
All other schedules are omitted because they are not applicable or not required, or
because the required information has been included in the audited consolidated
financial statements or notes thereto
EXHIBIT INDEX 25
22
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NATIONWIDE LIFE INSURANCE COMPANY (Registrant)
By /s/ DIMON R. McFERSON
-----------------------------------------------
Dimon R. McFerson, Chairman and Chief Executive
Officer - Nationwide Insurance Enterprise
Date: March 3, 1999
23
24
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ DIMON R. McFERSON 3/3/99 /s/ JOSEPH J. GASPER 2/9/99
- --------------------------------------------- ------ ---------------------------------------------- ------
Dimon R. McFerson, Chairman and Chief Date Joseph J. Gasper, President and Chief Date
Executive Officer - Nationwide Insurance Operating Officer and Director
Enterprise and Director
/s/ LEWIS J. ALPHIN 3/2/99 /s/ A.I. BELL 3/2/99
- --------------------------------------------- ------ ---------------------------------------------- ------
Lewis J. Alphin, Director Date A.I. Bell, Director Date
/s/ KEITH W. ECKEL 3/2/99 /s/ WILLARD J. ENGEL 3/2/99
- --------------------------------------------- ------ ----------------------------------------------- ------
Keith W. Eckel, Director Date Willard J. Engel, Director Date
/s/ FRED C. FINNEY 3/2/99 /s/ CHARLES L. FUELLGRAF, JR. 3/2/99
- --------------------------------------------- ------ ---------------------------------------------- ------
Fred C. Finney, Director Date Charles L. Fuellgraf, Jr., Director Date
/s/ DAVID O. MILLER 3/2/99 /s/ YVONNE L. MONTGOMERY 3/2/99
- --------------------------------------------- ------ --------------------------------------------- ------
David O. Miller, Director Date Yvonne L. Montgomery, Director Date
/s/ JAMES F. PATTERSON 3/2/99 /s/ ARDEN L. SHISLER 3/2/99
- --------------------------------------------- ------ -------------------------------------------- ------
James F. Patterson, Director Date Arden L. Shisler, Director Date
/s/ ROBERT L. STEWART 3/2/99 /s/ NANCY C. THOMAS 3/2/99
- --------------------------------------------- ------ -------------------------------------------- ------
Robert L. Stewart, Director Date Nancy C. Thomas, Director Date
/s/ HAROLD W. WEIHL 3/2/99 /s/ ROBERT A. OAKLEY 2/9/99
- --------------------------------------------- ------ -------------------------------------------- ------
Harold W. Weihl, Director Date Robert A. Oakley, Executive Vice Date
President - Chief Financial Officer
/s/ MARK R. THRESHER 2/9/99
- --------------------------------------------- ------
Mark R. Thresher, Vice President - Date
Controller (Chief Accounting Officer)
24
25
EXHIBIT INDEX
Exhibit Page
------- ----
3.1 Amended Articles of Incorporation of Nationwide Life Insurance
Company, dated March 14, 1986 (previously filed as Exhibit 3.1 to
Form 10-K, Commission File Number 2-28596, filed March 31,1998, and
incorporated herein by reference)
3.2 Form of Amended and Restated Code of Regulations of Nationwide Life
Insurance Company (previously filed as Exhibit 3 to Form 10-K,
Commission File Number 2-28596, filed March 28, 1997, and
incorporated herein by reference)
10.1 Form of Tax Sharing Agreement among Nationwide Mutual Insurance
Company, Nationwide Corporation and any corporation that may
hereafter be a subsidiary of Nationwide Corporation (previously
filed as Exhibit 10.1 to Form 10-K, Commission File Number 2-28596,
filed March 28, 1997, and incorporated herein by reference)
10.1.1 First Amendment to the Tax Sharing Agreement among Nationwide
Mutual Insurance Company, Nationwide Corporation and any
corporation that may hereafter be a subsidiary of Nationwide
Corporation (previously filed as Exhibit 10.2.1 to Form 10-K,
Commission File Number 1-12785, filed March 31, 1998, and
incorporated herein by reference)
10.2 Form of First Amendment to Cost Sharing Agreement among parties
named therein (previously filed as Exhibit 10.2 to Form 10-K,
Commission File Number 2-28596, filed March 28, 1997, and
incorporated herein by reference)
10.3 Modified Coinsurance Agreement between Nationwide Life Insurance
Company and Nationwide Mutual Insurance Company (previously filed
as Exhibit 10.3 to Form 10-K, Commission File Number 2-28596, filed
March 28, 1997, and incorporated herein by reference)
10.4 Modified Coinsurance Agreement between Employers Life Insurance
Company of Wausau and Nationwide Life Insurance Company (previously
filed as Exhibit 10.4 to Form 10-K, Commission File Number 2-28596,
filed March 28, 1997, and incorporated herein by reference)
10.5 Credit Facility, dated August 12, 1996, among Nationwide Life
Insurance Company, Nationwide Mutual Insurance Company, the banks
named therein and Morgan Guaranty Trust Company of New York, the
administrative agent (previously filed as Exhibit 10.5 to Form
10-K, Commission File Number 2-28596, filed March 28, 1997, and
incorporated herein by reference)
10.5.1 Amendment dated as of September 8, 1997 to the Credit Agreement
dated as of August 12, 1996 among Nationwide Mutual Insurance
Company, Nationwide Life Insurance Company, the banks party thereto
and Morgan Guaranty Trust Company of New York, as administrative
agent (previously filed as Exhibit 10(a) to Form 10-Q for the
quarterly period ended September 30, 1997, Commission File Number
1-12785, filed November 13, 1997, and incorporated herein by
reference)
10.6 Form of Lease Agreement between Nationwide Life Insurance Company
and Nationwide Mutual Insurance Company (previously filed as
Exhibit 10.6 to Form 10-K, Commission File Number 2-28596, filed
March 28, 1997, and incorporated herein by reference)
10.7 General Description of Nationwide Insurance Enterprise Executive
Incentive Plan (previously filed as Exhibit 10.7 to Form 10-K,
Commission File Number 2-28596, filed March 28, 1997, and
incorporated herein by reference)
10.8 General Description of Nationwide Insurance Enterprise Management
Incentive Plan (previously filed as Exhibit 10.8 to Form 10-K,
Commission File Number 2-28596, filed March 28, 1997, and
incorporated herein by reference)
10.9 Nationwide Insurance Enterprise Excess Benefit Plan effective as of
December 31, 1996 (previously filed as Exhibit 10.9 to Form 10-K,
Commission File Number 2-28596, filed March 28, 1997, and
incorporated herein by reference)
10.10 Nationwide Insurance Enterprise Supplemental Retirement Plan
effective as of December 31, 1996 (previously filed as Exhibit
10.10 to Form 10-K, Commission File Number 2-28596, filed March 28,
1997, and incorporated herein by reference)
25
26
Exhibit Page
------- ----
10.11 Nationwide Salaried Employees Severance Pay Plan (previously filed
as Exhibit 10.11 to Form 10-K, Commission File Number 2-28596,
filed March 28, 1997, and incorporated herein by reference)
10.12 Nationwide Insurance Enterprise Supplemental Defined Contribution
Plan effective as of January 1, 1996 (previously filed as Exhibit
10.12 to Form 10-K, Commission File Number 2-28596, filed March 28,
1997, and incorporated herein by reference)
10.13 General Description of Nationwide Insurance Enterprise Individual
Deferred Compensation Program previously filed as Exhibit 10.13 to
Form 10-K, Commission File Number 2-28596, filed March 28, 1997,
and incorporated herein by reference)
10.14 General Description of Nationwide Mutual Insurance Company
Directors Deferred Compensation Program (previously filed as
Exhibit 10.14 to Form 10-K, Commission File Number 2-28596, filed
March 28, 1997, and incorporated herein by reference)
10.15 Deferred Compensation Agreement, dated as of September 3, 1979,
between Nationwide Mutual Insurance Company and D. Richard McFerson
(previously filed as Exhibit 10.15 to Form 10-K, Commission File
Number 2-28596, filed March 28, 1997, and incorporated herein by
reference)
27 Financial Data Schedule (electronic filing only)
- ------
All other exhibits referenced by Item 601 of Regulation S-K are
not required under the related instructions or are inapplicable
and therefore have been omitted.
26
27
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Nationwide Life Insurance Company:
We have audited the consolidated financial statements of Nationwide Life
Insurance Company and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nationwide Life
Insurance Company and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
KPMG LLP
Columbus, Ohio
January 29, 1999
F-1
28
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
(in millions of dollars, except per share amounts)
December 31,
-----------------------
Assets 1998 1997
------ --------- ---------
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities $14,245.1 $13,204.1
Equity securities 127.2 80.4
Mortgage loans on real estate, net 5,328.4 5,181.6
Real estate, net 243.6 311.4
Policy loans 464.3 415.3
Other long-term investments 44.0 25.2
Short-term investments 289.1 358.4
--------- ---------
20,741.7 19,576.4
--------- ---------
Cash 3.4 175.6
Accrued investment income 218.7 210.5
Deferred policy acquisition costs 2,022.2 1,665.4
Other assets 420.3 438.4
Assets held in separate accounts 50,935.8 37,724.4
--------- ---------
$74,342.1 $59,790.7
========= =========
Liabilities and Shareholder's Equity
------------------------------------
Future policy benefits and claims $19,767.1 $18,702.8
Other liabilities 866.1 885.6
Liabilities related to separate accounts 50,935.8 37,724.4
--------- ---------
71,569.0 57,312.8
--------- ---------
Commitments and contingencies (notes 7 and 12)
Shareholder's equity:
Common stock, $1 par value. Authorized 5.0 million shares;
3.8 million shares issued and outstanding 3.8 3.8
Additional paid-in capital 914.7 914.7
Retained earnings 1,579.0 1,312.3
Accumulated other comprehensive income 275.6 247.1
--------- ---------
2,773.1 2,477.9
--------- ---------
$74,342.1 $59,790.7
========= =========
See accompanying notes to consolidated financial statements.
F-2
29
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Income
(in millions of dollars)
Years ended December 31,
-----------------------------------
1998 1997 1996
-------- -------- ---------
Revenues:
Policy charges $ 698.9 $ 545.2 $ 400.9
Life insurance premiums 200.0 205.4 198.6
Net investment income 1,481.6 1,409.2 1,357.8
Realized gains (losses) on investments 28.4 11.1 (0.3)
Other 66.8 46.5 35.9
-------- -------- --------
2,475.7 2,217.4 1,992.9
-------- -------- --------
Benefits and expenses:
Interest credited to policyholder account balances 1,069.0 1,016.6 982.3
Other benefits and claims 175.8 178.2 178.3
Policyholder dividends on participating policies 39.6 40.6 41.0
Amortization of deferred policy acquisition costs 214.5 167.2 133.4
Other operating expenses 419.7 384.9 342.4
-------- -------- --------
1,918.6 1,787.5 1,677.4
-------- -------- --------
Income from continuing operations before federal income tax expense 557.1 429.9 315.5
Federal income tax expense 190.4 150.2 110.9
-------- -------- --------
Income from continuing operations 366.7 279.7 204.6
Income from discontinued operations (less federal income tax expense
of $4.5 in 1996) -- -- 11.3
-------- -------- --------
Net income $ 366.7 $ 279.7 $ 215.9
======== ======== ========
See accompanying notes to consolidated financial statements.
F-3
30
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
Years ended December 31, 1998, 1997 and 1996
(in millions of dollars)
Accumulated
Additional other Total
Common paid-in Retained comprehensive shareholder's
stock capital earnings income equity
----- ------- -------- ------ ------
December 31, 1995 $ 3.8 $ 657.2 $1,583.2 $ 384.3 $2,628.5
Comprehensive income:
Net income -- -- 215.9 -- 215.9
Net unrealized losses on securities
available-for-sale arising during
the year -- -- -- (170.9) (170.9)
--------
Total comprehensive income 45.0
--------
Dividends to shareholder -- (129.3) (366.5) (39.8) (535.6)
------ ------- -------- ------- --------
December 31, 1996 3.8 527.9 1,432.6 173.6 2,137.9
Comprehensive income:
Net income -- -- 279.7 -- 279.7
Net unrealized gains on securities
available-for-sale arising during
the year -- -- -- 73.5 73.5
--------
Total comprehensive income 353.2
--------
Capital contribution -- 836.8 -- -- 836.8
Dividend to shareholder -- (450.0) (400.0) -- (850.0)
------ ------- -------- ------- --------
December 31, 1997 3.8 914.7 1,312.3 247.1 2,477.9
Comprehensive income:
Net income -- -- 366.7 -- 366.7
Net unrealized gains on securities
available-for-sale arising during
the year -- -- -- 28.5 28.5
--------
Total comprehensive income 395.2
--------
Dividend to shareholder -- -- (100.0) -- (100.0)
------ ------- -------- ------- --------
December 31, 1998 $ 3.8 $ 914.7 $1,579.0 $ 275.6 $2,773.1
====== ======= ======== ======= ========
See accompanying notes to consolidated financial statements.
F-4
31
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(in millions of dollars)
Years ended December 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net income $ 366.7 $ 279.7 $ 215.9
Adjustments to reconcile net income to net cash provided by operating
activities:
Interest credited to policyholder account balances 1,069.0 1,016.6 982.3
Capitalization of deferred policy acquisition costs (584.2) (487.9) (422.6)
Amortization of deferred policy acquisition costs 214.5 167.2 133.4
Amortization and depreciation (8.5) (2.0) 7.0
Realized gains on invested assets, net (28.4) (11.1) (0.3)
(Increase) decrease in accrued investment income (8.2) (0.3) 2.8
(Increase) decrease in other assets 16.4 (12.7) (38.9)
Decrease in policy liabilities (8.3) (23.1) (151.0)
(Decrease) increase in other liabilities (34.8) 230.6 191.4
Other, net (11.3) (10.9) (61.7)
--------- --------- ---------
Net cash provided by operating activities 982.9 1,146.1 858.3
--------- --------- ---------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale 1,557.0 993.4 1,162.8
Proceeds from sale of securities available-for-sale 610.5 574.5 299.6
Proceeds from repayments of mortgage loans on real estate 678.2 437.3 309.0
Proceeds from sale of real estate 103.8 34.8 18.5
Proceeds from repayments of policy loans and sale of other invested assets 23.6 22.7 22.8
Cost of securities available-for-sale acquired (3,182.8) (2,828.1) (1,573.6)
Cost of mortgage loans on real estate acquired (829.1) (752.2) (972.8)
Cost of real estate acquired (0.8) (24.9) (7.9)
Policy loans issued and other invested assets acquired (88.4) (62.5) (57.7)
Short-term investments, net 69.3 (354.8) 28.0
--------- --------- ---------
Net cash used in investing activities (1,058.7) (1,959.8) (771.3)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from capital contributions -- 836.8 --
Cash dividends paid (100.0) -- (50.0)
Increase in investment product and universal life insurance
product account balances 2,682.1 2,488.5 1,781.8
Decrease in investment product and universal life insurance
product account balances (2,678.5) (2,379.8) (1,784.5)
--------- --------- ---------
Net cash (used in) provided by financing activities (96.4) 945.5 (52.7)
--------- --------- ---------
Net (decrease) increase in cash (172.2) 131.8 34.3
Cash, beginning of year 175.6 43.8 9.5
--------- --------- ---------
Cash, end of year $ 3.4 $ 175.6 $ 43.8
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
32
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) Organization and Description of Business
----------------------------------------
Prior to January 27, 1997, Nationwide Life Insurance Company (NLIC) was
wholly owned by Nationwide Corporation (Nationwide Corp.). On that
date, Nationwide Corp. contributed the outstanding shares of NLIC's
common stock to Nationwide Financial Services, Inc. (NFS), a holding
company formed by Nationwide Corp. in November 1996 for NLIC and the
other companies within the Nationwide Insurance Enterprise that offer
or distribute long-term savings and retirement products. On March 11,
1997, NFS completed an initial public offering of its Class A common
stock.
During 1996 and 1997, Nationwide Corp. and NFS completed certain
transactions in anticipation of the initial public offering that
focused the business of NFS on long-term savings and retirement
products. On September 24, 1996, NLIC declared a dividend payable to
Nationwide Corp. on January 1, 1997 consisting of the outstanding
shares of common stock of certain subsidiaries that do not offer or
distribute long-term savings or retirement products. In addition,
during 1996, NLIC entered into two reinsurance agreements whereby all
of NLIC's accident and health and group life insurance business was
ceded to two affiliates effective January 1, 1996. These subsidiaries,
through December 31, 1996, and all accident and health and group life
insurance business have been accounted for as discontinued operations
for all periods presented. See notes 10 and 14. Additionally, NLIC paid
$900.0 million of dividends, $50.0 million to Nationwide Corp. on
December 31, 1996 and $850.0 million to NFS, which then made an
equivalent dividend to Nationwide Corp., on February 24, 1997.
NFS contributed $836.8 million to the capital of NLIC during March
1997.
Wholly owned subsidiaries of NLIC include Nationwide Life and Annuity
Insurance Company (NLAIC), Nationwide Advisory Services, Inc.,
Nationwide Investment Services Corporation and NWE, Inc. NLIC and its
subsidiaries are collectively referred to as "the Company."
The Company is a leading provider of long-term savings and retirement
products, including variable annuities, fixed annuities and life
insurance.
(2) Summary of Significant Accounting Policies
------------------------------------------
The significant accounting policies followed by the Company that
materially affect financial reporting are summarized below. The
accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, which differ
from statutory accounting practices prescribed or permitted by
regulatory authorities. Annual Statements for NLIC and NLAIC, filed
with the Department of Insurance of the State of Ohio (the Department),
are prepared on the basis of accounting practices prescribed or
permitted by the Department. Prescribed statutory accounting practices
include a variety of publications of the National Association of
Insurance Commissioners (NAIC), as well as state laws, regulations and
general administrative rules. Permitted statutory accounting practices
encompass all accounting practices not so prescribed. The Company has
no material permitted statutory accounting practices.
F-6
33
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
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. Operations that are classified
and reported as discontinued operations are not consolidated but
rather are reported as "Income from 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, 1998 or 1997.
Mortgage loans on real estate are carried at the unpaid principal
balance less valuation allowances. The Company provides valuation
allowances for impairments of mortgage loans on real estate based
on a review by portfolio managers. The measurement of impaired
loans is based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a
practical expedient, at the fair value of the collateral, if the
loan is collateral dependent. Loans in foreclosure and loans
considered to be impaired are placed on non-accrual status.
Interest received on non-accrual status mortgage loans on real
estate is included in interest income in the period received.
Real estate is carried at cost less accumulated depreciation and
valuation allowances. Other long-term investments are carried on
the equity basis, adjusted for valuation allowances. Impairment
losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the
assets' carrying amount.
Realized gains and losses on the sale of investments are
determined on the basis of specific security identification.
Estimates for valuation allowances and other than temporary
declines are included in realized gains and losses on investments.
F-7
34
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(c) Revenues and Benefits
---------------------
Investment Products and Universal Life Insurance Products:
Investment products consist primarily of individual and group
variable and fixed deferred annuities. Universal life insurance
products include universal life insurance, variable universal life
insurance, corporate owned life insurance and other
interest-sensitive life insurance policies. Revenues for
investment products and universal life insurance products consist
of net investment income, asset fees, cost of insurance, policy
administration and surrender charges that have been earned and
assessed against policy account balances during the period. Policy
benefits and claims that are charged to expense include interest
credited to policy account balances and benefits and claims
incurred in the period in excess of related policy account
balances.
Traditional Life Insurance Products: Traditional life insurance
products include those products with fixed and guaranteed premiums
and benefits and consist primarily of whole life insurance,
limited-payment life insurance, term life insurance and certain
annuities with life contingencies. Premiums for traditional life
insurance products are recognized as revenue when due. Benefits
and expenses are associated with earned premiums so as to result
in recognition of profits over the life of the contract. This
association is accomplished by the provision for future policy
benefits and the deferral and amortization of policy acquisition
costs.
(d) Deferred Policy Acquisition Costs
---------------------------------
The costs of acquiring new business, principally commissions,
certain expenses of the policy issue and underwriting department
and certain variable sales expenses have been deferred. For
investment products and universal life insurance products,
deferred policy acquisition costs are being amortized with
interest over the lives of the policies in relation to the present
value of estimated future gross profits from projected interest
margins, asset fees, cost of insurance, policy administration and
surrender charges. For years in which gross profits are negative,
deferred policy acquisition costs are amortized based on the
present value of gross revenues. For traditional life insurance
products, these deferred policy acquisition costs are
predominantly being amortized with interest over the premium
paying period of the related policies in proportion to the ratio
of actual annual premium revenue to the anticipated total premium
revenue. Such anticipated premium revenue was estimated using the
same assumptions as were used for computing liabilities for future
policy benefits. Deferred policy acquisition costs are adjusted to
reflect the impact of unrealized gains and losses on fixed
maturity securities available-for-sale as described in note 2(b).
(e) Separate Accounts
-----------------
Separate account assets and liabilities represent contractholders'
funds which have been segregated into accounts with specific
investment objectives. For all but $743.9 million of separate
account assets, the investment income and gains or losses of these
accounts accrue directly to the contractholders. The activity of
the separate accounts is not reflected in the consolidated
statements of income and cash flows except for the fees the
Company receives.
(f) Future Policy Benefits
----------------------
Future policy benefits for investment products in the accumulation
phase, universal life insurance and variable universal life
insurance policies have been calculated based on participants'
contributions plus interest credited less applicable contract
charges. The average interest rate credited on investment product
policy reserves was 6.0%, 6.1% and 6.3% for the years ended
December 31, 1998, 1997 and 1996, respectively.
Future policy benefits for traditional life insurance policies
have been calculated by the net level premium method using
interest rates varying from 6.0% to 10.5% and estimates of
mortality, morbidity, investment yields and withdrawals which were
used or which were being experienced at the time the policies were
issued, rather than the assumptions prescribed by state regulatory
authorities.
F-8
35
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(g) Participating Business
----------------------
Participating business represents approximately 40% in 1998 (50%
in 1997 and 52% in 1996) of the Company's life insurance in force,
74% in 1998 (77% in 1997 and 78% in 1996) of the number of life
insurance policies in force, and 14% in 1998 (27% in 1997 and 40%
in 1996) of life insurance statutory premiums. The provision for
policyholder dividends is based on current dividend scales and is
included in "Future policy benefits and claims" in the
accompanying consolidated balance sheets.
(h) Federal Income Tax
------------------
The Company files a consolidated federal income tax return with
Nationwide Mutual Insurance Company (NMIC), the majority
shareholder of Nationwide Corp. The members of the consolidated
tax return group have a tax sharing arrangement which provides, in
effect, for each member to bear essentially the same federal
income tax liability as if separate tax returns were filed.
The Company utilizes the asset and liability method of accounting
for income tax. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. Under this method, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce the
deferred tax assets to the amounts expected to be realized.
(i) Reinsurance Ceded
-----------------
Reinsurance premiums ceded and reinsurance recoveries on benefits
and claims incurred are deducted from the respective income and
expense accounts. Assets and liabilities related to reinsurance
ceded are reported on a gross basis. 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 10 and 14.
F-9
36
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(j) Recently Issued Accounting Pronouncements
-----------------------------------------
On January 1, 1998 the Company adopted SFAS No. 131 - Disclosures
about Segments of an Enterprise and Related Information (SFAS
131). SFAS 131 supersedes SFAS No. 14 - Financial Reporting for
Segments of a Business Enterprise. SFAS 131 establishes standards
for public business enterprises to report information about
operating segments in annual financial statements and selected
information about operating segments in interim financial reports.
SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The
adoption of SFAS 131 did not affect results of operations or
financial position, nor did it affect the manner in which the
Company defines its operating segments. The segment information
required for annual financial statements is included in note 13.
On January 1, 1998, the Company adopted SFAS No. 132 - Employers'
Disclosures about Pensions and Other Postretirement Benefits (SFAS
132). SFAS 132 revises employers' disclosures about pension and
other postretirement benefit plans. The Statement does not change
the measurement or recognition of benefit plans in the financial
statements. The revised disclosures required by SFAS 132 are
included in note 8.
In June 1998, the FASB issued SFAS No. 133 - Accounting for
Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133
establishes accounting and reporting standards for derivative
instruments and for hedging activities. Contracts that contain
embedded derivatives, such as certain insurance contracts, are
also addressed by the Statement. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at
fair value. The Statement is effective for fiscal years beginning
after June 15, 1999. It may be implemented earlier provided
adoption occurs as of the beginning of any fiscal quarter after
issuance. The Company plans to adopt this Statement in first
quarter 2000 and is currently evaluating the impact on results of
operations and financial condition.
In March 1998, The American Institute of Certified Public
Accountant's Accounting Standards Executive Committee issued
Statement of Position 98-1 - Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use (SOP 98-1). SOP
98-1 provides guidance intended to standardize accounting
practices for costs incurred to develop or obtain computer
software for internal use. Specifically, SOP 98-1 provides
guidance for determining whether computer software is for internal
use and when costs incurred for internal use software are to be
capitalized. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company does
not expect the adoption of SOP 98-1, which occurred on January 1,
1999, to have a material impact on the Company's financial
statements.
(k) Reclassification
----------------
Certain items in the 1997 and 1996 consolidated financial
statements have been reclassified to conform to the 1998
presentation.
F-10
37
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(3) Investments
-----------
The amortized cost, gross unrealized gains and losses and estimated
fair value of securities available-for-sale as of December 31, 1998 and
1997 were:
Gross Gross
Amortized unrealized unrealized Estimated
(in millions of dollars) cost gains losses fair value
------------------------ ---- ----- ------ ----------
December 31, 1998:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 255.9 $ 13.0 $ -- $ 268.9
Obligations of states and political subdivisions 1.6 -- -- 1.6
Debt securities issued by foreign governments 106.5 4.5 -- 111.0
Corporate securities 9,899.6 423.2 (18.7) 10,304.1
Mortgage-backed securities 3,457.7 104.2 (2.4) 3,559.5
--------- ------ ------ ---------
Total fixed maturity securities 13,721.3 544.9 (21.1) 14,245.1
Equity securities 110.4 18.3 (1.5) 127.2
--------- ------ ------ ---------
$13,831.7 $563.2 $(22.6) $14,372.3
========= ====== ====== =========
December 31, 1997:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 305.1 $ 8.6 $ -- $ 313.7
Obligations of states and political subdivisions 1.6 -- -- 1.6
Debt securities issued by foreign governments 93.3 2.7 (0.2) 95.8
Corporate securities 8,698.7 355.5 (11.5) 9,042.7
Mortgage-backed securities 3,634.2 118.6 (2.5) 3,750.3
--------- ------ ------ ---------
Total fixed maturity securities 12,732.9 485.4 (14.2) 13,204.1
Equity securities 67.8 12.9 (0.3) 80.4
--------- ------ ------ ---------
$12,800.7 $498.3 $(14.5) $13,284.5
========= ====== ====== =========
As of December 31, 1998 the Company had entered into S&P 500 futures
contracts with a notional amount of $20.0 million to reduce the risk of
changes in the fair market value of certain investments classified as
equity securities. These contracts had an unrealized loss of $1.3
million as of December 31, 1998 which is included in the recorded
amount of the equity securities and in accumulated other comprehensive
income, net of tax, similar to other unrealized gains and losses on
securities available-for-sale.
F-11
38
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The amortized cost and estimated fair value of fixed maturity
securities available-for-sale as of December 31, 1998, by expected
maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Amortized Estimated
(in millions of dollars) cost fair value
---- ----------
Fixed maturity securities available for sale:
Due in one year or less $ 2,019.9 $ 2,048.0
Due after one year through five years 8,169.1 8,470.6
Due after five years through ten years 2,795.0 2,927.7
Due after ten years 737.3 798.8
--------- ---------
$13,721.3 $14,245.1
========= =========
The components of unrealized gains on securities available-for-sale,
net, were as follows as of December 31:
(in millions of dollars) 1998 1997
---- ----
Gross unrealized gains $ 540.6 $ 483.8
Adjustment to deferred policy acquisition costs (116.6) (103.7)
Deferred federal income tax (148.4) (133.0)
------- -------
$ 275.6 $ 247.1
======= =======
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:
(in millions of dollars) 1998 1997 1996
---- ---- ----
Securities available-for-sale:
Fixed maturity securities $52.6 $137.5 $(289.2)
Equity securities 4.2 (2.7) 8.9
----- ------ -------
$56.8 $134.8 $(280.3)
===== ====== =======
Proceeds from the sale of securities available-for-sale during 1998,
1997 and 1996 were $610.5 million, $574.5 million and $299.6 million,
respectively. During 1998, gross gains of $9.0 million ($9.9 million
and $6.6 million in 1997 and 1996, respectively) and gross losses of
$7.6 million ($18.0 million and $6.9 million in 1997 and 1996,
respectively) were realized on those sales. In addition, gross gains of
$15.1 million and gross losses of $0.7 million were realized in 1997
when the Company paid a dividend to NFS, which then made an equivalent
dividend to Nationwide Corp., consisting of securities having an
aggregate fair value of $850.0 million.
The recorded investment of mortgage loans on real estate considered to
be impaired as of December 31, 1998 was $3.7 million. No valuation
allowance has been recorded for these loans as of December 31, 1998.
The recorded investment of mortgage loans on real estate considered to
be impaired as of December 31, 1997 was $19.9 million which includes
$3.9 million of impaired mortgage loans on real estate for which the
related valuation allowance was $0.1 million and $16.0 million of
impaired mortgage loans on real estate for which there was no valuation
allowance. During 1998, the average recorded investment in impaired
mortgage loans on real estate was approximately $9.1 million ($31.8
million in 1997) and interest income recognized on those loans was $0.3
million ($1.0 million in 1997), which is equal to interest income
recognized using a cash-basis method of income recognition.
F-12
39
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Activity in the valuation allowance account for mortgage loans on real
estate is summarized for the years ended December 31:
(in millions of dollars) 1998 1997
---- ----
Allowance, beginning of year $42.5 $51.0
Reductions credited to operations (0.1) (1.2)
Direct write-downs charged against the allowance -- (7.3)
----- -----
Allowance, end of year $42.4 $42.5
===== =====
Real estate is presented at cost less accumulated depreciation of $21.5
million as of December 31, 1998 ($45.1 million as of December 31, 1997)
and valuation allowances of $5.4 million as of December 31, 1998 ($11.1
million as of December 31, 1997).
Investments that were non-income producing for the twelve month period
preceding December 31, 1998 amounted to $42.4 million ($19.4 million
for 1997) and consisted of $32.7 million ($3.0 million in 1997) in
securities available-for-sale and $9.7 million ($16.4 million in 1997)
in real estate.
An analysis of investment income by investment type follows for the
years ended December 31:
(in millions of dollars) 1998 1997 1996
---- ---- ----
Gross investment income:
Securities available-for-sale:
Fixed maturity securities $ 982.5 $ 911.6 $ 917.1
Equity securities 0.8 0.8 1.3
Mortgage loans on real estate 458.9 457.7 432.8
Real estate 40.4 42.9 44.3
Short-term investments 17.8 22.7 4.2
Other 30.7 21.0 4.0
-------- -------- --------
Total investment income 1,531.1 1,456.7 1,403.7
Less investment expenses 49.5 47.5 45.9
-------- -------- --------
Net investment income $1,481.6 $1,409.2 $1,357.8
======== ======== ========
An analysis of realized gains (losses) on investments, net of valuation
allowances, by investment type follows for the years ended December 31:
(in millions of dollars) 1998 1997 1996
---- ---- ----
Securities available-for-sale:
Fixed maturity securities $(0.7) $ 3.6 $(3.5)
Equity securities 2.1 2.7 3.2
Mortgage loans on real estate 3.9 1.6 (4.1)
Real estate and other 23.1 3.2 4.1
----- ----- -----
$28.4 $11.1 $(0.3)
===== ===== =====
Fixed maturity securities with an amortized cost of $6.5 million and
$6.2 million as of December 31, 1998 and 1997, respectively, were on
deposit with various regulatory agencies as required by law.
F-13
40
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(4) Federal Income Tax
------------------
The Company's current federal income tax liability was $72.8 million
and $60.1 million as of December 31, 1998 and 1997, respectively.
The tax effects of temporary differences that give rise to significant
components of the net deferred tax liability as of December 31, 1998
and 1997 are as follows:
(in millions of dollars) 1998 1997
---- ----
Deferred tax assets:
Future policy benefits $207.7 $200.1
Liabilities in Separate Accounts 319.9 242.0
Mortgage loans on real estate and real estate 17.5 19.0
Other assets and other liabilities 58.9 59.2
------ ------
Total gross deferred tax assets 604.0 520.3
Less valuation allowance (7.0) (7.0)
------ ------
Net deferred tax assets 597.0 513.3
------ ------
Deferred tax liabilities:
Deferred policy acquisition costs 568.7 480.5
Fixed maturity securities 212.2 193.3
Deferred tax on realized investment gains 34.8 40.1
Equity securities and other long-term investments 9.6 7.5
Other 21.6 22.2
------ ------
Total gross deferred tax liabilities 846.9 743.6
------ ------
Net deferred tax liability $249.9 $230.3
====== ======
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, 1998, 1997 and 1996.
Federal income tax expense attributable to income from continuing
operations for the years ended December 31 was as follows:
(in millions of dollars) 1998 1997 1996
---- ---- ----
Currently payable $186.1 $121.7 $116.5
Deferred tax expense (benefit) 4.3 28.5 (5.6)
------ ------ ------
$190.4 $150.2 $110.9
====== ====== ======
F-14
41
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Total federal income tax expense for the years ended December 31, 1998,
1997 and 1996 differs from the amount computed by applying the U.S.
federal income tax rate to income before tax as follows:
1998 1997 1996
----------------- ---------------- -----------------
(in millions of dollars) Amount % Amount % Amount %
------ - ------ - ------ -
Computed (expected) tax expense $195.0 35.0 $150.5 35.0 $110.4 35.0
Tax exempt interest and dividends
received deduction (4.9) (0.9) - 0.0 (0.2) (0.1)
Other, net 0.3 0.1 (0.3) (0.1) 0.7 0.3
------ ---- ------ ---- ------ ----
Total (effective rate of each year) $190.4 34.2 $150.2 34.9 $110.9 35.2
====== ==== ====== ==== ====== ====
Total federal income tax paid was $173.4 million, $91.8 million and
$115.8 million during the years ended December 31, 1998, 1997 and 1996,
respectively.
(5) Comprehensive Income
--------------------
Pursuant to SFAS No. 130 - Reporting Comprehensive Income, which the
Company adopted January 1, 1998, the Consolidated Statements of
Shareholder's Equity include a new measure called "Comprehensive
Income". Comprehensive Income includes net income as well as certain
items that are reported directly within separate components of
shareholders' equity that bypass net income. Currently, the Company's
only component of Other Comprehensive Income is unrealized gains
(losses) on securities available-for-sale. The related before and after
federal tax amounts are as follows:
(in millions of dollars) 1998 1997 1996
---- ---- ----
Unrealized gains (losses) on securities
available-for-sale arising during the period:
Gross $ 58.2 $141.1 $(272.4)
Adjustment to deferred policy acquisition costs (12.9) (21.8) 57.0
Related federal income tax (expense) benefit (15.9) (41.7) 44.0
------ ------ ------
Net 29.4 77.6 (171.4)
------ ------ ------
Reclassification adjustment for net (gains) losses
on securities available-for-sale realized
during the period:
Gross (1.4) (6.3) 0.7
Related federal income tax expense (benefit) 0.5 2.2 (0.2)
------ ------ -------
Net (0.9) (4.1) 0.5
------ ------ -------
Total Other Comprehensive Income $ 28.5 $ 73.5 $(170.9)
====== ====== =======
(6) Fair Value of Financial Instruments
-----------------------------------
The following disclosures summarize the carrying amount and estimated
fair value of the Company's financial instruments. Certain assets and
liabilities are specifically excluded from the disclosure requirements
of financial instruments. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
F-15
42
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The fair value of a financial instrument is defined as the amount at
which the financial instrument could be exchanged in a current
transaction between willing parties. In cases where quoted market
prices are not available, fair value is to be based on estimates using
present value or other valuation techniques. Many of the Company's
assets and liabilities subject to the disclosure requirements are not
actively traded, requiring fair values to be estimated by management
using present value or other valuation techniques. These techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. Although fair value estimates
are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in the immediate settlement of the instruments.
Although insurance contracts, other than policies such as annuities
that are classified as investment contracts, are specifically exempted
from the disclosure requirements, estimated fair value of policy
reserves on life insurance contracts is provided to make the fair value
disclosures more meaningful.
The tax ramifications of the related unrealized gains and losses can
have a significant effect on fair value estimates and have not been
considered in the estimates.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures:
Fixed maturity and equity securities: The fair value for fixed
maturity securities is based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair
value is estimated using values obtained from independent pricing
services or, in the case of private placements, is estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the
investments. The fair value for equity securities is based on
quoted market prices. The carrying amount and fair value for
equity securities exclude the fair value of futures contracts
designated as hedges of equity securities.
Mortgage loans on real estate, net: The fair value for mortgage
loans on real estate is estimated using discounted cash flow
analyses, using interest rates currently being offered for similar
loans to borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Fair value for mortgage loans in default is the estimated fair
value of the underlying collateral.
Policy loans, short-term investments and cash: The carrying amount
reported in the consolidated balance sheets for these instruments
approximates their fair value.
Separate account assets and liabilities: The fair value of assets
held in separate accounts is based on quoted market prices. The
fair value of liabilities related to separate accounts is the
amount payable on demand, which is net of certain surrender
charges.
Investment contracts: The fair value for the Company's liabilities
under investment type contracts is disclosed using two methods.
For investment contracts without defined maturities, fair value is
the amount payable on demand. For investment contracts with known
or determined maturities, fair value is estimated using discounted
cash flow analysis. Interest rates used are similar to currently
offered contracts with maturities consistent with those remaining
for the contracts being valued.
F-16
43
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Policy reserves on life insurance contracts: Included are
disclosures for individual life insurance, universal life
insurance and supplementary contracts with life contingencies for
which the estimated fair value is the amount payable on demand.
Also included are disclosures for the Company's limited payment
policies, which the Company has used discounted cash flow analyses
similar to those used for investment contracts with known
maturities to estimate fair value.
Commitments to extend credit: Commitments to extend credit have
nominal fair value because of the short-term nature of such
commitments. See note 7.
Futures contracts: The fair value for futures contracts is based
on quoted market prices.
Carrying amount and estimated fair value of financial instruments
subject to disclosure requirements and policy reserves on life
insurance contracts were as follows as of December 31:
1998 1997
------------------------- --------------------------
Carrying Estimated Carrying Estimated
(in millions of dollars) amount fair value amount fair value
--------- ---------- --------- ----------
Assets:
Investments:
Securities available-for-sale:
Fixed maturity securities $14,245.1 $14,245.1 $13,204.1 $13,204.1
Equity securities 128.5 128.5 80.4 80.4
Mortgage loans on real estate, net 5,328.4 5,527.6 5,181.6 5,509.7
Policy loans 464.3 464.3 415.3 415.3
Short-term investments 289.1 289.1 358.4 358.4
Cash 3.4 3.4 175.6 175.6
Assets held in separate accounts 50,935.8 50,935.8 37,724.4 37,724.4
Liabilities:
Investment contracts 15,468.7 15,158.6 14,708.2 14,322.1
Policy reserves on life insurance contracts 3,914.0 3,768.9 3,345.4 3,182.4
Liabilities related to separate accounts 50,935.8 49,926.5 37,724.4 36,747.0
Futures contracts 1.3 1.3 -- --
(7) Risk Disclosures
----------------
The following is a description of the most significant risks facing
life insurers and how the Company mitigates those risks:
Credit Risk: The risk that issuers of securities owned by the Company
or mortgagors on mortgage loans on real estate owned by the Company
will default or that other parties, including reinsurers, which owe the
Company money, will not pay. The Company minimizes this risk by
adhering to a conservative investment strategy, by maintaining
reinsurance and credit and collection policies and by providing for any
amounts deemed uncollectible.
Interest Rate Risk: The risk that interest rates will change and cause
a decrease in the value of an insurer's investments. This change in
rates may cause certain interest-sensitive products to become
uncompetitive or may cause disintermediation. The Company mitigates
this risk by charging fees for non-conformance with certain policy
provisions, by offering products that transfer this risk to the
purchaser, and/or by attempting to match the maturity schedule of its
assets with the expected payouts of its liabilities. To the extent that
liabilities come due more quickly than assets mature, an insurer would
have to borrow funds or sell assets prior to maturity and potentially
recognize a gain or loss.
F-17
44
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Legal/Regulatory Risk: The risk that changes in the legal or regulatory
environment in which an insurer operates will result in increased
competition, reduced demand for a company's products, or create
additional expenses not anticipated by the insurer in pricing its
products. The Company mitigates this risk by offering a wide range of
products and by operating throughout the United States, thus reducing
its exposure to any single product or jurisdiction, and also by
employing underwriting practices which identify and minimize the
adverse impact of this risk.
Financial Instruments with Off-Balance-Sheet Risk: The Company is a
party to financial instruments with off-balance-sheet risk in the
normal course of business through management of its investment
portfolio. These financial instruments include commitments to extend
credit in the form of loans. These instruments involve, to varying
degrees, elements of credit risk in excess of amounts recognized on the
consolidated balance sheets.
Commitments to fund fixed rate mortgage loans on real estate are
agreements to lend to a borrower, and are subject to conditions
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment
of a deposit. Commitments extended by the Company are based on
management's case-by-case credit evaluation of the borrower and the
borrower's loan collateral. The underlying mortgage property represents
the collateral if the commitment is funded. The Company's policy for
new mortgage loans on real estate is to lend no more than 75% of
collateral value. Should the commitment be funded, the Company's
exposure to credit loss in the event of nonperformance by the borrower
is represented by the contractual amounts of these commitments less the
net realizable value of the collateral. The contractual amounts also
represent the cash requirements for all unfunded commitments.
Commitments on mortgage loans on real estate of $156.0 million
extending into 1999 were outstanding as of December 31, 1998. The
Company also had $40.0 million of commitments to purchase fixed
maturity securities outstanding as of December 31, 1998.
Significant Concentrations of Credit Risk: The Company grants mainly
commercial mortgage loans on real estate to customers throughout the
United States. The Company has a diversified portfolio with no more
than 22% (20% in 1997) in any geographic area and no more than 2% (2%
in 1997) with any one borrower as of December 31, 1998. As of December
31, 1998, 42% (46% in 1997) of the remaining principal balance of the
Company's commercial mortgage loan portfolio financed retail
properties.
Reinsurance: The Company has entered into a reinsurance contract to
cede a portion of its general account individual annuity business to
The Franklin Life Insurance Company (Franklin). Total recoveries due
from Franklin were $187.9 million and $220.2 million as of December 31,
1998 and 1997, 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.
(8) Pension Plan and Postretirement Benefits Other Than Pensions
------------------------------------------------------------
The Company is a participant, together with other affiliated companies,
in a pension plan covering all employees who have completed at least
one year of service. The Company funds pension costs accrued for direct
employees plus an allocation of pension costs accrued for employees of
affiliates whose work efforts benefit the Company. Assets of the
Retirement Plan are invested in group annuity contracts of NLIC and
Employers Life Insurance Company of Wausau (ELICW).
Pension costs charged to operations by the Company during the years
ended December 31, 1998, 1997 and 1996 were $2.0 million, $7.5 million
and $7.4 million, respectively. The Company has recorded a prepaid
pension asset of $5.0 million as of December 31, 1998 and no prepaid or
accrued pension asset or expense as of December 31, 1997.
F-18
45
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
In addition to the defined benefit pension plan, the Company, together
with other affiliated companies, participates in life and health care
defined benefit plans for qualifying retirees. Postretirement life and
health care benefits are contributory and generally available to full
time employees who have attained age 55 and have accumulated 15 years
of service with the Company after reaching age 40. Postretirement
health care benefit contributions are adjusted annually and contain
cost-sharing features such as deductibles and coinsurance. In addition,
there are caps on the Company's portion of the per-participant cost of
the postretirement health care benefits. These caps can increase
annually, but not more than three percent. The Company's policy is to
fund the cost of health care benefits in amounts determined at the
discretion of management. Plan assets are invested primarily in group
annuity contracts of NLIC.
The Company elected to immediately recognize its estimated accumulated
postretirement benefit obligation (APBO), however, certain affiliated
companies elected to amortize their initial transition obligation over
periods ranging from 10 to 20 years.
The Company's accrued postretirement benefit expense as of December 31,
1998 and 1997 was $40.1 million and $36.5 million, respectively, and
the net periodic postretirement benefit cost (NPPBC) for 1998, 1997 and
1996 was $4.1 million, $3.0 million and $3.3 million, respectively.
Information regarding the funded status of the pension plan as a whole
and the postretirement life and health care benefit plan as a whole as
of December 31, 1998 and 1997 follows:
Pension Benefits Postretirement Benefits
--------------------- -----------------------
(in millions of dollars) 1998 1997 1998 1997
--------------------------------------------------------- -------- -------- -------- -------
Change in benefit obligation:
Benefit obligation at beginning of year $2,033.8 $1,847.8 $237.9 $ 200.7
Service cost 87.6 77.3 9.8 7.0
Interest cost 123.4 118.6 15.4 14.0
Actuarial loss 123.2 60.0 15.6 24.4
Plan curtailment in 1998/merger in 1997 (107.2) 1.5 - -
Benefits paid (75.8) (71.4) (8.6) (8.2)
-------- -------- ------- -------
Benefit obligation at end of year 2,185.0 2,033.8 270.1 237.9
-------- -------- ------- -------
Change in plan assets:
Fair value of plan assets at beginning of year 2,212.9 1,947.9 69.2 63.0
Actual return on plan assets 300.7 328.1 5.0 3.6
Employer contribution 104.1 7.2 12.1 10.6
Plan merger - 1.1 - -
Benefits paid (75.8) (71.4) (8.4) (8.0)
-------- -------- ------- -------
Fair value of plan assets at end of year 2,541.9 2,212.9 77.9 69.2
-------- -------- ------- -------
Funded status 356.9 179.1 (192.2) (168.7)
Unrecognized prior service cost 31.5 34.7 - -
Unrecognized net (gains) losses (345.7) (330.7) 16.0 1.6
Unrecognized net (asset) obligation at transition (11.0) 33.3 1.3 1.5
-------- -------- ------- -------
Prepaid (accrued) benefit cost $ 31.7 $ (83.6) $(174.9) $(165.6)
======== ======== ======= =======
F-19
46
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Basis for measurements, funded status of the pension plan and
postretirement life and health care benefit plan:
Pension Benefits Postretirement Benefits
-------------------- -----------------------
1998 1997 1998 1997
-------- ------ -------- --------
Weighted average discount rate 5.50% 6.00% 6.65% 6.70%
Rate of increase in future compensation levels 3.75% 4.25% -- --
Assumed health care cost trend rate:
Initial rate -- -- 15.00% 12.13%
Ultimate rate -- -- 8.00% 6.12%
Uniform declining period -- -- 15 Years 12 Years
The net periodic pension cost for the pension plan as a whole for the
years ended December 31, 1998, 1997 and 1996 follows:
(in millions of dollars) 1998 1997 1996
-------------------------------------------------------------------------------- ---- ----
Service cost (benefits earned during the period) $ 87.6 $ 77.3 $ 75.5
Interest cost on projected benefit obligation 123.4 118.6 105.5
Expected return on plan assets (159.0) (139.0) (116.1)
Recognized gains (3.8) - -
Amortization of prior service cost 3.2 3.2 3.2
Amortization of unrecognized transition obligation 4.2 4.2 4.1
------- ------- -------
$ 55.6 $ 64.3 $ 72.2
======= ======= =======
Effective December 31, 1998, Wausau Service Corporation (WSC) ended its
affiliation with the Nationwide Insurance Enterprise and employees of
WSC ended participation in the plan. A curtailment gain of $67.1
million resulted (consisting of a $107.2 million reduction in the
projected benefit obligation, net of the write-off of the $40.1 million
remaining unamortized transition obligation related to WSC). The
Company anticipates that the plan will settle the obligation related to
WSC employees with a transfer of assets during 1999.
Basis for measurements, net periodic pension cost for the pension plan:
1998 1997 1996
---- ---- ----
Weighted average discount rate 6.00% 6.50% 6.00%
Rate of increase in future compensation levels 4.25% 4.75% 4.25%
Expected long-term rate of return on plan assets 7.25% 7.25% 6.75%
F-20
47
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The amount of NPPBC for the postretirement benefit plan as a whole for
the years ended December 31, 1998, 1997 and 1996 was as follows:
(in millions of dollars) 1998 1997 1996
---- ---- ----
Service cost (benefits attributed to employee service during the year) $ 9.8 $ 7.0 $ 6.5
Interest cost on accumulated postretirement benefit obligation 15.4 14.0 13.7
Actual return on plan assets (5.0) (3.6) (4.3)
Amortization of unrecognized transition obligation of affiliates 0.2 0.2 0.2
Net amortization and deferral 1.2 (0.5) 1.8
----- ----- -----
$21.6 $17.1 $17.9
===== ===== =====
Actuarial assumptions used for the measurement of the accumulated
postretirement benefit obligation (APBO) and the NPPBC for the
postretirement benefit plan for 1998, 1997 and 1996 were as follows:
1998 1997 1996
----- ----- ----
NPPBC:
Discount rate 6.70% 7.25% 6.65%
Long term rate of return on plan
assets, net of tax 5.83% 5.89% 4.80%
Assumed health care cost trend rate:
Initial rate 12.00% 11.00% 11.00%
Ultimate rate 6.00% 6.00% 6.00%
Uniform declining period 12 Years 12 Years 12 Years
For the postretirement benefit plan as a whole, a one percentage point
increase or decrease in the assumed health care cost trend rate would
have no impact on the APBO as of December 31, 1998 and have no impact
on the NPPBC for the year ended December 31, 1998.
(9) Shareholder's Equity, Regulatory Risk-Based Capital, Retained Earnings
----------------------------------------------------------------------
and Dividend Restrictions
-------------------------
Ohio, NLIC's and NLAIC's state of domicile, imposes minimum risk-based
capital requirements that were developed by the NAIC. The formulas for
determining the amount of risk-based capital specify various weighting
factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk. Regulatory compliance
is determined by a ratio of the company's regulatory total adjusted
capital, as defined by the NAIC, to its authorized control level
risk-based capital, as defined by the NAIC. Companies below specific
trigger points or ratios are classified within certain levels, each of
which requires specified corrective action. NLIC and NLAIC each exceed
the minimum risk-based capital requirements.
The statutory capital and surplus of NLIC as of December 31, 1998, 1997
and 1996 was $1.32 billion, $1.13 billion and $1.00 billion,
respectively. The statutory net income of NLIC for the years ended
December 31, 1998, 1997 and 1996 was $171.0 million, $111.7 million and
$73.2 million, respectively.
The Company is limited in the amount of shareholder dividends it may
pay without prior approval by the Department. As of December 31, 1998,
the maximum amount available for dividend payment from the Company to
its shareholder without prior approval of the Department was $71.0
million.
F-21
48
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
In addition, the payment of dividends by NLIC may also be subject to
restrictions set forth in the insurance laws of New York that limit the
amount of statutory profits on NLIC's participating policies (measured
before dividends to policyholders) that can inure to the benefit of the
Company and its shareholder.
The Company currently does not expect such regulatory requirements to
impair its ability to pay operating expenses and shareholder dividends
in the future.
(10) Transactions With Affiliates
----------------------------
As part of the restructuring described in note 1, NLIC paid a dividend
valued at $485.7 million to Nationwide Corp. on January 1, 1997
consisting of the outstanding shares of common stock of ELICW, National
Casualty Company (NCC) and West Coast Life Insurance Company (WCLIC).
Also, on February 24, 1997, NLIC paid a dividend to NFS, and NFS paid
an equivalent dividend to Nationwide Corp., consisting of securities
having an aggregate fair value of $850.0 million. The Company
recognized a gain of $14.4 million on the transfer of securities.
The Company leases office space from NMIC and certain of its
subsidiaries. For the years ended December 31, 1998, 1997 and 1996, the
Company made lease payments to NMIC and its subsidiaries of $8.0
million, $8.4 million and $9.1 million, respectively.
Pursuant to a cost sharing agreement among NMIC and certain of its
direct and indirect subsidiaries, including the Company, NMIC provides
certain operational and administrative services, such as sales support,
advertising, personnel and general management services, to those
subsidiaries. Expenses covered by this agreement are subject to
allocation among NMIC, the Company and other affiliates. Amounts
allocated to the Company were $95.0 million, $85.8 million and $101.6
million in 1998, 1997 and 1996, 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 inter-company 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 $31.9 million and $20.5 million as of
December 31, 1998 and 1997, 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 1998 and
1997 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-22
49
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Intercompany reinsurance agreements 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 the Company'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 the Company's 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 the Company for the Company'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. The Company believes that the terms of
the modified coinsurance agreements are consistent in all material
respects with what the Company could have obtained with unaffiliated
parties. Amounts ceded to NMIC and ELICW for the years ended December
31, 1998, 1997 and 1996 were:
1998 1997 1996
------------------------------------------------------------------------------------
(in millions of dollars) NMIC ELICW NMIC ELICW NMIC ELICW
-----------------------------------------------------------------------------------------------------------------------
Premiums $90.1 $106.3 $ 91.4 $199.8 $ 97.3 $224.2
Net investment income and other
revenue $11.1 $ 9.4 $ 10.7 $ 13.4 $ 10.9 $ 14.8
Benefits, claims and expenses $98.8 $160.5 $100.7 $225.9 $100.5 $246.6
The Company and various affiliates entered into agreements with
Nationwide Cash Management Company (NCMC), an affiliate, under which
NCMC acts as a common agent in handling the purchase and sale of
short-term securities for the respective accounts of the participants.
Amounts on deposit with NCMC were $248.4 million and $211.0 million as
of December 31, 1998 and 1997, respectively, and are included in
short-term investments on the accompanying consolidated balance sheets.
Certain annuity products are sold through three affiliated companies,
which are also subsidiaries of NFS. Total commissions and fees paid to
these affiliates for the three years ended December 31, 1998 were $60.0
million, $66.1 million and $76.9 million, respectively.
(11) Bank Lines of Credit
--------------------
In August 1996, NLIC, along with NMIC, entered into a $600.0 million
revolving credit facility which provides for a $600.0 million loan over
a five year term on a fully revolving basis with a group of national
financial institutions. The credit facility provides for several and
not joint liability with respect to any amount drawn by 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. In September 1997,
the credit agreement was amended to include NFS as a party to and
borrower under the agreement. As of December 31, 1998 the Company had
no amounts outstanding under the agreement.
F-23
50
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(12) Contingencies
-------------
On October 29, 1998, the Company and certain of its affiliates were
named in a lawsuit filed in the Common Pleas Court of Franklin County,
Ohio related to the sale of deferred annuity products for use as
investments in tax-deferred contributory retirement plans (Mercedes
Castillo v. Nationwide Financial Services, Inc., Nationwide Life
Insurance Company and Nationwide Life and Annuity Insurance Company).
The plaintiff in such lawsuit seeks to represent a national class of
the Company's customers and seeks unspecified compensatory and punitive
damages. The Company is currently evaluating this lawsuit, which is in
an early stage and has not been certified as a class. The Company
intends to defend this lawsuit vigorously.
(13) Segment Information
-------------------
The Company uses differences in products as the basis for defining its
reportable segments. The Company reports three product segments:
Variable Annuities, Fixed Annuities and Life Insurance.
The Variable Annuities segment 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 Company's
variable annuity products consist almost entirely of flexible premium
deferred variable annuity contracts.
The Fixed Annuities segment consists of annuity contracts that generate
a return for the customer at a specified interest rate, fixed for a
prescribed period, 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 includes the fixed option under variable
annuity contracts.
The Life Insurance segment consists of insurance products, including
variable universal life insurance and corporate-owned life insurance
products, that provide a death benefit and may also allow the customer
to build cash value on a tax-deferred basis.
In addition to the product segments, the Company reports corporate
revenue and expenses, investments and related investment income
supporting capital not specifically allocated to its product segments,
revenues and expenses of its investment advisor subsidiary (other than
the portion allocated to the Variable Annuities and Life Insurance
segments), revenues and expenses related to group annuity contracts
sold to Nationwide Insurance Enterprise employee and agent benefit
plans and all realized gains and losses on investments in a Corporate
and Other segment.
F-24
51
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The following table summarizes the financial results of the Company's business
segments for the years ended December 31, 1998, 1997 and 1996.
Variable Fixed Life Corporate
(in millions of dollars) Annuities Annuities Insurance and Other Total
- ------------------------------------ --------- --------- --------- --------- -----
1998:
Net investment income (1) $ (31.3) $ 1,116.6 $ 231.6 $ 164.7 $ 1,481.6
Other operating revenue 560.8 35.7 319.6 49.6 965.7
--------- --------- -------- -------- ---------
Total operating revenue (2) 529.5 1,152.3 551.2 214.3 2,447.3
--------- --------- -------- -------- ---------
Interest credited to policyholder
account balances -- 828.6 115.4 125.0 1,069.0
Amortization of deferred policy
acquisition costs 123.9 44.2 46.4 -- 214.5
Other benefits and expenses 187.2 104.2 294.6 49.1 635.1
--------- --------- -------- -------- ---------
Total expenses 311.1 977.0 456.4 174.1 1,918.6
--------- --------- -------- -------- ---------
Operating income (loss) before
federal income tax 218.4 175.3 94.8 40.2 528.7
Realized gains on investments -- -- -- 28.4 28.4
--------- --------- -------- -------- ---------
Consolidated income before
federal tax expense $ 218.4 $ 175.3 $ 94.8 $ 68.6 $ 557.1
========= ========= ======== ======== =========
Assets as of year end $47,668.7 $15,215.7 $5,187.6 $6,270.1 $74,342.1
========= ========= ======== ======== =========
1997:
Net investment income (1) $ (26.9) $ 1,098.2 $ 189.1 $ 148.8 $ 1,409.2
Other operating revenue 430.9 43.2 284.0 39.0 797.1
--------- --------- -------- -------- ---------
Total operating revenue (2) 404.0 1,141.4 473.1 187.8 2,206.3
--------- --------- -------- -------- ---------
Interest credited to policyholder
account balances -- 823.4 78.5 114.7 1,016.6
Amortization of deferred policy
acquisition costs 87.8 39.8 39.6 -- 167.2
Other benefits and expenses 165.3 108.7 284.1 45.6 603.7
--------- --------- -------- -------- ---------
Total expenses 253.1 971.9 402.2 160.3 1,787.5
--------- --------- -------- -------- ---------
Operating income before federal
income tax 150.9 169.5 70.9 27.5 418.8
Realized gains on investments -- -- -- 11.1 11.1
--------- --------- -------- -------- ---------
Consolidated income before
federal tax expense $ 150.9 $ 169.5 $ 70.9 $ 38.6 $ 429.9
========= ========= ======== ======== =========
Assets as of year end $35,278.7 $14,436.3 $3,901.4 $6,174.3 $59,790.7
========= ========= ======== ======== =========
F-25
52
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Variable Fixed Life Corporate
(in millions of dollars) Annuities Annuities Insurance and Other Total
------------------------------------ ---------- ---------- --------- --------- ---------
1996:
Net investment income (1) $ (21.5) $ 1,050.6 $ 174.0 $ 154.7 $ 1,357.8
Other operating revenue 306.1 42.0 261.6 25.7 635.4
---------- ---------- --------- --------- ---------
Total operating revenue (2) 284.6 1,092.6 435.6 180.4 1,993.2
---------- ---------- --------- --------- ---------
Interest credited to policyholder
account balances -- 805.0 70.2 107.1 982.3
Amortization of deferred policy
acquisition costs 57.4 38.6 37.4 -- 133.4
Benefits and expenses 136.9 113.6 260.8 50.4 561.7
---------- ---------- --------- --------- ---------
Total expenses 194.3 957.2 368.4 157.5 1,677.4
---------- ---------- --------- --------- ---------
Operating income before federal
income tax 90.3 135.4 67.2 22.9 315.8
Realized losses on investments -- -- -- (0.3) (0.3)
---------- ---------- --------- --------- ---------
Consolidated income from
continuing operations before
federal tax expense $ 90.3 $ 135.4 $ 67.2 $ 22.6 $ 315.5
========== ========== ======== ======== =========
Assets as of year end $ 25,069.7 $ 13,994.7 $3,353.3 $5,348.5 $47,766.2
========== ========== ======== ======== =========
-----------
(1) The Company's method of allocating net investment income results
in a charge (negative net investment income) to the Variable
Annuities segment which is recognized in the Corporate and Other
segment. The charge relates to non-invested assets which support
this segment on a statutory basis.
(2) Excludes realized gains and losses on investments.
The Company has no significant revenue from customers located outside
of the United States nor does the Company have any significant
long-lived assets located outside the United States.
(14) Discontinued Operations
-----------------------
As discussed in note 1, NFS is a holding company for NLIC and certain
other companies within the Nationwide Insurance Enterprise that offer
or distribute long-term savings and retirement products. Prior to the
contribution by Nationwide Corp. of the outstanding common stock of
NLIC to NFS, 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
payable to Nationwide Corp. on January 1, 1997 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 with offices in Scottsdale, Arizona
that serves as a fronting company for a property and casualty
subsidiary of NMIC. 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 in the
accompanying consolidated financial statements through December 31,
1996. The Company did not recognize any gain or loss on the disposal of
these subsidiaries.
F-26
53
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Also, 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 10 for a
complete discussion of the reinsurance agreements. The Company 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. NLIC's accident and health and group life insurance business
is accounted for as discontinued operations for all periods presented.
The Company 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 the Company.
A summary of the results of operations of discontinued operations for
the years ended December 31, 1998, 1997 and 1996 is as follows:
(in millions of dollars) 1998 1997 1996
---- ---- ----
Revenues $ -- $ -- $ 668.9
Net income $ -- $ -- $ 11.3
A summary of the assets and liabilities of discontinued operations as
of December 31, 1998, 1997 and 1996 is as follows:
(in millions of dollars) 1998 1997 1996
---- ---- ----
Assets, consisting primarily of investments $221.5 $247.3 $3,288.5
Liabilities, consisting primarily of policy benefits and claims $221.5 $247.3 $2,802.8
F-27
54
SCHEDULE I
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
(in millions of dollars)
As of December 31, 1998
- ----------------------------------------------------------------------------- ----------- ----------- --------------
Column A Column B Column C Column D
- ----------------------------------------------------------------------------- ----------- ----------- --------------
Amount at
which shown
in the
Market consolidated
Type of Investment Cost value balance sheet
- ----------------------------------------------------------------------------- ---------- --------- -------------
Fixed maturity securities available-for-sale:
Bonds:
U.S. Government and government agencies and authorities $ 3,713.6 $ 3,828.4 $ 3,828.4
States, municipalities and political subdivisions 1.6 1.6 1.6
Foreign governments 106.5 111.0 111.0
Public utilities 1,456.9 1,475.8 1,475.8
All other corporate 8,442.7 8,828.3 8,828.3
--------- --------- ---------
Total fixed maturity securities available-for-sale 13,721.3 14,245.1 14,245.1
--------- --------- ---------
Equity securities available-for-sale:
Common stocks:
Industrial, miscellaneous and all other 110.4 127.2 127.2
Non-redeemable preferred stock -- -- --
--------- --------- ---------
Total equity securities available-for-sale 110.4 127.2 127.2
--------- --------- ---------
Mortgage loans on real estate, net 5,371.7 5,328.4 (1)
Real estate, net:
Investment properties 184.6 186.8 (1)
Acquired in satisfaction of debt 60.0 56.8 (1)
Policy loans 464.3 464.3
Other long-term investments 43.1 44.0 (2)
Short-term investments 289.1 289.1
--------- ---------
Total investments $20,244.5 $20,741.7
========= =========
- ----------
(1) Difference from Column B is primarily due to valuation allowances due to
impairments on mortgage loans on real estate and due to accumulated
depreciation and valuation allowances due to impairments on real estate.
See note 3 to the consolidated financial statements.
(2) Difference from Column B is primarily due to operating gains (losses) of
investments in limited partnerships.
See accompanying independent auditors' report.
F-28
55
SCHEDULE III
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(in millions of dollars)
As of December 31, 1998, 1997 and 1996 and for each of the years then ended
- ---------------------------------------------------- -------------------- ------------------- ------------------ ---------------
Column A Column B Column C Column D Column E Column F
- ---------------------------------------------------- -------------------- ------------------- ------------------ ---------------
Deferred Future policy Other policy
policy benefits, losses, Unearned claims and
acquisition claims and premiums benefits payable Premium
Segment costs loss expenses (1) (1) revenue
- ---------------------------------------------------- -------------------- ------------------- ------------------ ---------------
1998: Variable Annuities $1,247.9 $ -- $ --
Fixed Annuities 316.7 14,592.3 23.1
Life Insurance 574.2 3,173.9 176.9
Corporate and Other (116.6) 2,000.9 -
-------- --------- ------
Total $2,022.2 $19,767.1 $200.0
======== ========= ======
1997: Variable Annuities $1,018.4 $ -- $ --
Fixed Annuities 277.9 14,103.1 27.3
Life Insurance 472.9 2,683.4 178.1
Corporate and Other (103.8) 1,916.3 -
-------- --------- ------
Total $1,665.4 $18,702.8 $205.4
======== ========= ======
1996: Variable Annuities $ 792.1 $ -- $ --
Fixed Annuities 242.0 13,388.9 24.0
Life Insurance 414.4 2,391.5 174.6
Corporate and Other (82.0) 1,820.2 --
-------- --------- ------
Total $1,366.5 $17,600.6 $198.6
======== ========= ======
- ----------------------------------- ---------------- -------------------- ------------------- ------------------ ---------------
Column A Column G Column H Column I Column J Column K
- ----------------------------------- ---------------- -------------------- ------------------- ------------------ ---------------
Net investment Benefits, claims, Amortization Other
income losses and of deferred policy operating Premiums
Segment (2) settlement expenses acquisition costs expenses (2) written
- ----------------------------------- ---------------- -------------------- ------------------- ------------------ ---------------
1998: Variable Annuities $ (31.3) $ 3.5 $123.9 $183.7
Fixed Annuities 1,116.6 847.6 44.2 85.2
Life Insurance 231.6 268.7 46.4 101.7
Corporate and Other 164.7 125.0 -- 49.1
-------- -------- ------ ------
Total $1,481.6 $1,244.8 $214.5 $419.7
======== ======== ====== ======
1997: Variable Annuities $ (26.8) $ 5.9 $ 87.8 $159.4
Fixed Annuities 1,098.2 846.7 39.8 85.4
Life Insurance 189.1 227.5 39.6 94.5
Corporate and Other 148.7 114.7 -- 45.6
-------- -------- ------ ------
Total $1,409.2 $1,194.8 $167.2 $384.9
======== ======== ====== ======
1996: Variable Annuities $ (21.4) $ 4.6 $ 57.4 $132.3
Fixed Annuities 1,050.6 838.5 38.6 79.7
Life Insurance 174.0 211.4 37.4 79.0
Corporate and Other 154.6 106.1 -- 51.4
-------- -------- ------ ------
Total $1,357.8 $1,160.6 $133.4 $342.4
======== ======== ====== ======
- ----------
(1) Unearned premiums and other policy claims and benefits payable are included
in Column C amounts.
(2) Allocations of net investment income and certain operating expenses are
based on a number of assumptions and estimates, and reported operating
results would change by segment if different methods were applied.
See accompanying independent auditors' report.
F-29
56
SCHEDULE IV
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
REINSURANCE
(in millions of dollars)
As of December 31, 1998, 1997 and 1996 and for each of the years then ended
- -------------------------------------- --------- ---------- ---------- --------- ---------
Column A Column B Column C Column D Column E Column F
- -------------------------------------- --------- ---------- ---------- --------- ----------
Percentage
Ceded to Assumed of amount
Gross other From other Net assumed
amount companies Companies amount to net
--------- ---------- ---------- --------- ----------
1998:
Life insurance in force $61,789.2 $16,504.0 $ 28.0 $45,313.2 0.1%
========= ========= ====== ========= ===
Premiums:
Life insurance $ 225.4 $ 27.4 $ 2.0 $ 200.0 1.0%
Accident and health insurance 169.7 179.4 9.7 -- N/A
--------- --------- ------ --------- ---
Total $ 395.1 $ 206.8 $ 11.7 $ 200.0 5.8%
========= ========= ====== ========= ===
1997:
Life insurance in force $52,648.4 $13,678.7 $289.7 $39,259.4 0.7%
========= ========= ====== ========= ===
Premiums:
Life insurance $ 235.9 $ 32.7 $ 2.2 $ 205.4 1.1%
Accident and health insurance 261.2 272.6 11.4 -- N/A
--------- --------- ------ --------- ---
Total $ 497.1 $ 305.3 $ 13.6 $ 205.4 6.6%
========= ========= ====== ========= ===
1996:
Life Insurance in force $47,150.6 $11,164.6 $288.6 $36,274.6 0.8%
========= ========= ====== ========= ===
Premiums:
Life insurance $ 225.6 $ 29.3 $ 2.3 $ 198.6 1.2%
Accident and health insurance 291.9 305.8 13.9 -- N/A
--------- --------- ------ --------- ---
Total $ 517.5 $ 335.1 $ 16.2 $ 198.6 8.2%
========= ========= ====== ========= ===
- ----------
Note: The life insurance caption represents principally premiums from
traditional life insurance and life-contingent immediate annuities and
excludes deposits on investment products and universal life insurance
products.
See accompanying independent auditors' report.
F-30
57
SCHEDULE V
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in millions of dollars)
Years ended December 31, 1998, 1997 and 1996
- -------------------------------------------------------- ------------- ---------------------- ----------- -----------
Column A Column B Column C Column D Column E
- -------------------------------------------------------- ------------- ---------------------- ----------- -----------
Balance at Charged to Charged to Balance at
beginning costs and other Deductions end of
Description of period expenses accounts (1) period
- -------------------------------------------------------- ------------- ----------- ---------- ----------- -----------
1998:
Valuation allowances - fixed maturity securities $ -- $ 7.5 $-- $ -- $ 7.5
Valuation allowances - mortgage loans on real estate 42.5 (0.1) -- -- 42.4
Valuation allowances - real estate 11.1 (5.7) -- -- 5.4
----- ------ --- ----- -----
Total $53.6 $ 1.7 $-- $ -- $55.3
===== ====== === ===== =====
1997:
Valuation allowances - fixed maturity securities $ -- $ 16.2 $-- $16.2 $ --
Valuation allowances - mortgage loans on real estate 51.0 (1.2) -- 7.3 42.5
Valuation allowances - real estate 15.2 (4.1) -- -- 11.1
----- ------ --- ----- -----
Total $66.2 $ 10.9 $-- $23.5 $53.6
===== ====== === ===== =====
1996:
Valuation allowances - mortgage loans on real estate $49.1 $ 4.5 $-- $ 2.6 $51.0
Valuation allowances - real estate 25.8 (10.6) -- -- 15.2
----- ------ --- ----- -----
Total $74.9 $ (6.1) $-- $ 2.6 $66.2
===== ====== === ===== =====
- ----------
(1) Amounts represent direct write-downs charged against the valuation
allowance.
See accompanying independent auditors' report.
F-31