1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 COMMISSION FILE NO. 2-28596
NATIONWIDE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
OHIO 31-4156830
(State or other jurisdiction ) (I.R.S. Employer Identification No.)
of incorporation or organization
ONE NATIONWIDE PLAZA
COLUMBUS, OHIO 43215
(614) 249-7111
(Address, including zip code and telephone number,
including area code, of Registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO
--- ---
All voting stock was held by affiliates of the Registrant on May 4, 2001.
COMMON STOCK (par value $1 per share) - 3,814,779 shares issued and outstanding
as of May 4, 2001 (Title of Class)
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
Item 1 Unaudited Consolidated Financial Statements 3
Item 2 Management's Narrative Analysis of the Results of Operations 13
Item 3 Quantitative and Qualitative Disclosures About Market Risk 23
PART II OTHER INFORMATION
Item 1 Legal Proceedings 23
Item 2 Changes in Securities 24
Item 3 Defaults Upon Senior Securities 24
Item 4 Submission of Matters to a Vote of Security Holders 24
Item 5 Other Information 24
Item 6 Exhibits and Reports on Form 8-K 24
SIGNATURE 25
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PART I - FINANCIAL INFORMATION
ITEM 1 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Income
(Unaudited)
(in millions)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2001 2000
============================================================================================================================
REVENUES
Policy charges $ 267.7 $ 272.6
Life insurance premiums 63.9 66.9
Net investment income 422.9 407.6
Net realized losses on investments, hedging instruments and hedged items (3.9) (3.1)
Other 5.9 5.2
- ----------------------------------------------------------------------------------------------------------------------------
756.5 749.2
- ----------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to policyholder account balances 301.2 294.2
Other benefits and claims 65.0 67.3
Policyholder dividends on participating policies 10.5 12.0
Amortization of deferred policy acquisition costs 92.9 85.9
Interest expense on short-term borrowings 2.3 -
Other operating expenses 115.6 122.1
- ----------------------------------------------------------------------------------------------------------------------------
587.5 581.5
- ----------------------------------------------------------------------------------------------------------------------------
Income before federal income tax expense and cumulative effect of adoption
of accounting principle 169.0 167.7
Federal income tax expense 44.6 54.4
- ----------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of adoption of accounting principle 124.4 113.3
Cumulative effect of adoption of accounting principle, net of tax (4.8) -
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 119.6 $ 113.3
============================================================================================================================
See accompanying notes to unaudited consolidated financial statements.
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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Balance Sheets
(in millions, except per share amounts)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2001 2000
==============================================================================================================================
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $15,620.3 in 2001; $15,245.8 in 2000) $ 16,051.3 $ 15,443.0
Equity securities (cost $45.0 in 2001; $103.5 in 2000) 41.5 109.0
Mortgage loans on real estate, net 6,349.9 6,168.3
Real estate, net 309.3 310.7
Policy loans 572.7 562.6
Other long-term investments 91.3 101.8
Short-term investments 660.1 442.6
- ------------------------------------------------------------------------------------------------------------------------------
24,076.1 23,138.0
- ------------------------------------------------------------------------------------------------------------------------------
Cash 24.0 18.4
Accrued investment income 273.0 251.4
Deferred policy acquisition costs 2,906.2 2,865.6
Other assets 520.3 396.7
Assets held in separate accounts 58,645.8 65,897.2
- ------------------------------------------------------------------------------------------------------------------------------
$ 86,445.4 $ 92,567.3
==============================================================================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims $ 22,596.2 $ 22,183.6
Short-term borrowings 179.0 118.7
Other liabilities 1,593.8 1,164.9
Liabilities related to separate accounts 58,645.8 65,897.2
- ------------------------------------------------------------------------------------------------------------------------------
83,014.8 89,364.4
- ------------------------------------------------------------------------------------------------------------------------------
Shareholder's equity:
Capital shares, $1 par value. Authorized 5.0 million shares, issued and
outstanding 3.8 million shares 3.8 3.8
Additional paid-in capital 646.1 646.1
Retained earnings 2,555.9 2,436.3
Accumulated other comprehensive income 224.8 116.7
- ------------------------------------------------------------------------------------------------------------------------------
3,430.6 3,202.9
- ------------------------------------------------------------------------------------------------------------------------------
$ 86,445.4 $ 92,567.3
==============================================================================================================================
See accompanying notes to unaudited consolidated financial statements.
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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
(Unaudited)
Three Months Ended March 31, 2001 and 2000
(in millions)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDER'S
STOCK CAPITAL EARNINGS INCOME (LOSS) EQUITY
===================================================================================================================================
Balance as of January 1, 2000 $ 3.8 $ 766.1 $ 2,011.0 $ (15.9) $ 2,765.0
Comprehensive income:
Net income - - 113.3 - 113.3
Net unrealized losses on securities available-
for-sale arising during the period, net of tax - - - (7.3) (7.3)
--------
Total comprehensive income 106.0
--------
Dividends to shareholder - - (50.0) - (50.0)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2000 $ 3.8 $ 766.1 $ 2,074.3 $ (23.2) $ 2,821.0
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF JANUARY 1, 2001 $ 3.8 $ 646.1 $ 2,436.3 $ 116.7 $ 3,202.9
Comprehensive income:
Net income - - 119.6 - 119.6
Net unrealized gains on securities available-
for-sale arising during the period, net of tax - - - 103.8 103.8
Cumulative effect of adoption of accounting
principle, net of tax - - - 3.6 3.6
Accumulated net gains on cash flow hedges,
net of tax - - - 0.7 0.7
--------
Total comprehensive income 227.7
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF MARCH 31, 2001 $ 3.8 $ 646.1 $ 2,555.9 $ 224.8 $ 3,430.6
===================================================================================================================================
See accompanying notes to unaudited consolidated financial statements.
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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, 2001 and 2000
(in millions)
2001 2000
============================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 119.6 $ 113.3
Adjustments to reconcile net income to net cash provided by operating activities:
Interest credited to policyholder account balances 301.2 294.2
Capitalization of deferred policy acquisition costs (198.6) (189.2)
Amortization of deferred policy acquisition costs 92.9 85.9
Amortization and depreciation (7.5) (1.4)
Realized losses on investments, hedging instruments and hedged items 3.9 3.1
Cumulative effect of adoption of accounting principle 7.4 -
Increase in accrued investment income (21.6) (5.9)
Decrease (increase) in other assets 0.5 (42.3)
Increase in policy liabilities 5.3 61.6
Increase in other liabilities 140.8 82.6
Other, net 0.3 (4.5)
----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 444.2 397.4
----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available-for-sale 907.2 715.5
Proceeds from sale of securities available-for-sale 33.7 258.2
Proceeds from repayments of mortgage loans on real estate 190.9 125.1
Proceeds from sale of real estate 0.1 2.1
Proceeds from repayments of policy loans and sale of other invested assets 29.3 10.7
Cost of securities available-for-sale acquired (1,255.4) (816.2)
Cost of mortgage loans on real estate acquired (354.0) (216.2)
Cost of real estate acquired (0.1) (1.5)
Short-term investments, net (217.5) 375.2
Other, net 60.8 (28.3)
----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (605.0) 424.6
----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of short-term borrowings 60.3 -
Cash dividends paid - (100.0)
Increase in investment and universal life insurance product
account balances 1,281.6 962.3
Decrease in investment and universal life insurance product
account balances (1,175.5) (1,688.1)
----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 166.4 (825.8)
----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 5.6 (3.8)
Cash, beginning of period 18.4 4.8
----------------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 24.0 $ 1.0
============================================================================================================================
See accompanying notes to unaudited consolidated financial statements.
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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements
Three Months Ended March 31, 2001
(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements of
Nationwide Life Insurance Company and subsidiaries (NLIC or
collectively, the Company) 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, for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all information and footnotes
required by accounting principles generally accepted in the United
States of America for complete financial statements. The financial
information included herein reflects all adjustments (all of which are
normal and recurring in nature) which are, in the opinion of
management, necessary for a fair presentation of financial position and
results of operations. Operating results for all periods presented are
not necessarily indicative of the results that may be expected for the
full year. All significant intercompany balances and transactions have
been eliminated. The accompanying unaudited consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and related notes for the year ended December 31,
2000 included in the Company's annual report on Form 10-K.
(2) New Accounting Principle
------------------------
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, was adopted by the Company effective
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. The
adoption of SFAS 133 resulted 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) was
recorded in accumulated other comprehensive income at January 1, 2001.
The adoption of SFAS 133 resulted 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
resulted in the Company reporting total derivative instrument assets
and liabilities of $44.8 million and $107.1 million, respectively, as
of January 1, 2001.
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.
(3) Derivatives
-----------
QUALITATIVE DISCLOSURE
Interest Rate Risk Management
The Company is exposed to changes in the fair value of fixed rate
investments (commercial mortgage loans and corporate bonds) due to
changes in interest rates. To manage this risk, the Company enters into
various types of derivative instruments to minimize fluctuations in
fair values resulting changes in from interest rates. The Company
principally uses interest rate swaps and short Eurodollar futures to
manage this risk.
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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
Under interest rate swaps, the Company receives variable interest rate
payments and makes fixed rate payments, thereby creating floating rate
investments.
Short Eurodollar futures change the fixed rate cash flow exposure to
variable rate cash flows. With short Eurodollar futures, if interest
rates rise (fall), the gains (losses) on the futures adjust the fixed
rate income on the investments, thereby creating floating rate
investments.
As a result of entering into commercial mortgage loan and private
placement commitments, the Company is exposed to changes in the fair
value of the commitment due to changes in interest rates during the
commitment period. To manage this risk, the Company enters into short
Treasury futures.
With short Treasury futures, if interest rates rise (fall), the gains
(losses) on the futures will offset the change in fair value of the
commitment.
Floating rate investments (commercial mortgage loans and corporate
bonds) expose the Company to fluctuations in cash flow and investment
income due to changes in interest rates. To manage this risk, the
Company enters into receive fixed, pay variable over-the-counter
interest rate swaps or long Eurodollar futures strips to convert the
variable rate investments to a fixed rate.
In using interest rate swaps, the Company receives fixed interest rate
payments and makes variable rate payments, thereby creating fixed rate
assets.
The long Eurodollar futures change the variable rate cash flow exposure
to fixed rate cash flows. With long Eurodollar futures, if interest
rates rise (fall), the losses (gains) on the futures are used to reduce
the variable rate income on the investments, thereby creating fixed
rate investments.
Foreign Currency Risk Management
In conjunction with the Company's medium-term note programs, the
Company issues both fixed and variable rate liabilities denominated in
foreign currencies. The Company is exposed to changes in fair value of
the liabilities due to changes in foreign currency exchange rates and
interest rates. To manage this risk, the Company enters into
cross-currency interest rate swaps to convert these liabilities to a
variable US dollar rate.
For a fixed rate liability, the cross-currency interest rate swap is
structured to receive a fixed rate, in the foreign currency, and pay a
variable US dollar rate, generally 3-month libor. For a variable rate
liability, the cross-currency interest rate swap is structured to
receive a variable rate, in the foreign currency, and pay a variable US
dollar rate, generally 3-month libor.
The Company is exposed to changes in fair value of fixed rate
investments denominated in a foreign currency due to changes in foreign
currency exchange rates and interest rates. To manage this risk, the
Company uses cross-currency interest rate swaps to convert these assets
to variable US dollar rate instruments.
Cross-currency interest rate swaps are structured to pay a fixed rate,
in the foreign currency, and receive a variable US dollar rate,
generally 3-month libor.
Non-Hedging Derivatives
The Company may enter into over-the-counter basis swaps (receive one
variable rate, pay another variable rate) to change the rate
characteristics of a specific investment to better match the variable
rate paid on a liability. While the pay-side terms of the basis swap
will line up with the terms of the asset, the Company may not be able
to match the receive-side terms of the derivative to a specific
liability; therefore, basis swaps may not receive hedge accounting
treatment.
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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
QUANTITATIVE DISCLOSURE
Fair Value Hedges
Changes in the fair value of derivative instruments designated as fair
value hedges, and the corresponding changes in the fair value of the
hedged asset or liability, attributable to the risk being hedged, are
included in net realized losses on investments, hedging instruments and
hedged items in the consolidated statements of income. Amounts
receivable or payable under interest rate swaps are recognized as an
adjustment to net investment income or interest credited to
policyholder account balances consistent with the nature of the hedged
item.
During the quarter ended March 31, 2001, a loss of $1.7 million was
recognized in net realized losses on investments, hedging instruments
and hedged items. This represents the ineffective portion of the fair
value hedging relationships. There were no gains or losses attributable
to the portion of the derivative instrument's change in value excluded
from the assessment of hedge effectiveness. There were also no gains or
losses recognized in earnings as a result of hedged firm commitments no
longer qualifying as fair value hedges.
Cash Flow Hedges
Changes in the fair value of derivative instruments designated as cash
flow hedges are reported in accumulated other comprehensive income
(AOCI). Amounts receivable or payable under interest rate swaps are
recognized as an adjustment to net investment income or interest
credited to policyholder account balances consistent with the nature of
the hedged item. In the event that a derivative instrument was
liquidated and the hedged item remained on the books, the gain or loss
on the derivative would be reclassified out of AOCI over the life of
the underlying asset. The Company is not anticipating any
reclassification out of AOCI over the next 12-month period.
Net realized losses on investments, hedging instruments and hedged
items include less than $0.1 million of net gains for the quarter ended
March 31, 2001 representing the ineffective portion of the cash flow
hedging relationships. There were no gains or losses attributable to
the portion of the derivative instruments' change in value excluded
from the assessment of hedge effectiveness.
Other Derivative Instruments, Including Embedded Derivatives
Net realized losses on investments for the quarter ended March 31, 2001
include a loss of $0.5 million, related to other derivative
instruments, including embedded derivatives. A $38.0 million loss was
recorded in the quarter ended March 31, 2001 on the change in value of
cross-currency interest rate swaps hedging variable rate medium term
notes denominated in foreign currencies. An offsetting gain of $37.2
million was recorded to reflect the change in spot rates during the
quarter on these variable rate liabilities. Additional gains of $0.3
million were also recorded related to other derivative instruments not
receiving hedge accounting treatment and embedded derivatives.
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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
(4) Comprehensive Income (Loss)
---------------------------
Comprehensive income (loss) includes net income as well as certain
items that are reported directly within a separate component of
shareholders' equity that bypass net income. Other comprehensive income
(loss) is comprised of unrealized gains (losses) on securities
available-for-sale and accumulated net gains on cash flow hedges. The
related before and after federal income tax amounts are as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------------------
(in millions) 2001 2000
==========================================================================================================
Unrealized gains (losses) on securities available-for- sale arising
during the period:
Gross $ 220.6 $ (32.8)
Adjustment to deferred policy acquisition costs (65.1) 20.6
Related federal income tax (expense) benefit (54.4) 4.3
----------------------------------------------------------------------------------------------------------
Net 101.1 (7.9)
----------------------------------------------------------------------------------------------------------
Reclassification adjustment for net losses on securities
available-for-sale realized during the period:
Gross 4.2 0.9
Related federal income tax benefit (1.5) (0.3)
----------------------------------------------------------------------------------------------------------
Net 2.7 0.6
----------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) on securities available-for-sale 103.8 (7.3)
----------------------------------------------------------------------------------------------------------
Accumulated net gains on cash flow hedges:
Transition adjustment 5.6 -
Gross 1.1 -
Related federal income tax expense (2.4) -
----------------------------------------------------------------------------------------------------------
Other comprehensive income on cash flow hedges 4.3 -
----------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) $ 108.1 $ (7.3)
==========================================================================================================
(5) Segment Disclosures
-------------------
The Company uses differences in products as the basis for defining its
reportable segments. The Company reports three product segments:
Individual Annuity, Institutional Products and Life Insurance.
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 programs. 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.
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NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
The Life Insurance segment consists of insurance products, including
universal life insurance, corporate-owned life insurance (COLI) and
bank-owned life insurance (BOLI) products, which provide a death
benefit and also allow the customer to build cash value on a
tax-advantaged basis.
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 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, hedging instruments and hedged items
in the Corporate segment.
The following table summarizes the financial results of the Company's
business segments for the three months ended March 31, 2001 and 2000.
Individual Institutional Life
(in millions) Annuity Products Insurance Corporate Total
===================================================================================================================
2001
Net investment income $ 124.4 $ 211.7 $ 79.9 $ 6.9 $ 422.9
Other operating revenue 144.0 57.0 130.6 5.9 337.5
-------------------------------------------------------------------------------------------------------------------
Total operating revenue(1) 268.4 268.7 210.5 12.8 760.4
-------------------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances 100.3 158.1 42.8 - 301.2
Amortization of deferred policy
acquisition costs 56.4 12.8 23.7 - 92.9
Interest expense on short-term
borrowings - - - 2.3 2.3
Other benefits and expenses 49.2 42.7 94.3 4.9 191.1
-------------------------------------------------------------------------------------------------------------------
Total expenses 205.9 213.6 160.8 7.2 587.5
-------------------------------------------------------------------------------------------------------------------
Operating income before federal
income tax expense(1) 62.5 55.1 49.7 5.6 172.9
Net realized losses on investments,
hedging instruments and hedged
items - - - (3.9) (3.9)
-------------------------------------------------------------------------------------------------------------------
Income before federal income tax
expense and cumulative effect of
adoption of accounting principle $ 62.5 $ 55.1 $ 49.7 $ 1.7 $ 169.0
===================================================================================================================
Assets as of period end $ 41,748.1 $ 34,062.1 $ 8,285.1 $ 2,350.1 $ 86,445.4
===================================================================================================================
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12
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
Individual Institutional Life
(in millions) Annuity Products Insurance Corporate Total
===================================================================================================================
2000
Net investment income $ 123.3 $ 206.7 $ 65.8 $ 11.8 $ 407.6
Other operating revenue 163.4 62.3 113.8 5.2 344.7
-------------------------------------------------------------------------------------------------------------------
Total operating revenue(1) 286.7 269.0 179.6 17.0 752.3
-------------------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances 101.6 159.2 33.4 - 294.2
Amortization of deferred policy
acquisition costs 56.7 12.3 16.9 - 85.9
Other benefits and expenses 56.7 38.3 96.0 10.4 201.4
-------------------------------------------------------------------------------------------------------------------
Total expenses 215.0 209.8 146.3 10.4 581.5
-------------------------------------------------------------------------------------------------------------------
Operating income before federal
income tax expense(1) 71.7 59.2 33.3 6.6 170.8
Net realized losses on investments,
hedging instruments and hedged
items - - - (3.1) (3.1)
-------------------------------------------------------------------------------------------------------------------
Income before federal income tax
expense and cumulative effect of
adoption of accounting principle $ 71.7 $ 59.2 $ $ 33.3 $ 3.5 $ 167.7
===================================================================================================================
Assets as of period end $47,598.5 $ 40,827.9 $ 7,069.8 $ 1,392.2 $96,888.4
===================================================================================================================
----------
(1) Excludes net realized gains and losses on investments, hedging
instruments and hedged items.
(6) 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.
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ITEM 2 MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
INTRODUCTION
The following analysis of unaudited consolidated results of
operations of the Company should be read in conjunction with the
unaudited consolidated financial statements and related notes
included elsewhere herein.
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 the Company'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.
RESULTS OF OPERATIONS
In addition to net income, the Company reports net operating
income, which excludes net realized gains and losses on
investments, hedging instruments and hedged items and cumulative
effect of adoption of accounting principle. 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 the first quarter of 2001 and 2000.
THREE MONTHS ENDED
MARCH 31,
-------------------------------
(in millions) 2001 2000
==========================================================================================================
Net income $ 119.6 $ 113.3
Net realized losses on investments, hedging instruments and hedged items,
net of tax 2.5 2.0
Cumulative effect of adoption of accounting principle, net of tax 4.8 -
----------------------------------------------------------------------------------------------------------
Net operating income $ 126.9 $ 115.3
==========================================================================================================
Revenues
Total revenues for the first quarter of 2001, excluding net
realized gains and losses on investments, hedging instruments and
hedged items increased to $760.4 million compared to $752.3
million for the same period in 2000.
13
14
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
specified period of annuity and certain life insurance contracts.
Policy charges for the first quarter of 2001 and 2000 were as
follows:
THREE MONTHS ENDED
MARCH 31,
-------------------------------
(in millions) 2001 2000
==========================================================================================================
Asset fees $ 159.5 $ 175.9
Cost of insurance charges 46.6 35.1
Administrative fees 41.3 36.7
Surrender fees 20.3 24.9
----------------------------------------------------------------------------------------------------------
Total policy charges $ 267.7 $ 272.6
==========================================================================================================
The decline in asset fees reflects a decrease in total average
separate account assets of $7.12 billion (10%) in first quarter
2001 compared to a year ago. Market depreciation on variable
annuity and investment life insurance products, partially offset
by net flows into these products, have resulted in the decrease 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 $25.28 billion as of March 31, 2001
compared to $21.10 billion a year ago.
The growth in administrative fees is attributable to a significant
increase in premiums on individual investment life policies and
certain corporate-owned life policies where the Company collects a
premium load. Surrender charges decreased as a result of continued
improvement in customer retention in the Individual Annuity
segment.
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 $407.6
million in the first quarter of 2000 to $422.9 million in the
first quarter of 2001 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 increased $1.11 billion to
$22.60 billion as of the end of first quarter 2001 compared to
$21.49 billion a year ago.
Realized gains and losses on investments are not considered by the
Company to be recurring components of earnings. The Company makes
decisions concerning the sale of invested assets based on a
variety of market, business, tax and other factors. In addition,
included in this caption are changes in the fair value of items
qualifying as fair value hedges, the related hedged items and the
ineffective portion of cash flow hedges, all of which are not
considered recurring components of earnings.
Other income includes fees earned by the Company's broker/dealers
as well as commissions and other income for marketing,
distribution and administration services.
14
15
Benefits and Expenses
Interest credited to policyholder account balances totaled $301.2
million in first quarter 2001 compared to $294.2 million in first
quarter 2000 and principally relates to fixed annuities, both
individual and institutional, and investment life insurance
products. The growth in interest credited reflects the increase in
COLI policy reserves.
The growth in amortization of deferred policy acquisition costs
(DAC), which totaled $92.9 million and $85.9 million in the first
quarter of 2001 and 2000, respectively, is principally due to the
Life Insurance segment as a result of growth in the number of
policies in-force in first quarter 2001.
Operating expenses were $115.6 million in first quarter 2001, a 5%
decrease from first quarter 2000 operating expenses of $122.1
million. The decrease reflects the Company's commitment to
aggressive expense management in response to volatile equity
markets.
Federal income tax expense was $42.0 million and $54.4 million for
the first quarter of 2001 and 2000, respectively. These amounts
represent effective tax rates of 26.0% for the first quarter of
2001 and 32.4% in 2000. An increase in tax exempt income and
investment tax credits resulted in the decrease in the effective
rate.
Recently Issued Accounting Pronouncements
See note 2 to the unaudited consolidated financial statements for
a discussion of recently issued accounting pronouncements.
Sales Information
Sales are comprised of annuities, pension plans and life insurance
products sold to a wide variety of customer bases.
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 and domestic investors through an
unrelated third party trust under the Company's two medium-term
note programs; 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 the first quarter of 2001 and
2000, are summarized as follows:
(in millions) 2001 2000
==========================================================================================================
Independent broker/dealers $ 1,192.7 $ 1,550.8
Brokerage firms 339.3 308.0
Financial institutions 722.4 644.4
Pension plan administrators 302.8 332.1
Life insurance specialists 377.8 230.0
Nationwide agents 168.8 211.3
Nationwide Retirement Solutions 432.3 774.8
----------------------------------------------------------------------------------------------------------
The decrease in sales in the independent broker/dealer channel
reflects lower demand for variable annuities due to volatile
equity markets, and a shift in private sector pension plan sales
from group annuities issued by the Company to trust products
issued by an affiliate, Nationwide Trust Company.
15
16
Sales through financial institutions grew 14% in first quarter
2001 compared to a year ago, 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
increased sales of COLI products. For the second consecutive year,
NLIC is a market leader in COLI sales, with a focus on mid-sized
cases.
Lower sales through Nationwide Retirement Solutions reflects the
Company's exit from the teacher market in early 2000, the impact
of previously lost cases on recurring deposits, and a shift in
public sector pension sales from group annuities issued by the
Company to administration only services provided by affiliates.
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 the first quarter of 2001 and
2000 are summarized as follows.
(in millions) 2001 2000
==========================================================================================================
The BEST of AMERICA products $ 1,025.6 $ 1,303.9
Private label annuities 221.5 273.9
Other 2.5 32.4
-------------------------------------------------------------------------------------------------------
Total individual variable annuity sales 1,249.6 1,610.2
-------------------------------------------------------------------------------------------------------
Deferred fixed annuities 316.2 85.1
Immediate fixed annuities 39.1 39.1
-------------------------------------------------------------------------------------------------------
Total individual fixed annuity sales 355.3 124.2
-------------------------------------------------------------------------------------------------------
Total individual annuity sales $ 1,604.9 $ 1,734.4
=======================================================================================================
The BEST of AMERICA products $ 938.0 $ 1,198.6
Other 13.9 16.1
-------------------------------------------------------------------------------------------------------
Total private sector pension plan sales 951.9 1,214.7
-------------------------------------------------------------------------------------------------------
Total public sector pension plan sales - IRC Section 457 annuities 402.1 691.6
-------------------------------------------------------------------------------------------------------
Total institutional products sales $ 1,354.0 $ 1,906.3
=======================================================================================================
The BEST of AMERICA variable life series $ 140.6 $ 125.3
Corporate-owned life insurance 377.8 228.5
Traditional/Universal life insurance 58.8 56.9
-------------------------------------------------------------------------------------------------------
Total life insurance sales $ 577.2 $ 410.7
=======================================================================================================
BUSINESS SEGMENTS
The Company 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.
16
17
The following table summarizes operating income before federal
income tax expense for the Company's business segments for the
first quarter of 2001 and 2000.
THREE MONTHS ENDED
MARCH 31,
-------------------------------
(in millions) 2001 2000
==========================================================================================================
Individual Annuity $ 62.5 $ 71.7
Institutional Products 55.1 59.2
Life Insurance 49.7 33.3
Corporate 5.6 6.6
----------------------------------------------------------------------------------------------------------
Operating income before federal income tax expense $ 172.9 $ 170.8
==========================================================================================================
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.
17
18
The following table summarizes certain selected financial data for
the Company's Individual Annuity segment for the periods
indicated.
THREE MONTHS ENDED
MARCH 31,
----------------------------
(in millions) 2001 2000
=======================================================================================================
INCOME STATEMENT DATA
Revenues:
Policy charges $ 128.0 $ 145.8
Net investment income 124.4 123.3
Premiums on immediate annuities 16.0 17.6
-------------------------------------------------------------------------------------------------------
268.4 286.7
-------------------------------------------------------------------------------------------------------
Benefits and expenses:
Interest credited to policyholder account balances 100.3 101.6
Other benefits 15.7 16.8
Amortization of deferred policy acquisition costs 56.4 56.7
Other operating expenses 33.5 39.9
-------------------------------------------------------------------------------------------------------
205.9 215.0
-------------------------------------------------------------------------------------------------------
Operating income before federal income tax expense $ 62.5 $ 71.7
=======================================================================================================
OTHER DATA
Sales:
Individual variable annuities $ 1,249.6 $ 1,610.2
Individual fixed annuities 355.3 124.2
-------------------------------------------------------------------------------------------------------
Total individual annuity sales $ 1,604.9 $ 1,734.4
=======================================================================================================
Average account balances:
General account $ 6,914.4 $ 7,072.4
Separate account 35,225.4 37,421.4
-------------------------------------------------------------------------------------------------------
Total average account balances $ 42,139.8 $ 44,493.8
=======================================================================================================
Account balances as of period end:
Individual variable annuities $ 35,625.0 $ 42,182.0
Individual fixed annuities 4,223.7 3,701.7
-------------------------------------------------------------------------------------------------------
Total account balances $ 39,848.7 $ 45,883.7
=======================================================================================================
Return on average equity 16.6% 20.3%
Pre-tax operating income to average account balances 0.59% 0.64%
-------------------------------------------------------------------------------------------------------
Pre-tax operating earnings totaled $62.5 million in first quarter
2001, down 13% compared to a year ago. The decrease in earnings is
primarily a result of lower asset and surrender fees, partially
offset by lower operating expenses.
Asset fees decreased to $108.2 million in the first quarter of
2001, down 8% from $117.2 million in the same period a year ago.
Asset fees are calculated daily and charged as a percentage of
separate account assets. The decrease in asset fees is due to
market depreciation on investments underlying reserves. Average
separate account assets decreased 6% to $35.23 billion as of March
31, 2001 compared to $37.42 billion a year ago.
Surrender fees decreased by $7.9 million to $15.2 million in the
first quarter of 2001. Fueling this decrease was the improvement
in variable annuity lapse rates over the first quarter of 2000,
which totaled 10.3%, excluding internal replacements, in the first
quarter of 2001, 220 basis points better than a year ago.
Operating expenses were $33.5 million in first quarter 2001, a
decrease of 16% over first quarter 2000, reflecting management's
focus on expense management in response to depressed equity
markets.
18
19
The following table depicts the interest spread on average general
account reserves in the Individual Annuity segment for the periods
indicated.
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2001 2000
==========================================================================================================
Net investment income 7.90% 7.87%
Interest credited 5.80 5.74
----------------------------------------------------------------------------------------------------------
Interest spread 2.10% 2.13%
==========================================================================================================
The Company experienced an increase in mortgage loan and bond
prepayment fees and such income accounted for approximately 8
basis points of the interest spread in first quarter 2001 compared
to no basis points in the same period a year ago. The Company
anticipates interest spreads over the next several quarters to
range between 195 and 200 basis points, excluding the impact of
mortgage loan and bond prepayment income.
Led by variable product deposits of $1.48 billion and withdrawals
and surrenders of $1.20 billion, Individual Annuity segment
deposits in first quarter 2001 of $1.83 billion offset by
withdrawals and surrenders totaling $1.29 billion generated net
flows of $540.8 million compared to the $292.5 million achieved a
year ago. 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.
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 1.23% as of March 31, 2001 compared to
1.25% a year ago.
The decrease in pre-tax operating income to average assets in 2001
and 2000 is primarily driven by the mix of products and producer
compensation arrangements. Increased sales of products with lower
policy charges and increased sales of trail commission individual
variable annuities are impacting margins, as measured by return on
average account balances.
Individual Annuity sales, which exclude internal replacements,
during first quarter 2001 were $1.60 billion, down from $1.73
billion in the year ago quarter. Sales of fixed annuities nearly
tripled to $316.2 million in first quarter 2001 compared to $85.1
million in first quarter 2000, offsetting the decline in variable
annuity sales.
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 programs. 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 two
medium-term note programs, large case pension plan acquisitions
and Nationwide employee and agent benefit plans, however the
income statement data does reflect this business.
19
20
The following table summarizes certain selected financial data for
the Company's Institutional Products segment for the periods
indicated.
THREE MONTHS ENDED
MARCH 31,
------------------------------
(in millions) 2001 2000
=========================================================================================================
INCOME STATEMENT DATA
Revenues:
Asset fees $ 47.3 $ 55.0
Net investment income 211.7 206.7
Other 9.7 7.3
---------------------------------------------------------------------------------------------------------
268.7 269.0
---------------------------------------------------------------------------------------------------------
Benefits and expenses:
Interest credited to policyholder account balances 158.1 159.2
Other benefits and expenses 55.5 50.6
---------------------------------------------------------------------------------------------------------
213.6 209.8
---------------------------------------------------------------------------------------------------------
Operating income before federal income tax expense $ 55.1 $ 59.2
=========================================================================================================
OTHER DATA
Sales:
Private sector pension plans $ 951.9 $ 1,214.7
Public sector pension plans 402.1 691.6
---------------------------------------------------------------------------------------------------------
Total institutional products sales $ 1,354.0 $ 1,906.3
=========================================================================================================
Average account balances:
General account $ 11,008.6 $10,707.4
Separate account 24,625.6 27,777.1
---------------------------------------------------------------------------------------------------------
Total average account balances $ 35,634.2 $38,484.5
=========================================================================================================
Account balances as of period end:
Private sector pension plans $ 16,194.0 $20,212.5
Public sector pension plans 15,637.6 19,628.0
Medium-term note programs 1,931.9 704.0
---------------------------------------------------------------------------------------------------------
Total account balances $ 33,763.5 $40,544.5
=========================================================================================================
Return on average equity 22.7% 24.7%
Pre-tax operating income to average account balances 0.62% 0.62%
---------------------------------------------------------------------------------------------------------
Institutional Products segment results reflect a slight increase
in interest spread income attributable to growth in average
general account assets. Interest spread is the differential
between net investment income and interest credited to
policyholder account balances. Interest spreads vary depending on
crediting rates offered by competitors, performance of the
investment portfolio, including the rate of prepayments, changes
in market interest rates and other factors.
The following table depicts the interest spread on general account
reserves in the Institutional Products segment for the periods
indicated.
THREE MONTHS ENDED
MARCH 31,
2001 2000
==========================================================================================================
Net investment income 7.69% 7.72%
Interest credited 5.74% 5.95%
----------------------------------------------------------------------------------------------------------
Interest spread 1.95% 1.77%
==========================================================================================================
20
21
The Company experienced an increase in mortgage loan and bond
prepayment fees and such income accounted for approximately 15
basis points of the interest spread in first quarter 2001 compared
to no basis points in the same period a year ago. The Company
anticipates interest spreads over the next several quarters to
range between 175 and 180 basis points, excluding the impact of
mortgage loan and bond prepayment income.
Asset fees declined 14% to $47.3 million in the quarter ended
March 31, 2001 compared to a year ago. The decline was driven by
an 11% drop in average separate account assets in the quarter
compared to a year ago.
Net investment income increased 2% to $211.7 million in the first
quarter of 2001 compared to a year ago. Driving this increase was
a 3% increase in the average general account balance in the
quarter compared to a year ago and the increase in mortgage loan
and bond prepayment income.
Interest credited and other benefits and expenses in first quarter
2001 were flat compared to a year ago.
Institutional Products segment deposits in first quarter 2001 of
$1.39 billion, offset by participant withdrawals and surrenders
totaling $1.29 billion, generated net flows from participant
activity of $102.3 million, a 65% decrease over first quarter 2000
net flows of $290.3 million.
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
0.77% in first quarter 2001 compared to 0.79% in first quarter
2000.
Institutional Products sales during first quarter 2001 reached
$1.35 billion compared to sales of $1.91 billion in first quarter
2000. In the private sector, while the Company sold a record
number of plans in the first quarter 2001, sales declined compared
to a year ago due to the weak equity markets which reduced the
average plan size of take-over cases. In the public sector, sales
declined from a year ago reflecting the impact of previously lost
cases on recurring deposits.
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.
21
22
The following table summarizes certain selected financial data for
the Company's Life Insurance segment for the periods indicated.
THREE MONTHS ENDED
MARCH 31,
---------------------------
(in millions) 2001 2000
======================================================================================================
INCOME STATEMENT DATA
Revenues:
Total policy charges $ 82.7 $ 64.5
Net investment income 79.9 65.8
Other 47.9 49.3
------------------------------------------------------------------------------------------------------
210.5 179.6
------------------------------------------------------------------------------------------------------
Benefits 102.6 95.9
Operating expenses 58.2 50.4
------------------------------------------------------------------------------------------------------
160.8 146.3
------------------------------------------------------------------------------------------------------
Operating income before federal income tax expense $ 49.7 $ 33.3
======================================================================================================
OTHER DATA
Sales:
The BEST of AMERICA variable life series $ 140.6 $ 125.3
Corporate-owned life insurance 377.8 228.5
Traditional/Universal life insurance 58.8 56.9
------------------------------------------------------------------------------------------------------
Total life insurance sales $ 577.2 $ 410.7
======================================================================================================
Policy reserves as of period end:
Individual investment life insurance $ 1,958.0 $ 2,000.1
Corporate investment life insurance 2,800.4 1,767.0
Traditional life insurance 1,825.0 1,795.5
Universal life insurance 770.9 765.1
------------------------------------------------------------------------------------------------------
Total policy reserves $ 7,354.3 $ 6,327.7
======================================================================================================
Return on average equity 12.9% 10.8%
------------------------------------------------------------------------------------------------------
Life Insurance segment earnings increased 49% to $49.7 million, up
from $33.3 million a year ago. The increase in Life Insurance
segment earnings is attributable to strong sales and increased
investment earnings due to reserve growth in both individual and
corporate investment life insurance products.
Driven primarily by increased policy charges, revenues from
investment life products increased to $102.8 million in first
quarter 2001 compared to $72.1 million in first quarter 2000. The
revenue growth reflects significantly increased policy reserve
levels driven by corporate investment life reserves, which include
both COLI and BOLI products and reached $2.80 billion as of March
31, 2001, up from $1.77 billion in the same period a year ago.
Pre-tax earnings from investment life products reached $29.8
million in first three months of 2001 compared to $19.5 million a
year ago, a 53% increase. The strong revenue growth discussed
previously more than offset increased operating expenses
associated with the growth in business.
Traditional/Universal life pre-tax earnings increased 44% to $19.9
million in first quarter 2001 compared to $13.8 million in the
same period a year ago, reflecting higher investment earnings and
lower policyholder benefit costs.
Total life insurance sales, excluding all BOLI and Nationwide
employee and agent benefit plan sales increased 41% to $577.2
million in first quarter 2001 compared to $410.7 million in first
quarter 2000. Sales in 2001 include a record level of production
for COLI and continued growth of individual investment life
insurance, reflecting the Company's efforts to sell through
multiple channels and growing producer and consumer acceptance of
these product offerings.
22
23
Corporate
The following table summarizes certain selected financial data for
the Company's Corporate segment for the periods indicated.
THREE MONTHS ENDED
MARCH 31,
----------------------------
(in millions) 2001 2000
=====================================================================================================
INCOME STATEMENT DATA
Operating revenues(1) $ 12.8 $ 17.0
Operating expenses 7.2 10.4
-----------------------------------------------------------------------------------------------------
Operating income before federal income tax expense(1) $ 5.6 $ 6.6
=====================================================================================================
---------
(1) Excludes net realized losses on investments, hedging
instruments and hedged items.
The Corporate segment consists of net investment income on
invested assets not allocated to the three product segments,
unallocated expenses and interest expense on short-term
borrowings. The decrease in revenues reflects a decrease in net
investment income on real estate investments.
In addition to these operating revenues and expenses, the Company
also reports net realized gains and losses on investments, hedging
instruments and hedged items in the Corporate segment. The Company
realized net investment losses of $4.2 million and net gains on
hedging instruments and hedged items of $0.3 million during the
first quarter of 2001 compared to realized net investment losses
of $3.1 million during the first quarter of 2000. In addition, the
Company realized a net after-tax loss of $4.8 million related to
the adoption of FAS 133 in first quarter 2001.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted due to reduced disclosure format.
PART II - OTHER INFORMATION
ITEM 1 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, 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.
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.
23
24
ITEM 2 CHANGES IN SECURITIES
Omitted due to reduced disclosure format.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Omitted due to reduced disclosure format.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted due to reduced disclosure format.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.29 Employee Leasing Agreement, dated July 1, 2000,
between Nationwide Mutual Insurance Company and
Nationwide Financial Services Inc. on behalf of
itself and its subsidiaries (filed as exhibit 10.35
to Form 10-Q, Commission File Number 1-12785, filed
May 11, 2001)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three month
period ended March 31, 2001.
24
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONWIDE LIFE INSURANCE COMPANY
---------------------------------
(Registrant)
Date: May 11, 2001 /s/Mark R. Thresher
------------------------------------------------------
Mark R. Thresher
Senior Vice President - Finance - Nationwide Financial
(Chief Accounting Officer)
25