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OHIO | 6311 | 31-4156830 |
(State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification Number) |
of registrant's principal executive offices)
One Nationwide Plaza
Large accelerated filer | □ |
Accelerated filer | □ |
Non-accelerated filer (Do not check if a smaller reporting company) | ☑ |
Smaller reporting Company | □ |
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are referred to as Target Term Options)
Certain state insurance laws applicable to these investment options may preclude, or be interpreted to preclude, Nationwide Life Insurance Company ("Nationwide") from providing a contractual guarantee in conjunction with the Specified Interest Rate. In such jurisdictions, the investment options are referred to as "Target Term Options" as opposed to "Guaranteed Term Options."Despite this distinction in terminology, Nationwide will administer all obligations described in this prospectus, regardless of the jurisdiction, in precisely the same manner. Thus, there will be no difference between the calculation, crediting, and administration of Specified Interest Rates in "Guaranteed Term Options" issued in states permitting a contractual guarantee, and the calculation, crediting, and administration of Specified Interest Rates in "Target Term Options" issued in states not permitting a contractual guarantee. |
For information on how to contact Nationwide, seeNationwide Life Insurance Company. |
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Guaranteed Term – The period corresponding to a 1, 3, 5, 7 or 10 year GTO. Amounts allocated to a GTO will be credited with a Specified Interest Rate over the corresponding Guaranteed Term, so long as such amounts are not withdrawn from the GTO prior to the Maturity Date. Because every Guaranteed Term will end on the final day of a calendar quarter, the Guaranteed Term may last for up to three months beyond the 1, 3, 5, 7 or 10 year anniversary of the allocation to the GTO. |
Guaranteed Term Option or GTO – An investment option offered under variable contracts that provides a Specified Interest Rate over Guaranteed Terms, so long as certain conditions are met. In some jurisdictions the GTO is referred to as a Target Term Option or TTO. |
Market Value Adjustment – The upward or downward adjustment in value of amounts allocated to a GTO that are withdrawn from the GTO for any reason prior to the Maturity Date. |
Maturity Date – The date on which a GTO matures. The date will be the last day of the calendar quarter during or within 30 days after the first, third, fifth, seventh or tenth anniversary on which amounts are allocated to a 1, 3, 5, 7 or 10 year GTO, respectively. |
Maturity Period – The period during which the value of amounts allocated under a GTO may be withdrawn without any Market Value Adjustment. The Maturity Period will begin on the day following the Maturity Date and will end on the 30th day after the Maturity Date. |
MVA Interest Rate – The rate of interest used in the Market Value Adjustment formula. Depending on the variable contracts under which the GTO is offered, the interest rate will be the Constant Maturity Treasury ("CMT") rates, or interest rate swaps, for maturity durations of 1, 3, 5, 7 and 10 years, as declared regularly by the Federal Reserve Board. |
Specified Interest Rate – The interest rate guaranteed to be credited to amounts allocated to a GTO as long as the allocations are not withdrawn prior to the Maturity Date. The Specified Interest Rate will not be less than the minimum required by applicable state law. |
Specified Value – The amount of a GTO allocation, plus interest accrued at the Specified Interest Rate, minus any other amounts withdrawn. The Specified Value is subject to a Market Value Adjustment at all times other than during the Maturity Period. |
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(1) | the MVA Interest Rate for the period coinciding with the Guaranteed Term of the GTO at investment; |
(2) | the MVA Interest Rate for the number of years remaining in a Guaranteed Term when the withdrawal from the GTO occurs; and |
(3) | the number of days remaining in the Guaranteed Term of the GTO. |
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(1) | surrender the GTO, in part or in whole, without a Market Value Adjustment during the Maturity Period; however, any surrender charges that may be applicable under the variable contract will be assessed; |
(2) | transfer (all or part) of the GTO, without a Market Value Adjustment, to any other permitted investment option under the variable contract, including any permitted underlying mutual fund sub-accounts, or another GTO of the same or different duration during the Maturity Period. A confirmation of any such transfer will be sent immediately after the transfer is processed; or |
(3) | elect not to transfer or surrender all or a portion of the GTO, in which case the GTO will be automatically transferred to the available money market sub-account of the contract at the end of the Maturity Period. A confirmation will be sent immediately after the automatic transfer is executed. |
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(1) | the MVA Interest Rate for the period of time coinciding with the Guaranteed Term of the GTO; |
(2) | the MVA Interest Rate for a period coinciding with the time remaining in the Guaranteed Term of a GTO when a withdrawal giving rise to a Market Value Adjustment occurs; and |
(3) | the number of days remaining in the Guaranteed Term of the GTO. |
[ | ] | t | |
1 + a | |||
1 + b + .0025 | |||
a | = | the MVA Interest Rate for a period equal to the Guaranteed Term at the time of deposit in the GTO; |
b | = | the MVA Interest Rate at the time of withdrawal for a period of time equal to the time remaining in the Guaranteed Term. In determining the number of years to maturity, any partial year will be counted as a full year, unless it would cause the number of years to exceed the Guaranteed Term; and |
t | = | the number of days until the Maturity Date, divided by 365.25. |
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• | In writing: P.O. Box 182021, Columbus, Ohio 43218-2021 |
• | By telephone: 1-800-848-6331, TDD 1-800-238-3035 |
• | By the internet: http://www.nationwide.com/nw/investor-relations/index.htm |
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[ | ] | d | |||
1 + a | 365.25 | ||||
MVA Factor | = | 1 + b + 0.0025 | |||
[ | ] | 985 | |||
1 + 0.08 | 365.25 | ||||
MVA Factor | = | 1 + 0.07 + 0.0025 | |||
MVA Factor | = | 1.01897 | |||
Surrender Value | = | Specified Value | x | MVA Factor | |
Surrender Value | = | $12,067.96 | x | 1.01897 | |
*Surrender Value | = | $12,296.89 |
* | Assumes no variable annuity contract contingent deferred sales charges are applicable. In jurisdictions where the .0025 is not permitted in the denominator, the Surrender Value is $12,374.52. |
a | = | The CMT rate declared by the Federal Reserve Board on Friday, and placed in effect by Nationwide for allocations made to the GTO on the following Wednesday through Tuesday. |
b | = | The CMT rate declared by the Federal Reserve Board on Friday, and placed in effect by Nationwide for withdrawals, transfers or other distributions giving rise to a Market Value Adjustment on the following Wednesday through Tuesday. |
d | = | The number of days remaining in the Guaranteed Term. |
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[ | ] | d | |||
1 + a | 365.25 | ||||
MVA Factor | = | 1 + b + 0.0025 | |||
[ | ] | 985 | |||
1 + 0.08 | 365.25 | ||||
MVA Factor | = | 1 + 0.09 + 0.0025 | |||
MVA Factor | = | 0.96944 | |||
Surrender Value | = | Specified Value | x | MVA Factor | |
Surrender Value | = | $12,067.96 | x | 0.96944 | |
*Surrender Value | = | $11,699.17 |
* | Assumes no variable annuity contract contingent deferred sales charges are applicable. In jurisdictions where the .0025 is not permitted in the denominator, the Surrender Value is $11,771.69. |
a | = | The CMT rate declared by the Federal Reserve Board on Friday, and placed in effect by Nationwide for allocations made to the GTO on the following Wednesday through Tuesday. |
b | = | The CMT rate declared by the Federal Reserve Board on Friday, and placed in effect by Nationwide for withdrawals, transfers or other distributions giving rise to a Market Value Adjustment on the following Wednesday through Tuesday. |
d | = | The number of days remaining in the Guaranteed Term. |
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[ | ] | d | |||
1 + a | 365.25 | ||||
MVA Factor | = | 1 + b + 0.0025 | |||
[ | ] | 985 | |||
1 + 0.08 | 365.25 | ||||
MVA Factor | = | 1 + 0.07 + 0.0025 | |||
MVA Factor | = | 1.01897 | |||
Surrender Value | = | Specified Value | x | MVA Factor | |
Surrender Value | = | $12,067.96 | x | 1.01897 | |
*Surrender Value | = | $12,296.89 |
* | Assumes no variable annuity contract contingent deferred sales charges are applicable. In jurisdictions where the .0025 is not permitted in the denominator, the Surrender Value is $12,374.52. |
a | = | The interest rate swap published by the Federal Reserve Board two days before the date the allocation to the GTO was made. If no interest rate swap is available for this date, then the most recent available rate prior to that date will be used. |
b | = | The interest rate swap published by the Federal Reserve Board two days before the date of withdrawal, transfer or other distribution giving rise to a Market Value Adjustment. If no interest rate swap is available for this date, then the most recent available rate prior to that date will be used. |
d | = | The number of days remaining in the Guaranteed Term. |
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[ | ] | d | |||
1 + a | 365.25 | ||||
MVA Factor | = | 1 + b + 0.0025 | |||
[ | ] | 985 | |||
1 + 0.08 | 365.25 | ||||
MVA Factor | = | 1 + 0.09 + 0.0025 | |||
MVA Factor | = | 0.96944 | |||
Surrender Value | = | Specified Value | x | MVA Factor | |
Surrender Value | = | $12,067.96 | x | 0.96944 | |
*Surrender Value | = | $11,699.17 |
* | Assumes no variable annuity contract contingent deferred sales charges are applicable. In jurisdictions where the .0025 is not permitted in the denominator, the Surrender Value is $11,771.69. |
a | = | The interest rate swap published by the Federal Reserve Board two days before the date the allocation to the GTO was made. If no interest rate swap is available for this date, then the most recent available rate prior to that date will be used. |
b | = | The interest rate swap published by the Federal Reserve Board two days before the date of the withdrawal, transfer or other distribution giving rise to a Market Value Adjustment. If no interest rate swap is available for this date, then the most recent available rate prior to that date will be used. |
d | = | The number of days remaining in the Guaranteed Term. |
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Current Yield | Time Remaining to the End of the Guaranteed Term | Specified Value | Market Value Adjustment | Market Value | ||||
12.00% | 9 Years | $10,850 | -29.35% | $7,665 | ||||
7 Years | $12,776 | -23.68% | $9,751 | |||||
5 Years | $15,040 | -17.56% | $12,399 | |||||
2 Years | $19,215 | -7.43% | $17,786 | |||||
180 Days | $21,733 | -1.88% | $21,323 | |||||
10.00% | 9 Years | $10,850 | -16.94% | $9,012 | ||||
7 Years | $12,776 | -13.44% | $11,059 | |||||
5 Years | $15,040 | -9.80% | $13,566 | |||||
2 Years | $19,215 | -4.04% | $18,438 | |||||
180 Days | $21,733 | -1.01% | $21,513 | |||||
9.00% | 9 Years | $10,850 | -9.84% | $9,782 | ||||
7 Years | $12,776 | -7.74% | $11,787 | |||||
5 Years | $15,040 | -5.59% | $14,199 | |||||
2 Years | $19,215 | -2.28% | $18,777 | |||||
180 Days | $21,733 | -0.57% | $21,610 | |||||
8.00% | 9 Years | $10,850 | -2.06% | $10,627 | ||||
7 Years | $12,776 | -1.61% | $12,571 | |||||
5 Years | $15,040 | -1.15% | $14,867 | |||||
2 Years | $19,215 | -0.46% | $19,126 | |||||
180 Days | $21,733 | -0.11% | $21,708 | |||||
7.00% | 9 Years | $10,850 | 6.47% | $11,552 | ||||
7 Years | $12,776 | 5.00% | $13,414 | |||||
5 Years | $15,040 | 3.55% | $15,573 | |||||
2 Years | $19,215 | 1.40% | $19,484 | |||||
180 Days | $21,733 | 0.34% | $21,808 | |||||
6.00% | 9 Years | $10,850 | 15.84% | $12,569 | ||||
7 Years | $12,776 | 12.11% | $14,324 | |||||
5 Years | $15,040 | 8.51% | $16,321 | |||||
2 Years | $19,215 | 3.32% | $19,853 | |||||
180 Days | $21,733 | 0.81% | $21,909 | |||||
4.00% | 9 Years | $10,850 | 37.45% | $14,914 | ||||
7 Years | $12,776 | 28.07% | $16,362 | |||||
5 Years | $15,040 | 19.33% | $17,948 | |||||
2 Years | $19,215 | 7.32% | $20,623 | |||||
180 Days | $21,733 | 1.76% | $22,115 |
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(in millions) | December 31, 2013 | December 31, 2012 | December 31, 2011 | |||
Total revenues | $1,874 | $1,660 | $1,483 | |||
Pre-tax operating earnings1 | $321 | $220 | $284 | |||
Account values as of year end | $64,375 | $56,786 | $52,733 |
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(in millions) | December 31, 2013 | December 31, 2012 | December 31, 2011 | |||
Total revenues | $844 | $830 | $811 | |||
Pre-tax operating earnings1 | $222 | $196 | $193 | |||
Account values as of year end | $30,086 | $26,644 | $24,871 |
(in millions) | December 31, 2013 | December 31, 2012 | December 31, 2011 | |||
Total revenues | $1,553 | $1,485 | $1,432 | |||
Pre-tax operating earnings1 | $234 | $240 | $280 | |||
Life insurance policy reserves as of year end | $24,863 | $22,395 | $20,892 | |||
Life insurance in force as of year end | $154,701 | $143,633 | $136,863 |
(in millions) | December 31, 2013 | December 31, 2012 | December 31, 2011 | |||
Operating revenues | $55 | $53 | $95 | |||
Pre-tax operating loss1 | $(75) | $(81) | $(52) | |||
Funding agreements backing MTNs | $- | $- | $292 | |||
FHLB funding agreements | $913 | $25 | $- |
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• | Systemic Risk and Reporting. Under the Dodd-Frank Act, nonbank financial companies, including insurance companies and their holding companies that the newly-created FSOC designates as systemically important will become subject to supervision by the Federal Reserve under heightened prudential standards. Proposed standards include (among others) risk-based capital requirements, leverage limits, liquidity requirements, risk management requirements, "living will" requirements, limitations on credit exposures, stress testing, early remediation and concentration limits. The FSOC can also recommend that a financial regulatory agency, including a state insurance regulator, adopt heightened standards with respect to financial activities or practices of the entities it regulates (irrespective if such entities have been designated as systemically important) and, if not adopted, such agency must justify such non-adoption. In addition, the new Office of Financial Research and FIO will collect information from insurers; although they are required to the extent possible to rely upon the reports of existing regulatory authorities. |
• | Orderly Liquidation. The Dodd-Frank Act provides that, upon the recommendation of designated regulatory agencies and a systemic risk determination by the Secretary of the Treasury in consultation with the President of the U.S., a failing financial company can be precluded from ordinary resolution under the Bankruptcy Code or other bankruptcy regime and be resolved instead under the orderly liquidation authority provided for in the Dodd-Frank Act, with the Federal Deposit Insurance Corporation ("FDIC") acting as receiver. In such case, creditors and other stakeholders in such a company could be treated less favorably than under the Bankruptcy Code or such other normal bankruptcy regime. Holding companies and their non-insurance subsidiaries may be subject to this authority. Insurance companies are generally exempt from the liquidation authority, but the FDIC has "backup authority" to place an insurance company into orderly liquidation under state law if the state regulator has not done so within 60 days of a systemic risk determination. |
• | Liquidation Fund Assessments. The Dodd-Frank Act creates an Orderly Liquidation Fund to help fund the cost of resolving failing financial companies under the orderly liquidation authority. Such fund would be funded by assessments on financial companies with $50 billion or more in assets– including, potentially, insurance companies and their holding companies. The size of an entity appears to be a major determinant as to the amount of any assessment, but other non-size risk factors are required to be taken into consideration. For insurance companies, contributions to state insurance guaranty funds must be considered. |
• | The Volcker Rule. The Dodd-Frank Act contains a rule (the "Volcker Rule") which generally prohibits an insured depository institution, any company that controls an insured depository institution, and companies that are affiliated with any such insured depository institution, from (a) engaging in proprietary trading or (b) having an ownership interest in, or sponsoring a covered fund. On December 10, 2013, the federal regulators issued joint regulations implementing the statutory requirements of the Volcker Rule. Among other exceptions, the regulations permit a regulated insurance company and its affiliates to engage in prohibited activity so long as such activity is for the general account or one or more separate accounts of such insurance company and so long as such activity is conducted in compliance with and subject to the insurance company investment laws, regulations and written guidance of the state or jurisdiction in which the company is domiciled and the appropriate federal banking regulators, after consultation with the FSOC and the relevant state insurance commissioners, have not jointly determined that such laws are insufficient to protect the safety and soundness of the institution or the financial stability of the U.S. The Volcker Rule becomes effective on April 1, 2014 and entities that are subject to the rule will be required to bring their activities and investments into compliance by July 21, 2015, unless extended by the banking agencies. |
• | Bureau of Consumer Financial Protection. The Dodd-Frank Act creates the Bureau of Consumer Financial Protection as an independent agency within the Federal Reserve with the authority to adopt rules related to consumer financial products and services. Insurance products are specifically exempted from the Bureau's authority; however because the Bureau only recently commenced operations, effects of the exemption cannot be predicted. |
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• | Changes in Employee Retirement Income Security Act of 1974 ("ERISA") that impact the sales of group annuities; |
• | Changes in tax laws that reduce or eliminate the tax-deferred accumulation of earnings on the premiums paid by the holders of annuities and life insurance products, or that otherwise affect how the benefits provided by life insurance and annuity contracts are taxed; and modification of the federal estate tax. Effective January 1, 2013, a federal income surtax of 3.8% was imposed on certain net investment income (including income from distributions from nonqualified annuity contracts) for individuals with a modified adjusted gross income in excess of a threshold amount (e.g., $250,000 for married persons who file jointly); |
• | Changes in the availability of, or rules concerning the establishment and operation of, IRC Section 401, 403(b) and 457 plans or individual retirement accounts and/or individual retirement annuities; or |
• | Changes in tax and ERISA regulations, such as the proposed regulations under development by the Labor Department that could alter the manner in which ERISA plans and individual retirement accounts may be marketed. |
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• | replace, in a timely manner, maturing liabilities; |
• | satisfy statutory capital requirements; |
• | generate fee income and market-related revenue to meet liquidity needs; |
• | access the capital necessary to grow its business; and |
• | sell certain assets. |
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• | Fixed maturity securities, except those considered trading securities, are primarily classified as available-for-sale and are reported at their fair value. Unrealized gains and losses on these securities are recorded as a separate component of other comprehensive income or loss, net of policyholder related amounts and deferred income taxes. |
• | Short-term investments include investments with remaining maturities of one year or less at the time of acquisition and are reported at fair value. |
• | Mortgage loans are recorded at unpaid principal balance, adjusted for any unamortized premium or discount, deferred fees or expenses, and valuation allowances. |
• | Policy loans are carried at unpaid principal balances. |
• | Alternative investments are generally reported based on the equity method of accounting. |
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• | Nationwide, as a registered Savings and Loan Holding Company (SLHC), and the Company are subject to the supervision, examination and enforcement authority of the Federal Reserve under the Home Owners' Loan Act of 1933. |
• | Nationwide (including the Company) may become subject to new or increased capital requirements. |
• | Nationwide (including the Company) may be exposed to increased oversight, including new required reporting, due to the creation of new federal agencies (e.g., the Dodd-Frank Act created the FSOC, Office of Financial Research, Consumer Financial Protection Bureau and the FIO). |
• | In April 2012, the FSOC adopted final rules under Title I of the Dodd-Frank Act setting forth the process it will follow and the criteria it will use to assess whether a non-bank financial company should be subject to enhanced prudential standards and heightened supervision by the Federal Reserve as a non-bank systemically important financial institution ("SIFI"). The FSOC follows a three-stage process. In Stage 1, a set of uniform quantitative metrics are applied to a broad group of non-bank financial companies in order to identify non-bank financial companies for further evaluation. If the Company meets the total consolidated assets threshold and at least one of the other five quantitative thresholds in the first stage, the FSOC continues with two stages of further analysis using additional sources of data and qualitative and quantitative factors. In addition, FSOC has reserved the authority under Title I of the Dodd-Frank Act to designate a non-bank financial company as a SIFI even if a company does not exceed the Stage 1 thresholds. |
• | Under the orderly liquidation authority set forth in Title II of the Dodd-Frank Act, the FDIC, as receiver of a covered financial company, succeeds to the rights, title, powers and privileges of the covered financial company and its stockholders, members, directors and officers and may take over and operate the company with all the powers of shareholders, members, directors and officers. The FDIC has the power to liquidate the covered financial company through the sale of assets, or transfer of assets to a bridge financial company, to merge the company with another company or transfer assets and liabilities, to pay valid obligations that come due to the extent funds are available, to terminate rights and claims of stockholders and creditors (except their right to payment, resolution, or other satisfaction of their claims in accordance with the provisions of Title II) and to determine and pay claims. To the extent Nationwide or any of its affiliates is a stockholder or creditor in a firm that becomes a covered financial company in receivership, they could become subject to a termination of rights or claims consistent with the provisions of Title II by the FDIC. If NLIC becomes a covered financial company, its creditors would become subject to FDIC's orderly liquidation authority under Title II and, therefore, subject to termination of rights similar to a liquidation of depository institutions under the Federal Deposit Insurance Act. While the FDIC has backup authority to initiate a liquidation of an insurance company that is a covered financial company if a state insurance department fails to act within 60 days of a determination triggering orderly liquidation procedures, the FDIC's authority is limited to standing in the place of the state insurance department and to filing the appropriate judicial action in the appropriate state court to place the insurer into orderly liquidation under the laws and requirements of the state. Under Ohio law, NLIC and NLAIC would therefore be subject to receivership or liquidation by the Ohio Department of Insurance pursuant to Ohio insurance law. As a financial company with total consolidated assets of equal to or greater than $50 billion, Nationwide could become subject to a risk based assessment to pay in full the obligations issued by the FDIC as receiver to the Secretary of the Treasury. The FDIC must impose assessments on a graduated basis according to a risk matrix. In recommending and establishing a risk matrix, the FSOC and the FDIC must consider, among other factors, assessments imposed upon on a financial company or affiliate that |
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is an insured depository institution pursuant to the Federal Deposit Insurance Act, a member of the Securities Investor Protection Corporation pursuant to the Securities Investors Protection Act or an insurance company assessed pursuant to state law to cover the cost of state insolvency proceedings. Thus, any assessment imposed upon Nationwide under Title II would need to consider a risk matrix recognizing assessments imposed upon insurance company subsidiaries of the Company by a state insurance guaranty fund or upon Nationwide Bank as a member of the FDIC. | |
• | Nationwide's investment activities from its general and investment accounts are permissible under the Volcker Rule but the future value and liquidity of such investments may be impacted by market conditions. |
• | Other provisions of the Dodd-Frank Act not limited to depository institution holding companies may also adversely affect the Company's ability to engage in various derivatives transactions of the type the Company has found useful in the past. Examples include a possible reduction in the availability of such products, a likely increase in the cost to the Company to transact in such products and a change in the nature of margin/collateral the Company must maintain with respect to such transactions. Specifically, under existing central clearing arrangements in the market, the central clearinghouse, and its members, typically reserve the right to unilaterally increase the amount of margin/collateral required to be maintained from time to time. During times of market volatility or stress, such rights tend to be exercised. In the event the Company is required to agree to such terms in order to continue to execute derivative transactions, it could have an adverse impact on the Company's finances and liquidity, especially during times of market stress and volatility. |
• | Additionally, under the Dodd-Frank Act, most banking institutions (with which the Company enters into a substantial portion of its derivatives) will be required to conduct at least a portion of their traditional over-the-counter derivatives businesses outside their depositary institutions. The affiliates through which these institutions will conduct such over-the-counter derivatives businesses might be less creditworthy than the depository institutions themselves, and "netting" of counterparty exposures across such affiliates and their related banks will not be allowed, potentially affecting the credit risk these counterparties pose to the Company and the degree to which the Company is able to enter into transactions with these counterparties. |
• | The definitions of ‘swap' and ‘security-based swap' under final regulations issued under the Dodd-Frank Act are extremely broad and, when applied literally, could encompass a number of arrangements that have not traditionally been viewed as part of the over-the-counter derivatives market, such as various insurance products offered by the Company. |
• | The new derivatives regulatory scheme under the Dodd-Frank Act may generally increase the costs of hedging, which would impact the Company's derivatives activities. The Company's risk management activities utilize derivatives with respect to the Company's own accounts as well as in connection with benefits offered with variable annuity products. The Company cannot predict the effect the new regulatory regime will have on hedging costs, hedging strategies or implementation thereof or whether the need, or choice, to increase or change the composition of the risks the Company does not hedge. |
• | Increased standards of care for broker dealers may affect pricing and compliance burdens, as well as third-party distribution of the Company's variable insurance products. |
• | Increased rule-making by state agencies to improve the regulation of sales to seniors may result in increased compliance burdens on the Company's operations and distribution of insurance products. |
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Year ended or as of December 31, | ||||||||||
(in millions) | 2013 | 2012 | 2011 (As Adjusted) | 2010 (As Adjusted) | 2009 (As Adjusted) | |||||
Statements of Operations Data: | ||||||||||
Total revenues | $5,117 | $4,456 | $2,208 | $3,254 | $3,469 | |||||
Net income (loss) | $1,028 | $600 | $(422) | $159 | $263 | |||||
Net income (loss) attributable to NLIC | $1,110 | $661 | $(366) | $219 | $315 | |||||
Balance Sheets Data: | ||||||||||
Total assets | $133,445 | $120,170 | $111,986 | $106,550 | $98,113 | |||||
Long-term debt | $707 | $1,038 | $991 | $978 | $706 | |||||
Shareholder's equity | $6,824 | $6,384 | $5,197 | $5,234 | $4,397 |
(i) | difficult economic and business conditions, including financial, capital and credit market conditions; |
(ii) | changes in interest rates and the equity markets causing a reduction of investment income and/or asset fees; an acceleration of the amortization of DAC and other; a reduction in separate account assets or a reduction in the demand for the Company's products; increased liabilities related to living benefits and death benefit guarantees; impact on the ultimate realizability of deferred tax assets; |
(iii) | realized losses with respect to impairments of assets in the investment portfolio of the Company; |
(iv) | reduction in the market value of the Company's investment portfolio as a result of changes in interest rates, equity prices, volatility, yields and liquidity in the equity and credit markets as well as geopolitical conditions and the impact of political, regulatory, judicial, economic or financial events, including terrorism, impacting financial markets generally and companies in the Company's investment portfolio specifically; |
(v) | exposure to losses related to variable annuity guarantee benefits, including from significant and sustained downturns or extreme volatility in equity markets; |
(vi) | defaults on commercial mortgages and volatility in their performance; |
(vii) | the potential impact on the Company's reported operations and related disclosures that could result from the adoption of certain accounting and/or financial reporting standards issued by the FASB, the SEC or other standard-setting bodies; |
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(viii) | adverse state and federal legislation and regulation, including, among other things, 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; regulatory changes affecting sales practices, including investigations and/or claims handling and escheat investigations; |
(ix) | outlook changes and downgrades in the financial strength and claims-paying ability ratings of the Company assigned by nationally recognized rating organizations; |
(x) | deviations from assumptions regarding future persistency, mortality and morbidity rates (including as a result of natural and man-made catastrophes, pandemics, malicious acts, terrorist acts and climate change) and interest rates used in calculating reserve amounts and in pricing the Company's products; |
(xi) | competitive, regulatory or tax changes that affect the cost of, or demand for, the Company's products, including tax law changes impacting the federal estate tax and tax treatment of life insurance and investment products; |
(xii) | regulatory actions of the DOL under ERISA, rule-making adopted by regulatory authorities under the Dodd-Frank Act and the Federal Deposit Insurance Act and other possible legislative and regulatory actions and reforms; |
(xiii) | adverse litigation results and/or resolution of litigation and/or arbitration, regulatory investigation and/or inquiry results could result in monetary damages or impact the manner in which the Company conducts its operations; |
(xiv) | the Company's ability to maintain the availability of its systems and facilities in the event of a disaster, natural catastrophe, blackout, terrorist attack or war; |
(xv) | heightened competition, including specifically the intensification of price competition, the entry of new competitors, consolidation and the development of new products by new and existing competitors; |
(xvi) | failure to maintain or expand distribution channels in order to obtain new customers or failure to retain existing customers; |
(xvii) | the availability, pricing and effectiveness of reinsurance; |
(xviii) | the Company's policies and procedures for managing risk may not be effective in mitigating material risk and loss to the Company; |
(xix) | adverse consequences, including financial and reputation costs, regulatory problems and potential loss of customers resulting from data and other security breaches, a failure to meet privacy regulations, inability to protect the Company's or customers' confidential information; and |
(xx) | the Company's ability to protect its intellectual property and defend against claims of infringement. |
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December 31, 2013 | December 31, 2012 | ||
Independent pricing services | 86% | 86% | |
Pricing matrices | 10% | 10% | |
Broker quotes | 3% | 3% | |
Other sources | 1% | 1% | |
Total | 100% | 100% |
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(in millions) | DAC | Other | Total | |||
Segment: | ||||||
Individual Products & Solutions - Annuity | $16 | $(4) | $12 | |||
Retirement Plans | $9 | - | $9 | |||
Individual Products & Solutions - Life and NBSG | $(26) | $8 | $(18) | |||
Total | $(1) | $4 | $3 |
(in millions) | DAC | Other | Total | |||
Segment: | ||||||
Individual Products & Solutions - Annuity | $(12) | $(2) | $(14) | |||
Individual Products & Solutions - Life and NBSG | $(38) | $25 | $(13) | |||
Total | $(50) | $23 | $(27) |
(in millions) | DAC | Other | Total | |||
Segment: | ||||||
Individual Products & Solutions - Annuity | $100 | $4 | $104 | |||
Retirement Plans | $4 | - | $4 | |||
Individual Products & Solutions - Life and NBSG | $31 | $(1) | $30 | |||
Total | $135 | $3 | $138 |
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(in millions) | December 31, 2013 | December 31, 20121 | Change | |||
Revenues: | ||||||
Policy charges: | ||||||
Asset fees | $854 | $771 | 11% | |||
Cost of insurance charges | 490 | 478 | 3% | |||
Administrative fees | 468 | 375 | 25% | |||
Surrender fees | 37 | 46 | (20%) | |||
Total policy charges | 1,849 | 1,670 | 11% | |||
Premiums | 724 | 635 | 14% | |||
Net investment income | 1,849 | 1,825 | 1% | |||
Net realized investment gains, net of other-than-temporary impairment losses | 678 | 319 | 113% | |||
Other revenues | 17 | 7 | 143% | |||
Total revenues | $5,117 | $4,456 | 15% | |||
Benefits and expenses: | ||||||
Interest credited to policyholder account values | $1,067 | $1,038 | 3% | |||
Benefits and claims | 1,354 | 1,227 | 10% | |||
Policyholder dividends | 59 | 54 | 9% | |||
Amortization of deferred policy acquisition costs | 374 | 575 | (35%) | |||
Other expenses, net of deferrals | 922 | 863 | 7% | |||
Total benefits and expenses | $3,776 | $3,757 | 1% | |||
Income before federal income taxes and noncontrolling interests | $1,341 | $699 | 92% | |||
Federal income tax expense | 313 | 99 | 216% | |||
Net income | $1,028 | $600 | 71% | |||
Less: Loss attributable to noncontrolling interest, net of tax | (82) | (61) | 34% | |||
Net income attributable to NLIC | $1,110 | $661 | 68% |
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(in millions) | December 31, 2012 | December 31, 20111 | Change | |||
Revenues: | ||||||
Policy charges: | ||||||
Asset fees | $771 | $724 | 6% | |||
Cost of insurance charges | 478 | 472 | 1% | |||
Administrative fees | 375 | 259 | 45% | |||
Surrender fees | 46 | 51 | (10%) | |||
Total policy charges | 1,670 | 1,506 | 11% | |||
Premiums | 635 | 531 | 20% | |||
Net investment income | 1,825 | 1,844 | (1%) | |||
Net realized investment gains (losses), net of other-than-temporary impairment losses: | 319 | (1,676) | NM | |||
Other revenues | 7 | 3 | 133% | |||
Total revenues | $4,456 | $2,208 | 102% | |||
Benefits and expenses: | ||||||
Interest credited to policyholder accounts | $1,038 | $1,033 | - | |||
Benefits and claims | 1,227 | 1,062 | 16% | |||
Policyholder dividends | 54 | 67 | (19%) | |||
Amortization of deferred policy acquisition costs | 575 | 65 | NM | |||
Other expenses, net of deferrals | 863 | 830 | 4% | |||
Total benefits and expenses | $3,757 | $3,057 | 23% | |||
Income (loss) before federal income taxes and noncontrolling interests | $699 | $(849) | NM | |||
Federal income tax expense (benefit) | 99 | (427) | NM | |||
Net income (loss) | $600 | $(422) | NM | |||
Less: Loss attributable to noncontrolling interest, net of tax | (61) | (56) | 9% | |||
Net income (loss) attributable to NLIC | $661 | $(366) | NM |
1 | Prior year results reflect a change in accounting principle, as described in Note 2 of the audited consolidated financial statements included in the F pages of this report. |
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(in millions) | December 31, 2013 | December 31, 2012 | Change | |||
Results of Operations | ||||||
Revenues: | ||||||
Policy charges: | ||||||
Asset fees | $716 | $642 | 12% | |||
Administrative fees | 283 | 229 | 24% | |||
Surrender fees | 22 | 28 | (21%) | |||
Total policy charges | 1021 | 899 | 14% | |||
Premiums | 416 | 334 | 25% | |||
Net investment income | 546 | 551 | (1%) | |||
Other revenues | (109) | (124) | (12%) | |||
Total revenues | $1,874 | $1,660 | 13% | |||
Benefits and expenses: | ||||||
Interest credited to policyholder accounts | $377 | $375 | 1% | |||
Benefits and claims | 688 | 595 | 16% | |||
Amortization of deferred policy acquisition costs | 185 | 185 | - | |||
Other expenses, net of deferrals | 303 | 285 | 6% | |||
Total benefits and expenses | $1,553 | $1,440 | 8% | |||
Pre-tax operating earnings | $321 | $220 | 46% |
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(in millions) | December 31, 2012 | December 31, 20111 | Change | |||
Results of Operations | ||||||
Revenues: | ||||||
Policy charges: | ||||||
Asset fees | $642 | $593 | 8% | |||
Administrative fees | 229 | 160 | 43% | |||
Surrender fees | 28 | 28 | - | |||
Total policy charges | $899 | $781 | 15% | |||
Premiums | 334 | 234 | 43% | |||
Net investment income | 551 | 527 | 5% | |||
Other revenues | (124) | (59) | 110% | |||
Total revenues | $1,660 | $1,483 | 12% | |||
Benefits and expenses: | ||||||
Interest credited to policyholder accounts | $375 | $374 | - | |||
Benefits and claims | 595 | 476 | 25% | |||
Amortization of deferred policy acquisition costs | 185 | 80 | 131% | |||
Other expenses, net of deferrals | 285 | 269 | 6% | |||
Total benefits and expenses | $1,440 | $1,199 | 20% | |||
Pre-tax operating earnings | $220 | $284 | (23%) |
1 | Prior year results reflect a change in accounting principle, as described in Note 2 of the audited consolidated financial statements included in the F pages of this report. |
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(in millions) | December 31, 2013 | December 31, 2012 | Change | |||
Results of Operations | ||||||
Revenues: | ||||||
Policy charges: | ||||||
Asset fees | $90 | $85 | 6% | |||
Administrative fees | 11 | 8 | 38% | |||
Surrender fees | - | 1 | (100%) | |||
Total policy charges | $101 | $94 | 7% | |||
Net investment income | 743 | 736 | 1% | |||
Total revenues | $844 | $830 | 2% | |||
Benefits and expenses: | ||||||
Interest credited to policyholder accounts | $473 | $457 | 4% | |||
Amortization of deferred policy acquisition costs | (2) | 14 | (114%) | |||
Other expenses, net of deferrals | 151 | 163 | (7%) | |||
Total benefits and expenses | $622 | $634 | (2%) | |||
Pre-tax operating earnings | $222 | $196 | 13% |
(in millions) | December 31, 2012 | December 31, 20111 | Change | |||
Results of Operations | ||||||
Revenues: | ||||||
Policy charges: | ||||||
Asset fees | $85 | $88 | (3%) | |||
Administrative fees | 8 | 7 | 14% | |||
Surrender fees | 1 | 1 | - | |||
Total policy charges | $94 | 96 | (2%) | |||
Net investment income | 736 | 715 | 3% | |||
Total revenues | $830 | $811 | 2% | |||
Benefits and expenses: | ||||||
Interest credited to policyholder accounts | $457 | $441 | 4% | |||
Amortization of deferred policy acquisition costs | 14 | 11 | 27% | |||
Other expenses, net of deferrals | 163 | 166 | (2%) | |||
Total benefits and expenses | $634 | $618 | 3% | |||
Pre-tax operating earnings | $196 | $193 | 2% |
1 | Prior year results reflect a change in accounting principle, as described in Note 2 of the audited consolidated financial statements included in the F pages of this report. |
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(in millions) | December 31, 2013 | December 31, 20121 | Change | |||
Results of Operations | ||||||
Revenues: | ||||||
Policy charges: | ||||||
Asset fees | $48 | $ 44 | 9% | |||
Cost of insurance charges | 490 | 478 | 3% | |||
Administrative fees | 174 | 137 | 27% | |||
Surrender fees | 15 | 18 | (17%) | |||
Total policy charges | 727 | 677 | 7% | |||
Premiums | 282 | 274 | 3% | |||
Net investment income | 544 | 534 | 2% | |||
Total revenues | $1,553 | $1,485 | 5% | |||
Benefits and expenses: | ||||||
Interest credited to policyholder accounts | $213 | $199 | 7% | |||
Benefits and claims | 636 | 589 | 8% | |||
Policyholder dividends | 61 | 57 | 7% | |||
Amortization of deferred policy acquisition costs | 125 | 150 | (17%) | |||
Other expenses, net of deferrals | 284 | 250 | 14% | |||
Total benefits and expenses | $1,319 | $1,245 | 6% | |||
Pre-tax operating earnings | $234 | $240 | (3%) |
1 | Due to a change in the manner in which we view our reportable segments, certain prior period amounts have been restated. |
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(in millions) | December 31, 20121 | December 31, 20111,2 | Change | |||
Results of Operations | ||||||
Revenues: | ||||||
Policy charges: | ||||||
Asset fees | $44 | $43 | 2% | |||
Cost of insurance charges | 478 | 472 | 1% | |||
Administrative fees | 137 | 92 | 49% | |||
Surrender fees | 18 | 22 | (18%) | |||
Total policy charges | 677 | 629 | 8% | |||
Premiums | 274 | 272 | 1% | |||
Net investment income | 534 | 531 | 1% | |||
Total revenues | $1,485 | $1,432 | 4% | |||
Benefits and expenses: | ||||||
Interest credited to policyholder accounts | $199 | $198 | 1% | |||
Benefits and claims | 589 | 577 | 2% | |||
Policyholder dividends | 57 | 67 | (15%) | |||
Amortization of deferred policy acquisition costs | 150 | 75 | 100% | |||
Other expenses, net of deferrals | 250 | 235 | 6% | |||
Total benefits and expenses | $1,245 | $1,152 | 8% | |||
Pre-tax operating earnings | $240 | $280 | (14%) |
1 | Due to a change in the manner in which we view our reportable segments, certain prior period amounts have been restated. |
2 | Prior year results reflect a change in accounting principle, as described in Note 2 of the audited consolidated financial statements included in the F pages of this report. |
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(in millions) | December 31, 2013 | December 31, 20121 | Change | |||
Results of Operations | ||||||
Operating revenues: | ||||||
Premiums | $26 | $27 | (4%) | |||
Net investment income | 16 | 4 | 300% | |||
Other revenues | 13 | 22 | (41%) | |||
Total operating revenues | $55 | $53 | 4% | |||
Benefits and operating expenses: | ||||||
Interest credited to policyholder accounts | $4 | $7 | (43%) | |||
Other expenses, net of deferrals | 126 | 127 | (1%) | |||
Total benefits and operating expenses | $130 | $134 | (3%) | |||
Pre-tax operating loss | $(75) | $(81) | (7%) | |||
Add: non-operating net realized investment gains, net of other-than-temporary impairment losses2 | 791 | $428 | 85% | |||
Add: adjustment to amortization of DAC and other related to net realized investment gains and losses | (70) | (243) | (71%) | |||
Add: net loss attributable to noncontrolling interest | ($82) | ($61) | 34% | |||
Income from continuing operations before federal income tax benefit | $564 | $43 | 1212% |
1 | Due to a change in the manner in which we view our reportable segments, certain prior period amounts have been restated. |
2 | Excluding operating items (trading portfolio realized gains and losses, trading portfolio valuation changes and net realized gains and losses related to hedges on GMDB contracts). |
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(in millions) | December 31, 20121 | December 31, 20111, 2 | Change | |||
Results of Operations | ||||||
Operating revenues: | ||||||
Premiums | $27 | $25 | 8% | |||
Net investment income | 4 | 71 | (94%) | |||
Other revenues | 22 | (1) | NM | |||
Total operating revenues | $53 | $95 | (44%) | |||
Benefits and operating expenses: | ||||||
Interest credited to policyholder accounts | $7 | $20 | (65%) | |||
Other expenses, net of deferrals | 127 | 127 | - | |||
Total benefits and operating expenses | $134 | $147 | (9%) | |||
Pre-tax operating loss | $(81) | $(52) | 56% | |||
Add: non-operating net realized investment gains (losses), net of other-than-temporary impairment losses3 | 428 | ($1,613) | NM | |||
Add: adjustment to amortization of DAC and other related to net realized investment gains and losses | (243) | 115 | NM | |||
Add: net loss attributable to noncontrolling interest | ($61) | ($56) | 9% | |||
Income (loss) from continuing operations before federal income tax benefit | $43 | $(1,606) | (103%) |
1 | Due to a change in the manner in which we view our reportable segments, certain prior period amounts have been restated. |
2 | Prior year results reflect a change in accounting principle, as described in Note 2 of the audited consolidated financial statements included in the F pages of this report. |
3 | Excluding operating items (trading portfolio realized gains and losses, trading portfolio valuation changes and net realized gains and losses related to hedges on GMDB contracts). |
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(in millions) | December 31, 2013 | December 31, 2012 | December 31, 20111 | |||
Long-term debt | $707 | $1,038 | $991 | |||
Shareholder's equity, excluding accumulated other comprehensive income | 6,242 | 5,132 | 4,511 | |||
Accumulated other comprehensive income | 582 | 1,252 | 686 | |||
Total shareholder's equity | $6,824 | $6,384 | $5,197 | |||
Total capital | $7,531 | $7,422 | $6,188 |
1 | Prior year results reflect a change in accounting principle, as described in Note 2 of the audited consolidated financial statements included in the F pages of this report. |
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Payments due by period | Amount per balance sheet | |||||||||||
(in millions) | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | |||||||
Debt1: | ||||||||||||
Short-term | $279 | $– | $– | $– | $279 | $278 | ||||||
Long-term | 54 | 107 | 107 | 1,431 | 1,699 | 707 | ||||||
Subtotal | $333 | 107 | 107 | 1,431 | 1,978 | $985 | ||||||
Purchase and lending commitments: | ||||||||||||
Fixed maturity securities | 70 | – | – | – | 70 | – | ||||||
Mortgage loans | 68 | – | – | – | 68 | – | ||||||
Limited partnerships2 | 23 | - | - | - | 23 | - | ||||||
Subtotal | $161 | - | - | - | $161 | - | ||||||
Future policy benefits and claims3,4,5,6: | ||||||||||||
Fixed annuities and fixed option of variable annuities | 1,311 | 1,925 | 2,143 | 3,968 | 9,347 | 7,985 | ||||||
Life insurance | 785 | 1,575 | 1,586 | 19,491 | 23,437 | 10,137 | ||||||
Single premium immediate annuities | 394 | 731 | 619 | 3,385 | 5,129 | 3,095 | ||||||
Group pension deferred fixed annuities | 1,463 | 3,065 | 1,986 | 7,895 | 14,409 | 14,313 | ||||||
Funding agreements and accident & health insurance9 | 337 | 28 | 635 | 927 | 1,927 | 1,235 | ||||||
Subtotal | $4,290 | 7,324 | 6,969 | 35,666 | 54,249 | 36,765 | ||||||
Cash collateral7,8: | ||||||||||||
Cash collateral on securities lending | 119 | – | – | – | 119 | 119 | ||||||
Cash collateral on derivative transactions | 382 | – | – | – | 382 | 382 | ||||||
Subtotal | $501 | - | - | - | $501 | $501 | ||||||
Total | $5,285 | $7,431 | $7,076 | $37,097 | $56,889 | $38,251 |
1 | No contractual provisions exist that could create, increase or accelerate those obligations presented. The amount presented includes contractual principal payments and interest based on rates in effect at December 31, 2013. |
2 | Primarily related to investments in low-income-housing tax credit partnerships. Call dates for the obligations presented are either date or event specific. For date specific obligations, the Company is required to fund a specified amount on a stated date provided there are no defaults under the agreement. For event specific obligations, the Company is required to fund a specified amount of its capital commitment when properties in a fund become fully stabilized. For event specific obligations, the call date of these commitments may extend beyond one year but has been reflected in payments due in less than one year due to the call features. The Company's capital typically is called within one to four years, depending on the timing of events. |
3 | A significant portion of policy contract benefits and claims to be paid do not have stated contractual maturity dates and may not result in any ultimate payment obligation. Amounts reported represent estimated undiscounted cash flows out of the Company's general account related to death, surrender, annuity and other benefit payments under policy contracts in force at December 31, 2013. Separate account payments are not reflected due to the matched nature of these obligations and because the contract owners bear the investment risk of such deposits. Estimated payment amounts were developed based on the Company's historical experience and related contractual provisions. Significant assumptions incorporated in the reported amounts include future policy lapse rates (including the impact of customer decisions to make future premium payments to keep the related policies in force); coverage levels remaining unchanged from those provided under contracts in force at December 31, 2013; future interest crediting rates; and estimated timing of payments. Actual amounts will vary, potentially by a significant amount, from the amounts indicated due to deviations between assumptions and actual results and the addition of new business in future periods. |
4 | Contractual provisions exist which could adjust the amount and/or timing of those obligations reported. Key assumptions related to payments due by period include customer lapse and withdrawal rates (including timing of death), exchanges to and from the fixed and separate accounts of the variable annuities, claim experience with respect to guarantees, and future interest crediting levels. Assumptions for future interest crediting levels were made based on processes consistent with the Company's past practices, which are at the discretion of the Company, subject to guaranteed minimum crediting rates in many cases and/or subject to contractually obligated increases for specified time periods. Many of the contracts with potentially accelerated payments are subject to surrender charges, which are generally calculated as a percentage of deposits made and are assessed at declining rates during the first |
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seven years after a deposit is made. Amounts disclosed include an estimate of those accelerated payments, net of applicable surrender charges. See Note 2 to the audited consolidated financial statements included in the F pages of this report for a description of the Company's method for establishing life and annuity reserves in accordance with GAAP. | |
5 | Certain assumptions have been made about mortality experience and retirement patterns in the amounts reported. Actual deaths and retirements may differ significantly from those projected, which could cause the timing of the obligations reported to vary significantly. In addition, contractual surrender provisions exist on an immaterial portion of these contracts that could accelerate those obligations presented. Amounts disclosed do not include an estimate of those accelerated payments. Most of the contracts with potentially accelerated payments are subject to surrender charges, which are generally calculated as a percentage of the commuted value of the remaining term certain benefit payments and are assessed at declining rates during the first seven policy years. |
6 | Contractual provisions exist that could increase those obligations presented. The process for determining future interest crediting rates as described in Note 5 above was used to develop the estimates of payments due by period. |
7 | Since the timing of the return of collateral is uncertain, these obligations have been reflected in payments due in less than one year. |
8 | The table above excludes certain derivative liabilities. For more information on these instruments see Characteristics of Interest Rate Sensitive Financial Instruments. Embedded derivatives on guaranteed benefit annuity programs are included in future policy benefits and claims in the table above. |
9 | Health reserves are immaterial and are reflected in the less than one year column. |
December 31, 2013 | December 31, 2012 | |||||||
(in millions) | Carrying value | % of total | Carrying value | % of total | ||||
Fixed maturity securities, available-for-sale | $32,249 | 79% | $31,811 | 79% | ||||
Mortgage loans, net of allowance | 6,341 | 16% | 5,827 | 14% | ||||
Policy loans | 987 | 2% | 980 | 2% | ||||
Short-term investments | 411 | 1% | 1,034 | 3% | ||||
Other investments | 767 | 2% | 639 | 2% | ||||
Total | $40,755 | 100% | $40,291 | 100% |
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(in millions) | Amortized cost | Fair value | % of fair value total | |||
Government agency | $2,104 | $2,199 | 55% | |||
Prime | 520 | 529 | 13% | |||
Alt-A | 858 | 844 | 21% | |||
Sub-prime | 437 | 431 | 11% | |||
Total | $3,919 | $4,003 | 100% |
Alt-A | Sub-prime | |||||||||||
(in millions) | Amortized cost | Fair value | % of fair value total | Amortized cost | Fair value | % of fair value total | ||||||
AAA | $– | $– | – | $18 | $18 | 4% | ||||||
AA | 11 | 11 | 1% | 28 | 29 | 7% | ||||||
A | 8 | 9 | 1% | 45 | 45 | 10% | ||||||
BBB | 35 | 35 | 4% | 36 | 35 | 8% | ||||||
BB and below | 804 | 789 | 94% | 310 | 304 | 71% | ||||||
Total | $858 | $844 | 100% | $437 | $431 | 100% | ||||||
Pre-2005 | $169 | $174 | 21% | $241 | $229 | 53% | ||||||
2005 | 403 | 395 | 47% | 95 | 96 | 22% | ||||||
2006 | 168 | 165 | 19% | 74 | 78 | 18% | ||||||
2007 | 118 | 110 | 13% | 7 | 7 | 2% | ||||||
2008-2013 | – | – | – | 20 | 21 | 5% | ||||||
Total | $858 | $844 | 100% | $437 | $431 | 100% |
(in millions) | Amortized cost | Fair value | % of fair value total | |||
Government agency | $2,257 | $2,462 | 53% | |||
Prime | 751 | 766 | 16% | |||
Alt-A | 1,027 | 994 | 21% | |||
Sub-prime | 471 | 445 | 10% | |||
Total | $4,506 | $4,667 | 100% |
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Alt-A | Sub-prime | |||||||||||
(in millions) | Amortized cost | Fair value | % of fair value total | Amortized cost | Fair value | % of fair value total | ||||||
AAA | $– | $– | – | $10 | $10 | 2% | ||||||
AA | 22 | 23 | 2% | 38 | 38 | 9% | ||||||
A | 18 | 18 | 2% | 47 | 47 | 11% | ||||||
BBB | 38 | 39 | 4% | 48 | 46 | 10% | ||||||
BB and below | 949 | 914 | 92% | 328 | 304 | 68% | ||||||
Total | $1,027 | $994 | 100% | $471 | $445 | 100% | ||||||
Pre-2005 | $230 | $235 | 24% | $270 | $246 | 55% | ||||||
2005 | 461 | 449 | 45% | 109 | 108 | 24% | ||||||
2006 | 194 | 179 | 18% | 79 | 76 | 17% | ||||||
2007 | 142 | 131 | 13% | 11 | 13 | 3% | ||||||
2011 | – | – | – | 2 | 2 | 1% | ||||||
Total | $1, 027 | $994 | 100% | $471 | $445 | 100% |
Amortized cost | Fair value | |||||||||||||||
(in millions) | AAA | AA | A and below | Total | AAA | AA | A and below | Total | ||||||||
December 31, 2013: | ||||||||||||||||
Commercial mortgage-backed securities | $789 | $206 | $444 | $1,439 | $807 | $217 | $480 | $1,504 | ||||||||
Other asset-backed securities | 324 | 199 | 367 | 890 | 323 | 198 | 318 | 839 | ||||||||
Total | $1,113 | $405 | $811 | $2,329 | $1,130 | $415 | $798 | $2,343 | ||||||||
December 31, 2012: | ||||||||||||||||
Commercial mortgage-backed securities | $546 | $245 | $428 | $1,219 | $607 | $269 | $461 | $1,337 | ||||||||
Other asset-backed securities | 42 | 121 | 370 | 533 | 42 | 126 | 323 | 491 | ||||||||
Total | $588 | $366 | $798 | $1,752 | $649 | $395 | $784 | $1,828 |
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(in millions) | Office | Industrial | Retail | Apartment | Hotel | Other | Total | |||||||
December 31, 2013 | ||||||||||||||
Mortgage loans: | ||||||||||||||
New England | $56 | $10 | $26 | $14 | $16 | $28 | $150 | |||||||
Middle Atlantic | 140 | 162 | 345 | 154 | – | 5 | 806 | |||||||
East North Central | 165 | 127 | 441 | 271 | 35 | 15 | 1,054 | |||||||
West North Central | 9 | 73 | 43 | 120 | - | - | 245 | |||||||
South Atlantic | 148 | 236 | 635 | 353 | 5 | 49 | 1,426 | |||||||
East South Central | 22 | 20 | 134 | 149 | 9 | – | 334 | |||||||
West South Central | 13 | 91 | 200 | 330 | – | – | 634 | |||||||
Mountain | 36 | 99 | 114 | 220 | – | – | 469 | |||||||
Pacific | 316 | 271 | 360 | 259 | 43 | 9 | 1,258 | |||||||
Total amortized cost | $905 | $1,089 | $2,298 | $1,870 | $108 | $106 | $6,376 | |||||||
Total valuation allowance | $(6) | $(10) | $(9) | $(7) | $(1) | $(2) | $(35) | |||||||
Total mortgage loans, net of allowance | $6,341 | |||||||||||||
December 31, 2012 | ||||||||||||||
Mortgage loans: | ||||||||||||||
New England | $59 | $17 | $21 | $4 | $18 | $– | $119 | |||||||
Middle Atlantic | 163 | 180 | 379 | 143 | – | 6 | 871 | |||||||
East North Central | 163 | 134 | 378 | 271 | 40 | 21 | 1,007 | |||||||
West North Central | 3 | 62 | 31 | 68 | 14 | – | 178 | |||||||
South Atlantic | 97 | 253 | 695 | 217 | 17 | 49 | 1,328 | |||||||
East South Central | 32 | 21 | 135 | 97 | 9 | – | 294 | |||||||
West South Central | 36 | 89 | 197 | 140 | - | – | 462 | |||||||
Mountain | 85 | 108 | 114 | 145 | – | – | 452 | |||||||
Pacific | 235 | 296 | 326 | 225 | 69 | 9 | 1,160 | |||||||
Total amortized cost | $873 | $1,160 | $2,276 | $1,310 | $167 | $85 | $5,871 | |||||||
Total valuation allowance | $(11) | $(14) | $(9) | $(2) | $(8) | - | $(44) | |||||||
Total mortgage loans, net of allowance | $5,827 |
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(in millions) | Office | Industrial | Hotel | Other high-risk | Total Portfolio | % of total | ||||||
December 31, 2013 | ||||||||||||
Total valuation allowance | $6 | $10 | $1 | $4 | $35 | 60% | ||||||
Refinanced loans1 | $130 | $301 | $8 | - | $949 | 46% | ||||||
Modified loans2 | $14 | $22 | $43 | $13 | $107 | 86% | ||||||
December 31, 2012 | ||||||||||||
Total valuation allowance | $11 | $14 | $8 | $6 | $44 | 89% | ||||||
Refinanced loans1 | $89 | $320 | $23 | $45 | $850 | 56% | ||||||
Modified loans2 | $3 | $24 | $63 | - | $94 | 96% |
1 | Includes all loans refinanced at any time during the term of the loan. |
2 | Includes all loans modified at any time during the term of the loan. |
Office | Industrial | Hotel | Other high–risk | |||||||||||||
(in millions) | Amortized cost | Average LTV | Amortized cost | Average LTV | Amortized cost | Average LTV | Amortized cost | Average LTV | ||||||||
December 31, 2013 | ||||||||||||||||
New England | $56 | 57% | $10 | 51% | $16 | 75% | $– | – | ||||||||
Middle Atlantic | 140 | 65% | 162 | 61% | - | - | - | - | ||||||||
East North Central | 165 | 61% | 127 | 56% | 35 | 69% | - | - | ||||||||
West North Central | 9 | 63% | 73 | 69% | - | - | - | - | ||||||||
South Atlantic | 148 | 48% | 236 | 59% | 5 | 72% | 22 | 102% | ||||||||
East South Central | 22 | 66% | 20 | 69% | 9 | 50% | 25 | 92% | ||||||||
West South Central | 13 | 60% | 91 | 58% | - | - | - | - | ||||||||
Mountain | 36 | 70% | 99 | 67% | - | - | 6 | 91% | ||||||||
Pacific | 316 | 59% | 271 | 56% | 43 | 66% | - | - | ||||||||
Total | $905 | 59% | $1,089 | 60% | $108 | 67% | $53 | 96% | ||||||||
December 31, 2012 | ||||||||||||||||
New England | $59 | 66% | $17 | 71% | $18 | 80% | $– | – | ||||||||
Middle Atlantic | 163 | 71% | 180 | 67% | – | – | 3 | 73% | ||||||||
East North Central | 163 | 65% | 134 | 65% | 40 | 72% | 32 | 81% | ||||||||
West North Central | 3 | 27% | 62 | 72% | 14 | 61% | 19 | 93% | ||||||||
South Atlantic | 97 | 60% | 253 | 70% | 17 | 71% | 97 | 96% | ||||||||
East South Central | 32 | 79% | 21 | 70% | 9 | 82% | 6 | 81% | ||||||||
West South Central | 36 | 64% | 89 | 69% | – | – | – | – | ||||||||
Mountain | 85 | 77% | 108 | 71% | – | – | 30 | 92% | ||||||||
Pacific | 235 | 61% | 296 | 66% | 69 | 70% | 16 | 94% | ||||||||
Total | $873 | 66% | $1,160 | 68% | $ 167 | 71% | $203 | 91% |
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• | For liabilities where cash flows are not interest sensitive and the credited rate is fixed (e.g., immediate annuities), the Company attempts to manage risk with a combination cash matching/duration matching strategy. Duration is a measure of the sensitivity of price to changes in interest rates. For a rate movement of 100 basis points, the fair value of liabilities with a duration of 5 years would change by approximately 5%. For this type of liability, the Company generally targets an asset/liability duration mismatch of -0.25 to +0.50 years. In addition, the Company attempts to minimize asset and liability cash flow mismatches, especially over the first five years. However, the desired degree of cash matching is balanced against the cost of cash matching. |
• | For liabilities where the Company has the right to modify the credited rate and policyholders also have options, the Company's risk management process includes modeling both the assets and liabilities over multiple stochastic scenarios. The Company considers a range of potential policyholder behavior as well as the specific liability crediting strategy. This analysis, combined with appropriate risk tolerances, drives the Company's investment policy. |
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Estimated year of maturities/repayments | ||||||||||||||||||
(in millions) | 2014 | 2015 | 2016 | 2017 | 2018 | There- after | Total | 2013 Fair Value | 2012 Fair Value | |||||||||
Assets | ||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||
Corporate bonds: | ||||||||||||||||||
Principal | $1,003 | $1,018 | $1,246 | $1,498 | $2,112 | $15,501 | $22,378 | $23,379 | $22,599 | |||||||||
Weighted average interest rate | 5.15% | 4.29% | 4.49% | 4.23% | 4.94% | 4.96% | 4.86% | |||||||||||
Mortgage and other asset- backed securities: | ||||||||||||||||||
Principal | - | $5 | - | $29 | $44 | $6,170 | $6,248 | $6,346 | $6,495 | |||||||||
Weighted average interest rate | - | 9.07% | - | 4.22% | 5.88% | 4.45% | 4.46% | |||||||||||
Other fixed maturity securities: | ||||||||||||||||||
Principal | $78 | $125 | $76 | $13 | $80 | $2,004 | $2,376 | $2,524 | $2,717 | |||||||||
Weighted average interest rate | 6.15% | 5.52% | 6.06% | 7.59% | 5.36% | 5.66% | 5.68% | |||||||||||
Mortgage loans: | ||||||||||||||||||
Principal | $295 | $558 | $622 | $477 | $281 | $4,140 | $6,373 | $6,481 | $5,988 | |||||||||
Weighted average interest rate | 5.96% | 5.52% | 5.81% | 5.71% | 4.76% | 4.83% | 5.10% | |||||||||||
Liabilities | ||||||||||||||||||
Individual deferred fixed annuities: | ||||||||||||||||||
Principal | $949 | $721 | $631 | $989 | $602 | $1,985 | $5,877 | $5,964 | $5,888 | |||||||||
Weighted average crediting rate | 2.58% | 2.53% | 2.53% | 2.57% | 2.58% | 2.52% | ||||||||||||
Group pension deferred fixed annuities: | ||||||||||||||||||
Principal | $1,446 | $1,373 | $1,511 | $940 | $845 | $8,000 | $14,115 | $12,849 | $12,922 | |||||||||
Weighted average crediting rate | 3.28% | 3.22% | 2.96% | 2.74% | 2.62% | 2.42% | ||||||||||||
Funding agreements: | ||||||||||||||||||
Principal | $7 | $14 | $14 | $14 | $107 | $760 | $916 | $890 | $25 | |||||||||
Weighted average crediting rate | 1.27% | 1.29% | 1.29% | 1.31% | 1.44% | 2.04% | ||||||||||||
Immediate annuities: | ||||||||||||||||||
Principal | $162 | $124 | $92 | $66 | $47 | $123 | $614 | $733 | $726 | |||||||||
Weighted average crediting rate | 5.48% | 5.50% | 5.54% | 5.59% | 5.64% | 5.68% | ||||||||||||
Short-term debt: | ||||||||||||||||||
Principal | $278 | $– | $– | $– | $– | $– | $278 | $278 | $300 | |||||||||
Weighted average interest rate | 0.28% | – | – | – | – | – | 0.28% | |||||||||||
Long-term debt: | ||||||||||||||||||
Principal | $– | $– | $– | $– | $– | $700 | $700 | $1,004 | $1,323 | |||||||||
Weighted average interest rate | – | – | – | – | – | 7.67% | 7.67% |
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Estimated year of maturities/repayments | ||||||||||||||||||
(in millions, except settlement prices) | 2014 | 2015 | 2016 | 2017 | 2018 | There- after | Total | 2013 Fair Value | 2012 Fair Value | |||||||||
Deriviative Financial Instruments | ||||||||||||||||||
Interest rate swaps: | ||||||||||||||||||
Pay fixed/receive variable: | ||||||||||||||||||
Notional value | $1,540 | $1,406 | $1,606 | $878 | $1,216 | $21,548 | $28,194 | $878 | $(1,915) | |||||||||
Weighted average pay rate | 1.32% | 1.24% | 1.76% | 1.02% | 1.91% | 3.17% | 2.77% | |||||||||||
Weighted average receive rate1 | 0.35% | 0.31% | 0.28% | 0.47% | 0.29% | 0.32% | 0.32% | |||||||||||
Pay variable/receive fixed: | ||||||||||||||||||
Notional value | $907 | $2,100 | $1,213 | $213 | $1,803 | $21,567 | $27,803 | ($1,198) | $1,800 | |||||||||
Weighted average pay rate1 | 0.31% | 0.30% | 0.27% | 0.37% | 0.27% | 0.32% | 0.31% | |||||||||||
Weighted average receive rate | 1.61% | 1.35% | 1.63% | 2.40% | 1.96% | 3.08% | 2.76% | |||||||||||
Pay fixed/receive fixed: | ||||||||||||||||||
Notional value | $– | $– | $48 | $– | $– | $177 | $225 | $(18) | $(7) | |||||||||
Weighted average pay rate | – | – | 4.73% | – | – | 4.98% | 4.92% | |||||||||||
Weighted average receive rate | – | – | 6.16% | – | – | 5.41% | 5.57% | |||||||||||
Total return swaps2: | ||||||||||||||||||
Notional value | $2,284 | $– | $– | $– | $– | $– | $2,284 | $(46) | $(28) | |||||||||
Embedded derivatives: | ||||||||||||||||||
Notional value | $– | $– | $– | $– | $– | $– | $– | $1,010 | $(748) | |||||||||
Other derivative contracts: | ||||||||||||||||||
Notional value | $– | $– | $– | $– | $2 | $– | $2 | $(5) | $(5) | |||||||||
Weighted average pay rate | – | – | – | – | 2.10% | – | 2.10% | |||||||||||
Option contracts: | ||||||||||||||||||
Long positions: | ||||||||||||||||||
Contract amount/notional value | $1,466 | $654 | $179 | $13 | $154 | $4,090 | $6,556 | $343 | $822 | |||||||||
Weighted average settlement price | $1,484 | $464 | $1,418 | $1,590 | $51 | $1 | $422 |
1 | Variable rates are generally based on 1, 3 or 6-month U.S. LIBOR and reflect the effective rate as of December 31, 2013. |
2 | Total return swaps are based on the Europe, Australasia and Far East Index from Morgan Stanley Capital International (EAFE Index). |
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Name | Age | Date Service Began | ||
Timothy G. Frommeyer | 49 | January 2009 | ||
Stephen S. Rasmussen | 61 | January 2009 | ||
Mark R. Thresher | 57 | January 2009 | ||
Kirt A. Walker | 50 | December 2009 | ||
Eric S. Henderson | 51 | March 2012 | ||
John L. Carter | 51 | February 2013 |
Name | Age | Position with NLIC | ||
Stephen S. Rasmussen | 61 | NMIC Chief Executive Officer1 | ||
Kirt A. Walker | 50 | President and Chief Operating Officer | ||
Patricia R. Hatler | 59 | Executive Vice President–Chief Legal and Governance Officer | ||
Lawrence A. Hilsheimer | 56 | Executive Vice President2 | ||
Matthew Jauchius | 44 | Executive Vice President – Chief Marketing Officer | ||
Michael C. Keller | 54 | Executive Vice President–Chief Information Officer | ||
Gale V. King | 57 | Executive Vice President–Chief Administrative Officer | ||
Mark R. Thresher | 57 | Executive Vice President | ||
John L. Carter | 51 | Senior Vice President–Nationwide Retirement Plans | ||
Timothy G. Frommeyer | 49 | Senior Vice President–Chief Financial Officer | ||
Peter A. Golato | 60 | Senior Vice President–Nationwide Financial Network | ||
Harry H. Hallowell | 53 | Senior Vice President–Chief Investment Officer | ||
Eric S. Henderson | 51 | Senior Vice President–Individual Products and Solutions | ||
Michael J. Mahaffey | 41 | Senior Vice President–Chief Risk Officer | ||
Kai V. Monahan | 46 | Senior Vice President–Internal Audit | ||
Steven C. Power | 56 | Senior Vice President–Nationwide Financial |
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Name | Age | Position with NLIC | ||
Michael S. Spangler | 47 | Senior Vice President–President, Nationwide Investment Management Group |
1 | NMIC is our ultimate parent company; however, Mr. Rasmussen does not serve as NLIC's chief executive officer. |
2 | Mr. Hilsheimer separated from his employment with NMIC effective March 8, 2013. |
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• | our financial planning process leads to financial objectives; |
• | we translate financial and individual objectives into incentive opportunities; |
• | we consider individual performance and use other non-financial factors to create flexibility in our compensation programs; and |
• | we think about both the level and form of these rewards, which we believe helps us to attract and retain the executive talent that is necessary to create stakeholder value. |
• | establishment of an overall compensation philosophy; |
• | oversight and review of human resources programs for directors, executive officers and employees; and |
• | responsibility for approval of salaries, incentive compensation plans and awards under such plans for certain executive officers, including those named in the "Summary Compensation Table for 2013," whom we refer to as the "named executive officers." |
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• | align the interests of executives with those of stakeholders; |
• | maintain a strong link between pay and performance; |
• | ensure an appropriate percentage of executive compensation is contingent upon both our performance and each executive officer's individual performance; and |
• | attract, retain and motivate top-caliber executive officers with compensation that is competitive in level and form; |
Compensation element | Description | Purpose | ||
Base Salary | Cash compensation that is a fixed component of total compensation. | • attract and retain top-caliber executive talent | ||
• recognize executive officers' skills, competencies, experience and job responsibilities | ||||
• reward individual performance against pre-established objectives | ||||
Short-term Incentive | Cash payments awarded after the completion of a one-year performance period. | • reward executives for achieving objective annual performance goals | ||
• recognize performance on individual objectives relative to the performance of other executive officers |
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Compensation element | Description | Purpose | ||
Long-term Incentive | Cash awards based on performance over multiple years and subject to forfeiture. | • reward executives for sustained long-term performance | ||
• retain and motivate executives to ensure business stability and success | ||||
• recognize the achievement of performance objectives that drive long-term success and financial stability and create value for our customers | ||||
• maintain a substantial portion of incentives earned in previous years at risk of forfeiture depending on future sustained financial growth and capital strength | ||||
• create a link between Nationwide Financial Services, Inc., or "NFS," our direct parent company, and NMIC to better facilitate a shared business model | ||||
Executive Benefits and Perquisites | Includes pension plans, deferred compensation plans and personal perquisites. | • attract and retain top-caliber executive talent | ||
• provide income after retirement and enable saving of income for retirement |
• | companies in three comparator groups that the NMIC human resources committee identified in order to provide a holistic view of the competitive market, consisting of: |
❍ | twenty-three companies in the insurance and broader financial services industry ("Industry Comparator Group"); |
❍ | a general industry comparator group consisting of forty-three public companies above and below NMIC's Fortune 500 ranking (#100) based on NMIC's statutory revenue; and |
❍ | a general industry comparator group consisting of forty-nine public companies above and below NMIC's Fortune 500 ranking (#147) based on NMIC's GAAP revenue; |
• | companies that participate in commercially available financial services industry and general industry compensation surveys. |
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• | Met Life, Inc. |
• | Prudential Financial, Inc. |
• | Hartford Financial Services |
• | Lincoln National Corp. |
• | Allstate Corp |
• | Principal Financial Group, Inc. |
• | Travelers Cos, Inc. |
• | Genworth Financial, Inc. |
• | AFLAC, Inc. |
• | CNA Financial Corp |
• | Unum Group |
• | Chubb Corp |
• | Progressive Corp-Ohio |
• | PNC Financial Services Group, Inc. |
• | Sun Trust Banks, Inc. |
• | State Street Corp |
• | BB&T Corp |
• | American Express Co. |
• | Fifth Third Bancorp |
• | KeyCorp |
• | Northern Trust Corp |
• | Comerica, Inc. |
• | Huntington Bancshares, Inc. |
• | Diversified Insurance Study of Executive Compensation, Towers Watson, 2012 |
• | US Property and Casualty Insurance Compensation Survey Report, Mercer HR Consulting, 2012 |
• | anticipate talent demands and identify implications; |
• | identify critical roles; |
• | conduct talent assessments; and |
• | identify successors for critical roles. |
Name | Targeted market positioning | Current positioning of incumbent executive | Rationale | |||
Kirt A. Walker, President and Chief Operating Officer | Market median | Near median | This is a competitive level of compensation relative to the market data. |
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Name | Targeted market positioning | Current positioning of incumbent executive | Rationale | |||
Timothy G. Frommeyer, Senior Vice President—Chief Financial Officer | Up to the 75th percentile | Slightly below 75th percentile | The complexity of Mr. Frommeyer's role as our Chief Financial Officer and board member and his responsibilities to the NMIC board of directors and many internal and external stakeholders led NMIC to apply benchmark plus principles and target his compensation at up to the 75th percentile, consistent with NMIC's talent management guidelines. | |||
Stephen S. Rasmussen, NMIC Chief Executive Officer | Market median | Near median | This is a competitive level of compensation relative to the market data. | |||
John L. Carter, President and Chief Operating Officer, Nationwide Retirement Plans as of March, 2013 | Up to the 75th percentile | Between median and 75th percentile | This is a competitive level of compensation relative to the market data based on the size of the retirement plans business in the industry compared to our peers in the market surveys. Nationwide Retirement Plans is one of the largest providers of pension plans. | |||
Eric S. Henderson, Senior Vice President—Individual Products and Solutions | Market Median | Between 25th percentile and median | Mr. Henderson assumed an expanded role near the end of 2011 and we continue to manage compensation levels to a more competitive market position over time. | |||
Lawrence A. Hilsheimer, President and Chief Operating Officer, Nationwide Retirement Plans until March, 20131 | Up to the 75th percentile | Above the 75th percentile | Mr. Hilsheimer's compensation levels were determined based on the market data for a previous role within NMIC, and compensation was managed above the market while he was in a developmental role within NFS. |
1 | Mr. Hilsheimer separated from his employment with NMIC effective March 12, 2013 |
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• | the degree to which the market data consist of sources of executive talent for NMIC; |
• | the comparability of Mr. Walker's job responsibilities to benchmark job responsibilities; |
• | Mr. Walker's experience, tenure and performance; and |
• | the responsibilities of Mr. Walker's position, internal equity and strategic importance to NMIC. |
• | their current compensation levels and relative market competitive pay levels, including revised market data relevant to Mr. Carter's role change from SVP, Distribution and Sales to President and Chief Operating Officer, Nationwide Retirement Plans in March 2013; |
• | the identification of Messrs. Frommeyer and Carter as occupying benchmark plus roles as well as summaries of their accomplishments and Mr. Henderson's accomplishments in 2012; |
• | recommendations from Mr. Walker, for Messrs. Carter, Henderson and Hilsheimer, and from NMIC's Chief Financial Officer for Mr. Frommeyer, in considering 2013 base salary adjustments and incentive target levels; and |
• | reviewed and approved Messrs. Carter's and Hilsheimer's sales incentive plans for 2013. |
• | recruiting needs based on compensation received by a candidate in previous positions; |
• | year-to-year variation in the market data, indicating the market data may be volatile; |
• | differences between the specific responsibilities of our executives' positions and the positions represented in the market data; and |
• | a desire to change the alignment of our incentives between short-term and long-term goals for particular positions. |
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Name1 | Base salary (percentage of target total compensation)2 | Target short-term incentive as a percent of base salary (percentage of target total compensation) | Target long- term incentive (percentage of target total compensation) | Target total compensation | Percentage of target total compensation attributed to target incentives | |||||
Kirt A. Walker | $417,196 | 80% | $438,480 | $1,118,764 | 68% | |||||
(32%) | (25%) | (43%) | ||||||||
Timothy G. Frommeyer | $227,115 | 65% | $64,466 | $329,119 | 63% | |||||
(37%) | (23%) | (40%) | ||||||||
Stephen S. Rasmussen | $180,510 | 165% | $1,006,500 | $1,486,485 | 88% | |||||
(12%) | (20%) | (68%) | ||||||||
John L. Carter | $144,090 | 100% | $266,220 | $558,810 | 66% | |||||
(34%) | (34%) | (32%) | ||||||||
Eric S. Henderson | $293,457 | 70% | $193,996 | $638,729 | 62% | |||||
(38%) | (27%) | (35%) | ||||||||
Lawrence A. Hilsheimer | $198,000 | 100% | $277,316 | $673,316 | 70% | |||||
(30%) | (29%) | (41%) |
1 | Dollar amounts shown represent the amounts allocated to us under the cost-sharing agreement. Percentages are calculated based on the total compensation elements, including unallocated amounts that are not shown in the table. |
2 | Target total compensation equals base salary plus target short-term incentives plus target long-term incentives |
• | Consistent with market practices, a relatively small percentage of the target total compensation is distributed as base salary, as the NMIC human resources committee believes compensation should be delivered to our named executive officers based on performance. |
• | A substantial percentage of the target total compensation is comprised of variable incentives, delivered through a mix of short-term incentive programs, which are more focused on short-term financial results, and long-term incentive programs, which are focused on achievements over multiple years and most closely align with building sustained value for our customers. The NMIC Chief Executive Officer's pay mix is more heavily weighted toward long-term incentives, consistent with his role. |
Name | Base salary change % | Total target cash change % | Long-term incentive target change % | Target total direct compensation change % | Rationale | |||||
Kirt A. Walker | 5% | 5% | 17% | 10% | Mr. Walker's performance was outstanding compared to his 2012 pre-established objectives. Adjustments to base salary and long-term incentive targets positioned his target total direct compensation near the median of the market data for his position. |
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Name | Base salary change % | Total target cash change % | Long-term incentive target change % | Target total direct compensation change % | Rationale | |||||
Timothy G. Frommeyer | 3% | 3% | 0% | 2% | Mr. Frommeyer's performance was very good compared to his 2012 pre-established objectives with respect to his leadership in organizing his team around the operating plan and managing significant product and underwriting challenges. His team's engagement increased via his focus on talent management and development, and his contributions to keeping NFS on track from all financial and risk management aspects contributed to the NFS business success. Mr. Frommeyer is viewed as critical talent and a successor candidate. | |||||
Stephen S. Rasmussen | 0% | 6% | 7% | 7% | Mr. Rasmussen's pay increase was related in part to exceptional sustained performance and in part to market adjustment to intended positioning. The increase was delivered entirely in incentive target increases, enhancing the pay for performance relationship. | |||||
John L. Carter | 25% | 11% | 14% | 12% | Mr. Carter's performance was outstanding compared to his 2012 pre-established objectives with respect to exceeding his sales plan, expanding retention efforts, significantly improving associate engagement and implementing a process to capture and analyze sales force metrics. Mr. Carter was promoted to President and Chief Operating Officer, Nationwide Retirement Plans, in March 2013, and compensation changes were made to align with the market for this new role and recognize his significant accomplishments in his previous role. | |||||
Eric S. Henderson | 5% | 8% | 0% | 5% | Mr. Henderson's performance was very good compared to his 2012 pre-established objectives with respect to significantly exceeding plan in several product lines, substantial improvement in customer enthusiasm for NLIC, and progress made in an integrated individual products management structure. | |||||
Lawrence A. Hilsheimer | 0% | 0% | -12% | -5% | Base salary and total cash compensation were maintained from Mr. Hilsheimer's previous role, however his short-term incentive plan focused on a growth strategy for the retirement plans business. The long-term incentive target was reduced to reflect an adjustment closer to the market for his current role. |
1 | Percentages are calculated based on the total compensation elements, including amounts that are not allocated to us. |
• | what we intend to accomplish with our compensation programs; |
• | how we determine the amount for each element of compensation; and |
• | the impact of performance on compensation. |
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• | salaries for comparable positions in the marketplace, taking scope of responsibility into account; |
• | NMIC and NFS's recent financial performance, both overall and with respect to key financial indicators; |
• | the annual performance evaluation of each executive officer compared to previously established objectives; |
• | internal pay equity; and |
• | management recommendations. |
• | Base salaries for Messrs. Frommeyer and Rasmussen were allocated using a variety of different factors including policies in-force, new policy counts, premiums, commissions, time studies and revenue, excluding material one-time, unusual or unrelated expenses. |
• | Base salary for Mr. Walker was allocated using policy in-force counts from various NFS business segments. |
• | Base salary for Mr. Carter was allocated using new policy counts and premium from various NFS business segments. |
• | Base salary for Mr. Henderson was allocated using policy in-force counts from the Nationwide Financial Individual Products and Solutions business segment. |
• | Base salary for Mr. Hilsheimer reflect factors determined by operational support of the retirement plans business segment, based on time spent managing and directing activities for each segment. |
• | emphasizes a one-company culture while recognizing the need to maintain some business unit focus; |
• | focuses on the Nationwide customer experience; and |
• | aligns incentive plans between associates and management. |
• | We allocated short-term incentives for Messrs. Frommeyer and Rasmussen to NFS based on NFS's operating revenue as a percentage of NMIC's total operating revenue. We allocated 100% of the short-term incentives for the other named executive officers to NFS. Short-term incentives for our named executives other than Mr. Hilsheimer were further allocated to us (as compared to other NMIC entities) using a variety of different factors |
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including policies in-force, new policy counts, premiums, commissions, time studies and revenue, excluding one-time, unusual or unrelated expenses. Short-term incentives for Mr. Hilsheimer reflect factors determined by operational support of the retirement plans business segment, based on time spent managing and directing activities for each segment. |
• | changes in industry and competitive conditions that occur after target setting; |
• | execution and achievement of key performance indicators that have a longer-term financial impact; |
• | performance on key performance indicators, such as customer experience, associate engagement and agency ratings, that may not be reflected in the financial results; and |
• | achievement of financial results consistent with Nationwide's values. |
• | Gains and losses from the acquisition or divestiture of businesses and/or operations and related deferred costs; |
• | Non-recurring, unanticipated tax adjustments; and |
• | Errors and/or omissions during target calculations. |
• | We define Consolidated Net Operating Income, or "CNOI," as a non-GAAP financial measure which highlights NMIC's results from continuing operations. CNOI excludes the impact of realized gains and losses on sales of investments and hedging instruments, certain hedged items, other than temporary impairments, discontinued operations and extraordinary items, net of tax. |
• | We define the Enterprise expense metric as a blend of the Property and Casualty statutory expense ratio, comprised of the loss adjustment expense ratio plus the underwriting expense ratio, with the NFS adjusted general operating expenses, comprised of general operating expenses net of incentives and contingent suits. |
• | We determine direct written premium, or "DWP," growth by measuring the increase or decrease in the current performance year-ending Nationwide Insurance or Allied Insurance direct written premium over the prior performance year-ending Nationwide Insurance and Allied Insurance direct written premium, respectively, as a percentage. |
• | We define the non-weather loss ratio as net calendar year incurred losses from non-weather peril, excluding contingent suits, divided by earned insurance premiums in the current year. |
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• | We calculate NFS Return on Capital by dividing NFS net operating income for the year, excluding interest income on excess capital and adding back debt expense, by the total NFS GAAP equity plus long-term debt at the beginning of the year, excluding excess capital. |
• | NFS Sales: New and renewal production premiums and deposits, previously referred to as "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. Management believes that the presentation of new and renewal production premiums and deposits 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. |
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Weights (%) | ||||||||||
Metric ($ in millions) | Messrs. Walker and Henderson | Mr. Frommeyer | Mr. Rasmussen | 2013 established business goals | 2013 incentive performance results3 | |||||
Enterprise Consolidated Net Operating Income1 | 45 | 45.00 | 40.95 | $1,016.0 | $1,446.0 | |||||
Customer Enthusiasm Index2 | 20 | 20.00 | 18.20 | 8.61 | 8.57 | |||||
Enterprise Expense Metric (P&C statutory expense ratio) | 3.50 | 3.50 | 3.19 | 43.3% | 43.2% | |||||
Enterprise Expense Metric (NFS adjusted general operating expenses) | 1.50 | 1.50 | 1.37 | $906.3 | $904.7 | |||||
NI DWP Growth | 5.00 | 4.55 | 2.92% | 3.4% | ||||||
Change in number of NI relationships per household | 3.33 | 3.03 | 0.012 | 0.012 | ||||||
NI Non-weather Loss ratio | 1.67 | 1.52 | 51.4% | 49.6% | ||||||
Allied DWP Growth | 2.50 | 2.28 | 5.49% | 5.21% | ||||||
Allied Personal Lines PIF | 0.83 | .76 | 2,314 | 2,254 | ||||||
Allied Non-weather Loss Ratio | 1.67 | 1.52 | 49.2% | 48.1% | ||||||
NFS Return on Capital | 15 | 7.50 | 6.83 | 9.62% | 11.5% | |||||
NFS Sales | 15 | 7.50 | 6.83 | $18,085.0 | $19,361.4 | |||||
Strategic Nonfinancial Objectives | 9.00 | Discussed below in "Determination of the Final Short-term Incentive Payments" | 162.5% of target amount |
1 | For 2013, performance on CNOI of $350.0 must be achieved in order for payment to be earned on the enterprise expense, customer enthusiasm and business unit metrics. |
2 | Mean customer satisfaction with NMIC on a scale of one to ten as determined by an external consultant. |
3 | These amounts are unaudited. |
• | the competitive and market environment in which each business segment operates; |
• | the outlook for sales growth of the industry and competitors; |
• | the level of maturity of each business segment; |
• | historical rates of sales growth; and |
• | our expectation as to the difficulty of achieving the planned rates of sales growth in each business segment. |
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Weights (%) | ||||||||||
Performance Criteria ($ in millions) | Mr. Carter 1/1/13 -3/3/13 | Mr. Carter 3/4/13 -12/31/13 | Mr. Hilsheimer | 2013 established goals | 2013 incentive performance results3 | |||||
Sales Metrics Individual Investments Group: | ||||||||||
Variable Annuities w/ GLB | 8.50 | $3,119.0 | $3,347.1 | |||||||
Variable Annuities w/o GLB | 8.50 | $1,328.0 | $2,383.6 | |||||||
In-plan guarantees | 1.70 | $150.0 | $111.2 | |||||||
SPIA | 8.50 | $561.0 | $611.8 | |||||||
Fixed Annuities | 2.55 | $1,117.0 | $600.9 | |||||||
Retirement Plans Group: | ||||||||||
Private Sector 1st year | 17.00 | 6.00 | 20.00 | $1,618.0 | $1,563.6 | |||||
Private Sector Recurring | 4.25 | 2.00 | 5.00 | $3,802.0 | $3,824.4 | |||||
Public Sector | 2.55 | 12.00 | 25.00 | $3,828.0 | $4,067.7 | |||||
Individual Protection Group: | ||||||||||
Total 1st year | 14.45 | $283.0 | $431.0 | |||||||
Total Renewal | 2.55 | $906.0 | $915.4 | |||||||
Corporate | 1.70 | $623.0 | $749.2 | |||||||
Nationwide Funds Group | ||||||||||
Funds | 12.75 | $750.0 | $755.8 | |||||||
NFS and Enterprise Metrics | ||||||||||
Enterprise Consolidated Net Operating Income1 | 6.75 | 36.00 | 22.50 | $1,016.0 | $1,446.0 | |||||
Customer Enthusiasm Index (Mean Satisfaction with Company)2 | 3.00 | 16.00 | 10.00 | 8.61 | 8.57 | |||||
Enterprise Expense Metric (P&C statutory expense ratio) | .53 | 2.80 | 1.75 | 43.3% | 43.2% | |||||
Enterprise Expense Metric (NFS adjusted general operating expenses) | .23 | 1.20 | 0.75 | $906.3 | $904.7 | |||||
NFS Return on Capital | 2.25 | 12.00 | 7.50 | 9.62% | 11.50% | |||||
NFS Sales3 | 2.25 | 12.00 | 7.50 | $18,085.0 | $19,361.4 |
1 | For 2013, performance on CNOI of $350.0 must be achieved in order for payment to be earned on the enterprise expense, customer enthusiasm, NFS return on capital, and NFS sales metrics. |
2 | Mean customer satisfaction on a scale of one to ten as determined by an external consultant. |
3 | These amounts are unaudited. |
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• | Delivering results through highly engaged associates, with regard to creating an engaging work experience by improving leadership effectiveness, ensuring a diverse pipeline for senior leadership talent, and ensuring qualified successors are identified for key management roles; |
• | Enabling execution of Nationwide's strategy with accountability, with regard to the successful integration of Harleysville Insurance Group, growing and retaining relationships per household, strengthening distribution effectiveness, leveraging innovation as a competitive advantage, and making progress on executing critical business transformation programs; and |
• | The accountability and transparency of Nationwide's governance, with regard to continuing board engagement with senior line and functional leaders, adhering to and reinforcing Nationwide's code of conduct, maintaining effective relationships with sponsor and community organizations, and maintaining quality communications with associates and key stakeholders. |
Name | Comparison of short-term incentive payment to target | Summary of rationale | ||
Kirt A. Walker | 156% of target | Performance compared to the PIP objectives | ||
Timothy G. Frommeyer | 151% of target | Performance compared to the PIP objectives | ||
Stephen S. Rasmussen | 152% of target | Performance compared to the PIP objectives | ||
John L. Carter | 152% of target | Performance compared to the SIP objectives | ||
Eric S. Henderson | 156% of target | Performance compared to the PIP objectives | ||
Lawrence A. Hilsheimer | 298% of target | Terms of the employment release agreement to award two times actual performance of 149% of the target amount |
• | reward sustained long-term value creation with appropriate consideration of risk capacity, appetite and limits; |
• | deliver market-competitive target compensation consistent with organizational performance; and |
• | retain and motivate executives to ensure business stability and success. |
• | Operating revenue growth, which is determined by comparing current performance year-ending operating revenue, net of interest credited, to prior performance year-ending operating revenue, net of interest credited. Operating revenue is a non-GAAP financial measure. Operating revenue excludes realized gains and losses on sales of investments and hedging instruments, discontinued operations and extraordinary items. |
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• | Capital strength, which is determined by combining our internal economic capital calculation (50%) and Standard & Poor's capital calculation (50%). |
• | The amount of any short-term incentive award under the PIP, SIP or LTPP to the extent the restatement impacts the amount awarded; |
• | The total amount of awards granted to the extent the restatement impacts the amounts that would have been granted, with such awards valued in good faith in the discretion of the NMIC board of directors, and; |
• | Any other amount determined by the NMIC board of directors, in its sole discretion, to have been improperly awarded. |
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Name and principal position (a) | Year (b) | Salary (c) | Bonus (d) | Non-equity incentive plan compensation (g)1 | Change in pension value and non- qualified deferred compensation earnings2 (h) | All other compensation (i) | Total (j) | |||||||
Kirt A. Walker, President and Chief Operating Officer | 2013 | 416,580 | – | 1,027,108 | 100,306 | 25,9686 | 1,747,283 | |||||||
2012 | 410,656 | – | 1,063,275 | 80,995 | 21,412 | 1,576,338 | ||||||||
2011 | 385,666 | – | 269,623 | 89,180 | 22,279 | 766,748 | ||||||||
Timothy G. Frommeyer, Senior Vice President– Chief Financial Officer | 2013 | 225,617 | – | 154,175 | 03 | 13,6787 | 393,470 | |||||||
2012 | 243,476 | 904 | 150,818 | 117,016 | 11,817 | 524,031 | ||||||||
2011 | 234,389 | 2,854 | 119,155 | 371,439 | 13,007 | 740,844 | ||||||||
Stephen S. Rasmussen, NMIC Chief Executive Officer | 2013 | 180,510 | – | 1,932,088 | 277,627 | 27,6868 | 2,417,911 | |||||||
2012 | 186,308 | – | 1,888,241 | 135,458 | 27,445 | 2,237,452 | ||||||||
2011 | 159,532 | – | 517,158 | 146,351 | 24,820 | 847,861 | ||||||||
John L. Carter, President and Chief Operating Officer, Nationwide Retirement Plans | 2013 | 138,302 | – | 612,275 | 04 | 20,5209 | 771,097 | |||||||
2012 | 204,421 | – | 846,731 | 81,656 | 15,029 | 1,147,837 | ||||||||
2011 | 194,792 | – | 484,716 | 146,016 | 13,551 | 839,075 | ||||||||
Eric S. Henderson, Senior Vice President– Individual Products and Solutions | 2013 | 290,512 | – | 548,148 | 05 | 15,82810 | 854,488 | |||||||
2012 | 308,953 | – | 549,058 | 267,105 | 16,176 | 1,141,292 | ||||||||
Lawrence A. Hilsheimer, President and Chief Operating Officer, Nationwide Retirement Plans until March, 2013 | 2013 | 44,317 | – | – | 4,024 | 1,043,74811 | 1,092,089 |
1 | Represents the amount determined under the PIP for Messrs. Walker, Frommeyer, Rasmussen and Henderson, and under the SIP for Mr. Carter, that was paid in 2014 for the 2013 performance year; and the amount earned in 2013 under the LTPP, and allocated to us pursuant to the cost-sharing agreement, as follows: Mr. Walker—$410,417 (PIP) and $616,691 (LTPP); Mr. Frommeyer— |
2 | Represents the change in pension value for all named executive officers. There were no above-market earnings on deferred compensation. |
3 | Negative value is shown as 0. The actual change in pension value is ($165,791). |
4 | Negative value is shown as 0. The actual change in pension value is ($17,853). |
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5 | Negative value is shown as 0. The actual change in pension value is ($68,783). |
6 | Includes tax gross-ups totaling $2,784 for amenities received at company events and the contribution we made on behalf of Mr. Walker in the amount of $17,046 under the Nationwide Supplemental Defined Contribution Plan. Aggregate value of perquisites and personal benefits is less than $10,000. |
7 | Includes a tax gross-up in the amount of $1,425 for amenities received at a company event and a tax gross-up in the amount of $909 for the company-paid cost of an executive physical. Aggregate value of perquisites and personal benefits is less than $10,000. |
8 | Includes the value of amenities received at company events, and tax gross-ups totaling $105 for such amenities, the actual incremental cost of Mr. Rasmussen's personal use of the company plane in the amount of $12,285, the contribution we made on behalf of Mr. Rasmussen in the amount of $13,928 under the Nationwide Supplemental Defined Contribution Plan and the company-paid portion for parking expenses and automotive service in the executive parking garage. |
9 | Includes the value of amenities received at company events, tax gross-ups totaling $946 for such amenities, and the company-paid portion for parking expenses and automotive service in the executive parking garage. |
10 | Includes tax gross-ups totaling $1,037 for amenities received at company events. Aggregate value of perquisites and personal benefits is less than $10,000. |
11 | Mr. Hilsheimer separated from his employment with NMIC effective March 12, 2013. Includes the following payments made under Mr. Hilsheimer's Executive Severance Agreement: salary paid from Mr. Hilsheimer's termination date to the date he signed his agreement; a tax gross-up of $5,596 for reimbursement for COBRA payments; two times the 2013 matching amounts under the Nationwide Supplemental Defined Contribution Plan in the amount of $15,484; two times his base salary in the amount of $396,000; and two times the amount that was determined under the SIP in the amount of $590,040. Also includes a tax gross-up of $871 for amenities received at a company event. Aggregate value of perquisites and personal benefits is less than $10,000. |
Estimated future payouts under non-equity incentive plan awards1 | ||||||||
Name (a) | Grant date (b) | Threshold (c) | Target (d) | Maximum (e) | ||||
Kirt A. Walker | 2/12/20132,3 | $130,291 | $260,582 | $651,456 | ||||
2/12/20134 | $0 | $438,480 | $1,096,200 | |||||
Timothy G. Frommeyer | 2/12/20132,3 | $18,769 | $37,538 | Note5 | ||||
2/12/20134 | $0 | $64,466 | $161,164 | |||||
Stephen S. Rasmussen | 2/12/20132,3 | $149,738 | $299,475 | $748,688 | ||||
2/12/20134 | $0 | $1,006,500 | $2,516,250 | |||||
John L. Carter | 2/12/20132,3 | $13,845 | $27,691 | $55,382 | ||||
4/2/20132,3 | $0 | $123,275 | $308,189 | |||||
4/2/20134 | $0 | $140,250 | $350,625 | |||||
Eric S. Henderson | 2/12/20132,3 | $75,638 | $151,276 | Note5 | ||||
2/12/20134 | $0 | $193,996 | $484,990 | |||||
Lawrence A. Hilsheimer | 2/12/20132,3 | $49,500 | $198,000 | $198,000 |
1 | Values are the amounts allocated to us pursuant to the cost-sharing agreement. |
2 | We calculated thresholds for certain metrics other than CNOI separately after a $350.0 million performance level was achieved on CNOI. Actual payment may be less than the amount shown. |
3 | Represents a PIP, or for Messrs. Carter and Hilsheimer, a SIP, award. |
4 | Represents an LTPP award using operating revenue growth and capital strength as metrics. |
5 | Maximum award amount is 200% of the sum of the awards for participants in the same pool. |
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Name (a) | Plan name (b) | Number of years credited service (c) | Present value of accumulated benefit1 (d) | Payments during last fiscal year (e) | ||||
Stephen S. Rasmussen | Nationwide Retirement Plan | 15.0 | $38,755 | $– | ||||
Nationwide Supplemental Retirement Plan | 15.0 | $538,668 | $– | |||||
Kirt A. Walker | Nationwide Retirement Plan | 15.0 | $94,162 | $– | ||||
Nationwide Supplemental Retirement Plan | 15.0 | $227,493 | $– | |||||
Timothy G. Frommeyer | Nationwide Retirement Plan | 26.3 | $508,282 | $– | ||||
Nationwide Supplemental Retirement Plan | 26.3 | $604,709 | $– | |||||
John L. Carter | Nationwide Retirement Plan | 7.2 | $73,976 | $– | ||||
Nationwide Supplemental Retirement Plan | 7.2 | $320,639 | $– | |||||
Eric S. Henderson | Nationwide Retirement Plan | 26.8 | $706,643 | $– | ||||
Nationwide Supplemental Retirement Plan | 26.8 | $654,224 | $– | |||||
Lawrence A. Hilsheimer | Nationwide Retirement Plan | 5.5 | $15,149 | $– | ||||
Nationwide Supplemental Retirement Plan | 4.3 | $83,827 | $– |
1 | These amounts are unaudited. |
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• | 1.25% of the participant's final average compensation, as defined below, multiplied by the number of years of service, up to a maximum of thirty-five years subject to the limitations set forth in the Internal Revenue Code; plus |
• | 0.50% of the participant's final average compensation in excess of Social Security covered compensation, as defined below, multiplied by the number of years of service, up to a maximum of thirty-five years and subject to the limitations set forth in the Internal Revenue Code. |
• | severance pay and other amounts following the later of: (i) the pay period that includes the participant's date of termination, or (ii) the pay period in which the participant's date of termination is posted to Nationwide's payroll system; |
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• | a lump-sum payment for vacation days made upon termination of employment or pursuant to an election by the participant; |
• | imputed income, executive officer perquisites and benefits paid under any long-term performance or equity plan; |
• | income imputed to any participant as a result of the provisions of health or other benefits to members of the participant's household; |
• | any payment made to a participant to offset the tax cost of other amounts Nationwide paid that are included in the participant's income for federal tax purposes; |
• | any payment of deferred compensation made prior to the participant's severance date; |
• | expense reimbursement or expense allowances including reimbursement for relocation expenses; |
• | retention payments made on or after January 1, 2002; |
• | all gross-up payments, including the related compensation payment, made on or after January 1, 2002; and |
• | compensation earned following the date on which a participant's employment status changes from eligible to ineligible and during the period he or she is ineligible. |
• | Opening Balance Amount: We determined the accrued benefit under the FAP formula as of December 31, 2001, and converted this accrued benefit into a lump sum that reflected the current value of that benefit; plus |
• | Pay Credits: We add amounts to the account every pay period based on the participant's years of service and compensation. The pay credits range from 3% of pay if the participant has up to thirty-five months of service, plus 3% of pay over the Social Security wage base for the year in question, to 7% of pay for those with over twenty-two years of service, plus 4% of pay over the Social Security wage base for the year in question; plus |
• | Interest Credits: We add interest amounts to the account on a biweekly basis based on the thirty-year United States Treasury bill rate in effect from the second month preceding the current quarter. The minimum interest rate is 3.25%. |
• | 1.25% of the participant's final average compensation, as defined in the "Qualified Pension Plans" section above, multiplied by the number of years of service, up to a maximum of forty years; plus |
• | 0.75% of the participant's final average compensation in excess of Social Security-covered compensation, as defined in "Qualified Pension Plans" above, multiplied by the number of years of service, up to a maximum of forty years; less |
• | benefits the executive accrued under the NRP. |
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• | his or her SRP benefit as of December 31, 2007, with the subsidized early retirement factors; |
• | his or her total benefit as of December 31, 2009 minus the benefits accrued under the NRP at date of termination, with the subsidized early retirement factors; or |
• | his or her SRP benefit without subsidized early retirement factors at the date of termination. |
• | severance pay and other amounts following the later of (i) the pay period that includes the participant's date of termination, and (ii) the pay period in which the participant's date of termination is posted to Nationwide's payroll system; |
• | company car value or subsidy or reimbursement for loss of a company car; |
• | a lump-sum payment for vacation days made upon termination of employment or pursuant to an election by the participant; |
• | imputed income, executive officer perquisites and benefits paid under any long-term performance or equity plan; |
• | income imputed to any participant as a result of the provision of health or other benefits to members of the participant's household; |
• | any payment made to a participant to offset the tax cost of other amounts Nationwide paid that are included in the participant's income for federal tax purposes; |
• | any payment of deferred compensation made prior to the participant's severance date or on account of a participant's severance date; and |
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• | expense reimbursement or expense allowances including reimbursement for relocation expenses. |
Name (a) | Executive contributions in last fiscal year1 (b) | Registrant contributions in last fiscal year2 (c) | Aggregate earnings in last fiscal year3 (d) | Aggregate withdrawals/ distributions4 (e) | Aggregate balance at last fiscal year end5 (f) | |||||
Kirt A. Walker | $63,443 | $15,604 | $104,978 | $63,227 | $1,099,384 | |||||
Timothy G Frommeyer | – | $6,969 | $4,189 | $37,354 | $99,811 | |||||
Stephen S. Rasmussen | – | $12,204 | $15,922 | – | $127,654 | |||||
John L. Carter | – | $5,608 | $6,165 | – | $147,527 | |||||
Eric S. Henderson | – | $7,496 | $1,483 | – | $35,484 | |||||
Larry Hilsheimer | – | $2,908 | $575 | – | $13,766 |
1 | Amount represents voluntary deferrals to the Nationwide Individual Deferred Compensation Plan. |
2 | Amount represents company contributions to the Nationwide Supplemental Defined Contribution Plan. |
3 | Amount represents investment gain from applicable nonqualified deferred compensation plans attributable to all prior year deferrals in the plans. Investment gains or losses are attributable to the investment selections the executive officer makes. Executive officers may choose from approximately eighty investment options for the Nationwide Individual Deferred Compensation Plan and the Nationwide Supplemental Defined Contribution Plan, and from sixteen investment options for the Nationwide Economic Value Incentive Plan. The Nationwide Economic Value Incentive Plan is a terminated plan that provided for involuntarily deferred compensation we may still pay to an executive officer based on his or her distribution election. |
4 | Amount represents distributions from the Nationwide Individual Deferred Compensation Plan. |
5 | Represents balances in the following plans: the Nationwide Individual Deferred Compensation Plan, the Nationwide Supplemental Defined Contribution Plan and the Nationwide Economic Value Incentive Plan. |
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• | credits made for plan years prior to 1996, and earnings on those amounts, are paid in January of the year following the year the participant's employment terminates; |
• | unless otherwise elected in accordance with the terms of the plan, credits made to the plan for plan years after 1995, and earnings on those amounts, are paid in 10 installments for participants who qualify for a benefit from the NRP and whose account balance exceeds $25,000, and in a single lump sum payment for all other participants. |
• | vested amounts contributed, plus related earnings under, the Nationwide Savings Plan, the Nationwide Individual Deferred Compensation Plan, and the Nationwide Supplemental Defined Contribution Plan; |
• | amounts accrued and vested under the Nationwide Retirement Plan and the Nationwide Supplemental Retirement Plan; and |
• | unused paid time off, up to specified limits and subject to certain limitations as specified within our paid time off plan. |
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• | a lump-sum cash payment equal to six to twelve months, depending on the circumstances of departure, of the annual base salary in effect on the date of termination; |
• | paid leave of absence of twenty-one days for executive officers over the age of forty to permit the executive officer time to seek legal advice regarding the terms of the severance agreement; |
• | short-term incentive payments earned under the PIP, prorated to the date of termination; |
• | up to one year of executive placement services, or a lump-sum payment of $6,800 in lieu of such services; |
• | payout of the current year earned but unused paid time off; and |
• | transfer of ownership of certain computer equipment, less any Nationwide-licensed software or operating system, to the executive officer. |
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• | a lump-sum cash payment equal to one or two times, as applicable, the annual base salary in effect immediately before the termination, payable within 30 days following the executive's termination; |
• | a lump-sum cash payment equal to one or two times, as applicable, the short-term incentive compensation that would have been earned pursuant to the PIP during the fiscal year in which the executive officer's termination date occurs payable based on actual performance over the full year, payable when annual bonuses are paid to our other executives; |
• | a lump-sum cash payment equal to the cost, including a gross-up payment to cover income and FICA taxes on the payment, to the executive officer of continuing the medical and dental coverage under COBRA, or under the retiree medical provisions of NMIC's medical plan, if applicable, for the executive officer, his spouse and dependents, for a specified period of time following the executive's termination date; |
• | supplemental benefits equal to the benefits the executive officer would have been entitled to receive on the termination date under certain retirement and deferred compensation plans, had the executive officer been fully vested in those plans on the termination date, less any benefits the executive officer actually receives under those plans, paid at the time the executive's benefits are otherwise paid under the applicable plans; |
• | in the event that the executive officer's termination date occurs within three years of the date on which the executive officer would have been first eligible to retire under the Nationwide Retirement Plan, a supplemental benefit equal to the benefits the executive officer would have received under the Nationwide Retirement Plan, the Nationwide Supplemental Retirement Plan and the Nationwide Excess Benefit Plan, had the executive officer earned service and age credit for the period ending on the earlier of three years after the executive officer's termination date or the earliest date the executive officer would have been eligible to retire under the Nationwide Retirement Plan and had the executive officer been fully vested under those plans, less any benefits the executive officer actually receives under those plans, paid at the time the executive's benefits are otherwise paid under the applicable plans; |
• | a lump-sum cash payment equal to the matching contributions that NMIC would have made for the executive officer under the Nationwide Savings Plan and the Nationwide Supplemental Defined Contribution Plan during the severance period defined in the agreement, as if the executive officer's contributions had continued in the same amount and at the same rate in effect immediately prior to the executive officer's termination date, payable within 30 days following the executive's termination date; |
• | service and age credits for the purpose of eligibility under NMIC's retiree medical plan, as if the executive officer had continued employment through the executive severance agreement's specified severance period; |
• | the right to retain certain computer and office equipment and furniture used at the executive officer's home; and |
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• | amounts earned, accrued or owed but not paid and benefits owed under employee benefit plans and programs. |
• | a material diminution in the executive's authority, duties or responsibilities, as reasonably determined by the board of directors of NMIC; |
• | a material change in the geographic location at which the executive must perform services; |
• | a material diminution in the executive's base salary, other than due to a change in base salary for all senior executives in NMIC; or |
• | any action or inaction of NMIC that constitutes a material breach by NMIC of the severance agreement. |
• | the executive has been convicted of a felony; |
• | the executive neglects, refuses or fails to perform his material duties to NMIC, which failure has continued for a period of at least 30 days after notice from NMIC; |
• | the executive engages in misconduct in the performance of his duties; |
• | the executive engages in public conduct that is harmful to the reputation of NMIC; |
• | the executive breaches his non-competition, non-disclosure or non-solicitation covenants; or |
• | the executive breaches NMIC's written code of business conduct and ethics. |
• | Normal Retirement Age; |
• | age fifty-five and completed 120 months of vesting service; or |
• | age sixty-two and completed sixty months of vesting service, |
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Benefits and payments upon termination | Voluntary termination | Termination without cause or for good reason following a substantial reorganization | For cause termination | Death, disability, or retirement | ||||
Short-term incentives: | ||||||||
Annual incentives1 | $– | $– | $– | $410,417 | ||||
Long-term incentives: | ||||||||
LTPP 11-13 award2 | $616,691 | $616,691 | $– | $616,691 | ||||
LTPP 12-14 award3 | $– | $398,410 | $– | $398,410 | ||||
LTPP 13-15 award3 | $– | $134,349 | $– | $134,349 | ||||
Life insurance proceeds | $– | $– | $– | $2,406,900 | ||||
Cash severance4 | $– | $1,701,039 | $– | $– | ||||
Total compensation | $616,691 | $2,850,489 | $– | $3,966,767 |
1 | Reflects the amount Mr. Walker would receive with respect to the 2013 short-term incentive payment under the PIP upon a termination of employment, except for cause, on December 31, 2013. Mr. Walker would not be eligible to receive a PIP award payment upon a voluntary termination on December 31, 2013. The PIP requires that plan participants be employed on the date PIP awards are paid. Payment of 2013 PIP was made on March 7, 2013. The "Termination without cause or for good reason following a substantial reorganization" column does not include the 2013 short-term incentive opportunity as the severance agreement provides that the short-term incentive payment under the agreement is in lieu of the payments that would be made under the PIP. The amounts were not reduced to their present value. |
2 | Reflects the amount Mr. Walker would receive with respect to the 2011-2013 awards under the LTPP upon a termination of employment, except for cause, on December 31, 2013. |
3 | Reflects the amount Mr. Walker would receive with respect to the 2012-2014 and 2013-2015 awards under the LTPP upon termination without cause or due to substantial reorganization, or for death, disability or retirement (not eligible), on December 31, 2013. Mr. Walker would not have qualified for retirement under the LTPP and would forfeit the target award opportunity granted in the year of termination unless termination is due to death or disability or if the termination is without cause or due to substantial reorganization. Accordingly, the amounts shown assume a two-thirds distribution of the total 2012-2014 award, which would have been paid in 2015, and a one-third distribution of the total 2013-2015 award, which would have been paid in 2016, using a performance score that was estimated as of December 31, 2013. The amounts were not reduced to their present value. |
4 | Includes lump-sum cash amounts equal to the sum of two times base salary; two times the 2013 matching amounts in the Nationwide Savings Plan and Nationwide Supplemental Defined Contribution Plan; two times the 2013 short-term incentive bonus; two times the annual COBRA rate, grossed up for FICA and income taxes, in effect at the time of termination for Mr. Walker and his family. The amounts were not reduced to their present value. |
Benefits and payments upon termination | Voluntary termination | Termination without cause | For cause termination | Death, disability, or retirement | ||||
Short-term incentives: | ||||||||
Annual incentives1 | $– | $38,782 | $– | $38,782 | ||||
Long-term incentives: | ||||||||
LTPP 11-13 award2 | $115,393 | $115,393 | $– | $115,393 | ||||
LTPP 12-14 award3 | $– | $68,337 | $– | $68,337 | ||||
LTPP 13-15 award3 | $– | $25,139 | $– | $25,139 | ||||
Life insurance proceeds | $– | $– | $– | $960,116 | ||||
Cash severance4 | $– | $227,426 | $– | $– | ||||
Total compensation | $115,393 | $475,077 | $– | $1,207,767 |
1 | Reflects the amount Mr. Frommeyer would receive with respect to the 2013 short-term incentive payment under the PIP upon a termination of employment, except for cause, on December 31, 2013. Mr. Frommeyer would not be eligible to receive a PIP award payment upon a voluntary termination on December 31, 2013. The PIP requires that plan participants be employed on the date PIP awards are paid. Payment of 2013 PIP was made on March 7, 2013. |
2 | Reflects the amount Mr. Frommeyer would receive with respect to the 2011-2013 awards under the LTPP upon a termination of employment, except for cause, on December 31, 2013. |
3 | Reflects the amount Mr. Frommeyer would receive with respect to the 2012-2014 and 2013-2015 awards under the LTPP upon termination without cause or due to substantial reorganization, or for death, disability or retirement (not eligible), on December 31, 2013. Mr. Frommeyer would not have qualified for retirement under the LTPP and would forfeit the target award opportunity granted in the year of termination unless termination is due to death or disability or if the termination is without cause or due to substantial |
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reorganization. Accordingly, the amounts shown assume a two-thirds distribution of the total 2012-2014 award, which would have been paid in 2015, and a one-third distribution of the total 2013-2015 award, which would have been paid in 2016, using a performance score that was estimated as of December 31, 2013. The amounts were not reduced to their present value. | |
4 | Includes an estimate of the amount we would pay under the severance plan guidelines for executives described above. For purposes of this table, we assumed a payment based on twelve months of base salary and $6,800, in lieu of outplacement services. |
Benefits and payments upon termination | Voluntary termination | Termination without cause or for good reason following a substantial reorganization | For cause termination | Death, disability, or retirement | ||||
Short-term incentives: | ||||||||
Annual incentive1 | $455,338 | $– | $– | $455,338 | ||||
Long-term incentives: | ||||||||
LTPP 11-13 award2 | $1,476,750 | $1,476,750 | $– | $1,476,750 | ||||
LTPP 12-14 award3 | $996,980 | $996,980 | $– | $996,980 | ||||
LTPP 13-15 award3 | $321,718 | $321,718 | $– | $321,718 | ||||
Life insurance proceeds | $– | $– | $– | $492,300 | ||||
Cash severance4 | $– | $1,358,705 | $– | $– | ||||
Total compensation | $3,250,786 | $4,154,153 | $– | $3,743,086 |
1 | Reflects the amount Mr. Rasmussen would receive with respect to the 2013 short-term incentive payment under the PIP upon a termination of employment, except for cause, on December 31, 2013. The PIP requires that plan participants be employed on the date PIP awards are paid. Payment of 2013 PIP was made on March 7, 2013. However, since Mr. Rasmussen would have qualified for retirement on December 31, 2013, he would receive the PIP payment. The "Termination without cause or for good reason following a substantial reorganization" column does not include the 2013 short-term incentive opportunity, as the severance agreement provides that the short-term incentive payment under the agreement is in lieu of the payment that would be made under the PIP. The amounts were not reduced to their present value. |
2 | Reflects the amount Mr. Rasmussen would receive with respect to the 2011-2013 awards under the LTPP upon a termination of employment, except for cause, on December 31, 2013. |
3 | Reflects the amount Mr. Rasmussen would receive with respect to the 2012-2014 and 2013-2015 awards under the LTPP upon termination on December 31, 2013. Mr. Rasmussen would have qualified for retirement under the LTPP. Accordingly, the amounts shown assume a two-thirds distribution of the total 2012-2014 award, which would be paid in 2015, and a one-third distribution of the total 2013-2015 award, which would be paid in 2016, using a performance score that was estimated as of December 31, 2013, which would have been paid in 2015. The amounts were not reduced to their present value. |
4 | Includes lump-sum cash amounts equal to the sum of two times base salary; three times the 2013 matching amounts in the Nationwide Savings Plan and Nationwide Supplemental Defined Contribution Plan; two times the 2013 short-term incentive bonus; three times the annual COBRA rate, grossed up for FICA and income taxes, in effect at the time of termination for Mr. Rasmussen and his family. The amounts were not reduced to their present value. |
Benefits and payments upon termination | Voluntary termination | Termination without cause or for good reason following a substantial reorganization | For cause termination | Death, disability, or retirement | ||||
Short-term incentives: | ||||||||
Sales Incentive1 | $– | $– | $– | $229,814 | ||||
Long-term incentives: | ||||||||
LTPP 11-13 award2 | $382,460 | $382,460 | $– | $382,460 | ||||
LTPP 12-14 award3 | $– | $246,682 | $– | $246,682 | ||||
LTPP 13-15 award3 | $– | $83,321 | $– | $83,321 | ||||
Life insurance proceeds | $– | $– | $– | $960,600 | ||||
Cash severance4 | $– | $365,254 | $– | $– | ||||
Total compensation | $382,460 | $1,077,717 | $– | $1,902,877 |
1 | Reflects the amount Mr. Carter would receive with respect to the 2013 short-term incentive payment under the SIP upon a termination of employment, except for cause, on December 31, 2013. Mr. Carter would not be eligible to receive a SIP award payment upon a voluntary termination on December 31, 2013. We require that SIP participants be employed on the date SIP awards are paid. Payment of 2013 SIP was made on March 7, 2013. The "Termination without cause or for good reason following a substantial reorganization" column does not include the 2013 short-term incentive opportunity, as the severance agreement provides that the short-term incentive payment under the agreement is in lieu of the payment that would be made under the SIP. The amounts were not reduced to their present value. |
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2 | Reflects the amount Mr. Carter would receive with respect to the 2011-2013 awards under the LTPP upon a termination of employment, except for cause, on December 31, 2013. |
3 | Reflects the amount Mr. Carter would receive with respect to the 2012-2014 and 2013-2015 awards under the LTPP upon termination without cause or due to substantial reorganization, or for death, disability or retirement (not eligible), on December 31, 2013. Mr. Carter would not have qualified for retirement under the LTPP and would forfeit the target award opportunity granted in the year of termination unless termination is due to death or disability or if the termination is without cause. Accordingly, the amounts shown assume a two-thirds distribution of the total 2012-2014 award, which would have been paid in 2015, and a one-third distribution of the total 2013-2015 award, which would have been paid in 2016, using a performance score that was estimated as of December 31, 2013. The amounts were not reduced to their present value. |
4 | Includes lump-sum cash amounts equal to the sum of one times base salary; one times the 2013 matching amounts in the Nationwide Savings Plan and Nationwide Supplemental Defined Contribution Plan; one times the 2013 short-term incentive bonus; one times the annual COBRA rate, grossed up for FICA and income taxes, in effect at the time of termination for Mr. Carter and his family. The amounts were not reduced to their present value. |
Benefits and payments upon termination | Voluntary termination | Termination without cause | For cause termination | Death, disability, or retirement | ||||
Short-term incentives: | ||||||||
Annual incentive1 | $– | $235,990 | $– | $235,990 | ||||
Long-term incentives: | ||||||||
LTPP 11-13 award2 | $312,158 | $312,158 | $– | $312,158 | ||||
LTPP 12-14 award3 | $– | $205,646 | $– | $205,646 | ||||
LTPP 13-15 award3 | $– | $68,005 | $– | $68,005 | ||||
Life insurance proceeds | $– | $– | $– | $1,397,133 | ||||
Cash severance4 | $– | $287,498 | $– | $– | ||||
Total compensation | $312,158 | $1,109,297 | $– | $2,218,932 |
1 | Reflects the amount Mr. Henderson would receive with respect to the 2013 short-term incentive payment under the PIP upon a termination of employment, except for cause, on December 31, 2013. Mr. Henderson would not be eligible to receive a PIP award payment upon a voluntary termination on December 31, 2013. The PIP requires that plan participants be employed on the date PIP awards are paid. Payment of 2013 PIP was made on March 7, 2013. |
2 | Reflects the amount Mr. Henderson would receive with respect to the 2011-2013 awards under the LTPP upon a termination of employment, except for cause, on December 31, 2013. |
3 | Reflects the amount Mr. Henderson would receive with respect to the 2012-2014 and 2013-2015 operating revenue growth/capital strength awards under the LTPP upon termination without cause or due to substantial reorganization, or for death, disability or retirement (not eligible), on December 31, 2013. Mr. Henderson would not have qualified for retirement under the LTPP and would forfeit the target award opportunity granted in the year of termination unless termination is due to death or disability or if the termination is without cause. Accordingly, the amounts shown assume a two-thirds distribution of the total 2012-2014 award, which would have been paid in 2015, and a one-third distribution of the total 2013-2015 award, which would have been paid in 2016, using a performance score that was estimated as of December 31, 2013. |
4 | Includes an estimate of the amount we would pay under the severance plan guidelines for executives described above. For purposes of this table, we assumed a payment based on twelve months of base salary and $6,800, in lieu of outplacement services. |
Benefits and payments upon termination | Voluntary termination | Termination without cause | For cause termination | Death, disability, or retirement | ||||
Short-term incentives: | ||||||||
Sales Incentive | $– | $– | $– | $– | ||||
Long-term incentives: | ||||||||
LTPP 11-13 awards1 | $– | $– | $– | $– | ||||
LTPP 12-14 awards1 | $– | $– | $– | $– | ||||
Life insurance proceeds | $– | $– | $– | $– | ||||
Cash severance2 | $– | $– | $– | $– | ||||
Total compensation | $– | $1,035,421 | $– | $– |
1 | Mr. Hilsheimer will receive LTPP award payments for the 2011-2013 and 2012-2014 award grants. However, there is no allocation to us for any portion of the LTPP payments. |
2 | Reflects the lump-sum cash payment to Mr. Hilsheimer upon his termination date in accordance with his severance agreement. The lump sum payment amount was the sum of two times base salary; two times the 2013 matching amounts in the Nationwide Savings Plan and Nationwide Supplemental Defined Contribution Plan; two times the 2013 short-term incentive bonus; two times the annual COBRA rate, grossed up for FICA and income taxes, in effect at the time of termination for Mr. Hilsheimer and his family. |
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Name and address of beneficial owner | Amount and nature of beneficial ownership | Percent of class | ||
Nationwide Financial Services, Inc. 1 Nationwide Plaza Columbus, Ohio 43215 | 3,814,779 shares | 100% |
• | using position at Nationwide or affiliation with any Nationwide company for personal gain or advantage; |
• | any interest or association that interferes with independent exercise of judgment in the best interest of Nationwide; and |
• | directly or indirectly having any position with or substantial interest in any business or property or engaging in any employment or other activity, which takes time and attention away from performance of Nationwide job duties. |
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KPMG LLP | ||
Suite 500 | ||
191 West Nationwide Blvd. Columbus, OH 43215-2568 |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholder
Nationwide Life Insurance Company:
We have audited the accompanying consolidated balance sheets of Nationwide Life Insurance Company and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2013. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nationwide Life Insurance Company and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Columbus, Ohio
February 28, 2014
KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity. |
F-1
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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Operations
(in millions)
Year ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(As Adjusted) | ||||||||||||
Revenues | ||||||||||||
Policy charges | $ | 1,849 | $ | 1,670 | $ | 1,506 | ||||||
Premiums | 724 | 635 | 531 | |||||||||
Net investment income | 1,849 | 1,825 | 1,844 | |||||||||
Net realized investment gains (losses), net of other-than-temporary impairment losses | 678 | 319 | (1,676 | ) | ||||||||
Other revenues | 17 | 7 | 3 | |||||||||
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| |||||||
Total revenues | $ | 5,117 | $ | 4,456 | $ | 2,208 | ||||||
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| |||||||
Benefits and expenses | ||||||||||||
Interest credited to policyholder account values | $ | 1,067 | $ | 1,038 | $ | 1,033 | ||||||
Benefits and claims | 1,354 | 1,227 | 1,062 | |||||||||
Policyholder dividends | 59 | 54 | 67 | |||||||||
Amortization of deferred policy acquisition costs | 374 | 575 | 65 | |||||||||
Other expenses, net of deferrals | 922 | 863 | 830 | |||||||||
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| |||||||
Total benefits and expenses | $ | 3,776 | $ | 3,757 | $ | 3,057 | ||||||
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| |||||||
Income (loss) before federal income taxes and noncontrolling interests | $ | 1,341 | $ | 699 | $ | (849 | ) | |||||
Federal income tax expense (benefit) | 313 | 99 | (427 | ) | ||||||||
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| |||||||
Net income (loss) | $ | 1,028 | $ | 600 | $ | (422 | ) | |||||
Less: Loss attributable to noncontrolling interest, net of tax | (82 | ) | (61 | ) | (56 | ) | ||||||
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| |||||||
Net income (loss) attributable to Nationwide Life Insurance Company | $ | 1,110 | $ | 661 | $ | (366 | ) | |||||
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|
|
See accompanying notes to consolidated financial statements and Note 2 for disclosure of the change in accounting principle.
F-2
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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Comprehensive Income (Loss)
(in millions)
Year ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(As Adjusted) | ||||||||||||
Net income (loss) | $ | 1,028 | $ | 600 | $ | (422 | ) | |||||
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| |||||||
Other comprehensive (loss) income, net of tax | ||||||||||||
Changes in: | ||||||||||||
Net unrealized (losses) gains on available-for-sale securities | (663 | ) | 571 | 317 | ||||||||
Other | (7 | ) | (5 | ) | 12 | |||||||
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Total other comprehensive (loss) income, net of tax | $ | (670 | ) | $ | 566 | $ | 329 | |||||
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Total comprehensive income (loss) | $ | 358 | $ | 1,166 | $ | (93 | ) | |||||
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Less: Comprehensive loss attributable to noncontrolling interests, net of tax | (82 | ) | (61 | ) | (56 | ) | ||||||
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Total comprehensive income (loss) attributable to Nationwide Life Insurance Company | $ | 440 | $ | 1,227 | $ | (37 | ) | |||||
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|
See accompanying notes to consolidated financial statements and Note 2 for disclosure of the change in accounting principle.
F-3
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
(in millions, except for share and per share amounts)
December 31, | ||||||||
2013 | 2012 | |||||||
Assets | ||||||||
Investments | ||||||||
Fixed maturity securities, available-for-sale | $ | 32,249 | $ | 31,811 | ||||
Mortgage loans, net of allowance | 6,341 | 5,827 | ||||||
Policy loans | 987 | 980 | ||||||
Short-term investments | 411 | 1,034 | ||||||
Other investments | 767 | 639 | ||||||
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| |||||
Total investments | $ | 40,755 | $ | 40,291 | ||||
Cash and cash equivalents | 61 | 62 | ||||||
Accrued investment income | 603 | 566 | ||||||
Deferred policy acquisition costs | 3,778 | 3,249 | ||||||
Goodwill | 200 | 200 | ||||||
Other assets | 3,979 | 4,362 | ||||||
Separate account assets | 84,069 | 71,440 | ||||||
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Total assets | $ | 133,445 | $ | 120,170 | ||||
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Liabilities and equity | ||||||||
Liabilities | ||||||||
Future policy benefits and claims | $ | 36,765 | $ | 36,154 | ||||
Short-term debt | 278 | 300 | ||||||
Long-term debt | 707 | 1,038 | ||||||
Other liabilities | 4,122 | 4,507 | ||||||
Separate account liabilities | 84,069 | 71,440 | ||||||
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| |||||
Total liabilities | $ | 125,941 | $ | 113,439 | ||||
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Shareholder’s equity | ||||||||
Common stock ($1 par value; authorized - 5,000,000 shares, issued and outstanding - 3,814,779 shares) | $ | 4 | $ | 4 | ||||
Additional paid-in capital | 1,718 | 1,718 | ||||||
Retained earnings | 4,520 | 3,410 | ||||||
Accumulated other comprehensive income | 582 | 1,252 | ||||||
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| |||||
Total shareholder’s equity | $ | 6,824 | $ | 6,384 | ||||
Noncontrolling interest | 680 | 347 | ||||||
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Total equity | $ | 7,504 | $ | 6,731 | ||||
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| |||||
Total liabilities and equity | $ | 133,445 | $ | 120,170 | ||||
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|
|
See accompanying notes to consolidated financial statements and Note 2 for disclosure of the change in accounting principle.
F-4
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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Changes in Equity
(in millions)
Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income | Total shareholder’s equity | Non-controlling interest | Total equity | ||||||||||||||||||||||
Balance as of December 31, 2010 | $ | 4 | $ | 1,718 | $ | 3,155 | $ | 357 | $ | 5,234 | $ | 355 | $ | 5,589 | ||||||||||||||
Comprehensive (loss) income: | ||||||||||||||||||||||||||||
Net loss | — | — | (366 | ) | — | (366 | ) | (56 | ) | (422 | ) | |||||||||||||||||
Other comprehensive income | — | — | — | 329 | 329 | — | 329 | |||||||||||||||||||||
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Total comprehensive (loss) income | — | — | (366 | ) | 329 | (37 | ) | (56 | ) | (93 | ) | |||||||||||||||||
Change in noncontrolling interest | — | — | — | — | — | 46 | 46 | |||||||||||||||||||||
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Balance as of December 31, 2011 | $ | 4 | $ | 1,718 | $ | 2,789 | $ | 686 | $ | 5,197 | $ | 345 | $ | 5,542 | ||||||||||||||
Cash dividend paid | — | — | (40 | ) | — | (40 | ) | — | (40 | ) | ||||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||
Net income (loss) | — | — | 661 | — | 661 | (61 | ) | 600 | ||||||||||||||||||||
Other comprehensive income | — | — | — | 566 | 566 | — | 566 | |||||||||||||||||||||
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Total comprehensive income (loss) | — | — | 661 | 566 | 1,227 | (61 | ) | 1,166 | ||||||||||||||||||||
Change in noncontrolling interest | — | — | — | — | — | 63 | 63 | |||||||||||||||||||||
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Balance as of December 31, 2012 | $ | 4 | $ | 1,718 | $ | 3,410 | $ | 1,252 | $ | 6,384 | $ | 347 | $ | 6,731 | ||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||
Net income (loss) | — | — | 1,110 | — | 1,110 | (82 | ) | 1,028 | ||||||||||||||||||||
Other comprehensive loss | — | — | — | (670 | ) | (670 | ) | — | (670 | ) | ||||||||||||||||||
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Total comprehensive income (loss) | — | — | 1,110 | (670 | ) | 440 | (82 | ) | 358 | |||||||||||||||||||
Change in noncontrolling interest | — | — | — | — | — | 415 | 415 | |||||||||||||||||||||
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Balance as of December 31, 2013 | $ | 4 | $ | 1,718 | $ | 4,520 | $ | 582 | $ | 6,824 | $ | 680 | $ | 7,504 | ||||||||||||||
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See accompanying notes to consolidated financial statements and Note 2 for disclosure of the change in accounting principle.
F-5
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(in millions)
Year ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
(As Adjusted) | ||||||||||||
Cash flows from operating activities: | ||||||||||||
Net income (loss) | $ | 1,028 | $ | 600 | $ | (422 | ) | |||||
Adjustments to net income (loss): | ||||||||||||
Net realized investment (gains) losses, net of other-than-temporary impairment losses | (678 | ) | (319 | ) | 1,676 | |||||||
Interest credited to policyholder account values | 1,067 | 1,038 | 1,033 | |||||||||
Capitalization of deferred policy acquisition costs | (604 | ) | (470 | ) | (604 | ) | ||||||
Amortization of deferred policy acquisition costs | 374 | 575 | 65 | |||||||||
Amortization and depreciation | 77 | 80 | 48 | |||||||||
Deferred tax expense (benefit) | 346 | 243 | (482 | ) | ||||||||
Changes in: | ||||||||||||
Policy liabilities | (475 | ) | (548 | ) | (608 | ) | ||||||
Derivatives, net | (483 | ) | (490 | ) | (364 | ) | ||||||
Other, net | 88 | (84 | ) | (265 | ) | |||||||
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Net cash provided by operating activities | $ | 740 | $ | 625 | $ | 77 | ||||||
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Cash flows from investing activities: | ||||||||||||
Proceeds from maturities of available-for-sale securities | $ | 3,689 | $ | 2,909 | $ | 2,705 | ||||||
Proceeds from sales of available-for-sale securities | 1,091 | 796 | 1,585 | |||||||||
Purchases of available-for-sale securities | (6,842 | ) | (5,167 | ) | (6,176 | ) | ||||||
Proceeds from repayments and sales of mortgage loans | 1,091 | 1,048 | 1,124 | |||||||||
Issuances and purchases of mortgage loans | (1,593 | ) | (1,114 | ) | (751 | ) | ||||||
Net decrease (increase) in short-term investments | 654 | 98 | (61 | ) | ||||||||
Collateral (paid) received, net | (637 | ) | (208 | ) | 359 | |||||||
Other, net | 42 | (12 | ) | 104 | ||||||||
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Net cash used in investing activities | $ | (2,505 | ) | $ | (1,650 | ) | $ | (1,111 | ) | |||
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Cash flows from financing activities: | ||||||||||||
Net change in short-term debt | $ | (22 | ) | $ | (477 | ) | $ | 477 | ||||
Proceeds from issuance of long-term debt | 2 | 13 | 13 | |||||||||
Cash dividend paid to Nationwide Financial Services, Inc. | — | (40 | ) | — | ||||||||
Repayments of long-term debt | (299 | ) | — | — | ||||||||
Investment and universal life insurance product deposits | 6,139 | 5,566 | 5,314 | |||||||||
Investment and universal life insurance product withdrawals | (4,034 | ) | (4,063 | ) | (5,024 | ) | ||||||
Other, net | (22 | ) | 39 | (34 | ) | |||||||
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Net cash provided by financing activities | $ | 1,764 | $ | 1,038 | $ | 746 | ||||||
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Net (decrease) increase in cash and cash equivalents | $ | (1 | ) | $ | 13 | $ | (288 | ) | ||||
Cash and cash equivalents, beginning of period | 62 | 49 | 337 | |||||||||
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Cash and cash equivalents, end of period | $ | 61 | $ | 62 | $ | 49 | ||||||
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See accompanying notes to consolidated financial statements and Note 2 for disclosure of the change in accounting principle.
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Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 2013, 2012 and 2011
(1) | Nature of Operations |
Nationwide Life Insurance Company (“NLIC,” or collectively with its subsidiaries, “the Company”) was incorporated in 1929 and is an Ohio domiciled stock life insurance company. The Company is a member of the Nationwide group of companies (“Nationwide”), 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 (“Nationwide Corp.”), a majority-owned subsidiary of NMIC.
Wholly-owned subsidiaries of NLIC as of December 31, 2013 include Nationwide Life and Annuity Insurance Company (“NLAIC”), Nationwide Investment Services Corporation (“NISC”) and Nationwide Investment Advisor (“NIA”). NLAIC primarily offers universal life insurance, variable universal life insurance, term life insurance, corporate-owned life insurance (“COLI”) and individual annuity contracts on a non-participating basis. NISC is a registered broker-dealer. NIA is a registered investment advisor.
The Company is a leading provider of long-term savings and retirement products in the United States (“U.S.”). The Company develops and sells a diverse range of products and services including individual annuities, private and public sector group retirement plans, investment products sold to institutions, life insurance and 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 who market products directly to a customer base include Nationwide Retirement Solutions, Inc. (“NRS”) and Nationwide Financial Network (“NFN”) producers, which includes the agency distribution force of the Company’s ultimate parent company, NMIC.
As of December 31, 2013 and 2012, the Company did not have a significant concentration of financial instruments in a single investee, industry or geographic region of the U.S. Also, the Company did not have a concentration of business transactions with a particular customer, lender, distribution source, market or geographic region of the U.S. in which the Company is overly vulnerable to a single event which could cause a severe impact to the Company’s financial position.
(2) | Summary of Significant Accounting Policies |
Basis of Presentation
The consolidated financial statements include the accounts of NLIC and companies in which NLIC directly or indirectly has a controlling financial interest. The consolidated financial statements include majority-owned subsidiaries and consolidated variable interest entities (“VIEs”). All significant intercompany accounts and transactions have been eliminated.
Entities in which NLIC does not have a controlling interest, but the Company has significant influence over the operating and financing decisions and also certain other investments, are reported using the equity method.
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Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
Use of Estimates
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The preparation of the consolidated financial statements in accordance with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates include the balance and amortization of deferred policy acquisition costs (“DAC”), legal and regulatory reserves, certain investment and derivative valuations including investment impairment losses, future policy benefits and claims including the valuation of embedded derivatives resulting from living benefit guarantees on variable annuity contracts, goodwill, provision for income taxes and valuation of deferred tax assets. Actual results could differ significantly from those estimates.
Revenues and Benefits
Investment and universal life insurance products. Investment products are long duration contracts that do not subject the Company to significant risk arising from mortality (the relative incidence of death in a given time) or morbidity (the relative incidence of disability resulting from disease or physical impairment). These include variable and fixed deferred annuity contracts in the accumulation phase with both individuals and groups and certain annuities without life contingencies. Universal life insurance products include long duration insurance contracts that do not have fixed or guaranteed terms. These include universal life insurance, variable universal life insurance, COLI, bank-owned life insurance (“BOLI”) and other interest-sensitive life insurance policies. Revenues for investment products and universal life insurance products consist of net investment income, surrender charges and other policy charges earned and assessed against policy account balances during the period. Policy charges are assessed on a daily or monthly basis and recognized as revenue when assessed and earned. Assessments for services provided in future periods are recorded as unearned revenue and recognized as revenue over the periods benefited. Surrender charges are recognized as revenue upon surrender of a contract in accordance with contractual terms. Policy benefits and claims that are charged to expense include interest credited to policyholder accounts and benefits and claims incurred in the period in excess of related policyholder accounts.
Traditional life insurance products. Traditional life insurance products include those products with fixed and guaranteed terms, primarily consisting of whole life insurance, term life insurance and certain annuities with life contingencies. Premiums for traditional life insurance products are generally recognized as revenue when due. For certain annuities with life contingencies, any excess of gross premium over the net premium is deferred and recognized with the amount of expected future benefits. Benefits and expenses are associated with earned premiums so that profits are recognized over the life of the contract. This association is accomplished through the provision for future policy benefits and the deferral and amortization of policy acquisition costs.
Future Policy Benefits and Claims
Investment and universal life insurance products. The Company calculates its liability for future policy benefits and claims for investment products in the accumulation phase and for universal life insurance policies as the policy accrued account balance, which represents participants’ net deposits adjusted for investment performance, interest credited and applicable contract charges.
F-8
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The Company offers certain universal life insurance, variable universal life insurance and variable annuity products with secondary guarantees, guaranteed minimum death benefits (“GMDB”), and guaranteed minimum income benefits (“GMIB”). Liabilities for these guarantees are calculated by multiplying the current benefit ratio by the cumulative assessments recorded from contract inception through the balance sheet date less the cumulative secondary guarantee benefit payments plus interest. The Company regularly evaluates its experience and assumptions and adjusts the benefit ratio as appropriate. If experience or assumption changes result in a new benefit ratio, the reserves are adjusted to reflect the changes with a related charge or credit to other benefits and claims in the period of evaluation. Determination of the expected benefit payments and assessments are based on a range of scenarios and assumptions including those related to market rates of return and volatility, contract surrenders and mortality experience. The accounting for these guarantees impacts estimated gross profits used to calculate the balance and amortization of DAC and other. Refer to Note 4 for further discussion of these guarantees.
Guarantees to variable annuity contractholders can include a return of no less than the total deposits made on the contract less any customer withdrawals, total deposits made on the contract less any customer withdrawals plus a minimum return, or the highest contract value on a specified anniversary date minus any customer withdrawals following the contract anniversary. In addition, these guarantees can include benefits payable in the event of death, upon annuitization, upon periodic withdrawal or at specified dates during the accumulation period. Refer to Note 4 for further discussion of these guarantees.
The Company’s guaranteed minimum accumulation benefit (“GMAB”) and guaranteed living withdrawal benefit (“GLWB”) are living benefit guarantees which represent embedded derivatives in variable annuity contracts that are required to be separated from, and valued apart from, the host variable annuity contracts. The embedded derivatives are held at fair value and include the present value of attributed fees. Subsequent changes in the fair value of the embedded derivatives are recognized in earnings as a component of net realized investment gains and losses. The fair value of the embedded derivatives is calculated based on a combination of capital market and actuarial assumptions. Projections of cash flows inherent in the valuation of the embedded derivatives incorporate numerous assumptions including, but not limited to, mortality, lapse rates, index volatility, wait period (the number of years the policyholder is assumed to wait prior to beginning withdrawals once eligible), efficiency of benefit utilization (the percent of the maximum permitted withdrawal that a policyholder takes) and discounting, including liquidity and non-performance risk (the risk that the liability will not be fulfilled and affects the value at which the liability is transferred). The assumptions used to calculate the fair value of embedded derivatives are reviewed as part of an annual comprehensive study of assumptions. Quarterly, consideration is given as to whether adjustments to these assumptions are necessary.
The Company’s equity indexed products (life and annuity) have the policyholders’ interest credits based on market performance with caps and floors. The interest credits represent embedded derivatives within the insurance contract and therefore are required to be separated from, and valued apart from, the host contracts. The embedded derivatives are held at fair value. Subsequent changes in the fair value of the embedded derivatives are recognized in earnings as a component of interest credited. The fair value of the embedded derivatives is calculated based on a combination of capital market and actuarial assumptions. Projections of cash flows inherent in the valuation of the embedded derivative incorporate numerous assumptions including, but not limited to, mortality, lapse rates and index volatility. The assumptions used to calculate the fair value of embedded derivatives are reviewed as part of an annual comprehensive study of assumptions. Quarterly, consideration is given as to whether adjustments to these assumptions are necessary.
Traditional life insurance products. The process of calculating reserve amounts for traditional life insurance products involves the use of a number of assumptions, including those related to persistency, mortality, morbidity, interest rates (the rates expected to be paid or received on financial instruments) and certain other expenses.
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Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The liability for future policy benefits and claims for traditional life insurance policies was determined using the net level premium method with weighted average interest rates of 6.6% and estimates of mortality, morbidity, investment yields and persistency that were used or being experienced at the time the policies were issued with a provision for adverse deviation.
The liability for future policy benefits for certain annuities with life contingencies was calculated using the present value of future benefits and certain expenses discounted using weighted average interest rates of 5.3% with a provision for adverse deviation.
Reinsurance ceded
The Company cedes insurance to other companies in order to limit potential losses and to diversify its exposures. Such agreements do not relieve the original insurer from its primary obligation to the policyholder in the event the reinsurer is unable to meet the obligations it has assumed. Reinsurance premiums ceded and reinsurance recoveries on benefits and claims incurred are deducted from the respective income and expense accounts. Assets and liabilities related to reinsurance ceded are reported in the consolidated balance sheets on a gross basis, separately from the related future policy benefits and claims of the Company.
Deferred Policy Acquisition Costs
The Company has deferred certain acquisition costs that are directly related to the successful acquisition of new and renewal insurance and investment contracts. The methods and assumptions used to amortize and assess recoverability of the DAC balance depend on the type of product.
Investment and universal life insurance products. For certain investment and universal life insurance products, DAC is amortized with interest over the lives of the policies in relation to the present value of estimated gross profits, which is determined primarily from projected interest margins, policy charges and net realized investment gains and losses, less policy benefits and other expenses. The DAC asset related to investment and universal life insurance products is adjusted to reflect the impact of unrealized gains and losses on available-for-sale securities with the corresponding adjustment recorded in accumulated other comprehensive income (“AOCI”). This adjustment to DAC represents the change in amortization that would have been required as a charge or credit to operations had such unrealized amounts been realized. DAC for investment and universal life insurance products is subject to recoverability testing in the year of policy issuance and DAC for universal life insurance products is also subject to loss recognition testing at the end of each reporting period.
The Company regularly evaluates and adjusts the DAC balance when actual gross profits in a given reporting period vary from management’s initial estimates. Additionally, 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 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, renewal premiums and mortality. The Company refers to this process as “unlocking.” Quarterly, consideration is given as to whether adjustments to these assumptions are necessary. The Company uses a reversion to the mean process to determine the assumption for the future net separate account investment performance. This process 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 Company’s long-term assumption for net separate account investment performance is approximately 7% growth per year.
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Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
Changes in assumptions and the emergence of actual gross profits can have a significant impact on the amount of DAC reported for investment and universal life insurance products and their related amortization patterns. Additionally, the amortization of DAC can be affected by the change in the valuation of the Company’s variable annuity guarantees. SeeFuture Policy Benefits and Claims for further discussion of the valuation of the Company’s variable annuity guarantees. In the event actual experience differs from assumptions or future assumptions are revised, the Company will record an increase or decrease in DAC amortization expense, which could be significant.
Traditional life insurance. DAC is amortized with interest over the premium-paying period of the related policies in proportion to premium revenue recognized. These assumptions are consistent with those used in the calculation of liabilities for future policy benefits at issuance. DAC is evaluated for recoverability at the time of policy issuance, and loss recognition testing is conducted each reporting period.
Refer to Note 5 for discussion regarding assumption changes impacting DAC amortization and related balances.
Investments
Available-for-sale securities. Available-for-sale securities are reported at fair value, with unrealized holding gains and losses reported as a separate component of other comprehensive income, net of adjustments for DAC, future policy benefits and claims, policyholder dividend obligations and deferred federal income taxes. Realized gains and losses on sales of available-for-sale securities are recognized in income based on the specific identification method. Interest and dividend income is recognized when earned.
As of December 31, 2013 and 2012, 99% of fixed maturity securities were priced using external source data. Independent pricing services are most often utilized (86% as of December 31, 2013 and 2012) to determine the fair value of securities for which market quotations are available. For these securities, the Company obtains the pricing services’ methodologies, inputs and assumptions and classifies the investments accordingly in the fair value hierarchy.
A corporate pricing matrix or an internally developed pricing model is used in valuing certain corporate debt securities. The corporate pricing matrix is developed using private spreads for corporate securities with varying weighted average lives and credit quality ratings. The weighted average life and credit quality rating of a particular fixed maturity security to be priced using the corporate pricing matrix are important inputs into the model and are used to determine a corresponding spread that is added to the appropriate U.S. Treasury yield to create an estimated market yield for that security. The estimated market yield and other relevant factors are then used to estimate the fair value of the particular security.
Non-binding broker quotes are also utilized to determine the fair value of certain corporate debt, mortgage-backed and other asset-backed securities when quotes are not available from independent pricing services, corporate pricing matrix or internal pricing models. These securities are classified with the lowest priority in the fair value hierarchy as only one broker quote is ordinarily obtained, the investment is not traded on an exchange, the pricing is not available to other entities and/or the transaction volume in the same or similar investments has decreased. Inputs used in the development of prices are not provided to the Company by the brokers, as the brokers often do not provide the necessary transparency into their quotes and methodologies. The Company performs reviews and tests to ensure that quotes are a reasonable estimate of the investments’ fair value at least annually. Price movements of broker quotes are subject to validation and require approval from the Company’s management. Management uses its knowledge of the investment and current market conditions to determine if the price is indicative of the investment’s fair value.
When the collectability of contractual interest payments on fixed maturity securities is considered doubtful, such securities are placed in non-accrual status and any accrued interest is excluded from investment income. These securities are not restored to accrual status until the Company determines that payment of future principal and interest is probable.
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Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
For investments in certain residential and commercial mortgage-backed securities, the Company recognizes income and amortizes discounts and premiums using the effective-yield method based on prepayment assumptions and the estimated economic life of the securities. When actual prepayments differ significantly from estimated prepayments, the effective-yield is recalculated to reflect actual payments to date and anticipated future payments. Any resulting adjustment is included in net investment income in the period the estimates are revised. All other investment income is recorded using the effective-yield method without anticipating the impact of prepayments.
The Company periodically reviews its available-for-sale securities to determine if any decline in fair value to below amortized cost is other-than-temporary. Factors considered in determining whether a decline is other-than-temporary include the length of time a security has been in an unrealized loss position, the severity of the unrealized loss, reasons for the decline in value and expectations for the amount and timing of a recovery in fair value.
In assessing corporate debt securities for other-than-temporary impairment, the Company evaluates the ability of the issuer to meet its debt obligations, the value of the company or specific collateral securing the debt, the Company’s intent to sell the security and whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost basis. The Company evaluates U.S. Treasury securities and obligations of U.S. Government corporations and agencies and obligations of states, political subdivisions and foreign governments for other-than-temporary impairment by examining similar characteristics.
When evaluating whether residential mortgage-backed securities, commercial mortgage-backed securities and other asset-backed securities are other-than-temporarily impaired, the Company examines 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, the quality of any credit guarantors, the Company’s intent to sell the security and whether it is more likely than not it will be required to sell the security before the recovery of its amortized cost basis.
The Company evaluates its intent to sell on an individual security basis. Other-than-temporary impairment losses on debt securities when the Company does not intend to sell the security and it is not more likely than not it will be required to sell the security prior to recovery of the security’s amortized cost basis are bifurcated with the credit portion of the impairment loss being recognized in earnings and the non-credit loss portion of the impairment and any subsequent changes in the fair value of those debt securities being recognized in other comprehensive income, net of applicable taxes and other offsets. To estimate the credit portion of an impairment loss recognized in earnings, the Company considers the timing and present value of the cash flows. To the extent that the present value of cash flows generated by a debt security is less than the amortized cost, an other-than-temporary impairment is recognized through earnings.
It is reasonably possible that further declines in fair values of such investments, or changes in assumptions or estimates of anticipated recoveries and/or cash flows, may cause further other-than-temporary impairments in the near term, which could be significant.
Mortgage loans, net of allowance. The Company holds commercial mortgage loans that are collateralized by properties throughout the U.S. These mortgage loans are further segregated into the following classes based on the unique risk profiles of the underlying property types: office, industrial, retail, apartment and other. Mortgage loans held-for-investment are held at amortized cost less a valuation allowance.
As part of the underwriting process, specific guidelines are followed to ensure the initial quality of a new mortgage loan. Third-party appraisals are generally obtained to support loaned amounts as the loans are usually collateral dependent.
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Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The collectability and value of a mortgage loan are based on the ability of the borrower to repay and/or the value of the underlying collateral. Many of the Company’s commercial mortgage loans are structured with balloon payment maturities, exposing the Company to risks associated with the borrowers’ ability to make the balloon payment or refinance the property.
The Company actively monitors the credit quality of its mortgage loans to support the development of the valuation allowance. This monitoring process includes quantitative analyses which facilitate the identification of deteriorating loans, and qualitative analyses, which consider other factors relevant to the borrowers’ ability to repay. Loans with deteriorating credit fundamentals are identified through special surveillance procedures and are evaluated based on the severity of their deterioration and management’s judgment as to the likelihood of loss.
Mortgage loans require a loan-specific reserve when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When management determines that a loan requires a loan-specific reserve, a provision for loss is established equal to the difference between the carrying value and either the fair value of the collateral less costs to sell or the present value of expected future cash flows discounted at the loan’s market interest rate. Loan-specific reserve charges are recorded in net realized investment gains and losses. In the event a loan-specific reserve charge is reversed, the recovery is recorded in net realized investment gains and losses.
In addition to the loan-specific reserves, the Company maintains a non-specific reserve based primarily on loan surveillance categories and property type classes, which reflects management’s best estimate of probable credit losses inherent in the portfolio as of the balance sheet date but not yet attributable to specific loans. Management’s periodic evaluation of the adequacy of the non-specific reserve is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay, the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. Non-specific reserve changes are recorded in net realized investment gains and losses.
Interest income on performing mortgage loans is recognized over the life of the loan using the effective-yield method. Loans in default or in the process of foreclosure are placed on non-accrual status. Interest received on non-accrual status mortgage loans is included in net investment income in the period received. Loans are considered delinquent when contractual payments are 90 days past due.
Policy loans. Policy loans, which are collateralized by the related insurance policy, are held at the outstanding principal balance and do not exceed the net cash surrender value of the policy. As such, no valuation allowance for policy loans is required.
Short-term investments. Short-term investments consist of highly liquid mutual funds and government agency discount notes with maturities of twelve months or less at acquisition. The Company and various affiliates maintains agreements with Nationwide Cash Management Company (“NCMC”), an affiliate, under which NCMC acts as a common agent in handling the purchase and sale of short-term securities for the respective accounts of the participants. Amounts on deposit with NCMC for the benefit of the Company are included in short-term investments on the consolidated balance sheets. The Company carries short-term investments at fair value.
Other investments. Other investments consist primarily of equity method investments in joint ventures and partnerships, equity securities, capital stock with the Federal Home Loan Bank of Cincinnati (“FHLB”) and trading securities.
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Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
Securities lending. The Company has entered into securities lending agreements with a custodial bank whereby eligible securities are loaned to third parties, primarily major brokerage firms. These transactions are used to generate additional income on the securities portfolio. The Company is entitled to receive from the borrower any payments of interest and dividends received on loaned securities during the loan term. The agreements require a minimum of 102% of the fair value of loaned securities to be held as collateral. Cash collateral is invested by the custodial bank in investment-grade securities, which are included in the total investments of the Company. Periodically, the Company may receive non-cash collateral, which would be recorded off-balance sheet. The Company recognizes loaned securities in either available-for-sale or other investments. A securities lending payable is recorded in other liabilities for the amount of cash collateral received. Net income received from securities lending activities is included in net investment income.
Variable interest entities. In the normal course of business, the Company has relationships with VIEs. If the Company determines that it has a variable interest and is the primary beneficiary, it consolidates the VIE. This determination is based on a review of the entity’s contract and other deal related information, such as the entity’s equity investment at risk, decision-making abilities, obligations to absorb economic risks and right to receive economic rewards of the entity. The Company is the primary beneficiary if the Company has the power to direct the activities of the VIE that most significantly impact the economic performance of the entity and the obligation to absorb losses or receive benefits from the entity that could be potentially significant to the VIE.
The majority of the VIEs consolidated by the Company are due to guarantees provided to limited partners related to the amount of tax credits that will be generated by the Low-Income-Housing Tax Credit Funds (“Tax Credit Funds”). The results of operations and financial position of each VIE for which the Company is the primary beneficiary as well as the corresponding noncontrolling interests, are recorded in the consolidated financial statements. Ownership interests held by unrelated third parties in the consolidated VIEs are presented as noncontrolling interests in the equity section of the consolidated financial statements. Loss attributable to noncontrolling interests is excluded from the net income attributable to NLIC on the consolidated statements of operations.
The Company invests in fixed maturity securities that could qualify as VIEs, including corporate securities, mortgage-backed securities and asset-backed securities. The Company is not the primary beneficiary of these securities as the Company does not have the power to direct the activities that most significantly impact the entities’ performance. The Company’s maximum exposure to loss is limited to the carrying values of these securities. There are no liquidity arrangements, guarantees or other commitments by third parties that affect the fair value of the Company’s interest in these assets. Refer to Note 6 for additional disclosures related to these investments.
The Company is not required and does not intend to provide financial or other support outside of contractual requirements to any VIE.
Derivative Instruments
The Company uses derivative instruments to manage exposures and mitigate risks primarily associated with interest rates, equity markets and foreign currency. These derivative instruments primarily include interest rate swaps, futures contracts and options. Certain features embedded in the Company’s indexed products and certain variable annuity contracts require derivative accounting. Refer to the prior discussion ofFuture Policy Benefits and Claims for a description of the valuation applicable to these products. All derivative instruments are held at fair value and are reflected as assets or liabilities in the consolidated balance sheets.
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Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
Fair value of derivative instruments is determined using various valuation techniques relying predominantly on observable market inputs. These inputs include interest rate swap curves, credit spreads, interest rates, counterparty credit risk, equity volatility and equity index levels. In cases where observable inputs are not available, the Company will utilize non-binding broker quotes to determine fair value, and these instruments are classified accordingly in the fair value hierarchy. Price movements of these broker quotes are subject to validation and require approval from the Company’s management. Management uses models to internally value the instruments for comparison to the values received through broker quotes.
For derivatives that are not designated for hedge accounting, the gain or loss on the derivative is primarily recognized in net realized investment gains and losses.
For derivative instruments that are designated and qualify for fair value hedge accounting, the gain or loss on the derivative instrument, as well as the hedged item to the extent of the risk being hedged, are recognized in net realized investment gains and losses.
For derivative instruments that are designated and qualify for cash flow hedge accounting, the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI and reclassified into earnings in the same period or periods that the hedged transaction impacts earnings. The ineffective portion of the derivative’s change in value, if any, along with any of the derivative’s change in value that is excluded from the assessment of hedge effectiveness, are recorded in net realized investment gains and losses.
The Company’s derivative transaction counterparties are generally financial institutions. To reduce the credit risk associated with open contracts, the Company enters into master netting agreements, which permit the closeout and netting of transactions with the same counterparty upon the occurrence of certain events. In addition, the Company attempts to reduce credit risk by obtaining collateral from counterparties. The determination of the need for and the levels of collateral vary based on an assessment of the credit risk of the counterparty. The Company accepts collateral in the form of cash and marketable securities.
Fair Value Measurements
Fair value is defined 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. Fair value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources while unobservable inputs reflect the Company’s view of market assumptions in the absence of observable market information. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. In determining fair value, the Company uses various methods, primarily market and income approaches.
The Company categorizes its fair value measurements 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.
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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The Company categorizes assets and liabilities held at fair value in the consolidated balance sheets as follows:
• | Level 1 – Unadjusted quoted prices accessible in active markets for identical assets or liabilities at the measurement date and mutual funds where the value per share (unit) is determined and published daily and is the basis for current transactions. |
• | 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. Primary inputs to this valuation technique may include comparative trades, bid/asks, interest rate movements, U.S. Treasury rates, London Interbank Offered Rate (“LIBOR”), prime rates, cash flows, maturity dates, call ability, estimated prepayments, and/or underlying collateral values. |
• | 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. |
The Company reviews its fair value hierarchy classifications for assets and liabilities quarterly. Changes in observability of significant valuation inputs identified during these reviews may trigger reclassifications. Reclassifications are reported as transfers at the beginning of the period in which the change occurs.
Fair Value Option
The Company assesses the fair value option election for newly acquired assets or liabilities on a prospective basis. There are no material assets or liabilities for which the Company elected the fair value option.
Federal Income Taxes
The Company recognizes deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, net operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income or loss in the years in which those temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce a deferred tax asset to the amount expected to be realized. Interest expense and any associated penalties which relate to tax years still subject to review by the Internal Revenue Service (“IRS”) are recorded as income tax expense.
The Company provides for federal income taxes based on amounts the Company believes it ultimately will owe. Inherent in the provision for federal income taxes are estimates regarding the deductibility of certain items and the realization of certain tax credits. In the event the ultimate deductibility of certain items or the realization of certain tax credits differs from estimates, the Company may be required to change the provision for federal income taxes recorded in the consolidated financial statements, which could be significant.
Tax 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 with taxing authorities 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.
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Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
NLIC files a separate consolidated federal income tax return, with its subsidiaries, and is eligible to join the NMIC consolidated federal tax return group in 2015.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original maturities of less than three months.
Goodwill
In connection with business acquisitions, the Company recognizes goodwill as the excess of the purchase price over the fair value of net assets acquired as goodwill. Goodwill is not amortized, but is evaluated for impairment at the reporting unit level annually. Goodwill of a reporting unit is tested for impairment on an interim basis, in addition to the annual evaluation if an event occurs or circumstances change which would more likely than not reduce the fair value of a reporting unit below its carrying amount. If a reporting unit’s fair value is less than its carrying value, the Company will calculate implied goodwill. An impairment would be recognized on a reporting unit for the amount that the carrying value of its goodwill exceeds the implied value of its goodwill.
The process of evaluating goodwill for impairment requires several judgments and assumptions to be made to determine the fair value of the reporting units, including the method used to determine fair value, discount rates, expected levels of cash flows, revenues and earnings, and the selection of comparable companies used to develop market-based assumptions. The Company performed its 2013 annual impairment test and determined that no impairment was required.
Closed Block
In connection with the sponsored demutualization of Provident Mutual Life Insurance Company (“Provident”) prior to its acquisition by the Company, Provident established a closed block for the benefit of certain classes of individual participating policies that had a dividend scale payable in 2001. Assets were allocated to the closed block in an amount that produces cash flows which, together with anticipated revenues from closed block business, is reasonably expected to be sufficient to provide for (1) payment of policy benefits, specified expenses and taxes, and (2) the continuation of dividends throughout the life of the Provident policies included in the closed block based upon the dividend scales payable for 2001, if the experience underlying such dividend scales continues.
Assets allocated to the closed block benefit only the holders of the policies included in the closed block and will not revert to the benefit of the Company. No reallocation, transfer, borrowing or lending of assets can be made between the closed block and other portions of the Company’s general account, any of its separate accounts, or any affiliate of the Company without the approval of the Pennsylvania Insurance Department and Ohio Department of Insurance (“ODI”). The closed block will remain in effect as long as any policy in the closed block is in force.
If, over time, the aggregate performance of the closed block assets and policies is better than was assumed in funding the closed block, dividends to policyholders will increase. If, over time, the aggregate performance of the closed block assets and policies is less favorable than was assumed in the funding, dividends to policyholders could be reduced. If the closed block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from the Company’s assets outside of the closed block, which are general account assets.
The assets and liabilities allocated to the closed block are recorded in the Company’s consolidated financial statements on the same basis as other similar assets and liabilities. The carrying amount of closed block liabilities in excess of the carrying amount of closed block assets at the date Provident was acquired by the Company represents the maximum future earnings from the assets and liabilities designated to the closed block that can be recognized in income, for the benefit of stockholders, over the period the policies in the closed block remain in force.
F-17
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
If actual cumulative earnings exceed expected cumulative earnings, the expected earnings are recognized in income. This is because the excess actual cumulative earnings over expected cumulative earnings, which represents undistributed accumulated earnings attributable to policyholders, is recorded as a policyholder dividend obligation. Therefore, the excess will be paid to closed block policyholders as an additional policyholder dividend expense in the future unless it is otherwise offset by future performance of the closed block that is less favorable than originally expected. If actual cumulative performance is less favorable than expected, actual earnings will be recognized in income.
The principal cash flow items that affect the amount of closed block assets and liabilities are premiums, net investment income, purchases and sales of investments, policyholder benefits, policyholder dividends, premium taxes and income taxes. The principal income and expense items excluded from the closed block are management and maintenance expenses, commissions and net investment income and realized gains and losses on investments held outside of the closed block that support the closed block business, all of which enter into the determination of total gross margins of closed block policies. See Note 10 for further disclosure.
Separate Accounts
Separate account assets and liabilities represent contractholders’ funds that have been legally segregated into accounts with specific investment objectives. In the separate account, investment income and gains and losses on investments accrue directly to, and investment risk is borne by, the contractholder. Separate account assets are primarily comprised of public, privately registered and non-registered mutual funds. Separate account assets are recorded at fair value based on the methodology that would be applicable to the underlying assets. The value of separate account liabilities is set to equal the fair value for separate account assets.
Participating Business
Participating business, which refers to policies that participate in profits through policyholder dividends, represented approximately 4% of the Company’s life insurance in force in 2013 (5% in 2012 and 2011) and 38% of the number of life insurance policies in force in 2013 (40% in 2012 and 42% in 2011). The provision for policyholder dividends was based on the respective year’s dividend scales and has been included in future policy benefits and claims in the consolidated balance sheets.
Change in Accounting Principle
In October 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-26, which amends FASB Accounting Standards Codification (“ASC”) 944,Financial Services – Insurance. The amended guidance modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal insurance and investment contracts. Under the amended guidance, acquisition costs are to include only those costs that are directly related to the successful acquisition of new or renewal insurance and investment contracts. The methods and assumptions used to amortize and assess recoverability of DAC were not impacted as a result of adopting this guidance.
The Company adjusted the presentation of its consolidated financial statements and accompanying notes for all periods presented, to reflect the retrospective adoption of this change in accounting principle.
F-18
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The following tables summarize the impact of the retrospective change in accounting principle on the consolidated statements of operations for the periods indicated:
Year ended December 31, 2011 | ||||||||||||
(in millions) | As Originally Reported | As Adjusted | Effect of Change | |||||||||
Amortization of deferred policy acquisition costs | $ | 76 | $ | 65 | $ | 11 | ||||||
Other expenses, net of deferrals1 | $ | 620 | $ | 760 | $ | (140 | ) | |||||
Federal income tax benefit | $ | (382 | ) | $ | (427 | ) | $ | 45 | ||||
Net loss attributable to Nationwide Life Insurance Company | $ | (282 | ) | $ | (366 | ) | $ | (84 | ) |
1 | Excludes interest expense, which is included in other expenses, net of deferrals on the consolidated statements of operations. |
Subsequent Events
The Company evaluated subsequent events through February 28, 2014, the date the consolidated financial statements were issued.
(3) | Recently Issued Accounting Standards |
Adopted Accounting Standards
On January 1, 2013, the Company adopted ASU 2011-11, which expands the disclosure requirements within ASC 210-10,Balance Sheet – Offsetting. The new disclosures require improved information about certain financial instruments and derivatives that are either offset in accordance with GAAP or subject to enforceable master offsetting arrangements irrespective of GAAP. The Company also adopted ASU 2013-01, which clarifies the scope of these disclosures. The adoption of this guidance resulted in increased disclosures only and had no impact on the Company’s consolidated financial statements.
On January 1, 2013, the Company adopted ASU 2013-02,Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which amends FASB ASC 220,Comprehensive Income. The amended guidance requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by significant component. For significant amounts reclassified into net income in their entirety in the same reporting period, the amended guidance also requires entities to present or disclose the effect of these reclassifications on line items of net income. The adoption of this guidance resulted in increased disclosures only and had no impact on the Company’s consolidated financial statements.
On July 17, 2013, the Company adopted ASU 2013-10, which permits the Overnight Index Swap Rate to be designed as a U.S. benchmark interest rate for hedge accounting purposes. This guidance is applied prospectively on new or redesigned hedging relationships and accordingly had no impact to the Company’s consolidated financial statements.
On January 1, 2012, the Company adopted ASU 2011-04, which amends existing guidance in ASC 820,Fair Value Measurements and Disclosures. The guidance in this ASU clarifies existing fair value measurement guidance and expands disclosures primarily related to Level 3 fair value measurements. The Company also adopted ASU 2013-03, which clarifies the applicability of these disclosures. The adoption of this guidance resulted in increased disclosures only and had no impact on the Company’s consolidated financial statements.
F-19
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
On January 1, 2012, the Company adopted ASU 2011-05, which amends existing guidance in ASC 220,Comprehensive Income. The amended guidance requires reporting entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The Company elected two separate but consecutive statements of operations and comprehensive income and adopted ASU 2011-05 retrospectively.
Pending Accounting Standards
In February 2013, the FASB issued ASU 2013-04, which amends existing guidance in ASC 405,Liabilities. The ASU provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. The guidance is effective retrospectively for the Company’s annual and interim periods beginning January 1, 2014. The Company is currently in the process of determining the impact of adoption.
In June 2013, the FASB issued ASU 2013-08, which amends existing guidance in ASC 946,Financial Services – Investment Companies. The amended guidance modifies the definition of investment companies and requires new disclosures around the status and operations of investment companies. In addition, the guidance requires an investment company to measure its noncontrolling interests in another investment company at fair value rather than the equity method of accounting. The Company will adopt the ASU for interim and annual reporting periods beginning January 1, 2014. The Company is currently in the process of determining the impact of adoption.
In July 2013, the FASB issued ASU 2013-11, which amends existing guidance in ASC 740,Income Taxes. The amended guidance provides clarification on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. The Company will adopt the ASU for interim and annual periods beginning January 1, 2014. The Company is currently in the process of determining the impact of adoption.
In January 2014, the FASB issued ASU 2014-01, which amends existing guidance in ASC 323,Equity Method and Joint Ventures. The amended guidance permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The Company will adopt the ASU for interim and annual reporting periods beginning January 1, 2015. The Company is currently in the process of determining the impact of adoption.
(4) | Certain Long-Duration Contracts |
Variable Annuity Contracts
Contractholder assets are invested in general and separate account investment options as directed by the contractholder. The Company issues variable annuity contracts through its separate accounts. The Company also provides various forms of guarantees to benefit the related contractholders. The Company provides five primary guarantee types: (1) GMDB; (2) GMAB; (3) GLWB; (4) a hybrid guarantee with GMAB and GLWB; and (5) GMIB.
The GMDB, offered on every variable annuity contract, provides a specified minimum return upon death. Many of these death benefits are spousal, whereby a death benefit will be paid upon death of the first spouse. The survivor has the option to terminate the contract or continue it by having the death benefit paid into the contract and having a second death benefit paid upon the survivor’s death.
F-20
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The GMAB, which was offered in the Company’s Capital Preservation Plus product, is a living benefit that provides the contractholder with a guaranteed return of deposits, adjusted proportionately for withdrawals, after a specified time period (5, 7 or 10 years) selected by the contractholder at the issuance of the variable annuity contract. In some cases, the contractholder also has the option, after a specified time period, to drop the guarantee and continue the variable annuity contract without the GMAB. In general, the GMAB requires a minimum allocation to guaranteed term options or adherence to limitations required by an approved asset allocation strategy.
The GLWB, offered in the Company’s Lifetime Income products, are living benefits that provide for enhanced retirement income security without the liquidity loss associated with annuitization. The withdrawal rates vary based on the age when withdrawals begin and are applied to a benefit base to determine the guaranteed lifetime income amount available to a contractholder. The benefit base is equal to the variable annuity premium at contract issuance and may increase as a result of a feature driven by account performance and policy duration.
The GMIB, which was offered with several variable annuity contracts, is a living benefit that provides the contractholder with a guaranteed annuitization stream of income.
The following table summarizes information regarding variable annuity contracts with guarantees invested in general and separate accounts, as of the dates indicated (a contract may contain multiple guarantees):
December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||||||||||
(in millions) | General account value | Separate account value | Net amount at risk1 | Average age2 | General account value | Separate account value | Net amount at risk1 | Average age2 | ||||||||||||||||||||||||
Contracts with GMDB: | ||||||||||||||||||||||||||||||||
Return of net deposits | $ | 916 | $ | 19,927 | $ | 13 | 64 | $ | 836 | $ | 14,963 | $ | 24 | 64 | ||||||||||||||||||
Minimum return or anniversary contract value | 2,031 | 33,520 | 237 | 69 | 2,048 | 29,787 | 561 | 68 | ||||||||||||||||||||||||
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Total contracts with GMDB | $ | 2,947 | $ | 53,447 | $ | 250 | 67 | $ | 2,884 | $ | 44,750 | $ | 585 | 66 | ||||||||||||||||||
GMAB Return of net deposits3 | $ | 92 | $ | 2,383 | $ | — | 64 | $ | 165 | $ | 3,230 | $ | 12 | 64 | ||||||||||||||||||
GLWB Minimum return or anniversary contract value | $ | 178 | $ | 28,071 | $ | 74 | 64 | $ | 128 | $ | 22,031 | $ | 613 | 65 | ||||||||||||||||||
GMIB Minimum return or anniversary contract value | $ | 49 | $ | 510 | $ | — | 64 | $ | 49 | $ | 514 | $ | 1 | 65 | ||||||||||||||||||
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1 | Net amount at risk is calculated on a policy-level basis and equals the respective guaranteed benefit less the account value (or zero if the account value exceeds the guaranteed benefit). |
2 | Represents the weighted average attained age of contractholders. |
3 | Contracts with the hybrid accumulation/withdrawal benefits are included with the accumulation benefits contracts. |
F-21
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The following table summarizes the reserve balances for guarantees on variable annuity contracts, as of the dates indicated:
(in millions) | December 31, 2013 | December 31, 2012 | ||||||
GMDB | $ | 55 | $ | 65 | ||||
GMAB1,2 | $ | (19 | ) | $ | 57 | |||
GLWB1 | $ | (1,075 | ) | $ | 600 | |||
GMIB | $ | 2 | $ | 2 | ||||
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1 | The fair value of the living benefit liability includes the present value of attributed fees. |
2 | Contracts with the hybrid accumulation/withdrawal benefits are included with the accumulation benefits contracts. |
Paid claims for GMDBs were $22 million and $30 million for the years ended December 31, 2013 and 2012, respectively.
Paid claims for GMABs, GLWBs and GMIBs were immaterial for the years ended December 31, 2013 and 2012.
The following table summarizes account balances of deferred variable annuity contracts with guarantees invested in separate accounts, as of the dates indicated:
(in millions) | December 31, 2013 | December 31, 2012 | ||||||
Mutual funds: | ||||||||
Bond | $ | 5,685 | $ | 5,634 | ||||
Domestic equity | 43,505 | 35,277 | ||||||
International equity | 3,179 | 2,614 | ||||||
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Total mutual funds | $ | 52,369 | $ | 43,525 | ||||
Money market funds | 1,078 | 1,225 | ||||||
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Total1 | $ | 53,447 | $ | 44,750 | ||||
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1 | Excludes $30.6 billion and $26.7 billion as of December 31, 2013 and 2012, respectively, of separate account assets not related to deferred variable annuity contracts with guarantees and are primarily attributable to retirement plan, variable universal life and COLI products. |
The Company did not transfer any assets from the general account to the separate account to cover guarantees for any of its variable annuity contracts during the years ended December 31, 2013 and 2012.
Universal and Variable Universal Life Insurance Contracts
The Company offers certain universal life and variable universal life insurance products with secondary guarantees. These no-lapse guarantees provide that a policy will not lapse so long as the policyholder makes minimum premium payments. The reserve balances on these guarantees were $325 million and $216 million as of December 31, 2013 and 2012, respectively. Paid claims on contracts maintained in force by these guarantees were immaterial for the years ended December 31, 2013 and 2012.
F-22
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The following table summarizes information regarding universal and variable universal life insurance contracts with no-lapse guarantees invested in general and separate accounts, as of the dates indicated:
(in millions) | General account value | Separate account value | Adjusted insurance in force1 | Average age2 | ||||||||||||
December 31, 2013 | $ | 1,270 | $ | 362 | $ | 16,960 | 55 | |||||||||
December 31, 2012 | $ | 992 | $ | 328 | $ | 12,321 | 56 | |||||||||
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1 | The adjusted insurance in force is calculated on a policy-level basis and equals the respective guaranteed death benefit less the account value (or zero if the account value exceeds the guaranteed benefit). |
2 | Represents the weighted average attained age of contractholders. |
(5) | Deferred Policy Acquisition Costs |
The following table summarizes changes in the DAC balance, as of the dates indicated:
(in millions) | December 31, 2013 | December 31, 2012 | December 31, 20111 | |||||||||
Balance at beginning of year | $ | 3,249 | $ | 3,487 | $ | 3,125 | ||||||
Capitalization of DAC | 604 | 470 | 604 | |||||||||
Amortization of DAC, excluding unlocks | (373 | ) | (525 | ) | (200 | ) | ||||||
Amortization of DAC related to unlocks | (1 | ) | (50 | ) | 135 | |||||||
Adjustments to DAC related to unrealized gains and losses on available-for-sale securities | 299 | (133 | ) | (177 | ) | |||||||
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Balance at end of year | $ | 3,778 | $ | 3,249 | $ | 3,487 | ||||||
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1 | The balances reflect a change in accounting principle, as described in Note 2. |
During 2013, the net change in DAC amortization as a result of the annual comprehensive review of model assumptions was immaterial.
During 2012, the Company incurred additional DAC amortization of $50 million as a result of the annual comprehensive review of model assumptions, as well as a deviation from equity market performance as compared to assumed net separate account returns. The updated assumptions were primarily related to actual gross profits and the in force block of business deviating from expectations, renewal premiums, general account margins and lapses.
During 2011, the Company recognized a reduction in DAC amortization of $135 million as a result of the annual comprehensive review of model assumptions. The updated assumptions related to interest spread, mortality, maintenance expense and market performance assumptions. The 2011 reduction in DAC amortization reflects the impact of the retrospective change in accounting principle described in Note 2.
F-23
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
(6) | Investments |
Available-for-Sale Securities
The following table summarizes amortized cost, unrealized gains and losses and fair value of available-for-sale securities, as of the dates indicated:
(in millions) | Amortized cost | Unrealized gains | Unrealized losses | Fair value | ||||||||||||
December 31, 2013 | ||||||||||||||||
Fixed maturity securities: | ||||||||||||||||
U.S. Treasury securities and obligations of U.S. Government corporations and agencies | $ | 484 | $ | 79 | $ | 2 | $ | 561 | ||||||||
Obligations of states, political subdivisions and foreign governments | 1,892 | 111 | 40 | 1,963 | ||||||||||||
Corporate public securities | 18,004 | 1,076 | 295 | 18,785 | ||||||||||||
Corporate private securities | 4,374 | 258 | 38 | 4,594 | ||||||||||||
Residential mortgage-backed securities | 3,919 | 163 | 79 | 4,003 | ||||||||||||
Commercial mortgage-backed securities | 1,439 | 86 | 21 | 1,504 | ||||||||||||
Other asset-backed securities | 890 | 26 | 77 | 839 | ||||||||||||
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Total fixed maturity securities | $ | 31,002 | $ | 1,799 | $ | 552 | $ | 32,249 | ||||||||
Equity securities | 6 | 18 | — | 24 | ||||||||||||
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Total available-for-sale securities | $ | 31,008 | $ | 1,817 | $ | 552 | $ | 32,273 | ||||||||
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December 31, 2012 | ||||||||||||||||
Fixed maturity securities: | ||||||||||||||||
U.S. Treasury securities and obligations of U.S. Government corporations and agencies | $ | 476 | $ | 121 | $ | — | $ | 597 | ||||||||
Obligations of states, political subdivisions and foreign governments | 1,820 | 301 | 1 | 2,120 | ||||||||||||
Corporate public securities | 16,152 | 1,891 | 33 | 18,010 | ||||||||||||
Corporate private securities | 4,216 | 392 | 19 | 4,589 | ||||||||||||
Residential mortgage-backed securities | 4,506 | 267 | 106 | 4,667 | ||||||||||||
Commercial mortgage-backed securities | 1,219 | 133 | 15 | 1,337 | ||||||||||||
Other asset-backed securities | 533 | 45 | 87 | 491 | ||||||||||||
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Total fixed maturity securities | $ | 28,922 | $ | 3,150 | $ | 261 | $ | 31,811 | ||||||||
Equity securities | 15 | 5 | — | 20 | ||||||||||||
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Total available-for-sale securities | $ | 28,937 | $ | 3,155 | $ | 261 | $ | 31,831 | ||||||||
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The fair value of the Company’s investments may fluctuate significantly in response to changes in interest rates, investment quality ratings and credit spreads. The Company has the ability and intent to hold equity securities until recovery. The Company does not have the intent to sell, nor is it more likely than not it will be required to sell, debt securities in an unrealized loss position.
F-24
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The following table summarizes the amortized cost and fair value of fixed maturity securities, by contractual maturity, as of December 31, 2013. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without early redemption penalties.
(in millions) | Amortized cost | Fair value | ||||||
Fixed maturity securities: | ||||||||
Due in one year or less | $ | 1,081 | $ | 1,097 | ||||
Due after one year through five years | 8,927 | 9,685 | ||||||
Due after five years through ten years | 7,805 | 7,967 | ||||||
Due after ten years | 6,941 | 7,154 | ||||||
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Subtotal | $ | 24,754 | $ | 25,903 | ||||
Residential mortgage-backed securities | 3,919 | 4,003 | ||||||
Commercial mortgage-backed securities | 1,439 | 1,504 | ||||||
Other asset-backed securities | 890 | 839 | ||||||
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Total fixed maturity securities | $ | 31,002 | $ | 32,249 | ||||
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The following table summarizes components of net unrealized gains and losses, as of the dates indicated:
(in millions) | December 31, 2013 | December 31, 2012 | ||||||
Net unrealized gains on available-for-sale securities, before adjustments, taxes and fair value hedging | $ | 1,265 | $ | 2,894 | ||||
Change in fair value attributable to fixed maturity securities designated in fair value hedging relationships | — | (4 | ) | |||||
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Net unrealized gains on available-for-sale securities, before adjustments and taxes1 | $ | 1,265 | $ | 2,890 | ||||
Adjustment to DAC and other | (176 | ) | (482 | ) | ||||
Adjustment to future policy benefits and claims | (89 | ) | (295 | ) | ||||
Adjustment to policyholder dividend obligation | (85 | ) | (177 | ) | ||||
Deferred federal income tax expense | (314 | ) | (672 | ) | ||||
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Net unrealized gains on available-for-sale securities | $ | 601 | $ | 1,264 | ||||
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1 | Includes net unrealized losses of $(40) million and $(48) million as of December 31, 2013 and 2012, respectively, related to the non-credit portion of other-than-temporarily impaired securities. |
F-25
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The following table summarizes the change in net unrealized gains and losses reported in accumulated other comprehensive income, for the years ended:
(in millions) | December 31, 2013 | December 31, 2012 | ||||||
Balance at beginning of year | $ | 1,264 | $ | 693 | ||||
Unrealized gains and losses arising during the period: | ||||||||
Net unrealized (losses) gains on available-for-sale securities before adjustments | (1,657 | ) | 990 | |||||
Non-credit impairments and subsequent changes in fair value of impaired debt securities | 8 | 178 | ||||||
Net adjustment to DAC and other | 306 | (135 | ) | |||||
Net adjustment to future policy benefits and claims | 206 | (112 | ) | |||||
Net adjustment to policyholder dividend obligation | 92 | (45 | ) | |||||
Related federal income tax benefit (expense) | 366 | (308 | ) | |||||
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Change in unrealized (losses) gains on available-for-sale securities | $ | (679 | ) | $ | 568 | |||
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Reclassification adjustment for net losses realized on available-for-sale securities, net of tax benefit ($8 and $2 as of December 31, 2013 and 2012, respectively) | (16 | ) | (3 | ) | ||||
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Change in net unrealized (losses) gains on available-for-sale securities | $ | (663 | ) | $ | 571 | |||
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Balance at end of year | $ | 601 | $ | 1,264 | ||||
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F-26
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The following table summarizes by asset class available-for-sale securities, in an unrealized loss position based on the amount of time each type of security has been in an unrealized loss position, as well as the related fair value and number of securities, as of the dates indicated:
Less than or equal to one year | More than one year | Total | ||||||||||||||||||||||||||||||||||
(in millions, except number of securities) | Fair value | Unrealized losses | Number of securities | Fair value | Unrealized losses | Number of securities | Fair value | Unrealized losses | Number of securities | |||||||||||||||||||||||||||
December 31, 2013 | ||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||
Corporate public securities | $ | 4,889 | $ | 256 | 346 | $ | 442 | $ | 39 | 34 | $ | 5,331 | $ | 295 | 380 | |||||||||||||||||||||
Residential mortgage-backed securities | 725 | 16 | 70 | 604 | 63 | 148 | 1,329 | 79 | 218 | |||||||||||||||||||||||||||
Other asset-backed securities | 507 | 6 | 32 | 144 | 71 | 40 | 651 | 77 | 72 | |||||||||||||||||||||||||||
Other | 1,838 | 85 | 126 | 222 | 16 | 20 | 2,060 | 101 | 146 | |||||||||||||||||||||||||||
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Total | $ | 7,959 | $ | 363 | 574 | $ | 1,412 | $ | 189 | 242 | $ | 9,371 | $ | 552 | 816 | |||||||||||||||||||||
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December 31, 2012 | ||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||
Corporate public securities | $ | 710 | $ | 11 | 68 | $ | 150 | $ | 22 | 10 | $ | 860 | $ | 33 | 78 | |||||||||||||||||||||
Residential mortgage-backed securities | 89 | 2 | 12 | 1,029 | 104 | 190 | 1,118 | 106 | 202 | |||||||||||||||||||||||||||
Other asset-backed securities | 27 | 1 | 5 | 163 | 86 | 46 | 190 | 87 | 51 | |||||||||||||||||||||||||||
Other | 326 | 4 | 23 | 284 | 31 | 36 | 610 | 35 | 59 | |||||||||||||||||||||||||||
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Total | $ | 1,152 | $ | 18 | 108 | $ | 1,626 | $ | 243 | 282 | $ | 2,778 | $ | 261 | 390 | |||||||||||||||||||||
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The following table summarizes gross unrealized losses based on the ratio of fair value to amortized cost, for available-for-sale securities in an unrealized loss position, as of the dates indicated:
December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
(in millions) | 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% - 80.0% | $ | 363 | $ | 107 | $ | 470 | $ | 18 | $ | 85 | $ | 103 | ||||||||||||
Less than 80.0% | ||||||||||||||||||||||||
Residential mortgage-backed securities | — | 21 | 21 | — | 50 | 50 | ||||||||||||||||||
Other asset-backed securities | — | 61 | 61 | — | 72 | 72 | ||||||||||||||||||
Other | — | — | — | — | 36 | 36 | ||||||||||||||||||
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Total | $ | 363 | $ | 189 | $ | 552 | $ | 18 | $ | 243 | $ | 261 | ||||||||||||
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F-27
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
Residential mortgage-backed securities are assessed for impairment using default estimates based on loan level data, where available. Where loan level data is not available, a proxy based on collateral characteristics is used. The impairment assessment considers loss severity as a function of multiple factors, including unpaid balance, interest rate, mortgage insurance ratios, assessed property value at origination, change in property value, loan-to-value (“LTV”) ratio at origination and prepayment speeds. Cash flows generated by the collateral are then utilized, along with consideration for the instrument’s position in the overall structure, to determine cash flows associated with the security.
Certain other asset-backed securities are assessed for impairment using expected cash flows based on various inputs including default estimates based on the underlying corporate securities, historical and forecasted loss severities or other market inputs when recovery estimates are not feasible. When the collateral is regional bank and insurance company trust preferred securities, default estimates used to estimate cash flows are based on U.S. Bank Rating service data and broker research.
The Company believes the unrealized losses on these available-for-sale securities represent temporary fluctuations in economic factors that are not indicative of other-than-temporary impairment.
Mortgage Loans, Net of Allowance
The following table summarizes the amortized cost of mortgage loans by method of evaluation for credit loss, and the related valuation allowances by type of credit loss, as of the dates indicated:
(in millions) | December 31, 2013 | December 31, 2012 | ||||||
Amortized cost: | ||||||||
Loans with non-specific reserves | $ | 6,350 | $ | 5,820 | ||||
Loans with specific reserves | 26 | 51 | ||||||
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Total amortized cost | $ | 6,376 | $ | 5,871 | ||||
Valuation allowance: | ||||||||
Non-specific reserves | $ | 29 | $ | 33 | ||||
Specific reserves | 6 | 11 | ||||||
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Total valuation allowance | $ | 35 | $ | 44 | ||||
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Mortgage loans, net of allowance | $ | 6,341 | $ | 5,827 | ||||
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The following table summarizes activity in the valuation allowance for mortgage loans, for the years ended:
(in millions) | December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||
Balance at beginning of year | $ | 44 | $ | 60 | $ | 96 | ||||||
Current period provision1 | (4 | ) | 2 | 25 | ||||||||
Recoveries2 | (5 | ) | (15 | ) | (7 | ) | ||||||
Charge offs and other | — | (3 | ) | (54 | ) | |||||||
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Balance at end of year | $ | 35 | $ | 44 | $ | 60 | ||||||
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1 | Includes specific reserve provisions and all changes in non-specific reserves. |
2 | Includes recoveries on sales and increases in the valuation of loans with specific reserves. |
F-28
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The following table summarizes impaired commercial mortgage loans by class, for the years ended:
(in millions) | Office | Industrial | Retail | Other | Total | |||||||||||||||
December 31, 2013 | ||||||||||||||||||||
Amortized cost | $ | — | $ | 26 | $ | — | $ | — | $ | 26 | ||||||||||
Specific reserves | — | (6 | ) | — | — | (6 | ) | |||||||||||||
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Carrying value of impaired mortgage loans, net of allowance | $ | — | $ | 20 | $ | — | $ | — | $ | 20 | ||||||||||
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December 31, 2012 | ||||||||||||||||||||
Amortized cost | $ | 13 | $ | 26 | $ | 12 | $ | — | $ | 51 | ||||||||||
Specific reserves | (2 | ) | (7 | ) | (2 | ) | — | (11 | ) | |||||||||||
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Carrying value of impaired mortgage loans, net of allowance | $ | 11 | $ | 19 | $ | 10 | $ | — | $ | 40 | ||||||||||
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The following table summarizes average recorded investment and interest income recognized for impaired commercial mortgage loans by class, for the years ended:
(in millions) | Office | Industrial | Retail | Other | Total | |||||||||||||||
December 31, 2013 | ||||||||||||||||||||
Average recorded investment | $ | 5 | $ | 20 | $ | 5 | $ | — | $ | 30 | ||||||||||
Interest income recognized | $ | 1 | $ | 1 | $ | 1 | $ | — | $ | 3 | ||||||||||
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December 31, 2012 | ||||||||||||||||||||
Average recorded investment | $ | 9 | $ | 20 | $ | 11 | $ | 34 | $ | 74 | ||||||||||
Interest income recognized | $ | 1 | $ | 2 | $ | 1 | $ | 6 | $ | 10 | ||||||||||
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As of December 31, 2013 and 2012, the Company’s mortgage loans classified as delinquent and/or in non-accrual status were immaterial in relation to the total mortgage loan portfolio. The Company had no mortgage loans 90 days or more past due and still accruing interest.
Management evaluates the credit quality of individual mortgage loans and the portfolio as a whole through a number of loan quality measurements, including, but not limited to, LTV and debt service coverage (“DSC”) ratios. The LTV ratio is calculated as a ratio of the amortized cost of a loan to the estimated value of the underlying collateral. DSC is the amount of cash flow generated by the underlying collateral of the mortgage loan available to meet periodic interest and principal payments of the loan. This process identifies mortgage loans representing the lowest risk profile and lowest potential for loss and those representing the highest risk profile and highest potential for loss. These factors are updated and evaluated at least annually.
F-29
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The following table summarizes the LTV ratio and DSC ratios of the mortgage loan portfolio, as of the dates indicated:
LTV ratio | DSC ratio | |||||||||||||||||||||||||||||||
(in millions) | Less than 80% | 80% - less than 90% | 90% or greater | Total | Greater than 1.10 | 1.00-1.10 | Less than 1.00 | Total | ||||||||||||||||||||||||
December 31, 2013: | ||||||||||||||||||||||||||||||||
Apartment | $ | 1,788 | $ | 52 | $ | 30 | $ | 1,870 | $ | 1,857 | $ | 6 | $ | 7 | $ | 1,870 | ||||||||||||||||
Industrial | 951 | 52 | 86 | 1,089 | 893 | 122 | 74 | 1,089 | ||||||||||||||||||||||||
Office | 837 | 30 | 38 | 905 | 800 | 43 | 62 | 905 | ||||||||||||||||||||||||
Retail | 2,236 | 41 | 21 | 2,298 | 2,214 | 61 | 23 | 2,298 | ||||||||||||||||||||||||
Other | 213 | — | 1 | 214 | 214 | — | — | 214 | ||||||||||||||||||||||||
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Total | $ | 6,025 | $ | 175 | $ | 176 | $ | 6,376 | $ | 5,978 | $ | 232 | $ | 166 | $ | 6,376 | ||||||||||||||||
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Weighted average DSC ratio | 1.77 | 1.22 | 1.00 | 1.74 | n/a | n/a | n/a | n/a | ||||||||||||||||||||||||
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Weighted average LTV ratio | n/a | n/a | n/a | n/a | 60 | % | 61 | % | 91 | % | 61 | % | ||||||||||||||||||||
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December 31, 2012: | ||||||||||||||||||||||||||||||||
Apartment | $ | 1,119 | $ | 129 | $ | 62 | $ | 1,310 | $ | 1,303 | $ | 5 | $ | 2 | $ | 1,310 | ||||||||||||||||
Industrial | 922 | 76 | 162 | 1,160 | 951 | 121 | 88 | 1,160 | ||||||||||||||||||||||||
Office | 776 | 55 | 42 | 873 | 783 | 16 | 74 | 873 | ||||||||||||||||||||||||
Retail | 1,940 | 250 | 86 | 2,276 | 2,139 | 92 | 45 | 2,276 | ||||||||||||||||||||||||
Other | 189 | 57 | 6 | 252 | 252 | — | — | 252 | ||||||||||||||||||||||||
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Total | $ | 4,946 | $ | 567 | $ | 358 | $ | 5,871 | $ | 5,428 | $ | 234 | $ | 209 | $ | 5,871 | ||||||||||||||||
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Weighted average DSC ratio | 1.74 | 1.27 | 1.07 | 1.65 | n/a | n/a | n/a | n/a | ||||||||||||||||||||||||
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Weighted average LTV ratio | n/a | n/a | n/a | n/a | 66 | % | 76 | % | 96 | % | 68 | % | ||||||||||||||||||||
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While these loan quality measurements contribute to management’s assessment of relative credit risk in the mortgage loan portfolio for the dates indicated based on underwriting criteria and ongoing assessment of the properties’ performance, management believes the amounts, net of valuation allowance, are collectible.
Available-For-Sale Securities on Deposit, Held in Trust and Pledged as Collateral
Available-for-sale securities with a carrying value of $8 million and $9 million were on deposit with various regulatory agencies as required by law as of December 31, 2013 and 2012, respectively. Additionally, available-for-sale securities with a carrying value of $849 million and $73 million were pledged as collateral to secure recoveries under reinsurance contracts and other funding agreements as of December 31, 2013 and 2012, respectively. These securities are primarily included in fixed maturity securities in the consolidated balance sheets.
F-30
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
Tax Credit Funds
The Company has sold $1.2 billion and $0.9 billion in Tax Credit Funds to unrelated third parties as of December 31, 2013 and 2012, respectively. The Company has guaranteed after-tax benefits to the third party investors through periods ending in 2028. The Company held immaterial reserves on these transactions as of December 31, 2013 and 2012. These guarantees are in effect for periods of approximately 15 years each. The Tax Credit Funds provide a stream of tax benefits to the investors that will generate a yield and return of capital. If the tax benefits are not sufficient to provide these cumulative after-tax yields, the Company must fund any shortfall. The maximum amount of undiscounted future payments that the Company could be required to pay the investors under the terms of the guarantees is $796 million, but the company does not anticipate making any material payments related to the guarantees. The Company’s risks are mitigated in the following ways: (1) the Company has the right to buyout the equity related to the guarantee under certain circumstances, (2) the Company may replace underperforming properties to mitigate exposure to guarantee payments and (3) the Company oversees the asset management of the deals.
Consolidated VIEs
The Company has relationships with VIEs where the Company is the primary beneficiary. These consolidated VIEs are primarily made up of Low-Income-Housing Tax Credit Funds with guarantees to limited partners. Net assets (controlling and noncontrolling interests) of all consolidated VIEs totaled $680 million and $347 million as of December 31, 2013 and 2012, respectively, which were composed primarily of other investments of $554 million, other assets of $182 million and other liabilities of $82 million as of December 31, 2013, and other investments of $348 million as of December 31, 2012. The Company’s general credit is not exposed to the creditors or beneficial interest holders of these consolidated VIEs.
Unconsolidated VIEs
In addition to the consolidated VIEs, the Company holds investments in VIEs where the Company is not the primary beneficiary, which are primarily investments in Tax Credit Funds without guarantees to limited partners. The carrying value of these investments was $104 million and $222 million as of December 31, 2013 and 2012, respectively. In addition, the Company has made commitments for further investments in these VIEs of $29 million and $66 million as of December 31, 2013 and 2012, respectively.
Net Investment Income
The following table summarizes net investment income by investment type, for the years ended:
(in millions) | December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||
Fixed maturity securities, available-for-sale | $ | 1,565 | $ | 1,506 | $ | 1,502 | ||||||
Mortgage loans | 348 | 366 | 370 | |||||||||
Policy loans | 52 | 53 | 56 | |||||||||
Other | (57 | ) | (45 | ) | (34 | ) | ||||||
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Gross investment income | $ | 1,908 | $ | 1,880 | $ | 1,894 | ||||||
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Investment expenses | 59 | 55 | 50 | |||||||||
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Net investment income | $ | 1,849 | $ | 1,825 | $ | 1,844 | ||||||
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F-31
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
Net Realized Investment Gains and Losses, Net of Other-Than-Temporary Impairments
The following table summarizes net realized investment gains and losses, net of other-than-temporary impairments, by source, for the years ended:
(in millions) | December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||
Net derivative gains (losses) | $ | 705 | $ | 314 | $ | (1,636 | ) | |||||
Realized gains on sales | 32 | 48 | 64 | |||||||||
Realized losses on sales | (54 | ) | (23 | ) | (45 | ) | ||||||
Other | — | 12 | (19 | ) | ||||||||
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Net realized investment gains (losses) before other-than-temporary impairments on fixed maturity securities | $ | 683 | $ | 351 | $ | (1,636 | ) | |||||
Other-than-temporary impairments on fixed maturity securities1 | (5 | ) | (32 | ) | (40 | ) | ||||||
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Net realized investment gains (losses), net of other-than-temporary impairments | $ | 678 | $ | 319 | $ | (1,676 | ) | |||||
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1 | Other-than-temporary impairments on fixed maturity securities are net $6 million, $36 million and $95 million of non-credit losses included in other comprehensive income for the years ended December 31, 2013, 2012 and 2011, respectively. |
Proceeds from the sale of available-for-sale securities were $1.1 billion, $0.8 billion and $1.6 billion during the years ended December 31, 2013, 2012 and 2011, respectively. Gross gains of $31 million, $47 million and $50 million and gross losses of $50 million, $20 million and $39 million were realized on sales of available-for-sale securities during the years ended December 31, 2013, 2012 and 2011, respectively.
The following table summarizes the cumulative credit losses, for the years ended:
(in millions) | December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||
Cumulative credit losses at beginning of year1 | $ | (289 | ) | $ | (328 | ) | $ | (340 | ) | |||
New credit losses | (3 | ) | (18 | ) | (8 | ) | ||||||
Incremental credit losses | (3 | ) | (10 | ) | (29 | ) | ||||||
Losses related to securities included in the beginning balance sold or paid down during the period | 23 | 67 | 49 | |||||||||
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Cumulative credit losses at end of year1 | $ | (272 | ) | $ | (289 | ) | $ | (328 | ) | |||
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1 | Cumulative credit losses are defined as amounts related to the Company’s credit portion of the other-than-temporary impairment losses on debt securities that the Company does not intend to sell and that it is not more likely than not the Company will be required to sell prior to recovery of the amortized cost basis. |
F-32
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
(7) | Derivative Instruments |
The Company is exposed to certain risks related to its ongoing business operations which are managed using derivative instruments.
Interest rate risk management. The Company uses interest rate contracts, primarily interest rate swaps, to reduce or alter interest rate exposure arising from mismatches between assets and liabilities. In the case of interest rate swaps, the Company enters into a contractual agreement with a counterparty to exchange, at specified intervals, the difference between fixed and variable rates of interest, calculated on a reference notional amount.
Interest rate swaps are used by the Company in association with fixed and variable rate investments to achieve cash flow streams that support certain financial obligations of the Company and to produce desired investment returns. As such, interest rate swaps are generally used to convert fixed rate cash flow streams to variable rate cash flow streams or vice versa. The Company also enters into interest rate swap transactions which are structured to provide an offset against the negative impact of higher interest rates on the Company’s capital position.
Equity market and interest rate risk management. The Company has a variety of variable annuity products with guaranteed benefit features. These products and related obligations expose the Company to various market risks, primarily equity and interest rate risks. Adverse changes in the equity markets or interest rate movements expose the Company to significant volatility. To mitigate these risks and hedge the guaranteed benefit obligations, the Company enters into a variety of derivatives including interest rate swaps, equity index futures, options and total return swaps.
Foreign currency risk management. As part of its regular investing activities, the Company may purchase foreign currency denominated investments. These investments and the associated income expose the Company to volatility associated with movements in foreign exchange rates. As foreign exchange rates change, the increase or decrease in the cash flows of the derivative instrument generally offsets the changes in the functional-currency equivalent cash flows of the hedged item. To mitigate this risk, the Company uses cross-currency swaps and futures, which are primarily included in other derivative contracts in the following tables.
Credit risk associated with derivative transactions. The Company periodically evaluates the risks within the derivative portfolios due to credit exposure. When evaluating this risk, the Company considers several factors which include, but are not limited to, the counterparty credit risk associated with derivative receivables, the Company’s own credit as it relates to derivative payables, the collateral thresholds associated with each counterparty and changes in relevant market data in order to gain insight into the probability of default by the counterparty. In addition, the impact the Company’s exposure to credit risk could have on the effectiveness of the Company’s hedging relationships is considered. As of December 31, 2013 and 2012, the impact of the exposure to credit risk on the fair value measurement of derivatives and the effectiveness of the Company’s hedging relationships was immaterial.
F-33
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The following table summarizes the fair value and related notional amounts of derivative instruments, as of the dates indicated:
Derivative assets | Derivative liabilities | |||||||||||||||
(in millions) | Fair value | Notional | Fair value | Notional | ||||||||||||
December 31, 2013 | ||||||||||||||||
Derivatives designated and qualifying as hedging instruments | $ | 1 | $ | 6 | $ | 26 | $ | 345 | ||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||
Interest rate contracts | $ | 1,787 | $ | 26,156 | $ | 2,100 | $ | 29,715 | ||||||||
Equity contracts | 343 | 6,556 | — | — | ||||||||||||
Total return swaps | 6 | 1,101 | 52 | 1,183 | ||||||||||||
Other derivative contracts | — | — | 5 | 2 | ||||||||||||
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Total derivative positions1 | $ | 2,137 | $ | 33,819 | $ | 2,183 | $ | 31,245 | ||||||||
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December 31, 2012 | ||||||||||||||||
Derivatives designated and qualifying as hedging instruments | $ | 4 | $ | 79 | $ | 21 | $ | 192 | ||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||
Interest rate contracts | $ | 1,960 | $ | 21,216 | $ | 2,065 | $ | 23,746 | ||||||||
Equity contracts | 822 | 7,445 | — | — | ||||||||||||
Total return swaps | 4 | 1,513 | 32 | 1,551 | ||||||||||||
Other derivative contracts | — | 10 | 5 | 17 | ||||||||||||
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Total derivative positions1 | $ | 2,790 | $ | 30,263 | $ | 2,123 | $ | 25,506 | ||||||||
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1 | Derivative assets and liabilities are included in other assets and other liabilities, respectively, in the consolidated balance sheets. As of December 31, 2013 and 2012, derivative assets exclude $196 million and $170 million, respectively, of accrued interest receivable, and derivative liabilities exclude $227 million and $179 million, respectively, of accrued interest payable. |
The fair value of the Company’s derivative positions, subject to offsetting by master netting agreements of $1.7 billion and $2.0 billion as of December 31, 2013 and 2012, respectively, and by collateral received from or posted with counterparties, resulted in immaterial net uncollateralized derivative asset and liability positions as of December 31, 2013 and 2012. As of December 31, 2013 and 2012, the Company held cash collateral from derivative counterparties of $382 million and $798 million, respectively. The Company held $29 million of securities as off-balance sheet collateral as of December 31, 2013. No securities were held as off-balance sheet collateral as of December 31, 2012. As of December 31, 2013 and 2012, the Company had posted cash collateral of $435 million and $228 million, respectively, and pledged securities with a fair value of $173 million and $148 million, respectively, with derivative counterparties.
F-34
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The following table summarizes gains and losses for derivative instruments recognized in net realized investment gains and losses in the consolidated statements of operations, for the years ended:
(in millions) | December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||
Derivatives designated and qualifying as hedging instruments | $ | (1 | ) | $ | (1 | ) | $ | (4 | ) | |||
Derivatives not designated as hedging instruments: | ||||||||||||
Interest rate contracts | $ | (209 | ) | $ | (125 | ) | $ | (44 | ) | |||
Equity contracts | (776 | ) | (665 | ) | (45 | ) | ||||||
Total return swaps | (321 | ) | (343 | ) | (17 | ) | ||||||
Other derivative contracts | (9 | ) | (1 | ) | (6 | ) | ||||||
Net interest settlements | 14 | 53 | 34 | |||||||||
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Total derivative losses1 | $ | (1,302 | ) | $ | (1,082 | ) | $ | (82 | ) | |||
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Change in embedded derivatives on guaranteed benefit annuity programs2 | 1,751 | 1,185 | (1,674 | ) | ||||||||
Other revenue on guaranteed benefit annuity programs | 256 | 211 | 120 | |||||||||
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Change in embedded derivative liabilities and related fees | $ | 2,007 | $ | 1,396 | $ | (1,554 | ) | |||||
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Net realized derivative gains (losses) | $ | 705 | $ | 314 | $ | (1,636 | ) | |||||
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1 | Included in total derivative losses are economic hedging losses of $1.8 billion, $827 million and gains of $1.0 billion related to the guaranteed benefit annuity programs for the years ended December 31, 2013, 2012 and 2011, respectively. |
2 | As part of the Company’s annual comprehensive review of DAC model assumptions, all relevant assumptions impacting the fair value of embedded derivatives on annuity programs are also reviewed and updated. For the individual variable annuity business, the change in the embedded derivatives on guaranteed benefit annuity programs for the year ended December 31, 2013 includes model enhancements and updated assumptions for discounting, benefit utilization, mortality and lapse rates. The change in embedded derivatives on guaranteed benefit annuity programs for the year ended December 31, 2012 included updated assumptions for lapse rates, mortality, withdrawal behavior and benefit utilization. |
F-35
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
(8) | Fair Value Measurements |
The following table summarizes assets and liabilities held at fair value on a recurring basis as of December 31, 2013:
(in millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Investments: | ||||||||||||||||
Fixed maturity securities, available-for-sale: | ||||||||||||||||
U.S. Treasury securities and obligations of U.S. Government corporations and agencies | $ | 557 | $ | 1 | $ | 3 | $ | 561 | ||||||||
Obligations of states, political subdivisions and foreign governments | 63 | 1,900 | — | 1,963 | ||||||||||||
Corporate public securities | 1 | 18,705 | 79 | 18,785 | ||||||||||||
Corporate private securities | — | 3,791 | 803 | 4,594 | ||||||||||||
Residential mortgage-backed securities | 791 | 3,203 | 9 | 4,003 | ||||||||||||
Commercial mortgage-backed securities | — | 1,504 | — | 1,504 | ||||||||||||
Other asset-backed securities | — | 645 | 194 | 839 | ||||||||||||
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Total fixed maturity securities, available-for-sale, at fair value | $ | 1,412 | $ | 29,749 | $ | 1,088 | $ | 32,249 | ||||||||
Other investments at fair value | 64 | 357 | 45 | 466 | ||||||||||||
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Investments at fair value | $ | 1,476 | $ | 30,106 | $ | 1,133 | $ | 32,715 | ||||||||
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Derivative assets | — | 1,794 | 343 | 2,137 | ||||||||||||
Separate account assets | 80,647 | 1,339 | 2,083 | 84,069 | ||||||||||||
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Assets at fair value | $ | 82,123 | $ | 33,239 | $ | 3,559 | $ | 118,921 | ||||||||
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Liabilities | ||||||||||||||||
Future policy benefits and claims: | ||||||||||||||||
Embedded derivatives on living benefits | $ | — | $ | — | $ | 1,094 | $ | 1,094 | ||||||||
Embedded derivatives on indexed products | — | — | (84 | ) | (84 | ) | ||||||||||
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Total future policy benefits and claims | $ | — | $ | — | $ | 1,010 | $ | 1,010 | ||||||||
Derivative liabilities | — | (2,178 | ) | (5 | ) | (2,183 | ) | |||||||||
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Liabilities at fair value | $ | — | $ | (2,178 | ) | $ | 1,005 | $ | (1,173 | ) | ||||||
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F-36
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the year ended December 31, 2013:
Balance as of December 31, 2012 | Net gains (losses) | Balance as of December 31, 2013 | ||||||||||||||||||||||||||||||
(in millions) | In operations1 | In other comprehensive income | Purchases | Sales | Transfers into Level 3 | Transfers out of Level 3 | ||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||||
Fixed maturity securities, available-for-sale: | ||||||||||||||||||||||||||||||||
Corporate private securities | $ | 772 | $ | (1 | )$ | (2 | )$ | 91 | $ | (117 | )$ | 127 | $ | (67 | )$ | 803 | ||||||||||||||||
Other asset-backed securities | 291 | — | 10 | 6 | (62 | ) | 15 | (66 | ) | 194 | ||||||||||||||||||||||
Other | 134 | — | (7 | ) | 18 | (53 | ) | — | (1 | ) | 91 | |||||||||||||||||||||
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Total fixed maturity securities, available-for-sale, at fair value2 | $ | 1,197 | (1 | ) | 1 | 115 | (232 | ) | 142 | (134 | ) | 1,088 | ||||||||||||||||||||
Other investments at fair value | 62 | (6 | ) | 6 | 5 | (22 | ) | — | — | 45 | ||||||||||||||||||||||
Derivative assets3 | 822 | (447 | ) | — | 129 | (161 | ) | — | — | 343 | ||||||||||||||||||||||
Separate account assets | 2,025 | 58 | — | — | — | — | — | 2,083 | ||||||||||||||||||||||||
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Assets at fair value | $ | 4,106 | $ | (396 | )$ | 7 | $ | 249 | $ | (415 | )$ | 142 | $ | (134 | )$ | 3,559 | ||||||||||||||||
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Liabilities | ||||||||||||||||||||||||||||||||
Future policy benefits and claims: | ||||||||||||||||||||||||||||||||
Embedded derivatives on living benefits | $ | (657 | )$ | 1,751 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,094 | ||||||||||||||||
Embedded derivatives on indexed products | (91 | ) | 7 | — | — | — | — | — | (84 | ) | ||||||||||||||||||||||
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Total future policy benefits and claims | $ | (748 | )$ | 1,758 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,010 | ||||||||||||||||
Derivative liabilities3 | (5 | ) | — | — | — | — | — | — | (5 | ) | ||||||||||||||||||||||
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Liabilities at fair value | $ | (753 | )$ | 1,758 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,005 | ||||||||||||||||
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1 | Net gains and losses included in operations are reported in net realized investment gains and losses and interest credited to policyholder accounts. The net unrealized gains on separate account assets are attributable to contractholders and therefore are not included in the Company’s earnings. The change in unrealized (losses) gains included in operations on assets and liabilities still held at the end of the year was $(6) million for other investments at fair value, $(297) million for derivative assets and $1.8 billion for future policy benefits and claims. |
2 | Non-binding broker quotes were utilized to determine a fair value of $924 million of total fixed maturity securities as of December 31, 2013. |
3 | Non-binding broker quotes were utilized to determine a fair value of all Level 3 derivative assets and liabilities. |
Transfers into and out of Level 3 during the year ended December 31, 2013 are primarily due to certain corporate private securities and other asset-backed securities, which changed pricing sources between broker quotes and independent pricing services. There were no transfers between Levels 1 and 2 during the year ended December 31, 2013.
F-37
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
As discussed in Note 2, the valuation of embedded derivatives in living benefit guarantees and equity indexed products incorporates many inputs. Significant unobservable inputs for living benefit guarantees include discounting, index volatility, mortality, lapse rates, wait period and benefit utilization, while significant unobservable inputs for equity indexed products include mortality, lapse rates and index volatility. For both products, the Company derives these inputs, which vary widely by product, attained age, policy duration, benefits in the money (living benefit guarantees only) and the existence of surrender charges, from current experience and industry data. The fair value for these benefits is calculated using the mean of discounted cash flows across numerous random scenarios, an approach that is commonly used by the insurance industry for this type of valuation. This process considers a broader range of assumptions than what would be found in a deterministic approach.
Living Benefit Guarantees
The following table summarizes significant unobservable inputs used for fair value measurements for living benefits liabilities classified as Level 3 as of December 31, 2013:
Unobservable Inputs | Range | |
Mortality | 0.1%-8%2 | |
Lapse | 0%-35% | |
Wait period | 0 yrs – 30 yrs3 | |
Efficiency of benefit utilization1 | 65%-100% | |
Discount rate | See footnote 4 | |
Index volatility | 15%-25% |
1 | The unobservable input is not applicable to GMABs. |
2 | Represents the mortality for the majority of business with living benefits, with policyholders ranging from 45 to 85. |
3 | A portion of the contractholders could never use the benefit, which would extend the range to an indeterminate period. |
4 | Incorporates the liquidity and non-performance risk adjustment. The liquidity spread takes into consideration market observables for spreads in illiquid assets. The non-performance risk adjustment reflects an additional spread over LIBOR determined by market observables for similarly rated public bonds. |
The following changes in any of the significant unobservable inputs presented in the table above may result in a change in the fair value measurements of the living benefits liability:
Higher mortality rates tend to decrease the value of the liability and lower mortality rates tend to increase the value of the liability.
Higher lapse rates tend to decrease the value of the liability and lower lapse rates tend to increase the value of the liability. Factors that impact the predicted lapse rate can include: age, policy duration, policy size, benefit in-the-moneyness and applicable surrender charges. All else being equal, policies that are in-the-money will have lower lapse rates than policies that are out-of-the-money, and policies that have a surrender charge present will have lower lapse rates than policies without a surrender charge.
The assumed wait period and the efficiency of utilization determine the timing and amount of living benefits withdrawals. These assumptions vary by the product type, age of the policyholder and policy duration. Many products have a bonus feature which enhances the guarantee on every policy anniversary for the first ten years so long as withdrawals have not commenced. All else being equal, policies commencing withdrawals at a time around the year ten bonus will have higher liability values than policies commencing withdrawals 20 years after issue or policies commencing withdrawals only one year after issue. In addition, policies that are assumed to withdraw the maximum permitted amount will have a higher liability value than a policy that is assumed to withdraw less than the maximum allowed amount.
F-38
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
A higher discount rate tends to decrease the value of the liability and a lower discount rate tends to increase the value of the liability.
Higher index volatility tends to increase the value of the liability and lower index volatility tends to decrease the value of the liability.
Equity Indexed Products
The following table summarizes significant unobservable inputs used for fair value measurements for indexed universal life equity indexed products classified as Level 3 as of December 31, 2013:
Unobservable Inputs | Range | |
Mortality | 0%-4%1 | |
Lapse | 0%-10% | |
Index volatility | 15%-25% |
1 | Represents the mortality for the majority of business, with policyholders ranging from 0 to 75. |
The following changes in any of the significant unobservable inputs presented in the table above may result in a change in the fair value measurements of the equity indexed products:
Higher mortality rates tend to decrease the value of the liability and lower mortality rates tend to increase the value of the liability.
Higher lapse rates tend to decrease the value of the liability and lower lapse rates tend to increase the value of the liability. Factors that impact the predicted lapse rate can include: age, policy duration, policy size, and applicable surrender charges. All else being equal, policies with a surrender charge present will have lower lapse rates than policies without a surrender charge.
Higher index volatility tends to increase the value of the liability and lower index volatility tends to decrease the value of the liability.
Separate Accounts
The Company’s separate account assets include an investment in a mutual fund with a non-readily determinable fair value. Net asset value has been used to estimate the fair value of this investment as a practical expedient. The investments are included in Level 3 as they may not be redeemed until a seven year guarantee period expires in 2016. The investment strategy of this fund is to build a portfolio where the assets shall be sufficient to achieve a target portfolio value by the end of the seven year guarantee period. The net asset value of this fund reported in separate account assets was $1.7 billion and $1.6 billion as of December 31, 2013 and 2012, respectively.
F-39
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The following table summarizes assets and liabilities held at fair value on a recurring basis as of December 31, 2012:
(in millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Investments: | ||||||||||||||||
Fixed maturity securities, available-for-sale: | ||||||||||||||||
U.S. Treasury securities and obligations of U.S. Government corporations and agencies | $ | 592 | $ | 2 | $ | 3 | $ | 597 | ||||||||
Obligations of states, political subdivisions and foreign governments | 73 | 2,047 | — | 2,120 | ||||||||||||
Corporate public securities | 1 | 17,890 | 119 | 18,010 | ||||||||||||
Corporate private securities | — | 3,817 | 772 | 4,589 | ||||||||||||
Residential mortgage-backed securities | 484 | 4,173 | 10 | 4,667 | ||||||||||||
Commercial mortgage-backed securities | — | 1,335 | 2 | 1,337 | ||||||||||||
Other asset-backed securities | — | 200 | 291 | 491 | ||||||||||||
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Total fixed maturity securities, available-for-sale, at fair value | $ | 1,150 | $ | 29,464 | $ | 1,197 | $ | 31,811 | ||||||||
Other investments at fair value | 45 | 1,001 | 62 | 1,108 | ||||||||||||
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Investments at fair value | $ | 1,195 | $ | 30,465 | $ | 1,259 | $ | 32,919 | ||||||||
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Derivative assets | — | 1,968 | 822 | 2,790 | ||||||||||||
Separate account assets | 68,185 | 1,230 | 2,025 | 71,440 | ||||||||||||
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Assets at fair value | $ | 69,380 | $ | 33,663 | $ | 4,106 | $ | 107,149 | ||||||||
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Liabilities | ||||||||||||||||
Future policy benefits and claims: | ||||||||||||||||
Embedded derivatives on living benefits | $ | — | $ | — | $ | (657 | ) | $ | (657 | ) | ||||||
Embedded derivatives on indexed products | — | — | (91 | ) | (91 | ) | ||||||||||
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Total future policy benefits and claims | $ | — | $ | — | $ | (748 | ) | $ | (748 | ) | ||||||
Derivative liabilities | — | (2,118 | ) | (5 | ) | (2,123 | ) | |||||||||
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Liabilities at fair value | $ | — | $ | (2,118 | ) | $ | (753 | ) | $ | (2,871 | ) | |||||
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F-40
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the year ended December 31, 2012:
Balance as of December 31, 2011 | Net gains (losses) | Balance as of December 31, 2012 | ||||||||||||||||||||||||||||||
(in millions) | In operations1 | In other comprehensive income | Purchases | Sales | Transfers into Level 3 | Transfers out of Level 3 | ||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||||
Fixed maturity securities, available-for-sale: | ||||||||||||||||||||||||||||||||
Corporate private securities | $ | 1,209 | $ | 2 | $ | 13 | $ | 69 | $ | (187 | )$ | 40 | $ | (374 | )$ | 772 | ||||||||||||||||
Other asset-backed securities | 251 | 2 | 53 | 36 | (61 | ) | 10 | — | 291 | |||||||||||||||||||||||
Other | 131 | — | 11 | 2 | (8 | ) | 1 | (3 | ) | 134 | ||||||||||||||||||||||
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Total fixed maturity securities, available-for-sale, at fair value2 | $ | 1,591 | 4 | 77 | 107 | (256 | ) | 51 | (377 | ) | 1,197 | |||||||||||||||||||||
Other investments at fair value | 43 | 16 | 3 | — | — | — | — | 62 | ||||||||||||||||||||||||
Derivative assets3 | 1,004 | (353 | ) | — | 350 | (179 | ) | — | — | 822 | ||||||||||||||||||||||
Separate account assets | 1,952 | 73 | — | — | — | — | — | 2,025 | ||||||||||||||||||||||||
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Assets at fair value | $ | 4,590 | $ | (260 | )$ | 80 | $ | 457 | $ | (435 | )$ | 51 | $ | (377 | )$ | 4,106 | ||||||||||||||||
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Liabilities | ||||||||||||||||||||||||||||||||
Future policy benefits and claims: | ||||||||||||||||||||||||||||||||
Embedded derivatives on living benefits | $ | (1,842 | )$ | 1,185 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (657 | ) | |||||||||||||||
Embedded derivatives on indexed products | (63 | ) | (28 | ) | — | — | — | — | — | (91 | ) | |||||||||||||||||||||
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Total future policy benefits and claims | $ | (1,905 | )$ | 1,157 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (748 | ) | |||||||||||||||
Derivative liabilities3 | (6 | ) | 1 | — | — | — | — | — | (5 | ) | ||||||||||||||||||||||
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Liabilities at fair value | $ | (1,911 | )$ | 1,158 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (753 | ) | |||||||||||||||
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1 | Net gains and losses included in operations are reported in net realized investment gains and losses and interest credited to policyholder accounts. The net unrealized gains on separate account assets are attributable to contractholders and therefore are not included in the Company’s earnings. The change in unrealized gains (losses) included in operations on assets and liabilities still held as of the end of the year was $16 million for other investments at fair value, $(257) million for derivative assets, $1.2 billion for future policy benefits and claims and $(1) million for derivative liabilities. |
2 | Non-binding broker quotes were utilized to determine a fair value of $1.1 billion of total fixed maturity securities as of December 31, 2012. |
3 | Non-binding broker quotes were utilized to determine a fair value of all Level 3 derivative assets and liabilities. |
During the year ended December 31, 2012, transfers from Level 1 to Level 2 within the debt securities issued by foreign governments were $42 million. There were no transfers from Level 2 to Level 1 during the year ended December 31, 2012.
Transfers into and out of Level 3 during the year ended December 31, 2012 represented changes in the sources used to price certain securities and changes in the Company’s assumptions related to the observability of certain inputs.
F-41
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
Financial Instruments Not Carried at Fair Value
The following table summarizes the carrying value and fair value of the Company’s financial instruments not carried at fair value as of the dates indicated. The valuation techniques used to estimate these fair values are described below.
December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||||||||||
(in millions) | Carrying value | Fair value | Level 2 | Level 3 | Carrying value | Fair value | Level 2 | Level 3 | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||||
Mortgage loans, net of allowance | $ | 6,341 | $ | 6,481 | $ | — | $ | 6,481 | $ | 5,827 | $ | 5,988 | $ | — | $ | 5,988 | ||||||||||||||||
Policy loans | $ | 987 | $ | 987 | $ | — | $ | 987 | $ | 980 | $ | 980 | $ | — | $ | 980 | ||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Investment contracts | $ | 21,874 | $ | 20,436 | $ | — | $ | 20,436 | $ | 20,123 | $ | 19,561 | $ | — | $ | 19,561 | ||||||||||||||||
Short-term debt | $ | 278 | $ | 278 | $ | — | $ | 278 | $ | 300 | $ | 300 | $ | — | $ | 300 | ||||||||||||||||
Long-term debt | $ | 707 | $ | 1,004 | $ | 997 | $ | 7 | $ | 1,038 | $ | 1,323 | $ | 1,282 | $ | 41 |
Mortgage loans, net of allowance. The fair values of mortgage loans are estimated using discounted cash flow analyses based on interest rates currently being offered for similar loans to borrowers with similar credit ratings.
Policy loans. The carrying amount reported in the consolidated balance sheets approximates fair value.
Investment contracts. For investment contracts without defined maturities, fair value is the amount payable on demand, net of surrender charges. For investment contracts with known or determined maturities, fair value is estimated using discounted cash flow analysis. Interest rates used in this analysis are similar to currently offered contracts with maturities consistent with those remaining for the contracts being valued. The fair value of adjustable rate contracts approximates their carrying value.
Short-term debt. The carrying amount reported in the consolidated balance sheets approximates fair value.
Long-term debt. The fair value for long-term debt are based on estimated market prices using observable inputs from similar debt instruments.
F-42
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
(9) | Goodwill |
The following table summarizes changes in the carrying value of goodwill by segment for the years indicated:
(in millions) | Retirement Plans | Individual Products & Solutions - Life and NBSG | Total | |||||||||
Balance as of December 31, 20111 | $ | 25 | $ | 175 | $ | 200 | ||||||
Adjustments | — | — | — | |||||||||
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Balance as of December 31, 20121 | $ | 25 | $ | 175 | $ | 200 | ||||||
Adjustments | — | — | — | |||||||||
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Balance as of December 31, 20131 | $ | 25 | $ | 175 | $ | 200 | ||||||
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1 | The goodwill balances have not been previously impaired. |
F-43
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
(10) | Closed Block |
The amounts shown in the following tables for assets, liabilities, revenues and expenses of the closed block are those that enter into the determination of amounts that are to be paid to policyholders.
The following table summarizes financial information for the closed block, as of the dates indicated:
(in millions) | December 31, 2013 | December 31, 2012 | ||||||
Liabilities: | ||||||||
Future policyholder benefits | $ | 1,703 | $ | 1,732 | ||||
Policyholder funds and accumulated dividends | 141 | 142 | ||||||
Policyholder dividends payable | 23 | 24 | ||||||
Policyholder dividend obligation | 113 | 198 | ||||||
Other policy obligations and liabilities | 29 | 32 | ||||||
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Total liabilities | $ | 2,009 | $ | 2,128 | ||||
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Assets: | ||||||||
Fixed maturity securities, available-for-sale | $ | 1,320 | $ | 1,511 | ||||
Mortgage loans, net of allowance | 257 | 183 | ||||||
Policy loans | 157 | 164 | ||||||
Other assets | 93 | 77 | ||||||
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Total assets | $ | 1,827 | $ | 1,935 | ||||
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Excess of reported liabilities over assets | 182 | 193 | ||||||
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Portion of above representing other comprehensive income: | ||||||||
(Decrease) increase in unrealized gain on fixed maturity securities, available-for-sale | $ | (92 | ) | $ | 45 | |||
Adjustment to policyholder dividend obligation | 92 | (45 | ) | |||||
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Total | $ | — | $ | — | ||||
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Maximum future earnings to be recognized from assets and liabilities | $ | 182 | $ | 193 | ||||
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Other comprehensive income: | ||||||||
Fixed maturity securities, available-for-sale: | ||||||||
Fair value | $ | 1,320 | $ | 1,511 | ||||
Amortized cost | 1,235 | 1,334 | ||||||
Shadow policyholder dividend obligation | (85 | ) | (177 | ) | ||||
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Net unrealized appreciation | $ | — | $ | — | ||||
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F-44
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The following table summarizes closed block operations for the years ended:
(in millions) | December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||
Revenues: | ||||||||||||
Premiums | $ | 66 | $ | 73 | $ | 77 | ||||||
Net investment income | 94 | 98 | 102 | |||||||||
Realized investment gains (losses) | — | 1 | (3 | ) | ||||||||
Realized losses credited to policyholder benefit obligation | (4 | ) | (5 | ) | (1 | ) | ||||||
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Total revenues | $ | 156 | $ | 167 | $ | 175 | ||||||
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Benefits and expenses: | ||||||||||||
Policy and contract benefits | $ | 123 | $ | 134 | $ | 145 | ||||||
Change in future policyholder benefits and interest credited to policyholder accounts | (29 | ) | (27 | ) | (35 | ) | ||||||
Policyholder dividends | 44 | 50 | 55 | |||||||||
Change in policyholder dividend obligation | 3 | (8 | ) | (8 | ) | |||||||
Other expenses | (2 | ) | 1 | 1 | ||||||||
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Total benefits and expenses | $ | 139 | $ | 150 | $ | 158 | ||||||
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Total revenues, net of benefits and expenses, before federal income tax expense | $ | 17 | $ | 17 | $ | 17 | ||||||
Federal income tax expense | 6 | 6 | 6 | |||||||||
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Revenues, net of benefits and expenses and federal income tax expense | $ | 11 | $ | 11 | $ | 11 | ||||||
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Maximum future earnings from assets and liabilities: | ||||||||||||
Beginning of period | $ | 193 | $ | 204 | $ | 215 | ||||||
Change during period | (11 | ) | (11 | ) | (11 | ) | ||||||
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End of period | $ | 182 | $ | 193 | $ | 204 | ||||||
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Cumulative closed block earnings from inception through December 31, 2013, 2012 and 2011 were higher than expected as determined in the actuarial calculation. Therefore, policyholder dividend obligations (excluding the adjustment for unrealized gains on available-for-sale securities) were $28 million, $21 million and $23 million as of December 31, 2013, 2012 and 2011, respectively.
F-45
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
(11) | Short-Term Debt |
The Company classifies debt as short-term if the maturity date at inception is less than one year and all other debt instruments as long-term.
The following table summarizes the carrying value of short-term debt and weighted average annual interest rates, as of the dates indicated:
(in millions) | December 31, 2013 | December 31, 2012 | ||||||
$600 million commercial paper program (0.24% and 0.29%, respectively) | $ | 278 | $ | 300 | ||||
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Total short-term debt | $ | 278 | $ | 300 | ||||
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In March 2012, NLIC entered into an agreement with the FHLB that allows the Company access to borrow up to $250 million and expires on March 28, 2014. The Company had $4.3 billion in eligible collateral and no amounts outstanding under the agreement as of December 31, 2013. Additionally, as part of the agreement, NLIC purchased $25 million in capital stock with the FHLB.
In May 2011, NMIC, NFS, and NLIC entered into a $600 million revolving variable rate credit facility upon expiration of its existing facility of the same amount. The new facility matures on May 6, 2015 and is subject to various covenants, as defined in the agreement. NLIC had no amounts outstanding under the facility as of December 31, 2013 and 2012.
The Company has entered into an agreement with its custodial bank to borrow against the cash collateral that is posted in connection with its securities lending program. The maximum amount available under the agreement is $350 million. The borrowing rate on this program is equal to one-month U.S. LIBOR. The Company had no amounts outstanding under this agreement as of December 31, 2013 and 2012.
The terms of each debt instrument contain various restrictive covenants, including, but not limited to, minimum statutory surplus and minimum net worth requirements, and maximum debt to tangible net worth requirements, as defined in the agreements. The Company was in compliance with all covenants as of December 31, 2013 and 2012.
The amount of interest paid on short-term debt was immaterial in 2013, 2012 and 2011.
(12) | Long-Term Debt |
The following table summarizes the carrying value of long-term debt, as of the dates indicated:
(in millions) | December 31, 2013 | December 31, 2012 | ||||||
8.15% surplus note, due June 26, 2032, payable to NFS | $ | 300 | $ | 300 | ||||
7.50% surplus note, due December 17, 2031, payable to NFS | 300 | 300 | ||||||
6.75% surplus note, due December 23, 2033, payable to NFS | 100 | 100 | ||||||
Variable funding surplus note, repaid June 2013 | — | 297 | ||||||
Other | 7 | 41 | ||||||
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Total long-term debt | $ | 707 | $ | 1,038 | ||||
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F-46
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
On December 31, 2010, Olentangy Reinsurance, LLC (Olentangy), a special purpose financial captive insurance company subsidiary of NLAIC domiciled in the State of Vermont, issued a variable funding surplus note due on December 31, 2040 to Nationwide Corporation, a majority-owned subsidiary of NMIC. In June 2013, the Company paid the outstanding balance of the surplus note. The Company made interest payments on this surplus note totaling $5 million and $10 million for the years ending December 31, 2013 and 2012, respectively. Any payment of interest or principal on the note requires the prior approval of the State of Vermont.
The Company made interest payments to NFS on surplus notes totaling $54 million for the years ended December 31, 2013, 2012 and 2011. Payments of interest and principal under the notes require the prior approval of the ODI.
(13) | Federal Income Taxes |
The following table summarizes the federal income tax expense (benefit) attributable to income (loss) before loss attributable to noncontrolling interests, for the years ended:
(in millions) | December 31, 2013 | December 31, 2012 | December 31, 20111 | |||||||||
Current tax (benefit) expense | $ | (33 | ) | $ | (144 | ) | $ | 55 | ||||
Deferred tax expense (benefit) | 346 | 243 | (482 | ) | ||||||||
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Total tax expense (benefit) | $ | 313 | $ | 99 | $ | (427 | ) | |||||
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1 | The balances reflect a change in accounting principle, as described in Note 2. |
The following table summarizes how the total federal income tax expense (benefit) differs from the amount computed by applying the U.S. federal income tax rate to income (loss) before loss attributable to noncontrolling interests, for the years ended:
December 31, 2013 | December 31, 2012 | December 31, 20111 | ||||||||||||||||||||||
(in millions) | Amount | % | Amount | % | Amount | % | ||||||||||||||||||
Rate reconciliation: | ||||||||||||||||||||||||
Computed (expected tax expense (benefit)) | $ | 469 | 35 | % | $ | 245 | 35 | % | $ | (297 | ) | 35 | % | |||||||||||
Dividends received deduction | (112 | ) | (8 | )% | (75 | ) | (11 | )% | (99 | ) | 12 | % | ||||||||||||
Tax credits | (82 | ) | (6 | )% | (85 | ) | (12 | )% | (30 | ) | 3 | % | ||||||||||||
Other, net | 38 | 2 | % | 14 | 2 | % | (1 | ) | — | % | ||||||||||||||
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Total | $ | 313 | 23 | % | $ | 99 | 14 | % | $ | (427 | ) | 50 | % | |||||||||||
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1 | The balances reflect a change in accounting principle, as described in Note 2. |
The Company’s current federal income tax (liability) receivable was $(13) million and $61 million as of December 31, 2013 and 2012, respectively.
Total federal income taxes (refunded) paid were $(107) million, $(95) million and $121 million for the years ended December 31, 2013, 2012 and 2011, respectively.
During 2013 and 2011, the Company recorded a tax benefit of $13 million and $10 million, respectively. These changes in estimates were primarily driven by differences in the Company’s separate account dividends received deduction (“DRD”) between the previous year’s estimate and the amount reported on the previous year’s tax return. No material changes in estimated income tax expense were recorded in 2012.
F-47
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
As of December 31, 2013, the Company has gross federal net operating loss carryforwards of $797 million, which expire between 2027 and 2028. In addition, the Company has $222 million in low-income-housing credit carryforwards, which expire between 2024 and 2033, $90 million in alternative minimum tax credit carryforwards, which have an unlimited carryforward and $40 million in foreign tax credit carryforwards which expire between 2019 and 2023. The Company expects to fully utilize all carryforwards.
The following table summarizes the tax effects of temporary differences that gave rise to significant components of the net deferred tax liability included in other liabilities in the consolidated balance sheets, as of the dates indicated:
(in millions) | December 31, 2013 | December 31, 2012 | ||||||
Deferred tax assets: | ||||||||
Future policy benefits and claims | $ | 1,244 | $ | 1,295 | ||||
Derivatives, including embedded derivatives | — | 94 | ||||||
Tax credit carryforwards | 352 | 288 | ||||||
Other | 845 | 478 | ||||||
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Gross deferred tax assets | $ | 2,441 | $ | 2,155 | ||||
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Valuation allowance | (17 | ) | (18 | ) | ||||
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Net deferred tax assets | 2,424 | 2,137 | ||||||
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Deferred tax liabilities: | ||||||||
Deferred policy acquisition costs | $ | (1,048 | ) | $ | (874 | ) | ||
Available-for-sale securities | (821 | ) | (1,338 | ) | ||||
Derivatives, including embedded derivatives | (600 | ) | — | |||||
Other | (255 | ) | (239 | ) | ||||
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Gross deferred tax liabilities | $ | (2,724 | ) | $ | (2,451 | ) | ||
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Net deferred tax liability | $ | (300 | ) | $ | (314 | ) | ||
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In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of the total gross deferred tax assets will not be realized. Valuation allowances are established when necessary to reduce the deferred tax assets to amounts expected to be realized. The valuation allowance was $17 million and $18 million as of December 31, 2013 and 2012, respectively. The change in the valuation allowance for the years ended December 31, 2013 and 2011 was $1 million and $6 million, respectively, while there was no change in the valuation allowance for the year ended December 31, 2012. Based on management’s analysis, it is more likely than not that the results of future operations and the implementation of tax planning strategies will generate sufficient taxable income to enable the Company to realize the deferred tax assets for which the Company has not established valuation allowances.
F-48
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The following table is a rollforward of the beginning and ending uncertain tax positions, including permanent and temporary differences, but excluding interest and penalties:
(in millions) | 2013 | 2012 | 2011 | |||||||||
Balance at beginning of period | $ | 36 | $ | 76 | $ | 119 | ||||||
Additions for current year tax positions | 2 | (2 | ) | 9 | ||||||||
Additions for prior years tax positions | — | 25 | — | |||||||||
Reductions for prior years tax positions | (2 | ) | (63 | ) | (52 | ) | ||||||
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Balance at end of period | $ | 36 | $ | 36 | $ | 76 | ||||||
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The Company does not anticipate any significant changes to unrecognized tax benefits during the next twelve months.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities through the 2005 tax year. In 2013, the IRS commenced an examination of the Company’s U.S. income tax returns for the years 2009 through 2010. Any adjustments that may result from IRS examination of tax returns are not expected to have a material effect on the results of operations, cash flows or financial position of the Company.
(14) | Statutory Financial Information |
Statutory Results
The Company’s life insurance subsidiaries are required to prepare statutory financial statements in conformity with the statutory accounting practices prescribed and permitted by insurance regulatory authorities, subject to any deviations prescribed or permitted by the applicable state department of insurance. Olentangy was granted a permitted practice from the State of Vermont that changed NLAIC’s valuation of this subsidiary by $66 million as of December 31, 2013, which also allowed NLIC to admit additional deferred tax assets of $10 million as of December 31, 2013. Statutory accounting practices focus on insurer solvency and materially differ from GAAP primarily due to charging policy acquisition and other costs to expense as incurred, establishing future policy benefits and claims reserves using different actuarial assumptions, excluding certain assets from statutory admitted assets; and valuing investments and establishing deferred taxes on a different basis.
The following table summarizes the statutory net income (loss) and statutory capital and surplus for the Company’s primary life insurance subsidiary for the years ended:
(in millions) | December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||
Statutory net income (loss) | ||||||||||||
NLIC | $ | 262 | $ | 764 | $ | 18 | ||||||
NLAIC | $ | (103 | ) | $ | (54 | ) | $ | (61 | ) | |||
Statutory capital and surplus | ||||||||||||
NLIC | $ | 3,550 | $ | 3,837 | $ | 3,591 | ||||||
NLAIC | $ | 534 | $ | 311 | $ | 302 | ||||||
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F-49
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
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. During the years ended December 31, 2013 and 2011, NLIC did not pay any dividends to NFS. During the year ended December 31, 2012, NLIC paid a cash dividend of $40 million to NFS. As of January 1, 2014, NLIC has the ability to pay dividends to NFS totaling $355 million without obtaining prior approval.
The State of Ohio insurance laws also require insurers to seek prior regulatory approval for any dividend paid from other than earned surplus. Earned capital and 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 capital and surplus must be reasonable in relation to the insurer’s outstanding liabilities and adequate for its financial needs. The payment of dividends by the Company 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 the Company’s participating policies (measured before dividends to policyholders) available for the benefit of the Company and its stockholders.
The Company currently does not expect such regulatory requirements to impair the ability to pay operating expenses and dividends in the future.
Regulatory Risk-Based Capital
The National Association of Insurance Commissioners’ (“NAIC”) Risk-Based Capital (“RBC”) model law requires every insurer to calculate its total adjusted capital and RBC requirement to ensure insurer solvency. Regulatory guidelines provide for an insurance commissioner to intervene if the insurer experiences financial difficulty, as evidenced by a company’s total adjusted capital falling below established relationships to required RBC. The model includes components for asset risk, liability risk, interest rate exposure and other factors. The State of Ohio, where NLIC and NLAIC are domiciled, imposes minimum RBC requirements that are developed by the NAIC. The formulas in the model for determining the amount of RBC specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of total adjusted capital, as defined by the NAIC, to authorized control level RBC, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, all of which require specified corrective action. NLIC and NLAIC each exceeded the minimum RBC requirements for all periods presented herein.
(15) | Related Party Transactions |
The Company has entered into significant, recurring transactions and agreements with NMIC, other affiliates and subsidiaries as a part of its ongoing operations. These include annuity and life insurance contracts, employee benefit plans, office space cost sharing arrangements, and agreements related to reinsurance, cost sharing, administrative services, marketing, intercompany loans, intercompany repurchases, cash management services and software licensing. Measures used to allocate expenses among companies include individual employee estimates of time spent, special cost studies, the number of full-time employees, commission expense and other methods agreed to by the participating companies.
In addition, Nationwide Services Company, LLC (“NSC”), a subsidiary of NMIC, provides data processing, systems development, hardware and software support, telephone, mail and other services to the Company, based on specified rates for units of service consumed. For the years ended December 31, 2013, 2012 and 2011, the Company made payments to NMIC and NSC totaling $277 million, $283 million and $241 million, respectively.
F-50
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The Company has issued group annuity and life insurance contracts and performs administrative services for various employee benefit plans sponsored by NMIC or its affiliates. Total account values of these contracts were $3.3 billion and $3.2 billion as of December 31, 2013 and 2012, respectively. Total revenues from these contracts were $137 million, $140 million and $148 million for the years ended December 31, 2013, 2012 and 2011, respectively, and include policy charges, net investment income from investments backing the contracts and administrative fees. Total interest credited to the account balances was $109 million, $113 million and $122 million for the years ended December 31, 2013, 2012 and 2011, respectively. The terms of these contracts are materially consistent with what the Company offers to unaffiliated parties.
The Company has a cost sharing arrangement with NMIC to occupy office space. For the years ended December 31, 2013, 2012 and 2011, the Company made payments to NMIC of $16 million, $15 million and $14 million, respectively. In addition, an affiliate of NMIC has a cost sharing arrangement with the Company to occupy office space.
NLIC has a reinsurance agreement with NMIC whereby all of NLIC’s accident and health business not ceded to unaffiliated reinsurers is ceded to NMIC on a modified coinsurance basis. Either party may terminate the agreement on January 1 of any year with prior notice. Under a modified coinsurance agreement, the ceding company retains invested assets, and investment earnings are paid to the reinsurer. Under the terms of NLIC’s agreements, the investment risk associated with changes in interest rates is borne by the reinsurer. The ceding of risk does not discharge the original insurer from its primary obligation to the policyholder. The Company believes that the terms of the modified coinsurance agreements are consistent in all material respects with what the Company could have obtained with unaffiliated parties. Revenues ceded to NMIC for the years ended December 31, 2013, 2012 and 2011 were $179 million, $161 million and $203 million, respectively, while benefits, claims and expenses ceded during these years were $178 million, $167 million and $212 million, respectively.
Funds of Nationwide Funds Group (“NFG”), an affiliate, are offered to the Company’s customers as investment options in certain of the Company’s products. As of December 31, 2013 and 2012, customer allocations to NFG funds totaled $53.2 billion and $45.0 billion, respectively. For the years ended December 31, 2013, 2012 and 2011, NFG paid the Company $163 million, $144 million and $129 million, respectively, for the distribution and servicing of these funds.
Amounts on deposit with NCMC for the benefit of the Company were $228 million and $854 million as of December 31, 2013 and 2012, respectively.
Refer to Note 12 for discussion of variable funding surplus note between Olentangy Reinsurance, LLC and Nationwide Corporation.
Certain annuity products are sold through affiliated companies, which are also subsidiaries of NFS. Total commissions and fees paid to these affiliates were $54 million for the years ended December 31, 2013 and 2012 and $64 million for the year ended December 31, 2011.
The Company provides financing to Nationwide Realty Investors, LTD, a subsidiary of NMIC. As of December 31, 2013 and 2012, the Company had notes receivable outstanding of $146 million and $126 million, respectively.
F-51
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
(16) | Contingencies |
Legal and Regulatory Matters
The Company is subject to legal and regulatory proceedings in the ordinary course of its business. The Company’s legal and regulatory matters include proceedings specific to the Company and other proceedings generally applicable to business practices in the industries in which the Company operates. These matters are subject to many uncertainties, and given their complexity and scope, their outcomes cannot be predicted. Regulatory proceedings could also affect the outcome of one or more of the Company’s litigation matters. Furthermore, it is often not possible to determine the ultimate outcomes of the pending regulatory 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 believes, however, that based on currently known information, the ultimate outcome of all pending legal and regulatory matters is not likely to have a material adverse effect on the Company’s consolidated financial position. Nonetheless, given the large or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation, it is possible that such outcomes could materially affect the Company’s consolidated financial position or results of operations in a particular quarter or annual period.
The various businesses conducted by the Company are subject to oversight by numerous federal and state regulatory entities, including but not limited to the Securities and Exchange Commission, the Financial Industry Regulatory Authority, the Department of Labor, the IRS and state insurance authorities. Such regulatory entities may, in the normal course, be engaged in general or targeted inquiries, examinations and investigations of the Company and/or its affiliates. The financial services industry has been the subject of increasing scrutiny in connection with a broad spectrum of regulatory issues; with respect to all such scrutiny directed at the Company and/or its affiliates, the Company is cooperating with regulators. The Company will cooperate with NMIC insofar as any inquiry, examination or investigation encompasses NMIC’s operations.
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. On November 18, 2009, the plaintiffs filed a sixth amended complaint amending the list of named plaintiffs and claiming to represent a class of qualified retirement plan trustees under the Employee Retirement Income Security Act of 1974 (“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. On November 6, 2009, the Court granted the plaintiffs’ motion for class certification. On October 21, 2010, the District Court dismissed NFS from the lawsuit. On February 6, 2012, the Second Circuit Court of Appeals vacated the November 6, 2009 order granting class certification and remanded the case back to the District Court for further consideration. On September 6, 2013, the District Court granted the plaintiffs’ motion for class certification. The case is set for trial beginning August 11, 2014. NLIC continues to defend this lawsuit vigorously.
F-52
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
On November 20, 2007, NRS and NLIC 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 Nationwide Life Insurance Company, Nationwide Retirement Solutions, Inc., Alabama State Employees Association, PEBCO, Inc. and Fictitious Defendants A to Z. On March 12, 2010, NRS and NLIC were named in a Second Amended Class Action Complaint filed in the Circuit Court of Jefferson County, Alabama entitledSteven E. Coker, Sandra H. Turner, David N.Lichtenstein and a class of similarly situated individuals v. Nationwide Life Insurance Company, Nationwide Retirement Solutions, Inc, Alabama State Employees Association, Inc., PEBCO, Inc. and Fictitious Defendants A to Z claiming to represent a class of all participants in the Alabama State Employees Association, Inc. (“ASEA”) Plan, excluding members of the Deferred Compensation Committee, ASEA’s directors, officers and board members, and PEBCO’s directors, officers and board members. On October 22, 2010, the parties to this action executed a court approved stipulation of settlement that agreed to certify a class for settlement purposes only, that provided for payments to the settlement class, and that provided for releases, certain bar orders, and dismissal of the case. The settlement fund has been paid out. On December 6, 2011, the Court entered an Order that NRS owes indemnification to ASEA and PEBCO for only the Coker (Gwin) class action, and dismissed NLIC. The Company has resolved the indemnification claims of ASEA. On February 15, 2013, the Court issued its Order determining the amount of fees due to PEBCO on its indemnification claim. On March 28, 2013, the Company filed a notice of appeal to the Alabama Supreme Court. The case is fully briefed. NRS continues to defend this case vigorously.
On June 8, 2011, NMIC and NLIC were named in a lawsuit filed in Court of Common Pleas, Cuyahoga County, Ohio entitledStanley Andrews and Donald C. Clark v. Nationwide Mutual Insurance Company and Nationwide Life InsuranceCompany. The complaint alleges that NMIC and NLIC have an obligation to review the Social Security Administration Death Master File database for all life insurance policyholders who have at least a 70% probability of being deceased according to actuarial tables. The complaint further alleges that NMIC and NLIC are not conducting such a review. The complaint seeks injunctive relief and declaratory judgment requiring NMIC and NLIC to conduct such a review, and alleges NMIC and NLIC have violated the covenant of good faith and fair dealing and have been unjustly enriched by not having conducted such reviews. The lower court granted Nationwide’s motion to dismiss. Plaintiffs appealed. The Court of Appeals affirmed the dismissal on October 24, 2012. Plaintiffs filed a petition for rehearing en banc on November 5, 2012. The Court of Appeals denied the petition on December 14, 2012. Plaintiffs filed a notice of appeal to the Ohio Supreme Court on January 24, 2013. Nationwide filed its memorandum in opposition to plaintiffs’ petition for jurisdiction to the Ohio Supreme Court on February 27, 2013. The Ohio Supreme Court denied plaintiffs’ petition for review of the decision of the Court of Appeals on April 24, 2013. Plaintiffs’ time to file a petition for writ of certiorari to the U.S. Supreme Court has expired, concluding this matter.
In 2012, the Plaintiff, Debtor in Possession Lehman Brothers Special Financing, Inc., filed a class action in the United States Bankruptcy Court for the Southern District of New York seeking the recovery of nearly $3.0 billion in assets from all the named defendants including NLIC and NMIC. This litigation arises from two collateralized debt obligation transactions, 801 Grand and Alta, which resulted in payments to NLIC and NMIC after the Plaintiff and its parent company, Lehman Brothers Holding, Inc. filed for bankruptcy in 2008. This triggered an early termination of the above transactions. The Plaintiff seeks to have sums returned to the bankruptcy estate in addition to prejudgment interest and costs. The case is currently stayed. In 2013, Plaintiff sent correspondence to all defendants inviting settlement discussions and has served NMIC and NLIC with a “SPV Derivatives ADR Notice,” formally starting the Alternative Dispute Resolution process. NMIC and NLIC have responded, and are currently taking part in the ADR process. Mediation was scheduled for and proceeded on December 13, 2013, but the parties reached an impasse. On January 10, 2014, Lehman filed another motion to extend the stay for a final four month period. After a hearing, the court extended the stay to the later of (a) May 20, 2014 or (b) 30 days after the court enters a scheduling order governing the Distributed Action. The parties are negotiating the proposed scheduling order for the conduct of the Distributed Action litigation, which will be finalized by March 24, 2014.
F-53
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
Tax Matters
The Company’s federal income tax returns are routinely audited by the IRS. The Company has established tax reserves as described in Note 2. The Company believes its tax reserves reasonably provide for potential assessments that may result from IRS examinations and other tax-related matters for all open tax years.
Indemnifications
In the normal course of business, the Company provides standard indemnifications to contractual counterparties. The types of indemnifications typically provided include breaches of representations and warranties, taxes and certain other liabilities, such as third party lawsuits. The indemnification clauses are often standard contractual terms and are entered into in the normal course of business based on an assessment that the risk of loss would be remote. The terms of the indemnifications vary in duration and nature. In many cases, the maximum obligation is not explicitly stated, and the contingencies triggering the obligation to indemnify have not occurred and are not expected to occur. Consequently, the maximum amount of the obligation under such indemnifications is not determinable. Historically, the Company has not made any material payments pursuant to these obligations.
(17) | Reinsurance |
The following table summarizes the effects of reinsurance on life, accident and health insurance in force and premiums for the years ended:
(in millions) | December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||
Premiums | ||||||||||||
Direct | $ | 1,015 | $ | 890 | $ | 832 | ||||||
Assumed from other companies | — | — | — | |||||||||
Ceded to other companies | (291 | ) | (255 | ) | (301 | ) | ||||||
|
|
|
|
|
| |||||||
Net | $ | 724 | $ | 635 | $ | 531 | ||||||
|
|
|
|
|
| |||||||
Life, accident and health insurance in force | ||||||||||||
Direct | $ | 228,095 | $ | 216,002 | $ | 209,732 | ||||||
Assumed from other companies | 6 | 5 | 5 | |||||||||
Ceded to other companies | (58,310 | ) | (59,895 | ) | (60,499 | ) | ||||||
|
|
|
|
|
| |||||||
Net | $ | 169,791 | $ | 156,112 | $ | 149,238 | ||||||
|
|
|
|
|
|
Total amounts recoverable under reinsurance contracts totaled $675 million, $684 million and $704 million as of December 31, 2013, 2012 and 2011, respectively.
(18) | 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 Products and Solutions-Annuity (formerly named Individual Investments), Retirement Plans, Individual Products and Solutions-Life and NBSG (formerly named Individual Protection) and Corporate and Other.
F-54
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The primary segment profitability measure that management uses is a non-GAAP financial measure called pre-tax operating earnings (loss), which is calculated by adjusting income before federal income taxes to exclude: (1) net realized investment gains and losses, except for operating items (trading portfolio realized gains and losses, trading portfolio valuation changes and net realized gains and losses related to hedges on GMDB contracts); (2) the adjustment to amortization of DAC and other related to net realized investment gains and losses; and (3) net losses attributable to noncontrolling interest.
Due to a change in the manner in which we view our reportable segments, certain prior period amounts have been restated.
Individual Products and Solutions-Annuity
The Individual Products & Solutions-Annuity segment consists of individual annuity products marketed under the Nationwide DestinationSM and other Nationwide-specific or private label brands. 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, deferred variable annuity contracts provide the customer with access to a wide range of investment options and asset protection features, while deferred fixed annuity contracts generate a return for the customer at a specified interest rate fixed for prescribed periods. Immediate annuities differ from deferred annuities in that the initial premium is exchanged for a stream of income for a certain period or for the owner’s lifetime without future access to the original investment. The majority of assets and recent sales for the Individual Products & Solutions-Annuity segment consist of deferred variable annuities.
Retirement Plans
The Retirement Plans segment is comprised of the Company’s private and public sector retirement plans businesses. The private sector primarily includes Internal Revenue Code (“IRC”) Section 401 fixed and variable group annuity business, and the public sector primarily includes IRC Section 457 and Section 401(a) business in the form of full-service arrangements that provide plan administration and fixed and variable group annuities as well as administration-only business. The Retirement Plan segment also includes managed account services and stable value wrap products.
Individual Products and Solutions-Life and NBSG
The Individual Products & Solutions-Life and NBSG segment consists of life insurance products, including individual variable universal life, COLI and BOLI products; traditional life insurance products; fixed universal life insurance products; and indexed universal life 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 non-operating realized gains and losses and related amortization, including mark-to-market adjustments on embedded derivatives, net of economic hedges, related to products with living benefits included in the Individual Products & Solutions-Annuity segment and other revenues and expenses not allocated to other segments.
F-55
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
The following tables summarize the Company’s business segment operating results for the years ended:
(in millions) | Individual Products and Solutions- Annuity | Retirement Plans | Individual Products and Solutions-Life and NBSG | Corporate and Other | Total | |||||||||||||||
December 31, 2013 | ||||||||||||||||||||
Revenues: | ||||||||||||||||||||
Policy charges | $ | 1,021 | $ | 101 | $ | 727 | $ | — | $ | 1,849 | ||||||||||
Premiums | 416 | — | 282 | 26 | 724 | |||||||||||||||
Net investment income | 546 | 743 | 544 | 16 | 1,849 | |||||||||||||||
Non-operating net realized investment gains, net of other-than-temporary impairment losses1 | — | — | — | 791 | 791 | |||||||||||||||
Other revenues2 | (109 | ) | — | — | 13 | (96 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total revenues | $ | 1,874 | $ | 844 | $ | 1,553 | $ | 846 | $ | 5,117 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Benefits and expenses: | ||||||||||||||||||||
Interest credited to policyholder accounts | $ | 377 | $ | 473 | $ | 213 | $ | 4 | $ | 1,067 | ||||||||||
Benefits and claims | 688 | — | 636 | 30 | 1,354 | |||||||||||||||
Policyholder dividends | — | — | 61 | (2 | ) | 59 | ||||||||||||||
Amortization of DAC | 185 | (2 | ) | 125 | 66 | 374 | ||||||||||||||
Other expenses, net of deferrals | 303 | 151 | 284 | 184 | 922 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total benefits and expenses | $ | 1,553 | $ | 622 | $ | 1,319 | $ | 282 | $ | 3,776 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income before federal income taxes and noncontrolling interests | $ | 321 | $ | 222 | $ | 234 | $ | 564 | $ | 1,341 | ||||||||||
|
| |||||||||||||||||||
Less: non-operating net realized investment gains, net of other-than-temporary impairment losses1 | — | — | — | (791 | ) | |||||||||||||||
Less: adjustment to amortization of DAC and other related to net realized investment gains and losses | — | — | — | 70 | ||||||||||||||||
Less: net loss attributable to noncontrolling interest | — | — | — | 82 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Pre-tax operating earnings (loss) | $ | 321 | $ | 222 | $ | 234 | $ | (75 | ) | |||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Assets as of year end | $ | 68,805 | $ | 29,904 | $ | 27,183 | $ | 7,553 | $ | 133,445 | ||||||||||
|
|
|
|
|
|
|
|
|
|
1 | Excluding operating items (trading portfolio realized gains and losses, trading portfolio valuation changes and net realized gains and losses related to hedges on GMDB contracts). |
2 | Includes operating items discussed above. |
F-56
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
(in millions) | Individual Products and Solutions- Annuity | Retirement Plans | Individual Products and Solutions-Life and NBSG | Corporate and Other | Total | |||||||||||||||
December 31, 2012 | ||||||||||||||||||||
Revenues: | ||||||||||||||||||||
Policy charges | $ | 899 | $ | 94 | $ | 677 | $ | — | $ | 1,670 | ||||||||||
Premiums | 334 | — | 274 | 27 | 635 | |||||||||||||||
Net investment income | 551 | 736 | 534 | 4 | 1,825 | |||||||||||||||
Non-operating net realized investment gains, net of other-than-temporary impairment losses1 | — | — | — | 428 | 428 | |||||||||||||||
Other revenues2 | (124 | ) | — | — | 22 | (102 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total revenues | $ | 1,660 | $ | 830 | $ | 1,485 | $ | 481 | $ | 4,456 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Benefits and expenses: | ||||||||||||||||||||
Interest credited to policyholder accounts | $ | 375 | $ | 457 | $ | 199 | $ | 7 | $ | 1,038 | ||||||||||
Benefits and claims | 595 | — | 589 | 43 | 1,227 | |||||||||||||||
Policyholder dividends | — | — | 57 | (3 | ) | 54 | ||||||||||||||
Amortization of DAC | 185 | 14 | 150 | 226 | 575 | |||||||||||||||
Other expenses, net of deferrals | 285 | 163 | 250 | 165 | 863 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total benefits and expenses | $ | 1,440 | $ | 634 | $ | 1,245 | $ | 438 | $ | 3,757 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income before federal income taxes and noncontrolling interests | $ | 220 | $ | 196 | $ | 240 | $ | 43 | $ | 699 | ||||||||||
|
| |||||||||||||||||||
Less: non-operating net realized investment gains, net of other-than-temporary impairment losses1 | — | — | — | (428 | ) | |||||||||||||||
Less: adjustment to amortization of DAC and other related to net realized investment gains and losses | — | — | — | 243 | ||||||||||||||||
Less: net loss attributable to noncontrolling interest | — | — | — | 61 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Pre-tax operating earnings (loss) | $ | 220 | $ | 196 | $ | 240 | $ | (81 | ) | |||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Assets as of year end | $ | 58,707 | $ | 27,842 | $ | 25,301 | $ | 8,320 | $ | 120,170 | ||||||||||
|
|
|
|
|
|
|
|
|
|
1 | Excluding operating items (trading portfolio realized gains and losses, trading portfolio valuation changes and net realized gains and losses related to hedges on GMDB contracts). |
2 | Includes operating items discussed above. |
F-57
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
December 31, 2013, 2012 and 2011
(in millions) | Individual Products and Solutions- Annuity | Retirement Plans | Individual Products and Solutions-Life and NBSG | Corporate and Other | Total | |||||||||||||||
December 31, 20113 | ||||||||||||||||||||
Revenues: | ||||||||||||||||||||
Policy charges | $ | 781 | $ | 96 | $ | 629 | $ | — | $ | 1,506 | ||||||||||
Premiums | 234 | — | 272 | 25 | 531 | |||||||||||||||
Net investment income | 527 | 715 | 531 | 71 | 1,844 | |||||||||||||||
Non-operating net realized investment losses, net of other-than-temporary impairment losses1 | — | — | — | (1,613 | ) | (1,613 | ) | |||||||||||||
Other revenues2 | (59 | ) | — | — | (1 | ) | (60 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total revenues | $ | 1,483 | $ | 811 | $ | 1,432 | $ | (1,518 | ) | $ | 2,208 | |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Benefits and expenses: | ||||||||||||||||||||
Interest credited to policyholder accounts | $ | 374 | $ | 441 | $ | 198 | $ | 20 | $ | 1,033 | ||||||||||
Benefits and claims | 476 | — | 577 | 9 | 1,062 | |||||||||||||||
Policyholder dividends | — | — | 67 | — | 67 | |||||||||||||||
Amortization of DAC | 80 | 11 | 75 | (101 | ) | 65 | ||||||||||||||
Other expenses, net of deferrals | 269 | 166 | 235 | 160 | 830 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total benefits and expenses | $ | 1,199 | $ | 618 | $ | 1,152 | $ | 88 | $ | 3,057 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income (loss) before federal income taxes and noncontrolling interests | $ | 284 | $ | 193 | $ | 280 | $ | (1,606 | ) | $ | (849 | ) | ||||||||
|
| |||||||||||||||||||
Less: non-operating net realized investment losses, net of other-than-temporary impairment losses1 | — | — | — | 1,613 | ||||||||||||||||
Less: adjustment to amortization of DAC and other related to net realized investment gains and losses | — | — | — | (115 | ) | |||||||||||||||
Less: net loss attributable to noncontrolling interest | — | — | — | 56 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Pre-tax operating earnings (loss) | $ | 284 | $ | 193 | $ | 280 | $ | (52 | ) | |||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Assets as of year end | $ | 57,741 | $ | 25,114 | $ | 22,503 | $ | 6,628 | $ | 111,986 | ||||||||||
|
|
|
|
|
|
|
|
|
|
1 | Excluding operating items (trading portfolio realized gains and losses, trading portfolio valuation changes and net realized gains and losses related to hedges on GMDB contracts). |
2 | Includes operating items discussed above. |
3 | The balances reflect a change in accounting principle, as described in Note 2. |
F-58
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Schedule I Consolidated Summary of Investments – Other Than Investments in Related Parties
As of December 31, 2013 (in millions)
Column A | Column B | Column C | Column D | |||||||||
Type of investment | Cost | Fair value | Amount at which shown in the consolidated balance sheet | |||||||||
Fixed maturity securities, available-for-sale: | ||||||||||||
Bonds: | ||||||||||||
U.S. Treasury securities and obligations of U.S. Government corporations and agencies | $ | 484 | $ | 561 | $ | 561 | ||||||
Obligations of states, political subdivisions and foreign governments | 1,892 | 1,963 | 1,963 | |||||||||
Public utilities | 2,616 | 2,759 | 2,759 | |||||||||
All other corporate, mortgage-backed and asset-backed securities | 26,010 | 26,966 | 26,966 | |||||||||
|
|
|
|
|
| |||||||
Total fixed maturity securities, available-for-sale | $ | 31,002 | $ | 32,249 | $ | 32,249 | ||||||
|
|
|
|
|
| |||||||
Equity securities, available-for-sale: | ||||||||||||
Common stocks: | ||||||||||||
Industrial, miscellaneous and all other | $ | 6 | $ | 14 | $ | 14 | ||||||
Nonredeemable preferred stocks | — | 10 | 10 | |||||||||
|
|
|
|
|
| |||||||
Total equity securities, available-for-sale | $ | 6 | $ | 24 | $ | 24 | ||||||
|
|
|
|
|
| |||||||
Trading assets | 30 | 31 | 31 | |||||||||
Mortgage loans, net of allowance | 6,376 | 6,341 | 1 | |||||||||
Policy loans | 987 | 987 | ||||||||||
Other investments | 712 | 712 | ||||||||||
Short-term investments | 411 | 411 | ||||||||||
|
|
|
| |||||||||
Total investments | $ | 39,524 | $ | 40,755 | ||||||||
|
|
|
|
1 | Difference from Column B primarily is attributable to valuation allowances due to impairments on mortgage loans (see Note 6 to the audited consolidated financial statements). |
See accompanying notes to consolidated financial statements and report of independent registered public accounting firm.
F-59
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Schedule III Supplementary Insurance Information
As of December 31, 2013, 2012 and 2011 and for each of the years then ended (in millions)
Column A | Column B | Column C | Column D | Column E | Column F | |||||||||||||||
Year: Segment | Deferred policy acquisition costs3 | Future policy benefits, losses, claims and loss expenses | Unearned premiums1 | Other policy claims and benefits payable1 | Premium revenue | |||||||||||||||
2013 | ||||||||||||||||||||
IPS - Annuity | $ | 2,214 | $ | 10,985 | $ | 416 | ||||||||||||||
Retirement Plans | 179 | 14,313 | — | |||||||||||||||||
IPS - Life and NBSG | 1,557 | 10,068 | 282 | |||||||||||||||||
Corporate and Other | (172 | ) | 1,399 | 26 | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||
Total | $ | 3,778 | $ | 36,765 | $ | 724 | ||||||||||||||
|
|
|
|
|
| |||||||||||||||
2012 | ||||||||||||||||||||
IPS - Annuity | $ | 2,110 | $ | 12,214 | $ | 334 | ||||||||||||||
Retirement Plans | 168 | 13,628 | — | |||||||||||||||||
IPS - Life and NBSG | 1,442 | 9,564 | 301 | |||||||||||||||||
Corporate and Other | (471 | ) | 748 | — | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||
Total | $ | 3,249 | $ | 36,154 | $ | 635 | ||||||||||||||
|
|
|
|
|
| |||||||||||||||
2011 | ||||||||||||||||||||
IPS - Annuity | $ | 2,232 | $ | 12,550 | $ | 234 | ||||||||||||||
Retirement Plans | 172 | 12,638 | — | |||||||||||||||||
IPS - Life and NBSG | 1,421 | 9,338 | 297 | |||||||||||||||||
Corporate and Other | (338 | ) | 726 | — | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||
Total | $ | 3,487 | $ | 35,252 | $ | 531 | ||||||||||||||
|
|
|
|
|
| |||||||||||||||
Column A | Column G | Column H | Column I | Column J | Column K | |||||||||||||||
Year: Segment | Net investment income2 | Benefits, claims, losses and settlement expenses | Amortization of deferred policy acquisition costs3 | Other operating expenses2,3 | Premiums written | |||||||||||||||
2013 | ||||||||||||||||||||
IPS - Annuity | $ | 546 | $ | 1,065 | $ | 185 | $ | 303 | ||||||||||||
Retirement Plans | 743 | 473 | (2 | ) | 151 | |||||||||||||||
IPS - Life and NBSG | 544 | 910 | 125 | 284 | ||||||||||||||||
Corporate and Other | 16 | 32 | 66 | 184 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 1,849 | $ | 2,480 | $ | 374 | $ | 922 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
2012 | ||||||||||||||||||||
IPS - Annuity | $ | 551 | $ | 970 | $ | 185 | $ | 285 | ||||||||||||
Retirement Plans | 736 | 457 | 14 | 163 | ||||||||||||||||
IPS - Life and NBSG | 536 | 868 | 150 | 255 | ||||||||||||||||
Corporate and Other | 2 | 24 | 226 | 160 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 1,825 | $ | 2,319 | $ | 575 | $ | 863 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
2011 | ||||||||||||||||||||
IPS - Annuity | $ | 527 | $ | 850 | $ | 80 | $ | 269 | ||||||||||||
Retirement Plans | 715 | 441 | 11 | 166 | ||||||||||||||||
IPS - Life and NBSG | 533 | 863 | 75 | 238 | ||||||||||||||||
Corporate and Other | 69 | 8 | (101 | ) | 157 | |||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 1,844 | $ | 2,162 | $ | 65 | $ | 830 | ||||||||||||
|
|
|
|
|
|
|
|
1 | Unearned premiums and other policy claims and benefits payable are included in Column C amounts. |
2 | Allocations of net investment income and certain operating expenses are based on numerous assumptions and estimates, and reported segment operating results would change if different methods were applied. |
3 | The 2011 balances reflect a change in accounting principle, as described in Note 2. |
See accompanying notes to consolidated financial statements and report of independent registered public accounting firm.
F-60
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
As of December 31, 2013, 2012 and 2011 and for each of the years then ended (in millions)
Column A | Column B | Column C | Column D | Column E | Column F | |||||||||||||||
Gross amount | Ceded to other companies | Assumed from other companies | Net amount | Percentage of amount assumed to net | ||||||||||||||||
2013 | ||||||||||||||||||||
Life, accident and health insurance in force | $ | 228,095 | $ | (58,310 | ) | $ | 6 | $ | 169,791 | — | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Premiums: | ||||||||||||||||||||
Life insurance1 | $ | 783 | $ | (59 | ) | $ | — | $ | 724 | — | ||||||||||
Accident and health insurance | 232 | (232 | ) | — | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 1,015 | $ | (291 | ) | $ | — | $ | 724 | — | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
2012 | ||||||||||||||||||||
Life, accident and health insurance in force | $ | 216,002 | $ | (59,895 | ) | $ | 5 | $ | 156,112 | — | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Premiums: | ||||||||||||||||||||
Life insurance1 | $ | 701 | $ | (66 | ) | $ | — | $ | 635 | — | ||||||||||
Accident and health insurance | 189 | (189 | ) | — | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 890 | $ | (255 | ) | $ | — | $ | 635 | — | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
2011 | ||||||||||||||||||||
Life, accident and health insurance in force | $ | 209,732 | $ | (60,499 | ) | $ | 5 | $ | 149,238 | — | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Premiums: | ||||||||||||||||||||
Life insurance1 | $ | 596 | $ | (65 | ) | $ | — | $ | 531 | — | ||||||||||
Accident and health insurance | 236 | (236 | ) | — | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 832 | $ | (301 | ) | $ | — | $ | 531 | — | ||||||||||
|
|
|
|
|
|
|
|
|
|
1 | Primarily represents premiums from traditional life insurance and life-contingent immediate annuities and excludes deposits on investment and universal life insurance products. |
See accompanying notes to consolidated financial statements and report of independent registered public accounting firm.
F-61
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Schedule V Valuation and Qualifying Accounts
Years ended December 31, 2013, 2012 and 2011 (in millions)
Column A | Column B | Column C | Column D | Column E | ||||||||||||||||
Description | Balance at beginning of period | Charged to costs and expenses | Charged to other accounts | Deductions1 | Balance at end of period | |||||||||||||||
2013 | ||||||||||||||||||||
Valuation allowances - mortgage loans | $ | 44 | $ | (4 | ) | $ | — | $ | 5 | $ | 35 | |||||||||
2012 | ||||||||||||||||||||
Valuation allowances - mortgage loans | $ | 60 | $ | 1 | $ | — | $ | 17 | $ | 44 | ||||||||||
2011 | ||||||||||||||||||||
Valuation allowances - mortgage loans | $ | 96 | $ | 25 | $ | — | $ | 61 | $ | 60 | ||||||||||
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1 | Amounts generally represent payoffs, sales and recoveries. |
See accompanying notes to consolidated financial statements and report of independent registered public accounting firm.
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Item 13. | Other Expenses of Issuance and Distribution |
Item 14. | Indemnification of Directors and Officers |
• | any threatened, pending or completed civil action, suit or proceeding; |
• | any threatened, pending or completed criminal action, suit or proceeding; |
• | any threatened, pending or completed administrative action or proceeding; |
• | any threatened, pending or completed investigative action or proceeding. |
Item 15. | Recent Sales of Unregistered Securities. |
Item 16. | Exhibits and Financial Statement Schedules |
(a) | Exhibits |
(1) | Not applicable |
(2) | Articles of Merger of Nationwide Life Insurance Company of America with and into Nationwide Life Insurance Company effective December 31, 2009 – filed previously on January 4, 2010, with N-4 Registration No. 333-164125. |
(3)(i) | Amended Articles of Incorporation Nationwide Life Insurance Company - filed previously on October 2, 2008, with Pre-Effective Amendment 3 to Form S-1 for Nationwide Life Insurance Company, Registration No. 333-149613. |
(3)(ii) | Nationwide Life Insurance Company Amended and Restated Code of Regulations - filed previously on January 4, 2010, with Form N-4, Registration No. 333-164125. |
(4) | Annuity Endorsement to Contracts - filed previously on May 2, 1995, as Exhibit 4 to Form S-1 for Nationwide Life Insurance Company, Registration No. 033-58997. |
(5) | Opinion Regarding Legality - Attached hereto. |
(6) | Not applicable |
(7) | Not applicable |
(8) | None |
(9) | Not applicable |
(10) | Tax Sharing Agreement dated as of January 2, 2009 between Nationwide Life Insurance Company and any corporation that is or may hereafter become a |
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subsidiary of Nationwide Life Insurance Company – filed previously on March 27, 2012 with Post-Effective Amendment No. 15 to Form S-1 for Nationwide Life Insurance Company, Registration No. 333-133163. | |
(11) | Not applicable |
(12) | Not applicable |
(13) | Not applicable |
(14) | Not applicable |
(15) | Not applicable |
(16) | Not applicable |
(17) | Not applicable |
(18) | Not applicable |
(19) | Not applicable |
(20) | Not applicable |
(21) | Subsidiaries of the Registrant - Attached hereto. |
(22) | Not applicable |
(23)(i) | Consent of Independent Registered Public Accounting Firm - Attached hereto. |
(23)(ii) | Consent of Counsel - see Exhibit 5. |
(24) | Power of Attorney - attached hereto. |
(25) | Not applicable |
(26) | Not applicable |
(27) | Not applicable |
(101.INS) | XBRL Instance Document - Attached hereto. |
(101.SCH) | XBRL Taxonomy Extension Schema - Attached hereto. |
(101.CAL) | XBRL Taxonomy Extension Calculation Linkbase - Attached hereto. |
(101.DEF) | XBRL Taxonomy Extension Definition Linkbase - Attached hereto. |
(101.LAB) | XBRL Taxonomy Extension Label Linkbase - Attached hereto. |
(101.PRE) | XBRL Taxonomy Extension Presentation Linkbase - Attached hereto. |
(b) | Financial Statement Schedules |
Item 17. | Undertakings |
(a)(1) | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
(i) | To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; |
(ii) | To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; |
(iii) | To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. |
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(2) | That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
(3) | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
(4) | That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. |
(5) | That, for the purpose of determining liability of the Registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned Registrant undertakes that in a primary offering of securities of the undersigned Registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: |
(i) | Any preliminary prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 424; |
(ii) | Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned Registrant or used or referred to by the undersigned Registrant; |
(iii) | The portion of any other free writing prospectus relating to the offering containing material information about the undersigned Registrant or its securities provided by or on behalf of the undersigned Registrant; and |
(iv) | Any other communication that is an offer in the offering made by the undersigned Registrant to the purchaser. |
(b) | Insofar as indemnification for liabilities arising under the Securities Act of 1933 ("Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officers or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. |
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NATIONWIDE LIFE INSURANCE COMPANY |
(Registrant) |
By: /s/ JAMIE RUFF CASTO |
Jamie Ruff Casto Attorney-in-Fact |
KIRT A. WALKER | |
Kirt A. Walker, President and Chief Operating Officer, and Director | |
MARK R. THRESHER | |
Mark R. Thresher, Executive Vice President and Director | |
TIMOTHY G. FROMMEYER | |
Timothy G. Frommeyer, Senior Vice President-Chief Financial Officer and Director | |
ERIC S. HENDERSON | |
Eric S. Henderson, Senior Vice President - Individual Products & Solutions and Director | |
JOHN L. CARTER | |
John L. Carter, Senior Vice President – Nationwide Retirement Plans and Director | |
STEPHEN S. RASMUSSEN | |
Stephen S. Rasmussen, Director | |
By /s/ JAMIE RUFF CASTO | |
Jamie Ruff Casto Attorney-in-Fact |