Nationwide Life Insurance 10Q 2008 Q2 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 June 30, 2008

¨	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: 2-64559

NATIONWIDE LIFE INSURANCE COMPANY

(Exact name of registrant as specified in its charter)


Ohio		31-4156830
(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)

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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ¨		Accelerated filer ¨

Non-accelerated filer x	(Do not check if a smaller reporting company)	Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

No established published trading market exists for the registrant’s common stock, par value $1.00 per share. As of August 1, 2008, 3,814,779 shares of the registrant’s common stock were outstanding, all of which are held by Nationwide Financial Services, Inc.

The Registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form in the reduced disclosure format.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION		1

	ITEM 1 Condensed Consolidated Financial Statements	1

	ITEM 2 Management’s Narrative Analysis of the Results of Operations	34

	ITEM 3 Quantitative and Qualitative Disclosures About Market Risk	66

	ITEM 4 Controls and Procedures	66

PART II – OTHER INFORMATION		67

	ITEM 1 Legal Proceedings	67

	ITEM 1A Risk Factors	67

	ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds	67

	ITEM 3 Defaults Upon Senior Securities	67

	ITEM 4 Submission of Matters to a Vote of Security Holders	67

	ITEM 5 Other Information	67

	ITEM 6 Exhibits	67

SIGNATURE		68

PART I – FINANCIAL INFORMATION

ITEM 1 Condensed Consolidated Financial Statements

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Condensed Consolidated Statements of Income

(Unaudited)

(in millions)


	Three months ended June 30,						Six months ended June 30,
	2008			2007			2008			2007
Revenues:
Policy charges	$	311.1		$	298.8		$	612.0		$	589.5
Premiums		72.0			69.7			147.5			142.7
Net investment income		431.8			496.4			881.5			1,010.7
Net realized investment losses		(14.2	)		(2.5	)		(209.5	)		(13.6	)
Other income		1.1			(2.1	)		1.9			(2.1	)

Total revenues		801.8			860.3			1,433.4			1,727.2

Benefits and expenses:
Interest credited to policyholder accounts		275.0			316.9			568.6			639.4
Benefits and claims		129.0			135.7			256.0			239.0
Policyholder dividends		6.2			4.8			14.5			10.7
Amortization of deferred policy acquisition costs		163.5			14.1			225.1			143.8
Interest expense, primarily with Nationwide Financial Services, Inc. (NFS)		15.3			16.8			31.9			31.9
Other operating expenses		120.5			135.0			247.2			263.1

Total benefits and expenses		709.5			623.3			1,343.3			1,327.9

Income from continuing operations before federal income tax expense		92.3			237.0			90.1			399.3
Federal income tax expense		28.5			71.3			10.8			103.4

Income from continuing operations		63.8			165.7			79.3			295.9
Cumulative effect of adoption of accounting principle, net of taxes		—			—			—			(6.0	)

Net income	$	63.8		$	165.7		$	79.3		$	289.9

See accompanying notes to condensed consolidated financial statements.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Condensed Consolidated Balance Sheets

(in millions, except per share amounts)


	June 30, 2008			December 31, 2007
	(Unaudited)
Assets
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $23,437.0 and $24,021.2)	$	22,568.2		$	23,933.4
Equity securities (cost $83.4 and $69.6)		77.3			72.9
Mortgage loans on real estate, net		7,264.0			7,615.4
Short-term investments, including amounts managed by a related party		723.7			959.1
Other investments		1,342.2			1,330.8

Total investments		31,975.4			33,911.6
Cash		24.0			1.3
Accrued investment income		287.7			314.3
Deferred policy acquisition costs		4,269.6			3,997.4
Other assets		1,506.0			1,638.9
Separate account assets		62,955.8			69,676.5

Total assets	$	101,018.5			109,540.0

Liabilities and Shareholder’s Equity
Liabilities:
Future policy benefits and claims	$	31,223.1		$	31,998.4
Short-term debt		249.5			285.3
Long-term debt, payable to NFS		700.0			700.0
Other liabilities		2,220.3			2,642.6
Separate account liabilities		62,955.8			69,676.5

Total liabilities		97,348.7			105,302.8

Shareholder’s equity:
Common stock, $1 par value; authorized - 5.0 shares; issued and outstanding - 3.8 shares		3.8			3.8
Additional paid-in capital		274.4			274.4
Retained earnings		3,882.3			4,049.5
Accumulated other comprehensive loss		(490.7	)		(90.5	)

Total shareholder’s equity		3,669.8			4,237.2

Total liabilities and shareholder’s equity	$	101,018.5		$	109,540.0

See accompanying notes to condensed consolidated financial statements.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Condensed Consolidated Statements of Changes in Shareholder’s Equity

Six Months Ended June 30, 2008 and 2007

(Unaudited)

(in millions)


	Common stock		Additional paid-in capital		Retained earnings			Accumulated other comprehensive (loss) income			Total shareholder’s equity
Balance as of December 31, 2006	$	3.8	$	274.4	$	4,138.8		$	28.7		$	4,445.7

Dividends to NFS		—		—		(475.0	)		—			(475.0	)

Comprehensive income:
Net income		—		—		289.9			—			289.9
Other comprehensive loss, net of taxes		—		—		—			(93.4	)		(93.4	)

Total comprehensive income												196.5

Balance as of June 30, 2007	$	3.8	$	274.4	$	3,953.7		$	(64.7	)	$	4,167.2


Balance as of December 31, 2007	$	3.8	$	274.4	$	4,049.5		$	(90.5	)	$	4,237.2

Dividends to NFS		—		—		(246.5	)		—			(246.5	)

Comprehensive loss:
Net income		—		—		79.3			—			79.3
Other comprehensive loss, net of taxes		—		—		—			(400.2	)		(400.2	)

Total comprehensive loss												(320.9	)

Balance as of June 30, 2008	$	3.8	$	274.4	$	3,882.3		$	(490.7	)	$	3,669.8

See accompanying notes to condensed consolidated financial statements.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in millions)


	Six months ended June 30,
	2008			2007
Cash flows from operating activities:
Net income	$	79.3		$	289.9
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized losses on investments, hedgining instruments and hedged items		209.5			13.6
Interest credited to policyholder account values		568.6			639.4
Capitalization of deferred policy acquisition costs		(303.3	)		(293.5	)
Amortization of deferred policy acquisition costs		225.1			143.8
Amortization and depreciation		5.1			17.0
Decrease in other assets		11.2			221.5
Decrease in policy and other liabilities		(661.0	)		(138.8	)
Other, net		(1.4	)		9.2

Net cash provided by operating activities		133.1			902.1

Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale		2,821.1			2,294.5
Proceeds from sale of securities available-for-sale		1,157.1			2,847.3
Proceeds from repayments or sales of mortgage loans on real estate		500.9			1,171.8
Cost of securities available-for-sale acquired		(3,659.1	)		(4,508.7	)
Cost of mortgage loans on real estate originated or acquired		(147.9	)		(761.4	)
Net decrease in short-term investments		230.1			527.8
Collateral paid – securities lending, net		(146.8	)		(41.2	)
Other, net		(17.6	)		(5.5	)

Net cash provided by investing activities		737.8			1,524.6

Cash flows from financing activities:
Net (decrease) increase in short-term debt		(35.8	)		164.5
Cash dividends paid to NFS		(181.8	)		(475.0	)
Investment and universal life insurance product deposits and other additions		1,163.2			1,583.4
Investment and universal life insurance product withdrawals and other deductions		(1,968.4	)		(3,698.0	)
Other		174.6			—

Net cash used in financing activities		(848.2	)		(2,425.1	)


Net increase in cash		22.7			1.6
Cash, beginning of period		1.3			0.5

Cash, end of period	$	24.0		$	2.1

See accompanying notes to condensed consolidated financial statements.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2008 and 2007

(1)

Basis of Presentation

The accompanying condensed consolidated financial statements of Nationwide Life Insurance Company and subsidiaries (NLIC, or collectively, the Company) have been prepared in accordance with United States (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. 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 condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2007 included in the Company’s 2007 Annual Report on Form 10-K.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ significantly from those estimates.

The Company determined that certain cash flows related to future policy benefits and claims totaling $111.9 million for the three months ended March 31, 2008, which were included as cash flows provided by operating activities on the condensed consolidated statements of cash flows in the applicable Quarterly Report on Form 10-Q, should be presented as financing activities. The net cash provided by operating activities for the three months ended March 31, 2008 as originally filed and revised was $351.1 million and $239.2 million, respectively. The net cash used in financing activities for the three months ended March 31, 2008 as originally filed and revised was $368.9 million and $257.0 million, respectively. They will be presented in that manner on a comparative basis in the 2009 filings.

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

(2)

Summary of Significant Accounting Policies

A complete summary of the Company’s significant accounting policies is included in Note 2 to the audited consolidated financial statements included in the Company’s 2007 Annual Report on Form 10-K. There have been no material changes to these policies since December 31, 2007 except as noted below.

Change in Accounting Principle

Historically, the Company accrued for legal costs associated with litigation defense and regulatory investigations by estimating the ultimate costs of such activity. Beginning April 1, 2007, the Company’s accrual for such legal expenses includes only the amount for services that have been provided but not yet paid. The Company believes the newly adopted accounting principle is preferable because it more accurately reflects expenses in the periods in which they are incurred. The Company continues to estimate and accrue the ultimate amounts it expects to pay for litigation and regulatory investigation loss contingencies.

(3)

Recently Issued Accounting Standards

In May 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 162,The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP (the GAAP hierarchy). SFAS 162 will be effective 60 days following the approval by the United States Securities and Exchange Commission (SEC) of the Public Company Accounting Oversight Board amendments to AU Section 411,The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company does not expect the adoption of SFAS 162 to result in a change in its current practices.

In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3,Determination of the Useful Life of Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,Goodwill and Other Intangible Assets (SFAS 142). FSP FAS 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The amended factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142 are to be applied prospectively to intangible assets acquired after the effective date. The Company does not expect the new factors to materially change the Company’s current methodologies.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133(SFAS 161). SFAS 161 amends and expands the disclosure requirements of SFAS 133 with the intent to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about derivative instrument fair values and related gains and losses, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company currently is evaluating the new disclosures required under SFAS 161.

In February 2008, the FASB issued FSP FAS 157-2,Effective Date of FASB Statement No. 157 (FSP FAS 157-2). This FSP delays the effective date of SFAS 157 for nonfinancial assets and liabilities until fiscal years beginning after November 15, 2008. FSP FAS 157-2 applies to nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the Company’s financial statements on a recurring basis (at least annually), and is effective upon issuance. The Company has not yet applied the provisions of SFAS 157 to the nonfinancial assets and liabilities within the scope of FSP FAS 157-2. However, the Company does not expect such application to have a material impact on its financial position or results of operations.

In April 2007, the FASB issued FSP FIN 39-1,An Amendment of FASB Interpretation No. 39(FSP FIN 39-1). FSP FIN 39-1 addresses whether a reporting entity that is party to a master netting arrangement can offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments that have been offset under the same master netting arrangement in accordance with paragraph 10 of Interpretation 39. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007, with early application permitted. The Company adopted FSP FIN 39-1 effective January 1, 2008. The Company made the decision not to offset the fair value of cash collateral received with the obligation to return the collateral. The adoption of FSP FIN 39-1 did not impact the Company’s financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. In addition, SFAS 159 does not establish requirements for recognizing and measuring dividend income, interest income or interest expense, nor does it eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS No. 157,Fair Value Measurements (SFAS 157), and SFAS No. 107,Disclosures about Fair Value of Financial Instruments. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. The Company adopted SFAS 159 for commercial mortgage loans held for sale effective January 1, 2008, which did not have a material impact on the Company’s financial position or results of operations. The Company will assess election for new financial assets or liabilities on a prospective basis. See Note 4 for disclosures required by SFAS 159.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(SFAS 157). SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities and requires new disclosures about fair value measurements. SFAS 157 also provides guidance regarding the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. For assets and liabilities that are measured at fair value on a recurring basis in periods subsequent to initial recognition, the reporting entity shall disclose information that enables financial statement users to assess the inputs used to develop those measurements. For recurring fair value measurements using significant unobservable inputs, the reporting entity shall disclose the effect of the measurements on earnings for the period. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. The Company adopted SFAS 157 effective January 1, 2008. The adoption of SFAS 157 did not have a material impact on the Company’s financial position or results of operations. See Note 4 for disclosures required by SFAS 157.

In September 2005, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (SOP 05-1). The Company adopted SOP 05-1 effective January 1, 2007, which resulted in a $6.0 million charge, net of taxes, as the cumulative effect of adoption of this accounting principle.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

(4)

Fair Value Measurements

Fair Value Option

As described in Note 3, the Company adopted SFAS 159 effective January 1, 2008 and elected SFAS 159 fair value treatment for commercial mortgage loans held for sale. Accordingly, the Company now records in earnings all market fluctuations associated with this portfolio. The Company previously recorded such loans at the lower of cost or market value. Balances for these loans will be measured at fair value prospectively with unrealized gains and losses included as a component of net realized investment gains and losses. The Company will assess election for new financial assets or liabilities on a prospective basis.

Fair Value Hierarchy

As described in Note 3, the Company adopted SFAS 157 effective January 1, 2008.SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

In accordance with SFAS 157, the Company categorized its financial instruments into a three level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument in its entirety.

The Company categorizes financial assets and liabilities recorded at fair value in the condensed consolidated balance sheets as follows:

•

Level 1 – Unadjusted quoted prices accessible in active markets for identical assets or liabilities at the measurement date. The types of assets and liabilities utilizing Level 1 valuations include U.S. Treasury and agency securities, equity securities listed in active markets, investments in publicly traded mutual funds with quoted market prices, and listed derivatives.

•

Level 2 – Unadjusted quoted prices for similar assets or liabilities in active markets or inputs (other than quoted prices) that are observable or that are derived principally from or corroborated by observable market data through correlation or other means. The types of assets and liabilities utilizing Level 2 valuations generally include U.S. Government securities not backed by the full faith of the government, municipal bonds, structured notes and certain mortgage-backed securities (MBSs) and asset-backed securities (ABSs), certain corporate debt, certain private equity investments, and certain derivatives, including certain cross-currency interest rate swaps and credit default swaps.

•

Level 3 – Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate about the assumptions market participants would use at the measurement date in pricing the asset or liability. Consideration is given to the risk inherent in both the method of valuation and the valuation inputs. Generally, the types of assets and liabilities utilizing Level 3 valuations are certain MBSs and ABSs, certain corporate debt, certain private equity investments, certain mutual fund holdings, and certain derivatives, including embedded derivatives associated with living benefit contracts.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of June 30, 2008:

(in millions)

Level 1

Level 2

Level 3

Total

Assets¹

Investments:

Securities available-for-sale:

Fixed maturity securities:

U.S. Treasury securities and obligations of U.S. Government corporations and agencies

546.5

10.3

—

556.8

Obligations of states and political subdivisions

—

223.6

—

223.6

Debt securities issued by foreign governments

—

36.1

—

36.1

Corporate securities

—

11,609.9

1,487.3

13,097.2

Mortgage-backed securities

330.9

4,889.8

138.8

5,359.5

Asset-backed securities

—

2,513.7

781.3

3,295.0

Total fixed maturity securities

877.4

19,283.4

2,407.4

22,568.2

Equity securities

14.0

60.7

2.6

77.3

Total securities available-for-sale

891.4

19,344.1

2,410.0

22,645.5

Mortgage loans held for sale²

—

90.7

Short-term investments

159.0

564.7

—

723.7

Total investments

1,050.4

19,908.8

2,500.7

23,459.9

Cash

24.0

—

24.0

Derivative assets³

28.1

162.2

229.7

420.0

Separate account assets⁴

13,418.1

48,969.4

568.3

62,955.8

Total assets

14,520.6

69,040.4

3,298.7

86,859.7

Liabilities¹

Future policy benefits and claims⁵

—

(222.0

)

(222.0

)

Derivative liabilities³

—

(281.5

)

(25.3

)

(306.8

)

Total liabilities

—

(281.5

)

(247.3

)

(528.8

)

¹	The Company considered the impact of non-performance risk and its own credit spreads on the valuation of financial instruments.

²	Carried at fair value as elected under SFAS 159.

³	Comprised of interest rate swaps, cross-currency interest rate swaps, credit default swaps, other non-hedging instruments, equity option contracts and interest rate futures contracts.

⁴	Comprised of public, privately registered and non-registered mutual funds and investments in securities.

⁵

Related to embedded derivatives associated with living benefit contracts. The Company’s guaranteed minimum accumulation benefits (GMABs), guaranteed minimum withdrawal benefits (GMWBs) and hybrid GMABs/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. This balance also includes embedded derivatives associated with fixed equity-indexed annuities (EIA) that provide for interest earnings that are linked to the performance of specified equity market indices.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

The following tables summarize financial instruments for which the Company used significant unobservable inputs (Level 3) to determine fair value measurements for the three and six month periods ended June 30, 2008:


(in millions)	Balance as of March 31, 2008			Net investment gains (losses)						Purchases, issuances, sales and settlements			Transfers in (out) of Level 3			Balance as of June 30, 2008			Change in unrealized gains (losses) in earnings due to assets still held
(in millions)	Balance as of March 31, 2008			In earnings (realized and unrealized)¹			In OCI (unrealized)²			Purchases, issuances, sales and settlements			Transfers in (out) of Level 3			Balance as of June 30, 2008
Assets
Investments:
Securities available-for-sale³:
Fixed maturity securities
Corporate securities	$	1,523.7		$	(8.6	)	$	(36.4	)	$	(138.6	)	$	147.2		$	1,487.3		$	—
Mortgage-backed securities		103.0			(18.6	)		17.2			(4.1	)		41.3			138.8			—
Asset-backed securities		854.1			(42.0	)		(16.7	)		(13.4	)		(0.7	)		781.3			—

Total fixed maturity securities		2,480.8			(69.2	)		(35.9	)		(156.1	)		187.8			2,407.4			—
Equity securities		0.8			—			—			—			1.8			2.6			—

Total securities available-for-sale		2,481.6			(69.2	)		(35.9	)		(156.1	)		189.6			2,410.0			—
Mortgage loans held for sale		90.6			0.2			—			(0.1	)		—			90.7			0.2
Short-term investments		670.5			—			—			—			(670.5	)		—			—

Total investments		3,242.7			(69.0	)		(35.9	)		(156.2	)		(480.9	)		2,500.7			0.2
Derivative assets		231.0			(43.6	)		(2.0	)		44.3			—			229.7			(41.1	)
Separate account assets⁴		1,710.8			(68.2	)		—			(234.8	)		(839.5	)		568.3			(59.5	)

Total assets	$	5,184.5		$	(180.8	)	$	(37.9	)	$	(346.7	)	$	(1,320.4	)	$	3,298.7		$	(100.4	)

Liabilities
Future policy benefits and claims⁵	$	(324.6	)	$	104.3		$	—		$	(1.7	)	$	—		$	(222.0	)	$	104.3
Derivative liabilities		(20.2	)		(10.7	)		—			5.6			—			(25.3	)		(5.1	)

Total liabilities	$	(344.8	)	$	93.6		$	—		$	3.9		$	—		$	(247.3	)	$	99.2

¹	Includes gains and losses on sales of financial instruments, changes in market value of certain instruments and other-than-temporary impairments. The net unrealized loss on separate account assets is attributable to contractholders and, therefore, is not included in the Company’s earnings.

²	Includes changes in market value of certain instruments.

Includes non-investment grade collateralized mortgage obligations, MBSs and ABSs, ABS trust preferred-residual income notes, counterparty or internally priced securities, and securities that are at or near default based on designations assigned by the National Association of Insurance Commissioners (NAIC) (see Note 5 for a discussion of NAIC Designations). Equity securities represent holdings in non-registered mutual funds with significant unobservable inputs.

⁴	Comprised of non-registered mutual funds with significant unobservable and/or liquidity restrictions. The net unrealized investment loss on these non-registered mutual funds is attributable to contractholders and, therefore, is not included in the Company’s earnings.

⁵

Relates to GMAB, GMWB and EIA embedded derivatives associated with contracts with living benefit riders. Related derivatives are internally valued. The valuation of guaranteed minimum benefit embedded derivatives is based on capital market and actuarial risk assumptions, including risk margin considerations reflecting policyholder behavior. The Company uses observable inputs, such as published swap rates, in its capital market assumptions. Actuarial assumptions, including lapse behavior and mortality rates, are based on annuity experience.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007


(in millions)	Balance as of December 31, 2007			Net investment gains (losses)						Purchases, issuances, sales and settlements			Transfers in (out) of Level 3			Balance as of June 30, 2008			Change in unrealized gains (losses) in earnings due to assets still held
(in millions)	Balance as of December 31, 2007			In earnings (realized and unrealized)¹			In OCI (unrealized)²			Purchases, issuances, sales and settlements			Transfers in (out) of Level 3			Balance as of June 30, 2008
Assets
Investments:
Securities available-for-sale³:
Fixed maturity securities
Corporate securities	$	1,429.5		$	(22.1	)	$	(66.9	)	$	(186.3	)	$	333.1		$	1,487.3		$	—
Mortgage-backed securities		176.6			(18.6	)		(23.6	)		(8.3	)		12.7			138.8			—
Asset-backed securities		754.4			(92.8	)		(98.9	)		(10.7	)		229.3			781.3			2.5

Total fixed maturity securities		2,360.5			(133.5	)		(189.4	)		(205.3	)		575.1			2,407.4			2.5
Equity securities		1.4			—			(0.8	)		—			2.0			2.6			—

Total securities available-for-sale		2,361.9			(133.5	)		(190.2	)		(205.3	)		577.1			2,410.0			2.5
Mortgage loans held for sale		86.1			(9.2	)		—			13.8			—			90.7			(9.2	)
Short-term investments		371.9			—			—			—			(371.9	)		—			—

Total investments		2,819.9			(142.7	)		(190.2	)		(191.5	)		205.2			2,500.7			(6.7	)
Derivative assets		166.6			17.6			1.2			44.3			—			229.7			20.1
Separate account assets⁴		2,258.3			(666.3	)		—			533.4			(1,557.1	)		568.3			(657.4	)

Total assets	$	5,244.8		$	(791.4	)	$	(189.0	)	$	386.2		$	(1,351.9	)	$	3,298.7		$	(644.0	)

Liabilities
Future policy benefits and claims⁵	$	(128.9	)	$	(89.5	)	$	—		$	(3.6	)	$	—		$	(222.0	)	$	(89.5	)
Derivative liabilities		(16.3	)		(14.6	)		—			5.6			—			(25.3	)		(9.1	)

Total liabilities	$	(145.2	)	$	(104.1	)	$	—		$	2.0		$	—		$	(247.3	)	$	(98.6	)

¹	Includes gains and losses on sales of financial instruments, changes in market value of certain instruments and other-than-temporary impairments. The net unrealized loss on separate account assets is attributable to contractholders and, therefore, is not included in the Company’s earnings.

²	Includes changes in market value of certain instruments.

⁴	Comprised of non-registered mutual funds with significant unobservable and/or liquidity restrictions. The net unrealized investment loss on these non-registered mutual funds is attributable to contractholders and, therefore, is not included in the Company’s earnings.

⁵

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

Transfers

The Company reviews its fair value hierarchy classifications quarterly. Changes in observability of significant valuation inputs identified during these reviews may trigger reclassification of fair value hierarchy levels of financial assets and liabilities. These reclassifications are reported as transfers in/out of Level 3 in the beginning of the period in which the change occurs. During the second quarter of 2008, certain corporate securities and ABSs were not actively traded due to concerns in the securities markets and resulting lack of liquidity. Since observable market prices could not be used, the Company used unobservable inputs to estimate fair value for these securities.

Fair Value on a Nonrecurring Basis

The Company did not have any material assets or liabilities reported at fair value on a nonrecurring basis required to be disclosed under SFAS 157.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

(5)

Investments

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
June 30, 2008:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations	$	73.8	$	13.4	$	0.1	$	87.1
Agencies not backed by the full faith and credit of the U. S. Government		414.7		55.6		0.6		469.7
Obligations of states and political subdivisions		228.7		0.1		5.2		223.6
Debt securities issued by foreign governments		33.9		2.4		0.2		36.1
Corporate securities
Public		8,317.4		117.8		304.0		8,131.2
Private		5,025.0		83.6		142.6		4,966.0
Mortgage-backed securities		5,684.1		24.8		349.4		5,359.5
Asset-backed securities		3,659.4		23.8		388.2		3,295.0

Total fixed maturity securities		23,437.0		321.5		1,190.3		22,568.2
Equity securities		83.4		2.3		8.4		77.3

Total securities available-for-sale	$	23,520.4	$	323.8	$	1,198.7	$	22,645.5

December 31, 2007:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations	$	110.8	$	14.3	$	0.4	$	124.7
Agencies not backed by the full faith and credit of the U. S. Government		406.1		61.2		—		467.3
Obligations of states and political subdivisions		245.3		1.6		2.7		244.2
Debt securities issued by foreign governments		40.0		2.5		0.1		42.4
Corporate securities
Public		8,253.8		133.4		161.6		8,225.6
Private		5,474.2		131.7		57.6		5,548.3
Mortgage-backed securities		5,855.9		31.3		98.4		5,788.8
Asset-backed securities		3,635.1		31.2		174.2		3,492.1

Total fixed maturity securities		24,021.2		407.2		495.0		23,933.4
Equity securities		69.6		4.8		1.5		72.9

Total securities available-for-sale	$	24,090.8	$	412.0	$	496.5	$	24,006.3

The market value of the Company’s general account investments may fluctuate significantly in response to changes in interest rates, investment quality ratings and credit spreads. While the Company has the ability and intent to hold available-for-sale debt securities in unrealized loss positions that are not other-than-temporarily impaired until recovery, it may be likely to experience realized investment losses to the extent its liquidity needs require the disposition of general account fixed maturity securities in unfavorable interest rate, liquidity or credit spread environments.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

Debt securities accounted for under Emerging Issues Task Force Issue No. 99-20,Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets, may experience other-than-temporary impairment in future periods in the event an adverse change in cash flows is anticipated. Furthermore, equity securities may experience other-than-temporary impairment in the future based on the prospects for recovery in value in a reasonable time period. In the financial sector, the Company held fixed maturity securities with features of equity-type securities with estimated fair values of $761.1 million and $674.4 million, and gross unrealized losses of $62.2 million and $17.6 million, as of June 30, 2008 and December 31, 2007, respectively. The Company evaluates such securities for other-than-temporary impairment utilizing the criterion of an equity security.

The table below summarizes the amortized cost and estimated fair value of fixed maturity securities available-for-sale, by maturity, as of June 30, 2008. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


(in millions)	Amortized cost		Estimated fair value
Fixed maturity securities available-for-sale:
Due in one year or less	$	1,243.1	$	1,264.8
Due after one year through five years		7,083.2		7,049.0
Due after five years through ten years		2,792.4		2,744.2
Due after ten years		2,974.8		2,855.7

Subtotal		14,093.5		13,913.7
Mortgage-backed securities		5,684.1		5,359.5
Asset-backed securities		3,659.4		3,295.0

Total	$	23,437.0	$	22,568.2

The following table presents the components of net unrealized losses on securities available-for-sale as of the dates indicated:


(in millions)	June 30, 2008			December 31, 2007
Net unrealized losses before adjustments and taxes	$	(904.1	)	$	(84.5	)
Adjustment to deferred policy acquisition costs		281.5			87.1
Adjustment to future policy benefits and claims		(56.8	)		(77.7	)
Deferred federal income tax benefit		237.6			26.1

Net unrealized losses	$	(441.8	)	$	(49.0	)

Net unrealized losses, before adjustments and taxes, excludes the portion of the change in fair value attributable to fixed maturity securities designated in fair value hedging relationships, which is recorded in earnings rather than other comprehensive income. As of June 30, 2008, the amount was $29.2 million.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

The following table presents an analysis of the net increase in net unrealized (losses) gains on securities available-for-sale before adjustments and taxes for the periods indicated:


	Three months ended June 30,						Six months ended June 30,
(in millions)	2008			2007			2008			2007
Fixed maturity securities	$	(426.9	)	$	(339.6	)	$	(781.0	)	$	(247.3	)
Equity securities		(3.4	)		0.4			(9.4	)		0.4

Net increase	$	(430.3	)	$	(339.2	)	$	(790.4	)	$	(246.9	)

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

For securities available-for-sale as of the dates indicated, the following table summarizes the Company’s gross unrealized losses based on the amount of time each type of security has been in an unrealized loss position:


	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
June 30, 2008:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations	$	4.7	$	0.1	$	—	$	—	$	4.7	$	0.1
Agencies not backed by the full faith and credit of the U.S. Government		16.1		0.6		—		—		16.1		0.6
Obligations of states and political subdivisions		155.0		2.6		31.1		2.6		186.1		5.2
Debt securities issued by foreign governments		4.8		0.2		—		—		4.8		0.2
Corporate securities
Public		3,626.6		169.4		1,305.1		134.6		4,931.7		304.0
Private		2,174.3		82.2		934.6		60.4		3,108.9		142.6
Mortgage-backed securities		2,232.9		145.4		1,662.8		204.0		3,895.7		349.4
Asset-backed securities		1,492.6		176.6		1,271.7		211.6		2,764.3		388.2

Total fixed maturity securities		9,707.0		577.1		5,205.3		613.2		14,912.3		1,190.3
Equity securities		63.3		8.3		0.1		0.1		63.4		8.4

Total	$	9,770.3	$	585.4	$	5,205.4	$	613.3	$	14,975.7	$	1,198.7

% of total gross unrealized losses				49%				51%

December 31, 2007:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations	$	16.4	$	0.4	$	2.6	$	—	$	19.0	$	0.4
Agencies not backed by the full faith and credit of the U.S. Government		—		—		13.9		—		13.9		—
Obligations of states and political subdivisions		15.4		0.1		149.6		2.6		165.0		2.7
Debt securities issued by foreign governments		11.5		0.1		—		—		11.5		0.1
Corporate securities
Public		2,354.0		95.2		1,966.8		66.4		4,320.8		161.6
Private		680.6		17.1		1,814.7		40.5		2,495.3		57.6
Mortgage-backed securities		1,227.8		23.7		2,466.4		74.7		3,694.2		98.4
Asset-backed securities		1,453.8		127.1		1,078.1		47.1		2,531.9		174.2

Total fixed maturity securities		5,759.5		263.7		7,492.1		231.3		13,251.6		495.0
Equity securities		17.1		1.5		0.1		—		17.2		1.5

Total	$	5,776.6	$	265.2	$	7,492.2	$	231.3	$	13,268.8	$	496.5

% of total gross unrealized losses				53%				47%

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

The Company has fixed maturity securities that have been in an unrealized loss position for more than one year that are not other-than-temporarily impaired. The Company reviews each asset in an unrealized loss position and evaluates whether or not the loss is other-than-temporary. This evaluation considers several factors, including the extent of the unrealized loss, the rating of the affected security, the Company’s ability and intent to hold the security until recovery, and economic conditions that could affect the creditworthiness of the issuer. As of June 30, 2008, fixed maturity securities that have been in an unrealized loss position for more than one year totaled $613.2 million, or 52% of the Company’s total unrealized losses on fixed maturity securities. Of this total, $569.7 million, or 93%, were classified as investment grade securities, as defined by the NAIC.

The majority of the increases in the Company’s unrealized losses from December 31, 2007 to June 30, 2008 were attributable to corporate securities, MBSs and ABSs. These increased unrealized loss positions primarily were driven by the combined impact of volatility in investment quality ratings and credit spreads, illiquid markets, and interest rate movements. In particular, exposure to the financial sector, including through structured securities such as trust preferred, collateralized loan obligations and collateralized debt obligations, have been significantly affected by negative circumstances in that sector. There is risk that further declines in estimated fair values of investments, or changes in anticipated recoveries and/or cash flows, may cause further other-than-temporary impairments in future periods, which could be significant.

As of June 30, 2008, $350.6 million (79%) of the Company’s unrealized losses on corporate securities relate to corporate securities classified as investment grade, as defined by the NAIC. Of those losses, $195.7 million (56%) relate to corporate securities that have been in an unrealized loss position for less than one year, with 66% of those investments having ratios of estimated fair value to amortized cost of at least 90%. Of the Company’s corporate securities in unrealized loss positions classified as non-investment grade, 58% have been in an unrealized loss position for less than one year.

As of June 30, 2008, $349.4 million (100%) of the Company’s unrealized losses on MBSs relate to MBSs classified as investment grade, as defined by the NAIC. Of those losses, $145.3 million (42%) relate to MBSs that have been in an unrealized loss position for less than one year. Of the Company’s investment grade MBSs in unrealized loss positions that have been so for more than one year, 87% have ratios of estimated fair value to amortized cost of at least 80%.

As of June 30, 2008, $365.8 million (94%) of the Company’s unrealized losses on ABSs relate to ABSs classified as investment grade, as defined by the NAIC. Of those losses, $157.6 million (43%) relate to ABSs that have been in an unrealized loss position for less than one year. Of the Company’s ABSs in unrealized loss positions classified as non-investment grade, 85% have been in an unrealized loss position for less than one year.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

For fixed maturity securities available-for-sale, the following tables summarize, as of the dates indicated, the Company’s gross unrealized loss position categorized as investment grade vs. non-investment grade, as defined by the NAIC, in an unrealized loss position for the period of time indicated, and based on the ratio of estimated fair value to amortized cost (in millions):


	Period of time for which unrealized loss has existed as of June 30, 2008
	Investment Grade						Non-Investment Grade						Total
Ratio of estimated fair value to amortized cost	Less than or equal to one year		More than one year		Total		Less than or equal to one year		More than one year		Total		Less than or equal to one year		More than one year		Total
99.9% - 95.0%	$	130.7	$	38.8	$	169.5	$	9.8	$	5.7	$	15.5	$	140.5	$	44.5	$	185.0
94.9% - 90.0%		85.2		133.6		218.8		17.7		7.9		25.6		102.9		141.5		244.4
89.9% - 85.0%		68.3		110.3		178.6		14.4		9.2		23.6		82.7		119.5		202.2
84.9% - 80.0%		48.7		130.3		179.0		6.8		5.3		12.1		55.5		135.6		191.1
Below 80.0%		169.3		156.7		326.0		26.2		15.4		41.6		195.5		172.1		367.6

Total	$	502.2	$	569.7	$	1,071.9	$	74.9	$	43.5	$	118.4	$	577.1	$	613.2	$	1,190.3


	Period of time for which unrealized loss has existed as of December 31, 2007
	Investment Grade						Non-Investment Grade						Total
Ratio of estimated fair value to amortized cost	Less than or equal to one year		More than one year		Total		Less than or equal to one year		More than one year		Total		Less than or equal to one year		More than one year		Total
99.9% - 95.0%	$	55.2	$	93.5	$	148.7	$	13.1	$	5.2	$	18.3	$	68.3	$	98.7	$	167.0
94.9% - 90.0%		49.9		84.6		134.5		13.2		4.4		17.6		63.1		89.0		152.1
89.9% - 85.0%		34.6		19.2		53.8		3.1		6.3		9.4		37.7		25.5		63.2
84.9% - 80.0%		16.3		6.2		22.5		3.0		0.2		3.2		19.3		6.4		25.7
Below 80.0%		60.5		5.8		66.3		14.9		5.8		20.7		75.4		11.6		87.0

Total	$	216.5	$	209.3	$	425.8	$	47.3	$	21.9	$	69.2	$	263.8	$	231.2	$	495.0

As noted in the table above, as of June 30, 2008, 36% of the Company’s investments in an unrealized loss position had ratios of estimated fair value to amortized cost of at least 90%. In addition, 90% of the Company’s investments in an unrealized loss position were classified as investment grade, as defined by the NAIC. Of the Company’s investments in unrealized loss positions classified as non-investment grade, 63% have been in an unrealized loss position for less than one year.

The NAIC assigns securities quality ratings and uniform valuations (called NAIC Designations), which are used by insurers when preparing their annual statements. For most securities, NAIC ratings are derived from ratings received from nationally recognized rating agencies. The NAIC also assigns ratings to securities that do not receive public ratings. The designations assigned by the NAIC range from class 1 (highest quality) to class 6 (lowest quality). Of the Company’s general account fixed maturity securities, 93% and 94% were in the two highest NAIC Designations as of June 30, 2008 and December 31, 2007, respectively.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

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 and shows the equivalent ratings between the NAIC and nationally recognized rating agencies:


(in millions)		June 30, 2008				December 31, 2007
NAIC designation¹	Rating agency equivalent designation²	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value
1	Aaa/Aa/A	$	16,115.9	$	15,399.3	$	16,765.5	$	16,662.7
2	Baa		5,706.5		5,646.7		5,730.3		5,784.3
3	Ba		1,103.6		1,050.4		1,101.6		1,078.3
4	B		355.9		330.5		325.0		316.8
5	Caa and lower		91.7		78.5		60.2		52.7
6	In or near default		63.4		62.8		38.6		38.6

	Total	$	23,437.0	$	22,568.2	$	24,021.2	$	23,933.4

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.

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

Recent conditions in the securities markets, including changes in investment quality ratings, liquidity, credit spreads and interest rates, have resulted in declines in the values of investment securities, including commercial MBSs and ABSs. When evaluating whether these securities are other-than-temporarily impaired, the Company considers characteristics of the underlying collateral, such as delinquency and default rates, the quality of the underlying borrower, the type of collateral in the pool, the vintage year of the collateral, subordination levels within the structure of the collateral pool, expected future cash flows, and the Company’s ability and intent to hold the security to recovery. These and other factors also affect the estimated fair value of these securities.

The Company’s investments in MBSs and ABSs include securities that are supported by Alt-A and Sub-prime collateral. The Company considers Alt-A collateral to be mortgages whose underwriting standards do not qualify the mortgage for regular conforming or jumbo loan programs. Typical underwriting characteristics that cause a mortgage to fall into the Alt-A classification may include, but are not limited to, inadequate loan documentation of a borrower’s financial information, debt-to-income ratios above normal lending limits, loan-to-value ratios above normal lending limits that do not have primary mortgage insurance, a borrower who is a temporary resident, and loans securing non-conforming types of real estate. Alt-A mortgages are generally issued to borrowers having higher Fair Isaac Credit Organization (FICO) scores, and the lender typically issues a slightly higher interest rate for such mortgages. The Company considers Sub-prime collateral to be mortgages that are first-lien mortgage loans issued to Sub-prime borrowers, as demonstrated by recent delinquent rent or housing payments or substandard FICO scores. Second-lien mortgage loans are also considered Sub-prime. The amortized cost and estimated fair value of the Company’s investments in securities containing Alt-A collateral totaled $2,011.6 million and $1,762.0 million, respectively, and the amortized cost and estimated fair value of the Company’s investments in securities containing Sub-prime collateral totaled $693.5 and $619.1, respectively. As of June 30, 2008, 99% and 76% of securities containing Alt-A and Sub-prime collateral, respectively, were rated AA or better. In addition, 59% and 70% of Alt-A and Sub-prime collateral, respectively, was originated in 2005 or earlier.

Proceeds from the sale of securities available-for-sale during the six months ended June 30, 2008 and 2007 were $1.16 billion and $2.85 billion, respectively. During the six months ended June 30, 2008 and 2007, gross gains of $17.5 million and $38.1 million, respectively, and gross losses of $13.9 million $42.4 million, respectively, were realized on those sales.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

Real estate held for use was $2.8 million and $17.8 million as of June 30, 2008 and December 31, 2007, respectively. These assets are carried at cost less accumulated depreciation, which was $0.4 million and $3.6 million as of June 30, 2008 and December 31, 2007, respectively. The carrying value of real estate held for sale was $14.8 million as of June 30, 2008 (there was no real estate held for sale as of December 31, 2007).

As of June 30, 2008 and December 31, 2007, the carrying value of commercial mortgage loans on real estate considered impaired was $4.2 million and $7.4 million, respectively (for which a $3.2 million and $3.0 million valuation allowance had been established, respectively). No valuation allowance exists for collateral dependent commercial mortgage loans for which the fair value of the collateral is estimated to be greater than the carrying value.

The following table summarizes activity in the valuation allowance account for mortgage loans on real estate for the periods indicated:


	Six months ended June 30,
(in millions)	2008		2007
Allowance, beginning of period	$	23.1	$	34.3
Net change in allowance		1.0		(13.7	)

Allowance, end of period	$	24.1	$	20.6

The following table summarizes net realized investment losses from continuing operations by source for the periods indicated:


	Three months ended June 30,						Six months ended June 30,
(in millions)	2008			2007			2008			2007
Total realized gains on sales, net of hedging losses	$	11.6		$	18.3		$	7.9		$	41.3
Total realized losses on sales, net of hedging gains		(10.6	)		(15.8	)		(32.9	)		(37.5	)
Other-than-temporary and other investment impairments		(79.3	)		(6.2	)		(165.1	)		(19.5	)
Credit default swaps		(2.0	)		(1.5	)		(6.2	)		(1.8	)
Derivatives and embedded derivatives associated with living benefit contracts		57.1			—			(17.7	)		—
Other derivatives		9.0			2.7			4.5			3.9

Net realized investment losses	$	(14.2	)	$	(2.5	)	$	(209.5	)	$	(13.6	)

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

The following table summarizes other-than-temporary and other investment impairments by asset type for the periods indicated:


	Three months ended June 30,					Six months ended June 30,
(in millions)	2008			2007		2008			2007
Fixed maturity securities:
Corporate securities
Public	$	14.6		$	4.7	$	24.6		$	4.9
Private		3.7			—		14.1			10.6
Mortgage-backed securities		18.6			—		18.6			—
Asset-backed securities		42.2			0.2		107.6			1.4

Total fixed maturity securities		79.1			4.9		164.9			16.9
Other		0.2			1.3		0.2			2.6

Total other-than-temporary and other investment impairments	$	79.3		$	6.2	$	165.1		$	19.5

The following table summarizes net investment income from continuing operations by investment type for the periods indicated:
	Three months ended June 30,					Six months ended June 30,
(in millions)	2008			2007		2008			2007
Securities available-for-sale:
Fixed maturity securities	$	332.6		$	342.8	$	683.0		$	688.5
Equity securities		1.4			0.9		3.1			1.2
Mortgage loans on real estate		114.6			125.1		235.0			263.2
Short-term investments		2.1			7.6		5.0			19.0
Other		(5.2	)		35.0		(15.5	)		69.6

Gross investment income		445.5			511.4		910.6			1,041.5
Less: investment expenses		13.7			15.0		29.1			30.8

Net investment income	$	431.8		$	496.4	$	881.5		$	1,010.7

Fixed maturity securities with an amortized cost of $37.3 million and $8.3 million as of June 30, 2008 and December 31, 2007, respectively, were on deposit with various regulatory agencies as required by law.

As of June 30, 2008 and December 31, 2007, the Company had received $359.7 million and $551.9 million, respectively, of cash collateral on securities lending. The Company had not received any non-cash collateral on securities lending as of June 30, 2008 and December 31, 2007. As of June 30 2008 and December 31, 2007, the Company had loaned securities with a fair value of $351.7 million and $541.2 million, respectively.

As of June 30, 2008 and December 31, 2007, the Company had received $200.0 million and $245.4 million, respectively, of cash for derivative collateral. The Company also held $24.2 million and $18.5 million of securities as off-balance sheet collateral on derivative transactions as of June 30, 2008 and December 31, 2007, respectively. As of June 30, 2008, the Company had pledged fixed maturity securities with a fair value of $52.9 million as collateral to various derivative counterparties compared to $18.8 million as of December 31, 2007.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

(6)

Federal Income Taxes

During the second quarter of 2008, the Company recorded $12.7 million of net federal income tax expense adjustments primarily related to differences between the 2007 estimated tax liability and the amounts expected to be reported on the Company’s 2007 tax returns when filed. These changes in estimates primarily were driven by the Company’s separate account dividends received deduction (DRD).

Total federal income tax (benefit) expense differs from the amount computed by applying the U.S. federal income tax rate to income from continuing operations before federal income tax (benefit) expense as follows for the periods indicated:


	Three months ended June 30,
	2008					2007
(dollars in millions)	Amount			%		Amount			%
Computed (expected) tax expense	$	32.3		35.0		$	83.0		35.0
DRD		(0.6	)	(0.7	)		(9.5	)	(4.0	)
Other, net		(3.2	)	(3.4	)		(2.2	)	(0.9	)

Total	$	28.5		30.9		$	71.3		30.1


	Six months ended June 30,
	2008					2007
(dollars in millions)	Amount			%		Amount			%
Computed (expected) tax expense	$	31.5		35.0		$	139.8		35.0
DRD		(18.4	)	(20.4	)		(29.1	)	(7.3	)
Other, net		(2.3	)	(2.6	)		(7.3	)	(1.8	)

Total	$	10.8		12.0		$	103.4		25.9

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

(7)

Shareholder’s Equity and Dividend Restrictions

On August 6, 2008, Nationwide Financial Services, Inc. (NFS) entered into a definitive agreement for Nationwide Mutual Insurance Company (NMIC), Nationwide Mutual Fire Insurance Company and Nationwide Corporation to acquire all of the outstanding publicly held Class A common shares of the Company for $52.25 per share in cash. The transaction is expected to close by the end of 2008 or early 2009, subject to shareholder approval and customary regulatory approvals and closing conditions. NMIC and its affiliates, which collectively hold 95.2% of the combined voting power of the outstanding common shares, have indicated that they will vote to approve the transaction.

Dividend Restrictions

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 (1) 10% of statutory-basis policyholders’ surplus as of the prior December 31 or (2) the statutory-basis net income of the insurer for the prior year. NLIC’s statutory capital and surplus as of December 31, 2007 was $2.50 billion, and statutory net income for 2007 was $309.0 million. As of July 1, 2008, NLIC could not pay any dividends to NFS without obtaining prior approval from the Ohio Department of Insurance (ODI). On April 7, 2008, NLIC paid a $246.5 million dividend to NFS after providing prior notice to the ODI. The dividend included $181.9 million in cash and $64.6 million in securities.

The State of Ohio insurance laws also require insurers to seek prior regulatory approval for any dividend paid from other than earned surplus. Earned surplus is defined under the State of Ohio insurance laws as the amount equal to the Company’s unassigned funds as set forth in its most recent statutory financial statements, including net unrealized capital gains and losses or revaluation of assets. Additionally, following any dividend, an insurer’s policyholder surplus must be reasonable in relation to the insurer’s outstanding liabilities and adequate for its financial needs. The payment of dividends by NLIC may also be subject to restrictions set forth in the insurance laws of the State of New York that limit the amount of statutory profits on NLIC’s participating policies (measured before dividends to policyholders) available for the benefit of the Company and its shareholder.

The Company currently does not expect such regulatory requirements to impair its ability to pay future operating expenses, interest and shareholder dividends.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

Comprehensive (Loss) Income

The Company’s comprehensive (loss) income includes net income and certain items that are reported directly within separate components of shareholder’s equity that are not recorded in net income (other comprehensive income or loss).

The following table summarizes the Company’s other comprehensive loss, before and after federal income tax benefit, for the periods indicated:


	Three months ended June 30,						Six months ended June 30,
(in millions)	2008			2007			2008			2007
Net unrealized losses on securities available-for-sale arising during the period:
Net unrealized losses before adjustments	$	(473.5	)	$	(346.6	)	$	(980.9	)	$	(268.2	)
Net adjustment to deferred policy acquisition costs		109.4			92.2			194.4			57.9
Net adjustment to future policy benefits and claims		52.8			25.2			20.9			28.5
Related federal income tax benefit		108.8			80.3			268.0			63.6

Net unrealized losses		(202.5	)		(148.9	)		(497.6	)		(118.2	)

Reclassification adjustment for net realized losses on securities available-for-sale realized during the period:
Net unrealized losses		75.7			7.3			161.3			21.2
Related federal income tax benefit		(26.5	)		(2.5	)		(56.5	)		(7.4	)

Net reclassification adjustment		49.2			4.8			104.8			13.8

Other comprehensive loss on securities available-for-sale		(153.3	)		(144.1	)		(392.8	)		(104.4	)

Accumulated net holding gains (losses) on cash flow hedges:
Unrealized holding gains (losses)		25.1			12.4			(17.9	)		16.9
Related federal income tax (expense) benefit		(8.8	)		(4.3	)		6.3			(5.9	)

Other comprehensive income (loss) on cash flow hedges		16.3			8.1			(11.6	)		11.0

Other unrealized gains:
Net unrealized gains		8.4			—			6.4			—
Related federal income tax expense		(2.9	)		—			(2.2	)		—

Other net unrealized gains		5.5			—			4.2			—

Total other comprehensive loss	$	(131.5	)	$	(136.0	)	$	(400.2	)	$	(93.4	)

Adjustments for net realized gains and losses on the ineffective portion of cash flow hedges were immaterial during the three and six month periods ended June 30, 2008 and 2007.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

(8)

Contingencies

Legal Matters

The Company is a party to litigation and arbitration proceedings in the ordinary course of its business. It is often not possible to determine the ultimate outcome of the pending investigations and legal proceedings or to provide reasonable ranges of potential losses with any degree of certainty. Some 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 the 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, the plaintiffs are seeking undefined amounts of damages or other relief, including punitive damages and equitable remedies, which 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 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 position or results of operations in a particular period.

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 against life insurers other than the Company.

The financial services industry, including mutual fund, variable annuity, retirement plan, life insurance and distribution companies, has also been the subject of increasing scrutiny by regulators, legislators and the media over the past few years. Numerous regulatory agencies, including the SEC, the Financial Industry Regulatory Authority 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 has cooperated with these investigations. Information requests from the New York State Attorney General and the SEC with respect to investigations into late trading and market timing were last responded to by the Company and its affiliates in December 2003 and June 2005, respectively, and no further information requests have been received with respect to these matters.

In addition, state and federal regulators and other governmental bodies have commenced investigations, proceedings or inquiries 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 and revenue sharing arrangements between the issuers of variable insurance contracts and mutual funds or their affiliates, fee arrangements in retirement plans, the use of side agreements and finite reinsurance agreements, funding agreements issued to back medium-term note (MTN) programs, recordkeeping and retention compliance by broker/dealers, and supervision of former registered representatives. Related investigations, proceedings or inquiries may be commenced in the future. The Company and/or its affiliates have been contacted by or received subpoenas from state and federal regulatory agencies and other governmental bodies, state securities law regulators and state attorneys general for information relating to certain of these investigations, including those relating to compensation, revenue sharing and bidding arrangements, anti-competitive activities, unsuitable sales or replacement practices, fee arrangements in retirement plans, the use of side agreements and finite reinsurance agreements, and funding agreements backing the NLIC MTN program. The Company is cooperating with regulators in connection with these inquiries and will cooperate with NMIC in responding to these inquiries to the extent that any inquiries encompass NMIC’s operations.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

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 mutual fund, retirement plan, life insurance and annuity companies. These proceedings also could affect the outcome of one or more of the Company’s litigation matters. There can be no assurance that any litigation or regulatory actions will not have a material adverse effect on the Company’s consolidated financial position or results of operations in the future.

On November 20, 2007, NLIC and Nationwide Retirement Solutions, Inc. (NRS) were named in a lawsuit filed in the Circuit Court of Jefferson County, Alabama entitledRuth A. Gwin and Sandra H. Turner, and a class of similarly situated individuals v NLIC, NRS, Alabama State Employees Association, PEBCO, Inc. and Fictitious Defendants A to Z. The plaintiffs purport to represent a class of all participants in the Alabama State Employees Association (ASEA) plan, excluding members of the Board of Control during the Class Period and excluding ASEA’s directors, officers and board members during the class period. The class period is the date from which NLIC and/or NRS first made a payment to ASEA or PEBCO arising out of the funding agreement dated March 24, 2004 to the date class notice is provided. The plaintiffs allege that the defendants breached their fiduciary duties, converted plan participants’ properties, and breached their contract when payments were made and the plan was administered under the funding agreement. The complaint seeks a declaratory judgment, an injunction, disgorgement of amounts paid, compensatory and punitive damages, interest, attorneys’ fees and costs, and such other equitable and legal relief to which the plaintiffs and class members may be entitled. On January 9, 2008, NLIC and NRS filed a Notice of Removal to the United States District Court Northern District of Alabama, Southern Division. On January 16, 2008, NLIC and NRS filed a motion to dismiss. On January 24, 2008, the plaintiffs filed a motion to remand. On April 15, 2008, the Court remanded this case back to state court in Jefferson County, Alabama. On May 12, 2008, the Company filed a motion to dismiss. NLIC and NRS continue to defend this lawsuit vigorously.

On July 11, 2007, NLIC was named in a lawsuit filed in the United States District Court for the Western District of Washington at Tacoma entitledJerre Daniels-Hall and David Hamblen, Individually and on behalf of All Others Similarly Situated v. National Education Association, NEA Member Benefits Corporation, Nationwide Life Insurance Company, Security Benefit Life Insurance Company, Security Benefit Group, Inc., Security Distributors, Inc., et. al. The plaintiff seeks to represent a class of all current or former National Education Association (NEA) members who participated in the NEA Valuebuilder 403(b) program at any time between January 1, 1991 and the present (and their heirs and/or beneficiaries). The plaintiffs allege that the defendants violated the Employee Retirement Income Security Act of 1974, as amended (ERISA) by failing to prudently and loyally manage plan assets, by failing to provide complete and accurate information, by engaging in prohibited transactions, and by breaching their fiduciary duties when they failed to prevent other fiduciaries from breaching their fiduciary duties. The complaint seeks to have the defendants restore all losses to the plan, restoration of plan assets and profits to participants, disgorgement of endorsement fees, disgorgement of service fee payments, disgorgement of excessive fees charged to plan participants, other unspecified relief for restitution, declaratory and injunctive relief, and attorneys’ fees. On October 12, 2007, NLIC filed a motion to dismiss. On May 23, 2008, the Court granted the defendants’ motion to dismiss. On June 19, 2008, the plaintiffs filed a notice of appeal. NLIC continues to defend this lawsuit vigorously.

On November 15, 2006, Nationwide Financial Services, Inc. (NFS), NLIC and NRS were named in a lawsuit filed in the United States District Court for the Southern District of Ohio entitledKevin Beary, Sheriff of Orange County, Florida, In His Official Capacity, Individually and On Behalf of All Others Similarly Situated v. Nationwide Life Insurance Co., Nationwide Retirement Solutions, Inc. and Nationwide Financial Services, Inc. The plaintiff seeks to represent a class of all sponsors of 457(b) deferred compensation plans in the United States that had variable annuity contracts with the defendants at any time during the class period, or in the alternative, all sponsors of 457(b) deferred compensation plans in Florida that had variable annuity contracts with the defendants during the class period. The class period is from January 1, 1996 until the class notice is provided. The plaintiff alleges that the defendants breached their fiduciary duties by arranging for and retaining service payments from certain mutual funds. The complaint seeks an accounting, a declaratory judgment, a permanent injunction and disgorgement or restitution of the service fee payments allegedly received by the defendants, including interest. On January 25, 2007, NFS, NLIC and NRS filed a motion to dismiss. On September 17, 2007, the Court granted the motion to dismiss. On October 1, 2007, the plaintiff filed a motion to vacate judgment and for leave to file an amended complaint. On October 25, 2007, NFS, NLIC and NRS filed their opposition to the plaintiff’s motion. NFS, NLIC and NRS continue to defend this lawsuit vigorously.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

On February 11, 2005, NLIC was named in a class action lawsuit filed in Common Pleas Court, Franklin County, Ohio entitledMichael Carr v. Nationwide Life Insurance Company. The plaintiff claims that the total of modal payments that policyholders paid per year exceeded the guaranteed maximum premium provided for in the policy. The complaint seeks recovery for breach of contract, fraud by omission, violation of the Ohio Deceptive Trade Practices Act and unjust enrichment. The complaint also seeks unspecified compensatory damages, disgorgement of all amounts in excess of the guaranteed maximum premium and attorneys’ fees. On February 2, 2006, the court granted the plaintiff’s motion for class certification on the breach of contract and unjust enrichment claims. The court certified a class consisting of all residents of the United States and the Virgin Islands who, during the class period, paid premiums on a modal basis to NLIC for term life insurance policies issued by NLIC during the class period that provide for guaranteed maximum premiums, excluding certain specified products. Excluded from the class are NLIC; any parent, subsidiary or affiliate of NLIC; all employees, officers and directors of NLIC; and any justice, judge or magistrate judge of the State of Ohio who may hear the case. The class period is from February 10, 1990 through February 2, 2006, the date the class was certified. On January 26, 2007, the plaintiff filed a motion for summary judgment. On April 30, 2007, NLIC filed a motion for summary judgment. On February 4, 2008, the Court entered its ruling on the parties’ pending motions for summary judgment. The Court granted NLIC’s motion for summary judgment for some of the plaintiffs’ causes of action, including breach of contract claims on all decreasing term policies, plaintiff Carr’s individual claims for fraud by omission, violation of the Ohio Deceptive Trade Practices Act and all unjust enrichment claims. However, several claims against NLIC remain, including plaintiff Carr’s individual claim for breach of contract and the plaintiff Class’ claims for breach of contract for the term life policies in 43 of 51 jurisdictions. On May 16, 2008, the parties filed their briefs on NLIC’s motion for summary judgment on the voluntary payment doctrine or, in the alternative, decertification. Additional briefs were filed on June 20, 2008. NLIC continues to defend this lawsuit vigorously.

On April 13, 2004, NLIC was named in a class action lawsuit filed in Circuit Court, Third Judicial Circuit, Madison County, Illinois, entitledWoodbury v. Nationwide Life Insurance Company. NLIC removed this case to the United States District Court for the Southern District of Illinois on June 1, 2004. 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 entitled In Re Mutual Funds Investment Litigation. In response, on May 13, 2005, the plaintiff filed the first amended complaint purporting to represent, with certain exceptions, a class of all persons who held (through their ownership of an NLIC annuity or insurance product) units of any NLIC sub-account invested in mutual funds that included foreign securities in their portfolios and that experienced market timing or stale price trading activity. The first amended complaint purports to disclaim, with respect to market timing or stale price trading in NLIC’s annuities sub-accounts, any allegation based on NLIC’s untrue statement, failure to disclose any material fact, or usage of any manipulative or deceptive device or contrivance in connection with any class member’s purchases or sales of NLIC annuities or units in annuities sub-accounts. The plaintiff claims, in the alternative, that if NLIC is found with respect to market timing or stale price trading in its annuities sub-accounts, to have made any untrue statement, to have failed to disclose any material fact or to have used or employed any manipulative or deceptive device or contrivance, then the plaintiff purports to represent a class, with certain exceptions, of all persons who, prior to NLIC’s untrue statement, omission of material fact, use or employment of any manipulative or deceptive device or contrivance, held (through their ownership of an NLIC annuity or insurance product) units of any NLIC sub-account invested in mutual funds that included foreign securities in their portfolios and that experienced market timing activity. The first amended complaint alleges common law negligence and seeks to recover damages not to exceed $75,000 per plaintiff or class member, including all compensatory damages and costs. On June 1, 2006, the District Court granted NLIC’s motion to dismiss the plaintiff’s complaint. The plaintiff appealed the District Court’s decision, and the issues have been fully briefed. NLIC continues to defend this lawsuit vigorously.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

On August 15, 2001, NFS and NLIC were named in a lawsuit filed in the United States District Court for the District of Connecticut entitledLou Haddock, as trustee of the Flyte Tool & Die, Incorporated Deferred Compensation Plan, et al v. Nationwide Financial Services, Inc. and Nationwide Life Insurance Company. Currently, the plaintiffs’ fifth amended complaint, filed March 21, 2006, purports to represent a class of qualified retirement plans under ERISA that purchased variable annuities from NLIC. The plaintiffs allege that they invested ERISA plan assets in their variable annuity contracts and that NLIC and NFS 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 NFS and NLIC, other unspecified relief for restitution, declaratory and injunctive relief, and attorneys’ fees. To date, the District Court has rejected the plaintiffs’ request for certification of the alleged class. On September 25, 2007, NFS’ and NLIC’s motion to dismiss the plaintiffs’ fifth amended complaint was denied. On October 12, 2007, NFS and NLIC filed their answer to the plaintiffs’ fifth amended complaint and amended counterclaims. On November 1, 2007, the plaintiffs filed a motion to dismiss NFS’ and NLIC’s amended counterclaims. On November 15, 2007, the plaintiffs filed a motion for class certification. On February 8, 2008, the Court denied the plaintiffs’ motion to dismiss the amended counterclaim, with the exception that it was tentatively granting the plaintiffs’ motion to dismiss with respect to NFS’ and NLIC’s claim that it could recover any “disgorgement remedy” from plan sponsors. On April 25, 2008, NFS and NLIC filed their opposition to the plaintiffs’ motion for class certification. NFS and NLIC continue to defend this lawsuit vigorously.

Tax Matters

Management has established tax reservesin accordance with current accounting guidance, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. These reserves are reviewed regularly and are adjusted as events occur that management believes impact its liability for additional taxes, such as lapsing of applicable statutes of limitations; conclusion of tax audits or substantial agreement on the deductibility/nondeductibility of uncertain items; 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. Management believes its tax reserves reasonably provide for potential assessments that may result from Internal Revenue Service (IRS) examinations and other tax-related matters for all open tax years.

The separate account DRD is a significant component of the Company’s federal income tax provision. On August 16, 2007, the IRS issued Revenue Ruling 2007-54. This ruling took a position with respect to the DRD that could have significantly reduced the Company’s DRD. The Company believes that the position taken by the IRS in the ruling was contrary to existing law and the relevant legislative history.

In Revenue Ruling 2007-61, released September 25, 2007, the IRS and the U.S. Department of the Treasury suspended Revenue Ruling 2007-54 and informed taxpayers of their intention to address certain issues in connection with the DRD in future tax regulations. Final tax regulations could impact the Company’s DRD in periods subsequent to their effective date.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

(9)

Segment Information

Management views the Company’s business primarily based on its underlying products and uses this basis to define its four reportable segments: Individual Investments, Retirement Plans, Individual Protection, and Corporate and Other.

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 to exclude (1) net realized investment gains and losses, except for periodic net amounts paid or received on interest rate swaps that do not qualify for hedge accounting treatment and net realized gains and losses related to securitizations and (2) the adjustment to amortization of deferred policy acquisition costs (DAC) related to net realized investment gains and losses.

Individual Investments

The Individual Investments segment consists of individual The BEST of AMERICA^® and private label deferred variable annuity products, deferred fixed annuity products, income products and investment advisory services. 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 features, while individual fixed annuity contracts generate a return for the customer at a specified interest rate fixed for prescribed periods.

Retirement Plans

The Retirement Plans segment is comprised of the Company’s private and public sector retirement plans business. The private sector primarily includes Internal Revenue Code (IRC) Section 401 business, and the public sector primarily includes IRC Section 457 and Section 401(a) business, both in the form of full-service arrangements that provide plan administration and fixed and variable group annuities as well as administration-only business.

Individual Protection

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; and universal life insurance products. Life insurance products provide a death benefit and generally allow the customer to build cash value on a tax-advantaged basis.

Corporate and Other

The Corporate and Other segment includes the MTN program; structured products business; non-operating realized gains and losses, including mark-to-market adjustments on embedded derivatives, net of economic hedges, related to products with living benefits included in the Individual Investments segment; and other revenues and expenses not allocated to other segments.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

The following tables summarize the Company’s business segment operating results for the periods indicated:

Three months ended June 30, 2008

(in millions)

Individual
Investments

Retirement
Plans

Individual
Protection

Corporate
and Other

Total

Revenues:

Policy charges

162.1

32.1

116.9

—

311.1

Premiums

30.0

—

��

42.0

—

72.0

Net investment income

123.7

157.1

85.4

65.6

431.8

Non-operating net realized investment losses¹

—

(19.8

)

(19.8

)

Other income

1.1

—

5.6

6.7

Total revenues

316.9

189.2

244.3

51.4

801.8

Benefits and expenses:

Interest credited to policyholder accounts

87.9

103.9

44.4

38.8

275.0

Benefits and claims

56.7

—

72.3

—

129.0

Policyholder dividends

—

6.2

—

6.2

Amortization of DAC

82.0

11.8

35.3

34.4

163.5

Interest expense

—

15.3

Other operating expenses

46.6

37.4

30.9

5.6

120.5

Total benefits and expenses

273.2

153.1

189.1

94.1

709.5

Income (loss) from continuing operations before federal income tax expense

43.7

36.1

55.2

(42.7

)

92.3

Less: non-operating net realized investment losses¹

—

19.8

Less: adjustment to amortization related to net realized investment gains and losses

—

34.4

Pre-tax operating earnings

43.7

36.1

55.2

11.5

¹	Excluding periodic net amounts paid or received on interest rate swaps that do not qualify for hedge accounting treatment and net realized gains and losses related to securitizations.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007


	Three months ended June 30, 2007
	Individual Investments			Retirement Plans			Individual Protection		Corporate and Other			Total
(in millions)	Individual Investments			Retirement Plans			Individual Protection		Corporate and Other			Total
Revenues:
Policy charges	$	164.1		$	35.2		$	99.5	$	—		$	298.8
Premiums		30.0			—			39.7		—			69.7
Net investment income		158.4			158.1			80.2		99.7			496.4
Non-operating net realized investment losses¹		—			—			—		(4.0	)		(4.0	)
Other income		(0.8	)		—			—		0.2			(0.6	)

Total revenues		351.7			193.3			219.4		95.9			860.3

Benefits and expenses:
Interest credited to policyholder accounts		108.1			108.4			44.0		56.4			316.9
Benefits and claims		74.9			—			60.8		—			135.7
Policyholder dividends		—			—			4.8		—			4.8
Amortization of DAC		12.7			(1.1	)		5.0		(2.5	)		14.1
Interest expense		—			—			—		16.8			16.8
Other operating expenses		54.6			44.9			37.0		(1.5	)		135.0

Total benefits and expenses		250.3			152.2			151.6		69.2			623.3

Income from continuing operations before federal income tax expense		101.4			41.1			67.8		26.7		$	237.0

Less: non-operating net realized investment losses¹		—			—			—		4.0
Less: adjustment to amortization related to net realized investment gains and losses		—			—			—		(2.5	)

Pre-tax operating earnings	$	101.4		$	41.1		$	67.8	$	28.2

¹	Excluding periodic net amounts paid or received on interest rate swaps that do not qualify for hedge accounting treatment and net realized gains and losses related to securitizations.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007

Six months ended June 30, 2008

Individual
Investments

Retirement
Plans

Individual
Protection

Corporate
and Other

Total

(in millions)

Revenues:

Policy charges

321.8

63.6

226.6

—

612.0

Premiums

63.3

—

84.2

—

147.5

Net investment income

254.1

315.5

167.2

144.7

881.5

Non-operating net realized investment losses¹

—

(198.1

)

(198.1

)

Other income

1.8

—

(11.3

)

(9.5

)

Total revenues

641.0

379.1

478.0

(64.7

)

1,433.4

Benefits and expenses:

Interest credited to policyholder accounts

179.2

209.0

88.5

91.9

568.6

Benefits and claims

110.6

—

145.4

—

256.0

Policyholder dividends

—

14.5

—

14.5

Amortization of DAC

159.7

21.7

56.8

(13.1

)

225.1

Interest expense

—

31.9

Other operating expenses

92.8

73.0

67.6

13.8

247.2

Total benefits and expenses

542.3

303.7

372.8

124.5

1,343.3

Income (loss) from continuing operations before federal income tax expense

98.7

75.4

105.2

(189.2

)

90.1

Less: non-operating net realized investment losses¹

—

198.1

Less: adjustment to amortization related to net realized investment gains and losses

—

(13.1

)

Pre-tax operating earnings (loss)

98.7

75.4

105.2

(4.2

)

¹	Excluding periodic net amounts paid or received on interest rate swaps that do not qualify for hedge accounting treatment and net realized gains and losses related to securitizations.

NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES

(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

June 30, 2008 and 2007


	Six months ended June 30, 2007
	Individual Investments		Retirement Plans		Individual Protection		Corporate and Other			Total
(in millions)	Individual Investments		Retirement Plans		Individual Protection		Corporate and Other			Total
Revenues:
Policy charges	$	319.3	$	69.3	$	200.9	$	—		$	589.5
Premiums		63.6		—		79.1		—			142.7
Net investment income		322.9		319.3		164.2		204.3			1,010.7
Non-operating net realized investment losses¹		—		—		—		(17.4	)		(17.4	)
Other income		—		—		—		1.7			1.7

Total revenues		705.8		388.6		444.2		188.6			1,727.2

Benefits and expenses:
Interest credited to policyholder accounts		219.7		217.0		88.1		114.6			639.4
Benefits and claims		121.5		—		117.5		—			239.0
Policyholder dividends		—		—		10.7		—			10.7
Amortization of DAC		112.2		8.5		28.1		(5.0	)		143.8
Interest expense		—		—		—		31.9			31.9
Other operating expenses		100.2		91.5		70.6		0.8			263.1

Total benefits and expenses		553.6		317.0		315.0		142.3			1,327.9

Income from continuing operations before federal income tax expense		152.2		71.6		129.2		46.3		$	399.3

Less: non-operating net realized investment losses¹		—		—		—		17.4
Less: adjustment to amortization related to net realized investment gains and losses		—		—		—		(5.0	)

Pre-tax operating earnings	$	152.2	$	71.6	$	129.2	$	58.7

¹	Excluding periodic net amounts paid or received on interest rate swaps that do not qualify for hedge accounting treatment and net realized gains and losses related to securitizations.

ITEM 2 MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

TABLE OF CONTENTS


FORWARD-LOOKING INFORMATION		35

OVERVIEW		36

CRITICAL ACCOUNTING POLICIESAND RECENTLY ISSUED ACCOUNTING STANDARDS		39

RESULTSOF OPERATIONS		42

SALES		45

BUSINESS SEGMENTS		50

CONTRACTUAL OBLIGATIONSAND COMMITMENTS		66

OFF-BALANCE SHEET TRANSACTIONS		66

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 Life Insurance Company and subsidiaries (NLIC, or collectively, the Company). Whenever used in this report, words such as “anticipate,” “estimate,” “expect,” “intend,” “plan,” “believe,” “project,” “target,” and other words of similar meaning are intended to identify such forward-looking statements. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such forward-looking statements include, among others, the following possibilities:

(i)

the potential impact on the Company’s reported net income and related disclosures that could result from the adoption of certain accounting and/or financial reporting standards issued by the Financial Accounting Standards Board, the United States Securities and Exchange Commission or other standard-setting bodies;

(ii)

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

(iii)

repeal of the federal estate tax;

(iv)

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;

(v)

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;

(vi)

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

(vii)

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;

(viii)

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), a reduction in separate account assets or a reduction in the demand for the Company’s products;

(ix)

reduction in the value of the Company’s investment portfolio as a result of changes in interest rates and yields in the market as well as geopolitical conditions and the impact of political, regulatory, judicial, economic or financial events, including terrorism, affecting the market generally and companies in the Company’s investment portfolio specifically;

(x)

general economic and business conditions that are less favorable than expected;

(xi)

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

(xii)

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

(xiii)

settlement of tax liabilities for amounts that differ significantly from those recorded on the balance sheets;

(xiv)

deviations from assumptions regarding future persistency, mortality (including as a result of the outbreak of a pandemic illness, such as Avian Flu), morbidity and interest rates used in calculating reserve amounts and in pricing the Company’s products;

(xv)

adverse litigation results and/or resolution of litigation and/or arbitration or investigation results that could result in monetary damages or impact the manner in which the Company conducts its operations; and

(xvi)

adverse consequences, including financial and reputation costs, regulatory problems and potential loss of customers resulting from failure to meet privacy regulations and/or protect the Company’s customers’ confidential information.

Overview

The following analysis of condensed consolidated results of operations and financial condition of the Company should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere herein and the Company’s 2007 Annual Report on Form 10-K.

The Company is a member of the Nationwide group of companies, which is comprised of Nationwide Mutual Insurance Company (NMIC) and all of its subsidiaries and affiliates.

All of the outstanding shares of NLIC’s common stock are owned by Nationwide Financial Services, Inc. (NFS), a holding company formed by Nationwide Corporation, a majority-owned subsidiary of NMIC.

Wholly-owned subsidiaries of NLIC include Nationwide Life and Annuity Insurance Company (NLAIC) and Nationwide Investment Services Corporation (NISC). NLAIC offers universal life insurance, variable universal life insurance, corporate-owned life insurance (COLI) and individual annuity contracts on a non-participating basis. NISC is a registered broker/dealer.

The Company is a leading provider of long-term savings and retirement products in the United States of America (U.S.). The Company develops and sells a diverse range of products including individual annuities, private and public sector group retirement plans, other investment products sold to institutions, life insurance and investment advisory services.

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, and life insurance specialists. Representatives of affiliates that market products directly to a customer base include Nationwide Retirement Solutions, Inc. (NRS); Nationwide Financial Network (NFN) producers; and Mullin TBG Insurance Agency Services, LLC (Mullin TBG), a joint venture between NFS’ majority-owned subsidiary, TBG Insurance Services Corporation d/b/a TBG Financial, and MC Insurance Agency Services, LLC d/b/a Mullin Consulting. The Company also distributes products through the agency distribution force of its ultimate majority parent company, NMIC.

On August 6, 2008, NFS entered into a definitive agreement for NMIC, Nationwide Mutual Fire Insurance Company and Nationwide Corporation to acquire all of the outstanding publicly held Class A common shares of the Company for $52.25 per share in cash. The transaction is expected to close by the end of 2008 or early 2009, subject to shareholder approval and customary regulatory approvals and closing conditions. NMIC and its affiliates, which collectively hold 95.2% of the combined voting power of the outstanding common shares, have indicated that they will vote to approve the transaction.

Business Segments

SeePart 1 – Financial Information, Item 1 – Condensed Consolidated Financial Statements, Note 9 – Segment Informationfor a discussion of reportable segments, including the components of each segment.

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


	Three months ended June 30,					Six months ended June 30,
(in millions)	2008		2007		Change	2008			2007		Change
Individual Investments	$	43.7	$	101.4	(57)%	$	98.7		$	152.2	(35)%
Retirement Plans		36.1		41.1	(12)%		75.4			71.6	5 %
Individual Protection		55.2		67.8	(19)%		105.2			129.2	(19)%
Corporate and Other		11.5		28.2	(59)%		(4.2	)		58.7	NM

Revenues and Expenses

The Company earns revenues and generates cash primarily from policy charges, life insurance premiums and net investment income. 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, which are assessed on the amount of insurance in force in excess of the related policyholder account value; 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. 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. Other income includes asset fees, administrative fees, commissions and other income earned by subsidiaries of the Company that provide administrative, marketing and distribution services.

Management 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 net realized investment gains and losses. 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, including the mark-to-market of embedded derivatives, net of economic hedges; and periodic net amounts paid or received on interest rate swaps that do not qualify for hedge accounting treatment.

The Company’s primary expenses include interest credited to policyholder accounts, life insurance and annuity benefits, amortization of DAC and general business operating expenses. Interest credited principally relates to individual and group fixed annuities, funding agreements backing the Company’s MTN program and certain life insurance products. Life insurance and annuity benefits include policyholder benefits in excess of policyholder accounts for universal life and individual deferred annuities and net claims and provisions for future policy benefits for traditional life insurance products and immediate annuities.

The Company regularly evaluates and adjusts the DAC balance when actual gross profits in a given reporting period vary from management’s initial estimates, with a corresponding charge or credit to current period earnings. This process is referred to by the Company as a “true-up”, which generally is performed, and the resulting impact recognized, on a quarterly basis. Additionally, the Company regularly evaluates its assumptions regarding the future estimated gross profits used as a basis for amortization of DAC and adjusts the total amortization recorded to date by a charge or credit to earnings if evidence suggests that these future assumptions and estimates should be revised. The Company refers to this process as “unlocking”, which generally is performed on an annual basis with any corresponding charge or credit reflected in the second quarter. In addition, the Company regularly monitors its actual experience and evaluates relevant internal and external information impacting its assumptions and may unlock more frequently than annually if such information and analysis warrants.

Profitability

The Company’s profitability largely depends on its ability to effectively price and manage risk on its various products, administer customer funds and control operating expenses. Lapse rates on existing contracts also impact profitability. The lapse rate and distribution of lapses affect surrender charges and impact DAC amortization assumptions when lapse experience changes significantly.

In particular, the Company’s profitability is driven by fee income on separate account products, general and separate account asset levels, and management’s ability to manage interest spread income. While asset fees are largely at guaranteed annual rates, amounts earned vary directly with the underlying performance of the separate accounts. Interest spread income is comprised of net investment income, excluding any applicable allocated charges for invested capital, less interest credited to policyholder accounts. 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 and the level of invested assets; the competitive environment; and other factors.

In addition, life insurance profits are significantly impacted by mortality, morbidity and persistency experience.

Cumulative Effect of Adoption of Accounting Principle

Fair Value Measurements

As described inPart 1 – Financial Information, Item 1 – Condensed Consolidated Financial Statements, Note 4 – Fair Value Measurements, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157,Fair Value Measurements (SFAS 157) effective January 1, 2008.SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

In accordance with SFAS 157, the Company categorized its financial instruments based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument in its entirety.

The Company categorizes financial assets and liabilities recorded at fair value in the condensed consolidated balance sheets as Level 1, Level 2 or Level 3 depending on the observability of inputs used to measure fair value.

Investments

Level 3 securities available-for-sale include non-investment grade collateralized mortgage obligations, mortgage-backed securities (MBSs) and asset-backed securities (ABSs), ABS trust preferred-residual income notes, counterparty or internally priced securities, and securities that are at or near default based on designations assigned by the National Association of Insurance Commissioners.

As of June 30, 2008, Level 3 investments comprised 11% of total investments. Significant transfers of corporate securities and ABSs into Level 3 during the first quarter of 2008 primarily were related to changes in pricing availability for corporate bonds and other fixed-income securities driven by shifts from matrix priced and non-matrix priced valuation methodologies to broker pricing.

Future Policy Benefits and Claims

The fair value measurements for future policy benefits and claims relate to embedded derivatives associated with contracts with living benefit riders (guaranteed minimum accumulation benefits, guaranteed minimum withdrawal benefits and equity-indexed annuities). Related derivatives are internally valued. The valuation of guaranteed minimum benefit embedded derivatives is based on capital market and actuarial risk assumptions, including risk margin considerations reflecting policyholder behavior. The Company uses observable inputs, such as published swap rates, in its capital market assumptions. Actuarial assumptions, including lapse behavior and mortality rates, are based on annuity experience.

Critical Accounting Policies and Recently Issued Accounting Standards

The preparation of financial statements in accordance with United States generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ significantly from those estimates.

The Company’s most critical estimates include those used to determine the following: the balance, recoverability and amortization of DAC for investment and universal life insurance products; impairment losses on investments; valuation allowances for mortgage loans on real estate; the liability for future policy benefits and claims; and federal income tax provision.

Note 2 to the audited consolidated financial statements included in the Company’s 2007 Annual Report on Form 10-K provides a summary of significant accounting policies. SeePart 1 – Financial Information, Item 1 – Condensed Consolidated Financial Statements, Note 3 – Recently Issued Accounting Standardsfor a discussion of recently issued accounting standards. The Company’s critical accounting policies have not changed materially from those disclosed in the Company’s 2007 Annual Report on Form 10-K. However, the impact of unlocking certain DAC assumptions during the second quarter of 2008 and 2007 and further clarification of the assumptions included in the Company’s DAC sensitivity analysis are disclosed below.

Deferred Policy Acquisition Costs for Investment and Universal Life Insurance Products

The Company has deferred certain costs of acquiring investment 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. In addition, the Company defers sales inducements, such as interest credit bonuses and jumbo deposit bonuses. Investment products primarily consist of individual and group variable and fixed deferred annuities in the Individual Investments and Retirement Plans segments. Universal life insurance products include universal life insurance, variable universal life insurance, COLI, bank-owned life insurance (BOLI) and other interest-sensitive life insurance policies in the Individual Protection segment. DAC is subject to recoverability testing in the year of policy issuance and loss recognition testing at the end of each reporting period.

For investment and universal life insurance products, the Company amortizes DAC 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 charges, administration fees, surrender charges, and net realized investment gains and losses less policy benefits and policy maintenance expenses. The Company adjusts the DAC asset related to investment and universal life insurance products to reflect the impact of unrealized gains and losses on fixed maturity securities available-for-sale as described in Note 2(b) to the audited consolidated financial statements included in the Company’s 2007 Annual Report on Form 10-K.

The assumptions used in the estimation of future gross profits are based on the Company’s current best estimates of future events and are reviewed as part of an annual process during the second quarter. During the annual process, the Company performs a comprehensive study of assumptions, including mortality and persistency studies, maintenance expense studies, and an evaluation of projected general and separate account investment returns. The most significant assumptions that are involved in the estimation of future gross profits include future net separate account investment performance, surrender/lapse rates, interest margins and mortality. Currently, the Company’s long-term assumption for net separate account investment performance is approximately 7% growth per year and varies by product. The Company reviews this assumption, like others, as part of its annual process. If this assumption were unlocked, the date of the unlocking could become the anchor date used in the reversion to the mean process (defined below). Variances from the long-term assumption are expected since the majority of the investments in the underlying separate accounts are in equity securities, which strongly correlate in the aggregate with the Standard & Poor’s Ratings Services (S&P) 500 Index. The Company bases its reversion to the mean process on actual net separate account investment performance from the anchor date to the valuation date. The Company then assumes different performance levels over the next three years such that the separate account mean return measured from the anchor date to the end of the life of the product equals the long-term assumption. The assumed net separate account investment performance used in the DAC models is intended to reflect what is anticipated. However, based on historical returns of the S&P 500 Index, and as part of its pre-set parameters, the Company’s reversion to the mean process generally limits net separate account investment performance to 0-15% during the three-year reversion period. See below for a discussion of 2008 and 2007 assumption changes that impacted DAC amortization and related balances.

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

In addition to the comprehensive annual study of assumptions, management evaluates the appropriateness of the individual variable annuity DAC balance quarterly 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 time period, or if the recorded balance falls outside of these parameters and management determines it is not reasonably possible to get back within the parameters during this time period, assumptions are required to be unlocked, and DAC is recalculated using revised best estimate assumptions. When DAC assumptions are unlocked and revised, the Company continues to use the reversion to the mean process. See below for a discussion of 2008 and 2007 assumption changes that impacted DAC amortization and related balances.

For variable annuity products, the DAC balance is sensitive to the effects of changes in the Company’s estimates of gross profits, primarily due to the significant portion of the Company’s gross profits that are dependent upon the rate of return on assets held in separate accounts. This rate of return influences fees earned by the Company from these products and costs incurred by the Company associated with minimum contractual guarantees, as well as other sources of future expected gross profits. As previously stated, the Company’s current long-term assumption for net separate account investment performance is approximately 7% growth per year. In its ongoing evaluation of this assumption, the Company monitors its historical experience, market information and other relevant trends. To demonstrate the sensitivity of both the Company’s variable annuity product DAC balance, which was approximately $2.0 billion in aggregate as of June 30, 2008, and related amortization, a 1% increase (to 8%) or decrease (to 6%) in the long-term assumption for net separate account investment performance would result in an approximately $20.0 million net decrease or net increase, respectively, in DAC amortization over the following year. These fluctuations are reasonably likely to occur. The information provided above considers only changes in the assumption for long-term net separate account investment performance and excludes changes in other assumptions used in the Company’s evaluation of DAC.

During the second quarter of 2007, the Company conducted its annual comprehensive review of model assumptions used to project DAC and other related balances, including sales inducement assets, VOBA, unearned revenue reserves, and guaranteed minimum death and income benefit reserves. This review included all assumptions, including expected separate account investment returns during the three-year reversion period, lapse rates, mortality and expenses. The Company determined as part of this annual review that the overall separate account returns were expected to exceed previous estimates due to favorable financial market trends. Additionally, while the Company estimates that the overall profitability of its variable products has improved, it expects the long-term net growth in separate account investment performance to moderate.

Accordingly, the second quarter 2007 unlocking process included changes in several assumptions, including assumptions affecting net separate account investment performance. This unlocking resulted in a net increase in DAC and a benefit to DAC amortization and other related balances totaling $221.6 million pre-tax, which was reported in the following segments in the pre-tax amounts indicated: Individual Investments- $196.4 million; Retirement Plans - $10.5 million; and Individual Protection - $14.7 million. First, the Company reset the anchor date for its reversion to the mean calculations, which increased the annual net separate account growth rate to 7% during the first three years of the projection period from 0% (which was the rate of return for the three-year reversion period required from the previous anchor date). Second, as a result of its current analysis, including its evaluation of ongoing trends and expectations regarding financial market performance, the Company unlocked and reset its long-term assumption for net separate account growth rates to 7% from 8%. This decreased the net separate account growth rate by 1% to 7% for all years subsequent to the three-year reversion period. The combination of resetting these two factors resulted in a $167.0 million increase in DAC and benefit to DAC amortization and other related balances. The impact of changing the annual net separate account growth rate from 0% to 7% during the three-year reversion period had a much larger effect on the DAC balance when compared to the 1% incremental change in the long-term assumption for net separate account investment performance. The remainder of the increase in DAC and benefit to DAC amortization and other related balances resulting from the DAC unlocking process primarily was related to the recorded balance of individual variable annuity DAC falling outside the Company’s preset parameters for the prescribed time period, which was driven by favorable market performance in excess of the assumed net separate account returns. Accordingly, the Company recalculated DAC using revised best estimate assumptions, which resulted in a $78.8 million increase in DAC and benefit to DAC amortization and other related balances. This was partially offset by a $24.2 million decrease in DAC and increase in DAC amortization and other related balances due to increasing estimated lapse rates for fixed annuity and BOLI products.

During the second quarter of 2007, the Company added a new feature to its existing guaranteed minimum withdrawal benefit rider, Lifetime Income (L.inc). This new feature results in a substantial change in the existing contracts and, therefore, an extinguishment of the DAC associated with those contracts pursuant to the American Institute of Certified Public Accountants’ Statement of Position 05-1,Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts. As a result, the Company eliminated existing DAC and other related balances resulting in a $135.0 million pre-tax charge.

At the end of the second quarter of 2008, the Company determined as part of its comprehensive annual study of assumptions that certain assumptions should be unlocked. The unlocked assumptions primarily related to lapse and spread assumptions in the Individual Investments segment, the assumed growth rate on deposits per contract in the Retirement Plans segment, and mortality and lapse assumptions in the Individual Protection segment. Therefore, in the second quarter of 2008, the Company recorded the following pre-tax adjustments: 1) a decrease in DAC and additional DAC amortization of $13.4 million; 2) a decrease in other assets and additional benefits and claims of $0.6 million; and 3) a decrease in unearned revenue liability and additional administrative fees of $3.1 million. The net impact of this activity was a $10.9 million unfavorable pre-tax adjustment to net income in the second quarter of 2008, which was reported in the following segments in the pre-tax amounts indicated: Individual Investments - $9.4 million unfavorable; Retirement Plans - $2.3 million unfavorable; and Individual Protection - $0.8 million favorable.

Results of Operations

Second Quarter – 2008 Compared to 2007

The following table summarizes the Company’s consolidated results of operations for the periods indicated:


	Three months ended June 30,
(in millions)	2008			2007			Change
Revenues:
Policy charges:
Asset fees	$	182.0		$	186.6		(2)%
Cost of insurance charges		80.8			73.6		10 %
Administrative fees		35.2			22.6		56 %
Surrender fees		13.1			16.0		(18)%

Total policy charges		311.1			298.8		4 %
Premiums		72.0			69.7		3 %
Net investment income		431.8			496.4		(13)%
Net realized investment losses		(14.2	)		(2.5	)	NM
Other income		1.1			(2.1	)	NM

Total revenues		801.8			860.3		(7)%

Benefits and expenses:
Interest credited to policyholder accounts		275.0			316.9		(13)%
Benefits and claims		129.0			135.7		(5)%
Policyholder dividends		6.2			4.8		29 %
Amortization of DAC		163.5			14.1		NM
Interest expense, primarily with NFS		15.3			16.8		(9)%
Other operating expenses		120.5			135.0		(11)%

Total benefits and expenses		709.5			623.3		14 %

Income from continuing operations before federal income tax expense		92.3			237.0		(61)%
Federal income tax expense		28.5			71.3		(60)%

Net income	$	63.8		$	165.7		(61)%

The decrease in net income primarily was driven by higher amortization of DAC, higher net realized investment losses and lower interest spread income. Lower other operating expenses and higher administrative fees partially offset the overall decline.

Higher amortization of DAC was due to several factors. First, the aforementioned DAC unlocking in the second quarter of 2007 lowered amortization of DAC by $235.8 million in the same quarter a year ago. Next, increased earnings on embedded derivatives in annuity products offering living benefits increased amortization of DAC by $35.8 million in the second quarter of 2008. Finally, the aforementioned DAC unlocking in the second quarter of 2008 increased amortization of DAC by $13.4 million in the current year quarter. However, the Company modified the features of its L.inc product within the Individual Investments segment during the second quarter of 2007. This modification required the Company to extinguish existing DAC and other balances related to L.inc, resulting in a $124.0 million increase in amortization of DAC and increased annuity benefits of $11.0 million in the prior year quarter. In addition, the impact of 2007 unlocking, which decreased the rate of DAC amortization, and lower gross profits in the current year quarter further offset the increases described above.

Net realized investment losses increased primarily due to a $73.1 million increase in impairment charges due to challenging conditions in the credit markets, partially offset by $57.1 million in gains on living benefit embedded derivatives, net of economic hedging activity, primarily as a result of differences between changes in the market value of liabilities and hedging instruments in a volatile market.

Interest spread income declined primarily within the Corporate and Other and Individual Investments segments due to lower income from alternative investments and lower income from mortgage loan prepayments and bond call premiums. SeePart I – Financial Information, Item 2 – MD&A – Business Segmentsfor a more detailed discussion of interest spread income.

The decrease in other operating expenses reflects lower incentive compensation and the impact of the continued movement of pension business to NFS trust product offerings.

Administrative fees were impacted by the aforementioned unlocking in the second quarter of 2008 and increased universal life sales upon which part of these fees are derived.

Year-to-Date – 2008 Compared to 2007

The following table summarizes the Company’s consolidated results of operations for the periods indicated:


	Six months ended June 30,
(in millions)	2008			2007			Change
Revenues:
Policy charges:
Asset fees	$	360.3		$	363.0		(1)%
Cost of insurance charges		160.0			147.6		8 %
Administrative fees		64.0			46.9		36 %
Surrender fees		27.7			32.0		(13)%

Total policy charges		612.0			589.5		4 %
Premiums		147.5			142.7		3 %
Net investment income		881.5			1,010.7		(13)%
Net realized investment losses		(209.5	)		(13.6	)	NM
Other income		1.9			(2.1	)	NM

Total revenues		1,433.4			1,727.2		(17)%

Benefits and expenses:
Interest credited to policyholder accounts		568.6			639.4		(11)%
Benefits and claims		256.0			239.0		7 %
Policyholder dividends		14.5			10.7		36 %
Amortization of DAC		225.1			143.8		57 %
Interest expense, primarily with NFS		31.9			31.9		—
Other operating expenses		247.2			263.1		(6)%

Total benefits and expenses		1,343.3			1,327.9		1 %

Income from continuing operations before federal income tax expense		90.1			399.3		(77)%
Federal income tax expense		10.8			103.4		(90)%

Income from continuing operations		79.3			295.9		(73)%
Cumulative effect of adoption of accounting principle, net of taxes		—			(6.0	)	NM

Net income		79.3			289.9		(73)%

The decrease in net income primarily was due to higher net realized investment losses, increased amortization of DAC, lower interest spread income, and higher benefits and claims, partially offset by higher policy charges and lower other operating expenses.

Net realized investment losses increased primarily due to a $145.6 million increase in impairment charges due to challenging conditions in the credit markets. In addition, the first six months of 2008 included $17.7 million in losses on living benefit embedded derivatives, net of economic hedging activity, primarily as a result of differences between changes in the market value of liabilities and hedging instruments in a volatile market.

Higher amortization of DAC was due to several factors. First, the aforementioned DAC unlocking in the first six months of 2007 lowered amortization of DAC by $235.8 million in the same period a year ago. Next, net realized losses on embedded derivatives in annuity products offering living benefits decreased amortization of DAC by $8.5 million in the first six months of 2008. Finally, the aforementioned DAC unlocking in the first six months of 2008 increased amortization of DAC by $13.4 million in the current year period. However, the Company modified the features of its L.inc product within the Individual Investments segment during the first six months of 2007. This modification required the Company to extinguish existing DAC and other balances related to L.inc, resulting in a $124.0 million increase in amortization of DAC and increased annuity benefits of $11.0 million in the prior year period. In addition, the impact of 2007 unlocking, which decreased the rate of DAC amortization, and lower gross profits in the current year period further offset the increases described above.

Interest spread income declined primarily within the Corporate and Other and Individual Investments segments due to lower income from alternative investments, lower income from mortgage loan prepayments and bond call premiums, and reduced earnings from the MTN program. SeePart I – Financial Information, Item 2 – MD&A – Business Segmentsfor a more detailed discussion of interest spread income.

Higher benefits and claims primarily were due to adverse mortality in the current year in the variable universal life and universal life insurance businesses in the Individual Protection segment. The average net claim size and the number of claims in these products increased over the prior year. These factors partially were offset by lower benefits and claims in the Individual Investments segment primarily driven by the related impact of unlocking of DAC and other related balances in the first six months of 2007, which increased annuity benefits by $12.5 million in the prior year period; the aforementioned modification of L.inc features in 2007 increased annuity benefits in the prior year period by $11.0 million; and higher guaranteed benefit expenses during the first six months of 2008 primarily related to growth in business offering living benefits.

Policy charges increased due to higher administrative fees and cost of insurance charges. Administrative fees were impacted by the aforementioned unlocking in the second quarter of 2008 and increased universal life sales upon which part of these fees are derived. Cost of insurance charges rose due to increased business in force combined with the aging of the individual life business block.

The decrease in other operating expenses reflects lower incentive compensation in the first six months of 2008 and the impact of the continued movement of pension business to NFS trust product offerings.

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 management, 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 statutory premiums and annuity consideration revenues.

Sales, as reported by the Company, are stated net of internal replacements, which management 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; asset transfers associated with large case BOLI and large case retirement plan acquisitions; and deposits into Nationwide employee and agent benefit plans. Although these products contribute to asset and earnings growth, their production flows potentially can mask trends in the underlying business and thus do not provide meaningful comparisons and analyses.

Management 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, 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 endorsement by the National Association of Counties, The United States Conference of Mayors and The International Association of Fire Fighters when marketing IRC Section 457 products.

Second Quarter – 2008 Compared to 2007

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


	Three months ended June 30,
(in millions)	2008		2007		Change
Individual Investments
Individual variable annuities	$	1,110.6	$	1,394.0	(20)%
Individual fixed annuities		42.4		39.4	8 %
Income products		57.4		50.0	15 %
Advisory services program		24.9		36.6	(32)%

Total Individual Investments		1,235.3		1,520.0	(19)%

Retirement Plans
Private sector:
Group products		238.2		274.6	(13)%
Public sector:
IRC Section 457 annuities		443.4		385.5	15 %

Total Retirement Plans		681.6		660.1	3 %

Individual Protection
Corporate-owned life insurance		148.8		153.6	(3)%
Traditional/universal life insurance		114.1		96.3	18 %
Variable life insurance		105.8		107.8	(2)%

Total Individual Protection		368.7		357.7	3 %

Total sales	$	2,285.6	$	2,537.8	(10)%

SeePart I – Financial Information, Item 2 – Management’s Narrative Analysis of the Results of Operations (MD&A) –Business Segments for an analysis of sales by product and segment.

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


	Three months ended June 30,
(in millions)	2008		2007		Change
Non-affiliated:
Independent broker/dealers	$	617.9	$	701.7	(12)%
Financial institutions		409.3		514.8	(20)%
Wirehouse and regional firms		393.7		456.7	(14)%
Life insurance specialists		95.3		91.1	5 %
Pension plan administrators		58.1		68.2	(15)%

Total non-affiliated sales		1,574.3		1,832.5	(14)%

Affiliated:
NRS		449.2		391.4	15 %
NFN producers		208.6		251.4	(17)%
Mullin TBG		53.5		62.5	(14)%

Total affiliated sales		711.3		705.3	1 %

Total sales	$	2,285.6	$	2,537.8	(10)%

The decrease in total sales primarily was due to lower individual variable annuity sales in the Individual Investments segment. Volatile market conditions and the recent economic slowdown have negatively impacted variable annuity sales industrywide. In addition, private sector group product sales in the Retirement Plans segment declined due to the continued movement of pension business to NFS trust product offerings. In recent years, an increasing amount of business in the Retirement Plans segment has been sold through NFS trust products rather than NLIC group annuity contracts due to NFS’ significant investment in the development of trust product capabilities not prevalent elsewhere in the market. Strong sales of public sector IRC Section 457 annuity plans in the Retirement Plans segment and the ULtimate universal life product in the Individual Protection segment partially offset the overall decline.

Lower sales through the financial institutions, independent broker/dealers, wirehouse and regional firms, and NFN producers channels reflect the declines in individual variable annuity and group product sales mentioned above, partially mitigated by increased sales of IRC Section 457 annuities and universal life products.

Increased NRS sales were driven by additional large deposits from two large administration-only agreements and increased participation by both new and existing employers.

Year-to-Date – 2008 Compared to 2007

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


	Six months ended June 30,
(in millions)	2008		2007		Change
Individual Investments
Individual variable annuities	$	2,319.0	$	2,634.1	(12)%
Individual fixed annuities		81.7		76.2	7 %
Income products		106.0		105.5	—
Advisory services program		48.1		73.4	(34)%

Total Individual Investments		2,554.8		2,889.2	(12)%

Retirement Plans
Private sector:
Group products		516.3		614.1	(16)%
Public sector:
IRC Section 457 annuities		879.2		775.2	13 %

Total Retirement Plans		1,395.5		1,389.3	—

Individual Protection
Corporate-owned life insurance		354.3		356.8	(1)%
Traditional/universal life insurance		229.9		181.0	27 %
Variable life insurance		207.1		216.5	(4)%

Total Individual Protection		791.3		754.3	5 %

Total sales	$	4,741.6	$	5,032.8	(6)%

SeePart I – Financial Information, Item 2 – MD&A –Business Segments for an analysis of sales by product and segment.

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


	Six months ended June 30,
(in millions)	2008		2007		Change
Non-affiliated:
Independent broker/dealers	$	1,255.4	$	1,417.1	(11)%
Financial institutions		860.9		967.1	(11)%
Wirehouse and regional firms		830.5		878.7	(5)%
Life insurance specialists		200.9		179.4	12 %
Pension plan administrators		132.9		152.7	(13)%

Total non-affiliated sales		3,280.6		3,595.0	(9)%

Affiliated:
NRS		891.6		787.4	13 %
NFN producers		416.0		472.9	(12)%
Mullin TBG		153.4		177.5	(14)%

Total affiliated sales		1,461.0		1,437.8	2 %

Total sales	$	4,741.6	$	5,032.8	(6)%

The decrease in total sales primarily was due to lower individual variable annuity sales in the Individual Investments segment. Volatile market conditions and the recent economic slowdown have negatively impacted variable annuity sales industrywide. In addition, private sector group product sales in the Retirement Plans segment declined due to the continued movement of pension business to NFS trust product offerings mentioned previously. Strong sales of public sector IRC Section 457 annuity plans in the Retirement Plans segment and the ULtimate universal life product in the Individual Protection segment partially offset the overall decline.

Lower sales through the independent broker/dealers, financial institutions, NFN producers, and wirehouse and regional firms channels reflect the declines in individual variable annuity and group product sales mentioned above, partially mitigated by increased sales of IRC Section 457 annuities and universal life products.

Increased NRS sales were driven by additional large deposits from two large administration-only agreements and increased participation by both new and existing employers.

Business Segments

Individual Investments

2nd Quarter – 2008 Compared to 2007

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


	Three months ended June 30,
(dollars in millions)	2008		2007			Change
Statements of Income Data
Revenues:
Policy charges:
Asset fees	$	144.3	$	145.6		(1)%
Administrative fees		8.2		6.1		34 %
Surrender fees		9.6		12.4		(23)%

Total policy charges		162.1		164.1		(1)%
Premiums		30.0		30.0		—
Net investment income		123.7		158.4		(22)%
Other income		1.1		(0.8	)	NM

Total revenues		316.9		351.7		(10)%

Benefits and expenses:
Interest credited to policyholder accounts		87.9		108.1		(19)%
Benefits and claims		56.7		74.9		(24)%
Amortization of DAC		82.0		12.7		NM
Other operating expenses		46.6		54.6		(15)%

Total benefits and expenses		273.2		250.3		9 %

Pre-tax operating earnings	$	43.7	$	101.4		(57)%

Other Data
Interest spread margin:
Net investment income		5.27%		5.75%
Interest credited		3.62%		3.75%

Interest spread on average general account values		1.65%		2.00%

Sales:
Individual variable annuities	$	1,110.6	$	1,394.0		(20)%
Individual fixed annuities		42.4		39.4		8 %
Income products		57.4		50.0		15 %
Advisory services program		24.9		36.6		(32)%

Total sales	$	1,235.3	$	1,520.0		(19)%

Average account values:
General account	$	9,721.2	$	11,526.9		(16)%
Separate account		38,443.4		40,662.0		(5)%
Advisory services program		563.6		630.3		(11)%

Total average account values	$	48,728.2	$	52,819.2		(8)%

Pre-tax operating earnings to average account values		0.36%		0.77%

Pre-tax operating earnings declined due to higher amortization of DAC and lower interest spread income, partially offset by lower benefits and claims and other operating expenses.

Higher amortization of DAC primarily was due to the aforementioned DAC unlocking in the second quarter of 2007, which lowered amortization of DAC by $208.9 million in the same quarter a year ago. In addition, the aforementioned DAC unlocking in the second quarter of 2008 increased amortization of DAC by $8.8 million in the current year quarter. However, the Company modified the features of its L.inc product within this segment during the second quarter of 2007. This modification required the Company to extinguish existing DAC and other balances related to L.inc, resulting in a $124.0 million increase in amortization of DAC and increased annuity benefits of $11.0 million in the prior year quarter as explained below. Additionally, the impact of 2007 unlocking, which decreased the rate of DAC amortization, and lower gross profits in the current year quarter lowered amortization of DAC by $11.7 million and $7.6 million, respectively, to further offset the increases noted above.

Interest spread income declined primarily due to lower general account assets caused by fixed annuity net outflows (a 16% decline in average account values), which reduced interest spread income by approximately $7.4 million. In addition, interest spread margins declined to 165 basis points compared to 200 basis points in the same quarter a year ago, reducing interest spread income by approximately $7.1 million. The current quarter margins included a $5.4 million decrease in income from mortgage loan prepayments and bond call premiums compared to the same quarter a year ago, which contributed 18 basis points to the margin decline discussed above.

Lower benefits and claims primarily were driven by the related impact of unlocking of DAC and other related balances in the second quarter of 2007, which increased annuity benefits by $12.5 million in the prior year quarter. Additionally, the aforementioned modification of L.inc features in 2007 increased annuity benefits in the prior year quarter by $11.0 million. Higher guaranteed benefit expenses primarily related to growth in business offering living benefits partially offset the decreases discussed above.

Other operating expenses declined primarily due to decreases in employee incentives ($3.3 million), technology costs ($2.5 million), and state and local taxes ($2.0 million).

The decrease in sales primarily was attributable to lower individual variable annuity sales due to volatile market conditions and the recent economic slowdown.

Year-to-Date – 2008 Compared to 2007

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


	Six months ended June 30,
(dollars in millions)	2008		2007		Change
Statements of Income Data
Revenues:
Policy charges:
Asset fees	$	285.3	$	282.3	1 %
Administrative fees		15.5		12.3	26 %
Surrender fees		21.0		24.7	(15)%

Total policy charges		321.8		319.3	1 %
Premiums		63.3		63.6	—
Net investment income		254.1		322.9	(21)%
Other income		1.8		—	NM

Total revenues		641.0		705.8	(9)%

Benefits and expenses:
Interest credited to policyholder accounts		179.2		219.7	(18)%
Benefits and claims		110.6		121.5	(9)%
Amortization of DAC		159.7		112.2	42 %
Other operating expenses		92.8		100.2	(7)%

Total benefits and expenses		542.3		553.6	(2)%

Pre-tax operating earnings	$	98.7	$	152.2	(35)%

Other Data
Interest spread margin:
Net investment income		5.37%		5.74%
Interest credited		3.64%		3.74%

Interest spread on average general account values		1.73%		2.00%

Sales:
Individual variable annuities	$	2,319.0	$	2,634.1	(12)%
Individual fixed annuities		81.7		76.2	7 %
Income products		106.0		105.5	—
Advisory services program		48.1		73.4	(34)%

Total sales	$	2,554.8	$	2,889.2	(12)%

Average account values:
General account	$	9,833.8	$	11,757.4	(16)%
Separate account		39,654.5		40,144.9	(1)%
Advisory services program		591.5		619.2	(4)%

Total average account values	$	50,079.8	$	52,521.5	(5)%

Account values as of period end:
Individual variable annuities	$	41,821.5	$	45,781.6	(9)%
Individual fixed annuities		3,872.3		5,151.4	(25)%
Income products		2,089.3		2,025.4	3 %
Advisory services program		522.8		643.7	(19)%

Total account values	$	48,305.9	$	53,602.1	(10)%

Pre-tax operating earnings to average account values		0.39%		0.58%

Pre-tax operating earnings declined due to higher amortization of DAC and lower interest spread income, partially offset by lower other operating expenses and benefits and claims.

Higher amortization of DAC primarily was due to the aforementioned DAC unlocking in the second quarter of 2007, which lowered amortization of DAC by $208.9 million in the first six months of 2007. In addition, the aforementioned DAC unlocking in the second quarter of 2008 increased amortization of DAC by $8.8 million in the current year period. However, the Company modified the features of its L.inc product within this segment during the second quarter of 2007. This modification required the Company to extinguish existing DAC and other balances related to L.inc, resulting in a $124.0 million increase in amortization of DAC and increased annuity benefits of $11.0 million in the first six months of 2007 as explained below. Additionally, the impact of 2007 unlocking, which decreased the rate of DAC amortization, and lower gross profits in the current year period lowered amortization of DAC by $25.9 million and $11.6 million, respectively, to further offset the increases noted above.

Interest spread income declined primarily due to lower general account assets caused by fixed annuity net outflows (a 16% decline in average account values), which reduced interest spread income by approximately $16.6 million. In addition, interest spread margins declined to 173 basis points compared to 200 basis points in the same period a year ago, reducing interest spread income by approximately $11.7 million. The current period margins included a $9.3 million decrease in income from mortgage loan prepayments and bond call premiums compared to the same period a year ago, which contributed 15 basis points to the margin decline discussed above.

Other operating expenses declined primarily due to decreases in employee incentives ($2.6 million), technology costs ($2.1 million), and state and local taxes ($1.9 million).

Lower benefits and claims primarily were driven by the related impact of unlocking of DAC and other related balances in the first six months of 2007, which increased annuity benefits by $12.5 million in the prior year period. Additionally, the aforementioned modification of L.inc features in 2007 increased annuity benefits in the prior year period by $11.0 million. Higher guaranteed benefit expenses primarily related to growth in business offering living benefits partially offset the decreases discussed above.

The decrease in sales primarily was attributable to lower individual variable annuity sales due to volatile market conditions and the recent economic slowdown.

The following table summarizes selected information about the Company’s deferred individual fixed annuities, including the fixed option of variable annuities, as of June 30, 2008:

Ratchet

Reset

Market value
adjustment (MVA)
and other

Total

(dollars in millions)

Account
value

Weighted
average
crediting
rate

Account
value

Weighted
average
crediting
rate

Account
value

Weighted
average
crediting
rate

Account
value

Weighted
average
crediting
rate

Minimum interest rate of 3.50% or greater

—

N/A

615.9

3.54%

—

N/A

615.9

3.54%

Minimum interest rate of 3.00% to 3.49%

1,151.2

4.06%

2,742.2

3.11%

—

N/A

3,893.4

3.39%

Minimum interest rate lower than 3.00%

800.0

3.43%

482.0

3.63%

36.7

3.97%

1,318.7

3.52%

MVA with no minimum interest rate guarantee

—

N/A

—

N/A

1,662.2

2.45%

1,662.2

2.45%

Total deferred individual fixed annuities

1,951.2

3.80%

3,840.1

3.24%

1,698.9

2.48%

7,490.2

3.21%

Retirement Plans

2nd Quarter – 2008 Compared to 2007

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


	Three months ended June 30,
(dollars in millions)	2008		2007			Change
Statements of Income Data
Revenues:
Policy charges:
Asset fees	$	28.2	$	31.4		(10)%
Administrative fees		3.4		2.7		26 %
Surrender fees		0.5		1.1		(55)%

Total policy charges		32.1		35.2		(9)%
Net investment income		157.1		158.1		(1)%

Total revenues		189.2		193.3		(2)%

Benefits and expenses:
Interest credited to policyholder accounts		103.9		108.4		(4)%
Amortization of DAC		11.8		(1.1	)	NM
Other operating expenses		37.4		44.9		(17)%

Total benefits and expenses		153.1		152.2		1 %

Pre-tax operating earnings	$	36.1	$	41.1		(12)%

Other Data
Interest spread margin:
Net investment income		5.79%		5.78%
Interest credited		3.83%		3.96%

Interest spread on average general account values		1.96%		1.82%

Sales:
Private sector	$	238.2	$	274.6		(13)%
Public sector		443.4		385.5		15 %

Total sales	$	681.6	$	660.1		3 %

Average account values:
General account	$	10,856.5	$	10,939.5		(1)%
Separate account		14,190.0		17,501.3		(19)%

Total average account values	$	25,046.5	$	28,440.8		(12)%

Pre-tax operating earnings to average account values		0.58%		0.58%

The decrease in pre-tax operating earnings was driven by higher amortization of DAC and lower asset fees, partially offset by lower other operating expenses.

Higher amortization of DAC primarily was due to the aforementioned DAC unlocking in the second quarter of 2007, which lowered amortization of DAC in the prior year quarter by $10.5 million. In addition, the aforementioned DAC unlocking in the second quarter of 2008 increased amortization of DAC by $2.3 million in the current year quarter.

The decline in asset fees primarily was driven by lower average separate account values due to net outflows related to the shift in pension business to NFS along with the loss of a large plan in 2007.

Lower other operating expenses primarily were due to the aforementioned movement of pension business to NFS trust product offerings.

Public Sector sales drove the overall increase in sales primarily due to significant increases in two large administration-only agreements and increased participation by both new and existing employers. Private Sector sales declined primarily due to the shift in pension business to NFS.

Year-to-Date – 2008 Compared to 2007

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


	Six months ended June 30,
(in millions)	2008		2007		Change
Statements of Income Data
Revenues:
Policy charges:
Asset fees	$	56.0	$	61.9	(10)%
Administrative fees		6.7		5.3	26 %
Surrender fees		0.9		2.1	(57)%

Total policy charges		63.6		69.3	(8)%
Net investment income		315.5		319.3	(1)%

Total revenues		379.1		388.6	(2)%

Benefits and expenses:
Interest credited to policyholder accounts		209.0		217.0	(4)%
Amortization of DAC		21.7		8.5	155 %
Other operating expenses		73.0		91.5	(20)%

Total benefits and expenses		303.7		317.0	(4)%

Pre-tax operating earnings	$	75.4	$	71.6	5 %

Other Data
Interest spread margin:
Net investment income		5.84%		5.86%
Interest credited		3.87%		3.98%

Interest spread on average general account values		1.97%		1.88%

Sales:
Private sector	$	516.3	$	614.1	(16)%
Public sector		879.2		775.2	13 %

Total sales	$	1,395.5	$	1,389.3	—

Average account values:
General account	$	10,802.2	$	10,906.0	(1)%
Separate account		14,746.7		17,562.0	(16)%

Total average account values	$	25,548.9	$	28,468.0	(10)%

Account values as of period end:
Private sector	$	8,558.8	$	11,515.9	(26)%
Public sector		16,394.5		16,942.6	(3)%

Total account values	$	24,953.3	$	28,458.5	(12)%

Pre-tax operating earnings to average account values		0.59%		0.50%

The increase in pre-tax operating earnings was driven by lower operating expenses, partially offset by higher amortization of DAC and lower asset fees.

Lower other operating expenses primarily were due to the aforementioned movement of pension business to NFS trust product offerings.

Higher amortization of DAC primarily was due to the aforementioned DAC unlocking in the second quarter of 2007, which lowered amortization of DAC in the first six months of 2007 by $10.5 million. In addition, the aforementioned DAC unlocking in the second quarter of 2008 increased amortization of DAC by $2.3 million in the current year period.

The decline in asset fees primarily was driven by lower average separate account values due to net outflows related to the shift in pension business to NFS and the loss of a large plan in 2007.

Individual Protection

2nd Quarter – 2008 Compared to 2007

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


	Three months ended June 30,
(in millions)	2008		2007		Change
Statements of Income Data
Revenues:
Policy charges:
Asset fees	$	9.5	$	9.6	(1)%
Cost of insurance charges		80.8		73.6	10 %
Administrative fees		23.6		13.8	71 %
Surrender fees		3.0		2.5	20 %

Total policy charges		116.9		99.5	17 %
Premiums		42.0		39.7	6 %
Net investment income		85.4		80.2	6 %

Total revenues		244.3		219.4	11 %

Benefits and expenses:
Interest credited to policyholder accounts		44.4		44.0	1 %
Benefits		72.3		60.8	19 %
Policyholder dividends		6.2		4.8	29 %
Amortization of DAC		35.3		5.0	NM
Other operating expenses		30.9		37.0	(16)%

Total benefits and expenses		189.1		151.6	25 %

Pre-tax operating earnings	$	55.2	$	67.8	(19)%

Other Data
Sales:
Corporate-owned life insurance	$	148.8	$	153.6	(3)%
Traditional/universal life insurance		114.1		96.3	18 %
Variable life insurance		105.8		107.8	(2)%

Total sales	$	368.7	$	357.7	3 %

The decrease in pre-tax operating earnings was driven by higher amortization of DAC and benefits, partially offset by higher policy charges and lower other operating expenses.

Amortization of DAC increased due to the aforementioned DAC unlocking in the second quarter of 2007, which lowered amortization of DAC by $18.1 million in the second quarter of 2007. In addition, the aforementioned DAC unlocking in the second quarter of 2008 increased amortization of DAC by $2.3 million in the current year quarter. The remainder of the increase was due to higher gross profits in the current quarter.

Higher benefits primarily were due to adverse mortality in the current quarter in the variable life and universal life insurance businesses. The average net claim size and the number of claims in these products increased 23% and 12%, respectively, over the prior year.

Other operating expenses declined primarily due to lower agency marketing costs.

The increase in sales primarily was due to a 53% increase in universal life sales primarily driven by the Ultimate product, partially offset by lower renewal variable life sales.

Year-to-Date – 2008 Compared to 2007

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


	Six months ended June 30,
(in millions)	2008		2007		Change
Statements of Income Data
Revenues:
Policy charges:
Asset fees	$	19.0	$	18.8	1 %
Cost of insurance charges		160.0		147.6	8 %
Administrative fees		41.8		29.3	43 %
Surrender fees		5.8		5.2	12 %

Total policy charges		226.6		200.9	13 %
Premiums		84.2		79.1	6 %
Net investment income		167.2		164.2	2 %

Total revenues		478.0		444.2	8 %

Benefits and expenses:
Interest credited to policyholder accounts		88.5		88.1	—
Benefits		145.4		117.5	24 %
Policyholder dividends		14.5		10.7	36 %
Amortization of DAC		56.8		28.1	102 %
Other operating expenses		67.6		70.6	(4)%

Total benefits and expenses		372.8		315.0	18 %

Pre-tax operating earnings	$	105.2	$	129.2	(19)%

Other Data
Sales:
Corporate-owned life insurance	$	354.3	$	356.8	(1)%
Traditional/universal life insurance		229.9		181.0	27%
Variable life insurance		207.1		216.5	(4)%

Total sales	$	791.3	$	754.3	5 %

Policy reserves as of period end:
Individual investment life insurance	$	3,748.4	$	3,952.7	(5)%
Corporate investment life insurance		8,539.6		9,059.0	(6)%
Traditional life insurance		2,030.8		2,006.2	1 %
Universal life insurance		1,285.9		1,156.7	11 %

Total policy reserves	$	15,604.7	$	16,174.6	(4)%

Insurance in force as of period end:
Individual investment life insurance	$	39,749.0	$	39,091.7	2 %
Corporate investment life insurance		25,421.6		25,258.8	1 %
Traditional life insurance		26,917.1		18,913.7	42 %
Universal life insurance		10,477.0		9,884.9	6 %

Total insurance in force	$	102,564.7	$	93,149.1	10 %

The decrease in pre-tax operating earnings was driven by higher benefits and amortization of DAC, partially offset by higher policy charges.

Higher benefits primarily were due to adverse mortality in the current year in the variable life and universal life insurance businesses. The average net claim size and the number of claims in these products increased 29% and 22%, respectively, over the prior year.

Amortization of DAC increased primarily due to the aforementioned DAC unlocking in the second quarter of 2007, which lowered amortization of DAC by $18.1 million in the first six months of 2007. In addition, the aforementioned DAC unlocking in the second quarter of 2008 increased amortization of DAC by $2.3 million in the current year period. The remainder of the increase was due to higher gross profits in the first six months of 2008.

The increase in sales primarily was due to a 69% increase in universal life sales primarily driven by the ULtimate product, partially offset by lower renewal variable life sales.

Corporate and Other

2nd Quarter – 2008 Compared to 2007

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


	Three months ended June 30,
(in millions)	2008			2007			Change
Statements of Income Data
Operating revenues:
Net investment income	$	65.6		$	99.7		(34)%
Other income		5.6			0.2		NM

Total operating revenues		71.2			99.9		(29)%

Benefits and operating expenses:
Interest credited to policyholder accounts		38.8			56.4		(31)%
Interest expense		15.3			16.8		(9)%
Other operating expenses		5.6			(1.5	)	NM

Total benefits and operating expenses		59.7			71.7		(17)%

Pre-tax operating earnings		11.5			28.2		(59)%
Add: non-operating net realized investment losses¹		(19.8	)		(4.0	)	NM
Add: adjustment to amortization related to net realized investment gains and losses		(34.4	)		2.5		NM

(Loss) income from continuing operations before federal income tax expense	$	(42.7	)	$	26.7		NM

¹	Excluding periodic net amounts paid or received on interest rate swaps that do not qualify for hedge accounting treatment and net realized gains and losses related to securitizations.

The Company recorded lower pre-tax operating earnings in the second quarter of 2008 primarily due to lower interest spread income.

The decrease in interest spread income primarily was driven by lower income from alternative investments ($6.2 million) and lower income from mortgage loan prepayments and bond call premiums ($2.4 million).

Higher non-operating net realized investment losses were driven by a $73.1 million increase in impairment charges in 2008 due to challenging conditions in the credit markets. These losses partially were offset by a $57.1 million increase in gains recorded on living benefit embedded derivatives, net of economic hedging activity, primarily due to differences between changes in the market value of liabilities and hedge assets in a volatile market.

The following table summarizes net realized investment losses from continuing operations by source for the periods indicated:


	Three months ended June 30,
(in millions)	2008			2007
Total realized gains on sales, net of hedging losses	$	11.6		$	18.3
Total realized losses on sales, net of hedging gains		(10.6	)		(15.8	)
Other-than-temporary and other investment impairments		(79.3	)		(6.2	)
Credit default swaps		(2.0	)		(1.5	)
Derivatives and embedded derivatives associated with living benefit contracts		57.1			—
Other derivatives		9.0			2.7

Net realized investment losses	$	(14.2	)	$	(2.5	)

The following table summarizes other-than-temporary and other investment impairments by asset type for the periods indicated:


	Three months ended June 30,
(in millions)	2008		2007
Fixed maturity securities:
Corporate securities
Public	$	14.6	$	4.7
Private		3.7		—
Mortgage-backed securities		18.6		—
Asset-backed securities		42.2		0.2

Total fixed maturity securities		79.1		4.9
Other		0.2		1.3

Total other-than-temporary and other investment impairments	$	79.3	$	6.2

Year-to-Date – 2008 Compared to 2007

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


	Six months ended June 30,
(in millions)	2008			2007			Change
Statements of Income Data
Operating revenues:
Net investment income	$	144.7		$	204.3		(29)%
Other income		(11.3	)		1.7		NM

Total operating revenues		133.4			206.0		(35)%

Benefits and operating expenses:
Interest credited to policyholder accounts		91.9			114.6		(20)%
Interest expense		31.9			31.9		—
Other operating expenses		13.8			0.8		NM

Total benefits and operating expenses		137.6			147.3		(7)%

Pre-tax operating (loss) earnings		(4.2	)		58.7		NM
Add: non-operating net realized investment losses¹		(198.1	)		(17.4	)	NM
Add: adjustment to amortization related to net realized investment gains and losses		13.1			5.0		NM

(Loss) income from continuing operations before federal income tax expense	$	(189.2	)	$	46.3		NM

Other Data
Customer funds managed and administered:
Funding agreements backing medium-term notes	$	4,294.3		$	3,939.9		9 %

¹	Excluding periodic net amounts paid or received on interest rate swaps that do not qualify for hedge accounting treatment and net realized gains and losses related to securitizations.

The Company recorded a pre-tax operating loss in the first six months of 2008 compared to earnings in the prior year primarily due to lower interest spread income.

Interest spread income declined primarily due to lower income from alternative investments ($12.3 million), lower income from mortgage loan prepayments and bond call premiums ($5.3 million), and reduced earnings from the MTN program ($3.0 million).

Higher non-operating net realized investment losses were driven by a $145.6 million increase in impairment charges in 2008 due to challenging conditions in the credit markets. In addition, the Company recorded a $17.7 million increase in losses on living benefit embedded derivatives, net of economic hedging activity, primarily as a result of differences between changes in the market value of liabilities and hedge assets in a volatile market.

The following table summarizes net realized investment losses from continuing operations by source for the periods indicated:


	Six months ended June 30,
(in millions)	2008			2007
Total realized gains on sales, net of hedging losses	$	7.9		$	41.3
Total realized losses on sales, net of hedging gains		(32.9	)		(37.5	)
Other-than-temporary and other investment impairments		(165.1	)		(19.5	)
Credit default swaps		(6.2	)		(1.8	)
Derivatives and embedded derivatives associated with living benefit contracts		(17.7	)		—
Other derivatives		4.5			3.9

Net realized investment losses	$	(209.5	)	$	(13.6	)


The following table summarizes other-than-temporary and other investment impairments by asset type for the periods indicated:

	Six months ended June 30,
(in millions)	2008			2007
Fixed maturity securities:
Corporate securities
Public	$	24.6		$	4.9
Private		14.1			10.6
Mortgage-backed securities		18.6			—
Asset-backed securities		107.6			1.4

Total fixed maturity securities		164.9			16.9
Other		0.2			2.6

Total other-than-temporary and other investment impairments	$	165.1		$	19.5

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.

The following table summarizes for the six months ended June 30, 2008 the Company’s largest aggregate losses on sales and write-downs by issuer, the related circumstances giving rise to the losses and the circumstances that may have affected other material investments held:


	Fair value at sale (proceeds)		YTD gain (loss) on sale			YTD write- downs			June 30, 2008
(in millions)	Fair value at sale (proceeds)		YTD gain (loss) on sale			YTD write- downs			Holdings¹		Net unrealized gain (loss)
A major newspaper publisher. An impairment was recognized in the first quarter of 2008 due to revenue and profitability erosion based on lower circulation and less advertising.	$	23.7	$	1.5		$	(5.0	)	$	3.9	$	0.3

Ownership interest in a mortgage-backed security. An impairment was recognized in the first quarter of 2008 due to spread widening caused by price declines. The Company is unlikely to hold this security until the price fully recovers.		0.8		(0.4	)		(5.5	)		129.5		(13.3	)

Ownership interest in a collateralized debt obligation. An impairment was recognized in the first quarter of 2008 as this security was sold at a loss at that time.		—		—			(12.1	)		—		—

Ownership interest in a market value collateralized loan obligation. An impairment was recognized in the first quarter of 2008 following the breach of the termination/liquidation trigger and subsequent restructuring of the security.		—		—			(11.2	)		—		—

Ownership interest in collateralized closed end second lien loans. Impairments were recognized in the first and second quarters of 2008 due to collateral deterioration and the uncertainty of the claims paying ability of the monoline surety.²		—		—			(10.6	)		1.6		—

A bank specializing in secured residential and commercial lending. An impairment was recognized in the second quarter of 2008 due to increased pressure on the financial sector. The Company does not expect this security to recover in the near future.		—		—			(10.2	)		13.8		—

Ownership in a trust preferred pool primarily with bank collateral. An impairment was recognized in the second quarter of 2008 due to market volatility in the financial sector and the deferral of payments by bank collateral in the transaction.		—		—			(8.1	)		10.1		—

Ownership interest in a mortgage-backed security. An impairment was recognized in the first quarter of 2008 due to collateral deterioration and the uncertainty of the claims paying ability of the monoline surety.²		—		—			(7.7	)		44.6		(7.2	)

Ownership interest in a mortgage-backed security. An impairment was recognized in the second quarter of 2008 due to deterioration in the underlying collateral and the volatile real estate market.³		—		—			(7.4	)		88.3		(13.0	)

(Table continued on next page)

(Table continued from previous page)


	Fair value at sale (proceeds)		YTD gain (loss) on sale		YTD write- downs			June 30, 2008
(in millions)	Fair value at sale (proceeds)		YTD gain (loss) on sale		YTD write- downs			Holdings¹		Net unrealized gain (loss)
Ownership interest in a synthetic collateralized debt obligation. An impairment was recognized in the second quarter of 2008 as the market yield indicates a deterioration in the expected yield.		—		—		(6.6	)		3.4		—

Ownership in a mortgage-backed security. An impairment was recognized in the second quarter of 2008 due to collateral erosion and the volatile real estate market.²		—		—		(6.2	)		24.4		(1.1	)

An international company that specializes in the ownership, management and development of shopping centers. An impairment was recognized in the first quarter of 2008 due to bankruptcy concerns and the risk of liquidation.		—		—		(6.0	)		24.0		(1.5	)

Ownership in a trust fund primarily consisting of mortgage loans. An impairment was recognized in the second quarter of 2008 due to collateral erosion and the volatile real estate market.²		—		—		(5.9	)		178.5		(17.0	)

A builder of single-family homes. Impairments were recognized in the first and second quarters of 2008 due to volatile real estate market conditions and the company’s negative cash flow position.		—		—		(5.1	)		7.6		—

Ownership interest in an mortgage-backed security. An impairment was recognized in the second quarter of 2008 due to collateral erosion and the volatile real estate market.³		—		—		(4.8	)		11.2		(0.8	)

Ownership in an asset-backed security. An impairment was recognized in the second quarter of 2008 due to spread widening caused by price declines. The Company is unlikely to hold this security until the price fully recovers.³		—		—		(4.8	)		6.4		(0.3	)

Ownership interest in a mortgage-backed security. An impairment was recognized in the first quarter of 2008 due to the continuing deterioration of collateral performance.²		—		—		(4.6	)		2.1		(0.7	)

Ownership interest in a collateralized debt obligation with a large exposure to financial sector debtors. This exposure severely depressed the security price and, along with the thinning support in the CDO structure, reduces the likelihood of a full recovery. An impairment was recognized in the first quarter of 2008.		—		—		(4.5	)		0.5		0.7

A pooled trust preferred security consisting mostly of structured bank collateral. Impairments were recognized in the first and second quarters of 2008 due to liquidity and market conditions.		—		—		(4.3	)		17.7		(9.9	)

Total	$	24.5	$	1.1	$	(130.6	)	$	567.6	$	(63.8	)

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

²	Security with Sub-prime collateral.

³	Security with Alt-A collateral

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.

Contractual Obligations and Commitments

The Company’s contractual obligations and commitments have not changed materially from those disclosed in the Company’s 2007 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 equal 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 condensed 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 condensed 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. and Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., assign the same ratings to the notes and the insurance financial strength of the Company. SeePart 1 – Financial Information, Item 1 – Condensed Consolidated Financial Statements, Note 5 – Investmentsfor information about off-balance sheet collateral related to the Company’s securities lending program.

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s market risks have not changed materially from those disclosed in the Company’s 2007 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 second fiscal quarter 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

SeePart 1 – Financial Information, Item 1 – Condensed Consolidated Financial Statements, Note 8 – Contingencies – Legal Mattersfor a discussion of legal proceedings.

ITEM 1A RISK FACTORS

The Company’s risk factors have not changed materially from those disclosed in the Company’s 2007 Annual Report on Form 10-K.

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Omitted due to reduced disclosure format.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

Omitted due to reduced disclosure format.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Omitted due to reduced disclosure format.

ITEM 5 OTHER INFORMATION

None.

ITEM 6 EXHIBITS


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 Timothy G. Frommeyer 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 Timothy G. Frommeyer 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 LIFE INSURANCE COMPANY (Registrant)

Date: August 7, 2008		/s/ Timothy G. Frommeyer
		Timothy G. Frommeyer, Senior Vice President — Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. sophomore Bad

Nationwide Life Insurance (NWLIC) 10-Q2008 Q2 Quarterly report

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