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 JUNE 30, 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
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 August 3, 2001.
COMMON STOCK (par value $1 per share) - 3,814,779 shares issued and outstanding
as of August 3, 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 16
Item 3 Quantitative and Qualitative Disclosures About Market Risk 26
PART II OTHER INFORMATION
Item 1 Legal Proceedings 27
Item 2 Changes in Securities 27
Item 3 Defaults Upon Senior Securities 27
Item 4 Submission of Matters to a Vote of Security Holders 27
Item 5 Other Information 27
Item 6 Exhibits and Reports on Form 8-K 27
SIGNATURE 28
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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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2001 2000 2001 2000
==============================================================================================================================
REVENUES
Policy charges $ 256.4 $ 266.1 $ 524.1 $ 538.7
Life insurance premiums 66.5 62.1 130.4 129.0
Net investment income 428.9 409.4 851.8 817.0
Net realized gains (losses) on investments, hedging instruments
and hedged items 2.1 (10.7) (1.8) (13.8)
Other 3.2 4.0 9.1 9.2
- ------------------------------------------------------------------------------------------------------------------------------
757.1 730.9 1,513.6 1,480.1
- ------------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to policyholder account balances 307.9 290.3 609.1 584.5
Other benefits and claims 77.2 61.7 142.2 129.0
Policyholder dividends on participating policies 11.1 11.5 21.6 23.5
Amortization of deferred policy acquisition costs 87.1 86.2 180.0 172.1
Interest expense on short-term borrowings 1.6 - 3.9 -
Other operating expenses 101.9 118.4 217.5 240.5
- ------------------------------------------------------------------------------------------------------------------------------
586.8 568.1 1,174.3 1,149.6
- ------------------------------------------------------------------------------------------------------------------------------
Income before federal income tax expense and cumulative effect
of adoption of accounting principles 170.3 162.8 339.3 330.5
Federal income tax expense 44.5 51.9 89.1 106.3
- ------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of adoption of accounting
principles 125.8 110.9 250.2 224.2
Cumulative effect of adoption of accounting principles, net of tax (2.3) - (7.1) -
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 123.5 $ 110.9 $ 243.1 $ 224.2
==============================================================================================================================
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)
JUNE 30, DECEMBER 31,
2001 2000
==============================================================================================================================
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $16,186.4 in 2001; $15,245.8 in 2000) $ 16,549.6 $ 15,443.0
Equity securities (cost $106.5 in 2001; $103.5 in 2000) 106.9 109.0
Mortgage loans on real estate, net 6,601.0 6,168.3
Real estate, net 310.5 310.7
Policy loans 579.6 562.6
Other long-term investments 96.5 101.8
Short-term investments 710.6 442.6
- ------------------------------------------------------------------------------------------------------------------------------
24,954.7 23,138.0
- ------------------------------------------------------------------------------------------------------------------------------
Cash 31.3 18.4
Accrued investment income 283.8 251.4
Deferred policy acquisition costs 3,033.8 2,865.6
Other assets 507.4 396.7
Assets held in separate accounts 62,639.7 65,897.2
- ------------------------------------------------------------------------------------------------------------------------------
$ 91,450.7 $ 92,567.3
==============================================================================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims $ 23,668.5 $ 22,183.6
Short-term borrowings 114.2 118.7
Other liabilities 1,502.2 1,164.9
Liabilities related to separate accounts 62,639.7 65,897.2
- ------------------------------------------------------------------------------------------------------------------------------
87,924.6 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 2,679.4 2,436.3
Accumulated other comprehensive income 196.8 116.7
- ------------------------------------------------------------------------------------------------------------------------------
3,526.1 3,202.9
- ------------------------------------------------------------------------------------------------------------------------------
$ 91,450.7 $ 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)
Six Months Ended June 30, 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 - - 224.2 - 224.2
Net unrealized losses on securities
available-for-sale arising during
the period, net of tax - - - (5.3) (5.3)
-----------------
Total comprehensive income 218.9
-----------------
Dividends to shareholder - - (90.0) - (90.0)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2000 $ 3.8 $ 766.1 $ 2,145.2 $ (21.2) $ 2,893.9
==================================================================================================================================
BALANCE AS OF JANUARY 1, 2001 $ 3.8 $ 646.1 $ 2,436.3 $ 116.7 $ 3,202.9
Comprehensive income:
Net income - - 243.1 - 243.1
Net unrealized gains on securities available-for-
sale arising during the period, net of tax - - - 73.7 73.7
Cumulative effect of adoption of accounting
principles, net of tax - - - 5.9 5.9
Accumulated net gains on cash flow hedges,
net of tax - - - 0.5 0.5
-----------------
Total comprehensive income 323.2
-----------------
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF JUNE 30, 2001 $ 3.8 $ 646.1 $ 2,679.4 $ 196.8 $ 3,526.1
==================================================================================================================================
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)
Six Months Ended June 30, 2001 and 2000
(in millions)
2001 2000
============================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 243.1 $ 224.2
Adjustments to reconcile net income to net cash provided by operating activities:
Interest credited to policyholder account balances 609.1 584.5
Capitalization of deferred policy acquisition costs (392.3) (400.5)
Amortization of deferred policy acquisition costs 180.0 172.1
Amortization and depreciation (16.8) (3.3)
Realized losses on investments, hedging instruments and hedged items 1.8 13.8
Cumulative effect of adoption of accounting principles 10.9 -
(Increase) decrease in accrued investment income (32.4) 6.2
Increase in other assets (90.2) (114.6)
Increase in policy liabilities 11.5 44.2
Increase in other liabilities 64.3 69.7
Other, net 0.6 (8.1)
----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 589.6 588.2
----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available-for-sale 2,048.2 1,912.9
Proceeds from sale of securities available-for-sale 131.2 67.5
Proceeds from repayments of mortgage loans on real estate 377.5 325.0
Proceeds from sale of real estate 9.5 2.6
Proceeds from repayments of policy loans and sale of other invested assets 46.2 12.8
Cost of securities available-for-sale acquired (3,104.4) (1,315.5)
Cost of mortgage loans on real estate acquired (796.7) (474.4)
Cost of real estate acquired (0.2) (2.9)
Short-term investments, net (268.0) 9.1
Other, net 120.2 (82.3)
----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (1,436.5) 454.8
----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net cost from issuance of short-term borrowings (4.5) -
Cash dividends paid - (100.0)
Increase in investment and universal life insurance product account balances 3,220.6 2,305.2
Decrease in investment and universal life insurance product account balances (2,356.3) (3,229.4)
----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 859.8 (1,024.2)
----------------------------------------------------------------------------------------------------------------------------
Net increase in cash 12.9 18.8
Cash, beginning of period 18.4 4.8
----------------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 31.3 $ 23.6
============================================================================================================================
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.)
Notes to Unaudited Consolidated Financial Statements
Six Months Ended June 30, 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 Principles
-------------------------
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.
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.
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8
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
In November 1999, the Emerging Issues Task Force (EITF) issued EITF
Issue No. 99-20, Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securitized Financial
Assets (EITF 99-20). The Company adopted EITF 99-20 on April 1, 2001.
EITF 99-20 establishes the method of recognizing interest income and
impairment on asset-backed investment securities. EITF 99-20 requires
the Company to update the estimate of cash flows over the life of
certain retained beneficial interests in securitization transactions
and purchased beneficial interests in securitized financial assets.
Pursuant to EITF 99-20, based on current information and events, if the
Company estimates that the fair value of its beneficial interests is
not greater than or equal to its carrying value and if there has been a
decrease in the estimated cash flows since the last revised estimate,
considering both timing and amount, then an other-than-temporary
impairment should be recognized. The cumulative effect, net of tax,
upon adoption of EITF 99-20 on April 1, 2001 decreased net income by
$2.3 million with a corresponding increase to accumulated other
comprehensive income.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, Business Combinations (SFAS 141) and Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets (SFAS 142).
SFAS 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. The use of the
pooling-of-interests method will be prohibited.
SFAS 142 applies to all acquired intangible assets whether acquired
singularly, as part of a group, or in a business combination. SFAS 142
supersedes APB Opinion No. 17, Intangible Assets, and will carry
forward provisions in Opinion 17 related to internally developed
intangible assets. SFAS 142 changes the accounting for goodwill and
intangible assets with indefinite lives from an amortization method to
an impairment-only approach. The amortization of goodwill from past
business combinations will cease upon adoption of this statement, which
will be January 1, 2002 for the Company. Companies will also be
required to evaluate all existing goodwill and intangible assets with
indefinite lives for impairment within six months of adoption. Any
transitional impairment losses will be recognized in the first
interim period in the year of adoption and will be recognized as the
effect of a change in accounting principle.
The Company does not expect any material impact of adopting SFAS 141
and SFAS 142 on the results of operations and financial position.
(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 from changes in interest rates. The Company
principally uses interest rate swaps and short Eurodollar futures to
manage this risk.
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.
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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
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, from time
to time, the Company issues both fixed and variable rate liabilities
denominated in foreign currencies. As a result, 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 these risks, 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
foreign 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 on assets 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.
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 gains and 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.
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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
During the three months and six months ended June 30, 2001, a gain of
$2.7 million and a gain of $1.0 million, respectively, were recognized
in net realized gains and 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 gains and losses on investments, hedging instruments and
hedged items do not include net gains and losses for the quarter ended
June 30, 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, hedging instruments and hedged
items for the three months and six months ended June 30, 2001 include a
loss of $1.1 million and a loss of $1.6 million, respectively, related
to other derivative instruments, including embedded derivatives. For
the three months and six months ended June 30, 2001 a $26.9 million
loss and a $64.9 million loss, respectively, were recorded on the
change in value of cross-currency interest rate swaps hedging variable
rate medium-term notes denominated in foreign currencies. Offsetting
gains of $25.8 million and $63.0 million were recorded to reflect the
change in spot rates during the three months and six months ended June
30, 2001 on these variable rate liabilities.
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11
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
shareholder's 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------------------------------------------------------------
(in millions) 2001 2000 2001 2000
===============================================================================================================
Unrealized gains (losses) on securities available-for-sale arising
during the period:
Transition adjustment - EITF 99-20 $ 3.5 $ - $ 3.5 $ -
Gross (68.5) 3.4 152.1 (29.4)
Adjustment to deferred policy acquisition costs 21.0 (11.5) (44.1) 9.1
Related federal income tax benefit (expense) 15.4 2.8 (39.0) 7.1
---------------------------------------------------------------------------------------------------------------
Net (28.6) (5.3) 72.5 (13.2)
---------------------------------------------------------------------------------------------------------------
Reclassification adjustment for net losses on securities
available-for-sale realized during the period:
Gross 1.1 11.2 5.3 12.1
Related federal income tax benefit (0.4) (3.9) (1.9) (4.2)
---------------------------------------------------------------------------------------------------------------
Net 0.7 7.3 3.4 7.9
---------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) on securities
available-for-sale (27.9) 2.0 75.9 (5.3)
---------------------------------------------------------------------------------------------------------------
Accumulated net (loss) gain on cash flow hedges:
Transition adjustment - FAS 133 - - 5.6 -
Gross (0.3) - 0.8 -
Related federal income tax benefit (expense) 0.2 - (2.2) -
---------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) on cash
flow hedges (0.1) - 4.2 -
---------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) $ (28.0) $ 2.0 $ 80.1 $ (5.3)
===============================================================================================================
(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.
11
12
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
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 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 June 30, 2001 and 2000.
INDIVIDUAL INSTITUTIONAL LIFE
(in millions) ANNUITY PRODUCTS INSURANCE CORPORATE TOTAL
==========================================================================================================
2001
Net investment income $ 127.2 $ 211.8 $ 81.1 $ 8.8 $ 428.9
Other operating revenue 144.4 54.3 124.5 2.9 326.1
----------------------------------------------------------------------------------------------------------
Total operating revenue(1) 271.6 266.1 205.6 11.7 755.0
----------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances 105.1 158.7 44.1 - 307.9
Amortization of deferred policy
acquisition costs 54.8 13.0 19.3 - 87.1
Interest expense on short-term
borrowings - - - 1.6 1.6
Other benefits and expenses 50.5 40.1 99.4 0.2 190.2
----------------------------------------------------------------------------------------------------------
Total expenses 210.4 211.8 162.8 1.8 586.8
----------------------------------------------------------------------------------------------------------
Operating income before federal
income tax expense(1) 61.2 54.3 42.8 9.9 168.2
Net realized gains on investments,
hedging instruments and hedged
items - - - 2.1 2.1
----------------------------------------------------------------------------------------------------------
Income before federal income tax
expense and cumulative effect of
adoption of accounting principles $ 61.2 $ 54.3 $ 42.8 $ 12.0 $ 170.3
==========================================================================================================
12
13
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 $ 118.3 $ 201.8 $ 74.9 $ 14.4 $ 409.4
Other operating revenue 159.0 61.5 107.7 4.0 332.2
-------------------------------------------------------------------------------------------------------
Total operating revenue(1) 277.3 263.3 182.6 18.4 741.6
-------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances 96.4 152.7 41.2 - 290.3
Amortization of deferred policy
acquisition costs 57.5 11.7 17.0 - 86.2
Other benefits and expenses 52.3 43.1 87.9 8.3 191.6
-------------------------------------------------------------------------------------------------------
Total expenses 206.2 207.5 146.1 8.3 568.1
-------------------------------------------------------------------------------------------------------
Operating income before federal
income tax expense(1) 71.1 55.8 36.5 10.1 173.5
Net realized losses on investments,
hedging instruments and hedged
items - - - (10.7) (10.7)
-------------------------------------------------------------------------------------------------------
Income (loss) before federal
income tax expense and
cumulative effect of adoption of
accounting principles $ 71.1 $ 55.8 $ 36.5 $ (0.6) $ 162.8
=======================================================================================================
----------
(1) Excludes net realized gains and losses on investments, hedging
instruments and hedged items.
13
14
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
The following table summarizes the financial results of the Company's
business segments for the six months ended June 30, 2001 and 2000.
INDIVIDUAL INSTITUTIONAL LIFE
(in millions) ANNUITY PRODUCTS INSURANCE CORPORATE TOTAL
==================================================================================================================
2001
Net investment income $ 251.6 $ 423.5 $ 161.0 $ 15.7 $ 851.8
Other operating revenue 288.4 111.3 255.1 8.8 663.6
------------------------------------------------------------------------------------------------------------------
Total operating revenue(1) 540.0 534.8 416.1 24.5 1,515.4
------------------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances 205.4 316.8 86.9 - 609.1
Amortization of deferred policy
acquisition costs 111.2 25.8 43.0 - 180.0
Interest expense on short-term
borrowings - - - 3.9 3.9
Other benefits and expenses 99.7 82.8 193.7 5.1 381.3
------------------------------------------------------------------------------------------------------------------
Total expenses 416.3 425.4 323.6 9.0 1,174.3
------------------------------------------------------------------------------------------------------------------
Operating income before federal
income tax expense(1) 123.7 109.4 92.5 15.5 341.1
Net realized losses on investments,
hedging instruments and hedged
items - - - (1.8) (1.8)
------------------------------------------------------------------------------------------------------------------
Income before federal income tax
expense and cumulative effect of
adoption of accounting principles $ 123.7 $ 109.4 $ 92.5 $ 13.7 $ 339.3
==================================================================================================================
Assets as of period end $43,766.8 $35,984.5 $ 8,707.9 $ 2,991.5 $91,450.7
==================================================================================================================
14
15
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 $ 241.6 $ 408.5 $ 140.7 $ 26.2 $ 817.0
Other operating revenue 322.4 123.8 221.5 9.2 676.9
-------------------------------------------------------------------------------------------------------------------
Total operating revenue(1) 564.0 532.3 362.2 35.4 1,493.9
-------------------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances 198.0 311.9 74.6 - 584.5
Amortization of deferred policy
acquisition costs 114.2 24.0 33.9 - 172.1
Other benefits and expenses 109.0 81.4 183.9 18.7 393.0
-------------------------------------------------------------------------------------------------------------------
Total expenses 421.2 417.3 292.4 18.7 1,149.6
-------------------------------------------------------------------------------------------------------------------
Operating income before federal
income tax expense(1) 142.8 115.0 69.8 16.7 344.3
Net realized losses on investments,
hedging instruments and hedged
items - - - (13.8) (13.8)
-------------------------------------------------------------------------------------------------------------------
Income before federal income tax
expense and cumulative effect of
adoption of accounting principles $ 142.8 $ 115.0 $ 69.8 $ 2.9 $ 330.5
===================================================================================================================
Assets as of period end $ 47,453.1 $ 39,619.6 $ 7,558.4 $ 1,369.0 $ 96,000.1
===================================================================================================================
----------
(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.
15
16
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 principles. 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 periods indicated.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------------
(in millions) 2001 2000 2001 2000
===========================================================================================================
Net income $ 123.5 $ 110.9 $ 243.1 $ 224.2
Net realized (gains) losses on investments,
hedging instruments and hedged items, net of tax (1.3) 7.0 1.2 9.0
Cumulative effect of adoption of accounting principles,
net of tax 2.3 - 7.1 -
-----------------------------------------------------------------------------------------------------------
Net operating income $ 124.5 $ 117.9 $ 251.4 $ 233.2
===========================================================================================================
Revenues
Total operating revenues, which exclude net realized gains and
losses on investments, hedging instruments and hedged items for
second quarter 2001 increased to $755.0 million compared to $741.6
million for the same period in 2000. For the first six months of
2001 and 2000, total operating revenues were $1.52 billion and
$1.49 billion, respectively. An increase in net investment income
was the key driver to revenue growth.
16
17
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 comparable periods of 2001 and 2000 were as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------------------
(in millions) 2001 2000 2001 2000
=====================================================================================================
Asset fees $ 157.4 $ 180.0 $ 316.9 $ 355.9
Cost of insurance charges 49.6 37.0 96.2 72.1
Administrative fees 31.1 27.2 72.4 63.9
Surrender fees 18.3 21.9 38.6 46.8
-----------------------------------------------------------------------------------------------------
Total policy charges $ 256.4 $ 266.1 $ 524.1 $ 538.7
=====================================================================================================
The decline in asset fees reflects a decrease in total average
separate account assets of $7.39 billion (11%) in the first six
months of 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 corporate and individual investment life insurance
reflecting expanded distribution and increased acceptance by
producers and consumers. The net amount at risk related to
corporate and individual investment life insurance grew to $30.62
billion as of June 30, 2001 compared to $24.66 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 in the first half of 2001 compared to the same period a
year ago.
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 $409.4
million in the second quarter of 2000 to $428.9 million in the
second quarter of 2001 and from $817.0 million in the first half
of 2000 to $851.8 million in the first half of 2001. The increases
were primarily due to increased invested assets to support growth
in individual fixed annuity, institutional products and life
insurance policy reserves, partially offset by lower yields.
General account reserves supporting these products increased $2.10
billion to $23.67 billion as of the end of second quarter 2001
compared to $21.57 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 management fees, commissions and other
income earned by subsidiaries of the Company that provide
investment management, marketing, distribution and administration
services.
17
18
Benefits and Expenses
Interest credited to policyholder account balances totaled $307.9
million in second quarter 2001 compared to $290.3 million in
second quarter 2000, while year-to-date 2001 interest credited
totaled $609.1 million compared to $584.5 million a year ago 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 for
these products, partially offset by lower crediting rates.
The growth in amortization of deferred policy acquisition costs
(DAC), which totaled $87.1 million and $86.2 million in the second
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 second quarter 2001. On a year-to-date basis,
DAC amortization totaled $180.0 million in 2001 compared to $172.1
million in 2000.
Operating expenses decreased 14% to $101.9 million in second
quarter 2001 compared to $118.4 million in second quarter 2000.
For the first half of 2001, operating expenses were $217.5
million, down 10% from $240.5 million for the first half of 2000.
The decrease reflects the Company's commitment to aggressive
expense management in response to volatile equity markets.
Federal income tax expense was $44.5 million in second quarter
2001 compared to $51.9 million for the same period a year ago,
representing effective tax rates of 26.1% and 31.9% for second
quarter 2001 and 2000, respectively. For the first six months of
2001 and 2000, federal income tax expense was $89.1 million and
$106.3 million, representing effective tax rates of 26.3% and
32.2%, respectively. An increase in tax exempt income and
investment tax credits resulted in the decrease in effective
rates.
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 consists of Nationwide
Retirement Solutions.
18
19
Sales by distribution channel are summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------------------
(in millions) 2001 2000 2001 2000
=====================================================================================================
Independent broker/dealers $ 1,068.8 $ 1,586.4 $ 2,261.5 $ 3,137.2
Brokerage firms 690.4 300.2 1,029.7 608.2
Financial institutions 820.6 767.1 1,543.0 1,411.5
Pension plan administrators 240.3 258.8 543.1 590.9
Life insurance specialists 137.9 97.6 515.7 327.6
Nationwide agents 193.7 223.6 362.5 434.9
Nationwide Retirement Solutions 404.9 671.7 837.2 1,446.5
-----------------------------------------------------------------------------------------------------
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.
Sales through brokerage firms increased 130% in second quarter
2001 compared to second quarter 2000 and are up 69% for the first
six months, principally due to the addition of Waddell & Reed as a
distributer.
Sales through financial institutions grew 7% in second quarter
2001 compared to a year ago, and grew 9% for the first six months
of 2001 compared to the first six months of 2000, driven mainly by
the appointment of new distributors in the bank channel who sell
fixed annuity products.
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.
19
20
Sales by product and segment for the comparable periods of 2001
and 2000 are summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------
(in millions) 2001 2000 2001 2000
======================================================================================================
The BEST of AMERICA products $ 1,027.6 $ 1,579.9 $ 2,053.2 $ 2,883.8
Private label annuities 535.5 274.8 757.0 548.7
Other 0.3 42.8 2.8 75.2
------------------------------------------------------------------------------------------------------
Total individual variable annuity sales 1,563.4 1,897.5 2,813.0 3,507.7
------------------------------------------------------------------------------------------------------
Deferred fixed annuities 437.0 106.4 753.2 191.5
Immediate fixed annuities 34.0 30.5 73.1 69.6
------------------------------------------------------------------------------------------------------
Total individual fixed annuity sales 471.0 136.9 826.3 261.1
------------------------------------------------------------------------------------------------------
Total individual annuity sales $ 2,034.4 $ 2,034.4 $ 3,639.3 $ 3,768.8
======================================================================================================
The BEST of AMERICA products $ 770.6 $ 950.5 $ 1,708.6 $ 2,149.1
Other 13.4 10.2 27.3 26.3
------------------------------------------------------------------------------------------------------
Total private sector pension plan sales 784.0 960.7 1,735.9 2,175.4
------------------------------------------------------------------------------------------------------
Total public sector pension plan sales -
IRC Section 457 annuities 388.0 613.7 790.1 1,305.3
------------------------------------------------------------------------------------------------------
Total institutional products sales $ 1,172.0 $ 1,574.4 $ 2,526.0 $ 3,480.7
======================================================================================================
The BEST of AMERICA variable life series $ 148.9 $ 138.1 $ 289.5 $ 263.4
Corporate-owned life insurance 137.9 94.8 515.7 323.3
Traditional/Universal life insurance 63.4 63.7 122.2 120.6
------------------------------------------------------------------------------------------------------
Total life insurance sales $ 350.2 $ 296.6 $ 927.4 $ 707.3
======================================================================================================
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.
The following table summarizes operating income before federal
income tax expense for the Company's business segments for the
periods indicated.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------------------
(in millions) 2001 2000 2001 2000
=================================================================================================================
Individual Annuity $ 61.2 $ 71.1 $ 123.7 $ 142.8
Institutional Products 54.3 55.8 109.4 115.0
Life Insurance 42.8 36.5 92.5 69.8
Corporate 9.9 10.1 15.5 16.7
-----------------------------------------------------------------------------------------------------------------
Operating income before federal income tax expense $ 168.2 $ 173.5 $ 341.1 $ 344.3
=================================================================================================================
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.
20
21
The following table summarizes certain selected financial data for
the Company's Individual Annuity segment for the periods
indicated.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------------------
(in millions) 2001 2000 2001 2000
====================================================================================================================
INCOME STATEMENT DATA
Revenues:
Policy charges $ 126.7 $ 145.0 $ 254.7 $ 290.8
Net investment income 127.2 118.3 251.6 241.6
Premiums on immediate annuities 17.7 14.0 33.7 31.6
---------------------------------------------------------------------------------------------------------------
271.6 277.3 540.0 564.0
---------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Interest credited to policyholder account balances 105.1 96.4 205.4 198.0
Other benefits 19.9 15.1 35.6 31.9
Amortization of deferred policy acquisition costs 54.8 57.5 111.2 114.2
Other operating expenses 30.6 37.2 64.1 77.1
---------------------------------------------------------------------------------------------------------------
210.4 206.2 416.3 421.2
---------------------------------------------------------------------------------------------------------------
Operating income before federal income tax expense $ 61.2 $ 71.1 $ 123.7 $ 142.8
===============================================================================================================
OTHER DATA
Sales:
Individual variable annuities $ 1,563.4 $ 1,897.5 $ 2,813.0 $ 3,507.7
Individual fixed annuities 471.0 136.9 826.3 261.1
---------------------------------------------------------------------------------------------------------------
Total individual annuity sales $ 2,034.4 $ 2,034.4 $ 3,639.3 $ 3,768.8
===============================================================================================================
Average account balances:
General account $ 7,285.2 $ 6,931.4 $ 7,099.8 $ 7,001.9
Separate account 34,039.6 38,008.1 34,632.5 37,714.8
---------------------------------------------------------------------------------------------------------------
Total average account balances $ 41,324.8 $ 44,939.5 $ 41,732.3 $ 44,716.7
===============================================================================================================
Account balances as of period end:
Individual variable annuities $ 37,170.8 $ 41,950.9
Individual fixed annuities 4,633.0 3,726.9
---------------------------------------------------------------------------------------------------------------
Total account balances $ 41,803.8 $ 45,677.8
===============================================================================================================
Return on average equity 14.4% 20.8% 15.4% 20.5%
Pre-tax operating income to average account balances 0.59% 0.63% 0.59% 0.63%
---------------------------------------------------------------------------------------------------------------
Pre-tax operating earnings totaled $61.2 million in second quarter
2001, down 14% compared to a year ago earnings of $71.1 million.
For the fist six months of 2001 pre-tax operating earnings were
$123.7 million compared to $142.8 million for the first six months
of 2000. The decrease in earnings is primarily a result of lower
asset and surrender fees, partially offset by lower operating
expenses.
Asset fees decreased to $107.4 million in the second quarter of
2001, down 11% from $120.6 million in the same period a year ago.
For the first half of 2001, asset fees totaled $215.6 million down
9% from the first half of 2000 total of $237.8 million. 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. Year-to-date
average separate account assets decreased 8% to $34.63 billion as
of June 30, 2001 compared to $37.71 billion a year ago.
21
22
Surrender fees decreased by $5.5 million to $14.3 million in the
second quarter of 2001. For the first six months of 2001,
surrender fees totaled $29.5 million compared to $42.9 million in
the same period a year ago. This decrease was due to a lower
individual variable annuity lapse rate.
Operating expenses were $30.6 million in second quarter 2001, a
decrease of 18% over second quarter 2000 reflecting management's
focus on expense management in response to volatile equity
markets. During the first half of 2001, operating expenses totaled
$64.1 million, a decrease of 17% over the first half of 2000 total
of $77.1 million.
The following table depicts the interest spread on average general
account reserves in the Individual Annuity segment for the periods
indicated.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------------------
2001 2000 2001 2000
========================================================================================================
Net investment income 7.57% 7.76% 7.73% 7.82%
Interest credited 5.77 5.56 5.79 5.66
--------------------------------------------------------------------------------------------------------
Interest spread 1.80% 2.20% 1.94% 2.16%
========================================================================================================
Interest spreads narrowed in the second quarter of 2001 compared
to first quarter and the prior year due to lower investment yield
rates, due to lower market rates and mortgage loan and bond
prepayment income. The Company anticipates interest spreads over
the next several quarters to range between 185 and 190 basis
points, excluding the impact of mortgage loan and bond prepayment
income.
Led by variable product deposits of $1.75 billion and withdrawals
and surrenders of $1.16 billion, Individual Annuity segment
deposits in second quarter 2001 of $2.22 billion offset by
withdrawals and surrenders totaling $1.24 billion generated net
flows of $987.0 million compared to the $948.6 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 expanding its broad distribution network and
innovative product development resources.
The decrease in pre-tax operating income to average assets in
second quarter and the first half of 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 second quarter 2001 and 2000 were $2.03 billion, while
year-to-date 2001 sales of individual annuities were $3.64 billion
down slightly from $3.77 billion in 2000. The addition of new
selling arrangements and volatile equity markets drove the growth
in sales of deferred fixed annuities which totaled $437.0 million
in the second quarter 2001 compared to $106.4 million in second
quarter 2000, offsetting the decline in variable annuity sales.
Sales of fixed annuities for the first half of 2001 were $753.2
million compared to $191.5 million for the first half of 2000.
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.
22
23
The following table summarizes certain selected financial data for
the Company's Institutional Products segment for the periods
indicated.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------------
(in millions) 2001 2000 2001 2000
=====================================================================================================================
INCOME STATEMENT DATA
Revenues:
Asset fees $ 45.7 $ 55.6 $ 93.0 $ 110.6
Net investment income 211.8 201.8 423.5 408.5
Other 8.6 5.9 18.3 13.2
-----------------------------------------------------------------------------------------------------------------
266.1 263.3 534.8 532.3
-----------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Interest credited to policyholder account balances 158.7 152.7 316.8 311.9
Other benefits and expenses 53.1 54.8 108.6 105.4
-----------------------------------------------------------------------------------------------------------------
211.8 207.5 425.4 417.3
-----------------------------------------------------------------------------------------------------------------
Operating income before federal income tax expense$ 54.3 $ 55.8 $ 109.4 $ 115.0
=================================================================================================================
OTHER DATA
Sales:
Private sector pension plans $ 784.0 $ 960.7 $ 1,735.9 $ 2,175.4
Public sector pension plans 388.0 613.7 790.1 1,305.3
-----------------------------------------------------------------------------------------------------------------
Total institutional products sales $ 1,172.0 $ 1,574.4 $ 2,526.0 $ 3,480.7
=================================================================================================================
Average account balances:
General account $ 11,505.4 $ 10,333.1 $ 11,257.0 $ 10,520.3
Separate account 23,737.1 28,254.7 24,181.4 28,015.9
-----------------------------------------------------------------------------------------------------------------
Total average account balances $ 35,242.5 $ 38,587.8 $ 35,438.4 $ 38,536.2
=================================================================================================================
Account balances as of period end:
Private sector pension plans $ 17,079.2 $ 19,393.4
Public sector pension plans 16,034.5 19,064.8
Medium-term note programs 2,569.5 873.6
-----------------------------------------------------------------------------------------------------------------
Total account balances $ 35,683.2 $ 39,331.8
=================================================================================================================
Return on average equity 23.3% 25.0% 23.9% 25.2%
Pre-tax operating income to average account balances 0.62% 0.58% 0.62% 0.60%
-----------------------------------------------------------------------------------------------------------------
Institutional Products segment results reflect an 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------------------
2001 2000 2001 2000
=====================================================================================================
Net investment income 7.36% 7.81% 7.52% 7.77%
Interest credited 5.52 5.91 5.63 5.93
-----------------------------------------------------------------------------------------------------
Interest spread 1.84% 1.90% 1.89% 1.84%
=====================================================================================================
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Interest spreads narrowed in the second quarter of 2001 compared
to one year ago as a drop in the earned rate more than offset
lower crediting rates. Higher bond and mortgage prepayment income
in first quarter 2001, favorably impacted spreads for the six
months ended June 30, 2001 relative to one 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 18% to $45.7 million in the quarter ended June
30, 2001 compared to a year ago, while year-to-date 2001 asset
fees were $93.0 million compared to $110.6 million in 2000. The
decline was driven by a 16% drop in average separate account
assets in the quarter compared to the quarter ended a year ago and
a 14% drop in year-to-date average separate account assets as of
June 30, 2001 compared to the same period a year ago.
Net investment income increased 5% to $211.8 million in the second
quarter of 2001 compared to a year ago, while year-to-date net
investment income increased 4% from the same period a year ago.
Driving this increase was a 11% and 7% increase in the average
general account balance in the quarter and first six months of
2001, respectively, compared to the same periods a year ago, and
the increase in mortgage loan and bond prepayment income, offset
by lower earned rates as market interest rates decrease.
Interest credited and other benefits and expenses in second
quarter 2001 slightly increased compared to the year ago driven by
the increase in general account reserves. For the first half of
2001 interest credited and other benefits and expenses totaled
$425.4 million, also up slightly from the first half of 2000.
Institutional Product sales during second quarter 2001 reached
$1.17 billion compared to sales of $1.57 billion in second quarter
2000. For the first six months of 2001, sales reached $2.53
billion compared to sales of $3.48 billion for the same period a
year ago. The Private Sector continues to be impacted by the
volatile equity markets, which reduced the average plan size of
take-over cases and a slowing economy, which has resulted in
reduced demand for new cases. In the Public Sector, sales declined
from a year ago reflecting the impact of previously lost cases on
recurring deposits. The decline in sales is also attributable to a
shift in both Private and Public sector sales from group annuity
contracts issued by the Company to administration only and trust
company products provided by affiliates.
Institutional Products segment deposits in second quarter 2001 of
$1.21 billion offset by participant withdrawals and surrenders
totaling $1.10 billion generated net flows from participant
activity of $109.5 million compared to second quarter 2000 net
flows of ($8.3) million. Year-to-date 2001 net flows decreased 25%
to $211.8 million compared to year-to-date 2000 net flows of
$282.0 million.
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.
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The following table summarizes certain selected financial data for
the Company's Life Insurance segment for the periods indicated.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------------------
(in millions) 2001 2000 2001 2000
=================================================================================================================
INCOME STATEMENT DATA
Revenues:
Total policy charges $ 75.5 $ 59.6 $ 158.2 $ 124.1
Net investment income 81.1 74.9 161.0 140.7
Other 49.0 48.1 96.9 97.4
-----------------------------------------------------------------------------------------------------------------
205.6 182.6 416.1 362.2
-----------------------------------------------------------------------------------------------------------------
Benefits 112.4 99.3 215.0 195.2
Operating expenses 50.4 46.8 108.6 97.2
-----------------------------------------------------------------------------------------------------------------
162.8 146.1 323.6 292.4
-----------------------------------------------------------------------------------------------------------------
Operating income before federal income tax expense $ 42.8 $ 36.5 $ 92.5 $ 69.8
=================================================================================================================
OTHER DATA
Sales:
The BEST of AMERICA variable life series $ 148.9 $ 138.1 $ 289.5 $ 263.4
Corporate-owned life insurance 137.9 94.8 515.7 323.3
Traditional/Universal life insurance 63.4 63.7 122.2 120.6
-----------------------------------------------------------------------------------------------------------------
Total life insurance sales $ 350.2 $ 296.6 $ 927.4 $ 707.3
=================================================================================================================
Policy reserves as of period end:
Corporate investment life insurance $ 2,987.3 $ 2,153.1
Individual investment life insurance 2,139.0 2,044.2
Traditional life insurance 1,837.7 1,801.7
Universal life insurance 774.2 767.2
-----------------------------------------------------------------------------------------------------------------
Total policy reserves $ 7,738.2 $ 6,766.2
=================================================================================================================
Return on average equity 10.8% 10.9% 11.8% 10.8%
-----------------------------------------------------------------------------------------------------------------
Life Insurance segment earnings increased 17% to $42.8 million for
the second quarter 2001, up from $36.5 million a year ago. On a
year-to-date basis segment earnings increased 33% to $92.5 million
in 2001 from $69.8 million in 2000. 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 $96.5 million in second
quarter 2001 compared to $76.9 million in second quarter 2000,
while year-to-date revenues increased to $199.3 million for 2001
compared to $149.0 million for 2000. The revenue growth reflects
significantly increased policy reserve levels driven by corporate
investment life reserves, which include both BOLI and COLI
products, which reached $2.99 billion as of June 30, 2001, up from
$2.15 billion in the same period a year ago.
Pre-tax earnings from investment life products totaled $22.5
million in second quarter 2001 a 9% increase from $20.7 million in
second quarter 2000, while the first six months of 2001 reached
$52.3 compared to $40.2 million a year ago, a 30% increase. The
strong revenue growth discussed previously was offset by
unfavorable mortality results in the second quarter of 2001.
Traditional/Universal life pre-tax earnings increased 28% to $20.3
million in second quarter 2001 compared to $15.8 million in the
same period a year ago, reflecting higher investment earnings and
lower operating expenses. For the first six months of 2001,
pre-tax earnings increased 36% to $40.2 million compared to $29.6
million for the first six months of 2000.
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Total life insurance sales, excluding BOLI and Nationwide employee
and agent benefit plan sales increased 18% to $350.2 million in
second quarter 2001 compared to $296.6 million in second quarter
2000. For the first six months of 2001, total life insurance
sales, excluding BOLI and Nationwide employee and agent benefit
plan sales, increased $220.1 million over 2000 and totaled $927.4
million. 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.
Corporate
The following table summarizes certain selected financial data for
the Company's Corporate segment for the periods indicated.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------------------
(in millions) 2001 2000 2001 2000
=================================================================================================================
INCOME STATEMENT DATA
Operating revenues(1) $ 11.7 $ 18.4 $ 24.5 $ 35.4
Operating expenses 1.8 8.3 9.0 18.7
-----------------------------------------------------------------------------------------------------------------
Operating income before federal income tax expense(1) $ 9.9 $ 10.1 $ 15.5 $ 16.7
=================================================================================================================
----------
(1) Excludes net realized gains and 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 decline in revenues reflects a decrease in net
investment income on real estate investments and fewer investments
retained in the corporate segment as more capital and the related
investments earnings are allocated to the product segments to
support growth.
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 $0.2 million and net gains on
hedges and hedged items of $2.3 million during the second quarter
of 2001 compared to realized net investment losses of $10.7
million during the second quarter of 2000. For the first six
months of 2001, the Company realized net investment losses of $4.4
million and net gains on hedges and hedged items of $2.6 million
compared to realized net investment losses of $13.8 million during
the first six months of 2000. In addition, the Company realized an
after tax loss of $4.8 million related to the adoption of FAS 133
in first quarter 2001 and an after tax loss of $2.3 related to the
adoption of EITF 99-20 in second quarter 2001.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted due to reduced disclosure format.
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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.
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
Omitted due to reduced disclosure format.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.30 Form of Employment Agreement, dated June 4,
2001, between Nationwide Mutual Insurance
Company and Michael C. Keller (filed as
exhibit 10.36 to Form 10-Q, Commission File
Number 1-12785, filed August 10, 2001)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three-month
period ended June 30, 2001.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONWIDE LIFE INSURANCE COMPANY
---------------------------------
(Registrant)
Date: August 10, 2001 /s/Mark R. Thresher
------------------------------------------------------
Mark R. Thresher
Senior Vice President - Finance - Nationwide Financial
(Chief Accounting Officer)
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