UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 (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 November 1, 2001.
COMMON STOCK (par value $1 per share) - 3,814,779 shares issued and outstanding
as of November 1, 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.
The undersigned registrant hereby amends Part 1, Item 1 of its Quarterly Report
for the quarterly period ended September 30, 2001 in order to bring related
party transaction presentation and disclosure into compliance as follows:
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------------
2001 2000 2001 2000
==============================================================================================================================
REVENUES
Policy charges $ 243.9 $ 284.8 $ 768.0 $ 823.5
Life insurance premiums 59.4 51.7 189.8 180.7
Net investment income 435.0 412.6 1,286.8 1,229.6
Net realized gains (losses) on investments, hedging instruments
and hedged items:
Unrelated parties (7.7) (2.1) (9.5) (15.9)
Related party 44.4 - 44.4 -
Other 3.3 3.6 12.4 12.8
- ------------------------------------------------------------------------------------------------------------------------------
778.3 750.6 2,291.9 2,230.7
- ------------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to policyholder account balances 314.8 292.4 923.9 876.9
Other benefits and claims 66.8 56.2 209.0 185.2
Policyholder dividends on participating policies 9.5 8.3 31.1 31.8
Amortization of deferred policy acquisition costs 85.2 91.6 265.2 263.7
Interest expense on short-term borrowings 0.8 - 4.7 -
Other operating expenses 109.8 125.2 327.3 365.7
- ------------------------------------------------------------------------------------------------------------------------------
586.9 573.7 1,761.2 1,723.3
- ------------------------------------------------------------------------------------------------------------------------------
Income before federal income tax expense and cumulative effect
of adoption of accounting principles 191.4 176.9 530.7 507.4
Federal income tax expense 52.8 50.9 141.9 157.2
- ------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of adoption of accounting
principles 138.6 126.0 388.8 350.2
Cumulative effect of adoption of accounting principles, net of tax - - (7.1) -
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 138.6 $ 126.0 $ 381.7 $ 350.2
==============================================================================================================================
See accompanying notes to unaudited consolidated financial statements.
3
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)
SEPTEMBER 30, DECEMBER 31,
2001 2000
==============================================================================================================================
ASSETS
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $16,964.3 in 2001; $15,245.8 in 2000) $ 17,573.4 $ 15,443.0
Equity securities (cost $106.3 in 2001; $103.5 in 2000) 96.5 109.0
Mortgage loans on real estate, net 6,809.7 6,168.3
Real estate, net 191.3 310.7
Policy loans 586.8 562.6
Other long-term investments 117.9 101.8
Short-term investments, primarily managed by a related party 771.2 442.6
- ------------------------------------------------------------------------------------------------------------------------------
26,146.8 23,138.0
- ------------------------------------------------------------------------------------------------------------------------------
Cash 24.9 18.4
Accrued investment income 308.0 251.4
Deferred policy acquisition costs 3,035.1 2,865.6
Other assets 753.1 396.7
Assets held in separate accounts 54,526.6 65,897.2
- ------------------------------------------------------------------------------------------------------------------------------
$ 84,794.5 $ 92,567.3
==============================================================================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims $ 24,764.0 $ 22,183.6
Short-term borrowings 25.0 118.7
Other liabilities 1,743.5 1,164.9
Liabilities related to separate accounts 54,526.6 65,897.2
- ------------------------------------------------------------------------------------------------------------------------------
81,059.1 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 2,783.0 2,436.3
Accumulated other comprehensive income 302.5 116.7
- ------------------------------------------------------------------------------------------------------------------------------
3,735.4 3,202.9
- ------------------------------------------------------------------------------------------------------------------------------
$ 84,794.5 $ 92,567.3
==============================================================================================================================
See accompanying notes to unaudited consolidated financial statements.
4
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Shareholder's Equity
(Unaudited)
Nine Months Ended September 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 - - 350.2 - 350.2
Net unrealized gains on securities available-for-
sale arising during the period, net of tax - - - 45.5 45.5
-----------------
Total comprehensive income 395.7
Dividends to shareholder - - (90.0) - (90.0)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance as of September 30, 2000 $ 3.8 $ 766.1 $ 2,271.2 $ 29.6 $ 3,070.7
==================================================================================================================================
BALANCE AS OF JANUARY 1, 2001 $ 3.8 $ 646.1 $ 2,436.3 $ 116.7 $ 3,202.9
Comprehensive income:
Net income - - 381.7 - 381.7
Net unrealized gains on securities available-for-
sale arising during the period, net of tax - - - 176.1 176.1
Cumulative effect of adoption of accounting
principles, net of tax - - - 5.9 5.9
Accumulated net gains on cash flow hedges,
net of tax - - - 3.8 3.8
-----------------
Total comprehensive income 567.5
Dividends to shareholder - - (35.0) - (35.0)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF SEPTEMBER 30, 2001 $ 3.8 $ 646.1 $ 2,783.0 $ 302.5 $ 3,735.4
==================================================================================================================================
See accompanying notes to unaudited consolidated financial statements.
5
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, 2001 and 2000
(in millions)
2001 2000
============================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 381.7 $ 350.2
Adjustments to reconcile net income to net cash provided by operating activities:
Interest credited to policyholder account balances 923.9 876.9
Capitalization of deferred policy acquisition costs (556.9) (586.8)
Amortization of deferred policy acquisition costs 265.2 263.7
Amortization and depreciation (23.4) (7.4)
Realized (gains) losses on investments, hedging instruments and hedged items:
Unrelated parties 9.5 15.9
Related party (44.4) -
Cumulative effect of adoption of accounting principles 10.9 -
Increase in accrued investment income (56.6) (9.2)
Increase in other assets (186.8) (53.3)
Increase in policy liabilities 21.1 0.5
Increase in other liabilities 248.6 269.7
Other, net 2.4 27.4
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 995.2 1,147.6
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities available-for-sale 3,076.6 2,479.2
Proceeds from sale of securities available-for-sale 247.7 432.3
Proceeds from repayments of mortgage loans on real estate 639.8 609.4
Proceeds from sale of real estate 168.5 2.2
Proceeds from repayments of policy loans and sale of other invested assets 57.3 17.2
Cost of securities available-for-sale acquired (4,958.7) (2,345.8)
Cost of mortgage loans on real estate acquired (1,246.8) (950.1)
Cost of real estate acquired (0.3) (6.1)
Short-term investments, net (328.6) (197.3)
Other, net (150.9) (116.8)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,495.4) (75.8)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of short-term borrowings (93.7) -
Cash dividends paid (35.0) (140.0)
Increase in investment and universal life insurance product account balances 4,517.3 3,609.4
Decrease in investment and universal life insurance product account balances (2,881.9) (4,544.0)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,506.7 (1,074.6)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 6.5 (2.8)
Cash, beginning of period 18.4 4.8
- ----------------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 24.9 $ 2.0
============================================================================================================================
See accompanying notes to unaudited consolidated financial statements.
6
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements
Nine Months Ended September 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 (GAAP), 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.
7
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 and the use of
the pooling-of-interests method has been eliminated.
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.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144). SFAS 144 supersedes SFAS 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of, and APB Opinion No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions. SFAS 144 is effective for fiscal years beginning
after December 15, 2001 (January 1, 2002 for the Company) and will
carry forward many of the provisions of SFAS 121 and Opinion 30. Under
SFAS 144, if a long-lived asset is part of a group that includes other
assets and liabilities, then the provisions of SFAS 144 apply to the
entire group. In addition, SFAS 144 does not apply to goodwill and
other intangible assets that are not amortized. Management does not
expect the adoption of SFAS 144 to have a material impact on the
results of operations or financial position of the Company.
8
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
(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.
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.
9
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
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.
During the three and nine months ended September 30, 2001, losses of
$4.2 million and $3.2 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
reclassifications out of AOCI over the next 12-month period.
The ineffective portion of cash flow hedges is included in net realized
gains and losses on investments, hedging instruments and hedged items
in the consolidated statements of income. For the three months ended
September 30, 2001, the ineffective portion of cash flow hedges was
less than $0.1 million. 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 gains and losses on investments, hedging instruments and
hedged items for the three and nine months ended September 30, 2001
include a gain of $0.4 million and a loss of $1.4 million,
respectively, related to other derivative instruments, including
embedded derivatives. For the three and nine months ended September 30,
2001 a $50.6 million gain and a $14.2 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. An offsetting loss of $50.4 million and a gain of $12.6
million were recorded to reflect the change in spot rates during the
three and nine months ended September 30, 2001 on these variable rate
liabilities.
10
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
(4) Related Party Transaction
-------------------------
During the third quarter 2001, NLIC entered into a transaction with
Nationwide Mutual Insurance Company (NMIC), whereby it sold 78% of its
interest in a limited partnership (representing 49% of the limited
partnership) to NMIC for $158.9 million. As a result of this sale, NLIC
recorded a realized gain of $44.4 million, and related tax expense of
$15.5 million. The sale price, which was paid in cash, represented the
fair value of the limited partnership and was based on a valuation of
the limited partnership and its underlying investments. The valuation
was completed by qualified management of the limited partnership and
utilized a combination of internal and independent valuations of the
underlying investments of the limited partnership. Additionally, senior
financial officers and the Boards of Directors of NLIC, its parent,
Nationwide Financial Services, Inc. (NFS), and NMIC separately reviewed
and approved the valuation prior to the execution of this transaction.
NLIC continues to hold an economic and voting interest in the limited
partnership of approximately 14%, with NMIC holding the remaining
interests.
(5) 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 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 $ -
Gross 229.3 116.0 381.4 86.6
Adjustment to deferred policy acquisition costs (78.1) (34.9) (122.2) (25.8)
Related federal income tax expense (52.9) (28.4) (91.9) (21.3)
-------------------------------------------------------------------------------------------------------
Net 98.3 52.7 170.8 39.5
-------------------------------------------------------------------------------------------------------
Reclassification adjustment for net losses (gains)
on securities available-for-sale realized during
the period:
Gross 6.4 (2.9) 11.7 9.2
Related federal income tax (benefit) expense (2.2) 1.0 (4.1) (3.2)
-------------------------------------------------------------------------------------------------------
Net 4.2 (1.9) 7.6 6.0
-------------------------------------------------------------------------------------------------------
Other comprehensive income on securities
available-for-sale 102.5 50.8 178.4 45.5
-------------------------------------------------------------------------------------------------------
Accumulated net gain on cash flow hedges:
Transition adjustment - FAS 133 - - 5.6 -
Gross 5.0 - 5.8 -
Related federal income tax expense (1.8) - (4.0) -
-------------------------------------------------------------------------------------------------------
Other comprehensive income on cash
flow hedges 3.2 - 7.4 -
-------------------------------------------------------------------------------------------------------
Total Other Comprehensive Income $105.7 $ 50.8 $185.8 $ 45.5
=======================================================================================================
11
NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(a wholly owned subsidiary of Nationwide Financial Services, Inc.)
Notes to Unaudited Consolidated Financial Statements, Continued
(6) 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.
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.
12
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 three months ended September 30, 2001 and
2000.
INDIVIDUAL INSTITUTIONAL LIFE
(in millions) ANNUITY PRODUCTS INSURANCE CORPORATE TOTAL
==========================================================================================================
2001
Net investment income $ 135.7 $ 211.8 $ 80.7 $ 6.8 $ 435.0
Other operating revenue 134.4 47.3 121.6 3.3 306.6
----------------------------------------------------------------------------------------------------------
Total operating revenue(1) 270.1 259.1 202.3 10.1 741.6
----------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances 111.0 159.2 44.6 - 314.8
Amortization of deferred policy
acquisition costs 53.0 10.4 21.8 - 85.2
Interest expense on short-term
borrowings - - - 0.8 0.8
Other benefits and expenses 52.7 40.5 92.5 0.4 186.1
----------------------------------------------------------------------------------------------------------
Total expenses 216.7 210.1 158.9 1.2 586.9
----------------------------------------------------------------------------------------------------------
Operating income before federal
income tax expense(1) 53.4 49.0 43.4 8.9 154.7
Net realized gains on investments,
hedging instruments and hedged
items - - - 36.7 36.7
----------------------------------------------------------------------------------------------------------
Income before federal income tax
expense and cumulative effect of
adoption of accounting principles $ 53.4 $ 49.0 $ 43.4 $ 45.6 $191.4
==========================================================================================================
2000
Net investment income $ 119.5 $ 203.7 $ 73.5 $ 15.9 $412.6
Other operating revenue 153.6 68.9 114.0 3.6 340.1
----------------------------------------------------------------------------------------------------------
Total operating revenue1 273.1 272.6 187.5 19.5 752.7
----------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances 98.8 153.6 40.0 - 292.4
Amortization of deferred policy
acquisition costs 60.9 15.2 15.5 - 91.6
Other benefits and expenses 41.6 46.0 92.9 9.2 189.7
----------------------------------------------------------------------------------------------------------
Total expenses 201.3 214.8 148.4 9.2 573.7
----------------------------------------------------------------------------------------------------------
Operating income before federal
income tax expense(1) 71.8 57.8 39.1 10.3 179.0
Net realized losses on investments,
hedging instruments and hedged
items - - - (2.1) (2.1)
----------------------------------------------------------------------------------------------------------
Income (loss) before federal
income tax expense and
cumulative effect of adoption of
accounting principles $ 71.8 $ 57.8 $ 39.1 $ 8.2 $176.9
==========================================================================================================
--------------
(1) Excludes net realized gains and losses on investments, hedging
instruments and hedged items.
13
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 nine months ended September 30, 2001 and
2000.
INDIVIDUAL INSTITUTIONAL LIFE
(in millions) ANNUITY PRODUCTS INSURANCE CORPORATE TOTAL
===============================================================================================================
2001
Net investment income $ 387.3 $ 635.3 $ 241.7 $ 22.5 $ 1,286.8
Other operating revenue 422.8 158.6 376.7 12.1 970.2
---------------------------------------------------------------------------------------------------------------
Total operating revenue(1) 810.1 793.9 618.4 34.6 2,257.0
---------------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances 316.4 476.0 131.5 - 923.9
Amortization of deferred policy
acquisition costs 164.2 36.2 64.8 - 265.2
Interest expense on short-term
borrowings - - - 4.7 4.7
Other benefits and expenses 152.4 123.3 286.2 5.5 567.4
---------------------------------------------------------------------------------------------------------------
Total expenses 633.0 635.5 482.5 10.2 1,761.2
---------------------------------------------------------------------------------------------------------------
Operating income before federal
income tax expense(1) 177.1 158.4 135.9 24.4 495.8
Net realized gains on investments,
hedging instruments and hedged
items - - - 34.9 34.9
---------------------------------------------------------------------------------------------------------------
Income before federal income tax
expense and cumulative effect of
adoption of accounting principles $ 177.1 $ 158.4 $ 135.9 $ 59.3 $ 530.7
===============================================================================================================
Assets as of period end $39,944.9 $33,120.7 $ 8,548.1 $ 3,180.8 $84,794.5
===============================================================================================================
14
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 $ 361.1 $ 612.2 $ 214.2 $ 42.1 $ 1,229.6
Other operating revenue 476.0 192.7 335.5 12.8 1,017.0
----------------------------------------------------------------------------------------------------------------
Total operating revenue(1) 837.1 804.9 549.7 54.9 2,246.6
----------------------------------------------------------------------------------------------------------------
Interest credited to policyholder
account balances 296.8 465.5 114.6 - 876.9
Amortization of deferred policy
acquisition costs 175.1 39.2 49.4 - 263.7
Other benefits and expenses 150.6 127.4 276.8 27.9 582.7
----------------------------------------------------------------------------------------------------------------
Total expenses 622.5 632.1 440.8 27.9 1,723.3
----------------------------------------------------------------------------------------------------------------
Operating income before federal
income tax expense(1) 214.6 172.8 108.9 27.0 523.3
Net realized losses on investments,
hedging instruments and hedged
items - - - (15.9) (15.9)
----------------------------------------------------------------------------------------------------------------
Income before federal income tax
expense and cumulative effect of
adoption of accounting principles $ 214.6 $ 172.8 $ 108.9 $ 11.1 $ 507.4
================================================================================================================
Assets as of period end $47,255.8 $40,005.9 $ 7,939.0 $ 2,486.5 $97,687.2
================================================================================================================
----------
(1) Excludes net realized gains and losses on investments, hedging
instruments and hedged items.
(7) 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
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONWIDE LIFE INSURANCE COMPANY
---------------------------------
(Registrant)
Date: January 22, 2002 /s/Mark R. Thresher
---------------------------------------------------
Mark R. Thresher
Senior Vice President - Finance -
Nationwide Financial
(Chief Accounting Officer)
16