NATIONWIDE FINANCIAL SERVICES INC/ - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-12785

LOGO

NATIONWIDE FINANCIAL SERVICES, INC.

(Exact name of registrant as specified in its charter)


Delaware		31-1486870
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

One Nationwide Plaza, Columbus, Ohio		43215
(Address of principal executive offices)		(Zip Code)

(614) 249-7111

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x No ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

As of April 29, 2005, the registrant had 52,337,521 shares outstanding of its Class A common stock (par value $0.01 per share) and 95,633,767 shares outstanding of its Class B common stock (par value $0.01 per share).

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION				1

ITEM 1 Unaudited Consolidated Financial Statements				1

ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations				22

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk				51

ITEM 4 Controls and Procedures				52

PART II – OTHER INFORMATION				52

ITEM 1 Legal Proceedings				52

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds				54

ITEM 3 Defaults Upon Senior Securities				54

ITEM 4 Submission of Matters to a Vote of Security Holders				55

ITEM 5 Other Information				55

ITEM 6 Exhibits				55

SIGNATURE				56

PART I – FINANCIAL INFORMATION

ITEM 1 Unaudited Consolidated Financial Statements

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

(in millions, except per share amounts)


	Three months ended March 31,
	2005		2004
Revenues:
Policy charges	$	312.9	$	306.1
Life insurance premiums		95.9		96.7
Net investment income		585.3		568.5
Net realized gains (losses) on investments, hedging instruments and hedged items		26.3		(13.3	)
Other		89.6		69.0

Total revenues		1,110.0		1,027.0

Benefits and expenses:
Interest credited to policyholder account values		340.6		335.2
Other benefits and claims		131.6		130.1
Policyholder dividends on participating policies		26.9		22.2
Amortization of deferred policy acquisition costs		125.5		111.1
Amortization of value of business acquired		12.0		12.5
Interest expense on debt		25.7		25.4
Other operating expenses		226.5		225.2

Total benefits and expenses		888.8		861.7

Income from continuing operations before federal income tax expense		221.2		165.3
Federal income tax expense		60.7		42.3

Income from continuing operations		160.5		123.0
Cumulative effect of adoption of accounting principle, net of taxes		—		(3.4	)

Net income	$	160.5	$	119.6

Earnings per common share:
Basic	$	1.05	$	0.79
Diluted	$	1.05	$	0.78

Weighted average common shares outstanding:
Basic		152.7		152.0
Diluted		153.5		152.9

Cash dividends declared per common share	$	0.19	$	0.18

See accompanying notes to unaudited consolidated financial statements,

including Note 10 which describes related party transactions.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in millions, except per share amounts)


	March 31, 2005			December 31, 2004
	(Unaudited)
Assets
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $30,595.5 in 2005; $30,423.2 in 2004)	$	31,188.2		$	31,516.8
Equity securities (cost $64.2 in 2005; $73.1 in 2004)		77.5			87.0
Trading assets, at fair value		26.0			15.9
Mortgage loans on real estate, net		9,127.8			9,267.5
Real estate, net		108.6			108.3
Policy loans		921.9			987.2
Other long-term investments		581.8			604.2
Short-term investments, including amounts managed by a related party		2,126.1			2,009.9

Total investments		44,157.9			44,596.8

Cash		38.3			52.4
Accrued investment income		427.3			428.7
Deferred policy acquisition costs		3,706.0			3,561.1
Value of business acquired		477.0			480.4
Other intangible assets		48.6			48.7
Goodwill		400.5			382.3
Other assets		2,383.5			2,497.0
Assets held in separate accounts		64,366.8			64,903.2

Total assets	$	116,005.9		$	116,950.6

Liabilities and Shareholders’ Equity
Liabilities:
Future policy benefits and claims	$	40,816.2		$	41,077.2
Short-term debt		182.9			230.8
Long-term debt		1,406.4			1,406.0
Other liabilities		4,086.3			4,118.3
Liabilities related to separate accounts		64,366.8			64,903.2

Total liabilities		110,858.6			111,735.5

Shareholders’ equity:
Preferred stock, $0.01 par value; authorized - 50.0 shares; issued and outstanding - none		—			—
Class A common stock, $0.01 par value; authorized - 750.0 shares; issued - 66.7 and 66.2 shares in 2005 and 2004, respectively; outstanding - 57.4 and 56.9 shares in 2005 and 2004, respectively		0.7			0.7
Class B common stock, $0.01 par value; authorized - 750.0 shares; issued and outstanding - 95.6 shares		1.0			1.0
Additional paid-in capital		1,647.8			1,634.6
Retained earnings		3,528.5			3,400.0
Accumulated other comprehensive income		222.6			432.2
Treasury stock		(251.4	)		(251.4	)
Other, net		(1.9	)		(2.0	)

Total shareholders’ equity		5,147.3			5,215.1

Total liabilities and shareholders’ equity	$	116,005.9		$	116,950.6

See accompanying notes to unaudited consolidated financial statements,

including Note 10 which describes related party transactions.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

Three Months Ended March 31, 2005 and 2004

(Unaudited)

(in millions)


	Class A common stock		Class B common stock		Additional paid-in capital		Retained earnings			Accumulated other comprehensive income			Treasury stock			Other, net			Total shareholders’ equity
Balance as of December 31, 2003	$	0.6	$	1.0	$	1,614.3	$	3,006.4		$	504.9		$	(247.6	)	$	(4.2	)	$	4,875.4

Comprehensive income:
Net income		—		—		—		119.6			—			—			—			119.6
Net unrealized gains on securities available-for-sale arising during the period, net of taxes		—		—		—		—			153.9			—			—			153.9
Accumulated net gains on cash flow hedges, net of taxes		—		—		—		—			5.0			—			—			5.0

Total comprehensive income																				278.5

Cash dividends declared		—		—		—		(26.3	)		—			—			—			(26.3	)
Other, net		—		—		6.3		0.1			—			(3.3	)		0.5			3.6

Balance as of March 31, 2004	$	0.6	$	1.0	$	1,620.6	$	3,099.8		$	663.8		$	(250.9	)	$	(3.7	)	$	5,131.2

Balance as of December 31, 2004	$	0.7	$	1.0	$	1,634.6	$	3,400.0		$	432.2		$	(251.4	)	$	(2.0	)	$	5,215.1

Comprehensive loss:
Net income		—		—		—		160.5			—			—			—			160.5
Net unrealized losses on securities available-for-sale arising during the period, net of taxes		—		—		—		—			(213.5	)		—			—			(213.5	)
Accumulated net gains on cash flow hedges, net of taxes		—		—		—		—			3.9			—			—			3.9

Total comprehensive loss																				(49.1	)

Cash dividends declared		—		—		—		(29.1	)		—			—			—			(29.1	)
Other, net		—		—		13.2		(2.9	)		—			—			0.1			10.4

Balance as of March 31, 2005	$	0.7	$	1.0	$	1,647.8	$	3,528.5		$	222.6		$	(251.4	)	$	(1.9	)	$	5,147.3

See accompanying notes to unaudited consolidated financial statements,

including Note 10 which describes related party transactions.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(in millions)


	Three months ended March 31,
	2005			2004
Cash flows from operating activities:
Net income	$	160.5		$	119.6
Adjustments to reconcile net income to net cash provided by operating activities:
Interest credited to policyholder account values		340.6			335.2
Capitalization of deferred policy acquisition costs		(133.0	)		(156.9	)
Amortization of deferred policy acquisition costs		125.5			111.1
Amortization and depreciation		33.7			39.1
Net realized (gains) losses on investments, hedging instruments and hedged items		(26.3	)		13.3
Decrease (increase) in accrued investment income		1.4			(7.6	)
Decrease (increase) in other assets		119.1			(9.0	)
Increase in policy liabilities		3.0			89.5
(Decrease) increase in other liabilities		(61.2	)		432.3
Other, net		(3.4	)		(7.8	)

Net cash provided by operating activities		559.9			958.8

Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale		2,121.4			1,008.7
Proceeds from sale of securities available-for-sale		929.1			222.3
Proceeds from repayments of mortgage loans on real estate		430.2			355.5
Proceeds from repayments of policy loans and sale of other invested assets		111.0			39.9
Cost of securities available-for-sale acquired		(3,143.2	)		(1,415.1	)
Cost of mortgage loans on real estate originated on acquired		(284.6	)		(697.4	)
Net change in short-term investments		(115.5	)		277.0
Collateral received (paid) – securities lending, net		129.5			(77.3	)
Acquisition of subsidiary, net of cash acquired		(18.0	)		—
Other, net		4.2			(290.6	)

Net cash provided by (used in) investing activities		164.1			(577.0	)

Cash flows from financing activities:
Net change in short-term debt		(47.9	)		96.4
Cash dividends paid		(27.5	)		(19.8	)
Investment and universal life insurance product deposits		680.1			1,283.4
Investment and universal life insurance product withdrawals		(1,353.1	)		(1,723.7	)
Other, net		10.3			3.0

Net cash used in financing activities		(738.1	)		(360.7	)

Net (decrease) increase in cash		(14.1	)		21.1
Cash, beginning of period		52.4			11.5

Cash, end of period	$	38.3		$	32.6

See accompanying notes to unaudited consolidated financial statements,

including Note 10 which describes related party transactions.

NATIONWIDE FINANCIAL SERVICES, INC.

Notes to Unaudited Consolidated Financial Statements

March 31, 2005 and 2004

(1)

Basis of Presentation

The accompanying unaudited consolidated financial statements of Nationwide Financial Services, Inc. and subsidiaries (NFS, or collectively, the Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements. GAAP differs from statutory accounting practices prescribed or permitted by regulatory authorities. The financial information included herein reflects all adjustments (all of which are normal and recurring in nature) which are, in the opinion of management, necessary for a fair presentation of financial position and results of operations. Operating results for all periods presented are not necessarily indicative of the results that may be expected for the full year. All significant intercompany balances and transactions have been eliminated. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2004 included in the Company’s 2004 Annual Report on Form 10-K.

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.

(2)

Reclassification

Certain items in the unaudited consolidated financial statements and related notes have been reclassified to conform to the current presentation.

(3)

Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (SFAS 123), (revised 2004), Share-Based Payment (SFAS 123R), which replaces SFAS 123 and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). SFAS 123R requires companies to expense at fair value all costs resulting from share-based payment transactions, except for equity instruments held by employee share ownership plans. SFAS 123R also amended SFAS No. 95, Statement of Cash Flows, to require excess tax benefits to be reported as a financing cash inflow rather than as a reduction of taxes paid. SFAS 123R as issued by the FASB was effective for the Company as of the beginning of the first period that begins after June 15, 2005. As permitted by SFAS 123R, the Company planned to adopt the Statement effective July 1, 2005 using the modified prospective method. On March 29, 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 107, which summarizes the views of the SEC regarding the interaction between SFAS 123R and certain SEC rules and regulations and provides the SEC’s views on the valuation of share-based payment arrangements for public companies. The Company will consider this guidance in its adoption of SFAS 123R. On April 14, 2005, the SEC adopted a rule that amended the effective date of SFAS 123R. The SEC’s new rule allows companies to implement SFAS 123R at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005. The Company plans to adopt SFAS 123R effective January 1, 2006 using the modified prospective method. The Company expects to report stock compensation expense of approximately $8.3 million, net of taxes, in 2006 due to the adoption of SFAS 123R.

In March 2004, the Emerging Issues Task Force (EITF) reached consensus on further guidance concerning the identification of and accounting for other-than-temporary impairments and disclosures for cost method investments, as required by EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1), which was issued on October 23, 2003. The Company disclosed in its Quarterly Report on Form 10-Q for the period ended June 30, 2004 that this additional guidance would be applied during its third quarter beginning July 1, 2004. Also, effective June 30, 2004, the Company revised its method of evaluating securities to be sold based on additional interpretation of the intent to hold criteria in EITF 03-1. This revision had no impact on the Company’s financial position or results of operations.

NATIONWIDE FINANCIAL SERVICES, INC.

Notes to Unaudited Consolidated Financial Statements, Continued

March 31, 2005 and 2004

On September 8, 2004, the FASB exposed for comment FASB Staff Position (FSP) EITF Issue 03-1-a, which was intended to provide guidance related to the application of paragraph 16 of EITF 03-1, and proposed FSP EITF Issue 03-1-b, which proposed a delay in the effective date of EITF 03-1 for debt securities that are impaired because of interest rate and/or sector spread increases. Based on comments received on these proposals, on September 30, 2004 the FASB issued FSP EITF 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, which delayed the effectiveness of the guidance in EITF 03-1 in its entirety, with the exception of certain disclosure requirements. The delay had no impact on the Company’s financial position or results of operations. The Company continues to actively monitor its portfolio for any securities deemed to be other-than-temporarily impaired based on the guidance in SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and SEC SAB No. 59, Accounting for Noncurrent Marketable Equity Securities. Due to uncertainty regarding the ultimate guidance to be issued, the Company cannot reasonably estimate the impact on the Company’s financial position or results of operations, if any, of adopting EITF 03-1.

In June 2004, the FASB issued FSP FAS 97-1, Situations in Which Paragraphs 17(b) and 20 of FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, Permit or Require Accrual of an Unearned Revenue Liability (FSP FAS 97-1), to clarify the guidance related to unearned revenue reserves (URR). The primary purpose of FSP FAS 97-1 is to address the practice question of whether Statement of Position (SOP) 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-1), issued by the American Institute of Certified Public Accountants (AICPA), restricts the application of the URR guidance in SFAS No. 97 to situations in which profits are expected to be followed by losses. Because the Company was computing its URR in accordance with FSP FAS 97-1 at the time SOP 03-1 was adopted, the issuance of FSP FAS 97-1 had no impact on the Company’s financial position or results of operations at the time of adoption.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law on December 8, 2003. In accordance with FSP FAS 106-1, Accounting and Disclosure Requirements Related to The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP FAS 106-1), issued in January 2004, the Company elected to defer accounting for the effects of the Act until the FASB issues guidance on how to account for the provisions of the Act. In May 2004, the FASB issued FSP FAS 106-2, Accounting and Disclosure Requirements Related to The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP FAS 106-2), which superceded FSP FAS 106-1 and provided guidance on accounting and disclosures related to the Act. Specifically, measures of the accumulated postretirement benefit obligation and net periodic postretirement benefit cost on or after the date of enactment must reflect the effects of the Act. The Company’s adoption of FSP FAS 106-2, effective June 30, 2004, had no impact on the Company’s financial position or results of operations due the application of Company maximum contribution caps and because the Company does not apply to the United States government for benefit reimbursements.

In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88 and 106 (SFAS 132R). SFAS 132R provides revised disclosure guidance for pension and other postretirement benefit plans but does not change the measurement or recognition of those plans under existing guidance. Disclosures previously required under SFAS No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits, which was replaced by SFAS 132R, were retained. In addition, SFAS 132R requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans on both an interim period and annual basis. See Note 9 for required disclosures. The Company adopted SFAS 132R effective December 31, 2003, except for the provisions relating to annual disclosures about estimated benefit payments, which was adopted in the fourth quarter of 2004, as permitted by SFAS 132R. Adoption of SFAS 132R had no impact on the Company’s financial position or results of operations.

In July 2003, the AICPA issued SOP 03-1 to address many topics. The most significant topic affecting the Company was the accounting for contracts with guaranteed minimum death benefits (GMDB). SOP 03-1 requires companies to evaluate the significance of a GMDB to determine whether a contract should be accounted for as an investment or insurance contract. For contracts determined to be insurance contracts, companies are required to establish a reserve to recognize a portion of the assessment (revenue) that compensates the insurance company for benefits to be provided in future periods. SOP 03-1 also provides guidance on separate account presentation, interest in separate accounts, gains and losses on the transfer of assets from the general account to a separate account, liability valuation, return based on a contractually referenced pool of assets or index, annuitization options, and sales inducements to contract holders. The Company adopted SOP 03-1 effective January 1, 2004, which resulted in a $3.4 million charge, net of taxes, as the cumulative effect of adoption of this accounting principle.

NATIONWIDE FINANCIAL SERVICES, INC.

Notes to Unaudited Consolidated Financial Statements, Continued

March 31, 2005 and 2004

The following table summarizes the components of cumulative effect adjustments recorded in the Company’s 2004 consolidated statements of income:


(in millions)	January 1, 2004
Increase in future policy benefits:
Ratchet interest crediting	$	(12.3	)
Secondary guarantees - life insurance		(2.4	)
GMDB claim reserves		(2.0	)
Guaranteed minimum income benefits (GMIB) claim reserves		(0.4	)

Subtotal		(17.1	)
Adjustment to amortization of deferred policy acquisition costs related to above		11.9
Deferred federal income taxes		1.8

Cumulative effect of adoption of accounting principle, net of taxes	$	(3.4	)

(4)

Stock-Based Compensation

The Company sponsors the Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity Compensation Plan (LTEP) covering selected employees, directors and agents of the Company and certain of its affiliates. The LTEP provides for the grant of any or all of the following types of awards: (i) stock options for shares of Class A common stock; (ii) stock appreciation rights (SARs), either in tandem with stock options or freestanding; (iii) restricted stock; (iv) performance shares and performance units; and (v) Nationwide value added, or NVA awards, which may be paid in cash or in shares of Class A common stock (or a combination of cash and shares). The LTEP provides that it will remain in effect subject to the right of the Company’s Board of Directors to terminate it sooner, until all shares subject to the LTEP have been delivered under awards. However, in no event may any LTEP award of incentive stock options be granted on or after February 27, 2012. The number of shares of Class A common stock that may be issued under the LTEP, or as to which SARs or other awards may be granted, currently may not exceed 20.1 million. Stock options granted under the LTEP have ten-year terms. For the substantial majority of stock options granted under the LTEP, one third of the options vest and become fully exercisable at the end of each of three years of continued employment or upon retirement.

The fair values of stock options are estimated on the dates of grant using a Black-Scholes option-pricing model. The following weighted average assumptions were used for the periods indicated:


	Three months ended March 31,
	2005		2004
Risk free interest rate	3.77	%	3.10	%
Dividend yield	2.06	%	2.01	%
Volatility factor	0.3281		0.3134
Weighted average expected option life	5.5 Years		5.5 Years

NATIONWIDE FINANCIAL SERVICES, INC.

Notes to Unaudited Consolidated Financial Statements, Continued

March 31, 2005 and 2004

The following table summarizes the Company’s stock option activity and related information for the periods indicated:


	Three months ended March 31,
	2005				2004
	Options on Class A common stock		Weighted average exercise price		Options on Class A common stock		Weighted average exercise price
Outstanding, beginning of period	8,162,893		$	34.49	8,315,880		$	33.42
Granted	1,002,210			37.05	931,825			38.00
Exercised	(464,502	)		24.39	(220,225	)		25.80
Cancelled	(49,431	)		35.48	(102,356	)		31.76

Outstanding, end of period	8,651,170		$	35.32	8,925,124		$	33.38

Exercisable, end of period	5,922,567		$	35.81	5,300,413		$	35.59

Weighted average fair value of options granted during the period			$	10.61			$	10.54

The following table summarizes information about employee stock options outstanding and exercisable as of March 31, 2005:

Options outstanding

Options currently
exercisable

Range of exercise prices

Number

Weighted
average
remaining
contractual
lives

Weighted
average
exercise
price

Number

Weighted
average
exercise
price

$22.10 - $32.75

3,124,307

7.06

24.62

2,338,153

24.93

$32.75 - $48.13

5,526,863

6.89

41.38

3,584,414

42.91

The Company has elected to follow APB 25 and related interpretations in accounting for stock options granted to employees as permitted by SFAS 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure. Under APB 25, no compensation expense is recognized because the stock option awards qualify as fixed awards and the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant. SFAS 123 requires pro forma disclosures as if the Company had adopted the expense recognition provisions of that statement, which require that the fair value of options granted are recorded as expense over the vesting period.

NATIONWIDE FINANCIAL SERVICES, INC.

Notes to Unaudited Consolidated Financial Statements, Continued

March 31, 2005 and 2004

The following table summarizes the effect on net income and earnings per common share for the periods indicated if the Company had accounted for compensation cost for employee stock options in accordance with the fair value accounting method provided by SFAS 123:


	For the three months ended March 31,
(in millions, except per share amounts)	2005		2004
Net income, as reported	$	160.5	$	119.6
Deduct: total stock-based employee compensation expense determined under fair value method, net of taxes		2.2		3.4

Pro forma net income	$	158.3	$	116.2

Earnings per common share:
Basic, as reported	$	1.05	$	0.79
Basic, pro forma	$	1.04	$	0.76
Diluted, as reported	$	1.05	$	0.78
Diluted, pro forma	$	1.03	$	0.76

(5)

Goodwill

The following table summarizes changes in the carrying value of goodwill by reportable segment for the periods indicated:


(in millions)	Individual Investments		Retirement Plans		Individual Protection			Corporate and Other			Total
Balance as of December 31, 2003	$	—	$	64.1	$	331.2		$	11.4		$	406.7
Adjustments		—		—		(23.8	)		(0.6	)		(24.4	)

Balance as of December 31, 2004		—		64.1		307.4			10.8			382.3
Acquisition		—		18.2		—			—			18.2

Balance as of March 31, 2005	$	—	$	82.3	$	307.4		$	10.8		$	400.5

The 2004 activity included final adjustments to Nationwide Financial Network (NFN) federal income tax reserve balances totaling $23.8 million resulting from the completion of all Internal Revenue Service audits of NFN for periods prior to NFS’ acquisition. In addition, the Company’s annual impairment testing resulted in a $0.6 million impairment loss on existing goodwill.

The current year addition to goodwill reflects the Company’s acquisition of Registered Investment Advisors Services, Inc. dba RIA Services, Inc. (RIA) effective February 28, 2005. RIA provides a technology solution that gives defined contribution plan sponsors the ability to provide their participants the option of professional money management from investment advisory firms. The Company believes that it can leverage this technology using its existing distribution platform to provide significant growth in the Retirement Plans segment in the area of managed accounts for plan participants. The aggregate purchase price was $18.4 million.

NATIONWIDE FINANCIAL SERVICES, INC.

Notes to Unaudited Consolidated Financial Statements, Continued

March 31, 2005 and 2004

(6)

Variable Annuity Contracts

The Company issues traditional variable annuity contracts through its separate accounts, for which investment income and gains and losses on investments accrue directly to, and investment risk is borne by, the contract holder. The Company also issues non-traditional variable annuity contracts in which the Company provides various forms of guarantees to benefit the related contract holders. The Company provides four primary guarantee types under non-traditional variable annuity contracts: (1) GMDB; (2) guaranteed minimum accumulation benefits (GMAB); (3) guaranteed minimum withdrawal benefits (GMWB); and (4) GMIB.

The GMDB provides a specified minimum return upon death. Many, but not all, of these death benefits are spousal, whereby a death benefit will be paid upon death of the first spouse. The survivor has the option to terminate the contract or continue it and have the death benefit paid into the contract and a second death benefit paid upon the survivor’s death. The Company offers six primary GMDB types:

•

Return of premium – provides the greater of account value or total deposits made to the contract less any partial withdrawals and assessments, which is referred to as “net premiums.” There are two variations of this benefit. In general, there is no lock-in age for this benefit. However, for some contracts the GMDB reverts to the account value at a specified age, typically age 75.

•

Reset – provides the greater of a return of premium death benefit or the most recent five-year anniversary (prior to lock-in age) account value adjusted for withdrawals. For most contracts, this GMDB locks in at age 86 or 90, and for others the GMDB reverts to the account value at age 75, 85, 86 or 90.

•

Ratchet – provides the greater of a return of premium death benefit or the highest specified “anniversary” account value (prior to age 86) adjusted for withdrawals. Currently, there are three versions of ratchet, with the difference based on the definition of anniversary: monthaversary – evaluated monthly; annual – evaluated annually; and five-year – evaluated every fifth year.

•

Rollup – provides the greater of a return of premium death benefit or premiums adjusted for withdrawals accumulated at generally 5% simple interest up to the earlier of age 86 or 200% of adjusted premiums. There are two variations of this benefit. For certain contracts, this GMDB locks in at age 86, and for others the GMDB reverts to the account value at age 75.

•

Combo – provides the greater of annual ratchet death benefit or rollup death benefit. This benefit locks in at either age 81 or 86.

•

Earnings enhancement – provides an enhancement to the death benefit that is a specified percentage of the adjusted earnings accumulated on the contract at the date of death. There are two versions of this benefit: (1) the benefit expires at age 86, and a credit of 4% of account value is deposited into the contract; and (2) the benefit does not have an end age, but has a cap on the payout and is paid upon the first death in a spousal situation. Both benefits have age limitations. This benefit is paid in addition to any other death benefits paid under the contract.

The GMAB, offered in the Company’s Capital Preservation Plus (CPP) contract rider, is a living benefit that provides the contract holder with a guaranteed return of premium, adjusted proportionately for withdrawals, after a specified period of time (5, 7 or 10 years) selected by the contract holder at the issuance of the variable annuity contract. In some cases, the contract holder also has the option, after a specified period of time, to drop the rider and continue the variable annuity contract without the GMAB. In general, the GMAB requires a minimum allocation to guaranteed term options or adherence to limitations required by an approved asset allocation strategy.

Beginning in March 2005, the Company also offers a hybrid GMAB/GMWB living benefit through its Capital Preservation Plus Lifetime Income contract rider. This living benefit combines a GMAB feature in its first 5-10 years (virtually identical to the previously described CPP benefit) with a lifetime withdrawal benefit which begins upon the maturity of the GMAB and extends for the duration of the insured’s life. In the event that the insured’s contract value is exhausted through such withdrawals, the Company shall continue to fund future withdrawals at a pre-defined level until the insured’s death. In some cases, the contract owner has the right to drop the GMWB portion of this rider or periodically reset the guaranteed withdrawal basis to a higher level. This benefit requires a minimum allocation to guaranteed term options or adherence to limitations required by an approved asset allocation strategy. All GMWB contracts are included with GMAB contracts in the following tables due to immateriality.

NATIONWIDE FINANCIAL SERVICES, INC.

Notes to Unaudited Consolidated Financial Statements, Continued

March 31, 2005 and 2004

The GMIB is a living benefit that provides the contract holder with a guaranteed annuitization value. The GMIB types are:

•

Ratchet – provides an annuitization value equal to the greater of account value, net premiums or the highest one-year anniversary account value (prior to age 86) adjusted for withdrawals.

•

Rollup – provides an annuitization value equal to the greater of account value and premiums adjusted for withdrawals accumulated at 5% compound interest up to the earlier of age 86 or 200% of adjusted premiums.

•

Combo – provides an annuitization value equal to the greater of account value, ratchet GMIB benefit or rollup GMIB benefit.

The following table summarizes the account values and net amount at risk, net of reinsurance, for variable annuity contracts with guarantees invested in both general and separate accounts as of the dates indicated:


	March 31, 2005					December 31, 2004
(in millions)	Account value		Net amount at risk¹		Wtd. avg. attained age	Account value		Net amount at risk¹		Wtd. avg. attained age
GMDB:
Return of premium	$	9,466.4	$	60.4	56	$	9,848.6	$	54.1	59
Reset		17,472.7		164.3	62		18,084.1		158.1	62
Ratchet		10,374.4		63.8	64		10,322.1		46.3	64
Rollup		674.0		10.2	69		707.2		9.7	68
Combo		2,453.5		30.3	67		2,519.9		19.2	67

Subtotal		40,441.0		329.0	62		41,481.9		287.4	62
Earnings enhancement		309.7		15.6	61		310.1		18.0	60

Total - GMDB	$	40,750.7	$	344.6	62	$	41,792.0	$	305.4	62

GMAB:
5 Year	$	622.9	$	0.5	N/A	$	512.2	$	0.1	N/A
7 Year		761.4		1.0	N/A		647.5		—	N/A
10 Year		385.2		0.8	N/A		332.4		—	N/A

Total - GMAB	$	1,769.5	$	2.3	N/A	$	1,492.1	$	0.1	N/A

GMIB²:
Ratchet	$	427.7	$	—	N/A	$	439.7	$	—	N/A
Rollup		1,149.3		0.1	N/A		1,188.7		—	N/A
Combo		0.6		—	N/A		1.0		—	N/A

Total - GMIB	$	1,577.6	$	0.1	N/A	$	1,629.4	$	—	N/A

Net amount at risk is calculated on a seriatum basis and represents the greater of the respective guaranteed benefit less the account value and zero. As it relates to GMIB, net amount at risk is calculated as if all policies were eligible to annuitize immediately, although all GMIB options have a waiting period of at least 7 years from issuance, with the earliest annuitizations beginning in 2006.

The weighted average period remaining until expected annuitization is not meaningful and has not been presented because there is currently no material GMIB exposure.

NATIONWIDE FINANCIAL SERVICES, INC.

Notes to Unaudited Consolidated Financial Statements, Continued

March 31, 2005 and 2004

The following table is a rollforward of the liabilities for guarantees on variable annuity contracts reflected in the Company’s general account for the periods indicated:


(in millions)	GMDB			GMAB			GMIB		Total
Balance as of December 31, 2003	$	21.8		$	4.3		$	—	$	26.1
Expense provision		35.6			—			0.8		36.4
Net claims paid		(33.7	)		—			—		(33.7	)
Value of new business sold		—			26.9			—		26.9
Change in fair value		—			(8.1	)		—		(8.1	)

Balance as of December 31, 2004		23.7			23.1			0.8		47.6
Expense provision		8.0			—			0.1		8.1
Net claims paid		(5.2	)		—			—		(5.2	)
Value of new business sold		—			5.8			—		5.8
Change in fair value		—			(4.9	)		—		(4.9	)

Balance as of March 31, 2005	$	26.5		$	24.0		$	0.9	$	51.4

The following table summarizes account balances of contracts with guarantees that were invested in separate accounts as of the dates indicated:


(in millions)	March 31, 2005		December 31, 2004
Mutual funds:
Bond	$	4,135.6	$	4,401.9
Domestic equity		27,251.8		28,214.4
International equity		1,869.5		1,926.1

Total mutual funds		33,256.9		34,542.4
Money market funds		1,677.3		1,389.1

Total	$	34,934.2	$	35,931.5

The Company’s GMDB claim reserves are determined by estimating the expected value of death benefits on contracts that trigger a policy benefit and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance as appropriate, with a related charge or credit to other benefits and claims in the period of evaluation if actual experience or other evidence suggests that earlier assumptions should be revised.

The following assumptions and methodology were used to determine the GMDB claim reserves as of March 31, 2005 and December 31, 2004:

•

Data used was based on a combination of historical numbers and future projections involving 50 stochastically generated economic scenarios

•

Mean gross equity performance – 8.1%

•

Equity volatility – 18.7%

•

Mortality – 100% of Annuity 2000 table

•

Asset fees – equivalent to mutual fund and product loads

•

Discount rate – 8.0%

NATIONWIDE FINANCIAL SERVICES, INC.

Notes to Unaudited Consolidated Financial Statements, Continued

March 31, 2005 and 2004

Lapse rate assumptions vary by duration as shown below:


Duration (years)	1		2		3		4		5		6		7		8		9		10+
Minimum	4.50	%	5.50	%	6.50	%	8.50	%	10.50	%	10.50	%	10.50	%	17.50	%	17.50	%	17.50	%
Maximum	4.50	%	8.50	%	11.50	%	17.50	%	22.50	%	22.50	%	22.50	%	22.50	%	22.50	%	19.50	%

GMABs and GMWBs are considered embedded derivatives under current accounting guidance, resulting in the related liabilities being separated from the host insurance product and recognized at fair value, with changes in fair value reported in earnings, and therefore, excluded from the SOP 03-1 policy benefits.

GMIB claim reserves are determined each period by estimating the expected value of annuitization benefits in excess of the projected account balance at the date of annuitization and recognizing the excess ratably over the accumulation period based on total assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance as appropriate, with a related charge or credit to other benefits and claims in the period of evaluation if actual experience or other evidence suggests that earlier assumptions should be revised. The assumptions used in calculating GMIB claim reserves are consistent with those used for calculating GMDB claim reserves. In addition, the calculation of GMIB claim reserves assumes utilization ranges from a low of 3% when the contract holder’s annuitization value is 10% in the money to 100% utilization when the contract holder is 90% in the money.

(7)

Earnings Per Share

Basic earnings per share represent the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Diluted earnings per share represent the amount of earnings for the period available to each share of common stock outstanding during the reporting period adjusted for the potential issuance of common shares for stock options, if dilutive.

The following table sets forth the Company’s calculations of basic and diluted earnings per share (EPS) for the periods indicated:


	Three months ended March 31,
	2005						2004
(in millions, except per share amounts)	Amount		Basic EPS		Diluted EPS		Amount			Basic EPS			Diluted EPS
Basic and diluted income from continuing operations before cumulative effect of adoption of accounting principle	$	160.5	$	1.05	$	1.05	$	123.0		$	0.81		$	0.80
Cumulative effect of adoption of accounting principle, net of taxes		—		—		—		(3.4	)		(0.02	)		(0.02	)

Basic and diluted net income	$	160.5	$	1.05	$	1.05	$	119.6		$	0.79		$	0.78

Weighted average common shares outstanding – basic		152.7						152.0
Dilutive effect of stock options		0.8						0.9

Weighted average common shares outstanding – diluted		153.5						152.9

NATIONWIDE FINANCIAL SERVICES, INC.

Notes to Unaudited Consolidated Financial Statements, Continued

March 31, 2005 and 2004

(8)

Comprehensive (Loss) Income

Comprehensive (loss) income includes net income and certain items that are reported directly within separate components of shareholders’ equity that bypass net income (other comprehensive income or loss). The following table summarizes the Company’s other comprehensive (loss) income, before and after federal income tax benefit (expense), for the periods indicated:


	Three months ended March 31,
(in millions)	2005			2004
Net unrealized (losses) gains on securities available-for-sale arising during the period:
Gross unrealized (losses) gains	$	(474.2	)	$	428.0
Adjustment to deferred policy acquisition costs		139.0			(134.4	)
Adjustment to value of business acquired		8.0			(11.0	)
Adjustment to future policy benefits and claims		4.6			(35.1	)
Adjustment to policyholder dividend obligation		21.4			(18.7	)
Related federal income tax benefit (expense)		105.4			(80.0	)

Net unrealized (losses) gains		(195.8	)		148.8

Reclassification adjustment for net realized losses (gains) on securities available-for-sale realized during the period:
Net unrealized (gains) losses		(27.3	)		7.9
Related federal income tax expense (benefit)		9.6			(2.8	)

Net reclassification adjustment		(17.7	)		5.1

Other comprehensive (loss) income on securities available-for-sale		(213.5	)		153.9

Accumulated net holding gains on cash flow hedges:
Unrealized holding gains		6.0			7.7
Related federal income tax expense		(2.1	)		(2.7	)

Other comprehensive income on cash flow hedges		3.9			5.0

Total other comprehensive (loss) income	$	(209.6	)	$	158.9

Adjustments for net realized gains and losses on the ineffective portion of cash flow hedges were immaterial during the three months ended March 31, 2005 and 2004.

NATIONWIDE FINANCIAL SERVICES, INC.

Notes to Unaudited Consolidated Financial Statements, Continued

March 31, 2005 and 2004

(9)

Pension Plan and Postretirement Benefits Other than Pensions

The following table summarizes the components of net periodic benefit cost for the Company’s pension plan as a whole for the periods indicated:


	Three months ended March 31,
(in millions)	2005			2004
Service cost	$	34.0		$	29.8
Interest cost		34.2			33.1
Expected return on plan assets		(42.5	)		(40.5	)
Recognized net actuarial loss		1.7			1.1
Amortization of prior service cost		1.1			0.8
Amortization of unrecognized transition asset		(0.3	)		(0.3	)

Net periodic benefit cost	$	28.2		$	24.0

The plan sponsor and all participating employers, including the Company, expect to contribute $125.0 million to the pension plan during 2005. Through March 31, 2005, $120.0 million had been contributed, including $22.0 million by the Company. Additional contributions to the plan totaling $5.0 million are anticipated from the plan sponsor and certain participating employers for the remainder of the year. The Company is not expected to make any further contributions in 2005. Tax planning strategies influence the timing of plan contributions.

The following table summarizes the components of net periodic benefit income for the NFN pension plan for the periods indicated:


	Three months ended March 31,
(in millions)	2005			2004
Service cost	$	0.3		$	0.3
Interest cost		1.2			1.5
Expected return on plan assets		(2.1	)		(2.2	)

Net periodic benefit income	$	(0.6	)	$	(0.4	)

Since this plan is overfunded, there are no contributions anticipated for 2005.

The following table summarizes the components of net periodic benefit cost for the Company’s postretirement benefit plan as a whole for the periods indicated:


	Three months ended March 31,
(in millions)	2005			2004
Service cost	$	2.3		$	2.7
Interest cost		4.3			5.1
Expected return on plan assets		(2.3	)		(2.1	)
Recognized net actuarial loss		0.5			—
Amortization of prior service cost		(3.8	)		(2.1	)

Net periodic benefit cost	$	1.0		$	3.6

NATIONWIDE FINANCIAL SERVICES, INC.

Notes to Unaudited Consolidated Financial Statements, Continued

March 31, 2005 and 2004

The plan sponsor and all participating employers, including the Company, expect to contribute $18.0 million to the postretirement benefit plan during 2005. Through March 31, 2005, $4.2 million had been contributed, including $1.0 million by the Company. Additional contributions to the plan totaling $13.8 million are anticipated from the plan sponsor and all participating employers, including $2.8 million by the Company, for the remainder of the year. Postretirement benefit plan contributions generally are funded on a monthly basis.

(10)

Related Party Transactions

The Company has entered into significant, recurring transactions and agreements with Nationwide Mutual Insurance Company (NMIC) and other affiliates as a part of its ongoing operations. The nature of the transactions and agreements include annuity and life insurance contracts, reinsurance agreements, cost sharing agreements, administration services agreements, marketing agreements, office space leases, intercompany repurchase agreements and cash management services agreements. The transactions and agreements are described more fully in Note 21 to the audited consolidated financial statements included in the Company’s 2004 Annual Report on Form 10-K. During the first quarter of 2005, there have been no material changes to the nature and terms of these transactions and agreements.

Amounts on deposit with a related party in cash management for the benefit of the Company were $657.6 million and $668.9 million as of March 31, 2005 and December 31, 2004, respectively.

The Company also participates in intercompany repurchase agreements with affiliates whereby the seller transfers securities to the buyer at a stated value. Upon demand or after a stated period, the seller repurchases the securities at the original sales price plus interest. As of March 31, 2005, the Company had cash borrowings outstanding of $15.6 million from affiliated entities under such agreements compared to no amount outstanding at December 31, 2004. During the first three months of 2005 and 2004, the maximum outstanding borrowings under such agreements were $15.6 million and $48.3 million, respectively, and the amounts the Company incurred for interest expense on intercompany repurchase agreements during these periods were immaterial. The Company believes that the terms of the repurchase agreements are materially consistent with what the Company could have obtained from unaffiliated parties.

Funds of Gartmore Global Investments, Inc. (GGI), an affiliate, are offered to the Company’s customers as investment options in certain of the Company’s products. As of March 31, 2005 and December 31, 2004, customer allocations to GGI funds totaled $18.44 billion and $17.93 billion, respectively. For the quarters ended March 31, 2005 and 2004, GGI paid the Company $15.0 million and $12.7 million, respectively, for the distribution and servicing of these funds. In addition, the Company entered into a renewable three-year marketing and support services agreement with GGI effective June 28, 2002. Under this agreement, the Company receives quarterly fees of $1.0 million in exchange for certain marketing and support of GGI product offerings.

(11)

Contingencies

Legal Matters

The Company is a party to litigation and arbitration proceedings in the ordinary course of its business. It is not possible to determine the ultimate outcome of the pending investigations and legal proceedings or to provide reasonable ranges of potential losses. Some of the matters, including certain of those referred to below, are in very preliminary stages, and the Company does not have sufficient information to make an assessment of plaintiffs’ claims for liability or damages. In some of the cases seeking to be certified as class actions, the court has not yet decided whether a class will be certified or (in the event of certification) the size of the class and class period. In many of the cases, plaintiffs are seeking undefined amounts of damages or other relief, including punitive damages and equitable remedies, that are difficult to quantify and cannot be defined based on the information currently available. The Company does not believe, based on information currently known by the Company’s management, that the outcomes of such pending investigations and legal proceedings are likely to have a material adverse effect on the Company’s consolidated financial position. However, given the large and/or indeterminate amounts sought in certain of these matters and inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could have a material adverse effect on the Company’s consolidated financial results in a particular quarterly or annual period.

NATIONWIDE FINANCIAL SERVICES, INC.

Notes to Unaudited Consolidated Financial Statements, Continued

March 31, 2005 and 2004

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.

The financial services industry, including mutual fund, variable annuity, life insurance and distribution companies, has also been the subject of increasing scrutiny by regulators, legislators and the media over the past two years. Numerous regulatory agencies, including the SEC, the National Association of Securities Dealers and the New York State Attorney General, have commenced industry-wide investigations regarding late trading and market timing in connection with mutual funds and variable insurance contracts, and have commenced enforcement actions against some mutual fund and life insurance companies on those issues. The Company has been contacted by or received subpoenas from the SEC and the New York State Attorney General, who are investigating market timing in certain mutual funds offered in insurance products sponsored by the Company. The Company is cooperating with this investigation and is responding to information requests.

In addition, state and federal regulators have commenced investigations or other proceedings relating to compensation and bidding arrangements and possible anti-competitive activities between insurance producers and brokers and issuers of insurance products, and unsuitable sales and replacements by producers on behalf of the issuer. Also under investigation are compensation arrangements between the issuers of variable insurance contracts and mutual funds or their affiliates, and funding agreements issued to back medium-term note (MTN) programs. Related investigations and proceedings may be commenced in the future. The Company has been contacted by or received subpoenas from state and federal regulatory agencies, state securities law regulators and state attorneys general for information relating to these investigations into compensation and bidding arrangements, anti-competitive activities, unsuitable sales or replacement practices, and funding agreements backing the MTN program. The Company is cooperating with regulators in connection with these inquiries. NMIC, NFS’ ultimate parent, has been contacted by or received subpoenas from certain regulators for information on these issues with respect to its operations and the operations of its subsidiaries, including the Company. The Company will cooperate with NMIC in responding to these inquiries to the extent that any inquiries encompass its operations.

These proceedings are expected to continue in the future and could result in legal precedents and new industry-wide legislation, rules and regulations that could significantly affect the financial services industry, including life insurance and annuity companies. These proceedings also could affect the outcome of one or more of the Company’s litigation matters.

On April 13, 2004, NLIC was named in a class action lawsuit filed in Circuit Court, Third Judicial Circuit, Madison County, Illinois, entitled Woodbury v. Nationwide Life Insurance Company. The plaintiff claims to represent a class of persons in the United States who, through their ownership of a Nationwide annuity or insurance product, held units of any Nationwide sub-account invested in mutual funds which included foreign securities in their portfolios and which allegedly experienced market timing trading activity. The complaint contains allegations of negligence, reckless indifference and breach of fiduciary duty. The plaintiff seeks to recover compensatory and punitive damages in an amount not to exceed $75,000 per plaintiff or class member. NLIC removed this case to the United States District Court for the Southern District of Illinois on June 1, 2004. The plaintiffs moved to remand on June 28, 2004. On July 12, 2004, NLIC filed a memorandum opposing remand and requesting a stay pending the resolution of an unrelated case covering similar issues, which is an appeal from a decision of the same District Court remanding a removed market timing case to an Illinois state court. On July 30, 2004, the U.S. District Court granted NLIC’s request for a stay pending a decision by the Seventh Circuit on the unrelated case mentioned above. On December 27, 2004, the case was transferred to the United States District Court for the District of Maryland and included in the multi-district proceeding there entitled In Re Mutual Funds Investment Litigation. NLIC intends to defend this lawsuit vigorously.

NATIONWIDE FINANCIAL SERVICES, INC.

Notes to Unaudited Consolidated Financial Statements, Continued

March 31, 2005 and 2004

On January 21, 2004, the Company was named in a lawsuit filed in the United States District Court for the Northern District of Mississippi entitled United Investors Life Insurance Company v. Nationwide Life Insurance Company and/or Nationwide Life Insurance Company of America and/or Nationwide Life and Annuity Insurance Company and/or Nationwide Life and Annuity Company of America and/or Nationwide Financial Services, Inc. and/or Nationwide Financial Corporation, and John Does A-Z. In its complaint, plaintiff United Investors alleges that the Company and/or its affiliated life insurance companies caused the replacement of variable insurance policies and other financial products issued by United Investors with policies issued by the Nationwide defendants. The plaintiff raises claims for (1) violations of the Federal Lanham Act, and common law unfair competition and defamation, (2) tortious interference with the plaintiff’s contractual relationship with Waddell & Reed, Inc. and/or its affiliates, Waddell & Reed Financial, Inc., Waddell & Reed Financial Services, Inc. and W&R Insurance Agency, Inc., or with the plaintiff’s contractual relationships with its variable policyholders, (3) civil conspiracy, and (4) breach of fiduciary duty. The complaint seeks compensatory damages, punitive damages, pre- and post-judgment interest, a full accounting, a constructive trust, and costs and disbursements, including attorneys’ fees. The Company filed a motion to dismiss the complaint on June 1, 2004. On February 8, 2005 the court denied the motion to dismiss. On March 23, 2005, the Company filed its answer. The Company intends to defend this lawsuit vigorously.

On October 31, 2003, NLIC and Nationwide Life and Annuity Insurance Company (NLAIC) were named in a lawsuit seeking class action status filed in the United States District Court for the District of Arizona entitled Robert Helman et al v. Nationwide Life Insurance Company et al. The suit challenges the sale of deferred annuity products for use as investments in tax-deferred contributory retirement plans. On April 8, 2004, the plaintiff filed an amended class action complaint on behalf of all persons who purchased an individual variable deferred annuity contract or a certificate to a group variable annuity contract issued by NLIC or NLAIC which were allegedly used to fund certain tax-deferred retirement plans. The amended class action complaint seeks unspecified compensatory damages. NLIC and NLAIC filed a motion to dismiss the complaint on May 24, 2004. On July 27, 2004, the court granted the motion to dismiss. The plaintiff has appealed that dismissal to the United States Court of Appeals for the Ninth Circuit. NLIC and NLAIC intend to defend this lawsuit vigorously.

On August 15, 2001, the Company was named in a lawsuit filed in the United States District Court for the District of Connecticut entitled Lou Haddock, as trustee of the Flyte Tool & Die, Incorporated Deferred Compensation Plan, et al v. Nationwide Financial Services, Inc. and Nationwide Life Insurance Company. The plaintiffs first amended their complaint on September 5, 2001 to include class action allegations and have subsequently amended their complaint three times. As amended, in the current complaint the plaintiffs seek to represent a class of ERISA qualified retirement plans that purchased variable annuities from NLIC. The plaintiffs allege that they invested ERISA plan assets in their variable annuity contracts and that the Company breached ERISA fiduciary duties by allegedly accepting service payments from certain mutual funds. The complaint seeks disgorgement of some or all of the payments allegedly received by the Company, other unspecified relief for restitution, declaratory and injunctive relief, and attorneys’ fees. On December 13, 2001, the plaintiffs filed a motion for class certification. The plaintiffs filed a supplement to that motion on September 19, 2003. The Company opposed that motion on December 24, 2003. On July 6, 2004, the Company filed a Revised Memorandum in Support of Summary Judgment. The plaintiffs have opposed that motion. The Company intends to defend this lawsuit vigorously.

On October 9, 2003, NLICA was named as one of twenty-six defendants in a lawsuit filed in the United States District Court for the Middle District of Pennsylvania entitled Steven L. Flood, Luzerne County Controller and the Luzerne County Retirement Board on behalf of the Luzerne County Employee Retirement System v. Thomas A. Makowski, Esq., et al. NLICA is a defendant as successor in interest to Provident Mutual Life Insurance Company, which is alleged to have entered into four agreements to manage assets and investments of the Luzerne County Employee Retirement System (the Plan). In their complaint, the plaintiffs allege that NLICA aided and abetted certain other defendants in breaching their fiduciary duties to the Plan. The plaintiffs also allege that NLICA violated the Federal Racketeer Influenced and Corrupt Organizations Act (RICO) by engaging in and conspiring to engage in an improper scheme to mismanage funds in order to collect excessive fees and commissions and that NLICA was unjustly enriched by the allegedly excessive fees and commissions. The complaint seeks treble compensatory damages, punitive damages, a full accounting, imposition of a constructive trust on all funds paid by the Plan to all defendants, pre- and post-judgment interest, and costs and disbursements, including attorneys’ fees. The plaintiffs seek to have each defendant judged jointly and severally liable for all damages. NLICA, along with virtually every other defendant, has filed a motion to dismiss the complaint for failure to state a claim. On August 24, 2004, the Court issued an order dismissing the count alleging aiding and abetting a breach of fiduciary duty and one of the RICO counts. The Court did not dismiss three of the RICO counts and a count alleging unjust enrichment. On September 30, 2004, NLICA filed its answer. NLICA intends to defend this lawsuit vigorously.

NATIONWIDE FINANCIAL SERVICES, INC.

Notes to Unaudited Consolidated Financial Statements, Continued

March 31, 2005 and 2004

Tax Matters

The Company’s federal income tax returns are routinely audited by the Internal Revenue Service (IRS), and the Company is currently under exam for the 2000-2002 tax years. The Company establishes tax reserves representing its best estimate of additional amounts it may be required to pay if certain tax positions are challenged and ultimately denied by the IRS. These reserves are reviewed regularly and when facts and circumstances warrant, are adjusted as events occur that the Company believes impact its liability for additional taxes, such as lapsing of applicable statutes of limitations, conclusion of tax audits, additional exposure based on current calculations, identification of new issues, release of administrative guidance or rendering of a court decision affecting a particular tax issue. The Company believes its tax reserves adequately address potential assessments that may result from IRS examinations and other tax-related matters for all open tax years.

A significant component of the tax reserve is related to the separate account dividends-received deduction (DRD). Although the Company has not yet reached an agreement with the IRS, and there can be no assurance that such an agreement will be reached, favorable resolution of the separate account DRD and/or other identified issues could result in a benefit to the Company’s future results of operations.

(12)

Securitization Transactions

The Company has sold $510.1 million of credit enhanced equity interests in Low-Income-Housing Tax Credit Funds (Tax Credit Funds) to unrelated third parties. The Company has guaranteed cumulative after-tax yields to third party investors ranging from 4.50% to 5.25% over periods ending between 2002 and 2021 and as of March 31, 2005 held guarantee reserves totaling $5.1 million on these transactions. These guarantees are in effect for periods of approximately 15 years each. The Tax Credit Funds provide a stream of tax benefits to the investors that will generate a yield and return of capital. If the tax benefits are not sufficient to provide these cumulative after-tax yields, then the Company must fund any shortfall, which is mitigated by stabilization collateral set aside by the Company at the inception of the transactions. The maximum amount of undiscounted future payments that the Company could be required to pay the investors under the terms of the guarantees is $1.38 billion. The Company does not anticipate making any payments related to the guarantees.

At the time of the sales, $5.1 million of net sale proceeds were set aside as collateral for certain properties owned by the Tax Credit Funds that had not met all of the criteria necessary to generate tax credits. Such criteria include completion of construction and the leasing of each unit to a qualified tenant, among others. Properties meeting the necessary criteria are considered to have “stabilized.” The properties are evaluated regularly, and the collateral is released when stabilized. During the first quarter of 2005, there was no stabilization collateral released into income compared to $0.1 million during the prior year quarter.

To the extent there are cash deficits in any specific property owned by the Tax Credit Funds, property reserves, property operating guarantees and reserves held by the Tax Credit Funds are exhausted before the Company is required to perform under its guarantees. To the extent the Company is ever required to perform under its guarantees, it may recover any such funding out of the cash flow distributed from the sale of the underlying properties of the Tax Credit Funds. This cash flow distribution would be paid to the Company prior to any cash flow distributions to unrelated third party investors.

(13)

Variable Interest Entities

As of March 31, 2005, the Company had relationships with 16 variable interest entities (VIEs) where the Company was the primary beneficiary. Each of these VIEs is a conduit that assists the Company in structured products transactions. One of the VIEs is used in the securitization of mortgage loans, while the others are involved in the sale of Tax Credit Funds to third party investors where the Company provides guaranteed returns (see Note 12). The results of operations and financial position of these VIEs are included along with corresponding minority interest liabilities and related income in the accompanying consolidated financial statements.

The net assets of these VIEs totaled $398.4 million as of March 31, 2005. The most significant components of net assets were $32.0 million of mortgage loans on real estate, $383.0 million of other long-term investments, $62.8 million of short-term investments, $35.9 million of other assets, $32.6 million of short-term debt, and $84.3 million of other liabilities. The total exposure to loss on these VIEs where the Company is the primary beneficiary was less than $0.1 million as of March 31, 2005. For the mortgage loan VIE, to which the short-term debt relates, the creditors have no recourse against the Company in the event of default by the VIE.

NATIONWIDE FINANCIAL SERVICES, INC.

Notes to Unaudited Consolidated Financial Statements, Continued

March 31, 2005 and 2004

In addition to the VIEs described above, the Company holds variable interests, in the form of limited partnerships or similar investments, in a number of Tax Credit Funds where the Company is not the primary beneficiary. These investments have been held by the Company for periods of 1 to 9 years and allow the Company to experience certain tax credits and other tax benefits from affordable housing projects. The Company also has certain investments in other securitization transactions that qualify as VIEs, but for which the Company is not the primary beneficiary. The total exposure to loss on these VIEs was $46.0 million as of March 31, 2005.

(14)

Segment Information

Management of the Company views its business primarily based on the underlying products, and this is the basis used for defining its reportable segments. During the second quarter of 2004, the Company reorganized its segment reporting structure and now reports four segments: Individual Investments, Retirement Plans, Individual Protection, and Corporate and Other. The Company has reclassified segment results for all prior periods presented to be consistent with the new reporting structure. The primary segment profitability measure that management uses is pre-tax operating earnings, which is calculated by adjusting income from continuing operations before federal income taxes and the cumulative effect of adoption of accounting principles, if any, to exclude net realized gains and losses on investments, hedging instruments and hedged items, except for operating items (periodic net coupon settlements on non-qualifying derivatives, trading portfolio realized gains and losses, and trading portfolio valuation changes) and realized gains and losses related to securitizations, if any.

The Individual Investments segment consists of individual The BEST of AMERICA® and private label deferred variable annuity products, NFN individual annuity products, deferred fixed annuity products, income products, and advisory services program revenues and expenses. This segment differs from the former Individual Annuity segment due to the addition of the advisory services program results. Individual deferred annuity contracts provide the customer with tax-deferred accumulation of savings and flexible payout options including lump sum, systematic withdrawal or a stream of payments for life. In addition, individual variable annuity contracts provide the customer with access to a wide range of investment options and asset protection in the event of an untimely death, while individual fixed annuity contracts generate a return for the customer at a specified interest rate fixed for prescribed periods.

The Retirement Plans segment is comprised of the Company’s private and public sector retirement plans business. This segment differs from the former Institutional Products segment because it no longer includes the results of the structured products and MTN businesses. The private sector includes Internal Revenue Code (IRC) Section 401(k) business generated through fixed and variable group annuities, Nationwide Trust Company, FSB, and The 401(k) Company. The public sector includes IRC Section 457 and Section 401(a) business in the form of fixed and variable group annuities and administration-only business.

The Individual Protection segment consists of investment life insurance products, including individual variable, corporate-owned and bank-owned life insurance products; traditional life insurance products; universal life insurance products; and the results of TBG Insurance Services Corporation (TBG Financial). This segment is unchanged from the former Life Insurance segment. Life insurance products provide a death benefit and generally allow the customer to build cash value on a tax-advantaged basis.

The Corporate and Other segment includes structured products business, the MTN program, net investment income not allocated to product segments, periodic net coupon settlements on non-qualifying derivatives, unallocated expenses, interest expense on debt, revenues and expenses of the Company’s non-insurance subsidiaries not reported in other segments, and realized gains and losses related to securitizations. This segment differs from the former Corporate segment as it now includes results from the structured products and MTN businesses, but no longer includes results from the advisory services program.

NATIONWIDE FINANCIAL SERVICES, INC.

Notes to Unaudited Consolidated Financial Statements, Continued

March 31, 2005 and 2004

The following table summarizes the Company’s business segment operating results for the three months ended March 31:


(in millions)	Individual Investments		Retirement Plans		Individual Protection		Corporate and Other			Total
2005
Revenues:
Net investment income	$	225.9	$	166.3	$	119.1	$	74.0		$	585.3
Other operating revenue		158.8		97.4		221.4		21.0			498.6
Net realized gains on investments, hedging instruments and hedged items¹		—		—		—		26.1			26.1

Total revenues		384.7		263.7		340.5		121.1			1,110.0

Benefits and expenses:
Interest credited to policyholder account values		152.7		111.8		45.6		30.5			340.6
Amortization of deferred policy acquisition costs		86.3		12.3		26.9		—			125.5
Amortization of value of business acquired		1.6		0.7		9.7		—			12.0
Interest expense on debt		—		—		—		25.7			25.7
Other benefits and expenses		80.8		91.8		186.1		26.3			385.0

Total benefits and expenses		321.4		216.6		268.3		82.5			888.8

Income from continuing operations before federal income tax expense		63.3		47.1		72.2		38.6		$	221.2

Net realized gains on investments, hedging instruments and hedged items¹		—		—		—		(26.1	)

Pre-tax operating earnings	$	63.3	$	47.1	$	72.2	$	12.5

Assets as of period end	$	54,315.5	$	31,360.7	$	18,724.7	$	11,605.0		$	116,005.9

2004
Revenues:
Net investment income	$	232.3	$	161.8	$	117.0	$	57.4		$	568.5
Other operating revenue		147.3		85.4		221.3		21.0			475.0
Net realized losses on investments, hedging instruments and hedged items¹		—		—		—		(16.5	)		(16.5	)

Total revenues		379.6		247.2		338.3		61.9			1,027.0

Benefits and expenses:
Interest credited to policyholder account values		160.3		110.1		47.1		17.7			335.2
Amortization of deferred policy acquisition costs		74.6		9.7		26.8		—			111.1
Amortization of value of business acquired		2.2		1.1		9.2		—			12.5
Interest expense on debt		—		—		—		25.4			25.4
Other benefits and expenses		82.5		80.4		194.5		20.1			377.5

Total benefits and expenses		319.6		201.3		277.6		63.2			861.7

Income (loss) from continuing operations before federal income tax expense		60.0		45.9		60.7		(1.3	)	$	165.3

Net realized losses on investments, hedging instruments and hedged items¹		—		—		—		16.5

Pre-tax operating earnings	$	60.0	$	45.9	$	60.7	$	15.2

Assets as of period end	$	53,742.7	$	31,179.3	$	16,597.2	$	11,876.0		$	113,395.2

¹	Excluding operating items (periodic net coupon settlements on non-qualifying derivatives, trading portfolio realized gains and losses, and trading portfolio valuation changes).

ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

The information included herein 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 Nationwide Financial Services, Inc. and subsidiaries (NFS, or collectively, 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)

Change in Nationwide Corporation’s control of the Company through its beneficial ownership of 94.3% of the combined voting power of all the outstanding common stock and 62.5% of the economic interest in the Company;

(ii)

NFS’ primary reliance, as a holding company, on dividends from its subsidiaries to meet debt service obligations and the applicable regulatory restrictions on the ability of NFS’ subsidiaries to pay such dividends;

(iii)

The potential impact on the Company’s reported net income and related disclosures that could result from the adoption of certain accounting and/or financial reporting standards issued by the Financial Accounting Standards Board (FASB), Public Company Accounting Oversight Board or other standard-setting bodies;

(iv)

Tax law changes impacting the tax treatment of life insurance and investment products;

(v)

Repeal of the federal estate tax;

(vi)

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;

(vii)

Adverse state and federal legislation and regulation, including limitations on premium levels, increases in minimum capital and reserves, and other financial viability requirements; restrictions on mutual fund distribution payment arrangements such as revenue sharing and 12b-1 payments; and regulation changes resulting from industry practice investigations;

(viii)

Failure to expand distribution channels in order to obtain new customers or failure to retain existing customers;

(ix)

Inability to carry out marketing and sales plans, including, among others, development of new products and/or changes to certain existing products and acceptance of the new and/or revised products in the market;

(x)

Changes in interest rates and the equity markets causing a reduction of investment income and/or asset fees; an acceleration of the amortization of deferred policy acquisition costs (DAC) and/or value of business acquired (VOBA); reduction in the value of the Company’s investment portfolio or separate account assets, or a reduction in the demand for the Company’s products;

(xi)

General economic and business conditions which are less favorable than expected;

(xii)

Competitive, regulatory or tax changes that affect the cost of, or demand for, the Company’s products;

(xiii)

Unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;

(xiv)

Deviations from assumptions regarding future persistency, mortality, morbidity and interest rates used in calculating reserve amounts and in pricing the Company’s products; and

(xv)

Adverse litigation results and/or resolution of litigation and/or arbitration or investigation results.

Introduction

The following analysis of unaudited consolidated results of operations and financial condition of the Company should be read in conjunction with the unaudited consolidated financial statements and related notes included elsewhere herein.

NFS is the holding company for Nationwide Life Insurance Company (NLIC) and other companies that comprise the domestic life insurance and retirement savings operations of the Nationwide group of companies (Nationwide), including Nationwide Financial Network (NFN), which refers to Nationwide Life Insurance Company of America (NLICA) and subsidiaries, including the affiliated distribution network. The Company is a leading provider of long-term savings and retirement products in the United States of America. The Company develops and sells a diverse range of products including individual annuities, private and public group retirement plans, other investment products sold to institutions, life insurance and advisory services. As a result of its initial public offering in March 1997 and subsequent stock related transactions since that date, including the issuance of 31.9 million shares in connection with the acquisition of NFN, 37.5% of the economic interest in NFS is publicly owned, with the remainder owned by Nationwide Corporation (Nationwide Corp.), which is a majority-owned subsidiary of Nationwide Mutual Insurance Company (NMIC).

Critical Accounting Policies and Recently Issued Accounting Standards

In preparing the unaudited 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 unaudited 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 critical estimates include those used in determining DAC for investment products and universal life insurance products, VOBA, impairment losses on investments, valuation allowances for mortgage loans on real estate, federal income taxes, goodwill, and pension and other postretirement employee benefits.

Note 2 to the audited consolidated financial statements included in the Company’s 2004 Annual Report on Form 10-K provides a summary of significant accounting policies. Note 3 to the unaudited consolidated financial statements included in Part I, Item 1 – Unaudited Consolidated Financial Statements of this report provides a discussion of recently issued accounting standards.

Deferred Policy Acquisition Costs for Investment Products and Universal Life Insurance Products

The Company has deferred the costs of acquiring investment products and universal life insurance products business, principally commissions, certain expenses of the policy issue and underwriting department, and certain variable sales expenses that relate to and vary with the production of new and renewal business. 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 (COLI) and other interest-sensitive life insurance policies. DAC is subject to recoverability testing at the time of policy issuance and loss recognition testing at the end of each reporting period.

For investment products (principally individual and group annuities) and universal life insurance products, DAC is being amortized with interest over the lives of the policies in relation to the present value of estimated gross profits from projected interest margins, asset fees, cost of insurance, policy administration and surrender charges, less policy benefits and policy maintenance expenses. The DAC asset related to investment products and universal life insurance products is adjusted to reflect the impact of unrealized gains and losses on fixed maturity securities available-for-sale, as described in Note 2(e) to the audited consolidated financial statements included in the Company’s 2004 Annual Report on Form 10-K.

The most significant assumptions that are involved in the estimation of future gross profits include future net separate account performance, surrender/lapse rates, interest margins and mortality. The Company’s long-term assumption for net separate account performance is currently 8% growth per year. If actual net separate account performance varies from the 8% assumption, the Company assumes different performance levels over the next three years such that the mean return equals the long-term assumption. This process is referred to as a reversion to the mean. The assumed net separate account return assumptions used in the DAC models are intended to reflect what is anticipated. However, based on historical returns of the Standard & Poor’s (S&P) 500 Index, the Company’s policy regarding the reversion to the mean process does not permit such returns to be negative or in excess of 15% during the three-year reversion period.

Changes in assumptions can have a significant impact on the amount of DAC reported for investment products and universal life insurance products and their related amortization patterns. In the event actual experience differs from assumptions or assumptions are revised, the Company is required to record an increase or decrease in DAC amortization expense (DAC unlocking), which could be significant. In general, increases in the estimated general and separate account returns result in increased expected future profitability and may lower the rate of DAC amortization, while increases in lapse/surrender and mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization.

The Company evaluates the appropriateness of the individual variable annuity DAC balance within pre-set parameters. These parameters are designed to appropriately reflect the Company’s long-term expectations with respect to individual variable annuity contracts while also evaluating the potential impact of short-term experience on the Company’s recorded individual variable annuity DAC balance. If the recorded balance of individual variable annuity DAC falls outside of these parameters for a prescribed period of time, or if the recorded balance falls outside of these parameters and the Company determines it is not reasonably possible to get back within the parameters during this period of time, assumptions are required to be unlocked and DAC is recalculated using revised best estimate assumptions. Otherwise, DAC is not unlocked to reflect updated assumptions. If DAC assumptions were unlocked and revised, the Company would continue to use the reversion to the mean process.

For other investment products and universal life insurance products, DAC is adjusted each quarter to reflect revised best estimate assumptions, including the use of a reversion to the mean methodology over the next three years as it relates to net separate account performance. Any resulting DAC unlocking adjustments are reflected currently in the consolidated statements of income.

Value of Business Acquired

As a result of the acquisition of NFN in 2002 and the application of purchase accounting, the Company reports an intangible asset representing the estimated fair value of the business in force and the portion of the purchase price that was allocated to the value of the right to receive future cash flows from the life insurance and annuity contracts existing as of the closing date of the NFN acquisition. The value assigned to VOBA in the purchase accounting for NFN was supported by an independent valuation study that was commissioned by the Company and executed by a team of qualified valuation experts, including actuarial consultants. The expected future cash flows used in determining such value were based on actuarially determined projections by major line of business of future policy and contract charges, premiums, mortality and morbidity, separate account performance, surrenders, changes in reserves, operating expenses, investment income and other factors. These projections considered all known or expected factors at the valuation date based on the judgment of management. The actual experience on purchased business, to some extent, has and may continue to vary from projections due to differences in renewal premiums, investment spreads, investment gains and losses, mortality and morbidity costs, or other factors.

Amortization of VOBA occurs with interest over the anticipated lives of the major lines of business to which it relates (initially ranging from 13 to 30 years) in relation to estimated gross profits, gross margins or premiums, as appropriate. If estimated gross profits, gross margins or premiums differ from expectations, the amortization of VOBA is adjusted on a retrospective or prospective basis, as appropriate. The VOBA asset related to investment products and universal life insurance products is adjusted annually for the impact of net unrealized gains and losses on securities available-for-sale had such gains and losses been realized and allocated to the product lines, as described in Note 2(b) to the consolidated financial statements included in the Company’s 2004 Annual Report on Form 10-K. The recoverability of VOBA is evaluated annually. If the evaluation indicates that the existing insurance liabilities, together with the present value of future net cash flows from the blocks of business acquired, is insufficient to recover VOBA, the difference, if any, is charged to expense as accelerated amortization of VOBA.

For those products amortized in relation to estimated gross profits, the most significant assumptions involved in the estimation of future gross profits include future net separate account performance, surrender/lapse rates, interest margins and mortality. The Company’s long-term assumption for net separate account performance is currently 8%. If actual net separate account performance varies from the 8% assumption, the Company assumes different performance levels over the next three years such that the mean return equals the long-term assumption. The assumed net separate account return assumptions used in the VOBA models are intended to reflect what is anticipated. However, based on historical returns of the S&P 500 Index, the Company’s policy regarding the reversion to the mean process does not permit such returns to be negative or in excess of 15% during the three-year reversion period.

Changes in assumptions can have a significant impact on the amount of VOBA reported for all products and their related amortization patterns. In the event actual experience differs from assumptions or assumptions are revised, the Company is required to record an increase or decrease in VOBA amortization expense (VOBA unlocking), which could be significant. In general, increases in the estimated general and separate account returns result in increased expected future profitability and may lower the rate of VOBA amortization, while increases in lapse/surrender and mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of VOBA amortization.

Impairment Losses on Investments

Management regularly reviews each investment in its fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments.

Under the Company’s accounting policy for equity securities and debt securities that can be contractually prepaid or otherwise settled in a way that may limit the Company’s ability to fully recover cost, an impairment is deemed to be other-than-temporary unless the Company has both the ability and intent to hold the investment for a reasonable period until the security’s forecasted recovery and evidence exists indicating that recovery will occur in a reasonable period of time. Also, for such debt securities the Company estimates cash flows over the life of purchased beneficial interests in securitized financial assets. If the Company estimates that the fair value of its beneficial interests is not greater than or equal to its carrying value based on current information and events, and if there has been an adverse change in estimated cash flows since the last revised estimate, considering both timing and amount, then the Company recognizes an other-than-temporary impairment and writes down the purchased beneficial interest to fair value.

For other debt securities, an other-than-temporary impairment charge is taken when the Company does not have the ability and intent to hold the security until the forecasted recovery or if it is no longer probable that the Company will recover all amounts due under the contractual terms of the security. Many criteria are considered during this process including, but not limited to, the current fair value as compared to amortized cost or cost, as appropriate, of the security; the amount and length of time a security’s fair value has been below amortized cost or cost; specific credit issues and financial prospects related to the issuer; the Company’s intent to hold or dispose of the security; and current economic conditions.

Other-than-temporary impairment losses result in a permanent reduction to the cost basis of the underlying investment.

Impairment losses are recorded on investments in 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 amounts.

Significant changes in the factors the Company considers when evaluating investments for impairment losses, including significant deterioration in the credit worthiness of individual issuers, could result in a significant change in impairment losses reported in the consolidated financial statements.

Valuation Allowances for Mortgage Loans on Real Estate

The Company provides valuation allowances for impairments of mortgage loans on real estate based on a review by portfolio managers. Mortgage loans on real estate are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When the Company determines that a loan is impaired, a provision for loss is established equal to the difference between the carrying value and the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, if the loan is collateral dependent. In addition to the valuation allowance on specific loans, the Company maintains an unallocated allowance for probable losses inherent in the loan portfolio as of the balance sheet date, but not yet specifically identified by loan. Changes in the valuation allowance are recorded in net realized gains and losses on investments, hedging instruments and hedged items. Loans in foreclosure are placed on non-accrual status. Interest received on non-accrual status mortgage loans on real estate is included in net investment income in the period received.

The valuation allowance account for mortgage loans on real estate is maintained at a level believed adequate by the Company and reflects the Company’s best estimate of probable credit losses, including losses incurred at the balance sheet date but not yet identified by specific loan. The Company’s periodic evaluation of the adequacy of the allowance for losses is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors.

Significant changes in the factors the Company considers in determining the valuation allowance for mortgage loans on real estate could result in a significant change in the valuation allowance reported in the unaudited consolidated financial statements.

Federal Income Taxes

The Company provides for federal income taxes based on amounts the Company believes it ultimately will owe. Inherent in the provision for federal income taxes are estimates regarding the deductibility of certain items and the realization of certain tax credits. In the event the ultimate deductibility of certain items or the realization of certain tax credits differs from estimates, the Company may be required to significantly change the provision for federal income taxes recorded in the unaudited consolidated financial statements. Any such change could significantly affect the amounts reported in the unaudited consolidated statements of income.

Goodwill

In connection with acquisitions of operating entities, the Company recognizes the excess of the purchase price over the fair value of net assets acquired as goodwill. Goodwill is not amortized but is evaluated for impairment at the reporting unit level annually in the fourth quarter. Goodwill of a reporting unit also is tested for impairment on an interim basis in addition to the annual evaluation if an event occurs or circumstances change which would more likely than not reduce the fair value of a reporting unit below its carrying amount.

The process of evaluating goodwill for impairment requires several judgments and assumptions to be made to determine the fair value of the reporting units, including the method used to determine fair value; discount rates; expected levels of cash flows, revenues and earnings; and the selection of comparable companies used to develop market-based assumptions.

Management believes that all judgments and assumptions made in connection with goodwill impairment testing are reasonable based on the underlying facts and circumstances evaluated. However, variances in actual results from expectations or changes in expectations for future cash flows, revenues and/or earnings could result in significant future goodwill impairment charges.

Pension and Other Postretirement Employee Benefits

Pension and other postretirement employee benefit (OPEB) assumptions are revised annually in conjunction with preparation of the Company’s Annual Report on Form 10-K. The 2004 pension expense for substantially all of the Company’s employees and certain agents totaled $14.3 million, an increase of $2.0 million over 2003 pension expense of $12.3 million. The increase primarily was due to decreasing interest rates at the plan level, reflected in a lower discount rate. For the Company’s primary pension plan, the discount rate used to value cash flows was lowered to 5.50% to determine 2004 pension expense from 6.00% used in 2003, and the long-term expected rate of return on plan assets was lowered to 7.25% for 2004 from 7.75% for 2003.

The 2004 and 2003 OPEB expense for substantially all of the Company’s employees and certain agents totaled $3.4 million and $3.3 million, respectively. The discount rate used to value cash flows was lowered to 6.10% to determine 2004 OPEB expense from 6.60% used in 2003, and the long-term expected rate of return on plan assets was lowered to 7.00% for 2004 from 7.50% for 2003.

The Company employs a prospective building block approach in establishing the discount rate and the expected long-term rate of return on plan assets. This process is integrated with the determination of other economic assumptions such as salary scale. For a given measurement date, the discount rate is set by reference to the yield on high-quality corporate bonds to approximate the rate at which plan benefits could effectively be settled. For pension benefits, a downward adjustment in the discount rate is included for plan administration and other expenses likely to be charged by an insurer. Since the OPEB liability includes both claims and administration expenses, a similar downward adjustment is not appropriate for the OPEB discount rate. The historical real rate of return for the reference bonds is subtracted from the yield on these bonds to generate an assumed inflation rate. The expected real rates of return on various asset sub-classes are developed based on historic risk premiums for those sub-classes. The expected real rates of return, reduced for investment expenses, are applied to the target allocation of each asset sub-class to produce an expected real rate of return for the target portfolio. This expected real rate of return varies by plan and changes when the plan’s target investment portfolio changes. The expected long-term rate of return on plan assets is the assumed inflation rate plus the expected real rate of return. This process effectively sets the expected return for the plan’s portfolio at the yield for the reference bond portfolio, adjusted for expected risk premiums of the target asset portfolio. Given the prospective nature of this calculation, short-term fluctuations in the market do not impact the expected risk premiums. However, as the yield for the reference bonds fluctuates, the assumed inflation rate and the expected long-term rate are adjusted in tandem.

The following illustrates the impact of changes in individual assumptions (without changing any other assumption) on expenses in 2004: (1) a 50 basis point increase in the pension discount rate would have decreased 2004 pension expense by approximately 10%, and a 50 basis point increase in the pension long-term expected rate of return would have decreased 2004 pension expense by approximately 13%; and (2) a 50 basis point increase in the OPEB discount rate would have decreased 2004 OPEB expense by approximately 21%, and a 50 basis point increase in the OPEB long-term expected rate of return would have decreased 2004 OPEB expense by approximately 11%.

Results of Operations

Revenues

Total revenues for the first quarter of 2005 increased to $1.11 billion compared to $1.03 billion for the same period in 2004. The growth in 2005 primarily was driven by net realized gains on investments, hedging instruments and hedged items. Increases in other income, net investment income and policy charges also contributed to higher revenues.

Policy charges include asset fees, which are earned primarily from separate account values generated from the sale of individual and group variable annuities and investment life insurance products; cost of insurance charges earned on universal life insurance products; administrative fees, which include fees charged per contract on a variety of the Company’s products and premium loads on universal life insurance products; and surrender fees, which are charged as a percentage of premiums withdrawn during a specified period for annuity and certain life insurance contracts.

The following table summarizes policy charges for the periods indicated:


	Three months ended March 31,
(in millions)	2005		2004
Asset fees	$	160.0	$	157.3
Cost of insurance charges		96.4		93.6
Administrative fees		30.6		30.1
Surrender fees		25.9		25.1

Total policy charges	$	312.9	$	306.1

The increase in asset fees was due to higher average market values of the investment options underlying the accounts, which have followed the general upward trends of the equity markets compared to a year ago.

Net investment income includes earnings on investments supporting fixed annuities, the medium-term note (MTN) program and certain life insurance products, and earnings on invested assets not allocated to product segments, all net of related investment expenses. Net investment income in the first quarter of 2005 increased 3% to $585.3 million compared to $568.5 million in the same period a year ago. The increase primarily was due to higher earnings on MTN variable rate assets, higher income from mortgage loan prepayment penalties and bond call premiums, and earnings on derivatives that do not qualify for hedge accounting treatment.

The Company makes decisions concerning the sale of invested assets based on a variety of market, business, tax and other factors. All realized gains and losses generated by these sales, charges related to other-than-temporary impairments of available-for-sale securities and other investments, and changes in valuation allowances on mortgage loans on real estate are reported in realized gains and losses on investments, hedging instruments and hedged items. Also included are changes in the fair values of derivatives qualifying as fair value hedges and the related changes in the fair values of hedged items; the ineffective, or excluded, portion of cash flow hedges; changes in the fair values of derivatives that do not qualify for hedge accounting treatment; and periodic net coupon settlements on non-qualifying derivatives.

Net realized gains on investments, hedging instruments and hedged items totaled $26.3 million in the first quarter of 2005 compared to net realized losses of $13.3 million in the first quarter of 2004, and included other-than-temporary impairments of $4.6 million and $20.0 million in the first quarter of 2005 and 2004, respectively. The gains were driven by an improving market and credit environment. Non-impairment related net realized gains on investments, hedging instruments and hedged items totaled $30.9 million in the first quarter of 2005 compared to net realized losses of $6.7 million in the first quarter of 2004.

Other income includes asset fees, administrative fees, commissions and other income earned by subsidiaries of the Company that provide administration, marketing and distribution services. Other income in the first quarter of 2005 rose to $89.6 million from $69.0 million in the first quarter of 2004 due to an increase in the number of private sector retirement plans sold through Nationwide Trust Company, FSB (NTC).

Benefits and Expenses

Total benefits and expenses for the first quarter of 2005 increased to $888.8 million compared to $861.7 million for the same period in 2004. The increase in 2005 primarily was driven by higher amortization of deferred policy acquisition costs, interest credited to policyholder account values and policyholder dividends on participating policies.

Interest credited to policyholder account values totaled $340.6 million in the first quarter of 2005 compared to $335.2 million in the first quarter of 2004. Interest credited principally relates to individual and institutional fixed annuities, funding agreements backing the Company’s MTN program and certain life insurance products. The increase reflects higher variable crediting rates related to the Company’s MTN program. Average crediting rates in the MTN program were 2.81% in the first quarter of 2005 compared to 1.45% in the same period a year ago. A decline in average crediting rates in the Individual Investments segment and in the private sector of the Retirement Plans segment partially offset the overall increase in interest credited. Average crediting rates in the Individual Investments segment were 3.75% in the first quarter of 2005 compared to 3.98% in the same period a year ago. Average crediting rates in the Retirement Plans segment were 4.22% in 2005 compared to 4.42% in the prior year quarter.

Other benefits and claims include policyholder benefits in excess of policyholder account values for universal life and individual deferred annuities and net claims and provisions for future policy benefits for traditional life insurance products and immediate annuities. Other benefits and claims in the first quarter of 2005 increased slightly compared to the same period a year ago. The increase primarily was due to an increase in the provision for future policy benefits for immediate annuities, partially offset by a decline in life insurance benefits as a result of favorable mortality.

Policyholder dividends on participating policies increased by 21% to $26.9 million in the first quarter of 2005 compared to $22.2 million in the same period a year ago. The increase primarily was due to higher NFN policyholder dividend obligations, partially offset by a decline in dividend rates.

Amortization of DAC increased to $125.5 million in the first quarter of 2005 compared to $111.1 million in the first quarter of 2004. The higher amortization resulted from increased earnings on variable products and a true-up charge within the Individual Investments segment due to rising interest rates between mid-December 2004 and mid-March 2005.

Other operating expenses increased slightly to $226.5 million in the first quarter of 2005 compared to $225.2 million in the first quarter of 2004. The increase reflects higher expenses related to litigation and regulatory investigations.

Federal income tax expense was $60.7 million and $42.3 million in the first quarter of 2005 and 2004, respectively. These amounts represent effective tax rates of 27.4% for the first quarter of 2005 and 25.6% in 2004. The current quarter increase in the effective tax rate was due to the fact that permanent items, primarily the separate account DRD, grew at a slower rate than pre-tax earnings.

Cumulative Effect of Adoption of Accounting Principle

In July 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-1). SOP 03-1 addresses many topics. The most significant topic affecting the Company was the accounting for contracts with guaranteed minimum death benefits (GMDB). SOP 03-1 requires companies to evaluate the significance of a GMDB to determine whether a contract should be accounted for as an investment or insurance contract. For contracts determined to be insurance contracts, companies are required to establish a reserve to recognize a portion of the assessment (revenue) that compensates the insurance company for benefits to be provided in future periods. SOP 03-1 also provides guidance on separate account presentation, interest in separate accounts, gains and losses on the transfer of assets from the general account to a separate account, liability valuation, return based on a contractually referenced pool of assets or index, annuitization options, and sales inducements to contract holders. The Company adopted SOP 03-1 effective January 1, 2004, which resulted in a $3.4 million charge, net of taxes, as the cumulative effect of adoption of this accounting principle. Also, see Note 3 to the unaudited consolidated financial statements included in this report.

Sales

The Company regularly monitors and reports a production volume metric titled “sales.” Sales or similar measures are commonly used in the insurance industry as a measure of the volume of new and renewal business generated in a period.

Sales are not derived from any specific GAAP income statement accounts or line items and should not be viewed as a substitute for any financial measure determined in accordance with GAAP, including sales as it relates to non-insurance companies. Additionally, the Company’s definition of sales may differ from that used by other companies. As used in the insurance industry, sales, or similarly titled measures, generate customer funds managed and administered, which ultimately drive revenues.

As calculated and analyzed by the Company, statutory premiums and deposits on individual and group annuities and life insurance products calculated in accordance with accounting practices prescribed or permitted by regulatory authorities and deposits on administration-only group retirement plans and the advisory services program are adjusted as described below to arrive at sales.

Life insurance premiums determined on a GAAP basis are significantly different than statutory premiums and deposits. Life insurance premiums determined on a GAAP basis are recognized as revenue when due, as calculated on an accrual basis in proportion to the service provided and performance rendered under the contract. In addition, many life insurance and annuity products involve an initial deposit or a series of deposits from customers. These deposits are accounted for as such on a GAAP basis and therefore are not reflected in the GAAP income statement. On a statutory basis, life insurance premiums collected (cash basis) and deposits received (cash basis) are aggregated and reported as revenues in the line item statutory premiums and annuity considerations.

Sales, as reported by the Company, are stated net of internal replacements, which the Company believes provides a more meaningful disclosure of production in a given period. In addition, the Company’s definition of sales excludes funding agreements issued under the Company’s MTN program; large case bank-owned life insurance (BOLI); large case retirement plan acquisitions; and deposits into Nationwide employee and agent benefit plans. Although these products contribute to asset and earnings growth, they do not produce steady production flow that lends itself to meaningful comparisons and, therefore, are excluded from sales.

The Company believes that the presentation of sales as measured for management purposes enhances the understanding of the Company’s business and helps depict longer-term trends that may not be apparent in the results of operations due to differences between the timing of sales and revenue recognition.

The Company’s flagship products are marketed under The BEST of AMERICA® brand and include individual variable and group annuities, group private sector retirement plans sold through NTC and variable life insurance. The BEST of AMERICA products allow customers to choose from investment options managed by premier mutual fund managers. The Company has also developed private label variable and fixed annuity products in conjunction with other financial services providers that allow those providers to sell products to their own customer bases under their own brand names.

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, The United States Conference of Mayors and The International Association of Firefighters when marketing IRC Section 457 products.

The following table summarizes sales by product and segment for the periods indicated:


	Three months ended March 31,
(in millions)	2005		2004
Individual Investments
Individual variable annuities:
The BEST of AMERICA products	$	815.4	$	1,070.4
Private label annuities		89.2		152.3
NFN and other		1.2		2.0

Total individual variable annuities		905.8		1,224.7

Individual fixed annuities		62.7		211.9
Advisory services program		53.2		22.9
Income products		44.9		34.9

Total Individual Investments		1,066.6		1,494.4

Retirement Plans
Private sector pension plan:
The BEST of AMERICA trust products		1,167.0		911.8
The 401(k) Company		426.8		260.5
The BEST of AMERICA annuity products		415.7		504.9
NFN products		53.2		123.6
Other		—		9.2

Total private sector pension plan		2,062.7		1,810.0

Public sector pension plan:
Administration-only agreements		578.5		469.2
IRC Section 457 annuities		373.8		406.7

Total public sector pension plan		952.3		875.9

Total Retirement Plans		3,015.0		2,685.9

Individual Protection
Corporate-owned life insurance		234.8		217.9
Traditional/universal life insurance		120.9		125.7
The BEST of AMERICA variable life series		103.7		108.0
NFN variable life products		60.0		66.4

Total Individual Protection		519.4		518.0

Total sales	$	4,601.0	$	4,698.3

The Company sells its products through a diverse distribution network. Unaffiliated entities that sell the Company’s products to their own customer bases include independent broker/dealers, financial institutions, wirehouse and regional firms, pension plan administrators, life insurance specialists and representatives of certain certified public accounting (CPA) firms. Representatives of the Company who market products directly to a customer base include Nationwide Retirement Solutions, Inc. (NRS), NFN producers, The 401(k) Company and TBG Insurance Services Corporation (TBG Financial). The Company also distributes products through the agency distribution force of its ultimate parent, NMIC (Nationwide agents).

The following table summarizes sales by distribution channel for the periods indicated:


	Three months ended March 31,
(in millions)	2005		2004
Non-affiliated:
Independent broker/dealers	$	1,402.6	$	1,521.7
Financial institutions		514.4		712.1
Wirehouse and regional firms		501.9		546.7
Pension plan administrators		139.9		143.8
Life insurance specialists		126.6		136.7
CPA channel		83.0		42.0

Total non-affiliated sales		2,768.4		3,103.0

Affiliated:
NRS		959.5		883.7
The 401(k) Company		426.8		260.5
Nationwide agents		176.9		188.6
NFN producers		160.9		181.3
TBG Financial		108.5		81.2

Total affiliated sales		1,832.6		1,595.3

Total sales	$	4,601.0	$	4,698.3

Sales through the independent broker/dealers channel in the first quarter of 2005 decreased 8% compared to the same period a year ago. Both variable annuity and variable life sales were negatively impacted by a continuing unstable market. Fixed life sales were affected by market anticipation of the Company’s June 2005 rollout of a new universal life product. Decreased production in both the Individual Investments and Individual Protection segments were partially offset by an increase in the Retirement Plans segment.

Sales generated by financial institutions declined 28% in the first quarter of 2005 compared to a year ago primarily due to planned reductions in fixed annuity sales and the impact of the Company’s announced exit from the Bermuda market.

Sales generated by wirehouse and regional firms decreased 8% in the first quarter of 2005 compared to the same period in 2004 due to lower variable annuity and Individual Protection sales, partially offset by an increase in Retirement Plans sales.

As the Company’s private sector retirement plan business model continues to evolve, direct production through the pension plan administrators channel is expected to decline, while new business opportunities are being created in conjunction or in partnership with the independent broker/dealers, wirehouse and regional firms, and financial institutions relationships. This was evidenced by the 3% decline in the first quarter of 2005 compared to the same period a year ago.

Sales generated by life insurance specialists decreased 7% in the first quarter of 2005 compared to the same period a year ago. This decline largely was driven by the slow growth in new COLI sales due to the unfavorable environment for COLI and executive deferred compensation programs affecting the creation of new plans and sales.

Sales generated by the CPA channel nearly doubled in the first quarter of 2005 compared to the same period a year ago due to a focus on increased advisory services sales and higher pension sales.

Sales through NRS in the first quarter of 2005 increased 9% compared to the same 2004 period driven by recurring deposits from the State of New York, the State of California and the City of Phoenix cases and higher participation rates in large plans.

Sales generated by The 401(k) Company grew 64% in the first quarter of 2005 compared to the same period a year ago due to recurring flows from the addition of four large plans during the fourth quarter of 2004.

Sales generated by Nationwide agents decreased 6% in the first quarter of 2005 compared to the same period a year ago due to a decrease in variable annuity and life insurance sales driven by market uncertainty.

Sales through NFN producers declined 11% in the first quarter of 2005 compared to the same period a year ago due to lower retirement plans sales driven by a reduction in wholesalers.

Sales through TBG Financial increased 34% in the first quarter of 2005 compared to a year ago due to higher renewal premiums from the funding of existing executive deferred compensation plans and strong first year sales of the private placement product.

Business Segments

During the second quarter of 2004, the Company reorganized its segment reporting structure and now reports four segments: Individual Investments, Retirement Plans, Individual Protection, and Corporate and Other. The Company has reclassified segment results for all prior periods presented to be consistent with the new reporting structure.

The following table summarizes pre-tax operating earnings by segment for the periods indicated:


	Three months ended March 31,
(in millions)	2005		2004
Individual Investments	$	63.3	$	60.0
Retirement Plans		47.1		45.9
Individual Protection		72.2		60.7
Corporate and Other		12.5		15.2

Individual Investments

The Individual Investments segment consists of individual The BEST of AMERICA and private label deferred variable annuity products, NFN individual annuity products, deferred fixed annuity products, income products, and advisory services program revenues and expenses. This segment differs from the former Individual Annuity segment due to the addition of the advisory services program results. Individual deferred annuity contracts provide the customer with tax-deferred accumulation of savings and flexible payout options including lump sum, systematic withdrawal or a stream of payments for life. In addition, individual variable annuity contracts provide the customer with access to a wide range of investment options and asset protection in the event of an untimely death, while individual fixed annuity contracts generate a return for the customer at a specified interest rate fixed for prescribed periods.

The following table summarizes selected financial data for the Company’s Individual Investments segment for the periods indicated:


	Three months ended March 31,
(dollars in millions)	2005		2004
Statements of Income Data
Revenues:
Policy charges	$	136.3	$	129.3
Net investment income		225.9		232.3
Premiums on income products		22.1		18.0
Other		0.4		—

Total revenues		384.7		379.6

Benefits and expenses:
Interest credited to policyholder account values		152.7		160.3
Other benefits		29.2		24.3
Amortization of DAC and VOBA		87.9		76.8
Other operating expenses		51.6		58.2

Total benefits and expenses		321.4		319.6

Pre-tax operating earnings	$	63.3	$	60.0

Other Data
Sales:
Individual variable annuities	$	905.8	$	1,224.7
Individual fixed annuities		62.7		211.9
Advisory services program		53.2		22.9
Income products		44.9		34.9

Total sales	$	1,066.6	$	1,494.4

Average account values:
General account	$	16,300.2	$	16,095.9
Separate account		35,430.3		33,684.2
Advisory services program		222.2		38.8

Total average account values	$	51,952.7	$	49,818.9

Account values as of period end:
Individual variable annuities	$	40,441.0	$	39,700.3
Individual fixed annuities		8,817.6		8,704.5
In retirement		1,916.3		1,848.1
Advisory services program		248.4		50.9

Total account values	$	51,423.3	$	50,303.8

GMDB - Net amount at risk, net of reinsurance	$	344.6	$	870.4
GMDB - Reserves, net of reinsurance	$	26.5	$	25.4
Pre-tax operating earnings to average account values		0.49%		0.48%

Pre-tax operating earnings totaled $63.3 million in the first quarter of 2005, up 6% compared to the first quarter of 2004. The increase was driven by higher asset fees and lower other operating expenses, partially offset by higher DAC amortization.

Asset fees increased to $115.6 million in the first quarter of 2005, up 5% from $110.4 million in the same period a year ago. Asset fees are calculated daily and charged as a percentage of separate account values. The fluctuations in asset fees were primarily due to changes in the market value of the investment options underlying the account values, which have followed the general trends of the equity markets over the comparison periods. Average separate account values increased 5% to $35.43 billion as of March 31, 2005 compared to $33.68 billion as of March 31, 2004.

Surrender fees rose 11% to $16.5 million in the first quarter of 2005 compared to $14.8 million in the same period a year ago primarily due to increased surrender activity driven by a higher base of assets relative to the prior year.

Premiums on income products increased 23% to $22.1 million in the first quarter of 2005 from $18.0 million in the prior year first quarter due to higher interest rates relative to a year ago. Increased purchase rates driven by higher interest rates created a favorable environment for income products.

The 20% increase in other benefits to $29.2 million during the first quarter of 2005 compared to $24.3 million in the prior year first quarter reflects increased provision for future policy benefits for immediate annuities consistent with the increase in premium income, partially offset by a reduction in GMDB costs due to higher market levels.

Other operating expenses were $51.6 million in the first quarter of 2005, an 11% decrease compared to $58.2 million in the first quarter of 2004. The decrease primarily was due to reductions in employee incentives and lower technology costs resulting from decreased project spending.

Interest spread income is comprised of net investment income, excluding capital charges, less interest credited to policyholder account values. Interest spread income can vary depending on crediting rates offered by the Company; performance of the investment portfolio, including the rate of prepayments; changes in market interest rates; the competitive environment; and other factors.

Interest spread income grew 2% in the first quarter of 2005 compared to the same period a year ago. The following table summarizes the interest spread on Individual Investments segment average general account values for the periods indicated:


	Three months ended March 31,
	2005		2004
Net investment income	5.70	%	5.91	%
Interest credited	3.75	%	3.98	%

Interest spread on average general account values	1.95	%	1.93	%

Interest spread margins widened during the first quarter of 2005 to 195 basis points compared to 193 basis points in the same period a year ago. Included in the current quarter were 17 basis points, or $7.0 million, of income from mortgage loan prepayment penalties and bond call premiums compared to 17 basis points, or $6.9 million, in the same period a year ago. The higher interest rate environment compared to the prior year eased the pressure on margins due to the interest rate floors contained in annuity contracts. For the full year 2005, the Company expects interest spread margins to tighten and projects full year spreads of 175 to 180 basis points, including a nominal level of prepayment activity.

The Company has taken actions to address low interest rate environments and the resulting impact on interest spread margins. The Company has lowered commission rates for individual fixed annuities and invokes contractual provisions that limit the amount of variable annuity deposits allocated to the guaranteed fixed option. In addition, the majority of new business now consists of lower floor guarantee products.

Sales totaled $1.07 billion during the first quarter of 2005, down 27% from $1.49 billion in the same period a year ago. Variable annuity production declined by 26% to $905.8 million in the first quarter of 2005, with 23% of new domestic sales allocated to guaranteed fixed options. The Company expects its new variable annuity contract rider, which offers a hybrid guaranteed minimum accumulation/withdrawal living benefit feature and was introduced in March, to positively impact sales during the rest of 2005. Fixed annuity sales totaled $62.7 million in the first quarter of 2005, a 70% decline from the same period of 2004. This decline was attributable to the actions described above, which were intended to reduce the level of new individual fixed annuity business due to the challenging interest rate environment. The decrease in sales also can be attributed to the impact of the Company’s announced exit from the Bermuda market.

Deposits in the first quarter of 2005 of $1.09 billion offset by withdrawals and surrenders totaling $1.52 billion generated net outflows of $425.8 million compared to net inflows of $59.5 million achieved in the first quarter a year ago.

The following table summarizes selected information about the Company’s deferred individual fixed annuities, including the fixed option of variable annuities, as of March 31, 2005:


	Ratchet			Reset
(dollars in millions)	Account value		Wtd. avg. crediting rate	Account value		Wtd. avg. crediting rate
Minimum interest rate of 3.50% or greater	$	—	N/A	$	1,131.3	3.53%
Minimum interest rate of 3.00% to 3.49%		3,152.1	4.77%		6,809.2	3.08%
Minimum interest rate lower than 3.00%		1,096.8	2.65%		345.6	3.16%
MVA with no minimum interest rate guarantee		—	N/A		—	N/A

Total deferred individual fixed annuities	$	4,248.9	4.22%	$	8,286.1	3.15%


	Market value adjustment (MVA)			Total
(dollars in millions)	Account value		Wtd. avg. crediting rate	Account value		Wtd. avg. crediting rate
Minimum interest rate of 3.50% or greater	$	—	N/A	$	1,131.3	3.53%
Minimum interest rate of 3.00% to 3.49%		—	N/A		9,961.3	3.62%
Minimum interest rate lower than 3.00%		—	N/A		1,442.4	2.77%
MVA with no minimum interest rate guarantee		1,748.1	3.27%		1,748.1	3.27%

Total deferred individual fixed annuities	$	1,748.1	3.27%	$	14,283.1	3.48%

Retirement Plans

The Retirement Plans segment is comprised of the Company’s private and public sector retirement plans business. This segment differs from the former Institutional Products segment because it no longer includes the results of the structured products and MTN businesses. The private sector includes IRC Section 401(k) business generated through fixed and variable group annuities, NTC and The 401(k) Company. The public sector includes IRC Section 457 and Section 401(a) business in the form of fixed and variable group annuities and administration-only business. Retirement Plans sales do not include large case retirement plan acquisitions and Nationwide employee and agent benefit plans. However, the statements of income data in the following table does reflect this business.

The following table summarizes selected financial data for the Company’s Retirement Plans segment for the periods indicated:


	Three months ended March 31,
(dollars in millions)	2005		2004
Statements of Income Data
Revenues:
Policy charges	$	39.7	$	43.4
Net investment income		166.3		161.8
Other		57.7		42.0

Total revenues		263.7		247.2

Benefits and expenses:
Interest credited to policyholder account values		111.8		110.1
Amortization of DAC and VOBA		13.0		10.8
Other operating expenses		91.8		80.4

Total benefits and expenses		216.6		201.3

Pre-tax operating earnings	$	47.1	$	45.9

Other Data
Sales:
Private sector	$	2,062.7	$	1,810.0
Public sector		952.3		875.9

Total sales	$	3,015.0	$	2,685.9

Average account values:
General account	$	10,589.9	$	9,959.5
Separate account		20,206.2		20,596.4
Administration-only		46,080.5		34,896.5

Total average account values	$	76,876.6	$	65,452.4

Account values as of period end:
Private sector	$	38,109.3	$	31,354.3
Public sector		38,982.5		35,326.0

Total account values	$	77,091.8	$	66,680.3

Pre-tax operating earnings to average account values		0.25%		0.28%

Pre-tax operating earnings increased 3% to $47.1 million in the first quarter of 2005 from $45.9 million a year ago. The improvement was driven by growth in other income from NTC and administration-only products as well as increased interest spread income. This was partially offset by higher general operating expenses, increased commission expense and slightly higher DAC amortization.

Asset fees decreased 9% to $35.1 million in the first quarter of 2005 compared to $38.5 million in the prior year quarter. The decrease was associated with the declining issuances of group annuity products in favor of non-annuity products due to the quality and breadth of NTC fund options, coupled with a less favorable equity market environment during the first quarter of 2005.

Surrender fees decreased 30% to $2.1 million in the first quarter of 2005 from $3.0 million in the prior year quarter as the aging block of group annuities in the private sector continued to contribute lower contingent deferred sales charges.

Other income, which includes fees for administration-only cases and NTC products, increased 37% to $57.7 million in the first quarter of 2005 compared to $42.0 million in the same period a year ago. The increase primarily was due to higher asset-based fees and revenues derived from higher NTC asset values as a result the positive equity market environment during the fourth quarter of 2004. In addition, growth in private sector retirement plans sold through NTC, which now account for 33% of private sector retirement plan account values compared to 27% a year ago, contributed to the increase. Also, the acquisition of Registered Investment Advisors Services, Inc. during the first quarter of 2005 contributed revenue of $0.6 million.

Interest spread income is comprised of net investment income less interest credited to policyholder account values. Interest spreads vary depending on crediting rates offered by the Company; the performance of the investment portfolio, including the rate of prepayments; changes in market interest rates; the competitive environment; and other factors.

Interest spread income was $2.8 million higher in the first quarter of 2005 compared to the prior year quarter. The increase primarily was due to higher income from mortgage loan prepayment penalties and bond call premiums and 6% higher average general account values compared to the same period a year ago, partially offset by an increase in interest credited.

The following table summarizes the interest spread on Retirement Plans segment average general account values for the periods indicated:


	Three months ended March 31,
	2005		2004
Net investment income	6.28	%	6.50	%
Interest credited	4.22	%	4.42	%

Interest spread on average general account values	2.06	%	2.08	%

Interest spread margins declined to 206 basis points in the first quarter of 2005 compared to 208 basis points for the comparable period a year ago. Included in the current quarter were 25 basis points, or $6.8 million, of income from mortgage loan prepayment penalties and bond call premiums compared to 20 basis points, or $5.0 million, in the same period a year ago. For the full year 2005, the Company expects interest spread margins to tighten and projects full year spreads of 180 to 185 basis points, including a nominal level of prepayment activity.

Other operating expenses increased 14% to $91.8 million in the first quarter of 2005 from $80.4 million in the same period a year ago. The increase reflects costs related to various information technology enhancements to the defined contribution record-keeping platform, an increase in participants in public sector and private sector retirement plans, and higher marketing and advertising expenses.

Sales during the first quarter of 2005 increased 12% to $3.02 billion from $2.69 billion in the first quarter of 2004, as sales in both the public and private sectors substantially outpaced the prior year.

Private sector retirement plan sales in the first quarter of 2005 increased 14% to $2.06 billion from $1.81 billion in the prior year first quarter. The growth was driven by a 64% increase in sales at The 401(k) Company due to the fourth quarter of 2004 addition of four large plans.

Public sector retirement plan sales increased 9% to $952.3 million in the first quarter of 2005 from $875.9 million in the prior year first quarter. The increase reflects the addition of the City of Phoenix plan in the second quarter of 2004 and substantial increases in flows from the State of California and State of New York plans. The addition of the City of Kansas City plan, effective March 1, 2005, also contributed to the increase.

Deposits in the first quarter of 2005 of $3.21 billion offset by participant withdrawals and surrenders of $2.24 billion generated net inflows from participant activity of $970.6 million, a 13% increase from the first quarter of 2004. Deferrals into existing plans, large plan acquisitions at The 401(k) Company, and the acquisitions of the City of Phoenix and City of Kansas City plans drove the increase.

Individual Protection

The Individual Protection segment consists of investment life insurance products, including individual variable, COLI and BOLI products; traditional life insurance products; universal life insurance products; and the results of TBG Financial. This segment is unchanged from the former Life Insurance segment. Life insurance products provide a death benefit and generally allow the customer to build cash value on a tax-advantaged basis.

The following table summarizes selected financial data for the Company’s Individual Protection segment for the periods indicated:


	Three months ended March 31,
(in millions)	2005		2004
Statements of Income Data
Revenues:
Policy charges	$	136.9	$	133.4
Net investment income		119.1		117.0
Other		84.5		87.9

Total revenues		340.5		338.3

Benefits and expenses:
Life benefits and policyholder dividends		174.9		175.1
Amortization of DAC and VOBA		36.6		36.0
Other operating expenses		56.8		66.5

Total benefits and expenses		268.3		277.6

Pre-tax operating earnings	$	72.2	$	60.7

Other Data
Sales:
Corporate-owned life insurance	$	234.8	$	217.9
Traditional/universal life insurance		120.9		125.7
The BEST of AMERICA variable life series		103.7		108.0
NFN variable life products		60.0		66.4

Total sales	$	519.4	$	518.0

Policy reserves as of period end:
Individual investment life insurance	$	4,892.1	$	4,577.9
Corporate investment life insurance		6,267.9		4,623.6
Traditional life insurance		4,234.5		4,234.1
Universal life insurance		1,022.4		922.3

Total policy reserves	$	16,416.9	$	14,357.9

Insurance in force as of period end:
Individual investment life insurance	$	56,772.8	$	56,744.9
Corporate investment life insurance		23,122.3		9,431.6
Traditional life insurance		33,596.4		33,039.1
Universal life insurance		8,510.3		8,553.2

Total insurance in force	$	122,001.8	$	107,768.8

Pre-tax operating earnings increased 19% to $72.2 million in the first quarter of 2005 from $60.7 million in the same period a year ago. Improved results from the corporate investment life business drove the improvement. Earnings for this business were 77% ahead of the prior year first quarter primarily due to improved spreads, favorable mortality and lower DAC amortization as described below. Additionally, earnings from TBG Financial increased $1.0 million due to strong production.

Policy charges increased 3% to $136.9 million in the first quarter of 2005 compared to $133.4 million in the prior year first quarter. Cost of insurance charges, which are assessed on the amount of insurance in force in excess of the related policyholder account value, increased 3% in the first quarter of 2005 compared to the same period a year ago. Growth in universal life and individual investment life products also contributed to the improvement.

Net investment income increased 2% to $119.1 million in the first quarter of 2005 compared to $117.0 million in the first quarter of 2004 primarily due to higher prepayment penalty income in the BOLI business.

Amortization of DAC and VOBA increased 2% to $36.6 million in the first quarter of 2005 compared to $36.0 million in the same period a year ago. Increased DAC amortization in the corporate life insurance business due to higher surrenders was partially offset by a reduction in amortization from the implementation of DAC model enhancements.

Other operating expenses decreased 15% to $56.8 million in the first quarter of 2005 from $66.5 million in the first quarter of 2004. Reduced expenses in individual fixed and investment life driven by reduced production were partially offset by higher expenses in corporate life products primarily related to premium taxes on a large BOLI case written in the first quarter of 2005.

First quarter 2005 sales of $519.4 million were flat compared to a year ago. However, COLI sales increased 8% compared to the same period a year ago largely driven by higher renewal premiums from the funding of existing COLI cases. Increased renewal premiums from COLI cases can be attributed to increased participant deferrals in existing executive deferred compensation plans, partially offset by the slow growth in new COLI sales due to the unfavorable environment for COLI and executive deferred compensation programs affecting the creation of new plans and sales. Traditional/universal life sales decreased 4% to $120.9 million primarily due to market anticipation of the Company’s June 2005 rollout of a new universal life product.

Corporate and Other

The following table summarizes selected financial data for the Company’s Corporate and Other segment for the periods indicated:


	Three months ended March 31,
(in millions)	2005			2004
Statements of Income Data
Operating revenues	$	95.0		$	78.4
Interest expense on debt		(25.7	)		(25.4	)
Other operating expenses		(56.8	)		(37.8	)

Pre-tax operating earnings		12.5			15.2
Net realized gains (losses) on investments, hedging instruments and hedged items¹		26.1			(16.5	)

Income (loss) from continuing operations before federal income taxes	$	38.6		$	(1.3	)

Other Data
Account values as of period end —
Funding agreements backing medium-term notes	$	4,161.4		$	4,580.6

¹	Excluding operating items (periodic net coupon settlements on non-qualifying derivatives, trading portfolio realized gains and losses, and trading portfolio valuation changes).

Pre-tax operating earnings in the first quarter of 2005 declined 18% compared to the first quarter of 2004. This decline primarily was due to discontinuing the use of fair value hedges on a portion of the MTN portfolio, resulting in fixed rate assets versus floating rate assets on a portion of the portfolio and higher variable crediting rates on liabilities in the MTN program. In addition, higher expenses related to commissions, litigation and regulatory investigations, and variable interest entities reduced pre-tax operating earnings. The decline was partially offset by an increase in net investment income primarily due to higher earnings on MTN variable rate assets, higher income from mortgage loan prepayment penalties and bond call premiums, and earnings on derivatives that do not qualify for hedge accounting treatment.

Net realized gains on investments, hedging instruments and hedged items excluding operating items (periodic net coupon settlements on non-qualifying derivatives, trading portfolio realized gains and losses, and trading portfolio valuation changes) totaled $26.1 million in the first quarter of 2005 compared to net realized losses of $16.5 million in the first quarter of 2004, and included other-than-temporary impairments of $4.6 million and $20.0 million in the first quarter of 2005 and 2004, respectively. The gains were driven by an improving market and credit environment.

The following table summarizes net realized gains (losses) on investments, hedging instruments and hedged items from continuing operations by source for the periods indicated:


	Three months ended March 31,
(in millions)	2005			2004
Realized gains on sales, net of hedging losses:
Fixed maturity securities available-for-sale	$	35.6		$	9.5
Hedging losses on fixed maturity sales		(2.0	)		(3.6	)
Equity securities available-for-sale		2.0			1.4
Real estate		—			0.4
Mortgage loans on real estate		2.0			—
Mortgage loan hedging losses		—			(0.5	)
Other		1.6			0.2

Total realized gains on sales		39.2			7.4

Realized losses on sales, net of hedging gains:
Fixed maturity securities available-for-sale		(7.7	)		(2.6	)
Hedging gains on fixed maturity sales		3.6			0.4
Equity securities available-for-sale		(0.6	)		(0.4	)
Real estate		—			(1.2	)
Mortgage loans on real estate		(1.4	)		(1.5	)
Mortgage loan hedging gains		1.9			1.8
Other		(0.5	)		(0.3	)

Total realized losses on sales		(4.7	)		(3.8	)

Other-than-temporary and other investment impairments:
Fixed maturity securities available-for-sale		(1.1	)		(15.6	)
Equity securities available-for-sale		(0.9	)		(0.2	)
Real estate		—			(2.2	)
Mortgage loans on real estate, including valuation allowance adjustment		(2.6	)		(2.0	)

Total other-than-temporary and other investment impairments		(4.6	)		(20.0	)

Credit default swaps		(1.7	)		(2.8	)
Periodic net coupon settlements on non-qualifying derivatives		(0.1	)		3.2
Other derivatives		0.7			2.8
Trading portfolio valuation loss		(0.3	)		—

Total realized gains (losses) before policyholder dividend obligation and DAC and VOBA adjustments		28.5			(13.2	)
Amounts credited to policyholder dividend obligation		(1.3	)		(1.0	)
Amortization adjustment for VOBA		0.7			0.9
Other		(1.6	)		—

Net realized gains (losses) on investments, hedging instruments and hedged items	$	26.3		$	(13.3	)

The Company has a comprehensive portfolio monitoring process for fixed maturity and equity securities to identify and evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. See “Impairment Losses on Investments” in the “Critical Accounting Policies and Recently Issued Accounting Standards” section of Part I, Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) of this report for a complete discussion of this process.

The following table summarizes for the three months ended March 31, 2005 the Company’s largest aggregate losses on sales and write-downs by issuer (including affiliates), the related circumstances giving rise to the losses and the circumstances that may have affected other material investments held:


									March 31, 2005
(in millions)	Fair value at sale (proceeds)		YTD loss on sale			YTD write- downs			Holdings¹		Net unrealized gain (loss)
A payroll services and temporary staffing company. A decline in the fourth quarter of 2004 prompted a decision to sell, and an impairment was recorded. The sale had not yet perfected in the first quarter of 2005, and a further impairment was recorded.	$	—	$	—		$	(0.9	)	$	2.2	$	—

A manufacturer and retailer of manufactured housing. A sale of the entire position was realized as an impairment loss during the first quarter of 2005.		0.4		—			(0.6	)		—		—

An asset-backed security secured by vacation club membership interests. Expected cash flows experienced deterioration in the first quarter of 2005, and an impairment was recorded.		—		—			(0.4	)		0.9		—

An asset-backed security backed by home mortgages. An impairment was recorded in the prior year. A sale of the issue was completed in the first quarter of 2005 with an additional loss that was realized as an impairment loss.		0.7		—			(0.3	)		—		—

U.S. government securities that were sold at a loss in the first quarter of 2005. No impairment necessary on the remaining holdings.		366.8		(2.4	)		—			254.5		9.8

Credit card-backed securities. A sale of a portion of the holdings resulted in a loss in the first quarter of 2005. Expected cash flows and fair values of the remaining holdings are being monitored. The Company has the ability and intent to hold the remaining securities to recovery. No impairment on these holdings necessary at this time.		26.6		(0.7	)		—			94.5		(0.5	)

A financial services company that offers a variety of automotive financial services to various authorized dealers. A sale of two securities by this issuer was completed in the first quarter of 2005. The Company has the ability and intent to hold the remaining securities to recovery.		7.7		(0.4	)		—			60.9		(1.6	)

Asset-backed securities secured by student loans. A sale of a portion of the holdings resulted in a loss in the first quarter of 2005. Expected cash flows and fair values of the remaining holdings are being monitored. The Company has the ability and intent to hold the remaining securities to recovery. No impairment on these holdings necessary at this time.		34.7		(0.4	)		—			92.7		(3.8	)

Securities issued by U.S. government-sponsored enterprises (these securities are not backed by the full faith and credit of the U.S. government) that were sold at a loss in the first quarter of 2005. No impairment necessary on the remaining holdings.		37.6		(0.3	)		—			933.8		53.0

Collateralized mortgage obligations backed by commercial mortgage pass-through certificates. A sale of one issue resulted in a loss in the first quarter of 2005. Expected cash flows and fair values of the remaining holdings are being monitored. The Company has the ability and intent to hold the remaining securities to recovery. No impairment on these holdings necessary at this time.		10.6		(0.3	)		—			117.9		(2.9	)

Collateralized mortgage obligations. A sale of a portion of the holdings resulted in a loss in the first quarter of 2005. Expected cash flows and fair values of the remaining holdings are being monitored. The Company has the ability and intent to hold the remaining securities to recovery. No impairment on these holdings necessary at this time.		12.4		(0.3	)		—			37.5		(0.2	)

A financial services company that provides financing, mortgage, insurance, real estate, automobile and railcar services. The company also operates communication satellites. A purchase and sale of this security was completed in the first quarter of 2005.		16.7		(0.2	)		—			—		—

A provider of global financial services such as investment banking, treasury and securities services, asset management, private banking, cardmember services, commercial banking and home finance. A sale of one security by the issuer was completed during the first quarter of 2005. No impairment loss necessary on the remaining holdings.		9.7		(0.2	)		—			44.0		0.5

Total	$	523.9	$	(5.2	)	$	(2.2	)	$	1,638.9	$	54.3

¹	Holdings represent amortized cost of fixed maturity securities and cost of equity securities as of the date indicated.

No other issuer had aggregate losses on sales and write-downs greater than 2.0% of the Company’s total gross losses on sales and write-downs on fixed maturity and equity securities.

Related Party Transactions

See Note 10 to the unaudited consolidated financial statements included in Part I, Item 1 – Unaudited Consolidated Financial Statements of this report for a discussion of related party transactions.

Liquidity and Capital Resources

Liquidity and capital resources demonstrate the overall financial strength of the Company and its ability to generate cash flows from its operations and borrow funds at competitive rates to meet operating and growth needs. The Company’s capital structure consists of long-term debt and shareholders’ equity.

The following table summarizes the Company’s capital structure as of the dates indicated:


(in millions)	March 31, 2005		December 31, 2004		March 31, 2004
Long-term debt	$	1,406.4	$	1,406.0	$	1,405.7

Shareholders’ equity, excluding accumulated other comprehensive income		4,924.7		4,782.9		4,467.4
Accumulated other comprehensive income		222.6		432.2		663.8

Total shareholders’ equity		5,147.3		5,215.1		5,131.2

Total capital	$	6,553.7	$	6,621.1	$	6,536.9

Long-term debt is comprised of the following: (1) three separate issuances of $300.0 million principal of senior notes and a single issuance of $200.0 million principal of senior notes, none of which are subject to any sinking fund payments; (2) a variable rate note payable; and (3) issuances of $100.0 million of junior subordinated debentures that are due March 1, 2037 and pay a distribution rate of 7.899%, and $200.0 million of junior subordinated debentures that are due October 31, 2028 and pay a distribution rate of 7.100%, each issued to unconsolidated subsidiary trusts.

The $300.0 million principal of 8.00% senior notes, due March 1, 2027, are redeemable, in whole or in part, at the option of NFS at any time on or after March 1, 2007 at scheduled redemption premiums through March 1, 2016, and, thereafter, at 100% of the principal amount thereof plus, in each case, accrued and unpaid interest. The $300.0 million principal of 6.25% senior notes, due November 15, 2011, were issued in November 2001 and are not redeemable prior to their maturity date. The $300.0 million principal of 5.90% senior notes, due July 1, 2012, issued in June 2002, and the $200.0 million principal of 5.625% senior notes due February 13, 2015, issued in February 2003, are redeemable, in whole or in part, at the option of NFS at any time or from time to time at a redemption price equal to the greater of: (i) 100% of the aggregate principal amount of the notes to be redeemed; or (ii) the sum of the present value of the remaining scheduled payments of principal and interest on the notes, discounted to the redemption date on a semi-annual basis at a prevailing U.S. Treasury rate plus 20 basis points, together in each case with accrued interest payments to the redemption date.

The terms of the senior notes contain various restrictive covenants, including limitations on the disposition of subsidiaries. As of March 31, 2005, the Company was in compliance with all such covenants.

The variable rate note payable is tied to 1-year U.S. LIBOR rates with annual resets and had an outstanding balance of $1.5 million and an interest rate of 4.35% as of March 31, 2005.

The 7.899% junior subordinated debentures are the sole assets of Nationwide Financial Services Capital Trust (Trust I) and are redeemable by NFS, in whole at any time or in part from time to time, at par plus an applicable make-whole premium. The capital securities have a liquidation value of $1,000 per security and must be redeemed by Trust I when the 7.899% junior subordinated debentures mature or are redeemed by NFS. The 7.10% junior subordinated debentures are the sole assets of Nationwide Financial Services Capital Trust II (Trust II) and became redeemable, in whole or in part, on or after October 19, 2003 at a redemption price equal to the principal amount to be redeemed plus any accrued and unpaid interest. The preferred securities have a liquidation value of $25 per security and must be redeemed by Trust II when the 7.10% junior subordinated debentures mature or are redeemed by NFS. The related capital and preferred securities are fully and unconditionally guaranteed by NFS. There are no sinking fund requirements related to the capital and preferred securities of subsidiary trusts.

NFS is a holding company whose principal asset is the common stock of NLIC. The principal sources of funds for NFS to pay interest, dividends and operating expenses are existing cash and investments and dividends from NLIC and other subsidiaries.

As an insurance holding company, the ability of NFS to meet debt service obligations and pay operating expenses and dividends depends primarily on the receipt of sufficient funds from its primary operating subsidiary, NLIC. The inability of NLIC to pay dividends to NFS in an amount sufficient to meet debt service obligations and pay operating expenses and dividends would have a material adverse effect on the Company. The payment of dividends by NLIC is subject to restrictions set forth in the insurance laws and regulations of the State of Ohio, its domiciliary state. The State of 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. NLIC’s statutory capital and surplus as of December 31, 2004 was $2.39 billion, and statutory net income for 2004 was $317.7 million. As of March 31, 2005, NLIC could pay dividends to NFS totaling $167.7 million without obtaining prior approval. On March 1, 2005, NLIC paid a $25.0 million dividend to NFS. The State of Ohio insurance laws also require insurers to seek prior regulatory approval for any dividend paid from other than earned surplus. The payment of dividends by NLIC may also be subject to restrictions set forth in the insurance laws of the State 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 NFS and its stockholders.

The ability of NLICA to pay dividends to NFS is subject to regulation under Pennsylvania insurance law. Under Pennsylvania insurance laws, unless the Pennsylvania Insurance Department (PID) either approves or fails to disapprove payment within 30 days after being notified, NLICA may not pay any cash dividends or other non-stock distributions to NFS during any 12-month period if the total payments exceed 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 prior year. In connection with the acquisition of NLICA, the PID ordered that no dividends could be paid out of NLICA before October 1, 2005 without prior approval. The statutory capital and surplus of NLICA as of December 31, 2004 was $576.5 million, while statutory net income for the year ended December 31, 2004 was $126.4 million. Effective October 1, 2005, based on statutory financial results as of and for the year ended December 31, 2004, and based on dividends paid through September 30, 2005, NLICA will be able to pay dividends to NFS totaling $76.4 million without obtaining prior approval.

NFS currently does not expect such regulatory requirements to impair its ability to pay interest, dividends, operating expenses and principal in the future.

Also available as a source of funds to the Company is a $1.00 billion revolving credit facility entered into by NFS, NLIC and NMIC with a group of national financial institutions. The facility provides for several and not joint liability with respect to any amount drawn by any party. The facility provides covenants, including, but not limited to, requirements that the Company maintain consolidated tangible net worth, as defined, in excess of $2.29 billion and NLIC maintain statutory surplus in excess of $1.56 billion. The Company had no amounts outstanding under this agreement as of March 31, 2005. NLIC also has an $800.0 million commercial paper program and is required to maintain an available credit facility equal to 50% of any amounts outstanding under the commercial paper program. Therefore, borrowing capacity under the $1.00 billion revolving credit facility is reduced by 50% of any amounts outstanding under the commercial paper program. NLIC had $134.6 million in commercial paper outstanding as of March 31, 2005.

The Company has an available financing capacity of $1.30 billion under a shelf registration statement dated February 4, 2003. Under the shelf registration statement, the Company can issue many security instruments including, but not limited to, unsecured senior or subordinated debt securities, preferred stock, Class A common stock, stock purchase contracts or stock purchase units. The Company may also, in conjunction with owned trusts, issue trust preferred securities guaranteed by NFS.

In addition, the Company has two majority-owned subsidiaries that each has available separate annually renewable, 364-day, $10.0 million line of credit agreements with a single financial institution. The lines of credit are guaranteed by NFS and are included in the consolidated balance sheets. One of the agreements was renewed in September 2004, and the majority-owned subsidiary had $6.9 million outstanding on that line of credit as of March 31, 2005 at a weighted average effective interest rate of 3.92% in 2005. The other agreement was established in August 2004, and the majority-owned subsidiary had $9.0 million outstanding on that line of credit as of March 31, 2005 at a weighted average effective interest rate of 3.52% in 2005.

NLIC has entered into an agreement with its custodial bank to borrow against the cash collateral that is posted in connection with its securities lending program. This is an uncommitted facility, which is contingent on the liquidity of the securities lending program. The borrowing facility was established to fund commercial mortgage loans that were originated with the intent of sale through securitization. The maximum amount available under the agreement is $350.0 million. The borrowing rate on this program is equal to one-month U.S. LIBOR. NLIC had no amount outstanding under this agreement as of March 31, 2005. As of March 31, 2005, the Company has not provided any guarantees on such borrowings, either directly or indirectly.

In addition to the agreement described above, NMIC has entered into an agreement with its custodial bank to borrow against the cash collateral that is posted in connection with its securities lending program. This is an uncommitted facility, which is contingent on the liquidity of the securities lending program. The borrowing facility was established to fund commercial mortgage loans that were originated with the intent of sale through securitization. Because NLIC has a variable interest in the profits from the securitization of these loans, NLIC consolidates the assets and liabilities associated with these loans and the corresponding borrowings in accordance with current accounting guidance. The maximum amount available under the agreement is $250.0 million. The borrowing rate on this program is equal to one-month U.S. LIBOR. NMIC had $32.6 million outstanding under this agreement as of March 31, 2005. As of March 31, 2005, the Company has not provided any guarantees on such borrowings, either directly or indirectly.

Contractual Obligations and Commitments

Contractual obligations and commitments have not changed materially from those disclosed in the Company’s 2004 Annual Report on Form 10-K.

Off-Balance Sheet Transactions

Under the MTN program, NLIC issues funding agreements to an unconsolidated third party trust to secure notes issued to investors by the trust. The funding agreements rank pari passu with all other insurance claims of the issuing company in the event of liquidation and should be treated as “annuities” under applicable Ohio insurance law. Therefore, the funding agreement obligations are classified as a component of future policy benefits and claims on the unaudited consolidated balance sheets. Because the Company is not the primary beneficiary of, and has no ownership interest in, or control over, the third party trust that issues the MTNs, the Company does not include the trust in its unaudited consolidated financial statements. Since the notes issued by the trust have a secured interest in the funding agreements issued by the Company, Moody’s Investors Service, Inc. (Moody’s) and Standard & Poor’s Ratings Services assign the same ratings to the notes and the insurance financial strength of NLIC.

As of March 31, 2005 and December 31, 2004, the Company had received $1.29 billion and $1.01 billion, respectively, of cash collateral on securities lending and $355.3 million and $415.7 million, respectively, of cash for derivative collateral. As of March 31, 2005 and December 31, 2004, the Company had received $28.9 million and $194.7 million, respectively, of non-cash collateral on securities lending. Both the cash and non-cash collateral amounts were included in short-term investments with a corresponding liability recorded in other liabilities. As of March 31, 2005 and December 31, 2004, the Company had loaned securities with a fair value of $1.29 billion and $1.18 billion, respectively. The Company also held $151.9 million and $222.5 million of securities as off-balance sheet collateral on derivative transactions as of March 31, 2005 and December 31, 2004, respectively.

Investments

General

The Company’s assets are divided between separate account and general account assets. As of March 31, 2005, $64.37 billion (55%) of the Company’s total assets were held in separate accounts and $51.63 billion (45%) were held in the Company’s general account, including $44.16 billion of general account investments.

Separate account assets consist primarily of deposits from the Company’s variable annuity and variable life insurance business. Most separate account assets are invested in various mutual funds. All of the investment performance in the Company’s separate account assets is passed through to the Company’s customers.

The following table summarizes the Company’s consolidated general account investments by asset category as of the dates indicated:


	March 31, 2005			December 31, 2004
(dollars in millions)	Carrying value		% of total	Carrying value		% of total
Fixed maturity securities	$	31,188.2	70.6	$	31,516.8	70.7
Equity securities		77.5	0.2		87.0	0.2
Trading assets		26.0	0.1		15.9	—
Mortgage loans on real estate, net		9,127.8	20.7		9,267.5	20.8
Real estate, net		108.6	0.2		108.3	0.2
Policy loans		921.9	2.1		987.2	2.2
Other long-term investments		581.8	1.3		604.2	1.4
Short-term investments		2,126.1	4.8		2,009.9	4.5

Total	$	44,157.9	100.0	$	44,596.8	100.0

The following table lists the ten largest fixed maturity investment holdings by amortized cost for both investment grade and non-investment grade securities included in the general account as of March 31, 2005:

(in millions)

Predominant
Rating

Amortized
Cost

Predominant
Rating

Amortized
Cost

Investment Grade

Non-Investment Grade

General Electric Capital Corporation

AAA

85.3

Bowater, Inc.

37.8

Southwest Airlines Company

A+

85.0

Electronic Data System Corporation

BB+

34.0

Baxter International, Inc.

BBB+

59.5

America West Airlines

BB+

29.9

Midwest Ind. Transmission Sys. Op., Inc.

A+

57.7

Delta Airlines, Inc.

B-

25.6

McDonald’s Corporation

57.5

Edison International

BB+

25.4

National Rural Utilities

A+

56.7

Timken Company

BB+

25.0

Bank of America Corporation

A+

56.7

DPL, Inc.

B+

24.3

Cargill, Inc.

56.7

Enterprise Products Ptnrs LP

BB+

22.6

Ford Motor Company

BBB-

56.6

Kaneb Pipe Line Partners LP

BB+

22.1

Wachovia Corporation

56.5

Georgia-Pacific Group

20.2

Securities Available-for-Sale

The following table summarizes the amortized cost, gross unrealized gains and losses, and estimated fair values of securities available-for-sale as of the dates indicated:


(in millions)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
March 31, 2005:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations	$	254.5	$	13.7	$	3.9	$	264.3
Agencies not backed by the full faith and credit of the U.S. Government		933.8		59.5		6.5		986.8
Obligations of states and political subdivisions		287.8		2.2		4.3		285.7
Debt securities issued by foreign governments		58.3		2.3		0.4		60.2
Corporate securities
Public		11,589.8		432.6		87.8		11,934.6
Private		7,152.7		256.6		60.9		7,348.4
Mortgage-backed securities – U.S. Government-backed		6,779.3		37.3		73.2		6,743.4
Asset-backed securities		3,539.3		65.3		39.8		3,564.8

Total fixed maturity securities		30,595.5		869.5		276.8		31,188.2
Equity securities		64.2		13.7		0.4		77.5

Total securities available-for-sale	$	30,659.7	$	883.2	$	277.2	$	31,265.7

December 31, 2004:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations	$	155.1	$	14.2	$	0.8	$	168.5
Agencies not backed by the full faith and credit of the U.S. Government		1,168.6		82.0		1.3		1,249.3
Obligations of states and political subdivisions		266.8		3.1		2.8		267.1
Debt securities issued by foreign governments		58.4		2.8		0.1		61.1
Corporate securities
Public		12,005.1		584.2		32.1		12,557.2
Private		7,306.3		358.2		28.6		7,635.9
Mortgage-backed securities – U.S. Government-backed		5,464.1		71.7		17.9		5,517.9
Asset-backed securities		3,998.8		89.3		28.3		4,059.8

Total fixed maturity securities		30,423.2		1,205.5		111.9		31,516.8
Equity securities		73.1		14.3		0.4		87.0

Total securities available-for-sale	$	30,496.3	$	1,219.8	$	112.3	$	31,603.8

The following table summarizes by time the gross unrealized losses on securities available-for-sale in an unrealized loss position as of the dates indicated:


	Less than or equal to one year				More than one year				Total
(in millions)	Estimated fair value		Gross unrealized losses		Estimated fair value		Gross unrealized losses		Estimated fair value		Gross unrealized losses
March 31,2005:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations	$	153.6	$	3.4	$	6.8	$	0.5	$	160.4	$	3.9
Agencies not backed by the full faith and credit of the U.S. Government		368.0		6.5		—		—		368.0		6.5
Obligations of states and political subdivisions		108.3		1.8		53.6		2.5		161.9		4.3
Debt securities issued by foreign governments		15.3		0.2		8.7		0.2		24.0		0.4
Corporate securities
Public		3,643.0		68.6		431.8		19.2		4,074.8		87.8
Private		2,223.3		46.6		252.0		14.3		2,475.3		60.9
Mortgage-backed securities – U.S. Government-backed		4,088.0		64.5		264.1		8.7		4,352.1		73.2
Asset-backed securities		1,289.3		29.1		190.4		10.7		1,479.7		39.8

Total fixed maturity securities		11,888.8		220.7		1,207.4		56.1		13,096.2		276.8
Equity securities		18.2		0.4		—		—		18.2		0.4

Total	$	11,907.0	$	221.1	$	1,207.4	$	56.1	$	13,114.4	$	277.2

% of gross unrealized losses				80%				20%

December 31, 2004:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations	$	42.7	$	0.5	$	14.1	$	0.3	$	56.8	$	0.8
Agencies not backed by the full faith and credit of the U.S. Government		184.9		1.0		1.8		0.3		186.7		1.3
Obligations of states and political subdivisions		80.8		0.5		54.6		2.3		135.4		2.8
Debt securities issued by foreign governments		5.3		—		8.7		0.1		14.0		0.1
Corporate securities
Public		1,853.0		21.6		349.7		10.5		2,202.7		32.1
Private		1,183.3		18.0		235.4		10.6		1,418.7		28.6
Mortgage-backed securities – U.S. Government-backed		1,492.9		11.9		231.7		6.0		1,724.6		17.9
Asset-backed securities		834.3		17.4		230.3		10.9		1,064.6		28.3

Total fixed maturity securities		5,677.2		70.9		1,126.3		41.0		6,803.5		111.9
Equity securities		17.3		0.4		—		—		17.3		0.4

Total	$	5,694.5	$	71.3	$	1,126.3	$	41.0	$	6,820.8	$	112.3

% of gross unrealized losses				63%				37%

The National Association of Insurance Commissioners (NAIC) assigns securities quality ratings and uniform valuations called “NAIC Designations” which are used by insurers when preparing their annual statements. The NAIC assigns designations to publicly traded and privately placed securities. The designations assigned by the NAIC range from class 1 (highest quality) to class 6. Of the Company’s general account fixed maturity securities, 94% were in the two highest NAIC Designations as of March 31, 2005.

The following table summarizes the credit quality, as determined by NAIC Designation, of the Company’s general account fixed maturity securities portfolio as of the dates indicated:


(in millions)	Rating agency equivalent designation²	March 31, 2005				December 31, 2004
NAIC designation¹	Rating agency equivalent designation²	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value
1	Aaa/Aa/A	$	19,689.7	$	19,931.5	$	19,025.7	$	19,556.7
2	Baa		9,216.4		9,505.8		9,604.5		10,069.0
3	Ba		1,068.2		1,106.0		1,127.7		1,188.0
4	B		459.8		469.8		466.8		487.0
5	Caa and lower		73.1		81.3		91.5		103.4
6	In or near default		88.3		93.8		107.0		112.7

	Total	$	30,595.5	$	31,188.2	$	30,423.2	$	31,516.8

¹	NAIC Designations are assigned at least annually. Some designations for securities shown have been assigned to securities not yet assigned an NAIC Designation in a manner approximating equivalent public rating categories.

²	Comparisons between NAIC and Moody’s designations are published by the NAIC. If no Moody’s rating is available, the Company assigns internal ratings corresponding to public ratings.

Mortgage-Backed Securities

The Company’s general account mortgage-backed securities (MBS) portfolio is comprised of residential MBS investments. As of March 31, 2005, MBS investments totaled $6.74 billion (22%) of the carrying value of the Company’s general account fixed maturity securities available-for-sale.

The Company believes that MBS investments add diversification, liquidity, credit quality and additional yield to its general account portfolio. The Company’s objective for its MBS portfolio is to provide reasonable cash flow stability and increased yield. The MBS portfolio includes collateralized mortgage obligations (CMOs), Real Estate Mortgage Investment Conduits (REMICs) and mortgage-backed pass-through securities. The Company’s general account MBS portfolio generally does not include interest-only securities, principal-only securities or other MBS investments which may exhibit extreme market volatility.

Prepayment/extension risk is an inherent risk of holding MBSs. However, the degree of prepayment/extension risk varies by the type of MBS held. The Company limits its exposure to prepayments/extensions by including less volatile types of MBSs. As of March 31, 2005, $2.56 billion (38%) of the carrying value of the general account MBS portfolio was invested in planned amortization class CMOs/REMICs (PACs). PACs are securities whose cash flows are designed to remain constant in a variety of mortgage prepayment environments. Most of the Company’s non-PAC MBSs possess varying degrees of cash flow structure and prepayment/extension risk. The MBS portfolio contains only 3% of pure pass-throughs.

The following table summarizes the distribution by investment type of the Company’s general account MBS portfolio as of the dates indicated:


	March 31, 2005			December 31, 2004
(dollars in millions)	Estimated fair value		% of total	Estimated fair value		% of total
Planned amortization class	$	2,558.1	37.9	$	2,394.7	43.4
Sequential		1,612.2	23.9		1,329.2	24.1
Non-accelerating securities – CMO		1,086.6	16.1		520.4	9.4
Very accurately defined maturity		821.6	12.2		683.5	12.4
Multi-family mortgage pass-through certificates		231.3	3.4		237.2	4.3
Accrual		187.2	2.8		191.8	3.5
Other		246.4	3.7		161.1	2.9

Total	$	6,743.4	100.0	$	5,517.9	100.0

Asset-Backed Securities

The Company’s general account asset-backed securities (ABS) portfolio includes home equity and credit card-backed ABS investments, among others. As of March 31, 2005, ABS investments were $3.56 billion (11%) of the carrying value of the Company’s general account fixed maturity securities available-for-sale.

The Company believes that general account ABS investments add diversification, liquidity, credit quality and additional yield to its general account portfolio. Like the MBS portfolio, the Company’s objective for its ABS portfolio is to provide reasonable cash flow stability and increased yield. The Company’s general account ABS portfolio generally does not include interest-only securities, principal-only securities or other ABS investments which may exhibit extreme market volatility.

The following table summarizes the distribution by investment type of the Company’s general account ABS portfolio as of the dates indicated:


	March 31, 2005			December 31, 2004
(dollars in millions)	Estimated fair value		% of total	Estimated fair value		% of total
Home equity/improvement	$	1,099.6	30.8	$	1,248.2	$	30.7
Credit card-backed		496.9	13.9		667.6		16.5
CBO/CLO/CDO		469.2	13.2		463.5		11.4
Commercial mortgage-backed securities		446.4	12.5		455.1		11.2
Pass-through certificate		152.8	4.3		154.3		3.8
Enhanced equity/equity trust certificates		150.3	4.2		160.5		4.0
Non-accelerated securities		149.5	4.2		200.0		4.9
Student loans		89.2	2.5		125.8		3.1
Franchise/business loan		81.7	2.3		84.9		2.1
Miscellaneous asset-backed		70.5	2.0		76.7		2.0
Other		358.7	10.1		423.2		10.3

Total	$	3,564.8	100.0	$	4,059.8		100.0

Private Placement Fixed Maturity Securities

The Company invests in private placement fixed maturity securities because of the generally higher nominal yield available compared to comparably rated public fixed maturity securities, more restrictive financial and business covenants available in private fixed maturity security loan agreements and stronger prepayment protection. Although private placement fixed maturity securities are not registered with the Securities and Exchange Commission (SEC) and generally are less liquid than public fixed maturity securities, restrictive financial and business covenants included in private placement fixed maturity security loan agreements generally are designed to compensate for the impact of increased liquidity risk. A significant portion of the private placement fixed maturity securities that the Company holds are participations in issues that are also owned by other investors. In addition, some of these securities are rated by nationally recognized rating agencies, and substantially all have been assigned a rating designation by the NAIC, as shown in the earlier table which summarizes the credit quality, as determined by NAIC Designation, of the Company’s general account fixed maturity securities portfolio as of March 31, 2005.

Mortgage Loans

As of March 31, 2005, general account mortgage loans were $9.13 billion (21%) of the carrying value of consolidated general account investments. Substantially all of these loans were commercial mortgage loans. Commitments to fund mortgage loans of $678.1 million were outstanding as of March 31, 2005.

The table below summarizes the carrying values of mortgage loans by regional exposure and type of collateral as of March 31, 2005:


(in millions)	Office		Warehouse		Retail		Apartment & Other		Total
New England	$	323.3	$	16.1	$	118.8	$	20.1	$	478.3
Middle Atlantic		278.1		313.7		380.5		103.1		1,075.4
East North Central		332.2		281.4		571.0		375.8		1,560.4
West North Central		78.9		73.5		69.4		71.0		292.8
South Atlantic		295.9		381.1		734.5		832.0		2,243.5
East South Central		48.9		87.9		101.1		142.4		380.3
West South Central		231.7		132.1		94.8		231.6		690.2
Mountain		189.6		120.5		205.4		308.2		823.7
Pacific		364.7		480.9		446.5		281.2		1,573.3

Total principal	$	2,143.3	$	1,887.2	$	2,722.0	$	2,365.4		9,117.9

Valuation allowance										(38.1	)
Unamortized premium										45.5
Change in fair value of hedged mortgage loans and commitments										2.5

Total mortgage loans on real estate, net									$	9,127.8

As of March 31, 2005, the Company’s largest exposure to any single borrowing group was $832.0 million (9%) of the Company’s general account mortgage loan portfolio.

As of March 31, 2005 and December 31, 2004, 0.05% of the Company’s mortgage loans were classified as delinquent. There were no foreclosed loans as of March 31, 2005 compared to 0.13% of the Company’s mortgage loans that were foreclosed as of December 31, 2004. Restructured loans totaled 0.27% of the Company’s mortgage loans as of March 31, 2005 and December 31, 2004.

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk

Market risks have not changed materially from those disclosed in the Company’s 2004 Annual Report on Form 10-K.

ITEM 4 Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on such evaluation, such officers have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report.

Changes in Internal Control Over Financial Reporting

There have been no changes during the Company’s first fiscal quarter to its internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II– OTHER INFORMATION

ITEM 1 Legal Proceedings

In addition, state and federal regulators have commenced investigations or other proceedings relating to compensation and bidding arrangements and possible anti-competitive activities between insurance producers and brokers and issuers of insurance products, and unsuitable sales and replacements by producers on behalf of the issuer. Also under investigation are compensation arrangements between the issuers of variable insurance contracts and mutual funds or their affiliates, and funding agreements issued to back MTN programs. Related investigations and proceedings may be commenced in the future. The Company has been contacted by or received subpoenas from state and federal regulatory agencies, state securities law regulators and state attorneys general for information relating to these investigations into compensation and bidding arrangements, anti-competitive activities, unsuitable sales or replacement practices, and funding agreements backing the MTN program. The Company is cooperating with regulators in connection with these inquiries. NMIC, NFS’ ultimate parent, has been contacted by or received subpoenas from certain regulators for information on these issues with respect to its operations and the operations of its subsidiaries, including the Company. The Company will cooperate with NMIC in responding to these inquiries to the extent that any inquiries encompass its operations.

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds

Pursuant to the Nationwide Financial Services, Inc. Amended and Restated Stock Retainer Plan for Non-Employee Directors, 2,588 shares of Class A Common Stock were issued by NFS during the first quarter of 2005, at an average price of $36.46 per share, to NFS directors, who are not employees of NFS or its affiliates. This was a partial payment of the annual stock retainer paid by NFS to such directors in consideration of serving as directors of the Company. The annual stock retainer consists of a grant of shares of Class A Common Stock of the Company having a value of $32,500 and is paid in monthly installments. In addition, the directors receive an annual cash retainer of $32,500 (paid in monthly installments) and a stock option grant valued at $45,000. The Chairman of the Board receives a supplemental annual retainer of $40,000, paid one-half in cash and one-half in shares of the Company’s Class A Common Stock, for his additional duties. This supplemental retainer of cash and stock is also paid in monthly installments. The issuance of such shares in partial payment of the annual retainer is exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) promulgated thereunder.

The following table summarizes the information required by Item 703 of Regulation S-K for purchases of NFS’ equity securities by NFS or any affiliated purchasers, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act, during the Company’s first quarter:


Period	(a) Total number of shares (or units) purchased	(b) Average price paid per share (or unit)		(c) Total number of shares (or units) purchased as part of publicly announced plans or programs	(d) Maximum number (or approximate value) of shares (or units) that may yet be purchased under the plans or programs
January 2005	275	$	37.34	N/A	N/A
February 2005	900	$	37.80	N/A	N/A
March 2005	550	$	36.86	N/A	N/A

Total	1,725¹	$	37.43	N/A	N/A

Represents shares of Class A Common Stock purchased on the open market by The 401(k) Company as fund administrator of the Nationwide Financial Services, Inc. Common Stock Fund, an investment choice under the Nationwide Savings Plan (the Plan), for the benefit of Plan participants. The 401(k) Company is an indirect subsidiary of NFS.

ITEM 3 Defaults Upon Senior Securities

None.

ITEM 4 Submission of Matters to a Vote of Security Holders

None.

ITEM 5 Other Information

None.

ITEM 6 Exhibits

10.1

Form of NVA Target Award Opportunity and Stock Option Award Agreement for Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity Compensation Plan.

31.1

Certification of W.G. Jurgensen pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of M. Eileen Kennedy pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of W.G. Jurgensen pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (this exhibit is intended to be furnished in accordance with Regulation S-K, Item 601(b)(32)(ii) and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any document filed under the Securities Act of 1933, except as shall be expressly set forth by specific reference to such filing).

32.2

Certification of M. Eileen Kennedy pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (this exhibit is intended to be furnished in accordance with Regulation S-K, Item 601(b)(32)(ii) and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any document filed under the Securities Act of 1933, except as shall be expressly set forth by specific reference to such filing).

SIGNATURE

Pursuant to the requirements 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 FINANCIAL SERVICES, INC.
		(Registrant)

Date: May 5, 2005		/s/ M. Eileen Kennedy
		M. Eileen Kennedy, Senior Vice President — Chief Financial Officer