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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will be credited with a Specified Interest Rate over the corresponding Guaranteed Term, so long as such amounts are not withdrawn from the GTO prior to the Maturity Date.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Market Value Adjustment – The upward or downward adjustment in value of amounts allocated to a GTO that are withdrawn from the GTO for any reason prior to the Maturity Date.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, 2014 | December 31, 2013 | December 31, 2012 | |||
Total revenues | $2,201 | $1,874 | $1,660 | |||
Pre-tax operating earnings | $583 | $321 | $220 | |||
Account values as of year end | $69,357 | $64,375 | $56,786 |
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(in millions) | December 31, 2014 | December 31, 2013 | December 31, 2012 | |||
Total revenues | $857 | $844 | $830 | |||
Pre-tax operating earnings | $250 | $222 | $195 | |||
Account values as of year end | $34,216 | $30,086 | $26,644 |
(in millions) | December 31, 2014 | December 31, 2013 | December 31, 2012 | |||
Total revenues | $1,644 | $1,559 | $1,485 | |||
Pre-tax operating earnings | $299 | $238 | $241 | |||
Life insurance policy reserves as of year end | $26,202 | $24,863 | $22,395 | |||
Life insurance in force as of year end | $167,173 | $154,701 | $143,633 |
(in millions) | December 31, 2014 | December 31, 2013 | December 31, 2012 | |||
Operating revenues | $78 | $55 | $54 | |||
Pre-tax operating loss | $(129) | $(73) | $(81) | |||
FHLB funding agreements | $1,762 | $913 | $25 |
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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 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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• | Title I of the Dodd-Frank Act. Title I of the Dodd-Frank Act established the Financial Stability Oversight Council ("FSOC") which has authority to designate non-bank financial companies as systemically important financial institutions ("non-bank SIFIs") thereby subjecting them to enhanced prudential standards and supervision by the Board of Governors of the Federal Reserve System ("Federal Reserve"). The prudential standards for non-bank SIFIs include enhanced RBC requirements, leverage limits, liquidity requirements, single counterparty exposure limits, governance requirements for risk management, stress test requirements, special debt-to-equity limits for certain companies, early remediation procedures and recovery and resolution planning. If FSOC were to determine that NMIC is a non-bank SIFI, NMIC would become subject to certain of these enhanced prudential standards, which could adversely affect the Company. The Federal Reserve also indicated that it may apply certain of these enhanced prudential standards to savings and loan holding companies ("SLHCs"), like NMIC and NFS, as the safety and soundness regulator for these institutions. It remains unclear the extent to which any of these enhanced prudential standards will be extended to SLHCs. |
❍ | As a financial company with total consolidated assets greater than $10 billion, NMIC is subject to stress testing requirements developed by the Federal Reserve to determine whether, on a consolidated basis, NMIC has the capital necessary to absorb losses as a result of adverse economic conditions. NMIC will be required to conduct company-run annual stress tests to be provided to the Federal Reserve. The Company cannot predict the manner in which the stress tests will ultimately be designed, conducted and disclosed with respect to NMIC or whether the results of such stress tests will cause an alteration to the Company's business practices or affect the perceptions of regulators, rating agencies, customers, counterparties or investors. |
❍ | FSOC may recommend that state insurance regulators or other regulators apply new or heightened safeguards for activities or practices in which the Company or other financial services companies engage in that FSOC determines could create or increase the risk that significant liquidity, credit or other problems might spread among financial companies. |
• | Title II of the Dodd-Frank Act. Title II of the Dodd-Frank Act provides that a financial company may be subject to a special orderly liquidation process outside the federal bankruptcy code, administered by the Federal Deposit Insurance Corporation ("FDIC") as receiver, upon a determination that the company is in default or danger of default and presents a threat to the financial stability of the U.S. The Company cannot predict how its creditors will evaluate this potential or whether it will impact financing or hedging costs. |
• | Title III of the Dodd-Frank Act. Title III of the Dodd-Frank Act transferred to the Federal Reserve the supervisory and regulatory authority of the Office of Thrift Supervision over SLHCs. As a registered SLHC, NMIC and NFS are now subject to the rulemaking authority of the Federal Reserve and the supervision and examination authority of the Federal Reserve under HOLA. The Federal Reserve uses a consolidated supervisory framework to supervise SLHCs with over $50 billion in total consolidated assets. This framework consists of on-site inspections and |
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continuous monitoring activities related to capital and liquidity planning and positions, corporate governance, recovery planning, management of core business lines, and support of banking offices. The Federal Reserve has also extended to SLHCs certain of its Regulation Y reporting obligations, which were previously only required of bank holding companies. Under Section 171 of the Dodd-Frank Act, the Federal Reserve is also required to establish consolidated RBC and leverage capital requirements for SLHCs. The Federal Reserve issued final regulations in July 2013, but temporarily exempted from these final regulations SLHCs that are substantially engaged in insurance underwriting activities until the Federal Reserve can develop an appropriate framework for such companies. The Company cannot predict the manner in which these consolidated capital requirements will be extended to SLHCs that are substantially engaged in insurance underwriting activities, and whether such requirements will cause an alteration to its business practices or affect the perceptions of regulators, rating agencies, customers, counterparties or investors. | |
• | Title V of the Dodd-Frank Act. Title V of the Dodd-Frank Act established the Federal Insurance Office ("FIO") within the U.S. Department of the Treasury ("Treasury"), which has the authority, on behalf of the U.S., to participate in the negotiations of international insurance agreements with foreign regulators, as well as to collect information about the insurance industry and recommend prudential standards. While not having a general supervisory or regulatory authority over the business of insurance, the director of the FIO will perform various functions with respect to insurance (other than health insurance), including serving as a non-voting member of FSOC and making recommendations to FSOC regarding insurers to be designated for more stringent regulation. On December 12, 2013, the FIO issued a report to Congress setting forth recommendations on modernization of the system of insurance regulation in the U.S. The report raised the possibility of a greater role for the federal government if states do not achieve greater uniformity in their laws and regulations. On September 24, 2014, the FIO released its second Annual Report on the Insurance Industry in which it updated several of the issues discussed in the 2013 modernization report. The Company cannot predict whether any such legislation or regulatory changes will be adopted, or what impact they will have on the Company's business, financial condition or results of operations. |
• | Title VI of the Dodd-Frank Act. Title VI of the Dodd-Frank Act introduced Section 619, which amended the Bank Holding Company Act of 1956 ("BHCA") (together, with applicable regulations, the "Volcker Rule"). The Volcker Rule, among other things, generally prohibits proprietary trading and sponsorship of, and investment in, covered funds, including, but not limited to, hedge funds and private equity funds, for institutions affiliated with depository institutions, subject to certain exceptions. As a result of their status as regulated insurance companies engaging in otherwise permitted activities, NLIC and NLAIC's investment activities from its general and separate accounts are permissible under the Volcker Rule, but the future value and liquidity of such investments may be impacted by market conditions. |
• | Title VII of the Dodd-Frank Act. |
❍ | Title VII of the Dodd-Frank Act creates a new framework for regulation of the over-the-counter ("OTC") derivatives markets which could impact NLIC and NLAIC's derivative activities. Under this new regulatory regime, the Commodity Futures Trading Commission ("CFTC") regulates "swaps," the SEC regulates "security-based swaps" and both commissions jointly regulate "mixed swaps" (collectively referred to herein as "swaps"). |
❍ | The Dodd-Frank Act generally requires swaps, subject to a determination by the CFTC or the SEC as to which swaps are covered, entered into by all counterparties except certain non-financial end users to be cleared through a regulated clearinghouse. In addition, certain swaps subject to the mandatory clearing requirement may be required to be executed through regulated exchanges or execution facilities. The CFTC has made a determination that certain categories of swaps, including certain types of interest rate swaps and credit default swaps, are required to be cleared and it is anticipated that other categories of swaps will become subject to this requirement in the future. The CFTC has also made a determination that a subset of these swaps must be executed on a registered swap execution facility or derivatives contract market; additional categories of swaps will become subject to this requirement in the future. In April 2013, the CFTC adopted a rule to exempt swaps between certain affiliated entities within a corporate group from the mandatory clearing requirement. This exemption may be available for swaps entered into among the Company and its affiliates, subject to certain conditions, including compliance with documentation and reporting requirements. |
❍ | Swap dealers and major swap participants ("MSPs") are required to be registered and are subject to significant regulatory requirements, including requirements relating to capital and margin (i.e., collateral), business conduct and reporting. NLIC and NLAIC should not be considered swap dealers or MSPs and therefore will not be directly subject to the requirements applicable to these categories of registered entities; however, many of NLIC and NLAIC's counterparties will be swap dealers and as such will be subject to these requirements. These requirements have increased and will continue to increase OTC derivatives dealers' costs, and these increased costs may be passed on to NLIC and NLAIC. |
❍ | The SEC and CFTC have issued regulations defining "swaps" and are required by the Dodd-Frank Act to determine whether "stable value contracts" ("SVCs") fall within the definition of a "swap," and, if so, whether it would be appropriate to exempt SVCs from such definition. In addition, various other products offered by NLIC |
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and NLAIC insurance subsidiaries might be treated as swaps, although the Company believes such treatment is unlikely. If these products are regulated as swaps, NLIC and NLAIC cannot predict how the rules would be applied to such products or the effect on their profitability or attractiveness to its clients. | |
❍ | Finally, the new regulatory scheme imposed on all market participants may increase the costs of hedging generally and, because banking institutions will be required to conduct at least a portion of their OTC derivatives businesses outside their depository institutions, may affect the credit risk these counterparties pose to NLIC and NLAIC and the degree to which it is able to enter into transactions with such counterparties. NLIC and NLAIC cannot predict the effect of the foregoing on its hedging costs, its hedging strategy or implementation thereof or whether it will need or choose to increase and/or change the composition of the risks it does not hedge. |
• | Title X of the Dodd-Frank Act. The Dodd-Frank Act established the Consumer Financial Protection Bureau ("CFPB") as an independent agency within the Federal Reserve to supervise and regulate institutions that provide certain financial products and services to consumers. Although consumer financial products and services generally exclude the business of insurance, the CFPB does have authority to regulate non-insurance consumer products and services. |
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Year ended or as of December 31, | ||||||||||
(in millions) | 2014 | 2013 | 2012 | 2011 (As Adjusted) | 2010 (As Adjusted) | |||||
Statements of Operations Data: | ||||||||||
Total revenues | $3,729 | $5,117 | $4,456 | $2,208 | $3,254 | |||||
Net income (loss) | $16 | $1,028 | $600 | $(422) | $159 | |||||
Net income (loss) attributable to NLIC | $110 | $1,110 | $661 | $(366) | $219 | |||||
Balance Sheets Data: | ||||||||||
Total assets | $143,524 | $133,445 | $120,170 | $111,986 | $106,550 | |||||
Long-term debt | $709 | $707 | $1,038 | $991 | $978 | |||||
Shareholder's equity | $7,396 | $6,824 | $6,384 | $5,197 | $5,234 |
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(i) | Fluctuations in the results of operations or financial condition; |
(ii) | difficult economic and business conditions, including financial, capital and credit market conditions 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, epidemics or pandemics, impacting financial markets generally and companies in the Company's investment portfolio specifically; |
(iii) | changes in certain accounting and/or financial reporting standards issued by the FASB, SEC or other standard-setting bodies; |
(iv) | the ability to maintain the availability of systems and facilities in the event of a disaster, natural or man-made catastrophe, blackout, terrorist attack or war; |
(v) | heightened competition that affects the cost of, and demand for, the Company's products, including specifically the intensification of price competition, the entry of new competitors, consolidation and the development of new products by competitors; |
(vi) | adverse state and federal legislation and regulation, including, among other things, tax law changes impacting the federal estate tax and tax treatment of life insurance and investment products; limitations on premium levels; increases in minimum capital and reserves and other financial viability requirements; restrictions on mutual fund administrative service payment arrangements or mutual fund distribution payment arrangements, such as revenue sharing and 12b-1 payments; changes affecting sales practices, including investigations and/or claims handling and escheat investigations regulatory actions of the DOL under ERISA, rule-making adopted by regulatory authorities under the "Dodd-Frank Act and the FDIA; |
(vii) | failure to maintain or expand distribution channels; |
(viii) | changes in interest rates and the equity markets causing a reduction in the market value of the Company's investment portfolio, investment income and/or asset fees; an acceleration of the amortization of DAC and other expenses; 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; or an impact on ultimate realizability of deferred tax assets; |
(ix) | outlook changes and downgrades in the financial strength and claims-paying ability ratings of the Company assigned by NRSROs; |
(x) | deviations from assumptions regarding future persistency, mortality and morbidity rates (including as a result of natural and man-made catastrophes, pandemics, epidemics, malicious acts, terrorist acts and climate change), and interest rates used in calculating reserve amounts and in pricing products; |
(xi) | adverse results and/or resolution of litigation, arbitration, regulatory investigation and/or inquiry; |
(xii) | the availability, pricing and effectiveness of reinsurance; |
(xiii) | the effectiveness of policies and procedures for managing risk; |
(xiv) | adverse consequences, including financial and reputational costs, regulatory problems and potential loss of customers resulting from data or other security breaches, a failure to meet privacy regulations, or the inability to protect the Company's or customers' confidential information; |
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(xv) | the inability to protect intellectual property and defend against claims of infringement; |
(xvi) | realized losses with respect to impairments of assets in the investment portfolio of the Company; |
(xvii) | exposure to losses related to variable annuity guarantee benefits, including from downturns and volatility in equity markets; and |
(xviii) | defaults on commercial mortgages and volatility in their performance. |
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December 31, 2014 | December 31, 2013 | ||
Independent pricing services | 87% | 86% | |
Pricing matrices | 9% | 10% | |
Broker quotes | 3% | 3% | |
Internal pricing models | 1% | 0% | |
Other sources | 0% | 1% | |
Total | 100% | 100% |
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(in millions) | DAC | Other expenses | Total | |||
Segment: | ||||||
Individual Products & Solutions - Annuity | $147 | $10 | $157 | |||
Retirement Plans | 35 | - | 35 | |||
Individual Products & Solutions - Life and NBSG | 8 | 4 | 12 | |||
Total | $190 | $14 | $204 |
(in millions) | DAC | Other expenses | 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 |
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(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) | December 31, 2014 | December 31, 2013 | Change | |||
Revenues: | ||||||
Policy charges: | ||||||
Asset fees | $955 | $854 | 12% | |||
Cost of insurance charges | 520 | 490 | 6% | |||
Administrative fees | 554 | 468 | 18% | |||
Surrender fees | 36 | 37 | (3%) | |||
Total policy charges | $2,065 | $1,849 | 12% | |||
Premiums | 831 | 724 | 15% | |||
Net investment income | 1,900 | 1,849 | 3% | |||
Net realized investment(losses) gains, including other-than-temporary impairment losses | (1,078) | 678 | (259%) | |||
Other revenues | 11 | 17 | (35%) | |||
Total revenues | $3,729 | $5,117 | (27%) | |||
Benefits and expenses: | ||||||
Interest credited to policyholder account values | $1,096 | $1,067 | 3% | |||
Benefits and claims | 1,502 | 1,354 | 11% | |||
Amortization of deferred policy acquisition costs | 207 | 374 | (45%) | |||
Other expenses, net of deferrals | 1,055 | 981 | 8% | |||
Total benefits and expenses | $3,860 | $3,776 | 2% | |||
(Loss) income before federal income taxes and noncontrolling interests | $(131) | $1,341 | (110%) | |||
Federal income tax (benefit) expense | (147) | 313 | (147%) | |||
Net income | $16 | $1,028 | (98%) | |||
Less: Loss attributable to noncontrolling interest, net of tax | (94) | (82) | 15% | |||
Net income attributable to NLIC | $110 | $1,110 | (90%) |
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(in millions) | December 31, 2013 | December 31, 2012 | Change | |||
Revenues: | ||||||
Policy charges: | ||||||
Asset fees | $854 | $771 | 11% | |||
Cost of insurance charges | 490 | 478 | 3% | |||
Administrative fees | 468 | 374 | 25% | |||
Surrender fees | 37 | 47 | (21%) | |||
Total policy charges | $1,849 | $1,670 | 11% | |||
Premiums | 724 | 635 | 14% | |||
Net investment income | 1,849 | 1,825 | 1% | |||
Net realized investment gains, including 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 accounts | $1,067 | $1,038 | 3% | |||
Benefits and claims | 1,354 | 1,227 | 10% | |||
Amortization of deferred policy acquisition costs | 374 | 575 | (35%) | |||
Other expenses, net of deferrals | 981 | 917 | 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, 2014 | December 31, 2013 | Change | |||
Results of Operations | ||||||
Revenues: | ||||||
Policy charges: | ||||||
Asset fees | $807 | $716 | 13% | |||
Administrative fees | 342 | 283 | 21% | |||
Surrender fees | 26 | 22 | 18% | |||
Total policy charges | $1,175 | $1,021 | 15% | |||
Premiums | 518 | 416 | 25% | |||
Net investment income | 546 | 546 | 0% | |||
Other revenues | (38) | (109) | (65%) | |||
Total revenues | $2,201 | $1,874 | 17% | |||
Benefits and expenses: | ||||||
Interest credited to policyholder accounts | $370 | $377 | (2%) | |||
Benefits and claims | 828 | 694 | 19% | |||
Amortization of deferred policy acquisition costs | 120 | 185 | (35%) | |||
Other expenses, net of deferrals | 300 | 295 | 2% | |||
Total benefits and expenses | $1,618 | $1,551 | 4% | |||
Pre-tax operating earnings | $583 | $323 | 80% |
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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 | $1,021 | $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 | 694 | 613 | 13% | |||
Amortization of deferred policy acquisition costs | 185 | 185 | 0% | |||
Other expenses, net of deferrals | 295 | 266 | 11% | |||
Total benefits and expenses | $1,551 | $1,439 | 8% | |||
Pre-tax operating earnings | $323 | $221 | 46% |
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(in millions) | December 31, 2014 | December 31, 2013 | Change | |||
Results of Operations | ||||||
Revenues: | ||||||
Policy charges: | ||||||
Asset fees | $96 | $90 | 7% | |||
Administrative fees | 11 | 11 | 0% | |||
Total policy charges | $107 | $101 | 6% | |||
Net investment income | 750 | 743 | 1% | |||
Total revenues | $857 | $844 | 2% | |||
Benefits and expenses: | ||||||
Interest credited to policyholder accounts | $482 | $473 | 2% | |||
Amortization of deferred policy acquisition costs | (28) | (2) | 1300% | |||
Other expenses, net of deferrals | 153 | 151 | 1% | |||
Total benefits and expenses | $607 | $622 | (2%) | |||
Pre-tax operating earnings | $250 | $222 | 13% |
(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 | 164 | (8%) | |||
Total benefits and expenses | $622 | $635 | (2%) | |||
Pre-tax operating earnings | $222 | $195 | 14% |
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(in millions) | December 31, 2014 | December 31, 2013 | Change | |||
Results of Operations | ||||||
Revenues: | ||||||
Policy charges: | ||||||
Asset fees | $52 | $48 | 8% | |||
Cost of insurance charges | 520 | 490 | 6% | |||
Administrative fees | 201 | 174 | 16% | |||
Surrender fees | 10 | 15 | (33%) | |||
Total policy charges | $783 | $727 | 8% | |||
Premiums | 284 | 282 | 1% | |||
Net investment income | 565 | 544 | 4% | |||
Other revenues | 12 | 6 | 100% | |||
Total revenues | $1,644 | $1,559 | 5% | |||
Benefits and expenses: | ||||||
Interest credited to policyholder accounts | $231 | $213 | 8% | |||
Benefits and claims | 644 | 636 | 1% | |||
Amortization of deferred policy acquisition costs | 122 | 125 | (2%) | |||
Other expenses, net of deferrals | 348 | 347 | 0% | |||
Total benefits and expenses | $1,345 | $1,321 | 2% | |||
Pre-tax operating earnings | $299 | $238 | 26% |
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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% | |||
Other revenues | 6 | - | 100% | |||
Total revenues | $1,559 | $1,485 | 5% | |||
Benefits and expenses: | ||||||
Interest credited to policyholder accounts | $213 | $199 | 7% | |||
Benefits and claims | 636 | 588 | 8% | |||
Amortization of deferred policy acquisition costs | 125 | 150 | (17%) | |||
Other expenses, net of deferrals | 347 | 307 | 13% | |||
Total benefits and expenses | $1,321 | $1,244 | 6% | |||
Pre-tax operating earnings | $238 | $241 | (1%) |
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, 2014 | December 31, 2013 | Change | |||
Results of Operations | ||||||
Operating revenues: | ||||||
Premiums | $29 | $26 | 12% | |||
Net investment income | 39 | 16 | 144% | |||
Other revenues | 10 | 13 | (23%) | |||
Total operating revenues | $78 | $55 | 42% | |||
Benefits and operating expenses: | ||||||
Interest credited to policyholder accounts | $13 | $4 | 225% | |||
Other expenses, net of deferrals | 194 | 124 | 56% | |||
Total benefits and operating expenses | $207 | $128 | 62% | |||
Pre-tax operating loss | $(129) | $(73) | 77% | |||
Add: non-operating net realized investment (losses) gains, including other-than-temporary impairment losses1 | $(1,051) | $783 | (234%) | |||
Add: adjustment to amortization of DAC and other related expenses related to net realized investment gains and losses | 11 | (70) | (116%) | |||
Add: net loss attributable to noncontrolling interests | (94) | (82) | 15% | |||
(Loss) income from continuing operations before federal income tax benefit (expense) | $(1,263) | $558 | (326%) |
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). |
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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 | 23 | (43%) | |||
Total operating revenues | $55 | $54 | 2% | |||
Benefits and operating expenses: | ||||||
Interest credited to policyholder accounts | $4 | $7 | (43%) | |||
Other expenses, net of deferrals | 124 | 128 | (3%) | |||
Total benefits and operating expenses | $128 | $135 | (5%) | |||
Pre-tax operating loss | $(73) | $(81) | (10%) | |||
Add: non-operating net realized investment gains, including other-than-temporary impairment losses2 | $783 | $427 | 83% | |||
Add: adjustment to amortization of DAC and other related expenses 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 expense | $558 | $42 | 1229% |
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, 2014 | December 31, 2013 | December 31, 2012 | |||
Long-term debt | $709 | $707 | $1,038 | |||
Shareholder's equity, excluding accumulated other comprehensive income | $6,352 | $6,242 | $5,132 | |||
Accumulated other comprehensive income | 1,044 | 582 | 1,252 | |||
Total shareholder's equity | $7,396 | $6,824 | $6,384 | |||
Total capital | $8,105 | $7,531 | $7,422 |
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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 | $661 | $- | $- | $- | $661 | $660 | ||||||
Long-term | 54 | 107 | 107 | 1,379 | 1,647 | 709 | ||||||
Subtotal | $715 | $107 | $107 | $1,379 | $2,308 | $1,369 | ||||||
Purchase and lending commitments: | ||||||||||||
Fixed maturity securities | 178 | - | - | - | 178 | - | ||||||
Mortgage loans | 289 | - | - | - | 289 | - | ||||||
Limited partnerships2 | 123 | - | - | - | 123 | - | ||||||
Subtotal | $590 | $- | $- | $- | $590 | $- | ||||||
Future policy benefits and claims3,4,5,6: | ||||||||||||
Fixed annuities and fixed option of variable annuities | 1,346 | 2,631 | 2,214 | 4,418 | 10,609 | 9,090 | ||||||
Life insurance | 910 | 1,663 | 1,692 | 23,187 | 27,452 | 10,793 | ||||||
Single premium immediate annuities | 444 | 824 | 706 | 3,715 | 5,689 | 3,530 | ||||||
Group pension deferred fixed annuities | 1,556 | 2,812 | 2,562 | 8,742 | 15,672 | 14,905 | ||||||
Funding agreements and accident & health insurance7 | 679 | 100 | 1,422 | 1,286 | 3,487 | 2,412 | ||||||
Subtotal | $4,935 | $8,030 | $8,596 | $41,348 | $62,909 | $40,730 | ||||||
Cash collateral8, 9 | ||||||||||||
Cash collateral on securities lending | 261 | - | - | - | 261 | 261 | ||||||
Cash collateral on derivative transactions | 535 | - | - | - | 535 | 535 | ||||||
Subtotal | $796 | $- | $- | $- | $796 | $796 | ||||||
Total | $7,036 | $8,137 | $8,703 | $42,727 | $66,603 | $42,895 |
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, 2014. |
2 | Limited partnerships are 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, 2014. 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, 2014; 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 | Health reserves are immaterial and are reflected in the less than one year column. |
8 | Since the timing of the return is uncertain, these obligations have been reflected in payments due in less than one year. |
9 | 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. |
December 31, 2014 | December 31, 2013 | |||||||
(in millions) | Carrying value | % of total | Carrying value | % of total | ||||
Fixed maturity securities, available-for-sale | $35,418 | 78% | $32,249 | 79% | ||||
Mortgage loans, net of allowance | 7,270 | 16% | 6,341 | 16% | ||||
Policy loans | 992 | 2% | 987 | 2% | ||||
Short-term investments | 935 | 2% | 411 | 1% | ||||
Other investments | 822 | 2% | 767 | 2% | ||||
Total | $45,437 | 100% | $40,755 | 100% |
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(in millions) | Amortized cost | Fair value | % of fair value total | |||
Government agency | $2,167 | $2,295 | 60% | |||
Prime | 397 | 409 | 11% | |||
Alt-A | 714 | 716 | 19% | |||
Sub-prime | 410 | 413 | 10% | |||
Other residential mortgage collateral | 6 | 6 | - | |||
Total | $3,694 | $3,839 | 100% |
Alt-A | Sub-prime | |||||||||||
(in millions) | Amortized cost | Fair value | % of fair value total | Amortized cost | Fair value | % of fair value total | ||||||
AAA | $- | $- | - | $7 | $7 | 2% | ||||||
AA | 8 | 8 | 1% | 20 | 22 | 5% | ||||||
A | 5 | 5 | 1% | 33 | 33 | 8% | ||||||
BBB | 13 | 14 | 2% | 42 | 42 | 10% | ||||||
BB and below | 688 | 689 | 96% | 308 | 309 | 75% | ||||||
Total | $714 | $716 | 100% | $410 | $413 | 100% | ||||||
Pre-2005 | $119 | $122 | 17% | $228 | $222 | 54% | ||||||
2005 | 342 | 343 | 48% | 98 | 101 | 24% | ||||||
2006 | 153 | 155 | 22% | 70 | 76 | 18% | ||||||
2007 | 100 | 96 | 13% | 5 | 3 | 1% | ||||||
2008-2014 | - | - | - | 9 | 11 | 3% | ||||||
Total | $714 | $716 | 100% | $410 | $413 | 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% |
Amortized cost | Fair value | |||||||||||||||
(in millions) | AAA | AA | A and below | Total | AAA | AA | A and below | Total | ||||||||
December 31, 2014: | ||||||||||||||||
Commercial mortgage-backed securities | $811 | $235 | $385 | $1,431 | $847 | $244 | $411 | $1,502 | ||||||||
Other asset-backed securities | 839 | 268 | 303 | 1,410 | 835 | 261 | 269 | 1,365 | ||||||||
Total | $1,650 | $503 | $688 | $2,841 | $1,682 | $505 | $680 | $2,867 | ||||||||
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 |
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(in millions) | Office | Industrial | Retail | Apartment | Hotel | Other | Total | |||||||
December 31, 2014 | ||||||||||||||
Mortgage loans: | ||||||||||||||
New England | $42 | $10 | $39 | $13 | $- | $28 | $132 | |||||||
Middle Atlantic | 170 | 151 | 363 | 168 | - | 3 | 855 | |||||||
East North Central | 178 | 105 | 440 | 347 | 23 | 17 | 1,110 | |||||||
West North Central | 8 | 66 | 74 | 134 | - | - | 282 | |||||||
South Atlantic | 129 | 266 | 687 | 579 | 30 | 48 | 1,739 | |||||||
East South Central | 27 | 19 | 139 | 127 | - | - | 312 | |||||||
West South Central | 51 | 143 | 266 | 300 | - | - | 760 | |||||||
Mountain | 112 | 111 | 110 | 271 | - | - | 604 | |||||||
Pacific | 323 | 329 | 463 | 345 | 34 | 8 | 1,502 | |||||||
Total amortized cost | $1,040 | $1,200 | $2,581 | $2,284 | $87 | $104 | $7,296 | |||||||
Total valuation allowance | $(3) | $(7) | $(6) | $(9) | $- | $(1) | $(26) | |||||||
Total mortgage loans, net of allowance | $7,270 | |||||||||||||
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 |
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(in millions) | Office | Industrial | Hotel | Other high-risk | Total Portfolio | % of total | ||||||
December 31, 2014 | ||||||||||||
Total valuation allowance | $3 | $6 | $- | $3 | $26 | 46% | ||||||
Refinanced loans1 | $105 | $286 | $8 | $- | $938 | 43% | ||||||
Modified loans2 | $- | $18 | $5 | $12 | $50 | 70% | ||||||
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% |
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, 2014 | ||||||||||||||||
New England | $42 | 61% | $10 | 50% | $- | - | $- | - | ||||||||
Middle Atlantic | 170 | 63% | 151 | 52% | - | - | - | - | ||||||||
East North Central | 178 | 59% | 105 | 54% | 23 | 54% | - | - | ||||||||
West North Central | 8 | 66% | 66 | 62% | - | - | 17 | 92% | ||||||||
South Atlantic | 129 | 49% | 266 | 61% | 30 | 58% | 12 | 110% | ||||||||
East South Central | 27 | 66% | 19 | 70% | - | - | - | - | ||||||||
West South Central | 51 | 69% | 143 | 54% | - | - | - | - | ||||||||
Mountain | 112 | 64% | 111 | 65% | - | - | - | - | ||||||||
Pacific | 323 | 55% | 329 | 55% | 34 | 64% | - | - | ||||||||
Total | $1,040 | 61% | $1,200 | 58% | $87 | 59% | $29 | 101% | ||||||||
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% |
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Individual Products and Solutions-Annuity1 | Individual Products and Solutions-Life and NBSG2 | Retirement Plans3 | ||||||||||
(in millions) | Account value | Weighted average crediting rate | Account value | Weighted average crediting rate | Account value | Weighted average crediting rate | ||||||
December 31, 2014 | ||||||||||||
Minimum guaranteed crediting rate of | ||||||||||||
3.51% or greater | $130 | 4.28% | $731 | 4.00% | $320 | 4.12% | ||||||
Minimum guaranteed crediting rate of | ||||||||||||
3.01% to 3.50% | $498 | 3.51% | $- | n/a | $11,605 | 3.48% | ||||||
Minimum guaranteed crediting rate of | ||||||||||||
2.01% to 3.00% | $2,971 | 2.99% | $4,212 | 3.38% | $1,670 | 3.11% | ||||||
Minimum guaranteed crediting rate of | ||||||||||||
0.01% to 2.00% | $3,492 | 1.64% | $176 | 3.66% | $744 | 1.79% | ||||||
No minimum guaranteed crediting rate4 | $1,457 | 2.16% | $292 | 7.21% | $478 | 2.01% | ||||||
December 31, 2013 | ||||||||||||
Minimum guaranteed crediting rate of | ||||||||||||
3.51% or greater | $138 | 4.28% | $747 | 4.00% | $2,076 | 4.04% | ||||||
Minimum guaranteed crediting rate of | ||||||||||||
3.01% to 3.50% | $515 | 3.51% | $- | n/a | $10,460 | 3.55% | ||||||
Minimum guaranteed crediting rate of | ||||||||||||
2.01% to 3.00% | $3,086 | 3.01% | $3,823 | 3.45% | $770 | 2.63% | ||||||
Minimum guaranteed crediting rate of | ||||||||||||
0.01% to 2.00% | $3,799 | 1.82% | $83 | 3.83% | $519 | 1.54% | ||||||
No minimum guaranteed crediting rate4 | $1,071 | 2.96% | $129 | 10.49% | $472 | 2.08% |
1 | Includes individual fixed annuity products and the fixed investment options selected within the variable annuity products. |
2 | Includes universal life products and the fixed investment options selected within the variable life products. |
3 | Includes group fixed annuity products. |
4 | Includes products with a stated minimum guaranteed crediting rate of 0%. |
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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. |
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• | 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. |
Estimated year of maturities/repayments | ||||||||||||||||||
(in millions) | 2015 | 2016 | 2017 | 2018 | 2019 | There- after | Total | 2014 Fair Value | 2013 Fair Value | |||||||||
Assets | ||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||
Corporate bonds: | ||||||||||||||||||
Principal | $891 | $1,050 | $1,389 | $2,001 | $2,700 | $16,218 | $24,249 | $25,900 | $23,379 | |||||||||
Weighted average interest rate | 4.37% | 4.68% | 4.28% | 4.96% | 5.25% | 4.71% | 4.75% | |||||||||||
Mortgage and other asset-backed securities: | ||||||||||||||||||
Principal | $4 | $- | $21 | $32 | $27 | $6,451 | $6,535 | $6,706 | $6,346 | |||||||||
Weighted average interest rate | 9.45% | - | 5.28% | 6.05% | 5.28% | 4.08% | 4.10% | |||||||||||
Other fixed maturity securities: | ||||||||||||||||||
Principal | $127 | $78 | $15 | $82 | $114 | $1,998 | $2,414 | $2,812 | $2,524 | |||||||||
Weighted average interest rate | 5.55% | 6.15% | 7.62% | 5.43% | 6.58% | 5.58% | 5.65% | |||||||||||
Mortgage loans: | ||||||||||||||||||
Principal | $456 | $504 | $440 | $265 | $357 | $5,274 | $7,296 | $7,616 | $6,481 | |||||||||
Weighted average interest rate | 5.44% | 5.84% | 5.36% | 4.71% | 4.13% | 4.55% | 4.73% | |||||||||||
Liabilities | ||||||||||||||||||
Individual deferred fixed annuities: | ||||||||||||||||||
Principal | $870 | $767 | $1,243 | $756 | $476 | $1,838 | $5,950 | $5,804 | $5,964 | |||||||||
Weighted average crediting rate | 2.51% | 2.54% | 2.61% | 2.65% | 2.59% | 2.66% | ||||||||||||
Group pension deferred fixed annuities: | ||||||||||||||||||
Principal | $1,514 | $1,329 | $1,408 | $1,267 | $910 | $8,263 | $14,691 | $13,372 | $12,849 | |||||||||
Weighted average crediting rate | 3.20% | 3.16% | 2.96% | 2.71% | 2.54% | 2.36% | ||||||||||||
Funding agreements: | ||||||||||||||||||
Principal | $12 | $31 | $67 | $98 | $800 | $760 | $1,768 | $1,765 | $890 | |||||||||
Weighted average crediting rate | 1.42% | 1.46% | 1.46% | 1.61% | 1.70% | 2.40% | ||||||||||||
Immediate annuities: | ||||||||||||||||||
Principal | $182 | $140 | $104 | $76 | $55 | $147 | $704 | $801 | $733 | |||||||||
Weighted average crediting rate | 5.20% | 5.22% | 5.26% | 5.30% | 5.35% | 5.39% | ||||||||||||
Short-term debt: | ||||||||||||||||||
Principal | $660 | $- | $- | $- | $- | $- | $660 | $660 | $278 | |||||||||
Weighted average interest rate | 1.02% | - | - | - | - | - | 1.02% | |||||||||||
Long-term debt: | ||||||||||||||||||
Principal | $- | $- | $- | $- | $- | $700 | $700 | $1,069 | $1,004 | |||||||||
Weighted average interest rate | - | - | - | - | - | 7.67% | 7.67% |
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Estimated year of maturities/repayments | ||||||||||||||||||
(in millions, except settlement prices) | 2015 | 2016 | 2017 | 2018 | 2019 | There- after | Total | 2014 Fair Value | 2013 Fair Value | |||||||||
Deriviative Financial Instruments | ||||||||||||||||||
Interest rate swaps: | ||||||||||||||||||
Pay fixed/receive variable: | ||||||||||||||||||
Notional value | $1,263 | $1,706 | $878 | $1,201 | $1,234 | $25,220 | $31,502 | $(2,457) | $878 | |||||||||
Weighted average pay rate | 1.32% | 1.69% | 1.02% | 1.91% | 2.13% | 3.15% | 2.85% | |||||||||||
Weighted average receive rate1 | 0.32% | 0.28% | 0.47% | 0.29% | 0.25% | 0.30% | 0.30% | |||||||||||
Pay variable/receive fixed: | ||||||||||||||||||
Notional value | $1,985 | $2,046 | $120 | $1,291 | $485 | $28,282 | $34,209 | $2,457 | ($1,198) | |||||||||
Weighted average pay rate1 | 0.31% | 0.26% | 0.31% | 0.27% | 0.27% | 0.30% | 0.29% | |||||||||||
Weighted average receive rate | 1.39% | 1.22% | 3.59% | 2.16% | 2.58% | 3.09% | 2.84% | |||||||||||
Pay fixed/receive fixed: | ||||||||||||||||||
Notional value | $- | $48 | $- | $- | $- | $382 | $430 | $11 | $(18) | |||||||||
Weighted average pay rate | - | 4.73% | - | - | 4.07% | 4.14% | ||||||||||||
Weighted average receive rate | - | 6.16% | - | - | - | 4.72% | 4.88% | |||||||||||
Credit default swaps purchased: | ||||||||||||||||||
Notional value | $- | $- | $- | $2 | $- | $- | $2 | $- | $- | |||||||||
Total return swaps2: | ||||||||||||||||||
Notional value | $2,732 | $76 | $- | $- | $- | $- | $2,808 | $(41) | $(46) | |||||||||
Embedded derivatives: | ||||||||||||||||||
Notional value | $- | $- | $- | $- | $- | $- | $- | $(264) | $1,005 | |||||||||
Option contracts: | ||||||||||||||||||
Long positions: | ||||||||||||||||||
Contract amount/notional value | $4,091 | $1,176 | $546 | $14 | $163 | $- | $5,990 | $411 | $343 | |||||||||
Weighted average settlement price | $1 | $1,577 | $1,631 | $1,588 | $1,351 | $- | $500 |
1 | Variable rates are generally based on 1, 3 or 6-month U.S. LIBOR and reflect the effective rate as of December 31, 2014. |
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 | ||
John L. Carter | 52 | February 2013 | ||
Timothy G. Frommeyer | 50 | January 2009 | ||
Eric S. Henderson | 52 | March 2012 | ||
Stephen S. Rasmussen | 62 | January 2009 | ||
Mark R. Thresher | 58 | January 2009 | ||
Kirt A. Walker | 51 | December 2009 |
Name | Age | Position with NLIC | ||
Stephen S. Rasmussen | 62 | NMIC Chief Executive Officer1 | ||
Kirt A. Walker | 51 | President and Chief Operating Officer | ||
Patricia R. Hatler | 60 | Executive Vice President–Chief Legal and Governance Officer | ||
Matthew Jauchius | 45 | Executive Vice President – Chief Marketing Officer | ||
Michael C. Keller | 55 | Executive Vice President–Chief Information Officer | ||
Gale V. King | 58 | Executive Vice President–Chief Human Resources Officer | ||
Mark R. Thresher | 58 | Executive Vice President | ||
John L. Carter | 52 | Senior Vice President–Nationwide Retirement Plans | ||
Timothy G. Frommeyer | 50 | Senior Vice President–Chief Financial Officer | ||
David L. Giertz | 51 | Senior Vice President-Nationwide Financial Distribution and Sales | ||
Peter A. Golato | 61 | Senior Vice President–Nationwide Financial Network | ||
Harry H. Hallowell | 54 | Senior Vice President–Chief Investment Officer | ||
Eric S. Henderson | 52 | Senior Vice President–Individual Products & Solutions |
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Name | Age | Position with NLIC | ||
Steven C. Power | 57 | Senior Vice President–Nationwide Financial | ||
Michael S. Spangler | 48 | Senior Vice President–Investment Management Group |
1 | NMIC is our ultimate parent company; however, Mr. Rasmussen does not serve as NLIC's chief executive officer. |
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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 associates; |
• | 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 2014," whom we refer to as the "named executive officers;" and |
• | oversight of people and culture risk position and risk management practices, including risk policy, strategy, tolerance and control. Key areas of risk oversight focus include key person risk and succession planning, employment practices, workplace safety, organizational culture and compensation design. |
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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 • 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 (#130) based on NMIC's GAAP revenue; |
• | companies that participate in commercially available financial services industry and general industry compensation surveys. |
• | 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 |
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• | 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, 2013 |
• | Global Financial Services Studies Executive Database, Towers Watson, 2013 |
• | US Property and Casualty Insurance Compensation Survey Report, Mercer HR Consulting, 2013 |
• | General Industry compensation surveys from Towers Watson, Mercer and Watson Wyatt, 2013 |
• | 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. | |||
Timothy G. Frommeyer, Senior Vice President—Chief Financial Officer | Market median | Near median | This is a competitive level of compensation relative to the market data. | |||
Stephen S. Rasmussen, NMIC Chief Executive 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 | |||
John L. Carter, President and Chief Operating Officer, Nationwide Retirement Plans | Up to the 75th percentile | Near the 75th percentile | This is a competitive level of compensation relative to the market data based on the size of our retirement plans business in the industry compared to our peers in the market surveys. Nationwide Retirement Plans is one of the largest retirement plans providers. | |||
Eric S. Henderson, Senior Vice President—Individual Products and Solutions | Market Median | Between the 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. |
• | 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; |
• | the identification of Mr. Carter as occupying a benchmark plus role as well as summaries of his accomplishments and Messrs. Frommeyer's and Henderson's accomplishments in 2013; |
• | recommendations from Mr. Walker, for Messrs. Carter and Henderson, and from NMIC's Chief Financial Officer for Mr. Frommeyer, in considering 2014 base salary adjustments and incentive target levels; and |
• | approval of Mr. Carter's sales incentive plan for 2014. |
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• | 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. |
Name1 | Base salary (percentage of target total compensation)1 | 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 compensation2 | Percentage of target total compensation attributed to target incentives | |||||
Kirt A. Walker | $451,639 | 80% | $500,175 | $1,245,917 | 68% | |||||
(32%) | (25%) | (43%) | ||||||||
Timothy G. Frommeyer | $227,432 | 65% | $62,199 | $327,401 | 63% | |||||
(37%) | (24%) | (39%) | ||||||||
Stephen S. Rasmussen | $171,050 | 165% | $995,000 | $1,454,998 | 88% | |||||
(12%) | (20%) | (68%) | ||||||||
John L. Carter | $163,484 | 105% | $300,105 | $785,702 | 67% | |||||
(33%) | (35%) | (32%) | ||||||||
Eric S. Henderson | $319,388 | 70% | $227,480 | $721,929 | 62% | |||||
(38%) | (27%) | (35%) | ||||||||
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 provided 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 |
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incentive programs, which are focused on achievements over multiple years and most closely align with building sustained value for our stakeholders. The NMIC Chief Executive Officer's pay mix is more heavily weighted toward long-term incentives, consistent with his role. |
Name | Base salary change %1 | Total target annual cash change % | Long-term incentive target change % | Target total direct compensation change % | Rationale | |||||
Kirt A. Walker | 5.0% | 5.0% | 7.1% | 5.9% | Mr. Walker's performance was outstanding compared to his 2013 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. | |||||
Timothy G. Frommeyer | 4.3% | 4.3% | 0.0% | 2.6% | Mr. Frommeyer's performance was outstanding compared to his 2013 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 significantly via his focus on talent management and development, and his contributions to keeping NFS on track from all financial and risk management aspects and directing an innovative effort to create a structure that resulted in significant capital relief for NFS contributed to the NFS business success. Mr. Frommeyer is viewed as critical talent and a successor candidate. | |||||
Stephen S. Rasmussen | 0.0% | 0.0% | 2.5% | 1.7% | Mr. Rasmussen's pay increase was a market adjustment to intended positioning. The increase was delivered entirely in a long-term incentive target increase, enhancing the pay for performance relationship. | |||||
John L. Carter | 2.2% | 4.8% | 5.9% | 5.1% | Mr. Carter's performance was outstanding compared to his 2013 pre-established objectives with respect to exceeding his sales goal, improving associate engagement, improving lapse rates and accomplishing several important conversions. | |||||
Eric S. Henderson | 8.7% | 8.7% | 10.1% | 9.2% | Mr. Henderson's performance was outstanding compared to his 2013 pre-established objectives with respect to significantly exceeding plan in several product lines and improving associate engagement. |
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. |
• | Allocation of base salaries for Messrs. Frommeyer and Rasmussen reflect a blend of factors used to allocate ongoing NFS operating expenses, using forecasted revenue and headcount projections as applicable. The revenue and headcount ratios are applied against specific operating expenses for allocation to legal entity, statutory and managed products and expense group. |
• | Base salary for Mr. Walker was allocated using policy in-force counts from various NFS business segments. |
• | Base salary allocation for for Mr. Carter was determined by operational support of retirement plans business unit segments based on time spent managing and directing activities for each segment. |
• | Base salary for Mr. Henderson was allocated using policy in-force counts from the Nationwide Financial Individual Products and Solutions business 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. |
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• | 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 Scottsdale net operating income as a non-GAAP financial measure which highlights Scottsdale's results from continuing operations. |
• | We define the Enterprise expense metric as a blend of the Property and Casualty adjusted statutory expense ratio, comprised of the loss adjustment expense ratio plus the underwriting expense ratio net of incentives and contingent suits, 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 business unit direct written premium over the prior performance year-ending business unit direct written premium 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. |
• | We define NFS Sales as new and renewal production premiums and deposits, previously referred to as "sales," that 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 | 2014 established business goals | 2014 incentive performance results3 | |||||
Enterprise Consolidated Net Operating Income1 | 45.00 | 45.00 | 40.95 | $1,388.0 | $1,201.4 | |||||
Customer Enthusiasm Index2 | 20.00 | 20.00 | 18.20 | 8.59 | 8.59 | |||||
Enterprise Expense Metric (P&C statutory expense ratio) | 3.50 | 3.50 | 3.19 | 41.67% | 40.88% | |||||
Enterprise Expense Metric (NFS adjusted general operating expenses) | 1.50 | 1.50 | 1.37 | $952.5 | $964.8 | |||||
NI DWP Growth | 3.75 | 3.41 | 2.54% | 3.07% | ||||||
Change in number of NI relationships per household | 2.50 | 2.28 | 0.0 | 141,713 | ||||||
NI Non-weather Loss ratio | 1.25 | 1.14 | 50.57% | 51.20% | ||||||
Allied DWP Growth | 1.52 | 1.39 | 5.60% | 5.12% | ||||||
Allied Non-weather Loss Ratio | 1.52 | 1.39 | 47.72% | 50.85% | ||||||
Titan Non-weather Loss Ratio | 0.28 | 0.25 | 59.85% | 61.25% | ||||||
Titan DWP Growth | 0.28 | 0.25 | 0.30% | -3.14% | ||||||
Agribusiness Non-weather Loss Ratio | 0.42 | 0.38 | 46.44% | 52.33% | ||||||
Agribusiness DWP Growth | 0.42 | 0.38 | 9.11% | 11.42% | ||||||
Harleysville Non-weather Loss Ratio | 0.42 | 0.38 | 47.60% | 52.96% | ||||||
Harleysville DWP Growth | 0.42 | 0.38 | 6.72% | 10.38% | ||||||
Scottsdale Net Operating Income | 1.49 | 1.36 | $186.5 | $92.5 | ||||||
Scottsdale DWP Growth | 0.74 | 0.68 | 14.66% | 9.55% | ||||||
NFS Return on Capital | 15.00 | 7.50 | 6.83 | 10.26% | 12.53% | |||||
NFS Sales | 15.00 | 7.50 | 6.83 | $20,995.4 | $20,778.6 | |||||
Strategic Nonfinancial Objectives | 9.00 | Discussed below in "Determination of the Final Short-term Incentive Payments" | 175% of target amount |
1 | For 2014, performance on CNOI of $350.0 must be achieved in order for payment to be earned on the enterprise expense, customer enthusiasm and business unit metrics. |
2 | Mean customer satisfaction on a scale of one to ten as determined by an external consultant. |
3 | These amounts are unaudited. |
• | the competitive environment of each market segment; |
• | the outlook for sales growth in each market segment; |
• | the level of maturity of each market segment; |
• | historical rates of sales growth; and |
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• | our expectation as to the difficulty of achieving the planned rates of sales growth in each market segment. |
Performance Criteria ($ in millions) | Weights (%) | 2014 established goals | 2014 incentive performance results3 | |||||||
Retirement Plans Group (SIP): | ||||||||||
Private Sector 1st year | 6.00 | $1,667.0 | $1,339.5 | |||||||
Private Sector Recurring | 4.00 | $3,858.0 | $3,896.8 | |||||||
Public Sector 1st year | 5.00 | $1,136.6 | $1,255.4 | |||||||
Public Sector Recurring | 5.00 | $3,230.9 | $3,109.4 | |||||||
NFS and Enterprise Metrics (PIP) | ||||||||||
Enterprise Consolidated Net Operating Income1 | 36.00 | $1,388.0 | $1,201.4 | |||||||
Customer Enthusiasm Index (Mean Satisfaction with Company)2 | 16.00 | 8.59 | 8.59 | |||||||
Enterprise Expense Metric (P&C statutory expense ratio) | 2.80 | 41.67% | 40.88% | |||||||
Enterprise Expense Metric (NFS adjusted general operating expenses) | 1.20 | $952.5 | $964.8 | |||||||
NFS Return on Capital | 12.00 | 10.26% | 12.53% | |||||||
NFS Sales | 12.00 | $20,995.4 | $20,778.6 |
1 | For 2014, 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 execution of strategic business line initiatives, 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 | 106% of target | Performance compared to the PIP objectives | ||
Timothy G. Frommeyer | 100% of target | Performance compared to the PIP objectives | ||
Stephen S. Rasmussen | 107% of target | Performance compared to the PIP objectives | ||
John L. Carter | 106% of target | Performance compared to the PIP objectives | ||
82% of target | Performance compared to the SIP objectives | |||
Eric S. Henderson | 106% of target | Performance compared to the PIP objectives |
• | reward sustained long-term value creation with appropriate consideration of risk capacity, tolerance 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. |
• | Capital strength, which is determined by combining our internal economic capital calculation (50%) and Standard & Poor's capital calculation (50%). |
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Metric | Weight | 2014 established business goals | 2014 incentive performance results | |||
Operating Revenue Growth (net of interest credited) | 50% | 4.5% | 6.4% | |||
Internal Economic Capital | 25% | AA+ | AAA | |||
S&P Capital | 25% | AA+ | AA+ |
• | 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) | Change in pension value and non- qualified deferred compensation earnings2 (h) | All other compensation (i) | Total (j) | |||||||
Kirt A. Walker, President & Chief Operating Officer | 2014 | $446,676 | $– | $1,019,9971 | $515,422 | $30,7363 | $2,012,831 | |||||||
2013 | $416,580 | $– | $1,027,108 | $100,306 | $25,968 | $1,747,283 | ||||||||
2012 | $410,656 | $– | $1,063,275 | $80,995 | $21,412 | $1,576,338 | ||||||||
Timothy G. Frommeyer, Senior Vice President– Chief Financial Officer | 2014 | $225,275 | $– | $147,8631 | $562,763 | $14,9244 | $950,825 | |||||||
2013 | $225,617 | $– | $154,175 | $– | $13,678 | $393,470 | ||||||||
2012 | $243,476 | $904 | $150,818 | $117,016 | $11,817 | $524,031 | ||||||||
Stephen S. Rasmussen, NMIC Chief Executive Officer | 2014 | $171,050 | $– | $1,914,8181 | $565,786 | $28,3165 | $2,679,970 | |||||||
2013 | $180,510 | $– | $1,932,088 | $277,627 | $27,686 | $2,417,911 | ||||||||
2012 | $186,308 | $– | $1,888,241 | $135,458 | $27,445 | $2,237,452 | ||||||||
John L. Carter, President, Nationwide Retirement Plans | 2014 | $162,664 | $– | $764,5011 | $236,280 | $13,3736 | $1,176,818 | |||||||
2013 | $138,302 | $– | $612,275 | $– | $20,520 | $771,097 | ||||||||
2012 | $204,421 | $– | $846,731 | $81,656 | $15,029 | $1,147,837 | ||||||||
Eric S. Henderson, Senior Vice President–Individual Products and Solutions | 2014 | $313,491 | $– | $551,1391 | $822,191 | $62,8147 | $1,749,635 | |||||||
2013 | $290,512 | $– | $548,148 | $– | $15,828 | $854,488 | ||||||||
2012 | $308,953 | $– | $549,058 | $267,105 | $16,176 | $1,141,292 |
1 | Represents the amount determined under the PIP for Messrs. Walker, Frommeyer, Rasmussen and Henderson, and under the PIP and SIP for Mr. Carter, that was paid in 2015 for the 2014 performance year; and the amount earned in 2014 under the LTPP, and allocated to us pursuant to the cost-sharing agreement, as follows: Mr. Walker—$311,749 (PIP) and $708,248 (LTPP); Mr. Frommeyer—$37,770 (PIP) and $110,093 (LTPP); Mr. Rasmussen—$ 308,649 (PIP) and $1,606,169 (LTPP); Mr. Carter—$325,978 (PIP and SIP) and $438,523 (LTPP); and Mr. Henderson—$185,565 (PIP) and $365,574 (LTPP). |
2 | Represents the change in pension value for all named executive officers. There were no above-market earnings on deferred compensation. |
3 | Includes tax gross-ups totaling $1,217 for amenities received at company events and the contribution we made on behalf of Mr. Walker in the amount of $23,128 under the Nationwide Supplemental Defined Contribution Plan. Aggregate value of perquisites and personal benefits is less than $10,000. |
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4 | Includes a tax gross-up in the amount of $1,607 for the company-paid cost of an executive physical. Aggregate value of perquisites and personal benefits is less than $10,000. |
5 | Includes the value of amenities received at company events, and tax gross-ups totaling $279 for such amenities, the actual incremental cost of Mr. Rasmussen's personal use of the company plane, the cost of Mr. Rasmussen's personal use of the company's suite, the contribution we made on behalf of Mr. Rasmussen in the amount of $16,798 under the Nationwide Supplemental Defined Contribution Plan and the company-paid portion for parking expenses and automotive service in the executive parking garage. |
6 | Includes a tax gross-up of $61 for amenities received at a company event and a tax gross-up in the amount of $917 for the company-paid cost of an executive physical. Aggregate value of perquisites and personal benefits is less than $10,000. |
7 | Includes the value of amenities received at a corporate event in the amount of $25,669, tax gross-ups totaling $12,844 for such amenities, the company-paid cost of an executive physical and a tax gross-up in the amount of $1,193 for the physical, the contribution we made on behalf of Mr. Henderson in the amount of $12,397 under the Nationwide Supplemental Defined Contribution Plan and the company-paid portion for parking expenses and automotive service in the executive parking garage. |
Estimated future payouts under non-equity incentive plan awards1 | ||||||||
Name (a) | Grant date (b) | Threshold (c) | Target (d) | Maximum (e) | ||||
Kirt A. Walker | 2/11/20142,3 | $147,051 | $294,103 | $735,257 | ||||
2/11/20144 | $0 | $500,175 | $1,250,438 | |||||
Timothy G. Frommeyer | 2/11/20142,3,5 | $18,885 | $37,770 | n/a | ||||
2/11/20144 | $0 | $62,199 | $155,499 | |||||
Stephen S. Rasmussen | 2/11/20142,3 | $144,474 | $288,948 | $722,370 | ||||
2/11/20144 | $0 | $995,000 | $2,487,500 | |||||
John L. Carter | 2/11/20142,3 | $161,056 | $322,113 | $644,225 | ||||
2/11/20144 | $0 | $300,105 | $750,263 | |||||
Eric S. Henderson | 2/11/20142,3,5 | $87,531 | $175,061 | n/a | ||||
2/11/20144 | $0 | $227,480 | $568,699 |
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 Mr. Carter, a PIP and 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 | 16.0 | $55,629 | $– | ||||
Nationwide Supplemental Retirement Plan | 16.0 | $1,087,580 | $– | |||||
Kirt A. Walker | Nationwide Retirement Plan | 16.0 | $153,840 | $– | ||||
Nationwide Supplemental Retirement Plan | 16.0 | $683,237 | $– | |||||
Timothy G. Frommeyer | Nationwide Retirement Plan | 27.3 | $705,518 | $– | ||||
Nationwide Supplemental Retirement Plan | 27.3 | $970,236 | $– | |||||
John L. Carter | Nationwide Retirement Plan | 8.2 | $84,924 | $– | ||||
Nationwide Supplemental Retirement Plan | 8.2 | $545,971 | $– | |||||
Eric S. Henderson | Nationwide Retirement Plan | 27.8 | $968,406 | $– | ||||
Nationwide Supplemental Retirement Plan | 27.8 | $1,214,652 | $– |
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; |
• | 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; |
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• | 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 |
• | expense reimbursement or expense allowances including reimbursement for relocation expenses. |
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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. |
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 | $109,352 | $17,762 | $114,958 | $110,886 | $1,444,473 | |||||
Timothy G Frommeyer | – | $6,647 | $2,688 | – | $78,126 | |||||
Stephen S. Rasmussen | – | $14,513 | $38,504 | – | $201,321 | |||||
John L. Carter | $6,690 | $7,115 | $6,397 | – | $187,216 | |||||
Eric S. Henderson | – | $8,632 | $1,853 | – | $53,849 |
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 notional 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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• | 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 |
• | amounts earned, accrued or owed but not paid and benefits owed under employee benefit plans and programs. |
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• | 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, |
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: |
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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 | ||||
Annual incentives1 | $– | $– | $– | $311,749 | ||||
Long-term incentives: | ||||||||
LTPP 12-14 award2 | $708,248 | $708,248 | $– | $708,248 | ||||
LTPP 13-15 award3 | $– | $420,168 | $– | $420,168 | ||||
LTPP 14-16 award3 | $– | $196,716 | $– | $196,716 | ||||
Life insurance proceeds | $– | $– | $– | $2,457,900 | ||||
Cash severance4 | $– | $1,629,476 | $– | $– | ||||
Total compensation | $708,248 | $2,954,608 | $– | $4,094,781 |
1 | Reflects the amount Mr. Walker would receive with respect to the 2014 short-term incentive payment under the PIP upon a termination of employment, except for cause, on December 31, 2014. Mr. Walker would not be eligible to receive a PIP award payment upon a voluntary termination on December 31, 2014. The PIP requires that plan participants be employed on the date PIP awards are paid. The "Termination without cause or for good reason following a substantial reorganization" column does not include the 2014 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 2012-2014 awards under the LTPP upon a termination of employment, except for cause, on December 31, 2014. |
3 | Reflects the amount Mr. Walker would receive with respect to the 2013-2015 and 2014-2016 awards under the LTPP upon termination without cause or due to substantial reorganization, or for death, disability or retirement (not eligible), on December 31, 2014. 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 2013-2015 award, which would have been paid in 2016, and a one-third distribution of the total 2014-2016 award, which would have been paid in 2017, using a performance score that was estimated as of December 31, 2014. 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 2014 matching amounts in the Nationwide Savings Plan and Nationwide Supplemental Defined Contribution Plan; two times the 2014 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 | $– | $37,770 | $– | $37,770 | ||||
Long-term incentives: | ||||||||
LTPP 12-14 award2 | $110,093 | $110,093 | $– | $110,093 | ||||
LTPP 13-15 award3 | $– | $55,982 | $– | $55,982 | ||||
LTPP 14-16 award3 | $– | $24,463 | $– | $24,463 | ||||
Life insurance proceeds | $– | $– | $– | $1,137,621 | ||||
Cash severance4 | $– | $231,707 | $– | $– | ||||
Total compensation | $110,093 | $350,033 | $– | $1,365,929 |
1 | Reflects the amount Mr. Frommeyer would receive with respect to the 2014 short-term incentive payment under the PIP upon a termination of employment, except for cause, on December 31, 2014. Mr. Frommeyer would not be eligible to receive a PIP award payment upon a voluntary termination on December 31, 2014. The PIP requires that plan participants be employed on the date PIP awards are paid. |
2 | Reflects the amount Mr. Frommeyer would receive with respect to the 2012-2014 awards under the LTPP upon a termination of employment, except for cause, on December 31, 2014. |
3 | Reflects the amount Mr. Frommeyer would receive with respect to the 2013-2015 and 2014-2016 awards under the LTPP upon termination without cause or due to substantial reorganization, or for death, disability or retirement (not eligible), on December 31, 2014. 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 reorganization. Accordingly, the amounts shown assume a two-thirds distribution of the total 2013-2015 award, which would have been paid in 2016, and a one-third distribution of the total 2014-2016 award, which would have been paid in 2017, using a performance score that was estimated as of December 31, 2014. 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. |
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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 incentive1 | $308,649 | $– | $– | $308,649 | ||||
Long-term incentives: | ||||||||
LTPP 12-14 award2 | $1,606,169 | $1,606,169 | $– | $1,606,169 | ||||
LTPP 13-15 award3 | $874,052 | $874,052 | $– | $874,052 | ||||
LTPP 14-16 award3 | $391,328 | $391,328 | $– | $391,328 | ||||
Life insurance proceeds | $– | $– | $– | $460,500 | ||||
Cash severance4 | $– | $1,022,769 | $– | $– | ||||
Total compensation | $3,180,198 | $3,894,318 | $– | $3,640,698 |
1 | Reflects the amount Mr. Rasmussen would receive with respect to the 2014 short-term incentive payment under the PIP upon a termination of employment, except for cause, on December 31, 2014. The PIP requires that plan participants be employed on the date PIP awards are paid. However, since Mr. Rasmussen would have qualified for retirement on December 31, 2014, he would receive the PIP payment. The "Termination without cause or for good reason following a substantial reorganization" column does not include the 2014 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 2012-2014 awards under the LTPP upon a termination of employment, except for cause, on December 31, 2014. |
3 | Reflects the amount Mr. Rasmussen would receive with respect to the 2013-2015 and 2014-2016 awards under the LTPP upon termination on December 31, 2014. Mr. Rasmussen would have qualified for retirement under the LTPP. Accordingly, the amounts shown assume a two-thirds distribution of the total 2013-2015 award, which would be paid in 2016, and a one-third distribution of the total 2014-2016 award, which would be paid in 2017, using a performance score that was estimated as of December 31, 2014, 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 2014 matching amounts in the Nationwide Savings Plan and Nationwide Supplemental Defined Contribution Plan; two times the 2014 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 | $– | $– | $– | $325,978 | ||||
Long-term incentives: | ||||||||
LTPP 12-14 award2 | $438,523 | $438,523 | $– | $438,523 | ||||
LTPP 13-15 award3 | $– | $255,102 | $– | $255,102 | ||||
LTPP 14-16 award3 | $– | $118,029 | $– | $118,029 | ||||
Life insurance proceeds | $– | $– | $– | $1,069,200 | ||||
Cash severance4 | $– | $505,591 | $– | $– | ||||
Total compensation | $438,523 | $1,317,245 | $– | $2,206,832 |
1 | Reflects the amount Mr. Carter would receive with respect to the 2014 short-term incentive payment under the SIP upon a termination of employment, except for cause, on December 31, 2014. Mr. Carter would not be eligible to receive a SIP award payment upon a voluntary termination on December 31, 2014. We require that SIP participants be employed on the date SIP awards are paid. The "Termination without cause or for good reason following a substantial reorganization" column does not include the 2014 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. |
2 | Reflects the amount Mr. Carter would receive with respect to the 2012-2015 awards under the LTPP upon a termination of employment, except for cause, on December 31, 2014. |
3 | Reflects the amount Mr. Carter would receive with respect to the 2013-2015 and 2014-2016 awards under the LTPP upon termination without cause or due to substantial reorganization, or for death, disability or retirement (not eligible), on December 31, 2014. 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 |
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shown assume a two-thirds distribution of the total 2013-2015 award, which would have been paid in 2016, and a one-third distribution of the total 2014-2016 award, which would have been paid in 2017, using a performance score that was estimated as of December 31, 2014. 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 2014 matching amounts in the Nationwide Savings Plan and Nationwide Supplemental Defined Contribution Plan; one times the 2014 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 | $– | $185,565 | $– | $185,565 | ||||
Long-term incentives: | ||||||||
LTPP 12-14 award2 | $365,574 | $365,574 | $– | $365,574 | ||||
LTPP 13-15 award3 | $– | $185,894 | $– | $185,894 | ||||
LTPP 14-16 award3 | $– | $89,466 | $– | $89,466 | ||||
Life insurance proceeds | $– | $– | $– | $1,696,356 | ||||
Cash severance4 | $– | $325,199 | $– | $– | ||||
Total compensation | $365,574 | $1,151,698 | $– | $2,522,855 |
1 | Reflects the amount Mr. Henderson would receive with respect to the 2014 short-term incentive payment under the PIP upon a termination of employment, except for cause, on December 31, 2014. Mr. Henderson would not be eligible to receive a PIP award payment upon a voluntary termination on December 31, 2014. The PIP requires that plan participants be employed on the date PIP awards are paid. |
2 | Reflects the amount Mr. Henderson would receive with respect to the 2012-2014 awards under the LTPP upon a termination of employment, except for cause, on December 31, 2014. |
3 | Reflects the amount Mr. Henderson would receive with respect to the 2013-2015 and 2014-2016 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, 2014. 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 2013-2015 award, which would have been paid in 2016, and a one-third distribution of the total 2014-2016 award, which would have been paid in 2017, using a performance score that was estimated as of December 31, 2014. |
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. |
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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, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2014. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying table of contents. 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, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, 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 25, 2015
KPMG LLP is a Delaware limited liability partnership, the U.S.
member firm of KPMG International Cooperative (“KPMG
International”), a Swiss entity.
F-1
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Operations
Year ended December 31, | ||||||||||||
(in millions) | 2014 | 2013 | 2012 | |||||||||
Revenues | ||||||||||||
Policy charges | $ | 2,065 | $ | 1,849 | $ | 1,670 | ||||||
Premiums | 831 | 724 | 635 | |||||||||
Net investment income | 1,900 | 1,849 | 1,825 | |||||||||
Net realized investment (losses) gains, including other-than-temporary impairment losses | (1,078 | ) | 678 | 319 | ||||||||
Other revenues | 11 | 17 | 7 | |||||||||
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Total revenues | $ | 3,729 | $ | 5,117 | $ | 4,456 | ||||||
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Benefits and expenses | ||||||||||||
Interest credited to policyholder account values | $ | 1,096 | $ | 1,067 | $ | 1,038 | ||||||
Benefits and claims | 1,502 | 1,354 | 1,227 | |||||||||
Amortization of deferred policy acquisition costs | 207 | 374 | 575 | |||||||||
Other expenses, net of deferrals | 1,055 | 981 | 917 | |||||||||
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Total benefits and expenses | $ | 3,860 | $ | 3,776 | $ | 3,757 | ||||||
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(Loss) income before federal income taxes and noncontrolling interests | $ | (131 | ) | $ | 1,341 | $ | 699 | |||||
Federal income tax (benefit) expense | (147 | ) | 313 | 99 | ||||||||
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Net income | $ | 16 | $ | 1,028 | $ | 600 | ||||||
Less: Loss attributable to noncontrolling interest, net of tax | (94 | ) | (82 | ) | (61 | ) | ||||||
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Net income attributable to Nationwide Life Insurance Company | $ | 110 | $ | 1,110 | $ | 661 | ||||||
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See accompanying notes to consolidated financial statements.
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
Year ended December 31, | ||||||||||||
(in millions) | 2014 | 2013 | 2012 | |||||||||
Net income | $ | 16 | $ | 1,028 | $ | 600 | ||||||
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Other comprehensive income (loss), net of tax | ||||||||||||
Changes in: | ||||||||||||
Net unrealized gains (losses) on available-for-sale securities | $ | 435 | $ | (663 | ) | $ | 571 | |||||
Other | 27 | (7 | ) | (5 | ) | |||||||
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Total other comprehensive income (loss), net of tax | $ | 462 | $ | (670 | ) | $ | 566 | |||||
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Total comprehensive income | $ | 478 | $ | 358 | $ | 1,166 | ||||||
Less: Comprehensive loss attributable to noncontrolling interests, net of tax | (94 | ) | (82 | ) | (61 | ) | ||||||
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Total comprehensive income attributable to Nationwide Life Insurance Company | $ | 572 | $ | 440 | $ | 1,227 | ||||||
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See accompanying notes to consolidated financial statements.
F-3
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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
December 31, | ||||||||
(in millions, except for share and per share amounts) | 2014 | 2013 | ||||||
Assets | ||||||||
Investments: | ||||||||
Fixed maturity securities, available-for-sale | $ | 35,418 | $ | 32,249 | ||||
Mortgage loans, net of allowance | 7,270 | 6,341 | ||||||
Policy loans | 992 | 987 | ||||||
Short-term investments | 935 | 411 | ||||||
Other investments | 822 | 767 | ||||||
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Total investments | $ | 45,437 | $ | 40,755 | ||||
Cash and cash equivalents | 77 | 61 | ||||||
Accrued investment income | 670 | 603 | ||||||
Deferred policy acquisition costs | 4,063 | 3,778 | ||||||
Goodwill | 200 | 200 | ||||||
Other assets | 5,001 | 3,979 | ||||||
Separate account assets | 88,076 | 84,069 | ||||||
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Total assets | $ | 143,524 | $ | 133,445 | ||||
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Liabilities and equity | ||||||||
Liabilities | ||||||||
Future policy benefits and claims | $ | 40,730 | $ | 36,765 | ||||
Short-term debt | 660 | 278 | ||||||
Long-term debt | 709 | 707 | ||||||
Other liabilities | 5,313 | 4,122 | ||||||
Separate account liabilities | 88,076 | 84,069 | ||||||
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Total liabilities | $ | 135,488 | $ | 125,941 | ||||
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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 | 4,630 | 4,520 | ||||||
Accumulated other comprehensive income | 1,044 | 582 | ||||||
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Total shareholder’s equity | $ | 7,396 | $ | 6,824 | ||||
Noncontrolling interests | 640 | 680 | ||||||
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Total equity | $ | 8,036 | $ | 7,504 | ||||
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Total liabilities and equity | $ | 143,524 | $ | 133,445 | ||||
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See accompanying notes to consolidated financial statements.
F-4
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of 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, 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 | ||||||||||||||
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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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Comprehensive income (loss): | ||||||||||||||||||||||||||||
Net income (loss) | — | — | 110 | — | 110 | (94 | ) | 16 | ||||||||||||||||||||
Other comprehensive income | — | — | — | 462 | 462 | — | 462 | |||||||||||||||||||||
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Total comprehensive income (loss) | $ | — | $ | — | $ | 110 | $ | 462 | $ | 572 | $ | (94 | ) | $ | 478 | |||||||||||||
Change in noncontrolling interest | — | — | — | — | — | 54 | 54 | |||||||||||||||||||||
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Balance as of December 31, 2014 | $ | 4 | $ | 1,718 | $ | 4,630 | $ | 1,044 | $ | 7,396 | $ | 640 | $ | 8,036 | ||||||||||||||
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See accompanying notes to consolidated financial statements.
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
Year ended December 31, | ||||||||||||
(in millions) | 2014 | 2013 | 2012 | |||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 16 | $ | 1,028 | $ | 600 | ||||||
Adjustments to net income: | ||||||||||||
Net realized investment losses (gains), including other-than-temporary impairment losses | 1,078 | (678 | ) | (319 | ) | |||||||
Interest credited to policyholder account values | 1,096 | 1,067 | 1,038 | |||||||||
Capitalization of deferred policy acquisition costs | (685 | ) | (604 | ) | (470 | ) | ||||||
Amortization of deferred policy acquisition costs | 207 | 374 | 575 | |||||||||
Amortization and depreciation | 128 | 77 | 80 | |||||||||
Deferred tax (benefit) expense | (152 | ) | 346 | 243 | ||||||||
Changes in: | ||||||||||||
Policy liabilities | (421 | ) | (475 | ) | (548 | ) | ||||||
Derivatives, net | (181 | ) | (483 | ) | (490 | ) | ||||||
Other, net | (59 | ) | 88 | (84 | ) | |||||||
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Net cash provided by operating activities | $ | 1,027 | $ | 740 | $ | 625 | ||||||
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Cash flows from investing activities | ||||||||||||
Proceeds from maturities of available-for-sale securities | $ | 2,798 | $ | 3,689 | $ | 2,909 | ||||||
Proceeds from sales of available-for-sale securities | 647 | 1,091 | 796 | |||||||||
Purchases of available-for-sale securities | (5,640 | ) | (6,842 | ) | (5,167 | ) | ||||||
Proceeds from repayments and sales of mortgage loans | 920 | 1,091 | 1,048 | |||||||||
Issuances and purchases of mortgage loans | (1,837 | ) | (1,593 | ) | (1,114 | ) | ||||||
Net (increase) decrease in short-term investments | (524 | ) | 654 | 98 | ||||||||
Collateral received (paid), net | 399 | (637 | ) | (208 | ) | |||||||
Other, net | (94 | ) | 42 | (12 | ) | |||||||
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Net cash used in investing activities | $ | (3,331 | ) | $ | (2,505 | ) | $ | (1,650 | ) | |||
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Cash flows from financing activities | ||||||||||||
Net change in short-term debt | $ | 382 | $ | (22 | ) | $ | (477 | ) | ||||
Proceeds from issuance of long-term debt | — | 2 | 13 | |||||||||
Cash dividend paid to Nationwide Financial Services, Inc. | — | — | (40 | ) | ||||||||
Repayments of long-term debt | — | (299 | ) | — | ||||||||
Investment and universal life insurance product deposits | 6,037 | 6,139 | 5,566 | |||||||||
Investment and universal life insurance product withdrawals | (4,095 | ) | (4,034 | ) | (4,063 | ) | ||||||
Other, net | (4 | ) | (22 | ) | 39 | |||||||
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Net cash provided by financing activities | $ | 2,320 | $ | 1,764 | $ | 1,038 | ||||||
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Net increase (decrease) in cash and cash equivalents | $ | 16 | $ | (1 | ) | $ | 13 | |||||
Cash and cash equivalents at beginning of year | 61 | 62 | 49 | |||||||||
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Cash and cash equivalents at end of year | $ | 77 | $ | 61 | $ | 62 | ||||||
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See accompanying notes to consolidated financial statements.
F-6
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
(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.
The Company is a leading provider of long-term savings and retirement products in the United States of America (“U.S.”). The Company develops and sells a diverse range of products 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.
Wholly-owned subsidiaries of NLIC as of December 31, 2014 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.
As of December 31, 2014 and 2013, 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 on 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.
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, 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.
F-7
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
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 incidence of death) or morbidity (the 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, as well as 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 are 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 at the policy accrued account balance, which represents participants’ net deposits adjusted for investment performance, interest credited and applicable contract charges.
The Company offers certain universal life insurance and variable universal life insurance with no-lapse guarantees and variable annuity products with guaranteed minimum death benefits (“GMDB”) and/or 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 guaranteed benefit payments plus interest. The Company annually 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 expenses. 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.
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Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
The Company’s guaranteed minimum accumulation benefit (“GMAB”) and guaranteed living withdrawal benefit (“GLWB”) living benefit guarantees 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, benefit utilization and discounting. Benefit utilization includes wait period (the number of years the policyholder is assumed to wait prior to beginning withdrawals once eligible) and efficiency of benefit utilization (the percent of the maximum permitted withdrawal that a policyholder takes). Discounting includes 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.
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 4.8% with a provision for adverse deviation.
The Company issues fixed and floating rate funding agreements to the Federal Home Loan Bank of Cincinnati (“FHLB”). The liability for such funding agreements is recorded in future policy benefits and claims at amortized cost. The amount of collateralized funding agreements outstanding with the FHLB as of December 31, 2014 and 2013 was $1.8 billion and $913 million, respectively. In connection with an FHLB requirement for funding agreements, the Company held $35 million and $18 million of FHLB stock as of December 31, 2014 and 2013, respectively.
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.
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Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
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 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 assumptions for net separate account investment performance consist of assumed gross returns of 10.5% for equity funds and 5.0% for fixed funds.
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 thepremium-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 and other expenses, 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, 2014 and 2013, 99% of fixed maturity securities were priced using external source data. Independent pricing services are most often utilized (87% and 86% as of December 31, 2014 and 2013, respectively) 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 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.
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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
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. At least annually, the Company performs reviews and tests to ensure that quotes are a reasonable estimate of the investments’ fair value. 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.
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. government and agencies, as well as 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 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 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 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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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
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. Surveillance procedures identify loans with deteriorating credit fundamentals and these loans 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 also 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 of loans without specific reserves as of the balance sheet date. 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 primarily of highly liquid mutual funds and government agency discount notes with maturities of twelve months or less at acquisition. The Company and various affiliates maintain 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 private equity, hedge funds and partnerships, as well as COLI, trading securities, equity securities and capital stock with the FHLB.
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. As of December 31, 2014 and 2013, the fair value of loaned securities was $254 million and $116 million, respectively.
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. 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. 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.
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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
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 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. Losses attributable to noncontrolling interests are 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.
The 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, including market and income approaches.
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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
The Company categorizes its financial instruments into a three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument in its entirety.
The Company categorizes 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 the 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 has elected the fair value option.
Federal Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected 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 due to 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 the Company believes impact its liability for additional taxes, such as the 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.
NLIC files a separate consolidated federal income tax return with its subsidiaries and is eligible to join the NMIC consolidated 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.
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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
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 2014 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.
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.
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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
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 2014 and 2013 and 5% in 2012 and 37% of the number of life insurance policies in force in 2014 (38% in 2013 and 40% in 2012). 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.
Subsequent Events
The Company evaluated subsequent events through February 25, 2015, the date the consolidated financial statements were issued.
(3) | Recently Issued Accounting Standards |
Adopted Accounting Standards
On January 1, 2014, the Company adopted 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 adoption of this guidance had no impact on the Company’s consolidated financial statements.
On January 1, 2014, the Company adopted 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 adoption of this guidance had no impact on the Company’s consolidated financial statements.
On January 1, 2014, the Company adopted 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 adoption of this guidance had no impact on the Company’s consolidated financial statements.
Pending Accounting Standards
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.
In January 2014, the FASB issued ASU 2014-04, which amends existing guidance in ASC 310,Receivablesand ASC 360,Property, Plant and Equipment. The amended guidance provides clarification on the accounting for situations in which a creditor obtains collateral assets in satisfaction of all or part of a receivable. The Company will adopt the ASU for interim and annual periods beginning January 1, 2015. The Company is currently in the process of determining the impact of adoption.
In May 2014, the FASB issued ASU 2014-09, which amends existing guidance in ASC 606,Revenue from Contracts with Customers and ASC 340,Other Assets and Deferred Costs – Contracts with Customers. The amended guidance develops a single standard to recognize revenue when the identified performance obligation is satisfied. The Company will adopt the ASU for interim and annual periods beginning January 1, 2017. The Company is currently in the process of determining the impact of adoption.
In June 2014, the FASB issued ASU 2014-11, which amends existing guidance in ASC 860,Transfers and Servicing. The amended guidance amends certain criteria when evaluating effective control in certain repurchase agreement transactions and eliminates specific guidance on repurchase financing and requires that these transactions be treated in the same manner as repurchase transactions. Additionally, the amended guidance requires additional disclosures for repurchase agreements. The Company will adopt the ASU for interim and annual periods beginning January 1, 2015. The Company is currently in the process of determining the impact of adoption.
In August 2014, the FASB issued ASU 2014-14, which amends ASC 310,Receivables. The amended guidance requires creditors to classify certain foreclosed government guaranteed mortgage loans as a receivable from the guarantor that is measured at the amount expected to be recovered under the guarantee, without treating the guarantee as a separate unit of account. The Company will adopt the ASU for interim and annual periods beginning January 1, 2015. The Company is currently in the process of determining the impact of adoption.
F-16
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
In November 2014, the FASB issued ASU 2014-17, which amends ASC 805,Business Combinations. The amended guidance gives an acquired entity the option to apply pushdown accounting in its stand-alone financial statements. The Company will adopt the ASU for interim and annual 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) GLWB; (3) GMAB; (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.
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 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 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, 2014 | December 31, 2013 | |||||||||||||||||||||||||||||||
(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 | $ | 872 | $ | 23,079 | $ | 21 | 65 | $ | 916 | $ | 19,927 | $ | 13 | 64 | ||||||||||||||||||
Minimum return or anniversary contract value | 1,918 | 33,662 | 292 | 69 | 2,031 | 33,520 | 237 | 69 | ||||||||||||||||||||||||
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Total contracts with GMDB | $ | 2,790 | $ | 56,741 | $ | 313 | 68 | $ | 2,947 | $ | 53,447 | $ | 250 | 67 | ||||||||||||||||||
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GLWB Minimum return or anniversary contract value | $ | 135 | $ | 31,031 | $ | 195 | 66 | $ | 178 | $ | 28,071 | $ | 74 | 64 | ||||||||||||||||||
GMAB Return of net deposits3 | $ | 43 | $ | 1,552 | $ | — | 67 | $ | 92 | $ | 2,383 | $ | — | 64 | ||||||||||||||||||
GMIB Minimum return or anniversary contract value | $ | 45 | $ | 451 | $ | 1 | 66 | $ | 49 | $ | 510 | $ | — | 64 | ||||||||||||||||||
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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-17
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
The following table summarizes the reserve balances for guarantees on variable annuity contracts, as of the dates indicated:
December 31, | ||||||||
(in millions) | 2014 | 2013 | ||||||
GMDB | $ | 76 | $ | 55 | ||||
GLWB1 | $ | 174 | $ | (1,075 | ) | |||
GMAB1, 2 | $ | 3 | $ | (19 | ) | |||
GMIB | $ | 1 | $ | 2 | ||||
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1 | The changes in reserve balances for withdrawal benefits and accumulation benefits were primarily driven by declines in key interest rates, partially offset by rising equity markets during 2014. Refer to Note 7 for discussion of the related derivative programs. |
2 | Contracts with the hybrid accumulation/withdrawal benefits are included with the accumulation benefits contracts. |
Paid claims for GMDBs were $11 million and $22 million for the years ended December 31, 2014 and 2013, respectively.
Paid claims for GLWBs, GMABs and GMIBs were immaterial for the years ended December 31, 2014 and 2013.
The following table summarizes the account balances of deferred variable annuity contracts with guarantees invested in separate accounts, as of the dates indicated:
December 31, | ||||||||
(in millions) | 2014 | 2013 | ||||||
Mutual funds: | ||||||||
Bond | $ | 5,280 | $ | 5,685 | ||||
Domestic equity | 47,316 | 43,505 | ||||||
International equity | 2,969 | 3,179 | ||||||
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Total mutual funds | $ | 55,565 | $ | 52,369 | ||||
Money market funds | 1,176 | 1,078 | ||||||
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Total1 | $ | 56,741 | $ | 53,447 | ||||
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1 | Excludes $31.3 billion and $30.6 billion as of December 31, 2014 and 2013, respectively, of separate account assets not related to deferred variable annuity contracts with guarantees, 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, 2014 and 2013.
Universal and Variable Universal Life Insurance Contracts
The Company offers certain universal life and variable universal life insurance products with no-lapse 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 $401 million and $325 million as of December 31, 2014 and 2013, respectively. Paid claims on contracts maintained in force by these guarantees were immaterial for the years ended December 31, 2014 and 2013.
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, 2014 | $ | 1,954 | $ | 2,191 | $ | 41,484 | 51 | |||||||||
December 31, 20133 | $ | 1,522 | $ | 2,235 | $ | 36,956 | 51 | |||||||||
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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. |
2 | Represents the weighted average attained age of contractholders. |
3 | Amounts above are based on all policies with no-lapse guarantees. Previously, only those policies with a no-lapse guarantee carrying a reserve were included in the disclosure. |
F-18
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
(5) | Deferred Policy Acquisition Costs |
The following table summarizes changes in the DAC balance, as of the dates indicated:
December 31, | ||||||||||||
(in millions) | 2014 | 2013 | 2012 | |||||||||
Balance at beginning of year | $ | 3,778 | $ | 3,249 | $ | 3,487 | ||||||
Capitalization of DAC | 685 | 604 | 470 | |||||||||
Amortization of DAC, excluding unlocks | (397 | ) | (373 | ) | (525 | ) | ||||||
Amortization of DAC related to unlocks | 190 | (1 | ) | (50 | ) | |||||||
Adjustments to DAC related to unrealized gains and losses on available-for-sale securities | (193 | ) | 299 | (133 | ) | |||||||
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Balance at end of year | $ | 4,063 | $ | 3,778 | $ | 3,249 | ||||||
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During 2014, the Company recognized a decrease in DAC amortization of $190 million as a result of the annual comprehensive review of model assumptions and enhancements. The updated assumptions were primarily related to the actual performance of the block of business since the prior year review and the expectations for lapses, partially offset by an update to the Company’s long-term assumptions for separate account investment performance.
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.
F-19
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
(6) | Investments |
Available-for-Sale Securities
The following table summarizes the 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, 2014 | ||||||||||||||||
Fixed maturity securities: | ||||||||||||||||
U.S. government and agencies | $ | 448 | $ | 79 | $ | — | $ | 527 | ||||||||
Obligations of states, political subdivisions and foreign governments | 1,966 | 320 | 1 | 2,285 | ||||||||||||
Corporate public securities | 19,851 | 1,519 | 120 | 21,250 | ||||||||||||
Corporate private securities | 4,398 | 286 | 34 | 4,650 | ||||||||||||
Residential mortgage-backed securities | 3,694 | 190 | 45 | 3,839 | ||||||||||||
Commercial mortgage-backed securities | 1,431 | 74 | 3 | 1,502 | ||||||||||||
Other asset-backed securities | 1,410 | 27 | 72 | 1,365 | ||||||||||||
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Total fixed maturity securities | $ | 33,198 | $ | 2,495 | $ | 275 | $ | 35,418 | ||||||||
Equity securities | 6 | 15 | — | 21 | ||||||||||||
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Total available-for-sale securities | $ | 33,204 | $ | 2,510 | $ | 275 | $ | 35,439 | ||||||||
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December 31, 2013 | ||||||||||||||||
Fixed maturity securities: | ||||||||||||||||
U.S. government 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 | ||||||||||||
Total fixed maturity securities | $ | 31,002 | $ | 1,799 | $ | 552 | $ | 32,249 | ||||||||
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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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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-20
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
The following table summarizes the amortized cost and fair value of fixed maturity securities, by contractual maturity, as of December 31, 2014. 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 | $ | 1,018 | $ | 1,037 | ||||
Due after one year through five years | 9,196 | 9,898 | ||||||
Due after five years through ten years | 8,267 | 8,617 | ||||||
Due after ten years | 8,182 | 9,160 | ||||||
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Subtotal | $ | 26,663 | $ | 28,712 | ||||
Residential mortgage-backed securities | 3,694 | 3,839 | ||||||
Commercial mortgage-backed securities | 1,431 | 1,502 | ||||||
Other asset-backed securities | 1,410 | 1,365 | ||||||
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Total fixed maturity securities | $ | 33,198 | $ | 35,418 | ||||
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The following table summarizes components of net unrealized gains and losses, as of the dates indicated:
December 31, | ||||||||
(in millions) | 2014 | 2013 | ||||||
Net unrealized gains on available-for-sale securities, before adjustments, taxes and fair value hedging | $ | 2,235 | $ | 1,265 | ||||
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Net unrealized gains on available-for-sale securities, before adjustments and taxes1 | $ | 2,235 | $ | 1,265 | ||||
Adjustment to DAC and other expense | (372 | ) | (176 | ) | ||||
Adjustment to future policy benefits and claims | (159 | ) | (89 | ) | ||||
Adjustment to policyholder dividend obligation | (120 | ) | (85 | ) | ||||
Deferred federal income tax expense | (548 | ) | (314 | ) | ||||
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Net unrealized gains on available-for-sale securities | $ | 1,036 | $ | 601 | ||||
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1 | Includes net unrealized losses of $9 million and $40 million as of December 31, 2014 and 2013, respectively, related to the non-credit portion of other-than-temporarily impaired securities. |
The following table summarizes the change in net unrealized gains and losses reported in accumulated other comprehensive income, for the years ended:
December 31, | ||||||||
(in millions) | 2014 | 2013 | ||||||
Balance at beginning of year | $ | 601 | $ | 1,264 | ||||
Unrealized gains and losses arising during the year: | ||||||||
Net unrealized gains (losses) on available-for-sale securities before adjustments | 939 | (1,657 | ) | |||||
Non-credit impairments and subsequent changes in fair value of impaired debt securities | 31 | 8 | ||||||
Net adjustment to DAC and other expense | (196 | ) | 306 | |||||
Net adjustment to future policy benefits and claims | (70 | ) | 206 | |||||
Net adjustment to policyholder dividend obligations | (35 | ) | 92 | |||||
Related federal income tax (expense) benefit | (234 | ) | 366 | |||||
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Unrealized gains (losses) on available-for-sale securities | $ | 435 | $ | (679 | ) | |||
Reclassification adjustment for net losses realized on available-for-sale securities, net of tax benefit ($0 and $8 as of December 31, 2014 and 2013, respectively) | — | (16 | ) | |||||
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Net unrealized gains (losses) on available-for-sale securities | $ | 435 | $ | (663 | ) | |||
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Balance at end of year | $ | 1,036 | $ | 601 | ||||
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F-21
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
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, as of the dates indicated:
Less than or equal to one year | More than one year | Total | ||||||||||||||||||
(in millions) | Fair value | Unrealized losses | Fair value | Unrealized losses | Unrealized losses1 | |||||||||||||||
December 31, 2014 | ||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||
Corporate public securities | $ | 1,642 | $ | 63 | $ | 1,578 | $ | 57 | $ | 120 | ||||||||||
Residential mortgage-backed securities | 268 | 2 | 487 | 43 | 45 | |||||||||||||||
Other asset-backed securities | 662 | 5 | 493 | 67 | 72 | |||||||||||||||
Other | 589 | �� | 27 | 457 | 11 | 38 | ||||||||||||||
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Total2 | $ | 3,161 | $ | 97 | $ | 3,015 | $ | 178 | $ | 275 | ||||||||||
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December 31, 2013 | ||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||
Corporate public securities | $ | 4,889 | $ | 256 | $ | 442 | $ | 39 | $ | 295 | ||||||||||
Residential mortgage-backed securities | 725 | 16 | 604 | 63 | 79 | |||||||||||||||
Other asset-backed securities | 507 | 6 | 144 | 71 | 77 | |||||||||||||||
Other | 1,838 | 85 | 222 | 16 | 101 | |||||||||||||||
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Total2 | $ | 7,959 | $ | 363 | $ | 1,412 | $ | 189 | $ | 552 | ||||||||||
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1 | As of December 31, 2014 and 2013, there were $66 million and $82 million, respectively, of unrealized losses related to available-for-sale securities with a fair value to amortized cost ratio of less than 80%. |
2 | Represents 541 and 816 available-for-sale securities in an unrealized loss position as of December 31, 2014 and 2013, respectively. |
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.
F-22
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
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:
December 31, | ||||||||
(in millions) | 2014 | 2013 | ||||||
Amortized cost: | ||||||||
Loans with non-specific reserves | $ | 7,279 | $ | 6,350 | ||||
Loans with specific reserves | 17 | 26 | ||||||
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Total amortized cost | $ | 7,296 | $ | 6,376 | ||||
Valuation allowance: | ||||||||
Non-specific reserves | $ | 21 | $ | 29 | ||||
Specific reserves | 5 | 6 | ||||||
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Total valuation allowance | $ | 26 | $ | 35 | ||||
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Mortgage loans, net of allowance | $ | 7,270 | $ | 6,341 | ||||
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The following table summarizes activity in the valuation allowance for mortgage loans, for the years ended:
December 31, | ||||||||||||
(in millions) | 2014 | 2013 | 2012 | |||||||||
Balance at beginning of year | $ | 35 | $ | 44 | $ | 60 | ||||||
Current period provision1 | (8 | ) | (4 | ) | 2 | |||||||
Recoveries2 | (1 | ) | (5 | ) | (15 | ) | ||||||
Charge offs and other | — | — | (3 | ) | ||||||||
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Balance at end of year | $ | 26 | $ | 35 | $ | 44 | ||||||
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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. |
As of December 31, 2014 and 2013, the carrying values of commercial mortgage loans specifically reserved were $12 million and $20 million, respectively, which is net of $5 million and $6 million, respectively, in specific reserves.
Interest income recognized on impaired commercial mortgage loans was $1 million and $3 million for the years ended December 31, 2014 and 2013, respectively. The average recorded investment was $16 million and $30 million for the years ended December 31, 2014 and 2013, respectively.
As of December 31, 2014 and 2013, 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-23
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
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, 2014 | ||||||||||||||||||||||||||||||||
Apartment | $ | 2,156 | $ | 111 | $ | 17 | $ | 2,284 | $ | 2,252 | $ | 26 | $ | 6 | $ | 2,284 | ||||||||||||||||
Industrial | 1,131 | 34 | 35 | 1,200 | 1,048 | 89 | 63 | 1,200 | ||||||||||||||||||||||||
Office | 1,004 | 16 | 20 | 1,040 | 990 | 4 | 46 | 1,040 | ||||||||||||||||||||||||
Retail | 2,506 | 64 | 11 | 2,581 | 2,421 | 128 | 32 | 2,581 | ||||||||||||||||||||||||
Other | 191 | — | — | 191 | 191 | — | — | 191 | ||||||||||||||||||||||||
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Total1 | $ | 6,988 | $ | 225 | $ | 83 | $ | 7,296 | $ | 6,902 | $ | 247 | $ | 147 | $ | 7,296 | ||||||||||||||||
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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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Total2 | $ | 6,025 | $ | 175 | $ | 176 | $ | 6,376 | $ | 5,978 | $ | 232 | $ | 166 | $ | 6,376 | ||||||||||||||||
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1 | As of December 31, 2014, the weighted average DSC ratios for the respective LTV ratio ranges above were 1.97, 1.27 and 0.90, with a total weighted average DSC ratio of 1.93. As of December 31, 2014, the weighted average LTV ratios for the respective DSC ratio ranges above were 60%, 59% and 90%, with a total weighted average LTV ratio of 60%. |
2 | As of December 31, 2013, the weighted average DSC ratios for the respective LTV ratio ranges above were 1.77, 1.22 and 1.00, with a total weighted average DSC ratio of 1.74. As of December 31, 2013, the weighted average LTV ratios for the respective DSC ratio ranges above were 60%, 61% and 91%, with a total weighted average LTV ratio of 61%. |
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 were on deposit with various regulatory agencies as required by law as of December 31, 2014 and 2013. Additionally, available-for-sale securities with a carrying value of $683 million and $849 million were pledged as collateral to secure recoveries under reinsurance contracts and other funding agreements as of December 31, 2014 and 2013, respectively. These securities are primarily included in fixed maturity securities in the consolidated balance sheets.
Tax Credit Funds
The Company has sold $1.3 billion and $1.2 billion in Tax Credit Funds to unrelated third parties as of December 31, 2014 and 2013, respectively. The Company has guaranteed after-tax benefits to the third party investors through periods ending in 2029. The Company held immaterial reserves on these transactions as of December 31, 2014 and 2013. 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 $744 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.
F-24
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
Consolidated VIEs
The Company has relationships with VIEs where the Company is the primary beneficiary. These consolidated VIEs are primarily made up of Tax Credit Funds with guarantees to limited partners. Net assets (controlling and noncontrolling interests) of all consolidated VIEs totaled $640 million and $680 million as of December 31, 2014 and 2013, respectively, and are included within the balance sheet primarily as other investments of $580 million, other assets of $109 million and other liabilities of $75 million as of December 31, 2014, other investments of $554 million, other assets of $182 million and other liabilities of $82 million as of December 31, 2013. 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 $113 million and $104 million as of December 31, 2014 and 2013, respectively. In addition, the Company has made commitments for further investments in these VIEs of $17 million and $29 million as of December 31, 2014 and 2013, respectively.
Net Investment Income
The following table summarizes net investment income, by investment type, for the years ended:
December 31, | ||||||||||||
(in millions) | 2014 | 2013 | 2012 | |||||||||
Fixed maturity securities, available-for-sale | $ | 1,575 | $ | 1,565 | $ | 1,506 | ||||||
Mortgage loans | 362 | 348 | 366 | |||||||||
Policy loans | 51 | 52 | 53 | |||||||||
Other | (29 | ) | (57 | ) | (45 | ) | ||||||
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Gross investment income | $ | 1,959 | $ | 1,908 | $ | 1,880 | ||||||
Investment expenses | 59 | 59 | 55 | |||||||||
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Net investment income | $ | 1,900 | $ | 1,849 | $ | 1,825 | ||||||
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Net Realized Investment Gains and Losses, Including Other-Than-Temporary Impairments
The following table summarizes net realized investment gains and losses, including other-than-temporary impairments, by source, for the years ended:
December 31, | ||||||||||||
(in millions) | 2014 | 2013 | 2012 | |||||||||
Net realized derivative (losses) gains | $ | (1,087 | ) | $ | 705 | $ | 314 | |||||
Realized gains on sales | 31 | 32 | 48 | |||||||||
Realized losses on sales | (19 | ) | (54 | ) | (23 | ) | ||||||
Other | 2 | — | 12 | |||||||||
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Net realized investment (losses) gains before other-than-temporary impairments on fixed maturity securities | $ | (1,073 | ) | $ | 683 | $ | 351 | |||||
Other-than-temporary impairments on fixed maturity securities1 | (5 | ) | (5 | ) | (32 | ) | ||||||
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Net realized investment (losses) gains, including other-than-temporary impairments | $ | (1,078 | ) | $ | 678 | $ | 319 | |||||
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1 | Other-than-temporary impairments on fixed maturity securities are net $1 million, $6 million and $36 million of non-credit losses included in other comprehensive income for the years ended December 31, 2014, 2013 and 2012, respectively. |
Proceeds from the sale of available-for-sale securities were $0.6 billion, $1.1 billion and $0.8 billion during the years ended December 31, 2014, 2013 and 2012, respectively. Gross gains of $17 million, $31 million and $47 million and gross losses of $10 million, $50 million and $20 million were realized on sales of available-for-sale securities during the years ended December 31, 2014, 2013 and 2012, respectively.
F-25
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
The following table summarizes the cumulative credit losses, for the years ended:
December 31, | ||||||||||||
(in millions) | 2014 | 2013 | 2012 | |||||||||
Cumulative credit losses at beginning of year1 | $ | (272 | ) | $ | (289 | ) | $ | (328 | ) | |||
New credit losses | (2 | ) | (3 | ) | (18 | ) | ||||||
Incremental credit losses | (4 | ) | (3 | ) | (10 | ) | ||||||
Losses related to securities included in the beginning balance sold or paid down during the period | 24 | 23 | 67 | |||||||||
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Cumulative credit losses at end of year1 | $ | (254 | ) | $ | (272 | ) | $ | (289 | ) | |||
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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. |
(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.
Other 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 derivatives 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, 2014 and 2013, 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-26
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
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, 2014 | ||||||||||||||||
Derivatives designated and qualifying as hedging instruments | $ | 29 | $ | 381 | $ | 9 | $ | 176 | ||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||
Interest rate contracts | $ | 2,602 | $ | 32,829 | $ | 2,611 | $ | 32,756 | ||||||||
Equity contracts | 411 | 5,990 | — | — | ||||||||||||
Total return swaps | — | — | 41 | 2,808 | ||||||||||||
Other derivative contracts | — | — | 3 | 2 | ||||||||||||
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Total derivative instruments1 | $ | 3,042 | $ | 39,200 | $ | 2,664 | $ | 35,742 | ||||||||
Accrued interest on derivative assets and liabilities | 243 | 244 | ||||||||||||||
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Total derivative positions | $ | 3,285 | $ | 2,908 | ||||||||||||
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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 instruments1 | $ | 2,137 | $ | 33,819 | $ | 2,183 | $ | 31,245 | ||||||||
Accrued interest on derivative assets and liabilities | 196 | 227 | ||||||||||||||
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Total derivative positions | $ | 2,333 | $ | 2,410 | ||||||||||||
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1 | Derivative assets and liabilities are included in other assets and other liabilities, respectively, in the consolidated balance sheets. |
Of the $3.3 billion and $2.3 billion of fair value of total derivative assets at December 31, 2014 and 2013, $2.6 billion and $1.7 billion, respectively, are subject to master netting agreements. The Company received $535 million and $382 million of cash collateral and held $64 million and $29 million, respectively, of securities as off-balance sheet collateral, resulting in an immaterial uncollateralized position as of December 31, 2014 and 2013. Of the $2.9 billion and $2.4 billion of fair value of total derivative liabilities at December 31, 2014 and 2013, $2.6 billion and $1.7 billion, respectively, are subject to master netting agreements. The Company posted $330 million and $435 million of cash collateral and pledged securities with a fair value of $174 million and $173 million, respectively, resulting in an immaterial uncollateralized position as of December 31, 2014 and 2013.
F-27
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
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:
December 31, | ||||||||||||
(in millions) | 2014 | 2013 | 2012 | |||||||||
Derivatives designated and qualifying as hedging instruments | $ | — | $ | (1 | ) | $ | (1 | ) | ||||
Derivatives not designated as hedging instruments: | ||||||||||||
Interest rate contracts | $ | 142 | $ | (209 | ) | $ | (125 | ) | ||||
Equity contracts | (79 | ) | (776 | ) | (665 | ) | ||||||
Total return swaps | (195 | ) | (321 | ) | (343 | ) | ||||||
Other derivative contracts | 4 | (9 | ) | (1 | ) | |||||||
Net interest settlements | 20 | 14 | 53 | |||||||||
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Total derivative losses1 | $ | (108 | ) | $ | (1,302 | ) | $ | (1,082 | ) | |||
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Change in embedded derivatives on guaranteed benefit annuity programs2 | (1,271 | ) | 1,751 | 1,185 | ||||||||
Other revenue on guaranteed benefit annuity programs | 292 | 256 | 211 | |||||||||
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Change in embedded derivative liabilities and related fees | $ | (979 | ) | $ | 2,007 | $ | 1,396 | |||||
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Net realized derivative (losses) gains | $ | (1,087 | ) | $ | 705 | $ | 314 | |||||
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1 | Included in total derivative losses are economic hedging gains (losses) of $941 million, $(1.8) billion and $(827) million related to the guaranteed benefit annuity programs for the years ended December 31, 2014, 2013 and 2012, respectively. Also included are economic hedging (losses) gains of $(1.0) billion, $645 million and $(129) million, respectively, related to the program that protects against the negative impact of higher interest rates on the Company’s statutory surplus position. |
2 | For the individual variable annuity business, the annual comprehensive review of model assumptions included a favorable impact for the years ended December 31, 2014 and 2013, primarily due to model enhancements and updated assumptions for discounting and benefit utilization, partially offset by mortality and lapse rates. |
F-28
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
(8) | Fair Value Measurements |
The following table summarizes assets and liabilities held at fair value on a recurring basis as of December 31, 2014:
(in millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Investments: | ||||||||||||||||
Fixed maturity securities, available-for-sale: | ||||||||||||||||
U.S. government and agencies | $ | 523 | $ | 1 | $ | 3 | $ | 527 | ||||||||
Obligations of states, political subdivisions and foreign governments | 66 | 2,219 | — | 2,285 | ||||||||||||
Corporate public securities | — | 21,158 | 92 | 21,250 | ||||||||||||
Corporate private securities | — | 3,659 | 991 | 4,650 | ||||||||||||
Residential mortgage-backed securities | 1,034 | 2,796 | 9 | 3,839 | ||||||||||||
Commercial mortgage-backed securities | — | 1,499 | 3 | 1,502 | ||||||||||||
Other asset-backed securities | — | 1,196 | 169 | 1,365 | ||||||||||||
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Total fixed maturity securities, available-for-sale, at fair value | $ | 1,623 | $ | 32,528 | $ | 1,267 | $ | 35,418 | ||||||||
Other investments at fair value1 | 42 | 899 | 36 | 977 | ||||||||||||
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Investments at fair value | $ | 1,665 | $ | 33,427 | $ | 1,303 | $ | 36,395 | ||||||||
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Derivative instruments - assets | — | 2,631 | 411 | 3,042 | ||||||||||||
Separate account assets | 84,583 | 1,387 | 2,106 | 88,076 | ||||||||||||
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Assets at fair value | $ | 86,248 | $ | 37,445 | $ | 3,820 | $ | 127,513 | ||||||||
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Liabilities | ||||||||||||||||
Future policy benefits and claims: | ||||||||||||||||
Embedded derivatives on living benefits | $ | — | $ | — | $ | (177 | ) | $ | (177 | ) | ||||||
Embedded derivatives on indexed products | — | — | (84 | ) | (84 | ) | ||||||||||
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Total future policy benefits and claims | $ | — | $ | — | $ | (261 | ) | $ | (261 | ) | ||||||
Derivative instruments - liabilities | — | (2,661 | ) | (3 | ) | (2,664 | ) | |||||||||
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Liabilities at fair value | $ | — | $ | (2,661 | ) | $ | (264 | ) | $ | (2,925 | ) | |||||
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1 | Other investments at fair value includes $21 million of trading securities as of December 31, 2014. |
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, 2014:
(in millions) | Fixed maturity securities2 | Other investments | Derivative assets3 | Separate account assets | Total assets at fair value | Liabilities at fair value3 | ||||||||||||||||||
Balance as of December 31, 2013 | $ | 1,088 | $ | 45 | $ | 343 | $ | 2,083 | $ | 3,559 | $ | 1,005 | ||||||||||||
Net gains (losses) | ||||||||||||||||||||||||
In operations1 | (5 | ) | 6 | 40 | 23 | 64 | (1,269 | ) | ||||||||||||||||
In other comprehensive income | 21 | 1 | — | — | 22 | — | ||||||||||||||||||
Purchases | 121 | — | 46 | — | 167 | — | ||||||||||||||||||
Sales | (241 | ) | (16 | ) | (18 | ) | — | (275 | ) | — | ||||||||||||||
Transfers into Level 3 | 400 | — | — | — | 400 | — | ||||||||||||||||||
Transfers out of Level 3 | (117 | ) | — | — | — | (117 | ) | — | ||||||||||||||||
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Balance as of December 31, 2014 | $ | 1,267 | $ | 36 | $ | 411 | $ | 2,106 | $ | 3,820 | $ | (264 | ) | |||||||||||
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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 $(1.3) billion for future policy benefits and claims, $154 million for derivative assets, and $6 million for other investments at fair value. |
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, 2014. |
3 | Non-binding broker quotes were utilized to determine a fair value of all Level 3 derivative assets and liabilities. |
F-29
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
Transfers into and out of Level 3 during the year ended December 31, 2014 are primarily due to certain corporate private securities, which changed pricing sources between broker quotes and independent pricing services. There were no material transfers between Levels 1 and 2 during the year ended December 31, 2014.
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, 2014:
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, tax status (i.e. qualified or non-qualified), interest rate levels 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.
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.
F-30
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
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, 2014:
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 the 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 guarantee period. The net asset value of this fund reported in separate account assets was $1.7 billion as of December 31, 2014 and 2013.
F-31
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
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. government 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 value1 | 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 instruments - 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 instruments - liabilities | — | (2,178 | ) | (5 | ) | (2,183 | ) | |||||||||
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Liabilities at fair value | $ | — | $ | (2,178 | ) | $ | 1,005 | $ | (1,173 | ) | ||||||
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1 | Other investments at fair value includes $31 million of trading securities as of December 31, 2013. |
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:
(in millions) | Fixed maturity securities2 | Other investments | Derivative assets3 | Separate account assets | Total assets at fair value | Liabilities at fair value3 | ||||||||||||||||||
Balance as of December 31, 2012 | $ | 1,197 | $ | 62 | $ | 822 | $ | 2,025 | $ | 4,106 | $ | (753 | ) | |||||||||||
Net gains (losses) | ||||||||||||||||||||||||
In operations1 | (1 | ) | (6 | ) | (447 | ) | 58 | (396 | ) | 1,758 | ||||||||||||||
In other comprehensive income | 1 | 6 | — | — | 7 | — | ||||||||||||||||||
Purchases | 115 | 5 | 129 | — | 249 | — | ||||||||||||||||||
Sales | (232 | ) | (22 | ) | (161 | ) | — | (415 | ) | — | ||||||||||||||
Transfers into Level 3 | 142 | — | — | — | 142 | — | ||||||||||||||||||
Transfers out of Level 3 | (134 | ) | — | — | — | (134 | ) | — | ||||||||||||||||
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Balance as of December 31, 2013 | $ | 1,088 | $ | 45 | $ | 343 | $ | 2,083 | $ | 3,559 | $ | 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 gains (losses) included in operations on assets and liabilities still held as of the end of the year was $1.8 billion for future policy benefits and claims, $(297) million for derivative assets and $(6) million for other investments at fair value. |
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-32
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
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, 2014 | December 31, 2013 | |||||||||||||||||||||||||||||||
(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 | $ | 7,270 | $ | 7,616 | $ | — | $ | 7,616 | $ | 6,341 | $ | 6,481 | $ | — | $ | 6,481 | ||||||||||||||||
Policy loans | $ | 992 | $ | 992 | $ | — | $ | 992 | $ | 987 | $ | 987 | $ | — | $ | 987 | ||||||||||||||||
Other investments | $ | 60 | $ | 60 | $ | — | $ | 60 | $ | 43 | $ | 43 | $ | — | $ | 43 | ||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Investment contracts | $ | 23,470 | $ | 21,742 | $ | — | $ | 21,742 | $ | 21,874 | $ | 20,436 | $ | — | $ | 20,436 | ||||||||||||||||
Short-term debt | $ | 660 | $ | 660 | $ | — | $ | 660 | $ | 278 | $ | 278 | $ | — | $ | 278 | ||||||||||||||||
Long-term debt | $ | 709 | $ | 1,069 | $ | 1,060 | $ | 9 | $ | 707 | $ | 1,004 | $ | 997 | $ | 7 | ||||||||||||||||
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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.
Other investments. Other investments not held at fair value consist of FHLB stock. 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 values for long-term debt are based on estimated market prices using observable inputs from similar debt instruments.
(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, 20121 | $ | 25 | $ | 175 | $ | 200 | ||||||
Adjustments | — | — | — | |||||||||
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Balance as of December 31, 20131 | $ | 25 | $ | 175 | $ | 200 | ||||||
Adjustments | — | — | — | |||||||||
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Balance as of December 31, 20141 | $ | 25 | $ | 175 | $ | 200 | ||||||
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1 | The goodwill balances have not been previously impaired. |
F-33
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
(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:
December 31, | ||||||||
(in millions) | 2014 | 2013 | ||||||
Liabilities: | ||||||||
Future policyholder benefits | $ | 1,669 | $ | 1,703 | ||||
Policyholder funds and accumulated dividends | 139 | 141 | ||||||
Policyholder dividends payable | 22 | 23 | ||||||
Policyholder dividend obligation | 152 | 113 | ||||||
Other policy obligations and liabilities | 33 | 29 | ||||||
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Total liabilities | $ | 2,015 | $ | 2,009 | ||||
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Assets: | ||||||||
Fixed maturity securities, available-for-sale | $ | 1,336 | $ | 1,320 | ||||
Mortgage loans, net of allowance | 272 | 257 | ||||||
Policy loans | 149 | 157 | ||||||
Other assets | 86 | 93 | ||||||
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Total assets | $ | 1,843 | $ | 1,827 | ||||
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Excess of reported liabilities over assets | 172 | 182 | ||||||
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Portion of above representing other comprehensive income: | ||||||||
Increase (decrease) in unrealized gain on fixed maturity securities, available-for-sale | $ | 35 | $ | (92 | ) | |||
Adjustment to policyholder dividend obligation | (35 | ) | 92 | |||||
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Total | $ | — | $ | — | ||||
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Maximum future earnings to be recognized from assets and liabilities | $ | 172 | $ | 182 | ||||
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Other comprehensive income: | ||||||||
Fixed maturity securities, available-for-sale: | ||||||||
Fair value | $ | 1,336 | $ | 1,320 | ||||
Amortized cost | 1,216 | 1,235 | ||||||
Shadow policyholder dividend obligation | (120 | ) | (85 | ) | ||||
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Net unrealized appreciation | $ | — | $ | — | ||||
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F-34
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
The following table summarizes closed block operations for the years ended:
December 31, | ||||||||||||
(in millions) | 2014 | 2013 | 2012 | |||||||||
Revenues: | ||||||||||||
Premiums | $ | 61 | $ | 66 | $ | 73 | ||||||
Net investment income | 93 | 94 | 98 | |||||||||
Realized investment gains | 1 | — | 1 | |||||||||
Realized losses credited to policyholder benefit obligation | (5 | ) | (4 | ) | (5 | ) | ||||||
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Total revenues | $ | 150 | $ | 156 | $ | 167 | ||||||
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Benefits and expenses: | ||||||||||||
Policy and contract benefits | $ | 124 | $ | 123 | $ | 134 | ||||||
Change in future policyholder benefits and interest credited to policyholder accounts | (34 | ) | (29 | ) | (27 | ) | ||||||
Policyholder dividends | 43 | 44 | 50 | |||||||||
Change in policyholder dividend obligation | (1 | ) | 3 | (8 | ) | |||||||
Other expenses | 2 | (2 | ) | 1 | ||||||||
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Total benefits and expenses | $ | 134 | $ | 139 | $ | 150 | ||||||
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Total revenues, net of benefits and expenses, before federal income tax expense | $ | 16 | $ | 17 | $ | 17 | ||||||
Federal income tax expense | 6 | 6 | 6 | |||||||||
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Revenues, net of benefits and expenses and federal income tax expense | $ | 10 | $ | 11 | $ | 11 | ||||||
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Maximum future earnings from assets and liabilities: | ||||||||||||
Beginning of period | $ | 182 | $ | 193 | $ | 204 | ||||||
Change during period | (10 | ) | (11 | ) | (11 | ) | ||||||
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End of period | $ | 172 | $ | 182 | $ | 193 | ||||||
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Cumulative closed block earnings from inception through December 31, 2014, 2013 and 2012 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 $32 million, $28 million and $21 million as of December 31, 2014, 2013 and 2012, respectively.
F-35
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
(11) | Short-Term Debt |
The Company classifies debt as short-term if the maturity date at inception is less than one year.
The following table summarizes the carrying value of short-term debt and weighted average annual interest rates, as of the dates indicated:
December 31, | ||||||||
(in millions) | 2014 | 2013 | ||||||
$600 million commercial paper program (0.20% and 0.24%, respectively) | $ | 264 | $ | 278 | ||||
$400 million revolving variable rate line of credit (1.57% and 0.00%, respectively) | 396 | — | ||||||
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Total short-term debt | $ | 660 | $ | 278 | ||||
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In November 2014, the Company entered into a $400 million unsecured revolving promissory note and line of credit agreement with its parent company, NFS. Outstanding principal balances of the line of credit bear interest at the rate of six-month London Interbank Offered Rate (“LIBOR”) plus 1.25%. Interest is due and payable as of the last day of each interest period, as defined in the agreement, while there are outstanding principal balances. Under the terms of the agreement, the Company may borrow, repay and re-borrow advances under the line of credit at any time prior to the termination of the note, which, among other conditions, is November 2015, subject to automatic renewal for additional one year periods unless either party terminates the agreement. In February 2015, the Company repaid $200 million of the outstanding balance.
In March 2014, the Company renewed an agreement to extend its ability to borrow with the FHLB. This extension, which expires on March 27, 2015, allows the Company access to borrow up to $250 million, which would be collateralized by pledged securities. The Company had $8.5 billion and $4.3 billion in eligible collateral and no amounts outstanding under the agreement as of December 31, 2014 and 2013, respectively. Additionally, as part of the agreement, NLIC purchased $25 million in capital stock with the FHLB.
NMIC, NFS, and NLIC have a $600 million revolving variable rate credit facility that matures on May 6, 2015. NLIC had no amounts outstanding under the facility as of December 31, 2014 and 2013.
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, 2014 and 2013.
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 statutory surplus leverage ratio requirements, as defined in the agreements. The Company was in compliance with all covenants as of December 31, 2014 and 2013.
The amount of interest paid on short-term debt was immaterial in 2014, 2013 and 2012.
(12) | Long-Term Debt |
The following table summarizes the carrying value of long-term debt, as of the dates indicated:
December 31, | ||||||||
(in millions) | 2014 | 2013 | ||||||
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 | ||||||
Other | 9 | 7 | ||||||
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Total long-term debt | $ | 709 | $ | 707 | ||||
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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 the surplus note totaling $5 million during 2013 prior to the repayment of the outstanding balance. Payments of interest and principal under the notes require 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, 2014, 2013 and 2012. Payments of interest and principal under the notes require the prior approval of the ODI.
F-36
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
(13) | Federal Income Taxes |
The following table summarizes the components of federal income tax (benefit) expense for the years ended:
December 31, | ||||||||||||
(in millions) | 2014 | 2013 | 2012 | |||||||||
Current tax expense (benefit) | $ | 5 | $ | (33 | ) | $ | (144 | ) | ||||
Deferred tax (benefit) expense | (152 | ) | 346 | 243 | ||||||||
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Total tax (benefit) expense | $ | (147 | ) | $ | 313 | $ | 99 | |||||
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The following table summarizes how the total federal income tax (benefit) expense differs from the amount computed by applying the U.S. federal income tax rate to net (loss) income for the years ended:
December 31, | ||||||||||||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||||||||
(in millions) | Amount | % | Amount | % | Amount | % | ||||||||||||||||||
Rate reconciliation: | ||||||||||||||||||||||||
Computed (expected tax (benefit) expense) | $ | (46 | ) | 35 | % | $ | 469 | 35 | % | $ | 245 | 35 | % | |||||||||||
Dividends received deduction | (87 | ) | 66 | % | (112 | ) | (8 | )% | (75 | ) | (11 | )% | ||||||||||||
Tax credits | (53 | ) | 41 | % | (82 | ) | (6 | )% | (85 | ) | (12 | )% | ||||||||||||
Other, net | 39 | (30 | )% | 38 | 2 | % | 14 | 2 | % | |||||||||||||||
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Total | $ | (147 | ) | 112 | % | $ | 313 | 23 | % | $ | 99 | 14 | % | |||||||||||
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The Company’s current federal income tax liability was $18 million and $13 million as of December 31, 2014 and 2013, respectively.
The Company made immaterial payments for the year ended December 31, 2014 and received refunds of $107 million and $95 million for the years ended 2013 and 2012, respectively.
During 2014 and 2013, the Company recorded a tax expense (benefit) of $16 million and $(13) 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.
As of December 31, 2014, the Company had gross federal net operating loss carryforwards of $332 million, which expire in 2028. In addition, the Company had $147 million in low-income-housing credit carryforwards, which expire between 2024 and 2034, and $155 million in alternative minimum tax credit carryforwards, which have an unlimited carryforward. In addition, the Company had $53 million in foreign tax credit carryforwards which expire between 2019 and 2024. The Company expects to fully utilize all carryforwards.
F-37
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
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:
December 31, | ||||||||
(in millions) | 2014 | 2013 | ||||||
Deferred tax assets | ||||||||
Future policy benefits and claims | $ | 1,274 | $ | 1,244 | ||||
Tax credit carryforwards | 355 | 352 | ||||||
Other | 840 | 845 | ||||||
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Gross deferred tax assets | $ | 2,469 | $ | 2,441 | ||||
Valuation allowance | (17 | ) | (17 | ) | ||||
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Net deferred tax assets | $ | 2,452 | $ | 2,424 | ||||
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Deferred tax liabilities | ||||||||
Deferred policy acquisition costs | $ | (1,113 | ) | $ | (1,048 | ) | ||
Available-for-sale securities | (1,201 | ) | (821 | ) | ||||
Derivatives, including embedded derivatives | (267 | ) | (600 | ) | ||||
Other | (269 | ) | (255 | ) | ||||
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Gross deferred tax liabilities | $ | (2,850 | ) | $ | (2,724 | ) | ||
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Net deferred tax liability | $ | (398 | ) | $ | (300 | ) | ||
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In assessing the realizability of deferred tax assets, the Company 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. Based on the Company’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.
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) | 2014 | 2013 | 2012 | |||||||||
Balance at beginning of period | $ | 36 | $ | 36 | $ | 76 | ||||||
Additions for current year tax positions | 3 | 2 | (2 | ) | ||||||||
Additions for prior years tax positions | — | — | 25 | |||||||||
Reductions for prior years tax positions | (1 | ) | (2 | ) | (63 | ) | ||||||
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Balance at end of period | $ | 38 | $ | 36 | $ | 36 | ||||||
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The Company believes it is reasonably possible that the 2006 to 2010 IRS audit for the NLIC’s consolidated tax returns will be effectively settled within the next 12 months and as a result the liability for unrecognized tax benefits could decrease $15 million.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. 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.
F-38
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
(14) | Statutory Financial Information |
Statutory Results
The Company’s life insurance subsidiaries prepare their 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 departments 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, 2014 and 2013, which also allowed NLIC to admit additional deferred tax assets of $10 million as of December 31, 2014 and 2013. Statutory accounting practices focus on insurer solvency and differ materially from GAAP primarily due to charging policy acquisition and other costs to expense as incurred, establishing future policy benefits and claims reserves based on 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 subsidiaries for the years ended:
December 31, | ||||||||||||
(in millions) | 2014 | 2013 | 2012 | |||||||||
Statutory net income (loss) | ||||||||||||
NLIC | $ | 341 | $ | 262 | $ | 764 | ||||||
NLAIC | $ | (122 | ) | $ | (103 | ) | $ | (54 | ) | |||
Statutory capital and surplus | ||||||||||||
NLIC | $ | 4,408 | $ | 3,550 | $ | 3,837 | ||||||
NLAIC | $ | 691 | $ | 534 | $ | 311 | ||||||
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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 distribute cash or other property if the fair market value thereof, together with that of other dividends or distributions made in the preceding twelve 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, 2014 and 2013, 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, 2015, NLIC has the ability to pay dividends to NFS totaling $441 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 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, NLAIC and Olentangy each exceeded the minimum RBC requirements for all periods presented.
F-39
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
(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, 2014, 2013 and 2012, the Company made payments to NMIC and NSC totaling $275 million, $277 million and $283 million, respectively.
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 as of December 31, 2014 and 2013. Total revenues from these contracts were $131 million, $137 million and $140 million for the years ended December 31, 2014, 2013 and 2012, 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 for the years ended December 31, 2014 and 2013, and $113 million for the year ended December 31, 2012. 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. The Company made payments to NMIC of $16 million for the years ended December 31, 2014 and 2013, and $15 million for the year ended December 31, 2012. 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, 2014, 2013 and 2012 were $208 million, $179 million and $161 million, respectively, while benefits, claims and expenses ceded during these years were $217 million, $178 million and $167 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, 2014 and 2013, customer allocations to NFG funds totaled $58.1 billion and $53.2 billion, respectively. For the years ended December 31, 2014, 2013 and 2012, NFG paid the Company $185 million, $163 million and $144 million, respectively, for the distribution and servicing of these funds.
Amounts on deposit with NCMC for the benefit of the Company were $636 million and $228 million as of December 31, 2014 and 2013, respectively.
Refer to Note 12 for discussion of variable funding surplus note between Olentangy Reinsurance, LLC and Nationwide Corporation.
Nationwide Bank has a line of credit agreement with NLIC that allows the Bank access to borrow up to $50 million from NLIC. The borrowing rate on the line of credit is equal to the daily Prime Rate. The Bank had no amounts outstanding under this agreement as of December 31, 2014 and 2013.
Certain annuity products are sold through affiliated companies, which are also subsidiaries of NFS. Total commissions and fees paid to these affiliates were $57 million for the year ended December 31, 2014, and $54 million for the years ended December 31, 2013 and 2012.
The Company provides financing to Nationwide Realty Investors, LTD, a subsidiary of NMIC. As of December 31, 2014 and 2013, the Company had notes receivable outstanding of $142 million and $146 million, respectively.
F-40
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
(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 U.S. 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 entitled Lou Haddock, as trustee of theFlyte 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 damages in an amount equivalent to 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. On December 11, 2014, the plaintiffs filed a seventh amended complaint adding another sub class of defendants that held trust platform products. On December 11, 2014, the plaintiffs filed a motion for preliminary approval of settlement. On January 5, 2015, the Court signed the Order Preliminarily Approving Settlement and Approving Form and Manner of Notice. A Fairness Hearing has been set for March 31, 2015. NLIC has made adequate provision for all probable and reasonably estimable losses associated with this settlement.
Lehman Brothers Holdings, Inc. (Debtors) and Giddens, James v NLIC and NMIC, et al. 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 certain assets from approximately 200 defendants, including NLIC and NMIC (the “Distributed Action”). The claims against NLIC and NMIC arise from the bankruptcy filings in 2008 of the Plaintiff and its parent company, Lehman Brothers Holding, Inc., which triggered the early termination of two collateralized debt obligation transactions, resulting in payments to NLIC and NMIC. The Plaintiff seeks to have certain sums returned to the bankruptcy estate in addition to prejudgment interest and costs. In 2013, Plaintiff sent correspondence to all defendants inviting settlement discussions and served NMIC and NLIC with a “SPV Derivatives ADR Notice,” formally starting the Alternative Dispute Resolution process. NMIC and NLIC responded, taking part in the ADR process, including a mediation. On July 17, 2014, the parties reached a settlement of this matter. On December 8, 2014, the settlement agreements were finalized and executed. Nationwide has issued the settlement payment, was dismissed from the case with prejudice on December 31, 2014, and this matter will shortly be closed.
F-41
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
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 amount of the obligation under such indemnifications is not determinable. Historically, the Company has not made any material payments pursuant to these obligations.
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.
(17) | Reinsurance |
The following table summarizes the effects of reinsurance on life, accident and health insurance in force and premiums for the years ended:
December 31, | ||||||||||||
(in millions) | 2014 | 2013 | 2012 | |||||||||
Premiums | ||||||||||||
Direct | $ | 1,178 | $ | 1,015 | $ | 890 | ||||||
Assumed from other companies | — | — | — | |||||||||
Ceded to other companies | (347 | ) | (291 | ) | (255 | ) | ||||||
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| |||||||
Net | $ | 831 | $ | 724 | $ | 635 | ||||||
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| |||||||
Life, accident and health insurance in force | ||||||||||||
Direct | $ | 241,936 | $ | 228,095 | $ | 216,002 | ||||||
Assumed from other companies | 5 | 6 | 5 | |||||||||
Ceded to other companies | (59,588 | ) | (58,310 | ) | (59,895 | ) | ||||||
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Net | $ | 182,353 | $ | 169,791 | $ | 156,112 | ||||||
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|
Amounts recoverable under reinsurance contracts totaled $704 million, $675 million and $684 million as of December 31, 2014, 2013 and 2012, respectively, and are included in other assets in the consolidated balance sheets.
(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.
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 expenses 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.
F-42
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
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 and/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 private and public sector retirement plans businesses. The private sector business primarily includes Internal Revenue Code (“IRC”) Section 401 qualified plans funded through fixed and variable group annuity contracts issued through NLIC. The public sector business primarily includes IRC Section 457 (b) and Section 401(a) governmental plans, both in the form of full-service arrangements that provide plan administration along with fixed and variable group annuities, as well as administration-only business. Across the public and private sector business Nationwide Investment Advisors managed account services are also available. The Retirement Plans segment also includes stable value wrap products and solutions.
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 insurance products. Life insurance products provide a death benefit and, for certain products, 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, other-than-temporary impairment losses, and other revenues and expenses not allocated to other segments. Additionally, this segment includes the funding agreements with the FHLB, as well as the medium-term note (“MTN”) program that concluded in the fourth quarter of 2012.
F-43
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
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, 2014 | ||||||||||||||||||||
Revenues: | ||||||||||||||||||||
Policy charges | $ | 1,175 | $ | 107 | $ | 783 | $ | — | $ | 2,065 | ||||||||||
Premiums | 518 | — | 284 | 29 | 831 | |||||||||||||||
Net investment income | 546 | 750 | 565 | 39 | 1,900 | |||||||||||||||
Non-operating net realized investment losses, including other-than-temporary impairment losses1 | — | — | — | (1,051 | ) | (1,051 | ) | |||||||||||||
Other revenues2 | (38 | ) | — | 12 | 10 | (16 | ) | |||||||||||||
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Total revenues | $ | 2,201 | $ | 857 | $ | 1,644 | $ | (973 | ) | $ | 3,729 | |||||||||
Benefits and expenses: | ||||||||||||||||||||
Interest credited to policyholder accounts | $ | 370 | $ | 482 | $ | 231 | $ | 13 | $ | 1,096 | ||||||||||
Benefits and claims | 828 | — | 644 | 30 | 1,502 | |||||||||||||||
Amortization of DAC | 120 | (28 | ) | 122 | (7 | ) | 207 | |||||||||||||
Other expenses, net of deferrals | 300 | 153 | 348 | 254 | 1,055 | |||||||||||||||
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Total benefits and expenses | $ | 1,618 | $ | 607 | $ | 1,345 | $ | 290 | $ | 3,860 | ||||||||||
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Income before federal income taxes and noncontrolling interests | $ | 583 | $ | 250 | $ | 299 | $ | (1,263 | ) | $ | (131 | ) | ||||||||
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Less: non-operating net realized investment losses, including other-than-temporary impairment losses1 | — | — | — | 1,051 | ||||||||||||||||
Less: adjustment to amortization of DAC and other related expenses related to net realized investment gains and losses | — | — | — | (11 | ) | |||||||||||||||
Less: net loss attributable to noncontrolling interest | — | — | — | 94 | ||||||||||||||||
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Pre-tax operating earnings (loss) | $ | 583 | $ | 250 | $ | 299 | $ | (129 | ) | |||||||||||
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Assets as of year end | $ | 72,429 | $ | 30,744 | $ | 29,322 | $ | 11,029 | $ | 143,524 | ||||||||||
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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-44
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
(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, including other-than-temporary impairment losses1 | — | — | — | 783 | 783 | |||||||||||||||
Other revenues2 | (109 | ) | — | 6 | 15 | (88 | ) | |||||||||||||
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Total revenues | $ | 1,874 | $ | 844 | $ | 1,559 | $ | 840 | $ | 5,117 | ||||||||||
Benefits and expenses: | ||||||||||||||||||||
Interest credited to policyholder accounts | $ | 377 | $ | 473 | $ | 213 | $ | 4 | $ | 1,067 | ||||||||||
Benefits and claims | 694 | — | 636 | 24 | 1,354 | |||||||||||||||
Amortization of DAC | 185 | (2 | ) | 125 | 66 | 374 | ||||||||||||||
Other expenses, net of deferrals | 295 | 151 | 347 | 188 | 981 | |||||||||||||||
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Total benefits and expenses | $ | 1,551 | $ | 622 | $ | 1,321 | $ | 282 | $ | 3,776 | ||||||||||
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Income before federal income taxes and noncontrolling interests | $ | 323 | $ | 222 | $ | 238 | $ | 558 | $ | 1,341 | ||||||||||
Less: non-operating net realized investment gains, including other-than-temporary impairment losses1 | — | — | — | (783 | ) | |||||||||||||||
Less: adjustment to amortization of DAC and other related expenses related to net realized investment gains and losses | — | — | — | 70 | ||||||||||||||||
Less: net loss attributable to noncontrolling interest | — | — | — | 82 | ||||||||||||||||
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Pre-tax operating earnings (loss) | $ | 323 | $ | 222 | $ | 238 | $ | (73 | ) | |||||||||||
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Assets as of year end | $ | 68,805 | $ | 29,904 | $ | 27,183 | $ | 7,553 | $ | 133,445 | ||||||||||
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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-45
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Notes to December 31, 2014, 2013 and 2012 Consolidated Financial Statements
(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, including of other-than-temporary impairment losses1 | — | — | — | 427 | 427 | |||||||||||||||
Other revenues2 | (124 | ) | — | — | 23 | (101 | ) | |||||||||||||
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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 | 613 | — | 588 | 26 | 1,227 | |||||||||||||||
Amortization of DAC | 185 | 14 | 150 | 226 | 575 | |||||||||||||||
Other expenses, net of deferrals | 266 | 164 | 307 | 180 | 917 | |||||||||||||||
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Total benefits and expenses | $ | 1,439 | $ | 635 | $ | 1,244 | $ | 439 | $ | 3,757 | ||||||||||
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Income before federal income taxes and noncontrolling interests | $ | 221 | $ | 195 | $ | 241 | $ | 42 | $ | 699 | ||||||||||
Less: non-operating net realized investment gains, including other-than-temporary impairment losses1 | — | — | — | (427 | ) | |||||||||||||||
Less: adjustment to amortization of DAC and other related expenses related to net realized investment gains and losses | — | — | — | 243 | ||||||||||||||||
Less: net loss attributable to noncontrolling interest | — | — | — | 61 | ||||||||||||||||
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Pre-tax operating earnings (loss) | $ | 221 | $ | 195 | $ | 241 | $ | (81 | ) | |||||||||||
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Assets as of year end | $ | 58,707 | $ | 27,842 | $ | 25,301 | $ | 8,320 | $ | 120,170 | ||||||||||
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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-46
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, 2014 (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. government and agencies | $ | 448 | $ | 527 | $ | 527 | ||||||
Obligations of states, political subdivisions and foreign governments | 1,966 | 2,285 | 2,285 | |||||||||
Public utilities | 2,969 | 3,228 | 3,228 | |||||||||
All other corporate, mortgage-backed and asset-backed securities | 27,815 | 29,378 | 29,378 | |||||||||
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Total fixed maturity securities, available-for-sale | $ | 33,198 | $ | 35,418 | $ | 35,418 | ||||||
Equity securities, available-for-sale: | ||||||||||||
Common stocks: | ||||||||||||
Industrial, miscellaneous and all other | $ | 6 | $ | 16 | $ | 16 | ||||||
Nonredeemable preferred stocks | — | 5 | 5 | |||||||||
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Total equity securities, available-for-sale | $ | 6 | $ | 21 | $ | 21 | ||||||
Trading assets | 20 | 21 | 21 | |||||||||
Mortgage loans, net of allowance | 7,296 | 7,270 | 1 | |||||||||
Policy loans | 992 | 992 | ||||||||||
Other investments | 780 | 780 | ||||||||||
Short-term investments | 935 | 935 | ||||||||||
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Total investments | $ | 43,227 | $ | 45,437 | ||||||||
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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-47
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, 2014, 2013 and 2012 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 costs | Future policy benefits, losses, claims and loss expenses | Unearned premiums1 | Other policy claims and benefits payable1 | Premium revenue | |||||||||||||||
2014 | ||||||||||||||||||||
IPS - Annuity | $ | 2,495 | $ | 12,619 | $ | 518 | ||||||||||||||
Retirement Plans | 216 | 14,905 | — | |||||||||||||||||
IPS - Life and NBSG | 1,717 | 10,763 | 284 | |||||||||||||||||
Corporate and Other | (365 | ) | 2,443 | 29 | ||||||||||||||||
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Total | $ | 4,063 | $ | 40,730 | $ | 831 | ||||||||||||||
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|
|
|
|
| |||||||||||||||
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 | ||||||||||||||||
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|
|
|
|
| |||||||||||||||
Total | $ | 3,778 | $ | 36,765 | $ | 724 | ||||||||||||||
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|
|
|
| |||||||||||||||
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 | ||||||||||||||
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|
|
|
| |||||||||||||||
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 costs | Other operating expenses2 | Premiums written | |||||||||||||||
2014 | ||||||||||||||||||||
IPS - Annuity | $ | 546 | $ | 1,198 | $ | 120 | $ | 300 | ||||||||||||
Retirement Plans | 750 | 482 | (28 | ) | 153 | |||||||||||||||
IPS - Life and NBSG | 565 | 875 | 122 | 348 | ||||||||||||||||
Corporate and Other | 39 | 43 | (7 | ) | 254 | |||||||||||||||
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|
|
|
|
|
|
| |||||||||||||
Total | $ | 1,900 | $ | 2,598 | $ | 207 | $ | 1,055 | ||||||||||||
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|
|
|
|
|
|
| |||||||||||||
2013 | ||||||||||||||||||||
IPS - Annuity | $ | 546 | $ | 1,071 | $ | 185 | $ | 295 | ||||||||||||
Retirement Plans | 743 | 473 | (2 | ) | 151 | |||||||||||||||
IPS - Life and NBSG | 544 | 849 | 125 | 347 | ||||||||||||||||
Corporate and Other | 16 | 28 | 66 | 188 | ||||||||||||||||
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|
|
|
|
|
|
| |||||||||||||
Total | $ | 1,849 | $ | 2,421 | $ | 374 | $ | 981 | ||||||||||||
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|
|
|
|
|
| |||||||||||||
2012 | ||||||||||||||||||||
IPS - Annuity | $ | 551 | $ | 988 | $ | 185 | $ | 266 | ||||||||||||
Retirement Plans | 736 | 457 | 14 | 164 | ||||||||||||||||
IPS - Life and NBSG | 536 | 787 | 150 | 307 | ||||||||||||||||
Corporate and Other | 2 | 33 | 226 | 180 | ||||||||||||||||
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|
|
|
|
|
|
| |||||||||||||
Total | $ | 1,825 | $ | 2,265 | $ | 575 | $ | 917 | ||||||||||||
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|
|
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|
|
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. |
See accompanying notes to consolidated financial statements and report of independent registered public accounting firm.
F-48
Table of Contents
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly-owned subsidiary of Nationwide Financial Services, Inc.)
Schedule IV Reinsurance
As of December 31, 2014, 2013 and 2012 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 | ||||||||||||||||
2014 | ||||||||||||||||||||
Life, accident and health insurance in force | $ | 241,936 | $ | (59,588 | ) | $ | 5 | $ | 182,353 | — | ||||||||||
Premiums: | ||||||||||||||||||||
Life insurance1 | $ | 888 | $ | (57 | ) | $ | — | $ | 831 | — | ||||||||||
Accident and health insurance | 290 | (290 | ) | — | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 1,178 | $ | (347 | ) | $ | — | $ | 831 | — | ||||||||||
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|
| |||||||||||
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 | — | ||||||||||
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|
|
|
|
|
| |||||||||||
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 | — | ||||||||||
|
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|
|
|
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|
|
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-49
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, 2014, 2013 and 2012 (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 | |||||||||||||||
2014 | ||||||||||||||||||||
Valuation allowances - mortgage loans | $ | 35 | $ | (8 | ) | $ | — | $ | 1 | $ | 26 | |||||||||
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2013 | ||||||||||||||||||||
Valuation allowances - mortgage loans | $ | 44 | $ | (4 | ) | $ | — | $ | 5 | $ | 35 | |||||||||
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2012 | ||||||||||||||||||||
Valuation allowances - mortgage loans | $ | 60 | $ | 1 | $ | — | $ | 17 | $ | 44 | ||||||||||
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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.
F-50
Table of Contents
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 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. |
Table of Contents
(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. |
(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. |
Table of Contents
(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. |
Table of Contents
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 |