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As filed with the Securities and Exchange Commission.
'33 Act File No. 33-58997
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 7
NATIONWIDE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
OHIO
(State or other jurisdiction of incorporation or organization)
63
(Primary Standard Industrial Classification Code Number)
31-4156830
(IRS Employer Identification Number)
ONE NATIONWIDE PLAZA, COLUMBUS, OHIO 43215
(Principal Executive Offices of Registrant) (Zip Code)
PATRICIA R. HATLER, SECRETARY, ONE NATIONWIDE PLAZA, COLUMBUS, OHIO 43215
TELEPHONE: (614) 249-7111
(Name, address, zip code, telephone number of agent for service)
Approximate date of proposed sale to the public: May 1, 2001
If any securities registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box [ X ]
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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NATIONWIDE LIFE INSURANCE COMPANY
Cross Reference Sheet
Pursuant to Regulation S-K, Item 501(b)
Caption in
Form S-1 Item No. and Caption Prospectus
1. Forepart of the Registration Statement and
Outside Front Cover of Prospectus.....................................................................Outside Front Cover
2. Inside Front and Outside Back Cover
Table of Contents .....................................................................................Inside Front Cover
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges....................................................................Summary Information
(Not applicable with respect to
ratio of earnings to fixed charges)
4. Use of Proceeds ...........................................................................................Investments
5. Determination of Offering Price............................................................................Not Applicable
6. Dilution...................................................................................................Not Applicable
7. Selling Security Holders...................................................................................Not Applicable
8. Plan of Distribution...........................................................................Variable Annuity Contracts
and the Distribution of GTOs
9. Description of Securities to be Registered.....................................Description of the Guaranteed Term Options
10. Interests of Named Experts and Counsel.....................................................................Not Applicable
11. Information with Respect to Registrant.........................................................................Nationwide
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.............................................................Not Applicable
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GUARANTEED TERM OPTIONS
Under Variable Annuity Contracts Issued by
NATIONWIDE LIFE INSURANCE COMPANY
One Nationwide Plaza
Columbus, Ohio 43215
Telephone: 1-800-238-3035
The date of this Prospectus is May 1, 2001.
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THIS PROSPECTUS MUST BE READ ALONG WITH THE APPROPRIATE VARIABLE ANNUITY
PROSPECTUS AND THE PROSPECTUSES DESCRIBING THE UNDERLYING MUTUAL FUND INVESTMENT
OPTIONS. ALL OF THESE PROSPECTUSES SHOULD BE READ CAREFULLY AND MAINTAINED FOR
FUTURE REFERENCE.
This prospectus describes investment options referred to as Guaranteed Term
Options ("GTOs"), offered by Nationwide Life Insurance Company ("Nationwide").
The GTOs are available under certain variable annuity contracts or variable life
insurance policies (collectively, "variable contracts") issued by Nationwide.
Generally, the variable annuity contracts offered by Nationwide provide an array
of underlying mutual fund investment options, to which the contract owner
allocates his or her purchase payments. The GTOs are separate, guaranteed
interest investment options available under variable contracts.
GTOs provide for guaranteed interest rates to be credited over specified
durations (referred to as "Guaranteed Terms"). Three (3), five (5), seven (7)
and ten (10) year GTOs are available. The Specified Interest Rate is guaranteed
to be credited for the duration of the Guaranteed Term on a daily basis,
resulting in a guaranteed annual effective yield unless a withdrawal from the
GTO occurs for any reason prior to the expiration of the Guaranteed Term.
Different interest rates apply to each GTO and are determined and guaranteed by
Nationwide in its sole discretion.
GTOs will produce a guaranteed annual effective yield at the Specified Interest
Rate SO LONG AS AMOUNTS INVESTED ARE NEITHER WITHDRAWN NOR TRANSFERRED PRIOR TO
THE END OF THE GUARANTEED TERM. IN THE EVENT OF A TRANSFER FOR ANY REASON PRIOR
TO THE EXPIRATION OF THE GUARANTEED TERM, THE AMOUNT TRANSFERRED WILL BE SUBJECT
TO A MARKET VALUE ADJUSTMENT.
Variable product prospectuses in which the GTOs are offered describe certain
charges and deductions that may apply to the GTOs. A more detailed discussion of
these charges and deductions, as they relate to particular variable contracts,
is contained in the variable product prospectuses.
The minimum amount that may be allocated to a GTO is $1,000 per allocation.
Nationwide established the Nationwide Multiple Maturity Separate Account,
pursuant to Ohio law, to aid in reserving and accounting for GTO obligations.
However, all of the general assets of Nationwide are available for the purpose
of meeting the guarantees of the GTOs. Amounts allocated to the GTOs are
generally invested in fixed income investments purchased by Nationwide. Variable
annuity contract owners allocating amounts to a GTO have no claim against any
assets of Nationwide, including assets held in the Nationwide Multiple Maturity
Separate Account.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE GTOS DESCRIBED IN THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATE
JURISDICTIONS AND, ACCORDINGLY, REPRESENTATIONS MADE IN THIS PROSPECTUS DO NOT
CONSTITUTE AN OFFERING IN SUCH JURISDICTIONS.
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TABLE OF CONTENTS
GLOSSARY............................................................
INFORMATION ABOUT THE GTOS..........................................
1. General.......................................................
2. The Specified Interest Rate...................................
3. The Investment Period.........................................
4. Guaranteed Terms..............................................
5. GTOs at Maturity..............................................
6. The Market Value Adjustment...................................
A. General Information Regarding the
Market Value Adjustment....................................
B. Constant Maturity Treasury Rates...........................
C. The Market Value Adjustment Formula........................
7. Contract Charges..............................................
8. GTOs at Annuitization.........................................
INVESTMENTS.........................................................
CONTRACTS AND THE DISTRIBUTION
(MARKETING) OF THE GTOs.............................................
NATIONWIDE LIFE INSURANCE COMPANY...................................
1. Business......................................................
A. Organization...............................................
B. Business Segments..........................................
C. Ratings....................................................
D. Competition................................................
E. Regulation.................................................
F. Employees..................................................
2. Properties....................................................
3. Legal Proceedings.............................................
4. Submissions of Matters to a Vote of Security Holders..........
5. Market for Nationwide's Common Stock and
Related Shareholder Matters.................................
6. Selected Consolidated Financial Data..........................
7. Management's Narrative Analysis of the Results
of Operations...............................................
A. Results of Operations......................................
(i) Revenues.............................................
(ii) Benefits and Expenses................................
(iii) Sales Information....................................
B. Business Segments..........................................
(i) Individual Annuity...................................
(ii) Institutional Products...............................
(iii) Life Insurance.......................................
(iv) Corporate............................................
8. Quantitative and Qualitative Disclosures About
Market Risk.................................................
A. Market Risk Sensitive Financial Instruments................
(i) Interest Rate Risk...................................
(ii) Asset/Liability Management Strategies to
Manage Interest Rate Risk............................
(iii) Characteristics of Interest Rate Sensitive
Financial Instruments................................
(iv) Equity Market Risk...................................
B. Inflation..................................................
9. Directors and Executive Officers..............................
10. Executive Compensation........................................
A. Compensation...............................................
B. Performance Incentive Plan.................................
C. Office of Investments Incentive Plan.......................
D. Executive Incentive Plan...................................
E. Deferred Compensation Program..............................
F. Savings Plan...............................................
G. Supplemental Defined Contribution Plan.....................
H. Nationwide Financial Services, Inc. 1996
Long-Term Equity Compensation Plan.........................
I. Option/SAR Grants in Last Fiscal Year......................
J. Aggregated Option/SAR Exercises in Last
Fiscal Year and Fiscal Year-End Option/SAR Values..........
K. Aggregated Option/SAR Exercises in Last
Fiscal Year and Fiscal Year-End Option/SAR
Values for Villanova Capital, Inc. (a
subsidiary of Nationwide Financial
Services, Inc.)............................................
L. Pension Plans..............................................
(i) Retirement Plan......................................
(ii) Excess and Supplemental Plans........................
11. Compensation Committee Joint Report on
Executive Compensation......................................
A. Introduction...............................................
B. Compensation Philosophy and Objectives.....................
C. Elements of 2000 Executive Compensation....................
D. Base Salaries..............................................
E. Annual Incentive Compensation..............................
F. Long-Term Incentive Compensation...........................
G. Nationwide Financial Services, Inc. 1996
Long-Term Equity Compensation Plan.........................
H. Compensation of the Chief Executive
Officers...................................................
I. Policy on Deductibility of Compensation....................
(i) Nationwide Financial Services, Inc.'s
Compensation Committee...............................
(ii) Nationwide Life Insurance Company
Compensation Committee...............................
J. Security Ownership of Certain Beneficial
Owners and Management......................................
K. Certain Relationships and Other
Transactions...............................................
(i) Intercompany Agreement...............................
(ii) Federal Income Taxes.................................
(iii) Lease................................................
(iv) Modified Coinsurance Agreements......................
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(v) Cost Sharing Agreement...............................
(vi) Cash Management Agreements...........................
(vii) Repurchase Agreement.................................
(viii) Transactions With Management And Others..............
12. Exhibits, Financial Statement Schedules and Reports........
Appendix............................................................
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GLOSSARY
CONSTANT MATURITY TREASURY RATE- The rate of interest used in the Market Value
Formula. Constant Maturity Treasury Rates for maturity durations of 1, 2, 3, 5,
7 and 10 years are declared regularly by the Federal Reserve Board.
GUARANTEED TERM OPTION ("GTO")- An investment option offered under variable
contracts which provides a Specified Interest Rate over Guaranteed Terms, so
long as certain conditions are met.
GUARANTEED TERM- The period corresponding to a 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 distributed 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 3
months beyond the 3, 5, 7 or 10 year anniversary of the allocation to the GTO.
MARKET VALUE ADJUSTMENT- The upward or downward adjustment in value of amounts
allocated to a GTO which 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 the third, fifth, seventh or tenth anniversary on
which amounts are allocated to a 3, 5, 7 or 10 year GTO, respectively.
MATURITY PERIOD- The period during which the value of amounts allocated under a
GTO may be distributed without any Market Value Adjustment. The Maturity Period
will begin on the day following the Maturity Date and will end on the thirtieth
day after the Maturity Date.
SPECIFIED INTEREST RATE- The interest rate guaranteed to be credited to amounts
allocated to a GTO so long as the allocations are not distributed for any reason
prior to the Maturity Date.
SPECIFIED VALUE- The amount of a GTO allocation, plus interest accrued at the
Specified Interest Rate, minus surrenders, transfers and any other amounts
distributed. The Specified Value is subject to a Market Value Adjustment at all
times other than during the Maturity Period.
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INFORMATION ABOUT THE GTOs
1. GENERAL
GTOs are guaranteed interest rate investment options available under
certain variable contracts issued by Nationwide. There are four different
GTOs available: a 3 year GTO; a 5 year GTO; a 7 year GTO; and a 10 year
GTO. A GTO may be purchased using purchase payments made to the contracts,
or by using funds transferred from other investment options available in
the variable contracts. Not all of the variable contracts issued by
Nationwide offer GTOs, nor are GTOs available in every state. If GTOs are
available under a variable annuity contract or variable life insurance
policy, the prospectus for the variable product and this prospectus must be
read together.
The guarantees associated with the GTOs are borne exclusively by, and are
legal obligations of, Nationwide. The Nationwide Multiple Maturity Separate
Account ("MMSA"), authorized and created in accordance with Ohio law, was
established for the sole purpose of reserving and accounting for assets
associated with the GTOs. The assets of the MMSA are owned by Nationwide.
Contract owners with GTOs have no claim against the assets of the MMSA,
maintain no interest in the MMSA and do not participate in the investment
experience of the MMSA.
GTOs provide for a guaranteed interest rate (the "Specified Interest
Rate"), to be credited as long as any amount allocated to the GTO is not
distributed for any reason prior to the Maturity Date of the GTO. Each GTO
has a Guaranteed Term. Generally, a 3 year GTO offers guaranteed interest
at a Specified Interest Rate over 3 years, a 5 year GTO offers guaranteed
interest at a Specified Interest Rate over 5 years, and so on. Because
every GTO will mature on the last day of a calendar quarter, the Guaranteed
Term of a GTO may extend for up to 3 months beyond the 3, 5, 7 or 10 year
anniversary of allocations made to 3, 5, 7 or 10 year GTOs, respectively.
Amounts allocated to a GTO will be credited interest at the Specified
Interest Rate for the duration of the Guaranteed Term associated with the
GTO. Specified Interest Rates for each GTO are declared periodically at
Nationwide's sole discretion. The Investment Period is the period of time
during which declared Specified Interest Rates will be effective for new
allocations. Investment Periods will typically last for one month, but may
be longer or shorter depending on interest rate fluctuations in financial
markets. During any particular Investment Period, any transfer allocation
or new purchase payment allocation to a GTO will earn the Specified
Interest Rate effective for that Investment Period for the duration of the
Guaranteed Term of the GTO (see "Specified Interest Rates and Guaranteed
Terms").
Interest at the Specified Interest Rate will be credited daily to amounts
allocated to a GTO, providing an annual effective yield. Interest at the
Specified Interest Rate will continue to be credited as long as allocations
remain in the GTO until the Maturity Date. However, any surrenders,
transfers or withdrawals for any reason prior to the Maturity Date will be
subject to a Market Value Adjustment.
Nationwide applies the Market Value Adjustment by using the Market Value
Adjustment Factor, which is derived from the Market Value Adjustment
Formula. The Market Value Adjustment Factor is multiplied by the part of
the Specified Value being withdrawn or transferred, resulting in either an
increase or decrease in the amount of the withdrawal or transfer. The
Market Value Adjustment Formula reflects the relationship between three
factors:
(1) the Constant Maturity Treasury Rate for the period coinciding
with the Guaranteed Term of the GTO at investment;
(2) the Constant Maturity Treasury Rate for the number of years
remaining in a Guaranteed Term when the surrender, transfer or
other withdrawal from the GTO occurs; and
(3) the number of days remaining in the Guaranteed Term of the
GTO.
Generally, the Market Value Adjustment Formula approximates the
relationship between prevailing interest rates at the time of the GTO
allocation, prevailing interest rates at time of transfer or surrender and
the amount of time remaining in a Guaranteed Term (see "The Market Value
Adjustment").
Contract owners having GTOs with Maturity Dates coinciding with the end of
the calendar quarter will be notified of the impending expiration of the
GTO at least 15 days and at most 30 days prior to the end of each calendar
quarter. Contract owners will then have the option of directing the
withdrawal or transfer of the GTO, during the Maturity Period,
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without application of any Market Value Adjustment. However, any transfers
from the GTO during this period may be subject to a surrender charge,
assessed by the variable contract.
If no direction is received by the thirtieth day following the Maturity
Date, amounts in the GTO will be automatically transferred (with no Market
Value Adjustment) to the available money market sub-account available in
the variable contract. For the period commencing with the first day after
the Maturity Date and ending on the thirtieth day following the Maturity
Date, the GTO will be credited with the same Specified Interest Rate in
effect before the Maturity Date (see "GTOs at Maturity").
The minimum amount of any allocation to a GTO is $1,000.
Under certain rare circumstances, when volatility in financial markets
compromises the ability of Nationwide to process allocations to or from the
GTOs in an orderly manner, Nationwide may temporarily suspend the right to
make additional allocations to the GTOs and/or to effect transfers or
withdrawals from the GTOs. Nationwide anticipates invoking this suspension
only when acceptance of additional allocations or the processing of
withdrawals or transfers from GTOs cannot be executed by Nationwide in a
manner consistent with its obligations to contract owners with existing or
prospective interests in one or more GTOs. Under no circumstances, however,
will Nationwide limit a contract owner's right to make at least one
allocation to a GTO, and one transfer or withdrawal from a GTO, in any
calendar year. All contract owners will be promptly notified of
Nationwide's determination to invoke any suspension in the right to make
allocations to, or to effect withdrawals or transfers from, the GTOs.
In addition, the variable contracts that offer GTOs may impose certain
restrictions on the transferability of invested assets within the variable
contract. The variable product prospectus should be consulted with regard
to specific transfer limitation provisions.
2. THE SPECIFIED INTEREST RATE
The Specified Interest Rate is the rate of interest guaranteed by
Nationwide to be credited to allocations made to the GTOs for the
corresponding Guaranteed Term, so long as no portion of the allocation is
distributed for any reason prior to the Maturity Date. Different Specified
Interest Rates may be established for the 4 different GTOs.
Generally, Nationwide will declare new Specified Interest Rates monthly;
however, depending on interest rate fluctuations, Nationwide may declare
new Specified Interest Rates more or less frequently.
Nationwide observes no specific method in establishing the Specified
Interest Rates. However, Nationwide will attempt to declare Specified
Interest Rates that are related to interest rates associated with
fixed-income investments available at the time and having durations and
cash flow attributes compatible with the Guaranteed Terms of the GTOs. In
addition, the establishment of Specified Interest Rates may be influenced
by other factors, including competitive considerations, administrative
costs and general economic trends. Nationwide has no way of predicting what
Specified Interest Rates may be declared in the future and there is no
minimum Specified Interest Rate for any of the GTOs.
Some Nationwide variable annuity contracts offer an Extra Value Option.
Under these contracts, where the contract owner has elected the Extra Value
Option, allocations made to the GTOs for the first 7 contract years will be
credited a guaranteed interest rate of 0.45% less than the guaranteed
interest rate that applies to the GTOs if the Extra Value Option is not
elected.
Some Nationwide variable annuity contracts offer a Beneficiary Protector
option. Under these contracts, where the contract owner has elected the
Beneficiary Protector option, allocations made to the GTOs will be credited
a guaranteed interest rate of 0.40% less than the guaranteed interest rate
that applies to the GTOs if the Beneficiary Protector option is not
elected.
3. THE INVESTMENT PERIOD
The Investment Period is the period of time during which a particular
Specified Interest Rate is in effect for new allocations to the various
GTOs. All allocations made to a GTO during an Investment Period are
credited with the Specified Interest Rate in effect at the time of
allocation. An Investment Period ends when a new Specified Interest Rate
relative to the applicable GTO is declared. Subsequent declarations of new
Specified Interest Rates have no effect on allocations made to GTOs during
prior Investment Periods. Prior allocations to
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the GTO will be credited with the Specified Interest Rate in effect when
the allocation was made.
Interest at the Specified Interest Rate is credited to allocations made to
GTOs on a daily basis, resulting in an annual effective yield guaranteed by
Nationwide, unless amounts are withdrawn or transferred from the GTO for
any reason prior to the Maturity Date. Interest at the Specified Interest
Rate will be credited for the entire Guaranteed Term associated with the
GTO. If amounts are withdrawn or transferred from the GTO for any reason
prior to the Maturity Date, a Market Value Adjustment will be applied to
the amount withdrawn or transferred.
Information concerning the Specified Interest Rates in effect for the
various GTOs can be obtained by calling the following toll free phone
number: 1-800-238-3035.
4. GUARANTEED TERMS
The Guaranteed Term is the period of time corresponding with the selected
GTO for which the Specified Interest Rate is guaranteed to be in effect, so
long as the amounts allocated remain in the GTO until the Maturity Date. A
Guaranteed Term always expires on a Maturity Date which will be the last
day of a calendar quarter. Consequently, a Guaranteed Term may last up to 3
months longer than the anniversary date of the allocation to the GTO.
For example, if an allocation is made to a 10 year GTO on August 1, 1999,
the Specified Interest Rate for that GTO will be credited until September
30, 2009; the Guaranteed Term will begin on August 1, 1999 and end on
September 30, 2009.
Guaranteed Terms will be exactly 3, 5, 7 or 10 years only when an
allocation to a GTO occurs on the first day of a calendar quarter.
5. GTOs AT MATURITY
Nationwide will send notice to contract owners of impending Maturity Dates
(always the last day of a calendar quarter) at least 15 days and at most 30
days prior to the end of a Guaranteed Term. The notice will include the
projected value of the GTO on the Maturity Date and will also specify
options that contract owners have with respect to the maturing GTO.
Once the GTO matures, contract owners may:
(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 investment option under the variable
contract, including any of the 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.
The GTO will continue to be credited with the Specified
Interest Rate in effect before the Maturity Date during the
Maturity Period, and prior to any of the transactions set
forth in (1), (2), or (3) above.
6. THE MARKET VALUE ADJUSTMENT
A. GENERAL INFORMATION REGARDING THE MARKET VALUE ADJUSTMENT
GTOs that are surrendered, transferred or distributed for any reason
prior to the Maturity Date for the GTO will be subject to a Market
Value Adjustment. The Market Value Adjustment is determined by
multiplying a Market Value Adjustment Factor (arrived at by using the
Market Value Adjustment Formula) by the Specified Value, or the portion
of the Specified Value being withdrawn. The Specified Value is the
amount allocated to the GTO, plus interest accrued at the Specified
Interest Rate, minus prior distributions. The Market Value Adjustment
may either increase or decrease the amount of the distribution.
The Market Value Adjustment is intended to approximate, without
duplicating, Nationwide's experience when it liquidates assets in order
to satisfy contractual obligations. Such obligations arise when
contract owners make withdrawals or transfers, or when the operation of
the variable annuity contract requires a distribution, such as a death
benefit. When liquidating assets, Nationwide may realize either a gain
or a loss.
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If prevailing interest rates are higher than the Specified Interest
Rate in effect at the time of the GTO allocation, Nationwide will
realize a loss when it liquidates assets in order to process a
surrender, death benefit or transfer; and therefore, application of the
Market Value Adjustment under such circumstances will decrease the
amount of the distribution.
Conversely, if prevailing interest rates are lower than the Specified
Interest Rate in effect at the time of the GTO allocation, Nationwide
will realize a gain when it liquidates assets in order to process a
surrender, death benefit or transfer; therefore, application of the
Market Value Adjustment under such circumstances will increase the
amount of the distribution.
Nationwide measures the relationship between prevailing interest rates
and the Specified Interest Rates through the Market Value Adjustment
Formula, and relies upon Constant Maturity Treasury Rates to represent
both prevailing interest rates and Specified Interest Rates. The Market
Value Adjustment Formula and the Constant Maturity Treasury Rates are
described more fully below.
B. CONSTANT MATURITY TREASURY RATES
The Market Value Adjustment Formula used to determine the Market Value
Adjustment Factor is based on Constant Maturity Treasury Rates which
are declared by the Federal Reserve Board on a regular basis.
Nationwide uses Constant Maturity Treasury Rates in its Market Value
Adjustment Formula because they represent a readily available and
consistently reliable interest rate benchmark in financial markets,
which can be relied upon to reflect the relationship between Specified
Interest Rates declared by Nationwide and the prospective interest rate
fluctuations.
Constant Maturity Treasury Rates for 1, 2, 3, 5, 7 and 10 years are
published by the Federal Reserve Board on a regular basis. To the
extent that the Market Value Adjustment Formula shown below requires a
rate associated with a maturity not published (such as a 4, 6, 8 or 9
year maturity), Nationwide will calculate such rates based on the
relationship of the published rates. For example, if the published 3
year rate is 6% and the published 5 year rate is 6.50%, the 4 year rate
will be calculated as 6.25%.
C. THE MARKET VALUE ADJUSTMENT FORMULA
The Market Value Adjustment Formula is used when a distribution is made
from a GTO during the Guaranteed Term. The Market Value Adjustment is a
calculation expressing the relationship between three factors:
(1) the Constant Maturity Treasury Rate for the period of time
coinciding with the Guaranteed Term of the GTO;
(2) the Constant Maturity Treasury Rate for a period coinciding
with the time remaining in the Guaranteed Term of a GTO when a
distribution giving rise to a Market Value Adjustment occurs;
and
(3) the number of days remaining in the Guaranteed Term of the
GTO.
The formula for determining the Market Value Adjustment Factor is:
t
1 + a
-------------
1 + b + .0025
Where:
a = the Constant Maturity Treasury Rate for a period equal to
the Guaranteed Term at the time of deposit in the GTO;
b = the Constant Maturity Treasury Rate at the time of distribution
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.
In the case of "a" above, the Constant Maturity Treasury Rate used will
be the Constant Maturity Treasury Rate declared on Fridays by the
Federal Reserve Board, and placed in effect by Nationwide on the
Wednesday immediately preceding the Investment Period during which the
allocation to the GTO was made.
In the case of "b" above, the Constant Maturity Treasury Rate used will
be the Constant Maturity Treasury Rate, declared on Fridays by the
Federal Reserve Board, and placed in effect
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by Nationwide on the Wednesday immediately preceding the withdrawal,
transfer or other distribution giving rise to the Market Value
Adjustment.
The Market Value Adjustment Factor will be equal to 1 during the
Investment Period.
The Market Value Adjustment Formula shown above also accounts for some
of the administrative and processing expenses incurred when
fixed-interest investments are liquidated. This is represented in the
addition of .0025 in the Market Value Adjustment Formula.
The result of the Market Value Adjustment Formula shown above is the
Market Value Adjustment Factor. The Market Value Adjustment Factor is
the market value that is multiplied by the Specified Value, or that
portion of the Specified Value being distributed from a GTO, in order
to effect a Market Value Adjustment. The Market Value Adjustment Factor
will either be greater than, less than, or equal to 1 and will be
multiplied by the Specified Value (or a portion of the Specified Value)
being withdrawn from the GTO for any reason. If the Market Value
Adjustment Factor is greater than 1, a gain will be realized by the
contract owner; if the Market Value Adjustment Factor is less than 1, a
loss will be realized. If the Market Value Adjustment Factor is exactly
1, no gain or loss will be realized.
If the Federal Reserve Board halts publication of Constant Maturity
Treasury Rates, or if, for any other reason, Constant Maturity Treasury
Rates are not available, Nationwide will use appropriate rates based on
U.S. Treasury Bond yields.
Examples of how to calculate Market Value Adjustments are provided in
the Appendix.
7. CONTRACT CHARGES
The variable contracts under which GTOs are made available have various
fees and charges, some of which may be assessed against allocations made to
GTOs.
Surrender charges, if applicable, will be assessed against full or partial
surrenders from the GTOs. If a surrender occurs prior to the Maturity Date
for a particular GTO, the amount surrendered is subject to a Market Value
Adjustment in addition to any surrender charge assessed pursuant to the
terms of the variable contract. The variable product prospectus fully
describes the surrender charges. Please refer to the variable product
prospectus for complete details regarding the surrender charges under the
variable contracts.
Mortality and expense risk charges, administrative charges and contract
maintenance charges that may be assessed under variable contracts are not
assessed against any allocation to a GTO. Such charges apply only to the
underlying mutual fund options available in the variable contracts.
8. GTOS AT ANNUITIZATION
GTOs are not available as investment options for variable annuity contracts
that are annuitized. If a variable annuity contract is annuitized while a
GTO is in effect, and prior to the Maturity Date of the GTO, a Market Value
Adjustment will apply to amounts transferred to other investment options
under the variable annuity contract that may be used during annuitization.
INVESTMENTS
Nationwide intends to invest amounts allocated to GTOs in high quality, fixed
interest investments (investment grade bonds, mortgages, and collateralized
mortgage obligations) in the same manner as Nationwide invests its general
account assets. Nationwide takes into account the various maturity durations of
the GTOs (3, 5, 7 and 10 years) and anticipated cash-flow requirements when
making investments. Nationwide is not obligated to invest GTO allocations in
accordance with any particular investment objective, but will generally adhere
to Nationwide's overall investment philosophy. The Specified Interest Rates
declared by Nationwide for the various GTOs will not necessarily correspond to
the performance of the nonunitized separate account.
CONTRACTS AND THE DISTRIBUTION (MARKETING) OF THE GTOS
The GTOs are available only as investment options under certain variable
contracts issued by Nationwide. The appropriate variable product prospectus and,
if applicable, the Statement of Additional Information should be consulted for
information regarding the distribution of the variable contracts.
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NATIONWIDE LIFE INSURANCE COMPANY
1. BUSINESS
A. ORGANIZATION
Nationwide Life Insurance Company ("Nationwide) was incorporated in
1929 and is an Ohio stock legal reserve life insurance company.
Naitonwide offers a variety of forms of individual annuities, private
and public sector pension plans and life insurance on a participating
and a non-participating basis.
Prior to January 27, 1997, Nationwide was wholly owned by Nationwide
Corporation ("Nationwide Corp."). On that date, Nationwide Corp.
contributed the outstanding shares of Nationwide's common stock to
Nationwide Financial Services, Inc. ("NFS"), a holding company formed
by Nationwide Corp. in November 1996 for Nationwide and other companies
within the Nationwide group of companies that offer or distribute
long-term savings and retirement products. On March 6, 1997, NFS
completed an initial public offering of its Class A common stock.
During 1996 and 1997, Nationwide Corp. and NFS completed certain
transactions in anticipation of the initial public offering that
focused the business of NFS on long-term savings and retirement
products. On September 24, 1996, Nationwide declared a dividend payable
to Nationwide Corp. on January 1, 1997 consisting of the outstanding
shares of common stock of certain subsidiaries that do not offer or
distribute long-term savings and retirement products. In addition,
during 1996, Nationwide entered into two reinsurance agreements whereby
all of Nationwide's accident and health and group life insurance
business was ceded to two affiliates effective January 1, 1996.
Additionally, Nationwide paid $900.0 million of dividends, $50.0
million to Nationwide Corp. on December 31, 1996 and $850.0 million to
NFS, which then made an equivalent dividend to Nationwide Corp., on
February 24, 1997.
NFS contributed $836.8 million to the capital of Nationwide during
March 1997.
Wholly owned subsidiaries of Nationwide as of December 31, 2000 include
Nationwide Life and Annuity Insurance Company, Nationwide Advisory
Services, Inc. and Nationwide Investment Services Corporation.
Nationwide is a member of the Nationwide group of companies, which
consists of Nationwide Mutual Insurance Company and all of its
subsidiaries and affiliates.
Nationwide Life and Annuity Insurance Company offers universal life
insurance, variable universal life insurance, corporate-owned life
insurance and individual annuity contracts on a non-participating
basis. Nationwide Advisory Services, Inc. and Nationwide Investment
Services Corporation are registered broker/dealers.
Nationwide, along with its affiliates (collectively, the "Company"), is
a leading provider of long-term savings and retirement products in the
United States (U.S.). Nationwide develops and sells a diverse range of
products including individual annuities, private and public sector
pension plans, and life insurance. By developing and offering a wide
variety of products, the Company believes that it has positioned itself
to compete effectively in various stock market and interest rate
environments. The Company markets its products through a broad spectrum
of distribution channels, including independent broker/dealers,
brokerage firms, pension plan administrators, life insurance
specialists, financial institutions, Nationwide agents and Nationwide
Retirement Solutions.
The Company is one of the leaders in the development and sale of
variable annuities. As of December 31, 2000, the Company was the third
largest writer of individual variable annuity contracts in the U.S.,
according to The Variable Annuity Research & Data Service.
The Company has grown substantially in recent years as a result of its
long-term investment in developing the distribution channels necessary
to reach its target customers and the products required to meet the
demands of these customers. The Company believes its growth has been
further enhanced by favorable demographic trends, the growing tendency
of Americans to supplement traditional sources of retirement income
with self-directed investments, such as products offered by the
Company, and the performance of the financial
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markets, particularly the U.S. stock markets, in recent years.
B. BUSINESS SEGMENTS
The Company has redefined its business segments in order to align this
disclosure with the way management currently views its core operations.
This updated view better reflects the different economics of the
Company's various businesses and also aligns well with the Company's
current market focus. As a result, the Company now reports three
product segments: Individual Annuity, Institutional Products and Life
Insurance. In addition, the Company reports corporate revenues and
expenses, investments and related investment income supporting capital
not specifically allocated to its product segments and revenues and
expenses of its broker/dealer subsidiaries in a Corporate segment.
The Individual Annuity segment, which accounted for $281.7 million
(40%) of the Company's operating income before federal income tax
expense for 2000, consists of both variable and fixed annuity
contracts. Individual 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, variable annuity contracts provide the customer with
access to a wide range of investment options and asset protection in
the event of an untimely death, while fixed annuity contracts generate
a return for the customer at a specified interest rate fixed for a
prescribed period. The Company's individual annuity products consist of
single premium deferred annuities, flexible premium deferred annuities
and single premium immediate annuities.
The Institutional Products segment, which accounted for $230.7 million
(33%) of the Company's operating income before federal income tax
expense for 2000, is comprised of the Company's group and payroll
deduction business, both public and private sectors, and medium-term
note program. The public sector includes the 457 business in the form
of fixed and variable annuities. The private sector includes the 401(k)
business generated through fixed and variable annuities.
The Life Insurance segment, which accounted for $152.9 million (22%) of
the Company's operating income before federal income tax expense for
2000, is composed of a wide range of insurance products including
universal life insurance, corporate-owned life insurance ("COLI") and
bank-owned life insurance ("BOLI"), which provide a death benefit and
also allow the customer to build cash value on a tax-advantaged basis.
The Corporate segment accounted for $37.1 million (5%) of the Company's
operating income (which excludes net realized gains and losses on
investments) before federal income tax expense for 2000.
C. RATINGS
Ratings with respect to claims-paying ability and financial strength
have become an increasingly important factor in establishing the
competitive position of insurance companies. Ratings are important to
maintaining public confidence in the Company and its ability to market
its annuity and life insurance products. Rating organizations
continually review the financial performance and condition of insurers,
including the Company. Any lowering of the Company's ratings could have
a material adverse effect on the Company's ability to market its
products and could increase the surrender of the Company's annuity
products. Both of these consequences could, depending upon the extent
thereof, have a material adverse effect on the Company's liquidity and,
under certain circumstances, net income. The Company is rated "A+"
(Superior) by A.M. Best Company, Inc. and its claims-paying
ability/financial strength is rated "Aa3" (Excellent) by Moody's
Investor Services, Inc. ("Moody's"), "AA" (Very Strong) by Standard &
Poor's, a Division of The McGraw-Hill Companies, Inc. ("S&P") and "AA+"
(Very Strong) by Fitch.
The foregoing ratings reflect each rating agency's opinion of
Nationwide's financial strength, operating performance and ability to
meet its obligations to policyholders and are not evaluations directed
toward the protection of investors. Such factors are of concern to
policyholders, agents and intermediaries.
The Company's financial strength is also reflected in the ratings of
commercial paper.
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The commercial paper is rated "A-1+" by S&P and "P-1" by Moody's.
D. COMPETITION
The Company competes with a large number of other insurers as well as
non-insurance financial services companies, such as banks,
broker/dealers and mutual funds, some of whom have greater financial
resources, offer alternative products and, with respect to other
insurers, have higher ratings than the Company. The Company believes
that competition in the Company's lines of business is based on price,
product features, commission structure, perceived financial strength,
claims-paying ratings, service and name recognition.
On November 12, 1999, the Gramm-Leach-Bliley Act (the "Act"), was
signed into law. The Act modernizes the regulatory framework for
financial services in the U. S. and allows banks, securities firms and
insurance companies to affiliate more directly than they have been
permitted to do in the past. While the Act facilitates these
affiliations, to date no significant competitors of the Company have
acquired, or have been acquired by, a banking entity under authority of
the Act. Nevertheless, it is not possible to anticipate whether such
affiliations might occur in the future.
E. REGULATION
Nationwide and Nationwide Life and Annuity Insurance Company, as with
other insurance companies, are subject to extensive regulation and
supervision in the jurisdictions in which they do business. Such
regulations limit the amount of dividends and other payments that can
be paid by insurance companies without prior approval and impose
restrictions on the amount and type of investments insurance companies
may hold. These regulations also affect many other aspects of insurance
companies' businesses, including licensing of insurers and their
products and agents, risk-based capital requirements and the type and
amount of required asset valuation reserve accounts. These regulations
are primarily intended to protect policyholders rather than
shareholders. The Company cannot predict the effect that any proposed
or future legislation may have on the financial condition or results of
operations of the Company.
Insurance companies are required to file detailed annual and quarterly
financial statements with state insurance regulators in each of the
states in which they do business, and their business and accounts are
subject to examination by such agencies at any time. In addition,
insurance regulators periodically examine an insurer's financial
condition, adherence to statutory accounting practices and compliance
with insurance department rules and regulations. Applicable state
insurance laws, rather than federal bankruptcy laws, apply to the
liquidation or the restructuring of insurance companies.
As part of their routine regulatory oversight process, state insurance
departments conduct detailed examinations periodically (generally once
every three to four years) of the books, records and accounts of
insurance companies domiciled in their states. Such examinations are
generally conducted in cooperation with the departments of two or three
other states under guidelines promulgated by the National Association
of Insurance Commissioners. The most recently completed examination of
the Company's insurance subsidiaries was conducted by the Ohio and
Delaware insurance departments for the four-year period ended December
31, 1996. The final reports of these examinations did not result in any
significant issues or adjustments.
The payment of dividends by Nationwide is subject to restrictions set
forth in the insurance laws and regulations of Ohio, its domiciliary
state. The Ohio insurance laws require Ohio-domiciled life insurance
companies to seek prior regulatory approval to pay a dividend or
distribution of cash or other property if the fair market value
thereof, together with that of other dividends or distributions made in
the preceding 12 months, exceeds the greater of:
(i) 10% of statutory-basis policyholders' surplus as of the prior
December 31; or
(ii) the statutory-basis net income of the insurer for the 12-month
period ending as of the prior December 31.
The Ohio insurance laws also require insurers to seek prior regulatory
approval for any dividend paid from other than earned surplus. Earned
surplus is defined under the Ohio insurance laws as the amount equal to
the Company's
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unassigned funds as set forth in its most recent statutory financial
statements, including net unrealized capital gains and losses or
revaluation of assets. Additionally, following any dividend, an
insurer's policyholder surplus must be reasonable in relation to the
insurer's outstanding liabilities and adequate for its financial needs.
The payment of dividends by Nationwide may also be subject to
restrictions set forth in the insurance laws of New York that limit the
amount of statutory profits on Nationwide's participating policies
(measured before dividends to policyholders) that can inure to the
benefit of the Company and its stockholders. The Company currently does
not expect such regulatory requirements to impair its ability to pay
operating expenses and dividends in the future.
F. EMPLOYEES
As of December 31, 2000, the Company had approximately 4,100 employees.
None of the employees of the Company are covered by a collective
bargaining agreement and the Company believes that its employee
relations are satisfactory.
2. PROPERTIES
Pursuant to an arrangement between Nationwide Mutual Insurance Company and
certain of its subsidiaries, during 2000 the Company leased on average
approximately 734,000 square feet of office space primarily in the four
building home office complex in Columbus, Ohio. the Company believes that
its present facilities are adequate for the anticipated needs of the
Company.
3. LEGAL PROCEEDINGS
The Company is a party to litigation and arbitration proceedings in the
ordinary course of its business, none of which is expected to have a
material adverse effect on the Company.
In recent years, life insurance companies have been named as defendants in
lawsuits, including class action lawsuits relating to life insurance and
annuity pricing and sales practices. A number of these lawsuits have
resulted in substantial jury awards or settlements.
On October 29, 1998, Nationwide was named in a lawsuit filed in Ohio state
court related to the sale of deferred annuity products for use as
investments in tax-deferred contributory retirement plans (Mercedes
Castillo v. Nationwide Financial Services, Inc., Nationwide Life Insurance
Company and Nationwide Life and Annuity Insurance Company). On May 3, 1999,
the complaint was amended to, among other things, add Marcus Shore as a
second plaintiff. The amended complaint is brought as a class action on
behalf of all persons who purchased individual deferred annuity contracts
or participated in group annuity contracts sold by Nationwide and the other
named Nationwide affiliates which were used to fund certain tax-deferred
retirement plans. The amended complaint seeks unspecified compensatory and
punitive damages. No class has been certified. On June 11, 1999, Nationwide
and the other named defendants filed a motion to dismiss the amended
complaint. On March 8, 2000, the court denied a motion to dismiss the
amended complaint filed by Nationwide and other name defendants. Nationwide
intends to defend this lawsuit vigorously.
There can be no assurance that any litigation relating to pricing or sales
practices will not have a material adverse effect on the Company in the
future.
4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2000, no matters were submitted to a vote of
security holders, through the solicitation of proxies or otherwise.
5. MARKET FOR NATIONWIDE'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
There is no established public trading market for Nationwide's shares of
common stock. All of the 3,814,779 shares of Nationwide's common stock
issued and outstanding are owned by NFS.
Nationwide declared $50.0 million and $61.0 million in dividends to NFS
during 2000 and 1999, respectively. In addition, Nationwide sought and
obtained prior regulatory approval from the Ohio Department of Insurance to
return $120.0 million and $175.0 million of capital to NFS during 2000 and
1999, respectively.
Nationwide currently does not have a formal dividend policy.
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6. SELECTED CONSOLIDATED FINANCIAL DATA
FIVE-YEAR SUMMARY
RESULTS OF OPERATIONS(1)
Years ended December 31,
(in millions, except per share amounts) 2000 1999 1998 1997 1996
Policy charges $1,092.2 $ 895.6 $ 698.9 $ 545.2 $ 400.9
Life insurance premiums 240.0 220.8 200.0 205.4 198.6
Net investment income 1,668.4 1,530.5 1,486.8 1,413.9 1,357.8
Realized gains (losses) on investments (24.9) (11.0) 17.9 11.1 (0.2)
Other 194.6 167.4 108.1 62.8 59.5
Total revenues 3,170.3 2,803.3 2,511.7 2,238.4 2,016.6
Interest credited and other benefits 1,470.0 1,349.2 1,284.4 1,235.4 1,201.6
Interest expense on debt and trust securities 48.5 47.2 35.1 26.1 --
Other expenses 1,027.9 834.1 686.7 569.9 486.9
Total benefits and expenses 2,546.4 2,230.5 2,006.2 1,831.4 1,688.5
Income from continuing operations before federal 623.9 572.8 505.5 407.0 328.1
income tax expense
Federal income tax expense 189.0 191.5 173.1 141.8 115.8
Income from continuing operations $ 434.9 $ 381.3 $ 332.4 $ 265.2 $ 212.3
Net income $ 434.9 $ 381.3 $ 332.4 $ 265.2 $ 223.6
Basic and diluted net income per common share(2) $ 3.38 $ 2.96 $ 2.58 $ 2.14 --
Cash dividends declared $ 0.46 $ 0.38 $ 0.30 $ 0.18 --
Diluted average shares outstanding 128.9 128.6 128.6 124.1 --
RECONCILIATION OF NET INCOME TO NET OPERATING
INCOME(1)
Net income $ 434.9 $ 381.3 $ 332.4 $ 265.2 $ 223.6
Less: Realized (gains) losses on investments, net 16.1 7.0 (11.7) (7.9) (1.0)
of tax
Less: Income from discontinued operations, net of -- -- -- -- (11.3)
tax
Net operating income 451.0 388.3 320.7 257.3 211.3
Pro forma adjustments -- -- -- (2.9) (26.2)
Pro forma net operating income $ 451.0 $ 388.3 $ 320.7 $ 254.4 $ 185.1
Pro forma net operating income per common share $ 3.50 $ 3.02 $ 2.49 $ 1.98 $ 1.44
Net operating return on average realized equity(3) 16.7% 16.6% 15.8% 14.5% --
(1) Comparisons between 2000, 1999 and 1998 results of operations and those
of prior years are affected by the Company's initial public offering in
March 1997 and companion offerings of senior notes and capital
securities as well as the payment of certain special dividends. Pro
forma amounts adjust for these transactions.
(2) Actual earnings and book value per common share amounts have not been
presented for 1996, because such amounts are not meaningful due to the
effects of initial public offering and the $900.0 million of dividends
paid prior to the initial public offering.
(3) Based on net operating income and excluding accumulated other
comprehensive income.
(4) During 2000, Nationwide Financial Services, Inc. began reporting new
product segments.
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SUMMARY OF FINANCIAL POSITION(1)
As of December 31,
(in millions, except per share amounts) 2000 1999 1998 1997 1996
Total invested assets $ 25,359.2 $ 22,587.9 $20,940.5 $19,673.2 $18,317.3
Deferred policy acquisition costs 2,872.7 2,555.8 2,022.3 1,665.4 1,366.5
Separate account assets 65,968.8 67,155.3 50,935.8 37,724.4 26,926.7
Other assets 977.9 755.0 772.6 829.9 1,159.7
Total assets $ 93,178.6 $ 93,054.0 $74,671.2 $59,892.9 $47,770.2
Policy reserves $ 22,243.3 $ 21,868.3 $19,772.2 $18,702.8 $17,600.6
Separate account liabilities 65,968.8 67,155.3 50,935.8 37,724.4 26,926.7
Other liabilities 1,370.6 944.9 917.3 943.1 1,111.2
Long-term debt 298.4 298.4 298.4 298.4 --
Total liabilities 89,881.1 90,266.9 71,923.7 57,668.7 45,638.5
NFS-obligated mandatorily redeemable capital and 300.0 300.0 300.0 100.0 --
preferred securities of subsidiary trusts
Shareholders' equity 2,997.5 2,487.1 2,447.5 2,124.2 2,131.7
Total liabilities and shareholders' equity $ 93,178.6 $ 93,054.0 $74,671.2 $59,892.9 $47,770.2
Book value per common share(2) $ 23.29 $ 19.35 $ 19.04 $ 16.53 --
CUSTOMER FUNDS MANAGED AND ADMINISTERED
Individual annuity $ 43,694.9 $ 44,023.7 $35,315.2 $28,156.4 $21,153.4
Institutional products 47,154.0 48,321.7 38,582.0 25,812.4 19,939.0
Life insurance 7,225.5 5,913.8 4,613.4 3,487.0 2,938.9
Asset management, gross 22,953.4 22,866.7 19,825.5 7,840.0 5,969.0
Less intercompany eliminations (10,031.7) (9,978.5) (8,154.4) (5,285.0) (3,832.8)
Asset management, net 12,921.7 12,888.2 11,670.8 2,555.0 2,136.2
$110,996.1 $111,147.4 $90,181.4 $60,010.8 $46,167.5
Years ended December 31,
(in millions) 2000 1999 1998 1997 1996
OPERATING INCOME BEFORE FEDERAL INCOME TAX EXPENSES
BY BUSINESS SEGMENT(1,4)
Individual annuity $ 276.3 $ 254.4 $ 230.2 $ 186.9 $ 100.9
Institutional products 224.6 201.5 164.8 126.2 117.3
Life insurance 161.1 122.7 88.8 66.7 67.2
Asset management 4.5 22.9 14.0 11.7 8.4
Corporate (17.7) (17.7) (10.2) 4.4 34.5
$ 648.8 $ 583.8 $ 487.6 $ 395.9 $ 328.3
SALES BY BUSINESS SEGMENT(4)
Individual annuity $7,338.7 $6,392.3 $6,140.2 $5,636.1 $4,815.9
Institutional products 7,392.2 6,645.6 5,461.8 3,981.9 3,085.7
Life insurance 1,530.2 1,095.9 653.2 468.7 419.3
(1) Comparisons between 2000, 1999 and 1998 results of operations and those
of prior years are affected by the Company's initial public offering in
March 1997 and companion offerings of senior notes and capital
securities as well as the payment of certain special dividends. Pro
forma amounts adjust for these transactions.
(2) Actual earnings and book value per common share amounts have not been
presented for 1996, because such amounts are not meaningful due to the
effects of initial public offering and the $900.0 million of dividends
paid prior to the initial public offering.
(3) Based on net operating income and excluding accumulated other
comprehensive income.
(4) During 2000, Nationwide Financial Services, Inc. began reporting new
product segments.
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7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
Management's narrative analysis and results of operations of Nationwide and
subsidiaries for the three years ended December 31, 2000 follows. This
discussion should be read in conjunction with the consolidated financial
statements and related notes included elsewhere in this report.
Management's discussion and analysis contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform
Act of 1995 with respect to the results of operations and businesses of the
Company. These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially
from those contemplated or projected, forecast, estimated or budgeted in
such forward-looking statements include, among others, the following
possibilities:
(i) the potential impact on the Company's reported net income that
could result from the adoption of certain accounting standards
issued by the Financial Accounting Standards Board;
(ii) tax law changes impacting the tax treatment of life insurance and
investment products;
(iii) heightened competition, including specifically the intensification
of price competition, the entry of new competitors and the
development of new products by new and existing competitors;
(iv) adverse state and federal legislation and regulation, including
limitations on premium levels, increases in minimum capital and
reserves and other financial viability requirements;
(v) failure to expand distribution channels in order to obtain new
customers or failure to retain existing customers;
(vi) inability to carry out marketing and sales plans, including, among
others, development of new products and/or changes to certain
existing products and acceptance of the new and/or revised
products in the market;
(vii) changes in interest rates and the capital markets causing a
reduction of investment income and/or asset fees, reduction in the
value of Nationwide's investment portfolio or a reduction in the
demand for the Company's products;
(viii) general economic and business conditions which are less favorable
than expected;
(ix) unanticipated changes in industry trends and ratings assigned by
nationally recognized rating organizations; and
(x) inaccuracies in assumptions regarding future persistency,
mortality, morbidity and interest rates used in calculating
reserve amounts.
A. RESULTS OF OPERATIONS
In addition to net income, the Company reports net operating income,
which excludes realized investment gains and losses. Net operating
income is commonly used in the insurance industry as a measure of
on-going earnings performance.
The following table reconciles the Company's reported net income to net
operating income for each of the last three years.
(in millions) 2000 1999 1998
Net income $475.3 $405.1 $366.7
Net realized losses 12.6 7.6 (18.5)
(gains) on investments,
net of tax
Net operating income $487.9 $412.7 $348.2
(i) Revenues
Total operating revenues, which exclude net realized gains and
losses on investments, increased to $3.00 billion in 2000 compared
to $2.70 billion for 1999 and $2.45 billion for 1998. The growth
in operating revenues over the past two years has primarily been
driven by increases in policy charges and net investment income.
Policy charges include asset fees, which are primarily earned from
separate account assets generated from sales of individual and
group variable annuities and investment life insurance products;
cost of insurance charges earned on universal life insurance
products; administration fees, which include fees charged per
contract on a variety of the Company 's products and premium loads
on universal life insurance products; and surrender fees, which
are charged as a percentage of premiums withdrawn during a
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specified period of annuity and certain life insurance contracts.
Policy charges for each of the last three years were as follows:
(in millions) 2000 1999 1998
Asset fees $714.6 $616.5 $494.7
Cost of insurance 156.5 117.0 88.8
charges
Administrative fees 134.2 102.4 73.8
Surrender fees 86.1 59.6 41.6
Total policy charges $1,091.4 $895.5 $698.9
The growth in asset fees reflects increases in total average
separate account assets of $11.99 billion (21%) in 2000 and $13.26
billion (30%) in 1999. Net flows into variable annuity and
investment life insurance products as well as market appreciation,
as measured on a daily average basis, in each of the last three
years have resulted in the increase in average separate account
balances.
Cost of insurance charges are assessed on the net amount at risk
on universal life insurance policies. The net amount at risk is
equal to a policy's death benefit minus the related policyholder
account value. The amount charged is based on the insured's age
and other underwriting factors. The increase in cost of insurance
charges is due primarily to growth in the net amount at risk
related to individual investment life insurance reflecting
expanded distribution and increased acceptance by producers and
consumers. The net amount at risk related to individual investment
life insurance grew to $24.69 billion at the end of 2000 compared
to $19.76 billion and $14.95 billion at the end of 1999 and 1998,
respectively.
The growth in administrative fees is attributable to a significant
increase in premiums on investment life policies and certain
corporate-owned life policies where the company collects a premium
load. The substantial majority of the increase in surrender
charges over the past two years is attributable to policyholder
withdrawals in the Individual Annuity segment, and is driven by an
overall increase in individual variable annuity policy reserves
and a heightened competitive environment in the individual annuity
marketplace.
Net investment income includes the investment income earned on
investments supporting fixed annuities and certain life insurance
products as well as the yield on the Company's general account
invested assets which are not allocated to product segments, net
of related investment expenses. General account assets supporting
insurance products are closely correlated to the underlying
reserves on these products. Net investment income grew from $1.48
billion and $1.52 billion in 1998 and 1999, respectively, to $1.65
billion in 2000 primarily due to increased invested assets to
support growth in individual fixed annuity, institutional products
and life insurance policy reserves. General account reserves
supporting these products grew by $322.0 million and $2.09 billion
in 2000 and 1999, respectively and were $22.18 billion at December
31, 2000. The change in net investment income was also impacted by
average yields on investments, which increased by 24 basis points
in 2000 and declined by 24 basis points in 1999 following market
interest rate trends.
Realized gains and losses on investments are not considered by the
Company to be recurring components of earnings. Nationwide makes
decisions concerning the sale of invested assets based on a
variety of market, business, tax and other factors.
Other income includes fees earned by the Company's broker/dealers
in 1999 and 1998, fees for investment management services, as well
as commissions and other income for marketing, distribution and
administration services.
(ii) Benefits and Expenses
Interest credited to policyholder account balances totaled $1.18
billion in 2000 compared to $1.10 billion in 1999 and $1.07
billion in 1998 and principally relates to fixed annuities, both
individual and institutional, and investment life insurance
products. The growth in interest credited reflects the increase in
policy reserves
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previously discussed and an overall increase in average crediting
rates during 2000. The average crediting rate on fixed annuity
policy reserves in the Individual Annuity and Institutional
Products segments was 5.64% and 5.98% in 2000 compared to 5.72%
and 5.72% in 1999 and 5.89% and 6.16% in 1998, respectively.
Amortization of deferred policy acquisition costs (DAC) increased
$79.5 million in 2000 and $58.1 million in 1999 principally due to
the Individual Annuity segment as a result of growth in the number
of policies in-force in each of the last two years coupled with
increased surrender activity during 2000. Amortization of DAC
increased in the Life Insurance segment as a result of growth in
policies in-force.
Operating expenses were $478.9 million in 2000, a 3% increase from
1999 operating expenses of $463.4 million. Operating expenses were
$419.7 million in 1998. The increase reflects the growth in the
number of annuity and life insurance contracts in-force and the
related increase in administrative processing costs. 1999 and 1998
also include costs associated with investment management
activities which were assigned to an affiliate in mid-1999.
Federal income tax expense was $207.7 million representing an
effective tax rate of 30.4% for 2000. Federal income tax expense
in 1999 and 1998 was $201.4 million and $190.4 million,
respectively, representing effective rates of 33.2% and 34.2%. An
increase in tax exempt income and investment tax credits resulted
in the decrease in effective rates.
(iii) Sales Information
Sales are comprised of annuities, pension plans and life insurance
products sold to a wide variety of customer bases. The 1999 and
1998 sales information has been restated to conform to the 2000
presentation, which better reflects multi-product sales across all
distribution channels.
Sales are stated net of internal replacements, which in the
Company's opinion provides a more meaningful disclosure of sales.
In addition, sales exclude: funding agreements issued to secure
notes issued to foreign investors through an unrelated third party
trust under the Company's $2 billion medium-term note program;
bank-owned life insurance (BOLI); large case pension plan
acquisitions; and deposits into Nationwide employee and agent
benefit plans. Although these products contribute to asset and
earnings growth, they do not produce steady production flow that
lends itself to meaningful comparisons and are therefore excluded
from sales.
The Company sells its products through a broad distribution
network. Unaffiliated entities that sell the Company's products to
their own customer base include independent broker/dealers,
brokerage firms, financial institutions, pension plan
administrators, life insurance specialists and Nationwide agents.
Representatives of the Company who market products directly to a
customer base identified by the Company include Nationwide
Retirement Solutions.
Sales by distribution channel for each of the last three years are
summarized as follows:
(in millions) 2000 1999 1998
Independent $5,933.4 $5,097.8 $4,841.8
broker/dealers
Brokerage firms 1,183.8 900.2 601.3
Financial institutions 2,868.0 2,431.2 2,005.5
Pension plan 1,044.2 1,165.7 1,015.8
administrators
Nationwide Retirement 2,328.6 2,470.3 2,445.9
Solutions
Nationwide agents 815.8 787.9 731.8
Life insurance 711.4 420.0 91.1
specialists
The competitive environment for individual annuity sales through
the independent broker/dealer channel has become very challenging;
however, total sales through this channel (including retirement
plans and life insurance) were up 16% in 2000 reflecting the
strength of the Company's multiple product strategy, appointment
of new distributors, introduction of new products and features and
a broad distribution network. Sales through
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financial institutions grew 18% during 2000 and 21% during 1999
driven mainly by the appointment of new distributors in the bank
channel and increased fixed annuity sales.
The increase in sales through life insurance specialists reflects
$711.4 million of COLI sales in 2000 compared to $409.2 million in
1999. Nationwide entered the COLI market in 1998 and has quickly
become a market leader through a focus on mid-sized cases. The
Company's flagship products are marketed under The BEST of
AMERICA(R) brand, and include individual and group variable
annuities and variable life insurance.
The BEST of AMERICA products allow customers to choose from
investment options managed by premier mutual fund managers. The
Company has also developed private label variable and fixed
annuity products in conjunction with other financial services
providers which allow those providers to sell products to their
own customer bases under their own brand name.
The Company also markets group deferred compensation retirement
plans to employees of state and local governments for use under
Internal Revenue Code ("IRC") Section 457. The Company utilizes
its sponsorship by the National Association of Counties and The
United States Conference of Mayors when marketing IRC Section 457
products.
Sales by product and segment for each of the last three years are as follows:
(in millions of dollars) 2000 1999 1998
The BEST of AMERICA products $5,475.4 $4,639.2 $4,656.1
Private label annuities 998.7 947.8 778.1
Other 90.9 382.5 332.9
Total individual variable annuity sales 6,565.0 5,969.5 5,767.1
Deferred fixed annuities 534.8 332.5 315.2
Immediate fixed annuities 127.7 64.2 52.9
Total individual fixed annuity sales 662.5 396.7 368.1
Total individual annuity sales $7,227.5 $6,366.2 $3,135.2
The BEST of AMERICA products $3,931.4 $3,537.7 $2,760.0
Other 47.3 83.1 41.8
Total private sector pension plan sales 3,978.7 3,620.8 2,801.8
IRC Section 457 annuities 2,148.8 2,190.3 2,143.0
Total public sector pension plan sales 2,148.8 2,190.3 2,143.0
Total institutional products sales $6,127.5 $5,811.1 $4,944.8
The BEST of AMERICA variable life series $573.4 $425.9 $316.0
Corporate-owned life insurance 711.4 409.2 91.1
Traditional/Universal life insurance 245.4 260.8 246.1
Total life insurance sales $1,530.2 $1,095.9 $653.2
B. BUSINESS SEGMENTS
The Company has redefined its business segments in order to align this
disclosure with the way management currently views its core operations.
This updated view better reflects the different economics of the
Company's various businesses and also aligns well with the current
market focus. The Company has three product segments: Individual
Annuity, Institutional Products and Life Insurance. In addition, the
Company reports certain other revenues and expenses in a Corporate
segment. All 1999 and 1998 amounts have been restated to reflect the
new business segments.
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22
The following table summarizes operating income before federal income
tax expense for the Company's business segments for each of the last
three years.
(in millions) 2000 1999 1998
Individual Annuity $281.7 $259.2 $231.5
Institutional Products 230.7 217.8 180.4
Life Insurance 152.9 120.8 88.8
Corporate 37.1 20.3 28.0
Operating income $702.4 $618.1 $528.7
before federal income
tax expense
(i) Individual Annuity
The Individual Annuity segment consists of both variable and fixed
annuity contracts. Individual 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, variable annuity
contracts provide the customer with access to a wide range of
investment options and asset protection in the event of an
untimely death, while fixed annuity contracts generate a return
for the customer at a specified interest rate fixed for a
prescribed period. The Company's individual annuity products
consist of single premium deferred annuities, flexible premium
deferred annuities and single premium immediate annuities.
The following table summarizes certain selected financial data for Nationwide's
Individual Annuity segment for the years indicated.
(in millions) 2000 1999 1998
INCOME STATEMENT DATA
Revenues:
Policy charges $ 573.2 $ 484.6 $ 389.5
Net investment income 483.2 458.9 431.7
Premiums on immediate annuities 52.7 26.8 23.1
1,109.1 970.3 844.3
Benefits and expenses:
Interest credited to policyholder account balances 396.4 384.9 357.9
Amortization of DAC 238.7 170.9 129.2
Other benefits 54.0 23.8 22.5
Other operating expenses 138.3 131.5 103.2
827.4 711.1 612.8
Operating income before federal income tax expense $ 281.7 $ 259.2 $ 231.5
OTHER DATA
Sales:
Individual variable annuities $ 6,565.0 $ 5,969.5 $ 5,767.1
Individual fixed annuities 662.5 396.7 368.1
Total individual annuity sales $ 7,227.5 $ 6,366.2 $ 6,135.2
Average account balances:
Separate account $37,934.0 $31,929.2 $25,563.9
General account 6,942.9 6,712.5 6,072.8
Total average account balances $44,876.9 $38,641.7 $31,636.7
Account balances as of year end:
Individual variable annuities $39,621.9 $40,274.7 $32,029.2
Individual fixed annuities 3,941.8 3,722.2 3,280.9
Total account balances $43,563.7 $43,996.9 $35,310.1
Return on average equity 20.4% 19.7% 20.2%
Pre-tax operating income to average account balances 0.63% 0.67% 0.73%
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23
Pre-tax operating earnings reached $281.7 million in 2000, up 9%
compared to 1999 earnings of $259.2 million, which were up 12%
from 1998. Improved segment results are primarily due to growth in
asset fees partially offset by increased DAC amortization.
Asset fees were $478.5 million in 2000 up 15% from $415.0 million
in 1999 and totaled $337.8 million in 1998. Asset fees are
calculated daily and charged as a percentage of separate account
reserves. Average separate account assets have increased
substantially in the past three years as a result of net market
appreciation and net flows of $675.2 million, $1.28 billion and
$3.08 billion in 2000, 1999 and 1998, respectively. While separate
account assets reflect market depreciation in 2000, there was
substantial market appreciation in the first half of the year,
which contributed to the growth in average separate account
assets.
Amortization of DAC increased 40% to $238.7 million in 2000
compared to $170.9 million and $129.2 million in 1999 and 1998,
respectively. The growth in DAC amortization is consistent with
the overall growth in the individual annuity business and the
increase in surrender activity.
The following table depicts the interest spread on average general
account reserves in the Individual Annuity segment for each of the
last three years.
2000 1999 1998
Net investment income 7.88% 7.58% 7.77%
Interest credited 5.64 5.72 5.89
Interest spread 2.24% 1.86% 1.88%
During 1998 and 1999 the Company experienced an increase in
mortgage loan and bond prepayment fees and such income accounted
for approximately 4 basis points of the interest spread in 2000
compared to 7 basis points and 11 basis points in 1999 and 1998,
respectively. Increases in interest rates in early 2000 generated
higher net investment income and slowed prepayment activity.
The Company is able to mitigate the effects of changes in
investment yields by periodically resetting the rates credited on
fixed features of individual annuity contracts. As of December 31,
2000, individual fixed annuity policy reserves and fixed option of
variable annuity reserves of $2.42 billion and $2.50 billion,
respectively, are in contracts that adjust the crediting rate
periodically with portions resetting in each calendar quarter. The
Company also has $398.7 million of fixed option of variable
annuity policy reserves related to private label annuities that
call for the crediting rate to be reset annually on each January 1
and $1.52 billion of individual fixed annuity policy reserves that
are in payout status where the Company has guaranteed periodic,
typically monthly, payments.
Led by variable product deposits of $8.20 billion and withdrawals
and surrenders of $5.98 billion, Individual Annuity segment
deposits in 2000 of $8.87 billion offset by withdrawals and
surrenders totaling $6.47 billion generated net flows of $2.40
billion compared to the $2.83 billion and $3.63 billion achieved
in 1999 and 1998, respectively. Despite the competitive nature of
the individual annuity market, the Company has demonstrated the
ability to generate positive net flows by leveraging its broad
distribution network and innovative product development resources.
The Company successfully introduced new products, features and
retention strategies during 2000.
Changes in the Company's products, including the introduction of
new products with reduced policy charges have slightly decreased
the ratio of asset fees to average separate account assets within
the segment. This ratio was 1.26% in 2000 compared to 1.29% and
1.30% in 1999 and 1998, respectively.
The decrease in pre-tax operating income to average assets in 2000
and 1999 is primarily driven by the mix of products, which is
demonstrated by average separate account assets accounting for
84.4%, 82.6% and 80.8% of total average account balances in
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24
2000, 1999 and 1998, respectively. Higher sales of trail
commission individual variable annuities and increased
amortization of policy acquisition costs are also impacting
margins.
Individual Annuity sales, which exclude internal replacements,
during 2000 were $7.23 billion compared to sales of $6.37 billion
in 1999 and $6.14 billion in 1998. Sales growth in 2000 was driven
by The BEST of AMERICA variable annuities and reflects the
successful introduction of the Extra Value rider, which accounted
for $2.65 billion of sales. In addition, sales of deferred fixed
annuities increased 61% to $534.8 million driven by additional
bank distribution.
(ii) Institutional Products
The Institutional Products segment is comprised of the Company's
group pension and payroll deduction business, both public and
private sectors, and medium-term note program. The public sector
includes the 457 business in the form of fixed and variable
annuities. The private sector includes the 401(k) business
generated through fixed and variable annuities. The sales figures
do not include business generated through the Company's
medium-term note program, large case pension plan acquisitions and
Nationwide employee and agent benefit plans, however the income
statement data does reflect this business.
The following table summarizes certain selected financial data for
the Company's Institutional Products segment for the years
indicated.
(in millions) 2000 1999 1998
INCOME STATEMENT DATA
Revenues:
Asset fees $220.2 $190.3 $149.0
Net investment income 827.4 771.2 784.7
Other 31.4 21.6 18.8
1,079.0 983.1 952.5
Benefits and expenses:
Interest credited to policyholder account balances 628.8 580.9 595.7
Other benefits and expenses 219.5 184.4 176.4
848.3 765.3 772.1
Operating income before federal income tax expense $230.7 $217.8 $180.4
OTHER DATA
Sales:
Private sector pension plans $3,978.7 $3,620.8 $2,801.8
Public sector pension plans 2,148.8 2,190.3 2,143.0
Total individual institutional products sales $6,127.5 $5,811.1 $4,944.8
Average account balances:
Separate account $27,806.7 $22,350.3 $16,995.4
General account 10,521.2 10,147.7 9,667.4
Total average account balances $38,327.9 $32,498.0 $26,662.8
Account balances as of year end:
Private sector pension plans $18,001.4 $19,246.2 $14,568.8
Public sector pension plans 17,294.5 18,949.2 15,801.4
Medium-term notes 1,627.7 574.5 ---
Total account balances $36,923.6 $38,769.9 $30,370.2
Return on average equity 24.2% 24.5% 22.0%
Pre-tax operating income to average account balances 0.59% 0.65% 0.66%
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Institutional Products segment earnings growth in 2000 and 1999
was driven by higher asset fees from 24% and 32% increases in
average separate account assets in 2000 and 1999, respectively.
Net investment income increased $56.2 million in 2000 to $827.4
million, following a decline in 1999 of $13.5 million to $771.2
million. The change in net investment income was driven by higher
average general account assets in each year and an increase in
average investment yields in 2000 and a decrease in average
investment yields in 1999. The increase in interest credited in
2000 is primarily the result of a 4% increase in average general
account reserves and an increase in the average crediting rate of
26 basis points. The decrease in interest credited in 1999 is
primarily the result of a 44 basis point decrease in the average
interest-crediting rate reflecting lower market rates, offset by a
5% increase in average general account reserves. Higher operating
expenses in 2000 reflect the significant technology investments
made as part of the new business model in the public sector
business.
The following table depicts the interest spread on average general
account reserves in the Institutional Products segment for each of
the last three years.
2000 1999 1998
Net investment 7.86% 7.60% 8.12%
income
Interest credited 5.98 5.72 6.16
Interest spread 1.88% 1.88% 1.96%
During 1998 and 1999 the Company experienced an increase in
mortgage loan and bond prepayment fees and such income accounted
for approximately 4 basis points of the interest spread in 2000
compared to 8 basis points and 22 basis points in 1999 and 1998,
respectively. Increases in interest rates in early 2000 generated
higher net investment income and slowed prepayment activity.
The Company is able to mitigate the effects of changes in
investment yields by periodically resetting the rates credited on
fixed features sold through group annuity contracts. Fixed annuity
policy reserves in the Institutional Products segment as of
December 31, 2000, included $7.03 billion in contracts where the
guaranteed interest rate is reestablished each quarter and $545.9
million in contracts that adjust the crediting rate periodically
with portions resetting in each calendar quarter. In this segment,
the Company also has $809.4 million of fixed option of variable
annuity policy reserves that call for the crediting rate to be
reset annually on January 1. The remaining $1.63 billion of fixed
annuity policy reserves relate to funding agreements issued in
conjunction with the Company's medium-term note program where the
crediting rate is either fixed for the term of the contract or
variable, based on an underlying index.
Institutional Products segment deposits in 2000 of $6.33 billion
offset by participant withdrawals and surrenders totaling $5.59
billion generated net flows from participant activity of $738.9
million. Net flows in 2000 are down from the $1.55 billion and
$2.00 billion achieved in 1999 and 1998, respectively. Net case
(terminations) acquisitions were ($1.32) billion in 2000, $810.8
million in 1999 and none in 1998. The increase in net terminations
in 2000 reflects the increasingly competitive environment
particularly in the public sector market.
Changes in the Company's products, including the introduction of
new institutional products with reduced policy charges, and the
mix of business have slightly decreased the ratio of asset fees to
average separate account assets within the segment. This ratio was
0.79% in 2000 compared to 0.83% and 0.86% in 1999 and 1998,
respectively.
The Company has recently experienced decreases in pre-tax
operating income to average account balances, which reached 0.59%
in 2000, compared to 0.65% in 1999 and to 0.66% in 1998. The
decreases were primarily driven by a change in the mix of
products, including new products with reduced policy charges and
the growth in separate account products.
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Institutional Products sales during 2000 reached $6.13 billion
compared to sales of $5.81 billion in 1999 and $4.94 billion in
1998. The growth in each year is primarily attributable to private
sector plans. The independent broker/dealer, brokerage firms and
financial institutions channels all reported sales growth in
excess of 10 percent each year.
(iii) Life Insurance
The Life Insurance segment consists of insurance products,
including universal life insurance, COLI and BOLI products, which
provide a death benefit and also allow the customer to build cash
value on a tax-advantaged basis.
The following table summarizes certain selected financial data for the Company's
Life Insurance segment for the years indicated.
(in millions) 2000 1999 1998
INCOME STATEMENT DATA
Revenues:
Total policy charges $266.6 $199.0 $141.6
Other 476.5 447.1 402.5
743.1 646.1 544.1
Benefits 389.3 359.5 308.3
Operating expenses 200.9 165.8 147.0
590.2 525.3 455.3
Operating income before federal income tax expense $152.9 $120.8 $88.8
OTHER DATA
Sales:
The BEST of AMERICA variable life series $573.4 $425.9 $316.0
Corporate-owned life insurance 711.4 409.2 91.1
Traditional/Universal life insurance 245.4 260.8 246.1
Total life insurance sales $1,530.2 $1,095.9 $653.2
Policy reserves as of year end:
Individual investment life insurance $2,092.0 $1,832.3 $1,270.1
Corporate investment life insurance 2,552.3 1,498.6 903.6
Traditional life insurance 1,813.0 1,787.0 1,689.4
Universal life insurance 768.2 795.9 750.3
Total policy reserves $7,225.5 $5,913.8 $4,613.4
Return on average equity 1 1.5% 11.0% 8.9%
Life Insurance segment earnings in 2000 increased 27% to $152.9
million, up from $120.8 million a year ago and $88.8 million in
1998. Continued strong sales and reserve growth from both
individual and corporate investment life insurance products
contributed to the sharp earnings increases.
Driven primarily by increased policy charges, revenues from
investment life products increased to $322.4 million in 2000
compared to $226.5 million in 1999 and $145.4 million in 1998. The
revenue growth reflects significantly increased policy reserve
levels as individual investment life reserves increased 14% in
2000 to $2.09 billion compared to $1.83 billion a year ago and
$1.27 billion at the end of 1998. Corporate investment life
reserves, which include both COLI and BOLI products, reached $2.55
billion, up from $1.50 billion and $903.6 million at the end of
1999 and 1998, respectively.
Pre-tax earnings from investment life products reached $85.3
million in 2000 compared to $53.4 million a year ago and $29.6
million in 1998. The strong revenue growth discussed previously
more than
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offset increased operating expenses associated with the growth
in business.
Traditional/Universal life pre-tax earnings slightly increased to
$67.6 million in 2000 compared to $67.4 million in 1999 and were
$59.2 million in 1998. The 1998 results reflect additional
expenses related to the installation of a new policy
administration system.
Total life insurance sales, excluding all BOLI and Nationwide
employee and agent benefit plan sales increased 40% to $1.53
billion in 2000 compared to $1.10 billion during 1999 and $653.2
million in 1998. Sales in 2000 include record levels of production
for individual investment life insurance and COLI, reflecting the
Company's efforts to sell through multiple channels and growing
producer and consumer acceptance of these product offerings.
(iv) Corporate
The Corporate segment includes net investment income not allocated
to the three product segments, unallocated expenses and interest
expense on short-term borrowings. 1999 and 1998 results also
include investment management activities associated with
Nationwide mutual funds. During 1999, these investment management
activities were assigned to an affiliate. In addition to these
operating revenues and expenses, the Company also reports net
realized gains and losses on investments in the Corporate segment.
The following table summarizes certain selected financial data for
the Company's Corporate segment for the years indicated.
(in millions) 2000 1999 1998
INCOME STATEMENT DATA
Operating revenues $72.1 $103.7 $106.4
Operating expenses 35.0 83.4 78.4
Operating income $37.1 $20.3 $28.0
before federal income
tax expense(1)
(1)Excludes net realized gains (losses) on investments.
In addition to the operating revenues presented in the table
above, the Company also reports net realized gains and losses on
investments in the Corporate segment. The Company realized net
investment (losses) gains of ($19.4) million, ($11.6) million and
$28.4 million during 2000, 1999 and 1998, respectively. During
2000 the Company recognized a total of $19.4 million of realized
losses on three fixed maturity security holdings.
8. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A. MARKET RISK SENSITIVE FINANCIAL INSTRUMENTS
The Company is subject to potential fluctuations in earnings and the
fair value of certain of its assets and liabilities, as well as
variations in expected cash flows due to changes in market interest
rates and equity prices. The following discussion focuses on specific
exposures the Company has to interest rate and equity price risk and
describes strategies used to manage these risks. The discussion is
limited to financial instruments subject to market risks and is not
intended to be a complete discussion of all the risks Nationwide is
exposed to.
(i) Interest Rate Risk
Fluctuations in interest rates can potentially impact the
Company's earnings, cash flows, and the fair value of its assets
and liabilities. Generally, in a declining interest rate
environment, the Company may be required to reinvest the proceeds
from matured and prepaid investments at rates lower than the
overall yield of the portfolio, which could reduce interest
spread income. In addition, minimum guaranteed crediting rates
(typically 3.0% or 3.5%) on certain annuity contracts could
result in a reduction of the Company's interest spread income in
the event of a significant and prolonged decline in interest
rates from market rates at the end of 2000. The average crediting
rate of fixed annuity products during 2000 was 5.64% and 5.98%
for the Individual Annuity and Institutional Products segments,
respectively, well in excess of the guaranteed rates. The Company
mitigates this risk by investing in assets with maturities and
durations that match the expected characteristics of the
liabilities and by investing in mortgage- and asset-backed
securities with limited prepayment exposure.
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Conversely, a rising interest rate environment could result in a
reduction of interest spread income or an increase in
policyholder surrenders. Existing general account investments
supporting annuity liabilities generally have a weighted average
maturity of approximately 4.5 years as of December 31, 2000 and
therefore, the change in yield of the portfolio will lag changes
in market interest rates. This lag is increased if the rate of
prepayments of securities slows. To the extent the Company sets
renewal rates based on current market rates, this will result in
reduced interest spreads. Alternatively, if the Company sets
renewal crediting rates while attempting to maintain a desired
spread from the portfolio yield, the rates offered by the Company
may be less than new money rates offered by competitors. This
difference could result in an increase in surrender activity by
policyholders. If the Company could not fund the surrenders with
its cash flow from operations, the Company may be required to
sell investments, which likely would have declined in value due
to the increase in interest rates. The Company mitigates this
risk by offering products that assess surrender charges or market
value adjustments at the time of surrender, by investing in
assets with maturities and durations that match the expected
characteristics of the liabilities, and by investing in mortgage-
and asset-backed securities with limited prepayment exposure.
(ii) Asset/Liability Management Strategies to Manage Interest
Rate Risk
The Company employs an asset/liability management approach
tailored to the specific requirements of each of its products.
Each product line has an investment strategy based on its
specific characteristics. The strategy establishes asset maturity
and duration, quality and other guidelines. For fixed maturity
securities and mortgages, the weighted average maturity is based
on repayments, which are scheduled to occur under the terms of
the asset. For mortgage- and asset-backed securities, repayments
are determined using the current rate of repayment of the
underlying mortgages or assets and the terms of the securities.
For individual immediate annuities having future benefits which
cannot be changed at the option of the policyholder, the
underlying assets are managed in a separate pool. The duration of
assets and liabilities in this pool are kept as close together as
possible. For assets, the repayment cash flows, plus anticipated
coupon payments, are used in calculating asset duration. Future
benefits and expenses are used for liabilities. As of December
31, 2000, the average duration of assets in this pool was 7.40
years and the average duration of the liabilities was 7.51 years.
Individual immediate annuity policy reserves on this business
were $1.52 billion as of December 31, 2000.
Because the timing of the payment of future benefits on the
majority of the Company's business can be changed by the
policyholder, the Company employs cash flow testing techniques in
its asset/liability management process. In addition, each year
the Company's annuity and insurance business is analyzed to
determine the adequacy of the reserves supporting such business.
This analysis is accomplished by projecting the anticipated cash
flows from such business and the assets required to support such
business under a number of possible future interest rate
scenarios. The first 7 of these scenarios are required by state
insurance regulation. Projections are also made using 11
additional scenarios, which involve more extreme fluctuations in
future interest rates and equity markets. Finally, to get a
statistical analysis of possible results and to minimize any bias
in the 18 predetermined scenarios, additional projections are
made using 50 randomly generated interest rate scenarios. For the
Company's 2000 cash flow testing process, interest rates for
90-day treasury bills ranged from 1.02% to 12.99% under the 18
predetermined scenarios and 0.39% to 28.48% under the 50 random
scenarios. Interest rates for longer maturity treasury securities
had comparable ranges. The values produced by each projection are
used to
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determine future gains or losses from the Company's annuity and
insurance business, which, in turn, are used to quantify the
adequacy of the Company's reserves over the entire projection
period. The results of the Company's cash flow testing indicated
that the Company's reserves were adequate as of December 31,
2000.
(iii) Characteristics of Interest Rate Sensitive Financial
Instruments
The following table provides information about the Company's
financial instruments as of December 31, 2000 that are sensitive
to changes in interest rates. Insurance contracts that subject
the Company to significant mortality risk, including life
insurance contracts and life-contingent immediate annuities, do
not meet the definition of a financial instrument and are not
included in the table.
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1999
(in millions of dollars) 2001 2002 2003 2004 2005 Thereafter Total Fair Value Fair Value
ASSETS
Fixed maturity securities:
Corporate bonds:
Principal $1,578.1 $1,565.5 $1,169.1 $1,018.9 $1,313.1 $3,388.1 $10,032.8 $ 9,858.2 $ 9,536.5
Average interest rate 7.4% 7.4% 7.2% 7.4% 7.6% 8.2% 7.7%
Mortgage and other
asset-backed securities:
Principal $1,193.7 $ 991.3 $ 725.7 $ 555.5 $ 431.1 $1,295.5 $ 5,192.8 $ 5,169.7 $ 5,196.9
Average interest rate 7.3% 7.4% 7.5% 7.6% 7.8% 7.8% 7.8%
Other fixed maturity
securities:
Principal $ 56.0 $ 8.8 $ 26.1 $ 49.0 $ 12.3 $ 346.4 $ 498.6 $ 415.1 $ 560.6
Average interest rate 7.0% 10.9% 8.3% 7.9% 7.6% 8.0% 7.9%
Mortgage loans on
real estate:
Principal $ 253.6 $ 393.8 $ 487.5 $ 488.2 $ 776.9 $3,812.4 $ 6,212.4 $ 6,327.8 $ 5,745.5
Average interest rate 8.7% 8.6% 8.1% 7.9% 8.2% 7.9% 8.0%
LIABILITIES
Deferred fixed annuities:
Principal $2,239.0 $1,495.0 $1,282.0 $1,105.0 $ 964.0 $9,404.9 $16,430.3 $15,697.8 $16,197.4
Average credited rate 5.8% 5.8% 5.9% 6.0% 6.1% 6.2% 6.1%
Immediate annuities:
Principal $ 45.0 $ 41.0 $ 35.0 $ 32.0 $ 28.0 $ 204.0 $ 385.0 $ 282.0 $ 237.8
Average credited rate 7.2% 7.2% 7.2% 7.2% 7.3% 7.3% 7.3%
Short-term borrowings:
Principal $ 120.0 -- -- -- -- -- $ 120.0 $ 118.7 --
Average interest rate 6.5% -- -- -- -- -- 6.5%
DERIVATIVE FINANCIAL
INSTRUMENTS
Interest rate swaps:
Pay fixed/receive variable
Notional value -- $ 30.0 $ 62.5 $ 133.9 $ 290.6 $ 417.8 $ 934.8 $ (21.3) $ 4.8
Weighted average pay rate -- 4.1% 6.7% 6.8% 6.4% 6.9% 6.6%
Weighted average receive -- 7.8% 6.6% 6.7% 7.0% 6.8% 6.9%
rate
Pay variable/receive fixed
Notional value -- $ 5.0 $ 28.1 $ 343.4 $ 394.2 $ 293.5 $ 1,064.2 $ (32.1) $ (25.3)
Weighted average pay rate -- 6.8% 6.9% 7.0% 7.1% 7.0% 7.1%
Weighted average receive -- 7.0% 4.0% 3.1% 2.6% 5.4% 3.6%
rate
Pay variable/receive
variable
Notional value -- -- $ 375.9 $ 9.0 $ 316.0 $ 30.0 $ 730.9 $ 5.2 --
Weighted average pay rate -- -- 6.9% 6.9% 6.8% 7.2% 6.9%
Weighted average receive -- -- 4.0% 6.8% 5.0% 7.4% 4.6%
rate
Interest rate futures:
Long positions
Contract amount/notional $ 36.0 $ 34.0 $ 6.0 $ 4.0 $ 1.0 -- $ 81.0 $ 0.3 --
Weighted average $ 92.8 $ 92.8 $ 92.5 $ 92.3 $ 92.3 -- $ 92.8
settlement price
Short positions
Contract amount/notional $1,685.8 $1,349.0 $ 922.0 $ 696.0 $ 403.0 $ 523.0 $ 5,578.8 $ (16.3) $ 1.3
Weighted average $ 93.5 $ 93.0 $ 93.0 $ 92.9 $ 92.8 $ 92.6 $ 93.0
settlement price
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Additional information about the characteristics of the financial
instruments and assumptions underlying the data presented in the
table above are as follows:
Mortgage- and asset-backed securities (MBSs and ABSs): The
maturity year is determined based on the terms of the securities
and the current rate of prepayment of the underlying pools of
mortgages or assets. The Company limits its exposure to
prepayments by purchasing less volatile types of MBSs and ABSs.
Other fixed maturity securities and mortgage loans on real estate:
The maturity year is determined based on the maturity date of the
security or loan.
Deferred fixed annuities: The maturity year is based on the
expected date of policyholder withdrawal, taking into account
actual experience, current interest rates, and contract terms.
Included are group annuity contracts representing $8.39 billion of
general account liabilities as of December 31, 2000, which are
generally subject to market value adjustment upon surrender and
which may also be subject to surrender charges. Of the total group
annuity liabilities, $7.03 billion were in contracts where the
crediting rate is reset quarterly, $545.9 million were in
contracts that adjust the crediting rate on an annual basis with
portions resetting in each calendar quarter and $809.4 million
were in contracts where the crediting rate is reset annually on
January 1. Fixed annuity policy reserves of $1.63 billion relate
to funding agreements issued in conjunction with the Company's
medium-term note program where the crediting rate is either fixed
for the term of the contract or variable, based on an underlying
index. Also included in deferred fixed annuities are certain
individual annuity contracts, which are also subject to surrender
charges calculated as a percentage of the lesser of deposits made
or the amount surrendered and assessed at declining rates during
the first seven years after a deposit is made. At December 31,
2000, individual annuity general account liabilities totaling
$4.92 billion were in contracts where the crediting rate is reset
periodically, with portions resetting in each calendar quarter and
$398.7 million that reset annually on January 1. The average
crediting rate is calculated as the difference between the
projected yield of the assets backing the liabilities and a
targeted interest spread. However, for certain individual
annuities the credited rate is also adjusted to partially reflect
current new money rates.
Immediate annuities: Included are non-life contingent contracts in
payout status where the Company has guaranteed periodic, typically
monthly, payments. The maturity year is based on the terms of the
contract.
Short-term borrowings: The maturity year is the stated maturity
date of the obligation.
Derivative financial instruments: The maturity year is based on
the terms of the related contracts. Interest rate swaps include
cross-currency swaps that eliminate all foreign currency exposure
the Company has with existing assets and liabilities. Underlying
details by currency have therefore been omitted. Variable swap
rates and settlement prices reflect those in effect at December
31, 2000.
(iv) Equity Market Risk
Asset fees calculated as a percentage of the separate account
assets are a significant source of revenue to the Company. At
December 31, 2000, 88% of separate account assets were invested in
equity mutual funds. Gains and losses in the equity markets will
result in corresponding increases and decreases in the Company's
separate account assets and the reported asset fee revenue. In
addition, a decrease in separate account assets may decrease the
Company's expectations of future profit margins, which may require
the Company to accelerate the amortization of deferred policy
acquisition costs.
B. INFLATION
The rate of inflation did not have a material effect on revenues or
operating results of the Company during 2000, 1999 or 1998.
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9. DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors currently consists of the following
fourteen Directors:
NAME AGE DIRECTOR SINCE YEAR TERM WILL EXPIRE
Lewis J. Alphin 52 1993 2015
A. I. Bell 55 1998 2013
Yvonne M. Curl 46 1998 2022
Kenneth D. Davis 47 1999 2002
Keith W. Eckel 54 1996 2014
Willard J. Engel 61 1994 2006
Fred C. Finney 54 1992 2013
Joseph J. Gasper 57 1996 2008
W. G. Jurgensen 49 2000 2003
David O. Miller 62 1996 2006
Ralph M. Paige 58 1999 2002
James F. Patterson 59 1989 2007
Arden L. Shisler 64 1992 2004
Robert L. Stewart 64 1986 2001
Nationwide Life's Executive Officers currently consist of the following
twenty-two Officers:
NAME AGE POSITION WITH NATIONWIDE
John R. Cook, Jr. 57 Senior Vice President - Chief Communications Officer
Thomas L. Crumrine 59 Senior Vice President
David A. Diamond 46 Senior Vice President - Corporate Controller
Joseph J. Gasper 57 President and Chief Operating Officer
Philip C. Gath 53 Senior Vice President - Chief Actuary - Nationwide Financial
Patricia R. Hatler 46 Senior Vice President, General Counsel and Secretary
Richard D. Headley 52 Executive Vice President
Michael S. Helfer 55 Executive Vice President - Corporate Strategy
David K. Hollingsworth 48 Senior Vice President - Business Development and Sponsor Relations
David R. Jahn 52 Senior Vice President - Product Management
Donna A. James 43 Executive Vice President - Chief Administrative Officer
William J. Jurgensen 49 Chairman of the Board and Chief Executive Officer
Richard A. Karas 58 Senior Vice President - Sales - Financial Services
Gregory S. Lashutka 57 Senior Vice President - Corporate Relations
Edwin P. McCausland, Jr. 56 Senior Vice President - Fixed Income Securities
Dimon Richard McFerson 64 Chairman (retired December 30, 2000)
Robert A. Oakley 54 Executive Vice President - Chief Financial Officer
Mark D. Phelan 46 Senior Vice President - Technology and Operations
Douglas C. Robinette 46 Senior Vice President - Claims
Mark R. Thresher 44 Senior Vice President - Finance (Chief Accounting Officer)
Susan A. Wolken 50 Senior Vice President - Product Management and Nationwide
Financial Marketing
Robert J. Woodward, Jr. 59 Executive Vice President - Chief Investment Officer
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Biographical information for each of the individuals listed in the above table
is set forth below.
DIMON R. MCFERSON, until his retirement in December 2000, was Chief Executive
Officer since April 1996. He was elected Chief Executive Officer in December
1992, and President and Chief Executive Officer in December 1993. He was
President and General Manager of Nationwide Mutual Insurance Company from April
1988 to April 1991; President and Chief Operating Officer of Nationwide Mutual
Insurance Company from April 1991 to December 1992; and President and Chief
Executive Officer of Nationwide Mutual Insurance Company from December 1992 to
April 1996. Mr. McFerson was with Nationwide for 21 years.
W.G. JURGENSEN has been a Director and Chief Executive Officer since 2000.
Previously, he was Executive Vice President of Bank One Corporation from 1998 to
May 2000. Prior to Bank One's merger with First Chicago NBD, Mr. Jurgensen
served from 1990 to 1998 as Executive Vice President with First Chicago, leading
various business units. For 17 years, Mr. Jurgensen was with Norwest
Corporation, beginning as a corporate banking officer and serving in
increasingly responsible roles including president and CEO of Norwest Investment
Services and management of the treasury function. Mr. Jurgensen's final post was
Executive Vice President - Corporate Banking.
JOSEPH J. GASPER has been President and Chief Operating Officer and Director of
Nationwide since April 1996. Previously, he was Executive Vice President -
Property/Casualty Operations of Nationwide Mutual Insurance Company from April
1995 to April 1996. He was Senior Vice President - Property/Casualty Operations
of Nationwide Mutual Insurance Company from September 1993 to April 1995. Prior
to that time, Mr. Gasper held numerous positions within Nationwide. Mr. Gasper
has been with Nationwide for 34 years.
LEWIS J. ALPHIN has been a Director of Nationwide since 1993. Mr. Alphin owns
and operates an 800-acre farm in Mt. Olive, NC. He taught agriculture business
at James Sprunt Community Collegy in Kenansville, NC for more than 22 years
before retiring in 1994. He is the former board chairman of the Cape Fear Farm
Credit Association, a member and former vice president, secretary/treasurer, and
director of the Duplin County Agribusiness Council, and a former board member of
the Southern States Cooperative (1986 to 1993). Mr. Alphin is a member of the
Duplin County Farm Bureau, the North Carolina Farm Bureau, ad the Farm Credit
Council. He is a member and former director of the Oak Wolfe Fire Department.
A. I. BELL has been a Director of Nationwide since April, 1998. Mr. Bell has
served as a state trustee of the Ohio Farm Bureau Federation from 1991 to 1998
and as president that last four years. He oversees the Bell family farm in
Zanesville, Ohio. The farm is the hub of a multi-family swine network, in
addition to grain and beef operations. Mr. Bell has represented the Ohio Farm
Bureau at state and national level activities, and has traveled internationally
representing Ohio agriculture. In 1995, he was introduced into The Ohio State
University Department of Animal Sciences Hall of Fame.
YVONNE M. CURL has been a Director of Nationwide since April 1998. Ms. Curl is
Vice President - Chief Marketing Officer for Avaya Inc. located in Basking
Ridge, NJ. Prior to joining Avaya Inc. in November 2000, she was employed by the
Xerox Corporation. She joined Xerox in 1976 as a sales representative and
progressed through management positions, including vice president - field
operations; executive assistant to te chairman and CEO; and as corporate vice
president serving as senior vice president and general manager, public sector
worldwide/global solutions group.
JOHN R. COOK, JR. has been Senior Vice President - Chief Communications Officer
since May 1997. Previously, Mr. Cook was Senior Vice President - Chief
Communications Officer of USAA from July 1989 to May 1997. Mr. Cook has been
with Nationwide for 3 years.
THOMAS L. CRUMRINE has been Senior Vice President of Nationwide since September
1997. Previously he was Senior Vice President - Property/Casualty from March
1996 to September 1997. Prior to that time he was Senior Vice President - Claims
from April 1995 to March 1996, Vice President - Claims from 1993 to March 1996,
Vice President - Agency Sales from 1991 to 1993 and Vice President - Agency
Services from 1989 to 1991. Prior to 1989 Mr. Crumrine held several positions
with Nationwide.
KENNETH D. DAVIS has been a Director of Nationwide since April 1999. Mr. Davis
is the immediate past president of the Ohio Farm Bureau Federation. He served as
a member of the Ohio Farm Bureau Federation's board of trustees from 1989 until
1999. He served as first vice president of the board from 1994 until 1998. Mr.
Davis serves on the board of directors of his local rural electric cooperatives
and is a member of many agriculture organizations including the Ohio Corn
Growers, Ohio Cattlemen's and Ohio Soybean associations.
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DAVID A. DIAMOND has been Senior Vice President - Corporate Controller since
December 11, 2000. Previously, Mr. Diamond was Senior Vice President - Corporate
Controller from August 1999 to December 2000. He was Vice President - Controller
from October 1993 to August 1999. Prior to that time, Mr. Diamond held several
positions within Nationwide. Mr. Diamond has been with Nationwide for 12 years.
KEITH W. ECKEL has been a Director of Nationwide since April 1996. Mr. Eckel is
a partner of Fred W. Eckel Sons and president of Eckel Farms, Inc. in northeast
Pennsylvania. He received the Master Farmer award from Penn State University in
1982. Mr. Eckel is a member of the Pennsylvania Agricultural Land Preservation
Board. He is a former president of the Pennsylvania Farm Bureau, a position he
held for 15 years, and the Lackawanna County Cooperative Extension Association.
He has served as a board member and executive committee member of the American
Farm Bureau Federation. He is a former vice president of the Pennsylvania
Council of Cooperative Extension Associations and former board member of the
Pennsylvania Vegetable Growers Association.
WILLARD J. ENGEL has been a Director of Nationwide since 1994. Mr. Engel served
as general manager of Lyon County Co-Operative Oil Co. in Marshall, MN from 1975
to 1997, and occasionally serves on a consulting basis. He previously was a
division manager of the Truman Farmers Elevator. He is a former director of the
Western Co-op Transport in Montevideo, MN, a former director and legislative
committee chairman of the Northwest Petroleum Association in St. Paul, and a
former director of Farmland Industries in Kansas City.
FRED C. FINNEY has been a Director of Nationwide since 1992. Mr. Finney is the
owner and operator of the Moreland Fruit Farm and operator of Melrose Orchard in
Wooster, OH. He is past president of the Ohio Farm Bureau Federation, the Ohio
Fruit Growers Society, Wayne County Farm Bureau, and the Westwood Ruritan Club.
He is a member of the American Berry Cooperative.
PHILIP C. GATH has been Senior Vice President - Chief Actuary - Nationwide
Financial since May 1998. Previously, Mr. Gath was Vice President - Product
Manager - Individual Variable Annuity from July 1997 to May 1998. Mr. Gath was
Vice President - Individual Life Actuary from August 1989 to July 1997. Prior to
that time, Mr. Gath held several positions within Nationwide. Mr. Gath has been
with Nationwide for 32 years.
PATRICIA R. HATLER has been Senior Vice President, General Counsel and Secretary
since April 2000. Previously, she was Senior Vice President and General Counsel
from July 1999 to April 2000. Prior to that time, she was General Counsel and
Corporate Secretary of Independence Blue Cross from 1983 to July 1999.
RICHARD D. HEADLEY has been Executive Vice President for Nationwide since July
2000. Previously, he was Executive Vice President - Chief Information Technology
Officer from May 1999 to July 2000. He was Senior Vice President - Chief
Information Technology Officer from October 1997 to May 1999. Previously, Mr.
Headly was Chairman and Chief Executive Officer of Banc One Services Corporation
from 1992 to Octover 1997. From January 1975 until 1992, Mr. Headley held
several positions with Banc One Corporation. Mr. Headley has been with
Nationwide for 3 years.
MICHAEL S. HELFER has been Executive Vice President - Corporate Strategy since
August 2000. He is a former partner and head of the financial institutions group
at Wilmer, Cutler and Pickering, a 350-lawyer international law firm
headquartered in Washington, D.C. He served as that firm's Chairman and Chief
Executive Officer from 1995 to 1998.
DAVID K. HOLLINGSWORTH has been Senior Vice President - Business Development and
Sponsor Relations since April 2000. Previouly, he was Senior Vice President -
Multi Channel and Sponsor relations from August 1999 until April 2000.
Previously, he was Senior Vice President - Marketing from June 1999 to August
1999. Prior to that time, Mr. Hollingsworth held numerous positions within
Nationwide. Mr. Hollingsworth has been with Nationwide for 26 years.
DAVID R. JAHN has been Senior Vice President - Product Management since November
2000. Previously, he was Senior Vice President - Commercial Insurance from March
1998 to November 2000. Previously, he was Vice President - Property/Casualty
Operations and Vice President - Resource Management from March 1996 to January
1998. Prior to that time, Mr. Jahn has held numerous positions within
Nationwide. Mr. Jahn has been with Nationwide for 29 years.
DONNA A. JAMES has been Executive Vice President - Chief Administrative Officer
since July 2000. Previously, she was Senior Vice President - Chief Human
Resources Officer from May 1999 to July 2000. She was Senior Vice President -
Human Resources from December 1997 to May 1999. Previously, she was Vice
President - Human Resources from July 1996 to December 1997. Prior to that time,
Ms. James was Vice President -
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Assistant to the CEO of Nationwide from March 1996 to July 1996. From May 1994
to March 1996, she was Associate Vice President - Assistant to the CEO of
Nationwide. Previously, Ms. James held several positions within Nationwide. Js.
James has been with Nationwide for 19 years.
RICHARD A. KARAS has been Senior Vice President - Sales - Financial Services
since March 1993. Previously, he was Vice President - Sales - Financial Services
from February 1989 to March 1993. Prior to that time, Mr. Karas held several
positions within Nationwide. Mr. Karas has been with Nationwide for 36 years.
GREGORY S. LASHUTKA has been Senior Vice President - Corporate Relations since
January 2000. Previously, he was the Mayor of the City of Columbus (Ohio) from
January 1992 to December 1999. From January 1986 to December 1991, Mr. Lashutka
was a Partner with Squire, Sanders & Dempsey. From January 1978 to December
1985, he was City Attorney for the City of Columbus (Ohio).
EDWIN P. MCCAUSLAND, JR. has been Senior Vice President - Fixed Income
Securities since 1999. Mr. McCausland has 29 years of experience in insurance
investments beginning his career in 1970 with Connecticut Mutual Life Insurance
Company. He joined Phoenix Mutual Life Insurance Company in 1981 as second Vice
President of Bond Investments and rising to Vice President of Pension
Operations. He was Vice President and Managing Director of Mass Mutual Life
Insurance Company prior to joining Nationwide.
DAVID O. MILLER has been a Director of Nationwide since November 1996. Mr.
Miller has been Chairman of the Board since 1998. Mr. Miller is president of
Owen Potato Farm, Inc. and a partner of M&M Enterprises in Licking County, OH.
He is a director and board chairman of the National Cooperative Business
Association, director of Cooperative Business International and the
International Cooperative Alliance, and serves on the educational executive
committee of the National Council of Farmer Cooperatives. He was president of
the Ohio Farm Bureau Federation from 1981 to 1985 and was vice president for six
years. Mr. Miller served a two year term on the board of the American Farm
Bureau Association. He is past president of the Ohio Vegetable and Potato
Growers Association, and was a director of Landmark, Inc., a farm supply
cooperative which is now part of Indianapolis-based Countrymark.
ROBERT A. OAKLEY has been Executive Vice President - Chief Financial Officer and
Treasurer since December 2000. Previously, Mr. Oakley was Executive Vice
President - Chief Financial Officer from April 1995 to December 2000. Prior to
that, Mr. Oakley was Senior Vice President - Chief Financial Officer from
October 1993 to April 1995. Prior to that time, Mr. Oakley held several
positions within Nationwide. Mr. Oakley has been with Nationwide for 25 years.
RALPH M. PAIGE has been a Director of Nationwide since April 1999. Mr. Paige has
been the Executive Director of the Federation of Southern Cooperatives/Land
Assistance Fund since 1969. Mr. Paige also served as the National Field
Director/Georgia State Director from 1981 to 1984.
JAMES F. PATTERSON has been a Director of Nationwide since April 1989. Mr.
Patterson is president of Patterson Farms, Inc. and has operated Patterson Fruit
Farm in Chesterland, OH since 1964. Mr. Patterson is on the boards of The Ohio
State University Hospitals Health System in Cleveland, Geauga Hospital, Inc. and
the National Cooperative Business Association. He is past president of the Ohio
Farm Bureau Federation and former member of Cleveland Foundation's Lake and
Geauga Advisory Committees.
MARK D. PHELAN has been Senior Vice President - Technology and Operations since
December 2000. Previously, he was Senior Vice President - Technology Services
from 1998 to December 2000. His previous management experience includes five
years (1977 - 1982) with the data processing division's sales group at IBM
Corporation. From 1982 through 1990, Mr. Phelan served as Director of AT&T's
Consumer Communications Services Group and he was subsequently promoted to Sales
Vice President for the Eastern Region of the Business Communications Services
Division. In 1992, he became Executive Vice President - Sales and Marketing for
the Electronic Commerce Division of Checkfree Corporation, a position he held
for five years. From 1997 until 1998, he was in private consulting.
DOUGLAS C. ROBINETTE has been Senior Vice President - Claims since November
2000. Previously he was Senior Vice President - Claimes and Financial Services
from 1999 to November 2000. Prior to that time, Mr. Robinette was Senior Vice
President - Marketing and Product Management from May 1998 to 1999. Mr.
Robinette was Executive Vice President, Customer Services of Employers Insurance
of Wausau, a member of the Nationwide group until 1998, from September 1996 to
May 1998. Prior to that time, he was Executive Vice President, Finance and
Insurance Services of Wausau from May 1995 to September 1996. From November 1994
to May 1995, Mr. Robinette was Senior Vice President, Finance and Insurance
Services of Wausau.
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From May 1993 to November 1994, he was Senior Vice President, Finance of Wausau.
Prior to that time, Mr. Robinette held several positions within the Nationwide
group. Mr. Robinette has been with Nationwide for 14 years.
ARDEN L. SHISLER has been a Director of Nationwide since 1984. Mr. Shisler is
president and chief executive officer of K&B Transport, Inc., a trucking firm in
Dalton, OH. He is a director of the National Cooperative Business Association in
Washington, DC. He is a former board member and vice president of the Ohio Farm
Bureau Federation and past president of the Ohio Agricultural Marketing
Association, an Ohio Farm Bureau Federation subsidiary. He is a member of the
Ohio Trucking Association, the Ohio Trucking Safety Council, the Wayne County
Farm Bureau, Cornerstone Community Church, the Advisory Committee of The Ohio
State University Agriculture Technical Institute and a board member of the
Wilderness Center.
ROBERT L. STEWART has been a Director of Nationwide since 1989. Mr. Stewart is
the owner and operator of Sunnydale Farms and Mining in Jewett, OH. He served on
the board of the Ohio Farm Bureau Federation and as president of the Ohio
Holstein Association board. Mr. Stewart was a director of the Ohio Agricultural
Stabilization and Conservation Service board and Landmark, Inc. a farm supply
cooperative which is now part of Indianapolis-based Countrymark.
MARK R. THRESHER has been Senior Vice President - Finance - Nationwide Financial
since May 1999. He was Vice President - Controller from August 1996 to May 1999.
He was Vice President and Treasurer from November 1996 to February 1997.
Previously, he was Vice President and Treasurer from June 1996 to November 1996.
Prior to joining Nationwide, Mr. Thresher served as a partner with KPMG LLP from
July 1988 to June 1996.
RICHARD M. WAGGONER has been Senior Vice President - Operations since May 1999.
Previously, he was President of Nationwide Services from May 1997 to May 1999.
Prior to that time, Mr. Waggoner has held numerous positions within the
Nationwide group of companies. Mr. Waggoner has been with Nationwide for 24
years.
SUSAN A. WOLKEN has been Senior Vice President - Product Management and
Nationwide Financial Marketing since May 1999. Previously, Ms. Wolken was Senior
Vice President - Life Company Operations from June 1997 to May 1999. She was
Senior Vice President - Enterprise Administration from July 1996 to June 1997.
Prior to that time, she was Senior Vice President - Human Resources from April
1995 to July 1996. From September 1993 to April 1995, Ms. Wolken was Vice
President - Human Resources. From October 1989 to September 1993 she was Vice
President - Individual Life and Health Operations. Ms. Wolken has been with
Nationwide for 26 years.
ROBERT J. WOODWARD, JR. has been Executive Vice President - Chief Investment
Officer since August 1995. Previously, he was Senior Vice President - Fixed
Income Investments from March 1991 to August 1995. Prior to that time, Mr.
Woodward held several positions within Nationwide. Mr. Woodward has been with
Nationwide for 36 years.
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10. EXECUTIVE COMPENSATION
A. COMPENSATION
Pursuant to a Cost Sharing Agreement, the salaries and benefits of
certain officers and employees of the Company and its subsidiaries,
including the Named Executive Officers, will be paid by Nationwide
Mutual Insurance Company and reimbursed in accordance with the terms of
the Cost Sharing Agreement.
The following table provides certain information concerning
compensation received by Nationwide's former Chief Executive Officer,
Nationwide's current Chairman of the Board and Chief Executive Officer,
and the four other most highly paid executive officers (the "Named
Executive Officers") for the fiscal years ended December 31, 2000, 1999
and 1998 for services rendered to Nationwide and its subsidiaries.
SUMMARY COMPENSATION TABLE
Long Term Compensation
-------------------------------------------
Annual Compensation Awards Payouts
--------------------------------------- ------------------------------- -----------
Restricted Long Term
Other Annual Stock Securities Incentive
Name and Salary Bonus Compensation Award(s) Underlying Plan All Other
Principal Position Year $ $ $ $ Options/SARs # Payouts Compensation
- -----------------------------------------------------------------------------------------------------------------------------------
Dimon R. McFerson: 2000 475,471 1,259,550(3) (6) 75,469 65,000 -- 44,662(10)
Chairman and Chief 1999 446,900 1,008,504(4) (6) -- 109,700 -- 22,785
Executive Officer(1,2) 1998 430,970 392,982(5) (6) -- 60,000 204,351(9) 23,278
W. G. Jurgensen: 2000 230,290 951,660(3) (6) 700,000(7) 210,000 -- 7,235(10)
Chairman of the Board -- -- -- -- -- -- -- --
and Chief Executive
Officer(2)
Joseph J. Gasper: 2000 634,499 1,132,145(3) (6) 1,077,500(7) 76,100 -- 45,876(10)
President and Chief 1999 512,308 952,282(4) (6) -- 78,000(8) -- 21,492
Operating Officer 1998 461,308 330,647(5) (6) -- 40,000 143,520(9) 21,491
Robert J. Woodward: 2000 246,577 580,944(3) (6) 164,319(7) 12,200 -- 14,961(10)
Executive Vice 1999 280,293 503,928(4) (6) -- 21,800 -- 11,406
President - Chief 1998 236,599 209,607(5) (6) -- 12,000 80,694(9) 10,883
Investment Officer(2)
Richard A. Karas: 2000 339,231 317,791(3) (6) 202,031(7) 15,000 -- 23,108(10)
Senior Vice President - 1999 307,308 330,021(4) (6) -- 34,400(8) -- 13,177
Sales - Financial 1998 283,847 212,503(5) (6) -- 20,000 90,000(9) 13,174
Services
Mark R. Thresher: 2000 262,622 274,142(3) (6) 140,075(7) 11,400 -- 15,806(10)
Senior Vice President 1999 219,846 244,609(4) (6) 61,688(7) 19,250(8) -- 12,099
- Finance(2) 1998 185,704 122,644(5) (6) -- 10,000 60,600(9) 8,231
(1) Mr. McFerson retired as Chairman and Chief Executive Officer of the Company
on July 31, 2000. His title changed to Chairman of the Company on August 1,
2000. He retired as Chairman and Director of the Company on December 30,
2000.
(2) Figures in the table, other than Restricted Stock Awards, Securities
Underlying Options/SARs and All Other Compensation, represent compensation
received by Messrs. McFerson, Jurgensen, Gasper, Woodward and Thresher for
their service rendered to the Company as allocated pursuant to the Cost
Sharing Agreement.
(3) Represents the amount received by the Named Executive Officers under the
Performance Incentive Plan in 2001 for the 2000 award year. Mr. Woodward's
bonus payout includes amounts received under the Office of Investments
Incentive Plan.
(4) Represents the amount received by the Named Executive Officers under the
Performance Incentive Plan in 2000 for the 1999 award year. Mr. Woodward's
bonus payout includes amounts received under the Office of Investments
Incentive Plan.
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(5) Represents the amount received by the Named Executive Officers under the
Performance Incentive Plan in 1999 for the 1998 award year.
(6) Aggregate perquisites and other personal benefits are less than the lower
of $50,000 or 10% of combined salary and bonus.
(7) The following is the number of shares and value of restricted stock at
the end of the 2000 fiscal year for: Mr. Jurgensen - 25,000 shares at a
value of $1,187,500; Mr. Gasper - 40,000 shares at a value of $1,900,000;
Mr. Woodward - 6,100 shares at a value of $289,750; Mr. Karas - 7,500
shares at a value of $356,250; and Mr. Thresher - 6,700 shares at a value
of $318,250.
(8) Mr. Gasper's options include 2,500 Villanova Capital, Inc. ("VCI") (a
subsidiary of Nationwide Financial Services, Inc.) options; Mr. Karas's
options include 2,000 VCI options; and Mr. Thresher's options include
2,000 VCI options.
(9) Represents the amount received by the Named Executive Officers under the
Executive Incentive Plan in 1999 for the award period 1996 to 1998.
(10) Represents contributions made or credited by the Company for 2000 under
the Savings Plan and the DC Supplemental Plan. The following are the
amounts for the Savings Plan and the DC Supplemental Plan: Mr. McFerson -
$2,379 for the Savings Plan, and $42,283 for the DC Supplemental Plan;
Mr. Jurgensen - $2,379 for the Savings Plan and $4,856 for the DC
Supplemental Plan; Mr. Gasper - $4,713 for the Savings Plan and $41,163
for the DC Supplemental Plan; Mr. Woodward - $3,060 for the Savings Plan
and $11,901 for the DC Supplemental Plan; Mr. Karas - $5,100 for the
Savings Plan and $18,008 for the DC Supplemental Plan; and Mr. Thresher -
$5,095 for the Savings Plan and $10,711 for the DC Supplemental Plan.
B. PERFORMANCE INCENTIVE PLAN
Nationwide maintains the Performance Incentive Plan ("PIP"), first
implemented in 1998. Under the PIP, annual payments are made to the
Named Executive Officers and certain other management employees of the
participating companies based on the achievement of measures tied to
the performance of the relevant operating company, the relevant
business unit and the individual participant over the preceding year.
Performance measures are based on a broad series of key financial
results, financial and operational comparison to external peer
comparators, the extent of accomplishment of strategic initiatives, and
other factors and results impacting organization performance, and
further based upon individual employee performance. Under the PIP, the
participant will be granted a target incentive amount that represents a
percentage (from 4.5% to 150% depending on the participant's position
within the participating company) of the participant's base salary. The
actual amount received by the participant under the PIP will range from
zero to no maximum factor of the participant's base salary, depending
solely on the achievement of the performance measures.
C. OFFICE OF INVESTMENTS INCENTIVE PLAN
Nationwide maintains the Office of Investments Incentive Plan (the
"OIP"), first implemented in 1999. Under the OIP, annual payments are
made to Mr. Woodward and certain other investment professionals within
the investment department based on the achievement of measures tied to
performance of the investment organization and the individual
participant. Performance measures are based on investment objectives
and operating company short and long-term investment performance versus
market indices. Under the OIP, the participant will be granted a target
incentive amount that represents a percentage (from 15% to 85%
depending on the participant" position within the participating
company) of the midpoint of the salary range for the participant's
position within the Company. The actual amount received by the
participant under the OIP will typically range from zero to a maximum
of two times the participant's target percentage opportunity, depending
on the performance of the investment organization and the individual
participant.
D. EXECUTIVE INCENTIVE PLAN
Prior to May 1, 1999, Nationwide Mutual Insurance Company and certain
of its subsidiaries and affiliates, including Nationwide, maintained
the Executive Incentive Plan ("EIP"). Under the EIP, annual payments
were made to the Named Executive Officers and certain other officers of
the participating companies based on the achievement of measures tied
to the performance of Nationwide and the relevant operating company
over the preceding three years. Performance measures were based on
profitability and growth objectives that were established in advance by
the Board of Directors of the participating company. Under the EIP, the
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participant was granted a target incentive amount that represented a
percentage (from 10% to 30% depending on the participant's position
within the participating company) of the participant's base salary. The
actual amount received by the participant ranged from zero to twice the
target incentive amount, depending solely on the achievement of the
performance measures.
Nationwide and the participating subsidiaries and affiliates terminated
the EIP in May 1999. As of May 1999, the Named Executive Officers no
longer participated in the EIP, but rather participated in the PIP.
E. DEFERRED COMPENSATION PROGRAM
Nationwide maintains a deferred compensation program (the "Nationwide
Individual Deferred Compensation Plan") pursuant to which elected
officers of participating companies may elect to defer payment of
amounts otherwise payable to them. An eligible officer is permitted to
enter into a deferral agreement pursuant to which such officer may
annually elect to defer a portion of his or her salary or incentive
compensation earned during the following year or performance cycle. Any
such election is effective prospectively. Amounts deferred under the
Nationwide Individual Deferred Compensation Plan will generally be
payable in annual installments beginning in January of the calendar
year following the calendar year in which the officer terminates
employment or after the expiration of the deferral period elected by
the participant. Accounts under the Nationwide Individual Deferred
Compensation Plan are credited with deferrals and earnings based on the
net investment return on the participants' choice of investment
measures from those offered under the Nationwide Individual Deferred
Compensation Plan.
Nationwide also maintains a deferred compensation plan (the "Employees'
Deferred Compensation Plan") pursuant to which certain employees of
participating companies, who earn in excess of $85,000 per year and who
are not eligible for the Nationwide Individual Deferred Compensation
Plan, may elect to defer payment of amounts otherwise payable to them.
An eligible employee is permitted to enter into a deferral agreement
pursuant to which such employee may annually elect to defer a portion
of his or her salary or incentive compensation earned during the
following year or performance cycle. Any such election is effective
prospectively. Amounts deferred under the Employees' Deferred
Compensation Plan will generally be payable in annual installments
beginning in January of the calendar year after the expiration of the
deferral period elected by the participant. Each participant's account
under the Employees' Deferred Compensation Plan is credited with
deferrals and earnings, based on the net investment return on the
participants' choice of investment measures from those offered under
the Employees' Deferred Compensation Plan.
F. SAVINGS PLAN
Nationwide maintains the Nationwide Savings Plan (the "Savings Plan"),
a qualified profit-sharing plan including a qualified cash or deferred
arrangement covering eligible employees of participating companies.
Under the Savings Plan, participants who are not residents of Puerto
Rico may elect to contribute between 1% and 22% of their compensation
to accounts established on their behalf under the Savings Plan in the
form of voluntary salary reductions on a pretax basis; participants who
are residents of Puerto Rico may make contributions on an after-tax
basis. The participating companies are obligated to make matching
employer contributions, for the benefit of their participating
employees, at the rate of 70% of the first 2% of compensation deferred
or contributed to the Savings Plan by each employee, and 40% of the
next 4% of compensation deferred or contributed by each employee to the
Savings Plan. All amounts contributed to the Savings Plan are held in a
separate account for each participant and are invested in one or more
funds made available under the Savings Plan and selected by the
participant. Normally, a participant receives the value of his or her
account upon termination of employment, although a participant may
withdraw all or a part of the amounts credited to his or her account
during employment under certain circumstances including attainment of
age 59 1/2, or receive a loan of a portion of his or her account
balance. Under the Savings Plan, a participant is immediately vested in
all amounts credited to his or her account as a result of salary
deferrals (and
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earnings on those deferrals) or after-tax contributions (and earnings
on those contributions), as applicable. A participant is vested in
amounts attributable to employer matching contributions (and earnings
on those contributions) over a period of five years.
G. SUPPLEMENTAL DEFINED CONTRIBUTION PLAN
Nationwide maintains an unfunded, nonqualified defined contribution
supplemental benefit plan, the Nationwide Supplemental Defined
Contribution Plan (the "DC Supplemental Plan"), which provides benefits
equal to employer matching contributions that would have been made
under the Savings Plan for the participants in the absence of the
limitation on compensation that can be considered, found in Section
401(a)(17) of the Internal Revenue Code of 1986, as amended ("IRC"),
and the IRC Section 402(g) limitation on amounts that can be deferred
under the Savings Plan, reduced by actual employer matching
contributions made to the Savings Plan. Participants are limited to
those elected officers earning in excess of $170,000 annually. Benefits
under the DC Supplemental Plan vest at the same time as employer
matching contributions vest under the Savings Plan.
H. NATIONWIDE FINANCIAL SERVICES, INC. 1996 LONG-TERM EQUITY COMPENSATION
PLAN
The purpose of the Nationwide Financial Services, Inc. 1996 Long-Term
Equity Compensation Plan (the "LTEP") is to benefit the stockholders of
Nationwide Financial Services, Inc. by encouraging high levels of
performance by selected officers, directors and employees of Nationwide
Financial Services, Inc. and certain of its affiliates, attracting and
retaining the services of such individuals and aligning the interests
of such individuals with those of the stockholders.
The LTEP provides for the grant of any or all of the following, types
of awards:
(i) stock options, including incentive stock options and nonqualified
stock options, for shares of Class A Common Stock;
(ii) stock appreciation rights ("SARs"), either in tandem with stock
options or freestanding;
(iii) restricted stock; and
(iv) performance awards.
Any stock option granted in the form of an incentive stock option must
satisfy the applicable requirements of IRC Section 422. Awards may be
made to the same person on more than one occasion and may be granted
singularly, in combination or in tandem as determined by Nationwide
Financial Services, Inc. Compensation Committee.
The LTEP grants the Compensation Committee, which administers the LTEP,
flexibility in creating the terms and restrictions deemed appropriate
for particular awards as facts and circumstances warrant. The LTEP is
intended to constitute a nonqualified, unfunded, unsecured plan for
incentive and deferred compensation and is not intended to be subject
to any requirements of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"). Awards under the LTEP which are
performance-based are intended to qualify as "performance-based
compensation" for purposes of Section 162(m) of the IRC.
No awards may be granted under the LTEP after December 11, 2006, and
the LTEP may be terminated by the Board of Directors of Nationwide
Financial Services, Inc. prior to such date. In the event of expiration
or earlier termination of the LTEP, the LTEP will remain in effect
until such time as all awards previously granted thereunder have been
satisfied or have expired.
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I. OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
NUMBER OF SECURITIES % OF TOTAL EXERCISE PRICE
UNDERLYING OPTIONS GRANTED OR BASE PRICE GRANT DATE
NAME OPTIONS/SARS GRANTED(1) TO EMPLOYEES IN PER SHARE PRESENT VALUE(2)
# FISCAL YEAR $ EXPIRATION DATE $
Dimon R. McFerson 65,000 5.6% 26.9375 February 9, 2010 730,600
W. G. Jurgensen 210,000 18.0% 28.0000 May 26, 2010 2,509,500
Joseph J. Gasper 76,100 6.5% 26.9375 February 9, 2010 855,364
Robert J. Woodward, Jr. 12,200 1.0% 26.9375 February 9, 2010 137,128
Richard A. Karas 15,000 1.3% 26.9375 February 9, 2010 168,600
Mark R. Thresher 11,400 1.0% 26.9375 February 9, 2010 128,136
(1) One-third of the options granted become exercisable on each of the first
three anniversary dates of the grant, except for 60,000 of Mr. Jurgensen's
option grant, which becomes one-fifth exercisable on each of the first five
anniversary dates of the grant. Options may be accelerated upon a change of
control or certain other events of termination of employment.
(2) The estimated grant date present value dollar amounts in this column are the
result of calculations made using the Black-Scholes model, a theoretical
method for estimating the present value of stock options based on a complex
set of assumptions. The material assumptions and adjustments incorporated in
the Black-Scholes model used to estimate the value of these options include
the following:
- An exercise price on the options equal to the fair market value of the
underlying stock on the date of the grant, as listed in the table.
- The rate available at the time the grant was made on zero-coupon U.S.
Government issues with a remaining term equal to the expected life.
The risk-free rate was 6.85% for the February 9, 2000 grant and 6.60%
for the May 26, 2000 grant.
- Dividends at a rate of $0.40 per share for the February 9, 2000 grant
and $0.48 per share for the May 26, 2000 grant, representing the
annualized dividends paid on shares of common stock at the date of
grant.
- An option term before exercise of five years, which represents the
typical period that options are held prior to exercise.
- Volatility of the stock price of 41.47% for the February 9, 2000 grant
and 42.25% for the May 26, 2000 grant, reflecting the average daily
stock price volatility since Nationwide Financial Services, Inc.'s
initial public offering on March 6, 1997.
- No adjustments were made for vesting requirements, non-transferability,
or risk of forfeiture.
J. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
NUMBER OF SECURITIES UNDERLYING
SHARES UNEXERCISED OPTIONS/SARS AT VALUE OF UNEXERCISED IN-THE-MONEY
ACQUIRED ON FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END
EXERCISE VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
NAME # $ # $
Dimon R. McFerson --- --- 272,200/--- 3,045,038/---
W. G. Jurgensen --- --- ---/210,000 ---/4,095,000
Joseph J. Gasper --- --- 81,834/139,766 3,887,115/6,638,885
Robert J. Woodward, Jr --- --- 25,267/30,733 325,970/325,293
Richard A Karas --- --- 34,133/43,267 371,150/408,237
Mark R. Thresher --- --- 15,418/26,232 144,678/298,485
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K. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES FOR VILLANOVA CAPITAL, INC. (A SUBSIDIARY OF
NATIONWIDE FINANCIAL SERVICES, INC.)
NUMBER OF SECURITIES UNDERLYING
SHARES UNEXERCISED OPTIONS/SARS AT VALUE OF UNEXERCISED IN-THE-MONEY
ACQUIRED ON FISCAL YEAR-END OPTIONS AT FISCAL YEAR -END
EXERCISE VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
NAME # $ # $
Dimon R. McFerson --- --- ---/--- ---/---
W. G. Jurgensen --- --- ---/--- ---/---
Joseph J. Gasper --- --- 500/2,000 ---/---
Robert J. Woodward, Jr --- --- ---/--- ---/---
Richard A Karas --- --- 400/1,600 ---/---
Mark R. Thresher --- --- 400/1,600 ---/---
L. PENSION PLANS
(i) Retirement Plan
Nationwide maintains a qualified defined-benefit plan, the
Nationwide Retirement Plan (the "Retirement Plan"). In general, a
participant's annual retirement benefit under the Retirement Plan
will be equal to the sum of:
- 1.25% of the participant's Final Average Compensation times
years of service (to a maximum of 35 years); and
- 0.50% of the participant's Final Average Compensation in
excess of Social Security Covered Compensation times years
of service (to a maximum of 35 years).
Final Average Compensation, for the portion of the participant's
benefit that is attributable to service on or after January 1,
1996, is the average of the highest five consecutive covered
compensation amounts of the participant in the participant's last
10 years of service. For the portion of a participant's benefit
attributable to service prior to January 1, 1996, Final Average
Compensation is the average of the highest three consecutive
covered compensation amounts of the participant in the
participant's last 10 years of service. Covered compensation, for
purposes of determining Final Average Compensation under either
method, is calculated on a calendar-year basis and includes
compensation from any member company of Nationwide. With respect
to Mr. Karas, because his compensation is allocated solely to
Nationwide Financial Services, Inc. and its subsidiaries, covered
compensation includes the compensation listed under the headings
Salary, Bonus and LTIP Payouts shown in the Summary Compensation
Table. Covered compensation for Messrs. McFerson, Jurgensen,
Gasper, Woodward and Thresher includes the amount set forth under
the headings Salary, Bonus and LTIP Payouts shown in the Summary
Compensation Table and additional compensation amounts received
for services rendered to other Nationwide companies. Social
Security Covered Compensation means the average of the Social
Security wage bases in effect during the 35-year period ending
with the last day of the year the participant attains Social
Security retirement age. The portion of a participant's benefit
attributable to years of service credited prior to 1996 is also
subject to post-retirement increases following the commencement of
benefits or the participant's attainment of age 65, whichever is
later.
A participant becomes fully vested after the completion of five
years of vesting service. The Retirement Plan generally provides
for payments to or on behalf of each vested participant upon such
participant's retirement on his or her normal retirement date or
later, although provision is made for payment of early retirement
benefits on a reduced basis commencing at age 55 for those
participants with 15 or more years of vesting service or at age 62
for those with 5 or more years of vesting service. The normal
retirement date under the Retirement Plan is the later of the date
the participant
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attains age 65 or completes five years of vesting service. Death
benefits are payable to a participant's spouse or, under certain
circumstances, the named beneficiary of a participant who dies
with a vested benefit under the Retirement Plan or while an
employee. The Retirement Plan also provides for the funding of
retiree medical benefits under Section 401(h) of the IRC.
(ii) Excess and Supplemental Plans
Nationwide maintains an unfunded, nonqualified defined-benefit
excess benefit plan, the Nationwide Excess Benefit Plan (the
"Nationwide Excess Plan") and an unfunded, nonqualified
defined-benefit supplemental benefit plan pursuant to which
certain participants may receive a supplemental retirement
benefit, the Nationwide Supplemental Retirement Plan (the
"Supplemental Plan"). Any participant whose benefits are limited
under the Retirement Plan by reason of limitations under IRC
Section 415 on the maximum benefit that may be paid under the
Retirement Plan will receive, under the Excess Plan, that portion
of the benefit that he or she would have been entitled to receive
under the Retirement Plan in the absence of such limitations.
Officers who earn in excess of $170,000 annually, have at least 5
years of vesting service and whose benefits under the Retirement
Plan are limited by reason of certain other limitations under the
IRC, may receive benefits under the Supplemental Plan. Benefits
under the Supplemental Plan will be the sum of:
- 1.25% of the participant's Final Average Compensation times
years of service (up to a maximum of 40 years); and
- 0.75% of the participant's Final Average Compensation in
excess of Social Security Covered Compensation times years
of service (up to a maximum of 40 years) reduced by benefits
accrued under the Retirement Plan and the Excess Plan.
The benefits under the Supplemental Plan, for individuals
participating in that plan on January 1, 1999, and the Excess Plan
vest at the same time as benefits vest under the Retirement Plan.
Benefits for all other participants in the Supplemental Plan vest
over a period of 5 years of participation in that plan.
The following chart indicates the estimated maximum annual
retirement benefits that a hypothetical participant would be
entitled to receive under the Retirement Plan, including payments
made under the Excess and Supplemental Plans, computed on a
straight-life annuity basis, if retirement occurred at age 65 and
the number of credited years of service and Final Average
Compensation equaled the amounts indicated. For purposes of the
chart, it is assumed that the Final Average Compensation is the
same whether measured over the three-year averaging period that
applies to service accumulated prior to 1996 or the five-year
period that applies to service accumulated after 1995. In actual
operation, the total benefit received under the Retirement Plan
(including payments made under the Excess and Supplemental Plans)
would be the total of the benefit determined based on years of
service earned under each method.
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YEARS OF SERVICE
FINAL AVERAGE
COMPENSATION 15 20 25 30 35
$125,000 $30,180 $40,240 $50,300 $60,360 $70,420
$150,000 36,743 48,990 61,238 73,482 85,733
$175,000 48,551 64,735 80,919 97,103 113,286
$200,000 56,051 74,735 93,419 112,103 130,786
$225,000 63,551 84,735 105,919 127,103 148,286
$250,000 71,051 94,735 118,419 142,103 165,786
$300,000 86,051 114,735 143,419 172,103 200,786
$350,000 101,051 134,735 168,419 202,103 235,786
$400,000 116,051 154,735 193,419 232,103 270,786
$450,000 131,051 174,735 218,419 262,103 305,786
$500,000 146,051 194,735 243,419 292,103 340,786
$700,000 206,051 274,735 343,419 412,103 480,786
$900,000 266,051 354,735 443,419 532,103 620,786
1,100,000 326,051 434,735 543,419 652,103 760,786
1,700,000 506,051 674,735 843,419 1,012,103 1,180,786
1,900,000 566,051 754,735 943,419 1,132,103 1,320,786
2,000,000 596,051 794,735 993,419 1,192,103 1,390,786
All Named Executive Officers have a portion or all of their
benefit calculated based on the post-1995 definition of Final
Average Compensation. As of December 31, 1995, the number of
credited years of service under the Retirement Plan for Messrs.
McFerson, Gasper, Woodward and Karas was 23 years, 29.5 years,
31.67 years and 31.5 years, respectively. Mr. Jurgensen and Mr.
Thresher had no credited service under the Retirement Plan at that
time. Mr. McFerson's credited years of service include 8.17 years
in excess of those actually earned through employment by the
Nationwide pursuant to an agreement with Nationwide Mutual
Insurance Company. The benefit attributable to those additional
years will be paid by Nationwide Mutual Insurance Company (not the
Retirement Plan) and is reduced by the benefit payable under the
retirement plan of Mr. McFerson's previous employer. Each of the
Named Executive Officers, other than Mr. Jurgensen and Mr.
Thresher, earned additional years of service in the years 1996
through 2000. Mr. Thresher began participation in the Retirement
Plan in 1997. Mr. Jurgensen will become eligible to participate in
the Retirement Plan in 2001, but is entitled, pursuant to an
agreement with Nationwide Mutual Insurance Company, to a
retirement benefit of 4% of his highest 5-year average
compensation for each full or partial year of service with
Nationwide, to a maximum of 16.25 years, if he completes at least
five years of service or becomes entitled to severance benefits
under the agreement. For purposes of such agreement, Mr.
Jurgensen's highest 5-year average compensation is the average of
his salary and incentive compensation over the five-year period,
or the period of his employment by Nationwide, if shorter, that
produces the highest average. This benefit is reduced by the
benefits received under the Retirement Plan, Supplemental Plan and
Excess Plan, as well as any benefit received under any defined
benefit pension plans maintained by Mr. Jurgensen's prior
employers, and will be paid by Nationwide Mutual Insurance Company
(not the Retirement Plan). The benefit of each Named Executive
Officer for the years since 1995 and all future years will be
calculated under the 5-year definition of Final Average
Compensation. Covered compensation paid by Nationwide Financial
Services, Inc. for the fiscal year ended December 31, 2000, for
Messrs. McFerson, Jurgensen, Gasper, Woodward, Karas and Thresher
was $1,488,747, $241,185,
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$1,529,207, $498,691, $770,162; and $527,231, respectively.
11. COMPENSATION COMMITTEE JOINT REPORT ON EXECUTIVE COMPENSATION
A. INTRODUCTION
Nationwide Financial Services, Inc. is 18.6% publicly owned. Nationwide
Mutual Insurance Company through a subsidiary, owns 81.4% of the
outstanding shares of the Nationwide Financial Services, Inc. Because
Nationwide is the principal operating subsidiary of Nationwide
Financial Services, Inc., the Nationwide Life Insurance Company
Compensation Committee (the "Nationwide Life Compensation Committee")
established all components of 2000 compensation for Nationwide
Financial Services, Inc.'s executive officers, with the exception of
stock-based incentive grants made by Nationwide Financial Services,
Inc.'s Compensation Committee under the LTEP.
Dimon R. McFerson, Nationwide Financial Services, Inc.'s Chairman and
Chief Executive Officer through July 31, 2000, served also in the same
capacity for Nationwide. Effective August 1, 2000, Mr. McFerson's title
was changed to Chairman for Nationwide Financial Services, Inc., as
well as for Nationwide. Mr. McFerson remained as Chairman of Nationwide
Financial Services, Inc.and Nationwide until his retirement on December
30, 2000. Effective May 26, 2000, W. G. Jurgensen was named Chief
Executive Officer-Elect for Nationwide Financial Services, Inc. and for
Nationwide, and effective August 1, 2000, was named Chief Executive
Officer for both companies. In January 2001, Mr. Jurgensen was named
Chairman of the Board and Chief Executive Officer of Nationwide
Financial Services, Inc. Robert J. Woodward, Jr., Nationwide Financial
Services, Inc.'s Executive Vice President - Chief Investment Officer,
serves also in the same capacity for Nationwide. Pursuant to the Cost
Sharing Agreement, compensation for Messrs. McFerson, Jurgensen,
Gasper, Woodward and Thresher is allocated among the companies in
Nationwide Mutual Insurance Company for whom services are performed.
The amounts are paid by Nationwide Mutual Insurance Company or
Nationwide and reimbursed by the other companies in accordance with the
terms of the Cost Sharing Agreement. The 2000 compensation for Messrs.
McFerson, Jurgensen, Gasper, Woodward, and Thresher reported in the
compensation tables and discussed in this report is the amount
allocated to Nationwide Financial Services, Inc. and its subsidiaries
under the Cost Sharing Agreement and is solely for services rendered to
Nationwide Financial Services, Inc. and its subsidiaries. Compensation
for Mr. Karas in the compensation tables was not allocated and is his
aggregate 2000 compensation for services rendered to Nationwide
Financial Services, Inc. and its subsidiaries.
The Nationwide Life Compensation Committee and Nationwide Financial
Services, Inc.'s Compensation Committee are both comprised solely of
non-employee directors.
B. COMPENSATION PHILOSOPHY AND OBJECTIVES
The Nationwide Life Compensation Committee and the Nationwide Financial
Services, Inc.'s Compensation Committee (collectively referred to
herein as the "Compensation Committees") believe that the compensation
program for Nationwide Financial Services, Inc.'s executive officers
should support Nationwide Financial Services, Inc.'s and Nationwide's
vision and business strategies. In addition, compensation should be
determined within a competitive framework based on overall financial
results, business unit results, teamwork, and individual contributions
that help build value for Nationwide Financial Services, Inc.'s
stockholders. The primary objectives of the compensation program are
to:
- Provide a direct link between pay and performance;
- Allocate a larger percentage of executive compensation to
pay that is at-risk in order to positively influence
behavior and support accountability;
- Attract, retain and motivate top-caliber employees required
for new business directions;
- Offer total compensation opportunities that are fully
competitive with the appropriate external markets in design
and pay level; and
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- Emphasize the need to focus on stockholder value, in
addition to providing-competitive value to customers.
As part of the overall compensation philosophy, the Compensation
Committees have determined that total compensation and each of the
elements that comprise total compensation (base salary, annual
incentives, long term incentives) should be targeted at the 50th
percentile of the market. The Compensation Committees believe that
differences in individual performance should result in significantly
different levels of compensation. Therefore, individual pay delivered
may be higher or lower than the 50th percentile of the market,
depending on individual performance.
Competitive market data is provided to the Compensation Committees by
independent compensation consultants. This data compares Nationwide
Financial Services, Inc.'s and Nationwide's compensation practices to
various groups of comparator companies. These comparator companies
compete with Nationwide Financial Services, Inc. for customers, capital
and employees, and are comparable to Nationwide Financial Services,
Inc. in size, scope and business focus. This group includes both
multi-line insurers and diversified financial organizations.
The companies chosen for the compensation comparator group are not
necessarily the same companies that comprise the peer group of
Nationwide Financial Services, Inc. The compensation comparator group
includes more companies than those in the peer group because it gives
the Compensation Committees a broader database for comparison purposes.
C. ELEMENTS OF 2000 EXECUTIVE COMPENSATION
The key elements of Nationwide Financial Services, Inc.'s executive
compensation program are base salary, annual and long-term incentives.
The following discussion relates to Nationwide Financial Services,
Inc.'s executive officers other than Mr. McFerson and Mr. Jurgensen,
whose compensation is discussed separately in the Compensation of the
Chief Executive Officers.
D. BASE SALARIES
Base salaries offer security to executives and allow Nationwide
Financial Services, Inc. to attract competent executive talent and
maintain a stable management team. They also allow executives to be
rewarded for individual performance and encourage the development of
executives. Pay for individual performance rewards executives for
achieving goals that may not be immediately evident in common financial
measurements.
Base salaries for executive officers are initially determined by
evaluating executives' levels of responsibility, prior experience,
breadth of knowledge, internal equity and external pay practices.
In determining increases to base salaries for 2000, the Nationwide Life
Compensation Committee considered relevant external market data, as
described above in Compensation Philosophy and Objectives. However,
increases to base salaries were driven primarily by individual
performance that was evaluated based on levels of individual
contribution to Nationwide Financial Services, Inc. and Nationwide.
When evaluating individual performance, the Nationwide Life
Compensation Committee considered, among other things, the executive's
efforts towards financial results and strategic initiatives, as well as
their efforts in promoting the values of Nationwide Financial Services,
Inc. and Nationwide; continuing educational and management training;
product innovation; developing relationships with customers,
distributors and employees; and demonstrating leadership abilities
among coworkers. No specific formula was used in evaluating individual
performance, and the weighting given to each factor with respect to
each executive officer was within the individual discretion and
judgment of each member of the Nationwide Life Compensation Committee.
Base salaries for the executive officers, including promotion and
market competitive-driven increases, were increased in 2000 by an
average of 9.4%, a rate comparable to the base salary increases
provided at comparator companies. Executive officer salaries were
established at a level that is consistent with the
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goals stated in Compensation Philosophy and Objectives.
E. ANNUAL INCENTIVE COMPENSATION
The Performance Incentive Plan and Office of Investments Incentive Plan
promote the pay-for-performance philosophy of the Compensation
Committees by providing executives with direct financial rewards in the
form of annual cash incentives. Awards for 2000 were based on return on
equity, earnings and revenue growth and other key financial measures,
financial and operational comparison to external peer competitors, the
extent of accomplishment of strategic initiatives, and other factors
and results impacting performance for Nationwide Financial Services,
Inc. and Nationwide and further based upon individual employee
performance.
Each year, the Nationwide Life Compensation Committee establishes many
specific performance measures used for the Performance Incentive Plan.
Participants are provided a target incentive opportunity that
represents a percentage of their base salary. In 2000, individual
targets for the Named Executive Officers other than the chief executive
officers ranged from 55% to 125% of base salary. Individual payouts
under the Performance Incentive Plan may range from zero to no maximum
factor of the individual's target incentive amount, depending on the
achievement of the performance measures. For 2000, the excellent
results achieved for the return on equity, the earnings and revenue
growth, and other financial and strategic performance measures of
Nationwide Financial Services, Inc. resulted in a payout of 140% of
target for Mr. Gasper and an average of 169% of target for Messrs.
Woodward, Karas and Thresher. These amounts are reflected in the Bonus
column in the Summary Compensation Table.
F. LONG-TERM INCENTIVE COMPENSATION
In keeping with the philosophy of the Compensation Committees to
provide a total compensation package that favors at-risk components of
pay, long-term incentives comprise a significant portion of an
executive's total compensation package. When determining long-term
incentive award sizes, the Compensation Committees consider the
executives' levels of responsibility, position within Nationwide
Financial Services, Inc., prior experience, historical award data,
various performance criteria, and compensation practices at comparator
companies.
The Compensation Committees utilize the long-term incentive plan
described below. This plan is designed to achieve a balance between
market pay orientation and alignment of executive interests with that
of stockholders.
G. NATIONWIDE FINANCIAL SERVICES, INC. 1996 LONG-TERM EQUITY COMPENSATION
PLAN
The LTEP authorizes grants of stock options, stock appreciation rights,
restricted stock and performance awards. The objectives of the LTEP are
to encourage high levels of performance by selected officers, directors
and employees of Nationwide Financial Services, Inc. and certain of its
affiliates, to attract and retain the services of such individuals, and
to align the interests of such individuals with those of the
stockholders.
During February 2000, the Nationwide Financial Services, Inc.
Compensation Committee made grants to executive officers and others
under the LTEP. Award sizes were determined based on competitive equity
grant practices using the median practices at comparator companies and
the individual's impact on Nationwide Financial Services, Inc.'s
performance and were determined consistent with the goals stated in
Compensation Philosophy and Objectives. The grants were awarded in
nonqualified stock options that have an exercise price equal to the
fair market value of Nationwide Financial Services, Inc.'s Class A
Common Stock on the date of the option grant, as well as restricted
stock grants. The options become exercisable in equal installments over
a three-year term, and expire ten years after the date of grant, and
the restricted stock vests at the end of a three-year period.
H. COMPENSATION OF THE CHIEF EXECUTIVE OFFICERS
Dimon R. McFerson served as Nationwide Financial Services, Inc.'s
Chairman and Chief Executive Officer, as well as in the same capacity
for Nationwide, through July 31, 2000.
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He retained the title of Chairman until his retirement on December 30,
2000. W. G. Jurgensen assumed the role of Nationwide Financial
Services, Inc.'s Chief Executive Officer - Elect, and the same capacity
for Nationwide, beginning May 26, 2000, and was named Chief Executive
Officer for both companies beginning August 1, 2000. In January 2001,
Mr. Jurgensen was named Chairman of the Board and Chief Executive
Officer of Nationwide Financial Services, Inc. Except for grants made
under the LTEP in February 2000 by Nationwide Financial Services,
Inc.'s Compensation Committee, and an LTEP grant made to Mr. Jurgensen
upon hire, all components of both Messrs. McFerson and Jurgensen's
compensation for 2000 were established by the Nationwide Life
Compensation Committee.
As discussed in the Introduction, a portion of Messrs. McFerson and
Jurgensen's annual compensation is allocated to Nationwide Financial
Services, Inc. for services rendered to Nationwide Financial Services,
Inc., based on the time Messrs. McFerson and Jurgensen devote to their
responsibilities with Nationwide Financial Services, Inc. The
compensation reported for Messrs. McFerson and Jurgensen in the
compensation tables and discussed in this report represents amounts
paid for Mr. McFerson's services as Chairman and Chief Executive
Officer of Nationwide Financial Services, Inc. and its subsidiaries
prior to August 1, 2000 and Chairman until his retirement on December
30, 2000, and for Mr. Jurgensen's services as Chief Executive Officer -
Elect of Nationwide Financial Services, Inc. and its subsidiaries
beginning May 26, 2000, and then as Chief Executive Officer from August
1, 2000.
Mr. McFerson's 2000 compensation was determined pursuant to the same
philosophy and objectives described earlier in this report and used for
all executive officers. In determining the compensation of Mr. McFerson
for 2000, the Nationwide Life Compensation Committee reviewed the
strong financial results of Nationwide Financial Services, Inc. for
1999, Mr. McFerson's superior leadership of the Nationwide companies
since 1992, his extensive experience in the industry, and his
successful efforts in Nationwide Financial Services, Inc. The portion
of Mr. McFerson's base salary compensation allocated to Nationwide
Financial Services, Inc. totaled $475,471 in 2000, an increase of 1.8%
over 1999. This increase reflects an increase in the cost allocation.
In 2000, Mr. McFerson's annual base salary rate was unchanged. This
salary positioned Mr. McFerson's base salary compensation at
approximately the 50th percentile of the comparator companies. All
elements of Mr. Jurgensen's 2000 compensation were determined pursuant
to his employment agreement with Nationwide Mutual Insurance Company
when he assumed the role of Chief Executive Officer for Nationwide
Financial Services, Inc. effective August 1, 2000. The portion of Mr.
Jurgensen's annual base salary compensation allocated to Nationwide
Financial Services, Inc. for 2000 was $230,290, which was prorated. The
basis for determination of Mr. Jurgensen's base salary is competitive
market data from peer companies, in addition to his financial industry
experience, and is consistent with the goals stated in Compensation
Philosophy and Objectives.
The portion of Mr. McFerson's annual incentive award allocated to
Nationwide Financial Services, Inc. earned in 2000 under the
Performance Incentive Plan was $1,259,550. This award was 265% of his
allocated base salary compensation and reflected 180% of his target
incentive. This payment was determined by the level of achievement of
specified financial, operational and strategic goals as assessed by the
Nationwide Board of Directors in their annual performance evaluation of
Mr. McFerson. The portion of Mr. Jurgensen's annual incentive award
allocated to Nationwide Financial Services, Inc. earned in 2000 under
the Performance Incentive Plan was $951,660. This award was 240% of his
allocated base salary compensation, without consideration of proration,
and reflected 160% of his target incentive. This payment was determined
by the level of achievement of specified financial, operational and
strategic goals as assessed by the Nationwide Board of Directors in
their annual performance evaluation of Mr. Jurgensen.
Under the LTEP, Nationwide Financial Services, Inc.'s Compensation
Committee
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granted Mr. McFerson 65,000 stock options and 32,500 restricted stock
shares. For these grants the Nationwide Financial Services, Inc.'s
Compensation Committee took into account Mr. McFerson's role in the
continued strategic positioning of Nationwide Financial Services, Inc.
In addition, under his employment agreement with Nationwide Mutual
Insurance Company, Mr. Jurgensen received 210,000 stock options and
25,000 restricted stock shares. These grants reflect the competitive
levels of long-term compensation for Chief Executive Officers of major
diversified insurance and financial services organizations with similar
size and scope. Nationwide Financial Services, Inc.'s Compensation
Committee reflected Nationwide Financial Services, Inc.'s desire to
have top officers build a significant personal level of stock ownership
in Nationwide Financial Services, Inc., so as to better align their
interests with those of other stockholders.
I. POLICY ON DEDUCTIBILITY OF COMPENSATION
Section 162(m) of the IRC provides that executive compensation in
excess of $1 million paid to a "covered employee," as that term is
defined in this section, in any calendar year is not deductible for
purposes of corporate income taxes unless it is performance-based
compensation and is paid pursuant to a plan meeting certain
requirements of the IRC. The Compensation Committees intend to continue
increased reliance on performance-based compensation programs. Such
programs will be designed to fulfill, in the best possible manner,
future corporate business objectives. To the extent consistent with
this goal, the Compensation Committees currently anticipate that such
programs will also be designed to satisfy the requirements of Section
162(m) of the IRC with respect to the deductibility of compensation
paid. However, the Compensation Committees may award compensation that
is not fully deductible if the Compensation Committees determine that
such award is consistent with their philosophy and in the best
interests of Nationwide Financial Services, Inc. and its stockholders.
(i) Nationwide Financial Services, Inc.'s Compensation Committee
David O. Miller, Chairman
James G. Brocksmith, Jr.
Charles L. Fuellgraf, Jr.
Donald L. McWhorter
(ii) Nationwide Life Insurance Company Compensation Committee
Willard J. Engel, Chairman
Nancy C. Breit
Fred C. Finney
Robert L. Stewart
J. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information regarding beneficial
ownership of:
(i) each person who is known by the Company to be the beneficial
owner of more than five percent of either class of Common
Stock,
(ii) each director and nominee for director,
(iii) each of the Named Executive Officers, and
(iv) all of the directors and executive officers of the Company as
a group.
The Class B Common Stock is convertible into Class A Common Stock at
any time by the holder on the basis of one share of Class A Common
Stock for each share of Class B Common Stock converted.
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CLASS A COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP PERCENT OF CLASS
Neuberger Berman Inc.(1) 1,566,700 6.54%
605 Third Ave.
New York, NY 10158-3698
Massachusetts Financial Services Company(2) 1,451,475 6.1 %
500 Boylston Street
Boston, MA 0216
(1) Based on a Schedule 13G dated February 2, 2001, Neuberger Berman Inc.
reported shared voting power with respect to 1,565,700 and shared
dispositive power with respect to 1,566,700 shares.
(2) Based on a Schedule 13G dated February 12, 2001, Massachusetts
Financial Services Company reported sole voting power and sole
dispositive power with respect to 1,451,475 shares.
CLASS B COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP PERCENT OF CLASS
Nationwide Corporation 104,745,000 100%
One Nationwide Plaza
Columbus, Ohio 43215
The table below sets forth the number of shares of stock of the Company
owned beneficially at March 12, 2001, by the directors, each nominee for
director, each Named Executive Officer and all directors and executive
officers of the Company as a group.
SECURITY OWNERSHIP
AMOUNT AND NATURE OF BENEFICIAL OPTIONS EXERCISABLE WITHIN
NAME OF BENEFICIAL OWNER OWNERSHIP(1,2 AND 4) 60 DAYS
James G. Brocksmith, Jr. 4,880 1,666
Charles L. Fuellgraf, Jr. 19,0043 3,166
Joseph J. Gasper 195,173 137,200
Henry S. Holloway 8,959 3,166
W. G. Jurgensen 25,000 ---
Richard A. Karas 71,737 54,133
Lydia M. Marshall 6,634 1,166
Dimon R. McFerson 324,379 272,200
Donald L. McWhorter 5,959 1,166
David O. Miller 7,943 3,166
James F. Patterson 7,752 3,166
Gerald D. Prothro 4,959 1,166
Arden L. Shisler 8,959 3,166
Mark R. Thresher 39,009 26,300
Robert J. Woodward, Jr. 54,782 38,333
Directors and Executive Officers as a Group (Total of 31) 1,297,057 840,783
(1) The shares of the Company's Class A Common Stock beneficially owned by
each person named above do not exceed one percent of the outstanding
shares of Class A Common Stock as of March 12, 2001, except Mr.
McFerson and the shares beneficially owned by the group of directors
and executive officers as a whole which represents 1.3% and 5.2%,
respectively.
(2) Total includes options exercisable within 60 days.
(3) Includes 2,000 shares held by spouse and 2,000 shares held in a
limited liability partnership.
(4) Total includes shares jointly owned with spouse for the following
persons: Mr. Gasper - 17,972 shares; Mr. Holloway - 2,000 shares, Mr.
McFerson - 52,179 shares; Mr. Patterson - 1,000 shares; Mr. Thresher -
6,009.
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K. CERTAIN RELATIONSHIPS AND OTHER TRANSACTIONS
(i) Intercompany Agreement
The Company, Nationwide Mutual and Nationwide Corporation entered
into an Intercompany Agreement, certain provisions of which are
summarized below (the "Intercompany Agreement"). As used herein,
"Nationwide Mutual" means Nationwide Mutual collectively with its
subsidiaries and affiliates (other than the Company and its
subsidiaries).
Nationwide Mutual Consent to Certain Events. The Intercompany
Agreement provides that until Nationwide Mutual ceases to control
at least 50% of the combined voting power of the outstanding
voting stock of the Company, the prior written consent of
Nationwide Mutual will be required for:
(i) any consolidation or merger of the Company or any of its
subsidiaries with any person (other than with a
wholly-owned subsidiary);
(ii) any sale, lease, exchange or other disposition or
acquisition of assets by the Company or any of its
subsidiaries (other than transactions to which the Company
and its subsidiaries are the only parties), or any series
of related dispositions or acquisitions involving
consideration in excess of $250 million;
(iii) any change in the authorized capital stock of the Company
or the creation of any additional class or series of
capital stock of the Company;
(iv) any issuance by the Company or any subsidiary of the
Company of any equity securities or rights, warrants or
options to purchase such equity securities, except
(a) shares of Class A Common Stock pursuant to employee
and director stock option, profit-sharing and other
benefit plans of the Company and its subsidiaries
and any options exercisable therefore,
(b) shares of Class A Common Stock issued upon the
conversion of any Class B Common Stock,
(c) the issuance of shares of capital stock of a
wholly-owned subsidiary of the Company to the
Company or another wholly-owned subsidiary of the
Company and
(d) in the public offering of Class A Common Stock in
March 1997;
(v) the dissolution, liquidation or winding up of the Company;
(vi) the amendment of the Certificate of Incorporation and
certain provisions of the Bylaws affecting corporate
governance; (vii) the election, removal or filling of a
vacancy in the office of the Chairman, Chief Executive
Officer or President of the Company;
(viii) the declaration of dividends on any class or series of
capital stock of the Company, except dividends not in
excess of the most recent regular cash dividend or any
dividend per share not in excess of 15% of the then
current per share market price of the Class A Common
Stock;
(ix) capital expenditures or series of related capital
expenditures of the Company or any of its subsidiaries in
excess of $250 million during any period of 12 consecutive
months;
(x) the creation, incurrence or guaranty by the Company or any
of its subsidiaries of indebtedness for borrowed money in
excess of $100 million, except in connection with the
Capital Securities and the Senior Notes; and
(xi) any change in the number of directors on the Board of
Directors of the Company, the determination of members of
the Board of Directors or any committee thereof and the
filling of newly created memberships and vacancies on the
Board of Directors or any committee thereof.
License to Use Nationwide Name and Service Marks. Pursuant to the
Intercompany Agreement, Nationwide Mutual granted to the Company
and certain of its subsidiaries a non-exclusive, nonassignable,
revocable
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license to use the "Nationwide" trade name and certain other
service marks specifically identified in the Intercompany
Agreement (collectively, the "Service Marks") solely for the
purpose of identifying and advertising the Company's long-term
savings and retirement business and activities related to such
business.
Equity Purchase Rights. The Company has agreed that, to the extent
permitted by the New York Stock Exchange (the "NYSE") and so long
as Nationwide Mutual controls at least 50% of the combined voting
power of the outstanding voting stock of the Company, Nationwide
Corporation may purchase its pro rata share (based on its then
current percentage voting interest in the Company) of any voting
equity securities to be issued by the Company (excluding any such
securities offered pursuant to employee stock options or other
benefit plans, dividend reinvestment plans and other offerings
other than for cash).
Registration Rights. The Company has granted to Nationwide
Corporation certain demand and "piggyback" registration rights
with respect to shares of Common Stock owned by it. Nationwide
Corporation has the right to request up to two demand
registrations in each calendar year, but not more than four in any
five-year period. Nationwide Corporation will also have the right,
which it may exercise at any time and from time to time, to
include the shares of Common Stock held by it in any registration
of common equity securities of the Company, initiated by the
Company on its own behalf or on behalf of any other stockholders
of the Company. These rights are subject to certain "blackout"
provisions. Such registration rights are transferable by
Nationwide Corporation.
Nationwide Mutual Agents. In the Intercompany Agreement,
Nationwide Mutual has agreed to allow the Company to distribute
its variable annuity, fixed annuity and individual universal,
variable and traditional life insurance products through
Nationwide Mutual agents. Such right is exclusive to the Company,
subject to the limited right of certain companies of Nationwide to
sell such products through the agency force, for at least five
years following the equity offerings.
(ii) Federal Income Taxes
The Company is included in the consolidated United States federal
income tax return for which Nationwide Mutual is the common parent
and the Company's tax liability will be included in the
consolidated federal income tax liability of Nationwide Mutual.
The Company also may be included in certain state and local tax
returns of Nationwide Mutual or its subsidiaries.
The Company is a party to an agreement, with Nationwide Mutual and
the other companies in the consolidated returns of Nationwide
Mutual, to determine the manner in which their respective tax
liabilities will be determined (the "Tax Sharing Agreement") for
1996 and subsequent years, as long as the Company is included in
the consolidated federal income tax return for Nationwide Mutual.
It will also be effective for any year in which the Company is
included in a consolidated or combined state or local tax return.
Under the Tax Sharing Agreement, the Company will pay to
Nationwide Mutual amounts equal to the taxes that the Company
would otherwise have to pay if the Company were to file a separate
federal income, or a separate state or local income or franchise,
tax return (including any amounts determined to be due as a result
of a redetermination of the tax liability of the consolidated or
combined group of which Nationwide Mutual is the common parent
arising from any audit or otherwise). The Company will be
responsible for all taxes, including assessments, if any, for
prior years with respect to all other taxes payable by the Company
or any of its subsidiaries, and for all other federal, state and
local taxes that may be imposed upon the Company and that are not
addressed in the Tax Sharing Agreement.
By virtue of its control of the Company and the terms of the Tax
Sharing Agreement, Nationwide Mutual effectively controls all of
the Company's tax decisions. Under the Tax Sharing Agreement,
Nationwide Mutual will have sole authority to respond to and
conduct
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all tax proceedings (including tax audits) relating to the
Company, to file all returns on behalf of the Company, and to
determine the amount of the Company's liability to (or entitlement
to payment from) Nationwide Mutual under the Tax Sharing
Agreement. This arrangement may result in conflicts of interest
between the Company and Nationwide Mutual. For example, under the
Tax Sharing Agreement, Nationwide Mutual may choose to consent,
compromise or settle any adjustment or deficiency proposed by the
relevant tax authority in a manner that may be beneficial to
Nationwide Mutual and detrimental to the Company. Under the Tax
Sharing Agreement, however, Nationwide Mutual is obligated to act
in good faith with regard to all persons included in the
applicable returns.
The Tax Sharing Agreement may not be amended without the prior
written consent of the Company.
(iii) Lease
Pursuant to an arrangement between Nationwide Mutual and certain
of its subsidiaries, during 2000 the Company leased on average
approximately 757,570 square feet of office space primarily in the
four building home office complex in Columbus, Ohio. This office
space was leased at current market rates ranging from $18.98 -
$20.50 per square foot plus an occupancy charge of $1.84 per
square foot per year. Under the arrangement, the Company
determines the amount of office space necessary to conduct its
operations and leases such space from Nationwide Mutual, subject
to availability. For the years ended December 31, 2000, 1999 and
1998, the Company made payments to Nationwide Mutual and its
subsidiaries totaling $14.3 million, $11.4 million and $9.2
million, respectively, under such arrangement.
(iv) Modified Coinsurance Agreements
Effective as of January 1, 1996, Nationwide Life entered into a
100% modified coinsurance agreement with Employers Life Insurance
Company of Wausau ("ELOW"). Under the agreement, Nationwide Life
ceded to ELOW and ELOW assumed Nationwide Life's non-variable
group and wholesale life insurance business and group and
franchise health insurance business and any ceded or assumed
reinsurance applicable to such group business. Effective July 1,
1999, the modified coinsurance agreement was terminated. Revenues
ceded to ELOW for years ended December 31, 1999 and 1998 were
$35.8 million and $101.2 million, respectively, while benefits,
claims and expenses ceded were $46.2 million and $160.5 million,
respectively.
Effective as of January 1, 1996, Nationwide Life also entered into
a 100% modified coinsurance agreement with Nationwide Mutual.
Under the agreement, Nationwide Life cedes to Nationwide Mutual
and Nationwide Mutual assumes Nationwide Life's individual
accident and health insurance business and any ceded or assumed
reinsurance applicable to such individual business. Effective July
1, 1999, the modified coinsurance agreement was amended to include
Nationwide Life's group and franchise health insurance business
and any ceded or assumed reinsurance applicable to such group
business. Revenues ceded to Nationwide Mutual for the years ended
December 31, 2000, 1999 and 1998 were $170.1 million, $157.2
million and $115.7 million, respectively, while benefits, claims
and expenses ceded were $168.0 million, $151.0 million and $98.8
million, respectively.
(v) Cost Sharing Agreement
Pursuant to a cost sharing agreement among Nationwide Mutual and
certain of its direct and indirect subsidiaries, including the
Company, Nationwide Mutual provides certain operational and
administrative services, such as sales support, advertising,
personnel and general management services, to those subsidiaries.
Expenses covered by such agreement are subject to allocation among
Nationwide Mutual and such subsidiaries. Measures used to allocate
expenses among companies include individual employee estimates of
time spent, special cost studies, salary expense, commission
expense and other methods agreed to by the participating companies
that
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are within industry guidelines and practices. In addition,
beginning in 1999 Nationwide Services Company, a subsidiary of
Nationwide Mutual provides computer, telephone, mail, employee
benefits administration, and other services to Nationwide Mutual
and certain of its direct and indirect subsidiaries, including the
Company, based on specified rates for units of service consumed.
For the years ended December 31, 2000, 1999 and 1998, the Company
made payments to Nationwide Mutual and Nationwide Services Company
totaling $156.6 million, $132.3 million and $95.0 million,
respectively. The Company does not believe that expenses
recognized under these agreements are materially different than
expenses that would have been recognized had the Company operated
on a stand-alone basis.
(vi) Cash Management Agreements
Nationwide Mutual has entered into an Investment Agency Agreement
with Nationwide Cash Management Company ("NCMC"), an affiliate of
the Company. NCMC makes, holds and administers short-term
investments (those maturing in one year or less) for Nationwide
Mutual and certain of its affiliates, including Nationwide Life
and certain of the Company's other subsidiaries. Under the
agreements, expenses of NCMC are allocated pro rata among the
participants based upon the participant's ownership percentage of
total assets held by NCMC. For the year ending December 31, 2000
and 1999, the Company paid NCMC fees and expenses totaling
$412,981 and $322,927, respectively, under such agreements.
(vii) Repurchase Agreement
Nationwide Life and certain of the Company's other subsidiaries
are parties to Master Repurchase Agreements with various
affiliates pursuant to which securities or other financial
instruments are transferred between parties against the transfer
of funds by the transferee upon the demand of either party.
(viii) Transactions With Management And Others
Joseph J. Gasper, President and Chief Operating Officer and
Director of the Company and Richard A. Karas, Senior Vice
President - Sales - Financial Services of the Company are limited
partners in Country Club Properties LP, which holds a 50% interest
in NRI-CCP I, LLC, a Delaware limited liability company, 50% of
which is owned by Nationwide Realty Investors, LTD. Nationwide
Realty Investors, LTD is owned 70% by Nationwide Life and 30% by
Nationwide Mutual. Nationwide Life is a wholly owned subsidiary of
the Company.
The general partner of Country Club Properties LP is La Quinta
Land Partners LLC. NRI-CCP I, LLC was formed for the purpose of
acquiring 960 acres of land in La Quinta, California for the
development of residential lots and three golf courses. The land
was acquired by NRI-CCP I, LLC on June 15, 2000. Mr. Gasper and
Mr. Karas each purchased their Limited Partnership Interests in
Country Club Properties LP (the "Limited Partnership Interest") on
March 11, 1999, at a cost of $125,000. Each of Mr. Gasper's and
Mr. Karas' Limited Partnership Interest represents less than one
percent of the partnership. Mr. Gasper and Mr. Karas are entitled
to a share of partnership distributions and a lifetime membership
in several golf courses to be developed. The golf membership is
transferable upon death.
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12. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
(1) Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Income for the years ended December 31,
2000, 1999 and 1998
Consolidated Statements of Shareholder's Equity for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December
31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule I Consolidated Summary of Investments - Other Than
Investments in Related Parties as of December 31, 2000
Schedule III Supplementary Insurance Information as of December 31,
2000, 1999 and 1998 and for each of the years then
ended
Schedule IV Reinsurance as of December 31, 2000, 1999 and 1998 and
for each of the years then ended
Schedule V Valuation and Qualifying Accounts for the years ended
December 31, 2000, 1999 and 1998
All other schedules are omitted because they are not applicable or
required or because the required information has been included in
the audited consolidated financial statements or notes thereto.
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
Nationwide Life Insurance Company:
We have audited the consolidated financial statements of Nationwide Life
Insurance Company (the Company) and subsidiaries as listed in the accompanying
index. In connection with our audits of the consolidated financial statements,
we also have audited the financial statement schedules as listed in the
accompanying index. These 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG LLP
Columbus, Ohio
January 26, 2001
57
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
(in millions, except per share amounts)
December 31,
------------------------------------
2000 1999
============================================================================================================================
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities $ 15,443.0 $ 15,294.0
Equity securities 109.0 92.9
Mortgage loans on real estate, net 6,168.3 5,786.3
Real estate, net 310.7 254.8
Policy loans 562.6 519.6
Other long-term investments 101.8 73.8
Short-term investments 442.6 416.0
- ----------------------------------------------------------------------------------------------------------------------------
23,138.0 22,437.4
- ----------------------------------------------------------------------------------------------------------------------------
Cash 18.4 4.8
Accrued investment income 251.4 238.6
Deferred policy acquisition costs 2,865.6 2,554.1
Other assets 396.7 305.9
Assets held in separate accounts 65,897.2 67,135.1
- ----------------------------------------------------------------------------------------------------------------------------
$ 92,567.3 $ 92,675.9
============================================================================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims $ 22,183.6 $ 21,861.6
Short-term borrowings 118.7 -
Other liabilities 1,164.9 914.2
Liabilities related to separate accounts 65,897.2 67,135.1
- ----------------------------------------------------------------------------------------------------------------------------
89,364.4 89,910.9
- ----------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 9 and 14)
Shareholder's equity:
Common stock, $1 par value. Authorized 5.0 million shares;
3.8 million shares issued and outstanding 3.8 3.8
Additional paid-in capital 646.1 766.1
Retained earnings 2,436.3 2,011.0
Accumulated other comprehensive income (loss) 116.7 (15.9)
- ----------------------------------------------------------------------------------------------------------------------------
3,202.9 2,765.0
- ----------------------------------------------------------------------------------------------------------------------------
$ 92,567.3 $ 92,675.9
============================================================================================================================
See accompanying notes to consolidated financial statements.
58
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Income
(in millions)
Years ended December 31,
---------------------------------------------
2000 1999 1998
===========================================================================================================================
Revenues:
Policy charges $ 1,091.4 $ 895.5 $ 698.9
Life insurance premiums 240.0 220.8 200.0
Net investment income 1,654.9 1,520.8 1,481.6
Realized (losses) gains on investments (19.4) (11.6) 28.4
Other 17.0 66.1 66.8
- ---------------------------------------------------------------------------------------------------------------------------
2,983.9 2,691.6 2,475.7
- ---------------------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Interest credited to policyholder account balances 1,182.4 1,096.3 1,069.0
Other benefits and claims 241.6 210.4 175.8
Policyholder dividends on participating policies 44.5 42.4 39.6
Amortization of deferred policy acquisition costs 352.1 272.6 214.5
Interest expense on short-term borrowings 1.3 - -
Other operating expenses 479.0 463.4 419.7
- ---------------------------------------------------------------------------------------------------------------------------
2,300.9 2,085.1 1,918.6
- ---------------------------------------------------------------------------------------------------------------------------
Income before federal income tax expense 683.0 606.5 557.1
Federal income tax expense 207.7 201.4 190.4
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 475.3 $ 405.1 $ 366.7
===========================================================================================================================
See accompanying notes to consolidated financial statements.
59
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
Years ended December 31, 2000, 1999 and 1998
(in millions)
Accumulated
Additional other Total
Common paid-in Retained comprehensive shareholder's
stock capital earnings income (loss) equity
=========================================================================================================================
December 31, 1997 $ 3.8 $ 914.7 $ 1,312.3 $ 247.1 $ 2,477.9
Comprehensive income:
Net income - - 366.7 - 366.7
Net unrealized gains on securities
available-for-sale arising during
the year - - - 28.5 28.5
---------------
Total comprehensive income 395.2
---------------
Dividend to shareholder - - (100.0) - (100.0)
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1998 3.8 914.7 1,579.0 275.6 2,773.1
=========================================================================================================================
Comprehensive income:
Net income - - 405.1 - 405.1
Net unrealized losses on securities
available-for-sale arising during
the year - - - (315.0) (315.0)
---------------
Total comprehensive income 90.1
---------------
Capital contribution - 26.4 87.9 23.5 137.8
Return of capital to shareholder - (175.0) - - (175.0)
Dividends to shareholder - - (61.0) - (61.0)
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1999 3.8 766.1 2,011.0 (15.9) 2,765.0
=========================================================================================================================
Comprehensive income:
Net income - - 475.3 - 475.3
Net unrealized gains on securities
available-for-sale arising during
the year - - - 132.6 132.6
---------------
Total comprehensive income 607.9
---------------
Return of capital to shareholder - (120.0) - - (120.0)
Dividends to shareholder - - (50.0) - (50.0)
- -------------------------------------------------------------------------------------------------------------------------
December 31, 2000 $ 3.8 $ 646.1 $ 2,436.3 $ 116.7 $ 3,202.9
=========================================================================================================================
See accompanying notes to consolidated financial statements.
60
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(in millions)
Years ended December 31,
----------------------------------------------
2000 1999 1998
==============================================================================================================================
Cash flows from operating activities:
Net income $ 475.3 $ 405.1 $ 366.7
Adjustments to reconcile net income to net cash provided by operating
activities:
Interest credited to policyholder account balances 1,182.4 1,096.3 1,069.0
Capitalization of deferred policy acquisition costs (778.9) (637.0) (584.2)
Amortization of deferred policy acquisition costs 352.1 272.6 214.5
Amortization and depreciation (12.7) 2.4 (8.5)
Realized losses (gains) on invested assets, net 19.4 11.6 (28.4)
Increase in accrued investment income (12.8) (7.9) (8.2)
(Increase) decrease in other assets (92.0) 122.9 16.4
Decrease in policy liabilities (0.3) (20.9) (8.3)
Increase (decrease) in other liabilities 229.3 149.7 (34.8)
Other, net 22.3 (8.6) (11.3)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,384.1 1,386.2 982.9
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale 2,988.7 2,307.9 1,557.0
Proceeds from sale of securities available-for-sale 602.0 513.1 610.5
Proceeds from repayments of mortgage loans on real estate 911.7 696.7 678.2
Proceeds from sale of real estate 18.7 5.7 103.8
Proceeds from repayments of policy loans and sale of other invested assets 79.3 40.9 23.6
Cost of securities available-for-sale acquired (3,475.5) (3,724.9) (3,182.8)
Cost of mortgage loans on real estate acquired (1,318.0) (971.4) (829.1)
Cost of real estate acquired (7.1) (14.2) (0.8)
Short-term investments, net (26.6) (27.5) 69.3
Other, net (182.3) (110.9) (88.4)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (409.1) (1,284.6) (1,058.7)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Capital returned to shareholder (120.0) (175.0) -
Net proceeds from issuance of short-term borrowings (commercial paper) 118.7 - -
Cash dividends paid (100.0) (13.5) (100.0)
Increase in investment product and universal life insurance
product account balances 4,517.0 3,799.4 2,682.1
Decrease in investment product and universal life insurance
product account balances (5,377.1) (3,711.1) (2,678.5)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (961.4) (100.2) (96.4)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 13.6 1.4 (172.2)
Cash, beginning of year 4.8 3.4 175.6
- ------------------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 18.4 $ 4.8 $ 3.4
==============================================================================================================================
See accompanying notes to consolidated financial statements.
61
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Nationwide Life Insurance Company (NLIC, or collectively with its
subsidiaries, the Company) is a leading provider of long-term savings
and retirement products in the United States and is a wholly owned
subsidiary of Nationwide Financial Services, Inc. (NFS). The Company
develops and sells a diverse range of products including individual
annuities, private and public sector pension plans and other investment
products sold to institutions and life insurance. NLIC markets its
products through a broad network of distribution channels, including
independent broker/dealers, national and regional brokerage firms,
financial institutions, pension plan administrators, life insurance
specialists, Nationwide Retirement Solutions and Nationwide agents.
Wholly owned subsidiaries of NLIC include Nationwide Life and Annuity
Insurance Company (NLAIC), Nationwide Advisory Services, Inc., and
Nationwide Investment Services Corporation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company that
materially affect financial reporting are summarized below. The
accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America which differ from statutory accounting practices
prescribed or permitted by regulatory authorities. Annual Statements
for NLIC and NLAIC, filed with the Department of Insurance of the State
of Ohio (the Department), are prepared on the basis of accounting
practices prescribed or permitted by the Department. Prescribed
statutory accounting practices include a variety of publications of the
National Association of Insurance Commissioners (NAIC), as well as
state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not
so prescribed. The Company has no material permitted statutory
accounting practices.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of contingent
assets and liabilities as of the date of the consolidated financial
statements and the reported amounts of revenues and expenses for the
reporting period. Actual results could differ significantly from those
estimates.
The most significant estimates include those used in determining
deferred policy acquisition costs, valuation allowances for mortgage
loans on real estate and real estate investments, the liability for
future policy benefits and claims and federal income taxes. Although
some variability is inherent in these estimates, management believes
the amounts provided are adequate.
(a) CONSOLIDATION POLICY
The consolidated financial statements include the accounts of NLIC
and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
62
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(b) VALUATION OF INVESTMENTS AND RELATED GAINS AND LOSSES
The Company is required to classify its fixed maturity securities
and equity securities as either held-to-maturity,
available-for-sale or trading. The Company classifies fixed
maturity and equity securities as available-for-sale.
Available-for-sale securities are stated at fair value, with the
unrealized gains and losses, net of adjustments to deferred policy
acquisition costs and deferred federal income tax, reported as a
separate component of accumulated other comprehensive income in
shareholder's equity. The adjustment to deferred policy
acquisition costs represents the change in amortization of
deferred policy acquisition costs that would have been required as
a charge or credit to operations had such unrealized amounts been
realized.
Mortgage loans on real estate are carried at the unpaid principal
balance less valuation allowances. The Company provides valuation
allowances for impairments of mortgage loans on real estate based
on a review by portfolio managers. The measurement of impaired
loans is based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a
practical expedient, at the fair value of the collateral, if the
loan is collateral dependent. Loans in foreclosure and loans
considered to be impaired are placed on non-accrual status.
Interest received on non-accrual status mortgage loans on real
estate is included in interest income in the period received.
Real estate is carried at cost less accumulated depreciation and
valuation allowances. Other long-term investments are carried on
the equity basis, adjusted for valuation allowances. Impairment
losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the
assets' carrying amount.
Realized gains and losses on the sale of investments are
determined on the basis of specific security identification.
Estimates for valuation allowances and other than temporary
declines are included in realized gains and losses on investments.
(c) REVENUES AND BENEFITS
INVESTMENT PRODUCTS AND UNIVERSAL LIFE INSURANCE PRODUCTS:
Investment products consist primarily of individual and group
variable and fixed deferred annuities. Universal life insurance
products include universal life insurance, variable universal life
insurance, corporate-owned life insurance and other
interest-sensitive life insurance policies. Revenues for
investment products and universal life insurance products consist
of net investment income, asset fees, cost of insurance, policy
administration and surrender charges that have been earned and
assessed against policy account balances during the period. Policy
benefits and claims that are charged to expense include interest
credited to policy account balances and benefits and claims
incurred in the period in excess of related policy account
balances.
TRADITIONAL LIFE INSURANCE PRODUCTS: Traditional life insurance
products include those products with fixed and guaranteed premiums
and benefits and consist primarily of whole life insurance,
limited-payment life insurance, term life insurance and certain
annuities with life contingencies. Premiums for traditional life
insurance products are recognized as revenue when due. Benefits
and expenses are associated with earned premiums so as to result
in recognition of profits over the life of the contract. This
association is accomplished by the provision for future policy
benefits and the deferral and amortization of policy acquisition
costs.
63
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(d) DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, principally commissions,
certain expenses of the policy issue and underwriting department
and certain variable sales expenses have been deferred. For
investment products and universal life insurance products,
deferred policy acquisition costs are being amortized with
interest over the lives of the policies in relation to the present
value of estimated future gross profits from projected interest
margins, asset fees, cost of insurance, policy administration and
surrender charges. For years in which gross profits are negative,
deferred policy acquisition costs are amortized based on the
present value of gross revenues. Deferred policy acquisition costs
are adjusted to reflect the impact of unrealized gains and losses
on fixed maturity securities available-for-sale as described in
note 2(b). For traditional life insurance products, these deferred
policy acquisition costs are predominantly being amortized with
interest over the premium paying period of the related policies in
proportion to the ratio of actual annual premium revenue to the
anticipated total premium revenue. Such anticipated premium
revenue was estimated using the same assumptions as were used for
computing liabilities for future policy benefits.
(e) SEPARATE ACCOUNTS
Separate account assets and liabilities represent contractholders'
funds which have been segregated into accounts with specific
investment objectives. For all but $1.12 billion and $915.4
million of separate account assets at December 31, 2000 and 1999,
respectively, the investment income and gains or losses of these
accounts accrue directly to the contractholders. The activity of
the separate accounts is not reflected in the consolidated
statements of income and cash flows except for the fees the
Company receives.
(f) FUTURE POLICY BENEFITS
Future policy benefits for investment products in the accumulation
phase, universal life insurance and variable universal life
insurance policies have been calculated based on participants'
contributions plus interest credited less applicable contract
charges.
Future policy benefits for traditional life insurance policies
have been calculated by the net level premium method using
interest rates varying from 6.0% to 10.5% and estimates of
mortality, morbidity, investment yields and withdrawals which were
used or which were being experienced at the time the policies were
issued.
(g) PARTICIPATING BUSINESS
Participating business represents approximately 21% in 2000 (29%
in 1999 and 40% in 1998) of the Company's life insurance in force,
66% in 2000 (69% in 1999 and 74% in 1998) of the number of life
insurance policies in force, and 8% in 2000 (13% in 1999 and 14%
in 1998) of life insurance statutory premiums. The provision for
policyholder dividends is based on current dividend scales and is
included in "Future policy benefits and claims" in the
accompanying consolidated balance sheets.
(h) FEDERAL INCOME TAX
The Company files a consolidated federal income tax return with
Nationwide Mutual Insurance Company (NMIC), the majority
shareholder of NFS. The members of the consolidated tax return
group have a tax sharing arrangement which provides, in effect,
for each member to bear essentially the same federal income tax
liability as if separate tax returns were filed.
64
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The Company utilizes the asset and liability method of accounting
for income tax. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. Under this method, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce the
deferred tax assets to the amounts expected to be realized.
(i) REINSURANCE CEDED
Reinsurance premiums ceded and reinsurance recoveries on benefits
and claims incurred are deducted from the respective income and
expense accounts. Assets and liabilities related to reinsurance
ceded are reported on a gross basis.
(j) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS
133). SFAS 133, as amended by SFAS 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133 and SFAS 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, is
effective for the Company as of January 1, 2001.
SFAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires an
entity to recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at
fair value.
As of January 1, 2001, the Company had $755.4 million notional
amount of freestanding derivatives with a market value of ($7.0)
million. All other derivatives qualified for hedge accounting
under SFAS 133. Adoption of SFAS 133 will result in the Company
recording a net transition adjustment loss of $4.8 million (net of
related income tax of $2.6 million) in net income. In addition, a
net transition adjustment loss of $3.6 million (net of related
income tax of $2.0 million) will be recorded in accumulated other
comprehensive income at January 1, 2001. The adoption of SFAS 133
will result in the Company derecognizing $17.0 million of deferred
assets related to hedges, recognizing $10.9 million of additional
derivative instrument liabilities and $1.3 million of additional
firm commitment assets, while also decreasing hedged future policy
benefits by $3.0 million and increasing the carrying amount of
hedged investments by $10.6 million. Further, the adoption of SFAS
133 will result in the Company reporting total derivative
instrument assets and liabilities of $44.8 million and $107.1
million, respectively.
Also, the Company expects that the adoption of SFAS 133 will
increase the volatility of reported earnings and other
comprehensive income. The amount of volatility will vary with the
level of derivative and hedging activities and fluctuations in
market interest rates and foreign currency exchange rates during
any period.
(k) RECLASSIFICATION
Certain items in the 1999 and 1998 consolidated financial
statements have been reclassified to conform to the 2000
presentation.
65
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(3) INVESTMENTS
The amortized cost, gross unrealized gains and losses and estimated
fair value of securities available-for-sale as of December 31, 2000 and
1999 were:
Gross Gross
Amortized unrealized unrealized Estimated
(in millions) cost gains losses fair value
=========================================================================================================================
December 31, 2000
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 277.5 $ 33.4 $ 0.1 $ 310.8
Obligations of states and political subdivisions 8.6 0.2 - 8.8
Debt securities issued by foreign governments 94.1 1.5 0.1 95.5
Corporate securities 9,758.3 235.0 135.1 9,858.2
Mortgage-backed securities - U.S. Government backed 2,719.1 46.1 3.8 2,761.4
Asset-backed securities 2,388.2 36.3 16.2 2,408.3
-------------------------------------------------------------------------------------------------------------------------
Total fixed maturity securities 15,245.8 352.5 155.3 15,443.0
Equity securities 103.5 9.5 4.0 109.0
-------------------------------------------------------------------------------------------------------------------------
$ 15,349.3 $ 362.0 $ 159.3 $ 15,552.0
=========================================================================================================================
December 31, 1999
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 428.4 $ 23.4 $ 2.4 $ 449.4
Obligations of states and political subdivisions 0.8 - - 0.8
Debt securities issued by foreign governments 110.6 0.6 0.8 110.4
Corporate securities 9,390.4 110.3 179.9 9,320.8
Mortgage-backed securities - U.S. Government backed 3,423.1 25.8 30.3 3,418.6
Asset-backed securities 2,024.0 8.6 38.6 1,994.0
-------------------------------------------------------------------------------------------------------------------------
Total fixed maturity securities 15,377.3 168.7 252.0 15,294.0
Equity securities 84.9 12.4 4.4 92.9
-------------------------------------------------------------------------------------------------------------------------
$ 15,462.2 $ 181.1 $ 256.4 $ 15,386.9
=========================================================================================================================
The amortized cost and estimated fair value of fixed maturity
securities available-for-sale as of December 31, 2000, by expected
maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
66
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Amortized Estimated
(in millions) cost fair value
===========================================================================================================
Fixed maturity securities available for sale:
Due in one year or less $ 1,288.7 $ 1,287.0
Due after one year through five years 4,577.9 4,572.4
Due after five years through ten years 3,071.3 3,136.6
Due after ten years 1,200.6 1,277.3
-----------------------------------------------------------------------------------------------------------
10,138.5 10,273.3
Mortgage-backed securities 2,719.1 2,761.4
Asset-backed securities 2,388.2 2,408.3
-----------------------------------------------------------------------------------------------------------
$ 15,245.8 $ 15,443.0
===========================================================================================================
The components of unrealized gains (losses) on securities available-for-sale, net, were as follows as of
each December 31:
(in millions)
2000 1999
===========================================================================================================
Gross unrealized gains (losses) $ 202.7 $ (75.3)
Adjustment to deferred policy acquisition costs (23.2) 50.9
Deferred federal income tax (62.8) 8.5
-----------------------------------------------------------------------------------------------------------
$ 116.7 $ (15.9)
===========================================================================================================
An analysis of the change in gross unrealized gains (losses) on securities available-for-sale for the years
ended December 31:
(in millions) 2000 1999 1998
===========================================================================================================
Securities available-for-sale:
Fixed maturity securities $ 280.5 $ (607.1) $ 52.6
Equity securities (2.5) (8.8) 4.2
-----------------------------------------------------------------------------------------------------------
$ 278.0 $ (615.9) $ 56.8
===========================================================================================================
Proceeds from the sale of securities available-for-sale during 2000,
1999 and 1998 were $602.0 million, $513.1 million and $610.5 million,
respectively. During 2000, gross gains of $12.1 million ($10.4 million
and $9.0 million in 1999 and 1998, respectively) and gross losses of
$25.6 million ($28.0 million and $7.6 million in 1999 and 1998,
respectively) were realized on those sales.
The Company had $13.0 million and $15.6 million of real estate
investments at December 31, 2000 and 1999, respectively, that were
non-income producing the preceding twelve months.
Real estate is presented at cost less accumulated depreciation of $25.7
million as of December 31, 2000 ($24.8 million as of December 31, 1999)
and valuation allowances of $5.2 million as of December 31, 2000 ($5.5
million as of December 31, 1999).
67
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The recorded investment of mortgage loans on real estate considered to
be impaired was $9.8 million as of December 31, 2000 ($3.7 million as
of December 31, 1999), which includes $5.3 million (none as of December
31, 1999) of impaired mortgage loans on real estate for which the
related valuation allowance was $1.6 million (none as of December 31,
1999) and $4.5 million ($3.7 million as of December 31, 1999) of
impaired mortgage loans on real estate for which there was no valuation
allowance. During 2000, the average recorded investment in impaired
mortgage loans on real estate was $7.7 million ($3.7 million in 1999)
and interest income recognized on those loans totaled $0.4 million in
2000 (none in 1999) which is equal to interest income recognized using
a cash-basis method of income recognition.
Activity in the valuation allowance account for mortgage loans on real
estate is summarized for the years ended December 31:
(in millions) 2000 1999 1998
===========================================================================================================
Allowance, beginning of year $ 44.4 $ 42.4 $ 42.5
Additions (reductions) charged to operations 4.1 0.7 (0.1)
Direct write-downs charged against the allowance (3.2) -- --
Allowance on acquired mortgage loans -- 1.3 --
-----------------------------------------------------------------------------------------------------------
Allowance, end of year $ 45.3 $ 44.4 $ 42.4
===========================================================================================================
An analysis of investment income by investment type follows for the years ended December 31:
(in millions) 2000 1999 1998
===========================================================================================================
Gross investment income:
Securities available-for-sale:
Fixed maturity securities $ 1,095.5 $ 1,031.3 $ 982.5
Equity securities 2.6 2.5 0.8
Mortgage loans on real estate 494.5 460.4 458.9
Real estate 32.2 28.8 40.4
Short-term investments 27.0 18.6 17.8
Other 53.2 26.5 30.7
-----------------------------------------------------------------------------------------------------------
Total investment income 1,705.0 1,568.1 1,531.1
Less investment expenses 50.1 47.3 49.5
-----------------------------------------------------------------------------------------------------------
Net investment income $ 1,654.9 $ 1,520.8 $ 1,481.6
===========================================================================================================
An analysis of realized gains (losses) on investments, net of valuation allowances, by investment type
follows for the years ended December 31:
(in millions) 2000 1999 1998
===========================================================================================================
Securities available-for-sale:
Fixed maturity securities $ (18.2) $ (25.0) $ (0.7)
Equity securities 4.7 7.4 2.1
Mortgage loans on real estate (4.2) (0.6) 3.9
Real estate and other (1.7) 6.6 23.1
-----------------------------------------------------------------------------------------------------------
$ (19.4) $ (11.6) $ 28.4
===========================================================================================================
Fixed maturity securities with an amortized cost of $12.8 million and
$9.1 million were on deposit with various regulatory agencies as
required by law as of December 31, 2000 and 1999, respectively.
68
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(4) SHORT-TERM BORROWINGS
NLIC established a $300 million commercial paper program in October
2000. Borrowings under the commercial paper program are unsecured and
are issued for terms of 364 days or less. As of December 31, 2000 the
Company had $118.7 million of commercial paper outstanding at an
average effective rate of 6.48%. See also note 13.
(5) DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, principally interest
rate swaps, interest rate futures contracts and foreign currency swaps,
to manage market risk exposures associated with changes in interest
rates and foreign currency exchange rates. Provided they meet specific
criteria, interest rate and foreign currency swaps and futures are
considered hedges and are accounted for under the accrual method and
deferral method, respectively. The Company has no significant
derivative positions that are not considered hedges. See note 2 (j)
regarding accounting for derivatives under SFAS 133 effective January
1, 2001.
Interest rate swaps are primarily used to convert specific investment
securities and interest bearing policy liabilities from a fixed-rate to
a floating-rate basis. Amounts receivable or payable under these
agreements are recognized as an adjustment to net investment income or
interest credited to policyholder account balances consistent with the
nature of the hedged item. Currently, changes in fair value of the
interest rate swap agreements are not recognized on the balance sheet,
except for interest rate swaps designated as hedges of fixed maturity
securities available-for-sale and cross currency swaps hedging foreign
denominated debt instruments, for which changes in fair values are
reported in accumulated other comprehensive income.
Interest rate futures contracts are primarily used to hedge the risk of
adverse interest rate changes related to the Company's mortgage loan
commitments and anticipated purchases of fixed rate investments. Gains
and losses are deferred and, at the time of closing, reflected as an
adjustment to the carrying value of the related mortgage loans or
investments. The carrying value adjustments are amortized into net
investment income over the life of the related mortgage loans or
investments.
Foreign currency swaps are used to convert cash flows from specific
policy liabilities and investments denominated in foreign currencies
into U.S. dollars at specified exchange rates. Amounts receivable or
payable under these agreements are recognized as an adjustment to net
investment income or interest credited to policyholder account balances
consistent with the nature of the hedged item. Gains and losses on
foreign currency swaps are recorded in earnings based on the related
spot foreign exchange rate at the end of the reporting period. Gains
and losses on these contracts offset those recorded as a result of
translating the hedged foreign currency denominated liabilities and
investments to U.S. dollars.
69
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The notional amount of derivative financial instruments outstanding as
of December 31, 2000 and 1999 were as follows:
(in millions ) 2000 1999
===========================================================================================================
Interest rate swaps
Pay fixed/receive variable rate swaps hedging investments $ 934.8 $ 362.7
Pay variable/receive fixed rate swaps hedging investments 98.8 28.5
Pay variable/receive variable rate swaps hedging investments 184.0 9.0
Other contracts hedging investments 20.4 10.1
Pay variable/receive fixed rate swaps hedging liabilities 965.3 577.2
Pay variable/receive variable rate swaps hedging liabilities 546.9 --
Foreign currency swaps
Hedging foreign currency denominated investments $ 30.5 $ 14.8
Hedging foreign currency denominated liabilities 1,542.2 577.2
Interest rate futures contracts $ 5,659.8 $ 781.6
-----------------------------------------------------------------------------------------------------------
(6) FEDERAL INCOME TAX
The tax effects of temporary differences that give rise to significant components of the net deferred tax
liability as of December 31, 2000 and 1999 were as follows:
(in millions) 2000 1999
===========================================================================================================
Deferred tax assets:
Fixed maturity securities $ -- $ 5.3
Future policy benefits 34.7 149.5
Liabilities in separate accounts 462.7 373.6
Mortgage loans on real estate and real estate 18.8 18.5
Other assets and other liabilities 40.3 51.1
-----------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 556.5 598.0
Valuation allowance (7.0) (7.0)
-----------------------------------------------------------------------------------------------------------
Net deferred tax assets 549.5 591.0
-----------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Fixed maturity securities 98.8 --
Equity securities and other long-term investments 6.4 10.8
Deferred policy acquisition costs 783.7 724.4
Deferred tax on realized investment gains 29.0 34.7
Other 38.1 26.5
-----------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 956.0 796.4
-----------------------------------------------------------------------------------------------------------
Net deferred tax liability $ 406.5 $ 205.4
===========================================================================================================
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion of the
total gross deferred tax assets will not be realized. Future taxable
amounts or recovery of federal income tax paid within the statutory
carryback period can offset nearly all future deductible amounts. The
valuation allowance was unchanged for the years ended December 31,
2000, 1999 and 1998.
70
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The Company's current federal income tax liability was $108.9 million
and $104.7 million as of December 31, 2000 and 1999, respectively.
Federal income tax expense for the years ended December 31 was as
follows:
(in millions) 2000 1999 1998
===========================================================================================================
Currently payable $ 78.0 $ 53.6 $ 186.1
Deferred tax expense 129.7 147.8 4.3
-----------------------------------------------------------------------------------------------------------
$ 207.7 $ 201.4 $ 190.4
===========================================================================================================
Total federal income tax expense for the years ended December 31, 2000,
1999 and 1998 differs from the amount computed by applying the U.S.
federal income tax rate to income before tax as follows:
2000 1999 1998
---------------------- ---------------------- ----------------------
(in millions) Amount % Amount % Amount %
==================================================================================================================
Computed (expected) tax expense $239.1 35.0 $212.3 35.0 $195.0 35.0
Tax exempt interest and dividends
received deduction (24.7) (3.6) (7.3) (1.2) (4.9) (0.9)
Income tax credits (8.0) (1.2) (4.3) (0.7) - -
Other, net 1.3 0.2 0.7 0.1 0.3 0.1
------------------------------------------------------------------------------------------------------------------
Total (effective rate of each year) $207.7 30.4 $201.4 33.2 $190.4 34.2
==================================================================================================================
Total federal income tax paid was $74.6 million, $29.8 million and
$173.4 million during the years ended December 31, 2000, 1999 and 1998,
respectively.
(7) COMPREHENSIVE INCOME
Comprehensive Income includes net income as well as certain items that
are reported directly within separate components of shareholder's
equity that bypass net income. Currently, the Company's only component
of Other Comprehensive Income is unrealized gains (losses) on
securities available-for-sale. The related before and after federal tax
amounts for the years ended December 31, 2000, 1999 and 1998 were as
follows:
(in millions) 2000 1999 1998
===========================================================================================================
Unrealized gains (losses) on securities available-for-sale arising
during the period:
Gross $ 264.5 $ (665.3) $ 58.2
Adjustment to deferred policy acquisition costs (74.0) 167.5 (12.9)
Related federal income tax (expense) benefit (66.7) 171.4 (15.9)
-----------------------------------------------------------------------------------------------------------
Net 123.8 (326.4) 29.4
-----------------------------------------------------------------------------------------------------------
Reclassification adjustment for net (gains) losses on securities
available-for-sale realized during the period:
Gross 13.5 17.6 (1.4)
Related federal income tax expense (benefit) (4.7) (6.2) 0.5
-----------------------------------------------------------------------------------------------------------
Net 8.8 11.4 (0.9)
-----------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income (Loss) $ 132.6 $ (315.0) $ 28.5
===========================================================================================================
71
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures summarize the carrying amount and estimated
fair value of the Company's financial instruments. Certain assets and
liabilities are specifically excluded from the disclosure requirements
of financial instruments. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The fair value of a financial instrument is defined as the amount at
which the financial instrument could be exchanged in a current
transaction between willing parties. In cases where quoted market
prices are not available, fair value is to be based on estimates using
present value or other valuation techniques. Many of the Company's
assets and liabilities subject to the disclosure requirements are not
actively traded, requiring fair values to be estimated by management
using present value or other valuation techniques. These techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. Although fair value estimates
are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in the immediate settlement of the instruments.
Although insurance contracts, other than policies such as annuities
that are classified as investment contracts, are specifically exempted
from the disclosure requirements, estimated fair value of policy
reserves on life insurance contracts is provided to make the fair value
disclosures more meaningful.
The tax ramifications of the related unrealized gains and losses can
have a significant effect on fair value estimates and have not been
considered in the estimates.
The Company in estimating its fair value disclosures used the following
methods and assumptions:
FIXED MATURITY AND EQUITY SECURITIES: The fair value for fixed
maturity securities is based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair
value is estimated using values obtained from independent pricing
services or, in the case of private placements, is estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality and maturity of the
investments. The fair value for equity securities is based on
quoted market prices. The carrying amount and fair value for fixed
maturity and equity securities exclude the fair value of
derivatives contracts designated as hedges of fixed maturity and
equity securities.
MORTGAGE LOANS ON REAL ESTATE, NET: The fair value for mortgage
loans on real estate is estimated using discounted cash flow
analyses, using interest rates currently being offered for similar
loans to borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Fair value for impaired mortgage loans is the estimated fair value
of the underlying collateral.
POLICY LOANS, SHORT-TERM INVESTMENTS AND CASH: The carrying amount
reported in the consolidated balance sheets for these instruments
approximates their fair value.
SEPARATE ACCOUNT ASSETS AND LIABILITIES: The fair value of assets
held in separate accounts is based on quoted market prices. The
fair value of liabilities related to separate accounts is the
amount payable on demand, which is net of certain surrender
charges.
INVESTMENT CONTRACTS: The fair value for the Company's liabilities
under investment type contracts is based on one of two methods.
For investment contracts without defined maturities, fair value is
the amount payable on demand. For investment contracts with known
or determined maturities, fair value is estimated using discounted
cash flow analysis. Interest rates used are similar to currently
offered contracts with maturities consistent with those remaining
for the contracts being valued.
72
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
POLICY RESERVES ON LIFE INSURANCE CONTRACTS: Included are
disclosures for individual life insurance, universal life
insurance and supplementary contracts with life contingencies for
which the estimated fair value is the amount payable on demand.
Also included are disclosures for the Company's limited payment
policies, which the Company has used discounted cash flow analyses
similar to those used for investment contracts with known
maturities to estimate fair value.
SHORT-TERM BORROWINGS: The carrying amount reported in the
consolidated balance sheets for these instruments approximates
their fair value.
COMMITMENTS TO EXTEND CREDIT: Commitments to extend credit have
nominal fair value because of the short-term nature of such
commitments. See note 9.
FUTURES CONTRACTS: The fair value for futures contracts is
based on quoted market prices.
INTEREST RATE AND FOREIGN CURRENCY SWAPS: The fair value for
interest rate and foreign currency swaps are calculated with
pricing models using current rate assumptions.
Carrying amount and estimated fair value of financial instruments
subject to disclosure requirements and policy reserves on life
insurance contracts were as follows as of December 31:
2000 1999
------------------------------- -------------------------------
Carrying Estimated Carrying Estimated
(in millions) amount fair value amount fair value
==============================================================================================================
Assets:
Investments:
Securities available-for-sale:
Fixed maturity securities $ 15,451.3 $ 15,451.3 $ 15,289.7 $ 15,289.7
Equity securities 109.0 109.0 92.9 92.9
Mortgage loans on real estate, net 6,168.3 6,327.8 5,786.3 5,745.5
Policy loans 562.6 562.6 519.6 519.6
Short-term investments 442.6 442.6 416.0 416.0
Cash 18.4 18.4 4.8 4.8
Assets held in separate accounts 65,897.2 65,897.2 67,135.1 67,135.1
Liabilities:
Investment contracts (16,815.3) (15,979.8) (16,977.7) (16,428.6)
Policy reserves on life insurance contracts (5,368.4) (5,128.5) (4,883.9) (4,607.9)
Short-term borrowings (118.7) (118.7) -- --
Liabilities related to separate accounts (65,897.2) (64,237.6) (67,135.1) (66,318.7)
Derivative financial instruments:
Interest rate swaps hedging assets (8.3) (8.3) 4.3 4.3
Interest rate swaps hedging liabilities (26.2) (32.2) (11.5) (24.2)
Foreign currency swaps (24.3) (30.9) (11.8) (11.8)
Futures contracts (16.0) (16.0) 1.3 1.3
--------------------------------------------------------------------------------------------------------------
(9) RISK DISCLOSURES
The following is a description of the most significant risks
facing life insurers and how the Company mitigates those risks:
73
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
CREDIT RISK: The risk that issuers of securities owned by the Company
or mortgagors on mortgage loans on real estate owned by the Company
will default or that other parties, including reinsurers, which owe the
Company money, will not pay. The Company minimizes this risk by
adhering to a conservative investment strategy, by maintaining
reinsurance and credit and collection policies and by providing for any
amounts deemed uncollectible.
INTEREST RATE RISK: The risk that interest rates will change and cause
a decrease in the value of an insurer's investments. This change in
rates may cause certain interest-sensitive products to become
uncompetitive or may cause disintermediation. The Company mitigates
this risk by charging fees for non-conformance with certain policy
provisions, by offering products that transfer this risk to the
purchaser and/or by attempting to match the maturity schedule of its
assets with the expected payouts of its liabilities. To the extent that
liabilities come due more quickly than assets mature, an insurer could
potentially have to borrow funds or sell assets prior to maturity and
potentially recognize a gain or loss.
LEGAL/REGULATORY RISK: The risk that changes in the legal or regulatory
environment in which an insurer operates will result in increased
competition, reduced demand for a company's products, or create
additional expenses not anticipated by the insurer in pricing its
products. The Company mitigates this risk by offering a wide range of
products and by operating throughout the United States, thus reducing
its exposure to any single product or jurisdiction and also by
employing underwriting practices which identify and minimize the
adverse impact of this risk.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Company is a
party to financial instruments with off-balance-sheet risk in the
normal course of business through management of its investment
portfolio. These financial instruments include commitments to extend
credit in the form of loans and derivative financial instruments. These
instruments involve, to varying degrees, elements of credit risk in
excess of amounts recognized on the consolidated balance sheets.
Commitments to fund fixed rate mortgage loans on real estate are
agreements to lend to a borrower, and are subject to conditions
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment
of a deposit. Commitments extended by the Company are based on
management's case-by-case credit evaluation of the borrower and the
borrower's loan collateral. The underlying mortgage property represents
the collateral if the commitment is funded. The Company's policy for
new mortgage loans on real estate is to lend no more than 75% of
collateral value. Should the commitment be funded, the Company's
exposure to credit loss in the event of nonperformance by the borrower
is represented by the contractual amounts of these commitments less the
net realizable value of the collateral. The contractual amounts also
represent the cash requirements for all unfunded commitments.
Commitments on mortgage loans on real estate of $360.6 million
extending into 2001 were outstanding as of December 31, 2000. The
Company also had $55.6 million of commitments to purchase fixed
maturity securities outstanding as of December 31, 2000.
Notional amounts of derivative financial instruments, primarily
interest rate swaps, interest rate futures contracts and foreign
currency swaps, significantly exceed the credit risk associated with
these instruments and represent contractual balances on which
calculations of amounts to be exchanged are based. Credit exposure is
limited to the sum of the aggregate fair value of positions that have
become favorable to NLIC, including accrued interest receivable due
from counterparties. Potential credit losses are minimized through
careful evaluation of counterparty credit standing, selection of
counterparties from a limited group of high quality institutions,
collateral agreements and other contract provisions. As of December 31,
2000, NLIC's credit risk from these derivative financial instruments
was $44.8 million.
SIGNIFICANT CONCENTRATIONS OF CREDIT RISK: The Company grants mainly
commercial mortgage loans on real estate to customers throughout the
United States. The Company has a diversified portfolio with no more
than 22% (23% in 1999) in any geographic area and no more than 1% (2%
in 1999) with any one borrower as of December 31, 2000. As of December
31, 2000, 36% (39% in 1999) of the remaining principal balance of the
Company's commercial mortgage loan portfolio financed retail
properties.
74
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
REINSURANCE: The Company has entered into reinsurance contracts to cede
a portion of its individual annuity business to The Franklin Life
Insurance Company (Franklin) and beginning in 2000 with Security
Benefit Life Insurance Company (SBL). Total recoveries due from
Franklin were $97.7 million and $143.6 million as of December 31, 2000
and 1999, respectively, while amounts due from SBL totaled $45.4
million at December 31, 2000. The contracts are immaterial to the
Company's results of operations. The ceding of risk does not discharge
the original insurer from its primary obligation to the policyholder.
Under the terms of the contract, Franklin and SBL have each established
a trust as collateral for the recoveries. The trust assets are invested
in investment grade securities, the market value of which must at all
times be greater than or equal to 102% and 100% of the reinsured
reserves for Franklin and SBL, respectively.
(10) PENSION PLAN AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company is a participant, together with other affiliated companies,
in a pension plan covering all employees who have completed at least
one year of service and who have met certain age requirements. Plan
contributions are invested in a group annuity contract of NLIC.
Benefits are based upon the highest average annual salary of a
specified number of consecutive years of the last ten years of service.
The Company funds pension costs accrued for direct employees plus an
allocation of pension costs accrued for employees of affiliates whose
work efforts benefit the Company.
Pension cost (benefit) charged to operations by the Company during the
years ended December 31, 2000, 1999 and 1998 were $1.9 million, $(8.3)
million and $2.0 million, respectively. The Company has recorded a
prepaid pension asset of $13.6 million and $13.3 million as of December
31, 2000 and 1999, respectively.
In addition to the defined benefit pension plan, the Company, together
with other affiliated companies, participates in life and health care
defined benefit plans for qualifying retirees. Postretirement life and
health care benefits are contributory and generally available to full
time employees who have attained age 55 and have accumulated 15 years
of service with the Company after reaching age 40. Postretirement
health care benefit contributions are adjusted annually and contain
cost-sharing features such as deductibles and coinsurance. In addition,
there are caps on the Company's portion of the per-participant cost of
the postretirement health care benefits. These caps can increase
annually, but not more than three percent. The Company's policy is to
fund the cost of health care benefits in amounts determined at the
discretion of management. Plan assets are invested primarily in group
annuity contracts of NLIC.
The Company elected to immediately recognize its estimated accumulated
postretirement benefit obligation (APBO), however, certain affiliated
companies elected to amortize their initial transition obligation over
periods ranging from 10 to 20 years.
The Company's accrued postretirement benefit expense as of December 31,
2000 and 1999 was $51.0 million and $49.6 million, respectively and the
net periodic postretirement benefit cost (NPPBC) for 2000, 1999 and
1998 was $3.8 million, $4.9 million and $4.1 million, respectively.
75
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Information regarding the funded status of the pension plan as a whole
and the postretirement life and health care benefit plan as a whole as
of December 31, 2000 and 1999 follows:
Pension Benefits Postretirement Benefits
---------------------------- ---------------------------
(in millions) 2000 1999 2000 1999
===================================================================================================================
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,811.4 $ 2,185.0 $ 239.8 $ 270.1
Service cost 81.4 80.0 12.2 14.2
Interest cost 125.3 109.9 18.7 17.6
Actuarial loss (gain) 34.8 (95.0) 16.1 (64.4)
Plan settlement -- (396.1) -- --
Benefits paid (71.2) (72.4) (10.4) (11.0)
Acquired companies -- -- -- 13.3
-------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 1,981.7 1,811.4 276.4 239.8
-------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 2,247.6 2,541.9 91.3 77.9
Actual return on plan assets 140.9 161.8 12.2 3.5
Employer contribution -- 12.4 26.3 20.9
Plan curtailment in 2000/settlement in 1999 19.8 (396.1) -- --
Benefits paid (71.2) (72.4) (10.4) (11.0)
-------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 2,337.1 2,247.6 119.4 91.3
-------------------------------------------------------------------------------------------------------------------
Funded status 355.4 436.2 (157.0) (148.5)
Unrecognized prior service cost 25.0 28.2 -- --
Unrecognized net gains (311.7) (402.0) (34.1) (46.7)
Unrecognized net (asset) obligation at transition (6.4) (7.7) 1.0 1.1
-------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 62.3 $ 54.7 $ (190.1) $ (194.1)
===================================================================================================================
Assumptions used in calculating the funded status of the pension plan
and postretirement life and health care benefit plan were as follows:
Pension Benefits Postretirement Benefits
--------------------------- ---------------------------
2000 1999 2000 1999
===================================================================================================================
Weighted average discount rate 6.75% 7.00% 7.50% 7.80%
Rate of increase in future compensation levels 5.00% 5.25% -- --
Assumed health care cost trend rate:
Initial rate -- -- 15.00% 15.00%
Ultimate rate -- -- 5.50% 5.50%
Uniform declining period -- -- 5 Years 5 Years
-------------------------------------------------------------------------------------------------------------------
76
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The components of net periodic pension cost for the pension plan as a
whole for the years ended December 31, 2000, 1999 and 1998 were as
follows:
(in millions) 2000 1999 1998
=========================================================================================================
Service cost (benefits earned during the period) $ 81.4 $ 80.0 $ 87.6
Interest cost on projected benefit obligation 125.3 109.9 123.4
Expected return on plan assets (184.5) (160.3) (159.0)
Recognized gains (11.8) (9.1) (3.8)
Amortization of prior service cost 3.2 3.2 3.2
Amortization of unrecognized transition obligation (asset) (1.3) (1.4) 4.2
---------------------------------------------------------------------------------------------------------
$ 12.3 $ 22.3 $ 55.6
=========================================================================================================
Effective December 31, 1998, Wausau Service Corporation (WSC) ended its
affiliation with Nationwide and employees of WSC ended participation in
the plan resulting in a curtailment gain of $67.1 million. During 1999,
the Plan transferred assets to settle its obligation related to WSC
employees, resulting in a gain of $32.9 million. The spin-off of
liabilities and assets was completed in the year 2000, resulting in an
adjustment to the curtailment gain of $19.8 million.
Assumptions used in calculating the net periodic pension cost for the
pension plan were as follows:
2000 1999 1998
================================================================================================================
Weighted average discount rate 7.00% 6.08% 6.00%
Rate of increase in future compensation levels 5.25% 4.33% 4.25%
Expected long-term rate of return on plan assets 8.25% 7.33% 7.25%
----------------------------------------------------------------------------------------------------------------
The components of NPPBC for the postretirement benefit plan as a whole for the years ended December 31, 2000,
1999 and 1998 were as follows:
(in millions) 2000 1999 1998
================================================================================================================
Service cost (benefits attributed to employee service during the year) $ 12.2 $ 14.2 $ 9.8
Interest cost on accumulated postretirement benefit obligation 18.7 17.6 15.4
Expected return on plan assets (7.9) (4.8) (4.4)
Amortization of unrecognized transition obligation of affiliates 0.6 0.6 0.2
Net amortization and deferral (1.3) (0.5) 0.6
----------------------------------------------------------------------------------------------------------------
$ 22.3 $ 27.1 $ 21.6
================================================================================================================
Actuarial assumptions used for the measurement of the NPPBC for the
postretirement benefit plan for 2000, 1999 and 1998 were as follows:
2000 1999 1998
================================================================================================================
Discount rate 7.80% 6.65% 6.70%
Long-term rate of return on plan assets, net of tax in 1999 and 1998 8.30% 7.15% 5.83%
Assumed health care cost trend rate:
Initial rate 15.00% 15.00% 12.00%
Ultimate rate 5.50% 5.50% 6.00%
Uniform declining period 5 Years 5 Years 12 Years
----------------------------------------------------------------------------------------------------------------
77
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Because current plan costs are very close to the employer dollar caps,
the health care cost trend has an immaterial effect on plan obligations
for the postretirement benefit plan as a whole. For this reason, the
effect of a one percentage point increase or decrease in the assumed
health care cost trend rate on the APBO as of December 31, 2000 and on
the NPPBC for the year ended December 31, 2000 was not calculated.
(11) SHAREHOLDER'S EQUITY, REGULATORY RISK-BASED CAPITAL, RETAINED EARNINGS
AND DIVIDEND RESTRICTIONS
Ohio, NLIC's and NLAIC's state of domicile, imposes minimum risk-based
capital requirements that were developed by the NAIC. The formulas for
determining the amount of risk-based capital specify various weighting
factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk. Regulatory compliance
is determined by a ratio of the company's regulatory total adjusted
capital, as defined by the NAIC, to its authorized control level
risk-based capital, as defined by the NAIC. Companies below specific
trigger points or ratios are classified within certain levels, each of
which requires specified corrective action. NLIC and NLAIC each exceed
the minimum risk-based capital requirements.
The statutory capital and surplus of NLIC as of December 31, 2000, 1999
and 1998 was $1.28 billion, $1.35 billion and $1.32 billion,
respectively. The statutory net income of NLIC for the years ended
December 31, 2000, 1999 and 1998 was $158.7 million, $276.2 million and
$171.0 million, respectively.
The NAIC completed a project to codify statutory accounting principles
(Codification), which is effective January 1, 2001 for NLIC and its
insurance company subsidiary. The resulting change to NLIC's January 1,
2001 surplus was an increase of approximately $80.0 million. The
significant change for NLIC, as a result of Codification, was the
recording of deferred taxes, which were not recorded prior to the
adoption of Codification.
The Company is limited in the amount of shareholder dividends it may
pay without prior approval by the Department. As of December 31, 2000
no dividends could be paid by NLIC without prior approval.
In addition, the payment of dividends by NLIC may also be subject to
restrictions set forth in the insurance laws of New York that limit the
amount of statutory profits on NLIC's participating policies (measured
before dividends to policyholders) that can inure to the benefit of the
Company and its shareholders.
The Company currently does not expect such regulatory requirements to
impair its ability to pay operating expenses and shareholder dividends
in the future.
(12) TRANSACTIONS WITH AFFILIATES
During second quarter 1999, the Company entered into a modified
coinsurance arrangement to reinsure the 1999 operating results of an
affiliated company, Employers Life Insurance Company of Wausau (ELOW)
retroactive to January 1, 1999. In September 1999, NFS acquired ELOW
for $120.8 million and immediately merged ELOW into NLIC terminating
the modified coinsurance arrangement. Because ELOW was an affiliate,
the Company accounted for the merger similar to poolings-of-interests;
however, prior period financial statements were not restated due to
immateriality. The reinsurance and merger combined contributed $1.46
million to net income in 1999.
78
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
The Company has a reinsurance agreement with NMIC whereby all of the
Company's accident and health business is ceded to NMIC on a modified
coinsurance basis. The agreement covers individual accident and health
business for all periods presented and group and franchise accident and
health business since July 1, 1999. Either party may terminate the
agreement on January 1 of any year with prior notice. Prior to July 1,
1999 group and franchise accident and health business and a block of
group life insurance policies were ceded to ELOW under a modified
coinsurance agreement. Under a modified coinsurance agreement, invested
assets are retained by the ceding company and investment earnings are
paid to the reinsurer. Under the terms of the Company's agreements, the
investment risk associated with changes in interest rates is borne by
the reinsurer. Risk of asset default is retained by the Company,
although a fee is paid to the Company for the retention of such risk.
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 and ELOW for the years
ended December 31, 2000, 1999 and 1998 were $170.1 million, $193.0
million, and $216.9 million, respectively, while benefits, claims and
expenses ceded were $168.0 million, $197.3 million and $259.3 million,
respectively.
Pursuant to a cost sharing agreement among NMIC and certain of its
direct and indirect subsidiaries, including the Company, NMIC provides
certain operational and administrative services, such as sales support,
advertising, personnel and general management services, to those
subsidiaries. Expenses covered by such agreement are subject to
allocation among NMIC and such subsidiaries. Measures used to allocate
expenses among companies include individual employee estimates of time
spent, special cost studies, salary expense, commission expense and
other methods agreed to by the participating companies that are within
industry guidelines and practices. In addition, beginning in 1999
Nationwide Services Company, a subsidiary of NMIC, provides computer,
telephone, mail, employee benefits administration, and other services
to NMIC and certain of its direct and indirect subsidiaries, including
the Company, based on specified rates for units of service consumed.
For the years ended December 31, 2000, 1999 and 1998, the Company made
payments to NMIC and Nationwide Services Company totaling $150.3
million, $124.1 million, and $95.0 million, respectively. The Company
does not believe that expenses recognized under these agreements are
materially different than expenses that would have been recognized had
the Company operated on a stand-alone basis.
The Company leases office space from NMIC and certain of its
subsidiaries. For the years ended December 31, 2000, 1999 and 1998, the
Company made lease payments to NMIC and its subsidiaries of $14.1
million, $9.9 million and $8.0 million, respectively.
The Company also participates in intercompany repurchase agreements
with affiliates whereby the seller will transfer securities to the
buyer at a stated value. Upon demand or after a stated period, the
seller will repurchase the securities at the original sales price plus
a price differential. Transactions under the agreements during 2000,
1999 and 1998 were not material. The Company believes that the terms of
the repurchase agreements are materially consistent with what the
Company could have obtained with unaffiliated parties.
The Company and various affiliates entered into agreements with
Nationwide Cash Management Company (NCMC), an affiliate, under which
NCMC acts as a common agent in handling the purchase and sale of
short-term securities for the respective accounts of the participants.
Amounts on deposit with NCMC were $321.1 million and $411.7 million as
of December 31, 2000 and 1999, respectively, and are included in
short-term investments on the accompanying consolidated balance sheets.
Certain annuity products are sold through affiliated companies, which
are also subsidiaries of NFS. Total commissions and fees paid to these
affiliates for the three years ended December 31, 2000 were $65.0
million, $79.7 million and $74.9 million, respectively.
79
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
(13) BANK LINES OF CREDIT
Also available as a source of funds to the Company is a $1 billion
revolving credit facility entered into by NFS, NLIC and NMIC. The
facility is comprised of a five year $700 million agreement and a 364
day $300 million agreement with a group of national financial
institutions. The facility provides for several and not joint liability
with respect to any amount drawn by any party. The facility provides
covenants, including, but not limited to, requirements that NLIC
maintain statutory surplus in excess of $935 million. The Company had
no amounts outstanding under this agreement as of December 31, 2000. Of
the total facility, $300 million is designated to back NLIC's $300
million commercial paper program. Therefore, borrowing capacity under
this facility would be reduced by the amount of any commercial paper
outstanding.
(14) CONTINGENCIES
On October 29, 1998, the Company was named in a lawsuit filed in Ohio
state court related to the sale of deferred annuity products for use as
investments in tax-deferred contributory retirement plans (Mercedes
Castillo v. Nationwide Financial Services, Inc., Nationwide Life
Insurance Company and Nationwide Life and Annuity Insurance Company).
On May 3, 1999, the complaint was amended to, among other things, add
Marcus Shore as a second plaintiff. The amended complaint is brought as
a class action on behalf of all persons who purchased individual
deferred annuity contracts or participated in group annuity contracts
sold by the Company and the other named Company affiliates which were
used to fund certain tax-deferred retirement plans. The amended
complaint seeks unspecified compensatory and punitive damages. No class
has been certified. On June 11, 1999, the Company and the other named
defendants filed a motion to dismiss the amended complaint. On March 8,
2000, the court denied the motion to dismiss the amended complaint
filed by the Company and other named defendants. The Company intends to
defend this lawsuit vigorously.
(15) SEGMENT INFORMATION
The Company has redefined its business segments in order to align this
disclosure with the way management currently views its core operations.
This updated view better reflects the different economics of the
Company's various businesses and also aligns well with the current
market focus. As a result, the Company now reports three product
segments: Individual Annuity, Institutional Products and Life
Insurance. In addition, the Company reports certain other revenues and
expenses in a Corporate segment. All 1999 and 1998 amounts have been
restated to reflect the new business segments.
The Individual Annuity segment consists of both variable and fixed
annuity contracts. Individual 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, variable annuity contracts provide the customer with
access to a wide range of investment options and asset protection in
the event of an untimely death, while fixed annuity contracts generate
a return for the customer at a specified interest rate fixed for a
prescribed period. The Company's individual annuity products consist of
single premium deferred annuities, flexible premium deferred annuities
and single premium immediate annuities.
The Institutional Products segment is comprised of the Company's group
pension and payroll deduction business, both public and private
sectors, and medium-term note program. The public sector includes the
457 business in the form of fixed and variable annuities. The private
sector includes the 401(k) business generated through fixed and
variable annuities.
The Life Insurance segment consists of insurance products, including
universal life insurance, corporate-owned life insurance and bank-owned
life insurance products, which provide a death benefit and also allow
the customer to build cash value on a tax-advantaged basis.
80
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
In addition to the product segments, the Company reports a Corporate
segment. The Corporate segment includes net investment income not
allocated to the three product segments, certain revenues and expenses
of the Company's investment advisory and broker/dealer subsidiary,
unallocated expenses and interest expense on short-term borrowings. In
addition to these operating revenues and expenses, the Company also
reports net realized gains and losses on investments in the Corporate
segment.
The following table summarizes the financial results of the Company's
business segments for the years ended December 31, 2000, 1999 and 1998.
Individual Institutional Life
(in millions) Annuity Products Insurance Corporate Total
===================================================================================================================
2000:
Net investment income $ 483.2 $ 827.4 $ 289.2 $ 55.1 $ 1,654.9
Other operating revenue 625.9 251.6 453.9 17.0 1,348.4
-------------------------------------------------------------------------------------------------------------------
Total operating revenue(1) 1,109.1 1,079.0 743.1 72.1 3,003.3
-------------------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances 396.4 628.8 157.2 -- 1,182.4
Amortization of deferred policy
acquisition costs 238.7 49.2 64.2 -- 352.1
Interest expense on short-term
borrowings -- -- -- 1.3 1.3
Other benefits and expenses 192.3 170.3 368.8 33.7 765.1
-------------------------------------------------------------------------------------------------------------------
Total expenses 827.4 848.3 590.2 35.0 2,300.9
-------------------------------------------------------------------------------------------------------------------
Operating income before
federal income tax 281.7 230.7 152.9 37.1 702.4
Realized losses on investments -- -- -- (19.4) (19.4)
-------------------------------------------------------------------------------------------------------------------
Income before
federal income tax $ 281.7 $ 230.7 $ 152.9 $ 17.7 $ 683.0
===================================================================================================================
Assets as of year end $45,422.5 $37,217.3 $ 8,103.3 $ 1,824.2 $92,567.3
-------------------------------------------------------------------------------------------------------------------
1999:
Net investment income $ 458.9 $ 771.2 $ 253.1 $ 37.6 $ 1,520.8
Other operating revenue 511.4 211.9 393.0 66.1 1,182.4
-------------------------------------------------------------------------------------------------------------------
Total operating revenue(1) 970.3 983.1 646.1 103.7 2,703.2
-------------------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances 384.9 580.9 130.5 -- 1,096.3
Amortization of deferred policy
acquisition costs 170.9 41.6 60.1 -- 272.6
Other benefits and expenses 155.3 142.8 334.7 83.4 716.2
-------------------------------------------------------------------------------------------------------------------
Total expenses 711.1 765.3 525.3 83.4 2,085.1
-------------------------------------------------------------------------------------------------------------------
Operating income before
federal income tax 259.2 217.8 120.8 20.3 618.1
Realized losses on investments -- -- -- (11.6) (11.6)
-------------------------------------------------------------------------------------------------------------------
Income before
federal income tax $ 259.2 $ 217.8 $ 120.8 $ 8.7 $ 606.5
===================================================================================================================
Assets as of year end $45,667.8 $39,045.1 $ 6,616.7 $ 1,346.3 $92,675.9
-------------------------------------------------------------------------------------------------------------------
81
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Consolidated Financial Statements, Continued
Individual Institutional Life
(in millions) Annuity Products Insurance Corporate Total
===================================================================================================================
1998:
Net investment income $ 431.7 $ 784.7 $ 225.6 $ 39.6 $ 1,481.6
Other operating revenue 412.6 167.8 318.5 66.8 965.7
-------------------------------------------------------------------------------------------------------------------
Total operating revenue(1) 844.3 952.5 544.1 106.4 2,447.3
-------------------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances 357.9 595.7 115.4 -- 1,069.0
Amortization of deferred policy
acquisition costs 129.2 38.9 46.4 -- 214.5
Other benefits and expenses 125.7 137.5 293.5 78.4 635.1
-------------------------------------------------------------------------------------------------------------------
Total expenses 612.8 772.1 455.3 78.4 1,918.6
-------------------------------------------------------------------------------------------------------------------
Operating income before federal
income tax 231.5 180.4 88.8 28.0 528.7
Realized gains on investments -- -- -- 28.4 28.4
-------------------------------------------------------------------------------------------------------------------
Income before
federal income tax $ 231.5 $ 180.4 $ 88.8 $ 56.4 $ 557.1
===================================================================================================================
Assets as of year end $36,641.8 $30,618.4 $ 5,187.6 $ 1,894.3 $74,342.1
-------------------------------------------------------------------------------------------------------------------
----------
1 Excludes net realized gains and losses on investments.
The Company has no significant revenue from customers located outside
of the United States nor does the Company have any significant
long-lived assets located outside the United States.
82
1
SCHEDULE I
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
(in millions)
As of December 31, 2000
- ------------------------------------------------------------------------ ------------- -------------- ---------------
Column A Column B Column C Column D
- ------------------------------------------------------------------------ ------------- -------------- ---------------
Amount at
which shown
in the
Market consolidated
Type of Investment Cost value balance sheet
- ------------------------------------------------------------------------ ------------- -------------- ---------------
Fixed maturity securities available-for-sale:
Bonds:
U.S. Government and government agencies and authorities $ 2,996.6 $ 3,072.2 $ 3,072.2
States, municipalities and political subdivisions 8.6 8.8 8.8
Foreign governments 94.1 95.5 95.5
Public utilities 1,186.6 1,195.9 1,195.9
All other corporate 10,959.9 11,070.6 11,070.6
---------- ---------- ----------
Total fixed maturity securities available-for-sale 15,245.8 15,443.0 15,443.0
---------- ---------- ----------
Equity securities available-for-sale:
Common stocks:
Industrial, miscellaneous and all other 103.5 109.0 109.0
Non-redeemable preferred stock -- -- --
---------- ---------- ----------
Total equity securities available-for-sale 103.5 109.0 109.0
---------- ---------- ----------
Mortgage loans on real estate, net 6,214.4 6,168.3(1)
Real estate, net:
Investment properties 255.0 270.1(2)
Acquired in satisfaction of debt 42.1 40.6(2)
Policy loans 562.6 562.6
Other long-term investments 95.1 101.8(3)
Short-term investments 442.6 442.6
---------- ----------
Total investments $ 22,961.1 $ 23,138.0
========== ==========
- ----------
(1) Difference from Column B is primarily due to valuation allowances due to
impairments on mortgage loans on real estate and due to accumulated
depreciation and valuation allowances due to impairments on real estate.
See note 3 to the consolidated financial statements.
(2) Difference from Column B primarily results from undistributed earnings
from an unconsolidated real estate subsidiary that is carried on the
equity method, offset in part by valuation allowances for accumulated
depreciation and valuation allowances due to impairments on real estate.
See note 3 to the consolidated financial statements.
(3) Difference from Column B is primarily due to operating gains and/or losses
of investments in limited partnerships.
See accompanying independent auditors' report.
2
SCHEDULE III
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(in millions)
As of December 31, 2000, 1999 and 1998 and for each of the years then ended
- ---------------------------------- ----------------- -------------------- ------------------- ------------------ ---------------
Column A Column B Column C Column D Column E Column F
- ---------------------------------- ----------------- -------------------- ------------------- ------------------ ---------------
Deferred Future policy
policy benefits, losses, Other policy
acquisition claims and Unearned claims and Premium
Segment costs loss expenses premiums(1) benefits payable(1) revenue
- ---------------------------------- ----------------- -------------------- ------------------- ------------------ ---------------
2000: Individual Annuities $ 1,711.6 $ 7,008.8 $ 52.7
Institutional Products 293.7 10,944.0 --
Life Insurance 877.8 3,995.6 187.3
Corporate (17.5) 235.2 --
--------------- -------------------- ---------------
Total $ 2,865.6 $ 22,183.6 $ 240.0
=============== ==================== ===============
1999: Individual Annuities $ 1,525.1 $ 7,337.8 $ 26.8
Institutional Products 275.2 10,833.4 --
Life Insurance 702.9 3,519.9 194.0
Corporate 50.9 170.5 --
--------------- -------------------- ---------------
Total $ 2,554.1 $ 21,861.6 $ 220.8
=============== ==================== ===============
1998: Individual Annuities $ 1,316.4 $ 6,579.0 $ 23.1
Institutional Products 248.2 9,792.8 --
Life Insurance 574.2 3,225.5 176.9
Corporate (116.6) 169.8 --
--------------- -------------------- ---------------
Total $ 2,022.2 $ 19,767.1 $ 200.0
=============== ==================== ===============
- ---------------------------------- ----------------- -------------------- ------------------- ------------------ ---------------
Column A Column G Column H Column I Column J Column K
- ---------------------------------- ----------------- -------------------- ------------------- ------------------ ---------------
Benefits, claims, Amortization Other
Net investment losses and of deferred policy operating Premiums
Segment income(2) settlement expenses acquisition costs expenses(2) written
- ---------------------------------------------------- -------------------- ------------------- ------------------ ---------------
2000: Individual Annuities $ 483.2 $ 450.4 $ 238.7 $ 138.3
Institutional Products 827.4 628.8 49.2 170.3
Life Insurance 289.2 344.8 64.2 136.7
Corporate 55.1 -- -- 33.7
--------------- -------------------- ------------------- ------------------
Total $ 1,654.9 $ 1,424.0 $ 352.1 $ 479.0
=============== ==================== =================== ==================
1999: Individual Annuities $ 458.9 $ 408.7 $ 170.9 $ 131.5
Institutional Products 771.2 580.9 41.6 142.8
Life Insurance 253.1 317.1 60.1 105.7
Corporate 37.6 -- -- 83.4
--------------- -------------------- ------------------- ------------------
Total $ 1,520.8 $ 1,306.7 $ 272.6 $ 463.4
=============== ==================== =================== ==================
1998: Individual Annuities $ 431.7 $ 380.4 $ 129.2 $ 103.2
Institutional Products 784.7 595.7 38.9 137.5
Life Insurance 225.6 268.7 46.4 100.6
Corporate 39.6 -- -- 78.4
--------------- -------------------- ------------------- ------------------
Total $ 1,481.6 $ 1,244.8 $ 214.5 $ 419.7
=============== ==================== =================== ==================
- ----------
1 Unearned premiums and other policy claims and benefits payable are included
in Column C amounts.
2 Allocations of net investment income and certain operating expenses are
based on a number of assumptions and estimates, and reported operating
results would change by segment if different methods were applied.
See accompanying independent auditors' report.
3
SCHEDULE IV
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
REINSURANCE
(in millions)
As of December 31, 2000, 1999 and 1998 and for each of the years then ended
- ----------------------------------------------- --------------- -------------- ------------- ------------- ------------
Column A Column B Column C Column D Column E Column F
- ----------------------------------------------- --------------- -------------- ------------- ------------- ------------
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount to net
--------------- -------------- ------------- ------------- ------------
2000:
Life insurance in force $ 95,475.2 $ 31,101.6 $ 16.4 $ 64,390.0 0.0%
=============== ============== ============= ============= ============
Premiums:
Life insurance $ 254.6 $ 14.8 $ 0.2 $ 240.0 0.1%
Accident and health insurance 150.8 156.8 6.0 -- N/A
--------------- -------------- ------------- ------------- ------------
Total $ 405.4 $ 171.6 $ 6.2 $ 240.0 2.6%
=============== ============== ============= ============= ============
1999:
Life insurance in force $ 84,845.3 $ 26,296.5 $ 14.9 $ 58,563.7 0.0%
=============== ============== ============= ============= ============
Premiums:
Life insurance $ 242.2 $ 22.6 $ 1.2 $ 220.8 0.6%
Accident and health insurance 134.9 142.8 7.9 -- N/A
--------------- -------------- ------------- ------------- ------------
Total $ 377.1 $ 165.4 $ 9.1 $ 220.8 4.2%
=============== ============== ============= ============= ============
1998:
Life insurance in force $ 63,215.9 $ 17,413.4 $ 28.0 $ 45,830.5 0.1%
=============== ============== ============= ============= ============
Premiums:
Life insurance $ 225.4 $ 27.4 $ 2.0 $ 200.0 1.0%
Accident and health insurance 169.7 179.4 9.7 -- N/A
--------------- -------------- ------------- ------------- ------------
Total $ 395.1 $ 206.8 $ 11.7 $ 200.0 5.8%
=============== ============== ============= ============= ============
- ----------
Note: The life insurance caption represents principally premiums from
traditional life insurance and life-contingent immediate annuities and
excludes deposits on investment products and universal life insurance
products.
See accompanying independent auditors' report.
4
SCHEDULE V
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in millions)
Years ended December 31, 2000, 1999 and 1998
- ---------------------------------------------------------------------------------------------------- ----------------------------
Column A Column B Column C Column D Column E
- ---------------------------------------------------------------------------------------------------- ----------------------------
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of period expenses accounts Deductions(1) period
- -------------------------------------------------------------------------------------- ------------- ----------------------------
2000:
Valuation allowances - fixed maturity securities $ -- $ -- $ -- $ -- $ --
Valuation allowances - mortgage loans on real estate 44.4 4.1 -- 3.2 45.3
Valuation allowances - real estate 5.5 0.4 -- 0.7 5.2
---------------------------- ------------- ----------------------------
Total $ 49.9 $ 4.5 $ -- $ 3.9 $ 50.5
============================ ============= ============================
1999:
Valuation allowances - fixed maturity securities $ 7.5 $ -- $ -- $ 7.5 $ --
Valuation allowances - mortgage loans on real estate 42.4 0.7 1.3(2) -- 44.4
Valuation allowances - real estate 5.4 0.9 -- 0.8 5.5
---------------------------- ------------- ----------------------------
Total $ 55.3 $ 1.6 $ 1.3 $ 8.3 $ 49.9
============================ ============= ============================
1998:
Valuation allowances - fixed maturity securities $ -- $ 7.5 $ -- $ -- $ 7.5
Valuation allowances - mortgage loans on real estate 42.5 (0.1) -- -- 42.4
Valuation allowances - real estate 11.1 (5.7) -- -- 5.4
---------------------------- ------------- ----------------------------
Total $ 53.6 $ 1.7 $ -- $ -- $ 55.3
============================ ============= ============================
- ----------
1 Amounts represent direct write-downs charged against the valuation
allowance.
2 Allowance on acquired mortgage loans.
See accompanying independent auditors' report.
83
APPENDIX
Example A
Assume that a variable annuity contract owner made a $10,000 allocation on the
first day of a calendar quarter into a 5-year Guaranteed Term Option. The
Specified Interest Rate at the time is 8% and the 5-year Constant Maturity
Treasury Rate in effect for the Specified Interest Rate is 8%. The variable
annuity contract owner decides to surrender the GTO 985 days from maturity. The
Specified Value of the GTO is $11,937.69. At this time, the 3-year Constant
Maturity Treasury Rate is 7%. (985/365.25 is 2.69 which rounds up to 3.)
1 + a d
------------------------ --------------
MVA FACTOR = 1 + b + 0.0025 365.25
1 + 0.08 985
----------------------- --------------
MVA FACTOR = 1 + 0.07 + 0.0025 365.25
MVA FACTOR = 1.01897
SURRENDER VALUE = SPECIFIED VALUE x MVA FACTOR
SURRENDER VALUE = 11,937.69 x 1.01897
*SURRENDER VALUE = $12,164.15
*Assumes no variable annuity contract contingent deferred sales charges are
applicable.
Specified Value (for purposes of the Example) = the amount of the GTO allocation
($10,000), plus interest accrued at the Specified Interest Rate (8%).
a = The Constant Maturity Treasury Rate declared by the Federal Reserve
Board on Friday, and placed in effect by Nationwide on the Wednesday
immediately preceding the Investment Period during which the allocation
to the GTO was made.
b = The Constant Maturity Treasury Rate declared by the Federal Reserve
Board on Friday, and placed in effect by Nationwide on the Wednesday
immediately preceding the withdrawal, transfer or other distribution
giving rise to the Market Value Adjustment.
d = The number of days remaining in the Guaranteed Term.
85
84
Example B
Assume variable annuity contract owner made a $10,000 allocation on the first
day of a calendar quarter into a 5-year Guaranteed Term Option. The Specified
Interest Rate at the time is 8% and the 5-year Constant Maturity Treasury Rate
in effect for the Specified Interest Rate is 8%. The variable annuity contract
owner decides to surrender his money 985 days from maturity. The Specified Value
of the GTO is $11,937.69. At this time, the 3 year Constant Maturity Treasury
Rate is 9%. (985/365.25 is 2.69 which rounds up to 3.)
1 + a d
------------------------ --------------
MVA FACTOR = 1 + b + 0.0025 365.25
1 + 0.08 985
----------------------- --------------
MVA FACTOR = 1 + 0.09 + 0.0025 365.25
MVA FACTOR = 0.96944
SURRENDER VALUE = SPECIFIED VALUE x MVA FACTOR
SURRENDER VALUE = 11,937.69 x 0.96944
*SURRENDER VALUE = $11,572.87
*Assumes no variable annuity contract contingent deferred sales charges are
applicable.
Specified Value (for purposes of the Example) = the amount of the GTO allocation
($10,000), plus interest accrued at the Specified Interest Rate (8%).
a = The Constant Maturity Treasury Rate declared by the Federal Reserve
Board on Friday, and placed in effect by Nationwide on the Wednesday
immediately preceding the Investment Period during which the allocation
to the GTO was made.
b = The Constant Maturity Treasury Rate declared by the Federal Reserve
Board on Friday, and placed in effect by Nationwide on the Wednesday
immediately preceding the withdrawal, transfer or other distribution
giving rise to the Market Value Adjustment.
d = The number of days remaining in the Guaranteed Term.
86
85
The table set forth below illustrates the impact of a Market Value Adjustment
applied upon a full surrender of a 10 year GTO allocation, at various stages of
the corresponding Guaranteed Term. These figures are based on CMT Rate of 8% (a
in the Market Value Adjustment Formula) and varying current yield CMT Rates
shown in the first column (b in the Market Value Adjustment Formula).
TIME REMAINING TO THE
END OF THE GUARANTEED SPECIFIED VALUE MARKET VALUE MARKET
CURRENT YIELD TERM ADJUSTMENT VALUE
12.00% 9 Years $10,800 -29.35% $7,630
7 Years $12,597 -23.68% $9,614
5 Years $14,693 -17.55% $12,114
2 Years $18,509 - 7.43% $17,134
180 Days $20,785 - 1.88% $20,394
10.00% 9 Years $10,800 -16.94% $8,970
7 Years $12,597 -13.44% $10,904
5 Years $14,693 - 9.80% $13,253
2 Years $18,509 - 4.04% $17,761
180 Days $20,785 - 1.01% $20,575
9.00% 9 Years $10,800 - 9.84% $9,731
7 Years $12,597 - 7.74% $11,622
5 Years $14,693 - 5.59% $13,872
2 Years $18,509 - 2.28% $18,067
180 Days $20,785 - 0.57% $20,667
8.00% 9 Years $10,800 - 2.06% $10,578
7 Years $12,597 - 1.61% $12,394
5 Years $14,693 - 1.15% $14,524
2 Years $18,509 - 0.46% $18,424
180 Days $20,785 - 0.11% $20,762
7.00% 9 Years $10,800 6.47% $11,499
7 Years $12,597 5.00% $13,227
5 Years $14,693 3.55% $15,215
2 Years $18,509 1.40% $18,768
180 Days $20,785 0.34% $20,856
6.00% 9 Years $10,800 15.84% $12,511
7 Years $12,597 12.11% $14,122
5 Years $14,693 8.51% $15,943
2 Years $18,509 3.32% $19,123
180 Days $20,785 0.81% $20,953
4.00% 9 Years $10,800 37.45% $14,845
7 Years $12,597 28.07% $16,133
5 Years $14,693 19.33% $17,533
2 Years $18,509 7.32% $19,864
180 Days $20,785 1.76% $21,151
87
86
PART II
INFORMATION NOT REQUIRED IN A PROSPECTUS
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Not Applicable
Item 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VII of the Amended Code of Regulations of Nationwide
provides as follows:
Section 1. Indemnification of Directors, Officers and Employees.
Nationwide will indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative by reason of the fact that he is
or was a director, officer or employee of Nationwide, or is or was
serving at the request of Nationwide as a director, trustee,
officer, member, or employee of another corporation, domestic or
foreign, non-profit or for profit, partnership, joint venture,
trust or other enterprise against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him in connection with such action,
suit or proceeding, to the extent and under the circumstances
permitted by the General Corporation Law of the State of Ohio.
Such indemnification (unless ordered by a court) will be made as
authorized in a specific case upon a determination that
indemnification of the director, trustee, officer or employee is
proper in the circumstances because he has met the applicable
standards of conduct set forth in the General Corporation Law of
the State of Ohio. Such determination will be made (1) by the
Board of Directors by a majority vote of a quorum consisting of
directors who were not, and are not, parties to or threatened with
any such action, suit or proceeding, or (2) if such a quorum is
not obtainable, or if a majority vote of a quorum of disinterested
directors so directs, in a written opinion by independent legal
counsel meeting the requirements of independence prescribed by the
General Corporation Law of Ohio, or (3) by the shareholders, or
(4) by the Court of Common Pleas or the court in which such
action, suit or proceeding was brought.
Section 2. Other Rights. The foregoing right of indemnification
will not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under the Articles of
Incorporation, these Regulations, any agreement, vote of
shareholders or disinterested directors or otherwise, and will
continue as to a person who has ceased to be a director, trustee,
officer or employee and will inure to the benefit of the heirs,
executors and administrators of such a person.
Section 3. Advance Payment of Expenses. Nationwide may pay
expenses, including attorneys' fees, incurred in defending any
action, suit or proceeding referred to in Section 1 of this
Article VII, in advance of the final disposition of such action,
suit or proceeding as authorized by the directors in the specific
case, upon receipt of an undertaking by or on behalf of the
director, trustee, officer or employee to repay such amount,
unless it will ultimately be determined that he is entitled to be
indemnified by Nationwide as authorized in this Article VII.
Section 4. Insurance. Nationwide may purchase and maintain
insurance on behalf of any person who is or was a director,
officer, member, or employee of Nationwide, or is or was serving
at the request of Nationwide as a director, trustee, officer or
employee of another corporation, domestic or foreign, non-profit
or for profit, partnership, joint venture, trust, or other
enterprise against any liability asserted against him and incurred
by him in any such capacity, or arising out of his status as such,
whether or not Nationwide would have the power to indemnify him
against such liability under this Article VII.
88
87
Item 15. RECENT SALES OF UNREGISTERED SECURITIES
Nationwide, through various separate accounts -- the Nationwide
Government Plans Variable Account ("GPVA"), Nationwide Government
Plans Variable Account-II ("GPVA-II"), and Nationwide Ohio DC
Variable Account ("Ohio DC Variable Account") -- offers contracts
to qualified pension plans and certain government plans in
reliance on Section 3(a)(2) of the Securities Act of 1933 and in
certain cases, Rule 144A thereunder. Data relating to the amount
of securities sold are:
2000 1999 1998
GPVA $1,179,979,320 $2,385,872,047 $1,986,448,255
QPVA $620,098 $85,144,727 $51,229,143
Ohio DC Variable Account $971,145,091 $1,161,465,441 $173,209,797
Item 16. EXHIBITS AND FINANCIAL SCHEDULES
(a)
Exhibit Index Page
(3)(i) Certificate of Incorporation (Exhibit A)*
(3)(ii) Code of Regulations (Exhibit B)*
(4) Annuity Endorsement to Contracts (Exhibit C)* E
(5) Opinion Regarding Legality (Exhibit D) E
(21) Subsidiaries of the Registrant (Exhibit D)*
(23) Consent of Experts and Counsel (Exhibit E) E
(24) Power of Attorney (Exhibit F)* - Copy attached hereto
(b)(1) Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Income for the years ended December 31,
2000, 1999 and 1998
Consolidated Statements of Shareholder's Equity for the years
ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December
31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(b)(2) Financial Statement Schedules:
Schedule I Consolidated Summary of Investments - Other than
Investments in Related Parties as of December 31,
2000
Schedule III Supplementary Insurance Information as of December
31, 2000, 1999 and 1998 and for each of the years
then ended
Schedule IV Reinsurance as of December 31, 2000, 1999 and 1998
and for each of the years then ended
Schedule V Valuation and Qualifying Accounts for the years ended
December 31, 2000, 1999 and 1998
All other schedules to the consolidated financial statements
referenced by Article 7 of Regulation S-X are not required under
the related instructions or are inapplicable and have therefore
been omitted.
* Filed with the original submission of this registration statement (SEC File
No. 33-58997) on May 2, 1995.
88
Item 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(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;
(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 determining of 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.
89
INDEPENDENT AUDITORS' CONSENT
The Board of Directors of Nationwide Life Insurance Company:
We hereby consent to the use of our report dated January 26, 2001 on our audits
of the consolidated financial statements of Nationwide Life Insurance Company
and subsidiaries and the financial statement schedules.
Columbus, OH
April 26, 2001 KPMG LLP
90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Post-Effective Amendment No. 7 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Columbus, State of Ohio, on the 26th of April, 2001.
NATIONWIDE LIFE INSURANCE COMPANY
-----------------------------------------------------
(Registrant)
By: /s/ STEVEN SAVINI
-----------------------------------------------------
Steven Savini, Esq.
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 7 to the Registration Statement has been signed by the following
persons on the 26th of April, 2001 in the capacities indicated.
SIGNATURE TITLE
LEWIS J. ALPHIN Director
- -------------------------------
Lewis J. Alphin
A. I. BELL Director
- -------------------------------
A. I. Bell
YVONNE M. CURL Director
- -------------------------------
Yvonne M. Curl
KENNETH D. DAVIS Director
- -------------------------------
Kenneth D. Davis
KEITH W. ECKEL Director
- -------------------------------
Keith W. Eckel
WILLARD J. ENGEL Director
- -------------------------------
Willard J. Engel
FRED C. FINNEY Director
- -------------------------------
Fred C. Finney
JOSEPH J. GASPER President and Chief Operating
- ------------------------------- Officer and Director
Joseph J. Gasper
W.G. JURGENSEN Chief Executive Officer
- ------------------------------- And Director
W.G. Jurgensen
DAVID O. MILLER Chairman of the Board and
- ------------------------------- Director
David O. Miller
RALPH M. PAIGE Director
- -------------------------------
Ralph M. Paige
JAMES F. PATTERSON Director
- -------------------------------
James F. Patterson
ARDEN L. SHISLER Director By /s/ STEVEN SAVINI
- ------------------------------- ----------------------
Arden L. Shisler Steven Savini
Attorney-in-Fact
ROBERT L. STEWART Director
- -------------------------------
Robert L. Stewart